2018
ANNUAL REPORT
FARMER MAC HAS HELPED FUND LOANS TO OVER
83,000
RURAL BORROWERS IN ALL 50 STATES,
WHICH HAS RESULTED IN MORE THAN
$53BILLION
OF INVESTMENT IN RURAL AMERICA.
WHO WE ARE
Farmer Mac® is the premier secondary market for U.S. agricultural credit and has been a
champion for and an integral part of this nation’s rural economy for over 30 years. Guided by
our mission—to help build a strong and vital rural America by increasing the availability and
affordability of credit for the benefit of American agriculture and rural communities—we
provide lenders access to flexible, low-cost financing and effective risk management tools to help
their farm, ranch, and rural utilities customers.
DEAR VALUED SHAREHOLDERS:
It’s my privilege to write to you for
the first time as the CEO of Farmer
Mac. In my first five months, I’ve
confirmed many initial impressions
and begun working to fine-tune
our strategy. I’ve also had time
to reflect on our mission, which
is simple but not easy. I’d like to
share my answers to the most
fundamental question about our
mission—What does it mean to
increase the availability and
affordability of credit for the
benefit of American agriculture
and rural communities? That is our
mission, and it means many things.
It means purchasing mortgage
loans from our network of lenders
who have close, community-
based relationships with farmers
across the United States. It
also means providing innovative
wholesale portfolio funding, credit
guarantees, and other products
for our network of lenders who
serve American agricultural and
rural utility borrowers. Since our
founding in 1988, our efforts have
reached thousands of lenders and
helped fund loans to over 83,000
farmers, ranchers, rural electric
cooperatives, and agribusinesses in
all 50 states, which has resulted in
more than $53 billion of investment
in rural America, an extraordinary
validation of the need for— and
purpose of— this organization.
It means delivering strong
financial results by combining
our competitive access to debt
capital with disciplined asset-
liability management, strong
capital efficiency, diligent
expense control, and a keen focus
on credit risk management.
DURING 2018, WE GREW OUR NON-
GAAP CORE EARNINGS BY 28% OVER
THE PRIOR YEAR TO $84
MILLION
During 2018, we grew our non-
GAAP core earnings by 28% over
the prior year to $84 million*.
It’s notable that over 99% of
these earnings are derived from
recurring revenue in the form of net
effective spread, guarantee fees,
and commitment fee income. We
grew our risk-adjusted capital to
over 13% in 2018, and our 90-day
delinquencies in the Farm & Ranch
portfolio decreased by 48% to
0.37% of the portfolio. In February
2019, our board considered these
strong results and approved an
increase in our quarterly dividend
by 21% and announced an increase
in our target payout ratio from
30% to 35% of annual core
earnings. Farmer Mac’s financial
health and continued discipline
should help us in our ongoing
2018 ANNUAL REPORT
1
BRADFORD T. NORDHOLM
President and
Chief Executive Officer
efforts to access low-cost debt
capital, deliver competitively-priced
credit products to our customers,
achieve industry-leading future
growth rates, further build our
capital base, and provide our
shareholders with returns on equity
at the top decile of our financial
industry peers.
infrastructure investment initiatives,
and Farmer Mac is committed to
innovating along with them when
it’s consistent with our mission
and charter.
It means attracting and retaining
a talented team of people to
accomplish all of this.
It means challenging ourselves
to analyze and innovate new
ways to fulfill our mission.
Our management team and board
have worked hand in hand to
develop a heightened focus on the
future, and we have embedded
strategic planning into our
management processes, both with
functional leadership and in how
we approach everyday decisions.
American agriculture is a remark-
ably innovative industry, one that
is considered a leader in the rapid
application of new technologies
to supplement crop production,
processes, and distribution. At
Farmer Mac, we have both the
opportunity and the obligation to
use information technology to better
support our network of lenders
and to make better (and much
faster) credit, product, and pricing
decisions. Many in our network are
also looking for innovative ways
to serve rural utilities, renewable
energy projects, and other rural
FARMER MAC IS A TEAM OF
100 TALENTED EMPLOYEES
MANAGING NEARLY
$20 BILLION
IN OUTSTANDING BUSINESS
VOLUME AND MORE THAN
$5 BILLION OF ANNUAL
GROSS VOLUME.
Farmer Mac is a team of 100
talented employees managing
nearly $20 billion in outstanding
business volume and more than
$5 billion of annual gross volume.
This requires each of our employees
to proficiently perform multiple
highly-technical functions against
a backdrop of complex technology,
and with a drive for efficiency and
excellence. Three of our current
priorities are to deepen those
teams responsible for day-to-day
interaction with our customers,
to enhance our technological
infrastructure, and to institutional-
ize enterprise risk management.
As our talented team evolves,
we’ll be working to capitalize on
the skills — and passion— of our
people. Internal surveys reveal that
our employees are very passionate
about the mission of Farmer Mac
in serving American agricultural
and rural communities. Our external
surveys consistently show most
customers express the same
sentiment. This alignment of
commitment and mission is a
critical part of the cultural fabric
of Farmer Mac.
As a candidate to be the new
CEO of Farmer Mac, I was attracted
to the sound financial condition
and mission of the organization.
As the new CEO of Farmer Mac,
I am profoundly grateful to
our customers, shareholders,
bondholders, board members, and
employees for their support and for
the exciting trajectory we’re setting
for our future success together.
Best regards,
BRADFORD T. NORDHOLM
President and
Chief Executive Officer
*Core earnings is a non-GAAP measure. For more information, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
2 FARMER MAC | FINANCING RURAL AMERICA
A MESSAGE FROM THE CHAIRMAN
During my many years of experience
on Farmer Mac’s Board of Directors
and my time as Acting President
and CEO, it has been a privilege to
work with such outstanding and
passionate colleagues. Together, we
share a commitment to serving our
important mission of delivering low-
cost capital to rural and agricultural
communities, and our financial
performance over the last few years
has been exceptional.
As I look ahead, I could not be more
confident that Brad is the right leader
to drive Farmer Mac’s success
through its next chapter of growth
and mission fulfillment. I know that he
and his executive leadership team will
build on the things that have made
Farmer Mac successful, make changes
where needed, drive innovation and
new capabilities at a faster pace, and
keep Farmer Mac a special place.
Sincerely,
LOWELL L. JUNKINS
Chairman of the Board
2018 ANNUAL REPORT
3
2018 KEY FINANCIALS
As of December 31, 2018
DOUBLE-DIGIT CORE EARNINGS GROWTH 1
99%
OF REVENUES ARE
CONSISTENTLY
COMPRISED OF
RECURRING SPREAD
AND FEE INCOME
2016
2016
2017
2018
$53.5
$65.6
25.4%
CORE EPS CAGR
$84.0
$ IN MILLIONS
$0.0
$20.0
$40.0
$60.0
$80.0
$100.0
STRONG CAPITAL BASE AND
GROWING SHAREHOLDER VALUE 2
INDUSTRY- LEADING LOW
LOSS RATES
AVERAGE ANNUAL CHARGE-OFFS AS % OF ASSETS
3
BOOK VALUE
PER SHARE
$60.00
TIER 1
CAPITAL RATIO
$50.00
$40.00
$30.00
$20.00
$10.00
$0.00
$42.59
$38.42
12.7%
12.6%
$49.01
15.0%
14.0%
13.4%
13.0%
12.0%
11.0%
10.0%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
0.96%
0.16%
0.02%
ALL COMMERCIAL
BANK LOANS
AND LEASES
AGRICULTURAL
INDUSTRY PEERS4
FARMER MAC5
2016
2017
2018
QUARTERLY DIVIDENDS
8TH CONSECUTIVE INCREASE
INCREASED TARGET PAYOUT RATIO
OF CORE EARNINGS TO ~35%
$0.70
R
E
T
R
A
U
Q
R
E
P
E
R
A
H
S
R
E
P
$
$0.80
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$0.00
$0.05
INITIATED NEW DIVIDEND POLICY:
TARGET ~30% PAYOUT RATIO OF CORE EARNINGS
$0.26
$0.58
$0.36
$0.10
$0.12
$0.14
$0.16
2011
2012
2013
2014
2015
2016
2017
2018
2019
1, 2, 3, 4, 5 For all footnote references, please see inside back cover
4 FARMER MAC | FINANCING RURAL AMERICA
EXECUTIVE OFFICERS
As of April 1, 2019
BRADFORD T. NORDHOLM
President and Chief Executive Officer
JOHN C. COVINGTON
Executive Vice President –
Chief Credit Officer
R. DALE LYNCH
Executive Vice President –
Chief Financial Officer and Treasurer
STEPHEN P. MULLERY
Executive Vice President –
General Counsel and Secretary
BOARD OF DIRECTORS
As of April 1, 2019
LOWELL L. JUNKINS, CHAIRMAN
Political Affairs Consultant
Lowell Junkins & Associates
Donnellson, Iowa
*
*
MYLES J. WATTS, VICE CHAIRMAN
Professor Emeritus, Agricultural Economics
Montana State University
Bozeman, Montana
DENNIS L. BRACK†
Director
Bath State Bank and Bath State Bancorp
Bath, Indiana
*
CHESTER J. CULVER
Founder
Chet Culver Group
Des Moines, Iowa
RICHARD H. DAVIDSON‡
Director
AgriBank, FCB
St. Paul, Minnesota
JAMES R. ENGEBRETSEN†
Retired Professor, Finance
Marriott School of Management
Brigham Young University
Provo, Utah
DENNIS A. EVERSON†
Director
First Dakota National Bank
Yankton, South Dakota
*
SARA L. FAIVRE
Co-owner and Managing Partner
Wild Type Ranch
Cameron, Texas
THOMAS W. HILL‡
Former Chief Financial and
Operations Officer
Farm Credit Bank of Texas
Austin, Texas
MITCHELL A. JOHNSON†
Financial Consultant
Washington, District of Columbia
CLARK B. MAXWELL†
President and Chief Executive Officer
Chatham Financial Corp.
Kennett Square, Pennsylvania
ROBERT G. SEXTON‡
President
Oslo Citrus Growers Association
Vero Beach, Florida
*
BRUCE J. SHERRICK
Professor, Agricultural and Applied Finance
University of Illinois
Champaign, Illinois
KERI L. VOTRUBA‡
Owner
Votruba Farm
Hemingford, Nebraska
DOUGLAS E. WILHELM‡
Former Chief Risk Officer
CoBank, ACB
Denver, Colorado
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
1999 K Street, N.W.
Fourth Floor
Washington, DC 20006
Phone: 202.872.7700
800.879.3276
Website: www.farmermac.com
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.
ANNUAL MEETING OF STOCKHOLDERS
Thursday, May 9, 2019
8:00 a.m.
The Town Hall
1999 K Street, N.W.
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.
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company
1 State Street
30th Floor
New York, NY 10004
Phone: 212.509.4000
800.509.5586
Website: www.continentalstock.com
CERTIFICATION
Farmer Mac has included as Exhibit 31 to its
Annual Report on Form 10-K for the fiscal year
ended December 31, 2018 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 2018 Annual Report
on Form 10-K, as filed with the SEC on
February 21, 2019, 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, 2018
PricewaterhouseCoopers LLP
1800 Tysons Boulevard
McLean, VA 22102
* Presidential Appointee
† Director elected by holders of Class A Common Stock
‡ Director elected by holders of Class B Common Stock
1 Core earnings is a non-GAAP measure. For more information, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
2 Book Value per Share excludes accumulated other comprehensive income.
3 Source: Board of Governors of the Federal Reserve System Charge-off and Delinquency Rates, and Farm Credit Funding Corporation Annual Information Statements;
Average annual charge-offs from 1999 to 2017.
4 Includes the average annual charge-off rates for Farm Credit System institutions’ total assets and commercial banks’ farmland and agricultural loans.
5 All Farmer Mac business volume.
As filed with the Securities and Exchange Commission on February 21, 2019
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, 2018
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)
52-1578738
(I.R.S. employer identification number)
1999 K Street, N.W., 4th Floor,
Washington, D.C.
(Address of principal executive offices)
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
6.875% Non-Cumulative Preferred Stock, Series B
6.000% Fixed-to-Floating Rate Non-Cumulative
Preferred Stock, Series C
Exchange on which registered
New York Stock Exchange
New York Stock Exchange
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 every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit such files).
Yes
No
Indicate by check mark 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,
a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,"
"accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
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 $787,705,568 as of June 30, 2018 based upon the closing prices for the
respective classes on June 30, 2018 reported by the New York Stock Exchange. For purposes of this information,
the outstanding shares of Class A voting common stock and Class C non-voting common stock held by directors,
executive officers, and significant stockholders of the registrant, as applicable, as of June 30, 2018 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 February 1, 2019, the registrant had outstanding 1,030,780 shares of Class A voting common stock,
500,301 shares of Class B voting common stock and 9,137,610 shares of Class C non-voting common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the registrant's 2019 Annual Meeting of Stockholders (portions of which
are incorporated by reference into Part III of this Annual Report on Form 10-K)
Forward-Looking Statements
Table of Contents
PART I
Item 1.
Business
General
Farmer Mac's Lines of Business
Farm & Ranch
USDA Guarantees
Rural Utilities
Institutional Credit
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
Office of Secondary Market Oversight
Capital Standards
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholders 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
Use of Non-GAAP Measures
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
3
5
7
7
7
14
15
27
29
33
36
37
37
38
41
41
41
42
43
45
65
65
65
65
66
66
69
70
71
76
79
82
103
106
107
125
129
130
131
136
136
136
137
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Equity
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 Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Item 16.
Signatures
Exhibits and Financial Statement Schedules
Form 10-K Summary
139
140
141
142
143
144
220
220
220
220
220
221
221
221
221
221
221
225
225
4
FORWARD-LOOKING STATEMENTS
In this report, the words "Farmer Mac," "we," "our," and "us" refer to the Federal Agricultural Mortgage
Corporation, unless otherwise stated or unless the context otherwise requires.
Some statements made in this report, such as in the "Management's Discussion & Analysis of Financial
Condition and Results of Operations" section, are "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995 about management's current expectations for Farmer Mac's
future financial results, business prospects, and business developments. Forward-looking statements
include, without limitation, any statement that may predict, forecast, indicate, or imply future results,
performance, or achievements. These statements typically include terms such as "anticipates," "believes,"
"expects," "intends," "plans," "potential," "may," "could," "should," and similar phrases. This report
includes forward-looking statements addressing Farmer Mac's:
• prospects for earnings;
• prospects for growth in business volume;
•
•
trends in net interest income and net effective spread;
trends in portfolio credit quality, delinquencies, substandard assets, credit losses, and
provisions for losses;
trends in expenses;
trends in investment securities;
•
•
• prospects for asset impairments and allowance for losses;
•
changes in capital position;
future dividend payments; and
•
• other business and financial matters.
Management's expectations for Farmer Mac's future necessarily involve assumptions, estimates, and the
evaluation of risks and uncertainties. Various factors or events, both known and unknown, could cause
Farmer Mac's actual results to differ materially from the expectations as expressed or implied by the
forward-looking statements, including the factors discussed under "Risk Factors" in Part I, Item 1A of this
Annual Report on Form 10-K for the fiscal period ended December 31, 2018, and uncertainties about:
•
•
•
•
•
•
the availability to Farmer Mac of debt and equity financing and, if available, the
reasonableness of rates and terms;
legislative or regulatory developments that could affect Farmer Mac, its sources of business, or
the agricultural or rural utilities industries;
fluctuations in the fair value of assets held by Farmer Mac and its subsidiaries;
the rate and direction of development of the secondary market for agricultural mortgage and
rural utilities loans, including lender interest in Farmer Mac's products and the secondary
market provided by Farmer Mac;
the general rate of growth in agricultural mortgage and rural utilities indebtedness;
the effect of economic conditions, including the effects of drought and other weather-related
conditions and fluctuations in agricultural real estate values, on agricultural mortgage lending
and borrower repayment capacity;
the effect of any changes in Farmer Mac's executive leadership;
•
• developments in the financial markets, including possible investor, analyst, and rating agency
reactions to events involving government-sponsored enterprises, including Farmer Mac;
5
•
•
changes in the level and direction of interest rates, which could, among other things, affect the
value of collateral securing Farmer Mac's agricultural mortgage loan assets;
the degree to which Farmer Mac is exposed to basis risk, which results from fluctuations in
Farmer Mac's borrowing costs relative to market indexes; and
• volatility in commodity prices relative to costs of production, changes in U.S. trade policies, or
fluctuations in export demand for U.S. agricultural products.
Considering these potential risks and uncertainties, no undue reliance should be placed on any forward-
looking statements expressed in this report. Farmer Mac undertakes no obligation to release publicly the
results of revisions to any forward-looking statements to reflect new information or any future events or
circumstances, except as otherwise mandated by the SEC. The information in this report is not necessarily
indicative of future results.
6
Item 1. Business
PART I
GENERAL
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 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 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
2018 – 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 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 under applicable state law to carry out any activities that Farmer Mac
otherwise would perform directly. 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 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 main 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; and
• guarantee and commitment fees received for outstanding guaranteed securities and LTSPCs.
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. Farmer Mac also uses the proceeds of debt issuance 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 asset class, dollar amount, issuer concentration, and credit quality. Those
7
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 become
unfavorable. As of December 31, 2018, Farmer Mac had $1.6 billion of discount notes and $14.6 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." For more
information about Farmer Mac's debt issuance, see "Business—Financing—Debt Issuance."
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 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 loans and obligations secured by loans and its sale of guaranteed securities to
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 issuance of LTSPCs for loans held
by lenders and its issuance of 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, portfolio diversification, and access to a wide
variety of loan products including those with long-term fixed rates. As part of its outreach strategy,
Farmer Mac engages with 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 has also increased its focus on wholesale financing for institutional
investors in agricultural assets that qualify as eligible collateral under Farmer Mac's charter. For these
potential issuers, Farmer Mac directs its outreach efforts through its business relationships within the
agricultural community and through executive outreach to institutions whose profile presents opportunity
to benefit from wholesale financing. 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 four lines of business – Farm & Ranch,
USDA Guarantees, Rural Utilities, and Institutional Credit. The loans (and participation interests in those
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 (comprising the assets eligible for the Farm & Ranch line of business);
8
•
•
agricultural and rural development loans guaranteed by the United States Department of
Agriculture ("USDA") (comprising the assets eligible for the USDA Guarantees line of business);
and
loans by lenders organized as cooperatives to finance electrification and telecommunications
systems in rural areas (comprising the assets eligible for the Rural Utilities line of business).
Farmer Mac also guarantees and purchases general obligations of lenders that are secured by pools of
these types of eligible loans (comprising the assets eligible for the Institutional Credit line of business).
As of December 31, 2018, the total outstanding business volume in all of Farmer Mac's lines of business
was $19.7 billion.
Farm & Ranch
Under the Farm & Ranch line of business, Farmer Mac purchases eligible mortgage loans (and related
participation interests) secured by first liens on agricultural real estate, which includes part-time farms and
rural housing ("Farm & Ranch loans"). Farmer Mac also guarantees securities representing interests in
pools of eligible Farm & Ranch loans and participation interests ("Farm & Ranch Guaranteed
Securities"). Farmer Mac also commits to purchase, subject to the applicable LTSPC agreement, eligible
Farm & Ranch loans and participation interests. To be eligible, Farm & Ranch loans must meet Farmer
Mac's credit underwriting, collateral valuation, documentation, and other specified standards described in
"Business—Farmer Mac's Lines of Business—Farm & Ranch." As of December 31, 2018, outstanding
Farm & Ranch loans held by Farmer Mac and loans that either backed off-balance sheet Farm & Ranch
Guaranteed Securities or were subject to LTSPCs totaled $7.2 billion.
USDA Guarantees
Under the USDA Guarantees line of business, Farmer Mac II LLC, a subsidiary of Farmer Mac, purchases
the portions of 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, 2018, outstanding USDA Securities and Farmer Mac Guaranteed USDA
Securities totaled $2.5 billion, of which $395.1 million were Farmer Mac Guaranteed USDA Securities.
Rural Utilities
Under the Rural Utilities line of business, Farmer Mac's authorized activities are similar to those
conducted under the Farm & Ranch line of business – purchases of, guarantees of securities backed by,
and issuances of LTSPCs for eligible rural utilities loans and related participation interests ("Rural
Utilities loans"). To be eligible, Rural Utilities loans must meet Farmer Mac's credit underwriting and
other specified standards described in "Business—Farmer Mac's Lines of Business—Rural Utilities." As
of December 31, 2018, the aggregate outstanding principal balance of Rural Utilities loans held by Farmer
Mac or that were subject to LTSPCs totaled $1.6 billion. There currently are no guaranteed securities
issued under the Rural Utilities line of business, although the Institutional Credit line of business includes
some AgVantage securities that are secured by Rural Utilities loans.
9
Institutional Credit
Under the Institutional Credit line of business, Farmer Mac guarantees and purchases general obligations
of lenders that are secured by pools of the types of loans eligible for purchase under Farmer Mac's Farm &
Ranch, USDA Guarantees, or Rural Utilities lines of business. AgVantage® is a registered trademark of
Farmer Mac used to designate Farmer Mac's guarantees of securities related to these general obligations of
lenders that are secured by pools of eligible loans and that comprise the Institutional Credit line of
business. Farm & Ranch Guaranteed Securities, Farmer Mac Guaranteed USDA Securities, and
AgVantage Securities are sometimes collectively referred to as "Farmer Mac Guaranteed Securities." For
more information on the products currently offered under Farmer Mac's Institutional Credit line of
business, see "Business—Farmer Mac's Lines of Business—Institutional Credit." As of December 31,
2018, outstanding securities held or guaranteed by Farmer Mac in its Institutional Credit line of business
totaled $8.4 billion.
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. But Farmer Mac does face
indirect competition from many sources. These sources include other financial institutions and other types
of financial entities that purchase, retain, securitize, or provide financing for the types of assets eligible for
Farmer Mac's secondary market activities, including commercial and investment banks, insurance
companies, other FCS institutions, and financial funds. 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 varied needs of lending institutions
related to capital requirements, liquidity, credit risk, and management of sector and geographic
concentrations and borrower exposure limits. However, the relative competitiveness of Farmer Mac's loan
rates is affected by the ability of other lending institutions to subsidize their rates on the loan products that
compete with Farmer Mac by price averaging with other types of loans or by accepting a lower return on
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 affect the price and volume at which Farmer
Mac issues debt and therefore its ability to offer savings to customers in the form of competitive products.
10
Capital and Corporate Governance
Farmer Mac's charter prescribes the company's basic capital and corporate governance structure. 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. The charter also authorizes Farmer Mac to issue non-
voting common stock. The classes of Farmer Mac's outstanding common stock and their relationship 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 any one holder may
own to no more than 33% 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% 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 contains no restrictions on the maximum number or percentage of outstanding
shares of Class B voting common stock that any one holder may own, 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 44% of the Class A voting common stock is held by three financial
institutions, with 31% held by one institution. Approximately 97% 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). We believe 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 regulatory mandate.
We believe that the concentration in such a small number of holders of Class B voting common stock is a
11
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"), 6.875% Non-Cumulative
Preferred Stock, Series B ("Series B Preferred Stock"), 6.000% Fixed-to-Floating Rate Non-Cumulative
Preferred Stock, Series C ("Series C 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. See also "Market for Registrant's
Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities" for more
information about Farmer Mac's common stock, and "Business—Financing—Equity Issuance" for more
information about Farmer Mac's common stock and preferred stock.
Unlike some other GSEs such as 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. Farmer Mac therefore seeks to fulfill its mission of serving the financing needs of rural
America in a way that is consistent with providing a return on the investment of its stockholders.
Farmer Mac generally requires 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 and related corporate policies that govern any conflicts of interest
that may arise in these transactions. Farmer Mac also requires 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 of Farmer Mac 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'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. Farmer Mac is also required to file quarterly reports of condition
with OSMO. As a publicly-traded corporation, Farmer Mac also must comply with the periodic reporting
12
requirements of the SEC. For a more detailed discussion of Farmer Mac's regulatory and governmental
relationships, see "Business—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 must comply with the higher of the minimum capital
requirement and the risk-based capital requirement. Also, in accordance with the FCA regulation on
capital planning, Farmer Mac's board of directors oversees a policy that requires Farmer Mac to maintain a
sufficient level of Tier 1 capital and restricts dividends and bonus payments if Farmer Mac's Tier 1 capital
falls below specified thresholds. For a discussion of Farmer Mac's capital requirements and its actual
capital levels, as well as FCA's role in the establishment and monitoring of those requirements and levels,
see "Business—Government Regulation of Farmer Mac—Capital Standards," "Management's Discussion
and Analysis of Financial Condition and Results of Operations—Balance Sheet Review—Equity," and
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and
Capital Resources—Capital Requirements."
Employees and Property
As of December 31, 2018, Farmer Mac employed 103 people, located primarily at its office at 1999 K
Street, N.W., 4th Floor, Washington, D.C. 20006. Farmer Mac also maintains offices at: (1) 9169
Northpark Drive, Johnston, Iowa 50322; (2) 5200 N. Palm Avenue, Suite 306, Fresno, California 93704;
and (3) 1065 E. Winding Creek Drive, Suite 200, Eagle, Idaho 83616. Farmer Mac's main telephone
number is (202) 872-7700.
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 any amendments to those filings, as soon as reasonably practicable after electronically filing those
materials with, or furnishing those materials to, the SEC. All references to www.farmermac.com in this
report are inactive textual references only. The information contained on Farmer Mac's website is not
incorporated by reference into this report.
13
FARMER MAC'S LINES OF BUSINESS
The following tables present the outstanding balances, new business volume, and net growth or decrease
after maturities, principal paydowns, and sales under Farmer Mac's four lines of business – Farm &
Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit:
Lines of Business - Outstanding Business Volume
As of December 31, 2018
As of December 31, 2017
(in thousands)
On-balance sheet:
Farm & Ranch:
Loans
Loans held in trusts:
Beneficial interests owned by third party investors
USDA Guarantees:
USDA Securities
Farmer Mac Guaranteed USDA Securities
Rural Utilities:
Loans
Institutional Credit:
AgVantage securities
Total on-balance sheet
Off-balance sheet:
Farm & Ranch:
LTSPCs(1)
Guaranteed Securities(1)
USDA Guarantees:
Farmer Mac Guaranteed USDA Securities
Rural Utilities:
LTSPCs(2)
Institutional Credit:
AgVantage securities
Revolving floating rate AgVantage facility(3)
Total off-balance sheet
Total
$
$
$
$
$
3,071,222
$
2,798,906
1,517,101
1,399,827
2,120,553
27,383
2,068,017
29,980
938,843
1,076,291
8,072,919
15,748,021
$
7,593,322
14,966,343
2,509,787
$
135,862
367,684
653,272
9,898
300,000
3,976,503
19,724,524
$
$
2,335,342
333,511
254,217
806,342
11,556
300,000
4,040,968
19,007,311
(1) During fourth quarter 2018, Farmer Mac repurchased the 100% participation interests in loans underlying a pool of $134.1 million in Farm & Ranch
Guaranteed Securities at par, thereby redeeming the corresponding Farm & Ranch Guaranteed Securities from their sole security holder. Farmer Mac
repurchased these participation interests at the request of the sole security holder in exchange for the termination of the participation interests and the
reconveyance of all beneficial interest in the loans to the sole security holder that owned the loans in which the participation interests had been issued. The
resulting pool of Farm & Ranch loans was concurrently added under LTSPCs. The commitment fee Farmer Mac receives on these loans added under
LTSPCs is the same as the guarantee fee Farmer Mac had been earning on the Farm & Ranch Guaranteed Securities.
Includes $17.0 million and $20.0 million related to one-year loan purchase commitments on which Farmer Mac receives a nominal unused commitment
fee as of December 31, 2018 and December 31, 2017, respectively.
(2)
(3) During both 2018 and 2017, $100.0 million of this facility was drawn and later repaid. Farmer Mac receives a fixed fee based on the full dollar amount of
the facility. If the counterparty draws on the facility, the amounts drawn will be in the form of AgVantage securities, and Farmer Mac will earn interest
income on those securities.
14
New Business Volume – Farmer Mac Loan Purchases, Guarantees, LTSPCs, and AgVantage Securities
For the Year Ended December 31,
2018
2017
2016
Gross volume
Net growth/
(decrease)
Gross Volume
Net growth/
(decrease)
Gross Volume
Net growth/
(decrease)
(in thousands)
$
960,848
$
389,589
$ 1,129,545
$ 684,279
$
966,023
$
556,479
430,071
(23,204)
554,743
44,003
399,095
(142,474)
332,270
127,851
11,645
—
3,010,307
300,000
52,537
110,870
369,759
161,925
113,217
144,622
375,203
106,054
78,349
97,749
(137,448)
(153,069)
137,341
—
76,779
(72,256)
50,491
441,404
(8,614)
355,734
477,939
2,383,912
617,192
2,098,852
563,432
—
—
—
—
—
$ 5,172,992
$
717,214
$ 4,737,225
$ 1,607,836
$ 4,437,122
$ 1,500,655
Farm & Ranch:
Loans
LTSPCs
USDA Guarantees:
USDA Securities
Farmer Mac Guaranteed USDA Securities
Rural Utilities:
Loans
LTSPCs
Institutional Credit:
AgVantage securities
AgVantage revolving line of credit facility
Total purchases, guarantees, LTSPCs, and
AgVantage securities
Farm & Ranch
Under the Farm & Ranch line of business, Farmer Mac provides a secondary market for mortgage loans
(and related participation interests) secured by first liens on agricultural real estate (including part-time
farms and rural housing) by (1) purchasing and retaining eligible mortgage loans, (2) 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 (3) issuing LTSPCs for
designated eligible mortgage loans, subject to 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 must:
• 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
15
• 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:
•
•
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.
Pending the effectiveness of new legislation described below, 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 $13.1 million as of December 31, 2018.
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, but Farmer Mac does limit the size of
those loans. For these loans, Farmer Mac generally does not assume more than $50.0 million in
cumulative direct credit exposure (e.g., loan purchases, LTSPCs, and non-AgVantage Farm & Ranch
Guaranteed Securities, which are not backed by a general obligation of a lender) to any one borrower or
group of related borrowers. An internal policy approved by Farmer Mac's board of directors limits the
cumulative direct credit exposure to any one borrower or group of related borrowers on these loans to 10%
of Farmer Mac's Tier 1 capital ($72.8 million as of December 31, 2018). That internal policy also sets a
limit of $75.0 million in cumulative exposure through a single lender to any one borrower or related
borrowers for AgVantage transactions, with the amount of any direct borrower exposure described above
not counting toward the $75.0 million limit. AgVantage transactions 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.
See "Business—Farmer Mac's Lines of Business—Institutional Credit.
In December 2018, Congress amended Farmer Mac's charter under the Agricultural Improvement Act of
2018 to increase the acreage limitation referred to above from 1,000 acres to 2,000 acres of agricultural
real estate, subject to FCA's assessment about the feasibility of such a change. FCA is required to submit
a report on its assessment of this change to Congress by no later than June 18, 2019. If FCA's assessment
indicates that it is feasible to increase the acreage limitation to 2,000 acres or more of agricultural real
estate, the change to Farmer Mac's charter will become effective one year after the date that FCA submits
its report to Congress. If this amendment becomes effective, the maximum loan size of $13.1 million
(adjusted annually for inflation) will apply to eligible Farm & Ranch loans secured by more than 2,000
acres of agricultural real estate. Farmer Mac may change the exposure limitations set forth above for
eligible Farm & Ranch loans secured by 2,000 acres or less of agricultural real estate if the amendment
becomes effective. If FCA's assessment determines that it is not feasible to increase the acreage
limitation, then the current limitation will remain in place.
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 that includes a primary residence whose value is at least 30% of the
property's aggregate value at origination. When analyzing borrower repayment capacity for part-time
farm loans, Farmer Mac typically considers off-farm income as a more important factor than for Farm &
Ranch loans that are not part-time farm loans. Farmer Mac had $504.1 million of part-time farm loans in
its portfolio as of December 31, 2018.
16
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. Farmer Mac uses the All-Transaction Housing Price Index ("HPI"), as
published by the Federal Housing Finance Agency, to index the value of a moderately priced rural housing
dwelling. Based on the most recent publication of the HPI, Farmer Mac increased the maximum purchase
price or current appraised value for a dwelling that secures a rural housing loan (excluding the land to
which the dwelling is affixed) to $320,000 effective December 14, 2018. The prior limit was
$300,000. Besides 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% of the total appraised value of the
combined property. Rural housing loans do not represent a significant part of Farmer Mac's business, with
$5.1 million of those loans in Farmer Mac's portfolio as of December 31, 2018.
Summary of Farm & Ranch Transactions
During the year ended December 31, 2018, Farmer Mac added $1.4 billion of gross new business volume
under the Farm & Ranch line of business. That gross new business volume was partially offset by
repayments on existing assets (principal paydowns, maturities, and sales) during the year, resulting in $7.2
billion of total outstanding business volume in this line of business as of December 31, 2018, compared to
$6.9 billion as of December 31, 2017. As of December 31, 2018, Farmer Mac had direct credit exposure
on 12,518 loans in the Farm & Ranch line of business across 48 states.
During 2018, Farmer Mac purchased eligible loans from 149 entities (the top ten institutions generated
67% of the purchase volume) and placed loans under LTSPCs with 19 entities in the Farm & Ranch line of
business. During 2017, Farmer Mac purchased eligible loans from 174 entities (the top ten institutions
generated 59% of the purchase volume) and placed loans under LTSPCs with 25 entities. During 2016,
Farmer Mac purchased eligible loans from 169 entities (the top ten institutions generated 59% of the
purchase volume) and placed loans under LTSPCs with 25 entities.
17
The following table summarizes loans purchased or placed under LTSPCs under the Farm & Ranch line of
business for each of the years ended December 31, 2018, 2017, and 2016. The table also sets forth the
amount of net growth or decrease in Farm & Ranch loans held and loans underlying LTSPCs, after
maturities, principal paydowns, and sales:
For the Year Ended December 31,
2018
2017
2016
Gross
volume
Net growth/
(decrease)
Gross
volume
Net growth/
(decrease)
Gross volume
Net growth/
(decrease)
(in thousands)
$
960,848
430,071
$ 1,390,919
$
$
389,589
$ 1,129,545
(23,204)
554,743
366,385
$ 1,684,288
$
$
684,279
$
966,023
44,003
399,095
728,282
$ 1,365,118
$
$
556,479
(142,474)
414,005
Loans
LTSPCs
Total
The following table presents the outstanding balances of Farm & Ranch loans held and loans underlying
Farm & Ranch Guaranteed Securities and LTSPCs as of the dates indicated:
On-balance sheet:
Loans
Loans held in trusts:
Beneficial interests owned by third party investors
Total on-balance sheet
Off-balance sheet:
LTSPCs(1)
Guaranteed Securities(1)
Total off-balance sheet
Total
As of December 31,
2018
2017
(in thousands)
$
$
$
$
3,071,222
$
2,798,906
1,517,101
1,399,827
4,588,323
$
4,198,733
2,509,787
135,862
2,645,649
7,233,972
$
$
2,335,342
333,511
2,668,853
6,867,586
(1) During fourth quarter 2018, Farmer Mac repurchased the 100% participation interests in loans underlying a pool of $134.1 million in Farm & Ranch
Guaranteed Securities at par, thereby redeeming the corresponding Farm & Ranch Guaranteed Securities from their sole security holder. Farmer Mac
repurchased these participation interests at the request of the sole security holder in exchange for the termination of the participation interests and the
reconveyance of all beneficial interest in the loans to the sole security holder that owned the loans in which the participation interests had been issued. The
resulting pool of Farm & Ranch loans was concurrently added under LTSPCs. The commitment fee Farmer Mac receives on these loans added under
LTSPCs is the same as the guarantee fee Farmer Mac had been earning on the Farm & Ranch Guaranteed Securities.
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 non-delinquent loans on a negotiated
basis. Farmer Mac purchases both fixed and adjustable rate loans that have a variety of maturities and
often include balloon payments. Of the $1.0 billion of loans purchased in the Farm & Ranch line of
business during 2018, 64% included balloon payments. By comparison, of the $1.1 billion of loans
purchased in the Farm & Ranch line of business during 2017, 70% included balloon payments.
During 2018, Farmer Mac purchased 2,171 Farm & Ranch term loans and revolving line of credit draws.
These purchases consisted of 910 term loans with an average unpaid principal balance of $910,000 and
18
1,261 revolving line of credit draws with an average unpaid principal balance of $127,000. In 2017
Farmer Mac purchased 2,129 Farm & Ranch term loans and revolving line of credit draws. These
purchases consisted of 1,037 term loans with an average unpaid principal balance of $979,000 and 1,092
revolving line of credit draws with an average unpaid principal balance of $107,000.
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 create off-
balance sheet obligations for Farmer Mac. Historically, the only securitization trusts where Farmer Mac
was not the primary beneficiary have been trusts containing 100% participation interests in loans that
comprised an LTSPC pool before 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 eligibility
standards for Farm & Ranch loans. In 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. This type of risk transfer reduces a lender's credit and concentration risk exposures and
therefore 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 each day, 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 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
when 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 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. 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 five percent of the original principal balance of the loan
pool) of any losses incurred on the loans in the pool. As of December 31, 2018 and 2017, approximately
6.8% and 7.2%, respectively, of total LTSPCs and Farm & Ranch Guaranteed Securities, including those
consolidated as loans on Farmer Mac's balance sheet, contained risk sharing arrangements.
19
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
•
fair value or in exchange for Farm & Ranch Guaranteed Securities (if the loans are not delinquent),
in accordance with the applicable agreement.
In 2018, Farmer Mac entered into $430.1 million of LTSPCs, compared to $554.7 million in 2017, in the
Farm & Ranch line of business. In 2018, LTSPCs were the preferred credit enhancement alternative for
new credit protection transactions, and they continue to be a significant portion of the Farm & Ranch line
of business. During 2018 and 2017, there were no conversions of LTSPCs into Farm & Ranch Guaranteed
Securities. As of December 31, 2018, the aggregate principal balance of the loans underlying LTSPCs in
Farmer Mac's Farm & Ranch line of business was $2.5 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 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 these 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 by Farmer
Mac 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.
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, 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 until those loans have been repaid, purchased out of the trust, or otherwise liquidated
(generally as a result of default). The aggregate amount of 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%) per year. The amount of
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.
Of the $19.7 billion outstanding principal balance of assets in Farmer Mac's four lines of business as of
December 31, 2018, $1.7 billion were in the form of Farm & Ranch Guaranteed Securities created from
the deposit of eligible loan assets into securitization trusts that issue "pass-through" certificates
20
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, 2018, Farmer Mac had outstanding Farm & Ranch Guaranteed Securities of $1.5
billion that represent interests in whole loans and $135.9 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% 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, 2018 and 2017, Farmer Mac sold Farm & Ranch Guaranteed Securities
in the amounts of $255.1 million and $363.5 million, respectively. No gains or losses resulted from these
sales in either 2018 or 2017. During 2018 and 2017, there were no conversions of LTSPCs into Farm &
Ranch Guaranteed Securities. During fourth quarter 2018, Farmer Mac repurchased the 100%
participation interests in loans underlying a pool of $134.1 million in Farm & Ranch Guaranteed
Securities at par, thereby redeeming the corresponding Farm & Ranch Guaranteed Securities from their
sole security holder. Farmer Mac repurchased these participation interests at the request of the sole
security holder in exchange for the termination of the participation interests and the reconveyance of all
beneficial interest in the loans to the sole security holder that owned the loans in which the participation
interests had been issued. The resulting pool of Farm & Ranch loans was concurrently added under
LTSPCs. The commitment fee Farmer Mac receives on these loans added under LTSPCs is the same as
the guarantee fee Farmer Mac had been earning on the Farm & Ranch Guaranteed Securities.
As of December 31, 2018, the aggregate principal balance of the loans that backed Farmer Mac's Farm &
Ranch Guaranteed Securities, which may or may not be consolidated on-balance sheet depending on the
primary beneficiary determination described above, was $1.7 billion. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations—Results of Operations—Business Volume."
21
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 considering the nature, risk profile, and other differences between
different categories of eligible 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") more than 80% 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 or underlying LTSPCs or Farm & Ranch Guaranteed Securities)
are also typically required to meet more specific underwriting standards established by Farmer Mac, as
described below.
Farmer Mac relies on the combined expertise of experienced internal agricultural credit underwriters and
loan servicers, along with external agricultural loan servicing and collateral valuation contractors, to
perform the necessary underwriting, servicing, and collateral valuation functions on Farm & Ranch loans.
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 practices 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. Farmer Mac also requires Farm & Ranch lenders to make representations and
warranties about 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 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.
Farmer Mac's credit underwriting standards for Farm & Ranch loans generally require that the original
LTV of any loan not exceed 70%. Farmer Mac may require lower original LTV thresholds for some
categories of loans, such as loans secured by property located in certain geographic regions, unseasoned
loans, single purpose facility loans, and loans exceeding certain dollar thresholds. Farmer Mac, from time
to time, allows higher LTV thresholds for loans secured by swine and poultry facilities that are supported
by a strong production contract with a reputable processor (up to 75% original LTV) and rural housing and
part-time farm loans secured primarily by owner-occupied residences (up to 80% original LTV). 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.
22
For 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% 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. Farmer Mac also uses an
interest rate shock test 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 processing 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% of the appraised value of the
property. The credit underwriting standards for facility loans are the same as for other Farm & Ranch
loans except that certain facility loans are required to have a more stringent total debt service coverage
ratio, including farm and non-farm income, of 1.35 or higher.
Loans not exceeding $1.5 million that are secured by eligible collateral with original LTVs not greater
than 55% made to borrowers with high consumer credit scores and adequate financial resources may be
accepted without further underwriting tests being applied.
Loans not exceeding $750,000 that are secured by eligible collateral with original LTVs not greater than
55% made to borrowers that meet certain criteria under a scoring model referencing consumer and
commercial financial data used by Farmer Mac may be accepted without further underwriting tests being
applied.
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 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:
• 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 the compensating strengths are typical of the financial condition of sound
borrowers in that segment.
•
Although underwriting approvals may be made 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 based on compensating strengths are fully underwritten and have experienced
cumulative rates of loss following default no different than loans approved based on conformity with all
applicable underwriting ratios.
23
For 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 eligible if:
•
•
•
it has been outstanding for at least five years and has an LTV of 60% or less;
there have been no payments more than 30 days past due during the three-year period before the
date the loan is either purchased by Farmer Mac or made subject to an LTSPC; 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.
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
reviewing loan documentation and collateral valuations.
•
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.
Farmer Mac does not require that each loan's compliance with the applicable underwriting standards be re-
evaluated after Farmer Mac purchases the loan or approves it for inclusion in a pool that backs Farm &
Ranch Guaranteed Securities or an LTSPC pool.
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.
24
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 about 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.
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 or
product. Farmer Mac directs its marketing efforts toward agricultural lenders throughout the nation to
achieve commodity or product and geographic diversification in its exposure to credit risk. Farmer Mac
evaluates its credit exposure in particular geographic regions and commodities or products relative to the
total principal amount of all outstanding loans held and loans underlying LTSPCs and 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 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 underlying an LTSPC, Farmer Mac's commodity or product and
geographic diversification disclosures reflect all loans underlying LTSPCs and any loans 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, 2018, Farmer Mac had 705 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, mortgage funds, commercial banks, and
insurance companies, compared to 680 eligible approved lenders as of December 31, 2017. Besides
participating directly in the Farm & Ranch line of business, some approved lenders facilitate indirect
25
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, 2018, of the 705 approved lenders
eligible to participate, 165 lenders had been active participants in the Farm & Ranch line of business
during the previous 12 months by either selling at least one loan to Farmer Mac or entering into an LTSPC
transaction with Farmer Mac, compared to 196 out of 680 approved lenders as of December 31, 2017.
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 these 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 loans
eligible for Farmer Mac's Farm & Ranch line of business 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 Farmer
Mac's Seller/Servicer Guide, including providing representations and warranties about the
eligibility of the loans and accuracy of loan data provided to Farmer Mac.
Servicing
Farmer Mac generally does not directly service the loans 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. In that capacity, Farmer Mac contracts with other institutions, known as
central servicers, to undertake most of the servicing responsibilities for the loans in accordance with
Farmer Mac's specified servicing requirements. For these loans, the central servicer may or may not be
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 in the Farm & Ranch line of business that are subject to a shared power
servicing provision.
Loans underlying LTSPCs are serviced by the holders of those loans in accordance with those lenders'
servicing procedures, which Farmer Mac reviews before entering into those transactions.
26
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 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 started 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
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 issuing 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. During 2018, 2017, and 2016, Farmer Mac and Farmer Mac II LLC conducted
USDA Guarantees transactions with 224, 222, and 222 entities, respectively.
The following table presents purchase activity in the USDA Guarantees line of business for each of the
years indicated, including the amounts retained by Farmer Mac and securitized and sold to lenders or other
investors in the form of Farmer Mac Guaranteed USDA Securities. The table also sets forth the amount of
net growth or decrease in each of these categories, after maturities, principal paydowns, and sales:
27
For the Year Ended December 31,
2018
2017
2016
Gross volume
Net growth/
(decrease)
Gross volume
Net growth/
(decrease)
Gross volume
Net growth/
(decrease)
(in thousands)
Purchased and retained
Purchased and sold
Total
$
$
332,270
$
52,537
127,851
110,870
460,121
$
163,407
$
$
375,715
155,969
531,684
$
$
113,217
144,622
257,839
$
$
383,303
97,954
481,257
$
$
78,349
97,749
176,098
In addition to the purchases of USDA Securities made by Farmer Mac II LLC in 2017, Farmer Mac
purchased for its liquidity investment portfolio $45.0 million of USDA Securities that were not eligible for
Farmer Mac's USDA Guarantees line of business because the related USDA guarantees were issued under
authority other than the Consolidated Farm and Rural Development Act. Farmer Mac did not make a
similar purchase in 2018 or 2016.
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,
2018
2017
(in thousands)
$
$
2,120,553
$
2,068,017
27,383
29,980
367,684
2,515,620
$
254,217
2,352,214
United States Department of Agriculture Guaranteed Loan Programs
The USDA, acting through its 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% 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 at least 60 days in the payment of any
principal or interest due on the USDA-guaranteed portion of the loan; or
28
•
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,
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 the years ended 2018 and 2017, 224 and 222
lenders, respectively, consisting mostly of community and regional banks, sold USDA Securities to
Farmer Mac.
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
Farmer Mac's charter authorizes the purchase of, and guarantee of securities backed by, loans (including
participation interests in loans) for electric or telephone facilities by lenders organized as cooperatives to
borrowers that 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. All
of Farmer Mac's business to date under the Rural Utilities line of business has involved loans made to
electric distribution cooperatives or electric generation and transmission ("G&T") cooperatives and none
of it to date has involved telecommunications loans. Farmer Mac's Rural Utilities line of business
encompasses purchases of eligible rural utilities loans and guarantees of securities backed by those loans,
as well as LTSPCs for pools of eligible rural utilities loans.
29
Summary of Rural Utilities Transactions
The following table summarizes business activity in the Rural Utilities line of business for each of the
years ended December 31, 2018, 2017, and 2016. The table also sets forth the amount of net growth or
decrease in Rural Utilities loans held and loans underlying LTSPCs, after maturities, principal paydowns,
and draws:
For the Year Ended December 31,
2018
2017
2016
Gross volume
Net growth/
(decrease)
Gross volume
Net growth/
(decrease)
Gross volume
Net growth/
(decrease)
(in thousands)
$
$
11,645
—
11,645
$
$
(137,448) $
137,341
(153,069)
—
(290,517) $
137,341
$
$
76,779
(72,256)
4,523
$
$
50,491
441,404
491,895
$
$
(8,614)
355,734
347,120
Loans
LTSPCs
Total
The following table presents the outstanding balances of Rural Utilities loans held as of the dates
indicated:
On-balance sheet:
Loans
Off-balance sheet:
LTSPCs(1)
Total
As of December 31,
2018
2017
(in thousands)
$
$
938,843
$
1,076,291
653,272
806,342
1,592,115
$
1,882,633
(1)
Includes $17.0 million and $20.0 million related to one-year loan purchase commitments on which Farmer Mac receives a nominal unused commitment
fee as of December 31, 2018 and 2017, respectively.
Loan Eligibility
To be eligible for Farmer Mac's Rural Utilities line of business, a Rural Utilities loan (or a participation
interest in a loan) must:
• be 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.
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 product and by loan type, based on whether loans are made to
electric distribution cooperatives or G&T cooperatives. These standards are based on industry practices
for similar Rural Utilities loans and are designed to assess the creditworthiness of the borrower, as well as
30
the risk to Farmer Mac. Farmer Mac reviews lenders' credit submissions and analyzes borrowers' audited
financial statements and financial and operating reports typically filed with RUS and the Federal Energy
Regulatory Commission to confirm that loans meet Farmer Mac's underwriting standards for Rural
Utilities loans. In most cases, Farmer Mac also requires sellers of rural utilities loans to make
representations and warranties about 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 loans that depend on 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.
For 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%;
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%.
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.
For 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%;
the modified debt service coverage ratio equals or exceeds 1.10;
the debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio does not
exceed 12; and
the aggregate members' equity to total capitalization ratio equals or exceeds 25%.
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
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 to accept the loans. Farmer Mac may also accept loans that do
not meet all underwriting standards if the loan has compensating strengths.
Collateral
It is customary in loans to distribution cooperatives and G&T cooperatives for the lender or lender group
to take a security interest in substantially all of the borrower's assets. When 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. When debt indentures are used, Farmer Mac determines if available collateral is adequate to support
the loan program and Farmer Mac's investment. As of December 31, 2018, substantially all of the Rural
Utilities loans held by Farmer Mac consisted of loans with a pledge of all assets. Farmer Mac sometimes
purchases unsecured Rural Utilities loans that meet stricter underwriting standards than those described
above under "—Underwriting." In accordance with Farmer Mac's internal policies, the total outstanding
balance of unsecured Rural Utilities loans may not exceed $100 million. As of December 31, 2018,
Farmer Mac held $3.2 million of unsecured Rural Utilities loans.
Servicing
Farmer Mac generally does not directly service the Rural Utilities loans held in its portfolio. Those loans
are serviced by a servicer designated by Farmer Mac. As of December 31, 2018, National Rural Utilities
Cooperative Finance Corporation ("CFC") serviced all of the Rural Utilities loans in Farmer Mac's
portfolio. CFC is a related party to Farmer Mac because of its stock ownership in Farmer Mac. As of
December 31, 2018, CFC held approximately 8% of Farmer Mac's outstanding Class A voting common
stock (or approximately 5% of total voting shares). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations—Results of Operations—Related Party Transactions."
Approved Lenders
Farmer Mac's charter requires eligible rural utilities loans to be by a lender organized as a
cooperative. Currently, the primary rural utilities lenders that are cooperatives are CFC and CoBank, ACB
and its affiliate CoBank, FCB (collectively, "CoBank"), institutions of the FCS. As of December 31,
2018, CFC was the only lender to have participated in Farmer Mac's Rural Utilities line of business. On
February 19, 2019, we purchased a $546 million portfolio of participations in seasoned Rural Utilities
loans from CoBank under a master loan participation agreement entered into on February 13, 2019.
CoBank is a related party to Farmer Mac because of its stock ownership in Farmer Mac. For more
information, please refer to the Current Report on Form 8-K that we filed with the SEC on February 20,
2019.
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 as part of its business
activities under the Rural Utilities line of business. As of December 31, 2018, Farmer Mac had direct
credit exposure on 1,135 loans to electric cooperatives constituting $1.6 billion across 39 states.
32
Farmer Mac's charter does not prescribe a maximum loan size for an eligible rural utilities loan. For these
loans, Farmer Mac generally does not assume more than $50.0 million in cumulative direct credit
exposure (e.g., loan purchases, LTSPCs, and non-AgVantage Rural Utilities Guaranteed Securities) to any
one borrower or group of related borrowers. An internal policy approved by Farmer Mac's board of
directors limits the cumulative direct credit exposure to any one borrower or group of related borrowers on
rural utilities loans to 10% of Farmer Mac's Tier 1 capital ($72.8 million as of December 31, 2018). That
internal policy also sets a limit of$75.0 million for cumulative loan exposure to any one borrower or
related borrowers for indirect credit exposures on rural utilities loans (e.g., AgVantage transactions), with
the amount of any direct exposure to a borrower not counting toward the $75.0 million limit. See
"Business—Farmer Mac's Lines of Business—Institutional Credit." As of December 31, 2018, Farmer
Mac's direct credit exposure to rural utilities loans consisted of $1.2 billion in loans to distribution
cooperatives and $0.4 billion in loans to G&T cooperatives.
Institutional Credit
Under the Institutional Credit line of business, Farmer Mac provides advances against eligible loans by
guaranteeing and purchasing general obligations of institutions, including financial funds, approved by
Farmer Mac, which obligations are also secured by the types of loans eligible for one of Farmer Mac's
other lines of business. Farmer Mac refers to these obligations as AgVantage® securities. Farmer Mac
guarantees the timely payment of principal and interest on AgVantage securities and may retain
AgVantage securities in its portfolio or sell them to third parties in the capital markets as Farmer Mac
Guaranteed Securities.
Farmer Mac has direct credit exposure to the general credit of the issuers of AgVantage securities and
assumes the ultimate credit risk of an issuer default on the AgVantage securities. Before approving an
institution as an issuer in an AgVantage transaction, Farmer Mac assesses the issuer's creditworthiness as
well as the credit quality and performance of the issuer's loan portfolio. 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 issuer, AgVantage securities must be secured by eligible loans or
guaranteed securities in an amount at least equal to the outstanding principal amount of the security. As a
result, Farmer Mac has indirect credit exposure to the loans or guaranteed securities that are pledged to
secure the AgVantage securities, which would be available to Farmer Mac in the event of a default by the
issuer.
Loans pledged under AgVantage securities are serviced by the issuers of the securities (or their affiliated
servicing institutions) in accordance with that institution's servicing procedures. Farmer Mac reviews
these servicing procedures before entering into those transactions. In AgVantage transactions, the issuer 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 replace the delinquent loan with another eligible
loan that is current in payment to maintain the minimum required collateralization level.
For AgVantage securities secured by loans eligible for Farmer Mac's 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;
• other highly-rated securities; or
33
• other instruments approved by Farmer Mac.
The required collateralization level for the AgVantage securities secured by Farm & Ranch loans currently
ranges from 103% to 125%. Within this range, Farmer Mac generally requires higher collateralization
levels for securities issued by institutions without long-term debt ratings from a nationally recognized
statistical rating organization ("NRSRO"). The required collateralization level is established when the
AgVantage facility is entered into with the counterparty and does not change during the life of the
AgVantage securities issued under the facility unless mutually agreed by Farmer Mac and the
counterparty.
For AgVantage securities that are secured by Farm & Ranch loans, Farmer Mac requires that the loans
meet the minimum standards set forth in the charter for those types of loans and that the value is supported
by either appraisals that conform to USPAP or similar collateral valuation methods based on Farmer Mac's
evaluation of the issuer's collateral valuation protocols and history. 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, for AgVantage transactions Farmer Mac currently limits the
size of those loans to $75.0 million in cumulative exposure through a single lender to any one borrower or
related borrowers (with the amount of any direct borrower exposure not counting toward the $75.0 million
limit).
Farmer Mac has tailored a version of its AgVantage product to focus on institutional investors in
agricultural assets that qualify as collateral for the types of loans eligible for the Farm & Ranch line of
business. Farmer Mac refers to this product variation as the Farm Equity AgVantage® product. This
product has similar requirements for AgVantage securities secured by Farm & Ranch loans described
above, but Farmer Mac also requires that Farm Equity AgVantage transactions and AgVantage transactions
with smaller financial funds or entities (1) generally maintain a higher collateralization level, through
lower loan-to-value ratio thresholds and higher overcollateralization requirements, and (2) generally
contain specified financial covenants for the life of the related AgVantage security to avoid default. As of
December 31, 2018, Farmer Mac had $279.8 million of outstanding Farm Equity AgVantage securities.
For AgVantage securities secured by loans eligible for Farmer Mac's Rural Utilities line of business,
Farmer Mac requires:
•
•
•
•
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 classified as performing and not in payment default beyond the applicable cure
period; 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.
Although Farmer Mac has only indirect credit exposure on the Rural Utilities loans pledged to secure
AgVantage securities, 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. See "Business—
34
Farmer Mac's Lines of Business—Rural Utilities—Underwriting." For loans made to G&T cooperatives
that secure the general obligation of the issuer 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%;
the modified debt service coverage ratio equals or exceeds 1.10; and
the equity to total assets ratio equals or exceeds 10%.
Farmer Mac's charter does not prescribe a maximum loan size or a total borrower exposure for an eligible
Rural Utilities loan, but Farmer Mac's current limit for AgVantage transactions 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 not counting towards the $75.0 million limit). Farmer Mac also permits up to 20%
of Rural Utilities loans pledged to secure AgVantage securities to be unsecured or secured by less than all
of the borrower's assets. As of December 31, 2018, all AgVantage securities secured by eligible Rural
Utilities loans were issued by CFC, which is a related party to Farmer Mac because of CFC's stock
ownership in Farmer Mac. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations—Results of Operations—Related Party Transactions."
As of December 31, 2018, 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. For more information on
Farmer Mac's AgVantage securities, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations—Risk Management—Credit Risk – Institutional."
Summary of Institutional Credit Transactions
During the year ended December 31, 2018, Farmer Mac added $3.3 billion of gross new business volume
under the Institutional Credit line of business. That gross new business volume was partially offset by
repayments on existing assets (principal paydowns and maturities) during the year, resulting in $8.4 billion
of total outstanding business volume in this line of business as of December 31, 2018, compared to $7.9
billion as of December 31, 2017. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations—Results of Operations—Business Volume" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk –
Institutional." The following table summarizes activity in the Institutional Credit line of business for each
of the years ended December 31, 2018, 2017, and 2016. The table also sets forth the amount of net growth
in the purchases of AgVantage securities, after maturities, principal paydowns, and draws:
For the Year Ended December 31,
2018
2017
2016
Gross volume
Net growth
Gross volume
Net growth
Gross volume
Net growth
(in thousands)
AgVantage Securities
Revolving floating rate AgVantage facility
$ 3,010,307
300,000
$ 3,310,307
$
$
477,939
$ 2,383,912
$ 617,192
$ 2,098,852
$
563,432
—
—
—
—
—
477,939
$ 2,383,912
$ 617,192
$ 2,098,852
$
563,432
35
The following table presents the outstanding principal amount of AgVantage securities held by Farmer
Mac and off-balance sheet AgVantage securities as of the dates indicated:
On-balance sheet:
AgVantage Securities
Off-balance sheet:
AgVantage Securities
Revolving floating rate AgVantage facility(1)
Total off-balance sheet
Total
As of December 31,
2018
2017
(in thousands)
$
$
$
$
8,072,919
9,898
300,000
309,898
8,382,817
$
$
$
$
7,593,322
11,556
300,000
311,556
7,904,878
(1) During both 2018 and 2017, $100.0 million of this facility was drawn and later repaid. Farmer Mac receives a fixed fee based on the full dollar amount of
the facility. If the counterparty draws on the facility, the amounts drawn will be in the form of AgVantage Securities, and Farmer Mac will earn interest
income on those securities.
FUNDING OF GUARANTEE AND LTSPC OBLIGATIONS
The main 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. Net credit losses/
(gains) arising from Farmer Mac's guarantees and commitments include charge-offs/(recoveries) 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 2018, Farmer Mac
had net credit losses of $40,000, compared to net credit gains of $1.4 million during 2017. The net credit
losses during 2018 included $7,000 of net losses on the sale of REO compared to $1.7 million of net gains
during 2017.
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, 2018, this reserve
against losses arising from Farmer Mac's guarantee activities was $80.8 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 Farmer Mac Guaranteed Securities, including
AgVantage securities. 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 of capital 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
36
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.
Debt Issuance
FINANCING
Farmer Mac's charter 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, all of which are unsecured general
obligations of Farmer Mac. Discount notes have original maturities of 1 year or less. Medium-term notes
generally have maturities of 6 months to 15 years.
The interest and principal on Farmer Mac's debt obligations are not guaranteed by, and do not constitute
debts or obligations of, FCA, 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 $20.0 billion of discount notes and
medium-term notes (of which $16.2 billion was outstanding as of December 31, 2018), subject to periodic
review of the adequacy of that level relative to Farmer Mac's borrowing needs. 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 asset class, 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 fully guaranteed by the United States or a U.S. government agency;
• obligations of or fully guaranteed by GSEs;
• municipal securities;
•
• money market instruments;
• diversified investment funds;
asset-backed securities;
•
•
corporate debt securities; and
• mortgage-backed securities.
37
For more information about the Liquidity and Investment Regulations, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Other
Investments." 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.
Equity Issuance
Farmer Mac's charter authorizes Farmer Mac to issue voting common stock, non-voting common stock,
and non-voting preferred stock. Farmer Mac may obtain additional capital from future issuances of voting
and non-voting common stock and non-voting preferred stock.
Common Stock
Only banks, other financial entities, insurance companies, and institutions of the FCS 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% 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, 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.
As of December 31, 2018, 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
9,137,550 shares of Class C non-voting common stock.
Farmer Mac's board of directors approved a share repurchase program during third quarter 2015
authorizing Farmer Mac to repurchase up to $25.0 million of its outstanding Class C non-voting common
stock for two years. In August 2017, Farmer Mac's board of directors approved the continuation of the
share repurchase program on its existing terms through August 2019 for the repurchase of up to $5.4
million of Farmer Mac's outstanding Class C non-voting common stock. This is the amount that was
remaining under the share repurchase program that Farmer Mac's board of directors originally authorized
in third quarter 2015 for the repurchase of up to $25 million of outstanding Class C non-voting common
stock. Farmer Mac did not repurchase any shares during 2018 or 2017 under this program. As of
December 31, 2018 and December 31, 2017, Farmer Mac had repurchased approximately 668,000 shares
of Class C non-voting common stock at a cost of approximately $19.6 million under the share repurchase
program.
38
The following table presents the dividends declared on Farmer Mac's common stock during and after
2018:
Date
Dividend
Declared
February 28, 2018
May 2, 2018
August 2, 2018
October 31, 2018
February 19, 2019
Per
Share
Amount
$0.58
$0.58
$0.58
$0.58
$0.70
For
Holders Of
Record As Of
March 19, 2018
June 15, 2018
Date
Paid
March 30, 2018
June 29, 2018
September 14, 2018
September 28, 2018
December 14, 2018
December 31, 2018
March 15, 2019
*
* The dividend declared on February 19, 2019 is scheduled to be paid on March 29, 2019.
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—Capital Standards."
Preferred Stock
No ownership restrictions apply to any preferred stock issued by Farmer Mac, and those securities are
freely transferable. As of December 31, 2018, the following shares of Farmer Mac preferred stock were
outstanding:
• 2,400,000 shares of Series A Preferred Stock, all of which were issued on January 17, 2013;
• 3,000,000 shares of Series B Preferred Stock, all of which were issued on March 25, 2014; and
• 3,000,000 shares of Series C Preferred Stock, all of which were issued on June 20, 2014.
The Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock (collectively referred
to as the "Outstanding Preferred Stock") each has a par value of $25.00 per share and an initial liquidation
preference of $25.00 per share. Farmer Mac incurred direct costs of $1.7 million related to the issuance of
the Series A Preferred Stock, direct costs of $1.9 million related to the issuance of the Series B Preferred
Stock, and direct costs of $1.6 million related to the issuance of the Series C Preferred Stock. Since each
of their respective issuances, Farmer Mac has not issued any additional shares of any series of Outstanding
Preferred Stock. Each series of Outstanding 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 issues in the future.
The Series A Preferred Stock and the Series B Preferred Stock pay an annual dividend rate fixed at
5.875% and 6.875%, respectively, for the life of the securities. The Series C Preferred Stock pays an
annual dividend rate of 6.000% from the date of issuance to and including the quarterly payment date on
July 17, 2024 and thereafter at a floating rate equal to three-month LIBOR plus 3.260%. Dividends on all
series of Outstanding Preferred Stock are non-cumulative, so if the board of directors has not declared a
dividend before the applicable dividend payment date for any dividend period, the dividend will not be
paid or cumulate, and Farmer Mac will not be obligated to pay dividends for that dividend period, whether
or not dividends on any series of Outstanding Preferred Stock are declared for any future dividend period.
Farmer Mac may pay dividends on the Outstanding Preferred Stock without paying dividends on any class
or series of stock Farmer Mac may issue in the future that ranks junior to the Outstanding Preferred Stock.
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The Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock rank equally with
each other and will rank equally with any other class or series of stock Farmer Mac may issue in the future
of equal priority as to dividends and upon liquidation. 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 on and any time after
January 17, 2018, the Series B Preferred Stock on and any time after April 17, 2019, and the Series C
Preferred Stock on and any time after July 18, 2024, all at a price equal to the then-applicable liquidation
preference. The Outstanding Preferred Stock is considered Tier 1 capital for Farmer Mac. For more
information on Farmer Mac's capital requirements, see "Business—Government Regulation of Farmer
Mac—Capital Standards."
The following table presents the dividends declared and paid on Series A Preferred Stock during and after
2018:
Date
Dividend
Declared
February 28, 2018
May 2, 2018
August 2, 2018
October 31, 2018
February 19, 2019
Per
Share
Amount
$0.3672
$0.3672
$0.3672
$0.3672
$0.3672
For
Period
Beginning
January 18, 2018
April 18, 2018
July 18, 2018
For
Period
Ending
April 17, 2018
July 17, 2018
Date
Paid
April 17, 2018
July 17, 2018
October 17, 2018
October 17, 2018
October 18, 2018
January 17, 2019
January 17, 2019
January 18, 2019
April 17, 2019
*
* The dividend declared on February 19, 2019 is scheduled to be paid on April 17, 2019.
The following table presents the dividends declared and paid on Series B Preferred Stock during and after
2018:
Date
Dividend
Declared
February 28, 2018
May 2, 2018
August 2, 2018
October 31, 2018
February 19, 2019
Per
Share
Amount
$0.4297
$0.4297
$0.4297
$0.4297
$0.4297
For
Period
Beginning
January 18, 2018
April 18, 2018
July 18, 2018
For
Period
Ending
April 17, 2018
July 17, 2018
Date
Paid
April 17, 2018
July 17, 2018
October 17, 2018
October 17, 2018
October 18, 2018
January 17, 2019
January 17, 2019
January 18, 2019
April 17, 2019
*
* The dividend declared on February 19, 2019 is scheduled to be paid on April 17, 2019.
The following table presents the dividends declared and paid on Series C Preferred Stock during and after
2018:
Date
Dividend
Declared
February 28, 2018
May 2, 2018
August 2, 2018
October 31, 2018
February 19, 2019
Per
Share
Amount
$0.3750
$0.3750
$0.3750
$0.3750
$0.3750
For
Period
Beginning
January 18, 2018
April 18, 2018
July 18, 2018
For
Period
Ending
April 17, 2018
July 17, 2018
Date
Paid
April 17, 2018
July 17, 2018
October 17, 2018
October 17, 2018
October 18, 2018
January 17, 2019
January 17, 2019
January 18, 2019
April 17, 2019
*
* The dividend declared on February 19, 2019 is scheduled to be paid on April 17, 2019.
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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
$80.8 million as of December 31, 2018); 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, 2018, Farmer Mac had not
used this borrowing authority and does not expect to use 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, FCA, which has the authority to regulate Farmer Mac's safety and
soundness. The statute creating Farmer Mac expressly requires that eligible Farm & Ranch loans meet
minimum credit and appraisal standards that represent sound loans to profitable businesses. The enabling
legislation also did not contain a specific federal securities law exemption as had been given to the
housing GSEs, which had the effect of requiring Farmer Mac to comply with the periodic reporting
requirements of the SEC, including filing annual and quarterly reports on the financial status of Farmer
Mac and current reports when there are significant developments. Farmer Mac's 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 that
is not based on Farmer Mac's status as an instrumentality of the United States.
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Since Farmer Mac's creation, Congress has amended Farmer Mac's charter five 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% of the principal of the purchased loans and modifying capital
requirements);
in 2008 to authorize Farmer Mac to purchase, and guarantee securities backed by, loans or interests
in loans by lenders organized as cooperatives to borrowers to finance electrification and
telecommunications systems in rural areas; and
in 2018 to expand the acreage exception to the Farm & Ranch loan amount limitation from 1,000
acres to 2,000 acres, subject to FCA's feasibility assessment, and to repeal obsolete provisions and
make technical corrections.
Farmer Mac's authorities and regulatory structure were not revised by legislation adopted in 2008 to
regulate other GSEs.
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. Farmer Mac's charter assigns to FCA, acting through OSMO within FCA, the responsibility for
the examination of Farmer Mac and the general supervision of the safe and sound performance of the
powers, functions, and duties vested in Farmer Mac by its 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.
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. 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. OSMO may also conduct additional oversight and
examination activities unrelated to its annual examination of Farmer Mac at any other time it determines
necessary. Farmer Mac is also required to file quarterly reports of condition with FCA.
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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) equal to the sum of
2.75% of Farmer Mac's aggregate on-balance sheet assets, as calculated for regulatory purposes,
plus 0.75% 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% 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 must 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 are shocked by the lesser of 600 basis points or 50% 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% to the resulting capital requirement for
management and operational risk.
As of December 31, 2018, Farmer Mac's statutory minimum and critical capital requirements were $545.0
million and $272.5 million, respectively, and its actual core capital level was $727.6 million, which is
$182.6 million above the statutory minimum capital requirement and $455.1 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, 2018 was $119.0 million and Farmer Mac's regulatory capital of $736.8
million exceeded that amount by approximately $617.8 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 to determine compliance with the capital standards established by Farmer Mac's
charter. As of December 31, 2018, Farmer Mac was classified as within level I – the highest compliance
level.
43
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). If Farmer Mac were classified as within level II, III or IV, the charter
requires the Director of OSMO to take specified 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 level II and level III include:
requiring Farmer Mac to submit and comply with a capital restoration plan;
•
• prohibiting the payment of dividends if the payment would result in Farmer Mac being reclassified
•
as within a lower level and requiring the pre-approval of any dividend payment even if the
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 mandatory supervisory measures
described above, 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 if 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, 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, Farmer Mac's board of directors oversees a policy that requires 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, Rural Utilities, and
44
Institutional Credit lines of business. Under this policy, Farmer Mac must maintain at all times a Tier 1
capital ratio of at least 7.0% of risk-weighted assets, calculated using an advanced internal ratings based
("AIRB") asset risk weighting regime that is consistent with current Basel-based principles.
The policy also requires Farmer Mac to maintain a "capital conservation buffer" of additional Tier 1
capital of more than 2.5% of risk-weighted assets. If the capital conservation buffer drops to various
levels at or below 2.5%, as shown in the table below, the policy requires Farmer Mac to restrict
distributions of current quarter Tier 1-eligible dividends and any discretionary 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%, and Farmer Mac's board of directors may consider other factors,
such as earnings presented in accordance with generally accepted accounting principles in the United
States ("GAAP") and other regulatory requirements, in determining whether to restrict capital
distributions, including dividends and bonus payments. As of December 31, 2018, Farmer Mac's Tier 1
capital ratio was 13.4%. The calculation of Farmer Mac's Tier 1 capital ratio does not include certain
interest rate risk components of the risk weighting of assets, which reflects the fact that Farmer Mac
pursues a match-funding approach to funding its assets and therefore does not bear material interest rate
risk in its portfolio. See "Management's Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources—Capital Requirements" for more information on Farmer
Mac's Tier 1 capital ratio. Farmer Mac does not expect its compliance on an ongoing basis with FCA's
rule on capital planning, including Farmer Mac's policy on Tier 1 capital, to materially affect Farmer
Mac's operations or financial condition.
Item 1A.
Risk Factors
Farmer Mac's business activities, financial performance, and results of operations are, by their nature,
subject to risks and uncertainties, including those related to the agricultural industry, 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 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. Because new risk factors likely will emerge from time to time, management
can neither predict all potential risk factors nor assess the effects of those factors on Farmer Mac's
business, operating results, and financial condition or how much any factor, or combination of factors,
45
may affect Farmer Mac's actual results and financial condition. If any of the following risks materialize,
Farmer Mac's business, financial condition, and/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.
Credit Risk
Many factors that are outside of Farmer Mac's or borrowers' control affecting the agricultural industry
or the rural utilities industry may negatively affect borrowers' profitability and, as a result, their ability
to repay their loans on which Farmer Mac has assumed credit risk, and any widespread repayment
shortfalls on these eligible loan assets could have a material adverse effect on Farmer Mac's financial
condition, results of operations, liquidity, or capital levels.
External factors or variables beyond Farmer Mac's or borrowers' control that could negatively affect
borrowers' profitability, and therefore their repayment capacity, could cause Farmer Mac to experience
increased delinquency rates, default rates, and credit losses within its loan portfolio, including, but not
limited to:
•
severe protracted or sudden adverse weather conditions, natural or environmental disasters or
similar or other catastrophic events, wildfires, animal and plant disease outbreaks, restrictions on
water supply or changes to sustainable groundwater management practices, limited access to
transportation to move agricultural products to markets, or other conditions affecting particular
geographic regions or industries;
• volatility in revenues or production expenses as a result of changes in commodity or fuel prices or
•
•
•
•
•
•
labor costs or availability within any particular industry;
fluctuations in currency exchange markets, modifications to U.S. or global trade policies, the
imposition of trade sanctions or protectionist measures, customs duties, or tariffs, or changes in the
global economy that would reduce export demand for U.S. agricultural products;
slow or negative domestic or international 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;
legislative or regulatory developments or actions adversely affecting the agricultural industry or
the rural utilities industry;
changes in the general economy that could affect the availability of off-farm sources of income and
prices of real estate for borrowers; and
economic conditions or technological advances that may negatively affect the market for electricity
in rural areas and therefore limit the ability of rural electric cooperatives to provide electricity or
raise rates to achieve profitable levels.
Farmer Mac's earnings depend significantly on the performance of its loan assets and the spread between
the interest, guarantee fees, and commitment fees earned on those assets and interest paid on Farmer Mac's
obligations and liabilities. The repayment of loans typically depends on the success of the related farming
or rural utilities operation, which, in turn, depends on many variables and factors over which borrowers
may have little or no control, including those described above. 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
46
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, liquidity, or capital
levels.
Concentration in or exposure to a particular commodity type, geographic region, collateral type,
business counterparty, borrower, or loan type in Farmer Mac's Farm & Ranch line of business may
expose Farmer Mac to credit risk that could materially and adversely affect its business, operating
results, and financial condition.
In its Farm & Ranch line of business, Farmer Mac may be subject to credit risk due to concentration in or
exposure to a particular commodity type, geographic region, collateral type, business counterparty,
borrower, or loan type. Widespread weakening in the financial conditions of borrowers within a particular
geographic region or commodity type could negatively impact Farmer Mac’s financial condition, and
Farmer Mac’s policies on geographic and commodity concentration may not be sufficient. Loans to
borrowers in certain commodity groups or geographic regions that have had historically higher
delinquency rates or credit losses relative to Farmer Mac's overall portfolio may present a higher risk of
delinquency or credit losses in future periods. Also, if Farmer Mac's portfolio is not sufficiently
diversified by geographic region or commodity type, then a tightening in trade policies or a prolonged
trade dispute adversely affecting the demand and pricing for certain U.S. agricultural exports could
negatively impact Farmer Mac's financial condition to the extent that affected borrowers do not receive
offsetting relief, cannot access other sources of liquidity for loan repayment, or are unable to adapt
operations or switch to commodity groups that are not affected. Farmer Mac's credit risk may also
increase as a result of its exposure to loans that are adversely affected by a decline in the sale value of the
underlying collateral, which can vary based on several factors, including commodity type, geographic
region, and the degree to which the collateral is single-use or highly improved. Specifically, the degree to
which the collateral for a commodity group is single-use or highly improved, such as for permanent
plantings, agricultural storage or processing facilities, or certain livestock facilities, may be a significant
determinant of the probability of ultimate losses on a given loan because producers requiring such highly
improved collateral are less able to adapt their operations or switch commodity groups when faced with
adverse conditions. For example, as of December 31, 2018, loans to borrowers in the Agricultural Storage
and Processing category comprised 1.2% of the Farm & Ranch portfolio, but cumulative net credit losses
for this category comprised 47.2% of the cumulative net credit losses for all categories. Widespread
deterioration in collateral values, resulting in the undercollateralization of the related loans, could have a
material adverse effect on Farmer Mac's financial condition, results of operations, liquidity, or capital
levels.
The default of any particular business counterparty could negatively impact Farmer Mac’s financial
condition, and Farmer Mac's processes to monitor counterparty credit exposure may not be sufficient.
Also, while Farmer Mac’s Farm & Ranch portfolio consists of loans varying in size and by borrower, the
average size of loans purchased by Farmer Mac has increased and includes several large exposures with
large borrowers. The default of any one of these borrowers could also negatively impact Farmer Mac's
financial condition. Farmer Mac may also be subject to credit risk as a result of its exposure to loans with
balloon payments at maturity if the borrower seeks to refinance but is unable to do so. As of
December 31, 2018, 65.8% of the loans in the Farm & Ranch line of business included balloon payments.
Too much concentration in or exposure to a particular commodity type, geographic region, collateral type,
business counterparty, borrower, or loan type could materially and adversely affect Farmer Mac's business,
operating results, and financial condition.
47
The profitability of and repayment by rural utilities operations on loans on which Farmer Mac has
assumed credit risk in its Rural Utilities line of business may be adversely affected by a variety of
factors, which could have a material adverse effect on Farmer Mac's financial condition, results of
operations, liquidity, or capital levels.
In the Rural Utilities line of business, eligible utilities operations include the distribution of electricity, the
generation and transmission of electricity, and telecommunications. Repayment of eligible loans in this
line of business could be affected by several factors. Although each type of utilities operation has
different inherent risks associated with it, all of them could be potentially affected by changes in public
and regulatory policies. Electrical distribution and generation cooperatives can also be adversely affected
by changes in fuel costs and prices received from consumers, contractual power obligations that do not
match up with supply or demand, and technological advances and innovation in the power industry,
including a shift towards renewable energy, that negatively alters the supply and demand dynamics for
power. Business cash flows can also be disrupted as a result of storms, although 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. If 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. If any of the factors described above negatively impacts
the cash flows or financial condition of utilities operations that are borrowers on loans in Farmer Mac's
Rural Utilities portfolio, Farmer Mac's financial condition, results of operations, liquidity, or capital levels
could be adversely affected.
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, 2018, 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 LTSPCs 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 LTSPCs, 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 LTSPCs defaulted and Farmer Mac recovered no value from the related
collateral, the funds for payment on these guarantees and LTSPCs could be substantially less than the
aggregate amount of the corresponding liabilities. It is difficult to quantify at any particular time the funds
that would be available from interest payments, loan repayments, and maturing AgVantage securities for
payment on Farmer Mac's guarantees and LTSPCs, 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, 2018, Farmer Mac held cash, cash equivalents, and other investment securities with a fair
48
value of $2.7 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 counterparty credit risk on AgVantage securities 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. Most of Farmer Mac's
AgVantage exposure is concentrated in a small number of issuers. As of December 31, 2018, $7.7 billion
of the $8.4 billion of AgVantage securities outstanding had been issued by three 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 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. For AgVantage securities secured by Farm & Ranch
loans, Farmer Mac also requires some level of overcollateralization (currently between 103% and 125% of
the principal amount of the securities issued) and, in some cases, compliance by the counterparty with
specified financial covenants for the life of the related AgVantage securities. Specifically, some issuing
institutions and smaller financial counterparties that use Farmer Mac's AgVantage or Farm Equity
AgVantage products may not be considered as creditworthy as Farmer Mac's other counterparties issuing
AgVantage securities. Therefore, these issuing institutions and smaller financial counterparties are subject
to significantly higher overcollateralization requirements (currently between 120% and 125% of the
principal amount of the securities issued) and must comply with specified financial covenants for the life
of the related AgVantage securities.
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 and asset-backed securities principally backed by U.S. Government-guaranteed
student loans, including auction rate certificates. Although some of Farmer Mac's investment securities do
not qualify for liquidity purposes under FCA's regulatory requirements, 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, 2018, Farmer Mac held at fair
value, as part of its liquidity investment portfolio, $32.7 million of asset-backed securities principally
backed by U.S. Government-guaranteed student loans (including $18.7 million of auction-rate certificates)
and $1.0 billion of investment securities guaranteed by GSEs. 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
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heavily concentrated, could have an adverse effect on Farmer Mac's business, operating results, and
financial condition.
Farmer Mac is exposed to swap counterparty credit risk on both its cleared and non-cleared swaps
transactions 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. Farmer Mac clears a significant portion of its interest rate swaps through a swap
clearinghouse through which centrally-cleared derivatives and futures contracts are traded, and posts
initial and variation margin to this clearinghouse. These collateral postings expose Farmer Mac to
institutional credit risk if 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. However, if
either the clearinghouse or the futures commission merchant that Farmer Mac uses to post collateral to the
clearinghouse fails to meet its obligations, Farmer Mac could face challenges in accessing its posted
collateral, which could materially and adversely affect its business, operating results, and financial
condition.
A portion of Farmer Mac's interest rate swap contracts are not cleared through swap clearinghouses, which
creates swap counterparty credit risk on those non-cleared swaps transactions. In managing this risk,
Farmer Mac contracts only with counterparties that have investment grade credit ratings, establishes and
maintains minimum threshold collateral requirements that are scaled based on credit ratings (for non-
cleared swaps transactions entered into before March 2017), and enters into netting agreements. Also,
new rules that became effective in March 2017 establish zero threshold requirements for the exchange of
variation margin between Farmer Mac and its swap dealer counterparties in non-cleared swaps
transactions entered into following the effective date. 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 contract that it did
not receive, or if Farmer Mac were unable to reposition the swap with a new counterparty. Of the $9.9
billion combined notional amount of Farmer Mac's interest rate swaps as of December 31, 2018, $1.4
billion were not cleared through swap clearinghouses. As of December 31, 2018, Farmer Mac's credit
exposure to interest rate swap counterparties was $51.3 million excluding netting arrangements and $3.1
million including netting arrangements.
Strategic/Business Risk
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 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:
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• 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 in
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 and
thus increase its funding costs;
the perception of existing or prospective investors or customers of Farmer Mac's reputation in the
marketplace; 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, adversely affect 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.
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, liquidity, 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 the 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 stability and financial prospects of, Farmer Mac's business;
• prevailing conditions in the capital markets;
•
•
•
lack of a public debt rating may reduce demand for Farmer Mac's debt securities;
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.
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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, which may be
constrained by many factors.
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:
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•
•
•
•
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•
reduced growth rates in the eligible agricultural mortgage market caused by prevailing conditions
in the overall and agricultural economy;
an increase in capital levels or the availability of other sources of capital for customers of Farmer
Mac;
a slowdown in the issuance of new guarantees by the USDA under the Consolidated Farm and
Rural Development Act;
increased acceptance by Federal Home Loan Banks of agricultural real estate mortgage loans as
collateral;
the extent to which agricultural lending institutions retain loans in their portfolios rather than 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 cooperatives.
For example, during the federal government fiscal year 2018, the USDA processed 8,375 guaranteed loans
compared to 9,604 loans during the federal government fiscal year 2017, which reflects a year-over-year
decrease of 13% in the issuance of new guarantees by the USDA under the Consolidated Farm and Rural
Development Act. If this slowdown continues, or if it is further exacerbated by the U.S. federal
government shutdown that lasted for several weeks in early 2019 or any future shutdowns, then Farmer
Mac could experience a decrease in new business volume in its USDA Guarantees line of business in the
future.
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, 2018, Farmer Mac had $8.4 billion of AgVantage securities outstanding, of which
$1.4 billion and $1.3 billion will be maturing in 2019 and 2020, respectively. Farmer Mac guarantees the
timely payment of principal and interest on AgVantage securities and may retain AgVantage securities in
its portfolio or sell them to third parties in the capital markets as Farmer Mac Guaranteed Securities. 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
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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.
The loss of business from key business counterparties 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 LTSPCs. Farmer Mac conducts a
significant portion of its business with a small number of business counterparties. This results in
vulnerability as existing assets pay down or mature and the status and needs of Farmer Mac's business
partners evolve. In 2018, ten institutions generated approximately 67% of loan purchase volume in the
Farm & Ranch line of business. As of December 31, 2018, approximately 91.8% of the $8.4 billion
outstanding principal amount of AgVantage securities under Farmer Mac's Institutional Credit line of
business were issued by three institutions. As of December 31, 2018, transactions with CFC represented
100% 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 counterparties or customers
and the business generated by those business counterparties or customers is significant to Farmer Mac's
business. As a result, the loss of business from any one of Farmer Mac's key business counterparties 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 counterparty 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.
Farmer Mac's efforts to balance fulfilling its Congressional mission with providing a return to its
stockholders may result in business transactions that involve lower returns or higher risk, which could
adversely affect its business, operating results, or 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 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 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 an accretive 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. Also, the entities that regulate Farmer Mac could seek to alter or limit Farmer Mac's
mission-related activities in the future or limit the 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 or that generate lower returns or limited in the
activities it was allowed to undertake, Farmer Mac's business, operating results, or financial condition
could be adversely affected.
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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 concentrated in a small number of
institutions. Approximately 44% of Farmer Mac's Class A voting common stock is held by three financial
institutions, with 31% held by one institution. Approximately 97% 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).
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.
As 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 of directors. As a result, each of these stockholder classes could
significantly influence Farmer Mac's business, strategy, and board composition in a way that may not be in
the best interests of all stockholders.
Changes in Farmer Mac's board of directors could adversely affect its business, operations, and
strategy.
Farmer Mac's charter prescribes that its board of directors consist of fifteen members. Five members are
elected by holders of Farmer Mac's Class A voting common stock, five members are elected by holders of
Farmer Mac's Class B voting common stock, and five members are appointed by the President of the
United States with the advice and consent of the United States Senate. The holders of Farmer Mac's Class
A voting common stock and of Farmer Mac's Class B voting common stock each elect one-third of the
membership of Farmer Mac's board of directors annually. Farmer Mac's Presidentially-appointed
members serve at the pleasure of the President of the United States and therefore could be replaced at any
time. If, as a result of annual elections or new Presidential appointments to the board, Farmer Mac were
to experience a significant turnover in the membership of its board of directors within a short time, Farmer
Mac's business, operations, and strategy could be negatively affected. If several newly elected or
appointed directors are not able to become proficient quickly in Farmer Mac's business, operations, and
strategies, this could adversely affect the effectiveness of Farmer Mac's board of directors in overseeing
and managing the business, affairs, strategies, and operations of Farmer Mac.
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Operational Risk
The inadequacy or failure of Farmer Mac's operational systems, cybersecurity plan, internal controls
or processes, or infrastructure, or those of third parties, or the inability of Farmer Mac to successfully
implement enhancements to any of these or migrate to new systems or infrastructure could have a
material adverse effect on Farmer Mac's business, liquidity, operating results, reputation, or financial
condition.
Farmer Mac is exposed to operational risk due to the complex nature of its business operations and the
processes and systems used to fulfill its Congressional mission, maintain operational efficiency and
technological relevance, and comply with regulatory requirements. Operational risk refers to the risk of
loss to Farmer Mac or damage to its reputation resulting from inadequate or failed internal processes,
personnel, systems, cybersecurity plan, or infrastructure, or its inability to successfully implement
enhancements to any of these or migrate to new systems or infrastructure, or from external events,
including a disruption involving physical site access, cyber incidents, catastrophic events, natural
disasters, terrorist activities, or disease pandemics.
Inadequacies or failures in Farmer Mac's internal processes, personnel, systems, cybersecurity plan, or
infrastructure could lead to a significant disruption in its business operations, financial and economic loss,
errors in its financial statements, impairment of its liquidity, liability or service interruptions to its
customers, increased regulatory or legislative scrutiny, or reputational damage. Farmer Mac's financial,
accounting, data processing, backup, information technology, or other operating systems and infrastructure
may fail to operate as intended or become temporarily unavailable because of events that are wholly or
partially beyond Farmer Mac's control, which could adversely affect Farmer Mac's ability to conduct its
business in the ordinary course. Farmer Mac relies on business processes that largely depend on people,
technology, and the use of complex systems and models to manage its business, process a high volume of
daily transactions, and generate the records on which its financial statements are based. This heightened
reliance increases the risk that Farmer Mac may be exposed to financial, reputational, or other losses
because of errors or inherent design flaws in its processes or systems, the failed execution of these
processes or systems, or human error. Farmer Mac's business relies on its ability to process, evaluate, and
interpret significant amounts of information, much of which is provided by third parties, and that
information may not be correct or Farmer Mac may fail to interpret it appropriately. Also, the internal
controls and processes Farmer Mac has in place designed to detect and prevent fraud may not be effective
or successful.
The potential for operational risk exposure is not limited to Farmer Mac's internal operational functions
and also exists as a result of Farmer Mac's interactions with, and reliance on, third parties. If the financial,
accounting, data processing, backup, information technology, or other operating systems and infrastructure
of third parties with whom Farmer Mac interacts or upon whom it relies fail to operate properly or are
disrupted, then Farmer Mac's operations and its ability to conduct its business in the ordinary course may
be adversely affected. Farmer Mac's ability to implement safeguards preventing disruption to third party
systems or infrastructure is more limited than for its own systems or infrastructure.
Farmer Mac continues to invest in and enhance its technological capabilities, operational systems,
cybersecurity plan, infrastructure, and organizational structure. But more operational risks may arise in
implementing these endeavors, including the risk that Farmer Mac may not be able to successfully
implement these enhancements or migrate to new systems or infrastructure, which may have a material
adverse effect on Farmer Mac’s business, operations, or financial condition.
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Farmer Mac conducts many of its critical business operations and activities in its main office in
Washington, D.C. This concentration of Farmer Mac's personnel, technology, and facilities increases
Farmer Mac's risk of financial or other loss. Although Farmer Mac routinely reviews, updates, and tests
its business continuity and disaster recovery plans, these plans may not be sufficient to mitigate all
potential business continuity risks. Farmer Mac's recovery capabilities or those of third parties with whom
it interacts or upon whom it relies could be overwhelmed by a disruption in infrastructure or a catastrophic
event such as a natural disaster, terrorist attack, extreme weather event, or disease pandemic. If Farmer
Mac is not able to resume business operations or its employees are unable to communicate with each other
because of any of these events, Farmer Mac may not be able to successfully implement its continuity and
disaster recovery plans, which could have a material adverse effect on Farmer Mac's business, liquidity,
operating results, reputation, or financial condition.
Any significant deficiency, failure, interruption, or breach in Farmer Mac's information systems,
including the occurrence of successful cyber-attacks or a significant deficiency in Farmer Mac's
cybersecurity plan, 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, including from third parties, to conduct and manage its
business operations. These information systems encompass an integrated set of hardware, software,
infrastructure, and trained personnel organized to facilitate the planning, control, coordination, and
decision-making processes occurring within Farmer Mac. As Farmer Mac's reliance on information
systems 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. Like many other financial institutions, Farmer Mac faces regular attempts by third parties
to gain unauthorized access to its information systems. Farmer Mac has experienced cyber incidents that
have not had a material effect on its business, operating results, or financial condition, but it is not possible
to predict the impact on Farmer Mac of any future cyber incidents.
Farmer Mac has undertaken preventive measures and devotes adequate resources to design, manage,
monitor, deploy, and assess its information systems and cybersecurity program consistent with industry
best practices. Specifically, Farmer Mac's cybersecurity program assesses Farmer Mac's cybersecurity
risk profile and seeks to ensure there are sufficient measures and safeguards in place to mitigate the risks
identified. However, Farmer Mac may not be able to prevent, address on a timely and adequate basis, or
fully mitigate the negative effects associated with a successful cyber-attack on Farmer Mac's or its third-
party information systems, which could adversely affect Farmer Mac's business, operating results,
reputation, or financial condition. Because the methods used to launch cyber-attacks change often or, in
some cases, are not recognized until launched, Farmer Mac also may be unable to implement effective
preventive measures or proactively address these methods until they are discovered. A failure or
interruption in any of Farmer Mac's information systems could cause a disruption or malfunction of its
operations, which could adversely affect Farmer Mac's ability to conduct business with its customers, loan
servicers, service providers, or other counterparties, result in financial loss, or damage Farmer Mac's
reputation.
The secure transmission, processing, and storage of Farmer Mac's confidential, proprietary, and other
information assets through Farmer Mac's or its third-party information systems is instrumental to Farmer
Mac's operations. Any action that results in unauthorized access to Farmer Mac's information systems by
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third parties, including through viruses, malware, cyber-attacks, or other information system breaches,
could disrupt Farmer Mac's operations, corrupt its data, or cause the misappropriation, unauthorized
release, loss, or destruction of the confidential, proprietary, or other information assets of its customers,
loan servicers, service providers, or other counterparties. Unauthorized access to Farmer Mac's
information systems or sensitive information could cause Farmer Mac to experience prolonged operational
interruption, damage to its reputation, material loss of business, legal liability, or increased costs from
private data exposure, which could adversely affect Farmer Mac's business, operating results, reputation,
or financial condition.
Farmer Mac depends on third parties, including loan servicers, information systems providers, and
other service providers, to protect confidential information from unauthorized access and
dissemination, and these third parties' failure to do so could result in liability for Farmer Mac or
damage Farmer Mac's reputation, which could have a negative effect on Farmer Mac's business,
operating results, or financial condition.
Farmer Mac relies on third parties, including loan servicers, information systems providers, software-as-a-
service (SaaS) providers, cloud computing service providers, and other service providers, to perform
various functions for Farmer Mac. In the course of these activities, these third parties collect and have
access to a variety of confidential or proprietary information, including, among others, sensitive financial
information, information presented to Farmer Mac's board of directors, information provided to Farmer
Mac's regulators, information about the lenders that participate in Farmer Mac's lines of business, and
personal financial information about the borrowers with loans in one of Farmer Mac's lines of business.
Any unauthorized access to or cyber incidents affecting the information systems of one of these third
parties, including through viruses, malware, cyber-attacks, or other information system breaches, could
result in the misappropriation and inappropriate release of the confidential or proprietary information
entrusted to Farmer Mac. Prior instances of unauthorized access to Farmer Mac's third parties'
information systems have not resulted in the misappropriation or inappropriate release of the confidential
or proprietary information entrusted to Farmer Mac, although it is not possible to predict the consequences
of any future instances. Any employees or agents of Farmer Mac's third parties that have authorized
access to confidential or proprietary information could also inadvertently or erroneously disseminate the
information to unauthorized third parties. Any unauthorized access to or dissemination of confidential or
proprietary information could result in liability for Farmer Mac or damage Farmer Mac's reputation, either
of which could have a negative effect on Farmer Mac's business, operating results, or financial condition.
If Farmer Mac's management of risk associated with its loan assets and investment securities based on
model assumptions and output is not effective, its business, operating results, financial condition, or
capital levels could be materially adversely affected.
Farmer Mac continually develops and adapts profitability and risk management models to adequately
address a wide 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 on 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. These failures could, for example, arise from factors
Farmer Mac did not anticipate or correctly evaluate in its models. Farmer Mac's quantified modeling does
not consider all risks. Farmer Mac's more qualitative approach to managing those risks not accounted for
in its quantitative models could prove insufficient, exposing it to material unanticipated losses. The
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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, or capital levels.
Market Risk
Farmer Mac is exposed to interest rate risk that could materially and adversely affect its business,
operating results, or 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 before the scheduled maturities increases the risk of asset and liability cash flow mismatches. In a
changing interest rate environment, these cash flow mismatches affect Farmer Mac's earnings if assets
repay sooner than expected and the resulting cash flows must be reinvested in lower-yielding investments,
particularly if Farmer Mac's related funding costs cannot be correspondingly repaid. Also, 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, 2018, of all the
outstanding business volume held on Farmer Mac's balance sheet, $8.3 billion had a fixed interest rate and
$7.4 billion had an adjustable interest rate.
Farmer Mac is also subject to another type of interest rate risk due to changes in its cost of funds relative
to floating rate market indexes (such as the London Interbank Offered Rate, or LIBOR) on some of the
floating rate assets it holds, which is referred to as "basis risk." Some of Farmer Mac's floating rate assets
reset on rate adjustment dates based on a floating rate market index, while the related debt that Farmer
Mac issued to fund those assets until their maturities may be refinanced based on Farmer Mac's cost of
funds at a particular time. Basis risk arises from the potential variability between the rates at which those
floating rate assets reset and the rates at which Farmer Mac can issue or refinance debt to fund those assets
until their maturities. Farmer Mac is also subject to basis risk on some of its fixed rate assets because of
its use of pay-fixed interest rate swaps, combined with a series of discount note or medium-term note
issuances, as an alternative source of effectively fixed rate funding. This risk arises because the rates at
which Farmer Mac refinances its funding for some fixed rate assets through the issuance of discount notes
or medium-term notes may vary from the agreed-upon rates based on the floating rate market index
received by Farmer Mac on the associated swaps. For example, if the rates on Farmer Mac’s discount
notes or medium-term notes deteriorate relative to LIBOR during the time between when its indexed
floating rate assets were first funded and when Farmer Mac refinances the associated debt or when Farmer
Mac uses pay-fixed swaps to fund its fixed rate assets, Farmer Mac is exposed to a commensurate
reduction in its net effective spread. Conversely, if the rates on Farmer Mac’s discount notes or medium-
term notes improve relative to LIBOR during that time or when Farmer Mac uses pay-fixed swaps to fund
its fixed rate assets, Farmer Mac would benefit from a commensurate increase in its net effective spread.
Although Farmer Mac seeks to issue debt of sufficient maturity to reduce the frequency of required
refinancing of that debt over the life of the associated asset, it may not be able to successfully do so, which
could adversely impact its business, operating results, and financial condition. As of December 31, 2018,
Farmer Mac held $6.2 billion of floating-rate assets in its lines of business and its liquidity investment
portfolio that reset based on floating rate market indexes, primarily one-month and three-month LIBOR.
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As of the same date, Farmer Mac also had $3.8 billion of interest rate swaps outstanding where Farmer
Mac pays a fixed rate of interest and receives a floating rate of interest.
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 may adversely affect net income.
Farmer Mac enters into financial derivatives transactions to hedge interest rate risks inherent in its
business and measures its financial derivatives at fair value. Although Farmer Mac's financial derivatives
provide effective economic hedges of interest rate risk, changes in the fair values of financial derivatives
can cause volatility in net income and in capital, particularly if those financial derivatives are not
designated in hedge accounting relationships or if there is any ineffectiveness in a hedge accounting
relationship. As interest rates increase or decrease, the fair values of Farmer Mac's derivatives change
based on the position Farmer Mac holds relative to the specific characteristics of the derivative. Farmer
Mac's core capital available to meet its statutory minimum capital requirement can be affected by changes
in the fair values of financial derivatives, as noted above. Adverse changes in the fair values of Farmer
Mac's financial derivatives that are not designated in hedge accounting relationships and any hedge
ineffectiveness that results in a loss 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 2018 and 2017, Farmer Mac recorded gains of $8.0 million and $10.2 million,
respectively, from changes in the fair values of its financial derivatives as a result of movements in interest
rates during those years.
The reform, replacement, or discontinuation of the LIBOR benchmark interest rate could adversely
affect Farmer Mac's business, operating results, or financial condition.
In July 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that
it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021 and
will support the LIBOR indexes through 2021 to allow for a transition to any alternative reference rates.
This announcement indicates that the continuation of LIBOR in its current form will not be guaranteed
after 2021, and it appears likely that LIBOR will be discontinued or modified by 2021. In response to this
development, the Federal Reserve Board and the Federal Reserve Bank of New York convened the
Alternative Reference Rates Committee ("ARRC") to identify a set of alternative reference interest rates
for possible use as market benchmark interest rates. The ARRC has proposed the Secured Overnight
Financing Rate ("SOFR") as its recommended alternative to LIBOR, and the Federal Reserve Bank of
New York began publishing SOFR rates beginning in second quarter 2018. SOFR is based on a broad
segment of the overnight Treasury repurchase market and is intended to be a broad measure of the cost of
borrowing cash overnight collateralized by Treasury securities. The Federal Reserve Bank of New York
notes on its publication page for SOFR that use of SOFR is subject to important limitations and
disclaimers, including that it may alter the methods of calculation, publication schedule, rate revision
practices, or availability of SOFR at any time without notice, or that it may withdraw, modify, or amend
the published SOFR rate in its sole discretion and without notice.
Farmer Mac is evaluating the potential effect on its business of the replacement of the LIBOR benchmark
interest rate, including the possibility of SOFR as a dominant replacement. As of December 31, 2018,
Farmer Mac held $5.1 billion of floating rate assets in its lines of business and its investment portfolio,
$3.6 billion of floating rate debt, and $9.8 billion notional amount of interest rate swaps, each of which
reset based on LIBOR. In addition, Farmer Mac's Series C Preferred Stock will be indexed to LIBOR
after July 17, 2024. The market transition away from LIBOR and towards SOFR, or any other alternative
59
benchmark interest rate that may be developed, is expected to be complicated and may require the
development of term and credit adjustments to accommodate for differences between the benchmark
interest rates. The introduction of an alternative reference rate may also introduce additional basis risk for
Farmer Mac if an alternative benchmark interest rate index is being used along with LIBOR during a
transition period. If LIBOR is discontinued and an alternative benchmark interest rate, including SOFR,
does not become widely used or accepted in place of LIBOR, then there may be uncertainty or differences
in the calculation of the applicable interest rate or payment amounts depending on the terms of the
governing instruments for Farmer Mac's assets and liabilities. If an alternative benchmark interest rate,
including SOFR, does become widely used or accepted in place of LIBOR, then significant work may be
required to transition to using this alternative rate in Farmer Mac's products. Either of these scenarios
could result in different financial performance for previously booked transactions, require different
hedging strategies, or require renegotiation of previously booked transactions, and may impact Farmer
Mac's existing transaction data, products, systems, operations and pricing processes, which could
adversely affect Farmer Mac's business, operating results, or financial condition.
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 or 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, 2018, Farmer Mac posted $47.0 million of
investment securities as collateral for its derivatives in net liability positions. 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. Farmer Mac is required to
fully collateralize its derivatives positions without any minimum threshold for cleared swap transactions,
as well as for non-cleared swap transactions entered into after March 1, 2017, the effective date of new
rules that established zero threshold requirements for the exchange of variation margin between Farmer
Mac and its swap dealer counterparties in such transactions. For non-cleared swaps transactions entered
into before March 2017, Farmer Mac's derivatives contracts contain provisions establishing minimum
threshold collateral amounts, ranging between $15 million and $25 million, below which Farmer Mac is
not required to post collateral, though these amounts 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. Under these contracts, the
amount required to be posted would increase if Farmer Mac also experienced a credit event, thereby
triggering full collateralization of its derivatives positions without any minimum threshold. If Farmer Mac
is required to fully collateralize all of its derivatives positions in an adverse interest rate environment, it
could have a material adverse effect on Farmer Mac's liquidity position or operating results.
60
Financial Risk
Incorrect estimates and assumptions by management, or changes in accounting standards or in
applying accounting policies, in preparing financial statements could adversely affect Farmer Mac's
business, operating results, reported assets and liabilities, financial condition, reputation, or capital
levels.
Farmer Mac's accounting policies and methods are fundamental to how it records and reports its financial
condition and results of operations. Some of these policies and methods require management to make
certain critical accounting estimates and assumptions in preparing Farmer Mac's consolidated financial
statements that could affect the reported amounts of assets and liabilities and the reported amounts of
income and expense during the reporting periods. Incorrect estimates and assumptions by management in
connection with preparing Farmer Mac's consolidated financial statements could adversely affect the
reported amounts of assets and liabilities and the reported amounts of income and expenses. For example,
as of December 31, 2018, Farmer Mac's assets and liabilities recorded at fair value included financial
instruments valued at $6.0 billion whose fair values management estimated in the absence of readily
observable fair values (in other words, level 3). These financial instruments measured with significant
unobservable inputs represented 32% of total assets and 73% of financial instruments measured at fair
value as of December 31, 2018. More information about 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 understate or overstate reported
financial results, which could materially and adversely affect Farmer Mac's business, operating results,
reported assets and liabilities, financial condition, reputation, or capital levels.
Farmer Mac is subject to the requirements of entities that set and interpret the accounting standards
governing the preparation of Farmer Mac's consolidated financial statements. These entities, which
include the Financial Accounting Standards Board ("FASB"), the SEC, and Farmer Mac's independent
registered public accounting firm, may add new accounting standards or change their interpretations of
how those standards should be applied. These changes may be difficult to predict and could affect how
Farmer Mac records and reports its financial condition and results of operations. In some cases, Farmer
Mac could be required to apply a new or revised standard retrospectively, potentially resulting in changes
to previously reported financial results. For example, the FASB issued a new accounting standard in
2016, effective for Farmer Mac for fiscal years beginning after December 15, 2019, that will require
entities to measure credit losses based on an "expected credit loss" approach rather than an "incurred loss"
approach currently required under GAAP. The new approach will require entities to measure all expected
credit losses for financial assets, carried at amortized cost, based on historical experience, current
conditions, and reasonable forecasts of collectability. If Farmer Mac is required to materially increase its
total allowance for losses as a result, that increase could adversely affect Farmer Mac's business, operating
results, financial condition, or capital levels. See Note 2(q) to the consolidated financial statements for
more information about this new accounting standard.
Changes in the value or composition of Farmer Mac's investment securities could adversely affect
Farmer Mac's business, operating results, financial condition, or 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, do not have well-
established secondary trading markets, making it more difficult to estimate current fair values for those
61
securities. Adverse financial market conditions may further compound the challenges of estimating fair
values for Farmer Mac's securities.
Farmer Mac relies on market observations to determine the fair value of its investment securities, although
the market data Farmer Mac relies on may not reflect the actual sale conditions that Farmer Mac would
face when selling its investment securities. For example, the market value of some securities owned by
Farmer Mac may depend 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. Later 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.
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, or capital levels.
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 2018 to December 2018, the
closing price of the stock ranged from $56.54 per share to $98.52 per share. The trading price may
fluctuate in response to various factors, including short sales, hedging, the presence or absence of a share
repurchase program, or stock market influences in general that are unrelated to Farmer Mac's operating
performance. Farmer Mac typically grants equity awards each year that are based on Farmer Mac's 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 under 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 39,000 shares daily during 2018, and
may have a prolonged negative effect on its trading price or increase price volatility.
62
Regulatory/Compliance Risk
Farmer Mac and many of its business partners are subject to comprehensive government regulation,
and changes to the laws and regulations to which Farmer Mac or its business partners are subject
could adversely affect Farmer Mac's business, operating results, reputation, or financial condition.
Farmer Mac was established under a statutory charter that is subject to amendment by the U.S. Congress
at any time and is regulated by various government agencies, including the FCA and the SEC. As a result,
Farmer Mac is exposed to the risk of legal or regulatory penalties, material financial loss including fines,
judgments, damages, and/or settlements, or loss of reputation if it fails to comply with applicable laws,
regulations, rules, regulatory requests, self-regulatory organization standards, or codes of conduct
applicable to its business activities. Future legislative or regulatory actions affecting Farmer Mac's
statutory charter or its business activities, including increased regulatory supervision, and any required
changes to Farmer Mac's business or operations resulting from such actions, could result in a financial loss
for Farmer Mac or otherwise reduce its profitability, impose additional compliance and other costs on
Farmer Mac, limit the products offered by Farmer Mac or its ability to pursue business opportunities in
which it might otherwise consider engaging, curtail business activities in which it is currently engaged,
affect the value of assets that Farmer Mac holds, or otherwise adversely affect Farmer Mac's business,
results of operations, reputation, or financial condition.
The financial services industry, in which most of Farmer Mac's business partners and customers operate, is
subject to significant legislation and regulations. Specifically, to the extent that current or future
legislation or regulations affect the activities of banks, insurance companies, other rural lenders,
derivatives counterparties, clearinghouses, securities dealers, or other regulated entities that constitute a
large portion of Farmer Mac's business counterparties or customers, Farmer Mac could experience
reduced customer demand or profitability, increased compliance costs, disadvantageous business terms in
its dealings with counterparties, and unfavorable changes to its business practices or activities. As a result,
Farmer Mac's business, operating results, reputation, or financial condition could be adversely affected.
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. Also, as
required by an FCA regulation on capital planning, Farmer Mac has adopted a policy to maintain a
sufficient level of Tier 1 capital and to restrict paying Tier 1-eligible dividends if Tier 1 capital falls below
specified thresholds. For more information about Farmer Mac's capital requirements, including the Tier 1
capital requirement, see "Business—Government Regulation of Farmer Mac—Regulation—Capital
Standards." 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:
•
•
•
credit losses or other-than-temporary impairment charges;
adverse changes in interest rates or credit spreads;
the need to increase the level of the allowance for losses on loans;
63
•
•
legislative or regulatory actions that increase Farmer Mac's capital requirements; and
changes in U.S. generally accepted accounting principles.
Political Risk
Farmer Mac is a GSE that may be materially and adversely affected by legislative or political
developments that 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, including the FCA and the SEC. Although
Farmer Mac is not aware of any pending legislative proposals that would adversely affect the way Farmer
Mac conducts its business or the status of Farmer Mac as a GSE, 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
commence 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 how 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, or capital levels. See
"Business—Government Regulation of Farmer Mac" for more information about the rules and regulations
governing Farmer Mac's activities.
Human Capital Risk
Farmer Mac's ability to attract and retain motivated and qualified employees is critical to the success of
its business, and failure to do so or a significant disruption in the continuity of Farmer Mac's
employees or any significant executive leadership change may materially adversely affect Farmer
Mac's business performance, operations, financial condition, or reputation.
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. If
Farmer Mac is unable to continue to retain and attract motivated and qualified employees or does not have
adequate human capital to achieve its business objectives, Farmer Mac's business performance, operations,
or financial condition could be materially adversely affected. A significant disruption in the continuity of
Farmer Mac's employees or any significant executive leadership change could also:
•
•
create uncertainty or instability;
require Farmer Mac and its existing employees to divert or expend more resources and attention to
replace personnel;
result in a loss of productivity and disrupt its daily operations;
affect Farmer Mac's ability to successfully execute its business strategies;
result in the departure of other executives or key employees; or
•
•
•
• damage the public or market perception of Farmer Mac.
For example, after the termination of employment of Farmer Mac's former President and Chief Executive
Officer in 2017, Farmer Mac expended significant resources and attention to identify his successor. Any
64
of the above factors could materially adversely affect Farmer Mac's performance, operations, financial
condition, or reputation.
Any of the risks described in this section could materially and adversely affect Farmer Mac's business,
operating results, financial condition, reputation, capital levels, and future earnings. For more information
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 a sublease that began on October 1, 2011 and ends on August 30, 2024. Farmer Mac also maintains
three other office locations: (1) 9169 Northpark Drive, Johnston, Iowa 50322, under a lease that began on
October 1, 2017 and ends on June 30, 2023; (2) 5200 N. Palm Avenue, Suite 306, Fresno, California
93704, under a lease that began on January 1, 2017 and ends on February 29, 2020; and (3) 1065 E.
Winding Creek Drive, Suite 200, Eagle, Idaho 83616, under a lease that began on October 1, 2016 and
ends on November 30, 2019. Farmer Mac believes that its offices are suitable and adequate for its current
and anticipated needs for the near future.
Item 3. Legal Proceedings
None.
Item 4. Mine Safety Disclosures
Not applicable.
65
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
Farmer Mac has three classes of common stock outstanding – Class A voting common stock, Class
(a)
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. In 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 February 4, 2019, Farmer Mac had 942 registered owners of the Class A voting common stock,
77 registered owners of the Class B voting common stock, and 883 registered owners of the Class C non-
voting common stock.
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
outstanding preferred stock. On March 1, 2017, Farmer Mac's board of directors declared a quarterly
dividend of $0.36 per share on Farmer Mac's common stock payable for first quarter 2017. That dividend
was paid quarterly through fourth quarter 2017. On February 28, 2018, Farmer Mac's board of directors
declared a quarterly dividend of $0.58 per share on Farmer Mac's common stock payable for first quarter
2018. That divided was paid quarterly through fourth quarter 2018. On February 19, 2019, Farmer Mac's
board of directors declared a dividend of $0.70 per share on Farmer Mac's common stock payable for first
quarter 2019. See "Business—Financing—Equity Issuance" for more information on Farmer Mac's
common stock.
The quarterly dividend of $0.70 per share on all three classes of common stock represents an increase of
$0.12 per common share, or 21%, over the quarterly dividend payout in 2018 and reflects the board's
authorization to increase Farmer Mac's common stock dividend payout target as a percentage of annual
core earnings from 30% for 2018 to 35% for 2019 and beyond. In deciding to increase Farmer Mac's
common stock dividend and payout target, the board of directors considered our strong capital position
and the consistency of and outlook for our earnings, balanced against the need for capital to fund the
significant growth objectives identified in our strategic plan and to meet regulatory requirements and
metrics established by our board of directors. These actions are also consistent with Farmer Mac's goal of
providing a competitive return on its common stockholders' investments through the payment of cash
dividends. Our payout ratio of core earnings is also now more in line with those of our financial
institution peers within the S&P Financial Index and NASDAQ Bank Index, many of which have
significantly increased their common stock dividends during the past two years.
66
The declaration and payment of future dividends to holders of Farmer Mac's common stock are, however,
at the discretion of Farmer Mac's board of directors and depend on many factors, including Farmer Mac's
financial condition, actual results of operations and earnings, the capital needs of Farmer Mac's business,
regulatory requirements, and other factors that Farmer Mac's board deems relevant. Farmer Mac's ability
to pay dividends on its common stock is also subject to the payment of dividends on its outstanding
preferred stock. Applicable FCA regulations also require Farmer Mac to provide FCA with 15 days'
advance notice of certain capital distributions. Farmer Mac's ability to declare and pay dividends could be
restricted if it were to fail to comply with applicable capital requirements. See Note 9 to the consolidated
financial statements for more information about Farmer Mac's capital position and see "Business—
Government Regulation of Farmer Mac—Regulation—Capital Standards" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—
Capital Requirements" for more information on the capital requirements applicable to Farmer Mac.
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 1, 2019. 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's common stock occurred during fourth quarter 2018 that was not registered under the Securities Act
and not otherwise reported on a Current Report on Form 8-K:
• On October 2, 2018, consistent with 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 50 shares of Class C non-voting common stock to the three 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 $72.18 per share, which was the closing
price of the Class C non-voting common stock on September 28, 2018, the last business day of the
third quarter, as reported by the New York Stock Exchange.
67
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, 2013 to December 31, 2018. The
graph assumes that $100 was invested on December 31, 2013 in each of: Farmer Mac's Class A voting
common stock; Farmer Mac's Class C non-voting common stock; the NYSE Composite Index; and the
S&P 500 Diversified Financials Index. The graph also assumes that all dividends were reinvested into the
same securities throughout the past five years. Farmer Mac obtained the information in the performance
graph from S&P Global Market Intelligence.
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, or any other document,
whether made before or after the date of this report and despite 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)
None.
68
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, 2018 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K.
Summary of Financial Condition:
2018
2017
2016
2015
2014
Cash and cash equivalents
Investment securities
$
425,256
$
302,022
$
265,229
$ 1,210,084
$ 1,363,387
2,262,884
2,260,437
2,515,851
2,775,516
1,939,188
Farmer Mac Guaranteed Securities
8,071,115
7,598,188
6,002,916
5,426,621
5,453,901
(dollars in thousands)
As of December 31,
USDA Securities
Loans, net
Total assets
Notes payable:
Due within one year
Due after one year
Total liabilities
Stockholders' equity
Non-controlling interest(1)
Capital:
2,176,173
2,131,365
2,029,613
1,917,319
1,771,532
5,515,052
5,266,786
4,507,435
3,962,044
3,520,075
18,694,328
17,792,274
15,606,020
15,540,354
14,287,821
7,757,050
8,089,826
8,440,123
9,111,461
7,353,953
8,486,647
7,432,790
5,222,977
4,967,036
5,471,186
17,941,771
17,084,128
14,962,373
14,986,634
13,505,992
752,557
708,146
643,425
553,517
—
—
222
203
545,801
236,028
Statutory minimum capital requirement
$
544,984
$
520,271
$
466,498
$
462,070
$
421,328
Core capital
Capital in excess of minimum capital requirement
727,601
182,617
657,061
136,790
609,667
143,169
564,536
102,466
766,296
344,968
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)
Tier 1 capital ratio(6)
0.52%
19.46%
4.00%
4.00%
13.4%
0.43%
16.64%
4.05%
4.05%
12.6%
0.41%
16.78%
3.84%
3.84%
12.7%
0.32%
13.83%
3.69%
4.48%
10.5%
0.28%
12.42%
3.18%
4.91%
11.3%
(1)
(2)
(3)
(4)
(5)
On May 14, 2014, Farmer Mac purchased $6.0 million of Farm Asset-Linked Capital Securities ("FALConS"), which represented
beneficial ownership interests in shares of Farmer Mac II LLC Preferred Stock, from certain holders. On March 30, 2015, Farmer Mac
II LLC redeemed all of the outstanding shares of Farmer Mac II LLC Preferred Stock which, in turn, triggered the redemption of all of
the outstanding FALConS on that same day. The remaining balance relates to AgVisory, Farmer Mac's former majority-owned
subsidiary whose principal activity was to appraise agricultural real estate. On May 1, 2017, Farmer Mac transferred its entire 65%
ownership interest in AgVisory back to the limited liability company as a company redemption.
Calculated as net income attributable to common stockholders divided by the simple average of beginning and ending total assets.
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 and accumulated other comprehensive (loss)/income, net of tax.
Calculated as the simple average of beginning and ending stockholders' equity divided by the simple average of beginning and ending
total assets.
Calculated as the simple average of beginning and ending stockholders' equity and non-controlling interest divided by the simple
average of beginning and ending total assets.
69
(6)
In 2016, Farmer Mac adjusted the calculation of its Tier 1 capital ratio to eliminate certain interest rate risk components of the risk
weighting of assets to reflect the fact that Farmer Mac pursues a match-funding approach to funding its assets and therefore does not
bear material interest rate risk in its portfolio. These interest rate risk components have not been eliminated in the calculations for the
Tier 1 capital ratio for the years ended December 31, 2014 and December 31, 2015. For more information about Farmer Mac's Tier 1
capital ratio, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources—Capital Requirements."
Summary of Operations:
2018
2017
2016
2015
2014
For the Year Ended December 31,
(in thousands, except per share amounts)
Interest Income:
Net interest income after provision for loan losses
$
174,198
$
155,939
$
139,209
$
123,419
$
71,308
Non-interest income:
Guarantee and commitment fees
(Losses)/gains on financial derivatives, hedging activities
and trading assets
Gains/(losses) on asset sales and debt repurchases
(Losses)/gains on the sale of real estate owned
Other income
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
13,976
14,114
14,868
14,077
14,694
3,771
3,751
16,983
(3,606)
—
(7)
1,377
11,740
49,916
136,022
27,942
108,080
729
89
1,748
832
17,512
42,765
130,686
46,369
84,317
(9)
15
1,823
20,468
40,320
9
(1)
2,305
20,141
35,482
119,357
108,078
42,057
77,300
Less: Net loss/(income) attributable to non-controlling
interest
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
Ending balance
Earnings Per Common Share and Dividends:
Basic earnings per common share
Diluted earnings per common share
Common stock dividends per common share
—
165
34
(13,182)
(13,182)
(13,182)
$
$
$
—
94,898
335
17
9,184
8.91
8.83
2.32
$
$
$
—
71,300
1,758
327
8,866
6.73
6.60
1.44
$
$
$
—
64,152
1,002
130
7,435
6.12
5.97
1.04
$
$
$
(238)
137
1,714
33,290
31,492
73,106
2,824
70,282
(22,192)
(9,839)
—
38,251
(3,166)
41
10,127
3.50
3.37
0.56
34,239
73,839
(5,139)
(13,182)
(8,147)
47,371
208
3,772
6,563
4.33
4.19
0.64
$
$
$
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. The accounts
of Contour Valuation Services, LLC (which began doing business as AgVisory during first quarter 2016)
("AgVisory"), Farmer Mac's former majority-owned subsidiary, are also included through June 30, 2017.
Farmer Mac redeemed its ownership interest in AgVisory on May 1, 2017. This discussion and analysis of
financial condition and results of operations should be read together with Farmer Mac's consolidated
financial statements and the related notes to the consolidated financial statements for the fiscal years
ended December 31, 2018, 2017, and 2016.
70
Overview
We increased our outstanding business volume by $717.2 million, or 3.8%, to $19.7 billion during 2018.
This increase was driven by net growth of $477.9 million in the Institutional Credit line of business,
$366.4 million in the Farm & Ranch line of business, and $163.4 million in the USDA Guarantees line of
business. The net growth in these lines of business was partially offset by a $290.5 million net business
volume decrease in the Rural Utilities line of business.
Our overall credit quality improved during 2018 compared to 2017. Our total provision for losses
recorded in 2018 was $0.3 million, compared to $1.8 million in 2017, which reflects a decrease of
$1.5 million. Our 90-day delinquencies decreased both in dollars and as a percentage of the Farm &
Ranch portfolio in 2018. Although our substandard assets increased in dollars in 2018, they remained the
same as a percentage of the Farm & Ranch portfolio compared to 2017. Farmer Mac's 90-day
delinquency rate and substandard asset rate during 2018 each remained below Farmer Mac's historical
averages.
On September 26, 2018, Farmer Mac's board of directors appointed Bradford T. Nordholm to serve as
Farmer Mac's President and Chief Executive Officer effective October 15, 2018, when Mr. Nordholm
replaced Lowell L. Junkins in that role. Mr. Junkins had served as Farmer Mac's Acting President and
Chief Executive Officer since December 2017 and continues to serve as Farmer Mac's Chairman of the
Board. For more information about Mr. Nordholm, see the Current Report on Form 8-K that Farmer Mac
filed with the SEC on October 1, 2018.
Subsequent Events
On February 19, 2019, we purchased a $546 million portfolio of participations in seasoned Rural Utilities
loans from CoBank under a master loan participation agreement entered into on February 13, 2019.
CoBank is a related party to Farmer Mac because of its stock ownership in Farmer Mac. For more
information, see the Current Report on Form 8-K that we filed with the SEC on February 20, 2019.
On February 19, 2019, Farmer Mac's board of directors declared a quarterly dividend of $0.70 per share
on all three classes of common stock. This is an increase of $0.12 per common share, or 21%, over the
quarterly dividend payout in 2018 and reflects the board's authorization to increase Farmer Mac's common
stock dividend payout target as a percentage of annual core earnings from 30% for 2018 to 35% for 2019
and beyond. In deciding to increase Farmer Mac's common stock dividend and our payout target, the
board of directors considered our strong capital position and the consistency of and outlook for our
earnings, balanced against the need for capital to fund the significant growth objectives identified in our
strategic plan and to meet regulatory requirements and metrics established by our board of directors.
These actions are also consistent with Farmer Mac's goal of providing a competitive return on its common
stockholders' investments through the payment of cash dividends. Our payout ratio of core earnings is
also now more in line with those of our financial institution peers within the S&P Financial Index and
NASDAQ Bank Index, many of which have significantly increased their common stock dividends during
the past two years.
The discussion below of Farmer Mac's financial information includes "non-GAAP measures," which are
measures of financial performance that are not presented in accordance with GAAP. For more
information about the non-GAAP measures Farmer Mac uses, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures."
71
Net Income and Core Earnings
Our net income attributable to common stockholders for 2018 was $94.9 million, compared to $71.3
million for 2017 and $64.2 million for 2016.
The $23.6 million increase in net income attributable to common stockholders for 2018 compared to 2017
was primarily due to: (1) an $18.4 million decrease in income tax expense due to the reduction in the
federal corporate income tax rate resulting from the enactment of new federal tax legislation, referred to as
the Tax Cuts and Jobs Act; and (2) a $13.3 million after-tax increase in net interest income. This year-
over-year increase was offset in part by: (1) an increase of $3.5 million in net after-tax losses on our
financial derivatives; (2) an increase in general and administrative ("G&A") expenses of $3.0 million
after-tax; and (3) an increase in compensation and employee benefits expenses of $2.6 million after-tax.
G&A expenses and compensation and employee benefits expenses increased by $7.0 million, or 17.5%, in
2018 compared to 2017. Farmer Mac previously disclosed its expectation that these expenses would
increase by approximately 15%, or $6.0 million, in 2018 compared to 2017. The incremental $1.0 million
increase in these expenses compared to the original expectation was primarily due to nonrecurring hiring
expenses of $0.6 million, primarily related to the search process for Farmer Mac's current President and
Chief Executive Officer and two other key hires.
The $7.1 million increase in net income attributable to common stockholders for 2017 compared to 2016
was primarily driven by increases of $11.3 million after-tax in net interest income and a $1.1 million after-
tax increase in net realized gains on the sale of real estate owned properties. The year-over-year increase
was offset in part by: (1) a $2.7 million after-tax decrease in gains in the fair value of financial derivatives
and hedged assets; (2) a $1.6 million after-tax increase in non-interest expense in 2017 primarily due to
higher G&A expenses and higher compensation and employee benefits expenses; and (3) the re-
measurement of net deferred tax asset due to the enactment of the Tax Cuts and Jobs Act, which resulted
in a $1.4 million increase to income tax expense in 2017.
Our non-GAAP core earnings for 2018 were $84.0 million, compared to $65.6 million in 2017 and $53.5
million in 2016.
The $18.4 million increase in core earnings for 2018 compared to 2017 was primarily due to a $16.8
million decrease in income tax expense resulting from the lower federal corporate income tax rate and a
$7.8 million after-tax increase in net effective spread resulting primarily from an increase in outstanding
business volume. The increases to core earnings were partially offset by a $3.0 million after-tax increase
in G&A expenses related to continued investments in Farmer Mac's technology and business infrastructure
and a $2.6 million after-tax increase in compensation and employee benefits expenses. A significant factor
contributing to the increase in compensation expense in 2018 compared to 2017 was the absence in 2018
of the recoupment of approximately $1.1 million after-tax in compensation costs related to the forfeiture
of unvested equity awards and annual variable incentive compensation resulting from the termination of
employment of Farmer Mac's former President and Chief Executive Officer in December 2017.
The $12.1 million increase in core earnings for 2017 compared to 2016 was primarily due to: (1) an $11.9
million after-tax increase in net effective spread; (2) a $1.1 million after-tax increase in net realized gains
on the sale of real estate owned properties; and (3) a $0.8 million after-tax increase in guarantee and
commitment fee income. The increase in core earnings in 2017 was offset in part primarily by a $1.5
million after-tax increase in operating expenses, driven by higher compensation and employee benefits
72
and G&A expenses. The $0.9 million after-tax increase in compensation and employee benefits expenses
was due primarily to an increase in headcount and employee health insurance costs. The $0.6 million
after-tax increase in G&A expenses was primarily due to: (1) continued investments in technology and
business infrastructure; (2) higher legal fees related to general corporate matters, including fees related to
the termination of employment of Farmer Mac's former President and Chief Executive Officer in
December 2017; (3) an increase in building lease expenses due to new leases for office space entered into
during 2017; and (4) expenses related to business development efforts. For more information about net
income attributable to common stockholders, the composition of core earnings, and a reconciliation of net
income attributable to common stockholders to core earnings, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations—Results of Operations." For more information about
the non-GAAP measures Farmer Mac uses, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations—Use of Non-GAAP Measures."
Net Interest Income and Net Effective Spread
Net interest income was $174.4 million for 2018, compared to $157.6 million for 2017 and $140.3 million
for 2016. The overall net interest yield was 0.96% for 2018, compared to 0.94% for 2017 and 0.90% for
2016.
The $16.8 million increase in net interest income for 2018 compared to 2017 was primarily due to net
growth in on-balance sheet AgVantage securities, Farm & Ranch loans, and USDA Securities, which
contributed to a $10.1 million increase in net interest income. Another factor contributing to the year-
over-year increase in net interest income were the fair value changes on financial derivatives and
corresponding financial assets and liabilities in fair value hedge relationships. Effective first quarter 2018,
Farmer Mac adopted Accounting Standard Update ("ASU") 2017-12, "Derivatives and Hedging (Topic
815): Targeted Improvements to Accounting for Hedging Activities." The new accounting guidance
requires the changes in the fair value of both the financial derivative designated in a fair value hedge
relationship and the corresponding hedged item to be recorded in the same line item in Farmer Mac's
consolidated statements of operations. Thus, Farmer Mac recognizes changes in fair value of both the
financial derivatives and corresponding hedged items within net interest income in its consolidated
statements of operations, which contributed $4.9 million in net interest income during 2018. Before first
quarter 2018, changes in the fair value of financial derivatives designated in a fair value hedge relationship
were recognized in "Gains/(losses) on financial derivatives" in Farmer Mac's consolidated statements of
operations. Another factor contributing to the year-over-year increase in net interest income was an
increase in the amount of cash basis interest income recognized on non-accrual Farm & Ranch loans,
which contributed $1.5 million in net interest income during 2018. The year-over-year increase in net
interest income was partially offset by the full amortization of the remaining $2.0 million in premium of
an interest-only security held in Farmer Mac's investment portfolio (the "Interest-Only Amortization")
because the issuer called the security upon full prepayment of the underlying mortgage loan that
collateralized the security.
The $17.3 million increase in net interest income for 2017 compared to 2016 was driven by net growth in
Farm & Ranch loans, on-balance sheet AgVantage securities, and USDA Securities. Also contributing to
the increase was the effect of an increase in short-term interest rates on assets and liabilities indexed to
LIBOR due to the Federal Reserve's monetary policy decisions since December 2016 to raise the target
range for the federal funds rate. This effect on net interest income occurred because interest expense used
to calculate net interest income does not include all the funding expenses related to these assets,
specifically the expense on financial derivatives not designated in hedge accounting relationships. This
73
increase in short-term rates on assets and liabilities indexed to LIBOR did not have a similar effect on net
effective spread because net effective spread includes interest expense from all funding related to those
assets, including interest expense from financial derivatives not designated in hedge accounting
relationships. Also contributing to the year-over-year increase was an increase in the net effect of
consolidated trusts resulting from an increase in securitization activity of Farm & Ranch loans throughout
2016 and 2017. Farmer Mac earns the difference between the interest income recognized on loans in
consolidated trusts and the related interest expense recognized on debt securities of consolidated trusts
held by third parties. The increase in net interest income was offset in part by an increase in net yield
adjustments related to amortization of premiums and discounts on assets consolidated at fair value. The
4 basis point increase in net interest yield in 2017 compared to 2016 was primarily due to a reduction in
the average balance of lower-earning cash and cash equivalents and investment securities.
Net effective spread, a non-GAAP measure, was $151.2 million in 2018, compared to $141.3 million in
2017 and $123.1 million in 2016. In percentage terms, net effective spread was 0.91% in 2018, compared
to 0.91% in 2017 and 0.84% in 2016. Farmer Mac uses net effective spread as an alternative measure to
net interest income because management believes it is a useful metric that reflects the economics of the
net spread between all the assets owned by Farmer Mac and all related funding, including any associated
derivatives, some of which may not be included in net interest income.
The $9.9 million increase in net effective spread in dollars for 2018 compared to 2017 was primarily due
to: (1) growth in outstanding business volume, which increased net effective spread by approximately
$10.1 million; and (2) a $1.5 million increase in the amount of cash basis interest income received from
non-accrual Farm & Ranch loans. This increase in net effective spread was partially offset by the Interest-
Only Amortization described above. In percentage terms, net effective spread remained at 0.91% in both
2018 and 2017 primarily because the positive impact of the cash basis interest income was offset by the
negative impact of the Interest-Only Amortization.
For 2017 compared to 2016, the $18.2 million increase in net effective spread in dollars was primarily due
to: (1) growth in on-balance sheet AgVantage securities, Farm & Ranch loans, and other business volume,
which increased net effective spread by approximately $15.1 million in 2017; and (2) changes in our
funding strategies and improvements in LIBOR-based short-term funding costs for floating rate assets
indexed to LIBOR, which added approximately $4.0 million in 2017. Net effective spread in percentage
terms increased 7 basis points in 2017 compared to 2016 primarily due to the decrease in the average
balance of lower-earning cash and cash equivalents and investment securities, which added approximately
5 basis points to net effective spread. Also contributing to the increase were the effects of changes in our
funding strategy and a favorable LIBOR-based funding market, which added approximately 3 basis points
in 2017.
For more information about Farmer Mac's use of net effective spread as a financial measure, see
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-
GAAP Measures." For a reconciliation of net interest income to net effective spread, see Table 7 in
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of
Operations—Net Interest Income."
Business Volume
Our outstanding business volume was $19.7 billion as of December 31, 2018, a net increase of $717.2
million from December 31, 2017, after taking into account all new business, maturities, and paydowns on
74
existing assets. This increase was driven by net growth of $477.9 million in the Institutional Credit line of
business, net growth of $366.4 million in the Farm & Ranch line of business, and net growth of
$163.4 million in the USDA Guarantees line of business. The net growth in these lines of business was
partially offset by a $290.5 million net business volume decrease in the Rural Utilities line of business.
On February 19, 2019, we purchased a $546 million portfolio of participations in seasoned Rural Utilities
loans from CoBank under a master loan participation agreement entered into on February 13, 2019.
CoBank is a related party to Farmer Mac because of its stock ownership in Farmer Mac. For more
information, see the Current Report on Form 8-K that we filed with the SEC on February 20, 2019.
For more information about Farmer Mac's business volume, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations—Results of Operations—Business Volume."
Capital
As of December 31, 2018, our core capital level was $727.6 million, which was $182.6 million above the
minimum capital level required by our statutory charter. As of December 31, 2017, our core capital level
was $657.1 million, which was $136.8 million above the minimum capital requirement. The increase in
capital above the minimum capital level was due primarily to an increase in retained earnings.
Credit Quality
Our overall credit quality improved during 2018 compared to 2017. Our total provision for losses and our
90-day delinquencies each decreased year-over-year, while our total allowance for losses and substandard
assets as a percent of our Farm & Ranch portfolio each remained the same. While we expect that over
time our 90-day delinquency and substandard assets rates will revert closer to Farmer Mac's historical
averages, our overall credit quality did not deteriorate in 2018 compared to 2017 because borrowers had
sufficient capacity to meet their financial obligations.
As of December 31, 2018, Farmer Mac's allowance for losses was $9.2 million (0.13% of the Farm &
Ranch portfolio), compared to $8.9 million (0.13% of the Farm & Ranch portfolio) as of December 31,
2017. The $0.3 million increase in the total allowance for losses in 2018 was primarily due to net growth
in our Farm & Ranch loan portfolio, slightly offset by a modest improvement in the portfolio's credit
quality.
As of December 31, 2018, Farmer Mac's substandard assets were $232.7 million (3.2% of the Farm &
Ranch portfolio), compared to $221.3 million (3.2% of the Farm & Ranch portfolio) as of December 31,
2017. The $11.4 million increase in substandard assets in 2018 compared to 2017 was due to growth in
our total Farm & Ranch portfolio, while the proportion of our substandard assets to the overall Farm &
Ranch portfolio remained the same as in 2017.
As of December 31, 2018, Farmer Mac's 90-day delinquencies were $26.9 million (0.37% of the Farm &
Ranch portfolio), compared to $48.4 million (0.71% of the Farm & Ranch portfolio) as of December 31,
2017. The year-over-year decrease is primarily due to two permanent planting loans to one borrower in
the aggregate amount of $15.3 million that became current during 2018.
75
For more information about Farmer Mac's credit metrics, including 90-day delinquencies, the total
allowance for losses, and substandard assets, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."
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. Farmer Mac
views the allowance for losses and fair value measurement as critical accounting policies. Both policies
require complex and subjective judgments, and are important to the presentation of Farmer Mac's financial
condition and results of operations.
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 underlying off-
balance sheet Farmer Mac Guaranteed Securities and LTSPCs ("reserve for losses") based on available
information. 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 underlying 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.
The allowance for loan losses increases through periodic provisions for loan losses that are charged
against net interest income. The reserve for losses increases through provisions for losses that are charged
to non-interest expense. Both the allowance for loan losses and reserve for losses decrease 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, occur when 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 underlying 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 underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs. The calculated
76
loss rates are applied to the current classification distribution of unimpaired loans in Farmer Mac's
portfolio to estimate probable losses, based 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
considering many relevant 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 underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs.
Rural Utilities
Farmer Mac separately evaluates the Rural Utilities loans it holds for investment and loans underlying
LTSPCs 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 line of business 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
identified 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 have been identified as 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. If 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 need to obtain 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. Also, updated appraisals
are always obtained during the foreclosure process. Depending on the risk factors associated with the loan
77
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
before 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). A property's appraised value may also be
discounted based on the market's reaction to Farmer Mac's asking price for the sale of the property.
More information about the allowance for losses is included in "Management's Discussion and Analysis of
Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and
Guarantees" and Note 2(i) 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
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 before 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, 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, net interest income, 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
78
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, 2018, Farmer Mac's assets and liabilities recorded at fair value included financial
instruments valued at $6.0 billion whose fair values were estimated by management in the absence of
readily determinable fair values (i.e., level 3). These financial instruments measured as level 3
represented 32% of total assets and 73% of financial instruments measured at fair value as of
December 31, 2018.
See Note 13 to the consolidated financial statements for more information about fair value measurement.
Use of Non-GAAP Measures
In the accompanying analysis of its financial information, Farmer Mac sometimes uses "non-GAAP
measures," which are measures of financial performance that are not presented in accordance with GAAP.
Specifically, Farmer Mac uses the following non-GAAP measures: "core earnings," "core earnings per
share," and "net effective spread." Farmer Mac uses these non-GAAP measures to measure corporate
economic performance and develop financial plans because, in management's view, they are useful
alternative measures in understanding Farmer Mac's economic performance, transaction economics, and
business trends.
The non-GAAP financial measures that Farmer Mac uses may not be comparable to similarly labeled non-
GAAP financial measures disclosed by other companies. Farmer Mac's disclosure of these non-GAAP
measures is intended to be supplemental in nature and is not meant to be considered in isolation from, as a
substitute for, or as more important than, the related financial information prepared in accordance with
GAAP.
Core Earnings and Core Earnings Per Share
Core earnings and core earnings per share principally differ from net income attributable to common
stockholders and earnings per common share, respectively, by excluding the effects of fair value
fluctuations. These fluctuations are not expected to have a cumulative net impact on Farmer Mac's
financial condition or results of operations reported in accordance with GAAP if the related financial
instruments are held to maturity, as is expected. Among other items, these fair value fluctuations have
included unrealized gains or losses on financial derivatives. Specifically, variation margin is exchanged
between Farmer Mac and its counterparties on both its cleared and non-cleared derivatives portfolios.
Before first quarter 2017, Farmer Mac accounted for variation margin as collateral and associated
unrealized gains or losses on its centrally cleared derivative contracts. However, beginning in first quarter
2017, as a result of a change in variation margin rules implemented by the Chicago Mercantile Exchange
("CME"), the central clearinghouse used by Farmer Mac, and confirmed by the U.S. Commodity Futures
Trading Commission ("CFTC"), the variation margin amounts exchanged between Farmer Mac and its
79
counterparties on cleared derivatives are considered as partial settlement of each respective derivatives
contract rather than collateral pledged by a counterparty. Therefore, Farmer Mac presents its cleared
derivatives portfolio net of variation margin payments on its consolidated balance sheets and recognizes
realized gains or losses as a result of these payments on its consolidated statements of operations. We
believe that the economic character of these transactions remains the same as they were before the CME
rule change. Even though these variation margin amounts are accounted for as realized gains or losses on
financial derivatives as a result of the CME rule change and related CFTC interpretation, this is not
expected to have a cumulative net impact on Farmer Mac's financial condition or results of operations
reported in accordance with GAAP because the related financial instruments are expected to be held to
maturity. Therefore, the effects of realized gains or losses resulting from the exchange of variation margin
on its cleared derivatives portfolio are excluded in the calculations of core earnings and core earnings per
share.
Core earnings and core earnings per share also differ from net income attributable to common
stockholders and earnings per common share, respectively, by excluding specified infrequent or unusual
transactions that we believe are not indicative of future operating results and that may not reflect the
trends and economic financial performance of Farmer Mac's core business. Accordingly, the one-time,
non-cash charge to income tax expense due to the re-measurement of the net deferred tax asset was
excluded from core earnings and core earnings per share. Farmer Mac re-measured its net deferred tax
asset at a lower federal corporate tax rate due to the enactment of new tax legislation on December 22,
2017. This charge is excluded from core earnings and core earnings per share because it is not a frequently
occurring transaction, is a non-cash charge, and is not indicative of future operating results. For a
reconciliation of Farmer Mac's net income attributable to common stockholders to core earnings and of
earnings per common share to core earnings per share, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations—Results of Operations."
Net Effective Spread
Farmer Mac uses net effective spread to measure the net spread Farmer Mac earns between its interest-
earning assets and the related net funding costs of these assets. Net effective spread differs from net
interest income and net interest yield because it excludes: (1) the amortization of premiums and discounts
on assets consolidated at fair value that are amortized as adjustments to yield in interest income over the
contractual or estimated remaining lives of the underlying assets; (2) interest income and interest expense
related to consolidated trusts with beneficial interests owned by third parties, which are presented on
Farmer Mac's consolidated balance sheets as "Loans held for investment in consolidated trusts, at
amortized cost"; and (3) beginning January 1, 2018, the fair value changes of financial derivatives and the
corresponding assets or liabilities designated in a fair value hedge relationship. Farmer Mac excludes
from net effective spread the premiums and discounts on assets consolidated at fair value because they
either do not reflect actual cash premiums paid for the assets at acquisition or are not expected to have an
economic effect on Farmer Mac's financial performance if the assets are held to maturity, as is expected.
Farmer Mac also excludes from net effective spread the interest income and interest expense associated
with the consolidated trusts and the average balance of the loans underlying these trusts to reflect
management's view that the net interest income Farmer Mac earns on the related Farmer Mac Guaranteed
Securities owned by third parties is effectively a guarantee fee. Accordingly, the excluded interest income
and interest expense associated with consolidated trusts is reclassified to guarantee and commitment fees
in determining Farmer Mac's core earnings.
80
Effective in first quarter 2018, Farmer Mac adopted ASU 2017-12, "Derivatives and Hedging (Topic 815):
Targeted Improvements to Accounting for Hedging Activities." Before first quarter 2018, gains and losses
on financial derivatives were included in "(Losses)/gains due to fair value changes" whether or not they
were designated in hedge relationships. Beginning in first quarter 2018, gains and losses on financial
derivatives in hedge relationships are included in either interest income or interest expense depending on
the corresponding hedged financial asset or liability, respectively. Farmer Mac excludes from net effective
spread those fair value changes of financial derivatives and the corresponding assets or liabilities
designated in fair value hedge relationships because they are not expected to have an economic effect on
Farmer Mac's financial performance if the financial derivatives and corresponding hedged items are held
to maturity, as is expected.
Net effective spread also principally differs from net interest income and net interest yield because it
includes the accrual of income and expense related to the contractual amounts due on financial derivatives
that are not designated in hedge relationships ("undesignated financial derivatives"). Farmer Mac uses
interest rate swaps to manage its interest rate risk exposure by synthetically modifying the interest rate
reset or maturity characteristics of certain assets and liabilities. The accrual of the contractual amounts
due on interest rate swaps designated in hedge relationships is included as an adjustment to the yield or
cost of the hedged item and is included in net interest income. For undesignated financial derivatives,
Farmer Mac records the income or expense related to the accrual of the contractual amounts due in
"(Losses)/gains on financial derivatives" on the consolidated statements of operations. However, the
accrual of the contractual amounts due for undesignated financial derivatives are included in Farmer Mac's
calculation of net effective spread.
Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread
to also include the net effects of terminations or net settlements on financial derivatives. The inclusion of
these items in net effective spread, along with the accrual of contractual amounts due for undesignated
financial derivatives described above, is intended to reflect management's view of the complete net spread
between an asset and all of its related funding, including any associated derivatives, whether or not they
are designated in a hedge accounting relationship. Specifically, these net effects of terminations or net
settlements on financial derivatives include:
1. The net effects of cash settlements on agency forward contracts on the debt of other GSEs.
These agency forward contracts are used as short-term economic hedges of the issuance of debt to
manage interest rate risk on loans that Farmer Mac has committed to acquire but has not yet
purchased. Farmer Mac records the realized gains or losses on settlements of agency forward
contracts used as short-term economic hedges of the issuance of debt in the consolidated
statements of operations in the period in which they occur. Under the revised methodology, for net
effective spread purposes, these realized gains or losses are deferred and amortized as net yield
adjustments over the term of the related debt, which generally ranges from 3 to 15 years.
Previously, for core earnings purposes, these amounts had been deferred and amortized and were
included within the "Other" item that is part of the "Revenues" component of core earnings.
2. The net effects of cash settlements on futures contracts involving U.S. Treasury securities.
Similar to the net effects of cash settlements on agency forward contracts, the net effects of cash
settlements on futures contracts involving U.S. Treasury securities are used as short-term economic
hedges of the issuance of debt and are reported in the consolidated statements of operations in the
period in which they occur. Under the revised methodology, for net effective spread purposes,
these realized gains or losses are deferred and amortized as net yield adjustments over the term of
the related debt, which generally ranges from 3 to 15 years. Previously, for core earnings
81
purposes, these realized gains and losses had been recognized in the period in which they occurred
within the "Other" item that is part of the "Revenues" component of core earnings.
3. The net effects of initial cash payments that Farmer Mac receives upon the inception of certain
swaps. When there is no direct payment arrangement between a swap dealer counterparty and a
debt dealer issuing Farmer Mac's medium-term notes for a particular transaction, Farmer Mac may
receive an initial cash payment from the swap dealer at the inception of the swap to offset dollar-
for-dollar the amount of the discount on the associated hedged debt. For GAAP purposes, changes
in fair value of these swaps are recognized in "Gains on financial derivatives," whereas the
offsetting discount on the associated hedged debt is amortized over the term of the debt as an
adjustment to its yield. This results in a timing difference between the recognition of "Gains on
financial derivatives" and the recognition of the discount in "Total interest expense." Also, the
initial cash payments included in "Gains on financial derivatives" had been excluded from net
effective spread, whereas the amortization of the discount included in interest expense had been a
component of net effective spread. The initial cash payments received by Farmer Mac vary
depending upon the number of the aforementioned type of swaps it executes during a quarter.
Under the revised methodology, for net effective spread purposes, these initial cash payments are
deferred and amortized as net yield adjustments over the term of the related debt, which generally
ranges from 3 to 15 years, and offset the amortization of the discount on the associated hedged
debt. Previously, for core earnings purposes, these initial cash payments had been recognized in
the period in which they were received within the “Other” item that is part of the "Revenues"
component of core earnings.
For a reconciliation of net interest income and net interest yield to net effective spread, see Table 6 in
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of
Operations—Net Interest Income."
Results of Operations
Farmer Mac's net income attributable to common stockholders for 2018 was $94.9 million ($8.83 per
diluted common share), compared to $71.3 million ($6.60 per diluted common share) for 2017, and $64.2
million ($5.97 per diluted common share) for 2016. Farmer Mac's non-GAAP core earnings for 2018
were $84.0 million ($7.82 per diluted common share), compared to $65.6 million ($6.08 per diluted
common share) for 2017 and $53.5 million ($4.98 per diluted common share) for 2016. For more
information about the changes in net income attributable to common stockholders and core earnings, see
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview—
Net Income and Core Earnings."
Reconciliations of Farmer Mac's net income attributable to common stockholders to core earnings and
core earnings per share are presented in the following tables along with information about the composition
of core earnings:
82
Table 1
Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings
Net income attributable to common stockholders
$
94,898
$
71,300
64,152
For the Year Ended December 31,
2018
2017
2016
(in thousands, except per share amounts)
Less reconciling items:
Gains on undesignated financial derivatives due to fair value changes (see Table 8)
Gains/(losses) on hedging activities due to fair value changes
Unrealized gains/(losses) on trading securities
Amortization of premiums/discounts and deferred gains on assets consolidated at fair
value
Net effects of terminations or net settlements on financial derivatives(1)
Re-measurement of net deferred tax asset due to enactment of new tax legislation
Income tax effect related to reconciling items
Sub-total
Core earnings
Composition of Core Earnings:
Revenues:
Net effective spread(2)
Guarantee and commitment fees(3)
Other(4)
Total revenues
Credit related expense (GAAP):
Provision for losses
REO operating expenses
Loss/(gain) on sale of REO
Total credit related expense
Operating expenses (GAAP):
Compensation and employee benefits
General and administrative
Regulatory fees
Total operating expenses
Net earnings
Income tax expense(5)
Net loss attributable to non-controlling interest (GAAP)
Preferred stock dividends (GAAP)
Core earnings
Core earnings per share:
Basic
Diluted
Weighted-average shares:
Basic
Diluted
83
7,959
4,449
81
(461)
1,708
—
(2,885)
10,851
10,218
(719)
(24)
(1,327)
2,674
(1,365)
(3,788)
5,669
$
84,047
$
65,631
$
$
151,195
$
141,303
20,733
520
172,448
335
16
7
358
27,534
19,707
2,562
49,803
122,287
25,058
—
13,182
20,350
935
162,588
1,758
23
(1,748)
33
24,233
15,959
2,500
42,692
119,863
41,215
(165)
13,182
$
$
84,047
$
65,631
$
7.89
$
7.82
6.20
$
6.08
10,654
10,746
10,594
10,803
8,585
5,043
1,460
(849)
2,178
—
(5,746)
10,671
53,481
123,072
19,170
2,070
144,312
1,002
39
(15)
1,026
22,772
15,109
2,463
40,344
102,942
36,313
(34)
13,182
53,481
5.10
4.98
10,477
10,746
(1)
Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread, which is a component of core earnings, to also
include the net effects of terminations or net settlements on financial derivatives. All prior period information has been recast to reflect the revised
methodology. For more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP
Measures—Net Effective Spread" and the information set forth below.
(2) Net effective spread is a non-GAAP measure. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of
Non-GAAP Measures—Net Effective Spread" for an explanation of net effective spread. See Table 6 for a reconciliation of net interest income to net
effective spread.
Includes interest income and interest expense related to consolidated trusts owned by third parties reclassified from net interest income to guarantee and
commitment fees to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee on the consolidated Farmer
Mac Guaranteed Securities.
(3)
(4) Reflects reconciling adjustments for the reclassification to exclude expenses related to interest rate swaps not designated as hedges and terminations or net
settlements on financial derivatives, and reconciling adjustments to exclude fair value adjustments on financial derivatives and trading assets and the
recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Securities.
Includes the tax impact of non-GAAP reconciling items between net income attributable to common stockholders and core earnings.
(5)
Table 2
Reconciliation of GAAP Basic Earnings Per Share to Core Earnings - Basic Earnings Per Share
GAAP - Basic EPS
Less reconciling items:
Gains on undesignated financial derivatives due to fair value changes (see Table 8)
Gains/(losses) on hedging activities due to fair value changes
Unrealized gains/(losses) on trading securities
Amortization of premiums/discounts and deferred gains on assets consolidated at fair
value
Net effects of terminations or net settlements on financial derivatives
Re-measurement of net deferred tax asset due to enactment of new tax legislation
Income tax effect related to reconciling items
Sub-total
Core Earnings - Basic EPS
For the Year Ended December 31,
2018
2017
2016
(in thousands, except per share amounts)
$
8.91
$
6.73
$
6.12
0.75
0.41
0.01
(0.04)
0.16
—
(0.27)
1.02
7.89
$
0.97
(0.07)
—
(0.13)
0.25
(0.13)
(0.36)
0.53
6.20
$
0.82
0.48
0.14
(0.08)
0.21
—
(0.55)
1.02
5.10
$
Shares used in per share calculation (GAAP and Core Earnings)
10,654
10,594
10,477
84
Reconciliation of GAAP Diluted Earnings Per Share to Core Earnings - Diluted Earnings Per Share
GAAP - Diluted EPS
Less reconciling items:
Gains on undesignated financial derivatives due to fair value changes (see Table 8)
Gains/(losses) on hedging activities due to fair value changes
Unrealized gains/(losses) on trading securities
Amortization of premiums/discounts and deferred gains on assets consolidated at fair
value
Net effects of terminations or net settlements on financial derivatives
Re-measurement of net deferred tax asset due to enactment of new tax legislation
Income tax effect related to reconciling items
Sub-total
Core Earnings - Diluted EPS
For the Year Ended December 31,
2018
2017
2016
(in thousands, except per share amounts)
$
8.83
$
6.60
$
5.97
0.74
0.41
0.01
(0.04)
0.16
—
(0.27)
1.01
7.82
$
0.94
(0.07)
—
(0.12)
0.25
(0.13)
(0.35)
0.52
6.08
$
0.80
0.46
0.14
(0.08)
0.20
—
(0.53)
0.99
4.98
$
Shares used in per share calculation (GAAP and Core Earnings)
10,746
10,803
10,746
The non-GAAP reconciling items between net income attributable to common stockholders and core
earnings are:
1. Gains/(losses) on financial derivatives due to fair value changes are presented by two reconciling items
in Table 1 above: (1) Gains on undesignated financial derivatives due to fair value changes; and (2) Gains/
(losses) on hedging activities due to fair value changes. The table below calculates the non-GAAP
reconciling item for gains/(losses) on hedging activities due to fair value changes:
Table 3
Non-GAAP Reconciling Items for Gains/(Losses) on Hedging Activities due to Fair Value Changes
Gains/(losses) due to fair value changes (see Table 6.2)
Initial cash payment received at inception of swap(1)
Gains/(losses) on hedging activities due to fair value changes
For the Year Ended December 31,
2018
2017
2016
(in thousands)
4,941
(492)
(719)
—
$
4,449
$
(719) $
5,043
—
5,043
(1) Relates to initial cash payments received at the inception of a swap designated in a fair value hedge. These initial cash payments were previously
recognized in "(Losses)/gains on financial derivatives" in the statement of operations. Upon adoption of ASU 2017-12, "Derivatives and Hedging (Topic
815): Targeted Improvements to Accounting for Hedging Activities," for financial derivatives designated in fair value hedge relationships, the changes in
the fair values of the derivative and the associated hedged item are recorded within net interest income. For core earnings purposes, these initial cash
payments are deferred and amortized as net yield adjustments over the term of the related debt.
2. Unrealized gains/(losses) on trading securities. The unrealized gains/(losses) on trading securities are
reported on Farmer Mac's consolidated statements of operations, which represent changes during the
period in fair values for trading assets remaining on Farmer Mac's balance sheet as of the end of the
reporting period.
3. Amortization of premiums/discounts and deferred gains on assets consolidated at fair value. The
amount of this non-GAAP reconciling item is the recorded amount of premium, discount, or deferred gain
85
amortization during the reporting period on those assets for which the premium, discount, or deferred gain
was based on the application of an accounting principle (e.g., consolidation of variable interest entities)
rather than on a cash transaction (e.g., a purchase price premium or discount).
4. The net effects of terminations or net settlements on financial derivatives. These terminations or net
settlements relate to:
• Forward contracts on the debt of other GSEs and futures contracts on U.S. Treasury securities.
These contracts are used as a short-term economic hedge of the issuance of debt. For GAAP
purposes, realized gains or losses on settlements of these contracts are reported in the consolidated
statements of operations in the period in which they occur. For core earnings purposes, these
realized gains or losses are deferred and amortized as net yield adjustments over the term of the
related debt, which generally ranges from 3 to 15 years.
•
Initial cash payments received by Farmer Mac upon the inception of certain swaps. When there is
no direct payment arrangement between a swap dealer counterparty and a debt dealer issuing
Farmer Mac's medium-term notes for a particular transaction, Farmer Mac may receive an initial
cash payment from the swap dealer at the inception of the swap to offset dollar-for-dollar the
amount of the discount on the associated hedged debt. For GAAP purposes, changes in fair value
of the swaps are recognized in "Gains on financial derivatives," while the economically offsetting
discount on the associated hedged debt is amortized over the term of the debt as an adjustment to
its yield. For core earnings purposes, these initial cash payments are deferred and amortized as net
yield adjustments over the term of the related debt, which generally ranges from 3 to 15 years.
5. Re-measurement of net deferred tax asset due to enactment of new tax legislation. This non-recurring,
non-cash charge to income tax expense in fourth quarter 2017 was the result of a re-measurement by
Farmer Mac of its net deferred tax asset at a lower federal corporate tax rate due to enactment of the Tax
Cuts and Jobs Act on December 22, 2017. This charge has been excluded from core earnings because it is
not the result of frequently occurring transactions, is not indicative of future operating results, and is a
non-cash charge. Farmer Mac re-measured its net deferred tax asset at the newly-enacted 21% corporate
tax rate which will be applied when temporary differences that gave rise to the net deferred tax asset will
be realized or settled.
The following sections provide more detail about specific components of Farmer Mac's results of
operations.
86
Net Interest Income. The following table provides information about interest-earning assets and funding
for the years ended December 31, 2018 and 2017. The average balance of non-accruing loans is included
in the average balance of loans, Farmer Mac Guaranteed Securities, and USDA Securities presented,
though the related income is accounted for on a cash basis. Therefore, as the average balance of non-
accruing loans and the income received increases or decreases, the net interest income and yield will
fluctuate accordingly. The average balance of loans in consolidated trusts with beneficial interests owned
by third parties is disclosed in the net effect of consolidated trusts and is not included in the average
balances of interest-earning assets and interest-bearing liabilities. The interest income and expense
associated with these trusts are shown in the net effect of consolidated trusts.
Table 4
December 31, 2018
For the Year Ended
December 31, 2017
December 31, 2016
Average
Balance
Income/
Expense
Average
Rate
Average
Balance
Income/
Expense
Average
Rate
Average
Balance
Income/
Expense
Average
Rate
(dollars in thousands)
Interest-earning assets:
Cash and investments
$ 2,723,136
$ 55,179
2.03% $ 2,703,306
$ 34,586
1.28% $ 3,572,018
$ 27,042
0.76%
Loans, Farmer Mac Guaranteed
Securities and USDA Securities(1)
13,917,222
434,585
Total interest-earning assets
16,640,358
489,764
Funding:
Notes payable due within one year
Notes payable due after one year(2)
3,412,019
62,447
12,501,093
259,638
3.12%
2.94%
1.83%
2.08%
12,763,456
320,932
15,466,762
355,518
2.51%
2.30%
11,058,332
252,406
14,630,350
279,448
2.28%
1.91%
5,148,548
49,318
9,683,124
154,789
0.96%
1.60%
7,304,519
37,648
6,882,357
105,828
0.52%
1.54%
Total interest-bearing
liabilities(3)
15,913,112
322,085
2.02%
14,831,672
204,107
1.38%
14,186,876
143,476
1.01%
Net non-interest-bearing funding
727,246
—
635,090
—
443,474
Total funding
16,640,358
322,085
1.94%
15,466,762
204,107
1.32%
14,630,350
143,476
0.98%
Net interest income/yield prior to
consolidation of certain trusts
16,640,358
167,679
Net effect of consolidated trusts(4)
1,443,394
6,757
1.01%
0.47%
15,466,762
151,411
1,251,048
6,236
0.98%
0.50%
14,630,350
135,972
905,005
4,302
Net interest income/yield
$ 18,083,752
$ 174,436
0.96% $ 16,717,810
$ 157,647
0.94% $15,535,355
$140,274
0.93%
0.48%
0.90%
(1)
(2)
(3)
(4)
Excludes interest income of $54.5 million, $45.0 million, and $32.5 million in 2018, 2017, and 2016, respectively, related to consolidated trusts with
beneficial interests owned by third parties.
Includes current portion of long-term notes.
Excludes interest expense of $47.8 million, $38.8 million, and $28.2 million in 2018, 2017, and 2016, 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 $16.8 million increase in net interest income for 2018 compared to 2017 was driven by net growth in
on-balance sheet AgVantage securities, Farm & Ranch loans, and USDA Securities, which contributed to a
$10.1 million increase in net interest income. Another factor contributing to the increase were the fair
value changes on financial derivatives and corresponding financial assets and liabilities in fair value hedge
relationships, which contributed $4.9 million in net interest income during 2018. Also contributing to the
year-over-year increase in net interest income was an increase in the amount of cash basis interest income
recognized on non-accrual Farm & Ranch loans, which contributed $1.5 million in net interest income
during 2018. The increase was offset in part by the $2.0 million negative impact of the Interest-Only
Amortization during 2018. The 2 basis point year-over-year increase in net interest yield was primarily
driven by an increase in the aforementioned fair value changes on financial derivatives and corresponding
financial assets and liabilities in fair value hedge relationships, offset in part by the impact of the Interest-
Only Amortization.
87
The $17.3 million increase in net interest income for 2017 compared to 2016 was driven by net growth in
Farm & Ranch loans, on-balance sheet AgVantage securities, and USDA Securities. Another factor
contributing to the increase was the effect of an increase in short-term interest rates on assets and
liabilities indexed to LIBOR due to the Federal Reserve's decisions since December 2016 to raise the
target range for the federal funds rate. This effect on net interest income occurred because interest
expense used to calculate net interest income does not include all the funding expenses related to these
assets, specifically the expense on financial derivatives not designated in hedge accounting relationships.
This increase in short-term rates on assets and liabilities indexed to LIBOR did not have a similar effect on
net effective spread because net effective spread includes interest expense from all funding related to those
assets, including interest expense from financial derivatives not designated in hedge accounting
relationships. Also contributing to the year-over-year increase was an increase in the net effect of
consolidated trusts resulting from an increase in securitization of Farm & Ranch loans throughout 2016
and 2017. Farmer Mac earns the difference between the interest income recognized on loans in
consolidated trusts and the related interest expense recognized on debt securities of consolidated trusts
held by third parties. The increase in net interest income was offset in part by an increase in net yield
adjustments related to amortization of premiums and discounts on assets consolidated at fair value. The 4
basis point increase in net interest yield in 2017 compared to 2016 was primarily due to a reduction in the
average balance of lower-earning cash and cash equivalents and investment securities.
The following table sets forth information about changes in the components of Farmer Mac's net interest
income prior to consolidation of certain trusts for the periods indicated. For each category, information is
provided on changes attributable to changes in volume (change in volume multiplied by old rate) and
changes in rate (change in rate multiplied by old volume). Combined rate/volume variances, the third
element of the calculation, are allocated based on their relative size.
Table 5
Income from interest-earning assets:
Cash and investments
2018 vs. 2017
2017 vs. 2016
Increase/(Decrease) Due to
Increase/(Decrease) Due to
Rate
Volume
Total
Rate
Volume
Total
(in thousands)
$ 20,338
$
255
$ 20,593
$ 15,303
$ (7,759) $ 7,544
Loans, Farmer Mac Guaranteed Securities and USDA Securities
82,733
30,920
113,653
Total
Expense from other interest-bearing liabilities
103,071
102,156
31,175
134,246
15,822
117,978
27,222
42,525
53,847
41,304
33,545
6,784
68,526
76,070
60,631
Change in net interest income prior to consolidation of certain trusts(1) $
915
$ 15,353
$ 16,268
$(11,322) $ 26,761
$ 15,439
(1)
Excludes the effect of debt in consolidated trusts with beneficial interests owned by third parties.
The following table presents a reconciliation of net interest income and net interest yield to net effective
spread. Net effective spread is measured by: including (1) expenses related to undesignated financial
derivatives, which consists of income or expense related to contractual amounts due on financial
derivatives not designated in hedge relationships (the income or expense related to financial derivatives
designated in hedge relationships is already included in net interest income), and (2) the amortization of
losses due to terminations or net settlements of financial derivatives; and excluding (3) the amortization of
premiums and discounts on assets consolidated at fair value, (4) the net effects of consolidated trusts with
beneficial interests owned by third parties, and (5) beginning in first quarter of 2018, the fair value
changes of financial derivatives and corresponding financial assets or liabilities in fair value hedge
88
relationships. See "Management's Discussion and Analysis of Financial Condition and Results of
Operations—Use of Non-GAAP Measures—Net Effective Spread" for more information about the
explanation of net effective spread.
Table 6
For the Year Ended December 31,
2018
2017
2016
Dollars
Yield
Dollars
Yield
Dollars
Yield
Net interest income/yield
Net effects of consolidated trusts
Expense related to undesignated financial derivatives
Amortization of premiums/discounts on assets
consolidated at fair value
Amortization of losses due to terminations or net
settlements on financial derivatives
$ 174,436
0.96 % $ 157,647
0.94 % $ 140,274
(dollars in thousands)
(6,757)
(11,685)
0.04 %
(0.07)%
(6,236)
(10,261)
0.04 %
(0.07)%
(4,302)
(11,480)
(0.07)%
0.90 %
0.03 %
417
0.01 %
1,191
0.01 %
610
— %
(275)
— %
(1,038)
(0.01)%
(2,030)
(0.02)%
Fair value changes on fair value hedge relationships
(4,941)
(0.03)%
—
— %
—
Net effective spread
$ 151,195
0.91 % $ 141,303
0.91 % $ 123,072
— %
0.84 %
For 2018 compared to 2017, the $9.9 million increase in net effective spread in dollars was primarily due
to: (1) growth in outstanding business volume, which increased net effective spread by approximately
$10.1 million; and (2) a $1.5 million increase in the amount of cash basis interest income recognized on
nonaccrual Farm & Ranch loans. The increase was offset in part by the $2.0 million impact of the
Interest-Only Amortization. In percentage terms, net effective spread remained at 0.91% in both 2018 and
2017 primarily because the positive impact of the cash basis interest income was offset by the negative
impact of the Interest-Only Amortization.
For 2017 compared to 2016, the $18.2 million increase in net effective spread in dollars was primarily
attributable to: (1) growth in on-balance sheet AgVantage securities, Farm & Ranch loans, and other
business volume, which increased net effective spread by approximately $15.1 million in 2017; and
(2) changes in Farmer Mac's funding strategies and improvements in LIBOR-based short-term funding
costs for floating rate assets indexed to LIBOR, which added approximately $4.0 million in 2017. Net
effective spread in percentage terms increased 7 basis points in 2017 compared to 2016 primarily due to
the decrease in the average balance of lower-earning cash and cash equivalents and investment securities,
which added approximately 5 basis points to net effective spread. Also contributing to the increase were
the effects of changes in Farmer Mac's funding strategy and a favorable LIBOR-based funding market,
which added approximately 3 basis points in 2017.
See Note 14 to the consolidated financial statements for more information about net interest income and
net effective spread from Farmer Mac's individual business segments. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations—Supplemental Information" for quarterly net
effective spread by line of business.
89
Provision for and Release of Allowance for Loan Losses and Reserve for Losses. The following table
summarizes the components of Farmer Mac's total allowance for losses for each year in the three-year
period ended December 31, 2018:
Table 7
Balance as of January 1, 2016
Provision for/(release of) losses
Charge-offs
Balance as of December 31, 2016
Provision for losses
Charge-offs
Balance as of December 31, 2017
Provision for losses
Charge-offs
Balance as of December 31, 2018
Allowance
for Loan
Losses
Reserve
for Losses
(in thousands)
Total
Allowance
for Losses
$
$
$
$
4,480
$
2,083
$
1,065
(130)
(63)
—
5,415
$
2,020
1,708
(327)
50
—
6,796
$
2,070
238
(17)
97
—
$
$
$
6,563
1,002
(130)
7,435
1,758
(327)
8,866
335
(17)
7,017
$
2,167
$
9,184
The total provision for losses recorded during 2018 decreased by $1.4 million compared to 2017 primarily
due to decreased year-over-year loan growth and modestly improved credit quality in the Farm & Ranch
portfolio.
The provision for the allowance for loan losses recorded during 2017 was due to: (1) an increase in the
general allowance due to overall net volume growth in on-balance sheet Farm & Ranch loans; and (2) an
increase in the specific allowance for certain impaired on-balance sheet crop and permanent planting loans
resulting from both an increase in the outstanding balance of such loans and downgrades in risk ratings on
some of those loans. The increase in the provision was offset in part by a modest decline in loss rates used
to estimate probable losses. The provision for the reserve for losses recorded during 2017 was primarily
due to an increase in the general reserve due to downgrades in risk ratings on certain unimpaired
Agricultural Storage and Processing loans underlying LTSPCs. The increase in the general reserve for
losses was offset in part by a net decrease in the balance of loans underlying LTSPCs and off-balance
sheet Farmer Mac Guaranteed Securities. The charge-offs recorded during 2017 were primarily related to
two impaired crop loans (with one borrower) that were foreclosed and transitioned to REO during first
quarter 2017. Farmer Mac had previously recorded a specific allowance of $0.2 million on these impaired
crop loans as of December 31, 2016. During second quarter 2017, Farmer Mac sold the related properties
for $5.4 million and recognized a $0.8 million gain on sale of REO.
The provisions to the allowance for loan losses recorded during 2016 were due to (1) an increase in the
general allowance due to overall net volume growth in on-balance sheet Farm & Ranch loans;
(2) downgrades in risk ratings for certain loans; and (3) an increase in the specific allowance for on-
balance sheet impaired loans resulting from an increase in the outstanding balance of such loans. The
releases from the reserve for losses recognized during 2016 were primarily due to the release of a specific
reserve on an impaired livestock loan underlying an LTSPC that was required to be removed from the
LTSPC pool by the originator during third quarter 2016, offset in part by provisions to the reserve for
losses due to an increase in the general reserve due to downgrades in risk rating on certain loans
underlying LTSPCs.
90
See Note 8 to the consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and
Guarantees."
Guarantee and Commitment Fees. Guarantee and commitment fees, which compensate Farmer Mac for
assuming the credit risk on loans underlying off-balance sheet Farmer Mac Guaranteed Securities and
LTSPCs, were $14.0 million for 2018, compared to $14.1 million and $14.9 million for 2017 and 2016,
respectively.
Guarantee and commitment fees, for the purpose of core earnings, include interest income and interest
expense related to consolidated trusts owned by third parties to reflect management's view that the net
interest income Farmer Mac earns is effectively a guarantee fee on the consolidated Farmer Mac
Guaranteed Securities. For 2018, guarantee and commitment fees, for the purpose of core earnings, were
$20.7 million compared to $20.4 million and $19.2 million for 2017 and 2016, respectively.
For more information about net income attributable to common stockholders, the composition of core
earnings, and a reconciliation of net income attributable to common stockholders to core earnings, see
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of
Operations." For more information about the non-GAAP measures Farmer Mac uses, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP
Measures."
Gains/(losses) on financial derivatives. The components of gains and losses on financial derivatives for
the years ended December 31, 2018, 2017, and 2016 are summarized in the following table:
Table 8
Fair value hedges:
(Losses)/gains due to fair value changes:
Financial derivatives(2)
Hedged items
(Losses)/gains on fair value hedging activities
Cash flow hedges:
Loss recognized (ineffective portion)
Losses on cash flow hedges
No hedge designation:
(Losses)/gains due to fair value changes
Accrual of contractual payments
Gains/(losses) due to terminations or net settlements
(Losses)/gains on financial derivatives not designated in hedging relationships
For the Year Ended December 31,
2018(1)
2017
2016
(in thousands)
$
— $
1,694
$
—
—
—
—
7,958
(11,685)
40
(3,687)
(2,413)
(719)
(320)
(320)
10,218
(9,941)
1,515
1,792
25,365
(20,322)
5,043
(353)
(353)
8,585
(11,127)
163
(2,379)
2,311
(Losses)/gains on financial derivatives
$
(3,687) $
753
$
(1)
Effective in first quarter 2018, Farmer Mac adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for
Hedging Activities." For financial derivatives designated in fair value hedge relationships, changes in the fair values of the derivative and the associated
hedged item are recorded within net interest income. For financial derivatives designated in cash flow hedge relationships, changes in the fair values of
the derivative and the associated hedged item are recorded within accumulated other comprehensive income and reclassified to net interest income when
the hedged item impacts earnings.
91
(2)
Included in the assessment of hedge effectiveness as of December 31, 2017, but excluded from the amounts in the table, were gains of $0.1 million for the
year ended December 31, 2017, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amounts
recognized as hedge ineffectiveness for the year ended December 31, 2017 were gains of $0.6 million. The comparable amounts as of December 31, 2016
were losses of $5.2 million for the year ended December 31, 2016, attributable to the fair value of the swaps at the inception of the hedging relationship
and, accordingly, gains of $0.2 million for the year ended December 31, 2016, attributable to hedge ineffectiveness.
The adoption of the new hedge accounting guidance ASU 2017-12, "Derivatives and Hedging (Topic
815): Targeted Improvements to Accounting for Hedging Activities," effective first quarter 2018, impacted
the presentation in Table 8 above. Beginning in first quarter 2018, gains and losses due to fair value
changes on financial derivatives designated in fair value hedge accounting relationships are included in
either interest income or interest expense depending on the corresponding hedged financial asset or
liability, respectively. For cash flow hedges, both the effective and ineffective portions of the changes in
the fair values of the derivative instruments are recorded in accumulated other comprehensive income
(AOCI) and reclassified to net interest income when the hedged item impacts earnings. Thus, for 2018, the
table above only presents changes in the fair values of Farmer Mac's open financial derivative positions
that are not designated in hedge accounting relationships. Before 2018, gains and losses on financial
derivatives were included in "(Losses)/gains due to fair value changes" whether or not they were
designated in hedge accounting relationships. Thus, for 2017 and 2016, the table above presents gains and
losses on all financial derivatives in "(Losses)/gains due to fair value changes." These changes in fair
value are primarily the result of fluctuations in long-term interest rates. The accrual of periodic cash
settlements for interest paid or received from Farmer Mac's interest rate swaps that are not designated in
hedge accounting relationships is shown as expense related to financial derivatives. Payments or receipts
to terminate derivative positions or net cash settled forward sales contracts on the debt of other GSEs and
U.S. Treasury futures that are not designated in hedge accounting relationships and initial cash payments
received upon the inception of certain swaps not designated in hedge accounting relationships are included
in "Gains/(losses) due to terminations or net settlements" in the table above. For swaps not designated in a
hedge accounting relationship, when there is no direct payment arrangement between a swap dealer
counterparty and a debt dealer issuing Farmer Mac's medium-term notes for a particular transaction,
Farmer Mac may receive an initial cash payment from the swap dealer at the inception of the swap to
offset dollar-for-dollar the amount of the discount on the associated hedged debt. Changes in the fair
value of these swaps are recognized immediately in "Gains/(losses) on financial derivatives," while the
offsetting discount on the hedged debt is amortized over the term of the debt as an adjustment to its yield.
The amounts of initial cash payments received by Farmer Mac vary depending on the number of the
aforementioned type of swaps it executes during a quarter.
(Losses)/gains on Sale of Real Estate Owned (REO). During 2018, Farmer Mac realized net losses of
$7,000 on the sales of REO properties, compared to net gains of $1.7 million and $15,000 for 2017 and
2016, respectively.
Gains/(losses) on Trading Securities. During 2018, Farmer Mac recorded $81,000 of unrealized gains on
trading securities, compared to unrealized losses of $24,000 during 2017 and unrealized gains of $1.5
million during 2016. During 2018 and 2017, all of the unrealized gains and losses, respectively, were
related to financial assets that had been selected to be carried at fair value with the related changes in fair
value included in earnings (i.e., the "fair value option"), compared to recorded losses of $0.3 million under
the fair value option for 2016.
Other Income. Other income totaled $1.4 million during 2018, compared to $0.8 million and $1.8 million
during 2017 and 2016, respectively. The increase in other income for 2018 compared to 2017 was
primarily due to the collection of $1.3 million and $0.5 million, respectively, in late fees received on Farm
& Ranch loans. The increase was offset in part by the absence in 2018 of the recognition of $0.4 million
92
of appraisal fees received by Farmer Mac's former consolidated appraisal company subsidiary, AgVisory,
that occurred in 2017. As of May 1, 2017, Farmer Mac transferred its entire 65% ownership interest in
AgVisory back to the limited liability company. Farmer Mac recognized a loss of approximately $0.1
million upon the transfer.
Compensation and Employee Benefits. Compensation and employee benefits were $27.5 million in 2018,
compared to $24.2 million and $22.8 million, respectively, in 2017 and 2016. The increase in
compensation and employee benefits in 2018 compared to 2017 was due to an increase in headcount and
related employee health insurance costs and higher payouts of variable incentive compensation resulting
from actual performance exceeding certain performance target amounts during 2017, which was paid in
2018. Another significant factor contributing to the increase in compensation expense in 2018 compared
to 2017 was the absence in 2018 of the recoupment of approximately $1.3 million in compensation costs
related to the forfeiture of unvested equity awards and annual variable incentive compensation resulting
from the termination of employment of Farmer Mac's former President and Chief Executive Officer in
December 2017. The increase in compensation and employee benefits in 2017 compared to 2016 was
primarily due to an increase in headcount and related employee health insurance costs and higher payouts
of variable incentive compensation resulting from actual performance exceeding certain performance
targets during 2016, which was paid in 2017.
General and Administrative Expenses. G&A expenses were $19.7 million for 2018, compared to $16.0
million and $15.1 million for 2017 and 2016, respectively. The increase in G&A expenses for 2018
compared to 2017 was primarily due to higher expenses related to: (1) continued technology and business
infrastructure investments; (2) an increase in headcount and the search process for Farmer Mac's current
President and Chief Executive Officer; and (3) new leases for office space entered into during 2017. The
increase for 2017 compared to 2016 was primarily due to higher expenses related to (1) continued
technology and business infrastructure investments; (2) legal fees related to general corporate matters,
including fees related to the termination of employment of Farmer Mac's former President and Chief
Executive Officer in December 2017; (3) building lease expenses due to new leases for office space
entered into during 2017; and (4) expenses related to business development efforts.
Regulatory Fees. Regulatory fees, which consist of the fees paid to the Farm Credit Administration
("FCA"), an independent agency in the executive branch of the United States government that regulates
Farmer Mac, were $2.6 million for 2018, compared to $2.5 million for both 2017 and 2016, respectively.
FCA has advised Farmer Mac that its estimated fees for the federal government fiscal year ending
September 30, 2019 would increase to $2.75 million ($0.688 million per federal government fiscal
quarter). After the end of a federal government fiscal year, FCA may revise its prior year estimated
assessments to reflect actual costs incurred, and has issued both additional assessments and refunds in the
past.
Income Tax Expense. Income tax expense was $27.9 million for 2018, compared to $46.4 million and
$42.1 million for 2017 and 2016, respectively. The decrease in income tax expense for 2018 compared to
2017 was primarily due to a lower effective federal corporate tax rate under the Tax Cuts and Jobs Act
enacted in December 2017. The effective federal tax rate for the year ended December 31, 2018 was
slightly lower than the statutory federal corporate tax rate due to the effect of exercises of share-based
compensation awards during 2018.
The increase in income tax expense in 2017 compared to 2016 was primarily due to higher pre-tax
income. Also contributing to the increase was a $1.4 million charge to income tax expense as a result of
93
the re-measurement of Farmer Mac's net deferred tax asset due to the enactment of the Tax Cuts and Jobs
Act. Income tax expense for 2017 also reflected $0.9 million of tax benefits associated with stock-based
compensation activity. The excess of Farmer Mac's effective income tax rate above the statutory rate in
2017 was primarily due to the non-recurring, non-cash charge related to the enactment of the Tax Cuts and
Jobs Act, which was offset in part by the tax benefits associated with stock-based compensation activity.
Business Volume. During 2018, we added $5.2 billion of gross new business volume, compared to $4.7
billion in 2017 and $4.4 billion in 2016. Specifically, in 2018 we:
• purchased $3.0 billion of AgVantage securities;
•
renewed a $300.0 million revolving floating rate AgVantage facility;
• purchased $960.8 million of newly originated Farm & Ranch loans;
•
• purchased $332.3 million of USDA Securities;
•
• purchased $11.6 million of Rural Utilities loans.
added $430.1 million of Farm & Ranch loans under LTSPCs;
issued $127.9 million of Farmer Mac Guaranteed USDA Securities; and
We achieved net growth of $477.9 million in our Institutional Credit line of business during 2018, as $3.3
billion of new business volume was offset in part by $2.8 billion of maturities and repayments. The new
business consisted of: (1) $800.0 million of new AgVantage securities purchased; (2) $2.2 billion in
refinances of maturing AgVantage securities; and (3) the renewal of a $300.0 million revolving floating
rate AgVantage facility. The maturities and repayments consisted of $2.5 billion of repayments on and
maturities of AgVantage securities and the expiration of the $300.0 million revolving floating rate
AgVantage facility that was renewed during fourth quarter.
Our Farm & Ranch line of business experienced net growth of $366.4 million during 2018 attributable to
$960.8 million of new loans purchased and $430.1 million of new LTSPCs, offset in part by loan
repayments of $571.1 million and LTSPC repayments of $453.4 million. Net growth in loan purchases
decreased by $294.7 million during 2018 compared to 2017. This decrease in growth was primarily due to
fewer opportunities to purchase large loans in amounts greater than $15.0 million compared to 2017. We
believe that this could be due to fewer eligible borrowers that are able to secure financing of that size, as
well as potentially increased pricing competition for the highest credit quality borrowers of these larger
loans. Also, increases in interest rates have reduced the demand for refinances in 2018 compared to 2017.
Based on our analysis of bank and FCS call report data, there was a decline in the growth of the overall
agricultural mortgage market in 2018. Nevertheless, we believe that our relative share of the overall
agricultural mortgage market during 2018 remained consistent with prior years and that our net growth of
9.3% in Farm & Ranch loan purchases compared favorably to the 4.9% net growth of the overall
agricultural mortgage loan market based on a review of bank and FCS call report data as of September 30,
2018. Net growth in LTSPCs decreased by $67.2 million during 2018 compared to 2017 primarily due to
the absence in 2018 of some customers that added large pools of loans under LTSPCs to restructure their
credit risk profile, which occurred in 2017.
Our USDA Guarantees line of business experienced net growth of $163.4 million during 2018, as $460.1
million of new business volume was offset in part by $296.7 million of maturities and repayments. The
new business consisted of $332.3 million of new USDA Securities purchased and the issuance of $127.9
million of Farmer Mac Guaranteed USDA Securities. The repayments and maturities consisted of $282.3
million on USDA Securities and $14.3 million on USDA Securities underlying Farmer Mac Guaranteed
USDA Securities. The decrease in purchases and net growth in the USDA Guarantees line of business
94
reflects increased competition, fewer refinances due to higher interest rates, and potentially lower loan
volume being processed through USDA. However, we do not believe that this indicates a decrease in
borrower demand for USDA agricultural loans.
Outstanding business volume in our Rural Utilities line of business decreased by $290.5 million during
2018, primarily due to repayments on loans held and loans underlying LTSPCs. Capital expenditures have
declined in the rural utilities industry, which we believe has decreased the overall demand for credit.
On February 19, 2019, we purchased a $546 million portfolio of participations in seasoned Rural Utilities
loans from CoBank under a master loan participation agreement entered into on February 13, 2019.
CoBank is a related party to Farmer Mac because of its stock ownership in Farmer Mac. For more
information, see the Current Report on Form 8-K that we filed with the SEC on February 20, 2019.
For more information about potential growth opportunities in Farmer Mac's lines of business, see
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Outlook" in
this report.
The following table sets forth gross purchase volumes of non-delinquent eligible loans, new loans added
under LTSPCs, and new guarantees during the periods indicated in the Farm & Ranch, USDA Guarantees,
and Rural Utilities lines of business, as well as purchases of AgVantage securities in the Institutional
Credit line of business. The table also sets forth the net growth or decrease under Farmer Mac's lines of
business, after maturities, principal paydowns, and sales:
Table 9
New Business Volume – Farmer Mac Loan Purchases, Guarantees, LTSPCs, and AgVantage Securities
Farm & Ranch:
Loans
LTSPCs
USDA Guarantees:
USDA Securities
Farmer Mac Guaranteed USDA Securities
Rural Utilities:
Loans
LTSPCs
Institutional Credit:
AgVantage securities
For the Year Ended December 31,
2018
2017
2016
Gross volume
Net growth/
(decrease)
Gross
Volume
Net growth/
(decrease)
Gross
Volume
Net growth/
(decrease)
(in thousands)
$
960,848
$ 389,589
$ 1,129,545
$ 684,279
$
966,023
$
556,479
430,071
(23,204)
554,743
44,003
399,095
(142,474)
332,270
127,851
52,537
110,870
369,759
161,925
113,217
144,622
375,203
106,054
78,349
97,749
11,645
(137,448)
137,341
—
(153,069)
—
76,779
(72,256)
50,491
441,404
(8,614)
355,734
3,010,307
477,939
2,383,912
617,192
2,098,852
563,432
AgVantage revolving line of credit facility
300,000
—
—
—
—
—
Total purchases, guarantees, LTSPCs, and
AgVantage securities
$ 5,172,992
$ 717,214
$ 4,737,225
$ 1,607,836
$ 4,437,122
$ 1,500,655
Within the Institutional Credit line of business, we experienced net new growth in AgVantage business
volume with our large counterparties of $270.3 million in the rural utilities industry and $75.0 million in
the agricultural industry. We also grew our AgVantage business with smaller financial fund counterparties
by a net $133.0 million. We committed to a new $300.0 million revolving floating rate AgVantage facility
95
with CFC to replace a similar facility that expired during third quarter 2018. We receive a fixed fee based
on the full dollar amount of this facility. If CFC draws on this facility, the amounts drawn will be in the
form of on-balance sheet AgVantage securities, and we will earn interest income on those securities.
The decrease in gross new business volume of loans purchased within the Farm & Ranch line of business
in 2018 compared to 2017 was primarily due to there being far fewer opportunities to purchase large loans
over $15.0 million. During 2017, we purchased eight large loans totaling $210.0 million, compared to the
purchase of only three large loans totaling $87.5 million during 2018. While gross Farm & Ranch loan
purchases were down during 2018, prepayments on Farm & Ranch loans during that time period also
decreased. Net outstanding Farm & Ranch loan volume grew 5.3% year-over-year, which compares to
year-over-year overall agricultural mortgage market growth of 4.9% based on a review of the most recent
bank and FCS call report data as of September 30, 2018. The decrease in Farmer Mac's prepayment rate
was primarily attributable to a steadily rising interest rate environment. During 2018, our prepayment rate
remained below our historical averages.
During 2018, we purchased 2,171 Farm & Ranch term loans and revolving line of credit draws. These
purchases consisted of 910 term loans with an average unpaid principal balance of $910,000 and 1,261
revolving line of credit draws with an average unpaid principal balance of $127,000. Last year, we
purchased 2,129 Farm & Ranch term loans and revolving line of credit draws. These purchases consisted
of 1,037 term loans with an average unpaid principal balance of $979,000 and 1,092 revolving line of
credit draws with an average unpaid principal balance of $107,000.
The moderate decrease in new business volume in the USDA Guarantees line of business in 2018
compared to 2017 reflected an increase in competition for these loans, fewer refinances due to a higher
interest rate environment, and lower loan volume being processed through USDA. However, we do not
believe that this indicates a decline in borrower demand for USDA agricultural loans.
Farmer Mac either retains the loans it purchases or securitizes them and retains or sells Farmer Mac
Guaranteed Securities backed by those loans. The weighted-average age of the Farm & Ranch non-
delinquent eligible loans purchased and retained (excluding the purchases of defaulted loans) during both
2018 and 2017 was less than one year. Of those loans, 59% and 66% had principal amortization periods
longer than the maturity date, resulting in balloon payments at maturity, with a weighted-average
remaining term to maturity of 18.5 years and 17.9 years, respectively.
During 2018, 2017, and 2016, Farmer Mac securitized some of the Farm & Ranch loans it had purchased
and sold the resulting Farmer Mac Guaranteed Securities, as shown below. Farmer Mac consolidates
these loans and presents them as "Loans held for investment in consolidated trusts, at amortized cost" on
the consolidated balance sheets. In 2018, 2017, and 2016, $68.7 million, $128.9 million, and $273.6
million, respectively, of Farmer Mac Guaranteed Securities were sold to Zions First National Bank, which
is a related party to Farmer Mac.
The following table sets forth information about the Farmer Mac Guaranteed Securities issued during the
periods indicated:
96
Table 10
For the Year Ended December 31,
2018
2017
2016
(in thousands)
Loans securitized and sold as Farm & Ranch Guaranteed Securities
$
255,078
$
363,475
$
Farmer Mac Guaranteed USDA Securities
AgVantage securities
127,851
161,925
3,010,307
2,383,912
2,098,852
511,393
106,054
Total Farmer Mac Guaranteed Securities issuances
$
3,393,236
$
2,909,312
$
2,716,299
The following table sets forth information about outstanding volume in each of Farmer Mac's four lines of
business as of the dates indicated:
Table 11
Lines of Business - Outstanding Business Volume
Farm & Ranch:
Loans
Loans held in trusts:
Beneficial interests owned by third party investors
LTSPCs(1)
Guaranteed Securities(1)
USDA Guarantees:
USDA Securities
Farmer Mac Guaranteed USDA Securities
Rural Utilities:
Loans
LTSPCs(2)
Institutional Credit
AgVantage Securities
Revolving floating rate AgVantage facility(3)
Total
As of December 31,
2018
2017
2016
(in thousands)
$
3,071,222
$
2,798,906
$
2,381,488
1,517,101
2,509,787
135,862
2,120,553
395,067
938,843
653,272
8,082,817
300,000
1,399,827
2,335,342
333,511
2,068,017
284,197
1,076,291
806,342
7,604,878
300,000
1,132,966
2,209,409
415,441
1,954,800
139,575
999,512
878,598
6,987,686
300,000
$
19,724,524
$
19,007,311
$
17,399,475
(1) During fourth quarter 2018, Farmer Mac repurchased the 100% participation interests in loans underlying a pool of $134.1 million in Farm & Ranch
Guaranteed Securities at par, thereby redeeming the corresponding Farm & Ranch Guaranteed Securities from their sole security holder. Farmer Mac
repurchased these participation interests at the request of the sole security holder in exchange for the termination of the participation interests and the
reconveyance of all beneficial interest in the loans to the sole security holder that owned the loans in which the participation interests had been issued. The
resulting pool of Farm & Ranch loans was concurrently added under LTSPCs. The commitment fee Farmer Mac receives on these loans added under
LTSPCs is the same as the guarantee fee Farmer Mac had been earning on the Farm & Ranch Guaranteed Securities.
(2) As of December 31, 2018, 2017, and 2016, includes $17.0 million, $20.0 million, and $20.0 million, respectively, related to one-year loan purchase
commitments on which Farmer Mac receives a nominal unused commitment fee.
(3) During both 2018 and 2017, $100.0 million of this facility was drawn and later repaid. During 2016, this facility was not used. Farmer Mac receives a
fixed fee based on the full dollar amount of the facility. If the counterparty draws on the facility, the amounts drawn will be in the form of AgVantage
securities, and Farmer Mac will earn interest income on those securities.
97
The following table summarizes by maturity date the scheduled principal amortization of loans held, loans
underlying off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities) and
LTSPCs, USDA Securities, and Farmer Mac Guaranteed USDA Securities as of December 31, 2018:
Table 12
2019
2020
2021
2022
2023
Thereafter
Total
Schedule of Principal Amortization as of December 31, 2018
Loans
Underlying
Off-Balance
Sheet Farmer
Mac
Guaranteed
Securities and
LTSPCs
Loans Held
USDA Securities
and Farmer Mac
Guaranteed
USDA Securities
Total
(in thousands)
$
233,439
$
253,395
$
114,524
$
601,358
245,859
258,436
221,169
231,829
241,383
269,652
210,230
197,099
112,040
112,309
115,990
119,612
599,282
640,397
547,389
548,540
4,336,434
2,127,162
1,941,145
8,404,741
$
5,527,166
$
3,298,921
$
2,515,620
$ 11,341,707
Of the $19.7 billion outstanding principal balance of volume included in Farmer Mac's four lines of
business as of December 31, 2018, $8.4 billion were AgVantage securities included in the Institutional
Credit line of business. Unlike business volume in the form of purchased loans, USDA Securities, and
loans underlying LTSPCs and non-AgVantage Farmer Mac Guaranteed Securities, most AgVantage
securities do not require periodic payments of principal based on amortization schedules and instead have
fixed maturity dates when the secured general obligation is due. The following table summarizes by
maturity date the outstanding principal amount of both on- and off-balance sheet AgVantage securities as
of December 31, 2018:
Table 13
2019
2020
2021
2022
2023
Thereafter(1)(2)
Total
AgVantage Balances by Year of Maturity
As of
December 31, 2018
(in thousands)
$
$
1,436,529
1,327,682
1,535,572
1,009,278
902,222
2,171,534
8,382,817
(1)
(2)
Includes the expiration of the $300.0 million revolving floating rate AgVantage facility.
Includes various maturities ranging from 2024 to 2044.
The weighted-average remaining maturity of the outstanding AgVantage securities shown in the table
above was 4.9 years as of December 31, 2018.
98
As part of fulfilling its guarantee obligations for Farm & Ranch Guaranteed Securities and commitments
to purchase eligible loans underlying LTSPCs, Farmer Mac purchases defaulted loans (all of which are at
least 90 days delinquent or in material non-monetary default at the time of purchase) out of the loan pools
underlying those securities and LTSPCs and records the purchased loans as such on its balance sheet. The
purchase price for a defaulted loan purchased out of a pool of loans backing Farm & Ranch Guaranteed
Securities is the then-current outstanding principal balance of the loan plus accrued and unpaid
interest. The purchase price for a defaulted loan purchased under an LTSPC is the then-current
outstanding principal balance of the loan, with accrued and unpaid interest on the defaulted loan. The
purchase price of a defaulted loan is not an indicator of the expected loss on that loan; many other factors
affect expected loss, if any, on any loan so purchased. The delinquent loans purchased out of securitized
pools and LTSPCs during 2018 had a weighted average age of 4 years. During 2017 and 2016, the
delinquent loans purchased out of securitized pools had a weighted-average age of 4 years and 9 years,
respectively. See "Management's Discussion and Analysis of Financial Condition and Results of
Operations—Risk Management—Credit Risk – Loans and Guarantees."
The following table presents Farmer Mac's purchases of defaulted loans underlying Farm & Ranch
Guaranteed Securities and LTSPCs for the periods indicated:
Table 14
Defaulted loans purchased underlying Farm & Ranch Guaranteed Securities owned by
third party investors
Defaulted loans purchased underlying LTSPCs
Total loan purchases
For the Year Ended December 31,
2018
2017
2016
(in thousands)
$
$
7,748
1,483
9,231
$
$
5,670
311
5,981
$
$
2,118
398
2,516
The increase in 2018 was driven by the purchase of two defaulted loans totaling $4.4 million.
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% of the
Class A voting common stock is held by three financial institutions, with 31% held by one institution.
Approximately 97% 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 rural America in a way 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 generally
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
99
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 and other related corporate policies that govern 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.
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, 2018 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, 2018. The table below does not
specify any relationships based on the ownership of Farmer Mac's non-voting common stock or any series
of preferred stock.
Table 15
Ownership of
Farmer Mac
Voting Common Stock
Affiliation with Any
Farmer Mac Directors
Primary Aspects of Institution's
Business Relationship with Farmer Mac
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)
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)
Farmer Mac directors
Richard H. Davidson and
Keri L. Votruba currently
serve as directors of
AgriBank.
In 2018 and 2017, Farmer Mac earned
approximately $1.3 million and $1.2
million, respectively, in fees attributable to
transactions with AgFirst, primarily
commitment fees for LTSPCs.
No Farmer Mac business through any of its
lines of business was conducted between the
parties during 2018 or 2017.
Bath State Bank
Less than 5% ownership
Farmer Mac director
Dennis L. Brack serves as a
director of Bath State Bank
and Bath State Bancorp, the
holding company of Bath
State Bank.
Farmer Mac purchased $2.0 million and
$5.4 million in USDA Securities from Bath
State Bank in 2018 and 2017, respectively.
100
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 2.51%
of total voting common
stock outstanding)
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.
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 during 2018 or 2017.
In both 2018 and 2017, Farmer Mac earned
approximately $1.0 million in fees
attributable to transactions with FCBT,
primarily commitment fees for LTSPCs.
In both 2018 and 2017, FCBT retained
approximately $0.2 million in servicing fees
for its work as a Farmer Mac central
servicer.
First Dakota
National Bank (First
Dakota)
Less than 5% ownership
Farmer Mac director
Dennis Everson is a
director of First Dakota and
also served as Branch
Administration Director of
First Dakota until
December 2012.
Farmer Mac purchased $39.5 million and
$28.5 million in loans from First Dakota in
2018 and 2017, respectively, and entered
into $3.0 million and $0.4 million of new
LTPSCs with First Dakota in 2018 and
2017, respectively.
National Rural
Utilities
Cooperative
Finance
Corporation (CFC)
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)
None
In 2018 and 2017, First Dakota retained
approximately $1.4 million and $1.2
million, respectively, in servicing fees for its
work as a Farmer Mac servicer.
Transactions with CFC represented 100% of
business volume under the Rural Utilities
line of business during 2018 and 2017, and
100% of the AgVantage securities secured
by Rural Utilities loans that have been
issued to date.
Transactions with CFC during 2018 and
2017 represented 19.1% and 10.3%,
respectively, of Farmer Mac's total
purchases for those years. Transactions
with CFC represented 23.6% and 24.6%,
respectively, of Farmer Mac's total
outstanding business volume as of
December 31, 2018 and 2017.
In both 2018 and 2017, Farmer Mac earned
guarantee fees of approximately $0.1
million attributable to transactions with
CFC. In 2018 and 2017, Farmer Mac
earned commitment fees of approximately
$1.9 million and $2.2 million, respectively,
attributable to transactions with CFC.
101
Name of Institution
Ownership of
Farmer Mac
Voting Common Stock
Affiliation with Any
Farmer Mac Directors
The Vanguard
Group, Inc.
Zions First National
Bank
None
None
56,376 shares of Class A
voting common stock
(5.47% 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 Institution's
Business Relationship with Farmer Mac
In 2018 and 2017, Farmer Mac earned
interest income of $76.8 million and $43.9
million, respectively, attributable to
AgVantage transactions with CFC.
In 2018 and 2017, CFC retained
approximately $3.6 million and $3.5
million, respectively, in servicing fees for its
work as a Farmer Mac central servicer.
In 2018 and 2017, CFC was the only
servicer of rural utilities loans and loans
underlying LTSPCs in the Rural Utilities
line of business and securing AgVantage
securities in the Institutional Credit line of
business.
No Farmer Mac business through any of its
lines of business was conducted between the
parties during 2018 and 2017.
In 2018 and 2017, Farmer Mac's purchases
of loans from Zions under the Farm &
Ranch line of business represented
approximately 11.9% and 11.2%,
respectively, of Farm & Ranch loan
purchase volume for those years. Those
purchases represented 8.2% and 7.5%,
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 4.2% and 3.8%,
respectively, of the USDA Guarantees line
of business purchases for the year ended
December 31, 2018 and 2017. Farmer Mac
did not purchase AgVantage securities from
Zions for the year ended December 31, 2018
and 2017. Transactions with Zions
represented 4.7% and 5.0%, respectively, of
Farmer Mac's total outstanding business
volume as of December 31, 2018 and 2017.
In 2018 and 2017, Zions retained
approximately $11.6 million and $11.5
million, respectively, in servicing fees for its
work as a Farmer Mac servicer.
As discussed in more detail in Note 2(p) 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 about default mitigation with a related party. If 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.
102
Outlook
Farmer Mac continues to provide a stable source of liquidity, capital, and risk management tools as the
secondary market that helps meet the financing needs of rural America. While the pace of Farmer Mac's
growth will depend on the capital and liquidity needs of the participants in the rural financing business,
Farmer Mac foresees opportunities for continued growth across our lines of business, driven by several
key factors:
• As agricultural and rural utilities lenders seek to manage equity capital and return on equity capital
requirements or seek to reduce exposure due to lending limits or concentration limits, Farmer Mac
can provide relief for those institutions through loan purchases, participations, guarantees,
LTSPCs, or wholesale funding.
• Overall loan growth within the rural utilities industry appears to be modest in the near term due to
generally flat demand for capital. Future growth opportunities for Farmer Mac related to this
industry through its Rural Utilities and Institutional Credit lines of business may arise from
transacting business with a new counterparty for Farmer Mac and may include new types of loan
products. However, Farmer Mac's growth may be impacted by sector growth, credit quality, and
the competitiveness of Farmer Mac's products.
• As a result of business development efforts, targeted marketing and brand awareness initiatives,
product development efforts, and continued interest in the agricultural asset class from institutional
investors, Farmer Mac's customer base and product set continue to expand, which may generate
more demand for Farmer Mac's products from new sources.
• Consolidation, expansion, and vertical integration occurring across many sectors of the agricultural
industry and in agricultural finance, coupled with Farmer Mac's relationships with larger regional
and national lenders, continues to provide opportunities that could influence Farmer Mac's loan
demand and the average transaction size within Farmer Mac's Farm & Ranch line of business.
We believe that these growth opportunities will be important in replacing income earned on our loans and
other assets as they mature, pay down, or are reinvested at potentially lower spreads.
Expense Outlook. Farmer Mac continues to expand its investments in human capital, technology, and
business infrastructure to increase capacity and efficiency as it seeks to accommodate its growth
opportunities and achieve its long-term strategic objectives. Accordingly, Farmer Mac expects the annual
increases in its operating expenses to be above historical averages over the next several years.
Specifically, Farmer Mac believes that aggregate operating expenses – compensation and employee
benefits, general and administrative expenses, and regulatory fees – will increase by approximately 8% to
9% in 2019 relative to 2018, depending on the execution of various growth and strategic initiatives.
Agricultural Industry. The agricultural industry includes many diverse sectors that respond in different
ways to changes in economic conditions. Those individual sectors often are affected differently,
sometimes positively and sometimes negatively, by prevailing domestic and global economic factors and
regional weather conditions. This results in cycles where one or more sectors may be under stress while
others are not. The profitability of agricultural sectors is also affected by the demand for and supply of
agricultural commodities and products on a domestic and global basis, which can vary largely as a result
of global production trends, international trade policies, weather patterns, access to water supply, and
harvest conditions.
103
Net cash income, as reported by the USDA and one of its benchmark measures of economic activity in the
agricultural industry, has declined significantly since reaching a cyclical peak in 2013. However, changes
in farm income levels are largely localized and depend on producer region and commodity production
type. The USDA forecasts that aggregate net cash income levels decreased year-over-year in 2018 due to
rising farm production expenses that were not offset by higher commodity quantities sold and stabilizing
commodity prices. Farmland values appear to have held steady in 2018, even in the Midwest region where
producers are most exposed to changes in the grain markets. Data released by the USDA indicates an
average increase in farm real estate values of 2.7% in 2018 in Corn Belt states (Illinois, Indiana, Iowa,
Missouri, and Ohio), but a decline of 1.4% in Northern Plains states (Kansas, Nebraska, North Dakota,
and South Dakota). In all other regions, farmland value averages are reported to be flat to increasing.
While regional averages for farmland values provide a good barometer for the overall movement in U.S.
farmland values, economic forces affecting land markets are highly localized and some markets may
experience greater volatility than state or national averages indicate.
Over the past few decades, the U.S. agricultural industry has become increasingly connected to global
trade, and agricultural export demand depends significantly on trading relationships in numerous foreign
markets, as well as on foreign exchange rates. A slowdown in global economic growth or a tightening in
trade policies and agreements could also adversely affect the demand for certain U.S. agricultural exports,
which may result in downward pressure on commodity prices. For example, the series of reciprocal
import tariffs placed on various agricultural products by China and the U.S. during 2018 has materially
affected the market prices for these products, particularly soybeans produced in the U.S. Tariffs placed on
imports of U.S. agricultural products into Mexico have also dampened price outlooks for other agricultural
products, such as pork and dairy. In August 2018, the USDA released initial details on a potential $12
billion aid package for U.S. agricultural producers designed to help offset expected market losses resulting
from recent trade disruptions. The USDA reports making initial payments to affected producers of nearly
$5.9 billion, more than half of which is anticipated to assist soybean growers in the form of cash payments
in late 2018 and early 2019 through the USDA's Market Facilitation Program. The USDA announced in
December 2018 that a final round of payments for the roughly $6 billion remaining in aid is expected to be
delivered throughout the spring months of 2019. If fully realized, the Market Facilitation Program
payments would constitute approximately 10% of net cash income, which equates to approximately three-
quarters of the expected decline in net cash income forecasted for 2018. At the same time, the U.S. dollar
strengthened by approximately 5% during 2018, as measured by the U.S. Dollar Index, which has
decreased the competitiveness of U.S. agricultural exports and thereby diminished their global demand
and driven down producer profits. We believe that our portfolio is sufficiently diverse by product and
production region to be able to withstand any short-term market volatility that may arise because of
changes in trade policy or sentiment. However, a prolonged trade dispute between one or more primary
agricultural markets without substantial offsetting relief could put significant financial stress on the U.S.
agricultural industry, which could have an adverse effect on Farmer Mac's portfolio.
In recent years, the 90-day delinquencies and credit losses in Farmer Mac's portfolio have remained low
compared to historical averages. However, some indications of stress have emerged, as the volume of
Farmer Mac's substandard assets has generally increased since 2015. To date, the fluctuations in 90-day
delinquencies and the increase in substandard assets have not yet translated into rising credit losses.
Farmer Mac believes that any losses associated with the current agricultural credit cycle will be moderated
by the strength and diversity of its portfolio, which Farmer Mac believes is adequately collateralized.
Farmer Mac believes that its portfolio remains sufficiently diversified, both geographically and by
commodity, and that its portfolio has been underwritten to high credit quality standards. Farmer Mac
therefore believes that its portfolio is well-positioned to endure reasonably foreseeable volatility in
104
farmland values and commodity prices. Farmer Mac also continues to closely monitor sector profitability,
economic and weather conditions, and agricultural land value and geographic trends to tailor underwriting
practices to changing conditions. For more information about the loan balances, loan-to-value ratios, 90-
day delinquencies, and substandard asset rate for the Farm & Ranch loans in Farmer Mac's portfolio as of
December 31, 2018, see "Management's Discussion and Analysis of Financial Condition and Results of
Operations—Risk Management—Credit Risk – Loans and Guarantees."
Farmer Mac continues to monitor the establishment and evolution of legislation and regulations, as well as
the status of various international trade agreements and partnerships, that could affect farmers, ranchers,
rural lenders, and rural America in general. The Agricultural Improvement Act of 2018, also referred to as
the Farm Bill, was signed into law in December 2018. Many provisions in the new Farm Bill are a
continuation of existing federal agricultural policies in effect under the previous Farm Bill, including those
affecting crop insurance, commodity support programs, and other aspects of agricultural production. We
will continue to monitor the effects of any altered federal agricultural policies as the USDA adopts final
regulations implementing the new Farm Bill.
The Farm Bill also contains a provision that amends Farmer Mac's charter to expand the acreage exception
to the loan amount limitation on Farm & Ranch loans from 1,000 acres to 2,000 acres, subject to FCA's
assessment of the feasibility of the change. FCA's assessment must be submitted to Congress no later than
June 18, 2019, and the amendment will become effective one year after this assessment is submitted if
FCA indicates that the change is feasible. We will continue to evaluate the effect that the potential
increase in acreage limitation may have on our business in the future.
Under the Farm Bill, the authorized limit for the amount of new guarantees issued by the USDA under the
Consolidated Farm and Rural Development Act, which are eligible for Farmer Mac's USDA Guarantees
line of business, was increased from $3.026 billion to $7.0 billion for each government fiscal year through
September 2023. Also, the limit for the size of individual loans to which these guarantees are applied was
increased from $1.399 million to $1.75 million, which thereby increases the authorized amount of the
USDA-guaranteed portion for an individual loan. These higher loan limits could result in increased new
business volume in our USDA Guarantees line of business. However, the effects of the new limits may be
offset by a continued slowdown in the issuance of new guarantees by the USDA, which could be further
exacerbated by the U.S. federal government shutdown that lasted for several weeks in early 2019 or any
future shutdowns.
Other legislation and regulations focused on groundwater management practices, including in California,
may result in tighter restrictions on groundwater usage that could negatively affect agricultural producers
in the future. As the Trump administration and the U.S. Congress continue their review of existing
regulations and promote new legislative or regulatory proposals and policies, Farmer Mac will monitor the
effects that any changes in legislation or regulation could have on Farmer Mac or its customers.
Farmer Mac's marketing and brand awareness initiatives directed towards the Farm & Ranch line of
business focus on lenders that have demonstrated a commitment to agricultural lending based on their
lending history. Farmer Mac conducts its outreach efforts to these lenders through direct personal contact,
which is facilitated through Farmer Mac's frequent participation in state and national banking conferences,
its alliances with the American Bankers Association and the Independent Community Bankers of America,
and its business relationships with members of the FCS. Farmer Mac's initiatives to increase the awareness
of Farmer Mac and its products within the agricultural lender community and the larger agricultural
industry have included hosting events on relevant agricultural lending topics, participating on speaker
105
panels at agriculture-related regional and national conferences, and distributing original content about
conditions in the agricultural economy. Demand for Farmer Mac's secondary market tools also depends on
the fluctuating needs of rural lenders as they seek to maintain liquidity and adequate capital levels.
Farmer Mac also directs marketing efforts towards the agricultural industry by trying to identify and
develop relationships with potential issuers of AgVantage securities, including insurance company
agricultural lenders, agricultural finance companies, and bank and non-bank agricultural lenders such as
agricultural mortgage funds, who can pledge loans as collateral to obtain financing as part of Farmer
Mac's Institutional Credit line of business. As part of these efforts, Farmer Mac has increased its focus on
wholesale financing for institutional investors in agricultural assets that qualify as eligible collateral under
Farmer Mac's charter. Farmer Mac has tailored a version of its AgVantage product to this type of issuer,
which is referred to as the Farm Equity AgVantage product. Farmer Mac also offers other AgVantage
products tailored to fund investors in agricultural mortgages. Farmer Mac directs its outreach efforts to
these potential issuers through its business relationships within the agricultural community and through
executive outreach to institutions whose profile presents opportunity to benefit from wholesale financing.
As institutional investment in agricultural assets continues to grow, Farmer Mac believes that it is in a
unique position to help increase access to capital for these types of counterparties and thereby provide a
new source of capital to benefit rural America. Farmer Mac believes there is opportunity to expand this
type of business as both the trend toward institutional investment in agricultural assets and awareness of
Farmer Mac's AgVantage product offerings continue to grow. For more information about the AgVantage
products, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—
Risk Management—Credit Risk – Institutional" in this report.
Rural Utilities Industry. Prospects for loan growth within the rural utilities industry appear to be modest in
the near term due to generally flat demand for capital, as capital expenditures for large generation assets
have decreased and increased revenues for electrical cooperatives have driven a de-leveraging trend.
Future growth opportunities within the rural utilities industry may be impacted by the demand for electric
power in rural areas, capital expenditures by electric cooperatives driven by regulatory or technological
changes, and competitive dynamics within the rural utilities cooperative finance industry. In the coming
years, the retirement of coal generation assets combined with growth in renewable generation, as well as
transacting business with a new counterparty, may provide new business opportunities for Farmer Mac.
Balance Sheet Review
Assets. Farmer Mac's total assets as of December 31, 2018 were $18.7 billion, compared to $17.8 billion
as of December 31, 2017. The increase in total assets was primarily attributable to an increase in total
Farmer Mac Guaranteed Securities and total loans, net of allowance.
As of December 31, 2018, Farmer Mac had $0.4 billion of cash and cash equivalents and $2.3 billion of
investment securities, compared to $0.3 billion of cash and cash equivalents and $2.3 billion of investment
securities as of December 31, 2017. As of December 31, 2018, Farmer Mac had $8.1 billion of Farmer
Mac Guaranteed Securities, $5.5 billion of loans, net of allowance, and $2.2 billion of USDA Securities.
This compares to $7.6 billion of Farmer Mac Guaranteed Securities, $5.3 billion of loans, net of
allowance, and $2.1 billion of USDA Securities as of December 31, 2017.
Liabilities. Farmer Mac's total liabilities were $17.9 billion as of December 31, 2018, compared to $17.1
billion as of December 31, 2017. The increase in total liabilities was primarily attributable to an increase
in total notes payable.
106
Equity. As of December 31, 2018, Farmer Mac had total equity of $752.6 million, compared to $708.1
million as of December 31, 2017. The increase in total equity was a result of an increase in retained
earnings.
Risk Management
Credit Risk – Loans and Guarantees. Farmer Mac is exposed to credit risk resulting from the inability of
borrowers to repay their loans along 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% of the credit risk on loans held and loans underlying LTSPCs in the
Farm & Ranch and Rural Utilities lines of business and loans underlying Farm & Ranch Guaranteed
Securities. Farmer Mac has direct credit exposure to the loans in non-AgVantage transactions but only
indirect credit exposure to loans that secure AgVantage transactions because AgVantage securities
represent a general obligation of an issuer that is, in turn, secured by eligible loans. Non-AgVantage
transactions like loan purchases, LTSPCs, and "pass-through" guaranteed securities that represent
beneficial interests in the underlying loans do not include a general obligation of a counterparty as a
separate source of repayment. For the reasons described in more detail below, Farmer Mac excludes its
assets in the USDA Guarantees line of business, the loans in the Rural Utilities line of business, and
AgVantage securities in the Institutional Credit line of business from the loan-level credit risk metrics it
discloses.
Farmer Mac's direct credit exposure to Farm & Ranch loans held and loans underlying Farm & Ranch
Guaranteed Securities and LTSPCs as of December 31, 2018 was $7.2 billion across 48 states. Farmer
Mac has established underwriting, collateral valuation, and documentation standards for agricultural real
estate mortgage loans and believes that these standards mitigate the risk of loss from borrower defaults
and provide guidance about the management, administration, and conduct of underwriting and appraisals
to all participating and potential lenders. These standards were developed based on industry practices for
agricultural real estate mortgage loans and are designed to assess the creditworthiness of the borrower, as
well as the value of the collateral securing the loan. Farmer Mac evaluates and adjusts these standards on
an ongoing basis based on current and anticipated market conditions. For more information about
Farmer Mac's underwriting and collateral valuation standards for Farm & Ranch loans, see "Business—
Farmer Mac's Lines of Business—Farm & Ranch—Underwriting and Collateral Valuation (Appraisal)
Standards."
Farmer Mac's direct credit exposure to Rural Utilities loans held and loans underlying LTSPCs as of
December 31, 2018 was $1.6 billion across 39 states, of which $1.2 billion were loans to electric
distribution cooperatives and $0.4 billion were loans to G&T cooperatives. Farmer Mac has developed
different underwriting standards for rural utilities loans that depend on whether direct or indirect credit
exposure is assumed on a loan and whether the borrower is an electric distribution cooperative or a G&T
cooperative. See "Business—Farmer Mac's Lines of Business—Rural Utilities—Underwriting." As of
December 31, 2018, there were no delinquencies in Farmer Mac's portfolio of Rural Utilities loans, and
Farmer Mac has not experienced any credit losses on Rural Utilities loans since Congress authorized
107
Farmer Mac's Rural Utilities line of business in 2008. Based on this performance, Farmer Mac excludes
the loans in the Rural Utilities line of business from the credit risk metrics it discloses.
Farmer Mac has indirect credit exposure to the Farm & Ranch loans and Rural Utilities loans that secure
AgVantage securities included in the Institutional Credit line of business. Farmer Mac's AgVantage
securities are general obligations of institutions approved by Farmer Mac and are secured by current
loans in an amount at least equal to the outstanding principal amount of the related security. Farmer Mac
excludes the loans that secure AgVantage securities from the credit risk metrics it discloses because
Farmer Mac has only indirect credit risk on those loans and because of the other characteristics of
AgVantage securities that mitigate credit risk. Those characteristics include a general obligation of an
issuing institution approved by Farmer Mac, the required collateralization level for the securities, the
requirement for delinquent loans to be removed from the pool of pledged loans and replaced with current
eligible loans, and in some cases, the requirement for the counterparty to comply with specified financial
covenants for the life of the related AgVantage security. As of December 31, 2018, Farmer Mac had not
experienced any credit losses on any AgVantage securities and does not expect to incur any such losses in
the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations
—Risk Management—Credit Risk – Institutional" for more information about Farmer Mac's credit risk
on AgVantage securities.
The credit exposure of Farmer Mac and Farmer Mac II LLC on USDA Securities, including those
underlying Farmer Mac Guaranteed USDA Securities, is covered by the full faith and credit of the United
States. Therefore, Farmer Mac believes that Farmer Mac and Farmer Mac II LLC have little or no credit
risk exposure in the USDA Guarantees line of business because of the USDA guarantee. As of
December 31, 2018, neither Farmer Mac nor Farmer Mac II LLC had experienced any credit losses on
any business under the USDA Guarantees line of business, and neither expects to incur any such losses in
the future.
Loans in the Farm & Ranch line of business are all secured by first liens on agricultural real estate.
Accordingly, Farmer Mac's exposure on a loan is limited to the difference between (1) the total of the
accrued interest, advances, and the principal balance of a loan and (2) the value of the property less the
cost to sell. Measurement of that excess or shortfall is the best predictor and determinant of loss,
compared to other measures that evaluate the efficiency of a particular farm operator. For example, debt
service ratios depend on farm operator efficiency and leverage, which can vary widely within a
geographic region or commodity type or based on an operator's business and farming skills. Thus, Farmer
Mac considers a loan's original loan-to-value ratio as one of many factors in evaluating loss severity. This
ratio is calculated by dividing the loan principal balance at the time of guarantee, purchase, or
commitment by the 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. Other
factors Farmer Mac considers include, but are not limited to, other underwriting standards, commodity
and farming forecasts, and regional economic and agricultural conditions.
Loan-to-value ratios depend on the market value of a property, as determined in accordance with Farmer
Mac's collateral valuation standards. As of December 31, 2018 and December 31, 2017, the average
unpaid loan balances for loans outstanding in the Farm & Ranch line of business was $640,000 and
$642,000, respectively. Farmer Mac calculates the original loan-to-value ratio of a loan by dividing the
original loan principal balance by the original appraised property value. This calculation does not reflect
any amortization of the original loan balance or any adjustment to the original appraised value to provide
a current market value. The original loan-to-value ratio of any cross-collateralized loans is calculated on
a consolidated basis rather than on a loan-by-loan basis. The weighted-average original loan-to-value
108
ratio for Farm & Ranch loans purchased during 2018 was 54%, compared to 50% for loans purchased
during 2017. The weighted-average original loan-to-value ratio for all Farm & Ranch loans held and all
loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs was approximately
51% as of both December 31, 2018 and December 31, 2017. The weighted-average original loan-to-value
ratio for all 90-day delinquencies was 52% as of both December 31, 2018 and2017.
The weighted-average current loan-to-value ratio (the loan-to-value ratio based on original appraised
value adjusted to reflect loan amortization since purchase) for Farm & Ranch loans held and loans
underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs was approximately 45%
as of both December 31, 2018 and 2017.
Farmer Mac maintains an allowance for loan losses to cover estimated probable losses on loans held and
a reserve for losses to cover estimated probable losses on loans underlying LTSPCs and off-balance sheet
Farm & Ranch Guaranteed Securities. The methodology that Farmer Mac uses to determine the level of
its allowance for losses is described in Note 2(i) 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 total allowance for losses as of
December 31, 2018 and 2017:
Table 16
Allowance for loan losses
Reserve for losses:
Off-balance sheet Farm & Ranch Guaranteed Securities
LTSPCs
Total allowance for losses
$
$
As of December 31, 2018
As of December 31, 2017
(in thousands)
7,017
$
215
1,952
9,184
$
6,796
257
1,813
8,866
109
The following table summarizes the changes in the components of Farmer Mac's total allowance for each
year in the five-year period ended December 31, 2018:
Table 17
Balance as of January 1, 2014
Release of losses
Charge-offs
Recoveries
Balance as of December 31, 2014
Provision for/(release of) losses
Charge-offs
Balance as of December 31, 2015
Provision for/(release of) losses
Charge-offs
Balance as of December 31, 2016
Provision for losses
Charge-offs
Balance as of December 31, 2017
Provision for losses
Charge-offs
Balance as of December 31, 2018
Allowance
for Loan
Losses
Total
Allowance
for Losses
Reserve
for Losses
(in thousands)
$
$
$
$
$
$
6,866
$
6,468
$
(961)
(86)
45
(2,205)
—
—
5,864
$
4,263
$
2,388
(3,772)
(2,180)
—
4,480
$
2,083
$
1,065
(130)
(63)
—
5,415
$
2,020
$
1,708
(327)
50
—
6,796
$
2,070
$
238
(17)
97
—
7,017
$
2,167
$
13,334
(3,166)
(86)
45
10,127
208
(3,772)
6,563
1,002
(130)
7,435
1,758
(327)
8,866
335
(17)
9,184
Activity affecting the allowance for loan losses and reserve for losses is discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—
Provision for and Release of Allowance for Loan Losses and Reserve for Losses." As of December 31,
2018, Farmer Mac's total allowance for losses totaled $9.2 million, or 0.13% of the outstanding principal
balance of Farm & Ranch loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch
Guaranteed Securities, compared to $8.9 million, or 0.13%, as of December 31, 2017.
As of December 31, 2018, Farmer Mac individually evaluated $34.4 million of the $155.3 million of
recorded investment in impaired assets for collateral shortfalls against updated appraised values, other
updated collateral valuations, or discounted values. For the remaining $120.9 million of impaired assets
for which updated valuations were not available, Farmer Mac evaluated them in the aggregate in
consideration of their similar risk characteristics and historical statistics. Farmer Mac recorded specific
allowances of $3.4 million for undercollateralized assets as of December 31, 2018. Farmer Mac's general
allowances were $5.8 million as of December 31, 2018.
The charge-off recorded during 2018 related to one loan that was foreclosed and transitioned to REO
during the year. The charge-offs recorded during 2017 were primarily related to two impaired crop loans
(with one borrower) that were foreclosed and transitioned to REO during 2017. Farmer Mac had
previously recorded a specific allowance of $0.2 million on these impaired crop loans as of December 31,
2016. In 2017, Farmer Mac sold the related properties for $5.4 million and recognized a $0.8 million gain
on the sale of the REO.
110
Farmer Mac's 90-day delinquency measure includes loans 90 days or more past due, as well as loans in
foreclosure and non-performing loans where the borrower is in bankruptcy. As of December 31, 2018,
Farmer Mac's 90-day delinquencies were $26.9 million (0.37% of the Farm & Ranch portfolio),
compared to $48.4 million (0.71% of the Farm & Ranch portfolio) as of December 31, 2017. Those 90-
day delinquencies were comprised of 47 delinquent loans as of December 31, 2018, compared to 51
delinquent loans as of December 31, 2017. The decrease in 90-day delinquencies compared to December
31, 2017 is primarily attributable to two permanent planting loans to one borrower totaling $15.3 million
that became current during 2018. During 2018, Farmer Mac's 90-day delinquency rate remained flat or
decreased across all major commodity groups. For the past several years, downward pressure on many
agricultural commodity prices has resulted in lower income for producers of a wide range of
commodities within the crop, livestock, and permanent planting sectors. However, 90-day delinquency
rates in Farmer Mac's portfolio across these three commodity groups have remained relatively stable,
with 90-day delinquency rates actually decreasing for crop and permanent planting loans in 2018 after
rising in 2017. Farmer Mac's 90-day delinquencies have historically fluctuated from quarter to quarter,
both in dollars and as a percentage of the outstanding Farm & Ranch portfolio, with higher levels
generally observed at the end of the first and third quarters and lower levels generally observed at the end
of the second and fourth quarters of each year as a result of the annual (January 1st) and semi-annual
(January 1st and July 1st) payment terms of most Farm & Ranch loans. Farmer Mac believes that it
remains adequately collateralized on its delinquent loans. Farmer Mac expects that over time its 90-day
delinquency rate will revert closer to Farmer Mac's historical average, and possibly exceed it (which it
did in third quarter 2017), due to macroeconomic factors and the cyclical nature of the agricultural
economy. Farmer Mac's average 90-day delinquency rate as a percentage of its Farm & Ranch portfolio
over the last 15 years is approximately 1%. The highest 90-day delinquency rate observed during that
period occurred in 2009 at approximately 2%, which coincided with increased delinquencies in loans
within Farmer Mac's then-held ethanol loan portfolio that Farmer Mac no longer holds.
The following table presents historical information about Farmer Mac's 90-day delinquencies in the Farm
& Ranch line of business compared to the principal balance of all Farm & Ranch loans held and loans
underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs:
Table 18
As of:
December 31, 2018
September 30, 2018
June 30, 2018
March 31, 2018
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
Farm & Ranch
Line of Business
90-Day
Delinquencies
Percentage
(dollars in thousands)
$
7,233,971
$
7,072,018
7,045,397
6,932,002
6,867,586
6,557,030
6,426,518
6,240,467
6,139,304
26,881
37,545
43,076
47,560
48,444
66,381
41,901
50,807
21,038
0.37%
0.53%
0.61%
0.69%
0.71%
1.01%
0.65%
0.81%
0.34%
When analyzing the overall risk profile of its lines of business, Farmer Mac considers more than the
Farm & Ranch loan delinquency percentages provided above. The lines of business also include
AgVantage securities and Rural Utilities loans held and underlying LTSPCs, neither of which have any
delinquencies, and USDA Securities, which are backed by the full faith and credit of the United States.
111
Across all of Farmer Mac's lines of business, 90-day delinquencies represented 0.14% of total
outstanding business volume as of December 31, 2018, compared to 0.25% as of December 31, 2017.
The following table presents outstanding Farm & Ranch loans held and loans underlying LTSPCs and
off-balance sheet Farm & Ranch Guaranteed Securities and 90-day delinquencies as of December 31,
2018 by year of origination, geographic region, commodity/collateral type, original loan-to-value ratio,
and range in the size of borrower exposure:
Table 19
By year of origination:
2008 and prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
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
Other
Total
By original loan-to-value ratio(3):
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%(4)
80.01% to 90.00%(4)
Total
By size of borrower exposure(5):
Less than $1,000,000
$1,000,000 to $4,999,999
$5,000,000 to $9,999,999
$10,000,000 to $24,999,999
$25,000,000 and greater
Total
Farm & Ranch 90-Day Delinquencies as of December 31, 2018
Distribution of
Farm & Ranch
Line of Business
Farm & Ranch
Line of Business
90-Day
Delinquencies(1)
Percentage
(dollars in thousands)
$
$
$
$
$
$
$
$
$
$
741,290
89,716
146,446
219,016
517,573
740,298
586,369
749,218
1,116,555
1,302,561
1,024,929
7,233,971
855,596
2,273,184
2,296,073
883,279
332,370
593,469
7,233,971
3,771,627
1,509,821
1,355,372
504,138
85,181
7,832
7,233,971
1,333,790
1,811,166
2,530,484
1,244,823
289,427
24,281
7,233,971
2,431,296
2,755,996
916,422
601,349
528,908
7,233,971
$
$
$
$
$
$
$
$
$
$
7,545
—
—
5,955
—
2,327
811
486
3,721
6,036
—
26,881
8,383
4,530
3,784
2,475
7,027
682
26,881
14,821
3,194
4,059
4,807
—
—
26,881
3,500
5,351
12,960
3,815
955
300
26,881
8,889
12,447
5,545
—
—
26,881
1.02%
—%
—%
2.72%
—%
0.31%
0.14%
0.06%
0.33%
0.46%
—%
0.37%
0.98%
0.20%
0.16%
0.28%
2.11%
0.11%
0.37%
0.39%
0.21%
0.30%
0.95%
—%
—%
0.37%
0.26%
0.30%
0.51%
0.31%
0.33%
1.24%
0.37%
0.37%
0.45%
0.61%
—%
—%
0.37%
10%
1%
2%
3%
7%
10%
8%
10%
16%
18%
15%
100%
12%
31%
32%
12%
5%
8%
100%
52%
21%
19%
7%
1%
—
100%
19%
25%
35%
17%
4%
—%
100%
34%
38%
13%
8%
7%
100%
112
(1)
Includes loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are 90 days or more past due, in
foreclosure, or in bankruptcy with at least one missed payment, excluding loans performing under either their original loan terms or a court-approved
bankruptcy plan.
(2) Geographic regions: Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND,
SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL,
GA, MS, NC, SC, TN).
Farmer Mac calculates the original loan-to-value ratio of a loan by dividing the original loan principal balance by the original appraised property value.
This calculation does not reflect any amortization of the original loan balance or any adjustment to the original appraised value to provide a current
market value. The original loan-to-value ratio of any cross-collateralized loans is calculated on a consolidated basis rather than on a loan-by-loan basis.
Primarily part-time farm loans. Loans with an original loan-to-value ratio of greater than 80% are required to have private mortgage insurance.
Includes aggregated loans to single borrowers or borrower-related entities.
(3)
(4)
(5)
Another indicator that Farmer Mac considers in analyzing the credit quality of its Farm & Ranch
portfolio is the level of internally-rated "substandard" assets, both in dollars and as a percentage of the
outstanding Farm & Ranch portfolio. Assets categorized as "substandard" have a well-defined weakness
or weaknesses, and there is a distinct possibility that some loss will be sustained if deficiencies are not
corrected. As of December 31, 2018, Farmer Mac's substandard assets were $232.7 million (3.2% of the
Farm & Ranch portfolio), compared to $221.3 million (3.2% of the Farm & Ranch portfolio) as of
December 31, 2017. Those substandard assets were comprised of 318 loans as of December 31, 2018
and 307 loans as of December 31, 2017. Although Farmer Mac's substandard asset volume increased
modestly from year-end 2017 in aggregate dollars, it remained stable as a percentage of the Farm &
Ranch portfolio. As of December 31, 2018, substandard asset volume included several large exposures
and represents a relatively diverse set of commodities. Farmer Mac did not experience a significant
change in the concentration of its substandard assets among commodities or geographic regions during
2018 as compared to 2017. Farmer Mac's average substandard assets as a percentage of its Farm &
Ranch portfolio over the last 15 years is approximately 4%. Due to macroeconomic factors and the
cyclical nature of the agricultural economy, Farmer Mac expects that over time its substandard asset rate
will eventually revert closer to, and possibly exceed, Farmer Mac's historical average. The highest
substandard asset rate observed during that period occurred in 2010 at approximately 8%, which
coincided with an increase in substandard loans within Farmer Mac's then-held ethanol portfolio that
Farmer Mac no longer holds. If Farmer Mac's substandard asset rate increases from current levels, it is
likely that Farmer Mac's provision to the allowance for loan losses and the reserve for losses will also
increase.
Although some credit losses are inherent to the business of agricultural lending, Farmer Mac believes that
any losses associated with the current agricultural credit cycle will be moderated by the strength and
diversity of its portfolio, which Farmer Mac believes is adequately collateralized. See Note 8 to the
consolidated financial statements for more information about credit quality indicators related to Farm &
Ranch loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed
Securities.
113
The following table presents Farmer Mac's cumulative net credit losses relative to the cumulative original
balance for all Farm & Ranch loans purchased and loans underlying LTSPCs and off-balance sheet
Farm & Ranch Guaranteed Securities as of December 31, 2018 by year of origination, geographic region,
and commodity/collateral type. The purpose of this information is to present information about losses
relative to original Farm & Ranch purchases, guarantees, and commitments.
Table 20
By year of origination:
2008 and prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
By geographic region(1):
Northwest
Southwest
Mid-North
Mid-South
Northeast
Southeast
Total
By commodity/collateral type:
Crops
Permanent plantings
Livestock
Part-time farm
Ag. Storage and Processing
Other
Total
Farm & Ranch Credit Losses Relative to Cumulative
Original Loans, Guarantees, and LTSPCs as of December 31, 2018
Cumulative Original Loans,
Guarantees and LTSPCs
Cumulative Net
Credit Losses/
(Recoveries)
Cumulative Loss
Rate
(dollars in thousands)
$
$
$
$
$
$
14,138,896
542,233
664,111
778,333
1,151,162
1,420,260
982,847
1,107,874
1,415,489
1,512,886
1,164,700
24,878,791
3,299,276
8,701,647
6,274,324
2,950,259
1,474,668
2,178,617
24,878,791
11,387,053
5,388,353
5,782,757
1,452,919
711,821
155,888
24,878,791
$
$
$
$
$
$
28,538
1,544
5
3,661
—
—
—
(540)
—
—
—
33,208
11,191
8,167
12,830
(211)
259
972
33,208
2,887
9,368
3,877
1,403
15,673
—
33,208
0.20 %
0.28 %
— %
0.47 %
— %
— %
— %
(0.05)%
— %
— %
— %
0.13 %
0.34 %
0.09 %
0.20 %
(0.01)%
0.02 %
0.04 %
0.13 %
0.03 %
0.17 %
0.07 %
0.10 %
2.20 %
— %
0.13 %
(1) Geographic regions: Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND,
SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL,
GA, MS, NC, SC, TN).
Analysis of portfolio performance indicates that commodity type is the primary determinant of Farmer
Mac's exposure to loss on a given loan. Within most commodity groups, certain geographic areas allow
greater economies of scale or proximity to markets than others and therefore may result in more
successful operations within the commodity group. Certain geographic areas also offer better growing
conditions and market access than others, which may result in more versatile and more successful
operators within a given commodity group. Farmer Mac's board of directors has established policies on
geographic and commodity concentration to maintain adequate diversification and measure concentration
risk.
114
In Farmer Mac's experience, the degree to which the collateral for a commodity group is single-use or
highly improved is a more significant determinant of the probability of ultimate losses on a given loan
than diversity of geographic location within a commodity group. Commodity groups that tend to be
single-use or highly improved include permanent plantings (nut crops for example), agricultural storage
and processing facilities (canola plants and grain processing facilities for example), and certain livestock
facilities (dairy facilities for example). The versatility of a borrower's operation (and in the case of
persisting adverse economic conditions, the borrower's ability to switch commodity groups) will more
likely result in profitability for the borrower and therefore a lower risk of decreased value for the
underlying collateral. Producers of agricultural commodities that require highly improved property are
generally less able to adapt their operations when faced with adverse economic conditions. Also, in the
event of a borrower's default, the prospective sale value of the collateral is more likely to decrease and
the related loan may become undercollateralized. This analysis is consistent with corresponding
commodity analyses, which indicate that Farmer Mac has experienced higher loss and collateral
deficiency rates in permanent planting loans and agricultural storage and processing loans, for which the
collateral is typically highly improved and specialized.
The following tables present concentrations of Farm & Ranch loans held and loans underlying LTSPCs
and off-balance sheet Farm & Ranch Guaranteed Securities by commodity type within geographic region
and cumulative credit losses by origination year and commodity type:
Table 21
As of December 31, 2018
Farm & Ranch Concentrations by Commodity Type within Geographic Region
Crops
Permanent
Plantings
Livestock
Part-time
Farm
Ag. Storage and
Processing
Other
Total
(dollars in thousands)
By geographic region(1):
Northwest
$
400,639
$
139,817
$ 238,037
$ 76,705
$
— $
398
$ 855,596
Southwest
544,888
1,148,175
433,401
85,691
57,011
4,018
2,273,184
5.5%
1.9%
3.3%
1.1%
—%
—%
11.8%
7.5%
15.9%
5.9%
1.2%
Mid-North
1,947,100
16,764
186,603
134,493
Mid-South
534,243
8,022
270,133
62,000
26.9%
0.2%
2.6%
1.9%
7.4%
0.1%
3.7%
0.9%
152,310
32,284
69,250
74,094
2.1%
0.5%
1.0%
1.0%
192,447
164,759
157,948
71,155
2.7%
2.3%
2.2%
0.9%
Northeast
Southeast
Total
0.8%
8,491
0.1%
8,438
0.1%
4,432
0.1%
6,809
0.1%
0.1%
31.4%
2,622
2,296,073
—%
443
—%
—
—%
351
—%
31.7%
883,279
12.2%
332,370
4.7%
593,469
8.2%
$ 3,771,627
$ 1,509,821
$1,355,372
$ 504,138
$
85,181
$
7,832
$7,233,971
52.1%
20.9%
18.7%
7.0%
1.2%
0.1%
100.0%
(1) Geographic regions: Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND,
SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL,
GA, MS, NC, SC, TN).
115
Table 22
As of December 31, 2018
Farm & Ranch Cumulative Credit Losses by Origination Year and Commodity Type
Crops
Permanent
Plantings
Livestock
Part-time
Farm
Ag. Storage and
Processing
Total
(in thousands)
By year of origination:
2008 and Prior
$
3,329
$
9,184
$
3,803
$
1,403
$
10,819
$
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
98
—
—
—
—
—
(540)
—
—
—
184
—
—
—
—
—
—
—
—
—
69
5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,193
—
3,661
—
—
—
—
—
—
—
28,538
1,544
5
3,661
—
—
—
(540)
—
—
—
$
2,887
$
9,368
$
3,877
$
1,403
$
15,673
$
33,208
Farmer Mac regularly conducts detailed, statistical stress tests of its portfolio for credit risk and compares
those results to current and historical credit quality metrics and to the various statutory, regulatory, and
Farmer Mac's board of directors' capital policy metrics. Farmer Mac's methodologies for pricing its
guarantee and commitment fees, managing credit risk, and providing adequate allowances for losses
consider all of the foregoing factors and information.
Farmer Mac requires approved lenders to make representations and warranties about the conformity of
eligible agricultural mortgage and rural utilities loans to Farmer Mac's standards, the accuracy of loan
data provided to Farmer Mac, and other requirements related to the loans. Sellers are responsible to
Farmer Mac for breaches of those representations and warranties, and Farmer Mac has the ability to
require a seller to cure, replace, or repurchase a loan sold or transferred to Farmer Mac if any breach of a
representation or warranty is discovered that was material to Farmer Mac's decision to purchase the loan
or that directly or indirectly causes a default or potential loss on a loan sold or transferred by the seller to
Farmer Mac. During the previous three years ended December 31, 2018, Farmer Mac has required one
seller to repurchase a total of two loans aggregating $0.8 million for breaches of representations and
warranties made about those two loans, both of which repurchases occurred during first quarter 2016. In
addition to relying on the representations and warranties of lenders, Farmer Mac also underwrites all of
the agricultural real estate mortgage loans (other than rural housing and part-time farm mortgage loans)
and rural utilities loans that it holds in its portfolio. For rural housing and part-time farm mortgage loans,
Farmer Mac relies on representations and warranties from the seller that those loans conform to Farmer
Mac's specified underwriting criteria without exception. For more information about Farmer Mac's loan
eligibility requirements, see "Business—Farmer Mac's Lines of Business—Farm & Ranch—Loan
Eligibility" and "Business—Farmer Mac's Lines of Business—Rural Utilities—Loan Eligibility."
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
116
has the right to terminate the servicing relationship for a particular loan or the entire portfolio serviced by
the central servicer. Farmer Mac also can proceed against the central servicer in arbitration or exercise
any remedies available to it under law. During the previous three years ended December 31, 2018,
Farmer Mac had not exercised any remedies or taken any formal action against any central servicers. For
more information about Farmer Mac's servicing requirements, see "Business—Farmer Mac's Lines of
Business—Farm & Ranch—Servicing" and "Business—Farmer Mac's Lines of Business—Rural Utilities
—Servicing."
Credit Risk – Institutional. Farmer Mac is exposed to credit risk arising from its business relationships
with other institutions including:
•
•
•
issuers of AgVantage securities;
approved lenders and servicers; and
interest rate swap counterparties.
Farmer Mac approves AgVantage counterparties and manages institutional credit risk related to those
AgVantage counterparties by requiring them to meet Farmer Mac's standards for creditworthiness for the
particular counterparty and transaction. The required collateralization level is established when the
AgVantage facility is entered into with the counterparty and does not change during the life of the
AgVantage securities issued under the facility. In AgVantage transactions, the corporate obligor is
required to remove from the pool of pledged collateral any loan that becomes more than 30 days
delinquent in the payment of principal or interest and to substitute an eligible loan that is current in
payment to maintain the minimum required collateralization level. In the event of a default on the general
obligation, Farmer Mac would have recourse to the pledged collateral and have rights to the ongoing
borrower payments of principal and interest. For Farm Equity AgVantage counterparties and smaller
financial funds or entities, Farmer Mac also requires that the counterparty generally (1) maintain a higher
collateralization level, through lower loan-to-value ratio thresholds and higher overcollateralization than
required for traditional AgVantage securities and (2) comply with specified financial covenants for the life
of the related AgVantage security to avoid default. For a more detailed description of AgVantage
securities, see "Business—Farmer Mac's Lines of Business—Institutional Credit—AgVantage Securities."
The unpaid principal balance of outstanding on-balance sheet AgVantage securities secured by loans
eligible for the Farm & Ranch line of business totaled $5.3 billion as of December 31, 2018 and $5.1
billion as of December 31, 2017. The unpaid principal balance of on-balance sheet AgVantage securities
secured by loans eligible for the Rural Utilities line of business totaled $2.8 billion as of December 31,
2018 and $2.5 billion as of December 31, 2017. The unpaid principal balance of outstanding off-balance
sheet AgVantage securities totaled $0.3 billion as of December 31, 2018 and $0.3 billion as of December
31, 2017.
The following table provides information about the issuers of AgVantage securities, as well as the required
collateralization levels for those transactions as of December 31, 2018 and 2017:
117
Table 23
Counterparty
Balance
Credit
Rating
Required
Collateralization
Balance
Credit
Rating
Required
Collateralization
As of December 31, 2018
As of December 31, 2017
(dollars in thousands)
AgVantage:
CFC(1)
MetLife
Rabo AgriFinance
Other(2)
Farm Equity AgVantage(4)
Total outstanding
$
3,070,455
2,550,000
2,075,000
407,572
279,790
$
5,312,362
A
AA-
None
(3)
None
100%
103%
110%
106% to 125%
110%
$
2,800,188
2,550,000
2,075,000
199,959
279,731
$
5,104,690
A
AA-
None
(3)
None
100%
103%
106%
106% to 125%
110%
(1)
Includes $300.0 million related to a revolving floating rate AgVantage facility. Farmer Mac receives a fixed fee based on the full dollar amount of the
facility.
(2) Consists of AgVantage securities issued by 6 different issuers as of both December 31, 2018 and 2017.
(3) Consists of AgVantage securities from 6 different issuers without a credit rating as of both December 31, 2018 and 2017.
(4) Consists of AgVantage securities from 5 different issuers as of both December 31, 2018 and 2017.
Farmer Mac manages institutional credit risk related to lenders and servicers by requiring those
institutions to meet Farmer Mac's standards for creditworthiness. Farmer Mac monitors the financial
condition of those institutions by evaluating financial statements and bank credit rating agency
reports. For more information about Farmer Mac's lender eligibility requirements, see "Business—Farmer
Mac's Lines of Business—Farm & Ranch—Approved Lenders" and "Business—Farmer Mac's Lines of
Business—Rural Utilities—Approved Lenders."
Farmer Mac manages institutional credit risk related to its interest rate swap counterparties through
collateralization provisions contained in each of its swap agreements that varies based on the market value
of its swaps portfolio with each counterparty. Furthermore, Farmer Mac and its interest rate swap
counterparties are required to fully collateralize their derivatives positions without any minimum threshold
for cleared swap transactions, as well as for non-cleared swap transactions entered into after March 1,
2017 (the effective date of new rules that established zero threshold requirements for the exchange of
variation margin between Farmer Mac and its swap dealer counterparties in such transactions). Farmer
Mac transacts interest rate swaps with multiple counterparties to reduce any counterparty credit exposure
concentration. Farmer Mac also uses the clearing process for cleared swap transactions as another
mechanism for managing its derivative counterparty risk. Credit risk related to interest rate swap contracts
is discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations
—Risk Management—Interest Rate Risk" and Note 6 to the consolidated financial statements.
Credit Risk – Other Investments. As of December 31, 2018, Farmer Mac had $0.4 billion of cash and cash
equivalents and $2.3 billion of investment securities. The management of the credit risk inherent in these
investments is governed by Farmer Mac's internal policies as well as the Liquidity and Investment
Regulations, which establish criteria for investments that are eligible for Farmer Mac's investment
portfolio, including limitations on asset class, dollar amount, issuer concentration, and credit quality. In
addition to establishing a portfolio of highly liquid investments as an available source of cash, the goals of
Farmer Mac's investment policies are designed to minimize Farmer Mac's exposure to financial market
volatility, preserve capital, and support Farmer Mac's access to the debt markets.
On September 13, 2018, FCA adopted a final rule to amend the Liquidity and Investment Regulations to
comply with Section 939A of the Dodd-Frank Act by removing references and requirements relating to
credit ratings and replacing them with other standards of creditworthiness. Previously, the Liquidity and
118
Investment Regulations and Farmer Mac's policies generally required each investment or issuer of an
investment to be highly rated by a nationally recognized statistical rating organization. The amendments
to the Liquidity and Investment Regulations and Farmer Mac's internal policies now require that
investments held in Farmer Mac's investment portfolio meet the following creditworthiness standards:
(1) at a minimum, at least one obligor of the investment must have a very strong capacity to meet financial
commitments for the life of the investment, even under severely adverse or stressful conditions, and
generally present a very low risk of default; (2) if the obligor whose capacity to meet financial
commitments is being relied upon to meet the standard set forth in subparagraph (1) is located outside of
the United States, the investment must also be fully guaranteed by a U.S. government agency; and (3) the
investment must exhibit low credit risk and other risk characteristics consistent with the purpose or
purposes for which it is held.
The Liquidity and Investment Regulations and Farmer Mac's internal policies also establish concentration
limits, which are intended to limit exposure to any single entity, issuer, or obligor. The amendments to the
Liquidity and Investment Regulations changed the limit for Farmer Mac's total credit exposure to any
single entity, issuer, or obligor of securities from 25% to 10% of Farmer Mac's regulatory capital
($73.7 million as of December 31, 2018). However, Farmer Mac's current policy limits this total credit
exposure to 5% of its regulatory capital ($36.8 million as of December 31, 2018). These exposure limits
do not apply to obligations of U.S. government agencies or GSEs, although Farmer Mac's current policy
restricts investing more than 100% of regulatory capital in the senior non-convertible debt securities of
any one GSE.
Before their amendment, the Liquidity and Investment Regulations also established limits on the
maximum amount, expressed as a percentage of Farmer Mac's investment portfolio, that could be invested
in each eligible asset class. Although the amended Liquidity and Investments Regulations eliminated
these limits, Farmer Mac's internal policies set forth asset class limits as part of Farmer Mac's overall risk
management framework.
Interest Rate Risk. Farmer Mac is subject to interest rate risk on all assets retained on its balance sheet
because of possible timing differences in the cash flows of the assets and related liabilities. This risk is
primarily related to loans held, Farmer Mac Guaranteed Securities (excluding AgVantage securities), and
USDA Securities due to the ability of borrowers to prepay their loans before the scheduled maturities,
thereby increasing the risk of asset and liability cash flow mismatches. Cash flow mismatches in a
changing interest rate environment can reduce the earnings of Farmer Mac if assets repay sooner than
expected and the resulting cash flows must be reinvested in lower-yielding investments when
Farmer Mac's funding costs cannot be correspondingly reduced, or if assets repay more slowly than
expected and the associated debt must be replaced by higher-cost debt. As discussed below, Farmer Mac
manages this interest rate risk by funding assets purchased with liabilities matching the duration and cash
flow characteristics of the assets purchased.
Interest Rate Risk Management
The goal of interest rate risk management at Farmer Mac is to create and maintain a portfolio that
generates stable earnings and value across a variety of interest rate environments. Recognizing that
interest rate sensitivity may change with the passage of time and as interest rates change, Farmer Mac
assesses this exposure regularly and, if necessary, readjusts its portfolio of assets and liabilities by:
119
• purchasing assets in the ordinary course of business;
•
• using financial derivatives to alter the characteristics of existing assets or liabilities.
refinancing existing liabilities; or
Farmer Mac's primary strategy for managing interest rate risk is to fund asset purchases with liabilities
that have similar duration and cash flow characteristics so that they will perform similarly as interest rates
change. To match these characteristics, Farmer Mac issues discount notes and both callable and non-
callable medium-term notes across a spectrum of maturities. Farmer Mac issues callable debt to offset the
prepayment risk associated with some loans. By using a blend of liabilities that includes callable debt, the
interest rate sensitivities of the liabilities tend to increase or decrease as interest rates change in a manner
similar to changes in the interest rate sensitivities of the assets. Farmer Mac also uses financial derivatives
to better match the durations of Farmer Mac's assets and liabilities, thereby reducing overall interest rate
sensitivity.
Taking into consideration the prepayment provisions and the default probabilities associated with its loan
assets, Farmer Mac uses prepayment models when projecting and valuing cash flows associated with these
assets. Because borrowers' behaviors in various interest rate environments may change over time, Farmer
Mac periodically evaluates the effectiveness of these models compared to actual prepayment experience
and adjusts and refines the models as necessary to improve the precision of future prepayment forecasts.
Yield maintenance provisions and other prepayment penalties contained in certain agricultural real estate
mortgage loans and most rural utilities loans reduce, but do not eliminate, prepayment risk. Those
provisions require borrowers to make an additional payment when they prepay their loans, thus
compensating Farmer Mac for the shortened duration of the prepaid loan. As of December 31, 2018,
approximately 2% of the total outstanding balance of loans in the Farm & Ranch line of business where
Farmer Mac either owned the loan or the beneficial interest in the underlying loan had yield maintenance
provisions or other forms of prepayment protection (together covering 5% of all loans with fixed interest
rates). Of the Farm & Ranch loans purchased in 2018, 5% had yield maintenance or another form of
prepayment protection. As of December 31, 2018, none of Farmer Mac's USDA Securities had yield
maintenance provisions and 4% contained other prepayment penalties. Of the USDA Securities purchased
in 2018, 9% contained various forms of prepayment penalties. As of December 31, 2018, 68% of the
Rural Utilities loans owned by Farmer Mac had yield maintenance provisions. All of the Rural Utilities
loans purchased in 2018 contained prepayment penalties.
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.
120
Farmer Mac is also subject to interest rate risk on loans that Farmer Mac has committed to acquire but has
not yet purchased, other than delinquent loans purchased through LTSPCs or loans designated for
securitization under a forward purchase agreement. When Farmer Mac commits to purchase these loans,
it is exposed to interest rate risk between the time it commits to purchase the loans and the time it issues
debt to fund the purchase of those loans.
Farmer Mac manages the interest rate risk related to these loans by using futures contracts involving U.S.
Treasury securities and/or forward sale contracts on the debt securities of other GSEs. Farmer Mac uses
U.S. Treasury futures contracts as a hedge against the level of interest rates, while forward sale contracts
on GSE securities reduce its interest rate exposure to changes in both U.S. Treasury rates and spreads on
Farmer Mac debt and certain Farmer Mac Guaranteed Securities. Issuing debt to fund the loans as
investments does not fully eliminate interest rate risk due to the possible timing differences in the cash
flows of the assets and related liabilities, as discussed above.
Farmer Mac's $0.4 billion of cash and cash equivalents mature within three months and are funded with
discount notes having similar maturities. As of December 31, 2018, $2.19 billion of the $2.26 billion of
investment securities (97%) were floating rate securities with rates that adjust within one year or fixed rate
securities with original maturities between three months and one year. Those securities are funded with
effectively floating rate debt that closely matches the rate adjustment dates of the associated investments.
Interest Rate Risk Metrics
Farmer Mac regularly stress tests its portfolio for interest rate risk and uses a variety of metrics to quantify
and manage its interest rate risk. These metrics include sensitivity to interest rate movements of market
value of equity ("MVE") and projected net effective spread ("NES") as well as duration gap analysis.
MVE represents management's estimate of the present value of all future cash flows from on- and off-
balance sheet assets, liabilities, and financial derivatives, discounted at current interest rates and
appropriate spreads. However, MVE is not indicative of the market value of Farmer Mac as a going
concern because these market values are theoretical and do not reflect future business activities. MVE
sensitivity analysis is used to measure the degree to which the market values of Farmer Mac's assets and
liabilities change for a given change in interest rates. Because this analysis evaluates the impact of interest
rate movements on the value of all future cash flows, this measure provides an evaluation of Farmer Mac's
long-term interest rate risk.
Farmer Mac's NES simulation represents the difference between projected income from interest-earning
assets and interest expense produced by the related funding, including associated derivatives. Farmer
Mac's NES may be affected by changes in market interest rates resulting from timing differences between
maturities and re-pricing characteristics of assets and liabilities. The direction and magnitude of any such
effect depends on the direction and magnitude of the change in interest rates as well as the composition of
Farmer Mac's portfolio. The NES forecast represents an estimate of the net effective spread income that
Farmer Mac's current portfolio is expected to produce over a twelve-month horizon. As a result, NES
sensitivity statistics provide a short-term view of Farmer Mac's interest rate sensitivity.
Duration is a measure of a financial instrument's sensitivity to small changes in interest rates. Duration
gap is the difference between the estimated durations of Farmer Mac's assets and liabilities. Because
duration is a measure of market value sensitivity, duration gap summarizes the extent to which estimated
market value sensitivities for assets and liabilities are matched. Duration gap provides a relatively concise
measure of the interest rate risk inherent in Farmer Mac's outstanding portfolio.
121
A positive duration gap denotes that the duration of Farmer Mac's assets is greater than the duration of its
liabilities. A positive duration gap indicates that the market value of Farmer Mac's assets is more sensitive
to small interest rate movements than is the market value of its liabilities. Conversely, a negative duration
gap indicates that Farmer Mac's assets are less sensitive to small interest rate movements than are its
liabilities.
Each of the metrics is produced using asset/liability models and is derived based on management's best
estimates of factors such as projected interest rates, interest rate volatility, and prepayment speeds.
Accordingly, these metrics should be understood as estimates rather than as precise measurements. Actual
results may differ to the extent there are material changes to Farmer Mac's portfolio or changes in
strategies undertaken to mitigate unfavorable sensitivities to interest rate changes.
The following schedule summarizes the results of Farmer Mac's MVE and NES sensitivity analysis as of
December 31, 2018 and 2017 to an immediate and instantaneous uniform or "parallel" shift in the yield
curve:
Table 24
Interest Rate Scenario
+100 basis points
-100 basis points
Interest Rate Scenario
+100 basis points
-100 basis points
Percentage Change in MVE from Base Case
As of December 31, 2018 As of December 31, 2017
(0.7)%
(5.9)%
(1.1)%
(5.4)%
Percentage Change in NES from Base Case
As of December 31, 2018 As of December 31, 2017
3.0 %
(3.0)%
4.4 %
(3.7)%
As of December 31, 2018, Farmer Mac's effective duration gap was negative 0.8 months, compared to
negative 0.9 months as of December 31, 2017. During 2018, interest rates increased significantly.
Despite this rate movement, Farmer Mac’s overall interest rate sensitivity remained stable and at relatively
low levels during 2018.
Financial Derivatives Transactions
The economic effects of financial derivatives are included in Farmer Mac's MVE, NES, and duration gap
analyses. Farmer Mac enters into the following financial derivative transactions principally to protect
against risk from the effects of market price or interest rate movements on the value of assets, future cash
flows, credit exposure, and debt issuance, not for trading or speculative purposes:
•
•
•
"pay-fixed" interest rate swaps, in which Farmer Mac pays fixed rates of interest to, and receives
floating rates of interest from, counterparties;
"receive-fixed" interest rate swaps, in which Farmer Mac receives fixed rates of interest from, and
pays floating rates of interest to, counterparties; and
"basis swaps," in which Farmer Mac pays variable rates of interest based on one index to, and
receives variable rates of interest based on another index from, counterparties.
122
As of December 31, 2018, Farmer Mac had $9.9 billion combined notional amount of interest rate swaps,
with terms ranging from less than one year to twenty-five years, of which $3.8 billion were pay-fixed
interest rate swaps, $4.3 billion were receive-fixed interest rate swaps, and $1.8 billion were basis swaps.
Farmer Mac enters into interest rate swap contracts to synthetically adjust the characteristics of its debt to
match more closely the cash flow and duration characteristics of its loans and other assets, thereby
reducing interest rate risk and often deriving an overall lower effective cost of borrowing than would
otherwise be available to Farmer Mac in the conventional debt market. Specifically, interest rate swaps
synthetically convert the variable cash flows related to the forecasted issuance of short-term debt into
effectively fixed rate medium-term notes that match the anticipated duration and interest rate
characteristics of the corresponding assets. Farmer Mac evaluates the overall cost of using the swap
market as a funding alternative and uses interest rate swaps to manage specific interest rate risks for
specific transactions. Certain financial derivatives are designated as fair value hedges of fixed rate assets
classified as available for sale or liabilities to protect against fair value changes in the assets or liabilities
related to a benchmark interest rate (e.g., LIBOR). Furthermore, certain financial derivatives are
designated as cash flow hedges to mitigate the volatility of future interest rate payments on floating rate
debt.
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 derivative assets or as derivative liabilities. Changes in the fair values of
financial derivatives are reported in "(Losses)/gains on financial derivatives" in the consolidated
statements of operations. For financial derivatives designated in fair value hedge accounting relationships,
changes in the fair values of the hedged items, primarily fixed rate AgVantage securities and fixed rate
medium-term notes, related to the risk being hedged are reported in "Net interest income" in the
consolidated statements of operations. Interest accruals on derivatives designated in fair value hedge
relationships are also recorded in "Net interest income" in the consolidated statements of operations. For
financial derivatives designated in cash flow hedge accounting relationships, the unrealized gain or loss on
the derivative is recorded in other comprehensive income. Because the hedging instrument is an interest
rate swap and the hedged forecasted transactions are future interest payments on variable rate debt,
amounts recorded in accumulated other comprehensive income are reclassified to "Total interest expense"
in conjunction with the recognition of interest expense on the debt. All of Farmer Mac's financial
derivatives transactions are conducted under standard collateralized agreements that limit Farmer Mac's
potential credit exposure to any counterparty. As of December 31, 2018, Farmer Mac had $1.4 million of
uncollateralized net exposures to three counterparties. As of December 31, 2017, Farmer Mac had
uncollateralized net exposures of $0.5 million to three counterparties.
123
Basis Risk
In addition to being exposed to the risk of asset and liability cash flow mismatches, Farmer Mac is
exposed to the risk related to changes in its cost of funds relative to floating rate market indexes (such as
LIBOR) on some of the floating rate assets it holds. This exposure is referred to as "basis risk." Some of
Farmer Mac's floating rate assets reset on rate adjustment dates based on a floating rate market index,
while the related debt that Farmer Mac issued to fund those assets until their maturities may be refinanced
based on Farmer Mac’s cost of funds at a particular time. Basis risk arises from the potential variability
between the rates at which those floating rate assets reset and the rates at which Farmer Mac can issue
debt to fund those assets. Farmer Mac can fund these floating rate assets in several ways, including:
•
•
•
•
issuing short-term discount notes with maturities that match the reset period of the assets;
issuing floating rate medium-term notes with maturities that match the maturities of the assets;
issuing non-maturity matched, floating rate medium-term notes; or
issuing non-maturity matched, fixed-rate discount notes or medium-term notes swapped to match
the interest rate reset dates of the assets as an alternative source of effectively floating rate funding.
Farmer Mac primarily uses the last two options identified in the list above to fund these floating rate assets
because this funding strategy is usually the most effective way to provide an interest rate match, maintain
a suitable liquidity profile, and lower Farmer Mac’s cost of funds. As funding for these floating rate assets
matures, Farmer Mac seeks to refinance the debt associated with these assets in a similar fashion to
achieve an appropriate interest rate match for the remaining life of the assets. However, for example, if the
rates on Farmer Mac’s discount notes or medium-term notes deteriorate relative to LIBOR during the time
between when these floating rate assets were first funded and when Farmer Mac refinances the associated
debt, Farmer Mac is exposed to a commensurate reduction in its net effective spread on the associated
assets. Conversely, if the rates on Farmer Mac’s discount notes or medium-term notes improve relative to
LIBOR during that time, Farmer Mac would benefit from a commensurate increase in its net effective
spread on those assets.
Farmer Mac is also subject to basis risk on some of its fixed rate assets as a result of its use of pay-fixed
interest rate swaps, combined with a series of discount note or medium-term note issuances, as an
alternative source of effectively fixed rate funding. This risk arises because the rates at which Farmer Mac
refinances its funding for some fixed rate assets through the issuance of discount notes or medium-term
notes may vary from the agreed-upon rates based on the floating rate market index received by Farmer
Mac on the associated swaps. In these cases, for example, if the rates on Farmer Mac's discount notes or
medium-term notes were to deteriorate relative to LIBOR, Farmer Mac would be exposed to a
commensurate reduction in its net interest income and net effective spread. Conversely, if the rates on
Farmer Mac's discount notes or medium-term notes were to improve relative to LIBOR, Farmer Mac
would benefit from a commensurate increase in its net interest income and net effective spread.
To mitigate this basis risk, Farmer Mac seeks to issue debt of sufficient maturity to reduce the frequency
of required refinancing of that debt over the life of the associated asset. As of December 31, 2018, Farmer
Mac held $6.2 billion of floating rate assets in its lines of business and its investment portfolio that reset
based on floating rate market indexes, primarily one-month and three-month LIBOR. As of the same date,
Farmer Mac also had $3.8 billion of interest rate swaps outstanding where Farmer Mac pays a fixed rate of
interest and receives a floating rate of interest.
124
Farmer Mac's short-term funding costs relative to LIBOR have varied throughout 2018. For the first half
of the year, funding costs relative to LIBOR were at levels generally more favorable than Farmer Mac’s
historical experience. As of December 31, 2018, these levels had deteriorated to levels less favorable than
Farmer Mac's historical experience. Farmer Mac adjusts its funding strategies to mitigate the effects of
this variability from time to time and seeks to maintain an effective funding cost.
Discontinuation of LIBOR
As described in "Risk Factors—Market Risk," Farmer Mac faces risks associated with the reform,
replacement, or discontinuation of the LIBOR benchmark interest rate and the transition to an alternative
benchmark interest rate. We are currently evaluating the potential effect on our business of the
replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as a dominant
replacement. As of December 31, 2018, Farmer Mac held $5.1 billion of floating rate assets in its lines of
business and its investment portfolio, $3.6 billion of floating rate debt, and $9.8 billion notional amount of
interest rate swaps, each of which reset based on LIBOR. In addition, Farmer Mac's Series C Preferred
Stock will be indexed to LIBOR after July 17, 2024. The market transition away from LIBOR and
towards SOFR, or any other alternative benchmark interest rate that may be developed, is expected to be
complicated and require significant work, possibly requiring the development of term and credit
adjustments to accommodate for differences between the benchmark interest rates. The transition may
also result in different financial performance for previously booked transactions, require different hedging
strategies, or require renegotiation of previously booked transactions.
Liquidity and Capital Resources
Farmer Mac regularly accesses the capital markets for funding, and Farmer Mac has maintained access to
the capital markets at favorable rates throughout 2017 and 2018. Assuming continued access to the capital
markets, Farmer Mac believes it has sufficient liquidity and capital resources to support its operations for
the next 12 months and for the foreseeable future. Farmer Mac also has a liquidity contingency plan to
manage unanticipated disruptions in its access to the capital markets. That plan involves borrowing
through repurchase agreement arrangements and the sale of liquid assets. Farmer Mac must maintain a
minimum of 90 days of liquidity under the Liquidity and Investment Regulations. Under the methodology
for calculating available days of liquidity prescribed by those regulations, Farmer Mac maintained an
average of 190 days of liquidity during 2018 and had 205 days of liquidity as of December 31, 2018.
Debt Issuance. Farmer Mac funds its purchases of eligible loan assets and investment assets and finances
its operations primarily by issuing debt obligations of various maturities through a network of dealers in
the public capital markets. Farmer Mac works to enhance its funding operations by undertaking extensive
debt investor relations initiatives, including conducting non-deal roadshows with institutional investors,
making periodic dealer sales force presentations, and speaking at fixed income investor conferences
throughout the United States. Debt obligations issued by Farmer Mac include discount notes and fixed and
floating rate medium-term notes, including callable notes. As of December 31, 2018, Farmer Mac had
outstanding discount notes of $1.6 billion, medium-term notes that mature within one year of $6.2 billion,
and medium-term notes that mature after one year of $8.5 billion.
Farmer Mac's board of directors has authorized the issuance of up to $20.0 billion of discount notes and
medium-term notes (of which $16.2 billion was outstanding as of December 31, 2018), subject to periodic
review of the adequacy of that level relative to Farmer Mac's borrowing requirements. Farmer Mac invests
the proceeds of its debt issuances in purchases of loans, USDA Securities, Farmer Mac Guaranteed
125
Securities, and investment assets in accordance with policies established by its board of directors and
subject to regulations established by FCA.
Liquidity. The funding and liquidity needs of Farmer Mac's lines of business are driven by the purchase
and retention of eligible loans, USDA Securities, and Farmer Mac Guaranteed Securities (including
AgVantage securities); the maturities of Farmer Mac's discount notes and medium-term notes; and
payment of principal and interest on Farmer Mac Guaranteed Securities. Farmer Mac's primary sources of
funds to meet these needs are the proceeds of its debt issuances, fees for its guarantees and commitments,
net effective spread, loan repayments, and maturities of AgVantage securities.
Farmer Mac maintains cash, cash equivalents (including U.S. Treasury securities and other short-term
money market instruments), and other investment securities that can be drawn upon for liquidity
needs. The following table presents these assets as of December 31, 2018 and 2017:
Table 25
Cash and cash equivalents
Investment securities:
Guaranteed by U.S. Government and its agencies
Guaranteed by GSEs
Asset-backed securities
Total
As of December 31, 2018
As of December 31, 2017
$
$
(in thousands)
425,256
$
1,216,911
1,013,281
32,692
2,688,140
$
302,022
1,331,490
893,843
35,104
2,562,459
Capital Requirements. Farmer Mac is subject to the following capital requirements – minimum, critical,
and risk-based. Farmer Mac must comply with the higher of the minimum capital requirement and the
risk-based capital requirement. The minimum capital requirement is expressed as a percentage of on-
balance sheet assets and off-balance sheet obligations. The critical capital requirement is equal to one-half
of the minimum capital amount. Farmer Mac's statutory charter does not specify the required level of risk-
based capital but directs FCA to establish a risk-based capital stress test for Farmer Mac, using specified
stress test parameters. Certain enforcement powers are given to FCA depending on Farmer Mac's
compliance with these capital standards. As of December 31, 2018, Farmer Mac was in compliance with
its statutory capital requirements and was classified as within "level I" (the highest compliance level).
In accordance with FCA's rule on capital planning, Farmer Mac's board of directors has adopted a policy
for maintaining a sufficient level of "Tier 1" capital (consisting of retained earnings, paid-in capital,
common stock, and qualifying preferred stock). That policy restricts Tier 1-eligible dividends and any
discretionary bonus payments if Tier 1 capital falls below specified thresholds. As of December 31, 2018
and 2017, Farmer Mac's Tier 1 capital ratio was 13.4% and 12.6%, respectively, as capital growth
outpaced the growth in risk-weighted assets during 2018. As of December 31, 2018, Farmer Mac was in
compliance with its capital adequacy policy.
For more information about the capital requirements applicable to Farmer Mac, its capital adequacy
policy, and FCA's rule on capital planning, see "Business—Government Regulation of Farmer Mac—
Capital Standards." See Note 9 to the consolidated financial statements for more information about
Farmer Mac's capital position.
126
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, 2018. 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 26
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)
Interest payments on fixed rate medium-term notes(2)
Interest payments on floating rate medium-term notes(3)
Operating lease obligations(4)
Purchase obligations(5)
$ 1,594,662
$
— $
— $
— $ 1,594,662
6,171,308
5,321,325
1,744,555
1,437,475
14,674,663
188,664
89,141
1,944
1,965
242,661
50,782
3,914
1,343
127,139
17,496
4,016
—
162,696
23,896
1,311
—
721,160
181,315
11,185
3,308
(1)
(2)
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.
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, 2018. As a result, these amounts do not reflect the effects of changes in the contractual
(4)
(5)
interest rates effective on future interest rate reset dates.
Includes amounts due under non-cancellable operating leases for office space and office equipment. See Note 12 to the consolidated financial statements
for more information about Farmer Mac's minimum lease payments for office space.
Includes minimum amounts due under non-cancellable agreements to purchase goods or services that are enforceable and legally binding and specify all
significant terms. These agreements include, among others, 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 cancellable without penalty or further payment as of December 31, 2018 and
therefore do not represent enforceable and legally binding obligations. The table also does not 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 derivatives 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, 2018 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. More information about financial derivatives is included in Note
2(g) and Note 6 to the consolidated financial statements.
127
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 commits, subject to the applicable LTSPC agreement, to a
future purchase of one or more loans from identified pools of eligible loans that met Farmer Mac's
standards when the applicable transaction was entered into and Farmer Mac assumed the credit risk on the
loans. The following table presents these significant commitments:
Table 27
LTSPCs(1)
Mandatory commitments to purchase loans and USDA Securities
As of December 31,
2018
2017
(in thousands)
$
3,163,059
$
3,141,684
37,077
54,347
(1) As of December 31, 2018 and 2017, includes $17.0 million and $20.0 million, respectively, related to one-year loan purchase commitments on which
Farmer Mac receives a nominal unused commitment fee.
For more information about Farmer Mac's commitments to purchase loans, see Note 12 to the
consolidated financial statements.
Off-Balance Sheet Arrangements
Farmer Mac offers approved lenders two credit enhancement alternatives to increase their liquidity or
lending capacity while retaining the cash flow benefits of their loans: (1) Farmer Mac Guaranteed
Securities, which are available through each of the Farm & Ranch, USDA Guarantees, Rural Utilities, and
Institutional Credit lines of business; and (2) LTSPCs, which are available through the Farm & Ranch and
Rural Utilities lines of business. For securitization trusts where Farmer Mac is the primary beneficiary,
the trust assets and liabilities are included on Farmer Mac's consolidated balance sheet. For securitization
trusts where Farmer Mac is not the primary beneficiary and in the event of de-consolidation, both of these
alternatives create off-balance sheet obligations for Farmer Mac. See Note 12 to the consolidated
financial statements for more information about consolidation and Farmer Mac's off-balance sheet
business activities.
128
As of December 31, 2018 and 2017, outstanding off-balance sheet LTSPCs and Farmer Mac Guaranteed
Securities totaled $4.0 billion and $4.0 billion respectively. The following table presents the balance of
outstanding LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities as of December 31, 2018
and 2017:
Table 28
Outstanding Balance of LTSPCs and
Off-Balance Sheet Farmer Mac Guaranteed Securities
Farm & Ranch obligations:
LTSPCs(1)
Farm & Ranch Guaranteed Securities(1)
Total Farm & Ranch obligations
USDA Guarantees obligations:
Farmer Mac Guaranteed USDA Securities
Rural Utilities obligations:
LTSPCs(2)
Institutional Credit obligations:
AgVantage Securities
Revolving floating rate AgVantage facility(3)
Total Institutional Credit obligations
Total off-balance sheet
As of December 31,
2018
2017
(in thousands)
$
2,509,787
$
2,335,342
135,862
2,645,649
333,511
2,668,853
367,684
254,217
653,272
806,342
9,898
300,000
309,898
11,556
300,000
311,556
$
3,976,503
$
4,040,968
(1) During fourth quarter 2018, Farmer Mac repurchased the 100% participation interests in loans underlying a pool of $134.1 million in Farm & Ranch
Guaranteed Securities at par, thereby redeeming the corresponding Farm & Ranch Guaranteed Securities from their sole security holder. Farmer Mac
repurchased these participation interests at the request of the sole security holder in exchange for the termination of the participation interests and the
reconveyance of all beneficial interest in the loans to the sole security holder that owned the loans in which the participation interests had been issued. The
resulting pool of Farm & Ranch loans was concurrently added under LTSPCs. The commitment fee Farmer Mac receives on these loans added under
LTSPCs is the same as the guarantee fee Farmer Mac had been earning on the Farm & Ranch Guaranteed Securities.
(2) As of December 31, 2018 and 2017, includes $17.0 million and $20.0 million, respectively, related to one-year loan purchase commitments on which
Farmer Mac receives a nominal unused commitment fee.
(3) During both 2018 and 2017, $100.0 million of this facility was drawn and later repaid. Farmer Mac receives a fixed fee based on the full dollar amount of
the facility. If the counterparty draws on the facility, the amounts drawn will be in the form of AgVantage securities, and Farmer Mac will earn interest
income on those securities.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk
Management—Credit Risk – Loans and Guarantees" and Notes 2(d), 2(f), 5 and 12 to the consolidated
financial statements for more information about Farmer Mac Guaranteed Securities and Notes 2(o) and 12
to the consolidated financial statements for more information about LTSPCs.
Regulatory Matters
The Agricultural Improvement Act of 2018, known as the "Farm Bill," was signed into law on
December 20, 2018 and contains provisions that affect or may affect Farmer Mac, as discussed in more
detail below.
The Farm Bill amended Farmer Mac's charter to increase the acreage limitation from 1,000 acres or more
to 2,000 acres or more of agricultural real estate that must secure an eligible Farm & Ranch loan for which
the Congressionally-authorized maximum loan size adjusted for inflation is applicable (currently
$13.1 million). This amendment is subject to FCA's assessment about the feasibility of such a change.
129
FCA is required to submit a report on its assessment of this change to Congress by no later than June 18,
2019. If FCA's assessment indicates that it is feasible to increase the acreage limitation to 2,000 acres or
more of agricultural real estate, the change to Farmer Mac's charter will become effective one year after
the date that FCA submits its report to Congress. If FCA's assessment determines that it is not feasible to
increase the acreage limitation, then the current limitation will remain in place. In addition to this
feasibility assessment, Congress expressed interest in FCA's opinion on alternatives other than the
increased acreage limitation in relation to a maximum loan size that would adequately address any safety
and soundness issues. We will continue to evaluate the effect that the increase in acreage limitation or any
other related proposal by FCA may have on our business in the future. FCA must also conduct a study
that analyzes and compares the financial risks inherent in loans made, held, securitized, or purchased by
FCS banks and associations and Farmer Mac, and how such risks are required to be capitalized under
statutes and regulations currently in effect. The Farm Bill also amended Farmer Mac's charter to repeal
obsolete provisions and to make technical corrections. The Farm Bill also added a new subsection to the
Farm Credit Act of 1971 to clarify that no funds from the administrative accounts of the Farm Credit
System Insurance Corporation or from the Farm Credit System Insurance Fund may be used to provide
assistance to Farmer Mac or to support any activities related to Farmer Mac.
The Farm Bill increased the authorized limits for the amount of new guarantees issued by the USDA under
the Consolidated Farm and Rural Development Act, which are eligible for Farmer Mac's USDA
Guarantees line of business, and for the size of individual loans to which these guarantees are applied. For
more information about the changes to these authorized limits, as well as their implications for Farmer
Mac, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—
Outlook."
The Farm Bill requires the Government Accountability Office ("GAO") to conduct two studies related to
FCS institutions, including Farmer Mac. Specifically, the GAO must conduct a study to determine
whether FCS institutions have sufficient authority and resources to meet the agricultural credit needs of
Native American tribes and their members. The GAO must submit a written report to Congress within 90
days of enactment of the law presenting the findings of this study. If the GAO finds that FCS institutions
do not have the ability to meet these agricultural credit needs, it must propose legislative and other
recommendations that it determines would result in a system under which these needs are met in an
equitable and effective manner. The GAO must also conduct a study assessing the availability of credit
and related services, as well as any barriers limiting their availability, provided by FCS institutions,
commercial banks, and life insurance companies, to socially disadvantaged farmers and ranchers. The
GAO must submit a written report to Congress within 120 days of enactment of the law presenting the
findings of this study and providing recommendations on how FCS institutions and other agricultural
credit providers can improve outreach to these farmers and ranchers regarding the availability of credit
and related services. We will continue to monitor any developments that could affect Farmer Mac as a
result of the preparation and completion of these GAO studies.
Other Matters
The expected effects of recently issued accounting pronouncements on the consolidated financial
statements are presented in Note 2(q) to the consolidated financial statements.
130
Supplemental Information
The following tables present quarterly and annual information about new business volume, repayments,
and outstanding business volume:
Table 29
For the quarter ended:
December 31, 2018
September 30, 2018
June 30, 2018
March 31, 2018
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
For the year ended:
December 31, 2018
December 31, 2017
New Business Volume
Farm & Ranch
USDA
Guarantees
Rural Utilities
Institutional
Credit
Loans
LTSPCs
USDA Securities
Loans
LTSPCs
AgVantage
Total
(in thousands)
$ 285,008
$
80,840
$
90,297
$
3,000
$
— $
585,814
$
1,044,959
192,628
224,101
259,111
204,917
298,274
312,217
314,137
243,692
64,100
126,066
159,065
282,809
102,774
55,899
113,261
117,265
116,339
129,960
123,525
100,024
131,298
169,261
131,101
129,343
—
—
8,645
15,000
70,000
25,000
27,341
10,800
—
—
—
—
—
—
—
20,000
1,085,953
825,203
813,337
234,753
290,995
1,296,757
561,407
247,154
1,459,020
1,305,330
1,363,683
837,503
893,341
1,859,134
1,147,247
768,254
960,848
1,129,545
430,071
554,743
460,121
531,684
11,645
137,341
—
—
3,310,307
2,383,912
5,172,992
4,737,225
131
Table 30
Repayments of Assets by Line of Business
Farm & Ranch
Guaranteed
Securities
Loans
LTSPCs
USDA
Guarantees
USDA
Securities
Rural Utilities
Institutional
Credit
Loans
LTSPCs
AgVantage
Total
(in thousands)
For the quarter ended:
Scheduled
Unscheduled
$ 36,006
56,299
December 31, 2018
$ 92,305
Scheduled
Unscheduled
$ 73,476
77,492
September 30, 2018
$ 150,968
Scheduled
Unscheduled
June 30, 2018
Scheduled
Unscheduled
March 31, 2018
Scheduled
Unscheduled
$ 33,075
86,426
$ 119,501
$ 110,733
73,502
$ 184,235
$ 25,848
49,229
December 31, 2017
$ 75,077
Scheduled
Unscheduled
$ 61,961
49,894
September 30, 2017
$ 111,855
Scheduled
Unscheduled
June 30, 2017
Scheduled
Unscheduled
March 31, 2017
Scheduled
Unscheduled
$ 21,687
51,442
$ 73,129
$ 70,394
114,811
$ 185,205
$ 20,566
47,156
December 31, 2016
$ 67,722
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
8,331
$ 35,682
9,257
33,319
17,588
$ 69,001
5,677
$ 21,742
4,562
47,159
10,239
$ 68,901
8,391
$ 31,067
8,273
69,539
16,664
$100,606
14,085
$ 70,057
4,929
81,204
19,014
$151,261
14,371
$ 36,806
6,941
43,975
21,312
$ 80,781
6,735
$ 21,409
5,861
124,676
12,596
$146,085
9,116
$ 41,821
10,737
47,262
19,853
$ 89,083
16,184
$ 48,375
11,985
64,486
28,169
$112,861
15,209
$ 21,546
10,767
111,137
25,976
$132,683
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
24,793
$
6,321
$ 16,062
21,135
20,538
—
45,928
$ 26,859
$ 16,062
28,135
$ 25,640
$ 8,286
35,068
3,476
—
63,203
$ 29,116
$ 8,286
36,983
$
353
$ 8,699
66,601
51,306
—
103,584
$ 51,659
$ 8,699
$
$
$
$
$
$
568,277
—
568,277
1,102,798
9,760
1,112,558
759,223
—
759,223
40,811
$ 26,507
$
— $
392,310
43,189
14,952
120,022
84,000
$ 41,459
$120,022
22,381
24,385
46,766
$
$
315
$ 13,621
4,876
—
5,191
$ 13,621
24,163
$ 27,191
$ 39,816
45,192
457
—
69,355
$ 27,648
$ 39,816
35,169
46,776
81,945
$
$
— $ 9,885
—
—
— $ 9,885
36,322
$ 26,909
$ 8,934
39,457
814
—
75,779
$ 27,723
$ 8,934
21,325
34,477
55,802
$
$
— $ 15,929
4,427
—
4,427
$ 15,929
$
$
$
$
$
$
$
$
$
$
$
—
392,310
231,717
—
231,717
100,571
—
100,571
1,166,922
4,000
1,170,922
161,451
102,059
263,510
311,739
2,240
313,979
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
695,472
140,548
836,020
1,265,754
177,517
1,443,271
877,791
282,145
1,159,936
654,503
337,798
992,301
345,059
129,406
474,465
281,846
226,080
507,926
1,284,600
160,217
1,444,817
368,569
333,612
702,181
406,314
210,204
616,518
For the year ended:
Scheduled
Unscheduled
$ 253,290
$
36,484
$158,548
$
130,722
$ 58,821
$ 33,047
$
2,822,608
$
3,493,520
293,719
27,021
231,221
165,993
90,272
120,022
December 31, 2018
$ 547,009
Scheduled
Unscheduled
$ 179,890
265,376
December 31, 2017
$ 445,266
$
$
$
63,505
$389,769
46,406
$148,411
35,524
280,399
81,930
$428,810
$
$
$
296,715
$ 149,093
$153,069
118,035
$ 54,415
$ 72,256
155,810
6,147
—
273,845
$ 60,562
$ 72,256
$
$
$
132
9,760
2,832,368
1,660,661
106,059
1,766,720
$
$
$
938,008
4,431,528
2,280,074
849,315
3,129,389
Table 31
As of:
Lines of Business - Outstanding Business Volume
Farm & Ranch
Guaranteed
Securities
Loans
LTSPCs
USDA
Guarantees
USDA
Securities
Rural Utilities
Institutional
Credit
Loans
LTSPCs
AgVantage
Total
(in thousands)
December 31, 2018
$4,588,322
$ 135,862
$2,509,787
$ 2,515,620
$
938,843
$ 653,273
$ 8,382,817
$ 19,724,524
September 30, 2018
4,420,619
287,594
2,363,805
2,471,251
June 30, 2018
March 31, 2018
December 31, 2017
4,378,958
4,274,359
4,198,733
297,833
2,368,606
2,418,115
314,497
2,343,146
2,391,739
1,043,477
333,511
2,335,342
2,352,214
1,076,291
September 30, 2017
4,068,893
354,823
2,133,314
2,298,956
1,066,482
June 30, 2017
March 31, 2017
December 31, 2016
3,882,474
3,643,386
3,514,454
367,419
2,176,625
2,237,013
1,024,130
387,272
2,209,809
2,149,697
415,441
2,209,409
2,094,375
999,130
999,512
962,702
991,819
669,335
677,621
686,320
806,342
819,963
859,779
869,664
878,598
8,365,280
19,540,586
8,391,885
19,524,837
8,325,905
19,379,443
7,904,878
19,007,311
7,901,842
18,644,273
7,711,418
18,258,858
7,585,583
17,844,541
7,287,686
17,399,475
Table 32
As of:
December 31, 2018
September 30, 2018
June 30, 2018
March 31, 2018
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
On-Balance Sheet Outstanding Business Volume
Fixed Rate
5- to 10-Year
ARMs & Resets
1-Month to 3-Year
ARMs
Total Held in
Portfolio
(in thousands)
$
8,325,347
$
2,717,505
$
4,705,169
$
15,748,021
7,945,007
7,551,149
7,507,581
7,158,014
6,921,477
6,722,463
5,373,283
5,346,011
2,629,612
2,594,399
2,498,985
2,499,203
2,447,923
2,406,120
2,330,819
2,274,535
4,986,987
5,398,021
5,432,923
5,309,126
5,426,757
5,226,982
5,255,146
4,888,291
15,561,606
15,543,569
15,439,489
14,966,343
14,796,157
14,355,565
12,959,248
12,508,837
133
The following table presents the quarterly net effective spread (a non-GAAP measure) by segment:
Table 33
For the quarter ended:
December 31, 2018(2)
September 30, 2018
June 30, 2018
March 31, 2018
December 31, 2017(2)
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
Net Effective Spread by Line of Business
Farm & Ranch
USDA Guarantees
Rural Utilities
Institutional Credit
Corporate
Net Effective
Spread(1)
Dollars
Yield
Dollars
Yield
Dollars
Yield
Dollars
Yield
Dollars
Yield
Dollars
Yield
(dollars in thousands)
$ 13,288
1.79% $ 4,630
0.85% $ 2,833
1.19% $ 15,751
0.80% $ 2,353
0.36% $ 38,855
13,887
13,347
12,540
12,396
11,303
11,158
10,511
10,131
1.91%
1.86%
1.80%
1.80%
1.73%
1.77%
1.77%
1.75%
4,627
4,398
4,400
4,979
4,728
4,551
4,561
5,152
0.86%
0.83%
0.82%
0.93%
0.90%
0.87%
0.89%
1.04%
2,877
2,923
2,950
3,057
2,765
2,669
2,568
2,530
1.18%
1.15%
1.12%
1.14%
1.07%
1.06%
1.04%
1.02%
15,642
15,220
14,824
14,800
14,455
14,467
12,615
11,636
0.78%
0.76%
0.78%
0.78%
0.78%
0.81%
0.82%
0.78%
2,044
274
2,387
2,235
2,725
2,489
2,271
1,999
0.30%
0.04%
0.36%
0.35%
0.41%
0.36%
0.32%
0.26%
39,077
36,162
37,101
37,467
35,976
35,334
32,526
31,448
0.93%
0.93%
0.86%
0.91%
0.93%
0.91%
0.91%
0.90%
0.88%
(1) Net effective spread is a non-GAAP measure. Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread to also
include the net effects of terminations or net settlements on financial derivatives. All prior period information has been recast to reflect the revised net effective
spread methodology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net
Effective Spread" for more information about net effective spread.
See Note 14 to the consolidated financial statements for a reconciliation of GAAP net interest income by line of business to net effective spread by line of
business for the years ended December 31, 2018 and 2017.
(2)
134
The following table presents quarterly core earnings (a non-GAAP measure) reconciled to net income
attributable to common stockholders:
Table 34
Revenues:
Core Earnings by Quarter End
December
2018
September
2018
June
2018
March
2018
December
2017
September
2017
June
2017
March
2017
December
2016
Net effective spread
$
38,855
$
39,077
$ 36,162
$ 37,101
$ 37,467
$
35,976
$ 35,334
$ 32,526
$
31,448
Guarantee and commitment fees
Other
Total revenues
Credit related expense/(income):
Provision for/(release of) losses
REO operating expenses
Losses/(gains) on sale of REO
Total credit related expense/
(income)
Operating expenses:
Compensation and employee benefits
General and administrative
Regulatory fees
5,309
(129)
5,170
110
5,171
111
5,083
428
5,157
69
4,935
274
4,942
107
5,316
485
5,158
545
44,035
44,357
41,444
42,612
42,693
41,185
40,383
38,327
37,151
166
—
—
166
7,167
5,829
687
(3)
—
41
38
582
—
(34)
(410)
16
—
464
—
(964)
384
—
(32)
466
23
(757)
548
(394)
(500)
352
(268)
444
—
5
449
6,777
4,350
625
6,936
5,202
625
6,654
4,326
625
5,247
4,348
625
5,987
3,890
625
6,682
3,921
625
6,317
3,800
625
512
—
—
512
5,949
4,352
625
Total operating expenses
13,683
11,752
12,763
11,605
10,220
10,502
11,228
10,742
10,926
Net earnings
Income tax expense
Net (loss)/income attributable to non-
controlling interest(1)
Preferred stock dividends
30,186
6,431
—
3,296
32,567
6,891
—
3,295
28,133
5,477
—
3,296
31,401
6,259
—
3,295
32,973
11,796
—
3,296
30,331
10,268
—
3,295
29,423
10,307
27,136
8,844
(150)
3,296
(15)
3,295
25,713
9,189
28
3,296
Core earnings
$
20,459
$
22,381
$ 19,360
$ 21,847
$ 17,881
$
16,768
$ 15,970
$ 15,012
$
13,200
Reconciling items:
(Losses)/gains on undesignated
financial derivatives due to fair
value changes
(Losses)/gains on hedging activities
due to fair value changes
Unrealized gains/(losses) on
trading assets
Amortization of premiums/
discounts and deferred gains on
assets consolidated at fair value
Net effects of terminations or net
settlements on financial derivatives
Re-measurement of net deferred
tax asset due to enactment of new
tax legislation
Income tax effect related to
reconciling items
Net income attributable to
common stockholders
57
67
(312)
—
238
(96)
3,625
6,709
(2,279)
(261)
995
801
8,683
17,906
(853)
1,051
1,687
2,564
(3)
11
16
(3)
60
1,742
1,420
(3,878)
(673)
—
(2)
(82)
(474)
(38)
546
196
232
(686)
(129)
(954)
(117)
(127)
(40)
1,242
632
862
232
948
2,150
—
—
—
(1,365)
—
—
—
—
(1,088)
(1,855)
(180)
(105)
(926)
(816)
(1,941)
(6,604)
$
19,560
$
26,474
$ 26,340
$ 22,524
$ 16,710
$
18,487
$ 17,488
$ 18,615
$
25,465
(1) As of May 1, 2017, Farmer Mac transferred its entire 65% ownership interest in AgVisory back to the limited liability company.
135
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Farmer Mac is exposed to market risk from changes in interest rates. Farmer Mac manages this market
risk by entering into various financial transactions, including financial derivatives, and by monitoring and
measuring its exposure to changes in interest rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations—Risk Management—Interest Rate Risk" for more
information about Farmer Mac's exposure to interest rate risk and its strategies to manage that risk. For
information about Farmer Mac's use of financial derivatives and related accounting policies, see Note 6 to
the consolidated financial statements.
Item 8.
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, 2018. 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 (2013). Based on its evaluation under the COSO
criteria, management concluded that Farmer Mac's internal control over financial reporting as of
December 31, 2018 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, 2018, as
stated in their report appearing below.
136
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of the Federal Agricultural Mortgage Corporation:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Federal Agricultural Mortgage
Corporation and its subsidiaries (the "Company") as of December 31, 2018 and 2017 and the related
consolidated statements of operations, comprehensive income, equity and cash flows for each of the three
years in the period ended December 31, 2018, including the related notes (collectively referred to as the
“consolidated financial statements”). We also have audited the Company's internal control over financial
reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2018 in
conformity with accounting principles generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated 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 Controls
over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated
financial statements and on the Company's internal control over financial reporting based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (PCAOB) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well
137
as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
/s/ PricewaterhouseCoopers LLP
McLean, VA
February 21, 2019
We have served as the Company’s auditor since 2010.
138
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of
December 31, 2018
December 31, 2017
(in thousands)
$
425,256
$
302,022
Assets:
Cash and cash equivalents
Investment securities:
Available-for-sale, at fair value
Held-to-maturity, at amortized cost
Total Investment Securities
Farmer Mac Guaranteed Securities:
Available-for-sale, at fair value
Held-to-maturity, at amortized cost
Total Farmer Mac Guaranteed Securities
USDA Securities:
Trading, at fair value
Held-to-maturity, at amortized cost
Total USDA Securities
Loans:
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 $19,783 and $17,373, 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 $17,125 and $14,631, respectively, related to consolidated trusts)
Guarantee and commitment obligation
Accounts payable and accrued expenses
Deferred tax liability, net
Reserve for losses
Total Liabilities
Commitments and Contingencies (Note 6)
Equity:
Preferred stock:
Series A, par value $25 per share, 2,400,000 shares authorized, issued and outstanding
Series B, par value $25 per share, 3,000,000 shares authorized, issued and outstanding
Series C, par value $25 per share, 3,000,000 shares authorized, 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, 9,137,550 shares and 9,087,670
shares outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income, net of tax
Retained earnings
Total Equity
Total Liabilities and Equity
$
$
$
2,217,852
45,032
2,262,884
5,974,497
2,096,618
8,071,115
9,999
2,166,174
2,176,173
4,004,968
1,517,101
(7,017)
5,515,052
128
7,487
180,080
40,366
6,369
9,418
18,694,328
7,757,050
8,486,647
16,243,697
1,528,957
19,633
96,743
38,683
11,891
—
2,167
17,941,771
$
$
58,333
73,044
73,382
1,031
500
9,138
118,822
24,956
393,351
752,557
18,694,328
$
2,215,405
45,032
2,260,437
5,471,914
2,126,274
7,598,188
13,515
2,117,850
2,131,365
3,873,755
1,399,827
(6,796)
5,266,786
139
7,093
155,278
39,895
2,048
29,023
17,792,274
8,089,826
7,432,790
15,522,616
1,404,945
26,599
75,402
38,400
14,096
—
2,070
17,084,128
58,333
73,044
73,382
1,031
500
9,088
118,979
51,085
322,704
708,146
17,792,274
The accompanying notes are an integral part of these consolidated financial statements.
139
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31,
2018
2017
2016
(in thousands, except per share amounts)
$
55,179
$
34,586
$
Interest income:
Investments and cash equivalents
Farmer Mac Guaranteed Securities and USDA Securities
Loans
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income:
Guarantee and commitment fees
(Losses)/gains on financial derivatives
Gains/(losses) on trading securities
Gains/(losses) on sale of available-for-sale investment securities
(Losses)/gains on sale of real estate owned
Other income
Non-interest income
Non-interest expense:
Compensation and employee benefits
General and administrative
Regulatory fees
Real estate owned operating costs, net
Provision for/(release of) reserve for losses
Non-interest expense
Income before income taxes
Income tax expense
Net income
Less: Net loss attributable to non-controlling interest
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
290,953
198,152
544,284
369,848
174,436
(238)
174,198
13,976
(3,687)
81
—
(7)
1,377
11,740
27,534
19,707
2,562
16
97
49,916
136,022
27,942
108,080
—
108,080
(13,182)
203,796
162,150
400,532
242,885
157,647
(1,708)
155,939
14,114
753
(24)
89
1,748
832
17,512
24,233
15,959
2,500
23
50
42,765
130,686
46,369
84,317
165
84,482
(13,182)
94,898
$
71,300
$
27,042
150,281
134,577
311,900
171,626
140,274
(1,065)
139,209
14,868
2,311
1,460
(9)
15
1,823
20,468
22,772
15,109
2,463
39
(63)
40,320
119,357
42,057
77,300
34
77,334
(13,182)
64,152
$
$
$
8.91
8.83
$
$
6.73
6.60
$
$
6.12
5.97
The accompanying notes are an integral part of these consolidated financial statements.
140
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income before taxes:
Net unrealized (losses)/gains on available-for-sale securities
Net changes in held-to-maturity securities
Net unrealized gains on cash flow hedges
Other comprehensive (loss)/income before tax
Income tax benefit/(expense) related to other comprehensive (loss)/income
Other comprehensive (loss)/income net of tax
Comprehensive income
Less: comprehensive loss attributable to non-controlling interest
For the Year Ended December 31,
2018
2017
2016
(in thousands)
$
108,080
$
84,317
$
77,300
(29,980)
(6,067)
2,938
(33,109)
6,953
(26,156)
81,924
—
20,012
(9,329)
2,046
12,729
(4,455)
8,274
92,591
165
(6,694)
71,120
4,463
68,889
(24,112)
44,777
122,077
34
Comprehensive income attributable to Farmer Mac
$
81,924
$
92,756
$
122,111
The accompanying notes are an integral part of these consolidated financial statements.
141
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Accumulated
Additional
Other
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Paid-In
Capital
Comprehensive
Retained
Non-controlling
Total
Income/(Loss)
Earnings
Interest
Equity
(in thousands)
Balance as of January 1, 2016
8,400
$204,759
10,687
$ 10,687
$ 117,862
$
(11,019) $ 231,228
$
203
$ 553,720
Net income/(loss):
Attributable to Farmer Mac
Attributable to non-controlling
interest
Other comprehensive income, net of
tax
Cash dividends:
Preferred stock
Common stock
Issuance of Class C Common Stock
Repurchase of Class C Common Stock
Stock-based compensation cost
Other stock-based award activity
Redemption of interest in subsidiary -
non-controlling interest
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
159
(307)
—
—
—
—
—
—
—
—
159
(307)
—
—
—
—
—
—
—
—
534
—
3,343
(3,084)
—
—
—
44,777
—
—
—
—
—
—
—
77,334
—
77,334
—
—
(13,182)
(10,885)
—
(8,781)
—
—
—
(34)
(34)
—
—
—
—
—
—
—
53
44,777
(13,182)
(10,885)
693
(9,088)
3,343
(3,084)
53
Balance as of December 31, 2016
8,400
$204,759
10,539
$ 10,539
$ 118,655
$
33,758
$ 275,714
$
222
$ 643,647
84,482
—
84,482
—
—
8,274
—
—
Net income/(loss):
Attributable to Farmer Mac
Attributable to non-controlling
interest
Other comprehensive income, net of
tax
Reclassification of stranded tax effects
due to enactment of new tax legislation
Cash dividends:
Preferred stock
Common stock
Issuance of Class C Common Stock
Stock-based compensation cost
Other stock-based award activity
Redemption of interest in subsidiary
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
80
—
—
—
—
—
—
—
—
—
80
—
—
—
—
—
—
—
—
—
231
2,701
(2,608)
—
Balance as of December 31, 2017
8,400
$204,759
10,619
$ 10,619
$ 118,979
Balance as of December 31, 2017
8,400
$204,759
10,619
$ 10,619
$ 118,979
9,053
(9,053)
—
—
—
—
—
—
(13,182)
(15,257)
—
—
—
—
$
$
51,085
$ 322,704
51,085
$ 322,704
$
$
Cumulative effect from change in
hedge accounting
—
—
—
—
—
27
471
Balance as of January 1, 2018
8,400
$204,759
10,619
$ 10,619
$ 118,979
$
51,112
$ 323,175
$
Net income:
Attributable to Farmer Mac
Other comprehensive income, net of
tax
Cash dividends:
Preferred stock
Common stock
Issuance of Class C Common Stock
Stock-based compensation cost
Other stock-based award activity
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
50
—
—
—
—
—
—
50
—
—
—
—
—
—
7
2,518
(2,682)
—
108,080
(26,156)
—
—
—
—
—
—
(13,182)
(24,722)
—
—
—
(165)
(165)
—
—
—
—
—
—
—
(57)
8,274
—
(13,182)
(15,257)
311
2,701
(2,608)
(57)
— $ 708,146
— $ 708,146
—
498
— $ 708,644
—
—
—
—
—
—
—
108,080
(26,156)
(13,182)
(24,722)
57
2,518
(2,682)
Balance as of December 31, 2018
8,400
$204,759
10,669
$ 10,669
$ 118,822
$
24,956
$ 393,351
$
— $ 752,557
The accompanying notes are an integral part of these consolidated financial statements.
142
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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 Securities
Amortization of debt premiums, discounts and issuance costs
Net change in fair value of trading securities, hedged assets, and financial derivatives
Losses/(gains) on sale of real estate owned
Total provision for losses
Excess tax benefits related to stock-based awards
Deferred income taxes
Other
Stock-based compensation expense
Purchases of loans held for sale
Proceeds from the sale of loans held for sale
Proceeds from repayment of trading investment securities
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 held-to-maturity investment securities
Purchases of Farmer Mac Guaranteed Securities and USDA 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 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 by 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
Tax payments related to share-based awards
Common stock repurchased
Investment in subsidiary - non-controlling interest
Dividends paid on common and preferred stock
Net cash provided/(used) by financing activities
Net 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,
2017
2018
2016
(in thousands)
$
108,080
$
84,317
$
77,300
(1,104)
30,207
(23,747)
7
335
946
2,625
—
2,517
(25,000)
25,000
—
92,060
(25,866)
(188)
(6,435)
21,341
(747)
200,031
1,739
22,858
(11,187)
(1,748)
1,758
860
3,221
11
2,702
—
—
—
70,630
(32,468)
94
3,641
25,702
2,881
175,011
(1,221,392)
—
(3,470,832)
(947,495)
(9,231)
1,242,310
2,813,041
611,344
—
382,929
116
(599,210)
41,726,788
7,692,845
(41,891,576)
(6,834,057)
—
(131,058)
7
(2,631)
—
—
(37,905)
522,413
123,234
302,022
425,256
$
(979,671)
(45,032)
(2,913,514)
(1,266,926)
(5,981)
1,326,779
1,063,178
435,356
10,218
519,219
8,099
(1,848,275)
51,980,890
8,600,860
(54,064,438)
(4,675,300)
—
(101,218)
238
(2,536)
—
—
(28,439)
1,710,057
36,793
265,229
302,022
$
1,828
31,757
(15,086)
(15)
1,002
—
4,103
9
3,343
—
—
2,212
70,087
(9,922)
1,318
43,560
2,079
(884)
212,691
(1,753,423)
—
(2,579,980)
(1,016,515)
(2,516)
1,725,045
1,834,672
402,897
186,769
609,347
295
(593,409)
95,036,368
6,519,115
(97,918,539)
(4,083,450)
1,428
(82,209)
553
(4,103)
(9,286)
53
(24,067)
(564,137)
(944,855)
1,210,084
$
265,229
The accompanying notes are an integral part of these consolidated financial statements.
143
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
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.
•
As of December 31, 2018 and 2017, the total outstanding balance in all of Farmer Mac's lines of business
was $19.7 billion and $19.0 billion, respectively.
Under the Farm & Ranch line of business, Farmer Mac purchases eligible mortgage loans secured by first
liens on agricultural real estate, which includes part-time farms and rural housing ("Farm & Ranch
loans"). Farmer Mac also guarantees securities representing interests in pools of mortgage loans eligible
for the Farm & Ranch line of business, which are referred to as "Farm & Ranch Guaranteed
Securities." Farmer Mac also commits to purchase, subject to 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. As of December 31, 2018 and 2017,
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
$7.2 billion and $6.9 billion, respectively.
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, 2018 and
2017, outstanding Farmer Mac Guaranteed USDA Securities and USDA Securities totaled $2.5 billion and
$2.4 billion, respectively.
144
Farmer Mac's authorized activities under the Rural Utilities line of business are similar to those conducted
under the Farm & Ranch line of business – purchases of, and guarantees of securities backed by, eligible
rural utilities loans, as well as the issuance of LTSPCs for pools of eligible rural utilities loans ("Rural
Utilities loans"). To be eligible, loans must meet Farmer Mac's credit underwriting and other specified
standards. As of December 31, 2018 and 2017, the aggregate outstanding principal balance of Rural
Utilities loans held or subject to LTSPCs was $1.6 billion and $1.9 billion, respectively.
Under the Institutional Credit line of business, Farmer Mac guarantees and purchases general obligations
of lenders that are secured by pools of loans that would be eligible under Farmer Mac's Farm & Ranch,
USDA Guarantees, or Rural Utilities lines of business. AgVantage® is a registered trademark of Farmer
Mac used to designate Farmer Mac's guarantees of securities related to these general obligations of lenders
that are secured by pools of eligible loans and that comprise the Institutional Credit line of business. As of
December 31, 2018 and 2017, outstanding securities held or guaranteed by Farmer Mac in its Institutional
Credit line of business totaled $8.4 billion and $7.9 billion, respectively.
Farm & Ranch Guaranteed Securities, Farmer Mac Guaranteed USDA Securities, and AgVantage
Securities are collectively referred to as "Farmer Mac Guaranteed Securities." The assets collateralizing
Farmer Mac Guaranteed Securities include (1) loans or loan participation interests eligible for purchase
under either the Farm & Ranch or Rural Utilities lines of business or (2) USDA Securities eligible for
purchase under the USDA Guarantees line of business. 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; 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, 2018, Farmer
Mac had $1.6 billion of discount notes and $14.6 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").
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
145
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 during
the year: (1) Farmer Mac Mortgage Securities Corporation ("FMMSC"), whose principal activities are to
facilitate the purchase and issuance of Farmer Mac Guaranteed Securities; and (2) Farmer Mac II LLC,
whose principal activity is the operation of substantially all of the business related to the USDA
Guarantees line of business – primarily the acquisition of USDA Securities. The consolidated financial
statements also include the accounts of VIEs in which Farmer Mac determined itself to be the primary
beneficiary. The accounts of Contour Valuation Services, LLC (which began doing business as AgVisory
during first quarter 2016) ("AgVisory"), Farmer Mac's former majority-owned subsidiary, are also
included through June 30, 2017. Farmer Mac redeemed its ownership interest in AgVisory on May 1,
2017.
(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 following table sets forth information regarding certain cash and non-cash transactions for the years
ended December 31, 2018, 2017, and 2016:
Table 2.1
Cash paid during the period for:
Interest
Income taxes
Non-cash activity:
For the Years Ended December 31,
2018
2017
2016
(in thousands)
$
268,728
$
161,060
$
110,609
30,882
39,500
29,500
Real estate owned acquired through loan liquidation
Loans acquired and securitized as Farmer Mac Guaranteed Securities
Consolidation of Farmer Mac Guaranteed Securities from off-balance sheet to loans
held for investment in consolidated trusts and to debt securities of consolidated trusts
held by third parties
Purchases of securities - traded not yet settled
Transfers of available-for-sale USDA Securities to held-to-maturity
Transfers of available-for-sale Farmer Mac Guaranteed Securities to held-to-maturity
128
382,929
255,080
(1,400)
—
—
5,400
519,219
363,475
1,400
—
—
—
609,347
511,393
—
1,980,327
32,824
On October 1, 2016, Farmer Mac transferred $2.0 billion of USDA Securities and $32.8 million of Farmer
Mac Guaranteed USDA Securities from available-for-sale to held-to-maturity to reflect Farmer Mac’s
positive intent and ability to hold these securities until maturity or payoff. Farmer Mac transferred these
securities at fair value as of the date of the transfer, which resulted in a cost basis adjustment of unrealized
appreciation in the amount of $73.1 million for the USDA Securities and $0.7 million for the Farmer Mac
Guaranteed USDA Securities. The accumulated unrealized appreciation was retained in accumulated other
comprehensive income in the amount of $73.8 million. Farmer Mac accounts for held-to-maturity
146
securities at amortized cost. Both the cost basis adjustment and accumulated unrealized appreciation are
being amortized as adjustments to the yield on the held-to-maturity USDA Securities over the remaining
contractual term of the transferred securities.
(c) Investment Securities, Farmer Mac Guaranteed Securities, and USDA Securities
Securities for which Farmer Mac has the intent and ability to hold to maturity are classified as held-to-
maturity and are carried at amortized cost. 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.
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 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. Loans for which Farmer Mac does not have the positive intent and
ability 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. Farmer Mac de-recognizes sold loans, and recognizes any
associated gain or loss, when they have been isolated from Farmer Mac, the buyer has the right to pledge
or exchange them, and Farmer Mac does not maintain effective control over them. 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(p) for more information
on the accounting policy related to consolidation.
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
147
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.
Troubled Debt Restructuring ("TDR")
A modification to the contractual terms of a loan that results in granting a concession to a borrower
experiencing financial difficulties is considered a 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.
(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 the 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) Real Estate Owned
Real estate owned ("REO") consists of real estate acquired through loan liquidation and is recorded at fair
value less estimated selling costs 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 costs is charged to the allowance for loan losses. After 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.
(g) 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
148
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 under GAAP.
Accounting for financial derivatives differs depending on whether a derivative is designated in a hedge
accounting relationship. Derivative instruments designated in fair value hedge accounting relationships
mitigate exposure to changes in the fair value of assets or liabilities. Derivative instruments designated in
cash flow hedge accounting 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 is assessed before the end of the
quarter of inception and monitored over the life of the hedging relationship.
Beginning in first quarter 2018, changes in the fair values of financial derivatives not designated as cash
flow or fair value hedges are reported in "(Losses)/gains on financial derivatives" in the consolidated
statements of operations. For financial derivatives designated in fair value hedge relationships, changes in
the fair values of hedged items related to the risk being hedged are reported in "Net interest income" in the
consolidated statements of operations. Interest accruals on derivatives designated in fair value hedge
relationships are also recorded in "Net interest income" in the consolidated statements of operations. For
financial derivatives designated in cash flow hedge relationships, the unrealized gain or loss on the
derivative is recorded in other comprehensive income. Because the hedging instrument is an interest rate
swap and the hedged forecasted transactions are future interest payments on variable rate debt, amounts
recorded in accumulated other comprehensive income are reclassified to "Total interest expense" in
conjunction with the recognition of interest expense on the debt. Before 2018, gains and losses on
financial derivatives were included in "(Losses)/gains on financial derivatives" whether or not they were
designated in hedge accounting relationships.
Farmer Mac has made an accounting policy election to measure the credit risk of its derivative financial
instruments that are subject to netting provisions on a net basis by counterparty portfolio. See Notes 6 and
13 for more information on financial derivatives.
(h) 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.
(i) Allowance for Loan Losses and Reserve 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.
149
The allowance for losses increases through periodic provisions for loan losses that are charged against net
interest income and the reserve for losses increases through provisions for losses that are charged to non-
interest expense, and decreases by charge-offs for realized losses, net of recoveries. Negative provisions,
or releases from the allowance for losses, generally occur when the estimate of probable losses as of the
end of a period is less 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 released and a corresponding amount is provided to the allowance 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
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 considering many relevant 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.
Farmer Mac separately evaluates the rural utilities loans it owns to determine if there are any probable
losses inherent in those assets.
150
Specific Allowance for Impaired Loans
Farmer Mac also analyzes certain loans in its portfolio for impairment in accordance with accounting
guidance on measuring impairment of individual loans. 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.
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. 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 before 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). A property appraisal value may also be discounted based on the market's
reaction to Farmer Mac's asking price for sale of the property.
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 believes this methodology that uses loan classification
scores and historical loss experience is a better indication of impairment for these collateral-dependent
loans than other valuation methods.
(j) 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 unvested restricted stock awards. The following schedule reconciles
basic and diluted EPS for the years ended December 31, 2018, 2017, and 2016:
151
Table 2.2
Basic EPS
Net income attributable to common
stockholders
Effect of dilutive securities(1)
Stock options, SARs and restricted
stock
Diluted EPS
(1)
For the Years Ended December 31,
2018
Weighted-
Average
Shares
Net
Income
$ per
Share
Net
Income
2017
Weighted-
Average
Shares
$ per
Share
Net
Income
2016
Weighted-
Average
Shares
$ per
Share
(in thousands, except per share amounts)
$94,898
10,654
$ 8.91
$71,300
10,594
$ 6.73
$64,152
10,477
$ 6.12
—
92
(0.08)
—
209
(0.13)
—
269
(0.15)
$94,898
10,746
$ 8.83
$71,300
10,803
$ 6.60
$64,152
10,746
$ 5.97
For the years ended December 31, 2018, 2017, and 2016, stock options and SARs of 15,812, 28,579, and 86,907, 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, 2018,
2017, and 2016, contingent shares of unvested restricted stock of 13,138, 29,647, and 37,284, respectively, were outstanding but not included in the
computation of diluted earnings per share of common stock because performance conditions had not yet been met.
(k) 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. New tax
reform legislation was enacted on December 22, 2017. This new tax legislation includes a broad range of
tax reform provisions, including a reduction to the corporate tax rate, changes to business expense
deductions, and changes to taxes on international earnings. U.S. GAAP requires recognition of the effect
of changes in tax law and tax rates as a component of the income tax provision related to continuing
operations in the period of enactment of the new legislation. This accounting treatment is also required for
deferred taxes that were established through a financial statement component other than continuing
operations such as other comprehensive income. Thus, Farmer Mac remeasured its deferred tax assets and
liabilities using the newly enacted statutory tax rate of 21% and recognized a one-time, non-cash charge of
$1.4 million to income tax expense during 2017.
Due to the re-measurement of Farmer Mac's deferred tax assets and liabilities using the newly enacted
statutory federal income tax rate of 21%, items originally recorded through other comprehensive income
do not reflect the new tax rate ("stranded tax effects"). In response, in February 2018, the Financial
Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02
"Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which provides
entities the option to reclassify these stranded tax effects from accumulated other comprehensive income
to retained earnings. Farmer Mac elected to adopt ASU 2018-02 for the year ended December 31, 2017.
This change in accounting principle resulted in an increase to "Accumulated other comprehensive income,
net of tax" and a corresponding decrease to "Retained earnings" of $9.1 million.
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 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%) 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
152
recognized is then measured at the largest amount of tax benefit that is greater than 50% 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.
(l) 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 $2.5 million, $2.7 million, and $3.3 million of compensation expense related to
stock options, SARs, and non-vested restricted stock awards for 2018, 2017, and 2016, respectively.
(m) Comprehensive Income
Comprehensive income represents all changes in stockholders' equity except those resulting from
investments by or distributions to stockholders, and is comprised of net income and unrealized gains and
losses on available-for-sale securities, certain held-to-maturity securities transferred from the available-
for-sale classification, and cash flow hedges, net of related taxes.
153
The following table presents the changes in accumulated other comprehensive income ("AOCI"), net of
tax, by component for the years ended December 31, 2018, 2017, and 2016:
Table 2.3
Available-for-Sale
Securities
Held-to-Maturity
Securities
Cash Flow
Hedges
Total
Balance as of January 1, 2016
Other comprehensive income before reclassifications
Amounts reclassified from AOCI
Net comprehensive (loss)/income
Balance as of December 31, 2016
Other comprehensive income before reclassifications
Amounts reclassified from AOCI
Net comprehensive income/(loss)
Stranded tax effects reclassified from AOCI due to
enactment of new tax legislation
Balance as of December 31, 2017
Cumulative effect from change in hedge accounting
Balance as of January 1, 2018
Other comprehensive (loss)/income before reclassifications
Amounts reclassified from AOCI
Net comprehensive (loss)/income
Balance as of December 31, 2018
$
$
$
$
(in thousands)
(10,035) $
(476) $
(508) $
(11,019)
5,481
(9,833)
(4,352)
47,993
(1,765)
46,228
1,588
1,313
2,901
(14,387) $
45,752
$
2,393
$
23,925
(10,917)
13,008
(297)
—
(6,064)
(6,064)
8,548
152
1,178
1,330
802
(1,676) $
48,236
$
4,525
$
—
(1,676)
(19,151)
(4,533)
(23,684)
—
48,236
—
(4,793)
(4,793)
27
4,552
2,571
(250)
2,321
(25,360) $
43,443
$
6,873
$
55,062
(10,285)
44,777
33,758
24,077
(15,803)
8,274
9,053
51,085
27
51,112
(16,580)
(9,576)
(26,156)
24,956
The following table presents other comprehensive income activity, the impact on net income of amounts
reclassified from each component of AOCI, and the related tax impact for the years ended December 31,
2018, 2017, and 2016:
154
Table 2.4
Other comprehensive income:
Available-for-sale-securities:
Unrealized holding (losses)/gains on
available-for-sale-securities
Less reclassification adjustments included
in:
Net Interest Income(1)
(Losses)/gains on financial derivatives(1)
(Losses)/gains on sale of available-for-
sale investment securities(2)
Other income(3)
2018
For the Years Ended
2017
2016
Before
Tax
Provision
(Benefit)
After
Tax
Before
Tax
Provision
(Benefit)
After
Tax
Before
Tax
Provision
(Benefit)
After
Tax
(in thousands)
$ (24,241) $ (5,090) $(19,151) $ 36,809
$ 12,884
$ 23,925
$ 8,433
$
2,952
$ 5,481
(5,784)
(1,215)
(4,569)
—
—
—
—
—
—
—
—
45
—
—
9
— (16,845)
(5,897)
(10,948)
(15,375)
(5,381)
(9,994)
—
36
(89)
137
(31)
48
(58)
89
9
239
3
84
6
155
Total
$ (29,980) $ (6,296) $(23,684) $ 20,012
$
7,004
$ 13,008
$ (6,694)
$
(2,342) $ (4,352)
Held-to-maturity securities:
Change in fair value(4)
Less reclassification adjustments included
in:
Net interest income(5)
Total
Cash flow hedges
Unrealized gains/(losses) on cash flow
hedges
Less reclassification adjustments included
in:
—
—
—
—
—
— 73,835
25,842
47,993
(6,067)
(1,274)
(4,793)
(9,329)
(3,265)
(6,064)
(2,715)
(950)
(1,765)
$
(6,067) $ (1,274) $ (4,793) $ (9,329) $ (3,265) $ (6,064) $71,120
$
24,892
$ 46,228
$
3,254
$
683
$ 2,571
$
233
$
81
$
152
$ 2,443
$
855
$ 1,588
Net interest income(6)
Total
(316)
(66)
(250)
1,813
$
2,938
$
617
$ 2,321
$ 2,046
Other comprehensive (loss)/income
$ (33,109) $ (6,953) $(26,156) $ 12,729
$
$
635
716
1,178
2,020
707
1,313
$ 1,330
$ 4,463
4,455
$ 8,274
$68,889
$
$
1,562
$ 2,901
24,112
$ 44,777
(1) Relates to the amortization of unrealized gains on hedged items prior to the application of fair value hedge accounting.
(2) Represents unrealized gains and losses on sales of available-for-sale investment securities.
(3) Represents amortization of deferred gains related to certain available-for-sale USDA Securities and Farmer Mac Guaranteed USDA Securities.
(4) Represents the accumulated unrealized gain on the USDA Securities and the Farmer Mac Guaranteed Securities transferred from available-for-sale to
held-to-maturity.
(5) Relates to the amortization of unrealized gains or losses prior to the reclassification of these securities from available-for-sale to held-to-maturity. The
amortization of unrealized gains or losses reported in AOCI for held-to-maturity securities will be offset by the amortization of the premium or discount
created from the transfer into held-to-maturity securities, which occurred at fair value. These unrealized gains or losses will be recorded over the
remaining life of the security with no impact on future net income.
(6) Relates to the recognition of unrealized gains and losses on cash flow hedges recorded in AOCI.
(n) 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(i) for Farmer Mac's policy for estimating probable losses for LTSPCs and Note 12 for
more information on the accounting for LTSPCs.
(o) 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
155
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.
(p) 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 in which Farmer Mac has a variable interest but is not the primary beneficiary, Farmer
Mac's interests are presented as either "Farmer Mac Guaranteed Securities," "USDA Securities," or
156
"Investment securities" on the consolidated balance sheets. Farmer Mac's involvement in VIEs classified
as Farmer Mac Guaranteed Securities or USDA Securities include securitization trusts under the USDA
Guarantees line of business and certain trusts related to 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 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:
Table 2.5
On-Balance Sheet:
Consolidated VIEs:
Loans held for investment in consolidated
trusts, at amortized cost
Debt securities of consolidated trusts held by
third parties (1)
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Carrying value (2)
Maximum exposure to loss (3)
Investment securities:
Carrying value (4)
Maximum exposure to loss (3) (4)
Off-Balance Sheet:
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Maximum exposure to loss (3) (5)
Consolidation of Variable Interest Entities
As of December 31, 2018
Farm &
Ranch
USDA
Guarantees
Rural
Utilities
Institutional
Credit
Corporate
Total
(in thousands)
$ 1,517,101
$
— $
— $
— $
— $ 1,517,101
1,528,957
—
—
—
—
—
27,627
27,383
—
—
—
—
—
—
—
—
—
—
—
—
—
1,528,957
—
—
27,627
27,383
1,000,942
1,000,942
1,003,968
1,003,968
135,862
367,684
—
—
—
503,546
(1)
(2)
(3)
(4)
(5)
Includes borrower remittances of $11.9 million. The borrower remittances had not been passed through to third party investors as of December 31, 2018.
Includes $0.2 million of unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees line of business.
Farmer Mac uses unpaid principal balance and outstanding face amount of investment securities to represent maximum exposure to loss.
Includes auction-rate certificates, asset-backed securities, and government-sponsored enterprise ("GSE")-guaranteed mortgage-backed securities.
The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary
due to shared power with an unrelated party.
157
Consolidation of Variable Interest Entities
As of December 31, 2017
Farm &
Ranch
USDA
Guarantees
Rural
Utilities
Institutional
Credit
Corporate
Total
(in thousands)
$ 1,399,827
$
— $
— $
— $
— $ 1,399,827
1,404,945
—
—
—
—
—
30,300
29,980
—
—
—
—
—
—
—
—
—
—
—
—
—
1,404,945
—
—
30,300
29,980
783,964
783,916
783,964
783,916
333,511
254,217
—
—
—
587,728
On-Balance Sheet:
Consolidated VIEs:
Loans held for investment in consolidated
trusts, at amortized cost
Debt securities of consolidated trusts held by
third parties (1)
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Carrying value (2)
Maximum exposure to loss (3)
Investment securities:
Carrying value (4)
Maximum exposure to loss (3) (4)
Off-Balance Sheet:
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Maximum exposure to loss (3) (5)
(1)
(2)
(3)
(4)
(5)
Includes borrower remittances of $5.1 million, which have not been passed through to third party investors as of December 31, 2017.
Includes $0.3 million of unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees line of business.
Farmer Mac uses unpaid principal balance and the outstanding face amount of investment securities to represent maximum exposure to loss.
Includes auction-rate certificates, asset-backed securities, and GSE-guaranteed mortgage-backed securities.
The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary
due to shared power with an unrelated party.
(q) New Accounting Standards
In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic
842)," which provides new guidance intended to improve financial reporting about leasing transactions.
The ASU requires organizations that lease assets to recognize on the balance sheet the assets and liabilities
for the rights and obligations created by those leases. The ASU also requires new disclosures to help
investors and other financial statement users better understand the amount, timing, and uncertainty of cash
flows arising from leases. The new standard is effective for fiscal years and interim periods within those
fiscal years beginning after December 15, 2018. The adoption of the new guidance will not have a
material effect on Farmer Mac’s financial position, results of operations, or cash flows.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326)," which
will require entities to measure all expected credit losses for financial assets held at the reporting date
based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will
be required to use forward-looking information to form their credit loss estimates. The ASU will also
require enhanced disclosures to help users of financial statements better understand significant estimates
and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of
an entity’s portfolio. The new standard is effective for fiscal years and interim periods within those fiscal
years, beginning after December 15, 2019. Early adoption will be permitted for all entities for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. Farmer Mac is
currently developing its accounting policy, planning for changes to its loss estimation methodologies, and
evaluating the impact that the new guidance will have on its consolidated financial statements. That
158
impact will primarily result from the new requirement to recognize all expected losses rather than just
incurred losses as of the reporting date.
In March 2017, the FASB issued ASU 2017-08, "Receivables—Nonrefundable Fees and Other Costs
(Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities," which shortens the
amortization period for certain callable debt securities held at a premium by requiring the premium to be
amortized to the earliest call date. The ASU does not require an accounting change for securities held at a
discount. The new standard is effective for fiscal years and interim periods within those fiscal years,
beginning after December 15, 2019. Farmer Mac does not expect that adoption of the new guidance will
have a material effect on Farmer Mac's financial position, results of operations, or cash flows.
In first quarter 2018, Farmer Mac adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities," which amends hedge accounting recognition and
presentation requirements to better align a reporting entity's risk management activities and hedge
accounting. The new guidance reduces the complexity and simplifies the application of hedge accounting
by eliminating the requirement to separately measure and report hedge ineffectiveness and by requiring
the entire change in the fair value of a hedging instrument to be presented in the same income statement
line as the hedged item. The cumulative-effect adjustment to retained earnings as of January 1, 2018
reflected application of the new guidance and did not have a material effect on Farmer Mac's financial
position, results of operations, or cash flows.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure
Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which removes or
modifies certain disclosures and adds new disclosures. The new requirements are designed to improve the
effectiveness of disclosures in the notes to the financial statements. The new standard is effective for fiscal
years and interim periods within those fiscal years, beginning after December 15, 2019. Farmer Mac does
not expect that adoption of the new guidance will have a material effect on Farmer Mac's financial
position, results of operations, or cash flows.
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other Internal-Use Software
(Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That is a Service Contract," which requires the application of the same criteria for
capitalization of implementation costs as for an arrangement that has a software license. The new guidance
also prescribes the balance sheet, income statement, and cash flows classifications of the capitalized
implementation costs and related amortization expense, and requires additional quantitative and
qualitative disclosures. The new standard is effective for fiscal years and interim periods within those
fiscal years, beginning after December 15, 2019. Farmer Mac does not expect that adoption of this
guidance will have a material effect on Farmer Mac's financial position, results of operations, or cash
flows.
In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the
Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest
Rate for Hedge Accounting Purposes," which permits the use of the OIS rate based on SOFR as a U.S.
benchmark interest rate for hedge accounting purposes. The new guidance is intended to facilitate the
transition from LIBOR to SOFR as a benchmark interest rate in the coming years. Because Farmer Mac
already adopted ASU 2017-12, the new standard is effective for fiscal years and interim periods within
those fiscal years, beginning after December 15, 2018. Farmer Mac does not currently hold any financial
instruments that use SOFR as the benchmark interest rate. Therefore, this guidance will not have an
159
immediate impact on Farmer Mac's financial position, results of operations, or cash flows. However, as
companies migrate from the use of LIBOR to SOFR, the adoption of this guidance will have a material
effect on Farmer Mac's financial position, results of operations, and cash flows in future years.
(r) 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 5% 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 Farm Credit System 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. Farmer Mac generally requires 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 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 participant in Farmer Mac's lines of business not
related to Farmer Mac.
Zions First National Bank:
Farmer Mac considers Zions First National Bank and its affiliates ("Zions") a related party due to the
ownership by Zions of approximately 31.2% of Farmer Mac's Class A voting common stock. The
following transactions occurred between Farmer Mac and Zions during 2018, 2017, and 2016:
Table 3.1
Unpaid Principal Balance:
Purchases:
Loans
USDA Securities
Sales of Farmer Mac Guaranteed Securities
For the Year Ended December 31,
2018
2017
2016
(in thousands)
$
114,719
$
126,449
$
153,140
19,120
68,721
20,368
128,924
16,600
273,586
The purchases of loans from Zions under the Farm & Ranch line of business represented approximately
11.9%, 11.2%, and 15.9% of Farm & Ranch loan purchases for the years ended December 31, 2018, 2017,
and 2016, respectively, and 8.2%, 7.5% and 11.2%, respectively, of total new Farm & Ranch business
volume. The purchases of USDA Securities from Zions under the USDA Guarantees line of business
represented approximately 4.2%, 3.8%, and 3.4% of purchases in that line of business for the years ended
December 31, 2018, 2017, and 2016, respectively. Outstanding Farm & Ranch loans, USDA Securities,
160
and AgVantage securities purchased from Zions represented 4.7% and 5.0%, respectively, of Farmer Mac's
outstanding business volume as of December 31, 2018 and 2017.
Zions retained servicing fees of $11.6 million, $11.5 million, and $9.9 million in 2018, 2017, and 2016,
respectively, for its work as a Farmer Mac servicer.
National Rural Utilities Cooperative Financial Corporation:
Farmer Mac considers the National Rural Utilities Cooperative Financial Corporation ("CFC") a related
party because of its ownership of approximately 7.9% of Farmer Mac's Class A voting common stock.
The following transactions occurred between Farmer Mac and CFC during 2018, 2017, and 2016:
Table 3.2
Farmer Mac Loan Purchases and Guarantees
Unpaid Principal Balance:
Loans
On-balance sheet AgVantage Securities
Off-balance sheet revolving floating rate AgVantage facility
LTSPCs
Total purchases and guarantees
For the Year Ended December 31,
2018
2017
2016
(in thousands)
$
11,645
$
137,341
$
50,491
675,000
300,000
—
350,000
250,000
—
—
—
441,404
$
986,645
$
487,341
$
741,895
The transactions with CFC represented 100% of Farmer Mac's volume of loan purchases and LTSPC
transactions under the Rural Utilities line of business for 2018, 2017, and 2016, and represented 29.5%,
14.7%, and 11.9% of AgVantage securities volume under the Institutional Credit line of business for 2018,
2017, and 2016, respectively, and represented 19.1%, 10.3%, and 16.7% of total purchases, guarantees,
and LTSPCs for 2018, 2017, and 2016, respectively. Of Farmer Mac's total outstanding business volume
as of December 31, 2018 and 2017, Rural Utilities loans, loans under LTSPCs, and AgVantage securities
issued by CFC represented 23.6% and 24.6%, respectively. For the years ended December 31, 2018,
2017, and 2016, Farmer Mac earned guarantee fees of $0.1 million.
Farmer Mac had interest receivable of $9.4 million and $5.2 million as of December 31, 2018 and 2017,
respectively, and earned interest income of $76.8 million, $43.9 million, and $27.6 million during 2018,
2017, and 2016, respectively, related to its AgVantage transactions with CFC.
As of December 31, 2018 and 2017, Farmer Mac had $0.1 million and $0.2 million, respectively, of
commitment fees receivable from CFC and earned commitment fees of $1.9 million, $2.2 million, and
$2.0 million, respectively for 2018, 2017, and 2016.
CFC retained servicing fees of $3.6 million, $3.5 million and $3.3 million in 2018, 2017, and 2016,
respectively, for its work as a Farmer Mac central servicer.
AgFirst Farm Credit Bank:
Farmer Mac has a related party relationship with AgFirst Farm Credit Bank ("AgFirst") resulting from
AgFirst being a holder of approximately 16.8% of Farmer Mac's Class B voting common stock.
161
AgFirst entered into $26.6 million, $40.0 million and $36.4 million of LTSPC transactions in 2018, 2017,
and 2016, respectively, and the aggregate balance of LTSPCs outstanding as of December 31, 2018 and
2017 was $340.5 million and $353.8 million, respectively. Farmer Mac received from AgFirst $1.2
million, $1.1 million, and $1.1 million in commitment fees in 2018, 2017, and 2016, respectively, and had
$0.1 million of commitment fees receivable as of both December 31, 2018 and 2017.
AgFirst owns certain securities backed by rural housing loans. Farmer Mac guarantees the last ten percent
of losses (based on the original principal balance at the time of pooling) from each loan in the pool
backing those securities. As of December 31, 2018 and 2017, the outstanding balance of those securities
owned by AgFirst was $8.6 million and $11.5 million, respectively. Farmer Mac received guarantee fees
of $33,000, $38,000, and $45,000 in 2018, 2017, and 2016, respectively, on 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% of Farmer Mac Class B voting common stock and because a member of
Farmer Mac's board of directors has an affiliation with that entity. Farmer Mac received from Farm Credit
Bank of Texas commitment fees of $1.0 million, $1.0 million, and $1.1 million in 2018, 2017, and 2016,
respectively. The aggregate amount of LTSPCs outstanding with Farm Credit Bank of Texas as of
December 31, 2018 and 2017 was $226.5 million and $250.3 million, respectively. In 2018, 2017, and
2016, Farm Credit Bank of Texas retained $0.2 million, $0.2 million, and $0.3 million, respectively, in
servicing fees for its work as a Farmer Mac central servicer.
Other Related Party Transactions:
Farmer Mac purchased $39.5 million, $28.5 million, and $24.7 million in loans from First Dakota
National Bank in 2018, 2017, and 2016, respectively. Farmer Mac entered into $3.0 million, $0.4 million,
and $0.0 million of new USDA Securities in 2018, 2017, and 2016, respectively, with First Dakota
National Bank. First Dakota National Bank retained servicing fees of $1.4 million, $1.2 million, and $1.1
million in 2018, 2017, and 2016, respectively, for its work as a Farmer Mac servicer. Farmer Mac
purchased $2.0 million, $5.4 million, and $1.3 million in USDA Securities from Bath State Bank in 2018,
2017, and 2016, respectively. These institutions had a related party relationship with Farmer Mac because
a member of Farmer Mac's board of directors is affiliated with each of those entities.
Farmer Mac owned $70 million of subordinated debt issued by CoBank as of December 31, 2016. During
2017, the subordinated debt was called and redeemed by CoBank. Farmer Mac has a related party
relationship with CoBank because CoBank is a major holder (32.6%) of Farmer Mac Class B voting
common stock and because a member of Farmer Mac's board of directors has an affiliation with that
entity.
162
4. INVESTMENT SECURITIES
The following tables set forth information about Farmer Mac's investment securities as of December 31,
2018 and 2017:
Table 4.1
As of December 31, 2018
Amount
Outstanding
Unamortized
Premium/
(Discount)
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
(in thousands)
Available-for-sale:
Floating rate auction-rate certificates backed by
Government guaranteed student loans
$
19,700
$
— $
19,700
$
— $
(985) $
Floating rate asset-backed securities
28,940
(136)
28,804
Floating rate Government/GSE guaranteed mortgage-
backed securities
Fixed rate GSE guaranteed mortgage-backed securities(1)
Fixed rate U.S. Treasuries
Total available-for-sale
Held-to-maturity:
1,379,472
1,528
1,381,000
384
797,913
2,226,409
1
(4,882)
(3,489)
385
793,031
2,222,920
Fixed rate Government/GSE guaranteed mortgage-
backed securities
45,032
—
45,032
2
721
18
119
860
562
(128)
18,715
28,678
(4,267)
1,377,454
—
(548)
403
792,602
(5,928)
2,217,852
—
45,594
Total investment securities
$
2,271,441
$
(3,489) $ 2,267,952
$
1,422
$
(5,928) $ 2,263,446
(1) During second quarter 2018, the remaining premium of an interest-only security was fully amortized because the issuer called the security upon full
prepayment of the underlying mortgage loan that collateralized the security.
As of December 31, 2017
Amount
Outstanding
Unamortized
Premium/
(Discount)
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
(in thousands)
Available-for-sale:
Floating rate auction-rate certificates backed by
Government guaranteed student loans
$
19,700
$
— $
19,700
$
— $
(886) $
Floating rate asset-backed securities
34,462
(154)
34,308
22
(120)
18,814
34,210
Floating rate Government/GSE guaranteed mortgage-
backed securities
Fixed rate GSE guaranteed mortgage-backed securities(1)
Fixed rate senior agency debt
Fixed rate U.S. Treasuries
Total available-for-sale
Held-to-maturity:
1,289,123
451
100,000
770,852
2,217
2,138
—
(1,836)
1,291,340
2,589
100,000
769,016
2,215
2,230
—
—
2,214,588
2,365
2,216,953
4,467
(3,368)
1,290,187
—
(49)
(1,592)
(6,015)
4,819
99,951
767,424
2,215,405
Fixed rate Government/GSE guaranteed mortgage-
backed securities
45,032
—
45,032
532
—
45,564
Total investment securities
$
2,259,620
$
2,365
$ 2,261,985
$
4,999
$
(6,015) $ 2,260,969
(1)
Fair value includes $4.3 million of an interest-only security with a notional amount of $143.7 million.
Farmer Mac did not sell any securities from its available-for-sale investment portfolio during the year
ended December 31, 2018. During the year ended December 31, 2017, Farmer Mac received proceeds of
$10.2 million from the sale of securities from its available-for-sale portfolio, resulting in gross realized
gains of $0.1 million. During the year ended December 31, 2016, Farmer Mac received proceeds of
163
$186.8 million from the sale of securities from its available-for-sale investment portfolio, resulting in
gross realized gains of $0.1 million and gross realized losses of $0.1 million.
As of December 31, 2018 and 2017, unrealized losses on available-for-sale investment securities were as
follows:
Table 4.2
As of December 31, 2018
Available-for-Sale Securities
Unrealized loss position for
less than 12 months
Unrealized loss position for
more than 12 months
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
(dollars in thousands)
Floating rate auction-rate certificates backed by Government
guaranteed student loans
Floating rate asset-backed securities
Floating rate Government/GSE guaranteed mortgage-backed securities
Fixed rate U.S. Treasuries
Total
$
— $
— $
18,715
$
6,456
927,416
499,581
(38)
(2,907)
(336)
19,058
196,416
81,597
$
1,433,453
$
(3,281) $
315,786
$
Number of securities in loss position
72
(985)
(90)
(1,360)
(212)
(2,647)
48
As of December 31, 2017
Available-for-Sale Securities
Unrealized loss position for
less than 12 months
Unrealized loss position for
more than 12 months
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
(in thousands)
— $
—
292,522
742,442
—
— $
18,814
$
—
(2,337)
(1,572)
—
23,145
221,641
24,983
99,951
(886)
(120)
(1,031)
(20)
(49)
$
1,034,964
$
(3,909) $
388,534
$
(2,106)
Floating rate auction-rate certificates backed by Government
guaranteed student loans
$
Floating rate asset-backed securities
Floating rate Government/GSE guaranteed mortgage-backed securities
Fixed rate U.S. Treasuries
Fixed rate senior agency debt
Total
Number of securities in loss position
40
51
The unrealized losses presented above are principally due to a general widening of market spreads and an
increase in the levels of interest rates from the dates of acquisition to December 31, 2018 and 2017, as
applicable. The resulting decrease in fair values reflects an increase in the perceived risk by the financial
markets related to those securities. As of December 31, 2018 and 2017, all of the investment securities in
an unrealized loss position either were backed by the full faith and credit of the U.S. government or had
credit ratings of at least "AA+."
Securities in unrealized loss positions for 12 months or longer have a fair value as of December 31, 2018
that is, on average, approximately 99.2% of their amortized cost basis. Farmer Mac believes that all of
164
these unrealized losses are recoverable within a reasonable period of time by way of maturity or changes
in credit spreads. Accordingly, Farmer Mac has concluded that none of the unrealized losses on these
available-for-sale investment securities are other-than-temporary impairment as of December 31, 2018 and
2017.
As of December 31, 2018, Farmer Mac owned $45.0 million of held-to-maturity investment securities at
amortized cost with a fair value of $45.6 million and a weighted average yield of 3.5%. As of December
31, 2017, Farmer Mac owned $45.0 million of held-to-maturity investment securities at amortized cost
with a fair value of $45.6 million and a weighted average yield of 2.5%. Farmer Mac did not own any
trading investment securities as of December 31, 2018 and 2017.
The amortized cost, fair value, and weighted-average yield of available-for-sale investment securities by
remaining contractual maturity as of December 31, 2018 are set forth below. Asset-backed and mortgage-
backed securities are included based on their final maturities, although the actual maturities may differ due
to prepayments of the underlying assets.
Table 4.3
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
As of December 31, 2018
Available-for-Sale Securities
Amortized
Cost
Fair Value
(dollars in thousands)
$
767,989
$
217,450
646,531
590,950
767,536
217,443
644,361
588,512
$
2,222,920
$
2,217,852
Weighted-
Average
Yield
1.29%
2.76%
2.72%
2.92%
2.28%
165
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, 2018 and 2017:
Table 5.1
Held-to-maturity:
AgVantage
Farmer Mac Guaranteed USDA Securities
Total Farmer Mac Guaranteed Securities
USDA Securities
Total held-to-maturity
Available-for-sale:
AgVantage
Trading:
USDA Securities
Held-to-maturity:
AgVantage
Farmer Mac Guaranteed USDA Securities
Total Farmer Mac Guaranteed Securities
USDA Securities
Total held-to-maturity
Available-for-sale:
AgVantage
Trading:
USDA Securities
As of December 31, 2018
Unpaid
Principal
Balance
Unamortized
Premium/
(Discount)
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
(in thousands)
$ 2,069,185
$
(194) $ 2,068,991
$
2,637
$
(11,948) $ 2,059,680
27,383
2,096,568
2,110,963
$ 4,207,531
$ 6,003,733
$
9,591
$
$
$
244
50
27,627
2,096,618
55,211
2,166,174
55,261
$ 4,262,792
(204) $ 6,003,529
701
$
10,292
98
2,735
—
2,735
22,335
20
$
$
$
—
27,725
(11,948)
2,087,405
(62,227)
2,103,947
(74,175) $ 4,191,352
(51,367) $ 5,974,497
(313) $
9,999
$
$
$
As of December 31, 2017
Unpaid
Principal
Balance
Unamortized
Premium/
(Discount)
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
(in thousands)
$ 2,096,754
$
(779) $ 2,095,975
$
2,011
$
(11,429) $ 2,086,557
29,980
2,126,734
2,055,050
$ 4,181,784
$ 5,496,569
$
12,966
$
$
$
319
30,299
(460)
2,126,274
62,800
2,117,850
62,340
$ 4,244,124
(182) $ 5,496,387
922
$
13,888
$
$
$
108
2,119
—
2,119
21,838
28
$
$
$
(73)
30,334
(11,502)
2,116,891
(54,969)
2,062,881
(66,471) $ 4,179,772
(46,311) $ 5,471,914
(401) $
13,515
166
As of December 31, 2018 and 2017, unrealized losses on held-to-maturity and available-for-sale on-
balance sheet Farmer Mac Guaranteed Securities and USDA Securities were as follows:
Table 5.2
Held-to-maturity:
AgVantage
USDA Securities
Total held-to-maturity
Available-for-sale:
AgVantage
Held-to-maturity:
AgVantage
Farmer Mac Guaranteed USDA Securities
USDA Securities
Total held-to-maturity
Available-for-sale:
AgVantage
As of December 31, 2018
Held-to-Maturity and Available-for-Sale Securities
Unrealized loss position for
less than 12 months
Unrealized loss position for
more than 12 months
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
(dollars in thousands)
669,610
38,203
707,813
$
$
(1,760) $
(696)
(2,456) $
976,318
2,065,743
3,042,061
$
$
(10,188)
(61,531)
(71,719)
1,480,423
$
(9,364) $
1,599,679
$
(42,003)
As of December 31, 2017
Held-to-Maturity and Available-for-Sale Securities
Unrealized loss position for
less than 12 months
Unrealized loss position for
more than 12 months
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
(in thousands)
1,304,160
$
(8,094) $
351,664
$
24,721
451
(73)
(2)
—
2,062,429
1,329,332
$
(8,169) $
2,414,093
$
(3,335)
—
(54,967)
(58,302)
1,273,965
$
(8,819) $
1,759,377
$
(37,492)
$
$
$
$
$
$
The unrealized losses presented above are principally due to higher interest rates from the date of
acquisition to December 31, 2018 and 2017, as applicable. The unrealized losses on the held-to-maturity
USDA Securities as of both December 31, 2018 and 2017 reflect their increased cost basis resulting from
their transfer to held-to-maturity as of October 1, 2016.
The credit exposure related to Farmer Mac's USDA Guarantees line of business is covered by the full faith
and credit guarantee of the United States.
The unrealized losses from AgVantage securities were on 38 and 36 available-for-sale securities as of
December 31, 2018 and 2017, respectively. There were 43 and 23 held-to-maturity AgVantage securities
with an unrealized loss as of December 31, 2018 and 2017, respectively. As of December 31, 2018, 21
available-for-sale AgVantage securities had been in a loss position for more than 12 months. As of
167
December 31, 2017, 16 available-for-sale AgVantage securities had been in a loss position for more than
12 months. Farmer Mac has concluded that none of the unrealized losses on its held-to-maturity Farmer
Mac Guaranteed Securities and USDA Securities and available-for-sale Farmer Mac Guaranteed
Securities are other-than-temporary impaired as of either December 31, 2018 or December 31, 2017.
Farmer Mac does not intend to sell these securities, and it is not more likely than not that Farmer Mac will
be required to sell the securities before recovery of the amortized cost basis.
During the years ended December 31, 2018, 2017 and 2016, Farmer Mac realized no gains or losses from
the sale of Farmer Mac Guaranteed Securities and USDA Securities.
The amortized cost, fair value, and weighted-average yield of available-for-sale and held-to-maturity
Farmer Mac Guaranteed Securities and USDA Securities by remaining contractual maturity as of
December 31, 2018 are set forth below. The balances presented are based on their final maturities,
although the actual maturities may differ due to prepayments of the underlying assets.
Table 5.3
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
As of December 31, 2018
Available-for-Sale Securities
Amortized
Cost
Fair Value
(dollars in thousands)
618,461
$
2,889,110
1,248,615
1,247,343
6,003,529
$
618,825
2,887,325
1,239,658
1,228,689
5,974,497
As of December 31, 2018
Held-to-Maturity Securities
Amortized
Cost
Fair Value
(dollars in thousands)
762,474
$
1,388,053
212,283
1,899,982
4,262,792
$
759,480
1,379,827
205,952
1,846,093
4,191,352
$
$
$
$
Weighted-
Average
Yield
2.87%
3.12%
3.21%
3.61%
3.22%
Weighted-
Average
Yield
2.11%
3.04%
3.39%
3.57%
3.12%
As of December 31, 2018, Farmer Mac owned trading USDA Securities with an amortized cost of $10.3
million, a fair value of $10.0 million, and a weighted-average yield of 5.21 percent. As of December 31,
2017, Farmer Mac owned trading USDA Securities with an amortized cost of $13.9 million, a fair value of
$13.5 million, and a weighted-average yield of 5.33 percent.
168
6. FINANCIAL DERIVATIVES
Farmer Mac enters into financial derivative transactions principally to protect against risk from the effects
of market price or interest rate movements on the value of certain assets, future cash flows, or debt
issuance, and not for trading or speculative purposes. Certain financial derivatives are designated as fair
value hedges of fixed rate assets, primarily classified as available-for-sale, to protect against fair value
changes in the assets related to a benchmark interest rate (e.g., LIBOR). Other financial derivatives are
designated as cash flow hedges to mitigate the volatility of future interest rate payments on floating rate
debt.
Farmer Mac manages the interest rate risk related to loans it has committed to acquire, but has not yet
permanently funded, through the use of forward sale contracts on the debt of other GSEs and futures
contracts involving U.S. Treasury securities. Farmer Mac uses forward sale contracts on GSE securities to
reduce its interest rate exposure to changes in both U.S. Treasury rates and spreads on Farmer Mac
debt. The notional amounts of these contracts are determined based on a duration-matched hedge ratio
between the hedged item and the hedge instrument. Gains or losses generated by these hedge transactions
are expected to offset changes in funding costs. All financial derivatives are recorded on the balance sheet
at fair value as a freestanding asset or liability.
Effective first quarter 2018, Farmer Mac adopted ASU 2017-12, "Derivatives and Hedging (Topic 815):
Targeted Improvements to Accounting for Hedging Activities." This ASU reduces the complexity of hedge
accounting by eliminating the requirement to separately measure and report hedge ineffectiveness and by
requiring the entire change in the fair value of a hedging instrument to be presented in the same income
statement line as the income or expense effect from the hedged item. Upon the adoption of the ASU,
Farmer Mac elected to retrospectively designate the hedged risk of its fair value hedges as the risk of
changes in fair value resulting from changes in the benchmark interest rate component of the contractual
coupon cash flows. Farmer Mac made this election for its fair value hedges designated upon the inception
of the hedging instruments. For fair value hedges designated after the inception of the hedging
instruments, Farmer Mac continues to designate the hedged risk as the risk of changes in fair value based
on total contractual coupon cash flows. The adoption of the new guidance did not have a material effect
on Farmer Mac's financial position, results of operations, or cash flows.
169
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, 2018 and 2017:
Table 6.1
Fair value hedges:
Interest rate swaps:
As of December 31, 2018
Fair Value
Notional
Amount
Asset
(Liability)
Weighted-
Average
Pay Rate
Weighted-
Average
Receive
Rate
Weighted-
Average
Forward
Price
Weighted-
Average
Remaining
Term
(in years)
(dollars in thousands)
Pay fixed non-callable
$ 3,097,084
$
3,004
$
(4,326)
2.42%
Receive fixed non-callable
2,031,200
885
(4,512)
2.49%
2.58%
1.94%
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable
373,000
2,441
(99)
2.40%
2.83%
No hedge designation:
Interest rate swaps:
Pay fixed non-callable
Receive fixed non-callable
Basis swaps
Treasury futures
Credit valuation adjustment
316,664
2,347,371
1,770,026
20,400
796
—
421
—
(60)
(10,399)
3.69%
— 2.37%
2.45%
(130)
(188)
21
2.52%
2.10%
2.49%
121.09
9.75
1.68
6.12
6.25
0.86
1.27
Total financial derivatives
$ 9,955,745
Collateral pledged
Net amount
$
$
7,487
$ (19,633)
(1,778)
47,018
5,709
$
27,385
170
As of December 31, 2017
Fair Value
Notional
Amount
Asset
(Liability)
Weighted-
Average
Pay Rate
Weighted-
Average
Receive
Rate
Weighted-
Average
Forward
Price
Weighted-
Average
Remaining
Term
(in years)
(dollars in thousands)
Fair value hedges:
Interest rate swaps:
Pay fixed non-callable
$ 2,086,347
$
5,240
$
(5,990)
Receive fixed non-callable
1,559,700
110
(4,033)
1.88%
1.38%
1.40%
1.45%
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable
365,500
1,402
(138)
2.16%
1.74%
No hedge designation:
Interest rate swaps:
Pay fixed non-callable
Receive fixed non-callable
Basis swaps
Treasury futures
Credit valuation adjustment
345,333
3,409,916
1,053,500
40,000
339
(16,352)
3.79%
—
18
—
(16)
— 1.25%
(106)
1.33%
(36)
56
1.40%
1.24%
1.42%
123.96
5.46
1.68
5.84
6.68
0.92
0.91
Total financial derivatives
$ 8,860,296
Collateral pledged
Net amount
$
$
7,093
$ (26,599)
—
24,926
7,093
$
(1,673)
As of December 31, 2018, Farmer Mac expects to reclassify $1.7 million after tax from accumulated other
comprehensive income to earnings over the next twelve months. This amount could differ from amounts
actually recognized due to changes in interest rates, hedge de-designations, and the addition of other
hedges after December 31, 2018. During the years ended December 31, 2018 and 2017, there were no
gains or losses from interest rate swaps designated as cash flow hedges reclassified to earnings because it
became probable that the original forecasted transaction would not occur.
171
The following table summarizes the net income/(expense) recognized in the consolidated statements of
operations related to derivatives for the years ended December 31, 2018, 2017, and 2016:
Table 6.2
For the Year Ended December 31, 2018
Net Income/(Expense) Recognized in Consolidated Statement of Operations on
Derivatives
Net Interest Income
Non-Interest
Income
Interest Income
Farmer Mac
Guaranteed
Securities and
USDA Securities
Interest
Income
Loans
Total
Interest
Expense
(Losses)/gains
on financial
derivatives
Total
(in thousands)
Total amounts presented in the consolidated statement of
operations:
$
Income/(expense) related to interest settlements on fair
value hedging relationships:
Recognized on derivatives
Recognized on hedged items
Discount amortization recognized on hedged items
Income/(expense) related to interest settlements on
fair value hedging relationships
$
Gains/(losses) on fair value hedging relationships:
290,953
$
198,152
$ (369,848) $
(3,687) $ 115,570
1,861
65,238
—
(630)
6,284
—
(7,995)
(36,837)
(668)
—
—
—
(6,764)
34,685
(668)
67,099
$
5,654
$
(45,500) $
— $
27,253
Recognized on derivatives
Recognized on hedged items
(20,279)
21,460
5,031
(5,243)
835
3,137
—
—
(14,413)
19,354
Gains/(losses) on fair value hedging relationships
$
1,181
$
(212) $
3,972
$
— $
4,941
Expense related to interest settlements on cash flow
hedging relationships:
Interest settlements reclassified from AOCI into net
income on derivatives
Recognized on hedged items
Discount amortization recognized on hedged items
Expense recognized on cash flow hedges
Losses on financial derivatives not designated in hedge
relationships:
Gains on interest rate swaps
Interest expense on interest rate swaps
Treasury futures
Losses on financial derivatives not designated in
hedge relationships
$
$
—
—
—
—
—
—
316
(9,182)
(6)
—
—
—
316
(9,182)
(6)
— $
— $
(8,872) $
— $
(8,872)
—
—
—
—
—
—
—
—
—
7,206
7,206
(10,920)
(10,920)
27
27
— $
— $
— $
(3,687) $
(3,687)
172
For the Year Ended December 31, 2017
Net Income/(Expense) Recognized in Consolidated Statement of Operations on
Derivatives
Net Interest Income
Non-Interest
Income
Interest
Income
Farmer Mac
Guaranteed
Securities and
USDA
Securities
Interest
Income
Loans
Total
Interest
Expense
(Losses)/gains on
financial
derivatives
Total
(in thousands)
Total amounts presented in the consolidated statement of
operations
Income/(expense) related to interest settlements on fair
value hedging relationships:
Recognized on derivatives
Recognized on hedged items
Discount amortization recognized on hedged items
Income/(expense) related to interest settlements on fair
value hedging relationships
$
203,796
$
162,150
$ (242,885) $
753
$ 123,814
(10,346)
46,389
—
(1,141)
3,379
—
2,642
(14,283)
(345)
—
—
—
(8,845)
35,485
(345)
$
36,043
$
2,238
$
(11,986) $
— $
26,295
Losses on fair value hedging relationships:
Recognized on derivatives(1)
Recognized on hedged items
Losses on fair value hedging relationships
Expense related to interest settlements on cash flow
hedging relationships:
Interest settlements reclassified from AOCI into net
income on derivatives
Recognized on hedged items
Discount amortization recognized on hedged items
Losses recognized in income for hedge ineffectiveness
Expense recognized on cash flow hedges
Gains on financial derivatives not designated in hedging
relationships:
Gains on interest rate swaps
Interest expense on interest rate swaps
Agency forwards
Treasury futures
$
$
$
$
—
—
—
—
—
—
1,694
(2,413)
1,694
(2,413)
— $
— $
— $
(719) $
(719)
— $
— $
(1,974) $
— $
(1,974)
—
—
—
—
—
—
(4,133)
(5)
—
—
—
(320)
(4,133)
(5)
(320)
— $
— $
(6,112) $
(320) $
(6,432)
— $
— $
— $
12,240
$
12,240
—
—
—
—
—
—
—
—
—
(10,200)
(10,200)
(588)
340
(588)
340
Gains on financial derivatives not designated in hedge
relationships
$
— $
— $
— $
1,792
$
1,792
(1)
Included in the assessment of hedge effectiveness as of December 31, 2017, but excluded from the amounts in the table, were gains of $0.1 million for
the year ended December 31, 2017, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amount
recognized as hedge ineffectiveness for the year ended December 31, 2017 were gains of $0.6 million.
173
For the Year Ended December 31, 2016
Net Income/(Expense) Recognized in Consolidated Statement of Operations on
Derivatives
Net Interest Income
Non-Interest
Income
Interest
Income
Farmer Mac
Guaranteed
Securities and
USDA
Securities
Interest
Income
Loans
Total
Interest
Expense
(Losses)/gains on
financial
derivatives
Total
(in thousands)
$
150,281
$
134,577
$ (171,626) $
2,311
$ 115,543
(15,494)
35,169
—
(1,011)
2,063
—
132
—
—
—
—
—
(16,373)
37,232
—
19,675
$
1,052
$
132
$
— $
20,859
—
—
—
—
—
—
25,365
25,365
(20,322)
(20,322)
— $
— $
— $
5,043
$
5,043
— $
— $
(2,126) $
— $
(2,126)
—
—
—
—
—
—
(1,437)
(1)
—
—
—
(353)
(1,437)
(1)
(353)
— $
— $
(3,564) $
(353) $
(3,917)
— $
— $
— $
9,489
$
9,489
—
—
—
—
—
—
—
—
—
(11,480)
(11,480)
(226)
(162)
(226)
(162)
— $
— $
— $
(2,379) $
(2,379)
Total amounts presented in the consolidated statement of
operations
Income/(expense) related to interest settlements on fair
value hedging relationships:
Recognized on derivatives
Recognized on hedged items
Discount amortization recognized on hedged items
Income/(expense) related to interest settlements on fair
value hedging relationships
$
Gains on fair value hedging relationships:
Recognized on derivatives(1)
Recognized on hedged items
Gains on fair value hedging relationships
Expense related to interest settlements on cash flow
hedging relationships:
Interest settlements reclassified from AOCI into net
income on derivatives
Recognized on hedged items
Discount amortization recognized on hedged items
Losses recognized in income for hedge ineffectiveness
Expense recognized on cash flow hedges
Losses on financial derivatives not designated in
hedging relationships:
Gains on interest rate swaps
Interest expense on interest rate swaps
Agency forwards
Treasury futures
Losses on financial derivatives not designated in
hedge relationships
$
$
$
$
$
(1)
Included in the assessment of hedge effectiveness as of December 31, 2016, but excluded from the amounts in the table, were losses of $5.2 million
for the year ended December 31, 2016, 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, 2016 were gains of $0.2 million.
174
The following table shows the carrying amount and associated cumulative basis adjustment related to the
application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in
fair value hedging relationships as of December 31, 2018 and 2017:
Table 6.3
Hedged Items in Fair Value Relationship
Carrying Amount of Hedged Assets/
(Liabilities)
Cumulative Amount of Fair Value Hedging
Adjustments included in the Carrying
Amount of the Hedged Assets/(Liabilities)
December 31, 2018 December 31, 2017 December 31, 2018 December 31, 2017
(in thousands)
Farmer Mac Guaranteed Securities, Available-
for-Sale, at fair value
$
2,882,919
$
1,928,220
$
(906) $
Loans held for investment, at amortized cost
Notes Payable, due after one year(1)(2)
(1) Carrying amount represents amortized cost.
(2)
Includes $0.3 million of hedging adjustments on a discontinued hedging relationship.
194,617
(2,021,356)
149,304
(1,552,935)
(5,287)
8,785
(22,853)
(189)
5,836
As of December 31, 2018 and 2017, Farmer Mac's credit exposure to interest rate swap counterparties,
excluding netting arrangements and any adjustment for nonperformance risk, but including accrued
interest, was $51.3 million and $28.5 million, respectively; however, including netting arrangements and
accrued interest, Farmer Mac's credit exposure was $3.1 million and $0.5 million as of December 31, 2018
and 2017, respectively. As of December 31, 2018, Farmer Mac held $0.7 million of cash and $1.1 million
of investment securities as collateral for its derivatives in net asset positions resulting in uncollateralized
net asset positions of $1.4 million. As of December 31, 2017, Farmer Mac held no cash collateral for its
derivatives in net asset positions, resulting in uncollateralized net asset positions of $0.5 million.
As of December 31, 2018 and 2017, the fair value of Farmer Mac's derivatives in a net liability position
including accrued interest but excluding netting arrangements and any adjustment for nonperformance
risk, was $78.4 million and $58.2 million, respectively; however, including netting arrangements and
accrued interest, the fair value of Farmer Mac's derivatives in a net liability position at the counterparty
level was $13.9 million and $28.0 million as of December 31, 2018 and 2017, respectively. Farmer Mac
posted cash of $0 and $47.0 million of investment securities as of December 31, 2018 and posted cash of
$0.1 million and $24.8 million investment securities as of December 31, 2017. Farmer Mac records
posted cash as a reduction in the outstanding balance of cash and cash equivalents and an increase in the
balance of prepaid expenses and other assets. Any investment securities posted as collateral are included
in the investment securities balances on the consolidated balance sheets. If Farmer Mac had breached
certain provisions of the derivative contracts as of December 31, 2018 and 2017, it could have been
required to settle its obligations under the agreements or post additional collateral of none and $3.1
million, respectively. As of December 31, 2018 and 2017, there were no financial derivatives in a net
payable position where Farmer Mac was required to pledge collateral which the counterparty had the right
to sell or repledge.
For certain derivatives, Farmer Mac clears interest rate swaps through a clearinghouse, the Chicago
Mercantile Exchange ("CME"). Farmer Mac posts initial and variation margin to this clearinghouse
through which centrally-cleared derivatives and futures contracts are traded. These collateral postings
expose Farmer Mac to institutional credit risk in the event that either the clearinghouse or the futures
commission merchant that Farmer Mac uses to post collateral to the clearinghouse fails to meet its
175
obligations. Conversely, the use of centrally-cleared derivatives mitigates Farmer Mac's credit risk to
individual counterparties because clearinghouses assume the credit risk among counterparties in centrally-
cleared derivatives transactions. Of Farmer Mac's $9.9 billion notional amount of interest rate swaps
outstanding as of December 31, 2018, $8.5 billion were cleared through the swap clearinghouse. Of
Farmer Mac's $8.8 billion notional amount of interest rate swaps outstanding as of December 31, 2017,
$7.9 billion were cleared through the swap clearinghouse.
7. NOTES PAYABLE
Farmer Mac's borrowings consist of discount notes and medium-term notes, both of which are unsecured
general obligations of Farmer Mac. Discount notes generally have original maturities of 1.0 year or less,
whereas medium-term notes generally have maturities of 0.5 years to 15.0 years.
The following tables set forth information related to Farmer Mac's borrowings as of December 31, 2018
and 2017:
Table 7.1
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:
2020
2021
2022
2023
Thereafter
Total due after one year
Total
December 31, 2018
Outstanding as of December 31
Average Outstanding During the Year
Amount
Weighted-
Average Rate
Amount
Weighted-
Average Rate
(dollars in thousands)
$
1,432,470
1,977,445
1.83%
1.83%
$
$
$
1,586,385
1,826,380
4,344,285
7,757,050
3,090,405
2,220,651
859,470
881,738
1,434,383
8,486,647
$
16,243,697
2.35%
2.29%
1.93%
2.10%
2.11%
2.41%
2.19%
2.88%
3.34%
2.48%
2.30%
176
December 31, 2017
Outstanding as of December 31
Average Outstanding During the Year
Amount
Weighted-
Average Rate
Amount
Weighted-
Average Rate
(dollars in thousands)
$
2,262,582
2,885,966
0.86%
1.04%
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:
2019
2020
2021
2022
Thereafter
Total due after one year
Total
$
$
$
1,724,969
2,560,211
3,804,646
8,089,826
2,644,734
1,842,143
849,263
790,564
1,306,086
7,432,790
$
15,522,616
1.20%
1.27%
1.23%
1.24%
1.48%
1.68%
1.85%
2.03%
3.05%
1.91%
1.56%
The maximum amount of Farmer Mac's discount notes outstanding at any month end during each of the
years ended December 31, 2018 and 2017 was $1.6 billion and $3.3 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 2019 as of December 31, 2018:
Table 7.2
Maturity:
2020
2021
2022
2023
Thereafter
Total
Debt Callable in 2019 as of December 31, 2018
Amount
Weighted-Average Rate
(dollars in thousands)
$
$
239,327
409,629
165,810
253,758
294,720
1,363,244
2.13%
2.38%
2.31%
3.14%
3.27%
2.66%
The following schedule summarizes the earliest interest rate reset date of total borrowings outstanding as
of December 31, 2018, including callable and non-callable medium-term notes, assuming callable notes
are redeemed at the initial call date:
177
Table 7.3
Debt with interest rate resets in:
2019
2020
2021
2022
2023
Thereafter
Total
Earliest Interest Rate Reset Date of Borrowings Outstanding
Amount
Weighted-Average Rate
(dollars in thousands)
$
$
9,668,398
2,210,866
1,565,748
788,504
836,768
1,173,413
16,243,697
2.20%
1.94%
2.32%
2.16%
2.88%
3.43%
2.30%
During 2018 and 2017, Farmer Mac called $0.0 million and $24.0 million 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, 2018, Farmer Mac had not used this borrowing authority
and does not expect to use this borrowing authority in the future.
Gains on Repurchase of Outstanding Debt
No outstanding debt repurchases were made in 2018, 2017, or 2016.
178
8. LOANS AND ALLOWANCE FOR LOSSES
Loans
Farmer Mac classifies loans as either held for investment or held for sale. Loans held for investment are
recorded at the unpaid principal balance, net of unamortized premium or discount and other cost
adjustments. Loans held for sale are reported at the lower of cost or fair value determined on a pooled
basis. As of December 31, 2018 and 2017, Farmer Mac had no loans held for sale. The following table
displays the composition of the loan balances as of December 31, 2018 and 2017:
Table 8.1
As of December 31, 2018
In
Consolidated
Trusts
Unsecuritized
Total
As of December 31, 2017
In
Consolidated
Trusts
Unsecuritized
Total
(in thousands)
$
3,071,222
$
1,517,101
$
4,588,323
$
2,798,906
$
1,399,827
$
4,198,733
938,843
—
938,843
1,076,291
—
1,076,291
4,010,065
1,517,101
5,527,166
3,875,197
1,399,827
5,275,024
(5,097)
—
(5,097)
(1,442)
—
(1,442)
Farm & Ranch
Rural Utilities
Total unpaid principal balance(1)
Unamortized premiums, discounts, and
other cost basis adjustments
Total loans
4,004,968
1,517,101
5,522,069
3,873,755
1,399,827
5,273,582
Allowance for loan losses
(5,565)
(1,452)
(7,017)
(5,493)
(1,303)
(6,796)
Total loans, net of allowance
$
3,999,403
$
1,515,649
$
5,515,052
$
3,868,262
$
1,398,524
$
5,266,786
(1) Unpaid principal balance is the basis of presentation in disclosures of outstanding balances for Farmer Mac's lines of business.
Allowance for Losses
Farm & Ranch
Farmer Mac maintains an allowance for losses presented in two components on its consolidated balance
sheets: (1) an allowance for loan losses to account for estimated probable losses on loans held, and (2) a
reserve for losses to account for estimated probable losses on loans underlying LTSPCs and off-balance
sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities). Farmer Mac's total allowance
for losses was $9.2 million as of December 31, 2018 and $8.9 million as of December 31, 2017. See Note
12 for more information about off-balance sheet Farmer Mac Guaranteed Securities and LTSPCs.
179
The following is a summary of the changes in the total allowance for losses for each year in the three-year
period ended December 31, 2018:
Table 8.2
Balance as of December 31, 2015
Provision for/(release of) losses
Charge-offs
Balance as of December 31, 2016
Provision for/(release of) losses
Charge-offs
Balance as of December 31, 2017
Provision for/(release of) losses
Charge-offs
Balance as of December 31, 2018
Allowance
for Loan
Losses
Reserve
for Losses
(in thousands)
Total
Allowance
for Losses
$
$
$
$
4,480
$
2,083
$
1,065
(130)
(63)
—
5,415
$
2,020
$
1,708
(327)
50
—
6,563
1,002
(130)
7,435
1,758
(327)
6,796
$
2,070
$
8,866
238
(17)
97
—
335
(17)
7,017
$
2,167
$
9,184
The total allowance for losses has increased because of increased loan volume within Farmer Mac's Farm
& Ranch portfolio. The total allowance for losses in the Farm & Ranch portfolio, as a percentage of
outstanding loan volume, has remained consistent in recent years. The total provision for losses decreased
by $1.4 million during 2018 as compared to 2017 primarily due to decreased loan growth year-over-year
and modestly improved credit quality in the Farm & Ranch portfolio.
During 2017, the net provisions to the allowance for loan losses recorded were primarily attributable to (1)
an increase in the general allowance due to overall net volume growth in on-balance sheet Farm & Ranch
loans, and (2) an increase in the specific allowance for certain impaired on-balance sheet crop and
permanent planting loans resulting from both an increase in the outstanding loan balance of such loans and
downgrades in risk ratings on some of those loans. The net provision to the reserve for losses recorded
during 2017 was primarily attributable to an increase in the general reserve due to downgrades in risk
ratings on certain unimpaired Agricultural Storage and Processing loans underlying LTSPCs.
During 2016, the provisions to its allowance for loan losses recorded were attributable to an increase in
the general allowance due to overall net volume growth in on-balance sheet Farm & Ranch loans and
downgrades in risk ratings for certain loans. The releases to the reserve for losses recorded during the
year ended December 31, 2016 were attributable to the release of a specific reserve on an impaired
livestock loan underling an LTSPC that was required to be removed from the LTPSC pool by the
originator during 2016.
The following tables present the changes in the total allowance for losses for the years ended
December 31, 2018, 2017, and 2016 by commodity type:
180
Table 8.3
For the Year Ended December 31, 2018
Crops
Permanent
Plantings
Livestock
Part-time
Farm
Ag. Storage and
Processing
Other
Total
Beginning Balance
$
4,081
$
2,469
$
1,211
$
481
$
(in thousands)
Provision for/(release of) losses
Charge-offs
Ending Balance
313
—
(343)
—
249
—
10
(17)
$
4,394
$
2,126
$
1,460
$
474
$
720
$
606
114
—
$
18
$
8,866
(8)
—
10
335
(17)
$
9,184
For the Year Ended December 31, 2017
Crops
Permanent
Plantings
Livestock
Part-time
Farm
Ag. Storage and
Processing
Other
Total
(in thousands)
Beginning Balance
$
3,365
$
1,723
$
1,375
$
405
$
533
$
34
$
Provision for/(release of) losses
Charge-offs
Ending Balance
944
(228)
816
(70)
(151)
(13)
92
(16)
73
—
$
4,081
$
2,469
$
1,211
$
481
$
606
$
(16)
—
18
7,435
1,758
(327)
$
8,866
For the Year Ended December 31, 2016
Crops
Permanent
Plantings
Livestock
Part-time
Farm
Ag. Storage and
Processing
Other
Total
3
31
—
34
$
$
6,563
1,002
(130)
7,435
Beginning Balance
$
2,791
$
Provision for/(release of) losses
Charge-offs
Ending Balance
574
—
931
792
—
$
1,781
$
(406)
—
(in thousands)
$
408
127
(130)
649
$
(116)
—
$
3,365
$
1,723
$
1,375
$
405
$
533
$
181
The following tables present the unpaid principal balances of loans held and loans underlying LTSPCs and
off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities) and the related total
allowance for losses by impairment method and commodity type as of December 31, 2018 and 2017:
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, 2018
Crops
Permanent
Plantings
Livestock
Ag.
Storage and
Processing
Part-time
Farm
(in thousands)
Other
Total
$ 2,452,803
$
952,719
$
705,752
$
329,070
1,239,094
515,520
624,522
166,907
$ 3,691,897
$ 1,468,239
$ 1,330,274
$
495,977
$
$
66,432
13,298
79,730
$
$
36,333
5,249
41,582
$
$
21,361
3,737
25,098
$
$
7,278
883
8,161
$ 2,519,235
$
989,052
$
727,113
$
336,348
1,252,392
520,769
628,259
167,790
$ 3,771,627
$ 1,509,821
$ 1,355,372
$
504,138
$
$
$
$
$
$
2,120
668
2,788
1,329
277
1,606
3,449
945
4,394
$
$
$
$
$
$
822
170
992
1,065
69
1,134
1,887
239
2,126
$
$
$
$
$
$
731
207
938
437
85
522
1,168
292
1,460
$
$
$
$
$
$
303
29
332
122
20
142
425
49
474
$
$
$
$
$
$
$
$
$
$
$
$
12,097
73,084
85,181
$
$
4,477
$ 4,456,918
3,286
2,622,413
7,763
$ 7,079,331
— $
—
— $
— $
131,404
69
69
23,236
$
154,640
12,097
73,084
85,181
84
636
720
$
$
$
$
— $
—
— $
84
636
720
$
$
4,477
$ 4,588,322
3,355
2,645,649
7,832
$ 7,233,971
4
5
9
$
$
— $
1
1
4
6
10
$
$
$
4,064
1,715
5,779
2,953
452
3,405
7,017
2,167
9,184
182
As of December 31, 2017
Crops
Permanent
Plantings
Livestock
Ag.
Storage and
Processing
Part-time
Farm
(in thousands)
Other
Total
$ 2,344,821
$
794,478
$
635,768
$
269,337
1,236,392
532,666
678,642
155,627
$ 3,581,213
$ 1,327,144
$ 1,314,410
$
424,964
$
$
67,828
8,904
76,732
$
$
38,180
2,239
40,419
$
$
17,766
2,782
20,548
$
$
7,858
806
8,664
$ 2,412,649
$
832,658
$
653,534
$
277,195
1,245,296
534,905
681,424
156,433
$ 3,657,945
$ 1,367,563
$ 1,334,958
$
433,628
$
$
$
$
$
$
2,104
546
2,650
1,207
224
1,431
3,311
770
4,081
$
$
$
$
$
$
1,101
305
1,406
1,006
57
1,063
2,107
362
2,469
$
$
$
$
$
$
738
231
969
172
70
242
910
301
1,211
$
$
$
$
$
$
287
48
335
126
20
146
413
68
481
$
$
$
$
$
$
$
$
$
$
$
$
13,023
45,738
58,761
$
$
9,030
$ 4,066,457
4,981
2,654,046
14,011
$ 6,720,503
— $
644
$
132,276
—
76
14,807
— $
720
$
147,083
13,023
45,738
58,761
44
562
606
$
$
$
$
— $
—
— $
44
562
606
$
$
9,674
$ 4,198,733
5,057
2,668,853
14,731
$ 6,867,586
11
5
16
$
$
— $
2
2
11
7
18
$
$
$
4,285
1,697
5,982
2,511
373
2,884
6,796
2,070
8,866
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
183
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, 2018 and 2017:
Table 8.5
Impaired Loans:
With no specific allowance:
Crops
Permanent
Plantings
Livestock
Part-time
Farm
Ag. Storage and
Processing
Other
Total
As of December 31, 2018
(in thousands)
Recorded investment
$
20,734
$
3,592
$
5,764
$
1,922
$
— $ — $ 32,012
Unpaid principal balance
20,632
3,573
5,737
1,912
With a specific allowance:
Recorded investment(1)
Unpaid principal balance
Associated allowance
Total:
Recorded investment
Unpaid principal balance
Associated allowance
59,335
59,098
1,606
80,069
79,730
1,606
38,176
38,009
1,134
41,768
41,582
1,134
19,443
19,361
522
25,207
25,098
522
6,276
6,249
142
8,198
8,161
142
—
—
—
—
—
—
—
—
70
69
1
70
69
1
31,854
123,300
122,786
3,405
155,312
154,640
3,405
Recorded investment of loans on
nonaccrual status(2)
$
26,611
$
21,349
$
8,803
$
4,645
$
— $ — $ 61,408
(1)
(2)
Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $120.9 million
(78%) of impaired loans as of December 31, 2018, which resulted in a specific allowance of $2.7 million.
Includes $41.8 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.
Crops
Permanent
Plantings
Livestock
Part-time
Farm
Ag. Storage and
Processing
Other
Total
As of December 31, 2017
(in thousands)
Impaired Loans:
With no specific allowance:
Recorded investment
$
14,417
$
3,272
$
11,171
$
1,953
$
— $
Unpaid principal balance
14,418
3,273
11,172
1,953
With a specific allowance:
Recorded investment(1)
Unpaid principal balance
Associated allowance
Total:
Recorded investment
Unpaid principal balance
Associated allowance
62,309
62,314
1,431
76,726
76,732
1,431
37,143
37,146
1,063
40,415
40,419
1,063
9,376
9,376
242
20,547
20,548
242
6,710
6,711
146
8,663
8,664
146
—
—
—
—
—
—
—
644
644
$ 31,457
31,460
76
76
2
720
720
2
115,614
115,623
2,884
147,071
147,083
2,884
Recorded investment of loans on
nonaccrual status(2)
$
27,630
$
25,701
$
5,333
$
4,929
$
— $ — $ 63,593
(1)
(2)
Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $113.2 million
(77%) of impaired loans as of December 31, 2017, which resulted in a specific allowance of $2.7 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.
184
The following table presents by commodity type the average recorded investment and interest income
recognized on impaired loans for the years ended December 31, 2018 and 2017:
Table 8.6
For the Year Ended:
Crops
Permanent
Plantings
Livestock
Part-time
Farm
Ag. Storage and
Processing
Other
Total
December 31, 2018
(in thousands)
Average recorded investment in impaired loans $ 74,804
$
44,461
$ 24,523
$
8,758
$
— $ 231
$ 152,777
Income recognized on impaired loans
1,219
1,687
299
241
—
—
3,446
Crops
Permanent
Plantings
Livestock
Part-time
Farm
Ag. Storage and
Processing
Other
Total
December 31, 2017
(in thousands)
For the Year Ended:
Average recorded investment in impaired loans $ 71,154
$
37,597
$ 15,913
$
8,135
$
— $ 381
$ 133,180
Income recognized on impaired loans
696
530
238
289
—
—
1,753
The impact of TDRs on Farmer Mac's allowance for loan losses was immaterial for the years ended
December 31, 2018 and 2017.
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. After 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.
The following tables present information related to Farmer Mac's acquisition of defaulted loans for the
years ended December 31, 2018, 2017, and 2016 and the outstanding balances and carrying amounts of all
such loans as of December 31, 2018 and 2017:
185
Table 8.7
Unpaid principal balance at acquisition date:
Loans underlying LTSPCs
Loans underlying off-balance sheet Farmer Mac Guaranteed Securities (excluding
AgVantage securities)
Total unpaid principal balance at acquisition date
Contractually required payments receivable
Impairment recognized subsequent to acquisition
Release of allowance for all outstanding acquired defaulted loans
Number of defaulted loans purchased
Outstanding balance
Carrying amount
For the Year Ended December 31,
2018
2017
2016
($ in thousands)
$
1,483
$
311
$
398
7,748
9,231
9,325
26
—
16
5,670
5,981
6,018
60
171
13
As of
2,118
2,516
2,544
208
67
8
December 31, 2018
December 31, 2017
$
(in thousands)
$
23,464
22,694
18,866
17,691
186
Net credit losses and 90-day delinquencies as of and for the periods indicated for loans held and loans
underlying off-balance sheet securities representing interests in pools of eligible Farm & Ranch loans
("Farm & Ranch Guaranteed Securities") and LTSPCs are presented in the table below. As of
December 31, 2018, there were no delinquencies and no probable losses inherent in Farmer Mac's Rural
Utilities loan portfolio and Farmer Mac had not experienced credit losses on any Rural Utilities loans.
Table 8.8
On-balance sheet assets:
Farm & Ranch:
Loans
Total on-balance sheet
Off-balance sheet assets:
Farm & Ranch:
LTSPCs
Total off-balance sheet
Total
90-Day Delinquencies(1)
As of
Net Credit (Recoveries)/Losses
For the Year Ended
December 31,
2018
December 31,
2017
December 31,
2018
December 31,
2017
December 31,
2016
(in thousands)
$
$
$
$
$
19,577
19,577
7,304
7,304
26,881
$
$
$
$
$
47,881
47,881
563
563
48,444
$
$
$
$
$
40
40
$
$
(1,397) $
(1,397) $
— $
— $
40
$
— $
— $
(1,397) $
154
154
—
—
154
(1)
Includes loans and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are 90 days or more past due, in foreclosure,
or in bankruptcy with at least one missed payment, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.
Of the $19.6 million of on-balance sheet loans reported as 90-day delinquencies as of December 31, 2018,
$0.1 million were loans subject to "removal-of-account" provisions. Of the $47.9 million of on-balance
sheet loans reported as 90-day delinquencies as of December 31, 2017, $0.3 million were loans subject to
"removal-of-account" provisions.
Rural Utilities
No allowance for losses has been provided for Farmer Mac's Rural Utilities line of business based on the
performance of the loans in this line of business and the credit quality of the collateral supporting these
loans, as well as Farmer Mac's counterparty risk analysis. As of December 31, 2018, there were no
delinquencies or probable losses inherent in Farmer Mac's Rural Utilities loans held or underlying
LTSPCs.
187
Credit Quality Indicators
The following tables present credit quality indicators related to Farm & Ranch loans held and loans
underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities as of December 31, 2018
and 2017:
Crops
Permanent
Plantings
Livestock
Part-time
Farm
Ag. Storage and
Processing
Other
Total
As of December 31, 2018
(in thousands)
$ 2,381,853
$
937,793
$ 679,253
$ 321,345
$
10,604
$
4,477
$ 4,335,325
71,096
66,286
14,926
36,333
26,499
21,361
7,725
7,278
Total on-balance sheet
$ 2,519,235
Off-Balance Sheet:
Acceptable
Special mention(2)
Substandard(3)
$ 1,128,787
62,430
61,175
$
$
989,052
$ 727,113
$ 336,348
469,479
$ 577,708
$ 162,730
36,778
14,512
30,703
19,848
1,023
4,037
Total off-balance sheet
$ 1,252,392
$
520,769
$ 628,259
$ 167,790
$
$
$
$
1,493
—
12,097
71,959
—
1,125
73,084
82,563
1,493
1,125
$
$
$
$
—
—
121,739
131,258
4,477
$ 4,588,322
2,656
$ 2,413,319
—
699
130,934
101,396
3,355
$ 2,645,649
7,133
$ 6,748,644
—
699
252,673
232,654
$ 3,510,640
$ 1,407,272
$1,256,961
$ 484,075
133,526
127,461
51,704
50,845
57,202
41,209
8,748
11,315
$ 3,771,627
$ 1,509,821
$1,355,372
$ 504,138
$
85,181
$
7,832
$ 7,233,971
Table 8.9
Credit risk profile by internally
assigned grade(1)
On-balance sheet:
Acceptable
Special mention(2)
Substandard(3)
Total Ending Balance:
Acceptable
Special mention(2)
Substandard(3)
Total
Commodity analysis of past due
loans(1)
On-balance sheet
Off-balance sheet
90 days or more past due
$
$
8,345
6,476
14,821
$
$
2,997
197
3,194
$
$
4,059
—
4,059
$
$
4,176
631
4,807
$
$
— $
— $
19,577
—
—
7,304
— $
— $
26,881
(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
(3)
secured.
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.
188
Crops
Permanent
Plantings
Livestock
Part-time
Farm
Ag. Storage and
Processing
Other
Total
As of December 31, 2017
(in thousands)
$ 2,274,912
$
771,600
$ 617,527
$ 260,854
$
13,023
$
9,030
$ 3,946,946
Credit risk profile by internally
assigned grade(1)
On-balance sheet:
Acceptable
Special mention(2)
Substandard(3)
70,063
67,674
22,878
38,180
18,405
17,602
8,483
7,858
Total on-balance sheet
$ 2,412,649
Off-Balance Sheet
Acceptable
Special mention(2)
Substandard(3)
$ 1,132,196
76,778
36,322
$
$
832,658
$ 653,534
$ 277,195
478,573
$ 634,633
$ 150,906
26,134
30,198
31,451
15,340
1,647
3,880
Total off-balance sheet
$ 1,245,296
$
534,905
$ 681,424
$ 156,433
$
$
$
$
—
—
13,023
42,723
—
3,015
$
$
—
644
119,829
131,958
9,674
$ 4,198,733
4,294
$ 2,443,325
169
594
136,179
89,349
45,738
$
5,057
$ 2,668,853
55,746
$ 13,324
$ 6,390,271
—
3,015
169
1,238
256,008
221,307
$ 3,407,108
$ 1,250,173
$ 1,252,160
$ 411,760
146,841
103,996
49,012
68,378
49,856
32,942
10,130
11,738
$ 3,657,945
$ 1,367,563
$ 1,334,958
$ 433,628
$
58,761
$ 14,731
$ 6,867,586
Total Ending Balance:
Acceptable
Special mention(2)
Substandard(3)
Total
Commodity analysis of past due
loans(1)
On-balance sheet
Off-balance sheet
90 days or more past due
$
$
21,702
151
21,853
$
$
18,833
—
18,833
$
$
3,835
—
3,835
$
$
3,511
412
3,923
$
$
— $
— $
47,881
—
—
563
— $
— $
48,444
(1) Amounts represent unpaid principal balance of risk-rated loans, which is the basis Farmer Mac uses to analyze its portfolio, and recorded investment of
past due loans.
(2) Assets in the "Special mention" category generally have potential weaknesses due to performance issues but are currently considered to be adequately
(3)
secured.
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.
189
Concentrations of Credit Risk
The following table sets forth the geographic and commodity/collateral diversification, the range of
original loan-to-value ratios, and the range in the size of borrower exposure for all Farm & Ranch loans
held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs as of
December 31, 2018 and 2017:
Table 8.10
By commodity/collateral type:
Crops
Permanent plantings
Livestock
Part-time farm
Ag. Storage and Processing
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%(2)
80.01% to 90.00%(2)
Total
By size of borrower exposure(3):
Less than $1,000,000
$1,000,000 to $4,999,999
$5,000,000 to $9,999,999
$10,000,000 to $24,999,999
$25,000,000 and greater
Total
As of
December 31, 2018
December 31, 2017
(in thousands)
3,771,627
$
1,509,821
1,355,372
504,138
85,181
7,832
7,233,971
855,596
2,273,184
2,296,073
883,279
332,370
593,469
7,233,971
1,333,790
1,811,166
2,530,484
1,244,823
289,427
24,281
7,233,971
2,431,296
2,755,996
916,422
601,349
528,908
$
$
$
$
$
$
7,233,971
$
3,657,945
1,367,563
1,334,958
433,628
58,761
14,731
6,867,586
740,991
2,093,213
2,244,094
908,603
296,264
584,421
6,867,586
1,322,422
1,733,671
2,385,605
1,150,914
248,799
26,175
6,867,586
2,379,596
2,627,617
867,574
584,896
407,903
6,867,586
$
$
$
$
$
$
$
$
(1) Geographic regions: Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND,
SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL,
GA, MS, NC, SC, TN).
Primarily part-time farm loans. Loans with original loan-to-value ratios of greater than 80% are required to have private mortgage insurance.
Includes multiple loans to the same borrower or borrower-related entities.
(2)
(3)
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
190
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.
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. By federal statute, no holder of Class A voting common stock may directly or
indirectly be a beneficial owner of more than 33% of the outstanding shares of Class A voting
common stock.
• Class B voting common stock, which may be held only by institutions of the Farm Credit
System. 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 2018, 2017, and 2016, Farmer Mac paid a quarterly dividend of $0.58, $0.36, and $0.26,
respectively, per share on all classes of its common stock. Farmer Mac's ability to declare and pay
dividends on its common stock could be restricted if it fails to comply with applicable capital
requirements.
Farmer Mac's board of directors approved a share repurchase program during third quarter 2015
authorizing Farmer Mac to repurchase up to $25.0 million of its outstanding Class C non-voting common
stock for two years. In August 2017, Farmer Mac's board of directors approved the continuation of the
share repurchase program on its existing terms through August 2019 for the repurchase of up to $5.4
million of Farmer Mac's outstanding Class C non-voting common stock. This is the amount that was
remaining under the share repurchase program that Farmer Mac's board of directors originally authorized
in third quarter 2015 for the repurchase of up to $25 million of outstanding Class C non-voting common
stock. Farmer Mac did not repurchase any shares during 2018 or 2017 under this program. As of
December 31, 2018 and December 31, 2017, Farmer Mac had repurchased approximately 668,000 shares
of Class C non-voting common stock at a cost of approximately $19.6 million under the share repurchase
program.
Preferred Stock
On January 17, 2013, Farmer Mac issued 2.4 million shares of 5.875% Non-Cumulative Preferred Stock,
Series A (the "Series A Preferred Stock"). On March 25, 2014, Farmer Mac issued 3.0 million shares of
6.875% Non-Cumulative Preferred Stock, Series B (the "Series B Preferred Stock"). On June 20, 2014,
Farmer Mac issued 3.0 million shares of 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock,
Series C (the "Series C Preferred Stock"). The Series A Preferred Stock, the Series B Preferred Stock, and
the Series C Preferred Stock (collectively referred to as the "Outstanding Preferred Stock") each has a par
value of $25.00 per share and a liquidation preference of $25.00 per share. The Series A Preferred Stock
and the Series B Preferred Stock pay an annual dividend rate of 5.875% and 6.875%, respectively, for the
life of the securities. The Series C Preferred Stock pays an annual dividend rate of 6.000% from the date
of issuance to and including the quarterly payment date occurring on July 17, 2024, and thereafter, at a
floating rate equal to three-month LIBOR plus 3.26%. Farmer Mac has the right, but not the obligation, to
191
redeem the Series A Preferred Stock at any time on and after January 17, 2018, the Series B Preferred
Stock at any time on and after April 17, 2019, and the Series C Preferred Stock at any time on and after
July 18, 2024, all at a price equal to the then-applicable liquidation preference. Dividends on all series of
Outstanding Preferred Stock are non-cumulative, which means that if Farmer Mac's 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 any series of Outstanding Preferred Stock are declared for
any future dividend period. Farmer Mac incurred direct costs of $1.7 million related to the issuance of the
Series A Preferred Stock, direct costs of $1.9 million related to the issuance of the Series B Preferred
Stock, and direct costs of $1.6 million related to the issuance of the Series C Preferred Stock. As of
December 31, 2018, Farmer Mac had 2.4 million shares of Series A Preferred Stock outstanding, 3.0
million shares of Series B Preferred Stock outstanding, and 3.0 million of Series C Preferred Stock
outstanding.
For 2018, 2017 and 2016, Farmer Mac paid the following quarterly dividends on its outstanding preferred
stock:
• $0.3672 per share on its 5.875% Non-Cumulative Preferred Stock, Series A;
• $0.4297 per share on its 6.875% Non-Cumulative Preferred Stock, Series B; and
• $0.3750 per share on its 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C.
Farmer Mac's ability to declare and pay dividends on its preferred stock could be restricted if it fails to
comply with applicable capital requirements. Farmer Mac's preferred stock is included as a component of
core capital for regulatory and statutory capital compliance measurements.
Equity-Based Incentive Compensation Plans
Farmer Mac's Amended and Restated 2008 Omnibus Incentive Compensation Plan authorizes the grant of
restricted stock, stock options, and SARs, among other alternative forms of equity-based compensation, to
Farmer Mac's directors, officers, and employees. SARs awarded to officers and employees vest annually
in thirds. Farmer Mac has not granted SARs to directors since 2008. If not exercised or cancelled earlier
due to the termination of employment, SARs granted to officers or employees expire after 10 years from
the grant date. For all SARs granted, the exercise price is equal to the closing price of Farmer Mac's Class
C non-voting common stock on the date of grant. SARs granted during 2018 have an exercise price of
$86.15 per share, SARs granted during 2017 have an exercise price of $60.84 per share, and SARs granted
during 2016 have an exercise price of $35.75 per share. During 2018, 2017, and 2016, restricted stock
awards were granted to directors with a vesting period of one year, to officers with a vesting period of
three years provided certain performance targets are met, to officers vesting annually in thirds, and to
employees with a vesting period of three years. During 2018, a restricted stock award was also granted to
Farmer Mac's President and Chief Executive Officer, which will "cliff" vest on March 31, 2021 if he is
still employed by Farmer Mac on that date.
192
The following tables summarize stock options, SARs, and non-vested restricted stock activity for the years
ended December 31, 2018, 2017, and 2016:
Table 9.1
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
For the Year Ended December 31,
2018
2017
2016
Stock
Options
and
SARs
Weighted-
Average
Exercise
Price
Stock
Options
and
SARs
Weighted-
Average
Exercise
Price
Stock
Options
and
SARs
Weighted-
Average
Exercise
Price
163,272
$
10,122
(48,434)
—
124,960
95,675
32.95
86.15
30.06
—
38.38
31.41
367,535
$
24,657
(111,278)
(117,642)
163,272
93,085
30.18
60.84
31.47
31.55
32.95
28.57
747,573
$
51,975
(431,346)
(667)
367,535
208,274
26.68
35.75
24.77
35.60
30.18
27.41
For the Year Ended December 31,
2018
2017
2016
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
95,015
$
32,070
(1,098)
(45,834)
80,153
44.39
84.03
86.15
42.12
60.98
138,497
$
45,828
(28,815)
(60,495)
95,015
34.63
59.79
42.15
34.77
44.39
132,651
$
76,617
(1,360)
(69,411)
138,497
32.12
36.33
35.75
31.69
34.63
The cancellations of stock options, SARs, and non-vested restricted stock during 2018, 2017, and 2016
were due to unvested awards terminating in accordance with the provisions of the applicable equity
compensation plans or award agreements upon directors' or employees' departures from Farmer Mac.
Farmer Mac generally 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 no cash from the
exercise of stock options during 2018, $0.2 million during 2017, and $0.5 million during 2016. During
2018, 2017, and 2016, 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 $1.5 million,
$2.6 million, and $3.6 million, respectively. During both 2018 and 2017, Farmer Mac recognized $0.9
million, respectively, of tax benefits recognized in income tax expense associated with stock compensation
activity.
During 2018, 2017, and 2016, Farmer Mac recorded a net decrease to additional paid-in capital of $2.7
million, $2.6 million, and $3.1 million, respectively, related to stock-based compensation awards.
193
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 2018, Farmer Mac issued 174 shares of Class C
non-voting common stock with a fair value of $14,000 to the 4 directors who made that election. During
2017, Farmer Mac issued 698 shares of Class C non-voting common stock with a fair value of $41,000 to
the 4 directors who made that election. During 2016, Farmer Mac issued 1,130 shares of Class C non-
voting common stock with a fair value of $41,000 to the 4 directors who made that election.
As of December 31, 2018, Farmer Mac had no stock options outstanding. The following tables
summarize information regarding SARs and non-vested restricted stock outstanding as of December 31,
2018:
Table 9.2
Range of
Exercise Prices
$10.00 - $24.99
25.00 - 39.99
40.00 - 54.99
55.00 - 69.99
70.00 - 84.99
85.00 - 99.99
Weighted-
Average
Grant-Date
Fair Value
$35.00 - $49.99
50.00 - 64.99
65.00 - 79.99
80.00 - 94.99
Outstanding
Exercisable
Weighted-
Average
Remaining
Contractual
Life
16,000 2.6 years
SARs
Weighted-
Average
Remaining
Contractual
Life
2.6 years
SARs
16,000
Vested or Expected to Vest
Weighted-
Average
Remaining
Contractual
Life
2.6 years
16,000
SARs
86,462 6.1 years
— 0.0 years
12,376 8.3 years
— 0.0 years
10,122 9.3 years
124,960
76,629
5.9 years
— 0.0 years
3,046
8.3 years
— 0.0 years
— 0.0 years
95,675
86,462
6.1 years
— 0.0 years
12,376
8.3 years
— 0.0 years
10,122
9.3 years
124,960
Outstanding
Expected to Vest
Non-vested
Restricted
Stock
27,505
21,848
3,578
27,222
80,153
Weighted-
Average
Remaining
Contractual
Life
0.3 years
1.3 years
2.2 years
1.6 years
Weighted-
Average
Remaining
Contractual
Life
0.3 years
1.3 years
2.2 years
1.6 years
Non-vested
Restricted
Stock
27,505
21,848
3,578
27,222
80,153
As of December 31, 2018 and 2017, the intrinsic value of options, SARs, and non-vested restricted stock
outstanding, exercisable, and vested or expected to vest was $7.9 million and $14.8 million,
respectively. During 2018, 2017, and 2016, the total intrinsic value of options and SARs exercised was
$3.0 million, $3.8 million, and $7.6 million, respectively. As of December 31, 2018, there was $2.6
million of total unrecognized compensation cost related to non-vested SARs and restricted stock
awards. This cost is expected to be recognized over a weighted-average period of 1.7 years.
The weighted-average grant date fair values of options, SARs, and restricted stock awards granted in
2018, 2017, and 2016 were $69.38, $44.93, and $25.11 per share, respectively. Under the fair value-based
194
method of accounting for stock-based compensation cost, Farmer Mac recognized compensation expense
of $2.5 million, $2.7 million, and $3.3 million during 2018, 2017, and 2016, respectively.
The fair values of stock options and SARs were estimated using the Black-Scholes option pricing model
based on the following assumptions:
Table 9.3
Risk-free interest rate
Expected years until exercise
Expected stock volatility
Dividend yield
For the Year Ended December 31,
2018
2.7%
6 years
33.0%
2.7%
2017
2.3%
6 years
34.8%
2.4%
2016
1.5%
5 years
34.7%
2.9%
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 non-voting common stock. The dividend yields were based on the expected dividends as a
percentage of the value of Farmer Mac's Class C non-voting 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 2018, 2017, and 2016 was $84.03, $59.79, and $36.33 per share, respectively, which is based
on the closing price of the stock on the date granted.
Capital Requirements
Farmer Mac is subject to the following capital requirements:
• Statutory minimum capital requirement – Farmer Mac's statutory minimum capital level is an
amount of core capital (stockholders' equity less accumulated other comprehensive income)
equal to the sum of 2.75% of Farmer Mac's aggregate on-balance sheet assets, as calculated for
regulatory purposes, plus 0.75% 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% of the total minimum capital requirement at that time.
• Risk-based capital requirement – Farmer Mac's charter directs the Farm Credit Administration
("FCA"), an independent agency in the executive branch of the United States government that
regulates Farmer Mac, to establish a risk-based capital stress test for Farmer Mac, using
specified stress-test parameters.
195
Farmer Mac is required to comply with the higher of the minimum capital requirement and the risk-based
capital requirement. As of both December 31, 2018 and 2017, the minimum capital requirement was
greater than the risk-based capital requirement. Farmer Mac's ability to declare and pay dividends could be
restricted if it fails to comply with applicable capital requirements.
As of December 31, 2018, Farmer Mac's minimum capital requirement was $545.0 million and its core
capital level was $727.6 million, which was $182.6 million above the minimum capital requirement as of
that date. As of December 31, 2017, Farmer Mac's minimum capital requirement was $520.3 million and
its core capital level was $657.1 million, which was $136.8 million above the minimum capital
requirement as of that date.
In accordance with FCA's rule on Farmer Mac's capital planning, and as part of Farmer Mac's capital plan,
Farmer Mac has adopted a policy for maintaining a sufficient level of Tier 1 capital (consisting of retained
earnings, paid-in-capital, common stock, and qualifying preferred stock) and imposing restrictions on
Tier 1-eligible dividends and any discretionary bonus payments in the event that this capital falls below
specified thresholds.
10. INCOME TAXES
Farmer Mac is subject to federal corporate income taxes but is exempt from state and local corporate
income taxes. The components of the federal corporate income tax expense for the years ended
December 31, 2018, 2017, and 2016 were as follows:
Table 10.1
Current income tax expense
Deferred income tax expense
Income tax expense
For the Year Ended December 31,
2018
2017
2016
(in thousands)
$
$
25,317
2,625
27,942
$
$
43,148
3,221
46,369
$
$
37,954
4,103
42,057
A reconciliation of income tax at the statutory federal corporate income tax rate to the income tax expense
for the years ended December 31, 2018, 2017, and 2016 is as follows:
Table 10.2
For the Year Ended December 31,
2018
2017
2016
(dollars in thousands)
Tax expense at statutory rate
$
28,564
$
45,740
$
41,775
Re-measurement of net deferred tax asset due to enactment of new tax legislation
Excess tax benefits related to stock-based awards
Valuation allowance
Other
Income tax expense
Statutory tax rate
—
(946)
—
324
1,365
(860)
4
120
$
27,942
$
46,369
$
—
—
21
261
42,057
21.0%
35.0%
35.0%
196
The components of the deferred tax assets and liabilities as of December 31, 2018 and 2017 were as
follows:
Table 10.3
Deferred tax assets:
Basis differences related to financial derivatives
Basis differences related to hedged items
Allowance for losses
Compensation and Benefits
Stock-based compensation
Capital loss carryforwards and other-than-temporary impairment
Valuation allowance
Other
Total deferred tax assets
Deferred tax liability:
Unrealized gains on securities
Unrealized gains on cash flow hedges
Other
Total deferred tax liability
Net deferred tax asset
As of December 31,
2018
2017
(in thousands)
$
7,614
$
1,810
1,929
967
623
36
(36)
121
6,800
5,661
1,862
778
532
36
(36)
74
13,064
15,707
4,807
1,827
61
6,695
$
6,369
$
12,376
1,203
80
13,659
2,048
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
established a valuation allowance of $36,000 as of both December 31, 2018 and 2017, which was
attributable to capital loss carryforwards 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, 2018, no capital loss carryforwards
expired. As of December 31, 2018, the amount of capital loss carryforwards was $0.2 million. These
capital loss carryforwards will expire in 2021.
Deferred tax assets are measured at rates in effect when they arise. To the extent rates change, the
deferred tax asset will be adjusted to reflect the new rate. A reduction in corporate tax rates would result
in a reduction in the value of the deferred tax asset. The Tax Cuts and Jobs Act was enacted on December
22, 2017. This new legislation provides for significant changes to the U.S. Internal Revenue Code of
1986, as amended, that was in effect through the end of 2017 and includes a reduction of the federal
corporate income tax rate from 35% to 21%, which became effective January 1, 2018. As a result of this
reduction in the federal corporate income tax rate, Farmer Mac re-measured its net deferred tax asset at the
newly enacted 21% federal corporate income tax rate and thus reduced its value by $1.4 million.
Accordingly, Farmer Mac recorded an increase to income tax expense of $1.4 million, or an increase of
1.04%, in Farmer Mac's effective tax rate for 2017.
197
As of December 31, 2018 and 2017, Farmer Mac did not identify any uncertain tax positions.
Farmer Mac did not incur unrecognized tax benefits for the years ended December 31, 2018, 2017, and
2016.
Tax years 2016 through 2018 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% of the lesser of an employee's gross salary and the maximum
compensation permitted under the Economic Growth and Tax Relief Reconciliation Act of 2001
("EGTRRA") ($275,000 for 2018, $270,000 for 2017, and $265,000 for 2016), plus 5.7% of the difference
between: (1) the lesser of the gross salary and 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. Expenses for this plan for the years ended December 31, 2018, 2017, and 2016 were $1.8 million,
$1.5 million, and $1.3 million, respectively.
Farmer Mac established a Nonqualified Deferred Compensation Plan (the "NQDC Plan") for its executive
officers effective May 1, 2017. Under the NQDC Plan, Farmer Mac credits the account of each participant
each calendar year with an amount equal to 18.9% of the difference between: (1) the amount established
under EGTRRA and (2) a participant’s gross annual base salary, which for purposes of calculating
employer credits under the NQDC Plan is capped at $700,000 for Farmer Mac’s Chief Executive Officer
and $500,000 for all other participants. This fixed contribution percentage is the same formula used for
determining employer contributions to Farmer Mac’s defined contribution retirement plan based on an
employee’s gross annual base salary that is above the amount established under EGTRRA for that year.
Expenses for the NQDC Plan were $0.1 million for both the years ended December 31, 2018 and 2017.
12. GUARANTEES AND LONG-TERM STANDBY PURCHASE COMMITMENTS
Farmer Mac offers two credit enhancement alternatives to direct loan purchases that allow approved
lenders the ability to retain the cash flow benefits of their loans and increase their liquidity and lending
capacity: (1) Farmer Mac Guaranteed Securities, which are available through each of the Farm & Ranch,
USDA Guarantees, Rural Utilities, and Institutional Credit lines of business, and (2) LTSPCs, which are
available through the Farm & Ranch or the Rural Utilities lines of business. LTSPCs and securitization
trusts where Farmer Mac is not the primary beneficiary result in the creation of off-balance sheet
obligations for Farmer Mac. Farmer Mac records, at the inception of an off-balance sheet guarantee or
LTSPC, a liability for the fair value of its obligation to stand ready to perform under the terms of each
guarantee or LTSPC and an asset that is equal to the fair value of the fees that will be received over the life
of each guarantee or LTSPC. 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 later amortized into guarantee and commitment fee income in relation to the
decrease in the unpaid principal balance on the underlying agricultural real estate mortgage and rural
utilities loans.
198
The contractual terms of Farmer Mac's off-balance sheet guarantees and LTSPCs range from less than 1
year to 30 years. However, the actual term of each guarantee or LTSPC may be significantly less than the
contractual term based on the prepayment characteristics of the related loans. Farmer Mac's maximum
potential exposure under these off-balance sheet guarantees and LTSPCs is comprised of the unpaid
principal balance of the underlying 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 $4.0 billion
as of both December 31, 2018 and 2017. Farmer Mac's maximum potential exposure for guarantees
issued before January 1, 2003, which are not recorded on the consolidated balance sheets, was $23.8
million and $28.0 million as of December 31, 2018 and 2017, respectively. The maximum exposure from
these guarantees and LTSPCs 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 or LTSPCs, 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, 2018, 2017, and 2016:
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.
Off-Balance Sheet Farmer Mac Guaranteed Securities
For the Year Ended December 31,
2018
2017
2016
(in thousands)
38,400
$
37,282
$
6,202
(5,919)
7,683
(6,565)
38,683
$
38,400
$
$
$
38,609
6,725
(8,052)
37,282
Agricultural real estate mortgage loans, rural utilities loans, and other related assets may be placed into
trusts to securitize 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 investors receive
timely payments 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
199
as of December 31, 2018 and 2017, 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
As of December 31, 2018
As of December 31, 2017
Farm & Ranch:
Guaranteed Securities(1)
USDA Guarantees:
Farmer Mac Guaranteed USDA Securities
Institutional Credit:
AgVantage Securities
Revolving floating rate AgVantage facility(2)
Total off-balance sheet Farmer Mac Guaranteed Securities
(in thousands)
135,862
$
367,684
9,898
300,000
813,444
$
333,511
254,217
11,556
300,000
899,284
$
$
(1) During fourth quarter 2018, Farmer Mac repurchased the 100% participation interests in loans underlying a pool of $134.1 million in Farm & Ranch
Guaranteed Securities at par, thereby redeeming the corresponding Farm & Ranch Guaranteed Securities from their sole security holder. Farmer Mac
repurchased these participation interests at the request of the sole security holder in exchange for the termination of the participation interests and the
reconveyance of all beneficial interest in the loans to the sole security holder that owned the loans in which the participation interests had been issued. The
resulting pool of Farm & Ranch loans was concurrently added under LTSPCs. The commitment fee Farmer Mac receives on these loans added under
LTSPCs is the same as the guarantee fee Farmer Mac had been earning on the Farm & Ranch Guaranteed Securities.
(2) Relates to a revolving floating rate AgVantage facility subject to specified contractual terms. Farmer Mac receives a fixed fee based on the full dollar
amount of the facility.
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.
200
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
Proceeds from new securitizations
Guarantee fees received
Purchases of assets from the trusts
For the Year Ended December 31,
2018
2017
2016
(in thousands)
$
382,929
$
519,219
$
609,347
1,920
(7,748)
2,610
(5,670)
3,552
(2,118)
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 $2.8 million
as of December 31, 2018 and $3.6 million as of December 31, 2017. As of December 31, 2018 and 2017,
the weighted-average remaining maturity of all loans underlying off-balance sheet Farmer Mac
Guaranteed Securities, excluding AgVantage securities, was 10.3 years and 10.0 years, respectively. As of
December 31, 2018 and 2017, the weighted-average remaining maturity of the off-balance sheet
AgVantage securities was 5.0 years and 0.8 years, respectively.
Long-Term Standby Purchase Commitments
An LTSPC is a commitment by Farmer Mac to purchase eligible loans from an identified pool of loans
under specified circumstances set forth in the applicable agreement, either for cash or in exchange for
Farmer Mac Guaranteed Securities, on one or more undetermined future dates. As consideration for its
assumption of the credit risk on loans underlying an LTSPC, Farmer Mac receives a commitment fee
payable monthly in arrears.
An LTSPC permits a lender to nominate from its portfolio an identified pool of loans for participation in
the Farm & Ranch or the Rural Utilities line of business, which are retained in the lender's portfolio and
serviced by the lender. 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 lender effectively transfers
the credit risk on those loans to Farmer Mac, thereby reducing the lender'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
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.
201
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
fair value or in exchange for Farm & Ranch Guaranteed Securities (in the Farm & Ranch line of
business, 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 $3.2 billion and $3.1 billion as of
December 31, 2018 and 2017, respectively.
As of both December 31, 2018 and 2017, the weighted-average remaining maturity of all loans underlying
LTSPCs was 15.3 years. For those LTSPCs issued or modified on or after January 1, 2003, Farmer Mac
has recorded a liability for its obligation to stand ready under the commitment in the guarantee and
commitment obligation on the consolidated balance sheets. This liability approximated $35.9 million as
of December 31, 2018 and $34.8 million as of December 31, 2017.
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, 2018 and 2017, commitments to
purchase Farm & Ranch loans and USDA Guarantees totaled $37.1 million and $46.3 million,
respectively, all of which were mandatory commitments. As of December 31, 2017, there were $8.0
million commitments to purchase Rural Utilities loans. 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.
Rental expense for Farmer Mac's office space for each of the years ended December 31, 2018, 2017, and
2016 was $2.0 million, $1.6 million, and $1.3 million, respectively. The future minimum lease payments
under Farmer Mac's non-cancellable leases for its office space and other contractual obligations as of
December 31, 2018 are as follows:
Table 12.4
2019
2020
2021
2022
2023
Thereafter
Total
Future Minimum
Lease Payments
Other Contractual
Obligations
$
$
(in thousands)
1,944
$
1,937
1,977
2,021
1,995
1,311
1,965
1,110
233
—
—
—
11,185
$
3,308
202
Other contractual obligations in the table above include minimum amounts due under non-cancellable
agreements to purchase goods or services that are enforceable and legally binding and specify all
significant terms. These agreements include, among others, 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 before use in the
consolidated financial statements. Farmer Mac's accounting policies for fair value measurement are
discussed in Note 2(o).
Fair value measurements related to financial instruments that are reported at fair value in the consolidated
financial statements each period are referred to as recurring fair value measurements. Fair value
measurements related to financial instruments that are not reported at fair value each period but are subject
to fair value adjustments in certain circumstances are referred to as nonrecurring fair value measurements.
Fair Value Classification and Transfers
The fair value hierarchy ranks the quality and reliability of the information used to determine fair
values. The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities and the lowest priority to unobservable inputs. The following three levels are used to
classify fair value measurements:
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
Level 2 Quoted prices in markets that are not active or financial instruments for which all
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
203
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 those instruments under the valuation hierarchy described above.
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,
senior agency debt securities, and Government/GSE guaranteed mortgage-backed securities, 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."
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.
204
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 non-standard 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.
Nonrecurring Fair Value Measurements and Classification
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 measures 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, 2018, Farmer Mac's assets and liabilities recorded at fair value included financial
instruments valued at $6.0 billion whose fair values were estimated by management in the absence of
readily determinable fair values (i.e., level 3). These financial instruments measured as Level 3
represented 32% of total assets and 73% of financial instruments measured at fair value as of
December 31, 2018. As of December 31, 2017, Farmer Mac's assets and liabilities recorded at fair value
included financial instruments valued at $5.5 billion whose fair values were estimated by management in
the absence of readily determinable fair values. These financial instruments measured as level 3
205
represented 31% of total assets and 71% of financial instruments measured at fair value as of
December 31, 2017.
Transfers in and/or out of the different levels within the fair value hierarchy are based on the fair values of
the assets and liabilities as of the beginning of the reporting period. During 2018, there were no transfers
within fair value hierarchy for fair value measurements of Farmer Mac's investment securities, Farmer
Mac Guaranteed Securities, USDA Securities, and financial derivatives. During 2017, there was one
transfer within the fair value hierarchy from Level 2 to Level 3 for the fair value measurement of a fixed-
rate GSE guaranteed mortgage-backed security (interest-only security). The transfer to Level 3 was
because unobservable inputs became significant to the overall estimate of the fair value of the security as
of March 31, 2017. There were no transfers within the fair value hierarchy for fair value measurements of
Farmer Mac's investment securities, Farmer Mac Guaranteed Securities, USDA Securities, and financial
derivatives during 2016. See Note 2(b) and Note 5 for information about the transfer of available-for-sale
USDA and Farmer Mac Guaranteed USDA securities to held-to-maturity as of October 1, 2016.
The following tables present information about Farmer Mac's assets and liabilities measured at fair value
on a recurring and non-recurring basis as of December 31, 2018 and 2017, respectively, and indicate the
fair value hierarchy of the valuation techniques used by Farmer Mac to determine such fair value:
206
Table 13.1
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Assets and Liabilities Measured at Fair Value as of December 31, 2018
Level 1
Level 2
Level 3
Total
(in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student
loans
$
— $
— $
18,715
$
—
—
—
792,602
792,602
—
—
—
—
—
28,678
1,377,454
403
—
—
—
—
—
18,715
28,678
1,377,454
403
792,602
1,406,535
18,715
2,217,852
—
—
—
—
7,487
5,974,497
5,974,497
5,974,497
5,974,497
9,999
9,999
—
9,999
9,999
7,487
$
$
$
$
$
792,602
$ 1,414,022
$ 6,003,211
$
8,209,835
188
188
$
$
19,445
19,445
$
$
— $
— $
19,633
19,633
— $
—
— $
— $
—
— $
317
128
445
$
$
317
128
445
Floating rate asset-backed securities
Floating rate Government/GSE guaranteed mortgage-backed securities
Fixed rate GSE guaranteed mortgage-backed securities
Fixed rate U.S. Treasuries
Total Investment Securities
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage
Total Farmer Mac Guaranteed Securities
USDA Securities:
Trading
Total USDA Securities
Financial derivatives
Total Assets at fair value
Liabilities:
Financial derivatives
Total Liabilities at fair value
Non-recurring:
Assets:
Loans held for investment
REO
Total Non-recurring Assets at fair value
207
Assets and Liabilities Measured at Fair Value as of December 31, 2017
Level 1
Level 2
Level 3
Total
(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student
loans
$
— $
— $
18,814
$
—
—
—
—
767,424
767,424
—
—
—
—
—
34,210
1,290,187
486
99,951
—
—
—
4,333
—
—
18,814
34,210
1,290,187
4,819
99,951
767,424
1,424,834
23,147
2,215,405
—
—
—
—
7,093
5,471,914
5,471,914
5,471,914
5,471,914
13,515
13,515
—
13,515
13,515
7,093
$
$
$
$
$
767,424
$ 1,431,927
$
5,508,576
$
7,707,927
36
36
$
$
26,563
26,563
$
$
— $
— $
26,599
26,599
— $
— $
— $
— $
508
508
$
$
508
508
Floating rate asset-backed securities
Floating rate Government/GSE guaranteed mortgage-backed securities
Fixed rate GSE guaranteed mortgage-backed securities
Fixed rate senior agency debt
Fixed rate U.S. Treasuries
Total available-for-sale
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage
Total Farmer Mac Guaranteed Securities
USDA Securities:
Trading
Total USDA Securities
Financial derivatives
Total Assets at fair value
Liabilities:
Financial derivatives
Total Liabilities at fair value
Non-recurring:
Assets:
Loans held for investment
Total Non-recurring Assets at fair value
208
The following tables present additional information about assets and liabilities measured at fair value on a
recurring basis for which Farmer Mac has used significant unobservable inputs to determine fair value.
Net transfers in and/or out of Level 3 are based on the fair values of the assets and liabilities as of the
beginning of the reporting period. There were no liabilities measured at fair value using significant
unobservable inputs during the years ended December 31, 2018 and 2017.
Table 13.2
Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2018
Cumulative
Effect from
Change in
Hedge
Accounting
Beginning
Balance
Purchases
Sales
Settlements
(in thousands)
Realized
and
Unrealized
(Losses)/
Gains
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
Fixed rate GSE guaranteed
mortgage-backed securities
Total available-for-sale
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage
Total available-for-sale
USDA Securities:
Available-for-sale
Trading(1)
Total USDA Securities
$
18,814
— $
— $
— $
— $
— $
(99) $
18,715
4,333
23,147
—
—
—
—
—
—
(2,137)
(2,137)
(2,092)
(2,092)
(104)
(203)
—
18,715
5,471,914
5,471,914
487
487
2,177,546
2,177,546
— (1,670,402)
— (1,670,402)
21,459
21,459
(26,507)
5,974,497
(26,507)
5,974,497
—
13,515
13,515
—
—
—
127,850
(127,850)
—
—
127,850
(127,850)
—
(3,597)
(3,597)
—
81
81
—
—
—
—
9,999
9,999
Total Assets at fair value
$5,508,576
$
487
$2,305,396
$(127,850) $(1,676,136) $
19,448
$
(26,710) $6,003,211
(1)
Includes unrealized gains of $0.1 million attributable to assets still held as of December 31, 2018 that are recorded in "Gains/(losses) on trading
securities."
209
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage
Total available-for-sale
USDA Securities:
Available-for-sale
Trading(1)
Total USDA Securities
Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2017
Beginning
Balance
Transfers in
Purchases
Sales
Settlements
(in thousands)
Unrealized
Gains/
(Losses)
included in
Other
Comprehen-
sive
Income
Realized
and
Unrealized
(Losses)
included
in Income
Ending
Balance
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate
certificates backed by Government
guaranteed student loans
Fixed rate GSE guaranteed
mortgage-backed securities
$
$
17,730
$
— $
— $
— $
— $
— $
1,084
$
18,814
— $
7,041
$
— $
— $
(444) $
— $
(2,264) $
4,333
Total available-for-sale
17,730
7,041
—
4,853,685
4,853,685
— 1,134,132
— 1,134,132
—
—
—
(444)
—
(1,180)
23,147
(526,650)
(526,650)
(7,625)
(7,625)
18,372
5,471,914
18,372
5,471,914
—
20,388
20,388
—
—
—
155,744
(155,744)
—
—
155,744
(155,744)
—
(6,849)
(6,849)
—
(24)
(24)
—
—
—
—
13,515
13,515
Total Assets at fair value
$ 4,891,803
$
7,041
$1,289,876
$(155,744) $ (533,943) $
(7,649) $
17,192
$5,508,576
(1)
Includes unrealized gains of $0.1 million attributable to assets still held as of December 31, 2017 that are recorded in "Gains/(losses) on trading
securities."
210
Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2016
Beginning
Balance
Purchases
Sales
Settlements
Realized
and
Unrealized
Gains/
(Losses)
included
in Income
Unrealized
(Losses)/
Gains
included in
Other
Comprehen
-sive
Income
Transfers
Out
Ending
Balance
(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate
certificates backed by Government
guaranteed student loans
$
44,924
$
— $ (26,806) $
Total available-for-sale
44,924
—
(26,806)
— $
—
$
6
6
(394)
(394)
— $
17,730
—
17,730
Trading:
Floating rate asset-backed
securities(1)
Total Trading
491
491
Total Investment Securities
45,415
Farmer Mac Guaranteed Securities:
—
—
—
—
—
(26,806)
(2,213)
(2,213)
(2,213)
1,722
1,722
1,728
—
—
(394)
— $
—
—
—
—
17,730
Available-for-sale:
AgVantage
4,121,244
1,430,392
Farmer Mac Guaranteed USDA
Securities(2)
31,361
4,100
Total available-for-sale
4,152,605
1,434,492
—
—
—
(706,446)
(20,944)
29,439
— 4,853,685
(3,240)
—
603
(32,824)
—
(709,686)
(20,944)
30,042
(32,824)
4,853,685
USDA Securities:
Available-for-sale
Trading(3)
1,888,344
391,240
(97,954)
(237,262)
28,975
—
—
(8,325)
Total USDA Securities
1,917,319
391,240
(97,954)
(245,587)
—
(262)
(262)
35,959
(1,980,327)
—
—
35,959
(1,980,327)
—
20,388
20,388
Total Assets at fair value
$ 6,115,339
$1,825,732
$(124,760) $ (957,486) $
(19,478) $
65,607
$(2,013,151) $4,891,803
(1) None of the unrealized gains are attributable to assets still held as of December 31, 2016 and are recorded in "Gains/(losses) on trading securities."
(2)
Includes $32.8 million of Farmer Mac Guaranteed USDA Securities and $2.0 billion of USDA Securities transferred from available-for-sale to held-to-
maturity on October 1, 2016.
Includes unrealized losses of $0.3 million attributable to assets still held as of December 31, 2016 that are recorded in "Gains/(losses) on trading
securities."
(3)
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, 2018 and 2017.
211
Table 13.3
Financial Instruments
Fair Value
Valuation Technique
Unobservable Input
Range
(Weighted-Average)
As of December 31, 2018
(in thousands)
Assets:
Investment securities:
Floating rate auction-rate certificates backed
by Government guaranteed student loans
$
18,715
Indicative bids
Range of broker
quotes
95.0% - 95.0%
(95.0%)
Farmer Mac Guaranteed Securities:
AgVantage
$ 5,974,497 Discounted cash flow Discount rate
3.0% - 4.4% (3.3%)
USDA Securities
$
9,999 Discounted cash flow Discount rate
3.2% - 5.2% (4.9%)
CPR
7% - 17% (16%)
Financial Instruments
Fair Value
Valuation Technique
Unobservable Input
Range
(Weighted-Average)
As of December 31, 2017
(in thousands)
Assets:
Investment securities:
Floating rate auction-rate certificates backed
by Government guaranteed student loans
Fixed rate GSE guaranteed mortgage-backed
securities
$
$
18,814
Indicative bids
Range of broker
quotes
95.5% - 95.5%
(95.5%)
4,333 Discounted cash flow Discount rate
CPR
2.9%
0%
Farmer Mac Guaranteed Securities:
AgVantage
$ 5,471,914 Discounted cash flow Discount rate
2.1% - 3.4% (2.4%)
USDA Securities
$
13,515 Discounted cash flow Discount rate
CPR
3.6% - 5.4% (5.0%)
7% - 19% (17%)
The significant unobservable inputs used in the fair value measurements of Farmer Mac Guaranteed
Securities and USDA Securities are prepayment rates and discount rates commensurate with the risks
involved. Typically, significant increases (decreases) in any of these inputs in isolation may result in
materially lower (higher) fair value measurements. Generally, in a rising interest rate environment, Farmer
Mac would expect average discount rates to increase and would likely expect a corresponding decrease in
forecasted prepayment rates. Conversely, in a declining interest rate environment, Farmer Mac would
expect average discount rates to decrease and would likely expect a corresponding increase in forecasted
prepayment rates. Prepayment rates are not presented in the table above for AgVantage securities because
they generally do not pay down principal based on amortization schedules but instead typically have fixed
maturity dates when the secured general obligations are due.
212
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, 2018 and 2017:
Table 13.4
Financial assets:
Cash and cash equivalents
Investment securities
Farmer Mac Guaranteed 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
As of December 31, 2018 As of December 31, 2017
Fair Value
Carrying
Amount
Fair Value
Carrying
Amount
(in thousands)
$ 425,256
$ 425,256
$ 302,022
$ 302,022
2,263,446
2,262,884
2,260,969
2,260,437
8,061,903
8,071,115
7,588,806
7,598,188
2,113,946
2,176,173
2,076,396
2,131,365
5,512,781
5,515,052
5,279,225
5,266,786
7,487
7,487
7,093
7,093
37,461
3,424
36,870
3,496
33,871
4,323
35,718
4,177
7,744,388
7,757,050
8,079,309
8,089,826
8,473,558
8,486,647
7,445,545
7,432,790
Debt securities of consolidated trusts held by third parties
1,501,754
1,528,957
1,386,652
1,404,945
Financial derivatives
Guarantee and commitment obligations:
LTSPCs
Farmer Mac Guaranteed Securities
19,633
19,633
26,599
26,599
36,471
2,731
35,880
2,803
32,976
3,722
34,824
3,576
The carrying value of cash and cash equivalents is a reasonable estimate of their approximate fair value
and is classified as Level 1. Investment securities primarily are valued based on unadjusted quoted prices
in active markets and are classified as Level 2. Farmer Mac internally models the fair value of its loan
portfolio, including loans held for investment and loans held for investment in consolidated trusts, Farmer
Mac Guaranteed Securities, and USDA Securities by discounting the projected cash flows of these
instruments at projected interest rates. The fair values are based on the present value of expected cash
flows using management's best estimate of certain key assumptions, which include prepayment speeds,
forward yield curves and discount rates commensurate with the risks involved. These fair value
measurements do not take into consideration the fair value of the underlying property and are classified as
Level 3. Financial derivatives primarily are valued using unadjusted counterparty valuations and are
classified as Level 2. The fair value of the guarantee fees receivable/obligation and debt securities of
consolidated trusts are estimated based on the present value of expected future cash flows of the
underlying mortgage assets using management's best estimate of certain key assumptions, which include
prepayments speeds, forward yield curves, and discount rates commensurate with the risks involved and
are classified as Level 3. Notes payable are valued by discounting the expected cash flows of these
instruments using a yield curve derived from market prices observed for similar agency securities and are
also classified as Level 3. Because the cash flows of Farmer Mac's financial instruments may be interest
rate path dependent, estimated fair values and projected discount rates for Level 3 financial instruments
213
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
Farmer Mac's operations consist of four operating segments – Farm & Ranch, USDA Guarantees, Rural
Utilities, and Institutional Credit. The Institutional Credit segment comprises Farmer Mac's purchases and
guarantees of AgVantage securities related to general obligations of lenders that are secured by pools of
eligible loans.
Farmer Mac uses these four segments to manage business risk, and each segment is based on distinct
products and distinct business activities. In addition to these four operating segments, a corporate segment
is presented. That segment represents activity in Farmer Mac's investment portfolio and other corporate
activities. Each operating segment's financial results include directly attributable revenues and
expenses. Corporate charges for administrative expenses that are not directly attributable to an operating
segment are allocated to each segment based on headcount.
Farmer Mac uses core earnings to measure corporate economic performance and develop financial plans
because, in management's view, core earnings is a useful alternative measure in understanding
Farmer Mac's economic performance, transaction economics, and business trends. Core earnings
principally differs from net income attributable to common stockholders by excluding the effects of fair
value fluctuations, which are not expected to have a cumulative net impact on financial condition or
results of operations reported in accordance with generally accepted accounting principles if the related
financial instruments are held to maturity, as is generally expected. Core earnings also differs from net
income attributable to common stockholders by excluding specified infrequent or unusual transactions that
Farmer Mac believes are not indicative of future operating results and that may not reflect the trends and
economic financial performance of Farmer Mac's core business. This corporate economic performance
measure may not be comparable to similarly labeled measures disclosed by other companies.
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 exclusion of unrealized gains and losses related to fair value changes
of trading assets and financial derivatives, as well as the allocation of certain expenses such as dividends
and interest expense related to the issuance of capital and the issuance 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 following tables present core earnings for Farmer Mac's operating segments and a reconciliation to
consolidated net income for the years ended December 31, 2018, 2017, and 2016:
214
Table 14.1
Core Earnings by Business Segment
For the Year Ended December 31, 2018
Farm &
Ranch
USDA
Guarantees
Rural
Utilities
Institutional
Credit
Corporate
Reconciling
Adjustments
Consolidated
Net Income
(in thousands)
Net interest income
$
62,951
$
20,554
$
12,505
$
69,321
$
9,105
$
—
$
174,436
Less: reconciling adjustments(1)(2)(3)
Net effective spread
Guarantee and commitment fees(2)
Other income/(expense)(3)
Non-interest income/(loss)
Provision for loan losses
Provision for reserve 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
(9,889)
53,062
17,976
1,371
19,347
(238)
(97)
(19,026)
(19,123)
53,048
(11,140)
(2,499)
18,055
797
20
817
—
—
(5,309)
(5,309)
13,563
(2,848)
41,908
10,715
—
—
Segment core earnings/(losses)
$
41,908
$
10,715
Total assets at carrying value
$ 4,701,736
$ 2,240,906
(922)
11,583
1,599
33
1,632
—
—
(3,062)
(3,062)
10,153
(2,133)
8,020
—
8,020
945,282
$
$
Total on- and off-balance sheet
program assets at principal balance
(1)
$ 7,233,972
$ 2,515,620
$ 1,592,115
(7,884)
61,437
360
—
360
—
—
(8,011)
(8,011)
53,786
(11,295)
(2,047)
7,058
—
(913)
(913)
—
—
(14,411)
(14,411)
(8,266)
2,361
42,491
—
(5,905)
(13,182)
42,491
$
(19,087) $
23,241
23,241
(6,756)
(2,747)
(9,503)
—
—
—
—
13,738 (5)
(2,887)
10,851 (5)
—
10,851 (5)
—
—
13,976
(2,236)
11,740
(238)
(97)
(49,819)
(49,916)
136,022
(27,942)
108,080
(13,182)
$
94,898
8,089,410
$ 2,716,994
$
—
$ 18,694,328
8,382,817
—
—
$ 19,724,524
$
$
$
(2)
(3)
Excludes the amortization of premiums and discounts on assets consolidated at fair value, originally included in interest income, to reflect core earnings
amounts.
Includes the reclassification of interest income and interest expense from consolidated trusts owned by third parties to guarantee and commitment fees, to
reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee.
Includes the reclassification of interest expense related to interest rate swaps not designated as hedges, which are included in "(Losses)/gains on financial
derivatives" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
Includes directly attributable costs and an allocation of indirectly attributable costs based on employee headcount.
(4)
(5) Net adjustments to reconcile to the corresponding income measures: core earnings before income taxes reconciled to income before income taxes; core
earnings before preferred stock dividends and attribution of income to non-controlling interest reconciled to net income; and segment core earnings
reconciled to net income attributable to common stockholders.
215
Core Earnings by Business Segment
For the Year Ended December 31, 2017
Net interest income
$
54,290
$
21,106
$
11,598
$
59,842
$
10,811
$
—
$
157,647
Farm &
Ranch
USDA
Guarantees
Rural
Utilities
Institutional
Credit
Corporate
Reconciling
Adjustments
Consolidated
Net Income
(in thousands)
(3,505)
56,337
(1,091)
9,720
Less: reconciling adjustments(1)(2)(3)(4)
Net effective spread
Guarantee and commitment fees(2)
Other income(3)(5)
Non-interest income/(loss)
Provision for loan losses
Provision for reserve for losses
Other non-interest expense
Non-interest expense(6)
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
Non-controlling interest
(8,922)
45,368
17,175
2,449
19,624
(1,708)
(50)
(16,554)
(16,604)
46,680
(16,338)
(2,287)
18,819
456
43
499
—
—
(4,384)
(4,384)
14,934
(5,227)
(539)
11,059
1,914
20
1,934
—
—
(2,430)
(2,430)
10,563
(3,696)
805
—
805
—
—
(6,439)
(6,439)
50,703
(17,746)
30,342
9,707
6,867
32,957
—
—
—
—
—
—
—
—
—
171
171
—
—
(12,908)
(12,908)
(3,017)
1,792
(1,225)
(13,182)
165
Segment core earnings/(losses)
$
30,342
$
9,707
$
6,867
$
32,957
$
(14,242) $
Total assets at carrying value
$ 4,274,693
$ 2,195,189
$1,088,986
$ 7,627,749
$ 2,605,657
$
16,344
16,344
(6,236)
715
(5,521)
—
—
—
—
10,823 (7)
(5,154)
5,669 (7)
—
—
5,669 (7) $
—
—
14,114
3,398
17,512
(1,708)
(50)
(42,715)
(42,765)
130,686
(46,369)
84,317
(13,182)
165
71,300
—
—
$
$
17,792,274
19,007,311
Total on- and off-balance sheet program
assets at principal balance
(1)
$ 6,867,586
$ 2,352,214
$1,882,633
$ 7,904,878
—
(2)
(3)
(4)
(5)
Excludes the amortization of premiums and discounts on assets consolidated at fair value, originally included in interest income, to reflect core
earnings amounts.
Includes the reclassification of interest income and interest expense from consolidated trusts owned by third parties to guarantee and commitment
fees, to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee.
Includes the reclassification of interest expense related to interest rate swaps not designated as hedges, which are included in "(Losses)/gains on
financial derivatives" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread, a component of core earnings, to also
include the net effects of gains/(losses) due to terminations or net settlements on financial derivatives. All prior period information has been recast
to reflect the revised methodology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-
GAAP Measures—Net Effective Spread."
Includes reconciling adjustments for fair value adjustments on financial derivatives and trading assets. Also includes a reconciling adjustment related
to the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Securities.
Includes directly attributable costs and an allocation of indirectly attributable costs based on employee headcount.
(6)
(7) Net adjustments to reconcile to the corresponding income measures: core earnings before income taxes reconciled to income before income taxes;
core earnings before preferred stock dividends and attribution of income to non-controlling interest reconciled to net income; and segment core
earnings reconciled to net income attributable to common stockholders.
216
Core Earnings by Business Segment
For the Year Ended December 31, 2016
Net interest income
$
47,219
$
21,865
$
11,739
$
48,756
$
10,695
$
—
$
140,274
Farm &
Ranch
USDA
Guarantees
Rural
Utilities
Institutional
Credit
Corporate
Reconciling
Adjustments
Consolidated
Net Income
(in thousands)
—
—
14,868
5,600
20,468
(1,065)
63
(40,383)
(40,320)
119,357
(42,057)
77,300
(13,182)
34
64,152
(7,729)
39,490
15,542
539
16,081
(1,065)
63
(16,206)
(16,143)
38,363
(13,428)
(3,210)
18,655
101
222
323
—
—
(4,200)
(4,200)
14,778
(5,173)
(1,771)
9,968
1,694
2
1,696
—
—
(2,856)
(2,856)
8,808
(3,083)
(3,184)
45,572
1,833
—
1,833
—
—
(3,786)
(3,786)
43,619
(15,265)
(1,308)
9,387
—
1,322
1,322
—
—
(13,335)
(13,335)
(2,626)
17,202
17,202
(4,302)
3,515
(787)
—
—
—
—
16,415 (7)
636
(5,744)
Less: reconciling adjustments(1)(2)(3)(4)
Net effective spread
Guarantee and commitment fees(2)
Other income(3)(5)
Non-interest income/(loss)
Provision for loan losses
Provision for reserve for losses
Other non-interest expense
Non-interest expense(6)
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
Non-controlling interest
24,935
9,605
5,725
28,354
—
—
—
—
—
—
—
—
(1,990)
(13,182)
34
10,671 (7)
—
—
10,671 (7) $
Segment core earnings/(losses)
$
24,935
$
9,605
$
5,725
$
28,354
$
(15,138) $
Total assets at carrying value
$ 3,582,098
$ 2,096,503
$ 1,012,014
$ 6,008,574
$ 2,906,831
$
—
—
$
$
15,606,020
17,399,475
Total on- and off-balance sheet program
assets at principal balance
(1)
$ 6,139,304
$ 2,094,375
$ 1,878,110
$ 7,287,686
—
(2)
(3)
(4)
(5)
Excludes the amortization of premiums and discounts on assets consolidated at fair value, originally included in interest income, to reflect core
earnings amounts.
Includes the reclassification of interest income and interest expense from consolidated trusts owned by third parties to guarantee and commitment fees,
to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee.
Includes the reclassification of interest expense related to interest rate swaps not designated as hedges, which are included in "(Losses)/gains on
financial derivatives" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread, a component of core earnings, to also include
the net effects of gains/(losses) due to terminations or net settlements on financial derivatives. All prior period information has been recast to reflect
the revised methodology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP
Measures—Net Effective Spread."
Includes reconciling adjustments for fair value adjustments on financial derivatives and trading assets. Also includes a reconciling adjustment related to
the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Securities.
Includes directly attributable costs and an allocation of indirectly attributable costs based on staffing.
(6)
(7) Net adjustments to reconcile to the corresponding income measures: core earnings before income taxes reconciled to income before income taxes; core
earnings before preferred stock dividends and attribution of income to non-controlling interest reconciled to net income; and segment core earnings
reconciled to net income attributable to common stockholders.
217
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2018 Quarter Ended
Dec. 31
Sept. 30
June 30
Mar. 31
(in thousands, except per share amounts)
$
146,453
$
142,615
$
135,670
$
119,546
104,237
42,216
(146)
42,070
3,506
(2,999)
57
—
118
682
13,703
29,049
6,193
22,856
22,856
97,557
45,058
(99)
44,959
3,490
628
(3)
(41)
365
4,439
11,650
37,748
7,979
29,769
29,769
91,737
43,933
(424)
43,509
3,481
2,534
11
34
320
6,380
12,921
36,968
7,332
29,636
29,636
(3,296)
(3,295)
(3,296)
19,560
$
26,474
$
26,340
$
76,317
43,229
431
43,660
3,499
(3,850)
16
—
574
239
11,642
32,257
6,438
25,819
25,819
(3,295)
22,524
1.84
1.82
$
$
2.48
2.46
$
$
2.47
2.45
$
$
2.12
2.10
Table 15.1
Interest income:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income:
Guarantee and commitment fees
(Losses)/gains on financial derivatives
Gains/(losses) on trading assets
(Losses)/gains on sale of real estate owned
Other income
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Net income attributable to Farmer Mac
Preferred stock dividends
Net income attributable to common stockholders
Earnings per common share:
Basic earnings per common share
Diluted earnings per common share
$
$
$
218
Interest income:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income/(loss):
Guarantee and commitment fees
(Losses)/gains on financial derivatives
Gains/(losses) on trading assets
Gains on sale of available-for-sale investment securities
Gains/(losses) on sale of real estate owned
Other (loss)/income
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Less: Net loss attributable to non-controlling
interest
Net income attributable to Farmer Mac
Preferred stock dividends
Net income attributable to common stockholders
Earnings per common share:
Basic earnings per common share
Diluted earnings per common share
16. SUBSEQUENT EVENT
2017 Quarter Ended
Dec. 31
Sept. 30
June 30
Mar. 31
(in thousands, except per share amounts)
$
$
111,371
70,088
41,283
(474)
40,809
$
104,497
64,935
39,562
(270)
39,292
3,484
(1,777)
60
—
964
(58)
2,673
10,210
33,272
13,266
20,006
—
20,006
(3,296)
16,710
1.57
1.55
$
$
$
3,314
661
—
89
32
203
4,299
10,616
32,975
11,193
21,782
—
21,782
(3,295)
18,487
1.74
1.71
$
$
$
$
$
$
98,047
58,316
39,731
(327)
39,404
3,472
(617)
(2)
—
757
134
3,744
11,390
31,758
11,124
20,634
150
20,784
(3,296)
17,488
1.65
1.62
$
$
$
$
86,617
49,546
37,071
(637)
36,434
3,844
2,486
(82)
—
(5)
553
6,796
10,549
32,681
10,786
21,895
15
21,910
(3,295)
18,615
1.76
1.73
On February 19, 2019, we purchased a $546 million portfolio of participations in seasoned Rural Utilities
loans from CoBank under a master loan participation agreement entered into on February 13, 2019.
CoBank is a related party to Farmer Mac because of its stock ownership in Farmer Mac. For more
information, see the Current Report on Form 8-K that we filed with the SEC on February 20, 2019. As
discussed in Note 3, Farmer Mac has a related party relationship with CoBank because CoBank is a major
holder (32.6%) of Farmer Mac Class B voting common stock and because a member of Farmer Mac's
board of directors has an affiliation with that entity.
219
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9.
None.
Item 9A. Controls and Procedures
Management's Evaluation of Disclosure Controls and Procedures. Farmer Mac maintains disclosure
controls and procedures designed to ensure that information required to be disclosed in its periodic filings
under the Securities Exchange Act of 1934 (the “Exchange Act”), including this 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 about required disclosure. Management, including Farmer Mac's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation
of Farmer Mac's disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of
the Exchange Act) as of December 31, 2018.
Farmer Mac carried out the evaluation of the effectiveness of its disclosure controls and procedures,
required by paragraph (b) of Exchange Act Rules 13a-15 and 15d-15, under the supervision and with the
participation of management, including the Chief Executive Officer and Chief Financial Officer. Based
upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Farmer
Mac's disclosure controls and procedures were effective as of December 31, 2018.
Management's Report on Internal Control Over Financial Reporting. See "Financial Statements—
Management's Report on Internal Control Over Financial Reporting" in Item 8 of this Annual Report on
Form 10-K.
Attestation Report of Independent Registered Public Accounting Firm. See "Financial Statements—
Report of Independent Registered Public Accounting Firm" in Item 8 of this Annual Report on Form 10-
K.
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, 2018 that have materially
affected, or are reasonably likely to materially affect, Farmer Mac's internal control over financial
reporting.
Item 9B.
Other Information
(a) None.
(b) None.
Item 10. Directors, Executive Officers, and Corporate Governance
PART III
220
The information required by this Item is incorporated by reference to Farmer Mac's definitive proxy
statement to be filed on or about April 1, 2019.
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 1, 2019.
Item 12.
Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management and Related
The information required by this Item is incorporated by reference to Farmer Mac's definitive proxy
statement to be filed on or about April 1, 2019.
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 1, 2019.
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 1, 2019.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
(1) Financial Statements.
Refer to Item 8 above.
(2) Financial Statement Schedules.
There are no schedules because 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.
(b)
Exhibits
221
**
3.1
3.2
4.1
4.2
4.3
4.4
4.4.1
4.5
4.5.1
4.6
4.6.1
10.1
10.2
*
*
*
*
*
*
*
*
*
*
†*
†*
†*
†*
†*
†*
—
—
—
—
—
—
—
—
—
—
—
—
—
Title VIII of the Farm Credit Act of 1971, as most recently amended by the Agricultural
Improvement Act of 2018.
Amended and Restated By-Laws of the Registrant (Previously filed as Exhibit 3.1 to Form 8-K filed
August 2, 2018).
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).
Specimen Certificate for 6.875% Non-Cumulative Preferred Stock, Series B (Previously filed as
Exhibit 4.5 to Form 10-Q filed May 12, 2014).
Certificate of Designation of Terms and Conditions of 6.875% Non-Cumulative Preferred Stock,
Series B (Previously filed as Exhibit 4.1 to Form 8-A filed March 25, 2014).
Specimen Certificate for 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C
(Previously filed as Exhibit 4.6 to Form 10-Q filed August 11, 2014).
Certificate of Designation of Terms and Conditions of 6.000% Fixed-to-Floating Rate Non-
Cumulative Preferred Stock, Series C (Previously filed as Exhibit 4.1 to Form 8-A filed June 20,
2014).
Employment Agreement dated as of October 15, 2018 between Bradford T. Nordholm and the
Registrant (Previously filed as Exhibit 10.1 to Form 8-K filed October 1, 2018).
Letter Agreement on compensation terms for Registrant's Acting President and Chief Executive
Officer between Registrant and Lowell L. Junkins, dated May 18, 2018 (effective May 1, 2018)
(Previously filed as Exhibit 10.1 to Form 10-Q filed August 9, 2018).
10.3
—
10.3.1 —
10.3.2 —
10.3.3 —
Amended and Restated 2008 Omnibus Incentive Plan (Previously filed as Exhibit 10.2 to Form 10-Q
filed August 9, 2018).
Form of SARs Award 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 SARs Award 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 SARs Award Agreement under the 2008 Omnibus Incentive Plan for grants made from April
1, 2013 to March 31, 2015 (Previously filed as Exhibit 10.1 to Form 8-K filed April 5, 2013).
†*
10.3.4 —
Form of SARs Award Agreement under the 2008 Omnibus Incentive Plan for grants made on or after
April 1, 2015 (Previously filed as Exhibit 10.1 to Form 8-K filed on April 3, 2015).
†*
†*
†*
†*
†*
*
**
#
†
10.3.5 —
10.3.6 —
10.3.7 —
10.3.8 —
10.3.9 —
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 from April 1, 2012 to March 31, 2013 (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 from April
1, 2013 to March 31, 2015 (Previously filed as Exhibit 10.2 to Form 8-K filed April 5, 2013).
Form of Time-Based Restricted Stock Award Agreement for grants made to non-directors on or after
April 1, 2015 (Previously filed as Exhibit 10.3 to Form 8-K filed on April 3, 2015).
Incorporated by reference to the indicated prior filing.
Filed with this report.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
Management contract or compensatory plan.
222
†*
†*
†*
†*
†*
†*
†*
†*
*#
10.3.10 — Form of Performance-Based Restricted Stock Award Agreement for grants made to non-directors
from April 1, 2013 to March 31, 2015 (Previously filed as Exhibit 10.2 to Form 8-K filed April 5,
2013).
10.3.11 — Form of Performance-Based Restricted Stock Award Agreement for grants made to non-directors on
or after April 1, 2015 (Previously filed as Exhibit 10.2 to Form 8-K filed on April 3, 2015).
10.4
— Federal Agricultural Mortgage Corporation Amended and Restated Executive Officer Severance Plan
(Previously filed as Exhibit 10.1 to Form 8-K filed November 3, 2016).
10.5
— Form of Participation Agreement to the Federal Agricultural Mortgage Corporation Amended and
Restated Executive Officer Severance Plan (Previously filed as Exhibit 10.2 to Form 8-K filed
November 3, 2016).
10.6
10.7
10.8
10.9
10.10
— Nonqualified Deferred Compensation Plan (effective May 1, 2017) (Previously filed as Exhibit 10.2
to Form 10-Q filed May 10, 2017)
— Adoption Agreement of the Nonqualified Deferred Compensation Plan (effective May 1, 2017)
(Previously filed as Exhibit 10.3 to Form 10-Q filed May 10, 2017)
— 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, effective January 1,
2018 (Previously filed as Exhibit 10.7 to Form 10-K filed March 8, 2018).
— Amended and Restated Master Central Servicing Agreement between Zions First National Bank and
the Registrant, dated as of May 1, 2004 (Previously filed as Exhibit 10.11.2 to Form 10-Q filed
August 9, 2004).
*#
10.10.1 — 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).
*#
10.10.2 — 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).
*#
10.11
— Loan Closing File Review Agreement between Zions First National Bank and the Registrant, dated as
of May 1, 2004 (Previously filed as Exhibit 10.12 to Form 10-Q filed November 9, 2005).
*
*
*
*
*
*
*
*
**
#
†
10.12
— Sublease Agreement between Mayer Brown LLP and the Registrant, dated as of December 6, 2010
(Previously filed as Exhibit 10.43 to Form 10-K/A filed June 1, 2011).
10.13
— Master Trust, Sale and Servicing Agreement between CFC Advantage, LLC, National Rural Utilities
Cooperative Finance Corporation, U.S. Bank National Association, and the Registrant, dated as of
October 20, 2006 (Previously filed as Exhibit 10.22 to Form 10-Q filed
August 9, 2010).
10.14
10.15
— Registration Rights Agreement Series 2007-1 between CFC Advantage, LLC, National Rural Utilities
Cooperative Finance Corporation, and the Registrant, dated as of February 15, 2007 (Previously filed
as Exhibit 10.23 to Form 10-Q filed August 9, 2010).
— Registration Rights Agreement Series 2007-2 between CFC Advantage, LLC, National Rural Utilities
Cooperative Finance Corporation, and the Registrant, dated as of August 10, 2007 (Previously filed as
Exhibit 10.24 to Form 10-Q filed August 9, 2010).
10.16
— Amended and Restated Note Purchase Agreement between Farmer Mac Mortgage Securities
Corporation, National Rural Utilities Cooperative Finance Corporation, and the Registrant, dated as
of March 24, 2011 (Previously filed as Exhibit 10.22 to Form 10-Q filed May 10, 2011).
10.16.1 — Amended and Restated First Supplemental Note Purchase Agreement between Farmer Mac Mortgage
Securities Corporation, National Rural Utilities Cooperative Finance Corporation, and the Registrant,
dated as of January 8, 2015 (Previously filed as Exhibit 10.1 to Form 8-K filed January 13, 2015).
10.16.2 — Second Amended and Restated First Supplemental Note Purchase Agreement between Farmer Mac
Mortgage Securities Corporation, National Rural Utilities Cooperative Finance Corporation, and the
Registrant, dated as of February 26, 2018 (Previously filed as Exhibit 10.1 to Form 10-Q filed May
10, 2018).
Incorporated by reference to the indicated prior filing.
Filed with this report.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
Management contract or compensatory plan.
223
*
*
*
10.17
10.18
10.19
*#
10.20
*
*
10.21
10.22
*#
10.23
*#
10.24
*
*
*
*
10.25
10.26
10.27
21
**
31.1
**
31.2
**
32
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Setoff Rights Letter Agreement between National Rural Utilities Cooperative Finance
Corporation, Farmer Mac Mortgage Securities Corporation, and the Registrant, dated as of
March 24, 2011 (Previously filed as Exhibit 10.24 to Form 10-Q filed May 10, 2011).
Amended and Restated Master Sale and Servicing Agreement between National Rural Utilities
Cooperative Finance Corporation and the Registrant, dated as of August 12, 2011 (Previously
filed as Exhibit 10.26 to Form 10-Q filed November 9, 2011).
Amendment No. 1 to Amended and Restated Master Sale and Servicing Agreement between
National Rural Utilities Cooperative Finance Corporation and the Registrant, dated as of
November 28, 2016 (Previously filed as Exhibit 10.17 to Form 10-K filed March 9, 2017).
Credit Support Agreement between National Rural Utilities Cooperative Finance Corporation
and the Registrant, dated as of September 1, 2009 (Previously filed as Exhibit 10.38 to Form 10-
Q filed August 9, 2010).
Indenture between National Rural Utilities Cooperative Finance Corporation, U.S. Bank
National Association, and the Registrant, dated as of September 1, 2009 (Previously filed as
Exhibit 10.39 to Form 10-Q filed August 9, 2010).
Master Note Purchase Agreement between Farmer Mac Mortgage Securities Corporation,
National Rural Utilities Cooperative Finance Corporation, and the Registrant, dated as of July
31, 2015 (Previously filed as Exhibit 10.1 to Form 10-Q filed November 9, 2015).
Amended and Restated First Supplemental Note Purchase Agreement between Farmer Mac
Mortgage Securities Corporation, National Rural Utilities Cooperative Finance Corporation, and
the Registrant, dated as of March 15, 2016 (Previously filed as Exhibit 10.1 to Form 10-Q filed
May 10, 2016).
Second Supplemental Note Purchase Agreement between Farmer Mac Mortgage Securities
Corporation, National Rural Utilities Cooperative Finance Corporation, and the Registrant, dated
as of July 31, 2018 (Previously filed as Exhibit 10.1 to Form 10-Q filed November 8, 2018).
Second Amended, Restated and Consolidated Pledge Agreement between Farmer Mac Mortgage
Securities Corporation, National Rural Utilities Cooperative Finance Corporation, U.S. Bank
National Association, and the Registrant, dated as of July 31, 2015 (Previously filed as Exhibit
10.3 to Form 10-Q filed November 9, 2015).
Long Term Standby Commitment to Purchase between National Rural Utilities Cooperative
Finance Corporation and the Registrant, dated as of August 31, 2015 (Previously filed as Exhibit
10.4 to Form 10-Q filed November 9, 2015).
Amendment No. 1 to Long Term Standby Commitment to Purchase between National Rural
Utilities Cooperative Finance Corporation and the Registrant, dated as of May 31, 2016
(Previously filed as Exhibit 10.1 to Form 10-Q filed August 9, 2016).
List of the Registrant's subsidiaries (Previously filed as Exhibit 21 to Form 10-K filed March 8,
2018).
Certification of Registrant's principal executive officer relating to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2018, pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Registrant's principal financial officer relating to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2018, pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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, 2018, pursuant
to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*
**
#
†
Incorporated by reference to the indicated prior filing.
Filed with this report.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
Management contract or compensatory plan.
224
Item 16. Form 10-K Summary
None.
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
By:
/s/ Bradford T. Nordholm
Bradford T. Nordholm
President and Chief Executive Officer
(Principal Executive Officer)
February 21, 2019
Date
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
Chairman of the Board and Director
February 21, 2019
Lowell L. Junkins
/s/ Bradford T. Nordholm
Bradford T. Nordholm
President and Chief Executive Officer
(Principal Executive Officer)
February 21, 2019
/s/ R. Dale Lynch
R. Dale Lynch
Executive Vice President – Chief Financial
Officer and Treasurer
(Principal Financial Officer)
February 21, 2019
/s/ Gregory N. Ramsey
Gregory N. Ramsey
Vice President – Controller
(Principal Accounting Officer)
February 21, 2019
225
Name
Title
Date
/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
Sara L. Faivre
/s/ Thomas W. Hill
Thomas W. Hill
/s/ Mitchell A. Johnson
Mitchell A. Johnson
/s/ Clark B. Maxwell
Clark B. Maxwell
/s/ Robert G. Sexton
Robert G. Sexton
/s/ Bruce J. Sherrick
Bruce J. Sherrick
/s/ Keri L. Votruba
Keri L. Votruba
/s/ Myles J. Watts
Myles J. Watts
/s/ Douglas E. Wilhelm
Douglas E. Wilhelm
Director
February 21, 2019
Director
February 21, 2019
Director
February 21, 2019
Director
February 21, 2019
Director
February 21, 2019
Director
February 21, 2019
Director
February 21, 2019
Director
February 21, 2019
Director
February 21, 2019
Director
February 21, 2019
Director
February 21, 2019
Director
February 21, 2019
Director
February 21, 2019
Director
February 21, 2019
226
1999 K Street, N.W.
Fourth Floor
Washington, DC 20006
Phone: 202.872.7700 or 800.879.3276
www.farmermac.com
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2018
ANNUAL REPORT