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FEDERAL AGRICULTURAL MORTGAGE CORP - Quarter Report: 2016 June (Form 10-Q)

As filed with the Securities and Exchange Commission on August 9, 2016

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

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
Commission File Number 001-14951 
 ____________________________________________________________

FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
Federally chartered instrumentality
of the United States
 
52-1578738
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer identification number)
 
 
 
1999 K Street, N.W., 4th Floor,
Washington, D.C.
 
20006
(Address of principal executive offices)
 
(Zip code)
(202) 872-7700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes        x                               No           o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes        x                                No          o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes        o                                No           x
As of August 1, 2016, the registrant had outstanding 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock and 8,939,354 shares of Class C Non-Voting Common Stock.



Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I

Item 1.
Financial Statements



3

Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
As of
 
June 30, 2016
 
December 31, 2015
 
(in thousands)
Assets:
 
 
 
Cash and cash equivalents
$
1,764,626

 
$
1,210,084

Investment securities:
 

 
 

Available-for-sale, at fair value
2,460,679

 
2,775,025

Trading, at fair value
281

 
491

Total investment securities
2,460,960

 
2,775,516

Farmer Mac Guaranteed Securities:
 

 
 

Available-for-sale, at fair value
4,731,031

 
4,152,605

Held-to-maturity, at amortized cost
1,388,724

 
1,274,016

Total Farmer Mac Guaranteed Securities
6,119,755

 
5,426,621

USDA Securities:
 

 
 

Available-for-sale, at fair value
1,967,759

 
1,888,344

Trading, at fair value
24,787

 
28,975

Total USDA Securities
1,992,546

 
1,917,319

Loans:
 

 
 

Loans held for investment, at amortized cost
3,277,522

 
3,258,413

Loans held for investment in consolidated trusts, at amortized cost
922,666

 
708,111

Allowance for loan losses
(4,893
)
 
(4,480
)
Total loans, net of allowance
4,195,295

 
3,962,044

Real estate owned, at lower of cost or fair value
1,330

 
1,369

Financial derivatives, at fair value
8,242

 
3,816

Interest receivable (includes $9,454 and $7,938, respectively, related to consolidated trusts)
106,400

 
112,700

Guarantee and commitment fees receivable
39,653

 
40,189

Deferred tax asset, net
30,659

 
42,916

Prepaid expenses and other assets
103,724

 
47,780

Total Assets
$
16,823,190

 
$
15,540,354

 
 
 
 
Liabilities and Equity:
 

 
 

Liabilities:
 

 
 

Notes payable:
 

 
 

Due within one year
$
10,125,269

 
$
9,111,461

Due after one year
4,722,814

 
4,967,036

Total notes payable
14,848,083

 
14,078,497

Debt securities of consolidated trusts held by third parties
928,050

 
713,536

Financial derivatives, at fair value
140,758

 
77,199

Accrued interest payable (includes $7,936 and $6,705, respectively, related to consolidated trusts)
47,906

 
47,621

Guarantee and commitment obligation
38,115

 
38,609

Accounts payable and accrued expenses
232,934

 
29,089

Reserve for losses
2,191

 
2,083

Total Liabilities
16,238,037

 
14,986,634

Commitments and Contingencies (Note 6)


 


Equity:
 

 
 

Preferred stock:
 

 
 

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

 
58,333

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

 
73,044

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

 
73,382

Common stock:
 

 
 

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

 
1,031

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

 
500

Class C Non-Voting, $1 par value, no maximum authorization, 8,928,855 shares and 9,155,661 shares outstanding, respectively
8,929

 
9,156

Additional paid-in capital
117,989

 
117,862

Accumulated other comprehensive income/(loss), net of tax
12,384

 
(11,019
)
Retained earnings
239,349

 
231,228

Total Stockholders' Equity
584,941

 
553,517

Non-controlling interest
212

 
203

Total Equity
585,153

 
553,720

Total Liabilities and Equity
$
16,823,190

 
$
15,540,354

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



4

Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
(in thousands, except per share amounts)
Interest income:
 
 
 
 
 
 
 
Investments and cash equivalents
$
6,560

 
$
3,094

 
$
13,241

 
$
5,959

Farmer Mac Guaranteed Securities and USDA Securities
37,299

 
34,484

 
72,809

 
67,606

Loans
33,377

 
28,814

 
65,077

 
56,778

Total interest income
77,236

 
66,392

 
151,127

 
130,343

Total interest expense
42,878

 
34,528

 
83,129

 
67,690

Net interest income
34,358

 
31,864

 
67,998

 
62,653

Provision for loan losses
(364
)
 
(110
)
 
(413
)
 
(186
)
Net interest income after provision for loan losses
33,994

 
31,754

 
67,585

 
62,467

Non-interest (loss)/income:
 

 
 

 
 
 
 
Guarantee and commitment fees
3,655

 
3,388

 
7,281

 
6,765

(Losses)/gains on financial derivatives and hedging activities
(4,696
)
 
14,389

 
(11,478
)
 
10,507

Gains on trading securities
394

 
170

 
752

 
532

(Losses)/gains on sale of available-for-sale investment securities

 

 
(9
)
 
6

Losses on sale of real estate owned

 

 

 
(1
)
Other income
413

 
260

 
514

 
873

Non-interest (loss)/income
(234
)
 
18,207

 
(2,940
)
 
18,682

Non-interest expense:
 

 
 

 
 
 
 
Compensation and employee benefits
5,611

 
5,733

 
11,385

 
11,426

General and administrative
3,757

 
3,374

 
7,283

 
6,197

Regulatory fees
612

 
600

 
1,225

 
1,200

Real estate owned operating costs, net

 

 
39

 
(1
)
Provision for reserve for losses
94

 
1,146

 
108

 
374

Non-interest expense
10,074

 
10,853

 
20,040

 
19,196

Income before income taxes
23,686

 
39,108

 
44,605

 
61,953

Income tax expense
8,400

 
13,769

 
15,735

 
18,000

Net income
15,286

 
25,339

 
28,870

 
43,953

Less: Net loss/(income) attributable to non-controlling interest
16

 
119

 
44

 
(5,235
)
Net income attributable to Farmer Mac
15,302

 
25,458

 
28,914

 
38,718

Preferred stock dividends
(3,296
)
 
(3,296
)
 
(6,591
)
 
(6,591
)
Loss on retirement of preferred stock

 

 

 
(8,147
)
Net income attributable to common stockholders
$
12,006

 
$
22,162

 
$
22,323

 
$
23,980

 
 
 
 
 
 
 
 
Earnings per common share and dividends:
 
 
 
 
 
 
 
Basic earnings per common share
$
1.15

 
$
2.01

 
$
2.13

 
$
2.19

Diluted earnings per common share
$
1.13

 
$
1.94

 
$
2.07

 
$
2.11

Common stock dividends per common share
$
0.26

 
$
0.16

 
$
0.52

 
$
0.32

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


5

Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
(in thousands)
Net income
$
15,286

 
$
25,339

 
$
28,870

 
$
43,953

Other comprehensive income/(loss) before taxes:
 
 
 
 
 
 
 
Net unrealized gains/(losses) on available-for sale securities
52,130

 
(41,851
)
 
45,753

 
16,586

Net changes in held-to-maturity securities
(997
)
 
(3,350
)
 
(2,008
)
 
(6,693
)
Net unrealized (losses)/gains on cash flow hedges
(2,976
)
 
1,430

 
(7,739
)
 
1,183

Other comprehensive income/(loss) before tax
48,157

 
(43,771
)
 
36,006

 
11,076

Income tax (expense)/benefit related to other comprehensive income
(16,856
)
 
15,320

 
(12,603
)
 
(3,876
)
Other comprehensive income/(loss), net of tax
31,301

 
(28,451
)
 
23,403

 
7,200

Comprehensive income/(loss)
46,587

 
(3,112
)
 
52,273

 
51,153

Less: comprehensive loss/(income) attributable to non-controlling interest
16

 
119

 
44

 
(5,235
)
Comprehensive income/(loss) attributable to Farmer Mac
$
46,603

 
$
(2,993
)
 
$
52,317

 
$
45,918

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


6

Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
Other
 
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Paid-In
 
Comprehensive
 
Retained
 
Non-controlling
 
Total
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Income/(Loss)
 
Earnings
 
Interest
 
Equity
 
 
(in thousands)
Balance as of December 31, 2014
 
8,400

 
$
204,759

 
10,937

 
$
10,937

 
$
113,559

 
$
15,533

 
$
201,013

 
$
236,028

 
$
781,829

Net income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Attributable to Farmer Mac
 

 

 

 

 

 

 
38,718

 

 
38,718

Attributable to non-controlling interest
 

 

 

 

 

 

 

 
(119
)
 
(119
)
Other comprehensive loss, net of tax
 

 

 

 

 

 
7,200

 

 

 
7,200

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
 

 

 

 

 

 

 
(6,591
)
 

 
(6,591
)
Common stock
 

 

 

 

 

 

 
(3,516
)
 

 
(3,516
)
Issuance of Class C Common Stock
 

 

 
102

 
102

 
7

 

 

 

 
109

Stock-based compensation cost
 

 

 

 

 
1,644

 

 

 

 
1,644

Other stock-based award activity
 

 

 

 

 
888

 

 

 

 
888

Investment in subsidiary - non-controlling interest
 

 

 

 

 

 

 

 
131

 
131

Redemption of Farmer Mac II LLC preferred stock
 

 

 

 

 

 

 
(8,147
)
 
(235,853
)
 
(244,000
)
Balance as of June 30, 2015
 
8,400

 
$
204,759

 
11,039

 
$
11,039

 
$
116,098

 
$
22,733

 
$
221,477

 
$
187

 
$
576,293

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2015
 
8,400

 
$
204,759

 
10,687

 
$
10,687

 
$
117,862

 
$
(11,019
)
 
$
231,228

 
$
203

 
$
553,720

Net income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Attributable to Farmer Mac
 

 

 

 

 

 

 
28,914

 

 
28,914

Attributable to non-controlling interest
 

 

 

 

 

 

 

 
(44
)
 
(44
)
Other comprehensive loss, net of tax
 

 

 

 

 

 
23,403

 

 

 
23,403

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
 

 

 

 

 

 

 
(6,591
)
 

 
(6,591
)
Common stock
 

 

 

 

 

 

 
(5,421
)
 

 
(5,421
)
Issuance of Class C Common Stock
 

 

 
80

 
80

 
6

 

 

 

 
86

Repurchase of Class C Common Stock
 

 

 
(307
)
 
(307
)
 

 

 
(8,781
)
 

 
(9,088
)
Stock-based compensation cost
 

 

 

 

 
1,788

 

 

 

 
1,788

Other stock-based award activity
 

 

 

 

 
(1,667
)
 

 

 

 
(1,667
)
Investment in subsidiary - non-controlling interest
 

 

 

 

 

 

 

 
53

 
53

Balance as of June 30, 2016
 
8,400

 
$
204,759

 
10,460

 
$
10,460

 
$
117,989

 
$
12,384

 
$
239,349

 
$
212

 
$
585,153

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


7

Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
28,870

 
$
43,953

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

Net amortization of deferred gains, premiums, and discounts on loans, investments, Farmer Mac Guaranteed Securities, and USDA Securities
1,035

 
1,604

Amortization of debt premiums, discounts and issuance costs
16,143

 
5,870

Net change in fair value of trading securities, hedged assets, and financial derivatives
4,314

 
(15,619
)
Losses/(gains) on sale of available-for-sale investment securities
9

 
(6
)
Loss on sale of real estate owned

 
1

Total provision for losses
521

 
560

Deferred income taxes
(1,964
)
 
5,657

Stock-based compensation expense
1,788

 
1,644

Proceeds from repayment of trading investment securities
325

 
437

Proceeds from repayment of loans purchased as held for sale
37,460

 
54,728

Net change in:
 
 
 
Interest receivable
6,300

 
5,747

Guarantee and commitment fees receivable
536

 
1,615

Other assets
(54,970
)
 
9,182

Accrued interest payable
285

 
1,828

Other liabilities
(3,499
)
 
(3,838
)
Net cash provided by operating activities
37,153

 
113,363

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale investment securities
(341,099
)
 
(915,614
)
Purchases of Farmer Mac Guaranteed Securities and USDA Securities
(1,506,177
)
 
(559,162
)
Purchases of loans held for investment
(459,315
)
 
(336,364
)
Purchases of defaulted loans
(1,415
)
 
(1,981
)
Proceeds from repayment of available-for-sale investment securities
624,402

 
914,988

Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Securities
845,206

 
236,801

Proceeds from repayment of loans purchased as held for investment
199,357

 
143,804

Proceeds from sale of available-for-sale investment securities
186,769

 
74,998

Proceeds from sale of Farmer Mac Guaranteed Securities
278,443

 
112,440

Payments from sale of real estate owned

 
(1
)
Net cash used in investing activities
(173,829
)
 
(330,091
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of discount notes
48,914,061

 
38,965,462

Proceeds from issuance of medium-term notes
2,843,542

 
2,690,604

Payments to redeem discount notes
(48,963,471
)
 
(38,734,464
)
Payments to redeem medium-term notes
(2,040,800
)
 
(2,106,715
)
Excess tax benefits related to stock-based awards
253

 
154

Payments to third parties on debt securities of consolidated trusts
(41,259
)
 
(20,641
)
Proceeds from common stock issuance
137

 
1,488

Common stock repurchased
(9,286
)
 

Investment in subsidiary - non-controlling interest
53

 
131

Redemption of Farmer Mac II LLC Preferred Stock

 
(244,000
)
Dividends paid - Non-controlling interest - preferred stock

 
(5,415
)
Dividends paid on common and preferred stock
(12,012
)
 
(10,107
)
Net cash provided by financing activities
691,218

 
536,497

Net increase in cash and cash equivalents
554,542

 
319,769

Cash and cash equivalents at beginning of period
1,210,084

 
1,363,387

Cash and cash equivalents at end of period
$
1,764,626

 
$
1,683,156

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



8

Table of Contents

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


1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The interim unaudited consolidated financial statements of the Federal Agricultural Mortgage Corporation ("Farmer Mac") and subsidiaries have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). These interim unaudited consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial position and the results of operations and cash flows of Farmer Mac and subsidiaries for the interim periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements have been omitted as permitted by SEC rules and regulations. The December 31, 2015 consolidated balance sheet presented in this report has been derived from Farmer Mac's audited 2015 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the consolidated financial statements as of the dates and for the periods presented. These interim unaudited consolidated financial statements should be read in conjunction with the 2015 consolidated financial statements of Farmer Mac and subsidiaries included in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 10, 2016. That Form 10-K describes Farmer Mac's significant accounting policies, which include its policies on Principles of Consolidation; Cash and Cash Equivalents and Statements of Cash Flows; Transfers of Financial Assets and Liabilities; Investment Securities, Farmer Mac Guaranteed Securities, and USDA Securities; Loans; Securitization of Loans; Real Estate Owned; Financial Derivatives; Notes Payable; Allowance for Loan Losses and Reserve for Losses; Earnings Per Common Share; Income Taxes; Stock-Based Compensation; Comprehensive Income; Long-Term Standby Purchase Commitments; Fair Value Measurement; and Consolidation of Variable Interest Entities ("VIEs"). Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year. Presented below are Farmer Mac's significant accounting policies that contain updated information for the three and six months ended June 30, 2016.

Principles of Consolidation

The consolidated financial statements include the accounts of Farmer Mac and its three subsidiaries: (1) Farmer Mac Mortgage Securities Corporation ("FMMSC"), whose principal activities are to facilitate the purchase and issuance of Farmer Mac Guaranteed Securities; (2) Farmer Mac II LLC, whose principal activity is the operation of substantially all of the business related to the USDA Guarantees line of business – primarily the acquisition of USDA Securities; and (3) Contour Valuation Services, LLC (which began doing business as AgVisory during first quarter 2016), whose principal activity is to appraise agricultural real estate.  The consolidated financial statements also include the accounts of VIEs in which Farmer Mac determined itself to be the primary beneficiary.  



9

Table of Contents

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

Table 1.1
 
Consolidation of Variable Interest Entities
 
As of June 30, 2016
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
Corporate
 
Total
 
(in thousands)
On-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment in consolidated trusts, at amortized cost
$
922,666

 
$

 
$

 
$

 
$

 
$
922,666

Debt securities of consolidated trusts held by third parties (1)
928,050

 

 

 

 

 
928,050

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

 
33,447

 

 
30,962

 

 
64,409

      Maximum exposure to loss (3)

 
32,886

 

 
30,000

 

 
62,886

   Investment securities:
 
 
 
 
 
 
 
 
 
 
 
        Carrying value (4)

 

 

 

 
812,501

 
812,501

        Maximum exposure to loss (3) (4)

 

 

 

 
813,063

 
813,063

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Maximum exposure to loss (3) (5)
466,479

 
30,962

 

 
970,000

 

 
1,467,441

(1) 
Includes borrower remittances of $5.4 million. The borrower remittances have not been passed through to third party investors as of June 30, 2016.
(2) 
Includes $0.6 million of unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees line of business. Includes fair value adjustments related to the Institutional Credit line of business of $1.0 million.
(3) 
Farmer Mac uses unpaid principal balance and outstanding face amount of investment securities to represent maximum exposure to loss.
(4) 
Includes auction-rate certificates, asset-backed securities, and government-sponsored enterprise ("GSE")-guaranteed mortgage-backed securities.
(5) 
The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.



10

Table of Contents

 
Consolidation of Variable Interest Entities
 
As of December 31, 2015
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
Corporate
 
Total
 
(in thousands)
On-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment in consolidated trusts, at amortized cost
$
708,111

 
$

 
$

 
$

 
$

 
$
708,111

Debt securities of consolidated trusts held by third parties (1)
713,536

 

 

 

 

 
713,536

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

 
31,360

 

 
31,400

 

 
62,760

      Maximum exposure to loss (3)

 
31,553

 

 
30,000

 

 
61,553

   Investment securities:
 
 
 
 
 
 
 
 
 
 
 
        Carrying value (4)

 

 

 

 
917,292

 
917,292

        Maximum exposure to loss (3) (4)

 

 

 

 
918,121

 
918,121

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Maximum exposure to loss (3) (5)
514,051

 
10,272

 

 
970,000

 

 
1,494,323

(1) 
Includes borrower remittances of $5.4 million, which have not been passed through to third party investors as of December 31, 2015.
(2) 
Includes $0.2 million of unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees line of business. Includes fair value adjustments related to the Institutional Credit line of business of $1.4 million.
(3) 
Farmer Mac uses unpaid principal balance and the outstanding face amount of investment securities to represent maximum exposure to loss.
(4) 
Includes auction-rate certificates, asset-backed securities, and GSE-guaranteed mortgage-backed securities.
(5) 
The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.
 
(a)
Statements of Cash Flows

The following table sets forth information regarding certain non-cash transactions for the six months ended June 30, 2016 and 2015:

Table 1.2

 
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
(in thousands)
Non-cash activity:
 
 
 
Loans acquired and securitized as Farmer Mac Guaranteed Securities
$
278,443

 
$
112,440

Consolidation of Farm & Ranch Guaranteed Securities from off-balance sheet to loans held for investment in consolidated trusts and to debt securities of consolidated trusts held by third parties
255,781

 
112,440

Purchases of securities - traded, not yet settled
224,990

 
236,600

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

 
8,147




11

Table of Contents


(b)
Earnings Per Common Share

Basic earnings per common share ("EPS") is based on the weighted-average number of shares of common stock outstanding.  Diluted earnings per common share is based on the weighted-average number of shares of common stock outstanding adjusted to include all potentially dilutive common stock options, stock appreciation rights ("SARs"), and non-vested restricted stock awards.  The following schedule reconciles basic and diluted EPS for the six months ended June 30, 2016 and 2015:

Table 1.3

 
For the Three Months Ended
 
June 30, 2016
 
June 30, 2015
 
Net
Income
 
Weighted-Average Shares
 
$ per
Share
 
Net
Income
 
Weighted-Average Shares
 
$ per
Share
 
(in thousands, except per share amounts)
Basic EPS
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
12,006

 
10,456

 
$
1.15

 
$
22,162

 
11,010

 
$
2.01

Effect of dilutive securities(1)
 
 
 
 
 
 
 

 
 

 
 
Stock options, SARs and restricted stock

 
158

 
(0.02
)
 

 
428

 
(0.07
)
Diluted EPS
$
12,006

 
10,614

 
$
1.13

 
$
22,162

 
11,438

 
$
1.94

(1) 
For the three months ended June 30, 2016 and 2015, stock options and SARs of 82,052 and 229,693, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the three months ended June 30, 2016 and 2015, contingent shares of non-vested restricted stock of 37,284 and 45,034, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions had not yet been met.
 
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
Net
Income
 
Weighted-Average Shares
 
$ per
Share
 
Net
Income
 
Weighted-Average Shares
 
$ per
Share
 
(in thousands, except per share amounts)
Basic EPS
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
22,323

 
10,460

 
$
2.13

 
$
23,980

 
10,974

 
$
2.19

Effect of dilutive securities(1)
 
 
 
 
 
 
 
 
 
 
 
Stock options, SARs and restricted stock

 
348

 
(0.06
)
 

 
411

 
(0.08
)
Diluted EPS
$
22,323

 
10,808

 
$
2.07

 
$
23,980

 
11,385

 
$
2.11

(1) 
For the six months ended June 30, 2016 and 2015, stock options and SARs of 146,459 and 215,547, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the six months ended June 30, 2016 and 2015, contingent shares of non-vested restricted stock of 37,284 and 37,774, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions had not yet been met.

(c)
Comprehensive Income

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



12

Table of Contents

The following table presents the changes in accumulated other comprehensive income ("AOCI"), net of tax, by component for the three and six months ended June 30, 2016 and 2015:

Table 1.4

 
As of June 30, 2016
 
As of June 30, 2015
 
Available-for-Sale Securities
 
Held-to-Maturity Securities
 
Cash Flow Hedges
 
Total
 
Available-for-Sale Securities
 
Held-to-Maturity Securities
 
Cash Flow Hedges
 
Total
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
(14,180
)
 
$
(1,133
)
 
$
(3,604
)
 
$
(18,917
)
 
$
47,700

 
$
3,800

 
$
(316
)
 
$
51,184

Other comprehensive income/(loss) before reclassifications
36,469

 

 
(2,267
)
 
34,202

 
(23,936
)
 

 
772

 
(23,164
)
Amounts reclassified from AOCI
(2,585
)
 
(648
)
 
332

 
(2,901
)
 
(3,266
)
 
(2,178
)
 
157

 
(5,287
)
Net other comprehensive income/(loss)
33,884

 
(648
)
 
(1,935
)
 
31,301

 
(27,202
)
 
(2,178
)
 
929

 
(28,451
)
Ending Balance
$
19,704

 
$
(1,781
)
 
$
(5,539
)
 
$
12,384

 
$
20,498

 
$
1,622

 
$
613

 
$
22,733

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
(10,035
)
 
$
(476
)
 
$
(508
)
 
$
(11,019
)
 
$
9,716

 
$
5,973

 
$
(156
)
 
$
15,533

Other comprehensive income/(loss) before reclassifications
34,700

 

 
(5,662
)
 
29,038

 
17,407

 

 
533

 
17,940

Amounts reclassified from AOCI
(4,961
)
 
(1,305
)
 
631

 
(5,635
)
 
(6,625
)
 
(4,351
)
 
236

 
(10,740
)
Net other comprehensive income/(loss)
29,739

 
(1,305
)
 
(5,031
)
 
23,403

 
10,782

 
(4,351
)
 
769

 
7,200

Ending Balance
$
19,704

 
$
(1,781
)
 
$
(5,539
)
 
$
12,384

 
$
20,498

 
$
1,622

 
$
613

 
$
22,733




13

Table of Contents

The following table presents other comprehensive income activity, the impact on net income of amounts reclassified from each component of AOCI, and the related tax impact for the three and six months ended June 30, 2016 and 2015:

Table 1.5

 
For the Three Months Ended
 
June 30, 2016
 
June 30, 2015
 
Before Tax
 
Provision (Benefit)
 
After Tax
 
Before Tax
 
Provision (Benefit)
 
After Tax
 
(in thousands)
Other comprehensive income/(loss):
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale-securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains/(losses) on available-for-sale-securities
$
56,107

 
$
19,638

 
$
36,469

 
$
(36,826
)
 
$
(12,890
)
 
$
(23,936
)
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
(Losses)/gains on financial derivatives and hedging activities(1)
(4,016
)
 
(1,405
)
 
(2,611
)
 
(4,952
)
 
(1,733
)
 
(3,219
)
Other income(2)
39

 
13

 
26

 
(73
)
 
(26
)
 
(47
)
Total
$
52,130

 
$
18,246

 
$
33,884

 
$
(41,851
)
 
$
(14,649
)
 
$
(27,202
)
Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(3)
$
(997
)
 
$
(349
)
 
$
(648
)
 
$
(3,350
)
 
$
(1,172
)
 
$
(2,178
)
Total
$
(997
)
 
$
(349
)
 
$
(648
)
 
$
(3,350
)
 
$
(1,172
)
 
$
(2,178
)
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Unrealized (losses)/gains on cash flow hedges
$
(3,488
)
 
$
(1,221
)
 
$
(2,267
)
 
$
1,186

 
$
414

 
$
772

Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(4)
512

 
180

 
332

 
244

 
87

 
157

Total
$
(2,976
)
 
$
(1,041
)
 
$
(1,935
)
 
$
1,430

 
$
501

 
$
929

Other comprehensive income/(loss)
$
48,157

 
$
16,856

 
$
31,301

 
$
(43,771
)
 
$
(15,320
)
 
$
(28,451
)
(1) 
Relates to the amortization of unrealized gains on hedged items prior to the application of fair value hedge accounting.
(2) 
Represents amortization of deferred gains related to certain available-for-sale USDA Securities and Farmer Mac Guaranteed USDA Securities.
(3) 
Relates to the amortization of unrealized gains or losses prior to the reclassification of these securities from available-for-sale to held-to-maturity. The amortization of unrealized gains or losses reported in AOCI for held-to-maturity securities will be offset by the amortization of the premium or discount created from the transfer into held-to-maturity securities, which occurred at fair value. These unrealized gains or losses will be recorded over the remaining life of the security with no impact on future net income.
(4) 
Relates to the recognition of unrealized gains and losses on cash flow hedges recorded in AOCI.



14

Table of Contents

 
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
Before Tax
 
Provision (Benefit)
 
After Tax
 
Before Tax
 
Provision (Benefit)
 
After Tax
 
(in thousands)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale-securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains on available-for-sale-securities
$
53,385

 
$
18,685

 
$
34,700

 
$
26,778

 
$
9,371

 
$
17,407

Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
(Losses)/gains on financial derivatives and hedging activities(1)
(7,939
)
 
(2,778
)
 
(5,161
)
 
(9,813
)
 
(3,434
)
 
(6,379
)
(Losses)/gains on sale of available-for-sale investment securities(2)
9

 
3

 
6

 
(6
)
 
(2
)
 
(4
)
Other income(3)
298

 
104

 
194

 
(373
)
 
(131
)
 
(242
)
Total
$
45,753

 
$
16,014

 
$
29,739

 
$
16,586

 
$
5,804

 
$
10,782

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(4)
$
(2,008
)
 
$
(703
)
 
$
(1,305
)
 
$
(6,693
)
 
$
(2,342
)
 
$
(4,351
)
Total
$
(2,008
)
 
$
(703
)
 
$
(1,305
)
 
$
(6,693
)
 
$
(2,342
)
 
$
(4,351
)
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Unrealized (losses)/gains on cash flow hedges
$
(8,710
)
 
$
(3,048
)
 
$
(5,662
)
 
$
820

 
$
287

 
$
533

Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(5)
971

 
340

 
631

 
363

 
127

 
236

Total
$
(7,739
)
 
$
(2,708
)
 
$
(5,031
)
 
$
1,183

 
$
414

 
$
769

Other comprehensive income
$
36,006

 
$
12,603

 
$
23,403

 
$
11,076

 
$
3,876

 
$
7,200

(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) 
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.
(5) 
Relates to the recognition of unrealized gains and losses on cash flow hedges recorded in AOCI.

(d) New Accounting Standards

In January 2016, the FASB issued Accounting Standards Update ("ASU") 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities," which amends the guidance in GAAP on the classification and measurement of financial instruments. The ASU significantly revises an entity's accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. 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 February 2016, the FASB issued ASU 2016-02, "Leases," which provides new guidance intended to improve financial reporting about leasing transactions. The ASU will require 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 will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Farmer Mac does not expect that adoption of the new guidance will have a material effect on Farmer Mac’s financial position, results of operations, or cash flows.



15

Table of Contents

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which provides new guidance intended to simplify several aspects of accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. Farmer Mac does not expect that adoption of the new guidance will have a material effect on Farmer Mac’s financial position, results of operations, or cash flows.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses," 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 better 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 application 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 evaluating the impact of adopting the new guidance on its consolidated financial statements. 

(e)
Reclassifications

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



16

Table of Contents


2.
INVESTMENT SECURITIES

The following tables set forth information about Farmer Mac's investment securities as of June 30, 2016 and December 31, 2015:
 
Table 2.1

 
As of June 30, 2016
 
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

 
$

 
$
(1,970
)
 
$
17,730

Floating rate asset-backed securities
61,070

 
(228
)
 
60,842

 
4

 
(847
)
 
59,999

Floating rate corporate debt securities
10,000

 

 
10,000

 
2

 

 
10,002

Floating rate Government/GSE guaranteed mortgage-backed securities
1,261,876

 
3,095

 
1,264,971

 
2,600

 
(3,254
)
 
1,264,317

Fixed rate GSE guaranteed mortgage-backed securities(1)
613

 
2,808

 
3,421

 
4,344

 

 
7,765

Floating rate GSE subordinated debt
70,000

 

 
70,000

 

 
(4,896
)
 
65,104

Fixed rate senior agency debt
175,000

 
(11
)
 
174,989

 
9

 

 
174,998

Fixed rate U.S. Treasuries
860,150

 
(393
)
 
859,757

 
1,007

 

 
860,764

Total available-for-sale
2,458,409

 
5,271

 
2,463,680

 
7,966

 
(10,967
)
 
2,460,679

Trading:
 
 
 
 
 

 
 

 
 

 
 

Floating rate asset-backed securities
1,887

 

 
1,887

 

 
(1,606
)
 
281

Total investment securities
$
2,460,296

 
$
5,271

 
$
2,465,567

 
$
7,966

 
$
(12,573
)
 
$
2,460,960

(1) 
Fair value includes $7.1 million of an interest-only security with a notional amount of $147.3 million.

 
As of December 31, 2015
 
Amount Outstanding
 
Unamortized Premium/(Discount)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
46,500

 
$

 
$
46,500

 
$

 
$
(1,576
)
 
$
44,924

Floating rate asset-backed securities
74,744

 
(253
)
 
74,491

 
14

 
(776
)
 
73,729

Floating rate corporate debt securities
10,000

 

 
10,000

 

 
(9
)
 
9,991

Fixed rate corporate debt securities
10,000

 
(1
)
 
9,999

 

 
(5
)
 
9,994

Floating rate Government/GSE guaranteed mortgage-backed securities
1,353,495

 
3,515

 
1,357,010

 
2,768

 
(4,319
)
 
1,355,459

Fixed rate GSE guaranteed mortgage-backed securities(1)
692

 
3,117

 
3,809

 
4,095

 

 
7,904

Floating rate GSE subordinated debt
70,000

 

 
70,000

 

 
(3,751
)
 
66,249

Fixed rate senior agency debt
214,000

 
(25
)
 
213,975

 
12

 

 
213,987

Fixed rate U.S. Treasuries
993,680

 
(417
)
 
993,263

 
2

 
(477
)
 
992,788

Total available-for-sale
2,773,111

 
5,936

 
2,779,047

 
6,891

 
(10,913
)
 
2,775,025

Trading:
 
 
 
 
 

 
 

 
 

 
 

Floating rate asset-backed securities
2,211

 

 
2,211

 

 
(1,720
)
 
491

Total investment securities
$
2,775,322

 
$
5,936

 
$
2,781,258

 
$
6,891

 
$
(12,633
)
 
$
2,775,516

(1) 
Fair value includes $7.2 million of an interest-only security with a notional amount of $148.5 million.




17

Table of Contents

Farmer Mac did not sell any securities from its available-for-sale investment portfolio during the three months ended June 30, 2016 and 2015. During the six months ended June 30, 2016, Farmer Mac received proceeds of $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, compared to proceeds of $75.0 million for the same period in 2015, resulting in gross realized gains of 6,000.
 
As of June 30, 2016 and December 31, 2015, unrealized losses on available-for-sale investment securities were as follows:

Table 2.2

 
As of June 30, 2016
 
Available-for-Sale Securities
 
Unrealized loss position for
less than 12 months
 
Unrealized loss position for
more than 12 months
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
(in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student loans
$

 
$

 
$
17,730

 
$
(1,970
)
Floating rate asset-backed securities
40,217

 
(494
)
 
9,061

 
(353
)
Floating rate Government/GSE guaranteed mortgage-backed securities
473,462

 
(2,397
)
 
135,301

 
(857
)
Floating rate GSE subordinated debt

 

 
65,104

 
(4,896
)
Total
$
513,679

 
$
(2,891
)
 
$
227,196

 
$
(8,076
)

 
As of December 31, 2015
 
Available-for-Sale Securities
 
Unrealized loss position for
less than 12 months
 
Unrealized loss position for
more than 12 months
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
(in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student loans
$

 
$

 
$
18,124

 
$
(1,576
)
Floating rate asset-backed securities
44,552

 
(464
)
 
9,975

 
(312
)
Floating rate corporate debt securities
4,991

 
(9
)
 

 

Fixed rate corporate debt securities
9,994

 
(5
)
 

 

Floating rate Government/GSE guaranteed mortgage-backed securities
794,959

 
(3,408
)
 
100,192

 
(911
)
Floating rate GSE subordinated debt

 

 
66,249

 
(3,751
)
Fixed rate U.S. Treasuries
944,842

 
(477
)
 

 

Total
$
1,799,338

 
$
(4,363
)
 
$
194,540

 
$
(6,550
)

The unrealized losses presented above are principally due to a general widening of credit spreads from the dates of acquisition to June 30, 2016 and December 31, 2015, as applicable. The resulting decrease in fair values reflects an increase in the perceived risk by the financial markets related to those securities. As of June 30, 2016, all of the investment securities in an unrealized loss position either were backed by the full faith and credit of the U.S. government or had credit ratings of at least "AA+," except one that was rated "A-." As of December 31, 2015, all of the investment securities in an unrealized loss position either were backed by the full faith and credit of the U.S. government or had credit ratings of at least "AA+," except


18

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three that were rated "A-." The unrealized losses were on 56 and 69 individual investment securities as of June 30, 2016 and December 31, 2015, respectively.

As of June 30, 2016, 17 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $8.1 million. As of December 31, 2015, 17 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $6.6 million.  Securities in unrealized loss positions for 12 months or longer have a fair value as of June 30, 2016 that is, on average, approximately 97 percent of their amortized cost basis. Farmer Mac believes that all of these unrealized losses are recoverable within a reasonable period of time by way of maturity or changes in credit spreads. Accordingly, Farmer Mac has concluded that none of the unrealized losses on these available-for-sale investment securities represents other-than-temporary impairment as of June 30, 2016 and December 31, 2015.

Farmer Mac did not own any held-to-maturity investment securities as of June 30, 2016 and December 31, 2015. As of June 30, 2016, Farmer Mac owned trading investment securities with an amortized cost of $1.9 million, a fair value of $0.3 million, and a weighted average yield of 4.53 percent. As of December 31, 2015, Farmer Mac owned trading investment securities with an amortized cost of $2.2 million, a fair value of $0.5 million, and a weighted average yield of 4.41 percent.

The amortized cost, fair value, and weighted average yield of available-for-sale investment securities by remaining contractual maturity as of June 30, 2016 are set forth below. Asset-backed and mortgage-backed securities are included based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets.

Table 2.3

 
As of June 30, 2016
 
Available-for-Sale Securities
 
Amortized
Cost
 
Fair Value
 
Weighted-
Average
Yield
 
(dollars in thousands)
Due within one year
$
1,039,762

 
$
1,040,780

 
0.57%
Due after one year through five years
151,635

 
151,911

 
1.19%
Due after five years through ten years
512,451

 
511,166

 
1.03%
Due after ten years
759,832

 
756,822

 
1.10%
Total
$
2,463,680

 
$
2,460,679

 
0.89%




19

Table of Contents

3.
FARMER MAC GUARANTEED SECURITIES AND USDA SECURITIES

The following tables set forth information about on-balance sheet Farmer Mac Guaranteed Securities and USDA Securities as of June 30, 2016 and December 31, 2015:

Table 3.1

 
As of June 30, 2016
 
Unpaid Principal Balance
 
Unamortized Premium/(Discount)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
1,391,203

 
$
(2,479
)
 
$
1,388,724

 
$
15,468

 
$
(143
)
 
$
1,404,049

Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
4,715,099

 
$

 
$
4,715,099

 
$
54,623

 
$
(72,138
)
 
$
4,697,584

Farmer Mac Guaranteed USDA Securities
32,886

 
(301
)
 
32,585

 
862

 

 
33,447

Total Farmer Mac Guaranteed Securities
4,747,985

 
(301
)
 
4,747,684

 
55,485

 
(72,138
)
 
4,731,031

USDA Securities
1,873,805

 
1,867

 
1,875,672

 
92,104

 
(17
)
 
1,967,759

Total available-for-sale
$
6,621,790

 
$
1,566

 
$
6,623,356

 
$
147,589

 
$
(72,155
)
 
$
6,698,790

Trading:
 
 
 
 
 

 
 

 
 

 
 

USDA Securities
$
22,705

 
$
1,533

 
$
24,238

 
$
601

 
$
(52
)
 
$
24,787


 
As of December 31, 2015
 
Unpaid Principal Balance
 
Unamortized Premium/(Discount)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
1,274,431

 
$
(415
)
 
$
1,274,016

 
$
7,801

 
$

 
$
1,281,817

Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
4,164,952

 
$

 
$
4,164,952

 
$
26,831

 
$
(70,539
)
 
$
4,121,244

Farmer Mac Guaranteed USDA Securities
31,554

 
(333
)
 
31,221

 
140

 

 
31,361

Total Farmer Mac Guaranteed Securities
4,196,506

 
(333
)
 
4,196,173

 
26,971

 
(70,539
)
 
4,152,605

USDA Securities
1,849,322

 
1,890

 
1,851,212

 
37,160

 
(28
)
 
1,888,344

Total available-for-sale
$
6,045,828

 
$
1,557

 
$
6,047,385

 
$
64,131

 
$
(70,567
)
 
$
6,040,949

Trading:
 
 
 
 
 

 
 

 
 

 
 

USDA Securities
$
27,129

 
$
1,934

 
$
29,063

 
$
125

 
$
(213
)
 
$
28,975




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As of June 30, 2016 and December 31, 2015, unrealized losses on held-to-maturity and available-for-sale on-balance sheet Farmer Mac Guaranteed Securities and USDA Securities were as follows:

Table 3.2

 
As of June 30, 2016
 
Held-to-Maturity and Available-for-Sale Securities
 
Unrealized loss position for
less than 12 months
 
Unrealized loss position for
more than 12 months
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
(in thousands)
Held-to-maturity:
 
 
 
 
 
 
 
AgVantage
$
154,857

 
$
(143
)
 
$

 
$

 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
AgVantage
$
398,252

 
$
(1,763
)
 
$
1,891,826

 
$
(70,375
)
USDA Securities

 

 
103,665

 
(17
)
Total available-for-sale
$
398,252

 
$
(1,763
)

$
1,995,491


$
(70,392
)

 
As of December 31, 2015
 
Available-for-Sale Securities
 
Unrealized loss position for
less than 12 months
 
Unrealized loss position for
more than 12 months
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
(in thousands)
Available-for-sale:
 
 
 
 
 
 
 
AgVantage
$
1,193,866

 
$
(41,835
)
 
$
1,104,981

 
$
(28,704
)
USDA Securities

 

 
103,010

 
(28
)
Total available-for-sale
$
1,193,866

 
$
(41,835
)
 
$
1,207,991

 
$
(28,732
)

The unrealized losses presented above are principally due to higher interest rates from the date of acquisition to June 30, 2016 and December 31, 2015, as applicable. The credit exposure related to Farmer Mac's USDA Guarantees line of business is covered by the full faith and credit guarantee of the United States. The unrealized losses from AgVantage securities were on 22 available-for-sale securities as of June 30, 2016. There were two held-to-maturity AgVantage securities with an unrealized loss as of June 30, 2016. The unrealized losses from AgVantage securities were on 22 available-for-sale securities as of December 31, 2015. There were no unrealized losses from held-to-maturity securities as of December 31, 2015. As of June 30, 2016, 16 available-for-sale AgVantage securities had been in a loss position for more than 12 months with a total unrealized loss of $70.4 million. As of December 31, 2015, 8 available-for-sale AgVantage securities had been in a loss position for more than 12 months with a total unrealized loss of $28.7 million. Farmer Mac has concluded that none of the unrealized losses on its held-to-maturity Farmer Mac Guaranteed Securities and available-for-sale Farmer Mac Guaranteed Securities and USDA Securities are other-than-temporary impairment as of either June 30, 2016 or December 31, 2015.  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.



21

Table of Contents

During the three and six months ended June 30, 2016 and 2015, Farmer Mac realized no gains or losses from the sale of Farmer Mac Guaranteed Securities and USDA Securities.

The amortized cost, fair value, and weighted average yield of available-for-sale and held-to-maturity Farmer Mac Guaranteed Securities and USDA Securities by remaining contractual maturity as of June 30, 2016 are set forth below. The balances presented are based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets.

Table 3.3

 
As of June 30, 2016
 
Available-for-Sale Securities
 
Amortized
Cost
 
Fair Value
 
Weighted-
Average
Yield
 
(dollars in thousands)
Due within one year
$
367,261

 
$
367,986

 
1.32
%
Due after one year through five years
2,320,284

 
2,333,066

 
1.53
%
Due after five years through ten years
1,448,102

 
1,486,022

 
2.20
%
Due after ten years
2,487,709

 
2,511,716

 
2.60
%
Total
$
6,623,356

 
$
6,698,790

 
2.07
%
 
As of June 30, 2016
 
Held-to-Maturity Securities
 
Amortized
Cost
 
Fair Value
 
Weighted-
Average
Yield
 
(dollars in thousands)
Due within one year
$
838,099

 
$
838,742

 
2.19
%
Due after one year through five years
513,538

 
525,345

 
2.78
%
Due after five years through ten years
37,087

 
39,962

 
3.37
%
Total
$
1,388,724

 
$
1,404,049

 
2.45
%

As of June 30, 2016, Farmer Mac owned trading USDA Securities with an amortized cost of $24.2 million, a fair value of $24.8 million, and a weighted average yield of 5.49 percent. As of December 31, 2015, Farmer Mac owned trading USDA Securities with an amortized cost of $29.1 million, a fair value of $29.0 million, and a weighted average yield of 5.53 percent.  

4.
FINANCIAL DERIVATIVES

Farmer Mac enters into financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of certain assets, future cash flows, or debt issuance, and not for trading or speculative purposes.  Certain financial derivatives are designated as fair 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 (i.e., LIBOR). Other financial derivatives are designated as cash flow hedges to mitigate the volatility of future interest rate payments on floating rate debt.



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Table of Contents

All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability. Changes in the fair values of financial derivatives not designated as cash flow hedges are reported in "(Losses)/gains on financial derivatives and hedging activities" in the consolidated statements of operations. For financial derivatives designated in fair value hedging relationships, changes in the fair values of the hedged items, which are primarily fixed rate AgVantage securities, related to the risk being hedged are also reported in "(Losses)/gains on financial derivatives and hedging activities" in the consolidated statements of operations. Interest accruals on derivatives designated in fair value hedging relationships are recorded in "Net interest income" in the consolidated statements of operations. For the three and six months ended June 30, 2016, the amount of interest expense recognized on those derivatives was $4.1 million and $8.9 million, respectively. For the three and six months ended June 30, 2015, the amount of interest expense recognized on those derivatives was $5.6 million and $11.1 million, respectively. For financial derivatives designated in cash flow hedging relationships, the effective portion of the derivative gain/loss is recorded in other comprehensive income and any ineffective portion is recognized immediately in"(Losses)/gains on financial derivatives and hedging activities" in the consolidated statements of operations. 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 other comprehensive income are reclassified to "Total interest expense" in conjunction with the recognition of interest expense on the debt. During the three and six months ended June 30, 2016, $0.5 million and $1.0 million, respectively, was reclassified out of other comprehensive income into interest expense. For for the three and six months ended June 30, 2015, $0.2 million and $0.4 million, respectively, was reclassified out of other comprehensive income into interest expense. As of June 30, 2016, Farmer Mac expects to reclassify $2.1 million pretax, or $1.3 million after-tax, from accumulated other comprehensive income, net of tax, to earnings over the next twelve months. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to June 30, 2016. During the three and six months ended June 30, 2016 and 2015, there were no gains or losses from interest rate swaps designated as cash flow hedges reclassified to earnings because it became probable the original forecasted transaction would not occur.



23

Table of Contents

The following tables summarize information related to Farmer Mac's financial derivatives on a gross basis without giving consideration to master netting arrangements as of June 30, 2016 and December 31, 2015 and the effects of financial derivatives on the consolidated statements of operations for the three and six months ended June 30, 2016 and 2015:

Table 4.1
  
As of June 30, 2016
  
 
 
Fair Value
 
Weighted-
Average
Pay Rate
 
Weighted-
Average Receive Rate
 
Weighted-
Average
Forward
Price
 
Weighted-
Average
Remaining
Life (in years)
  
Notional Amount
 
Asset
 
(Liability)
 
 
 
 
  
(dollars in thousands)
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
$
1,391,816

 
$
6

 
$
(67,960
)
 
1.83%
 
0.64%
 
 
 
5.24
Receive fixed non-callable
30,000

 
862

 

 
0.78%
 
1.75%
 
 
 
3.96
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
157,000

 

 
(9,360
)
 
2.26%
 
0.86%
 
 
 
7.21
No hedge designation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
442,611

 

 
(61,957
)
 
4.08%
 
0.64%
 
 
 
6.31
Receive fixed non-callable
6,035,677

 
7,367

 
(1,007
)
 
0.51%
 
0.60%
 
 
 
0.53
Receive fixed callable
30,000

 

 
(17
)
 
0.57%
 
0.58%
 
 
 
0.83
Basis swaps
400,000

 
7

 
(219
)
 
0.61%
 
0.58%
 
 
 
0.95
Agency forwards
17,586

 

 
(94
)
 
 
 
 
 
101.03

 
 
Treasury futures
28,100

 

 
(309
)
 
 
 
 
 
131.89

 
 
Credit valuation adjustment
 
 

 
165

 
 
 
 
 
 
 
 
Total financial derivatives
$
8,532,790

 
$
8,242

 
$
(140,758
)
 
  
 
  
 
 
 
  
Collateral pledged
 
 

 
95,144

 
 
 
 
 
 
 
 
Net amount
 
 
$
8,242

 
$
(45,614
)
 
 
 
 
 
 
 
 


24

Table of Contents

  
As of December 31, 2015
  

 
Fair Value
 
Weighted-
Average
Pay Rate
 
Weighted-
Average Receive Rate
 
Weighted-
Average
Forward
Price
 
Weighted-
Average
Remaining
Life (in years)
  
Notional Amount
 
Asset
 
(Liability)
 
 
 
 
  
(dollars in thousands)
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
$
1,276,285

 
$
949

 
$
(26,703
)
 
2.35%
 
0.37%
 
 
 
4.16
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
119,000

 
8

 
(1,381
)
 
2.25%
 
0.64%
 
 
 
7.03
No hedge designation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
454,041

 
229

 
(44,528
)
 
3.73%
 
0.33%
 
 
 
6.02
Receive fixed non-callable
5,590,638

 
2,384

 
(4,205
)
 
0.31%
 
0.47%
 
 
 
0.57
Receive fixed callable
230,000

 

 
(421
)
 
0.41%
 
0.91%
 
 
 
2.26
Basis swaps
725,000

 
232

 
(131
)
 
0.22%
 
0.38%
 
 
 
2.33
Treasury futures
35,000

 
19

 

 
 
 
 
 
125.96

 
 
Credit valuation adjustment
 
 
(5
)
 
170

 
 
 
 
 
 
 
 
Total financial derivatives
$
8,429,964

 
$
3,816

 
$
(77,199
)
 
  
 
  
 
 
 
  
Collateral pledged
 
 

 
37,986

 
 
 
 
 
 
 
 
Net amount
 
 
$
3,816

 
$
(39,213
)
 
 
 
 
 
 
 
 

Table 4.2

 
(Losses)/gains on financial derivatives and hedging activities
  
For the Three Months Ended
 
For the Six Months Ended
  
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
(in thousands)
Fair value hedges:
 
 
 
 
 
 
 
Interest rate swaps(1)
$
(14,440
)
 
$
14,075

 
$
(41,339
)
 
$
8,316

Hedged items
16,541

 
(11,354
)
 
46,329

 
(2,478
)
Gains on fair value hedges
2,101

 
2,721

 
4,990

 
5,838

Cash flow hedges:
 
 
 
 
 
 
 
Loss recognized (ineffective portion)
(105
)
 
(150
)
 
(254
)
 
(366
)
Losses on cash flow hedges
(105
)
 
(150
)
 
(254
)
 
(366
)
No hedge designation:
 
 
 
 
 
 
 
Interest rate swaps
(6,345
)
 
11,948

 
(14,487
)
 
6,207

Agency forwards
10

 
(356
)
 
(868
)
 
(1,142
)
Treasury futures
(357
)
 
226

 
(859
)
 
(30
)
(Losses)/gains on financial derivatives not designated in hedging relationships
(6,692
)
 
11,818

 
(16,214
)
 
5,035

(Losses)/gains on financial derivatives and hedging activities
$
(4,696
)
 
$
14,389

 
$
(11,478
)
 
$
10,507

(1) 
Included in the assessment of hedge effectiveness as of June 30, 2016, but excluded from the amounts in the table, were losses of $1.8 million and $3.3 million for the three and six months ended June 30, 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 three and six months ended June 30, 2016 were gains of $0.3 million and $1.7 million, respectively. The comparable amounts as of June 30, 2015 were losses of $2.9 million and $5.8 million for the three and six months ended June 30, 2015, attributable to the fair value of the swaps at the inception of the hedging relationship and, accordingly, losses of $0.2 million and gains of $0.1 million for the three and six months ended June 30, 2015, attributable to hedge ineffectiveness.




25

Table of Contents

As of June 30, 2016 and December 31, 2015, Farmer Mac's credit exposure to interest rate swap counterparties, excluding netting arrangements and any adjustment for nonperformance risk, but including accrued interest, was $15.6 million and $6.4 million, respectively; however, including netting arrangements and accrued interest, Farmer Mac's credit exposure was zero and $47,000 as of June 30, 2016 and December 31, 2015, respectively. As of June 30, 2016, Farmer Mac held no cash as collateral for its derivatives in net asset positions and had no uncollateralized net asset positions. As of December 31, 2015, Farmer Mac held no cash collateral for its derivatives in net asset positions, resulting in uncollateralized net asset positions of $47,000.

As of June 30, 2016 and December 31, 2015, 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 $152.3 million and $90.1 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 $135.1 million and $83.2 million as of June 30, 2016 and December 31, 2015, respectively.  Farmer Mac posted cash of $95.1 million and no investment securities as of June 30, 2016 and posted cash of $38.0 million and no investment securities as of December 31, 2015.  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 June 30, 2016 and December 31, 2015, it could have been required to settle its obligations under the agreements or post additional collateral of $40.0 million and $45.2 million, respectively. As of June 30, 2016 and December 31, 2015, 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. Farmer Mac posts initial and variation margin to the clearinghouses through which centrally-cleared derivatives and futures contracts are traded. These collateral postings expose Farmer Mac to institutional credit risk in the event that either the clearinghouse or the futures commission merchant that Farmer Mac uses to post collateral to the clearinghouse fails to meet its obligations. Conversely, the use of centrally-cleared derivatives mitigates Farmer Mac's credit risk to individual counterparties because clearinghouses assume the credit risk among counterparties in centrally-cleared derivatives transactions. Of Farmer Mac's $8.5 billion notional amount of interest rate swaps outstanding as of June 30, 2016, $7.5 billion were cleared through swap clearinghouses. Of Farmer Mac's $8.4 billion notional amount of interest rate swaps outstanding as of December 31, 2015, $6.2 billion were cleared through swap clearinghouses.



26

Table of Contents


5.
LOANS AND ALLOWANCE FOR LOSSES

Loans

Farmer Mac classifies loans as either held for investment or held for sale. Loans held for investment are recorded at the unpaid principal balance, net of unamortized premium or discount and other cost adjustments. Loans held for sale are reported at the lower of cost or fair value determined on a pooled basis. As of June 30, 2016 and December 31, 2015, Farmer Mac had no loans held for sale. The following table displays the composition of the loan balances as of June 30, 2016 and December 31, 2015:

Table 5.1

 
As of June 30, 2016
 
As of December 31, 2015
 
Unsecuritized
 
In Consolidated Trusts
 
Total
 
Unsecuritized
 
In Consolidated Trusts
 
Total
 
(in thousands)
Farm & Ranch
$
2,265,932

 
$
922,666

 
$
3,188,598

 
$
2,249,864

 
$
708,111

 
$
2,957,975

Rural Utilities
1,001,769

 

 
1,001,769

 
1,008,126

 

 
1,008,126

Total unpaid principal balance(1)
3,267,701

 
922,666

 
4,190,367

 
3,257,990

 
708,111

 
3,966,101

Unamortized premiums, discounts and other cost basis adjustments
9,821

 

 
9,821

 
423

 

 
423

Total loans
3,277,522

 
922,666

 
4,200,188

 
3,258,413

 
708,111

 
3,966,524

Allowance for loan losses
(4,038
)
 
(855
)
 
(4,893
)
 
(3,736
)
 
(744
)
 
(4,480
)
Total loans, net of allowance
$
3,273,484

 
$
921,811

 
$
4,195,295

 
$
3,254,677

 
$
707,367

 
$
3,962,044

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

Allowance for Losses

Farmer Mac maintains an allowance for losses presented in two components on its consolidated balance sheets: (1) an allowance for loan losses to account for estimated probable losses on loans held, and (2) a reserve for losses to account for estimated probable losses on loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities.  As of June 30, 2016 and December 31, 2015, Farmer Mac's total allowances for losses were $7.1 million and $6.6 million, respectively. See Note 6 for more information about off-balance sheet Farmer Mac Guaranteed Securities and LTSPCs.  



27

Table of Contents

The following is a summary of the changes in the total allowance for losses for the three and six months months ended June 30, 2016 and 2015:

Table 5.2
 
As of June 30, 2016
 
As of June 30, 2015
 
Allowance
for Loan
Losses
 
Reserve
for Losses
 
Total
Allowance
for Losses
 
Allowance
for Loan
Losses
 
Reserve
for Losses
 
Total
Allowance
for Losses
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
4,529

 
$
2,097

 
$
6,626

 
$
5,940

 
$
3,491

 
$
9,431

Provision for losses
364

 
94

 
458

 
110

 
1,146

 
1,256

Charge-offs

 

 

 
(111
)
 

 
(111
)
Ending Balance
$
4,893

 
$
2,191


$
7,084

 
$
5,939

 
$
4,637

 
$
10,576

 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
4,480

 
$
2,083

 
$
6,563

 
$
5,864

 
$
4,263

 
$
10,127

Provision for losses
413

 
108

 
521

 
186

 
374

 
560

Charge-offs

 

 

 
(111
)
 

 
(111
)
Ending Balance
$
4,893

 
$
2,191

 
$
7,084

 
$
5,939

 
$
4,637

 
$
10,576


During second quarter 2016, Farmer Mac recorded provisions to its allowance for loan losses of $0.4 million and provisions to its reserve for losses of $0.1 million. The provisions to the allowance for loan losses recorded during second quarter 2016 were attributable to the establishment of a specific reserve for a long-standing impaired permanent planting loan due to collateral shortfalls relative to the unpaid principal balance and an increase in the specific allowance for on-balance sheet impaired loans resulting from a modest increase in the outstanding balance of such loans. The provisions to the reserve for losses recorded during the three months ended June 30, 2016 were attributable to an increase in the general allowance due to downgrades in risk rating on certain unimpaired crop loans and permanent planting loans underlying LTSPCs. The provisions were partially offset by a decrease in the general allowance of Agricultural Storage and Processing loans and Agricultural Storage and Processing loans underlying LTSPCs due to paydowns of these loans. Farmer Mac recorded no charge-offs to its allowance for loan losses during second quarter 2016.

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



28

Table of Contents

The following tables present the changes in the total allowance for losses for the three and six months ended June 30, 2016 and 2015 by commodity type:

Table 5.3

 
June 30, 2016
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
2,892

 
$
937

 
$
1,763

 
$
444

 
$
587

 
$
3

 
$
6,626

Provision for/(release of) losses
219

 
207

 
143

 
3

 
(114
)
 

 
458

Ending Balance
$
3,111

 
$
1,144

 
$
1,906

 
$
447


$
473


$
3


$
7,084

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
2,791

 
$
931

 
$
1,781

 
$
408

 
$
649

 
$
3

 
$
6,563

Provision for/(release of) losses
320

 
213

 
125

 
39

 
(176
)
 

 
521

Ending Balance
$
3,111

 
$
1,144

 
$
1,906

 
$
447

 
$
473

 
$
3

 
$
7,084


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

 
$
2,284

 
$
1,343

 
$
459

 
$
2,698

 
$
7

 
$
9,431

Provision for/(release of) losses
13

 
(63
)
 
417

 
85

 
804

 

 
1,256

Charge-offs

 

 

 
(111
)
 

 

 
(111
)
Ending Balance
$
2,653

 
$
2,221

 
$
1,760

 
$
433

 
$
3,502

 
$
7

 
$
10,576

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
2,519

 
$
2,159

 
$
1,423

 
$
467

 
$
3,552

 
$
7

 
$
10,127

Provision for/(release of) losses
134

 
62

 
337

 
77

 
(50
)
 

 
560

Charge-offs

 

 

 
(111
)
 

 

 
(111
)
Ending Balance
$
2,653

 
$
2,221

 
$
1,760

 
$
433

 
$
3,502

 
$
7

 
$
10,576



29

Table of Contents


The following tables present the unpaid principal balances of loans held and loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities and the related total allowance for losses by impairment method and commodity type as of June 30, 2016 and December 31, 2015:

Table 5.4

  
As of June 30, 2016
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
2,016,360

 
$
474,431

 
$
485,740

 
$
138,786

 
$
11,843

 
$
3,155

 
$
3,130,315

Off-balance sheet
1,275,541

 
458,343

 
727,971

 
117,304

 
41,960

 
4,964

 
2,626,083

Total
$
3,291,901

 
$
932,774

 
$
1,213,711

 
$
256,090

 
$
53,803

 
$
8,119

 
$
5,756,398

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
22,481

 
$
22,001

 
$
6,301

 
$
7,500

 
$

 
$

 
$
58,283

Off-balance sheet
6,227

 
3,123

 
5,584

 
918

 

 

 
15,852

Total
$
28,708

 
$
25,124

 
$
11,885

 
$
8,418

 
$

 
$

 
$
74,135

Total Farm & Ranch loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
2,038,841

 
$
496,432

 
$
492,041

 
$
146,286

 
$
11,843

 
$
3,155

 
$
3,188,598

Off-balance sheet
1,281,768

 
461,466

 
733,555

 
118,222

 
41,960

 
4,964

 
2,641,935

Total
$
3,320,609

 
$
957,898

 
$
1,225,596

 
$
264,508

 
$
53,803

 
$
8,119

 
$
5,830,533

Allowance for Losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,957

 
$
380

 
$
714

 
$
164

 
$
59

 
$

 
$
3,274

Off-balance sheet
433

 
260

 
298

 
57

 
414

 
3

 
1,465

Total
$
2,390

 
$
640

 
$
1,012

 
$
221

 
$
473

 
$
3

 
$
4,739

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
511

 
$
476

 
$
434

 
$
198

 
$

 
$

 
$
1,619

Off-balance sheet
210

 
28

 
460

 
28

 

 

 
726

Total
$
721

 
$
504

 
$
894

 
$
226

 
$

 
$

 
$
2,345

Total Farm & Ranch loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
2,468

 
$
856

 
$
1,148

 
$
362

 
$
59

 
$

 
$
4,893

Off-balance sheet
643

 
288

 
758

 
85

 
414

 
3

 
2,191

Total
$
3,111

 
$
1,144

 
$
1,906

 
$
447

 
$
473

 
$
3

 
$
7,084




30

Table of Contents

  
As of December 31, 2015
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,911,039

 
$
433,654

 
$
444,320

 
$
92,712

 
$
15,944

 
$
3,199

 
$
2,900,868

Off-balance sheet
1,313,872

 
483,473

 
777,663

 
110,378

 
56,208

 
7,142

 
2,748,736

Total
$
3,224,911

 
$
917,127

 
$
1,221,983

 
$
203,090

 
$
72,152

 
$
10,341

 
$
5,649,604

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
12,803

 
$
21,247

 
$
5,958

 
$
7,261

 
$
9,838

 
$

 
$
57,107

Off-balance sheet
5,937

 
3,037

 
8,840

 
774

 

 

 
18,588

Total
$
18,740

 
$
24,284

 
$
14,798

 
$
8,035

 
$
9,838

 
$

 
$
75,695

Total Farm & Ranch loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,923,842

 
$
454,901

 
$
450,278

 
$
99,973

 
$
25,782

 
$
3,199

 
$
2,957,975

Off-balance sheet
1,319,809

 
486,510

 
786,503

 
111,152

 
56,208

 
7,142

 
2,767,324

Total
$
3,243,651

 
$
941,411

 
$
1,236,781

 
$
211,125

 
$
81,990

 
$
10,341

 
$
5,725,299

Allowance for Losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,968

 
$
434

 
$
702

 
$
116

 
$
167

 
$

 
$
3,387

Off-balance sheet
347

 
137

 
292

 
65

 
482

 
3

 
1,326

Total
$
2,315

 
$
571

 
$
994

 
$
181

 
$
649

 
$
3

 
$
4,713

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
290

 
$
218

 
$
384

 
$
201

 
$

 
$

 
$
1,093

Off-balance sheet
186

 
142

 
403

 
26

 

 

 
757

Total
$
476

 
$
360

 
$
787

 
$
227

 
$

 
$

 
$
1,850

Total Farm & Ranch loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
2,258

 
$
652

 
$
1,086

 
$
317

 
$
167

 
$

 
$
4,480

Off-balance sheet
533

 
279

 
695

 
91

 
482

 
3

 
2,083

Total
$
2,791

 
$
931

 
$
1,781

 
$
408

 
$
649

 
$
3

 
$
6,563




31

Table of Contents

The following tables present by commodity type the unpaid principal balances, recorded investment, and specific allowance for losses related to impaired loans and the recorded investment in loans on nonaccrual status as of June 30, 2016 and December 31, 2015:

Table 5.5
  
As of June 30, 2016
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Impaired Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment
$
2,101

 
$
13,840

 
$
1,832

 
$
1,671

 
$

 
$

 
$
19,444

Unpaid principal balance
2,027

 
13,804

 
1,832

 
1,665

 

 

 
19,328

With a specific allowance:
 

 
 

 
 

 
 

 
 

 
 

 
 

Recorded investment(1)
27,126

 
11,409

 
9,992

 
6,776

 

 

 
55,303

Unpaid principal balance
26,681

 
11,320

 
10,053

 
6,753

 

 

 
54,807

Associated allowance
721

 
504

 
894

 
226

 

 

 
2,345

Total:
 

 
 

 
 

 
 

 
 

 
 

 
 

Recorded investment
29,227

 
25,249

 
11,824

 
8,447

 

 

 
74,747

Unpaid principal balance
28,708

 
25,124

 
11,885

 
8,418

 

 

 
74,135

Associated allowance
721

 
504

 
894

 
226

 

 

 
2,345

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment of loans on nonaccrual status(2)
$
8,629

 
$
14,903

 
$
3,329

 
$
5,691

 
$

 
$

 
$
32,552

(1) 
Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $52.1 million (70 percent) of impaired loans as of June 30, 2016, which resulted in a specific reserve of $1.3 million.
(2) 
Includes $17.4 million of loans that are less than 90 days delinquent but which have not met Farmer Mac's performance criteria for returning to accrual status.
  
As of December 31, 2015
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Impaired Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment
$
3,772

 
$
12,340

 
$
5,644

 
$
1,851

 
$

 
$

 
$
23,607

Unpaid principal balance
3,720

 
12,346

 
5,645

 
1,851

 

 

 
23,562

With a specific allowance:
 

 
 

 
 

 
 

 
 

 
 

 
 

Recorded investment(1)
15,103

 
11,939

 
9,050

 
6,185

 
9,838

 

 
52,115

Unpaid principal balance
15,020

 
11,938

 
9,153

 
6,184

 
9,838

 

 
52,133

Associated allowance
476

 
360

 
787

 
227

 

 

 
1,850

Total:
 

 
 

 
 

 
 

 
 

 
 

 
 

Recorded investment
18,875

 
24,279

 
14,694

 
8,036

 
9,838

 

 
75,722

Unpaid principal balance
18,740

 
24,284

 
14,798

 
8,035

 
9,838

 

 
75,695

Associated allowance
476

 
360

 
787

 
227

 

 

 
1,850

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment of loans on nonaccrual status(2)
$
5,105

 
$
16,546

 
$
4,313

 
$
5,870

 
$
9,838

 
$

 
$
41,672

(1) 
Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $46.4 million (61 percent) of impaired loans as of December 31, 2015, which resulted in a specific reserve of $1.0 million.
(2) 
Includes $14.7 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.


32

Table of Contents



The following table presents by commodity type the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2016 and 2015:

Table 5.6

 
June 30, 2016
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Average recorded investment in impaired loans
$
28,732

 
$
24,133

 
$
14,883

 
$
8,772

 
$

 
$

 
$
76,520

Income recognized on impaired loans
60

 
509

 
133

 
105

 

 

 
807

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Average recorded investment in impaired loans
$
26,121

 
$
29,673

 
$
13,906

 
$
9,111

 
$
7,368

 
$

 
$
86,179

Income recognized on impaired loans
62

 
553

 
148

 
177

 

 

 
940


 
June 30, 2015
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Average recorded investment in impaired loans
$
24,392

 
$
42,347

 
$
14,247

 
$
10,924

 
$
6,750

 
$

 
$
98,660

Income recognized on impaired loans
58

 
142

 
49

 
92

 

 

 
341

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

 
$
41,407

 
$
14,683

 
$
11,733

 
$
4,500

 
$

 
$
93,794

Income recognized on impaired loans
340

 
225

 
197

 
150

 

 

 
912


For the three and six months ended June 30, 2016, there were no troubled debt restructurings ("TDRs"). For the three and six months ended June 30, 2015, the recorded investment of loans determined to be TDRs was $1.1 million both before and after restructuring. As of June 30, 2016 and 2015, there were no TDRs identified during the previous 12 months that were in default under the modified terms. The impact of TDRs on Farmer Mac's allowance for loan losses was immaterial for the three and six months ended June 30, 2016 and 2015.

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



33

Table of Contents

During the three months ended June 30, 2016, Farmer Mac purchased no defaulted loans. During the six months ended June 30, 2016, Farmer Mac purchased five defaulted loans having an unpaid principal balance of $1.4 million from pools underlying Farm & Ranch Guaranteed Securities. During the three months ended June 30, 2015, Farmer Mac purchased one defaulted loan having an unpaid principal balance of $1.3 million from a pool underlying a Farm & Ranch Guaranteed Security. During the six months ended June 30, 2015, Farmer Mac purchased two defaulted loans having an unpaid principal balance of $2.0 million from pools underlying Farm & Ranch Guaranteed Securities.
  
The following tables present information related to Farmer Mac's acquisition of defaulted loans for the three and six months ended June 30, 2016 and 2015 and the outstanding balances and carrying amounts of all such loans as of June 30, 2016 and December 31, 2015:

Table 5.7

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
(in thousands)
Unpaid principal balance at acquisition date:
 
 
 
 
 
 
 
  Loans underlying LTSPCs
$

 
$

 
$
1,267

 
$

  Loans underlying off-balance sheet Farmer Mac Guaranteed Securities

 
1,324

 
148

 
1,981

    Total unpaid principal balance at acquisition date

 
1,324

 
1,415

 
1,981

Contractually required payments receivable

 

 
1,435

 

Impairment recognized subsequent to acquisition
208

 
57

 
208

 
109

Recovery/release of allowance for defaulted loans
6

 

 
10

 
121


 
As of
 
June 30, 2016
 
December 31, 2015
 
(in thousands)
Outstanding balance
$
16,734

 
$
36,195

Carrying amount
14,875

 
34,015






34

Table of Contents

Net credit losses and 90-day delinquencies as of and for the periods indicated for loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs are presented in the table below.  As of June 30, 2016, there were no delinquencies and no probable losses inherent in Farmer Mac's Rural Utilities loan portfolio and Farmer Mac had not experienced credit losses on any Rural Utilities loans.

Table 5.8

 
90-Day Delinquencies(1)
 
Net Credit Losses
 
As of
 
For the Six Months Ended
 
June 30, 2016
 
December 31, 2015
 
June 30, 2016
 
June 30, 2015
 
(in thousands)
On-balance sheet assets:
 
 
 
 
 
 
 
Farm & Ranch:
 
 
 
 
 
 
 
Loans
$
15,180

 
$
26,935

 
$
39

 
$
112

Total on-balance sheet
$
15,180

 
$
26,935

 
$
39

 
$
112

Off-balance sheet assets:
 

 
 
 
 

 
 

Farm & Ranch:
 

 
 
 
 

 
 

LTSPCs
$
6,913

 
$
5,201

 
$

 
$

Total off-balance sheet
$
6,913

 
$
5,201

 
$

 
$

Total
$
22,093

 
$
32,136

 
$
39

 
$
112

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

Of the $15.2 million of on-balance sheet loans reported as 90-day delinquencies as of June 30, 2016, $0.3 million were loans subject to "removal-of-account" provisions. Of the $26.9 million of on-balance sheet loans reported as 90-day delinquencies as of December 31, 2015, none were loans subject to "removal-of-account" provisions.























35

Table of Contents

Credit Quality Indicators

The following tables present credit quality indicators related to Farm & Ranch loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities as of June 30, 2016 and December 31, 2015:  

Table 5.9
  
As of June 30, 2016
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Credit risk profile by internally assigned grade(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
1,982,541

 
$
473,353

 
$
453,701

 
$
136,174

 
$
11,843

 
$
3,155

 
$
3,060,767

Special mention(2)
33,819

 
1,078

 
32,039

 
2,612

 

 

 
69,548

Substandard(3)
22,481

 
22,001

 
6,301

 
7,500

 

 

 
58,283

Total on-balance sheet
$
2,038,841

 
$
496,432

 
$
492,041

 
$
146,286

 
$
11,843

 
$
3,155

 
$
3,188,598

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
1,203,888

 
$
422,893

 
$
686,744

 
$
110,477

 
$
39,837

 
$
4,324

 
$
2,468,163

Special mention(2)
54,224

 
20,489

 
29,565

 
2,786

 
2,123

 
544

 
109,731

Substandard(3)
23,656

 
18,084

 
17,246

 
4,959

 

 
96

 
64,041

Total off-balance sheet
$
1,281,768

 
$
461,466

 
$
733,555

 
$
118,222

 
$
41,960

 
$
4,964

 
$
2,641,935

Total Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
3,186,429

 
$
896,246

 
$
1,140,445

 
$
246,651

 
$
51,680

 
$
7,479

 
$
5,528,930

Special mention(2)
88,043

 
21,567

 
61,604

 
5,398

 
2,123

 
544

 
179,279

Substandard(3)
46,137

 
40,085

 
23,547

 
12,459

 

 
96

 
122,324

Total
$
3,320,609

 
$
957,898

 
$
1,225,596

 
$
264,508

 
$
53,803

 
$
8,119

 
$
5,830,533

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity analysis of past due loans(1)
 

 
 

 
 

 
 

 
 

 
 

 
 

On-balance sheet
$
5,773

 
$
6,663

 
$
639

 
$
2,105

 
$

 
$

 
$
15,180

Off-balance sheet
6,121

 
15

 
298

 
479

 

 

 
6,913

90 days or more past due
$
11,894

 
$
6,678

 
$
937

 
$
2,584

 
$

 
$

 
$
22,093

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



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As of December 31, 2015
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Credit risk profile by internally assigned grade(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
1,888,762

 
$
431,038

 
$
409,003

 
$
89,541

 
$
15,944

 
$
3,199

 
$
2,837,487

Special mention(2)
22,255

 
2,616

 
35,317

 
2,918

 

 

 
63,106

Substandard(3)
12,825

 
21,247

 
5,958

 
7,514

 
9,838

 

 
57,382

Total on-balance sheet
$
1,923,842

 
$
454,901

 
$
450,278

 
$
99,973

 
$
25,782

 
$
3,199

 
$
2,957,975

Off-Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
1,279,454

 
$
473,335

 
$
753,472

 
$
102,990

 
$
56,208

 
$
6,517

 
$
2,671,976

Special mention(2)
24,422

 
7,226

 
13,121

 
2,938

 

 
523

 
48,230

Substandard(3)
15,933

 
5,949

 
19,910

 
5,224

 

 
102

 
47,118

Total off-balance sheet
$
1,319,809

 
$
486,510

 
$
786,503

 
$
111,152

 
$
56,208

 
$
7,142

 
$
2,767,324

Total Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
3,168,216

 
$
904,373

 
$
1,162,475

 
$
192,531

 
$
72,152

 
$
9,716

 
$
5,509,463

Special mention(2)
46,677

 
9,842

 
48,438

 
5,856

 

 
523

 
111,336

Substandard(3)
28,758

 
27,196

 
25,868

 
12,738

 
9,838

 
102

 
104,500

Total
$
3,243,651

 
$
941,411

 
$
1,236,781

 
$
211,125

 
$
81,990

 
$
10,341

 
$
5,725,299

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity analysis of past due loans(1)
 

 
 

 
 

 
 

 
 

 
 

 
 

On-balance sheet
$
4,656

 
$
7,405

 
$
2,517

 
$
2,519

 
$
9,838

 
$

 
$
26,935

Off-balance sheet
511

 

 
4,542

 
148

 

 

 
5,201

90 days or more past due
$
5,167

 
$
7,405

 
$
7,059

 
$
2,667

 
$
9,838

 
$

 
$
32,136

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



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Table of Contents

Concentrations of Credit Risk

The following table sets forth the geographic and commodity/collateral diversification, as well as the range of original loan-to-value ratios, for all Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs as of June 30, 2016 and December 31, 2015:

Table 5.10

 
As of
  
June 30, 2016
 
December 31, 2015
  
(in thousands)
By commodity/collateral type:
 
 
 
Crops
$
3,320,609

 
$
3,243,651

Permanent plantings
957,898

 
941,411

Livestock
1,225,596

 
1,236,781

Part-time farm
264,508

 
211,125

Ag. Storage and Processing
53,803

 
81,990

Other
8,119

 
10,341

Total
$
5,830,533

 
$
5,725,299

By geographic region(1):
 

 
 

Northwest
$
613,508

 
$
582,127

Southwest
1,722,509

 
1,726,927

Mid-North
2,045,422

 
2,009,654

Mid-South
794,257

 
769,831

Northeast
225,405

 
215,883

Southeast
429,432

 
420,877

Total
$
5,830,533

 
$
5,725,299

By original loan-to-value ratio:
 

 
 

0.00% to 40.00%
$
1,632,950

 
$
1,594,818

40.01% to 50.00%
1,339,807

 
1,279,321

50.01% to 60.00%
1,603,174

 
1,593,025

60.01% to 70.00%
1,086,716

 
1,107,710

70.01% to 80.00%
150,822

 
126,860

80.01% to 90.00%
17,064

 
23,565

Total
$
5,830,533

 
$
5,725,299

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


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




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Table of Contents

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

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

The following table presents the maximum principal amount of potential undiscounted future payments that Farmer Mac could be required to make under all off-balance sheet Farmer Mac Guaranteed Securities as of June 30, 2016 and December 31, 2015, not including offsets provided by any recourse provisions, recoveries from third parties, or collateral for the underlying loans:

Table 6.1
Outstanding Balance of Off-Balance Sheet Farmer Mac Guaranteed Securities
  
As of June 30, 2016
 
As of December 31, 2015
  
(in thousands)
Farm & Ranch:
 
 
 
Guaranteed Securities
$
466,479

 
$
514,051

USDA Guarantees:
 

 
 

Farmer Mac Guaranteed USDA Securities
30,962

 
10,272

Institutional Credit:
 

 
 

AgVantage Securities
984,871

 
984,871

Revolving floating rate AgVantage facility(1)
300,000

 
300,000

Total off-balance sheet Farmer Mac Guaranteed Securities
$
1,782,312

 
$
1,809,194

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

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

Table 6.2
 
For the Six Months Ended
  
June 30, 2016
 
June 30, 2015
  
(in thousands)
Proceeds from new securitizations
$
278,443

 
$
112,440

Guarantee fees received
1,823

 
2,082

Purchases of assets from the trusts
(1,267
)
 
(1,981
)

Farmer Mac has recorded a liability for its obligation to stand ready under the guarantee in the guarantee and commitment obligation on the consolidated balance sheets.  This liability approximated $7.0 million as of June 30, 2016 and $8.3 million as of December 31, 2015. As of June 30, 2016 and December 31, 2015, the weighted-average remaining maturity of all loans underlying off-balance sheet Farmer Mac Guaranteed Securities, excluding AgVantage securities, was 11.0 years and 11.3 years, respectively.  As of


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June 30, 2016 and December 31, 2015, the weighted-average remaining maturity of the off-balance sheet AgVantage securities was 1.2 years and 1.7 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 in an amount approximating what would have been the guarantee fee if the transaction were structured as a swap for Farmer Mac Guaranteed Securities.

The maximum principal amount of potential undiscounted future payments that Farmer Mac could be requested to make under all LTSPCs, not including offsets provided by any recourse provisions, recoveries from third parties, or collateral for the underlying loans, was $3.1 billion as of June 30, 2016 and $2.8 billion as of December 31, 2015.

As of June 30, 2016 and December 31, 2015, the weighted-average remaining maturity of all loans underlying LTSPCs was 15.2 years and 14.6 years, respectively.  For those LTSPCs issued or modified on or after January 1, 2003, Farmer Mac has recorded a liability for its obligation to stand ready under the commitment in the guarantee and commitment obligation on the consolidated balance sheets.  This liability approximated $31.1 million as of June 30, 2016 and $30.3 million as of December 31, 2015.


7.
EQUITY

Non-Controlling Interest in Farmer Mac II LLC

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

Common Stock

On September 8, 2015, Farmer Mac's board of directors approved a share repurchase program authorizing Farmer Mac to repurchase up to $25 million of its outstanding Class C non-voting common stock through September 8, 2017. As of June 30, 2016, Farmer Mac had repurchased approximately 668,000 shares of Class C non-voting common stock at a cost of approximately $19.6 million pursuant to the share repurchase program.



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Table of Contents

Capital Requirements

Farmer Mac is subject to the following capital requirements:
 
Statutory minimum capital requirement – Farmer Mac's statutory minimum capital level is an amount of core capital (stockholders' equity less accumulated other comprehensive income) equal to the sum of 2.75 percent of Farmer Mac's aggregate on-balance sheet assets, as calculated for regulatory purposes, plus 0.75 percent of the aggregate off-balance sheet obligations of Farmer Mac, specifically including:   
the unpaid principal balance of outstanding Farmer Mac Guaranteed Securities;
instruments issued or guaranteed by Farmer Mac that are substantially equivalent to Farmer Mac Guaranteed Securities, including LTSPCs; and
other off-balance sheet obligations of Farmer Mac.
Statutory critical capital requirement – Farmer Mac's critical capital level is an amount of core capital equal to 50 percent of the total minimum capital requirement at that time.
Risk-based capital requirement – Farmer Mac's charter directs FCA to establish a risk-based capital stress test for Farmer Mac, using specified stress-test parameters.

Farmer Mac is required to comply with the higher of the minimum capital requirement and the risk-based capital requirement. As of June 30, 2016 and December 31, 2015, 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 June 30, 2016, Farmer Mac's minimum capital requirement was $497.1 million and its core capital level was $572.6 million, which was $75.5 million above the minimum capital requirement as of that date.  As of December 31, 2015, Farmer Mac's minimum capital requirement was $462.1 million and its core capital level was $564.5 million, which was $102.4 million above the minimum capital requirement as of that date.

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

8.
FAIR VALUE DISCLOSURES

As of June 30, 2016, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $6.7 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 40 percent of total assets and 72 percent of financial instruments measured at fair value as of June 30, 2016. As of December 31, 2015, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $6.1 billion whose fair values were estimated by management in the absence of readily determinable fair values.  These financial instruments measured as level 3 represented 39 percent of total assets and 69 percent of financial instruments measured at fair value as of December 31, 2015.



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Table of Contents

Net transfers in and/or out of the different levels within the fair value hierarchy are based on the fair values of the assets and liabilities as of the beginning of the reporting period.  There were no transfers within the fair value hierarchy for fair value measurements of Farmer Mac's investment securities, Farmer Mac Guaranteed Securities, USDA Securities, and financial derivatives during the first six months of 2016 and 2015.

The following tables present information about Farmer Mac's assets and liabilities measured at fair value on a recurring and nonrecurring basis as of June 30, 2016 and December 31, 2015, respectively, and indicate the fair value hierarchy of the valuation techniques used by Farmer Mac to determine such fair value:

Table 8.1
Assets and Liabilities Measured at Fair Value as of June 30, 2016
 
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
$

 
$

 
$
17,730

 
$
17,730

Floating rate asset-backed securities

 
59,999

 

 
59,999

Floating rate corporate debt securities

 
10,002

 

 
10,002

Floating rate Government/GSE guaranteed mortgage-backed securities

 
1,264,317

 

 
1,264,317

Fixed rate GSE guaranteed mortgage-backed securities

 
7,765

 

 
7,765

Floating rate GSE subordinated debt

 
65,104

 

 
65,104

Fixed rate senior agency debt

 
174,998

 

 
174,998

Fixed rate U.S. Treasuries
860,764

 

 

 
860,764

Total available-for-sale
860,764

 
1,582,185

 
17,730

 
2,460,679

Trading:
 

 
 

 
 

 
 

Floating rate asset-backed securities

 

 
281

 
281

Total trading

 

 
281

 
281

Total Investment Securities
860,764

 
1,582,185

 
18,011

 
2,460,960

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 

Available-for-sale:
 

 
 

 
 

 
 

AgVantage

 

 
4,697,584

 
4,697,584

Farmer Mac Guaranteed USDA Securities

 

 
33,447

 
33,447

Total Farmer Mac Guaranteed Securities

 

 
4,731,031

 
4,731,031

USDA Securities:
 

 
 

 
 

 
 

Available-for-sale

 

 
1,967,759

 
1,967,759

Trading

 

 
24,787

 
24,787

Total USDA Securities

 

 
1,992,546

 
1,992,546

Financial derivatives

 
8,242

 

 
8,242

Total Assets at fair value
$
860,764

 
$
1,590,427

 
$
6,741,588

 
$
9,192,779

Liabilities:
 

 
 

 
 

 
 

Financial derivatives
$
309

 
$
140,449

 
$

 
$
140,758

Total Liabilities at fair value
$
309

 
$
140,449

 
$

 
$
140,758

Nonrecurring:
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Loans held for investment
$

 
$

 
$
2,227

 
$
2,227

REO

 

 
630

 
630

Total Nonrecurring Assets at fair value
$

 
$

 
$
2,857

 
$
2,857




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Table of Contents

Assets and Liabilities Measured at Fair Value as of December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Recurring:
 
Assets:
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$

 
$

 
$
44,924

 
$
44,924

Floating rate asset-backed securities

 
73,729

 

 
73,729

Floating rate corporate debt securities

 
9,991

 

 
9,991

Fixed rate corporate debt

 
9,994

 

 
9,994

Floating rate Government/GSE guaranteed mortgage-backed securities

 
1,355,459

 

 
1,355,459

Fixed rate GSE guaranteed mortgage-backed securities

 
7,904

 

 
7,904

Floating rate GSE subordinated debt

 
66,249

 

 
66,249

Fixed rate senior agency debt

 
213,987

 

 
213,987

Fixed rate U.S. Treasuries
992,788

 

 

 
992,788

Total available-for-sale
992,788

 
1,737,313

 
44,924

 
2,775,025

Trading:
 

 
 

 
 

 
 

Floating rate asset-backed securities

 

 
491

 
491

Total trading

 

 
491

 
491

Total Investment Securities
992,788

 
1,737,313

 
45,415

 
2,775,516

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 

Available-for-sale:
 

 
 

 
 

 
 

AgVantage

 

 
4,121,244

 
4,121,244

Farmer Mac Guaranteed USDA Securities

 

 
31,361

 
31,361

Total Farmer Mac Guaranteed Securities

 

 
4,152,605

 
4,152,605

USDA Securities:
 

 
 

 
 

 
 

Available-for-sale

 

 
1,888,344

 
1,888,344

Trading

 

 
28,975

 
28,975

Total USDA Guaranteed Securities

 

 
1,917,319

 
1,917,319

Financial derivatives
19

 
3,797

 

 
3,816

Total Assets at fair value
$
992,807

 
$
1,741,110

 
$
6,115,339

 
$
8,849,256

Liabilities:
 

 
 

 
 

 
 

Financial derivatives
$

 
$
77,199

 
$

 
$
77,199

Total Liabilities at fair value
$

 
$
77,199

 
$

 
$
77,199

Nonrecurring:
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Loans held for investment
$

 
$

 
$
11,443

 
$
11,443

REO
$

 
$

 
$
388

 
$
388

Total Nonrecurring Assets at fair value
$

 
$

 
$
11,831

 
$
11,831






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Table of Contents

The following tables present additional information about assets and liabilities measured at fair value on a recurring basis for which Farmer Mac has used significant unobservable inputs to determine fair value. Net transfers in and/or out of level 3 are based on the fair values of the assets and liabilities as of the beginning of the reporting period. There were no liabilities measured at fair value using significant unobservable inputs during the three and six months ended June 30, 2016 and 2015.

Table 8.2
 
Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended June 30, 2016
  
Beginning
Balance
 
Purchases
 
Sales
 
Settlements
 
Realized and
Unrealized Gains included
in Income
 
Unrealized
Gains/(Losses)
included in Other
Comprehen-sive
Income
 
Ending
Balance
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
17,730

 
$

 
$

 
$

 
$

 
$

 
$
17,730

Total available-for-sale
17,730

 

 

 

 

 

 
17,730

Trading:
 

 
 

 
 

 
 
 
 

 
 
 
 

Floating rate asset-backed securities(1)
383

 

 

 
(120
)
 
18

 

 
281

Total trading
383

 

 

 
(120
)
 
18

 

 
281

Total Investment Securities
18,113

 

 

 
(120
)
 
18

 

 
18,011

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale:
 

 
 

 
 

 
 
 
 

 
 
 
 

AgVantage
4,534,810

 
163,845

 

 
(16,699
)
 
13,137

 
2,491

 
4,697,584

Farmer Mac Guaranteed USDA Securities
30,694

 
4,100

 

 
(2,238
)
 

 
891

 
33,447

Total Farmer Mac Guaranteed Securities
4,565,504

 
167,945

 

 
(18,937
)
 
13,137

 
3,382

 
4,731,031

USDA Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale
1,908,014

 
129,645

 
(19,014
)
 
(97,303
)
 

 
46,417

 
1,967,759

Trading(2)
26,869

 

 

 
(2,459
)
 
377

 

 
24,787

Total USDA Securities
1,934,883

 
129,645

 
(19,014
)
 
(99,762
)
 
377

 
46,417

 
1,992,546

Total Assets at fair value
$
6,518,500

 
$
297,590

 
$
(19,014
)
 
$
(118,819
)
 
$
13,532

 
$
49,799

 
$
6,741,588

(1) 
Unrealized gains are attributable to assets still held as of June 30, 2016 and are recorded in "Gains on trading securities."
(2) 
Includes unrealized gains of $0.3 million attributable to assets still held as of June 30, 2016 that are recorded in "Gains on trading securities."




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Table of Contents

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

 
$

 
$

 
$

 
$

 
$
(197
)
 
$
40,182

Total available-for-sale
40,379

 

 

 

 

 
(197
)
 
40,182

Trading:
 

 
 

 
 

 
 
 
 

 
 
 
 

Floating rate asset-backed securities(1)
638

 

 

 
(190
)
 
158

 

 
606

Total trading
638

 

 

 
(190
)
 
158

 

 
606

Total Investment Securities
41,017

 

 

 
(190
)
 
158

 
(197
)
 
40,788

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale:
 

 
 

 
 

 
 
 
 

 
 
 
 

AgVantage
3,818,704

 
249,260

 

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

Farmer Mac Guaranteed USDA Securities
23,505

 
12,512

 

 
(1,766
)
 

 
757

 
35,008

Total Farmer Mac Guaranteed Securities
3,842,209

 
261,772

 

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

USDA Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale
1,794,844

 
111,421

 

 
(69,192
)
 

 
(11,667
)
 
1,825,406

Trading(2)
37,593

 

 

 
(3,834
)
 
11

 

 
33,770

Total USDA Securities
1,832,437

 
111,421

 

 
(73,026
)
 
11

 
(11,667
)
 
1,859,176

Total Assets at fair value
$
5,715,663

 
$
373,193

 
$

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

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



45

Table of Contents

Level 3 Assets and Liabilities Measured at Fair Value for the Six Months Ended June 30, 2016
  
Beginning
Balance
 
Purchases
 
Sales
 
Settlements
 
Realized and
Unrealized Gains included
in Income
 
Unrealized
Gains/(Losses)
included in Other
Comprehen-sive
Income
 
Ending
Balance
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
44,924

 
$

 
$
(26,806
)
 
$

 
$
6

 
$
(394
)
 
$
17,730

Total available-for-sale
44,924

 

 
(26,806
)
 

 
6

 
(394
)
 
17,730

Trading:
 

 
 

 
 

 
 
 
 

 
 
 
 

Floating rate asset-backed securities(1)
491

 

 

 
(326
)
 
116

 

 
281

Total trading
491

 

 

 
(326
)
 
116

 

 
281

Total Investment Securities
45,415

 

 
(26,806
)
 
(326
)
 
122

 
(394
)
 
18,011

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale:
 

 
 

 
 

 
 
 
 

 
 
 
 

AgVantage
4,121,244

 
1,079,376

 

 
(529,229
)
 
37,435

 
(11,242
)
 
4,697,584

Farmer Mac Guaranteed USDA Securities
31,361

 
4,100

 

 
(2,736
)
 


 
722

 
33,447

Total Farmer Mac Guaranteed Securities
4,152,605

 
1,083,476

 

 
(531,965
)
 
37,435

 
(10,520
)
 
4,731,031

USDA Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale
1,888,344

 
228,613

 
(22,662
)
 
(181,490
)
 

 
54,954

 
1,967,759

Trading(2)
28,975

 

 

 
(4,824
)
 
636

 

 
24,787

Total USDA Securities
1,917,319

 
228,613

 
(22,662
)
 
(186,314
)
 
636

 
54,954

 
1,992,546

Total Assets at fair value
$
6,115,339

 
$
1,312,089

 
$
(49,468
)
 
$
(718,605
)
 
$
38,193

 
$
44,040

 
$
6,741,588

(1) 
Unrealized gains are attributable to assets still held as of June 30, 2016 and are recorded in "Gains on trading securities."
(2) 
Includes unrealized gains of $0.6 million attributable to assets still held as of June 30, 2016 that are recorded in "Gains on trading securities."


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Table of Contents

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

 
$

 
$

 
$

 
$

 
$
(394
)
 
$
40,182

Total available-for-sale
40,576

 

 

 

 

 
(394
)
 
40,182

Trading:
 

 
 

 
 

 
 
 
 

 
 
 
 

Floating rate asset-backed securities(1)
689

 

 

 
(437
)
 
354

 

 
606

Total trading
689

 

 

 
(437
)
 
354

 

 
606

Total Investment Securities
41,265

 

 

 
(437
)
 
354

 
(394
)
 
40,788

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale:
 

 
 

 
 

 
 
 
 

 
 
 
 

AgVantage
3,631,662

 
464,175

 

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

Farmer Mac Guaranteed USDA Securities
27,619

 
12,512

 

 
(6,418
)
 

 
1,295

 
35,008

Total Farmer Mac Guaranteed Securities
3,659,281

 
476,687

 

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

USDA Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale
1,731,222

 
200,607

 

 
(133,383
)
 

 
26,960

 
1,825,406

Trading(2)
40,310

 

 

 
(6,717
)
 
177

 

 
33,770

Total USDA Securities
1,771,532

 
200,607

 

 
(140,100
)
 
177

 
26,960

 
1,859,176

Total Assets at fair value
$
5,472,078

 
$
677,294

 
$

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

 
$
5,951,172

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



47

Table of Contents

The following tables present additional information about the significant unobservable inputs, such as discount rates and constant prepayment rates ("CPR"), used in the fair value measurements categorized in level 3 of the fair value hierarchy as of June 30, 2016 and December 31, 2015.

Table 8.3
 
 
As of June 30, 2016
Financial Instruments
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted-Average)
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
 
$
17,730

 
Indicative bids
 
Range of broker quotes
 
90.0% - 90.0% (90.0%)
Floating rate asset-backed securities
 
$
281

 
Discounted cash flow
 
Discount rate
 
29.7% - 32.0% (31.2%)
 
 
 
 
 
 
CPR
 
10.0%
Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
AgVantage
 
$
4,697,584

 
Discounted cash flow
 
Discount rate
 
1.2% - 2.5% (1.7%)
Farmer Mac Guaranteed USDA Securities
 
$
33,447

 
Discounted cash flow
 
Discount rate
 
1.2% - 4.1% (1.7%)
 
 
 
 
 
 
CPR
 
9% - 23% (12%)
USDA Securities
 
$
1,992,546

 
Discounted cash flow
 
Discount rate
 
1.8% - 5.0% (3.0%)
 
 
 
 
 
 
CPR
 
0% - 22% (10%)

 
 
As of December 31, 2015
Financial Instruments
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted-Average)
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
 
$
44,924

 
Indicative bids
 
Range of broker quotes
 
92.0% - 99.6% (96.6%)
Floating rate asset-backed securities
 
$
491

 
Discounted cash flow
 
Discount rate
 
18.3% - 23.9% (21.5%)
 
 
 
 
 
 
CPR
 
10.0%
Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
AgVantage
 
$
4,121,244

 
Discounted cash flow
 
Discount rate
 
1.1% - 3.3% (1.8%)
Farmer Mac Guaranteed USDA Securities
 
$
31,361

 
Discounted cash flow
 
Discount rate
 
1.0% - 3.9% (1.8%)
 
 
 
 
 
 
CPR
 
9% - 20% (10.0%)
USDA Securities
 
$
1,917,319

 
Discounted cash flow
 
Discount rate
 
1.3% - 5.1% (3.1%)
 
 
 
 
 
 
CPR
 
0% - 19% (7.0%)

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.


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Table of Contents


Disclosures on Fair Value of Financial Instruments

The following table sets forth the estimated fair values and carrying values for financial assets, liabilities, and guarantees and commitments as of June 30, 2016 and December 31, 2015:

Table 8.4

 
As of June 30, 2016
 
As of December 31, 2015
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,764,626

 
$
1,764,626

 
$
1,210,084

 
$
1,210,084

Investment securities
2,460,960

 
2,460,960

 
2,775,516

 
2,775,516

Farmer Mac Guaranteed Securities
6,135,080

 
6,119,755

 
5,434,422

 
5,426,621

USDA Securities
1,992,546

 
1,992,546

 
1,917,319

 
1,917,319

Loans
4,343,577

 
4,195,295

 
4,027,660

 
3,962,044

Financial derivatives
8,242

 
8,242

 
3,816

 
3,816

Guarantee and commitment fees receivable:
 
 
 
 
 
 
 
LTSPCs
29,518

 
31,968

 
31,953

 
31,240

Farmer Mac Guaranteed Securities
7,248

 
7,685

 
8,872

 
8,949

Financial liabilities:
 
 
 
 
 
 
 
Notes payable:
 
 
 
 
 
 
 
Due within one year
10,128,930

 
10,125,269

 
9,108,468

 
9,111,461

Due after one year
4,875,304

 
4,722,814

 
5,009,310

 
4,967,036

Debt securities of consolidated trusts held by third parties
953,120

 
928,050

 
713,316

 
713,536

Financial derivatives
140,758

 
140,758

 
77,199

 
77,199

Guarantee and commitment obligations:
 
 
 
 
 
 
 
LTSPCs
28,680

 
31,130

 
31,015

 
30,301

Farmer Mac Guaranteed Securities
6,548

 
6,985

 
8,230

 
8,308


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


49

Table of Contents

also classified as level 3 within the fair value hierarchy. Because the cash flows of Farmer Mac's financial instruments may be interest rate path dependent, estimated fair values and projected discount rates for level 3 financial instruments are derived using a Monte Carlo simulation model. Different market assumptions and estimation methodologies could significantly affect estimated fair value amounts.



50

Table of Contents

9.
BUSINESS SEGMENT REPORTING

The following tables present core earnings for Farmer Mac's reportable operating segments and a reconciliation to consolidated net income for the three and six months ended June 30, 2016 and 2015:

Table 9.1

Core Earnings by Business Segment
For the Three Months Ended June 30, 2016
 
Farm & Ranch
 
USDA Guarantees
 
Rural 
Utilities
 
Institutional Credit
 
Corporate
 
Reconciling
Adjustments
 
Consolidated Net Income
 
(in thousands)
Net interest income
$
11,606

 
$
4,938

 
$
2,855

 
$
12,109

 
$
2,850

 
$

 
$
34,358

Less: reconciling adjustments(1)(2)(3)
(1,731
)
 
(350
)
 
(293
)
 
(702
)
 
(256
)
 
3,332

 

Net effective spread
9,875

 
4,588

 
2,562

 
11,407

 
2,594

 
3,332

 

Guarantee and commitment fees(2)
3,965

 
14

 
373

 
458

 

 
(1,155
)
 
3,655

Other income/(expense)(3)(4)
78

 
25

 

 

 
(228
)
 
(3,764
)
 
(3,889
)
Non-interest income/(loss)
4,043

 
39

 
373

 
458

 
(228
)
 
(4,919
)
 
(234
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for loan losses
(364
)
 

 

 

 

 

 
(364
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for losses
(94
)
 

 

 

 

 

 
(94
)
Other non-interest expense
(4,112
)
 
(1,092
)
 
(830
)
 
(538
)
 
(3,408
)
 

 
(9,980
)
Non-interest expense(5)
(4,206
)
 
(1,092
)
 
(830
)
 
(538
)
 
(3,408
)
 

 
(10,074
)
Core earnings before income taxes
9,348

 
3,535

 
2,105

 
11,327

 
(1,042
)
 
(1,587
)
(6) 
23,686

Income tax (expense)/benefit
(3,272
)
 
(1,237
)
 
(737
)
 
(3,964
)
 
254

 
556

 
(8,400
)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends
6,076

 
2,298

 
1,368

 
7,363

 
(788
)
 
(1,031
)
(6) 
15,286

Preferred stock dividends

 

 

 

 
(3,296
)
 

 
(3,296
)
Non-controlling interest - preferred stock dividends

 

 

 

 
16

 

 
16

Segment core earnings/(losses)
$
6,076

 
$
2,298

 
$
1,368

 
$
7,363

 
$
(4,068
)
 
$
(1,031
)
(6) 
$
12,006

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at carrying value
$
3,311,270

 
$
2,046,516

 
$
1,023,630

 
$
6,071,924

 
$
4,369,850

 
$

 
$
16,823,190

Total on- and off-balance sheet program assets at principal balance
$
5,830,533

 
$
1,960,358

 
$
1,934,473

 
$
7,391,172

 


 

 
$
17,116,536

(1) 
Excludes the amortization of premiums and discounts on assets consolidated at fair value, originally included in interest income, to reflect core earnings amounts.
(2) 
Includes the reclassification of interest income and interest expense from consolidated trusts owned by third parties to guarantee and commitment fees, to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee.
(3) 
Includes the reclassification of interest expense related to interest rate swaps not designated as hedges, which are included in "(Losses)/gains on financial derivatives and hedging activities" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
(4) 
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.
(5) 
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(6) 
Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest; and segment core earnings to corresponding income measures: income before income taxes, net income, and net income attributable to common stockholders, respectively.


51

Table of Contents

Core Earnings by Business Segment
For the Three Months Ended June 30, 2015
 
Farm & Ranch
 
USDA Guarantees
 
Rural 
Utilities
 
Institutional Credit
 
Corporate
 
Reconciling
Adjustments
 
Consolidated Net Income
 
(in thousands)
Net interest income
$
10,757

 
$
4,643

 
$
3,153

 
$
11,312

 
$
1,999

 
$

 
$
31,864

Less: reconciling adjustments(1)(2)(3)
(1,076
)
 
(177
)
 
(315
)
 
(452
)
 
(57
)
 
2,077

 

Net effective spread
9,681

 
4,466

 
2,838

 
10,860

 
1,942

 
2,077

 

Guarantee and commitment fees(2)
3,693

 
8

 

 
384

 

 
(697
)
 
3,388

Other income/(expense)(3)(4)
160

 
28

 

 

 
(212
)
 
14,843

 
14,819

Non-interest income/(loss)
3,853

 
36

 

 
384

 
(212
)
 
14,146

 
18,207

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for loan losses
(110
)
 

 

 

 

 

 
(110
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for losses
(1,146
)
 

 

 

 

 

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

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

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

 
3,477

 
1,978

 
10,712

 
(1,256
)
 
16,223

(6) 
39,108

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

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

 
2,261

 
1,287

 
6,963

 
(900
)
 
10,545

(6) 
25,339

Preferred stock dividends

 

 

 

 
(3,296
)
 

 
(3,296
)
Non-controlling interest - preferred stock dividends

 

 

 

 
119

 

 
119

Segment core earnings/(losses)
$
5,183

 
$
2,261

 
$
1,287

 
$
6,963

 
$
(4,077
)
 
$
10,545

(6) 
$
22,162

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at carrying value
$
2,780,018

 
$
1,913,390

 
$
962,702

 
$
5,874,088

 
$
3,614,399

 
$

 
$
15,144,597

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

 
$
1,862,430

 
$
954,188

 
$
6,827,939

 
 
 

 
$
15,130,127

(1) 
Excludes the amortization of premiums and discounts on assets consolidated at fair value, originally included in interest income, to reflect core earnings amounts.
(2) 
Includes the reclassification of interest income and interest expense from consolidated trusts owned by third parties to guarantee and commitment fees, to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee.
(3) 
Includes the reclassification of interest expense related to interest rate swaps not designated as hedges, which are included in "(Losses)/gains on financial derivatives and hedging activities" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
(4) 
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.
(5) 
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(6) 
Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest; and segment core earnings to corresponding income measures: income before income taxes, net income, and net income attributable to common stockholders, respectively.



52

Table of Contents

Core Earnings by Business Segment
For the Six Months Ended June 30, 2016
 
Farm & Ranch
 
USDA Guarantees
 
Rural 
Utilities
 
Institutional Credit
 
Corporate
 
Reconciling
Adjustments
 
Consolidated Net Income
 
(in thousands)
Net interest income
$
22,733

 
$
9,990

 
$
5,719

 
$
23,858

 
$
5,698

 
$

 
$
67,998

Less: reconciling adjustments(1)(2)(3)
(3,397
)
 
(1,094
)
 
(619
)
 
(1,361
)
 
(552
)
 
7,023

 

Net effective spread
19,336

 
8,896

 
5,100

 
22,497

 
5,146

 
7,023

 

Guarantee and commitment fees(2)
7,874

 
21

 
668

 
916

 

 
(2,198
)
 
7,281

Other income/(expense)(3)(4)
175

 
83

 

 

 
(900
)
 
(9,579
)
 
(10,221
)
Non-interest income/(loss)
8,049

 
104

 
668

 
916

 
(900
)
 
(11,777
)
 
(2,940
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for loan losses
(413
)
 

 

 

 

 

 
(413
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for losses
(108
)
 

 

 

 

 

 
(108
)
Other non-interest expense
(8,273
)
 
(2,185
)
 
(1,661
)
 
(1,077
)
 
(6,736
)
 

 
(19,932
)
Non-interest expense(5)
(8,381
)
 
(2,185
)
 
(1,661
)
 
(1,077
)
 
(6,736
)
 

 
(20,040
)
Core earnings before income taxes
18,591

 
6,815

 
4,107

 
22,336

 
(2,490
)
 
(4,754
)
(6) 
44,605

Income tax (expense)/benefit
(6,508
)
 
(2,385
)
 
(1,438
)
 
(7,816
)
 
747

 
1,665

 
(15,735
)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends
12,083

 
4,430

 
2,669

 
14,520

 
(1,743
)
 
(3,089
)
(6) 
28,870

Preferred stock dividends

 

 

 

 
(6,591
)
 

 
(6,591
)
Non-controlling interest - preferred stock dividends

 

 

 

 
44

 

 
44

Segment core earnings/(losses)
$
12,083

 
$
4,430

 
$
2,669

 
$
14,520

 
$
(8,290
)
 
$
(3,089
)
(6) 
$
22,323

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at carrying value
$
3,311,270

 
$
2,046,516

 
$
1,023,630

 
$
6,071,924

 
$
4,369,850

 
$

 
$
16,823,190

Total on- and off-balance sheet program assets at principal balance
$
5,830,533

 
$
1,960,358

 
$
1,934,473

 
$
7,391,172

 
 
 

 
$
17,116,536

(1) 
Excludes the amortization of premiums and discounts on assets consolidated at fair value, originally included in interest income, to reflect core earnings amounts.
(2) 
Includes the reclassification of interest income and interest expense from consolidated trusts owned by third parties to guarantee and commitment fees, to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee.
(3) 
Includes the reclassification of interest expense related to interest rate swaps not designated as hedges, which are included in "(Losses)/gains on financial derivatives and hedging activities" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
(4) 
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.
(5) 
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(6) 
Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest; and segment core earnings to corresponding income measures: income before income taxes, net income, and net income attributable to common stockholders, respectively.



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Core Earnings by Business Segment
For the Six Months Ended June 30, 2015
 
Farm & Ranch
 
USDA Guarantees
 
Rural 
Utilities
 
Institutional Credit
 
Corporate
 
Reconciling
Adjustments
 
Consolidated Net Income
 
(in thousands)
Net interest income
$
21,988

 
$
8,987

 
$
5,611

 
$
22,304

 
$
3,763

 
$

 
$
62,653

Less: reconciling adjustments(1)(2)(3)
(2,193
)
 
(296
)
 
31

 
(1,019
)
 
(132
)
 
3,609

 

Net effective spread
19,795

 
8,691

 
5,642

 
21,285

 
3,631

 
3,609

 
 
Guarantee and commitment fees(2)
7,326

 
2

 

 
769

 

 
(1,332
)
 
6,765

Other income/(expense)(3)(4)
247

 
87

 

 

 
(764
)
 
12,347

 
11,917

Non-interest income/(loss)
7,573

 
89

 

 
769

 
(764
)
 
11,015

 
18,682

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for loan losses
(186
)
 

 

 

 

 

 
(186
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for losses
(374
)
 

 

 

 

 

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

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

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

 
7,370

 
3,916

 
20,987

 
(3,122
)
 
14,624

(6) 
61,953

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

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

 
4,791

 
2,547

 
13,642

 
(250
)
 
11,407

(6) 
43,953

Preferred stock dividends

 

 

 

 
(6,591
)
 

 
(6,591
)
Non-controlling interest - preferred stock dividends

 

 

 

 
(5,235
)
 

 
(5,235
)
Loss on retirement of preferred stock

 

 

 

 

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

 
$
4,791

 
$
2,547

 
$
13,642

 
$
(12,076
)
 
$
3,260

(6) 
$
23,980

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at carrying value
$
2,780,018

 
$
1,913,390

 
$
962,702

 
$
5,874,088

 
$
3,614,399

 
$

 
$
15,144,597

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

 
$
1,862,430

 
$
954,188

 
$
6,827,939

 
 
 

 
$
15,130,127

(1) 
Excludes the amortization of premiums and discounts on assets consolidated at fair value, originally included in interest income, to reflect core earnings amounts.
(2) 
Includes the reclassification of interest income and interest expense from consolidated trusts owned by third parties to guarantee and commitment fees, to reflect the net interest income Farmer Mac earns is effectively a guarantee fee.
(3) 
Includes the reclassification of interest expense related to interest rate swaps not designated as hedges, which are included in "(Losses)/gains on financial derivatives and hedging activities" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
(4) 
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.
(5) 
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(6) 
Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest; and segment core earnings to corresponding income measures: income before income taxes, net income, and net income attributable to common stockholders, respectively.


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Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Financial information included in this report is consolidated to include the accounts of Farmer Mac and its three subsidiaries – Farmer Mac Mortgage Securities Corporation, Farmer Mac II LLC, and Contour Valuation Services, LLC (which began doing business as AgVisory during first quarter 2016) ("AgVisory"). This discussion and analysis of financial condition and results of operations should be read together with: (1) the interim unaudited consolidated financial statements and the related notes that appear elsewhere in this report; and (2) Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 10, 2016.


FORWARD-LOOKING STATEMENTS

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

Management's expectations for Farmer Mac's future necessarily involve a number of assumptions and estimates and the evaluation of risks and uncertainties.  Various factors or events, both known and unknown, could cause Farmer Mac's actual results to differ materially from the expectations as expressed or implied by the forward-looking statements, including the factors discussed under "Risk Factors" in Part I, Item 1A of Farmer Mac's Annual Report on Form 10-K for the fiscal period ended December 31, 2015 filed with the SEC on March 10, 2016, and uncertainties regarding:
 
the availability to Farmer Mac of debt and equity financing and, if available, the reasonableness of rates and terms;
legislative or regulatory developments that could affect Farmer Mac, its sources of business, or the agricultural sector or the rural utilities industry;
fluctuations in the fair value of assets held by Farmer Mac and its subsidiaries;


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

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

Overview

In second quarter 2016, Farmer Mac increased its outstanding business volume by $0.9 billion, to $17.1 billion, driven primarily by the addition of $0.4 billion of loans added under LTSPCs in the Rural Utilities line of business, net portfolio growth of $0.3 billion in the Institutional Credit line of business, and net portfolio growth of $0.2 billion in Farm & Ranch loans. Farmer Mac's overall credit quality remained stable during second quarter 2016, as substandard assets and the total allowance for losses increased modestly and 90-day delinquencies decreased due to several delinquent loans being cured or paid off in full at par. The discussion below of Farmer Mac's financial information includes measures of financial performance that are not presented in accordance with generally accepted accounting principles in the United States (GAAP), and these are considered "non-GAAP" measures. For more information about the non-GAAP measures Farmer Mac uses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures."
 
Net Income and Core Earnings

Farmer Mac's net income attributable to common stockholders for second quarter 2016 was $12.0 million, compared to $22.2 million for second quarter 2015. The decrease was primarily attributable to the effects of unrealized fair value changes on financial derivatives and hedged assets, which was a $1.3 million after-tax loss in second quarter 2016, compared to a $10.4 million after-tax gain in second quarter 2015. For more information about changes in net income attributable to common stockholders, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations."

Farmer Mac's non-GAAP core earnings for second quarter 2016 were $13.0 million, compared to $12.4 million in first quarter 2016 and $11.6 million in in second quarter 2015. The $0.6 million sequential


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quarterly increase in core earnings was primarily attributable to higher total revenues, which included a $0.7 million after-tax increase in net effective spread and a $0.1 million after-tax increase in guarantee and commitment fees. The increase was offset in part by an increase in credit-related expenses of $0.2 million after-tax due to higher provisions to the allowance for losses in second quarter 2016 compared to first quarter 2016. Operating expenses were relatively flat sequentially, as higher general and administrative expenses related to continued technology and business infrastructure investments and expenses associated with business development efforts and other corporate initiatives were offset by lower compensation costs in second quarter 2016. These lower compensation costs were due to a decrease in stock compensation expense, which reflects the absence of the costs associated with the annual vesting of stock-based awards that occurred in first quarter 2016.

The year-over-year $1.4 million increase in core earnings was primarily attributable to increases in net effective spread of $0.8 million after-tax and guarantee and commitment fee income of $0.5 million after-tax. Also contributing to the increase compared to last year was a decrease in credit-related expenses, which decreased year-over-year as provisions to the allowance for losses were $0.3 million after-tax in second quarter 2016 compared to provisions of $0.8 million after-tax in second quarter 2015. Operating expenses increased by $0.2 million after-tax driven by higher general and administrative expenses related to continued technology and business infrastructure investments and expenses associated with business development efforts and other corporate initiatives. The increase in operating expenses was offset by lower compensation costs in second quarter 2016 resulting from lower payouts of variable incentive compensation compared to second quarter 2015.

Fair value changes on derivatives do not affect core earnings. For more information about 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 $34.4 million in second quarter 2016 compared to $31.9 million in second quarter 2015. In percentage terms, net interest income for second quarter 2016 was 0.88 percent compared to 0.90 percent in second quarter 2015. The year-over-year increase in dollars was due to several factors. One factor was the impact of an increase in short-term interest rates on assets and liabilities indexed to LIBOR due to the Federal Reserve's decision to raise the target range for the federal funds rate in fourth quarter 2015. 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 undesignated financial derivatives. Alternatively, the increase in short-term rates on assets and liabilities indexed to LIBOR would not have a similar effect on net effective spread as described below because net effective spread includes interest expense from all funding related to such assets, including interest expense from undesignated financial derivatives. Also contributing to the year-over-year increase in net interest income was growth in outstanding business volume, an increase in cash basis interest income received on non-accruing Farm & Ranch loans, and an increase in securitization activity of Farm & Ranch loans during 2015 and the first half of 2016. The year-over-year decrease in net interest income in percentage terms primarily related to a tighter spread on a large AgVantage security that was refinanced at a shorter maturity than the original security and a higher average balance maintained in lower-earning


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cash and investment securities in the first half of 2016 compared to the first half of 2015 to increase Farmer Mac's liquidity position.

Net effective spread, a non-GAAP measure, was $31.0 million in second quarter 2016, compared to $29.9 million in first quarter 2016 and $29.8 million in second quarter 2015. In percentage terms, net effective spread for second quarter 2016 was 0.84 percent, compared to 0.82 percent in first quarter 2016 and 0.88 percent in second quarter 2015. Farmer Mac uses net effective spread as an alternative measure to net interest income because management believes it is a useful metric that accurately 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 reflected in net interest income under 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."

The sequential increase in quarterly net effective spread in both dollar and percentage terms was primarily due to (1) lower LIBOR-based funding costs for floating rate assets indexed to LIBOR due to adjustments in Farmer Mac's funding strategies for these types of assets and (2) an increase in cash basis interest income received on non-accruing Farm & Ranch loans. A higher average balance of AgVantage securities during second quarter 2016 also contributed to the sequential growth in dollars of net effective spread. The year-over year decrease in quarterly net effective spread in percentage terms was due to a tighter spread on a large AgVantage security that was refinanced at a shorter maturity than the original security and a higher average balance maintained in lower-earning cash and investment securities in the first half of 2016 compared to the first half of 2015 to increase Farmer Mac's liquidity position. The year-over-year increase in dollars was primarily attributable to growth in outstanding business volume and an increase in cash basis interest income received on non-accruing Farm & Ranch loans.

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

Business Volume

Farmer Mac added $1.3 billion of new business volume during second quarter 2016. The new business volume included Rural Utilities loans added under LTSPCs of $421.4 million, purchases of $396.2 million of AgVantage securities, purchases of $241.1 million of newly originated Farm & Ranch loans, purchases of $110.6 million of USDA Securities, Farm & Ranch loans added under LTSPCs of $58.2 million, issuance of $23.1 million of Farmer Mac Guaranteed USDA Securities, and purchases of Rural Utilities loans of $10.0 million. Taking into account maturities and paydowns on existing assets, Farmer Mac's outstanding business volume was $17.1 billion as of June 30, 2016, an increase of $0.9 billion from March 31, 2016, $1.2 billion from December 31, 2015, and an increase of $2.0 billion compared to June 30, 2015.

Capital

As of June 30, 2016, Farmer Mac's core capital level was $572.6 million, $75.5 million above the minimum capital level required by Farmer Mac's statutory charter.  As of December 31, 2015, Farmer Mac's core capital level was $564.5 million, which was $102.4 million above the minimum capital requirement. The decrease in capital in excess of the minimum capital level was due primarily to an increase in minimum capital required to support the growth of on-balance sheet assets during the first half of 2016.


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Farmer Mac's board of directors approved a share repurchase program during third quarter 2015 authorizing Farmer Mac to repurchase up to $25 million of its outstanding Class C non-voting common stock through September 2017. Farmer Mac did not repurchase any shares during second quarter 2016 under this program. As of June 30, 2016, 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.

Credit Quality

Farmer Mac continued to maintain stable credit quality, as substandard assets and the total allowance for losses in terms of both dollars and percentage of the Farm & Ranch portfolio increased modestly from their respective levels as of March 31, 2016. The provision to the allowance for losses of $0.5 million during second quarter 2016 primarily related to the establishment of a specific reserve for a long-standing impaired loan due to collateral shortfalls relative to the unpaid principal balance and an increase in the specific allowance for on-balance sheet impaired loans resulting from a modest increase in the outstanding balance of such loans.

As of June 30, 2016, Farmer Mac's 90-day delinquencies were $22.1 million (0.38 of the Farm & Ranch portfolio), compared to $32.1 million (0.56 percent of the Farm & Ranch portfolio) as of December 31, 2015, and $31.9 million (0.58 percent of the Farm & Ranch portfolio) as of June 30, 2015. The decrease in 90-day delinquencies from year-end primarily related to (1) the workout in January 2016 of two Agricultural Storage and Processing loans that financed one canola facility and (2) the receipt by Farmer Mac of funds in the amount of $5.0 million to pay off a long-standing delinquent timber loan. In July 2016, Farmer Mac also received funds in the amount of $1.0 million to pay off another delinquent timber loan with the same borrower. For more information about Farmer Mac's credit metrics, including 90-day delinquencies, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."

Use of Non-GAAP Measures

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

The non-GAAP financial measures that Farmer Mac uses may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies. Farmer Mac's disclosure of these non-GAAP measures is intended to be supplemental in nature, and is not meant to be considered in isolation from, as a substitute for, or as more important than, the related financial information prepared in accordance with GAAP.



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Core Earnings and Core Earnings per Share

Core earnings and core earnings per share principally differ from net income attributable to common stockholders and earnings per common share, respectively, by excluding the effects of fair value fluctuations, which are not expected to have a cumulative net impact on financial condition or results of operations reported in accordance with GAAP if the related financial instruments are held to maturity, as is generally expected. Core earnings and core earnings per share also differ from net income attributable to common stockholders and earnings per common share, respectively, by excluding specified infrequent or unusual transactions that Farmer Mac believes are not indicative of future operating results and that may not reflect the trends and economic financial performance of Farmer Mac's core business. For example, the loss from retirement of the Farmer Mac II LLC Preferred Stock in first quarter 2015 has been excluded from core earnings and core earnings per share because it is not a frequently occurring transaction and not indicative of future operating results. This is also consistent with Farmer Mac's previous treatment of these types of origination costs associated with securities underwriting that are capitalized and deferred during the life of the security. 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; and (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." Farmer Mac excludes from net effective spread the 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 because they either do not reflect actual cash premiums paid for the assets at acquisition or are not expected to have an economic effect on Farmer Mac's financial performance if the assets are held to maturity, as is generally expected. Farmer Mac excludes from net effective spread the interest income and interest expense associated with the consolidated trusts, which have been reclassified from net interest income to guarantee and commitment fees, and the average balance of the loans underlying these trusts to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee on the resulting Farmer Mac Guaranteed Securities.

Net effective spread also principally differs from net interest income and net interest yield because it includes the accrual of income and expense related to the contractual amounts due on financial derivatives that are not designated in hedge accounting relationships ("undesignated financial derivatives").
Farmer Mac uses interest rate swaps to manage its interest rate risk exposure by synthetically modifying the interest rate reset or maturity characteristics of certain assets and liabilities.  The accrual of the contractual amounts due on interest rate swaps designated in hedge accounting relationships is included as an adjustment to the yield or cost of the hedged item and is included in net interest income. For undesignated financial derivatives, Farmer Mac records the income or expense related to the accrual of the contractual amounts due in "(Losses)/gains on financial derivatives and hedging activities" on the consolidated statements of operations.  However, the accrual of the contractual amounts due for undesignated financial derivatives are included in Farmer Mac's calculation of net effective spread, which


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is intended to reflect management's view of the net spread between an asset and all of its related funding, including any associated derivatives, whether or not they are in a hedge accounting relationship. For a reconciliation of net interest income and net interest yield to net effective spread, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Net Interest Income."

Results of Operations

Farmer Mac's net income attributable to common stockholders for the three months ended June 30, 2016 was $12.0 million, or $1.13 per diluted common share, compared to $22.2 million, or $1.94 per diluted common share, for the same period in 2015. For the six months ended June 30, 2016, Farmer Mac's net income attributable to common stockholders was $22.3 million, or $2.07 per diluted common share, compared to $24.0 million, or $2.11 per diluted common share, for the same period in 2015. Farmer Mac's non-GAAP core earnings for the three months ended June 30, 2016 were $13.0 million, or $1.23 per diluted common share, compared to $11.6 million, or $1.02 per diluted common share, for the same period in 2015. Farmer Mac's non-GAAP core earnings for the six months ended June 30, 2016 were $25.4 million, or $2.35 per diluted common share, compared to $20.7 million, or $1.82 per diluted common share, for the same period in 2015.




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A reconciliation 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 a breakdown of the composition of core earnings:

Table 1
Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings
 
For the Three Months Ended
 
June 30, 2016
 
June 30, 2015
 
(in thousands, except per share amounts)
Net income attributable to common stockholders
$
12,006

 
$
22,162

Less reconciling items:
 

 
 

Unrealized (losses)/gains on financial derivatives and hedging activities
(2,076
)
 
15,982

Unrealized gains on trading securities
394

 
170

Amortization of premiums/discounts and deferred gains on assets consolidated at fair value
(371
)
 
(125
)
Net effects of settlements on agency forward contracts
466

 
197

Income tax effect related to reconciling items
556

 
(5,679
)
Sub-total
(1,031
)
 
10,545

Core earnings
$
13,037

 
$
11,617

 
 
 
 
Composition of Core Earnings:
 
 
 
Revenues:
 
 
 
Net effective spread(1)
$
31,026

 
$
29,787

Guarantee and commitment fees(2)
4,810

 
4,085

Other(3)
(125
)
 
(24
)
Total revenues
35,711

 
33,848

 
 
 
 
Credit related expense (GAAP):
 
 
 
Provision for losses
458

 
1,256

REO operating expenses

 

Losses on sale of REO

 

Total credit related expense
458

 
1,256

 
 
 
 
Operating expenses (GAAP):
 
 
 
Compensation and employee benefits
5,611

 
5,733

General and administrative
3,757

 
3,374

Regulatory fees
612

 
600

Total operating expenses
9,980

 
9,707

 
 
 
 
Net earnings
25,273

 
22,885

Income tax expense(4)
8,956

 
8,091

Net loss attributable to non-controlling interest (GAAP)
(16
)
 
(119
)
Preferred stock dividends (GAAP)
3,296

 
3,296

Core earnings
$
13,037

 
$
11,617

 
 
 
 
Core earnings per share:
 
 
 
  Basic
$
1.25

 
$
1.06

  Diluted
1.23

 
1.02

Weighted-average shares:
 
 
 
  Basic
10,456

 
11,010

  Diluted
10,614

 
11,438

(1) 
Net effective spread is a non-GAAP measure. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread" for an explanation of net effective spread. See Table 6 for a reconciliation of net interest income to net effective spread.


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(2) 
Includes interest income and interest expense related to consolidated trusts owned by third parties reclassified from net interest income to guarantee and commitment fees to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee on the consolidated Farmer Mac Guaranteed Securities.
(3) 
Reflects reconciling adjustments for the reclassification to exclude expenses related to interest rate swaps not designated as hedges and fair value adjustments on financial derivatives and trading assets and a reconciling adjustment to exclude the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Securities.
(4) 
Includes the tax impact of non-GAAP reconciling items between net income attributable to common stockholders and core earnings.



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Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings
 
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
(in thousands, except per share amounts)
Net income attributable to common stockholders
$
22,323

 
$
23,980

Less reconciling items:
 

 
 

Unrealized (losses)/gains on financial derivatives and hedging activities
(5,065
)
 
15,087

Unrealized gains on trading securities
752

 
532

Amortization of premiums/discounts and deferred gains on assets consolidated at fair value
(652
)
 
(939
)
Net effects of settlements on agency forward contracts
211

 
(55
)
Loss on retirement of Farmer Mac II LLC Preferred Stock(1)

 
(8,147
)
Income tax effect related to reconciling items
1,665

 
(3,218
)
Sub-total
(3,089
)
 
3,260

Core earnings
$
25,412

 
$
20,720

 
 
 
 
Composition of Core Earnings:
 
 
 
Revenues:
 
 
 
Net effective spread(2)
$
60,975

 
$
59,044

Guarantee and commitment fees(3)
9,479

 
8,097

Other(4)
(642
)
 
(429
)
Total revenues
69,812

 
66,712

 
 
 
 
Credit related expense (GAAP):
 
 
 
Provision for losses
521

 
560

REO operating expenses
39

 
(1
)
Losses on sale of REO

 
1

Total credit related expense
560

 
560

 
 
 
 
Operating expenses (GAAP):
 
 
 
Compensation and employee benefits
11,385

 
11,426

General and administrative
7,283

 
6,197

Regulatory fees
1,225

 
1,200

Total operating expenses
19,893

 
18,823

 
 
 
 
Net earnings
49,359

 
47,329

Income tax expense(5)
17,400

 
14,783

Net (loss)/income attributable to non-controlling interest (GAAP)
(44
)
 
5,235

Preferred stock dividends (GAAP)
6,591

 
6,591

Core earnings
$
25,412

 
$
20,720

 
 
 
 
Core earnings per share:
 
 
 
  Basic
$
2.43

 
$
1.89

  Diluted
2.35

 
1.82

Weighted-average shares:
 
 
 
  Basic
10,460

 
10,974

  Diluted
10,808

 
11,385

(1) 
Relates to the write-off of deferred issuance costs as a result of the retirement of Farmer II LLC Preferred Stock.
(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.



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(3) 
Includes interest income and interest expense related to consolidated trusts owned by third parties reclassified from net interest income to guarantee and commitment fees to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee on the consolidated Farmer Mac Guaranteed Securities.
(4) 
Reflects reconciling adjustments for the reclassification to exclude expenses related to interest rate swaps not designated as hedges and fair value adjustments on financial derivatives and trading assets and a reconciling adjustment to exclude the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Securities.
(5) 
Includes the tax impact of non-GAAP reconciling items between net income attributable to common stockholders and core earnings.

Table 2
Reconciliation of GAAP Basic Earnings Per Share to Core Earnings Basic Earnings Per Share
  
For the Three Months Ended
 
For the Six Months Ended
  
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
(in thousands, except per share amounts)
GAAP - Basic EPS
$
1.15

 
$
2.01

 
$
2.13

 
$
2.19

Less Reconciling Items:
 
 
 
 
 
 
 
Unrealized (losses)/gains on financial derivatives and hedging activities
(0.19
)
 
1.44

 
(0.49
)
 
1.38

Unrealized gains on trading securities
0.04

 
0.02

 
0.07

 
0.05

Amortization of premiums/discounts and deferred gains on assets consolidated at fair value
(0.04
)
 
(0.01
)
 
(0.06
)
 
(0.09
)
Net effects of settlements on agency forward contracts
0.04

 
0.02

 
0.02

 
(0.01
)
Loss on retirement of Farmer Mac II LLC Preferred Stock

 

 

 
(0.74
)
Income tax effect related to reconciling items
0.05

 
(0.52
)
 
0.16

 
(0.29
)
Sub-total
(0.10
)
 
0.95

 
(0.30
)
 
0.30

Core Earnings - Basic EPS
$
1.25

 
$
1.06

 
$
2.43

 
$
1.89

 
 
 
 
 
 
 
 
Shares used in per share calculation (GAAP and Core Earnings)
10,456

 
11,010

 
10,460

 
10,974


Reconciliation of GAAP Diluted Earnings Per Share to Core Earnings Diluted Earnings Per Share
  
For the Three Months Ended
 
For the Six Months Ended
  
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
(in thousands, except per share amounts)
GAAP - Diluted EPS
$
1.13

 
$
1.94

 
$
2.07

 
$
2.11

Less Reconciling Items:
 
 
 
 
 
 
 
Unrealized (losses)/gains on financial derivatives and hedging activities
(0.20
)
 
1.40

 
(0.46
)
 
1.32

Unrealized gains on trading securities
0.04

 
0.01

 
0.07

 
0.05

Amortization of premiums/discounts and deferred gains on assets consolidated at fair value
(0.03
)
 
(0.01
)
 
(0.06
)
 
(0.08
)
Net effects of settlements on agency forward contracts
0.04

 
0.02

 
0.02

 

Loss on retirement of Farmer Mac II LLC Preferred Stock

 

 

 
(0.72
)
Income tax effect related to reconciling items
0.05

 
(0.50
)
 
0.15

 
(0.28
)
Sub-total
(0.10
)
 
0.92

 
(0.28
)
 
0.29

Core Earnings - Diluted EPS
$
1.23

 
$
1.02

 
$
2.35

 
$
1.82

 
 
 
 
 
 
 
 
Shares used in per share calculation (GAAP and Core Earnings)
10,614

 
11,438

 
10,808

 
11,385





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

1. Unrealized (losses)/gains on financial derivatives and hedging activities. The table below calculates the non-GAAP reconciling item for unrealized (losses)/gains on financial derivatives and hedging activities.

Table 3
Non-GAAP Reconciling Item for Unrealized (Losses)/Gains on Financial Derivatives and Hedging Activities
  
For the Three Months Ended
 
For the Six Months Ended
  
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
(in thousands)
Fair value hedges:
 
 
 
 
 
 
 
  Unrealized gains on fair value hedges (see Table 8)
$
2,101

 
$
2,721

 
$
4,990

 
$
5,838

No hedge designation:
 
 
 
 
 
 
 
  Unrealized (losses)/gains due to fair value changes (see Table 8)
(4,177
)
 
13,261

 
(10,055
)
 
9,249

Unrealized (losses)/gains on financial derivatives and hedging activities
$
(2,076
)
 
$
15,982

 
$
(5,065
)
 
$
15,087


2. Unrealized gains on trading securities. The unrealized gains on trading securities are reported on Farmer Mac's consolidated statements of operations, which represent changes during the period in fair values for trading assets remaining on Farmer Mac's balance sheet as of the end of the reporting period.
3. Amortization of premiums/discounts and deferred gains on assets consolidated at fair value. The amount of this non-GAAP reconciling item is the recorded amount of premium, discount, or deferred gain amortization during the reporting period on those assets for which the premium, discount, or deferred gain was based on the application of an accounting principle (e.g., consolidation of variable interest entities) rather than on a cash transaction (e.g., a purchase price premium or discount).
4. The net effect of settlements on agency forward contracts. These agency forward contracts are used as a short-term economic hedge of the issuance of debt. For GAAP purposes, realized gains or losses on settlements of agency forward contracts used as a short-term hedge of the issuance of debt are reported in the consolidated statements of operations in the period in which they occur. For core earnings purposes, these realized gains or losses on settlements of agency forward contracts are deferred and amortized as yield adjustments over the term of the related debt, which generally ranges from 3 to 15 years.
5. The loss on retirement of the Farmer Mac II LLC Preferred Stock. This loss in first quarter 2015 has been excluded from core earnings because it is not a frequently occurring transaction and is not indicative of future operating results. This is also consistent with Farmer Mac's previous treatment of these types of origination costs associated with securities underwriting that are capitalized and deferred during the life of the security.
The following sections provide more detail regarding specific components of Farmer Mac's results of operations.




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Net Interest Income.  The following table provides information regarding interest-earning assets and funding for the six months ended June 30, 2016 and 2015.  The average balance of non-accruing loans is included in the average balance of loans, Farmer Mac Guaranteed Securities, and USDA Securities presented, though the related income is accounted for on a cash basis.  Therefore, as the average balance of non-accruing loans and the income received increases or decreases, the net interest income and yield will fluctuate accordingly.  The average balance of loans in consolidated trusts with beneficial interests owned by third parties is disclosed in the net effect of consolidated trusts and is not included in the average balances of interest-earning assets and interest-bearing liabilities.  The interest income and expense associated with these trusts are shown in the net effect of consolidated trusts. 

Table 4

  
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
Average
Balance
 
Income/
Expense
 
Average
Rate
 
Average
Balance
 
Income/
Expense
 
Average
Rate
 
(dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and investments
$
3,745,379

 
$
13,241

 
0.71
%
 
$
3,249,476

 
$
5,959

 
0.37
%
Loans, Farmer Mac Guaranteed Securities and USDA Securities(1)
10,873,414

 
123,439

 
2.27
%
 
10,363,677

 
115,330

 
2.23
%
Total interest-earning assets
14,618,793

 
136,680

 
1.87
%
 
13,613,153

 
121,289

 
1.78
%
Funding:
 

 
 

 
 
 
 

 
 

 
 

Notes payable due within one year
7,221,753

 
16,528

 
0.46
%
 
5,554,106

 
4,996

 
0.18
%
Notes payable due after one year(2)
6,974,570

 
54,353

 
1.56
%
 
7,492,262

 
54,972

 
1.47
%
Total interest-bearing liabilities(3)
14,196,323

 
70,881

 
1.00
%
 
13,046,368

 
59,968

 
0.92
%
Net non-interest-bearing funding
422,470

 

 
 

 
566,786

 

 
 

Total funding
14,618,793

 
70,881

 
0.97
%
 
13,613,154

 
59,968

 
0.88
%
Net interest income/yield prior to consolidation of certain trusts
14,618,793

 
65,799

 
0.90
%
 
13,613,154

 
61,321

 
0.90
%
Net effect of consolidated trusts(4)
797,936

 
2,199

 
0.55
%
 
478,225

 
1,332

 
0.56
%
Net interest income/yield
$
15,416,729

 
$
67,998

 
0.88
%
 
$
14,091,379

 
$
62,653

 
0.89
%
(1) 
Excludes interest income of $14.4 million and $9.1 million in the first half of 2016 and 2015, respectively, related to consolidated trusts with beneficial interests owned by third parties.
(2) 
Includes current portion of long-term notes.
(3) 
Excludes interest expense of $12.2 million and $7.7 million in the first half of 2016 and 2015, respectively, related to consolidated trusts with beneficial interests owned by third parties.
(4) 
Includes the effect of consolidated trusts with beneficial interests owned by third parties.

Net interest income was $68.0 million for the six months ended June 30, 2016 compared to $62.7 million for the same period in 2015. The overall net interest yield was 88 basis points for the six months ended June 30, 2016 compared to 89 basis points from same period in 2015.
  
The $5.3 million increase in net interest income for the six months ended June 30, 2016 compared to the same period in 2015 was due to several factors. One factor was the impact of an increase in short-term interest rates on assets and liabilities indexed to LIBOR due to the Federal Reserve's decision to raise the target range for the federal funds rate in fourth quarter 2015. This effect on net interest income is because interest expense used to calculate net interest income does not include all the funding expenses related to these assets, specifically the expense on undesignated financial derivatives. Alternatively, the increase in short-term rates on assets and liabilities indexed to LIBOR would not have a similar effect on net effective spread because net effective spread includes interest expense from all funding related to such assets, including interest expense from undesignated financial derivatives. Another factor contributing to the year-over-year increase in net interest income was an increase in the average outstanding balance of Farm & Ranch loans, USDA Securities, and AgVantage securities. Also contributing to the increase was (1) a


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decrease in net yield adjustments related to amortization of premiums and discounts on assets consolidated at fair value driven by slower prepayments on those assets and (2) the impact of an increase in securitization activity of Farm & Ranch loans during 2015 and the first half of 2016. The increase was offset in part by an increase in yield adjustments from amortization of purchase premiums on certain Farm & Ranch loans resulting from accelerated prepayments. The year-over-year decrease in net interest income in percentage terms primarily related to a tighter spread on a large AgVantage security that was refinanced at a shorter maturity than the original security and a higher average balance maintained in lower-earning cash and investment securities in the first half of 2016 compared to the first half of 2015 to increase Farmer Mac's liquidity position.
 
The following table sets forth information regarding changes in the components of Farmer Mac's net interest income prior to consolidation of certain trusts for the periods indicated.  For each category, information is provided on changes attributable to changes in volume (change in volume multiplied by old rate) and changes in rate (change in rate multiplied by old volume).  Combined rate/volume variances, the third element of the calculation, are allocated based on their relative size.  

Table 5

  
For the Six Months Ended June 30, 2016 Compared to Same Period 2015
 
Increase/(Decrease) Due to
 
Rate
 
Volume
 
Total
 
(in thousands)
Income from interest-earning assets:
 
 
 
 
 
Cash and investments
$
6,253

 
$
1,029

 
$
7,282

Loans, Farmer Mac Guaranteed Securities and USDA Securities
2,358

 
5,751

 
8,109

Total
8,611

 
6,780

 
15,391

Expense from other interest-bearing liabilities
5,396

 
5,517

 
10,913

Change in net interest income prior to consolidation of certain trusts(1)
$
3,215

 
$
1,263

 
$
4,478

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

For the six months ended June 30, 2016 compared to the same period in 2015, the increase in income on interest-earning assets and the increase in expense on other interest-bearing liabilities due to changes in rate resulted from the repricing of both interest-earning assets and interest-bearing liabilities due to the Federal Reserve's decision to raise the target range for the federal funds rate in fourth quarter 2015. The increase in income due to changes in rate on loans, Farmer Mac Guaranteed Securities, and USDA Securities was also due to a decrease in net yield adjustments related to amortization of premiums and discounts on assets consolidated at fair value driven by slower prepayments on those assets in the first half of 2016. That increase in income was offset in part by a decline in market rates on AgVantage securities acquired or refinanced during 2015 and the first half of 2016 and an increase in yield adjustments from amortization of purchase premiums on certain Farm & Ranch loans resulting from accelerated prepayments. The increases in income from interest-earning assets and in expense from other interest-bearing liabilities due to changes in volume reflect the increase in the average balance of on-balance sheet assets and the related funding for those assets, respectively.





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The following table presents a reconciliation of net interest income and net yield to net effective spread.  This spread is measured by including income or expense related to contractual amounts due on undesignated financial derivatives (the income or expense related to financial derivatives designated in hedge accounting relationships is already included in net interest income) and excluding the amortization of premiums and discounts on assets consolidated at fair value and the net effects of consolidated trusts with beneficial interests owned by third parties.

Table 6
  
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
(dollars in thousands)
Net interest income/yield
$
34,358

 
0.88
 %
 
$
31,864

 
0.90
 %
 
$
67,998

 
0.88
 %
 
$
62,653

 
0.89
 %
Net effects of consolidated trusts
(1,155
)
 
0.02
 %
 
(697
)
 
0.02
 %
 
(2,199
)
 
0.02
 %
 
(1,332
)
 
0.01
 %
Expense related to undesignated financial derivatives
(2,509
)
 
(0.07
)%
 
(1,577
)
 
(0.05
)%
 
(5,178
)
 
(0.07
)%
 
(3,588
)
 
(0.05
)%
Amortization of premiums/discounts on assets consolidated at fair value
332

 
0.01
 %
 
197

 
0.01
 %
 
354

 
 %
 
1,311

 
0.02
 %
Net effective spread
$
31,026

 
0.84
 %
 
$
29,787

 
0.88
 %
 
$
60,975

 
0.83
 %
 
$
59,044

 
0.87
 %


Net effective spread was $31.0 million and $61.0 million for the three and six months ended June 30, 2016 compared to $29.8 million and $59.0 million for the same periods in 2015, respectively. In percentage terms, net effective spread for the three and six months ended June 30, 2016 was 0.84 percent and 0.83 percent, respectively, compared to 0.88 percent and 0.87 percent for the same periods in 2015, respectively.

For the first six months of 2016 compared to the same period in 2015, the contraction in net effective spread in percentage terms was primarily attributable to market increases in LIBOR-based short-term funding costs which primarily impacted first quarter 2016, a tighter spread on a large AgVantage security that was refinanced in first quarter 2016 at a shorter maturity than the original security, and an increase in yield adjustments from amortization of purchase premiums on certain Farm & Ranch loans resulting from accelerated prepayments. Additionally, net effective spread was negatively impacted by the decrease in net non-interest bearing funding in the first half of 2016 compared to the same period last year due to the redemption of Farmer Mac II LLC Preferred stock on March 30, 2015 as certain interest earning assets which were previously funded with capital are currently being funded with interest bearing liabilities. Farmer Mac also maintained a higher average balance in lower-earning cash and investment securities in the first half of 2016 compared to the first half of 2015 to increase Farmer Mac's liquidity position. The year-over-year increase in dollars was attributable to growth in outstanding business volume.

See Note 9 to the consolidated financial statements for more information regarding net interest income and net effective spread from Farmer Mac's individual business segments. Additionally, see "—Supplemental Information" for quarterly net effective spread by line of business.




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Provision for and Release of Allowance for Loan Losses and Reserve for Losses. The following table summarizes the components of Farmer Mac's total allowance for losses for the three and six months ended June 30, 2016 and 2015:

Table 7

 
As of June 30, 2016
 
As of June 30, 2015
 
Allowance
for Loan
Losses
 
Reserve
for Losses
 
Total
Allowance
for Losses
 
Allowance
for Loan
Losses
 
Reserve
for Losses
 
Total
Allowance
for Losses
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
4,529

 
$
2,097

 
$
6,626

 
$
5,940

 
$
3,491

 
$
9,431

Provision for/(release of) losses
364

 
94

 
458

 
110

 
1,146

 
1,256

Ending Balance
$
4,893

 
$
2,191

 
$
7,084

 
$
5,939

 
$
4,637

 
$
10,576

 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
4,480

 
$
2,083

 
$
6,563

 
$
5,864

 
$
4,263

 
$
10,127

Provision for/(release of) losses
413

 
108

 
521

 
186

 
374

 
560

Charge-offs

 

 

 
(111
)
 

 
(111
)
Ending Balance
$
4,893

 
$
2,191

 
$
7,084

 
$
5,939

 
$
4,637

 
$
10,576


The provisions to the allowance for loan losses recorded during the three and six months ended June 30, 2016 were attributable to the establishment of a specific reserve for a long-standing impaired permanent planting loan due to collateral shortfalls relative to the unpaid principal balance and an increase in the specific allowance for on-balance sheet impaired loans resulting from a modest increase in the outstanding balance of such loans. The provisions to the reserve for losses recorded during the three and six months ended June 30, 2016 were attributable to an increase in the general allowance due to downgrades in risk rating on certain unimpaired crop loans and permanent planting loans underlying LTSPCs. The provisions were partially offset by a decrease in the general allowance of Agricultural Storage and Processing loans and Agricultural Storage and Processing loans underlying LTSPCs due to paydowns of these loans.

The provisions to the allowance for loan losses for the three and six months ended June 30, 2015 were primarily attributable to a specific allowance for two Agricultural Storage and Processing loans underlying an LTSPC that financed one canola facility. The establishment of the specific allowance for these loans was due to a downgrade in risk rating resulting from collateral shortfalls relative to the unpaid principal balance for such loans. The provisions were partially offset by a decrease in the general allowance of Agricultural Storage and Processing loans and Agricultural Storage and Processing loans underlying LTSPCs due to paydowns of these loans.

As of June 30, 2016 and December 31, 2015, Farmer Mac's allowance for loan losses was $4.9 million and $4.5 million, respectively, and its reserve for losses was $2.2 million and $2.1 million, respectively. See Note 5 to the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."

Guarantee and Commitment Fees.  Guarantee and commitment fees, which compensate Farmer Mac for assuming the credit risk on loans underlying off-balance sheet Farmer Mac Guaranteed Securities and LTSPCs, were $3.7 million and $7.3 million, respectively, for the three and six months ended June 30,


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2016, compared to $3.4 million and $6.8 million for the same periods in 2015, respectively. The increase in guarantee and commitment fees was attributable to the addition of $0.5 billion in third quarter 2015 and $0.4 billion in second quarter 2016 of Rural Utilities loans under LTSPCs, offset in part by a lower average outstanding balance of off-balance sheet Farm & Ranch Guaranteed Securities.

(Losses)/Gains on Financial Derivatives and Hedging Activities.  The effect of unrealized and realized gains and losses on Farmer Mac's financial derivatives and hedging activities was net losses of $4.7 million and $11.5 million for the three and six months ended June 30, 2016, compared to net gains of $14.4 million and $10.5 million for the same periods in 2015, respectively.

The components of gains and losses on financial derivatives and hedging activities for three and six months ended June 30, 2016 and 2015 are summarized in the following table:

Table 8
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
(in thousands)
Fair value hedges:
 
 
 
 
 
 
 
Unrealized (losses)/gains due to fair value changes:
 
 
 
 
 
 
 
Financial derivatives(1)
$
(14,440
)
 
$
14,075

 
$
(41,339
)
 
$
8,316

Hedged items
16,541

 
(11,354
)
 
46,329

 
(2,478
)
Unrealized gains on fair value hedging activities
2,101

 
2,721

 
4,990

 
5,838

Cash flow hedges:
 
 
 
 
 
 
 
Loss recognized (ineffective portion)
(105
)
 
(150
)
 
(254
)
 
(366
)
Losses on cash flow hedges
(105
)
 
(150
)
 
(254
)
 
(366
)
No hedge designation:
 
 
 
 
 
 
 
Unrealized (losses)/gains due to fair value changes
(4,177
)
 
13,261

 
(10,055
)
 
9,249

Realized:
 
 
 
 
 
 
 
Expense related to financial derivatives
(2,404
)
 
(1,427
)
 
(4,924
)
 
(3,222
)
Losses due to terminations or net settlements
(111
)
 
(16
)
 
(1,235
)
 
(992
)
(Losses)/gains on financial derivatives not designated in hedging relationships
(6,692
)
 
11,818

 
(16,214
)
 
5,035

(Losses)/gains on financial derivatives and hedging activities
$
(4,696
)
 
$
14,389

 
$
(11,478
)
 
$
10,507

(1) 
Included in the assessment of hedge effectiveness as of June 30, 2016, but excluded from the amounts in the table, were losses of $1.8 million and $3.3 million for the three and six months ended June 30, 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 three and six months ended June 30, 2016 were gains of $0.3 million and $1.7 million, respectively. The comparable amounts as of June 30, 2015 were losses of $2.9 million and $5.8 million for the three and six months ended June 30, 2015, attributable to the fair value of the swaps at the inception of the hedging relationship and, accordingly, losses of $0.2 million and gains of $0.1 million for the three and six months ended June 30, 2015, attributable to hedge ineffectiveness.

Changes in the fair values of Farmer Mac's open derivative positions for both designated and undesignated hedges are captured in the table above in unrealized losses due to fair value changes and are primarily the result of fluctuations in long-term interest rates. For financial derivatives designated in fair value hedge accounting relationships, changes in the fair values of the hedged items attributable to the hedged risk are also included in the table above in unrealized (losses)/gains due to fair value changes. The accrual of periodic cash settlements for interest paid or received from Farmer Mac's interest rate swaps that are not designated in 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 are included in losses due to terminations or net settlements.    


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Gains on Trading Securities.  During the three and six months ended June 30, 2016, Farmer Mac recorded unrealized gains on trading securities of $0.4 million and $0.8 million, respectively, compared to unrealized gains of $0.2 million and $0.5 million during the same periods in 2015, respectively. Of the total gains recognized during the three and six months ended June 30, 2016, $0.4 million and $0.6 million of gains related to financial assets selected to be carried at fair value with changes in fair value included in earnings (the fair value option), compared to recorded gains of $11,000 and $0.2 million during the same period in 2015.

Other Income. Other income totaled $0.4 million and $0.5 million, respectively, for the three and six months ended June 30, 2016, compared to $0.3 million and $0.9 million for the same periods in 2015. Other income during the three and six months ended June 30, 2016 included the recognition of $0.3 million and $0.6 million, respectively, of appraisal fees received by Farmer Mac's consolidated appraisal company subsidiary, AgVisory, which was formed in fourth quarter 2014 compared to $0.1 million for the same periods in 2015. Other income during the three and six months ended June 30, 2016 also included the recognition of $0.1 million of and $0.3 million of losses, respectively, previously deferred in accumulated other comprehensive income related to fair value changes of certain available-for-sale securities contributed to Farmer Mac II LLC in 2010 and other miscellaneous items, compared to the recognition of $0.1 million and $0.4 million, respectively, of previously deferred gains for the same periods in 2015.

Compensation and Employee Benefits.  Compensation and employee benefits were $5.6 million and $11.4 million, respectively, for the three and six months ended June 30, 2016, compared to $5.7 million and $11.4 million, respectively, for the same periods in 2015. The year-over-year quarterly decrease was due primarily to lower payouts of variable incentive compensation awarded in second quarter 2016 compared to second quarter 2015 offset in part by an increase in employee health insurance costs. Compensation costs for the three and six months ended June 30, 2016 included $0.2 million and $0.4 million, respectively, in compensation costs for Farmer Mac's consolidated appraisal company subsidiary, AgVisory, compared to $0.2 million and $0.3 million, respectively, for the same periods last year.

General and Administrative Expenses.  General and administrative expenses, including legal, audit, and consulting fees, were $3.8 million and $7.3 million, respectively, for the three and six months ended June 30, 2016, compared to $3.4 million and $6.2 million for the same periods in 2015. The increase in the first half of 2016 compared to the first half of 2015 was due primarily to higher consulting fees and information services expenses related to corporate strategic initiatives, continued technology and business infrastructure investments, and expenses related to business development efforts. Additionally, general and administrative costs for the three and six months ended June 30, 2016 included $0.2 million and $0.3 million, respectively, in operating expenses for Farmer Mac's consolidated appraisal company subsidiary compared to $0.1 million and $0.2 million, respectively for the same periods last year.

Regulatory Fees.  Regulatory fees, which consist of the fees paid to FCA, were $0.6 million and $1.2 million, respectively, for both the three and six months ended June 30, 2016 and 2015. FCA has advised Farmer Mac that its estimated fees for the federal fiscal year ending September 30, 2016 will remain at the same level ($0.6 million per federal fiscal quarter) as the prior federal fiscal year.  After the end of a federal government fiscal year, FCA may revise its prior year estimated assessments to reflect actual costs incurred, and has issued both additional assessments and refunds in the past.



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Income Tax Expense.  Income tax expense totaled $8.4 million and $15.7 million, respectively, for the three and six months ended June 30, 2016, compared to income tax expense of $13.8 million and $18.0 million for the same periods in 2015. The decrease in income tax expense in the first half of 2016 compared to the same period last year was due to lower pre-tax income offset in part by two items that occurred during first quarter 2015 but did not recur during the first half of 2016: (1) the consolidated tax benefits recognized from the dividends declared on Farmer Mac II LLC Preferred Stock, which is included in the presentation of "Net income attributable to non-controlling interest" on the consolidated statements of operations on a pre-tax basis, and (2) the loss on retirement of the Farmer Mac II LLC Preferred Stock. These items were also the primary reasons why Farmer Mac's effective tax rate was lower than the statutory rate in the six months ended June 30, 2015.

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


Business Volume.  During second quarter 2016, Farmer Mac added $1.3 billion of new business volume compared to $0.7 billion in second quarter 2015. Specifically, Farmer Mac:
 
added $421.4 million of Rural Utilities loans under LTSPCs;
purchased $396.2 million of AgVantage securities;
purchased $241.1 million of newly originated Farm & Ranch loans;
purchased $110.6 million of USDA Securities;
added $58.2 million of Farm & Ranch loans under LTSPCs;
issued $23.1 million of Farmer Mac Guaranteed USDA Securities; and
purchased $10.0 million of Rural Utilities loans.

Farmer Mac's outstanding business volume was $17.1 billion as of June 30, 2016, an increase of $901.0 million from March 31, 2016. The increase in Farmer Mac's outstanding business volume was driven by the addition of $421.4 million of Rural Utilities loans added under LTSPCs, portfolio growth in AgVantage securities, and net portfolio growth in Farm & Ranch loans and USDA Securities. The new business volume in AgVantage securities for second quarter 2016 included purchases of $150.0 million from Metropolitan Life Insurance Company ("MetLife") and $200.0 million from Rabo Agrifinance, Inc. ("Rabo"). The AgVantage securities purchased from Rabo in second quarter 2016 included a $50.0 million AgVantage security that Rabo used to refinance an AgVantage security that matured in second quarter 2016 and a $50.0 million AgVantage security that Rabo used to refinance an AgVantage security that matured in early July 2016. The new business volume in AgVantage securities for second quarter 2016 also included $27.4 million purchased under Farm Equity AgVantage facilities with agricultural real estate investment funds, compared to $76.9 million of that product purchased in second quarter 2015.



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

Table 9
New Business Volume – Farmer Mac Loan Purchases, Guarantees, LTSPCs, and AgVantage Securities
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
(in thousands)
Farm & Ranch:
 
 
 
 
 
 
 
Loans
$
241,093

 
$
196,927

 
$
439,641

 
$
327,151

LTSPCs
58,156

 
102,944

 
126,173

 
162,255

USDA Guarantees:
 
 
 
 
 
 
 
USDA Securities
110,631

 
111,421

 
205,951

 
200,607

Farmer Mac Guaranteed USDA Securities
23,114

 
12,512

 
26,762

 
12,512

Rural Utilities:
 
 
 
 
 
 
 
Loans
10,000

 

 
19,691

 
8,703

LTSPCs
421,404

 

 
421,404

 

Institutional Credit:
 
 
 
 
 
 
 
AgVantage Securities
396,245

 
307,250

 
1,323,464

 
522,165

Total purchases, guarantees, LTSPCs, and AgVantage Securities
$
1,260,643

 
$
731,054

 
$
2,563,086

 
$
1,233,393


New business volume for loans within the Farm & Ranch line of business for the first half of 2016 was substantially ahead of first half of 2015 and reflected an increase in loan demand. New business volume for LTSPCs within the Farm & Ranch line of business for the first half of 2016 compared to the first half of 2015 reflected a decline in demand among Farm Credit System institutions for the LTSPC product. The increase in new business volume in the USDA Guarantees line of business for the first half of 2016 compared to the first half of 2015 reflected an increase in lender usage of USDA guaranteed loan programs and the resulting increase in loans available for purchase on the secondary market, as well as the increasing willingness of banks to sell the lower-return guaranteed portions of these loans to fund other new loan originations. Loan purchase volume in the Rural Utilities line of business remained low due to modest demand for credit associated with slow economic growth and greater energy efficiency in recent years, as well as an ongoing preference by CFC, Farmer Mac's only current rural utilities cooperative counterparty, to retain loans on its balance sheet. The large LTSPC transaction completed with CFC in second quarter 2016 marked the second time Farmer Mac has added loans under LTSPCs in the Rural Utilities line of business. Changes in AgVantage securities volume are primarily driven by the generally larger transaction sizes for that product and the fluctuating funding and liquidity needs of Farmer Mac's customer network and scheduled maturity amounts.

Based on market conditions, Farmer Mac either retains the loans it purchases or securitizes them and retains or sells Farmer Mac Guaranteed Securities backed by those loans.  The weighted-average age of the Farm & Ranch non-delinquent eligible loans purchased and retained (excluding the purchases of defaulted loans) during second quarter 2016 and second quarter 2015 was less than one year. Of those loans, 61 percent and 56 percent, respectively, had principal amortization periods longer than the maturity date, resulting in balloon payments at maturity, with a weighted-average remaining term to maturity of 17.9 years and 16.2 years, respectively.



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During second quarter 2016 and 2015, Farmer Mac securitized some of the Farm & Ranch loans it had purchased and sold the resulting Farmer Mac Guaranteed Securities in the amounts of $119.9 million and $63.0 million, respectively. Farmer Mac consolidates these loans and presents them as "Loans held for investment in consolidated trusts, at amortized cost" on the consolidated balance sheets. For the three and six months ended June 30, 2016, $66.0 million and $149.5 million, respectively, of Farmer Mac Guaranteed Securities were sold to Zions First National Bank, which is a related party to Farmer Mac, compared to $39.7 million and $83.6 million of sales for the three and six months ended June 30, 2015, respectively.

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

Table 10
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
(in thousands)
Loans securitized and sold as Farm & Ranch Guaranteed Securities
$
119,868

 
$
62,953

 
$
255,781

 
$
112,440

Farmer Mac Guaranteed USDA Securities
19,014

 

 
22,662

 

AgVantage Securities
396,245

 
307,250

 
1,323,464

 
522,165

Total Farmer Mac Guaranteed Securities issuances
$
535,127

 
$
370,203

 
$
1,601,907

 
$
634,605




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

Table 11
Lines of Business - Outstanding Business Volume
 
As of June 30, 2016
 
As of December 31, 2015
 
(in thousands)
On-balance sheet:
 
 
 
Farm & Ranch:
 
 
 
Loans
$
2,265,932

 
$
2,249,864

Loans held in trusts:
 
 
 
Beneficial interests owned by third party investors
922,666

 
708,111

USDA Guarantees:
 
 
 
USDA Securities
1,896,510

 
1,876,451

Farmer Mac Guaranteed USDA Securities
32,886

 
31,554

Rural Utilities:
 
 
 
Loans
1,001,769

 
1,008,126

Institutional Credit:
 
 
 
AgVantage Securities
6,106,301

 
5,439,383

Total on-balance sheet
$
12,226,064

 
$
11,313,489

Off-balance sheet:
 
 
 
Farm & Ranch:
 
 
 
LTSPCs
2,175,456

 
2,253,273

Guaranteed Securities
466,479

 
514,051

USDA Guarantees:
 
 
 
Farmer Mac Guaranteed USDA Securities
30,962

 
10,272

Rural Utilities:
 
 
 
LTSPCs(1)
932,704

 
522,864

Institutional Credit:
 
 
 
AgVantage Securities
984,871

 
984,871

AgVantage Revolving Line of Credit Facility(2)
300,000

 
300,000

Total off-balance sheet
$
4,890,472

 
$
4,585,331

Total
$
17,116,536

 
$
15,898,820

(1) 
Includes $8.8 million related to a one-year loan purchase commitment on which Farmer Mac receives a nominal unused commitment fee as of both June 30, 2016 and December 31, 2015.
(2) 
As of both June 30, 2016 and December 31, 2015, this facility had not been utilized. 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 presented as AgVantage Securities, and Farmer Mac will earn interest income on those securities.



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The following table summarizes by maturity date the scheduled principal amortization of loans held, loans underlying off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities) and LTSPCs, USDA Securities, and Farmer Mac Guaranteed USDA Securities as of June 30, 2016:

Table 12
Schedule of Principal Amortization as of June 30, 2016
 
Loans Held
 
Loans Underlying Off-Balance Sheet Farmer Mac Guaranteed Securities and LTSPCs
 
 USDA Securities and Farmer Mac Guaranteed USDA Securities
 
Total
 
(in thousands)
2016
$
90,995

 
$
136,607

 
$
43,740

 
$
271,342

2017
177,718

 
306,231

 
94,332

 
578,281

2018
188,408

 
1,037,374

 
92,557

 
1,318,339

2019
180,818

 
193,368

 
94,315

 
468,501

2020
191,280

 
182,834

 
94,356

 
468,470

Thereafter
3,361,148

 
1,718,225

 
1,541,058

 
6,620,431

Total
$
4,190,367

 
$
3,574,639

 
$
1,960,358

 
$
9,725,364


Of the $17.1 billion outstanding principal balance of volume included in Farmer Mac's four lines of business as of June 30, 2016, $7.4 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 June 30, 2016:

Table 13
AgVantage Balances by Year of Maturity
 
As of
 
June 30, 2016
 
(in thousands)
2016
$
869,750

2017
1,577,420

2018(1)
1,451,685

2019
650,349

2020
606,388

Thereafter(2)
2,235,580

Total
$
7,391,172

(1) 
Includes the expiration of the $300.0 million revolving floating rate AgVantage facility. As of June 30, 2016, this facility had not been utilized.
(2) 
Includes various maturities ranging from 2021 to 2044.

The weighted-average remaining maturity of the outstanding AgVantage securities shown in the table above was 4.0 years as of June 30, 2016.  As a general matter, if maturing AgVantage securities are not replaced with new AgVantage securities, either from the same issuer or from new business, or if the spread


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earned by Farmer Mac on new AgVantage securities that replace maturing AgVantage securities is lower than the spread earned on the maturing securities, Farmer Mac's income could be adversely affected.

As part of fulfilling its guarantee obligations for Farm & Ranch Guaranteed Securities and commitments to purchase eligible loans underlying LTSPCs, Farmer Mac purchases defaulted loans, all of which are at least 90-days delinquent or in material non-monetary default at the time of purchase, out of the loan pools underlying those securities and LTSPCs, and records the purchased loans as such on its balance sheet.  The purchase price for a defaulted loan purchased out of a pool of loans backing Farm & Ranch Guaranteed Securities is the then-current outstanding principal balance of the loan plus accrued and unpaid interest.  The purchase price for a defaulted loan purchased under an LTSPC is the then-current outstanding principal balance of the loan, with accrued and unpaid interest on the defaulted loan payable out of any future loan payments or liquidation proceeds as received.  The purchase price of a defaulted loan is not an indicator of the expected loss on that loan; many other factors affect expected loss, if any, on any loan so purchased. The delinquent loans purchased out of securitized pools and LTSPCs during second quarter 2015 had a weighted-average age of 16 years. Farmer Mac did not purchase any delinquent loans during second quarter 2016. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."

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

Table 14
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
(in thousands)
Defaulted loans purchased underlying Farm & Ranch Guaranteed Securities owned by third party investors
$

 
$
1,324

 
$
1,267

 
$
1,981

Defaulted loans purchased underlying LTSPCs

 

 
148

 

Total loan purchases
$

 
$
1,324

 
$
1,415

 
$
1,981


Outlook  

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

As agricultural and rural utilities lenders face increased equity capital requirements under new regulatory frameworks or rating agency requirements, or seek to reduce exposure due to lending limits or concentration limits, Farmer Mac can provide relief for those institutions through loan purchases, guarantees, or LTSPCs.
Lending opportunities in the rural utilities industry exist as rural utilities seek alternatives for financing, including refinancing existing debt.
As a result of targeted marketing and product development efforts, Farmer Mac's lender network and Institutional Credit customer base continues to expand, which may generate additional demand for Farmer Mac's products from new sources.


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

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

Farmer Mac continues to monitor land values and commodity prices in response to cyclical swings. Although farmland values and commodity prices have declined recently in some sectors, primarily in the Midwest, Farmer Mac believes that its portfolio remains sufficiently diversified, both geographically and by commodity, and that its portfolio has generally demonstrated historically high credit quality and low delinquency rates to endure reasonably foreseeable volatility in farmland values and commodity prices. Farmer Mac also continues to closely monitor sector profitability, economic conditions, and agricultural land value and geographic trends to tailor underwriting practices to changing conditions. For more information about the loan balances and loan-to-value ratios for Farm & Ranch loans in Farmer Mac's portfolio as of June 30, 2016, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."

The western part of the United States, and in particular California, continues to experience drought conditions to varying degrees. Although Farmer Mac has not observed any material effect on its portfolio from the drought through June 30, 2016, the persistence of drought conditions in certain areas of the west could have an adverse effect on Farmer Mac’s delinquency rates or loss experience. Through regular discussions with its loan servicers and lenders and their customers, Farmer Mac continues to remain informed about the drought conditions and their effects in those areas.

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

Farmer Mac's marketing efforts directed towards the Farm & Ranch line of business focus on lenders that have demonstrated a commitment to agricultural lending based on their lending history. Farmer Mac directs its outreach efforts to these lenders through direct personal contact, which is facilitated through Farmer Mac's frequent participation in state and national banking conferences, its alliances with the American Bankers Association and the Independent Community Bankers of America, and its business relationships with members of the Farm Credit System. In the Farm & Ranch line of business, Farmer


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Mac has experienced continuing stable demand for its loan products. Demand for Farmer Mac's secondary market tools could also increase as rural lenders adapt to new and changing regulations, which may require lenders to obtain more liquidity and capital to continue their lending practices.

Farmer Mac also directs marketing efforts towards the agricultural industry by trying to identify and develop relationships with potential issuers of AgVantage securities, including insurance company agricultural lenders, who can pledge loans as collateral to obtain financing as part of Farmer Mac's Institutional Credit line of business. As part of these efforts, Farmer Mac has recently increased its focus on wholesale financing for institutional investors in agricultural assets that qualify as eligible collateral under Farmer Mac's charter. In July 2014, Farmer Mac expanded its AgVantage product to this new type of issuer and refers to this product variation as the Farm Equity AgVantage product. Farmer Mac directs its outreach efforts to these potential issuers through its business relationships within the agricultural community and through executive outreach to institutions whose profile presents opportunity to benefit from wholesale financing. As institutional investment in agricultural assets continues to grow, Farmer Mac believes that it is in a unique position to help increase access to capital for these types of counterparties and thereby provide a new source of capital to benefit rural America. Farmer Mac designed the Farm Equity AgVantage product to provide an efficient, low-cost source of financing tailored to meet the needs of institutional investors that can be adapted to many different types of organizational structures and for both public and private institutional investors. Although this product is still in the early stages of development, Farmer Mac believes there is opportunity to expand this type of business as both the trend toward institutional investment in agricultural assets and awareness of the Farm Equity AgVantage product continue to grow. For more information about the Farm Equity AgVantage product, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Institutional" in this report and "Business—Farmer Mac Lines of Business—Institutional Credit" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 10, 2016.

Rural Utilities Industry. Domestic economic indicators continue to show modest growth and, as the economy strengthens, Farmer Mac believes that demand for rural utilities loans may increase. Also, the rural utilities industry may experience increased needs for financing in the future to make improvements in response to environmental and clean energy policies. However, demand for capital within the rural utilities industry currently remains moderate, which has resulted in an ongoing high level of competition between rural utilities cooperative lenders that could suppress loan growth opportunities for those lenders, including lenders that participate in Farmer Mac's Rural Utilities line of business. Although competitive pressures remain within the rural utilities lending industry, Farmer Mac sees opportunities for growth in this area within Farmer Mac's Institutional Credit line of business because the wholesale funding rates that Farmer Mac provides may be highly competitive compared to other available sources of debt funding for rural utilities cooperative lenders.
  

Balance Sheet Review

Assets.  Farmer Mac's total assets as of June 30, 2016 were $16.8 billion, compared to $15.5 billion as of December 31, 2015.  The increase in total assets was primarily attributable to an increase in total Farmer Mac Guaranteed Securities and cash and cash equivalents.

As of June 30, 2016, Farmer Mac had $1.8 billion of cash and cash equivalents and $2.5 billion of investment securities, compared to $1.2 billion of cash and cash equivalents and $2.8 billion of investment


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securities as of December 31, 2015. As of June 30, 2016, Farmer Mac had $6.1 billion of Farmer Mac Guaranteed Securities, $4.2 billion of loans, net of allowance, and $2.0 billion of USDA Securities. This compares to $5.4 billion of Farmer Mac Guaranteed Securities, $4.0 billion of loans, net of allowance, and $1.9 billion of USDA Securities as of December 31, 2015.

Liabilities.  Farmer Mac's total liabilities increased to $16.2 billion as of June 30, 2016 from $15.0 billion as of December 31, 2015.  The increase in liabilities was primarily attributable to an increase in notes payable.

Equity.  As of June 30, 2016, Farmer Mac had total equity of $585.2 million, comprised of stockholders' equity of $584.9 million and non-controlling interest of $0.2 million related to Farmer Mac's appraisal subsidiary, AgVisory.  As of December 31, 2015, Farmer Mac had total equity of $553.7 million, comprised of stockholders' equity of $553.5 million and non-controlling interest of $0.2 million.  The increase in total equity was a result of an increase in retained earnings and accumulated other comprehensive income. The increase in accumulated other comprehensive income was due to increases in fair value on certain fixed-rate USDA Securities offset in part by decreases in fair value on cash flow hedges as long-term market interest rates declined during the first half of 2016.

Off-Balance Sheet Arrangements 

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


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Risk Management


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

Farmer Mac generally assumes 100 percent of the credit risk on loans held, loans underlying LTSPCs in the Farm & Ranch and Rural Utilities lines of business, and Farmer Mac Guaranteed Securities in the Farm & Ranch line of business. Farmer Mac has direct credit exposure to loans in non-AgVantage transactions and indirect credit exposure to loans that secure AgVantage transactions because AgVantage securities represent a general obligation of an issuer that is, in turn, secured by eligible loans.  The credit exposure of Farmer Mac and Farmer Mac II LLC on USDA Securities, including those underlying Farmer Mac Guaranteed USDA Securities, is covered by the full faith and credit of the United States.  Therefore, Farmer Mac believes that Farmer Mac and Farmer Mac II LLC have little or no credit risk exposure in the USDA Guarantees line of business because of the USDA guarantee.  As of June 30, 2016, neither Farmer Mac nor Farmer Mac II LLC had experienced any credit losses on any business under the USDA Guarantees line of business, and neither expects to incur any such losses in the future.

Farmer Mac has established underwriting, collateral valuation, and documentation standards for agricultural real estate mortgage loans and rural utilities loans. Farmer Mac believes that these standards mitigate the risk of loss from borrower defaults and provide guidance about the management, administration, and conduct of underwriting and appraisals to all participating and potential lenders.  These standards were developed based on industry practices for agricultural real estate mortgage loans and rural utilities loans and are designed to assess the creditworthiness of the borrower, as well as the value of the collateral securing the loan.  Farmer Mac evaluates and adjusts these standards on an ongoing basis based on current and anticipated market conditions.  For more information about Farmer Mac's underwriting and collateral valuation standards, see "Business—Farmer Mac Lines of Business—Farm & Ranch—Underwriting and Collateral Valuation (Appraisal) Standards" and "Business—Farmer Mac Lines of Business—Rural Utilities—Underwriting" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 10, 2016.

Farmer Mac requires approved lenders to make representations and warranties regarding the conformity of eligible agricultural mortgage and rural utilities loans to Farmer Mac's standards, the accuracy of loan data provided to Farmer Mac, and other requirements related to the loans.  Sellers are responsible to Farmer Mac for breaches of those representations and warranties, and Farmer Mac has the ability to require a seller to cure, replace, or repurchase a loan sold or transferred to Farmer Mac if any breach of a representation or warranty is discovered that was material to Farmer Mac's decision to purchase the loan or that directly or indirectly causes a default or potential loss on a loan sold or transferred by the seller to Farmer Mac. During second quarter 2016, Farmer Mac did not require any seller to cure or repurchase a loan purchased by Farmer Mac for breach of a representation or warranty. During the previous three years as of June 30, 2016, Farmer Mac had 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


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warranties of lenders, Farmer Mac also underwrites all of the agricultural mortgage loans (other than rural housing and part-time farm mortgage loans) and rural utilities loans that it holds in its portfolio. For rural housing and part-time farm mortgage loans, Farmer Mac relies on representations and warranties from the seller that those loans conform to Farmer Mac's specified underwriting criteria without exception. For more information about Farmer Mac's loan eligibility requirements, see "Business—Farmer Mac Lines of Business—Farm & Ranch—Loan Eligibility" and "Business—Farmer Mac Lines of Business—Rural Utilities—Loan Eligibility" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 10, 2016.
 
Under contracts with Farmer Mac and in consideration for servicing fees, Farmer Mac-approved central servicers service loans in accordance with Farmer Mac's requirements.  Central servicers are responsible to Farmer Mac for serious errors in the servicing of those loans.  If a central servicer materially breaches the terms of its servicing agreement with Farmer Mac, such as failing to forward payments received or releasing collateral without Farmer Mac's consent, or experiences insolvency or bankruptcy, Farmer Mac has the right to terminate the servicing relationship for a particular loan or the entire portfolio serviced by the central servicer. In addition, Farmer Mac can proceed against the central servicer in arbitration or exercise any remedies available to it under law. In the last three years, Farmer Mac has not exercised any remedies or taken any formal action against any central servicers. For more information about Farmer Mac's servicing requirements, see "Business—Farmer Mac Lines of Business—Farm & Ranch—Servicing" and "Business—Farmer Mac Lines of Business—Rural Utilities—Servicing" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 10, 2016.
 
Farmer Mac's AgVantage securities are general obligations of institutions approved by Farmer Mac and are secured by eligible loans in an amount at least equal to the outstanding principal amount of the security. Farmer Mac excludes the loans that secure AgVantage securities from the credit risk metrics it discloses because Farmer Mac has only indirect credit risk on those loans and because of the other characteristics of AgVantage securities that mitigate credit risk. Those characteristics include a general obligation of an issuing institution approved by Farmer Mac, the required collateralization level for the securities, 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 such, all AgVantage securities are secured by current loans representing at least 100 percent of the outstanding amount of these securities.  As of June 30, 2016, 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.

Farmer Mac has developed different underwriting standards for rural utilities loans that depend on whether direct or indirect credit exposure is assumed on a loan and whether the borrower is an electric distribution cooperative or a G&T cooperative. As of June 30, 2016, there were no delinquencies in Farmer Mac's portfolio of rural utilities loans, and Farmer Mac has not experienced any credit losses on rural utilities loans since Congress authorized Farmer Mac's Rural Utilities line of business in 2008. Based on this performance, Farmer Mac excludes the loans in the Rural Utilities line of business from the credit risk metrics it discloses. Farmer Mac's direct credit exposure to rural utilities loans and loans underlying LTSPCs as of June 30, 2016 was $1.9 billion across 38 states, of which $1.5 billion were loans to electric distribution cooperatives and $0.4 billion were loans to G&T cooperatives. Farmer Mac also had indirect credit exposure to the rural utilities loans securing AgVantage securities and included in the Institutional Credit line of business, some of which are loans to G&T cooperatives. For more


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information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Institutional."

Farmer Mac maintains an allowance for loan losses to cover estimated probable losses on loans held and a reserve for losses to cover estimated probable losses on loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities.  The methodology that Farmer Mac uses to determine the level of its allowance for losses is described in Note 2(j) to the consolidated financial statements included in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 10, 2016. 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 for the three and six months ended June 30, 2016 and 2015:

Table 15
 
June 30, 2016
 
June 30, 2015
 
Allowance for Loan Losses
 
Reserve for Losses
 
Total Allowance for Losses
 
Allowance for Loan Losses
 
Reserve for Losses
 
Total Allowance for Losses
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
4,529

 
$
2,097

 
$
6,626

 
$
5,940

 
$
3,491

 
$
9,431

Provision for losses
364

 
94

 
458

 
110

 
1,146

 
1,256

Charge-offs

 

 

 
(111
)
 

 
(111
)
Ending Balance
$
4,893

 
$
2,191

 
$
7,084

 
$
5,939

 
$
4,637

 
$
10,576

 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
4,480

 
$
2,083

 
$
6,563

 
$
5,864

 
$
4,263

 
$
10,127

Provision for losses
413

 
108

 
521

 
186

 
374

 
560

Charge-offs

 

 

 
(111
)
 

 
(111
)
Ending Balance
$
4,893

 
$
2,191

 
$
7,084

 
$
5,939

 
$
4,637

 
$
10,576


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 June 30, 2016, Farmer Mac's allowances for losses totaled $7.1 million, or 12 basis points of the outstanding principal balance of loans held for investment and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities, compared to $6.6 million, or 11 basis points, as of December 31, 2015.

Farmer Mac's 90-day delinquency measure includes loans 90 days or more past due, as well as loans in foreclosure and non-performing loans where the borrower is in bankruptcy. As of June 30, 2016, Farmer Mac's 90-day delinquencies were $22.1 million (0.38 percent of the Farm & Ranch portfolio), compared to $32.1 million (0.56 percent of the Farm & Ranch portfolio) as of December 31, 2015 and $31.9 million (0.58 percent of the Farm & Ranch portfolio) as of June 30, 2015. Those 90-day delinquencies were comprised of 40 delinquent loans as of June 30, 2016, compared with 35 delinquent loans as of December 31, 2015 and 26 delinquent loans as of June 30, 2015. The decrease in Farmer Mac's 90-day delinquencies as a percentage of its Farm & Ranch portfolio from year-end primarily related to (1) the workout in January 2016 of two Agricultural Storage and Processing loans that financed one canola


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facility and (2) the receipt by Farmer Mac of funds in the amount of $5.0 million to pay off a long-standing delinquent timber loan. In July 2016, Farmer Mac also received funds in the amount of $1.0 million to pay off another delinquent timber loan with the same borrower. 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 of each year, which corresponds with the annual (January 1st) and semi-annual (January 1st and July 1st) payment characteristics of most Farm & Ranch loans. Farmer Mac expects that over time its 90-day delinquency rate will eventually revert closer to Farmer Mac's historical averages due to macroeconomic and other potential factors, but Farmer Mac has not yet seen an impact on its portfolio or a rise in delinquencies related to these factors. Farmer Mac's average 90-day delinquency rate for the Farm & Ranch line of business over the last fifteen years is approximately 1 percent.

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

Table 16
 
Farm & Ranch Line of Business
 
90-Day
Delinquencies
 
Percentage
 
(dollars in thousands)
As of:
 
 
 
 
 
June 30, 2016
$
5,830,533

 
$
22,093

 
0.38
%
March 31, 2016
5,713,789

 
34,680

 
0.61
%
December 31, 2015
5,725,299

 
32,136

 
0.56
%
September 30, 2015
5,504,030

 
36,669

 
0.67
%
June 30, 2015
5,485,570

 
31,852

 
0.58
%
March 31, 2015
5,347,248

 
32,101

 
0.60
%
December 31, 2014
5,417,174

 
18,917

 
0.35
%
September 30, 2014
5,314,437

 
24,661

 
0.46
%
June 30, 2014
5,310,664

 
25,911

 
0.49
%

When analyzing the overall risk profile of its lines of business, Farmer Mac takes into account more than the Farm & Ranch loan delinquency percentages provided above. The lines of business also include AgVantage securities and Rural Utilities loans 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. Across all of Farmer Mac's lines of business, 90-day delinquencies represented 0.13 percent of total outstanding business volume as of June 30, 2016, compared to 0.20 percent as of December 31, 2015.

As of June 30, 2016, Farmer Mac individually evaluated $22.6 million of the $74.7 million of recorded investment in impaired loans for collateral shortfalls against updated appraised values, other updated collateral valuations, or discounted values. For the remaining $52.1 million of impaired assets for which updated valuations were not available, Farmer Mac evaluated them in the aggregate in consideration of their similar risk characteristics and historical statistics. Farmer Mac recorded specific allowances of $2.3 million for undercollateralized assets as of June 30, 2016. Farmer Mac's non-specific or general allowances were $4.8 million as of June 30, 2016.

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


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cost to sell. Measurement of that excess or shortfall is the best predictor and determinant of loss, compared to other measures that evaluate the efficiency of a particular farm operator.  Debt service ratios depend upon farm operator efficiency and leverage, which can vary widely within a geographic region, commodity type, or an operator's business and farming skills.  A loan's original loan-to-value ratio is one of many factors Farmer Mac considers in evaluating loss severity and is calculated by dividing the loan principal balance at the time of guarantee, purchase, or commitment by the appraised value at the date of loan origination or, when available, updated appraised value at the time of guarantee, purchase, or commitment.  Other factors include, but are not limited to, other underwriting standards, commodity and farming forecasts, and regional economic and agricultural conditions.

Loan-to-value ratios depend upon the market value of a property, as determined in accordance with Farmer Mac's collateral valuation standards.  As of June 30, 2016 and December 31, 2015, the average unpaid loan balance for loans outstanding in the Farm & Ranch line of business was $597,000 and $602,000, respectively. The original loan-to-value ratio is based on the original appraised value that has not been indexed to provide a current market value or reflect amortization of loans. The weighted average original loan-to-value ratio for Farm & Ranch loans purchased during second quarter 2016 was 45 percent, compared to 44 percent for loans purchased in the same period for 2015. The weighted average original loan-to-value ratio for all Farm & Ranch loans held and all loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs was approximately 46 percent as of both June 30, 2016 and December 31, 2015. The weighted-average original loan-to-value ratio for all 90-day delinquencies was 41 percent and 45 percent, respectively, as of June 30, 2016 and December 31, 2015.

The weighted average current loan-to-value ratio, which is the loan-to-value ratio based on original appraised value but which reflects loan amortization since purchase, for Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs was approximately 44 percent as of both June 30, 2016 and December 31, 2015.







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The following table presents outstanding Farm & Ranch loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities and 90-day delinquencies as of June 30, 2016 by year of origination, geographic region, commodity/collateral type, and original loan-to-value ratio:

Table 17
Farm & Ranch 90-Day Delinquencies as of June 30, 2016
 
Distribution of Farm & Ranch Line of Business
 
Farm & Ranch Line of Business
 
90-Day Delinquencies(1)
 
Percentage
 
(dollars in thousands)
By year of origination:
 
 
 
 
 
 
 
2004 and Prior
10
%
 
574,110

 
6,212

 
1.08
%
2005
3
%
 
170,117

 
931

 
0.55
%
2006
3
%
 
155,761

 

 
%
2007
3
%
 
165,988

 
1,709

 
1.03
%
2008
4
%
 
214,519

 
999

 
0.47
%
2009
2
%
 
140,848

 
587

 
0.42
%
2010
4
%
 
227,423

 

 
%
2011
5
%
 
313,390

 
6,669

 
2.13
%
2012
12
%
 
714,705

 
1,783

 
0.25
%
2013
18
%
 
1,047,481

 
1,494

 
0.14
%
2014
13
%
 
741,705

 
1,709

 
0.23
%
2015
16
%
 
924,564

 

 
%
2016
7
%
 
439,922

 

 
%
Total
100
%
 
$
5,830,533

 
$
22,093

 
0.38
%
By geographic region(2):
 

 
 

 
 

 
 

Northwest
10
%
 
$
613,508

 
$
3,951

 
0.64
%
Southwest
30
%
 
1,722,509

 
4,889

 
0.28
%
Mid-North
35
%
 
2,045,422

 
1,647

 
0.08
%
Mid-South
14
%
 
794,257

 
1,779

 
0.22
%
Northeast
4
%
 
225,405

 
6,583

 
2.92
%
Southeast
7
%
 
429,432

 
3,244

 
0.76
%
Total
100
%
 
$
5,830,533

 
$
22,093

 
0.38
%
By commodity/collateral type:
 
 
 

 
 

 
 

Crops
57
%
 
$
3,320,609

 
$
11,894

 
0.36
%
Permanent plantings
17
%
 
957,898

 
6,678

 
0.70
%
Livestock
21
%
 
1,225,596

 
937

 
0.08
%
Part-time farm
4
%
 
264,508

 
2,584

 
0.98
%
Ag. Storage and Processing
1
%
 
53,803

 

 
%
Other

 
8,119

 

 
%
Total
100
%
 
$
5,830,533

 
$
22,093

 
0.38
%
By original loan-to-value ratio:
 
 
 
 
 
 
 
0.00% to 40.00%
28
%
 
$
1,632,950

 
$
7,004

 
0.43
%
40.01% to 50.00%
23
%
 
1,339,807

 
2,729

 
0.20
%
50.01% to 60.00%
27
%
 
1,603,174

 
9,243

 
0.58
%
60.01% to 70.00%
19
%
 
1,086,716

 
2,297

 
0.21
%
70.01% to 80.00%(3)
3
%
 
150,822

 
820

 
0.54
%
80.01% to 90.00%(3)
%
 
17,064

 

 
%
Total
100
%
 
$
5,830,533

 
$
22,093

 
0.38
%
(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, and in bankruptcy, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.
(2) 
Geographic regions:  Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).
(3) 
Primarily part-time farm loans. Loans with an original loan-to-value ratio of greater than 80% are required to have private mortgage insurance.


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The following table presents Farmer Mac's cumulative net credit losses relative to the cumulative original balance for all Farm & Ranch loans purchased and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities as of June 30, 2016 by year of origination, geographic region, and commodity/collateral type.  The purpose of this information is to present information regarding losses relative to original Farm & Ranch purchases, guarantees, and commitments.

Table 18
Farm & Ranch Credit Losses Relative to Cumulative
Original Loans, Guarantees, and LTSPCs as of June 30, 2016
 
Cumulative Original Loans, Guarantees and LTSPCs
 
 Cumulative Net Credit Losses
 
 Cumulative Loss Rate
 
(dollars in thousands)
By year of origination:
 
 
 
 
 
Before 2005
10,829,663

 
11,915

 
0.11
 %
2005
898,369

 
(184
)
 
(0.02
)%
2006
898,740

 
9,617

 
1.07
 %
2007
716,816

 
4,686

 
0.65
 %
2008
811,050

 
3,247

 
0.40
 %
2009
541,987

 
1,508

 
0.28
 %
2010
648,117

 

 
 %
2011
748,586

 
3,661

 
0.49
 %
2012
1,111,943

 

 
 %
2013
1,373,465

 

 
 %
2014
914,350

 

 
 %
2015
991,552

 

 
 %
2016
474,914

 

 
 %
Total
$
20,959,552

 
$
34,450

 
0.16
 %
By geographic region(1):
 

 
 

 
 

Northwest
$
2,839,436

 
$
11,063

 
0.39
 %
Southwest
7,236,761

 
9,108

 
0.13
 %
Mid-North
5,342,747

 
12,830

 
0.24
 %
Mid-South
2,498,822

 
(211
)
 
(0.01
)%
Northeast
1,289,871

 
169

 
0.01
 %
Southeast
1,751,915

 
1,491

 
0.09
 %
Total
$
20,959,552

 
$
34,450

 
0.16
 %
By commodity/collateral type:
 

 
 

 
 

Crops
$
9,741,431

 
$
4,382

 
0.04
 %
Permanent plantings
4,193,874

 
9,332

 
0.22
 %
Livestock
5,106,874

 
3,859

 
0.08
 %
Part-time farm
1,123,273

 
1,204

 
0.11
 %
Ag. Storage and Processing
645,681

 
15,673

 
2.43
 %
Other
148,419

 

 
 %
Total
$
20,959,552

 
$
34,450

 
0.16
 %
(1) 
Geographic regions:  Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).


Analysis of portfolio performance indicates that commodity type is the primary determinant of Farmer Mac's exposure to loss on a given loan. Within most commodity groups, certain geographic areas allow greater economies of scale or proximity to markets than others and, consequently, may result in more successful operations within the commodity group. Certain geographic areas also offer better growing conditions and market access than others and, consequently, may result in more versatile and more successful operators within a given commodity group.  Farmer Mac's board of directors has established


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policies regarding geographic and commodity concentration to maintain adequate diversification and measure concentration risk.

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




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The following tables present concentrations of Farm & Ranch loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities by commodity type within geographic region and cumulative credit losses by origination year and commodity type:

Table 19
 
As of June 30, 2016
 
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
$
316,059

 
$
80,891

 
$
179,833

 
$
36,725

 
$

 
$

 
$
613,508

 
5.4
%
 
1.4
%
 
3.0
%
 
0.6
%
 
%
 
%
 
10.4
%
Southwest
513,637

 
690,917

 
450,673

 
50,238

 
13,612

 
3,432

 
1,722,509

 
8.9
%
 
11.8
%
 
7.7
%
 
0.9
%
 
0.2
%
 
0.1
%
 
29.6
%
Mid-North
1,762,931

 
21,638

 
182,563

 
54,147

 
20,151

 
3,992

 
2,045,422

 
30.2
%
 
0.4
%
 
3.1
%
 
0.9
%
 
0.3
%
 
0.1
%
 
35.0
%
Mid-South
488,481

 
24,091

 
241,135

 
35,646

 
4,696

 
208

 
794,257

 
8.4
%
 
0.4
%
 
4.1
%
 
0.6
%
 
0.1
%
 
%
 
13.6
%
Northeast
99,110

 
18,387

 
48,643

 
53,298

 
5,866

 
101

 
225,405

 
1.7
%
 
0.3
%
 
0.9
%
 
0.9
%
 
0.1
%
 
%
 
3.9
%
Southeast
140,391

 
121,974

 
122,749

 
34,454

 
9,478

 
386

 
429,432

 
2.4
%
 
2.2
%
 
2.1
%
 
0.6
%
 
0.2
%
 
%
 
7.5
%
Total
$
3,320,609

 
$
957,898

 
$
1,225,596

 
$
264,508

 
$
53,803

 
$
8,119

 
$
5,830,533

 
57.0
%
 
16.5
%
 
20.9
%
 
4.5
%
 
0.9
%
 
0.2
%
 
100.0
%
(1) 
Geographic regions:  Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).





        


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Table 20
 
As of June 30, 2016

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

 
$
(79
)
 
$
(107
)
 
$

 
$

 
$
91

1996
(721
)
 
2,296

 
(73
)
 

 

 
1,502

1997
(397
)
 
2,785

 
(131
)
 

 

 
2,257

1998
(438
)
 
1,803

 
1,781

 

 

 
3,146

1999
(108
)
 
723

 
158

 
296

 

 
1,069

2000
7

 
1,907

 
1,049

 
(41
)
 

 
2,922

2001
45

 
1

 
132

 

 

 
178

2002

 

 

 
89

 

 
89

2003
309

 

 

 
41

 

 
350

2004

 

 
162

 
149

 

 
311

2005
(87
)
 
(263
)
 

 
166

 

 
(184
)
2006
1,688

 

 
40

 
201

 
7,688

 
9,617

2007
1,083

 
11

 
779

 
303

 
2,510

 
4,686

2008
2,626

 

 

 

 
621

 
3,247

2009
98

 
148

 
69

 

 
1,193

 
1,508

2010

 

 

 

 

 

2011

 

 

 

 
3,661

 
3,661

2012

 

 

 

 

 

2013

 

 

 

 

 

2014

 

 

 

 

 

2015

 

 

 

 

 

2016

 

 

 

 

 

Total
$
4,382

 
$
9,332

 
$
3,859

 
$
1,204

 
$
15,673

 
$
34,450


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

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

Farmer Mac approves AgVantage counterparties and manages institutional credit risk related to those AgVantage counterparties by requiring them to meet Farmer Mac's standards for creditworthiness for the particular counterparty and transaction.  The required collateralization level is established at the time the AgVantage facility is entered into with the counterparty and does not change during the life of the AgVantage securities issued under such facility.  In AgVantage transactions, the corporate obligor is


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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, 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 Farm Equity AgVantage security to avoid default. For a more detailed description of AgVantage securities, see "Business—Farmer Mac Lines of Business—Institutional Credit—AgVantage Securities" in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 10, 2016.

The unpaid principal balance of outstanding on-balance sheet AgVantage securities secured by loans eligible for the Farm & Ranch line of business totaled $3.8 billion as of June 30, 2016 and $3.4 billion as of December 31, 2015. The unpaid principal balance of on-balance sheet AgVantage securities secured by loans eligible for the Rural Utilities line of business totaled $2.3 billion as of June 30, 2016 and $2.1 billion as of December 31, 2015. In addition, the unpaid principal balance of outstanding off-balance sheet AgVantage transactions totaled $1.3 billion as of both June 30, 2016 and December 31, 2015.

The following table provides information about the issuers of AgVantage securities, as well as the required collateralization levels for those transactions as of June 30, 2016 and December 31, 2015:

Table 21
 
 
As of June 30, 2016
 
As of December 31, 2015
Counterparty
 
Balance
 
Credit Rating
 
Required Collateralization
 
Balance
 
Credit Rating
 
Required Collateralization
 
 
(dollars in thousands)
AgVantage:
 
 
 
 
 
 
 
 
 
 
 
 
MetLife
 
$
2,700,000

 
AA-
 
103%
 
$
2,550,000

 
AA-
 
103%
CFC(1)
 
2,615,296

 
A
 
100%
 
2,384,257

 
A
 
100%
Rabo Agrifinance, Inc.
 
1,750,000

 
None
 
106%
 
1,500,000

 
None
 
106%
Other(2)
 
84,245

 
(3) 
 
102% to 125%
 
95,716

 
(3) 
 
102% to 125%
Farm Equity AgVantage(4)
 
241,631

 
None
 
110%
 
194,281

 
None
 
110%
Total outstanding
 
$
7,391,172

 
 
 
 
 
$
6,724,254

 
 
 
 
(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. This facility had not been drawn upon as of either June 30, 2016 and December 31, 2015.
(2) 
Consists of AgVantage securities issued by 5 different issuers as of June 30, 2016 and 6 different issuers as of December 31, 2015.
(3) 
Includes $84.2 million related to 5 issuers without a credit rating as of June 30, 2016 and $70.4 million related to 5 issuers without a credit rating and $25.3 million related to an issuer with a credit rating of BBB- as of December 31, 2015.
(4) 
Consists of securities from 3 separate issuers as of June 30, 2016 and 2 separate issuers as of December 31, 2015.

Farmer Mac manages institutional credit risk related to lenders and servicers by requiring those institutions to meet Farmer Mac's standards for creditworthiness.  Farmer Mac monitors the financial condition of those institutions by evaluating financial statements and bank credit rating agency reports.  For more information about Farmer Mac's lender eligibility requirements, see "Business—Farmer Mac Lines of Business—Farm & Ranch—Approved Lenders" and "Business—Farmer Mac Lines of Business—Rural Utilities—Approved Lenders" in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 10, 2016.



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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, new rules jointly issued by various prudential regulators, including the FCA, establish minimum requirements for the exchange of initial and variation margin between Farmer Mac and its swap dealer counterparties in non-cleared swaps transactions. Farmer Mac will be required to comply with some of these requirements by March 31, 2017. In addition, Farmer Mac transacts interest rate swaps with multiple counterparties to ensure a more even distribution of institutional credit risk related to its swap transactions. As a result of mandatory clearing rules for certain interest rate derivative transactions enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), Farmer Mac uses the clearing process for cleared swap transactions as another mechanism for managing its derivative counterparty risk. Credit risk related to interest rate swap contracts is discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Interest Rate Risk" and Note 6 to the consolidated financial statements.

Credit Risk Other Investments. As of June 30, 2016, Farmer Mac had $1.8 billion of cash and cash equivalents and $2.5 billion of investment securities. The management of the credit risk inherent in these investments is governed by Farmer Mac's internal policies as well as FCA regulations, which establish limitations on dollar amount, issuer concentration, and credit quality. Those regulations can be found at 12 C.F.R. §§ 652.1-652.45 (the "Liquidity and Investment Regulations"). In addition to establishing a portfolio of highly liquid investments as an available source of cash, the goals of Farmer Mac's investment policies are designed to minimize Farmer Mac's exposure to financial market volatility, preserve capital, and support Farmer Mac's access to the debt markets.

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

The Liquidity and Investment Regulations and Farmer Mac's policies also establish concentration limits, which are intended to limit exposure to any one counterparty. The Liquidity and Investment Regulations limit Farmer Mac's total credit exposure to any single issuer of securities and uncollateralized financial derivatives to 25 percent of Farmer Mac's regulatory capital (as of June 30, 2016, 25 percent of Farmer Mac's regulatory capital was $144.9 million), though Farmer Mac's current policy, for any investments made after the effective date of this policy, limits this total credit exposure to 5 percent of its regulatory capital (as of June 30, 2016, 5 percent of Farmer Mac's regulatory capital was $29.0 million). These exposure limits do not apply to obligations of the United States or GSEs, though Farmer Mac is restricted by the Liquidity and Investment Regulations and its own policy from investing more than 100 percent of its regulatory capital in any one GSE.

On February 23, 2016, FCA published a proposed rule in the Federal Register to amend the Liquidity and


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Investment Regulations to comply with Section 939A of the Dodd-Frank Act by removing references and requirements relating to credit ratings and replacing them with other standards of creditworthiness, as well as to revise the eligibility criteria and exposure limits for certain types of investments. Farmer Mac submitted comments on this proposed rule to FCA on April 25, 2016. Farmer Mac expects that it will be able to successfully adapt to FCA's proposed amendments of the Liquidity and Investment Regulations.

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

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

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

In certain cases, yield maintenance provisions and other prepayment penalties contained in agricultural mortgage loans and rural utilities loans reduce, but do not eliminate, prepayment risk.  Those provisions require borrowers to make an additional payment when they prepay their loans, thus compensating Farmer Mac for the shortened duration of the prepaid loan.  As of June 30, 2016, less than 1 percent of the total outstanding balance of loans in the Farm & Ranch line of business where Farmer Mac either owned the loan or the beneficial interest in the underlying loan had yield maintenance provisions or other forms of prepayment protection (together covering 2 percent of all loans with fixed interest rates).  Of the Farm & Ranch loans purchased in second quarter 2016, none had yield maintenance or another form of prepayment protection. As of June 30, 2016, none of Farmer Mac's USDA Securities had yield maintenance provisions; however, 4 percent contained other prepayment penalties.  Of the USDA Securities purchased in second quarter 2016, 8 percent contained various forms of prepayment penalties.  As of June 30, 2016, 61 percent of the Rural Utilities loans owned by Farmer Mac had yield


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maintenance provisions. Of the Rural Utilities loans purchased in second quarter 2016, none 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.

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

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

Farmer Mac's $1.8 billion of cash and cash equivalents mature within three months and are funded with discount notes having similar maturities. As of June 30, 2016, $2.4 billion of the $2.5 billion of investment securities (99 percent) were floating rate securities with rates that adjust within one year or fixed rate securities with original maturities between three months and one year. Those securities are funded with effectively floating rate debt that closely matches the rate adjustment dates of the associated investments. As of June 30, 2016, Farmer Mac had outstanding discount notes of $6.6 billion, medium-term notes that mature within one year of $3.5 billion, and medium-term notes that mature after one year of $4.7 billion.

Recognizing that interest rate sensitivity may change with the passage of time and as interest rates change, Farmer Mac assesses this exposure on a regular basis and, if necessary, readjusts its portfolio of assets and liabilities by:
 
purchasing assets in the ordinary course of business;
refinancing existing liabilities; or
using financial derivatives to alter the characteristics of existing assets or liabilities.
 
Farmer Mac regularly stress tests its portfolio for interest rate risk and uses a variety of metrics to quantify and manage its interest rate risk. These metrics include sensitivity to interest rate movements of market value of equity ("MVE") and net interest income ("NII") as well as duration gap analysis. MVE


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represents management's estimate of the present value of all future cash flows from on- and off-balance sheet assets, liabilities, and financial derivatives, discounted at current interest rates and appropriate spreads. However, MVE is not indicative of the market value of Farmer Mac as a going concern because these market values are theoretical and do not reflect future business activities. MVE sensitivity analysis is used to measure the degree to which the market values of Farmer Mac's assets and liabilities change for a given change in interest rates. Because this analysis evaluates the impact of interest rate movements on the value of all future cash flows, this measure provides an evaluation of Farmer Mac's long-term interest rate risk.

Farmer Mac's NII is the difference between the yield on its interest-earning assets and its funding costs. Farmer Mac's NII may be affected by changes in market interest rates resulting from timing differences between maturities and re-pricing characteristics of assets and liabilities. The direction and magnitude of any such effect depends on the direction and magnitude of the change in interest rates as well as the composition of Farmer Mac's portfolio. The NII forecast represents an estimate of the net interest income that Farmer Mac's current portfolio is expected to produce over a twelve-month horizon. As a result, NII sensitivity statistics provide a short-term view of Farmer Mac's interest rate sensitivity.

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

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

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



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The following schedule summarizes the results of Farmer Mac's MVE and NII sensitivity analysis as of June 30, 2016 and December 31, 2015 to an immediate and instantaneous uniform or "parallel" shift in the yield curve:

Table 22
 
 
Percentage Change in MVE from Base Case
Interest Rate Scenario
 
As of June 30, 2016
 
As of December 31, 2015
+100 basis points
 
5.2
 %
 
0.7
 %
-25 basis points
 
(3.0
)%
 
(1.3
)%

 
 
Percentage Change in NII from Base Case
Interest Rate Scenario
 
As of June 30, 2016
 
As of December 31, 2015
+100 basis points
 
2.7
 %
 
4.4
 %
-25 basis points
 
(0.9
)%
 
(0.4
)%


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

As of June 30, 2016, Farmer Mac's effective duration gap was negative 3.6 months, compared to negative 1.6 months as of December 31, 2015.  During the first half of 2016, long term interest rates decreased sharply. This rate movement shortened the duration of Farmer Mac's mortgage assets relative to its liabilities, thereby widening slightly Farmer Mac's duration gap. Farmer Mac's overall interest rate sensitivity remained relatively stable and at relatively low levels during the quarter.

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

As of June 30, 2016, Farmer Mac had $8.5 billion combined notional amount of interest rate swaps, with terms ranging from less than one year to twenty-five years, of which $2.0 billion were pay-fixed interest rate swaps, $6.1 billion were receive-fixed interest rate swaps, and $0.4 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 times deriving an overall lower effective cost of borrowing than would


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otherwise be available to Farmer Mac in the conventional debt market.  Specifically, interest rate swaps synthetically convert the variable cash flows related to the forecasted issuance of short-term debt into effectively fixed rate medium-term notes that match the anticipated duration and interest rate characteristics of the corresponding assets.  Farmer Mac evaluates the overall cost of using the swap market as a funding alternative and uses interest rate swaps to manage specific interest rate risks for specific transactions. Certain financial derivatives are designated as fair value hedges of fixed rate assets classified as available-for-sale to protect against fair value changes in the assets related to a benchmark interest rate (e.g., LIBOR).

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

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



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Farmer Mac is also subject to basis risk on some of its fixed rate assets as a result of its use of pay-fixed interest rate swaps, combined with a series of discount note or medium-term note issuances, as an alternative source of effectively fixed rate funding. This risk arises because the rates at which Farmer Mac refinances its funding for some fixed rate assets through the issuance of discount notes or medium-term notes may vary from the agreed-upon rates based on the floating rate market index received by Farmer Mac on the associated swaps. In these cases, if the rates on Farmer Mac's discount notes or medium-term 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 June 30, 2016, Farmer Mac held $6.3 billion of floating-rate assets in its lines of business and its liquidity investment portfolio that reset on the basis of floating rate market indexes, primarily one-month and three-month LIBOR. As of the same date, Farmer Mac also had $2.0 billion of interest rate swaps outstanding where Farmer Mac pays a fixed rate of interest and receives a floating rate of interest.

During fourth quarter 2015, the levels at which Farmer Mac issued discount notes and medium-term notes deteriorated versus LIBOR. Farmer Mac believes that this deterioration was caused by a significant compression of spreads between U.S. Treasury interest rates and corresponding interest rate swap rates, and was not related to any developments specific to Farmer Mac. In response to this deterioration, Farmer Mac has slightly shortened the maturity profile of its effectively floating rate debt and increased its pricing targets on new floating rate and certain fixed rate asset purchases. Although short-term funding levels improved somewhat during second quarter 2016, Farmer Mac's funding costs relative to LIBOR continue to be less attractive compared to its historical experience.

As discussed in Note 4 to the consolidated financial statements, all financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability. Changes in the fair values of financial derivatives are reported in "(Losses)/gains on financial derivatives and hedging activities" in the consolidated statements of operations. For financial derivatives designated in fair value hedge accounting relationships, changes in the fair values of the hedged items related to the risk being hedged are also reported in "(Losses)/gains on financial derivatives and hedging activities" in the consolidated statements of operations. The accrual of the contractual amounts due on the financial derivative is included as an adjustment to the yield of the hedged item and is reported in net interest income. For financial derivatives designated in cash flow hedge accounting relationships, the effective portion of the derivative gain/loss is recorded in other comprehensive income; amounts are disclosed as a reclassification out of other comprehensive income and affecting net interest income when the hedged transaction occurs and affects earnings. Any ineffective portion of designated hedge transactions is recognized immediately in "(Losses)/gains on financial derivatives and hedging activities".  All of Farmer Mac's financial derivative transactions are conducted under standard collateralized agreements that limit Farmer Mac's potential credit exposure to any counterparty.  As of June 30, 2016, Farmer Mac had no uncollateralized net exposures. As of December 31, 2015, Farmer Mac had uncollateralized net exposures of $47,000 to one counterparty.



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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 2015 and the first six months of 2016. Assuming continued access to the capital markets, Farmer Mac believes it has sufficient liquidity and capital resources to support its operations for the next 12 months and for the foreseeable future. Farmer Mac also has a liquidity contingency plan to manage unanticipated disruptions in its access to the capital markets. That plan involves borrowing through repurchase agreement arrangements and the sale of liquid assets. Farmer Mac is required to maintain a minimum of 90 days of liquidity under the Liquidity and Investment Regulations. In accordance with the methodology for calculating available days of liquidity prescribed by those regulations, Farmer Mac maintained an average of 154 days of liquidity during second quarter 2016 and had 145 days of liquidity as of June 30, 2016.
                              
Debt Issuance.  Farmer Mac funds its purchases of eligible loan assets and investment assets and finances its operations primarily by issuing debt obligations of various maturities through a network of dealers in the public capital markets.  Farmer Mac works to enhance its funding operations by undertaking extensive debt investor relations initiatives, including conducting non-deal roadshows with institutional investors, making periodic dealer sales force presentations, and speaking at fixed income investor conferences throughout the United States. Debt obligations issued by Farmer Mac include discount notes and fixed and floating rate medium-term notes, including callable notes.

Farmer Mac's board of directors has authorized the issuance of up to $18.0 billion of discount notes and medium-term notes (of which $14.8 billion was outstanding as of June 30, 2016), 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 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 June 30, 2016 and December 31, 2015:



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Table 23
 
As of June 30, 2016
 
As of December 31, 2015

 
(in thousands)
Cash and cash equivalents
$
1,764,626

 
$
1,210,084

Investment securities:
 

 
 

Guaranteed by U.S. Government and its agencies
1,398,356

 
1,558,003

Guaranteed by GSEs
1,007,020

 
1,114,148

Corporate debt securities
10,002

 
19,985

Asset-backed securities
45,582

 
83,380

Total
$
4,225,586

 
$
3,985,600


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

The carrying value of Farmer Mac's ARCs investments was $17.7 million as of June 30, 2016, compared to $44.9 million as of December 31, 2015. During the first half of 2016, Farmer Mac sold two available-for-sale auction rate certificates and received gross proceeds of $26.8 million, resulting in a realized loss of $0.1 million, which Farmer Mac had recognized in third quarter 2015 as other-than-temporary impairment losses. As of June 30, 2016, Farmer Mac's carrying value of all of its ARCs investments was 90 percent of par.  The discounted carrying value reflects uncertainty regarding the ability to obtain par in the absence of any active market trading. See Note 8 to the consolidated financial statements for more information on the carrying value of ARCs.

Capital. Farmer Mac is subject to the following capital requirements – minimum, critical, and risk-based. Farmer Mac is required to comply with the higher of the minimum capital requirement and the risk-based capital requirement. The minimum capital requirement is expressed as a percentage of on-balance sheet assets and off-balance sheet obligations. The critical capital requirement is equal to one-half of the minimum capital amount. Farmer Mac's statutory charter does not specify the required level of risk-based capital but directs FCA to establish a risk-based capital stress test for Farmer Mac, using specified stress test parameters. Certain enforcement powers are given to FCA depending on Farmer Mac's compliance with these capital standards. As of June 30, 2016, Farmer Mac was in compliance with its statutory capital requirements and was classified as within "level I" (the highest compliance level). See Note 7 to the consolidated financial statements for more information about Farmer Mac's capital position and see "Business—Government Regulation of Farmer Mac—Capital Standards" in Farmer Mac's Annual Report


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on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 10, 2016 for more information on the capital requirements applicable to Farmer Mac.

In accordance with FCA's rule on capital planning, Farmer Mac's board of directors has adopted a policy for maintaining a sufficient level of "Tier 1" capital (consisting of retained earnings, paid-in-capital, common stock, qualifying preferred stock, and accumulated other comprehensive income allocable to investments not included in one of the four operating lines of business). That policy imposes restrictions on Tier 1-eligible dividends and any discretionary bonus payments in the event that Tier 1 capital falls below specified thresholds. As of June 30, 2016 and December 31, 2015, Farmer Mac's Tier 1 capital ratio was 9.8% and 10.5%, respectively. The decrease in the Tier 1 capital ratio from year-end was due to an increase in risk weighted assets primarily resulting from growth in outstanding business volume. For more information about Farmer Mac's capital adequacy policy and FCA's rule on capital planning, see "Business—Government Regulation of Farmer Mac—Capital Standards" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 10, 2016. As of June 30, 2016, Farmer Mac was in compliance with its capital adequacy policy.

Farmer Mac II LLC redeemed all of the outstanding shares of Farmer Mac II LLC Preferred Stock on March 30, 2015, the initial redemption date, at a cash redemption price equal to the liquidation preference (the same as the par value) of $1,000 per share, using the $150.0 million in proceeds of the preferred stock offerings Farmer Mac completed in 2014 and cash on hand to fund this redemption. The redemption of the Farmer Mac II LLC Preferred Stock triggered the redemption of all of the outstanding FALConS on the same day. For more information on the Farmer Mac II LLC Preferred Stock and Farmer Mac's capital, see "Business—Financing—Equity Issuance—Non-Controlling Interest in Farmer Mac II LLC" and "Business—Government Regulation of Farmer Mac—Capital Standards" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 10, 2016.


Regulatory Matters

The Dodd-Frank Act contains a variety of provisions designed to regulate financial markets. Certain provisions of the Dodd-Frank Act, including those regarding derivatives, corporate governance, and executive compensation, apply to Farmer Mac. On October 22, 2015, the Federal Reserve Board, FCA, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, and the Office of the Comptroller of the Currency adopted a joint final rule to establish minimum requirements for the exchange of initial and variation margin between swap dealers or major swap participants and their counterparties to non-cleared swaps. This final rule, which will become effective later this year, will establish minimum requirements for the exchange of initial and variation margin between Farmer Mac and its swap dealer counterparties in non-cleared swaps transactions. On February 23, 2016, FCA published a proposed rule in the Federal Register to amend the Liquidity and Investment Regulations to comply with Section 939A of the Dodd-Frank Act by removing references and requirements relating to credit ratings and replacing them with other standards of creditworthiness, as well as to revise the eligibility criteria and exposure limits for certain types of investments. Farmer Mac submitted comments on this proposed rule to FCA on April 25, 2016. Farmer Mac does not expect that any of the final rules that have been adopted under the Dodd-Frank Act (including the final rule establishing margin requirements for non-cleared swaps) or that are anticipated to be adopted (including the FCA's proposed rule that would replace references and requirements related to credit ratings with other standards of creditworthiness) will have a material effect on Farmer Mac's business activities and operations or financial condition. Farmer Mac will continue to monitor all applicable developments in the implementation of the Dodd-Frank Act and expects


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to be able to adapt successfully to any new applicable legislative and regulatory requirements.

On July 27, 2016, the FCA published a final rule in the Federal Register to address Farmer Mac's board governance and standards of conduct, including conflicts of interest, risk governance, and Farmer Mac's existing disclosure and reporting requirements. This final rule will become effective no earlier than 30 days after the publication in the Federal Register during which either or both Houses of Congress are in session. Farmer Mac does not expect that this final rule will have a material effect on Farmer Mac's business activities and operations or financial condition.


Other Matters

Common Stock Dividends. For each of the first and second quarters of 2016, Farmer Mac paid a quarterly dividend of $0.26 per share on all classes of its common stock. For each quarter in 2015, Farmer Mac paid a quarterly dividend of $0.16 per share on all classes of its common stock. Farmer Mac's ability to declare and pay dividends on common stock could be restricted if it fails to comply with applicable capital requirements. See "Business—Government Regulation of Farmer Mac—Capital Standards—Enforcement Levels" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 10, 2016.

Preferred Stock Dividends. For each of the first and second quarters of 2016 and for each quarter of 2015,
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.



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Supplemental Information

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

Table 24
New Business Volume
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
 
 
Loans
 
LTSPCs
 
USDA Securities
 
Loans
 
LTSPCs
 
AgVantage
 
Total
 
(in thousands)
For the quarter ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
$
241,093

 
$
58,156

 
$
133,745

 
$
10,000

 
$
421,404

 
$
396,245

 
$
1,260,643

March 31, 2016
198,548

 
68,017

 
98,968

 
9,691

 

 
927,219

 
1,302,443

December 31, 2015
245,252

 
185,919

 
72,442

 
46,082

 

 
14,391

 
564,086

September 30, 2015
175,965

 
79,621

 
91,374

 
53,552

 
522,262

 
506,602

 
1,429,376

June 30, 2015
196,927

 
102,944

 
123,933

 

 

 
307,250

 
731,054

March 31, 2015
130,224

 
59,311

 
89,186

 
8,703

 

 
214,915

 
502,339

December 31, 2014
196,058

 
72,045

 
86,942

 
6,972

 

 
454,490

 
816,507

September 30, 2014
150,243

 
77,368

 
97,275

 
9,936

 

 
295,700

 
630,522

June 30, 2014
159,116

 
34,850

 
90,785

 
4,689

 

 
300,775

 
590,215

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the year ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
748,368

 
427,795

 
376,935

 
108,337

 
522,262

 
1,043,158

 
3,226,855

December 31, 2014
697,824

 
369,857

 
342,986

 
75,500

 

 
1,279,655

 
2,765,822





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Table 25
Repayments of Assets by Line of Business
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
 
 
Loans
 
Guaranteed Securities
 
LTSPCs
 
USDA Securities
 
Loans
 
LTSPCs
 
AgVantage
 
Total
 
(in thousands)
For the quarter ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
10,769

 
$
9,876

 
$
34,610

 
$
34,434

 
$
82

 
$
7,424

 
$
66,699

 
$
163,894

Unscheduled
64,184

 
8,947

 
54,119

 
68,535

 

 

 

 
195,785

June 30, 2016
$
74,953

 
$
18,823

 
$
88,729

 
$
102,969

 
$
82

 
$
7,424

 
$
66,699

 
$
359,679

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
42,555

 
$
17,866

 
$
42,619

 
$
42,969

 
$
25,966

 
$
4,140

 
$
589,847

 
$
765,962

Unscheduled
91,510

 
10,883

 
72,642

 
44,694

 

 

 

 
219,729

March 31, 2016
$
134,065

 
$
28,749

 
$
115,261

 
$
87,663

 
$
25,966

 
$
4,140

 
$
589,847

 
$
985,691

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
6,689

 
$
16,884

 
$
26,265

 
$
18,981

 
$
11,234

 
$
4,165

 
$
15,154

 
$
99,372

Unscheduled
59,280

 
22,534

 
78,250

 
33,809

 

 

 

 
193,873

December 31, 2015
$
65,969

 
$
39,418

 
$
104,515

 
$
52,790

 
$
11,234

 
$
4,165

 
$
15,154

 
$
293,245

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
37,524

 
$
11,178

 
$
45,943

 
$
19,785

 
$
25,662

 
$
4,033

 
$
609,524

 
$
753,649

Unscheduled
70,242

 
11,164

 
61,075

 
35,394

 

 

 

 
177,875

September 30, 2015
$
107,766

 
$
22,342

 
$
107,018

 
$
55,179

 
$
25,662

 
$
4,033

 
$
609,524

 
$
931,524

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
8,687

 
$
11,126

 
$
34,064

 
$
31,064

 
$
19

 
$

 
$
9,245

 
$
94,205

Unscheduled
48,659

 
11,299

 
47,714

 
45,357

 
13,910

 

 

 
166,939

June 30, 2015
$
57,346

 
$
22,425

 
$
81,778

 
$
76,421

 
$
13,929

 
$

 
$
9,245

 
$
261,144

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
39,803

 
$
21,163

 
$
53,747

 
$
33,388

 
$
25,805

 
$

 
$
81,922

 
$
255,828

Unscheduled
59,731

 
16,687

 
68,330

 
38,914

 
390

 

 

 
184,052

March 31, 2015
$
99,534

 
$
37,850

 
$
122,077

 
$
72,302

 
$
26,195

 
$

 
$
81,922

 
$
439,880

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
7,000

 
$
19,821

 
$
28,472

 
$
16,966

 
$

 
$

 
$
9,349

 
$
81,608

Unscheduled
29,284

 
21,907

 
58,882

 
31,890

 

 

 

 
141,963

December 31, 2014
$
36,284

 
$
41,728

 
$
87,354

 
$
48,856

 
$

 
$

 
$
9,349

 
$
223,571

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
37,361

 
$
11,560

 
$
45,631

 
$
18,123

 
$
43,612

 
$

 
$
383,130

 
$
539,417

Unscheduled
59,601

 
15,002

 
54,683

 
29,539

 

 

 

 
158,825

September 30, 2014
$
96,962

 
$
26,562

 
$
100,314

 
$
47,662

 
$
43,612

 
$

 
$
383,130

 
$
698,242

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
9,813

 
$
13,623

 
$
52,622

 
$
28,681

 
$

 
$

 
$
361,831

 
$
466,570

Unscheduled
45,094

 
13,575

 
42,550

 
38,465

 
19,622

 

 

 
159,306

June 30, 2014
$
54,907

 
$
27,198

 
$
95,172

 
$
67,146

 
$
19,622

 
$

 
$
361,831

 
$
625,876

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the year ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
92,703

 
$
60,351

 
$
160,019

 
$
103,218

 
$
62,720

 
$
8,198

 
$
715,845

 
$
1,203,054

Unscheduled
237,912

 
61,684

 
255,369

 
153,474

 
14,300

 

 

 
722,739

December 31, 2015
$
330,615

 
$
122,035

 
$
415,388

 
$
256,692

 
$
77,020

 
$
8,198

 
$
715,845

 
$
1,925,793

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
95,761

 
$
69,434

 
$
174,882

 
$
93,089

 
$
67,356

 
$

 
$
930,578

 
$
1,431,100

Unscheduled
197,308

 
60,231

 
215,971

 
138,980

 
74,786

 

 

 
687,276

December 31, 2014
$
293,069

 
$
129,665

 
$
390,853

 
$
232,069

 
$
142,142

 
$

 
$
930,578

 
$
2,118,376





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Table 26
Lines of Business - Outstanding Business Volume
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
 
 
Loans
 
Guaranteed Securities
 
LTSPCs
 
USDA Securities
 
Loans
 
LTSPCs
 
AgVantage
 
Total
 
(in thousands)
As of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
$
3,188,598

 
$
466,479

 
$
2,175,456

 
$
1,960,358

 
$
1,001,769

 
$
932,704

 
$
7,391,172

 
$
17,116,536

March 31, 2016
3,022,458

 
485,302

 
2,206,029

 
1,929,582

 
991,851

 
518,724

 
7,061,626

 
16,215,572

December 31, 2015
2,957,975

 
514,051

 
2,253,273

 
1,918,277

 
1,008,126

 
522,864

 
6,724,254

 
15,898,820

September 30, 2015
2,778,692

 
553,469

 
2,171,869

 
1,898,625

 
982,078

 
518,229

 
6,725,017

 
15,627,979

June 30, 2015
2,710,493

 
575,811

 
2,199,266

 
1,862,430

 
954,188

 

 
6,827,939

 
15,130,127

March 31, 2015
2,570,912

 
598,236

 
2,178,100

 
1,814,918

 
968,117

 

 
6,529,934

 
14,660,217

December 31, 2014
2,540,222

 
636,086

 
2,240,866

 
1,798,034

 
985,609

 

 
6,396,941

 
14,597,758

September 30, 2014
2,380,448

 
677,814

 
2,256,175

 
1,759,948

 
978,637

 

 
5,951,800

 
14,004,822

June 30, 2014
2,327,167

 
704,376

 
2,279,121

 
1,710,335

 
1,012,313

 

 
6,039,230

 
14,072,542



Table 27
On-Balance Sheet Outstanding Business Volume
 
Fixed Rate
 
5- to 10-Year ARMs & Resets
 
1-Month to 3-Year ARMs
 
Total Held in Portfolio
 
(in thousands)
As of:
 
 
 
 
 
 
 
June 30, 2016
$
5,201,386

 
$
2,157,342

 
$
4,867,336

 
$
12,226,064

March 31, 2016
4,942,566

 
2,296,767

 
4,468,045

 
11,707,378

December 31, 2015
4,923,163

 
2,271,960

 
4,118,366

 
11,313,489

September 30, 2015
4,889,894

 
2,147,916

 
4,049,361

 
11,087,171

June 30, 2015
5,136,559

 
2,118,999

 
4,102,075

 
11,357,633

March 31, 2015
5,006,542

 
2,020,600

 
3,857,363

 
10,884,505

December 31, 2014
5,020,085

 
2,002,943

 
3,697,272

 
10,720,300

September 30, 2014
4,823,897

 
1,919,353

 
3,324,703

 
10,067,953

June 30, 2014
4,955,560

 
1,881,625

 
3,247,011

 
10,084,196





106

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

Table 28
 
Net Effective Spread by Line of Business
 
 
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
Corporate
 
Net Effective Spread
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
(dollars in thousands)
For the quarter ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016(1)
$
9,875

 
1.78
%
 
$
4,588

 
0.96
%
 
$
2,562

 
1.03
%
 
$
11,407

 
0.77
%
 
$
2,594

 
0.29
%
 
$
31,026

 
0.84
%
March 31, 2016
9,461

 
1.71
%
 
4,308

 
0.91
%
 
2,538

 
1.02
%
 
11,090

 
0.80
%
 
2,552

 
0.26
%
 
29,949

 
0.82
%
December 31, 2015
9,381

 
1.72
%
 
4,518

 
0.96
%
 
2,845

 
1.14
%
 
10,899

 
0.80
%
 
2,306

 
0.26
%
 
29,949

 
0.85
%
September 30, 2015
9,628

 
1.80
%
 
4,630

 
0.99
%
 
2,907

 
1.18
%
 
11,271

 
0.81
%
 
1,951

 
0.25
%
 
30,387

 
0.88
%
June 30, 2015(1)
9,681

 
1.82
%
 
4,466

 
0.98
%
 
2,838

 
1.18
%
 
10,860

 
0.78
%
 
1,942

 
0.25
%
 
29,787

 
0.88
%
March 31, 2015(2)
10,114

 
1.97
%
 
4,225

 
0.95
%
 
2,804

 
1.15
%
 
10,425

 
0.77
%
 
1,689

 
0.20
%
 
29,257

 
0.86
%
December 31, 2014(3)
8,682

 
1.71
%
 
5,250

 
1.19
%
 
2,908

 
1.18
%
 
9,870

 
0.78
%
 
1,732

 
0.26
%
 
28,442

 
0.91
%
September 30, 2014
8,207

 
1.68
%
 
5,073

 
1.18
%
 
2,890

 
1.16
%
 
9,823

 
0.78
%
 
3,773

 
0.59
%
 
29,766

 
0.97
%
June 30, 2014
7,820

 
1.64
%
 
4,159

 
0.99
%
 
2,953

 
1.16
%
 
9,957

 
0.78
%
 
4,160

 
0.57
%
 
29,049

 
0.92
%
(1) 
Net effective spread is a non-GAAP measure. See Note 9 to the consolidated financial statements for a reconciliation of GAAP net interest income by line of business to net effective spread by line of business,
(2) 
Beginning in first quarter 2015, Farmer Mac revised its methodology for interest expense allocation among the Farm & Ranch, USDA Guarantees, and Rural Utilities lines of business. As a result of this revision, a greater percentage of interest expense has been allocated to the longer-term assets included within the USDA Guarantees and Rural Utilities lines of business. Net effective spread for periods prior to the quarter ended March 31, 2015 does not reflect this revision.
(3) 
On October 1, 2014, $78.5 million of preferred stock issued by CoBank was called, resulting in a loss of net effective spread of $2.1 million or 30 basis points
in the corporate segment. The impact on consolidated net effective spread was 7 basis points.




























107

Table of Contents

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

Table 29
Core Earnings by Quarter Ended
 
June 2016
 
March 2016
 
December 2015
 
September 2015
 
June 2015
 
March 2015
 
December 2014
 
September 2014
 
June 2014
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net effective spread
$
31,026

 
$
29,949

 
$
29,949

 
$
30,387

 
$
29,787

 
$
29,257

 
$
28,442

 
$
29,766

 
$
29,049

Guarantee and commitment fees
4,810

 
4,669

 
4,730

 
4,328

 
4,085

 
4,012

 
4,097

 
4,152

 
4,216

Other(1)
(125
)
 
(517
)
 
(284
)
 
(93
)
 
(24
)
 
(405
)
 
(1,285
)
 
(2,001
)
 
(520
)
Total revenues
35,711

 
34,101

 
34,395

 
34,622

 
33,848

 
32,864

 
31,254

 
31,917

 
32,745

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit related expense/(income):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for/(release of) losses
458

 
63

 
(49
)
 
(303
)
 
1,256

 
(696
)
 
(479
)
 
(804
)
 
(2,557
)
REO operating expenses

 
39

 
44

 
48

 

 
(1
)
 
48

 
1

 
59

Losses/(gains) on sale of REO

 

 

 

 

 
1

 
28

 

 
(168
)
Total credit related expense/(income)
458

 
102

 
(5
)
 
(255
)
 
1,256

 
(696
)
 
(403
)
 
(803
)
 
(2,666
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and employee benefits
5,611

 
5,774

 
5,385

 
5,236

 
5,733

 
5,693

 
4,971

 
4,693

 
4,889

General and administrative
3,757

 
3,526

 
3,238

 
3,676

 
3,374

 
2,823

 
2,992

 
3,123

 
3,288

Regulatory fees
612

 
613

 
613

 
600

 
600

 
600

 
600

 
593

 
594

Total operating expenses
9,980

 
9,913

 
9,236

 
9,512

 
9,707

 
9,116

 
8,563

 
8,409

 
8,771

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
25,273

 
24,086

 
25,164

 
25,365

 
22,885

 
24,444

 
23,094

 
24,311

 
26,640

Income tax expense/(benefit)(2)
8,956

 
8,444

 
8,855

 
8,924

 
8,091

 
6,692

 
4,858

 
6,327

 
(4,734
)
Net (loss)/income attributable to non-controlling interest
(16
)
 
(28
)
 
(60
)
 
(36
)
 
(119
)
 
5,354

 
5,414

 
5,412

 
5,819

Preferred stock dividends
3,296

 
3,295

 
3,296

 
3,295

 
3,296

 
3,295

 
3,296

 
3,283

 
2,308

Core earnings
$
13,037

 
$
12,375

 
$
13,073

 
$
13,182

 
$
11,617

 
$
9,103

 
$
9,526

 
$
9,289

 
$
23,247

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciling items:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized (losses)/gains on financial derivatives and hedging activities
(2,076
)
 
(2,989
)
 
2,743

 
(6,906
)
 
15,982

 
(895
)
 
(5,719
)
 
4,131

 
(4,696
)
Unrealized gains/(losses) on trading assets
394

 
358

 
696

 
(8
)
 
170

 
362

 
1,044

 
(32
)
 
(71
)
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value
(371
)
 
(281
)
 
(263
)
 
(117
)
 
(125
)
 
(814
)
 
(1,247
)
 
(678
)
 
(274
)
Net effects of settlements on agency forward contracts
466

 
(255
)
 
(162
)
 
(390
)
 
197

 
(252
)
 
(46
)
 
113

 
363

Loss on retirement of Farmer Mac II LLC Preferred Stock

 

 

 

 

 
(8,147
)
 

 

 

Income tax effect related to reconciling items
556

 
1,109

 
(1,055
)
 
2,598

 
(5,679
)
 
2,461

 
2,089

 
(1,237
)
 
1,636

Net income attributable to common stockholders
$
12,006

 
$
10,317

 
$
15,032

 
$
8,359

 
$
22,162

 
$
1,818

 
$
5,647

 
$
11,586

 
$
20,205

(1) 
Fourth quarter 2014 and third quarter 2014 include $13.6 million and $17.9 million, respectively, of interest expense related to securities purchased under agreements to resell and securities sold, not yet purchased and $12.8 million and $16.4 million, respectively of gains on securities sold, not yet purchased.
(2) 
Fourth quarter 2014 and second quarter 2014 reflect a reduction of $1.4 million and $11.6 million, respectively, in the tax valuation allowance against capital loss carryforwards related to capital gains on securities sold, not yet purchased.


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Item 3.
Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.
Controls and Procedures

Management's Evaluation of Disclosure Controls and Procedures. Farmer Mac maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its periodic filings under the Securities Exchange Act of 1934 (the “Exchange Act”), including this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to Farmer Mac's management on a timely basis to allow decisions regarding required disclosure. Management, including Farmer Mac's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Farmer Mac's disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30, 2016.
  
Farmer Mac carried out the evaluation of the effectiveness of its disclosure controls and procedures, required by paragraph (b) of Exchange Act Rules 13a-15 and 15d-15, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Farmer Mac's disclosure controls and procedures were effective as of June 30, 2016.

Changes in Internal Control Over Financial Reporting. There were no changes in Farmer Mac's internal control over financial reporting during the three months ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, Farmer Mac's internal control over financial reporting.


PART II

Item 1.
Legal Proceedings

None.

Item 1A.    Risk Factors

There were no material changes from the risk factors previously disclosed in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 10, 2016.




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

(a)Farmer Mac is a federally chartered instrumentality of the United States and its debt and equity securities are exempt from registration pursuant to Section 3(a)(2) of the Securities Act of 1933.
  
During second quarter 2016, the following transactions occurred related to Farmer Mac's equity securities that were not registered under the Securities Act of 1933 and were not otherwise reported on a Current Report on Form 8-K:

Class C Non-Voting Common Stock. Under Farmer Mac's policy that permits directors of Farmer Mac to elect to receive shares of Class C Non-Voting Common Stock in lieu of their cash retainers, Farmer Mac issued an aggregate of 87 shares of its Class C Non-Voting Common Stock on April 8, 2016 to the three directors who elected to receive stock in lieu of their cash retainers. Farmer Mac calculated the number of shares issued to the directors based on a price of $37.73 per share, which was the closing price of the Class C Non-Voting Common Stock on March 31, 2016 as reported by the New York Stock Exchange.

On April 15, 2016, Farmer Mac granted an aggregate of 13,700 shares of restricted Class C non-voting common stock under its 2008 Omnibus Incentive Plan at a grant price of $37.52 per share to eighteen employees as incentive compensation. On May 3, 2016, Farmer Mac also granted 2,200 shares of restricted Class C non-voting common stock under its 2008 Omnibus Incentive Plan at a grant price of $41.57 per share to one employee. All of the shares of restricted stock granted will "cliff" vest on April 15, 2019 if the employee remains employed by Farmer Mac on that date.

(b)
Not applicable.

(c)
None.


Item 3. Defaults Upon Senior Securities

(a) None.

(b) None.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5.     Other Information

(a) None.

(b) None.





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Item 6.                Exhibits and Financial Statement Schedules
(3)           Exhibits.
*
 
3.1
 
 
Title VIII of the Farm Credit Act of 1971, as most recently amended by the Food, Conservation and Energy Act of 2008 (Previously filed as Exhibit to Form 10-Q filed August 12, 2008).
*
 
3.2
 
 
Amended and Restated By-Laws of the Registrant (Previously filed as Exhibit 3.1 to Form 8-K filed June 9, 2014).
*
 
4.1
 
 
Specimen Certificate for Farmer Mac Class A Voting Common Stock (Previously filed as Exhibit 4.1 to Form 10-Q filed May 15, 2003).
*
 
4.2
 
 
Specimen Certificate for Farmer Mac Class B Voting Common Stock (Previously filed as Exhibit 4.2 to Form 10-Q filed May 15, 2003).
*
 
4.3
 
 
Specimen Certificate for Farmer Mac Class C Non-Voting Common Stock (Previously filed as Exhibit 4.3 to Form 10-Q filed May 15, 2003).
*
 
4.4
 
 
Specimen Certificate for 5.875% Non-Cumulative Preferred Stock, Series A (Previously filed as Exhibit 4.4.1 to Form 10-Q filed May 9, 2013).
*
 
4.4.1
 
 
Certificate of Designation of Terms and Conditions of 5.875% Non-Cumulative Preferred Stock, Series A (Previously filed as Exhibit 4.1 to Form 8-A filed January 17, 2013).
*
 
4.5
 
 
Specimen Certificate for 6.875% Non-Cumulative Preferred Stock, Series B (Previously filed as Exhibit 4.5 to Form 10-Q filed May 12, 2014).
*
 
4.5.1
 
 
Certificate of Designation of Terms and Conditions of 6.875% Non-Cumulative Preferred Stock, Series B (Previously filed as Exhibit 4.1 to Form 8-A filed March 25, 2014).
*
 
4.6
 
 
Specimen Certificate for 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C (Previously filed as Exhibit 4.6 to Form 10-Q filed August 11, 2014).
*
 
4.6.1
 
 
Certificate of Designation of Terms and Conditions of 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C (Previously filed as Exhibit 4.1 to Form 8-A filed June 20, 2014).
**
 
10.1
 
 
Amendment No. 1 to Long Term Standby Commitment to Purchase dated as of May 31, 2016 between National Rural Utilities Cooperative Finance Corporation and the Registrant.
**
 
31.1
 
 
Certification of Registrant's principal executive officer relating to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
**
 
31.2
 
 
Certification of Registrant's principal financial officer relating to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
**
 
32
 
 
Certification of Registrant's principal executive officer and principal financial officer relating to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*
Incorporated by reference to the indicated prior filing.
**
Filed with this report.
Management contract or compensatory plan.


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

FEDERAL AGRICULTURAL MORTGAGE CORPORATION

          /s/ Timothy L. Buzby
 
August 9, 2016
By:
Timothy L. Buzby
 
Date
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 

          /s/ R. Dale Lynch
 
August 9, 2016
By:
R. Dale Lynch
 
Date
 
Executive Vice President – Chief Financial Officer
 
 
 
(Principal Financial Officer)
 
 





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