Federal Agricultural Mortgage Corporation
1999 K Street, NW 4th Floor Washington, DC 20006
800-879-3276 | www.farmermac.com
Federal Agricultural Mortgage Corporation
2013 Annual Report
CORPORATE PROFILE
The Federal Agricultural Mortgage Corporation, commonly known as “Farmer Mac,” is a stockholder-
owned, federally chartered corporation that combines private capital and public sponsorship to serve a
public purpose. Congress has charged Farmer Mac with the mission of providing a secondary market
for agricultural real estate and rural housing mortgage loans, rural utilities loans, and loans guaranteed
by the United States Department of Agriculture (“USDA”). This secondary market is designed to
increase the availability of long-term credit at stable interest rates to America’s rural communities,
including farmers, ranchers, rural homeowners, and rural utilities cooperatives, and to provide those
borrowers with the benefits of capital markets pricing and product innovation. Farmer Mac
accomplishes its Congressional mission of providing liquidity and lending capacity to agricultural and
rural utilities lenders by:
purchasing eligible loans directly from lenders;
providing advances against eligible loans by purchasing obligations secured by those loans;
securitizing assets and guaranteeing the payment of principal and interest on the resulting
securities that represent interests in, or obligations secured by, pools of eligible loans
(“Farmer Mac Guaranteed Securities”); and
issuing long-term standby purchase commitments (“LTSPCs”) for eligible loans.
Farmer Mac conducts these activities through three lines of business – Farm & Ranch, USDA
Guarantees, and Rural Utilities. The loans eligible for the secondary market provided by Farmer Mac
include:
mortgage loans secured by first liens on agricultural real estate, including part-time farms
and rural housing (encompassing the Farm & Ranch line of business);
agricultural and rural development loans guaranteed by the USDA (encompassing the USDA
Guarantees line of business, which is operated by Farmer Mac’s subsidiary Farmer Mac II
LLC); and
to finance electrification and
loans made by
telecommunications systems in rural areas (encompassing the Rural Utilities line of
business).
lenders organized as cooperatives
The assets underlying Farmer Mac Guaranteed Securities include (1) loans, loan participation interests,
or USDA-guaranteed portions of loans eligible under one of Farmer Mac’s lines of business and
(2) general obligations of lenders secured by pools of eligible loans. Farmer Mac guarantees the timely
payment of principal and interest on the resulting Farmer Mac Guaranteed Securities. AgVantage® is a
registered trademark of Farmer Mac used to designate Farmer Mac’s guarantees of securities related to
general obligations of lenders secured by pools of eligible loans. Farmer Mac may retain Farmer Mac
Guaranteed Securities in its portfolio or sell them to third parties.
Farmer Mac’s activities are intended to provide lenders with an efficient and competitive secondary
market that enhances these lenders’ ability to offer competitively-priced financing to rural borrowers.
Loan product information and indicative “net yields” for Farmer Mac’s Farm & Ranch and USDA
Guarantees lines of business are available on Farmer Mac’s website at www.farmermac.com.
Please refer to “Business,” “Management’s Discussion and Analysis of Financial Condition and Results
of Operations,” and Note 1 to the consolidated financial statements in Farmer Mac’s 2013 Form 10-K
included in this Annual Report for a more complete description of Farmer Mac and its lines of business.
CORPORATE INFORMATION
Corporate Headquarters
Transfer Agent and Registrar
1999 K Street, NW
Fourth Floor
Washington, DC 20006
Phone: (202) 872-7700 or
(800) 879-3276
(202) 872-7713
Fax:
Website: http://www.farmermac.com
Continental Stock Transfer & Trust Company
17 Battery Place
Eighth Floor
New York, NY 10004
Phone: (212) 509-4000
(800) 509-5586
Website: http://www.continentalstock.com
Annual Meeting of Stockholders
Certification
Thursday, June 5, 2014
8:00 a.m.
The Town Hall
1999 K Street, NW
First Floor
Washington, DC 20006
Formal notice of the meeting, the proxy
statement, and the proxy card are being
mailed to each stockholder of record entitled
to vote at the meeting simultaneously with the
mailing of this Annual Report.
Stock Exchange
Farmer Mac’s Class A voting common stock
and Class C non-voting common stock trade
on the New York Stock Exchange under the
symbols AGM.A and AGM, respectively.
Farmer Mac has included as Exhibit 31 to its
Annual Report on Form 10-K for the fiscal
year ended December 31, 2013 filed with the
SEC the certifications of the Chief Executive
Officer and Chief Financial Officer certifying
the quality of Farmer Mac’s financial
disclosures.
Form 10-K
Stockholders may obtain, without charge, a
copy of Farmer Mac’s 2013 Annual Report
on Form 10-K, as filed with the SEC, from
Farmer Mac’s website or by contacting
Farmer Mac’s Secretary at Farmer Mac’s
Corporate Headquarters.
Independent Registered Public Accounting
Firm for the year ended December 31, 2013
PricewaterhouseCoopers LLP
1800 Tysons Boulevard
McLean, VA 22102
LETTER FROM THE CHAIRMAN AND THE PRESIDENT
To the Stockholders of Farmer Mac:
Farmer Mac entered 2013 on the heels of a near record year in terms of farm income in the
United States, and 2013 proved to be another healthy year for America’s agricultural and rural
communities. Farmer Mac, which marked its 25th anniversary in 2013, also had a very
productive and profitable year, continuing to provide high quality, low cost credit and increased
lender competition for the benefit of American agricultural and rural borrowers while also
producing value for our stockholders.
We continued to increase our role at the intersection of America’s rural lending industry and
borrower community in 2013. By providing a secondary market for banks, insurance companies,
the Farm Credit System, and rural utilities lenders, Farmer Mac continues to demonstrate its
unique capability of introducing competition into the various facets of agricultural and rural
utilities financing. The beneficiaries of this secondary market and increased competition are
America’s farmers, ranchers, and rural communities, and ultimately, U.S. consumers.
Farmer Mac continued its upward trajectory during 2013, as it achieved new milestones for
outstanding business volume and core earnings. Total outstanding business volume grew by
$935 million to reach just under $14 billion at year-end, driven by a diversified mix of new
business at attractive margins, including strong growth in Farm & Ranch loan purchases. Farmer
Mac’s core earnings were $54.9 million in 2013 compared to $49.6 million in 2012, due to new
business, gains from the sale of certain securities, lower operating expenses, and strong credit
performance.
The credit quality of loans in our Farm & Ranch, USDA Guarantees, and Rural Utilities lines of
business continued to perform very favorably during 2013. As 2013 progressed, the drought
conditions experienced in the Midwest and Great Plains during 2012 were relieved and
ultimately had no measurable impact on the credit quality of Farmer Mac’s portfolio. In the
Farm & Ranch portfolio, 90-day delinquencies were $28.3 million at year end 2013, or 0.55
percent of the non-Agvantage Farm & Ranch portfolio, down from $33.3 million, or 0.70
percent, at year end 2012. Farmer Mac’s overall portfolio remains diverse both geographically
and by commodity, and we continue to consider sector profitability, weather conditions,
1
including the drought currently affecting certain western regions in the United States, economic
conditions, and agricultural land value trends as part of our robust underwriting process.
Farmer Mac finished 2013 with a significant amount of total equity capital, aided by strong
earnings and the issuance of $60 million of non-cumulative perpetual preferred stock in
early 2013, and continues to grow its capital through the recent offering of an additional
$75 million of non-cumulative perpetual preferred stock in March 2014. Our belief in the
strength of our financial condition and earnings outlook is reflected in the recent increase in the
quarterly dividend declared on all three classes of our common stock.
Farmer Mac continues to provide a steady source of liquidity, capital, and risk management tools
to assist rural lenders in meeting the financing needs of their customers. We believe that our
Farm & Ranch and Rural Utilities portfolios have significant opportunities for growth over the
next several years, driven by several key factors, including increased capital requirements facing
lenders, borrower demand for longer-term fixed rate loans, and an increase in demand for power
driven by an overall economic recovery.
Farmer Mac is excited and well-equipped to expand upon the positive results achieved in 2013 as
it endeavors to enhance stockholder value and fulfill its mission of delivering capital and
increasing lender competition for the benefit of American agricultural and rural communities.
Thank you for investing in Farmer Mac and we look forward to the opportunities we see for
stockholders in 2014.
Lowell L. Junkins
Chairman of the Board
Timothy L. Buzby
President and Chief Executive Officer
NON-GAAP PERFORMANCE MEASURES
Farmer Mac reports its financial results in accordance with accounting principles generally
accepted in the United States (“GAAP”). In addition to GAAP measures, Farmer Mac also
presents its “core earnings,” a non-GAAP performance measure. 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 GAAP net income by excluding the effects of fair value accounting guidance, which
are not expected to have a cumulative net impact on GAAP earnings if the related financial
instruments are held to maturity, as is generally expected. Core earnings also differs from
GAAP net income by excluding specified infrequent or unusual transactions that Farmer Mac
believes are not indicative of future operating results and that may not reflect the trends and
economic financial performance of Farmer Mac’s core business. This non-GAAP financial
measure may not be comparable to similarly labeled non-GAAP financial measures disclosed by
other companies. Farmer Mac’s disclosure of this non-GAAP measure is intended to be
supplemental in nature, and is not meant to be considered in isolation from, as a substitute for, or
as more important than, the related financial information prepared in accordance with GAAP.
A reconciliation of Farmer Mac’s GAAP net income attributable to common stockholders to core
earnings is presented in the following table.
Reconciliation of GAAP Net Income Attributable to Common Stockholders to Core Earnings
GAAP net income attributable to common stockholders
$
71,833
$
43,894
$
13,784
Less the after-tax effects of:
Unrealized gains/(losses) on financial derivatives and hedging activities
Unrealized (losses)/gains on trading assets
Amortization of premiums/discounts and deferred gains on assets
consolidated at fair value (1)
Net effects of settlements on agency forward contracts
Lower of cost or fair value adjustment on loans held for sale
For the Year Ended December 31,
2013
2012
2011
(in thousands, except per share amounts)
29,368
(533)
(12,467)
573
—
16,941
4,325
200
(7,266)
856
(3,863)
(5,748)
54,892
$
49,642
$
$
5.07
4.90
$
4.74
4.51
10,816
11,209
10,479
11,019
(30,930)
2,246
(3,692)
(2,523)
5,776
(29,123)
42,907
4.15
3.97
10,335
10,802
$
$
Sub-total
Core earnings
Core earnings per share:
Weighted-average shares:
Basic
Diluted
Basic
Diluted
(1)
Includes $10.3 million related to the acceleration of premium amortization in fourth quarter 2013 due to significant refinancing activity in
the Rural Utilities line of business.
2
3
including the drought currently affecting certain western regions in the United States, economic
conditions, and agricultural land value trends as part of our robust underwriting process.
Farmer Mac finished 2013 with a significant amount of total equity capital, aided by strong
earnings and the issuance of $60 million of non-cumulative perpetual preferred stock in
early 2013, and continues to grow its capital through the recent offering of an additional
$75 million of non-cumulative perpetual preferred stock in March 2014. Our belief in the
strength of our financial condition and earnings outlook is reflected in the recent increase in the
quarterly dividend declared on all three classes of our common stock.
Farmer Mac continues to provide a steady source of liquidity, capital, and risk management tools
to assist rural lenders in meeting the financing needs of their customers. We believe that our
Farm & Ranch and Rural Utilities portfolios have significant opportunities for growth over the
next several years, driven by several key factors, including increased capital requirements facing
lenders, borrower demand for longer-term fixed rate loans, and an increase in demand for power
driven by an overall economic recovery.
Farmer Mac is excited and well-equipped to expand upon the positive results achieved in 2013 as
it endeavors to enhance stockholder value and fulfill its mission of delivering capital and
increasing lender competition for the benefit of American agricultural and rural communities.
Thank you for investing in Farmer Mac and we look forward to the opportunities we see for
stockholders in 2014.
Lowell L. Junkins
Chairman of the Board
Timothy L. Buzby
President and Chief Executive Officer
NON-GAAP PERFORMANCE MEASURES
Farmer Mac reports its financial results in accordance with accounting principles generally
accepted in the United States (“GAAP”). In addition to GAAP measures, Farmer Mac also
presents its “core earnings,” a non-GAAP performance measure. 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 GAAP net income by excluding the effects of fair value accounting guidance, which
are not expected to have a cumulative net impact on GAAP earnings if the related financial
instruments are held to maturity, as is generally expected. Core earnings also differs from
GAAP net income by excluding specified infrequent or unusual transactions that Farmer Mac
believes are not indicative of future operating results and that may not reflect the trends and
economic financial performance of Farmer Mac’s core business. This non-GAAP financial
measure may not be comparable to similarly labeled non-GAAP financial measures disclosed by
other companies. Farmer Mac’s disclosure of this non-GAAP measure is intended to be
supplemental in nature, and is not meant to be considered in isolation from, as a substitute for, or
as more important than, the related financial information prepared in accordance with GAAP.
A reconciliation of Farmer Mac’s GAAP net income attributable to common stockholders to core
earnings is presented in the following table.
Reconciliation of GAAP Net Income Attributable to Common Stockholders to Core Earnings
For the Year Ended December 31,
2013
2012
2011
(in thousands, except per share amounts)
GAAP net income attributable to common stockholders
$
71,833
$
43,894
$
13,784
Less the after-tax effects of:
Unrealized gains/(losses) on financial derivatives and hedging activities
Unrealized (losses)/gains on trading assets
Amortization of premiums/discounts and deferred gains on assets
consolidated at fair value (1)
Net effects of settlements on agency forward contracts
Lower of cost or fair value adjustment on loans held for sale
Sub-total
Core earnings
Core earnings per share:
Basic
Diluted
Weighted-average shares:
Basic
Diluted
29,368
(533)
(12,467)
573
—
16,941
4,325
200
(7,266)
856
(3,863)
(5,748)
54,892
$
49,642
$
$
5.07
4.90
$
4.74
4.51
10,816
11,209
10,479
11,019
(30,930)
2,246
(3,692)
(2,523)
5,776
(29,123)
42,907
4.15
3.97
10,335
10,802
$
$
(1)
Includes $10.3 million related to the acceleration of premium amortization in fourth quarter 2013 due to significant refinancing activity in
the Rural Utilities line of business.
2
3
Revenues:
Net effective spread
Guarantee and commitment fees
Other
Total revenues
Credit related (income)/expenses:
Provisions for/(release of) losses
REO operating expenses
Gains on sale of REO
Total credit related (income)/expenses
Operating expenses:
Compensation & employee benefits
General & Administrative
Regulatory fees
Total operating expenses
Net earnings
Income taxes
Non-controlling interest
Preferred stock dividends
Core earnings
Composition of Core Earnings
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
105,251
$
106,557
$
27,922
3,421
136,594
448
423
(1,236)
(365)
17,817
11,563
2,375
31,755
105,204
24,630
22,187
3,495
26,622
501
133,680
1,875
134
(878)
1,131
19,186
11,123
2,281
32,590
99,959
25,251
22,187
2,879
$
54,892
$
49,642
$
89,419
28,090
(662)
116,847
(2,347)
823
(974)
(2,498)
17,884
9,732
2,277
29,893
89,452
21,479
22,187
2,879
42,907
Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the consolidated financial statements and accompanying notes included in this
Annual Report for more complete information on Farmer Mac’s performance for the referenced
periods.
BUSINESS HIGHLIGHTS
The underlying trends of our core business have continued to be positive, with steady growth in
core earnings and retained earnings. We have achieved this growth by striving to add new
customers and new business at favorable returns while maintaining a strong portfolio credit profile
and operating efficiently.
Core Earnings Per Share and Book Value Per Share
2011
2012
2013
Book Value Per Share*
Core Earnings/Share
*Does not include the effects of Accumulated Other Comprehensive Income (AOCI)
Strong agricultural
fundamentals and
rigorous underwriting standards have kept
the
credit quality of Farmer Mac’s loan portfolio healthy and minimized delinquencies. Our 90-day
delinquencies, in both dollar amount and as a percentage of our outstanding business volume,
decreased in 2013 from already favorable levels in 2012.
Historical 90-Day Delinquencies*
Core Earnings
Per Share
$6
$5
$4
$3
$2
$1
$0
% of Outstanding Volume
1.00%
0.50%
0.00%
Book Value
Per Share
$30
$25
$20
$15
$10
$5
$0
$(mil)
$75
$50
$25
$0
4
5
As of Dec. 31, 2011
As of Dec. 31, 2012
As of Dec. 31, 2013
90-Day Delinquencies in Dollars
90-Day Delinquencies (% of Outstanding Volume)
*The historical 90-day delinquencies shown above represent 90-day delinquencies in Farmer Mac’s Farm & Ranch line of business. Farmer Mac did
not experience any 90-day delinquencies in its USDA Guarantees or Rural Utilities lines of business in the three-year period shown above.
Revenues:
Net effective spread
Guarantee and commitment fees
Other
Total revenues
Credit related (income)/expenses:
Provisions for/(release of) losses
REO operating expenses
Gains on sale of REO
Total credit related (income)/expenses
Operating expenses:
Compensation & employee benefits
General & Administrative
Regulatory fees
Total operating expenses
Net earnings
Income taxes
Non-controlling interest
Preferred stock dividends
Core earnings
Composition of Core Earnings
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
105,251
$
106,557
$
27,922
3,421
136,594
448
423
(1,236)
(365)
17,817
11,563
2,375
31,755
105,204
24,630
22,187
3,495
26,622
501
133,680
1,875
134
(878)
1,131
19,186
11,123
2,281
32,590
99,959
25,251
22,187
2,879
$
54,892
$
49,642
$
89,419
28,090
(662)
116,847
(2,347)
823
(974)
(2,498)
17,884
9,732
2,277
29,893
89,452
21,479
22,187
2,879
42,907
Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the consolidated financial statements and accompanying notes included in this
Annual Report for more complete information on Farmer Mac’s performance for the referenced
periods.
BUSINESS HIGHLIGHTS
The underlying trends of our core business have continued to be positive, with steady growth in
core earnings and retained earnings. We have achieved this growth by striving to add new
customers and new business at favorable returns while maintaining a strong portfolio credit profile
and operating efficiently.
Core Earnings Per Share and Book Value Per Share
Book Value
Per Share
$30
$25
$20
$15
$10
$5
$0
2011
2012
2013
Book Value Per Share*
Core Earnings/Share
*Does not include the effects of Accumulated Other Comprehensive Income (AOCI)
Core Earnings
Per Share
$6
$5
$4
$3
$2
$1
$0
fundamentals and
Strong agricultural
the
credit quality of Farmer Mac’s loan portfolio healthy and minimized delinquencies. Our 90-day
delinquencies, in both dollar amount and as a percentage of our outstanding business volume,
decreased in 2013 from already favorable levels in 2012.
rigorous underwriting standards have kept
$(mil)
$75
$50
$25
$0
Historical 90-Day Delinquencies*
% of Outstanding Volume
1.00%
0.50%
0.00%
4
5
As of Dec. 31, 2011
As of Dec. 31, 2012
As of Dec. 31, 2013
90-Day Delinquencies in Dollars
90-Day Delinquencies (% of Outstanding Volume)
*The historical 90-day delinquencies shown above represent 90-day delinquencies in Farmer Mac’s Farm & Ranch line of business. Farmer Mac did
not experience any 90-day delinquencies in its USDA Guarantees or Rural Utilities lines of business in the three-year period shown above.
Throughout our history, we have successfully minimized credit losses by requiring demonstrated
repayment capacity and low loan-to-value ratios and by focusing on diversification across
commodity types and geographic regions. This underwriting process has limited cumulative credit
losses to less than 0.01 percent per year on average.
Historical Cumulative Credit Losses
Farmer Mac has experienced significant growth in business volumes across several lines of business
and products. Borrowers seeking longer-term financing at fixed rates and Farmer Mac’s
competitive financing rates have been key drivers of this growth.
Total and Net New Business Volume
% of Total
Volume
0.50%
0.40%
0.30%
0.20%
0.10%
0.00%
Averages less than 1 basis point per
year over Farmer Mac’s history.
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Our focus on profitable, risk-adjusted growth has produced a strong and growing equity base for our
stockholders. This provides us with a significant amount of capital above the statutory minimum
capital requirement and a built-in capacity to grow our business and profitably deliver on our
mission.
Core Capital vs. Statutory Minimum Capital Requirement
Total New Business
$(mil)
$1,000
$800
$600
$400
$200
$0
-$200
-$400
-$600
-$800
-$1,000
2011
2012
2013
Farm & Ranch Loans - Net New Business† (right axis)
AgVantage Securities* - Net New Business† (right axis)
Farm & Ranch Loans - Total New Business (left axis)
AgVantage Securities* - Total New Business (left axis)
* Includes AgVantage Securities in all lines of business
† Net New Business equals Total New Business minus maturities and repayments
Net New Business
$(mil)
$2,000
$1,500
$1,000
$500
$0
-$500
-$1,000
-$1,500
-$2,000
$(mil)
$700
$600
$500
$400
$300
$200
$100
$0
As of Dec. 31, 2011
As of Dec. 31, 2012
As of Dec. 31, 2013
Statutory Minimum Capital
Core Capital
6
7
Throughout our history, we have successfully minimized credit losses by requiring demonstrated
repayment capacity and low loan-to-value ratios and by focusing on diversification across
commodity types and geographic regions. This underwriting process has limited cumulative credit
losses to less than 0.01 percent per year on average.
Historical Cumulative Credit Losses
Farmer Mac has experienced significant growth in business volumes across several lines of business
and products. Borrowers seeking longer-term financing at fixed rates and Farmer Mac’s
competitive financing rates have been key drivers of this growth.
Total and Net New Business Volume
Averages less than 1 basis point per
year over Farmer Mac’s history.
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Our focus on profitable, risk-adjusted growth has produced a strong and growing equity base for our
stockholders. This provides us with a significant amount of capital above the statutory minimum
capital requirement and a built-in capacity to grow our business and profitably deliver on our
Core Capital vs. Statutory Minimum Capital Requirement
Total New Business
$(mil)
$1,000
$800
$600
$400
$200
$0
-$200
-$400
-$600
-$800
-$1,000
2011
2012
2013
Farm & Ranch Loans - Net New Business† (right axis)
AgVantage Securities* - Net New Business† (right axis)
Farm & Ranch Loans - Total New Business (left axis)
AgVantage Securities* - Total New Business (left axis)
* Includes AgVantage Securities in all lines of business
† Net New Business equals Total New Business minus maturities and repayments
Net New Business
$(mil)
$2,000
$1,500
$1,000
$500
$0
-$500
-$1,000
-$1,500
-$2,000
% of Total
Volume
0.50%
0.40%
0.30%
0.20%
0.10%
0.00%
mission.
$(mil)
$700
$600
$500
$400
$300
$200
$100
$0
As of Dec. 31, 2011
As of Dec. 31, 2012
As of Dec. 31, 2013
Statutory Minimum Capital
Core Capital
6
7
BOARD OF DIRECTORS
(as of April 16, 2014)
Lowell L. Junkins, Chairman1
Political Affairs Consultant
Lowell Junkins & Associates
Montrose, Iowa
Dennis L. Brack2
Director
Bath State Bank and Bath State Bancorp
Bath, Indiana
Richard H. Davidson3
Director
AgriBank, FCB
St. Paul, Minnesota
Dennis A. Everson2
Director
First Dakota National Bank
Yankton, South Dakota
Thomas W. Hill3
Former Chief Financial and
Operations Officer
Farm Credit Bank of Texas
Austin, Texas
Clark B. Maxwell2
Chief Operating Officer
Chatham Financial Corp.
Kennett Square, Pennsylvania
Dan Raines3
Director
AgGeorgia Farm Credit, ACA
Perry, Georgia
Douglas E. Wilhelm3
Former Chief Risk Officer
CoBank, ACB
Denver, Colorado
Myles J. Watts, Vice Chairman1
Professor, Agricultural Economics
Montana State University
Bozeman, Montana
Chester J. Culver1
Founder
Chet Culver Group
Des Moines, Iowa
James R. Engebretsen2
Professor, Finance
Marriott School of Management
Brigham Young University
Provo, Utah
Sara L. Faivre-Davis1
Co-Owner and Managing Partner
Wild Type Ranch
Cameron, Texas
Mitchell A. Johnson2
Financial Consultant
Washington, D.C.
James B. McElroy3
Former Director
AgriBank, FCB
St. Paul, Minnesota
Bruce J. Sherrick1
Professor, Agricultural and
Applied Finance
University of Illinois
Champaign, Illinois
___________________________
1 Director appointed by the President
of the United States
2 Director elected by Class A Stockholders
3 Director elected by Class B Stockholders
EXECUTIVE OFFICERS
(as of April 16, 2014)
Timothy L. Buzby
President and Chief Executive Officer
Tom D. Stenson
Executive Vice President and
Chief Operating Officer
R. Dale Lynch
Senior Vice President –
Chief Financial Officer and Treasurer
Stephen P. Mullery
Senior Vice President –
General Counsel and Secretary
8
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Federal Agricultural Mortgage Corporation
2013 Form 10-K
As filed with the Securities and Exchange Commission on
March 13, 2014
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2013
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
or
For the transition period from _____ to _____.
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
(State or other jurisdiction of
incorporation or organization)
1999 K Street, N.W., 4th Floor,
Washington, D.C.
(Address of principal executive offices)
52-1578738
(I.R.S. employer identification number)
20006
(Zip code)
(202) 872-7700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A voting common stock
Class C non-voting common stock
5.875% Non-Cumulative Preferred Stock, Series A
Exchange on which registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Class B voting common stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically 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
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R.
§229.405) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Management's Discussion and Analysis of Financial Condition and Results of Operations
Yes
No
The aggregate market value of the Class A voting common stock and Class C non-voting common stock held by
non-affiliates of the registrant was $291,572,715 as of June 28, 2013, based upon the closing prices for the
respective classes on June 28, 2013 reported by the New York Stock Exchange. For purposes of this information,
the outstanding shares of Class C non-voting common stock owned by directors and executive officers of the
registrant were deemed to be held by affiliates. The aggregate market value of the Class B voting common stock is
not ascertainable due to the absence of publicly available quotations or prices for the Class B voting common stock
as a result of the limited market for, and infrequency of trades in, Class B voting common stock and the fact that any
such trades are privately negotiated transactions.
As of March 3, 2014, the registrant had outstanding 1,030,780 shares of Class A voting common stock,
500,301 shares of Class B voting common stock and 9,354,992 shares of Class C non-voting common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the registrant's 2014 Annual Meeting of Stockholders (portions of which
are incorporated by reference into Part III of this Annual Report on Form 10-K).
Table of Contents
Forward-Looking Statements
PART I
Item 1.
Business
General
Farmer Mac Lines of Business
Farm & Ranch
USDA Guarantees
Rural Utilities
Financing
Debt Issuance
Equity Issuance
General
Regulation
Funding of Guarantee and LTSPC Obligations
Farmer Mac's Authority to Borrow from the U.S. Treasury
Government Regulation of Farmer Mac
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
of Equity Securities
Selected Financial Data
Overview
Critical Accounting Policies and Estimates
Results of Operations
Outlook
Balance Sheet Review
Risk Management
Liquidity and Capital Resources
Regulatory Matters
Other Matters
Supplemental Information
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements
Management's Report on Internal Controls Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Equity
2
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases
4
6
6
6
13
14
26
29
34
35
35
36
39
39
39
40
43
56
56
56
57
58
58
61
62
63
64
69
90
92
93
110
116
117
118
123
124
124
125
127
128
129
130
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.
Act.
Yes
No
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically 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
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R.
§229.405) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
The aggregate market value of the Class A voting common stock and Class C non-voting common stock held by
non-affiliates of the registrant was $291,572,715 as of June 28, 2013, based upon the closing prices for the
respective classes on June 28, 2013 reported by the New York Stock Exchange. For purposes of this information,
the outstanding shares of Class C non-voting common stock owned by directors and executive officers of the
registrant were deemed to be held by affiliates. The aggregate market value of the Class B voting common stock is
not ascertainable due to the absence of publicly available quotations or prices for the Class B voting common stock
as a result of the limited market for, and infrequency of trades in, Class B voting common stock and the fact that any
such trades are privately negotiated transactions.
As of March 3, 2014, the registrant had outstanding 1,030,780 shares of Class A voting common stock,
500,301 shares of Class B voting common stock and 9,354,992 shares of Class C non-voting common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the registrant's 2014 Annual Meeting of Stockholders (portions of which
are incorporated by reference into Part III of this Annual Report on Form 10-K).
Table of Contents
PART I
Item 1.
Forward-Looking Statements
Business
General
Farmer Mac Lines of Business
Farm & Ranch
USDA Guarantees
Rural Utilities
Funding of Guarantee and LTSPC Obligations
Financing
Debt Issuance
Equity Issuance
Farmer Mac's Authority to Borrow from the U.S. Treasury
Government Regulation of Farmer Mac
General
Regulation
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Properties
Legal Proceedings
Mine Safety Disclosures
Item 5.
Item 6.
Item 7.
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases
of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Critical Accounting Policies and Estimates
Results of Operations
Outlook
Balance Sheet Review
Risk Management
Liquidity and Capital Resources
Regulatory Matters
Other Matters
Supplemental Information
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements
Management's Report on Internal Controls Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Equity
2
4
6
6
6
13
14
26
29
34
35
35
36
39
39
39
40
43
56
56
56
57
58
58
61
62
63
64
69
90
92
93
110
116
117
118
123
124
124
125
127
128
129
130
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Signatures
131
132
209
209
209
210
210
210
210
210
210
211
211
216
FORWARD-LOOKING STATEMENTS
Some statements made in this report are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 pertaining to management's current expectations as to the
Federal Agricultural Mortgage Corporation's ("Farmer Mac") future financial results, business prospects,
and business developments. Forward-looking statements include, without limitation, any statement that
may predict, forecast, indicate, or imply future results, performance, or achievements. These statements
typically are accompanied by, and identified with, terms such as "anticipates," "believes," "expects,"
"intends," "should," and similar phrases. The following management's discussion and analysis includes
forward-looking statements addressing Farmer Mac's:
• prospects for earnings;
• prospects for growth in business volume;
trends in net interest income and net effective spread;
trends in portfolio credit quality, delinquencies, and provisions for losses;
trends in expenses;
trends in investment securities;
• prospects for asset impairments and allowance for losses;
changes in capital position; and
• other business and financial matters.
Management's expectations for Farmer Mac's future necessarily involve a number of assumptions and
estimates and the evaluation of risks and uncertainties. Various factors or events could cause Farmer
Mac's actual results to differ materially from the expectations as expressed or implied by the forward-
looking statements, including the factors discussed under "Risk Factors" in Part 1, Item 1A of this Annual
Report on Form 10-K and uncertainties regarding:
the availability to Farmer Mac and Farmer Mac II LLC of debt and equity financing and, if
available, the reasonableness of rates and terms;
legislative or regulatory developments that could affect Farmer Mac or its sources of business,
including but not limited to:
developments related to the implementation of agricultural policies and programs
resulting from the recently enacted Agricultural Act of 2014 (referred to as the 2014
Farm Bill), including the elimination of direct payments to agricultural producers by the
USDA and increased federal subsidies for enhanced crop insurance programs; and
changes in policies related to renewable fuel standards and the use of ethanol as a
blending agent;
fluctuations in the fair value of assets held by Farmer Mac and Farmer Mac II LLC;
the rate and direction of development of the secondary market for agricultural mortgage and
rural utilities loans, including lender interest in Farmer Mac credit products and the secondary
market provided by Farmer Mac;
the general rate of growth in agricultural mortgage and rural utilities indebtedness;
the impact of economic conditions, including the effects of 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;
•
•
•
•
•
•
•
•
•
•
•
3
4
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10.
Directors, Executive Officers, and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13.
Certain Relationships and Related Transactions and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Signatures
Item 15.
Exhibits and Financial Statement Schedules
131
132
209
209
209
210
210
210
210
210
210
211
211
216
FORWARD-LOOKING STATEMENTS
Some statements made in this report are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 pertaining to management's current expectations as to the
Federal Agricultural Mortgage Corporation's ("Farmer Mac") future financial results, business prospects,
and business developments. Forward-looking statements include, without limitation, any statement that
may predict, forecast, indicate, or imply future results, performance, or achievements. These statements
typically are accompanied by, and identified with, terms such as "anticipates," "believes," "expects,"
"intends," "should," and similar phrases. The following management's discussion and analysis includes
forward-looking statements addressing Farmer Mac's:
•
•
•
•
•
•
•
•
•
prospects for earnings;
prospects for growth in business volume;
trends in net interest income and net effective spread;
trends in portfolio credit quality, delinquencies, and provisions for losses;
trends in expenses;
trends in investment securities;
prospects for asset impairments and allowance for losses;
changes in capital position; and
other business and financial matters.
Management's expectations for Farmer Mac's future necessarily involve a number of assumptions and
estimates and the evaluation of risks and uncertainties. Various factors or events could cause Farmer
Mac's actual results to differ materially from the expectations as expressed or implied by the forward-
looking statements, including the factors discussed under "Risk Factors" in Part 1, Item 1A of this Annual
Report on Form 10-K and uncertainties regarding:
•
•
•
•
•
•
•
the availability to Farmer Mac and Farmer Mac II LLC of debt and equity financing and, if
available, the reasonableness of rates and terms;
legislative or regulatory developments that could affect Farmer Mac or its sources of business,
including but not limited to:
developments related to the implementation of agricultural policies and programs
resulting from the recently enacted Agricultural Act of 2014 (referred to as the 2014
Farm Bill), including the elimination of direct payments to agricultural producers by the
USDA and increased federal subsidies for enhanced crop insurance programs; and
changes in policies related to renewable fuel standards and the use of ethanol as a
blending agent;
fluctuations in the fair value of assets held by Farmer Mac and Farmer Mac II LLC;
the rate and direction of development of the secondary market for agricultural mortgage and
rural utilities loans, including lender interest in Farmer Mac credit products and the secondary
market provided by Farmer Mac;
the general rate of growth in agricultural mortgage and rural utilities indebtedness;
the impact of economic conditions, including the effects of 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;
3
4
•
•
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.
Item 1. Business
PART I
GENERAL
In light of these potential risks and uncertainties, no undue reliance should be placed on any forward-
looking statements expressed in this report. Furthermore, Farmer Mac undertakes no obligation to release
publicly the results of revisions to any forward-looking statements that may be made to reflect new
information or any future events or circumstances, except as otherwise mandated by the U.S. Securities
and Exchange Commission. The discussion below is not necessarily indicative of future results.
The Federal Agricultural Mortgage Corporation ("Farmer Mac") is a stockholder-owned, federally
chartered corporation that combines private capital and public sponsorship to serve a public
purpose. Congress has charged Farmer Mac with the mission of providing a secondary market for a
variety of loans made to borrowers in rural America. A secondary market is an economic arrangement in
which the owners of financial assets, such as the originators of loans, may sell all or part of those assets or
pay a fee to otherwise offset some or all of the inherent risks of holding the assets. Farmer Mac's main
secondary market activities are:
• purchasing eligible loans directly from lenders;
• providing advances against eligible loans by purchasing obligations secured by those loans;
•
•
securitizing assets and guaranteeing the payment of principal and interest on the resulting
securities that represent interests in, or obligations secured by, pools of eligible loans; and
issuing long-term standby purchase commitments ("LTSPCs") for eligible loans.
Securities guaranteed by Farmer Mac may be retained by the seller of the underlying eligible loans,
retained by Farmer Mac, or sold to third party investors.
Farmer Mac was established under federal legislation first enacted in 1988 and amended most recently in
2008 – Title VIII of the Farm Credit Act of 1971 (12 U.S.C. §§ 2279aa et seq.), which is sometimes
referred to as Farmer Mac's charter. Farmer Mac is known as a government-sponsored enterprise ("GSE")
by virtue of the status conferred by its charter. The charter provides that Farmer Mac has the power to
establish, acquire, and maintain affiliates (as defined in the charter) under applicable state law to carry out
any activities that otherwise would be performed directly by Farmer Mac. Farmer Mac established its two
existing subsidiaries, Farmer Mac II LLC and Farmer Mac Mortgage Securities Corporation, under that
power.
Farmer Mac is an institution of the Farm Credit System (the "FCS"), which is composed of the banks,
associations, and related entities, including Farmer Mac and its subsidiaries, regulated by the Farm Credit
Administration ("FCA"), an independent agency in the executive branch of the United States
government. Although Farmer Mac (including its subsidiaries) is an institution of the FCS, it is not liable
for any debt or obligation of any other institution of the FCS. None of FCA, the FCS, or any other
individual institution of the FCS is liable for any debt or obligation of Farmer Mac or its subsidiaries. The
debts and obligations of Farmer Mac and its subsidiaries are not guaranteed by the full faith and credit of
the United States.
Farmer Mac's two principal sources of revenue are:
•
interest income earned on assets held on balance sheet, net of related funding costs and interest
payments and receipts on financial derivatives (i.e., net effective spread); and
• guarantee and commitment fees received in connection with outstanding guaranteed securities and
LTSPCs.
5
6
•
•
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.
Item 1. Business
PART I
GENERAL
In light of these potential risks and uncertainties, no undue reliance should be placed on any forward-
looking statements expressed in this report. Furthermore, Farmer Mac undertakes no obligation to release
publicly the results of revisions to any forward-looking statements that may be made to reflect new
information or any future events or circumstances, except as otherwise mandated by the U.S. Securities
and Exchange Commission. The discussion below is not necessarily indicative of future results.
The Federal Agricultural Mortgage Corporation ("Farmer Mac") is a stockholder-owned, federally
chartered corporation that combines private capital and public sponsorship to serve a public
purpose. Congress has charged Farmer Mac with the mission of providing a secondary market for a
variety of loans made to borrowers in rural America. A secondary market is an economic arrangement in
which the owners of financial assets, such as the originators of loans, may sell all or part of those assets or
pay a fee to otherwise offset some or all of the inherent risks of holding the assets. Farmer Mac's main
secondary market activities are:
• purchasing eligible loans directly from lenders;
• providing advances against eligible loans by purchasing obligations secured by those loans;
•
securitizing assets and guaranteeing the payment of principal and interest on the resulting
securities that represent interests in, or obligations secured by, pools of eligible loans; and
issuing long-term standby purchase commitments ("LTSPCs") for eligible loans.
•
Securities guaranteed by Farmer Mac may be retained by the seller of the underlying eligible loans,
retained by Farmer Mac, or sold to third party investors.
Farmer Mac was established under federal legislation first enacted in 1988 and amended most recently in
2008 – Title VIII of the Farm Credit Act of 1971 (12 U.S.C. §§ 2279aa et seq.), which is sometimes
referred to as Farmer Mac's charter. Farmer Mac is known as a government-sponsored enterprise ("GSE")
by virtue of the status conferred by its charter. The charter provides that Farmer Mac has the power to
establish, acquire, and maintain affiliates (as defined in the charter) under applicable state law to carry out
any activities that otherwise would be performed directly by Farmer Mac. Farmer Mac established its two
existing subsidiaries, Farmer Mac II LLC and Farmer Mac Mortgage Securities Corporation, under that
power.
Farmer Mac is an institution of the Farm Credit System (the "FCS"), which is composed of the banks,
associations, and related entities, including Farmer Mac and its subsidiaries, regulated by the Farm Credit
Administration ("FCA"), an independent agency in the executive branch of the United States
government. Although Farmer Mac (including its subsidiaries) is an institution of the FCS, it is not liable
for any debt or obligation of any other institution of the FCS. None of FCA, the FCS, or any other
individual institution of the FCS is liable for any debt or obligation of Farmer Mac or its subsidiaries. The
debts and obligations of Farmer Mac and its subsidiaries are not guaranteed by the full faith and credit of
the United States.
Farmer Mac's two principal sources of revenue are:
•
interest income earned on assets held on balance sheet, net of related funding costs and interest
payments and receipts on financial derivatives (i.e., net effective spread); and
• guarantee and commitment fees received in connection with outstanding guaranteed securities and
LTSPCs.
5
6
Farmer Mac funds its purchases of eligible loans (including participation interests in eligible loans) and
guaranteed securities primarily by issuing debt obligations of various maturities in the public capital
markets. The proceeds of debt issuance are also used to fund liquidity investments that must comply with
policies adopted by Farmer Mac's board of directors and with 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"). Farmer Mac's regular debt
issuance supports its access to the capital markets, and Farmer Mac's liquidity investment assets provide
an alternative source of funds should market conditions be unfavorable. As of December 31, 2013,
Farmer Mac had $4.9 billion of discount notes and $7.4 billion of medium-term notes outstanding. For
more information about Farmer Mac's eligible loan assets and liquidity investment assets, as well as its
financial performance and sources of capital and liquidity, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Secondary Market
Farmer Mac's activities are intended to provide lenders with an efficient and competitive secondary
market that enhances these lenders' ability to offer competitively-priced financing to rural borrowers. This
secondary market is designed to increase the availability of long-term credit at stable interest rates to
America's rural communities and to provide rural borrowers with the benefits of capital markets pricing
and product innovation. The secondary market provided by Farmer Mac functions as a bridge between the
national capital markets and the agricultural and rural credit markets by attracting new capital for
financing rural borrowers.
Farmer Mac's purchases of both eligible loans and obligations secured by eligible loans, as well as Farmer
Mac's guaranteed securities sold to third party investors, increase lenders' liquidity and lending capacity
and provide a continuous source of funding for lenders that extend credit to borrowers in rural America.
Farmer Mac's LTSPCs for eligible loans held by lenders, as well as Farmer Mac's guaranteed securities
retained by lenders in exchange for the related securitized loans, result in lower regulatory capital
requirements for the lenders and reduced borrower or commodity concentration exposure for some
lenders, thereby expanding their lending capacity. By increasing the efficiency and competitiveness of
rural finance, the secondary market provided by Farmer Mac has the potential to lower the interest rates
paid on loans by rural borrowers.
The current economic and regulatory environment presents Farmer Mac with opportunities to market a
mix of products to rural lenders in need of capital, liquidity, long-term fixed rate products, and portfolio
diversification. As part of its outreach strategy, Farmer Mac listens to current and prospective rural
lenders to identify their specific needs, with an emphasis on individual lender meetings, lender road
shows, and face-to-face contact at state and national banking conferences. Farmer Mac seeks to maximize
the use of technology to support these business development efforts.
Lines of Business
Farmer Mac conducts its secondary market activities through three lines of business – Farm & Ranch,
USDA Guarantees, and Rural Utilities. The loans eligible for the secondary market provided by Farmer
Mac include:
• mortgage loans secured by first liens on agricultural real estate, including part-time farms and rural
housing (encompassing the Farm & Ranch line of business);
•
•
agricultural and rural development loans guaranteed by the United States Department of
Agriculture ("USDA") (encompassing the USDA Guarantees line of business); and
loans made by cooperative lenders to finance electrification and telecommunications systems in
rural areas (encompassing the Rural Utilities line of business).
As of December 31, 2013, the total outstanding amount of the eligible loans included in all of Farmer
Mac's lines of business was $14.0 billion.
Farm & Ranch
Under the Farm & Ranch line of business, Farmer Mac purchases eligible mortgage loans secured by first
liens on agricultural real estate and rural housing. Farmer Mac also guarantees securities representing
interests in, or obligations secured by, pools of mortgage loans eligible for the Farm & Ranch line of
business ("Farm & Ranch Guaranteed Securities"). Additionally, Farmer Mac commits to purchase,
subject to the terms of the applicable LTSPC agreement, eligible Farm & Ranch mortgage loans. To be
eligible, loans must meet Farmer Mac's credit underwriting, collateral valuation, documentation, and other
specified standards that are discussed in "Business—Farmer Mac Lines of Business—Farm & Ranch." As
of December 31, 2013, outstanding loans held by Farmer Mac, loans that either backed off-balance sheet
Farm & Ranch Guaranteed Securities or were subject to LTSPCs, and other Farm & Ranch Guaranteed
Securities totaled $9.7 billion.
USDA Guarantees
Under the USDA Guarantees line of business, Farmer Mac II LLC, a subsidiary of Farmer Mac, purchases
the portions of certain agricultural, rural development, business and industry, and community facilities
loans guaranteed by the USDA under the Consolidated Farm and Rural Development Act (7 U.S.C.
§§ 1921 et seq.). Farmer Mac refers to these USDA-guaranteed portions of loans as "USDA Securities."
Farmer Mac II LLC also purchases USDA Securities in exchange for issuing securities to third parties
backed by those USDA Securities, which are then also guaranteed by Farmer Mac ("Farmer Mac
Guaranteed USDA Securities"). As of December 31, 2013, outstanding USDA Securities and Farmer Mac
Guaranteed USDA Securities totaled $1.7 billion, of which $41.3 million were Farmer Mac Guaranteed
USDA Securities.
Rural Utilities
Farmer Mac initiated the Rural Utilities line of business in 2008 after Congress expanded Farmer Mac's
authorized secondary market activities to include rural utilities loans. Farmer Mac's authorized activities
under this line of business are similar to those conducted under the Farm & Ranch line of business –
purchases of, and guarantees of securities ("Rural Utilities Guaranteed Securities") backed by, eligible
rural utilities loans. To be eligible, loans must meet Farmer Mac's credit underwriting and other specified
standards that are discussed in "Business—Farmer Mac Lines of Business—Rural Utilities." Although
Farmer Mac has the ability to provide LTSPCs in the Rural Utilities line of business, none have been
issued to date. As of December 31, 2013, the aggregate outstanding principal balance of rural utilities
loans held and Rural Utilities Guaranteed Securities was $2.6 billion.
7
8
Farmer Mac funds its purchases of eligible loans (including participation interests in eligible loans) and
guaranteed securities primarily by issuing debt obligations of various maturities in the public capital
markets. The proceeds of debt issuance are also used to fund liquidity investments that must comply with
policies adopted by Farmer Mac's board of directors and with 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"). Farmer Mac's regular debt
issuance supports its access to the capital markets, and Farmer Mac's liquidity investment assets provide
an alternative source of funds should market conditions be unfavorable. As of December 31, 2013,
Farmer Mac had $4.9 billion of discount notes and $7.4 billion of medium-term notes outstanding. For
more information about Farmer Mac's eligible loan assets and liquidity investment assets, as well as its
financial performance and sources of capital and liquidity, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Secondary Market
Farmer Mac's activities are intended to provide lenders with an efficient and competitive secondary
market that enhances these lenders' ability to offer competitively-priced financing to rural borrowers. This
secondary market is designed to increase the availability of long-term credit at stable interest rates to
America's rural communities and to provide rural borrowers with the benefits of capital markets pricing
and product innovation. The secondary market provided by Farmer Mac functions as a bridge between the
national capital markets and the agricultural and rural credit markets by attracting new capital for
Farmer Mac's purchases of both eligible loans and obligations secured by eligible loans, as well as Farmer
Mac's guaranteed securities sold to third party investors, increase lenders' liquidity and lending capacity
and provide a continuous source of funding for lenders that extend credit to borrowers in rural America.
Farmer Mac's LTSPCs for eligible loans held by lenders, as well as Farmer Mac's guaranteed securities
retained by lenders in exchange for the related securitized loans, result in lower regulatory capital
requirements for the lenders and reduced borrower or commodity concentration exposure for some
lenders, thereby expanding their lending capacity. By increasing the efficiency and competitiveness of
rural finance, the secondary market provided by Farmer Mac has the potential to lower the interest rates
paid on loans by rural borrowers.
The current economic and regulatory environment presents Farmer Mac with opportunities to market a
mix of products to rural lenders in need of capital, liquidity, long-term fixed rate products, and portfolio
diversification. As part of its outreach strategy, Farmer Mac listens to current and prospective rural
lenders to identify their specific needs, with an emphasis on individual lender meetings, lender road
shows, and face-to-face contact at state and national banking conferences. Farmer Mac seeks to maximize
the use of technology to support these business development efforts.
Lines of Business
Mac include:
Farmer Mac conducts its secondary market activities through three lines of business – Farm & Ranch,
USDA Guarantees, and Rural Utilities. The loans eligible for the secondary market provided by Farmer
• mortgage loans secured by first liens on agricultural real estate, including part-time farms and rural
housing (encompassing the Farm & Ranch line of business);
•
•
agricultural and rural development loans guaranteed by the United States Department of
Agriculture ("USDA") (encompassing the USDA Guarantees line of business); and
loans made by cooperative lenders to finance electrification and telecommunications systems in
rural areas (encompassing the Rural Utilities line of business).
As of December 31, 2013, the total outstanding amount of the eligible loans included in all of Farmer
Mac's lines of business was $14.0 billion.
Farm & Ranch
Under the Farm & Ranch line of business, Farmer Mac purchases eligible mortgage loans secured by first
liens on agricultural real estate and rural housing. Farmer Mac also guarantees securities representing
interests in, or obligations secured by, pools of mortgage loans eligible for the Farm & Ranch line of
business ("Farm & Ranch Guaranteed Securities"). Additionally, Farmer Mac commits to purchase,
subject to the terms of the applicable LTSPC agreement, eligible Farm & Ranch mortgage loans. To be
eligible, loans must meet Farmer Mac's credit underwriting, collateral valuation, documentation, and other
specified standards that are discussed in "Business—Farmer Mac Lines of Business—Farm & Ranch." As
of December 31, 2013, outstanding loans held by Farmer Mac, loans that either backed off-balance sheet
Farm & Ranch Guaranteed Securities or were subject to LTSPCs, and other Farm & Ranch Guaranteed
Securities totaled $9.7 billion.
financing rural borrowers.
USDA Guarantees
Under the USDA Guarantees line of business, Farmer Mac II LLC, a subsidiary of Farmer Mac, purchases
the portions of certain agricultural, rural development, business and industry, and community facilities
loans guaranteed by the USDA under the Consolidated Farm and Rural Development Act (7 U.S.C.
§§ 1921 et seq.). Farmer Mac refers to these USDA-guaranteed portions of loans as "USDA Securities."
Farmer Mac II LLC also purchases USDA Securities in exchange for issuing securities to third parties
backed by those USDA Securities, which are then also guaranteed by Farmer Mac ("Farmer Mac
Guaranteed USDA Securities"). As of December 31, 2013, outstanding USDA Securities and Farmer Mac
Guaranteed USDA Securities totaled $1.7 billion, of which $41.3 million were Farmer Mac Guaranteed
USDA Securities.
Rural Utilities
Farmer Mac initiated the Rural Utilities line of business in 2008 after Congress expanded Farmer Mac's
authorized secondary market activities to include rural utilities loans. Farmer Mac's authorized activities
under this line of business are similar to those conducted under the Farm & Ranch line of business –
purchases of, and guarantees of securities ("Rural Utilities Guaranteed Securities") backed by, eligible
rural utilities loans. To be eligible, loans must meet Farmer Mac's credit underwriting and other specified
standards that are discussed in "Business—Farmer Mac Lines of Business—Rural Utilities." Although
Farmer Mac has the ability to provide LTSPCs in the Rural Utilities line of business, none have been
issued to date. As of December 31, 2013, the aggregate outstanding principal balance of rural utilities
loans held and Rural Utilities Guaranteed Securities was $2.6 billion.
7
8
Farmer Mac Guaranteed Securities
Capital and Corporate Governance
Farm & Ranch Guaranteed Securities, Farmer Mac Guaranteed USDA Securities, and Rural Utilities
Guaranteed Securities are sometimes collectively referred to as "Farmer Mac Guaranteed Securities." The
assets underlying Farmer Mac Guaranteed Securities include (1) loans, loan participation interests, or
USDA Securities eligible under one of Farmer Mac's lines of business and (2) general obligations of
lenders secured by pools of eligible loans. Farmer Mac guarantees the timely payment of principal and
interest on the resulting Farmer Mac Guaranteed Securities. Farmer Mac may retain Farmer Mac
Guaranteed Securities in its portfolio or sell them to third parties. AgVantage® is a registered trademark of
Farmer Mac used to designate Farmer Mac's guarantees of securities related to general obligations of
lenders that are secured by pools of eligible loans. AgVantage securities are currently issued under the
Farm & Ranch and Rural Utilities lines of business.
Competition
Farmer Mac is the only Congressionally-chartered corporation established to provide a secondary market
for agricultural mortgage loans, rural utilities loans, and USDA Securities. However, Farmer Mac does
face indirect competition from a variety of sources. Historically, these sources have included other
financial institutions that purchase, retain, or securitize the types of loans eligible for Farmer Mac's
secondary market activities, including commercial and investment banks, insurance companies, and other
FCS institutions. Farmer Mac also competes indirectly with originators of eligible loans who would
prefer to retain the loans they originate rather than sell them into the secondary market. Farmer Mac is
able to compete to acquire eligible loans due to the variety of products it offers and its ability to offer low-
cost funding to its customers. This enables Farmer Mac to offer flexible financing options and products
designed to meet the variety of needs faced by lending institutions related to capital requirements,
liquidity, credit risk, and management of sector and geographic concentrations and borrower exposures.
However, the relative competitiveness of the loan rates offered by Farmer Mac is affected by the ability of
other lending institutions to subsidize their rates on the loan products with which Farmer Mac competes
by price averaging with other types of loans or by low-return use of equity. Farmer Mac's ability to
develop business with lending institutions is also affected by changes in the levels of available capital and
liquidity of those institutions, the existence of alternative sources of funding and credit enhancement for
those institutions, the rate of growth in the market for eligible loans, and demand for Farmer Mac's
products.
Farmer Mac's competitive position is also affected by the willingness of originators to offer eligible loans
for sale in the secondary market, as well as the types and variety of products offered by Farmer Mac's
competitors to meet the needs of Farmer Mac's customer base. Farmer Mac's limits on borrower exposure
and loan size, as well as the types of loans that are eligible for Farmer Mac's lines of business, also affect
Farmer Mac's competitive position. Farmer Mac's ability to obtain low-cost funding in the debt markets is
essential to its ability to maintain its competitive position with its customers. As a result, competition for
debt investors with other debt-issuing institutions, such as the FCS, Federal Home Loan Banks, Fannie
Mae, Freddie Mac, and highly-rated financial institutions, can impact the price and volume at which
Farmer Mac issues debt and, consequently, its ability to offer savings to its customers in the form of
competitive products.
Farmer Mac's basic capital and corporate governance structure is prescribed in its charter. The charter
authorizes Farmer Mac to issue two classes of voting common stock each of which elects one-third of
Farmer Mac's 15-person board of directors, as well as non-voting common stock. The classes of Farmer
Mac's common stock that are currently outstanding and their relation to Farmer Mac's board of directors
are described below.
• Class A voting common stock. The charter restricts ownership of Farmer Mac's Class A voting
common stock to banks, insurance companies, and other financial institutions or similar entities
that are not institutions of the FCS. The charter also provides that five members of Farmer Mac's
15-member board of directors are elected by a plurality of the votes of the Class A stockholders
each year. The charter limits the amount of Class A voting common stock that may be owned by
one holder to no more than 33 percent of the outstanding shares of Class A voting common
stock. Farmer Mac is not aware of any regulation applicable to non-FCS financial institutions that
requires a minimum investment in Farmer Mac's Class A voting common stock or that prescribes a
maximum investment amount lower than the 33 percent limit set forth in the charter. Farmer
Mac's Class A voting common stock is listed on the New York Stock Exchange under the symbol
AGM.A.
• Class B voting common stock. The charter restricts ownership of Farmer Mac's Class B voting
common stock to FCS institutions and also provides that five members of Farmer Mac's 15-
member board of directors are elected by a plurality of the votes of the Class B stockholders each
year. The charter does not contain any restrictions on the maximum number or percentage of
outstanding shares of Class B voting common stock that may be held by an eligible stockholder,
and Farmer Mac is not aware of any regulation applicable to FCS institutions that requires a
minimum investment in its Class B voting common stock or that prescribes a maximum
amount. Farmer Mac's Class B voting common stock, which has a limited market and trades
infrequently, is not listed or quoted on any exchange or other quotation system, and Farmer Mac is
not aware of any publicly available quotations or prices for this class of common stock.
• Class C non-voting common stock. The charter does not impose any ownership restrictions on
Farmer Mac's Class C non-voting common stock, and shares of this class are freely
transferable. Holders of the Class C common stock do not vote on the election of directors or any
other matter. Farmer Mac's Class C non-voting common stock is listed on the New York Stock
Exchange under the symbol AGM.
• Presidential director appointments. The remaining five members of Farmer Mac's board of
directors are individuals who meet the qualifications specified in the charter and are appointed by
the President of the United States with the advice and consent of the United States Senate. These
appointed directors serve at the pleasure of the President of the United States.
The ownership of Farmer Mac's two classes of voting common stock is currently concentrated in a small
number of institutions. Approximately 45 percent of the Class A voting common stock is held by three
financial institutions, with 31 percent held by one institution. Approximately 97 percent of the Class B
voting common stock is held by five FCS institutions (two of which are related to each other through a
parent-subsidiary relationship). Farmer Mac believes that the concentration in the Class A voting common
stock is a by-product of trading activity in the stock over time and is not by design under the charter or any
9
10
Farmer Mac Guaranteed Securities
Capital and Corporate Governance
Farm & Ranch Guaranteed Securities, Farmer Mac Guaranteed USDA Securities, and Rural Utilities
Guaranteed Securities are sometimes collectively referred to as "Farmer Mac Guaranteed Securities." The
assets underlying Farmer Mac Guaranteed Securities include (1) loans, loan participation interests, or
USDA Securities eligible under one of Farmer Mac's lines of business and (2) general obligations of
lenders secured by pools of eligible loans. Farmer Mac guarantees the timely payment of principal and
interest on the resulting Farmer Mac Guaranteed Securities. Farmer Mac may retain Farmer Mac
Guaranteed Securities in its portfolio or sell them to third parties. AgVantage® is a registered trademark of
Farmer Mac used to designate Farmer Mac's guarantees of securities related to general obligations of
lenders that are secured by pools of eligible loans. AgVantage securities are currently issued under the
Farm & Ranch and Rural Utilities lines of business.
Competition
Farmer Mac is the only Congressionally-chartered corporation established to provide a secondary market
for agricultural mortgage loans, rural utilities loans, and USDA Securities. However, Farmer Mac does
face indirect competition from a variety of sources. Historically, these sources have included other
financial institutions that purchase, retain, or securitize the types of loans eligible for Farmer Mac's
secondary market activities, including commercial and investment banks, insurance companies, and other
FCS institutions. Farmer Mac also competes indirectly with originators of eligible loans who would
prefer to retain the loans they originate rather than sell them into the secondary market. Farmer Mac is
able to compete to acquire eligible loans due to the variety of products it offers and its ability to offer low-
cost funding to its customers. This enables Farmer Mac to offer flexible financing options and products
designed to meet the variety of needs faced by lending institutions related to capital requirements,
liquidity, credit risk, and management of sector and geographic concentrations and borrower exposures.
However, the relative competitiveness of the loan rates offered by Farmer Mac is affected by the ability of
other lending institutions to subsidize their rates on the loan products with which Farmer Mac competes
by price averaging with other types of loans or by low-return use of equity. Farmer Mac's ability to
develop business with lending institutions is also affected by changes in the levels of available capital and
liquidity of those institutions, the existence of alternative sources of funding and credit enhancement for
those institutions, the rate of growth in the market for eligible loans, and demand for Farmer Mac's
products.
Farmer Mac's competitive position is also affected by the willingness of originators to offer eligible loans
for sale in the secondary market, as well as the types and variety of products offered by Farmer Mac's
competitors to meet the needs of Farmer Mac's customer base. Farmer Mac's limits on borrower exposure
and loan size, as well as the types of loans that are eligible for Farmer Mac's lines of business, also affect
Farmer Mac's competitive position. Farmer Mac's ability to obtain low-cost funding in the debt markets is
essential to its ability to maintain its competitive position with its customers. As a result, competition for
debt investors with other debt-issuing institutions, such as the FCS, Federal Home Loan Banks, Fannie
Mae, Freddie Mac, and highly-rated financial institutions, can impact the price and volume at which
Farmer Mac issues debt and, consequently, its ability to offer savings to its customers in the form of
competitive products.
Farmer Mac's basic capital and corporate governance structure is prescribed in its charter. The charter
authorizes Farmer Mac to issue two classes of voting common stock each of which elects one-third of
Farmer Mac's 15-person board of directors, as well as non-voting common stock. The classes of Farmer
Mac's common stock that are currently outstanding and their relation to Farmer Mac's board of directors
are described below.
• Class A voting common stock. The charter restricts ownership of Farmer Mac's Class A voting
common stock to banks, insurance companies, and other financial institutions or similar entities
that are not institutions of the FCS. The charter also provides that five members of Farmer Mac's
15-member board of directors are elected by a plurality of the votes of the Class A stockholders
each year. The charter limits the amount of Class A voting common stock that may be owned by
one holder to no more than 33 percent of the outstanding shares of Class A voting common
stock. Farmer Mac is not aware of any regulation applicable to non-FCS financial institutions that
requires a minimum investment in Farmer Mac's Class A voting common stock or that prescribes a
maximum investment amount lower than the 33 percent limit set forth in the charter. Farmer
Mac's Class A voting common stock is listed on the New York Stock Exchange under the symbol
AGM.A.
• Class B voting common stock. The charter restricts ownership of Farmer Mac's Class B voting
common stock to FCS institutions and also provides that five members of Farmer Mac's 15-
member board of directors are elected by a plurality of the votes of the Class B stockholders each
year. The charter does not contain any restrictions on the maximum number or percentage of
outstanding shares of Class B voting common stock that may be held by an eligible stockholder,
and Farmer Mac is not aware of any regulation applicable to FCS institutions that requires a
minimum investment in its Class B voting common stock or that prescribes a maximum
amount. Farmer Mac's Class B voting common stock, which has a limited market and trades
infrequently, is not listed or quoted on any exchange or other quotation system, and Farmer Mac is
not aware of any publicly available quotations or prices for this class of common stock.
• Class C non-voting common stock. The charter does not impose any ownership restrictions on
Farmer Mac's Class C non-voting common stock, and shares of this class are freely
transferable. Holders of the Class C common stock do not vote on the election of directors or any
other matter. Farmer Mac's Class C non-voting common stock is listed on the New York Stock
Exchange under the symbol AGM.
• Presidential director appointments. The remaining five members of Farmer Mac's board of
directors are individuals who meet the qualifications specified in the charter and are appointed by
the President of the United States with the advice and consent of the United States Senate. These
appointed directors serve at the pleasure of the President of the United States.
The ownership of Farmer Mac's two classes of voting common stock is currently concentrated in a small
number of institutions. Approximately 45 percent of the Class A voting common stock is held by three
financial institutions, with 31 percent held by one institution. Approximately 97 percent of the Class B
voting common stock is held by five FCS institutions (two of which are related to each other through a
parent-subsidiary relationship). Farmer Mac believes that the concentration in the Class A voting common
stock is a by-product of trading activity in the stock over time and is not by design under the charter or any
9
10
regulatory mandate. Farmer Mac believes that the concentration in such a small number of holders of
Class B voting common stock is a by-product of the limited number of eligible holders of that stock and
the structure of the FCS, the number of institutions of which has decreased over time as a result of mergers
and consolidations.
The dividend and liquidation rights of all three classes of Farmer Mac's common stock are the same.
Dividends may be paid on Farmer Mac's common stock only when, as, and if declared by Farmer Mac's
board of directors in its sole discretion, subject to compliance with applicable capital requirements and the
payment of dividends on any outstanding preferred stock issued by Farmer Mac. Upon liquidation,
dissolution, or winding up of the business of Farmer Mac, after payment and provision for payment of
outstanding debt of Farmer Mac, the holders of shares of Farmer Mac's currently outstanding 5.875%
Non-Cumulative Preferred Stock, Series A ("Series A Preferred Stock") and any other preferred stock then
outstanding, would be paid at par value out of assets available for distribution, plus all declared and
unpaid dividends, before the holders of shares of common stock received any payment. The assets of
Farmer Mac II LLC are not directly available to satisfy the claims of Farmer Mac's creditors or
stockholders. Those assets will only be available to the creditors and stockholders of Farmer Mac after all
obligations owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied. In
addition, Farmer Mac II LLC has outstanding preferred stock, which is permanent equity of Farmer Mac
II LLC and presented as "Non-controlling interest – preferred stock" within total equity on Farmer Mac's
consolidated balance sheets. See "Business—Financing—Equity Issuance—Non-Controlling Interest in
Farmer Mac II LLC." See also "Market for Registrant's Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities" for more information regarding Farmer Mac's common stock,
and "Business—Financing—Equity Issuance" for more information on Farmer Mac's common stock and
preferred stock.
Unlike some other GSEs, specifically other FCS institutions and the Federal Home Loan Banks, Farmer
Mac is not structured as a cooperative owned exclusively by member institutions and established to
provide services exclusively to its members. Rather, Farmer Mac, as a publicly-traded corporation, has a
broader base of stockholders, including those who do not directly participate in the secondary market
provided by Farmer Mac. Therefore, Farmer Mac seeks to fulfill its mission of serving the financing
needs of rural America in a manner that is consistent with providing a return on the investment of its
stockholders.
Farmer Mac's policy is to require financial institutions to own a requisite amount of Farmer Mac common
stock, based on the size and type of institution, to participate in the Farm & Ranch line of business. As a
result of this requirement, coupled with the ability of holders of Class A and Class B voting common stock
to elect two-thirds of Farmer Mac's board of directors, Farmer Mac regularly conducts business with
"related parties," including institutions affiliated with members of Farmer Mac's board of directors and
institutions that own large amounts of Farmer Mac's voting common stock. Farmer Mac has adopted a
Code of Business Conduct and Ethics that governs any conflicts of interest that may arise in these
transactions, and Farmer Mac's policy is to require that any transactions with related parties be conducted
in the ordinary course of business, with terms and conditions comparable to those available to any other
counterparty not related to Farmer Mac. For more information about related party transactions, see
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of
Operations—Related Party Transactions" and Note 3 to the consolidated financial statements.
Regulatory Oversight
Farmer Mac's charter assigns to FCA, acting through the separate Office of Secondary Market Oversight
("OSMO") within FCA, the responsibility for the examination and the general supervision of the safe and
sound performance of the powers, functions, and duties vested in Farmer Mac by the charter. The charter
also authorizes FCA, acting through OSMO, to apply its general enforcement powers to Farmer
Mac. Farmer Mac (including its subsidiaries) is the only entity regulated by OSMO, which was created as
a separate office in recognition of the different role that Farmer Mac plays in providing a secondary
market, as compared to the roles of other FCS institutions as primary lenders. The Director of OSMO is
selected by, and reports to, the FCA board. The FCA board approves the policies, regulations, charters,
and enforcement activities applicable to other FCS institutions, which are the only eligible holders of
Farmer Mac's Class B voting common stock. FCA has no regulatory authority over the financial
institutions that are the eligible holders of Farmer Mac's Class A voting common stock.
Farmer Mac's charter requires an annual examination of the financial transactions of Farmer Mac and
authorizes FCA to assess Farmer Mac for the cost of FCA's regulatory activities, including the cost of any
examination. Each year, OSMO conducts an examination of Farmer Mac to evaluate its safety and
soundness, compliance with applicable laws and regulations, and mission achievement. The examination
includes a review of Farmer Mac's capital adequacy, asset quality, management performance, earnings,
liquidity, and sensitivity to interest rate risk. Farmer Mac is also required to file quarterly reports of
condition with OSMO. In addition, as a publicly-traded corporation, Farmer Mac is required to comply
with the periodic reporting requirements of the U.S. Securities and Exchange Commission (the "SEC").
For a more detailed discussion of Farmer Mac's regulatory and governmental relationships, see
"—Government Regulation of Farmer Mac."
Capital
Farmer Mac's charter establishes three capital standards for Farmer Mac – minimum capital, critical
capital, and risk-based capital. Farmer Mac is required to comply with the higher of the minimum capital
requirement and the risk-based capital requirement. Also, in accordance with a recently effective FCA
regulation on capital planning, Farmer Mac's board of directors has adopted a policy for maintaining a
sufficient level of Tier 1 capital and imposing restrictions on dividends and employee (including officer)
bonus payments in the event that Farmer Mac's Tier 1 capital falls below specified thresholds. For a
discussion of Farmer Mac's capital requirements and its actual capital levels, and particularly FCA's role
in the establishment and maintenance of those requirements and levels, see "—Government Regulation of
Farmer Mac—Regulation—Capital Standards," "Management's Discussion and Analysis of Financial
Condition and Results of Operations—Balance Sheet Review—Equity," "Management's Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital
Requirements" and "Management's Discussion and Analysis of Financial Condition and Results of
Operations—Regulatory Matters."
Employees and Property
As of December 31, 2013, Farmer Mac employed 67 people, located primarily at its office at 1999 K
Street, N.W., 4th Floor, Washington, D.C. 20006. Farmer Mac also maintains an office at 5408 NW 88th
Street, Suite 120, Johnston, Iowa 50131. Farmer Mac's main telephone number is (202) 872-7700.
11
12
regulatory mandate. Farmer Mac believes that the concentration in such a small number of holders of
Class B voting common stock is a by-product of the limited number of eligible holders of that stock and
the structure of the FCS, the number of institutions of which has decreased over time as a result of mergers
and consolidations.
The dividend and liquidation rights of all three classes of Farmer Mac's common stock are the same.
Dividends may be paid on Farmer Mac's common stock only when, as, and if declared by Farmer Mac's
board of directors in its sole discretion, subject to compliance with applicable capital requirements and the
payment of dividends on any outstanding preferred stock issued by Farmer Mac. Upon liquidation,
dissolution, or winding up of the business of Farmer Mac, after payment and provision for payment of
outstanding debt of Farmer Mac, the holders of shares of Farmer Mac's currently outstanding 5.875%
Non-Cumulative Preferred Stock, Series A ("Series A Preferred Stock") and any other preferred stock then
outstanding, would be paid at par value out of assets available for distribution, plus all declared and
unpaid dividends, before the holders of shares of common stock received any payment. The assets of
Farmer Mac II LLC are not directly available to satisfy the claims of Farmer Mac's creditors or
stockholders. Those assets will only be available to the creditors and stockholders of Farmer Mac after all
obligations owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied. In
addition, Farmer Mac II LLC has outstanding preferred stock, which is permanent equity of Farmer Mac
II LLC and presented as "Non-controlling interest – preferred stock" within total equity on Farmer Mac's
consolidated balance sheets. See "Business—Financing—Equity Issuance—Non-Controlling Interest in
Farmer Mac II LLC." See also "Market for Registrant's Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities" for more information regarding Farmer Mac's common stock,
and "Business—Financing—Equity Issuance" for more information on Farmer Mac's common stock and
preferred stock.
Mac is not structured as a cooperative owned exclusively by member institutions and established to
provide services exclusively to its members. Rather, Farmer Mac, as a publicly-traded corporation, has a
broader base of stockholders, including those who do not directly participate in the secondary market
provided by Farmer Mac. Therefore, Farmer Mac seeks to fulfill its mission of serving the financing
needs of rural America in a manner that is consistent with providing a return on the investment of its
stockholders.
Farmer Mac's policy is to require financial institutions to own a requisite amount of Farmer Mac common
stock, based on the size and type of institution, to participate in the Farm & Ranch line of business. As a
result of this requirement, coupled with the ability of holders of Class A and Class B voting common stock
to elect two-thirds of Farmer Mac's board of directors, Farmer Mac regularly conducts business with
"related parties," including institutions affiliated with members of Farmer Mac's board of directors and
institutions that own large amounts of Farmer Mac's voting common stock. Farmer Mac has adopted a
Code of Business Conduct and Ethics that governs any conflicts of interest that may arise in these
transactions, and Farmer Mac's policy is to require that any transactions with related parties be conducted
in the ordinary course of business, with terms and conditions comparable to those available to any other
counterparty not related to Farmer Mac. For more information about related party transactions, see
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of
Operations—Related Party Transactions" and Note 3 to the consolidated financial statements.
Regulatory Oversight
Farmer Mac's charter assigns to FCA, acting through the separate Office of Secondary Market Oversight
("OSMO") within FCA, the responsibility for the examination and the general supervision of the safe and
sound performance of the powers, functions, and duties vested in Farmer Mac by the charter. The charter
also authorizes FCA, acting through OSMO, to apply its general enforcement powers to Farmer
Mac. Farmer Mac (including its subsidiaries) is the only entity regulated by OSMO, which was created as
a separate office in recognition of the different role that Farmer Mac plays in providing a secondary
market, as compared to the roles of other FCS institutions as primary lenders. The Director of OSMO is
selected by, and reports to, the FCA board. The FCA board approves the policies, regulations, charters,
and enforcement activities applicable to other FCS institutions, which are the only eligible holders of
Farmer Mac's Class B voting common stock. FCA has no regulatory authority over the financial
institutions that are the eligible holders of Farmer Mac's Class A voting common stock.
Farmer Mac's charter requires an annual examination of the financial transactions of Farmer Mac and
authorizes FCA to assess Farmer Mac for the cost of FCA's regulatory activities, including the cost of any
examination. Each year, OSMO conducts an examination of Farmer Mac to evaluate its safety and
soundness, compliance with applicable laws and regulations, and mission achievement. The examination
includes a review of Farmer Mac's capital adequacy, asset quality, management performance, earnings,
liquidity, and sensitivity to interest rate risk. Farmer Mac is also required to file quarterly reports of
condition with OSMO. In addition, as a publicly-traded corporation, Farmer Mac is required to comply
with the periodic reporting requirements of the U.S. Securities and Exchange Commission (the "SEC").
For a more detailed discussion of Farmer Mac's regulatory and governmental relationships, see
"—Government Regulation of Farmer Mac."
Unlike some other GSEs, specifically other FCS institutions and the Federal Home Loan Banks, Farmer
Capital
Farmer Mac's charter establishes three capital standards for Farmer Mac – minimum capital, critical
capital, and risk-based capital. Farmer Mac is required to comply with the higher of the minimum capital
requirement and the risk-based capital requirement. Also, in accordance with a recently effective FCA
regulation on capital planning, Farmer Mac's board of directors has adopted a policy for maintaining a
sufficient level of Tier 1 capital and imposing restrictions on dividends and employee (including officer)
bonus payments in the event that Farmer Mac's Tier 1 capital falls below specified thresholds. For a
discussion of Farmer Mac's capital requirements and its actual capital levels, and particularly FCA's role
in the establishment and maintenance of those requirements and levels, see "—Government Regulation of
Farmer Mac—Regulation—Capital Standards," "Management's Discussion and Analysis of Financial
Condition and Results of Operations—Balance Sheet Review—Equity," "Management's Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital
Requirements" and "Management's Discussion and Analysis of Financial Condition and Results of
Operations—Regulatory Matters."
Employees and Property
As of December 31, 2013, Farmer Mac employed 67 people, located primarily at its office at 1999 K
Street, N.W., 4th Floor, Washington, D.C. 20006. Farmer Mac also maintains an office at 5408 NW 88th
Street, Suite 120, Johnston, Iowa 50131. Farmer Mac's main telephone number is (202) 872-7700.
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Available Information
Farmer Mac makes available free of charge, through the "Investors" section of its internet website at
www.farmermac.com, copies of materials it files with, or furnishes to, the SEC, including its Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements,
and amendments, if any, to those filings, as soon as reasonably practicable after electronically filing those
materials with, or furnishing those materials to, the SEC. Please note that all references to
www.farmermac.com in this Annual Report on Form 10-K are inactive textual references only. The
information contained on Farmer Mac's website is not incorporated by reference into this Annual Report
on Form 10-K.
FARMER MAC LINES OF BUSINESS
The following tables present the outstanding balances and new business volume under Farmer Mac's three
lines of business – Farm & Ranch, USDA Guarantees, and Rural Utilities:
Outstanding Balances of Loans Held, Loans Underlying Off-Balance Sheet Farmer Mac Guaranteed
Securities and LTSPCs, AgVantage Securities, USDA Securities, and Farmer Mac Guaranteed USDA Securities
On-balance sheet:
Farm & Ranch:
Loans
Loans held in trusts:
Beneficial interests owned by Farmer Mac
Beneficial interests owned by third party investors
AgVantage Securities
USDA Guarantees:
USDA Securities
Farmer Mac Guaranteed USDA Securities
Rural Utilities:
Loans
Loans held in trusts:
Beneficial interests owned by Farmer Mac
AgVantage Securities
Total on-balance sheet
Off-balance sheet:
Farm & Ranch:
AgVantage Securities
LTSPCs
Guaranteed Securities
USDA Guarantees:
As of December 31,
2013
2012
(in thousands)
$
1,875,958
$
1,519,415
—
259,509
3,539,650
1,645,806
21,089
39
160,397
3,339,200
1,559,683
26,238
698,010
663,097
354,241
1,527,205
368,848
1,298,506
9,921,468
$
8,935,423
970,000
$
970,000
2,261,862
765,751
2,156,068
911,370
$
$
Farmer Mac Guaranteed USDA Securities
20,222
29,658
Rural Utilities:
AgVantage Securities
Total off-balance sheet
Total
11,009
12,669
$
$
4,028,844
13,950,312
$
$
4,079,765
13,015,188
New Business Volume – Farmer Mac Loan Purchases, Guarantees, and LTSPCs
Farm & Ranch:
Loans
LTSPCs
AgVantage Securities
USDA Guarantees:
USDA Securities
Rural Utilities:
Loans
AgVantage Securities
Farmer Mac Guaranteed USDA Securities
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
824,881
$
570,346
$
540,798
453,500
361,894
—
86,965
820,000
744,110
601,000
479,324
5,327
166,117
383,406
495,455
471,994
1,801,500
404,445
3,268
203,789
2,796
Total purchases, guarantees, and LTSPCs
$
3,088,038
$
2,949,630
$
3,383,247
For additional financial information about Farmer Mac's lines of business, each of which is a reportable
operating segment of Farmer Mac, see Note 14 to the consolidated financial statements. The following
sections describe Farmer Mac's activities under each line of business.
Farm & Ranch
Under the Farm & Ranch line of business, Farmer Mac provides a secondary market for mortgage loans
secured by agricultural real estate and rural housing by (1) purchasing and retaining eligible mortgage
loans, (2) providing advances against eligible mortgage loans by purchasing obligations secured by those
loans, (3) securitizing eligible mortgage loans and guaranteeing the timely payment of principal and
interest on the resulting securities that represent interests in, or obligations secured by, pools of those
loans, or (4) providing LTSPCs to acquire designated eligible mortgage loans, subject to the terms of the
applicable LTSPC agreement. Farmer Mac is compensated for these activities through net effective spread
on loans and Farmer Mac Guaranteed Securities held on balance sheet, guarantee fees earned on Farmer
Mac Guaranteed Securities, and commitment fees earned on loans in LTSPCs.
Loan Eligibility
To be eligible for the Farm & Ranch line of business, a loan is required to:
• be secured by a fee simple mortgage or a long-term leasehold mortgage, with status as a first lien
on agricultural real estate, including part-time farms and rural housing, located within the United
• be an obligation of a citizen or national of the United States, an alien lawfully admitted for
permanent residence in the United States, or a private corporation or partnership that is majority-
owned by U.S. citizens, nationals, or legal resident aliens;
• be an obligation of a person, corporation, or partnership having training or farming experience that
is sufficient to ensure a reasonable likelihood that the loan will be repaid according to its terms;
States;
and
13
14
Available Information
Farmer Mac makes available free of charge, through the "Investors" section of its internet website at
www.farmermac.com, copies of materials it files with, or furnishes to, the SEC, including its Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements,
and amendments, if any, to those filings, as soon as reasonably practicable after electronically filing those
materials with, or furnishing those materials to, the SEC. Please note that all references to
www.farmermac.com in this Annual Report on Form 10-K are inactive textual references only. The
information contained on Farmer Mac's website is not incorporated by reference into this Annual Report
on Form 10-K.
FARMER MAC LINES OF BUSINESS
The following tables present the outstanding balances and new business volume under Farmer Mac's three
lines of business – Farm & Ranch, USDA Guarantees, and Rural Utilities:
Outstanding Balances of Loans Held, Loans Underlying Off-Balance Sheet Farmer Mac Guaranteed
Securities and LTSPCs, AgVantage Securities, USDA Securities, and Farmer Mac Guaranteed USDA Securities
Beneficial interests owned by Farmer Mac
Beneficial interests owned by third party investors
Farmer Mac Guaranteed USDA Securities
Beneficial interests owned by Farmer Mac
On-balance sheet:
Farm & Ranch:
Loans
Loans held in trusts:
AgVantage Securities
USDA Guarantees:
USDA Securities
Rural Utilities:
Loans
Loans held in trusts:
AgVantage Securities
Total on-balance sheet
Off-balance sheet:
Farm & Ranch:
AgVantage Securities
LTSPCs
Guaranteed Securities
USDA Guarantees:
Rural Utilities:
AgVantage Securities
Total off-balance sheet
Total
As of December 31,
2013
2012
(in thousands)
$
1,875,958
$
1,519,415
—
259,509
3,539,650
1,645,806
21,089
39
160,397
3,339,200
1,559,683
26,238
698,010
663,097
354,241
1,527,205
368,848
1,298,506
9,921,468
$
8,935,423
970,000
$
970,000
2,261,862
765,751
2,156,068
911,370
$
$
11,009
12,669
$
$
4,028,844
13,950,312
$
$
4,079,765
13,015,188
Farmer Mac Guaranteed USDA Securities
20,222
29,658
New Business Volume – Farmer Mac Loan Purchases, Guarantees, and LTSPCs
Farm & Ranch:
Loans
LTSPCs
AgVantage Securities
USDA Guarantees:
USDA Securities
Farmer Mac Guaranteed USDA Securities
Rural Utilities:
Loans
AgVantage Securities
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
824,881
$
570,346
$
540,798
453,500
361,894
—
86,965
820,000
744,110
601,000
479,324
5,327
166,117
383,406
495,455
471,994
1,801,500
404,445
3,268
203,789
2,796
Total purchases, guarantees, and LTSPCs
$
3,088,038
$
2,949,630
$
3,383,247
For additional financial information about Farmer Mac's lines of business, each of which is a reportable
operating segment of Farmer Mac, see Note 14 to the consolidated financial statements. The following
sections describe Farmer Mac's activities under each line of business.
Farm & Ranch
Under the Farm & Ranch line of business, Farmer Mac provides a secondary market for mortgage loans
secured by agricultural real estate and rural housing by (1) purchasing and retaining eligible mortgage
loans, (2) providing advances against eligible mortgage loans by purchasing obligations secured by those
loans, (3) securitizing eligible mortgage loans and guaranteeing the timely payment of principal and
interest on the resulting securities that represent interests in, or obligations secured by, pools of those
loans, or (4) providing LTSPCs to acquire designated eligible mortgage loans, subject to the terms of the
applicable LTSPC agreement. Farmer Mac is compensated for these activities through net effective spread
on loans and Farmer Mac Guaranteed Securities held on balance sheet, guarantee fees earned on Farmer
Mac Guaranteed Securities, and commitment fees earned on loans in LTSPCs.
Loan Eligibility
To be eligible for the Farm & Ranch line of business, a loan is required to:
• be secured by a fee simple mortgage or a long-term leasehold mortgage, with status as a first lien
on agricultural real estate, including part-time farms and rural housing, located within the United
States;
• be an obligation of a citizen or national of the United States, an alien lawfully admitted for
permanent residence in the United States, or a private corporation or partnership that is majority-
owned by U.S. citizens, nationals, or legal resident aliens;
• be an obligation of a person, corporation, or partnership having training or farming experience that
is sufficient to ensure a reasonable likelihood that the loan will be repaid according to its terms;
and
13
14
• meet the credit underwriting, collateral valuation, documentation, and other specified standards for
the Farm & Ranch line of business. See "—Underwriting and Collateral Valuation (Appraisal)
Standards" and "—Approved Lenders" for a description of these standards.
Eligible agricultural real estate consists of one or more parcels of land, which may be improved by
permanently affixed buildings or other structures, that (other than rural housing property):
and LTSPCs.
•
•
is used for the production of one or more agricultural commodities or products; and
either consists of a minimum of five acres or generates minimum annual receipts of $5,000.
Farmer Mac's charter authorizes a maximum loan size (adjusted annually for inflation) for an eligible
Farm & Ranch loan secured by more than 1,000 acres of agricultural real estate. That maximum loan size
was $11.0 million as of December 31, 2013 and increased to $12.0 million as of January 1, 2014.
Although the charter does not prescribe a maximum loan size or a total borrower exposure for an eligible
Farm & Ranch loan secured by 1,000 acres or less of agricultural real estate, Farmer Mac currently limits
the size of those loans to:
• $30.0 million in cumulative exposure to any one borrower or related borrowers for transactions
involving direct exposure to credit risk on loans (e.g., loan purchases, LTSPC transactions, and
non-AgVantage Farm & Ranch Guaranteed Securities, which are not backed by a general
obligation of a lender); and
• $75.0 million in cumulative exposure (with the amount of any direct borrower exposure described
above also counting toward the $75.0 million limit) for AgVantage transactions, which involve the
general obligation of a lender that is in turn secured by eligible loans, resulting in indirect exposure
to credit risk on those loans.
Farmer Mac includes its part-time farm loans and rural housing loans in the Farm & Ranch line of
business. Farmer Mac defines a "part-time farm" as agricultural real estate meeting the eligibility
requirements described above on which is located a primary residence whose value is at least 30 percent
of the property's aggregate value at origination. Farmer Mac assesses part-time farm repayment capacity
primarily on the basis of the borrower's off-farm income, rather than agricultural production capacity.
Part-time farm loans do not represent a significant part of Farmer Mac's business, with a total of $162.7
million of those loans in Farmer Mac's portfolio as of December 31, 2013.
For the rural housing portion of this line of business, an eligible loan must be secured by a mortgage on a
one- to four-family, owner-occupied, moderately priced principal residence located in a community with a
population of 2,500 or fewer. The current maximum purchase price or current appraised value for a
dwelling, excluding the land to which the dwelling is affixed, that secures a rural housing loan is
$269,807. That limit is generally adjusted annually based on changes in home values during the previous
year, though it was not adjusted in 2013. In addition to the dwelling itself, an eligible rural housing loan
can be secured by land associated with the dwelling having an appraised value of no more than 50 percent
of the total appraised value of the combined property. Rural housing loans do not represent a significant
part of Farmer Mac's business, with a total of $3.8 million of those loans in Farmer Mac's portfolio as of
December 31, 2013.
Summary of Farm & Ranch Transactions
During the year ended December 31, 2013, Farmer Mac added a total of $1.8 billion of new business
volume under the Farm & Ranch line of business. That new business volume was partially offset by
repayments on existing assets (principal paydowns and maturities) during the year, resulting in $9.7 billion
of total outstanding business volume in this line of business as of December 31, 2013, including loans
held, AgVantage securities, and loans underlying non-AgVantage Farm & Ranch Guaranteed Securities
During 2013, Farmer Mac purchased eligible loans from 218 entities (the top ten institutions generated 53
percent of the purchase volume) and placed loans under LTSPCs with 25 entities in the Farm & Ranch line
of business. During 2012, Farmer Mac purchased eligible loans from 159 entities (the top ten institutions
generated 53.9 percent of the purchase volume) and placed loans under LTSPCs with 33 entities. During
2011, Farmer Mac purchased eligible loans from 111 entities (the top ten institutions generated 66.4
percent of the purchase volume) and placed loans under LTSPCs with 22 entities.
The following table summarizes loans purchased or newly placed under LTSPCs and AgVantage
securities purchased under the Farm & Ranch line of business for each of the years ended December 31,
2013, 2012, and 2011:
Loans
LTSPCs
Total
AgVantage Securities
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
$
824,881
$
570,346
$
540,798
453,500
744,110
601,000
1,819,179
$
1,915,456
$
495,455
471,994
1,801,500
2,768,949
The following table presents the outstanding balances of Farm & Ranch loans held, AgVantage securities,
and loans underlying non-AgVantage Farm & Ranch Guaranteed Securities and LTSPCs as of the dates
indicated:
Beneficial interests owned by Farmer Mac
Beneficial interests owned by third party investors
On-balance sheet:
Loans
Loans held in trusts:
AgVantage Securities
Total on-balance sheet
Off-balance sheet:
AgVantage Securities
LTSPCs
Guaranteed Securities
Total off-balance sheet
Total
As of December 31,
2013
2012
(in thousands)
$
1,875,958
$
1,519,415
—
259,509
3,539,650
5,675,117
970,000
2,261,862
765,751
3,997,613
9,672,730
$
$
$
$
39
160,397
3,339,200
5,019,051
970,000
2,156,068
911,370
4,037,438
9,056,489
$
$
$
$
15
16
• meet the credit underwriting, collateral valuation, documentation, and other specified standards for
the Farm & Ranch line of business. See "—Underwriting and Collateral Valuation (Appraisal)
Standards" and "—Approved Lenders" for a description of these standards.
Eligible agricultural real estate consists of one or more parcels of land, which may be improved by
permanently affixed buildings or other structures, that (other than rural housing property):
•
•
is used for the production of one or more agricultural commodities or products; and
either consists of a minimum of five acres or generates minimum annual receipts of $5,000.
Farmer Mac's charter authorizes a maximum loan size (adjusted annually for inflation) for an eligible
Farm & Ranch loan secured by more than 1,000 acres of agricultural real estate. That maximum loan size
was $11.0 million as of December 31, 2013 and increased to $12.0 million as of January 1, 2014.
Although the charter does not prescribe a maximum loan size or a total borrower exposure for an eligible
Farm & Ranch loan secured by 1,000 acres or less of agricultural real estate, Farmer Mac currently limits
the size of those loans to:
• $30.0 million in cumulative exposure to any one borrower or related borrowers for transactions
involving direct exposure to credit risk on loans (e.g., loan purchases, LTSPC transactions, and
non-AgVantage Farm & Ranch Guaranteed Securities, which are not backed by a general
obligation of a lender); and
• $75.0 million in cumulative exposure (with the amount of any direct borrower exposure described
above also counting toward the $75.0 million limit) for AgVantage transactions, which involve the
general obligation of a lender that is in turn secured by eligible loans, resulting in indirect exposure
to credit risk on those loans.
Farmer Mac includes its part-time farm loans and rural housing loans in the Farm & Ranch line of
business. Farmer Mac defines a "part-time farm" as agricultural real estate meeting the eligibility
requirements described above on which is located a primary residence whose value is at least 30 percent
of the property's aggregate value at origination. Farmer Mac assesses part-time farm repayment capacity
primarily on the basis of the borrower's off-farm income, rather than agricultural production capacity.
Part-time farm loans do not represent a significant part of Farmer Mac's business, with a total of $162.7
million of those loans in Farmer Mac's portfolio as of December 31, 2013.
For the rural housing portion of this line of business, an eligible loan must be secured by a mortgage on a
one- to four-family, owner-occupied, moderately priced principal residence located in a community with a
population of 2,500 or fewer. The current maximum purchase price or current appraised value for a
dwelling, excluding the land to which the dwelling is affixed, that secures a rural housing loan is
$269,807. That limit is generally adjusted annually based on changes in home values during the previous
year, though it was not adjusted in 2013. In addition to the dwelling itself, an eligible rural housing loan
can be secured by land associated with the dwelling having an appraised value of no more than 50 percent
of the total appraised value of the combined property. Rural housing loans do not represent a significant
part of Farmer Mac's business, with a total of $3.8 million of those loans in Farmer Mac's portfolio as of
December 31, 2013.
Summary of Farm & Ranch Transactions
During the year ended December 31, 2013, Farmer Mac added a total of $1.8 billion of new business
volume under the Farm & Ranch line of business. That new business volume was partially offset by
repayments on existing assets (principal paydowns and maturities) during the year, resulting in $9.7 billion
of total outstanding business volume in this line of business as of December 31, 2013, including loans
held, AgVantage securities, and loans underlying non-AgVantage Farm & Ranch Guaranteed Securities
and LTSPCs.
During 2013, Farmer Mac purchased eligible loans from 218 entities (the top ten institutions generated 53
percent of the purchase volume) and placed loans under LTSPCs with 25 entities in the Farm & Ranch line
of business. During 2012, Farmer Mac purchased eligible loans from 159 entities (the top ten institutions
generated 53.9 percent of the purchase volume) and placed loans under LTSPCs with 33 entities. During
2011, Farmer Mac purchased eligible loans from 111 entities (the top ten institutions generated 66.4
percent of the purchase volume) and placed loans under LTSPCs with 22 entities.
The following table summarizes loans purchased or newly placed under LTSPCs and AgVantage
securities purchased under the Farm & Ranch line of business for each of the years ended December 31,
2013, 2012, and 2011:
Loans
LTSPCs
AgVantage Securities
Total
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
$
824,881
$
570,346
$
540,798
453,500
744,110
601,000
1,819,179
$
1,915,456
$
495,455
471,994
1,801,500
2,768,949
The following table presents the outstanding balances of Farm & Ranch loans held, AgVantage securities,
and loans underlying non-AgVantage Farm & Ranch Guaranteed Securities and LTSPCs as of the dates
indicated:
On-balance sheet:
Loans
Loans held in trusts:
Beneficial interests owned by Farmer Mac
Beneficial interests owned by third party investors
AgVantage Securities
Total on-balance sheet
Off-balance sheet:
AgVantage Securities
LTSPCs
Guaranteed Securities
Total off-balance sheet
Total
As of December 31,
2013
2012
(in thousands)
$
1,875,958
$
1,519,415
—
259,509
3,539,650
5,675,117
970,000
2,261,862
765,751
3,997,613
9,672,730
$
$
$
$
39
160,397
3,339,200
5,019,051
970,000
2,156,068
911,370
4,037,438
9,056,489
$
$
$
$
15
16
Loan Purchases
Farmer Mac offers loan products designed to increase the secondary market liquidity of agricultural real
estate mortgage loans and the lending capacity of financial institutions that originate those loans. Farmer
Mac enters into mandatory delivery commitments to purchase loans and offers rates for those
commitments daily. Farmer Mac also purchases portfolios of newly originated and seasoned loans that are
current in payment on a negotiated basis. Farmer Mac purchases both fixed and adjustable rate loans that
have a variety of maturities and often include balloon payments. Loans purchased may sometimes include
provisions that require a yield maintenance payment or some other form of prepayment penalty in the
event a borrower prepays a loan (depending upon the level of interest rates at the time of prepayment). Of
the $824.9 million of loans purchased in the Farm & Ranch line of business during 2013, 66 percent
included balloon payments and none included yield maintenance prepayment protection. By comparison,
of the $570.3 million of loans purchased in the Farm & Ranch line of business during 2012, 57 percent
included balloon payments and none included yield maintenance prepayment protection.
Guarantees and Commitments
Farmer Mac offers two credit enhancement alternatives to direct loan purchases through the Farm &
Ranch line of business that allow approved lenders the ability to retain the cash flow benefits of their loans
and increase their liquidity and lending capacity: (1) LTSPCs and (2) Farm & Ranch Guaranteed
Securities. LTSPCs and securitization trusts where Farmer Mac is not the primary beneficiary still result
in the creation of off-balance sheet obligations for Farmer Mac. Historically, the only securitization trusts
where Farmer Mac has not determined itself to be the primary beneficiary have been trusts containing
100 percent participation interests in loans that comprised an LTSPC pool prior to securitization, and in
which the participating institution is not a related party to Farmer Mac. In performing Farmer Mac's
purchase and guarantee obligations related to LTSPCs and Farm & Ranch Guaranteed Securities,
payments made on the underlying loans or participation interests and liquidation of the related collateral
(in the event of default under the terms of those assets) are intended to protect Farmer Mac against losses.
Both LTSPC and Farm & Ranch Guaranteed Securities transactions permit a lender to nominate from its
portfolio an identified pool of loans, subject to review by Farmer Mac for conformity with its standards
for Farm & Ranch loans. In non-AgVantage Farm & Ranch Guaranteed Securities and LTSPC
transactions, the lender effectively transfers the credit risk on those eligible loans because, through Farmer
Mac's guarantee or commitment to purchase, Farmer Mac assumes the ultimate credit risk of borrower
defaults on the underlying loans. In the case of AgVantage securities, Farmer Mac assumes the ultimate
credit risk of issuer default on the underlying obligations that are secured by eligible loans. These types of
risk transfer reduce a lender's credit and concentration risk exposures and, consequently, its regulatory
capital requirements and loss reserve requirements. The loans and participation interests underlying
LTSPCs and Farm & Ranch Guaranteed Securities may include those with payment, maturity, and interest
rate characteristics that differ from the loan products that Farmer Mac offers for purchase on a daily basis,
but all are subject to the applicable standards described in "—Underwriting and Collateral Valuation
(Appraisal) Standards." See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."
LTSPCs. An LTSPC commits Farmer Mac, subject to the terms of the applicable LTSPC agreement, to a
future purchase of one or more loans from an identified pool of eligible loans that met Farmer Mac's
standards at the time the transaction was entered into and Farmer Mac assumed the credit risk on the
loans. The LTSPC structure, which is not a guarantee of loans or securities, permits the lender to retain
the loan pool in its portfolio until such time, if ever, as the lender elects to deliver some or all of the loans
in the pool to Farmer Mac for purchase under the terms of the LTSPC agreement. As consideration for its
assumption of the credit risk on loans underlying an LTSPC, Farmer Mac receives commitment fees
payable monthly in arrears in an amount approximating what would have been the guarantee fees if the
transaction were structured as Farm & Ranch Guaranteed Securities. Farmer Mac offers different options
under LTSPC arrangements to meet the credit and liquidity needs of its counterparties. Some LTSPCs
provide that the underlying loans can be converted into Farm & Ranch Guaranteed Securities at the option
of the counterparty with no conversion fee paid to Farmer Mac. Some LTSPCs contain risk sharing
arrangements that provide for the counterparty to absorb up to a specified amount (typically between one
and three percent of the original principal balance of the loan pool) of any losses incurred on the loans in
the pool. As of December 31, 2013 and 2012, approximately 2.7 percent and 3.0 percent, respectively, of
total LTSPCs and Farm & Ranch Guaranteed Securities, including those consolidated as loans on Farmer
Mac's balance sheet, contained risk sharing arrangements.
At a lender's request, Farmer Mac purchases loans subject to an LTSPC at:
• par if the loans become delinquent for either 90 days or 120 days (depending on the agreement) or
are in material non-monetary default, with accrued and unpaid interest on the defaulted loans
payable out of any future loan payments or liquidation proceeds; or
•
a mark-to-market price or in exchange for Farm & Ranch Guaranteed Securities (if the loans are
not delinquent), in accordance with the terms of the applicable agreement.
In 2013, Farmer Mac entered into $540.8 million of LTSPCs, compared to $744.1 million in 2012. In
2013, LTSPCs remained the preferred credit enhancement alternative for new off-balance sheet
transactions, and they continue to be a significant portion of the Farm & Ranch line of business. During
2013 and 2012, there were no conversions of LTSPCs into Farm & Ranch Guaranteed Securities. As of
2013, Farmer Mac's outstanding LTSPCs covered 4,274 mortgage loans with an aggregate principal
balance of $2.3 billion. See "Management's Discussion and Analysis of Financial Condition and Results
of Operations—Results of Operations—Business Volume."
Farm & Ranch Guaranteed Securities. In Farm & Ranch Guaranteed Securities transactions, Farmer Mac
guarantees securities representing interests in, or obligations secured by, eligible Farm & Ranch loans or
participation interests in those loans held by a trust or other entity. Farmer Mac guarantees the timely
payment of interest and principal on the securities, which are either retained by Farmer Mac or sold to
third parties. For those securities sold to third parties, the eligible loans or participation interests are often
acquired from lenders in exchange for the Farm & Ranch Guaranteed Securities backed by those
assets. As consideration for its assumption of the credit risk on the assets underlying the Farm & Ranch
Guaranteed Securities, Farmer Mac receives guarantee fees based on the outstanding principal balance of
the related securities. The Farm & Ranch Guaranteed Securities representing the general obligations of
issuers secured by eligible loans are referred to as AgVantage securities. See "—AgVantage Securities."
Farmer Mac is obligated under its guarantee on the securities to make timely payments to investors of
principal (including balloon payments) and interest based on the scheduled payments on the underlying
loans or obligations, regardless of whether Farmer Mac or the related trust has actually received those
scheduled payments. Farmer Mac's guarantee fees typically are collected out of installment payments
made on the underlying loans or obligations until those loans or obligations have been repaid, purchased
out of the trust, or otherwise liquidated (generally as a result of default). The aggregate amount of
17
18
Loan Purchases
Farmer Mac offers loan products designed to increase the secondary market liquidity of agricultural real
estate mortgage loans and the lending capacity of financial institutions that originate those loans. Farmer
Mac enters into mandatory delivery commitments to purchase loans and offers rates for those
commitments daily. Farmer Mac also purchases portfolios of newly originated and seasoned loans that are
current in payment on a negotiated basis. Farmer Mac purchases both fixed and adjustable rate loans that
have a variety of maturities and often include balloon payments. Loans purchased may sometimes include
provisions that require a yield maintenance payment or some other form of prepayment penalty in the
event a borrower prepays a loan (depending upon the level of interest rates at the time of prepayment). Of
the $824.9 million of loans purchased in the Farm & Ranch line of business during 2013, 66 percent
included balloon payments and none included yield maintenance prepayment protection. By comparison,
of the $570.3 million of loans purchased in the Farm & Ranch line of business during 2012, 57 percent
included balloon payments and none included yield maintenance prepayment protection.
Guarantees and Commitments
Farmer Mac offers two credit enhancement alternatives to direct loan purchases through the Farm &
Ranch line of business that allow approved lenders the ability to retain the cash flow benefits of their loans
and increase their liquidity and lending capacity: (1) LTSPCs and (2) Farm & Ranch Guaranteed
Securities. LTSPCs and securitization trusts where Farmer Mac is not the primary beneficiary still result
in the creation of off-balance sheet obligations for Farmer Mac. Historically, the only securitization trusts
where Farmer Mac has not determined itself to be the primary beneficiary have been trusts containing
100 percent participation interests in loans that comprised an LTSPC pool prior to securitization, and in
which the participating institution is not a related party to Farmer Mac. In performing Farmer Mac's
purchase and guarantee obligations related to LTSPCs and Farm & Ranch Guaranteed Securities,
payments made on the underlying loans or participation interests and liquidation of the related collateral
(in the event of default under the terms of those assets) are intended to protect Farmer Mac against losses.
Both LTSPC and Farm & Ranch Guaranteed Securities transactions permit a lender to nominate from its
portfolio an identified pool of loans, subject to review by Farmer Mac for conformity with its standards
for Farm & Ranch loans. In non-AgVantage Farm & Ranch Guaranteed Securities and LTSPC
transactions, the lender effectively transfers the credit risk on those eligible loans because, through Farmer
Mac's guarantee or commitment to purchase, Farmer Mac assumes the ultimate credit risk of borrower
defaults on the underlying loans. In the case of AgVantage securities, Farmer Mac assumes the ultimate
credit risk of issuer default on the underlying obligations that are secured by eligible loans. These types of
risk transfer reduce a lender's credit and concentration risk exposures and, consequently, its regulatory
capital requirements and loss reserve requirements. The loans and participation interests underlying
LTSPCs and Farm & Ranch Guaranteed Securities may include those with payment, maturity, and interest
rate characteristics that differ from the loan products that Farmer Mac offers for purchase on a daily basis,
but all are subject to the applicable standards described in "—Underwriting and Collateral Valuation
(Appraisal) Standards." See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."
LTSPCs. An LTSPC commits Farmer Mac, subject to the terms of the applicable LTSPC agreement, to a
future purchase of one or more loans from an identified pool of eligible loans that met Farmer Mac's
standards at the time the transaction was entered into and Farmer Mac assumed the credit risk on the
loans. The LTSPC structure, which is not a guarantee of loans or securities, permits the lender to retain
the loan pool in its portfolio until such time, if ever, as the lender elects to deliver some or all of the loans
in the pool to Farmer Mac for purchase under the terms of the LTSPC agreement. As consideration for its
assumption of the credit risk on loans underlying an LTSPC, Farmer Mac receives commitment fees
payable monthly in arrears in an amount approximating what would have been the guarantee fees if the
transaction were structured as Farm & Ranch Guaranteed Securities. Farmer Mac offers different options
under LTSPC arrangements to meet the credit and liquidity needs of its counterparties. Some LTSPCs
provide that the underlying loans can be converted into Farm & Ranch Guaranteed Securities at the option
of the counterparty with no conversion fee paid to Farmer Mac. Some LTSPCs contain risk sharing
arrangements that provide for the counterparty to absorb up to a specified amount (typically between one
and three percent of the original principal balance of the loan pool) of any losses incurred on the loans in
the pool. As of December 31, 2013 and 2012, approximately 2.7 percent and 3.0 percent, respectively, of
total LTSPCs and Farm & Ranch Guaranteed Securities, including those consolidated as loans on Farmer
Mac's balance sheet, contained risk sharing arrangements.
At a lender's request, Farmer Mac purchases loans subject to an LTSPC at:
• par if the loans become delinquent for either 90 days or 120 days (depending on the agreement) or
are in material non-monetary default, with accrued and unpaid interest on the defaulted loans
payable out of any future loan payments or liquidation proceeds; or
•
a mark-to-market price or in exchange for Farm & Ranch Guaranteed Securities (if the loans are
not delinquent), in accordance with the terms of the applicable agreement.
In 2013, Farmer Mac entered into $540.8 million of LTSPCs, compared to $744.1 million in 2012. In
2013, LTSPCs remained the preferred credit enhancement alternative for new off-balance sheet
transactions, and they continue to be a significant portion of the Farm & Ranch line of business. During
2013 and 2012, there were no conversions of LTSPCs into Farm & Ranch Guaranteed Securities. As of
2013, Farmer Mac's outstanding LTSPCs covered 4,274 mortgage loans with an aggregate principal
balance of $2.3 billion. See "Management's Discussion and Analysis of Financial Condition and Results
of Operations—Results of Operations—Business Volume."
Farm & Ranch Guaranteed Securities. In Farm & Ranch Guaranteed Securities transactions, Farmer Mac
guarantees securities representing interests in, or obligations secured by, eligible Farm & Ranch loans or
participation interests in those loans held by a trust or other entity. Farmer Mac guarantees the timely
payment of interest and principal on the securities, which are either retained by Farmer Mac or sold to
third parties. For those securities sold to third parties, the eligible loans or participation interests are often
acquired from lenders in exchange for the Farm & Ranch Guaranteed Securities backed by those
assets. As consideration for its assumption of the credit risk on the assets underlying the Farm & Ranch
Guaranteed Securities, Farmer Mac receives guarantee fees based on the outstanding principal balance of
the related securities. The Farm & Ranch Guaranteed Securities representing the general obligations of
issuers secured by eligible loans are referred to as AgVantage securities. See "—AgVantage Securities."
Farmer Mac is obligated under its guarantee on the securities to make timely payments to investors of
principal (including balloon payments) and interest based on the scheduled payments on the underlying
loans or obligations, regardless of whether Farmer Mac or the related trust has actually received those
scheduled payments. Farmer Mac's guarantee fees typically are collected out of installment payments
made on the underlying loans or obligations until those loans or obligations have been repaid, purchased
out of the trust, or otherwise liquidated (generally as a result of default). The aggregate amount of
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18
guarantee fees received on Farm & Ranch Guaranteed Securities depends on the amount of those
securities outstanding and on the applicable guarantee fee rate, which Farmer Mac's charter caps at
50 basis points (0.50 percent) per year. The amount of non-AgVantage Farm & Ranch Guaranteed
Securities outstanding is influenced by the repayment rates on the underlying loans and by the rate at
which Farmer Mac issues new Farm & Ranch Guaranteed Securities, including as a result of conversions
from LTSPCs. In general, when the level of interest rates declines significantly below the interest rates on
loans underlying Farm & Ranch Guaranteed Securities, the rate of prepayments is likely to increase.
Conversely, when interest rates rise above the interest rates on the loans underlying Farm & Ranch
Guaranteed Securities, the rate of prepayments is likely to decrease. In addition to changes in interest
rates, the timing of principal payments on Farm & Ranch Guaranteed Securities also is influenced by a
variety of economic, demographic, and other considerations, such as yield maintenance provisions that
may be associated with the underlying loans. For more information about yield maintenance provisions,
see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk
Management—Interest Rate Risk."
Of the $14.0 billion outstanding principal balance of program assets included in Farmer Mac's three lines
of business as of December 31, 2013, $5.5 billion were in the form of Farm & Ranch Guaranteed
Securities. As of December 31, 2013, the outstanding Farm & Ranch Guaranteed Securities consisted of:
• $4.5 billion of Farm & Ranch Guaranteed Securities structured as AgVantage securities, which
represent a general obligation of the issuing institution secured by a pledge of eligible loan assets
in excess of the principal amount of the AgVantage securities but do not represent a direct interest
in the cash flows of the pledged collateral. See "—AgVantage Securities."
• $1.0 billion of Farm & Ranch Guaranteed Securities created from the deposit of eligible loan
assets into securitization trusts that issue "pass-through" certificates representing interests in the
underlying assets. This type of securitization structure may involve the deposit of either whole
loans or loan participation interests into the trusts.
As of December 31, 2013, Farmer Mac had outstanding non-AgVantage Farm & Ranch Guaranteed
Securities of $259.5 million that represent interests in whole loans and $765.8 million that represent
interests in loan participations as a result of conversions from LTSPCs. Both types of transactions involve
the deposit of eligible assets into securitization trusts along with all of the rights under related agreements
that provide for, among other things, remedies for any breaches of representations and warranties made by
the lender and the servicing of the underlying assets. In each of these transactions, the related trust has
issued securities that represent interests in the assets of the trust and that Farmer Mac guarantees as to the
timely payment of principal and interest.
For Farm & Ranch Guaranteed Securities that result from the conversion of LTSPCs, a 100 percent
participation in the cash flows associated with each loan formerly subject to the LTSPC, rather than the
whole loan, is deposited into the securitization trust. These transactions involve loan participations for
reasons unique to the counterparties that have elected these conversions, all of whom are members of the
FCS. Loans made by FCS institutions to farmers and ranchers have, by statute, specified loan and
collateral actions to which borrowers are entitled, known as "borrower rights." Farmer Mac does not have
the ability to offer all of the prescribed borrower rights without the involvement of another FCS
counterparty. In recognition of this and Farmer Mac's desire not to disrupt the borrower's relationship
with the originating FCS lender and expectations about how the loan will be serviced, Farmer Mac
developed the participation interest securitization structure for FCS loans with borrower rights. The
deposit of participation interests into securitization trusts permits the legal ownership of the related loan to
remain with the FCS counterparty, together with the servicing and borrower rights related to the loan.
Farmer Mac, in its role as trustee, generally has the right to give or withhold consent to the exercise of
remedies as to each related loan. The FCS servicers in these transactions are also the holders of the related
Farm & Ranch Guaranteed Securities, which have the same economic benefit to the holder from a cash
flow perspective as a securitization of whole loans. See "—Servicing" for more information about the
servicing of loans underlying Farm & Ranch Guaranteed Securities.
For the years ended December 31, 2013 and 2012, Farmer Mac sold non-AgVantage Farm & Ranch
Guaranteed Securities in the amounts of $150.4 million and $32.7 million, respectively. No gains or
losses resulted from these sales in either 2013 or 2012. During 2013 and 2012, there were no conversions
of LTSPCs into Farm & Ranch Guaranteed Securities. As of December 31, 2013, Farmer Mac's
outstanding non-AgVantage Farm & Ranch Guaranteed Securities, which may or may not be consolidated
on-balance sheet depending on the primary beneficiary determination described above, were backed by
4,218 mortgage loans with an aggregate principal balance of $1.0 billion. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations—Results of Operations—Business
Volume." See "—AgVantage Securities" for information about Farmer Mac's AgVantage transactions,
which are a form of Farmer Mac Guaranteed Securities.
AgVantage Securities
Each AgVantage security is a general obligation of an institution approved by Farmer Mac, and that
obligation is also secured by a pool of eligible loans under one of Farmer Mac's lines of business. Farmer
Mac guarantees those securities as to the timely payment of principal and interest and may retain
AgVantage securities in its portfolio or sell them to third parties in the capital markets as Farmer Mac
Guaranteed Securities. For information on AgVantage Securities secured by rural utilities loans, see "—
Rural Utilities—Summary of Rural Utilities Transactions."
Before approving an institution as an issuer in an AgVantage transaction in the Farm & Ranch line of
business, Farmer Mac assesses the institution's agricultural real estate mortgage loan performance as well
as the institution's creditworthiness. Farmer Mac continues to monitor the counterparty risk assessment on
an ongoing basis after the AgVantage security is issued.
In addition to being a general obligation of the issuing institution, each Farm & Ranch AgVantage security
must be secured by eligible agricultural real estate mortgage loans in an amount at least equal to the
outstanding principal amount of the security. In the Farm & Ranch line of business, Farmer Mac currently
requires the general obligation to be over-collateralized, either by more eligible loans or any of the
following types of assets:
cash;
•
•
of the United States; or
• other highly-rated securities.
securities issued by the U.S. Treasury or guaranteed by an agency or instrumentality
The required collateralization level for a Farm & Ranch AgVantage security currently ranges from
103 percent to 120 percent, with higher collateralization levels generally required for securities issued by
institutions without long-term debt ratings from a nationally recognized statistical rating organization
("NRSRO"). The required collateralization level is established at the time of issuance and does not
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20
guarantee fees received on Farm & Ranch Guaranteed Securities depends on the amount of those
securities outstanding and on the applicable guarantee fee rate, which Farmer Mac's charter caps at
50 basis points (0.50 percent) per year. The amount of non-AgVantage Farm & Ranch Guaranteed
Securities outstanding is influenced by the repayment rates on the underlying loans and by the rate at
which Farmer Mac issues new Farm & Ranch Guaranteed Securities, including as a result of conversions
from LTSPCs. In general, when the level of interest rates declines significantly below the interest rates on
loans underlying Farm & Ranch Guaranteed Securities, the rate of prepayments is likely to increase.
Conversely, when interest rates rise above the interest rates on the loans underlying Farm & Ranch
Guaranteed Securities, the rate of prepayments is likely to decrease. In addition to changes in interest
rates, the timing of principal payments on Farm & Ranch Guaranteed Securities also is influenced by a
variety of economic, demographic, and other considerations, such as yield maintenance provisions that
may be associated with the underlying loans. For more information about yield maintenance provisions,
see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk
Management—Interest Rate Risk."
Of the $14.0 billion outstanding principal balance of program assets included in Farmer Mac's three lines
of business as of December 31, 2013, $5.5 billion were in the form of Farm & Ranch Guaranteed
Securities. As of December 31, 2013, the outstanding Farm & Ranch Guaranteed Securities consisted of:
• $4.5 billion of Farm & Ranch Guaranteed Securities structured as AgVantage securities, which
represent a general obligation of the issuing institution secured by a pledge of eligible loan assets
in excess of the principal amount of the AgVantage securities but do not represent a direct interest
in the cash flows of the pledged collateral. See "—AgVantage Securities."
• $1.0 billion of Farm & Ranch Guaranteed Securities created from the deposit of eligible loan
assets into securitization trusts that issue "pass-through" certificates representing interests in the
underlying assets. This type of securitization structure may involve the deposit of either whole
loans or loan participation interests into the trusts.
As of December 31, 2013, Farmer Mac had outstanding non-AgVantage Farm & Ranch Guaranteed
Securities of $259.5 million that represent interests in whole loans and $765.8 million that represent
interests in loan participations as a result of conversions from LTSPCs. Both types of transactions involve
the deposit of eligible assets into securitization trusts along with all of the rights under related agreements
that provide for, among other things, remedies for any breaches of representations and warranties made by
the lender and the servicing of the underlying assets. In each of these transactions, the related trust has
issued securities that represent interests in the assets of the trust and that Farmer Mac guarantees as to the
timely payment of principal and interest.
For Farm & Ranch Guaranteed Securities that result from the conversion of LTSPCs, a 100 percent
participation in the cash flows associated with each loan formerly subject to the LTSPC, rather than the
whole loan, is deposited into the securitization trust. These transactions involve loan participations for
reasons unique to the counterparties that have elected these conversions, all of whom are members of the
FCS. Loans made by FCS institutions to farmers and ranchers have, by statute, specified loan and
collateral actions to which borrowers are entitled, known as "borrower rights." Farmer Mac does not have
the ability to offer all of the prescribed borrower rights without the involvement of another FCS
counterparty. In recognition of this and Farmer Mac's desire not to disrupt the borrower's relationship
with the originating FCS lender and expectations about how the loan will be serviced, Farmer Mac
developed the participation interest securitization structure for FCS loans with borrower rights. The
deposit of participation interests into securitization trusts permits the legal ownership of the related loan to
remain with the FCS counterparty, together with the servicing and borrower rights related to the loan.
Farmer Mac, in its role as trustee, generally has the right to give or withhold consent to the exercise of
remedies as to each related loan. The FCS servicers in these transactions are also the holders of the related
Farm & Ranch Guaranteed Securities, which have the same economic benefit to the holder from a cash
flow perspective as a securitization of whole loans. See "—Servicing" for more information about the
servicing of loans underlying Farm & Ranch Guaranteed Securities.
For the years ended December 31, 2013 and 2012, Farmer Mac sold non-AgVantage Farm & Ranch
Guaranteed Securities in the amounts of $150.4 million and $32.7 million, respectively. No gains or
losses resulted from these sales in either 2013 or 2012. During 2013 and 2012, there were no conversions
of LTSPCs into Farm & Ranch Guaranteed Securities. As of December 31, 2013, Farmer Mac's
outstanding non-AgVantage Farm & Ranch Guaranteed Securities, which may or may not be consolidated
on-balance sheet depending on the primary beneficiary determination described above, were backed by
4,218 mortgage loans with an aggregate principal balance of $1.0 billion. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations—Results of Operations—Business
Volume." See "—AgVantage Securities" for information about Farmer Mac's AgVantage transactions,
which are a form of Farmer Mac Guaranteed Securities.
AgVantage Securities
Each AgVantage security is a general obligation of an institution approved by Farmer Mac, and that
obligation is also secured by a pool of eligible loans under one of Farmer Mac's lines of business. Farmer
Mac guarantees those securities as to the timely payment of principal and interest and may retain
AgVantage securities in its portfolio or sell them to third parties in the capital markets as Farmer Mac
Guaranteed Securities. For information on AgVantage Securities secured by rural utilities loans, see "—
Rural Utilities—Summary of Rural Utilities Transactions."
Before approving an institution as an issuer in an AgVantage transaction in the Farm & Ranch line of
business, Farmer Mac assesses the institution's agricultural real estate mortgage loan performance as well
as the institution's creditworthiness. Farmer Mac continues to monitor the counterparty risk assessment on
an ongoing basis after the AgVantage security is issued.
In addition to being a general obligation of the issuing institution, each Farm & Ranch AgVantage security
must be secured by eligible agricultural real estate mortgage loans in an amount at least equal to the
outstanding principal amount of the security. In the Farm & Ranch line of business, Farmer Mac currently
requires the general obligation to be over-collateralized, either by more eligible loans or any of the
following types of assets:
•
•
cash;
securities issued by the U.S. Treasury or guaranteed by an agency or instrumentality
of the United States; or
• other highly-rated securities.
The required collateralization level for a Farm & Ranch AgVantage security currently ranges from
103 percent to 120 percent, with higher collateralization levels generally required for securities issued by
institutions without long-term debt ratings from a nationally recognized statistical rating organization
("NRSRO"). The required collateralization level is established at the time of issuance and does not
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20
change during the life of the AgVantage security. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations—Risk Management—Credit Risk – Institutional."
In all AgVantage transactions, the corporate obligor is required to remove from the pool of pledged
collateral any loan that becomes more than 30 days delinquent in the payment of principal or interest and
to substitute an eligible loan that is current in payment to maintain the minimum required collateralization
level. As of December 31, 2013, Farmer Mac had not experienced any credit losses, nor had it been called
upon to make a guarantee payment to third parties, on any of its AgVantage securities.
As of December 31, 2013 and 2012, the outstanding principal amount of Farm & Ranch AgVantage
securities held by Farmer Mac was $3.5 billion and $3.3 billion, respectively. As of both December 31,
2013 and 2012, the aggregate outstanding principal amount of off-balance sheet AgVantage securities sold
to third parties in the Farm & Ranch line of business totaled $970.0 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—
Business Volume" and "—Risk Management—Credit Risk – Institutional."
Underwriting and Collateral Valuation (Appraisal) Standards
As required by Farmer Mac's charter, Farmer Mac has established underwriting, security appraisal, and
repayment standards for eligible loans taking into account the nature, risk profile, and other differences
between different categories of qualified loans. The charter prescribes that the following minimum
standards must be applied to agricultural real estate mortgage loans in the Farm & Ranch line of business:
require each borrower to demonstrate sufficient cash flow to adequately service the loan;
require sufficient documentation standards;
• provide that no loan with a loan-to-value ratio ("LTV") in excess of 80 percent may be eligible;
•
•
• protect the integrity of the appraisal process for any loan; and
•
confirm that the borrower is or will be actively engaged in agricultural production.
In addition to these minimum standards, agricultural mortgage loans on which Farmer Mac assumes direct
credit exposure, such as loans purchased, subject to an LTSPC, or underlying non-AgVantage Farm &
Ranch Guaranteed Securities, are also typically required to meet more specific underwriting standards
established by Farmer Mac, as described below. Agricultural mortgage loans on which Farmer Mac
assumes indirect credit risk, such as loans that secure AgVantage securities, are required to meet the
minimum standards set forth in the charter.
Farmer Mac uses experienced internal agricultural credit underwriters, independent contractors who aid in
loan analysis, and loan servicers along with external agricultural loan servicing and collateral valuation
contractors to perform those respective functions on Farm & Ranch loans. Farmer Mac relies on the
combined expertise of its own internal staff and those third-party service providers with which Farmer
Mac has contracted to provide Farmer Mac with suitable resources for performing the necessary
underwriting, collateral valuation, and servicing functions.
Underwriting. To manage Farmer Mac's credit risk and to provide guidance for the management,
administration, and conduct of underwriting to all participating and potential Farm & Ranch lenders,
Farmer Mac has adopted credit underwriting standards that vary by loan type and loan product. Farmer
Mac developed these standards based on industry norms for similar mortgage loans and designed them to
assess the creditworthiness of the borrower, as well as the risk to Farmer Mac for having assumed the
21
22
credit risk on those loans. Furthermore, Farmer Mac requires Farm & Ranch lenders to make
representations and warranties regarding the conformity of eligible mortgage loans to these standards and
any other requirements that Farmer Mac may impose from time to time. Farmer Mac has the ability to
require repurchase of the loan upon a material breach of these representations and warranties. The
underwriting standards described in this section apply to Farmer Mac's Farm & Ranch loans other than
(1) part-time farm and rural housing loans, whose underwriting standards more closely resemble
generally-accepted industry standards for residential lending, including fully verified repayment capacity
and use of credit scores and (2) Farm & Ranch loans that secure AgVantage securities, which are general
obligations of institutions whose creditworthiness Farmer Mac assesses on an individual basis. For more
information about AgVantage securities, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations—Risk Management—Credit Risk – Institutional."
Farmer Mac's credit underwriting standards for Farm & Ranch loans require that the original LTV of any
loan not exceed 70 percent (or 60 percent in the case of certain Midwestern states in which property
values have experienced recent escalation), with the exception that a loan secured by a livestock facility
and supported by a contract with an integrator may have an original LTV of up to 75 percent. The original
LTV of a loan is calculated by dividing the loan's principal balance at the time of guarantee, purchase, or
commitment by the lower of the appraised value or the purchase price at the date of loan origination or,
when available, updated appraised value at the time of guarantee, purchase, or commitment. Rural
housing loans and part-time farm loans secured primarily by owner-occupied residences may also have
original LTVs of up to 80 percent.
In the case of newly-originated Farm & Ranch loans, Farmer Mac's credit underwriting standards include:
• pro forma total debt service coverage ratio supported by historical profitability, including farm and
non-farm income, of 1.25 or higher;
• pro forma debt-to-asset ratio of 50 percent or less; and
• pro forma ratio of current assets to current liabilities of 1.25 or higher.
Farmer Mac evaluates these standards on an ongoing basis based on current and anticipated market
conditions, and adjusts these standards as Farmer Mac determines is necessary, while adhering closely to
its core underwriting standards for repayment capacity, working capital (current ratio), and leverage (debt-
to-asset ratio). Farmer Mac also implements interest rate shock tests for adjustable rate Farm & Ranch
loans with initial reset periods of less than five years.
Farmer Mac includes its facility loans, such as dairy and ethanol facilities, in its Farm & Ranch line of
business. Farmer Mac defines a facility loan as a loan secured by agricultural real estate with building
improvements (other than a residence) that contribute more than 60 percent of the appraised value of the
property. The credit underwriting standards for facility loans are the same as for Farm & Ranch loans but
more stringent for the total debt service coverage ratio, including farm and non-farm income, of 1.35 or
higher.
Loans not exceeding $1 million that are secured by eligible collateral with original LTVs not greater than
55 percent made to borrowers with high credit scores and adequate financial resources may be accepted
without further underwriting tests being applied.
In addition, Farmer Mac's underwriting standards provide for the acceptance of a loan that, in the
judgment of the Farmer Mac underwriter, is a sound loan with a high probability of repayment in
change during the life of the AgVantage security. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations—Risk Management—Credit Risk – Institutional."
In all AgVantage transactions, the corporate obligor is required to remove from the pool of pledged
collateral any loan that becomes more than 30 days delinquent in the payment of principal or interest and
to substitute an eligible loan that is current in payment to maintain the minimum required collateralization
level. As of December 31, 2013, Farmer Mac had not experienced any credit losses, nor had it been called
upon to make a guarantee payment to third parties, on any of its AgVantage securities.
As of December 31, 2013 and 2012, the outstanding principal amount of Farm & Ranch AgVantage
securities held by Farmer Mac was $3.5 billion and $3.3 billion, respectively. As of both December 31,
2013 and 2012, the aggregate outstanding principal amount of off-balance sheet AgVantage securities sold
to third parties in the Farm & Ranch line of business totaled $970.0 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—
Business Volume" and "—Risk Management—Credit Risk – Institutional."
Underwriting and Collateral Valuation (Appraisal) Standards
As required by Farmer Mac's charter, Farmer Mac has established underwriting, security appraisal, and
repayment standards for eligible loans taking into account the nature, risk profile, and other differences
between different categories of qualified loans. The charter prescribes that the following minimum
standards must be applied to agricultural real estate mortgage loans in the Farm & Ranch line of business:
• provide that no loan with a loan-to-value ratio ("LTV") in excess of 80 percent may be eligible;
require each borrower to demonstrate sufficient cash flow to adequately service the loan;
require sufficient documentation standards;
• protect the integrity of the appraisal process for any loan; and
confirm that the borrower is or will be actively engaged in agricultural production.
•
•
•
In addition to these minimum standards, agricultural mortgage loans on which Farmer Mac assumes direct
credit exposure, such as loans purchased, subject to an LTSPC, or underlying non-AgVantage Farm &
Ranch Guaranteed Securities, are also typically required to meet more specific underwriting standards
established by Farmer Mac, as described below. Agricultural mortgage loans on which Farmer Mac
assumes indirect credit risk, such as loans that secure AgVantage securities, are required to meet the
minimum standards set forth in the charter.
Farmer Mac uses experienced internal agricultural credit underwriters, independent contractors who aid in
loan analysis, and loan servicers along with external agricultural loan servicing and collateral valuation
contractors to perform those respective functions on Farm & Ranch loans. Farmer Mac relies on the
combined expertise of its own internal staff and those third-party service providers with which Farmer
Mac has contracted to provide Farmer Mac with suitable resources for performing the necessary
underwriting, collateral valuation, and servicing functions.
Underwriting. To manage Farmer Mac's credit risk and to provide guidance for the management,
administration, and conduct of underwriting to all participating and potential Farm & Ranch lenders,
Farmer Mac has adopted credit underwriting standards that vary by loan type and loan product. Farmer
Mac developed these standards based on industry norms for similar mortgage loans and designed them to
assess the creditworthiness of the borrower, as well as the risk to Farmer Mac for having assumed the
credit risk on those loans. Furthermore, Farmer Mac requires Farm & Ranch lenders to make
representations and warranties regarding the conformity of eligible mortgage loans to these standards and
any other requirements that Farmer Mac may impose from time to time. Farmer Mac has the ability to
require repurchase of the loan upon a material breach of these representations and warranties. The
underwriting standards described in this section apply to Farmer Mac's Farm & Ranch loans other than
(1) part-time farm and rural housing loans, whose underwriting standards more closely resemble
generally-accepted industry standards for residential lending, including fully verified repayment capacity
and use of credit scores and (2) Farm & Ranch loans that secure AgVantage securities, which are general
obligations of institutions whose creditworthiness Farmer Mac assesses on an individual basis. For more
information about AgVantage securities, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations—Risk Management—Credit Risk – Institutional."
Farmer Mac's credit underwriting standards for Farm & Ranch loans require that the original LTV of any
loan not exceed 70 percent (or 60 percent in the case of certain Midwestern states in which property
values have experienced recent escalation), with the exception that a loan secured by a livestock facility
and supported by a contract with an integrator may have an original LTV of up to 75 percent. The original
LTV of a loan is calculated by dividing the loan's principal balance at the time of guarantee, purchase, or
commitment by the lower of the appraised value or the purchase price at the date of loan origination or,
when available, updated appraised value at the time of guarantee, purchase, or commitment. Rural
housing loans and part-time farm loans secured primarily by owner-occupied residences may also have
original LTVs of up to 80 percent.
In the case of newly-originated Farm & Ranch loans, Farmer Mac's credit underwriting standards include:
• pro forma total debt service coverage ratio supported by historical profitability, including farm and
non-farm income, of 1.25 or higher;
• pro forma debt-to-asset ratio of 50 percent or less; and
• pro forma ratio of current assets to current liabilities of 1.25 or higher.
Farmer Mac evaluates these standards on an ongoing basis based on current and anticipated market
conditions, and adjusts these standards as Farmer Mac determines is necessary, while adhering closely to
its core underwriting standards for repayment capacity, working capital (current ratio), and leverage (debt-
to-asset ratio). Farmer Mac also implements interest rate shock tests for adjustable rate Farm & Ranch
loans with initial reset periods of less than five years.
Farmer Mac includes its facility loans, such as dairy and ethanol facilities, in its Farm & Ranch line of
business. Farmer Mac defines a facility loan as a loan secured by agricultural real estate with building
improvements (other than a residence) that contribute more than 60 percent of the appraised value of the
property. The credit underwriting standards for facility loans are the same as for Farm & Ranch loans but
more stringent for the total debt service coverage ratio, including farm and non-farm income, of 1.35 or
higher.
Loans not exceeding $1 million that are secured by eligible collateral with original LTVs not greater than
55 percent made to borrowers with high credit scores and adequate financial resources may be accepted
without further underwriting tests being applied.
In addition, Farmer Mac's underwriting standards provide for the acceptance of a loan that, in the
judgment of the Farmer Mac underwriter, is a sound loan with a high probability of repayment in
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accordance with its terms even though the loan does not meet one or more of the underwriting ratios
usually required for loans of that type. In those cases, Farmer Mac permits approval of a loan if it:
•
reviewing loan documentation and collateral valuations.
• has compensating strengths, which means it exceeds minimum requirements for one or more of the
underwriting standards to a degree that compensates for noncompliance with one or more other
standards; and
is made to a producer of particular agricultural commodities or products in a segment of
agriculture in which such compensating strengths are typical of the financial condition of sound
borrowers in that segment.
•
Despite these underwriting approvals based on compensating strengths, no loan will be approved if it does
not at least meet all of the minimum standards prescribed by Farmer Mac's charter.
Farmer Mac's use of compensating strengths is not intended to provide a basis for waiving or lessening the
requirement that eligible mortgage loans under the Farm & Ranch line of business be of consistently high
quality. Loans approved on the basis of compensating strengths are fully underwritten and have
experienced lower cumulative rates of loss following default compared to loans that were approved on the
basis of conformance with all applicable underwriting ratios. During 2013, $308.4 million (22.6 percent)
of the loans purchased or loans added under LTSPCs were approved based on compensating strengths
($3.4 million of which also had original LTVs of greater than 70 percent). As of December 31, 2013, a
total of $2.2 billion (42.8 percent) of the outstanding balance of loans held and loans underlying LTSPCs
and Farm & Ranch Guaranteed Securities (excluding AgVantage securities) were approved based on
compensating strengths ($94.1 million of which had original LTVs of greater than 70 percent).
In the case of a seasoned loan, Farmer Mac considers sustained historical performance to be a reliable
alternative indicator of a borrower's ability to pay the loan according to its terms. In the Farm & Ranch
line of business, a seasoned loan generally will be deemed an eligible loan if:
•
•
•
it has been outstanding for at least five years and has an LTV of 60 percent or less;
there have been no payments more than 30 days past due during the previous three years; and
there have been no material restructurings or modifications for credit reasons during the previous
five years.
A seasoned loan that has been outstanding for more than one year but less than five years must
substantially comply with the applicable underwriting standards for newly originated loans as of the date
the loan was originated by the lender. The loan must also have a payment history that shows no payment
more than 30 days past due during the three-year period immediately before the date the loan is either
purchased by Farmer Mac or made subject to an LTSPC. Farmer Mac does not require that each loan's
compliance with the underwriting standards be re-evaluated after Farmer Mac purchases the loan or
approves it for inclusion in a pool that backs a guaranteed security or an LTSPC pool.
Farmer Mac performs due diligence before purchasing, guaranteeing securities backed by, or committing
to purchase seasoned loans, including:
described above would apply.
Farmer Mac performs these and other due diligence procedures using methods that consider the size, age,
leverage, industry sector, and nature of the collateral for the loans.
Required documentation for all loans in the Farm & Ranch line of business includes a first lien mortgage
or deed of trust, a written promissory note, and assurance of Farmer Mac's lien position through either a
title insurance policy or title opinion from an experienced real estate attorney in any geographic area
where title insurance is not the industry practice.
As Farmer Mac develops new credit products, it establishes underwriting guidelines for them. Those
guidelines result in industry-specific measures that meet or exceed the minimum underwriting standards
contained in Farmer Mac's charter and provide Farmer Mac with the flexibility to deliver the benefits of a
secondary market to farmers, ranchers, and rural homeowners in diverse sectors of the rural economy.
Collateral Valuation Standards. Farmer Mac has adopted collateral valuation standards for newly
originated loans purchased or underlying Farm & Ranch Guaranteed Securities or LTSPCs. Those
standards require, among other things, that a current valuation be performed, or have been performed
within the preceding 12 months, independently of the credit decision-making process. Farmer Mac
generally requires appraisals to conform to the Uniform Standards of Professional Appraisal Practice
("USPAP") promulgated by the Appraisal Standards Board. For AgVantage securities in the Farm &
Ranch line of business, Farmer Mac requires either appraisals that conform to the USPAP or similar
collateral valuation methods based upon Farmer Mac's evaluation of the lender's collateral valuation
protocols and history.
Farmer Mac's collateral valuation standards require that the valuation function be conducted or
administered by an individual who meets specific qualification and competence criteria and who:
•
is not associated, except by the engagement for the collateral valuation, with the credit
underwriters making the loan decision, though the appraiser or evaluator and the credit underwriter
may be directly or indirectly employed by a common employer;
•
receives no financial or professional benefit of any kind by virtue of the report content, valuation,
or credit decision made, or based on the valuation report; and
• has no present or contemplated future direct or indirect interest in the property serving or to serve
as collateral.
Farmer Mac's collateral valuation standards require uniform reporting of reliable and credible opinions of
the market value based on analyses of comparable property sales, including consideration of the property's
income-producing capacity and, if relevant, the market's response to the cost of improvements, as well as
information regarding market trends. For seasoned loans, Farmer Mac obtains collateral valuation updates
as considered necessary in its assessment of collateral risk determined in the due diligence process. If a
current or updated collateral valuation is required for a seasoned loan, the collateral valuation standards
•
evaluating loan database information to determine conformity to the criteria set forth in the
preceding paragraphs;
confirming that loan file data conform to database information;
•
• validating supporting credit information in the loan files; and
23
24
accordance with its terms even though the loan does not meet one or more of the underwriting ratios
usually required for loans of that type. In those cases, Farmer Mac permits approval of a loan if it:
•
reviewing loan documentation and collateral valuations.
• has compensating strengths, which means it exceeds minimum requirements for one or more of the
underwriting standards to a degree that compensates for noncompliance with one or more other
•
is made to a producer of particular agricultural commodities or products in a segment of
agriculture in which such compensating strengths are typical of the financial condition of sound
standards; and
borrowers in that segment.
Despite these underwriting approvals based on compensating strengths, no loan will be approved if it does
not at least meet all of the minimum standards prescribed by Farmer Mac's charter.
Farmer Mac's use of compensating strengths is not intended to provide a basis for waiving or lessening the
requirement that eligible mortgage loans under the Farm & Ranch line of business be of consistently high
quality. Loans approved on the basis of compensating strengths are fully underwritten and have
experienced lower cumulative rates of loss following default compared to loans that were approved on the
basis of conformance with all applicable underwriting ratios. During 2013, $308.4 million (22.6 percent)
of the loans purchased or loans added under LTSPCs were approved based on compensating strengths
($3.4 million of which also had original LTVs of greater than 70 percent). As of December 31, 2013, a
total of $2.2 billion (42.8 percent) of the outstanding balance of loans held and loans underlying LTSPCs
and Farm & Ranch Guaranteed Securities (excluding AgVantage securities) were approved based on
compensating strengths ($94.1 million of which had original LTVs of greater than 70 percent).
In the case of a seasoned loan, Farmer Mac considers sustained historical performance to be a reliable
alternative indicator of a borrower's ability to pay the loan according to its terms. In the Farm & Ranch
line of business, a seasoned loan generally will be deemed an eligible loan if:
it has been outstanding for at least five years and has an LTV of 60 percent or less;
there have been no payments more than 30 days past due during the previous three years; and
there have been no material restructurings or modifications for credit reasons during the previous
five years.
A seasoned loan that has been outstanding for more than one year but less than five years must
substantially comply with the applicable underwriting standards for newly originated loans as of the date
the loan was originated by the lender. The loan must also have a payment history that shows no payment
more than 30 days past due during the three-year period immediately before the date the loan is either
purchased by Farmer Mac or made subject to an LTSPC. Farmer Mac does not require that each loan's
compliance with the underwriting standards be re-evaluated after Farmer Mac purchases the loan or
approves it for inclusion in a pool that backs a guaranteed security or an LTSPC pool.
Farmer Mac performs due diligence before purchasing, guaranteeing securities backed by, or committing
to purchase seasoned loans, including:
evaluating loan database information to determine conformity to the criteria set forth in the
preceding paragraphs;
confirming that loan file data conform to database information;
• validating supporting credit information in the loan files; and
•
•
•
•
•
Farmer Mac performs these and other due diligence procedures using methods that consider the size, age,
leverage, industry sector, and nature of the collateral for the loans.
Required documentation for all loans in the Farm & Ranch line of business includes a first lien mortgage
or deed of trust, a written promissory note, and assurance of Farmer Mac's lien position through either a
title insurance policy or title opinion from an experienced real estate attorney in any geographic area
where title insurance is not the industry practice.
As Farmer Mac develops new credit products, it establishes underwriting guidelines for them. Those
guidelines result in industry-specific measures that meet or exceed the minimum underwriting standards
contained in Farmer Mac's charter and provide Farmer Mac with the flexibility to deliver the benefits of a
secondary market to farmers, ranchers, and rural homeowners in diverse sectors of the rural economy.
Collateral Valuation Standards. Farmer Mac has adopted collateral valuation standards for newly
originated loans purchased or underlying Farm & Ranch Guaranteed Securities or LTSPCs. Those
standards require, among other things, that a current valuation be performed, or have been performed
within the preceding 12 months, independently of the credit decision-making process. Farmer Mac
generally requires appraisals to conform to the Uniform Standards of Professional Appraisal Practice
("USPAP") promulgated by the Appraisal Standards Board. For AgVantage securities in the Farm &
Ranch line of business, Farmer Mac requires either appraisals that conform to the USPAP or similar
collateral valuation methods based upon Farmer Mac's evaluation of the lender's collateral valuation
protocols and history.
Farmer Mac's collateral valuation standards require that the valuation function be conducted or
administered by an individual who meets specific qualification and competence criteria and who:
•
•
is not associated, except by the engagement for the collateral valuation, with the credit
underwriters making the loan decision, though the appraiser or evaluator and the credit underwriter
may be directly or indirectly employed by a common employer;
receives no financial or professional benefit of any kind by virtue of the report content, valuation,
or credit decision made, or based on the valuation report; and
• has no present or contemplated future direct or indirect interest in the property serving or to serve
as collateral.
Farmer Mac's collateral valuation standards require uniform reporting of reliable and credible opinions of
the market value based on analyses of comparable property sales, including consideration of the property's
income-producing capacity and, if relevant, the market's response to the cost of improvements, as well as
information regarding market trends. For seasoned loans, Farmer Mac obtains collateral valuation updates
as considered necessary in its assessment of collateral risk determined in the due diligence process. If a
current or updated collateral valuation is required for a seasoned loan, the collateral valuation standards
described above would apply.
23
24
Portfolio Diversification
It is Farmer Mac's policy to diversify its portfolio of loans held and loans underlying Farm & Ranch
Guaranteed Securities and LTSPCs, both geographically and by agricultural commodity/product. Farmer
Mac directs its marketing efforts toward agricultural lenders throughout the nation to achieve commodity/
product and geographic diversification in its exposure to credit risk. Farmer Mac evaluates its credit
exposure in particular geographic regions and commodities/products relative to the total principal amount
of all outstanding loans held and loans underlying LTSPCs and non-AgVantage Farm & Ranch
Guaranteed Securities.
Farmer Mac is not obligated to assume credit risk on every loan that meets its underwriting and collateral
valuation standards submitted by an eligible participant. Farmer Mac may consider other factors, such as
its overall portfolio diversification, commodity and farming forecasts, and risk management objectives, in
deciding whether or not to accept a loan as part of the Farm & Ranch line of business. For example, if
industry forecasts indicate possible weakness in a geographic area or agricultural commodity or product,
Farmer Mac may decide not to purchase or commit to purchase an affected loan as part of managing
Farmer Mac's overall portfolio exposure to areas of possible heightened risk exposure. Because Farmer
Mac effectively assumes the credit risk on all loans under an LTSPC, Farmer Mac's commodity/product
and geographic diversification disclosures reflect all loans under LTSPCs and any loans that have been
purchased out of LTSPC pools. For information about the diversification of Farmer Mac's existing
portfolio, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—
Risk Management—Credit Risk – Loans and Guarantees" and Note 8 to the consolidated financial
statements.
Approved Lenders
As of December 31, 2013, Farmer Mac had 669 approved lenders eligible to participate in Farmer Mac's
Farm & Ranch line of business, ranging from single-office to multi-branch institutions, spanning
community banks, FCS institutions, mortgage companies, commercial banks, and insurance companies,
compared to 536 eligible approved lenders as of December 31, 2012. In addition to participating directly
in the Farm & Ranch line of business, some of the approved lenders facilitate indirect participation by
other lenders by managing correspondent networks of lenders from which the approved lenders purchase
loans to sell to Farmer Mac. As of December 31, 2013, of the 669 approved lenders eligible to participate,
237 lenders had been active participants in the Farm & Ranch line of business during the previous
12 months by either selling or pooling for purchase commitment at least one loan to Farmer Mac.
To be considered for approval as a participant in the Farm & Ranch line of business, a lender must meet
criteria that Farmer Mac establishes. Those criteria include the following requirements:
Servicing
Farmer Mac generally does not directly service the loans included in the Farm & Ranch line of business,
although in some cases Farmer Mac may assume direct servicing for defaulted loans. Farmer Mac serves
in the role of master servicer for Farm & Ranch loans held by Farmer Mac and for whole loans underlying
Farm & Ranch Guaranteed Securities (other than AgVantage securities). In that capacity, Farmer Mac
contracts with other institutions, known as a central servicers, to undertake the majority of the servicing
responsibilities for the loans in accordance with Farmer Mac's specified servicing requirements. For these
loans, the central servicer is typically not the same entity as the lender that sold the loans to Farmer Mac,
and the originating lenders may retain some direct borrower contacts, referred to as field servicing
functions. Field servicers may enter into contracts with Farmer Mac's central servicers that specify the
retained servicing functions.
Loans related to the participation interests underlying Farm & Ranch Guaranteed Securities that result
from the conversion of LTSPCs are serviced for the benefit of Farmer Mac, as trustee and guarantor, by
the FCS institution that participated the loans to Farmer Mac. The servicer of those loans is usually also
the holder of the related Farm & Ranch Guaranteed Securities. In those transactions, the FCS servicer is
required to service the loans related to the securitized participation interests in a commercially reasonable
manner and in substantial compliance with Farmer Mac's servicing requirements for Farm & Ranch loans.
Those servicers are also required to give effect to all statutory borrower rights applicable to the loans and
have shared power with Farmer Mac for some servicing actions to ensure this. The loans related to the
Farm & Ranch Guaranteed Securities that result from the conversion of loans formerly subject to an
LTSPC are the only loans included in the Farm & Ranch line of business that are subject to a shared power
Loans underlying LTSPCs and AgVantage securities are serviced by the holders of those loans in
accordance with those lenders' servicing procedures, which are reviewed by Farmer Mac before entering
In summary, the substance of all servicing for loans in the Farm & Ranch line of business is performed in
a manner consistent with Farmer Mac's servicing requirements, with some special servicing
requirements for the assets underlying Farm & Ranch Guaranteed Securities resulting from LTSPC
conversions to accommodate the borrower rights regime unique to loans originated by FCS institutions.
servicing provision.
into those transactions.
USDA Guarantees
General
• own a requisite amount of Farmer Mac common stock according to a schedule prescribed for the
charter to provide that:
Farmer Mac initiated its USDA Guarantees line of business in 1991 after Congress revised Farmer Mac's
size and type of institution;
• have, in the judgment of Farmer Mac, the ability and experience to make or purchase and sell
eligible farm and ranch loans and service those loans in accordance with Farmer Mac's
requirements either through the lender's own staff or through contractors and originators;
• maintain a minimum adjusted net worth; and
•
enter into a Seller/Servicer Agreement, which requires compliance with the terms of the Farmer
Mac Seller/Servicer Guide, including providing representations and warranties regarding the
eligibility of the loans and accuracy of loan data provided to Farmer Mac.
• USDA-guaranteed portions of loans (which Farmer Mac refers to as "USDA Securities")
guaranteed under the Consolidated Farm and Rural Development Act (7 U.S.C. § 1921 et seq.) are
statutorily included in the definition of loans eligible for the secondary market programs provided
by Farmer Mac;
• USDA Securities are exempted from the credit underwriting, collateral valuation, documentation,
and other standards that other loans must meet to be eligible for the secondary market provided by
25
26
Portfolio Diversification
It is Farmer Mac's policy to diversify its portfolio of loans held and loans underlying Farm & Ranch
Guaranteed Securities and LTSPCs, both geographically and by agricultural commodity/product. Farmer
Mac directs its marketing efforts toward agricultural lenders throughout the nation to achieve commodity/
product and geographic diversification in its exposure to credit risk. Farmer Mac evaluates its credit
exposure in particular geographic regions and commodities/products relative to the total principal amount
of all outstanding loans held and loans underlying LTSPCs and non-AgVantage Farm & Ranch
Guaranteed Securities.
Farmer Mac is not obligated to assume credit risk on every loan that meets its underwriting and collateral
valuation standards submitted by an eligible participant. Farmer Mac may consider other factors, such as
its overall portfolio diversification, commodity and farming forecasts, and risk management objectives, in
deciding whether or not to accept a loan as part of the Farm & Ranch line of business. For example, if
industry forecasts indicate possible weakness in a geographic area or agricultural commodity or product,
Farmer Mac may decide not to purchase or commit to purchase an affected loan as part of managing
Farmer Mac's overall portfolio exposure to areas of possible heightened risk exposure. Because Farmer
Mac effectively assumes the credit risk on all loans under an LTSPC, Farmer Mac's commodity/product
and geographic diversification disclosures reflect all loans under LTSPCs and any loans that have been
purchased out of LTSPC pools. For information about the diversification of Farmer Mac's existing
portfolio, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—
Risk Management—Credit Risk – Loans and Guarantees" and Note 8 to the consolidated financial
statements.
Approved Lenders
As of December 31, 2013, Farmer Mac had 669 approved lenders eligible to participate in Farmer Mac's
Farm & Ranch line of business, ranging from single-office to multi-branch institutions, spanning
community banks, FCS institutions, mortgage companies, commercial banks, and insurance companies,
compared to 536 eligible approved lenders as of December 31, 2012. In addition to participating directly
in the Farm & Ranch line of business, some of the approved lenders facilitate indirect participation by
other lenders by managing correspondent networks of lenders from which the approved lenders purchase
loans to sell to Farmer Mac. As of December 31, 2013, of the 669 approved lenders eligible to participate,
237 lenders had been active participants in the Farm & Ranch line of business during the previous
12 months by either selling or pooling for purchase commitment at least one loan to Farmer Mac.
To be considered for approval as a participant in the Farm & Ranch line of business, a lender must meet
criteria that Farmer Mac establishes. Those criteria include the following requirements:
• own a requisite amount of Farmer Mac common stock according to a schedule prescribed for the
size and type of institution;
• have, in the judgment of Farmer Mac, the ability and experience to make or purchase and sell
eligible farm and ranch loans and service those loans in accordance with Farmer Mac's
requirements either through the lender's own staff or through contractors and originators;
• maintain a minimum adjusted net worth; and
•
enter into a Seller/Servicer Agreement, which requires compliance with the terms of the Farmer
Mac Seller/Servicer Guide, including providing representations and warranties regarding the
eligibility of the loans and accuracy of loan data provided to Farmer Mac.
Servicing
Farmer Mac generally does not directly service the loans included in the Farm & Ranch line of business,
although in some cases Farmer Mac may assume direct servicing for defaulted loans. Farmer Mac serves
in the role of master servicer for Farm & Ranch loans held by Farmer Mac and for whole loans underlying
Farm & Ranch Guaranteed Securities (other than AgVantage securities). In that capacity, Farmer Mac
contracts with other institutions, known as a central servicers, to undertake the majority of the servicing
responsibilities for the loans in accordance with Farmer Mac's specified servicing requirements. For these
loans, the central servicer is typically not the same entity as the lender that sold the loans to Farmer Mac,
and the originating lenders may retain some direct borrower contacts, referred to as field servicing
functions. Field servicers may enter into contracts with Farmer Mac's central servicers that specify the
retained servicing functions.
Loans related to the participation interests underlying Farm & Ranch Guaranteed Securities that result
from the conversion of LTSPCs are serviced for the benefit of Farmer Mac, as trustee and guarantor, by
the FCS institution that participated the loans to Farmer Mac. The servicer of those loans is usually also
the holder of the related Farm & Ranch Guaranteed Securities. In those transactions, the FCS servicer is
required to service the loans related to the securitized participation interests in a commercially reasonable
manner and in substantial compliance with Farmer Mac's servicing requirements for Farm & Ranch loans.
Those servicers are also required to give effect to all statutory borrower rights applicable to the loans and
have shared power with Farmer Mac for some servicing actions to ensure this. The loans related to the
Farm & Ranch Guaranteed Securities that result from the conversion of loans formerly subject to an
LTSPC are the only loans included in the Farm & Ranch line of business that are subject to a shared power
servicing provision.
Loans underlying LTSPCs and AgVantage securities are serviced by the holders of those loans in
accordance with those lenders' servicing procedures, which are reviewed by Farmer Mac before entering
into those transactions.
In summary, the substance of all servicing for loans in the Farm & Ranch line of business is performed in
a manner consistent with Farmer Mac's servicing requirements, with some special servicing
requirements for the assets underlying Farm & Ranch Guaranteed Securities resulting from LTSPC
conversions to accommodate the borrower rights regime unique to loans originated by FCS institutions.
USDA Guarantees
General
Farmer Mac initiated its USDA Guarantees line of business in 1991 after Congress revised Farmer Mac's
charter to provide that:
• USDA-guaranteed portions of loans (which Farmer Mac refers to as "USDA Securities")
guaranteed under the Consolidated Farm and Rural Development Act (7 U.S.C. § 1921 et seq.) are
statutorily included in the definition of loans eligible for the secondary market programs provided
by Farmer Mac;
• USDA Securities are exempted from the credit underwriting, collateral valuation, documentation,
and other standards that other loans must meet to be eligible for the secondary market provided by
25
26
Farmer Mac, and are exempted from any diversification and internal credit enhancement that may
be required of pools of other eligible loans; and
• Farmer Mac is authorized to pool and issue Farmer Mac Guaranteed Securities backed by USDA
Securities.
Since January 2010, nearly all purchases of USDA Securities have been made by Farmer Mac II LLC, a
subsidiary of Farmer Mac that operates substantially all of the business related to the USDA Guarantees
line of business. Farmer Mac operates only that part of the business that involves the issuance of Farmer
Mac Guaranteed USDA Securities to investors other than Farmer Mac or Farmer Mac II LLC. Although
Farmer Mac II LLC may issue securities in these transactions, Farmer Mac II LLC does not guarantee any
USDA Securities it holds or any Farmer Mac Guaranteed USDA Securities issued by Farmer Mac or
Farmer Mac II LLC.
Summary of USDA Guarantees Transactions
Farmer Mac guarantees the timely payment of principal and interest on Farmer Mac Guaranteed USDA
Securities backed by USDA Securities. Farmer Mac does not guarantee the repayment of the USDA
Securities themselves. In January 2010, Farmer Mac contributed substantially all of the assets comprising
the USDA Guarantees line of business, in excess of $1.1 billion, to Farmer Mac's subsidiary, Farmer Mac
II LLC. The assets that Farmer Mac contributed to Farmer Mac II LLC consisted primarily of USDA
Securities and also included $35.0 million of Farmer Mac Guaranteed USDA Securities. Farmer Mac did
not and will not guarantee the timely payment of principal and interest on the $1.1 billion of contributed
USDA Securities. The assets of Farmer Mac II LLC will only be available to creditors of Farmer Mac
after all obligations owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied.
During the years ended December 31, 2013, 2012, and 2011, Farmer Mac II LLC purchased
approximately $361.9 million, $479.3 million, and $404.4 million, respectively, of USDA Securities, all of
which were retained on its balance sheet. Farmer Mac did not purchase any USDA Securities in 2013.
During the years ended December 31, 2012, and 2011, Farmer Mac purchased $5.3 million and $3.3
million, respectively, of USDA Securities. All of the USDA Securities purchased by Farmer Mac in 2012
and 2011 (which exclude those purchased directly by Farmer Mac II LLC) were securitized and sold to
lenders or other investors in the form of Farmer Mac Guaranteed USDA Securities. During 2013, 2012,
and 2011, Farmer Mac and Farmer Mac II LLC conducted USDA Guarantees transactions with 195, 225,
and 193 entities, respectively.
As of December 31, 2013 and 2012, $1.7 billion and $1.6 billion, respectively, of Farmer Mac Guaranteed
USDA Securities and USDA Securities were outstanding. The following table presents activity in the
USDA Guarantees line of business for each of the years indicated:
Purchased and retained
Purchased and sold
Total
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
$
361,894
—
361,894
$
$
479,324
5,327
484,651
$
$
404,445
3,268
407,713
The following table presents the outstanding balance of USDA Securities and Farmer Mac Guaranteed
USDA Securities as of the dates indicated:
On-balance sheet:
USDA Securities
Off-balance sheet:
Total
Farmer Mac Guaranteed USDA Securities
Farmer Mac Guaranteed USDA Securities
As of December 31,
2013
2012
(in thousands)
$
$
1,645,806
$
1,559,683
21,089
20,222
26,238
29,658
1,687,117
$
1,615,579
As of December 31, 2013, Farmer Mac had experienced no other-than-temporary impairment on any of its
Farmer Mac Guaranteed USDA Securities or USDA Securities.
United States Department of Agriculture Guaranteed Loan Programs
The USDA, acting through its various agencies, currently administers the federal rural credit programs
first developed in the mid-1930s. The USDA makes direct loans and guarantees portions of loans made
and serviced by USDA-qualified lenders for various purposes. The USDA's guarantee is supported by the
full faith and credit of the United States. The USDA guarantees up to 95 percent of the principal amount
of guaranteed loans. Through its USDA Guarantees line of business, Farmer Mac is one of several
competing purchasers of USDA Securities representing the USDA-guaranteed portions of farm ownership
loans, farm operating loans, business and industry loans, community facilities loans, and other loans. The
guaranteed portions of these loans are fully guaranteed as to principal and interest by the USDA.
USDA Guarantees. Each USDA guarantee is a full faith and credit obligation of the United States and
becomes enforceable if a lender fails to repurchase the portion of the loan that is guaranteed by the USDA
from its holder within 30 days after written demand from the holder when:
•
•
the borrower under the guaranteed loan is in default not less than 60 days in the payment of any
principal or interest due on the USDA-guaranteed portion of the loan; or
the lender has failed to remit to the holder the payment made by the borrower on the USDA-
guaranteed portion of the loan or any related loan subsidy within 30 days after the lender's receipt
of the payment.
If the lender does not repurchase the USDA-guaranteed portion as provided above, the USDA is required
to purchase the unpaid principal balance of the USDA-guaranteed portion together with accrued interest
(including any loan subsidy) to the date of purchase, less the lender's servicing fee, within 60 days after
written demand upon the USDA by the holder. While the USDA guarantee will not cover the note interest
to the holder on USDA-guaranteed portions accruing after 90 days from the date of the original demand
letter of the holder to the lender requesting repurchase, Farmer Mac has established procedures to require
prompt demand on the USDA to purchase USDA-guaranteed portions that have not been repurchased by
the lender.
If, in the opinion of the lender (with the concurrence of the USDA) or in the opinion of the USDA,
repurchase of the USDA-guaranteed portion is necessary to service the related guaranteed loan adequately,
27
28
Farmer Mac, and are exempted from any diversification and internal credit enhancement that may
be required of pools of other eligible loans; and
• Farmer Mac is authorized to pool and issue Farmer Mac Guaranteed Securities backed by USDA
Securities.
Since January 2010, nearly all purchases of USDA Securities have been made by Farmer Mac II LLC, a
subsidiary of Farmer Mac that operates substantially all of the business related to the USDA Guarantees
line of business. Farmer Mac operates only that part of the business that involves the issuance of Farmer
Mac Guaranteed USDA Securities to investors other than Farmer Mac or Farmer Mac II LLC. Although
Farmer Mac II LLC may issue securities in these transactions, Farmer Mac II LLC does not guarantee any
USDA Securities it holds or any Farmer Mac Guaranteed USDA Securities issued by Farmer Mac or
Farmer Mac II LLC.
Summary of USDA Guarantees Transactions
Farmer Mac guarantees the timely payment of principal and interest on Farmer Mac Guaranteed USDA
Securities backed by USDA Securities. Farmer Mac does not guarantee the repayment of the USDA
Securities themselves. In January 2010, Farmer Mac contributed substantially all of the assets comprising
the USDA Guarantees line of business, in excess of $1.1 billion, to Farmer Mac's subsidiary, Farmer Mac
II LLC. The assets that Farmer Mac contributed to Farmer Mac II LLC consisted primarily of USDA
Securities and also included $35.0 million of Farmer Mac Guaranteed USDA Securities. Farmer Mac did
not and will not guarantee the timely payment of principal and interest on the $1.1 billion of contributed
USDA Securities. The assets of Farmer Mac II LLC will only be available to creditors of Farmer Mac
after all obligations owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied.
During the years ended December 31, 2013, 2012, and 2011, Farmer Mac II LLC purchased
approximately $361.9 million, $479.3 million, and $404.4 million, respectively, of USDA Securities, all of
which were retained on its balance sheet. Farmer Mac did not purchase any USDA Securities in 2013.
During the years ended December 31, 2012, and 2011, Farmer Mac purchased $5.3 million and $3.3
million, respectively, of USDA Securities. All of the USDA Securities purchased by Farmer Mac in 2012
and 2011 (which exclude those purchased directly by Farmer Mac II LLC) were securitized and sold to
lenders or other investors in the form of Farmer Mac Guaranteed USDA Securities. During 2013, 2012,
and 2011, Farmer Mac and Farmer Mac II LLC conducted USDA Guarantees transactions with 195, 225,
and 193 entities, respectively.
As of December 31, 2013 and 2012, $1.7 billion and $1.6 billion, respectively, of Farmer Mac Guaranteed
USDA Securities and USDA Securities were outstanding. The following table presents activity in the
USDA Guarantees line of business for each of the years indicated:
Purchased and retained
Purchased and sold
Total
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
$
361,894
—
361,894
$
$
479,324
5,327
484,651
$
$
404,445
3,268
407,713
The following table presents the outstanding balance of USDA Securities and Farmer Mac Guaranteed
USDA Securities as of the dates indicated:
On-balance sheet:
USDA Securities
Farmer Mac Guaranteed USDA Securities
Off-balance sheet:
Farmer Mac Guaranteed USDA Securities
Total
As of December 31,
2013
2012
(in thousands)
$
$
1,645,806
$
1,559,683
21,089
20,222
26,238
29,658
1,687,117
$
1,615,579
As of December 31, 2013, Farmer Mac had experienced no other-than-temporary impairment on any of its
Farmer Mac Guaranteed USDA Securities or USDA Securities.
United States Department of Agriculture Guaranteed Loan Programs
The USDA, acting through its various agencies, currently administers the federal rural credit programs
first developed in the mid-1930s. The USDA makes direct loans and guarantees portions of loans made
and serviced by USDA-qualified lenders for various purposes. The USDA's guarantee is supported by the
full faith and credit of the United States. The USDA guarantees up to 95 percent of the principal amount
of guaranteed loans. Through its USDA Guarantees line of business, Farmer Mac is one of several
competing purchasers of USDA Securities representing the USDA-guaranteed portions of farm ownership
loans, farm operating loans, business and industry loans, community facilities loans, and other loans. The
guaranteed portions of these loans are fully guaranteed as to principal and interest by the USDA.
USDA Guarantees. Each USDA guarantee is a full faith and credit obligation of the United States and
becomes enforceable if a lender fails to repurchase the portion of the loan that is guaranteed by the USDA
from its holder within 30 days after written demand from the holder when:
•
•
the borrower under the guaranteed loan is in default not less than 60 days in the payment of any
principal or interest due on the USDA-guaranteed portion of the loan; or
the lender has failed to remit to the holder the payment made by the borrower on the USDA-
guaranteed portion of the loan or any related loan subsidy within 30 days after the lender's receipt
of the payment.
If the lender does not repurchase the USDA-guaranteed portion as provided above, the USDA is required
to purchase the unpaid principal balance of the USDA-guaranteed portion together with accrued interest
(including any loan subsidy) to the date of purchase, less the lender's servicing fee, within 60 days after
written demand upon the USDA by the holder. While the USDA guarantee will not cover the note interest
to the holder on USDA-guaranteed portions accruing after 90 days from the date of the original demand
letter of the holder to the lender requesting repurchase, Farmer Mac has established procedures to require
prompt demand on the USDA to purchase USDA-guaranteed portions that have not been repurchased by
the lender.
If, in the opinion of the lender (with the concurrence of the USDA) or in the opinion of the USDA,
repurchase of the USDA-guaranteed portion is necessary to service the related guaranteed loan adequately,
27
28
the holder is required to sell the USDA-guaranteed portion to the lender or USDA for an amount equal to
the unpaid principal balance and accrued interest on such USDA-guaranteed portion less the lender's
servicing fee. Federal regulations prohibit the lender from repurchasing USDA-guaranteed portions for
arbitrage purposes.
Lenders. Any lender authorized by the USDA to obtain a USDA guarantee on a loan may participate in
Farmer Mac's USDA Guarantees line of business. During 2013, 195 lenders, consisting mostly of
community and regional banks, sold USDA Securities to Farmer Mac, compared to 225 lenders that did so
during 2012.
Loan Servicing. The lender on each USDA guaranteed loan is required by regulation to retain the
unguaranteed portion of the guaranteed loan, to service the entire underlying guaranteed loan, including
the USDA-guaranteed portion, and to remain mortgagee and/or secured party of record. The USDA-
guaranteed portion and the unguaranteed portion of the loan are to be secured by the same collateral with
equal lien priority. The USDA-guaranteed portion of a loan cannot be paid later than, or in any way be
subordinated to, the related unguaranteed portion.
Rural Utilities
General
Under its charter, Farmer Mac is permitted to purchase, and guarantee securities backed by, rural electric
and telephone loans made by cooperative lenders to borrowers who have received or are eligible to receive
loans under the Rural Electrification Act of 1936 ("REA"). The REA is administered by the Rural Utilities
Service ("RUS"), an agency of the USDA. None of Farmer Mac's business to date under the Rural
Utilities line of business has involved telecommunications loans. Farmer Mac's Rural Utilities line of
business encompasses purchases of eligible rural utilities loans and guarantees of Rural Utilities
Guaranteed Securities backed by such loans. Although Farmer Mac is also authorized to issue LTSPCs for
pools of eligible rural utilities loans, no LTSPCs have been issued to date under the Rural Utilities line of
business.
Summary of Rural Utilities Transactions
During the year ended December 31, 2013, Farmer Mac added $0.9 billion of new Rural Utilities
business, compared to $0.5 billion and $0.2 billion for the years ended December 31, 2012 and 2011,
respectively. As of December 31, 2013 and 2012, the aggregate outstanding principal balance of rural
utilities loans held and of Rural Utilities Guaranteed Securities was $2.6 billion and $2.3 billion,
respectively.
The following table summarizes new Rural Utilities business activity for each of the years ended
December 31, 2013, 2012, and 2011:
On-balance sheet:
Loans
AgVantage Securities
Off-balance sheet:
AgVantage Securities
Total
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
$
86,965
$
166,117
$
203,789
820,000
383,406
—
—
—
2,796
906,965
$
549,523
$
206,585
The following table presents the outstanding balances of rural utilities loans held and of Rural Utilities
Guaranteed Securities as of the dates indicated:
Beneficial interests owned by Farmer Mac
On-balance sheet:
Loans
Loans held in trusts:
AgVantage Securities
Total on-balance sheet
Off-balance sheet:
AgVantage Securities
Total
As of December 31,
2013
2012
(in thousands)
$
$
$
698,010
$
663,097
354,241
1,527,205
368,848
1,298,506
2,579,456
$
2,330,451
11,009
12,669
2,590,465
$
2,343,120
As of December 31, 2013, all of the Rural Utilities Guaranteed Securities consisted of securities
representing either (1) direct interests in eligible rural electric loans or (2) general obligations of the
National Rural Utilities Cooperative Finance Corporation ("CFC") secured by eligible rural electric
loans. As of December 31, 2013, CFC held approximately 8 percent of Farmer Mac's outstanding Class A
voting common stock (5 percent of total voting shares) and 50 percent of Farmer Mac's outstanding Series
A Preferred Stock, which was issued in January 2013 when Farmer Mac's outstanding Series C Non-
Voting Cumulative Preferred Stock ("Series C Preferred Stock"), of which CFC held 100 percent, was
simultaneously redeemed in its entirety.
Loan Eligibility
a loan) is required to:
To be eligible for Farmer Mac's Rural Utilities line of business, a rural utilities loan (or an interest in such
• be made for an electric or telephone facility by a lender organized as a cooperative to a borrower
that has received or is eligible to receive a loan under the REA;
• be performing and not more than 30 days delinquent; and
• meet Farmer Mac's underwriting standards described in more detail below.
29
30
the holder is required to sell the USDA-guaranteed portion to the lender or USDA for an amount equal to
the unpaid principal balance and accrued interest on such USDA-guaranteed portion less the lender's
servicing fee. Federal regulations prohibit the lender from repurchasing USDA-guaranteed portions for
The following table summarizes new Rural Utilities business activity for each of the years ended
December 31, 2013, 2012, and 2011:
Lenders. Any lender authorized by the USDA to obtain a USDA guarantee on a loan may participate in
Farmer Mac's USDA Guarantees line of business. During 2013, 195 lenders, consisting mostly of
community and regional banks, sold USDA Securities to Farmer Mac, compared to 225 lenders that did so
Loan Servicing. The lender on each USDA guaranteed loan is required by regulation to retain the
unguaranteed portion of the guaranteed loan, to service the entire underlying guaranteed loan, including
the USDA-guaranteed portion, and to remain mortgagee and/or secured party of record. The USDA-
guaranteed portion and the unguaranteed portion of the loan are to be secured by the same collateral with
equal lien priority. The USDA-guaranteed portion of a loan cannot be paid later than, or in any way be
subordinated to, the related unguaranteed portion.
arbitrage purposes.
during 2012.
Rural Utilities
General
Under its charter, Farmer Mac is permitted to purchase, and guarantee securities backed by, rural electric
and telephone loans made by cooperative lenders to borrowers who have received or are eligible to receive
loans under the Rural Electrification Act of 1936 ("REA"). The REA is administered by the Rural Utilities
Service ("RUS"), an agency of the USDA. None of Farmer Mac's business to date under the Rural
Utilities line of business has involved telecommunications loans. Farmer Mac's Rural Utilities line of
business encompasses purchases of eligible rural utilities loans and guarantees of Rural Utilities
Guaranteed Securities backed by such loans. Although Farmer Mac is also authorized to issue LTSPCs for
pools of eligible rural utilities loans, no LTSPCs have been issued to date under the Rural Utilities line of
business.
Summary of Rural Utilities Transactions
During the year ended December 31, 2013, Farmer Mac added $0.9 billion of new Rural Utilities
business, compared to $0.5 billion and $0.2 billion for the years ended December 31, 2012 and 2011,
respectively. As of December 31, 2013 and 2012, the aggregate outstanding principal balance of rural
utilities loans held and of Rural Utilities Guaranteed Securities was $2.6 billion and $2.3 billion,
respectively.
On-balance sheet:
Loans
AgVantage Securities
Off-balance sheet:
AgVantage Securities
Total
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
$
86,965
$
166,117
$
203,789
820,000
383,406
—
—
—
2,796
906,965
$
549,523
$
206,585
The following table presents the outstanding balances of rural utilities loans held and of Rural Utilities
Guaranteed Securities as of the dates indicated:
On-balance sheet:
Loans
Loans held in trusts:
Beneficial interests owned by Farmer Mac
AgVantage Securities
Total on-balance sheet
Off-balance sheet:
AgVantage Securities
Total
As of December 31,
2013
2012
(in thousands)
$
$
$
698,010
$
663,097
354,241
1,527,205
368,848
1,298,506
2,579,456
$
2,330,451
11,009
12,669
2,590,465
$
2,343,120
As of December 31, 2013, all of the Rural Utilities Guaranteed Securities consisted of securities
representing either (1) direct interests in eligible rural electric loans or (2) general obligations of the
National Rural Utilities Cooperative Finance Corporation ("CFC") secured by eligible rural electric
loans. As of December 31, 2013, CFC held approximately 8 percent of Farmer Mac's outstanding Class A
voting common stock (5 percent of total voting shares) and 50 percent of Farmer Mac's outstanding Series
A Preferred Stock, which was issued in January 2013 when Farmer Mac's outstanding Series C Non-
Voting Cumulative Preferred Stock ("Series C Preferred Stock"), of which CFC held 100 percent, was
simultaneously redeemed in its entirety.
Loan Eligibility
To be eligible for Farmer Mac's Rural Utilities line of business, a rural utilities loan (or an interest in such
a loan) is required to:
• be made for an electric or telephone facility by a lender organized as a cooperative to a borrower
that has received or is eligible to receive a loan under the REA;
• be performing and not more than 30 days delinquent; and
• meet Farmer Mac's underwriting standards described in more detail below.
29
30
Underwriting
Farmer Mac's charter does not specify minimum underwriting criteria for eligible rural utilities loans
under the Rural Utilities line of business. To manage Farmer Mac's credit risk, to mitigate the risk of loss
from borrower defaults, and to provide guidance for the management, administration, and conduct of
underwriting to participants in the Rural Utilities line of business, Farmer Mac has adopted credit
underwriting standards that vary by loan type, based on whether loans are made to electric distribution
cooperatives or electric generation and transmission ("G&T") cooperatives, and by loan product. These
standards are based on industry norms for similar rural utilities loans and are designed to assess the
creditworthiness of the borrower, as well as the risk to Farmer Mac depending on whether direct or
indirect credit exposure is assumed on the loan. Farmer Mac reviews lenders' credit submissions and
analyzes borrowers' audited financial statements and financial and operating reports filed with RUS and
the Federal Energy Regulatory Commission to confirm that loans meet Farmer Mac's underwriting
standards for rural utilities loans. Furthermore, Farmer Mac requires sellers of rural utilities loans to make
representations and warranties regarding the conformity of eligible loans to these standards and any other
requirements that Farmer Mac may impose from time to time. Farmer Mac has the ability to require
repurchase of the loan upon a material breach of these representations and warranties.
In addition to the loan eligibility criteria described above for rural utilities loans, 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. Farmer Mac's credit underwriting standards for all rural utilities loans
on which it assumes direct credit exposure (i.e., with no general obligation of a lender involved in the
transaction) require:
•
•
each borrower to demonstrate sufficient cash flow to adequately service the loan; and
each borrower's leverage position to be adequate based on industry standards.
In the case of a newly-originated loan to a distribution cooperative on which Farmer Mac assumes direct
credit exposure, the borrower typically must, among other criteria set forth in Farmer Mac's credit
underwriting standards, meet the following ratios (based on the average of the most recent three years):
•
•
•
the ratio of long-term debt to "net utility plant" does not exceed 90 percent;
the modified debt service coverage ratio (the cooperative's available cash plus patronage capital
credits allocated to the cooperative, relative to debt expense) equals or exceeds 1.35; and
the ratio of equity to total assets equals or exceeds 20 percent.
The "net utility plant" means the real and tangible personal property of a rural utilities borrower
constituting the long-term assets of property, plant, and equipment (PPE), less depreciation, computed in
accordance with applicable accounting requirements.
In the case of a newly-originated loan to a G&T cooperative on which Farmer Mac assumes direct credit
exposure, the borrower typically must, among other criteria set forth in Farmer Mac's credit underwriting
standards, meet the following ratios (based on the average of the most recent three years):
•
•
the equity to total assets ratio equals or exceeds 10 percent;
the modified debt service coverage ratio equals or exceeds 1.15;
the debt to EBITDA (earnings before income taxes, depreciation and amortization) ratio does not
exceed 12; and
the aggregate members' equity to total capitalization ratio equals or exceeds 25 percent.
Since the inception of the Rural Utilities line of business in 2008, Farmer Mac has purchased only one
loan that has not met all of the applicable underwriting standards for Rural Utilities loans described above.
Farmer Mac's credit underwriting standards for all AgVantage transactions under the Rural Utilities line of
business, in which Farmer Mac has indirect credit exposure on loans securing the general obligation of a
lender, require:
•
the counterparty issuing the general obligation to have a credit rating from an NRSRO that is at
least investment grade , or be of comparable creditworthiness as determined through Farmer
•
the collateral to be comprised of loans, or interests in loans, for electric or telephone facilities by a
lender organized as a cooperative to a borrower that has received or is eligible to receive a loan
Mac's analysis;
under the REA;
the collateral to be performing and not more than 30 days delinquent; and
the collateralization (consisting of current, performing loans) to be maintained at the contractually
prescribed level, in an amount at least equal to the outstanding principal amount of the security.
In addition, the same underwriting standards that apply to loans made to distribution cooperatives on
which Farmer Mac assumes direct credit exposure also apply to loans made to distribution cooperatives
that secure the general obligation of the lender in AgVantage transactions (based on the average of the
most recent three years):
the ratio of long-term debt to net utility plant does not exceed 90 percent;
the modified debt service coverage ratio equals or exceeds 1.35; and
the ratio of equity to total assets equals or exceeds 20 percent.
For loans made to G&T cooperatives that secure the general obligation of the lender in AgVantage
transactions, the G&T cooperative must either (1) have a rating from an NRSRO of BBB- (or equivalent
rating) or better or (2) meet the following underwriting standards (based on the average of the most recent
three years):
the aggregate members' equity to total capitalization ratio equals or exceeds 25 percent;
the modified debt service coverage ratio equals or exceeds 1.10; and
the equity to total assets ratio equals or exceeds 10 percent.
The due diligence Farmer Mac performs before purchasing, or guaranteeing securities backed by rural
utilities loans includes:
evaluating loan database information to determine conformity to Farmer Mac's underwriting
standards;
confirming that loan file data conforms to database information;
• validating supporting credit information in the loan files; and
reviewing loan documentation.
•
•
•
•
•
•
•
•
•
•
•
•
•
31
32
Underwriting
Farmer Mac's charter does not specify minimum underwriting criteria for eligible rural utilities loans
under the Rural Utilities line of business. To manage Farmer Mac's credit risk, to mitigate the risk of loss
from borrower defaults, and to provide guidance for the management, administration, and conduct of
underwriting to participants in the Rural Utilities line of business, Farmer Mac has adopted credit
underwriting standards that vary by loan type, based on whether loans are made to electric distribution
cooperatives or electric generation and transmission ("G&T") cooperatives, and by loan product. These
standards are based on industry norms for similar rural utilities loans and are designed to assess the
creditworthiness of the borrower, as well as the risk to Farmer Mac depending on whether direct or
indirect credit exposure is assumed on the loan. Farmer Mac reviews lenders' credit submissions and
analyzes borrowers' audited financial statements and financial and operating reports filed with RUS and
the Federal Energy Regulatory Commission to confirm that loans meet Farmer Mac's underwriting
standards for rural utilities loans. Furthermore, Farmer Mac requires sellers of rural utilities loans to make
representations and warranties regarding the conformity of eligible loans to these standards and any other
requirements that Farmer Mac may impose from time to time. Farmer Mac has the ability to require
repurchase of the loan upon a material breach of these representations and warranties.
In addition to the loan eligibility criteria described above for rural utilities loans, 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. Farmer Mac's credit underwriting standards for all rural utilities loans
on which it assumes direct credit exposure (i.e., with no general obligation of a lender involved in the
transaction) require:
each borrower to demonstrate sufficient cash flow to adequately service the loan; and
each borrower's leverage position to be adequate based on industry standards.
In the case of a newly-originated loan to a distribution cooperative on which Farmer Mac assumes direct
credit exposure, the borrower typically must, among other criteria set forth in Farmer Mac's credit
underwriting standards, meet the following ratios (based on the average of the most recent three years):
the ratio of long-term debt to "net utility plant" does not exceed 90 percent;
the modified debt service coverage ratio (the cooperative's available cash plus patronage capital
credits allocated to the cooperative, relative to debt expense) equals or exceeds 1.35; and
the ratio of equity to total assets equals or exceeds 20 percent.
The "net utility plant" means the real and tangible personal property of a rural utilities borrower
constituting the long-term assets of property, plant, and equipment (PPE), less depreciation, computed in
accordance with applicable accounting requirements.
the equity to total assets ratio equals or exceeds 10 percent;
the modified debt service coverage ratio equals or exceeds 1.15;
•
•
•
•
•
•
•
•
•
the debt to EBITDA (earnings before income taxes, depreciation and amortization) ratio does not
exceed 12; and
the aggregate members' equity to total capitalization ratio equals or exceeds 25 percent.
Since the inception of the Rural Utilities line of business in 2008, Farmer Mac has purchased only one
loan that has not met all of the applicable underwriting standards for Rural Utilities loans described above.
Farmer Mac's credit underwriting standards for all AgVantage transactions under the Rural Utilities line of
business, in which Farmer Mac has indirect credit exposure on loans securing the general obligation of a
lender, require:
•
•
•
•
the counterparty issuing the general obligation to have a credit rating from an NRSRO that is at
least investment grade , or be of comparable creditworthiness as determined through Farmer
Mac's analysis;
the collateral to be comprised of loans, or interests in loans, for electric or telephone facilities by a
lender organized as a cooperative to a borrower that has received or is eligible to receive a loan
under the REA;
the collateral to be performing and not more than 30 days delinquent; and
the collateralization (consisting of current, performing loans) to be maintained at the contractually
prescribed level, in an amount at least equal to the outstanding principal amount of the security.
In addition, the same underwriting standards that apply to loans made to distribution cooperatives on
which Farmer Mac assumes direct credit exposure also apply to loans made to distribution cooperatives
that secure the general obligation of the lender in AgVantage transactions (based on the average of the
most recent three years):
•
•
•
the ratio of long-term debt to net utility plant does not exceed 90 percent;
the modified debt service coverage ratio equals or exceeds 1.35; and
the ratio of equity to total assets equals or exceeds 20 percent.
For loans made to G&T cooperatives that secure the general obligation of the lender in AgVantage
transactions, the G&T cooperative must either (1) have a rating from an NRSRO of BBB- (or equivalent
rating) or better or (2) meet the following underwriting standards (based on the average of the most recent
three years):
•
•
•
the aggregate members' equity to total capitalization ratio equals or exceeds 25 percent;
the modified debt service coverage ratio equals or exceeds 1.10; and
the equity to total assets ratio equals or exceeds 10 percent.
The due diligence Farmer Mac performs before purchasing, or guaranteeing securities backed by rural
utilities loans includes:
In the case of a newly-originated loan to a G&T cooperative on which Farmer Mac assumes direct credit
exposure, the borrower typically must, among other criteria set forth in Farmer Mac's credit underwriting
standards, meet the following ratios (based on the average of the most recent three years):
•
evaluating loan database information to determine conformity to Farmer Mac's underwriting
standards;
confirming that loan file data conforms to database information;
•
• validating supporting credit information in the loan files; and
•
reviewing loan documentation.
31
32
Farmer Mac is not obligated to assume credit risk on every rural utilities loan submitted to Farmer Mac that
meets its underwriting and collateral valuation standards. Farmer Mac may consider other factors, such as
portfolio diversification, in deciding whether or not to accept the loans.
Collateral
borrowers. For indirect credit exposures on rural utilities loans (e.g., AgVantage transactions), Farmer
Mac's current limit is $75.0 million for cumulative loan exposure to any one borrower or related
borrowers, with the amount of any direct exposure to a borrower also counting toward the $75.0 million
limit. As of December 31, 2013, Farmer Mac's direct credit exposure to rural utilities loans consisted of
$1.0 billion in loans to distribution cooperatives and $35.3 million in loans to G&T cooperatives.
It is customary in loans to distribution cooperatives and G&T cooperatives for the lender to take a security
interest in substantially all of the borrower's assets. In cases in which Farmer Mac purchases a rural
utilities loan with a pledge of all assets and a lender also has a lien on all assets, Farmer Mac verifies that a
lien accommodation results in either a shared first lien or a first lien in favor of Farmer Mac. In cases
where debt indentures are utilized, Farmer Mac determines if available collateral is adequate to support
the loan program and Farmer Mac's investment. As of December 31, 2013, all of the rural utilities loans
held by Farmer Mac consisted of loans with a pledge of all assets of the borrower except for one
unsecured loan with a balance of $13.1 million. Farmer Mac also has indirect credit exposure on rural
utilities loans that are pledged to secure AgVantage securities. Some of those loans are unsecured or
secured by less than all of the borrower's assets. The agreements governing Farmer Mac's Rural Utilities
AgVantage securities provide that these loans may not comprise more than 20 percent of the aggregate
rural utilities loans securing these AgVantage securities.
Servicing
Farmer Mac generally does not directly service the rural utilities loans held in its portfolio or the loans
underlying Rural Utilities Guaranteed Securities. Those loans are serviced by a servicer designated by
Farmer Mac. Rural utilities loans pledged to secure AgVantage securities are serviced by the issuer of the
AgVantage securities in accordance with the institution's servicing procedures, which are reviewed and
approved by Farmer Mac before entering into those transactions. CFC, a related party to Farmer Mac by
virtue of CFC's stock ownership in Farmer Mac and sole issuer of AgVantage securities secured by rural
utilities loans, currently services all of the rural utilities loans in Farmer Mac's portfolio.
Approved Lenders
Farmer Mac's charter requires eligible rural utilities loans be made by a lender organized as a
cooperative. Currently, the only two rural utilities lenders that are cooperatives are CFC and CoBank,
ACB ("CoBank"), an institution of the FCS. As of December 31, 2013, these cooperatives had
approximately $20.7 billion in loans outstanding to distribution cooperatives and $7.4 billion in loans
outstanding to G&T cooperatives. To date, CFC is the only lender to have participated in Farmer Mac's
Rural Utilities line of business.
Portfolio Diversification
Rural utilities loans are made throughout the entire United States. Farmer Mac analyzes the geographic
distribution of loans to cooperatives and considers regional concentration levels in connection with its
business activities under the Rural Utilities program. As of December 31, 2013, Farmer Mac had direct
credit exposure on 788 loans to electric cooperatives constituting $1.1 billion across 37 states.
Farmer Mac's charter does not prescribe a maximum loan size for an eligible rural utilities loan, but
Farmer Mac currently has a $30.0 million limit in place for cumulative direct credit exposure on those
loans (e.g., purchases of loans or securities representing interests in loans) to any one borrower or related
Funding of Guarantee and LTSPC Obligations
The principal sources of funding for the payment of Farmer Mac's obligations under its guarantees and
LTSPCs are the fees Farmer Mac receives for its guarantees and commitments, net effective spread,
proceeds of debt issuances, loan repayments, and maturities of AgVantage securities. Farmer Mac
satisfies its obligations under LTSPCs and its guarantees by purchasing defaulted loans out of LTSPCs and
from the related trusts for Farmer Mac Guaranteed Securities. Farmer Mac typically recovers a significant
portion of the value of defaulted loans purchased either through borrower payments, loan payoffs,
payments by third parties, or foreclosure and sale of the property securing the loans. Ultimate credit
losses arising from Farmer Mac's guarantees and commitments are reflected in Farmer Mac's charge-offs
against its allowance for losses, gains and losses on the sale of real estate owned ("REO"), which consists
of real estate acquired through foreclosure, and fair value adjustments of REOs held. During 2013,
Farmer Mac had net credit losses of $3.0 million, compared to $1.7 million during 2012, primarily due to
an increase in the level of charge-offs in 2013.
Farmer Mac's charter requires Farmer Mac to maintain in its accounts a portion of the guarantee fees it
receives from its guarantee activities as a reserve against losses. As of December 31, 2013, this reserve
against losses arising from Farmer Mac's guarantee activities was $31.6 million. Farmer Mac calculates
the amount of this statutorily required reserve against losses arising from its guarantee activities based on
the credit risk component of guarantee fees received on all Farm & Ranch Guaranteed Securities and
AgVantage securities (in both the Farm & Ranch and Rural Utilities lines of business). This amount does
not represent either anticipated credit losses or estimated probable credit losses and does not directly relate
to either the allowance for loan losses or the reserve for losses in Farmer Mac's consolidated balance
sheets. Rather, this is the amount that must be exhausted before Farmer Mac may issue obligations to the
U.S. Treasury against the $1.5 billion that Farmer Mac is statutorily authorized to borrow from the U.S.
Treasury to fulfill its guarantee obligations. That borrowing authority is not intended to be a routine
funding source and has never been used. For a more detailed discussion of Farmer Mac's borrowing
authority from the U.S. Treasury, see "Business—Farmer Mac's Authority to Borrow from the U.S.
Treasury."
Farmer Mac's total outstanding guarantees and LTSPCs exceed the total of: (1) the amount held as an
allowance for losses, (2) the amount maintained as a reserve against losses arising from guarantee
activities, and (3) the amount Farmer Mac may borrow from the U.S. Treasury. However, Farmer Mac
does not expect its future payment obligations under its guarantees and LTSPCs to exceed amounts
available to satisfy those obligations, including access to the underlying collateral in the event of
default. For information about Farmer Mac's allowance for losses, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and
Guarantees" and Note 2(j) and Note 8 to the consolidated financial statements.
33
34
Farmer Mac is not obligated to assume credit risk on every rural utilities loan submitted to Farmer Mac that
meets its underwriting and collateral valuation standards. Farmer Mac may consider other factors, such as
portfolio diversification, in deciding whether or not to accept the loans.
Collateral
Servicing
It is customary in loans to distribution cooperatives and G&T cooperatives for the lender to take a security
interest in substantially all of the borrower's assets. In cases in which Farmer Mac purchases a rural
utilities loan with a pledge of all assets and a lender also has a lien on all assets, Farmer Mac verifies that a
lien accommodation results in either a shared first lien or a first lien in favor of Farmer Mac. In cases
where debt indentures are utilized, Farmer Mac determines if available collateral is adequate to support
the loan program and Farmer Mac's investment. As of December 31, 2013, all of the rural utilities loans
held by Farmer Mac consisted of loans with a pledge of all assets of the borrower except for one
unsecured loan with a balance of $13.1 million. Farmer Mac also has indirect credit exposure on rural
utilities loans that are pledged to secure AgVantage securities. Some of those loans are unsecured or
secured by less than all of the borrower's assets. The agreements governing Farmer Mac's Rural Utilities
AgVantage securities provide that these loans may not comprise more than 20 percent of the aggregate
rural utilities loans securing these AgVantage securities.
Farmer Mac generally does not directly service the rural utilities loans held in its portfolio or the loans
underlying Rural Utilities Guaranteed Securities. Those loans are serviced by a servicer designated by
Farmer Mac. Rural utilities loans pledged to secure AgVantage securities are serviced by the issuer of the
AgVantage securities in accordance with the institution's servicing procedures, which are reviewed and
approved by Farmer Mac before entering into those transactions. CFC, a related party to Farmer Mac by
virtue of CFC's stock ownership in Farmer Mac and sole issuer of AgVantage securities secured by rural
utilities loans, currently services all of the rural utilities loans in Farmer Mac's portfolio.
Approved Lenders
Farmer Mac's charter requires eligible rural utilities loans be made by a lender organized as a
cooperative. Currently, the only two rural utilities lenders that are cooperatives are CFC and CoBank,
ACB ("CoBank"), an institution of the FCS. As of December 31, 2013, these cooperatives had
approximately $20.7 billion in loans outstanding to distribution cooperatives and $7.4 billion in loans
outstanding to G&T cooperatives. To date, CFC is the only lender to have participated in Farmer Mac's
Rural Utilities line of business.
Portfolio Diversification
Rural utilities loans are made throughout the entire United States. Farmer Mac analyzes the geographic
distribution of loans to cooperatives and considers regional concentration levels in connection with its
business activities under the Rural Utilities program. As of December 31, 2013, Farmer Mac had direct
credit exposure on 788 loans to electric cooperatives constituting $1.1 billion across 37 states.
Farmer Mac's charter does not prescribe a maximum loan size for an eligible rural utilities loan, but
Farmer Mac currently has a $30.0 million limit in place for cumulative direct credit exposure on those
loans (e.g., purchases of loans or securities representing interests in loans) to any one borrower or related
borrowers. For indirect credit exposures on rural utilities loans (e.g., AgVantage transactions), Farmer
Mac's current limit is $75.0 million for cumulative loan exposure to any one borrower or related
borrowers, with the amount of any direct exposure to a borrower also counting toward the $75.0 million
limit. As of December 31, 2013, Farmer Mac's direct credit exposure to rural utilities loans consisted of
$1.0 billion in loans to distribution cooperatives and $35.3 million in loans to G&T cooperatives.
Funding of Guarantee and LTSPC Obligations
The principal sources of funding for the payment of Farmer Mac's obligations under its guarantees and
LTSPCs are the fees Farmer Mac receives for its guarantees and commitments, net effective spread,
proceeds of debt issuances, loan repayments, and maturities of AgVantage securities. Farmer Mac
satisfies its obligations under LTSPCs and its guarantees by purchasing defaulted loans out of LTSPCs and
from the related trusts for Farmer Mac Guaranteed Securities. Farmer Mac typically recovers a significant
portion of the value of defaulted loans purchased either through borrower payments, loan payoffs,
payments by third parties, or foreclosure and sale of the property securing the loans. Ultimate credit
losses arising from Farmer Mac's guarantees and commitments are reflected in Farmer Mac's charge-offs
against its allowance for losses, gains and losses on the sale of real estate owned ("REO"), which consists
of real estate acquired through foreclosure, and fair value adjustments of REOs held. During 2013,
Farmer Mac had net credit losses of $3.0 million, compared to $1.7 million during 2012, primarily due to
an increase in the level of charge-offs in 2013.
Farmer Mac's charter requires Farmer Mac to maintain in its accounts a portion of the guarantee fees it
receives from its guarantee activities as a reserve against losses. As of December 31, 2013, this reserve
against losses arising from Farmer Mac's guarantee activities was $31.6 million. Farmer Mac calculates
the amount of this statutorily required reserve against losses arising from its guarantee activities based on
the credit risk component of guarantee fees received on all Farm & Ranch Guaranteed Securities and
AgVantage securities (in both the Farm & Ranch and Rural Utilities lines of business). This amount does
not represent either anticipated credit losses or estimated probable credit losses and does not directly relate
to either the allowance for loan losses or the reserve for losses in Farmer Mac's consolidated balance
sheets. Rather, this is the amount that must be exhausted before Farmer Mac may issue obligations to the
U.S. Treasury against the $1.5 billion that Farmer Mac is statutorily authorized to borrow from the U.S.
Treasury to fulfill its guarantee obligations. That borrowing authority is not intended to be a routine
funding source and has never been used. For a more detailed discussion of Farmer Mac's borrowing
authority from the U.S. Treasury, see "Business—Farmer Mac's Authority to Borrow from the U.S.
Treasury."
Farmer Mac's total outstanding guarantees and LTSPCs exceed the total of: (1) the amount held as an
allowance for losses, (2) the amount maintained as a reserve against losses arising from guarantee
activities, and (3) the amount Farmer Mac may borrow from the U.S. Treasury. However, Farmer Mac
does not expect its future payment obligations under its guarantees and LTSPCs to exceed amounts
available to satisfy those obligations, including access to the underlying collateral in the event of
default. For information about Farmer Mac's allowance for losses, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and
Guarantees" and Note 2(j) and Note 8 to the consolidated financial statements.
33
34
FINANCING
Equity Issuance
Debt Issuance
Farmer Mac's statutory charter (12 U.S.C. § 2279aa-6(e)) authorizes Farmer Mac to issue debt obligations
to purchase eligible loans, USDA Securities, and Farmer Mac Guaranteed Securities, and to maintain
reasonable amounts for business operations, including adequate liquidity. Farmer Mac funds its purchases
of eligible loan assets and liquidity investment assets primarily by issuing debt obligations of various
maturities in the public capital markets. Farmer Mac also issues debt obligations to obtain funds to
finance its transaction costs and its obligations under guarantees and LTSPCs. Farmer Mac's debt
obligations include discount notes and fixed and floating rate medium-term notes, including callable notes.
The interest and principal on Farmer Mac's debt obligations are not guaranteed by, and do not constitute
debts or obligations of, FCA or the United States or any agency or instrumentality of the United States
other than Farmer Mac. Farmer Mac is an institution of the FCS, but is not liable for any debt or
obligation of any other institution of the FCS. Likewise, neither the FCS nor any other individual
institution of the FCS is liable for any debt or obligation of Farmer Mac. Income to the purchaser of a
Farmer Mac discount note or medium-term note is not exempt under federal law from federal, state, or
local taxation. Farmer Mac's discount notes and medium-term notes are not currently rated by an
NRSRO.
Farmer Mac's board of directors has authorized the issuance of up to $15.0 billion of discount notes and
medium-term notes (of which $12.3 billion was outstanding as of December 31, 2013), subject to periodic
review of the adequacy of that level relative to Farmer Mac's borrowing needs. The board of directors
increased that authorization from $12.0 billion to $15.0 billion in December 2012. Farmer Mac invests
the proceeds of its debt issuances in loan purchases, Farmer Mac Guaranteed Securities, and liquidity
investment assets in accordance with policies established by its board of directors that comply with FCA's
Liquidity and Investment Regulations, which establish limitations on dollar amount, issuer concentration,
and credit quality. Farmer Mac's regular debt issuance supports its access to the capital markets, and
Farmer Mac's liquidity investment assets provide an alternative source of funds should market conditions
be unfavorable. Farmer Mac's current policies authorize liquidity investments in:
international and multilateral development bank obligations;
• obligations of or guaranteed by the United States;
• obligations of GSEs;
• municipal securities;
•
• money market instruments;
• diversified investment funds;
asset-backed securities;
•
corporate debt securities; and
•
• mortgage securities.
For more information about Farmer Mac's outstanding investments and indebtedness, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Review" and
Note 4 and Note 7 to the consolidated financial statements.
Farmer Mac's charter authorizes Farmer Mac to issue voting common stock, non-voting common stock,
and non-voting preferred stock. Only banks, other financial entities, insurance companies, and institutions
of the FCS eligible to participate in one or more of Farmer Mac's lines of business may hold voting
common stock. No holder of Class A voting common stock may directly or indirectly be a beneficial
owner of more than 33 percent of the outstanding shares of Class A voting common stock. There are no
restrictions on the maximum number or percentage of outstanding shares of Class B voting common stock
that may be held by an eligible stockholder. No ownership restrictions apply to Class C non-voting
common stock or to any preferred stock issued by Farmer Mac, and those securities are freely transferable.
The dividend rights of all three classes of Farmer Mac's common stock are the same, and dividends may
be paid on common stock only when, as, and if declared by Farmer Mac's board of directors in its sole
discretion, subject to compliance with applicable capital requirements and the payment of dividends on
outstanding preferred stock. Upon liquidation, dissolution, or winding up of the business of Farmer Mac,
after payment and provision for payment of outstanding debt of Farmer Mac, the holders of shares of
preferred stock would be paid at par value out of assets available for distribution, plus all declared and
unpaid dividends, before the holders of shares of common stock received any payment. The assets of
Farmer Mac II LLC are not directly available to satisfy the claims of Farmer Mac's creditors or
stockholders. Those assets will only be available to the creditors and stockholders of Farmer Mac after all
obligations owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied.
Common Stock
As of December 31, 2013, the following shares of Farmer Mac common stock were outstanding:
• 1,030,780 shares of Class A voting common stock;
• 500,301 shares of Class B voting common stock; and
• 9,354,804 shares of Class C non-voting common stock.
Farmer Mac may obtain additional capital from future issuances of voting and non-voting common stock
and non-voting preferred stock. Farmer Mac did not repurchase any common stock during 2013 or 2012.
The following table presents the dividends declared on Farmer Mac's common stock during and
subsequent to 2013:
Date
Dividend
Declared
February 6, 2013
June 5, 2013
July 31, 2013
December 4, 2013
February 6, 2014
Per
Share
Amount
$0.12
$0.12
$0.12
$0.12
$0.14
For
Holders Of
Record As Of
March 15, 2013
June 17, 2013
Date
Paid
March 29, 2013
June 28, 2013
September 16, 2013
September 30, 2013
December 20, 2013
December 31, 2013
March 17, 2014
*
* The dividend declared on February 6, 2014 is scheduled to be paid on March 31, 2014.
35
36
FINANCING
Equity Issuance
Debt Issuance
Farmer Mac's statutory charter (12 U.S.C. § 2279aa-6(e)) authorizes Farmer Mac to issue debt obligations
to purchase eligible loans, USDA Securities, and Farmer Mac Guaranteed Securities, and to maintain
reasonable amounts for business operations, including adequate liquidity. Farmer Mac funds its purchases
of eligible loan assets and liquidity investment assets primarily by issuing debt obligations of various
maturities in the public capital markets. Farmer Mac also issues debt obligations to obtain funds to
finance its transaction costs and its obligations under guarantees and LTSPCs. Farmer Mac's debt
obligations include discount notes and fixed and floating rate medium-term notes, including callable notes.
The interest and principal on Farmer Mac's debt obligations are not guaranteed by, and do not constitute
debts or obligations of, FCA or the United States or any agency or instrumentality of the United States
other than Farmer Mac. Farmer Mac is an institution of the FCS, but is not liable for any debt or
obligation of any other institution of the FCS. Likewise, neither the FCS nor any other individual
institution of the FCS is liable for any debt or obligation of Farmer Mac. Income to the purchaser of a
Farmer Mac discount note or medium-term note is not exempt under federal law from federal, state, or
local taxation. Farmer Mac's discount notes and medium-term notes are not currently rated by an
NRSRO.
Farmer Mac's board of directors has authorized the issuance of up to $15.0 billion of discount notes and
medium-term notes (of which $12.3 billion was outstanding as of December 31, 2013), subject to periodic
review of the adequacy of that level relative to Farmer Mac's borrowing needs. The board of directors
increased that authorization from $12.0 billion to $15.0 billion in December 2012. Farmer Mac invests
the proceeds of its debt issuances in loan purchases, Farmer Mac Guaranteed Securities, and liquidity
investment assets in accordance with policies established by its board of directors that comply with FCA's
Liquidity and Investment Regulations, which establish limitations on dollar amount, issuer concentration,
and credit quality. Farmer Mac's regular debt issuance supports its access to the capital markets, and
Farmer Mac's liquidity investment assets provide an alternative source of funds should market conditions
be unfavorable. Farmer Mac's current policies authorize liquidity investments in:
• obligations of or guaranteed by the United States;
•
international and multilateral development bank obligations;
• obligations of GSEs;
• municipal securities;
• money market instruments;
• diversified investment funds;
•
•
asset-backed securities;
corporate debt securities; and
• mortgage securities.
For more information about Farmer Mac's outstanding investments and indebtedness, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Review" and
Note 4 and Note 7 to the consolidated financial statements.
Farmer Mac's charter authorizes Farmer Mac to issue voting common stock, non-voting common stock,
and non-voting preferred stock. Only banks, other financial entities, insurance companies, and institutions
of the FCS eligible to participate in one or more of Farmer Mac's lines of business may hold voting
common stock. No holder of Class A voting common stock may directly or indirectly be a beneficial
owner of more than 33 percent of the outstanding shares of Class A voting common stock. There are no
restrictions on the maximum number or percentage of outstanding shares of Class B voting common stock
that may be held by an eligible stockholder. No ownership restrictions apply to Class C non-voting
common stock or to any preferred stock issued by Farmer Mac, and those securities are freely transferable.
The dividend rights of all three classes of Farmer Mac's common stock are the same, and dividends may
be paid on common stock only when, as, and if declared by Farmer Mac's board of directors in its sole
discretion, subject to compliance with applicable capital requirements and the payment of dividends on
outstanding preferred stock. Upon liquidation, dissolution, or winding up of the business of Farmer Mac,
after payment and provision for payment of outstanding debt of Farmer Mac, the holders of shares of
preferred stock would be paid at par value out of assets available for distribution, plus all declared and
unpaid dividends, before the holders of shares of common stock received any payment. The assets of
Farmer Mac II LLC are not directly available to satisfy the claims of Farmer Mac's creditors or
stockholders. Those assets will only be available to the creditors and stockholders of Farmer Mac after all
obligations owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied.
Common Stock
As of December 31, 2013, the following shares of Farmer Mac common stock were outstanding:
•
•
•
1,030,780 shares of Class A voting common stock;
500,301 shares of Class B voting common stock; and
9,354,804 shares of Class C non-voting common stock.
Farmer Mac may obtain additional capital from future issuances of voting and non-voting common stock
and non-voting preferred stock. Farmer Mac did not repurchase any common stock during 2013 or 2012.
The following table presents the dividends declared on Farmer Mac's common stock during and
subsequent to 2013:
Date
Dividend
Declared
February 6, 2013
June 5, 2013
July 31, 2013
December 4, 2013
February 6, 2014
Per
Share
Amount
$0.12
$0.12
$0.12
$0.12
$0.14
For
Holders Of
Record As Of
March 15, 2013
June 17, 2013
Date
Paid
March 29, 2013
June 28, 2013
September 16, 2013
September 30, 2013
December 20, 2013
December 31, 2013
March 17, 2014
*
* The dividend declared on February 6, 2014 is scheduled to be paid on March 31, 2014.
35
36
Farmer Mac's ability to declare and pay common stock dividends could be restricted if it were to fail to
comply with applicable capital requirements. See Note 9 to the consolidated financial statements and
"Business—Government Regulation of Farmer Mac—Regulation—Capital Standards."
Linked Capital Securities or "FALConS," represent undivided beneficial ownership interests in 250,000
shares of Farmer Mac II LLC Preferred Stock. The Farmer Mac II LLC Preferred Stock has a liquidation
preference of $1,000 per share.
Preferred Stock
On January 17, 2013, Farmer Mac redeemed and retired all 57,578 outstanding shares of its Series C
Preferred Stock (and paid all outstanding declared but unpaid dividends on the Series C Preferred Stock
on a pro-rated basis to the date of redemption) through the proceeds received from the issuance of
2.4 million shares of Series A Preferred Stock on the same date (as further described below). Farmer Mac
had authorized the issuance of up to 100,000 shares of Series C Preferred Stock with a par value of $1,000
per share and an initial liquidation preference of $1,000 per share. CFC, a related party, owned all of the
outstanding Series C Preferred Stock on the date of its redemption, and held at issuance 1.2 million shares
of the Series A Preferred Stock.
The Series A Preferred Stock has a par value of $25 per share and an initial liquidation preference of
$25 per share. Since its issuance, there have been no additional sales of Series A Preferred Stock by
Farmer Mac. Series A Preferred Stock ranks senior to Farmer Mac's outstanding Class A voting common
stock, Class B voting common stock, Class C non-voting common stock, and any other common stock of
Farmer Mac issued in the future. The annual dividend rate will remain at a fixed rate of 5.875 percent for
as long as the Series A Preferred Stock remains outstanding. Dividends on Series A Preferred Stock are
non-cumulative, which means that if the Board of Directors has not declared a dividend before the
applicable dividend payment date for any dividend period, such dividend will not be paid or cumulate, and
Farmer Mac will have no obligation to pay dividends for such dividend period, whether or not dividends
on the Series A Preferred Stock are declared for any future dividend period. Farmer Mac may pay
dividends on Series A Preferred Stock without paying dividends on any outstanding class or series of stock
that ranks junior to Series A Preferred Stock. Farmer Mac has the right, but not the obligation, to redeem
some or all of the issued and outstanding shares of Series A Preferred Stock at a price equal to the then-
applicable liquidation preference beginning on January 17, 2018 and anytime thereafter.
The following table presents the dividends declared and paid on Series A Preferred Stock during and
subsequent to 2013:
Date
Dividend
Declared
February 6, 2013
June 5, 2013
July 31, 2013
December 4, 2013
February 6, 2014
Per
Share
Amount
$0.3672
$0.3672
$0.3672
$0.3672
$0.3672
For
Period
Beginning
January 18, 2013
April 18, 2013
July 18, 2013
For
Period
Ending
April 17, 2013
July 17, 2013
Date
Paid
April 17, 2013
July 17, 2013
October 17, 2013
October 17, 2013
October 18, 2013
January 17, 2014
January 17, 2014
January 18, 2014
April 17, 2014
*
* The dividend declared on February 6, 2014 is scheduled to be paid on April 17, 2014.
Non-Controlling Interest in Farmer Mac II LLC
On January 25, 2010, Farmer Mac completed a private offering of $250.0 million aggregate face amount
of securities issued by a newly formed Delaware statutory trust. The trust securities, called Farm Asset-
Dividends on the Farmer Mac II LLC Preferred Stock are payable if, when, and as declared by Farmer
Mac II LLC's board of directors, quarterly, on a non-cumulative basis, on March 30, June 30,
September 30, and December 30 of each year. From the date of issuance to but excluding the quarterly
payment date occurring on March 30, 2015, the annual dividend rate on the Farmer Mac II LLC Preferred
Stock is 8.875 percent. After consideration of the consolidated tax benefits to Farmer Mac, the net
effective cost of the $250.0 million of the Farmer Mac II LLC Preferred Stock is currently 5.77 percent
per year. From March 30, 2015 to but excluding the quarterly payment date occurring on March 30, 2020,
the annual dividend rate on the Farmer Mac II LLC Preferred Stock will be 10.875 percent. Beginning on
March 30, 2020, the dividend rate on the Farmer Mac II LLC Preferred Stock will be an annual rate equal
to three-month LIBOR plus 8.211 percent. Dividends on the Farmer Mac II LLC Preferred Stock are non-
cumulative, so dividends that are not declared for any payment date will not accrue.
Farmer Mac II LLC Preferred Stock is permanent equity of Farmer Mac II LLC and is presented as "Non-
controlling interest – preferred stock" within total equity on the consolidated balance sheets of Farmer
Mac. Farmer Mac II LLC incurred $8.1 million of direct costs related to the issuance of the Farmer Mac
II LLC Preferred Stock, which reduced the amount of non-controlling interest – preferred stock. The
accrual of declared dividends is presented as "Net income attributable to non-controlling interest –
preferred stock dividends" on the consolidated statements of operations on a pre-tax basis. The
consolidated tax benefit is included in "income tax expense" on the consolidated statements of operations.
Without the consent of the holders of the FALConS or the Farmer Mac II LLC Preferred Stock, Farmer
Mac II LLC may redeem the Farmer Mac II LLC Preferred Stock on March 30 of 2015, 2016, 2017, 2018,
and 2019 and on any quarterly payment date on or after March 30, 2020, in whole or in part, at a cash
redemption price equal to the liquidation preference. Farmer Mac II LLC will likely redeem some or all
of the Farmer Mac II LLC Preferred Stock on March 30, 2015 or a subsequent redemption date if Farmer
Mac is able to replace the Farmer Mac II LLC Preferred Stock, which does not constitute a Tier 1 capital-
eligible security, with other securities issued by Farmer Mac constituting Tier 1 capital-eligible securities,
as defined under Farmer Mac's capital plan. For more information on Farmer Mac's capital plan, see
"Government Regulation of Farmer Mac—Capital Standards—Capital Adequacy Requirements." In
addition, prior to the initial redemption date on March 30, 2015 or between subsequent redemption dates,
Farmer Mac or an affiliated third party may purchase FALConS from time to time in the open market, in
privately negotiated transactions or through a public tender offer, and, subject to favorable market
conditions, may seek to do so.
37
38
Farmer Mac's ability to declare and pay common stock dividends could be restricted if it were to fail to
comply with applicable capital requirements. See Note 9 to the consolidated financial statements and
"Business—Government Regulation of Farmer Mac—Regulation—Capital Standards."
Linked Capital Securities or "FALConS," represent undivided beneficial ownership interests in 250,000
shares of Farmer Mac II LLC Preferred Stock. The Farmer Mac II LLC Preferred Stock has a liquidation
preference of $1,000 per share.
Preferred Stock
On January 17, 2013, Farmer Mac redeemed and retired all 57,578 outstanding shares of its Series C
Preferred Stock (and paid all outstanding declared but unpaid dividends on the Series C Preferred Stock
on a pro-rated basis to the date of redemption) through the proceeds received from the issuance of
2.4 million shares of Series A Preferred Stock on the same date (as further described below). Farmer Mac
had authorized the issuance of up to 100,000 shares of Series C Preferred Stock with a par value of $1,000
per share and an initial liquidation preference of $1,000 per share. CFC, a related party, owned all of the
outstanding Series C Preferred Stock on the date of its redemption, and held at issuance 1.2 million shares
of the Series A Preferred Stock.
The Series A Preferred Stock has a par value of $25 per share and an initial liquidation preference of
$25 per share. Since its issuance, there have been no additional sales of Series A Preferred Stock by
Farmer Mac. Series A Preferred Stock ranks senior to Farmer Mac's outstanding Class A voting common
stock, Class B voting common stock, Class C non-voting common stock, and any other common stock of
Farmer Mac issued in the future. The annual dividend rate will remain at a fixed rate of 5.875 percent for
as long as the Series A Preferred Stock remains outstanding. Dividends on Series A Preferred Stock are
non-cumulative, which means that if the Board of Directors has not declared a dividend before the
applicable dividend payment date for any dividend period, such dividend will not be paid or cumulate, and
Farmer Mac will have no obligation to pay dividends for such dividend period, whether or not dividends
on the Series A Preferred Stock are declared for any future dividend period. Farmer Mac may pay
dividends on Series A Preferred Stock without paying dividends on any outstanding class or series of stock
that ranks junior to Series A Preferred Stock. Farmer Mac has the right, but not the obligation, to redeem
some or all of the issued and outstanding shares of Series A Preferred Stock at a price equal to the then-
applicable liquidation preference beginning on January 17, 2018 and anytime thereafter.
The following table presents the dividends declared and paid on Series A Preferred Stock during and
subsequent to 2013:
Date
Dividend
Declared
February 6, 2013
June 5, 2013
July 31, 2013
December 4, 2013
February 6, 2014
Per
Share
Amount
$0.3672
$0.3672
$0.3672
$0.3672
$0.3672
For
Period
Beginning
January 18, 2013
April 18, 2013
July 18, 2013
For
Period
Ending
April 17, 2013
July 17, 2013
Date
Paid
April 17, 2013
July 17, 2013
October 17, 2013
October 17, 2013
October 18, 2013
January 17, 2014
January 17, 2014
January 18, 2014
April 17, 2014
*
* The dividend declared on February 6, 2014 is scheduled to be paid on April 17, 2014.
Non-Controlling Interest in Farmer Mac II LLC
On January 25, 2010, Farmer Mac completed a private offering of $250.0 million aggregate face amount
of securities issued by a newly formed Delaware statutory trust. The trust securities, called Farm Asset-
Dividends on the Farmer Mac II LLC Preferred Stock are payable if, when, and as declared by Farmer
Mac II LLC's board of directors, quarterly, on a non-cumulative basis, on March 30, June 30,
September 30, and December 30 of each year. From the date of issuance to but excluding the quarterly
payment date occurring on March 30, 2015, the annual dividend rate on the Farmer Mac II LLC Preferred
Stock is 8.875 percent. After consideration of the consolidated tax benefits to Farmer Mac, the net
effective cost of the $250.0 million of the Farmer Mac II LLC Preferred Stock is currently 5.77 percent
per year. From March 30, 2015 to but excluding the quarterly payment date occurring on March 30, 2020,
the annual dividend rate on the Farmer Mac II LLC Preferred Stock will be 10.875 percent. Beginning on
March 30, 2020, the dividend rate on the Farmer Mac II LLC Preferred Stock will be an annual rate equal
to three-month LIBOR plus 8.211 percent. Dividends on the Farmer Mac II LLC Preferred Stock are non-
cumulative, so dividends that are not declared for any payment date will not accrue.
Farmer Mac II LLC Preferred Stock is permanent equity of Farmer Mac II LLC and is presented as "Non-
controlling interest – preferred stock" within total equity on the consolidated balance sheets of Farmer
Mac. Farmer Mac II LLC incurred $8.1 million of direct costs related to the issuance of the Farmer Mac
II LLC Preferred Stock, which reduced the amount of non-controlling interest – preferred stock. The
accrual of declared dividends is presented as "Net income attributable to non-controlling interest –
preferred stock dividends" on the consolidated statements of operations on a pre-tax basis. The
consolidated tax benefit is included in "income tax expense" on the consolidated statements of operations.
Without the consent of the holders of the FALConS or the Farmer Mac II LLC Preferred Stock, Farmer
Mac II LLC may redeem the Farmer Mac II LLC Preferred Stock on March 30 of 2015, 2016, 2017, 2018,
and 2019 and on any quarterly payment date on or after March 30, 2020, in whole or in part, at a cash
redemption price equal to the liquidation preference. Farmer Mac II LLC will likely redeem some or all
of the Farmer Mac II LLC Preferred Stock on March 30, 2015 or a subsequent redemption date if Farmer
Mac is able to replace the Farmer Mac II LLC Preferred Stock, which does not constitute a Tier 1 capital-
eligible security, with other securities issued by Farmer Mac constituting Tier 1 capital-eligible securities,
as defined under Farmer Mac's capital plan. For more information on Farmer Mac's capital plan, see
"Government Regulation of Farmer Mac—Capital Standards—Capital Adequacy Requirements." In
addition, prior to the initial redemption date on March 30, 2015 or between subsequent redemption dates,
Farmer Mac or an affiliated third party may purchase FALConS from time to time in the open market, in
privately negotiated transactions or through a public tender offer, and, subject to favorable market
conditions, may seek to do so.
37
38
The following table presents the dividends declared on Farmer Mac II LLC Preferred Stock during and
subsequent to 2013:
regulated by an independent regulator, the Farm Credit Administration, which has the authority to regulate
Farmer Mac's safety and soundness. The statute creating Farmer Mac expressly requires that qualified
Date
Dividend
Declared
February 6, 2013
June 5, 2013
July 31, 2013
December 4, 2013
February 6, 2014
Per
Share
Amount
$22.1875
$22.1875
$22.1875
$22.1875
$22.1875
For
Period
Beginning
For
Period
Ending
December 30, 2012
March 29, 2013
March 30, 2013
June 30, 2013
June 29, 2013
September 29, 2013
September 30, 2013
Date
Paid
April 1, 2013
July 1, 2013
loans meet minimum credit and appraisal standards that represent sound loans to profitable
businesses. The enabling legislation also required Farmer Mac to comply with the periodic reporting
requirements of the SEC, including filing quarterly reports on the financial status of Farmer Mac and
current reports when there are significant developments. Farmer Mac's statutory charter also requires
offerings of Farmer Mac Guaranteed Securities to be registered under the Securities Act of 1933 and
related regulations (collectively, the "Securities Act"), unless an exemption for an offering is available.
September 30, 2013
December 29, 2013
December 30, 2013
December 30, 2013
March 29, 2014
*
Since Farmer Mac's creation, Congress has amended Farmer Mac's charter four times:
* The dividend declared on February 6, 2014 is scheduled to be paid on March 31, 2014.
FARMER MAC'S AUTHORITY TO BORROW FROM THE U.S. TREASURY
Farmer Mac is authorized to borrow up to $1.5 billion from the U.S. Treasury through the issuance of debt
obligations to the U.S. Treasury. Any funds borrowed from the U.S. Treasury may be used solely for the
purpose of fulfilling Farmer Mac's guarantee obligations. Farmer Mac's charter provides that the U.S.
Treasury is required to purchase Farmer Mac's debt obligations up to the authorized limit if Farmer Mac
certifies that:
•
•
a portion of the guarantee fees assessed by Farmer Mac has been set aside as a reserve against
losses arising out of Farmer Mac's guarantee activities in an amount determined by Farmer Mac's
board of directors to be necessary and such reserve has been exhausted (that amount was
$31.6 million as of December 31, 2013); and
the proceeds of such obligations are needed to fulfill Farmer Mac's guarantee obligations.
Any debt obligations issued by Farmer Mac under this authority would bear interest at a rate determined
by the U.S. Treasury, taking into consideration the average rate on outstanding marketable obligations of
the United States as of the last day of the last calendar month ending before the date of the purchase of the
obligations from Farmer Mac. Farmer Mac would be required to repurchase any of its debt obligations
held by the U.S. Treasury within a "reasonable time." As of December 31, 2013, Farmer Mac had not
utilized this borrowing authority and does not expect to utilize this borrowing authority in the future.
The United States government does not guarantee payments due on Farmer Mac Guaranteed Securities,
funds invested in the equity or debt securities of Farmer Mac, any dividend payments on shares of Farmer
Mac stock, or the profitability of Farmer Mac.
GOVERNMENT REGULATION OF FARMER MAC
General
Farmer Mac was created by federal statute in 1988 in the aftermath of the collapse of the agricultural
credit delivery system. Farmer Mac's primary committees of jurisdiction in Congress – the Committee on
Agriculture of the U.S. House of Representatives and the U.S. Senate Committee on Agriculture, Nutrition
and Forestry – added requirements for Farmer Mac that had not been included in any of the other statutes
establishing other GSEs. Unlike the other existing GSEs at the time, Farmer Mac was required to be
in 1990 to create the USDA Guarantees line of business;
in 1991 to clarify Farmer Mac's authority to purchase its guaranteed securities, establish OSMO as
Farmer Mac's financial regulator, and set minimum regulatory capital requirements for Farmer
•
•
Mac;
•
in 1996 to remove certain barriers to and restrictions on Farmer Mac's operations to be more
competitive (e.g., allowing Farmer Mac to buy loans directly from lenders and issue guaranteed
securities representing 100 percent of the principal of the purchased loans and modifying capital
•
in 2008 to authorize Farmer Mac to purchase, and guarantee securities backed by, loans made by
lenders organized as cooperatives to borrowers to finance electrification and telecommunications
Farmer Mac's authorities and regulatory structure were not revised by subsequent legislation adopted in
requirements); and
systems in rural areas.
2008 to regulate other GSEs.
Regulation
Office of Secondary Market Oversight (OSMO)
As an institution of the FCS, Farmer Mac (including its subsidiaries) is subject to the regulatory authority
of FCA. FCA, acting through OSMO, has general regulatory and enforcement authority over Farmer
Mac, including the authority to promulgate rules and regulations governing the activities of Farmer Mac
and to apply its general enforcement powers to Farmer Mac and its activities. The Director of OSMO,
who is selected by and reports to the FCA board, is responsible for the examination of Farmer Mac and the
general supervision of the safe and sound performance by Farmer Mac of the powers and duties vested in
it by Farmer Mac's charter. Farmer Mac's charter requires an annual examination of the financial
transactions of Farmer Mac and authorizes FCA to assess Farmer Mac for the cost of its regulatory
activities, including the cost of any examination. Farmer Mac is required to file quarterly reports of
condition with FCA.
Capital Standards
General Requirements. Farmer Mac's charter establishes three capital standards for Farmer Mac:
• Statutory minimum capital requirement. Farmer Mac's minimum capital level is an amount of core
capital (stockholders' equity less accumulated other comprehensive income plus non-controlling
interest – preferred stock) equal to the sum of 2.75 percent of Farmer Mac's aggregate on-balance
39
40
The following table presents the dividends declared on Farmer Mac II LLC Preferred Stock during and
subsequent to 2013:
Date
Dividend
Declared
February 6, 2013
June 5, 2013
July 31, 2013
December 4, 2013
February 6, 2014
Per
Share
Amount
$22.1875
$22.1875
$22.1875
$22.1875
$22.1875
December 30, 2012
March 29, 2013
For
Period
Ending
June 29, 2013
Date
Paid
April 1, 2013
July 1, 2013
For
Period
Beginning
March 30, 2013
June 30, 2013
September 29, 2013
September 30, 2013
September 30, 2013
December 29, 2013
December 30, 2013
December 30, 2013
March 29, 2014
*
* The dividend declared on February 6, 2014 is scheduled to be paid on March 31, 2014.
FARMER MAC'S AUTHORITY TO BORROW FROM THE U.S. TREASURY
Farmer Mac is authorized to borrow up to $1.5 billion from the U.S. Treasury through the issuance of debt
obligations to the U.S. Treasury. Any funds borrowed from the U.S. Treasury may be used solely for the
purpose of fulfilling Farmer Mac's guarantee obligations. Farmer Mac's charter provides that the U.S.
Treasury is required to purchase Farmer Mac's debt obligations up to the authorized limit if Farmer Mac
certifies that:
•
a portion of the guarantee fees assessed by Farmer Mac has been set aside as a reserve against
losses arising out of Farmer Mac's guarantee activities in an amount determined by Farmer Mac's
board of directors to be necessary and such reserve has been exhausted (that amount was
$31.6 million as of December 31, 2013); and
•
the proceeds of such obligations are needed to fulfill Farmer Mac's guarantee obligations.
Any debt obligations issued by Farmer Mac under this authority would bear interest at a rate determined
by the U.S. Treasury, taking into consideration the average rate on outstanding marketable obligations of
the United States as of the last day of the last calendar month ending before the date of the purchase of the
obligations from Farmer Mac. Farmer Mac would be required to repurchase any of its debt obligations
held by the U.S. Treasury within a "reasonable time." As of December 31, 2013, Farmer Mac had not
utilized this borrowing authority and does not expect to utilize this borrowing authority in the future.
The United States government does not guarantee payments due on Farmer Mac Guaranteed Securities,
funds invested in the equity or debt securities of Farmer Mac, any dividend payments on shares of Farmer
Mac stock, or the profitability of Farmer Mac.
GOVERNMENT REGULATION OF FARMER MAC
General
Farmer Mac was created by federal statute in 1988 in the aftermath of the collapse of the agricultural
credit delivery system. Farmer Mac's primary committees of jurisdiction in Congress – the Committee on
Agriculture of the U.S. House of Representatives and the U.S. Senate Committee on Agriculture, Nutrition
and Forestry – added requirements for Farmer Mac that had not been included in any of the other statutes
establishing other GSEs. Unlike the other existing GSEs at the time, Farmer Mac was required to be
regulated by an independent regulator, the Farm Credit Administration, which has the authority to regulate
Farmer Mac's safety and soundness. The statute creating Farmer Mac expressly requires that qualified
loans meet minimum credit and appraisal standards that represent sound loans to profitable
businesses. The enabling legislation also required Farmer Mac to comply with the periodic reporting
requirements of the SEC, including filing quarterly reports on the financial status of Farmer Mac and
current reports when there are significant developments. Farmer Mac's statutory charter also requires
offerings of Farmer Mac Guaranteed Securities to be registered under the Securities Act of 1933 and
related regulations (collectively, the "Securities Act"), unless an exemption for an offering is available.
Since Farmer Mac's creation, Congress has amended Farmer Mac's charter four times:
•
•
•
•
in 1990 to create the USDA Guarantees line of business;
in 1991 to clarify Farmer Mac's authority to purchase its guaranteed securities, establish OSMO as
Farmer Mac's financial regulator, and set minimum regulatory capital requirements for Farmer
Mac;
in 1996 to remove certain barriers to and restrictions on Farmer Mac's operations to be more
competitive (e.g., allowing Farmer Mac to buy loans directly from lenders and issue guaranteed
securities representing 100 percent of the principal of the purchased loans and modifying capital
requirements); and
in 2008 to authorize Farmer Mac to purchase, and guarantee securities backed by, loans made by
lenders organized as cooperatives to borrowers to finance electrification and telecommunications
systems in rural areas.
Farmer Mac's authorities and regulatory structure were not revised by subsequent legislation adopted in
2008 to regulate other GSEs.
Regulation
Office of Secondary Market Oversight (OSMO)
As an institution of the FCS, Farmer Mac (including its subsidiaries) is subject to the regulatory authority
of FCA. FCA, acting through OSMO, has general regulatory and enforcement authority over Farmer
Mac, including the authority to promulgate rules and regulations governing the activities of Farmer Mac
and to apply its general enforcement powers to Farmer Mac and its activities. The Director of OSMO,
who is selected by and reports to the FCA board, is responsible for the examination of Farmer Mac and the
general supervision of the safe and sound performance by Farmer Mac of the powers and duties vested in
it by Farmer Mac's charter. Farmer Mac's charter requires an annual examination of the financial
transactions of Farmer Mac and authorizes FCA to assess Farmer Mac for the cost of its regulatory
activities, including the cost of any examination. Farmer Mac is required to file quarterly reports of
condition with FCA.
Capital Standards
General Requirements. Farmer Mac's charter establishes three capital standards for Farmer Mac:
• Statutory minimum capital requirement. Farmer Mac's minimum capital level is an amount of core
capital (stockholders' equity less accumulated other comprehensive income plus non-controlling
interest – preferred stock) equal to the sum of 2.75 percent of Farmer Mac's aggregate on-balance
39
40
sheet assets, as calculated for regulatory purposes, plus 0.75 percent of Farmer Mac's aggregate
off-balance sheet obligations, specifically including:
provides the Director with discretionary authority to take various optional supervisory measures
depending on the level in which Farmer Mac is classified. The mandatory measures applicable to levels II
and III include:
the unpaid principal balance of outstanding Farmer Mac Guaranteed Securities;
instruments issued or guaranteed by Farmer Mac that are substantially equivalent to Farmer
Mac Guaranteed Securities, including LTSPCs; and
other off-balance sheet obligations of Farmer Mac.
• Statutory critical capital requirement. Farmer Mac's critical capital level is an amount of core
capital equal to 50 percent of the total minimum capital requirement at that time.
• Risk-based capital. The charter directs FCA to establish a risk-based capital stress test for Farmer
approved by the Director.
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.
The risk-based capital stress test promulgated by FCA is intended to determine the amount of regulatory
capital (core capital plus the allowance for losses) that Farmer Mac would need to maintain positive
capital during a ten-year period in which:
•
•
annual losses occur at a rate of default and severity "reasonably related" to the rates of the highest
sequential two years in a limited U.S. geographic area; and
interest rates increase to a level equal to the lesser of 600 basis points or 50 percent of the ten-year
U.S. Treasury rate, and interest rates remain at such level for the remainder of the period.
The risk-based capital stress test then adds an additional 30 percent to the resulting capital requirement for
management and operational risk.
As of December 31, 2013, Farmer Mac's statutory minimum and critical capital requirements were
$398.5 million and $199.3 million, respectively, and its actual core capital level was $590.7 million,
$192.2 million above the statutory minimum capital requirement and $391.4 million above the statutory
critical capital requirement. Based on the risk-based capital stress test, Farmer Mac's risk-based capital
requirement as of December 31, 2013 was $90.8 million and Farmer Mac's regulatory capital of
$604.0 million exceeded that amount by approximately $513.2 million. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—
Capital Requirements" for a presentation of Farmer Mac's current regulatory capital position.
Enforcement Levels. Farmer Mac's charter directs FCA to classify Farmer Mac within one of four
enforcement levels for purposes of determining compliance with the capital standards established by
Farmer Mac's charter. As of December 31, 2013, Farmer Mac was classified as within level I – the highest
compliance level.
Failure to comply with the applicable required capital level in the charter would result in Farmer Mac
being classified as within level II (below the applicable risk-based capital level, but above the minimum
capital level), level III (below the minimum capital level, but above the critical capital level) or level IV
(below the critical capital level). In the event that Farmer Mac were classified as within level II, III or IV,
the charter requires the Director of OSMO to take a number of mandatory supervisory measures and
41
42
•
requiring Farmer Mac to submit and comply with a capital restoration plan;
• prohibiting the payment of dividends if such payment would result in Farmer Mac being
reclassified as within a lower level and requiring the pre-approval of any dividend payment even if
such payment would not result in reclassification as within level IV; and
•
reclassifying Farmer Mac as within one level lower if it does not submit a capital restoration plan
that is approved by the Director, or the Director determines that Farmer Mac has failed to make, in
good faith, reasonable efforts to comply with such a plan and fulfill the schedule for the plan
If Farmer Mac were classified as within level III, then, in addition to the foregoing mandatory supervisory
measures, the Director of OSMO could take any of the following discretionary supervisory measures:
•
•
•
•
•
imposing limits on any increase in, or ordering the reduction of, any obligations of Farmer Mac,
including off-balance sheet obligations;
limiting or prohibiting asset growth or requiring the reduction of assets;
requiring the acquisition of new capital in an amount sufficient to provide for reclassification as
terminating, reducing, or modifying any activity the Director determines creates excessive risk to
within a higher level;
Farmer Mac; or
appointing a conservator or a receiver for Farmer Mac.
Farmer Mac's charter does not specify any supervisory measures, either mandatory or discretionary, to be
taken by the Director in the event Farmer Mac were classified as within level IV.
The Director of OSMO has the discretionary authority to reclassify Farmer Mac to a level that is one level
below its then current level (for example, from level I to level II) if the Director determines that Farmer
Mac is engaging in any action not approved by the Director that could result in a rapid depletion of core
capital or if the value of property subject to mortgages backing Farmer Mac Guaranteed Securities has
decreased significantly.
Capital Adequacy Requirements. Under FCA's rule on capital planning adopted on September 12, 2013
and effective January 3, 2014, Farmer Mac must develop and submit to OSMO for approval annually a
plan for capital that considers the sources and uses of Farmer Mac's capital, addresses capital projections
under stress scenarios, assesses Farmer Mac's overall capital adequacy, and incorporates a Farmer Mac
board-approved policy on capital adequacy. In accordance with this regulation and as part of its capital
plan for 2014, Farmer Mac's board of directors has established a policy that will require Farmer Mac to
maintain an adequate level of "Tier 1" capital, consisting of retained earnings, paid-in-capital, common
stock, qualifying preferred stock, and accumulated other comprehensive income allocable to "non-
program" investments that are not included in the Farm & Ranch, USDA Guarantees, and Rural Utilities
lines of business. Under this policy, Farmer Mac must maintain at all times during 2014 a Tier 1 capital
ratio of not less than 4.0 percent of risk-weighted assets, calculated using an advanced internal ratings
based ("AIRB") asset risk weighting regime that is consistent with current Basel-based principles, with the
minimum Tier 1 capital ratio increasing by 0.25 percent annually to reach 5.0 percent in 2018.
sheet assets, as calculated for regulatory purposes, plus 0.75 percent of Farmer Mac's aggregate
off-balance sheet obligations, specifically including:
the unpaid principal balance of outstanding Farmer Mac Guaranteed Securities;
instruments issued or guaranteed by Farmer Mac that are substantially equivalent to Farmer
Mac Guaranteed Securities, including LTSPCs; and
other off-balance sheet obligations of Farmer Mac.
• Statutory critical capital requirement. Farmer Mac's critical capital level is an amount of core
capital equal to 50 percent of the total minimum capital requirement at that time.
• Risk-based capital. The 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.
The risk-based capital stress test promulgated by FCA is intended to determine the amount of regulatory
capital (core capital plus the allowance for losses) that Farmer Mac would need to maintain positive
capital during a ten-year period in which:
•
•
annual losses occur at a rate of default and severity "reasonably related" to the rates of the highest
sequential two years in a limited U.S. geographic area; and
interest rates increase to a level equal to the lesser of 600 basis points or 50 percent of the ten-year
U.S. Treasury rate, and interest rates remain at such level for the remainder of the period.
The risk-based capital stress test then adds an additional 30 percent to the resulting capital requirement for
management and operational risk.
As of December 31, 2013, Farmer Mac's statutory minimum and critical capital requirements were
$398.5 million and $199.3 million, respectively, and its actual core capital level was $590.7 million,
$192.2 million above the statutory minimum capital requirement and $391.4 million above the statutory
critical capital requirement. Based on the risk-based capital stress test, Farmer Mac's risk-based capital
requirement as of December 31, 2013 was $90.8 million and Farmer Mac's regulatory capital of
$604.0 million exceeded that amount by approximately $513.2 million. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—
Capital Requirements" for a presentation of Farmer Mac's current regulatory capital position.
Enforcement Levels. Farmer Mac's charter directs FCA to classify Farmer Mac within one of four
enforcement levels for purposes of determining compliance with the capital standards established by
Farmer Mac's charter. As of December 31, 2013, Farmer Mac was classified as within level I – the highest
compliance level.
Failure to comply with the applicable required capital level in the charter would result in Farmer Mac
being classified as within level II (below the applicable risk-based capital level, but above the minimum
capital level), level III (below the minimum capital level, but above the critical capital level) or level IV
(below the critical capital level). In the event that Farmer Mac were classified as within level II, III or IV,
the charter requires the Director of OSMO to take a number of mandatory supervisory measures and
provides the Director with discretionary authority to take various optional supervisory measures
depending on the level in which Farmer Mac is classified. The mandatory measures applicable to levels II
and III include:
requiring Farmer Mac to submit and comply with a capital restoration plan;
•
• prohibiting the payment of dividends if such payment would result in Farmer Mac being
•
reclassified as within a lower level and requiring the pre-approval of any dividend payment even if
such payment would not result in reclassification as within level IV; and
reclassifying Farmer Mac as within one level lower if it does not submit a capital restoration plan
that is approved by the Director, or the Director determines that Farmer Mac has failed to make, in
good faith, reasonable efforts to comply with such a plan and fulfill the schedule for the plan
approved by the Director.
If Farmer Mac were classified as within level III, then, in addition to the foregoing mandatory supervisory
measures, the Director of OSMO could take any of the following discretionary supervisory measures:
•
•
•
•
•
imposing limits on any increase in, or ordering the reduction of, any obligations of Farmer Mac,
including off-balance sheet obligations;
limiting or prohibiting asset growth or requiring the reduction of assets;
requiring the acquisition of new capital in an amount sufficient to provide for reclassification as
within a higher level;
terminating, reducing, or modifying any activity the Director determines creates excessive risk to
Farmer Mac; or
appointing a conservator or a receiver for Farmer Mac.
Farmer Mac's charter does not specify any supervisory measures, either mandatory or discretionary, to be
taken by the Director in the event Farmer Mac were classified as within level IV.
The Director of OSMO has the discretionary authority to reclassify Farmer Mac to a level that is one level
below its then current level (for example, from level I to level II) if the Director determines that Farmer
Mac is engaging in any action not approved by the Director that could result in a rapid depletion of core
capital or if the value of property subject to mortgages backing Farmer Mac Guaranteed Securities has
decreased significantly.
Capital Adequacy Requirements. Under FCA's rule on capital planning adopted on September 12, 2013
and effective January 3, 2014, Farmer Mac must develop and submit to OSMO for approval annually a
plan for capital that considers the sources and uses of Farmer Mac's capital, addresses capital projections
under stress scenarios, assesses Farmer Mac's overall capital adequacy, and incorporates a Farmer Mac
board-approved policy on capital adequacy. In accordance with this regulation and as part of its capital
plan for 2014, Farmer Mac's board of directors has established a policy that will require Farmer Mac to
maintain an adequate level of "Tier 1" capital, consisting of retained earnings, paid-in-capital, common
stock, qualifying preferred stock, and accumulated other comprehensive income allocable to "non-
program" investments that are not included in the Farm & Ranch, USDA Guarantees, and Rural Utilities
lines of business. Under this policy, Farmer Mac must maintain at all times during 2014 a Tier 1 capital
ratio of not less than 4.0 percent of risk-weighted assets, calculated using an advanced internal ratings
based ("AIRB") asset risk weighting regime that is consistent with current Basel-based principles, with the
minimum Tier 1 capital ratio increasing by 0.25 percent annually to reach 5.0 percent in 2018.
41
42
The policy also requires Farmer Mac to maintain a "capital conservation buffer" of additional Tier 1
capital of more than 2.5 percent of risk-weighted assets. If the capital conservation buffer drops to various
levels at or below 2.5 percent, as shown in the table below, the policy requires Farmer Mac to restrict
distributions of current quarter Tier 1-eligible dividends and total employee (including officer) bonus
payments to an amount not to exceed the corresponding payout percentage specified in the table below,
which represents the percentage of the cumulative core earnings for the four quarters immediately
preceding the distribution date:
Capital Conservation Buffer
Payout Percentage
(percentage of risk-weighted assets)
(percentage of four quarters' accumulated core earnings)
greater than 2.5%
No limitation
greater than 1.875% to and including 2.5%
greater than 1.25% to and including 1.875%
greater than 0.625% to and including 1.25%
60%
40%
20%
equal to or less than 0.625%
0% (no payout permitted)
These distribution restrictions will remain for so long as the Tier 1 capital conservation buffer remains at
or below the minimum level of 2.5 percent, and Farmer Mac's board of directors may consider other
factors, such as GAAP earnings and other regulatory requirements, in determining whether to restrict
capital distributions, including dividends and bonus payments. This policy will be effective for Farmer
Mac for distributions made in first quarter 2014. Farmer Mac does not expect its compliance with the
final rule on capital planning, including Farmer Mac's policy on Tier 1 capital established under the final
rule, to materially affect Farmer Mac's operations or financial condition. For more information on FCA's
regulation on capital planning and other regulations affecting Farmer Mac, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations—Regulatory Matters."
Item 1A.
Risk Factors
Farmer Mac's business activities, financial performance, and results of operations are, by their nature,
subject to a number of risks and uncertainties, including those related to the agricultural sector, the rural
utilities industry, access to the capital markets, the regulatory environment, and the level of prevailing
interest rates and overall market conditions. The following risk factors could materially affect Farmer
Mac's financial condition and operating results and should be considered in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of
this Annual Report on Form 10-K, including the risks and uncertainties described in the "Forward-
Looking Statements" section. Furthermore, because new risk factors likely will emerge from time to time,
management can neither predict all such risk factors nor assess the effects of such factors on Farmer Mac's
business, operating results, and financial condition or the extent to which any factor, or combination of
factors, may affect Farmer Mac's actual results and financial condition. If any of the following risks
materialize, Farmer Mac's business, financial condition, or results of operations could be materially and
adversely affected. Farmer Mac undertakes no obligation to update or revise this risk factor discussion,
except as required by law.
An inability to access the equity and debt capital markets could have a material adverse effect on
Farmer Mac's business, operating results, financial condition, and capital levels.
Farmer Mac's ability to operate its business, meet its obligations, generate asset volume growth, and fulfill
its statutory mission depends on Farmer Mac's capacity to remain adequately capitalized through the
issuance of equity securities and to issue substantial amounts of debt frequently and at favorable
rates. The issuance of equity and debt securities in the U.S. financial markets are primary sources of
Farmer Mac's capitalization and funding for Farmer Mac's purchases of eligible loan assets and liquidity
investment assets and for repaying or refinancing existing debt. Moreover, one of the primary sources of
Farmer Mac's revenue is the net interest income earned from the difference, or "spread," between the
return received on assets held and the related borrowing costs. Farmer Mac's ability to obtain funds
through the issuance of equity and debt securities, at favorable rates and terms, depends on many factors,
including:
general;
• Farmer Mac's corporate structure established by its charter, including its status as a government-
sponsored enterprise, or GSE, and perceptions about the viability of stockholder-owned GSEs in
•
compliance with applicable statutory, regulatory, and board-approved capital requirements and any
measures imposed by Farmer Mac's regulator or board of directors if Farmer Mac failed to comply
with those requirements;
• Farmer Mac's financial results and changes in its financial condition;
• public perception of the risks to and financial prospects of Farmer Mac's business;
• prevailing conditions in the capital markets;
competition from other issuers of GSE equity or debt; and
legislative or regulatory actions relating to Farmer Mac's business, including any actions that
would affect Farmer Mac's GSE status or that could increase its costs for hedging interest rate risks
or restrict or reduce its ability to issue equity or debt.
Factors affecting the agricultural sector or the rural utilities industry may negatively affect borrowers'
profitability and, as a consequence, their ability to repay their loans on which Farmer Mac has
assumed credit risk.
External factors beyond Farmer Mac's control that could negatively affect borrowers' profitability could
cause Farmer Mac to experience increased delinquency and default rates within its loan portfolio,
including, but not limited to:
•
severe protracted or sudden adverse weather conditions, animal and plant disease outbreaks,
restrictions on water supply, or other conditions affecting particular geographic regions or
industries;
within any particular industry;
increases in production expenses, including increases in commodity or fuel prices or labor costs
fluctuations in currency exchange markets or changes in the global economy that would reduce
export demand for U.S. agricultural products;
slow or negative economic growth, which could reduce demand for U.S. agricultural products;
adverse changes in interest rates, agricultural land values, or other factors that may affect
delinquency levels and credit losses on agricultural real estate mortgage loans;
the effects of any changes in federal assistance for ethanol producers, such as the elimination of the
tax credit previously available to blenders and the elimination of the import tariff previously
•
•
•
•
•
•
•
43
44
The policy also requires Farmer Mac to maintain a "capital conservation buffer" of additional Tier 1
capital of more than 2.5 percent of risk-weighted assets. If the capital conservation buffer drops to various
levels at or below 2.5 percent, as shown in the table below, the policy requires Farmer Mac to restrict
distributions of current quarter Tier 1-eligible dividends and total employee (including officer) bonus
payments to an amount not to exceed the corresponding payout percentage specified in the table below,
which represents the percentage of the cumulative core earnings for the four quarters immediately
preceding the distribution date:
Capital Conservation Buffer
Payout Percentage
(percentage of risk-weighted assets)
(percentage of four quarters' accumulated core earnings)
greater than 2.5%
No limitation
greater than 1.875% to and including 2.5%
greater than 1.25% to and including 1.875%
greater than 0.625% to and including 1.25%
60%
40%
20%
equal to or less than 0.625%
0% (no payout permitted)
These distribution restrictions will remain for so long as the Tier 1 capital conservation buffer remains at
or below the minimum level of 2.5 percent, and Farmer Mac's board of directors may consider other
factors, such as GAAP earnings and other regulatory requirements, in determining whether to restrict
capital distributions, including dividends and bonus payments. This policy will be effective for Farmer
Mac for distributions made in first quarter 2014. Farmer Mac does not expect its compliance with the
final rule on capital planning, including Farmer Mac's policy on Tier 1 capital established under the final
rule, to materially affect Farmer Mac's operations or financial condition. For more information on FCA's
regulation on capital planning and other regulations affecting Farmer Mac, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations—Regulatory Matters."
Item 1A.
Risk Factors
Farmer Mac's business activities, financial performance, and results of operations are, by their nature,
subject to a number of risks and uncertainties, including those related to the agricultural sector, the rural
utilities industry, access to the capital markets, the regulatory environment, and the level of prevailing
interest rates and overall market conditions. The following risk factors could materially affect Farmer
Mac's financial condition and operating results and should be considered in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of
this Annual Report on Form 10-K, including the risks and uncertainties described in the "Forward-
Looking Statements" section. Furthermore, because new risk factors likely will emerge from time to time,
management can neither predict all such risk factors nor assess the effects of such factors on Farmer Mac's
business, operating results, and financial condition or the extent to which any factor, or combination of
factors, may affect Farmer Mac's actual results and financial condition. If any of the following risks
materialize, Farmer Mac's business, financial condition, or results of operations could be materially and
adversely affected. Farmer Mac undertakes no obligation to update or revise this risk factor discussion,
except as required by law.
An inability to access the equity and debt capital markets could have a material adverse effect on
Farmer Mac's business, operating results, financial condition, and capital levels.
Farmer Mac's ability to operate its business, meet its obligations, generate asset volume growth, and fulfill
its statutory mission depends on Farmer Mac's capacity to remain adequately capitalized through the
issuance of equity securities and to issue substantial amounts of debt frequently and at favorable
rates. The issuance of equity and debt securities in the U.S. financial markets are primary sources of
Farmer Mac's capitalization and funding for Farmer Mac's purchases of eligible loan assets and liquidity
investment assets and for repaying or refinancing existing debt. Moreover, one of the primary sources of
Farmer Mac's revenue is the net interest income earned from the difference, or "spread," between the
return received on assets held and the related borrowing costs. Farmer Mac's ability to obtain funds
through the issuance of equity and debt securities, at favorable rates and terms, depends on many factors,
including:
• Farmer Mac's corporate structure established by its charter, including its status as a government-
sponsored enterprise, or GSE, and perceptions about the viability of stockholder-owned GSEs in
general;
compliance with applicable statutory, regulatory, and board-approved capital requirements and any
measures imposed by Farmer Mac's regulator or board of directors if Farmer Mac failed to comply
with those requirements;
•
• Farmer Mac's financial results and changes in its financial condition;
• public perception of the risks to and financial prospects of Farmer Mac's business;
• prevailing conditions in the capital markets;
•
•
competition from other issuers of GSE equity or debt; and
legislative or regulatory actions relating to Farmer Mac's business, including any actions that
would affect Farmer Mac's GSE status or that could increase its costs for hedging interest rate risks
or restrict or reduce its ability to issue equity or debt.
Factors affecting the agricultural sector or the rural utilities industry may negatively affect borrowers'
profitability and, as a consequence, their ability to repay their loans on which Farmer Mac has
assumed credit risk.
External factors beyond Farmer Mac's control that could negatively affect borrowers' profitability could
cause Farmer Mac to experience increased delinquency and default rates within its loan portfolio,
including, but not limited to:
•
•
•
•
•
•
severe protracted or sudden adverse weather conditions, animal and plant disease outbreaks,
restrictions on water supply, or other conditions affecting particular geographic regions or
industries;
increases in production expenses, including increases in commodity or fuel prices or labor costs
within any particular industry;
fluctuations in currency exchange markets or changes in the global economy that would reduce
export demand for U.S. agricultural products;
slow or negative economic growth, which could reduce demand for U.S. agricultural products;
adverse changes in interest rates, agricultural land values, or other factors that may affect
delinquency levels and credit losses on agricultural real estate mortgage loans;
the effects of any changes in federal assistance for ethanol producers, such as the elimination of the
tax credit previously available to blenders and the elimination of the import tariff previously
43
44
applicable to foreign producers, which may affect the level of income of ethanol producers and
consequently their repayment capacity on affected loans in Farmer Mac's portfolio;
the effects of changes in federal assistance for agricultural producers resulting from the recently
enacted Agricultural Act of 2014 (referred to as the 2014 Farm Bill), including the elimination of
direct payments to agricultural producers by the USDA and increased federal subsidies for
enhanced crop insurance programs, which may, on a net basis, affect the level of income of grain,
livestock, or other producers and, consequently, their repayment capacity on affected loans owned
or guaranteed by Farmer Mac;
changes in the general economy that could affect the availability of off-farm sources of income and
prices of real estate for borrowers; and
•
•
• negative economic conditions that may strain the ability of members of rural electric
cooperatives to pay the costs of providing electricity or cause regulators of rural electric
cooperatives to restrict the cooperatives' ability to raise rates to achieve profitable levels.
Farmer Mac's business, operating results, financial condition, and capital levels may be materially and
adversely affected by external factors that may affect the price or marketability of Farmer Mac's
products or Farmer Mac's ability to offer its products and services.
Farmer Mac's business, operating results, financial condition, and capital levels may be materially and
adversely affected by external factors, including adverse changes in the capital markets or changes in
public policy, that may affect the price or marketability of Farmer Mac's products and services or Farmer
Mac's ability to offer its products and services, including, but not limited to:
• disruptions in the capital markets, which could adversely affect the value and performance of
•
•
•
Farmer Mac's eligible loan assets and investment securities, liquidity position, and ability to access
funding at favorable levels or to raise capital;
competitive pressures in the purchase of loans eligible for Farmer Mac's lines of business and the
sale of Farmer Mac Guaranteed Securities and debt securities;
changes in interest rates that may increase the basis risk of Farmer Mac's hedging instruments,
thereby increasing its funding costs; and
legislative or regulatory developments or interpretations of Farmer Mac's statutory charter that
could adversely affect Farmer Mac or its ability to offer new products, the ability or motivation of
certain lenders to participate in Farmer Mac's lines of business or the terms of any such
participation, or increase the cost of related corporate activities.
Farmer Mac's business development, profitability, and capital depend on the continued growth of the
secondary market for agricultural real estate mortgage loans and for rural utilities loans, the future for
both of which remains uncertain.
Continued growth in Farmer Mac's business and future profitability may be constrained by conditions that
limit the need or ability for lenders to obtain the benefits of the secondary market provided by Farmer
Mac, including, but not limited to:
•
•
reduced growth rates in the agricultural mortgage market caused by prevailing conditions in the
overall economy;
the increase in capital levels or the availability of other sources of capital for customers of Farmer
Mac;
• decreased demand for mortgage lending due to borrower liquidity;
collateral;
•
•
•
the acceptance by Federal Home Loan Banks of agricultural real estate mortgage loans as
the historical preference of many agricultural lending institutions to retain loans in their portfolios
rather than to sell them into the secondary market;
the small number of business partners that currently provide a significant portion of Farmer Mac's
business volume, resulting in vulnerability as existing business volume pays down or matures and
the status of these business partners evolves; and
•
expanded funding alternatives available to rural utilities.
The loss of business from key business partners or customers could adversely affect Farmer Mac's
business and result in a decrease in its revenues and profits.
Farmer Mac's business and ability to generate revenues and profits largely depends on its ability to
purchase eligible loans or place eligible loans under guarantees or purchase commitments. Farmer Mac
conducts a significant portion of its business with a small number of business partners. This results in
vulnerability as existing assets pay down or mature and the status and needs of Farmer Mac's business
partners evolve. In 2013, ten institutions generated approximately 53 percent of loan purchase volume in
the Farm & Ranch line of business. As of December 31, 2013, approximately 99.8 percent of the $6.0
billion outstanding principal amount of AgVantage securities were issued by five institutions.
Transactions with CFC has represented 100 percent of business volume under Farmer Mac's Rural
Utilities line of business since its inception in 2008. Farmer Mac's ability to maintain the current
relationships with its business partners or customers and the business generated by those business partners
or customers is significant to Farmer Mac's business. Consequently, the loss of business from any one of
Farmer Mac's key business partners could negatively impact Farmer Mac's revenues and profitability.
Furthermore, Farmer Mac may not be able to replace the loss of business of a key business partner or
customer with alternate sources of business due to limitations on the types of assets eligible for the
secondary market provided by Farmer Mac under its charter, which could adversely affect Farmer Mac's
business and result in a decrease in its revenues and profits.
The failure of an issuer to pay the outstanding principal amount or to issue new AgVantage securities
upon the maturity of outstanding AgVantage securities could negatively affect Farmer Mac's liquidity
position and income.
As of December 31, 2013, Farmer Mac had $6.0 billion of AgVantage securities outstanding, of which
$0.9 billion and $0.7 billion will be maturing in 2014 and 2015, respectively. AgVantage securities are
guaranteed by Farmer Mac as to the timely payment of interest and principal. The terms of most
AgVantage securities do not require the periodic payment of principal based on amortization schedules
and instead have fixed maturity dates when the secured general obligation is due. If the issuer of a
maturing AgVantage security defaults and does not pay the outstanding principal amount due upon
maturity, Farmer Mac's liquidity position could be negatively affected because Farmer Mac will be
required to obtain funds in a significant amount to pay the holder of the AgVantage security or, for
AgVantage securities owned by Farmer Mac, to pay off the debt securities used to fund the purchase of the
AgVantage securities. Farmer Mac's income could also be adversely affected if the issuer of a maturing
AgVantage security does not issue new AgVantage securities to replace the maturing securities and Farmer
Mac does not find alternate sources of business, or if the net interest margin earned by Farmer Mac on
new AgVantage securities that replace maturing AgVantage securities is lower than the margin earned on
the maturing AgVantage securities.
45
46
applicable to foreign producers, which may affect the level of income of ethanol producers and
consequently their repayment capacity on affected loans in Farmer Mac's portfolio;
•
the effects of changes in federal assistance for agricultural producers resulting from the recently
enacted Agricultural Act of 2014 (referred to as the 2014 Farm Bill), including the elimination of
direct payments to agricultural producers by the USDA and increased federal subsidies for
enhanced crop insurance programs, which may, on a net basis, affect the level of income of grain,
livestock, or other producers and, consequently, their repayment capacity on affected loans owned
•
changes in the general economy that could affect the availability of off-farm sources of income and
or guaranteed by Farmer Mac;
prices of real estate for borrowers; and
• negative economic conditions that may strain the ability of members of rural electric
cooperatives to pay the costs of providing electricity or cause regulators of rural electric
cooperatives to restrict the cooperatives' ability to raise rates to achieve profitable levels.
Farmer Mac's business, operating results, financial condition, and capital levels may be materially and
adversely affected by external factors that may affect the price or marketability of Farmer Mac's
products or Farmer Mac's ability to offer its products and services.
Farmer Mac's business, operating results, financial condition, and capital levels may be materially and
adversely affected by external factors, including adverse changes in the capital markets or changes in
public policy, that may affect the price or marketability of Farmer Mac's products and services or Farmer
Mac's ability to offer its products and services, including, but not limited to:
• disruptions in the capital markets, which could adversely affect the value and performance of
Farmer Mac's eligible loan assets and investment securities, liquidity position, and ability to access
funding at favorable levels or to raise capital;
competitive pressures in the purchase of loans eligible for Farmer Mac's lines of business and the
sale of Farmer Mac Guaranteed Securities and debt securities;
changes in interest rates that may increase the basis risk of Farmer Mac's hedging instruments,
thereby increasing its funding costs; and
legislative or regulatory developments or interpretations of Farmer Mac's statutory charter that
could adversely affect Farmer Mac or its ability to offer new products, the ability or motivation of
certain lenders to participate in Farmer Mac's lines of business or the terms of any such
participation, or increase the cost of related corporate activities.
Farmer Mac's business development, profitability, and capital depend on the continued growth of the
secondary market for agricultural real estate mortgage loans and for rural utilities loans, the future for
both of which remains uncertain.
Continued growth in Farmer Mac's business and future profitability may be constrained by conditions that
limit the need or ability for lenders to obtain the benefits of the secondary market provided by Farmer
Mac, including, but not limited to:
reduced growth rates in the agricultural mortgage market caused by prevailing conditions in the
the increase in capital levels or the availability of other sources of capital for customers of Farmer
overall economy;
Mac;
• decreased demand for mortgage lending due to borrower liquidity;
•
•
•
•
•
•
•
•
•
the acceptance by Federal Home Loan Banks of agricultural real estate mortgage loans as
collateral;
the historical preference of many agricultural lending institutions to retain loans in their portfolios
rather than to sell them into the secondary market;
the small number of business partners that currently provide a significant portion of Farmer Mac's
business volume, resulting in vulnerability as existing business volume pays down or matures and
the status of these business partners evolves; and
expanded funding alternatives available to rural utilities.
The loss of business from key business partners or customers could adversely affect Farmer Mac's
business and result in a decrease in its revenues and profits.
Farmer Mac's business and ability to generate revenues and profits largely depends on its ability to
purchase eligible loans or place eligible loans under guarantees or purchase commitments. Farmer Mac
conducts a significant portion of its business with a small number of business partners. This results in
vulnerability as existing assets pay down or mature and the status and needs of Farmer Mac's business
partners evolve. In 2013, ten institutions generated approximately 53 percent of loan purchase volume in
the Farm & Ranch line of business. As of December 31, 2013, approximately 99.8 percent of the $6.0
billion outstanding principal amount of AgVantage securities were issued by five institutions.
Transactions with CFC has represented 100 percent of business volume under Farmer Mac's Rural
Utilities line of business since its inception in 2008. Farmer Mac's ability to maintain the current
relationships with its business partners or customers and the business generated by those business partners
or customers is significant to Farmer Mac's business. Consequently, the loss of business from any one of
Farmer Mac's key business partners could negatively impact Farmer Mac's revenues and profitability.
Furthermore, Farmer Mac may not be able to replace the loss of business of a key business partner or
customer with alternate sources of business due to limitations on the types of assets eligible for the
secondary market provided by Farmer Mac under its charter, which could adversely affect Farmer Mac's
business and result in a decrease in its revenues and profits.
The failure of an issuer to pay the outstanding principal amount or to issue new AgVantage securities
upon the maturity of outstanding AgVantage securities could negatively affect Farmer Mac's liquidity
position and income.
As of December 31, 2013, Farmer Mac had $6.0 billion of AgVantage securities outstanding, of which
$0.9 billion and $0.7 billion will be maturing in 2014 and 2015, respectively. AgVantage securities are
guaranteed by Farmer Mac as to the timely payment of interest and principal. The terms of most
AgVantage securities do not require the periodic payment of principal based on amortization schedules
and instead have fixed maturity dates when the secured general obligation is due. If the issuer of a
maturing AgVantage security defaults and does not pay the outstanding principal amount due upon
maturity, Farmer Mac's liquidity position could be negatively affected because Farmer Mac will be
required to obtain funds in a significant amount to pay the holder of the AgVantage security or, for
AgVantage securities owned by Farmer Mac, to pay off the debt securities used to fund the purchase of the
AgVantage securities. Farmer Mac's income could also be adversely affected if the issuer of a maturing
AgVantage security does not issue new AgVantage securities to replace the maturing securities and Farmer
Mac does not find alternate sources of business, or if the net interest margin earned by Farmer Mac on
new AgVantage securities that replace maturing AgVantage securities is lower than the margin earned on
the maturing AgVantage securities.
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46
Farmer Mac is a GSE that may be materially and adversely affected by legislative or political
developments, which may affect the ongoing operations or continued existence of GSEs.
Farmer Mac is a GSE that is governed by a statutory charter, which is subject to amendment by the U.S.
Congress at any time, and regulated by government agencies. Although Farmer Mac is not aware of any
pending legislative proposals that would adversely affect either the manner in which Farmer Mac conducts
its business or the status of Farmer Mac as a GSE at this time, Farmer Mac's ability to effectively conduct
its business is subject to risks and uncertainties related to legislative or political developments that may
affect the status or operations of GSEs generally. From time to time, legislative initiatives may be
commenced that, if successful, could result in the enactment of legislation or the promulgation of
regulations that could negatively affect the status of Farmer Mac as a GSE or the manner in which Farmer
Mac operates. Farmer Mac cannot predict whether any legislative proposals related to the housing GSEs
would also address the continued GSE status of Farmer Mac or modify the current operating structure or
authorities of Farmer Mac in any material way. Implementation of any such proposal could have a
material and adverse effect on Farmer Mac's business, operating results, financial condition, and capital
levels. See "Government Regulation of Farmer Mac" in Item 1 of this Annual Report on Form 10-K for
additional discussion on the rules and regulations governing Farmer Mac's activities.
Farmer Mac is subject to capital requirements that are subject to change, and failure to meet those
requirements could result in supervisory measures or the inability of Farmer Mac to declare dividends,
or otherwise materially and adversely affect Farmer Mac's business, operating results, or financial
condition.
Farmer Mac is required by statute and regulation to maintain certain capital levels. Any inability by
Farmer Mac to meet these capital requirements could result in supervisory measures by FCA, adversely
affect Farmer Mac's ability to declare dividends on its common and preferred stock, or otherwise
materially and adversely affect Farmer Mac's business, operating results, or financial condition. In
addition, pursuant to a recently-effective FCA regulation on capital planning, Farmer Mac has adopted a
policy to maintain a sufficient level of Tier 1 capital and to impose restrictions on paying Tier 1-eligible
dividends in the event that Tier 1 capital falls below specified thresholds. For more information on
Farmer Mac's capital requirements, including the new Tier 1 capital requirement, see "Business—
Government Regulation of Farmer Mac—Regulation—Capital Standards." For more information on
FCA's capital planning rule, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations—Regulatory Matters." Factors that could adversely affect the adequacy of Farmer
Mac's capital levels in the future, and which may be beyond Farmer Mac's control, include:
•
•
•
•
•
the potential for any other-than-temporary impairment charges;
adverse changes in interest rates or credit spreads;
the potential need to increase the level of the allowance for losses on eligible loan assets in the
future;
legislative or regulatory actions that increase Farmer Mac's applicable capital requirements; and
changes in U.S. generally accepted accounting principles ("GAAP").
Farmer Mac is exposed to credit risk on its eligible loan assets, the repayment of which may depend on
factors outside of Farmer Mac's or the borrower's control, and widespread repayment shortfalls on
loans could have a material adverse effect on Farmer Mac's financial condition, results of operations,
and liquidity.
Farmer Mac's earnings depend significantly on the performance of its eligible loan assets and the spread
between the interest, guarantee fees, and commitment fees earned on such assets and interest paid on
Farmer Mac's obligations and liabilities. Farmer Mac assumes the ultimate credit risk of borrower
defaults on the agricultural mortgage and rural utilities loans it holds, as well as the loans underlying
LTSPCs and non-AgVantage Farmer Mac Guaranteed Securities. Widespread repayment shortfalls on
loans in the Farm & Ranch line of business or Rural Utilities line of business could result in losses on
loans held or require Farmer Mac to pay under its guarantees and LTSPCs, which could have a material
adverse effect on Farmer Mac's financial condition, results of operations, and liquidity.
In the Farm & Ranch line of business, repayment of eligible loans typically depends on the success of the
related farming operation, which, in turn, depends on many variables and factors over which farmers may
have little or no control, such as weather conditions, animal and plant disease outbreaks, restrictions on
water supply, economic conditions (both domestic and international), and political conditions. Farmer
Mac's credit risk may also increase in the case of a loan with a balloon payment due at maturity if the
borrower seeks to refinance but is unable to do so. As of December 31, 2013, 66.2 percent of the loans in
the Farm & Ranch line of business included balloon payments. In addition, loans to borrowers in
industries that have had historically higher delinquency rates relative to Farmer Mac's overall portfolio
may present a higher risk of delinquency in future periods. For example, as of December 31, 2013, loans
to borrowers in the permanent plantings and part-time farm categories comprised a combined 20.8 percent
of the Farm & Ranch portfolio (excluding AgVantage securities), but delinquencies in these combined
categories comprised 54.6 percent of the aggregate delinquencies for all commodity categories. As of
December 31, 2013, loans to borrowers in the AgStorage and Processing category (including ethanol
facilities) comprised 3.0 percent of the Farm & Ranch portfolio (excluding AgVantage securities), but
cumulative net credit losses for this category comprised 39.3 percent of the cumulative net credit losses
for all categories.
In the Rural Utilities line of business, eligible utilities operations include the distribution of electricity, the
generation and transmission of electricity, and telecommunications. Each type of utility operation has
different inherent risks associated with it, but all share a common risk posed by potential changes in public
and regulatory policies. Business cash flows can be disrupted as a result of storms, though distribution
cooperatives have in place cost-sharing arrangements with providers in other regions that mitigate this
exposure. Historically, natural disasters have often resulted in disaster area declarations and financial aid
to utilities providers through the Federal Emergency Management Agency and other conduits, although
there can be no assurance that any such aid would be available in the event of any future natural
disaster. The electrical distribution and generation sectors can be adversely affected by changes in fuel
costs and prices received from consumers, as well as by contractual power obligations that do not match
up with supply or demand. In the event that Farmer Mac purchases telecommunications loans in the
future, the depth and pace of technological change in the telecommunications industry can also provide
significant challenges, as the industry requires heavy capital investment and correct judgments about the
sustainability of new technologies in an area with many competitors.
47
48
Farmer Mac is a GSE that may be materially and adversely affected by legislative or political
developments, which may affect the ongoing operations or continued existence of GSEs.
Farmer Mac is a GSE that is governed by a statutory charter, which is subject to amendment by the U.S.
Congress at any time, and regulated by government agencies. Although Farmer Mac is not aware of any
pending legislative proposals that would adversely affect either the manner in which Farmer Mac conducts
its business or the status of Farmer Mac as a GSE at this time, Farmer Mac's ability to effectively conduct
its business is subject to risks and uncertainties related to legislative or political developments that may
affect the status or operations of GSEs generally. From time to time, legislative initiatives may be
commenced that, if successful, could result in the enactment of legislation or the promulgation of
regulations that could negatively affect the status of Farmer Mac as a GSE or the manner in which Farmer
Mac operates. Farmer Mac cannot predict whether any legislative proposals related to the housing GSEs
would also address the continued GSE status of Farmer Mac or modify the current operating structure or
authorities of Farmer Mac in any material way. Implementation of any such proposal could have a
material and adverse effect on Farmer Mac's business, operating results, financial condition, and capital
levels. See "Government Regulation of Farmer Mac" in Item 1 of this Annual Report on Form 10-K for
additional discussion on the rules and regulations governing Farmer Mac's activities.
Farmer Mac is subject to capital requirements that are subject to change, and failure to meet those
requirements could result in supervisory measures or the inability of Farmer Mac to declare dividends,
or otherwise materially and adversely affect Farmer Mac's business, operating results, or financial
condition.
Farmer Mac is required by statute and regulation to maintain certain capital levels. Any inability by
Farmer Mac to meet these capital requirements could result in supervisory measures by FCA, adversely
affect Farmer Mac's ability to declare dividends on its common and preferred stock, or otherwise
materially and adversely affect Farmer Mac's business, operating results, or financial condition. In
addition, pursuant to a recently-effective FCA regulation on capital planning, Farmer Mac has adopted a
policy to maintain a sufficient level of Tier 1 capital and to impose restrictions on paying Tier 1-eligible
dividends in the event that Tier 1 capital falls below specified thresholds. For more information on
Farmer Mac's capital requirements, including the new Tier 1 capital requirement, see "Business—
Government Regulation of Farmer Mac—Regulation—Capital Standards." For more information on
FCA's capital planning rule, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations—Regulatory Matters." Factors that could adversely affect the adequacy of Farmer
Mac's capital levels in the future, and which may be beyond Farmer Mac's control, include:
•
•
•
•
•
future;
the potential for any other-than-temporary impairment charges;
adverse changes in interest rates or credit spreads;
the potential need to increase the level of the allowance for losses on eligible loan assets in the
legislative or regulatory actions that increase Farmer Mac's applicable capital requirements; and
changes in U.S. generally accepted accounting principles ("GAAP").
Farmer Mac is exposed to credit risk on its eligible loan assets, the repayment of which may depend on
factors outside of Farmer Mac's or the borrower's control, and widespread repayment shortfalls on
loans could have a material adverse effect on Farmer Mac's financial condition, results of operations,
and liquidity.
Farmer Mac's earnings depend significantly on the performance of its eligible loan assets and the spread
between the interest, guarantee fees, and commitment fees earned on such assets and interest paid on
Farmer Mac's obligations and liabilities. Farmer Mac assumes the ultimate credit risk of borrower
defaults on the agricultural mortgage and rural utilities loans it holds, as well as the loans underlying
LTSPCs and non-AgVantage Farmer Mac Guaranteed Securities. Widespread repayment shortfalls on
loans in the Farm & Ranch line of business or Rural Utilities line of business could result in losses on
loans held or require Farmer Mac to pay under its guarantees and LTSPCs, which could have a material
adverse effect on Farmer Mac's financial condition, results of operations, and liquidity.
In the Farm & Ranch line of business, repayment of eligible loans typically depends on the success of the
related farming operation, which, in turn, depends on many variables and factors over which farmers may
have little or no control, such as weather conditions, animal and plant disease outbreaks, restrictions on
water supply, economic conditions (both domestic and international), and political conditions. Farmer
Mac's credit risk may also increase in the case of a loan with a balloon payment due at maturity if the
borrower seeks to refinance but is unable to do so. As of December 31, 2013, 66.2 percent of the loans in
the Farm & Ranch line of business included balloon payments. In addition, loans to borrowers in
industries that have had historically higher delinquency rates relative to Farmer Mac's overall portfolio
may present a higher risk of delinquency in future periods. For example, as of December 31, 2013, loans
to borrowers in the permanent plantings and part-time farm categories comprised a combined 20.8 percent
of the Farm & Ranch portfolio (excluding AgVantage securities), but delinquencies in these combined
categories comprised 54.6 percent of the aggregate delinquencies for all commodity categories. As of
December 31, 2013, loans to borrowers in the AgStorage and Processing category (including ethanol
facilities) comprised 3.0 percent of the Farm & Ranch portfolio (excluding AgVantage securities), but
cumulative net credit losses for this category comprised 39.3 percent of the cumulative net credit losses
for all categories.
In the Rural Utilities line of business, eligible utilities operations include the distribution of electricity, the
generation and transmission of electricity, and telecommunications. Each type of utility operation has
different inherent risks associated with it, but all share a common risk posed by potential changes in public
and regulatory policies. Business cash flows can be disrupted as a result of storms, though distribution
cooperatives have in place cost-sharing arrangements with providers in other regions that mitigate this
exposure. Historically, natural disasters have often resulted in disaster area declarations and financial aid
to utilities providers through the Federal Emergency Management Agency and other conduits, although
there can be no assurance that any such aid would be available in the event of any future natural
disaster. The electrical distribution and generation sectors can be adversely affected by changes in fuel
costs and prices received from consumers, as well as by contractual power obligations that do not match
up with supply or demand. In the event that Farmer Mac purchases telecommunications loans in the
future, the depth and pace of technological change in the telecommunications industry can also provide
significant challenges, as the industry requires heavy capital investment and correct judgments about the
sustainability of new technologies in an area with many competitors.
47
48
Farmer Mac Guaranteed Securities and LTSPCs expose Farmer Mac to significant contingent
liabilities, and Farmer Mac's ability to fulfill its obligations under its guarantees and LTSPCs may be
limited.
Farmer Mac's guarantee and purchase commitment obligations to third parties, including Farmer Mac
Guaranteed Securities and LTSPCs, are obligations of Farmer Mac only and are not backed by the full
faith and credit of the United States, FCA, or any other agency or instrumentality of the United States
other than Farmer Mac. As of December 31, 2013, Farmer Mac had $4.0 billion of contingent liabilities
related to Farmer Mac Guaranteed Securities and LTSPCs issued to third parties, which represents Farmer
Mac's exposure if all loans underlying these guarantees and purchase commitments defaulted and Farmer
Mac recovered no value from the related collateral. Farmer Mac's principal sources of funds for payments
on all of its liabilities, including claims that may arise under its guarantees and purchase commitments, are
the liquid assets held by Farmer Mac (including cash and cash equivalents), guarantee and commitment
fees, interest payments on assets held by Farmer Mac, loan repayments, repayment of principal amounts
due upon maturity of AgVantage securities, and proceeds from the issuance of debt securities. If all of the
loans underlying Farmer Mac's guarantees and purchase commitments defaulted and Farmer Mac
recovered no value from the related collateral, the sources of funds for payment on these guarantees and
purchase commitments could be substantially less than the aggregate amount of the corresponding
liabilities. It is difficult to quantify at any particular point in time the funds that would be available from
interest payments, loan repayments, and maturing AgVantage securities for payment on Farmer Mac's
guarantees and purchase commitments, and Farmer Mac's ability to issue debt as a source of repayment
would be subject to its ability to access the debt markets and market conditions at that time. As of
December 31, 2013, Farmer Mac held cash, cash equivalents, and other investment securities with a fair
value of $3.2 billion that could be used as a source of funds for payment on its obligations. Although
Farmer Mac believes that it remains well-collateralized on the assets underlying its guarantee and
purchase commitment obligations to third parties and that the estimated probable losses for these
obligations remain low relative to the amount available for payment of claims on these obligations,
Farmer Mac's total contingent liabilities for these obligations exceed the amount it may have available for
payment of claims on these obligations. See "Management's Discussion and Analysis—Risk Management
—Credit Risk – Loans and Guarantees" for more information on Farmer Mac's management of credit risk.
Farmer Mac is exposed to swap counterparty credit risk on its non-cleared swaps that could materially
and adversely affect its business, operating results, and financial condition.
Farmer Mac relies on interest rate swap contracts and hedging arrangements to effectively manage its
interest rate risk. In managing this swap counterparty credit risk on non-cleared swaps, Farmer Mac
contracts only with counterparties that have investment grade credit ratings, establishes and maintains
collateral requirements that are scaled based upon credit ratings, and enters into netting agreements.
However, failure to perform under a non-cleared derivatives contract by one or more of Farmer Mac's
counterparties could disrupt Farmer Mac's hedging operations, particularly if Farmer Mac were entitled to
a termination payment under the terms of the contract that it did not receive, or if Farmer Mac were unable
to reposition the swap with a new counterparty. Of the $6.6 billion combined notional amount of interest
rate swaps, $4.3 billion were not cleared through swap clearinghouses as of December 31, 2013. As of
December 31, 2013, Farmer Mac's credit exposure to interest rate swap counterparties was $25.1 million
excluding netting arrangements and $3.3 million including netting arrangements.
Farmer Mac is exposed to AgVantage counterparty credit risk that could materially and adversely affect
its business, operating results, and financial condition.
Farmer Mac is exposed to credit risk from issuers of AgVantage securities. Each AgVantage security is a
general obligation of an issuing institution secured by eligible loans in an amount at least equal to the
outstanding principal amount of the security and guaranteed by Farmer Mac. However, most of Farmer
Mac's AgVantage exposure is concentrated in a small number of issuers. Farmer Mac seeks to manage its
risk to AgVantage counterparties by reviewing each institution for which Farmer Mac has AgVantage
exposure and requiring those institutions to meet Farmer Mac's standards for creditworthiness. In
addition, Farmer Mac requires some level of over-collateralization (between 103 percent and 120 percent
of the principal amount of the securities issued) for AgVantage securities in the Farm & Ranch line of
business. As of December 31, 2013, nearly all of the AgVantage securities outstanding had been issued by
five counterparties. A default by any of these counterparties could have a significant adverse effect on
Farmer Mac's business, operating results, and financial condition.
Farmer Mac is exposed to counterparty credit risk on its investment securities that could materially and
adversely affect its business, operating results, and financial condition.
Farmer Mac maintains an investment portfolio that can be drawn upon for liquidity needs. In addition to
cash and cash equivalents (such as U.S. Treasury securities and short-term money market instruments),
this portfolio consists of investment securities, including securities guaranteed by U.S. Government
agencies and GSEs, GSE-issued preferred stock, corporate debt obligations, and auction-rate certificates.
Though some of these investment securities do not qualify for purposes of calculating liquidity under the
regulatory requirements prescribed by FCA, they still may be drawn upon for Farmer Mac's liquidity
needs. Farmer Mac regularly reviews concentration limits to ensure that its investments are appropriately
diversified and comply with policies approved by Farmer Mac's board of directors and with applicable
FCA regulations, but Farmer Mac is still exposed to credit risk from issuers of the investment securities it
holds. For example, as of December 31, 2013, Farmer Mac held at fair value, as part of its liquidity
investment portfolio, $195.6 million of corporate debt securities, $174.4 million of asset-backed securities
principally backed by U.S. Government-guaranteed student loans (including $65.3 million of auction-rate
certificates), $946.7 million of investment securities guaranteed by GSEs, and $83.2 million of preferred
stock issued by a single GSE. A default by multiple issuers of investment securities held by Farmer Mac,
or by a single issuer of investment securities in which Farmer Mac is more heavily concentrated, could
have an adverse effect on Farmer Mac's business, operating results, and financial condition.
Farmer Mac is exposed to interest rate risk that could materially and adversely affect its business,
operating results, and financial condition.
Farmer Mac is subject to interest rate risk due to the possible timing differences in the cash flows of the
assets it holds and related liabilities. Farmer Mac's primary strategy for managing interest rate risk is to
fund asset purchases with liabilities that have similar duration and cash flow characteristics so that they
will perform similarly as interest rates change. Through Farmer Mac's issuances of debt securities in the
form of discount notes and medium-term notes coupled with interest rate swap contracts that adjust the
characteristics of the debt issued, Farmer Mac seeks to match its liabilities closely with the cash flow and
duration characteristics of its loans and other assets. However, the ability of borrowers to prepay their
loans prior to the scheduled maturities increases the risk of asset and liability cash flow mismatches. In a
changing interest rate environment, these cash flow mismatches could reduce Farmer Mac's earnings if
assets repay sooner than expected and the resulting cash flows must be reinvested in lower-yielding
49
50
Farmer Mac Guaranteed Securities and LTSPCs expose Farmer Mac to significant contingent
liabilities, and Farmer Mac's ability to fulfill its obligations under its guarantees and LTSPCs may be
Farmer Mac is exposed to AgVantage counterparty credit risk that could materially and adversely affect
its business, operating results, and financial condition.
limited.
Farmer Mac's guarantee and purchase commitment obligations to third parties, including Farmer Mac
Guaranteed Securities and LTSPCs, are obligations of Farmer Mac only and are not backed by the full
faith and credit of the United States, FCA, or any other agency or instrumentality of the United States
other than Farmer Mac. As of December 31, 2013, Farmer Mac had $4.0 billion of contingent liabilities
related to Farmer Mac Guaranteed Securities and LTSPCs issued to third parties, which represents Farmer
Mac's exposure if all loans underlying these guarantees and purchase commitments defaulted and Farmer
Mac recovered no value from the related collateral. Farmer Mac's principal sources of funds for payments
on all of its liabilities, including claims that may arise under its guarantees and purchase commitments, are
the liquid assets held by Farmer Mac (including cash and cash equivalents), guarantee and commitment
fees, interest payments on assets held by Farmer Mac, loan repayments, repayment of principal amounts
due upon maturity of AgVantage securities, and proceeds from the issuance of debt securities. If all of the
loans underlying Farmer Mac's guarantees and purchase commitments defaulted and Farmer Mac
recovered no value from the related collateral, the sources of funds for payment on these guarantees and
purchase commitments could be substantially less than the aggregate amount of the corresponding
liabilities. It is difficult to quantify at any particular point in time the funds that would be available from
interest payments, loan repayments, and maturing AgVantage securities for payment on Farmer Mac's
guarantees and purchase commitments, and Farmer Mac's ability to issue debt as a source of repayment
would be subject to its ability to access the debt markets and market conditions at that time. As of
December 31, 2013, Farmer Mac held cash, cash equivalents, and other investment securities with a fair
value of $3.2 billion that could be used as a source of funds for payment on its obligations. Although
Farmer Mac believes that it remains well-collateralized on the assets underlying its guarantee and
purchase commitment obligations to third parties and that the estimated probable losses for these
obligations remain low relative to the amount available for payment of claims on these obligations,
Farmer Mac's total contingent liabilities for these obligations exceed the amount it may have available for
payment of claims on these obligations. See "Management's Discussion and Analysis—Risk Management
—Credit Risk – Loans and Guarantees" for more information on Farmer Mac's management of credit risk.
Farmer Mac is exposed to swap counterparty credit risk on its non-cleared swaps that could materially
and adversely affect its business, operating results, and financial condition.
Farmer Mac relies on interest rate swap contracts and hedging arrangements to effectively manage its
interest rate risk. In managing this swap counterparty credit risk on non-cleared swaps, Farmer Mac
contracts only with counterparties that have investment grade credit ratings, establishes and maintains
collateral requirements that are scaled based upon credit ratings, and enters into netting agreements.
However, failure to perform under a non-cleared derivatives contract by one or more of Farmer Mac's
counterparties could disrupt Farmer Mac's hedging operations, particularly if Farmer Mac were entitled to
a termination payment under the terms of the contract that it did not receive, or if Farmer Mac were unable
to reposition the swap with a new counterparty. Of the $6.6 billion combined notional amount of interest
rate swaps, $4.3 billion were not cleared through swap clearinghouses as of December 31, 2013. As of
December 31, 2013, Farmer Mac's credit exposure to interest rate swap counterparties was $25.1 million
excluding netting arrangements and $3.3 million including netting arrangements.
Farmer Mac is exposed to credit risk from issuers of AgVantage securities. Each AgVantage security is a
general obligation of an issuing institution secured by eligible loans in an amount at least equal to the
outstanding principal amount of the security and guaranteed by Farmer Mac. However, most of Farmer
Mac's AgVantage exposure is concentrated in a small number of issuers. Farmer Mac seeks to manage its
risk to AgVantage counterparties by reviewing each institution for which Farmer Mac has AgVantage
exposure and requiring those institutions to meet Farmer Mac's standards for creditworthiness. In
addition, Farmer Mac requires some level of over-collateralization (between 103 percent and 120 percent
of the principal amount of the securities issued) for AgVantage securities in the Farm & Ranch line of
business. As of December 31, 2013, nearly all of the AgVantage securities outstanding had been issued by
five counterparties. A default by any of these counterparties could have a significant adverse effect on
Farmer Mac's business, operating results, and financial condition.
Farmer Mac is exposed to counterparty credit risk on its investment securities that could materially and
adversely affect its business, operating results, and financial condition.
Farmer Mac maintains an investment portfolio that can be drawn upon for liquidity needs. In addition to
cash and cash equivalents (such as U.S. Treasury securities and short-term money market instruments),
this portfolio consists of investment securities, including securities guaranteed by U.S. Government
agencies and GSEs, GSE-issued preferred stock, corporate debt obligations, and auction-rate certificates.
Though some of these investment securities do not qualify for purposes of calculating liquidity under the
regulatory requirements prescribed by FCA, they still may be drawn upon for Farmer Mac's liquidity
needs. Farmer Mac regularly reviews concentration limits to ensure that its investments are appropriately
diversified and comply with policies approved by Farmer Mac's board of directors and with applicable
FCA regulations, but Farmer Mac is still exposed to credit risk from issuers of the investment securities it
holds. For example, as of December 31, 2013, Farmer Mac held at fair value, as part of its liquidity
investment portfolio, $195.6 million of corporate debt securities, $174.4 million of asset-backed securities
principally backed by U.S. Government-guaranteed student loans (including $65.3 million of auction-rate
certificates), $946.7 million of investment securities guaranteed by GSEs, and $83.2 million of preferred
stock issued by a single GSE. A default by multiple issuers of investment securities held by Farmer Mac,
or by a single issuer of investment securities in which Farmer Mac is more heavily concentrated, could
have an adverse effect on Farmer Mac's business, operating results, and financial condition.
Farmer Mac is exposed to interest rate risk that could materially and adversely affect its business,
operating results, and financial condition.
Farmer Mac is subject to interest rate risk due to the possible timing differences in the cash flows of the
assets it holds and related liabilities. Farmer Mac's primary strategy for managing interest rate risk is to
fund asset purchases with liabilities that have similar duration and cash flow characteristics so that they
will perform similarly as interest rates change. Through Farmer Mac's issuances of debt securities in the
form of discount notes and medium-term notes coupled with interest rate swap contracts that adjust the
characteristics of the debt issued, Farmer Mac seeks to match its liabilities closely with the cash flow and
duration characteristics of its loans and other assets. However, the ability of borrowers to prepay their
loans prior to the scheduled maturities increases the risk of asset and liability cash flow mismatches. In a
changing interest rate environment, these cash flow mismatches could reduce Farmer Mac's earnings if
assets repay sooner than expected and the resulting cash flows must be reinvested in lower-yielding
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investments, particularly if Farmer Mac's related funding costs cannot be correspondingly repaid. In
addition, if assets repay more slowly than anticipated and the associated debt issued to fund the assets
must be reissued at a higher yield, Farmer Mac's earnings could be adversely affected. As of
December 31, 2013, of all the eligible loan assets held on Farmer Mac's balance sheet, $5.0 billion had a
fixed interest rate and $4.9 billion had an adjustable interest rate.
Changes in interest rates relative to Farmer Mac's management of interest rate risk through derivatives
may cause volatility in financial results and capital levels and adversely affect net interest income.
Farmer Mac enters into financial derivatives transactions to hedge interest rate risks inherent in its
business and applies fair value accounting to its financial derivatives transactions. Although Farmer Mac's
financial derivatives provide effective economic hedges of interest rate risk, accounting guidance requires
changes in the fair values of financial derivatives to be reflected in net income. As interest rates increase
or decrease, the fair value of Farmer Mac's derivatives changes based on the position Farmer Mac holds
relative to the specific characteristics of the derivative. Application of the accounting guidance on
financial derivatives could contribute to volatility in Farmer Mac's earnings under GAAP, particularly if
the financial derivative is not designated in a hedging relationship. Another consequence of the changes in
the fair values of financial derivatives being accounted for in earnings is the resulting effect on Farmer
Mac's regulatory core capital that is available to meet Farmer Mac's statutory minimum capital
requirement. Adverse changes in the fair values of Farmer Mac's financial derivatives would reduce the
amount of core capital available to meet this requirement, which could result in regulatory enforcement
action against Farmer Mac if it were unable to meet the requirement. In 2013 and 2012, Farmer Mac
recorded unrealized gains of $33.9 million and $0.7 million for fair value changes on its financial
derivatives not designated in a hedging relationship as a result of movements in interest rates during the
year. In contrast, Farmer Mac recorded unrealized losses of $47.6 million in 2011 for fair value changes
on its financial derivatives not designated in a hedging relationship as a result of movements in interest
rates during the year. Beginning in 2012, Farmer Mac has designated a portion of its interest rate swaps in
fair value hedging relationships and has recorded in earnings offsetting fair value adjustments on the
hedged items attributable to the risk being hedged. Although derivative instruments designated in fair
value hedging relationships may lessen exposure to changes in the fair value of assets or liabilities, any
differences arising from fair value changes that are not offset could result in hedge ineffectiveness and
adversely affect Farmer Mac's earnings under GAAP.
Changes in interest rates as well as certain credit events may trigger collateralization requirements for
Farmer Mac under its derivatives contracts, which could adversely affect Farmer Mac's liquidity
position and operating results.
Farmer Mac uses derivatives contracts to help manage its interest rate risk. Changes in interest rates have
required, and in the future may require, Farmer Mac to post cash or investment securities to its derivative
counterparties to reflect the changes in fair market values of Farmer Mac's derivatives as a result of the
changes in interest rates. For example, as of December 31, 2013, Farmer Mac posted $9.8 million of cash
and $1.5 million of investment securities as collateral for its derivatives in net liability positions. Farmer
Mac's derivatives contracts contain provisions establishing minimum threshold collateral amounts below
which Farmer Mac is not required to post collateral. These threshold collateral amounts range between
$15 million and $25 million, but may be reduced to zero upon the occurrence of specified credit events
such as insolvency, receivership, failure to make a payment under the contract when due, or failure to
continue as an instrumentality of the United States. If changes in interest rates were to result in a
significant decrease in the fair value of Farmer Mac's derivatives, Farmer Mac would be required to post a
significant amount of cash, cash equivalents, or investment securities, possibly within a short period of
time, to satisfy its obligations under its derivatives contracts. The amount required to be posted would
expand if Farmer Mac also experienced a credit event triggering full collateralization of its derivatives
positions without any minimum threshold. As of December 31, 2013, the amount that would have been
required for full collateralization of Farmer Mac's derivatives positions given the fair value of Farmer
Mac's derivatives at that time was $63.5 million. If Farmer Mac were required to fully collateralize its
derivatives position in an adverse interest rate environment, it could have a negative effect on Farmer
Mac's liquidity position and operating results.
Incorrect estimates and assumptions by management in preparing financial statements could adversely
affect Farmer Mac's business, operating results, reported assets and liabilities, financial condition, and
capital levels.
Incorrect estimates and assumptions by management in connection with the preparation of Farmer Mac's
consolidated financial statements could adversely affect the reported amounts of assets and liabilities and
the reported amounts of income and expenses. The preparation of Farmer Mac's consolidated financial
statements requires management to make certain critical accounting estimates and assumptions that could
affect the reported amounts of assets and liabilities and the reported amounts of income and expense
during the reporting periods. For example, as of December 31, 2013, Farmer Mac's assets and liabilities
recorded at fair value included financial instruments valued at $6.8 billion whose fair values were
estimated by management in the absence of readily determinable fair values (in other words, level 3).
These financial instruments measured as level 3 represented 51 percent of total assets and 73 percent of
financial instruments measured at fair value as of December 31, 2013. Further information regarding fair
value measurement is included in "Management's Discussion and Analysis—Critical Accounting Policies
—Fair Value Measurement." If management makes incorrect assumptions or estimates, Farmer Mac may
under- or overstate reported financial results, which could materially and adversely affect Farmer Mac's
business, operating results, reported assets and liabilities, financial condition, and capital levels.
Changes in the value or composition of Farmer Mac's investment securities could adversely affect
Farmer Mac's business, operating results, financial condition, and capital levels.
Deterioration in financial or credit market conditions could reduce the fair value of Farmer Mac's
investment securities, particularly those securities that are less liquid and more subject to market
variability. Some securities owned by Farmer Mac, including auction-rate certificates and GSE
subordinated debt, do not have well-established secondary trading markets, making it more difficult to
estimate current fair values for those securities. Adverse financial market conditions may further
compound the challenges of estimating fair values for Farmer Mac's securities, as was the case in 2008
after widespread failure of the auction mechanism that had been established to provide liquidity for the
auction-rate certificates that Farmer Mac currently holds.
Farmer Mac relies on market observations to determine the fair value of its investment securities, although
the market data Farmer Mac relies upon may not reflect the actual sale conditions that Farmer Mac would
face when selling its investment securities. For example, the market value of auction-rate certificates held
by Farmer Mac depends in large part on the amounts and timing of the expected cash flows on these
securities, which may be highly uncertain. Therefore, a change in the amounts or timing of cash flows
could materially alter the market price of those securities. Subsequent valuations of these and other
investment securities, in light of factors then prevailing, may result in significant changes in the value of
Farmer Mac's investment securities. For example, the current market values for the auction-rate
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investments, particularly if Farmer Mac's related funding costs cannot be correspondingly repaid. In
addition, if assets repay more slowly than anticipated and the associated debt issued to fund the assets
must be reissued at a higher yield, Farmer Mac's earnings could be adversely affected. As of
December 31, 2013, of all the eligible loan assets held on Farmer Mac's balance sheet, $5.0 billion had a
fixed interest rate and $4.9 billion had an adjustable interest rate.
Changes in interest rates relative to Farmer Mac's management of interest rate risk through derivatives
may cause volatility in financial results and capital levels and adversely affect net interest income.
Farmer Mac enters into financial derivatives transactions to hedge interest rate risks inherent in its
business and applies fair value accounting to its financial derivatives transactions. Although Farmer Mac's
financial derivatives provide effective economic hedges of interest rate risk, accounting guidance requires
changes in the fair values of financial derivatives to be reflected in net income. As interest rates increase
or decrease, the fair value of Farmer Mac's derivatives changes based on the position Farmer Mac holds
relative to the specific characteristics of the derivative. Application of the accounting guidance on
financial derivatives could contribute to volatility in Farmer Mac's earnings under GAAP, particularly if
the financial derivative is not designated in a hedging relationship. Another consequence of the changes in
the fair values of financial derivatives being accounted for in earnings is the resulting effect on Farmer
Mac's regulatory core capital that is available to meet Farmer Mac's statutory minimum capital
requirement. Adverse changes in the fair values of Farmer Mac's financial derivatives would reduce the
amount of core capital available to meet this requirement, which could result in regulatory enforcement
action against Farmer Mac if it were unable to meet the requirement. In 2013 and 2012, Farmer Mac
recorded unrealized gains of $33.9 million and $0.7 million for fair value changes on its financial
derivatives not designated in a hedging relationship as a result of movements in interest rates during the
year. In contrast, Farmer Mac recorded unrealized losses of $47.6 million in 2011 for fair value changes
on its financial derivatives not designated in a hedging relationship as a result of movements in interest
rates during the year. Beginning in 2012, Farmer Mac has designated a portion of its interest rate swaps in
fair value hedging relationships and has recorded in earnings offsetting fair value adjustments on the
hedged items attributable to the risk being hedged. Although derivative instruments designated in fair
value hedging relationships may lessen exposure to changes in the fair value of assets or liabilities, any
differences arising from fair value changes that are not offset could result in hedge ineffectiveness and
adversely affect Farmer Mac's earnings under GAAP.
Changes in interest rates as well as certain credit events may trigger collateralization requirements for
Farmer Mac under its derivatives contracts, which could adversely affect Farmer Mac's liquidity
position and operating results.
Farmer Mac uses derivatives contracts to help manage its interest rate risk. Changes in interest rates have
required, and in the future may require, Farmer Mac to post cash or investment securities to its derivative
counterparties to reflect the changes in fair market values of Farmer Mac's derivatives as a result of the
changes in interest rates. For example, as of December 31, 2013, Farmer Mac posted $9.8 million of cash
and $1.5 million of investment securities as collateral for its derivatives in net liability positions. Farmer
Mac's derivatives contracts contain provisions establishing minimum threshold collateral amounts below
which Farmer Mac is not required to post collateral. These threshold collateral amounts range between
$15 million and $25 million, but may be reduced to zero upon the occurrence of specified credit events
such as insolvency, receivership, failure to make a payment under the contract when due, or failure to
continue as an instrumentality of the United States. If changes in interest rates were to result in a
significant decrease in the fair value of Farmer Mac's derivatives, Farmer Mac would be required to post a
significant amount of cash, cash equivalents, or investment securities, possibly within a short period of
time, to satisfy its obligations under its derivatives contracts. The amount required to be posted would
expand if Farmer Mac also experienced a credit event triggering full collateralization of its derivatives
positions without any minimum threshold. As of December 31, 2013, the amount that would have been
required for full collateralization of Farmer Mac's derivatives positions given the fair value of Farmer
Mac's derivatives at that time was $63.5 million. If Farmer Mac were required to fully collateralize its
derivatives position in an adverse interest rate environment, it could have a negative effect on Farmer
Mac's liquidity position and operating results.
Incorrect estimates and assumptions by management in preparing financial statements could adversely
affect Farmer Mac's business, operating results, reported assets and liabilities, financial condition, and
capital levels.
Incorrect estimates and assumptions by management in connection with the preparation of Farmer Mac's
consolidated financial statements could adversely affect the reported amounts of assets and liabilities and
the reported amounts of income and expenses. The preparation of Farmer Mac's consolidated financial
statements requires management to make certain critical accounting estimates and assumptions that could
affect the reported amounts of assets and liabilities and the reported amounts of income and expense
during the reporting periods. For example, as of December 31, 2013, Farmer Mac's assets and liabilities
recorded at fair value included financial instruments valued at $6.8 billion whose fair values were
estimated by management in the absence of readily determinable fair values (in other words, level 3).
These financial instruments measured as level 3 represented 51 percent of total assets and 73 percent of
financial instruments measured at fair value as of December 31, 2013. Further information regarding fair
value measurement is included in "Management's Discussion and Analysis—Critical Accounting Policies
—Fair Value Measurement." If management makes incorrect assumptions or estimates, Farmer Mac may
under- or overstate reported financial results, which could materially and adversely affect Farmer Mac's
business, operating results, reported assets and liabilities, financial condition, and capital levels.
Changes in the value or composition of Farmer Mac's investment securities could adversely affect
Farmer Mac's business, operating results, financial condition, and capital levels.
Deterioration in financial or credit market conditions could reduce the fair value of Farmer Mac's
investment securities, particularly those securities that are less liquid and more subject to market
variability. Some securities owned by Farmer Mac, including auction-rate certificates and GSE
subordinated debt, do not have well-established secondary trading markets, making it more difficult to
estimate current fair values for those securities. Adverse financial market conditions may further
compound the challenges of estimating fair values for Farmer Mac's securities, as was the case in 2008
after widespread failure of the auction mechanism that had been established to provide liquidity for the
auction-rate certificates that Farmer Mac currently holds.
Farmer Mac relies on market observations to determine the fair value of its investment securities, although
the market data Farmer Mac relies upon may not reflect the actual sale conditions that Farmer Mac would
face when selling its investment securities. For example, the market value of auction-rate certificates held
by Farmer Mac depends in large part on the amounts and timing of the expected cash flows on these
securities, which may be highly uncertain. Therefore, a change in the amounts or timing of cash flows
could materially alter the market price of those securities. Subsequent valuations of these and other
investment securities, in light of factors then prevailing, may result in significant changes in the value of
Farmer Mac's investment securities. For example, the current market values for the auction-rate
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certificates and GSE subordinated debt held by Farmer Mac are significantly below their amortized cost
due to widening credit spreads after purchase. As of December 31, 2013, the fair values of Farmer Mac's
auction-rate certificates and GSE subordinated debt were $65.3 million and $63.4 million, respectively,
compared to Farmer Mac's amortized cost of $74.1 million and $70.0 million, respectively, for each of
these classes of investment securities.
Farmer Mac also relies on internal models to estimate the fair values of its investment securities and to
determine whether credit losses exist, which requires Farmer Mac to exercise judgment about estimates
and assumptions used in the models. If Farmer Mac uses incorrect estimates or assumptions in the
internal models it develops to estimate the fair value of its investment securities, those models could
adversely affect reported income during the reporting period.
If Farmer Mac decides to sell securities in its investment portfolio, the price ultimately realized will
depend on the demand and liquidity in the market at the time of sale. Farmer Mac's inability to sell the
securities in its investment portfolio at or above their estimated fair values could adversely affect Farmer
Mac's business, operating results, financial condition, and capital levels.
Farmer Mac's ability to attract and retain qualified employees is critical to the success of its business,
and failure to do so may materially adversely affect Farmer Mac's performance or financial condition.
adversely affected.
Farmer Mac relies on its employees' breadth and depth of knowledge of agricultural and rural utilities
lending, financial products, and other areas of expertise to run its business operations successfully. A
significant disruption in the continuity of Farmer Mac's employees would require Farmer Mac to expend
resources to replace personnel and could result in a loss of productivity in the interim. If Farmer Mac is
unable to continue to retain and attract qualified employees, Farmer Mac's performance or financial
condition could be materially adversely affected.
Any failure, interruption, or breach in Farmer Mac's information systems or technology, including the
occurrence of successful cyber incidents or a deficiency in Farmer Mac's cyber security, could result in
a loss of business, damage to Farmer Mac's reputation, the disclosure or misuse of confidential or
proprietary information, or increased costs or liability to Farmer Mac, which could adversely affect
Farmer Mac's business, operating results, or financial condition.
Farmer Mac relies heavily on information systems and other technology, including from third parties, to
conduct and manage its business operations. As Farmer Mac's reliance on technology has increased, so
have the risks posed to its systems, including the effect of events that would threaten the confidentiality,
integrity, or availability of Farmer Mac's information resources, known as cyber incidents. Farmer Mac
has undertaken remedial measures and devotes significant resources to regularly implement, maintain, and
upgrade its information systems and network with backup systems and other safeguards (including a
business continuity plan) to diminish these risks and risks that Farmer Mac's information system and
network assets could be used to unlawfully gain access to third-party network systems. However, Farmer
Mac may not be able to prevent, address on a timely and adequate basis, or fully mitigate the negative
effects of any failure or interruption of Farmer Mac's information systems or network, including these
backup systems and safeguards, on Farmer Mac's business, operating results, or financial condition. A
failure or interruption in any of Farmer Mac's information systems, backup infrastructure, or other
technology could result in a disruption or malfunction of its operations, which could adversely affect
Farmer Mac's ability to do business with its approved lenders or other counterparties, result in financial
loss, or cause damage to Farmer Mac's reputation.
The secure transmission, processing, and storage of Farmer Mac's approved lenders' and other
counterparties' confidential, proprietary, and other information through online and network systems and
applications is instrumental to Farmer Mac's operations. Any action that results in unauthorized access to
Farmer Mac's information systems and networks by third parties, including through computer viruses,
malicious code, cyber-attacks, or other information security breaches, could disrupt Farmer Mac's
operations, corrupt its data, or result in the misappropriation, unauthorized release, loss, or destruction of
the confidential, proprietary, or other information of its approved lenders and other counterparties. Similar
to many other financial institutions, Farmer Mac faces regular attempts by third parties to gain
unauthorized access to its systems, though Farmer Mac is not aware of any actual breaches of its network
or underlying databases by unauthorized third parties. However, if such an event were to occur, Farmer
Mac could consequently experience operational interruption, damage to its reputation, loss of business,
legal liability, or increased costs from private data exposure, which could adversely affect Farmer Mac's
business, operating results, or financial condition.
If Farmer Mac's management of risk associated with its eligible loan assets and investment securities is
not effective, its business, operating results, financial condition, and capital levels could be materially
Events in the financial markets since 2008 leading to heightened volatility and tightened liquidity and
credit have challenged financial institutions, including Farmer Mac, to adapt and further develop
profitability and risk management models adequate to address a wider range of possible market
developments. Farmer Mac's techniques and strategies may not be effective in mitigating its risk exposure
in all economic market environments or against all types of risk, including risks that Farmer Mac fails to
identify or anticipate. Some of Farmer Mac's qualitative tools and metrics for managing risk are based
upon its use of observed historical market behavior. Farmer Mac applies statistical and other tools to these
observations to quantify its risks. These tools and metrics may fail to predict future or unanticipated
risk. Such failures could, for example, arise from factors Farmer Mac did not anticipate or correctly
evaluate in its models. In addition, Farmer Mac's quantified modeling does not take into account all
risks. Farmer Mac's more qualitative approach to managing those risks could prove insufficient, exposing
it to material unanticipated losses. The inability of Farmer Mac to effectively identify and manage the
risks inherent in its business could have a material adverse effect on its business, operating results,
financial condition, and capital levels.
Farmer Mac's ability to repay its obligations and/or raise capital through issuances of debt or equity
may be adversely affected by the sale of certain assets to, and the operating results of, its subsidiary
Farmer Mac II LLC.
In January 2010, Farmer Mac contributed substantially all of its USDA Guarantees line of business to
Farmer Mac II LLC, including USDA Securities in an aggregate principal amount of $1.1 billion and the
primary intangible assets related to the operation of that line of business. As a result, the assets of Farmer
Mac II LLC are no longer directly available to satisfy the claims of Farmer Mac's creditors or
stockholders. In the event of an insolvency, bankruptcy, liquidation, reorganization, dissolution, or
winding-up of Farmer Mac II LLC, Farmer Mac, as the holder of the common equity interest, may lose all
or some of its investment in Farmer Mac II LLC, which event likely would adversely affect Farmer Mac's
ability to raise capital, issue new debt, and repay outstanding debt as it comes due. Because Farmer Mac
is also a creditor to Farmer Mac II LLC, the value of Farmer Mac II LLC's assets may be insufficient to
repay amounts due to Farmer Mac, which also could adversely affect Farmer Mac's ability to raise capital,
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certificates and GSE subordinated debt held by Farmer Mac are significantly below their amortized cost
due to widening credit spreads after purchase. As of December 31, 2013, the fair values of Farmer Mac's
auction-rate certificates and GSE subordinated debt were $65.3 million and $63.4 million, respectively,
compared to Farmer Mac's amortized cost of $74.1 million and $70.0 million, respectively, for each of
these classes of investment securities.
Farmer Mac also relies on internal models to estimate the fair values of its investment securities and to
determine whether credit losses exist, which requires Farmer Mac to exercise judgment about estimates
and assumptions used in the models. If Farmer Mac uses incorrect estimates or assumptions in the
internal models it develops to estimate the fair value of its investment securities, those models could
adversely affect reported income during the reporting period.
If Farmer Mac decides to sell securities in its investment portfolio, the price ultimately realized will
depend on the demand and liquidity in the market at the time of sale. Farmer Mac's inability to sell the
securities in its investment portfolio at or above their estimated fair values could adversely affect Farmer
Mac's business, operating results, financial condition, and capital levels.
Farmer Mac's ability to attract and retain qualified employees is critical to the success of its business,
and failure to do so may materially adversely affect Farmer Mac's performance or financial condition.
Farmer Mac relies on its employees' breadth and depth of knowledge of agricultural and rural utilities
lending, financial products, and other areas of expertise to run its business operations successfully. A
significant disruption in the continuity of Farmer Mac's employees would require Farmer Mac to expend
resources to replace personnel and could result in a loss of productivity in the interim. If Farmer Mac is
unable to continue to retain and attract qualified employees, Farmer Mac's performance or financial
condition could be materially adversely affected.
Any failure, interruption, or breach in Farmer Mac's information systems or technology, including the
occurrence of successful cyber incidents or a deficiency in Farmer Mac's cyber security, could result in
a loss of business, damage to Farmer Mac's reputation, the disclosure or misuse of confidential or
proprietary information, or increased costs or liability to Farmer Mac, which could adversely affect
Farmer Mac's business, operating results, or financial condition.
Farmer Mac relies heavily on information systems and other technology, including from third parties, to
conduct and manage its business operations. As Farmer Mac's reliance on technology has increased, so
have the risks posed to its systems, including the effect of events that would threaten the confidentiality,
integrity, or availability of Farmer Mac's information resources, known as cyber incidents. Farmer Mac
has undertaken remedial measures and devotes significant resources to regularly implement, maintain, and
upgrade its information systems and network with backup systems and other safeguards (including a
business continuity plan) to diminish these risks and risks that Farmer Mac's information system and
network assets could be used to unlawfully gain access to third-party network systems. However, Farmer
Mac may not be able to prevent, address on a timely and adequate basis, or fully mitigate the negative
effects of any failure or interruption of Farmer Mac's information systems or network, including these
backup systems and safeguards, on Farmer Mac's business, operating results, or financial condition. A
failure or interruption in any of Farmer Mac's information systems, backup infrastructure, or other
technology could result in a disruption or malfunction of its operations, which could adversely affect
Farmer Mac's ability to do business with its approved lenders or other counterparties, result in financial
loss, or cause damage to Farmer Mac's reputation.
The secure transmission, processing, and storage of Farmer Mac's approved lenders' and other
counterparties' confidential, proprietary, and other information through online and network systems and
applications is instrumental to Farmer Mac's operations. Any action that results in unauthorized access to
Farmer Mac's information systems and networks by third parties, including through computer viruses,
malicious code, cyber-attacks, or other information security breaches, could disrupt Farmer Mac's
operations, corrupt its data, or result in the misappropriation, unauthorized release, loss, or destruction of
the confidential, proprietary, or other information of its approved lenders and other counterparties. Similar
to many other financial institutions, Farmer Mac faces regular attempts by third parties to gain
unauthorized access to its systems, though Farmer Mac is not aware of any actual breaches of its network
or underlying databases by unauthorized third parties. However, if such an event were to occur, Farmer
Mac could consequently experience operational interruption, damage to its reputation, loss of business,
legal liability, or increased costs from private data exposure, which could adversely affect Farmer Mac's
business, operating results, or financial condition.
If Farmer Mac's management of risk associated with its eligible loan assets and investment securities is
not effective, its business, operating results, financial condition, and capital levels could be materially
adversely affected.
Events in the financial markets since 2008 leading to heightened volatility and tightened liquidity and
credit have challenged financial institutions, including Farmer Mac, to adapt and further develop
profitability and risk management models adequate to address a wider range of possible market
developments. Farmer Mac's techniques and strategies may not be effective in mitigating its risk exposure
in all economic market environments or against all types of risk, including risks that Farmer Mac fails to
identify or anticipate. Some of Farmer Mac's qualitative tools and metrics for managing risk are based
upon its use of observed historical market behavior. Farmer Mac applies statistical and other tools to these
observations to quantify its risks. These tools and metrics may fail to predict future or unanticipated
risk. Such failures could, for example, arise from factors Farmer Mac did not anticipate or correctly
evaluate in its models. In addition, Farmer Mac's quantified modeling does not take into account all
risks. Farmer Mac's more qualitative approach to managing those risks could prove insufficient, exposing
it to material unanticipated losses. The inability of Farmer Mac to effectively identify and manage the
risks inherent in its business could have a material adverse effect on its business, operating results,
financial condition, and capital levels.
Farmer Mac's ability to repay its obligations and/or raise capital through issuances of debt or equity
may be adversely affected by the sale of certain assets to, and the operating results of, its subsidiary
Farmer Mac II LLC.
In January 2010, Farmer Mac contributed substantially all of its USDA Guarantees line of business to
Farmer Mac II LLC, including USDA Securities in an aggregate principal amount of $1.1 billion and the
primary intangible assets related to the operation of that line of business. As a result, the assets of Farmer
Mac II LLC are no longer directly available to satisfy the claims of Farmer Mac's creditors or
stockholders. In the event of an insolvency, bankruptcy, liquidation, reorganization, dissolution, or
winding-up of Farmer Mac II LLC, Farmer Mac, as the holder of the common equity interest, may lose all
or some of its investment in Farmer Mac II LLC, which event likely would adversely affect Farmer Mac's
ability to raise capital, issue new debt, and repay outstanding debt as it comes due. Because Farmer Mac
is also a creditor to Farmer Mac II LLC, the value of Farmer Mac II LLC's assets may be insufficient to
repay amounts due to Farmer Mac, which also could adversely affect Farmer Mac's ability to raise capital,
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issue new debt, and repay outstanding debt as it comes due. In addition, the ability of Farmer Mac II LLC
to successfully operate the USDA Guarantees line of business will impact its ability to pay dividends on
the common equity interest owned by Farmer Mac. If Farmer Mac II LLC cannot pay dividends to
Farmer Mac or repay or refinance obligations owed to Farmer Mac, Farmer Mac's liquidity and ability to
raise additional capital also may be adversely affected, which could adversely affect Farmer Mac's
operating results and financial condition.
The trading price for Farmer Mac's Class C non-voting common stock may be volatile due to market
influences, trading volume, or the effects of equity awards for Farmer Mac's officers, directors, and
employees.
The trading price of Farmer Mac's Class C non-voting common stock has at times experienced substantial
price volatility and may continue to be volatile. For example, from January 2013 to December 2013, the
price of the stock ranged from $26.96 per share to $37.72 per share. The trading price may fluctuate in
response to various factors, including short sales, hedging, or stock market influences in general that are
unrelated to Farmer Mac's operating performance. In addition, as a component of compensation for
officers, directors, and employees, Farmer Mac typically grants equity awards each year that are based on
the Class C non-voting common stock, including stock appreciation rights and restricted stock that vest
over time or upon the achievement of specified performance goals. Sales of stock acquired upon vesting
or the exercise of equity awards by Farmer Mac's officers, directors, or employees, whether pursuant to an
established trading plan or otherwise, could adversely affect the trading price of Farmer Mac's Class C
non-voting common stock. These factors may be exacerbated during periods of low trading volume for
Farmer Mac's Class C non-voting common stock, which averaged approximately 30,000 shares daily
during 2013, and may have a prolonged negative effect on its trading price or increase price volatility.
Farmer Mac's efforts to pursue its Congressional mission of providing a secondary market for loans
made to borrowers in rural America may adversely affect its business, operating results, and financial
condition.
Congress created Farmer Mac to provide for a secondary market for agricultural mortgage loans, loans to
rural utilities cooperatives, and the guaranteed portions of USDA-guaranteed loans. In pursuing this
mission, Farmer Mac's secondary market activities are designed to:
•
increase the availability of long-term credit to rural borrowers at stable interest rates;
• provide greater liquidity and lending capacity in extending credit to rural borrowers; and
• provide an arrangement for new lending by facilitating capital market investments in long-term
funding for rural borrowers, including funds at fixed rates of interest.
Although Farmer Mac strives to undertake its mission-related activities in a manner consistent with
providing a positive return to Farmer Mac's stockholders, it is possible that these activities may contribute
to a lower return to stockholders than if Farmer Mac's sole purpose were to maximize stockholder value.
In addition, it is possible that the entities that regulate Farmer Mac could seek to alter Farmer Mac's
mission-related activities in the future or place limits on its liquidity investments that provide liquidity for
Farmer Mac's mission-related activities. If this were to happen, and Farmer Mac were required to
undertake activities involving greater risk to satisfy its Congressional mission, Farmer Mac's business,
operating results, and financial condition could be adversely affected.
A few stockholders who own large amounts of Farmer Mac voting common stock may seek to influence
Farmer Mac's business, strategy, or board composition, and the interests of these stockholders may differ
from the interests of Farmer Mac or other holders of Farmer Mac's common stock.
The ownership of Farmer Mac's two classes of voting common stock is currently concentrated in a small
number of institutions. Approximately 45 percent of Farmer Mac's Class A voting common stock is held by
three financial institutions, with 31 percent held by one institution. Approximately 97 percent of Farmer
Mac's Class B voting common stock is held by five FCS institutions (two of which are related to each other
through a parent-subsidiary relationship). Three of those five FCS institutions may be deemed to have entered
into a voting arrangement regarding the election of directors to Farmer Mac's board of directors.
Many holders of Farmer Mac's voting common stock are rural lenders that may compete directly with each
other. At times, some of these voting stockholders may also view Farmer Mac as an indirect competitor
because Farmer Mac's secondary market activities often provide attractive funding and effective risk
management tools that help many lenders compete in the origination of eligible rural loans. So long as Farmer
Mac's Class A and Class B voting common stock is highly concentrated in a small number of institutions,
there is the potential that these institutions will seek to influence Farmer Mac's business, strategy, or board
composition in a way that may not be in the best interests of either Farmer Mac or all other stockholders.
Furthermore, the interests of the holders of Farmer Mac's Class A and Class B voting common stock may
not be fully aligned with each other or the interests of Farmer Mac's Class C non-voting common stockholders,
and this could lead to a strategy that is not in the best interests of Farmer Mac or all of its stockholders. The
holders of Farmer Mac's Class A voting common stock and the holders of Farmer Mac's Class B voting
common stock each have the right to elect one third of the membership of Farmer Mac's Board. Accordingly,
each of these stockholder classes has the potential to significantly influence Farmer Mac's business and
strategy in a manner that may not be in the best interests of all stockholders.
Any of the risks described in this section could materially and adversely affect Farmer Mac's business,
operating results, financial condition, capital levels, and future earnings. For additional discussion about
Farmer Mac's risk management, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations—Risk Management" in Item 7 of this Annual Report on Form 10-K.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
Item 3. Legal Proceedings
None.
Farmer Mac maintains its principal office at 1999 K Street, N.W., 4th Floor, Washington, D.C. 20006,
under the terms of a sublease that began on October 1, 2011 and ends on August 30, 2024. Farmer Mac
also maintains an office located at 5408 NW 88th Street, Suite 120, Johnston, Iowa 50131, under the terms
of a lease that began on July 1, 2013 and ends on June 30, 2018. Farmer Mac's offices are suitable and
adequate for its current and currently anticipated needs.
55
56
issue new debt, and repay outstanding debt as it comes due. In addition, the ability of Farmer Mac II LLC
to successfully operate the USDA Guarantees line of business will impact its ability to pay dividends on
the common equity interest owned by Farmer Mac. If Farmer Mac II LLC cannot pay dividends to
Farmer Mac or repay or refinance obligations owed to Farmer Mac, Farmer Mac's liquidity and ability to
raise additional capital also may be adversely affected, which could adversely affect Farmer Mac's
operating results and financial condition.
The trading price for Farmer Mac's Class C non-voting common stock may be volatile due to market
influences, trading volume, or the effects of equity awards for Farmer Mac's officers, directors, and
employees.
The trading price of Farmer Mac's Class C non-voting common stock has at times experienced substantial
price volatility and may continue to be volatile. For example, from January 2013 to December 2013, the
price of the stock ranged from $26.96 per share to $37.72 per share. The trading price may fluctuate in
response to various factors, including short sales, hedging, or stock market influences in general that are
unrelated to Farmer Mac's operating performance. In addition, as a component of compensation for
officers, directors, and employees, Farmer Mac typically grants equity awards each year that are based on
the Class C non-voting common stock, including stock appreciation rights and restricted stock that vest
over time or upon the achievement of specified performance goals. Sales of stock acquired upon vesting
or the exercise of equity awards by Farmer Mac's officers, directors, or employees, whether pursuant to an
established trading plan or otherwise, could adversely affect the trading price of Farmer Mac's Class C
non-voting common stock. These factors may be exacerbated during periods of low trading volume for
Farmer Mac's Class C non-voting common stock, which averaged approximately 30,000 shares daily
during 2013, and may have a prolonged negative effect on its trading price or increase price volatility.
Farmer Mac's efforts to pursue its Congressional mission of providing a secondary market for loans
made to borrowers in rural America may adversely affect its business, operating results, and financial
condition.
Congress created Farmer Mac to provide for a secondary market for agricultural mortgage loans, loans to
rural utilities cooperatives, and the guaranteed portions of USDA-guaranteed loans. In pursuing this
mission, Farmer Mac's secondary market activities are designed to:
•
increase the availability of long-term credit to rural borrowers at stable interest rates;
• provide greater liquidity and lending capacity in extending credit to rural borrowers; and
• provide an arrangement for new lending by facilitating capital market investments in long-term
funding for rural borrowers, including funds at fixed rates of interest.
Although Farmer Mac strives to undertake its mission-related activities in a manner consistent with
providing a positive return to Farmer Mac's stockholders, it is possible that these activities may contribute
to a lower return to stockholders than if Farmer Mac's sole purpose were to maximize stockholder value.
In addition, it is possible that the entities that regulate Farmer Mac could seek to alter Farmer Mac's
mission-related activities in the future or place limits on its liquidity investments that provide liquidity for
Farmer Mac's mission-related activities. If this were to happen, and Farmer Mac were required to
undertake activities involving greater risk to satisfy its Congressional mission, Farmer Mac's business,
operating results, and financial condition could be adversely affected.
A few stockholders who own large amounts of Farmer Mac voting common stock may seek to influence
Farmer Mac's business, strategy, or board composition, and the interests of these stockholders may differ
from the interests of Farmer Mac or other holders of Farmer Mac's common stock.
The ownership of Farmer Mac's two classes of voting common stock is currently concentrated in a small
number of institutions. Approximately 45 percent of Farmer Mac's Class A voting common stock is held by
three financial institutions, with 31 percent held by one institution. Approximately 97 percent of Farmer
Mac's Class B voting common stock is held by five FCS institutions (two of which are related to each other
through a parent-subsidiary relationship). Three of those five FCS institutions may be deemed to have entered
into a voting arrangement regarding the election of directors to Farmer Mac's board of directors.
Many holders of Farmer Mac's voting common stock are rural lenders that may compete directly with each
other. At times, some of these voting stockholders may also view Farmer Mac as an indirect competitor
because Farmer Mac's secondary market activities often provide attractive funding and effective risk
management tools that help many lenders compete in the origination of eligible rural loans. So long as Farmer
Mac's Class A and Class B voting common stock is highly concentrated in a small number of institutions,
there is the potential that these institutions will seek to influence Farmer Mac's business, strategy, or board
composition in a way that may not be in the best interests of either Farmer Mac or all other stockholders.
Furthermore, the interests of the holders of Farmer Mac's Class A and Class B voting common stock may
not be fully aligned with each other or the interests of Farmer Mac's Class C non-voting common stockholders,
and this could lead to a strategy that is not in the best interests of Farmer Mac or all of its stockholders. The
holders of Farmer Mac's Class A voting common stock and the holders of Farmer Mac's Class B voting
common stock each have the right to elect one third of the membership of Farmer Mac's Board. Accordingly,
each of these stockholder classes has the potential to significantly influence Farmer Mac's business and
strategy in a manner that may not be in the best interests of all stockholders.
Any of the risks described in this section could materially and adversely affect Farmer Mac's business,
operating results, financial condition, capital levels, and future earnings. For additional discussion about
Farmer Mac's risk management, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations—Risk Management" in Item 7 of this Annual Report on Form 10-K.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
Farmer Mac maintains its principal office at 1999 K Street, N.W., 4th Floor, Washington, D.C. 20006,
under the terms of a sublease that began on October 1, 2011 and ends on August 30, 2024. Farmer Mac
also maintains an office located at 5408 NW 88th Street, Suite 120, Johnston, Iowa 50131, under the terms
of a lease that began on July 1, 2013 and ends on June 30, 2018. Farmer Mac's offices are suitable and
adequate for its current and currently anticipated needs.
Item 3. Legal Proceedings
None.
55
56
Item 4. Mine Safety Disclosures
Not applicable.
57
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
(a)
Farmer Mac has three classes of common stock outstanding: Class A voting common stock, Class
B voting common stock, and Class C non-voting common stock. Ownership of Class A voting common
stock is restricted to banks, insurance companies, and other financial institutions or similar entities that are
not institutions of the FCS. Ownership of Class B voting common stock is restricted to institutions of the
FCS. There are no ownership restrictions on the Class C non-voting common stock. Under the terms of
the original public offering of the Class A and Class B voting common stock, Farmer Mac reserved the
right to redeem at book value any shares of either class held by an ineligible holder.
Farmer Mac's Class A voting common stock and Class C non-voting common stock are listed on the New
York Stock Exchange under the symbols AGM.A and AGM, respectively. The Class B voting common
stock, which has a limited market and trades infrequently, is not listed or quoted on any exchange or other
quotation system, and Farmer Mac is not aware of any publicly available quotations or prices for that class
of common stock.
As of March 3, 2014, there were 1,094 registered owners of the Class A voting common stock,
81 registered owners of the Class B voting common stock, and 1,020 registered owners of the Class C
non-voting common stock.
The information below represents the high and low closing sales prices for shares of both the Class A and
Class C common stock for the periods indicated below, as reported by the New York Stock Exchange:
Class A Stock
Class C Stock
High
Low
High
Low
Sales Prices
(per share)
$
$
22.41
26.49
25.98
21.80
23.36
17.52
17.28
11.35
$
$
32.96
36.04
35.65
32.19
37.72
27.36
26.51
22.70
29.36
32.78
29.04
26.96
30.79
25.76
23.71
20.55
18.01
$
28.88
$
19.75
$
34.58
$
First quarter (through March 3, 2014)
$
$
2014
2013
Fourth quarter
Third quarter
Second quarter
First quarter
2012
Fourth quarter
Third quarter
Second quarter
First quarter
The dividend rights of all three classes of Farmer Mac's common stock are the same, and dividends may
be paid on common stock only when, as, and if declared by Farmer Mac's board of directors in its sole
discretion, subject to compliance with applicable capital requirements and payment of dividends on any
$
$
28.55
32.33
32.50
27.75
29.50
21.47
20.51
18.33
58
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
(a)
Farmer Mac has three classes of common stock outstanding: Class A voting common stock, Class
B voting common stock, and Class C non-voting common stock. Ownership of Class A voting common
stock is restricted to banks, insurance companies, and other financial institutions or similar entities that are
not institutions of the FCS. Ownership of Class B voting common stock is restricted to institutions of the
FCS. There are no ownership restrictions on the Class C non-voting common stock. Under the terms of
the original public offering of the Class A and Class B voting common stock, Farmer Mac reserved the
right to redeem at book value any shares of either class held by an ineligible holder.
Farmer Mac's Class A voting common stock and Class C non-voting common stock are listed on the New
York Stock Exchange under the symbols AGM.A and AGM, respectively. The Class B voting common
stock, which has a limited market and trades infrequently, is not listed or quoted on any exchange or other
quotation system, and Farmer Mac is not aware of any publicly available quotations or prices for that class
of common stock.
As of March 3, 2014, there were 1,094 registered owners of the Class A voting common stock,
81 registered owners of the Class B voting common stock, and 1,020 registered owners of the Class C
non-voting common stock.
The information below represents the high and low closing sales prices for shares of both the Class A and
Class C common stock for the periods indicated below, as reported by the New York Stock Exchange:
Sales Prices
Class A Stock
Class C Stock
High
Low
High
Low
$
$
$
$
28.55
32.33
32.50
27.75
29.50
(per share)
$
$
22.41
26.49
25.98
21.80
23.36
$
$
32.96
36.04
35.65
32.19
37.72
$
28.88
$
19.75
$
34.58
$
21.47
20.51
18.33
17.52
17.28
11.35
27.36
26.51
22.70
29.36
32.78
29.04
26.96
30.79
25.76
23.71
20.55
18.01
2014
First quarter (through March 3, 2014)
2013
Fourth quarter
Third quarter
Second quarter
First quarter
2012
Fourth quarter
Third quarter
Second quarter
First quarter
The dividend rights of all three classes of Farmer Mac's common stock are the same, and dividends may
be paid on common stock only when, as, and if declared by Farmer Mac's board of directors in its sole
discretion, subject to compliance with applicable capital requirements and payment of dividends on any
57
58
Performance Graph. The following graph compares the performance of Farmer Mac's Class A voting
common stock and Class C non-voting common stock with the performance of the New York Stock
Exchange Composite Index (the "NYSE Comp") and the Standard & Poor's 500 Diversified Financials
Index (the "S&P 500 Div Fin") over the period from December 31, 2008 to December 31, 2013. The
graph assumes that $100 was invested on December 31, 2008 in each of: Farmer Mac's Class A voting
common stock; Farmer Mac's Class C non-voting common stock; the NYSE Comp; and the S&P 500 Div
Fin. The graph also assumes that all dividends were reinvested into the same securities throughout the
past five years. Farmer Mac obtained the information contained in the performance graph from SNL
Financial.
outstanding preferred stock. From first quarter 2009 through fourth quarter 2011, Farmer Mac paid a
quarterly dividend of $0.05 per share on all classes of Farmer Mac's common stock. On February 2, 2012,
Farmer Mac's board of directors declared a quarterly dividend of $0.10 per share on Farmer Mac's
common stock payable for first quarter 2012, which increased the quarterly dividend rate to the level paid
prior to 2009. That dividend rate was paid quarterly through fourth quarter 2012. On February 6, 2013,
Farmer Mac's board of directors declared a quarterly dividend of $0.12 per share on Farmer Mac's
common stock payable for first quarter 2013. That dividend rate was paid quarterly through fourth quarter
2013. On February 6, 2014, Farmer Mac's board of directors declared a quarterly dividend of $0.14 per
share on Farmer Mac's common stock payable on March 31, 2014. Farmer Mac expects to continue to
pay comparable quarterly cash dividends for the foreseeable future, subject to the outlook and indicated
capital needs of Farmer Mac and the determination of the board of directors. Farmer Mac's ability to pay
dividends on its common stock is subject to the payment of dividends on its outstanding preferred
stock. Farmer Mac's ability to declare and pay dividends could also be restricted if it were to fail to
comply with applicable capital requirements. See "Business—Government Regulation of Farmer Mac—
Regulation—Capital Standards." In addition, the FCA recently adopted a rule that requires Farmer Mac to
provide FCA with 15 days' advance notice of certain capital distributions. See "Management's Discussion
and Analysis—Regulatory Matters."
Information about securities authorized for issuance under Farmer Mac's equity compensation plans
appears under "Equity Compensation Plans" in Farmer Mac's definitive proxy statement to be filed on or
about April 25, 2014. That portion of the definitive proxy statement is incorporated by reference into this
Annual Report on Form 10-K.
Farmer Mac is a federally chartered instrumentality of the United States, and its common stock is exempt
from registration under Section 3(a)(2) of the Securities Act. One type of transaction related to Farmer
Mac common stock occurred during fourth quarter 2013 that was not registered under the Securities Act
and not otherwise reported on a Current Report on Form 8-K:
• On October 11, 2013, pursuant to 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 192 shares of its Class C non-voting common stock to the five
directors who elected to receive such stock in lieu of a portion of their cash retainers. The number
of shares issued to the directors was calculated based on a price of $33.38 per share, which was the
closing price of the Class C non-voting common stock on September 30, 2013, the last business
day of the third quarter, as reported by the New York Stock Exchange.
This performance graph shall not be deemed to be "soliciting material" or to be "filed" with the SEC, and
this performance graph shall not be incorporated by reference into any of Farmer Mac's filings under the
Securities Act or the Securities Exchange Act of 1934 and related regulations (collectively, the "Exchange
Act"), or any other document, whether made before or after the date of this report and irrespective of any
general incorporation language contained in a filing or document (except to the extent Farmer Mac
specifically incorporates this section by reference into a filing or document).
(b)
Not applicable.
(c)
Farmer Mac did not repurchase any shares of its common stock during 2013, 2012, or 2011.
59
60
Performance Graph. The following graph compares the performance of Farmer Mac's Class A voting
common stock and Class C non-voting common stock with the performance of the New York Stock
Exchange Composite Index (the "NYSE Comp") and the Standard & Poor's 500 Diversified Financials
Index (the "S&P 500 Div Fin") over the period from December 31, 2008 to December 31, 2013. The
graph assumes that $100 was invested on December 31, 2008 in each of: Farmer Mac's Class A voting
common stock; Farmer Mac's Class C non-voting common stock; the NYSE Comp; and the S&P 500 Div
Fin. The graph also assumes that all dividends were reinvested into the same securities throughout the
past five years. Farmer Mac obtained the information contained in the performance graph from SNL
Financial.
outstanding preferred stock. From first quarter 2009 through fourth quarter 2011, Farmer Mac paid a
quarterly dividend of $0.05 per share on all classes of Farmer Mac's common stock. On February 2, 2012,
Farmer Mac's board of directors declared a quarterly dividend of $0.10 per share on Farmer Mac's
common stock payable for first quarter 2012, which increased the quarterly dividend rate to the level paid
prior to 2009. That dividend rate was paid quarterly through fourth quarter 2012. On February 6, 2013,
Farmer Mac's board of directors declared a quarterly dividend of $0.12 per share on Farmer Mac's
common stock payable for first quarter 2013. That dividend rate was paid quarterly through fourth quarter
2013. On February 6, 2014, Farmer Mac's board of directors declared a quarterly dividend of $0.14 per
share on Farmer Mac's common stock payable on March 31, 2014. Farmer Mac expects to continue to
pay comparable quarterly cash dividends for the foreseeable future, subject to the outlook and indicated
capital needs of Farmer Mac and the determination of the board of directors. Farmer Mac's ability to pay
dividends on its common stock is subject to the payment of dividends on its outstanding preferred
stock. Farmer Mac's ability to declare and pay dividends could also be restricted if it were to fail to
comply with applicable capital requirements. See "Business—Government Regulation of Farmer Mac—
Regulation—Capital Standards." In addition, the FCA recently adopted a rule that requires Farmer Mac to
provide FCA with 15 days' advance notice of certain capital distributions. See "Management's Discussion
and Analysis—Regulatory Matters."
Information about securities authorized for issuance under Farmer Mac's equity compensation plans
appears under "Equity Compensation Plans" in Farmer Mac's definitive proxy statement to be filed on or
about April 25, 2014. That portion of the definitive proxy statement is incorporated by reference into this
Annual Report on Form 10-K.
Farmer Mac is a federally chartered instrumentality of the United States, and its common stock is exempt
from registration under Section 3(a)(2) of the Securities Act. One type of transaction related to Farmer
Mac common stock occurred during fourth quarter 2013 that was not registered under the Securities Act
and not otherwise reported on a Current Report on Form 8-K:
• On October 11, 2013, pursuant to 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 192 shares of its Class C non-voting common stock to the five
directors who elected to receive such stock in lieu of a portion of their cash retainers. The number
of shares issued to the directors was calculated based on a price of $33.38 per share, which was the
closing price of the Class C non-voting common stock on September 30, 2013, the last business
day of the third quarter, as reported by the New York Stock Exchange.
This performance graph shall not be deemed to be "soliciting material" or to be "filed" with the SEC, and
this performance graph shall not be incorporated by reference into any of Farmer Mac's filings under the
Securities Act or the Securities Exchange Act of 1934 and related regulations (collectively, the "Exchange
Act"), or any other document, whether made before or after the date of this report and irrespective of any
general incorporation language contained in a filing or document (except to the extent Farmer Mac
specifically incorporates this section by reference into a filing or document).
(b)
Not applicable.
(c)
Farmer Mac did not repurchase any shares of its common stock during 2013, 2012, or 2011.
59
60
Item 6.
Selected Financial Data
The selected consolidated financial data presented below is summarized from Farmer Mac's consolidated
balance sheet data as of December 31, 2013 and the five-year period then ended, as well as selected results
of operations data for the five-year period then ended. This data should be reviewed in conjunction with
the audited consolidated financial statements and related notes and with "Item 7—Management's
Discussion and Analysis of Financial Condition and Results of Operations" included in this Annual Report
on Form 10-K.
Summary of Financial Condition:
2013
2012
2011
2010
2009
Cash and cash equivalents
Investment securities
$
749,313
$
785,564
$
817,046
$
729,920
$
654,794
2,484,075
2,499,629
2,184,490
1,763,329
1,131,895
Farmer Mac Guaranteed Securities
5,091,600
4,766,258
4,289,272
2,907,264
3,398,996
(dollars in thousands)
As of December 31,
USDA Securities (1)
Loans, net
Total assets
Notes payable:
Due within one year
Due after one year
Total liabilities
Mezzanine equity
Stockholders' equity
Non-controlling interest - preferred stock
Selected Financial Ratios:
Return on average assets (2)
Return on average common equity (3)
Average equity to assets (4)
Average total equity to assets (5)
1,612,013
1,590,783
1,491,905
1,317,444
—
3,193,248
2,729,774
2,894,156
2,558,599
753,720
13,361,780
12,622,201
11,883,508
9,479,914
6,138,813
7,338,781
6,567,366
6,087,879
4,509,419
3,662,898
5,001,169
5,034,739
4,104,882
3,430,656
1,908,713
12,787,311
12,029,239
11,328,975
9,001,037
5,798,406
—
332,616
241,853
—
351,109
241,853
—
312,680
241,853
—
237,024
241,853
144,216
196,191
—
0.55%
25.30%
2.63%
4.49%
0.36%
16.00%
2.71%
4.68%
0.13%
6.34%
2.57%
4.84%
0.28%
13.88%
2.77%
5.25%
1.46%
113.70%
1.88%
4.45%
(1) Prior to 2010, USDA Securities were included in Farmer Mac Guaranteed Securities.
(2) Calculated as net income attributable to common stockholders divided by the simple average of beginning and ending total assets.
(3) Calculated as net income attributable to common stockholders divided by the simple average of beginning and ending stockholders'
equity, net of preferred stock, at redemption value.
(4) Calculated as the simple average of beginning and ending stockholders' equity divided by the simple average of beginning and ending
total assets.
(5) Calculated as the simple average of beginning and ending mezzanine equity, stockholders' equity and non-controlling interest -
preferred stock divided by the simple average of beginning and ending total assets.
Lower of cost or fair value adjustment on loans held for sale
(8,748)
(139)
Summary of Operations:
2013
2012
2011
2010
2009
For the Year Ended December 31,
(in thousands, except per share amounts)
Net interest income after provision for loan losses
$
98,603
$
118,289
$
120,695
$
94,150
$
83,055
Gains/(losses) on financial derivatives, hedging activities and
trading assets
30,945
(19,522)
(89,190)
(11,889)
26,958
24,963
24,821
24,091
31,805
Interest Income:
Non-interest income/(loss):
Guarantee and commitment fees
Other-than-temporary impairment losses
Gains on asset sales and debt repurchases
Gains on the repurchase of debt
Gains on the sale of real estate owned
Other income
Non-interest income/(loss)
Non-interest expense
Income before income taxes
Income tax expense
Net income
Less: Net income attributable to non-controlling interest -
preferred stock dividends
Preferred stock dividends
Loss on retirement of preferred stock
Allowance for Losses Activity:
Provision for/(release of) losses
Net charge-offs/(recoveries)
Ending balance
Earnings Per Common Share and Dividends:
Basic earnings per common share
Diluted earnings per common share
Common stock dividends per common share
Regulatory Capital:
—
2,113
1,462
1,236
—
3,057
65,771
33,107
131,267
33,752
97,515
(22,187)
(3,495)
—
448
4,004
13,334
6.64
6.41
0.48
$
$
$
—
18
—
878
(5,943)
3,341
3,735
30,908
91,116
22,156
68,960
(22,187)
(2,879)
—
1,875
2,501
16,890
4.19
3.98
0.40
$
$
$
—
269
—
974
8,887
6,850
(47,389)
28,659
44,647
5,797
38,850
(22,187)
(2,879)
—
—
266
—
10
1,244
4,974
32,627
66,497
13,797
52,700
(20,707)
(4,129)
(5,784)
$
$
$
$
$
$
(2,347) $
4,310
252
17,516
(1,618)
20,115
$
1.32
1.28
0.20
2.16
2.08
0.20
64,570
(3,994)
4,934
—
—
1,578
98,754
29,692
152,117
52,517
99,600
(17,302)
—
—
5,242
7,490
14,187
8.12
8.04
0.20
Net income attributable to common stockholders
71,833
43,894
13,784
$
22,080
82,298
Statutory minimum capital requirement
$
398,531
$
374,037
$
348,649
$
300,996
$
216,959
Core capital
Excess capital
590,671
192,140
518,993
144,956
475,163
126,514
460,602
159,606
337,153
120,194
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial information included in this report is consolidated to include the accounts of Farmer Mac and its
two subsidiaries – Farmer Mac Mortgage Securities Corporation and Farmer Mac II LLC. Farmer Mac II
LLC is a Delaware limited liability company that operates substantially all of Farmer Mac's USDA
Guarantees line of business – primarily the acquisition of USDA Securities. The business operations of
Farmer Mac II LLC began in January 2010. Since then, Farmer Mac has operated only that part of the
USDA Guarantees line of business that involves the issuance of Farmer Mac Guaranteed Securities
backed by USDA Securities to investors other than Farmer Mac or Farmer Mac II LLC. Although Farmer
Mac II LLC may issue securities in these transactions, Farmer Mac II LLC does not guarantee any USDA
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of operations data for the five-year period then ended. This data should be reviewed in conjunction with
the audited consolidated financial statements and related notes and with "Item 7—Management's
Discussion and Analysis of Financial Condition and Results of Operations" included in this Annual Report
on Form 10-K.
Summary of Financial Condition:
2013
2012
2011
2010
2009
Cash and cash equivalents
Investment securities
$
749,313
$
785,564
$
817,046
$
729,920
$
654,794
2,484,075
2,499,629
2,184,490
1,763,329
1,131,895
Farmer Mac Guaranteed Securities
5,091,600
4,766,258
4,289,272
2,907,264
3,398,996
As of December 31,
(dollars in thousands)
USDA Securities (1)
Loans, net
Total assets
Notes payable:
Due within one year
Due after one year
Total liabilities
Mezzanine equity
Stockholders' equity
Non-controlling interest - preferred stock
Selected Financial Ratios:
Return on average assets (2)
Return on average common equity (3)
Average equity to assets (4)
Average total equity to assets (5)
1,612,013
1,590,783
1,491,905
1,317,444
—
3,193,248
2,729,774
2,894,156
2,558,599
753,720
13,361,780
12,622,201
11,883,508
9,479,914
6,138,813
7,338,781
6,567,366
6,087,879
4,509,419
3,662,898
5,001,169
5,034,739
4,104,882
3,430,656
1,908,713
12,787,311
12,029,239
11,328,975
9,001,037
5,798,406
—
332,616
241,853
—
351,109
241,853
—
312,680
241,853
—
237,024
241,853
144,216
196,191
—
0.55%
25.30%
2.63%
4.49%
0.36%
16.00%
2.71%
4.68%
0.13%
6.34%
2.57%
4.84%
0.28%
13.88%
2.77%
5.25%
1.46%
113.70%
1.88%
4.45%
(1) Prior to 2010, USDA Securities were included in Farmer Mac Guaranteed Securities.
(2) Calculated as net income attributable to common stockholders divided by the simple average of beginning and ending total assets.
(3) Calculated as net income attributable to common stockholders divided by the simple average of beginning and ending stockholders'
equity, net of preferred stock, at redemption value.
(4) Calculated as the simple average of beginning and ending stockholders' equity divided by the simple average of beginning and ending
total assets.
(5) Calculated as the simple average of beginning and ending mezzanine equity, stockholders' equity and non-controlling interest -
preferred stock divided by the simple average of beginning and ending total assets.
Item 6.
Selected Financial Data
Summary of Operations:
2013
2012
2011
2010
2009
For the Year Ended December 31,
The selected consolidated financial data presented below is summarized from Farmer Mac's consolidated
balance sheet data as of December 31, 2013 and the five-year period then ended, as well as selected results
Interest Income:
(in thousands, except per share amounts)
Net interest income after provision for loan losses
$
98,603
$
118,289
$
120,695
$
94,150
$
83,055
Non-interest income/(loss):
Guarantee and commitment fees
26,958
24,963
24,821
24,091
31,805
(8,748)
(139)
Gains/(losses) on financial derivatives, hedging activities and
trading assets
30,945
(19,522)
(89,190)
(11,889)
Other-than-temporary impairment losses
Gains on asset sales and debt repurchases
Gains on the repurchase of debt
Gains on the sale of real estate owned
Lower of cost or fair value adjustment on loans held for sale
Other income
Non-interest income/(loss)
Non-interest expense
Income before income taxes
Income tax expense
Net income
Less: Net income attributable to non-controlling interest -
preferred stock dividends
Preferred stock dividends
Loss on retirement of preferred stock
Net income attributable to common stockholders
Allowance for Losses Activity:
Provision for/(release of) losses
Net charge-offs/(recoveries)
Ending balance
Earnings Per Common Share and Dividends:
Basic earnings per common share
Diluted earnings per common share
Common stock dividends per common share
Regulatory Capital:
—
2,113
1,462
1,236
—
3,057
65,771
33,107
131,267
33,752
97,515
(22,187)
(3,495)
—
71,833
448
4,004
13,334
6.64
6.41
0.48
$
$
$
—
18
—
878
(5,943)
3,341
3,735
30,908
91,116
22,156
68,960
(22,187)
(2,879)
—
43,894
1,875
2,501
16,890
4.19
3.98
0.40
$
$
$
—
269
—
974
8,887
6,850
(47,389)
28,659
44,647
5,797
38,850
(22,187)
(2,879)
—
—
266
—
10
1,244
4,974
32,627
66,497
13,797
52,700
(20,707)
(4,129)
(5,784)
$
$
$
13,784
$
22,080
(2,347) $
4,310
252
17,516
(1,618)
20,115
$
1.32
1.28
0.20
2.16
2.08
0.20
$
$
$
64,570
(3,994)
4,934
—
—
1,578
98,754
29,692
152,117
52,517
99,600
—
(17,302)
—
82,298
5,242
7,490
14,187
8.12
8.04
0.20
Statutory minimum capital requirement
$
398,531
$
374,037
$
348,649
$
300,996
$
216,959
Core capital
Excess capital
590,671
192,140
518,993
144,956
475,163
126,514
460,602
159,606
337,153
120,194
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial information included in this report is consolidated to include the accounts of Farmer Mac and its
two subsidiaries – Farmer Mac Mortgage Securities Corporation and Farmer Mac II LLC. Farmer Mac II
LLC is a Delaware limited liability company that operates substantially all of Farmer Mac's USDA
Guarantees line of business – primarily the acquisition of USDA Securities. The business operations of
Farmer Mac II LLC began in January 2010. Since then, Farmer Mac has operated only that part of the
USDA Guarantees line of business that involves the issuance of Farmer Mac Guaranteed Securities
backed by USDA Securities to investors other than Farmer Mac or Farmer Mac II LLC. Although Farmer
Mac II LLC may issue securities in these transactions, Farmer Mac II LLC does not guarantee any USDA
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Securities it holds or any Farmer Mac Guaranteed Securities issued by Farmer Mac or Farmer Mac II
LLC.
This discussion and analysis of financial condition and results of operations should be read together with
Farmer Mac's consolidated financial statements and the related notes to the consolidated financial
statements for the fiscal years ended December 31, 2013, 2012, and 2011.
Overview
At the end of 2013, Farmer Mac's outstanding program volume and core earnings reached record levels,
and asset quality remained high. Spread compression on new Farm & Ranch loan purchases, which has
been continuing for the past several years, stabilized in the second half of 2013 and showed modest
expansion in the fourth quarter. Farmer Mac also increased the amount of its Tier 1 capital during 2013
and finished the year with a significant amount of total equity capital, aided by strong earnings and the
issuance of $60.0 million of Tier 1-eligible, non-cumulative perpetual preferred stock in January 2013.
Farmer Mac is prepared to build on these positive results, while remaining committed to delivering
stockholder value and fulfilling its mission. Farmer Mac believes that its financial condition and earnings
outlook remain strong, as indicated by the recent increase in the quarterly dividend declared on all three
classes of common stock.
During the year, Farmer Mac added $3.1 billion of new business volume, which included purchases of
AgVantage securities in an aggregate amount of $1.3 billion under the Farm & Ranch and Rural Utilities
lines of business and purchases of Farm & Ranch loans in an aggregate amount of $824.9 million. This
amount of Farm & Ranch loan purchases is 45 percent higher than the $570.3 million purchased in 2012
and 66 percent higher than the $495.5 million purchased in 2011. Taking into account maturities and
paydowns on existing assets, this new business increased the aggregate outstanding amount of business
volume to $14.0 billion as of December 31, 2013, compared to $13.0 billion as of December 31, 2012, and
$11.9 billion as of December 31, 2011.
Farmer Mac's GAAP net income attributable to common stockholders for 2013 was $71.8 million,
compared to net income of $43.9 million and $13.8 million, respectively, for 2012 and 2011. While non-
GAAP core earnings grew steadily over these periods, the sharp increases in Farmer Mac's GAAP net
income in each of these years were mostly due to the effects of fair value changes on financial derivatives
and hedged assets. In 2013, acceleration of the amortization of premiums for certain Rural Utilities loans
that were consolidated at fair value and that were recast into new loan products in the fourth quarter of the
year partially offset the increase in GAAP net income.
Farmer Mac's non-GAAP core earnings for 2013 were a record $54.9 million, compared to $49.6 million
in 2012 and $42.9 million in 2011. Farmer Mac's net effective spread was $105.3 million (86 basis points)
in 2013, compared to $106.6 million (95 basis points) in 2012 and $89.4 million (96 basis points) in 2011.
While the spreads on new Farm & Ranch loans added during the second half of 2013 stabilized and were
at levels that met or exceeded current average net effective spreads as of December 31, 2013, repayments
of existing Farm & Ranch loans with higher historical spreads relative to the new Farm & Ranch loans
added in 2013, combined with the effect of refinancing existing floating rate assets at higher costs, were
the primary drivers of the decrease in net effective spread in 2013. Reinvestment of maturing AgVantage
securities at lower market spreads also contributed to the decrease in net effective spread in 2013. For
more information on Farmer Mac's use of core earnings, a non-GAAP measure, see "— Results of
Operations."
The loans included in Farmer Mac's three lines of business continued to perform well during 2013. As of
December 31, 2013, Farmer Mac's 90-day delinquencies in the Farm & Ranch line of business were $28.3
million (0.55 percent of the non-AgVantage Farm & Ranch portfolio), down from $33.3 million (0.70
percent) as of December 31, 2012, and down from $40.6 million (0.93 percent) as of December 31, 2011.
As 2013 progressed, the drought conditions experienced in the Midwest and Great Plains during 2012 that
had caused significant deterioration in the yields of feed grains were relieved and ultimately had no
measurable impact on the credit quality of Farmer Mac's portfolio. Farmer Mac continues to monitor the
effects of a persistent drought affecting certain western regions in the United States that worsened over the
course of 2013 and remains significant in early 2014. As of December 31, 2013, this drought has had no
measurable impact on the credit quality of Farmer Mac's portfolio. Farmer Mac believes that it generally
remains well-collateralized on its exposures in drought areas.
When analyzing the overall risk profile of its entire portfolio, Farmer Mac takes into account more than
the loan delinquency percentages in its Farm & Ranch line of business. Farmer Mac's portfolio also
includes AgVantage securities and rural utilities loans, neither of which had any delinquencies as of
December 31, 2013, and USDA Securities, which are backed by the full faith and credit of the United
States. Across Farmer Mac's three lines of business, 90-day delinquencies represented 0.20 percent of
total business volume as of December 31, 2013, compared to 0.26 percent as of December 31, 2012 and
0.34 percent as of December 31, 2011.
As of December 31, 2013, Farmer Mac's core capital of $590.7 million exceeded its minimum capital
requirement of $398.5 million by $192.2 million. As noted, Farmer Mac issued $60.0 million of non--
cumulative perpetual preferred stock (Series A Preferred Stock) in January 2013 and used the proceeds to
redeem and retire all $57.6 million of its outstanding Series C Preferred Stock. See "— Outlook" for
further discussion about the opportunities that Farmer Mac foresees for future business growth.
Critical Accounting Policies and Estimates
The preparation of Farmer Mac's consolidated financial statements in conformity with GAAP requires the
use of estimates and assumptions that affect the amounts reported in the consolidated financial statements
and related notes for the periods presented. Actual results could differ from those estimates. The critical
accounting policies that are both important to the portrayal of Farmer Mac's financial condition and results
of operations and require complex, subjective judgments are the accounting policies for: (1) the allowance
for losses, (2) fair value measurement, and (3) other-than-temporary impairment.
Allowance for Losses
Farmer Mac maintains an allowance for losses to cover estimated probable losses incurred as of the
balance sheet date on loans held for investment ("allowance for loan losses") and loans that underlie off-
balance sheet Farmer Mac Guaranteed Securities and LTSPCs ("reserve for losses") based on available
information. Farmer Mac Guaranteed Securities do not include AgVantage securities with regard to the
allowance for losses discussion. For purposes of this accounting policy, the allowance for loan losses and
the reserve for losses are described collectively as the "allowance for losses" because the estimation
methodology is identical for loans that are held for investment and for loans that underlie off-balance sheet
Farmer Mac Guaranteed Securities and LTSPCs. Disaggregation by commodity type is performed, where
appropriate, in analyzing the need for an allowance for losses.
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Securities it holds or any Farmer Mac Guaranteed Securities issued by Farmer Mac or Farmer Mac II
This discussion and analysis of financial condition and results of operations should be read together with
Farmer Mac's consolidated financial statements and the related notes to the consolidated financial
statements for the fiscal years ended December 31, 2013, 2012, and 2011.
LLC.
Overview
At the end of 2013, Farmer Mac's outstanding program volume and core earnings reached record levels,
and asset quality remained high. Spread compression on new Farm & Ranch loan purchases, which has
been continuing for the past several years, stabilized in the second half of 2013 and showed modest
expansion in the fourth quarter. Farmer Mac also increased the amount of its Tier 1 capital during 2013
and finished the year with a significant amount of total equity capital, aided by strong earnings and the
issuance of $60.0 million of Tier 1-eligible, non-cumulative perpetual preferred stock in January 2013.
Farmer Mac is prepared to build on these positive results, while remaining committed to delivering
stockholder value and fulfilling its mission. Farmer Mac believes that its financial condition and earnings
outlook remain strong, as indicated by the recent increase in the quarterly dividend declared on all three
classes of common stock.
During the year, Farmer Mac added $3.1 billion of new business volume, which included purchases of
AgVantage securities in an aggregate amount of $1.3 billion under the Farm & Ranch and Rural Utilities
lines of business and purchases of Farm & Ranch loans in an aggregate amount of $824.9 million. This
amount of Farm & Ranch loan purchases is 45 percent higher than the $570.3 million purchased in 2012
and 66 percent higher than the $495.5 million purchased in 2011. Taking into account maturities and
paydowns on existing assets, this new business increased the aggregate outstanding amount of business
volume to $14.0 billion as of December 31, 2013, compared to $13.0 billion as of December 31, 2012, and
$11.9 billion as of December 31, 2011.
Farmer Mac's GAAP net income attributable to common stockholders for 2013 was $71.8 million,
compared to net income of $43.9 million and $13.8 million, respectively, for 2012 and 2011. While non-
GAAP core earnings grew steadily over these periods, the sharp increases in Farmer Mac's GAAP net
income in each of these years were mostly due to the effects of fair value changes on financial derivatives
and hedged assets. In 2013, acceleration of the amortization of premiums for certain Rural Utilities loans
that were consolidated at fair value and that were recast into new loan products in the fourth quarter of the
year partially offset the increase in GAAP net income.
Farmer Mac's non-GAAP core earnings for 2013 were a record $54.9 million, compared to $49.6 million
in 2012 and $42.9 million in 2011. Farmer Mac's net effective spread was $105.3 million (86 basis points)
in 2013, compared to $106.6 million (95 basis points) in 2012 and $89.4 million (96 basis points) in 2011.
While the spreads on new Farm & Ranch loans added during the second half of 2013 stabilized and were
at levels that met or exceeded current average net effective spreads as of December 31, 2013, repayments
of existing Farm & Ranch loans with higher historical spreads relative to the new Farm & Ranch loans
added in 2013, combined with the effect of refinancing existing floating rate assets at higher costs, were
the primary drivers of the decrease in net effective spread in 2013. Reinvestment of maturing AgVantage
securities at lower market spreads also contributed to the decrease in net effective spread in 2013. For
more information on Farmer Mac's use of core earnings, a non-GAAP measure, see "— Results of
Operations."
The loans included in Farmer Mac's three lines of business continued to perform well during 2013. As of
December 31, 2013, Farmer Mac's 90-day delinquencies in the Farm & Ranch line of business were $28.3
million (0.55 percent of the non-AgVantage Farm & Ranch portfolio), down from $33.3 million (0.70
percent) as of December 31, 2012, and down from $40.6 million (0.93 percent) as of December 31, 2011.
As 2013 progressed, the drought conditions experienced in the Midwest and Great Plains during 2012 that
had caused significant deterioration in the yields of feed grains were relieved and ultimately had no
measurable impact on the credit quality of Farmer Mac's portfolio. Farmer Mac continues to monitor the
effects of a persistent drought affecting certain western regions in the United States that worsened over the
course of 2013 and remains significant in early 2014. As of December 31, 2013, this drought has had no
measurable impact on the credit quality of Farmer Mac's portfolio. Farmer Mac believes that it generally
remains well-collateralized on its exposures in drought areas.
When analyzing the overall risk profile of its entire portfolio, Farmer Mac takes into account more than
the loan delinquency percentages in its Farm & Ranch line of business. Farmer Mac's portfolio also
includes AgVantage securities and rural utilities loans, neither of which had any delinquencies as of
December 31, 2013, and USDA Securities, which are backed by the full faith and credit of the United
States. Across Farmer Mac's three lines of business, 90-day delinquencies represented 0.20 percent of
total business volume as of December 31, 2013, compared to 0.26 percent as of December 31, 2012 and
0.34 percent as of December 31, 2011.
As of December 31, 2013, Farmer Mac's core capital of $590.7 million exceeded its minimum capital
requirement of $398.5 million by $192.2 million. As noted, Farmer Mac issued $60.0 million of non--
cumulative perpetual preferred stock (Series A Preferred Stock) in January 2013 and used the proceeds to
redeem and retire all $57.6 million of its outstanding Series C Preferred Stock. See "— Outlook" for
further discussion about the opportunities that Farmer Mac foresees for future business growth.
Critical Accounting Policies and Estimates
The preparation of Farmer Mac's consolidated financial statements in conformity with GAAP requires the
use of estimates and assumptions that affect the amounts reported in the consolidated financial statements
and related notes for the periods presented. Actual results could differ from those estimates. The critical
accounting policies that are both important to the portrayal of Farmer Mac's financial condition and results
of operations and require complex, subjective judgments are the accounting policies for: (1) the allowance
for losses, (2) fair value measurement, and (3) other-than-temporary impairment.
Allowance for Losses
Farmer Mac maintains an allowance for losses to cover estimated probable losses incurred as of the
balance sheet date on loans held for investment ("allowance for loan losses") and loans that underlie off-
balance sheet Farmer Mac Guaranteed Securities and LTSPCs ("reserve for losses") based on available
information. Farmer Mac Guaranteed Securities do not include AgVantage securities with regard to the
allowance for losses discussion. For purposes of this accounting policy, the allowance for loan losses and
the reserve for losses are described collectively as the "allowance for losses" because the estimation
methodology is identical for loans that are held for investment and for loans that underlie off-balance sheet
Farmer Mac Guaranteed Securities and LTSPCs. Disaggregation by commodity type is performed, where
appropriate, in analyzing the need for an allowance for losses.
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The allowance for loan losses is increased through periodic provisions for loan losses that are charged
against net interest income and the reserve for losses is increased through provisions for losses that are
charged to non-interest expense. Both the allowance for loan losses and reserve for losses are reduced by
charge-offs for actual losses, net of recoveries. Charge-offs represent losses on the outstanding principal
balance, any interest payments previously accrued or advanced, and expected costs of liquidation.
Negative provisions, or releases of allowance for losses, are recorded in the event that the estimate of
probable losses as of the end of a period is lower than the estimate at the beginning of the period.
The total allowance for losses consists of a general allowance for losses and a specific allowance for
individually identified impaired loans.
General Allowance for Losses
Farm & Ranch
Farmer Mac's methodology for determining its general allowance for losses incorporates Farmer Mac's
automated loan classification system. That system scores loans based on criteria such as historical
repayment performance, indicators of current financial condition, loan seasoning, loan size, and loan-to-
value ratio. For purposes of the loss allowance methodology, the loans in Farmer Mac's portfolio of loans
and loans that underlie off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs have been
scored and classified for each calendar quarter since first quarter 2000. The allowance methodology
captures the migration of loan scores across concurrent and overlapping three-year time horizons and
calculates loss rates separately within each loan classification for (1) loans held for investment and (2)
loans that underlie off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs. The calculated
loss rates are applied to the current classification distribution of unimpaired loans in Farmer Mac's
portfolio to estimate probable losses, on the assumption that the historical credit losses and trends used to
calculate loss rates will continue in the future. Management evaluates this assumption by taking into
consideration various factors, including:
economic conditions;
•
• geographic and agricultural commodity/product concentrations in the portfolio;
the credit profile of the portfolio;
•
• delinquency trends of the portfolio;
• historical charge-off and recovery activities of the portfolio; and
• other factors to capture current portfolio trends and characteristics that differ from historical
experience.
Management believes that this methodology produces a reasonable estimate of probable losses, as of the
balance sheet date, for all loans included in the Farm & Ranch line of business, including loans held for
investment and loans that underlie off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs.
Rural Utilities
Farmer Mac separately evaluates the rural utilities loans it holds for investment to estimate any probable
losses inherent in those assets. Farmer Mac has not provided an allowance for losses for the portfolio
segment related to the Rural Utilities program based on the credit quality of the collateral supporting rural
utilities assets.
Specific Allowance for Impaired Loans
Farmer Mac individually analyzes certain loans in its portfolio for impairment. Farmer Mac's individually
impaired loans generally include loans 90 days or more past due, in foreclosure, restructured, in
bankruptcy, and certain performing loans that have previously been delinquent or are secured by real
estate that produces agricultural commodities or products that are currently under stress.
For individually identified impaired loans with an updated appraisal, other updated collateral valuation, or
management's estimate of discounted collateral value, this analysis compares the measurement of the fair
value of the collateral to the total recorded investment in the loan. The total recorded investment in the
loan includes principal, interest, and advances, net of any charge-offs. In the event that an individually
analyzed loan's collateral value does not equal or exceed its total recorded investment, Farmer Mac
provides a specific allowance for loss in the amount of the difference between the recorded investment and
fair value, less estimated costs to liquidate the collateral. Estimated selling costs are based on historical
selling costs incurred by Farmer Mac or management's best estimate of selling costs for a particular
property. For individually identified impaired loans without updated valuations, this analysis is performed
in the aggregate considering similar risk characteristics of the loans and historical statistics. Farmer Mac
considers appraisals that are more than two years old as of the reporting date not to be updated for
purposes of individually analyzing loans.
Farmer Mac uses a risk-based approach in determining the necessity of obtaining updated appraisals on
impaired loans. For example, larger exposures associated with highly improved and specialized collateral
will generally receive updated appraisals once the loans are identified as impaired. In addition, updated
appraisals are always obtained during the foreclosure process. Depending on the risk factors associated
with the loan and underlying collateral, which can vary widely depending on the circumstances of the loan
and collateral, this can occur early in the foreclosure process, while in other instances this may occur just
prior to the transfer of title. As part of its routine credit review process, Farmer Mac often will exercise
judgment in discounting an appraised value due to local real estate trends or the condition of the property
(e.g., following an inspection by Farmer Mac or the servicer). In addition, a property appraised value may
be discounted based on the market's reaction to Farmer Mac's asking price for sale of the property.
Further information regarding the allowance for losses is included in "—Risk Management—Credit Risk
– Loans and Guarantees" and Note 2(j) to the consolidated financial statements.
Fair Value Measurement
A significant portion of Farmer Mac's assets consists of financial instruments that are measured at fair
value in the consolidated balance sheets. For financial instruments that are complex in nature or for which
observable inputs are not available, the measurement of fair value requires management to make
significant judgments and assumptions. These judgments and assumptions, as well as changes in market
conditions, may have a material impact on the consolidated balance sheets and statements of operations.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (also referred to as an exit price) and
establishes a hierarchy for ranking fair value measurements. In determining fair value, Farmer Mac uses
various valuation approaches, including market and income approaches. The fair value hierarchy requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. When available, the fair value of Farmer Mac's financial instruments is based on
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66
The allowance for loan losses is increased through periodic provisions for loan losses that are charged
against net interest income and the reserve for losses is increased through provisions for losses that are
charged to non-interest expense. Both the allowance for loan losses and reserve for losses are reduced by
charge-offs for actual losses, net of recoveries. Charge-offs represent losses on the outstanding principal
balance, any interest payments previously accrued or advanced, and expected costs of liquidation.
Negative provisions, or releases of allowance for losses, are recorded in the event that the estimate of
probable losses as of the end of a period is lower than the estimate at the beginning of the period.
The total allowance for losses consists of a general allowance for losses and a specific allowance for
individually identified impaired loans.
General Allowance for Losses
Farm & Ranch
Farmer Mac's methodology for determining its general allowance for losses incorporates Farmer Mac's
automated loan classification system. That system scores loans based on criteria such as historical
repayment performance, indicators of current financial condition, loan seasoning, loan size, and loan-to-
value ratio. For purposes of the loss allowance methodology, the loans in Farmer Mac's portfolio of loans
and loans that underlie off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs have been
scored and classified for each calendar quarter since first quarter 2000. The allowance methodology
captures the migration of loan scores across concurrent and overlapping three-year time horizons and
calculates loss rates separately within each loan classification for (1) loans held for investment and (2)
loans that underlie off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs. The calculated
loss rates are applied to the current classification distribution of unimpaired loans in Farmer Mac's
portfolio to estimate probable losses, on the assumption that the historical credit losses and trends used to
calculate loss rates will continue in the future. Management evaluates this assumption by taking into
• geographic and agricultural commodity/product concentrations in the portfolio;
consideration various factors, including:
economic conditions;
•
•
the credit profile of the portfolio;
• delinquency trends of the portfolio;
experience.
Management believes that this methodology produces a reasonable estimate of probable losses, as of the
balance sheet date, for all loans included in the Farm & Ranch line of business, including loans held for
investment and loans that underlie off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs.
Rural Utilities
utilities assets.
Farmer Mac separately evaluates the rural utilities loans it holds for investment to estimate any probable
losses inherent in those assets. Farmer Mac has not provided an allowance for losses for the portfolio
segment related to the Rural Utilities program based on the credit quality of the collateral supporting rural
Specific Allowance for Impaired Loans
Farmer Mac individually analyzes certain loans in its portfolio for impairment. Farmer Mac's individually
impaired loans generally include loans 90 days or more past due, in foreclosure, restructured, in
bankruptcy, and certain performing loans that have previously been delinquent or are secured by real
estate that produces agricultural commodities or products that are currently under stress.
For individually identified impaired loans with an updated appraisal, other updated collateral valuation, or
management's estimate of discounted collateral value, this analysis compares the measurement of the fair
value of the collateral to the total recorded investment in the loan. The total recorded investment in the
loan includes principal, interest, and advances, net of any charge-offs. In the event that an individually
analyzed loan's collateral value does not equal or exceed its total recorded investment, Farmer Mac
provides a specific allowance for loss in the amount of the difference between the recorded investment and
fair value, less estimated costs to liquidate the collateral. Estimated selling costs are based on historical
selling costs incurred by Farmer Mac or management's best estimate of selling costs for a particular
property. For individually identified impaired loans without updated valuations, this analysis is performed
in the aggregate considering similar risk characteristics of the loans and historical statistics. Farmer Mac
considers appraisals that are more than two years old as of the reporting date not to be updated for
purposes of individually analyzing loans.
Farmer Mac uses a risk-based approach in determining the necessity of obtaining updated appraisals on
impaired loans. For example, larger exposures associated with highly improved and specialized collateral
will generally receive updated appraisals once the loans are identified as impaired. In addition, updated
appraisals are always obtained during the foreclosure process. Depending on the risk factors associated
with the loan and underlying collateral, which can vary widely depending on the circumstances of the loan
and collateral, this can occur early in the foreclosure process, while in other instances this may occur just
prior to the transfer of title. As part of its routine credit review process, Farmer Mac often will exercise
judgment in discounting an appraised value due to local real estate trends or the condition of the property
(e.g., following an inspection by Farmer Mac or the servicer). In addition, a property appraised value may
be discounted based on the market's reaction to Farmer Mac's asking price for sale of the property.
Further information regarding the allowance for losses is included in "—Risk Management—Credit Risk
– Loans and Guarantees" and Note 2(j) to the consolidated financial statements.
• historical charge-off and recovery activities of the portfolio; and
• other factors to capture current portfolio trends and characteristics that differ from historical
Fair Value Measurement
A significant portion of Farmer Mac's assets consists of financial instruments that are measured at fair
value in the consolidated balance sheets. For financial instruments that are complex in nature or for which
observable inputs are not available, the measurement of fair value requires management to make
significant judgments and assumptions. These judgments and assumptions, as well as changes in market
conditions, may have a material impact on the consolidated balance sheets and statements of operations.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (also referred to as an exit price) and
establishes a hierarchy for ranking fair value measurements. In determining fair value, Farmer Mac uses
various valuation approaches, including market and income approaches. The fair value hierarchy requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. When available, the fair value of Farmer Mac's financial instruments is based on
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quoted market prices, valuation techniques that use observable market-based inputs, or unobservable
inputs that are corroborated by market data. Pricing information obtained from third parties is internally
validated for reasonableness prior to use in the consolidated financial statements.
When observable market prices are not readily available, Farmer Mac estimates fair value using
techniques that rely on alternate market data or internally developed models using significant inputs that
are generally less readily observable. Market data includes prices of financial instruments with similar
maturities and characteristics, interest rate yield curves, measures of volatility, and prepayment rates. If
market data needed to estimate fair value is not available, Farmer Mac estimates fair value using
internally-developed models that employ a discounted cash flow approach. Even when market
assumptions are not readily available, Farmer Mac's assumptions reflect those that market participants
would likely use in pricing the asset or liability at the measurement date.
Farmer Mac's assets and liabilities presented at fair value in the consolidated balance sheets on a recurring
basis include investment securities, Farmer Mac Guaranteed Securities, USDA Securities, and financial
derivatives. The changes in fair value from period to period are recorded either in the consolidated
statements of comprehensive income as other comprehensive (loss)/income, net of tax or in the
consolidated statements of operations as gains/(losses) on financial derivatives and hedging activities or
gains/(losses) on trading assets.
The fair value hierarchy ranks the quality and reliability of the information used to determine fair
values. The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities and the lowest priority to unobservable inputs. The hierarchy has the following three
levels to classify fair value measurements:
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
Level 2 Quoted prices in markets that are not active or financial instruments for which all
Level 3
significant inputs are observable, either directly or indirectly.
Prices or valuations that require unobservable inputs that are significant to the fair value
measurement.
As of December 31, 2013, Farmer Mac's assets and liabilities recorded at fair value included financial
instruments valued at $6.8 billion whose fair values were estimated by management in the absence of
readily determinable fair values (i.e., level 3). These financial instruments measured as level 3
represented 51 percent of total assets and 73 percent of financial instruments measured at fair value as of
December 31, 2013.
Assets underlying (or, in the case of USDA Securities, consisting of) these financial instruments measured
as level 3 primarily include the following:
Type of Financial Instrument
Underlying Assets
Farm & Ranch Guaranteed Securities
General obligations of various issuers that are secured
by agricultural real estate loans eligible under the
standards for the Farm & Ranch line of business.
Farmer Mac Guaranteed USDA Securities
Portions of loans guaranteed by the USDA pursuant to
the Consolidated Farm Rural Development Act.
USDA Securities
Portions of loans guaranteed by the USDA pursuant to
the Consolidated Farm Rural Development Act.
Rural Utilities Guaranteed Securities
General obligations of issuers (currently only CFC) that
are secured by rural utilities loans eligible under the
standards for the Rural Utilities line of business.
Auction-rate certificates ("ARCs")
Guaranteed student loans that are backed by the full
faith and credit of the United States.
Further information regarding fair value measurement is included in Note 13 to the consolidated financial
statements.
Other-than-Temporary Impairment of Investment Securities
If the fair value of a security is less than its amortized cost basis as of the balance sheet date, Farmer Mac
assesses whether the impairment is temporary or other-than-temporary. Other-than-temporary impairment
occurs when the fair value of an available-for-sale security is below its amortized cost, and it is
determined that management (1) has the intent to sell the security or (2) more likely than not will be
required to sell the security before its anticipated recovery. In these cases, the entire difference between
the amortized cost basis of the security and the fair value as of the balance sheet date is recognized as
other-than-temporary impairment in earnings.
For debt securities, if management does not intend to sell the security and it is not more likely than not
that it will be required to sell the security before anticipated recovery, Farmer Mac determines whether a
credit loss exists. Many factors considered in this determination involve significant judgment, including
recent events specific to the issuer or the related industry, changes in external credit ratings, the severity
and duration of the impairment, recoveries or additional declines in fair value subsequent to the balance
sheet date, and other relevant information related to the collectability of the security. If Farmer Mac
determines that the present value of the cash flows likely to be collected from the security is greater than
the amortized cost basis of the security, the impairment is deemed to be temporary. Conversely, if the
present value of the cash flows likely to be collected is less than the amortized cost basis of the security, a
credit loss is deemed to have occurred and the security is deemed to be other-than-temporarily impaired
and the amount of the total other-than-temporary impairment related to the credit loss is recognized in
earnings. The amount of the total other-than-temporary impairment related to all other factors is
recognized in other comprehensive income, net of tax.
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quoted market prices, valuation techniques that use observable market-based inputs, or unobservable
inputs that are corroborated by market data. Pricing information obtained from third parties is internally
validated for reasonableness prior to use in the consolidated financial statements.
When observable market prices are not readily available, Farmer Mac estimates fair value using
techniques that rely on alternate market data or internally developed models using significant inputs that
are generally less readily observable. Market data includes prices of financial instruments with similar
maturities and characteristics, interest rate yield curves, measures of volatility, and prepayment rates. If
market data needed to estimate fair value is not available, Farmer Mac estimates fair value using
internally-developed models that employ a discounted cash flow approach. Even when market
assumptions are not readily available, Farmer Mac's assumptions reflect those that market participants
would likely use in pricing the asset or liability at the measurement date.
Farmer Mac's assets and liabilities presented at fair value in the consolidated balance sheets on a recurring
basis include investment securities, Farmer Mac Guaranteed Securities, USDA Securities, and financial
derivatives. The changes in fair value from period to period are recorded either in the consolidated
statements of comprehensive income as other comprehensive (loss)/income, net of tax or in the
consolidated statements of operations as gains/(losses) on financial derivatives and hedging activities or
gains/(losses) on trading assets.
The fair value hierarchy ranks the quality and reliability of the information used to determine fair
values. The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities and the lowest priority to unobservable inputs. The hierarchy has the following three
levels to classify fair value measurements:
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
Level 2 Quoted prices in markets that are not active or financial instruments for which all
significant inputs are observable, either directly or indirectly.
Level 3
Prices or valuations that require unobservable inputs that are significant to the fair value
measurement.
As of December 31, 2013, Farmer Mac's assets and liabilities recorded at fair value included financial
instruments valued at $6.8 billion whose fair values were estimated by management in the absence of
readily determinable fair values (i.e., level 3). These financial instruments measured as level 3
represented 51 percent of total assets and 73 percent of financial instruments measured at fair value as of
December 31, 2013.
Assets underlying (or, in the case of USDA Securities, consisting of) these financial instruments measured
as level 3 primarily include the following:
Type of Financial Instrument
Farm & Ranch Guaranteed Securities
Underlying Assets
General obligations of various issuers that are secured
by agricultural real estate loans eligible under the
standards for the Farm & Ranch line of business.
Farmer Mac Guaranteed USDA Securities
Portions of loans guaranteed by the USDA pursuant to
the Consolidated Farm Rural Development Act.
USDA Securities
Portions of loans guaranteed by the USDA pursuant to
the Consolidated Farm Rural Development Act.
Rural Utilities Guaranteed Securities
General obligations of issuers (currently only CFC) that
are secured by rural utilities loans eligible under the
standards for the Rural Utilities line of business.
Auction-rate certificates ("ARCs")
Guaranteed student loans that are backed by the full
faith and credit of the United States.
Further information regarding fair value measurement is included in Note 13 to the consolidated financial
statements.
Other-than-Temporary Impairment of Investment Securities
If the fair value of a security is less than its amortized cost basis as of the balance sheet date, Farmer Mac
assesses whether the impairment is temporary or other-than-temporary. Other-than-temporary impairment
occurs when the fair value of an available-for-sale security is below its amortized cost, and it is
determined that management (1) has the intent to sell the security or (2) more likely than not will be
required to sell the security before its anticipated recovery. In these cases, the entire difference between
the amortized cost basis of the security and the fair value as of the balance sheet date is recognized as
other-than-temporary impairment in earnings.
For debt securities, if management does not intend to sell the security and it is not more likely than not
that it will be required to sell the security before anticipated recovery, Farmer Mac determines whether a
credit loss exists. Many factors considered in this determination involve significant judgment, including
recent events specific to the issuer or the related industry, changes in external credit ratings, the severity
and duration of the impairment, recoveries or additional declines in fair value subsequent to the balance
sheet date, and other relevant information related to the collectability of the security. If Farmer Mac
determines that the present value of the cash flows likely to be collected from the security is greater than
the amortized cost basis of the security, the impairment is deemed to be temporary. Conversely, if the
present value of the cash flows likely to be collected is less than the amortized cost basis of the security, a
credit loss is deemed to have occurred and the security is deemed to be other-than-temporarily impaired
and the amount of the total other-than-temporary impairment related to the credit loss is recognized in
earnings. The amount of the total other-than-temporary impairment related to all other factors is
recognized in other comprehensive income, net of tax.
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Results of Operations
Farmer Mac's GAAP net income attributable to common stockholders for 2013 was $71.8 million or $6.41
per diluted common share, compared to $43.9 million or $3.98 per diluted common share for 2012, and
$13.8 million or $1.28 per diluted common share for 2011.
Farmer Mac's non-GAAP core earnings were $54.9 million or $4.90 per diluted share in 2013, compared
to $49.6 million or $4.51 per diluted share in 2012, and $42.9 million or $3.97 per diluted common share
in 2011.
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 GAAP net income by excluding the effects of fair value accounting guidance,
which are not expected to have a cumulative net impact on GAAP earnings if the related financial
instruments are held to maturity, as is generally expected. Core earnings also differs from GAAP net
income by excluding specified infrequent or unusual transactions that Farmer Mac believes are not
indicative of future operating results and that may not reflect the trends and economic financial
performance of Farmer Mac's core business. This non-GAAP financial measure may not be comparable to
similarly labeled non-GAAP financial measures disclosed by other companies. Farmer Mac's disclosure
of this non-GAAP measure is intended to be supplemental in nature, and is not meant to be considered in
isolation from, as a substitute for, or as more important than, the related financial information prepared in
accordance with GAAP.
A reconciliation of Farmer Mac's GAAP net income attributable to common stockholders to core earnings
is presented in the following table, and the adjustments are described in more detail below the table:
Table 1
Reconciliation of GAAP Net Income Attributable to Common Stockholders to Core Earnings
GAAP net income attributable to common stockholders
$
71,833
$
43,894
$
13,784
For the Years Ended December 31,
2013
2012
2011
(in thousands, except per share amounts)
Less the after-tax effects of:
Unrealized gains/(losses) on financial derivatives and hedging activities
Unrealized (losses)/gains on trading assets
Amortization of premiums/discounts and deferred gains on assets consolidated at
Net effects of settlements on agency forward contracts
Lower of cost or fair value adjustment on loans held for sale
fair value (1)
Sub-total
Core earnings
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70
Includes $10.3 million related to the acceleration of premium amortization in fourth quarter 2013 due to significant refinancing activity in the Rural
54,892
$
49,642
$
105,251
$
106,557
$
4,325
200
(7,266)
856
(3,863)
(5,748)
26,622
501
133,680
1,875
134
(878)
1,131
19,186
11,123
2,281
32,590
99,959
25,251
22,187
2,879
29,368
(533)
(12,467)
573
—
16,941
27,922
3,421
136,594
448
423
(1,236)
(365)
17,817
11,563
2,375
31,755
105,204
24,630
22,187
3,495
$
$
$
$
54,892
$
49,642
$
$
5.07
4.90
$
4.74
4.51
—
11,209
10,479
11,019
(30,930)
2,246
(3,692)
(2,523)
5,776
(29,123)
42,907
89,419
28,090
(662)
116,847
(2,347)
823
(974)
(2,498)
17,884
9,732
2,277
29,893
89,452
21,479
22,187
2,879
42,907
4.15
3.97
10,335
10,802
Composition of Core Earnings:
Revenues:
Net effective spread
Guarantee and commitment fees
Other
Total revenues
Credit related (income)/expenses:
Provisions for/(release of) losses
REO operating expenses
Gains on sale of REO
Total credit related (income)/expenses
Operating expenses:
Compensation & employee benefits
General & Administrative
Regulatory fees
Total operating expenses
Net earnings
Income taxes
Non-controlling interest
Preferred stock dividends
Core earnings
Core earnings per share:
Weighted-average shares:
Basic
Diluted
Basic
Diluted
(1)
Utilities line of business.
A reconciliation of Farmer Mac's GAAP net income attributable to common stockholders to core earnings
is presented in the following table, and the adjustments are described in more detail below the table:
Table 1
Reconciliation of GAAP Net Income Attributable to Common Stockholders to Core Earnings
For the Years Ended December 31,
2013
2012
2011
(in thousands, except per share amounts)
GAAP net income attributable to common stockholders
$
71,833
$
43,894
$
13,784
Less the after-tax effects of:
Unrealized gains/(losses) on financial derivatives and hedging activities
Unrealized (losses)/gains on trading assets
Amortization of premiums/discounts and deferred gains on assets consolidated at
fair value (1)
Net effects of settlements on agency forward contracts
Lower of cost or fair value adjustment on loans held for sale
Sub-total
Core earnings
Composition of Core Earnings:
Revenues:
Net effective spread
Guarantee and commitment fees
Other
Total revenues
Credit related (income)/expenses:
Provisions for/(release of) losses
REO operating expenses
Gains on sale of REO
Total credit related (income)/expenses
Operating expenses:
Compensation & employee benefits
General & Administrative
Regulatory fees
Total operating expenses
Net earnings
Income taxes
Non-controlling interest
Preferred stock dividends
Core earnings
Core earnings per share:
Basic
Diluted
Weighted-average shares:
Basic
Diluted
29,368
(533)
(12,467)
573
—
16,941
4,325
200
(7,266)
856
(3,863)
(5,748)
54,892
$
49,642
$
105,251
$
106,557
$
27,922
3,421
136,594
448
423
(1,236)
(365)
17,817
11,563
2,375
31,755
105,204
24,630
22,187
3,495
26,622
501
133,680
1,875
134
(878)
1,131
19,186
11,123
2,281
32,590
99,959
25,251
22,187
2,879
54,892
$
49,642
$
$
5.07
4.90
$
4.74
4.51
10,816
11,209
10,479
11,019
(30,930)
2,246
(3,692)
(2,523)
5,776
(29,123)
42,907
89,419
28,090
(662)
116,847
(2,347)
823
(974)
(2,498)
17,884
9,732
2,277
29,893
89,452
21,479
22,187
2,879
42,907
4.15
3.97
10,335
10,802
$
$
$
$
(1)
Includes $10.3 million related to the acceleration of premium amortization in fourth quarter 2013 due to significant refinancing activity in the Rural
Utilities line of business.
70
Farmer Mac excludes the after-tax effect of unrealized gains and losses resulting from changes in the fair
values of financial derivatives and hedging activities from core earnings. As of December 31, 2013, the
cumulative fair value of after-tax losses recorded on financial derivatives was $36.4 million. Over time,
Farmer Mac will realize in earnings the net effect of the cash settlements on its interest rate swap
contracts, which will on its own produce either income or expense, but is expected to generate positive net
effective spread when combined with the interest received and paid on the assets and liabilities Farmer
Mac holds on its balance sheet. Any positive net effective spread would continue to build retained
earnings and capital over time.
Farmer Mac previously elected the fair value option for certain investment securities and Farmer Mac
Guaranteed Securities that were funded or hedged principally with financial derivatives in an effort to
mitigate volatility in GAAP earnings. Farmer Mac classifies these assets as trading and measures them at
fair value, with changes in fair value recorded in GAAP earnings as they occur; however, Farmer Mac
excludes the changes in fair value from core earnings consistent with its treatment of fair value changes on
financial derivatives.
In 2010, Farmer Mac consolidated certain variable interest entities ("VIEs") where Farmer Mac held
beneficial interests in trusts used as vehicles for securitization. Prior to consolidation, Farmer Mac
classified these assets as trading Farmer Mac Guaranteed Securities because of a fair value option election
made previously. As such, these assets were measured at fair value and the unrealized gains and losses
resulting from changes in fair value were excluded from Farmer Mac's core earnings. Upon consolidation,
these assets were transferred to loans held for investment in consolidated trusts at their fair value, which
resulted in an unamortized premium of $42.7 million. This premium is being amortized into interest
income over the contractual lives of the underlying assets.
Also in 2010, Farmer Mac contributed substantially all of the assets, in excess of $1.1 billion, comprising
the USDA Guarantees line of business to a subsidiary, Farmer Mac II LLC. The contributed assets
included securities that were designated as either available-for-sale or trading, depending on whether a fair
value option election had been made previously. Farmer Mac transferred these assets at their fair value,
which resulted in an unamortized premium of $39.1 million being recorded by Farmer Mac II LLC. This
premium is being amortized into interest income over the estimated remaining lives of the USDA
Securities that were transferred.
At the time of transfer, Farmer Mac had after-tax unrealized gains of $7.0 million recorded in accumulated
other comprehensive income related to changes in the fair value of the contributed securities designated as
available-for-sale. These gains are being amortized into other income based on the estimated remaining
lives of the related USDA Securities. On a consolidated basis, the amortization of these gains will offset
the premium amortization on the contributed securities designated as available-for-sale.
On January 1, 2013, Farmer Mac transferred $674.0 million of loans from held for sale to held for
investment because Farmer Mac either (1) no longer intends to sell these loans in the foreseeable future or
(2) generally securitizes these loans using VIEs that are ultimately consolidated on Farmer Mac's balance
sheet and reported as "Loans held for investment in consolidated trusts, at amortized cost." Farmer Mac
transferred these loans at the lower of cost or fair value (determined on a pooled basis). Farmer Mac
recorded a $5.9 million unamortized discount for loans transferred at fair value. This discount is being
amortized into interest income over the contractual lives of the underlying loans.
The after-tax net effect of the amortization of the premiums, discounts, and deferred gains described above
are shown as amortization of premiums, discounts, and deferred gains on assets consolidated at fair value
in the table above. Farmer Mac excludes these items from core earnings because they 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. As of December 31, 2013, $25.2 million of these premiums and $5.5 million of
discounts were still outstanding and $1.7 million of after-tax gains remained deferred in accumulated other
comprehensive income.
Farmer Mac routinely enters into forward sales contracts on the debt of other GSEs to reduce its interest
rate exposure on forecasted future debt issuances. In its calculation of core earnings, Farmer Mac reverses
the gains or losses resulting from the net settlement of these contracts in the period of settlement and
amortizes them over the estimated lives of the associated debt issuances. The after-tax net effect of these
items is shown as net effect of settlements on agency forward contracts in the table above. Changes in the
fair values of these contracts prior to net settlement are excluded from Farmer Mac's core earnings and are
captured in unrealized gains/(losses) on financial derivatives and hedging activities in the table above.
The following sections provide more detail regarding specific components of Farmer Mac's results of
operations.
Net Interest Income. Net interest income was $98.1 million for 2013, $122.0 million for 2012, and $121.3
million for 2011. The decrease in net interest income in 2013 compared to 2012 was primarily attributable
to lower net effective spread that resulted from repayments of Farm & Ranch loans that had higher
historical spreads and the acceleration of amortization of $15.9 million in premiums associated with
certain Rural Utilities loans that were recast into other loan products in fourth quarter 2013. In addition,
reduced interest income on Farmer Mac Guaranteed Securities resulting from the designation of certain
interest rate swaps in fair value hedge relationships during third quarter 2012 for which the interest
settlements are recorded in margin, reduced net interest income in 2013. The interest rate swaps are used
to hedge against the risk of changes in fair values of certain AgVantage securities due to changes in the
designated benchmark interest rate (i.e., LIBOR). The accrual of the contractual amounts due on these
interest rate swaps is included as an adjustment to the yield of the hedged items and is reported in interest
income for 2013, but only for the second half of 2012, when the related hedge designation became
effective. The overall net interest yield was 79 basis points for the year ended December 31, 2013,
compared to 105 basis points and 120 basis points for the years ended December 31, 2012 and 2011,
respectively.
The following table provides information regarding interest-earning assets and funding for the years ended
December 31, 2013, 2012, and 2011. The average balance of non-accruing loans is included in the
average balance of loans, Farmer Mac Guaranteed Securities, and USDA Securities presented, though the
related income is accounted for on a cash basis. Therefore, as the average balance of non-accruing loans
and the income received increases or decreases, the net interest yield will fluctuate accordingly. The
average balance of loans in consolidated trusts with beneficial interests owned by third parties is disclosed
in the net effect of consolidated trusts and is not included in the average balances of interest-earning assets
and interest-bearing liabilities. The interest income and expense associated with these trusts are shown in
the net effect of consolidated trusts. The average rate earned on cash and investments reflects lower short-
term market rates during 2013 compared to 2012 and 2011. The lower average rate on loans, Farmer Mac
Guaranteed Securities, and USDA Securities during 2013 is due to the decline in market rates reflected in
the rates on loans acquired or reset during the past year and the effect of designating certain interest rate
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Farmer Mac excludes the after-tax effect of unrealized gains and losses resulting from changes in the fair
values of financial derivatives and hedging activities from core earnings. As of December 31, 2013, the
cumulative fair value of after-tax losses recorded on financial derivatives was $36.4 million. Over time,
Farmer Mac will realize in earnings the net effect of the cash settlements on its interest rate swap
contracts, which will on its own produce either income or expense, but is expected to generate positive net
effective spread when combined with the interest received and paid on the assets and liabilities Farmer
Mac holds on its balance sheet. Any positive net effective spread would continue to build retained
earnings and capital over time.
Farmer Mac previously elected the fair value option for certain investment securities and Farmer Mac
Guaranteed Securities that were funded or hedged principally with financial derivatives in an effort to
mitigate volatility in GAAP earnings. Farmer Mac classifies these assets as trading and measures them at
fair value, with changes in fair value recorded in GAAP earnings as they occur; however, Farmer Mac
excludes the changes in fair value from core earnings consistent with its treatment of fair value changes on
financial derivatives.
In 2010, Farmer Mac consolidated certain variable interest entities ("VIEs") where Farmer Mac held
beneficial interests in trusts used as vehicles for securitization. Prior to consolidation, Farmer Mac
classified these assets as trading Farmer Mac Guaranteed Securities because of a fair value option election
made previously. As such, these assets were measured at fair value and the unrealized gains and losses
resulting from changes in fair value were excluded from Farmer Mac's core earnings. Upon consolidation,
these assets were transferred to loans held for investment in consolidated trusts at their fair value, which
resulted in an unamortized premium of $42.7 million. This premium is being amortized into interest
income over the contractual lives of the underlying assets.
Also in 2010, Farmer Mac contributed substantially all of the assets, in excess of $1.1 billion, comprising
the USDA Guarantees line of business to a subsidiary, Farmer Mac II LLC. The contributed assets
included securities that were designated as either available-for-sale or trading, depending on whether a fair
value option election had been made previously. Farmer Mac transferred these assets at their fair value,
which resulted in an unamortized premium of $39.1 million being recorded by Farmer Mac II LLC. This
premium is being amortized into interest income over the estimated remaining lives of the USDA
Securities that were transferred.
At the time of transfer, Farmer Mac had after-tax unrealized gains of $7.0 million recorded in accumulated
other comprehensive income related to changes in the fair value of the contributed securities designated as
available-for-sale. These gains are being amortized into other income based on the estimated remaining
lives of the related USDA Securities. On a consolidated basis, the amortization of these gains will offset
the premium amortization on the contributed securities designated as available-for-sale.
On January 1, 2013, Farmer Mac transferred $674.0 million of loans from held for sale to held for
investment because Farmer Mac either (1) no longer intends to sell these loans in the foreseeable future or
(2) generally securitizes these loans using VIEs that are ultimately consolidated on Farmer Mac's balance
sheet and reported as "Loans held for investment in consolidated trusts, at amortized cost." Farmer Mac
transferred these loans at the lower of cost or fair value (determined on a pooled basis). Farmer Mac
recorded a $5.9 million unamortized discount for loans transferred at fair value. This discount is being
amortized into interest income over the contractual lives of the underlying loans.
The after-tax net effect of the amortization of the premiums, discounts, and deferred gains described above
are shown as amortization of premiums, discounts, and deferred gains on assets consolidated at fair value
in the table above. Farmer Mac excludes these items from core earnings because they 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. As of December 31, 2013, $25.2 million of these premiums and $5.5 million of
discounts were still outstanding and $1.7 million of after-tax gains remained deferred in accumulated other
comprehensive income.
Farmer Mac routinely enters into forward sales contracts on the debt of other GSEs to reduce its interest
rate exposure on forecasted future debt issuances. In its calculation of core earnings, Farmer Mac reverses
the gains or losses resulting from the net settlement of these contracts in the period of settlement and
amortizes them over the estimated lives of the associated debt issuances. The after-tax net effect of these
items is shown as net effect of settlements on agency forward contracts in the table above. Changes in the
fair values of these contracts prior to net settlement are excluded from Farmer Mac's core earnings and are
captured in unrealized gains/(losses) on financial derivatives and hedging activities in the table above.
The following sections provide more detail regarding specific components of Farmer Mac's results of
operations.
Net Interest Income. Net interest income was $98.1 million for 2013, $122.0 million for 2012, and $121.3
million for 2011. The decrease in net interest income in 2013 compared to 2012 was primarily attributable
to lower net effective spread that resulted from repayments of Farm & Ranch loans that had higher
historical spreads and the acceleration of amortization of $15.9 million in premiums associated with
certain Rural Utilities loans that were recast into other loan products in fourth quarter 2013. In addition,
reduced interest income on Farmer Mac Guaranteed Securities resulting from the designation of certain
interest rate swaps in fair value hedge relationships during third quarter 2012 for which the interest
settlements are recorded in margin, reduced net interest income in 2013. The interest rate swaps are used
to hedge against the risk of changes in fair values of certain AgVantage securities due to changes in the
designated benchmark interest rate (i.e., LIBOR). The accrual of the contractual amounts due on these
interest rate swaps is included as an adjustment to the yield of the hedged items and is reported in interest
income for 2013, but only for the second half of 2012, when the related hedge designation became
effective. The overall net interest yield was 79 basis points for the year ended December 31, 2013,
compared to 105 basis points and 120 basis points for the years ended December 31, 2012 and 2011,
respectively.
The following table provides information regarding interest-earning assets and funding for the years ended
December 31, 2013, 2012, and 2011. The average balance of non-accruing loans is included in the
average balance of loans, Farmer Mac Guaranteed Securities, and USDA Securities presented, though the
related income is accounted for on a cash basis. Therefore, as the average balance of non-accruing loans
and the income received increases or decreases, the net interest yield will fluctuate accordingly. The
average balance of loans in consolidated trusts with beneficial interests owned by third parties is disclosed
in the net effect of consolidated trusts and is not included in the average balances of interest-earning assets
and interest-bearing liabilities. The interest income and expense associated with these trusts are shown in
the net effect of consolidated trusts. The average rate earned on cash and investments reflects lower short-
term market rates during 2013 compared to 2012 and 2011. The lower average rate on loans, Farmer Mac
Guaranteed Securities, and USDA Securities during 2013 is due to the decline in market rates reflected in
the rates on loans acquired or reset during the past year and the effect of designating certain interest rate
71
72
swaps in fair value hedge relationships as described above. The downward trend in the average rate on
notes payable due after one year reflects the retirement of older debt and the issuance of new debt at lower
market rates. While the average rate on notes payable within one year has not changed in absolute terms,
these shorter-term funding levels, which are typically swapped to a floating rate of interest, have become
less favorable relative to the LIBOR interest rate swap curve in 2013, which could reduce the margin on
floating rate assets that need to be refinanced in the future if this relationship continues.
Table 2
For the Year Ended December 31,
2013
2012
2011
Average
Balance
Income/
Expense
Average
Rate
Average
Balance
Income/
Expense
Average
Rate
Average
Balance
Income/
Expense
Average
Rate
(dollars in thousands)
Table 3
Interest-earning assets:
Cash and investments
$ 2,897,795
$ 21,940
0.76% $ 3,020,264
$ 24,729
0.82% $ 2,503,513
$ 28,117
1.12%
Loans, Farmer Mac Guaranteed
Securities and USDA Securities (1)
9,302,145
205,556
Total interest-earning assets
12,199,940
227,496
Funding:
Notes payable due within one year
4,532,662
7,939
Notes payable due after one year (2)
7,140,897
122,399
Total interest-bearing liabilities (3)
11,673,559
130,338
Net non-interest-bearing funding
526,381
—
2.21%
1.86%
0.18%
1.71%
1.12%
8,225,582
221,949
11,245,846
246,678
5,266,520
9,707
5,516,953
116,649
10,783,473
126,356
462,373
—
2.70%
2.19%
0.18%
2.11%
1.17%
6,858,866
209,611
9,362,379
237,728
3.06%
2.54%
4,232,118
9,218
4,658,829
110,474
8,890,947
119,692
471,432
—
0.22%
2.37%
1.35%
Total funding
12,199,940
130,338
1.07%
11,245,846
126,356
1.12%
9,362,379
119,692
1.28%
Expense from interest-bearing liabilities
Net interest income/yield prior to
consolidation of certain trusts
12,199,940
97,158
Net effect of consolidated trusts (4)
167,227
964
0.80%
0.58%
11,245,846
120,322
392,046
1,658
1.07%
0.42%
9,362,379
118,036
747,577
3,269
Adjusted net interest income/yield
$12,367,167
$ 98,122
0.79% $11,637,892
$121,980
1.05% $10,109,956
$121,305
1.26%
0.44%
1.20%
(1)
Includes $15.9 million related to the acceleration of premium amortization in fourth quarter 2013 due to significant refinancing activity in the rural
utilities line of business. Excludes interest income of $7.9 million, $18.0 million, and $37.0 million in 2013, 2012, and 2011, respectively, related to
consolidated trusts with beneficial interests owned by third parties.
Includes current portion of long-term notes.
(2)
(3) Excludes interest expense of $6.9 million, $16.3 million, and $33.7 million in 2013, 2012, and 2011, respectively, related to consolidated trusts with
beneficial interests owned by third parties.
Includes the effect of consolidated trusts with beneficial interests owned by third parties.
(4)
The following table sets forth information regarding changes in the components of Farmer Mac's net
interest income for the periods indicated. For each category, information is provided on changes
attributable to changes in volume (change in volume multiplied by old rate) and changes in rate (change in
rate multiplied by old volume). Combined rate/volume variances, the third element of the calculation, are
allocated based on their relative size. The decreases in income due to changes in rate reflect the reset of
variable rate investments and adjustable rate mortgages to lower rates, the acceleration of premium
amortization in fourth quarter 2013 due to significant refinancing activity in the Rural Utilities line of
business, and the acquisition of new lower-yielding investments, loans, Farmer Mac Guaranteed
Securities, and USDA Securities, as described above. The decrease in expense due to changes in rate
reflects the decreased cost of funding due to lower interest rates in the debt markets. The increases due to
changes in volume reflect the increase in on-balance sheet assets during 2013 compared to 2012.
Income from interest-earning assets:
Cash and investments
Loans, Farmer Mac Guaranteed Securities and USDA
Securities (1)
Total
2013 vs. 2012
2012 vs. 2011
Increase/(Decrease) Due to
Increase/(Decrease) Due to
Rate
Volume
Total
Rate
Volume
Total
(in thousands)
$
(1,814) $
(975) $
(2,789) $
(8,510) $
5,122
$
(3,388)
(43,235)
(45,049)
(6,135)
26,842
25,867
10,117
(16,393)
(19,182)
3,982
(26,351)
(34,861)
(16,761)
38,689
43,811
23,425
12,338
8,950
6,664
Change in net interest income prior to consolidation of
certain trusts (2)
$ (38,914) $
15,750
$ (23,164) $ (18,100) $
20,386
$
2,286
(1) Includes $15.9 million related to the acceleration of premium amortization in fourth quarter 2013 due to significant refinancing activity in the rural
utilities line of business.
(2) Excludes the effect of debt in consolidated trusts with beneficial interests owned by third parties.
The net interest yield includes the amortization of premiums and discounts on assets consolidated at fair
value and excludes the accrual of income and expense related to the contractual amounts due on financial
derivatives that are not designated in hedging relationships. The following paragraphs describe the effects
of these items on the net interest yield and the table below presents them as adjustments to reconcile to the
net effective spread Farmer Mac earns on the difference between its interest-earning assets and its net
funding costs, including payments for income and expense related to derivative financial instruments that
are not designated as hedging instruments in a hedge accounting relationship ("undesignated financial
derivatives").
Farmer Mac uses interest rate swaps to manage its interest rate risk exposure by synthetically modifying
the interest rate reset or maturity characteristics of certain assets and liabilities. Beginning in third quarter
2012, Farmer Mac designated certain interest rate swaps in fair value hedge accounting relationships. The
accrual of the contractual amounts due on these interest rate swaps is included as an adjustment to the
yield of the hedged item and is included in interest income. For interest rate swaps not designated in
hedge accounting relationships, Farmer Mac records the income or expense related to the accrual of the
contractual amounts due in "Gains/(losses) on financial derivatives and hedging activities" on the
consolidated statements of operations. Farmer Mac includes the accrual of the contractual amounts due
for undesignated financial derivatives in its calculation of net effective spread.
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74
swaps in fair value hedge relationships as described above. The downward trend in the average rate on
notes payable due after one year reflects the retirement of older debt and the issuance of new debt at lower
market rates. While the average rate on notes payable within one year has not changed in absolute terms,
these shorter-term funding levels, which are typically swapped to a floating rate of interest, have become
less favorable relative to the LIBOR interest rate swap curve in 2013, which could reduce the margin on
floating rate assets that need to be refinanced in the future if this relationship continues.
Table 2
For the Year Ended December 31,
2013
2012
2011
Average
Balance
Income/
Expense
Average
Rate
Average
Balance
Income/
Expense
Average
Rate
Average
Balance
Income/
Expense
Average
Rate
(dollars in thousands)
$ 2,897,795
$ 21,940
0.76% $ 3,020,264
$ 24,729
0.82% $ 2,503,513
$ 28,117
1.12%
8,225,582
221,949
11,245,846
246,678
6,858,866
209,611
9,362,379
237,728
3.06%
2.54%
Interest-earning assets:
Cash and investments
Loans, Farmer Mac Guaranteed
Securities and USDA Securities (1)
9,302,145
205,556
Total interest-earning assets
12,199,940
227,496
Funding:
Notes payable due within one year
4,532,662
7,939
Notes payable due after one year (2)
7,140,897
122,399
5,266,520
9,707
5,516,953
116,649
Total interest-bearing liabilities (3)
11,673,559
130,338
10,783,473
126,356
Net non-interest-bearing funding
526,381
—
462,373
—
4,232,118
9,218
4,658,829
110,474
8,890,947
119,692
471,432
—
2.70%
2.19%
0.18%
2.11%
1.17%
2.21%
1.86%
0.18%
1.71%
1.12%
0.80%
0.58%
0.22%
2.37%
1.35%
1.26%
0.44%
1.20%
(1)
(2)
(4)
Includes $15.9 million related to the acceleration of premium amortization in fourth quarter 2013 due to significant refinancing activity in the rural
utilities line of business. Excludes interest income of $7.9 million, $18.0 million, and $37.0 million in 2013, 2012, and 2011, respectively, related to
consolidated trusts with beneficial interests owned by third parties.
Includes current portion of long-term notes.
(3) Excludes interest expense of $6.9 million, $16.3 million, and $33.7 million in 2013, 2012, and 2011, respectively, related to consolidated trusts with
beneficial interests owned by third parties.
Includes the effect of consolidated trusts with beneficial interests owned by third parties.
The following table sets forth information regarding changes in the components of Farmer Mac's net
interest income for the periods indicated. For each category, information is provided on changes
attributable to changes in volume (change in volume multiplied by old rate) and changes in rate (change in
rate multiplied by old volume). Combined rate/volume variances, the third element of the calculation, are
allocated based on their relative size. The decreases in income due to changes in rate reflect the reset of
variable rate investments and adjustable rate mortgages to lower rates, the acceleration of premium
amortization in fourth quarter 2013 due to significant refinancing activity in the Rural Utilities line of
business, and the acquisition of new lower-yielding investments, loans, Farmer Mac Guaranteed
Securities, and USDA Securities, as described above. The decrease in expense due to changes in rate
reflects the decreased cost of funding due to lower interest rates in the debt markets. The increases due to
changes in volume reflect the increase in on-balance sheet assets during 2013 compared to 2012.
Table 3
Total funding
12,199,940
130,338
1.07%
11,245,846
126,356
1.12%
9,362,379
119,692
1.28%
Expense from interest-bearing liabilities
Income from interest-earning assets:
Cash and investments
Loans, Farmer Mac Guaranteed Securities and USDA
Securities (1)
Total
2013 vs. 2012
2012 vs. 2011
Increase/(Decrease) Due to
Increase/(Decrease) Due to
Rate
Volume
Total
Rate
Volume
Total
(in thousands)
$
(1,814) $
(975) $
(2,789) $
(8,510) $
5,122
$
(3,388)
(43,235)
(45,049)
(6,135)
26,842
25,867
10,117
(16,393)
(19,182)
3,982
(26,351)
(34,861)
(16,761)
38,689
43,811
23,425
12,338
8,950
6,664
Net interest income/yield prior to
consolidation of certain trusts
12,199,940
97,158
11,245,846
120,322
Net effect of consolidated trusts (4)
167,227
964
392,046
1,658
1.07%
0.42%
9,362,379
118,036
747,577
3,269
Change in net interest income prior to consolidation of
certain trusts (2)
$ (38,914) $
15,750
$ (23,164) $ (18,100) $
20,386
$
2,286
(1) Includes $15.9 million related to the acceleration of premium amortization in fourth quarter 2013 due to significant refinancing activity in the rural
Adjusted net interest income/yield
$12,367,167
$ 98,122
0.79% $11,637,892
$121,980
1.05% $10,109,956
$121,305
utilities line of business.
(2) Excludes the effect of debt in consolidated trusts with beneficial interests owned by third parties.
The net interest yield includes the amortization of premiums and discounts on assets consolidated at fair
value and excludes the accrual of income and expense related to the contractual amounts due on financial
derivatives that are not designated in hedging relationships. The following paragraphs describe the effects
of these items on the net interest yield and the table below presents them as adjustments to reconcile to the
net effective spread Farmer Mac earns on the difference between its interest-earning assets and its net
funding costs, including payments for income and expense related to derivative financial instruments that
are not designated as hedging instruments in a hedge accounting relationship ("undesignated financial
derivatives").
Farmer Mac uses interest rate swaps to manage its interest rate risk exposure by synthetically modifying
the interest rate reset or maturity characteristics of certain assets and liabilities. Beginning in third quarter
2012, Farmer Mac designated certain interest rate swaps in fair value hedge accounting relationships. The
accrual of the contractual amounts due on these interest rate swaps is included as an adjustment to the
yield of the hedged item and is included in interest income. For interest rate swaps not designated in
hedge accounting relationships, Farmer Mac records the income or expense related to the accrual of the
contractual amounts due in "Gains/(losses) on financial derivatives and hedging activities" on the
consolidated statements of operations. Farmer Mac includes the accrual of the contractual amounts due
for undesignated financial derivatives in its calculation of net effective spread.
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74
Farmer Mac's net interest income and net interest yield include net expenses related to the amortization of
premiums and discounts on assets consolidated at fair value. These premiums and discounts are amortized
as adjustments to yield in interest income over the contractual or estimated remaining lives of the
underlying assets. Farmer Mac excludes these amounts from net effective spread because they 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.
Prior to 2013, Farmer Mac excluded yield maintenance payments received upon the payoff of certain
borrowers' loans from its calculation of net effective spread. These payments were excluded because the
timing and size of the payments vary greatly and the variations in these payments are not necessarily
indicative of positive or negative trends in Farmer Mac's financial results. However, beginning in 2013
Farmer Mac no longer excludes these yield maintenance payments from its calculation of net effective
spread because Farmer Mac generally reinvests these yield maintenance payments, along with the prepaid
balance of the underlying loans, in other interest-earning assets. Yield maintenance payments were
immaterial to Farmer Mac's net effective spread for 2013.
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 and excluding the amortization of premiums and discounts on assets consolidated at
fair value. Farmer Mac's net effective spread was $105.3 million for 2013, compared to $106.6 million
and $89.4 million, respectively, for 2012 and 2011. In percentage terms, net effective spread for 2013 was
0.86 percent compared to 0.95 percent and 0.96 percent, respectively, for 2012 and 2011. This contraction
in net effective spread is primarily attributable to repayments of existing Farm & Ranch loans with higher
historical spreads relative to the new Farm & Ranch loans added this year, combined with the effect of
refinancing existing floating rate assets at higher costs during 2013 compared to 2012. See Note 14 to the
consolidated financial statements for more information regarding net effective spread from Farmer Mac's
individual business segments.
Table 4
For the Year Ended December 31,
2013
2012
2011
Dollars
Yield
Dollars
Yield
Dollars
Yield
(dollars in thousands)
Net interest income/yield prior to consolidation of certain trusts
$ 97,158
0.80 % $ 120,322
1.07 % $ 118,036
1.26 %
Expense related to undesignated financial derivatives
(12,325)
(0.10)%
(25,596)
(0.23)%
(38,663)
(0.41)%
Yield maintenance payments
—
— %
(1,187)
(0.01)%
(816)
(0.01)%
Amortization of premiums on assets consolidated at fair value (1)
20,418
0.16 %
13,018
0.12 %
10,862
Net effective spread
$ 105,251
0.86 % $ 106,557
0.95 % $ 89,419
0.12 %
0.96 %
(1)
Includes $15.9 million related to the acceleration of premium amortization in fourth quarter 2013 due to significant refinancing activity in the rural
utilities line of business.
Release of and Provisions for Allowance for Loan Losses. During 2013, Farmer Mac recorded releases to
its allowance for loan losses of $0.5 million and charge-offs of $4.0 million, respectively, compared to
provisions to its allowance for loan losses of $3.7 million and charge-offs of $2.5 million, respectively, for
2012, and provisions to its allowance for loans losses of $0.6 million and charge-offs of $0.3 million,
respectively, for 2011. The releases recorded during 2013 were driven primarily by overall improved
credit quality. The charge-offs recorded in 2013 included a $3.6 million charge-off related to one ethanol
loan that was foreclosed during first quarter 2013 and for which Farmer Mac recorded a partial recovery
of $1.1 million upon sale of the REO property in second quarter 2013. The provisions recorded during
2012 resulted primarily from a specific allowance of $3.2 million from the purchase of one defaulted
ethanol loan pursuant to the terms of an LTSPC agreement during fourth quarter 2012. Prior to purchasing
that defaulted ethanol loan, there was a specific allowance in the reserve for losses in the amount of $3.2
million related to that individual loan. During 2011, Farmer Mac purchased two defaulted loans pursuant
to the terms of an LTSPC agreement that resulted in a specific allowance of $1.8 million. Prior to the
purchase of those two defaulted loans, there was a specific allowance in the reserve for losses in the
amount of $1.8 million related to those two individual loans. These specific allowances were partially
offset by a decline in estimated probable losses related to Farmer Mac's exposure to the ethanol and dairy
industries. As of December 31, 2013, Farmer Mac's total allowance for loan losses was $6.9 million,
compared to $11.4 million as of December 31, 2012. See "—Risk Management—Credit Risk – Loans and
Guarantees."
Provision for and Release of Reserve for Losses. During 2013, Farmer Mac recorded provisions to its
reserve for losses of $0.9 million, compared to releases of $1.8 million for 2012 and $3.0 million for
2011. The provisions recorded in 2013 were primarily attributable to increased estimated probable losses
inherent in Farmer Mac's non-ethanol related Ag. Storage and Processing loans (e.g., grain elevators and
cold storage) due to an enhancement in Farmer Mac's loss methodology that takes into consideration the
more developed and specialized nature of these types of properties. The releases recorded during 2012
primarily resulted from the purchase of one defaulted ethanol loan, pursuant to the terms of an LTSPC
agreement during fourth quarter 2012. The purchase of that individual defaulted ethanol loan resulted in a
specific release from the reserve for losses in the amount of $3.2 million described above, offset partially
by increases to the reserve for losses during 2012. The releases recorded in 2011 primarily resulted from
the purchase of two defaulted loans under the terms of an LTSPC agreement combined with a decline in
estimated probable losses related to Farmer Mac's exposure to the ethanol and dairy industries. The
purchase of those two individual defaulted loans resulted in a specific release from the reserve for losses
in the amount of $1.8 million, described above. As of December 31, 2013, Farmer Mac's reserve for
losses was $6.5 million, compared to $5.5 million as of December 31, 2012. See "—Risk Management—
Credit Risk – Loans and Guarantees."
Guarantee and Commitment Fees. Guarantee and commitment fees, which compensate Farmer Mac for
assuming the credit risk on loans underlying Farmer Mac Guaranteed Securities and LTSPCs, were
$27.0 million for 2013, compared to $25.0 million for 2012 and $24.8 million for 2011. The increase in
guarantee and commitment fees was primarily attributable to new business volume of Farm & Ranch
loans placed under LTSPCs throughout 2012 and 2013 and the deconsolidation of $460.3 million of
Farm & Ranch Guaranteed Securities in second quarter 2012 because of a change in related party status,
when former director Ernest Hodges (an employee of Farm Credit West, ACA) retired from Farmer Mac's
board of directors.
Gains and 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 $31.8
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Farmer Mac's net interest income and net interest yield include net expenses related to the amortization of
premiums and discounts on assets consolidated at fair value. These premiums and discounts are amortized
as adjustments to yield in interest income over the contractual or estimated remaining lives of the
underlying assets. Farmer Mac excludes these amounts from net effective spread because they 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.
Prior to 2013, Farmer Mac excluded yield maintenance payments received upon the payoff of certain
borrowers' loans from its calculation of net effective spread. These payments were excluded because the
timing and size of the payments vary greatly and the variations in these payments are not necessarily
indicative of positive or negative trends in Farmer Mac's financial results. However, beginning in 2013
Farmer Mac no longer excludes these yield maintenance payments from its calculation of net effective
spread because Farmer Mac generally reinvests these yield maintenance payments, along with the prepaid
balance of the underlying loans, in other interest-earning assets. Yield maintenance payments were
immaterial to Farmer Mac's net effective spread for 2013.
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 and excluding the amortization of premiums and discounts on assets consolidated at
fair value. Farmer Mac's net effective spread was $105.3 million for 2013, compared to $106.6 million
and $89.4 million, respectively, for 2012 and 2011. In percentage terms, net effective spread for 2013 was
0.86 percent compared to 0.95 percent and 0.96 percent, respectively, for 2012 and 2011. This contraction
in net effective spread is primarily attributable to repayments of existing Farm & Ranch loans with higher
historical spreads relative to the new Farm & Ranch loans added this year, combined with the effect of
refinancing existing floating rate assets at higher costs during 2013 compared to 2012. See Note 14 to the
consolidated financial statements for more information regarding net effective spread from Farmer Mac's
individual business segments.
Table 4
For the Year Ended December 31,
2013
2012
2011
Dollars
Yield
Dollars
Yield
Dollars
Yield
(dollars in thousands)
Net interest income/yield prior to consolidation of certain trusts
$ 97,158
0.80 % $ 120,322
1.07 % $ 118,036
1.26 %
Expense related to undesignated financial derivatives
(12,325)
(0.10)%
(25,596)
(0.23)%
(38,663)
(0.41)%
Yield maintenance payments
—
— %
(1,187)
(0.01)%
(816)
(0.01)%
Amortization of premiums on assets consolidated at fair value (1)
20,418
0.16 %
13,018
0.12 %
10,862
Net effective spread
$ 105,251
0.86 % $ 106,557
0.95 % $ 89,419
0.12 %
0.96 %
(1)
Includes $15.9 million related to the acceleration of premium amortization in fourth quarter 2013 due to significant refinancing activity in the rural
utilities line of business.
Release of and Provisions for Allowance for Loan Losses. During 2013, Farmer Mac recorded releases to
its allowance for loan losses of $0.5 million and charge-offs of $4.0 million, respectively, compared to
provisions to its allowance for loan losses of $3.7 million and charge-offs of $2.5 million, respectively, for
2012, and provisions to its allowance for loans losses of $0.6 million and charge-offs of $0.3 million,
respectively, for 2011. The releases recorded during 2013 were driven primarily by overall improved
credit quality. The charge-offs recorded in 2013 included a $3.6 million charge-off related to one ethanol
loan that was foreclosed during first quarter 2013 and for which Farmer Mac recorded a partial recovery
of $1.1 million upon sale of the REO property in second quarter 2013. The provisions recorded during
2012 resulted primarily from a specific allowance of $3.2 million from the purchase of one defaulted
ethanol loan pursuant to the terms of an LTSPC agreement during fourth quarter 2012. Prior to purchasing
that defaulted ethanol loan, there was a specific allowance in the reserve for losses in the amount of $3.2
million related to that individual loan. During 2011, Farmer Mac purchased two defaulted loans pursuant
to the terms of an LTSPC agreement that resulted in a specific allowance of $1.8 million. Prior to the
purchase of those two defaulted loans, there was a specific allowance in the reserve for losses in the
amount of $1.8 million related to those two individual loans. These specific allowances were partially
offset by a decline in estimated probable losses related to Farmer Mac's exposure to the ethanol and dairy
industries. As of December 31, 2013, Farmer Mac's total allowance for loan losses was $6.9 million,
compared to $11.4 million as of December 31, 2012. See "—Risk Management—Credit Risk – Loans and
Guarantees."
Provision for and Release of Reserve for Losses. During 2013, Farmer Mac recorded provisions to its
reserve for losses of $0.9 million, compared to releases of $1.8 million for 2012 and $3.0 million for
2011. The provisions recorded in 2013 were primarily attributable to increased estimated probable losses
inherent in Farmer Mac's non-ethanol related Ag. Storage and Processing loans (e.g., grain elevators and
cold storage) due to an enhancement in Farmer Mac's loss methodology that takes into consideration the
more developed and specialized nature of these types of properties. The releases recorded during 2012
primarily resulted from the purchase of one defaulted ethanol loan, pursuant to the terms of an LTSPC
agreement during fourth quarter 2012. The purchase of that individual defaulted ethanol loan resulted in a
specific release from the reserve for losses in the amount of $3.2 million described above, offset partially
by increases to the reserve for losses during 2012. The releases recorded in 2011 primarily resulted from
the purchase of two defaulted loans under the terms of an LTSPC agreement combined with a decline in
estimated probable losses related to Farmer Mac's exposure to the ethanol and dairy industries. The
purchase of those two individual defaulted loans resulted in a specific release from the reserve for losses
in the amount of $1.8 million, described above. As of December 31, 2013, Farmer Mac's reserve for
losses was $6.5 million, compared to $5.5 million as of December 31, 2012. See "—Risk Management—
Credit Risk – Loans and Guarantees."
Guarantee and Commitment Fees. Guarantee and commitment fees, which compensate Farmer Mac for
assuming the credit risk on loans underlying Farmer Mac Guaranteed Securities and LTSPCs, were
$27.0 million for 2013, compared to $25.0 million for 2012 and $24.8 million for 2011. The increase in
guarantee and commitment fees was primarily attributable to new business volume of Farm & Ranch
loans placed under LTSPCs throughout 2012 and 2013 and the deconsolidation of $460.3 million of
Farm & Ranch Guaranteed Securities in second quarter 2012 because of a change in related party status,
when former director Ernest Hodges (an employee of Farm Credit West, ACA) retired from Farmer Mac's
board of directors.
Gains and 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 $31.8
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million for 2013, compared to net losses of $19.8 million for 2012 and $92.6 million for 2011. Farmer
Mac has designated certain interest rate swaps in fair value hedge relationships.
The components of gains and losses on financial derivatives and hedging activities for the years ended
December 31, 2013, 2012, and 2011 are summarized in the following table:
Table 5
Fair value hedges:
Unrealized gains/(losses) due to fair value changes:
Financial derivatives (1)
Hedged items
Gains on hedging activities
No hedge designation:
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
29,538
$
(404) $
(18,230)
11,308
6,388
5,984
—
—
—
Unrealized gains due to fair value changes
33,873
669
(47,578)
Realized:
Expense related to financial derivatives
Losses due to terminations or net settlements
Gains/(losses) on financial derivatives not designated in hedging relationships
(12,325)
(1,092)
20,456
(25,596)
(886)
(25,813)
Gains/(losses) on financial derivatives and hedging activities
$
31,764
$
(19,829) $
(38,663)
(6,404)
(92,645)
(92,645)
(1)
Included in the assessment of hedge effectiveness at December 31, 2013, but excluded from the amounts in the table, were losses of $11.8 million for
2013, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amounts recognized as hedge
ineffectiveness for the year ended December 31, 2013 were gains of $0.5 million. The comparable amounts at December 31, 2012 were losses of $6.1
million attributable to the fair value of the swaps at the inception of the hedging relationship and gains of $0.1 million 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 gains/(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 hedging relationships are included in losses due to
terminations or net settlements.
For the years ended December 31, 2013, 2012, and 2011, Farmer Mac was a party to interest rate swaps
with one related party, Zions First National Bank. Farmer Mac realized losses of $0.6 million, $1.0
million, and $1.9 million during 2013, 2012, and 2011, respectively, related to these interest rate swaps
with Zions. Farmer Mac recognized unrealized gains of $0.5 million, $0.6 million, and $2.1 million
during 2013, 2012, and 2011, respectively, due to changes in the fair values of these interest rate swaps
with Zions. See Note 3 to the consolidated financial statements for more information on related party
transactions.
Losses and Gains on Trading Assets. During 2013, Farmer Mac recorded unrealized losses on trading
assets of $0.8 million, compared to unrealized gains of $0.3 million and $3.5 million, during 2012 and
2011, respectively. Of the total unrealized losses recognized during 2013, $1.3 million related to assets
selected for the fair value option. Of the total unrealized gains recognized during 2012 and 2011, $44,000
and $2.2 million, respectively, related to assets selected for the fair value option. Farmer Mac has not
made any fair value option elections since 2008.
Gains on Sales of Available-for-Sale Investment Securities. During 2013, 2012, and 2011, Farmer Mac
realized net gains of $2.1 million, $18,000, and $0.3 million, respectively. The gains in 2013 and 2011
primarily were the result of sales of GSE guaranteed mortgage-backed securities from Farmer Mac's
available for-sale investment portfolio.
Gains on the repurchase of debt. During 2013, Farmer Mac repurchased $29.1 million of outstanding debt
at a gain of $1.5 million; no debt repurchases were made in 2012 or 2011.
Gains on Sales of Real Estate Owned. During 2013, 2012, and 2011, Farmer Mac realized gains of $1.2
million, $0.9 million, and $1.0 million, respectively, from the sales of real estate owned properties.
Lower of Cost or Fair Value Adjustment on Loans Held for Sale. During 2012, Farmer Mac recorded
unrealized losses of $5.9 million, compared to unrealized gains of $8.9 million for 2011. The unrealized
losses recorded in 2012 primarily resulted from a decline in the fair value of certain loans held for sale as
mortgage spreads widened and long-term interest rates increased at the end of fourth quarter 2012. The
unrealized gains recorded during 2011 resulted from the reversal of previously recognized unrealized
losses as the fair value of these loans increased above their cost amounts. Effective January 1, 2013,
Farmer Mac transferred $674.0 million of loans from held for sale to held for investment because it
intends to hold those loans for the foreseeable future.
Other Income. Other income totaled $3.1 million in 2013, compared to $3.3 million and $6.9 million in
2012 and 2011, respectively. Other income during 2013, 2012, and 2011 included the recognition of $1.2
million, $1.8 million, and $5.2 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.
Compensation and Employee Benefits. Compensation and employee benefits were $17.8 million in 2013
compared to $19.2 million and $17.9 million in 2012 and 2011, respectively. The decrease in
compensation and employee benefits during 2013 compared to 2012 was due primarily to a severance
payment in fourth quarter 2012 to the former President and Chief Executive Officer, offset partially by
increases in employee headcount and in the cost of employee health insurance.
General and Administrative Expenses. General and administrative expenses, including legal, audit, and
consulting fees, were $11.6 million, $11.1 million, and $9.7 million in 2013, 2012, and 2011, respectively.
The increase in general and administrative expenses in 2013 compared to 2012 was primarily attributable
to higher costs for consulting and information technology associated with general corporate activities.
Regulatory Fees. Regulatory fees were $2.4 million for 2013, and $2.3 million for both 2012 and 2011.
FCA has advised Farmer Mac that its estimated fees for the federal fiscal year ending September 30, 2014
will be $2.4 million, which will not be a material increase from the prior federal fiscal year. After the end
77
78
million for 2013, compared to net losses of $19.8 million for 2012 and $92.6 million for 2011. Farmer
Mac has designated certain interest rate swaps in fair value hedge relationships.
The components of gains and losses on financial derivatives and hedging activities for the years ended
December 31, 2013, 2012, and 2011 are summarized in the following table:
Table 5
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
29,538
$
(404) $
(18,230)
11,308
6,388
5,984
—
—
—
Fair value hedges:
Unrealized gains/(losses) due to fair value changes:
Financial derivatives (1)
Hedged items
Gains on hedging activities
No hedge designation:
Realized:
Expense related to financial derivatives
Losses due to terminations or net settlements
Unrealized gains due to fair value changes
33,873
669
(47,578)
Gains/(losses) on financial derivatives not designated in hedging relationships
Gains/(losses) on financial derivatives and hedging activities
$
31,764
$
(19,829) $
(1)
Included in the assessment of hedge effectiveness at December 31, 2013, but excluded from the amounts in the table, were losses of $11.8 million for
2013, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amounts recognized as hedge
ineffectiveness for the year ended December 31, 2013 were gains of $0.5 million. The comparable amounts at December 31, 2012 were losses of $6.1
million attributable to the fair value of the swaps at the inception of the hedging relationship and gains of $0.1 million attributable to hedge
ineffectiveness.
(12,325)
(1,092)
20,456
(25,596)
(886)
(25,813)
(38,663)
(6,404)
(92,645)
(92,645)
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 gains/(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 hedging relationships are included in losses due to
terminations or net settlements.
For the years ended December 31, 2013, 2012, and 2011, Farmer Mac was a party to interest rate swaps
with one related party, Zions First National Bank. Farmer Mac realized losses of $0.6 million, $1.0
million, and $1.9 million during 2013, 2012, and 2011, respectively, related to these interest rate swaps
with Zions. Farmer Mac recognized unrealized gains of $0.5 million, $0.6 million, and $2.1 million
during 2013, 2012, and 2011, respectively, due to changes in the fair values of these interest rate swaps
with Zions. See Note 3 to the consolidated financial statements for more information on related party
transactions.
Losses and Gains on Trading Assets. During 2013, Farmer Mac recorded unrealized losses on trading
assets of $0.8 million, compared to unrealized gains of $0.3 million and $3.5 million, during 2012 and
2011, respectively. Of the total unrealized losses recognized during 2013, $1.3 million related to assets
selected for the fair value option. Of the total unrealized gains recognized during 2012 and 2011, $44,000
and $2.2 million, respectively, related to assets selected for the fair value option. Farmer Mac has not
made any fair value option elections since 2008.
Gains on Sales of Available-for-Sale Investment Securities. During 2013, 2012, and 2011, Farmer Mac
realized net gains of $2.1 million, $18,000, and $0.3 million, respectively. The gains in 2013 and 2011
primarily were the result of sales of GSE guaranteed mortgage-backed securities from Farmer Mac's
available for-sale investment portfolio.
Gains on the repurchase of debt. During 2013, Farmer Mac repurchased $29.1 million of outstanding debt
at a gain of $1.5 million; no debt repurchases were made in 2012 or 2011.
Gains on Sales of Real Estate Owned. During 2013, 2012, and 2011, Farmer Mac realized gains of $1.2
million, $0.9 million, and $1.0 million, respectively, from the sales of real estate owned properties.
Lower of Cost or Fair Value Adjustment on Loans Held for Sale. During 2012, Farmer Mac recorded
unrealized losses of $5.9 million, compared to unrealized gains of $8.9 million for 2011. The unrealized
losses recorded in 2012 primarily resulted from a decline in the fair value of certain loans held for sale as
mortgage spreads widened and long-term interest rates increased at the end of fourth quarter 2012. The
unrealized gains recorded during 2011 resulted from the reversal of previously recognized unrealized
losses as the fair value of these loans increased above their cost amounts. Effective January 1, 2013,
Farmer Mac transferred $674.0 million of loans from held for sale to held for investment because it
intends to hold those loans for the foreseeable future.
Other Income. Other income totaled $3.1 million in 2013, compared to $3.3 million and $6.9 million in
2012 and 2011, respectively. Other income during 2013, 2012, and 2011 included the recognition of $1.2
million, $1.8 million, and $5.2 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.
Compensation and Employee Benefits. Compensation and employee benefits were $17.8 million in 2013
compared to $19.2 million and $17.9 million in 2012 and 2011, respectively. The decrease in
compensation and employee benefits during 2013 compared to 2012 was due primarily to a severance
payment in fourth quarter 2012 to the former President and Chief Executive Officer, offset partially by
increases in employee headcount and in the cost of employee health insurance.
General and Administrative Expenses. General and administrative expenses, including legal, audit, and
consulting fees, were $11.6 million, $11.1 million, and $9.7 million in 2013, 2012, and 2011, respectively.
The increase in general and administrative expenses in 2013 compared to 2012 was primarily attributable
to higher costs for consulting and information technology associated with general corporate activities.
Regulatory Fees. Regulatory fees were $2.4 million for 2013, and $2.3 million for both 2012 and 2011.
FCA has advised Farmer Mac that its estimated fees for the federal fiscal year ending September 30, 2014
will be $2.4 million, which will not be a material increase from the prior federal fiscal year. After the end
77
78
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.
The following table sets forth purchases of non-delinquent eligible loans and AgVantage securities, new
LTSPCs, and new guarantees during the periods indicated in the Farm & Ranch, USDA Guarantees, and
Other Expense. During 2011, Farmer Mac recorded $0.9 million of expense related to the termination of
an agreement with a third party that previously provided services related to loan and security
administration for certain Farm & Ranch assets. Farmer Mac is currently performing those services
internally and expects to continue to do so in the future. Since then, Farmer Mac has not incurred any
comparable termination charges.
Income Tax Expense. Income tax expense totaled $33.8 million in 2013, compared to $22.2 million and
$5.8 million in 2012 and 2011, respectively. The consolidated tax benefit of the dividends declared on
Farmer Mac II LLC Preferred Stock, which is presented as "Net income attributable to non-controlling
interest – preferred stock dividends" on the consolidated statements of operations on a pre-tax basis, was
the primary reason Farmer Mac's effective tax rate was lower than the statutory federal rate of 35 percent.
Farmer Mac carried a valuation allowance of $37.9 million as of December 31, 2013 and $40.6 million as
of December 31, 2012 against the deferred tax assets arising primarily from capital loss carryforwards
related to capital losses incurred during 2009 on Farmer Mac's investments in Fannie Mae preferred stock,
Lehman Brothers Holdings Inc. senior debt securities, and other GSE preferred stock. Because these
losses were capital in nature, tax benefits can only be realized to the extent Farmer Mac would have
offsetting capital gains. The valuation allowance as of December 31, 2013 reflected a reduction of $2.1
million from the expected implementation of tax planning strategies in 2014. Farmer Mac does not
currently expect to produce sufficient capital gains within the five year carryforward period to recognize a
significant portion of the tax benefits related to these capital losses. For more information about income
taxes, see Note 10 to the consolidated financial statements.
Business Volume. During 2013, Farmer Mac added $3.1 billion of new business volume, compared to
$2.9 billion in 2012, and $3.4 billion in 2011. Farmer Mac's outstanding program volume as of
December 31, 2013 was $14.0 billion, compared to $13.0 billion and $11.9 billion as of December 31,
2012 and 2011, respectively. During 2013, Farmer Mac:
• purchased $824.9 million of newly originated Farm & Ranch loans;
added $540.8 million of Farm & Ranch loans under LTSPCs;
•
• purchased $453.5 million of Farm & Ranch AgVantage securities;
• purchased $361.9 million of USDA Securities;
• purchased $87.0 million of Rural Utilities loans; and
• purchased $820.0 million of Rural Utilities AgVantage securities.
Farmer Mac's outstanding business volume was $14.0 billion as of December 31, 2013, an increase of
$1.0 billion from December 31, 2012, as new volume exceeded maturities and principal paydowns on
existing eligible loan assets during the year. The new program volume in 2013 included $400.0 million of
Farm & Ranch AgVantage securities purchased from Rabo Agrifinance Inc. and $820.0 million of Rural
Utilities AgVantage securities purchased from CFC. Aggregate repayments (principal paydowns and
maturities) were $2.1 billion in 2013 compared to $1.8 billion in 2012. Repayments in 2013 included
$253.1 million related to Farm & Ranch AgVantage securities and $593.0 million related to Rural Utilities
AgVantage securities.
Rural Utilities lines of business:
Table 6
Farmer Mac New Purchases, Guarantees, and LTSPCs
Farm & Ranch:
Loans
LTSPCs
AgVantage Securities
USDA Guarantees:
USDA Securities
Rural Utilities:
Loans
AgVantage Securities
Farmer Mac Guaranteed USDA Securities
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
824,881
$
570,346
$
540,798
453,500
361,894
—
86,965
820,000
744,110
601,000
479,324
5,327
166,117
383,406
495,455
471,994
1,801,500
404,445
3,268
203,789
2,796
Total purchases, guarantees, and LTSPCs
$
3,088,038
$
2,949,630
$
3,383,247
The increase in Farm & Ranch loan purchase volume from prior years primarily resulted from more
borrowers seeking longer-term financing at fixed rates or longer-term adjustable rate mortgages, and the
decrease in Farm & Ranch LTSPC volume primarily resulted from decreased participation in the LTSPC
product among Farmer Mac's existing customer base. The decrease in USDA Securities volume was
driven primarily by reduced supplemental federal funding for USDA-guaranteed loans later in the 2013
federal fiscal year due to budget constraints. The decrease in Rural Utilities loan volume resulted
primarily from decreased demand for financing in the rural utilities industry, driven partially by continued
weakness in the domestic economy. The uneven distribution in annual AgVantage securities volume is
primarily driven by the generally larger transaction sizes for that product and the fluctuating funding and
liquidity needs of Farmer Mac's customer network.
The purchase price of non-delinquent eligible loans and portfolios is the 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 2013 and 2012
was less than one year. Of those loans, 66 percent and 57 percent had principal amortization periods
longer than the maturity date, resulting in balloon payments at maturity, with a weighted-average
remaining term to maturity of 17.2 years and 16.8 years, respectively.
During 2013, 2012, and 2011, Farmer Mac securitized loans it had purchased and sold the resulting
Farmer Mac Guaranteed Securities in the amount of $150.4 million, $32.7 million, and $22.4 million,
respectively. Farmer Mac consolidates these loans and presents them as "Loans held for investment in
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80
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.
Other Expense. During 2011, Farmer Mac recorded $0.9 million of expense related to the termination of
an agreement with a third party that previously provided services related to loan and security
administration for certain Farm & Ranch assets. Farmer Mac is currently performing those services
internally and expects to continue to do so in the future. Since then, Farmer Mac has not incurred any
comparable termination charges.
Income Tax Expense. Income tax expense totaled $33.8 million in 2013, compared to $22.2 million and
$5.8 million in 2012 and 2011, respectively. The consolidated tax benefit of the dividends declared on
Farmer Mac II LLC Preferred Stock, which is presented as "Net income attributable to non-controlling
interest – preferred stock dividends" on the consolidated statements of operations on a pre-tax basis, was
the primary reason Farmer Mac's effective tax rate was lower than the statutory federal rate of 35 percent.
Farmer Mac carried a valuation allowance of $37.9 million as of December 31, 2013 and $40.6 million as
of December 31, 2012 against the deferred tax assets arising primarily from capital loss carryforwards
related to capital losses incurred during 2009 on Farmer Mac's investments in Fannie Mae preferred stock,
Lehman Brothers Holdings Inc. senior debt securities, and other GSE preferred stock. Because these
losses were capital in nature, tax benefits can only be realized to the extent Farmer Mac would have
offsetting capital gains. The valuation allowance as of December 31, 2013 reflected a reduction of $2.1
million from the expected implementation of tax planning strategies in 2014. Farmer Mac does not
currently expect to produce sufficient capital gains within the five year carryforward period to recognize a
significant portion of the tax benefits related to these capital losses. For more information about income
taxes, see Note 10 to the consolidated financial statements.
Business Volume. During 2013, Farmer Mac added $3.1 billion of new business volume, compared to
$2.9 billion in 2012, and $3.4 billion in 2011. Farmer Mac's outstanding program volume as of
December 31, 2013 was $14.0 billion, compared to $13.0 billion and $11.9 billion as of December 31,
2012 and 2011, respectively. During 2013, Farmer Mac:
• purchased $824.9 million of newly originated Farm & Ranch loans;
•
added $540.8 million of Farm & Ranch loans under LTSPCs;
• purchased $453.5 million of Farm & Ranch AgVantage securities;
• purchased $361.9 million of USDA Securities;
• purchased $87.0 million of Rural Utilities loans; and
• purchased $820.0 million of Rural Utilities AgVantage securities.
Farmer Mac's outstanding business volume was $14.0 billion as of December 31, 2013, an increase of
$1.0 billion from December 31, 2012, as new volume exceeded maturities and principal paydowns on
existing eligible loan assets during the year. The new program volume in 2013 included $400.0 million of
Farm & Ranch AgVantage securities purchased from Rabo Agrifinance Inc. and $820.0 million of Rural
Utilities AgVantage securities purchased from CFC. Aggregate repayments (principal paydowns and
maturities) were $2.1 billion in 2013 compared to $1.8 billion in 2012. Repayments in 2013 included
$253.1 million related to Farm & Ranch AgVantage securities and $593.0 million related to Rural Utilities
AgVantage securities.
The following table sets forth purchases of non-delinquent eligible loans and AgVantage securities, new
LTSPCs, and new guarantees during the periods indicated in the Farm & Ranch, USDA Guarantees, and
Rural Utilities lines of business:
Table 6
Farmer Mac New Purchases, Guarantees, and LTSPCs
Farm & Ranch:
Loans
LTSPCs
AgVantage Securities
USDA Guarantees:
USDA Securities
Farmer Mac Guaranteed USDA Securities
Rural Utilities:
Loans
AgVantage Securities
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
824,881
$
570,346
$
540,798
453,500
361,894
—
86,965
820,000
744,110
601,000
479,324
5,327
166,117
383,406
495,455
471,994
1,801,500
404,445
3,268
203,789
2,796
Total purchases, guarantees, and LTSPCs
$
3,088,038
$
2,949,630
$
3,383,247
The increase in Farm & Ranch loan purchase volume from prior years primarily resulted from more
borrowers seeking longer-term financing at fixed rates or longer-term adjustable rate mortgages, and the
decrease in Farm & Ranch LTSPC volume primarily resulted from decreased participation in the LTSPC
product among Farmer Mac's existing customer base. The decrease in USDA Securities volume was
driven primarily by reduced supplemental federal funding for USDA-guaranteed loans later in the 2013
federal fiscal year due to budget constraints. The decrease in Rural Utilities loan volume resulted
primarily from decreased demand for financing in the rural utilities industry, driven partially by continued
weakness in the domestic economy. The uneven distribution in annual AgVantage securities volume is
primarily driven by the generally larger transaction sizes for that product and the fluctuating funding and
liquidity needs of Farmer Mac's customer network.
The purchase price of non-delinquent eligible loans and portfolios is the 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 2013 and 2012
was less than one year. Of those loans, 66 percent and 57 percent had principal amortization periods
longer than the maturity date, resulting in balloon payments at maturity, with a weighted-average
remaining term to maturity of 17.2 years and 16.8 years, respectively.
During 2013, 2012, and 2011, Farmer Mac securitized loans it had purchased and sold the resulting
Farmer Mac Guaranteed Securities in the amount of $150.4 million, $32.7 million, and $22.4 million,
respectively. Farmer Mac consolidates these loans and presents them as "Loans held for investment in
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80
consolidated trusts, at amortized cost" on the consolidated balance sheet. In 2013 and 2012, $120.4
million and $5.3 million, respectively, of securities were sold to Zions First National Bank ("Zions"),
which is a related party to Farmer Mac. See Note 3 to the consolidated financial statements for more
information about related party transactions.
Table 8
The following table sets forth information regarding outstanding volume in each of Farmer Mac's three
lines of business as of the dates indicated:
The following table sets forth information regarding the Farmer Mac Guaranteed Securities issued during
the periods indicated:
Outstanding Balance of Loans, Loans Underlying Off-Balance Sheet Farmer Mac Guaranteed Securities
and LTSPCs, AgVantage Securities, USDA Securities, and Farmer Mac Guaranteed USDA Securities
Table 7
For the Year Ended December 31,
2013
2012
2011
(in thousands)
Loans securitized and sold as Farm & Ranch Guaranteed
Securities
Farmer Mac Guaranteed USDA Securities
Farm & Ranch AgVantage Securities
Rural Utilities AgVantage Securities
Total Farmer Mac Guaranteed Securities Issuances
$
$
150,417
$
32,736
$
—
453,500
820,000
5,327
601,000
383,406
22,406
3,268
1,801,500
2,796
1,423,917
$
1,022,469
$
1,829,970
Beneficial interests owned by Farmer Mac
Beneficial interests owned by third party investors
Farm & Ranch:
Loans
Loans held in trusts:
Guaranteed Securities
AgVantage Securities
LTSPCs
USDA Guarantees:
Rural Utilities:
Loans
Loans held in trusts:
AgVantage Securities
Total
USDA Guaranteed Securities
Farmer Mac Guaranteed USDA Securities
Beneficial interests owned by Farmer Mac
As of December 31,
2013
2012
2011
(in thousands)
$
1,875,958
$
1,519,415
$
1,251,370
—
259,509
765,751
4,509,650
2,261,862
1,645,806
41,311
39
160,397
911,370
4,309,200
2,156,068
1,559,683
55,896
181
696,554
621,871
3,711,000
1,776,051
1,435,679
77,498
698,010
663,097
529,227
354,241
1,538,214
368,848
1,311,175
386,800
1,427,071
$
13,950,312
$
13,015,188
$
11,913,302
81
82
consolidated trusts, at amortized cost" on the consolidated balance sheet. In 2013 and 2012, $120.4
million and $5.3 million, respectively, of securities were sold to Zions First National Bank ("Zions"),
which is a related party to Farmer Mac. See Note 3 to the consolidated financial statements for more
information about related party transactions.
The following table sets forth information regarding the Farmer Mac Guaranteed Securities issued during
the periods indicated:
Table 7
Loans securitized and sold as Farm & Ranch Guaranteed
Securities
Farmer Mac Guaranteed USDA Securities
Farm & Ranch AgVantage Securities
Rural Utilities AgVantage Securities
For the Year Ended December 31,
2013
2012
2011
(in thousands)
150,417
$
32,736
$
—
453,500
820,000
5,327
601,000
383,406
22,406
3,268
1,801,500
2,796
$
$
Total Farmer Mac Guaranteed Securities Issuances
1,423,917
$
1,022,469
$
1,829,970
The following table sets forth information regarding outstanding volume in each of Farmer Mac's three
lines of business as of the dates indicated:
Table 8
Outstanding Balance of Loans, Loans Underlying Off-Balance Sheet Farmer Mac Guaranteed Securities
and LTSPCs, AgVantage Securities, USDA Securities, and Farmer Mac Guaranteed USDA Securities
Farm & Ranch:
Loans
Loans held in trusts:
Beneficial interests owned by Farmer Mac
Beneficial interests owned by third party investors
Guaranteed Securities
AgVantage Securities
LTSPCs
USDA Guarantees:
USDA Guaranteed Securities
Farmer Mac Guaranteed USDA Securities
Rural Utilities:
Loans
Loans held in trusts:
As of December 31,
2013
2012
2011
(in thousands)
$
1,875,958
$
1,519,415
$
1,251,370
—
259,509
765,751
4,509,650
2,261,862
1,645,806
41,311
39
160,397
911,370
4,309,200
2,156,068
1,559,683
55,896
181
696,554
621,871
3,711,000
1,776,051
1,435,679
77,498
698,010
663,097
529,227
Beneficial interests owned by Farmer Mac
AgVantage Securities
Total
354,241
1,538,214
368,848
1,311,175
386,800
1,427,071
$
13,950,312
$
13,015,188
$
11,913,302
81
82
The following table summarizes by maturity date the scheduled principal amortization of loans held, loans
underlying off-balance sheet Farmer Mac Guaranteed Securities and LTSPCs, USDA Securities, and
Farmer Mac Guaranteed USDA Securities as of December 31, 2013:
The following table summarizes by maturity date the outstanding principal amount of both on- and off-
balance sheet AgVantage securities as of December 31, 2013:
Table 9
Schedule of Principal Amortization of Loans Held, Loans Underlying Off-Balance Sheet Farmer Mac
Guaranteed Securities and LTSPCs, USDA Securities, and Farmer Mac Guaranteed USDA Securities
Loans
Underlying
Off-Balance
Sheet Farmer
Mac
Guaranteed
Securities and
LTSPCs
Loans Held
USDA Securities
and Farmer Mac
Guaranteed
USDA Securities
Total
(in thousands)
$
320,056
$
281,527
$
208,247
$
809,830
163,474
156,948
156,898
177,584
243,802
230,325
213,630
205,233
2,212,758
1,853,096
121,951
144,055
114,150
116,516
982,198
529,227
531,328
484,678
499,333
5,048,052
$
3,187,718
$
3,027,613
$
1,687,117
$
7,902,448
2014
2015
2016
2017
2018
Thereafter
Total
Of the $14.0 billion outstanding principal balance of volume included in Farmer Mac's three lines of
business as of December 31, 2013, $6.0 billion were Farmer Mac Guaranteed Securities structured as
AgVantage securities. Each AgVantage security is a general obligation of an issuing institution approved
by Farmer Mac and is secured by eligible loans in an amount at least equal to the outstanding principal
amount of the security. Unlike business volume in the form of purchased loans, USDA Securities, and
loans underlying LTSPCs and non-AgVantage Farmer Mac Guaranteed Securities, most of the Farmer
Mac Guaranteed Securities structured as 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.
Table 10
AgVantage Balances by Year of Maturity
2014
2015
2016
2017
2018
Thereafter (1)
Total
As of
December 31, 2013
(in thousands)
$
$
921,379
676,459
1,329,067
1,378,456
784,774
957,729
6,047,864
(1) Includes various maturities ranging from 2019 to 2024.
The weighted-average remaining maturity of the outstanding $6.0 billion of AgVantage securities shown
in the table above was 3.4 years as of December 31, 2013. Farmer Mac replaced $170.0 million of
AgVantage securities scheduled to mature in 2014 through a series of agreements whereby Farmer Mac
purchased new AgVantage securities from the issuer of the maturing securities in transactions that closed
in January 2014 and February 2014. Farmer Mac's purchases of these new AgVantage securities closed
prior to the maturity dates of the original AgVantage securities being replaced. The new securities are
scheduled to mature in January 2022 and February 2022. As a general matter, if maturing AgVantage
securities are not replaced by new AgVantage securities, either from the same issuer or from new business,
or if the net interest margin earned by Farmer Mac on new AgVantage securities that replace maturing
AgVantage securities is lower than the margin earned on the maturing securities, Farmer Mac's income
could be adversely affected.
As part of fulfilling its guarantee obligations for Farm & Ranch Guaranteed Securities and commitments
to purchase eligible loans underlying LTSPCs, Farmer Mac purchases defaulted loans, all of which are at
least 90-days delinquent or in material non-monetary default at the time of purchase, out of the loan pools
underlying those securities and LTSPCs, and records the purchased loans as such on its balance sheet. The
purchase price for a defaulted loan purchased out of a pool of loans backing Farm & Ranch Guaranteed
Securities is the current outstanding principal balance of the loan plus accrued and unpaid interest. The
purchase price for a defaulted loan purchased under an LTSPC is the then-current outstanding principal
balance of the loan, with accrued and unpaid interest on the defaulted loans payable out of any future loan
payments or liquidation proceeds as received. The purchase price of a defaulted loan is not an indicator of
the expected loss on that loan; many other factors affect expected loss, if any, on any loan so purchased.
The weighted-average age of delinquent loans purchased out of securitized pools and LTSPCs was 11
years during 2013 and 5 years during 2012 and 2011. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and
Guarantees."
83
84
The following table summarizes by maturity date the scheduled principal amortization of loans held, loans
underlying off-balance sheet Farmer Mac Guaranteed Securities and LTSPCs, USDA Securities, and
The following table summarizes by maturity date the outstanding principal amount of both on- and off-
balance sheet AgVantage securities as of December 31, 2013:
Farmer Mac Guaranteed USDA Securities as of December 31, 2013:
Table 9
Table 10
Schedule of Principal Amortization of Loans Held, Loans Underlying Off-Balance Sheet Farmer Mac
Guaranteed Securities and LTSPCs, USDA Securities, and Farmer Mac Guaranteed USDA Securities
Loans
Underlying
Off-Balance
Sheet Farmer
Mac
Guaranteed
Securities and
LTSPCs
USDA Securities
and Farmer Mac
Guaranteed
USDA Securities
(in thousands)
Loans Held
163,474
156,948
156,898
177,584
243,802
230,325
213,630
205,233
2,212,758
1,853,096
121,951
144,055
114,150
116,516
982,198
Total
529,227
531,328
484,678
499,333
5,048,052
$
320,056
$
281,527
$
208,247
$
809,830
$
3,187,718
$
3,027,613
$
1,687,117
$
7,902,448
2014
2015
2016
2017
2018
Thereafter
Total
Of the $14.0 billion outstanding principal balance of volume included in Farmer Mac's three lines of
business as of December 31, 2013, $6.0 billion were Farmer Mac Guaranteed Securities structured as
AgVantage securities. Each AgVantage security is a general obligation of an issuing institution approved
by Farmer Mac and is secured by eligible loans in an amount at least equal to the outstanding principal
amount of the security. Unlike business volume in the form of purchased loans, USDA Securities, and
loans underlying LTSPCs and non-AgVantage Farmer Mac Guaranteed Securities, most of the Farmer
Mac Guaranteed Securities structured as 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.
AgVantage Balances by Year of Maturity
2014
2015
2016
2017
2018
Thereafter (1)
Total
As of
December 31, 2013
(in thousands)
$
$
921,379
676,459
1,329,067
1,378,456
784,774
957,729
6,047,864
(1) Includes various maturities ranging from 2019 to 2024.
The weighted-average remaining maturity of the outstanding $6.0 billion of AgVantage securities shown
in the table above was 3.4 years as of December 31, 2013. Farmer Mac replaced $170.0 million of
AgVantage securities scheduled to mature in 2014 through a series of agreements whereby Farmer Mac
purchased new AgVantage securities from the issuer of the maturing securities in transactions that closed
in January 2014 and February 2014. Farmer Mac's purchases of these new AgVantage securities closed
prior to the maturity dates of the original AgVantage securities being replaced. The new securities are
scheduled to mature in January 2022 and February 2022. As a general matter, if maturing AgVantage
securities are not replaced by new AgVantage securities, either from the same issuer or from new business,
or if the net interest margin earned by Farmer Mac on new AgVantage securities that replace maturing
AgVantage securities is lower than the margin earned on the maturing securities, Farmer Mac's income
could be adversely affected.
As part of fulfilling its guarantee obligations for Farm & Ranch Guaranteed Securities and commitments
to purchase eligible loans underlying LTSPCs, Farmer Mac purchases defaulted loans, all of which are at
least 90-days delinquent or in material non-monetary default at the time of purchase, out of the loan pools
underlying those securities and LTSPCs, and records the purchased loans as such on its balance sheet. The
purchase price for a defaulted loan purchased out of a pool of loans backing Farm & Ranch Guaranteed
Securities is the current outstanding principal balance of the loan plus accrued and unpaid interest. The
purchase price for a defaulted loan purchased under an LTSPC is the then-current outstanding principal
balance of the loan, with accrued and unpaid interest on the defaulted loans payable out of any future loan
payments or liquidation proceeds as received. The purchase price of a defaulted loan is not an indicator of
the expected loss on that loan; many other factors affect expected loss, if any, on any loan so purchased.
The weighted-average age of delinquent loans purchased out of securitized pools and LTSPCs was 11
years during 2013 and 5 years during 2012 and 2011. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and
Guarantees."
83
84
The following table presents Farmer Mac's purchases of defaulted loans underlying Farm & Ranch
Guaranteed Securities and LTSPCs for the periods indicated:
Table 11
For the Year Ended December 31,
2013
2012
2011
Defaulted loans purchased underlying Farm & Ranch Guaranteed
Securities owned by third party investors
Defaulted loans purchased underlying LTSPCs
(in thousands)
6,667
37
8,933
8,091
Total loan purchases
$
6,704
$
17,024
$
7,471
14,192
21,663
For information regarding eligible participants in the Farm & Ranch and USDA Guarantees lines of
business, see "Business—Farmer Mac Lines of Business—Farm & Ranch—Approved Lenders" and
"Business—Farmer Mac Lines of Business—USDA Guarantees—United States Department of
Agriculture Guaranteed Loan Programs."
Farmer Mac II LLC. In January 2010, Farmer Mac contributed substantially all of the assets comprising
the USDA Guarantees line of business (in excess of $1.1 billion) to Farmer Mac's subsidiary, Farmer
Mac II LLC. The assets that Farmer Mac contributed to Farmer Mac II LLC consisted primarily of USDA
Securities that had not been securitized by Farmer Mac but also included $35.0 million of Farmer Mac
Guaranteed Securities. Farmer Mac did not and will not guarantee the timely payment of principal and
interest on the $1.1 billion of contributed USDA Securities. The financial information presented in this
report reflects the accounts of Farmer Mac and its subsidiaries on a consolidated basis. Accordingly,
Farmer Mac's reportable operating segments presented in this report will differ from the stand-alone
financial statements of Farmer Mac II LLC. Those separate financial statements are available on the
website of Farmer Mac II LLC and are not incorporated by reference into this report.
The assets of Farmer Mac II LLC will only be available to creditors of Farmer Mac after all obligations
owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied. As of December 31,
2013, Farmer Mac II LLC held assets with a fair value of $1.7 billion, had debt outstanding to Farmer
Mac of $375.0 million, had preferred stock outstanding with a liquidation preference of $250.0 million,
and had $1.0 billion of common stock outstanding held by Farmer Mac. For more information about the
formation and operations of Farmer Mac II LLC and the features of the preferred stock issued by Farmer
Mac II LLC in January 2010, see Notes 9 and 14 to the consolidated financial statements.
Related Party Transactions. As provided by Farmer Mac's statutory charter, only banks, insurance
companies, and other financial institutions or similar entities may hold Farmer Mac's Class A voting
common stock, and only institutions of the FCS may hold Farmer Mac's Class B voting common
stock. Farmer Mac's charter also provides that holders of Class A voting common stock elect five
members of Farmer Mac's 15-member board of directors and that holders of Class B voting common stock
elect five members of the board of directors. The ownership of Farmer Mac's two classes of voting
common stock is currently concentrated in a small number of institutions. Approximately 45 percent of
the Class A voting common stock is held by three financial institutions, with 31 percent held by one
institution. Approximately 97 percent of the Class B voting common stock is held by five FCS institutions
(two of which are related to each other through a parent-subsidiary relationship).
Unlike some other GSEs, specifically other FCS institutions and the Federal Home Loan Banks, Farmer
Mac is not structured as a cooperative owned exclusively by member institutions and established to
provide services exclusively to its members. Farmer Mac, as a stockholder-owned, publicly-traded
corporation, seeks to fulfill its mission of serving the financing needs of agriculture and rural America in a
manner that is consistent with providing a return on the investment of its stockholders, including those
who do not directly participate in the secondary market provided by Farmer Mac. Farmer Mac's policy is
to require financial institutions to own a requisite amount of common stock, based on the size and type of
institution, to participate in the Farm & Ranch line of business. As a result of this requirement, coupled
with the ability of holders of Class A and Class B voting common stock to elect two-thirds of Farmer
Mac's board of directors, Farmer Mac regularly conducts business with "related parties," including
institutions affiliated with members of Farmer Mac's board of directors and institutions that own large
amounts of Farmer Mac's voting common stock. Farmer Mac has adopted a Code of Business Conduct
and Ethics that governs any conflicts of interest that may arise in these transactions, and Farmer Mac's
policy is to require that any transactions with related parties be conducted in the ordinary course of
business, with terms and conditions comparable to those available to any other counterparty not related to
Farmer Mac.
85
86
The following table presents Farmer Mac's purchases of defaulted loans underlying Farm & Ranch
Guaranteed Securities and LTSPCs for the periods indicated:
Table 11
Defaulted loans purchased underlying Farm & Ranch Guaranteed
Securities owned by third party investors
Defaulted loans purchased underlying LTSPCs
Total loan purchases
$
6,704
$
17,024
$
For the Year Ended December 31,
2013
2012
2011
(in thousands)
6,667
37
8,933
8,091
7,471
14,192
21,663
For information regarding eligible participants in the Farm & Ranch and USDA Guarantees lines of
business, see "Business—Farmer Mac Lines of Business—Farm & Ranch—Approved Lenders" and
"Business—Farmer Mac Lines of Business—USDA Guarantees—United States Department of
Agriculture Guaranteed Loan Programs."
Farmer Mac II LLC. In January 2010, Farmer Mac contributed substantially all of the assets comprising
the USDA Guarantees line of business (in excess of $1.1 billion) to Farmer Mac's subsidiary, Farmer
Mac II LLC. The assets that Farmer Mac contributed to Farmer Mac II LLC consisted primarily of USDA
Securities that had not been securitized by Farmer Mac but also included $35.0 million of Farmer Mac
Guaranteed Securities. Farmer Mac did not and will not guarantee the timely payment of principal and
interest on the $1.1 billion of contributed USDA Securities. The financial information presented in this
report reflects the accounts of Farmer Mac and its subsidiaries on a consolidated basis. Accordingly,
Farmer Mac's reportable operating segments presented in this report will differ from the stand-alone
financial statements of Farmer Mac II LLC. Those separate financial statements are available on the
website of Farmer Mac II LLC and are not incorporated by reference into this report.
The assets of Farmer Mac II LLC will only be available to creditors of Farmer Mac after all obligations
owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied. As of December 31,
2013, Farmer Mac II LLC held assets with a fair value of $1.7 billion, had debt outstanding to Farmer
Mac of $375.0 million, had preferred stock outstanding with a liquidation preference of $250.0 million,
and had $1.0 billion of common stock outstanding held by Farmer Mac. For more information about the
formation and operations of Farmer Mac II LLC and the features of the preferred stock issued by Farmer
Mac II LLC in January 2010, see Notes 9 and 14 to the consolidated financial statements.
Related Party Transactions. As provided by Farmer Mac's statutory charter, only banks, insurance
companies, and other financial institutions or similar entities may hold Farmer Mac's Class A voting
common stock, and only institutions of the FCS may hold Farmer Mac's Class B voting common
stock. Farmer Mac's charter also provides that holders of Class A voting common stock elect five
members of Farmer Mac's 15-member board of directors and that holders of Class B voting common stock
elect five members of the board of directors. The ownership of Farmer Mac's two classes of voting
common stock is currently concentrated in a small number of institutions. Approximately 45 percent of
the Class A voting common stock is held by three financial institutions, with 31 percent held by one
institution. Approximately 97 percent of the Class B voting common stock is held by five FCS institutions
(two of which are related to each other through a parent-subsidiary relationship).
Unlike some other GSEs, specifically other FCS institutions and the Federal Home Loan Banks, Farmer
Mac is not structured as a cooperative owned exclusively by member institutions and established to
provide services exclusively to its members. Farmer Mac, as a stockholder-owned, publicly-traded
corporation, seeks to fulfill its mission of serving the financing needs of agriculture and rural America in a
manner that is consistent with providing a return on the investment of its stockholders, including those
who do not directly participate in the secondary market provided by Farmer Mac. Farmer Mac's policy is
to require financial institutions to own a requisite amount of common stock, based on the size and type of
institution, to participate in the Farm & Ranch line of business. As a result of this requirement, coupled
with the ability of holders of Class A and Class B voting common stock to elect two-thirds of Farmer
Mac's board of directors, Farmer Mac regularly conducts business with "related parties," including
institutions affiliated with members of Farmer Mac's board of directors and institutions that own large
amounts of Farmer Mac's voting common stock. Farmer Mac has adopted a Code of Business Conduct
and Ethics that governs any conflicts of interest that may arise in these transactions, and Farmer Mac's
policy is to require that any transactions with related parties be conducted in the ordinary course of
business, with terms and conditions comparable to those available to any other counterparty not related to
Farmer Mac.
85
86
The following table summarizes the material relationships between Farmer Mac and certain related
parties. The related parties listed in the table below consist of (1) all holders of at least five percent of a
class of Farmer Mac voting common stock as of December 31, 2013 and (2) other institutions that are
considered "related parties" through an affiliation with a Farmer Mac director and that have conducted
business with Farmer Mac during the two years ended December 31, 2013. The table below does not
specify any relationships based on the ownership of non-voting common or preferred stock, such as
Farmer Mac's investments in preferred stock issued by CoBank or the investments of related parties in
Farmer Mac's Class C non-voting common stock or Farmer Mac's Series A Preferred Stock.
Table 12
Ownership of
Farmer Mac
Voting Common Stock
Affiliation with Any
Farmer Mac Directors
Primary Aspects of Institution's
Business Relationship with Farmer Mac
Texas (FCBT)
Farm Credit Bank of
38,503 shares of Class B
Farmer Mac director
In 2013 and 2012, Farmer Mac earned
Name of Institution
AgFirst Farm Credit
Bank
None
84,024 shares of Class B
voting common stock
(16.79% of outstanding
Class B stock and 5.49%
of total voting common
stock outstanding)
AgGeorgia Farm
Credit, ACA
Less than 5% ownership
Farmer Mac director Dan
Raines, Jr. is a director of
AgGeorgia.
AgriBank, FCB
201,621 shares of Class
B voting common stock
(40.30% of outstanding
Class B stock and
13.17% of total voting
common stock
outstanding)
Bath State Bank
Less than 5% ownership
Farmer Mac directors
Richard H. Davidson and
James B. McElroy are
directors of AgriBank.
Brian O'Keane, who served
on Farmer Mac's board of
directors from June 2008 to
June 2012, is the Executive
Vice President, Banking
and Finance, and Chief
Financial Officer of
AgriBank.
Farmer Mac director
Dennis L. Brack is a
director of Bath State Bank
and Bath State Bancorp, the
holding company of Bath
State Bank.
In 2013 and 2012, Farmer Mac earned
approximately $1.2 million and $1.3
million, respectively, in fees attributable to
transactions with AgFirst, primarily
commitment fees for LTSPCs.
Farmer Mac entered into $27.5 million and
$51.5 million of new LTSPCs with
AgGeorgia during 2013 and 2012,
respectively. Farmer Mac received $0.1
million of commitment fees during both
2013 and 2012.
No Farmer Mac business through any of its
lines of business was conducted between the
parties.
Farm Credit West,
ACA (FCW)
Farmer Mac purchased $9.3 million and
$4.4 million in USDA Securities from Bath
State Bank in 2013 and 2012, respectively.
Name of Institution
Voting Common Stock
Farmer Mac Directors
Business Relationship with Farmer Mac
Affiliation with Any
Primary Aspects of Institution's
CoBank, ACB
163,253 shares of Class
Farmer Mac director
No Farmer Mac business through any of its
lines of business was conducted between the
parties.
Ownership of
Farmer Mac
B voting common stock
(32.63% of outstanding
Class B stock and
10.66% of total voting
common stock
outstanding)
voting common stock
(7.70% of outstanding
Class B stock and 2.52%
of total voting common
stock outstanding)
Douglas E. Wilhelm served
as an executive officer of
CoBank until June 30,
2012. Mr. Wilhelm is also
currently a party to a
services agreement with
CoBank, under which he
serves as an employee of
CoBank.
Thomas W. Hill served as
an executive officer of
FCBT until November
2010. Mr. Hill is also
currently a party to a
services agreement with
FCBT, under which he
serves as an employee of
FCBT.
approximately $0.2 million and
$0.3 million, respectively, in fees
attributable to transactions with FCBT,
primarily commitment fees for LTSPCs.
In 2013 and 2012, Farmer Mac paid FCBT
approximately $0.5 million and $0.6
million, respectively, in servicing fees for its
work as a Farmer Mac central servicer.
First Dakota
National Bank
(Dakota Mac)
Less than 5% ownership
Farmer Mac director
Dennis Everson is a
director of Dakota Mac and
also served as Branch
Farmer Mac purchased $61.6 million and
$37.1 million in loans from Dakota Mac in
2013 and 2012, respectively, and entered
into $1.0 million of new LTSPCs with
Administration Director of
Dakota Mac in 2013.
Dakota Mac until
December 2012.
750 shares of Class B
voting common stock
(0.15% of outstanding
Ernest M. Hodges, who
served on Farmer Mac's
board of directors from
In 2012, Farmer Mac received
approximately $2.2 million in fees
attributable to transactions with FCW,
Class B stock and 0.05%
of total voting common
June 2005 to June 2012, is
an Executive Vice President
primarily guarantee fees for Farm & Ranch
Guaranteed Securities and commitment fees
stock outstanding)
of Farm Credit West.
for LTSPCs.
In 2012, FCW retained approximately $0.9
million in servicing fees for its work as a
Farmer Mac central servicer. FCW was not
a related party during 2013.
87
88
The following table summarizes the material relationships between Farmer Mac and certain related
parties. The related parties listed in the table below consist of (1) all holders of at least five percent of a
class of Farmer Mac voting common stock as of December 31, 2013 and (2) other institutions that are
considered "related parties" through an affiliation with a Farmer Mac director and that have conducted
business with Farmer Mac during the two years ended December 31, 2013. The table below does not
specify any relationships based on the ownership of non-voting common or preferred stock, such as
Farmer Mac's investments in preferred stock issued by CoBank or the investments of related parties in
Farmer Mac's Class C non-voting common stock or Farmer Mac's Series A Preferred Stock.
Table 12
Ownership of
Farmer Mac
Name of Institution
Voting Common Stock
AgFirst Farm Credit
84,024 shares of Class B
None
Bank
voting common stock
(16.79% of outstanding
Class B stock and 5.49%
of total voting common
stock outstanding)
Less than 5% ownership
AgGeorgia Farm
Credit, ACA
Farmer Mac director Dan
Raines, Jr. is a director of
AgGeorgia.
Affiliation with Any
Farmer Mac Directors
Primary Aspects of Institution's
Business Relationship with Farmer Mac
In 2013 and 2012, Farmer Mac earned
approximately $1.2 million and $1.3
million, respectively, in fees attributable to
transactions with AgFirst, primarily
commitment fees for LTSPCs.
Farmer Mac entered into $27.5 million and
$51.5 million of new LTSPCs with
AgGeorgia during 2013 and 2012,
respectively. Farmer Mac received $0.1
million of commitment fees during both
2013 and 2012.
Ownership of
Farmer Mac
Voting Common Stock
Affiliation with Any
Farmer Mac Directors
Name of Institution
CoBank, ACB
163,253 shares of Class
B voting common stock
(32.63% of outstanding
Class B stock and
10.66% of total voting
common stock
outstanding)
Farm Credit Bank of
Texas (FCBT)
38,503 shares of Class B
voting common stock
(7.70% of outstanding
Class B stock and 2.52%
of total voting common
stock outstanding)
First Dakota
National Bank
(Dakota Mac)
Less than 5% ownership
Primary Aspects of Institution's
Business Relationship with Farmer Mac
No Farmer Mac business through any of its
lines of business was conducted between the
parties.
In 2013 and 2012, Farmer Mac earned
approximately $0.2 million and
$0.3 million, respectively, in fees
attributable to transactions with FCBT,
primarily commitment fees for LTSPCs.
In 2013 and 2012, Farmer Mac paid FCBT
approximately $0.5 million and $0.6
million, respectively, in servicing fees for its
work as a Farmer Mac central servicer.
Farmer Mac purchased $61.6 million and
$37.1 million in loans from Dakota Mac in
2013 and 2012, respectively, and entered
into $1.0 million of new LTSPCs with
Dakota Mac in 2013.
Farmer Mac director
Douglas E. Wilhelm served
as an executive officer of
CoBank until June 30,
2012. Mr. Wilhelm is also
currently a party to a
services agreement with
CoBank, under which he
serves as an employee of
CoBank.
Farmer Mac director
Thomas W. Hill served as
an executive officer of
FCBT until November
2010. Mr. Hill is also
currently a party to a
services agreement with
FCBT, under which he
serves as an employee of
FCBT.
Farmer Mac director
Dennis Everson is a
director of Dakota Mac and
also served as Branch
Administration Director of
Dakota Mac until
December 2012.
AgriBank, FCB
201,621 shares of Class
Farmer Mac directors
No Farmer Mac business through any of its
lines of business was conducted between the
parties.
Farm Credit West,
ACA (FCW)
B voting common stock
(40.30% of outstanding
Class B stock and
13.17% of total voting
common stock
outstanding)
Richard H. Davidson and
James B. McElroy are
directors of AgriBank.
Brian O'Keane, who served
on Farmer Mac's board of
directors from June 2008 to
June 2012, is the Executive
Vice President, Banking
and Finance, and Chief
Financial Officer of
AgriBank.
Farmer Mac director
Dennis L. Brack is a
director of Bath State Bank
and Bath State Bancorp, the
holding company of Bath
State Bank.
Bath State Bank
Less than 5% ownership
Farmer Mac purchased $9.3 million and
$4.4 million in USDA Securities from Bath
State Bank in 2013 and 2012, respectively.
750 shares of Class B
voting common stock
(0.15% of outstanding
Class B stock and 0.05%
of total voting common
stock outstanding)
Ernest M. Hodges, who
served on Farmer Mac's
board of directors from
June 2005 to June 2012, is
an Executive Vice President
of Farm Credit West.
In 2012, Farmer Mac received
approximately $2.2 million in fees
attributable to transactions with FCW,
primarily guarantee fees for Farm & Ranch
Guaranteed Securities and commitment fees
for LTSPCs.
In 2012, FCW retained approximately $0.9
million in servicing fees for its work as a
Farmer Mac central servicer. FCW was not
a related party during 2013.
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88
Ownership of
Farmer Mac
Voting Common Stock
Affiliation with Any
Farmer Mac
Directors
Name of Institution
National Rural
Utilities
Cooperative
Finance
Corporation (CFC)
None
81,500 shares of Class A
voting common stock
(7.91% of outstanding
Class A stock and 5.32%
of total voting common
stock outstanding)
The Vanguard
Group, Inc.
Zions First National
Bank
None
None
56,295 shares of Class A
voting common stock
(5.46% of outstanding
Class A stock and 3.68%
of total voting common
stock outstanding)
322,100 shares of Class A
voting common stock
(31.25% of outstanding
Class A stock and
21.04% of total voting
common stock
outstanding)
Primary Aspects of Institutions
Business Relationship with Farmer Mac
Transactions with CFC represent 100 percent of
business volume under the Rural Utilities line of
business since its inception in 2008.
Transactions with CFC during 2013 and 2012
represented 29.4 percent and 18.6 percent,
respectively, of Farmer Mac's total new eligible
loan volume for those years. Transactions with
CFC represented 18.6 percent and 18.0 percent,
respectively, of Farmer Mac's total outstanding
eligible loan assets as of December 31, 2013 and
2012.
In 2013and 2012, Farmer Mac earned guarantee
fees of approximately $4.1 million and $4.4
million, respectively, attributable to transactions
with CFC.
In 2013 and 2012, Farmer Mac earned interest
income of $23.7 million and $28.0 million,
respectively, attributable to AgVantage
transactions with CFC.
CFC is currently the only servicer of rural utilities
loans in the Rural Utilities line of business.
No Farmer Mac business through any of its lines
of business was conducted between the parties.
In 2013 and 2012, Farmer Mac's purchases of
loans from Zions under the Farm & Ranch line of
business represented approximately 25.5 percent
and 29.6 percent, respectively, of Farm & Ranch
loan purchase volume for those years. Those
purchases represented 11.5 percent and
8.8 percent, respectively, of total Farm & Ranch
business volume for those years. The purchases
of USDA Securities from Zions under the USDA
Guarantees line of business represented
approximately 3.6 percent and 3.0 percent,
respectively, of that program's purchases for the
year ended December 31, 2013 and 2012.
Transactions with Zions represented 5.1 percent
and 4.7 percent, respectively, of Farmer Mac's
total outstanding eligible loan assets as of
December 31, 2013 and 2012.
In 2013 and 2012, Farmer Mac received
approximately $0.4 million and $0.6 million,
respectively, in guarantee fees attributable to
transactions with Zions.
In 2013 and 2012, Zions retained approximately
$2.0 million in servicing fees for its work as a
Farmer Mac central servicer.
As discussed in more detail in Note 2(q) to the consolidated financial statements, Farmer Mac’s
consolidated financial statements include the accounts of VIEs in which Farmer Mac determines itself to
be the primary beneficiary, including securitization trusts where Farmer Mac shares the power to make
decisions regarding default mitigation with a related party. In the event that related party status changes,
consolidation or deconsolidation of securitization trusts may occur. For more information about related
party transactions, see Note 3 to the consolidated financial statements.
Outlook
Farmer Mac continues to provide a stable source of liquidity, capital, and risk management tools to help
rural lenders meet the financing needs of their customers, and expects to continue to be able to meet future
business opportunities as they arise. While the pace of Farmer Mac's growth will depend on the capital
and liquidity needs of lenders, as well as Farmer Mac's ability to continue to increase its lender network,
Farmer Mac foresees opportunities for continued growth in eligible loan assets. More specifically, Farmer
Mac believes that its Farm & Ranch, USDA Guarantees, and Rural Utilities lines of business have
opportunities for growth, driven by several key factors:
• As agricultural lenders face increased equity capital requirements under new regulatory
frameworks, or seek to reduce exposure due to lending limits or concentration limits, Farmer Mac
can provide relief for those institutions under those circumstances through loan purchases,
guarantees, or LTSPCs.
• As borrowers expect interest rates to increase in the future and seek longer-term, fixed rate loans,
Farmer Mac can assist lenders in managing their interest rate risk for those longer-term assets,
which may not match well with the lenders' shorter-term deposit funding or other funding sources.
• As the overall economy recovers, rural utilities generally may experience an increase in demand
for power, which can lead to more investment and borrowing needs in that industry.
Farmer Mac believes that these growth opportunities will be important in replacing income earned on the
eligible loan and investment portfolio assets that are scheduled to mature, pay down, or be reinvested at
lower spreads over the next several years. Maturing AgVantage securities and the scheduled principal
amortization of other eligible loan assets are discussed in "—Results of Operations—Business Volume."
Farmer Mac also currently owns in its liquidity investment portfolio $78.5 million par amount of preferred
stock issued by CoBank that currently pays an 11 percent annual dividend, from which Farmer Mac earns
approximately $7.7 million ($0.69 per diluted share in 2013) annually in after-tax dividend income.
CoBank has the option to call these securities beginning in October 2014, and Farmer Mac believes it is
likely that CoBank will do so. Farmer Mac expects to hold these securities until they mature or are called.
Agricultural Sector. The agricultural sector includes many diverse industries that respond in different
ways to changes in economic conditions. Those individual industries often are affected differently,
sometimes positively and sometimes negatively, by prevailing domestic and global economic factors and
regional weather conditions. This results in cycles where one or more industries may be under stress at
the same time that others are not. In addition, borrowers that rely on non-farm sources of income as a
significant percentage of overall income may experience stress associated with weakness in the general
economy. The profitability of agricultural industries is also affected by commodity inventories and their
associated market prices, which can vary largely as a result of weather patterns, access to water supply,
and harvest conditions that may affect supply.
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Name of Institution
Voting Common Stock
Ownership of
Farmer Mac
Affiliation with Any
Farmer Mac
Directors
National Rural
Utilities
Cooperative
Finance
Corporation (CFC)
81,500 shares of Class A
None
voting common stock
(7.91% of outstanding
Class A stock and 5.32%
of total voting common
stock outstanding)
The Vanguard
Group, Inc.
56,295 shares of Class A
None
voting common stock
(5.46% of outstanding
Class A stock and 3.68%
of total voting common
stock outstanding)
Zions First National
322,100 shares of Class A
None
Bank
voting common stock
(31.25% of outstanding
Class A stock and
21.04% of total voting
common stock
outstanding)
Primary Aspects of Institutions
Business Relationship with Farmer Mac
Transactions with CFC represent 100 percent of
business volume under the Rural Utilities line of
business since its inception in 2008.
Transactions with CFC during 2013 and 2012
represented 29.4 percent and 18.6 percent,
respectively, of Farmer Mac's total new eligible
loan volume for those years. Transactions with
CFC represented 18.6 percent and 18.0 percent,
respectively, of Farmer Mac's total outstanding
eligible loan assets as of December 31, 2013 and
2012.
In 2013and 2012, Farmer Mac earned guarantee
fees of approximately $4.1 million and $4.4
million, respectively, attributable to transactions
with CFC.
In 2013 and 2012, Farmer Mac earned interest
income of $23.7 million and $28.0 million,
respectively, attributable to AgVantage
transactions with CFC.
CFC is currently the only servicer of rural utilities
loans in the Rural Utilities line of business.
No Farmer Mac business through any of its lines
of business was conducted between the parties.
In 2013 and 2012, Farmer Mac's purchases of
loans from Zions under the Farm & Ranch line of
business represented approximately 25.5 percent
and 29.6 percent, respectively, of Farm & Ranch
loan purchase volume for those years. Those
purchases represented 11.5 percent and
8.8 percent, respectively, of total Farm & Ranch
business volume for those years. The purchases
of USDA Securities from Zions under the USDA
Guarantees line of business represented
approximately 3.6 percent and 3.0 percent,
respectively, of that program's purchases for the
year ended December 31, 2013 and 2012.
Transactions with Zions represented 5.1 percent
and 4.7 percent, respectively, of Farmer Mac's
total outstanding eligible loan assets as of
December 31, 2013 and 2012.
In 2013 and 2012, Farmer Mac received
approximately $0.4 million and $0.6 million,
respectively, in guarantee fees attributable to
transactions with Zions.
In 2013 and 2012, Zions retained approximately
$2.0 million in servicing fees for its work as a
Farmer Mac central servicer.
As discussed in more detail in Note 2(q) to the consolidated financial statements, Farmer Mac’s
consolidated financial statements include the accounts of VIEs in which Farmer Mac determines itself to
be the primary beneficiary, including securitization trusts where Farmer Mac shares the power to make
decisions regarding default mitigation with a related party. In the event that related party status changes,
consolidation or deconsolidation of securitization trusts may occur. For more information about related
party transactions, see Note 3 to the consolidated financial statements.
Outlook
Farmer Mac continues to provide a stable source of liquidity, capital, and risk management tools to help
rural lenders meet the financing needs of their customers, and expects to continue to be able to meet future
business opportunities as they arise. While the pace of Farmer Mac's growth will depend on the capital
and liquidity needs of lenders, as well as Farmer Mac's ability to continue to increase its lender network,
Farmer Mac foresees opportunities for continued growth in eligible loan assets. More specifically, Farmer
Mac believes that its Farm & Ranch, USDA Guarantees, and Rural Utilities lines of business have
opportunities for growth, driven by several key factors:
• As agricultural lenders face increased equity capital requirements under new regulatory
frameworks, or seek to reduce exposure due to lending limits or concentration limits, Farmer Mac
can provide relief for those institutions under those circumstances through loan purchases,
guarantees, or LTSPCs.
• As borrowers expect interest rates to increase in the future and seek longer-term, fixed rate loans,
Farmer Mac can assist lenders in managing their interest rate risk for those longer-term assets,
which may not match well with the lenders' shorter-term deposit funding or other funding sources.
• As the overall economy recovers, rural utilities generally may experience an increase in demand
for power, which can lead to more investment and borrowing needs in that industry.
Farmer Mac believes that these growth opportunities will be important in replacing income earned on the
eligible loan and investment portfolio assets that are scheduled to mature, pay down, or be reinvested at
lower spreads over the next several years. Maturing AgVantage securities and the scheduled principal
amortization of other eligible loan assets are discussed in "—Results of Operations—Business Volume."
Farmer Mac also currently owns in its liquidity investment portfolio $78.5 million par amount of preferred
stock issued by CoBank that currently pays an 11 percent annual dividend, from which Farmer Mac earns
approximately $7.7 million ($0.69 per diluted share in 2013) annually in after-tax dividend income.
CoBank has the option to call these securities beginning in October 2014, and Farmer Mac believes it is
likely that CoBank will do so. Farmer Mac expects to hold these securities until they mature or are called.
Agricultural Sector. The agricultural sector includes many diverse industries that respond in different
ways to changes in economic conditions. Those individual industries often are affected differently,
sometimes positively and sometimes negatively, by prevailing domestic and global economic factors and
regional weather conditions. This results in cycles where one or more industries may be under stress at
the same time that others are not. In addition, borrowers that rely on non-farm sources of income as a
significant percentage of overall income may experience stress associated with weakness in the general
economy. The profitability of agricultural industries is also affected by commodity inventories and their
associated market prices, which can vary largely as a result of weather patterns, access to water supply,
and harvest conditions that may affect supply.
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90
While agricultural land values have increased over the past several years, recent market activity suggests
that land values may have moderated, most notably in those areas that have experienced the greatest
increase, such as the Midwestern region. While the increase in land values has varied by geographic
region, it appears to have been primarily spurred by the combination of high commodity prices,
particularly for corn, soybeans, and wheat, and low interest rates. As those commodity prices continue to
adjust to align more closely with traditional supply and demand economics, land values have also begun to
moderate in some areas. Increases in interest rates also could put downward pressure on the discounted
cash flow values of farmland, which could negatively affect the appraised values of farmland. Farmer
Mac's overall portfolio remains diverse both geographically and by commodity, and Farmer Mac
continues to closely monitor sector profitability, economic conditions, and agricultural land value and
geographic trends to tailor underwriting practices to changing conditions. For a discussion of the average
outstanding loan volume and weighted average original loan-to-value ratios for non-AgVantage Farm &
Ranch loans in Farmer Mac's portfolio as of December 31, 2013, please see "—Risk Management—Credit
Risk – Loans and Guarantees."
The western part of the United States, including California, is currently experiencing drought conditions,
with the water level in many California reservoirs at just over half of their average year-to-date water
storage levels and the end of the rainy season forecast to conclude by the end of March. Much of the
snowpack in the higher elevations is also at less than normal levels, which indicates that the runoff from
melted snow will not replenish the low reservoir levels. Though many farm irrigation districts will receive
little or no water from the governing water authorities, the impact on individual farmers will vary due to
alternative water sources the farmer may have in place. These alternative water sources include
underground sources (well water) and any water that may have been “banked” by the farmer in years
where water was more plentiful. Farmer Mac has not observed any material effect on its portfolio due to
these drought conditions as of December 31, 2013, but any protraction of extreme or exceptional drought
conditions beyond the 2014 water year could have an adverse effect on Farmer Mac’s loss or delinquency
rates. This is particularly true in the permanent plantings sector, where the value of the related collateral is
closely tied to the production value and capability of the permanent plantings, and in the dairy sector,
which may experience increased feed costs as water is diverted away from hay acreage commonly relied
upon by dairy producers and toward land supporting other agricultural commodities. Farmer Mac believes
that it remains well-collateralized on loans in its Farm & Ranch line of business, including its permanent
planting and dairy portfolios.
Farmer Mac also continues to monitor the establishment and evolution of legislation and regulations that
affect farmers, ranchers, and rural lenders. Many federal agricultural policies previously in effect have
been altered with the recent enactment of the Agricultural Act of 2014, including those affecting crop
subsidies, crop insurance, and other aspects of agricultural production. Farmer Mac will continue to
monitor the effects of these altered federal agricultural policies as the USDA engages in the process of
promulgating regulations intended to implement the Agricultural Act of 2014.
Farmer Mac's marketing efforts directed towards the Farm & Ranch line of business focus on lenders that
have demonstrated a commitment to agricultural lending based on their lending history. Farmer Mac
directs its outreach efforts to these lenders through direct personal contact, which is facilitated through
Farmer Mac's frequent participation in state and national banking conferences, its alliances with the
American Bankers Association and the Independent Community Bankers of America, and its business
relationships with members of the Farm Credit System. Farmer Mac continues to observe significant
demand for its longer-term fixed rate loan products in its Farm & Ranch line of business. Demand for
Farmer Mac's secondary market tools could also increase as rural lenders adapt to new and changing
regulations, which may require lenders to obtain more liquidity and capital to continue their lending
practices.
Farmer Mac continues to monitor developments in the ethanol industry and evaluate their potential impact
on the overall performance of Farmer Mac's portfolio. After having experienced narrow margins over the
last several years, overall the industry appears to experiencing a return to profitability as corn prices have
decreased compared to prior years. The renewable fuel standard regulated by the U.S. Environmental
Protection Agency (EPA) currently mandates targeted use of fuel from renewable sources, including
ethanol, though this mandate, including a potential reduction in the targeted percentage of ethanol that is
required to be blended into gasoline, is currently being considered for modification by the EPA. The
ethanol loans in Farmer Mac's portfolio have decreased in recent years both in dollar amount ($88.4
million as of December 31, 2013) and as a percentage of portfolio volume (1.7 percent of the non-
AgVantage Farm & Ranch portfolio as of December 31, 2013). As of December 31, 2012 and 2011, the
dollar amount of Farmer Mac's ethanol portfolio was $144.9 million (3.1 percent) and $161.4 million (3.7
percent), respectively. Other than $21.3 million of undisbursed commitments on existing ethanol loans,
Farmer Mac does not expect to add additional ethanol loans to its portfolio.
Rural Utilities Industry. Historically, the demand of the rural utilities industry for capital and financing
tends to follow the state of the general economy and applicable environmental regulations. Continued
weakness in the general economy has reduced the demand for rural electric power and, consequently, the
need for rural utilities cooperatives to expand. This lower demand within the industry has increased
competition for Farmer Mac's customer base from lenders that are not eligible to, or for other reasons do
not, participate in Farmer Mac's Rural Utilities line of business, and is the primary reason for the slower
rate of growth in Farmer Mac's Rural Utilities line of business compared to its other lines of business over
the past few years. Domestic economic indicators continue to show modest growth, and Farmer Mac and
industry sources expect that demand for rural utilities loans will increase as the economy eventually
strengthens.
Farmer Mac believes that the rural utilities industry will have significant needs for financing over the
course of the next decade, as capital will be needed for growth and modernization, including G&T and
distribution system improvements and demand-side management. In addition, the industry will also
require capital to comply with any future public policy initiatives such as environmental regulations and
clean energy initiatives. For example, in response to low natural gas fuel costs, many power generators
are building environmentally cleaner natural gas-fired generating projects to replace their aging coal-fired
plants. Expanded federal financing for G&T systems and a corresponding increase in rural utilities
cooperatives' demand for G&T loans could result in increased business volume for Farmer Mac in its
Rural Utilities line of business.
Balance Sheet Review
Assets. Farmer Mac's total assets as of December 31, 2013 were $13.4 billion, compared to $12.6 billion
as of December 31, 2012. The increase in total assets was driven primarily by net new purchases of Farm
& Ranch AgVantage securities and loans and Rural Utilities AgVantage securities.
As of December 31, 2013, Farmer Mac had $749.3 million of cash and cash equivalents and $2.5 billion
of investment securities, compared to $785.6 million of cash and cash equivalents and $2.5 billion of
investment securities as of December 31, 2012. As of December 31, 2013, Farmer Mac had $5.1 billion of
Farmer Mac Guaranteed Securities, $1.6 billion of USDA Securities, and $3.2 billion of loans, net of
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While agricultural land values have increased over the past several years, recent market activity suggests
that land values may have moderated, most notably in those areas that have experienced the greatest
increase, such as the Midwestern region. While the increase in land values has varied by geographic
region, it appears to have been primarily spurred by the combination of high commodity prices,
particularly for corn, soybeans, and wheat, and low interest rates. As those commodity prices continue to
adjust to align more closely with traditional supply and demand economics, land values have also begun to
moderate in some areas. Increases in interest rates also could put downward pressure on the discounted
cash flow values of farmland, which could negatively affect the appraised values of farmland. Farmer
Mac's overall portfolio remains diverse both geographically and by commodity, and Farmer Mac
continues to closely monitor sector profitability, economic conditions, and agricultural land value and
geographic trends to tailor underwriting practices to changing conditions. For a discussion of the average
outstanding loan volume and weighted average original loan-to-value ratios for non-AgVantage Farm &
Ranch loans in Farmer Mac's portfolio as of December 31, 2013, please see "—Risk Management—Credit
Risk – Loans and Guarantees."
The western part of the United States, including California, is currently experiencing drought conditions,
with the water level in many California reservoirs at just over half of their average year-to-date water
storage levels and the end of the rainy season forecast to conclude by the end of March. Much of the
snowpack in the higher elevations is also at less than normal levels, which indicates that the runoff from
melted snow will not replenish the low reservoir levels. Though many farm irrigation districts will receive
little or no water from the governing water authorities, the impact on individual farmers will vary due to
alternative water sources the farmer may have in place. These alternative water sources include
underground sources (well water) and any water that may have been “banked” by the farmer in years
where water was more plentiful. Farmer Mac has not observed any material effect on its portfolio due to
these drought conditions as of December 31, 2013, but any protraction of extreme or exceptional drought
conditions beyond the 2014 water year could have an adverse effect on Farmer Mac’s loss or delinquency
rates. This is particularly true in the permanent plantings sector, where the value of the related collateral is
closely tied to the production value and capability of the permanent plantings, and in the dairy sector,
which may experience increased feed costs as water is diverted away from hay acreage commonly relied
upon by dairy producers and toward land supporting other agricultural commodities. Farmer Mac believes
that it remains well-collateralized on loans in its Farm & Ranch line of business, including its permanent
planting and dairy portfolios.
Farmer Mac also continues to monitor the establishment and evolution of legislation and regulations that
affect farmers, ranchers, and rural lenders. Many federal agricultural policies previously in effect have
been altered with the recent enactment of the Agricultural Act of 2014, including those affecting crop
subsidies, crop insurance, and other aspects of agricultural production. Farmer Mac will continue to
monitor the effects of these altered federal agricultural policies as the USDA engages in the process of
promulgating regulations intended to implement the Agricultural Act of 2014.
Farmer Mac's marketing efforts directed towards the Farm & Ranch line of business focus on lenders that
have demonstrated a commitment to agricultural lending based on their lending history. Farmer Mac
directs its outreach efforts to these lenders through direct personal contact, which is facilitated through
Farmer Mac's frequent participation in state and national banking conferences, its alliances with the
American Bankers Association and the Independent Community Bankers of America, and its business
relationships with members of the Farm Credit System. Farmer Mac continues to observe significant
demand for its longer-term fixed rate loan products in its Farm & Ranch line of business. Demand for
Farmer Mac's secondary market tools could also increase as rural lenders adapt to new and changing
regulations, which may require lenders to obtain more liquidity and capital to continue their lending
practices.
Farmer Mac continues to monitor developments in the ethanol industry and evaluate their potential impact
on the overall performance of Farmer Mac's portfolio. After having experienced narrow margins over the
last several years, overall the industry appears to experiencing a return to profitability as corn prices have
decreased compared to prior years. The renewable fuel standard regulated by the U.S. Environmental
Protection Agency (EPA) currently mandates targeted use of fuel from renewable sources, including
ethanol, though this mandate, including a potential reduction in the targeted percentage of ethanol that is
required to be blended into gasoline, is currently being considered for modification by the EPA. The
ethanol loans in Farmer Mac's portfolio have decreased in recent years both in dollar amount ($88.4
million as of December 31, 2013) and as a percentage of portfolio volume (1.7 percent of the non-
AgVantage Farm & Ranch portfolio as of December 31, 2013). As of December 31, 2012 and 2011, the
dollar amount of Farmer Mac's ethanol portfolio was $144.9 million (3.1 percent) and $161.4 million (3.7
percent), respectively. Other than $21.3 million of undisbursed commitments on existing ethanol loans,
Farmer Mac does not expect to add additional ethanol loans to its portfolio.
Rural Utilities Industry. Historically, the demand of the rural utilities industry for capital and financing
tends to follow the state of the general economy and applicable environmental regulations. Continued
weakness in the general economy has reduced the demand for rural electric power and, consequently, the
need for rural utilities cooperatives to expand. This lower demand within the industry has increased
competition for Farmer Mac's customer base from lenders that are not eligible to, or for other reasons do
not, participate in Farmer Mac's Rural Utilities line of business, and is the primary reason for the slower
rate of growth in Farmer Mac's Rural Utilities line of business compared to its other lines of business over
the past few years. Domestic economic indicators continue to show modest growth, and Farmer Mac and
industry sources expect that demand for rural utilities loans will increase as the economy eventually
strengthens.
Farmer Mac believes that the rural utilities industry will have significant needs for financing over the
course of the next decade, as capital will be needed for growth and modernization, including G&T and
distribution system improvements and demand-side management. In addition, the industry will also
require capital to comply with any future public policy initiatives such as environmental regulations and
clean energy initiatives. For example, in response to low natural gas fuel costs, many power generators
are building environmentally cleaner natural gas-fired generating projects to replace their aging coal-fired
plants. Expanded federal financing for G&T systems and a corresponding increase in rural utilities
cooperatives' demand for G&T loans could result in increased business volume for Farmer Mac in its
Rural Utilities line of business.
Balance Sheet Review
Assets. Farmer Mac's total assets as of December 31, 2013 were $13.4 billion, compared to $12.6 billion
as of December 31, 2012. The increase in total assets was driven primarily by net new purchases of Farm
& Ranch AgVantage securities and loans and Rural Utilities AgVantage securities.
As of December 31, 2013, Farmer Mac had $749.3 million of cash and cash equivalents and $2.5 billion
of investment securities, compared to $785.6 million of cash and cash equivalents and $2.5 billion of
investment securities as of December 31, 2012. As of December 31, 2013, Farmer Mac had $5.1 billion of
Farmer Mac Guaranteed Securities, $1.6 billion of USDA Securities, and $3.2 billion of loans, net of
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allowance. This compares to $4.8 billion of Farmer Mac Guaranteed Securities, $1.6 billion of USDA
Securities, and $2.7 billion of loans, net of allowance, as of December 31, 2012.
Business—Farm & Ranch—Underwriting and Collateral Valuation (Appraisal) Standards" and "Business
—Farmer Mac Lines of Business—Rural Utilities—Underwriting."
Liabilities. Farmer Mac's total liabilities increased to $12.8 billion as of December 31, 2013 from $12.0
billion as of December 31, 2012. The increase in liabilities was primarily due to an increase in notes
payable used to purchase program assets.
Equity. As of December 31, 2013, Farmer Mac had total equity of $574.5 million comprised of
stockholders' equity of $332.6 million and non-controlling interest – preferred stock of $241.9 million. As
of December 31, 2012, Farmer Mac had total equity of $593.0 million comprised of stockholders' equity
of $351.1 million and non-controlling interest – preferred stock of $241.9 million. The decrease in total
equity during 2013 was the result of a decrease in accumulated other comprehensive income due to
decreases in the fair value of available-for-sale securities, partially offset by increased retained earnings.
These decreases in the fair value of available-for-sale securities were driven primarily by higher U.S.
Treasury rates.
Risk Management
Credit Risk – Loans and Guarantees. Farmer Mac is exposed to credit risk resulting from the inability of
borrowers to repay their loans in conjunction with a deficiency in the value of the collateral relative to the
outstanding balance of the loan and the costs of liquidation. Farmer Mac is exposed to credit risk on:
•
•
•
loans held;
loans underlying Farmer Mac Guaranteed Securities; and
loans underlying LTSPCs.
Farmer Mac generally assumes 100 percent of the credit risk on loans held and loans underlying Farm &
Ranch Guaranteed Securities, LTSPCs, and Rural Utilities Guaranteed Securities. Farmer Mac has direct
credit exposure to loans in non-AgVantage transactions and indirect credit exposure to loans that secure
AgVantage transactions, which are a type of Farmer Mac Guaranteed Securities that represent a general
obligation of a lender secured by qualified loans. The credit exposure of Farmer Mac and Farmer Mac II
LLC on USDA Securities, including those underlying Farmer Mac Guaranteed Securities, is covered by
the full faith and credit of the United States. Farmer Mac believes that Farmer Mac and Farmer Mac II
LLC have little or no credit risk exposure in the USDA Guarantees line of business because of the USDA
guarantee. As of December 31, 2013, neither Farmer Mac nor Farmer Mac II LLC had experienced any
credit losses on any business under the USDA Guarantees line of business and does not expect that
Farmer Mac or Farmer Mac II LLC will incur any such losses in the future.
Farmer Mac has established underwriting, collateral valuation, and documentation standards for
agricultural real estate mortgage loans and rural utilities loans. Farmer Mac believes that these standards
mitigate the risk of loss from borrower defaults and provide guidance about the management,
administration, and conduct of underwriting and appraisals to all participating and potential
lenders. These standards were developed on the basis of industry norms for agricultural real estate
mortgage loans and rural utilities loans and are designed to assess the creditworthiness of the borrower,
as well as the value of the collateral securing the loan. Farmer Mac evaluates and adjusts these standards
on an ongoing basis based on current and anticipated market conditions. For more information about
Farmer Mac's underwriting and collateral valuation standards, see "Business—Farmer Mac Lines of
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 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."
Under contracts with Farmer Mac and in consideration for servicing fees, Farmer Mac-approved central
servicers service loans in accordance with Farmer Mac's requirements. Central servicers are responsible
to Farmer Mac for serious errors in the servicing of those loans. If a central servicer materially breaches
the terms of its servicing agreement with Farmer Mac, such as failing to forward payments received or
releasing collateral without Farmer Mac's consent, or experiences insolvency or bankruptcy, Farmer Mac
has the right to terminate the servicing relationship for a particular loan or the entire portfolio serviced by
the central servicer. In addition, Farmer Mac can proceed against the central servicer in arbitration or
exercise any remedies available to it under law. In the last three years, Farmer Mac has not exercised any
remedies or taken any formal action against any central servicers. For more information about Farmer
Mac's servicing requirements, see "Business—Farmer Mac Lines of Business—Farm & Ranch—
Servicing" and "Business—Farmer Mac Lines of Business—Rural Utilities—Servicing."
Farmer Mac AgVantage securities are general obligations of institutions approved by Farmer Mac and are
secured by eligible loans in an amount at least equal to the outstanding principal amount of the security.
Farmer Mac excludes the loans that secure AgVantage securities from the credit risk metrics it discloses
because of the credit quality of the issuing institutions, the collateralization level for the securities, and
because delinquent loans are required to be removed from the pool of pledged loans and replaced with
current eligible loans. As such, all AgVantage securities are secured by current loans representing at least
100 percent of the outstanding amount of these securities. As of December 31, 2013, 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 December 31, 2013, there were no delinquencies in
Farmer Mac's portfolio of rural utilities loans, which includes rural utilities loans held and rural utilities
loans underlying or securing Rural Utilities Guaranteed Securities. Farmer Mac's direct credit exposure
to rural utilities loans as of December 31, 2013 was $1.1 billion, of which $1.0 billion were loans to
93
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allowance. This compares to $4.8 billion of Farmer Mac Guaranteed Securities, $1.6 billion of USDA
Securities, and $2.7 billion of loans, net of allowance, as of December 31, 2012.
Business—Farm & Ranch—Underwriting and Collateral Valuation (Appraisal) Standards" and "Business
—Farmer Mac Lines of Business—Rural Utilities—Underwriting."
Liabilities. Farmer Mac's total liabilities increased to $12.8 billion as of December 31, 2013 from $12.0
billion as of December 31, 2012. The increase in liabilities was primarily due to an increase in notes
payable used to purchase program assets.
Equity. As of December 31, 2013, Farmer Mac had total equity of $574.5 million comprised of
stockholders' equity of $332.6 million and non-controlling interest – preferred stock of $241.9 million. As
of December 31, 2012, Farmer Mac had total equity of $593.0 million comprised of stockholders' equity
of $351.1 million and non-controlling interest – preferred stock of $241.9 million. The decrease in total
equity during 2013 was the result of a decrease in accumulated other comprehensive income due to
decreases in the fair value of available-for-sale securities, partially offset by increased retained earnings.
These decreases in the fair value of available-for-sale securities were driven primarily by higher U.S.
Treasury rates.
Risk Management
Credit Risk – Loans and Guarantees. Farmer Mac is exposed to credit risk resulting from the inability of
borrowers to repay their loans in conjunction with a deficiency in the value of the collateral relative to the
outstanding balance of the loan and the costs of liquidation. Farmer Mac is exposed to credit risk on:
loans held;
•
•
•
loans underlying LTSPCs.
loans underlying Farmer Mac Guaranteed Securities; and
Farmer Mac generally assumes 100 percent of the credit risk on loans held and loans underlying Farm &
Ranch Guaranteed Securities, LTSPCs, and Rural Utilities Guaranteed Securities. Farmer Mac has direct
credit exposure to loans in non-AgVantage transactions and indirect credit exposure to loans that secure
AgVantage transactions, which are a type of Farmer Mac Guaranteed Securities that represent a general
obligation of a lender secured by qualified loans. The credit exposure of Farmer Mac and Farmer Mac II
LLC on USDA Securities, including those underlying Farmer Mac Guaranteed Securities, is covered by
the full faith and credit of the United States. Farmer Mac believes that Farmer Mac and Farmer Mac II
LLC have little or no credit risk exposure in the USDA Guarantees line of business because of the USDA
guarantee. As of December 31, 2013, neither Farmer Mac nor Farmer Mac II LLC had experienced any
credit losses on any business under the USDA Guarantees line of business and does not expect that
Farmer Mac or Farmer Mac II LLC will incur any such losses in the future.
Farmer Mac has established underwriting, collateral valuation, and documentation standards for
agricultural real estate mortgage loans and rural utilities loans. Farmer Mac believes that these standards
mitigate the risk of loss from borrower defaults and provide guidance about the management,
administration, and conduct of underwriting and appraisals to all participating and potential
lenders. These standards were developed on the basis of industry norms for agricultural real estate
mortgage loans and rural utilities loans and are designed to assess the creditworthiness of the borrower,
as well as the value of the collateral securing the loan. Farmer Mac evaluates and adjusts these standards
on an ongoing basis based on current and anticipated market conditions. For more information about
Farmer Mac's underwriting and collateral valuation standards, see "Business—Farmer Mac Lines of
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 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."
Under contracts with Farmer Mac and in consideration for servicing fees, Farmer Mac-approved central
servicers service loans in accordance with Farmer Mac's requirements. Central servicers are responsible
to Farmer Mac for serious errors in the servicing of those loans. If a central servicer materially breaches
the terms of its servicing agreement with Farmer Mac, such as failing to forward payments received or
releasing collateral without Farmer Mac's consent, or experiences insolvency or bankruptcy, Farmer Mac
has the right to terminate the servicing relationship for a particular loan or the entire portfolio serviced by
the central servicer. In addition, Farmer Mac can proceed against the central servicer in arbitration or
exercise any remedies available to it under law. In the last three years, Farmer Mac has not exercised any
remedies or taken any formal action against any central servicers. For more information about Farmer
Mac's servicing requirements, see "Business—Farmer Mac Lines of Business—Farm & Ranch—
Servicing" and "Business—Farmer Mac Lines of Business—Rural Utilities—Servicing."
Farmer Mac AgVantage securities are general obligations of institutions approved by Farmer Mac and are
secured by eligible loans in an amount at least equal to the outstanding principal amount of the security.
Farmer Mac excludes the loans that secure AgVantage securities from the credit risk metrics it discloses
because of the credit quality of the issuing institutions, the collateralization level for the securities, and
because delinquent loans are required to be removed from the pool of pledged loans and replaced with
current eligible loans. As such, all AgVantage securities are secured by current loans representing at least
100 percent of the outstanding amount of these securities. As of December 31, 2013, 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 December 31, 2013, there were no delinquencies in
Farmer Mac's portfolio of rural utilities loans, which includes rural utilities loans held and rural utilities
loans underlying or securing Rural Utilities Guaranteed Securities. Farmer Mac's direct credit exposure
to rural utilities loans as of December 31, 2013 was $1.1 billion, of which $1.0 billion were loans to
93
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electric distribution cooperatives and $35.3 million were loans to G&T cooperatives. Farmer Mac also
had indirect credit exposure to the rural utilities loans securing Rural Utilities Guaranteed Securities
structured as AgVantage securities, some of which were secured by loans to G&T cooperatives. For
more information, see "—Credit Risk – Institutional."
Table 14
The following table summarizes the changes in the components of Farmer Mac's allowance for each year
in the five-year period ended December 31, 2013:
Farmer Mac maintains an allowance for losses to cover estimated probable losses on loans held and loans
underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities. The methodology that
Farmer Mac uses to determine the level of its allowances for losses is described in Note 2(j) to the
consolidated financial statements. Management believes that this methodology produces a reasonable
estimate of probable losses, as of the balance sheet date, for all loans held and loans underlying off-
balance sheet Farm & Ranch Guaranteed Securities and LTSPCs.
The following table summarizes the components of Farmer Mac's allowance for losses as of
December 31, 2013 and 2012:
Table 13
Allowance for loan losses
Reserve for losses:
Off-balance sheet Farm & Ranch Guaranteed Securities
LTSPCs
Total allowance for losses
December 31, 2013
December 31, 2012
$
$
(in thousands)
6,866
$
356
6,112
13,334
$
11,351
556
4,983
16,890
95
Balance as of December 31, 2009
6,292
$
7,895
$
Balance as of January 1, 2009
Provision for losses
Charge-offs
Recoveries
Provision for losses
Charge-offs
Recoveries
Balance as of December 31, 2010
Provision for/(releases of) losses
Charge-offs
Balance as of December 31, 2011
Provision for/(releases of) losses
Charge-offs
Balance as of December 31, 2012
(Releases of)/provision for losses
Charge-offs
Allowance
for Loan
Losses
Reserve
for Losses
(in thousands)
Total
Allowance
for Losses
10,929
$
5,506
$
2,853
(8,491)
1,001
1,893
(605)
2,223
610
(252)
3,691
(2,501)
(481)
(4,004)
9,803
$
10,312
$
10,161
$
7,355
$
11,351
$
5,539
$
2,389
—
—
—
—
2,417
(2,957)
—
(1,816)
—
929
—
16,435
5,242
(8,491)
1,001
14,187
4,310
(605)
2,223
20,115
(2,347)
(252)
17,516
1,875
(2,501)
16,890
448
(4,004)
13,334
Balance as of December 31, 2013
6,866
$
6,468
$
Activity affecting the allowances for losses is discussed in "—Results of Operations—Income Statement
Analysis." As of December 31, 2013, Farmer Mac's allowances for losses totaled $13.3 million, or
26 basis points, of the outstanding principal balance of loans held for investment and loans underlying
LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities (excluding AgVantage securities),
compared to $16.9 million, or 36 basis points, as of December 31, 2012.
As of December 31, 2013, Farmer Mac's 90-day delinquencies were $28.3 million (0.55 percent of the
non-AgVantage Farm & Ranch portfolio), compared to $33.3 million (0.70 percent of the non-AgVantage
Farm & Ranch portfolio) as of December 31, 2012. When analyzing the overall risk profile of its
program business, Farmer Mac takes into account more than the Farm & Ranch loan delinquency
percentages provided above. The total program business includes AgVantage securities and rural utilities
loans, neither of which have any delinquencies, and USDA Securities, which are backed by the full faith
and credit of the United States. Across all of Farmer Mac's lines of business, 90-day delinquencies
represented 0.20 percent of total program business as of December 31, 2013, compared to 0.26 percent of
total program business as of December 31, 2012.
As of December 31, 2013, Farmer Mac's ethanol exposure, which includes loans held and loans subject
to LTSPCs, was $88.4 million (1.7 percent of the non-AgVantage Farm & Ranch portfolio) on
19 different plants, with an additional $21.3 million of undisbursed commitments. Other than the
undisbursed commitments, Farmer Mac does not expect to add additional ethanol loans to its portfolio.
$
$
$
$
$
$
96
electric distribution cooperatives and $35.3 million were loans to G&T cooperatives. Farmer Mac also
had indirect credit exposure to the rural utilities loans securing Rural Utilities Guaranteed Securities
structured as AgVantage securities, some of which were secured by loans to G&T cooperatives. For
more information, see "—Credit Risk – Institutional."
Farmer Mac maintains an allowance for losses to cover estimated probable losses on loans held and loans
underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities. The methodology that
Farmer Mac uses to determine the level of its allowances for losses is described in Note 2(j) to the
consolidated financial statements. Management believes that this methodology produces a reasonable
estimate of probable losses, as of the balance sheet date, for all loans held and loans underlying off-
balance sheet Farm & Ranch Guaranteed Securities and LTSPCs.
The following table summarizes the components of Farmer Mac's allowance for losses as of
December 31, 2013 and 2012:
Table 13
Allowance for loan losses
Reserve for losses:
LTSPCs
Total allowance for losses
Off-balance sheet Farm & Ranch Guaranteed Securities
December 31, 2013
December 31, 2012
$
$
(in thousands)
6,866
$
356
6,112
13,334
$
11,351
556
4,983
16,890
The following table summarizes the changes in the components of Farmer Mac's allowance for each year
in the five-year period ended December 31, 2013:
Table 14
Balance as of January 1, 2009
Provision for losses
Charge-offs
Recoveries
Balance as of December 31, 2009
Provision for losses
Charge-offs
Recoveries
Balance as of December 31, 2010
Provision for/(releases of) losses
Charge-offs
Balance as of December 31, 2011
Provision for/(releases of) losses
Charge-offs
Balance as of December 31, 2012
(Releases of)/provision for losses
Charge-offs
Balance as of December 31, 2013
Allowance
for Loan
Losses
Reserve
for Losses
(in thousands)
Total
Allowance
for Losses
10,929
$
5,506
$
2,853
(8,491)
1,001
2,389
—
—
6,292
$
7,895
$
1,893
(605)
2,223
2,417
—
—
9,803
$
10,312
$
610
(252)
(2,957)
—
10,161
$
7,355
$
3,691
(2,501)
(1,816)
—
11,351
$
5,539
$
(481)
(4,004)
929
—
6,866
$
6,468
$
16,435
5,242
(8,491)
1,001
14,187
4,310
(605)
2,223
20,115
(2,347)
(252)
17,516
1,875
(2,501)
16,890
448
(4,004)
13,334
$
$
$
$
$
$
Activity affecting the allowances for losses is discussed in "—Results of Operations—Income Statement
Analysis." As of December 31, 2013, Farmer Mac's allowances for losses totaled $13.3 million, or
26 basis points, of the outstanding principal balance of loans held for investment and loans underlying
LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities (excluding AgVantage securities),
compared to $16.9 million, or 36 basis points, as of December 31, 2012.
As of December 31, 2013, Farmer Mac's 90-day delinquencies were $28.3 million (0.55 percent of the
non-AgVantage Farm & Ranch portfolio), compared to $33.3 million (0.70 percent of the non-AgVantage
Farm & Ranch portfolio) as of December 31, 2012. When analyzing the overall risk profile of its
program business, Farmer Mac takes into account more than the Farm & Ranch loan delinquency
percentages provided above. The total program business includes AgVantage securities and rural utilities
loans, neither of which have any delinquencies, and USDA Securities, which are backed by the full faith
and credit of the United States. Across all of Farmer Mac's lines of business, 90-day delinquencies
represented 0.20 percent of total program business as of December 31, 2013, compared to 0.26 percent of
total program business as of December 31, 2012.
As of December 31, 2013, Farmer Mac's ethanol exposure, which includes loans held and loans subject
to LTSPCs, was $88.4 million (1.7 percent of the non-AgVantage Farm & Ranch portfolio) on
19 different plants, with an additional $21.3 million of undisbursed commitments. Other than the
undisbursed commitments, Farmer Mac does not expect to add additional ethanol loans to its portfolio.
95
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As of December 31, 2013, Farmer Mac had no ethanol loans that were 90-days delinquent. For more
information about the conditions facing ethanol producers, see "—Outlook."
farming forecasts, and regional economic and agricultural conditions. Effective January 1, 2013, some
states were reclassified to different regions of the United States as compared to prior periods.
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 December 31, 2013 and 2012, the average unpaid
balance of loans outstanding in the Farm & Ranch line of business (excluding loans that secured
AgVantage securities) was $426,000 and $392,000, respectively. For Farm & Ranch loan purchases
made in 2013, the weighted average original loan-to-value ratio was 44 percent, compared to 45 percent
in 2012 and 46 percent in 2011. The weighted average original loan-to-value ratio (based on original
appraised value that has not been indexed to provide a current market value or reflect amortization of
loans) for Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed
Securities (excluding AgVantage securities) and LTSPCs was approximately 49 percent as of
December 31, 2013 and 52 percent as of December 31, 2012. The weighted average current loan-to-
value ratio (based on original appraised value but which reflects loan amortization since purchase) for
Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities
(excluding AgVantage securities) and LTSPCs was approximately 38 percent as of December 31, 2013
and 2012. The weighted-average original loan-to-value ratio for all 90-day delinquencies was 45 percent
as of December 31, 2013, and 59 percent as of December 31, 2012.
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 (excluding AgVantage
securities) and LTSPCs:
Table 15
As of:
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
December 31, 2011
Outstanding Loans,
Guarantees, and
LTSPCs (1)
90-day
Delinquencies
Percentage
(dollars in thousands)
$
5,163,080
$
5,035,748
4,917,489
4,782,609
4,747,289
4,402,957
4,403,212
4,372,483
4,349,163
28,296
33,042
33,922
39,663
33,263
40,797
47,026
53,119
40,622
0.55%
0.66%
0.69%
0.83%
0.70%
0.93%
1.07%
1.21%
0.93%
(1) Excludes loans pledged to secure AgVantage securities.
The 90-day delinquency measure includes loans 90 days or more past due as well as loans in foreclosure,
loans restructured after delinquency, and non-performing loans where the borrower is in bankruptcy.
As of December 31, 2013, Farmer Mac individually analyzed $32.0 million of the $97.1 million of
recorded investment in impaired loans for collateral shortfalls against updated appraised values, other
updated collateral valuations or discounted values. For the remaining $65.1 million of impaired assets
for which updated valuations were not available, Farmer Mac evaluated them in the aggregate in
consideration of their similar risk characteristics and historical statistics. Farmer Mac recorded specific
allowances of $2.7 million for undercollateralized assets as of December 31, 2013. Farmer Mac's non-
specific or general allowances were $10.6 million as of December 31, 2013.
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 are calculated by dividing the loan
principal balance at the time of guarantee, purchase, or commitment by the appraised value at the date of
loan origination or, when available, updated appraised value at the time of guarantee, purchase, or
commitment. Other factors include, but are not limited to, other underwriting standards, commodity and
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As of December 31, 2013, Farmer Mac had no ethanol loans that were 90-days delinquent. For more
information about the conditions facing ethanol producers, see "—Outlook."
farming forecasts, and regional economic and agricultural conditions. Effective January 1, 2013, some
states were reclassified to different regions of the United States as compared to prior periods.
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 December 31, 2013 and 2012, the average unpaid
balance of loans outstanding in the Farm & Ranch line of business (excluding loans that secured
AgVantage securities) was $426,000 and $392,000, respectively. For Farm & Ranch loan purchases
made in 2013, the weighted average original loan-to-value ratio was 44 percent, compared to 45 percent
in 2012 and 46 percent in 2011. The weighted average original loan-to-value ratio (based on original
appraised value that has not been indexed to provide a current market value or reflect amortization of
loans) for Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed
Securities (excluding AgVantage securities) and LTSPCs was approximately 49 percent as of
December 31, 2013 and 52 percent as of December 31, 2012. The weighted average current loan-to-
value ratio (based on original appraised value but which reflects loan amortization since purchase) for
Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities
(excluding AgVantage securities) and LTSPCs was approximately 38 percent as of December 31, 2013
and 2012. The weighted-average original loan-to-value ratio for all 90-day delinquencies was 45 percent
as of December 31, 2013, and 59 percent as of December 31, 2012.
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 (excluding AgVantage
securities) and LTSPCs:
Table 15
As of:
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
December 31, 2011
Outstanding Loans,
Guarantees, and
LTSPCs (1)
90-day
Delinquencies
Percentage
(dollars in thousands)
$
5,163,080
$
5,035,748
4,917,489
4,782,609
4,747,289
4,402,957
4,403,212
4,372,483
4,349,163
28,296
33,042
33,922
39,663
33,263
40,797
47,026
53,119
40,622
0.55%
0.66%
0.69%
0.83%
0.70%
0.93%
1.07%
1.21%
0.93%
(1) Excludes loans pledged to secure AgVantage securities.
The 90-day delinquency measure includes loans 90 days or more past due as well as loans in foreclosure,
loans restructured after delinquency, and non-performing loans where the borrower is in bankruptcy.
As of December 31, 2013, Farmer Mac individually analyzed $32.0 million of the $97.1 million of
recorded investment in impaired loans for collateral shortfalls against updated appraised values, other
updated collateral valuations or discounted values. For the remaining $65.1 million of impaired assets
for which updated valuations were not available, Farmer Mac evaluated them in the aggregate in
consideration of their similar risk characteristics and historical statistics. Farmer Mac recorded specific
allowances of $2.7 million for undercollateralized assets as of December 31, 2013. Farmer Mac's non-
specific or general allowances were $10.6 million as of December 31, 2013.
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 are calculated by dividing the loan
principal balance at the time of guarantee, purchase, or commitment by the appraised value at the date of
loan origination or, when available, updated appraised value at the time of guarantee, purchase, or
commitment. Other factors include, but are not limited to, other underwriting standards, commodity and
97
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The following table presents outstanding Farm & Ranch loans held and loans underlying LTSPCs and
off-balance sheet Farm & Ranch Guaranteed Securities (excluding AgVantage securities) and 90-day
delinquencies as of December 31, 2013 by year of origination, geographic region, commodity/collateral
type, and original loan-to-value ratio:
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 (excluding AgVantage securities) as of December 31, 2013 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
Farm & Ranch 90-Day Delinquencies as of December 31, 2013
Distribution of
Outstanding
Loans,
Guarantees, and
LTSPCs
Outstanding
Loans,
Guarantees, and
LTSPCs (1)
90-Day
Delinquencies
(2)
Percentage
(dollars in thousands)
Table 16
By year of origination:
Before 2001
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total
By geographic region (3):
Northwest
Southwest
Mid-North
Mid-South
Northeast
Southeast
Total
By commodity/collateral type:
Crops
Permanent plantings
Livestock
Part-time farm
Ag. Storage and processing (including ethanol facilities)
Other
Total
By original loan-to-value ratio:
0.00% to 40.00%
40.01% to 50.00%
50.01% to 60.00%
60.01% to 70.00%
70.01% to 80.00%
80.01% to 90.00%
Total
7%
2%
3%
3%
4%
5%
6%
5%
7%
5%
7%
9%
16%
21%
100%
10%
34%
33%
12%
4%
7%
100%
52%
18%
24%
3%
3%
—
100%
27%
21%
28%
21%
2%
1%
100%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
342,884
122,141
155,126
178,043
208,094
282,698
287,333
258,759
336,681
233,694
349,216
469,951
844,979
1,093,481
5,163,080
524,034
1,752,109
1,702,668
601,359
231,731
351,179
5,163,080
2,666,857
907,824
1,246,105
162,743
170,918
8,633
5,163,080
1,375,758
1,099,033
1,431,562
1,113,427
110,828 (4)
32,472 (4)
$
5,163,080
$
4,108
1,360
1,029
3,605
119
997
4,567
10,425
1,169
185
732
—
—
—
28,296
2,423
9,283
2,370
2,317
1,029
10,874
28,296
8,256
11,841
4,462
3,618
—
119
28,296
7,755
15,597
2,017
1,978
949
—
28,296
1.20%
1.11%
0.66%
2.02%
0.06%
0.35%
1.59%
4.03%
0.35%
0.08%
0.21%
—%
—%
—%
0.55%
0.46%
0.53%
0.14%
0.39%
0.44%
3.10%
0.55%
0.31%
1.30%
0.36%
2.22%
—%
1.38%
0.55%
0.56%
1.42%
0.14%
0.18%
0.86%
—%
0.55%
(1) Excludes loans pledged to secure AgVantage securities.
(2)
Includes loans and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are 90 days or more past due, in
foreclosure, restructured after delinquency, and in bankruptcy, excluding loans performing under either their original loan terms or a court-approved
bankruptcy plan.
(3) 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).
(4) Primarily part-time farm loans.
99
commitments.
Table 17
By year of origination:
Before 2001
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total
Northwest
Southwest
Mid-North
Mid-South
Northeast
Southeast
Total
Other
Total
Farm & Ranch Credit Losses Relative to Cumulative
Original Loans, Guarantees, and LTSPCs as of December 31, 2013
Cumulative Original Loans,
Guarantees and LTSPCs (1)
Cumulative Net
Credit Losses
Cumulative Loss
Rate
(dollars in thousands)
$
7,365,009
$
11,032
1,157,584
1,191,640
1,013,633
746,745
900,898
931,876
712,846
796,799
512,302
616,221
704,271
1,000,307
1,177,469
18,827,600
2,546,795
6,762,961
4,426,691
2,048,769
1,496,854
1,545,530
18,827,600
8,270,827
3,886,607
4,799,267
1,050,500
674,342
146,057
$
$
$
$
18,827,600
$
178
89
404
264
(213)
9,602
4,456
3,244
1,508
—
—
—
—
7,402
9,045
12,984
(282)
83
1,332
30,564
4,403
9,377
3,859
913
12,012
—
30,564
0.15 %
0.02 %
0.01 %
0.04 %
0.04 %
(0.02)%
1.03 %
0.63 %
0.41 %
0.29 %
— %
— %
— %
— %
0.29 %
0.13 %
0.29 %
(0.01)%
0.01 %
0.09 %
0.16 %
0.05 %
0.24 %
0.08 %
0.09 %
1.78 %
— %
0.16 %
By geographic region (2):
30,564
0.16 %
By commodity/collateral type:
Crops
Permanent plantings
Livestock
Part-time farm
Ag. Storage and processing (including ethanol facilities) (3)
(1) Excludes loans pledged to secure AgVantage securities.
(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) Several of the loans underlying agricultural storage and processing LTSPCs are for facilities under construction and, as of December 31, 2013,
approximately $21.3 million of the loans were not yet disbursed by the lender.
$
$
$
$
$
100
The following table presents outstanding Farm & Ranch loans held and loans underlying LTSPCs and
off-balance sheet Farm & Ranch Guaranteed Securities (excluding AgVantage securities) and 90-day
delinquencies as of December 31, 2013 by year of origination, geographic region, commodity/collateral
type, and original loan-to-value ratio:
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 (excluding AgVantage securities) as of December 31, 2013 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.
Farm & Ranch 90-Day Delinquencies as of December 31, 2013
Table 17
Distribution of
Outstanding
Loans,
Guarantees, and
LTSPCs
Outstanding
Loans,
Guarantees, and
LTSPCs (1)
(dollars in thousands)
90-Day
Delinquencies
(2)
Percentage
Farm & Ranch Credit Losses Relative to Cumulative
Original Loans, Guarantees, and LTSPCs as of December 31, 2013
Cumulative Original Loans,
Guarantees and LTSPCs (1)
Cumulative Net
Credit Losses
Cumulative Loss
Rate
(dollars in thousands)
By year of origination:
Before 2001
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total
By geographic region (2):
Northwest
Southwest
Mid-North
Mid-South
Northeast
Southeast
Total
By commodity/collateral type:
Crops
Permanent plantings
Livestock
Part-time farm
Ag. Storage and processing (including ethanol facilities) (3)
Other
Total
$
$
$
$
$
$
7,365,009
1,157,584
1,191,640
1,013,633
746,745
900,898
931,876
712,846
796,799
512,302
616,221
704,271
1,000,307
1,177,469
18,827,600
2,546,795
6,762,961
4,426,691
2,048,769
1,496,854
1,545,530
18,827,600
8,270,827
3,886,607
4,799,267
1,050,500
674,342
146,057
18,827,600
$
$
$
$
$
$
11,032
178
89
404
264
(213)
9,602
4,456
3,244
1,508
—
—
—
—
30,564
7,402
9,045
12,984
(282)
83
1,332
30,564
4,403
9,377
3,859
913
12,012
—
30,564
0.15 %
0.02 %
0.01 %
0.04 %
0.04 %
(0.02)%
1.03 %
0.63 %
0.41 %
0.29 %
— %
— %
— %
— %
0.16 %
0.29 %
0.13 %
0.29 %
(0.01)%
0.01 %
0.09 %
0.16 %
0.05 %
0.24 %
0.08 %
0.09 %
1.78 %
— %
0.16 %
(1) Excludes loans pledged to secure AgVantage securities.
(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) Several of the loans underlying agricultural storage and processing LTSPCs are for facilities under construction and, as of December 31, 2013,
approximately $21.3 million of the loans were not yet disbursed by the lender.
99
100
By geographic region (3):
28,296
0.55%
By year of origination:
Before 2001
Table 16
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total
Northwest
Southwest
Mid-North
Mid-South
Northeast
Southeast
Total
By commodity/collateral type:
Crops
Permanent plantings
Livestock
Part-time farm
Other
Total
0.00% to 40.00%
40.01% to 50.00%
50.01% to 60.00%
60.01% to 70.00%
70.01% to 80.00%
80.01% to 90.00%
Total
bankruptcy plan.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
342,884
122,141
155,126
178,043
208,094
282,698
287,333
258,759
336,681
233,694
349,216
469,951
844,979
1,093,481
5,163,080
524,034
1,752,109
1,702,668
601,359
231,731
351,179
5,163,080
2,666,857
907,824
1,246,105
162,743
170,918
8,633
5,163,080
1,375,758
1,099,033
1,431,562
1,113,427
7%
2%
3%
3%
4%
5%
6%
5%
7%
5%
7%
9%
16%
21%
100%
10%
34%
33%
12%
4%
7%
100%
52%
18%
24%
3%
3%
—
100%
27%
21%
28%
21%
2%
1%
4,108
1,360
1,029
3,605
119
997
4,567
10,425
1,169
185
732
—
—
—
2,423
9,283
2,370
2,317
1,029
10,874
28,296
8,256
11,841
4,462
3,618
—
119
28,296
7,755
15,597
2,017
1,978
949
—
1.20%
1.11%
0.66%
2.02%
0.06%
0.35%
1.59%
4.03%
0.35%
0.08%
0.21%
—%
—%
—%
0.46%
0.53%
0.14%
0.39%
0.44%
3.10%
0.55%
0.31%
1.30%
0.36%
2.22%
—%
1.38%
0.55%
0.56%
1.42%
0.14%
0.18%
0.86%
—%
0.55%
Ag. Storage and processing (including ethanol facilities)
By original loan-to-value ratio:
110,828 (4)
32,472 (4)
100%
$
5,163,080
$
28,296
(1) Excludes loans pledged to secure AgVantage securities.
(2)
Includes loans and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are 90 days or more past due, in
foreclosure, restructured after delinquency, and in bankruptcy, excluding loans performing under either their original loan terms or a court-approved
(3) 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).
(4) Primarily part-time farm loans.
Analysis of portfolio performance indicates that commodity type is the primary determinant of Farmer
Mac's exposure to loss on a given loan. Within most commodity groups, certain geographic areas allow
greater economies of scale or proximity to markets than others and, consequently, may result in more
successful operations within the commodity group. Certain geographic areas also offer better growing
conditions and agricultural infrastructure than others and, consequently, may result in more versatile and
more successful operators within a given commodity group. Farmer Mac's board of directors has
established policies regarding geographic and commodity concentration to maintain adequate
diversification and measure concentration risk.
The following tables present concentrations of Farm & Ranch loans held and loans underlying LTSPCs
and off-balance sheet Farm & Ranch Guaranteed Securities (excluding AgVantage securities) by
commodity type within geographic region and cumulative credit losses by origination year and
commodity type:
Table 18
Farm & Ranch Concentrations by Commodity Type within Geographic Region
December 31, 2013
Crops
Permanent
Plantings
Livestock
Part-time
Farm
Ag. Storage and
Processing
(including ethanol
facilities)
Other
Total
(dollars in thousands)
$ 279,768
$
87,996
$ 128,870
$ 12,400
$
15,000
$
— $ 524,034
5.5%
1.7%
2.5%
0.2%
0.3%
—%
10.2%
512,149
659,762
528,068
34,907
16,692
531
1,752,109
9.9%
12.8%
10.2%
0.7%
0.3%
—%
33.9%
1,363,284
24,120
180,437
12,711
115,992
6,124
1,702,668
26.4%
0.5%
3.5%
0.3%
368,257
11,932
191,183
26,408
7.1%
0.2%
3.8%
0.5%
68,455
26,231
67,063
56,050
1.3%
0.5%
1.2%
1.1%
74,944
97,783
150,484
20,267
1.5%
1.9%
2.9%
0.4%
2.2%
2,990
0.1%
13,743
0.3%
6,501
0.1%
0.1%
589
—%
189
—%
33.0%
601,359
11.7%
231,731
4.4%
1,200
351,179
—%
6.8%
$2,666,857
$ 907,824
$1,246,105
$ 162,743
$
170,918
$
8,633
$5,163,080
51.7%
17.6%
24.1%
3.2%
3.3%
0.1%
100.0%
By geographic region (1):
Northwest
Southwest
Mid-North
Mid-South
Northeast
Southeast
Total
(1) Geographic regions: Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND,
SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL,
FL, GA, MS, NC, SC, TN).
Table 19
By year of origination:
1995 and Prior
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total
Cumulative Credit Losses/(Recoveries) by Origination Year and Commodity Type
December 31, 2013
Crops
Permanent
Plantings
Livestock
Part-time
Farm
(in thousands)
Ag. Storage and
Processing
(including ethanol
facilities)
Total
277
(721)
(397)
(438)
(108)
7
45
—
363
—
(87)
1,729
1,012
2,623
98
—
—
—
—
(79)
2,296
2,785
1,848
723
1,907
(263)
1
—
—
—
—
11
—
—
—
—
—
148
(107)
(73)
(131)
1,781
158
1,049
132
—
—
162
—
40
779
—
69
—
—
—
—
—
—
—
—
296
(41)
—
89
41
102
137
145
144
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7,688
2,510
621
1,193
91
1,502
2,257
3,191
1,069
2,922
178
89
404
264
(213)
9,602
4,456
3,244
1,508
—
—
—
—
$
4,403
$
9,377
$
3,859
$
913
$
12,012
$
30,564
In Farmer Mac's experience, the degree to which the collateral is specialized or highly improved, such as
permanent plantings and facilities, is a more significant determinant of the probability of ultimate losses
on a given loan than geographic location. The versatility of a borrower's operation (and in the case of
persisting adverse economic conditions, the borrower's ability to switch commodity groups) will more
likely result in profitability for the borrower and, consequently, a lower risk of decreased value for the
underlying collateral. However, producers of agricultural commodities that require specialized or highly
improved property are less able to adapt their operations when faced with adverse economic conditions.
If adverse economic conditions persist for these commodities, not only might the borrower face a higher
risk of default, but also the prospective sale value of the collateral is more likely to decrease and the
related loan may become undercollateralized. This analysis is consistent with corresponding commodity
analyses, which indicate that Farmer Mac has experienced higher loss and collateral deficiency rates in
permanent planting loans and Ag. Storage and Processing loans (including Farmer Mac's exposure to
loans on ethanol plants) for which the collateral is typically highly improved and specialized. See "—
Outlook."
Farmer Mac's methodologies for pricing its guarantee and commitment fees, managing credit risks, and
providing adequate allowances for losses consider all of the foregoing factors and information.
101
102
Analysis of portfolio performance indicates that commodity type is the primary determinant of Farmer
Mac's exposure to loss on a given loan. Within most commodity groups, certain geographic areas allow
greater economies of scale or proximity to markets than others and, consequently, may result in more
successful operations within the commodity group. Certain geographic areas also offer better growing
conditions and agricultural infrastructure than others and, consequently, may result in more versatile and
more successful operators within a given commodity group. Farmer Mac's board of directors has
established policies regarding geographic and commodity concentration to maintain adequate
diversification and measure concentration risk.
The following tables present concentrations of Farm & Ranch loans held and loans underlying LTSPCs
and off-balance sheet Farm & Ranch Guaranteed Securities (excluding AgVantage securities) by
commodity type within geographic region and cumulative credit losses by origination year and
commodity type:
Table 18
Farm & Ranch Concentrations by Commodity Type within Geographic Region
December 31, 2013
Crops
Permanent
Plantings
Livestock
Farm
facilities)
Other
Total
Ag. Storage and
Processing
Part-time
(including ethanol
(dollars in thousands)
$ 279,768
$
87,996
$ 128,870
$ 12,400
$
15,000
$
— $ 524,034
5.5%
1.7%
2.5%
0.2%
0.3%
—%
10.2%
512,149
659,762
528,068
34,907
16,692
531
1,752,109
9.9%
12.8%
10.2%
0.7%
0.3%
—%
33.9%
1,363,284
24,120
180,437
12,711
115,992
6,124
1,702,668
26.4%
0.5%
3.5%
0.3%
368,257
11,932
191,183
26,408
7.1%
0.2%
3.8%
0.5%
68,455
26,231
67,063
56,050
1.3%
0.5%
1.2%
1.1%
74,944
97,783
150,484
20,267
1.5%
1.9%
2.9%
0.4%
2.2%
2,990
0.1%
13,743
0.3%
6,501
0.1%
0.1%
589
—%
189
—%
33.0%
601,359
11.7%
231,731
4.4%
1,200
351,179
—%
6.8%
$2,666,857
$ 907,824
$1,246,105
$ 162,743
$
170,918
$
8,633
$5,163,080
51.7%
17.6%
24.1%
3.2%
3.3%
0.1%
100.0%
By geographic region (1):
Northwest
Southwest
Mid-North
Mid-South
Northeast
Southeast
Total
(1) Geographic regions: Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND,
SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL,
FL, GA, MS, NC, SC, TN).
Table 19
By year of origination:
1995 and Prior
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total
Cumulative Credit Losses/(Recoveries) by Origination Year and Commodity Type
December 31, 2013
Crops
Permanent
Plantings
Livestock
Part-time
Farm
(in thousands)
Ag. Storage and
Processing
(including ethanol
facilities)
Total
277
(721)
(397)
(438)
(108)
7
45
—
363
—
(87)
1,729
1,012
2,623
98
—
—
—
—
(79)
2,296
2,785
1,848
723
1,907
1
—
—
—
(263)
—
11
—
148
—
—
—
—
(107)
(73)
(131)
1,781
158
1,049
132
—
—
162
—
40
779
—
69
—
—
—
—
—
—
—
—
296
(41)
—
89
41
102
137
145
144
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7,688
2,510
621
1,193
—
—
—
—
91
1,502
2,257
3,191
1,069
2,922
178
89
404
264
(213)
9,602
4,456
3,244
1,508
—
—
—
—
$
4,403
$
9,377
$
3,859
$
913
$
12,012
$
30,564
In Farmer Mac's experience, the degree to which the collateral is specialized or highly improved, such as
permanent plantings and facilities, is a more significant determinant of the probability of ultimate losses
on a given loan than geographic location. The versatility of a borrower's operation (and in the case of
persisting adverse economic conditions, the borrower's ability to switch commodity groups) will more
likely result in profitability for the borrower and, consequently, a lower risk of decreased value for the
underlying collateral. However, producers of agricultural commodities that require specialized or highly
improved property are less able to adapt their operations when faced with adverse economic conditions.
If adverse economic conditions persist for these commodities, not only might the borrower face a higher
risk of default, but also the prospective sale value of the collateral is more likely to decrease and the
related loan may become undercollateralized. This analysis is consistent with corresponding commodity
analyses, which indicate that Farmer Mac has experienced higher loss and collateral deficiency rates in
permanent planting loans and Ag. Storage and Processing loans (including Farmer Mac's exposure to
loans on ethanol plants) for which the collateral is typically highly improved and specialized. See "—
Outlook."
Farmer Mac's methodologies for pricing its guarantee and commitment fees, managing credit risks, and
providing adequate allowances for losses consider all of the foregoing factors and information.
101
102
Credit Risk – Institutional. Farmer Mac is exposed to credit risk arising from its business relationships
with other institutions including:
•
•
•
issuers of AgVantage securities and investments held by Farmer Mac;
approved lenders and servicers; and
interest rate swap counterparties.
Each AgVantage security is a general obligation of an issuing institution that is secured by eligible loans in
an amount at least equal to the outstanding principal amount of the security, with some level of
overcollateralization also required for AgVantage securities secured by Farm & Ranch loans. Farmer Mac
approves AgVantage counterparties and manages institutional credit risk related to those AgVantage
counterparties by requiring them to meet Farmer Mac's standards for creditworthiness. The required
collateralization level is established at the time of issuance and does not change during the life of the
security. In AgVantage transactions, the corporate obligor is required to remove from the pool of pledged
collateral any loan that becomes more than 30 days delinquent in the payment of principal or interest and
to substitute an eligible loan that is current in payment to maintain the minimum required collateralization
level. In the event of a default on the general obligation, Farmer Mac would have recourse to the pledged
collateral and have rights to the ongoing borrower payments of principal and interest. For a more detailed
description of AgVantage securities, see "Business—Farmer Mac Lines of Business—Farm & Ranch—
AgVantage Securities."
The unpaid principal balance of outstanding AgVantage on-balance sheet Farm & Ranch Guaranteed
Securities totaled $3.5 billion as of December 31, 2013 and $3.3 billion as of December 31, 2012. The
unpaid principal balance of on-balance sheet Rural Utilities Guaranteed Securities structured as
AgVantage transactions issued by the National Rural Utilities Cooperative Finance Corporation ("CFC")
and held by Farmer Mac totaled $1.5 billion as of December 31, 2013 and $1.3 billion as of December 31,
2012. In addition, the unpaid principal balance of outstanding off-balance sheet AgVantage transactions
totaled $1.0 billion as of December 31, 2013 and 2012.
The following table provides information about the issuers of AgVantage securities, as well as the required
collateralization levels for those transactions as of December 31, 2013 and December 31, 2012:
Table 20
Counterparty
Balance
December 31, 2013
Credit
Rating
Required
Collateralization
Balance
(dollars in thousands)
December 31, 2012
Credit
Rating
Required
Collateralization
MetLife(1)
CFC
Rabo Agrifinance, Inc.
Rabobank N.A.
Other(2)
$
2,750,000
1,538,214
1,700,000
50,000
9,650
AA-
A
N/A
N/A
N/A
Total outstanding
$
6,047,864
103%
100%
106%
106%
111% to 120%
$
2,750,000
1,311,175
1,500,000
50,000
9,200
$
5,620,375
AA-
A
N/A
N/A
N/A
103%
100%
106%
106%
111% to 120%
(1) Includes securities issued by Metropolitan Life Insurance Company and MetLife Insurance Company of Connecticut.
(2) Consists of AgVantage securities issued by 3 different issuers as of December 31, 2013 and 4 different issuers as of December 31, 2012.
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 on Farmer Mac's approval of lenders, see "Business—Farmer Mac Lines of
Business—Farm & Ranch—Approved Lenders" and "Business—Farmer Mac Lines of Business—Farm &
Ranch—Servicers."
Farmer Mac manages institutional credit risk related to its interest rate swap counterparties through
collateralization provisions contained in each of its swap agreements that varies based on the market value
of its swaps portfolio with each counterparty. In addition, Farmer Mac transacts interest rate swaps with
multiple counterparties to ensure a more even distribution of institutional credit risk related to its swap
transactions. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank
Act"), mandatory clearing of certain interest rate derivative transactions became effective for Farmer Mac
during second quarter 2013, and Farmer Mac has been able to use the clearing process for cleared swap
transactions as another mechanism for managing its derivative counterparty risk. Credit risk related to
interest rate swap contracts is discussed in "—Risk Management—Interest Rate Risk" and Note 6 to the
consolidated financial statements.
Credit Risk – Other Investments. As of December 31, 2013, Farmer Mac had $749.3 million of cash and
cash equivalents and $2.5 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 December 31, 2013, 25 percent of
Farmer Mac's regulatory capital was $151.0 million). This limitation is not applied to the obligations of
the United States or to qualified investment funds. The limitation applied to the obligations of any GSE is
100 percent of Farmer Mac's regulatory capital. Farmer Mac's policy applicable to new investments limits
Farmer Mac's total exposure to any single issuer of securities (other than GSEs and Government
Agencies) and uncollateralized financial derivatives to 5 percent of Farmer Mac's regulatory capital. See
103
104
Credit Risk – Institutional. Farmer Mac is exposed to credit risk arising from its business relationships
with other institutions including:
issuers of AgVantage securities and investments held by Farmer Mac;
•
•
•
approved lenders and servicers; and
interest rate swap counterparties.
Each AgVantage security is a general obligation of an issuing institution that is secured by eligible loans in
an amount at least equal to the outstanding principal amount of the security, with some level of
overcollateralization also required for AgVantage securities secured by Farm & Ranch loans. Farmer Mac
approves AgVantage counterparties and manages institutional credit risk related to those AgVantage
counterparties by requiring them to meet Farmer Mac's standards for creditworthiness. The required
collateralization level is established at the time of issuance and does not change during the life of the
security. In AgVantage transactions, the corporate obligor is required to remove from the pool of pledged
collateral any loan that becomes more than 30 days delinquent in the payment of principal or interest and
to substitute an eligible loan that is current in payment to maintain the minimum required collateralization
level. In the event of a default on the general obligation, Farmer Mac would have recourse to the pledged
collateral and have rights to the ongoing borrower payments of principal and interest. For a more detailed
description of AgVantage securities, see "Business—Farmer Mac Lines of Business—Farm & Ranch—
AgVantage Securities."
The unpaid principal balance of outstanding AgVantage on-balance sheet Farm & Ranch Guaranteed
Securities totaled $3.5 billion as of December 31, 2013 and $3.3 billion as of December 31, 2012. The
unpaid principal balance of on-balance sheet Rural Utilities Guaranteed Securities structured as
AgVantage transactions issued by the National Rural Utilities Cooperative Finance Corporation ("CFC")
and held by Farmer Mac totaled $1.5 billion as of December 31, 2013 and $1.3 billion as of December 31,
2012. In addition, the unpaid principal balance of outstanding off-balance sheet AgVantage transactions
totaled $1.0 billion as of December 31, 2013 and 2012.
The following table provides information about the issuers of AgVantage securities, as well as the required
collateralization levels for those transactions as of December 31, 2013 and December 31, 2012:
Table 20
Counterparty
Balance
Credit
Rating
Required
Collateralization
Balance
Credit
Rating
Required
Collateralization
December 31, 2013
December 31, 2012
MetLife(1)
CFC
Rabo Agrifinance, Inc.
Rabobank N.A.
Other(2)
$
2,750,000
1,538,214
1,700,000
50,000
9,650
AA-
A
N/A
N/A
N/A
Total outstanding
$
6,047,864
103%
100%
106%
106%
(dollars in thousands)
$
2,750,000
AA-
A
N/A
N/A
N/A
1,311,175
1,500,000
50,000
9,200
$
5,620,375
103%
100%
106%
106%
111% to 120%
111% to 120%
(1) Includes securities issued by Metropolitan Life Insurance Company and MetLife Insurance Company of Connecticut.
(2) Consists of AgVantage securities issued by 3 different issuers as of December 31, 2013 and 4 different issuers as of December 31, 2012.
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 on Farmer Mac's approval of lenders, see "Business—Farmer Mac Lines of
Business—Farm & Ranch—Approved Lenders" and "Business—Farmer Mac Lines of Business—Farm &
Ranch—Servicers."
Farmer Mac manages institutional credit risk related to its interest rate swap counterparties through
collateralization provisions contained in each of its swap agreements that varies based on the market value
of its swaps portfolio with each counterparty. In addition, Farmer Mac transacts interest rate swaps with
multiple counterparties to ensure a more even distribution of institutional credit risk related to its swap
transactions. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank
Act"), mandatory clearing of certain interest rate derivative transactions became effective for Farmer Mac
during second quarter 2013, and Farmer Mac has been able to use the clearing process for cleared swap
transactions as another mechanism for managing its derivative counterparty risk. Credit risk related to
interest rate swap contracts is discussed in "—Risk Management—Interest Rate Risk" and Note 6 to the
consolidated financial statements.
Credit Risk – Other Investments. As of December 31, 2013, Farmer Mac had $749.3 million of cash and
cash equivalents and $2.5 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 December 31, 2013, 25 percent of
Farmer Mac's regulatory capital was $151.0 million). This limitation is not applied to the obligations of
the United States or to qualified investment funds. The limitation applied to the obligations of any GSE is
100 percent of Farmer Mac's regulatory capital. Farmer Mac's policy applicable to new investments limits
Farmer Mac's total exposure to any single issuer of securities (other than GSEs and Government
Agencies) and uncollateralized financial derivatives to 5 percent of Farmer Mac's regulatory capital. See
103
104
"—Regulatory Matters" for more information on recent changes to the Liquidity and Investment
Regulations.
Interest Rate Risk. Farmer Mac is subject to interest rate risk on all assets retained on its balance sheet
because of possible timing differences in the cash flows of the assets and related liabilities. This risk is
primarily related to loans held, Farmer Mac Guaranteed Securities, and USDA Securities due to the ability
of borrowers to prepay their loans before the scheduled maturities, thereby increasing the risk of asset and
liability cash flow mismatches. Cash flow mismatches in a changing interest rate environment can reduce
the earnings of Farmer Mac if assets repay sooner than expected and the resulting cash flows must be
reinvested in lower-yielding investments when Farmer Mac's funding costs cannot be correspondingly
reduced, or if assets repay more slowly than expected and the associated debt must be replaced by higher-
cost debt. As discussed below, Farmer Mac manages this interest rate risk by funding assets purchased
with liabilities matching the duration and cash flow characteristics of the assets purchased.
The goal of interest rate risk management at Farmer Mac is to create and maintain a portfolio that
generates stable earnings and value across a variety of interest rate environments. Farmer Mac's primary
strategy for managing interest rate risk is to fund asset purchases with liabilities that have similar duration
and cash flow characteristics so that they will perform similarly as interest rates change. To match these
characteristics, Farmer Mac issues discount notes and both callable and non-callable medium-term notes
across a spectrum of maturities. Farmer Mac issues callable debt to offset the prepayment risk associated
with some loans. By using a blend of liabilities that includes callable debt, the interest rate sensitivities of
the liabilities tend to increase or decrease as interest rates change in a manner similar to changes in the
interest rate sensitivities of the assets. Farmer Mac also uses financial derivatives to better match the
durations of Farmer Mac's assets and liabilities, thereby reducing overall interest rate sensitivity.
Taking into consideration the prepayment provisions and the default probabilities associated with its loan
assets, Farmer Mac uses prepayment models to project and value cash flows associated with these
assets. Because borrowers' behaviors in various interest rate environments may change over time, Farmer
Mac periodically evaluates the effectiveness of these models compared to actual prepayment experience
and adjusts and refines the models as necessary to improve the precision of subsequent prepayment
forecasts.
In certain cases, yield maintenance provisions and other prepayment penalties contained in agricultural
mortgage and rural utilities loans reduce, but do not eliminate, prepayment risk. Those provisions require
borrowers to make an additional payment when they prepay their loans, thus compensating Farmer Mac
for the shortened duration of the prepaid loan. As of December 31, 2013, 3 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 2 percent had
other forms of prepayment protection (together covering 6 percent of all loans with fixed interest
rates). Of the Farm & Ranch loans purchased in 2013, none had yield maintenance or another form of
prepayment protection. As of December 31, 2013, none of the USDA Securities had yield maintenance
provisions; however, 8 percent contained prepayment penalties. Of the USDA Securities purchased in
2013, 9 percent contained various forms of prepayment penalties. As of December 31, 2013, 67 percent of
the rural utilities loans owned by Farmer Mac had yield maintenance provisions. Of the rural utilities
loans purchased in 2013, 55 percent had yield maintenance provisions. As of December 31, 2013,
substantially all of the rural utilities loans held in trusts where Farmer Mac owned the beneficial interest in
the underlying loan had yield maintenance provisions.
Farmer Mac's purchases of eligible loan assets expose Farmer Mac to interest rate risk arising primarily
from uncertainty as to when the borrowers will repay the outstanding principal balance on the related
loans. Generally, the values of Farmer Mac's eligible loan assets, and the debt issued to fund these assets,
increase when interest rates decline, and their values decrease as interest rates rise. Furthermore, changes
in interest rates may affect loan prepayment rates which may, in turn, affect durations and values of the
loans. Declining interest rates generally increase prepayment rates, which shortens the duration of these
assets, while rising interest rates tend to slow loan prepayments, thereby extending the duration of the
loans.
Farmer Mac is also subject to interest rate risk on loans that Farmer Mac has committed to acquire (other
than delinquent loans through LTSPCs) but has not yet purchased. When Farmer Mac commits to
purchase those loans, it is exposed to interest rate risk between the time it commits to purchase the loans
and the time it either:
•
•
sells Farmer Mac Guaranteed Securities backed by the loans; or
issues debt to retain the loans in its portfolio.
Farmer Mac manages the interest rate risk related to these loans, and any related Farmer Mac Guaranteed
Securities or debt issuance, through the use of forward sale contracts on the debt of other GSEs and
futures contracts involving U.S. Treasury securities. Farmer Mac uses forward sale contracts on GSE
securities to reduce its interest rate exposure to changes in both U.S. Treasury rates and spreads on Farmer
Mac debt and certain Farmer Mac Guaranteed Securities. Issuing debt to fund the loans as investments
does not fully eliminate interest rate risk due to the possible timing differences in the cash flows of the
assets and related liabilities, as discussed above.
Farmer Mac's $749.3 million of cash and cash equivalents mature within three months and are funded
with discount notes having similar maturities. As of December 31, 2013, $2.3 billion of the $2.5 billion of
investment securities (92 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 December 31, 2013, Farmer Mac had outstanding discount notes of $4.9 billion,
medium-term notes that mature within one year of $2.4 billion, and medium-term notes that mature after
one year of $5.0 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;
•
refunding existing liabilities; or
• using financial derivatives to alter the characteristics of existing assets or liabilities.
Farmer Mac uses a variety of metrics to quantify and manage its interest rate risk. These metrics include
sensitivity to interest rate movements of market value of equity ("MVE") and net interest income ("NII")
as well as duration gap analysis. MVE represents management's estimate of the present value of all future
cash flows from on- and off-balance sheet assets, liabilities, and financial derivatives, discounted at
current interest rates and appropriate spreads. However, MVE is not indicative of the market value of
Farmer Mac as a going concern because these market values are theoretical and do not reflect future
105
106
"—Regulatory Matters" for more information on recent changes to the Liquidity and Investment
Regulations.
Interest Rate Risk. Farmer Mac is subject to interest rate risk on all assets retained on its balance sheet
because of possible timing differences in the cash flows of the assets and related liabilities. This risk is
primarily related to loans held, Farmer Mac Guaranteed Securities, and USDA Securities due to the ability
of borrowers to prepay their loans before the scheduled maturities, thereby increasing the risk of asset and
liability cash flow mismatches. Cash flow mismatches in a changing interest rate environment can reduce
the earnings of Farmer Mac if assets repay sooner than expected and the resulting cash flows must be
reinvested in lower-yielding investments when Farmer Mac's funding costs cannot be correspondingly
reduced, or if assets repay more slowly than expected and the associated debt must be replaced by higher-
cost debt. As discussed below, Farmer Mac manages this interest rate risk by funding assets purchased
with liabilities matching the duration and cash flow characteristics of the assets purchased.
The goal of interest rate risk management at Farmer Mac is to create and maintain a portfolio that
generates stable earnings and value across a variety of interest rate environments. Farmer Mac's primary
strategy for managing interest rate risk is to fund asset purchases with liabilities that have similar duration
and cash flow characteristics so that they will perform similarly as interest rates change. To match these
characteristics, Farmer Mac issues discount notes and both callable and non-callable medium-term notes
across a spectrum of maturities. Farmer Mac issues callable debt to offset the prepayment risk associated
with some loans. By using a blend of liabilities that includes callable debt, the interest rate sensitivities of
the liabilities tend to increase or decrease as interest rates change in a manner similar to changes in the
interest rate sensitivities of the assets. Farmer Mac also uses financial derivatives to better match the
durations of Farmer Mac's assets and liabilities, thereby reducing overall interest rate sensitivity.
Taking into consideration the prepayment provisions and the default probabilities associated with its loan
assets, Farmer Mac uses prepayment models to project and value cash flows associated with these
assets. Because borrowers' behaviors in various interest rate environments may change over time, Farmer
Mac periodically evaluates the effectiveness of these models compared to actual prepayment experience
and adjusts and refines the models as necessary to improve the precision of subsequent prepayment
forecasts.
In certain cases, yield maintenance provisions and other prepayment penalties contained in agricultural
mortgage and rural utilities loans reduce, but do not eliminate, prepayment risk. Those provisions require
borrowers to make an additional payment when they prepay their loans, thus compensating Farmer Mac
for the shortened duration of the prepaid loan. As of December 31, 2013, 3 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 2 percent had
other forms of prepayment protection (together covering 6 percent of all loans with fixed interest
rates). Of the Farm & Ranch loans purchased in 2013, none had yield maintenance or another form of
prepayment protection. As of December 31, 2013, none of the USDA Securities had yield maintenance
provisions; however, 8 percent contained prepayment penalties. Of the USDA Securities purchased in
2013, 9 percent contained various forms of prepayment penalties. As of December 31, 2013, 67 percent of
the rural utilities loans owned by Farmer Mac had yield maintenance provisions. Of the rural utilities
loans purchased in 2013, 55 percent had yield maintenance provisions. As of December 31, 2013,
substantially all of the rural utilities loans held in trusts where Farmer Mac owned the beneficial interest in
the underlying loan had yield maintenance provisions.
Farmer Mac's purchases of eligible loan assets expose Farmer Mac to interest rate risk arising primarily
from uncertainty as to when the borrowers will repay the outstanding principal balance on the related
loans. Generally, the values of Farmer Mac's eligible loan assets, and the debt issued to fund these assets,
increase when interest rates decline, and their values decrease as interest rates rise. Furthermore, changes
in interest rates may affect loan prepayment rates which may, in turn, affect durations and values of the
loans. Declining interest rates generally increase prepayment rates, which shortens the duration of these
assets, while rising interest rates tend to slow loan prepayments, thereby extending the duration of the
loans.
Farmer Mac is also subject to interest rate risk on loans that Farmer Mac has committed to acquire (other
than delinquent loans through LTSPCs) but has not yet purchased. When Farmer Mac commits to
purchase those loans, it is exposed to interest rate risk between the time it commits to purchase the loans
and the time it either:
•
•
sells Farmer Mac Guaranteed Securities backed by the loans; or
issues debt to retain the loans in its portfolio.
Farmer Mac manages the interest rate risk related to these loans, and any related Farmer Mac Guaranteed
Securities or debt issuance, through the use of forward sale contracts on the debt of other GSEs and
futures contracts involving U.S. Treasury securities. Farmer Mac uses forward sale contracts on GSE
securities to reduce its interest rate exposure to changes in both U.S. Treasury rates and spreads on Farmer
Mac debt and certain Farmer Mac Guaranteed Securities. Issuing debt to fund the loans as investments
does not fully eliminate interest rate risk due to the possible timing differences in the cash flows of the
assets and related liabilities, as discussed above.
Farmer Mac's $749.3 million of cash and cash equivalents mature within three months and are funded
with discount notes having similar maturities. As of December 31, 2013, $2.3 billion of the $2.5 billion of
investment securities (92 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 December 31, 2013, Farmer Mac had outstanding discount notes of $4.9 billion,
medium-term notes that mature within one year of $2.4 billion, and medium-term notes that mature after
one year of $5.0 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;
refunding existing liabilities; or
using financial derivatives to alter the characteristics of existing assets or liabilities.
Farmer Mac uses a variety of metrics to quantify and manage its interest rate risk. These metrics include
sensitivity to interest rate movements of market value of equity ("MVE") and net interest income ("NII")
as well as duration gap analysis. MVE represents management's estimate of the present value of all future
cash flows from on- and off-balance sheet assets, liabilities, and financial derivatives, discounted at
current interest rates and appropriate spreads. However, MVE is not indicative of the market value of
Farmer Mac as a going concern because these market values are theoretical and do not reflect future
105
106
business activities. MVE sensitivity analysis is used to measure the degree to which the market values of
Farmer Mac's assets and liabilities change for a given change in interest rates. Because this analysis
evaluates the impact of interest rate movements on the value of all future cash flows, this measure
provides an evaluation of Farmer Mac's long-term interest rate risk.
Farmer Mac's NII is the difference between the yield on its interest-earning assets and its funding costs.
Farmer Mac's NII may be affected by changes in market interest rates resulting from timing differences
between maturities and repricing characteristics of assets and liabilities. The direction and magnitude of
any such effect depends on the direction and magnitude of the change in interest rates as well as the
composition of Farmer Mac's portfolio. The NII forecast represents an estimate of the net interest income
that Farmer Mac's current portfolio is expected to produce over a twelve month horizon. As a result, NII
sensitivity statistics provide a shorter-term view of Farmer Mac's interest rate sensitivity.
Duration is a measure of a financial instrument's sensitivity to small changes in interest rates. Duration
gap is the difference between the estimated durations of Farmer Mac's assets and liabilities. Because
duration is a measure of market value sensitivity, duration gap summarizes the extent to which estimated
market value sensitivities for assets and liabilities are matched. Duration gap provides a relatively concise
measure of the interest rate risk inherent in Farmer Mac's outstanding book of business.
A positive duration gap denotes that the duration of Farmer Mac's assets is greater than the duration of its
liabilities. A positive duration gap indicates that the market value of Farmer Mac's assets is more sensitive
to small interest rate movements than is the market value of its liabilities. Conversely, a negative duration
gap indicates that Farmer Mac's assets are less sensitive to small interest rate movements than are the
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
December 31, 2013 and December 31, 2012 to an immediate and instantaneous uniform or "parallel" shift
in the yield curve:
Table 21
Interest Rate Scenario
December 31, 2013
December 31, 2012
Percentage Change in MVE from Base Case
+100 basis points
-25 basis points
+100 basis points
-25 basis points
(2.2)%
0.1 %
2.2 %
(8.1)%
Interest Rate Scenario
December 31, 2013
December 31, 2012
Percentage Change in NII from Base Case
4.8 %
(2.2)%
(0.4)%
(6.2)%
Farmer Mac's board of directors has established policies and procedures regarding MVE and NII
sensitivity. These policies include the measurement of MVE and NII sensitivity to more severe decreasing
interest rate scenarios that are consistent in magnitude with the increasing interest rate scenarios.
However, given the low interest rate environment, such rate scenarios produce negative interest rates, and,
as a result, do not produce results that are meaningful. Consequently, Farmer Mac measures and reports
MVE and NII sensitivity to a down 25 basis point interest rate shock.
As of December 31, 2013, Farmer Mac's effective duration gap was 0.3 months, compared to minus 2.4
months as of December 31, 2012. Longer-term interest rates increased significantly and the yield curves
steepened during 2013. This sharp rate movement lengthened the duration of Farmer Mac's assets relative
to its liabilities, thereby reducing Farmer Mac's duration gap and its overall interest rate sensitivity.
Farmer Mac's interest rate sensitivity remains relatively low and at manageable levels.
The economic effects of financial derivatives are included in Farmer Mac's MVE, NII, and duration gap
analyses. Farmer Mac enters into the following financial derivative transactions principally to protect
against risk from the effects of market price or interest rate movements on the value of assets, future cash
flows, credit exposure, and debt issuance, not for trading or speculative purposes:
•
•
•
"pay-fixed" interest rate swaps, in which Farmer Mac pays fixed rates of interest to, and receives
floating rates of interest from, counterparties;
"receive-fixed" interest rate swaps, in which Farmer Mac receives fixed rates of interest from, and
pays floating rates of interest to, counterparties; and
"basis swaps," in which Farmer Mac pays variable rates of interest based on one index to, and
receives variable rates of interest based on another index from, counterparties.
As of December 31, 2013, Farmer Mac had $6.6 billion combined notional amount of interest rate swaps,
with terms ranging from less than one year to twenty-five years, of which $1.7 billion were pay-fixed
interest rate swaps, $4.5 billion were receive-fixed interest rate swaps, and $0.4 billion were basis swaps.
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108
business activities. MVE sensitivity analysis is used to measure the degree to which the market values of
Farmer Mac's assets and liabilities change for a given change in interest rates. Because this analysis
evaluates the impact of interest rate movements on the value of all future cash flows, this measure
provides an evaluation of Farmer Mac's long-term interest rate risk.
Farmer Mac's NII is the difference between the yield on its interest-earning assets and its funding costs.
Farmer Mac's NII may be affected by changes in market interest rates resulting from timing differences
between maturities and repricing characteristics of assets and liabilities. The direction and magnitude of
any such effect depends on the direction and magnitude of the change in interest rates as well as the
composition of Farmer Mac's portfolio. The NII forecast represents an estimate of the net interest income
that Farmer Mac's current portfolio is expected to produce over a twelve month horizon. As a result, NII
sensitivity statistics provide a shorter-term view of Farmer Mac's interest rate sensitivity.
Duration is a measure of a financial instrument's sensitivity to small changes in interest rates. Duration
gap is the difference between the estimated durations of Farmer Mac's assets and liabilities. Because
duration is a measure of market value sensitivity, duration gap summarizes the extent to which estimated
market value sensitivities for assets and liabilities are matched. Duration gap provides a relatively concise
measure of the interest rate risk inherent in Farmer Mac's outstanding book of business.
A positive duration gap denotes that the duration of Farmer Mac's assets is greater than the duration of its
liabilities. A positive duration gap indicates that the market value of Farmer Mac's assets is more sensitive
to small interest rate movements than is the market value of its liabilities. Conversely, a negative duration
gap indicates that Farmer Mac's assets are less sensitive to small interest rate movements than are the
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
December 31, 2013 and December 31, 2012 to an immediate and instantaneous uniform or "parallel" shift
in the yield curve:
Table 21
Percentage Change in MVE from Base Case
Interest Rate Scenario
December 31, 2013
December 31, 2012
+100 basis points
-25 basis points
(2.2)%
0.1 %
4.8 %
(2.2)%
Percentage Change in NII from Base Case
Interest Rate Scenario
December 31, 2013
December 31, 2012
+100 basis points
-25 basis points
2.2 %
(8.1)%
(0.4)%
(6.2)%
Farmer Mac's board of directors has established policies and procedures regarding MVE and NII
sensitivity. These policies include the measurement of MVE and NII sensitivity to more severe decreasing
interest rate scenarios that are consistent in magnitude with the increasing interest rate scenarios.
However, given the low interest rate environment, such rate scenarios produce negative interest rates, and,
as a result, do not produce results that are meaningful. Consequently, Farmer Mac measures and reports
MVE and NII sensitivity to a down 25 basis point interest rate shock.
As of December 31, 2013, Farmer Mac's effective duration gap was 0.3 months, compared to minus 2.4
months as of December 31, 2012. Longer-term interest rates increased significantly and the yield curves
steepened during 2013. This sharp rate movement lengthened the duration of Farmer Mac's assets relative
to its liabilities, thereby reducing Farmer Mac's duration gap and its overall interest rate sensitivity.
Farmer Mac's interest rate sensitivity remains relatively low and at manageable levels.
The economic effects of financial derivatives are included in Farmer Mac's MVE, NII, and duration gap
analyses. Farmer Mac enters into the following financial derivative transactions principally to protect
against risk from the effects of market price or interest rate movements on the value of assets, future cash
flows, credit exposure, and debt issuance, not for trading or speculative purposes:
•
•
•
"pay-fixed" interest rate swaps, in which Farmer Mac pays fixed rates of interest to, and receives
floating rates of interest from, counterparties;
"receive-fixed" interest rate swaps, in which Farmer Mac receives fixed rates of interest from, and
pays floating rates of interest to, counterparties; and
"basis swaps," in which Farmer Mac pays variable rates of interest based on one index to, and
receives variable rates of interest based on another index from, counterparties.
As of December 31, 2013, Farmer Mac had $6.6 billion combined notional amount of interest rate swaps,
with terms ranging from less than one year to twenty-five years, of which $1.7 billion were pay-fixed
interest rate swaps, $4.5 billion were receive-fixed interest rate swaps, and $0.4 billion were basis swaps.
107
108
Farmer Mac enters into interest rate swap contracts to adjust the characteristics of its debt to match more
closely the cash flow and duration characteristics of its loans and other assets, thereby reducing interest
rate risk and often times deriving an overall lower effective cost of borrowing than would otherwise be
available to Farmer Mac in the conventional debt market. Specifically, interest rate swaps synthetically
convert the variable cash flows related to the forecasted issuance of short-term debt into effectively fixed
rate medium-term notes that match the anticipated duration and interest rate characteristics of the
corresponding assets. Farmer Mac evaluates the overall cost of using the swap market as a funding
alternative and uses interest rate swaps to manage specific interest rate risks for specific transactions.
Certain financial derivatives are designated as fair value hedges of fixed rate assets classified as available-
for-sale to protect against fair value changes in the assets related to a benchmark interest rate (i.e.,
LIBOR).
Farmer Mac has used callable interest rate swaps (in conjunction with the issuance of short-term debt) as
an alternative to callable medium-term notes with equivalently structured maturities and call options. The
call options on the swaps are designed to match the prepayment options on those assets without
prepayment protection. The blended durations of the swaps are also designed to match the duration of the
related assets over their estimated lives. If the assets prepay, the swaps can be called and the short-term
debt repaid; if the assets do not prepay, the swaps remain outstanding and the short-term debt is rolled
over, effectively providing fixed rate callable funding over the lives of the related assets. Thus, the
economics of the assets are closely matched to the economics of the interest rate swap and funding
combination.
As discussed in Note 6 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
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, changes in fair
value of the hedged items related to the risk being hedged are reported in "Accumulated other
comprehensive (loss)/income, net of tax" in the consolidated balance sheets. All of Farmer Mac's
financial derivative transactions are conducted under standard collateralized agreements that limit Farmer
Mac's potential credit exposure to any counterparty. As of December 31, 2013, Farmer Mac had
uncollateralized net exposures of $3.0 million to three counterparties.
Liquidity and Capital Resources
Farmer Mac regularly accesses the capital markets for liquidity, and Farmer Mac has maintained access to
the capital markets at favorable rates throughout 2013. Assuming continued access to the capital markets,
Farmer Mac believes it has sufficient liquidity and capital resources to support its operations for the next
12 months and for the foreseeable future. Farmer Mac also has a liquidity contingency plan to manage
unanticipated disruptions in its access to the capital markets. That plan involves borrowing through
repurchase agreement arrangements and the sale of liquid assets. In accordance with the calculation
prescribed by the Liquidity and Investment Regulations, Farmer Mac is required to maintain a minimum
of 60 days of liquidity and targets 90 days of liquidity. In accordance with the methodology prescribed by
those regulations, Farmer Mac maintained an average of 167 days of liquidity during 2013 and had
134 days of liquidity as of December 31, 2013. FCA recently adopted a final rule to revise its regulations
governing the management of liquidity risk at Farmer Mac, which will require that Farmer Mac maintain a
minimum of 90 days of liquidity and use a different methodology for calculating the available days of
liquidity. For more information about this final rule, see "—Regulatory Matters."
Debt Issuance. Farmer Mac funds its purchases of eligible loan assets and investment assets primarily by
issuing debt obligations of various maturities through a network of dealers in the public capital
markets. Farmer Mac works to enhance its funding operations by undertaking extensive debt investor
relations initiatives, including conducting non-deal roadshows with institutional investors; making
periodic dealer sales force presentations; and speaking at fixed income investor conferences throughout
the United States. Debt obligations issued by Farmer Mac include discount notes and fixed and floating
rate medium-term notes, including callable notes. Farmer Mac also issues discount notes and medium-
term notes to obtain funds to finance investment activities, transaction costs, guarantee payments, and
LTSPC purchase obligations.
Farmer Mac's board of directors has authorized the issuance of up to $15.0 billion of discount notes and
medium-term notes (of which $12.3 billion was outstanding as of December 31, 2013), subject to periodic
review of the adequacy of that level relative to Farmer Mac's borrowing requirements. Farmer Mac
invests the proceeds of its debt issuances in purchases of loans, Farmer Mac Guaranteed Securities, and
investment assets in accordance with policies established by its board of directors and subject to
regulations established by FCA.
Liquidity. The funding and liquidity needs of Farmer Mac's lines of business are driven by the purchase
and retention of eligible loans, USDA Securities, and Farmer Mac Guaranteed Securities; the maturities of
Farmer Mac's discount notes and medium-term notes; and payment of principal and interest on Farmer
Mac Guaranteed Securities. Farmer Mac's primary sources of funds to meet these needs are the proceeds
of its debt issuances, fees for its guarantees and commitments, net effective spread, loan repayments, and
maturities of AgVantage securities.
Farmer Mac may use a combination of pay-fixed interest rate swaps and receive-fixed interest rate swaps
to mitigate its exposure to interest rate risk and monitors the effects of actual and potential fair value
changes on its regulatory capital surplus. From time to time, Farmer Mac uses pay-fixed interest rate
swaps, combined with a planned series of discount note or short-term floating rate medium term note
issuances, as an alternative source of effectively fixed rate funding. While the swap market may provide
favorable effectively fixed rates, interest rate swap transactions expose Farmer Mac to the risk of future
variability of its own issuance spreads versus corresponding LIBOR rates. If the spreads on the Farmer
Mac discount notes or short-term floating rate medium term notes were to deteriorate relative to LIBOR,
109
110
Farmer Mac enters into interest rate swap contracts to adjust the characteristics of its debt to match more
Liquidity and Capital Resources
closely the cash flow and duration characteristics of its loans and other assets, thereby reducing interest
rate risk and often times deriving an overall lower effective cost of borrowing than would otherwise be
available to Farmer Mac in the conventional debt market. Specifically, interest rate swaps synthetically
convert the variable cash flows related to the forecasted issuance of short-term debt into effectively fixed
rate medium-term notes that match the anticipated duration and interest rate characteristics of the
corresponding assets. Farmer Mac evaluates the overall cost of using the swap market as a funding
alternative and uses interest rate swaps to manage specific interest rate risks for specific transactions.
Certain financial derivatives are designated as fair value hedges of fixed rate assets classified as available-
for-sale to protect against fair value changes in the assets related to a benchmark interest rate (i.e.,
LIBOR).
Farmer Mac has used callable interest rate swaps (in conjunction with the issuance of short-term debt) as
an alternative to callable medium-term notes with equivalently structured maturities and call options. The
call options on the swaps are designed to match the prepayment options on those assets without
prepayment protection. The blended durations of the swaps are also designed to match the duration of the
related assets over their estimated lives. If the assets prepay, the swaps can be called and the short-term
debt repaid; if the assets do not prepay, the swaps remain outstanding and the short-term debt is rolled
over, effectively providing fixed rate callable funding over the lives of the related assets. Thus, the
economics of the assets are closely matched to the economics of the interest rate swap and funding
combination.
As discussed in Note 6 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
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, changes in fair
value of the hedged items related to the risk being hedged are reported in "Accumulated other
comprehensive (loss)/income, net of tax" in the consolidated balance sheets. All of Farmer Mac's
financial derivative transactions are conducted under standard collateralized agreements that limit Farmer
Mac's potential credit exposure to any counterparty. As of December 31, 2013, Farmer Mac had
uncollateralized net exposures of $3.0 million to three counterparties.
Farmer Mac regularly accesses the capital markets for liquidity, and Farmer Mac has maintained access to
the capital markets at favorable rates throughout 2013. Assuming continued access to the capital markets,
Farmer Mac believes it has sufficient liquidity and capital resources to support its operations for the next
12 months and for the foreseeable future. Farmer Mac also has a liquidity contingency plan to manage
unanticipated disruptions in its access to the capital markets. That plan involves borrowing through
repurchase agreement arrangements and the sale of liquid assets. In accordance with the calculation
prescribed by the Liquidity and Investment Regulations, Farmer Mac is required to maintain a minimum
of 60 days of liquidity and targets 90 days of liquidity. In accordance with the methodology prescribed by
those regulations, Farmer Mac maintained an average of 167 days of liquidity during 2013 and had
134 days of liquidity as of December 31, 2013. FCA recently adopted a final rule to revise its regulations
governing the management of liquidity risk at Farmer Mac, which will require that Farmer Mac maintain a
minimum of 90 days of liquidity and use a different methodology for calculating the available days of
liquidity. For more information about this final rule, see "—Regulatory Matters."
Debt Issuance. Farmer Mac funds its purchases of eligible loan assets and investment assets primarily by
issuing debt obligations of various maturities through a network of dealers in the public capital
markets. Farmer Mac works to enhance its funding operations by undertaking extensive debt investor
relations initiatives, including conducting non-deal roadshows with institutional investors; making
periodic dealer sales force presentations; and speaking at fixed income investor conferences throughout
the United States. Debt obligations issued by Farmer Mac include discount notes and fixed and floating
rate medium-term notes, including callable notes. Farmer Mac also issues discount notes and medium-
term notes to obtain funds to finance investment activities, transaction costs, guarantee payments, and
LTSPC purchase obligations.
Farmer Mac's board of directors has authorized the issuance of up to $15.0 billion of discount notes and
medium-term notes (of which $12.3 billion was outstanding as of December 31, 2013), subject to periodic
review of the adequacy of that level relative to Farmer Mac's borrowing requirements. Farmer Mac
invests the proceeds of its debt issuances in purchases of loans, Farmer Mac Guaranteed Securities, and
investment assets in accordance with policies established by its board of directors and subject to
regulations established by FCA.
Liquidity. The funding and liquidity needs of Farmer Mac's lines of business are driven by the purchase
and retention of eligible loans, USDA Securities, and Farmer Mac Guaranteed Securities; the maturities of
Farmer Mac's discount notes and medium-term notes; and payment of principal and interest on Farmer
Mac Guaranteed Securities. Farmer Mac's primary sources of funds to meet these needs are the proceeds
of its debt issuances, fees for its guarantees and commitments, net effective spread, loan repayments, and
maturities of AgVantage securities.
Farmer Mac may use a combination of pay-fixed interest rate swaps and receive-fixed interest rate swaps
to mitigate its exposure to interest rate risk and monitors the effects of actual and potential fair value
changes on its regulatory capital surplus. From time to time, Farmer Mac uses pay-fixed interest rate
swaps, combined with a planned series of discount note or short-term floating rate medium term note
issuances, as an alternative source of effectively fixed rate funding. While the swap market may provide
favorable effectively fixed rates, interest rate swap transactions expose Farmer Mac to the risk of future
variability of its own issuance spreads versus corresponding LIBOR rates. If the spreads on the Farmer
Mac discount notes or short-term floating rate medium term notes were to deteriorate relative to LIBOR,
109
110
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 December 31, 2013 and December 31, 2012:
Table 22
Cash and cash equivalents
Investment securities:
December 31,
2013
December 31,
2012
(in thousands)
$
749,313
$
785,564
Guaranteed by U.S. Government and its agencies
1,084,187
1,377,870
Guaranteed by GSEs
Preferred stock issued by GSEs
Corporate debt securities
Asset-backed securities
Total
946,737
83,161
195,591
174,399
755,991
87,086
129,179
149,503
$
3,233,388
$
3,285,193
Farmer Mac's asset-backed investment securities include callable, highly rated auction-rate certificates
("ARCs"), the interest rates on which are reset through an auction process, most commonly at intervals of
28 days, or at formula-based floating rates as set forth in the related transaction documents in the event of
a failed auction. These formula-based floating rates, which may at times reset to zero, are intended to
preserve the underlying principal balance of the securities and avoid overall cash shortfalls. Accordingly,
payments of accrued interest may be delayed and are ultimately subject to cash availability. Beginning in
mid-February 2008, there were widespread failures of the auction mechanism designed to provide regular
liquidity to these types of securities. Consequently, Farmer Mac has not sold any of its ARCs into the
auctions since that time. All ARCs held by Farmer Mac are collateralized entirely by pools of Federal
Family Education Loan Program ("FFELP") guaranteed student loans that are backed by the full faith and
credit of the United States. Farmer Mac continues to believe that the credit quality of these securities is
high, based on the underlying collateralization and the securities' ratings. To date, Farmer Mac has
received all interest due on ARCs it holds and expects to continue to do so. Farmer Mac does not believe
that the auction failures will affect Farmer Mac's liquidity or its ability to fund its operations or make
dividend payments. All ARCs held by Farmer Mac are callable by the issuers at par at any time.
The carrying value of Farmer Mac's ARCs investments was $65.3 million as of December 31, 2013,
compared to $63.2 million of ARCs as of December 31, 2012. As of December 31, 2013, Farmer Mac's
carrying value of its ARCs was 88 percent of par. The discounted carrying value reflects uncertainty
regarding the ability to obtain par in the absence of any active market trading. See Note 13 for more
information on the carrying value of ARCs.
Excluding $0.9 billion of holdings in U.S. Treasury securities, the following table presents Farmer Mac's
largest holdings as of December 31, 2013. These holdings are presented as either "Cash and cash
equivalents" or "Investment securities" on the consolidated balance sheets.
Table 23
Investment
Issuer
Credit
Rating
Outstanding
Amount
Fair Value
(in thousands)
Government Guaranteed Securities
Small Business Administration
(1)
$
320,664
$
328,554
Government Guaranteed Securities
National Credit Union Administration
Senior Agency Debt
Senior Agency Debt
GSE Guaranteed Securities
Senior Agency Debt
GSE Preferred Stock
GSE Subordinated Debt
Federal Home Loan Mortgage
Corporation
Federal Home Loan Bank
Federal National Mortgage Association
Federal National Mortgage Association
CoBank, ACB (2)
CoBank, ACB (2)
AA+
AA+
AA+
AA+
AA+
A-
A-
248,682
227,695
183,320
140,988
84,314
78,500
70,000
248,805
227,655
184,027
148,713
84,602
83,161
63,385
(1) No rating available, backed by the full faith and credit of the United States.
(2) CoBank, ACB is an institution of the Farm Credit System, a government-sponsored enterprise.
Capital Requirements. Farmer Mac's charter establishes three capital standards – minimum, critical, and
risk-based. 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. The 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 upon Farmer Mac's compliance with the capital standards. Pursuant
to FCA regulation on capital planning, Farmer Mac has also established a policy for maintaining a
sufficient level of Tier 1 capital relative to its total risk-weighted assets, and has established parameters for
restricting Tier 1-eligible dividend and employee (including officer) bonus payments if Tier 1 capital
drops below specified levels. This policy will be effective for Farmer Mac for distributions commencing
in first quarter 2014. See "Business—Government Regulation of Farmer Mac—Regulation—Capital
Standards" for a discussion of Farmer Mac's statutory and risk-based capital requirements, FCA
enforcement powers, and Farmer Mac's Tier 1 capital policy, including restrictions on distributions. See
also "—Regulatory Matters" for a discussion of the FCA's recently-effective final rule on Farmer Mac's
capital planning.
111
112
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 December 31, 2013 and December 31, 2012:
Table 22
Cash and cash equivalents
Investment securities:
Guaranteed by GSEs
Preferred stock issued by GSEs
Corporate debt securities
Asset-backed securities
Total
Guaranteed by U.S. Government and its agencies
1,084,187
1,377,870
December 31,
December 31,
2013
2012
(in thousands)
$
749,313
$
785,564
946,737
83,161
195,591
174,399
755,991
87,086
129,179
149,503
$
3,233,388
$
3,285,193
Farmer Mac's asset-backed investment securities include callable, highly rated auction-rate certificates
("ARCs"), the interest rates on which are reset through an auction process, most commonly at intervals of
28 days, or at formula-based floating rates as set forth in the related transaction documents in the event of
a failed auction. These formula-based floating rates, which may at times reset to zero, are intended to
preserve the underlying principal balance of the securities and avoid overall cash shortfalls. Accordingly,
payments of accrued interest may be delayed and are ultimately subject to cash availability. Beginning in
mid-February 2008, there were widespread failures of the auction mechanism designed to provide regular
liquidity to these types of securities. Consequently, Farmer Mac has not sold any of its ARCs into the
auctions since that time. All ARCs held by Farmer Mac are collateralized entirely by pools of Federal
Family Education Loan Program ("FFELP") guaranteed student loans that are backed by the full faith and
credit of the United States. Farmer Mac continues to believe that the credit quality of these securities is
high, based on the underlying collateralization and the securities' ratings. To date, Farmer Mac has
received all interest due on ARCs it holds and expects to continue to do so. Farmer Mac does not believe
that the auction failures will affect Farmer Mac's liquidity or its ability to fund its operations or make
dividend payments. All ARCs held by Farmer Mac are callable by the issuers at par at any time.
The carrying value of Farmer Mac's ARCs investments was $65.3 million as of December 31, 2013,
compared to $63.2 million of ARCs as of December 31, 2012. As of December 31, 2013, Farmer Mac's
carrying value of its ARCs was 88 percent of par. The discounted carrying value reflects uncertainty
regarding the ability to obtain par in the absence of any active market trading. See Note 13 for more
information on the carrying value of ARCs.
Excluding $0.9 billion of holdings in U.S. Treasury securities, the following table presents Farmer Mac's
largest holdings as of December 31, 2013. These holdings are presented as either "Cash and cash
equivalents" or "Investment securities" on the consolidated balance sheets.
Table 23
Investment
Issuer
Credit
Rating
Outstanding
Amount
Fair Value
(in thousands)
Government Guaranteed Securities
Small Business Administration
(1)
$
320,664
$
328,554
Senior Agency Debt
Senior Agency Debt
Federal Home Loan Mortgage
Corporation
Federal Home Loan Bank
Government Guaranteed Securities
National Credit Union Administration
GSE Guaranteed Securities
Senior Agency Debt
GSE Preferred Stock
GSE Subordinated Debt
Federal National Mortgage Association
Federal National Mortgage Association
CoBank, ACB (2)
CoBank, ACB (2)
AA+
AA+
AA+
AA+
AA+
A-
A-
248,682
227,695
183,320
140,988
84,314
78,500
70,000
248,805
227,655
184,027
148,713
84,602
83,161
63,385
(1) No rating available, backed by the full faith and credit of the United States.
(2) CoBank, ACB is an institution of the Farm Credit System, a government-sponsored enterprise.
Capital Requirements. Farmer Mac's charter establishes three capital standards – minimum, critical, and
risk-based. 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. The 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 upon Farmer Mac's compliance with the capital standards. Pursuant
to FCA regulation on capital planning, Farmer Mac has also established a policy for maintaining a
sufficient level of Tier 1 capital relative to its total risk-weighted assets, and has established parameters for
restricting Tier 1-eligible dividend and employee (including officer) bonus payments if Tier 1 capital
drops below specified levels. This policy will be effective for Farmer Mac for distributions commencing
in first quarter 2014. See "Business—Government Regulation of Farmer Mac—Regulation—Capital
Standards" for a discussion of Farmer Mac's statutory and risk-based capital requirements, FCA
enforcement powers, and Farmer Mac's Tier 1 capital policy, including restrictions on distributions. See
also "—Regulatory Matters" for a discussion of the FCA's recently-effective final rule on Farmer Mac's
capital planning.
111
112
As of December 31, 2013 and 2012, Farmer Mac was classified as within "level I" (the highest
compliance level). The following table sets forth Farmer Mac's minimum capital requirements and
surpluses as of December 31, 2013 and 2012:
Table 24
As of December 31,
2013
2012
Amount
Ratio
Capital
Required
Amount
Ratio
Capital
Required
(dollars in thousands)
On-balance sheet assets (1)
$ 13,386,264
2.75% $
368,122
$ 12,478,534
2.75% $
343,160
Outstanding balance of off-balance sheet program assets
4,028,844
0.75%
30,217
4,079,765
0.75%
25,599
0.75%
192
398,531
590,671
37,234
0.75%
$
192,140
$
144,956
30,598
279
374,037
518,993
Financial derivatives (1)
Minimum capital requirement
Core capital
Excess capital
(1) As defined for determining statutory minimum capital.
Based on the risk-based capital stress test, Farmer Mac's risk-based capital requirement as of
December 31, 2013 was $90.8 million and Farmer Mac's regulatory capital of $604.0 million exceeded
that amount by approximately $513.2 million. Farmer Mac's risk-based capital requirement as of
December 31, 2012 was $58.1 million and Farmer Mac's regulatory capital of $535.9 million exceeded
that amount by approximately $477.8 million. Based on Farmer Mac's analysis of its capital position as of
December 31, 2013, Farmer Mac believes that it would have been in compliance with its new policy for
maintaining a Tier 1 capital ratio of at least 4.0 percent of risk-weighted assets plus a capital conservation
buffer of more than 2.5 percent of risk-weighted assets, if the policy had been effective on that date.
Farmer Mac II LLC Preferred Stock is permanent equity of Farmer Mac II LLC, though it does not
constitute a Tier 1 capital-eligible security. In an effort to increase Farmer Mac's Tier 1 capital, as defined
under Farmer Mac's capital plan, Farmer Mac II LLC will likely redeem some or all of the outstanding
Farmer Mac II LLC Preferred Stock on March 30, 2015 or a subsequent redemption date, at a cash
redemption price equal to the liquidation preference if Farmer Mac is able to replace the Farmer Mac II
LLC Preferred Stock with other securities issued by Farmer Mac constituting Tier 1 capital-eligible
securities. In addition, prior to the initial redemption date on March 30, 2015 or between subsequent
redemption dates, Farmer Mac or an affiliated third party may purchase FALConS from time to time in the
open market, in privately negotiated transactions or through a public tender offer, and, subject to favorable
market conditions, may seek to do so. For more information on the Farmer Mac II LLC Preferred Stock,
see "Business—Farmer Mac Lines of Business—Financing—Equity Issuance—Non-Controlling Interest
in Farmer Mac II LLC." For more information on Farmer Mac's capital plan, "Government Regulation of
Farmer Mac—Capital Standards—Capital Adequacy Requirements."
113
114
Contractual Obligations. The following table presents the amount and timing of Farmer Mac's known,
fixed, and determinable contractual obligations by payment date as of December 31, 2013. The payment
amounts represent those amounts contractually due to the recipient (including return of discount and
interest on debt) and do not include unamortized premiums or discounts or other similar carrying value
adjustments.
Table 25
One Year
or Less
One to
Three Years
Three to
Five Years
Over Five
Years
Total
(in thousands)
Discount notes (1)
Medium-term notes (1)
$ 4,883,980
$
— $
— $
— $ 4,883,980
2,458,000
2,706,715
1,206,000
1,097,867
7,468,582
Interest payments on fixed rate medium-term notes (2)
107,859
139,438
82,780
173,516
503,593
Interest payments on floating rate medium-term notes (3)
Operating lease obligations (4)
Purchase obligations (5)
1,216
1,340
614
907
2,729
61
2,778
97
—
8,339
97
—
2,317
15,186
675
(1) Future events, including additional issuance of discount notes and medium-term notes and refinancing of those notes, could cause actual
payments to differ significantly from these amounts. For more information regarding discount notes and medium-term notes, see Note 7
to the consolidated financial statements.
(2) Interest payments on callable medium-term notes are calculated based on contractual maturity. Future calls of these notes could cause
actual interest payments to differ significantly from the amounts presented.
(3) Calculated using the effective interest rates as of December 31, 2013. As a result, these amounts do not reflect the effects of changes in
the contractual interest rates effective on future interest rate reset dates.
(4) Includes amounts due under non-cancelable operating leases for office space and office equipment. See Note 12 to the consolidated
financial statements for more information regarding Farmer Mac's minimum lease payments for office space.
(5) Includes minimum amounts due under non-cancelable agreements to purchase goods or services that are enforceable and legally binding
and specify all significant terms. These agreements include agreements for the provision of consulting services, information technology
support, equipment maintenance, and financial analysis software and services. The amounts actually paid under these agreements will
likely be higher due to the variable components of some of these agreements under which the ultimate obligation owed is determined by
reference to actual usage or hours worked. The table does not include amounts due under agreements that are cancelable without penalty
or further payment as of December 31, 2013 and therefore do not represent enforceable and legally binding obligations. The table also
does not include amounts due under the terms of employment agreements with members of senior management; nor does it include
payments that are based on a varying outstanding loan volume (such as servicing fees), as those payments are not known, fixed, and
determinable contractual obligations.
Farmer Mac enters into financial derivative contracts under which it either receives cash from
counterparties, or is required to pay cash to them, depending on changes in interest rates. Financial
derivatives are carried on the consolidated balance sheets at fair value, representing the net present value
of expected future cash payments or receipts based on market interest rates as of the balance sheet date
adjusted for the consideration of credit risk of Farmer Mac and its counterparties. The fair values of the
contracts change daily as market interest rates change. Because the financial derivative liabilities recorded
on the consolidated balance sheet as of December 31, 2013 do not represent the amounts that may
ultimately be paid under the financial derivative contracts, those liabilities are not included in the table of
contractual obligations presented above. Further information regarding financial derivatives is included in
Note 2(h) and Note 6 to the consolidated financial statements.
2013
2012
Amount
Ratio
Amount
Ratio
As of December 31,
Capital
Required
(dollars in thousands)
Capital
Required
30,598
279
374,037
518,993
192
398,531
590,671
$
192,140
$
144,956
Financial derivatives (1)
Minimum capital requirement
Core capital
Excess capital
(1) As defined for determining statutory minimum capital.
Based on the risk-based capital stress test, Farmer Mac's risk-based capital requirement as of
December 31, 2013 was $90.8 million and Farmer Mac's regulatory capital of $604.0 million exceeded
that amount by approximately $513.2 million. Farmer Mac's risk-based capital requirement as of
December 31, 2012 was $58.1 million and Farmer Mac's regulatory capital of $535.9 million exceeded
that amount by approximately $477.8 million. Based on Farmer Mac's analysis of its capital position as of
December 31, 2013, Farmer Mac believes that it would have been in compliance with its new policy for
maintaining a Tier 1 capital ratio of at least 4.0 percent of risk-weighted assets plus a capital conservation
buffer of more than 2.5 percent of risk-weighted assets, if the policy had been effective on that date.
Farmer Mac II LLC Preferred Stock is permanent equity of Farmer Mac II LLC, though it does not
constitute a Tier 1 capital-eligible security. In an effort to increase Farmer Mac's Tier 1 capital, as defined
under Farmer Mac's capital plan, Farmer Mac II LLC will likely redeem some or all of the outstanding
Farmer Mac II LLC Preferred Stock on March 30, 2015 or a subsequent redemption date, at a cash
redemption price equal to the liquidation preference if Farmer Mac is able to replace the Farmer Mac II
LLC Preferred Stock with other securities issued by Farmer Mac constituting Tier 1 capital-eligible
securities. In addition, prior to the initial redemption date on March 30, 2015 or between subsequent
redemption dates, Farmer Mac or an affiliated third party may purchase FALConS from time to time in the
open market, in privately negotiated transactions or through a public tender offer, and, subject to favorable
market conditions, may seek to do so. For more information on the Farmer Mac II LLC Preferred Stock,
see "Business—Farmer Mac Lines of Business—Financing—Equity Issuance—Non-Controlling Interest
in Farmer Mac II LLC." For more information on Farmer Mac's capital plan, "Government Regulation of
Farmer Mac—Capital Standards—Capital Adequacy Requirements."
As of December 31, 2013 and 2012, Farmer Mac was classified as within "level I" (the highest
compliance level). The following table sets forth Farmer Mac's minimum capital requirements and
surpluses as of December 31, 2013 and 2012:
Table 24
Contractual Obligations. The following table presents the amount and timing of Farmer Mac's known,
fixed, and determinable contractual obligations by payment date as of December 31, 2013. The payment
amounts represent those amounts contractually due to the recipient (including return of discount and
interest on debt) and do not include unamortized premiums or discounts or other similar carrying value
adjustments.
Table 25
On-balance sheet assets (1)
$ 13,386,264
2.75% $
368,122
$ 12,478,534
2.75% $
343,160
Outstanding balance of off-balance sheet program assets
4,028,844
0.75%
30,217
4,079,765
0.75%
Discount notes (1)
Medium-term notes (1)
One Year
or Less
One to
Three Years
Three to
Five Years
Over Five
Years
Total
(in thousands)
$ 4,883,980
$
— $
— $
— $ 4,883,980
2,458,000
2,706,715
1,206,000
1,097,867
7,468,582
25,599
0.75%
37,234
0.75%
Interest payments on fixed rate medium-term notes (2)
107,859
139,438
82,780
173,516
503,593
Interest payments on floating rate medium-term notes (3)
Operating lease obligations (4)
Purchase obligations (5)
1,216
1,340
614
907
2,729
61
97
2,778
—
97
8,339
—
2,317
15,186
675
(1) Future events, including additional issuance of discount notes and medium-term notes and refinancing of those notes, could cause actual
payments to differ significantly from these amounts. For more information regarding discount notes and medium-term notes, see Note 7
to the consolidated financial statements.
(2) Interest payments on callable medium-term notes are calculated based on contractual maturity. Future calls of these notes could cause
actual interest payments to differ significantly from the amounts presented.
(3) Calculated using the effective interest rates as of December 31, 2013. As a result, these amounts do not reflect the effects of changes in
the contractual interest rates effective on future interest rate reset dates.
(4) Includes amounts due under non-cancelable operating leases for office space and office equipment. See Note 12 to the consolidated
financial statements for more information regarding Farmer Mac's minimum lease payments for office space.
(5) Includes minimum amounts due under non-cancelable agreements to purchase goods or services that are enforceable and legally binding
and specify all significant terms. These agreements include agreements for the provision of consulting services, information technology
support, equipment maintenance, and financial analysis software and services. The amounts actually paid under these agreements will
likely be higher due to the variable components of some of these agreements under which the ultimate obligation owed is determined by
reference to actual usage or hours worked. The table does not include amounts due under agreements that are cancelable without penalty
or further payment as of December 31, 2013 and therefore do not represent enforceable and legally binding obligations. The table also
does not include amounts due under the terms of employment agreements with members of senior management; nor does it include
payments that are based on a varying outstanding loan volume (such as servicing fees), as those payments are not known, fixed, and
determinable contractual obligations.
Farmer Mac enters into financial derivative contracts under which it either receives cash from
counterparties, or is required to pay cash to them, depending on changes in interest rates. Financial
derivatives are carried on the consolidated balance sheets at fair value, representing the net present value
of expected future cash payments or receipts based on market interest rates as of the balance sheet date
adjusted for the consideration of credit risk of Farmer Mac and its counterparties. The fair values of the
contracts change daily as market interest rates change. Because the financial derivative liabilities recorded
on the consolidated balance sheet as of December 31, 2013 do not represent the amounts that may
ultimately be paid under the financial derivative contracts, those liabilities are not included in the table of
contractual obligations presented above. Further information regarding financial derivatives is included in
Note 2(h) and Note 6 to the consolidated financial statements.
113
114
Contingent Liabilities. In conducting its loan purchase activities, Farmer Mac enters into mandatory
delivery commitments to purchase agricultural real estate mortgage loans and USDA Securities. In
conducting its LTSPC activities, Farmer Mac enters into arrangements whereby it commits to buy eligible
loans under certain conditions at an undetermined future date. The following table presents these
significant commitments:
and 2012:
Table 27
As of December 31, 2013 and 2012, outstanding off-balance sheet LTSPCs and Farmer Mac Guaranteed
Securities totaled $4.0 billion and $4.1 billion, respectively. The following table presents the balance of
outstanding LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities as of December 31, 2013
Table 26
LTSPCs
As of December 31,
2013
2012
(in thousands)
$
2,261,862
$
2,156,068
Mandatory commitments to purchase loans and USDA Securities
81,159
76,679
Farm & Ranch Guaranteed Securities
$
1,735,751
$
1,881,370
Further information regarding Farmer Mac's commitments to purchase loans is included in Note 12 to the
consolidated financial statements.
Off-Balance Sheet Arrangements. Farmer Mac offers two credit enhancement alternatives to direct loan
purchases through the Farm & Ranch line of business that allow approved lenders the ability to retain the
cash flow benefits of their loans and increase their liquidity and lending capacity: (1) LTSPCs and
(2) Farmer Mac Guaranteed Securities. Prior to the adoption of new accounting guidance on January 1,
2010 related to the consolidation of off-balance sheet assets, both types of transactions resulted in the
creation of off-balance sheet obligations for Farmer Mac in the ordinary course of its business. Effective
January 1, 2010, securitization trusts where Farmer Mac is the primary beneficiary, as described in Note 2
(q) to the consolidated financial statements, are consolidated on-balance sheet as "Loans held for
investment in consolidated trusts." LTSPCs and securitization trusts where Farmer Mac is not the primary
beneficiary still result in the creation of off-balance sheet obligations for Farmer Mac. In performing its
purchase and guarantee obligations under LTSPCs and Farmer Mac Guaranteed Securities, Farmer Mac
would have the right to enforce the underlying loans, and in the event of a default under the terms of those
loans, would have access to the underlying collateral.
Outstanding Balance of LTSPCs and
Off-Balance Sheet Farmer Mac Guaranteed Securities
Farm & Ranch obligations:
LTSPCs
Total Farm & Ranch obligations
Farmer Mac Guaranteed USDA Securities
Rural Utilities Guaranteed Securities
As of December 31,
2013
2012
(in thousands)
2,261,862
3,997,613
20,222
11,009
2,156,068
4,037,438
29,658
12,669
Total off-balance sheet
$
4,028,844
$
4,079,765
See "—Risk Management—Credit Risk – Loans and Guarantees" and Notes 2(c), 2(e), 5 and 12 to the
consolidated financial statements for more information on Farmer Mac Guaranteed Securities and Notes 2
(o) and 12 to the consolidated financial statements for more information on LTSPCs.
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. Rules for mandatory clearing of many interest rate
derivatives under the Dodd-Frank Act went into effect for Farmer Mac during second quarter 2013, and
Farmer Mac anticipates that most of its derivatives executed in the future will be subject to mandatory
clearing. In addition, rules for trading certain derivatives on electronic swap execution facilities under the
Dodd-Frank Act recently went into effect, although most derivatives that Farmer Mac uses to hedge
interest rate risk are currently not made available to trade by any swap execution facility and are therefore
not required to be traded electronically through a swap execution facility. 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, including those related to clearing of derivatives or electronic trading on swap execution facilities,
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 September 12, 2013, FCA adopted a final rule to revise its regulations governing business and capital
planning at Farmer Mac, requiring Farmer Mac to submit, on an annual basis, a capital plan to FCA and to
notify FCA before making a capital distribution (other than quarterly dividends that are the same as the
previous quarter and other capital distributions that are consistent with Farmer Mac's capital plan). The
rule also requires Farmer Mac to maintain sufficient capital to meet its policy goals under both expected
and stressful scenarios, and sets forth various items that must be included in Farmer Mac's annual capital
115
116
Contingent Liabilities. In conducting its loan purchase activities, Farmer Mac enters into mandatory
delivery commitments to purchase agricultural real estate mortgage loans and USDA Securities. In
conducting its LTSPC activities, Farmer Mac enters into arrangements whereby it commits to buy eligible
loans under certain conditions at an undetermined future date. The following table presents these
As of December 31, 2013 and 2012, outstanding off-balance sheet LTSPCs and Farmer Mac Guaranteed
Securities totaled $4.0 billion and $4.1 billion, respectively. The following table presents the balance of
outstanding LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities as of December 31, 2013
and 2012:
significant commitments:
Table 26
Table 27
LTSPCs
Mandatory commitments to purchase loans and USDA Securities
81,159
76,679
As of December 31,
2013
2012
(in thousands)
$
2,261,862
$
2,156,068
Further information regarding Farmer Mac's commitments to purchase loans is included in Note 12 to the
consolidated financial statements.
Off-Balance Sheet Arrangements. Farmer Mac offers two credit enhancement alternatives to direct loan
purchases through the Farm & Ranch line of business that allow approved lenders the ability to retain the
cash flow benefits of their loans and increase their liquidity and lending capacity: (1) LTSPCs and
(2) Farmer Mac Guaranteed Securities. Prior to the adoption of new accounting guidance on January 1,
2010 related to the consolidation of off-balance sheet assets, both types of transactions resulted in the
creation of off-balance sheet obligations for Farmer Mac in the ordinary course of its business. Effective
January 1, 2010, securitization trusts where Farmer Mac is the primary beneficiary, as described in Note 2
(q) to the consolidated financial statements, are consolidated on-balance sheet as "Loans held for
investment in consolidated trusts." LTSPCs and securitization trusts where Farmer Mac is not the primary
beneficiary still result in the creation of off-balance sheet obligations for Farmer Mac. In performing its
purchase and guarantee obligations under LTSPCs and Farmer Mac Guaranteed Securities, Farmer Mac
would have the right to enforce the underlying loans, and in the event of a default under the terms of those
loans, would have access to the underlying collateral.
Outstanding Balance of LTSPCs and
Off-Balance Sheet Farmer Mac Guaranteed Securities
As of December 31,
2013
2012
(in thousands)
Farm & Ranch obligations:
Farm & Ranch Guaranteed Securities
$
1,735,751
$
1,881,370
LTSPCs
Total Farm & Ranch obligations
Farmer Mac Guaranteed USDA Securities
Rural Utilities Guaranteed Securities
2,261,862
3,997,613
20,222
11,009
2,156,068
4,037,438
29,658
12,669
Total off-balance sheet
$
4,028,844
$
4,079,765
See "—Risk Management—Credit Risk – Loans and Guarantees" and Notes 2(c), 2(e), 5 and 12 to the
consolidated financial statements for more information on Farmer Mac Guaranteed Securities and Notes 2
(o) and 12 to the consolidated financial statements for more information on LTSPCs.
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. Rules for mandatory clearing of many interest rate
derivatives under the Dodd-Frank Act went into effect for Farmer Mac during second quarter 2013, and
Farmer Mac anticipates that most of its derivatives executed in the future will be subject to mandatory
clearing. In addition, rules for trading certain derivatives on electronic swap execution facilities under the
Dodd-Frank Act recently went into effect, although most derivatives that Farmer Mac uses to hedge
interest rate risk are currently not made available to trade by any swap execution facility and are therefore
not required to be traded electronically through a swap execution facility. 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, including those related to clearing of derivatives or electronic trading on swap execution facilities,
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 September 12, 2013, FCA adopted a final rule to revise its regulations governing business and capital
planning at Farmer Mac, requiring Farmer Mac to submit, on an annual basis, a capital plan to FCA and to
notify FCA before making a capital distribution (other than quarterly dividends that are the same as the
previous quarter and other capital distributions that are consistent with Farmer Mac's capital plan). The
rule also requires Farmer Mac to maintain sufficient capital to meet its policy goals under both expected
and stressful scenarios, and sets forth various items that must be included in Farmer Mac's annual capital
115
116
plan and capital adequacy goals. The final rule was published in the Federal Register on October 31, 2013
and became effective on January 3, 2014. In accordance with the requirements under the final rule,
Farmer Mac has adopted a policy for maintaining a sufficient level of Tier 1 capital and imposing
restrictions on Tier 1-eligible dividends and employee (including officer) bonus payments in the event that
Tier 1 capital falls below specified thresholds. For more information on Farmer Mac's capital adequacy
policy, see "Business—Government Regulation of Farmer Mac—Regulation—Capital Standards."
Farmer Mac does not expect its compliance with the final rule on capital planning, including Farmer
Mac's policy on Tier 1 capital established under the final rule, to materially affect Farmer Mac's operations
or financial condition.
On October 10, 2013, FCA adopted a final rule to revise the Liquidity and Investment Regulations
governing the management of liquidity risk at Farmer Mac. The final rule adopted by FCA increases the
minimum days-of-liquidity requirement for Farmer Mac's liquidity reserve from 60 to 90 days of maturing
obligations, and also requires progressively higher-quality liquid assets to meet progressively shorter time
intervals of obligations within the new 90-day minimum period. This rule was published in the Federal
Register on November 1, 2013 and will become effective on April 30, 2014. Farmer Mac does not expect
its compliance with the final rule on liquidity management to materially affect Farmer Mac's operations or
financial condition. The final rule adopted on October 10, 2013 complements the final rule published by
FCA on November 5, 2012 amending the Liquidity and Investment Regulations to address investment
eligibility and management. FCA also has sought public comment regarding the use of credit ratings in
the Liquidity and Investment Regulations, in accordance with the Dodd-Frank Act, for purposes of a final
rule to be published at a later date.
On February 25, 2014, FCA published in the Federal Register an advance notice of proposed rulemaking
(the "ANPRM") seeking public comment on Farmer Mac's board governance and standards of conduct,
including director election procedures, director fiduciary duties, conflicts of interest, and risk governance.
FCA is requesting comments on the ANPRM by April 28, 2014, and Farmer Mac intends to submit a
comment letter on or prior to this date.
Other Matters
The expected effects of recently issued accounting pronouncements on the consolidated financial
statements are presented in Note 2(r) to the consolidated financial statements.
The following tables present quarterly and annual information regarding loan purchases, guarantees, and
LTSPCs and outstanding loans, guarantees, and LTSPCs:
Supplemental Information
Table 28
Farmer Mac New Purchases, Guarantees, and LTSPCs
Farm & Ranch
Guaranteed
USDA
(in thousands)
Rural Utilities
Guaranteed
Securities
Loans
Securities
LTSPCs (1)
Guarantees
Loans
Total
December 31, 2013
$
245,770
$
50,000
$
75,731
$
58,438
$
41,374
$
245,000
$
716,313
193,089
226,135
159,887
181,555
132,882
145,423
110,486
98,425
103,500
200,000
100,000
—
201,000
200,000
200,000
—
198,783
99,504
166,780
378,258
115,757
70,458
179,637
97,688
70,372
110,897
122,187
102,339
114,974
165,613
101,725
104,134
5,107
10,222
30,262
56,638
26,843
58,286
24,350
55,007
250,000
—
325,000
133,406
250,000
—
—
—
820,851
646,758
904,116
852,196
841,456
639,780
616,198
355,254
For the quarter ended:
September 30, 2013
June 30, 2013
March 31, 2013
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
December 31, 2011
For the year ended:
December 31, 2013
December 31, 2012
824,881
570,346
453,500
601,000
540,798
744,110
361,894
484,651
86,965
166,117
820,000
383,406
3,088,038
2,949,630
(1) Several of the loans underlying agricultural storage and processing LTSPCs are for facilities under construction and, as of December 31, 2013,
approximately $21.3 million of the loans were not yet disbursed by the lender.
117
118
and became effective on January 3, 2014. In accordance with the requirements under the final rule,
Farmer Mac has adopted a policy for maintaining a sufficient level of Tier 1 capital and imposing
restrictions on Tier 1-eligible dividends and employee (including officer) bonus payments in the event that
Tier 1 capital falls below specified thresholds. For more information on Farmer Mac's capital adequacy
policy, see "Business—Government Regulation of Farmer Mac—Regulation—Capital Standards."
Farmer Mac does not expect its compliance with the final rule on capital planning, including Farmer
Mac's policy on Tier 1 capital established under the final rule, to materially affect Farmer Mac's operations
or financial condition.
On October 10, 2013, FCA adopted a final rule to revise the Liquidity and Investment Regulations
governing the management of liquidity risk at Farmer Mac. The final rule adopted by FCA increases the
minimum days-of-liquidity requirement for Farmer Mac's liquidity reserve from 60 to 90 days of maturing
obligations, and also requires progressively higher-quality liquid assets to meet progressively shorter time
intervals of obligations within the new 90-day minimum period. This rule was published in the Federal
Register on November 1, 2013 and will become effective on April 30, 2014. Farmer Mac does not expect
its compliance with the final rule on liquidity management to materially affect Farmer Mac's operations or
financial condition. The final rule adopted on October 10, 2013 complements the final rule published by
FCA on November 5, 2012 amending the Liquidity and Investment Regulations to address investment
eligibility and management. FCA also has sought public comment regarding the use of credit ratings in
the Liquidity and Investment Regulations, in accordance with the Dodd-Frank Act, for purposes of a final
rule to be published at a later date.
On February 25, 2014, FCA published in the Federal Register an advance notice of proposed rulemaking
(the "ANPRM") seeking public comment on Farmer Mac's board governance and standards of conduct,
including director election procedures, director fiduciary duties, conflicts of interest, and risk governance.
FCA is requesting comments on the ANPRM by April 28, 2014, and Farmer Mac intends to submit a
comment letter on or prior to this date.
Other Matters
The expected effects of recently issued accounting pronouncements on the consolidated financial
statements are presented in Note 2(r) to the consolidated financial statements.
plan and capital adequacy goals. The final rule was published in the Federal Register on October 31, 2013
Supplemental Information
The following tables present quarterly and annual information regarding loan purchases, guarantees, and
LTSPCs and outstanding loans, guarantees, and LTSPCs:
Table 28
Farmer Mac New Purchases, Guarantees, and LTSPCs
Farm & Ranch
Guaranteed
USDA
Loans
Securities
LTSPCs (1)
Guarantees
Loans
(in thousands)
Rural Utilities
Guaranteed
Securities
Total
For the quarter ended:
December 31, 2013
$
245,770
$
50,000
$
75,731
$
58,438
$
41,374
$
245,000
$
716,313
September 30, 2013
June 30, 2013
March 31, 2013
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
December 31, 2011
For the year ended:
December 31, 2013
December 31, 2012
193,089
226,135
159,887
181,555
132,882
145,423
110,486
98,425
103,500
200,000
100,000
—
201,000
200,000
200,000
—
198,783
99,504
166,780
378,258
115,757
70,458
179,637
97,688
70,372
110,897
122,187
102,339
114,974
165,613
101,725
104,134
5,107
10,222
30,262
56,638
26,843
58,286
24,350
55,007
250,000
—
325,000
133,406
250,000
—
—
—
820,851
646,758
904,116
852,196
841,456
639,780
616,198
355,254
824,881
570,346
453,500
601,000
540,798
744,110
361,894
484,651
86,965
166,117
820,000
383,406
3,088,038
2,949,630
(1) Several of the loans underlying agricultural storage and processing LTSPCs are for facilities under construction and, as of December 31, 2013,
approximately $21.3 million of the loans were not yet disbursed by the lender.
117
118
Table 29
For the quarter ended:
Scheduled
Unscheduled
December 31, 2013
Scheduled
Unscheduled
September 30, 2013
Scheduled
Unscheduled
June 30, 2013
Scheduled
Unscheduled
March 31, 2013
Scheduled
Unscheduled
December 31, 2012
Scheduled
Unscheduled
September 30, 2012
Scheduled
Unscheduled
June 30, 2012
Scheduled
Unscheduled
March 31, 2012
Scheduled
Unscheduled
December 31, 2011
For the year ended:
Scheduled
Unscheduled
December 31, 2013
Scheduled
Unscheduled
December 31, 2012
Farmer Mac Repayments of Loans, Guarantees and LTSPCs, and USDA Guarantees
Farm & Ranch
Guaranteed
USDA
Rural Utilities
Table 30
Guaranteed
Securities
Total
Loans
Securities
LTSPCs
Guarantees
Loans
(in thousands)
Outstanding Balance of Farmer Mac Loans, Guarantees and LTSPCs, and USDA Guarantees
Farm & Ranch
Guaranteed
USDA
(in thousands)
Rural Utilities
Guaranteed
Securities
Loans
Securities
LTSPCs
Guarantees
Loans
Total
December 31, 2013
$ 2,135,467
$ 5,275,401
$ 2,261,862
$ 1,687,117
$ 1,052,251
$ 1,538,214
$ 13,950,312
September 30, 2013
June 30, 2013
March 31, 2013
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
December 31, 2011
1,950,703
1,876,958
1,704,544
1,679,851
1,545,401
1,534,625
1,944,956
1,948,105
5,311,354
5,235,069
5,265,700
5,220,570
5,284,920
5,120,507
4,488,165
4,332,871
2,283,341
2,213,462
2,221,565
2,156,068
1,881,836
1,858,080
1,850,362
1,776,051
1,676,793
1,667,170
1,648,105
1,615,579
1,599,226
1,579,187
1,529,642
1,513,177
1,017,774
1,049,920
1,039,698
1,031,945
975,307
976,651
921,929
916,027
1,546,301
13,786,266
1,552,939
13,595,518
1,558,250
13,437,862
1,311,175
13,015,188
1,181,369
12,468,059
1,181,370
12,250,420
1,331,371
12,066,425
1,427,071
11,913,302
As of:
Table 31
Outstanding Balance of Loans Held,
On-Balance Sheet AgVantage Securities, and USDA Securities
Fixed Rate
5- to 10-Year
ARMs & Resets
1-Month to 3-Year
ARMs
Total Held in
Portfolio
(in thousands)
$
4,980,500
$
1,827,744
$
3,113,224
$
4,970,420
4,714,119
4,670,617
4,483,454
4,904,265
5,035,743
4,993,233
5,288,687
1,802,255
1,871,225
1,797,456
1,803,866
1,213,588
1,259,568
1,210,405
1,230,374
2,924,785
2,964,004
2,883,474
2,648,103
2,473,086
2,063,490
2,410,310
1,967,960
9,921,468
9,697,460
9,549,348
9,351,547
8,935,423
8,590,939
8,358,801
8,613,948
8,487,021
As of:
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
December 31, 2011
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
6,729
54,277
61,006
34,455
84,889
119,344
7,242
46,479
53,721
34,014
101,180
135,194
3,691
43,414
47,105
25,076
97,030
122,106
10,252
85,241
95,493
36,956
76,679
113,635
18,901
36,831
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
74,367
11,586
85,953
14,983
12,232
27,215
212,949
17,682
230,631
28,453
26,417
54,870
28,695
35,655
64,350
15,718
20,869
36,587
14,624
13,295
27,919
20,760
23,946
44,706
17,640
21,162
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
36,063
61,147
97,210
47,143
81,761
128,904
50,222
57,385
107,607
37,262
64,021
101,283
12,347
91,679
104,026
22,173
69,828
92,001
18,501
44,239
62,740
39,628
65,698
105,326
21,679
111,238
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
17,463
30,651
48,114
21,235
39,514
60,749
26,056
65,776
91,832
29,918
59,743
89,661
17,299
68,687
85,986
21,357
73,578
94,935
23,587
92,481
116,068
26,561
58,699
85,260
15,717
38,369
6,897
—
6,897
31,994
5,259
37,253
$
$
$
$
253,087
—
253,087
256,638
—
256,638
— $
5,311
—
—
— $
5,311
22,509
$
77,925
—
—
22,509
$
77,925
— $
3,600
—
—
— $
3,600
24,260
$
250,001
3,927
28,187
3,564
—
3,564
18,448
—
$
$
$
$
—
250,001
150,001
—
150,001
95,700
—
18,448
$
95,700
— $
1,808
—
—
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
394,606
157,661
552,267
406,448
223,655
630,103
301,780
187,322
489,102
230,081
251,361
481,442
65,632
239,435
305,067
358,585
265,232
623,817
220,529
235,256
455,785
238,053
225,022
463,075
75,745
207,600
55,732
$
38,802
$
132,917
$
54,086
$
— $
1,808
$
283,345
82,440
$
330,752
$
170,690
$
94,672
$
61,400
$
592,961
$ 1,332,915
286,825
369,265
75,975
302,364
378,339
$
$
$
67,917
398,669
79,797
93,765
173,562
$
$
$
264,314
435,004
92,649
271,444
364,093
$
$
$
195,684
290,356
88,804
293,445
382,249
$
$
$
5,259
66,659
46,272
3,927
50,199
$
$
$
—
819,999
592,961
$ 2,152,914
499,302
$
882,799
—
964,945
499,302
$ 1,847,744
119
120
Table 29
For the quarter ended:
Scheduled
Unscheduled
December 31, 2013
Scheduled
Unscheduled
September 30, 2013
Scheduled
Unscheduled
June 30, 2013
Scheduled
Unscheduled
March 31, 2013
Scheduled
Unscheduled
December 31, 2012
Scheduled
Unscheduled
September 30, 2012
Scheduled
Unscheduled
June 30, 2012
Scheduled
Unscheduled
March 31, 2012
Scheduled
Unscheduled
For the year ended:
Scheduled
Unscheduled
December 31, 2013
Scheduled
Unscheduled
December 31, 2012
Farmer Mac Repayments of Loans, Guarantees and LTSPCs, and USDA Guarantees
Farm & Ranch
Guaranteed
USDA
(in thousands)
Loans
Securities
LTSPCs
Guarantees
Loans
Total
Rural Utilities
Guaranteed
Securities
6,897
—
6,897
31,994
5,259
37,253
$
$
$
$
253,087
—
253,087
256,638
—
256,638
— $
5,311
— $
5,311
22,509
$
77,925
22,509
$
77,925
— $
3,600
—
—
—
—
—
—
— $
3,600
24,260
$
250,001
3,927
28,187
3,564
—
3,564
18,448
—
—
250,001
150,001
—
150,001
95,700
—
18,448
$
95,700
— $
1,808
—
—
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
394,606
157,661
552,267
406,448
223,655
630,103
301,780
187,322
489,102
230,081
251,361
481,442
65,632
239,435
305,067
358,585
265,232
623,817
220,529
235,256
455,785
238,053
225,022
463,075
75,745
207,600
5,259
66,659
46,272
3,927
50,199
—
819,999
592,961
$ 2,152,914
499,302
$
882,799
—
964,945
499,302
$ 1,847,744
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
6,729
54,277
61,006
34,455
84,889
119,344
7,242
46,479
53,721
34,014
101,180
135,194
3,691
43,414
47,105
25,076
97,030
122,106
10,252
85,241
95,493
36,956
76,679
113,635
18,901
36,831
286,825
369,265
75,975
302,364
378,339
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
74,367
11,586
85,953
14,983
12,232
27,215
212,949
17,682
230,631
28,453
26,417
54,870
28,695
35,655
64,350
15,718
20,869
36,587
14,624
13,295
27,919
20,760
23,946
44,706
17,640
21,162
67,917
398,669
79,797
93,765
173,562
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
17,463
30,651
48,114
21,235
39,514
60,749
26,056
65,776
91,832
29,918
59,743
89,661
17,299
68,687
85,986
21,357
73,578
94,935
23,587
92,481
116,068
26,561
58,699
85,260
15,717
38,369
195,684
290,356
88,804
293,445
382,249
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
36,063
61,147
97,210
47,143
81,761
128,904
50,222
57,385
107,607
37,262
64,021
101,283
12,347
91,679
104,026
22,173
69,828
92,001
18,501
44,239
62,740
39,628
65,698
105,326
21,679
111,238
264,314
435,004
92,649
271,444
364,093
119
December 31, 2011
55,732
$
38,802
$
132,917
$
54,086
$
— $
1,808
$
283,345
82,440
$
330,752
$
170,690
$
94,672
$
61,400
$
592,961
$ 1,332,915
Table 30
As of:
Outstanding Balance of Farmer Mac Loans, Guarantees and LTSPCs, and USDA Guarantees
Farm & Ranch
Guaranteed
USDA
Rural Utilities
Loans
Securities
LTSPCs
Guarantees
Loans
(in thousands)
Guaranteed
Securities
Total
December 31, 2013
$ 2,135,467
$ 5,275,401
$ 2,261,862
$ 1,687,117
$ 1,052,251
$ 1,538,214
$ 13,950,312
September 30, 2013
June 30, 2013
March 31, 2013
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
December 31, 2011
1,950,703
1,876,958
1,704,544
1,679,851
1,545,401
1,534,625
1,944,956
1,948,105
5,311,354
5,235,069
5,265,700
5,220,570
5,284,920
5,120,507
4,488,165
4,332,871
2,283,341
2,213,462
2,221,565
2,156,068
1,881,836
1,858,080
1,850,362
1,776,051
1,676,793
1,667,170
1,648,105
1,615,579
1,599,226
1,579,187
1,529,642
1,513,177
1,017,774
1,049,920
1,039,698
1,031,945
975,307
976,651
921,929
916,027
1,546,301
13,786,266
1,552,939
13,595,518
1,558,250
13,437,862
1,311,175
13,015,188
1,181,369
12,468,059
1,181,370
12,250,420
1,331,371
12,066,425
1,427,071
11,913,302
Table 31
Outstanding Balance of Loans Held,
On-Balance Sheet AgVantage Securities, and USDA Securities
Fixed Rate
5- to 10-Year
ARMs & Resets
1-Month to 3-Year
ARMs
Total Held in
Portfolio
(in thousands)
$
4,980,500
$
1,827,744
$
3,113,224
$
4,970,420
4,714,119
4,670,617
4,483,454
4,904,265
5,035,743
4,993,233
5,288,687
1,802,255
1,871,225
1,797,456
1,803,866
1,213,588
1,259,568
1,210,405
1,230,374
2,924,785
2,964,004
2,883,474
2,648,103
2,473,086
2,063,490
2,410,310
1,967,960
9,921,468
9,697,460
9,549,348
9,351,547
8,935,423
8,590,939
8,358,801
8,613,948
8,487,021
As of:
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
December 31, 2011
120
The following table presents the quarterly net effective spread by business segment:
The following table presents quarterly core earnings reconciled to GAAP net income available to common
Table 32
For the quarter ended:
Net Effective Spread by Business Segment
Farm & Ranch
USDA Guarantees
Rural Utilities
Corporate
Net Effective Spread
Dollars
Yield
Dollars
Yield
Dollars
Yield
Dollars
Yield
Dollars
Yield
(dollars in thousands)
December 31, 2013 (1)
$
18,080
1.34% $
2,708
0.65% $
2,047
0.32% $
4,309
0.56% $
27,144
0.85%
September 30, 2013
16,174
1.23%
June 30, 2013
16,325
1.30%
March 31, 2013
16,049
1.32%
December 31, 2012
16,133
1.36%
September 30, 2012
16,839
1.46%
June 30, 2012
16,749
1.54%
March 31, 2012
14,874
1.45%
December 31, 2011
15,442
1.57%
2,831
2,738
2,933
2,869
2,830
2,790
2,766
2,693
0.68%
0.68%
0.73%
0.74%
0.73%
0.74%
0.75%
0.74%
2,985
3,033
3,014
3,155
3,109
3,006
3,177
3,152
0.46%
0.46%
0.51%
0.55%
0.57%
0.55%
0.54%
0.54%
3,791
3,967
4,267
4,303
4,478
4,664
4,815
4,735
0.52%
0.58%
0.59%
0.56%
0.57%
0.64%
0.66%
0.71%
25,781
0.83%
26,063
0.87%
26,263
0.90%
26,460
0.91%
27,256
0.95%
27,209
0.99%
25,632
0.94%
26,022
1.00%
(1) Fourth quarter 2013 includes the impact in Farm & Ranch net effective spread of one-time adjustments for recovered buyout interest and yield
maintenance (14 basis points in aggregate) and the impact in Rural Utilities of spread compression from the early refinancing of loans and AgVantage
securities (11 basis points).
stockholders:
Table 33
Revenues:
Guarantee and commitment fees
Other
Total revenues
Credit related (income)/expenses:
Provisions for/(release of) losses
REO operating expenses
(Gains)/losses on sale of REO
Total credit related (income)/
expenses
Operating expenses:
Compensation & employee benefits
General & Administrative
Regulatory fees
Total operating expenses
Net earnings
Income taxes
Non-controlling interest
Preferred stock dividends
Reconciling items (after-tax effects):
Unrealized gains/(losses) on
financial derivatives and hedging
activities
Unrealized (losses)/gains on
trading assets
Amortization of premiums/
discounts and deferred gains on
assets consolidated at fair value
Net effects of settlements on
agency forwards
Lower of cost or fair value
adjustments on loans held for sale
GAAP net income/(loss)
attributable to common
stockholders
Core Earnings by Quarter Ended
December
September
2013
2013
June
2013
March
2013
December
September
2012
2012
June
2012
March
2012
December
2011
(in thousands)
Net effective spread
$
27,144
$
25,781
$ 26,063
$ 26,263
$
26,460
$
27,256
$ 27,209
$ 25,632
$
26,022
7,130
427
7,046
(466)
6,954
3,274
6,792
186
6,764
393
6,591
6,607
6,660
384
(294)
18
6,740
55
34,701
32,361
36,291
33,241
33,617
34,231
33,522
32,310
32,817
Core earnings
$
15,282
$
11,767
$ 16,545
$ 11,298
$
11,603
$
13,385
$ 12,901
$ 11,753
$
12,576
12
3
(26)
(11)
4,025
3,104
594
7,723
5,279
5,546
882
(704)
1,176
(36)
35
259
(39)
(1,124)
126
(47)
1,157
47
(629)
94
66
13
174
15
(262)
(40)
(1,569)
1,255
575
173
(73)
450
6
—
456
4,523
2,827
593
4,571
2,715
594
7,943
7,880
6,263
5,547
881
7,007
5,547
881
4,698
2,917
594
8,209
6,081
5,547
851
4,375
2,788
562
4,574
2,664
562
4,485
2,758
563
7,725
7,800
7,806
6,682
5,547
719
6,627
5,547
720
6,028
5,547
720
(118)
82
(254)
(290)
3,916
2,315
563
6,794
7,471
5,546
720
26,989
24,458
29,980
23,777
23,783
26,333
25,795
24,048
26,313
8,003
4,632
11,021
5,712
3,456
(14,035)
10,185
386
(50)
(407)
(212)
136
(286)
(2,006)
714
2,476
(10,864)
(421)
(564)
(618)
(4,534)
(873)
(901)
(958)
(1,875)
114
—
(158)
—
955
—
(338)
(102)
—
(3,863)
699
—
(250)
—
509
—
(240)
—
$
12,485
$
15,413
$ 27,745
$ 16,190
$
9,601
$
16,381
$ (4,291) $ 22,203
$
13,323
5,752
2,913
594
9,259
5,914
5,546
720
4,719
1,778
121
122
Table 32
For the quarter ended:
Net Effective Spread by Business Segment
Farm & Ranch
USDA Guarantees
Rural Utilities
Corporate
Net Effective Spread
Dollars
Yield
Dollars
Yield
Dollars
Yield
Dollars
Yield
Dollars
Yield
(dollars in thousands)
December 31, 2013 (1)
$
18,080
1.34% $
2,708
0.65% $
2,047
0.32% $
4,309
0.56% $
27,144
0.85%
September 30, 2013
16,174
1.23%
June 30, 2013
16,325
1.30%
March 31, 2013
16,049
1.32%
December 31, 2012
16,133
1.36%
September 30, 2012
16,839
1.46%
June 30, 2012
16,749
1.54%
March 31, 2012
14,874
1.45%
December 31, 2011
15,442
1.57%
2,831
2,738
2,933
2,869
2,830
2,790
2,766
2,693
0.68%
0.68%
0.73%
0.74%
0.73%
0.74%
0.75%
0.74%
2,985
3,033
3,014
3,155
3,109
3,006
3,177
3,152
0.46%
0.46%
0.51%
0.55%
0.57%
0.55%
0.54%
0.54%
3,791
3,967
4,267
4,303
4,478
4,664
4,815
4,735
0.52%
0.58%
0.59%
0.56%
0.57%
0.64%
0.66%
0.71%
25,781
0.83%
26,063
0.87%
26,263
0.90%
26,460
0.91%
27,256
0.95%
27,209
0.99%
25,632
0.94%
26,022
1.00%
(1) Fourth quarter 2013 includes the impact in Farm & Ranch net effective spread of one-time adjustments for recovered buyout interest and yield
maintenance (14 basis points in aggregate) and the impact in Rural Utilities of spread compression from the early refinancing of loans and AgVantage
securities (11 basis points).
The following table presents the quarterly net effective spread by business segment:
The following table presents quarterly core earnings reconciled to GAAP net income available to common
stockholders:
Table 33
Revenues:
Core Earnings by Quarter Ended
December
2013
September
2013
June
2013
March
2013
December
2012
September
2012
June
2012
March
2012
December
2011
(in thousands)
Net effective spread
$
27,144
$
25,781
$ 26,063
$ 26,263
$
26,460
$
27,256
$ 27,209
$ 25,632
$
26,022
Guarantee and commitment fees
Other
Total revenues
Credit related (income)/expenses:
Provisions for/(release of) losses
REO operating expenses
(Gains)/losses on sale of REO
Total credit related (income)/
expenses
Operating expenses:
Compensation & employee benefits
General & Administrative
Regulatory fees
Total operating expenses
7,130
427
7,046
(466)
6,954
3,274
6,792
186
6,764
393
6,591
6,607
6,660
384
(294)
18
6,740
55
34,701
32,361
36,291
33,241
33,617
34,231
33,522
32,310
32,817
12
3
(26)
(11)
4,025
3,104
594
7,723
(704)
1,176
(36)
35
259
(39)
(1,124)
126
(47)
1,157
47
(629)
94
66
13
174
15
(262)
(40)
(1,569)
1,255
575
173
(73)
450
6
—
456
4,523
2,827
593
4,571
2,715
594
7,943
7,880
4,698
2,917
594
8,209
5,752
2,913
594
9,259
4,375
2,788
562
4,574
2,664
562
4,485
2,758
563
7,725
7,800
7,806
(118)
82
(254)
(290)
3,916
2,315
563
6,794
Net earnings
Income taxes
Non-controlling interest
Preferred stock dividends
26,989
24,458
29,980
23,777
23,783
26,333
25,795
24,048
26,313
5,279
5,546
882
6,263
5,547
881
7,007
5,547
881
6,081
5,547
851
5,914
5,546
720
6,682
5,547
719
6,627
5,547
720
6,028
5,547
720
7,471
5,546
720
Core earnings
$
15,282
$
11,767
$ 16,545
$ 11,298
$
11,603
$
13,385
$ 12,901
$ 11,753
$
12,576
Reconciling items (after-tax effects):
Unrealized gains/(losses) on
financial derivatives and hedging
activities
Unrealized (losses)/gains on
trading assets
Amortization of premiums/
discounts and deferred gains on
assets consolidated at fair value
Net effects of settlements on
agency forwards
Lower of cost or fair value
adjustments on loans held for sale
GAAP net income/(loss)
attributable to common
stockholders
8,003
4,632
11,021
5,712
(50)
(407)
(212)
136
4,719
1,778
3,456
(14,035)
10,185
386
(286)
(2,006)
714
2,476
(10,864)
(421)
(564)
(618)
(4,534)
(873)
(901)
(958)
(1,875)
114
—
(158)
—
955
—
(338)
(102)
—
(3,863)
699
—
(250)
—
509
—
(240)
—
$
12,485
$
15,413
$ 27,745
$ 16,190
$
9,601
$
16,381
$ (4,291) $ 22,203
$
13,323
121
122
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements
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
2(h) and Note 6 to the consolidated financial statements.
Management's Report on Internal Control over Financial Reporting
The management of Farmer Mac is responsible for establishing and maintaining adequate internal control
over financial reporting, as defined in Exchange Act Rule 13a-15(f). Internal control over financial
reporting is a process designed under the supervision of Farmer Mac's Chief Executive Officer and Chief
Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of Farmer Mac's financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America.
Farmer Mac's internal control over financial reporting includes those policies and procedures that: (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of Farmer Mac; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of Farmer Mac are being
made only in accordance with authorizations of management and directors of Farmer Mac; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of Farmer Mac's assets that could have a material effect on the consolidated financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Under the supervision and with the participation of Farmer Mac's Chief Executive Officer and Chief
Financial Officer, Farmer Mac's management assessed the effectiveness of Farmer Mac's internal control
over financial reporting as of December 31, 2013. In making this assessment, Farmer Mac's management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control - Integrated Framework (1992). Based on its evaluation under the COSO
criteria, management concluded that Farmer Mac's internal control over financial reporting as of
December 31, 2013 was effective.
Farmer Mac's independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited
the effectiveness of Farmer Mac's internal control over financial reporting as of December 31, 2013, as
stated in their report appearing below.
123
124
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements
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
2(h) and Note 6 to the consolidated financial statements.
Management's Report on Internal Control over Financial Reporting
The management of Farmer Mac is responsible for establishing and maintaining adequate internal control
over financial reporting, as defined in Exchange Act Rule 13a-15(f). Internal control over financial
reporting is a process designed under the supervision of Farmer Mac's Chief Executive Officer and Chief
Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of Farmer Mac's financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America.
Farmer Mac's internal control over financial reporting includes those policies and procedures that: (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of Farmer Mac; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of Farmer Mac are being
made only in accordance with authorizations of management and directors of Farmer Mac; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of Farmer Mac's assets that could have a material effect on the consolidated financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Under the supervision and with the participation of Farmer Mac's Chief Executive Officer and Chief
Financial Officer, Farmer Mac's management assessed the effectiveness of Farmer Mac's internal control
over financial reporting as of December 31, 2013. In making this assessment, Farmer Mac's management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control - Integrated Framework (1992). Based on its evaluation under the COSO
criteria, management concluded that Farmer Mac's internal control over financial reporting as of
December 31, 2013 was effective.
Farmer Mac's independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited
the effectiveness of Farmer Mac's internal control over financial reporting as of December 31, 2013, as
stated in their report appearing below.
123
124
/s/PricewaterhouseCoopers LLP
McLean, Virginia
March 13, 2014
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of the Federal Agricultural Mortgage Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of
operations, of comprehensive (loss)/income, of equity, and of cash flows present fairly, in all material
respects, the financial position of the Federal Agricultural Mortgage Corporation and its subsidiaries
(“Farmer Mac”) at December 31, 2013 and 2012, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2013 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, Farmer Mac
maintained, in all material respects, effective internal control over financial reporting as of December 31,
2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Farmer Mac's
management is responsible for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our
responsibility is to express opinions on these financial statements and on Farmer Mac's internal control
over financial reporting based on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
125
126
/s/PricewaterhouseCoopers LLP
McLean, Virginia
March 13, 2014
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of the Federal Agricultural Mortgage Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of
operations, of comprehensive (loss)/income, of equity, and of cash flows present fairly, in all material
respects, the financial position of the Federal Agricultural Mortgage Corporation and its subsidiaries
(“Farmer Mac”) at December 31, 2013 and 2012, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2013 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, Farmer Mac
maintained, in all material respects, effective internal control over financial reporting as of December 31,
2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Farmer Mac's
management is responsible for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our
responsibility is to express opinions on these financial statements and on Farmer Mac's internal control
over financial reporting based on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
125
126
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Assets:
Cash and cash equivalents
Investment securities:
Available-for-sale, at fair value
Trading, at fair value
Total investment securities
Farmer Mac Guaranteed Securities:
Available-for-sale, at fair value
USDA Securities:
Available-for-sale, at fair value
Trading, at fair value
Total USDA Securities
Loans:
Loans held for sale, at lower of cost or fair value
Loans held for investment, at amortized cost
Loans held for investment in consolidated trusts, at amortized cost
Allowance for loan losses
Total loans, net of allowance
Real estate owned, at lower of cost or fair value
Financial derivatives, at fair value
Interest receivable (includes $9,276 and $9,676, respectively, related to consolidated trusts)
Guarantee and commitment fees receivable
Deferred tax asset, net
Prepaid expenses and other assets
Total Assets
Liabilities and Equity:
Liabilities:
Notes payable:
Due within one year
Due after one year
Total notes payable
Debt securities of consolidated trusts held by third parties
Financial derivatives, at fair value
Accrued interest payable (includes $2,823 and $2,534, respectively, related to consolidated trusts)
Guarantee and commitment obligation
Accounts payable and accrued expenses
Reserve for losses
Total Liabilities
Commitments and Contingencies (Note 12)
Equity:
Preferred stock:
Series A, par value $25 per share, 2,400,000 shares authorized, issued and outstanding
Series C, par value $1,000 per share, 100,000 shares authorized, 57,578 shares issued and outstanding
Common stock:
Class A Voting, $1 par value, no maximum authorization, 1,030,780 shares outstanding
Class B Voting, $1 par value, no maximum authorization, 500,301 shares outstanding
Class C Non-Voting, $1 par value, no maximum authorization, 9,354,804 shares and 9,171,343 shares
outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive (loss)/income, net of tax
Retained earnings
Total Stockholders' Equity
Non-controlling interest - preferred stock
Total Equity
Total Liabilities and Equity
See accompanying notes to consolidated financial statements.
December 31,
2013
December 31,
2012
(in thousands)
$
749,313
$
785,564
2,483,147
928
2,484,075
2,498,382
1,247
2,499,629
5,091,600
4,766,258
1,553,669
58,344
1,612,013
—
2,570,125
629,989
(6,866)
3,193,248
2,617
19,718
107,201
43,904
44,045
14,046
13,361,780
7,338,781
5,001,169
12,339,950
261,760
75,708
53,772
39,667
9,986
6,468
12,787,311
$
$
58,333
—
1,031
500
9,355
110,722
(16,202)
168,877
332,616
241,853
574,469
13,361,780
$
1,486,595
104,188
1,590,783
673,991
1,503,559
563,575
(11,351)
2,729,774
3,985
31,173
103,414
41,789
3,123
66,709
12,622,201
6,567,366
5,034,739
11,602,105
167,621
150,682
51,779
37,803
13,710
5,539
12,029,239
—
57,578
1,031
500
9,171
106,617
73,969
102,243
351,109
241,853
592,962
12,622,201
$
$
$
Investments and cash equivalents
$
21,940
$
24,729
$
Farmer Mac Guaranteed Securities and USDA Securities
For the Year Ended December 31,
2013
2012
2011
(in thousands)
128,399
85,059
235,398
137,276
98,122
481
98,603
26,958
31,764
(819)
2,113
1,462
1,236
—
3,057
65,771
17,817
11,563
2,375
423
929
—
33,107
131,267
33,752
97,515
(22,187)
75,328
(3,495)
136,297
103,644
264,670
142,690
121,980
(3,691)
118,289
24,963
(19,829)
307
18
—
878
(5,943)
3,341
3,735
19,186
11,123
2,281
134
(1,816)
—
30,908
91,116
22,156
68,960
(22,187)
46,773
(2,879)
28,117
127,394
119,176
274,687
153,382
121,305
(610)
120,695
24,821
(92,645)
3,455
269
—
974
8,887
6,850
(47,389)
17,884
9,732
2,277
823
(2,957)
900
28,659
44,647
5,797
38,850
(22,187)
16,663
(2,879)
13,784
Interest income:
Loans
Total interest income
Total interest expense
Net interest income
Release of/(provision for) loan losses
Net interest income after release of loan losses
Non-interest income/(loss):
Guarantee and commitment fees
Gains/(losses) on financial derivatives and hedging activities
(Losses)/gains on trading assets
Gains on sale of available-for-sale investment securities
Lower of cost or fair value adjustment on loans held for sale
Gains on repurchase of debt
Gains on sale of real estate owned
Other income
Non-interest income/(loss)
Non-interest expense:
Compensation and employee benefits
General and administrative
Regulatory fees
Real estate owned operating costs, net
Provision for/(release of) losses
Other expenses
Non-interest expense
Income before income taxes
Income tax expense
Net income
stock dividends
Net income attributable to Farmer Mac
Preferred stock dividends
Earnings per common share and dividends:
Basic earnings per common share
Diluted earnings per common share
Less: Net income attributable to non-controlling interest - preferred
Net income attributable to common stockholders
71,833
$
43,894
$
$
$
$
6.64
6.41
$
$
4.19
3.98
$
$
1.33
1.28
See accompanying notes to consolidated financial statements.
127
128
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31,
2013
2012
2011
(in thousands)
Interest income:
Investments and cash equivalents
$
21,940
$
24,729
$
Assets:
Cash and cash equivalents
Investment securities:
Available-for-sale, at fair value
Trading, at fair value
Total investment securities
Farmer Mac Guaranteed Securities:
Available-for-sale, at fair value
USDA Securities:
Available-for-sale, at fair value
Trading, at fair value
Total USDA Securities
Loans:
Allowance for loan losses
Total loans, net of allowance
Real estate owned, at lower of cost or fair value
Financial derivatives, at fair value
Guarantee and commitment fees receivable
Deferred tax asset, net
Prepaid expenses and other assets
Total Assets
Liabilities and Equity:
Liabilities:
Notes payable:
Due within one year
Due after one year
Total notes payable
Guarantee and commitment obligation
Accounts payable and accrued expenses
Reserve for losses
Total Liabilities
Commitments and Contingencies (Note 12)
Equity:
Preferred stock:
Common stock:
Loans held for sale, at lower of cost or fair value
Loans held for investment, at amortized cost
Loans held for investment in consolidated trusts, at amortized cost
Interest receivable (includes $9,276 and $9,676, respectively, related to consolidated trusts)
Debt securities of consolidated trusts held by third parties
Financial derivatives, at fair value
Accrued interest payable (includes $2,823 and $2,534, respectively, related to consolidated trusts)
December 31,
2013
December 31,
2012
(in thousands)
$
749,313
$
785,564
2,483,147
928
2,484,075
2,498,382
1,247
2,499,629
5,091,600
4,766,258
1,553,669
58,344
1,612,013
—
2,570,125
629,989
(6,866)
3,193,248
2,617
19,718
107,201
43,904
44,045
14,046
1,486,595
104,188
1,590,783
673,991
1,503,559
563,575
(11,351)
2,729,774
3,985
31,173
103,414
41,789
3,123
66,709
$
$
$
7,338,781
5,001,169
12,339,950
261,760
75,708
53,772
39,667
9,986
6,468
6,567,366
5,034,739
11,602,105
167,621
150,682
51,779
37,803
13,710
5,539
12,787,311
12,029,239
58,333
—
1,031
500
9,355
110,722
(16,202)
168,877
332,616
241,853
574,469
—
57,578
1,031
500
9,171
106,617
73,969
102,243
351,109
241,853
592,962
Series A, par value $25 per share, 2,400,000 shares authorized, issued and outstanding
Series C, par value $1,000 per share, 100,000 shares authorized, 57,578 shares issued and outstanding
Class A Voting, $1 par value, no maximum authorization, 1,030,780 shares outstanding
Class B Voting, $1 par value, no maximum authorization, 500,301 shares outstanding
Class C Non-Voting, $1 par value, no maximum authorization, 9,354,804 shares and 9,171,343 shares
Accumulated other comprehensive (loss)/income, net of tax
outstanding, respectively
Additional paid-in capital
Retained earnings
Total Stockholders' Equity
Non-controlling interest - preferred stock
Total Equity
Total Liabilities and Equity
See accompanying notes to consolidated financial statements.
$
13,361,780
$
12,622,201
Farmer Mac Guaranteed Securities and USDA Securities
Loans
Total interest income
Total interest expense
Net interest income
Release of/(provision for) loan losses
Net interest income after release of loan losses
Non-interest income/(loss):
Guarantee and commitment fees
Gains/(losses) on financial derivatives and hedging activities
(Losses)/gains on trading assets
Gains on sale of available-for-sale investment securities
Gains on repurchase of debt
Gains on sale of real estate owned
13,361,780
$
12,622,201
Lower of cost or fair value adjustment on loans held for sale
Other income
Non-interest income/(loss)
Non-interest expense:
Compensation and employee benefits
General and administrative
Regulatory fees
Real estate owned operating costs, net
Provision for/(release of) losses
Other expenses
Non-interest expense
Income before income taxes
Income tax expense
Net income
Less: Net income attributable to non-controlling interest - preferred
stock dividends
Net income attributable to Farmer Mac
Preferred stock dividends
Net income attributable to common stockholders
Earnings per common share and dividends:
Basic earnings per common share
Diluted earnings per common share
$
$
$
128,399
85,059
235,398
137,276
98,122
481
98,603
26,958
31,764
(819)
2,113
1,462
1,236
—
3,057
65,771
17,817
11,563
2,375
423
929
—
33,107
131,267
33,752
97,515
(22,187)
75,328
(3,495)
136,297
103,644
264,670
142,690
121,980
(3,691)
118,289
24,963
(19,829)
307
18
—
878
(5,943)
3,341
3,735
19,186
11,123
2,281
134
(1,816)
—
30,908
91,116
22,156
68,960
(22,187)
46,773
(2,879)
71,833
$
43,894
$
28,117
127,394
119,176
274,687
153,382
121,305
(610)
120,695
24,821
(92,645)
3,455
269
—
974
8,887
6,850
(47,389)
17,884
9,732
2,277
823
(2,957)
900
28,659
44,647
5,797
38,850
(22,187)
16,663
(2,879)
13,784
6.64
6.41
$
$
4.19
3.98
$
$
1.33
1.28
127
128
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Net income
Other comprehensive (loss)/income, net of tax:
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
97,515
$
68,960
$
38,850
Unrealized holding (losses)/gains on available-for-sale securities (1)
(75,465)
Unrealized gains on cash flow hedges (2)
Less reclassification adjustments included in:
Gains/(losses) on financial derivatives and hedging activities (3)
Gains on sale of available-for-sale investment securities (4)
Other income (5)
Other comprehensive (loss)/income
Comprehensive income
70
(12,598)
(1,374)
(804)
(90,171)
7,344
2,165
—
(6,358)
(12)
(1,196)
(5,401)
63,559
Less: Comprehensive income attributable to noncontrolling interest -
preferred stock dividends
(22,187)
(22,187)
Comprehensive (loss)/income attributable to Farmer Mac
$
(14,843) $
41,372
$
64,637
—
—
(174)
(3,368)
61,095
99,945
(22,187)
77,758
(1) Presented net of income tax benefit of $40.6 million and expense of $1.2 million and $34.8 million for the years ended December 31, 2013, 2012, and
2011, respectively.
(2) Presented net of income tax expense of $38,000 for the year ended December 31, 2013.
(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
$6.8 million and $3.4 million for the years ended December 31, 2013 and 2012, respectively.
(4) Represents realized gains on sales of available-for-sale investment securities. Presented net of income tax benefit of $0.7 million, $6,000 and $0.1 million
for the years ended and December 31, 2013, 2012, and 2011, respectively.
(5) Represents amortization of deferred gains related to certain available-for-sale USDA Securities and Farmer Mac Guaranteed Securities. Presented net of
income tax benefit of $0.4 million, $0.6 million, and $1.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.
See accompanying notes to consolidated financial statements.
Preferred stock:
Balance, beginning of period
Issuance of Series A preferred stock
Redemption of Series C preferred stock
Balance, end of period
Common stock:
Balance, beginning of period
Issuance of Class C common stock
Balance, end of period
Additional paid-in capital:
Balance, beginning of period
Stock-based compensation expense
Issuance of Class C common stock
Tax effect of stock-based awards
Balance, end of period
Retained earnings:
Balance, beginning of period
Net income attributable to Farmer Mac
Cash dividends:
Preferred stock, Series A ($1.3994 per share)
Preferred stock, Series C ($2.36 per share in 2013
and $50.00 per share in 2012 and 2011)
Common stock ($0.48 per share in 2013, $0.40 per
share in 2012, $0.20 per share in 2011)
Accumulated other comprehensive income:
Balance, beginning of period
Other comprehensive (loss)/income, net of tax
Balance, end of period
Total Stockholders' Equity
Non-controlling interest - preferred stock:
Balance, beginning of period
Balance, end of period
Total Equity
For the Year Ended December 31,
2013
2012
2011
Shares
Amount
Shares
Amount
Shares
Amount
(in thousands)
58
$
57,578
2,400
58,333
(58)
(57,578)
2,400
58,333
58
—
—
58
—
—
$
57,578
$
57,578
57,578
$
57,578
$
$
$
10,702
184
10,886
$
$
$
10,702
10,357
10,357
10,284
10,284
184
345
345
10,886
10,702
10,702
10,357
10,357
$ 106,617
$ 102,821
$ 100,050
58
—
—
58
73
$ 110,722
$ 106,617
$ 102,821
$ 102,243
$
62,554
2,966
25
1,114
75,328
(3,359)
(136)
(5,199)
2,428
14
1,354
46,773
—
(2,879)
(4,205)
$
73,969
$
79,370
(90,171)
$ (16,202)
$ 332,616
$ 241,853
$ 241,853
$ 574,469
(5,401)
$
73,969
$ 351,109
$ 241,853
$ 241,853
$ 592,962
$
$
$
$
$
$
—
—
73
2,929
22
(180)
$
50,837
16,663
—
(2,879)
(2,067)
62,554
18,275
61,095
79,370
$ 312,680
$ 241,853
$ 241,853
$ 554,533
Balance, end of period
$ 168,877
$ 102,243
See accompanying notes to consolidated financial statements.
129
130
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
97,515
$
68,960
$
38,850
Net income
Other comprehensive (loss)/income, net of tax:
Unrealized holding (losses)/gains on available-for-sale securities (1)
(75,465)
Unrealized gains on cash flow hedges (2)
Less reclassification adjustments included in:
Gains/(losses) on financial derivatives and hedging activities (3)
Gains on sale of available-for-sale investment securities (4)
Other income (5)
Other comprehensive (loss)/income
Comprehensive income
70
(12,598)
(1,374)
(804)
(90,171)
7,344
2,165
—
(6,358)
(12)
(1,196)
(5,401)
63,559
Less: Comprehensive income attributable to noncontrolling interest -
preferred stock dividends
(22,187)
(22,187)
Comprehensive (loss)/income attributable to Farmer Mac
$
(14,843) $
41,372
$
(1) Presented net of income tax benefit of $40.6 million and expense of $1.2 million and $34.8 million for the years ended December 31, 2013, 2012, and
2011, respectively.
(2) Presented net of income tax expense of $38,000 for the year ended December 31, 2013.
(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
$6.8 million and $3.4 million for the years ended December 31, 2013 and 2012, respectively.
(4) Represents realized gains on sales of available-for-sale investment securities. Presented net of income tax benefit of $0.7 million, $6,000 and $0.1 million
for the years ended and December 31, 2013, 2012, and 2011, respectively.
(5) Represents amortization of deferred gains related to certain available-for-sale USDA Securities and Farmer Mac Guaranteed Securities. Presented net of
income tax benefit of $0.4 million, $0.6 million, and $1.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.
See accompanying notes to consolidated financial statements.
64,637
—
—
(174)
(3,368)
61,095
99,945
(22,187)
77,758
Preferred stock:
Balance, beginning of period
Issuance of Series A preferred stock
Redemption of Series C preferred stock
Balance, end of period
Common stock:
Balance, beginning of period
Issuance of Class C common stock
Balance, end of period
Additional paid-in capital:
Balance, beginning of period
Stock-based compensation expense
Issuance of Class C common stock
Tax effect of stock-based awards
Balance, end of period
Retained earnings:
Balance, beginning of period
Net income attributable to Farmer Mac
Cash dividends:
Preferred stock, Series A ($1.3994 per share)
Preferred stock, Series C ($2.36 per share in 2013
and $50.00 per share in 2012 and 2011)
Common stock ($0.48 per share in 2013, $0.40 per
share in 2012, $0.20 per share in 2011)
2013
For the Year Ended December 31,
2012
2011
Shares
Amount
Shares
Amount
Shares
Amount
(in thousands)
58
$
57,578
2,400
58,333
(58)
(57,578)
58,333
58
—
—
58
$
57,578
—
—
57,578
$
58
—
—
58
2,400
10,702
184
10,886
$
$
$
$
$
$
10,702
10,357
184
345
10,886
10,702
10,357
10,284
345
73
10,702
10,357
$
57,578
—
—
57,578
10,284
73
10,357
$
$
$
$ 106,617
$ 102,821
$ 100,050
2,966
25
1,114
2,428
14
1,354
2,929
22
(180)
$ 110,722
$ 106,617
$ 102,821
$ 102,243
$
62,554
75,328
(3,359)
(136)
(5,199)
46,773
—
(2,879)
(4,205)
Balance, end of period
$ 168,877
$ 102,243
Accumulated other comprehensive income:
Balance, beginning of period
Other comprehensive (loss)/income, net of tax
Balance, end of period
Total Stockholders' Equity
Non-controlling interest - preferred stock:
Balance, beginning of period
Balance, end of period
Total Equity
$
73,969
$
79,370
(90,171)
$ (16,202)
$ 332,616
$ 241,853
$ 241,853
$ 574,469
(5,401)
$
73,969
$ 351,109
$ 241,853
$ 241,853
$ 592,962
See accompanying notes to consolidated financial statements.
129
130
$
50,837
16,663
—
(2,879)
(2,067)
62,554
18,275
61,095
79,370
$
$
$
$ 312,680
$ 241,853
$ 241,853
$ 554,533
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash flows from operating activities:
Net income
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 Guaranteed Securities
Amortization of debt premiums, discounts and issuance costs
Net change in fair value of trading securities, hedged assets, financial derivatives, and loans held
for sale
Gains on sale of available-for-sale investment securities
Gains on repurchase of debt
Gains on sale of real estate owned
Total provision for/(release of) losses
Deferred income taxes
Stock-based compensation expense
Proceeds from repayment of trading investment securities
Purchases of loans held for sale
Proceeds from repayment of loans purchased as held for sale
Net change in:
Interest receivable
Guarantee and commitment fees receivable
Other assets
Accrued interest payable
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of available-for-sale investment securities
Purchases of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
Purchases of loans held for investment
Purchases of defaulted loans
Proceeds from repayment of available-for-sale investment securities
Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
Proceeds from repayment of loans purchased as held for investment
Proceeds from sale of available-for-sale investment securities
Proceeds from sale of Farmer Mac Guaranteed Securities
Proceeds from sale of real estate owned
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of discount notes
Proceeds from issuance of medium-term notes
Payments to redeem discount notes
Payments to redeem medium-term notes
Excess tax benefits related to stock-based awards
Payments to third parties on debt securities of consolidated trusts
Proceeds from common stock issuance
Proceeds from Series A Preferred stock issuance
Retirement of Series C Preferred stock
Dividends paid - Non-controlling interest - preferred stock
Dividends paid on common and preferred stock
Net cash provided by financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
97,515
$
68,960
$
38,850
26,217
11,839
(44,362)
(2,113)
(1,462)
(1,236)
448
6,670
2,967
774
—
168,589
(3,835)
(2,115)
52,872
1,993
(771)
313,990
(1,703,082)
(1,635,394)
(911,846)
(6,704)
1,350,491
1,125,270
265,151
366,562
150,417
4,042
(995,093)
64,859,652
2,886,783
(64,952,365)
(2,066,602)
1,160
(56,278)
1,913
58,333
(57,578)
(22,187)
(7,979)
644,852
(36,251)
785,564
749,313
$
19,643
14,658
(1,017)
(18)
—
(878)
1,875
(1,982)
2,428
810
(171,925)
151,473
6,938
(10,405)
(43,200)
(9,075)
5,018
33,303
(1,888,352)
(1,469,057)
(564,251)
(17,024)
1,410,427
862,992
289,318
7,018
38,063
2,056
(1,328,810)
14,326
12,800
44,124
(269)
—
(974)
(2,347)
(18,939)
2,929
83,858
(214,116)
95,991
(19,982)
3,368
(9,623)
3,723
(6,899)
26,820
(1,694,794)
(2,209,604)
(489,483)
(21,663)
891,108
749,399
292,484
447,864
25,674
4,201
(2,004,814)
67,404,261
3,358,188
(67,577,763)
(1,790,000)
2,113
(106,438)
2,935
—
—
(22,187)
(7,084)
1,264,025
(31,482)
817,046
785,564
$
68,770,286
2,295,579
(67,459,368)
(1,366,275)
243
(148,234)
22
—
—
(22,187)
(4,946)
2,065,120
87,126
729,920
817,046
$
See accompanying notes to consolidated financial statements.
1. ORGANIZATION
The Federal Agricultural Mortgage Corporation ("Farmer Mac") is a stockholder-owned, federally
chartered instrumentality of the United States established under Title VIII of the Farm Credit Act of 1971,
as amended (12 U.S.C. §§ 2279aa et seq.), which is sometimes referred to as Farmer Mac's
charter. Farmer Mac was originally created by the United States Congress to provide a secondary market
for a variety of loans made to borrowers in rural America. This secondary market is designed to increase
the availability of long-term credit at stable interest rates to America's rural communities and to provide
rural borrowers with the benefits of capital markets pricing and product innovation. Since Farmer Mac's
inception, Congress has expanded Farmer Mac's charter to authorize Farmer Mac to create the USDA
Guarantees line of business and to purchase, and guarantee securities backed by, loans made by
cooperative lenders to finance electrification and telecommunications systems in rural areas.
Farmer Mac's main secondary market activities are:
• purchasing eligible loans directly from lenders;
• providing advances against eligible loans by purchasing obligations secured by those loans;
•
•
securitizing assets and guaranteeing the payment of principal and interest on the resulting
securities that represent interests in, or obligations secured by, pools of eligible loans; and
issuing long-term standby purchase commitments ("LTSPCs") for eligible loans.
Farmer Mac conducts these activities through three lines of business – Farm & Ranch, USDA Guarantees,
and Rural Utilities. As of December 31, 2013, the total outstanding balance in all of Farmer Mac's lines of
business was $14.0 billion.
Under the Farm & Ranch line of business, Farmer Mac purchases eligible mortgage loans secured by first
liens on agricultural real estate and rural housing. Farmer Mac also guarantees securities representing
interests in, or obligations secured by, pools of mortgage loans eligible for the Farm & Ranch line of
business. Additionally, Farmer Mac commits to purchase, subject to the terms of the applicable LTSPC
agreement, eligible Farm & Ranch mortgage loans. The securities guaranteed by Farmer Mac under this
line of business are referred to as "Farm & Ranch Guaranteed Securities." To be eligible, loans must meet
Farmer Mac's credit underwriting, collateral valuation, documentation, and other specified standards. As
of December 31, 2013, outstanding loans held by Farmer Mac, loans that either backed off-balance sheet
Farm & Ranch Guaranteed Securities or were subject to LTSPCs, and other Farm & Ranch Guaranteed
Securities totaled $9.7 billion.
Under the USDA Guarantees line of business, Farmer Mac II LLC, a subsidiary of Farmer Mac, purchases
the portions of certain agricultural, rural development, business and industry, and community facilities
loans guaranteed by the United States Department of Agriculture under the Consolidated Farm and Rural
Development Act (7 U.S.C. §§ 1921 et seq.). USDA-guaranteed portions are referred to and presented on
the consolidated balance sheets as "USDA Securities." Farmer Mac II LLC also purchases USDA
Securities in exchange for issuing securities to third parties backed by those USDA Securities, which are
then also guaranteed by Farmer Mac. These issued securities are referred to and presented on the
consolidated balance sheets as Farmer Mac Guaranteed USDA Securities. As of December 31, 2013,
outstanding Farmer Mac Guaranteed USDA Securities and USDA Securities totaled $1.7 billion.
131
132
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash flows from operating activities:
Net income
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 Guaranteed Securities
Amortization of debt premiums, discounts and issuance costs
Net change in fair value of trading securities, hedged assets, financial derivatives, and loans held
for sale
Gains on sale of available-for-sale investment securities
Gains on repurchase of debt
Gains on sale of real estate owned
Total provision for/(release of) losses
Deferred income taxes
Stock-based compensation expense
Proceeds from repayment of trading investment securities
Purchases of loans held for sale
Proceeds from repayment of loans purchased as held for sale
Guarantee and commitment fees receivable
Net change in:
Interest receivable
Other assets
Accrued interest payable
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of available-for-sale investment securities
Purchases of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
Purchases of loans held for investment
Purchases of defaulted loans
Proceeds from repayment of available-for-sale investment securities
Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
Proceeds from repayment of loans purchased as held for investment
Proceeds from sale of available-for-sale investment securities
Proceeds from sale of Farmer Mac Guaranteed Securities
Proceeds from sale of real estate owned
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of discount notes
Proceeds from issuance of medium-term notes
Payments to redeem discount notes
Payments to redeem medium-term notes
Excess tax benefits related to stock-based awards
Payments to third parties on debt securities of consolidated trusts
Proceeds from common stock issuance
Proceeds from Series A Preferred stock issuance
Retirement of Series C Preferred stock
Dividends paid - Non-controlling interest - preferred stock
Dividends paid on common and preferred stock
Net cash provided by financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
See accompanying notes to consolidated financial statements.
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
97,515
$
68,960
$
38,850
26,217
11,839
(44,362)
(2,113)
(1,462)
(1,236)
448
6,670
2,967
774
—
168,589
(3,835)
(2,115)
52,872
1,993
(771)
313,990
(1,703,082)
(1,635,394)
(911,846)
(6,704)
1,350,491
1,125,270
265,151
366,562
150,417
4,042
19,643
14,658
14,326
12,800
(1,017)
44,124
(18)
—
(878)
1,875
(1,982)
2,428
810
(171,925)
151,473
6,938
(10,405)
(43,200)
(9,075)
5,018
33,303
(1,888,352)
(1,469,057)
(564,251)
(17,024)
1,410,427
862,992
289,318
7,018
38,063
2,056
(269)
—
(974)
(2,347)
(18,939)
2,929
83,858
(214,116)
95,991
(19,982)
3,368
(9,623)
3,723
(6,899)
26,820
(1,694,794)
(2,209,604)
(489,483)
(21,663)
891,108
749,399
292,484
447,864
25,674
4,201
(995,093)
(1,328,810)
(2,004,814)
64,859,652
2,886,783
67,404,261
3,358,188
68,770,286
2,295,579
(64,952,365)
(67,577,763)
(67,459,368)
(2,066,602)
(1,790,000)
(1,366,275)
1,160
(56,278)
1,913
58,333
(57,578)
(22,187)
(7,979)
644,852
(36,251)
785,564
749,313
2,113
(106,438)
2,935
—
—
(22,187)
(7,084)
243
(148,234)
22
—
—
(22,187)
(4,946)
1,264,025
2,065,120
(31,482)
817,046
785,564
$
87,126
729,920
817,046
$
$
1. ORGANIZATION
The Federal Agricultural Mortgage Corporation ("Farmer Mac") is a stockholder-owned, federally
chartered instrumentality of the United States established under Title VIII of the Farm Credit Act of 1971,
as amended (12 U.S.C. §§ 2279aa et seq.), which is sometimes referred to as Farmer Mac's
charter. Farmer Mac was originally created by the United States Congress to provide a secondary market
for a variety of loans made to borrowers in rural America. This secondary market is designed to increase
the availability of long-term credit at stable interest rates to America's rural communities and to provide
rural borrowers with the benefits of capital markets pricing and product innovation. Since Farmer Mac's
inception, Congress has expanded Farmer Mac's charter to authorize Farmer Mac to create the USDA
Guarantees line of business and to purchase, and guarantee securities backed by, loans made by
cooperative lenders to finance electrification and telecommunications systems in rural areas.
Farmer Mac's main secondary market activities are:
• purchasing eligible loans directly from lenders;
• providing advances against eligible loans by purchasing obligations secured by those loans;
securitizing assets and guaranteeing the payment of principal and interest on the resulting
•
securities that represent interests in, or obligations secured by, pools of eligible loans; and
issuing long-term standby purchase commitments ("LTSPCs") for eligible loans.
•
Farmer Mac conducts these activities through three lines of business – Farm & Ranch, USDA Guarantees,
and Rural Utilities. As of December 31, 2013, the total outstanding balance in all of Farmer Mac's lines of
business was $14.0 billion.
Under the Farm & Ranch line of business, Farmer Mac purchases eligible mortgage loans secured by first
liens on agricultural real estate and rural housing. Farmer Mac also guarantees securities representing
interests in, or obligations secured by, pools of mortgage loans eligible for the Farm & Ranch line of
business. Additionally, Farmer Mac commits to purchase, subject to the terms of the applicable LTSPC
agreement, eligible Farm & Ranch mortgage loans. The securities guaranteed by Farmer Mac under this
line of business are referred to as "Farm & Ranch Guaranteed Securities." To be eligible, loans must meet
Farmer Mac's credit underwriting, collateral valuation, documentation, and other specified standards. As
of December 31, 2013, outstanding loans held by Farmer Mac, loans that either backed off-balance sheet
Farm & Ranch Guaranteed Securities or were subject to LTSPCs, and other Farm & Ranch Guaranteed
Securities totaled $9.7 billion.
Under the USDA Guarantees line of business, Farmer Mac II LLC, a subsidiary of Farmer Mac, purchases
the portions of certain agricultural, rural development, business and industry, and community facilities
loans guaranteed by the United States Department of Agriculture under the Consolidated Farm and Rural
Development Act (7 U.S.C. §§ 1921 et seq.). USDA-guaranteed portions are referred to and presented on
the consolidated balance sheets as "USDA Securities." Farmer Mac II LLC also purchases USDA
Securities in exchange for issuing securities to third parties backed by those USDA Securities, which are
then also guaranteed by Farmer Mac. These issued securities are referred to and presented on the
consolidated balance sheets as Farmer Mac Guaranteed USDA Securities. As of December 31, 2013,
outstanding Farmer Mac Guaranteed USDA Securities and USDA Securities totaled $1.7 billion.
131
132
Farmer Mac initiated the Rural Utilities line of business in 2008 after Congress expanded Farmer Mac's
authorized secondary market activities to include rural utilities loans. Farmer Mac's authorized activities
under this line of business are similar to those conducted under the Farm & Ranch line of business –
purchases of, and guarantees of securities ("Rural Utilities Guaranteed Securities") backed by, eligible
rural utilities loans. To be eligible, loans must meet Farmer Mac's credit underwriting and other specified
standards. Farmer Mac has retained in its portfolio all of the rural utilities loans and Rural Utilities
Guaranteed Securities under this line of business since its inception, with the exception of AgVantage
securities that were sold to third parties and had an outstanding balance of $11.0 million as of
December 31, 2013. To date, Farmer Mac has not issued any LTSPCs with respect to rural utilities
loans. As of December 31, 2013, the aggregate outstanding principal balance of rural utilities loans held
and Rural Utilities Guaranteed Securities was $2.6 billion.
Farm & Ranch Guaranteed Securities, Farmer Mac Guaranteed USDA Securities, and Rural Utilities
Guaranteed Securities are collectively referred to as "Farmer Mac Guaranteed Securities." The assets
collateralizing Farmer Mac Guaranteed Securities include (1) loans, loan participation interests, or USDA
Securities eligible under one of Farmer Mac's lines of business and (2) general obligations of lenders
secured by pools of eligible loans. Farmer Mac guarantees the timely payment of principal and interest on
the resulting Farmer Mac Guaranteed Securities. Farmer Mac may retain Farmer Mac Guaranteed
Securities in its portfolio or sell them to third parties.
Farmer Mac's two principal sources of revenue are:
•
interest income earned on assets held on balance sheet, net of related funding costs and
interest payments and receipts on financial derivatives (i.e., net effective spread); and
• guarantee and commitment fees received in connection with outstanding Farmer Mac
Guaranteed Securities and LTSPCs.
Farmer Mac funds its purchases of eligible loan assets and liquidity investment assets primarily by issuing
debt obligations of various maturities in the public capital markets. As of December 31, 2013, Farmer
Mac had $4.9 billion of discount notes and $7.4 billion of medium-term notes outstanding. The proceeds
of debt issuance are invested in loan purchases, Farmer Mac Guaranteed Securities, and liquidity
investment assets in accordance with policies established by Farmer Mac's board of directors that comply
with regulations promulgated by the Farm Credit Administration ("FCA"), 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Farmer Mac conform with accounting principles generally
accepted in the United States of America ("generally accepted accounting principles" or "GAAP"). The
preparation of consolidated financial statements in conformity with generally accepted accounting
principles requires management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities (including, but not
limited to, the allowance for loan losses, reserve for losses, other-than-temporary impairment of
investment securities and fair value measurements) as of the date of the consolidated financial statements
and the reported amounts of income and expenses during the reporting period. Actual results could differ
from those estimates. The following are the significant accounting policies that Farmer Mac follows in
preparing and presenting its consolidated financial statements:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Farmer Mac and its two subsidiaries: (1)
Farmer Mac Mortgage Securities Corporation ("FMMSC"), whose principal activities are to facilitate the
purchase and issuance of Farmer Mac Guaranteed Securities and (2) Farmer Mac II LLC, whose principal
activity is the operation of substantially all of the business related to the USDA Guarantees line of
business – primarily the acquisition of USDA Securities. The consolidated financial statements also
include the accounts of variable interest entities ("VIEs") in which Farmer Mac determined itself to be the
primary beneficiary. See Note 2(q) for more information on consolidated VIEs.
A Farmer Mac guarantee of timely payment of principal and interest is an explicit element of the terms of
all Farmer Mac Guaranteed Securities. When Farmer Mac retains such securities in its portfolio, that
guarantee is not extinguished. For Farmer Mac Guaranteed Securities in Farmer Mac's portfolio, Farmer
Mac has entered into guarantee arrangements with FMMSC. The guarantee fee rate established between
Farmer Mac and FMMSC is an element in determining the fair value of these Farmer Mac Guaranteed
Securities, and guarantee fees related to these securities are reflected in guarantee and commitment fees in
the consolidated statements of operations. These guarantee fees totaled $10.9 million in 2013, $10.3
million in 2012, and $9.0 million in 2011. The corresponding expense of FMMSC has been eliminated
against interest income in consolidation. All other inter-company balances and transactions have been
eliminated in consolidation.
(b) Cash and Cash Equivalents and Statements of Cash Flows
Farmer Mac considers highly liquid investment securities with maturities at the time of purchase of three
months or less to be cash equivalents. The carrying value of cash and cash equivalents is a reasonable
estimate of their approximate fair value. Changes in the balance of cash and cash equivalents are reported
in the consolidated statements of cash flows.
133
134
Farmer Mac initiated the Rural Utilities line of business in 2008 after Congress expanded Farmer Mac's
authorized secondary market activities to include rural utilities loans. Farmer Mac's authorized activities
under this line of business are similar to those conducted under the Farm & Ranch line of business –
purchases of, and guarantees of securities ("Rural Utilities Guaranteed Securities") backed by, eligible
rural utilities loans. To be eligible, loans must meet Farmer Mac's credit underwriting and other specified
standards. Farmer Mac has retained in its portfolio all of the rural utilities loans and Rural Utilities
Guaranteed Securities under this line of business since its inception, with the exception of AgVantage
securities that were sold to third parties and had an outstanding balance of $11.0 million as of
December 31, 2013. To date, Farmer Mac has not issued any LTSPCs with respect to rural utilities
loans. As of December 31, 2013, the aggregate outstanding principal balance of rural utilities loans held
and Rural Utilities Guaranteed Securities was $2.6 billion.
Farm & Ranch Guaranteed Securities, Farmer Mac Guaranteed USDA Securities, and Rural Utilities
Guaranteed Securities are collectively referred to as "Farmer Mac Guaranteed Securities." The assets
collateralizing Farmer Mac Guaranteed Securities include (1) loans, loan participation interests, or USDA
Securities eligible under one of Farmer Mac's lines of business and (2) general obligations of lenders
secured by pools of eligible loans. Farmer Mac guarantees the timely payment of principal and interest on
the resulting Farmer Mac Guaranteed Securities. Farmer Mac may retain Farmer Mac Guaranteed
Securities in its portfolio or sell them to third parties.
Farmer Mac's two principal sources of revenue are:
•
interest income earned on assets held on balance sheet, net of related funding costs and
interest payments and receipts on financial derivatives (i.e., net effective spread); and
• guarantee and commitment fees received in connection with outstanding Farmer Mac
Guaranteed Securities and LTSPCs.
Farmer Mac funds its purchases of eligible loan assets and liquidity investment assets primarily by issuing
debt obligations of various maturities in the public capital markets. As of December 31, 2013, Farmer
Mac had $4.9 billion of discount notes and $7.4 billion of medium-term notes outstanding. The proceeds
of debt issuance are invested in loan purchases, Farmer Mac Guaranteed Securities, and liquidity
investment assets in accordance with policies established by Farmer Mac's board of directors that comply
with regulations promulgated by the Farm Credit Administration ("FCA"), 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Farmer Mac conform with accounting principles generally
accepted in the United States of America ("generally accepted accounting principles" or "GAAP"). The
preparation of consolidated financial statements in conformity with generally accepted accounting
principles requires management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities (including, but not
limited to, the allowance for loan losses, reserve for losses, other-than-temporary impairment of
investment securities and fair value measurements) as of the date of the consolidated financial statements
and the reported amounts of income and expenses during the reporting period. Actual results could differ
from those estimates. The following are the significant accounting policies that Farmer Mac follows in
preparing and presenting its consolidated financial statements:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Farmer Mac and its two subsidiaries: (1)
Farmer Mac Mortgage Securities Corporation ("FMMSC"), whose principal activities are to facilitate the
purchase and issuance of Farmer Mac Guaranteed Securities and (2) Farmer Mac II LLC, whose principal
activity is the operation of substantially all of the business related to the USDA Guarantees line of
business – primarily the acquisition of USDA Securities. The consolidated financial statements also
include the accounts of variable interest entities ("VIEs") in which Farmer Mac determined itself to be the
primary beneficiary. See Note 2(q) for more information on consolidated VIEs.
A Farmer Mac guarantee of timely payment of principal and interest is an explicit element of the terms of
all Farmer Mac Guaranteed Securities. When Farmer Mac retains such securities in its portfolio, that
guarantee is not extinguished. For Farmer Mac Guaranteed Securities in Farmer Mac's portfolio, Farmer
Mac has entered into guarantee arrangements with FMMSC. The guarantee fee rate established between
Farmer Mac and FMMSC is an element in determining the fair value of these Farmer Mac Guaranteed
Securities, and guarantee fees related to these securities are reflected in guarantee and commitment fees in
the consolidated statements of operations. These guarantee fees totaled $10.9 million in 2013, $10.3
million in 2012, and $9.0 million in 2011. The corresponding expense of FMMSC has been eliminated
against interest income in consolidation. All other inter-company balances and transactions have been
eliminated in consolidation.
(b) Cash and Cash Equivalents and Statements of Cash Flows
Farmer Mac considers highly liquid investment securities with maturities at the time of purchase of three
months or less to be cash equivalents. The carrying value of cash and cash equivalents is a reasonable
estimate of their approximate fair value. Changes in the balance of cash and cash equivalents are reported
in the consolidated statements of cash flows.
133
134
The following table sets forth information regarding certain cash and non-cash transactions for the years
ended December 31, 2013, 2012 and 2011:
Table 2.1
Cash paid during the period for:
Interest
Income taxes
Non-cash activity:
Real estate owned acquired through loan liquidation
Loans acquired and securitized as Farmer Mac Guaranteed Securities
Purchases of investment securities traded, not yet settled
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
Deconsolidation of loans held for investment in consolidated trusts and debt
securities of consolidated trusts held by third parties - transferred to off-
balance sheet Farm & Ranch Guaranteed Securities
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
114,609
$
112,663
$
23,000
21,500
1,443
150,417
—
2,280
32,736
—
101,288
26,568
4,605
22,406
162,674
150,417
32,736
22,406
—
460,261
—
Transfers of loans held for sale to loans held for investment
673,991
—
878,798
On January 1, 2013, Farmer Mac transferred $674.0 million of loans from held for sale to held for
investment because Farmer Mac either (1) no longer intends to sell these loans in the foreseeable future or
(2) securitizes these loans using VIEs that are ultimately consolidated on Farmer Mac's balance sheet and
reported as "Loans held for investment in consolidated trusts, at amortized cost." Farmer Mac transferred
these loans at the lower of cost or fair value (determined on a pooled basis). Farmer Mac recorded a $5.9
million unamortized discount for loans transferred at fair value. At the time of purchase, loans are
classified as either held for sale or held for investment depending upon management's intent and ability to
hold the loans for the foreseeable future. Cash receipts from the repayment of loans are classified within
the statements of cash flows based on management's intent upon purchase of the loan.
During 2012, Farmer Mac deconsolidated $460.3 million of Farm & Ranch Guaranteed Securities owned
by Farm Credit West ("FCW") from loans held for investment in consolidated trusts and debt securities of
consolidated trusts held by third parties to off-balance sheet Farm & Ranch Guaranteed Securities because
FCW was no longer a related party as of June 30, 2012. See Note 2(q) for further information related to
the consolidation of VIEs.
Effective January 1, 2011, Farmer Mac transferred $878.8 million of loans in the Farm & Ranch line of
business from held for sale to held for investment because Farmer Mac no longer has the intent to
securitize or sell these loans in the foreseeable future. Farmer Mac transferred these loans at their cost,
which was lower than the estimated fair value at the time of transfer.
(c) Investment Securities, Farmer Mac Guaranteed Securities and USDA Securities
Securities for which Farmer Mac does not have the positive intent and ability to hold to maturity are
classified as available-for-sale or trading and are carried at estimated fair value. Unrealized gains and
losses on available-for-sale securities are reported as a component of accumulated other comprehensive
income in stockholders' equity. For securities classified as trading,unrealized gains and losses are
included in earnings. Gains and losses on the sale of available-for-sale and trading securities are
determined using the specific identification cost method. As of December 31, 2013, Farmer Mac did not
classify any securities as held-to-maturity. However, effective January 1, 2014, Farmer Mac transferred
$1.6 billion of available-for-sale securities to a held-to-maturity classification as the company currently
has the intent to hold the securities to maturity.
Farmer Mac determines the fair value of investment securities using quoted market prices, when available,
and evaluates the securities for other-than-temporary impairment. Farmer Mac determines the fair values
of certain investment securities for which quoted market prices are not available, Farmer Mac Guaranteed
Securities and USDA Securities based on the present value of the associated expected future cash
flows. In estimating the present value of the expected future cash flows, management is required to make
estimates and assumptions. The key estimates and assumptions include discount rates and collateral
repayment rates. Premiums, discounts and other deferred costs are amortized to interest income over the
estimated life of the security using the effective interest method.
Farmer Mac generally receives compensation when loans with yield maintenance provisions underlying
Farmer Mac Guaranteed Securities prepay. These yield maintenance payments mitigate Farmer Mac's
exposure to reinvestment risk and are calculated such that, when reinvested with the prepaid principal,
they should generate substantially the same cash flows that would have been generated had the loans not
prepaid. Yield maintenance payments are recognized as interest income in the consolidated statements of
operations upon receipt.
(d) Loans
Loans for which Farmer Mac has the positive intent and ability to hold for the foreseeable future are
classified as held for investment and reported at their unpaid principal balance, net of unamortized
purchase discounts or premiums. When Farmer Mac consolidates a trust, it recognizes the loans
underlying the trust in the consolidated balance sheets as "Loans held for investment in consolidated
trusts, at amortized cost." See Note 2(q) for more information on the accounting policy related to
consolidation. Loans that Farmer Mac does not intend to hold for the foreseeable future are classified as
held for sale and reported at the lower of cost or fair value determined on a pooled basis. For loans held
for investment and loans held for sale, the net unamortized purchase premium as of December 31, 2013
was $11.5 million, compared to $35.1 million as of December 31, 2012. Farmer Mac does not amortize
premiums and discounts related to loans held for sale.
135
136
The following table sets forth information regarding certain cash and non-cash transactions for the years
ended December 31, 2013, 2012 and 2011:
Table 2.1
Cash paid during the period for:
Interest
Income taxes
Non-cash activity:
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
114,609
$
112,663
$
23,000
21,500
101,288
26,568
4,605
22,406
162,674
Real estate owned acquired through loan liquidation
Loans acquired and securitized as Farmer Mac Guaranteed Securities
Purchases of investment securities traded, not yet settled
1,443
150,417
—
2,280
32,736
—
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
150,417
32,736
22,406
Deconsolidation of loans held for investment in consolidated trusts and debt
securities of consolidated trusts held by third parties - transferred to off-
balance sheet Farm & Ranch Guaranteed Securities
—
460,261
—
Transfers of loans held for sale to loans held for investment
673,991
—
878,798
On January 1, 2013, Farmer Mac transferred $674.0 million of loans from held for sale to held for
investment because Farmer Mac either (1) no longer intends to sell these loans in the foreseeable future or
(2) securitizes these loans using VIEs that are ultimately consolidated on Farmer Mac's balance sheet and
reported as "Loans held for investment in consolidated trusts, at amortized cost." Farmer Mac transferred
these loans at the lower of cost or fair value (determined on a pooled basis). Farmer Mac recorded a $5.9
million unamortized discount for loans transferred at fair value. At the time of purchase, loans are
classified as either held for sale or held for investment depending upon management's intent and ability to
hold the loans for the foreseeable future. Cash receipts from the repayment of loans are classified within
the statements of cash flows based on management's intent upon purchase of the loan.
During 2012, Farmer Mac deconsolidated $460.3 million of Farm & Ranch Guaranteed Securities owned
by Farm Credit West ("FCW") from loans held for investment in consolidated trusts and debt securities of
consolidated trusts held by third parties to off-balance sheet Farm & Ranch Guaranteed Securities because
FCW was no longer a related party as of June 30, 2012. See Note 2(q) for further information related to
the consolidation of VIEs.
Effective January 1, 2011, Farmer Mac transferred $878.8 million of loans in the Farm & Ranch line of
business from held for sale to held for investment because Farmer Mac no longer has the intent to
securitize or sell these loans in the foreseeable future. Farmer Mac transferred these loans at their cost,
which was lower than the estimated fair value at the time of transfer.
(c) Investment Securities, Farmer Mac Guaranteed Securities and USDA Securities
Securities for which Farmer Mac does not have the positive intent and ability to hold to maturity are
classified as available-for-sale or trading and are carried at estimated fair value. Unrealized gains and
losses on available-for-sale securities are reported as a component of accumulated other comprehensive
income in stockholders' equity. For securities classified as trading,unrealized gains and losses are
included in earnings. Gains and losses on the sale of available-for-sale and trading securities are
determined using the specific identification cost method. As of December 31, 2013, Farmer Mac did not
classify any securities as held-to-maturity. However, effective January 1, 2014, Farmer Mac transferred
$1.6 billion of available-for-sale securities to a held-to-maturity classification as the company currently
has the intent to hold the securities to maturity.
Farmer Mac determines the fair value of investment securities using quoted market prices, when available,
and evaluates the securities for other-than-temporary impairment. Farmer Mac determines the fair values
of certain investment securities for which quoted market prices are not available, Farmer Mac Guaranteed
Securities and USDA Securities based on the present value of the associated expected future cash
flows. In estimating the present value of the expected future cash flows, management is required to make
estimates and assumptions. The key estimates and assumptions include discount rates and collateral
repayment rates. Premiums, discounts and other deferred costs are amortized to interest income over the
estimated life of the security using the effective interest method.
Farmer Mac generally receives compensation when loans with yield maintenance provisions underlying
Farmer Mac Guaranteed Securities prepay. These yield maintenance payments mitigate Farmer Mac's
exposure to reinvestment risk and are calculated such that, when reinvested with the prepaid principal,
they should generate substantially the same cash flows that would have been generated had the loans not
prepaid. Yield maintenance payments are recognized as interest income in the consolidated statements of
operations upon receipt.
(d) Loans
Loans for which Farmer Mac has the positive intent and ability to hold for the foreseeable future are
classified as held for investment and reported at their unpaid principal balance, net of unamortized
purchase discounts or premiums. When Farmer Mac consolidates a trust, it recognizes the loans
underlying the trust in the consolidated balance sheets as "Loans held for investment in consolidated
trusts, at amortized cost." See Note 2(q) for more information on the accounting policy related to
consolidation. Loans that Farmer Mac does not intend to hold for the foreseeable future are classified as
held for sale and reported at the lower of cost or fair value determined on a pooled basis. For loans held
for investment and loans held for sale, the net unamortized purchase premium as of December 31, 2013
was $11.5 million, compared to $35.1 million as of December 31, 2012. Farmer Mac does not amortize
premiums and discounts related to loans held for sale.
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136
(e) Securitization of Loans
Asset securitization involves the transfer of financial assets to another entity in exchange for cash and/or
beneficial interests in the assets transferred. Farmer Mac or third parties transfer agricultural real estate
mortgage loans or rural utilities loans into trusts that are used as vehicles for the securitization of the
transferred loans. The trusts issue Farmer Mac Guaranteed Securities that are beneficial interests in the
assets of the trusts, to either Farmer Mac or third party investors. Farmer Mac guarantees the timely
payment of principal and interest on the securities issued by the trusts and receives guarantee fees as
compensation for its guarantee. Farmer Mac recognizes guarantee fees on an accrual basis over the terms
of the Farmer Mac Guaranteed Securities, which generally coincide with the terms of the underlying
loans. As such, no guarantee fees are unearned at the end of any reporting period. When Farmer Mac
purchases a delinquent loan underlying a Farmer Mac Guaranteed Security, Farmer Mac stops accruing
the guarantee fee upon loan purchase.
(f) Non-accrual Loans
Non-accrual loans are loans for which it is probable that Farmer Mac will be unable to collect all amounts
due according to the contractual terms of the loan agreement and include all loans 90 days or more past
due. When a loan becomes 90 days past due, interest accrual on the loan is discontinued and interest
previously accrued is reversed against interest income in the current period. The interest on such loans is
accounted for on the cash basis until a loan qualifies for return to accrual status. Loans are returned to
accrual status when all the principal and interest payments contractually due are collected and certain
performance criteria are met.
(g) Real Estate Owned
Real estate owned ("REO") consists of real estate acquired through loan liquidation and is recorded at fair
value less estimated selling cost at acquisition. Fair value is determined by appraisal or other appropriate
valuation method. Any excess of the recorded investment in the loan over the fair value less estimated
selling cost is charged to the allowance for loan losses. Subsequent to the acquisition, management
continues to perform periodic valuations of real estate owned. Declines in the net realizable value (fair
value less estimated selling costs) are charged through income and presented in "Real estate owned
operating costs, net" on the consolidated statements of operations.
Farmer Mac contracts with third parties to operate or preserve real estate owned and offered for sale when
appropriate to maintain property value. Non-recoverable costs are expensed as incurred and those related
to the production of saleable goods or crops are capitalized to the extent they are realizable. As revenues
from the sale of goods or crops are received, they are applied first to any capitalized costs and any
remaining revenues offset non-recoverable expenses incurred. Farmer Mac had no capitalized costs as of
December 31, 2013 and 2012.
(h) 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, not for trading or speculative purposes. Farmer Mac enters into interest rate swap contracts
principally to adjust the characteristics of its short-term debt to match more closely the cash flow and
duration characteristics of its longer-term loans and other assets, and also to adjust the characteristics of its
long-term debt to match more closely the cash flow and duration characteristics of its short-term 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. Farmer Mac is
required to recognize certain contracts and commitments as derivatives when the characteristics of those
contracts and commitments meet the definition of a derivative.
Accounting for financial derivatives differs significantly depending on whether a derivative is designated
in a hedging relationship. Derivative instruments designated in fair value hedging relationships mitigate
exposure to changes in the fair value of assets or liabilities. Derivative instruments designated in cash
flow hedging relationships mitigate exposure to the variability in expected future cash flows or other
forecasted transactions. In order to qualify for fair value or cash flow hedge accounting treatment,
documentation must indicate the intention to designate the derivative as a hedge of a specific asset or
liability or a future cash flow. Effectiveness of the hedge must be assessed at inception and monitored
over the life of the hedging relationship.
All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability.
Changes in the fair values of financial derivatives not designated as cash flow hedges are reported in
"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 reported in "Gains/(losses) on
financial derivatives and hedging activities" in the consolidated statements of operations. The accrual of
the contractual amounts due on the financial derivative is included as an adjustment to the yield of the
hedged item and is reported in net interest income. 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 OCI when the hedged transaction affects
earnings. Any ineffective portion of designated hedge transactions is recognized immediately in "Gains/
(losses) on financial derivatives and hedging activities" in the consolidated statements of operations.
Farmer Mac has made an accounting policy election to measure the credit risk of its derivative financial
instruments that are subject to master netting agreements on a net basis by counterparty portfolio,
consistent with how Farmer Mac previously has been measuring credit risk for these instruments. See
Notes 6 and 13 for more information on financial derivatives.
Notes payable are classified as due within one year or due after one year based on the length of time
remaining to their contractual maturities. Debt issuance costs and premiums and discounts are deferred
and amortized to interest expense using the effective interest method over the contractual life of the related
(i) Notes Payable
debt.
(j) Allowance for Losses
Farmer Mac maintains an allowance for losses to cover estimated probable losses incurred as of the
balance sheet date on loans held ("allowance for loan losses") and loans underlying LTSPCs and off-
balance sheet Farmer Mac Guaranteed Securities ("reserve for losses") based on available
information. Disaggregation by commodity type is performed, where appropriate, in analyzing the need
for an allowance for losses. Farmer Mac Guaranteed Securities do not include AgVantage securities with
regard to the allowance for losses discussion.
137
138
(e) Securitization of Loans
Asset securitization involves the transfer of financial assets to another entity in exchange for cash and/or
beneficial interests in the assets transferred. Farmer Mac or third parties transfer agricultural real estate
mortgage loans or rural utilities loans into trusts that are used as vehicles for the securitization of the
transferred loans. The trusts issue Farmer Mac Guaranteed Securities that are beneficial interests in the
assets of the trusts, to either Farmer Mac or third party investors. Farmer Mac guarantees the timely
payment of principal and interest on the securities issued by the trusts and receives guarantee fees as
compensation for its guarantee. Farmer Mac recognizes guarantee fees on an accrual basis over the terms
of the Farmer Mac Guaranteed Securities, which generally coincide with the terms of the underlying
loans. As such, no guarantee fees are unearned at the end of any reporting period. When Farmer Mac
purchases a delinquent loan underlying a Farmer Mac Guaranteed Security, Farmer Mac stops accruing
the guarantee fee upon loan purchase.
(f) Non-accrual Loans
Non-accrual loans are loans for which it is probable that Farmer Mac will be unable to collect all amounts
due according to the contractual terms of the loan agreement and include all loans 90 days or more past
due. When a loan becomes 90 days past due, interest accrual on the loan is discontinued and interest
previously accrued is reversed against interest income in the current period. The interest on such loans is
accounted for on the cash basis until a loan qualifies for return to accrual status. Loans are returned to
accrual status when all the principal and interest payments contractually due are collected and certain
performance criteria are met.
(g) Real Estate Owned
Real estate owned ("REO") consists of real estate acquired through loan liquidation and is recorded at fair
value less estimated selling cost at acquisition. Fair value is determined by appraisal or other appropriate
valuation method. Any excess of the recorded investment in the loan over the fair value less estimated
selling cost is charged to the allowance for loan losses. Subsequent to the acquisition, management
continues to perform periodic valuations of real estate owned. Declines in the net realizable value (fair
value less estimated selling costs) are charged through income and presented in "Real estate owned
operating costs, net" on the consolidated statements of operations.
Farmer Mac contracts with third parties to operate or preserve real estate owned and offered for sale when
appropriate to maintain property value. Non-recoverable costs are expensed as incurred and those related
to the production of saleable goods or crops are capitalized to the extent they are realizable. As revenues
from the sale of goods or crops are received, they are applied first to any capitalized costs and any
remaining revenues offset non-recoverable expenses incurred. Farmer Mac had no capitalized costs as of
December 31, 2013 and 2012.
(h) 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, not for trading or speculative purposes. Farmer Mac enters into interest rate swap contracts
principally to adjust the characteristics of its short-term debt to match more closely the cash flow and
duration characteristics of its longer-term loans and other assets, and also to adjust the characteristics of its
long-term debt to match more closely the cash flow and duration characteristics of its short-term 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. Farmer Mac is
required to recognize certain contracts and commitments as derivatives when the characteristics of those
contracts and commitments meet the definition of a derivative.
Accounting for financial derivatives differs significantly depending on whether a derivative is designated
in a hedging relationship. Derivative instruments designated in fair value hedging relationships mitigate
exposure to changes in the fair value of assets or liabilities. Derivative instruments designated in cash
flow hedging relationships mitigate exposure to the variability in expected future cash flows or other
forecasted transactions. In order to qualify for fair value or cash flow hedge accounting treatment,
documentation must indicate the intention to designate the derivative as a hedge of a specific asset or
liability or a future cash flow. Effectiveness of the hedge must be assessed at inception and monitored
over the life of the hedging relationship.
All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability.
Changes in the fair values of financial derivatives not designated as cash flow hedges are reported in
"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 reported in "Gains/(losses) on
financial derivatives and hedging activities" in the consolidated statements of operations. The accrual of
the contractual amounts due on the financial derivative is included as an adjustment to the yield of the
hedged item and is reported in net interest income. 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 OCI when the hedged transaction affects
earnings. Any ineffective portion of designated hedge transactions is recognized immediately in "Gains/
(losses) on financial derivatives and hedging activities" in the consolidated statements of operations.
Farmer Mac has made an accounting policy election to measure the credit risk of its derivative financial
instruments that are subject to master netting agreements on a net basis by counterparty portfolio,
consistent with how Farmer Mac previously has been measuring credit risk for these instruments. See
Notes 6 and 13 for more information on financial derivatives.
(i) Notes Payable
Notes payable are classified as due within one year or due after one year based on the length of time
remaining to their contractual maturities. Debt issuance costs and premiums and discounts are deferred
and amortized to interest expense using the effective interest method over the contractual life of the related
debt.
(j) Allowance for Losses
Farmer Mac maintains an allowance for losses to cover estimated probable losses incurred as of the
balance sheet date on loans held ("allowance for loan losses") and loans underlying LTSPCs and off-
balance sheet Farmer Mac Guaranteed Securities ("reserve for losses") based on available
information. Disaggregation by commodity type is performed, where appropriate, in analyzing the need
for an allowance for losses. Farmer Mac Guaranteed Securities do not include AgVantage securities with
regard to the allowance for losses discussion.
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138
The allowance for losses is increased through periodic provisions for loan losses that are charged against
net interest income and provisions for losses that are charged to non-interest expense, and is reduced by
charge-offs for actual losses, net of recoveries. Negative provisions, or releases of allowance for losses,
generally are recorded in the event that the estimate of probable losses as of the end of a period is lower
than the estimate at the beginning of the period. In certain circumstances, for example, when a defaulted
loan is purchased out of a guaranteed security or pursuant to an LTSPC, the related reserve for losses is
reclassified as allowance for loan losses and there is a corresponding release from the provision for losses
and a charge to the provision for loan losses.
The total allowance for losses consists of a general allowance for losses and a specific allowance for
individual impaired loans.
Charge-offs
Farmer Mac records a charge-off against the allowance for losses principally when a loss has been
confirmed through the receipt of assets, generally the underlying collateral, in full satisfaction of the loan.
The loss equals the excess of the recorded investment in the loan over the fair value of the collateral less
estimated selling costs.
General Allowance for Losses
Farm & Ranch
Farmer Mac's methodology for determining its allowance for losses incorporates Farmer Mac's automated
loan classification system. That system scores loans based on criteria such as historical repayment
performance, indicators of current financial condition, loan seasoning, loan size and loan-to-value
ratio. The allowance methodology captures the migration of loan scores across concurrent and
overlapping 3-year time horizons and calculates loss rates separately within each loan classification for
(1) loans underlying LTSPCs and (2) loans held and loans underlying Farm & Ranch Guaranteed
Securities. The calculated loss rates are applied to the current classification distribution of unimpaired
loans in Farmer Mac's portfolio to estimate inherent losses, on the assumption that the historical credit
losses and trends used to calculate loss rates will continue in the future.
Management evaluates this assumption by taking into consideration several factors, including:
economic conditions;
•
• geographic and agricultural commodity/product concentrations in the portfolio;
•
the credit profile of the portfolio;
• delinquency trends of the portfolio;
• historical charge-off and recovery activities of the portfolio; and
• other factors to capture current portfolio trends and characteristics that differ from historical
experience.
Management believes that its use of this methodology produces a reasonable estimate of probable losses,
as of the balance sheet date, for all loans held in the Farm & Ranch portfolio and loans underlying off-
balance sheet Farm & Ranch Guaranteed Securities and LTSPCs. There were no purchases or sales during
2013 that materially affected the credit profile of the Farm & Ranch portfolio.
Rural Utilities
Farmer Mac separately evaluates the rural utilities loans it owns to determine if there are any probable
losses inherent in those assets. No allowance for losses has been provided for this portfolio segment based
on the credit quality of the collateral supporting rural utilities assets and Farmer Mac's counterparty risk
analysis. As of December 31, 2013 there were no delinquencies and no probable losses inherent in Farmer
Mac's rural utilities loans.
Specific Allowance for Impaired Loans
Farmer Mac also analyzes certain loans in its portfolio for impairment in accordance with accounting
guidance on measuring individual impairment of a loan. Farmer Mac's impaired loans generally include
loans 90 days or more past due, in foreclosure, restructured, in bankruptcy and certain performing loans
that have previously been delinquent or are secured by real estate that produces agricultural commodities
or products currently under stress.
For loans with an updated appraised value, other updated collateral valuation or management's estimate of
discounted collateral value, this analysis includes the measurement of the fair value of the underlying
collateral for individual loans relative to the total recorded investment, including principal, interest and
advances and net of any charge-offs. In the event that the collateral value does not support the total
recorded investment, Farmer Mac specifically provides an allowance for the loan for the difference
between the recorded investment and its fair value, less estimated costs to liquidate the collateral.
Estimated selling costs are based on historical selling costs incurred by Farmer Mac or management's best
estimate of selling costs for a particular property. For the remaining impaired assets without updated
valuations, this analysis is performed in the aggregate in consideration of the similar risk characteristics of
the assets and historical statistics. Farmer Mac considers appraisals aged more than two years as of the
reporting period end date to be outdated. Farmer Mac believes this methodology that utilizes loan
classification scores and historical loss experience is a better indication of impairment for these collateral-
dependent loans than other valuation methods.
Farmer Mac uses a risk-based approach in determining the necessity of obtaining updated appraisals on
impaired loans. For example, larger exposures associated with highly improved and specialized collateral
will generally receive updated appraisals once the loans are identified as impaired. In addition, updated
appraisals are always obtained during the foreclosure process. Depending on the risk factors associated with
the loan and underlying collateral, which can vary widely depending on the circumstances of the loan and
collateral, this can occur early in the foreclosure process, while in other instances this may occur just prior
to the transfer of title. As part of its routine credit review process, Farmer Mac often will exercise judgment
in discounting an appraisal value due to local real estate trends or the condition of the property (e.g., following
an inspection by Farmer Mac or the servicer). In addition, a property appraisal value may be discounted
based on the market's reaction to Farmer Mac's asking price for sale of the property.
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140
The allowance for losses is increased through periodic provisions for loan losses that are charged against
Rural Utilities
net interest income and provisions for losses that are charged to non-interest expense, and is reduced by
charge-offs for actual losses, net of recoveries. Negative provisions, or releases of allowance for losses,
generally are recorded in the event that the estimate of probable losses as of the end of a period is lower
than the estimate at the beginning of the period. In certain circumstances, for example, when a defaulted
loan is purchased out of a guaranteed security or pursuant to an LTSPC, the related reserve for losses is
reclassified as allowance for loan losses and there is a corresponding release from the provision for losses
and a charge to the provision for loan losses.
The total allowance for losses consists of a general allowance for losses and a specific allowance for
Farmer Mac records a charge-off against the allowance for losses principally when a loss has been
confirmed through the receipt of assets, generally the underlying collateral, in full satisfaction of the loan.
The loss equals the excess of the recorded investment in the loan over the fair value of the collateral less
individual impaired loans.
Charge-offs
estimated selling costs.
General Allowance for Losses
Farm & Ranch
Farmer Mac's methodology for determining its allowance for losses incorporates Farmer Mac's automated
loan classification system. That system scores loans based on criteria such as historical repayment
performance, indicators of current financial condition, loan seasoning, loan size and loan-to-value
ratio. The allowance methodology captures the migration of loan scores across concurrent and
overlapping 3-year time horizons and calculates loss rates separately within each loan classification for
(1) loans underlying LTSPCs and (2) loans held and loans underlying Farm & Ranch Guaranteed
Securities. The calculated loss rates are applied to the current classification distribution of unimpaired
loans in Farmer Mac's portfolio to estimate inherent losses, on the assumption that the historical credit
losses and trends used to calculate loss rates will continue in the future.
Management evaluates this assumption by taking into consideration several factors, including:
• geographic and agricultural commodity/product concentrations in the portfolio;
economic conditions;
•
•
the credit profile of the portfolio;
• delinquency trends of the portfolio;
• historical charge-off and recovery activities of the portfolio; and
• other factors to capture current portfolio trends and characteristics that differ from historical
experience.
Management believes that its use of this methodology produces a reasonable estimate of probable losses,
as of the balance sheet date, for all loans held in the Farm & Ranch portfolio and loans underlying off-
balance sheet Farm & Ranch Guaranteed Securities and LTSPCs. There were no purchases or sales during
2013 that materially affected the credit profile of the Farm & Ranch portfolio.
Farmer Mac separately evaluates the rural utilities loans it owns to determine if there are any probable
losses inherent in those assets. No allowance for losses has been provided for this portfolio segment based
on the credit quality of the collateral supporting rural utilities assets and Farmer Mac's counterparty risk
analysis. As of December 31, 2013 there were no delinquencies and no probable losses inherent in Farmer
Mac's rural utilities loans.
Specific Allowance for Impaired Loans
Farmer Mac also analyzes certain loans in its portfolio for impairment in accordance with accounting
guidance on measuring individual impairment of a loan. Farmer Mac's impaired loans generally include
loans 90 days or more past due, in foreclosure, restructured, in bankruptcy and certain performing loans
that have previously been delinquent or are secured by real estate that produces agricultural commodities
or products currently under stress.
For loans with an updated appraised value, other updated collateral valuation or management's estimate of
discounted collateral value, this analysis includes the measurement of the fair value of the underlying
collateral for individual loans relative to the total recorded investment, including principal, interest and
advances and net of any charge-offs. In the event that the collateral value does not support the total
recorded investment, Farmer Mac specifically provides an allowance for the loan for the difference
between the recorded investment and its fair value, less estimated costs to liquidate the collateral.
Estimated selling costs are based on historical selling costs incurred by Farmer Mac or management's best
estimate of selling costs for a particular property. For the remaining impaired assets without updated
valuations, this analysis is performed in the aggregate in consideration of the similar risk characteristics of
the assets and historical statistics. Farmer Mac considers appraisals aged more than two years as of the
reporting period end date to be outdated. Farmer Mac believes this methodology that utilizes loan
classification scores and historical loss experience is a better indication of impairment for these collateral-
dependent loans than other valuation methods.
Farmer Mac uses a risk-based approach in determining the necessity of obtaining updated appraisals on
impaired loans. For example, larger exposures associated with highly improved and specialized collateral
will generally receive updated appraisals once the loans are identified as impaired. In addition, updated
appraisals are always obtained during the foreclosure process. Depending on the risk factors associated with
the loan and underlying collateral, which can vary widely depending on the circumstances of the loan and
collateral, this can occur early in the foreclosure process, while in other instances this may occur just prior
to the transfer of title. As part of its routine credit review process, Farmer Mac often will exercise judgment
in discounting an appraisal value due to local real estate trends or the condition of the property (e.g., following
an inspection by Farmer Mac or the servicer). In addition, a property appraisal value may be discounted
based on the market's reaction to Farmer Mac's asking price for sale of the property.
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140
(k) 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 years ended December 31, 2013, 2012 and 2011:
Table 2.2
Basic EPS
Net income attributable to
common stockholders
Effect of dilutive securities (1):
Stock options, SARs and
restricted stock
For the Year Ended December 31,
2013
Weighted-
Average
Shares
Net
Income
$ per
Share
Net
Income
2012
Weighted-
Average
Shares
$ per
Share
Net
Income
2011
Weighted-
Average
Shares
$ per
Share
(in thousands, except per share amounts)
$ 71,833
10,816
$
6.64
$ 43,894
10,479
$
4.19
$ 13,784
$ 10,335
$
1.33
393
(0.23)
540
(0.21)
467
(0.05)
Diluted EPS
$ 71,833
11,209
$
6.41
$ 43,894
11,019
$
3.98
$ 13,784
10,802
$
1.28
(1) For the years ended December 31, 2013, 2012, and 2011 stock options and SARs of 33,730, 317,253, and 703,624 respectively, were outstanding but not
included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the years ended December 31, 2013,
2012, and 2011 contingent shares of non-vested restricted stock of 26,696, 79,300, and 76,340 respectively, were outstanding but not included in the
computation of diluted earnings per share of common stock because performance conditions were not met.
(l) Income Taxes
Deferred federal income tax assets and liabilities are established for temporary differences between
financial and taxable income and are measured using the current enacted statutory tax rate. Income tax
expense is equal to the income taxes payable in the current year plus the net change in the deferred tax
asset or liability balance.
Farmer Mac evaluates its tax positions at least quarterly to identify and recognize any liabilities related to
uncertain tax positions in its federal income tax returns. Farmer Mac uses a two-step approach in which
income tax benefits are recognized if, based on the technical merits of a tax position, it is more likely than
not (a probability of greater than 50 percent) that the tax position would be sustained upon examination by
the taxing authority, which includes all related appeals and litigation process. The amount of tax benefit
recognized is then measured at the largest amount of tax benefit that is greater than 50 percent likely to be
realized upon settlement with the taxing authority, considering all information available at the reporting
date. Farmer Mac's policy for recording interest and penalties associated with uncertain tax positions is to
record them as a component of income tax expense. Farmer Mac establishes a valuation allowance for
deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be
realized.
(m) Stock-Based Compensation
Farmer Mac accounts for its stock-based employee compensation plans using the grant date fair value
method of accounting. Farmer Mac measures the cost of employee services received in exchange for an
141
(k) 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 years ended December 31, 2013, 2012 and 2011:
Table 2.2
Basic EPS
Net income attributable to
common stockholders
Effect of dilutive securities (1):
Stock options, SARs and
restricted stock
(l) Income Taxes
2013
Weighted-
Average
Shares
Net
Income
For the Year Ended December 31,
2012
Weighted-
Average
Shares
$ per
Share
Net
Income
$ per
Share
Net
Income
(in thousands, except per share amounts)
2011
Weighted-
Average
Shares
$ per
Share
$
—
— $ — $ 16,190
10,737
$
1.51
$ 13,784
$ 10,335
$
1.33
—
—
424
(0.06)
467
(0.05)
Diluted EPS
$
—
— $ — $ 16,190
11,161
$
1.45
$ 13,784
10,802
$
1.28
(1) For the years ended December 31, 2013, 2012, and 2011 stock options and SARs of 33,730, 317,253, and 703,624 respectively, were outstanding but not
included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the years ended December 31, 2013,
2012, and 2011 contingent shares of non-vested restricted stock of 26,696, 79,300, and 76,340 respectively, were outstanding but not included in the
computation of diluted earnings per share of common stock because performance conditions were not met.
Deferred federal income tax assets and liabilities are established for temporary differences between
financial and taxable income and are measured using the current enacted statutory tax rate. Income tax
expense is equal to the income taxes payable in the current year plus the net change in the deferred tax
asset or liability balance.
Farmer Mac evaluates its tax positions at least quarterly to identify and recognize any liabilities related to
uncertain tax positions in its federal income tax returns. Farmer Mac uses a two-step approach in which
income tax benefits are recognized if, based on the technical merits of a tax position, it is more likely than
not (a probability of greater than 50 percent) that the tax position would be sustained upon examination by
the taxing authority, which includes all related appeals and litigation process. The amount of tax benefit
recognized is then measured at the largest amount of tax benefit that is greater than 50 percent likely to be
realized upon settlement with the taxing authority, considering all information available at the reporting
date. Farmer Mac's policy for recording interest and penalties associated with uncertain tax positions is to
record them as a component of income tax expense. Farmer Mac establishes a valuation allowance for
deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be
realized.
(m) Stock-Based Compensation
Farmer Mac accounts for its stock-based employee compensation plans using the grant date fair value
method of accounting. Farmer Mac measures the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award determined using the Black-
Scholes option pricing model. The cost is recognized over the period during which an employee is
required to provide service in exchange for the award. For performance based grants, Farmer Mac
recognizes the grant-date fair value over the vesting period as long as it remains probable that the
performance conditions will be met. If the service or performance conditions are not met, Farmer Mac
reverses previously recognized compensation expense upon forfeiture.
Farmer Mac recognized $3.0 million, $2.5 million, and $3.0 million of compensation expense related to
stock options, SARs and non-vested restricted stock awards for 2013, 2012, and 2011, respectively.
(n) Comprehensive Income
Comprehensive income represents all changes in stockholders' equity except those resulting from
investments by or distributions to stockholders, and is comprised primarily of net income and unrealized
gains and losses on securities available-for-sale, net of related taxes.
(o) Long-Term Standby Purchase Commitments
Farmer Mac accounts for its LTSPCs as guarantees. Commitment fee income represents a reduction of the
commitment obligation based on amortization using the actual prepayment experience on the underlying
loans. See Note 2(j) for Farmer Mac's policy for estimating probable losses for LTSPCs and Note 12 for
more information on the accounting for LTSPCs.
(p) Fair Value Measurement
Farmer Mac defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date and establishes a
fair value hierarchy that ranks the quality and reliability of the inputs to valuation techniques used to
measure fair value. The hierarchy gives highest rank to unadjusted quoted prices in active markets for
identical assets or liabilities (level 1 measurements) and the lowest rank to unobservable inputs (level 3
measurements).
Farmer Mac's assessment of the significance of the input to the fair value measurement requires judgment
and considers factors specific to the financial instrument. Both observable and unobservable inputs may
be used to determine the fair value of financial instruments that Farmer Mac has classified within the level
3 category. As a result, the unrealized gains and losses for assets and liabilities within the level 3 category
may include changes in fair value that were attributable to both observable (e.g., changes in market
interest rates) and unobservable (e.g., changes in projected prepayment rates) inputs. See Note 13 for
more information regarding fair value measurement.
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142
Farmer Mac would reassess whether it is the primary beneficiary of those trusts. The amounts disclosed in
the tables below represent Farmer Mac's holdings of a portion of the beneficial interests issued by these
AgVantage Trusts. For VIEs classified as investment securities, which include auction-rate certificates,
asset-backed securities and government-sponsored enterprise ("GSE")-guaranteed mortgage-backed
securities, Farmer Mac is determined not to be the primary beneficiary because of the lack of voting rights
or other powers to direct the activities of the trust. The following tables present, by line of business,
details about the consolidation of VIEs:
(q) Consolidation of Variable Interest Entities
Farmer Mac has interests in various entities that are considered to be VIEs. These interests include
investments in securities issued by VIEs, such as Farmer Mac agricultural mortgage-backed securities
created pursuant to Farmer Mac's securitization transactions and mortgage and asset-backed trusts that
Farmer Mac did not create. The consolidation model uses a qualitative evaluation that requires
consolidation of an entity when the reporting enterprise both (1) has the power to direct matters which
significantly impact the activities and success of the entity, and (2) has exposure to benefits and/or losses
that could potentially be significant to the entity. The reporting enterprise that meets both these conditions
is deemed the primary beneficiary of the VIE. Upon consolidation of a VIE, Farmer Mac accounts for the
incremental assets and liabilities initially at their carrying amounts.
The VIEs in which Farmer Mac has a variable interest are limited to securitization trusts. The major
factor in determining if Farmer Mac is the primary beneficiary is whether Farmer Mac has the power to
direct the activities of the trust that potentially have the most significant impact on the economic
performance of the trust. Generally, the ability to make decisions regarding default mitigation is evidence
of that power. Farmer Mac determined that it is the primary beneficiary for the securitization trusts related
to most Farm & Ranch and all Rural Utilities securitization transactions because of its rights as guarantor
under both programs to control the default mitigation activities of the trusts. For certain securitization
trusts created when loans subject to LTSPCs were converted to Farm & Ranch Guaranteed Securities,
Farmer Mac determined that it was not the primary beneficiary since the power to make decisions
regarding default mitigation was shared among unrelated parties. For these trusts, the shared power
provisions are substantive with respect to decision-making power and relate to the same activity (i.e.,
default mitigation). For similar securitization transactions where the power to make decisions regarding
default mitigation was shared with a related party, Farmer Mac determined that it was the primary
beneficiary because the applicable accounting guidance does not permit parties within a related party
group to conclude that the power is shared. In the event that a related party status changes, consolidation
or deconsolidation of these securitization trusts could occur.
For those trusts that Farmer Mac is the primary beneficiary, the assets and liabilities are presented on the
consolidated balance sheets as "Loans held for investment in consolidated trusts, at amortized cost" and
"Debt securities of consolidated trusts held by third parties," respectively. These assets can only be used
to satisfy the obligations of the related trust.
For those trusts where Farmer Mac has a variable interest but has not been determined to be the primary
beneficiary, Farmer Mac's interests are presented as either "Farmer Mac Guaranteed Securities," "USDA
Securities," or "Investment securities" on the consolidated balance sheets. Farmer Mac's involvement in
VIEs classified as Farmer Mac or USDA Securities include securitization trusts under the USDA
Guarantees line of business and certain trusts related to Farm & Ranch AgVantage securities. In the case
of USDA guaranteed trusts, Farmer Mac is not determined to be the primary beneficiary because it does
not have the decision-making power over default mitigation activities. Based on the USDA's program
authority over the servicing and default mitigation activities of the USDA guaranteed portions of loans,
Farmer Mac believes that the USDA has the power to direct the activities that most significantly impact
the trust's economic performance. Farmer Mac does not have exposure to losses that could be significant
to the trust and there are no triggers that would result in Farmer Mac superseding the USDA's authority
with regard to directing the activities of the trust. For the AgVantage trusts, Farmer Mac currently does
not have the power to direct the activities that have the most significant economic impact to the trust
unless, as guarantor, there is a default by the issuer of the trust securities. Should there be a default,
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144
Farmer Mac would reassess whether it is the primary beneficiary of those trusts. The amounts disclosed in
the tables below represent Farmer Mac's holdings of a portion of the beneficial interests issued by these
AgVantage Trusts. For VIEs classified as investment securities, which include auction-rate certificates,
asset-backed securities and government-sponsored enterprise ("GSE")-guaranteed mortgage-backed
securities, Farmer Mac is determined not to be the primary beneficiary because of the lack of voting rights
or other powers to direct the activities of the trust. The following tables present, by line of business,
details about the consolidation of VIEs:
(q) Consolidation of Variable Interest Entities
Farmer Mac has interests in various entities that are considered to be VIEs. These interests include
investments in securities issued by VIEs, such as Farmer Mac agricultural mortgage-backed securities
created pursuant to Farmer Mac's securitization transactions and mortgage and asset-backed trusts that
Farmer Mac did not create. The consolidation model uses a qualitative evaluation that requires
consolidation of an entity when the reporting enterprise both (1) has the power to direct matters which
significantly impact the activities and success of the entity, and (2) has exposure to benefits and/or losses
that could potentially be significant to the entity. The reporting enterprise that meets both these conditions
is deemed the primary beneficiary of the VIE. Upon consolidation of a VIE, Farmer Mac accounts for the
incremental assets and liabilities initially at their carrying amounts.
The VIEs in which Farmer Mac has a variable interest are limited to securitization trusts. The major
factor in determining if Farmer Mac is the primary beneficiary is whether Farmer Mac has the power to
direct the activities of the trust that potentially have the most significant impact on the economic
performance of the trust. Generally, the ability to make decisions regarding default mitigation is evidence
of that power. Farmer Mac determined that it is the primary beneficiary for the securitization trusts related
to most Farm & Ranch and all Rural Utilities securitization transactions because of its rights as guarantor
under both programs to control the default mitigation activities of the trusts. For certain securitization
trusts created when loans subject to LTSPCs were converted to Farm & Ranch Guaranteed Securities,
Farmer Mac determined that it was not the primary beneficiary since the power to make decisions
regarding default mitigation was shared among unrelated parties. For these trusts, the shared power
provisions are substantive with respect to decision-making power and relate to the same activity (i.e.,
default mitigation). For similar securitization transactions where the power to make decisions regarding
default mitigation was shared with a related party, Farmer Mac determined that it was the primary
beneficiary because the applicable accounting guidance does not permit parties within a related party
group to conclude that the power is shared. In the event that a related party status changes, consolidation
or deconsolidation of these securitization trusts could occur.
For those trusts that Farmer Mac is the primary beneficiary, the assets and liabilities are presented on the
consolidated balance sheets as "Loans held for investment in consolidated trusts, at amortized cost" and
"Debt securities of consolidated trusts held by third parties," respectively. These assets can only be used
to satisfy the obligations of the related trust.
For those trusts where Farmer Mac has a variable interest but has not been determined to be the primary
beneficiary, Farmer Mac's interests are presented as either "Farmer Mac Guaranteed Securities," "USDA
Securities," or "Investment securities" on the consolidated balance sheets. Farmer Mac's involvement in
VIEs classified as Farmer Mac or USDA Securities include securitization trusts under the USDA
Guarantees line of business and certain trusts related to Farm & Ranch AgVantage securities. In the case
of USDA guaranteed trusts, Farmer Mac is not determined to be the primary beneficiary because it does
not have the decision-making power over default mitigation activities. Based on the USDA's program
authority over the servicing and default mitigation activities of the USDA guaranteed portions of loans,
Farmer Mac believes that the USDA has the power to direct the activities that most significantly impact
the trust's economic performance. Farmer Mac does not have exposure to losses that could be significant
to the trust and there are no triggers that would result in Farmer Mac superseding the USDA's authority
with regard to directing the activities of the trust. For the AgVantage trusts, Farmer Mac currently does
not have the power to direct the activities that have the most significant economic impact to the trust
unless, as guarantor, there is a default by the issuer of the trust securities. Should there be a default,
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144
Table 2.3
On-Balance Sheet:
Consolidated VIEs:
Consolidation of Variable Interest Entities
December 31, 2013
Farm &
Ranch
USDA
Guarantees
Rural
Utilities
(in thousands)
Investments
Total
Loans held for investment in consolidated trusts, at
amortized cost (1)
$
259,509
$
— $
370,480
$
— $
629,989
Debt securities of consolidated trusts held by third parties (2)
261,760
—
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Carrying value (3)
Maximum exposure to loss (4)
Investment securities:
Carrying value
Maximum exposure to loss (4)
Off-Balance Sheet:
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Maximum exposure to loss (4) (5)
33,248
30,000
21,234
21,088
—
—
—
—
—
—
—
—
—
—
261,760
—
—
54,482
51,088
533,688
540,726
533,688
540,726
1,735,751
20,222
—
—
1,755,973
(1) Includes unamortized premiums related to Rural Utilities of $16.2 million.
(2) Includes borrower remittances of $2.3 million, which have not been passed through to third party investors as of December 31, 2013.
(3) Includes unamortized premiums and discounts and fair value adjustments related to Farm & Ranch and USDA Guarantees of $3.2 million
and $0.1 million, respectively.
(4) Farmer Mac uses unpaid principal balance and outstanding face amount of investment securities to represent maximum exposure to loss.
(5) Of the Farm & Ranch amount, $765.8 million relates to unconsolidated trusts where Farmer Mac determined it was not the primary
beneficiary due to shared power with an unrelated party.
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146
Loans held for investment in consolidated trusts, at
amortized cost (1)
$
160,436
$
— $
403,139
$
— $
563,575
Debt securities of consolidated trusts held by third parties (2)
167,621
—
—
167,621
Consolidation of Variable Interest Entities
December 31, 2012
Farm &
Ranch
USDA
Guarantees
Rural
Utilities
Investments
Total
(in thousands)
—
—
—
—
—
31,370
30,000
26,681
26,238
—
—
—
—
—
—
58,051
56,238
724,893
737,148
724,893
737,148
1,881,370
29,658
—
—
1,911,028
(1) Includes unamortized premiums related to Rural Utilities of $34.3 million.
(2) Includes borrower remittances of $7.2 million, which have not been passed through to third party investors as of December 31, 2012.
(3) Includes unamortized premiums and discounts and fair value adjustments related to Farm & Ranch and USDA Guarantees of $1.4 million
(4) Farmer Mac uses unpaid principal balance and the outstanding face amount of investment securities to represent maximum exposure to
and $0.4 million, respectively.
loss.
(5) Of the Farm & Ranch amount, $911.4 million relates to unconsolidated trusts where Farmer Mac determined it was not the primary
beneficiary due to shared power with an unrelated party.
On-Balance Sheet:
Consolidated VIEs:
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Carrying value (3)
Maximum exposure to loss (4)
Investment securities:
Carrying value
Maximum exposure to loss (4)
Off-Balance Sheet:
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Maximum exposure to loss (4) (5)
(r) New Accounting Standards
Derivatives and Hedging
In July 2013, the FASB issued ASU 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed
Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge
Accounting Purposes.” The update permits the Overnight Index Swap Rate (“OIS”) to be used as a
benchmark interest rate for hedge accounting purposes under Topic 815 in addition to Treasury rates and
LIBOR. The amendments also remove the restriction on using different benchmark rates for similar
hedges. The adoption of ASU 2013-10 did not have a material effect on Farmer Mac’s financial position,
results of operations, or cash flows.
Receivables
Subsequent to year-end 2013, the FASB issued ASU 2014-04, “Receivables - Troubled Debt
Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized
Consumer Mortgage Loans upon Foreclosure.” This update clarifies that an in substance repossession or
foreclosure occurs, and a creditor is considered to have received physical possession of residential real
estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title
to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all
interest in the residential real estate property to the creditor to satisfy the loan through completion of a
Table 2.3
On-Balance Sheet:
Consolidated VIEs:
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Carrying value (3)
Maximum exposure to loss (4)
Investment securities:
Carrying value
Maximum exposure to loss (4)
Off-Balance Sheet:
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Maximum exposure to loss (4) (5)
Loans held for investment in consolidated trusts, at
amortized cost (1)
$
259,509
$
— $
370,480
$
— $
629,989
Debt securities of consolidated trusts held by third parties (2)
261,760
—
—
261,760
33,248
30,000
21,234
21,088
—
—
54,482
51,088
—
—
—
—
533,688
540,726
533,688
540,726
—
—
—
—
—
1,735,751
20,222
—
—
1,755,973
(1) Includes unamortized premiums related to Rural Utilities of $16.2 million.
(2) Includes borrower remittances of $2.3 million, which have not been passed through to third party investors as of December 31, 2013.
(3) Includes unamortized premiums and discounts and fair value adjustments related to Farm & Ranch and USDA Guarantees of $3.2 million
and $0.1 million, respectively.
(4) Farmer Mac uses unpaid principal balance and outstanding face amount of investment securities to represent maximum exposure to loss.
(5) Of the Farm & Ranch amount, $765.8 million relates to unconsolidated trusts where Farmer Mac determined it was not the primary
beneficiary due to shared power with an unrelated party.
Consolidation of Variable Interest Entities
December 31, 2013
Farm &
Ranch
USDA
Guarantees
Rural
Utilities
Investments
Total
(in thousands)
On-Balance Sheet:
Consolidated VIEs:
Consolidation of Variable Interest Entities
Farm &
Ranch
USDA
Guarantees
December 31, 2012
Rural
Utilities
(in thousands)
Investments
Total
Loans held for investment in consolidated trusts, at
amortized cost (1)
$
160,436
$
— $
403,139
$
— $
563,575
Debt securities of consolidated trusts held by third parties (2)
167,621
—
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Carrying value (3)
Maximum exposure to loss (4)
Investment securities:
Carrying value
Maximum exposure to loss (4)
Off-Balance Sheet:
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Maximum exposure to loss (4) (5)
—
—
—
—
—
—
167,621
—
—
58,051
56,238
724,893
737,148
724,893
737,148
31,370
30,000
26,681
26,238
—
—
—
—
1,881,370
29,658
—
—
1,911,028
(1) Includes unamortized premiums related to Rural Utilities of $34.3 million.
(2) Includes borrower remittances of $7.2 million, which have not been passed through to third party investors as of December 31, 2012.
(3) Includes unamortized premiums and discounts and fair value adjustments related to Farm & Ranch and USDA Guarantees of $1.4 million
and $0.4 million, respectively.
(4) Farmer Mac uses unpaid principal balance and the outstanding face amount of investment securities to represent maximum exposure to
loss.
(5) Of the Farm & Ranch amount, $911.4 million relates to unconsolidated trusts where Farmer Mac determined it was not the primary
beneficiary due to shared power with an unrelated party.
(r) New Accounting Standards
Derivatives and Hedging
In July 2013, the FASB issued ASU 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed
Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge
Accounting Purposes.” The update permits the Overnight Index Swap Rate (“OIS”) to be used as a
benchmark interest rate for hedge accounting purposes under Topic 815 in addition to Treasury rates and
LIBOR. The amendments also remove the restriction on using different benchmark rates for similar
hedges. The adoption of ASU 2013-10 did not have a material effect on Farmer Mac’s financial position,
results of operations, or cash flows.
Receivables
Subsequent to year-end 2013, the FASB issued ASU 2014-04, “Receivables - Troubled Debt
Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized
Consumer Mortgage Loans upon Foreclosure.” This update clarifies that an in substance repossession or
foreclosure occurs, and a creditor is considered to have received physical possession of residential real
estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title
to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all
interest in the residential real estate property to the creditor to satisfy the loan through completion of a
145
146
deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require
interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by
the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real
estate property that are in the process of foreclosure according to local requirements of the applicable
jurisdiction.” ASU 2014-04 is effective for interim and annual periods beginning after December 15,
2014. The adoption of the new guidance will not have a material effect on Farmer Mac’s financial
position, results of operations, or cash flows.
(s) Reclassifications
Certain reclassifications of prior period information were made to conform to the current period
presentation.
3. RELATED PARTY TRANSACTIONS
Farmer Mac considers an entity to be a related party if (1) the entity holds at least five percent of a class of
Farmer Mac voting common stock or (2) the institution has an affiliation with a Farmer Mac director and
conducts material business with Farmer Mac. As provided by Farmer Mac's statutory charter, only banks,
insurance companies and other financial institutions or similar entities may hold Farmer Mac's Class A
voting common stock and only institutions of the FCS may hold Farmer Mac's Class B voting common
stock. Farmer Mac's statutory charter also provides that Class A stockholders elect five members of
Farmer Mac's 15-member board of directors and that Class B stockholders elect five members of the board
of directors. Additionally, in order to participate in the Farm & Ranch program, a financial institution
must own a requisite amount of Farmer Mac's common stock, based on the size and type of institution. As
a result of these requirements, Farmer Mac conducts business with related parties in the normal course of
Farmer Mac's business. All related party transactions were conducted with terms and conditions
comparable to those available to any other program participant not related to Farmer Mac.
The following transactions occurred between Farmer Mac and Zions First National Bank or its affiliates
("Zions"), which is the largest holder of Farmer Mac Class A voting common stock and a major holder of
Class C non-voting common stock during 2013, 2012, and 2011:
Zions First National Bank:
Table 3.1
Unpaid Principal Balance:
Purchases:
Loans
USDA-guaranteed portions
Sales of Farmer Mac Guaranteed Securities
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
210,088
$
168,826
$
125,088
13,153
120,409
14,415
5,327
5,218
—
The purchases of loans from Zions under the Farm & Ranch line of business represented approximately
25.5 percent, 29.6 percent, and 25.2 percent of Farm & Ranch loan purchases for the years ended
December 31, 2013, 2012, and 2011, respectively, and 11.5 percent, 8.8 percent, and 4.5 percent,
respectively, of total new Farm & Ranch business volume. The purchases of USDA-guaranteed portions
from Zions under the USDA Guarantees line of business represented approximately 3.6 percent, 3.0
percent, and 1.3 percent of that program's purchases for the year ended December 31, 2013, 2012, and
2011. Zions represented 5.1 percent and 4.7 percent, respectively of Farmer Mac's outstanding book of
business at December 31, 2013 and 2012.
Farmer Mac or Zions received the applicable amounts shown below with respect to transactions between
the two parties in 2013, 2012, and 2011:
147
148
deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require
3. RELATED PARTY TRANSACTIONS
interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by
the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real
estate property that are in the process of foreclosure according to local requirements of the applicable
jurisdiction.” ASU 2014-04 is effective for interim and annual periods beginning after December 15,
2014. The adoption of the new guidance will not have a material effect on Farmer Mac’s financial
position, results of operations, or cash flows.
(s) Reclassifications
presentation.
Certain reclassifications of prior period information were made to conform to the current period
Farmer Mac considers an entity to be a related party if (1) the entity holds at least five percent of a class of
Farmer Mac voting common stock or (2) the institution has an affiliation with a Farmer Mac director and
conducts material business with Farmer Mac. As provided by Farmer Mac's statutory charter, only banks,
insurance companies and other financial institutions or similar entities may hold Farmer Mac's Class A
voting common stock and only institutions of the FCS may hold Farmer Mac's Class B voting common
stock. Farmer Mac's statutory charter also provides that Class A stockholders elect five members of
Farmer Mac's 15-member board of directors and that Class B stockholders elect five members of the board
of directors. Additionally, in order to participate in the Farm & Ranch program, a financial institution
must own a requisite amount of Farmer Mac's common stock, based on the size and type of institution. As
a result of these requirements, Farmer Mac conducts business with related parties in the normal course of
Farmer Mac's business. All related party transactions were conducted with terms and conditions
comparable to those available to any other program participant not related to Farmer Mac.
Zions First National Bank:
The following transactions occurred between Farmer Mac and Zions First National Bank or its affiliates
("Zions"), which is the largest holder of Farmer Mac Class A voting common stock and a major holder of
Class C non-voting common stock during 2013, 2012, and 2011:
Table 3.1
Unpaid Principal Balance:
Purchases:
Loans
USDA-guaranteed portions
Sales of Farmer Mac Guaranteed Securities
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
210,088
$
168,826
$
125,088
13,153
120,409
14,415
5,327
5,218
—
The purchases of loans from Zions under the Farm & Ranch line of business represented approximately
25.5 percent, 29.6 percent, and 25.2 percent of Farm & Ranch loan purchases for the years ended
December 31, 2013, 2012, and 2011, respectively, and 11.5 percent, 8.8 percent, and 4.5 percent,
respectively, of total new Farm & Ranch business volume. The purchases of USDA-guaranteed portions
from Zions under the USDA Guarantees line of business represented approximately 3.6 percent, 3.0
percent, and 1.3 percent of that program's purchases for the year ended December 31, 2013, 2012, and
2011. Zions represented 5.1 percent and 4.7 percent, respectively of Farmer Mac's outstanding book of
business at December 31, 2013 and 2012.
Farmer Mac or Zions received the applicable amounts shown below with respect to transactions between
the two parties in 2013, 2012, and 2011:
147
148
Table 3.2
AgFirst Farm Credit Bank:
Guarantee fees received by Farmer Mac
$
417
$
633
$
Servicing fees retained by Zions
2,033
1,980
940
1,870
For the Year Ended December 31,
2013
2012
2011
(in thousands)
Farmer Mac and Zions were parties to interest rate swap contracts having an aggregate outstanding
notional amount of approximately $29.3 million and $49.3 million as of December 31, 2013 and 2012,
respectively. As of December 31, 2013 and 2012, Farmer Mac had net interest payable to Zions under
those contracts of approximately $0.3 million and $0.5 million, respectively. Zions acted as dealer with
respect to approximately $37.0 million of par value of Farmer Mac discount notes during 2011and none in
2012 and 2013. The related commissions Farmer Mac paid to Zions for these services were immaterial.
The National Rural Utilities Cooperative Financial Corporation:
Farmer Mac considers the National Rural Utilities Cooperative Financial Corporation ("CFC") a related
party due to its ownership of approximately 7.9 percent of Class A voting common stock. The following
transactions occurred between Farmer Mac and CFC during 2013, 2012, and 2011:
Table 3.3
Farmer Mac Loan Purchases and Guarantees
Rural Utilities:
Loans
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
86,965
$
166,117
$
203,789
On-balance sheet Farmer Mac Guaranteed Securities
820,000
383,406
Off-balance sheet Farmer Mac Guaranteed Securities
—
—
—
2,796
Total purchases and guarantees
$
906,965
$
549,523
$
206,585
Those transactions with CFC represented 100 percent of Farmer Mac's loan purchase and guarantee
volume under the Rural Utilities program for 2013, 2012, and 2011 and represented 29.4 percent, 18.6
percent, and 6.1 percent of total purchases for 2013, 2012, and 2011, respectively. Of Farmer Mac's total
outstanding book of business at December 31, 2013 and 2012, CFC represented 18.6 percent and 18.0
percent, respectively. As of December 31, 2013 and for the year then ended, Farmer Mac had guarantee
fees receivable of $0.7 million from CFC and earned guarantee fees of $4.1 million. As of December 31,
2012 and for the year then ended, Farmer Mac had guarantee fees receivable of $0.7 million from CFC
and earned guarantee fees of $4.4 million. As of December 31, 2011 and for the year then ended, Farmer
Mac had guarantee fees receivable of $1.1 million from CFC and earned guarantee fees of $5.4 million.
Farmer Mac also had interest receivable of $5.6 million and $5.7 million as of December 31, 2013 and
2012, respectively, and earned interest income of $23.7 million, $28.0 million, and $30.9 million during
2013, 2012, and 2011, respectively, related to its AgVantage transactions with CFC.
Farmer Mac has a related party relationship with AgFirst Farm Credit Bank ("AgFirst"), resulting from
AgFirst being a holder of approximately 16.8 percent of Farmer Mac Class B voting common stock.
AgFirst entered into $8.1 million, $16.8 million, and $8.6 million of LTSPC transactions in 2013, 2012,
and 2011, respectively, and the aggregate balance of LTSPCs outstanding as of December 31, 2013 and
2012 was $131.8 million and $186.5 million, respectively. Farmer Mac received from AgFirst $0.7
million, $0.8 million, and $1.0 million in commitment fees in 2013, 2012, and 2011, respectively, and had
$0.1 million of commitment fees receivable as of December 31, 2013 and 2012.
AgFirst owns certain securities backed by rural housing loans for which Farmer Mac is the second-loss
guarantor for the last ten percent. As of December 31, 2013 and 2012, the outstanding balance of those
securities owned by AgFirst was $121.9 million and $168.1 million, respectively. Farmer Mac received
guarantee fees of $0.5 million in 2013 and 2012 and $0.4 million in 2011, with respect to those securities.
Farm Credit Bank of Texas:
Farmer Mac has a related party relationship with Farm Credit Bank of Texas resulting from the bank being
a holder of approximately 7.7 percent of Farmer Mac Class B voting common stock. During 2013, 2012,
and 2011, Farmer Mac did not enter into any new LTSPCs with Farm Credit Bank of Texas. Farmer Mac
received from Farm Credit Bank of Texas commitment fees of $0.2 million in 2013 and $0.3 million in
2012 and 2011, respectively. The aggregate amount of LTSPCs outstanding as of December 31, 2013 and
2012 was $63.2 million and $75.1 million, respectively. In 2013, 2012, and 2011, Farm Credit Bank of
Texas retained $0.5 million, $0.6 million, and $0.8 million, respectively, in servicing fees for its work as a
Farmer Mac central servicer.
Farm Credit West:
Farmer Mac had a related party relationship with Farm Credit West, ACA during 2012 and 2011 resulting
from a member of Farmer Mac's board of directors being the Executive Vice President of Farm Credit
West. Effective in June 2012, Farm Credit West was no longer a related party because the Executive Vice
President of Farm Credit West was no longer a member of Farmer Mac's board of directors. Amounts,
where presented for 2012, represent activity for the entire year.
During 2012 and 2011 Farm Credit West entered into $8.1 million and $2.1 million, respectively, of new
LTSPCs. Farmer Mac received from Farm Credit West commitment fees of $0.3 million for each of the
years ended December 31, 2012 and 2011. During 2003 and 2006, Farm Credit West, ACA converted
$722.3 million and $129.0 million, respectively, of existing LTSPCs to Farm & Ranch Guaranteed
Securities. The aggregate amount of LTSPCs outstanding as of December 31, 2012 was $95.4 million and
the outstanding principal balance of the converted securities was $420.9 million. Farmer Mac understands
that the current owner of some of those Farmer Mac Guaranteed Securities is CoBank, FCB. Farmer Mac
received $1.9 million and $2.3 million in guarantee fees on those securities during 2012 and 2011,
respectively. In 2012 and 2011 Farm Credit West retained $0.9 million and $1.0 million, respectively, in
servicing fees for its work as a Farmer Mac central servicer.
149
150
Table 3.2
AgFirst Farm Credit Bank:
Guarantee fees received by Farmer Mac
$
417
$
633
$
Servicing fees retained by Zions
2,033
1,980
940
1,870
For the Year Ended December 31,
2013
2012
2011
(in thousands)
Farmer Mac and Zions were parties to interest rate swap contracts having an aggregate outstanding
notional amount of approximately $29.3 million and $49.3 million as of December 31, 2013 and 2012,
respectively. As of December 31, 2013 and 2012, Farmer Mac had net interest payable to Zions under
those contracts of approximately $0.3 million and $0.5 million, respectively. Zions acted as dealer with
respect to approximately $37.0 million of par value of Farmer Mac discount notes during 2011and none in
2012 and 2013. The related commissions Farmer Mac paid to Zions for these services were immaterial.
The National Rural Utilities Cooperative Financial Corporation:
Farmer Mac considers the National Rural Utilities Cooperative Financial Corporation ("CFC") a related
party due to its ownership of approximately 7.9 percent of Class A voting common stock. The following
transactions occurred between Farmer Mac and CFC during 2013, 2012, and 2011:
Table 3.3
Farmer Mac Loan Purchases and Guarantees
For the Year Ended December 31,
2013
2012
2011
(in thousands)
On-balance sheet Farmer Mac Guaranteed Securities
820,000
383,406
Off-balance sheet Farmer Mac Guaranteed Securities
—
—
—
2,796
Total purchases and guarantees
$
906,965
$
549,523
$
206,585
Those transactions with CFC represented 100 percent of Farmer Mac's loan purchase and guarantee
volume under the Rural Utilities program for 2013, 2012, and 2011 and represented 29.4 percent, 18.6
percent, and 6.1 percent of total purchases for 2013, 2012, and 2011, respectively. Of Farmer Mac's total
outstanding book of business at December 31, 2013 and 2012, CFC represented 18.6 percent and 18.0
percent, respectively. As of December 31, 2013 and for the year then ended, Farmer Mac had guarantee
fees receivable of $0.7 million from CFC and earned guarantee fees of $4.1 million. As of December 31,
2012 and for the year then ended, Farmer Mac had guarantee fees receivable of $0.7 million from CFC
and earned guarantee fees of $4.4 million. As of December 31, 2011 and for the year then ended, Farmer
Mac had guarantee fees receivable of $1.1 million from CFC and earned guarantee fees of $5.4 million.
Farmer Mac also had interest receivable of $5.6 million and $5.7 million as of December 31, 2013 and
2012, respectively, and earned interest income of $23.7 million, $28.0 million, and $30.9 million during
2013, 2012, and 2011, respectively, related to its AgVantage transactions with CFC.
Farmer Mac has a related party relationship with AgFirst Farm Credit Bank ("AgFirst"), resulting from
AgFirst being a holder of approximately 16.8 percent of Farmer Mac Class B voting common stock.
AgFirst entered into $8.1 million, $16.8 million, and $8.6 million of LTSPC transactions in 2013, 2012,
and 2011, respectively, and the aggregate balance of LTSPCs outstanding as of December 31, 2013 and
2012 was $131.8 million and $186.5 million, respectively. Farmer Mac received from AgFirst $0.7
million, $0.8 million, and $1.0 million in commitment fees in 2013, 2012, and 2011, respectively, and had
$0.1 million of commitment fees receivable as of December 31, 2013 and 2012.
AgFirst owns certain securities backed by rural housing loans for which Farmer Mac is the second-loss
guarantor for the last ten percent. As of December 31, 2013 and 2012, the outstanding balance of those
securities owned by AgFirst was $121.9 million and $168.1 million, respectively. Farmer Mac received
guarantee fees of $0.5 million in 2013 and 2012 and $0.4 million in 2011, with respect to those securities.
Farm Credit Bank of Texas:
Farmer Mac has a related party relationship with Farm Credit Bank of Texas resulting from the bank being
a holder of approximately 7.7 percent of Farmer Mac Class B voting common stock. During 2013, 2012,
and 2011, Farmer Mac did not enter into any new LTSPCs with Farm Credit Bank of Texas. Farmer Mac
received from Farm Credit Bank of Texas commitment fees of $0.2 million in 2013 and $0.3 million in
2012 and 2011, respectively. The aggregate amount of LTSPCs outstanding as of December 31, 2013 and
2012 was $63.2 million and $75.1 million, respectively. In 2013, 2012, and 2011, Farm Credit Bank of
Texas retained $0.5 million, $0.6 million, and $0.8 million, respectively, in servicing fees for its work as a
Farmer Mac central servicer.
Rural Utilities:
Loans
$
86,965
$
166,117
$
203,789
Farm Credit West:
Farmer Mac had a related party relationship with Farm Credit West, ACA during 2012 and 2011 resulting
from a member of Farmer Mac's board of directors being the Executive Vice President of Farm Credit
West. Effective in June 2012, Farm Credit West was no longer a related party because the Executive Vice
President of Farm Credit West was no longer a member of Farmer Mac's board of directors. Amounts,
where presented for 2012, represent activity for the entire year.
During 2012 and 2011 Farm Credit West entered into $8.1 million and $2.1 million, respectively, of new
LTSPCs. Farmer Mac received from Farm Credit West commitment fees of $0.3 million for each of the
years ended December 31, 2012 and 2011. During 2003 and 2006, Farm Credit West, ACA converted
$722.3 million and $129.0 million, respectively, of existing LTSPCs to Farm & Ranch Guaranteed
Securities. The aggregate amount of LTSPCs outstanding as of December 31, 2012 was $95.4 million and
the outstanding principal balance of the converted securities was $420.9 million. Farmer Mac understands
that the current owner of some of those Farmer Mac Guaranteed Securities is CoBank, FCB. Farmer Mac
received $1.9 million and $2.3 million in guarantee fees on those securities during 2012 and 2011,
respectively. In 2012 and 2011 Farm Credit West retained $0.9 million and $1.0 million, respectively, in
servicing fees for its work as a Farmer Mac central servicer.
149
150
Other Related Party Transactions:
Farmer Mac purchased $61.6 million, $37.1 million, and $29.7 million in loans from First Dakota Bank in
2013, 2012, and 2011, respectively. Farmer Mac entered into $1.0 million of new LTSPCs in 2013 and
none in 2012 and 2011, respectively with First Dakota Bank. Farmer Mac purchased $9.3 million, $4.4
million, and $10.6 million in USDA Securities from Bath State Bank in 2013, 2012, and 2011,
respectively. AgGeorgia Farm Credit, ACA ("AgGeorgia") was a related party for 2013 and 2012.
Farmer Mac entered into $27.5 million and $51.5 million of new LTSPCs with AgGeorgia and received
$0.1 million of commitment fees during both 2013 and 2012. These institutions had a related party
relationship with Farmer Mac resulting from a member of Farmer Mac's board of directors being affiliated
with the entity in some respect.
Farmer Mac owned $78.5 million par value of preferred stock and $70.0 million of subordinated debt
issued by CoBank as of December 31, 2013 and 2012, respectively. Farmer Mac has a related party
relationship with CoBank because CoBank is a major holder (32.6 percent) of Farmer Mac Class B voting
common stock.
4. INVESTMENT SECURITIES
The following tables present the amount outstanding, amortized cost, and fair values of Farmer Mac's
investment securities as of December 31, 2013 and 2012:
Table 4.1
December 31, 2013
Amount
Outstanding
Unamortized
Premium/
(Discount)
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
(in thousands)
$
74,100
$
— $
74,100
$
— $
(8,815) $
65,285
166,185
109,345
55,000
612,413
1,173
70,000
78,500
30,595
523,691
754,405
(217)
(3)
48
4,336
3,966
—
365
84
294
1,141
165,968
109,342
55,048
616,749
5,139
70,000
78,865
30,679
523,985
755,546
195
445
97
4,955
3,518
—
4,296
5
107
95
(59)
(18)
(4)
(435)
—
(6,615)
—
(3)
(30)
(8)
166,104
109,769
55,141
621,269
8,657
63,385
83,161
30,681
524,062
755,633
2,475,407
10,014
2,485,421
13,713
(15,987)
2,483,147
Available-for-sale:
Floating rate auction-rate certificates backed by
Government guaranteed student loans
Floating rate asset-backed securities
Floating rate corporate debt securities
Fixed rate corporate debt securities
Floating rate Government/GSE guaranteed mortgage-
backed securities
Fixed rate GSE guaranteed mortgage-backed securities (1)
Floating rate GSE subordinated debt
Fixed rate GSE preferred stock
Fixed rate taxable municipal bonds
Fixed rate senior agency debt
Fixed rate U.S. Treasuries
Total available-for-sale
Trading:
Floating rate asset-backed securities
3,553
—
3,553
—
(2,625)
928
Total investment securities
$
2,478,960
$
10,014
$ 2,488,974
$
13,713
$
(18,612) $ 2,484,075
(1) Fair value includes $7.4 million of an interest-only security with a notional amount of $152.4 million.
Amount
Outstanding
Unamortized
Premium/
(Discount)
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
December 31, 2012
(in thousands)
$
74,100
$
— $
74,100
$
— $
(10,941) $
63,159
699,062
5,973
705,035
8,035
150,519
6,501
76,345
51,969
1,910
70,000
78,500
50,000
72,700
(372)
—
(32)
243
1
—
784
(6)
287
150,147
6,501
76,313
52,212
1,911
70,000
79,284
49,994
72,987
933
—
450
204
7,802
154
—
61
128
258
(36)
151,044
(211)
—
(12,569)
—
—
—
—
—
(1)
(9)
6,501
76,763
52,416
712,859
2,065
57,431
87,086
50,055
73,114
1,165,889
1,163,400
2,495,006
2,240
9,118
1,165,640
2,504,124
18,025
(23,767)
2,498,382
Available-for-sale:
Floating rate auction-rate certificates backed by
Government guaranteed student loans
Floating rate asset-backed securities
Fixed rate asset-backed securities
Floating rate corporate debt securities
Fixed rate corporate debt securities
Floating rate Government/GSE guaranteed mortgage-
backed securities
Fixed rate GSE guaranteed mortgage-backed securities
Floating rate GSE subordinated debt
Fixed rate GSE preferred stock
Floating rate senior agency debt
Fixed rate senior agency debt
Fixed rate U.S. Treasuries
Total available-for-sale
Trading:
Floating rate asset-backed securities
4,327
—
4,327
—
(3,080)
1,247
Total investment securities
$
2,499,333
$
9,118
$
2,508,451
$
18,025
$
(26,847) $
2,499,629
During 2013, Farmer Mac received proceeds of $366.6 million from the sale of securities from its
available-for-sale investment portfolio, resulting in gross realized gains of $3.1 million and gross realized
losses of $1.0 million. During 2012, Farmer Mac received proceeds of $7.0 million from the sale of
securities from its available-for-sale investment portfolio, resulting in gross realized gains $28,000 and
gross realized losses of $10,000. During 2011, Farmer Mac received proceeds of $447.9 million from the
sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $0.3
million and gross realized losses of $10,000.
151
152
Other Related Party Transactions:
Farmer Mac purchased $61.6 million, $37.1 million, and $29.7 million in loans from First Dakota Bank in
2013, 2012, and 2011, respectively. Farmer Mac entered into $1.0 million of new LTSPCs in 2013 and
none in 2012 and 2011, respectively with First Dakota Bank. Farmer Mac purchased $9.3 million, $4.4
million, and $10.6 million in USDA Securities from Bath State Bank in 2013, 2012, and 2011,
respectively. AgGeorgia Farm Credit, ACA ("AgGeorgia") was a related party for 2013 and 2012.
Farmer Mac entered into $27.5 million and $51.5 million of new LTSPCs with AgGeorgia and received
$0.1 million of commitment fees during both 2013 and 2012. These institutions had a related party
relationship with Farmer Mac resulting from a member of Farmer Mac's board of directors being affiliated
with the entity in some respect.
Farmer Mac owned $78.5 million par value of preferred stock and $70.0 million of subordinated debt
issued by CoBank as of December 31, 2013 and 2012, respectively. Farmer Mac has a related party
relationship with CoBank because CoBank is a major holder (32.6 percent) of Farmer Mac Class B voting
common stock.
4. INVESTMENT SECURITIES
Table 4.1
The following tables present the amount outstanding, amortized cost, and fair values of Farmer Mac's
investment securities as of December 31, 2013 and 2012:
Amount
Outstanding
Unamortized
Premium/
(Discount)
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
December 31, 2013
(in thousands)
$
74,100
$
— $
74,100
$
— $
(8,815) $
65,285
166,185
109,345
55,000
612,413
1,173
70,000
78,500
30,595
523,691
754,405
(217)
(3)
48
4,336
3,966
—
365
84
294
1,141
165,968
109,342
55,048
616,749
5,139
70,000
78,865
30,679
523,985
755,546
195
445
97
4,955
3,518
—
4,296
5
107
95
(59)
(18)
(4)
(435)
—
(6,615)
—
(3)
(30)
(8)
166,104
109,769
55,141
621,269
8,657
63,385
83,161
30,681
524,062
755,633
2,475,407
10,014
2,485,421
13,713
(15,987)
2,483,147
Available-for-sale:
Floating rate auction-rate certificates backed by
Government guaranteed student loans
Floating rate asset-backed securities
Floating rate corporate debt securities
Fixed rate corporate debt securities
Floating rate Government/GSE guaranteed mortgage-
backed securities
Fixed rate GSE guaranteed mortgage-backed securities (1)
Floating rate GSE subordinated debt
Fixed rate GSE preferred stock
Fixed rate taxable municipal bonds
Fixed rate senior agency debt
Fixed rate U.S. Treasuries
Total available-for-sale
Trading:
Floating rate asset-backed securities
3,553
—
3,553
—
(2,625)
928
Total investment securities
$
2,478,960
$
10,014
$ 2,488,974
$
13,713
$
(18,612) $ 2,484,075
(1) Fair value includes $7.4 million of an interest-only security with a notional amount of $152.4 million.
December 31, 2012
Amount
Outstanding
Unamortized
Premium/
(Discount)
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
(in thousands)
$
74,100
$
— $
74,100
$
— $
(10,941) $
63,159
150,519
6,501
76,345
51,969
(372)
—
(32)
243
150,147
6,501
76,313
52,212
699,062
5,973
705,035
1,910
70,000
78,500
50,000
72,700
1
—
784
(6)
287
1,911
70,000
79,284
49,994
72,987
1,163,400
2,495,006
2,240
9,118
1,165,640
2,504,124
933
—
450
204
8,035
154
—
7,802
61
128
258
(36)
151,044
—
—
—
(211)
—
(12,569)
—
—
(1)
(9)
6,501
76,763
52,416
712,859
2,065
57,431
87,086
50,055
73,114
1,165,889
18,025
(23,767)
2,498,382
Available-for-sale:
Floating rate auction-rate certificates backed by
Government guaranteed student loans
Floating rate asset-backed securities
Fixed rate asset-backed securities
Floating rate corporate debt securities
Fixed rate corporate debt securities
Floating rate Government/GSE guaranteed mortgage-
backed securities
Fixed rate GSE guaranteed mortgage-backed securities
Floating rate GSE subordinated debt
Fixed rate GSE preferred stock
Floating rate senior agency debt
Fixed rate senior agency debt
Fixed rate U.S. Treasuries
Total available-for-sale
Trading:
Floating rate asset-backed securities
4,327
—
4,327
—
(3,080)
1,247
Total investment securities
$
2,499,333
$
9,118
$
2,508,451
$
18,025
$
(26,847) $
2,499,629
During 2013, Farmer Mac received proceeds of $366.6 million from the sale of securities from its
available-for-sale investment portfolio, resulting in gross realized gains of $3.1 million and gross realized
losses of $1.0 million. During 2012, Farmer Mac received proceeds of $7.0 million from the sale of
securities from its available-for-sale investment portfolio, resulting in gross realized gains $28,000 and
gross realized losses of $10,000. During 2011, Farmer Mac received proceeds of $447.9 million from the
sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $0.3
million and gross realized losses of $10,000.
151
152
As of December 31, 2013 and 2012, unrealized losses on available-for-sale investment securities were as
follows:
Table 4.2
December 31, 2013
Available-for-Sale Securities
Unrealized loss position for
less than 12 months
Unrealized loss position for
more than 12 months
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
(in thousands)
Floating rate auction-rate certificates backed by Government
guaranteed student loans
$
— $
— $
65,285
$
(8,815)
As of December 31, 2013, 7 of the securities in loss positions had been in loss positions for more than
12 months and had a total unrealized loss of $15.4 million. As of December 31, 2012, 9 of the securities
in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of
$23.5 million. Securities in unrealized loss positions 12 months or more have a fair value as of
December 31, 2013 that is, on average, approximately 89.3 percent of their amortized cost basis. Farmer
Mac believes that all of these unrealized losses are recoverable within a reasonable period of time by way
of changes in credit spreads or maturity. Accordingly, Farmer Mac has concluded that none of the
unrealized losses on these available-for-sale investment securities represents other-than-temporary
impairment as of December 31, 2013 and December 31, 2012. 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.
Floating rate asset-backed securities
Floating rate corporate debt securities
Fixed rate corporate debt securities
50,129
19,982
10,058
Floating rate Government/GSE guaranteed mortgage-backed securities
161,960
(59)
(18)
(4)
(435)
—
(3)
(30)
(8)
—
—
—
—
—
—
—
—
Farmer Mac did not own any held-to-maturity investment securities as of December 31, 2013 and
December 31, 2012. As of December 31, 2013, Farmer Mac owned trading investment securities with an
amortized cost of $3.6 million, a fair value of $0.9 million, and a weighted average yield of 4.25 percent.
As of December 31, 2012, Farmer Mac owned trading investment securities with an amortized cost of
63,385
(6,615)
$4.3 million, a fair value of $1.2 million, and a weighted average yield of 4.29 percent.
—
—
—
—
—
—
—
8,041
316,273
118,056
Floating rate GSE subordinated debt
Fixed rate taxable municipal bonds
Fixed rate senior agency debt
Fixed rate U.S. Treasuries
Total
Floating rate auction-rate certificates backed by Government
guaranteed student loans
Floating rate asset-backed securities
Floating rate Government/GSE guaranteed mortgage-backed securities
Floating rate GSE subordinated debt
Fixed rate senior agency debt
Fixed rate U.S. Treasuries
Total
$
684,499
$
(557) $
128,670
$
(15,430)
December 31, 2012
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)
$
— $
— $
63,159
$
(10,941)
21,648
174,352
—
50,088
136,194
(27)
(209)
—
(1)
(9)
3,619
829
57,431
—
—
(9)
(2)
(12,569)
—
—
$
382,282
$
(246) $
125,038
$
(23,521)
The amortized cost, fair value, and weighted average yield of available-for-sale investment securities by
remaining contractual maturity as of December 31, 2013 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 4.3
December 31, 2013
Available-for-Sale Securities
Amortized
Cost
Fair Value
(dollars in thousands)
Weighted-
Average
Yield
0.54%
1.03%
0.91%
2.48%
1.08%
Due within one year
$
1,363,679
$
1,363,878
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
196,460
347,682
577,600
197,281
346,025
575,963
$
2,485,421
$
2,483,147
The unrealized losses presented above are principally due to a general widening of credit spreads from the
dates of acquisition to December 31, 2013 and 2012, as applicable. The resulting decrease in fair values
reflect an increase in the perceived risk by the financial markets related to those securities. As of
December 31, 2013, all of the investment securities in an unrealized loss position had credit ratings of at
least "AA+" except two that were rated "A-" and one that was rated "BBB+". As of December 31, 2013,
the aggregate unrealized loss on the security rated "BBB+" was $4,000, and the security matures in 2014.
As of December 31, 2012, all of the investment securities in an unrealized loss position had credit ratings
of at least "AA+" except one that was rated "A-". The unrealized losses were on 64 and 17 individual
investment securities as of December 31, 2013 and 2012, respectively.
153
154
As of December 31, 2013 and 2012, unrealized losses on available-for-sale investment securities were as
follows:
Table 4.2
Floating rate auction-rate certificates backed by Government
$
— $
— $
65,285
$
(8,815)
Floating rate Government/GSE guaranteed mortgage-backed securities
161,960
guaranteed student loans
Floating rate asset-backed securities
Floating rate corporate debt securities
Fixed rate corporate debt securities
Floating rate GSE subordinated debt
Fixed rate taxable municipal bonds
Fixed rate senior agency debt
Fixed rate U.S. Treasuries
Total
December 31, 2013
Available-for-Sale Securities
Unrealized loss position for
less than 12 months
Unrealized loss position for
more than 12 months
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
(in thousands)
50,129
19,982
10,058
—
8,041
316,273
118,056
(59)
(18)
(4)
(435)
—
(3)
(30)
(8)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
63,385
(6,615)
$
684,499
$
(557) $
128,670
$
(15,430)
December 31, 2012
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)
$
— $
— $
63,159
$
(10,941)
21,648
174,352
—
50,088
136,194
(27)
(209)
—
(1)
(9)
3,619
829
57,431
—
—
(12,569)
(9)
(2)
—
—
$
382,282
$
(246) $
125,038
$
(23,521)
Floating rate auction-rate certificates backed by Government
guaranteed student loans
Floating rate asset-backed securities
Floating rate Government/GSE guaranteed mortgage-backed securities
Floating rate GSE subordinated debt
Fixed rate senior agency debt
Fixed rate U.S. Treasuries
Total
The unrealized losses presented above are principally due to a general widening of credit spreads from the
dates of acquisition to December 31, 2013 and 2012, as applicable. The resulting decrease in fair values
reflect an increase in the perceived risk by the financial markets related to those securities. As of
December 31, 2013, all of the investment securities in an unrealized loss position had credit ratings of at
least "AA+" except two that were rated "A-" and one that was rated "BBB+". As of December 31, 2013,
the aggregate unrealized loss on the security rated "BBB+" was $4,000, and the security matures in 2014.
As of December 31, 2012, all of the investment securities in an unrealized loss position had credit ratings
of at least "AA+" except one that was rated "A-". The unrealized losses were on 64 and 17 individual
investment securities as of December 31, 2013 and 2012, respectively.
As of December 31, 2013, 7 of the securities in loss positions had been in loss positions for more than
12 months and had a total unrealized loss of $15.4 million. As of December 31, 2012, 9 of the securities
in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of
$23.5 million. Securities in unrealized loss positions 12 months or more have a fair value as of
December 31, 2013 that is, on average, approximately 89.3 percent of their amortized cost basis. Farmer
Mac believes that all of these unrealized losses are recoverable within a reasonable period of time by way
of changes in credit spreads or maturity. Accordingly, Farmer Mac has concluded that none of the
unrealized losses on these available-for-sale investment securities represents other-than-temporary
impairment as of December 31, 2013 and December 31, 2012. Farmer Mac does not intend to sell these
securities and it is not more likely than not that Farmer Mac will be required to sell the securities before
recovery of the amortized cost basis.
Farmer Mac did not own any held-to-maturity investment securities as of December 31, 2013 and
December 31, 2012. As of December 31, 2013, Farmer Mac owned trading investment securities with an
amortized cost of $3.6 million, a fair value of $0.9 million, and a weighted average yield of 4.25 percent.
As of December 31, 2012, Farmer Mac owned trading investment securities with an amortized cost of
$4.3 million, a fair value of $1.2 million, and a weighted average yield of 4.29 percent.
The amortized cost, fair value, and weighted average yield of available-for-sale investment securities by
remaining contractual maturity as of December 31, 2013 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 4.3
December 31, 2013
Available-for-Sale Securities
Amortized
Cost
Fair Value
(dollars in thousands)
Due within one year
$
1,363,679
$
1,363,878
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
196,460
347,682
577,600
197,281
346,025
575,963
$
2,485,421
$
2,483,147
Weighted-
Average
Yield
0.54%
1.03%
0.91%
2.48%
1.08%
153
154
5. 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 December 31, 2013 and 2012:
Table 5.1
December 31, 2013
Unpaid
Principal
Balance
Unamortized
Premium/
(Discount)
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
(in thousands)
$ 3,539,650
$
125
$ 3,539,775
$
59,933
$
(14,282) $ 3,585,426
21,089
1,527,205
5,087,944
1,590,433
6,678,377
(518)
20,571
— 1,527,205
(393)
5,087,551
4,585
4,192
1,595,018
6,682,569
669
4,118
64,720
2,753
67,473
(6)
21,234
(46,383)
1,484,940
(60,671)
5,091,600
(44,102)
1,553,669
(104,773)
6,645,269
Available-for-sale:
Farm & Ranch
USDA Guarantees
Rural Utilities
Total Farmer Mac Guaranteed Securities
USDA Guaranteed Securities
Total available-for-sale
Trading:
USDA Guaranteed Securities
55,373
4,972
60,345
193
(2,194)
58,344
Total Farmer Mac Guaranteed Securities and
USDA Guaranteed Securities
$ 6,733,750
$
9,164
$ 6,742,914
$
67,666
$ (106,967) $ 6,703,613
December 31, 2012
Unpaid
Principal
Balance
Unamortized
Premium/
(Discount)
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
(in thousands)
$ 3,339,200
$
160
$ 3,339,360
$
92,223
$
(5,094) $ 3,426,489
26,238
1,298,506
4,663,944
1,461,184
6,125,128
(452)
25,786
— 1,298,506
(292)
4,663,652
5,975
5,683
1,467,159
6,130,811
909
18,530
111,662
19,605
131,267
(14)
(3,948)
(9,056)
26,681
1,313,088
4,766,258
(169)
1,486,595
(9,225)
6,252,853
Available-for-sale:
Farm & Ranch
USDA Guarantees
Rural Utilities
Total Farmer Mac Guaranteed Securities
USDA Guaranteed Securities
Total available-for-sale
Trading:
those losses. None of the Rural Utilities Guaranteed Securities has been in an unrealized loss position for
greater than 12 months. Farmer Mac has concluded that none of the unrealized losses on its available-for-
sale Farmer Mac Guaranteed Securities and USDA Securities represents an other-than-temporary
impairment as of December 31, 2013 and 2012. 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 2013, 2012, and 2011, 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 Farmer Mac Guaranteed
Securities and USDA Securities by remaining contractual maturity as of December 31, 2013 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 5.2
December 31, 2013
Available-for-Sale Securities
Amortized
Cost
Fair Value
(dollars in thousands)
$
$
904,030
$
3,153,604
757,080
1,867,855
6,682,569
$
913,404
3,181,924
748,279
1,801,662
6,645,269
Weighted-
Average
Yield
2.37%
2.18%
2.02%
2.59%
2.30%
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Farmer Mac did not own any held-to-maturity Farmer Mac Guaranteed Securities or USDA Securities as
of December 31, 2013 and 2012. As of December 31, 2013, Farmer Mac owned trading USDA Securities
with an amortized cost of $60.3 million, a fair value of $58.3 million, and a weighted average yield of
5.60 percent. As of December 31, 2012, Farmer Mac owned trading USDA Securities with an amortized
cost of $104.9 million, a fair value of $104.2 million, and a weighted average yield of 5.77 percent.
USDA Guaranteed Securities
98,499
6,415
104,914
624
(1,350)
104,188
Total Farmer Mac Guaranteed Securities and
USDA Guaranteed Securities
$ 6,223,627
$
12,098
$ 6,235,725
$
131,891
$
(10,575) $ 6,357,041
6. FINANCIAL DERIVATIVES
The unrealized losses presented above are principally due to higher interest rates from the date of
acquisition to December 31, 2013 and 2012, as applicable. The credit exposure related to Farmer Mac's
USDA Guarantees line of business is covered by the full faith and credit guarantee of the United States.
As of December 31, 2013, 13 AgVantage securities in loss positions in the Farm & Ranch line of business
had been in a loss position for more than 12 months with a total unrealized loss of $8.7 million. Each
Farm & Ranch AgVantage security requires some level of overcollateralization and is secured by eligible
loans of the issuing institution with a requirement that delinquent loans be removed from the collateral
pool and replaced with current eligible loans. Thus, Farmer Mac does not believe it will realize any of
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, not for trading or speculative purposes. Farmer Mac enters into interest rate swap contracts to
adjust the characteristics of its short-term debt to match more closely the cash flow and duration
characteristics of its longer-term loans and other assets, and also to adjust the characteristics of its long-
term debt to match more closely the cash flow and duration characteristics of its short-term 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. Certain financial
derivatives are designated as fair value hedges of fixed rate assets classified as available-for-sale to protect
155
156
5. 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 December 31, 2013 and 2012:
Table 5.1
Unpaid
Principal
Balance
Unamortized
Premium/
(Discount)
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
December 31, 2013
(in thousands)
$ 3,539,650
$
125
$ 3,539,775
$
59,933
$
(14,282) $ 3,585,426
21,089
1,527,205
5,087,944
1,590,433
6,678,377
(518)
20,571
—
1,527,205
(393)
5,087,551
4,585
4,192
1,595,018
6,682,569
669
4,118
64,720
2,753
67,473
(6)
21,234
(46,383)
1,484,940
(60,671)
5,091,600
(44,102)
1,553,669
(104,773)
6,645,269
Available-for-sale:
Farm & Ranch
USDA Guarantees
Rural Utilities
Total Farmer Mac Guaranteed Securities
USDA Guaranteed Securities
Total available-for-sale
Trading:
USDA Guaranteed Securities
55,373
4,972
60,345
193
(2,194)
58,344
Total Farmer Mac Guaranteed Securities and
USDA Guaranteed Securities
$ 6,733,750
$
9,164
$ 6,742,914
$
67,666
$ (106,967) $ 6,703,613
Unpaid
Principal
Balance
Unamortized
Premium/
(Discount)
Amortized
Unrealized
Cost
Gains
Unrealized
Losses
Fair Value
December 31, 2012
(in thousands)
$ 3,339,200
$
160
$ 3,339,360
$
92,223
$
(5,094) $ 3,426,489
26,238
1,298,506
4,663,944
1,461,184
6,125,128
(452)
25,786
—
1,298,506
(292)
4,663,652
5,975
5,683
1,467,159
6,130,811
909
18,530
111,662
19,605
131,267
(14)
(3,948)
(9,056)
26,681
1,313,088
4,766,258
(169)
1,486,595
(9,225)
6,252,853
Available-for-sale:
Farm & Ranch
USDA Guarantees
Rural Utilities
Total Farmer Mac Guaranteed Securities
USDA Guaranteed Securities
Total available-for-sale
Trading:
those losses. None of the Rural Utilities Guaranteed Securities has been in an unrealized loss position for
greater than 12 months. Farmer Mac has concluded that none of the unrealized losses on its available-for-
sale Farmer Mac Guaranteed Securities and USDA Securities represents an other-than-temporary
impairment as of December 31, 2013 and 2012. 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 2013, 2012, and 2011, 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 Farmer Mac Guaranteed
Securities and USDA Securities by remaining contractual maturity as of December 31, 2013 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 5.2
December 31, 2013
Available-for-Sale Securities
Amortized
Cost
Fair Value
(dollars in thousands)
904,030
$
3,153,604
757,080
1,867,855
6,682,569
$
913,404
3,181,924
748,279
1,801,662
6,645,269
$
$
Weighted-
Average
Yield
2.37%
2.18%
2.02%
2.59%
2.30%
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Farmer Mac did not own any held-to-maturity Farmer Mac Guaranteed Securities or USDA Securities as
of December 31, 2013 and 2012. As of December 31, 2013, Farmer Mac owned trading USDA Securities
with an amortized cost of $60.3 million, a fair value of $58.3 million, and a weighted average yield of
5.60 percent. As of December 31, 2012, Farmer Mac owned trading USDA Securities with an amortized
cost of $104.9 million, a fair value of $104.2 million, and a weighted average yield of 5.77 percent.
USDA Guaranteed Securities
98,499
6,415
104,914
624
(1,350)
104,188
Total Farmer Mac Guaranteed Securities and
USDA Guaranteed Securities
$ 6,223,627
$
12,098
$ 6,235,725
$
131,891
$
(10,575) $ 6,357,041
6. FINANCIAL DERIVATIVES
The unrealized losses presented above are principally due to higher interest rates from the date of
acquisition to December 31, 2013 and 2012, as applicable. The credit exposure related to Farmer Mac's
USDA Guarantees line of business is covered by the full faith and credit guarantee of the United States.
As of December 31, 2013, 13 AgVantage securities in loss positions in the Farm & Ranch line of business
had been in a loss position for more than 12 months with a total unrealized loss of $8.7 million. Each
Farm & Ranch AgVantage security requires some level of overcollateralization and is secured by eligible
loans of the issuing institution with a requirement that delinquent loans be removed from the collateral
pool and replaced with current eligible loans. Thus, Farmer Mac does not believe it will realize any of
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, not for trading or speculative purposes. Farmer Mac enters into interest rate swap contracts to
adjust the characteristics of its short-term debt to match more closely the cash flow and duration
characteristics of its longer-term loans and other assets, and also to adjust the characteristics of its long-
term debt to match more closely the cash flow and duration characteristics of its short-term 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. Certain financial
derivatives are designated as fair value hedges of fixed rate assets classified as available-for-sale to protect
155
156
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.
Credit Risk:
Farmer Mac manages the interest rate risk related to loans it has committed to acquire, but has not yet
permanently funded, through the use of forward sale contracts on the debt of other government-sponsored
enterprises ("GSEs") and futures contracts involving U.S. Treasury securities. Farmer Mac uses forward
sale contracts on GSE securities to reduce its interest rate exposure to changes in both U.S. Treasury rates
and spreads on Farmer Mac debt. The notional amounts of these contracts are determined based on a
duration-matched hedge ratio between the hedged item and the hedge instrument. Gains or losses
generated by these hedge transactions are expected to offset changes in funding costs.
All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability.
Changes in the fair values of financial derivatives not designated as cash flow hedges are reported in
"Gains/(losses) on financial derivatives and hedging activities" in the consolidated statements of
operations. For financial derivatives designated in fair value hedging relationships, changes in the fair
values of the hedged items related to the risk being hedged are also 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 OCI when
the hedged transaction affects earnings. Any ineffective portion of designated hedge transactions is
recognized immediately in"Gains/(losses) on financial derivatives and hedging activities" in the
consolidated statements of operations.
Market Risk:
Market risk is the risk of an adverse effect resulting from changes in interest rates or spreads on the value
of a financial instrument. Farmer Mac manages market risk associated with financial derivatives by
establishing and monitoring limits as to the degree of risk that may be undertaken. This risk is
periodically measured as part of Farmer Mac's overall risk monitoring processes, which include market
value of equity measurements, net interest income modeling, and other measures.
Credit risk is the risk that a counterparty will fail to perform according to the terms of a financial
derivative contract in which Farmer Mac has an unrealized gain. Credit losses could occur in the event of
non-performance by counterparties to these contracts. Non-exchange traded derivatives expose Farmer
Mac to institutional credit risk to individual counterparties because transactions are executed and settled
between Farmer Mac and each counterparty, exposing Farmer Mac to potential losses if a counterparty
fails to meet its obligations. Farmer Mac mitigates this counterparty credit risk by contracting only with
counterparties that have investment grade credit ratings, establishing and maintaining collateral
requirements based upon credit ratings, and entering into netting agreements. Netting agreements provide
for the calculation of the net amount of all receivables and payables under all transactions covered by the
netting agreement between Farmer Mac and a single counterparty. Farmer Mac's exposure to credit risk
related to its financial derivatives is represented by those counterparties for which Farmer Mac has a net
receivable, including the effect of any netting arrangements. As of December 31, 2013 and 2012, Farmer
Mac's credit exposure to interest rate swap counterparties, excluding netting arrangements and any
adjustment for nonperformance risk, but including accrued interest, was $25.1 million and $37.1 million,
respectively; however, including netting arrangements and accrued interest, Farmer Mac's credit exposure
was $3.3 million and $2.4 million as of December 31, 2013 and 2012, respectively. As of December 31,
2013 and 2012, Farmer Mac held no cash and $1.7 million, respectively, as collateral for its derivatives in
net asset positions, resulting in uncollateralized net asset positions of $3.0 million and $0.8 million,
respectively. Farmer Mac records cash held as collateral as an increase in the balance of cash and cash
equivalents and an increase in the balance of accounts payable and accrued expenses.
In the normal course of business, Farmer Mac and its counterparties enforce the collateral requirements
contained in the related derivative contracts. Under these collateral requirements, the amount of collateral
posted is typically based on the net fair value of all derivative contracts with the counterparty, i.e.,
derivative assets net of derivative liabilities at the counterparty level. If Farmer Mac were to default under
a derivative contract (such as the failure to pay amounts when due, any other material breach of the
agreement that remains unremedied, a material default under another of Farmer Mac's credit agreements,
or bankruptcy, insolvency or receivership), the related counterparty could request payment or full
collateralization on the derivative contract. In addition, if Farmer Mac ceases to be a federally chartered
instrumentality of the United States, the related counterparty could request full collateralization on the
derivative contract. As of December 31, 2013 and 2012, 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 $92.0 million and $168.0 million, respectively; however, including netting
arrangements and accrued interest, the fair value of Farmer Mac's derivatives in a net liability position at
the counterparty level, was $74.8 million and $135.8 million as of December 31, 2013 and 2012,
respectively. Farmer Mac posted cash of $9.8 million and investment securities with a fair value of $1.5
million as of December 31, 2013 and posted cash of $60.3 million as of December 31, 2012 as collateral
for its derivatives in net liability positions. Farmer Mac records posted cash as a reduction in the
outstanding balance of cash and cash equivalents and an increase in the balance of prepaid expenses and
other assets. The investment securities posted as collateral are included in the investment securities
balances on the consolidated balance sheets. If Farmer Mac had breached certain provisions of the
derivative contracts as of December 31, 2013 and 2012, it could have been required to settle its
obligations under the agreements or post additional collateral of $63.5 million and $75.5 million,
respectively. As of December 31, 2013 and 2012, 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.
157
158
against fair value changes in the assets related to a benchmark interest rate (i.e., LIBOR). Other financial
Credit Risk:
derivatives are designated as cash flow hedges to mitigate the volatility of future interest rate payments on
floating rate debt.
Farmer Mac manages the interest rate risk related to loans it has committed to acquire, but has not yet
permanently funded, through the use of forward sale contracts on the debt of other government-sponsored
enterprises ("GSEs") and futures contracts involving U.S. Treasury securities. Farmer Mac uses forward
sale contracts on GSE securities to reduce its interest rate exposure to changes in both U.S. Treasury rates
and spreads on Farmer Mac debt. The notional amounts of these contracts are determined based on a
duration-matched hedge ratio between the hedged item and the hedge instrument. Gains or losses
generated by these hedge transactions are expected to offset changes in funding costs.
All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability.
Changes in the fair values of financial derivatives not designated as cash flow hedges are reported in
"Gains/(losses) on financial derivatives and hedging activities" in the consolidated statements of
operations. For financial derivatives designated in fair value hedging relationships, changes in the fair
values of the hedged items related to the risk being hedged are also 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 OCI when
the hedged transaction affects earnings. Any ineffective portion of designated hedge transactions is
recognized immediately in"Gains/(losses) on financial derivatives and hedging activities" in the
consolidated statements of operations.
Market Risk:
Market risk is the risk of an adverse effect resulting from changes in interest rates or spreads on the value
of a financial instrument. Farmer Mac manages market risk associated with financial derivatives by
establishing and monitoring limits as to the degree of risk that may be undertaken. This risk is
periodically measured as part of Farmer Mac's overall risk monitoring processes, which include market
value of equity measurements, net interest income modeling, and other measures.
Credit risk is the risk that a counterparty will fail to perform according to the terms of a financial
derivative contract in which Farmer Mac has an unrealized gain. Credit losses could occur in the event of
non-performance by counterparties to these contracts. Non-exchange traded derivatives expose Farmer
Mac to institutional credit risk to individual counterparties because transactions are executed and settled
between Farmer Mac and each counterparty, exposing Farmer Mac to potential losses if a counterparty
fails to meet its obligations. Farmer Mac mitigates this counterparty credit risk by contracting only with
counterparties that have investment grade credit ratings, establishing and maintaining collateral
requirements based upon credit ratings, and entering into netting agreements. Netting agreements provide
for the calculation of the net amount of all receivables and payables under all transactions covered by the
netting agreement between Farmer Mac and a single counterparty. Farmer Mac's exposure to credit risk
related to its financial derivatives is represented by those counterparties for which Farmer Mac has a net
receivable, including the effect of any netting arrangements. As of December 31, 2013 and 2012, Farmer
Mac's credit exposure to interest rate swap counterparties, excluding netting arrangements and any
adjustment for nonperformance risk, but including accrued interest, was $25.1 million and $37.1 million,
respectively; however, including netting arrangements and accrued interest, Farmer Mac's credit exposure
was $3.3 million and $2.4 million as of December 31, 2013 and 2012, respectively. As of December 31,
2013 and 2012, Farmer Mac held no cash and $1.7 million, respectively, as collateral for its derivatives in
net asset positions, resulting in uncollateralized net asset positions of $3.0 million and $0.8 million,
respectively. Farmer Mac records cash held as collateral as an increase in the balance of cash and cash
equivalents and an increase in the balance of accounts payable and accrued expenses.
In the normal course of business, Farmer Mac and its counterparties enforce the collateral requirements
contained in the related derivative contracts. Under these collateral requirements, the amount of collateral
posted is typically based on the net fair value of all derivative contracts with the counterparty, i.e.,
derivative assets net of derivative liabilities at the counterparty level. If Farmer Mac were to default under
a derivative contract (such as the failure to pay amounts when due, any other material breach of the
agreement that remains unremedied, a material default under another of Farmer Mac's credit agreements,
or bankruptcy, insolvency or receivership), the related counterparty could request payment or full
collateralization on the derivative contract. In addition, if Farmer Mac ceases to be a federally chartered
instrumentality of the United States, the related counterparty could request full collateralization on the
derivative contract. As of December 31, 2013 and 2012, 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 $92.0 million and $168.0 million, respectively; however, including netting
arrangements and accrued interest, the fair value of Farmer Mac's derivatives in a net liability position at
the counterparty level, was $74.8 million and $135.8 million as of December 31, 2013 and 2012,
respectively. Farmer Mac posted cash of $9.8 million and investment securities with a fair value of $1.5
million as of December 31, 2013 and posted cash of $60.3 million as of December 31, 2012 as collateral
for its derivatives in net liability positions. Farmer Mac records posted cash as a reduction in the
outstanding balance of cash and cash equivalents and an increase in the balance of prepaid expenses and
other assets. The investment securities posted as collateral are included in the investment securities
balances on the consolidated balance sheets. If Farmer Mac had breached certain provisions of the
derivative contracts as of December 31, 2013 and 2012, it could have been required to settle its
obligations under the agreements or post additional collateral of $63.5 million and $75.5 million,
respectively. As of December 31, 2013 and 2012, 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.
157
158
Effective in second quarter 2013, Farmer Mac expanded its use of centrally-cleared derivatives by
clearing through a clearinghouse certain interest rate swaps. Farmer Mac posts initial and variation
margin to the clearinghouses through which centrally-cleared derivatives and futures contracts are traded.
These collateral postings expose Farmer Mac to institutional credit risk in the event that either the
clearinghouse or the futures commission merchant that Farmer Mac uses to post collateral to the
clearinghouse fails to meet its obligations. Conversely, the use of centrally-cleared derivatives mitigates
Farmer Mac's credit risk to individual counterparties because clearinghouses assume the credit risk among
counterparties in centrally-cleared derivatives transactions. Of the $6.6 billion notional amount of interest
rate swaps outstanding as of December 31, 2013, $2.3 billion were cleared through swap clearinghouses.
Interest Rate Risk:
Farmer Mac uses financial derivatives to manage its interest rate risk exposure by effectively modifying
the interest rate reset or maturity characteristics of certain assets and liabilities and by locking in the rates
for certain forecasted issuances of liabilities. The primary financial derivatives Farmer Mac uses include
interest rate swaps and forward sale contracts. Farmer Mac uses interest rate swaps to assume fixed rate
interest payments in exchange for floating rate interest payments and vice versa. Depending on the
economic hedging relationship, the effects of these agreements are (a) the conversion of long-term fixed
rate assets to shorter-term floating rate assets, (b) the conversion of variable rate liabilities to longer-term
fixed rate liabilities, or (c) the reduction of the variability of future changes in interest rates on forecasted
issuances of liabilities. The contractual amounts (net interest settlements) due under these agreements that
are not designated in hedging relationships are recorded as "Gains/(losses) on financial derivatives and
hedging activities" in the consolidated statements of operations.
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 December 31, 2013 and December 31,
2012 and the effects of financial derivatives on the consolidated statements of operations for the years
ended December 31, 2013 and 2012:
Table 6.1
December 31, 2013
Fair Value
Weighted-
Weighted-
Weighted-
Average
Pay Rate
Average
Receive
Rate
Average
Forward
Price
Weighted-
Average
Remaining
Life
(in years)
(dollars in thousands)
Notional
Amount
Asset
(Liability)
Fair value hedges:
Interest rate swaps:
Cash flow hedges:
Interest rate swaps:
No hedge designation:
Interest rate swaps:
Pay fixed non-callable
Receive fixed non-callable
Receive fixed callable
Basis swaps
Agency forwards
Treasury futures
Credit valuation adjustment
Collateral (received)/pledged
Net amount
Pay fixed non-callable
$
900,000
$
— $ (28,989)
2.25%
0.24%
Pay fixed non-callable
$
10,000
$
68
$
— 2.50%
0.48%
4.63%
0.27%
0.10%
0.32%
0.24%
0.70%
0.65%
0.29%
98.91
123.02
806,596
4,324,663
175,000
404,288
65,704
5,600
7,570
11,836
83
276
86
—
(201)
(45,360)
(262)
(934)
(318)
—
(1)
156
$
$
—
9,844
19,718
$ (65,864)
Total financial derivatives
$ 6,691,851
19,718
$ (75,708)
3.25
6.95
4.86
0.53
3.30
1.52
159
160
Effective in second quarter 2013, Farmer Mac expanded its use of centrally-cleared derivatives by
clearing through a clearinghouse certain interest rate swaps. Farmer Mac posts initial and variation
margin to the clearinghouses through which centrally-cleared derivatives and futures contracts are traded.
These collateral postings expose Farmer Mac to institutional credit risk in the event that either the
clearinghouse or the futures commission merchant that Farmer Mac uses to post collateral to the
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 December 31, 2013 and December 31,
2012 and the effects of financial derivatives on the consolidated statements of operations for the years
ended December 31, 2013 and 2012:
clearinghouse fails to meet its obligations. Conversely, the use of centrally-cleared derivatives mitigates
Table 6.1
Farmer Mac's credit risk to individual counterparties because clearinghouses assume the credit risk among
counterparties in centrally-cleared derivatives transactions. Of the $6.6 billion notional amount of interest
rate swaps outstanding as of December 31, 2013, $2.3 billion were cleared through swap clearinghouses.
December 31, 2013
Fair Value
Notional
Amount
Asset
(Liability)
Weighted-
Average
Pay Rate
Weighted-
Average
Receive
Rate
Weighted-
Average
Forward
Price
Weighted-
Average
Remaining
Life
(in years)
(dollars in thousands)
Fair value hedges:
Interest rate swaps:
Pay fixed non-callable
$
900,000
$
— $ (28,989)
2.25%
0.24%
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable
$
10,000
$
68
$
— 2.50%
0.48%
No hedge designation:
Interest rate swaps:
Pay fixed non-callable
Receive fixed non-callable
Receive fixed callable
Basis swaps
Agency forwards
Treasury futures
Credit valuation adjustment
806,596
4,324,663
175,000
404,288
65,704
5,600
Total financial derivatives
$ 6,691,851
Collateral (received)/pledged
Net amount
7,570
11,836
83
276
86
—
(201)
(45,360)
(262)
(934)
(318)
—
(1)
156
$
$
19,718
$ (75,708)
—
9,844
19,718
$ (65,864)
4.63%
0.27%
0.10%
0.32%
0.24%
0.70%
0.65%
0.29%
98.91
123.02
3.25
6.95
4.86
0.53
3.30
1.52
Interest Rate Risk:
Farmer Mac uses financial derivatives to manage its interest rate risk exposure by effectively modifying
the interest rate reset or maturity characteristics of certain assets and liabilities and by locking in the rates
for certain forecasted issuances of liabilities. The primary financial derivatives Farmer Mac uses include
interest rate swaps and forward sale contracts. Farmer Mac uses interest rate swaps to assume fixed rate
interest payments in exchange for floating rate interest payments and vice versa. Depending on the
economic hedging relationship, the effects of these agreements are (a) the conversion of long-term fixed
rate assets to shorter-term floating rate assets, (b) the conversion of variable rate liabilities to longer-term
fixed rate liabilities, or (c) the reduction of the variability of future changes in interest rates on forecasted
issuances of liabilities. The contractual amounts (net interest settlements) due under these agreements that
are not designated in hedging relationships are recorded as "Gains/(losses) on financial derivatives and
hedging activities" in the consolidated statements of operations.
159
160
December 31, 2012
Fair Value
Notional
Amount
Asset
(Liability)
Weighted-
Average
Pay Rate
Weighted-
Average
Receive
Rate
Weighted-
Average
Forward
Price
Weighted-
Average
Remaining
Life
(in years)
(dollars in thousands)
Fair value hedges:
Interest rate swaps:
Pay fixed non-callable
$
950,000
$
— $ (58,758)
2.20%
0.31%
No hedge designation:
Interest rate swaps:
Pay fixed non-callable
805,622
357
(91,205)
Receive fixed non-callable
4,135,149
30,338
Receive fixed callable
Basis swaps
Agency forwards
Treasury futures
Credit valuation adjustment
245,000
609,262
59,035
11,200
6
499
—
—
(27)
(211)
(238)
(784)
(58)
(12)
584
4.83%
0.33%
0.15%
0.43%
0.32%
0.85%
0.55%
0.36%
101.22
129.77
4.07
4.14
0.74
3.89
1.29
Total financial derivatives
$ 6,815,268
Collateral (received)/pledged
Net amount
Table 6.2
$
$
31,173
$ (150,682)
(1,650)
60,311
29,523
$ (90,371)
Gains/(Losses) on Financial Derivatives and Hedging Activities
For the Year Ended December 31,
2012
(in thousands)
2011
2013
Fair value hedges:
Interest rate swaps (1)
Hedged items
Gains on hedging activities
No hedge designation:
Interest rate swaps
Agency forwards
Treasury futures
Credit default swaps
$
29,538
$
(18,230)
11,308
21,355
(1,002)
103
—
20,456
(404) $
6,388
5,984
(24,763)
(828)
(129)
(93)
(25,813)
—
—
—
(86,402)
(5,710)
(513)
(20)
(92,645)
(92,645)
Gains/(losses) on financial derivatives not designated in
hedging relationships
Gains/(losses) on financial derivatives and hedging
activities
$
31,764
$
(19,829) $
hedge most of the interest rate basis risk related to loans Farmer Mac purchases that pay a Constant
Maturity Treasury-based rate and the discount notes Farmer Mac issues to fund the loan purchases. The
pricing of discount notes is closely correlated to LIBOR rates. Farmer Mac recorded unrealized gains on
those outstanding basis swaps for the years ended December 31, 2013, 2012, and 2011 of $0.5 million,
$0.6 million, and $2.1 million, respectively.
7. NOTES PAYABLE
Farmer Mac's borrowings consist of discount notes and medium-term notes, both of which are unsecured
general obligations of Farmer Mac. Discount notes generally have original maturities of 1 year or less,
whereas medium-term notes generally have maturities of 6 months to 15 years.
The following tables set forth information related to Farmer Mac's borrowings as of December 31, 2013
and 2012:
Table 7.1
Outstanding as of December 31
Average Outstanding During the Year
Amount
Rate
Amount
Rate
December 31, 2013
(dollars in thousands)
$
4,365,045
167,617
0.18%
0.16%
Due within one year:
Discount notes
Medium-term notes
Current portion of long-term notes
Total due within one year
Due after one year:
Medium-term notes due in:
2015
2016
2017
2018
Thereafter
Total
$
$
$
4,880,971
179,999
2,277,811
7,338,781
1,411,140
1,290,629
528,322
675,968
1,095,110
5,001,169
0.12%
0.17%
1.79%
0.64%
1.14%
1.33%
1.23%
1.33%
2.85%
1.60%
1.03%
Total due after one year
$
12,339,950
(1)
Included in the assessment of hedge effectiveness at December 31, 2013, but excluded from the amounts in the table, were losses of $11.8 million for
the year ended December 31, 2013, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amounts
recognized as hedge ineffectiveness for the year ended December 31, 2013 were gains of $0.5 million. The comparable amounts at December 31, 2012
were losses of $6.1 million for the year ended December 31, 2012 attributable to the fair value of the swaps at the inception of the hedging relationship
and, accordingly, gains of $0.1 million for the the year ended December 31, 2012 attributable to hedge ineffectiveness.
As of December 31, 2013, Farmer Mac had outstanding basis swaps with Zions First National Bank, a
related party, with a total notional amount of $29.3 million and a fair value of $(0.2) million, compared to
$49.3 million and $(0.7) million, respectively, as of December 31, 2012. Under the terms of those basis
swaps, Farmer Mac pays Constant Maturity Treasury-based rates and receives LIBOR. Those swaps
161
162
December 31, 2012
Fair Value
Weighted-
Weighted-
Weighted-
Average
Pay Rate
Average
Receive
Rate
Average
Forward
Price
Weighted-
Average
Remaining
Life
(in years)
(dollars in thousands)
Notional
Amount
Asset
(Liability)
hedge most of the interest rate basis risk related to loans Farmer Mac purchases that pay a Constant
Maturity Treasury-based rate and the discount notes Farmer Mac issues to fund the loan purchases. The
pricing of discount notes is closely correlated to LIBOR rates. Farmer Mac recorded unrealized gains on
those outstanding basis swaps for the years ended December 31, 2013, 2012, and 2011 of $0.5 million,
$0.6 million, and $2.1 million, respectively.
7. NOTES PAYABLE
Farmer Mac's borrowings consist of discount notes and medium-term notes, both of which are unsecured
general obligations of Farmer Mac. Discount notes generally have original maturities of 1 year or less,
whereas medium-term notes generally have maturities of 6 months to 15 years.
The following tables set forth information related to Farmer Mac's borrowings as of December 31, 2013
and 2012:
101.22
129.77
Table 7.1
December 31, 2013
Outstanding as of December 31
Average Outstanding During the Year
Amount
Rate
Amount
Rate
(dollars in thousands)
$
4,365,045
167,617
0.18%
0.16%
Due within one year:
Discount notes
Medium-term notes
Current portion of long-term notes
Total due within one year
Due after one year:
Medium-term notes due in:
2015
2016
2017
2018
Thereafter
Total due after one year
$
$
$
4,880,971
179,999
2,277,811
7,338,781
1,411,140
1,290,629
528,322
675,968
1,095,110
5,001,169
Total
$
12,339,950
0.12%
0.17%
1.79%
0.64%
1.14%
1.33%
1.23%
1.33%
2.85%
1.60%
1.03%
Fair value hedges:
Interest rate swaps:
No hedge designation:
Interest rate swaps:
Receive fixed callable
Basis swaps
Agency forwards
Treasury futures
Credit valuation adjustment
Collateral (received)/pledged
Net amount
Table 6.2
Fair value hedges:
Interest rate swaps (1)
Hedged items
Gains on hedging activities
No hedge designation:
Interest rate swaps
Agency forwards
Treasury futures
Credit default swaps
Pay fixed non-callable
$
950,000
$
— $ (58,758)
2.20%
0.31%
Pay fixed non-callable
805,622
357
(91,205)
Receive fixed non-callable
4,135,149
30,338
4.83%
0.33%
0.15%
0.43%
0.32%
0.85%
0.55%
0.36%
245,000
609,262
59,035
11,200
6
499
—
—
(27)
(211)
(238)
(784)
(58)
(12)
584
$
$
(1,650)
60,311
29,523
$ (90,371)
Total financial derivatives
$ 6,815,268
31,173
$ (150,682)
Gains/(Losses) on Financial Derivatives and Hedging Activities
For the Year Ended December 31,
2013
2011
2012
(in thousands)
$
29,538
$
(18,230)
11,308
21,355
(1,002)
103
—
20,456
(404) $
6,388
5,984
(24,763)
(828)
(129)
(93)
(25,813)
Gains/(losses) on financial derivatives not designated in
hedging relationships
Gains/(losses) on financial derivatives and hedging
activities
$
31,764
$
(19,829) $
(1)
Included in the assessment of hedge effectiveness at December 31, 2013, but excluded from the amounts in the table, were losses of $11.8 million for
the year ended December 31, 2013, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amounts
recognized as hedge ineffectiveness for the year ended December 31, 2013 were gains of $0.5 million. The comparable amounts at December 31, 2012
were losses of $6.1 million for the year ended December 31, 2012 attributable to the fair value of the swaps at the inception of the hedging relationship
and, accordingly, gains of $0.1 million for the the year ended December 31, 2012 attributable to hedge ineffectiveness.
As of December 31, 2013, Farmer Mac had outstanding basis swaps with Zions First National Bank, a
related party, with a total notional amount of $29.3 million and a fair value of $(0.2) million, compared to
$49.3 million and $(0.7) million, respectively, as of December 31, 2012. Under the terms of those basis
swaps, Farmer Mac pays Constant Maturity Treasury-based rates and receives LIBOR. Those swaps
4.07
4.14
0.74
3.89
1.29
—
—
—
(86,402)
(5,710)
(513)
(20)
(92,645)
(92,645)
161
162
December 31, 2012
Outstanding as of December 31
Average Outstanding During the Year
Amount
Rate
Amount
Rate
(dollars in thousands)
Table 7.3
$
5,181,559
84,961
0.18%
0.20%
Debt with interest rate resets in:
Due within one year:
Discount notes
Medium-term notes
Current portion of long-term notes
Due after one year:
Medium-term notes due in:
2014
2015
2016
2017
Thereafter
Total due after one year
$
$
$
4,966,010
194,989
1,406,367
6,567,366
1,679,364
1,128,413
863,799
616,187
746,976
5,034,739
Total
$
11,602,105
0.16%
0.15%
0.80%
0.30%
2.36%
1.40%
1.74%
1.19%
2.97%
1.99%
1.03%
The maximum amount of Farmer Mac's discount notes outstanding at any month end during each of the
years ended December 31, 2013 and 2012 was $4.9 billion and $5.7 billion, respectively.
Callable medium-term notes give Farmer Mac the option to redeem the debt at par value on a specified
call date or at any time on or after a specified call date. The following table summarizes by maturity date,
the amounts and costs for Farmer Mac debt callable in 2014 as of December 31, 2013:
Table 7.2
Debt Callable in 2014 as of December 31, 2013
Maturity
Amount
(dollars in thousands)
2015
2016
2017
2018
Thereafter
$
$
83,927
160,898
68,935
143,892
233,202
690,854
Rate
0.49%
0.53%
0.89%
1.12%
2.59%
1.38%
The following schedule summarizes the earliest interest rate reset date of total borrowings outstanding as
of December 31, 2013, including callable and non-callable medium-term notes, assuming callable notes
are redeemed at the initial call date:
Earliest Interest Rate Reset Date of Borrowings Outstanding
Amount
Weighted-Average Rate
(dollars in thousands)
2014
2015
2016
2017
2018
Thereafter
Total
$
$
8,439,610
1,027,216
1,029,753
459,386
532,076
851,909
12,339,950
0.68%
1.45%
1.56%
1.29%
1.38%
2.95%
1.03%
During 2013 and 2012, Farmer Mac called $0.4 billion and $0.8 billion of callable medium-term notes,
respectively.
Authority to Borrow from the U.S. Treasury
Farmer Mac's statutory charter authorizes it to borrow up to $1.5 billion from the U.S. Treasury through
the issuance of debt obligations to the U.S. Treasury. Any funds borrowed from the U.S. Treasury may be
used solely for the purpose of fulfilling Farmer Mac's guarantee obligations. Any debt obligations issued
by Farmer Mac under this authority would bear interest at a rate determined by the U.S. Treasury, taking
into consideration the average rate on outstanding marketable obligations of the United States as of the
last day of the last calendar month ending before the date of the purchase of the obligations from Farmer
Mac. The charter requires Farmer Mac to repurchase any of its debt obligations held by the U.S. Treasury
within a reasonable time. As of December 31, 2013, Farmer Mac had not utilized this borrowing authority
and does not expect to utilize this borrowing authority in the future.
Gains on Repurchase of Outstanding Debt
In 2013, Farmer Mac repurchased $29.1 million of outstanding debt at a gain of $1.5 million; no
outstanding debt repurchases were made in 2012 or 2011.
163
164
Outstanding as of December 31
Average Outstanding During the Year
Amount
Rate
Amount
Rate
December 31, 2012
(dollars in thousands)
$
5,181,559
84,961
0.18%
0.20%
Table 7.3
Earliest Interest Rate Reset Date of Borrowings Outstanding
Amount
Weighted-Average Rate
(dollars in thousands)
Debt with interest rate resets in:
2014
2015
2016
2017
2018
Thereafter
Total
$
$
8,439,610
1,027,216
1,029,753
459,386
532,076
851,909
12,339,950
0.68%
1.45%
1.56%
1.29%
1.38%
2.95%
1.03%
During 2013 and 2012, Farmer Mac called $0.4 billion and $0.8 billion of callable medium-term notes,
respectively.
Authority to Borrow from the U.S. Treasury
Farmer Mac's statutory charter authorizes it to borrow up to $1.5 billion from the U.S. Treasury through
the issuance of debt obligations to the U.S. Treasury. Any funds borrowed from the U.S. Treasury may be
used solely for the purpose of fulfilling Farmer Mac's guarantee obligations. Any debt obligations issued
by Farmer Mac under this authority would bear interest at a rate determined by the U.S. Treasury, taking
into consideration the average rate on outstanding marketable obligations of the United States as of the
last day of the last calendar month ending before the date of the purchase of the obligations from Farmer
Mac. The charter requires Farmer Mac to repurchase any of its debt obligations held by the U.S. Treasury
within a reasonable time. As of December 31, 2013, Farmer Mac had not utilized this borrowing authority
and does not expect to utilize this borrowing authority in the future.
Gains on Repurchase of Outstanding Debt
In 2013, Farmer Mac repurchased $29.1 million of outstanding debt at a gain of $1.5 million; no
outstanding debt repurchases were made in 2012 or 2011.
Due within one year:
Discount notes
Medium-term notes
Current portion of long-term notes
Due after one year:
Medium-term notes due in:
2014
2015
2016
2017
Thereafter
Total
$
$
$
4,966,010
194,989
1,406,367
6,567,366
1,679,364
1,128,413
863,799
616,187
746,976
5,034,739
0.16%
0.15%
0.80%
0.30%
2.36%
1.40%
1.74%
1.19%
2.97%
1.99%
1.03%
Total due after one year
$
11,602,105
The maximum amount of Farmer Mac's discount notes outstanding at any month end during each of the
years ended December 31, 2013 and 2012 was $4.9 billion and $5.7 billion, respectively.
Callable medium-term notes give Farmer Mac the option to redeem the debt at par value on a specified
call date or at any time on or after a specified call date. The following table summarizes by maturity date,
the amounts and costs for Farmer Mac debt callable in 2014 as of December 31, 2013:
Table 7.2
Debt Callable in 2014 as of December 31, 2013
Maturity
Amount
(dollars in thousands)
2015
2016
2017
2018
Thereafter
$
$
83,927
160,898
68,935
143,892
233,202
690,854
Rate
0.49%
0.53%
0.89%
1.12%
2.59%
1.38%
The following schedule summarizes the earliest interest rate reset date of total borrowings outstanding as
of December 31, 2013, including callable and non-callable medium-term notes, assuming callable notes
are redeemed at the initial call date:
163
164
8. LOANS AND ALLOWANCE FOR LOSSES
Allowances 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. The following table displays the composition of the loan balances as of December 31, 2013 and
2012:
Table 8.1
December 31, 2013
In
Consolidated
Trusts
Unsecuritized
Total
December 31, 2012
In
Consolidated
Trusts
Unsecuritized
Total
The following is a summary of the changes in the allowance for losses for each year in the three-year
(in thousands)
period ended December 31, 2013:
Farm & Ranch
Rural Utilities
Total unpaid principal balance (1)
Unamortized premiums, discounts and
other cost basis adjustments
Lower of cost or fair value adjustment
on loans held for sale
$
1,875,958
$
259,509
$
2,135,467
$
1,519,415
$
160,436
$
1,679,851
698,010
2,573,968
354,241
613,750
1,052,251
3,187,718
663,097
2,182,512
368,848
529,284
1,031,945
2,711,796
(3,843)
16,239
12,396
981
34,291
35,272
—
—
—
(5,943)
—
(5,943)
Total loans
$
2,570,125
$
629,989
$
3,200,114
$
2,177,550
$
563,575
$
2,741,125
Balance as of January 1, 2011
9,803
$
10,312
$
20,115
Loans held for investment, at amortized
cost
Loans held for sale, at lower of cost or
fair value
$
2,570,125
$
629,989
$
3,200,114
$
1,503,559
$
563,575
$
2,067,134
—
—
—
673,991
—
673,991
Total loans
2,570,125
629,989
3,200,114
2,177,550
563,575
2,741,125
Allowance for loan losses
(6,587)
(279)
(6,866)
(10,986)
(365)
(11,351)
Total loans, net of allowance
$
2,563,538
$
629,710
$
3,193,248
$
2,166,564
$
563,210
$
2,729,774
(1) Unpaid principal balance is the basis of presentation in disclosures of outstanding balances for Farmer Mac's lines of business.
165
Farmer Mac maintains an allowance for losses to cover estimated probable losses on loans held and loans
underlying long-term standby purchase commitments ("LTSPCs") and off-balance sheet Farmer Mac
Guaranteed Securities. As of December 31, 2013 and 2012, Farmer Mac recorded allowances for losses of
$13.3 million and $16.9 million, respectively. See Note 5 and Note 12 for more information about Farmer
Mac Guaranteed Securities. Farmer Mac Guaranteed Securities do not include AgVantage securities with
regard to the allowance for losses discussion.
Farmer Mac's allowance for losses is presented in two components on its consolidated balance sheets:
an "Allowance for loan losses" on loans held; and
a "Reserve for losses" on loans underlying LTSPCs and Farmer Mac Guaranteed Securities.
•
•
Table 8.2
Allowance
for Loan
Losses
Reserve
for Losses
(in thousands)
Total
Allowance
for Losses
610
(252)
3,691
(2,501)
(481)
(4,004)
(2,957)
—
(1,816)
—
929
—
(2,347)
(252)
17,516
1,875
(2,501)
448
(4,004)
Provision for/(release of) losses
Charge-offs
Provision for/(release of) losses
Charge-offs
(Release of)/provision for losses
Charge-offs
Balance as of December 31, 2012
11,351
$
5,539
$
16,890
Balance as of December 31, 2013
6,866
$
6,468
$
13,334
Balance as of December 31, 2011
10,161
$
7,355
$
During 2013, Farmer Mac recorded releases to its allowance for loan losses of $0.5 million and provisions
to its reserve for losses of $0.9 million. Farmer Mac also recorded $4.0 million of charge-offs to its
allowance for loan losses during 2013. The charge-offs recorded in 2013 included a $3.6 million charge-
off related to one ethanol loan that transitioned to real estate owned ("REO") during first quarter 2013 and
for which Farmer Mac had previously provided a specific allowance.
During 2012, Farmer Mac recorded provisions to its allowance for loan losses of $3.7 million and releases
from its reserve for losses of $1.8 million. In fourth quarter 2012, Farmer Mac purchased one defaulted
ethanol loan pursuant to the terms of an LTSPC agreement. This resulted in the reclassification of a
specific allowance of $3.2 million from the reserve for losses to the allowance for loan losses. The
provision for/(release of) losses for 2012 reflects this reclassification as well as an increase in the specific
allowance for this loan during 2012 prior to purchase. Farmer Mac also recorded charge-offs of $2.5
million to its allowance for loan losses during 2012.
$
$
$
$
166
8. LOANS AND ALLOWANCE FOR LOSSES
Allowances for Losses
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. The following table displays the composition of the loan balances as of December 31, 2013 and
Loans
2012:
Table 8.1
December 31, 2013
In
Consolidated
Trusts
December 31, 2012
In
Consolidated
Trusts
Unsecuritized
Total
Unsecuritized
Total
(in thousands)
$
1,875,958
$
259,509
$
2,135,467
$
1,519,415
$
160,436
$
1,679,851
698,010
2,573,968
354,241
613,750
1,052,251
3,187,718
663,097
2,182,512
368,848
529,284
1,031,945
2,711,796
(3,843)
16,239
12,396
981
34,291
35,272
Farm & Ranch
Rural Utilities
Total unpaid principal balance (1)
Unamortized premiums, discounts and
other cost basis adjustments
Lower of cost or fair value adjustment
on loans held for sale
Total loans
$
2,570,125
$
629,989
$
3,200,114
$
2,177,550
$
563,575
$
2,741,125
—
—
—
(5,943)
—
(5,943)
Loans held for investment, at amortized
Loans held for sale, at lower of cost or
cost
fair value
Total loans
$
2,570,125
$
629,989
$
3,200,114
$
1,503,559
$
563,575
$
2,067,134
—
—
—
673,991
—
673,991
2,570,125
629,989
3,200,114
2,177,550
563,575
2,741,125
Allowance for loan losses
(6,587)
(279)
(6,866)
(10,986)
(365)
(11,351)
Total loans, net of allowance
$
2,563,538
$
629,710
$
3,193,248
$
2,166,564
$
563,210
$
2,729,774
(1) Unpaid principal balance is the basis of presentation in disclosures of outstanding balances for Farmer Mac's lines of business.
Farmer Mac maintains an allowance for losses to cover estimated probable losses on loans held and loans
underlying long-term standby purchase commitments ("LTSPCs") and off-balance sheet Farmer Mac
Guaranteed Securities. As of December 31, 2013 and 2012, Farmer Mac recorded allowances for losses of
$13.3 million and $16.9 million, respectively. See Note 5 and Note 12 for more information about Farmer
Mac Guaranteed Securities. Farmer Mac Guaranteed Securities do not include AgVantage securities with
regard to the allowance for losses discussion.
Farmer Mac's allowance for losses is presented in two components on its consolidated balance sheets:
•
•
an "Allowance for loan losses" on loans held; and
a "Reserve for losses" on loans underlying LTSPCs and Farmer Mac Guaranteed Securities.
The following is a summary of the changes in the allowance for losses for each year in the three-year
period ended December 31, 2013:
Table 8.2
Balance as of January 1, 2011
Provision for/(release of) losses
Charge-offs
Balance as of December 31, 2011
Provision for/(release of) losses
Charge-offs
Balance as of December 31, 2012
(Release of)/provision for losses
Charge-offs
Balance as of December 31, 2013
Allowance
for Loan
Losses
Reserve
for Losses
(in thousands)
Total
Allowance
for Losses
$
$
$
$
9,803
$
10,312
$
20,115
610
(252)
(2,957)
—
10,161
$
7,355
$
3,691
(2,501)
(1,816)
—
(2,347)
(252)
17,516
1,875
(2,501)
11,351
$
5,539
$
16,890
(481)
(4,004)
929
—
448
(4,004)
6,866
$
6,468
$
13,334
During 2013, Farmer Mac recorded releases to its allowance for loan losses of $0.5 million and provisions
to its reserve for losses of $0.9 million. Farmer Mac also recorded $4.0 million of charge-offs to its
allowance for loan losses during 2013. The charge-offs recorded in 2013 included a $3.6 million charge-
off related to one ethanol loan that transitioned to real estate owned ("REO") during first quarter 2013 and
for which Farmer Mac had previously provided a specific allowance.
During 2012, Farmer Mac recorded provisions to its allowance for loan losses of $3.7 million and releases
from its reserve for losses of $1.8 million. In fourth quarter 2012, Farmer Mac purchased one defaulted
ethanol loan pursuant to the terms of an LTSPC agreement. This resulted in the reclassification of a
specific allowance of $3.2 million from the reserve for losses to the allowance for loan losses. The
provision for/(release of) losses for 2012 reflects this reclassification as well as an increase in the specific
allowance for this loan during 2012 prior to purchase. Farmer Mac also recorded charge-offs of $2.5
million to its allowance for loan losses during 2012.
165
166
During 2011, Farmer Mac recorded provisions to its allowance for loan losses of $0.6 million and releases
from its reserve for losses of $3.0 million. In 2011, Farmer Mac purchased two defaulted loans pursuant
to the terms of an LTSPC agreement. This resulted in the reclassification of $1.8 million of specific
allowance, which had been recorded in 2010, from the reserve for losses to allowance for loan losses. The
provision for/(release of) losses for 2011 reflects this reclassification as well as the decline in the
estimated probable losses related to Farmer Mac's exposure to the ethanol and dairy industries. Farmer
Mac also recorded charge-offs of $0.3 million to its allowance for loan losses during 2011.
The following tables present the changes in the allowance for losses for the year ended December 31,
2013 and 2012 by commodity type:
Table 8.3
For the Year Ended December 31, 2013
Crops
Permanent
Plantings
Livestock
Part-time
Farm
Ag. Storage and
Processing
(including ethanol
facilities)
Other
Total
(in thousands)
2,589
$
2,316
$
1,534
$
784
$
9,661
$
(420)
(45)
(130)
—
(263)
—
4
(334)
1,256
(3,625)
2,124
$
2,186
$
1,271
$
454
$
7,292
$
6
1
—
7
$
16,890
448
(4,004)
$
13,334
For the Year Ended December 31, 2012
Crops
Permanent
Plantings
Livestock
Part-time
Farm
Ag. Storage and
Processing
(including ethanol
facilities)
Other
Total
(in thousands)
4,133
$
3,099
$
1,697
$
509
(2,053)
(408)
(375)
(163)
—
477
380
(73)
$
8,106
$
1,555
—
2,589
$
2,316
$
1,534
$
784
$
9,661
$
4
2
—
6
$
17,516
1,875
(2,501)
$
16,890
$
$
$
$
For the Year Ended:
Beginning Balance
(Release of)/provision for losses
Charge-offs
Ending Balance
For the Year Ended:
Beginning Balance
Provision for/(release of) losses
Charge-offs
Ending Balance
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 allowance for losses by impairment
method and commodity type as of December 31, 2013 and 2012:
Table 8.4
Ending Balance:
Collectively evaluated for
impairment:
On-balance sheet
Off-balance sheet
Total
Individually evaluated for
impairment:
Total Farm & Ranch loans:
On-balance sheet
Off-balance sheet
Total
On-balance sheet
Off-balance sheet
Total
Allowance for Losses:
Collectively evaluated for
impairment:
On-balance sheet
Off-balance sheet
Total
Individually evaluated for
impairment:
Total Farm & Ranch loans:
On-balance sheet
Off-balance sheet
Total
On-balance sheet
Off-balance sheet
Total
As of December 31, 2013
Ag.
Storage and
Processing
(including
ethanol
facilities)
Crops
Permanent
Plantings
Livestock
Part-time
Farm
(in thousands)
Other
Total
$ 1,363,861
$
295,037
$
319,665
$
39,940
$
32,636
359
$ 2,051,498
1,279,887
567,932
912,397
109,884
138,282
8,159
3,016,541
$ 2,643,748
$
862,969
$ 1,232,062
$
149,824
$
170,918
8,518
$ 5,068,039
21,147
1,962
23,109
$
$
41,441
3,414
44,855
$
$
10,844
3,199
14,043
10,422
2,497
12,919
— $
—
— $
115
—
115
$
$
83,969
11,072
95,041
$ 1,385,008
$
336,478
$
330,509
1,281,849
571,346
915,596
50,362
112,381
32,636
138,282
474
$ 2,135,467
8,159
3,027,613
$ 2,666,857
$
907,824
$ 1,246,105
$
162,743
$
170,918
8,633
$ 5,163,080
1,321
397
1,718
362
44
406
1,683
441
2,124
$
$
$
$
$
$
325
159
484
1,641
61
1,702
1,966
220
2,186
$
$
$
$
$
$
436
642
1,078
140
53
193
576
695
1,271
2,290
5,002
7,292
— $
—
— $
2,290
5,002
7,292
$
$
— $
4,392
6,246
$
10,638
4
4
3
3
7
7
— $
$
— $
2,474
222
2,696
6,866
6,468
$
13,334
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
20
42
62
331
61
392
351
103
454
$
$
$
$
$
$
$
$
$
$
$
$
$
$
167
168
During 2011, Farmer Mac recorded provisions to its allowance for loan losses of $0.6 million and releases
from its reserve for losses of $3.0 million. In 2011, Farmer Mac purchased two defaulted loans pursuant
to the terms of an LTSPC agreement. This resulted in the reclassification of $1.8 million of specific
allowance, which had been recorded in 2010, from the reserve for losses to allowance for loan losses. The
provision for/(release of) losses for 2011 reflects this reclassification as well as the decline in the
estimated probable losses related to Farmer Mac's exposure to the ethanol and dairy industries. Farmer
Mac also recorded charge-offs of $0.3 million to its allowance for loan losses during 2011.
The following tables present the changes in the allowance for losses for the year ended December 31,
2013 and 2012 by commodity type:
Table 8.3
Crops
Permanent
Plantings
Livestock
Farm
facilities)
Other
Total
For the Year Ended December 31, 2013
Ag. Storage and
Processing
Part-time
(including ethanol
(in thousands)
For the Year Ended:
Beginning Balance
Charge-offs
Ending Balance
(Release of)/provision for losses
2,589
$
2,316
$
1,534
$
784
$
9,661
$
$
16,890
(420)
(45)
(130)
—
(263)
—
4
(334)
1,256
(3,625)
448
(4,004)
2,124
$
2,186
$
1,271
$
454
$
7,292
$
$
13,334
For the Year Ended December 31, 2012
Ag. Storage and
Processing
Part-time
(including ethanol
Crops
Permanent
Plantings
Livestock
Farm
facilities)
Other
Total
For the Year Ended:
Beginning Balance
Provision for/(release of) losses
Charge-offs
Ending Balance
4,133
$
3,099
$
1,697
$
$
8,106
$
$
17,516
509
(2,053)
(408)
(375)
(163)
—
1,555
—
1,875
(2,501)
2,589
$
2,316
$
1,534
$
784
$
9,661
$
$
16,890
(in thousands)
477
380
(73)
6
1
—
7
4
2
—
6
$
$
$
$
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 allowance for losses by impairment
method and commodity type as of December 31, 2013 and 2012:
Table 8.4
Ending Balance:
Collectively evaluated for
impairment:
On-balance sheet
Off-balance sheet
Total
Individually evaluated for
impairment:
On-balance sheet
Off-balance sheet
Total
Total Farm & Ranch loans:
On-balance sheet
Off-balance sheet
Total
Allowance for Losses:
Collectively evaluated for
impairment:
On-balance sheet
Off-balance sheet
Total
Individually evaluated for
impairment:
On-balance sheet
Off-balance sheet
Total
Total Farm & Ranch loans:
On-balance sheet
Off-balance sheet
Total
As of December 31, 2013
Crops
Permanent
Plantings
Livestock
Part-time
Farm
(in thousands)
Ag.
Storage and
Processing
(including
ethanol
facilities)
Other
Total
$ 1,363,861
$
295,037
$
319,665
$
39,940
$
32,636
1,279,887
567,932
912,397
109,884
138,282
$ 2,643,748
$
862,969
$ 1,232,062
$
149,824
$
170,918
$
$
359
$ 2,051,498
8,159
3,016,541
8,518
$ 5,068,039
$
$
21,147
1,962
23,109
$
$
41,441
3,414
44,855
$
$
10,844
3,199
14,043
$ 1,385,008
$
336,478
$
330,509
1,281,849
571,346
915,596
$
$
$
10,422
2,497
12,919
50,362
112,381
$
$
$
— $
—
— $
115
—
115
$
$
83,969
11,072
95,041
32,636
138,282
474
$ 2,135,467
8,159
3,027,613
8,633
$ 5,163,080
$ 2,666,857
$
907,824
$ 1,246,105
$
162,743
$
170,918
$
$
$
$
2,290
5,002
7,292
— $
—
— $
2,290
5,002
7,292
$
$
— $
4,392
6,246
$
10,638
4
4
7
7
— $
3
3
$
— $
2,474
222
2,696
6,866
6,468
$
13,334
$
$
$
$
$
$
1,321
397
1,718
362
44
406
1,683
441
2,124
$
$
$
$
$
$
325
159
484
1,641
61
1,702
1,966
220
2,186
$
$
$
$
$
$
436
642
1,078
140
53
193
576
695
1,271
$
$
$
$
$
$
20
42
62
331
61
392
351
103
454
$
$
$
$
$
$
167
168
As of December 31, 2012
Crops
Permanent
Plantings
Livestock
Part-time
Farm
(in thousands)
Ag.
Storage and
Processing
(including
ethanol
facilities)
$
977,564
$
260,047
$
268,869
$
50,287
$
42,812
1,169,710
584,880
1,002,164
136,482
144,637
$ 2,147,274
$
844,927
$ 1,271,033
$
186,769
$
187,449
$
$
22,002
2,073
24,075
$
$
29,647
7,958
37,605
$
$
11,511
5,197
16,708
$
999,566
$
289,694
$
280,380
1,171,783
592,838
1,007,361
$
$
$
12,660
2,436
15,096
62,947
138,918
$
$
$
4,337
—
4,337
47,149
144,637
$ 2,171,349
$
882,532
$ 1,287,741
$
201,865
$
191,786
$
$
$
$
$
$
1,406
476
1,882
684
23
707
2,090
499
2,589
$
$
$
$
$
$
586
215
801
1,465
50
1,515
2,051
265
2,316
$
$
$
$
$
$
499
680
1,179
335
20
355
834
700
1,534
$
$
$
$
$
$
46
57
103
665
16
681
711
73
784
$
$
$
$
$
$
2,265
3,996
6,261
3,400
—
3,400
5,665
3,996
9,661
$
$
$
$
$
$
$
$
$
$
$
$
Ending Balance:
Collectively evaluated for
impairment:
On-balance sheet
Off-balance sheet
Total
Individually evaluated for
impairment:
On-balance sheet
Off-balance sheet
Total
Total Farm & Ranch loans:
On-balance sheet
Off-balance sheet
Total
Allowance for Losses:
Collectively evaluated for
impairment:
On-balance sheet
Off-balance sheet
Total
Individually evaluated for
impairment:
On-balance sheet
Off-balance sheet
Total
Total Farm & Ranch loans:
On-balance sheet
Off-balance sheet
Total
The following tables present by commodity type the unpaid principal balances, recorded investment, and
specific allowance for losses related to impaired loans and the recorded investment in loans on nonaccrual
status as of December 31, 2013 and 2012:
Other
Total
Table 8.5
— $ 1,599,579
11,000
3,048,873
11,000
$ 4,648,452
115
901
1,016
$
$
80,272
18,565
98,837
115
$ 1,679,851
11,901
3,067,438
12,016
$ 4,747,289
As of December 31, 2013
Ag. Storage and
Processing
(including
ethanol
facilities)
Other
Total
Crops
Permanent
Plantings
Livestock
Part-time
Farm
(in thousands)
Impaired Loans:
With no specific allowance:
With a specific allowance:
Recorded investment (1)
Unpaid principal balance
Associated allowance
Total:
Recorded investment
Unpaid principal balance
Associated allowance
Recorded investment
$
6,956
$
9,880
$
6,671
$
1,444
$
— $ — $ 24,951
Unpaid principal balance
6,825
9,877
6,588
1,443
—
24,733
16,697
16,284
406
23,653
23,109
406
36,146
34,978
1,702
46,026
44,855
1,702
7,600
7,455
193
14,271
14,043
193
11,554
11,476
392
12,998
12,919
392
—
—
—
—
—
—
—
119
115
3
119
115
3
72,116
70,308
2,696
97,067
95,041
2,696
(1)
Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $65.1 million
(67 percent) of impaired loans as of December 31, 2013, which resulted in a specific reserve of $1.3 million.
(2)
Includes $9.6 million of loans that are less than 90 days delinquent but which have not met Farmer Mac's performance criteria for returning to accrual
status.
$
10,231
Recorded investment of loans on
nonaccrual status (2)
$
10,812
$
15,237
$
5,344
$
5,835
$
— $ — $ 37,228
4,802
5,429
— $
5
5
— $
1
1
$
6,549
110
6,659
— $
11,351
6
6
5,539
$
16,890
169
170
As of December 31, 2012
Ag.
Storage and
Processing
(including
ethanol
facilities)
Crops
Permanent
Plantings
Livestock
Part-time
Farm
(in thousands)
Ending Balance:
Collectively evaluated for
impairment:
On-balance sheet
Off-balance sheet
Total
Individually evaluated for
impairment:
Total Farm & Ranch loans:
On-balance sheet
Off-balance sheet
Total
On-balance sheet
Off-balance sheet
Total
Allowance for Losses:
Collectively evaluated for
impairment:
On-balance sheet
Off-balance sheet
Total
Individually evaluated for
impairment:
Total Farm & Ranch loans:
On-balance sheet
Off-balance sheet
Total
On-balance sheet
Off-balance sheet
Total
$
$
$
$
$
$
$
$
$
977,564
$
260,047
$
268,869
$
50,287
$
42,812
— $ 1,599,579
1,169,710
584,880
1,002,164
136,482
144,637
11,000
3,048,873
$ 2,147,274
$
844,927
$ 1,271,033
$
186,769
$
187,449
11,000
$ 4,648,452
22,002
2,073
24,075
$
$
29,647
7,958
37,605
$
$
11,511
5,197
16,708
12,660
2,436
15,096
4,337
—
4,337
115
901
1,016
$
$
80,272
18,565
98,837
$
999,566
$
289,694
$
280,380
1,171,783
592,838
1,007,361
62,947
138,918
47,149
144,637
115
$ 1,679,851
11,901
3,067,438
$ 2,171,349
$
882,532
$ 1,287,741
$
201,865
$
191,786
12,016
$ 4,747,289
1,406
476
1,882
684
23
707
2,090
499
2,589
$
$
$
$
$
$
586
215
801
1,465
50
1,515
2,051
265
2,316
$
$
$
$
$
$
499
680
1,179
335
20
355
834
700
1,534
2,265
3,996
6,261
3,400
—
3,400
5,665
3,996
9,661
— $
4,802
5,429
$
10,231
— $
$
6,549
110
6,659
— $
11,351
5,539
$
16,890
5
5
1
1
6
6
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
46
57
103
665
16
681
711
73
784
$
$
$
$
$
$
$
$
$
$
$
$
The following tables present by commodity type the unpaid principal balances, recorded investment, and
specific allowance for losses related to impaired loans and the recorded investment in loans on nonaccrual
status as of December 31, 2013 and 2012:
Other
Total
Table 8.5
As of December 31, 2013
Crops
Permanent
Plantings
Livestock
Part-time
Farm
(in thousands)
Ag. Storage and
Processing
(including
ethanol
facilities)
Other
Total
Impaired Loans:
With no specific allowance:
Recorded investment
$
6,956
$
9,880
$
6,671
$
1,444
$
— $ — $ 24,951
Unpaid principal balance
6,825
9,877
6,588
1,443
With a specific allowance:
Recorded investment (1)
Unpaid principal balance
Associated allowance
Total:
Recorded investment
Unpaid principal balance
Associated allowance
16,697
16,284
406
23,653
23,109
406
36,146
34,978
1,702
46,026
44,855
1,702
7,600
7,455
193
14,271
14,043
193
11,554
11,476
392
12,998
12,919
392
—
—
—
—
—
—
—
—
24,733
119
115
3
119
115
3
72,116
70,308
2,696
97,067
95,041
2,696
Recorded investment of loans on
nonaccrual status (2)
$
10,812
$
15,237
$
5,344
$
5,835
$
— $ — $ 37,228
(1)
(2)
Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $65.1 million
(67 percent) of impaired loans as of December 31, 2013, which resulted in a specific reserve of $1.3 million.
Includes $9.6 million of loans that are less than 90 days delinquent but which have not met Farmer Mac's performance criteria for returning to accrual
status.
169
170
As of December 31, 2012
Crops
Permanent
Plantings
Livestock
Part-time
Farm
(in thousands)
Ag. Storage and
Processing
(including
ethanol
facilities)
Other
Total
Impaired Loans:
With no specific allowance:
Recorded investment
$
7,295
$
11,652
$
7,644
$
3,140
$
Unpaid principal balance
7,247
11,509
7,489
3,090
— $
—
907
901
$ 30,638
30,236
With a specific allowance:
Recorded investment (1)
Unpaid principal balance
Associated allowance
Total:
Recorded investment
Unpaid principal balance
Associated allowance
17,214
16,829
706
24,509
24,076
706
26,567
26,095
1,515
38,219
37,604
1,515
9,360
9,219
355
17,004
16,708
355
12,118
12,007
682
15,258
15,097
682
4,337
4,337
3,400
4,337
4,337
3,400
117
114
1
1,024
1,015
1
69,713
68,601
6,659
100,351
98,837
6,659
Recorded investment of loans on
nonaccrual status (2)
$
11,888
$
15,789
$
5,141
$
8,180
$
4,337
$ — $ 45,335
(1)
(2)
Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $56.0 million
(56 percent) of impaired loans as of December 31, 2012, which resulted in a specific reserve of $1.1 million.
Includes $15.7 million of loans that are less than 90 days delinquent but which have not met Farmer Mac's performance criteria for returning to accrual
status.
The following table presents by commodity type the average recorded investment and interest income
recognized on impaired loans for the years ended December 31, 2013 and 2012:
Table 8.6
December 31, 2013
Crops
Permanent
Plantings
Livestock
Part-time
Farm
Ag. Storage and
Processing
(including
ethanol
facilities)
Other
Total
(in thousands)
For the Year Ended:
Average recorded investment in impaired loans $ 28,387
$
42,838
$ 16,117
$ 13,042
$
867
$ 481
$ 101,732
Income recognized on impaired loans
793
2,254
277
444
—
—
3,768
December 31, 2012
Crops
Permanent
Plantings
Livestock
Part-time
Farm
Ag. Storage and
Processing
(including
ethanol
facilities)
Other
Total
(in thousands)
For the Year Ended:
Average recorded investment in impaired loans $ 28,568
$
35,071
$ 15,379
$ 15,953
$
4,695
$ 1,033
$ 100,699
Income recognized on impaired loans
293
1,823
263
315
—
—
2,694
A modification to the contractual terms of a loan that results in granting a concession to a borrower
experiencing financial difficulties is considered a troubled debt restructuring ("TDR"). Farmer Mac has
granted a concession when, as a result of the restructuring, it does not expect to collect all amounts due in
a timely manner, including interest accrued at the original contract rate. In making its determination of
whether a borrower is experiencing financial difficulties, Farmer Mac considers several factors, including
whether (1) the borrower has declared or is in the process of declaring bankruptcy, (2) there is substantial
doubt as to whether the borrower will continue to be a going concern, and (3) the borrower can obtain
funds from other sources at an effective interest rate at or near a current market interest rate for debt with
similar risk characteristics. Farmer Mac evaluates TDRs similarly to other impaired loans for purposes of
the allowance for losses. For the year ended December 31, 2013, the recorded investment of loans
determined to be TDRs was $1.1 million, both before and after restructuring. For the year ended
December 31, 2012, the recorded investment of loans determined to be TDRs was $2.6 million before
restructuring and $2.8 million after restructuring. For the year ended December 31, 2011, the recorded
investment of loans determined to be TDRs was $0.6 million, both before and after restructuring. As of
December 31, 2013, there were no TDRs identified during the previous 12 months that were in default
under the modified terms. As of December 31, 2012, there was one TDR identified during the previous 12
months that was in default, under the modified terms, with a recorded investment of $0.2 million. As of
December 31, 2011, 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 for the years
ended December 31, 2013, 2012, and 2011 was a provision of $0.1 million, a release of $0.3 million, and a
release of $0.1 million, respectively.
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
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 2013, Farmer Mac purchased 11 defaulted loans having an unpaid principal balance of $6.7
million, from pools underlying Farm & Ranch Guaranteed Securities and LTSPCs. During 2012, Farmer
Mac purchased 15 defaulted loans having an unpaid principal balance of $17.0 million from pools
underlying Farm & Ranch Guaranteed Securities and LTSPCs. During 2011, Farmer Mac purchased 20
defaulted loans having an unpaid principal balance of $21.7 million from pools underlying Farm & Ranch
Guaranteed Securities and LTSPCs.
171
172
As of December 31, 2012
Ag. Storage and
Processing
(including
ethanol
facilities)
Other
Total
Crops
Permanent
Plantings
Livestock
Part-time
Farm
(in thousands)
Recorded investment
$
7,295
$
11,652
$
7,644
$
3,140
$
Unpaid principal balance
7,247
11,509
7,489
3,090
— $
—
907
901
$ 30,638
30,236
17,214
16,829
706
24,509
24,076
706
26,567
26,095
1,515
38,219
37,604
1,515
9,360
9,219
355
17,004
16,708
355
12,118
12,007
682
15,258
15,097
682
4,337
4,337
3,400
4,337
4,337
3,400
117
114
1
1,024
1,015
1
69,713
68,601
6,659
100,351
98,837
6,659
Recorded investment of loans on
nonaccrual status (2)
$
11,888
$
15,789
$
5,141
$
8,180
$
4,337
$ — $ 45,335
(1)
Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $56.0 million
(56 percent) of impaired loans as of December 31, 2012, which resulted in a specific reserve of $1.1 million.
(2)
Includes $15.7 million of loans that are less than 90 days delinquent but which have not met Farmer Mac's performance criteria for returning to accrual
The following table presents by commodity type the average recorded investment and interest income
recognized on impaired loans for the years ended December 31, 2013 and 2012:
Impaired Loans:
With no specific allowance:
With a specific allowance:
Recorded investment (1)
Unpaid principal balance
Associated allowance
Total:
Recorded investment
Unpaid principal balance
Associated allowance
status.
Table 8.6
Crops
Permanent
Plantings
Livestock
Other
Total
For the Year Ended:
Average recorded investment in impaired loans $ 28,387
$
42,838
$ 16,117
$ 13,042
$
867
$ 481
$ 101,732
Income recognized on impaired loans
793
2,254
277
444
—
—
3,768
December 31, 2013
Ag. Storage and
Processing
(including
ethanol
facilities)
Part-time
Farm
(in thousands)
December 31, 2012
Ag. Storage and
Processing
(including
ethanol
facilities)
Part-time
Farm
(in thousands)
Crops
Permanent
Plantings
Livestock
Other
Total
For the Year Ended:
Average recorded investment in impaired loans $ 28,568
$
35,071
$ 15,379
$ 15,953
$
4,695
$ 1,033
$ 100,699
Income recognized on impaired loans
293
1,823
263
315
—
—
2,694
A modification to the contractual terms of a loan that results in granting a concession to a borrower
experiencing financial difficulties is considered a troubled debt restructuring ("TDR"). Farmer Mac has
granted a concession when, as a result of the restructuring, it does not expect to collect all amounts due in
a timely manner, including interest accrued at the original contract rate. In making its determination of
whether a borrower is experiencing financial difficulties, Farmer Mac considers several factors, including
whether (1) the borrower has declared or is in the process of declaring bankruptcy, (2) there is substantial
doubt as to whether the borrower will continue to be a going concern, and (3) the borrower can obtain
funds from other sources at an effective interest rate at or near a current market interest rate for debt with
similar risk characteristics. Farmer Mac evaluates TDRs similarly to other impaired loans for purposes of
the allowance for losses. For the year ended December 31, 2013, the recorded investment of loans
determined to be TDRs was $1.1 million, both before and after restructuring. For the year ended
December 31, 2012, the recorded investment of loans determined to be TDRs was $2.6 million before
restructuring and $2.8 million after restructuring. For the year ended December 31, 2011, the recorded
investment of loans determined to be TDRs was $0.6 million, both before and after restructuring. As of
December 31, 2013, there were no TDRs identified during the previous 12 months that were in default
under the modified terms. As of December 31, 2012, there was one TDR identified during the previous 12
months that was in default, under the modified terms, with a recorded investment of $0.2 million. As of
December 31, 2011, 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 for the years
ended December 31, 2013, 2012, and 2011 was a provision of $0.1 million, a release of $0.3 million, and a
release of $0.1 million, respectively.
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
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 2013, Farmer Mac purchased 11 defaulted loans having an unpaid principal balance of $6.7
million, from pools underlying Farm & Ranch Guaranteed Securities and LTSPCs. During 2012, Farmer
Mac purchased 15 defaulted loans having an unpaid principal balance of $17.0 million from pools
underlying Farm & Ranch Guaranteed Securities and LTSPCs. During 2011, Farmer Mac purchased 20
defaulted loans having an unpaid principal balance of $21.7 million from pools underlying Farm & Ranch
Guaranteed Securities and LTSPCs.
171
172
The following tables present information related to Farmer Mac's acquisition of defaulted loans for the
years ended December 31, 2013, 2012, and 2011 and the outstanding balances and carrying amounts of all
such loans as of December 31, 2013, 2012, and 2011:
Table 8.8
Table 8.7
For the Year Ended December 31,
2013
2012
2011
(in thousands)
Unpaid principal balance at acquisition date:
Loans underlying LTSPCs
Loans underlying off-balance sheet Farmer Mac Guaranteed Securities
Total unpaid principal balance at acquisition date
Contractually required payments receivable
Impairment recognized subsequent to acquisition
Recovery/release of allowance for defaulted loans
$
37
$
8,091
$
6,667
6,704
6,907
477
949
8,933
17,024
17,432
4,774
997
14,192
7,471
21,663
21,715
3,845
714
Outstanding balance
Carrying amount
2013
(in thousands)
$
32,838
29,613
As of December 31,
2012
2011
$
41,737
$
33,798
35,773
29,461
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 December 31, 2013, there were no delinquencies and no probable losses inherent in Farmer
Mac's rural utilities loan portfolio and Farmer Mac has not experienced credit losses on any rural utilities
loans.
90-Day Delinquencies (1)
Net Credit Losses
As of December 31,
For the Year Ended December 31,
2013
2012
2013
2012
2011
(in thousands)
$
$
$
$
$
27,580
27,580
716
716
28,296
$
$
$
$
$
29,592
29,592
3,671
3,671
33,263
$
$
$
$
$
2,975
2,975
$
$
1,673
1,673
$
$
— $
— $
— $
— $
2,975
$
1,673
$
200
200
—
—
200
On-balance sheet assets:
Farm & Ranch:
Loans
Total on-balance sheet
Off-balance sheet assets:
Farm & Ranch:
LTSPCs
Total off-balance sheet
Total
(1)
Includes loans and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are 90 days or more
past due, in foreclosure, restructured after delinquency, and in bankruptcy, excluding loans performing under either their original
loan terms or a court-approved bankruptcy plan.
Of the $27.6 million and $29.6 million of on-balance sheet loans reported as 90-day delinquencies as of
December 31, 2013 and 2012, respectively, $1.2 million and $4.6 million, respectively, are loans subject to
"removal-of-account" provisions.
Credit Quality Indicators
Farmer Mac analyzes credit risk related to loans held and loans underlying LTSPCs and off-balance sheet
Farm & Ranch Guaranteed Securities (excluding AgVantage securities) based on internally assigned loan
scores (i.e., risk ratings) that are derived by taking into consideration such factors as historical repayment
performance, indicators of current financial condition, loan seasoning, loan size, and loan-to-value ratio.
Loans are then classified into one of the following asset categories based on their underlying risk rating:
acceptable; other assets especially mentioned; and substandard. Farmer Mac believes this analysis
provides meaningful information regarding the credit risk profile of its Farm & Ranch portfolio as of each
quarterly reporting period end date.
Farmer Mac also uses 90-day delinquency information to evaluate its credit risk exposure on these assets
because historically it has been the best measure of borrower credit quality deterioration. Most of the
loans held and underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities have
annual (January 1) or semi-annual (January 1 and July 1) payment dates and are supported by less frequent
and less predictable revenue sources, such as the cash flows generated from the maturation of crops, sales
of livestock, and government farm support programs. Taking into account the reduced frequency of
payment due dates and revenue sources, Farmer Mac considers 90-day delinquency to be the most
significant observation point when evaluating delinquency information.
173
174
The following tables present information related to Farmer Mac's acquisition of defaulted loans for the
years ended December 31, 2013, 2012, and 2011 and the outstanding balances and carrying amounts of all
Table 8.8
such loans as of December 31, 2013, 2012, and 2011:
Table 8.7
For the Year Ended December 31,
2013
2012
2011
(in thousands)
Unpaid principal balance at acquisition date:
Loans underlying LTSPCs
Loans underlying off-balance sheet Farmer Mac Guaranteed Securities
Total unpaid principal balance at acquisition date
Contractually required payments receivable
Impairment recognized subsequent to acquisition
Recovery/release of allowance for defaulted loans
$
37
$
8,091
$
6,667
6,704
6,907
477
949
8,933
17,024
17,432
4,774
997
14,192
7,471
21,663
21,715
3,845
714
Outstanding balance
Carrying amount
As of December 31,
2012
2011
2013
(in thousands)
32,838
29,613
$
$
41,737
$
33,798
35,773
29,461
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 December 31, 2013, there were no delinquencies and no probable losses inherent in Farmer
Mac's rural utilities loan portfolio and Farmer Mac has not experienced credit losses on any rural utilities
loans.
90-Day Delinquencies (1)
Net Credit Losses
As of December 31,
For the Year Ended December 31,
2013
2012
2013
2012
2011
(in thousands)
$
$
$
$
$
27,580
27,580
716
716
28,296
$
$
$
$
$
29,592
29,592
3,671
3,671
33,263
$
$
$
$
$
2,975
2,975
$
$
1,673
1,673
$
$
— $
— $
— $
— $
2,975
$
1,673
$
200
200
—
—
200
On-balance sheet assets:
Farm & Ranch:
Loans
Total on-balance sheet
Off-balance sheet assets:
Farm & Ranch:
LTSPCs
Total off-balance sheet
Total
(1)
Includes loans and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are 90 days or more
past due, in foreclosure, restructured after delinquency, and in bankruptcy, excluding loans performing under either their original
loan terms or a court-approved bankruptcy plan.
Of the $27.6 million and $29.6 million of on-balance sheet loans reported as 90-day delinquencies as of
December 31, 2013 and 2012, respectively, $1.2 million and $4.6 million, respectively, are loans subject to
"removal-of-account" provisions.
Credit Quality Indicators
Farmer Mac analyzes credit risk related to loans held and loans underlying LTSPCs and off-balance sheet
Farm & Ranch Guaranteed Securities (excluding AgVantage securities) based on internally assigned loan
scores (i.e., risk ratings) that are derived by taking into consideration such factors as historical repayment
performance, indicators of current financial condition, loan seasoning, loan size, and loan-to-value ratio.
Loans are then classified into one of the following asset categories based on their underlying risk rating:
acceptable; other assets especially mentioned; and substandard. Farmer Mac believes this analysis
provides meaningful information regarding the credit risk profile of its Farm & Ranch portfolio as of each
quarterly reporting period end date.
Farmer Mac also uses 90-day delinquency information to evaluate its credit risk exposure on these assets
because historically it has been the best measure of borrower credit quality deterioration. Most of the
loans held and underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities have
annual (January 1) or semi-annual (January 1 and July 1) payment dates and are supported by less frequent
and less predictable revenue sources, such as the cash flows generated from the maturation of crops, sales
of livestock, and government farm support programs. Taking into account the reduced frequency of
payment due dates and revenue sources, Farmer Mac considers 90-day delinquency to be the most
significant observation point when evaluating delinquency information.
173
174
Crops
Permanent
Plantings
Livestock
Other
Total
As of December 31, 2012
Ag. Storage and
Processing
(including
ethanol
facilities)
Part-time
Farm
(in thousands)
Credit risk profile by internally
assigned grade (1)
On-balance sheet:
Acceptable
Special Mention (2)
Substandard (3)
Off-Balance Sheet
Acceptable
Special Mention (2)
Substandard (3)
Total Ending Balance:
Acceptable
Special Mention (2)
Substandard (3)
Commodity analysis of past due
loans (1)
On-balance sheet
Off-balance sheet
90-days or more past due
past due loans.
secured.
corrected.
$
947,097
$
226,253
$ 252,525
$
48,156
$
11,972
$
— $ 1,486,003
30,466
22,003
33,794
29,647
16,344
11,511
2,131
12,660
19,981
15,196
102,716
91,132
—
115
115
Total on-balance sheet
$
999,566
289,694
$ 280,380
$
62,947
47,149
$
$ 1,679,851
$ 1,143,790
567,064
$ 922,254
$ 130,557
114,983
$ 10,287
$ 2,888,935
10,459
17,534
5,068
20,706
40,410
44,697
3,220
5,141
23,372
6,282
592
1,022
83,121
95,382
Total off-balance sheet
$ 1,171,783
592,838
$ 1,007,361
$ 138,918
144,637
$ 11,901
$ 3,067,438
$ 2,090,887
793,317
$ 1,174,779
$ 178,713
126,955
$ 10,287
$ 4,374,938
40,925
39,537
38,862
50,353
56,754
56,208
5,351
17,801
43,353
21,478
592
1,137
185,837
186,514
Total
$ 2,171,349
$
882,532
$ 1,287,741
$ 201,865
$
191,786
$ 12,016
$ 4,747,289
$
$
3,971
697
4,668
10,756
45
10,801
$
$
4,389
2,833
7,222
$
$
6,022
96
6,118
4,337
—
4,337
$
$
117
—
117
$
$
29,592
3,671
33,263
(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
(2) Assets in the Special mention category generally have potential weaknesses due to performance issues but are currently considered to be adequately
(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
$
$
$
$
$
$
$
$
$
$
$
$
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 (excluding AgVantage
securities) as of December 31, 2013 and 2012:
Table 8.9
Credit risk profile by internally
assigned grade (1)
On-balance sheet:
Acceptable
Special mention (2)
Substandard (3)
As of December 31, 2013
Crops
Permanent
Plantings
Livestock
Ag. Storage and
Processing
(including
ethanol
facilities)
Part-time
Farm
(in thousands)
Other
Total
$ 1,348,205
$
290,064
$ 300,308
$
39,022
$
10,987
$
359
$ 1,988,945
15,656
21,147
4,973
41,441
19,357
10,844
918
10,422
Total on-balance sheet
$ 1,385,008
Off-Balance Sheet:
Acceptable
Special mention (2)
Substandard (3)
$ 1,251,834
10,977
19,038
Total off-balance sheet
$ 1,281,849
Total Ending Balance:
Acceptable
Special mention (2)
Substandard (3)
$ 2,600,039
26,633
40,185
$
$
$
$
336,478
$ 330,509
$
50,362
548,254
$ 844,130
$ 105,589
15,621
7,471
36,555
34,911
917
5,875
571,346
$ 915,596
$ 112,381
838,318
$1,144,438
$ 144,611
20,594
48,912
55,912
45,755
1,835
16,297
$
$
$
$
6,267
15,382
32,636
99,072
11,011
28,199
138,282
110,059
17,278
43,581
$
$
$
$
—
115
474
47,171
99,351
$ 2,135,467
7,478
$ 2,856,357
578
103
75,659
95,597
8,159
$ 3,027,613
7,837
$ 4,845,302
578
218
122,830
194,948
Total
$ 2,666,857
$
907,824
$1,246,105
$ 162,743
$
170,918
$
8,633
$ 5,163,080
Commodity analysis of past due
loans (1)
On-balance sheet
Off-balance sheet
90-days or more past due
$
$
8,036
220
8,256
$
$
11,841
—
11,841
$
$
4,462
—
4,462
$
$
3,122
496
3,618
$
$
— $
—
— $
119
—
119
$
$
27,580
716
28,296
(1) Amounts represent unpaid principal balance of risk-rated loans, which is the basis Farmer Mac uses to analyze its portfolio, and recorded investment of
past due loans.
(2) Assets in the Special mention category generally have potential weaknesses due to performance issues but are currently considered to be adequately
secured.
(3) Substandard assets have a well-defined weakness or weaknesses and there is a distinct possibility that some loss will be sustained if deficiencies are not
corrected.
175
176
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 (excluding AgVantage
securities) as of December 31, 2013 and 2012:
Table 8.9
Crops
Permanent
Plantings
Livestock
Other
Total
As of December 31, 2013
Ag. Storage and
Processing
(including
ethanol
facilities)
Part-time
Farm
(in thousands)
Credit risk profile by internally
assigned grade (1)
On-balance sheet:
Acceptable
Special mention (2)
Substandard (3)
Off-Balance Sheet:
Acceptable
Special mention (2)
Substandard (3)
Total Ending Balance:
Acceptable
Special mention (2)
Substandard (3)
Commodity analysis of past due
loans (1)
On-balance sheet
Off-balance sheet
90-days or more past due
past due loans.
secured.
corrected.
$ 1,348,205
$
290,064
$ 300,308
$
39,022
$
10,987
$
359
$ 1,988,945
Total on-balance sheet
$ 1,385,008
336,478
$ 330,509
$
50,362
15,656
21,147
4,973
41,441
19,357
10,844
918
10,422
$ 1,251,834
548,254
$ 844,130
$ 105,589
7,478
$ 2,856,357
10,977
19,038
15,621
7,471
36,555
34,911
917
5,875
Total off-balance sheet
$ 1,281,849
571,346
$ 915,596
$ 112,381
138,282
8,159
$ 3,027,613
$ 2,600,039
838,318
$1,144,438
$ 144,611
110,059
7,837
$ 4,845,302
26,633
40,185
20,594
48,912
55,912
45,755
1,835
16,297
17,278
43,581
578
218
122,830
194,948
Total
$ 2,666,857
$
907,824
$1,246,105
$ 162,743
$
170,918
$
8,633
$ 5,163,080
—
115
474
578
103
47,171
99,351
$ 2,135,467
75,659
95,597
6,267
15,382
32,636
99,072
11,011
28,199
$
$
$
$
$
$
8,036
220
8,256
11,841
—
11,841
$
$
4,462
—
4,462
$
$
3,122
496
3,618
— $
—
— $
119
—
119
$
$
27,580
716
28,296
(1) Amounts represent unpaid principal balance of risk-rated loans, which is the basis Farmer Mac uses to analyze its portfolio, and recorded investment of
(2) Assets in the Special mention category generally have potential weaknesses due to performance issues but are currently considered to be adequately
(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
$
$
$
$
$
$
$
$
$
$
$
$
As of December 31, 2012
Crops
Permanent
Plantings
Livestock
Ag. Storage and
Processing
(including
ethanol
facilities)
Part-time
Farm
(in thousands)
Other
Total
$
947,097
$
226,253
$ 252,525
$
48,156
$
11,972
$
— $ 1,486,003
Credit risk profile by internally
assigned grade (1)
On-balance sheet:
Acceptable
Special Mention (2)
Substandard (3)
30,466
22,003
33,794
29,647
16,344
11,511
2,131
12,660
Total on-balance sheet
$
999,566
Off-Balance Sheet
Acceptable
Special Mention (2)
Substandard (3)
$ 1,143,790
10,459
17,534
Total off-balance sheet
$ 1,171,783
Total Ending Balance:
Acceptable
Special Mention (2)
Substandard (3)
$ 2,090,887
40,925
39,537
$
$
$
$
289,694
$ 280,380
$
62,947
567,064
$ 922,254
$ 130,557
5,068
20,706
40,410
44,697
3,220
5,141
592,838
$ 1,007,361
$ 138,918
793,317
$ 1,174,779
$ 178,713
38,862
50,353
56,754
56,208
5,351
17,801
$
$
$
$
19,981
15,196
47,149
$
—
115
115
102,716
91,132
$ 1,679,851
114,983
$ 10,287
$ 2,888,935
23,372
6,282
592
1,022
83,121
95,382
144,637
$ 11,901
$ 3,067,438
126,955
$ 10,287
$ 4,374,938
43,353
21,478
592
1,137
185,837
186,514
Total
$ 2,171,349
$
882,532
$ 1,287,741
$ 201,865
$
191,786
$ 12,016
$ 4,747,289
Commodity analysis of past due
loans (1)
On-balance sheet
Off-balance sheet
90-days or more past due
$
$
3,971
697
4,668
$
$
10,756
45
10,801
$
$
4,389
2,833
7,222
$
$
6,022
96
6,118
$
$
4,337
—
4,337
$
$
117
—
117
$
$
29,592
3,671
33,263
(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.
175
176
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 (excluding AgVantage securities) and LTSPCs as of
December 31, 2013 and 2012:
9. EQUITY
Common Stock
Table 8.10
By commodity/collateral type:
Crops
Permanent plantings
Livestock
Part-time farm
Ag. Storage and Processing (including ethanol facilities)
Other
Total
By geographic region (1):
Northwest
Southwest
Mid-North
Mid-South
Northeast
Southeast
Total
By original loan-to-value ratio:
0.00% to 40.00%
40.01% to 50.00%
50.01% to 60.00%
60.01% to 70.00%
70.01% to 80.00%
80.01% to 90.00%
Total
December 31, 2013
December 31, 2012
(in thousands)
2,666,857
$
907,824
1,246,105
162,743
170,918
8,633
5,163,080
524,034
1,752,109
1,702,668
601,359
231,731
351,179
5,163,080
1,375,758
1,099,033
1,431,562
1,113,427
110,828
32,472
$
$
$
$
5,163,080
$
2,171,349
882,532
1,287,741
201,865
191,786
12,016
4,747,289
456,522
1,781,822
1,298,148
589,418
261,756
359,623
4,747,289
1,338,715
851,980
1,296,225
1,091,427
122,259
46,683
4,747,289
$
$
$
$
$
$
(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). Amounts by geographic region as of December
31, 2012 have been restated to reflect the current regional classifications.
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.
Farmer Mac has three classes of common stock outstanding:
• Class A voting common stock, which may be held only by banks, insurance companies, and
other financial institutions or similar entities that are not institutions of the Farm Credit System
("FCS"). By federal statute, no holder of Class A voting common stock may directly or
indirectly be a beneficial owner of more than 33 percent of the outstanding shares of Class A
voting common stock.
• Class B voting common stock, which may be held only by institutions of the FCS. There are
no restrictions on the maximum holdings of Class B voting common stock.
• Class C non-voting common stock, which has no ownership restrictions.
During 2013, 2012, and 2011, Farmer Mac paid a quarterly dividend of $0.12, $0.10, and $0.05,
respectively, per share on all classes of its common stock. On February 6, 2014, Farmer Mac's board of
directors declared a quarterly dividend of $0.14 per share on Farmer Mac's common stock payable on
March 31, 2014. Farmer Mac's ability to declare and pay dividends on common stock could be restricted
if it failed to comply with applicable capital requirements.
Preferred Stock
On January 17, 2013, Farmer Mac issued 2.4 million shares of 5.875 percent Non-Cumulative Preferred
Stock, Series A (the "Series A Preferred Stock"). The Series A Preferred Stock has a par value of $25.00
per share, a liquidation preference of $25.00 per share, and an annual dividend rate of 5.875 percent.
Dividends on the Series A Preferred Stock are non-cumulative, so dividends that are not declared for a
payment date will not accrue. Farmer Mac incurred $1.7 million of direct costs related to the issuance of
Series A Preferred Stock. Farmer Mac used the proceeds from the sale of the Series A Preferred Stock to
redeem and retire the outstanding shares of Series C Non-Voting Cumulative Preferred Stock ("Series C
Preferred Stock"). As of December 31, 2013, Farmer Mac had 2.4 million shares of Series A Preferred
Stock outstanding. As of December 31, 2012, Farmer Mac had 57,578 shares of Series C Preferred Stock
outstanding. Prior to its redemption, dividends on Series C Preferred Stock compounded quarterly at an
annual rate of 5.0 percent of the then-applicable liquidation preference per share.
Farmer Mac's ability to declare and pay dividends on its preferred stock could be restricted if it failed to
comply with regulatory capital requirements. Farmer Mac's preferred stock is included as a component of
core capital for regulatory and statutory capital compliance measurements.
Non-Controlling Interest in Farmer Mac II LLC
On January 25, 2010, Farmer Mac completed a private offering of $250.0 million of securities issued by a
newly formed Delaware statutory trust. The trust securities represent undivided beneficial ownership
interests in 250,000 shares of non-cumulative perpetual preferred stock (the "Farmer Mac II LLC
Preferred Stock") of Farmer Mac's subsidiary, Farmer Mac II LLC, a Delaware limited liability
company. The Farmer Mac II LLC Preferred Stock has a liquidation preference of $1,000 per share.
177
178
Ag. Storage and Processing (including ethanol facilities)
Concentrations of Credit Risk
December 31, 2013 and 2012:
Table 8.10
By commodity/collateral type:
Crops
Permanent plantings
Livestock
Part-time farm
By geographic region (1):
Other
Total
Northwest
Southwest
Mid-North
Mid-South
Northeast
Southeast
Total
By original loan-to-value ratio:
0.00% to 40.00%
40.01% to 50.00%
50.01% to 60.00%
60.01% to 70.00%
70.01% to 80.00%
80.01% to 90.00%
Total
December 31, 2013
December 31, 2012
(in thousands)
2,666,857
$
907,824
1,246,105
162,743
170,918
8,633
5,163,080
524,034
1,752,109
1,702,668
601,359
231,731
351,179
5,163,080
1,375,758
1,099,033
1,431,562
1,113,427
110,828
32,472
$
$
$
$
5,163,080
$
2,171,349
882,532
1,287,741
201,865
191,786
12,016
4,747,289
456,522
1,781,822
1,298,148
589,418
261,756
359,623
4,747,289
1,338,715
851,980
1,296,225
1,091,427
122,259
46,683
4,747,289
$
$
$
$
$
$
(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). Amounts by geographic region as of December
31, 2012 have been restated to reflect the current regional classifications.
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.
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 (excluding AgVantage securities) and LTSPCs as of
9. EQUITY
Common Stock
Farmer Mac has three classes of common stock outstanding:
• Class A voting common stock, which may be held only by banks, insurance companies, and
other financial institutions or similar entities that are not institutions of the Farm Credit System
("FCS"). By federal statute, no holder of Class A voting common stock may directly or
indirectly be a beneficial owner of more than 33 percent of the outstanding shares of Class A
voting common stock.
• Class B voting common stock, which may be held only by institutions of the FCS. There are
no restrictions on the maximum holdings of Class B voting common stock.
• Class C non-voting common stock, which has no ownership restrictions.
During 2013, 2012, and 2011, Farmer Mac paid a quarterly dividend of $0.12, $0.10, and $0.05,
respectively, per share on all classes of its common stock. On February 6, 2014, Farmer Mac's board of
directors declared a quarterly dividend of $0.14 per share on Farmer Mac's common stock payable on
March 31, 2014. Farmer Mac's ability to declare and pay dividends on common stock could be restricted
if it failed to comply with applicable capital requirements.
Preferred Stock
On January 17, 2013, Farmer Mac issued 2.4 million shares of 5.875 percent Non-Cumulative Preferred
Stock, Series A (the "Series A Preferred Stock"). The Series A Preferred Stock has a par value of $25.00
per share, a liquidation preference of $25.00 per share, and an annual dividend rate of 5.875 percent.
Dividends on the Series A Preferred Stock are non-cumulative, so dividends that are not declared for a
payment date will not accrue. Farmer Mac incurred $1.7 million of direct costs related to the issuance of
Series A Preferred Stock. Farmer Mac used the proceeds from the sale of the Series A Preferred Stock to
redeem and retire the outstanding shares of Series C Non-Voting Cumulative Preferred Stock ("Series C
Preferred Stock"). As of December 31, 2013, Farmer Mac had 2.4 million shares of Series A Preferred
Stock outstanding. As of December 31, 2012, Farmer Mac had 57,578 shares of Series C Preferred Stock
outstanding. Prior to its redemption, dividends on Series C Preferred Stock compounded quarterly at an
annual rate of 5.0 percent of the then-applicable liquidation preference per share.
Farmer Mac's ability to declare and pay dividends on its preferred stock could be restricted if it failed to
comply with regulatory capital requirements. Farmer Mac's preferred stock is included as a component of
core capital for regulatory and statutory capital compliance measurements.
Non-Controlling Interest in Farmer Mac II LLC
On January 25, 2010, Farmer Mac completed a private offering of $250.0 million of securities issued by a
newly formed Delaware statutory trust. The trust securities represent undivided beneficial ownership
interests in 250,000 shares of non-cumulative perpetual preferred stock (the "Farmer Mac II LLC
Preferred Stock") of Farmer Mac's subsidiary, Farmer Mac II LLC, a Delaware limited liability
company. The Farmer Mac II LLC Preferred Stock has a liquidation preference of $1,000 per share.
177
178
Dividends on the Farmer Mac II LLC Preferred Stock will be payable if, when, and as declared by
Farmer Mac II LLC's board of directors, quarterly, on a non-cumulative basis, on March 30, June 30,
September 30, and December 30 of each year. From the date of issuance to but excluding the quarterly
payment date occurring on March 30, 2015, the annual dividend rate on the Farmer Mac II LLC Preferred
Stock will be 8.875 percent. From March 30, 2015 to but excluding the quarterly payment date occurring
on March 30, 2020, the annual dividend rate on the Farmer Mac II LLC Preferred Stock will be 10.875
percent. Beginning on March 30, 2020, the dividend rate on the Farmer Mac II LLC Preferred Stock will
be an annual rate equal to three-month LIBOR plus 8.211 percent. Dividends on the Farmer Mac II LLC
Preferred Stock are non-cumulative, so dividends that are not declared for any payment date will not
accrue. Farmer Mac II LLC Preferred Stock is permanent equity of Farmer Mac II LLC and is presented
as "Non-controlling interest – preferred stock" within permanent equity on the consolidated balance sheets
of Farmer Mac. Farmer Mac II LLC incurred $8.1 million of direct costs related to the issuance of the
Farmer Mac II LLC Preferred Stock, which reduced the amount of non-controlling interest – preferred
stock. The accrual of declared dividends is presented as "Net income attributable to non-controlling
interest – preferred stock dividends" on the consolidated statements of operations on a pre-tax basis. The
consolidated tax benefit is included in income tax expense. Farmer Mac II LLC may redeem the preferred
stock on March 30 of 2015, 2016, 2017, 2018, and 2019 and on any payment date on or after March 30,
2020, in whole or in part, at a cash redemption price equal to the liquidation preference.
Equity-based Incentive Compensation Plans
Farmer Mac's 2008 Omnibus Incentive Compensation Plan authorizes the grants of restricted stock, stock
options and SARs, among other alternative forms of equity-based compensation, to directors, officers and
other employees. SARs awarded to officers and employees vest annually in thirds and SARs awarded to
directors vest fully after approximately one year. If not exercised or terminated earlier due to the
termination of employment or service on the Board, SARs granted to officers or employees expire after 10
years and those granted to directors expire after 7 years. For all SARs granted, the exercise price is equal
to the closing price of the Class C non-voting common stock on the date of grant. SARs granted during
2013 have exercise prices ranging from $30.20 to $37.17 per share, SARs granted during 2012 have
exercise prices ranging from $21.69 to $32.85 per share, and SARS granted during 2011 have exercise
prices ranging from $18.14 to $18.17 per share. During 2013, restricted stock awards were granted to
directors with a vesting period of one year, to officers vesting in three years provided certain performance
targets are met, and to officers and employees vesting annually in thirds. During 2012 and 2011, restricted
stock awards were granted to directors with a vesting period of one year, and restricted stock awards were
granted to officers vesting in three years provided certain performance targets are met.
The following tables summarize stock options, SARs and non-vested restricted stock activity for the years
ended December 31, 2013, 2012, and 2011:
Table 9.1
Outstanding, beginning of
year
Granted
Exercised
Canceled
Outstanding, end of year
Exercisable at end of year
For the Year Ended December 31,
2013
2012
2011
Stock
Options
and
SARs
Weighted-
Average
Exercise
Price
Stock
Options
and
SARs
Weighted-
Average
Exercise
Price
Stock
Options
and
SARs
Weighted-
Average
Exercise
Price
788,748
$
1,327,066
$
1,924,133
$
94,017
(208,877)
(9,643)
664,245
483,216
$
$
20.89
31.24
16.24
23.02
23.78
22.83
157,983
(427,348)
(268,953)
788,748
574,439
$
$
18.72
22.32
13.18
23.29
20.89
21.76
146,000
(32,001)
(711,066)
1,327,066
914,743
$
$
21.16
18.63
6.99
25.83
18.72
21.12
For the Year Ended December 31,
2013
2012
2011
Non-vested
Restricted
Stock
Weighted-
Average
Grant Date
Fair Value
Non-vested
Restricted
Stock
Weighted-
Average
Grant Date
Fair Value
Non-vested
Restricted
Stock
Weighted-
Average
Grant Date
Fair Value
91,311
$
73,985
(1,000)
(66,011)
18.75
30.27
31.42
18.21
27.66
196,076
$
72,637
(59,624)
(117,778)
91,311
$
12.15
21.92
16.98
10.62
18.75
182,609
$
73,060
(2,003)
(57,590)
196,076
$
9.63
18.77
18.77
12.33
12.15
Outstanding, beginning of
year
Granted
Canceled
Vested and issued
Outstanding, end of year
98,285
$
The cancellations of stock options, SARs, and non-vested restricted stock during 2013, 2012, and 2011
were due either to unvested awards terminating in accordance with the provisions of the applicable stock
option plans upon directors' or employees' departures from Farmer Mac, by voluntary forfeiture, or vested
awards terminating unexercised on their expiration date.
Farmer Mac receives cash when stock options are exercised. Cash is not received from exercises of SARs
or the vesting and issuance of restricted stock. Farmer Mac received $1.9 million from the exercise of
stock options during 2013 and $2.9 million during 2012. There were no exercises of stock options in
2011. During 2013, 2012, and 2011, the reduction of income taxes payable as a result of the deduction for
the exercise of stock options and SARs and the vesting or accelerated tax elections of restricted stock was
$2.1 million, $3.4 million, and $0.5 million, respectively.
During 2013 and 2012, Farmer Mac recorded a net increase to additional paid-in capital of $1.1 million
and $1.4 million, respectively, and a net reduction of $0.2 million in 2011 related to stock-based
compensation awards.
Farmer Mac has a policy that permits directors of Farmer Mac to elect to receive shares of Class C non-
voting common stock in lieu of cash retainers. During 2013, Farmer Mac issued 842 shares of Class C
179
180
Dividends on the Farmer Mac II LLC Preferred Stock will be payable if, when, and as declared by
Farmer Mac II LLC's board of directors, quarterly, on a non-cumulative basis, on March 30, June 30,
September 30, and December 30 of each year. From the date of issuance to but excluding the quarterly
Stock will be 8.875 percent. From March 30, 2015 to but excluding the quarterly payment date occurring
on March 30, 2020, the annual dividend rate on the Farmer Mac II LLC Preferred Stock will be 10.875
percent. Beginning on March 30, 2020, the dividend rate on the Farmer Mac II LLC Preferred Stock will
be an annual rate equal to three-month LIBOR plus 8.211 percent. Dividends on the Farmer Mac II LLC
Preferred Stock are non-cumulative, so dividends that are not declared for any payment date will not
accrue. Farmer Mac II LLC Preferred Stock is permanent equity of Farmer Mac II LLC and is presented
as "Non-controlling interest – preferred stock" within permanent equity on the consolidated balance sheets
of Farmer Mac. Farmer Mac II LLC incurred $8.1 million of direct costs related to the issuance of the
Farmer Mac II LLC Preferred Stock, which reduced the amount of non-controlling interest – preferred
stock. The accrual of declared dividends is presented as "Net income attributable to non-controlling
interest – preferred stock dividends" on the consolidated statements of operations on a pre-tax basis. The
consolidated tax benefit is included in income tax expense. Farmer Mac II LLC may redeem the preferred
stock on March 30 of 2015, 2016, 2017, 2018, and 2019 and on any payment date on or after March 30,
2020, in whole or in part, at a cash redemption price equal to the liquidation preference.
Equity-based Incentive Compensation Plans
Farmer Mac's 2008 Omnibus Incentive Compensation Plan authorizes the grants of restricted stock, stock
options and SARs, among other alternative forms of equity-based compensation, to directors, officers and
other employees. SARs awarded to officers and employees vest annually in thirds and SARs awarded to
directors vest fully after approximately one year. If not exercised or terminated earlier due to the
termination of employment or service on the Board, SARs granted to officers or employees expire after 10
years and those granted to directors expire after 7 years. For all SARs granted, the exercise price is equal
to the closing price of the Class C non-voting common stock on the date of grant. SARs granted during
2013 have exercise prices ranging from $30.20 to $37.17 per share, SARs granted during 2012 have
exercise prices ranging from $21.69 to $32.85 per share, and SARS granted during 2011 have exercise
prices ranging from $18.14 to $18.17 per share. During 2013, restricted stock awards were granted to
directors with a vesting period of one year, to officers vesting in three years provided certain performance
targets are met, and to officers and employees vesting annually in thirds. During 2012 and 2011, restricted
stock awards were granted to directors with a vesting period of one year, and restricted stock awards were
granted to officers vesting in three years provided certain performance targets are met.
payment date occurring on March 30, 2015, the annual dividend rate on the Farmer Mac II LLC Preferred
Table 9.1
The following tables summarize stock options, SARs and non-vested restricted stock activity for the years
ended December 31, 2013, 2012, and 2011:
For the Year Ended December 31,
2013
2012
2011
Stock
Options
and
SARs
Weighted-
Average
Exercise
Price
Stock
Options
and
SARs
Weighted-
Average
Exercise
Price
Stock
Options
and
SARs
Weighted-
Average
Exercise
Price
788,748
$
94,017
(208,877)
(9,643)
664,245
483,216
$
$
20.89
31.24
16.24
23.02
23.78
22.83
1,327,066
$
157,983
(427,348)
(268,953)
788,748
574,439
$
$
18.72
22.32
13.18
23.29
20.89
21.76
1,924,133
$
146,000
(32,001)
(711,066)
1,327,066
914,743
$
$
21.16
18.63
6.99
25.83
18.72
21.12
2013
For the Year Ended December 31,
2012
2011
Non-vested
Restricted
Stock
Weighted-
Average
Grant Date
Fair Value
Non-vested
Restricted
Stock
Weighted-
Average
Grant Date
Fair Value
Non-vested
Restricted
Stock
Weighted-
Average
Grant Date
Fair Value
91,311
73,985
(1,000)
(66,011)
98,285
$
$
18.75
30.27
31.42
18.21
27.66
196,076
72,637
(59,624)
(117,778)
91,311
$
$
12.15
21.92
16.98
10.62
18.75
182,609
73,060
(2,003)
(57,590)
196,076
$
$
9.63
18.77
18.77
12.33
12.15
Outstanding, beginning of
year
Granted
Exercised
Canceled
Outstanding, end of year
Exercisable at end of year
Outstanding, beginning of
year
Granted
Canceled
Vested and issued
Outstanding, end of year
The cancellations of stock options, SARs, and non-vested restricted stock during 2013, 2012, and 2011
were due either to unvested awards terminating in accordance with the provisions of the applicable stock
option plans upon directors' or employees' departures from Farmer Mac, by voluntary forfeiture, or vested
awards terminating unexercised on their expiration date.
Farmer Mac receives cash when stock options are exercised. Cash is not received from exercises of SARs
or the vesting and issuance of restricted stock. Farmer Mac received $1.9 million from the exercise of
stock options during 2013 and $2.9 million during 2012. There were no exercises of stock options in
2011. During 2013, 2012, and 2011, the reduction of income taxes payable as a result of the deduction for
the exercise of stock options and SARs and the vesting or accelerated tax elections of restricted stock was
$2.1 million, $3.4 million, and $0.5 million, respectively.
During 2013 and 2012, Farmer Mac recorded a net increase to additional paid-in capital of $1.1 million
and $1.4 million, respectively, and a net reduction of $0.2 million in 2011 related to stock-based
compensation awards.
Farmer Mac has a policy that permits directors of Farmer Mac to elect to receive shares of Class C non-
voting common stock in lieu of cash retainers. During 2013, Farmer Mac issued 842 shares of Class C
179
180
non-voting common stock with a fair value of $26,000 to the 7 directors who made that election. During
2012, Farmer Mac issued 649 shares of Class C non-voting common stock with a fair value of $15,000 to
the 4 directors who made that election. During 2011, Farmer Mac issued 1,283 shares of Class C non-
voting common stock with a fair value of $24,000 to the 4 directors who made that election. Fair values
are determined based on the closing price of the Class C non-voting common stock as of the last business
day of each quarter.
The weighted-average grant date fair values of options, SARs, and restricted stock awards granted in
2013, 2012, and 2011 were $23.12, $16.73, and $15.35 per share, respectively. Under the fair value-based
method of accounting for stock-based compensation cost, Farmer Mac recognized compensation expense
of $3.0 million, $2.5 million, and $3.0 million during 2013, 2012, and 2011, respectively.
The fair values of stock options and SARs were estimated using the Black-Scholes option pricing model
based on the following assumptions:
The following tables summarize information regarding stock options, SARs, and non-vested restricted
stock outstanding as of December 31, 2013:
Table 9.3
Table 9.2
Outstanding
Exercisable
Range of
Exercise Prices
Stock Options
and SARs
$5.00 - $ 9.99
10.00 - 14.99
15.00 - 19.99
20.00 - 24.99
25.00 - 29.99
30.00 - 34.99
35.00 - 39.99
32,000
68,331
74,000
141,537
229,354
115,023
4,000
664,245
Weighted-
Average
Remaining
Contractual
Life
5.3 years
6.4 years
7.4 years
5.7 years
3.5 years
8.3 years
9.1 years
Weighted-
Average
Remaining
Contractual
Life
5.3 years
6.4 years
7.4 years
3.9 years
3.5 years
4.4 years
—
Stock Options
and SARs
32,000
68,331
46,333
84,204
229,354
22,994
—
483,216
Weighted-
Average
Grant-Date
Fair Value
$15.00 - $19.99
20.00 - 24.99
25.00 - 29.99
30.00 - 34.99
Outstanding
Expected to Vest
Weighted-
Average
Remaining
Contractual
Life
0.2 years
1.2 years
—
1.4 years
Non-vested
Restricted
Stock
13,300
12,000
—
72,985
98,285
Weighted-
Average
Remaining
Contractual
Life
0.2 years
1.2 years
—
1.4 years
Non-vested
Restricted
Stock
6,650
11,160
—
67,930
85,740
Vested or Expected to Vest
Weighted-
Average
Remaining
Contractual
Life
5.3 years
Stock Options
and SARs
32,000
68,331
70,660
136,204
229,354
110,368
3,720
650,637
6.4 years
7.4 years
5.6 years
3.5 years
8.3 years
9.1 years
The weighted average exercise price of the 650,637 options and SARs vested or expected to vest as of
December 31, 2013 was $23.77.
As of December 31, 2013 and 2012, the intrinsic value of options, SARs, and non-vested restricted stock
outstanding, exercisable, and vested or expected to vest was $10.0 million and $11.4 million,
respectively. During 2013, 2012, and 2011, the total intrinsic value of options and SARs exercised was
$3.8 million, $7.4 million, and $0.5 million, respectively. As of December 31, 2013, there was $2.5
million of total unrecognized compensation cost related to non-vested stock options, SARS and restricted
stock awards. This cost is expected to be recognized over a weighted-average period of 1.5 years.
181
182
Risk-free interest rate
Expected years until exercise
Expected stock volatility
Dividend yield
For the Year Ended December 31,
2013
0.6%
4 years
83.4%
1.5%
2012
1.1%
5 years
94.6%
1.8%
2011
2.2%
6 years
102.5%
1.1%
The risk-free interest rates used in the model were based on the U.S. Treasury yield curve in effect at the
grant date. Farmer Mac used historical data to estimate the timing of option exercises and stock option
cancellation rates used in the model. Expected volatilities were based on historical volatility of Farmer
Mac's Class C common stock. The dividend yields were based on the expected dividends as a percentage
of the value of Farmer Mac's Class C common stock on the grant date.
Because restricted stock awards will be issued upon vesting regardless of the stock price, expected stock
volatility is not considered in determining grant date fair value. Restricted stock awards also accrue
dividends which are paid at vesting. The weighted-average grant date fair value of the restricted stock
awarded in 2013, 2012, and 2011 was $30.27, $21.92, and $18.77 per share, respectively, which was the
closing price of the stock on the date granted.
Statutory and Regulatory Capital Requirements
Farmer Mac is subject to three statutory and regulatory capital requirements:
• Statutory minimum capital requirement – Farmer Mac's statutory minimum capital level is an
amount of core capital (stockholders' equity less accumulated other comprehensive income
plus non-controlling interest – preferred stock) equal to the sum of 2.75 percent of
Farmer Mac's aggregate on-balance sheet assets, as calculated for regulatory purposes, plus
0.75 percent of the aggregate off-balance sheet obligations of Farmer Mac, specifically
including:
the unpaid principal balance of outstanding Farmer Mac Guaranteed Securities;
instruments issued or guaranteed by Farmer Mac that are substantially equivalent to
Farmer Mac Guaranteed Securities, including LTSPCs; and
other off-balance sheet obligations of Farmer Mac.
• Statutory critical capital requirement – Farmer Mac's critical capital level is an amount of core
capital equal to 50 percent of the total minimum capital requirement at that time.
non-voting common stock with a fair value of $26,000 to the 7 directors who made that election. During
2012, Farmer Mac issued 649 shares of Class C non-voting common stock with a fair value of $15,000 to
the 4 directors who made that election. During 2011, Farmer Mac issued 1,283 shares of Class C non-
voting common stock with a fair value of $24,000 to the 4 directors who made that election. Fair values
are determined based on the closing price of the Class C non-voting common stock as of the last business
day of each quarter.
The weighted-average grant date fair values of options, SARs, and restricted stock awards granted in
2013, 2012, and 2011 were $23.12, $16.73, and $15.35 per share, respectively. Under the fair value-based
method of accounting for stock-based compensation cost, Farmer Mac recognized compensation expense
of $3.0 million, $2.5 million, and $3.0 million during 2013, 2012, and 2011, respectively.
The fair values of stock options and SARs were estimated using the Black-Scholes option pricing model
based on the following assumptions:
The following tables summarize information regarding stock options, SARs, and non-vested restricted
stock outstanding as of December 31, 2013:
Table 9.3
Outstanding
Exercisable
Vested or Expected to Vest
Range of
Exercise Prices
Stock Options
and SARs
Stock Options
and SARs
Stock Options
and SARs
Table 9.2
$5.00 - $ 9.99
10.00 - 14.99
15.00 - 19.99
20.00 - 24.99
25.00 - 29.99
30.00 - 34.99
35.00 - 39.99
32,000
68,331
74,000
141,537
229,354
115,023
4,000
664,245
Weighted-
Average
Remaining
Contractual
Life
5.3 years
6.4 years
7.4 years
5.7 years
3.5 years
8.3 years
9.1 years
Weighted-
Average
Remaining
Contractual
Life
0.2 years
1.2 years
—
1.4 years
32,000
68,331
46,333
84,204
229,354
22,994
483,216
—
—
Weighted-
Average
Remaining
Contractual
Life
5.3 years
6.4 years
7.4 years
3.9 years
3.5 years
4.4 years
Weighted-
Average
Remaining
Contractual
Life
0.2 years
1.2 years
—
1.4 years
Non-vested
Restricted
Stock
6,650
11,160
—
67,930
85,740
Outstanding
Expected to Vest
Weighted-
Average
Grant-Date
Fair Value
$15.00 - $19.99
20.00 - 24.99
25.00 - 29.99
30.00 - 34.99
Non-vested
Restricted
Stock
13,300
12,000
—
72,985
98,285
Weighted-
Average
Remaining
Contractual
Life
5.3 years
6.4 years
7.4 years
5.6 years
3.5 years
8.3 years
9.1 years
32,000
68,331
70,660
136,204
229,354
110,368
3,720
650,637
The weighted average exercise price of the 650,637 options and SARs vested or expected to vest as of
December 31, 2013 was $23.77.
As of December 31, 2013 and 2012, the intrinsic value of options, SARs, and non-vested restricted stock
outstanding, exercisable, and vested or expected to vest was $10.0 million and $11.4 million,
respectively. During 2013, 2012, and 2011, the total intrinsic value of options and SARs exercised was
$3.8 million, $7.4 million, and $0.5 million, respectively. As of December 31, 2013, there was $2.5
million of total unrecognized compensation cost related to non-vested stock options, SARS and restricted
stock awards. This cost is expected to be recognized over a weighted-average period of 1.5 years.
Risk-free interest rate
Expected years until exercise
Expected stock volatility
Dividend yield
For the Year Ended December 31,
2013
0.6%
4 years
83.4%
1.5%
2012
1.1%
5 years
94.6%
1.8%
2011
2.2%
6 years
102.5%
1.1%
The risk-free interest rates used in the model were based on the U.S. Treasury yield curve in effect at the
grant date. Farmer Mac used historical data to estimate the timing of option exercises and stock option
cancellation rates used in the model. Expected volatilities were based on historical volatility of Farmer
Mac's Class C common stock. The dividend yields were based on the expected dividends as a percentage
of the value of Farmer Mac's Class C common stock on the grant date.
Because restricted stock awards will be issued upon vesting regardless of the stock price, expected stock
volatility is not considered in determining grant date fair value. Restricted stock awards also accrue
dividends which are paid at vesting. The weighted-average grant date fair value of the restricted stock
awarded in 2013, 2012, and 2011 was $30.27, $21.92, and $18.77 per share, respectively, which was the
closing price of the stock on the date granted.
Statutory and Regulatory Capital Requirements
Farmer Mac is subject to three statutory and regulatory capital requirements:
• Statutory minimum capital requirement – Farmer Mac's statutory minimum capital level is an
amount of core capital (stockholders' equity less accumulated other comprehensive income
plus non-controlling interest – preferred stock) equal to the sum of 2.75 percent of
Farmer Mac's aggregate on-balance sheet assets, as calculated for regulatory purposes, plus
0.75 percent of the aggregate off-balance sheet obligations of Farmer Mac, specifically
including:
the unpaid principal balance of outstanding Farmer Mac Guaranteed Securities;
instruments issued or guaranteed by Farmer Mac that are substantially equivalent to
Farmer Mac Guaranteed Securities, including LTSPCs; and
other off-balance sheet obligations of Farmer Mac.
• Statutory critical capital requirement – Farmer Mac's critical capital level is an amount of core
capital equal to 50 percent of the total minimum capital requirement at that time.
181
182
• Risk-based capital requirement – Farmer Mac's charter directs the Farm Credit Administration
("FCA") to establish a risk-based capital stress test for Farmer Mac, using specified stress-test
parameters.
A reconciliation of tax at the statutory federal tax rate to the income tax expense for the years ended
December 31, 2013, 2012, and 2011 is as follows:
Farmer Mac is required to comply with the higher of the minimum capital requirement and the risk-based
capital requirement.
As of December 31, 2013, Farmer Mac's minimum and critical capital requirements were $398.5 million
and $199.3 million, respectively, and its actual core capital level was $590.7 million, which was
$192.2 million above the minimum capital requirement and $391.4 million above the critical capital
requirement as of that date. As of December 31, 2012, Farmer Mac's minimum and critical capital
requirements were $374.0 million and $187.0 million, respectively, and its actual core capital level was
$519.0 million, which was $145.0 million above the minimum capital requirement and $332.0 million
above the critical capital requirement as of that date.
Based on the risk-based capital stress test, Farmer Mac's risk-based capital requirement as of
December 31, 2013 was $90.8 million, and Farmer Mac's regulatory capital (core capital plus the
allowance for losses) of $604.0 million exceeded that amount by approximately $513.2 million. As of
December 31, 2012, Farmer Mac's risk-based capital requirement was $58.1 million, and Farmer Mac's
regulatory capital of $535.9 million exceeded that amount by approximately $477.8 million.
10. INCOME TAXES
Farmer Mac is subject to federal income taxes but is exempt from state and local income taxes. The
components of the federal income tax expense for the years ended December 31, 2013, 2012, and 2011
were as follows:
Table 10.1
For the Year Ended December 31,
2013
2012
2011
(in thousands)
Current income tax expense
Deferred income tax expense/(benefit)
Income tax expense
$
$
27,082
6,670
33,752
$
$
24,138
(1,982)
22,156
$
$
24,736
(18,939)
5,797
Tax expense at statutory rate
Non-taxable dividend income
Income from non-controlling interest
Valuation allowance
Other
Income tax expense
Statutory tax rate
For the Year Ended December 31,
2013
2012
2011
(dollars in thousands)
$
45,943
$
31,891
$
(2,116)
(7,766)
(2,693)
384
(2,116)
(7,766)
6
141
15,627
(2,116)
(7,766)
(254)
306
5,797
$
33,752
$
22,156
$
35.0%
35.0%
35.0%
The components of the deferred tax assets and liabilities as of December 31, 2013 and 2012 were as
Table 10.2
follows:
Table 10.3
Deferred tax assets:
Basis differences related to financial derivatives
$
22,349
$
44,963
Basis differences related to securities
Unrealized losses on available-for-sale securities
As of December 31,
2013
2012
(in thousands)
2,509
8,762
4,667
1,916
38,532
(36,432)
—
1,499
(1,499)
2,455
44,758
—
—
353
360
713
—
—
5,911
2,111
39,272
(39,272)
2,080
1,352
(1,352)
2,333
57,398
13,160
39,829
1,118
168
54,275
3,123
$
44,045
$
Lower of cost or fair value adjustment on loans held for sale
Amortization of premiums on capital investments
Allowance for losses
Stock-based compensation
Capital loss carryforwards
Valuation allowance
Valuation allowance
Other
Total deferred tax assets
Deferred tax liability:
Basis differences related to securities
Unrealized gains on available-for-sale securities
Basis difference in subsidiary
Other
Total deferred tax liability
Net deferred tax asset
A valuation allowance is required to reduce a deferred tax asset to an amount that is more likely than not
to be realized. Future realization of the tax benefit from a deferred tax asset depends on the existence of
sufficient taxable income of the appropriate character. After the evaluation of both positive and negative
objective evidence regarding the likelihood that its deferred tax assets will be realized, Farmer Mac
183
184
As of December 31, 2013, Farmer Mac's minimum and critical capital requirements were $398.5 million
and $199.3 million, respectively, and its actual core capital level was $590.7 million, which was
$192.2 million above the minimum capital requirement and $391.4 million above the critical capital
requirement as of that date. As of December 31, 2012, Farmer Mac's minimum and critical capital
requirements were $374.0 million and $187.0 million, respectively, and its actual core capital level was
$519.0 million, which was $145.0 million above the minimum capital requirement and $332.0 million
above the critical capital requirement as of that date.
Based on the risk-based capital stress test, Farmer Mac's risk-based capital requirement as of
December 31, 2013 was $90.8 million, and Farmer Mac's regulatory capital (core capital plus the
allowance for losses) of $604.0 million exceeded that amount by approximately $513.2 million. As of
December 31, 2012, Farmer Mac's risk-based capital requirement was $58.1 million, and Farmer Mac's
regulatory capital of $535.9 million exceeded that amount by approximately $477.8 million.
Farmer Mac is subject to federal income taxes but is exempt from state and local income taxes. The
components of the federal income tax expense for the years ended December 31, 2013, 2012, and 2011
10. INCOME TAXES
were as follows:
Table 10.1
For the Year Ended December 31,
2013
2012
2011
(in thousands)
Current income tax expense
Deferred income tax expense/(benefit)
Income tax expense
$
$
27,082
6,670
33,752
$
$
24,138
(1,982)
22,156
$
$
24,736
(18,939)
5,797
• Risk-based capital requirement – Farmer Mac's charter directs the Farm Credit Administration
("FCA") to establish a risk-based capital stress test for Farmer Mac, using specified stress-test
A reconciliation of tax at the statutory federal tax rate to the income tax expense for the years ended
December 31, 2013, 2012, and 2011 is as follows:
parameters.
capital requirement.
Farmer Mac is required to comply with the higher of the minimum capital requirement and the risk-based
Table 10.2
Tax expense at statutory rate
Non-taxable dividend income
Income from non-controlling interest
Valuation allowance
Other
Income tax expense
Statutory tax rate
For the Year Ended December 31,
2013
2012
2011
(dollars in thousands)
$
45,943
$
31,891
$
(2,116)
(7,766)
(2,693)
384
(2,116)
(7,766)
6
141
$
33,752
$
22,156
$
15,627
(2,116)
(7,766)
(254)
306
5,797
35.0%
35.0%
35.0%
The components of the deferred tax assets and liabilities as of December 31, 2013 and 2012 were as
follows:
Table 10.3
As of December 31,
2013
2012
(in thousands)
Deferred tax assets:
Basis differences related to financial derivatives
$
22,349
$
44,963
Basis differences related to securities
Unrealized losses on available-for-sale securities
Allowance for losses
Stock-based compensation
Capital loss carryforwards
Valuation allowance
Lower of cost or fair value adjustment on loans held for sale
Amortization of premiums on capital investments
Valuation allowance
Other
Total deferred tax assets
Deferred tax liability:
Basis differences related to securities
Unrealized gains on available-for-sale securities
Basis difference in subsidiary
Other
Total deferred tax liability
Net deferred tax asset
2,509
8,762
4,667
1,916
38,532
(36,432)
—
1,499
(1,499)
2,455
44,758
—
—
353
360
713
$
44,045
$
—
—
5,911
2,111
39,272
(39,272)
2,080
1,352
(1,352)
2,333
57,398
13,160
39,829
1,118
168
54,275
3,123
A valuation allowance is required to reduce a deferred tax asset to an amount that is more likely than not
to be realized. Future realization of the tax benefit from a deferred tax asset depends on the existence of
sufficient taxable income of the appropriate character. After the evaluation of both positive and negative
objective evidence regarding the likelihood that its deferred tax assets will be realized, Farmer Mac
183
184
established a valuation allowance of $37.9 million and $40.6 million, respectively, and as of December 31,
2013 and 2012, which was attributable to non-deductible capital losses on investment securities. Farmer
Mac did not establish a valuation allowance for the remainder of its deferred tax assets because it believes
it is more likely than not that those deferred tax assets will be realized. In determining its deferred tax
asset valuation allowance, Farmer Mac considered its taxable income of the appropriate character (for
example, ordinary income or capital gain) within the carryback and carryforward periods available under
the tax law and the impact of possible tax planning strategies. As of December 31, 2013, the amount of
capital loss carryforwards was $110.1 million. Of these capital loss carryforwards, $104.1 million will
expire in 2014, $0.1 million in 2015, and $5.9 million in 2016.
As of December 31, 2013 both the recorded liability for uncertain tax positions and the corresponding
deferred tax asset were $1.1 million. As of December 31, 2012 both the recorded liability for uncertain
tax positions and the corresponding deferred tax asset were $1.0 million.
The following table presents the changes in unrecognized tax benefits for the years ended December 31,
2013, 2012, and 2011:
Table 10.4
Beginning balance
Increases/(decreases) based on tax positions related to current year
Ending balance
For the Year Ended December 31,
2013
2012
2011
(in thousands)
1,046
102
1,148
$
$
1,175
(129)
1,046
$
$
$
$
1,454
(279)
1,175
The resolution of the unrecognized tax benefits presented above represents temporary differences and,
therefore, would not result in a change to Farmer Mac's effective tax rate. As of December 31, 2013 and
2012, accrued interest payable and the associated interest expense related to unrecognized tax benefits was
immaterial and is presented as a component of income taxes. Farmer Mac does not expect to be subject
to, and has not recorded tax penalties. The IRS currently is examining Farmer Mac's uncertain tax
positions reported in its 2011 tax return; therefore, there may be a significant change in its unrecognized
tax benefits within the next 12 months. Tax years 2010 through 2013 remain subject to examination.
11. EMPLOYEE BENEFITS
Farmer Mac makes contributions to a defined contribution retirement plan for all of its employees.
Farmer Mac contributed 13.2 percent of the lesser of an employee's gross salary or the maximum
compensation permitted under the Economic Growth and Tax Relief Reconciliation Act of 2001
("EGTRRA") ($255,000 for 2013, $250,000 for 2012, and $245,000 for 2011), plus 5.7 percent of the
difference between: (1) the lesser of the gross salary or the amount established under EGTRRA; and (2)
the Social Security Taxable Wage Base. Employees are fully vested after having been employed for
approximately 3 years. Expense for this plan for the years ended December 31, 2013, 2012, and 2011 was
$1.1 million, $0.9 million, and $1.0 million, respectively.
12. 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 the Farm & Ranch, the
USDA Guarantees, or the Rural Utilities lines of business, and (2) LTSPCs, which are available through
the Farm & Ranch or the Rural Utilities lines of business. Farmer Mac records, at the inception of a
guarantee, a liability for the fair value of its obligation to stand ready to perform under the terms of each
guarantee and an asset that is equal to the fair value of the fees that will be received over the life of each
guarantee. The fair values of the guarantee obligation and asset at inception 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.
Because the cash flows of these instruments may be interest rate path dependent, these values and
projected discount rates are derived using a Monte Carlo simulation model. The guarantee obligation and
corresponding asset are subsequently amortized into guarantee and commitment fee income in relation to
the decline in the unpaid principal balance on the underlying agricultural real estate mortgage and rural
utilities loans.
The contractual terms of Farmer Mac's guarantees range from less than 1 year to 30 years. However, the
actual term of each guarantee may be significantly less than the contractual term based on the prepayment
characteristics of the related agricultural real estate mortgage loans. Farmer Mac's maximum potential
exposure under these guarantees is comprised of the unpaid principal balance of the underlying
agricultural real estate mortgage loans. Guarantees issued or modified on or after January 1, 2003 are
recorded in the consolidated balance sheets. Farmer Mac's maximum potential exposure was $3.9 billion
and $3.6 billion as of December 31, 2013 and 2012, respectively. Farmer Mac's maximum potential
exposure for guarantees issued prior to January 1, 2003, which are not recorded on the consolidated
balance sheets, was $108.7 million and $474.7 million as of December 31, 2013 and 2012, respectively.
The maximum exposure from these guarantees is not representative of the actual loss Farmer Mac is likely
to incur, based on historical loss experience. In the event Farmer Mac was required to make payments
under its guarantees, Farmer Mac would have the right to enforce the terms of the loans, and in the event
of default, would have access to the underlying collateral. For information on Farmer Mac's methodology
for determining the reserve for losses for its financial guarantees, see Note 2(j) and Note 8. The following
table presents changes in Farmer Mac's guarantee and commitment obligations in the consolidated balance
sheets for the years ended December 31, 2013, 2012, and 2011:
Table 12.1
Beginning balance, January 1
Additions to the guarantee and commitment obligation (1)
Amortization of the guarantee and commitment obligation
Ending balance, December 31
(1) Represents the fair value of the guarantee and commitment obligation at inception.
For the Year Ended December 31,
2013
2012
2011
(in thousands)
37,803
$
27,440
$
8,414
(6,550)
15,134
(4,771)
39,667
$
37,803
$
$
$
30,308
5,097
(7,965)
27,440
185
186
established a valuation allowance of $37.9 million and $40.6 million, respectively, and as of December 31,
12. OFF-BALANCE SHEET GUARANTEES AND LONG-TERM STANDBY PURCHASE
2013 and 2012, which was attributable to non-deductible capital losses on investment securities. Farmer
Mac did not establish a valuation allowance for the remainder of its deferred tax assets because it believes
it is more likely than not that those deferred tax assets will be realized. In determining its deferred tax
asset valuation allowance, Farmer Mac considered its taxable income of the appropriate character (for
example, ordinary income or capital gain) within the carryback and carryforward periods available under
the tax law and the impact of possible tax planning strategies. As of December 31, 2013, the amount of
capital loss carryforwards was $110.1 million. Of these capital loss carryforwards, $104.1 million will
expire in 2014, $0.1 million in 2015, and $5.9 million in 2016.
As of December 31, 2013 both the recorded liability for uncertain tax positions and the corresponding
deferred tax asset were $1.1 million. As of December 31, 2012 both the recorded liability for uncertain
tax positions and the corresponding deferred tax asset were $1.0 million.
The following table presents the changes in unrecognized tax benefits for the years ended December 31,
2013, 2012, and 2011:
Table 10.4
Beginning balance
Ending balance
Increases/(decreases) based on tax positions related to current year
For the Year Ended December 31,
2013
2012
2011
(in thousands)
$
$
1,046
102
1,148
$
$
1,175
(129)
1,046
$
$
1,454
(279)
1,175
The resolution of the unrecognized tax benefits presented above represents temporary differences and,
therefore, would not result in a change to Farmer Mac's effective tax rate. As of December 31, 2013 and
2012, accrued interest payable and the associated interest expense related to unrecognized tax benefits was
immaterial and is presented as a component of income taxes. Farmer Mac does not expect to be subject
to, and has not recorded tax penalties. The IRS currently is examining Farmer Mac's uncertain tax
positions reported in its 2011 tax return; therefore, there may be a significant change in its unrecognized
tax benefits within the next 12 months. Tax years 2010 through 2013 remain subject to examination.
11. EMPLOYEE BENEFITS
Farmer Mac makes contributions to a defined contribution retirement plan for all of its employees.
Farmer Mac contributed 13.2 percent of the lesser of an employee's gross salary or the maximum
compensation permitted under the Economic Growth and Tax Relief Reconciliation Act of 2001
("EGTRRA") ($255,000 for 2013, $250,000 for 2012, and $245,000 for 2011), plus 5.7 percent of the
difference between: (1) the lesser of the gross salary or the amount established under EGTRRA; and (2)
the Social Security Taxable Wage Base. Employees are fully vested after having been employed for
approximately 3 years. Expense for this plan for the years ended December 31, 2013, 2012, and 2011 was
$1.1 million, $0.9 million, and $1.0 million, respectively.
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 the Farm & Ranch, the
USDA Guarantees, or the Rural Utilities lines of business, and (2) LTSPCs, which are available through
the Farm & Ranch or the Rural Utilities lines of business. Farmer Mac records, at the inception of a
guarantee, a liability for the fair value of its obligation to stand ready to perform under the terms of each
guarantee and an asset that is equal to the fair value of the fees that will be received over the life of each
guarantee. The fair values of the guarantee obligation and asset at inception 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.
Because the cash flows of these instruments may be interest rate path dependent, these values and
projected discount rates are derived using a Monte Carlo simulation model. The guarantee obligation and
corresponding asset are subsequently amortized into guarantee and commitment fee income in relation to
the decline in the unpaid principal balance on the underlying agricultural real estate mortgage and rural
utilities loans.
The contractual terms of Farmer Mac's guarantees range from less than 1 year to 30 years. However, the
actual term of each guarantee may be significantly less than the contractual term based on the prepayment
characteristics of the related agricultural real estate mortgage loans. Farmer Mac's maximum potential
exposure under these guarantees is comprised of the unpaid principal balance of the underlying
agricultural real estate mortgage loans. Guarantees issued or modified on or after January 1, 2003 are
recorded in the consolidated balance sheets. Farmer Mac's maximum potential exposure was $3.9 billion
and $3.6 billion as of December 31, 2013 and 2012, respectively. Farmer Mac's maximum potential
exposure for guarantees issued prior to January 1, 2003, which are not recorded on the consolidated
balance sheets, was $108.7 million and $474.7 million as of December 31, 2013 and 2012, respectively.
The maximum exposure from these guarantees is not representative of the actual loss Farmer Mac is likely
to incur, based on historical loss experience. In the event Farmer Mac was required to make payments
under its guarantees, Farmer Mac would have the right to enforce the terms of the loans, and in the event
of default, would have access to the underlying collateral. For information on Farmer Mac's methodology
for determining the reserve for losses for its financial guarantees, see Note 2(j) and Note 8. The following
table presents changes in Farmer Mac's guarantee and commitment obligations in the consolidated balance
sheets for the years ended December 31, 2013, 2012, and 2011:
Table 12.1
Beginning balance, January 1
Additions to the guarantee and commitment obligation (1)
Amortization of the guarantee and commitment obligation
Ending balance, December 31
For the Year Ended December 31,
2013
2012
2011
(in thousands)
37,803
$
27,440
$
8,414
(6,550)
15,134
(4,771)
39,667
$
37,803
$
$
$
30,308
5,097
(7,965)
27,440
(1) Represents the fair value of the guarantee and commitment obligation at inception.
185
186
Off-Balance Sheet Farmer Mac Guaranteed Securities
payment made by the borrower on the USDA-guaranteed portion or any related loan subsidy within 30
days after the lender's receipt of the payment.
Agricultural real estate mortgage loans, rural utilities loans and other related 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. Farmer Mac is obligated under its
guarantee to ensure that the securities make timely payments to investors of principal and interest based
on the underlying loans, regardless of whether the trust has actually received such scheduled loan
payments. As consideration for Farmer Mac's assumption of the credit risk on these securities, Farmer
Mac receives guarantee fees that are recognized as earned on an accrual basis over the life of the loans and
based upon the outstanding balance of the Farmer Mac Guaranteed Security.
Farmer Mac is required to perform under its obligation when the underlying loans for the off-balance sheet
Farmer Mac Guaranteed Securities do not make their scheduled installment payments. When a loan
underlying a Farm & Ranch Guaranteed Security becomes 90 days or more past due, Farmer Mac may, in
its sole discretion, repurchase the loan from the trust and generally does repurchase such loans, thereby
reducing the principal balance of the outstanding Farm & Ranch Guaranteed Security.
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 December 31, 2013 and December 31, 2012, not including offsets provided by any recourse
provisions, recoveries from third parties, or collateral for the underlying loans:
Table 12.2
Outstanding Balance of Off-Balance Sheet Farmer Mac Guaranteed Securities
Farm & Ranch:
AgVantage Securities
Guaranteed Securities
USDA Guarantees:
Farmer Mac Guaranteed USDA Securities
Rural Utilities:
AgVantage Securities
Total off-balance sheet Farmer Mac Guaranteed Securities
December 31, 2013
December 31, 2012
(in thousands)
$
$
970,000
$
765,751
20,222
11,009
1,766,982
$
970,000
911,370
29,658
12,669
1,923,697
If Farmer Mac repurchases a loan that is collateral for a Farmer Mac Guaranteed Security, Farmer Mac
would have the right to enforce the terms of the loan, and in the event of a default, would have access to
the underlying collateral. Farmer Mac typically recovers its investment in the defaulted loans purchased
either through borrower payments, loan payoffs, payments by third parties or foreclosure and sale of the
property securing the loans.
Farmer Mac has recourse to the USDA for any amounts advanced for the timely payment of principal and
interest on Farmer Mac Guaranteed USDA Securities. That recourse is the USDA guarantee, a full faith
and credit obligation of the United States that becomes enforceable if a lender fails to repurchase the
USDA-guaranteed portion from its owner within 30 days after written demand from the owner when (a)
the borrower under the guaranteed loan is in default not less than 60 days in the payment of any principal
or interest due on the USDA-guaranteed portion, or (b) the lender has failed to remit to the owner the
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 12.3
For the Year Ended December 31,
2013
2011
2012
(in thousands)
Proceeds from new securitizations
$
150,417
$
38,063
$
Guarantee fees received
Purchases of assets from the trusts
5,182
(6,667)
5,197
(8,933)
25,674
7,520
(7,471)
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 $13.4 million
as of December 31, 2013 and $15.8 million as of December 31, 2012. As of December 31, 2013 and
December 31, 2012, the weighted-average remaining maturity of all loans underlying off-balance sheet
Farmer Mac Guaranteed Securities, excluding AgVantage securities, was 12.8 years and 13.4 years,
respectively. As of December 31, 2013 and December 31, 2012, the weighted-average remaining maturity
of the off-balance sheet AgVantage securities was 3.4 years and 4.7 years.
Long-Term Standby Purchase Commitments
An LTSPC is a commitment by Farmer Mac to purchase eligible loans from an identified pool of loans
under enumerated circumstances, 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.
An LTSPC permits a seller to nominate from its portfolio an identified pool of loans for participation in
the Farm & Ranch program, which are retained in the seller's portfolio and serviced by the seller. Farmer
Mac reviews the loan pool to confirm that it conforms to Farmer Mac's underwriting standards. Upon
Farmer Mac's approval of the eligible loans, the seller effectively transfers the credit risk on those loans to
Farmer Mac, thereby reducing the seller's credit and concentration risk exposures and, consequently, its
regulatory capital requirements and its loss reserve requirements. Credit risk is transferred through
Farmer Mac's commitment to purchase the identified loans from the counterparty based on Farmer Mac's
original credit review and acceptance of the credit risk on the loans.
The specific events or circumstances that would require Farmer Mac to purchase some or all of the loans
subject to LTSPCs include: (1) the failure of the borrower under any loan to make installment payments
under that loan for a period of either 90 days or 120 days (depending on the provisions of the applicable
187
188
Off-Balance Sheet Farmer Mac Guaranteed Securities
Agricultural real estate mortgage loans, rural utilities loans and other related 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. Farmer Mac is obligated under its
guarantee to ensure that the securities make timely payments to investors of principal and interest based
on the underlying loans, regardless of whether the trust has actually received such scheduled loan
payments. As consideration for Farmer Mac's assumption of the credit risk on these securities, Farmer
Mac receives guarantee fees that are recognized as earned on an accrual basis over the life of the loans and
based upon the outstanding balance of the Farmer Mac Guaranteed Security.
Farmer Mac is required to perform under its obligation when the underlying loans for the off-balance sheet
Farmer Mac Guaranteed Securities do not make their scheduled installment payments. When a loan
underlying a Farm & Ranch Guaranteed Security becomes 90 days or more past due, Farmer Mac may, in
its sole discretion, repurchase the loan from the trust and generally does repurchase such loans, thereby
reducing the principal balance of the outstanding Farm & Ranch Guaranteed Security.
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 December 31, 2013 and December 31, 2012, not including offsets provided by any recourse
provisions, recoveries from third parties, or collateral for the underlying loans:
Table 12.2
Outstanding Balance of Off-Balance Sheet Farmer Mac Guaranteed Securities
December 31, 2013
December 31, 2012
Farm & Ranch:
AgVantage Securities
Guaranteed Securities
USDA Guarantees:
Rural Utilities:
AgVantage Securities
Farmer Mac Guaranteed USDA Securities
(in thousands)
970,000
$
765,751
20,222
11,009
970,000
911,370
29,658
12,669
1,923,697
$
$
Total off-balance sheet Farmer Mac Guaranteed Securities
1,766,982
$
If Farmer Mac repurchases a loan that is collateral for a Farmer Mac Guaranteed Security, Farmer Mac
would have the right to enforce the terms of the loan, and in the event of a default, would have access to
the underlying collateral. Farmer Mac typically recovers its investment in the defaulted loans purchased
either through borrower payments, loan payoffs, payments by third parties or foreclosure and sale of the
property securing the loans.
Farmer Mac has recourse to the USDA for any amounts advanced for the timely payment of principal and
interest on Farmer Mac Guaranteed USDA Securities. That recourse is the USDA guarantee, a full faith
and credit obligation of the United States that becomes enforceable if a lender fails to repurchase the
USDA-guaranteed portion from its owner within 30 days after written demand from the owner when (a)
the borrower under the guaranteed loan is in default not less than 60 days in the payment of any principal
or interest due on the USDA-guaranteed portion, or (b) the lender has failed to remit to the owner the
payment made by the borrower on the USDA-guaranteed portion or any related loan subsidy within 30
days after the lender's receipt of the payment.
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 12.3
For the Year Ended December 31,
2013
2012
(in thousands)
2011
Proceeds from new securitizations
$
150,417
$
38,063
$
Guarantee fees received
Purchases of assets from the trusts
5,182
(6,667)
5,197
(8,933)
25,674
7,520
(7,471)
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 $13.4 million
as of December 31, 2013 and $15.8 million as of December 31, 2012. As of December 31, 2013 and
December 31, 2012, the weighted-average remaining maturity of all loans underlying off-balance sheet
Farmer Mac Guaranteed Securities, excluding AgVantage securities, was 12.8 years and 13.4 years,
respectively. As of December 31, 2013 and December 31, 2012, the weighted-average remaining maturity
of the off-balance sheet AgVantage securities was 3.4 years and 4.7 years.
Long-Term Standby Purchase Commitments
An LTSPC is a commitment by Farmer Mac to purchase eligible loans from an identified pool of loans
under enumerated circumstances, 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.
An LTSPC permits a seller to nominate from its portfolio an identified pool of loans for participation in
the Farm & Ranch program, which are retained in the seller's portfolio and serviced by the seller. Farmer
Mac reviews the loan pool to confirm that it conforms to Farmer Mac's underwriting standards. Upon
Farmer Mac's approval of the eligible loans, the seller effectively transfers the credit risk on those loans to
Farmer Mac, thereby reducing the seller's credit and concentration risk exposures and, consequently, its
regulatory capital requirements and its loss reserve requirements. Credit risk is transferred through
Farmer Mac's commitment to purchase the identified loans from the counterparty based on Farmer Mac's
original credit review and acceptance of the credit risk on the loans.
The specific events or circumstances that would require Farmer Mac to purchase some or all of the loans
subject to LTSPCs include: (1) the failure of the borrower under any loan to make installment payments
under that loan for a period of either 90 days or 120 days (depending on the provisions of the applicable
187
188
agreement); or (2) the determination by the holder of the LTSPC to sell or exchange some or all of the
loans under the LTSPC to Farmer Mac.
Farmer Mac purchases loans subject to an LTSPC at:
• par if the loans become delinquent for either 90 days or 120 days (depending on the agreement) or
are in material non-monetary default, with accrued and unpaid interest on the defaulted loans
payable out of any future loan payments or liquidation proceeds; or
a mark-to-market price or in exchange for Farm & Ranch Guaranteed Securities (if the loans are
not delinquent), in accordance with the terms of the applicable agreement.
•
The maximum principal amount of potential undiscounted future payments that Farmer Mac could be
requested to make under all LTSPCs, not including offsets provided by any recourse provisions, recoveries
from third parties, or collateral for the underlying loans, was $2.3 billion as of December 31, 2013 and
$2.2 billion as of December 31, 2012.
As of December 31, 2013 and December 31, 2012, the weighted-average remaining maturity of all loans
underlying LTSPCs was 13.9 years and 13.6 years, respectively. For those LTSPCs issued or modified on
or after January 1, 2003, Farmer Mac has recorded a liability for its obligation to stand ready under the
commitment in the guarantee and commitment obligation on the consolidated balance sheet. This liability
approximated $26.3 million as of December 31, 2013 and $22.0 million as of December 31, 2012.
Commitments
Farmer Mac enters into mandatory and optional delivery commitments to purchase loans. Most loan
purchase commitments entered into by Farmer Mac are mandatory commitments, in which Farmer Mac
charges a fee to extend or cancel the commitment. As of December 31, 2013 and 2012, commitments to
purchase Farm & Ranch loans and USDA Guarantees totaled $54.8 million and $71.4 million,
respectively, all of which were mandatory commitments. As of December 31, 2013 and 2012,
commitments to purchase rural utilities loans totaled $26.3 million and $5.3 million, respectively. Any
optional loan purchase commitments are sold forward under optional commitments to deliver Farmer Mac
Guaranteed Securities that may be canceled by Farmer Mac without penalty.
Farmer Mac is exposed to interest rate risk from the time it commits to purchase a loan to the time it
either: (a) sells Farmer Mac Guaranteed Securities backed by the loan or (b) issues debt to retain the loan
in its portfolio. There were no commitments to sell Farmer Mac Guaranteed Securities as of
December 31, 2013 and 2012. Farmer Mac manages the interest rate risk related to loans not yet sold or
funded as a retained investment through the use of forward sale contracts on the debt of other GSEs and
futures contracts involving U.S. Treasury securities. For more information on financial derivatives see
Note 2(h) and Note 6.
Rental expense for Farmer Mac's office space for each of the years ended December 31, 2013, 2012, and
2011 was $1.3 million, $1.3 million and $1.6 million, respectively. The future minimum lease payments
under Farmer Mac's non-cancelable leases for its office space and other contractual obligations are as
follows:
Table 12.4
Future Minimum
Lease Payments
Other Contractual
Obligations
(in thousands)
1,340
$
1,363
1,366
1,389
1,389
8,339
15,186
$
614
58
3
—
—
—
675
2014
2015
2016
2017
2018
Thereafter
Total
$
$
Other contractual obligations in the table above include minimum amounts due under non-cancelable
agreements to purchase goods or services that are enforceable and legally binding and specify all
significant terms. These agreements include agreements for the provision of consulting services,
information technology support, equipment maintenance, and financial analysis software and
services. The amounts actually paid under these agreements will likely be higher due to the variable
components of some of these agreements under which the ultimate obligation owed is determined by
reference to actual usage or hours worked.
13. FAIR VALUE DISCLOSURES
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date (also referred to as an exit price).
In determining fair value, Farmer Mac uses various valuation approaches, including market and income
based approaches. The fair value hierarchy requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. When available, the fair value of
Farmer Mac's financial instruments is based on quoted market prices, valuation techniques that use
observable market-based inputs, or unobservable inputs that are corroborated by market data. Pricing
information obtained from third parties is internally validated for reasonableness prior to use in the
consolidated financial statements. Farmer Mac's accounting polices for fair value measurement and a
description of the fair value techniques used for instruments measured at fair value is discussed in
Note 2(p).
The fair value hierarchy ranks the quality and reliability of the information used to determine fair
values. The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities and the lowest priority to unobservable inputs. The following three levels are used to
classify fair value measurements:
189
190
agreement); or (2) the determination by the holder of the LTSPC to sell or exchange some or all of the
loans under the LTSPC to Farmer Mac.
Farmer Mac purchases loans subject to an LTSPC at:
Rental expense for Farmer Mac's office space for each of the years ended December 31, 2013, 2012, and
2011 was $1.3 million, $1.3 million and $1.6 million, respectively. The future minimum lease payments
under Farmer Mac's non-cancelable leases for its office space and other contractual obligations are as
follows:
• par if the loans become delinquent for either 90 days or 120 days (depending on the agreement) or
Table 12.4
are in material non-monetary default, with accrued and unpaid interest on the defaulted loans
payable out of any future loan payments or liquidation proceeds; or
•
a mark-to-market price or in exchange for Farm & Ranch Guaranteed Securities (if the loans are
not delinquent), in accordance with the terms of the applicable agreement.
The maximum principal amount of potential undiscounted future payments that Farmer Mac could be
requested to make under all LTSPCs, not including offsets provided by any recourse provisions, recoveries
from third parties, or collateral for the underlying loans, was $2.3 billion as of December 31, 2013 and
$2.2 billion as of December 31, 2012.
As of December 31, 2013 and December 31, 2012, the weighted-average remaining maturity of all loans
underlying LTSPCs was 13.9 years and 13.6 years, respectively. For those LTSPCs issued or modified on
or after January 1, 2003, Farmer Mac has recorded a liability for its obligation to stand ready under the
commitment in the guarantee and commitment obligation on the consolidated balance sheet. This liability
approximated $26.3 million as of December 31, 2013 and $22.0 million as of December 31, 2012.
Commitments
Farmer Mac enters into mandatory and optional delivery commitments to purchase loans. Most loan
purchase commitments entered into by Farmer Mac are mandatory commitments, in which Farmer Mac
charges a fee to extend or cancel the commitment. As of December 31, 2013 and 2012, commitments to
purchase Farm & Ranch loans and USDA Guarantees totaled $54.8 million and $71.4 million,
respectively, all of which were mandatory commitments. As of December 31, 2013 and 2012,
commitments to purchase rural utilities loans totaled $26.3 million and $5.3 million, respectively. Any
optional loan purchase commitments are sold forward under optional commitments to deliver Farmer Mac
Guaranteed Securities that may be canceled by Farmer Mac without penalty.
Farmer Mac is exposed to interest rate risk from the time it commits to purchase a loan to the time it
either: (a) sells Farmer Mac Guaranteed Securities backed by the loan or (b) issues debt to retain the loan
in its portfolio. There were no commitments to sell Farmer Mac Guaranteed Securities as of
December 31, 2013 and 2012. Farmer Mac manages the interest rate risk related to loans not yet sold or
funded as a retained investment through the use of forward sale contracts on the debt of other GSEs and
futures contracts involving U.S. Treasury securities. For more information on financial derivatives see
Note 2(h) and Note 6.
Future Minimum
Lease Payments
Other Contractual
Obligations
(in thousands)
1,340
$
1,363
1,366
1,389
1,389
8,339
15,186
$
614
58
3
—
—
—
675
2014
2015
2016
2017
2018
Thereafter
Total
$
$
Other contractual obligations in the table above include minimum amounts due under non-cancelable
agreements to purchase goods or services that are enforceable and legally binding and specify all
significant terms. These agreements include agreements for the provision of consulting services,
information technology support, equipment maintenance, and financial analysis software and
services. The amounts actually paid under these agreements will likely be higher due to the variable
components of some of these agreements under which the ultimate obligation owed is determined by
reference to actual usage or hours worked.
13. FAIR VALUE DISCLOSURES
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date (also referred to as an exit price).
In determining fair value, Farmer Mac uses various valuation approaches, including market and income
based approaches. The fair value hierarchy requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. When available, the fair value of
Farmer Mac's financial instruments is based on quoted market prices, valuation techniques that use
observable market-based inputs, or unobservable inputs that are corroborated by market data. Pricing
information obtained from third parties is internally validated for reasonableness prior to use in the
consolidated financial statements. Farmer Mac's accounting polices for fair value measurement and a
description of the fair value techniques used for instruments measured at fair value is discussed in
Note 2(p).
The fair value hierarchy ranks the quality and reliability of the information used to determine fair
values. The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities and the lowest priority to unobservable inputs. The following three levels are used to
classify fair value measurements:
189
190
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for
are few transactions for the financial instruments; (2) the prices in the market are not current; (3) the price
identical, unrestricted assets or liabilities.
Level 2 Quoted prices in markets that are not active or financial instruments for which all
Level 3
significant inputs are observable, either directly or indirectly.
Prices or valuations that require unobservable inputs that are significant to the fair value
measurement.
Farmer Mac performs a detailed analysis of the assets and liabilities carried at fair value to determine the
appropriate level based on the transparency of the inputs used in the valuation techniques. In certain
cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In
such cases, an instrument's level within the fair value hierarchy is based on the lowest level of input that is
significant to the fair value measurement. Farmer Mac's assessment of the significance of a particular
input to the fair value measurement of an instrument requires judgment and consideration of factors
specific to the instrument. While Farmer Mac believes its valuation methods are appropriate and
consistent with those of other market participants, using different methodologies or assumptions to
determine fair value could result in a materially different estimate of fair value for some financial
instruments.
The following is a description of the fair value techniques used for instruments measured at fair value as
well as the general classification of such instruments pursuant to the valuation hierarchy described
above. Fair value measurements related to financial instruments that are reported at fair value in the
consolidated financial statements each period are referred to as recurring fair value measurements. Fair
value measurements related to financial instruments that are not reported at fair value each period but are
subject to fair value adjustments in certain circumstances are referred to as nonrecurring fair value
measurements.
Recurring Fair Value Measurements and Classification
Available-for-Sale and Trading Investment Securities
The fair value of investments in U.S. Treasuries is based on unadjusted quoted prices in active
markets. Farmer Mac classifies these fair value measurements as level 1.
For a significant portion of Farmer Mac's investment portfolio, including most asset-backed securities,
corporate debt securities, senior agency debt securities, Government/GSE guaranteed mortgage-backed
securities, municipal bonds, and preferred stock issued by GSEs, fair value is primarily determined using a
reputable and nationally recognized third party pricing service. The prices obtained are non-binding and
generally representative of recent market trades. The fair value of certain asset-backed and Government
guaranteed mortgage-backed securities are estimated based on quotations from brokers or dealers.
Farmer Mac corroborates its primary valuation source by obtaining a secondary price from another
independent third party pricing service. Farmer Mac classifies these fair value measurements as level 2.
For certain investment securities that are thinly traded or not quoted, Farmer Mac estimates fair value
using internally-developed models that employ a discounted cash flow approach. Farmer Mac maximizes
the use of observable market data, including prices of financial instruments with similar maturities and
characteristics, interest rate yield curves, measures of volatility and prepayment rates. Farmer Mac
generally considers a market to be thinly traded or not quoted if the following conditions exist: (1) there
quotes vary significantly either over time or among independent pricing services or dealers; or (4) there is
limited availability of public market information. Farmer Mac classifies these fair value measurements as
level 3.
Farmer Mac's 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 also be delayed and are ultimately subject to cash availability. Beginning in mid-
February 2008, there were widespread failures of the auction mechanism designed to provide regular
liquidity to these types of securities. Consequently, Farmer Mac has not sold any of its ARCs into the
auctions since that time. All ARCs held by Farmer Mac are collateralized entirely by pools of Federal
Family Education Loan Program ("FFELP") guaranteed student loans that are backed by the full faith and
credit of the United States. Farmer Mac continues to believe that the credit quality of these securities is
high, based on the underlying collateralization and the securities' ratings. To date, Farmer Mac has
received all interest due on ARCs it holds and expects to continue to do so.
Farmer Mac classifies its estimates of fair value for ARCs as level 3 measurements. Farmer Mac uses
unadjusted quotes from a broker specializing in these types of securities to determine the estimated fair
value of these investments as of each quarter end. Through discussions with the broker, Farmer Mac
gained an understanding of the assumptions underlying the broker quotes and independently benchmarked
those quotes against other dealer price indications. Farmer Mac believes the broker quotes are the best
indication of fair value as of the measurement date although there is uncertainty regarding the ability to
transact at such levels. Considering there is no active secondary market for these securities, although
limited observable transactions do occasionally occur, price quotes vary significantly among dealers or
independent pricing services, if provided at all, and there is little transparency in the price determination,
Farmer Mac believes these measurements are appropriately classified as level 3.
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 during
2013, 2012, and 2011.
Available-for-Sale and Trading Farmer Mac Guaranteed Securities and USDA Securities
Farmer Mac estimates the fair value of its 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. Farmer Mac classifies these fair value measurements as level 3 because there is
limited market activity and therefore little or no price transparency. On a sample basis, Farmer Mac
corroborates the fair value of its Farmer Mac Guaranteed Securities and USDA Securities by obtaining a
secondary valuation from an independent third party service.
Farmer Mac made no transfers within the fair value hierarchy for fair value measurements of Farmer Mac
Guaranteed Securities and USDA Securities during 2013, 2012, and 2011.
191
192
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
Level 2 Quoted prices in markets that are not active or financial instruments for which all
significant inputs are observable, either directly or indirectly.
Level 3
Prices or valuations that require unobservable inputs that are significant to the fair value
measurement.
Farmer Mac performs a detailed analysis of the assets and liabilities carried at fair value to determine the
appropriate level based on the transparency of the inputs used in the valuation techniques. In certain
cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In
such cases, an instrument's level within the fair value hierarchy is based on the lowest level of input that is
significant to the fair value measurement. Farmer Mac's assessment of the significance of a particular
input to the fair value measurement of an instrument requires judgment and consideration of factors
specific to the instrument. While Farmer Mac believes its valuation methods are appropriate and
consistent with those of other market participants, using different methodologies or assumptions to
determine fair value could result in a materially different estimate of fair value for some financial
instruments.
The following is a description of the fair value techniques used for instruments measured at fair value as
well as the general classification of such instruments pursuant to the valuation hierarchy described
above. Fair value measurements related to financial instruments that are reported at fair value in the
consolidated financial statements each period are referred to as recurring fair value measurements. Fair
value measurements related to financial instruments that are not reported at fair value each period but are
subject to fair value adjustments in certain circumstances are referred to as nonrecurring fair value
measurements.
Recurring Fair Value Measurements and Classification
Available-for-Sale and Trading Investment Securities
The fair value of investments in U.S. Treasuries is based on unadjusted quoted prices in active
markets. Farmer Mac classifies these fair value measurements as level 1.
For a significant portion of Farmer Mac's investment portfolio, including most asset-backed securities,
corporate debt securities, senior agency debt securities, Government/GSE guaranteed mortgage-backed
securities, municipal bonds, and preferred stock issued by GSEs, fair value is primarily determined using a
reputable and nationally recognized third party pricing service. The prices obtained are non-binding and
generally representative of recent market trades. The fair value of certain asset-backed and Government
guaranteed mortgage-backed securities are estimated based on quotations from brokers or dealers.
Farmer Mac corroborates its primary valuation source by obtaining a secondary price from another
independent third party pricing service. Farmer Mac classifies these fair value measurements as level 2.
For certain investment securities that are thinly traded or not quoted, Farmer Mac estimates fair value
using internally-developed models that employ a discounted cash flow approach. Farmer Mac maximizes
the use of observable market data, including prices of financial instruments with similar maturities and
characteristics, interest rate yield curves, measures of volatility and prepayment rates. Farmer Mac
generally considers a market to be thinly traded or not quoted if the following conditions exist: (1) there
are few transactions for the financial instruments; (2) the prices in the market are not current; (3) the price
quotes vary significantly either over time or among independent pricing services or dealers; or (4) there is
limited availability of public market information. Farmer Mac classifies these fair value measurements as
level 3.
Farmer Mac's 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 also be delayed and are ultimately subject to cash availability. Beginning in mid-
February 2008, there were widespread failures of the auction mechanism designed to provide regular
liquidity to these types of securities. Consequently, Farmer Mac has not sold any of its ARCs into the
auctions since that time. All ARCs held by Farmer Mac are collateralized entirely by pools of Federal
Family Education Loan Program ("FFELP") guaranteed student loans that are backed by the full faith and
credit of the United States. Farmer Mac continues to believe that the credit quality of these securities is
high, based on the underlying collateralization and the securities' ratings. To date, Farmer Mac has
received all interest due on ARCs it holds and expects to continue to do so.
Farmer Mac classifies its estimates of fair value for ARCs as level 3 measurements. Farmer Mac uses
unadjusted quotes from a broker specializing in these types of securities to determine the estimated fair
value of these investments as of each quarter end. Through discussions with the broker, Farmer Mac
gained an understanding of the assumptions underlying the broker quotes and independently benchmarked
those quotes against other dealer price indications. Farmer Mac believes the broker quotes are the best
indication of fair value as of the measurement date although there is uncertainty regarding the ability to
transact at such levels. Considering there is no active secondary market for these securities, although
limited observable transactions do occasionally occur, price quotes vary significantly among dealers or
independent pricing services, if provided at all, and there is little transparency in the price determination,
Farmer Mac believes these measurements are appropriately classified as level 3.
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 during
2013, 2012, and 2011.
Available-for-Sale and Trading Farmer Mac Guaranteed Securities and USDA Securities
Farmer Mac estimates the fair value of its 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. Farmer Mac classifies these fair value measurements as level 3 because there is
limited market activity and therefore little or no price transparency. On a sample basis, Farmer Mac
corroborates the fair value of its Farmer Mac Guaranteed Securities and USDA Securities by obtaining a
secondary valuation from an independent third party service.
Farmer Mac made no transfers within the fair value hierarchy for fair value measurements of Farmer Mac
Guaranteed Securities and USDA Securities during 2013, 2012, and 2011.
191
192
Financial Derivatives
The fair value of exchange-traded U.S. Treasury futures is based on unadjusted quoted prices for identical
financial instruments. Farmer Mac classifies these fair value measurements as level 1.
Farmer Mac's derivative portfolio consists primarily of interest rate swaps and forward sales contracts on
the debt of other GSEs. Farmer Mac estimates the fair value of these financial instruments primarily
based upon the counterparty valuations. Farmer Mac internally values its derivative portfolio using a
discounted cash flow valuation technique and obtains a secondary valuation for certain interest rate swaps
to corroborate the counterparty valuations. Farmer Mac also regularly reviews the counterparty valuations
as part of the collateral exchange process. Farmer Mac classifies these fair value measurements as level 2.
Certain basis swaps are nonstandard interest rate swap structures and are therefore internally modeled
using significant assumptions and unobservable inputs, resulting in level 3 classification. Farmer Mac
uses a discounted cash flow valuation technique, using management's best estimate of certain key
assumptions, which include prepayment speeds, forward yield curves, and discount rates commensurate
with the risks involved.
During first quarter 2013, Farmer Mac observed an increasing trend in the use of the overnight index swap
("OIS") curve by other market participants to value certain collateralized interest rate swap agreements.
As a result, Farmer Mac concluded that the OIS curve was a more appropriate curve to use to discount the
cash flows on certain collateralized interest rate swaps effective March 31, 2013. The impact of this
change was not significant.
As of December 31, 2013, the consideration of credit risk, Farmer Mac's and the counterparties, resulted
in an adjustment of $45,000 to the valuations of Farmer Mac's derivative portfolio. As of December 31,
2012, the consideration of credit risk, Farmer Mac's and the counterparties, resulted in an adjustment of
$0.6 million to the valuations of Farmer Mac's derivative portfolio. See Note 2(h) and Note 6 for further
information regarding Farmer Mac's derivative portfolio.
Nonrecurring Fair Value Measurements and Classification
Loans Held-for-Sale
Loans held for sale are reported at the lower of cost or fair value in the consolidated balance sheets.
Farmer Mac internally models the fair value of loans 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. The fair values of these
instruments are classified as level 3 measurements. As of December 31, 2013, Farmer Mac had no loans
classified as held for sale. As of December 31, 2012, Farmer Mac recorded an adjustment of $5.9 million
to report loans held for sale at the lower of cost or fair value.
Loans Held for Investment
Certain loans in Farmer Mac's held for investment loan portfolio are measured at fair value when they are
determined to be impaired. For these impaired loans, the fair value of the loan generally is based on the fair
value of the underlying property, which is determined by recent third-party appraisals. Farmer Mac uses net
realizable value (fair value less estimated costs to sell) as a reasonable estimate of fair value and classifies
the fair values as level 3 measurements in the tables below.
When recent third-party appraisals are not available, Farmer Mac measures loan impairment in the aggregate
in consideration of the similar risk characteristics of the assets and historical statistics, and does not include
these impaired loans in the tables below.
Real Estate Owned
Farmer Mac initially records REO properties at net realizable value and subsequently records them at the
lower of carrying value or net realizable value. The fair value of the REO generally is based on third-party
appraisals. Farmer Mac classifies the REO fair values as level 3 measurements. Farmer Mac uses net
realizable value as a reasonable estimate of fair value in the tables below.
Fair Value Classification and Transfers
As of December 31, 2013, Farmer Mac's assets and liabilities recorded at fair value included financial
instruments valued at $6.8 billion whose fair values were estimated by management in the absence of
readily determinable fair values (i.e., level 3). These financial instruments measured as level 3
represented 51 percent of total assets and 73 percent of financial instruments measured at fair value as of
December 31, 2013. As of December 31, 2012, Farmer Mac's assets and liabilities recorded at fair value
included financial instruments valued at $7.1 billion whose fair values were estimated by management in
the absence of readily determinable fair values. These financial instruments measured as level 3
represented 56 percent of total assets and 73 percent of financial instruments measured at fair value as of
December 31, 2012.
193
194
Loans Held for Investment
Certain loans in Farmer Mac's held for investment loan portfolio are measured at fair value when they are
determined to be impaired. For these impaired loans, the fair value of the loan generally is based on the fair
value of the underlying property, which is determined by recent third-party appraisals. Farmer Mac uses net
realizable value (fair value less estimated costs to sell) as a reasonable estimate of fair value and classifies
the fair values as level 3 measurements in the tables below.
When recent third-party appraisals are not available, Farmer Mac measures loan impairment in the aggregate
in consideration of the similar risk characteristics of the assets and historical statistics, and does not include
these impaired loans in the tables below.
Real Estate Owned
Farmer Mac initially records REO properties at net realizable value and subsequently records them at the
lower of carrying value or net realizable value. The fair value of the REO generally is based on third-party
appraisals. Farmer Mac classifies the REO fair values as level 3 measurements. Farmer Mac uses net
realizable value as a reasonable estimate of fair value in the tables below.
During first quarter 2013, Farmer Mac observed an increasing trend in the use of the overnight index swap
Fair Value Classification and Transfers
As of December 31, 2013, Farmer Mac's assets and liabilities recorded at fair value included financial
instruments valued at $6.8 billion whose fair values were estimated by management in the absence of
readily determinable fair values (i.e., level 3). These financial instruments measured as level 3
represented 51 percent of total assets and 73 percent of financial instruments measured at fair value as of
December 31, 2013. As of December 31, 2012, Farmer Mac's assets and liabilities recorded at fair value
included financial instruments valued at $7.1 billion whose fair values were estimated by management in
the absence of readily determinable fair values. These financial instruments measured as level 3
represented 56 percent of total assets and 73 percent of financial instruments measured at fair value as of
December 31, 2012.
Financial Derivatives
The fair value of exchange-traded U.S. Treasury futures is based on unadjusted quoted prices for identical
financial instruments. Farmer Mac classifies these fair value measurements as level 1.
Farmer Mac's derivative portfolio consists primarily of interest rate swaps and forward sales contracts on
the debt of other GSEs. Farmer Mac estimates the fair value of these financial instruments primarily
based upon the counterparty valuations. Farmer Mac internally values its derivative portfolio using a
discounted cash flow valuation technique and obtains a secondary valuation for certain interest rate swaps
to corroborate the counterparty valuations. Farmer Mac also regularly reviews the counterparty valuations
as part of the collateral exchange process. Farmer Mac classifies these fair value measurements as level 2.
Certain basis swaps are nonstandard interest rate swap structures and are therefore internally modeled
using significant assumptions and unobservable inputs, resulting in level 3 classification. Farmer Mac
uses a discounted cash flow valuation technique, using management's best estimate of certain key
assumptions, which include prepayment speeds, forward yield curves, and discount rates commensurate
with the risks involved.
("OIS") curve by other market participants to value certain collateralized interest rate swap agreements.
As a result, Farmer Mac concluded that the OIS curve was a more appropriate curve to use to discount the
cash flows on certain collateralized interest rate swaps effective March 31, 2013. The impact of this
change was not significant.
As of December 31, 2013, the consideration of credit risk, Farmer Mac's and the counterparties, resulted
in an adjustment of $45,000 to the valuations of Farmer Mac's derivative portfolio. As of December 31,
2012, the consideration of credit risk, Farmer Mac's and the counterparties, resulted in an adjustment of
$0.6 million to the valuations of Farmer Mac's derivative portfolio. See Note 2(h) and Note 6 for further
information regarding Farmer Mac's derivative portfolio.
Nonrecurring Fair Value Measurements and Classification
Loans Held-for-Sale
Loans held for sale are reported at the lower of cost or fair value in the consolidated balance sheets.
Farmer Mac internally models the fair value of loans 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. The fair values of these
instruments are classified as level 3 measurements. As of December 31, 2013, Farmer Mac had no loans
classified as held for sale. As of December 31, 2012, Farmer Mac recorded an adjustment of $5.9 million
to report loans held for sale at the lower of cost or fair value.
193
194
The following tables present information about Farmer Mac's assets and liabilities measured at fair value
on a recurring and nonrecurring basis as of December 31, 2013 and 2012, respectively, and indicate the
fair value hierarchy of the valuation techniques used by Farmer Mac to determine such fair value:
Assets and Liabilities Measured at Fair Value as of December 31, 2012
Level 1
Level 2
Level 3
Total
(in thousands)
Table 13.1
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Assets and Liabilities Measured at Fair Value as of December 31, 2013
Level 1
Level 2
Level 3
Total
(in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student
$
— $
— $
63,159
$
Floating rate auction-rate certificates backed by Government guaranteed student
loans
$
— $
— $
65,285
$
Floating rate asset-backed securities
Floating rate corporate debt securities
Fixed rate corporate debt securities
Floating rate Government/GSE guaranteed mortgage-backed securities
Fixed rate GSE guaranteed mortgage-backed securities
Floating rate GSE subordinated debt
Fixed rate GSE preferred stock
Fixed rate taxable municipal bonds
Fixed rate senior agency debt
Fixed rate U.S. Treasuries
Total available-for-sale
Trading:
Floating rate asset-backed securities
Total trading
Total Investment Securities
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farm & Ranch
USDA Guarantees
Rural Utilities
Total Farmer Mac Guaranteed Securities
USDA Securities:
Available-for-sale
Trading
Total USDA Securities
Financial derivatives
Total Assets at fair value
Liabilities:
Financial derivatives
Total Liabilities at fair value
Nonrecurring:
Assets:
Loans held for investment
REO
Total Nonrecurring Assets at fair value
—
—
—
—
—
—
—
—
—
755,633
755,633
—
—
166,104
109,769
55,141
621,064
8,657
63,385
83,161
30,681
524,062
—
—
—
—
205
—
—
—
—
—
—
65,285
166,104
109,769
55,141
621,269
8,657
63,385
83,161
30,681
524,062
755,633
1,662,024
65,490
2,483,147
—
—
928
928
928
928
755,633
1,662,024
66,418
2,484,075
—
—
—
—
—
—
—
—
755,633
1
1
—
—
—
—
—
—
—
19,718
1,681,742
75,472
75,472
$
$
$
$
$
$
— $
—
— $
— $
—
— $
3,585,426
3,585,426
21,234
1,484,940
5,091,600
21,234
1,484,940
5,091,600
1,553,669
1,553,669
58,344
58,344
1,612,013
1,612,013
—
6,770,031
235
235
4,420
1,818
6,238
19,718
9,207,406
75,708
75,708
4,420
1,818
6,238
$
$
$
$
$
$
$
$
$
$
Floating rate Government/GSE guaranteed mortgage-backed securities
Fixed rate GSE guaranteed mortgage-backed securities
Floating rate GSE subordinated debt
Recurring:
Assets:
Investment Securities:
Available-for-sale:
loans
Floating rate asset-backed securities
Fixed rate asset-backed securities
Floating rate corporate debt securities
Fixed rate corporate debt
Fixed rate GSE preferred stock
Floating rate senior agency debt
Fixed rate senior agency debt
Fixed rate U.S. Treasuries
Total available-for-sale
Trading:
Floating rate asset-backed securities
Total trading
Total Investment Securities
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farm & Ranch
USDA Guarantees
Rural Utilities
USDA Securities:
Available-for-sale
Trading
Total USDA Securities
Financial derivatives
Total Assets at fair value
Liabilities:
Financial derivatives
Total Liabilities at fair value
Nonrecurring:
Assets:
Loans held for sale
Loans held for investment
REO
Total Farmer Mac Guaranteed Securities
1,165,889
1,165,889
1,269,334
63,159
1,165,889
1,269,334
151,044
6,501
76,763
52,416
712,859
2,065
57,431
87,086
50,055
73,114
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,247
1,247
64,406
63,159
151,044
6,501
76,763
52,416
712,859
2,065
57,431
87,086
50,055
73,114
1,165,889
2,498,382
1,247
1,247
2,499,629
3,426,489
3,426,489
26,681
1,313,088
4,766,258
26,681
1,313,088
4,766,258
1,486,595
1,486,595
104,188
104,188
1,590,783
1,590,783
31,173
—
31,173
1,165,889
1,300,507
6,421,447
8,887,843
$
$
$
$
$
$
$
$
$
149,979
149,979
691
691
150,682
150,682
— $
— $
657,154
$
657,154
—
—
8,130
1,704
8,130
1,704
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12
12
—
—
Total Nonrecurring Assets at fair value
— $
— $
666,988
$
666,988
195
196
The following tables present information about Farmer Mac's assets and liabilities measured at fair value
on a recurring and nonrecurring basis as of December 31, 2013 and 2012, respectively, and indicate the
fair value hierarchy of the valuation techniques used by Farmer Mac to determine such fair value:
Assets and Liabilities Measured at Fair Value as of December 31, 2012
Level 1
Level 2
Level 3
Total
(in thousands)
Assets and Liabilities Measured at Fair Value as of December 31, 2013
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Level 1
Level 2
Level 3
Total
(in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student
loans
$
— $
— $
63,159
$
Table 13.1
Recurring:
Assets:
Investment Securities:
Available-for-sale:
loans
Floating rate GSE subordinated debt
Fixed rate GSE preferred stock
Fixed rate taxable municipal bonds
Fixed rate senior agency debt
Fixed rate U.S. Treasuries
Total available-for-sale
Trading:
Floating rate asset-backed securities
Total trading
Total Investment Securities
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farm & Ranch
USDA Guarantees
Rural Utilities
USDA Securities:
Available-for-sale
Trading
Total Farmer Mac Guaranteed Securities
Total USDA Securities
Financial derivatives
Total Assets at fair value
Liabilities:
Financial derivatives
Total Liabilities at fair value
Nonrecurring:
Assets:
Loans held for investment
REO
Total Nonrecurring Assets at fair value
Floating rate auction-rate certificates backed by Government guaranteed student
$
— $
— $
65,285
$
Floating rate asset-backed securities
Floating rate corporate debt securities
Fixed rate corporate debt securities
Floating rate Government/GSE guaranteed mortgage-backed securities
Fixed rate GSE guaranteed mortgage-backed securities
Floating rate asset-backed securities
Fixed rate asset-backed securities
Floating rate corporate debt securities
Fixed rate corporate debt
Floating rate Government/GSE guaranteed mortgage-backed securities
Fixed rate GSE guaranteed mortgage-backed securities
Floating rate GSE subordinated debt
Fixed rate GSE preferred stock
Floating rate senior agency debt
Fixed rate senior agency debt
Fixed rate U.S. Treasuries
Total available-for-sale
Trading:
Floating rate asset-backed securities
Total trading
Total Investment Securities
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farm & Ranch
USDA Guarantees
Rural Utilities
Total Farmer Mac Guaranteed Securities
USDA Securities:
Available-for-sale
Trading
Total USDA Securities
Financial derivatives
Total Assets at fair value
Liabilities:
Financial derivatives
Total Liabilities at fair value
Nonrecurring:
Assets:
Loans held for sale
Loans held for investment
REO
Total Nonrecurring Assets at fair value
755,633
755,633
1,662,024
65,490
2,483,147
755,633
1,662,024
66,418
2,484,075
166,104
109,769
55,141
621,064
8,657
63,385
83,161
30,681
524,062
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
1
205
—
—
—
—
—
—
—
—
—
928
928
65,285
166,104
109,769
55,141
621,269
8,657
63,385
83,161
30,681
524,062
755,633
928
928
3,585,426
3,585,426
21,234
1,484,940
5,091,600
21,234
1,484,940
5,091,600
1,553,669
1,553,669
58,344
58,344
1,612,013
1,612,013
$
$
$
$
$
235
235
4,420
1,818
6,238
75,708
75,708
4,420
1,818
6,238
19,718
—
19,718
755,633
1,681,742
6,770,031
9,207,406
$
$
$
$
$
$
$
$
$
$
$
75,472
75,472
— $
—
— $
— $
—
— $
195
196
—
—
—
—
—
—
—
—
—
—
1,165,889
1,165,889
151,044
6,501
76,763
52,416
712,859
2,065
57,431
87,086
50,055
73,114
—
—
—
—
—
—
—
—
—
—
—
—
1,269,334
63,159
—
—
—
—
1,165,889
1,269,334
1,247
1,247
64,406
63,159
151,044
6,501
76,763
52,416
712,859
2,065
57,431
87,086
50,055
73,114
1,165,889
2,498,382
1,247
1,247
2,499,629
—
—
—
—
—
—
—
—
1,165,889
12
12
—
—
—
—
—
—
—
31,173
1,300,507
149,979
149,979
$
$
$
$
$
$
3,426,489
3,426,489
26,681
1,313,088
4,766,258
26,681
1,313,088
4,766,258
1,486,595
1,486,595
104,188
104,188
1,590,783
1,590,783
—
6,421,447
691
691
31,173
8,887,843
150,682
150,682
$
$
$
— $
— $
657,154
$
657,154
—
—
—
—
8,130
1,704
8,130
1,704
— $
— $
666,988
$
666,988
$
$
$
$
$
The following tables present additional information about assets and liabilities measured at fair value on a
recurring basis for which Farmer Mac has used significant unobservable inputs to determine fair value.
Net transfers in and/or out of level 3 are based on the fair values of the assets and liabilities as of the
beginning of the reporting period.
Table 13.2
Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2013
Beginning
Balance
Purchases
Sales
Settlements
(in thousands)
Realized
and
Unrealized
Gains/
(Losses)
included
in Income
Unrealized
Losses
included in
Other
Comprehen-
sive
Income
Ending
Balance
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed
by Government guaranteed student loans
Floating rate Government/GSE guaranteed
mortgage-backed securities
Total available-for-sale
Trading:
Floating rate asset-backed securities (1)
Total trading
Total Investment Securities
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farm & Ranch
USDA Guarantees
Rural Utilities
Total Farmer Mac Guaranteed Securities
USDA Securities:
Available-for-sale
Trading (2)
Total USDA Securities
Total Assets at fair value
Liabilities:
Financial derivatives (3)
Total Liabilities at fair value
$
63,159
$
— $
— $
— $
— $
2,126
$
65,285
—
63,159
1,247
1,247
64,406
233
233
—
—
233
3,426,489
26,681
1,313,088
4,766,258
453,500
—
820,000
1,273,500
—
—
—
—
—
—
—
—
—
(24)
(24)
(774)
(774)
(798)
—
—
455
455
455
(4)
2,122
—
—
2,122
205
65,490
928
928
66,418
(253,137)
(5,214)
(591,300)
(849,651)
(18,230)
—
—
(18,230)
(23,196)
(233)
(56,848)
(80,277)
3,585,426
21,234
1,484,940
5,091,600
1,486,595
104,188
1,590,783
$ 6,421,447
361,894
—
361,894
$ 1,635,627
$
(234,035)
(44,570)
(278,605)
—
—
—
— $(1,129,054) $
—
(1,274)
(1,274)
(19,049) $
1,553,669
(60,785)
58,344
—
1,612,013
(60,785)
(138,940) $ 6,770,031
$
$
(691) $
(691) $
— $
— $
— $
— $
— $
— $
456
456
$
$
— $
— $
(235)
(235)
(1) Unrealized gains are attributable to assets still held as of December 31, 2013 and are recorded in "(Losses)/gains on trading assets."
(2)
Includes unrealized losses of $0.5 million attributable to assets still held as of December 31, 2013 that are recorded in "(Losses)/gains on trading assets."
(3) Unrealized gains are attributable to liabilities still held as of December 31, 2013 and are recorded in "Gains/(losses) on financial derivatives and hedging
activities."
Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2012
Beginning
Balance
Purchases
Sales
Settlements
Ending
Balance
(in thousands)
Realized
and
Unrealized
Gains/
(Losses)
included
in Income
Unrealized
Gains/
(Losses)
included in
Other
Comprehen-
sive
Income
Floating rate auction-rate certificates backed
by Government guaranteed student loans
$
60,213
$
— $
— $
— $
—
— $
—
$
2,946
2,946
63,159
63,159
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Total available-for-sale
Trading:
Floating rate asset-backed securities (1)
Total trading
Total Investment Securities
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farm & Ranch
USDA Guarantees
Rural Utilities
USDA Securities:
Available-for-sale
Trading (2)
Total USDA Securities
Liabilities:
Financial derivatives (3)
Total Liabilities at fair value
Total Farmer Mac Guaranteed Securities
60,213
1,796
1,796
62,009
2,807,627
35,599
1,446,046
4,289,272
1,279,546
212,359
1,491,905
—
—
—
—
601,000
5,327
383,406
989,733
479,324
—
479,324
—
—
—
—
—
—
—
—
—
(5,327)
(5,327)
(812)
(812)
(812)
(2,832)
(8,907)
(495,701)
(507,440)
(256,685)
(108,215)
(364,900)
—
—
2,946
1,247
1,247
64,406
6,388
14,306
3,426,489
(11)
26,681
(20,663)
1,313,088
6,388
(6,368)
4,766,258
(15,590)
1,486,595
—
104,188
(15,590)
1,590,783
263
263
263
—
—
—
44
44
$
$
$
Total Assets at fair value
$ 5,843,186
$ 1,469,057
$
(5,327) $ (873,152) $
6,695
(19,012) $ 6,421,447
$
$
(1,335) $
(1,335) $
— $
— $
— $
— $
— $
— $
644
644
— $
— $
(691)
(691)
(1) Unrealized gains are attributable to assets still held as of December 31, 2012 and are recorded in "(Losses)/gains on trading assets."
(2)
Includes unrealized gains of $0.3 million attributable to assets still held as of December 31, 2012 that are recorded in "(Losses)/gains on trading assets."
(3) Unrealized gains are attributable to liabilities still held as of December 31, 2012 and are recorded in "Gains/(losses) on financial derivatives and hedging
activities."
197
198
The following tables present additional information about assets and liabilities measured at fair value on a
recurring basis for which Farmer Mac has used significant unobservable inputs to determine fair value.
Net transfers in and/or out of level 3 are based on the fair values of the assets and liabilities as of the
beginning of the reporting period.
Table 13.2
Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2013
Beginning
Balance
Purchases
Sales
Settlements
Ending
Balance
(in thousands)
Realized
and
Unrealized
Gains/
(Losses)
included
in Income
Unrealized
Losses
included in
Other
Comprehen-
sive
Income
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed
by Government guaranteed student loans
Floating rate Government/GSE guaranteed
mortgage-backed securities
Total available-for-sale
Trading:
Floating rate asset-backed securities (1)
Total trading
Total Investment Securities
Farmer Mac Guaranteed Securities:
Total Farmer Mac Guaranteed Securities
Available-for-sale:
Farm & Ranch
USDA Guarantees
Rural Utilities
USDA Securities:
Available-for-sale
Trading (2)
Total USDA Securities
Liabilities:
Financial derivatives (3)
Total Liabilities at fair value
$
63,159
$
— $
— $
— $
— $
2,126
$
65,285
—
63,159
1,247
1,247
64,406
233
233
—
—
233
26,681
1,313,088
4,766,258
1,486,595
104,188
1,590,783
—
820,000
1,273,500
361,894
—
361,894
—
—
—
—
—
—
—
—
—
—
—
—
(24)
(24)
(774)
(774)
(798)
—
—
455
455
455
(4)
2,122
205
65,490
—
—
928
928
2,122
66,418
(5,214)
(591,300)
(849,651)
(234,035)
(44,570)
(278,605)
—
—
(18,230)
(233)
(56,848)
(80,277)
21,234
1,484,940
5,091,600
—
(60,785)
1,553,669
(1,274)
(1,274)
—
58,344
(60,785)
1,612,013
3,426,489
453,500
(253,137)
(18,230)
(23,196)
3,585,426
Total Assets at fair value
$ 6,421,447
$ 1,635,627
$
— $(1,129,054) $
(19,049) $
(138,940) $ 6,770,031
$
$
(691) $
(691) $
— $
— $
— $
— $
— $
— $
456
456
$
$
— $
— $
(235)
(235)
(1) Unrealized gains are attributable to assets still held as of December 31, 2013 and are recorded in "(Losses)/gains on trading assets."
(2)
Includes unrealized losses of $0.5 million attributable to assets still held as of December 31, 2013 that are recorded in "(Losses)/gains on trading assets."
(3) Unrealized gains are attributable to liabilities still held as of December 31, 2013 and are recorded in "Gains/(losses) on financial derivatives and hedging
activities."
Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2012
Beginning
Balance
Purchases
Sales
Settlements
(in thousands)
Realized
and
Unrealized
Gains/
(Losses)
included
in Income
Unrealized
Gains/
(Losses)
included in
Other
Comprehen-
sive
Income
Ending
Balance
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed
by Government guaranteed student loans
$
60,213
$
— $
— $
Total available-for-sale
Trading:
Floating rate asset-backed securities (1)
Total trading
Total Investment Securities
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farm & Ranch
USDA Guarantees
Rural Utilities
Total Farmer Mac Guaranteed Securities
USDA Securities:
Available-for-sale
Trading (2)
Total USDA Securities
Total Assets at fair value
Liabilities:
Financial derivatives (3)
Total Liabilities at fair value
60,213
1,796
1,796
62,009
—
—
—
—
2,807,627
35,599
1,446,046
4,289,272
601,000
5,327
383,406
989,733
1,279,546
212,359
1,491,905
$ 5,843,186
479,324
—
479,324
$ 1,469,057
—
—
—
—
—
(5,327)
—
(5,327)
—
—
—
(812)
(812)
(812)
(2,832)
(8,907)
(495,701)
(507,440)
(256,685)
(108,215)
(364,900)
$
(5,327) $ (873,152) $
$
$
(1,335) $
(1,335) $
— $
— $
— $
— $
— $
— $
— $
—
— $
—
$
2,946
2,946
63,159
63,159
263
263
263
6,388
—
—
6,388
—
44
44
6,695
644
644
—
—
2,946
1,247
1,247
64,406
14,306
(11)
(20,663)
(6,368)
3,426,489
26,681
1,313,088
4,766,258
(15,590)
1,486,595
—
104,188
(15,590)
1,590,783
(19,012) $ 6,421,447
— $
— $
(691)
(691)
$
$
$
(1) Unrealized gains are attributable to assets still held as of December 31, 2012 and are recorded in "(Losses)/gains on trading assets."
(2)
(3) Unrealized gains are attributable to liabilities still held as of December 31, 2012 and are recorded in "Gains/(losses) on financial derivatives and hedging
Includes unrealized gains of $0.3 million attributable to assets still held as of December 31, 2012 that are recorded in "(Losses)/gains on trading assets."
activities."
197
198
Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2011
Table 13.3
Beginning
Balance
Purchases
Sales
Settlements
(in thousands)
Realized
and
Unrealized
Gains/
(Losses)
included
in Income
Unrealized
Gains/
(Losses)
included in
Other
Comprehen-
sive
Income
Ending
Balance
Financial Instruments
Fair Value
Valuation Technique
Unobservable Input
(Weighted-Average)
Range
December 31, 2013
(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed
by Government guaranteed student loans
$
64,335
$
— $
— $
Total available-for-sale
Trading:
Floating rate asset-backed securities (1)
Total trading
Total Investment Securities
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farm & Ranch
USDA Guarantees
Rural Utilities
Total Farmer Mac Guaranteed Securities
USDA Securities:
Available-for-sale
Trading (2)
Total USDA Securities
Total Assets at fair value
Liabilities:
Financial derivatives (3)
Total Liabilities at fair value
64,335
1,400
1,400
65,735
—
—
—
—
942,809
1,801,500
37,637
1,926,818
2,907,264
3,268
—
1,804,768
1,005,679
311,765
1,317,444
$ 4,290,443
404,836
—
404,836
$ 2,209,604
—
—
—
—
—
(3,268)
—
(3,268)
—
—
—
(822)
(822)
(822)
(2,031)
(4,334)
(476,400)
(482,765)
(172,785)
(102,525)
(275,310)
$
(3,268) $ (758,897) $
$
$
(3,390) $
(3,390) $
— $
— $
— $
— $
— $
— $
1,218
1,218
1,218
—
—
—
—
—
3,119
3,119
4,337
2,055
2,055
— $
—
— $
(4,122) $
—
(4,122)
60,213
60,213
1,796
1,796
62,009
—
—
(4,122)
65,349
2,296
(4,372)
63,273
2,807,627
35,599
1,446,046
4,289,272
41,816
—
41,816
100,967
1,279,546
212,359
1,491,905
$ 5,843,186
— $
— $
(1,335)
(1,335)
$
$
$
(1) Unrealized gains are attributable to assets still held as of December 31, 2011 and are recorded in "Losses on trading assets."
(2)
Includes unrealized losses of $1.8 million attributable to assets still held as of December 31, 2011 that are recorded in "(Losses)/gains on trading assets."
(3) Unrealized gains are attributable to liabilities still held as of December 31, 2011 and are recorded in "Gains/(losses) on financial derivatives and hedging
activities."
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 December 31, 2013 and 2012.
199
200
Floating rate asset-backed securities
928 Discounted cash flow Discount rate
13.0% - 22.5% (17.7%)
65,285
Indicative bids
Range of broker quotes
82.0% - 92.0% (88.1%)
Floating rate Government/GSE
guaranteed mortgage-backed securities
$
205 Discounted cash flow Discount rate
1.8% - 1.8% (1.8%)
CPR
CPR
CPR
CPR
10%
6%
0.9% - 3.6% (1.8%)
0.9% - 3.2% (1.9%)
7% - 14% (11%)
1.1% - 3.4% (1.8%)
1.2% - 5.3% (3.4%)
0% - 23% (5%)
3,585,426 Discounted cash flow Discount rate
21,234 Discounted cash flow Discount rate
1,484,940 Discounted cash flow Discount rate
1,612,013 Discounted cash flow Discount rate
235 Discounted cash flow Discount rate
0.7% - 2.3% (1.3%)
CPR
10% - 11% (10%)
Financial Instruments
Fair Value
Valuation Technique
Unobservable Input
(Weighted-Average)
Range
December 31, 2012
(in thousands)
Floating rate asset-backed securities
1,247 Discounted cash flow Discount rate
12.4% - 19.7% (16.2%)
63,159
Indicative bids
Range of broker quotes
82.0% - 90.0% (85.0%)
CPR
10%
Assets:
Investment securities:
Floating rate auction-rate certificates
backed by Government guaranteed
student loans
Farmer Mac Guaranteed Securities:
Farm & Ranch
USDA Guarantees
Rural Utilities
USDA Securities
Liabilities:
Financial Derivatives:
Basis swaps
Assets:
Investment securities:
Floating rate auction-rate certificates
backed by Government guaranteed
student loans
Farmer Mac Guaranteed Securities:
Farm & Ranch
USDA Guarantees
Rural Utilities
USDA Securities
Liabilities:
Financial Derivatives:
Basis swaps
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,426,489 Discounted cash flow Discount rate
26,681 Discounted cash flow Discount rate
1,313,088 Discounted cash flow Discount rate
1,590,783 Discounted cash flow Discount rate
CPR
CPR
1.1% - 3.4% (1.6%)
1.0% - 3.4% (2.1%)
8% - 17% (14%)
0.8% - 2.9% (1.6%)
1.4% - 5.3% (3.4%)
0% - 26% (10%)
691 Discounted cash flow Discount rate
1.0% - 3.0% (1.7%)
CPR
11% - 19% (16%)
Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2011
Table 13.3
Beginning
Balance
Purchases
Sales
Settlements
Ending
Balance
(in thousands)
Realized
and
Unrealized
Gains/
(Losses)
included
in Income
Unrealized
Gains/
(Losses)
included in
Other
Comprehen-
sive
Income
Recurring:
Assets:
Investment Securities:
Available-for-sale:
—
—
—
—
—
—
—
—
—
Floating rate auction-rate certificates backed
by Government guaranteed student loans
$
64,335
$
— $
— $
Total available-for-sale
Trading:
Floating rate asset-backed securities (1)
Total trading
Total Investment Securities
Farmer Mac Guaranteed Securities:
64,335
1,400
1,400
65,735
—
—
—
—
— $
—
— $
(4,122) $
—
(4,122)
(822)
(822)
(822)
1,218
1,218
1,218
—
—
(4,122)
60,213
60,213
1,796
1,796
62,009
Total Farmer Mac Guaranteed Securities
2,907,264
1,804,768
(3,268)
942,809
1,801,500
37,637
1,926,818
3,268
—
(3,268)
1,005,679
311,765
1,317,444
404,836
—
404,836
(2,031)
(4,334)
(476,400)
(482,765)
(172,785)
(102,525)
(275,310)
Available-for-sale:
Farm & Ranch
USDA Guarantees
Rural Utilities
USDA Securities:
Available-for-sale
Trading (2)
Total USDA Securities
Liabilities:
Financial derivatives (3)
Total Liabilities at fair value
Total Assets at fair value
$ 4,290,443
$ 2,209,604
$
(3,268) $ (758,897) $
$
$
(3,390) $
(3,390) $
— $
— $
— $
— $
— $
— $
— $
— $
(1,335)
(1,335)
(1) Unrealized gains are attributable to assets still held as of December 31, 2011 and are recorded in "Losses on trading assets."
(2)
Includes unrealized losses of $1.8 million attributable to assets still held as of December 31, 2011 that are recorded in "(Losses)/gains on trading assets."
(3) Unrealized gains are attributable to liabilities still held as of December 31, 2011 and are recorded in "Gains/(losses) on financial derivatives and hedging
activities."
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 December 31, 2013 and 2012.
65,349
2,296
2,807,627
35,599
(4,372)
1,446,046
63,273
4,289,272
41,816
1,279,546
—
212,359
41,816
1,491,905
100,967
$ 5,843,186
—
—
—
—
—
3,119
3,119
4,337
2,055
2,055
$
$
$
Financial Instruments
Fair Value
Valuation Technique
Unobservable Input
Range
(Weighted-Average)
(in thousands)
December 31, 2013
Assets:
Investment securities:
Floating rate auction-rate certificates
backed by Government guaranteed
student loans
Floating rate asset-backed securities
Floating rate Government/GSE
guaranteed mortgage-backed securities
Farmer Mac Guaranteed Securities:
Farm & Ranch
USDA Guarantees
Rural Utilities
USDA Securities
Liabilities:
Financial Derivatives:
Basis swaps
$
$
$
$
$
$
$
$
65,285
Indicative bids
Range of broker quotes
82.0% - 92.0% (88.1%)
928 Discounted cash flow Discount rate
13.0% - 22.5% (17.7%)
CPR
10%
205 Discounted cash flow Discount rate
1.8% - 1.8% (1.8%)
CPR
6%
3,585,426 Discounted cash flow Discount rate
21,234 Discounted cash flow Discount rate
CPR
1,484,940 Discounted cash flow Discount rate
1,612,013 Discounted cash flow Discount rate
CPR
0.9% - 3.6% (1.8%)
0.9% - 3.2% (1.9%)
7% - 14% (11%)
1.1% - 3.4% (1.8%)
1.2% - 5.3% (3.4%)
0% - 23% (5%)
235 Discounted cash flow Discount rate
0.7% - 2.3% (1.3%)
CPR
10% - 11% (10%)
Financial Instruments
Fair Value
Valuation Technique
Unobservable Input
Range
(Weighted-Average)
(in thousands)
December 31, 2012
Assets:
Investment securities:
Floating rate auction-rate certificates
backed by Government guaranteed
student loans
Floating rate asset-backed securities
Farmer Mac Guaranteed Securities:
Farm & Ranch
USDA Guarantees
Rural Utilities
USDA Securities
Liabilities:
Financial Derivatives:
Basis swaps
$
$
$
$
$
$
$
63,159
Indicative bids
Range of broker quotes
82.0% - 90.0% (85.0%)
1,247 Discounted cash flow Discount rate
12.4% - 19.7% (16.2%)
CPR
10%
3,426,489 Discounted cash flow Discount rate
26,681 Discounted cash flow Discount rate
CPR
1,313,088 Discounted cash flow Discount rate
1,590,783 Discounted cash flow Discount rate
CPR
1.1% - 3.4% (1.6%)
1.0% - 3.4% (2.1%)
8% - 17% (14%)
0.8% - 2.9% (1.6%)
1.4% - 5.3% (3.4%)
0% - 26% (10%)
691 Discounted cash flow Discount rate
1.0% - 3.0% (1.7%)
CPR
11% - 19% (16%)
199
200
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 the Farm & Ranch
and Rural Utilities securities structured as AgVantage securities because they generally do not pay down
principal based on amortization schedules but instead typically have fixed maturity dates when the secured
general obligations are due.
Disclosures on Fair Value of Financial Instruments
The following table sets forth the estimated fair values and carrying values for financial assets, liabilities,
and guarantees and commitments as of December 31, 2013 and 2012:
Table 13.4
Financial assets:
Cash and cash equivalents
Investment securities
December 31, 2013
December 31, 2012
Fair Value
Carrying
Amount
Fair Value
Carrying
Amount
(in thousands)
$ 749,313
$ 749,313
$ 785,564
$ 785,564
2,484,075
2,484,075
2,499,629
2,499,629
Farmer Mac Guaranteed Securities
5,091,600
5,091,600
4,766,258
4,766,258
USDA Securities
Loans
Financial derivatives
Guarantee and commitment fees receivable:
LTSPCs
Farmer Mac Guaranteed Securities
Financial liabilities:
Notes payable:
Due within one year
Due after one year
Debt securities of consolidated trusts held by third parties
Financial derivatives
Guarantee and commitment obligations:
LTSPCs
Farmer Mac Guaranteed Securities
1,612,013
1,612,013
1,590,783
1,590,783
3,138,932
3,193,248
2,746,742
2,729,774
19,718
19,718
31,173
31,173
33,807
18,470
27,244
16,660
27,805
20,432
22,863
18,926
7,353,356
7,338,781
6,573,013
6,567,366
4,977,942
5,001,169
5,202,751
5,034,739
257,512
75,708
261,760
75,708
164,910
150,682
167,621
150,682
32,856
15,185
26,293
13,374
26,896
17,354
21,954
15,849
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 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.
14. BUSINESS SEGMENT REPORTING
Management has determined that Farmer Mac's operations consist of three reportable segments – Farm &
Ranch, USDA Guarantees, and Rural Utilities. Farmer Mac uses these three segments to generate revenue
and manage business risk, and each segment is based on distinct products and distinct business
activities. In addition to these three 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 GAAP net income by excluding the effects of fair value accounting guidance,
which are not expected to have a cumulative net impact on GAAP earnings if the related financial
instruments are held to maturity, as is generally expected. Core earnings also differs from GAAP net
income 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
201
202
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 the Farm & Ranch
and Rural Utilities securities structured as AgVantage securities because they generally do not pay down
principal based on amortization schedules but instead typically have fixed maturity dates when the secured
general obligations are due.
Disclosures on Fair Value of Financial Instruments
The following table sets forth the estimated fair values and carrying values for financial assets, liabilities,
and guarantees and commitments as of December 31, 2013 and 2012:
Table 13.4
Farmer Mac Guaranteed Securities
5,091,600
5,091,600
4,766,258
4,766,258
Financial assets:
Cash and cash equivalents
Investment securities
USDA Securities
Loans
Financial derivatives
Guarantee and commitment fees receivable:
LTSPCs
Farmer Mac Guaranteed Securities
Financial liabilities:
Notes payable:
Due within one year
Due after one year
Debt securities of consolidated trusts held by third parties
Financial derivatives
Guarantee and commitment obligations:
LTSPCs
Farmer Mac Guaranteed Securities
December 31, 2013
December 31, 2012
Fair Value
Fair Value
Carrying
Amount
Carrying
Amount
(in thousands)
$ 749,313
$ 749,313
$ 785,564
$ 785,564
2,484,075
2,484,075
2,499,629
2,499,629
1,612,013
1,612,013
1,590,783
1,590,783
3,138,932
3,193,248
2,746,742
2,729,774
19,718
19,718
31,173
31,173
33,807
18,470
27,244
16,660
27,805
20,432
22,863
18,926
7,353,356
7,338,781
6,573,013
6,567,366
4,977,942
5,001,169
5,202,751
5,034,739
257,512
75,708
261,760
75,708
164,910
150,682
167,621
150,682
32,856
15,185
26,293
13,374
26,896
17,354
21,954
15,849
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 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.
14. BUSINESS SEGMENT REPORTING
Management has determined that Farmer Mac's operations consist of three reportable segments – Farm &
Ranch, USDA Guarantees, and Rural Utilities. Farmer Mac uses these three segments to generate revenue
and manage business risk, and each segment is based on distinct products and distinct business
activities. In addition to these three 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 GAAP net income by excluding the effects of fair value accounting guidance,
which are not expected to have a cumulative net impact on GAAP earnings if the related financial
instruments are held to maturity, as is generally expected. Core earnings also differs from GAAP net
income 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
201
202
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 December 31, 2013, Farmer Mac II LLC held
assets with a fair value of $1.7 billion, had debt outstanding of $375.0 million, had preferred stock
outstanding with a liquidation preference of $250.0 million, and had $1.0 billion of common stock
outstanding held by Farmer Mac.
The following tables present core earnings for Farmer Mac's reportable operating segments and a
reconciliation to consolidated net income for the years ended December 31, 2013, 2012, and 2011:
Table 14.1
Farm & Ranch
Rural Utilities
Corporate
USDA
Guarantees
Reconciling
Adjustments
Consolidated
Net Income
(in thousands)
Interest income (1)
$
121,570
$
53,384
$
58,921
$
21,940
$
(20,417)
$
235,398
Core Earnings by Business Segment
For the Year Ended December 31, 2013
(964)
(53,978)
66,628
23,690
2,244
25,934
481
(929)
(15,292)
(16,221)
76,822
(26,888)
—
(42,174)
11,210
132
791
923
—
—
(3,161)
(3,161)
8,972
(3,140)
—
(47,842)
11,079
4,100
—
4,100
—
—
(5,465)
(5,465)
9,714
(3,400)
Interest income related to consolidated
trusts owned by third parties
reclassified to guarantee fee income
Interest expense (2)
Net effective spread
Guarantee and commitment fees
Other income (3)
Non-interest income
Release of loan losses
Provision for losses
Other non-interest expense
Non-interest expense (4)
Core earnings before income taxes
Income tax (expense)/benefit
Core earnings before preferred stock
dividends and attribution of income
to non-controlling interest - preferred
stock dividends
Preferred stock dividends
Non-controlling interest - preferred
stock dividends
$
$
—
(5,606)
16,334
—
1,622
1,622
—
—
(8,260)
(8,260)
9,696
8,798
18,494
(3,495)
(22,187)
964
12,324
(7,129)
(964)
34,156
33,192
26,063 (5)
(9,122)
—
—
—
—
—
—
—
(137,276)
98,122
26,958
38,813
65,771
481
(929)
(32,178)
(33,107)
131,267
(33,752)
97,515
(3,495)
(22,187)
71,833
49,934
5,832
6,314
16,941 (5)
—
—
—
—
—
—
Segment core earnings/(losses)
49,934
$
5,832
$
6,314
$
(7,188) $
16,941 (5)
$
Total assets at carrying value
5,821,292
$
1,656,688
$
2,566,896
$
3,316,904
$
—
$
13,361,780
Total on- and off-balance sheet
program assets at principal balance
9,672,730
1,687,117
2,590,465
—
—
13,950,312
(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 - preferred stock dividends; and segment core earnings to corresponding income measures: income before income taxes, net income,
and net income attributable to common stockholders, respectively.
203
204
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
holders in Farmer Mac II LLC have been satisfied. As of December 31, 2013, Farmer Mac II LLC held
assets with a fair value of $1.7 billion, had debt outstanding of $375.0 million, had preferred stock
outstanding with a liquidation preference of $250.0 million, and had $1.0 billion of common stock
outstanding held by Farmer Mac.
LLC will only be available to creditors of Farmer Mac after all obligations owed to creditors of and equity
Table 14.1
The following tables present core earnings for Farmer Mac's reportable operating segments and a
reconciliation to consolidated net income for the years ended December 31, 2013, 2012, and 2011:
Core Earnings by Business Segment
For the Year Ended December 31, 2013
Farm & Ranch
USDA
Guarantees
Rural Utilities
Corporate
(in thousands)
Reconciling
Adjustments
Consolidated
Net Income
Interest income (1)
$
121,570
$
53,384
$
58,921
$
21,940
$
(20,417)
$
235,398
Interest income related to consolidated
trusts owned by third parties
reclassified to guarantee fee income
Interest expense (2)
Net effective spread
Guarantee and commitment fees
Other income (3)
Non-interest income
Release of loan losses
Provision for losses
Other non-interest expense
Non-interest expense (4)
Core earnings before income taxes
Income tax (expense)/benefit
Core earnings before preferred stock
dividends and attribution of income
to non-controlling interest - preferred
stock dividends
Preferred stock dividends
Non-controlling interest - preferred
stock dividends
Segment core earnings/(losses)
Total assets at carrying value
Total on- and off-balance sheet
program assets at principal balance
$
$
(964)
(53,978)
66,628
23,690
2,244
25,934
481
(929)
(15,292)
(16,221)
76,822
(26,888)
—
(42,174)
11,210
132
791
923
—
—
(3,161)
(3,161)
8,972
(3,140)
—
(47,842)
11,079
4,100
—
4,100
—
—
(5,465)
(5,465)
9,714
(3,400)
49,934
5,832
6,314
—
—
—
—
—
—
—
(5,606)
16,334
—
1,622
1,622
—
—
(8,260)
(8,260)
9,696
8,798
18,494
(3,495)
(22,187)
964
12,324
(7,129)
(964)
34,156
33,192
—
—
—
—
26,063 (5)
(9,122)
16,941 (5)
—
—
49,934
$
5,832
$
6,314
$
(7,188) $
16,941 (5)
$
—
(137,276)
98,122
26,958
38,813
65,771
481
(929)
(32,178)
(33,107)
131,267
(33,752)
97,515
(3,495)
(22,187)
71,833
5,821,292
$
1,656,688
$
2,566,896
$
3,316,904
$
—
$
13,361,780
9,672,730
1,687,117
2,590,465
—
—
13,950,312
(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
(3)
are included in "Gains/(losses) on financial derivatives and hedging activities" on the consolidated financial statements.
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.
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(4)
(5) Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-
controlling interest - preferred stock dividends; and segment core earnings to corresponding income measures: income before income taxes, net income,
and net income attributable to common stockholders, respectively.
203
204
Core Earnings by Business Segment
For the Year Ended December 31, 2012
Farm & Ranch
USDA
Guarantees
Rural Utilities
Corporate
(in thousands)
Reconciling
Adjustments
Consolidated
Net Income
Core Earnings by Business Segment
For the Year Ended December 31, 2011
Farm & Ranch
Rural Utilities
Corporate
USDA
Guarantees
Reconciling
Adjustments
Consolidated
Net Income
(in thousands)
Interest income (1)
$
131,714
$
56,815
$
63,243
$
24,729
$
(11,831)
$
264,670
Interest income (1)
$
146,653
$
56,726
$
53,237
$
28,117
$
(10,046)
$
274,687
Interest income related to consolidated
trusts owned by third parties
reclassified to guarantee fee income
Interest expense (2)
Net effective spread
Guarantee and commitment fees
Other income/(expense) (3)
Non-interest income/(loss)
Provision for loan losses
Release of losses
Other non-interest expense
Non-interest expense (4)
Core earnings before income taxes
Income tax (expense)/benefit
Core earnings before preferred stock
dividends and attribution of income
to non-controlling interest - preferred
stock dividends
Preferred stock dividends
Non-controlling interest - preferred
stock dividends
Segment core earnings
Total assets at carrying value
Total on- and off-balance sheet
program assets at principal balance
$
$
(1,659)
(65,460)
64,595
22,095
2,427
24,522
(3,691)
1,816
(15,066)
(13,250)
72,176
(25,261)
—
(45,560)
11,255
163
599
762
—
—
(3,065)
(3,065)
8,952
(3,134)
—
(50,796)
12,447
4,364
466
4,830
—
—
(5,809)
(5,809)
11,468
(4,013)
46,915
5,818
7,455
—
—
—
—
—
—
—
(6,469)
18,260
—
(2,113)
(2,113)
—
—
(8,784)
(8,784)
7,363
7,157
14,520
(2,879)
(22,187)
1,659
25,595
15,423
(1,659)
(22,607)
(24,266)
—
—
—
—
(8,843) (5)
3,095
(5,748) (5)
—
—
46,915
$
5,818
$
7,455
$
(10,546) $
(5,748) (5)
$
—
(142,690)
121,980
24,963
(21,228)
3,735
(3,691)
1,816
(32,724)
(30,908)
91,116
(22,156)
68,960
(2,879)
(22,187)
43,894
5,190,136
$
1,641,030
$
2,398,809
$
3,392,226
$
—
$
12,622,201
9,056,489
1,615,579
2,343,120
—
—
13,015,188
Includes reconciling adjustments for the amortization of premiums and discounts on assets consolidated at fair value to reflect core earnings amounts.
(1)
(2) Based on effective funding cost determined for each operating segment, including expenses related to interest rate swaps not designated as hedges, which
amounts.
Interest income related to consolidated
trusts owned by third parties
reclassified to guarantee fee income
Interest expense (2)
Net effective spread
Guarantee and commitment fees
Other income/(expense) (3)
Non-interest income/(loss)
Provision for loan losses
Release of losses
Other non-interest expense
Non-interest expense (4)
Core earnings before income taxes
Income tax (expense)/benefit
Core earnings before preferred stock
dividends and attribution of income
to non-controlling interest - preferred
stock dividends
Preferred stock dividends
Non-controlling interest - preferred
stock dividends
$
$
(3,269)
(92,155)
51,229
22,525
3,201
25,726
(610)
2,957
(15,768)
(12,811)
63,534
(22,237)
—
(45,937)
10,789
204
283
487
—
—
(2,752)
(2,752)
8,524
(2,983)
—
(40,950)
12,287
5,361
—
5,361
—
—
(4,923)
(4,923)
12,725
(4,454)
—
(13,003)
15,114
—
(2,272)
(2,272)
—
—
(8,173)
(8,173)
4,669
8,195
12,864
(2,879)
(22,187)
3,269
38,663
31,886
(3,269)
(73,422)
(76,691)
(44,805) (5)
15,682
—
—
—
—
—
—
—
(153,382)
121,305
24,821
(72,210)
(47,389)
(610)
2,957
(31,616)
(28,659)
44,647
(5,797)
38,850
(2,879)
(22,187)
13,784
41,297
5,541
8,271
(29,123) (5)
—
—
—
—
—
—
Segment core earnings
41,297
$
5,541
$
8,271
$
(12,202) $
(29,123) (5)
$
Total assets at carrying value
4,840,519
$
1,552,105
$
2,421,904
$
3,068,980
$
—
$
11,883,508
Total on- and off-balance sheet
program assets at principal balance
8,057,027
1,513,177
2,343,098
—
—
11,913,302
(1)
Includes reconciling adjustments for yield maintenance income and amortization of premiums on assets consolidated at fair value to reflect core earnings
(2) Based on effective funding cost determined for each operating segment, including expenses related to interest rate swaps, 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 yield maintenance income, expenses related to interest rate swaps and fair value adjustments
on financial derivatives and trading assets. Also includes a reconciling adjustment related to the recognition of deferred gains over the estimated lives of
certain Farmer Mac Guaranteed Securities and USDA Securities.
(4)
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(5) Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-
controlling interest - preferred stock dividends; and segment core earnings to corresponding income measures: income before income taxes, net income,
and net income attributable to common stockholders, respectively.
are included in "Gains/(losses) on financial derivatives and hedging activities" on the consolidated financial statements.
Includes reconciling adjustments for the reclassification of yield maintenance income and 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.
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(4)
(5) Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-
(3)
controlling interest - preferred stock dividends; and segment core earnings to corresponding income measures: income before income taxes, net income,
and net income attributable to common stockholders, respectively.
205
206
Core Earnings by Business Segment
For the Year Ended December 31, 2012
Farm & Ranch
Rural Utilities
Corporate
USDA
Guarantees
Reconciling
Adjustments
Consolidated
Net Income
(in thousands)
Core Earnings by Business Segment
For the Year Ended December 31, 2011
Farm & Ranch
USDA
Guarantees
Rural Utilities
Corporate
(in thousands)
Reconciling
Adjustments
Consolidated
Net Income
Interest income (1)
$
131,714
$
56,815
$
63,243
$
24,729
$
(11,831)
$
264,670
Interest income (1)
$
146,653
$
56,726
$
53,237
$
28,117
$
(10,046)
$
274,687
Interest income related to consolidated
trusts owned by third parties
reclassified to guarantee fee income
Interest expense (2)
Net effective spread
Guarantee and commitment fees
Other income/(expense) (3)
Non-interest income/(loss)
Provision for loan losses
Release of losses
Other non-interest expense
Non-interest expense (4)
Core earnings before income taxes
Income tax (expense)/benefit
Core earnings before preferred stock
dividends and attribution of income
to non-controlling interest - preferred
stock dividends
Preferred stock dividends
Non-controlling interest - preferred
stock dividends
Segment core earnings
Total assets at carrying value
Total on- and off-balance sheet
program assets at principal balance
$
$
(3,269)
(92,155)
51,229
22,525
3,201
25,726
(610)
2,957
(15,768)
(12,811)
63,534
(22,237)
—
(45,937)
10,789
204
283
487
—
—
(2,752)
(2,752)
8,524
(2,983)
—
(40,950)
12,287
5,361
—
5,361
—
—
(4,923)
(4,923)
12,725
(4,454)
41,297
5,541
8,271
—
—
—
—
—
—
—
(13,003)
15,114
—
(2,272)
(2,272)
—
—
(8,173)
(8,173)
4,669
8,195
12,864
(2,879)
(22,187)
3,269
38,663
31,886
(3,269)
(73,422)
(76,691)
—
—
—
—
(44,805) (5)
15,682
(29,123) (5)
—
—
41,297
$
5,541
$
8,271
$
(12,202) $
(29,123) (5)
$
—
(153,382)
121,305
24,821
(72,210)
(47,389)
(610)
2,957
(31,616)
(28,659)
44,647
(5,797)
38,850
(2,879)
(22,187)
13,784
4,840,519
$
1,552,105
$
2,421,904
$
3,068,980
$
—
$
11,883,508
8,057,027
1,513,177
2,343,098
—
—
11,913,302
(1)
Includes reconciling adjustments for yield maintenance income and amortization of premiums 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, which are included in "Gains/
Interest income related to consolidated
trusts owned by third parties
reclassified to guarantee fee income
Interest expense (2)
Net effective spread
Guarantee and commitment fees
Other income/(expense) (3)
Non-interest income/(loss)
Provision for loan losses
Release of losses
Other non-interest expense
Non-interest expense (4)
Core earnings before income taxes
Income tax (expense)/benefit
Core earnings before preferred stock
dividends and attribution of income
to non-controlling interest - preferred
stock dividends
Preferred stock dividends
Non-controlling interest - preferred
stock dividends
$
$
(1,659)
(65,460)
64,595
22,095
2,427
24,522
(3,691)
1,816
(15,066)
(13,250)
72,176
(25,261)
—
(45,560)
11,255
163
599
762
—
—
(3,065)
(3,065)
8,952
(3,134)
—
(50,796)
12,447
4,364
466
4,830
—
—
(5,809)
(5,809)
11,468
(4,013)
46,915
5,818
7,455
—
—
—
—
—
—
—
(6,469)
18,260
—
(2,113)
(2,113)
—
—
(8,784)
(8,784)
7,363
7,157
14,520
(2,879)
(22,187)
1,659
25,595
15,423
(1,659)
(22,607)
(24,266)
—
—
—
—
(8,843) (5)
3,095
(5,748) (5)
—
—
—
(142,690)
121,980
24,963
(21,228)
3,735
(3,691)
1,816
(32,724)
(30,908)
91,116
(22,156)
68,960
(2,879)
(22,187)
43,894
Segment core earnings
46,915
$
5,818
$
7,455
$
(10,546) $
(5,748) (5)
$
Total assets at carrying value
5,190,136
$
1,641,030
$
2,398,809
$
3,392,226
$
—
$
12,622,201
Total on- and off-balance sheet
program assets at principal balance
9,056,489
1,615,579
2,343,120
—
—
13,015,188
(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.
over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Securities.
(4)
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(5) Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-
controlling interest - preferred stock dividends; and segment core earnings to corresponding income measures: income before income taxes, net income,
and net income attributable to common stockholders, respectively.
(losses) on financial derivatives and hedging activities" on the consolidated financial statements.
Includes reconciling adjustments for the reclassification of yield maintenance income, expenses related to interest rate swaps 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.
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(3)
Includes reconciling adjustments for the reclassification of yield maintenance income and 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
(3)
(4)
(5) Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-
controlling interest - preferred stock dividends; and segment core earnings to corresponding income measures: income before income taxes, net income,
and net income attributable to common stockholders, respectively.
205
206
15. QUARTERLY FINANCIAL INFORMATION (Unaudited)
Table 15.1
Interest income:
Interest income
Interest expense
Net interest income
(Provision for)/release of loan losses
Net interest income after (provision for)/release of loan losses
Non-interest income:
Guarantee and commitment fees
Gains on financial derivatives and hedging activities
(Losses)/gains on trading assets
(Losses)/gains on sale of available-for-sale investment securities
Gains on repurchase of debt
Gains on sale of real estate owned
Other income
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Less: Net income attributable to non-controlling
interest - preferred stock dividends
Net income attributable to Farmer Mac
Preferred stock dividends
Net income attributable to common stockholders
Earnings/(loss) per common share:
Basic earnings per common share
Diluted earnings per common share
2013 Quarter Ended
Dec. 31
Sept. 30
June 30
Mar. 31
(in thousands, except per share amounts)
Interest income:
Interest income
Interest expense
Net interest income
$
49,180
$
62,975
$
61,745
$
35,777
13,403
(117)
13,286
6,768
9,263
(76)
(960)
1,462
26
539
17,022
7,621
22,687
3,774
18,913
(5,546)
13,367
(882)
34,787
28,188
499
28,687
6,819
3,024
(626)
—
—
39
565
9,821
8,441
30,067
8,226
21,841
(5,547)
16,294
(881)
33,584
28,161
529
28,690
6,759
14,983
(327)
3,071
—
1,124
873
26,483
7,964
47,209
13,036
34,173
(5,547)
28,626
(881)
61,498
33,128
28,370
(430)
27,940
6,612
4,494
210
2
—
47
1,080
12,445
9,081
31,304
8,716
22,588
(5,547)
17,041
(851)
$
$
$
12,485
$
15,413
$
27,745
$
16,190
1.14
1.11
$
$
1.42
1.37
$
$
2.57
2.48
$
$
1.51
1.45
2012 Quarter Ended
Dec. 31
Sept. 30
June 30
Mar. 31
(in thousands, except per share amounts)
$
56,151
$
63,810
$
71,578
$
33,358
22,793
(4,354)
18,439
6,568
3,505
2,735
(10)
629
(5,943)
890
8,374
6,109
20,704
4,837
15,867
(5,546)
10,321
(720)
33,448
30,362
(137)
30,225
6,401
1,558
(441)
—
(13)
—
959
8,464
7,748
30,941
8,294
22,647
(5,547)
17,100
(719)
36,961
34,617
1,220
35,837
6,064
(31,292)
(3,086)
—
262
—
771
(27,281)
9,209
(653)
(2,629)
1,976
(5,547)
(3,571)
(720)
73,131
38,923
34,208
(420)
33,788
5,930
6,400
1,099
28
—
—
721
14,178
7,842
40,124
11,654
28,470
(5,547)
22,923
(720)
(Provision for)/release of loan losses
Net interest income after (provision for)/release of loan losses
Non-interest income/(loss):
Guarantee and commitment fees
Gains/(losses) on financial derivatives and hedging activities
Gains/(losses) on trading assets
(Losses)/gains on sale of available-for-sale investment securities
Gains/(losses) on sale of real estate owned
Lower of cost or fair value adjustment on loans held for sale
Other income
Non-interest income/(loss)
Non-interest expense
Income/(loss) before income taxes
Income tax expense/(benefit)
Net income
Less: Net income attributable to non-controlling
interest - preferred stock dividends
Net income/(loss) attributable to Farmer Mac
Preferred stock dividends
Net income/(loss) attributable to common stockholders
9,601
$
16,381
$
(4,291) $
22,203
Earnings/(loss) per common share:
Basic earnings/(loss) per common share
Diluted earnings/(loss) per common share
0.91
0.87
$
$
1.56
1.49
$
$
(0.41) $
(0.41) $
2.14
2.04
$
$
$
207
208
15. QUARTERLY FINANCIAL INFORMATION (Unaudited)
Table 15.1
Interest income:
Interest income
Interest expense
Net interest income
(Provision for)/release of loan losses
Net interest income after (provision for)/release of loan losses
Non-interest income:
Guarantee and commitment fees
Gains on financial derivatives and hedging activities
(Losses)/gains on trading assets
(Losses)/gains on sale of available-for-sale investment securities
Gains on repurchase of debt
Gains on sale of real estate owned
Other income
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Less: Net income attributable to non-controlling
interest - preferred stock dividends
Net income attributable to Farmer Mac
Preferred stock dividends
2013 Quarter Ended
Dec. 31
Sept. 30
June 30
Mar. 31
(in thousands, except per share amounts)
$
49,180
$
62,975
$
61,745
$
35,777
13,403
(117)
13,286
6,768
9,263
(76)
(960)
1,462
26
539
17,022
7,621
22,687
3,774
18,913
(5,546)
13,367
(882)
34,787
28,188
499
28,687
6,819
3,024
(626)
—
—
39
565
9,821
8,441
30,067
8,226
21,841
(5,547)
16,294
(881)
33,584
28,161
529
28,690
6,759
14,983
(327)
3,071
—
1,124
873
26,483
7,964
47,209
13,036
34,173
(5,547)
28,626
(881)
61,498
33,128
28,370
(430)
27,940
6,612
4,494
210
2
—
47
1,080
12,445
9,081
31,304
8,716
22,588
(5,547)
17,041
(851)
Net income attributable to common stockholders
12,485
$
15,413
$
27,745
$
16,190
Earnings/(loss) per common share:
Basic earnings per common share
Diluted earnings per common share
1.14
1.11
$
$
1.42
1.37
$
$
2.57
2.48
$
$
1.51
1.45
$
$
$
Interest income:
Interest income
Interest expense
Net interest income
(Provision for)/release of loan losses
Net interest income after (provision for)/release of loan losses
Non-interest income/(loss):
Guarantee and commitment fees
Gains/(losses) on financial derivatives and hedging activities
Gains/(losses) on trading assets
(Losses)/gains on sale of available-for-sale investment securities
Gains/(losses) on sale of real estate owned
Lower of cost or fair value adjustment on loans held for sale
Other income
Non-interest income/(loss)
Non-interest expense
Income/(loss) before income taxes
Income tax expense/(benefit)
Net income
Less: Net income attributable to non-controlling
interest - preferred stock dividends
Net income/(loss) attributable to Farmer Mac
Preferred stock dividends
Net income/(loss) attributable to common stockholders
Earnings/(loss) per common share:
Basic earnings/(loss) per common share
Diluted earnings/(loss) per common share
2012 Quarter Ended
Dec. 31
Sept. 30
June 30
Mar. 31
(in thousands, except per share amounts)
$
56,151
$
63,810
$
71,578
$
33,358
22,793
(4,354)
18,439
6,568
3,505
2,735
(10)
629
(5,943)
890
8,374
6,109
20,704
4,837
15,867
(5,546)
10,321
(720)
33,448
30,362
(137)
30,225
6,401
1,558
(441)
—
(13)
—
959
8,464
7,748
30,941
8,294
22,647
(5,547)
17,100
(719)
36,961
34,617
1,220
35,837
6,064
(31,292)
(3,086)
—
262
—
771
(27,281)
9,209
(653)
(2,629)
1,976
(5,547)
(3,571)
(720)
73,131
38,923
34,208
(420)
33,788
5,930
6,400
1,099
28
—
—
721
14,178
7,842
40,124
11,654
28,470
(5,547)
22,923
(720)
$
$
$
9,601
$
16,381
$
(4,291) $
22,203
0.91
0.87
$
$
1.56
1.49
$
$
(0.41) $
(0.41) $
2.14
2.04
207
208
Item 9.
None.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 10.
Directors, Executive Officers and Corporate Governance
Part III
Item 9A. Controls and Procedures
(a) Management's Evaluation of Disclosure Controls and Procedures. Farmer Mac maintains disclosure
controls and procedures designed to ensure that information required to be disclosed in its periodic filings
under the Securities Exchange Act of 1934 (the “Exchange Act”), including this Annual Report on Form
10-K, 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
Exchange Act) as of December 31, 2013.
of the
and
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 December 31, 2013.
(b) Changes in Internal Control Over Financial Reporting. There were no changes in Farmer Mac's
internal control over financial reporting during the three months ended December 31, 2013 that have
materially affected, or are reasonably likely to materially affect, Farmer Mac's internal control over
financial reporting.
Item 9B.
Other Information
None.
209
210
Farmer Mac has adopted a Code of Business Conduct and Ethics (the "Code") that applies to all directors,
officers, employees, and agents of Farmer Mac, including Farmer Mac's principal executive officer,
principal financial officer, principal accounting officer, and other senior financial officers. A copy of the
Code is available in the "Investors—Corporate Governance" section of Farmer Mac's internet website
(www.farmermac.com). Farmer Mac will post any amendment to, or waiver from, a provision of the Code
in that same section of its internet website. The Code was most recently amended in December 2013. A
print copy of the Code is available free of charge upon written request to Farmer Mac's Secretary.
Additional information required by this item is incorporated by reference to the Farmer Mac's definitive
proxy statement to be filed on or about April 25, 2014.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to Farmer Mac's definitive proxy
statement to be filed on or about April 25, 2014.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information required by this item is incorporated by reference to Farmer Mac's definitive proxy
statement to be filed on or about April 25, 2014.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to Farmer Mac's definitive proxy
statement to be filed on or about April 25, 2014.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to Farmer Mac's definitive proxy
statement to be filed on or about April 25, 2014.
Disclosure
None.
Item 9A. Controls and Procedures
(a) Management's Evaluation of Disclosure Controls and Procedures. Farmer Mac maintains disclosure
controls and procedures designed to ensure that information required to be disclosed in its periodic filings
under the Securities Exchange Act of 1934 (the “Exchange Act”), including this Annual Report on Form
10-K, 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
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 December 31, 2013.
(b) Changes in Internal Control Over Financial Reporting. There were no changes in Farmer Mac's
internal control over financial reporting during the three months ended December 31, 2013 that have
materially affected, or are reasonably likely to materially affect, Farmer Mac's internal control over
financial reporting.
Item 9B.
Other Information
None.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
Farmer Mac has adopted a Code of Business Conduct and Ethics (the "Code") that applies to all directors,
officers, employees, and agents of Farmer Mac, including Farmer Mac's principal executive officer,
principal financial officer, principal accounting officer, and other senior financial officers. A copy of the
Code is available in the "Investors—Corporate Governance" section of Farmer Mac's internet website
(www.farmermac.com). Farmer Mac will post any amendment to, or waiver from, a provision of the Code
in that same section of its internet website. The Code was most recently amended in December 2013. A
print copy of the Code is available free of charge upon written request to Farmer Mac's Secretary.
Additional information required by this item is incorporated by reference to the Farmer Mac's definitive
proxy statement to be filed on or about April 25, 2014.
Mac's disclosure controls and procedures (as defined under
and
of the
Item 11. Executive Compensation
Exchange Act) as of December 31, 2013.
The information required by this item is incorporated by reference to Farmer Mac's definitive proxy
statement to be filed on or about April 25, 2014.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information required by this item is incorporated by reference to Farmer Mac's definitive proxy
statement to be filed on or about April 25, 2014.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to Farmer Mac's definitive proxy
statement to be filed on or about April 25, 2014.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to Farmer Mac's definitive proxy
statement to be filed on or about April 25, 2014.
209
210
PART IV
(3) Exhibits.
Item 15. Exhibits and Financial Statement Schedules
(a)
(1) Financial Statements.
Refer to Item 8 above.
(2) Financial Statement Schedules.
All schedules are omitted since they are not applicable, not required, or the information required to be set
forth therein is included in the consolidated financial statements or in notes thereto.
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).
Amended and Restated By-Laws of the Registrant (Previously filed as Exhibit 3.1 to Form 8-K
filed December 12, 2012).
Specimen Certificate for Farmer Mac Class A Voting Common Stock (Previously filed as Exhibit
4.1 to Form 10-Q filed May 15, 2003).
Specimen Certificate for Farmer Mac Class B Voting Common Stock (Previously filed as Exhibit
4.2 to Form 10-Q filed May 15, 2003).
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).
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).
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).
Amended and Restated 1997 Incentive Plan (Previously filed as Exhibit 10.1.3 to Form 10-Q
filed November 14, 2003).
Form of stock option award agreement under 1997 Incentive Plan (Previously filed as Exhibit
10.1.4 to Form 10-K filed March 16, 2005).
2008 Omnibus Incentive Plan (Previously filed as Exhibit 10.1.2 to Form 10-Q filed August 12,
2008).
Form of SAR Agreement under the 2008 Omnibus Incentive Plan for grants made prior to
April 1, 2012 (Previously filed as Exhibit 10 to Form 8-K filed June 11, 2008).
Form of SAR Agreement under the 2008 Omnibus Incentive Plan for grants made from April 1,
2012 to March 31, 2013 (Previously filed as Exhibit 10.1 to Form 8-K filed April 6, 2012).
Form of Stock Appreciation Rights Award Agreement under the 2008 Omnibus Incentive Plan
for grants made after April 1, 2013 (Previously filed as Exhibit 10.1 to Form 8-K filed April 5,
†*
10.2.4
—
Form of Restricted Stock Agreement (Officers) under the 2008 Omnibus Incentive Plan for
grants made prior to April 1, 2012 (Previously filed as Exhibit 10.1 to Form 8-K filed
†*
10.2.5
—
Form of Restricted Stock Agreement (Officers) under the 2008 Omnibus Incentive Plan for
grants made on and after April 1, 2012 (Previously filed as Exhibit 10.2 to Form 8-K filed
2013)
June 10, 2009).
April 6, 2012).
Form of Restricted Stock Agreement (Directors) under the 2008 Omnibus Incentive Plan
(Previously filed as Exhibit 10.3 to Form 8-K filed April 6, 2012).
Form of Time-Based Restricted Stock Award Agreement for grants made to non-directors after
April 1, 2013 (Previously filed as Exhibit 10.2 to Form 8-K filed April 5, 2013).
Form of Performance-Based Restricted Stock Award Agreement for grants made to non-directors
after April 1, 2013 (Previously filed as Exhibit 10.2 to Form 8-K filed April 5, 2013).
Federal Agricultural Mortgage Corporation Executive Officer Severance Plan (Previously filed
as Exhibit 10.1 to Form 8-K filed June 13, 2012).
Form of Participation Agreement to the Federal Agricultural Mortgage Corporation Executive
Officer Severance Plan (Previously filed as Exhibit 10.2 to Form 8-K filed June 13, 2012).
Separation Agreement, Waiver and Release effective October 18, 2012 between the Registrant
and Michael A. Gerber (Previously filed as Exhibit 10.1 to Form 8-K filed October 30, 2012).
Incorporated by reference to the indicated prior filing.
Filed with this report.
Management contract or compensatory plan.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
3.1
3.2
4.1
4.2
4.3
4.4
4.4.1
10.1
10.1.1
10.2
10.2.1
10.2.2
10.2.3
10.2.6
10.2.7
10.2.8
10.3
10.4
10.5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
*
*
*
*
*
*
*
†*
†*
†*
†*
†*
†*
†*
†*
†*
†*
†*
†*
*
**
†
#
211
212
PART IV
(3) Exhibits.
Item 15. Exhibits and Financial Statement Schedules
(a)
(1) Financial Statements.
Refer to Item 8 above.
(2) Financial Statement Schedules.
All schedules are omitted since they are not applicable, not required, or the information required to be set
forth therein is included in the consolidated financial statements or in notes thereto.
*
*
*
*
*
*
*
†*
†*
†*
†*
†*
†*
3.1
3.2
4.1
4.2
4.3
4.4
4.4.1
10.1
10.1.1
10.2
10.2.1
10.2.2
10.2.3
—
—
—
—
—
—
—
—
—
—
—
—
—
†*
10.2.4
—
†*
10.2.5
—
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).
Amended and Restated By-Laws of the Registrant (Previously filed as Exhibit 3.1 to Form 8-K
filed December 12, 2012).
Specimen Certificate for Farmer Mac Class A Voting Common Stock (Previously filed as Exhibit
4.1 to Form 10-Q filed May 15, 2003).
Specimen Certificate for Farmer Mac Class B Voting Common Stock (Previously filed as Exhibit
4.2 to Form 10-Q filed May 15, 2003).
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).
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).
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).
Amended and Restated 1997 Incentive Plan (Previously filed as Exhibit 10.1.3 to Form 10-Q
filed November 14, 2003).
Form of stock option award agreement under 1997 Incentive Plan (Previously filed as Exhibit
10.1.4 to Form 10-K filed March 16, 2005).
2008 Omnibus Incentive Plan (Previously filed as Exhibit 10.1.2 to Form 10-Q filed August 12,
2008).
Form of SAR Agreement under the 2008 Omnibus Incentive Plan for grants made prior to
April 1, 2012 (Previously filed as Exhibit 10 to Form 8-K filed June 11, 2008).
Form of SAR Agreement under the 2008 Omnibus Incentive Plan for grants made from April 1,
2012 to March 31, 2013 (Previously filed as Exhibit 10.1 to Form 8-K filed April 6, 2012).
Form of Stock Appreciation Rights Award Agreement under the 2008 Omnibus Incentive Plan
for grants made after April 1, 2013 (Previously filed as Exhibit 10.1 to Form 8-K filed April 5,
2013)
Form of Restricted Stock Agreement (Officers) under the 2008 Omnibus Incentive Plan for
grants made prior to April 1, 2012 (Previously filed as Exhibit 10.1 to Form 8-K filed
June 10, 2009).
Form of Restricted Stock Agreement (Officers) under the 2008 Omnibus Incentive Plan for
grants made on and after April 1, 2012 (Previously filed as Exhibit 10.2 to Form 8-K filed
April 6, 2012).
Form of Restricted Stock Agreement (Directors) under the 2008 Omnibus Incentive Plan
(Previously filed as Exhibit 10.3 to Form 8-K filed April 6, 2012).
Form of Time-Based Restricted Stock Award Agreement for grants made to non-directors after
April 1, 2013 (Previously filed as Exhibit 10.2 to Form 8-K filed April 5, 2013).
Form of Performance-Based Restricted Stock Award Agreement for grants made to non-directors
after April 1, 2013 (Previously filed as Exhibit 10.2 to Form 8-K filed April 5, 2013).
Federal Agricultural Mortgage Corporation Executive Officer Severance Plan (Previously filed
as Exhibit 10.1 to Form 8-K filed June 13, 2012).
Form of Participation Agreement to the Federal Agricultural Mortgage Corporation Executive
Officer Severance Plan (Previously filed as Exhibit 10.2 to Form 8-K filed June 13, 2012).
Separation Agreement, Waiver and Release effective October 18, 2012 between the Registrant
and Michael A. Gerber (Previously filed as Exhibit 10.1 to Form 8-K filed October 30, 2012).
10.2.6
10.2.7
10.2.8
10.3
10.4
10.5
—
—
—
—
—
—
†*
†*
†*
†*
†*
†*
*
**
†
#
Incorporated by reference to the indicated prior filing.
Filed with this report.
Management contract or compensatory plan.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
211
212
†*
†*
†*
*#
—
—
10.6
10.7
10.8
Employment Agreement dated December 6, 2012 between Timothy L. Buzby and the Registrant
(Previously filed as Exhibit 10.1 to Form 8-K filed December 10, 2012).
Form of Indemnification Agreement for Directors (Previously filed as Exhibit 10.1 to Form 8-K
filed April 9, 2008).
Description of compensation agreement between the Registrant and its directors (Previously
filed as Exhibit 10.6 to Form 10-K filed March 16, 2011).
10.9
—
Amended and Restated Master Central Servicing Agreement dated as of May 1, 2004 between
Zions First National Bank and the Registrant (Previously filed as Exhibit 10.11.2 to Form 10-Q
filed August 9, 2004).
*#
10.9.1
—
Amendment No. 1 to Amended and Restated Master Central Servicing Agreement between
Zions First National Bank and the Registrant, dated as of June 1, 2009 (Previously filed as
Exhibit 10.11.1 to Form 10-Q filed August 10, 2009).
*#
10.9.2
—
Amendment No. 2 to Amended and Restated Master Central Servicing Agreement between
Zions First National Bank and the Registrant, dated as of August 25, 2010 (Previously filed as
Exhibit 10.11.2 to Form 10-Q filed November 9, 2010).
*#
10.10
—
Loan Closing File Review Agreement dated as of August 2, 2005 between Zions First National
Bank and the Registrant (Previously filed as Exhibit 10.12 to Form 10-Q filed
November 9, 2005).
*
10.11
—
Sublease Agreement dated as of December 6, 2010 between Mayer Brown LLP and the
Registrant (Previously filed as Exhibit 10.43 to Form 10-K/A filed June 1, 2011).
*
**
†
#
Incorporated by reference to the indicated prior filing.
Filed with this report.
Management contract or compensatory plan.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
10.12
—
Master Trust, Sale and Servicing Agreement dated as of October 20, 2006 between CFC
Advantage, LLC, National Rural Utilities Cooperative Finance Corporation, U.S. Bank National
Association, and the Registrant (Previously filed as Exhibit 10.22 to Form 10-Q filed
August 9, 2010).
10.13
—
10.14
—
Registration Rights Agreement Series 2007-1 dated as of February 15, 2007 between CFC
Advantage, LLC, National Rural Utilities Cooperative Finance Corporation, and the Registrant
(Previously filed as Exhibit 10.23 to Form 10-Q filed August 9, 2010).
Registration Rights Agreement Series 2007-2 dated as of August 10, 2007 between CFC
Advantage, LLC, National Rural Utilities Cooperative Finance Corporation and the Registrant
(Previously filed as Exhibit 10.24 to Form 10-Q filed August 9, 2010).
10.15
—
Amended and Restated Note Purchase Agreement dated as of March 24, 2011 between Farmer
Mac Mortgage Securities Corporation, National Rural Utilities Cooperative Finance
Corporation, and the Registrant (Previously filed as Exhibit 10.22 to Form 10-Q filed May 10,
2011).
10.15.1
First Supplemental Note Purchase Agreement dated as of March 24, 2011 between Farmer Mac
Mortgage Securities Corporation, National Rural Utilities Cooperative Finance Corporation, and
the Registrant (Previously filed as Exhibit 10.25 to Form 10-Q filed May 10, 2011).
10.16
—
Amended, Restated and Consolidated Pledge Agreement dated as of March 24, 2011 between
Farmer Mac Mortgage Securities Corporation, National Rural Utilities Cooperative Finance
Corporation, U.S. Bank National Association, and the Registrant (Previously filed as Exhibit
10.23 to Form 10-Q filed May 10, 2011).
10.17
—
10.18
—
Setoff Rights Letter Agreement dated as of March 24, 2011 between National Rural Utilities
Cooperative Finance Corporation, Farmer Mac Mortgage Securities Corporation, and the
Registrant (Previously filed as Exhibit 10.24 to Form 10-Q filed May 10, 2011).
Amended and Restated Master Sale and Servicing Agreement dated as of August 12, 2011
between National Rural Utilities Cooperative Finance Corporation and the Registrant
(Previously filed as Exhibit 10.26 to Form 10-Q filed November 9, 2011).
*#
10.19
—
Credit Support Agreement dated as of September 1, 2009 between National Rural Utilities
Cooperative Finance Corporation and the Registrant (Previously filed as Exhibit 10.38 to Form
10-Q filed August 9, 2010).
Incorporated by reference to the indicated prior filing.
Filed with this report.
Management contract or compensatory plan.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
*
*
*
*
*
*
*
*
**
*
†
#
213
214
—
—
10.6
10.7
10.8
Employment Agreement dated December 6, 2012 between Timothy L. Buzby and the Registrant
(Previously filed as Exhibit 10.1 to Form 8-K filed December 10, 2012).
Form of Indemnification Agreement for Directors (Previously filed as Exhibit 10.1 to Form 8-K
filed April 9, 2008).
Description of compensation agreement between the Registrant and its directors (Previously
filed as Exhibit 10.6 to Form 10-K filed March 16, 2011).
10.9
—
Amended and Restated Master Central Servicing Agreement dated as of May 1, 2004 between
Zions First National Bank and the Registrant (Previously filed as Exhibit 10.11.2 to Form 10-Q
filed August 9, 2004).
*#
10.9.1
—
Amendment No. 1 to Amended and Restated Master Central Servicing Agreement between
Zions First National Bank and the Registrant, dated as of June 1, 2009 (Previously filed as
Exhibit 10.11.1 to Form 10-Q filed August 10, 2009).
*#
10.9.2
—
Amendment No. 2 to Amended and Restated Master Central Servicing Agreement between
Zions First National Bank and the Registrant, dated as of August 25, 2010 (Previously filed as
Exhibit 10.11.2 to Form 10-Q filed November 9, 2010).
*#
10.10
—
Loan Closing File Review Agreement dated as of August 2, 2005 between Zions First National
Bank and the Registrant (Previously filed as Exhibit 10.12 to Form 10-Q filed
November 9, 2005).
10.11
—
Sublease Agreement dated as of December 6, 2010 between Mayer Brown LLP and the
Registrant (Previously filed as Exhibit 10.43 to Form 10-K/A filed June 1, 2011).
Incorporated by reference to the indicated prior filing.
**
Filed with this report.
Management contract or compensatory plan.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
†*
†*
†*
*#
*
*
†
#
*
*
*
*
*
*
*
*
10.12
—
10.13
—
10.14
—
10.15
—
10.15.1
10.16
—
10.17
—
10.18
—
Master Trust, Sale and Servicing Agreement dated as of October 20, 2006 between CFC
Advantage, LLC, National Rural Utilities Cooperative Finance Corporation, U.S. Bank National
Association, and the Registrant (Previously filed as Exhibit 10.22 to Form 10-Q filed
August 9, 2010).
Registration Rights Agreement Series 2007-1 dated as of February 15, 2007 between CFC
Advantage, LLC, National Rural Utilities Cooperative Finance Corporation, and the Registrant
(Previously filed as Exhibit 10.23 to Form 10-Q filed August 9, 2010).
Registration Rights Agreement Series 2007-2 dated as of August 10, 2007 between CFC
Advantage, LLC, National Rural Utilities Cooperative Finance Corporation and the Registrant
(Previously filed as Exhibit 10.24 to Form 10-Q filed August 9, 2010).
Amended and Restated Note Purchase Agreement dated as of March 24, 2011 between Farmer
Mac Mortgage Securities Corporation, National Rural Utilities Cooperative Finance
Corporation, and the Registrant (Previously filed as Exhibit 10.22 to Form 10-Q filed May 10,
2011).
First Supplemental Note Purchase Agreement dated as of March 24, 2011 between Farmer Mac
Mortgage Securities Corporation, National Rural Utilities Cooperative Finance Corporation, and
the Registrant (Previously filed as Exhibit 10.25 to Form 10-Q filed May 10, 2011).
Amended, Restated and Consolidated Pledge Agreement dated as of March 24, 2011 between
Farmer Mac Mortgage Securities Corporation, National Rural Utilities Cooperative Finance
Corporation, U.S. Bank National Association, and the Registrant (Previously filed as Exhibit
10.23 to Form 10-Q filed May 10, 2011).
Setoff Rights Letter Agreement dated as of March 24, 2011 between National Rural Utilities
Cooperative Finance Corporation, Farmer Mac Mortgage Securities Corporation, and the
Registrant (Previously filed as Exhibit 10.24 to Form 10-Q filed May 10, 2011).
Amended and Restated Master Sale and Servicing Agreement dated as of August 12, 2011
between National Rural Utilities Cooperative Finance Corporation and the Registrant
(Previously filed as Exhibit 10.26 to Form 10-Q filed November 9, 2011).
*#
10.19
—
Credit Support Agreement dated as of September 1, 2009 between National Rural Utilities
Cooperative Finance Corporation and the Registrant (Previously filed as Exhibit 10.38 to Form
10-Q filed August 9, 2010).
*
**
†
#
Incorporated by reference to the indicated prior filing.
Filed with this report.
Management contract or compensatory plan.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
213
214
21
*
*
**
31.1
10.20
—
Indenture dated as of September 1, 2009 between National Rural Utilities Cooperative Finance
Corporation, U.S. Bank National Association and the Registrant (Previously filed as Exhibit
10.39 to Form 10-Q filed August 9, 2010).
—
—
List of the Registrant's subsidiaries (Previously filed as Exhibit 21 to Form 10-K filed March 16,
2010).
Certification of Registrant's principal executive officer relating to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2013, pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Name
Title
Date
/s/ Lowell L. Junkins
Lowell L. Junkins
/s/ Timothy L. Buzby
Timothy L. Buzby
/s/ R. Dale Lynch
R. Dale Lynch
Chairman of the Board and Director
March 13, 2014
President and Chief Executive Officer
March 13, 2014
(Principal Executive Officer)
Senior Vice President – Chief Financial March 13, 2014
Officer and Treasurer
(Principal Financial Officer)
/s/ Gregory N. Ramsey
Controller
March 13, 2014
Gregory N. Ramsey
(Principal Accounting Officer)
**
31.2
—
Certification of Registrant's principal financial officer relating to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2013, 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 Annual Report on Form 10-K for the year ended December 31, 2013, pursuant to
18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
/s/ Timothy L. Buzby
By:
Timothy L. Buzby
President and
Chief Executive Officer
March 13, 2014
Date
*
**
†
#
Incorporated by reference to the indicated prior filing.
Filed with this report.
Management contract or compensatory plan.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
215
216
*
*
**
*
†
#
Incorporated by reference to the indicated prior filing.
Filed with this report.
Management contract or compensatory plan.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
10.20
—
Indenture dated as of September 1, 2009 between National Rural Utilities Cooperative Finance
Corporation, U.S. Bank National Association and the Registrant (Previously filed as Exhibit
10.39 to Form 10-Q filed August 9, 2010).
21
List of the Registrant's subsidiaries (Previously filed as Exhibit 21 to Form 10-K filed March 16,
—
—
2010).
**
31.1
Certification of Registrant's principal executive officer relating to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2013, pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
**
31.2
—
Certification of Registrant's principal financial officer relating to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2013, 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 Annual Report on Form 10-K for the year ended December 31, 2013, pursuant to
18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
By:
/s/ Timothy L. Buzby
Timothy L. Buzby
President and
Chief Executive Officer
March 13, 2014
Date
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Name
Title
Date
/s/ Lowell L. Junkins
Lowell L. Junkins
Chairman of the Board and Director
March 13, 2014
/s/ Timothy L. Buzby
Timothy L. Buzby
President and Chief Executive Officer
(Principal Executive Officer)
March 13, 2014
/s/ R. Dale Lynch
R. Dale Lynch
Senior Vice President – Chief Financial March 13, 2014
Officer and Treasurer
(Principal Financial Officer)
/s/ Gregory N. Ramsey
Gregory N. Ramsey
Controller
(Principal Accounting Officer)
March 13, 2014
215
216
Name
/s/ Dennis L. Brack
Dennis L. Brack
/s/ Chester J. Culver
Chester J. Culver
/s/ Richard H. Davidson
Richard H. Davidson
/s/ James R. Engebretsen
James R. Engebretsen
/s/ Dennis A. Everson
Dennis A. Everson
/s/ Sara L. Faivre-Davis
Sara L. Faivre-Davis
/s/ Thomas W. Hill
Thomas W. Hill
/s/ Mitchell A. Johnson
Mitchell A. Johnson
/s/ Clark B. Maxwell
Clark B. Maxwell
/s/ James B. McElroy
James B. McElroy
/s/ J. Dan Raines, Jr.
J. Dan Raines, Jr.
/s/ Bruce J. Sherrick
Bruce J. Sherrick
/s/ Myles J. Watts
Myles J. Watts
/s/ Douglas E. Wilhelm
Douglas E. Wilhelm
Title
Director
Date
March 13, 2014
Director
March 13, 2014
Director
March 13, 2014
Director
March 13, 2014
Director
March 13, 2014
Director
March 13, 2014
Director
March 13, 2014
Director
March 13, 2014
Director
March 13, 2014
Director
March 13, 2014
Director
March 13, 2014
Director
March 13, 2014
Director
March 13, 2014
Director
March 13, 2014
217
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CORPORATE PROFILE
The Federal Agricultural Mortgage Corporation, commonly known as “Farmer Mac,” is a stockholder-
owned, federally chartered corporation that combines private capital and public sponsorship to serve a
public purpose. Congress has charged Farmer Mac with the mission of providing a secondary market
for agricultural real estate and rural housing mortgage loans, rural utilities loans, and loans guaranteed
by the United States Department of Agriculture (“USDA”). This secondary market is designed to
increase the availability of long-term credit at stable interest rates to America’s rural communities,
including farmers, ranchers, rural homeowners, and rural utilities cooperatives, and to provide those
borrowers with the benefits of capital markets pricing and product innovation. Farmer Mac
accomplishes its Congressional mission of providing liquidity and lending capacity to agricultural and
rural utilities lenders by:
purchasing eligible loans directly from lenders;
providing advances against eligible loans by purchasing obligations secured by those loans;
securitizing assets and guaranteeing the payment of principal and interest on the resulting
securities that represent interests in, or obligations secured by, pools of eligible loans
(“Farmer Mac Guaranteed Securities”); and
issuing long-term standby purchase commitments (“LTSPCs”) for eligible loans.
Farmer Mac conducts these activities through three lines of business – Farm & Ranch, USDA
Guarantees, and Rural Utilities. The loans eligible for the secondary market provided by Farmer Mac
include:
mortgage loans secured by first liens on agricultural real estate, including part-time farms
and rural housing (encompassing the Farm & Ranch line of business);
agricultural and rural development loans guaranteed by the USDA (encompassing the USDA
Guarantees line of business, which is operated by Farmer Mac’s subsidiary Farmer Mac II
LLC); and
to finance electrification and
loans made by
telecommunications systems in rural areas (encompassing the Rural Utilities line of
business).
lenders organized as cooperatives
The assets underlying Farmer Mac Guaranteed Securities include (1) loans, loan participation interests,
or USDA-guaranteed portions of loans eligible under one of Farmer Mac’s lines of business and
(2) general obligations of lenders secured by pools of eligible loans. Farmer Mac guarantees the timely
payment of principal and interest on the resulting Farmer Mac Guaranteed Securities. AgVantage® is a
registered trademark of Farmer Mac used to designate Farmer Mac’s guarantees of securities related to
general obligations of lenders secured by pools of eligible loans. Farmer Mac may retain Farmer Mac
Guaranteed Securities in its portfolio or sell them to third parties.
Farmer Mac’s activities are intended to provide lenders with an efficient and competitive secondary
market that enhances these lenders’ ability to offer competitively-priced financing to rural borrowers.
Loan product information and indicative “net yields” for Farmer Mac’s Farm & Ranch and USDA
Guarantees lines of business are available on Farmer Mac’s website at www.farmermac.com.
Please refer to “Business,” “Management’s Discussion and Analysis of Financial Condition and Results
of Operations,” and Note 1 to the consolidated financial statements in Farmer Mac’s 2013 Form 10-K
included in this Annual Report for a more complete description of Farmer Mac and its lines of business.
CORPORATE INFORMATION
Corporate Headquarters
Transfer Agent and Registrar
1999 K Street, NW
Fourth Floor
Washington, DC 20006
Phone: (202) 872-7700 or
(800) 879-3276
(202) 872-7713
Fax:
Website: http://www.farmermac.com
Continental Stock Transfer & Trust Company
17 Battery Place
Eighth Floor
New York, NY 10004
Phone: (212) 509-4000
(800) 509-5586
Website: http://www.continentalstock.com
Annual Meeting of Stockholders
Certification
Thursday, June 5, 2014
8:00 a.m.
The Town Hall
1999 K Street, NW
First Floor
Washington, DC 20006
Formal notice of the meeting, the proxy
statement, and the proxy card are being
mailed to each stockholder of record entitled
to vote at the meeting simultaneously with the
mailing of this Annual Report.
Stock Exchange
Farmer Mac’s Class A voting common stock
and Class C non-voting common stock trade
on the New York Stock Exchange under the
symbols AGM.A and AGM, respectively.
Farmer Mac has included as Exhibit 31 to its
Annual Report on Form 10-K for the fiscal
year ended December 31, 2013 filed with the
SEC the certifications of the Chief Executive
Officer and Chief Financial Officer certifying
the quality of Farmer Mac’s financial
disclosures.
Form 10-K
Stockholders may obtain, without charge, a
copy of Farmer Mac’s 2013 Annual Report
on Form 10-K, as filed with the SEC, from
Farmer Mac’s website or by contacting
Farmer Mac’s Secretary at Farmer Mac’s
Corporate Headquarters.
Independent Registered Public Accounting
Firm for the year ended December 31, 2013
PricewaterhouseCoopers LLP
1800 Tysons Boulevard
McLean, VA 22102
Federal Agricultural Mortgage Corporation
1999 K Street, NW 4th Floor Washington, DC 20006
800-879-3276 | www.farmermac.com
Federal Agricultural Mortgage Corporation
2013 Annual Report