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As filed with the Securities and Exchange Commission on March 8, 2018February 25, 2021
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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| UNITED STATES |
| SECURITIES AND EXCHANGE COMMISSION |
| WASHINGTON, D.C. 20549 |
| Form 10-K |
(Mark One)
|
| | | | |
x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172020
or
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o☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _____.
Commission File Number 001-14951
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| |
| 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 |
| Washington, | DC | | 20006 |
| (Address of principal executive offices) | | (Zip code) |
|
| | | | |
| (202) | 872-7700 |
| (Registrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading symbol | | Exchange on which registered |
| Class A voting common stock | | AGM.A | | New York Stock Exchange |
| Class C non-voting common stock | | AGM | | New York Stock Exchange |
5.875% Non-Cumulative Preferred Stock, Series A | | New York Stock Exchange |
6.875% Non-Cumulative Preferred Stock, Series B | | New York Stock Exchange |
| 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C | | AGM.PRC | | New York Stock Exchange |
| 5.700% Non-Cumulative Preferred Stock, Series D | | AGM.PRD | | New York Stock Exchange |
| 5.750% Non-Cumulative Preferred Stock, Series E | | AGM.PRE | | New York Stock Exchange |
| 5.250% Non-Cumulative Preferred Stock, Series F | | AGM.PRF | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: Class B voting common stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes Yes�� o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. §229.405) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer"filer," "smaller reporting company," and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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| | | | | | | | | | |
| Large accelerated filer | o☒ | Accelerated filer | x☐ |
| Non-accelerated filer | o☐ | Smaller reporting company | o☐ |
| | Emerging growth company | ☐ |
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
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The aggregate market value of the Class A voting common stock and Class C non-voting common stock held by non-affiliates of the registrant was $643,055,683$588,995,888 as of June 30, 20172020, the last business day of the registrant's most recently completed second fiscal quarter, based upon the closing prices for the respective classes on June 30, 20172020 reported by the New York Stock Exchange. For purposes of this information, the outstanding shares of Class A voting common stock and Class C non-voting common stock ownedheld by directors, and executive officers, and significant stockholders of the registrant, as applicable, as of June 30, 20172020 were deemed to be held by affiliates. The aggregate market value of the Class B voting common stock is not ascertainable due to the absence of publicly available quotations or prices for the Class B voting common stock as a result of the limited market for, and infrequency of trades in, Class B voting common stock and the fact that any such trades are privately negotiated transactions.
As of March 1, 2018,February 8, 2021, the registrant had outstanding 1,030,780 shares of Class A voting common stock, 500,301 shares of Class B voting common stock, and 9,091,3899,206,055 shares of Class C non-voting common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating toCertain information contained in the registrant's 2018Proxy Statement for the 2021 Annual Meeting of Stockholders (portions of which areis incorporated herein by reference intoin Part III of this Annual Report on Form 10-K).
10-K. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant's fiscal year to which this report relates.
Table of Contents
FORWARD-LOOKING STATEMENTS
In this report, the words "Farmer Mac," "we," "our," and "us" refer to the Federal Agricultural Mortgage Corporation unless otherwise stated or unless the context otherwise requires.
Some statements made in this report, and in particularsuch as in the "Management's Discussion &and Analysis of Financial Condition and Results of Operations" section, are "forward-looking statements" within the meaning ofas defined in the Private Securities Litigation Reform Act of 1995 pertaining toabout management's current expectations as tofor Farmer Mac's future financial results, business prospects, and business developments. Forward-looking statements include, without limitation, any statement, including statements about the COVID-19 pandemic and its impact on Farmer Mac, that may predict, forecast, indicate, or imply future results, performance, or achievements. These statements typically are accompanied by, and identified with,include terms such as "anticipates," "believes," "continues," "estimates," "expects," "forecasts," "intends," "outlook," "plans," "potential," "project," "target" and similar terms, and future or conditional tense verbs like "could," "may," "might," "should," "will," and similar phrases."would." This report includes forward-looking statements addressing Farmer Mac's:
•prospects for earnings;
•prospects for growth in business volume;
•assessment of the effect of the COVID-19 pandemic on our business, financial results, financial condition, and business plans and strategies;
•trends in net interest income and net effective spread;
•trends in portfolio credit quality, delinquencies, substandard assets, credit losses, and provisions for losses;
•trends in expenses;
•trends in investment securities;
•prospects for asset impairments and allowance for losses;
changes in executive leadership;
•changes in capital position;
•future dividend payments; 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 this Annual Report on Form 10-K for the fiscal period ended December 31, 2017,report, and uncertainties regarding:about:
•the duration, spread, and severity of the COVID-19 pandemic;
•the actions taken to address the COVID-19 pandemic, including government actions to mitigate the economic impact of the pandemic, how quickly and to what extent normal economic and operating conditions can resume, the possibility of future disruptions to economic recovery caused by more outbreaks, regulatory measures or voluntary actions to limit the spread of COVID-19, and the duration and efficacy of those restrictions;
•the effects of the COVID-19 pandemic on the business operations of agricultural and rural borrowers, the capital markets, and Farmer Mac's business operations;
•the availability to Farmer Mac of debt and equity financing and, if available, the reasonableness of rates and terms;
•legislative or regulatory developments that could affect Farmer Mac, its sources of business, or the agricultural or rural utilities industries;
•fluctuations in the fair value of assets held by Farmer Mac and its subsidiaries;
•the rate and directionlevel of development of the secondary market for agricultural mortgage and rural utilities loans, including lender interest in Farmer Mac's products and the secondary market provided by Farmer Mac;
•the general rate of growth in agricultural mortgage and rural utilities indebtedness;
•the effect of economic conditions including the effects of drought and other weather-related conditions and fluctuations in agricultural real estate values,geopolitics on agricultural mortgage or rural utilities lending, and borrower repayment capacity;capacity, or collateral values, including fluctuations in interest rates, changes in U.S. trade policies, fluctuations in export demand for U.S. agricultural products, and volatility in commodity prices;
•the effect of any changesdegree to which Farmer Mac is exposed to interest rate risk resulting from fluctuations in Farmer Mac's executive leadership;borrowing costs relative to market indexes;
•developments in the financial markets, including possible investor, analyst, and rating agency reactions to events involving government-sponsored enterprises, including Farmer Mac;
changes in •the level and directioneffect 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 fluctuationsany changes in Farmer Mac's borrowing costs relative to market indexes such as LIBOR;executive leadership; and
volatility•other factors that could hinder agricultural mortgage lending or borrower repayment capacity, including the effects of weather and fluctuations in commodity prices relative to costs of production and/or export demand for U.S. agricultural products.real estate values.
In light ofConsidering 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 mandatedrequired by the SEC.applicable law. The information contained in this report is not necessarily indicative of future results.
PART I
GENERAL
The Federal Agricultural Mortgage Corporation ("Farmer Mac")Mac is a stockholder-owned, federally chartered corporation that combines private capital and public sponsorship to serve a public purpose. Congress has charged Farmer Mac with the mission of providing a secondary market for a variety of loans made to borrowers in rural America. A secondary market is an economic arrangement in which the owners of financial assets, such as the originators of loans, may sell all or part of those assets or pay a fee to otherwise offset some or all of the inherent risks of holding the assets. Farmer Mac's main secondary market activities are:include:
•purchasing eligible loans (including participations in eligible loans and revolving lines of credit) directly from lenders;
providing advances against•purchasing general obligation securities that are issued by lenders and guaranteed by Farmer Mac and that are secured by eligible loans, which Farmer Mac refers to as "AgVantage," a registered trademark of Farmer Mac;
•issuing securities guaranteed by purchasing obligations secured by those loans;
securitizing assets and guaranteeing the payment of principal and interest on the resulting securitiesFarmer Mac that represent interests in, or obligations secured by, pools of eligible loans;loans (together with AgVantage, these securities are referred to as "Farmer Mac Guaranteed Securities"); and
issuing•providing long-term standby purchase commitments ("LTSPCs") for eligible loans.
Securities guaranteed by Farmer Mac Guaranteed Securities may be retained by the seller of the underlying eligible loans, retained by Farmer Mac, or sold to third-party investors.
Farmer Mac was established under federal legislation first enacted in 1988 and amended most recently in 20082018 – Title VIII of the Farm Credit Act of 1971 (12 U.S.C. §§ 2279aa et seq.), which is sometimes referred to as Farmer Mac's charter. Farmer Mac is a government-sponsored enterprise ("GSE") by virtue of the status conferred by its charter. The charter provides that Farmer Mac has the power to establish, acquire, and maintain affiliates under applicable state law to carry out any activities that Farmer Mac otherwise would be performed directly by Farmer Mac.perform directly. Farmer Mac established its two existing subsidiaries – Farmer Mac II LLC and Farmer Mac Mortgage Securities Corporation – under that power.
Farmer Mac is an institution of the Farm Credit System (the "FCS"("FCS"), which is composed of the banks, associations, and related entities, including Farmer Mac and its subsidiaries, regulated by the Farm Credit Administration ("FCA"), an independent agency in the executive branch of the United States government. Although Farmer Mac is an institution of the FCS, it is not liable for any debt or obligation of any other institution of the FCS. None of FCA, the FCS, or any other individual institution of the FCS is liable for any debt or obligation of Farmer Mac or its subsidiaries. The debts and obligations of Farmer Mac and its subsidiaries are not guaranteed by the full faith and credit of the United States.
Farmer Mac's two principalprimary sources of revenue are:
•interest income earned on assets held on balance sheet, net of related funding costs and interest payments and receipts on financial derivatives; and
•guarantee and commitment fees received in connection withfor outstanding guaranteed securities and LTSPCs.
Farmer Mac funds its purchases of eligible loans (including participation interests in eligible loans) and guaranteed securities primarily by issuing debt obligations of various maturities in the public capital markets. TheFarmer Mac also uses the proceeds of debt issuance are also used to
fund liquidity investments that must comply with
policies adopted by Farmer Mac's board of directors and with FCA regulations, which establish limitations on asset class, dollar amount, issuer concentration, and credit quality. Those regulations can be found at 12 C.F.R. §§ 652.1-652.45 (the "Liquidity("Liquidity and Investment Regulations"). Farmer Mac's regular debt issuance supports its access to the capital markets, and Farmer Mac's liquidity investment assetsinvestments provide an alternative source of funds should market conditions become unfavorable. As of December 31, 2017,2020, Farmer Mac had $1.7$1.8 billion of discount notes and $13.8$20.0 billion of medium-term notes outstanding. For more information about Farmer Mac's eligible loan assetsloans, securities, and liquidity investment assets,investments, as well as its financial performance and sources of capital and liquidity, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." For more information about Farmer Mac's debt issuance, see "Business—Financing—Debt Issuance."
Secondary Market
Farmer Mac's activities are intended to provide lenders with an efficient and competitive secondary market that enhances these lenders' ability to offer competitively-priced financing solutions to rural borrowers. This secondary market is designed to increase the availability of credit at stablecompetitive interest rates to America's rural communities and agricultural sectors, as well as to provide rural borrowers with the benefits of capital markets pricing and product innovation. The secondary market provided by Farmer Mac functions as a bridge between the nationalpublic capital markets and the U.S. agricultural and rural credit markets by attracting newadditional capital sources for financing rural America and agricultural borrowers.
Farmer Mac's purchases of both eligible loans and obligations secured by eligible loans, as well as Farmer Mac'ssecurities and its sale of guaranteed securities sold to third party investors increase lenders' liquidity and lending capacity and provide a continuousstable source of funding for lenders that extend credit to borrowers inthe agricultural and rural America.credit markets. Farmer Mac's issuance of LTSPCs for eligible loans held by lenders as well asand its issuance of guaranteed securities retained byto lenders in exchange for the related securitized loans could result in lower regulatory capital requirements for the lenders and reduced borrower or commodity concentration exposure for somemany lenders, thereby expanding their lending capacity. By increasing the efficiencyThrough providing efficient and competitiveness of rural finance, the secondary market provided bycompetitive financing solutions, Farmer Mac has the potential to increase lending flexibility for rural credit markets, which may result in lower the interest rates paid on loans made by lenders to rural and agricultural borrowers.
The current economic and regulatory environment presents Farmer Mac with opportunities to market a mix of products to rural lenders in need of capital, liquidity, portfolio diversification, and access to a wide variety of loan products, including those with long-term fixed rates. As part of its outreach strategy, Farmer Mac engages with current and prospective rural lenders to identify how the utilization of secondary market capital could further support their specific needs, with an emphasis on individual lender meetings, lender road shows,origination efforts and face-to-face contact at statedrive efficient capital deployment to agriculture communities and national banking conferences.rural America. Farmer Mac also provides wholesale funding for institutional investors in agricultural assets that qualify as eligible collateral under Farmer Mac's charter. For these potential issuers, Farmer Mac directs its outreach efforts through its business relationships within the agricultural community and through outreach to institutions whose profile presents opportunity to benefit from wholesale funding. Farmer Mac seeks to maximize the use of technology to support these business development efforts.
Lines of Business
FARMER MAC'S LINES OF BUSINESS
Farmer Mac conducts its secondary market activities through four lines of business – Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit. The loans (and participation interests in those loans) eligible for theFarmer Mac's secondary market provided by Farmer Mac include:
•mortgage loans secured by first liens on agricultural real estate, including part-time farms and rural housing (comprising the assets eligible for the Farm & Ranch line of business);
•agricultural and rural development loans guaranteed by the United States Department of Agriculture ("USDA") (comprising the assets eligible for the USDA Guarantees line of business); and
•loans made by lenders organized as cooperatives to finance electrification and telecommunications systems in rural areas (comprising the assets eligible for the Rural Utilities line of business).
Farmer Mac also guarantees and purchases general obligations of lenders that are secured by pools of these three types of eligible loans (comprising the assets eligible for the Institutional Credit line of business). As of December 31, 2017,2020, the total outstanding business volume in all of Farmer Mac's lines of business was $19.0$21.9 billion.
The following table presents the outstanding balances under Farmer Mac's four lines of business (Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit) as of December 31, 2020 and December 31, 2019:
| | | | | | | | | | | |
| Lines of Business - Outstanding Business Volume |
| | As of December 31, 2020 | | As of December 31, 2019 |
| | (in thousands) |
| On-balance sheet: | | | |
| Farm & Ranch: | | | |
| Loans | $ | 4,889,393 | | | $ | 3,675,640 | |
| Loans held in trusts: | | | |
| Beneficial interests owned by third party investors | 1,287,045 | | | 1,600,917 | |
| USDA Guarantees: | | | |
| USDA Securities | 2,452,964 | | | 2,199,072 | |
| Farmer Mac Guaranteed USDA Securities | 34,456 | | | 31,887 | |
| Rural Utilities: | | | |
| Loans | 2,260,412 | | | 1,671,293 | |
| Institutional Credit: | | | |
| AgVantage securities | 7,734,947 | | | 8,432,679 | |
| Total on-balance sheet | $ | 18,659,217 | | | $ | 17,611,488 | |
| Off-balance sheet: | | | |
| Farm & Ranch: | | | |
| LTSPCs | $ | 2,325,431 | | | $ | 2,393,071 | |
| Guaranteed Securities | 79,312 | | | 107,322 | |
| USDA Guarantees: | | | |
| Farmer Mac Guaranteed USDA Securities | 299,298 | | | 389,216 | |
| Rural Utilities: | | | |
| LTSPCs | 556,425 | | | 609,278 | |
| Institutional Credit: | | | |
| AgVantage securities | 4,412 | | | 7,567 | |
| | | |
| Total off-balance sheet | $ | 3,264,878 | | | $ | 3,506,454 | |
| Total | $ | 21,924,095 | | | $ | 21,117,942 | |
Farm & Ranch
Under the Farm & Ranch line of business, Farmer Mac purchases eligibleprovides a secondary market for mortgage loans secured by first liens on agricultural real estate which includes(including part-time farms and rural housing ("Farm & Ranch loans").housing) by (1) purchasing and retaining eligible mortgage loans and revolving lines of credit, (2) securitizing eligible mortgage loans and guaranteeing the timely payment of principal and interest on the resulting securities that represent interests in, or obligations secured by, pools of those loans, or (3) issuing LTSPCs for designated eligible mortgage loans, subject to the applicable LTSPC agreement. Farmer Mac also guaranteesis compensated for these activities through net interest income on loans and securities representingheld on balance sheet, guarantee fees earned on securities issued to third parties, and commitment fees earned on loans in LTSPCs.
Farmer Mac experiences direct credit exposure to borrowers through its loan purchases, LTSPCs, and Farmer Mac Guaranteed Securities that represent interests in, or obligations secured by, pools of eligible Farm & Ranch loans but that are not AgVantage securities ("Farm & Ranch Guaranteed Securities"). Additionally, Farmer Mac commitsapplies credit underwriting standards and methodologies to purchase, subjecthelp assess exposures to the terms of the applicable LTSPC agreement, eligible Farm & Ranch loans. loans, which may include collateral valuation, financial metrics, and other appropriate borrower financial and credit information.
Loan Eligibility
To be eligible loans must for the Farm & Ranch line of business, a loan must:
•be secured by a fee simple mortgage or a leasehold mortgage with status as a first lien on agricultural real estate (including part-time farms and rural housing) located within the United States;
•be an obligation of a citizen or national of the United States, an alien lawfully admitted for permanent residence in the United States, or a private corporation or partnership that is majority-owned by U.S. citizens, nationals, or legal resident aliens;
•be an obligation of a person, corporation, or partnership having training or farming experience that is sufficient to ensure a reasonable likelihood that the loan will be repaid according to its terms; and
•meet Farmer Mac'sthe credit underwriting, collateral valuation, documentation, and other specified standards described in "Business—Farmer Mac's Lines of Business—for the Farm & Ranch." AsRanch line of December 31, 2017, outstandingbusiness. See "—Underwriting and Collateral Standards" and "— Lenders" for a description of these standards.
Eligible agricultural real estate consists of one or more parcels of land, which may be improved by permanently affixed buildings or other structures, that:
•is used for the production of one or more agricultural commodities or products; and
•either consists of a minimum of five acres or generates minimum annual receipts of $5,000.
This variety in the types of permitted collateral to include buildings and structures used in agriculture production means that eligible Farm & Ranch loans heldmay include loans to agribusinesses that support agriculture production, food and fiber processing, and other supply chain production, as well as loans to direct growers and producers of agricultural commodities.
Farmer Mac's charter authorizes a maximum loan size (adjusted annually for inflation) for an eligible Farm & Ranch loan secured by more than 2,000 acres of agricultural real estate. That maximum loan size
was $13.2 million as of December 31, 2020. The charter does not prescribe a maximum loan size or a total borrower exposure for an eligible Farm & Ranch loan secured by 2,000 acres or less of agricultural real estate. However, an internal policy approved by Farmer Mac's board of directors limits the cumulative direct credit exposure to any one borrower or group of related borrowers on loans secured by 2,000 acres or less of agricultural real estate to 10% of Farmer Mac's Tier 1 capital ($100.6 million as of December 31, 2020).
Guarantees and Commitments
Farmer Mac offers two credit enhancement alternatives to direct loan purchases through the Farm & Ranch line of business that allow approved lenders the ability to retain the cash flow benefits of their loans and loans that either backed off-balance sheetincrease their liquidity and lending capacity: (1) LTSPCs and (2) Farm & Ranch Guaranteed Securities. In LTSPCs and Farm & Ranch Guaranteed Securities, the lender effectively transfers the credit risk on their eligible loans because, through Farmer Mac's commitment to purchase the loan (in the case of LTSPCs) or wereFarmer Mac's guarantee (in the case of Farm & Ranch Guaranteed Securities), Farmer Mac assumes the ultimate credit risk of borrower defaults on the related loans.
An LTSPC permits the lender to retain loans in its portfolio until such time, if ever, as the lender elects to deliver some or all of the loans covered by the LTSPC to Farmer Mac for purchase. Loans subject to an LTSPC must meet Farmer Mac's standards for eligible loans at the commencement of the LTSPC when Farmer Mac assumes the credit risk on the loans. As consideration for its assumption of the credit risk on loans covered by an LTSPC, Farmer Mac receives commitment fees payable monthly in arrears. Some LTSPCs totaled $6.9 billion.contain risk sharing arrangements for pools of loans that provide for the counterparty to absorb up to a specified amount (typically between one and five percent of the original principal balance of the loan pool) of any losses incurred on the loans in the pool. At a lender's request, Farmer Mac purchases loans subject to an LTSPC at:
•par if the loans become delinquent for either 90 days or 120 days (depending on the agreement) or are in material non-monetary default, with accrued and unpaid interest on the defaulted loans payable out of any future loan payments or liquidation proceeds; or
•fair value or in exchange for cash or Farm & Ranch Guaranteed Securities (if the loans are not delinquent), in accordance with the applicable agreement.
In Farm & Ranch Guaranteed Securities transactions, Farmer Mac guarantees securities representing interests in eligible Farm & Ranch loans or participation interests in those loans held by a trust or other entity. Farmer Mac either retains or sells these securities and guarantees the timely payment of principal and interest on the securities in the event of a payment shortfall due to default. As consideration for its assumption of the credit risk on the assets underlying the Farm & Ranch Guaranteed Securities, Farmer Mac receives guarantee fees based on the outstanding principal balance of the related securities.
Farmer Mac is obligated under its guarantee on the securities to make timely payments to investors of principal (including balloon payments) and interest based on the scheduled payments on the underlying loans, regardless of whether Farmer Mac or the related trust has actually received those scheduled payments. Farmer Mac's guarantee fees typically are collected out of installment payments made on the underlying loans until those loans have been repaid, purchased out of the trust, or otherwise liquidated (generally as a result of default). The aggregate amount of guarantee fees received on Farm & Ranch Guaranteed Securities depends on the amount of those securities outstanding and on the applicable guarantee fee rate, which Farmer Mac's charter caps at 50 basis points (0.50%) per year. The amount of
Farm & Ranch Guaranteed Securities outstanding is influenced by the repayment rates on the underlying loans and by the rate at which Farmer Mac issues new Farm & Ranch Guaranteed Securities. In general, when the level of interest rates declines significantly below the interest rates on loans underlying Farm & Ranch Guaranteed Securities, the rate of prepayments is likely to increase. Conversely, when interest rates rise above the interest rates on the loans underlying Farm & Ranch Guaranteed Securities, the rate of prepayments is likely to decrease. In addition to changes in interest rates, the timing of principal payments on Farm & Ranch Guaranteed Securities also is influenced by a variety of economic, demographic, and other considerations. Farmer Mac's guarantee does not cover prepayments on the loans underlying the related Farm & Ranch Guaranteed Securities.
Underwriting and Collateral Standards
As required by Farmer Mac's charter, Farmer Mac has established underwriting, security appraisal, and repayment standards for eligible loans that consider the nature, risk profile, and other differences between different categories of eligible loans. The charter prescribes that the following minimum standards must be applied to agricultural real estate mortgage loans in the Farm & Ranch line of business:
•provide that no loan with a loan-to-value ratio ("LTV") more than 80% may be eligible;
•require each borrower to demonstrate sufficient cash flow to adequately service the loan;
•require sufficient documentation standards;
•protect the integrity of the appraisal process for any loan; and
•confirm that the borrower is or will be actively engaged in agricultural production.
In addition to these minimum standards, eligible loans in Farmer Mac's Farm & Ranch line of business are also typically required to meet more specific underwriting criteria established by Farmer Mac or demonstrate compensating strength in one or more other underwriting criteria. For larger loan exposures to agriculture production and agribusinesses that support agriculture production, food and fiber processing, and other supply chain production, which may have different risk profiles, Farmer Mac has implemented methodologies and parameters that help assess credit risk based on the appropriate sector, borrower construct, and transaction complexity. Farmer Mac relies on the combined expertise of experienced internal agricultural credit underwriters and loan servicers, along with external agricultural loan servicing and collateral valuation contractors, to perform the necessary underwriting, servicing, and collateral valuation functions on Farm & Ranch loans.
Lenders
Farmer Mac approves lenders into its network of loan sellers based on an assessment of the lender's credit profile, which may include factors such as the institution's credit rating, origination history, or financial profile. Most lenders that participate in the Farm & Ranch line of business meet prescribed criteria that Farmer Mac establishes for loan-selling counterparties, which typically include the requirement to:
•own a requisite amount of Farmer Mac common stock according to a schedule prescribed for the size and type of institution;
•have, in the judgment of Farmer Mac, the ability and experience to make or purchase and sell loans eligible for Farmer Mac's Farm & Ranch line of business and service those loans in accordance with Farmer Mac's requirements either through the lender's own staff or through contractors and originators, as well as have appropriate internal controls, policies, and procedures;
•maintain a minimum amount of net liquidity; and
•enter into a Seller/Servicer Agreement, which requires compliance with the terms of Farmer Mac's Seller/Servicer Guide, including providing representations and warranties about the eligibility of the loans and accuracy of loan data provided to Farmer Mac.
Loan Servicing
Farmer Mac generally does not directly service the loans in the Farm & Ranch line of business, although in some cases Farmer Mac may assume direct servicing for defaulted loans. Farmer Mac contracts with other institutions to undertake most of the servicing responsibilities for its loans in accordance with Farmer Mac's specified servicing requirements or in accordance with the servicing standards established by the servicing institution if the institution's standards are acceptable to Farmer Mac. For these loans, the servicer may or may not be the same entity as the lender that sold the loans to Farmer Mac. However, the originating lender often retains some servicing responsibility, particularly with direct borrower contact, which is referred to as "field servicing." Field servicers may enter into contracts with Farmer Mac's servicers that specify their field servicing responsibilities.
Loans under LTSPCs are serviced by the holders of those loans in accordance with those lenders' servicing procedures, which Farmer Mac reviews before entering into those transactions.
The substance of all servicing for loans in the Farm & Ranch line of business is performed in a manner consistent with Farmer Mac's servicing requirements, with some special servicing for loans purchased from LTSPCs to collateralize Farm & Ranch Guaranteed Securities, in order to accommodate the borrower rights regime unique to loans originated by FCS institutions.
USDA Guarantees
Under the USDA Guarantees lineFarmer Mac's charter provides that:
•USDA-guaranteed portions of business,loans (which Farmer Mac II LLC, a subsidiary of Farmer Mac, purchases the portions of certain agricultural, rural development, business and industry, and community facilities loansrefers to as "USDA Securities") guaranteed by the USDA under the Consolidated Farm and Rural Development Act (7 U.S.C. §§§ 1921 et seq.). are statutorily included in the definition of loans eligible for the secondary market programs provided by Farmer Mac;
•USDA Securities are exempted from the credit underwriting, collateral valuation, documentation, and other standards that other loans must meet to be eligible for the secondary market provided by Farmer Mac, refers to these USDA-guaranteed portionsand are exempted from any diversification and internal credit enhancement that may be required of loans as "USDA Securities." pools of other eligible loans; and
•Farmer Mac II LLC also purchasesis authorized to pool, issue, and guarantee timely interest and principal on securities backed by USDA Securities in exchange for issuing securities to third parties backed by those USDA Securities, which are then also guaranteed by Farmer Mac ("Farmer Mac Guaranteed USDA Securities"). As of December 31, 2017, outstanding
Farmer Mac purchases USDA Securities andthrough Farmer Mac II LLC, a subsidiary of Farmer Mac that operates substantially all of the business related to the USDA Guarantees line of business. Farmer Mac II LLC does not guarantee any USDA Securities it holds or any Farmer Mac Guaranteed USDA Securities totaled $2.4 billion, of which $284.2 million wereissued by Farmer Mac Guaranteedor Farmer Mac II LLC.
Lenders
Any lender authorized by the USDA Securities.to obtain a USDA guarantee on a loan may participate in Farmer Mac's USDA Guarantees line of business.
Loan Servicing
The lender on each USDA guaranteed loan is required by regulation to retain the unguaranteed portion of the guaranteed loan, to service the entire underlying guaranteed loan, including the USDA-guaranteed portion, and to remain mortgagee and/or secured party of record. The USDA-guaranteed portion and the unguaranteed portion of the loan are to be secured by the same collateral with equal lien priority. The USDA-guaranteed portion of a loan cannot be paid later than, or in any way be subordinated to, the related unguaranteed portion.
Rural Utilities
UnderFarmer Mac's charter authorizes the purchase of, and guarantee of securities backed by, loans (including participation interests in loans) for electric (including renewable electric energy) or telecommunications facilities by lenders organized as cooperatives to borrowers that have received or are eligible to receive loans under the Rural Electrification Act of 1936 ("REA"). The REA is administered by the Rural Utilities Service ("RUS"), an agency of the USDA. Farmer Mac's Rural Utilities line of business Farmer Mac's authorized activities are similar to those conducted under the Farm & Ranch lineencompasses purchases of business – purchases of,eligible Rural Utilities loans and guarantees of securities backed by those loans, as well as LTSPCs for pools of eligible rural utilities loans ("Rural Utilities loans").loans. To be eligible, Rural Utilities loans must meet Farmer Mac's credit underwriting and other specified standards described in "Business—Farmer Mac's Lines of Business—Rural Utilities." As of December 31, 2017, the aggregate outstanding principal balance of Rural Utilities loans held by Farmer Mac or that were subject to LTSPCs totaled $1.9 billion.standards. There currently are no guaranteed securities issued under the Rural Utilities line of business.business, although the Institutional Credit line of business includes some AgVantage securities that are secured by Rural Utilities loans. The vast majority of Farmer Mac's business to date under the Rural Utilities line of business has involved loans made to electric facilities (primarily electric distribution cooperatives and electric generation and transmission cooperatives). During 2020, Farmer Mac purchased $64.3 million of renewable energy loans in connection with various projects as part of Farmer Mac's renewable energy project finance strategic initiative under its Rural Utilities authority.
Loan Eligibility
To be eligible for Farmer Mac's Rural Utilities line of business, a Rural Utilities loan (or a participation interest in a loan) must:
•be to a borrower that has received or is eligible to receive a loan under the REA for an electric or telecommunications facility;
•be by a lender organized as a cooperative;
•be performing and not more than 30 days delinquent; and
•meet Farmer Mac's underwriting standards described in more detail below.
Underwriting and Collateral Standards
Farmer Mac's charter does not specify minimum underwriting criteria for eligible Rural Utilities loans. To manage Farmer Mac's credit risk, to mitigate the risk of loss from borrower defaults, and to provide guidance for the management, administration, and conduct of underwriting to participants in the Rural Utilities line of business, Farmer Mac has adopted credit underwriting standards that vary by loan product and by loan type. These standards are based on industry practices for similar Rural Utilities loans and are designed to assess the creditworthiness of the borrower, as well as the risk to Farmer Mac. Farmer Mac
reviews lenders' credit submissions and analyzes borrowers' audited financial statements and financial and operating reports to confirm that loans meet Farmer Mac's underwriting standards for Rural Utilities loans.
It is customary in loans to electric distribution cooperatives and electric generation and transmission cooperatives for the lender or lender group to take a security interest in substantially all of the borrower's assets. When Farmer Mac purchases a Rural Utilities loan with a pledge of all assets and a lender also has a lien on all assets, Farmer Mac verifies that a lien accommodation results in either a shared first lien or a first lien in favor of Farmer Mac. When debt indentures are used, Farmer Mac determines if available collateral is adequate to support the loan program and Farmer Mac's investment. Loans to renewable electric energy borrowers are typically secured by the borrower's project equipment, contracts, and land or leasehold interest, but Farmer Mac's enforcement rights may be subject to tax equity interests in the borrower's renewable energy project. Farmer Mac also purchases unsecured Rural Utilities loans (primarily electric generation and transmission loans) that meet Farmer Mac's underwriting standards for unsecured Rural Utilities loans.
Lenders and Loan Servicing
Farmer Mac's charter requires eligible Rural Utilities loans to be by a lender organized as a cooperative. Farmer Mac does not directly service the Rural Utilities loans held in its portfolio, which are serviced by a designee of Farmer Mac.
Institutional Credit
Under the Institutional Credit line of business, Farmer Mac guarantees and purchases general obligations
of lenders and other financial institutions (including financial funds) that are secured by pools of the types of loans eligible for purchase under Farmer Mac's Farm & Ranch, USDA Guarantees, or Rural Utilities lines of business.business..Farmer Mac refers to these as AgVantage® is a registered trademark of securities. Typically, Farmer Mac used to designateretains AgVantage securities in its portfolio. Farmer Mac's guaranteesguarantee and purchase of AgVantage securities related to these general obligations of lenders that are secured by pools of eligible loans and that comprise the Institutional Credit line of business. Farm & Ranch Guaranteed Securities,
Farmer Mac Guaranteed USDA Securities,has direct credit exposure to the general credit of the issuers of AgVantage securities and AgVantage Securities are sometimes collectively referred to as "Farmer Mac Guaranteed Securities." For more informationassumes the ultimate credit risk of an issuer default on the products currently offered underAgVantage securities. Before approving an institution as an issuer in an AgVantage transaction, Farmer Mac's Institutional Credit lineMac assesses the issuer's creditworthiness as well as the credit quality and performance of business, see "Business—the issuer's loan portfolio and loan underwriting standards. Farmer Mac's LinesMac continues to monitor the counterparty risk assessment on an ongoing basis after the AgVantage security is issued. In addition to being a general obligation of Business—Institutional Credit." As of December 31, 2017, outstandingthe issuer, all AgVantage securities heldmust be secured by eligible loans or eligible securities guaranteed by Farmer Mac in its Institutional Creditan amount at least equal to the outstanding principal amount of the issuer's AgVantage securities. As a result, Farmer Mac has indirect credit exposure to the loans or guaranteed securities that are pledged to secure the AgVantage securities, which comprise collateral for Farmer Mac in the event of a default by the issuer.
Loans pledged under AgVantage securities are serviced by the issuers of the securities (or their affiliated servicing institutions) in accordance with these institutions' servicing procedures. Farmer Mac reviews these servicing procedures before purchasing AgVantage securities from the issuer. In AgVantage transactions, the issuer is required to remove from the pool of pledged collateral any loan that becomes more than 30 days delinquent in the payment of principal or interest and to replace the delinquent loan with another eligible loan that is current in payment or to pay down the AgVantage securities to maintain the minimum required collateralization level.
For AgVantage securities secured by loans eligible for Farmer Mac's Farm & Ranch line of business, totaled $7.9 billion.Farmer Mac currently requires the general obligation to be over-collateralized, either by more eligible loans or any of the following types of assets:
Competition•cash;
•securities issued by the U.S. Treasury or guaranteed by an agency or instrumentality of the United States;
•other highly-rated securities; or
•other instruments approved by Farmer Mac.
The required collateralization level for the AgVantage securities secured by Farm & Ranch loans currently ranges from 103% to 125%. The required collateralization level is determined based on credit factors related to the issuer, is established when the AgVantage facility is entered into with the counterparty, and does not change during the life of the AgVantage securities issued under the facility unless mutually agreed by Farmer Mac and the counterparty.
For AgVantage securities that are secured by Farm & Ranch loans, Farmer Mac requires that the loans meet the minimum standards set forth in the charter for those types of loans with a maximum limit of $75.0 million in cumulative exposure to any one borrower or related borrowers from a single AgVantage issuer.
Farmer Mac has tailored a version of its AgVantage product to focus on institutional investors in agricultural assets that qualify as collateral for the types of loans eligible for the Farm & Ranch line of business. Farmer Mac refers to this product variation as the Farm Equity AgVantage product. This product has similar requirements for AgVantage securities secured by Farm & Ranch loans described above, but Farmer Mac also requires that Farm Equity AgVantage transactions maintain a higher collateralization level through lower loan-to-value ratio thresholds and contain specified financial covenants for the life of the related AgVantage security.
AgVantage securities secured by loans eligible for Farmer Mac's Rural Utilities line of business require:
•the counterparty issuing the general obligation to have a credit rating from an NRSRO that is at least investment grade, or be of comparable creditworthiness as determined through Farmer Mac's analysis; and
•the collateralization (consisting of current, performing loans) to be maintained at the contractually prescribed level, in an amount at least equal to the outstanding principal amount of the security.
Although Farmer Mac has only indirect credit exposure on the Rural Utilities loans pledged to secure AgVantage securities, the same underwriting standards that apply to loans made to electric cooperatives on which Farmer Mac assumes direct credit exposure also apply to loans made to electric cooperatives that secure the general obligation of the lender in AgVantage transactions. Farmer Mac's charter does not prescribe a maximum loan size or a total borrower exposure for an eligible Rural Utilities loan, but Farmer Mac's current limit for AgVantage transactions is $75.0 million for cumulative loan exposure to any one borrower or related borrowers (with the amount of any direct exposure to a borrower not counting towards the $75.0 million limit). Farmer Mac also permits up to 20% of Rural Utilities loans pledged to secure AgVantage securities to be unsecured or secured by less than all of the borrower's assets.
COMPETITION
Farmer Mac is the only Congressionally-charteredfederally-chartered corporation established to provide a secondary market for agricultural mortgage loans, rural utilitiesRural Utilities loans, and USDA Securities. However,But Farmer Mac does face indirect competition from a variety ofmany sources. These sources include other financial institutions and other types of financial entities that purchase, retain, securitize, or provide financing for the types of assets eligible for Farmer Mac's secondary market activities includingsuch as commercial and investment banks, insurance companies, other FCS institutions, financial funds, and financial funds.certain government programs. Farmer Mac also competes indirectly with originators of eligible loans whothat would prefer to retain the loans they originate rather than sell them into the secondary market. Farmer Mac is able to compete to acquire eligible loans due to the variety of products it offers and its ability to offer low-costcompetitive funding structures and pricing to its customers. This enables Farmer Mac to offerprovide flexible financing options and products designed to meet the varietyvaried needs of needs faced by lending institutions related to capital requirements, liquidity, credit risk, and management of sector and geographic concentrations and borrower exposure limits. However, theThe relative competitiveness of theFarmer Mac's loan rates offered by Farmer Mac is affected by the ability of other lending institutions to subsidize their rates on the loan products with which Farmer Mac competes by price averaging with other types of loans or by accepting a lower return on equity.and Farmer Mac's ability to develop business with lending institutions is alsoare affected by changes in many factors, including:
•the levelsoverall supply of capital available capitalto the agricultural and liquidityrural utilities sectors;
•the ability of thoseother lending institutions the existence of alternative sources of fundingto compete with Farmer Mac (e.g., by price averaging through offering multiple loan and credit enhancement for those institutions, the rate of growth in thefee based products or by accepting a lower return on equity given market for eligible loans, and demand for Farmer Mac's products.dynamics);
Farmer Mac's competitive position is also affected by the willingness of originators to offer eligible loans for sale in the secondary market, as well as •the types and variety of products offered by Farmer Mac's competitors to meet the needs of Farmer Mac's customer base.base;
•changes in the levels of available capital and liquidity of lending institutions;
•the existence of alternative sources of funding and credit enhancement for lending institutions;
•the rate of growth in the market for eligible loans; and
•demand for Farmer Mac's products.
Because Farmer Mac's charter limits Farmer Mac's business to secondary-market activities, Farmer Mac's competitive position is affected by the willingness of originators to offer eligible loans for sale in the secondary market or to utilize Farmer Mac for funding syndicated or participated loans. The charter's limits on borrower exposure and loan size for some Farm & Ranch loans, as well as the types of loans that are eligible for Farmer Mac's lines of business, also affect Farmer Mac's competitive position. For more information on government regulation of Farmer Mac, see "Business—Government Regulation of Farmer Mac."
Farmer Mac's ability to obtain low-costcompetitive funding in the debt markets is essential to its ability to maintain its competitiverelative position with its customers. As a result, competition for debt investors with other debt-issuing institutions, such as the FCS, Federal Home Loan Banks, Fannie Mae, Freddie Mac, and highly-rated financial institutions, can impactaffect the price and volume at which Farmer Mac issues debt and consequently,therefore its ability to offer savings to its customers in the form of competitive products.
Capital and Corporate Governance
CAPITAL AND CORPORATE GOVERNANCE
Farmer Mac's charter prescribes the company's basic capital and corporate governance structure is prescribed in its charter.structure. The charter authorizes Farmer Mac to issue two classes of voting common stock, each of which elects one-third of Farmer Mac's 15-person board of directors. The charter also authorizes Farmer Mac to issue non-voting
common stock. The classes of Farmer Mac's outstanding common stock that are currently outstanding and their relationrelationship to Farmer Mac's board of directors are described below.
•Class A voting common stock. The charter restricts ownership of Farmer Mac's Class A voting common stock to banks, insurance companies, and other financial institutions or similar entities that are not institutions of the FCS. The charter also provides that five members of Farmer Mac's 15-member board of directors are elected by a plurality of the votes of the Class A stockholders each year. The charter limits the amount of Class A voting common stock that may be owned byany one holder may own to no more than 33 percent33% of the outstanding shares of Class A voting common stock. Farmer Mac is not aware of any regulation applicable to non-FCS financial institutions that requires a minimum investment in Farmer Mac's Class A voting common stock or that prescribes a maximum investment amount lower than the 33 percent33% limit set forth in the charter. Farmer Mac's Class A voting common stock is listed on the New York Stock Exchange under the symbol AGM.A.
•Class B voting common stock. The charter restricts ownership of Farmer Mac's Class B voting common stock to FCS institutions and also provides that five members of Farmer Mac's 15-member board of directors are elected by a plurality of the votes of the Class B stockholders each year. The charter does not contain anycontains no restrictions on the maximum number or percentage of outstanding shares of Class B voting common stock that any one holder may be held by an eligible stockholder,own, and Farmer Mac is not aware of any regulation applicable to FCS institutions that requires a minimum investment in its Class B voting common stock or that prescribes a maximum amount. Farmer Mac's Class B voting common stock, which has a limited market and trades infrequently, is not listed or quoted on any exchange or other quotation system, and Farmer Mac is not aware of any publicly available quotations or prices for this class of common stock.
•Class C non-voting common stock. The charter does not impose any ownership restrictions on Farmer Mac's Class C non-voting common stock, and shares of this class are freely transferable. Farmer Mac uses Class C non-voting stock for awards of equity-based compensation to officers, directors, and selected employees as part of the company's compensation programs. Holders of the Class C common stock do not vote on the election of directors or any other matter. Farmer Mac's Class C non-voting common stock is listed on the New York Stock Exchange under the symbol AGM.
•Presidential director appointments. The remaining five members of Farmer Mac's board of directors are individuals who meet the qualifications specified in the charter and are appointed by the President of the United States with the advice and consent of the United States Senate.Senate (one of whom is designated as the chair of the board of directors). These appointed directors serve at the pleasure of the President of the United States.
The ownership of Farmer Mac's two classes of voting common stock is currently concentrated in a small number of institutions. Approximately 44 percent of the Class A voting common stock is held by three financial institutions, with 31 percent held by one institution. Approximately 97 percent of the Class B voting common stock is held by five FCS institutions (two of which are related to each other through a parent-subsidiary relationship). Farmer Mac believes that the concentration in the Class A voting common stock is a by-product of trading activity in the stock over time and is not by design under the charter or any regulatory mandate. Farmer Mac believes that the concentration in such a small number of holders of Class B voting common stock is a by-product of the limited number of eligible holders of that stock and the structure of the FCS, the number of institutions of which has decreased over time as a result of mergers and consolidations.
The dividend and liquidation rights of all three classes of Farmer Mac's common stock are the same. Dividends may be paid on Farmer Mac's common stock only when, as, and if declared by Farmer Mac's board of directors in its sole discretion, subject to compliance with applicable capital requirements and the payment of dividends on any outstanding preferred stock issued by Farmer Mac. Upon liquidation, dissolution, or winding up of the business of Farmer Mac, after payment and provision for payment of outstanding debt of Farmer Mac, the holders of shares of Farmer Mac's currently outstanding 5.875% Non-Cumulative Preferred Stock, Series A ("Series A Preferred Stock"), 6.875% Non-Cumulative Preferred Stock, Series B ("Series B Preferred Stock"), 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C ("Series C Preferred Stock"), 5.700% Non-Cumulative Preferred Stock, Series D ("Series D Preferred Stock"), 5.750% Non-Cumulative Preferred Stock, Series E ("Series E Preferred Stock"), 5.250% Non-Cumulative Preferred Stock, Series F ("Series F Preferred Stock"), and any other preferred stock then outstanding, would be paid at par value out of assets available for distribution, plus all declared and unpaid dividends, before the holders of shares
of common stock received any payment. See also "Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities" for more information regardingabout Farmer Mac's common stock, and "Business—Financing—Equity Issuance" for more information onabout Farmer Mac's common stock and preferred stock.
Unlike some other GSEs such as other FCS institutions and the Federal Home Loan Banks, Farmer Mac is not structured as a cooperative owned exclusively by member institutions and established to provide services exclusively to its members. Rather, Farmer Mac, as a publicly-traded corporation, has a broader base of stockholders, including those who do not directly participate in the secondary market provided by Farmer Mac. Therefore, Farmer Mac therefore seeks to fulfill its mission of serving the financing needs of rural America in a mannerway that is consistent with providing a return on the investment of its stockholders.
Farmer Mac's policy is toMac generally requirerequires financial institutions to own a requisite amount of Farmer Mac common stock, based on the size and type of institution, to participate in the Farm & Ranch line of business. As a result of this requirement, coupled with the ability of holders of Class A and Class B voting common stock to elect two-thirds of Farmer Mac's board of directors, Farmer Mac regularly conducts business with "related parties," including institutions affiliated with members of Farmer Mac's board of directors and institutions that own large amounts of Farmer Mac's voting common stock. Farmer Mac has adopted a Code of Business Conduct and Ethics and related corporate policies that governsgovern any conflicts of interest that may arise in these transactions, andtransactions. Farmer Mac's policy is to requireMac also requires that any transactions with related parties be conducted in the ordinary course of business, with terms and conditions comparable to those available to any other counterparty not related to Farmer Mac. For more information about related party transactions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Related Party Transactions" and Note 3 to the consolidated financial statements.
Capital
Farmer Mac's charter establishes three capital standards for Farmer Mac – minimum capital, critical capital, and risk-based capital. Farmer Mac must comply with the higher of the minimum capital requirement and the risk-based capital requirement. Also, in accordance with the applicable FCA regulation on capital planning, Farmer Mac's board of directors oversees a policy that requires Farmer Mac to maintain a sufficient level of Tier 1 capital and restricts dividends and bonus payments if Farmer Mac's Tier 1 capital falls below specified thresholds. For a discussion of Farmer Mac's capital requirements and its actual capital levels, as well as FCA's role in the establishment and monitoring of those requirements and levels, see "Business—Government Regulation of Farmer Mac—Capital Standards," "Management's Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Review—Equity," and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Requirements."
Regulatory OversightLoan Eligibility
To be eligible for the Farm & Ranch line of business, a loan must:
•be secured by a fee simple mortgage or a leasehold mortgage with status as a first lien on agricultural real estate (including part-time farms and rural housing) located within the United States;
•be an obligation of a citizen or national of the United States, an alien lawfully admitted for permanent residence in the United States, or a private corporation or partnership that is majority-owned by U.S. citizens, nationals, or legal resident aliens;
•be an obligation of a person, corporation, or partnership having training or farming experience that is sufficient to ensure a reasonable likelihood that the loan will be repaid according to its terms; and
•meet the credit underwriting, collateral valuation, documentation, and other specified standards for the Farm & Ranch line of business. See "—Underwriting and Collateral Standards" and "— Lenders" for a description of these standards.
Eligible agricultural real estate consists of one or more parcels of land, which may be improved by permanently affixed buildings or other structures, that:
•is used for the production of one or more agricultural commodities or products; and
•either consists of a minimum of five acres or generates minimum annual receipts of $5,000.
This variety in the types of permitted collateral to include buildings and structures used in agriculture production means that eligible Farm & Ranch loans may include loans to agribusinesses that support agriculture production, food and fiber processing, and other supply chain production, as well as loans to direct growers and producers of agricultural commodities.
Farmer Mac's charter assignsauthorizes a maximum loan size (adjusted annually for inflation) for an eligible Farm & Ranch loan secured by more than 2,000 acres of agricultural real estate. That maximum loan size
was $13.2 million as of December 31, 2020. The charter does not prescribe a maximum loan size or a total borrower exposure for an eligible Farm & Ranch loan secured by 2,000 acres or less of agricultural real estate. However, an internal policy approved by Farmer Mac's board of directors limits the cumulative direct credit exposure to FCA, actingany one borrower or group of related borrowers on loans secured by 2,000 acres or less of agricultural real estate to 10% of Farmer Mac's Tier 1 capital ($100.6 million as of December 31, 2020).
Guarantees and Commitments
Farmer Mac offers two credit enhancement alternatives to direct loan purchases through the separate OfficeFarm & Ranch line of Secondary Market Oversight ("OSMO") within FCA,business that allow approved lenders the responsibilityability to retain the cash flow benefits of their loans and increase their liquidity and lending capacity: (1) LTSPCs and (2) Farm & Ranch Guaranteed Securities. In LTSPCs and Farm & Ranch Guaranteed Securities, the lender effectively transfers the credit risk on their eligible loans because, through Farmer Mac's commitment to purchase the loan (in the case of LTSPCs) or Farmer Mac's guarantee (in the case of Farm & Ranch Guaranteed Securities), Farmer Mac assumes the ultimate credit risk of borrower defaults on the related loans.
An LTSPC permits the lender to retain loans in its portfolio until such time, if ever, as the lender elects to deliver some or all of the loans covered by the LTSPC to Farmer Mac for purchase. Loans subject to an LTSPC must meet Farmer Mac's standards for eligible loans at the commencement of the LTSPC when Farmer Mac assumes the credit risk on the loans. As consideration for its assumption of the credit risk on loans covered by an LTSPC, Farmer Mac receives commitment fees payable monthly in arrears. Some LTSPCs contain risk sharing arrangements for pools of loans that provide for the examinationcounterparty to absorb up to a specified amount (typically between one and five percent of the original principal balance of the loan pool) of any losses incurred on the loans in the pool. At a lender's request, Farmer Mac purchases loans subject to an LTSPC at:
•par if the loans become delinquent for either 90 days or 120 days (depending on the agreement) or are in material non-monetary default, with accrued and unpaid interest on the defaulted loans payable out of any future loan payments or liquidation proceeds; or
•fair value or in exchange for cash or Farm & Ranch Guaranteed Securities (if the loans are not delinquent), in accordance with the applicable agreement.
In Farm & Ranch Guaranteed Securities transactions, Farmer Mac guarantees securities representing interests in eligible Farm & Ranch loans or participation interests in those loans held by a trust or other entity. Farmer Mac either retains or sells these securities and guarantees the timely payment of principal and interest on the securities in the event of a payment shortfall due to default. As consideration for its assumption of the credit risk on the assets underlying the Farm & Ranch Guaranteed Securities, Farmer Mac receives guarantee fees based on the outstanding principal balance of the related securities.
Farmer Mac is obligated under its guarantee on the securities to make timely payments to investors of principal (including balloon payments) and interest based on the scheduled payments on the underlying loans, regardless of whether Farmer Mac or the related trust has actually received those scheduled payments. Farmer Mac's guarantee fees typically are collected out of installment payments made on the underlying loans until those loans have been repaid, purchased out of the trust, or otherwise liquidated (generally as a result of default). The aggregate amount of guarantee fees received on Farm & Ranch Guaranteed Securities depends on the amount of those securities outstanding and on the applicable guarantee fee rate, which Farmer Mac's charter caps at 50 basis points (0.50%) per year. The amount of
Farm & Ranch Guaranteed Securities outstanding is influenced by the repayment rates on the underlying loans and by the rate at which Farmer Mac issues new Farm & Ranch Guaranteed Securities. In general, when the level of interest rates declines significantly below the interest rates on loans underlying Farm & Ranch Guaranteed Securities, the rate of prepayments is likely to increase. Conversely, when interest rates rise above the interest rates on the loans underlying Farm & Ranch Guaranteed Securities, the rate of prepayments is likely to decrease. In addition to changes in interest rates, the timing of principal payments on Farm & Ranch Guaranteed Securities also is influenced by a variety of economic, demographic, and other considerations. Farmer Mac's guarantee does not cover prepayments on the loans underlying the related Farm & Ranch Guaranteed Securities.
Underwriting and Collateral Standards
As required by Farmer Mac's charter, Farmer Mac has established underwriting, security appraisal, and repayment standards for eligible loans that consider the nature, risk profile, and other differences between different categories of eligible loans. The charter prescribes that the following minimum standards must be applied to agricultural real estate mortgage loans in the Farm & Ranch line of business:
•provide that no loan with a loan-to-value ratio ("LTV") more than 80% may be eligible;
•require each borrower to demonstrate sufficient cash flow to adequately service the loan;
•require sufficient documentation standards;
•protect the integrity of the appraisal process for any loan; and
•confirm that the borrower is or will be actively engaged in agricultural production.
In addition to these minimum standards, eligible loans in Farmer Mac's Farm & Ranch line of business are also typically required to meet more specific underwriting criteria established by Farmer Mac or demonstrate compensating strength in one or more other underwriting criteria. For larger loan exposures to agriculture production and agribusinesses that support agriculture production, food and fiber processing, and other supply chain production, which may have different risk profiles, Farmer Mac has implemented methodologies and parameters that help assess credit risk based on the appropriate sector, borrower construct, and transaction complexity. Farmer Mac relies on the combined expertise of experienced internal agricultural credit underwriters and loan servicers, along with external agricultural loan servicing and collateral valuation contractors, to perform the necessary underwriting, servicing, and collateral valuation functions on Farm & Ranch loans.
Lenders
Farmer Mac approves lenders into its network of loan sellers based on an assessment of the lender's credit profile, which may include factors such as the institution's credit rating, origination history, or financial profile. Most lenders that participate in the Farm & Ranch line of business meet prescribed criteria that Farmer Mac establishes for loan-selling counterparties, which typically include the requirement to:
•own a requisite amount of Farmer Mac common stock according to a schedule prescribed for the size and type of institution;
•have, in the judgment of Farmer Mac, the ability and experience to make or purchase and sell loans eligible for Farmer Mac's Farm & Ranch line of business and service those loans in accordance with Farmer Mac's requirements either through the lender's own staff or through contractors and originators, as well as have appropriate internal controls, policies, and procedures;
•maintain a minimum amount of net liquidity; and
•enter into a Seller/Servicer Agreement, which requires compliance with the terms of Farmer Mac's Seller/Servicer Guide, including providing representations and warranties about the eligibility of the loans and accuracy of loan data provided to Farmer Mac.
Loan Servicing
Farmer Mac generally does not directly service the loans in the Farm & Ranch line of business, although in some cases Farmer Mac may assume direct servicing for defaulted loans. Farmer Mac contracts with other institutions to undertake most of the servicing responsibilities for its loans in accordance with Farmer Mac's specified servicing requirements or in accordance with the servicing standards established by the servicing institution if the institution's standards are acceptable to Farmer Mac. For these loans, the servicer may or may not be the same entity as the lender that sold the loans to Farmer Mac. However, the originating lender often retains some servicing responsibility, particularly with direct borrower contact, which is referred to as "field servicing." Field servicers may enter into contracts with Farmer Mac's servicers that specify their field servicing responsibilities.
Loans under LTSPCs are serviced by the holders of those loans in accordance with those lenders' servicing procedures, which Farmer Mac reviews before entering into those transactions.
The substance of all servicing for loans in the Farm & Ranch line of business is performed in a manner consistent with Farmer Mac's servicing requirements, with some special servicing for loans purchased from LTSPCs to collateralize Farm & Ranch Guaranteed Securities, in order to accommodate the borrower rights regime unique to loans originated by FCS institutions.
USDA Guarantees
Farmer Mac's charter provides that:
•USDA-guaranteed portions of loans (which Farmer Mac refers to as "USDA Securities") guaranteed under the Consolidated Farm and Rural Development Act (7 U.S.C. § 1921 et seq.) are statutorily included in the definition of loans eligible for the secondary market programs provided by Farmer Mac;
•USDA Securities are exempted from the credit underwriting, collateral valuation, documentation, and other standards that other loans must meet to be eligible for the secondary market provided by Farmer Mac, and are exempted from any diversification and internal credit enhancement that may be required of pools of other eligible loans; and
•Farmer Mac is authorized to pool, issue, and guarantee timely interest and principal on securities backed by USDA Securities ("Farmer Mac Guaranteed USDA Securities").
Farmer Mac purchases USDA Securities through Farmer Mac II LLC, a subsidiary of Farmer Mac that operates substantially all of the business related to the USDA Guarantees line of business. Farmer Mac II LLC does not guarantee any USDA Securities it holds or any Farmer Mac Guaranteed USDA Securities issued by Farmer Mac or Farmer Mac II LLC.
Lenders
Any lender authorized by the USDA to obtain a USDA guarantee on a loan may participate in Farmer Mac's USDA Guarantees line of business.
Loan Servicing
The lender on each USDA guaranteed loan is required by regulation to retain the unguaranteed portion of the guaranteed loan, to service the entire underlying guaranteed loan, including the USDA-guaranteed portion, and to remain mortgagee and/or secured party of record. The USDA-guaranteed portion and the unguaranteed portion of the loan are to be secured by the same collateral with equal lien priority. The USDA-guaranteed portion of a loan cannot be paid later than, or in any way be subordinated to, the related unguaranteed portion.
Rural Utilities
Farmer Mac's charter authorizes the purchase of, and guarantee of securities backed by, loans (including participation interests in loans) for electric (including renewable electric energy) or telecommunications facilities by lenders organized as cooperatives to borrowers that have received or are eligible to receive loans under the Rural Electrification Act of 1936 ("REA"). The REA is administered by the Rural Utilities Service ("RUS"), an agency of the USDA. Farmer Mac's Rural Utilities line of business encompasses purchases of eligible Rural Utilities loans and guarantees of securities backed by those loans, as well as LTSPCs for pools of eligible Rural Utilities loans. To be eligible, Rural Utilities loans must meet Farmer Mac's credit underwriting and other specified standards. There currently are no guaranteed securities issued under the Rural Utilities line of business, although the Institutional Credit line of business includes some AgVantage securities that are secured by Rural Utilities loans. The vast majority of Farmer Mac's business to date under the Rural Utilities line of business has involved loans made to electric facilities (primarily electric distribution cooperatives and electric generation and transmission cooperatives). During 2020, Farmer Mac purchased $64.3 million of renewable energy loans in connection with various projects as part of Farmer Mac's renewable energy project finance strategic initiative under its Rural Utilities authority.
Loan Eligibility
To be eligible for Farmer Mac's Rural Utilities line of business, a Rural Utilities loan (or a participation interest in a loan) must:
•be to a borrower that has received or is eligible to receive a loan under the REA for an electric or telecommunications facility;
•be by a lender organized as a cooperative;
•be performing and not more than 30 days delinquent; and
•meet Farmer Mac's underwriting standards described in more detail below.
Underwriting and Collateral Standards
Farmer Mac's charter does not specify minimum underwriting criteria for eligible Rural Utilities loans. To manage Farmer Mac's credit risk, to mitigate the risk of loss from borrower defaults, and to provide guidance for the management, administration, and conduct of underwriting to participants in the Rural Utilities line of business, Farmer Mac has adopted credit underwriting standards that vary by loan product and by loan type. These standards are based on industry practices for similar Rural Utilities loans and are designed to assess the creditworthiness of the borrower, as well as the risk to Farmer Mac. Farmer Mac
reviews lenders' credit submissions and analyzes borrowers' audited financial statements and financial and operating reports to confirm that loans meet Farmer Mac's underwriting standards for Rural Utilities loans.
It is customary in loans to electric distribution cooperatives and electric generation and transmission cooperatives for the lender or lender group to take a security interest in substantially all of the borrower's assets. When Farmer Mac purchases a Rural Utilities loan with a pledge of all assets and a lender also has a lien on all assets, Farmer Mac verifies that a lien accommodation results in either a shared first lien or a first lien in favor of Farmer Mac. When debt indentures are used, Farmer Mac determines if available collateral is adequate to support the loan program and Farmer Mac's investment. Loans to renewable electric energy borrowers are typically secured by the borrower's project equipment, contracts, and land or leasehold interest, but Farmer Mac's enforcement rights may be subject to tax equity interests in the borrower's renewable energy project. Farmer Mac also purchases unsecured Rural Utilities loans (primarily electric generation and transmission loans) that meet Farmer Mac's underwriting standards for unsecured Rural Utilities loans.
Lenders and Loan Servicing
Farmer Mac's charter requires eligible Rural Utilities loans to be by a lender organized as a cooperative. Farmer Mac does not directly service the Rural Utilities loans held in its portfolio, which are serviced by a designee of Farmer Mac.
Institutional Credit
Under the Institutional Credit line of business, Farmer Mac guarantees and purchases general obligations of lenders and other financial institutions (including financial funds) that are secured by pools of the types of loans eligible for purchase under Farmer Mac's Farm & Ranch, USDA Guarantees, or Rural Utilities lines of business..Farmer Mac refers to these as AgVantage securities. Typically, Farmer Mac retains AgVantage securities in its portfolio. Farmer Mac's guarantee and purchase of AgVantage securities comprise the Institutional Credit line of business.
Farmer Mac has direct credit exposure to the general credit of the issuers of AgVantage securities and assumes the ultimate credit risk of an issuer default on the AgVantage securities. Before approving an institution as an issuer in an AgVantage transaction, Farmer Mac assesses the issuer's creditworthiness as well as the credit quality and performance of the issuer's loan portfolio and loan underwriting standards. Farmer Mac continues to monitor the counterparty risk assessment on an ongoing basis after the AgVantage security is issued. In addition to being a general obligation of the issuer, all AgVantage securities must be secured by eligible loans or eligible securities guaranteed by Farmer Mac in an amount at least equal to the outstanding principal amount of the issuer's AgVantage securities. As a result, Farmer Mac has indirect credit exposure to the loans or guaranteed securities that are pledged to secure the AgVantage securities, which comprise collateral for Farmer Mac in the event of a default by the issuer.
Loans pledged under AgVantage securities are serviced by the issuers of the securities (or their affiliated servicing institutions) in accordance with these institutions' servicing procedures. Farmer Mac reviews these servicing procedures before purchasing AgVantage securities from the issuer. In AgVantage transactions, the issuer is required to remove from the pool of pledged collateral any loan that becomes more than 30 days delinquent in the payment of principal or interest and to replace the delinquent loan with another eligible loan that is current in payment or to pay down the AgVantage securities to maintain the minimum required collateralization level.
For AgVantage securities secured by loans eligible for Farmer Mac's Farm & Ranch line of business, Farmer Mac currently requires the general obligation to be over-collateralized, either by more eligible loans or any of the following types of assets:
•cash;
•securities issued by the U.S. Treasury or guaranteed by an agency or instrumentality of the United States;
•other highly-rated securities; or
•other instruments approved by Farmer Mac.
The required collateralization level for the AgVantage securities secured by Farm & Ranch loans currently ranges from 103% to 125%. The required collateralization level is determined based on credit factors related to the issuer, is established when the AgVantage facility is entered into with the counterparty, and does not change during the life of the AgVantage securities issued under the facility unless mutually agreed by Farmer Mac and the general supervisioncounterparty.
For AgVantage securities that are secured by Farm & Ranch loans, Farmer Mac requires that the loans meet the minimum standards set forth in the charter for those types of loans with a maximum limit of $75.0 million in cumulative exposure to any one borrower or related borrowers from a single AgVantage issuer.
Farmer Mac has tailored a version of its AgVantage product to focus on institutional investors in agricultural assets that qualify as collateral for the types of loans eligible for the Farm & Ranch line of business. Farmer Mac refers to this product variation as the Farm Equity AgVantage product. This product has similar requirements for AgVantage securities secured by Farm & Ranch loans described above, but Farmer Mac also requires that Farm Equity AgVantage transactions maintain a higher collateralization level through lower loan-to-value ratio thresholds and contain specified financial covenants for the life of the saferelated AgVantage security.
AgVantage securities secured by loans eligible for Farmer Mac's Rural Utilities line of business require:
•the counterparty issuing the general obligation to have a credit rating from an NRSRO that is at least investment grade, or be of comparable creditworthiness as determined through Farmer Mac's analysis; and sound performance
•the collateralization (consisting of current, performing loans) to be maintained at the contractually prescribed level, in an amount at least equal to the outstanding principal amount of the powers, functions, and duties vested insecurity.
Although Farmer Mac byhas only indirect credit exposure on the charter. The charterRural Utilities loans pledged to secure AgVantage securities, the same underwriting standards that apply to loans made to electric cooperatives on which Farmer Mac assumes direct credit exposure also authorizes FCA, acting through OSMO,apply to apply itsloans made to electric cooperatives that secure the general enforcement powers to Farmer Mac.obligation of the lender in AgVantage transactions. Farmer Mac's charter requiresdoes not prescribe a maximum loan size or a total borrower exposure for an annual examinationeligible Rural Utilities loan, but Farmer Mac's current limit for AgVantage transactions is $75.0 million for cumulative loan exposure to any one borrower or related borrowers (with the amount of any direct exposure to a borrower not counting towards the $75.0 million limit). Farmer Mac also permits up to 20% of Rural Utilities loans pledged to secure AgVantage securities to be unsecured or secured by less than all of the borrower's assets.
COMPETITION
Farmer Mac is the only federally-chartered corporation established to provide a secondary market for agricultural mortgage loans, Rural Utilities loans, and USDA Securities. But Farmer Mac does face indirect competition from many sources. These sources include other entities that purchase, retain, securitize, or provide financing for the types of assets eligible for Farmer Mac's secondary market activities such as commercial and investment banks, insurance companies, other FCS institutions, financial transactionsfunds, and certain government programs. Farmer Mac also competes indirectly with originators of eligible loans that would prefer to retain the loans they originate rather than sell them into the secondary market. Farmer Mac is able to compete to acquire eligible loans due to the variety of products it offers and its ability to offer competitive funding structures and pricing to its customers. This enables Farmer Mac to provide flexible financing options and products designed to meet the varied needs of lending institutions related to capital requirements, liquidity, credit risk, and management of sector and geographic concentrations and borrower exposure limits. The relative competitiveness of Farmer Mac's loan rates and Farmer Mac's ability to develop business with lending institutions are affected by many factors, including:
•the overall supply of capital available to the agricultural and rural utilities sectors;
•the ability of other lending institutions to compete with Farmer Mac (e.g., by price averaging through offering multiple loan and authorizes FCAfee based products or by accepting a lower return on equity given market dynamics);
•the types and variety of products offered by Farmer Mac's competitors to assessmeet the needs of Farmer Mac's customer base;
•changes in the levels of available capital and liquidity of lending institutions;
•the existence of alternative sources of funding and credit enhancement for lending institutions;
•the rate of growth in the market for eligible loans; and
•demand for Farmer Mac's products.
Because Farmer Mac's charter limits Farmer Mac's business to secondary-market activities, Farmer Mac's competitive position is affected by the willingness of originators to offer eligible loans for sale in the secondary market or to utilize Farmer Mac for funding syndicated or participated loans. The charter's limits on loan size for some Farm & Ranch loans, as well as the costtypes of FCA's regulatory activities, including the costloans that are eligible for Farmer Mac's lines of any examination.business, also affect Farmer Mac's competitive position. For more information on government regulation of Farmer Mac, is also required to file quarterly reports of condition with OSMO. In addition, as a publicly-traded corporation, Farmer Mac is required to comply with the periodic reporting requirements of the SEC. For a more detailed discussion of Farmer Mac's regulatory and governmental relationships, see "Business—Government Regulation of Farmer Mac."
Farmer Mac's ability to obtain competitive funding in the debt markets is essential to its ability to maintain its relative position with its customers. As a result, competition for debt investors with other debt-issuing institutions, such as the FCS, Federal Home Loan Banks, Fannie Mae, Freddie Mac, and highly-rated financial institutions, can affect the price and volume at which Farmer Mac issues debt and therefore its ability to offer savings to customers in the form of competitive products.
CAPITAL AND CORPORATE GOVERNANCE
Farmer Mac's charter prescribes the company's basic capital and corporate governance structure. The charter authorizes Farmer Mac to issue two classes of voting common stock, each of which elects one-third of Farmer Mac's 15-person board of directors. The charter also authorizes Farmer Mac to issue non-voting common stock. The classes of Farmer Mac's outstanding common stock and their relationship to Farmer Mac's board of directors are described below.
•Class A voting common stock. The charter restricts ownership of Farmer Mac's Class A voting common stock to banks, insurance companies, and other financial institutions or similar entities that are not institutions of the FCS. The charter also provides that five members of Farmer Mac's 15-member board of directors are elected by a plurality of the votes of the Class A stockholders each year. The charter limits the amount of Class A voting common stock that any one holder may own to no more than 33% of the outstanding shares of Class A voting common stock. Farmer Mac is not aware of any regulation applicable to non-FCS financial institutions that requires a minimum investment in Farmer Mac's Class A voting common stock or that prescribes a maximum investment amount lower than the 33% limit set forth in the charter. Farmer Mac's Class A voting common stock is listed on the New York Stock Exchange under the symbol AGM.A.
•Class B voting common stock. The charter restricts ownership of Farmer Mac's Class B voting common stock to FCS institutions and also provides that five members of Farmer Mac's 15-member board of directors are elected by a plurality of the votes of the Class B stockholders each year. The charter contains no restrictions on the maximum number or percentage of outstanding shares of Class B voting common stock that any one holder may own, and Farmer Mac is not aware of any regulation applicable to FCS institutions that requires a minimum investment in its Class B voting common stock or that prescribes a maximum amount. Farmer Mac's Class B voting common stock, which has a limited market and trades infrequently, is not listed or quoted on any exchange or other quotation system, and Farmer Mac is not aware of any publicly available quotations or prices for this class of common stock.
•Class C non-voting common stock. The charter does not impose any ownership restrictions on Farmer Mac's Class C non-voting common stock, and shares of this class are freely transferable. Farmer Mac uses Class C non-voting stock for awards of equity-based compensation to officers, directors, and selected employees as part of the company's compensation programs. Holders of the Class C common stock do not vote on the election of directors or any other matter. Farmer Mac's Class C non-voting common stock is listed on the New York Stock Exchange under the symbol AGM.
•Presidential director appointments. The remaining five members of Farmer Mac's board of directors are individuals who meet the qualifications specified in the charter and are appointed by the President of the United States with the advice and consent of the United States Senate (one of whom is designated as the chair of the board of directors). These appointed directors serve at the pleasure of the President of the United States.
The dividend and liquidation rights of all three classes of Farmer Mac's common stock are the same. Dividends may be paid on Farmer Mac's common stock only when, as, and if declared by Farmer Mac's board of directors in its sole discretion, subject to compliance with applicable capital requirements and the payment of dividends on any outstanding preferred stock issued by Farmer Mac. Upon liquidation, dissolution, or winding up of the business of Farmer Mac, after payment and provision for payment of outstanding debt of Farmer Mac, the holders of shares of Farmer Mac's currently outstanding 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C ("Series C Preferred Stock"), 5.700% Non-Cumulative Preferred Stock, Series D ("Series D Preferred Stock"), 5.750% Non-Cumulative Preferred Stock, Series E ("Series E Preferred Stock"), 5.250% Non-Cumulative Preferred Stock, Series F ("Series F Preferred Stock"), and any other preferred stock then outstanding, would be paid at par value out of assets available for distribution, plus all declared and unpaid dividends, before the holders of shares
of common stock received any payment. See also "Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities" for more information about Farmer Mac's common stock, and "Business—Financing—Equity Issuance" for more information about Farmer Mac's common stock and preferred stock.
Unlike some other GSEs such as other FCS institutions and the Federal Home Loan Banks, Farmer Mac is not structured as a cooperative owned exclusively by member institutions and established to provide services exclusively to its members. Rather, Farmer Mac, as a publicly-traded corporation, has a broader base of stockholders, including those who do not directly participate in the secondary market provided by Farmer Mac. Farmer Mac therefore seeks to fulfill its mission of serving the financing needs of rural America in a way that is consistent with providing a return on the investment of its stockholders.
Farmer Mac generally requires financial institutions to own a requisite amount of Farmer Mac common stock, based on the size and type of institution, to participate in the Farm & Ranch line of business. As a result of this requirement, coupled with the ability of holders of Class A and Class B voting common stock to elect two-thirds of Farmer Mac's board of directors, Farmer Mac regularly conducts business with "related parties," including institutions affiliated with members of Farmer Mac's board of directors and institutions that own large amounts of Farmer Mac's voting common stock. Farmer Mac has adopted a Code of Business Conduct and Ethics and related corporate policies that govern any conflicts of interest that may arise in these transactions. Farmer Mac also requires that any transactions with related parties be conducted in the ordinary course of business, with terms and conditions comparable to those available to any other counterparty not related to Farmer Mac. For more information about related party transactions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Related Party Transactions" and Note 3 to the consolidated financial statements.
Capital
Farmer Mac's charter establishes three capital standards for Farmer Mac – minimum capital, critical capital, and risk-based capital. Farmer Mac is required tomust comply with the higher of the minimum capital requirement and the risk-based capital requirement. Also, in accordance with the applicable FCA regulation on capital planning, Farmer Mac's board of directors maintainsoversees a policy for maintainingthat requires Farmer Mac to maintain a sufficient level of Tier 1 capital and imposing restrictions onrestricts dividends and bonus payments if Farmer Mac's Tier 1 capital falls below specified thresholds. For a discussion of Farmer Mac's capital requirements and its actual capital levels, as well as FCA's role in the establishment and monitoring of those requirements and levels, see "Business—Government Regulation of Farmer Mac—Regulation—Capital Standards," "Management's Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Review—Equity," and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Requirements."
Employees and Property
As of December 31, 2017, Farmer Mac employed 88 people, located primarily at its office at 1999 K Street, N.W., 4th Floor, Washington, D.C. 20006. Farmer Mac also maintains offices at (1) 9169 Northpark Drive, Johnston, Iowa 50322, (2) 5200 N. Palm Avenue, Suite 306, Fresno, California 93704, and (3) 1065 E. Winding Creek, Suite 200, Eagle, Idaho 83616. Farmer Mac's main telephone number is (202) 872-7700.
Available Information
Farmer Mac makes available free of charge, through the "Investors" section of its internet website at www.farmermac.com, copies of materials it files with, or furnishes to, the SEC, including its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and amendments, if any, to those filings, as soon as reasonably practicable after electronically filing those materials with, or furnishing those materials to, the SEC. Please note that all references to www.farmermac.com in this report are inactive textual references only. The information contained on Farmer Mac's website is not incorporated by reference into this report.
FARMER MAC'S LINES OF BUSINESS
The following tables present the outstanding balances and new business volume under Farmer Mac's four lines of business – Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit:
|
| | | | | | | |
| Lines of Business - Outstanding Business Volume |
| | December 31, 2017 | | December 31, 2016 |
| | (in thousands) |
| On-balance sheet: | | | |
| Farm & Ranch: | | | |
| Loans | $ | 2,798,906 |
| | $ | 2,381,488 |
|
| Loans held in trusts: | | | |
| Beneficial interests owned by third party investors | 1,399,827 |
| | 1,132,966 |
|
| USDA Guarantees: | | | |
| USDA Securities | 2,068,017 |
| | 1,954,800 |
|
| Farmer Mac Guaranteed USDA Securities | 29,980 |
| | 35,599 |
|
| Rural Utilities: | | | |
| Loans | 1,076,291 |
| | 999,512 |
|
| Institutional Credit: | | | |
AgVantage Securities(1) | 7,593,322 |
| | 6,004,472 |
|
| Total on-balance sheet | $ | 14,966,343 |
| | $ | 12,508,837 |
|
| Off-balance sheet: | | | |
| Farm & Ranch: | | | |
| LTSPCs | $ | 2,335,342 |
| | $ | 2,209,409 |
|
| Guaranteed Securities | 333,511 |
| | 415,441 |
|
| USDA Guarantees: | | | |
| Farmer Mac Guaranteed USDA Securities | 254,217 |
| | 103,976 |
|
| Rural Utilities: | | | |
LTSPCs(2) | 806,342 |
| | 878,598 |
|
| Institutional Credit: | | | |
AgVantage Securities(1) | 11,556 |
| | 983,214 |
|
Revolving floating rate AgVantage facility(3) | 300,000 |
| | 300,000 |
|
| Total off-balance sheet | $ | 4,040,968 |
| | $ | 4,890,638 |
|
| Total | $ | 19,007,311 |
| | $ | 17,399,475 |
|
| |
(1)
| In April 2017, Farmer Mac purchased and retained $1.0 billion in AgVantage securities from MetLife. MetLife used the proceeds from Farmer Mac's purchase of $1.0 billion in AgVantage securities to refinance an AgVantage security of the same amount that matured in April 2017. Previously, $970.0 million of the maturing $1.0 billion AgVantage security had been sold to third parties and reported as off-balance sheet business volume in the Institutional Credit line of business. |
| |
(2)
| Includes $20.0 million related to one-year loan purchase commitments on which Farmer Mac receives a nominal unused commitment fee as of both December 31, 2017 and 2016. |
| |
(3)
| During 2017, $100.0 million of this facility was drawn and subsequently repaid. During 2016 this facility was not 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 in the form of AgVantage Securities, and Farmer Mac will earn interest income on those securities. |
|
| | | | | | | | | | | |
| New Business Volume – Farmer Mac Loan Purchases, Guarantees, and LTSPCs |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Farm & Ranch: | | | | | |
| Loans | $ | 1,129,545 |
| | $ | 966,023 |
| | $ | 748,368 |
|
| LTSPCs | 554,743 |
| | 399,095 |
| | 427,795 |
|
| USDA Guarantees: | | | | | |
| USDA Securities | 369,759 |
| | 375,203 |
| | 363,621 |
|
| Farmer Mac Guaranteed USDA Securities | 161,925 |
| | 106,054 |
| | 13,314 |
|
| Rural Utilities: | | | | | |
| Loans | 137,341 |
| | 50,491 |
| | 108,337 |
|
| LTSPCs | — |
| | 441,404 |
| | 522,262 |
|
| Institutional Credit: | | | | | |
| AgVantage Securities | 2,383,912 |
| | 2,098,852 |
| | 743,158 |
|
| Revolving floating rate AgVantage facility | — |
| | — |
| | 300,000 |
|
| Total purchases, guarantees, and LTSPCs | $ | 4,737,225 |
| | $ | 4,437,122 |
| | $ | 3,226,855 |
|
Farm & Ranch
Under the Farm & Ranch line of business, Farmer Mac provides a secondary market for mortgage loans secured by first liens on agricultural real estate (including part-time farms and rural housing) by (1) purchasing and retaining eligible mortgage loans, (2) securitizing eligible mortgage loans and guaranteeing the timely payment of principal and interest on the resulting securities that represent interests in, or obligations secured by, pools of those loans, or (3) issuing LTSPCs for designated eligible mortgage loans, subject to the terms of the applicable LTSPC agreement. Farmer Mac is compensated for these activities through net effective spread on loans and Farmer Mac Guaranteed Securities held on balance sheet, guarantee fees earned on Farmer Mac Guaranteed Securities, and commitment fees earned on loans in LTSPCs.
Loan Eligibility
To be eligible for the Farm & Ranch line of business, a loan is required to:must:
•be secured by a fee simple mortgage or a long-term leasehold mortgage with status as a first lien on agricultural real estate (including part-time farms and rural housing) located within the United States;
•be an obligation of a citizen or national of the United States, an alien lawfully admitted for permanent residence in the United States, or a private corporation or partnership that is majority-owned by U.S. citizens, nationals, or legal resident aliens;
•be an obligation of a person, corporation, or partnership having training or farming experience that is sufficient to ensure a reasonable likelihood that the loan will be repaid according to its terms; and
•meet the credit underwriting, collateral valuation, documentation, and other specified standards for the Farm & Ranch line of business. See "—Underwriting and Collateral Valuation (Appraisal) Standards" and "—Approved Lenders" for a description of these standards.
Eligible agricultural real estate consists of one or more parcels of land, which may be improved by permanently affixed buildings or other structures, that:
•is used for the production of one or more agricultural commodities or products; and
•either consists of a minimum of five acres or generates minimum annual receipts of $5,000.
This variety in the types of permitted collateral to include buildings and structures used in agriculture production means that eligible Farm & Ranch loans may include loans to agribusinesses that support agriculture production, food and fiber processing, and other supply chain production, as well as loans to direct growers and producers of agricultural commodities.
Farmer Mac's charter authorizes a maximum loan size (adjusted annually for inflation) for an eligible Farm & Ranch loan secured by more than 1,0002,000 acres of agricultural real estate. That maximum loan size
was $12.9$13.2 million as of December 31, 2017. Although the2020. The charter does not prescribe a maximum loan size or a total borrower exposure for an eligible Farm & Ranch loan secured by 1,0002,000 acres or less of agricultural real estate. However, an internal policy approved by Farmer Mac's board of directors limits the cumulative direct credit exposure to any one borrower or group of related borrowers on loans secured by 2,000 acres or less of agricultural real estate Farmer Mac currently limits the size of those loans to:
$50.0 million in cumulative exposure to any one borrower or related borrowers for transactions involving direct exposure to credit risk on loans (e.g., loan purchases, LTSPC transactions, and non-AgVantage Farm & Ranch Guaranteed Securities, which are not backed by a general obligation of a lender); and
$75.0 million in cumulative exposure through a single lender to any one borrower or related borrowers (with the amount of any direct borrower exposure described above not counting toward the $75.0 million limit) for AgVantage transactions, which involve the general obligation of a lender that is in turn secured by eligible loans, resulting in indirect exposure to credit risk on those loans. See "Business—Farmer Mac's Lines of Business—Institutional Credit."
Farmer Mac includes its part-time farm loans and rural housing loans in the Farm & Ranch line of business. Farmer Mac defines a "part-time farm" as agricultural real estate meeting the eligibility requirements described above on which is located a primary residence whose value is at least 30 percent of the property's aggregate value at origination. When analyzing borrower repayment capacity for part-time farm loans, Farmer Mac typically considers off-farm income as a more important factor than for Farm & Ranch loans that are not part-time farm loans. Part-time farm loans do not represent a significant part10% of Farmer Mac's business, with a total of $433.6Tier 1 capital ($100.6 million of those loans in Farmer Mac's portfolio as of December 31, 2017.2020).
For the rural housing portion of this line of business, an eligible loan must be secured by a mortgage on a one- to four-family, owner-occupied, moderately priced principal residence located in a community with a population of 2,500 or fewer. Farmer Mac uses the All-Transaction Housing Price Index ("HPI"), as published by the Federal Housing Finance Agency, to index the value of a moderately priced rural housing dwelling. Based on the most recent publication of the HPI, Farmer Mac increased the maximum purchase price or current appraised value for a dwelling that secures a rural housing loan (excluding the land to which the dwelling is affixed) to $300,000 effective December 18, 2017. The prior limit was $279,950. In addition to the dwelling itself, an eligible rural housing loan can be secured by land associated with the dwelling having an appraised value of no more than 50 percent of the total appraised value of the combined property. Rural housing loans do not represent a significant part of Farmer Mac's business, with a total of $6.0 million of those loans in Farmer Mac's portfolio as of December 31, 2017.
Summary of Farm & Ranch Transactions
During the year ended December 31, 2017, Farmer Mac added a total of $1.7 billionof new business volume under the Farm & Ranch line of business. That new business volume was partially offset by
repayments on existing assets (principal paydowns and maturities) during the year, resulting in $6.9 billion of total outstanding business volume in this line of business as of December 31, 2017, compared to $6.1 billion as of December 31, 2016. As of December 31, 2017, Farmer Mac had direct credit exposure on 12,455 loans in the Farm & Ranch line of business across 48 states.
During 2017, Farmer Mac purchased eligible loans from 174 entities (the top ten institutions generated 59 percent of the purchase volume) and placed loans under LTSPCs with 25 entities in the Farm & Ranch line of business. During 2016, Farmer Mac purchased eligible loans from 169 entities (the top ten institutions generated 59 percent of the purchase volume) and placed loans under LTSPCs with 25 entities. During 2015, Farmer Mac purchased eligible loans from 163 entities (the top ten institutions generated 55 percent of the purchase volume) and placed loans under LTSPCs with 28 entities.
The following table summarizes loans purchased or newly placed under LTSPCs under the Farm & Ranch line of business for each of the years ended December 31, 2017, 2016, and 2015:
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Loans | $ | 1,129,545 |
| | $ | 966,023 |
| | $ | 748,368 |
|
| LTSPCs | 554,743 |
| | 399,095 |
| | 427,795 |
|
| Total | $ | 1,684,288 |
| | $ | 1,365,118 |
| | $ | 1,176,163 |
|
The following table presents the outstanding balances of Farm & Ranch loans held and loans underlying Farm & Ranch Guaranteed Securities and LTSPCs as of the dates indicated:
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (in thousands) |
| On-balance sheet: | | | |
| Loans | $ | 2,798,906 |
| | $ | 2,381,488 |
|
| Loans held in trusts: | | | |
| Beneficial interests owned by third party investors | 1,399,827 |
| | 1,132,966 |
|
| Total on-balance sheet | $ | 4,198,733 |
| | $ | 3,514,454 |
|
| Off-balance sheet: | |
| | |
|
| LTSPCs | $ | 2,335,342 |
| | $ | 2,209,409 |
|
| Guaranteed Securities | 333,511 |
| | 415,441 |
|
| Total off-balance sheet | $ | 2,668,853 |
| | $ | 2,624,850 |
|
| Total | $ | 6,867,586 |
| | $ | 6,139,304 |
|
Loan Purchases
Farmer Mac offers loan products designed to increase the secondary market liquidity of agricultural real estate mortgage loans and the lending capacity of financial institutions that originate those loans. Farmer Mac enters into mandatory delivery commitments to purchase loans and offers rates for those commitments daily. Farmer Mac also purchases portfolios of newly originated and seasoned, current loans on a negotiated basis. Farmer Mac purchases both fixed and adjustable rate loans that have a variety of maturities and often include balloon payments. Of the $1.1 billion of loans purchased in the Farm & Ranch line of business during 2017, 70 percentincluded balloon payments. By comparison, of the $1.0
billion of loans purchased in the Farm & Ranch line of business during 2016, 60 percent included balloon payments.
Farmer Mac's new and expanded business relationships with larger regional and national lenders has led to an increase in Farmer Mac's loan purchase volume and the average transaction size within the Farm & Ranch line of business. The average unpaid principal balance of loans purchased in the Farm & Ranch line of business was $781,000 in 2017, compared to $665,000 during 2016 and $666,000 during 2015. As of December 31, 2017 and 2016, the average unpaid principal balance of loans outstanding in the Farm & Ranch line of business was $642,000 and $611,000, respectively.
Guarantees and Commitments
Farmer Mac offers two credit enhancement alternatives to direct loan purchases through the Farm & Ranch line of business that allow approved lenders the ability to retain the cash flow benefits of their loans and increase their liquidity and lending capacity: (1) LTSPCs and (2) Farm & Ranch Guaranteed Securities. LTSPCs and securitization trusts where Farmer Mac is not the primary beneficiary result in the creation of off-balance sheet obligations for Farmer Mac. Historically, the only securitization trusts where Farmer Mac has not determined itself to be the primary beneficiary have been trusts containing 100 percent participation interests in loans that comprised an LTSPC pool prior to securitization, and in which the participating institution is not a related party to Farmer Mac. In performing Farmer Mac's purchase and guarantee obligations related to LTSPCs and Farm & Ranch Guaranteed Securities, payments made on the underlying loans or participation interests and liquidation of the related collateral (in the event of default under the terms of those assets) are intended to protect Farmer Mac against losses.
Both LTSPC and Farm & Ranch Guaranteed Securities transactions permit a lender to nominate from its portfolio an identified pool of loans, subject to review by Farmer Mac for conformity with its eligibility standards for Farm & Ranch loans. In Farm & Ranch Guaranteed Securities and LTSPC transactions, the lender effectively transfers the credit risk on thosetheir eligible loans because, through Farmer Mac's guarantee or commitment to purchase the loan (in the case of LTSPCs) or Farmer Mac's guarantee (in the case of Farm & Ranch Guaranteed Securities), Farmer Mac assumes the ultimate credit risk of borrower defaults on the underlyingrelated loans. This type of risk transfer reduces a lender's credit and concentration risk exposures and, consequently, its regulatory capital requirements and loss reserve requirements. The loans and participation interests underlying LTSPCs and Farm & Ranch Guaranteed Securities may include those with payment, maturity, and interest rate characteristics that differ from the loan products that Farmer Mac offers for purchase on a daily basis, but all are subject to the applicable standards described in
"—Underwriting and Collateral Valuation (Appraisal) Standards." See also "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."
LTSPCs. An LTSPC commits Farmer Mac, subject to the terms of the applicable LTSPC agreement, to a future purchase of one or more loans from an identified pool of eligible loans that met Farmer Mac's standards at the time the transaction was entered into and Farmer Mac assumed the credit risk on the loans. The LTSPC structure, which is not a guarantee of loans or securities, permits the lender to retain the loan poolloans in its portfolio until such time, if ever, as the lender elects to deliver some or all of the loans incovered by the poolLTSPC to Farmer Mac for purchase underpurchase. Loans subject to an LTSPC must meet Farmer Mac's standards for eligible loans at the termscommencement of the LTSPC agreement.when Farmer Mac assumes the credit risk on the loans. As consideration for its assumption of the credit risk on loans underlyingcovered by an LTSPC, Farmer Mac receives commitment fees payable monthly in arrears. Farmer Mac offers different options under LTSPC arrangements to meet the credit and liquidity needs of its counterparties. Some LTSPCs provide that the underlying loans can be converted into Farm & Ranch Guaranteed Securities at the option of the counterparty with no conversion
fee paid to Farmer Mac. Some LTSPCs contain risk sharing arrangements for pools of loans that provide for the counterparty to absorb up to a specified amount (typically between one and five percent of the original principal balance of the loan pool) of any losses incurred on the loans in the pool. As of December 31, 2017 and 2016, approximately 7.2 percent and 9.3 percent, respectively, of total LTSPCs and Farm & Ranch Guaranteed Securities, including those consolidated as loans on Farmer Mac's balance sheet, contained risk sharing arrangements.
At a lender's request, Farmer Mac purchases loans subject to an LTSPC at:
•par if the loans become delinquent for either 90 days or 120 days (depending on the agreement) or are in material non-monetary default, with accrued and unpaid interest on the defaulted loans payable out of any future loan payments or liquidation proceeds; or
•fair value or in exchange for cash or Farm & Ranch Guaranteed Securities (if the loans are not delinquent), in accordance with the terms of the applicable agreement.
In 2017, Farmer Mac entered into $554.7 million of LTSPCs, compared to $399.1 million in 2016, in the Farm & Ranch line of business. In 2017, LTSPCs were the preferred credit enhancement alternative for new credit protection transactions, and they continue to be a significant portion of the Farm & Ranch line of business. During 2017 and 2016, there were no conversions of LTSPCs into Farm & Ranch Guaranteed Securities. As of December 31, 2017, the aggregate principal balance of the loans underlying LTSPCs in Farmer Mac's Farm & Ranch line of business was $2.3 billion. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Business Volume."
Farm & Ranch Guaranteed Securities. In Farm & Ranch Guaranteed Securities transactions, Farmer Mac guarantees securities representing interests in eligible Farm & Ranch loans or participation interests in those loans held by a trust or other entity. Farmer Mac either retains or sells these securities and guarantees the timely payment of principal and interest and principal on thesethe securities which are either retained by Farmer Mac or soldin the event of a payment shortfall due to third parties. For those securities sold to third parties, the eligible loans or participation interests are often acquired from lenders in exchange for the Farm & Ranch Guaranteed Securities backed by those assets.default. As consideration for its assumption of the credit risk on the assets underlying the Farm & Ranch Guaranteed Securities, Farmer Mac receives guarantee fees based on the outstanding principal balance of the related securities.
Farmer Mac is obligated under its guarantee on the securities to make timely payments to investors of principal (including balloon payments) and interest based on the scheduled payments on the underlying loans, regardless of whether Farmer Mac or the related trust has actually received those scheduled payments. Farmer Mac's guarantee fees typically are collected out of installment payments made on the underlying loans until those loans have been repaid, purchased out of the trust, or otherwise liquidated (generally as a result of default). The aggregate amount of guarantee fees received on Farm & Ranch Guaranteed Securities depends on the amount of those securities outstanding and on the applicable guarantee fee rate, which Farmer Mac's charter caps at 50 basis points (0.50 percent)(0.50%) per year. The amount of
Farm & Ranch Guaranteed Securities outstanding is influenced by the repayment rates on the underlying loans and by the rate at which Farmer Mac issues new Farm & Ranch Guaranteed Securities, including as a result of conversions from LTSPCs.Securities. In general, when the level of interest rates declines significantly below the interest rates on loans underlying Farm & Ranch Guaranteed Securities, the rate of prepayments is likely to increase. Conversely, when interest rates rise above the interest rates on the loans underlying Farm & Ranch Guaranteed Securities, the rate of prepayments is likely to decrease. In
addition to changes in interest rates, the timing of principal payments on Farm & Ranch Guaranteed Securities also is influenced by a variety of economic, demographic, and other considerations.
Of the $19.0 billion outstanding principal balance of assets included in Farmer Mac's four lines of business as of December 31, 2017, $1.7 billion were in the form of Farm & Ranch Guaranteed Securities created from the deposit of eligible loan assets into securitization trusts that issue "pass-through" certificates representing interests in the underlying assets. This type of securitization structure may involve the deposit of either whole loans or loan participation interests into the trusts.
As of December 31, 2017, Farmer Mac had outstanding Farm & Ranch Guaranteed Securities of $1.4 billion that represent interests in whole loans and $333.5 million that represent interests in loan participations as a result of conversions from LTSPCs. Both types of transactions involve the deposit of eligible assets into securitization trusts along with all of the rights under related agreements that provide for, among other things, remedies for any breaches of representations and warranties made by the lender and the servicing of the underlying assets. In each of these transactions, the related trust has issued securities that represent interests in the assets of the trust and that Farmer Mac guarantees as to the timely payment of principal and interest.
For Farm & Ranch Guaranteed Securities that result from the conversion of LTSPCs, a 100 percent participation in the cash flows associated with each loan formerly subject to the LTSPC, rather than the whole loan, is deposited into the securitization trust. These transactions involve loan participations for reasons unique to the counterparties that have elected these conversions, all of whom are members of the FCS. Loans made by FCS institutions to farmers and ranchers have, by statute, specified loan and collateral actions to which borrowers are entitled, known as "borrower rights." Farmer Macguarantee does not havecover prepayments on the ability to offer all of the prescribed borrower rights without the involvement of another FCS counterparty. In recognition of this and Farmer Mac's desire not to disrupt the borrower's relationship with the originating FCS lender and expectations about how the loan will be serviced, Farmer Mac developed the participation interest securitization structure for FCS loans with borrower rights. The deposit of participation interests into securitization trusts permits the legal ownership of the related loan to remain with the FCS counterparty, together with the servicing and borrower rights related to the loan. Farmer Mac, in its role as trustee, generally has the right to give or withhold consent to the exercise of remedies as to each related loan. The FCS servicers in these transactions are also the holders ofunderlying the related Farm & Ranch Guaranteed Securities, which have the same economic benefit to the holder from a cash flow perspective as a securitization of whole loans. See "—Servicing" for more information about the servicing of loans underlying Farm & Ranch Guaranteed Securities.
For the years ended December 31, 2017 and 2016, Farmer Mac sold Farm & Ranch Guaranteed Securities in the amounts of $363.5 million and $511.4 million, respectively. No gains or losses resulted from these sales in either 2017 or 2016. During 2017 and 2016, there were no conversions of LTSPCs into Farm & Ranch Guaranteed Securities. As of December 31, 2017, the aggregate principal balance of the loans that backed Farmer Mac's Farm & Ranch Guaranteed Securities, which may or may not be consolidated on-balance sheet depending on the primary beneficiary determination described above, was $1.7 billion. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Business Volume."
Underwriting and Collateral Valuation (Appraisal) Standards
As required by Farmer Mac's charter, Farmer Mac has established underwriting, security appraisal, and repayment standards for eligible loans taking into accountthat consider the nature, risk profile, and other differences between different categories of eligible loans. The charter prescribes that the following minimum standards must be applied to agricultural real estate mortgage loans in the Farm & Ranch line of business:
•provide that no loan with a loan-to-value ratio ("LTV") in excess of 80 percentmore than 80% may be eligible;
•require each borrower to demonstrate sufficient cash flow to adequately service the loan;
•require sufficient documentation standards;
•protect the integrity of the appraisal process for any loan; and
•confirm that the borrower is or will be actively engaged in agricultural production.
In addition to these minimum standards, agricultural mortgageeligible loans on whichin Farmer Mac assumes direct credit exposure, such as loans purchased or underlying LTSPCs orMac's Farm & Ranch Guaranteed Securities,line of business are also typically required to meet more specific underwriting standardscriteria established by Farmer Mac as described below.
or demonstrate compensating strength in one or more other underwriting criteria. For larger loan exposures to agriculture production and agribusinesses that support agriculture production, food and fiber processing, and other supply chain production, which may have different risk profiles, Farmer Mac has implemented methodologies and parameters that help assess credit risk based on the appropriate sector, borrower construct, and transaction complexity. Farmer Mac relies on the combined expertise of experienced internal agricultural credit underwriters and loan servicers, along with external agricultural loan servicing and collateral valuation contractors, to perform the necessary underwriting, servicing, and collateral valuation functions on Farm & Ranch loans.
Underwriting. To manage Farmer Mac's credit risk and to provide guidance for the management, administration, and conduct of underwriting to all participating and potential Farm & Ranch lenders, Farmer Mac has adopted credit underwriting standards that vary by loan type and loan product. Farmer Mac developed these standards based on industry practices for similar mortgage loans and designed them to assess the creditworthiness of the borrower, as well as the risk to Farmer Mac for having assumed the credit risk on those loans. Furthermore, Farmer Mac requires Farm & Ranch lenders to make representations and warranties regarding the conformity of eligible mortgage loans to these standards and any other requirements that Farmer Mac may impose from time to time. Farmer Mac has the ability to require repurchase of the loan upon a material breach of these representations and warranties. The underwriting standards described in this section apply to Farmer Mac's Farm & Ranch loans other than part-time farm and rural housing loans, whose underwriting standards more closely resemble generally-accepted industry standards for residential lending, including fully verified repayment capacity and use of credit scores.Lenders
Farmer Mac's credit underwriting standards for Farm & Ranch loans generally require that the original LTV of any loan not exceed 70 percent. Farmer Mac may require lower original LTV thresholds for some categories of loans, such as loans secured by property located in certain geographic regions, unseasoned loans, single purpose facility loans, and loans exceeding certain dollar thresholds. Farmer Mac, from time to time, allows higher LTV thresholds for loans secured by swine and poultry facilities that are supported by a strong production contract with a reputable processor (up to 75 percent original LTV) and rural housing and part-time farm loans secured primarily by owner-occupied residences (up to 80 percent original LTV). The original LTV of a loan is calculated by dividing the loan's principal balance at the time of guarantee, purchase, or commitment by the lower of the appraised value or the purchase price at the date of loan origination or, when available, updated appraised value at the time of guarantee, purchase, or commitment.
In the case of newly-originated Farm & Ranch loans, Farmer Mac's credit underwriting standards include:
pro forma total debt service coverage ratio supported by historical profitability, including farm and non-farm income, of 1.25 or higher;
pro forma debt-to-asset ratio of 50 percent or less; and
pro forma ratio of current assets to current liabilities of 1.25 or higher.
Farmer Mac evaluates these standardsapproves lenders into its network of loan sellers based on an ongoing basis based on current and anticipated market conditions, and adjusts these standards as Farmer Mac determines is necessary. Farmer Mac also uses an interest rate shock test for adjustable rate Farm & Ranch loans with initial reset periodsassessment of less than five years.
Farmer Mac includes its facility loans,the lender's credit profile, which may include factors such as dairy and processing facilities, in its Farm & Ranch line of business. Farmer Mac defines a facility loan as a loan secured by agricultural real estate with building improvements (other than a residence)the institution's credit rating, origination history, or financial profile. Most lenders that contribute more than 60 percent of the appraised value of the property. The credit underwriting standards for facility loans are the same as for other Farm & Ranch loans except that certain facility loans are required to have a more stringent total debt service coverage ratio, including farm and non-farm income, of 1.35 or higher.
Loans not exceeding $1.5 million that are secured by eligible collateral with original LTVs not greater than 55 percent made to borrowers with high credit scores and adequate financial resources may be accepted without further underwriting tests being applied.
Farmer Mac's underwriting standards provide for the acceptance of a loan that, in the judgment of the Farmer Mac underwriter, is a sound loan with a high probability of repayment in accordance with its terms even though the loan does not meet one or more of the underwriting ratios usually required for loans of that type. In those cases, Farmer Mac permits approval of a loan if it:
has compensating strengths, which means it exceeds minimum requirements for one or more of the underwriting standards to a degree that compensates for noncompliance with one or more other standards; and
is made to a producer of particular agricultural commodities or products in a segment of agriculture in which such compensating strengths are typical of the financial condition of sound borrowers in that segment.
Although underwriting approvals may be made based on compensating strengths, no loan will be approved if it does not at least meet all of the minimum standards prescribed by Farmer Mac's charter.
Farmer Mac's use of compensating strengths is not intended to provide a basis for waiving or lessening the requirement that eligible mortgage loans under the Farm & Ranch line of business be of consistently high quality. Loans approved on the basis of compensating strengths are fully underwritten and have experienced lower cumulative rates of loss following default compared to loans that were approved on the basis of conformance with all applicable underwriting ratios.
In the case of a seasoned loan, Farmer Mac considers sustained historical performance to be a reliable alternative indicator of a borrower's ability to pay the loan according to its terms. In the Farm & Ranch line of business, a seasoned loan generally will be deemed an eligible loan if:
it has been outstanding for at least five years and has an LTV of 60 percent or less;
there have been no payments more than 30 days past due during the three-year period immediately before the date the loan is either purchased by Farmer Mac or made subject to an LTSPC; and
there have been no material restructurings or modifications for credit reasons during the previous five years.
A seasoned loan that has been outstanding for more than one year but less than five years must substantially comply with the applicable underwriting standards for newly originated loans as of the date the loan was originated by the lender.
Farmer Mac performs due diligence before purchasing, guaranteeing securities backed by, or committing to purchase seasoned loans, including:
evaluating loan database information to determine conformity to the criteria set forth in the preceding paragraphs;
confirming that loan file data conform to database information;
validating supporting credit information in the loan files; and
reviewing loan documentation and collateral valuations.
Farmer Mac performs these and other due diligence procedures using methods that consider the size, age, leverage, industry sector, and nature of the collateral for the loans.
Required documentation for all loansparticipate in the Farm & Ranch line of business includes a first lien mortgage or deed of trust, a written promissory note, and assurance of Farmer Mac's lien position through either a title insurance policy or title opinion from an experienced real estate attorney in any geographic area where title insurance is not the industry practice.
As Farmer Mac develops new credit products, it establishes underwriting guidelines for them. Those guidelines result in industry-specific measures that meet or exceed the minimum underwriting standards contained in Farmer Mac's charter and provide Farmer Mac with the flexibility to deliver the benefits of a secondary market to farmers, ranchers, and rural homeowners in diverse sectors of the rural economy. Farmer Mac does not require that each loan's compliance with the applicable underwriting standards be re-evaluated after Farmer Mac purchases the loan or approves it for inclusion in a pool that backs Farm & Ranch Guaranteed Securities or an LTSPC pool.
Collateral Valuation Standards. Farmer Mac has adopted collateral valuation standards for newly originated loans purchased or underlying Farm & Ranch Guaranteed Securities or LTSPCs. Those standards require, among other things, that a current valuation be performed, or have been performed within the preceding 12 months, independently of the credit decision-making process. Farmer Mac generally requires appraisals to conform to the Uniform Standards of Professional Appraisal Practice ("USPAP") promulgated by the Appraisal Standards Board.
Farmer Mac's collateral valuation standards require that the valuation function be conducted or administered by an individual who meets specific qualification and competence criteria and who:
is not associated, except by the engagement for the collateral valuation, with the credit underwriters making the loan decision, though the appraiser or evaluator and the credit underwriter may be directly or indirectly employed by a common employer;
receives no financial or professional benefit of any kind by virtue of the report content, valuation, or credit decision made, or based on the valuation report; and
has no present or contemplated future direct or indirect interest in the property serving or to serve as collateral.
Farmer Mac's collateral valuation standards require uniform reporting of reliable and credible opinions of the market value based on analyses of comparable property sales, including consideration of the property's income-producing capacity and, if relevant, the market's response to the cost of improvements, as well as information regarding market trends. For seasoned loans, Farmer Mac obtains collateral valuation updates as considered necessary in its assessment of collateral risk determined in the due diligence process. If a current or updated collateral valuation is required for a seasoned loan, the collateral valuation standards described above would apply.
Portfolio Diversification
It is Farmer Mac's policy to diversify its portfolio of loans held and loans underlying Farm & Ranch Guaranteed Securities and LTSPCs, both geographically and by agricultural commodity/product. Farmer Mac directs its marketing efforts toward agricultural lenders throughout the nation to achieve commodity/product and geographic diversification in its exposure to credit risk. Farmer Mac evaluates its credit exposure in particular geographic regions and commodities/products relative to the total principal amount of all outstanding loans held and loans underlying LTSPCs and Farm & Ranch Guaranteed Securities.
Farmer Mac is not obligated to assume credit risk on every loan that meets its underwriting and collateral valuation standards submitted by an eligible participant. Farmer Mac may consider other factors, such as its overall portfolio diversification, commodity and farming forecasts, and risk management objectives, in deciding whether or not to accept a loan as part of the Farm & Ranch line of business. For example, if industry forecasts indicate possible weakness in a geographic area or agricultural commodity or product, Farmer Mac may decide not to purchase or commit to purchase an affected loan as part of managing Farmer Mac's overall portfolio exposure to areas of possible heightened risk exposure. Because Farmer Mac effectively assumes the credit risk on all loans underlying an LTSPC, Farmer Mac's commodity/product and geographic diversification disclosures reflect all loans underlying LTSPCs and any loans that have been purchased out of LTSPC pools. For information about the diversification of Farmer Mac's existing portfolio, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees" and Note 8 to the consolidated financial statements.
Approved Lenders
As of December 31, 2017, Farmer Mac had 680 approved lenders eligible to participate in Farmer Mac's Farm & Ranch line of business, ranging from single-office to multi-branch institutions, spanning community banks, FCS institutions, mortgage companies, mortgage funds, commercial banks, and insurance companies, compared to 638 eligible approved lenders as of December 31, 2016. In addition to participating directly in the Farm & Ranch line of business, some of the approved lenders facilitate indirect participation by other lenders by managing correspondent networks of lenders from which the approved lenders purchase loans to sell to Farmer Mac. As of December 31, 2017, of the 680 approved
lenders eligible to participate, 196 lenders had been active participants in the Farm & Ranch line of business during the previous 12 months by either selling at least one loan to Farmer Mac or entering into an LTSPC transaction with Farmer Mac, as compared to 184 out of 638 approved lenders as of December 31, 2016.
To be considered for approval as a participant in the Farm & Ranch line of business, a lender must meetprescribed criteria that Farmer Mac establishes. Those criteriaestablishes for loan-selling counterparties, which typically include the following requirements:requirement to:
•own a requisite amount of Farmer Mac common stock according to a schedule prescribed for the size and type of institution;
•have, in the judgment of Farmer Mac, the ability and experience to make or purchase and sell loans eligible for Farmer Mac's Farm & Ranch line of business and service those loans in accordance with Farmer Mac's requirements either through the lender's own staff or through contractors and originators;originators, as well as have appropriate internal controls, policies, and procedures;
•maintain a minimum adjustedamount of net worth;liquidity; and
•enter into a Seller/Servicer Agreement, which requires compliance with the terms of the Farmer MacMac's Seller/Servicer Guide, including providing representations and warranties regardingabout the eligibility of the loans and accuracy of loan data provided to Farmer Mac.
Servicing
Farmer Mac generally does not directly service the loans included in the Farm & Ranch line of business, although in some cases Farmer Mac may assume direct servicing for defaulted loans. Farmer Mac serves in the role of master servicer for Farm & Ranch loans held by Farmer Mac and for whole loans underlying Farm & Ranch Guaranteed Securities. In that capacity, Farmer Mac contracts with other institutions known as central servicers, to undertake the majoritymost of the servicing responsibilities for theits loans in accordance with Farmer Mac's specified servicing requirements.requirements or in accordance with the servicing standards established by the servicing institution if the institution's standards are acceptable to Farmer Mac. For these loans, the central servicer may or may not be the same entity as the lender that sold the loans to Farmer Mac, andMac. However, the originating lenders may retainlender often retains some servicing responsibility, particularly with direct borrower contacts,contact, which is referred to as "field servicing" functions.servicing." Field servicers may enter into contracts with Farmer Mac's central servicers that specify the retainedtheir field servicing functions. responsibilities.
Loans related to the participation interests underlying Farm & Ranch Guaranteed Securities that result from the conversion of LTSPCs are serviced for the benefit of Farmer Mac, as trustee and guarantor, by the FCS institution that participated the loans to Farmer Mac. The servicer of those loans is usually also the holder of the related Farm & Ranch Guaranteed Securities. In those transactions, the FCS servicer is required to service the loans related to the securitized participation interests in a commercially reasonable manner and in substantial compliance with Farmer Mac's servicing requirements for Farm & Ranch loans. Those servicers are also required to give effect to all statutory borrower rights applicable to the loans and have shared power with Farmer Mac for some servicing actions to ensure this. The loans related to the Farm & Ranch Guaranteed Securities that result from the conversion of loans formerly subject to an LTSPC are the only loans included in the Farm & Ranch line of business that are subject to a shared power servicing provision.
Loans underlyingunder LTSPCs are serviced by the holders of those loans in accordance with those lenders' servicing procedures, which are reviewed by Farmer Mac reviews before entering into those transactions.
In summary, theThe substance of all servicing for loans in the Farm & Ranch line of business is performed in a manner consistent with Farmer Mac's servicing requirements, with some special servicing for the assets
underlyingloans purchased from LTSPCs to collateralize Farm & Ranch Guaranteed Securities, resulting from LTSPC conversionsin order to accommodate the borrower rights regime unique to loans originated by FCS institutions.
USDA Guarantees
General
Farmer Mac initiated its USDA Guarantees line of business in 1991 after Congress revised Farmer Mac's charter to provideprovides that:
•USDA-guaranteed portions of loans (which Farmer Mac refers to as "USDA Securities") guaranteed under the Consolidated Farm and Rural Development Act (7 U.S.C. § 1921 et seq.) are statutorily included in the definition of loans eligible for the secondary market programs provided by Farmer Mac;
•USDA Securities are exempted from the credit underwriting, collateral valuation, documentation, and other standards that other loans must meet to be eligible for the secondary market provided by Farmer Mac, and are exempted from any diversification and internal credit enhancement that may be required of pools of other eligible loans; and
•Farmer Mac is authorized to pool, issue, and issue guarantee timely interest and principal on securities backed by USDA Securities ("Farmer Mac Guaranteed Securities backed by USDA Securities.Securities").
Since January 2010, nearly allFarmer Mac purchases of USDA Securities have been made bythrough Farmer Mac II LLC, a subsidiary of Farmer Mac that operates substantially all of the business related to the USDA Guarantees line of business. Farmer Mac operates only that part of the business that involves the issuance of Farmer Mac Guaranteed USDA Securities to investors other than Farmer Mac or Farmer Mac II LLC. Although Farmer Mac II LLC may issue securities in these transactions, Farmer Mac II LLC does not guarantee any USDA Securities it holds or any Farmer Mac Guaranteed USDA Securities issued by Farmer Mac or Farmer Mac II LLC.
Summary of USDA Guarantees Transactions
Farmer Mac guarantees the timely payment of principal and interest on Farmer Mac Guaranteed USDA Securities backed by USDA Securities. Farmer Mac does not guarantee the repayment of the USDA Securities themselves. During the year ended December 31, 2017, Farmer Mac II LLC purchased approximately $531.7 million of USDA Securities, of which $375.7 million were retained and $156.0 million were securitized and sold to lenders or other investors in the form of Farmer Mac Guaranteed USDA Securities. During the year ended December 31, 2016, Farmer Mac II LLC purchased approximately $481.3 million of USDA Securities, of which $383.3 million were retained and $98.0 million were securitized and sold to lenders or other investors in the form of Farmer Mac Guaranteed USDA Securities. During the year ended December 31, 2015, Farmer Mac II LLC purchased approximately $376.9 million of USDA Securities, all of which were retained. In addition to the purchases of USDA Securities made by Farmer Mac II LLC in 2017, Farmer Mac purchased for its liquidity investment portfolio $45.0 million of USDA Securities that were not eligible for Farmer Mac's USDA Guarantees line of business because the related USDA guarantees were issued under authority not related to the Consolidated Farm and Rural Development Act. Farmer Mac did not purchase any USDA Securities in 2016 or 2015. During 2017, 2016, and 2015, Farmer Mac and Farmer Mac II LLC conducted USDA Guarantees transactions with 222, 222, and 209 entities, respectively.
As of December 31, 2017 and 2016, $2.4 billion and $2.1 billion, respectively, of Farmer Mac Guaranteed USDA Securities and USDA Securities were outstanding. The following table presents activity in the USDA Guarantees line of business for each of the years indicated:
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Purchased and retained | $ | 375,715 |
| | $ | 383,303 |
| | $ | 376,935 |
|
| Purchased and sold | 155,969 |
| | 97,954 |
| | — |
|
| Total | $ | 531,684 |
| | $ | 481,257 |
| | $ | 376,935 |
|
The following table presents the outstanding balance of USDA Securities and Farmer Mac Guaranteed USDA Securities as of the dates indicated:
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (in thousands) |
| On-balance sheet: | | | |
| USDA Securities | $ | 2,068,017 |
| | $ | 1,954,800 |
|
| Farmer Mac Guaranteed USDA Securities | 29,980 |
| | 35,599 |
|
| Off-balance sheet: | | | |
| Farmer Mac Guaranteed USDA Securities | 254,217 |
| | 103,976 |
|
| Total | $ | 2,352,214 |
| | $ | 2,094,375 |
|
As of December 31, 2017, Farmer Mac had experienced no other-than-temporary impairment on any of its Farmer Mac Guaranteed USDA Securities or USDA Securities.
United States Department of Agriculture Guaranteed Loan Programs
The USDA, acting through its agencies, currently administers the federal rural credit programs first developed in the mid-1930s. The USDA makes direct loans and guarantees portions of loans made and serviced by USDA-qualified lenders for various purposes. The USDA's guarantee is supported by the full faith and credit of the United States. The USDA guarantees up to 95 percent of the principal amount of guaranteed loans. Through its USDA Guarantees line of business, Farmer Mac is one of several competing purchasers of USDA Securities representing the USDA-guaranteed portions of farm ownership loans, farm operating loans, business and industry loans, community facilities loans, and other loans. The guaranteed portions of these loans are fully guaranteed as to principal and interest by the USDA.
USDA Guarantees. Each USDA guarantee is a full faith and credit obligation of the United States and becomes enforceable if a lender fails to repurchase the portion of the loan that is guaranteed by the USDA from its holder within 30 days after written demand from the holder when:
the borrower under the guaranteed loan is in default not less than 60 days in the payment of any principal or interest due on the USDA-guaranteed portion of the loan; or
the lender has failed to remit to the holder the payment made by the borrower on the USDA-guaranteed portion of the loan or any related loan subsidy within 30 days after the lender's receipt of the payment.
If the lender does not repurchase the USDA-guaranteed portion as provided above, the USDA is required to purchase the unpaid principal balance of the USDA-guaranteed portion together with accrued interest (including any loan subsidy) to the date of purchase, less the lender's servicing fee, within 60 days after written demand upon the USDA by the holder. While the USDA guarantee will not cover the note interest to the holder on USDA-guaranteed portions accruing after 90 days from the date of the original demand letter of the holder to the lender requesting repurchase, Farmer Mac has established procedures to require prompt demand on the USDA to purchase USDA-guaranteed portions that have not been repurchased by the lender.
If, in the opinion of the lender (with the concurrence of the USDA) or in the opinion of the USDA, repurchase of the USDA-guaranteed portion is necessary to service the related guaranteed loan adequately, the holder is required to sell the USDA-guaranteed portion to the lender or USDA for an amount equal to the unpaid principal balance and accrued interest on such USDA-guaranteed portion less the lender's servicing fee. Federal regulations prohibit the lender from repurchasing USDA-guaranteed portions for arbitrage purposes.
Lenders. Any lender authorized by the USDA to obtain a USDA guarantee on a loan may participate in Farmer Mac's USDA Guarantees line of business. During both 2017 and 2016, 222 lenders, consisting mostly of community and regional banks, sold USDA Securities to Farmer Mac.
Loan Servicing.
The lender on each USDA guaranteed loan is required by regulation to retain the unguaranteed portion of the guaranteed loan, to service the entire underlying guaranteed loan, including the USDA-guaranteed portion, and to remain mortgagee and/or secured party of record. The USDA-guaranteed portion and the unguaranteed portion of the loan are to be secured by the same collateral with equal lien priority. The USDA-guaranteed portion of a loan cannot be paid later than, or in any way be subordinated to, the related unguaranteed portion.
Rural Utilities
General
Under itsFarmer Mac's charter Farmer Mac is permitted toauthorizes the purchase of, and guarantee of securities backed by, ruralloans (including participation interests in loans) for electric and telephone loans made(including renewable electric energy) or telecommunications facilities by lenders organized as cooperatives to borrowers whothat have received or are eligible to receive loans under the Rural Electrification Act of 1936 ("REA"). The REA is administered by the Rural Utilities Service ("RUS"), an agency of the USDA. NoneFarmer Mac's Rural Utilities line of business encompasses purchases of eligible Rural Utilities loans and guarantees of securities backed by those loans, as well as LTSPCs for pools of eligible Rural Utilities loans. To be eligible, Rural Utilities loans must meet Farmer Mac's credit underwriting and other specified standards. There currently are no guaranteed securities issued under the Rural Utilities line of business, although the Institutional Credit line of business includes some AgVantage securities that are secured by Rural Utilities loans. The vast majority of Farmer Mac's business to date under the Rural Utilities line of business has involved telecommunications loans.loans made to electric facilities (primarily electric distribution cooperatives and electric generation and transmission cooperatives). During 2020, Farmer Mac purchased $64.3 million of renewable energy loans in connection with various projects as part of Farmer Mac's renewable energy project finance strategic initiative under its Rural Utilities line of business encompasses purchases of eligible rural utilities loans and guarantees of securities backed by those loans, as well as the issuance of LTSPCs for pools of eligible rural utilities loans. Farmer Mac began issuing LTSPCs for pools of eligible rural utilities loans in 2015.authority.
Summary of Rural Utilities Transactions
During the year ended December 31, 2017, Farmer Mac added $137.3 million of new Rural Utilities business, compared to $491.9 million and $630.6 million for the years ended December 31, 2016 and 2015, respectively. As of both December 31, 2017 and 2016, the aggregate outstanding principal balance of Rural Utilities loans held and underlying LTSPCs was $1.9 billion.
The following table summarizes new Rural Utilities business activity for each of the years ended December 31, 2017, 2016, and 2015:
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Loans | $ | 137,341 |
| | $ | 50,491 |
| | $ | 108,337 |
|
| LTSPCs | — |
| | 441,404 |
| | 522,262 |
|
| Total | $ | 137,341 |
| | $ | 491,895 |
| | $ | 630,599 |
|
The following table presents the outstanding balances of Rural Utilities loans held as of the dates indicated:
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (in thousands) |
| On-balance sheet: | | | |
| Loans | $ | 1,076,291 |
| | $ | 999,512 |
|
| Off-balance sheet: | | | |
LTSPCs(1) | 806,342 |
| | 878,598 |
|
| Total | $ | 1,882,633 |
| | $ | 1,878,110 |
|
| |
(1)
| Includes $20.0 million related to one-year loan purchase commitments on which Farmer Mac receives a nominal unused commitment fee as of both December 31, 2017 and 2016, respectively. |
Loan Eligibility
To be eligible for Farmer Mac's Rural Utilities line of business, a rural utilitiesRural Utilities loan (or ana participation interest in such a loan) is required to:must:
•be made for an electric or telephone facility by a lender organized as a cooperative to a borrower that has received or is eligible to receive a loan under the REA;REA for an electric or telecommunications facility;
•be by a lender organized as a cooperative;
•be performing and not more than 30 days delinquent; and
•meet Farmer Mac's underwriting standards described in more detail below.
Underwriting and Collateral Standards
Farmer Mac's charter does not specify minimum underwriting criteria for eligible rural utilities loans under the Rural Utilities line of business.loans. To manage Farmer Mac's credit risk, to mitigate the risk of loss from borrower defaults, and to provide guidance for the management, administration, and conduct of underwriting to participants in the Rural Utilities line of business, Farmer Mac has adopted credit underwriting standards that vary by loan product and by loan type, based on whether loans are made to electric distribution cooperatives or electric generation and transmission ("G&T") cooperatives.type. These standards are based on industry practices for similar rural utilitiesRural Utilities loans and are designed to assess the creditworthiness of the borrower, as well as the risk to Farmer Mac. Farmer Mac
reviews lenders' credit submissions and analyzes borrowers' audited financial statements and financial and operating reports filed with RUS and the Federal Energy Regulatory Commission to confirm that loans meet Farmer Mac's underwriting standards for rural utilities loans. Furthermore, Farmer Mac requires sellers of rural utilities loans to make representations and warranties regarding the conformity of eligible loans to these standards
and any other requirements that Farmer Mac may impose from time to time. Farmer Mac has the ability to require repurchase of the loan upon a material breach of these representations and warranties.
In addition to the loan eligibility criteria described above for rural utilities loans, Farmer Mac has developed different underwriting standards for rural utilities loans that depend on whether the borrower is an electric distribution cooperative or a G&T cooperative. Farmer Mac's credit underwriting standards for all rural utilities loans on which it assumes direct credit exposure (i.e., with no general obligation of a lender involved in the transaction) require:
each borrower to demonstrate sufficient cash flow to adequately service the loan; and
each borrower's leverage position to be adequate based on industry standards.
In the case of a newly-originated loan to a distribution cooperative on which Farmer Mac assumes direct credit exposure, the borrower typically must, among other criteria set forth in Farmer Mac's credit underwriting standards, meet the following ratios (based on the average of the most recent three years):
the ratio of long-term debt to "net utility plant" does not exceed 90 percent;
the modified debt service coverage ratio (the cooperative's available cash plus patronage capital credits allocated to the cooperative, relative to debt expense) equals or exceeds 1.35; and
the ratio of equity to total assets equals or exceeds 20 percent.
The "net utility plant" means the real and tangible personal property of a rural utilities borrower constituting the long-term assets of property, plant, and equipment (PPE), less depreciation, computed in accordance with applicable accounting requirements.
In the case of a newly-originated loan to a G&T cooperative on which Farmer Mac assumes direct credit exposure, the borrower typically must, among other criteria set forth in Farmer Mac's credit underwriting standards, meet the following ratios (based on the average of the most recent three years):
the equity to total assets ratio equals or exceeds 10 percent;
the modified debt service coverage ratio equals or exceeds 1.10;
the debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio does not exceed 12; and
the aggregate members' equity to total capitalization ratio equals or exceeds 25 percent.
The due diligence Farmer Mac performs before purchasing, or guaranteeing securities backed by, rural utilities loans includes:
evaluating loan database information to determine conformity to Farmer Mac's underwriting standards;
confirming that loan file data conforms to database information;
validating supporting credit information in the loan files; and
reviewing loan documentation.
Farmer Mac is not obligated to assume credit risk on every rural utilities loan submitted to Farmer Mac that meets its underwriting and collateral valuation standards. Farmer Mac may consider other factors, such as portfolio diversification, in deciding whether or not to accept theRural Utilities loans.
Collateral
It is customary in loans to electric distribution cooperatives and G&Telectric generation and transmission cooperatives for the lender or lender group to take a security interest in substantially all of the borrower's assets. In cases in whichWhen Farmer Mac purchases a rural utilitiesRural Utilities loan with a pledge of all assets and a lender also has a lien on all assets, Farmer Mac verifies that a lien accommodation results in either a shared first lien or a first lien in favor of Farmer Mac. In cases whereWhen debt indentures are used, Farmer Mac determines if available collateral is adequate to support the loan program and Farmer Mac's investment. As of December 31, 2017, substantially all ofLoans to renewable electric energy borrowers are typically secured by the Rural Utilities loans held byborrower's project equipment, contracts, and land or leasehold interest, but Farmer Mac's enforcement rights may be subject to tax equity interests in the borrower's renewable energy project. Farmer Mac consisted of loans with a pledge of all assets. Farmer Mac sometimesalso purchases unsecured Rural Utilities loans (primarily electric generation and transmission loans) that meet stricterFarmer Mac's underwriting standards than those described above under "—Underwriting." In accordance with Farmer Mac's internal policies, the total outstanding balance of unsecured Rural Utilities loans may not exceed $100 million. As of December 31, 2017, Farmer Mac held $25.1 million offor unsecured Rural Utilities loans.
Lenders and Loan Servicing
Farmer Mac's charter requires eligible Rural Utilities loans to be by a lender organized as a cooperative. Farmer Mac generally does not directly service the Rural Utilities loans held in its portfolio. Those loansportfolio, which are serviced by a servicer designated bydesignee of Farmer Mac. National Rural Utilities Cooperative Finance Corporation ("CFC") currently services all of the Rural Utilities loans in Farmer Mac's portfolio. CFC is a related party to Farmer Mac by virtue of CFC's stock ownership in Farmer Mac. As of December 31, 2017, CFC held approximately 8 percent of Farmer Mac's outstanding Class A voting common stock (or approximately 5 percent of total voting shares). See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Related Party Transactions."
Approved Lenders
Farmer Mac's charter requires eligible rural utilities loans be made by a lender organized as a cooperative. Currently, the only two rural utilities lenders that are cooperatives are CFC and CoBank, ACB ("CoBank"), an institution of the FCS. To date, CFC is the only lender to have participated in Farmer Mac's Rural Utilities line of business.
Portfolio Diversification
Rural utilities loans are made throughout the entire United States. Farmer Mac analyzes the geographic distribution of loans to cooperatives and considers regional concentration levels in connection with its business activities under the Rural Utilities program. As of December 31, 2017, Farmer Mac had direct credit exposure on 1,066 loans to electric cooperatives constituting $1.9 billion across 39 states.
Farmer Mac's charter does not prescribe a maximum loan size for an eligible rural utilities loan, but Farmer Mac currently has a $50.0 million limit in place for cumulative direct credit exposure on those loans (e.g., purchases of loans, LTSPCs, or guarantees of securities representing interests in loans) to any one borrower or group of related borrowers. For indirect credit exposures on rural utilities loans (e.g., AgVantage transactions), Farmer Mac's current limit is $75.0 million for cumulative loan exposure to any one borrower or related borrowers, with the amount of any direct exposure to a borrower not counting toward the $75.0 million limit. See "Business—Farmer Mac's Lines of Business—Institutional Credit." As of December 31, 2017, Farmer Mac's direct credit exposure to rural utilities loans consisted of $1.4 billion in loans to distribution cooperatives and $0.5 billion in loans to G&T cooperatives.
Institutional Credit
Under the Institutional Credit line of business, Farmer Mac provides advances against eligible loans by guaranteeingguarantees and purchasingpurchases general obligations of lenders and other financial institutions approved by Farmer Mac, which obligations(including financial funds) that are also secured by pools of the types of loans eligible for one ofpurchase under Farmer Mac's otherFarm & Ranch, USDA Guarantees, or Rural Utilities lines of business. Farmerbusiness..Farmer Mac refers to these obligations as AgVantage® securities. Typically, Farmer Mac guarantees the timely payment of principal and interest on AgVantage securities and may retainretains AgVantage securities in its portfolio or sell them to third parties inportfolio. Farmer Mac's guarantee and purchase of AgVantage securities comprise the capital markets as Farmer Mac Guaranteed Securities. Institutional Credit line of business.
Farmer Mac has direct credit exposure to the general credit of the issuers of AgVantage securities and assumes the ultimate credit risk of an issuer default on the AgVantage securities. Before approving an institution as an issuer in an AgVantage transaction, Farmer Mac assesses the institution'sissuer's creditworthiness as well as itsthe credit quality and performance of the issuer's loan performance.portfolio and loan underwriting standards. Farmer Mac continues to monitor the counterparty risk assessment on an ongoing basis after the AgVantage security is issued. In addition to being a general obligation of the issuing institution,issuer, all AgVantage securities must be secured by eligible loans or eligible securities guaranteed securitiesby Farmer Mac in an amount at least equal to the outstanding principal amount of the security.issuer's AgVantage securities. As a result, Farmer Mac has indirect credit exposure to the loans or guaranteed securities that are pledged to secure the AgVantage securities, which would be available tocomprise collateral for Farmer Mac in the event of a default by the issuer.
Loans pledged under AgVantage securities are serviced by the issuers of the securities (or their affiliated servicing institutions) in accordance with that institution'sthese institutions' servicing procedures. Farmer Mac reviews these servicing procedures before entering into those transactions.purchasing AgVantage securities from the issuer. In AgVantage transactions, the issuer is required to remove from the pool of pledged collateral any loan that becomes more than 30 days delinquent in the payment of principal or interest and to substitute anreplace the delinquent loan with another eligible loan that is current in payment or to pay down the AgVantage securities to maintain the minimum required collateralization level.
For AgVantage securities secured by loans eligible for Farmer Mac's Farm & Ranch line of business, Farmer Mac currently requires the general obligation to be over-collateralized, either by more eligible loans or any of the following types of assets:
•cash;
•securities issued by the U.S. Treasury or guaranteed by an agency or instrumentality of the United States; or
•other highly-rated securities.securities; or
•other instruments approved by Farmer Mac.
The required collateralization level for the AgVantage securities secured by Farm & Ranch loans currently ranges from 103 percent103% to 125 percent. Within this range, Farmer Mac generally requires higher collateralization levels for securities issued by institutions without long-term debt ratings from a nationally recognized statistical rating organization ("NRSRO")125%. The required collateralization level is determined based on credit factors related to the issuer, is established at the timewhen the AgVantage facility is entered into with the counterparty, and does not change during the life of the AgVantage securities issued under such facility.the facility unless mutually agreed by Farmer Mac and the counterparty.
For AgVantage securities that are secured by Farm & Ranch loans, Farmer Mac requires that the loans meet the minimum standards set forth in the charter for those types of loans and that the value is supported by either appraisals that conform to USPAP or similar collateral valuation methods based upon Farmer Mac's evaluation of the lender's collateral valuation protocols and history. Although the charter does not prescribewith a maximum loan size or a total borrower exposure for an eligible Farm & Ranch loan secured by 1,000 acres or lesslimit of agricultural real estate, for AgVantage transactions Farmer Mac currently limits the
size of those loans to $75.0 million in cumulative exposure through a single lender to any one borrower or group of related borrowers (with the amount of any direct borrower exposure not counting toward the $75 million limit).from a single AgVantage issuer.
Farmer Mac has tailored a version of its AgVantage product to focus on institutional investors in agricultural assets that qualify as collateral for the types of loans eligible for the Farm & Ranch line of business. Farmer Mac refers to this product variation as the Farm Equity AgVantage® product. This product has similar requirements for AgVantage securities secured by Farm & Ranch loans described above, but Farmer Mac also requires that Farm Equity AgVantage transactions and AgVantage transactions with smaller financial funds or entities (1) generally maintain a higher collateralization level through lower loan-to-value ratio thresholds and higher overcollateralization requirements, and (2) generally contain specified financial covenants for the life of the related AgVantage security to avoid default. As of December 31, 2017, Farmer Mac had $279.7 million of outstanding Farm Equity AgVantage securities.security.
For AgVantage securities secured by loans eligible for Farmer Mac's Rural Utilities line of business Farmer Mac requires:require:
•the counterparty issuing the general obligation to have a credit rating from an NRSRO that is at least investment grade, or be of comparable creditworthiness as determined through Farmer Mac's analysis; and
the collateral to be comprised of loans, or interests in loans, for electric or telephone facilities by a lender organized as a cooperative to a borrower that has received or is eligible to receive a loan under the REA;
the collateral to be classified as performing and not in payment default beyond the applicable cure period; and
•the collateralization (consisting of current, performing loans) to be maintained at the contractually prescribed level, in an amount at least equal to the outstanding principal amount of the security.
Although Farmer Mac has only indirect credit exposure on the rural utilitiesRural Utilities loans pledged to secure AgVantage securities, the same underwriting standards that apply to loans made to distributionelectric cooperatives on which Farmer Mac assumes direct credit exposure also apply to loans made to distributionelectric cooperatives that secure the general obligation of the lender in AgVantage transactions. See "Business—Farmer Mac's Lines of Business—Rural Utilities—Underwriting." For loans made to G&T cooperatives that secure the general obligation of the issuer in AgVantage transactions, the G&T cooperative must either (1) have a rating from an NRSRO of BBB- (or equivalent rating) or better or (2) meet the following underwriting standards (based on the average of the most recent three years):
the aggregate members' equity to total capitalization ratio equals or exceeds 25 percent;
the modified debt service coverage ratio equals or exceeds 1.10; and
the equity to total assets ratio equals or exceeds 10 percent.
Farmer Mac's charter does not prescribe a maximum loan size or a total borrower exposure for an eligible rural utilitiesRural Utilities loan, but Farmer Mac's current limit for AgVantage transactions is $75.0 million for cumulative loan exposure to any one borrower or related borrowers (with the amount of any direct exposure to a borrower not counting towards the $75$75.0 million limit). Farmer Mac also permits up to 20 percent20% of rural utilitiesRural Utilities loans pledged to secure AgVantage securities to be unsecured or secured by less than all of the borrower's assets. As
COMPETITION
Farmer Mac is the only federally-chartered corporation established to provide a secondary market for agricultural mortgage loans, Rural Utilities loans, and USDA Securities. But Farmer Mac does face indirect competition from many sources. These sources include other entities that purchase, retain, securitize, or provide financing for the types of December 31, 2017, all AgVantage securities securedassets eligible for Farmer Mac's secondary market activities such as commercial and investment banks, insurance companies, other FCS institutions, financial funds, and certain government programs. Farmer Mac also competes indirectly with originators of eligible loans that would prefer to retain the loans they originate rather than sell them into the secondary market. Farmer Mac is able to compete to acquire eligible loans due to the variety of products it offers and its ability to offer competitive funding structures and pricing to its customers. This enables Farmer Mac to provide flexible financing options and products designed to meet the varied needs of lending institutions related to capital requirements, liquidity, credit risk, and management of sector and geographic concentrations and borrower exposure limits. The relative competitiveness of Farmer Mac's loan rates and Farmer Mac's ability to develop business with lending institutions are affected by eligiblemany factors, including:
•the overall supply of capital available to the agricultural and rural utilities sectors;
•the ability of other lending institutions to compete with Farmer Mac (e.g., by price averaging through offering multiple loan and fee based products or by accepting a lower return on equity given market dynamics);
•the types and variety of products offered by Farmer Mac's competitors to meet the needs of Farmer Mac's customer base;
•changes in the levels of available capital and liquidity of lending institutions;
•the existence of alternative sources of funding and credit enhancement for lending institutions;
•the rate of growth in the market for eligible loans; and
•demand for Farmer Mac's products.
Because Farmer Mac's charter limits Farmer Mac's business to secondary-market activities, Farmer Mac's competitive position is affected by the willingness of originators to offer eligible loans werefor sale in the secondary market or to utilize Farmer Mac for funding syndicated or participated loans. The charter's limits on loan size for some Farm & Ranch loans, as well as the types of loans that are eligible for Farmer Mac's lines of business, also affect Farmer Mac's competitive position. For more information on government regulation of Farmer Mac, see "Business—Government Regulation of Farmer Mac."
Farmer Mac's ability to obtain competitive funding in the debt markets is essential to its ability to maintain its relative position with its customers. As a result, competition for debt investors with other debt-issuing institutions, such as the FCS, Federal Home Loan Banks, Fannie Mae, Freddie Mac, and highly-rated financial institutions, can affect the price and volume at which Farmer Mac issues debt and therefore its ability to offer savings to customers in the form of competitive products.
CAPITAL AND CORPORATE GOVERNANCE
Farmer Mac's charter prescribes the company's basic capital and corporate governance structure. The charter authorizes Farmer Mac to issue two classes of voting common stock, each of which elects one-third of Farmer Mac's 15-person board of directors. The charter also authorizes Farmer Mac to issue non-voting common stock. The classes of Farmer Mac's outstanding common stock and their relationship to Farmer Mac's board of directors are described below.
•Class A voting common stock. The charter restricts ownership of Farmer Mac's Class A voting common stock to banks, insurance companies, and other financial institutions or similar entities that are not institutions of the FCS. The charter also provides that five members of Farmer Mac's 15-member board of directors are elected by a plurality of the votes of the Class A stockholders each year. The charter limits the amount of Class A voting common stock that any one holder may own to no more than 33% of the outstanding shares of Class A voting common stock. Farmer Mac is not aware of any regulation applicable to non-FCS financial institutions that requires a minimum investment in Farmer Mac's Class A voting common stock or that prescribes a maximum investment amount lower than the 33% limit set forth in the charter. Farmer Mac's Class A voting common stock is listed on the New York Stock Exchange under the symbol AGM.A.
•Class B voting common stock. The charter restricts ownership of Farmer Mac's Class B voting common stock to FCS institutions and also provides that five members of Farmer Mac's 15-member board of directors are elected by a plurality of the votes of the Class B stockholders each year. The charter contains no restrictions on the maximum number or percentage of outstanding shares of Class B voting common stock that any one holder may own, and Farmer Mac is not aware of any regulation applicable to FCS institutions that requires a minimum investment in its Class B voting common stock or that prescribes a maximum amount. Farmer Mac's Class B voting common stock, which has a limited market and trades infrequently, is not listed or quoted on any exchange or other quotation system, and Farmer Mac is not aware of any publicly available quotations or prices for this class of common stock.
•Class C non-voting common stock. The charter does not impose any ownership restrictions on Farmer Mac's Class C non-voting common stock, and shares of this class are freely transferable. Farmer Mac uses Class C non-voting stock for awards of equity-based compensation to officers, directors, and selected employees as part of the company's compensation programs. Holders of the Class C common stock do not vote on the election of directors or any other matter. Farmer Mac's Class C non-voting common stock is listed on the New York Stock Exchange under the symbol AGM.
•Presidential director appointments. The remaining five members of Farmer Mac's board of directors are individuals who meet the qualifications specified in the charter and are appointed by the President of the United States with the advice and consent of the United States Senate (one of whom is designated as the chair of the board of directors). These appointed directors serve at the pleasure of the President of the United States.
The dividend and liquidation rights of all three classes of Farmer Mac's common stock are the same. Dividends may be paid on Farmer Mac's common stock only when, as, and if declared by Farmer Mac's board of directors in its sole discretion, subject to compliance with applicable capital requirements and the payment of dividends on any outstanding preferred stock issued by CFC, whichFarmer Mac. Upon liquidation, dissolution, or winding up of the business of Farmer Mac, after payment and provision for payment of outstanding debt of Farmer Mac, the holders of shares of Farmer Mac's currently outstanding 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C ("Series C Preferred Stock"), 5.700% Non-Cumulative Preferred Stock, Series D ("Series D Preferred Stock"), 5.750% Non-Cumulative Preferred Stock, Series E ("Series E Preferred Stock"), 5.250% Non-Cumulative Preferred Stock, Series F ("Series F Preferred Stock"), and any other preferred stock then outstanding, would be paid at par value out of assets available for distribution, plus all declared and unpaid dividends, before the holders of shares
of common stock received any payment. See also "Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities" for more information about Farmer Mac's common stock, and "Business—Financing—Equity Issuance" for more information about Farmer Mac's common stock and preferred stock.
Unlike some other GSEs such as other FCS institutions and the Federal Home Loan Banks, Farmer Mac is not structured as a cooperative owned exclusively by member institutions and established to provide services exclusively to its members. Rather, Farmer Mac, as a publicly-traded corporation, has a broader base of stockholders, including those who do not directly participate in the secondary market provided by Farmer Mac. Farmer Mac therefore seeks to fulfill its mission of serving the financing needs of rural America in a way that is consistent with providing a return on the investment of its stockholders.
Farmer Mac generally requires financial institutions to own a requisite amount of Farmer Mac common stock, based on the size and type of institution, to participate in the Farm & Ranch line of business. As a result of this requirement, coupled with the ability of holders of Class A and Class B voting common stock to elect two-thirds of Farmer Mac's board of directors, Farmer Mac regularly conducts business with "related parties," including institutions affiliated with members of Farmer Mac's board of directors and institutions that own large amounts of Farmer Mac's voting common stock. Farmer Mac has adopted a Code of Business Conduct and Ethics and related corporate policies that govern any conflicts of interest that may arise in these transactions. Farmer Mac also requires that any transactions with related parties be conducted in the ordinary course of business, with terms and conditions comparable to those available to any other counterparty not related to Farmer Mac. For more information about related party to Farmer Mac by virtue of CFC's stock
ownership in Farmer Mac. Seetransactions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Related Party Transactions."Transactions" and Note 3 to the consolidated financial statements.
As of December 31, 2017,Capital
Farmer Mac's charter establishes three capital standards for Farmer Mac had not experienced any credit losses, nor had it been called upon to make a guarantee payment to third parties,– minimum capital, critical capital, and risk-based capital. Farmer Mac must comply with the higher of the minimum capital requirement and the risk-based capital requirement. Also, in accordance with the applicable FCA regulation on any of its AgVantage securities. For more information oncapital planning, Farmer Mac's AgVantage securities,board of directors oversees a policy that requires Farmer Mac to maintain a sufficient level of Tier 1 capital and restricts dividends and bonus payments if Farmer Mac's Tier 1 capital falls below specified thresholds. For a discussion of Farmer Mac's capital requirements and its actual capital levels, as well as FCA's role in the establishment and monitoring of those requirements and levels, see "Business—Government Regulation of Farmer Mac—Capital Standards," "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Institutional.Balance Sheet Review—Equity,"
Summary of Institutional Credit Transactions
During the year ended December 31, 2017, Farmer Mac added a total of $2.4 billion of new business volume under the Institutional Credit line of business. That new business volume was partially offset by repayments on existing assets (principal paydowns and maturities) during the year, resulting in $7.9 billion of total outstanding business volume in this line of business as of December 31, 2017, compared to $7.3 billion as of December 31, 2016.
As of December 31, 2017 and 2016, the outstanding principal amount of AgVantage securities held by Farmer Mac on its balance sheet was $7.6 billion and $6.0 billion, respectively. As of December 31, 2017 and 2016, the aggregate outstanding principal amount of off-balance sheet AgVantage securities sold to third parties totaled $0.3 billion and $1.3 billion, respectively. The decrease in the unpaid principal balance of outstanding off-balance sheet AgVantage securities from year-end 2016 was attributable to the refinancing of a $1.0 billion AgVantage security that matured in April 2017 into three new on-balance sheet AgVantage securities. Previously, $970.0 million of this $1.0 billion maturing AgVantage security was reported as off-balance sheet business volume because it was owned by third party investors. The amount as of both December 31, 2017 and 2016 includes a $300.0 million revolving floating rate AgVantage facility entered into with CFC. During 2017, $100.0 million of this facility was drawn and subsequently repaid. During 2016, this facility was not utilized. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Business Volume" and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Institutional.Liquidity and Capital Resources—Capital Requirements." The following table summarizes new Institutional Credit line
Regulatory Oversight
Farmer Mac's charter assigns to FCA, acting through the separate Office of business activitySecondary Market Oversight ("OSMO") within FCA, the responsibility for eachthe examination of the years ended December 31, 2017, 2016, and 2015:
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| AgVantage Securities | $ | 2,383,912 |
| | $ | 2,098,852 |
| | $ | 743,158 |
|
| Revolving floating rate AgVantage facility | — |
| | — |
| | 300,000 |
|
| | $ | 2,383,912 |
| | $ | 2,098,852 |
| | $ | 1,043,158 |
|
The following table presents the outstanding principal amount of AgVantage securities held by Farmer Mac and off-balance sheet AgVantage securitiesthe general supervision of the safe and sound performance of the powers, functions, and duties vested in Farmer Mac by the charter. The charter also authorizes FCA, acting through OSMO, to apply its general enforcement powers to Farmer Mac. Farmer Mac's charter requires an annual examination of the financial transactions of Farmer Mac and authorizes FCA to assess Farmer Mac for the cost of FCA's regulatory activities, including the cost of any examination. Farmer Mac is also required to file quarterly reports of condition
with OSMO. As a publicly-traded corporation, Farmer Mac also must comply with the periodic reporting requirements of the SEC. For a more detailed discussion of Farmer Mac's regulatory and governmental relationships, see "Business—Government Regulation of Farmer Mac."
HUMAN CAPITAL
As of December 31, 2020, Farmer Mac employed 121 people, with 34 new employees hired during the year. Farmer Mac employs full-time employees to meet its business needs as it grows and evolves while supplementing human capital needs with independent contractors and consultants as needed. Our workforce included seven actively engaged independent contractors as of the dates indicated:end of the year.
Farmer Mac's employees are located throughout the United States, often near many of its primary customers. As of December 31, 2020, 83 full-time employees were located in the Washington, D.C. area, 14 full-time employees were located in the Johnston, Iowa area, and 24 full-time employees worked on a fully-remote basis (without regard to the COVID-19 pandemic) in other parts of the United States.
As a financial services organization, Farmer Mac must attract and retain a highly-skilled workforce in an often competitive employment environment. We utilize traditional methods to attract and retain talent, such as competitive salaries and benefits, including a generous group health plan and an employer-funded 401(k) plan. We also believe that our mission to serve agricultural and rural communities, as well as philanthropic activities we undertake in support of our mission, provide Farmer Mac an advantage in our efforts to attract and retain talent. We also recognize that employee engagement is a key component in Farmer Mac's human capital retention strategy. Therefore, we seek to create an inclusive work culture that is diverse and collaborative, with a focus on long-term succession planning and professional development. We also utilize flexible work structures and technology to create incentives to join and remain with Farmer Mac. Farmer Mac experienced a 9.6% turnover rate in 2020, which was down 4.3% compared to 2019.
COVID-19 Pandemic
The COVID-19 pandemic altered the way many companies work, including Farmer Mac. In March 2020, we executed our business continuity plan swiftly and with minimal disruption, and all of our employees have been working in a fully-remote environment since then. We promptly assessed the technical resources required for Farmer Mac to operate on a fully-remote basis, as well the ability of our employees to manage home and work in this new paradigm. For example, Farmer Mac provided stipends to all employees to purchase office equipment and supplies for remote work capability. To encourage employee morale and support our mission, Farmer Mac donated the budgeted stipend funds that remained unused to a nonprofit organization fighting against food insecurity in the United States. To ensure continuity in regular communications, we have reinforced our employees' access to secure digital meeting platforms, and our senior executive team has been leading bi-weekly meetings of all employees to share pertinent information on Farmer Mac's business and operations and to provide a forum for discussing current events. We also leveraged this engagement opportunity to gauge the health and well-being of employees and to solicit their feedback, to which we responded with initiatives to address work/life balance, including added flexibility in working hours and paid time off.
We have established a cross-functional team to assess the criteria necessary for a safe return to Farmer Mac's offices, including employee health screenings, facility redesign, and family care needs. We do not
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (in thousands) |
| On-balance sheet: | | | |
| AgVantage Securities | $ | 7,593,322 |
| | $ | 6,004,472 |
|
| Off-balance sheet: | |
| | |
|
| AgVantage Securities | $ | 11,556 |
| | $ | 983,214 |
|
Revolving floating rate AgVantage facility(1) | 300,000 |
| | 300,000 |
|
| Total off-balance sheet | $ | 311,556 |
| | $ | 1,283,214 |
|
| Total | $ | 7,904,878 |
| | $ | 7,287,686 |
|
| |
(1)
| During 2017, $100.0 million of this facility was drawn and subsequently repaid. During 2016, this facility was not 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 in the form of AgVantage Securities, and Farmer Mac will earn interest income on those securities. |
currently have an established timeline for a full-scale return of our employees to Farmer Mac's offices. However, we remain confident in our employees' capacity to remain engaged and productive on a remote basis as may be needed for the foreseeable future.
Code of Business Conduct and Ethics
Farmer Mac provides appropriate orientation for every new hire and requires annual training on and recertification of our Code of Business Conduct and Ethics, which encompasses the following four core principles: (1) promoting a safe workplace and a respectful and inclusive culture, (2) conducting business lawfully, fairly, and objectively, (3) communicating responsibly and protecting information, and (4) conducting business diligently and being a good corporate citizen. Farmer Mac's Code of Business Conduct and Ethics was refreshed in 2018 to reflect this principles-based approach. Our Code of Business Conduct and Ethics is available at www.farmermac.com and is not incorporated by reference into this report.
Diversity, Equity, and Inclusion
During 2020, we strengthened our focus on diversity, equity, and inclusion ("DE&I") efforts within Farmer Mac's workforce. Our philosophy emphasized listening first, with a focus on small employee groups to solicit feedback on Farmer Mac's practices. This yielded guidance for a newly-formed internal Diversity Council, which is charged with helping to shape Farmer Mac's strategy for DE&I. Farmer Mac has also contracted with an external consultant to help deepen our understanding of race and racism and how it may affect the workplace and to assist Farmer Mac's Diversity Council with building a framework and strategy for DE&I.
AVAILABLE INFORMATION
Farmer Mac makes available free of charge, through the "Investors" section of its internet website at www.farmermac.com, copies of materials it files with, or furnishes to, the SEC, including its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and any amendments to those filings, as soon as reasonably practicable after electronically filing those materials with, or furnishing those materials to, the SEC. All references to www.farmermac.com in this report are inactive textual references only. The information contained on Farmer Mac's website is not incorporated by reference into this report.
FUNDING OF GUARANTEE AND LTSPC OBLIGATIONS
The principalmain sources of funding for the payment of Farmer Mac's obligations under its guarantees and LTSPCs are the fees Farmer Mac receives for its guarantees and commitments, net effective spread, proceeds of debt issuances, loan repayments, and maturities of AgVantage securities. Farmer Mac satisfieshas traditionally satisfied its obligations under LTSPCs and its guarantees by purchasing defaulted loans out of the LTSPCs andor from related securitization trusts under the related trusts for Farmer Mac Guaranteed Securities.terms of the respective agreements governing the LTSPC or guaranteed securities. Farmer Mac typically recovers a significant portion of the value of defaulted loans purchased either through borrower payments, loan payoffs, payments by third parties, or foreclosure and sale of the property securing the loans. Net credit losses/(gains) arising from Farmer Mac's guarantees and commitments include charge-offs/(recoveries) against its allowance for losses, gains and losses on the sale of real estate owned ("REO"), which consists of real estate acquired through foreclosure (known as "real estate owned" or "REO"), and fair value adjustments of REOs held. During 2017, Farmer Mac had net credit gains of $1.4 million, compared to net credit losses of $0.2 million during 2016. The net credit gains during 2017 included $1.7 million of net gains on the sale of REO compared to $15,000 during 2016.
Farmer Mac's charter requires Farmer Mac to maintain in its accounts a portion of the guarantee fees it receives from its guarantee activities as a reserve against losses. As of December 31, 2017,2020, this reserve against losses arising from Farmer Mac's guarantee activities was $71.6$101.6 million. Farmer Mac calculates the amount of this statutorily required reserve against losses arising from its guarantee activities based on the credit risk component of guarantee fees received on all Farmer Mac Guaranteed Securities,securities it guarantees, including AgVantage securities. This amount does not represent either anticipated credit losses or estimated probable credit losses and does not directly relate to either the allowance for loan losses or the reserve for losses in Farmer Mac's consolidated balance sheets. Rather, this is the amount of capital that must be exhausted before Farmer Mac may issue obligations to the U.S. Treasury against the $1.5 billion that Farmer Mac is statutorily authorized to borrow from the U.S. Treasury to fulfill its guarantee obligations. That borrowing authority is not intended to be a routine funding source and has never been used. For a more detailed discussion of Farmer Mac's borrowing authority from the U.S. Treasury, see "Business—Farmer Mac's Authority to Borrow from the U.S. Treasury."
Farmer Mac's total outstanding guarantees and LTSPCs exceed the total of: (1) the amount held as an allowance for losses, (2) the amount maintained as a reserve against losses arising from guarantee
activities, and (3) the amount Farmer Mac may borrow from the U.S. Treasury. However, Farmer Mac does not expect its future payment obligations under its guarantees and LTSPCs to exceed amounts available to satisfy those obligations, includingwhich includes access to the underlying collateral in the event of default. For information about Farmer Mac's allowance for losses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees" and Note 2(j)2(h), Note 8, and Note 812 to the consolidated financial statements.
FINANCING
Debt Issuance
Farmer Mac's statutory charter authorizes Farmer Mac to issue debt obligations to purchase eligible loans USDA Securities, and Farmer Mac Guaranteedsecurities, USDA Securities, and to maintain reasonable amounts for business operations, includingof liquid investments to maintain an adequate supply of liquidity. Farmer Mac funds its purchases of eligible loanprogram assets and liquidity investment assets primarily by issuing debt obligations of various maturities in the public capital markets. Farmer Mac also issues debt obligations to obtain funds to finance its transaction costs and its obligations under guarantees and LTSPCs. Farmer Mac's debt obligations include discount notes and fixed and floating rate medium-term notes, including callable medium-term notes, all of which are unsecured general obligations of Farmer Mac.
Discount notes generally have original maturities of 1.01 year or less, whereas medium-termless. Medium-term notes generally have maturities of 0.5 years6 months to 15.015 years.
The interest and principal on Farmer Mac's debt obligations are not guaranteed by, and do not constitute debts or obligations of, FCA, or the United States, or any agency or instrumentality of the United States other than Farmer Mac. Farmer Mac is an institution of the FCS but is not liable for any debt or obligation of any other institution of the FCS. Likewise, neither the FCS nor any other individual institution of the FCS is liable for any debt or obligation of Farmer Mac. Income to the purchaser of a Farmer Mac discount note or medium-term note is not exempt under federal law from federal, state, or local taxation. Farmer Mac's discount notes and medium-term notes are not currently rated by an NRSRO.
Farmer Mac's board of directors has authorized the issuance of up to $18.0 billion of discount notes and medium-term notes (of which $15.5 billion was outstanding as of December 31, 2017), subject to periodic review of the adequacy of that level relative to Farmer Mac's borrowing needs. Farmer Mac invests the proceeds of its debt issuances in loaneligible program asset purchases, Farmer Mac Guaranteed Securities, and liquidity investment assets in accordance with policies established by its board of directors that comply with FCA's Liquidity and Investment Regulations, which establish limitations on asset class, dollar amount, issuer concentration, and credit quality. Farmer Mac's regular debt issuance supports its access to the capital markets, and Farmer Mac's liquidity investment assets provide an alternative source of funds should market conditions be unfavorable. Farmer Mac's current policies authorize liquidity investments in:
obligations of or guaranteed by the United States;
obligations of or guaranteed by GSEs;
municipal securities;
international and multilateral development bank obligations;
money market instruments;
diversified investment funds;
asset-backed securities;
corporate debt securities;
mortgage-backed securities; and
preferred stock issued by other FCS institutions.
For more information about Farmer Mac's outstanding investmentsthe Liquidity and indebtedness,Investment Regulations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Review"Liquidity and Capital Resources." For more information about Farmer Mac's outstanding investments and indebtedness, see Note 4 and Note 7 to the consolidated financial statements.
Equity Issuance
Farmer Mac's charter authorizes Farmer Mac to issue voting common stock, non-voting common stock, and non-voting preferred stock. Farmer Mac may obtain additional capital from future issuances of voting and non-voting common stock and non-voting preferred stock.
Common Stock
Only banks, other financial entities, insurance companies, and institutions of the FCS may hold voting common stock. No holder of Class A voting common stock may directly or indirectly be a beneficial owner of more than 33 percent33% of the outstanding shares of Class A voting common stock. There are no restrictions on the maximum number or percentage of outstanding shares of Class B voting common stock that may be held by an eligible stockholder. No ownership restrictions apply to Class C non-voting common stock, and those securities are freely transferable.
The dividend rights of all three classes of Farmer Mac's common stock are the same, and dividends may be paid on common stock only when, as, and if declared by Farmer Mac's board of directors in its sole discretion, subject to compliance with applicable capital requirements and the payment of dividends on outstanding preferred stock. Upon liquidation, dissolution, or winding up of the business of Farmer Mac, after payment and provision for payment of outstanding debt of Farmer Mac, the holders of shares of preferred stock would be paid at par value out of assets available for distribution, plus all declared and unpaid dividends, before the holders of shares of common stock received any payment.
As of December 31, 2017,2020, the following shares of Farmer Mac common stock were outstanding:
•1,030,780 shares of Class A voting common stock;
•500,301 shares of Class B voting common stock; and
9,087,670•9,205,897 shares of Class C non-voting common stock.
Farmer Mac's board of directors approved a share repurchase program during thirdDuring first quarter 2015 authorizing2020, Farmer Mac to repurchase up to $25.0 million of its outstanding Class C non-voting common stock for two years. In August 2017, Farmer Mac's board of directors approved the continuation of the share repurchase program on its existing terms through August 2019 for the repurchase of up to $5.4 million of Farmer Mac's outstanding Class C non-voting common stock, which is the amount currently remaining under the share repurchase program as originally authorized. As of December 31, 2017, Farmer Mac had repurchased approximately 668,0004,000 shares of Class C non-voting common stock at a cost of approximately $19.6$0.2 million pursuantunder a share repurchase program that Farmer Mac's board or directors approved in 2015 and modified in 2019. Shortly after these repurchases were completed, Farmer Mac indefinitely suspended its share repurchase program in an effort to preserve capital and liquidity in view of market volatility and uncertainty caused by the COVID-19 pandemic. As of December 31, 2020, Farmer Mac had repurchased approximately 673,000 shares of Class C non-voting common stock at a cost of approximately $19.8 millionunder the share repurchase program.program since 2015. The program expires at the end of March 2021.
The following table presents the dividends declared on Farmer Mac's common stock during and subsequent to 2017:
|
| | | | | | | | | | | | | | | | | | | |
Date
Dividend
Declared | | Per
Share
Amount | | For
Holders Of
Record As Of | | Date
Paid |
| February 24, 2020 | | $0.80 | | March 1, 201716, 2020 | | $0.36 | | March 20, 2017 | | March 31, 20172020 |
May 3, 201729, 2020 | | $0.360.80 | | June 15, 20172020 | | June 30, 20172020 |
August 3, 201727, 2020 | | $0.360.80 | | September 15, 201716, 2020 | | September 29, 201730, 2020 |
November 1, 201711, 2020 | | $0.360.80 | | December 15, 20172020 | | December 29, 201731, 2020 |
February 28, 201823, 2021 | | $0.580.88 | | March 19, 201816, 2021 | | * |
* The dividend declared on February 28, 201823, 2021 is scheduled to be paid on March 30, 2018.31, 2021.
Farmer Mac's ability to declare and pay common stock dividends could be restricted if it were to fail to comply with applicable capital requirements. See Note 9 to the consolidated financial statements and "Business—Government Regulation of Farmer Mac—Regulation—Capital Standards."
Preferred Stock
No ownership restrictions apply to any preferred stock issued by Farmer Mac, and those securities are freely transferable. As of December 31, 2017,2020, the following shares of Farmer Mac preferred stock were outstanding:
2,400,000 shares of Series A Preferred Stock, all of which were issued on January 17, 2013;
3,000,000 shares of Series B Preferred Stock, all of which were issued on March 25, 2014; and
•3,000,000 shares of Series C Preferred Stock, all of which were issued onin June 20, 2014.2014;
•4,000,000 shares of Series D Preferred Stock, all of which were issued in May 2019;
The•3,180,000 shares of Series E Preferred Stock, all of which were issued in May 2020; and
•4,800,000 shares of Series F Preferred Stock, all of which were issued in August 2020.
On September 19, 2020, Farmer Mac used part of the net proceeds from the sale of the Series F Preferred Stock to redeem and repurchase all $60.0 million aggregate outstanding of Farmer Mac's 5.875% Non-Cumulative Preferred Stock, Series A ("Series A Preferred Stock"), plus any declared and unpaid dividends through and including the redemption date. As a result of the retirement of the Series A Preferred Stock, Farmer Mac recognized $1.7 million of deferred issuance costs, which is presented as "Loss on retirement of preferred stock" on the consolidated statements of operations.
The Series BC Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, and Series CF Preferred Stock (collectively, referred to as the "Outstanding Preferred Stock") each has a par value of $25.00 per share and an initial liquidation preference of $25.00 per share. Farmer Mac incurred direct costs of $1.7 million related to the issuance of the Series A Preferred Stock, direct costs of $1.9 million related to the issuance of the Series B Preferred Stock, and direct costs of $1.6 million related to the issuance of the Series C Preferred Stock. Since each of their respective issuances, Farmer Mac has not issued any additionalmore shares of any series of Outstanding Preferred Stock. Each series of Outstanding Preferred Stock ranks senior to Farmer Mac's outstanding Class A voting common stock, Class B voting common stock, Class C non-voting common stock, and any other common stock of Farmer Mac issues in the future.
The Series AD Preferred Stock, Series E Preferred Stock, and the Series BF Preferred Stock pay an annual dividend rate fixed at 5.875 percent5.700%, 5.750%, and 6.875 percent,5.250%, respectively, for the life of the securities. The Series C Preferred Stock pays an annual dividend rate of 6.000 percent6.000% from the date of issuance to and including the quarterly payment date occurring on July 17, 2024 and thereafter at a floating rate equal to three-month LIBOR plus 3.260 percent.3.260%. Dividends on all series of Outstanding Preferred Stock are non-cumulative, which means thatso if the board of directors has not declared a dividend before the applicable dividend payment date for any dividend period, suchthe dividend will not be paid or cumulate,accumulate, and Farmer Mac will have no obligationnot be obligated to pay dividends for suchthat dividend period, whether or not dividends on any series of Outstanding Preferred Stock are declared for any future dividend period. Farmer Mac may pay dividends on the Outstanding Preferred Stock without paying dividends on any class or series of stock Farmer Mac may issue in the future that ranks junior to the Outstanding Preferred Stock.
The Series AC Preferred Stock, Series BD Preferred Stock, Series E Preferred Stock, and Series CF Preferred Stock rank equally with each other and will rank equally with any other class or series of stock Farmer Mac may issue in the future of equal priority as to dividends and upon liquidation. Farmer Mac has the right, but not the obligation, to redeem some or all of the issued and outstanding shares of Series A Preferred Stock on and anytime after January 17, 2018, the Series B Preferred Stock on and anytime after April 17, 2019, and the Series C Preferred Stock on and anytimeany time after July 18, 2024, the Series D Preferred Stock on and after July 17, 2024, the Series E Preferred Stock on and after July 17, 2025, and the Series F Preferred Stock on and after October 17, 2025, all at a price equal to the then-applicable liquidation preference. Any redemption date for the Series D, Series E, or Series F Preferred Stock must be a scheduled quarterly dividend payment date, The Outstanding Preferred Stock is considered Tier 1 capital for Farmer Mac. For more information on Farmer Mac's capital requirements, see "Business—Government Regulation of Farmer Mac—Regulation—Capital Standards."
The following table presents the dividends declared and paid on Series A Preferred Stock during and subsequent to 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Date
Dividend
Declared | | Per
Share
Amount | | For
Period
Beginning | | For
Period
Ending | | Date
Paid |
March 1, 2017February 24, 2020 | | $0.3672 | | January 18, 20172020 | | April 17, 20172020 | | April 17, 20172020 |
May 3, 201729, 2020 | | $0.3672 | | April 18, 20172020 | | July 17, 20172020 | | July 17, 20172020 |
August 3, 201727, 2020 | | $0.36720.2530 | | July 18, 20172020 | | October 17, 2017September 19, 2020 | | October 17, 2017 |
November 1, 2017 | | $0.3672 | | October 18, 2017 | | January 17, 2018 | | January 17, 2018 |
February 28, 2018 | | $0.3672 | | January 18, 2018 | | April 17, 2018 | | *September 19, 2020 |
* The dividend declared on February 28, 2018 is scheduled to be paid on April 17, 2018.
The following table presents the dividends declared and paid on Series B Preferred Stock during and subsequent to 2017:
|
| | | | | | | | |
Date
Dividend
Declared | | Per
Share
Amount | | For
Period
Beginning | | For
Period
Ending | | Date
Paid |
March 1, 2017 | | $0.4297 | | January 18, 2017 | | April 17, 2017 | | April 17, 2017 |
May 3, 2017 | | $0.4297 | | April 18, 2017 | | July 17, 2017 | | July 17, 2017 |
August 3, 2017 | | $0.4297 | | July 18, 2017 | | October 17, 2017 | | October 17, 2017 |
November 1, 2017 | | $0.4297 | | October 18, 2017 | | January 17, 2018 | | January 17, 2018 |
February 28, 2018 | | $0.4297 | | January 18, 2018 | | April 17, 2018 | | * |
24* The dividend declared on February 28, 2018 is scheduled to be paid on April 17, 2018.
The following table presents the dividends declared and paid on Series C Preferred Stock during and subsequent to 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Date
Dividend
Declared | | Per
Share
Amount | | For
Period
Beginning | | For
Period
Ending | | Date
Paid |
March 1, 2017February 24, 2020 | | $0.3750 | | January 18, 20172020 | | April 17, 20172020 | | April 17, 20172020 |
May 3, 201729, 2020 | | $0.3750 | | April 18, 20172020 | | July 17, 20172020 | | July 17, 20172020 |
August 3, 201727, 2020 | | $0.3750 | | July 18, 20172020 | | October 17, 20172020 | | October 17, 20172020 |
November 1, 201711, 2020 | | $0.3750 | | October 18, 20172020 | | January 17, 20182021 | | January 17, 20182021 |
February 28, 201823, 2021 | | $0.3750 | | January 18, 20182021 | | April 17, 20182021 | | * |
* The dividend declared on February 28, 201823, 2021 is scheduled to be paid on April 17, 2018.2021.
Non-Controlling Interest in Farmer Mac II LLC
Until March 30, 2015, Farmer Mac II LLC had 250,000 shares of preferred stock outstanding ("Farmer Mac II LLC Preferred Stock") as a result of a private offering completed in January 2010 of $250.0 million aggregate face amount 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 infollowing table presents the 250,000 shares of Farmer Mac II LLC Preferred Stock. The Farmer Mac II LLCdividends declared and paid on Series D Preferred Stock had a liquidation preference of $1,000 per share. Fromduring and after 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Date
Dividend
Declared | | Per
Share
Amount | | For
Period
Beginning | | For
Period
Ending | | Date
Paid |
| February 24, 2020 | | $0.35625 | | January 18, 2020 | | April 17, 2020 | | April 17, 2020 |
| May 29, 2020 | | $0.35625 | | April 18, 2020 | | July 17, 2020 | | July 17, 2020 |
| August 27, 2020 | | $0.35625 | | July 18, 2020 | | October 17, 2020 | | October 17, 2020 |
| November 11, 2020 | | $0.35625 | | October 18, 2020 | | January 17, 2021 | | January 17, 2021 |
| February 23, 2021 | | $0.35625 | | January 18, 2021 | | April 17, 2021 | | * |
* The dividend declared on February 23, 2021 is scheduled to be paid on April 17, 2021.
The following table presents the date of issuance to but excluding the quarterly payment date occurringdividends declared and paid on March 30, 2015, the annual dividend rate on the Farmer Mac II LLCSeries E Preferred Stock was 8.875 percent, at which timeduring and after 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Date
Dividend
Declared | | Per
Share
Amount | | For
Period
Beginning | | For
Period
Ending | | Date
Paid |
| May 29, 2020 | | $0.227600 | | May 21, 2020 | | July 17, 2020 | | July 17, 2020 |
| August 27, 2020 | | $0.359375 | | July 18, 2020 | | October 17, 2020 | | October 17, 2020 |
| November 11, 2020 | | $0.359375 | | October 18, 2020 | | January 17, 2021 | | January 17, 2021 |
| February 23, 2021 | | $0.359375 | | January 18, 2021 | | April 17, 2021 | | * |
* The dividend declared on February 23, 2021 is scheduled to be paid on April 17, 2021.
The following table presents the annual dividend rate would have increased to 10.875 percent had the Farmer Mac IIdividends declared and paid on Series F Preferred Stock not been redeemedduring and after 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Date
Dividend
Declared | | Per
Share
Amount | | For
Period
Beginning | | For
Period
Ending | | Date
Paid |
| August 27, 2020 | | $0.2078125 | | August 21, 2020 | | October 17, 2020 | | October 17, 2020 |
| November 11, 2020 | | $0.3281250 | | October 18, 2020 | | January 17, 2021 | | January 17, 2021 |
| February 23, 2021 | | $0.3281250 | | January 18, 2021 | | April 17, 2021 | | * |
* The dividend declared on March 30, 2015. The redemption of Farmer Mac II LLC Preferred StockFebruary 23, 2021 is scheduled to be paid on March 30, 2015 triggered the redemption of all the outstanding FALConS securities on that same day.April 17, 2021.
FARMER MAC'S AUTHORITY TO BORROW FROM THE U.S. TREASURY
Farmer Mac is authorized to borrow up to $1.5 billion from the U.S. Treasury through the issuance of debt obligations to the U.S. Treasury. Any funds borrowed from the U.S. Treasury may be used solely for the purpose of fulfilling to fulfill
Farmer Mac's guarantee obligations. Farmer Mac's charter provides that the U.S. Treasury is required to purchase Farmer Mac's debt obligations up to the authorized limit if Farmer Mac certifies that:
•a portion of the guarantee fees assessed by Farmer Mac has been set aside as a reserve against losses arising out of Farmer Mac's guarantee activities in an amount determined by Farmer Mac's board of directors to be necessary and such reserve has been exhausted (that amount was
$71.6101.6 million as of December 31, 2017)2020); and
•the proceeds of such obligations are needed to fulfill Farmer Mac's guarantee obligations.
Any debt obligations issued by Farmer Mac under this authority would bear interest at a rate determined by the U.S. Treasury, taking into consideration the average rate on outstanding marketable obligations of the United States as of the last day of the last calendar month ending before the date of the purchase of the obligations from Farmer Mac. Farmer Mac would be required to repurchase any of its debt obligations held by the U.S. Treasury within a "reasonable time." As of December 31, 2017,2020, Farmer Mac had not used this borrowing authority and does not expect to use this borrowing authority in the future.
The United States government does not guarantee payments due on securities guaranteed by Farmer Mac, Guaranteed Securities, funds invested in the equity or debt securities of Farmer Mac, any dividend payments on shares of Farmer Mac stock, or the profitability of Farmer Mac.
GOVERNMENT REGULATION OF FARMER MAC
General
Farmer Mac was created by federal statute in 1988 in the aftermath of the collapse of the agricultural credit delivery system. Farmer Mac's primary committees of jurisdiction in Congress – the Committee on Agriculture of the U.S. House of Representatives and the U.S. Senate Committee on Agriculture, Nutrition and Forestry – added requirements for Farmer Mac that had not been included in any of the other statutes establishing other GSEs. Unlike the other existing GSEs at the time, Farmer Mac was required to be regulated by an independent regulator, FCA, which has the authority to regulate Farmer Mac's safety and soundness. The statute creating Farmer Mac expressly requires that eligible Farm & Ranch loans meet minimum credit and appraisal standards that represent sound loans to profitable businesses. The enabling legislation also did not contain a specific federal securities law exemption as had been given to the housing GSEs, which had the effect of requiring Farmer Mac to comply with the periodic reporting requirements of the SEC, including filing annual and quarterly reports on the financial status of Farmer Mac and current reports when there are significant developments. Farmer Mac's statutory charter also requires offerings of securities backed by eligible loans and guaranteed by Farmer Mac Guaranteed Securities to be registered under the Securities Act of 1933 and related regulations (collectively, the "Securities Act"), unless an exemption for an offering is available that is not related tobased on Farmer Mac's status as an instrumentality of the United States.
Since Farmer Mac's creation, Congress has amended Farmer Mac's charter fourfive times:
•in 1990 to create the USDA Guarantees line of business;
•in 1991 to clarify Farmer Mac's authority to purchase its guaranteed securities, establish OSMO as Farmer Mac's financial regulator, and set minimum regulatory capital requirements for Farmer Mac;
•in 1996 to remove certain barriers to and restrictions on Farmer Mac's operations to be more competitive (e.g., allowing Farmer Mac to buy loans directly from lenders and issue guaranteed securities representing 100 percent100% of the principal of the purchased loans and modifying capital requirements); and
•in 2008 to authorize Farmer Mac to purchase, and guarantee securities backed by, loans madeor interests in loans by lenders organized as cooperatives to borrowers to finance electrification and telecommunications systems in rural areas.areas; and
•in 2018 to expand the acreage exception to the Farm & Ranch loan amount limitation from 1,000 acres to 2,000 acres, subject to FCA's feasibility assessment (which was completed in June 2019), and to repeal obsolete provisions and make technical corrections.
Farmer Mac's authorities and regulatory structure were not revised by subsequent legislation adopted in 2008 to regulate other GSEs.
Office of Secondary Market Oversight (OSMO)
As an institution of the FCS, Farmer Mac (including its subsidiaries) is subject to the regulatory authority of FCA. Farmer Mac's charter assigns to FCA, acting through OSMO within FCA, the responsibility for the examination of Farmer Mac and the general supervision of the safe and sound performance of the powers, functions, and duties vested in Farmer Mac by its charter. The charter also authorizes FCA, acting through OSMO, to apply its general enforcement powers to Farmer Mac. Farmer Mac (including
its subsidiaries) is the only entity regulated by OSMO, which was created as a separate office in
recognition of the different role that Farmer Mac plays in providing a secondary market, as compared to the roles of other FCS institutions as primary lenders. The Director of OSMO is selected by and reports to the FCA board.
Farmer Mac's charter requires an annual examination of the financial transactions of Farmer Mac and authorizes FCA to assess Farmer Mac for the cost of its regulatory activities, including the cost of any examination. Each year, OSMO conducts an examination of Farmer Mac to evaluate its safety and soundness, compliance with applicable laws and regulations, and mission achievement. The examination includes a review of Farmer Mac's capital adequacy, asset quality, management performance, earnings, liquidity, and sensitivity to interest rate risk. OSMO may also conduct additional oversight and examination activities that are not relatedunrelated to its annual examination of Farmer Mac at any other time it determines necessary. Farmer Mac is also required to file quarterly reports of condition with FCA.
Capital Standards
General Requirements. Farmer Mac's charter establishes three capital standards for Farmer Mac:
•Statutory minimum capital requirement. Farmer Mac's minimum capital level is an amount of core capital (stockholders' equity less accumulated other comprehensive income) equal to the sum of 2.75 percent2.75% of Farmer Mac's aggregate on-balance sheet assets, as calculated for regulatory purposes, plus 0.75 percent0.75% of Farmer Mac's aggregate off-balance sheet obligations, specifically including:
| |
◦ | the unpaid principal balance of outstanding Farmer Mac Guaranteed Securities; |
| |
◦ | instruments issued or guaranteed by Farmer Mac that are substantially equivalent to Farmer Mac Guaranteed Securities, including LTSPCs; and |
| |
◦ | other off-balance sheet obligations of Farmer Mac. |
◦the unpaid principal balance of outstanding loan-backed securities guaranteed by Farmer Mac;
◦instruments issued or guaranteed by Farmer Mac that are substantially equivalent to securities guaranteed by Farmer Mac, 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 percent50% of the total minimum capital requirement at that time.
•Risk-based capital. The charter directs FCA to establish a risk-based capital stress test for Farmer Mac, using specified stress-test parameters.
Farmer Mac is required tomust comply with the higher of the minimum capital requirement and the risk-based capital requirement.
The risk-based capital stress test promulgated by FCA is intended to determine the amount of regulatory capital (core capital plus the allowance for losses) that Farmer Mac would need to maintain positive capital during a ten-year period in which:
•annual losses occur at a rate of default and severity "reasonably related" to the rates of the highest sequential two years in a limited U.S. geographic area; and
•interest rates increase to a level equal toare shocked by the lesser of 600 basis points or 50 percent50% of the ten-year U.S. Treasury rate, and interest rates remain at such level for the remainder of the period.
The risk-based capital stress test then adds an additional 30 percent30% to the resulting capital requirement for management and operational risk.
As of December 31, 2017, Farmer Mac's statutory minimum and critical capital requirements were $520.3 million and $260.1 million, respectively, and its actual core capital level was $657.1 million, which is $136.8 million above the statutory minimum capital requirement and $397.0 million above the statutory critical capital requirement. Based on the risk-based capital stress test, Farmer Mac's risk-based capital requirement as of December 31, 20172020 was $235.4$197.4 million and Farmer Mac's regulatory capital of $665.9 million$1.0 billion exceeded that amount by
approximately $430.5$826.6 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Requirements" for a presentation of Farmer Mac's current regulatory capital position.
Enforcement Levels. Farmer Mac's charter directs FCA to classify Farmer Mac within one of four enforcement levels for purposes of determiningto determine compliance with the capital standards established by Farmer Mac's charter. As of December 31, 2017,2020, Farmer Mac was classified as within level I – the highest compliance level.
Failure to comply with the applicable required capital level in the charter would result in Farmer Mac being classified as within level II (below the applicable risk-based capital level, but above the minimum capital level), level III (below the minimum capital level, but above the critical capital level) or level IV (below the critical capital level). If Farmer Mac were classified as within level II, III or IV, the charter requires the Director of OSMO to take a number ofspecified mandatory supervisory measures and provides the Director with discretionary authority to take various optional supervisory measures depending on the level in which Farmer Mac is classified. The mandatory measures applicable to levelslevel II and level III include:
•requiring Farmer Mac to submit and comply with a capital restoration plan;
•prohibiting the payment of dividends if suchthe payment would result in Farmer Mac being reclassified as within a lower level and requiring the pre-approval of any dividend payment even if suchthe payment would not result in reclassification as within level IV; and
•reclassifying Farmer Mac as within one level lower if it does not submit a capital restoration plan that is approved by the Director, or the Director determines that Farmer Mac has failed to make, in good faith, reasonable efforts to comply with such a plan and fulfill the schedule for the plan approved by the Director.
If Farmer Mac were classified as within level III, then, in addition to the foregoing mandatory supervisory measures described above, the Director of OSMO could take any of the following discretionary supervisory measures:
•imposing limits on any increase in, or ordering the reduction of, any obligations of Farmer Mac, including off-balance sheet obligations;
•limiting or prohibiting asset growth or requiring the reduction of assets;
•requiring the acquisition of new capital in an amount sufficient to provide for reclassification as within a higher level;
•terminating, reducing, or modifying any activity the Director determines creates excessive risk to Farmer Mac; or
•appointing a conservator or a receiver for Farmer Mac.
Farmer Mac's charter does not specify any supervisory measures, either mandatory or discretionary, to be taken by the Director in the eventif Farmer Mac were classified as within level IV.
The Director of OSMO has the discretionary authority to reclassify Farmer Mac to a level that is one level below its then current level (for example, from level I to level II) if the Director determines that Farmer Mac is engaging in any action not approved by the Director that could result in a rapid depletion of core capital or if the value of property subject to mortgages backing securities guaranteed by Farmer Mac Guaranteed Securities has decreased significantly.
Capital Adequacy Requirements. Under FCA's rule on capital planning, Farmer Mac must develop and submit to OSMO for approval annually a plan for capital that considers the sources and uses of Farmer Mac's capital, addresses capital projections under stress scenarios, assesses Farmer Mac's overall capital adequacy, and incorporates a Farmer Mac board-approved policy on capital adequacy. In accordance with this regulation, Farmer Mac's board of directors has establishedoversees a policy that will requirerequires Farmer Mac to maintain an adequate level of "Tier 1" capital, consisting of retained earnings, paid-in-capital, common stock, qualifying preferred stock, and accumulated other comprehensive income allocable to "non-program" investments that are not included in the Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit lines of business. Under this policy, Farmer Mac must have maintainedmaintain at all times during 2017 a Tier 1 capital ratio of not less than 6.75 percentat least 7.0% of risk-weighted assets, calculated using an advanced internal ratings based ("AIRB") asset risk weighting regime that is consistent with current Basel-based principles, with the minimum Tier 1 capital ratio increasing to 7.0 percent in 2018 and thereafter.principles.
The policy also requires Farmer Mac to maintain a "capital conservation buffer" of additional Tier 1 capital of more than 2.5 percent2.5% of risk-weighted assets. If the capital conservation buffer drops to various levels at or below 2.5 percent,2.5%, as shown in the table below, the policy requires Farmer Mac to restrict distributions of current quarter Tier 1-eligible dividends and any discretionary bonus payments to an amount not to exceed the corresponding payout percentage specified in the table below, which represents the percentage of the cumulative core earnings for the four quarters immediately preceding the distribution date:
|
| | | | |
| Capital Conservation Buffer | Payout Percentage |
| (percentage of risk-weighted assets) | (percentage of four quarters' accumulated core earnings) |
| greater than 2.5% | No limitation |
| greater than 1.875% to and including 2.5% | 60% |
| greater than 1.25% to and including 1.875% | 40% |
| greater than 0.625% to and including 1.25% | 20% |
| equal to or less than 0.625% | 0% (no payout permitted) |
These distribution restrictions willwould remain for so long as the Tier 1 capital conservation buffer remains at or below the minimum level of 2.5 percent,2.5%, and Farmer Mac's board of directors may consider other factors, such as GAAP earnings presented in accordance with generally accepted accounting principles in the United States ("GAAP") and other regulatory requirements, in determining whether to restrict capital distributions, including dividends and bonus payments. As of December 31, 2017,2020, Farmer Mac's Tier 1 capital ratio was 12.6%14.1%. In 2016, Farmer Mac adjusted theThe calculation of itsFarmer Mac's Tier 1 capital ratio to eliminatedoes not include certain interest rate risk components of the risk weighting of assets, to reflectwhich reflects the fact that Farmer Mac pursues a match-fundingan approach to funding its assets with liabilities of similar duration and convexity characteristics and therefore does not bear material interest rate risk in its portfolio. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Requirements" for more information on Farmer
Mac's Tier 1 capital ratio.
Liquidity Requirements
Liquidity Reserve Requirement and Supplemental Liquidity. Farmer Mac's Liquidity and Investment Regulations require that Farmer Mac does not expectmaintain at all times a liquidity reserve sufficient to fund at least 90 days of the principal portion of maturing obligations and other borrowings. Farmer Mac may also maintain supplemental liquidity to fund obligations and borrowings maturing after 90 days. The
investments that Farmer Mac holds as its complianceliquidity reserve and as supplemental liquidity must consist of unencumbered and readily marketable assets that are diversified in accordance with categories prescribed by FCA, including limitations on an ongoing basis with FCA's rule on capital planning, includingasset class, dollar amount, issuer concentration, and credit quality. Farmer Mac must report, in writing, to OSMO no later than the next business day following the discovery of any breach of Farmer Mac's minimum liquidity reserve requirement.
Liquidity Management. Under the Liquidity and Investment Regulations, Farmer Mac must develop and approve annually a liquidity policy on Tier 1 capital, to materially affectthat outlines Farmer Mac's operations or financial condition.purpose and objectives for liquidity reserves, diversification requirements for liquidity reserves, target liquidity levels, maximum investment amounts as a percentage of Farmer Mac's program assets, exception parameters (and approval requirements), delegations of investment authority, and reporting requirements to Farmer Mac's board of directors and to OSMO. The regulations also require Farmer Mac to develop a liability maturity management plan and a contingency funding plan, each of which must be reviewed and approved annually by Farmer Mac's board of directors.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" for more information about Farmer Mac's liquidity and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk—Other Investments" for more information about Farmer Mac's eligible investments.
Item 1A.Risk Factors
Farmer Mac's business activities, financial performance, and results of operations are, by their nature, subject to a number of risks and uncertainties, including those related to the agricultural industry, the rural utilities industry, access to the capital markets, the regulatory environment, and the level of prevailing interest rates and overall market conditions. The following risk factors should be considered in conjunctionalong with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Annual Report on Form 10-K,report, including the risks and uncertainties described in the "Forward-Looking Statements" section. Furthermore, becauseBecause new risk factors likely will emerge from time to time, management can neither predict all suchpotential risk factors nor assess the effects of suchthose factors on Farmer Mac's business, operating results, and financial condition or the extent to whichhow much any factor, or combination of factors, may affect Farmer Mac's actual results and financial condition. If any of the following risks materialize, Farmer Mac's business, financial condition, or results of operations could be materially and adversely affected. Farmer Mac undertakes no obligation to update or revise this risk factor discussion, except asunless required by applicable law.
COVID-19 Pandemic Risk
The effects of the COVID-19 pandemic are uncertain and may heighten the risk factors described in this report or could otherwise have a material adverse effect on Farmer Mac's business, operations, operating results, financial condition, liquidity, or capital levels.
The COVID-19 pandemic continues to create extensive disruptions to the global economy and to the lives of individuals throughout the world. The effectiveness of Farmer Mac’s efforts to manage and mitigate the following risk factors during the COVID-19 pandemic and how much the pandemic affects Farmer Mac’s business, results of operations, and financial condition will depend on many factors beyond Farmer Mac’s control, including:
•the duration and severity of the pandemic and the effectiveness of government and public health responses, including to the prevalence of any new strains of the novel coronavirus and the widespread distribution, public acceptance, availability, and use of vaccines;
•the existence and scope of government intervention to mitigate the negative economic effects of the COVID-19 pandemic, including imposing any moratoria on agricultural mortgage foreclosures;
•the ability of Farmer Mac’s borrowers to withstand economic pressures caused by the COVID-19 pandemic, how quickly and to what extent affected borrowers can recover from the negative economic effects of the pandemic, and the nature and extent to which affected borrowers require loan payment deferments;
•the extent to which disruptions in the capital markets or volatility in interest rates stemming from the effects of the COVID-19 pandemic impair customer demand for Farmer Mac’s loan products, Farmer Mac’s ability to offer those loan products at competitive prices, or Farmer Mac’s ability to access the capital markets to fund and capitalize its operations;
•the continued ability of Farmer Mac, its vendors, and the organizations on which they rely, such as government offices and courthouses, to operate effectively during the COVID-19 pandemic, including their ability to implement effective cyber-security protocols in remote-working environments as needed;
•how quickly and to what extent normal economic and operating conditions can resume, including whether any future COVID-19 outbreaks interrupt economic recovery; and
•whether the COVID-19 pandemic causes any residual negative effects once the pandemic has subsided.
The full effects of the COVID-19 pandemic on Farmer Mac’s business, results of operations, and financial condition may not be fully known for some time and may heighten the risk factors described below or may otherwise materially and adversely affect Farmer Mac’s business, operations, operating results, financial condition, liquidity, or capital levels.
Credit and Counterparty Risk
Factors affecting the agricultural industry or the rural utilities industry, some of which may be outside of Farmer Mac's or borrowers' control may negatively affectimpair borrowers' profitability and as a consequence, their ability to repay their loans on which Farmer Mac has assumed credit risk, and any widespread repayment shortfalls on these eligible loan assets could have a material adverse effect onin Farmer Mac's financial condition, results of operations, liquidity, or capital levels.
External factors or variables beyond Farmer Mac's or borrowers' control that could negatively affect borrowers' profitability, and therefore, their repayment capacity, could cause Farmer Mac to experience increased delinquency rates, default rates, and credit losses within its loan portfolio, including, but not limited to:
severe protracted or sudden adverse weather conditions, natural disasters, wildfires, animal and plant disease outbreaks, restrictions on water supply or changes to sustainable groundwater management practices, limited access to transportation to move agricultural products to markets, or other conditions affecting particular geographic regions or industries;
volatility in revenues or production expenses as a result of changes in commodity or fuel prices or labor costs or availability within any particular industry;
fluctuations in currency exchange markets, modifications to U.S. or global trade policies, or changes in the global economy that would reduce export demand for U.S. agricultural products;
slow or negative domestic or international economic growth, which could reduce demand for U.S. agricultural products;
adverse changes in interest rates, agricultural land values, or other factors that may affect delinquency levels and credit losses on agricultural real estate mortgage loans;
legislative or regulatory developments or actions adversely affecting the agricultural industry or the rural utilities industry;
changes in the general economy that could affect the availability of off-farm sources of income and prices of real estate for borrowers; and
economic conditions or technological advances that may negatively affect the market for electricity in rural areas and consequently limit the ability of rural electric cooperatives to provide electricity or raise rates to achieve profitable levels.
Farmer Mac's earnings depend significantly on the performance of its loan assets and the spread between the interest, guarantee fees, and commitment fees earned on those assets and interest paid on Farmer Mac's obligations and liabilities. Farmer Mac assumes the ultimate credit risk of borrower defaults on the agricultural mortgage and rural utilities loans it holds, as well as the loans underlying LTSPCs and non-AgVantage Farmer Mac Guaranteed Securities. Widespread repayment shortfalls on loans in the Farm & Ranch line of business or Rural Utilities line of business could result in losses on loans held or require Farmer Mac to pay under its guarantees and LTSPCs, which could have a material adverse effect on Farmer Mac's financial condition, results of operations, liquidity, or capital levels.
InExternal factors beyond Farmer Mac's or borrowers' control could impair borrowers' profitability, such as severe or protracted adverse weather and related effects (including recent severely cold weather in Texas); volatility in demand for agricultural products or electricity in rural areas; variability in borrowers' input costs; protracted regional, domestic, or global economic stress (whether due to the Farm & Ranch linecontinued COVID-19 pandemic or otherwise); legislative or regulatory actions affecting rural borrowers; U.S. trade policy affecting the demand for agricultural exports or the price of business, repaymentimports required for borrowers' operations; increased competition among producers due to oversupply or available alternatives; and adverse changes in interest rates and land values. Any of loans typically dependsthese factors could put downward pressure on the successprofitability of a farming or rural utilities operation, which could then inhibit the related farming operation, which, in turn, dependsborrower's repayment capacity on many variables and factors, including those described above, over which farmers may have littleone or no control. Farmer Mac's credit risk may also increase in the case of a loan with a balloon payment due at maturity if the borrower seeks to refinance but is unable to do so. As of December 31, 2017, 65.9 percent of themore loans in the Farm & Ranch line of business included balloon payments.that Farmer Mac may also be subject tohave from that borrower in its portfolio.
Farmer Mac assumes the ultimate credit risk due to concentration in or exposure to a particular commodity type, geographic region, business partner, or borrower. Widespread weakening in the financial conditions of borrowers within a particular geographic region or commodity type or the default of any particular business partner could negatively impact Farmer Mac’s financial condition,borrower defaults on its agricultural mortgage and rural utilities loan assets, and Farmer Mac’s policies regarding geographicMac's earnings, which come from net interest income, guarantee fees, and commodity concentrationcommitment fees on those assets, depend significantly on their performance. Widespread and its processes to monitor counterparty credit exposure may not be sufficient. Additionally, while Farmer Mac’s Farm & Ranch portfolio consists ofsustained repayment shortfalls on loans varying in size and by borrower, the average size of loans purchased by Farmer Mac has increased and includes several large loans with large borrowers. The default of any one of these borrowers could also negatively impact Farmer Mac's financial condition. Farmer Mac's credit risk may also increase as aportfolio could result of its exposure to loans that are adversely affected by a decline in losses, particularly if the sale value of the underlyingavailable collateral which can vary based on several factors, including commodity type, geographic region, and the degree to which the collateral is single-use or highly improved. Loans to borrowers in certain commodity groups or geographic regions that have had historically higher delinquency rates or credit losses relative todoes not cover Farmer Mac's overall portfolio may present a higher risk of delinquency or credit losses in future periods. For example, as of December 31, 2017, loans to borrowers in the permanent plantings category comprised 19.9 percent of the Farm & Ranch portfolio, but delinquencies inexposure, and this category comprised 38.9 percent of the aggregate delinquencies for all commodity categories. Also, the degree to which the collateral for a commodity group is single-use or highly improved, such as for permanent plantings, agricultural storage or processing facilities, or certain livestock facilities, may be a significant determinant of the probability of ultimate losses on a given loan because producers requiring such highly improved collateral are less able to adapt their operations or switch commodity groups when faced with adverse conditions. For example, as of December 31, 2017, loans to borrowers in the Agricultural Storage and Processing category (including ethanol facilities) comprised 0.9 percent of the Farm & Ranch portfolio, but cumulative net credit losses for this category comprised 47.3 percent of the cumulative net credit losses for all categories. Widespread deterioration in collateral values, resulting in the undercollateralization of the related loans, could have a material adverse effect on Farmer Mac's financial condition, results of operations, liquidity, or capital levels.
In the Rural Utilities line of business, eligible utilities operations include the distribution of electricity, the generation and transmission of electricity, and telecommunications. Repayment of eligible loans in this line of business could be affected by several factors. Although each type of utilities operation has different inherent risks associated with it, all of them could be potentially affected by changes in public and regulatory policies. In addition, business cash flows can be disrupted as a result of storms, though distribution cooperatives have in place cost-sharing arrangements with providers in other regions that mitigate this exposure. Historically, natural disasters have often resulted in disaster area declarations and financial aid to utilities providers through the Federal Emergency Management Agency and other conduits, although there can be no assurance that any such aid would be available in the event of any future natural disaster. Electrical distribution and generation cooperatives can also be adversely affected by changes in fuel costs and prices received from consumers, as well as by contractual power obligations that do not match up with supply or demand. Additionally, technological advances and innovation in the power industry could reduce customer demand for electricity in the future. If Farmer Mac purchases telecommunications loans in the future, the depth and pace of technological change in the telecommunications industry can also provide significant challenges, as the industry requires heavy capital investment and correct judgments about the sustainability of new technologies in an area with many competitors. If any of the factors described above negatively impacts the cash flows or financial condition of utilities operations that are borrowers on loansConcentrations in Farmer Mac's Rural Utilities portfolio, Farmer Mac's financial condition, results of operations, liquidity,loan or capital levels could be adversely affected.
Farmer Mac Guaranteed Securities and LTSPCs expose Farmer Macinvestments portfolios, or to significant contingent liabilities, and Farmer Mac's ability to fulfill its obligations under its guarantees and LTSPCsone or more borrowers or counterparties, may be limited.
Farmer Mac's guarantee and purchase commitment obligations to third parties, including Farmer Mac Guaranteed Securities and LTSPCs, are obligations of Farmer Mac only and are not backed by the full faith and credit of the United States, FCA, or any other agency or instrumentality of the United States other than Farmer Mac. As of December 31, 2017, Farmer Mac had $4.0 billion of contingent liabilities related to Farmer Mac Guaranteed Securities and LTSPCs issued to third parties, which representsincrease Farmer Mac's exposure if all loans underlying these guarantees and LTSPCs defaulted and Farmer Mac recovered no value from the related collateral. Farmer Mac's principal sources of funds for payments on all of its liabilities, including claims that may arise under its guarantees and LTSPCs, are the liquid assets held by Farmer Mac (including cash and cash equivalents), guarantee and commitment fees, interest payments on assets held by Farmer Mac, loan repayments, repayment of principal amounts due upon maturity of AgVantage securities, and proceeds from the issuance of debt securities. If all of the loans underlying Farmer Mac's guarantees and LTSPCs defaulted and Farmer Mac recovered no value from the related collateral, the funds for payment on these guarantees and LTSPCs could be substantially less than the aggregate amount of the corresponding liabilities. It is difficult to quantify at any particular point in time the funds that would be available from interest payments, loan repayments, and maturing AgVantage securities for payment on Farmer Mac's guarantees and LTSPCs, and Farmer Mac's ability to issue debt as a source of repayment would be subject to its ability to access the debt markets and market conditions at that time. As of December 31, 2017, Farmer Mac held cash, cash equivalents, and other investment securities with a fair value of $2.6 billion that could be used as a source of funds for payment on its obligations. Although Farmer Mac believes that it remains well-collateralized on the assets underlying its guarantee and purchase commitment obligations to third parties and that the estimated probable losses for these obligations remain low relative to the amount available for payment of claims on these obligations, Farmer Mac's total contingent liabilities for these obligations exceed the amount it may have available for
payment of claims on these obligations. See "Management's Discussion and Analysis—Risk Management—Credit Risk – Loans and Guarantees" for more information on Farmer Mac's management of credit risk.
Farmer Mac is exposed to counterparty credit risk, on AgVantage securities thatwhich could materially and adversely affect its business, operating results, and financial condition.
Farmer Mac is exposedMac's exposure to credit risk from issuersmay increase due to concentrations in its loan portfolio to a particular commodity type, geographic region, or collateral type. Widespread weakening in the financial condition of borrowers within a particular geographic region, commodity type, or collateral type (which could be exacerbated by a prolonged period of economic stress due to the effects of the COVID-19 pandemic) could negatively affect Farmer Mac’s financial condition if the geographic and commodity diversity within Farmer Mac's portfolio does not successfully mitigate concentration risk. Farmer Mac's credit risk may also increase due to decline in the collateral values securing the loans in Farmer Mac's portfolio, particularly if the collateral is single-use or highly improved, such as storage and processing facilities or permanent plantings. Single-use or highly improved collateral increases the risk of ultimate losses on a given loan because producers requiring single-use or highly improved collateral are less able to adapt their operations or switch functional production when faced with adverse conditions and are more likely to be undercollateralized in a default scenario. For example, Farmer Mac's cumulative net credit losses for
loans to borrowers in the Agricultural Storage and Processing category are 54.5% of its cumulative net credit losses for all categories.
Farmer Mac's exposure to credit risk may also increase due to concentrated exposure to a particular borrower or counterparty. Farmer Mac’s Farm & Ranch portfolio consists of loans varying in size and by borrower, including large exposures ($25 million or more) to individual borrowers. The default of any one of these borrowers could negatively affect Farmer Mac's financial condition. Farmer Mac also has concentrated exposures to individual business counterparties on AgVantage securities. Each AgVantage security is asecurities, which are general obligationobligations of an issuing institutioninstitutional counterparties secured by eligible loans held by the issuing institution. Although AgVantage securities are collateralized by eligible loans in ana principal amount at least equal to or greater than the outstanding principal amount of the securitysecurities outstanding, Farmer Mac could suffer losses if the market value of the loan collateral declines and guaranteedthe counterparty defaults. Taking possession of the loan collateral upon a default by the AgVantage counterparty could also result in higher current expected credit losses for Farmer Mac.Mac's loans held on balance sheet, as well as increased capital requirements. Most of Farmer Mac's AgVantage exposure is concentrated in a small number offew issuers. As of December 31, 2017, $7.42020, $7.0 billion of the $7.9$7.7 billion of AgVantage securities outstanding had been issued by three counterparties. A default by any of these counterparties could have a significant adverse effect on Farmer Mac's business, operating results, and financial condition. Farmer Mac seeks to manage its risk to AgVantage counterparties by reviewing each institution for which Farmer Mac has AgVantage exposure and requiring those institutions to meet
Farmer Mac's standards for creditworthiness. In addition, Farmer Mac requires some level of overcollateralization (currently between 103 percent and 125 percent of the principal amount of the securities issued) and, in some cases, compliance by the counterparty with specified financial covenants for the life of the related AgVantage securities, for AgVantage securities secured by Farm & Ranch loans. Specifically, certain issuing institutions and smaller financial counterparties that use Farmer Mac's AgVantage or Farm Equity AgVantage products may not be considered as creditworthy as Farmer Mac's other counterparties issuing AgVantage securities. Therefore, these issuing institutions and smaller financial counterparties are subjectexposure to significantly higher overcollateralization requirements (currently between 120 percent and 125 percent of the principal amount of the securities issued) and must comply with specified financial covenants for the life of the related AgVantage securities.
Farmer Mac is exposed to counterparty credit risk on itsmay also increase due to concentrated exposure to one or more investment securities that could materially and adversely affect its business, operating results, and financial condition.
types or counterparties in the investment portfolio Farmer Mac maintains anfor liquidity. This investment portfolio that can be drawn upon for liquidity needs. In addition toconsists primarily of cash and cash equivalents, (such as U.S. Treasury securities, and short-term money market instruments), this portfolio consists of investment securities, including securities guaranteed by U.S. Government agencies and GSEs, corporate debt obligations, and auction-rate certificates. Though some of these investmentasset-backed securities do not qualify for purposes of calculating liquidity under the regulatory requirements prescribedbacked primarily by FCA, they still may be drawn upon for Farmer Mac's liquidity needs.U.S. Government-guaranteed loans. Farmer Mac regularly reviews concentration limits to ensure that its investments are appropriately diversified and comply with policies approved by Farmer Mac's board of directors and with applicable FCA regulations, but Farmer Mac is still exposed to credit risk from issuers of the investment securities it holds.holds, particularly to issuers to whom Farmer Mac may have a higher concentration of exposure relative to the rest of Farmer Mac's investment portfolio. For example, as of December 31, 2017,2020, Farmer Mac held at fair value as part of its liquidity investment portfolio, $35.1 million of asset-backed securities principally backed by U.S. Government-guaranteed student loans (including $18.8 million of auction-rate certificates) and $893.8 million$1.9 billion of investment securities guaranteed by GSEs. A default by multiple issuers of investment securities held by Farmer Mac or by a single issuer of investment securities in which Farmer Mac is more heavily concentrated could have an adverse effect on Farmer Mac's business, operating results, and financial condition.
Farmer Mac Guaranteed Securities and LTSPCs expose Farmer Mac to significant contingent liabilities, and Farmer Mac's ability to fulfill its obligations under its guarantees and LTSPCs may be limited.
Farmer Mac's guarantee and purchase commitment obligations to third parties, including LTSPCs and securities guaranteed by Farmer Mac, are obligations of Farmer Mac only and are not backed by the full faith and credit of the United States, FCA, or any other agency or instrumentality of the United States other than Farmer Mac. As of December 31, 2020, Farmer Mac had $3.3 billion of contingent liabilities related to LTSPCs and securities issued to third parties and guaranteed by Farmer Mac, which represents Farmer Mac's exposure if all loans underlying these LTSPCs and guarantees defaulted and Farmer Mac recovered no value from the related collateral. If this were to occur, the funds available for payment on these guarantees and LTSPCs could be substantially less than the aggregate amount of the corresponding liabilities. As of December 31, 2020, Farmer Mac held cash, cash equivalents, and other investment securities with a fair value of $4.9 billion that could be used as a source of funds for payment on its obligations, including its guarantee and LTSPC obligations. Although Farmer Mac believes that it
remains well-collateralized on the assets underlying its guarantee and LTSPC obligations to third parties and that the estimated probable losses for these obligations remain low relative to the amount available for payment of claims on these obligations, Farmer Mac's total contingent liabilities for these obligations could exceed the amount it may have available for payment of Farmer Mac's obligations, including claims on Farmer Mac's contingent obligations. See "Management's Discussion and Analysis—Risk Management—Credit Risk – Loans and Guarantees" for more information on Farmer Mac's management of credit risk.
Farmer Mac is exposed to swap counterparty credit risk on both its cleared and non-cleared swaps transactions that could materially and adversely affect its business, operating results, and financial condition.
Farmer Mac relies onuses interest rate swap contracts and hedging arrangements to effectively manage its interest rate risk. Farmer Mac clears a significant portion of its interest rate swaps through a swap clearinghouse through which centrally-cleared derivatives and uses the services of a futures commission merchant to post and receive mark-to-market margin amounts. Farmer Mac also transacts non-cleared (bilateral) derivative contracts are traded,directly with swap counterparties and posts initial and variationreceives collateral to secure the market value of those contracts. A failure of any of these counterparties could cause intra-day disruption for Farmer Mac's swap operations if the failure were to prompt a termination of all or part of Farmer Mac's swap positions or if Farmer Mac were unable to quickly access margin or collateral amounts. These conditions could be exacerbated in volatile market conditions, in which the market could move against Farmer Mac's position before Farmer Mac had time to this clearinghouse. Thesereposition its swaps. Farmer Mac's derivative contracts executed before March 2017 have market value thresholds ranging from $15 to $25 million that must be exceeded before Farmer Mac must post collateral. Repositioning these swaps under current margin rules if the related counterparty were to fail could require Farmer Mac to post significant collateral postingswithin a short time frame. Any of these factors resulting from a failure of the swap clearinghouse, futures commission merchant, or any of Farmer Mac's bilateral swap counterparties could have a negative effect on Farmer Mac's operations and liquidity and could expose Farmer Mac to institutional creditmore interest rate risk, if either the clearinghouse or the futures commission merchant that Farmer Mac uses to post collateral to the clearinghouse fails to meet its obligations. Conversely, the use of centrally-cleared derivatives mitigates Farmer Mac's credit risk to individual counterparties because clearinghouses assume the credit risk among counterparties in centrally-cleared derivatives transactions. However, if either the clearinghouse or the futures commission merchant that Farmer Mac uses to post collateral to the clearinghouse fails to meet its obligations, Farmer Mac could face challenges in accessing its posted collateral, which could materially and adversely affect its business, operating results, and financial condition.
A portion of Farmer Mac's interest rate swap contracts are not cleared through swap clearinghouses, which creates swap counterparty credit risk on those non-cleared swaps transactions. In managing this risk, Farmer Mac contracts only with counterparties that have investment grade credit ratings, establishes and maintains minimum threshold collateral requirements that are scaled based upon credit ratings (for non-cleared swaps transactions entered into prior to March 2017), and enters into netting agreements. Additionally, new rules that became effective in March 2017 establish zero threshold requirements for the exchange of variation margin between Farmer Mac and its swap dealer counterparties in non-cleared swaps transactions entered into following the effective date. However, failure to perform under a non-cleared derivatives contract by one or more of Farmer Mac's counterparties could disrupt Farmer Mac's hedging operations, particularly if Farmer Mac were entitled to a termination payment under the terms of the contract that it did not receive, or if Farmer Mac were unable to reposition the swap with a new counterparty. Of the $8.8 billion combined notional amount of Farmer Mac's interest rate swaps as of December 31, 2017, $0.9 billion were not cleared through swap clearinghouses. As of December 31, 2017,2020, the aggregate notional balance of Farmer Mac's credit exposure to interest rate swap counterpartiescleared swaps was $28.5 million excluding netting arrangements$12.8 billion, and $0.5 million including netting arrangements.the aggregate notional balance of Farmer Mac's non-cleared swaps was $2.6 billion (including $0.3 billion notional amount of non-cleared swaps executed before March 2017).
Strategic/Business Risk
Farmer Mac's business, operating results, financial condition, and capital levels may be materially and adversely affected by external factors that may affect the demand for Farmer Mac's secondary market, the price or marketability of Farmer Mac's products, or Farmer Mac's ability to offer its products and services.
Farmer Mac's business, operating results, financial condition, and capital levels may be materially and adversely affected by external factors including adverse changes in the capital markets or changes in public policy, that may affect the price or marketability of Farmer Mac's products and services or Farmer Mac's ability to offer its products and services, including, but not limited to:
•disruptions in the capital markets, which could adversely affect the value and performance of Farmer Mac's eligible loan assets and investment securities, liquidity position, and ability to access funding at favorable levels or to raise capital;markets;
•competitive pressures in the purchase of loans eligible for Farmer Mac's lines of businessloan purchase and guarantee activities or in the saleissuance of Farmer Mac Guaranteed Securities andits debt securities;
•changes in interest rates that may increase the basis riskFarmer Mac's funding costs;
•market or customer perception of Farmer Mac's hedging instruments, thereby increasing its funding costs; andreputation;
public perception of the risks posed by changes in Farmer Mac's executive leadership;
•legislative or regulatory developments or interpretations ofadversely affecting Farmer Mac's statutory charter, that could adversely affect Farmer Mac or its ability to offer new products, adversely affect the ability or motivation of certain lenders to participate in Farmer Mac's lines of business, or the terms of any such participation, or increase the cost of related corporate activities.activities;
•reduced demand for agricultural real estate loans or Rural Utilities loans due to regional, domestic, or global economic conditions; and
•expanded funding alternatives available to agricultural and rural utilities borrowers.
An inability to access the equity and debt capital markets could have a material adverse effect on Farmer Mac's business, operating results, financial condition, liquidity, and capital levels.
Farmer Mac's ability to operate its business, meet its obligations, generate asset volume growth, and fulfill its statutory mission depends on Farmer Mac's capacity to remain adequately capitalized through the issuance of equity securities and to issue substantial amounts of debt frequently andsecurities at favorable rates. The issuance of equityrates and debt securitiesterms in the U.S. financial markets are the primary sources ofmarkets. Farmer Mac's capitalizationpotential for growth and funding forfuture net income depends in part on Farmer Mac's purchasesability to access equity markets to raise efficient capital. The issuance of eligible loan assets and liquidity investment assets anddebt securities is Farmer Mac's primary source for repaying or refinancing existing debt. Moreover,debt, and one of the primary sources of Farmer Mac's revenue is the net interest income earned from the difference, or "spread," between the return received on assets held and the related borrowing costs. Farmer Mac's ability to obtain funds throughaccess the issuancedebt and equity markets to raise capital, fund its assets, repay debt, and earn net interest income depends on market perception of Farmer Mac. If Farmer Mac were unable to access the U.S. financial markets to issue equity andor debt securities at favorable rates and terms, depends on many factors, including:
Farmer Mac's corporate structure established by its charter, including its status as a government-sponsored enterprise, or GSE, and perceptions about the viability of stockholder-owned GSEs in general;
compliance with applicable statutory, regulatory, and board-approved capital requirements and any measures imposed by Farmer Mac's regulator or board of directors if Farmer Mac failed to comply with those requirements;
Farmer Mac's financial results and changes in its financial condition;
public perception of the risks to, and stability and financial prospects of, Farmer Mac's business;
public perception of the risks posed by changes in Farmer Mac's executive leadership;
prevailing conditions in the capital markets;
lack of a public debt rating may reduce demand for Farmer Mac's debt securities;
competition from other issuers of GSE equity or debt; and
legislative or regulatory actions relating to Farmer Mac's business, including any actions that would affect Farmer Mac's GSE status.
Farmer Mac's business development, profitability, and capital depend on the continued growth of the secondary market for agricultural real estate mortgage loans and for rural utilities loans, which may be constrained by a number of factors.
Continued growth in Farmer Mac's business and future profitability may be constrained by conditions that limit the needoperating results, or ability for lenders to obtain the benefits of the secondary market provided by Farmer Mac, including, but not limited to:
reduced growth rates in the agricultural mortgage market caused by prevailing conditions in the overall economy;
an increase in capital levels or the availability of other sources of capital for customers of Farmer Mac;
acceptance by Federal Home Loan Banks of agricultural real estate mortgage loans as collateral;
the extent to which many agricultural lending institutions retain loans in their portfolios rather than sell them into the secondary market;
the small number of business partners that currently provide a significant portion of Farmer Mac's business volume, resulting in vulnerability as existing business volume pays down or matures and the status of these business partners evolves; and
expanded funding alternatives available to rural utilities.
The failure of an issuer to pay the outstanding principal amount or to issue new AgVantage securities upon the maturity of outstanding AgVantage securities could negatively affect Farmer Mac's liquidity position and income.
As of December 31, 2017, Farmer Mac had $7.9 billion of AgVantage securities outstanding, of which $2.4 billion and $1.1 billion will be maturing in 2018 and 2019, respectively. Farmer Mac guarantees the timely payment of principal and interest on AgVantage securities and may retain AgVantage securities in its portfolio or sell them to third parties in the capital markets as Farmer Mac Guaranteed Securities. The terms of most AgVantage securities do not require the periodic payment of principal based on amortization schedules and instead have fixed maturity dates when the secured general obligation is due. If the issuer of a maturing AgVantage security defaults and does not pay the outstanding principal amount due upon maturity, Farmer Mac's liquidity positionfinancial condition could be negatively affected because Farmer Mac will be required to obtain funds in a significant amount to pay the holder of the AgVantage security or, for AgVantage securities owned by Farmer Mac, to pay off the debt securities used to fund the purchase of the AgVantage securities. Farmer Mac's income could also be adversely affected if the issuer of a maturing AgVantage security does not issue new AgVantage securities to replace the maturing securities and Farmer Mac does not find alternate sources of business, or if the net interest margin earned by Farmer Mac on new AgVantage securities that replace maturing AgVantage securities is lower than the margin earned on the maturing AgVantage securities.affected.
The loss of business from key business partnerscounterparties or customers, including AgVantage counterparties, could adversely affectweaken Farmer Mac's business and result in a decrease in its revenues and profits.
Farmer Mac's business and ability to generate revenues and profits largely depends on its ability to purchase eligible loans or place eligible loans under guarantees or LTSPCs.LTSPCs and to purchase or guarantee AgVantage securities. Farmer Mac conducts a significant portion of its business with a small number offew business partners.counterparties. This resultscould result in vulnerability as existing assets pay down or mature and the status and needs of Farmer Mac's business partners evolve. In 2017,2020, ten institutions generated approximately 59 percent57% of loan purchase volume in the Farm & Ranch line of business. As of December 31, 2017,2020, approximately 93.9 percent90% of the $7.9$7.7 billion outstanding principal amount of AgVantage securities under Farmer Mac's Institutional Credit line of business were issued by three institutions. Transactionsinstitutions (of which $1.7 billion and $1.4 billion will be maturing in 2021 and 2022, respectively). As of December 31, 2020, transactions with CFC havetwo institutions represented 100 percentnearly all of the business volume under Farmer Mac's Rural Utilities line of business since its inception in 2008.business. Farmer Mac's ability to maintain the current relationships with its business partnerscounterparties or customers and the business generated by those business partnerscounterparties or customers is significant to Farmer Mac's business. Consequently,As a result, the loss of business from any one of Farmer Mac's key business partnerscounterparties could negatively impactdecrease Farmer Mac's revenues and profitability. Furthermore, Farmer Mac may not be ableunable to replace the loss of business
of a key business partnercounterparty or customer with alternate sources of business due to limitations on the types of assets eligible for theFarmer Mac's secondary market, provided by Farmer Mac under its charter, which could adversely affect Farmer Mac's business and result in a decrease in its revenues and profits.
Farmer Mac's efforts to balance fulfilling its Congressional mission with providing a return to its stockholders may result in business transactions that involve lower returns or higher risk, which could adversely affect its business, operating results, or financial condition.
Congress created Farmer Mac to provide for a secondary market for agricultural mortgage loans, Rural Utilities loans, to rural utilities cooperatives, and the guaranteed portions of USDA-guaranteed loans. In pursuing this mission, Farmer Mac's secondary market activities are designed to:
•increase the availability of credit to rural borrowers at stable interest rates;
•provide greater liquidity and lending capacity in extending credit to rural borrowers; and
•provide an arrangement for new lending by facilitating capital market investments in funding for rural borrowers, including funds at fixed rates of interest.
Farmer Mac's charter provides that its standards for Farm & Ranch loans shall not discriminate against small originators or small agricultural mortgage loans of at least $50,000. The charter also requires Farmer Mac's board of directors to promote and encourage the inclusion of qualified loans for small farms and family farmers in the agricultural mortgage secondary market.
Although Farmer Mac strives to undertake its mission-related activities in a manner consistent with providing a positivean accretive return to Farmer Mac's stockholders, it is possible that these activities maycould contribute to a lower return to stockholders than if Farmer Mac's sole purpose were to maximize stockholder value. In addition, it is possible that the entities that regulateIf Farmer Mac could seek to alter or place limits on Farmer Mac's mission-related activities in the future or place limits on its investments that provide liquidity for Farmer Mac's mission-related activities. If this were to happen, and Farmer Mac were required to undertake activities involving greater risk or lower returns to satisfy its Congressional mission, or that generate lower returns or limited in the activities it was allowed to undertake, Farmer Mac's business, operating results, or financial condition could be adversely affected.
A few stockholders who own large amounts of Farmer Mac voting common stock may seek to influence Farmer Mac's business, strategy, or board composition, and the interests of these stockholders may differ from the interests of Farmer Mac or other holders of Farmer Mac's common stock.
The ownership of Farmer Mac's two classes of voting common stock is currently concentrated in a small number offew institutions. Approximately 44 percentThree financial institutions hold approximately 44% of Farmer Mac's Class A voting common stock, is held by three financial institutions, with 31 percent31% held by one institution. Approximately 97 percentFive FCS institutions hold approximately 97% of Farmer Mac's Class B voting common stock is held by five FCS institutions (two of which are related to each other through a parent-subsidiary relationship).
Many The holders of Farmer Mac's Class A voting common stock and the holders of Farmer Mac's Class B voting common stock each have the right to elect one-third of the membership of Farmer Mac's board of directors. Many of these holders are rural lenders that may compete directly with each other. At times, some of these voting stockholders may also view Farmer Mac as an indirect competitor because Farmer Mac's secondary market activities often provide attractive funding and effective risk management tools that help many lenders compete in the origination of eligible rural loans. As long as Farmer Mac's Class A and Class B voting common stock is highly concentrated in a small number offew institutions, there is the potential that these institutions willcould seek to influence (and may succeed in influencing), Farmer Mac's business, strategy, or board composition in a way that may not be in the best interests of either Farmer Mac or all other stockholders. Furthermore, the interests of the holders of
Changes in Farmer Mac's Class Aboard could adversely affect its business, operations, and Class B voting common stock may not be fully aligned with each other or the interests of strategy.
Farmer Mac's Class C non-voting common stockholders, and this could lead to a strategycharter prescribes that is not in the best interestsits board of Farmer Mac or alldirectors consist of its stockholders.fifteen members. The holders of Farmer Mac's Class A voting common stock and the holders of Farmer Mac's Class B voting
common stock separately elect five board members for each have the right to elect one third of the membership of Farmer Mac's board of directors. Accordingly, each of these stockholder classes has the potential to significantly influence Farmer Mac's business, strategy, and board composition in a manner that may not be in the best interests of all stockholders.
Changes in Farmer Mac's board of directors could adversely affect its business, operations, and strategy.
Farmer Mac's charter prescribes that its board of directors be comprised of fifteen members. Five members are elected by holders of Farmer Mac's Class A voting common stock, five members are elected by holders of Farmer Mac's Class B voting common stock, and five members are appointed by theclass annually. The President of the United States, with the advice and consent of the United States Senate. The holdersSenate, appoints five board members (one of whom is designated as the chair of the board of directors). Farmer Mac's Class A voting common stock and of Farmer Mac's Class B voting common stock each elect one third of the membership of Farmer Mac'sPresidentially appointed board of directors annually. Farmer Mac's Presidentially-appointed members serve at the pleasure of the President of the United States and therefore could be replaced at any time. If,
as a result of annual elections or new Presidential appointments to the board, Farmer Mac were to experience a significant turnover in theboard membership of its board of directors within a short time period, Farmer Mac's business, operations, and strategy could be negatively affected. If several newly elected or appointedthe new directors arewere not able to become proficient quickly in Farmer Mac's business, operations, and strategies, this could adversely affect the effectiveness of the Farmer Mac's board of directors in overseeing and managing the business, affairs, strategies, and operations of Farmer Mac.Mac could be adversely affected. In 2020, three new individuals joined Farmer Mac's board of directors, two of whom were elected by holders of voting common stock in May 2020 (one of whom died later that year) and one of whom was appointed by the President of the United States after confirmation by the U.S. Senate in December 2020.
Operational Risk
The inadequacy or failure of Farmer Mac's operational systems, cybersecurity plan, internal controls or processes, or infrastructure, or the inabilitythose of Farmer Mac to successfully implement enhancements to any of these or migrate to new systems or infrastructurethird parties, could have a material adverse effect on Farmer Mac's business, liquidity, operating results, reputation, or financial condition.
Farmer Mac is exposed to operational risk due to the complex nature of its business operations and the processes and systems used to fulfillundertake its Congressional mission, maintain operational efficiency and technological relevance,business activities and comply with regulatory requirements. Operational risk refers to the risk of loss to Farmer Mac or damage to its reputation resulting from from:
•inadequate or failed internal processes, personnel, systems, cybersecurity plan, or infrastructure, or itsinfrastructure;
•Farmer Mac's inability to successfully implement enhancements to any of these or migrate to new systems or infrastructure,infrastructure;
•failed execution based on human error;
•inadequate or from failed internal controls or processes to detect or prevent fraud; or
•external events, including a disruption involving physical site access, cyber incidents, catastrophic events, natural disasters, terrorist activities, or disease pandemics.
Farmer Mac relies on business processes that largely depend on people, technology, and the use of complex systems and models to manage its business, process a high volume of daily transactions, and generate the records on which Farmer Mac's financial statements are based. Inadequacies or failures in Farmer Mac's internal processes, personnel, systems, cybersecurity plan, or infrastructure could lead to a significant disruption in its business operations, financial and economic loss, errors in its financial statements, impairment of its liquidity, liability or service interruptions to its customers, increased regulatory or legislative scrutiny, or reputational damage.
In response to the challenges presented by the COVID-19 pandemic, Farmer Mac's financial, accounting, data processing,Mac has modified its business practices to focus on protecting its employees and the public while continuing to fulfill its critical mission and maintaining its regular business operations in support of the farmers, ranchers, and rural utilities of America. On March 12, 2020, Farmer Mac activated its Business Continuity Plan (“BCP”) and has been operating uninterrupted since then with all of its employees working remotely from their homes. Farmer Mac has provided guidance and support to its employees to ensure that they have the tools and knowledge needed to effectively work from home, and Farmer Mac’s technology platform and BCP have been functioning as designed in support of all functions of the organization. Nonetheless, because the technology in employees’ homes may not be as robust as in Farmer Mac’s offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or other operating systems may failless reliable than Farmer Mac’s in-office technology, the continuation of these work-from-home measures introduces more operational risk. These risks include but are not limited to operate as intendedgreater cybersecurity risk and disruption or become temporarily unavailable becausefailure of events that are wholly or partially beyond Farmer Mac's control,local technology networks, which could adversely affectimpair Farmer Mac's ability to conduct its business in the ordinary course. Farmer Mac relies upon business processes that largely depend on people, technology, and the use of complex systems and models to manage its business, process a high volume of daily transactions, and generate the records upon which its financial statements are based. This heightened reliance increases the risk that Farmer Mac may be exposed to financial, reputational, or other losses because of errors or inherent design flaws in its
perform
processes or systems or the failed executioncritical functions. The realization of any of these processesrisks could have a material adverse effect on Farmer Mac’s business, results of operations, or systems. Additionally,financial condition.
The potential for operational risk exposure also exists as a result of Farmer Mac's interactions with, and reliance on, third parties. Farmer Mac's business relies on its ability to process, evaluate, and interpret significant amounts of information, much of which is provided by third parties and that information may not be correct orprovide. Yet Farmer Mac may failMac's ability to interpret it appropriately. Furthermore, the internal controls and processes Farmer Mac has in place designedimplement safeguards preventing disruption to detect and prevent fraud may not be effective or successful.
Farmer Mac continues to invest in and enhance its technological capabilities, operational systems, cybersecurity plan, infrastructure, and organizational structure. However, additional operational risks may arise in the implementation of these endeavors, including the risk that Farmer Mac may not be able to successfully implement these enhancements or migrate to newthird-party systems or infrastructure which may have a material adverse effect on Farmer Mac’s business, operations,is more limited than for its own systems or financial condition.
Many of Farmer Mac's critical business operations and activities are conducted in its main office located in Washington, D.C., and this concentration of Farmer Mac's personnel, technology, and facilities increases Farmer Mac'sinfrastructure. The risk of disruption to third-party systems or infrastructure may be heightened due to COVID-19-related illnesses or government or third-party actions taken to mitigate the public health effects of the COVID-19 pandemic, including stay-at-home orders. If the financial, accounting, data processing, backup, information technology, or other loss.operating systems and infrastructure of third parties with whom Farmer Mac also uses several third party vendorsinteracts or upon whom it relies fail to host a significant amount of Farmer Mac's operational and information technology systems. If the operations of any of these third party vendorsoperate properly or are disrupted, then Farmer Mac's operations could be materially adversely affected. Though Farmer Mac routinely reviews, updates, and testsits ability to conduct its business continuity and disaster recovery plans, these plansin the ordinary course may not be sufficient to mitigate all potential business continuity risks, as Farmer Mac's recovery capabilities could be overwhelmed by a disruption in its infrastructure or a catastrophic event such as a natural disaster, terrorist attack, extreme weather event, or disease pandemic. If Farmer Mac is not able to resume any business operations or its employees are unable to communicate with each other because of any of these events, Farmer Mac may not be able to successfully implement its continuity and disaster recovery plans,adversely affected, which could have a material adverse effect on Farmer Mac's business, liquidity, operating results reputation,of operations, or financial condition.
Any significant deficiency, failure, interruption, or breach in Farmer Mac's information systems, including the occurrence of successful cyber-attacks or a significant deficiency in Farmer Mac's cybersecurity plan, could result in a loss of business, damage to Farmer Mac's reputation, the disclosure or misuse of confidential or proprietary information, or increased costs or liability to Farmer Mac, which could adversely affect Farmer Mac's business, operating results, or financial condition.
Farmer Mac relies heavily on information systems, including from third parties, to conduct and manage its business operations. These information systems encompass an integrated set of hardware, software, infrastructure, and trained personnel organized to facilitate the planning, control, coordination, and decision-making processes occurring within Farmer Mac. As Farmer Mac's reliance on information systems has increased, so have the risks posed to its systems, including the effect of events that would threaten the confidentiality, integrity, or availability of Farmer Mac's information resources, known as cyber incidents. Similar toLike many other financial institutions, Farmer Mac faces regular attempts by third parties to gain unauthorized access to its information systems. Despite the increased cybersecurity risks presented by a workforce that is operating entirely remotely, Farmer Mac has experienced cyberis not aware of any cyber-attacks or other privacy or data security incidents through the date of this report that negatively affected the confidentiality, integrity, or availability of Farmer Mac’s information resources or that have not had a material impacteffect on its business, operating results, or financial condition, but it is not possible to predict the impacteffect on Farmer Mac of any future cyber incidents.
Farmer Mac has undertaken preventive measures and devotes significantwhat Farmer Mac believes to be adequate resources to design, manage, monitor, deploy, and assess its information systems and cybersecurity program consistent with industry best practices. Specifically, Farmer Mac's cybersecurity program routinely assesses Farmer Mac's cybersecurity risk profile and seeks to ensure there are sufficient measures and safeguards in place to mitigate the risks identified. However, Farmer Mac may not be ableunable to prevent, address on a timely and
adequate basis, or fully mitigate the negative effects associated with a successful cyber-attack on Farmer Mac's or its third-party information systems, which could adversely affect Farmer Mac's business, operating results, reputation, or financial condition. In addition, becauseBecause the methods used to launch cyber-attacks change frequentlyoften or, in some cases, are not recognized until launched, Farmer Mac also may be unable to implement effective preventive measures or proactively address these methods until they are discovered.A failure or interruption in any of Farmer Mac's information systems could result incause a disruption or malfunction of its operations, which could adversely affect Farmer Mac's ability to conduct business with its lenders,customers, loan
servicers, service providers, or other counterparties, result in financial loss, or cause damage to Farmer Mac's reputation.
The secure transmission, processing, and storage of Farmer Mac's confidential, proprietary, and other information assets through Farmer Mac's or its third-party information systems is instrumental to Farmer Mac's operations. Any action that results in unauthorized access to Farmer Mac's information systems by third parties, including through viruses, malware, cyber-attacks, or other information system breaches, could disrupt Farmer Mac's operations, corrupt its data, or result incause the misappropriation, unauthorized release, loss, or destruction of the confidential, proprietary, or other information assets of its lenders,customers, loan servicers, service providers, or other counterparties. If unauthorizedUnauthorized access to Farmer Mac's information systems occurs or sensitive information is obtained, this could cause Farmer Mac to experience prolonged operational interruption, damage to its reputation, material loss of business, legal liability, or increased costs from private data exposure, which could adversely affect Farmer Mac's business, operating results, reputation, or financial condition.condition
Failure by Farmer Mac depends onMac's third-party vendors, including loan servicers, information systems providers, and other service providers to protect confidential information from unauthorized access and dissemination and these vendors' failure to do so could result in liability for Farmer Mac or damage Farmer Mac's reputation, which could have a negative effect on Farmer Mac's business, operating results, or financial condition.
Farmer Mac relies on third-party vendors,third parties, including loan servicers, information systems providers, software-as-a-service (SaaS) providers, cloud computing service providers, and other service providers, to perform various functions for Farmer Mac. In the course ofDuring these activities, these vendorsthird parties collect and have access to a variety of confidential or proprietary information, including, among others, sensitive financial information, information presented to Farmer Mac's board of directors, information provided to Farmer Mac's regulators, information about the lenders that participate in Farmer Mac's lines of business, and personal financial information about the borrowers with loans included in one of Farmer Mac's lines of business. Any unauthorized access to a vendor'sor cyber incidents affecting the information systems byof one of these third parties, including through viruses, malware, cyber-attacks, or other information system breaches, could result in the misappropriation and inappropriate release of the confidential or proprietary information entrusted to Farmer Mac. Prior instances of unauthorized access by third parties to Farmer Mac's vendors'third parties' information systems have not resulted in the misappropriation or inappropriate release of the confidential or proprietary information entrusted to Farmer Mac, thoughalthough it is not possible to predict the consequences of any future instances. Also, any vendor'sAny employees or agents of Farmer Mac's third parties that have authorized access to confidential or proprietary information could also inadvertently or erroneously disseminate the information to inappropriateunauthorized third parties. The risk of unauthorized access to confidential or proprietary information through information system breaches or inadvertent dissemination may be heightened in a remote-working environment, which may be more prevalent due to the COVID-19 pandemic. Any unauthorized access to or dissemination of confidential or proprietary information could result in liability for Farmer Mac or damage Farmer Mac's reputation, either of which could have a negative effect on Farmer Mac's business, operating results, or financial condition.
If Farmer Mac's management of risk associated with its loan assets and investment securities based on model assumptions and output is not effective, its business, operating results, financial condition, or capital levels could be materially adversely affected.
Farmer Mac continually develops and adapts profitability and risk management models to adequately address a wide range of possible market developments. Farmer Mac's techniques and strategies may not be effective in mitigating its risk exposure in all economic market environments or against all types of risk, including risks that Farmer Mac fails to identify or anticipate. Some of Farmer Mac's qualitative tools and
metrics for managing risk are based uponon its use of observed historical market behavior. Farmer Mac applies statistical and other tools to these observations to quantify its risks. These tools and metrics may fail to predict future or unanticipated risk. Such failuresrisk or may not be effective in mitigating its risk exposure in all economic market environments or against all types of risk, which could for example, arise from factorsexpose Farmer Mac did not anticipate or correctly evaluate in its models. In addition, Farmer Mac's quantified modeling does not take into account all risks. Farmer Mac's more qualitative approach to managing those risks not accounted for in its quantitative models could prove insufficient, exposing it to material unanticipated losses. The inability of Farmer Mac to effectively identify and manage the risks inherent in its business could have a material adverse effect on its business, operating results, financial condition, or capital levels.
Farmer Mac's efforts to expand product offerings and services to its customers exposes Farmer Mac to operational risk that could materially and adversely affect its business, operating results, or financial condition.
As the needs of Farmer Mac's customer base and rural America evolve, Farmer Mac seeks to respond by offering new products and services to meet these needs. As Farmer Mac expands its product offerings and services, it is exposed to operational risk in implementing these new products and services. New products and services may require new operational processes, which often require new internal controls to manage new risks that these new processes present. If these controls are insufficient or ineffective to manage the risks inherent in these new processes, or if there is human error in executing these new controls either due to their novelty or otherwise, Farmer Mac could face financial loss, reputational damage, or regulatory enforcement, which could materially and adversely affect Farmer Mac's business, operating results, or financial condition.
Market Risk
Farmer Mac is exposed to interest rate risk that could materially and adversely affect its business, operating results or financial condition.
Farmer Mac is subject to interest rate risk due to the possible timing differences in the cash flows of the assets it holds and related liabilities.the liabilities issued to fund those assets. Farmer Mac's primary strategy for managing interest rate risk is to fund asset purchases with liabilities that have similar duration and cash flowconvexity characteristics so that they will perform similarly as interest rates change. Through Farmer Mac's issuances of debt securities in the form of discount notes and medium-term notes coupled with interest rate swap contracts that adjust the characteristics of the debt issued, Farmer Mac seeks to match its liabilities closely with the cash flow and duration characteristics of its loans and other assets. However, the ability of borrowers to prepay their loans prior tobefore the scheduled maturities increases the risklikelihood of asset and liability cash flow mismatches. In a changing interest rate environment, these cash flow mismatches could reduceaffect Farmer Mac's earnings if assets repay sooner than expected and the resulting cash flows must be reinvested in lower-yielding investments, particularly if Farmer Mac's related funding costs cannot be correspondingly repaid. In addition,Conversely, if assets repay more slowly than anticipated and the associated debt issued to fund the assets must be reissued at a higher yield,interest rate, Farmer Mac's earnings could be adversely affected. AsVolatility in market conditions during the past year stemming from the effects of December 31, 2017,the COVID-19 pandemic prompted the Federal Reserve to significantly lower the target range for the federal funds rate, resulting in an extremely low interest rate environment. A resumption of all the outstanding business volume heldmarket volatility from uncertainties surrounding a prolonged pandemic could adversely affect Farmer Mac's ability to manage interest rate risk, which could have a material adverse effect on Farmer Mac's balance sheet, $7.2 billion had a fixed interest rate and $7.8 billion had an adjustable interest rate.operating results or financial condition.
Farmer Mac is also subject to another type of interest raterepricing risk, due to changes in itswhich is the risk that Farmer Mac's funding cost of funds relative to floating rate market indexes (sucha benchmark index (for example, the London Interbank Offered Rate known as LIBOR) on some of"LIBOR") will increase from the floating rate assets it holds, which is referred to as "basis risk." Some of Farmer Mac's floating rate assets reset on rate adjustment dates based on a floating rate market index, whereastime the related debt that Farmer Macinitial funding was issued to fund those assets until their maturities may be refinanced based on Farmer Mac's cost of funds at a particular time. Basisand the time the liabilities are re-funded. This risk arises from maturity mismatches between assets and liabilities where assets with longer maturities must be re-funded. A significant increase in the potential variabilitydifference between Farmer Mac's funding cost relative to the rates at which those floating rate assets reset and the rates at which Farmer Mac can issue or refinance debt to fund those assets until their maturities. Farmer Mac is also subject to basis risk on some of its fixed rate assets because of its use of pay-fixed interest rate swaps, combined with a series of discount note or medium-term note issuances, as an alternative source of
benchmark
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 basedindex, including LIBOR, could compress spread income on the floating rate market index received by Farmer Mac on the associated swaps. If the rates on Farmer Mac’s discount notes or medium-term notes deteriorate relative to LIBOR during the time between when its indexed floating rate assets were first funded and when Farmer Mac refinances the associated debt or in cases when Farmer Mac uses pay-fixed swaps to fund its fixed rate assets Farmer Mac is exposed to a commensurate reduction in its net effective spread. Conversely, if the rates on Farmer Mac’s discount notes or medium-term notes improve relative to LIBOR during that time or in cases when Farmer Mac uses pay-fixed swaps to fund its fixed rate assets, Farmer Mac would benefit from a commensurate increase in its net effective spread. Although Farmer Macholds and seeks to issue debt of sufficient maturity to reducere-fund with the frequency of required refinancing of that debt over the life of the associated asset, it may not be able to successfully do so, whichhigher cost funding. Widespread compression within a short timeframe could adversely impact its business,affect Farmer Mac's operating results andor financial condition. As of December 31, 2017, Farmer Mac held $6.6 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 $2.8 billion of interest rate swaps outstanding where Farmer Mac pays a fixed rate of interest and receives a floating rate of interest.
Changes in interest rates relative to Farmer Mac's management of interest rate risk through derivatives may cause volatility in financial results and capital levels and may adversely affect Farmer Mac's net income.income, liquidity position, or operating results.
Farmer Mac enters into financial derivatives transactions to hedge interest rate risks inherent in its business and measurescarries its financial derivatives at fair value.value in its consolidated financial statements. Although Farmer Mac's financial derivatives provide effective economic hedges of interest rate risk, changes in the fair values of financial derivatives can cause volatility in net income and in capital, particularly if those financial derivatives are not designated in hedge accounting relationships or if there is any ineffectiveness in a hedge accounting relationship. As interest rates increase or decrease, the fair values of Farmer Mac's derivatives change based on the position Farmer Mac holds relative to the specific characteristics of the derivative. Farmer Mac's core capital that is available to meet its statutory minimum capital requirement can be affected by changes in the fair values of financial derivatives, as noted above. Adverse changes in the fair values of Farmer Mac's financial derivatives that are not designated in hedge accounting relationships and any hedge ineffectiveness that results in a loss would reduce the amount of core capital available to meet this requirement, which could result in regulatory enforcement action against Farmer Mac if it were unable to meet the requirement. In 20172020 and 2016,2019, Farmer Mac recorded gainsa loss of $10.2$3.7 millionand $8.6a gain of $10.1 million, respectively, from changes in the fair values of its financial derivatives as a result of movements in interest rates during those years.
Changes in interest rates as well as certain credit events may trigger collateralization requirements for In addition, Farmer Mac under its derivatives contracts, which could adversely affect Farmer Mac's liquidity position or operating results.recorded losses of $9.2 million and $7.9 million in 2020 and 2019, respectively, related to ineffectiveness in hedge accounting relationships.
Farmer Mac uses derivatives contracts to help manage its interest rate risk. Changes in interest rates have required, and in the future may require, Farmer Mac to post cash or investment securities to collateralize its derivative counterpartiesexposures due to reflect thecorresponding changes in the fair market values of Farmer Mac's derivatives as a result of the changes in interest rates. For example, as of December 31, 2017, Farmer Mac posted $0.1 million of cash and $24.8 million of investment securities as collateral for its derivatives in net liability positions.these derivatives. If changes in interest rates were to result in a significant decrease in the fair value of Farmer Mac's derivatives, Farmer Mac would be required to post a significant amount of cash, cash equivalents, or
investment securities, possibly within a short period of time, to satisfy its obligations under its derivatives contracts. As of December 31, 2020, Farmer Mac is required to fully collateralizeposted $11.2 million of cash and $201.1 million of investment securities as collateral for its derivatives positions without any minimum threshold for cleared swap transactions, as well as for non-cleared swap transactions entered into after March 1, 2017, the effective date of new rules that established zero threshold requirements for the exchange of variation margin between Farmer Mac and its swap dealer counterparties in such transactions. For non-cleared swaps transactions entered into prior to March 2017, Farmer Mac's derivatives contracts contain provisions establishing minimum threshold collateral amounts, ranging between $15 million and $25 million, below which Farmer Mac is not required to post collateral, though these amounts may be reduced to zero upon the occurrence of specified credit events such as insolvency, receivership, failure to make a payment under the contract when due, or failure to continue as an instrumentality of the United States. Under these contracts, the amount required to be posted would increase if Farmer Mac also experienced a credit event, thereby triggering full collateralization of its derivatives positions without any minimum threshold.net liability positions. If Farmer Mac is required to fully collateralize alla significant portion of its derivatives positions in an adverse interest rate environment, it could have a material adverse effect on Farmer Mac's liquidity position or operating results.
The reform, replacement, or discontinuation of the LIBOR benchmark interest rate could adversely affect Farmer Mac's business, operating results, or financial condition.
In July 2017, the United Kingdom's Financial Conduct Authority ("UKFCA"), which regulates U.S. Dollar LIBOR ("LIBOR"), announced that it wouldno longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021 and would support the LIBOR indexes through 2021 to allow for a transition to any alternative reference rates. In November 2020, the UKFCA and the ICE Benchmark Administration, which administers LIBOR, announced that most tenors of LIBOR would continue to be published through June 2023. These announcements indicate that the continuation of LIBOR in its current form will be discontinued after June 2023. Farmer Mac is evaluating the potential effect on its business of the replacement of the LIBOR benchmark interest rate, including the possibility of replacement benchmark interest rates. As of December 31, 2020, Farmer Mac held $5.1 billion of floating rate assets in its lines of business and its investment portfolio, had issued $4.7 billion of floating rate debt, and had
entered into $14.6 billion notional amount of interest rate swaps, each of which resets based on LIBOR. In addition, Farmer Mac's Series C Preferred Stock will be indexed to LIBOR after July 17, 2024. The market transition away from LIBOR and towards an alternative benchmark interest rate that may be developed is expected to be complicated and may require the development of term and credit adjustments to accommodate for differences between the benchmark interest rates. The introduction of an alternative reference rate may also introduce additional re-funding and repricing risk for Farmer Mac if an alternative benchmark interest rate index is used along with LIBOR during a transition period. If LIBOR is discontinued and an alternative benchmark interest rate does not become widely used or accepted in place of LIBOR, then there may be uncertainty or differences in the calculation of the applicable interest rate or payment amounts depending on the terms of the governing instruments for Farmer Mac's assets and liabilities. This could result in different financial performance for previously booked transactions, require different hedging strategies, or require renegotiation of previously booked transactions, and may affect Farmer Mac's existing transaction data, products, systems, operations and pricing processes, which could adversely affect Farmer Mac's business, operating results, or financial condition.
Financial Risk
Incorrect estimates and assumptions by management in preparing financial statements could adversely affect Farmer Mac's business, operating results, reported assets and liabilities, financial condition, reputation, or capital levels.
Farmer Mac's accounting policies and methods are fundamental to how it records and reports its financial condition and results of operations. Some of these policies and methods require management to make estimates and assumptions in preparing Farmer Mac's consolidated financial statements. Incorrect estimates and assumptions by management in connection with the preparation ofpreparing Farmer Mac's consolidated financial statements could adversely affect the reported amounts of assets and liabilities and the reported amounts of income and expenses. The preparation of Farmer Mac's consolidated financial statements requires management to make certain critical accounting estimates and assumptions that could affect the reported amounts of assets and liabilities and the reported amounts of income and expense during the reporting periods. For example, as of December 31, 2017,2020, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $5.5$7.0 billion whose fair values weremanagement estimated by management in the absence of readily determinableobservable fair values (in other words, level 3). These financial instruments measured with significant unobservable inputs represented 31 percent29% of total assets and 71 percent65% of financial instruments measured at fair value as of December 31, 2017. Further information regarding fair value measurement is included in2020. See "Management's Discussion and Analysis—Critical Accounting Policies—Fair Value Measurement."Measurement" for more information about fair value measurement If management makes incorrect assumptions or estimates Farmer Mac may understatethat result in understating or overstateoverstating reported financial results, whichit could materially and adversely affect Farmer Mac's business, operating results, reported assets and liabilities, financial condition, reputation, or capital levels.
Changes in accounting standards or in applying accounting policies could adversely affect Farmer Mac's business, operating results, financial condition, or capital levels.
Farmer Mac is subject to the requirements of entities that set and interpret the accounting standards governing the preparation of Farmer Mac's consolidated financial statements. These entities, which include the Financial Accounting Standards Board ("FASB"), the SEC, and Farmer Mac's independent registered public accounting firm, may add new accounting standards or change their interpretations of how those standards should be applied. These changes may be difficult to predict and could affect how Farmer Mac records and reports its financial condition and results of operations. In some cases, Farmer Mac could be required to apply a new or revised standard retrospectively, potentially resulting in changes to previously reported financial results. For example, the FASB issued a new accounting standard in 2016, which was effective for Farmer Mac on January 1, 2020, that required entities to measure credit
losses based on an "expected credit loss" approach rather than an "incurred loss" approach previously required under GAAP. The new approach requires entities to measure all expected credit losses for financial assets carried at amortized cost and debt securities classified as available-for-sale, based on historical experience, current conditions, and reasonable forecasts of collectability. This new accounting standard could cause increases and more volatility in Farmer Mac's provision for credit losses and could adversely affect Farmer Mac's business, operating results, financial condition, or capital levels. See Note 2(p) to the consolidated financial statements for more information about this new accounting standard.
Changes in the value or composition of Farmer Mac's investment securities could adversely affect Farmer Mac's business, operating results, financial condition, or capital levels.
Deterioration in financial or credit market conditions could reduce the fair value of Farmer Mac's investment securities, particularly those securities that are less liquid and more subject to market variability. Some securities owned by Farmer Mac, including auction-rate certificates, do not have well-established secondary trading markets, making it more difficult to estimate current fair values for those securities. Adverse financial market conditions may further compound the challenges of estimating fair values for Farmer Mac's securities, as was the case in 2008 after widespread failure of the auction
mechanism that had been established to provide liquidity for the auction-rate certificates thatThis requires Farmer Mac currently holds.
Farmer Mac reliesto rely on market observations to determine the fair value of its investment securities, although the market data Farmer Mac relies upon may not reflect the actual sale conditions that Farmer Mac would face when selling its investment securities. For example, the market value of auction-rate certificates held by Farmer Mac depends in large part on the amounts and timing of the expected cash flows on these securities, which may be highly uncertain. Therefore, a change in the amounts or timing of cash flows could materially alter the market price of those securities. Subsequent valuations of these and other investment securities, in light of factors then prevailing, may result in significant changes in the value of Farmer Mac's investment securities. For example, the current market values for the auction-rate certificates held by Farmer Mac are below their amortized cost due to widening credit spreads after purchase. As of December 31, 2017, the fair values of Farmer Mac's auction-rate certificates were $18.8 million, compared to Farmer Mac's amortized cost of $19.7 million, for this class of investment securities.
Farmer Mac also relies on internal models to estimate the fair values of its investment securities and to determine whether credit losses exist, which requiresexist. However, available market data may not reflect the actual sale conditions Farmer Mac may face when selling its investment securities, particularly in adverse financial market conditions. Internal models require Farmer Mac to exercise judgment about estimates and assumptions used in the models. If Farmer Mac uses unreliable market data or incorrect estimates or assumptions in theits internal models it develops to estimate the fair value of its investment securities, those modelsestimates could adversely affect reported incomeresults of operations during the reporting period.
If And if Farmer Mac decides to sell securities in its investment portfolio, the price ultimately realized will depend on the demand and liquidity in the market at the time of sale.sale, which could be significantly less than Farmer Mac's inabilityestimates for fair value. Failure to sellaccurately estimate the securities in itsfair value of Farmer Mac's investment portfolio at or above their estimated fair valuessecurities could adversely affect Farmer Mac's business, operating results, financial condition, or capital levels.
The trading price for Farmer Mac's Class C non-voting common stock may be volatile due to market influences, trading volume, or the effects of equity awards for Farmer Mac's officers, directors, and employees.employees, or sales of significant amounts of the stock by large holders.
The trading price of Farmer Mac's Class C non-voting common stock ("Class C stock") has at times experienced substantial price volatility and may continue to beremain volatile. For example, from January 2017 to December 2017, the closing price of the Class C stock ranged from $53.94$43.02 per share to $80.27$83.55 per share.share during 2020. The trading price may fluctuate in response to various factors, including short sales, hedging, the presence or absence of a share repurchase program, or stock market influences in general that are unrelated to Farmer Mac's operating performance. In addition, as a componentperformance (including COVID-19), or sales of compensation for officers, directors, and employees,significant amounts of the stock by large holders. Farmer Mac typically grants equity awards each year that are based on the Class C non-voting common stock, including stock appreciation rights and restricted stockgrants that vest over time or upon the achievement of specified performance goals. Sales of stock acquired upon vesting or the exercise of equity awards by Farmer Mac's officers, directors, or employees, whether pursuant tounder an established trading plan or otherwise, could adversely affect the trading price of Farmer Mac'sthe Class C non-voting common stock. TheseAll of these factors may be exacerbated during periods of low trading volume for Farmer Mac's Class C non-voting common stock, which averaged approximately 54,00053,700 shares daily during 2017,2020, and may have a prolonged negative effect on its trading price or increase price volatility.
44
Regulatory/Regulatory and Compliance Risk
Farmer Mac and many of its business partners are subject to comprehensive government regulation, and changes to theapplicable laws and regulations to which Farmer Mac or its business partners are subject could adversely affect Farmer Mac's business, operating results, reputation, or financial condition.
Farmer Mac was established under a statutory charter that is subject to amendment by the U.S. Congress may amend at any time and is regulated by various government agencies, including the FCA and the SEC. As a result, Farmer Mac is therefore exposed to the risk of legal or regulatory penalties,penalties; material financial loss including fines, judgments, damages, and/or settlements,settlements; or of loss of reputation if it fails to comply withviolates applicable laws, regulations, or rules, as well as regulatory requests, and self-regulatory organization standards, andor codes of conduct applicable to its business activities. Future legislative or regulatory actions affecting Farmer Mac's statutory charter or its business activities, including increased regulatory supervision, and any required changes to Farmer Mac's business or operations resulting from such actions, could result in a financial loss for Farmer Mac or otherwise reduce its profitability, impose additionalmore compliance and other costs on Farmer Mac, limit the products offered by Farmer Mac or its ability to pursue business opportunities in which it might otherwise consider engaging, curtail business activities in which it is currently engaged, affect the value of assets that Farmer Mac holds, or otherwise adversely affect Farmer Mac's business, results of operations, reputation, or financial condition.
The financial services industry, in which most of Farmer Mac's business partnerscounterparties and customers operate, is subject to significant legislation and regulations. Specifically, toTo the extent that current or future legislation, regulations, or regulationssupervisory activities affect the activities of banks, insurance companies, other rural lenders, derivatives counterparties, clearinghouses, securities dealers, or other regulated entities that constitute a large portion of Farmer Mac's business counterparties or customers, Farmer Mac could experience reduced customer demandloss of business or profitability,business opportunities, increased compliance costs, disadvantageous business terms in its dealings with counterparties, and unfavorable changes to its business practices or activities. As a result, Farmer Mac's business, operating results, reputation, or financial condition could be adversely affected.
Farmer Mac is subject toMac's capital requirements that are subject tomay change, and failure to meet those requirements could result in supervisory measures or the inability of Farmer Mac to declare dividends, or otherwise materially and adversely affect Farmer Mac's business, operating results, or financial condition.
Farmer Mac is required by statute and regulation to maintain certain capital levels. Any inability by Farmer Mac to meet these capital requirements could result in supervisory measures by FCA, adversely affect Farmer Mac's ability to declare dividends on its common and preferred stock, or otherwise materially and adversely affect Farmer Mac's business, operating results, or financial condition. In addition, asAs required by an FCA regulation on capital planning, Farmer Mac has adopted a policy to maintain a sufficient level of Tier 1 capital and to impose restrictions onrestrict paying Tier 1-eligible dividends if Tier 1 capital falls below specified thresholds. For more information onabout Farmer Mac's capital requirements, including the Tier 1 capital requirement, see "Business—Government Regulation of Farmer Mac—Regulation—Capital Standards." Factors that could adversely affect the adequacy of Farmer Mac's capital levels in the future, and which may be beyond Farmer Mac's control, include:
•credit losses or other-than-temporary impairment charges;losses;
•adverse changes in interest rates or credit spreads;
•the need to increase the level of the allowance for losses on loans;
•legislative or regulatory actions that increase Farmer Mac's applicable capital requirements; and
•changes in U.S. generally accepted accounting principles.GAAP.
Political Risk
Farmer Mac is a GSE that may be materially and adversely affected by legislative or political developments that may affect the ongoing operations or continued existence of GSEs.developments.
Farmer Mac is a GSE that is governed bywith a statutory charter which is subject to amendmentthat may be amended by the U.S. Congress at any time, and is also regulated by government agencies, including the FCA and the SEC. Although Farmer Mac is not aware of any pending legislative or regulatory proposals that would adversely affect either the manner in which Farmer Mac conductsmaterially impact its business or the status of Farmer Mac as a GSE at this time,operations, Farmer Mac's ability to effectively conduct its business is subject to risks and uncertainties related to legislative or political developments that maycould affect the statusFarmer Mac or operations of GSEs generally. From time to time,These political risks and uncertainties may be heightened under a new Congress or Presidential administration. Farmer Mac cannot predict whether or when legislative or regulatory initiatives may be commencedcommence that, if successful, could result in the enactment of legislation or the promulgation of regulations that could negatively affect the status of Farmer Mac as a GSE or the manner in whichhow Farmer Mac operates. Farmer Mac cannot predict whether any legislative proposals related to the housing GSEs would also address the continued GSE status of Farmer Mac or modify the current operating structure or authorities of Farmer Mac in any material way. Implementation of any such proposaloperates, and which could have a material and adverse effect on Farmer Mac's business, operating results, financial condition, or capital levels. See "Business—Government Regulation of Farmer Mac" for additional discussion onmore information about the rules and regulations governing Farmer Mac's activities.
Human Capital Risk
Farmer Mac's ability to attract and retain motivated and qualified employees is critical to the success of its business, and failuresignificant or sustained disruption in the continuity of Farmer Mac's employees or executive leaders may materially adversely affect Farmer Mac's business performance, operations, financial condition, or reputation.
Farmer Mac relies on its employees' breadth and depth of knowledge of Farmer Mac and related industries to do sorun its business operations successfully. If Farmer Mac cannot continue to retain and attract motivated and qualified employees or adoes not have adequate human capital to achieve its business objectives, Farmer Mac's business performance, operations, financial condition, or reputation could be materially adversely affected. A significant disruption in the continuity of Farmer Mac's employees or any significant executive leadership change may materially adversely affect Farmer Mac's performance, operations, financial condition, or reputation.
Farmer Mac relies on its employees' breadth and depth of knowledge of agricultural and rural utilities lending, financial products, and other areas of expertise to run its business operations successfully. If Farmer Mac is unable to continue to retain and attract qualified employees, Farmer Mac's performance, operations, or financial condition could be materially adversely affected. Additionally, a significant disruption in the continuity of Farmer Mac's employees or any significant executive leadership change could:
create uncertainty or instability;
require Farmer Mac and its existing employees to divert or expend additional resources and attention to replace personnel;
also result in a loss of productivity and be disruptive to its daily operations in the interim;
affect Farmer Mac's ability to successfully execute its business strategies;
strategies by creating uncertainty or instability or requiring Farmer Mac to divert or expend more resources to replace personnel. For example, after the termination of employment of Farmer Mac's former Chief Financial Officer in July 2019 and resignation of Farmer Mac's former Chief Credit Officer in February 2020, Farmer Mac expended significant resources and attention to identify their successors. Loss of key leadership personnel could also damage the public or market perception of Farmer Mac or result in the departure of other executives or key employees; or
negatively impact the public or market perception of Farmer Mac.
employees. Any of these factors could materially adversely affect Farmer Mac's business performance, operations, financial condition, or reputation.
In December 2017, Farmer Mac appointed Lowell L. Junkins, the chairman of its board of directors, to serve as the Acting President and Chief Executive Officer of Farmer Mac following the termination of employment of Farmer Mac's former President and Chief Executive Officer while Farmer Mac conducts a search for a successor. If Farmer Mac is unsuccessful in appointing a new President and Chief Executive Officer with appropriate qualifications and expertise in a timely manner, Farmer Mac's performance, operations, financial condition, or reputation could be materially adversely affected.
Any of the risks described in this section could materially and adversely affect Farmer Mac's business, operating results, financial condition, reputation, capital levels, and future earnings. For additional discussionmore information about Farmer Mac's risk management, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management" in Item 7 of this Annual Report on Form 10-K.
| |
Item 1B. | Unresolved Staff Comments |
Item 1B.Unresolved Staff Comments
None.
Item 2.Properties
Farmer Mac maintains its principal office at 1999 K Street, N.W., 4th Floor, Washington, D.C. 20006, under the terms of a sublease that began on October 1, 2011 and ends on August 30, 2024. Farmer Mac also maintains the following additionalone other office locations: (1)location at 9169 Northpark Drive, Johnston, Iowa 50322, under the terms of a lease that began on October 1, 2017 and ends on June 30, 2023; (2) 5200 N. Palm Avenue, Suite 306, Fresno, California 93704, under the terms of a lease2023. Farmer Mac believes that began on January 1, 2017 and ends on February 29, 2020; and (3) 1065 E. Winding Creek, Suite 200, Eagle, Idaho 83616, under the terms of a lease that began on October 1, 2016 and ends on November 30, 2019. Farmer Mac'sits offices are suitable and adequate for its current and currently anticipated needs.needs for the near future. Farmer Mac's activities at each property encompass all of its operating segments.
Item 3.Legal Proceedings
None.
| |
Item 4. | Mine Safety Disclosures |
Item 4.Mine Safety Disclosures
Not applicable.
PART II
| |
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |
Item 5.Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer
Purchases for Equity Securities
(a)Farmer Mac has three classes of common stock outstanding – Class A voting common stock, Class B voting common stock, and Class C non-voting common stock. Ownership of Class A voting common stock is restricted to banks, insurance companies, and other financial institutions or similar entities that are not institutions of the FCS. Ownership of Class B voting common stock is restricted to institutions of the FCS. There are no ownership restrictions on the Class C non-voting common stock. Under the terms ofIn the original public offering of the Class A and Class B voting common stock, Farmer Mac reserved the right to redeem at book value any shares of either class held by an ineligible holder.
Farmer Mac's Class A voting common stock and Class C non-voting common stock are listed on the New York Stock Exchange under the symbols AGM.A and AGM, respectively. The Class B voting common stock, which has a limited market and trades infrequently, is not listed or quoted on any exchange or other quotation system, and Farmer Mac is not aware of any publicly available quotations or prices for that class of common stock.
As of March 1, 2018, there were 963February 8, 2021, Farmer Mac had 889 registered owners of the Class A voting common stock, 77 registered owners of the Class B voting common stock, and 902839 registered owners of the Class C non-voting common stock.
The information below represents the high and low closing sales prices for shares of both the Class A and Class C common stock for the periods indicated below, as reported by the New York Stock Exchange:
|
| | | | | | | | | | | | | | | |
| | Sales Prices |
| | Class A Stock | | Class C Stock |
| | High | | Low | | High | | Low |
| | (per share) |
| 2018 | | | | | | | |
| First quarter (through March 1, 2018) | $ | 79.30 |
| | $ | 72.22 |
| | $ | 82.74 |
| | $ | 74.55 |
|
| 2017 | | | | | | | |
| Fourth quarter | $ | 76.34 |
| | $ | 66.62 |
| | $ | 80.27 |
| | $ | 67.02 |
|
| Third quarter | 75.00 |
| | 62.47 |
| | 74.77 |
| | 63.26 |
|
| Second quarter | 65.86 |
| | 51.55 |
| | 68.08 |
| | 53.94 |
|
| First quarter | 69.45 |
| | 54.51 |
| | 61.95 |
| | 55.05 |
|
| 2016 | |
| | |
| | |
| | |
|
| Fourth quarter | $ | 62.00 |
| | $ | 43.48 |
| | $ | 58.72 |
| | $ | 39.72 |
|
| Third quarter | 52.38 |
| | 36.60 |
| | 42.32 |
| | 33.95 |
|
| Second quarter | 41.61 |
| | 34.99 |
| | 43.50 |
| | 32.62 |
|
| First quarter | 38.00 |
| | 26.09 |
| | 40.00 |
| | 26.36 |
|
The dividend rights of all three classes of Farmer Mac's common stock are the same, and dividends may be paid on common stock only when, as, and if declared by Farmer Mac's board of directors in its sole discretion, subject to compliance with applicable capital requirements and payment of dividends on any outstanding preferred stock. On March 2, 2016,February 19, 2019, Farmer Mac's board of directors declared a quarterly dividend of $0.26$0.70 per share on Farmer Mac's common stock payable for first quarter 2016.2019. That dividend
rate was paid quarterly through fourth quarter 2016.2019. On March 1, 2017,February 24, 2020, Farmer Mac's board of directors declared a quarterly dividend of $0.36$0.80 per share on Farmer Mac's common stock payable for first quarter 2017.2020. That dividend was paid quarterly through fourth quarter 2017.2020. On February 28, 2018,23, 2021, Farmer Mac's board of directors declared a quarterly dividend of $0.58 per$0.88per share on Farmer Mac's common stock payable for first quarter 2018.2021. See "Business—Financing—Equity Issuance" for more information on Farmer Mac's common stock.
The quarterly dividend of $0.88 per share on all three classes of common stock for first quarter 2021 represents an increase of $0.08 per common share, or 10%, over the quarterly dividend payout in 2020 and reflects the board's goal to maintain Farmer Mac seeksMac's common stock dividend payout target as a percentage of annual core earnings at 35%. In deciding to providemaintain Farmer Mac's common stock dividend payout target, the board of directors considered Farmer Mac's strong capital position and the consistency of and outlook for earnings, balanced against the need for capital to fund the significant growth objectives identified in the company's strategic plan and to meet regulatory requirements and metrics established by the board of directors. These actions are also consistent with Farmer Mac's goal of providing a competitive return on its common stockholders' investments through the payment of cash dividends while retaining sufficient capital to support future growth in its business and to meet regulatory requirements and metrics established by Farmer Mac's board of directors. Farmer Mac expects to maintain a growing and sustainable common dividend and to target a common dividend payout ratio of its core earnings to common stockholders of approximately 30 percent. However, thedividends.
The declaration and payment of future dividends to holders of Farmer Mac's common stock are, however, at the discretion of Farmer Mac's board of directors and depend on many factors, including Farmer Mac's financial condition, actual results of operations and earnings, the capital needs of Farmer Mac's business, regulatory requirements, and other factors that Farmer Mac's board deems relevant. Farmer Mac's ability
to pay dividends on its common stock is also subject to the payment of dividends on its outstanding preferred stock. Also, applicableApplicable FCA regulations also require Farmer Mac to provide FCA with 15 days' advance notice of certain capital distributions. Farmer Mac's ability to declare and pay dividends could be restricted if it were to fail to comply with applicable capital requirements. See Note 9 to the consolidated financial statements for more information about Farmer Mac's capital position and see "Business—Government Regulation of Farmer Mac—Regulation—Capital Standards" and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Requirements" for more information on the capital requirements applicable to Farmer Mac.
Information about securities authorized for issuance under Farmer Mac's equity compensation plans appears under "Equity Compensation Plans" in Farmer Mac's definitive proxy statement to be filed on or about April 2, 2018.5, 2021. That portion of the definitive proxy statement is incorporated by reference into this Annual Report on Form 10-K.
Farmer Mac is a federally chartered instrumentality of the United States, and its common stock is exempt from registration under Section 3(a)(2) of the Securities Act. One type of transaction related to Farmer Mac's common stock occurred during fourth quarter 20172020 that was not registered under the Securities Act and not otherwise reported on a Current Report on Form 8-K:
•On October 3, 2017, pursuant to2, 2020, consistent with Farmer Mac's policy that permits directors of Farmer Mac to elect to receive shares of Class C non-voting common stock in lieu of their cash retainers, Farmer Mac issued an aggregate of 44187 shares of its Class C non-voting common stock to the threefour directors who elected to receive such stock in lieu of a portion of their cash retainers. The number of shares issued to the directors was calculated based on a price of $72.74$63.66 per share, which was the closing price of the Class C non-voting common stock on September 29, 2017,30, 2020, the last business day of the third quarter, as reported by the New York Stock Exchange.
Performance Graph. The following graph compares the performance of Farmer Mac's Class A voting common stock and Class C non-voting common stock with the performance of the New York Stock Exchange Composite Index (the "NYSE("NYSE Comp") and the Standard & Poor's 500 Diversified Financials Index (the "S("S&P 500 Div Fin") over the period from December 31, 20122015 to December 31, 2017.2020. The graph assumes that $100 was invested on December 31, 20122015 in each of: Farmer Mac's Class A voting common stock; Farmer Mac's Class C non-voting common stock; the NYSE Comp;Composite Index; and the S&P 500 Div Fin.Diversified Financials Index. The graph also assumes that all dividends were reinvested into the same securities throughout the past five years. Farmer Mac obtained the information contained in the performance graph from S&P Global Market Intelligence.
This performance graph shall not be deemed to be "soliciting material" or to be "filed" with the SEC, and this performance graph shall not be incorporated by reference into any of Farmer Mac's filings under the Securities Act or the Securities Exchange Act of 1934 and related regulations, or any other document, whether made before or after the date of this report and irrespective ofdespite any general incorporation language contained in a filing or document (except to the extent Farmer Mac specifically incorporates this section by reference into a filing or document).
(b)Not applicable.
(c)None.
Item 6.Selected Financial Data
No longer required. Reference is made to "Item 8—Financial Statements."
| |
Item 6. | Selected Financial Data |
The selected consolidated financial data presented below is summarized from Farmer Mac's consolidated balance sheet data as of December 31, 2017 and the five-year period then ended, as well as selected results of operations data for the five-year period then ended. This data should be reviewed in conjunction with the audited consolidated financial statements and related notes and with "Management'sItem 7.Management's Discussion and Analysis of Financial Condition and Results of Operations" included inOperations
The objective of this Annual Report on Form 10-K.
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| Summary of Financial Condition: | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (dollars in thousands) |
| Cash and cash equivalents | $ | 302,022 |
| | $ | 265,229 |
| | $ | 1,210,084 |
| | $ | 1,363,387 |
| | $ | 749,313 |
|
| Investment securities | 2,260,437 |
| | 2,515,851 |
| | 2,775,516 |
| | 1,939,188 |
| | 2,484,075 |
|
| Farmer Mac Guaranteed Securities | 7,598,188 |
| | 6,002,916 |
| | 5,426,621 |
| | 5,453,901 |
| | 5,091,600 |
|
| USDA Securities | 2,131,365 |
| | 2,029,613 |
| | 1,917,319 |
| | 1,771,532 |
| | 1,612,013 |
|
| Loans, net | 5,266,786 |
| | 4,507,435 |
| | 3,962,044 |
| | 3,520,075 |
| | 3,193,248 |
|
| Total assets | 17,792,274 |
| | 15,606,020 |
| | 15,540,354 |
| | 14,287,821 |
| | 13,361,780 |
|
| Notes payable: | | | | | | | | | |
| Due within one year | 8,089,826 |
| | 8,440,123 |
| | 9,111,461 |
| | 7,353,953 |
| | 7,338,781 |
|
| Due after one year | 7,432,790 |
| | 5,222,977 |
| | 4,967,036 |
| | 5,471,186 |
| | 5,001,169 |
|
| Total liabilities | 17,084,128 |
| | 14,962,373 |
| | 14,986,634 |
| | 13,505,992 |
| | 12,787,311 |
|
| Stockholders' equity | 708,146 |
| | 643,425 |
| | 553,517 |
| | 545,801 |
| | 332,616 |
|
Non-controlling interest(1) | — |
| | 222 |
| | 203 |
| | 236,028 |
| | 241,853 |
|
| Capital: | | | | | | | | | |
| Statutory minimum capital requirement | $ | 520,271 |
| | $ | 466,498 |
| | $ | 462,070 |
| | $ | 421,328 |
| | $ | 398,531 |
|
| Core capital | 657,061 |
| | 609,667 |
| | 564,536 |
| | 766,296 |
| | 590,671 |
|
| Capital in excess of minimum capital requirement | 136,790 |
| | 143,169 |
| | 102,466 |
| | 344,968 |
| | 192,140 |
|
| Selected Financial Ratios: | | | | | | | | | |
Return on average assets(2) | 0.43 | % | | 0.41 | % | | 0.32 | % | | 0.28 | % | | 0.55 | % |
Return on average common equity(3) | 16.64 | % | | 16.78 | % | | 13.83 | % | | 12.42 | % | | 28.17 | % |
Average equity to assets(4) | 4.05 | % | | 3.84 | % | | 3.69 | % | | 3.18 | % | | 2.63 | % |
Average total equity to assets(5) | 4.05 | % | | 3.84 | % | | 4.48 | % | | 4.91 | % | | 4.49 | % |
Tier 1 capital ratio(6) | 12.6 | % | | 12.7 | % | | 10.5 | % | | 11.3 | % | | 6.7 | % |
| |
(1)
| 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. The remaining balance relates to AgVisory, Farmer Mac's former majority-owned subsidiary whose principal activity was to appraise agricultural real estate. On May 1, 2017, Farmer Mac transferred its entire 65% ownership interest in AgVisory back to the limited liability company as a company redemption. |
| |
(2)
| Calculated as net income attributable to common stockholders divided by the simple average of beginning and ending total assets. |
| |
(3)
| Calculated as net income attributable to common stockholders divided by the simple average of beginning and ending stockholders' equity, net of preferred stock, at redemption value and accumulated other comprehensive (loss)/income, net of tax. |
| |
(4)
| Calculated as the simple average of beginning and ending stockholders' equity divided by the simple average of beginning and ending total assets. |
| |
(5)
| Calculated as the simple average of beginning and ending stockholders' equity and non-controlling interest divided by the simple average of beginning and ending total assets. |
| |
(6)
| In 2016, Farmer Mac adjusted the calculation of its Tier 1 capital ratio to eliminate certain interest rate risk components of the risk weighting of assets to reflect the fact that Farmer Mac pursues a match-funding approach to funding its assets and therefore does not bear material interest rate risk in its portfolio. These interest rate risk components have not been eliminated in the calculations for the Tier 1 capital ratio for the years ended December 31, 2013 through December 31, 2015. For more information about Farmer Mac's Tier 1 capital ratio, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Requirements." |
|
| | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| Summary of Operations: | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (in thousands, except per share amounts) |
| Interest Income: | | | |
| | |
| | |
| | |
|
| Net interest income after provision for loan losses | $ | 155,939 |
| | $ | 139,209 |
| | $ | 123,419 |
| | $ | 71,308 |
| | $ | 109,934 |
|
| Non-interest income: | | | | | | | | | |
| Guarantee and commitment fees | 14,114 |
| | 14,868 |
| | 14,077 |
| | 14,694 |
| | 15,627 |
|
| Gains on financial derivatives, hedging activities and trading assets | 729 |
| | 3,771 |
| | 3,751 |
| | 16,983 |
| | 30,945 |
|
| Gains/(losses) on asset sales and debt repurchases | 89 |
| | (9 | ) | | 9 |
| | (238 | ) | | 3,575 |
|
| Gains/(losses) on the sale of real estate owned | 1,748 |
| | 15 |
| | (1 | ) | | 137 |
| | 1,236 |
|
| Other income | 832 |
| | 1,823 |
| | 2,305 |
| | 1,714 |
| | 3,057 |
|
| Non-interest income | 17,512 |
| | 20,468 |
| | 20,141 |
| | 33,290 |
| | 54,440 |
|
| Non-interest expense | 42,765 |
| | 40,320 |
| | 35,482 |
| | 31,492 |
| | 33,107 |
|
| Income before income taxes | 130,686 |
| | 119,357 |
| | 108,078 |
| | 73,106 |
| | 131,267 |
|
| Income tax expense | 46,369 |
| | 42,057 |
| | 34,239 |
| | 2,824 |
| | 33,752 |
|
| Net income | 84,317 |
| | 77,300 |
| | 73,839 |
| | 70,282 |
| | 97,515 |
|
| Less: Net loss/(income) attributable to non-controlling interest | 165 |
| | 34 |
| | (5,139 | ) | | (22,192 | ) | | (22,187 | ) |
| Preferred stock dividends | (13,182 | ) | | (13,182 | ) | | (13,182 | ) | | (9,839 | ) | | (3,495 | ) |
| Loss on retirement of preferred stock | — |
| | — |
| | (8,147 | ) | | — |
| | — |
|
| Net income attributable to common stockholders | $ | 71,300 |
| | $ | 64,152 |
| | $ | 47,371 |
| | $ | 38,251 |
| | $ | 71,833 |
|
| Allowance for Losses Activity: | | | | | | | | | |
| Provision for/(release of) losses | $ | 1,758 |
| | $ | 1,002 |
| | $ | 208 |
| | $ | (3,166 | ) | | $ | 448 |
|
| Net charge-offs | 327 |
| | 130 |
| | 3,772 |
| | 41 |
| | 4,004 |
|
| Ending balance | 8,866 |
| | 7,435 |
| | 6,563 |
| | 10,127 |
| | 13,334 |
|
| Earnings Per Common Share and Dividends: | | | | | | | | | |
| Basic earnings per common share | $ | 6.73 |
| | $ | 6.12 |
| | $ | 4.33 |
| | $ | 3.50 |
| | $ | 6.64 |
|
| Diluted earnings per common share | 6.60 |
| | 5.97 |
| | 4.19 |
| | 3.37 |
| | 6.41 |
|
| Common stock dividends per common share | 1.44 |
| | 1.04 |
| | 0.64 |
| | 0.56 |
| | 0.48 |
|
| |
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
section of the report is to provide a discussion and analysis, from management’s perspective, of the material information necessary to assess Farmer Mac's financial condition and results of operations for the year ended December 31, 2020. Financial information included in this report is consolidated to include the accounts of Farmer Mac and its two subsidiaries – Farmer Mac Mortgage Securities Corporation and Farmer Mac II LLC. The accounts of Contour Valuation Services, LLC (which began doing business as AgVisory during first quarter 2016) ("AgVisory"), Farmer Mac's former majority-owned subsidiary, are also included through May 1, 2017, at which time Farmer Mac redeemed its ownership interest. This discussion and analysis of financial condition and results of operations should be read together with Farmer Mac's consolidated financial statements and the related notes to the consolidated financial statements for the fiscal years ended December 31, 2017, 2016,2020, 2019, and 2015.2018.
Overview
Farmer Mac increased its outstanding business volume by $1.6 billion (9.2 percent) to $19.0 billion during 2017. The primary drivers of the increase were net portfolio growth of $0.7 billion in Farm & Ranch loan
purchases and $0.6 billion in purchases of AgVantage securities. Farmer Mac's overall credit quality deteriorated modestly during 2017, as the total allowance for losses, substandard assets, and 90-day delinquencies as of December 31, 2017 all increased in terms of both dollars and as a percentage of the Farm & Ranch portfolio from their respective 2016 levels. Substandard assets and 90-day delinquencies as a percentage of the Farm & Ranch portfolio remained below Farmer Mac's historical average substandard assets rate and historical average 90-day delinquency rate, respectively.
Farmer Mac also increased the quarterly dividend on all three classes of its common stock by 61 percent from $0.36 per share in each quarter of 2017 to $0.58 per share for first quarter 2018. Farmer Mac expects the new U.S. tax legislation enacted in December 2017 to have a positive effect on core earnings because of the lower federal corporate income tax rate that will apply to Farmer Mac starting in 2018. This was an important factor in Farmer Mac’s decision to significantly increase the amount of its quarterly common stock dividend beginning in 2018, consistent with its common stock dividend policy to target a core earnings payout ratio of approximately 30 percent. This represents the seventh consecutive year that Farmer Mac has increased its quarterly dividend from the prior year, and Farmer Mac believes that the most recent increase is supported by Farmer Mac's earnings potential and overall capital position.
The discussion below of Farmer Mac's financial information includes certain "non-GAAP measures," which are measures of financial performance that are not presented in accordance with generally accepted accounting principles in the United States ("GAAP"). For more information about the non-GAAP measures Farmer Mac uses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures."
COVID-19 Update
Farmer Mac continues to closely monitor the effects of the COVID-19 pandemic on our financial condition and operations. We have operated uninterrupted and entirely remotely since March 2020, and our liquidity levels remain well above regulatory requirements, which has enabled us to execute our mission to support rural America during the pandemic. During 2020:
•we maintained uninterrupted access to the debt capital markets;
•we provided a total of $5.7 billion in liquidity and lending capacity to lenders serving rural America;
•we worked with our loan servicers and other partners to respond to and facilitate COVID-19-related payment deferment requests from borrowers and executed COVID-19 payment deferments for $432.0 million of unpaid principal balance on Farm & Ranch loans, Farm & Ranch LTSPCs, and USDA Securities to provide relief to borrowers;
•we continued to maintain strong liquidity in our investment portfolio, as evidenced by our year-end cash position of $1.0 billion; and
•we built and preserved capital and liquidity by issuing net new preferred stock of $139.5 million and indefinitely suspending our common stock repurchase program.
The economic impacts of the COVID-19 pandemic caused our total allowance for credit losses to remain elevated at the end of 2020. On January 1, 2020, we adopted Accounting Standards Update 2016-13, Financial Instruments - Credit Loss (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL"). Under CECL, our allowances and reserve for credit losses reflect our estimate of expected losses over the lives of our financial instruments based on historical information and reasonable and supportable forecasts. The economic effects from the COVID-19 pandemic that most affected our estimate of expected credit losses were the effects on credit spreads and expectations for continued elevated levels of unemployment. Of the $8.1 million credit loss provision that we recorded during 2020, $1.0 million was attributable to economic factors, mostly related to COVID-19. For more information about the effect of COVID-19 on Farmer Mac's expected credit losses, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans & Guarantees."
For more information about Farm & Ranch payment deferments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees." For more information about AgVantage loan collateral payment deferments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Institutional."
Net Income and Core Earnings
Farmer Mac'sThe following table shows our net income attributable to common stockholders and core earnings for 2017 was $71.3 million, comparedthe periods presented. Core earnings and core earnings per share are non-GAAP measures that differ from net income attributable to $64.2 million for 2016common stockholders and $47.4 million for 2015.earnings per common share, respectively, by excluding the effects of fair value fluctuations and specified infrequent or unusual transactions.
Table 1
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (in thousands) |
| Net income attributable to common stockholders | $ | 89,176 | | | $ | 93,650 | | | $ | 94,898 | |
| Core earnings | 100,612 | | | 93,742 | | | 84,047 | |
The $7.1$4.5 million increasedecrease in net income attributable to common stockholders for 20172020 compared to 20162019 was primarily drivendue to a $7.5 million after-tax increase in operating expenses, a $4.4 million after-tax decrease in the fair value of undesignated financial derivatives due to fluctuations in long-term interest rates, a $3.9 million increase in preferred stock dividends, and a $3.6 million after-tax increase in the total provision for credit losses. These decreases were partially offset by increases of $11.3a $13.8 million after-tax increase in net interest income and a $1.1$1.3 million after-tax increase in net realized gains on the sale of real estate owned properties. The year-over-year increase was offset in part by (1) a $2.7 million after-tax decrease in gains in fair value of financial derivatives and hedged assets; (2) a $1.6 million after-tax increase in non-interest expense in 2017, primarily attributable to higher general and administrative ("G&A") expenses and higher compensation and employee benefits expenses; and (3) the re-measurement of net deferred tax asset due to the enactment of new federal tax legislation (the Tax Cuts and Jobs Act), which resulted in a $1.4 million increase to income tax expense in 2017.other income.
The $16.8$1.2 million increasedecrease in net income attributable to common stockholders for 20162019 compared to 20152018 was driven by andue to a $2.5 million after-tax increase of $9.4in the provision for loan losses, a $1.6 million after-tax increase in operating expenses, a $1.0 million after-tax decrease in net interest income, and a $1.8$0.8 million increase in preferred stock dividends. These factors were partially offset by a $7.1 million after-tax increase in gains inthe fair value of undesignated financial derivatives and hedged assets. Also contributingdue to the increase was the absencefluctuations in 2016 of (1) an $8.1 million ($6.2 million after-tax) loss recorded in first quarter 2015 resulting from the write-off of deferred issuance costs upon the redemption of the Farmer Mac II LLC Preferred Stock on March 30, 2015; and (2) $3.5 million after-tax in dividend expense recorded during first quarter 2015 on that preferred stock. The increase was offset in part by a $3.1 million after-tax increase in non-interest expense in 2016 primarily attributable to higher G&A expenses, higher compensation and employee benefits expenses, and a decrease in the release of reserve for losses.long-term interest rates.
Farmer Mac's non-GAAP core earnings for 2017 were $65.6 million, compared to $53.5 million in 2016 and $47.0 million in 2015.
The $12.1$6.9 million increase in core earnings for 20172020 compared to 20162019 was primarily attributabledue to (1) a $11.9$22.4 million after-tax increase in net effective spread; (2) a $1.1 million after-taxspread. This increase in net realized gains on the sale of real estate owned properties; and (3) a $0.8 million after-tax increase in guarantee and commitment fee income. The increase in core earnings in 2017 was partially offset in part primarily by a $1.5$7.5 million after-tax increase in operating expenses, driven by higher compensationa $3.9 million increase in preferred stock dividends, and employee benefits and G&A expenses. The $0.9a $3.6 million after-tax increase in compensation and benefits expenses was due primarily to an increase in headcount and employee health insurance costs. the total provision for credit losses.
The $0.6 million after-tax increase in G&A expenses was attributable primarily to (1) continued investments in technology and business infrastructure; (2) higher legal fees related to general corporate matters, including fees related to the termination of employment of Farmer Mac's former President and Chief Executive Officer in December 2017; (3) an increase in building lease expenses due to new leases for office space entered into during 2017; and (4) expenses related to business development efforts.
The $6.5$9.7 million increase in core earnings for 20162019 compared to 20152018 was primarily attributabledue to higher total revenues, which included (1)a $3.7$13.8 million after-tax increase in net effective spread and (2)driven by higher business volume, partially offset by a $1.3$2.5 million after-tax increase in guaranteethe provision for loan losses and commitment fee income. Also contributing to the increase was a $3.5 million after-tax decrease in preferred dividend expense resulting from the redemption of all outstanding shares of Farmer Mac II LLC Preferred Stock in first quarter 2015. The increase in core earnings in 2016 was offset in part by a $1.8$1.6 million after-tax increase in operating expenses and a $0.5 million after-tax increase in the net provision to the allowance for losses.expenses.
For more information about net income attributable to common stockholders, the composition of core earnings, and a reconciliation of net income attributable to common stockholders to core earnings, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations." For more information about the non-GAAP measures Farmer Mac uses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures."
Net Interest Income and Net Effective Spread
Net interest income was $157.6 millionfor 2017, compared to $140.3 million for 2016 and $125.8 million for 2015. The overall net interest yield was 0.94 percent for 2017, compared to 0.90 percent for 2016 and 0.88 percent for 2015.
The $17.3 million increase infollowing table shows our net interest income for 2017 compared to 2016 was driven by net growth in Farm & Ranch loans, on-balance sheet AgVantage Securities, and USDA Securities. Another factor contributing to the increase was the effect of an increase in short-term interest rates on assets and liabilities indexed to LIBOR due to the Federal Reserve's decisions since December 2016 to raise the target range for the federal funds rate. This effect on net interest income occurred because interest expense used to calculate net interest income does not include all the funding expenses related to these assets, specifically the expense on financial derivatives not designated in hedge accounting relationships. This increase in short-term rates on assets and liabilities indexed to LIBOR did not have a similar effect on net effective spread because net effectivein both dollars and percentage yield or spread includes interest expense from all funding related to those assets, including interest expense from financial derivatives not designated in hedge accounting relationships. Also contributing to the year-over-year increase was an increase in the net effect of
consolidated trusts resulting from an increase in securitization activity of Farm & Ranch loans throughout 2016 and 2017. Farmer Mac earns the difference between the interest income recognized on loans in consolidated trusts and the related interest expense recognized on debt securities of consolidated trusts held by third parties. The increase in net interest income was offset in part by an increase in net yield adjustments related to amortization of premiums and discounts on assets consolidated at fair value. The 4 basis point increase in net interest yield in 2017 compared to 2016 was primarily attributable to a reduction in the average balance of lower-earning cash and cash equivalents and investment securities.
The $14.5 million increase in net interest income for 2016 compared to 2015 was due to several factors. One factor was the effect 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. As noted above, the effect on net interest income occurred because interest expense does not include the expense on financial derivatives not designated in hedge accounting relationships. 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 were (1) lower 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) an increase in the net effect of consolidated trusts due to an increase in securitization activity of Farm & Ranch loans during 2016. The increase was offset in part by (1) higher net yield adjustments from amortization of purchase premiums on certain Farm & Ranch loans and (2) a tighter spread on a large AgVantage security that was refinanced in first quarter 2016 at a shorter maturity than the original security. The 2 basis point increase in net interest yield for 2016 compared to 2015 was primarily driven by a lower average balance in cash and cash equivalents primarily during the second half of 2016.
Net effective spread, a non-GAAP measure, was $141.3 million for 2017, compared to $123.1 million in 2016 and $117.4 million in 2015. In percentage terms, net effective spread for 2017 was 0.91 percent, compared to 0.84 percent in 2016 and 0.85 percent in 2015.periods presented. Farmer Mac uses net effective spread, a non-GAAP measure, as an alternative measure to net interest income because management believes it is a useful metric that reflects the economics of the net spread between all the assets owned by Farmer Mac and all related funding, including any associated derivatives, some of which may not be included in net interest income.
For 2017Table 2
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (in thousands) |
| Net interest income | $ | 190,588 | | | $ | 173,135 | | | $ | 174,436 | |
| Net interest yield % | 0.85 | % | | 0.87 | % | | 0.96 | % |
| Net effective spread | 196,956 | | | 168,608 | | | 151,195 | |
| Net effective spread % | 0.93 | % | | 0.91 | % | | 0.91 | % |
The $17.5 million increase in net interest income for 2020 compared to 2016,2019 was primarily due to a $23.2 million increase related to new business volume. This was partially offset by a $4.1 million increase in funding and liquidity costs and a $1.3 million decrease in the $18.2fair value of derivatives designated in fair value hedge accounting relationships (designated financial derivatives). In percentage terms, the decrease of 0.02% in net interest income yield was primarily attributable to an increase of 0.05% in funding and liquidity costs and 0.01% in net fair value changes from designated financial derivatives, partially offset by an increase of 0.04% related to new business volume.
The $1.3 million decrease in net interest income in 2019 compared to 2018 was due to a $12.8 million decrease in net fair value changes from fair value hedge accounting relationships and a $5.2 million increase in funding and liquidity costs. These factors were partially offset by $15.1 million in net new business volume across all lines of business, the change in composition of existing Institutional Credit business volume and $1.6 million in various interest income fluctuations primarily related to prepayment activity. The 0.09% decrease in percentage terms was primarily attributable to a 0.06% decrease in net fair value changes from fair value hedge accounting relationships and a 0.05% increase in funding and liquidity costs, partially offset by a 0.01% increase from business volume.
The $28.3 million increase in net effective spread in dollars for 2020 compared to 2019 was primarily attributabledue to (1) growth in on-balance sheet AgVantage securities, Farm & Ranch loans, and othernew business volume, which increased net effective spread by approximately $15.1$23.2 million, and a $4.6 million decrease in 2017; and (2) changes in Farmer Mac'snon-GAAP funding strategies and improvements in LIBOR-based short-term funding costs for floating rate assets indexed to LIBOR, which added approximately $4.0 million in 2017. Net effective spread incosts. In percentage terms, increased 7 basis points in 2017 compared to 2016 primarily due to the decrease in the average balance of lower-earning cash and cash equivalents and investment securities, which added approximately 5 basis points to net effective spread. Also contributing to the increase were the effects of changes in Farmer Mac's funding strategy and a favorable LIBOR-based funding market, which added approximately 3 basis points in 2017.0.02% was primarily attributable to new business volume.
For 2016 compared to 2015, the $5.7The $17.4 million increase in dollars was attributable to growth in outstanding business volume. The 1 basis point contraction in net effective spread in dollars for 2019 compared to 2018 was due to a $14.2 million increase from net new business volume across all lines of business, the change in
composition of existing Institutional Credit business volume, a $1.6 million increase in various interest income fluctuations primarily related to prepayment activity, and a $1.6 million decrease in non-GAAP funding costs. In percentage terms, net effective spread was primarily attributable to a higher average balance0.91% in lower-earningboth 2019 and 2018, as the increase from the absence of the amortization of $2.0 million in premium of an interest-only security held in Farmer Mac's investment securities in 2016 compared to 2015.portfolio (the "Interest-Only Amortization") was offset by the decrease from narrower spreads on liquidity investment securities.
For more information about Farmer Mac's use of net effective spread as a financial measure, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-
GAAPNon-GAAP Measures." For a reconciliation of net interest income to net effective spread, see Table 711 in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Net Interest Income."
Business Volume
Farmer Mac added $4.7Our outstanding business volume was $21.9 billion as of December 31, 2020, a net increase of $806.2 millionfrom December 31, 2019 after taking into account all new business, volume during 2017. The new business volume included purchases of $2.4 billionof AgVantage securities, purchases of $1.1 billion of newly originated Farm & Ranch loans, Farm & Ranch loans added under LTSPCs of $554.7 million, purchases of $369.8 million of USDA Securities, the issuance of $161.9 million of Farmer Mac Guaranteed USDA Securities, and purchases of Rural Utilities loans of $137.3 million. Also during 2017, Farmer Mac fully refinanced a $1.0 billion AgVantage security that matured in April 2017 into three new on-balance sheet AgVantage securities. Previously, $970.0 million of the $1.0 billion maturing AgVantage security was reported as off-balance sheet business volume because it was owned by third-party investors. Taking into account maturities, and paydowns on existing assets,assets. This net increase was primarily attributable to net increases of $804.2 million in Farm & Ranch, $536.3 million in Rural Utilities, and $166.5 million in USDA Guarantees. These net increases were partially offset by a net decrease of $700.9 million in the Institutional Credit line of business.
The $804.2 million net increase in our Farm & Ranch line of business reflected a $1.2 billion net increase in outstanding loan purchase volume that was partially offset by net decreases of $313.9 million in loans held in consolidated trusts and $95.7 million in loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities.
The $536.3 million net increase in our Rural Utilities line of business reflected a $589.1 million net increase in outstanding loan purchase volume that was partially offset by a $52.9 million net decrease in loans under LTSPCs.
The $700.9 million net decrease in our Institutional Credit line of business was primarily attributable to maturities of $2.0 billion in our Institutional Credit line of business that was only partially offset by new business.
For more information about Farmer Mac's outstanding business volume, was $19.0 billion assee "Management's Discussion and Analysis of December 31, 2017, an increaseFinancial Condition and Results of $1.6 billion from December 31, 2016.Operations—Results of Operations—Business Volume."
Capital
As of December 31, 2017, Farmer Mac's core capital level was $657.1 million, which was $136.8 million above the minimum capital level required by Farmer Mac's statutory charter. As of December 31, 2016, Farmer Mac's core capital level was $609.7 million, which was $143.2 million above the minimum capital requirement. Table 3
| | | | | | | | | | | |
| As of |
| December 31, 2020 | | December 31, 2019 |
| (in thousands) |
| Core capital | $ | 1,006,400 | | | $ | 815,437 | |
| Capital in excess of minimum capital level required | 325,455 | | | 196,669 | |
The decreaseincrease in capital in excess of the minimum capital level required was primarily due primarily to anthe issuance of the Series E Preferred Stock and Series F Preferred Stock and the increase in minimum capital required to supportretained earnings, partially offset by growth in our outstanding business volume and the growth of on-balance sheet assets during 2017. In particular, the refinancing of a $1.0 billion AgVantage security that matured in April 2017 into three new on-balance sheet AgVantage securities significantly increased Farmer Mac's on-balance sheet assets because $970.0 millionredemption of the refinanced security was previously held by third party investors and reported as off-balance sheet business volume. In addition,Series A Preferred Stock.
Current Expected Credit Loss
As noted above, Farmer Mac elected to adopt Accounting Standard Update ("ASU") 2018-02, "Reclassificationadopted CECL on January 1, 2020. Under CECL, we estimate and recognize expected credit losses over the lives of Certain Tax Effects from Accumulated Other Comprehensive Income,"our financial assets. We base our estimate of expected losses on historical loss information and reasonable and supportable forecasts. In 2020, our reasonable and supportable forecasts included the impact of the COVID-19 pandemic on economic factors such as credit spreads and unemployment. Thus, our total provision for credit losses during the year ended December 31, 2017, which resulted in an increase to "Accumulated other comprehensive income, net of tax" and a corresponding decrease to "Retained earnings" of $9.1 million. The decrease in capital in excess of2020 was affected by the minimum capital level was offset in part by an increase in retained earnings during 2017, excluding theongoing economic effects of the adoption of ASU 2018-02. See Note 2(r) to the consolidated financial statements for more information about the adoption of ASU 2018-02 and the effect on Farmer Mac's consolidated financial statements.COVID-19 pandemic.
In August 2017, Farmer Mac's board of directors approved the continuation of a share repurchase program on its existing terms through August 2019 and authorized Farmer Mac to repurchase up to $5.4 million of its outstanding Class C non-voting common stock. This is the amount that was remaining under the share repurchase program that Farmer Mac's board of directors originally authorized in third quarter 2015 for the repurchase of up to $25 million of outstanding Class C non-voting common stock. Farmer Mac did not repurchase shares during 2017 under this program. Farmer Mac also did not repurchase any shares under this program in the last three quarters of 2016, but did repurchase 307,000 shares in first quarter 2016. As of December 31, 2017, Farmer Mac had repurchased approximately 668,000 shares of Class C non-voting common stock at a cost of approximately $19.6 million under the share repurchase program.
Credit Quality
As of December 31, 2017,2020, Farmer Mac's total allowance for losses on its on-balance sheet loan portfolio was $8.9$13.8 million (0.13 percent(0.16% of all loans), compared to $10.5 million (0.15% of all loans) as of December 31, 2019. As of January 1, 2020, Farmer Mac recorded a cumulative transition adjustment of $1.5 million. For the year ended December 31, 2020, Farmer Mac recorded a provision to its allowance for loan losses of $7.7 million. Farmer Mac also recorded a direct charge-off of $5.8 million from the allowance. The charge-off was primarily related to a Farm & Ranch agricultural storage & processing loan secured by a specialized poultry facility.
As of December 31, 2020, Farmer Mac's reserve for losses on its off-balance sheet LTSPCs and Guaranteed Securities was $3.3 million (0.10% of all off-balance sheet LTSPCs and Guaranteed Securities), compared to $2.2 million (0.06% of all off-balance sheet LTSPCs and Guaranteed Securities) as of December 31, 2019. As of January 1, 2020, Farmer Mac recorded a cumulative transition adjustment of $0.9 million. For the year ended December 31, 2020, Farmer Mac recorded a provision to its reserve for its off-balance sheet portfolio of $0.3 million.
Credit Quality
The following table presents Farm & Ranch substandard assets, in dollars and as a percentage of the Farm & Ranch portfolio), comparedportfolio, for both on- and off-balance sheet assets as of December 31, 2020 and December 31, 2019:
Table 4
| | | | | | | | | | | | | | | | | | | | | | | |
| Farm & Ranch Line of Business |
| On-Balance Sheet | | Off-Balance Sheet |
| Substandard Assets | | % of Portfolio | | Substandard Assets | | % of Portfolio |
| (dollars in thousands) |
| December 31, 2020 | $ | 180,823 | | | 2.9 | % | | $ | 110,671 | | | 4.6 | % |
| December 31, 2019 | 207,078 | | | 3.9 | % | | 102,877 | | | 4.1 | % |
| | | | | | | |
| Increase/(decrease) from prior year-ending | $ | (26,255) | | | (1.0) | % | | $ | 7,794 | | | 0.5 | % |
The decrease of $26.3 million in on-balance sheet substandard assets during 2020 was primarily driven by credit upgrades during the year, particularly in permanent plantings, livestock, and crops. The on-balance sheet Farm & Ranch portfolio grew by $899.9 million which, when coupled with credit upgrades, and charge-offs, caused the percentage of substandard assets to $7.4decrease. The $7.8 million (0.12 percentincrease in substandard assets in our off-balance sheet Farm & Ranch portfolio during 2020 was primarily due to credit downgrades in the livestock portfolio during the year.
There were no substandard assets in the Rural Utilities portfolio as of both December 31, 2020 and 2019.
For an analysis of current loan-to-value ratios across substandard and other internally assigned risk ratings, see Table 27 in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."
The following table presents Farm & Ranch 90-day delinquencies, in dollars and as a percentage of the Farm & Ranch portfolio)portfolio, for both on- and off-balance sheet assets as of December 31, 2016. The $1.5 million increase in 2017 to the provision to the allowance for losses was primarily attributable to net volume growth in on-balance2020 and December 31, 2019:
Table 5
| | | | | | | | | | | | | | | | | | | | | | | |
| Farm & Ranch Line of Business |
| On-Balance Sheet | | Off-Balance Sheet |
| 90-Day
Delinquencies | | % of Portfolio | | 90-Day
Delinquencies | | % of Portfolio |
| (dollars in thousands) |
| December 31, 2020 | $ | 34,799 | | | 0.56 | % | | $ | 11,433 | | | 0.48 | % |
| December 31, 2019 | 57,719 | | | 1.09 | % | | 3,235 | | | 0.13 | % |
| | | | | | | |
| Increase/(decrease) from prior year-ending | $ | (22,920) | | | (0.53) | % | | $ | 8,198 | | | 0.35 | % |
On-balance sheet Farm & Ranch loans 90 or more days delinquent decreased in permanent plantings, livestock, crops, and downgradespart-time farms, offset by an increase in risk ratings.
As of December 31, 2017, Farmer Mac's substandard assets were $221.3 million (3.2 percent ofagricultural storage and processing attributable to the single loan secured by a specialized poultry facility. Off-balance sheet Farm & Ranch portfolio), compared to $165.2 million (2.7 percentloans 90 days or more delinquent increased in crops and part-time farms, offset by decreases in livestock and permanent plantings. The top ten borrower exposures over 90 days delinquent in either the on- or off-balance sheet portfolio represented over half of the Farm & Ranch portfolio)aggregate 90-day delinquencies as of December 31, 2016. The increase2020.
There were no delinquencies in substandard assets from 2016 was primarily driven by credit downgrades in on-balance sheet loans across a diverse setthe Rural Utilities portfolio as of commodities. As ofboth December 31, 2017, the commodity groups that experienced the largest year-over-year increases in substandard assets were crops, livestock,2020 and permanent plantings.2019.
As of December 31, 2017, Farmer Mac's 90-day delinquencies were $48.4 million (0.71 percent of the Farm & Ranch portfolio), compared to $21.0 million (0.34 percent of the Farm & Ranch portfolio) as of December 31, 2016. The year-over-year increase in 90-day delinquencies was primarily attributable to the delinquencies of several larger loans and certain crop and permanent planting loans due to factors specific to the borrower and not related to macroeconomic factors in the agricultural economy. In particular, $15.3 million permanent planting loans to a single borrower became delinquent in first quarter 2017 and accounts for over half of the year-over-year increase in 90-day delinquencies.
For more information about Farmer Mac's credit metrics, including 90-day delinquencies, the total allowance for losses, and substandard assets, as well as the effects of the COVID-19 pandemic on loan payment deferments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."
New Federal Tax Legislation
The Tax Cuts and Jobs Act was enacted on December 22, 2017. This new federal tax legislation provides for significant changes to the U.S. Internal Revenue Code that was in effect through the end of 2017 and includes a reduction of the federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. As a result of this reduction in the tax rate, Farmer Mac re-measured its net deferred tax asset at the new 21 percent tax rate and reduced its value by $1.4 million. Accordingly, Farmer Mac recorded an increase to income tax expense of $1.4 million during fourth quarter 2017. Farmer Mac also elected to adopt ASU 2018-02 "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," for the year ended December 31, 2017. As a result, Farmer Mac recorded an increase to "Accumulated other comprehensive income, net of tax" and a corresponding decrease to "Retained earnings" of $9.1 million. Farmer Mac estimates that its annual effective tax rate beginning in 2018 will be approximately 21 percent, which reflects the federal corporate income tax rate under the new federal tax legislation. See Note 2(l) and Note 2(r) to the consolidated financial statements for more information about the accounting policy for income taxes and about the adoption of ASU 2018-02 and the effect on Farmer Mac's consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of Farmer Mac's consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes for the periods presented. Actual results could differ from those estimates. TheFarmer Mac views the allowance for losses and fair value measurement as critical accounting policies. Both policies thatrequire complex and subjective judgments and are both important to the presentation of Farmer Mac's financial condition and results of operations and require complex, subjective judgments are the accounting policies for the allowance for losses and fair value measurement.operations.
Allowance for Losses
On January 1, 2020, Farmer Mac adopted Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, ("CECL"). Under CECL, Farmer Mac's allowance for credit losses represents the difference between the carrying amount of the related financial instruments and the present value of their expected cash flows discounted at their effective interest rates, as of the respective balance sheet date. Under CECL, Farmer Mac's reserve for credit losses represents the difference between the outstanding amount of off-balance sheet credit exposures and the present value of their expected cash flows discounted at their effective interest rates.
Farmer Mac maintains an allowance for credit losses to cover estimated probablecurrent expected credit losses incurred as of the balance sheet date onfor on-balance sheet investment securities, loans held for investment, ("allowanceand Farmer Mac Guaranteed Securities (collectively, "allowance for loan losses") and. Additionally, Farmer Mac maintains a reserve for credit losses to cover current expected credit losses as of the balance sheet date for off-balance sheet loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities and LTSPCs ("reserve(collectively, "reserve for losses") based on available information. For purposes of this accounting policy,. Both the allowance for loan losses and the reserve for losses are described collectively as the "allowance for losses" because the estimation methodology is identical for loans that are held for investmentbased on historical information and for loans underlying off-balance sheet reasonable and supportable forecasts.
Farmer Mac Guaranteed Securitieshas never experienced a credit loss in its Rural Utilities line of business. Upon the adoption of CECL, Farmer Mac is now required to measure its expected credit losses for the expected life of all financial instruments, including its Rural Utilities loans. To estimate expected credit losses on these loans, Farmer Mac relies upon industry historical credit loss data from ratings agencies and LTSPCs. Disaggregation by commodity type is performed, where appropriate,publicly available information as disclosed in analyzing the need for an allowance for losses.securities filings of other major lenders who serve the utilities industry.
The allowance for loan losses increases through periodic provisions for loan losses that are charged against net interest income. Theincome and the reserve for losses increases through provisions for losses that are charged to non-interest expense. Both the allowance for loan losses and reserve for losses decreaseare decreased by charge-offs for actualrealized losses, net of recoveries. Charge-offs representReleases from the allowance for losses on the outstanding principal balance, any interest payments previously accrued or advanced, and expected costs of liquidation. Negative provisions, or releases of allowancereserve for losses occur when the estimate of probableexpected credit losses as of the end of a period is lowerless than the estimate at the beginning of the period.
The total allowance for losses consists of a generalthe allowance for losses and the reserve for losses.
Charge-offs
Farmer Mac records a specificcharge-off from the allowance for individually identified impaired loans.losses when either a) a loan, or a portion of a loan, is deemed uncollectible; or b) a loss has been confirmed through the receipt of assets, generally the underlying collateral, in full satisfaction of the loan. The charge-off equals the excess of the recorded investment in the loan over the fair value of the collateral less estimated selling costs.
General Allowance for LossesEstimation Methodology
Farm & Ranch
Farmer Mac'sMac bases its methodology for determining its general allowance forcurrent estimate of expected losses on a statistical model, which incorporates credit loss history and reasonable and supportable forecasts. Farmer Mac's automated loan classification system. That system scores loans based on criteria such as historical repayment performance, indicators of current financial condition, loan seasoning, loan size, and loan-to-value ratio. For purposes ofestimation methodology includes the loss allowance methodology, the loans in Farmer Mac'sfollowing key components:
•An economic model for each portfolio, of loans and loans underlying off-balance sheetincluding Farm & Ranch, Guaranteed SecuritiesRural Utilities, and LTSPCs have been scored and classifiedInstitutional Credit;
•A migration matrix for each calendar quarter since first quarter 2000. The allowance methodology capturesportfolio that reasonably predicts the movement of each financial asset among various risk categories over the course of each asset's expected life (the migration matrix forms the basis for our estimate of the probability of default of each financial asset);
•A loss-given-default ("LGD") model that reasonably predicts the amount of loss that Farmer Mac would incur upon the default of each financial asset;
•An economic factor forecast that updates the migration of loan scores across concurrentmatrix model and overlapping three-year time horizons and calculates loss rates separately within each loan classificationthe LGD model with current assumptions for (1) loans held for investment and (2) loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs. The calculated loss ratesthe economic indicators that Farmer Mac has determined are appliedmost correlated with or relevant to the current classification distributionperformance of unimpaired loans in Farmer Mac'seach portfolio to estimate probable losses, based onof assets (including Gross Domestic Product ("GDP"), credit spreads, unemployment rates, land values, and commodity prices); and
•A discounted cash flow analysis, which relies upon each of the assumption thatabove model outputs, plus the historical credit lossescontractual terms of each financial asset, and trends used to calculate loss rates will continue in the future. effective interest rate of each financial asset.
Management evaluates this assumptionthese assumptions by taking into consideration variousconsidering many relevant factors, including:
•economic conditions;
•geographic and agricultural commodity/product concentrations in the portfolio;
•the credit profile of the portfolio;portfolio, including risk ratings and financial metrics;
•delinquency trends of the portfolio;
•historical charge-off and recovery activities of the portfolio; and
•other factors to capture current portfolio trends and characteristics that differ from historical experience.
Management believes that thisits methodology produces a reasonable estimate of probableexpected credit losses, as of the balance sheet date, for the expected life of all of the company's financial assets.
Allowance for Loss on Available-for-Sale (AFS) Securities
To measure current expected credit losses on impaired AFS securities, Farmer Mac first considers those impaired securities that: 1) Farmer Mac does not intend to sell, and 2) it is not more likely than not that Farmer Mac will be required to sell before recovering its amortized cost basis. In assessing whether a credit loss exists, Farmer Mac compares the present value, discounted at the security's effective interest rate, of cash flows expected to be collected from an impaired AFS debt security to its amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized cost basis of the impaired security, a credit loss exists and Farmer Mac records an allowance for loss for that credit loss. However, the amount of that allowance is limited by the amount that the security’s fair value is less than its amortized cost basis. Accrued interest receivable is recorded separately on the Consolidated Balance Sheet, and the allowance for credit losses excludes uncollectible accrued interest receivable.
Collateral Dependent Assets ("CDAs")
CDAs are loans, includedloans underlying LTSPCs, or off-balance sheet credit exposures in which the borrower is either in foreclosure or is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral by Farmer Mac. Farmer Mac estimates the current expected credit loss on CDAs based upon the appraised value of the collateral, the costs to sell it, and any applicable credit protection such as a guarantee.
COVID-19 Payment Deferments
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. Section 4013 of the CARES Act titled “Temporary Relief from Troubled Debt Restructurings” provides financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to troubled debt restructurings (“TDRs”) for a limited period of time to account for the effects of the COVID-19 pandemic. On April 10, 2020, Farmer Mac’s prudential regulator, FCA (through OSMO) issued guidance to Farmer Mac on loan servicing and reporting TDRs for lines of business affected by the COVID-19 outbreak. This guidance was consistent with the guidance provided by other financial regulatory agencies and the Financial Accounting Standards Board that short-term modifications made on a good faith basis in response to the COVID-19 national emergency are not TDRs when the borrower was not past due on loan payments before the March 13, 2020 presidential proclamation declaring the COVID-19 outbreak a national emergency.
During second quarter 2020, Farmer Mac implemented the guidance from FCA by granting up to 6-month payment deferments to borrowers who have been economically impacted by the COVID-19 pandemic. Farmer Mac deems loans under a COVID-19 payment deferment not to be past due and continues to accrue interest on those loans. Furthermore, Farmer Mac does not consider a payment deferment on any such loan to be a troubled debt restructuring. In estimating expected credit losses on Farm & Ranch line of business, including loans held for investment, and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs.
Rural Utilities
Farmer Mac separately evaluates the Rural Utilities loans it holds for investmentdoes consider payment deferments along with other available credit and loans underlying LTSPCseconomic information that pertains to estimate any probable losses inherent in those assets. Farmer Mac has not provided an allowance for losses for the portfolio segment related to the Rural Utilities line of business based on the credit quality of the collateral supporting rural utilities assets. that portfolio.
Specific Allowance for Impaired Loans
Farmer Mac individually analyzes certain loans in its portfolio for impairment. Farmer Mac's individually identified impaired loans generally include loans 90 days or more past due, in foreclosure, restructured, in bankruptcy, and certain performing loans that have previously been delinquent or are secured by real estate that produces agricultural commodities or products that have been identified as under stress.
For individually identified impaired loans with an updated appraisal, other updated collateral valuation, or management's estimate of discounted collateral value, this analysis compares the measurement of the fair value of the collateral to the total recorded investment in the loan. The total recorded investment in the loan includes principal, interest, and advances, net of any charge-offs. In the event that an individually analyzed loan's collateral value does not equal or exceed its total recorded investment, Farmer Mac provides a specific allowance for loss in the amount of the difference between the recorded investment and fair value, less estimated costs to liquidate the collateral. Estimated selling costs are based on historical selling costs incurred by Farmer Mac or management's best estimate of selling costs for a particular property. For individually identified impaired loans without updated valuations, this analysis is performed in the aggregate considering similar risk characteristics of the loans and historical statistics. Farmer Mac considers appraisals that are more than two years old as of the reporting date not to be updated for purposes of individually analyzing loans.
Farmer Mac uses a risk-based approach in determining the necessity of obtaining updated appraisals on impaired loans. For example, larger exposures associated with highly improved and specialized collateral will generally receive updated appraisals once the loans are identified as impaired. In addition, updated appraisals are always obtained during the foreclosure process. Depending on the risk factors associated with the loan and underlying collateral, which can vary widely depending on the circumstances of the loan and collateral, this can occur early in the foreclosure process, while in other instances this may occur just prior to the transfer of title. As part of its routine credit review process, Farmer Mac often will exercise judgment in discounting an appraised value due to local real estate trends or the condition of the property
(e.g., following an inspection by Farmer Mac or the servicer). In addition, a property's appraised value may be discounted based on the market's reaction to Farmer Mac's asking price for sale of the property.
FurtherMore information regardingabout the allowance for losses is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees" and Note 2(j)2(g) to the consolidated financial statements.
Fair Value Measurement
A significant portion of Farmer Mac's assets consists of financial instruments that are measured at fair value in the consolidated balance sheets. For financial instruments that are complex in nature or for which observable inputs are not available, the measurement of fair value requires management to make significant judgments and assumptions. These judgments and assumptions, as well as changes in market conditions, may have a material impacteffect on the consolidated balance sheets and statements of operations.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit price) and establishes a hierarchy for ranking fair value measurements. In determining fair value, Farmer Mac uses various valuation approaches, including market and income approaches. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. When available, the fair value of Farmer Mac's financial instruments is based on quoted market prices, valuation techniques that use observable market-based inputs, or unobservable inputs that are corroborated by market data. Pricing information obtained from third parties is internally validated for reasonableness prior tobefore use in the consolidated financial statements.
When observable market prices are not readily available, Farmer Mac estimates fair value using techniques that rely on alternate market data or internally developed models using significant inputs that are generally less readily observable. Market data includes prices of financial instruments with similar maturities and characteristics, interest rate yield curves, measures of volatility, and prepayment rates. If market data needed to estimate fair value is not available, Farmer Mac estimates fair value using
internally-developed models that employ a discounted cash flow approach. Even when market assumptions are not readily available, Farmer Mac's assumptions reflect those that market participants would likely use in pricing the asset or liability at the measurement date.
Farmer Mac's assets and liabilities presented at fair value in the consolidated balance sheets on a recurring basis include investment securities, Farmer Mac Guaranteed Securities, USDA Securities, and financial derivatives. The changes in fair value from period to period are recorded either in the consolidated statements of comprehensive income as other comprehensive (loss)/income, net of tax or in the consolidated statements of operations as gains/(losses) on financial derivatives, and hedging activitiesnet interest income, or gains/(losses) on trading assets.
The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The hierarchy has the following three levels to classify fair value measurements:
| |
Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
74
Level 2Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.
Level 3Prices or valuations that require unobservable inputs that are significant to the fair value measurement.
| |
Level 2 | Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly. |
| |
Level 3 | Prices or valuations that require unobservable inputs that are significant to the fair value measurement. |
As of December 31, 2017,2020, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $5.5$7.0 billion whose fair values were estimated by management in the absence of readily determinable fair values (i.e., level 3). These financial instruments measured as level 3 represented 31 percent29% of total assets and 71 percent65% of financial instruments measured at fair value as of December 31, 2017.2020.
See Note 13 to the consolidated financial statements for more information about fair value measurement.
Use of Non-GAAP Measures
In the accompanying analysis of its financial information, Farmer Mac sometimes uses "non-GAAP measures," which are measures of financial performance that are not presented in accordance with GAAP. Specifically, Farmer Mac uses the following non-GAAP measures: "core earnings," "core earnings per share," and "net effective spread." Farmer Mac uses these non-GAAP measures to measure corporate economic performance and develop financial plans because, in management's view, they are useful alternative measures in understanding Farmer Mac's economic performance, transaction economics, and business trends.
The non-GAAP financial measures that Farmer Mac uses may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies. Farmer Mac's disclosure of these non-GAAP measures is intended to be supplemental in nature and is not meant to be considered in isolation from, as a substitute for, or as more important than, the related financial information prepared in accordance with GAAP.
Core Earnings and Core Earnings Per Share
CoreThe main difference between core earnings and core earnings per share principally differ from(non-GAAP measures) and net income attributable to common stockholders and earnings per common share respectively, by excluding(GAAP measures) is that those non-GAAP measures exclude the effects of fair value fluctuations. These fluctuations are not expected to have a cumulative net impact on Farmer Mac's financial condition or results of operations reported in accordance with GAAP if the related financial instruments are held to maturity, as is expected. Among other items,Another difference is that these fair value fluctuations have included unrealized gains or losses on financial derivatives and hedging activities. Variation margin is exchanged between Farmer Mac and its counterparties on both its cleared and non-cleared derivatives portfolios. Prior to first quarter 2017, Farmer Mac accounted for variation margin as collateral and associated unrealized gains or losses on its centrally cleared derivative contracts. However, beginning in first quarter 2017, the variation margin amounts exchanged between Farmer Mac and its counterparties on cleared derivatives are considered as settlement rather than collateral as a result of a change in variation margin rules implemented by the Chicago Mercantile Exchange ("CME"), the central clearinghouse used by Farmer Mac. Specifically, effective January 3, 2017, CME began to deem the exchange of variation margin between derivatives counterparties as a partial settlement of each respective derivative contract rather than as collateral pledged by a counterparty. Accordingly, beginning in first quarter 2017, Farmer Mac presents its cleared derivatives portfolio net of variation margin payments on its consolidated balance sheets and recognizes realized gains or losses as a result of these payments on its consolidated statements
of operations. In October 2017, the U.S. Commodity Futures Trading Commission ("CFTC") issued an interpretive letter to the CME confirming that, under the Commodity Exchange Act, the exchange of variation margin payments on cleared swap positions constitutes settlement of the outstanding exposure and not collateral against it and that CME rules must reflect this interpretation. However, the CFTC acknowledged the economic equivalence between the settlement of and the pledge of collateral against outstanding exposure under a derivatives contract, and Farmer Mac also believes that the economic character of these transactions remains the same as they were before the CME rule change. Even though these variation margin amounts are accounted for as realized gains or losses on financial derivatives and hedging activities as a result of the CME rule change and subsequent CFTC interpretation, this is not expected to have a cumulative net impact on Farmer Mac's financial condition or results of operations reported in accordance with GAAP because the related financial instruments are expected to be held to maturity. Therefore, since the beginning of first quarter 2017, Farmer Mac has excluded the effects of realized gains or losses resulting from the exchange of variation margin on its cleared derivatives portfolio in its calculations of core earnings and core earnings per share to present them on a consistent basis with quarters prior to 2017.
Core earnings and core earnings per share also differ from net income attributable to common stockholders and earnings per common share, respectively, by excludingtwo non-GAAP measures exclude specified infrequent or unusual transactions that Farmer Mac believeswe believe are not indicative of future operating results and that may not reflect the trends and economic financial performance of Farmer Mac's core business. Accordingly, the one-time, non-cash charge to income tax expense due to the re-measurement of the net deferred tax asset was excluded from core earnings and core earnings per share. Farmer Mac re-measured its net deferred tax asset at a lower federal corporate tax rate due to the enactment of new tax legislation on December 22, 2017. This charge isFor example, we have excluded from core earnings and core earnings per share because it is not a frequently occurring transaction, is a non-cash charge, and is not indicative of future operating results. Additionally, the loss fromany losses on retirement of the Farmer Mac II LLC Preferred Stock in first quarter 2015 was excluded from core earnings and core earnings per share during that quarter because it was not a frequently occurring transaction and not indicative of future operating results. This was 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.preferred stock. 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. NetAs further explained below, net effective spread differs from net interest income and net interest yield because it excludes (1) the amortization of premiums and discounts on assets consolidated at fair value that are amortized as adjustments to yield in interest income over the contractual or estimated remaining lives of the underlying assets; and (2)by excluding certain items from net interest income and net 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." yield and including certain other items that net interest income and net interest yield do not contain.
Farmer Mac excludes from net effective spread the premiums and discounts on assets consolidated at fair value because they either do not reflect actual cash premiums paid for the assets at acquisition or are not expected to have an economic effect on Farmer Mac's financial performance if the assets are held to maturity, as is expected. Farmer Mac also excludes from net effective spread the interest income and interest expense associated with the consolidated trusts and the average balance of the loans underlying these trusts to reflect management's view that the net interest income Farmer Mac earns on the related Farmer Mac Guaranteed Securities owned by third parties is effectively a guarantee fee. Accordingly, the excluded interest income and interest expense associated with consolidated trusts is reclassified to guarantee and commitment fees for purposes ofin determining Farmer Mac's core earnings. Farmer Mac also excludes from net effective spread the fair value changes of financial derivatives and the corresponding assets or liabilities designated in fair value hedge relationships because they are not expected to have an economic effect on Farmer Mac's financial performance, as we expect to hold the financial derivatives and corresponding hedged items to maturity.
Net effective spread also principally differs from net interest income and net interest yield because it includes the accrual of income and expense related to the contractual amounts due on financial derivatives that are not designated in hedge accounting relationships ("undesignated financial derivatives").
Farmer Mac uses interest rate swaps to manage its interest rate risk exposure by synthetically modifying the 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 "Gains"(Losses)/gains on financial derivatives and hedging activities"derivatives" on the consolidated statements of operations. However, the accrual of the contractual amounts due for undesignated financial derivatives are included in Farmer Mac's calculation of net effective spread.
Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net62
Net effective spread to also includediffers from net interest income and net interest yield because it includes the net effects of terminations or net settlements on financial derivatives, which consist of: (1) the net effects of cash settlements on agency forward contracts on the debt of other GSEs and hedging activities.U.S. Treasury security futures that we use as short-term economic hedges on the issuance of debt; and (2) the net effects of initial cash payments that Farmer Mac receives upon the inception of certain swaps. The inclusion of these items in net effective spread along with the accrual of contractual amounts due for undesignated financial derivatives described above, is intended to reflect management'sour view of the complete net spread between an asset and all of its related funding, including any associated derivatives, whether or not they are designated in a hedge accounting relationship. Specifically, these net effects of terminations or net settlements on financial derivatives and hedging activities include:
1. The net effects of cash settlements on agency forward contracts on the debt of other GSEs. These agency forward contracts are used as short-term economic hedges of the issuance of debt to manage interest rate risk on loans that Farmer Mac has committed to acquire but has not yet purchased. Farmer Mac records the realized gains or losses on settlements of agency forward contracts used as short-term economic hedges of the issuance of debt in the consolidated statements of operations in the period in which they occur. Under the revised methodology, for net effective spread purposes, these realized gains or losses are deferred and amortized as net yield adjustments over the term of the related debt, which generally ranges from 3 to 15 years. Previously, for core earnings purposes, these amounts had been deferred and amortized and were included within the "Other" item that is part of the "Revenues" component of core earnings.
2. The net effects of cash settlements on futures contracts involving U.S. Treasury securities. Similar to the net effects of cash settlements on agency forward contracts, the net effects of cash settlements on futures contracts involving U.S. Treasury securities are used as short-term economic hedges of the issuance of debt and are reported in the consolidated statements of operations in the period in which they occur. Under the revised methodology, for net effective spread purposes, these realized gains or losses are deferred and amortized as net yield adjustments over the term of the related debt, which generally ranges from 3 to 15 years. Previously, for core earnings purposes, these realized gains and losses had been recognized in the period in which they occurred within the "Other" item that is part of the "Revenues" component of core earnings.
3. The net effects of initial cash payments that Farmer Mac receives upon the inception of certain swaps. When there is no direct payment arrangement between a swap dealer counterparty and a debt dealer issuing Farmer Mac's medium-term notes for a particular transaction, Farmer Mac may receive an initial cash payment from the swap dealer at the inception of the swap to offset dollar-for-dollar the amount of the discount on the associated hedged debt. For GAAP purposes, changes in fair value of these swaps are recognized in "Gains on financial derivatives and hedging activities," whereas the offsetting discount on the associated hedged debt is amortized over the term of the debt as an adjustment to its yield. This results in a timing difference between the recognition of "Gains on financial derivatives and hedging activities" and the recognition of the discount in "Total interest expense." Additionally, the initial cash payments included in "Gains on financial derivatives and hedging activities" had been excluded from net effective spread, whereas the amortization of the discount included in interest expense had been a component of net effective spread. The initial cash payments received by Farmer Mac vary depending upon the number of the aforementioned type of swaps it executes during a quarter. Under the revised methodology, for net effective spread purposes, these initial cash payments are deferred and amortized as net yield adjustments over the term of the related debt, which generally ranges from 3 to 15 years, and offset the amortization of the discount on the associated hedged debt. Previously, for core earnings purposes, these initial cash payments had been recognized in the period in which they were received within the “Other” item that is part of the "Revenues" component of core earnings.
For a reconciliation of net interest income and net interest yield to net effective spread, see Table 711 in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Net Interest Income."
All prior period information has been recast to reflect the revised net effective spread methodology. This change in methodology had a corresponding effect on core earnings and core earnings per share. Reconciliations to recast core earnings, core earnings per share, and net effective spread for the years ended December 31, 2016 and 2015 are presented in the following tables.
Table 1
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Reconciliation of Core Earnings to Core Earnings (Recast) |
| | For the Year Ended December 31, |
| | 2016 | | 2015 |
| | Dollars | | Per Basic Share | | Per Diluted Share | | Dollars | | Per Basic Share | | Per Diluted Share |
| | (in thousands, except per share amounts) |
| Core Earnings | $ | 53,791 |
| | $ | 5.13 |
| | $ | 5.01 |
| | $ | 46,975 |
| | $ | 4.29 |
| | $ | 4.15 |
|
| Less reconciling items: | | | | | | | | | | | |
| Net effects of terminations or net settlements on financial derivatives and hedging activities | 479 |
| | 0.05 |
| | 0.04 |
| | (92 | ) | | (0.01 | ) | | (0.01 | ) |
| Income tax effect related to reconciling items | (169 | ) | | (0.02 | ) | | (0.01 | ) | | 32 |
| | — |
| | — |
|
| Core Earnings (recast) | $ | 53,481 |
| | $ | 5.10 |
| | $ | 4.98 |
| | $ | 47,035 |
| | $ | 4.30 |
| | $ | 4.16 |
|
|
| | | | | | | | | | | | | |
| Reconciliation of Net Effective Spread to Net Effective Spread (Recast) |
| | For the Year Ended December 31, |
| | 2016 | | 2015 |
| | Dollars | | Yield | | Dollars | | Yield |
| | (dollars in thousands) |
| Net Effective Spread | $ | 125,102 |
| | 0.86 | % | | $ | 119,380 |
| | 0.87 | % |
| Amortization of losses due to terminations or net settlements on financial derivatives and hedging activities | (2,030 | ) | | (0.02 | )% | | (1,952 | ) | | (0.02 | )% |
| Net Effective Spread (recast) | $ | 123,072 |
| | 0.84 | % | | $ | 117,428 |
| | 0.85 | % |
Results of Operations
Farmer Mac's net income attributable to common stockholders for 2017 was $71.3 million ($6.60 per diluted common share), compared to $64.2 million ($5.97 per diluted common share) for 2016, and $47.4 million ($4.19 per diluted common share) for 2015. Farmer Mac's non-GAAP core earnings for 2017 were $65.6 million ($6.08 per diluted common share), compared to $53.5 million ($4.98 per diluted common share) for 2016, and $47.0 million ($4.16 per diluted common share) for 2015. For more information about the changes in net income attributable to common stockholders and core earnings, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview—Net Income and Core Earnings."
Reconciliations of Farmer Mac's net income attributable to common stockholders to core earnings and core earnings per share are presented in the following tables along with information about the composition of core earnings:
Table 26
| | | | | | | | | | | | | | | | | |
| Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings |
| For the Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (in thousands, except per share amounts) |
| Net income attributable to common stockholders | $ | 89,176 | | | $ | 93,650 | | | $ | 94,898 | |
| Less reconciling items: | | | | | |
| (Losses)/gains on undesignated financial derivatives due to fair value changes (see Table 14) | (3,691) | | | 10,077 | | | 7,959 | |
| (Losses)/gains on hedging activities due to fair value changes | (10,019) | | | (9,010) | | | 4,449 | |
| Unrealized gains on trading securities | 51 | | | 326 | | | 81 | |
| Net effects of amortization of premiums/discounts and deferred gains on assets consolidated at fair value | 58 | | | (122) | | | (461) | |
| Net effects of terminations or net settlements on financial derivatives | 1,236 | | | 1,089 | | | 1,708 | |
| Issuance costs on the retirement of preferred stock | (1,667) | | | (1,956) | | | — | |
| | | | | |
| Income tax effect related to reconciling items | 2,596 | | | (496) | | | (2,885) | |
| Sub-total | (11,436) | | | (92) | | | 10,851 | |
| Core earnings | $ | 100,612 | | | $ | 93,742 | | | $ | 84,047 | |
| | | | | |
| Composition of Core Earnings: | | | | | |
| Revenues: | | | | | |
Net effective spread(1) | $ | 196,956 | | | $ | 168,608 | | | $ | 151,195 | |
Guarantee and commitment fees(2) | 19,150 | | | 21,335 | | | 20,733 | |
Other(3) | 2,687 | | | 1,775 | | | 520 | |
| Total revenues | 218,793 | | | 191,718 | | | 172,448 | |
| | | | | |
| Credit related expense (GAAP): | | | | | |
| Provision for losses | 8,055 | | | 3,501 | | | 335 | |
| REO operating expenses | — | | | 64 | | | 16 | |
| (Gains)/losses on sale of REO | (463) | | | — | | | 7 | |
| Total credit related expense | 7,592 | | | 3,565 | | | 358 | |
| | | | | |
| Operating expenses (GAAP): | | | | | |
| Compensation and employee benefits | 36,502 | | | 28,762 | | | 27,534 | |
| General and administrative | 21,976 | | | 20,311 | | | 19,707 | |
| Regulatory fees | 2,925 | | | 2,788 | | | 2,562 | |
| Total operating expenses | 61,403 | | | 51,861 | | | 49,803 | |
| | | | | |
| Net earnings | 149,798 | | | 136,292 | | | 122,287 | |
Income tax expense(4) | 31,381 | | | 28,610 | | | 25,058 | |
| | | | | |
| Preferred stock dividends (GAAP) | 17,805 | | | 13,940 | | | 13,182 | |
| Core earnings | $ | 100,612 | | | $ | 93,742 | | | $ | 84,047 | |
| | | | | |
| Core earnings per share: | | | | | |
| Basic | $ | 9.38 | | | $ | 8.76 | | | $ | 7.89 | |
| Diluted | 9.33 | | | 8.70 | | | 7.82 | |
| Weighted-average shares: | | | | | |
| Basic | 10,728 | | | 10,696 | | | 10,654 | |
| Diluted | 10,786 | | | 10,778 | | | 10,746 | |
(1)Net effective spread is a non-GAAP measure. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread" for an explanation of net effective spread. See Table 11 for a reconciliation of net interest income to net effective spread.
|
| | | | | | | | | | | |
| Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands, except per share amounts) |
| Net income attributable to common stockholders | $ | 71,300 |
| | $ | 64,152 |
| | $ | 47,371 |
|
| Less reconciling items: | |
| | |
| | |
|
| Gains on financial derivatives and hedging activities due to fair value changes | 9,499 |
| | 13,628 |
| | 10,924 |
|
| Unrealized (losses)/gains on trading securities | (24 | ) | | 1,460 |
| | 1,220 |
|
| Amortization of premiums/discounts and deferred gains on assets consolidated at fair value | (1,327 | ) | | (849 | ) | | (1,319 | ) |
Net effects of terminations or net settlements on financial derivatives and hedging activities(1) | 2,674 |
| | 2,178 |
| | (699 | ) |
Loss on retirement of Farmer Mac II LLC Preferred Stock(2) | — |
| | — |
| | (8,147 | ) |
| Re-measurement of net deferred tax asset due to enactment of new tax legislation | (1,365 | ) | | — |
| | — |
|
| Income tax effect related to reconciling items | (3,788 | ) | | (5,746 | ) | | (1,643 | ) |
| Sub-total | 5,669 |
| | 10,671 |
| | 336 |
|
| Core earnings | $ | 65,631 |
| | $ | 53,481 |
| | $ | 47,035 |
|
| | | | | | |
| Composition of Core Earnings: | | | | | |
| Revenues: | | | | | |
Net effective spread(3) | $ | 141,303 |
| | $ | 123,072 |
| | $ | 117,428 |
|
Guarantee and commitment fees(4) | 20,350 |
| | 19,170 |
| | 17,155 |
|
Other(5) | 935 |
| | 2,070 |
| | 1,239 |
|
| Total revenues | 162,588 |
| | 144,312 |
| | 135,822 |
|
| | | | | | |
| Credit related expense/(income) (GAAP): | | | | | |
| Provision for losses | 1,758 |
| | 1,002 |
| | 208 |
|
| REO operating expenses | 23 |
| | 39 |
| | 91 |
|
| (Gains)/losses on sale of REO | (1,748 | ) | | (15 | ) | | 1 |
|
| Total credit related expense | 33 |
| | 1,026 |
| | 300 |
|
| | | | | | |
| Operating expenses (GAAP): | | | | | |
| Compensation and employee benefits | 24,233 |
| | 22,772 |
| | 22,047 |
|
| General and administrative | 15,959 |
| | 15,109 |
| | 13,111 |
|
| Regulatory fees | 2,500 |
| | 2,463 |
| | 2,413 |
|
| Total operating expenses | 42,692 |
| | 40,344 |
| | 37,571 |
|
| | | | | | |
| Net earnings | 119,863 |
| | 102,942 |
| | 97,951 |
|
Income tax expense(6) | 41,215 |
| | 36,313 |
| | 32,595 |
|
| Net (loss)/income attributable to non-controlling interest (GAAP) | (165 | ) | | (34 | ) | | 5,139 |
|
| Preferred stock dividends (GAAP) | 13,182 |
| | 13,182 |
| | 13,182 |
|
| Core earnings | $ | 65,631 |
| | $ | 53,481 |
| | $ | 47,035 |
|
| | | | | | |
| Core earnings per share: | | | | | |
| Basic | $ | 6.20 |
| | $ | 5.10 |
| | $ | 4.30 |
|
| Diluted | 6.08 |
| | 4.98 |
| | 4.16 |
|
| Weighted-average shares: | | | | | |
| Basic | 10,594 |
| | 10,477 |
| | 10,949 |
|
| Diluted | 10,803 |
| | 10,746 |
| | 11,309 |
|
(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.
| |
(1)
| Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread, which is a component of core earnings, to also include the net effects of terminations or net settlements on financial derivatives and hedging activities. All prior period information has been recast to reflect the revised methodology. For more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread." |
| |
(2)
| Relates to the write-off of deferred issuance costs as a result of the retirement of Farmer II LLC Preferred Stock. |
| |
(3)
| 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 7 for a reconciliation of net interest income to net effective spread. |
| |
(4)
| 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. |
| |
(5)
| Reflects reconciling adjustments for the reclassification to exclude expenses related to interest rate swaps not designated as hedges and terminations or net settlements on financial derivatives and hedging activities, and reconciling adjustments to exclude fair value adjustments on financial derivatives and trading assets and the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Securities. |
| |
(6)
| Includes the tax impact of non-GAAP reconciling items between net income attributable to common stockholders and core earnings. The year ended December 31, 2017 includes $0.9 million of tax benefits resulting from the vesting of restricted stock and the exercise of SARs under new accounting guidance for stock-based awards that became effective in first quarter 2017. |
(3)Reflects reconciling adjustments for the reclassification to exclude expenses related to interest rate swaps not designated as hedges and terminations or net settlements on financial derivatives, and reconciling adjustments to exclude fair value adjustments on financial derivatives and trading assets and the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Securities.
(4)Includes the tax impact of non-GAAP reconciling items between net income attributable to common stockholders and core earnings.
Table 37
| | | | | | | | | | | | | | | | | |
| Reconciliation of GAAP Basic Earnings Per Share to Core Earnings - Basic Earnings Per Share |
| | For the Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | | |
| GAAP - Basic EPS | $ | 8.31 | | | $ | 8.76 | | | $ | 8.91 | |
| Less reconciling items: | | | | | |
| (Losses)/gains on undesignated financial derivatives due to fair value changes (see Table 14) | (0.34) | | | 0.94 | | | 0.75 | |
| (Losses)/gains on hedging activities due to fair value changes | (0.94) | | | (0.83) | | | 0.41 | |
| Unrealized gains on trading securities | — | | | 0.03 | | | 0.01 | |
| Net effects of amortization of premiums/discounts and deferred gains on assets consolidated at fair value | 0.01 | | | (0.01) | | | (0.04) | |
| Net effects of terminations or net settlements on financial derivatives | 0.12 | | | 0.10 | | | 0.16 | |
| Issuance costs on the retirement of preferred stock | (0.16) | | | (0.18) | | | — | |
| Income tax effect related to reconciling items | 0.24 | | | (0.05) | | | (0.27) | |
| Sub-total | (1.07) | | | — | | | 1.02 | |
| Core Earnings - Basic EPS | $ | 9.38 | | | $ | 8.76 | | | $ | 7.89 | |
| | | | | |
| Shares used in per share calculation (GAAP and Core Earnings) | 10,728 | | | 10,696 | | | 10,654 | |
| | | | | | | | | | | | | | | | | |
| Reconciliation of GAAP Diluted Earnings Per Share to Core Earnings - Diluted Earnings Per Share |
| | For the Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | | |
| GAAP - Diluted EPS | $ | 8.27 | | | $ | 8.69 | | | $ | 8.83 | |
| Less reconciling items: | | | | | |
| (Losses)/gains on undesignated financial derivatives due to fair value changes (see Table 14) | (0.34) | | | 0.93 | | | 0.74 | |
| (Losses)/gains on hedging activities due to fair value changes | (0.93) | | | (0.83) | | | 0.41 | |
| Unrealized gains on trading securities | — | | | 0.03 | | | 0.01 | |
| Net effects of amortization of premiums/discounts and deferred gains on assets consolidated at fair value | 0.01 | | | (0.01) | | | (0.04) | |
| Net effects of terminations or net settlements on financial derivatives | 0.11 | | | 0.10 | | | 0.16 | |
| Issuance costs on the retirement of preferred stock | (0.15) | | | (0.18) | | | — | |
| Income tax effect related to reconciling items | 0.24 | | | (0.05) | | | (0.27) | |
| Sub-total | (1.06) | | | (0.01) | | | 1.01 | |
| Core Earnings - Diluted EPS | $ | 9.33 | | | $ | 8.70 | | | $ | 7.82 | |
| | | | | |
| Shares used in per share calculation (GAAP and Core Earnings) | 10,786 | | | 10,778 | | | 10,746 | |
|
| | | | | | | | | | | |
| Reconciliation of GAAP Basic Earnings Per Share to Core Earnings Basic Earnings Per Share |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands, except per share amounts) |
| GAAP - Basic EPS | $ | 6.73 |
| | $ | 6.12 |
| | 4.33 |
|
| Less reconciling items: | | | | | |
| Gains on financial derivatives and hedging activities due to fair value changes | 0.90 |
| | 1.30 |
| | 1.00 |
|
| Unrealized (losses)/gains on trading securities | — |
| | 0.14 |
| | 0.11 |
|
| Amortization of premiums/discounts and deferred gains on assets consolidated at fair value | (0.13 | ) | | (0.08 | ) | | (0.12 | ) |
| Net effects of terminations or net settlements on financial derivatives and hedging activities | 0.25 |
| | 0.21 |
| | (0.07 | ) |
| Loss on retirement of Farmer Mac II LLC Preferred Stock | — |
| | — |
| | (0.74 | ) |
| Re-measurement of net deferred tax asset due to enactment of new tax legislation | (0.13 | ) | | — |
| | — |
|
| Income tax effect related to reconciling items | (0.36 | ) | | (0.55 | ) | | (0.15 | ) |
| Sub-total | 0.53 |
| | 1.02 |
| | 0.03 |
|
| Core Earnings - Basic EPS | $ | 6.20 |
| | $ | 5.10 |
| | $ | 4.30 |
|
| | | | | | |
| Shares used in per share calculation (GAAP and Core Earnings) | 10,594 |
| | 10,477 |
| | 10,949 |
|
|
| | | | | | | | | | | |
| Reconciliation of GAAP Diluted Earnings Per Share to Core Earnings Diluted Earnings Per Share |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands, except per share amounts) |
| GAAP - Diluted EPS | $ | 6.60 |
| | $ | 5.97 |
| | $ | 4.19 |
|
| Less reconciling items: | | | | | |
| Gains on financial derivatives and hedging activities due to fair value changes | 0.87 |
| | 1.26 |
| | 0.97 |
|
| Unrealized (losses)/gains on trading securities | — |
| | 0.14 |
| | 0.11 |
|
| Amortization of premiums/discounts and deferred gains on assets consolidated at fair value | (0.12 | ) | | (0.08 | ) | | (0.12 | ) |
| Net effects of terminations or net settlements on financial derivatives and hedging activities | 0.25 |
| | 0.20 |
| | (0.06 | ) |
| Loss on retirement of Farmer Mac II LLC Preferred Stock | — |
| | — |
| | (0.72 | ) |
| Re-measurement of net deferred tax asset due to enactment of new tax legislation | (0.13 | ) | | — |
| | — |
|
| Income tax effect related to reconciling items | (0.35 | ) | | (0.53 | ) | | (0.15 | ) |
| Sub-total | 0.52 |
| | 0.99 |
| | 0.03 |
|
| Core Earnings - Diluted EPS | $ | 6.08 |
| | $ | 4.98 |
| | $ | 4.16 |
|
| | | | | | |
| Shares used in per share calculation (GAAP and Core Earnings) | 10,803 |
| | 10,746 |
| | 11,309 |
|
The six non-GAAP reconciling items between net income attributable to common stockholders and core earnings are:
1. GainsLosses on financial derivatives due to fair value changes are presented by two reconciling items in Table 6 above: (a) (Losses)/gains on undesignated financial derivatives due to fair value changes; and (b) Losses on hedging activities due to fair value changes. The table below calculates the non-GAAP reconciling item for gains/(losses)losses on financial derivatives and hedging activities due to fair value changes.changes:
Table 48
| | | | | | | | | | | | | | | | | |
| Non-GAAP Reconciling Items for (Losses)/Gains on Hedging Activities due to Fair Value Changes |
| | For the Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | | |
| (Losses)/gains due to fair value changes (see Table 6.2) | $ | (9,184) | | | $ | (7,907) | | | $ | 4,941 | |
| Initial cash payment (received) at inception of swap | (835) | | | (1,103) | | | (492) | |
| (Losses)/gains on hedging activities due to fair value changes | $ | (10,019) | | | $ | (9,010) | | | $ | 4,449 | |
|
| | | | | | | | | | | |
| Non-GAAP Reconciling Items for Unrealized Gains/(Losses) on Financial Derivatives and Hedging Activities |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Fair value hedges: | | | | | |
| (Losses)/gains due to fair value changes (see Table 9) | $ | (719 | ) | | $ | 5,043 |
| | $ | 9,065 |
|
| No hedge designation: | | | | | |
| Gains due to fair value changes (see Table 9) | 10,218 |
| | 8,585 |
| | 1,859 |
|
Gains on financial derivatives and hedging activities due to fair value changes
| $ | 9,499 |
| | $ | 13,628 |
| | $ | 10,924 |
|
2. Unrealized (losses)/gains on trading securities. The unrealized gains/(losses)/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. AmortizationThe net effects of 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 effecteffects of terminations or net settlements on financial derivatives and hedging activities.derivatives. These terminations or net settlements relate to:
•Forward contracts on the debt of other GSEs and futures contracts on U.S. Treasury securities. These contracts are used as a short-term economic hedge of the issuance of debt. For GAAP purposes, realized gains or losses on settlements of these contracts are reported in the consolidated statements of operations in the period in which they occur. For core earnings purposes, these realized gains or losses are deferred and amortized as net yield adjustments over the term of the related debt, which generally ranges from 3 to 15 years.
•Initial cash payments received by Farmer Mac upon the inception of certain swaps. When there is no direct payment arrangement between a swap dealer counterparty and a debt dealer issuing Farmer Mac's medium-term notes for a particular transaction, Farmer Mac may receive an initial cash payment from the swap dealer at the inception of the swap to offset dollar-for-dollar the amount of the discount on the associated hedged debt. For GAAP purposes, changes in fair value of the swaps are recognized in "Gains on financial derivatives, and hedging activities," whereaswhile the economically offsetting discount on the associated hedged debt is amortized over the term of the debt as an adjustment to its yield. For purposes of core earnings, purposes, these initial cash payments are deferred and amortized as net yield adjustments over the term of the related debt, which generally ranges from 3 to 15 years.
5. The lossrecognition of deferred issuance costs on retirementthe retirements of the Farmer Mac II LLCSeries A Preferred Stock. This lossStock in firstthird quarter 20152020 and Series B Preferred Stock in second quarter 2019 has been excluded from core earnings because it isthey are not a frequently occurring transaction and is nottransactions, nor are they indicative of future operating results.
This is also consistent with Farmer Mac's previous treatment of these types of originationdeferred issuance costs associated with securities underwriting that are capitalized and deferred during the liferetirement of the security.
6. Re-measurement of net deferred tax asset due to enactment of new tax legislation. This non-recurring, non-cash charge to income tax expensepreferred stock. The next eligible preferred stock redemption date is in fourththird quarter 2017 was the result of a re-measurement by Farmer Mac of its net deferred tax asset at a lower federal corporate tax rate due to enactment of the new tax legislation on December 22, 2017. This charge has been excluded from core earnings because it is not the result of frequently occurring transactions, is not indicative of future operating results, and is a non-cash charge. Farmer Mac re-measured its net deferred tax asset at the newly-enacted 21 percent corporate tax rate which will be applied when temporary differences that gave rise to the net deferred tax asset will be realized or settled.2024.
The following sections provide more detail regardingabout specific components of Farmer Mac's results of operations.
Net Interest Income. The following table provides information regardingabout interest-earning assets and funding for the years ended December 31, 2017, 2016,2020, 2019, and 2015.2018. 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 59
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended |
| | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| Average
Balance | | Income/
Expense | | Average
Rate | | Average
Balance | | Income/
Expense | | Average
Rate | | Average
Balance | | Income/
Expense | | Average
Rate |
| | (dollars in thousands) |
| Interest-earning assets: | | | | | | | | | | | | | | | | | |
| Cash and investments | $ | 4,180,158 | | | $ | 42,144 | | | 1.01 | % | | $ | 3,218,286 | | | $ | 81,522 | | | 2.53 | % | | $ | 2,723,136 | | | $ | 55,179 | | | 2.03 | % |
Loans, Farmer Mac Guaranteed Securities and USDA Securities(1) | 16,950,819 | | | 407,296 | | | 2.40 | % | | 15,214,248 | | | 502,694 | | | 3.30 | % | | 13,917,222 | | | 434,585 | | | 3.12 | % |
| Total interest-earning assets | 21,130,977 | | | 449,440 | | | 2.13 | % | | 18,432,534 | | | 584,216 | | | 3.17 | % | | 16,640,358 | | | 489,764 | | | 2.94 | % |
| Funding: | | | | | | | | | | | | | | | | | |
| Notes payable due within one year | 3,937,104 | | | 24,242 | | | 0.62 | % | | 3,758,256 | | | 86,031 | | | 2.29 | % | | 3,412,019 | | | 62,447 | | | 1.83 | % |
Notes payable due after one year(2) | 16,869,918 | | | 241,211 | | | 1.43 | % | | 14,116,085 | | | 332,719 | | | 2.36 | % | | 12,501,093 | | | 259,638 | | | 2.08 | % |
Total interest-bearing liabilities(3) | 20,807,022 | | | 265,453 | | | 1.28 | % | | 17,874,341 | | | 418,750 | | | 2.34 | % | | 15,913,112 | | | 322,085 | | | 2.02 | % |
| Net non-interest-bearing funding | 323,955 | | | — | | | | | 558,193 | | | — | | | | | 727,246 | | | — | | | |
| Total funding | 21,130,977 | | | 265,453 | | | 1.26 | % | | 18,432,534 | | | 418,750 | | | 2.27 | % | | 16,640,358 | | | 322,085 | | | 1.94 | % |
| Net interest income/yield prior to consolidation of certain trusts | 21,130,977 | | | 183,987 | | | 0.87 | % | | 18,432,534 | | | 165,466 | | | 0.90 | % | | 16,640,358 | | | 167,679 | | | 1.01 | % |
Net effect of consolidated trusts(4) | 1,396,850 | | | 6,601 | | | 0.47 | % | | 1,544,052 | | | 7,669 | | | 0.50 | % | | 1,443,394 | | | 6,757 | | | 0.47 | % |
| Net interest income/yield | $ | 22,527,827 | | | $ | 190,588 | | | 0.85 | % | | $ | 19,976,586 | | | $ | 173,135 | | | 0.87 | % | | $ | 18,083,752 | | | $ | 174,436 | | | 0.96 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| | Average
Balance | | Income/
Expense | | Average
Rate | | Average
Balance | | Income/
Expense | | Average
Rate | | Average
Balance | | Income/
Expense | | Average
Rate |
| | (dollars in thousands) |
| Interest-earning assets: | | | | | | | | | | | | | | | | | |
| Cash and investments | $ | 2,703,306 |
| | $ | 34,586 |
| | 1.28 | % | | $ | 3,572,018 |
| | $ | 27,042 |
| | 0.76 | % | | $ | 3,310,948 |
| | $ | 13,338 |
| | 0.40 | % |
Loans, Farmer Mac Guaranteed Securities and USDA Securities(1) | 12,763,456 |
| | 320,932 |
| | 2.51 | % | | 11,058,332 |
| | 252,406 |
| | 2.28 | % | | 10,453,343 |
| | 231,342 |
| | 2.21 | % |
| Total interest-earning assets | 15,466,762 |
| | 355,518 |
| | 2.30 | % | | 14,630,350 |
| | 279,448 |
| | 1.91 | % | | 13,764,291 |
| | 244,680 |
| | 1.78 | % |
| Funding: | |
| | |
| | | | |
| | |
| | |
| | |
| | |
| | |
|
| Notes payable due within one year | 5,148,548 |
| | 49,318 |
| | 0.96 | % | | 7,304,519 |
| | 37,648 |
| | 0.52 | % | | 6,013,079 |
| | 13,472 |
| | 0.22 | % |
Notes payable due after one year(2) | 9,683,124 |
| | 154,789 |
| | 1.60 | % | | 6,882,357 |
| | 105,828 |
| | 1.54 | % | | 7,235,869 |
| | 108,479 |
| | 1.50 | % |
Total interest-bearing liabilities(3) | 14,831,672 |
| | 204,107 |
| | 1.38 | % | | 14,186,876 |
| | 143,476 |
| | 1.01 | % | | 13,248,948 |
| | 121,951 |
| | 0.92 | % |
| Net non-interest-bearing funding | 635,090 |
| | — |
| | |
| | 443,474 |
| | — |
| | |
| | 515,343 |
| | — |
| | |
|
| Total funding | 15,466,762 |
| | 204,107 |
| | 1.32 | % | | 14,630,350 |
| | 143,476 |
| | 0.98 | % | | 13,764,291 |
| | 121,951 |
| | 0.89 | % |
| Net interest income/yield prior to consolidation of certain trusts | 15,466,762 |
| | 151,411 |
| | 0.98 | % | | 14,630,350 |
| | 135,972 |
| | 0.93 | % | | 13,764,291 |
| | 122,729 |
| | 0.89 | % |
Net effect of consolidated trusts(4) | 1,251,048 |
| | 6,236 |
| | 0.50 | % | | 905,005 |
| | 4,302 |
| | 0.48 | % | | 546,022 |
| | 3,078 |
| | 0.56 | % |
| Net interest income/yield | $ | 16,717,810 |
| | $ | 157,647 |
| | 0.94 | % | | $ | 15,535,355 |
| | $ | 140,274 |
| | 0.90 | % | | $ | 14,310,313 |
| | $ | 125,807 |
| | 0.88 | % |
| |
(1)
| (1)Excludes interest income of $45.0 million, $32.5 million, and $20.1 million in 2017, 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 $38.8 million, $28.2 million, and 17.1 million in 2017, 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 $157.6of $54.1 million,for 2017, $60.9 million, and $54.5 million in 2020, 2019, and 2018, 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 $47.5 million, $53.2 million, and $47.8 million in 2020, 2019, and 2018, 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.
For 2020 compared to $140.3 million for 2016 and $125.8 million for 2015. The overall net interest yield was 0.94 percent for 2017, compared to 0.90 percent for 2016 and 0.88 percent for 2015.
The $17.32019, the $17.5 million increase in net interest income for 2017 comparedwas primarily due to 2016net business volume growth across most lines of business, which contributed $23.2 million to net interest income. This was drivenpartially offset by net growth in Farm & Ranch loans, on-balance sheet AgVantage Securities, and USDA Securities. Another factor contributing to the increase was the effect of ana $4.1 million increase in short-termfunding and liquidity costs and a decrease of $1.3 million in net fair value changes from designated financial derivatives as a result of fluctuations in interest rates on assets and liabilities indexed to LIBOR due torates. In percentage terms, the Federal Reserve's decisions since December 2016 to raise the target range for the federal funds rate. This effect ondecrease of 0.02% in net interest income occurred because interest expense usedyield was primarily attributable to calculatean increase of 0.05% in funding and liquidity costs and 0.01% in net interest income does not include all the funding expensesfair value changes from designated financial derivatives, partially offset by an increase of 0.04% related to these assets, specificallynew business volume.
For 2019 compared to 2018, the expense on financial derivatives not designated in hedge accounting relationships. This increase in short-term rates on assets and liabilities indexed to LIBOR did not have a similar effect on
net effective spread because net effective spread includes interest expense from all funding related to those assets, including interest expense from financial derivatives not designated in hedge accounting relationships. Also contributing to the year-over-year increase was an increase in the net effect of consolidated trusts resulting from an increase in securitization of Farm & Ranch loans throughout 2016 and 2017. Farmer Mac earns the difference between the interest income recognized on loans in consolidated trusts and the related interest expense recognized on debt securities of consolidated trusts held by third parties. The increase$1.3 million decrease in net interest income was offsetdue to a $12.8 million decrease in part by annet fair value changes from fair value hedge accounting relationships, a $5.2 million increase in net yield adjustments related to amortizationfunding and liquidity costs and a $1.7 million decrease in cash-basis interest income. These factors were partially offset by:
1)$15.1 million from business volume, including:
•$12.3 million in new business volume,
•$1.9 million from the refinancing of premiums existing Institutional Credit business volume at higher spreads,
•and discounts on assets$0.9 million from consolidated at fair value. trusts; and
2)$3.4 million in interest income fluctuations, including:
•the absence of $2.0 million from the Interest-Only Amortization, and
•the receipt of a $1.4 million prepayment penalty.
The 4 basis point increase in net interest yield in 2017 compared to 2016decrease of 0.09% was primarily attributable to a reduction in the average balancedecrease of lower-earning cash and cash equivalents and investment securities.
The $14.5 million increase0.06% in net interest income for 2016 compared to 2015 was due to several factors. One factor was the effect offair value changes from designated financial derivatives and an increase of 0.05% in short-term interest rates on assetsfunding 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. As noted above, the effect on net interest income occurred because interest expense does not include the expense on financial derivatives not designated in hedge accounting relationships. Another factor contributing to the year-over-year increase in net interest income wasliquidity costs, partially offset by an increase in the average outstanding balance of Farm & Ranch loans, USDA Securities, and AgVantage securities. Also contributing to the increase were (1) lower 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) an increase in the net effect of consolidated trusts due to an increase in securitization activity of Farm & Ranch loans during 2016. The increase was offset in part by (1) higher net yield adjustments0.01% from amortization of purchase premiums on certain Farm & Ranch loans and (2) a tighter spread on a large AgVantage security that was refinanced in first quarter 2016 at a shorter maturity than the original security. The 2 basis point increase in net interest yield for 2016 compared to 2015 was primarily driven by a lower average balance in cash and cash equivalents primarily during the second half of 2016.business volume.
The following table sets forth information regardingabout 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, and then allocated based on theirthe relative size.size of rate and volume changes from the prior period.
Table 610
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 vs. 2019 | | 2019 vs. 2018 |
| | Increase/(Decrease) Due to | | Increase/(Decrease) Due to |
| | Rate | | Volume | | Total | | Rate | | Volume | | Total |
| | (in thousands) |
| Income from interest-earning assets: | | | | | | | | | | | |
| Cash and investments | $ | (58,877) | | | $ | 19,499 | | | $ | (39,378) | | | $ | 15,253 | | | $ | 11,090 | | | $ | 26,343 | |
| Loans, Farmer Mac Guaranteed Securities and USDA Securities | (148,159) | | | 52,761 | | | (95,398) | | | 26,158 | | | 41,951 | | | 68,109 | |
| Total | (207,036) | | | 72,260 | | | (134,776) | | | 41,411 | | | 53,041 | | | 94,452 | |
| Expense from other interest-bearing liabilities | (213,715) | | | 60,418 | | | (153,297) | | | 54,225 | | | 42,440 | | | 96,665 | |
Change in net interest income prior to consolidation of certain trusts(1) | $ | 6,679 | | | $ | 11,842 | | | $ | 18,521 | | | $ | (12,814) | | | $ | 10,601 | | | $ | (2,213) | |
(1)Excludes the effect of debt in consolidated trusts with beneficial interests owned by third parties.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 vs 2016 | | 2016 vs 2015 |
| | Increase/(Decrease) Due to | | Increase/(Decrease) Due to |
| | Rate | | Volume | | Total | | Rate | | Volume | | Total |
| | (in thousands) |
| Income from interest-earning assets: | | | | | | | | | | | |
| Cash and investments | $ | 15,303 |
| | $ | (7,759 | ) | | $ | 7,544 |
| | $ | 12,576 |
| | $ | 1,128 |
| | $ | 13,704 |
|
| Loans, Farmer Mac Guaranteed Securities and USDA Securities | 27,222 |
| | 41,304 |
| | 68,526 |
| | 7,403 |
| | 13,661 |
| | 21,064 |
|
| Total | 42,525 |
| | 33,545 |
| | 76,070 |
| | 19,979 |
| | 14,789 |
| | 34,768 |
|
| Expense from other interest-bearing liabilities | 53,847 |
| | 6,784 |
| | 60,631 |
| | 12,535 |
| | 8,990 |
| | 21,525 |
|
Change in net interest income prior to consolidation of certain trusts(1) | $ | (11,322 | ) | | $ | 26,761 |
| | $ | 15,439 |
| | $ | 7,444 |
| | $ | 5,799 |
| | $ | 13,243 |
|
| |
(1)
| Excludes the effect of debt in consolidated trusts with beneficial interests owned by third parties.
|
The following table presents a reconciliation of net interest income and net interest yield to net effective spread. Net effective spread is measured by: including (1) including expenses related to undesignated financial derivatives, and hedging activities, which consists of income or expense related to contractual amounts due on financial derivatives not designated in hedge accounting relationships (the income or expense related to financial derivatives designated in hedge accounting relationships is already included in net interest income), and (2) including the amortization of losses due to terminations or net settlements onof financial derivativesderivatives; and hedging activities; andexcluding (3) excluding the amortization of premiums and discounts on assets consolidated at fair value, and(4) the net effects of consolidated trusts with beneficial interests owned by third parties.parties, and (5) the fair value changes of financial derivatives and corresponding financial assets or liabilities in fair value hedge relationships. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread" for more information regarding the explanation ofabout net effective spread.
Table 711
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | Dollars | | Yield | | Dollars | | Yield | | Dollars | | Yield |
| | | | | | |
| Net interest income/yield | $ | 190,588 | | | 0.85 | % | | $ | 173,135 | | | 0.87 | % | | $ | 174,436 | | | 0.96 | % |
| Net effects of consolidated trusts | (6,601) | | | 0.02 | % | | (7,669) | | | 0.03 | % | | (6,757) | | | 0.04 | % |
| Expense related to undesignated financial derivatives | 3,468 | | | 0.02 | % | | (5,095) | | | (0.03) | % | | (11,685) | | | (0.07) | % |
| Amortization of premiums/discounts on assets consolidated at fair value | 197 | | | — | % | | 398 | | | — | % | | 417 | | | 0.01 | % |
| Amortization of losses due to terminations or net settlements on financial derivatives | 120 | | | — | % | | (68) | | | — | % | | (275) | | | — | % |
| Fair value changes on fair value hedge relationships | 9,184 | | | 0.04 | % | | 7,907 | | | 0.04 | % | | (4,941) | | | (0.03) | % |
| Net effective spread | $ | 196,956 | | | 0.93 | % | | $ | 168,608 | | | 0.91 | % | | $ | 151,195 | | | 0.91 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | Dollars | | Yield | | Dollars | | Yield | | Dollars | | Yield |
| | (dollars in thousands) |
| Net interest income/yield | $ | 157,647 |
| | 0.94 | % | | $ | 140,274 |
| | 0.90 | % | | $ | 125,807 |
| | 0.88 | % |
| Net effects of consolidated trusts | (6,236 | ) | | 0.04 | % | | (4,302 | ) | | 0.03 | % | | (3,078 | ) | | 0.01 | % |
| Expense related to undesignated financial derivatives | (10,261 | ) | | (0.07 | )% | | (11,480 | ) | | (0.07 | )% | | (5,649 | ) | | (0.04 | )% |
| Amortization of premiums/discounts on assets consolidated at fair value | 1,191 |
| | 0.01 | % | | 610 |
| | — | % | | 2,300 |
| | 0.02 | % |
| Amortization of losses due to terminations or net settlements on financial derivatives and hedging activities | (1,038 | ) | | (0.01 | )% | | (2,030 | ) | | (0.02 | )% | | (1,952 | ) | | (0.02 | )% |
| Net effective spread | $ | 141,303 |
| | 0.91 | % | | $ | 123,072 |
| | 0.84 | % | | $ | 117,428 |
| | 0.85 | % |
Net effective spread was $141.3 million for 2017For 2020 compared to $123.1 million for 2016 and $117.4 million for 2015. In percentage terms, net effective spread for 2017 was 0.91 percent compared to 0.84 percent for 2016 and 0.85 percent for 2015.
For 2017 compared to 2016,2019, the $18.2$28.3 million increase in net effective spread in dollars was primarily attributabledue to (1) growth in on-balance sheet AgVantage securities, Farm & Ranch loans, and othernet business volume growth across most lines of business, which increasedcontributed $23.2 million to net effective spread, by approximately $15.1and a $4.6 million decrease in 2017; and (2) changes in Farmer Mac'snon-GAAP funding strategies and improvements in LIBOR-based short-term funding costs for floating rate assets indexed to LIBOR, which added approximately $4.0 million in 2017. Net effective spread incosts. In percentage terms, increased 7 basis points in 2017the increase of 0.02% was primarily attributable to new business volume.
For 2019 compared to 2016 primarily due to2018, the decrease in the average balance of lower-earning cash and cash equivalents and investment securities, which added approximately 5 basis points to net effective spread. Also contributing to the increase were the effects of changes in Farmer Mac's funding strategy and a favorable LIBOR-based funding market, which added approximately 3 basis points in 2017.
For 2016 compared to 2015, the $5.7$17.4 million increase in dollars was attributable to growth in outstanding business volume. The 1 basis point contraction in net effective spread in dollars was due to:
1)$14.2 million increase from business volume, including:
•$12.3 million in net new business volume,
•$1.9 million from the refinancing of existing Institutional Credit business volume at higher spreads;
2)$1.6 million in interest income fluctuations, including:
•the absence of $2.0 million from the Interest-Only Amortization,
•the receipt of a $1.4 million prepayment penalty,
•partially offset by a $1.7 million decrease in cash-basis interest income; and
3)$1.6 million decrease in non-GAAP funding costs.
In percentage terms, net effective spread remained at 0.91% in both 2019 and 2018 primarily because the increase from the absence of the Interest-Only Amortization was primarily attributable to a higher average balance in lower-earningoffset by the decrease from narrower spreads on liquidity investment securities in 2016 compared to 2015.securities.
See Note 14 to the consolidated financial statements for more information regardingabout net interest income and net effective spread from Farmer Mac's individual business segments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Supplemental Information" for quarterly net effective spread by line of business.
Provision for and Release of Allowance for Loan Losses and Reserve for Losses. The following table summarizes the components of Farmer Mac's total allowance for losses for each year in the three-year period ended December 31, 2017:2020:
Table 812
| | | | | | | | | | | | | | | | | |
| Allowance
for
Losses | | Reserve
for Losses | | Total
Allowance
for Losses |
| (in thousands) |
| Balance as of January 1, 2018 | $ | 6,796 | | | $ | 2,070 | | | $ | 8,866 | |
| Provision for losses | 238 | | | 97 | | | 335 | |
| Charge-offs | (17) | | | — | | | (17) | |
| Balance as of December 31, 2018 | $ | 7,017 | | | $ | 2,167 | | | $ | 9,184 | |
| Provision for/(release of) losses | 3,504 | | | (3) | | | 3,501 | |
| Charge-offs | (67) | | | — | | | (67) | |
| Balance as of December 31, 2019 | $ | 10,454 | | | $ | 2,164 | | | $ | 12,618 | |
| Cumulative effect adjustment from adoption of current expected credit loss standard | 1,793 | | | 863 | | | 2,656 | |
| Adjusted beginning balance | 12,247 | | | 3,027 | | | 15,274 | |
| Provision for/(release of) losses | 7,810 | | | 250 | | | 8,060 | |
| Charge-offs | (5,759) | | | — | | | (5,759) | |
| Ending balance | $ | 14,298 | | | $ | 3,277 | | | $ | 17,575 | |
|
| | | | | | | | | | | |
| | Allowance
for Loan
Losses | | Reserve
for Losses | | Total
Allowance
for Losses |
| | (in thousands) |
| Balance as of January 1, 2015 | $ | 5,864 |
| | $ | 4,263 |
| | $ | 10,127 |
|
| Provision for/(release of) losses | 2,388 |
| | (2,180 | ) | | 208 |
|
| Charge-offs | (3,772 | ) | | — |
| | (3,772 | ) |
| Balance as of December 31, 2015 | $ | 4,480 |
| | $ | 2,083 |
| | $ | 6,563 |
|
| Provision for/(release of) losses | 1,065 |
| | (63 | ) | | $ | 1,002 |
|
| Charge-offs | (130 | ) | | — |
| | (130 | ) |
| Balance as of December 31, 2016 | $ | 5,415 |
| | $ | 2,020 |
| | $ | 7,435 |
|
| Provision for losses | 1,708 |
| | 50 |
| | 1,758 |
|
| Charge-offs | (327 | ) | | — |
| | (327 | ) |
| Balance as of December 31, 2017 | $ | 6,796 |
| | $ | 2,070 |
| | $ | 8,866 |
|
As of December 31, 2017During 2020, the allowance and December 31, 2016, Farmer Mac's allowance for loan losses was $6.8 million and $5.4 million, respectively, and its reserve for losses was $2.1 million and $2.0 million, respectively.
The increase inimpacted by the provisioncumulative transition adjustment that we recorded related to the allowanceadoption of CECL and provisions for loan losses recorded during 2017 as compared to 2016, was attributable to (1) an increase in the general allowance due to overall net volume growth in on-balance sheet Farm & Ranch loans; and (2) an increase in the specific allowance for certain impaired on-balance sheet crop and permanent planting loans resulting from both an increase in the outstanding balance of such loans and downgradeschanges in risk ratings, economic factors, and net business volume growth during the year.
The cumulative effect adjustment from the adoption of CECL on certain of those loans. The increase in the provisionJanuary 1, 2020 was offset in part by a modest decline in loss rates used to estimate probable losses. The increase in the provision to the reserve for losses recorded during 2017 as compared to 2016 was primarily attributable to an increase in the general reserve due to downgrades in risk ratings on certain unimpaired Agricultural Storage and Processing loans underlying LTSPCs. The increase in the provision to the reserve for losses was offset in part by a net decrease in the balance of loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities. The charge-offs recorded during 2017 were primarily related to two impaired crop loans with one borrower that were foreclosed and transitioned to REO during first quarter 2017. Farmer Mac had previously recorded a specific allowance of $0.2 million on these impaired crop loans as of December 31, 2016. During second quarter 2017, Farmer Mac sold the related properties for $5.4$2.7 million and recognized a $0.8 million gain on salewas recorded directly to retained earnings, net of REO.
tax. The provisions totransition adjustment was the allowance for loan losses recorded during 2016 were attributable todifference between (1) an increase in the general allowance due to overall net volume growth in on-balance sheet Farm & Ranch loans; (2) downgrades in risk ratings for certain loans; and (3) an increase in the specific allowance for on-balance sheet impaired loans resulting from an increase in the outstanding balance of such loans. The releases from the reserve for losses recognized during 2016 were primarily attributable to the release of a specific reserve on an impaired livestock loan underlying an LTSPC that was required to be removed from the LTSPC pool by the originator during third quarter 2016, offset in part by provisions to the reserve for
losses attributable to an increase in the general reserve due to downgrades in risk rating on certain loans underlying LTSPCs.
The provisions to the allowance for loan losses recorded during 2015 were primarily attributable to the establishment of a specific allowance for two Agricultural Storage and Processing loans that financed one canola facility due to a downgrade in risk rating resulting from collateral shortfalls relative to the unpaid principal balance for such loans. In fourth quarter 2015, Farmer Mac purchased these defaulted Agricultural Storage and Processing loans under the terms of the applicable LTSPC agreement. As a result, Farmer Mac recognized a charge-off of $3.7 million in fourth quarter 2015. Farmer Mac had previously established a specific allowance of $3.6 million for these loans as of September 30, 2015. In January 2016, Farmer Mac received funds in the amount of $9.8 million to pay off these Agricultural Storage and Processing loans. The provisions to the total allowance for losses were offset byon December 31, 2019 that reflected probable incurred losses under the previous accounting standard and (2) the total allowance for losses on January 1, 2020 that reflected expected losses under CECL.
The cumulative effect adjustment for credit losses on on-balance sheet assets was $1.8 million after an increase of $5.4 million to the allowance for losses on Rural Utilities loans and Farmer Mac Guaranteed Securities and a $3.6 million decrease in the allowance for losses on Farm & Ranch loans and Farmer Mac Guaranteed Securities. Although Farmer Mac has never experienced any credit losses in its portfolio of Rural Utilities loans and Farmer Mac Guaranteed Securities, our estimate of expected losses is based upon reasonable and supportable forecasts over the expected lives of these assets. The cumulative effect of CECL on the Farm & Ranch portfolio was a reduction in the specific allowance for a permanent planting loanlosses on those loans and
Farmer Mac Guaranteed Securities that reflected the expected recovery rate based on loan-to-value ratios in those portfolios.
The cumulative effect adjustment for credit losses on LTSPCs was $0.9 million after an updated appraised valueincrease of $1.0 million on Rural Utilities LTSPCs and a decrease of $0.1 million on Farm & Ranch LTSPCs.
Our estimates of expected losses are based on historical information and reasonable and supportable forecasts. Our reasonable and supportable forecasts incorporate economic factor forecasts and are sensitive to changes in those economic factor forecasts. As of December 31, 2020, our forecasts included the effects of the collateral underlying that loanCOVID-19 pandemic on economic factors such as land values, gross domestic product, credit spreads, and by releases fromunemployment expectations. The economic factor related to unemployment expectations had the general reserve frommost significant impact on our 2020 provision for credit losses, particularly on our estimate of expected losses in the reserveRural Utilities portfolio. Unemployment expectations did not affect our estimate of expected losses on the Farm & Ranch portfolio as much because of stable farm land values and improved credit quality in the Farm & Ranch portfolio during the year. The provision to Farmer Mac's allowance for losses due to substantial paydownsfor on-balance sheet assets was $7.8 million during 2020, reflecting $4.7 million for expected losses on Rural Utilities loans and a provision of Agricultural Storage$3.0 million on Farm & Ranch loans and Processing loans underlying LTSPCs resulting from repayments of these loans at par.Farmer Mac Guaranteed Securities.
See NoteNotes 8 and 12 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. GuaranteeThe following table presents guarantee and commitment fees, which compensate Farmer Mac for assuming the credit risk on loans underlying off-balance sheet Farmer Mac Guaranteed Securities and LTSPCs, were $14.1 million for 2017, comparedthe years ended December 31, 2020, 2019, and 2018:
Table 13
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (in thousands) |
| Guarantee and commitment fees | $ | 12,549 | | | $ | 13,666 | | | $ | 13,976 | |
In Farmer Mac's presentation of core earnings, guarantee and commitment fees include interest income and interest expense related to$14.9 million and $14.1 million, respectively, for 2016 and 2015. consolidated trusts owned by third parties to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee on the consolidated Farmer Mac Guaranteed Securities. The decrease in guarantee and commitment fees for 2017the year ended December 31, 2020 compared to 20162019 was attributableprimarily due to decreased LTSPC volume. As adjusted for the refinancing of a $1.0 billion AgVantage security with Metropolitan Life Insurance Company ("MetLife") in April 2017 into three new on-balance sheet AgVantage securities earning interest income. Previously, $970.0 million of the $1.0 billion AgVantage security that matured in April 2017 had been sold to third parties and reported as off-balance sheet business volume in the Institutional Credit line of business on which Farmer Mac earned a guarantee fee. Also contributing to the decrease was a lower average outstanding balance of off-balance sheet Farm & Ranch Guaranteed Securities and Farm & Ranch loans underlying LTSPCs. The decrease was offset in part by an increase in the average outstanding balance of off-balance sheet Farmer Mac Guaranteed USDA Securities and an increase in the average outstanding balance of Rural Utilities loans underlying LTSPCs. The increase incore earnings presentation, guarantee and commitment fees were $19.2 million for 20162020, compared to 2015 was$21.3 million and $20.7 million for 2019 and 2018, respectively.
For more information about net income attributable to common stockholders, the additioncomposition of $0.5 billion in third quarter 2015core earnings, and $0.4 billion in second quarter 2016a reconciliation of Rural Utilities loans under LTSPCs, offset in part by lower average outstanding balancesnet income attributable to common stockholders to core earnings, see "Management's Discussion and Analysis of off-balance sheet Farm & Ranch Guaranteed SecuritiesFinancial Condition and Farm & Ranch loans underlying LTSPCs.Results of Operations—Results of Operations." For more information about the non-GAAP measures Farmer Mac uses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures."
Gains on Financial Derivatives and Hedging Activities. The effect of unrealized and realized gains on Farmer Mac's financial derivatives and hedging activities was net gains of $0.8 million for 2017, compared to net gains of $2.3 million and $2.5 million, respectively for 2016 and 2015.
(Losses)/gains on financial derivatives. The components of gains and losses on financial derivatives and hedging activities for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 are summarized in the following table:
Table 914
| | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (in thousands) |
| (Losses)/gains due to fair value changes | $ | (3,691) | | | $ | 10,077 | | | $ | 7,958 | |
| Accrual of contractual payments | 3,468 | | | (5,095) | | | (11,685) | |
| (Losses)/gains due to terminations or net settlements | (23) | | | 300 | | | 40 | |
| (Losses)/gains on financial derivatives | $ | (246) | | | $ | 5,282 | | | $ | (3,687) | |
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Fair value hedges: | | | | | |
| (Losses)/gains due to fair value changes: | | | | | |
Financial derivatives(1) | $ | 1,694 |
| | $ | 25,365 |
| | $ | 5,965 |
|
| Hedged items | (2,413 | ) | | (20,322 | ) | | 3,100 |
|
| (Losses)/gains on fair value hedging activities | (719 | ) | | 5,043 |
| | 9,065 |
|
| Cash flow hedges: | | | | | |
| Loss recognized (ineffective portion) | (320 | ) | | (353 | ) | | (551 | ) |
| Losses on cash flow hedges | (320 | ) | | (353 | ) | | (551 | ) |
| No hedge designation: | | | | | |
| Gains due to fair value changes | 10,218 |
| | 8,585 |
| | 1,859 |
|
| Accrual of contractual payments | (9,941 | ) | | (11,127 | ) | | (5,098 | ) |
| Gains/(losses) due to terminations or net settlements | 1,515 |
| | 163 |
| | (2,744 | ) |
| Gains/(losses) on financial derivatives not designated in hedging relationships | 1,792 |
| | (2,379 | ) | | (5,983 | ) |
| Gains on financial derivatives and hedging activities | $ | 753 |
| | $ | 2,311 |
| | $ | 2,531 |
|
| |
(1)
| IncludedThese changes in the assessment of hedge effectiveness as of December 31, 2017, but excluded from the amounts in the table, were gains of $0.1 million for the year ended December 31, 2017, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amounts recognized as hedge ineffectiveness for the year ended December 31, 2017 were gains of $0.6 million. The comparable amounts as of December 31, 2016 were losses of $5.2 million for the year ended December 31, 2016, attributable to the fair value of the swaps at the inception of the hedging relationship and, accordingly, gains of $0.2 million for the year ended December 31, 2016, attributable to hedge ineffectiveness. The comparable amounts as of December 31, 2015 were losses of $9.2 million for the year ended December 31, 2015, attributable to the fair value of the swaps at the inception of the hedging relationship and, accordingly, gains of $0.1 million for the year ended December 31, 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 "(Losses)/gains 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 "(Losses)/gains due to fair value changes." For financial derivatives designated in cash flow hedge accounting relationships, the ineffective portion of changes in fair value are included as "Losses on cash flow hedges" in the table above. 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 relationshipsundesignated financial derivatives is shown as expense related to financial derivatives. Payments or receipts to terminate undesignated derivative positions or net cash settled forward sales contracts on the debt of other GSEs and undesignated U.S. Treasury security futures that are not designated in hedge accounting relationships and initial cash payments received upon the inception of certain undesignated swaps are included in "Gains/(losses)"(Losses)/gains due to terminations or net settlements" in the table above. WhenFor undesignated swaps, when there is no direct payment arrangement between a swap dealer counterparty and a debt dealer issuing Farmer Mac's medium-term notes for a particular transaction, Farmer Mac may receive an initial cash payment from the swap dealer at the inception of the swap to offset dollar-for-dollar the amount of the discount on the associated hedged debt. Changes in the fair value of these swaps are recognized immediately in "Gains/(losses)"(Losses)/gains on financial derivatives, and hedging activities," whereaswhile the offsetting discount on the hedged debt is amortized over the term of the debt as an adjustment to its yield. Thus, there is a timing difference between the recognition of these initial cash payments in "Gains/(losses) on financial derivatives and hedging activities" and the recognition of the discount in interest expense. There is also a presentation difference because the initial cash payments are
included in "Gains/(losses) on financial derivatives and hedging activities," whereas the amortization of the discount is included in interest expense. Additionally, theThe amounts of initial cash payments received by Farmer Mac vary depending uponon the number of the aforementioned type of swaps it executes during a quarter.
(Losses)/gains on Trading SecuritiesOther Income. During 2017, Farmer Mac recorded $24,000The following table presents other income for years ended December 31, 2020, 2019, and 2018:
Table 15
| | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Late fees | $ | 1,292 | | | $ | 1,135 | | | $ | 1,258 | |
| Other | 2,195 | | | 769 | | | 119 | |
| Total other income | $ | 3,487 | | | $ | 1,904 | | | $ | 1,377 | |
The increase in other fees is primarily due to an increase in the fees received from borrowers to modify their long-term fixed borrowing rate to a new lower rate.
Operating Expenses. The components of unrealized losses on trading securities, compared to unrealized gains of $1.5 million during 2016 and unrealized gains of $1.2 million during 2015. During 2017, all of the unrealized losses were related to financial assets that had been selected to be carried at fair value with the related changes in fair value included in earnings (i.e., the "fair value option"), compared to recorded losses of $0.3 million and recorded gains $0.8 million under the fair value option for 2016 and 2015.
Gains on Sale of Real Estate Owned. During 2017, Farmer Mac realized net gains of $1.7 million on sales of real estate owned properties compared to gains of $15,000 and losses of $1,000operating expenses for the 2016years ended December 31, 2020, 2019, and 2015, respectively.2018 are summarized in the following table:
Other Income. Other income totaled $0.8 million during 2017, compared to $1.8 million and $2.3 million, respectively, for 2016 and 2015. Other income during 2017 included the recognition of $0.4 million of appraisal fees received by Farmer Mac's consolidated appraisal company subsidiary, AgVisory, compared to $1.3 million and $0.6 million, respectively, for 2016 and 2015. As of May 1, 2017, Farmer Mac transferred its entire 65% ownership interest in AgVisory back to the limited liability company. Farmer Mac recognized a loss of approximately $0.1 million upon the transfer. Other income during 2017 included the recognition of $0.1 million of losses 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 $0.2 million of losses and $1.0 million of gains, respectively, of previously deferred losses or gains for 2016 and 2015.Table 16
| | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Compensation and employee benefits | $ | 36,502 | | | $ | 28,762 | | | $ | 27,534 | |
| General and administrative | 21,976 | | | 20,311 | | | 19,707 | |
| Regulatory fees | 2,925 | | | 2,788 | | | 2,562 | |
| Total Operating Expenses | $ | 61,403 | | | $ | 51,861 | | | $ | 49,803 | |
a.Compensation and Employee Benefits. CompensationThe increase in compensation and employee benefits were $24.2 million in 2017,expenses for 2020 compared to $22.8 million2019 was primarily due to increased headcount in the current period, higher bonus expense, and $22.0 million, respectively,severance payments made to an executive who resigned in 2016 and 2015.first quarter 2020. The increase in compensation and employee benefits in 20172019 compared to 20162018 was primarily due primarily to an increase in headcounthiring of executives and related employee health insurance costscosts.
b.General and higher payouts of variable incentive compensation resulting from actual performance exceeding certain performance target amounts during 2017.Administrative Expenses (G&A). The increase in compensation and employee benefits was offset in part by $1.3 million in recouped compensation costs related to the forfeiture of unvested equity awards and annual variable incentive compensation resulting from the termination of employment of Farmer Mac's former President and Chief Executive Officer in December 2017. The increase in compensation and employee benefits in 2016G&A expenses for 2020 compared to 2015 was due primarily to an increase in headcount and related employee health insurance costs.
General and Administrative Expenses. General and administrative expenses were $16.0 million for 2017, compared to $15.1 million and $13.1 million, respectively, for 2016 and 2015. The increase in general and administrative expenses for 2017 compared to 2016 was due primarily to higher expenses related to (1) continued technology and business infrastructure investments; (2) legal fees related to general corporate matters, including fees related to the termination of employment of Farmer Mac's former President and Chief Executive Officer in December 2017; (3) building lease expenses due to new leases for office space entered into during 2017; and (4) expenses related to business development efforts. The increase in general and administrative expenses in 2016 compared to 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.
Regulatory Fees. Regulatory fees, which consist of the fees paid to the Farm Credit Administration ("FCA"), an independent agency in the executive branch of the United States government that regulates Farmer Mac, were $2.5 million for 2017, compared to $2.5 million and $2.4 million, respectively, for 2016 and 2015. FCA advised Farmer Mac that its estimated fees for the federal fiscal year ending September 30, 2018 would remain at $2.5 million ($0.625 million per federal fiscal quarter), the same amount as compared to the prior federal fiscal year. After the end of a federal government fiscal year, FCA may revise its prior year estimated assessments to reflect actual costs incurred, and has issued both additional assessments and refunds in the past.
Income Tax Expense. Income tax expense was $46.4 million for 2017, compared to $42.1 million and $34.2 million, respectively, for 2016 and 2015.
The increase in income tax expense in 2017 compared to 20162019 was primarily due to higher pre-tax income. Also contributingincreased spending on software licenses and information technology consultants to thesupport growth and strategic initiatives. The increase in G&A expenses in 2019 compared to 2018 was a $1.4 million chargedue to various growth, strategic, and compliance initiatives in 2019.
Income Tax Expense. The following table presents income tax expense as a result ofand the re-measurement of Farmer Mac's net deferred tax asset due to the enactment of new tax legislation on December 22, 2017. Income tax expense for 2017 also reflected $0.9 million of tax benefits associated with stock-based compensation activity that is subject to ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,”adopted in first quarter 2017. The excess of Farmer Mac's effective income tax rate abovefor the statutory rate in 2017 was primarily attributable toyears ended December 31, 2020, 2019, and 2018:
Table 17
| | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (dollars in thousands) |
| Income tax expense | $ | 28,785 | | | $ | 29,105 | | | $ | 27,942 | |
| Effective tax rate | 20.9 | % | | 20.9 | % | | 20.5 % |
Business Volume.
The following table sets forth the non-recurring, non-cash charge related to the new tax legislation, which was offset in part by the tax benefits associated with stock-based compensation activity. See Note 2(l) and Note 10 to the consolidated financial statements for more information about income taxes and the impact of new tax legislation onnet growth or decrease under Farmer Mac's financial position, resultslines of operationsbusiness for the years ended December 31, 2020, 2019, and cash flows. More information about2018:
Table 18
| | | | | | | | | | | | | | | | | |
| Net New Business Volume – Farmer Mac Loan Purchases, Guarantees, LTSPCs, and AgVantage Securities |
| | For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Net Growth/(Decrease) | | Net Growth/(Decrease) | | Net Growth/(Decrease) |
| | (in thousands) |
| Farm & Ranch: | | | | | |
| Loans | $ | 1,213,754 | | | $ | 604,418 | | | $ | 272,316 | |
| Loans held in trusts: | | | | | |
| Beneficial interests owned by third party investors | (313,872) | | | 83,816 | | | 117,273 | |
| LTSPCs | (95,650) | | | (145,257) | | | (23,204) | |
| USDA Guarantees: | | | | | |
| USDA Securities | 256,461 | | | 83,023 | | | 52,537 | |
| Farmer Mac Guaranteed USDA Securities | (89,918) | | | 21,532 | | | 110,870 | |
| Rural Utilities: | | | | | |
| Loans | 589,119 | | | 732,450 | | | (137,448) | |
| LTSPCs | (52,853) | | | (43,994) | | | (153,069) | |
| Institutional Credit: | | | | | |
| AgVantage securities | (700,887) | | | 357,429 | | | 477,939 | |
AgVantage revolving line of credit facility(1) | — | | | (300,000) | | | — | |
| Total purchases, guarantees, LTSPCs, and AgVantage securities | $ | 806,154 | | | $ | 1,393,417 | | | $ | 717,214 | |
(1)During 2019, the adoption of ASU 2016-09facility was drawn on two separate occurrences for $100.0 million and the effect on Farmer Mac's financial position, results of operations,$150.0 million and cash flows is included in Note 2(r) to the consolidated financial statements.
The increase in income tax expense in 2016 compared to 2015 was due to higher pre-tax income and two items that occurred during first quarter 2015 but did not recur during 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 2015.
Farmer Mac estimates that its annual effective tax rate beginning inlater repaid. During 2018, will be approximately 21 percent, which reflects the federal corporate income tax rate under the new tax legislation enacted in December 2017.
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$100.0 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.this facility was drawn and later repaid. The facility was terminated during fourth quarter 2019.
Business Volume. During 2017, Farmer Mac added $4.7 billion of new business volume, compared to $4.4 billion in 2016 and $3.2 billion in 2015. Specifically, Farmer Mac:
purchased $2.4 billion of AgVantage securities;
purchased $1.1 billion of newly originated Farm & Ranch loans;
added $554.7 million of Farm & Ranch loans under LTSPCs;
purchased $369.8 million of USDA Securities;
issued $161.9 million of Farmer Mac Guaranteed USDA Securities; and
purchased $137.3 million of Rural Utilities loans.
Farmer Mac'sOur outstanding business volume was $19.0$21.9 billion as of December 31, 2017, an2020, a net increase of $1.6 billion, or 9.2 percent,$806.2 million from December 31, 2016. The2019 after taking into account all new business, maturities, and repayments on existing assets. This net increase in Farmer Mac's outstanding business volume was driven by broad-based portfolio growth across mostprimarily attributable to net increases of Farmer Mac's products and lines of business, including$804.2 million in Farm & Ranch, loans, AgVantage securities, USDA Securities, and$536.3 million in Rural Utilities, loans.and $166.5 million in USDA Guarantees. The net increases were partially offset by a net decrease of $700.9 million in the Institutional Credit line of business.
The $617.2$804.2 million net increase in our Farm & Ranch line of business reflected a $1.2 billion net increase in outstanding loan purchase volume that was partially offset by net decreases of $313.9 million in loans held in consolidated trusts and $95.7 million in loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities. Included in the $1.2 billion net increase in outstanding loan purchase volume is a growing proportion of larger loan exposures (generally loan commitments more than $10 million) to agribusinesses that support agriculture production, food and fiber processing, and other supply chain production. The net growth in 2020 reflected our ability to retain borrowers in a decreasing interest rate environment by proactively engaging with borrowers and adjusting their rates and loan sizes to reflect current market conditions and their specific funding needs. We broadened and deepened our market share as evidenced by gross new loan purchase volume increasing 82%, or $1.1 billion, versus 2019. Of this gross new loan purchase volume, 80% is attributable to active lenders (lenders selling Farmer Mac volume in 2020 and 2019) and 20% is attributable to new or previously inactive lenders. We
deepened our relationship with our lenders as evidenced by an 80% increase in the number of lenders selling us loans totaling $1 million or more versus the prior year period.Our net growth of 17.1% in the Farm & Ranch on-balance sheet portfolio over the twelve months ended December 31, 2020 is significantly higher than the 5.0% net growth of the overall agricultural mortgage loan market over the twelve months ended September 30, 2020 (based on our analysis of bank and Farm Credit System call report data). During 2020, Farmer Mac syndicated a $15.0 million position of a newly purchased $59.2 million agricultural loan. This transaction represents new activity for Farmer Mac to broaden its relationships across the agricultural lending spectrum.
Our USDA Guarantees line of business grew by $166.5 million in 2020. Our gross volume of $777.9 million was the highest gross volume that we have ever recorded in any calendar year. This growth reflected the positive effect of adjustments that we made to our product structure in the second half of 2019 to more effectively meet customer demands in an increasingly competitive environment and in response to increased USDA loan limits permitted by the 2018 Farm Bill.
The $700.9 million net decrease in the Institutional Credit line of business during 2020 was due primarily to three large counterparties who reduced their amount of outstanding credit in connection with scheduled maturities and payments on multiple AgVantage bonds. The year-over-year changes in AgVantage securities for 2017 wasvolume are primarily driven by net portfolio growth from twothe generally larger transaction sizes for that product, scheduled maturity amounts, the liquidity needs of Farmer Mac's long-standing issuers: (1) Rabo AgriFinance ("Rabo")Mac’s AgVantage counterparties, and (2) National Rural Utilities Cooperative Finance Corporation ("CFC"), which increased their outstanding AgVantage business volume with Farmer Mac by $275.0 million and $205.8 million, respectively. The net growth from Rabo included shorter-term funding (less than one year), which was the first time Rabo has used Farmer Mac's AgVantage funding for its short-term funding needs. The remaining net increase in AgVantage securities came from Farmer Mac's smaller institutional customers, which increased outstanding balances by $136.4 million in 2017, including transactions with two new counterparties.
Farmer Mac grew its Farm & Ranch loan portfolio by $684.3 million during 2017, which was primarily driven by an increasechanges in the average sizepricing and availability of loans purchased, including several large loans with large borrowers. During 2017, Farmer Mac purchased 1,445 Farm & Ranch loans with an average unpaid principal balance of $781,000 compared to 1,467 Farm & Ranch loans purchased with an average unpaid principal balance of $665,000 during 2016. wholesale funding.
The $257.8$536.3 million net increase in USDA Securitiesour Rural Utilities line of business reflected ana $589.1 million net increase in both USDA Securities securitizedoutstanding loan purchase volume that was partially offset by a $52.9 net decrease in loans under LTSPCs. During 2020, we funded $64.3 million of loans for solar and sold to lenders in the formwind projects as part of our renewable energy strategic initiative.
The level and composition of Farmer Mac Guaranteed USDA SecuritiesMac’s outstanding business volume is based on the relationship between new business, maturities, and USDA Securities retained on-balance sheet.repayments on existing assets from quarter to quarter. This relationship in turn depends on a variety of factors both internal and external to Farmer Mac grew its Rural Utilities loan portfolio by $76.8 million, which was primarily dueMac. The external factors include general market forces, competition, and our counterparties’ liquidity needs, access to the purchasesalternative funding, desired products, and assessment of a few larger loans in competitive situations as a resultstrategic factors. The internal factors include our assessment of an improvement in Farmer Mac's pricing on these types of loans.
profitability, mission fulfillment, credit risk, and customer relationships. For more information about potential growth opportunities in Farmer Mac's lines of business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Outlook" in this report.
In April 2017, Farmer Mac purchased and retained $1.0 billion of AgVantage securities issued by MetLife. MetLife used the proceeds from Farmer Mac's purchase of $1.0 billion in AgVantage securities to refinance an AgVantage security of the same amount that matured in April 2017. Previously, Farmer Mac held $30.0 million of the $1.0 billion AgVantage security that matured in April 2017 on-balance sheet and earned a spread between the interest income earned on that portion of the security and the related funding costs. The remaining $970.0 million of the $1.0 billion AgVantage security that matured in April 2017 had previously been sold to third parties and reported as off-balance sheet business volume in the Institutional Credit line of business on which Farmer Mac earned an annual guarantee fee of approximately 0.15 percent. For the newly purchased $1.0 billion in AgVantage securities, which are now held entirely on-balance sheet, Farmer Mac will earn weighted average annual net effective spread income of approximately 0.42 percent. The newly purchased AgVantage securities are comprised of three securities with separate maturities – $500.0 million of a one-year security, which features a monthly call option six months after the issuance date, $250.0 million of a two-year security, and $250.0 million of a three-year security.
The following table sets forth purchases of non-delinquent eligible loans, new loans added under LTSPCs, and new guaranteesinformation about the Farmer Mac Guaranteed Securities issued 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:indicated:
Table 1019
| | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Loans securitized and sold as Farm & Ranch Guaranteed Securities | $ | 165,054 | | | $ | 263,561 | | | $ | 255,078 | |
| Farmer Mac Guaranteed USDA Securities | — | | | 57,853 | | | 127,851 | |
| AgVantage securities | 1,298,751 | | | 2,258,550 | | | 3,010,307 | |
| Total Farmer Mac Guaranteed Securities Issuances | $ | 1,463,805 | | | $ | 2,579,964 | | | $ | 3,393,236 | |
|
| | | | | | | | | | | |
| New Business Volume – Farmer Mac Loan Purchases, Guarantees, LTSPCs, and AgVantage Securities |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Farm & Ranch: | | | | | |
| Loans | $ | 1,129,545 |
| | $ | 966,023 |
| | $ | 748,368 |
|
| LTSPCs | 554,743 |
| | 399,095 |
| | 427,795 |
|
| USDA Guarantees: | | | | | |
| USDA Securities | 369,759 |
| | 375,203 |
| | 363,621 |
|
| Farmer Mac Guaranteed USDA Securities | 161,925 |
| | 106,054 |
| | 13,314 |
|
| Rural Utilities: | | | | | |
| Loans | 137,341 |
| | 50,491 |
| | 108,337 |
|
| LTSPCs | — |
| | 441,404 |
| | 522,262 |
|
| Institutional Credit: | | | | | |
| AgVantage Securities | 2,383,912 |
| | 2,098,852 |
| | 743,158 |
|
| Revolving floating rate AgVantage facility | — |
| | — |
| | 300,000 |
|
| Total purchases, guarantees, LTSPCs, and AgVantage Securities | $ | 4,737,225 |
| | $ | 4,437,122 |
| | $ | 3,226,855 |
|
New business volume for loans purchased within the Farm & Ranch line of business in 2017 was substantially greater than in 2016. This was primarily due to an increase in borrower demand for long-term real estate financing, as farmers used equity in farmland assets to increase sources of operating capital, and an increase in the average size of loans purchased, including several large loans with large borrowers. The increase in new business volume for loans added under LTSPCs within the Farm & Ranch line of business in 2017 compared to 2016 reflected a large LTSPC pool added in fourth quarter 2017 with an existing customer and an increase in the average size of loans added under LTSPCs, despite the decrease in demand among Farm Credit System institutions for the LTSPC product. The increase in new business volume in the USDA Guarantees line of business in 2017 compared to 2016 reflected an increase
in lender usage of USDA guaranteed loan programs due to available federal funding for those programs. Loan purchase volume in the Rural Utilities line of business increased in 2017 compared to 2016 primarily as a result of an improvement in Farmer Mac's pricing for larger, more competitive loans to rural utilities borrowers and because CFC, Farmer Mac's only current rural utilities counterparty, is increasingly partnering with Farmer Mac in these more competitive situations. Farmer Mac did not add loans under LTSPCs in the Rural Utilities line of business during 2017, which reflects the absence of demand from CFC for the LTSPC product. Changes in AgVantage securities volume are primarily driven by the generally larger transaction sizes for that product and the fluctuating funding and liquidity needs of Farmer Mac's customer network and scheduled maturity amounts. The volume of new AgVantage securities was higher in 2017 compared to 2016 primarily due to the scheduled maturities for those periods and related refinancing activity, as Farmer Mac refinanced $1.5 billion of maturing AgVantage securities during 2017 compared to $1.3 billion in 2016.
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 2017both 2020 and 20162019 was less than one year. Of those loans, 66 percent45%and 60 percent50% had principal amortization periods longer than the maturity date, resulting in balloon payments at maturity, with a weighted-average remaining term to maturity of 17.919.8 years and 17.714.2 years for each period, respectively.
During 2017, 2016,2020 and 2015,2019, Farmer Mac securitized some of the Farm & Ranch loans it had purchased and sold the resulting Farmer Mac Guaranteed Securities, inas shown above. During 2020 and 2019, Farmer Mac realized no gains or losses from the amountssale of $363.5 million, $511.4 million, and $336.9 million, respectively.Farmer Mac Guaranteed Securities or USDA Securities. Farmer Mac consolidates these loans and presents them as "Loans held for investment in consolidated trusts, at amortized cost" on the consolidated balance sheets. In 2017, 2016,For 2020, 2019 and 2015, $128.92018, $41.2 million, $273.6$163.1 million and $255.3$68.7 million, respectively, of Farmer Mac Guaranteed Securities were sold to Zions First National Bank, which is a related party to(related by virtue of its owning more than 10% of Farmer Mac.Mac's Class A voting common stock).
The following table sets forth information regarding the Farmer Mac Guaranteed Securities issued during the periods indicated:
Table 11
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Loans securitized and sold as Farm & Ranch Guaranteed Securities | $ | 363,475 |
| | $ | 511,393 |
| | $ | 336,913 |
|
| Farmer Mac Guaranteed USDA Securities | 161,925 |
| | 106,054 |
| | 13,314 |
|
| AgVantage Securities | 2,383,912 |
| | 2,098,852 |
| | 743,158 |
|
| Total Farmer Mac Guaranteed Securities issuances | $ | 2,909,312 |
| | $ | 2,716,299 |
| | $ | 1,093,385 |
|
The following table sets forth information regardingabout outstanding volume in each of Farmer Mac's four lines of business as of the dates indicated:
Table 1220
| | | | | | | | | | | | | | | | | |
| Lines of Business - Outstanding Business Volume |
| As of December 31, |
| | 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Farm & Ranch: | | | | | |
| Loans | $ | 4,889,393 | | | $ | 3,675,640 | | | $ | 3,071,222 | |
| Loans held in trusts: | | | | | |
| Beneficial interests owned by third party investors | 1,287,045 | | | 1,600,917 | | | 1,517,101 | |
| LTSPCs | 2,325,431 | | | 2,393,071 | | | 2,509,787 | |
| Guaranteed Securities | 79,312 | | | 107,322 | | | 135,862 | |
| USDA Guarantees: | | | | | |
| USDA Securities | 2,452,964 | | | 2,199,072 | | | 2,120,553 | |
| Farmer Mac Guaranteed USDA Securities | 333,754 | | | 421,103 | | | 395,067 | |
| Rural Utilities: | | | | | |
| Loans | 2,260,412 | | | 1,671,293 | | | 938,843 | |
| LTSPCs | 556,425 | | | 609,278 | | | 653,272 | |
| Institutional Credit | | | | | |
| AgVantage Securities | 7,739,359 | | | 8,440,246 | | | 8,082,817 | |
Revolving floating rate AgVantage facility(1) | — | | | — | | | 300,000 | |
| Total | $ | 21,924,095 | | | $ | 21,117,942 | | | $ | 19,724,524 | |
(1)During 2019, the facility was drawn on two separate occurrences for $100.0 million and $150.0 million and later repaid. During 2018, $100.0 million of this facility was drawn and later repaid. The facility was terminated during fourth quarter 2019.
|
| | | | | | | | | | | |
| Lines of Business - Outstanding Business Volume |
| | As of December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Farm & Ranch: | | | | | |
| Loans | $ | 2,798,906 |
| | $ | 2,381,488 |
| | $ | 2,249,864 |
|
| Loans held in trusts: | | | | | |
| Beneficial interests owned by third party investors | 1,399,827 |
| | 1,132,966 |
| | 708,111 |
|
| LTSPCs | 2,335,342 |
| | 2,209,409 |
| | 2,253,273 |
|
| Guaranteed Securities | 333,511 |
| | 415,441 |
| | 514,051 |
|
| USDA Guarantees: | | | | | |
| USDA Securities | 2,068,017 |
| | 1,954,800 |
| | 1,876,451 |
|
| Farmer Mac Guaranteed USDA Securities | 284,197 |
| | 139,575 |
| | 41,826 |
|
| Rural Utilities: | | | | | |
| Loans | 1,076,291 |
| | 999,512 |
| | 1,008,126 |
|
LTSPCs(1) | 806,342 |
| | 878,598 |
| | 522,864 |
|
| Institutional Credit | | | | | |
| AgVantage Securities | 7,604,878 |
| | 6,987,686 |
| | 6,424,254 |
|
Revolving floating rate AgVantage facility(2) | 300,000 |
| | 300,000 |
| | 300,000 |
|
| Total | $ | 19,007,311 |
| | $ | 17,399,475 |
| | $ | 15,898,820 |
|
| |
(1)
| As of December 31, 2017, 2016, and 2015, includes $20.0 million, $20.0 million, and $8.8 million, respectively, related to one-year loan purchase commitments on which Farmer Mac receives a nominal unused commitment fee. |
| |
(2)
| During 2017, $100.0 million of this facility was drawn and subsequently repaid. During 2016 and 2015, this facility was not 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 in the form of AgVantage Securities, and Farmer Mac will earn interest income on those securities. |
The following table summarizes by maturity date the scheduled principal amortization of loans held, loans underlying off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities) and LTSPCs, USDA Securities, and Farmer Mac Guaranteed USDA Securities as of December 31, 2017:2020:
Table 1321
| | | | | | | | | | | | | | | | | | | | | | | |
| Schedule of Principal Amortization as of December 31, 2020 |
| Loans Held | | Loans Underlying Off-Balance Sheet Farmer Mac Guaranteed Securities and LTSPCs | | USDA Securities and Farmer Mac Guaranteed USDA Securities | | Total |
| (in thousands) |
| 2021 | $ | 354,984 | | | $ | 253,508 | | | $ | 117,226 | | | $ | 725,718 | |
| 2022 | 343,208 | | | 230,490 | | | 121,173 | | | 694,871 | |
| 2023 | 356,542 | | | 209,665 | | | 125,543 | | | 691,750 | |
| 2024 | 350,961 | | | 185,040 | | | 123,667 | | | 659,668 | |
| 2025 | 384,864 | | | 188,737 | | | 126,479 | | | 700,080 | |
| Thereafter | 6,646,291 | | | 1,893,728 | | | 2,172,630 | | | 10,712,649 | |
| Total | $ | 8,436,850 | | | $ | 2,961,168 | | | $ | 2,786,718 | | | $ | 14,184,736 | |
|
| | | | | | | | | | | | | | | |
| Schedule of Principal Amortization as of December 31, 2017 |
| | Loans Held | | Loans Underlying Off-Balance Sheet Farmer Mac Guaranteed Securities and LTSPCs | | USDA Securities and Farmer Mac Guaranteed USDA Securities | | Total |
| | (in thousands) |
| 2018 | 241,162 |
| | 749,219 |
| | 107,123 |
| | 1,097,504 |
|
| 2019 | 234,966 |
| | 218,473 |
| | 104,035 |
| | 557,474 |
|
| 2020 | 236,896 |
| | 203,286 |
| | 104,456 |
| | 544,638 |
|
| 2021 | 245,362 |
| | 216,539 |
| | 106,408 |
| | 568,309 |
|
| 2022 | 214,049 |
| | 192,039 |
| | 108,615 |
| | 514,703 |
|
| Thereafter | 4,102,589 |
| | 1,895,639 |
| | 1,821,577 |
| | 7,819,805 |
|
| Total | $ | 5,275,024 |
| | $ | 3,475,195 |
| | $ | 2,352,214 |
| | $ | 11,102,433 |
|
Of the $19.0$21.9 billion outstanding principal balance of volume included in Farmer Mac's four lines of business as of December 31, 2017, $7.92020, $7.7 billion were AgVantage securities included in the Institutional Credit line of business. Unlike business volume in the form of purchased loans, USDA Securities, and loans underlying LTSPCs and non-AgVantage Farmer Mac Guaranteed Securities, most AgVantage securities do not require periodic payments of principal based on amortization schedules and instead have fixed maturity dates when the secured general obligation is due. The following table summarizes by maturity date the outstanding principal amount of both on- and off-balance sheet AgVantage securities as of December 31, 2017:2020:
Table 1422
| | | | | |
| AgVantage Balances by Year of Maturity |
| | As of |
| | December 31, 2020 |
| | (in thousands) |
| 2021 | $ | 1,823,932 | |
| 2022 | 1,565,655 | |
| 2023 | 1,045,738 | |
| 2024 | 864,090 | |
| 2025 | 231,025 | |
Thereafter(1) | 2,208,919 | |
| Total | $ | 7,739,359 | |
|
| | | |
| AgVantage Balances by Year of Maturity |
| | As of |
| | December 31, 2017 |
| | (in thousands) |
2018(1) | 2,383,187 |
|
| 2019 | 1,118,419 |
|
| 2020 | 1,196,727 |
|
| 2021 | 1,066,491 |
|
| 2022 | 567,057 |
|
Thereafter(2) | 1,572,997 |
|
| Total | $ | 7,904,878 |
|
| |
(1)
| Includes the expiration of the $300.0 million revolving floating rate AgVantage facility. |
| |
(2)
| Includes various maturities ranging from 2023 to 2044. |
(1)Includes various maturities ranging from 2026 to 2044.
The weighted-average remaining maturity of the outstanding AgVantage securities shown in the table above was 3.94.9 years as of December 31, 2017. 2020.
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 during 2017, 2016, and 2015 had a weighted-average age of 4 years, 9 years, and 6 years, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."
The following table presents Farmer Mac's purchases of defaulted loans underlying Farm & Ranch Guaranteed Securities and LTSPCs for the periods indicated:
Table 15
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Defaulted loans purchased underlying Farm & Ranch Guaranteed Securities owned by third party investors | $ | 5,670 |
| | $ | 2,118 |
| | $ | 3,407 |
|
| Defaulted loans purchased underlying LTSPCs | 311 |
| | 398 |
| | 13,500 |
|
| Total loan purchases | $ | 5,981 |
| | $ | 2,516 |
| | $ | 16,907 |
|
Related Party Transactions. As provided by Farmer Mac's statutory charter, only banks, insurance companies, and other financial institutions or similar entities may hold Farmer Mac's Class A voting common stock, and only institutions of the FCS may hold Farmer Mac's Class B voting common stock. Farmer Mac's charter also provides that holders of Class A voting common stock elect five members of Farmer Mac's 15-member board of directors and that holders of Class B voting common stock elect five members of the board of directors. The ownership of Farmer Mac's two classes of voting common stock is currently concentrated in a small number of institutions. Approximately 45 percent45% of the Class A voting common stock is held by three financial institutions, with 31 percent31% held by one institution. Approximately 97 percent97% of the Class B voting common stock is held by five FCS institutions (two of which are related to each other through a parent-subsidiary relationship).
Unlike some other GSEs, specifically other FCS institutions and the Federal Home Loan Banks, Farmer Mac is not structured as a cooperative owned exclusively by member institutions and established to provide services exclusively to its members. Farmer Mac, as a stockholder-owned, publicly-traded corporation, seeks to fulfill its mission of serving the financing needs of rural America in a mannerway that is consistent with providing a return on the investment of its stockholders, including those who do not directly participate in the secondary market provided by Farmer Mac. Farmer Mac's policy is to generally require financial institutions to own a requisite amount of common stock, based on the size and type of institution, to participate in the Farm & Ranch line of business. As a result of this requirement, coupled with the ability of holders of Class A and Class B voting common stock to elect two-thirds of Farmer Mac's board of directors, Farmer Mac regularly conducts business with "related parties," including
institutions affiliated with members of Farmer Mac's board of directors and institutions that own large amounts of Farmer Mac's voting common stock. Farmer Mac has adopted a Code of Business Conduct and Ethics and other related corporate policies that governsgovern any conflicts of interest that may arise in these transactions, and Farmer Mac's policy is to require that any transactions with related parties be conducted in the ordinary course of business, with terms and conditions comparable to those available to any other counterparty not related to Farmer Mac.
The following table summarizes the material relationships between Farmer Mac and certain related parties. The related parties listed in the table below consist of (1) all holders of at least five percent of a class of Farmer Mac voting common stock as of December 31, 20172020 and (2) other institutions that are considered "related parties" through an affiliation with a Farmer Mac director and that have conducted business with Farmer Mac during the two years ended December 31, 2017.2020. The table below does not specify any relationships based on the ownership of Farmer Mac's non-voting common stock or any series of preferred stock.
Table 16
|
| | | | | | | | | | | | | | | | | | | |
| Name of Institution | | Ownership of
Farmer Mac Voting Common Stock
| | Affiliation with Any
Farmer Mac Directors
| | Primary Aspects of Institution's
Business Relationship with Farmer Mac
|
| AgFirst Farm Credit Bank | | 84,024 shares of Class B voting common stock
(16.79% of outstanding Class B stock and 5.49% of total voting common stock outstanding)
| | None | | In both 20172020 and 2016,2019, Farmer Mac earned approximately $1.2 million in fees attributable to transactions with AgFirst, primarily commitment fees for LTSPCs. |
| | | | | | | | | | | | | | | | | | | | |
| Name of Institution | | Ownership of
Farmer Mac Voting Common Stock | | Affiliation with Any
Farmer Mac Directors | | Primary Aspects of Institution's
Business Relationship with Farmer Mac |
| AgriBank, FCB | | 201,621 shares of Class B voting common stock
(40.30% of outstanding Class B stock and 13.17% of total voting common stock outstanding)
| | Farmer Mac directordirectors Richard H. Davidson is currently a directorand Daniel L. Shaw serve as directors of AgriBank, and AgriBank. | | Farmer Mac director Douglas A. Felton is a former director of AgriBank. | | No Farmer Macdid not conduct any business through any of its lines of business was conducted between the parties.with AgriBank during 2020 or 2019. |
| Bath State Bank | | Less than 5% ownership | | Farmer Mac director Dennis L. Brack isserves as a director of Bath State Bank and Bath State Bancorp, the holding company of Bath State Bank. | | Farmer Mac purchased $5.4$9.2 million and $1.3$4.0 million in USDA Securities from Bath State Bank in 20172020 and 2016,2019, respectively. |
|
| | | | | | |
Name of Institution | | Ownership of
Farmer Mac Voting Common Stock
| | Affiliation with Any
Farmer Mac Directors
| | Primary Aspects of Institution's
Business Relationship with Farmer Mac
|
CoBank, ACB
| | 163,253 shares of Class B voting common stock
(32.63% of outstanding Class B stock and 10.66% of total voting common stock outstanding)
| | Farmer Mac director Douglas E. WilhelmEverett M. Dobrinski served as an executive officera director of CoBank until June 30, 2012. Mr. Wilhelm is also currently a party to a services agreement with CoBank, under which he serves as an employee of CoBank.
through December 2019.
| | No Farmer Mac business through anypurchased $416.8 million and $776.4 million in participation interests in loans from CoBank in 2020 and 2019, respectively. This represented 56.0% and 89.1% of its linesloan purchases under the Rural Utilities line of business was conducted between the parties.
for 2020 and 2019, respectively. |
| | | In 2020 and 2019, CoBank retained $2.3 million and $1.2 million of servicing fees related to the loan participations sold to Farmer Mac, respectively. |
| Farm Credit Bank of Texas (FCBT) | | 38,503 shares of Class B voting common stock
(7.70% of outstanding Class B stock and 2.51% of total voting common stock outstanding)
| | Farmer Mac director Thomas W. Hill served as an executive officer of FCBT until November 2010. Mr. Hill is also currently a party to a services agreement with FCBT, under which he serves as an employee of FCBT.None | | In 20172020 and 2016,2019, Farmer Mac earned approximately $1.0$1.2 million and $1.1 million, respectively, in fees attributable to transactions with FCBT, primarily commitment fees for LTSPCs. |
| | | | | | In 2017both 2020 and 2016,2019, FCBT retained approximately $0.2$0.1 million and $0.3 million, respectively, in servicing fees for its work as a Farmer Mac central servicer. |
First Dakota National Bank (First Dakota)Matthew 25 Management Corp. | | Less than 5% ownership85,241 shares of Class A voting common stock (8.27% of outstanding Class A stock and 5.57% of total voting common stock outstanding) | | None | | Farmer Mac director Dennis Everson is a directordid not conduct any business with Matthew 25 Management Corp. during 2020 or 2019. |
| | | | | | | | | | | | | | | | | | | | |
Name of First Dakota and also served as Branch Administration DirectorInstitution | | Ownership of First Dakota until December 2012. | |
Farmer Mac purchased $28.5 million and $24.7 million in loans from First Dakota in 2017 and 2016, respectively, and entered into $0.4 million of new LTPSCsVoting Common Stock | | Affiliation with First Dakota in 2017 and none in 2016. |
| | | | | | In 2017 and 2016, First Dakota retained approximately $1.2 million and $1.1 million, respectively, in servicing fees for its work as a Any
Farmer Mac servicer.Directors | | Primary Aspects of Institution's
Business Relationship with Farmer Mac |
| National Rural Utilities Cooperative Finance Corporation (CFC) | | 81,500 shares of Class A voting common stock
(7.91% of outstanding Class A stock and 5.32% of total voting common stock outstanding)
| | None
Farmer Mac director Todd P. Ware serves as a director of CFC. | | Transactions with CFC represent 100 percentrepresented 36.7% and 9.8% of business volumeloan purchases under the Rural Utilities line of business since its inception in 2008,during 2020 and 100 percent of the AgVantage securities secured by Rural Utilities loans that have been issued to date. |
| | | | | | Transactions with CFC during 2017 and 2016 represented 10.3 percent and 16.7 percent, respectively, of Farmer Mac's total purchases for those years. Transactions with CFC represented 24.6 percent and 25.7 percent, respectively, of Farmer Mac's total outstanding business volume as of December 31, 2017 and 2016. |
| 2019, respectively. |
| | | | | | |
Name of Institution | | Ownership of
Farmer Mac Voting Common Stock
| | Affiliation with Any
Farmer Mac Directors
| | Primary Aspects of Institution's
Business Relationship with Farmer Mac
|
| | | | | | In both 20172020 and 2016, Farmer Mac earned guarantee fees of approximately $0.1 million attributable to transactions with CFC. In 2017 and 2016,2019, Farmer Mac earned commitment fees of approximately $2.2$1.3 million and $2.0$1.7 million, respectively, attributable to transactions with CFC. |
| | | | | | In 20172020 and 2016,2019, Farmer Mac earned interest income of $43.9$63.1 million and $27.6$97.3 million, respectively, attributable to AgVantage transactions with CFC. |
| | | | | | In 20172020 and 2016,2019, CFC retained approximately $3.5$3.3 million and $3.3$3.2 million, respectively, in servicing fees for its work as a Farmer Mac central servicer. |
| | | | | | CFC is currently the only servicer of rural utilities loans and loans underlying LTSPCs in the Rural Utilities line of business and securing AgVantage securities in the Institutional Credit line of business. |
| The Vanguard Group, Inc. | | 56,37649,999 shares of Class A voting common stock
(5.47%4.85% of outstanding Class A stock and 3.68%3.27% of total voting common stock outstanding)
| | None | | No Farmer Mac did not conduct any business through any of its lines of business was conducted between the parties.
with The Vanguard Group during 2020 or 2019.
|
Zions FirstBancorporation, National BankAssociation (Zions) | | 322,100 shares of Class A voting common stock
(31.25% of outstanding Class A stock and 21.04% of total voting common stock outstanding)
| | None | | In 20172020 and 2016,2019, Farmer Mac's purchases of loans from Zions under the Farm & Ranch line of business represented approximately 11.2 percent7.1% and 15.9 percent,9.5%, respectively, of Farm & Ranch loan purchase volume for those years. Those purchases represented 7.5 percent6.2% and 11.2 percent,7.6%, respectively, of total Farm & Ranch business volume for those years. The purchases of USDA Securities from Zions under the USDA Guarantees line of business represented approximately 3.8 percent1.4% and 3.4 percent,2.1%, respectively, of the USDA Guarantees line of business purchases for the yearyears ended December 31, 20172020 and 2016. Farmer Mac did not purchase AgVantage securities from Zions for the year ended December 31, 2017 and 2016.2019. Transactions with Zions represented 5.0 percent4.1% and 5.3 percent,4.5%, respectively, of Farmer Mac's total outstanding business volume as of December 31, 20172020 and 2016.2019. |
| | | | | | In 20172020 and 2016,2019, Zions retained approximately $11.5$11.8 million and $9.9$12.2 million, respectively, in servicing fees for its work as a Farmer Mac servicer. |
As discussed in more detail in Note 2(q)2(n) to the consolidated financial statements, Farmer Mac’s consolidated financial statements include the accounts of VIEs in which Farmer Mac determines itself to
be the primary beneficiary, including securitization trusts where Farmer Mac shares the power to make decisions regardingabout default mitigation with a related party. If that related party status changes, consolidation or deconsolidation of securitization trusts may occur. For more information about related party transactions, see Note 3 to the consolidated financial statements.
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 theThe pace of Farmer Mac'sMac’s growth will depend on the capital and liquidity needs of the participantslending institutions in the agricultural and rural financingutilities business as well as the overall health of borrowers in the sectors we serve. Farmer Mac foresees opportunities for continuedprofitable growth across all four of itsour lines of business driven by several key factors:
•As agricultural and rural utilities lenders face increasedseek to manage equity capital requirements under regulatory frameworks or rating agencyand return on equity capital requirements or seek to reduce exposure due to lending limits or concentration limits, Farmer Mac can provide relief for those institutions through loan and portfolio purchases, participations, guarantees, LTSPCs, or LTSPCs.wholesale funding.
•While lending opportunities inprospects for overall loan growth within the rural utilities industry generally remainappears to be moderate Farmer Mac believes there is opportunityin the near term due to slow growth in the demand for capital, future growth among larger rural utilities borrowers because CFC, the only lender that currently participatesopportunities may increase in Farmer Mac'sMac’s Rural Utilities line of business increasingly partnersfrom deepening business relationships with eligible counterparties, broadband-related capital expenditures, and the exploration of new types of loan products. These opportunities may be limited by sector growth, credit quality, and the competitiveness of Farmer Mac to provide competitive pricing for transactions with these borrowers. Farmer Mac also believes that there are growth opportunities within its Institutional Credit line of business because it provides a competitive source of debt funding for CFC.Mac’s products.
•As a result of targeted marketingbusiness and brand awareness initiatives, product development efforts and continued interest in the emergence ofagricultural asset class from institutional investors, within agriculture, Farmer Mac's lender network and Institutional CreditMac’s customer base continuesand product set continue to expand, which may generate additionalmore demand for Farmer Mac'sMac’s products from new sources.
•Consolidation expansion,within the agricultural finance industry, coupled with Farmer Mac’s relationships with larger regional and national lenders, continue to provide opportunities that could influence Farmer Mac’s loan demand and increase the average transaction size within Farmer Mac’s Farm & Ranch line of business.
•Expansion and refinancing opportunities for agricultural producers resulting from a decrease in interest rates have increased financing requirements for mergers and acquisitions, consolidation, and vertical integration occurring across many sectors of the agricultural industry, which may also generate demand for Farmer Mac’s loan products.
The COVID-19 pandemic and in agricultural banking, coupled withrelated efforts to contain it continue to create disruptions to the global economy. Government stimulus programs designed to mitigate the economic impacts of the pandemic, as well as significant liquidity support by the Federal Reserve to facilitate the functioning of the capital markets, has reduced volatility to the economy and the sectors we serve. But the duration, severity, and continued spread of COVID-19, the effectiveness and availability of vaccines, and ongoing government efforts taken to contain COVID-19 and mitigate public health and economic effects continue to evolve and remain uncertain. Farmer Mac'sMac’s mission is to support rural America during this pandemic, and the disruptions caused by COVID-19 may present some new and expanded business relationships with larger regional and national lenders, has led to an increase in Farmer Mac's loan purchase volume and the average transaction size within Farmer Mac's Farm & Ranch line of business.
opportunities for Farmer Mac believes thatto help meet the financing needs of rural America while also presenting uncertainties and risks. COVID-19 has highlighted the importance of a healthy and stable global food supply chain, as well as the need for increased connectivity through rural broadband. These market conditions could result in increased investment in the supply chain for food, fuel, fiber, energy, and broadband, all of which require access to low-cost, long-term capital. Farmer Mac can provide a source of secondary market liquidity to help stimulate capital deployment to help facilitate these growth opportunities will be importantinvestments while continually monitoring potential market and sector volatility associated with the ongoing impacts of the pandemic. See "Risk Factors" in replacing income earned
Part II, Item 1A of this report for more information about the uncertainties and risks associated with the COVID-19 pandemic on the loansFarmer Mac and other assets as they mature, pay down, or are reinvested at potentially lower spreads.its business.
Operating Expense Outlook. Farmer Mac continues to expand its investments in human capital, technology, and business infrastructure to increase capacity and efficiency as it seeks to accommodate the aforementionedits growth opportunities and achieve its long-term strategic objectives. Accordingly, Farmer Mac expects the annualcontinued increases in its operating expenses to be above historical averages over the next several years. Specifically,years corresponding to business and revenue growth. We expect these efforts to continue and increase over the next 12 - 18 months as we innovate and grow our business while monitoring the growth in operating expenses commensurate with the growth in our revenue.
Operations. On March 12, 2020, Farmer Mac believes that aggregate compensationactivated its business continuity plan and employee benefits and general and administrative expenses will increase approximately 15 percent in 2018 relative to 2017,has been operating uninterruptedly since then, with increases likely to remain elevated in 2019.
CEO Search. In December 2017,all of its employees working remotely from their homes. Farmer Mac appointed Lowell L. Junkins, the chairmanhas provided guidance and support to all of its boardemployees to ensure that they have the tools and knowledge needed to effectively work from home, and Farmer Mac’s technology platform and business continuity plan have been functioning as designed in support of directors, to serve asall functions of the Acting President and CEOorganization with no material disruption of Farmer Mac following the termination of employment of Farmer Mac's former President and CEO while Farmer Mac conductsbusiness. As a search for a successor. Shortly after that appointment, the board of directors formed a CEO search committee
consisting of six board members to lead a thorough search process. Since its formation, the search committee has been soliciting stakeholder feedback, developing a CEO profile and position description, and evaluating executive search firms. The CEO search committee recently selected an executive search firm and will seek to recommend board approval of a new President and CEO with appropriate qualifications and expertise in a timely manner.
Agricultural Industry. The agricultural industry includes many diverse sectors that respond in different ways to changes in economic conditions. Those individual sectors often are affected differently, sometimes positively and sometimes negatively, by prevailing domestic and global economic factors and regional weather conditions. This results in cycles where one or more sectors may be under stress while others are not. The profitability of agricultural sectors is also affected by commodity inventories and their associatedsecondary 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.
Net cash income, as reported by the USDA and one of its benchmark measures of economic activityparticipant in the agricultural industry, has declined significantly since reachingand rural utility lending space, Farmer Mac's business model is already based on a cyclical peakremote interface with its customers and vendors. We do not expect Farmer Mac's remote-working environment to have a material effect on our operations either in 2013. However, changesthe near term or for the foreseeable future.
Agricultural Industry. Like most industries, the COVID-19 pandemic heavily impacted the U.S. agricultural and food sectors throughout 2020. According to advance sales data from the U.S. Census Bureau, regional school and restaurant closures combined with consumer social distancing precautions caused a 53% drop in food and beverage sales away from home in April 2020. Sales at food and beverage places ended the year 19% below 2019 levels. Meat and poultry processing plants experienced widespread closures in April and May, as the Center for Disease Control (CDC) reported more than 239 facilities affected by COVID-19 outbreaks in 23 states. According to data from the U.S. Energy Information Administration, ethanol production fell to 50% of 2019 levels in April 2020 as gasoline consumption fell amid closures and reduced mobility. Ethanol is a primary demand driver for corn, so the sudden demand shock caused downward pressure on grain commodity prices. The USDA corn price index hit a 10-year low in April 2020.
Despite these pressures, the agricultural and food sectors endured with a strong finish in 2020. Food consumption at home picked up considerably, with U.S. Census data showing an 11% increase in sales at food and beverage stores in 2020 compared to 2019. USDA research shows that farm incomeproduction and food processing take a higher net margin of the food dollar spent at home, so the shift of consumer spending to food at home could offset some or all of the losses from sales to restaurants and schools. Consumer mobility increased steadily in the second half of 2020, restoring fuel demand and pushing ethanol production back to 88% of 2019 levels are largely localizedby December. Record government support payments to farmers and depend on producer region and commodity production type.ranchers helped offset the mid-year disruptions. The USDA estimates that aggregatetotal farm program payments to farmers at over $46 billion for the year, a combination of typical farm programs, payments from the trade-oriented Market Facilitation Program (MFP), forgivable loans from the Paycheck Protection Program (PPP), and two rounds of Coronavirus Food Assistance Program (CFAP) payments. Finally, reduced global supply of grains and increased export demand for grains combined to push world grain prices to 7-year highs. USDA corn and soybean cash price indices closed the year 30% and 42% above 2019 levels, respectively. Of the major agricultural commodities, only cattle and dairy prices did not end the year higher than when it began.
The rebound in commodity prices combined with extensive government support payments led to a large increase in sector-wide profitability for 2020. USDA projections for net farm income and net cash farm income in 2020 are the highest levels rosesince 2013 at $121.1 billion and $136.2 billion, respectively. An average year generates approximately $100 billion in 2017net farm income, so both 2020 metrics are well above historical averages. A small decline in cash expenses due to a reduction in interest expense added to improved profitability. Animal protein and specialty crop producers did not fully participate in the increase, as higher commodity quantities soldlabor, feed, and stabilizing commodity prices. other input costs partially offset any gains in cash receipts. Early USDA estimates for 2021 show a stable income outlook of $111.4 billion in net farm income and $128.3 billion in net cash farm income due to a reduction in government support payments but an increase in grain cash receipts. Higher profitability and lower overall interest rates allow sector participants to refinance and restructure their balance sheets with more favorable terms, driving deal flow and lender competition.
Farmland values have weakenedheld steady throughout much of 2020 after rising at approximately the rate of inflation for the last two years. Data released in the Midwest region, where producers are most exposed to changes in the grain markets. In this region, data releasedAugust 2020 by the USDA indicates an average declineincrease in farmlandfarm real estate values of between 0.5 percent0.2% in 2020 in Corn Belt states (Illinois, Indiana, Iowa, Missouri, and 1.8 percentOhio), but a decrease of 2.3% in 2017.Northern Plains states (Kansas, Nebraska, North Dakota, and South Dakota). In all other regions, farmland values appearvalue averages are reported to be flat to increasing. For example, data released byThe COVID-19 pandemic slowed public auctions and sales in the first half of 2020, but transactions picked up in the third and fourth quarters, and values trended higher in the fourth quarter. An improved profitability outlook combined with low market interest rates could provide support for land values into 2021. Early estimates from the USDA indicates that Pacific state farmlandshow a 2% increase in farm real estate in 2021. Historically, rising farm real estate values increasedare paired with an average of 8.7 percentincrease in 2017.real estate-secured debt. While regional averages for farmland values provide a good barometer for the overall movement in U.S. farmland values, economic forces affecting land markets are highly localized, and some markets may experience greater volatility than state or national averages indicate.
Agricultural export demand also depends significantly on exchange rates.As a result of improved profitability and an injection of working capital into the sectors, Farmer Mac's 90-day delinquencies and substandard assets decreased in fourth quarter 2020. Forty-four percent of the loans past due 90-days or more in third quarter 2020 cured or paid off by December 31, 2020. However, the ongoing COVID-19 pandemic and the potential for continued economic stress increase the level of uncertainty inherent in the agricultural credit sector and could alter the trajectory of the current agricultural cycle. A strengthening U.S. dollar relative to other worldwide currencies causes American agricultural commodities to be less competitive globally, thereby diminishing their global demand and driving down producer profits. Conversely, a weakening U.S. dollar reduces the cost of American agricultural commodities worldwide, causing them to be more competitive in global markets. The U.S. dollar weakened by more than 10 percent during 2017, as measured by the U.S. Dollar Index, which has recently enhanced the competitiveness of U.S. agricultural exports. However, a slowdown in global economic growth or changes in trade policies and agreements could adversely affect the demand for certain U.S. agricultural exports, whichprolonged disruption may result in downward pressure on commodity prices.
The U.S. experienced several severe weather events and natural disasters in 2017. Although severe weather events and natural disasters may damage a borrower’s property used in agricultural production, that damage may not affect a borrower’s ability to repay its obligations due to risk mitigating payments available in many cases from property and casualty insurance, crop insurance, and government disaster relief. Farmer Mac is not aware of any loans in its portfolio that are currently experiencing distress due to the weather events that occurred in 2017 and believes that these events are not likely to have a material impact on the quality or performance of Farmer Mac’selevated loan portfolio.
In recent years, the 90-day delinquencies and credit losses in Farmer Mac's portfolio have remained low compared to their historical averages. However, some indicationsa higher percentage of stress have emerged, as the volume of Farmer Mac's substandard assets has generally increased since 2015 and 90-day delinquencies have
generally increased throughout 2017. Both measures have increased compared to the historically favorable levels observed in recent years. To date, the increases in these two measures have not yet translated into rising credit losses. Farmer Mac believes that any losses associated with the current agricultural credit cycle will be moderated by the strength and diversity of its portfolio, which Farmer Mac believes is adequately collateralized.loans rated substandard. Farmer Mac believes that its portfolio remains sufficientlycontinues to be highly diversified, both geographically and by commodity, and that its portfolio has been underwritten to high credit quality standards. Accordingly,Therefore, Farmer Mac believes that its portfolio is well-positioned to endure reasonably foreseeable volatility in commodity prices and farmland values and commodity prices. Farmer Mac also continues to closely monitor sector profitability, economic and weather conditions, and agricultural land value and geographic trends to tailor underwriting practices to changing conditions.values. For more information about the loan balances, loan-to-value ratios, 90-day delinquencies, and substandard asset rate for the Farm & Ranch loans in Farmer Mac'sMac’s portfolio as of December 31, 2017,2020, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."
Apart from the COVID-19 pandemic, three exogenous factors will continue to be a source of heightened uncertainty for the agricultural and food sectors: international trade, weather conditions, and state and federal farm policy. The U.S. agricultural sector has become increasingly dependent on foreign markets as a source of demand. Agriculture exports were strong in 2020, aided by a weaker U.S. dollar, a recovery in Chinese hog production and subsequent demand for feed inputs, and better overall trade relations. The U.S. experienced $22 billion in severe weather disasters in 2020, the highest level in the 40 years tracked
by the National Oceanic and Atmospheric Administration. Many of those events affected agriculture, including a midwestern derecho, western wildfires, and western drought. Federal crop insurance provides a strong mitigator against this risk, but farmers and ranchers face increasingly-severe weather incidents. For more information about the recent Texas Arctic Freeze, please refer to the separate section below. Farmer Mac closely monitors state and federal legislation and regulations that could affect U.S. agriculture. Democrats took control of the White House, the U.S. House of Representatives, and the U.S. Senate in 2021. Although party control has not historically correlated with the availability of government farm payments, there could be changes in regulatory or tax policies that could affect the U.S. agricultural and food sectors. Farmer Mac continues to monitor the establishment and evolution of legislation and regulations, as well as the status of various international trade agreements and partnerships, that could affect farmers, ranchers, rural lenders, and rural America in general. The Tax Cuts and Jobs Act, signed into law in December 2017, may result in lower overall effective tax rates for U.S. farmers and ranchers, thereby improving after-tax returns for farming operations. The Agricultural Act of 2014, also referred to as the U.S. Farm Bill, expires in September 2018, at which time it is likely to be replaced by new legislation. Various federal agricultural policies, including those affecting crop subsidies, crop insurance, commodity support programs, and other aspects of agricultural production, in effect under the current U.S. Farm Bill may be altered with the enactment of new legislation. New legislation and regulations focused on groundwater management practices, including in California, may result in tighter restrictions on groundwater usage that could negatively affect agricultural producers in the future. Finally, as the Trump administration and the U.S. Congress continue their review of existing regulations and the promotion of new legislative or regulatory proposals and policies, Farmer Mac will monitor the effects that any changes in legislation or regulation could have on Farmer Mac or its customers.
Farmer Mac's marketing and brand awareness initiatives directed towards the Farm & Ranch line of business focus on lenders that have demonstrated a commitment to agricultural lending based on their lending history. Farmer Mac directs its outreach efforts to these lenders through direct personal contact, which is facilitated through Farmer Mac's frequent participation in state and national banking conferences, its alliances with the American Bankers Association and the Independent Community Bankers of America, and its business relationships with members of the Farm Credit System. Farmer Mac's initiatives to increase the awareness of Farmer Mac and its products withinRural Utilities Industry. The rural energy industry has less cyclicality than the agricultural lender community and the larger agricultural industry have included hosting events on relevant agricultural lending topics, participating on speaker panels at agriculture-related regional and national conferences, and distributing original content aboutsector, but does trend with conditions in the agriculturalgeneral economy. InHigher levels of unemployment and adverse credit markets are typically associated with drops in energy demand (i.e., lower commercial, industrial, or residential demand) and increases in industry ratings downgrades. The economic distress caused by the Farm & Ranch lineCOVID-19 pandemic has led to historic levels of business,unemployment and reduced energy demand from the commercial and industrial sectors. According to data from the U.S. Energy Information Administration, electricity sales to commercial and industrial consumers dropped 8% year-to-date through November 2020 compared to 2019. However, residential sales during the same period were up 2% compared to 2019, as residents spent more time at home during state, local, and self-imposed quarantines. Residential power sales are typically significantly more profitable than those for commercial and industrial consumers, so some of the profitability reduction from the loss of commercial and industrial sales can be offset by the change in sales mix. Sector sales mix varies from utility to utility based on the characteristics of the region served, so the degree of profitability offset may differ. Some rural electric cooperatives received forgivable loans through the Paycheck Protection Program (PPP), which are another potential source to offset any profitability reduction. The COVID-19 pandemic has also highlighted the greater need for and interest in access to broadband internet in rural areas, and the CARES Act authorized more than $300 million to support healthcare industry telecommunications and rural broadband grants. Farmer Mac is experiencing stronger 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 capitalexpects the heightened level of uncertainty surrounding the economic impacts of COVID-19 to continue their lending practices.
into 2021. Through December 31, 2020 Farmer Mac also directs marketing efforts towardshad not observed material degradation in the agricultural industry by tryingfinancial performance of its Rural Utilities portfolio.
During 2020, the sudden decrease of interest rates to identify and develop relationships with potential issuers of AgVantage securities, including insurance company agricultural lenders, agricultural finance companies, and bank and non-bank agricultural lenders such as agricultural mortgage funds, who can pledge loans as collateral to obtainhistoric lows drove significant financing asactivity on the part of Farmer Mac's Institutional Credit line of business. As part of these efforts, Farmer Mac has increased its focus on
wholesale financingrural electric cooperatives. Prospects for institutional investors in agricultural assets that qualify as eligible collateral under Farmer Mac's charter. Farmer Mac has tailored a version of its AgVantage product to this type of issuer, which is referred to as the Farm Equity AgVantage product. Farmer Mac also offers other AgVantage products tailored to fund investors in agricultural mortgages. Farmer Mac directs its outreach efforts to these potential issuers through its business relationships within the agricultural community and through executive outreach to institutions whose profile presents opportunity to benefit from wholesale financing. As institutional investment in agricultural assets continues to grow, Farmer Mac believes that it is in a unique position to help increase access to capital for these types of counterparties and thereby provide a new source of capital to benefit rural America. Farmer Mac 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. 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 and other AgVantage product offerings 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.
Rural Utilities Industry. Demand for capitalloan growth within the rural utilities industry generally remainsoverall appear to be moderate which has resulted in anthe short to medium term as ongoing high level of competition between rural utilities cooperative lenders that could suppress loannormal-course capital expenditures related to maintaining and upgrading utility infrastructure continue at typical levels. Farmer Mac's future growth opportunities for those lenders, including lenders that participatefinancing the electric cooperative industry may be affected by the demand for electric power in Farmer Mac's Rural Utilities linerural areas, capital expenditures by electric cooperatives driven by regulatory or technological changes, the continuation of business. Althougha low interest rate environment, and competitive pressures remaindynamics within the rural utilities lending industry,cooperative finance industry. In December 2020, the Federal Communication Commission’s Rural Digital Opportunity Fund (RDOF) auction awarded $9.2 billion in broadband-related operating cost subsidies to winning bidders. This may provide a catalyst for capital demands from rural electric cooperatives who seek to develop and deploy broadband services, as over $1.5 billion in subsidies were awarded to various rural electric cooperatives. The cooperatives that were unsuccessful RDOF bidders also gained knowledge about the processes and technologies involved in broadband projects, which may enable them to develop broadband infrastructure. In particular, these capital needs may provide Farmer Mac believes there iswith new financing opportunities with our existing customers.
The growth in renewable energy generation and deployment of energy storage technologies may help deepen Farmer Mac's relationships with existing customers through new business opportunities with them. This growth may also broaden Farmer Mac's customer base with cooperative lenders focused on lending to renewable cooperatives. In response to this growth, Farmer Mac has deployed new financing products tailored to the renewable energy sector, which represents a new market opportunity for growth among larger rural utilities borrowers because CFC increasingly partners withFarmer Mac. Under this new program, Farmer Mac to provide competitive pricing for transactions with these borrowers.purchased solar project participation interests from a new counterparty during first quarter 2020, wind project participation interests from an existing counterparty in third quarter 2020, and loans from a new counterparty in fourth quarter 2020. Farmer Mac also believes there areanticipates further growth opportunities within its Institutional Credit linein this area during 2021. As of business becauseDecember 31, 2020 the wholesale funding rates thattotal outstanding balance of Farmer Mac’s renewable energy financing portfolio was $73.0 million.
Texas Arctic Freeze. Farmer Mac is carefully monitoring the effects of the extremely cold weather during mid-February 2021 in the mid-south region, particularly in Texas, on both our agricultural and rural infrastructure portfolios. As of December 31, 2020, our agricultural portfolio exposure in Texas was approximately $611 million, with cattle being the largest commodity exposure. Cattle producers in that region could face animal health issues as a result of the freezing conditions, but most of our other commodity exposures in that region are less likely to be significantly affected by these conditions. As of December 31, 2020, our rural infrastructure portfolio exposure in Texas was approximately $377 million and is split between distribution and generation and transmission cooperatives. All these cooperatives were affected in some way by the arctic freeze such as obstacles in receiving fuel for power plants or the inability to obtain contracted electricity, which resulted in rolling blackouts across the state. We believe that the electric cooperatives in our portfolio located in Texas entered this period of stress in a strong financial position (including revolving lines of credit) to absorb cost increases. Most of these electric cooperatives have fuel or power cost pass-through provisions within their rate-making authority which provides mayflexibility to recoup market price fluctuations. It is unknown at this time what magnitude of cost pass-throughs will be highly competitive comparedrequired to other available sourcespay for additional energy costs and whether there will be new regulatory barriers to implementing them. As of debt funding forFebruary 25, 2021, we are not aware of any damage from the arctic freeze that would likely result in a material credit loss in either our agricultural portfolio or our rural utilities cooperative lenders.infrastructure portfolio.
Balance Sheet Review
Assets. Farmer Mac's total assetsThe following table summarizes the balance sheet as of December 31, 2017 were $17.8 billion, compared to $15.6 billion as of December 31, 2016.the periods indicated:
Table 24
| | | | | | | | | | | | | | | | | | | | | | | |
| As of | | Change |
| December 31, 2020 | | December 31, 2019 | | $ | | % |
| (in thousands) |
| Assets | | | | | | | |
| Cash and cash equivalents | $ | 1,033,941 | | | $ | 604,381 | | | $ | 429,560 | | | 71 | % |
| Investment securities, net of allowance | 3,898,724 | | | 3,004,875 | | | 893,849 | | | 30 | % |
| Farmer Mac Guaranteed Securities, net of allowance | 8,123,493 | | | 8,590,476 | | | (466,983) | | | (5) | % |
| USDA Securities | 2,480,321 | | | 2,241,073 | | | 239,248 | | | 11 | % |
| Loans, net of allowance | 8,535,146 | | | 6,981,440 | | | 1,553,706 | | | 22 | % |
| Other | 283,876 | | | 287,129 | | | (3,253) | | | (1) | % |
| Total assets | $ | 24,355,501 | | 24,355,501 | | $ | 21,709,374 | | | $ | 2,646,127 | | | 12 | % |
| Liabilities | | | | | | | |
| Notes Payable | 21,848,917 | | | 19,098,648 | | | 2,750,269 | | | 14 | % |
| Other | 1,514,107 | | | 1,811,450 | | | (297,343) | | | (16) | % |
| Total liabilities | $ | 23,363,024 | | | $ | 20,910,098 | | | $ | 2,452,926 | | | 12 | % |
| Total equity | 992,477 | | | 799,276 | | | 193,201 | | | 24 | % |
| Total liabilities and equity | $ | 24,355,501 | | | $ | 21,709,374 | | | $ | 2,646,127 | | | 12 | % |
Assets. The increase in total assets was primarily attributable to anthe net growth in our outstanding business volume across most lines of business.
The increase in total Farmer Mac Guaranteed Securities and total loans, net of allowance.
As of December 31, 2017, Farmer Mac had $0.3 billion of cash and cash equivalents and $2.3 billion of investment securities comparedwas primarily due to $0.3 billion of casha decision to increase our liquidity investment portfolio due to the COVID-19 pandemic and cash equivalents and $2.5 billion of investment securities. As of December 31, 2017, Farmer Mac had $7.6 billion of Farmer Mac Guaranteed Securities, $5.3 billion of loans, net of allowance, and $2.1 billion of USDA Securities. This compares to $6.0 billion of Farmer Mac Guaranteed Securities, $4.5 billion of loans, net of allowance, and $2.0 billion of USDA Securities as of December 31, 2016.support our program asset growth.
Liabilities. Farmer Mac's total liabilities were $17.1 billion as of December 31, 2017, compared to $15.0 billion as of December 31, 2016. The increase in total liabilities was primarily attributabledue to an increase in total notes payable.payable to support our program asset growth.
Equity. As of December 31, 2017, Farmer Mac had total equity of $708.1 million, which is comprised entirely of stockholders' equity. As of December 31, 2016, Farmer Mac had total equity of $643.6 million, comprised of stockholders' equity of $643.4 million and non-controlling interest of $0.2 million. As of May 1, 2017, Farmer Mac transferred its entire 65% ownership interest in AgVisory back to the limited liability company and recognized a loss of approximately $0.1 million, after-tax, upon the transfer. The increase in total equity during 2017 was a resultprimarily due to the issuance of the Series E Preferred Stock and the Series F Preferred Stock and an increase in retained earningsnet income. These increases were partially offset by the redemption of the Series A Preferred stock and accumulatedan increase in other comprehensive income. The increase in accumulated other comprehensive income waslosses, net of tax, primarily due to increasesdecreases in the fair value on certain floating-rate AgVantage securities.of available-for-sale securities and financial derivatives designated in cash flow hedge accounting relationships.
In addition, Farmer Mac elected to adopt ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,"for the year ended December 31, 2017. This change in accounting principle resulted in an increase to "Accumulated other comprehensive income, net of tax" and a corresponding decrease to "Retained earnings" of $9.1 million. See Note 2(r) to the consolidated financial statements for more information about the adoption of ASU 2018-02 and the effect on Farmer Mac's consolidated financial statements.
Risk Management
Credit Risk – Loans and Guarantees.
COVID-19
Farmer Mac is exposedcontinues to monitor the effects of the COVID-19 pandemic on Farmer Mac's credit risk resultingrelated to Farmer Mac's borrower exposures. In mid-2020, Farmer Mac experienced an increase in payment deferment requests from the inabilityits network of loan servicers on behalf of borrowers in Farmer Mac's
Farm & Ranch loan portfolio, although deferment requests were below our expectations. Our early expectations for payment deferment requests were based on forecasts provided by other GSEs and other Farm Credit System institutions. To address the requests that we have received, Farmer Mac has established criteria for approval of payment deferments for borrowers impacted by the COVID-19 pandemic and have communicated these criteria to repay their loans in conjunction with a deficiency inkey counterparties. Farmer Mac will monitor the valuecriteria as the impact of the collateral relativepandemic continues to unfold and determine if any changes should be made. Most of the outstandingpayment deferments Farmer Mac has approved and executed for loans it has purchased or securitized in its Farm & Ranch portfolio have been for up to six months, with the deferred principal and interest payments capitalized into the unpaid principal balance of the loan andloan. The unpaid principal balance is then re-amortized over 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 percentremaining term of the credit riskloan. Approved and executed payment deferments for loans in LTSPCs have varied from three-month payment deferments for principal and interest to deferred interest-only payments for up to twelve months, depending on loans held and loans underlying LTSPCsthe applicable LTSPC lender's deferment policy. As of December 31, 2020, we have executed payment deferments in the Farm & Ranch and Rural Utilities linesUSDA Securities portfolios related to an aggregate of $432.0 million of unpaid principal balances, which represents 1.97% of our total outstanding business volume.
In addition, FCA has issued regulatory guidance encouraging Farmer Mac to work with its lending and loans underlyingservicing partners in approving and executing servicing actions for borrowers impacted by COVID-19. The table below presents a cumulative summary of COVID-19 payment deferments through December 31, 2020 in the Farm & Ranch Guaranteed Securities.and USDA Guarantees lines of business. Farmer Mac has direct credit exposure to the loans in non-AgVantage transactions but only indirect credit exposure to loans that secure AgVantage transactions because AgVantage securities represent a general obligation of an issuer that is, in turn, secured by eligible loans. Non-AgVantage transactions like loan purchases, LTSPCs, and "pass-through" guaranteed securities that represent beneficial interests in the underlying loans do not include a general obligation of a counterparty as a separate source of repayment. For the reasons described in more detail below, Farmer Mac excludes its assets in the USDA Guarantees line of business, the loansreceived any payment deferment requests in the Rural Utilities line of business,business. For more information about FCA's regulatory guidance related to the COVID-19 pandemic, see "Management's Discussion and AgVantage securities inAnalysis of Financial Condition and Results of Operations—Regulatory Matters."
Table 25
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Farm & Ranch COVID-19 Deferments Summary |
| | |
| | | | | | | | |
| | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | As of December 31, 2020(1) |
| | Unpaid Principal Balance |
| | Requested, but not yet Approved | | Approved, but not yet Executed | | Not Approved(2) | | Approved and Executed |
| Farm & Ranch: | | (in thousands) |
| On-balance sheet: | | | | | | | | |
| Loans held for investment | | $ | 286 | | | $ | 675 | | | $ | — | | | $ | 118,903 | |
| Loans held in consolidated trusts | | — | | | 2,005 | | | 1,140 | | | 26,564 | |
| On-balance sheet total | | $ | 286 | | | $ | 2,680 | | | $ | 1,140 | | | $ | 145,467 | |
| Off-balance sheet: | | | | | | | | |
| LTSPCs | | 585 | | | 8,144 | | | 3,502 | | | 193,665 | |
| Farm & Ranch Total | | $ | 871 | | $ | — | | $ | 10,824 | | | $ | 4,642 | | | $ | 339,132 | |
| USDA: | | | | | | | | |
| USDA Securities | | $ | 11,664 | | | $ | — | | | $ | 5,081 | | | $ | 86,703 | |
| Farmer Mac Guaranteed USDA Securities | | 946 | | | — | | | 382 | | | 6,189 | |
| USDA Total | | $ | 12,610 | | | $ | — | | | $ | 5,463 | | | $ | 92,892 | |
| | | | | | | | |
| Farm & Ranch and USDA Total Deferments | | $ | 13,481 | | | $ | 10,824 | | | $ | 10,105 | | | $ | 432,024 | |
(1)Loans under a COVID-19 deferment are not considered to be past due.
(2)Typically due to the Institutional Credit line of businessborrower withdrawing from the loan-level credit risk metrics it discloses.COVID-19 deferment process. For example, the borrower may have refinanced the loan, paid off the loan, or decided not to pursue payment relief.
Farm & Ranch
Farmer Mac's direct credit exposure to Farm & Ranch loans held and loans underlying Farm & Ranch Guaranteed Securities and LTSPCs as of December 31, 20172020 was $6.9$8.6 billion across 48 states. Farmer Mac has establishedapplies credit underwriting standards and methodologies to help assess exposures to Farm & Ranch loans, which may include collateral valuation, financial metrics, and documentation standards for agricultural real estate mortgage loansother appropriate borrower financial and believescredit information. For larger loan exposures to agriculture production and agribusinesses that these standards mitigate thesupport agriculture production, food and fiber processing, and other supply chain production, which may have different risk of loss from borrower defaultsprofiles, Farmer Mac has implemented methodologies and provide guidance about the management, administration, and conduct of underwriting and appraisals to all participating and potential lenders. These standards were developedparameters that help assess credit risk based on industry practices for agricultural real estate mortgage loansthe appropriate sector, borrower construct, 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.transaction complexity. For more information about Farmer Mac's underwriting and collateral valuation standards for Farm & Ranch loans, see "Business—Farmer Mac's Lines of Business—Farm & Ranch—Underwriting and Collateral Valuation (Appraisal) Standards."Standards".
Farmer Mac's direct credit exposure to Rural Utilities loans held and loans underlying LTSPCs as of December 31, 2017 was $1.9 billion across 39 states, of which $1.4 billion were loans to electric distribution cooperatives and $0.5 billion were loans to generation and transmission ("G&T") cooperatives. Farmer Mac has developed different underwriting standards for rural utilities loans that depend on whether direct or indirect credit exposure is assumed on a loan and whether the borrower is an electric distribution cooperative or a G&T cooperative. See "Business—Farmer Mac's Lines of Business—Rural Utilities—Underwriting." As of December 31, 2017, 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 has indirect credit exposure to the Farm & Ranch loans and Rural Utilities loans that secure AgVantage securities included in the Institutional Credit line of business. Farmer Mac's AgVantage securities are general obligations of institutions approved by Farmer Mac and are secured by current loans in an amount at least equal to the outstanding principal amount of the related security. Accordingly, Farmer Mac excludes the loans that secure AgVantage securities from the credit risk metrics it discloses because Farmer Mac has only indirect credit risk on those loans and because of the other characteristics of AgVantage securities that mitigate credit risk. Those characteristics include a general obligation of an issuing institution approved by Farmer Mac, the required collateralization level for the securities, the requirement for delinquent loans to be removed from the pool of pledged loans and replaced with current eligible loans, and in some cases, the requirement for the counterparty to comply with specified financial covenants for the life of the related AgVantage security. As of December 31, 2017,2020, Farmer Mac had not experienced any credit losses on any AgVantage securities and does not expect to incur any such losses in the future.securities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Institutional" for more information about Farmer Mac's credit risk on AgVantage securities.
The credit exposure of Farmer Mac and Farmer Mac II LLC on USDA Securities, including those underlying Farmer Mac Guaranteed USDA Securities, is covered by the full faith and credit of the United States. Therefore, Farmer Mac believes that Farmer Mac and Farmer Mac II LLC have little or no credit risk exposure in the USDA Guarantees line of business because of the USDA guarantee. As of December 31, 2017, neither Farmer Mac nor Farmer Mac II LLC had experienced any credit losses on any business under the USDA Guarantees line of business, and neither expects to incur any such losses in the future.
Loans in the Farm & Ranch line of business are all secured by first liens on agricultural real estate. Accordingly, Farmer Mac's exposure on a loan is limited to the difference between (1) the total of the accrued interest, advances, and the principal balance of a loan and (2) the value of the property less the cost to sell. Measurement of that excess or shortfall is the best predictor and determinant of loss, compared to other measures that evaluate the efficiency of a particular farm operator. For example, debt service ratios depend upon farm operator efficiency and leverage, which can vary widely within a geographic region or commodity type or based upon an operator's business and farming skills. Thus, Farmer Mac considers a loan's original loan-to-value ratio as one of many factors in evaluating loss severity. This ratio is calculated by dividing the loan principal balance at the time of guarantee, purchase, or commitment by the appraised value at the date of loan origination or, when available, updated appraised value at the time of guarantee, purchase, or commitment. Other factors Farmer Mac considers include, but are not limited to, other underwriting standards, commodity and farming forecasts, and regional economic and agricultural conditions.
Loan-to-value ratios depend uponon the market value of a property, as determined in accordance with Farmer Mac's collateral valuation standards. As of December 31, 20172020 and 2016,December 31, 2019, the average unpaid loan balanceprincipal balances for loans outstanding in the Farm & Ranch line of business was $642,000$742,000 and $611,000,$683,000, respectively. TheFarmer Mac calculates the "original loan-to-value" ratio of a loan by dividing the original loan-to-value ratio is based onloan principal balance by the original appraised value that hasproperty value. This calculation does not been indexedreflect any amortization of the original loan balance or any adjustment to the original appraised value to provide a current market value or reflect amortization of loans. As of second quarter 2017, Farmer Mac revised its calculation of thevalue. The original loan-to-value ratio of a loan to combine for any cross-collateralized loans: (1) the original loan principal balance amounts in the numerator; and (2) the original appraised property values in the denominator. In previous periods, the ratio wasloans is calculated on a combined basis rather than on a loan-by-loan basis without considering the effects of any cross-collateralization. Prior period ratios of original loan-to-value have been recalculated to conform to this revised calculation.basis. The weighted-average original loan-to-value ratio for Farm & Ranch loans purchased during 20172020 was 50 percent,54%, compared to 53 percent51% for loans purchased during 2016.2019. The weighted-average original loan-to-value ratio for all Farm & Ranch loans held and all loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs was approximately 51 percent52% and 51% as of both December 31, 20172020 and 2016.December 31, 2019, respectively. The weighted-average original loan-to-value ratio for all 90-day delinquencies was 52 percent50% and 55 percent, respectively,53% as of December 31, 20172020 and 2016.December 31, 2019, respectively.
The weighted-average current loan-to-value ratio which is the loan-to-value(the loan to-value ratio based on original appraised value but which reflectsand current outstanding loan amortization since purchase,amount adjusted to reflect amortization) for Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs was approximately 45 percent46% and 44 percent45% as of December 31, 20172020 and 2016,December 31, 2019, respectively.
For more information about the credit quality of 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 sheetMac's Farm & Ranch Guaranteed Securities. The methodology that Farmer Mac uses to determineportfolio and the level of itsassociated allowance for losses is described in Note 2(j)please refer to Notes 8 and 12 to the consolidated financial statements. Management believes that this methodology produces a reasonable estimate of probable losses, as of the balance sheet date, for all loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs.
The following table summarizes the components of Farmer Mac's total allowance for losses as of December 31, 2017 and 2016:
Table 17
|
| | | | | | | |
| | As of December 31, 2017 | | As of December 31, 2016 |
| | (in thousands) |
| Allowance for loan losses | $ | 6,796 |
| | $ | 5,415 |
|
| Reserve for losses: | |
| | |
|
| Off-balance sheet Farm & Ranch Guaranteed Securities | 257 |
| | 226 |
|
| LTSPCs | 1,813 |
| | 1,794 |
|
| Total allowance for losses | $ | 8,866 |
| | $ | 7,435 |
|
The following table summarizes the changes in the components of Farmer Mac's total allowance for each year in the five-year period ended December 31, 2017
Table 18
|
| | | | | | | | | | | |
| | Allowance
for Loan
Losses | | Reserve
for Losses | | Total
Allowance
for Losses |
| | (in thousands) |
| Balance as of January 1, 2013 | $ | 11,351 |
| | $ | 5,539 |
| | $ | 16,890 |
|
| (Release of)/provision for losses | (481 | ) | | 929 |
| | 448 |
|
| Charge-offs | (4,004 | ) | | — |
| | (4,004 | ) |
| Balance as of December 31, 2013 | $ | 6,866 |
| | $ | 6,468 |
| | $ | 13,334 |
|
| Release of losses | (961 | ) | | (2,205 | ) | | (3,166 | ) |
| Charge-offs | (86 | ) | | $ | — |
| | (86 | ) |
| Recoveries | 45 |
| | — |
| | 45 |
|
| Balance as of December 31, 2014 | $ | 5,864 |
| | $ | 4,263 |
| | $ | 10,127 |
|
| Provision for/(release of) losses | 2,388 |
| | (2,180 | ) | | 208 |
|
| Charge-offs | (3,772 | ) | | — |
| | (3,772 | ) |
| Balance as of December 31, 2015 | $ | 4,480 |
| | $ | 2,083 |
| | $ | 6,563 |
|
Provision for/(release of) losses
| 1,065 |
| | (63 | ) | | 1,002 |
|
| Charge-offs | (130 | ) | | — |
| | (130 | ) |
| Balance as of December 31, 2016 | $ | 5,415 |
| | $ | 2,020 |
| | $ | 7,435 |
|
| Provision for losses | 1,708 |
| | 50 |
| | 1,758 |
|
| Charge-offs | (327 | ) | | $ | — |
| | (327 | ) |
| Balance as of December 31, 2017 | $ | 6,796 |
| | $ | 2,070 |
| | $ | 8,866 |
|
Activity affecting the allowance for loan losses and reserve for losses is discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Provision for and Release of Allowance for Loan Losses and Reserve for Losses." As of December 31, 2017, Farmer Mac's total allowance for losses totaled $8.9 million, or 0.13 percent of the outstanding principal balance of Farm & Ranch loans held for investment and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities, compared to $7.4 million, or 0.12 percent, as of December 31, 2016. The $1.5 million increase in the total allowance for losses was primarily attributable to net volume growth in Farm & Ranch loans and downgrades in risk ratings, which caused a net increase to the specific allowance for certain impaired on-balance sheet crop and permanent plantings loans.
As of December 31, 2017, Farmer Mac individually evaluated $33.9 million of the $147.1 million of recorded investment in impaired assets for collateral shortfalls against updated appraised values, other updated collateral valuations, or discounted values. For the remaining $113.2 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 $2.9 million for undercollateralized assets as of December 31, 2017. Farmer Mac's general allowances were $6.0 million as of December 31, 2017.
The charge-offs recorded during 2017 were primarily related to two impaired crop loans, with one borrower, that were foreclosed and transitioned to REO during first quarter 2017. Farmer Mac had previously recorded a specific allowance of $0.2 million on these impaired crop loans as of December 31, 2016. In second quarter 2017, Farmer Mac sold the related properties for $5.4 million and recognized a $0.8 million gain on the sale of the REO.
Farmer Mac's 90-day delinquency measure includes loans 90 days or more past due, as well as loans in foreclosure and non-performing loans where the borrower is in bankruptcy. As of December 31, 2017,2020, Farmer Mac's 90-day delinquencies were $48.4$46.2 million (0.71 percent(0.54% of the Farm & Ranch portfolio), compared
to $21.0$61.0 million (0.34 percent(0.78% of the Farm & Ranch portfolio) as of December 31, 2016.2019. Those 90-day delinquencies were comprised of 51 delinquent loans as of December 31, 2017, compared with 38 delinquent loans as of December 31, 2016. The increase in 90-day delinquencies, as2020, compared to 57 delinquent loans as of December 31, 2016, is2019. The decrease in 90-day delinquencies was primarily attributabledriven by three commodity groups – permanent plantings, livestock, and part-time farms. The decreases in those commodity groups were partially offset by increases related to the delinquency of several larger loansagricultural storage & processing loan secured by a specialized poultry facility and certainmultiple crop and permanent planting loans mostly due to factors specific to theloans. The top ten borrower and not related to macroeconomic factors in the agricultural economy. In particular, $15.3 million in permanent planting loans to a single borrower becameexposures over 90 days delinquent in first quarter 2017 and accounts forrepresented over half of the increase in 90-day delinquencies. Farmer Mac believes it is adequately collateralized on this exposure. Farmer Mac's 90-day delinquencies have historically fluctuated from quarter to quarter, bothas of December 31, 2020. Loans under COVID-19 deferment are not considered past due and are not included in dollars and as a percentage of the outstanding Farm & Ranch portfolio, with higher levels generally observed at the end of the first and third quarters and lower levels generally observed at the end of the second and fourth quarters of each year as a result of the annual (January 1st) and semi-annual (January 1st and July 1st) payment terms of most Farm & Ranch loans.our delinquent loan statistics. Farmer Mac believes that it remains adequately collateralized on theseits delinquent loans. Farmer Mac expects that over time its
Our 90-day delinquency rate will revert closer toas of December 31, 2020 was below Farmer Mac's historical average (which it did as of third quarter 2017), and possiblyaverage. In the near-term, our delinquency rate may exceed it,our historical average due to macroeconomic factors and the cyclical natureexpected impact of the COVID-19 pandemic on the agricultural economy. Farmer Mac's average 90-day delinquency rate as a percentage of its Farm & Ranch portfolio over the last 15 years is approximately 1 percent.1%. The highest 90-day delinquency rate observed during that period occurred in 2009 at approximately 2 percent,2%, which coincided with increased delinquencies in loans within Farmer Mac's then-held ethanol loan portfolio that Farmer Mac no longer holds. Although the vast majority of the year-over-year increase in 90-day delinquencies is due to borrower-specific factors, other factors such as macroeconomic trends and the cyclical nature of the agricultural economy could contribute to an increase in 90-day delinquencies in the future.
The following table presents historical information regardingabout Farmer Mac's 90-day delinquencies in the Farm & Ranch line of business compared to the unpaid principal balance of all Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs:
Table 1926
| | | | | | | | | | | | | | | | | |
| Farm & Ranch Line of Business | | 90-Day
Delinquencies | | Percentage |
| | (dollars in thousands) |
| As of: | | | | | |
| December 31, 2020 | $ | 8,581,181 | | | $ | 46,232 | | | 0.54 | % |
| September 30, 2020 | 8,249,349 | | | 88,041 | | | 1.07 | % |
| June 30, 2020 | 8,017,850 | | | 68,682 | | | 0.86 | % |
| March 31, 2020 | 7,811,594 | | | 79,722 | | | 1.02 | % |
| December 31, 2019 | 7,776,950 | | | 60,954 | | | 0.78 | % |
| September 30, 2019 | 7,393,728 | | | 59,691 | | | 0.81 | % |
| June 30, 2019 | 7,291,352 | | | 28,045 | | | 0.38 | % |
| March 31, 2019 | 7,215,585 | | | 52,366 | | | 0.73 | % |
| December 31, 2018 | 7,233,971 | | | 26,881 | | | 0.37 | % |
|
| | | | | | | | | | |
| | Farm & Ranch Line of Business | | 90-Day
Delinquencies | | Percentage |
| | (dollars in thousands) |
| As of: | | | | | |
| December 31, 2017 | $ | 6,867,586 |
| | $ | 48,444 |
| | 0.71 | % |
| September 30, 2017 | 6,557,030 |
| | 66,381 |
| | 1.01 | % |
| June 30, 2017 | 6,426,518 |
| | 41,901 |
| | 0.65 | % |
| March 31, 2017 | 6,240,467 |
| | 50,807 |
| | 0.81 | % |
| December 31, 2016 | 6,139,304 |
| | 21,038 |
| | 0.34 | % |
| September 30, 2016 | 6,004,728 |
| | 18,377 |
| | 0.31 | % |
| 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 | % |
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 0.25 percent0.21% of total outstanding business volume as of December 31, 2017,2020, compared to 0.12 percent0.29% as of December 31, 2016.
2019 and 0.14% as of December 31, 2018. The following table presents outstanding Farm & Ranch loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities and 90-day delinquencies as of December 31, 20172020 by year of origination, geographic region, commodity/collateral type, original loan-to-value ratio, and range in the size of borrower exposure:
Table 20
|
| | | | | | | | | | | | | |
| Farm & Ranch 90-Day Delinquencies as of December 31, 2017 |
| | Distribution of Farm & Ranch Line of Business | | Farm & Ranch Line of Business | | 90-Day Delinquencies(1) | | Percentage |
| | (dollars in thousands) |
| By year of origination: | | | | | | | |
| 2007 and prior | 11 | % | | $ | 752,033 |
| | $ | 7,860 |
| | 1.05 | % |
| 2008 | 2 | % | | 172,998 |
| | 550 |
| | 0.32 | % |
| 2009 | 2 | % | | 106,427 |
| | 482 |
| | 0.45 | % |
| 2010 | 3 | % | | 174,235 |
| | 1,136 |
| | 0.65 | % |
| 2011 | 4 | % | | 249,293 |
| | 767 |
| | 0.31 | % |
| 2012 | 9 | % | | 589,919 |
| | — |
| | — | % |
| 2013 | 12 | % | | 850,314 |
| | 1,578 |
| | 0.19 | % |
| 2014 | 10 | % | | 658,571 |
| | 20,055 |
| (2) | 3.05 | % |
| 2015 | 13 | % | | 871,938 |
| | 10,604 |
| (3) | 1.22 | % |
| 2016 | 16 | % | | 1,174,003 |
| | 3,920 |
| | 0.33 | % |
| 2017 | 18 | % | | 1,267,855 |
| | 1,492 |
| | 0.12 | % |
| Total | 100 | % | | $ | 6,867,586 |
| | $ | 48,444 |
| | 0.71 | % |
By geographic region(4): | |
| | |
| | |
| | |
|
| Northwest | 11 | % | | $ | 740,991 |
| | $ | 4,222 |
| | 0.57 | % |
| Southwest | 30 | % | | 2,093,213 |
| | 4,933 |
| | 0.24 | % |
| Mid-North | 33 | % | | 2,244,094 |
| | 5,799 |
| | 0.26 | % |
| Mid-South | 13 | % | | 908,603 |
| | 13,187 |
| | 1.45 | % |
| Northeast | 4 | % | | 296,264 |
| | 1,433 |
| | 0.48 | % |
| Southeast | 9 | % | | 584,421 |
| | 18,870 |
| | 3.23 | % |
| Total | 100 | % | | $ | 6,867,586 |
| | $ | 48,444 |
| | 0.71 | % |
| By commodity/collateral type: | | | |
| | |
| | |
|
| Crops | 53 | % | | $ | 3,657,945 |
| | $ | 21,853 |
| | 0.60 | % |
| Permanent plantings | 20 | % | | 1,367,563 |
| | 18,833 |
| | 1.38 | % |
| Livestock | 20 | % | | 1,334,958 |
| | 3,835 |
| | 0.29 | % |
| Part-time farm | 6 | % | | 433,628 |
| | 3,923 |
| | 0.90 | % |
| Ag. Storage and Processing | 1 | % | | 58,761 |
| | — |
| | — | % |
| Other | — |
| | 14,731 |
| | — |
| | — | % |
| Total | 100 | % | | $ | 6,867,586 |
| | $ | 48,444 |
| | 0.71 | % |
By original loan-to-value ratio(5): | | | | | | | |
| 0.00% to 40.00% | 19 | % | | $ | 1,322,422 |
| | $ | 5,206 |
| | 0.39 | % |
| 40.01% to 50.00% | 25 | % | | 1,733,671 |
| | 11,294 |
| | 0.65 | % |
| 50.01% to 60.00% | 35 | % | | 2,385,605 |
| | 28,822 |
| | 1.21 | % |
| 60.01% to 70.00% | 17 | % | | 1,150,914 |
| | 2,240 |
| | 0.19 | % |
70.01% to 80.00%(6) | 4 | % | | 248,799 |
| | 882 |
| | 0.35 | % |
80.01% to 90.00%(6) | — | % | | 26,175 |
| | — |
| | — | % |
| Total | 100 | % | | $ | 6,867,586 |
| | $ | 48,444 |
| | 0.71 | % |
By size of borrower exposure(7): | | | | | | | |
| Less than $1,000,000 | 35 | % | | $ | 2,379,596 |
| | $ | 10,536 |
| | 0.44 | % |
| $1,000,000 to $4,999,999 | 38 | % | | 2,627,617 |
| | 12,808 |
| | 0.49 | % |
| $5,000,000 to $9,999,999 | 13 | % | | 867,574 |
| | 9,815 |
| (3) | 1.13 | % |
| $10,000,000 to $24,999,999 | 8 | % | | 584,896 |
| | 15,285 |
| (2) | 2.61 | % |
| $25,000,000 to $50,000,000 | 6 | % | | 407,903 |
| | — |
| | — | % |
| Total | 100 | % | | $ | 6,867,586 |
| | $ | 48,444 |
| | 0.71 | % |
| |
(1)
| Includes loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are 90 days or more past due, in foreclosure, or in bankruptcy with at least one missed payment, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan. |
| |
(2)
| Includes $15.3 million of permanent planting loans with one borrower located in the Southeast who became 90-days delinquent during first quarter 2017. The original combined loan-to-value ratio of these two permanent planting loans was between 50.01% to 60.00%. |
| |
(3)
| Includes $9.8 million related to two crop loans located in the Mid-South that became 90 days delinquent as a result of a bankruptcy filed by one borrower. These two loans with the same borrower had separate underlying collateral with original loan-to-value ratios between 40.01% to 50.00% and 50.01% to 60.00%, respectively. |
| |
(4)
| 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). |
| |
(5)
| As of second quarter 2017, Farmer Mac revised its calculation of the original loan-to-value ratio of a loan to combine for any cross-collateralized loans: (i) the original loan principal balance amounts in the numerator; and (ii) the original appraised property values in the denominator. In previous periods, the ratio was calculated on a loan-by-loan basis without considering the effects of any cross-collateralization. Prior period information has been reclassified to conform to the current period calculation and presentation. |
| |
(6)
| Primarily part-time farm loans. Loans with an original loan-to-value ratio of greater than 80% are required to have private mortgage insurance. |
| |
(7)
| Includes aggregated loans to single borrowers or borrower-related entities. |
Table 27
| | | | | | | | | | | | | | | | | | | | | | | |
| Farm & Ranch 90-Day Delinquencies as of December 31, 2020 |
| | Distribution of Farm & Ranch Line of Business | | Farm & Ranch Line of Business | | 90-Day Delinquencies(1) | | Percentage |
| | (dollars in thousands) |
| By year of origination: | | | | | | | |
| 2010 and prior | 7 | % | | $ | 592,548 | | | $ | 2,591 | | | 0.44 | % |
| 2011 | 2 | % | | 130,862 | | | — | | | — | % |
| 2012 | 4 | % | | 326,344 | | | — | | | — | % |
| 2013 | 6 | % | | 474,806 | | | 961 | | | 0.20 | % |
| 2014 | 4 | % | | 373,001 | | | 1,077 | | | 0.29 | % |
| 2015 | 6 | % | | 540,674 | | | 691 | | | 0.13 | % |
| 2016 | 10 | % | | 875,272 | | | 11,326 | | | 1.29 | % |
| 2017 | 11 | % | | 903,891 | | | 14,811 | | | 1.64 | % |
| 2018 | 9 | % | | 828,905 | | | 2,317 | | | 0.28 | % |
| 2019 | 14 | % | | 1,178,015 | | | 12,458 | | | 1.06 | % |
| 2020 | 27 | % | | 2,356,863 | | | — | | | 1.06 | % |
| Total | 100 | % | | $ | 8,581,181 | | | $ | 46,232 | | | 0.54 | % |
By geographic region(2): | | | | | | | |
| Northwest | 12 | % | | $ | 1,048,868 | | | $ | 11,690 | | | 1.11 | % |
| Southwest | 35 | % | | 2,981,880 | | | 1,616 | | | 0.05 | % |
| Mid-North | 29 | % | | 2,483,698 | | | 15,056 | | | 0.61 | % |
| Mid-South | 12 | % | | 1,059,152 | | | 3,043 | | | 0.29 | % |
| Northeast | 4 | % | | 368,156 | | | 4,396 | | | 1.19 | % |
| Southeast | 8 | % | | 639,427 | | | 10,431 | | | 1.63 | % |
| Total | 100 | % | | $ | 8,581,181 | | | $ | 46,232 | | | 0.54 | % |
| By commodity/collateral type: | | | | | | | |
| Crops | 50 | % | | $ | 4,344,410 | | | $ | 27,589 | | | 0.64 | % |
| Permanent plantings | 24 | % | | 2,041,054 | | | 1,462 | | | 0.07 | % |
| Livestock | 18 | % | | 1,536,808 | | | 8,927 | | | 0.58 | % |
| Part-time farm | 6 | % | | 506,140 | | | 754 | | | 0.15 | % |
| Ag. Storage and Processing | 2 | % | | 148,091 | | | 7,500 | | | 5.06 | % |
| Other | — | | | 4,678 | | | — | | | — | % |
| Total | 100 | % | | $ | 8,581,181 | | | $ | 46,232 | | | 0.54 | % |
| By original loan-to-value ratio: | | | | | | | |
| 0.00% to 40.00% | 17 | % | | $ | 1,466,011 | | | $ | 3,803 | | | 0.26 | % |
| 40.01% to 50.00% | 25 | % | | 2,104,552 | | | 16,615 | | | 0.79 | % |
| 50.01% to 60.00% | 35 | % | | 2,998,033 | | | 22,874 | | | 0.76 | % |
| 60.01% to 70.00% | 20 | % | | 1,695,216 | | | 2,608 | | | 0.15 | % |
70.01% to 80.00%(3) | 3 | % | | 301,886 | | | 222 | | | 0.07 | % |
80.01% to 90.00%(3) | — | % | | 15,483 | | | 110 | | | 0.71 | % |
| Total | 100 | % | | $ | 8,581,181 | | | $ | 46,232 | | | 0.54 | % |
By size of borrower exposure(4): | | | | | | | |
| Less than $1,000,000 | 29 | % | | $ | 2,475,210 | | | $ | 6,456 | | | 0.26 | % |
| $1,000,000 to $4,999,999 | 35 | % | | 2,980,950 | | | 22,026 | | | 0.74 | % |
| $5,000,000 to $9,999,999 | 15 | % | | 1,297,834 | | | 7,500 | | | 0.58 | % |
| $10,000,000 to $24,999,999 | 12 | % | | 1,019,996 | | | 10,250 | | | 1.00 | % |
| $25,000,000 and greater | 9 | % | | 807,191 | | | — | | | — | % |
| Total | 100 | % | | $ | 8,581,181 | | | $ | 46,232 | | | 0.54 | % |
(1)Includes loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are 90 days or more past due, in foreclosure, or in bankruptcy with at least one missed payment, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.
(2)Geographic regions: Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).
(3)Primarily part-time farm loans. Loans with an original loan-to-value ratio of greater than 80% are required to have private mortgage insurance.
(4)Includes aggregated loans to single borrowers or borrower-related entities.
Another indicator that Farmer Mac considers in analyzing the credit quality of its Farm & Ranch portfolio is the level of internally-rated "substandard" assets, both in dollars and as a percentage of the outstanding Farm & Ranch portfolio. Assets categorized as "substandard" have a well-defined weakness or weaknesses, and there is a distinct possibility that some loss will be sustained if deficiencies are not corrected. As of December 31, 2017,2020, Farmer Mac's substandard assets were $221.3$291.5 million (3.2 percent(3.4% of the Farm & Ranch portfolio), compared to $165.2$310.0 million (2.7 percent(4.0% of the Farm & Ranch portfolio) as of December 31, 2016.2019. Those substandard assets were comprised of 307343 loans as of December 31, 20172020 and 287353 loans as of December 31, 2016. 2019.
The $56.1decrease of $18.5 million increase from year-end 2016in substandard assets during 2020 was primarily driven by credit upgrades in our on-balance sheet portfolio, partially offset by credit downgrades in our off-balance sheet portfolio during the year. Substandard assets decreased as a percentage of the total on-balance sheet loans. The new substandard asset volume from year-end 2016 includes several large exposures and also represents a relatively diverse set of commodities. Farmer Mac expects that over time its substandard asset rate will eventually revert closer to, and possibly exceed, Farmer Mac's historical averageportfolio primarily due to macroeconomic factors and the cyclical naturecredit upgrades in our on-balance sheet portfolio. Substandard assets increased as a percentage of the agricultural economy. total off-balance sheet portfolio primarily due to the credit downgrades in our off-balance sheet portfolio. The percentage of substandard assets within the portfolio closely approximates the historical average.
Farmer Mac's average substandard assets as a percentage of its Farm & Ranch portfolio over the last 15 years is approximately 4 percent.4%. Due to the COVID-19 pandemic, we believe that the substandard rate could rise above that historical average in the short-term. However, the recent improvements in the agricultural economy could potentially counter the negative effects of COVID-19 on our loan portfolio. The full extent of the impact of the COVID-19 pandemic remains to be seen, and we will continue to monitor its impact on our substandard asset rate. The highest substandard asset rate observed during that periodthe last 15 years occurred in 2010 at approximately 8 percent,8%, which coincided with an increase in substandard loans within Farmer Mac's then-held ethanol portfolio that Farmer Mac no longer holds. If Farmer Mac's substandard asset rate continues to increaseincreases from current levels, it is likely that Farmer Mac's provision to the allowance for loan losses and the reserve for losses will also increase.
Although some credit losses are inherent to the business of agricultural lending, Farmer Mac believes that any losses associated with the current agricultural credit cycle will be moderated by the strength and diversity of its portfolio, which Farmer Mac believes is adequately collateralized. See Note 8 to
The following table presents the consolidated financial statementscurrent loan-to-value ratios for more information regarding credit quality indicators related tothe Farm & Ranch loans heldportfolio, as disaggregated by internally assigned risk ratings:
Table 28
| | | | | | | | | | | | | | | | | | | | | | | |
| Farm & Ranch current loan-to-value ratio by internally assigned risk rating as of December 31, 2020 |
| Acceptable | | Special Mention | | Substandard | | Total |
| (in thousands) |
Current loan-to-value ratio(1): | | | | | | | |
| 0.00% to 40.00% | $ | 2,569,762 | | | $ | 81,890 | | | $ | 91,930 | | | $ | 2,743,582 | |
| 40.01% to 50.00% | 2,161,539 | | | 90,165 | | | 72,847 | | | 2,324,551 | |
| 50.01% to 60.00% | 1,994,724 | | | 58,366 | | | 81,283 | | | 2,134,373 | |
| 60.01% to 70.00% | 1,010,825 | | | 60,555 | | | 18,988 | | | 1,090,368 | |
| 70.01% to 80.00% | 235,587 | | | 18,343 | | | 18,675 | | | 272,605 | |
| 80.01% and greater | 5,920 | | | 2,011 | | | 7,771 | | | 15,702 | |
| Total | $ | 7,978,357 | | | $ | 311,330 | | | $ | 291,494 | | | $ | 8,581,181 | |
(1)The current loan-to-value ratio is based on original appraised value (or most recently obtained appraisal, if available) and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities.
current outstanding loan amount adjusted to reflect loan amortization.
The following table presents Farmer Mac's cumulative net credit losses relative to the cumulative original balance for all Farm & Ranch loans purchased and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities as of December 31, 20172020 by year of origination, geographic region, and commodity/collateral type. The purpose of this information is to present information regardingabout realized losses relative to original Farm & Ranch purchases, guarantees, and commitments.
Table 2129
| | | | | | | | | | | | | | | | | |
| Farm & Ranch Credit Losses Relative to Cumulative |
| Original Loans, Guarantees, and LTSPCs as of December 31, 2020 |
| Cumulative Original Loans, Guarantees and LTSPCs | | Cumulative Net Credit Losses/(Recoveries) | | Cumulative Loss Rate |
| | (dollars in thousands) |
| By year of origination: | | | | | |
| 2010 and prior | $ | 15,323,945 | | | $ | 30,124 | | | 0.20 | % |
| 2011 | 780,955 | | | 3,661 | | | 0.47 | % |
| 2012 | 1,157,760 | | | — | | | — | % |
| 2013 | 1,460,375 | | | — | | | — | % |
| 2014 | 1,032,953 | | | — | | | — | % |
| 2015 | 1,197,566 | | | (516) | | | (0.04) | % |
| 2016 | 1,488,794 | | | — | | | — | % |
| 2017 | 1,578,674 | | | 5,365 | | | 0.34 | % |
| 2018 | 1,291,175 | | | — | | | — | % |
| 2019 | 1,488,791 | | | — | | | — | % |
| 2020 | 2,590,540 | | | | | — | % |
| Total | $ | 29,391,528 | | | $ | 38,634 | | | 0.13 | % |
By geographic region(1): | | | | | |
| Northwest | $ | 3,816,339 | | | $ | 11,191 | | | 0.29 | % |
| Southwest | 10,415,885 | | | 8,542 | | | 0.08 | % |
| Mid-North | 7,414,805 | | | 18,219 | | | 0.25 | % |
| Mid-South | 3,632,060 | | | (613) | | | (0.02) | % |
| Northeast | 1,611,170 | | | 323 | | | 0.02 | % |
| Southeast | 2,501,269 | | | 972 | | | 0.04 | % |
| Total | $ | 29,391,528 | | | $ | 38,634 | | | 0.13 | % |
| By commodity/collateral type: | | | | | |
| Crops | $ | 13,582,696 | | | $ | 2,887 | | | 0.02 | % |
| Permanent plantings | 6,535,361 | | | 9,783 | | | 0.15 | % |
| Livestock | 6,555,620 | | | 3,836 | | | 0.06 | % |
| Part-time farm | 1,707,662 | | | 1,090 | | | 0.06 | % |
| Ag. Storage and Processing | 857,324 | | | 21,038 | | | 2.45 | % |
| Other | 152,865 | | | — | | | — | % |
| Total | $ | 29,391,528 | | | $ | 38,634 | | | 0.13 | % |
(1)Geographic regions: Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).
|
| | | | | | | | | | |
| Farm & Ranch Credit Losses Relative to Cumulative |
| Original Loans, Guarantees, and LTSPCs as of December 31, 2017 |
| | Cumulative Original Loans, Guarantees and LTSPCs | | Cumulative Net Credit Losses/(Recoveries) | | Cumulative Loss Rate |
| | (dollars in thousands) |
| By year of origination: | | | | | |
| 2007 and prior | $ | 13,315,157 |
| | $ | 25,094 |
| | 0.19 | % |
| 2008 | 817,237 |
| | 3,370 |
| | 0.41 | % |
| 2009 | 549,250 |
| | 1,578 |
| | 0.29 | % |
| 2010 | 662,387 |
| | 5 |
| | — | % |
| 2011 | 768,959 |
| | 3,661 |
| | 0.48 | % |
| 2012 | 1,152,645 |
| | — |
| | — | % |
| 2013 | 1,410,440 |
| | — |
| | — | % |
| 2014 | 952,578 |
| | — |
| | — | % |
| 2015 | 1,094,229 |
| | (540 | ) | | (0.05 | )% |
| 2016 | 1,343,880 |
| | — |
| | — | % |
| 2017 | 1,344,265 |
| |
| | — | % |
| Total | $ | 23,411,027 |
| | $ | 33,168 |
| | 0.14 | % |
By geographic region(1): | |
| | |
| | |
|
| Northwest | $ | 3,086,468 |
| | $ | 11,191 |
| | 0.36 | % |
| Southwest | 8,113,941 |
| | 8,167 |
| | 0.10 | % |
| Mid-North | 5,932,095 |
| | 12,830 |
| | 0.22 | % |
| Mid-South | 2,801,098 |
| | (211 | ) | | (0.01 | )% |
| Northeast | 1,394,583 |
| | 185 |
| | 0.01 | % |
| Southeast | 2,082,842 |
| | 1,006 |
| | 0.05 | % |
| Total | $ | 23,411,027 |
| | $ | 33,168 |
| | 0.14 | % |
| By commodity/collateral type: | |
| | |
| | |
|
| Crops | $ | 10,701,811 |
| | $ | 2,887 |
| | 0.03 | % |
| Permanent plantings | 4,959,802 |
| | 9,402 |
| | 0.19 | % |
| Livestock | 5,580,280 |
| | 3,877 |
| | 0.07 | % |
| Part-time farm | 1,339,933 |
| | 1,329 |
| | 0.10 | % |
| Ag. Storage and Processing | 671,874 |
| | 15,673 |
| | 2.33 | % |
| Other | 157,327 |
| | — |
| | — | % |
| Total | $ | 23,411,027 |
| | $ | 33,168 |
| | 0.14 | % |
| |
(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 policies regarding geographic and commodity concentration to maintain adequate diversification and measure concentration risk.
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 generally 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.
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 2230
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Farm & Ranch Concentrations by Commodity Type within Geographic Region |
| Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Other | | Total |
| (dollars in thousands) |
By geographic region(1): | | | | | | | | | | | | | |
| Northwest | $ | 505,381 | | | $ | 196,530 | | | $ | 257,345 | | | $ | 84,553 | | | $ | 5,000 | | | $ | 59 | | | $ | 1,048,868 | |
| 5.8 | % | | 2.3 | % | | 3.0 | % | | 1.0 | % | | 0.1 | % | | — | % | | 12.2 | % |
| Southwest | 708,740 | | | 1,549,973 | | | 537,006 | | | 96,863 | | | 86,919 | | | 2,379 | | | 2,981,880 | |
| 8.2 | % | | 18.1 | % | | 6.3 | % | | 1.1 | % | | 1.0 | % | | — | % | | 34.7 | % |
| Mid-North | 2,102,120 | | | 10,955 | | | 222,812 | | | 117,914 | | | 27,963 | | | 1,934 | | | 2,483,698 | |
| 24.4 | % | | 0.1 | % | | 2.6 | % | | 1.4 | % | | 0.4 | % | | — | % | | 28.9 | % |
| Mid-South | 628,515 | | | 43,568 | | | 312,432 | | | 67,897 | | | 6,721 | | | 19 | | | 1,059,152 | |
| 7.3 | % | | 0.5 | % | | 3.7 | % | | 0.8 | % | | 0.1 | % | | — | % | | 12.4 | % |
| Northeast | 161,833 | | | 58,401 | | | 78,494 | | | 65,996 | | | 3,432 | | | — | | | 368,156 | |
| 1.9 | % | | 0.7 | % | | 0.9 | % | | 0.8 | % | | — | % | | — | % | | 4.3 | % |
| Southeast | 237,821 | | | 181,627 | | | 128,719 | | | 72,917 | | | 18,056 | | | 287 | | | 639,427 | |
| 2.8 | % | | 2.1 | % | | 1.5 | % | | 0.9 | % | | 0.2 | % | | — | % | | 7.5 | % |
| Total | $ | 4,344,410 | | | $ | 2,041,054 | | | $ | 1,536,808 | | | $ | 506,140 | | | $ | 148,091 | | | $ | 4,678 | | | $ | 8,581,181 | |
| 50.4 | % | | 23.8 | % | | 18.0 | % | | 6.0 | % | | 1.8 | % | | — | % | | 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).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 |
| | 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 | $ | 356,732 |
| | $ | 97,501 |
| | $ | 223,429 |
| | $ | 63,079 |
| | $ | — |
| | $ | 250 |
| | $ | 740,991 |
|
| | 5.2 | % | | 1.4 | % | | 3.3 | % | | 0.9 | % | | — | % | | — | % | | 10.8 | % |
| Southwest | 516,489 |
| | 1,050,625 |
| | 422,784 |
| | 73,711 |
| | 20,272 |
| | 9,332 |
| | 2,093,213 |
|
| | 7.5 | % | | 15.3 | % | | 6.1 | % | | 1.1 | % | | 0.3 | % | | 0.1 | % | | 30.4 | % |
| Mid-North | 1,903,087 |
| | 17,291 |
| | 191,197 |
| | 111,368 |
| | 17,958 |
| | 3,193 |
| | 2,244,094 |
|
| | 27.7 | % | | 0.3 | % | | 2.8 | % | | 1.6 | % | | 0.3 | % | | — | % | | 32.7 | % |
| Mid-South | 557,559 |
| | 19,869 |
| | 270,266 |
| | 54,138 |
| | 6,259 |
| | 512 |
| | 908,603 |
|
| | 8.1 | % | | 0.3 | % | | 3.9 | % | | 0.8 | % | | 0.1 | % | | — | % | | 13.2 | % |
| Northeast | 135,718 |
| | 24,145 |
| | 56,141 |
| | 75,229 |
| | 5,031 |
| | — |
| | 296,264 |
|
| | 2.0 | % | | 0.3 | % | | 0.9 | % | | 1.1 | % | | 0.1 | % | | — | % | | 4.4 | % |
| Southeast | 188,360 |
| | 158,132 |
| | 171,141 |
| | 56,103 |
| | 9,241 |
| | 1,444 |
| | 584,421 |
|
| | 2.7 | % | | 2.3 | % | | 2.5 | % | | 0.8 | % | | 0.1 | % | | 0.1 | % | | 8.5 | % |
| Total | $ | 3,657,945 |
| | $ | 1,367,563 |
| | $ | 1,334,958 |
| | $ | 433,628 |
| | $ | 58,761 |
| | $ | 14,731 |
| | $ | 6,867,586 |
|
| | 53.2 | % | | 19.9 | % | | 19.5 | % | | 6.3 | % | | 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). |
Table 23
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 |
| Farm & Ranch Cumulative Credit Losses by Origination Year and Commodity Type |
| | Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Total |
| | (in thousands) |
| By year of origination: | | | | | | | | | | | |
| 2007 and Prior | $ | 703 |
| | $ | 9,184 |
| | $ | 3,803 |
| | $ | 1,206 |
| | $ | 10,198 |
| | $ | 25,094 |
|
| 2008 | 2,626 |
| | — |
| | — |
| | 123 |
| | 621 |
| | 3,370 |
|
| 2009 | 98 |
| | 218 |
| | 69 |
| | — |
| | 1,193 |
| | 1,578 |
|
| 2010 | — |
| | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
| 2011 | — |
| | — |
| | — |
| | — |
| | 3,661 |
| | 3,661 |
|
| 2012 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| 2013 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| 2014 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| 2015 | (540 | ) | | — |
| | — |
| | — |
| | — |
| | (540 | ) |
| 2016 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| 2017 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 2,887 |
| | $ | 9,402 |
| | $ | 3,877 |
| | $ | 1,329 |
| | $ | 15,673 |
| | $ | 33,168 |
|
Table 31
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Farm & Ranch Cumulative Credit Losses by Origination Year and Commodity Type |
| Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Total |
| (in thousands) |
| By year of origination: | | | | | | | | | | | |
| 2010 and prior | $ | 3,427 | | | $ | 9,783 | | | $ | 3,836 | | | $ | 1,066 | | | $ | 12,012 | | | $ | 30,124 | |
| 2011 | — | | | — | | | — | | | — | | | 3,661 | | | 3,661 | |
| 2012 | — | | | — | | | — | | | — | | | — | | | — | |
| 2013 | — | | | — | | | — | | | — | | | — | | | — | |
| 2014 | — | | | — | | | — | | | — | | | — | | | — | |
| 2015 | (540) | | | — | | | — | | | 24 | | | — | | | (516) | |
| 2016 | — | | | — | | | — | | | — | | | — | | | — | |
| 2017 | — | | | — | | | — | | | — | | | 5,365 | | | 5,365 | |
| 2018 | — | | | — | | | — | | | — | | | — | | | — | |
| 2019 | — | | | — | | | — | | | — | | | — | | | — | |
| 2020 | — | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | 2,887 | | | $ | 9,783 | | | $ | 3,836 | | | $ | 1,090 | | | $ | 21,038 | | | $ | 38,634 | |
Rural Utilities
Farmer Mac's direct credit exposure to Rural Utilities loans held and loans underlying LTSPCs as of December 31, 2020 was $2.8 billion across 45 states. For more information about Farmer Mac's underwriting and collateral valuation standards for Rural Utilities loans, see "Business—Farmer Mac's Lines of Business—Rural Utilities—Underwriting". As of December 31, 2020, there were no delinquencies in Farmer Mac's portfolio of Rural Utilities loans.
Farmer Mac regularly conducts detailed, statistical stress testshas indirect credit exposure to Rural Utilities loans that secure AgVantage securities included in the Institutional Credit line of business. As of December 31, 2020, Farmer Mac had not experienced any credit losses on any AgVantage securities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Institutional" for more information about Farmer Mac's credit risk on AgVantage securities.
Farmer Mac has never experienced a credit loss in its Rural Utilities line of business. Upon the adoption of the current expected credit loss accounting standard ("CECL") on January 1, 2020, we are now required to forecast and disclose our expected credit losses for the expected life of our Rural Utilities portfolio assets. To do this, Farmer Mac relies upon industry data purchased from ratings agencies as well as publicly available information as disclosed in the securities filings of other major lenders who serve this industry. Activity affecting the allowance for loan losses and reserve for losses is discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Provision for and Release of Allowance for Loan Losses and Reserve for Losses."
Farmer Mac evaluates credit risk for these assets by reviewing a variety of borrower credit risk characteristics. These characteristics can include (but is not limited to) financial metrics, internal risk ratings, ratings assigned by ratings agencies, types of customers served, sources of power supply, and the regulatory environment.
The following table presents Farmer Mac’s portfolio of generation and transmission ("G&T") and distribution cooperative borrowers, as well as renewable energy loans, disaggregated by internally assigned risk ratings.
Table 32
| | | | | | | | | | | | | | | | | | | | | | | |
| Rural Utilities portfolio by internally assigned risk rating as of December 31, 2020 |
| Acceptable | | Special Mention | | Substandard | | Total |
| (in thousands) |
| Distribution Cooperative | $ | 2,128,985 | | | $ | — | | | $ | — | | | $ | 2,128,985 | |
| G&T Cooperative | 614,817 | | | — | | | — | | | 614,817 | |
| Renewable Energy | 73,035 | | | — | | | — | | | 73,035 | |
| Rural Utilities Total | $ | 2,816,837 | | | $ | — | | | $ | — | | | $ | 2,816,837 | |
For more information about the credit quality of Farmer Mac's Rural Utilities portfolio and the associated allowance for losses please refer to Notes 8 and 12 of the consolidated financial statements.
Other Considerations Regarding Credit Risk Related to Loans and Guarantees
The credit exposure on USDA Securities, including those underlying Farmer Mac Guaranteed USDA Securities, is guaranteed by the full faith and credit of the United States. Therefore, Farmer Mac believes that we have little or no credit risk exposure in the USDA Guarantees line of business because of the USDA guarantee. As of December 31, 2020, Farmer Mac had not experienced any credit losses on any securities under the USDA Guarantees line of business and does not expect to incur any such losses in the future. Because we do not expect credit losses on this portfolio, Farmer Mac does not provide an allowance for losses on its portfolio for credit risk and compares those results to current and historical credit quality metrics and to the various statutory, regulatory, andof USDA Guaranteed Securities. As of December 31, 2020, Farmer Mac's boardMac had executed COVID-19 payment deferments on loans with unpaid principal balances 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.$92.9 million underlying USDA Securities.
Farmer Mac requires most approved lenders to make representations and warranties regardingabout the conformity of eligible agricultural mortgage and rural utilitiesRural Utilities loans to Farmer Mac's standards, the accuracy of loan data provided to Farmer Mac, and other requirements related to the loans. Sellers who make these representations and warranties are responsible to Farmer Mac for breaches of those representations and warranties, andwarranties. Farmer Mac has the ability to require a seller to cure, replace, or repurchase a loan sold or transferred to Farmer Mac if any breach of a representation or warranty is discovered that was material to Farmer Mac's decision to purchase the loan or that directly or indirectly causes a default or potential loss on a loan sold or transferred by the seller to Farmer Mac. During the previous three years ended December 31, 2017, Farmer Mac has required one seller to repurchase a total of two loans aggregating $0.8 million for2020, there have been no breaches of representations and warranties made about those two loans, both of which repurchases occurred during first quarter 2016.by sellers that resulted in Farmer Mac requiring a seller to cure, replace, or repurchase a loan. In addition to relying on the representations and warranties of lenders,sellers, Farmer Mac also underwrites all of the agricultural real estate mortgage loans (other than rural housing and part-time farm mortgage loans) and rural utilitiesRural Utilities loans thaton which it holds in its portfolio.has direct credit exposure. For rural housing and part-time farm mortgage loans, Farmer Mac relies on representations and warranties from the seller that those loans conform to Farmer Mac's specified underwriting criteria without exception. For more information about Farmer Mac's loan eligibility requirements and underwriting standards, see "Business—Farmer Mac's Lines of Business—Farm & Ranch—Loan Eligibility"Eligibility," "Business—Farmer Mac's Lines of Business—Farm & Ranch—Underwriting and Collateral Standards," "Business—Farmer Mac's Lines of Business—Rural Utilities—Loan Eligibility," and "Business—Farmer Mac's Lines of Business—Rural Utilities—Loan Eligibility.Underwriting and Collateral Standards."
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 servicersServicers 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, the servicer is responsible for any corresponding damages to Farmer Mac and, in most cases, Farmer Mac has the right to terminate the servicing relationship for a particular loan or the entire portfolio serviced by the central servicer. In addition, Farmer Mac also can proceed against the central servicer in arbitration or exercise any remedies available to it under law. During the previous three years ended December 31, 2017,2020, Farmer Mac had not exercised any remedies or taken any formal action against any central servicers. For more information about Farmer Mac's servicing requirements, see "Business—Farmer Mac's Lines of Business—Farm & Ranch—Servicing" and "Business—Farmer Mac's Lines of Business—Rural Utilities—Servicing."
Credit Risk – Institutional. Farmer Mac is exposed to credit risk arising from its business relationships with other institutions, including:which include:
•issuers of AgVantage securities;
•approved lenders and servicers; and
•interest rate swap counterparties.
Farmer Mac approves AgVantage counterparties and manages institutional credit risk related to those AgVantage counterparties by requiring them to meet Farmer Mac's standards for creditworthiness for the particular counterparty type and transaction. The required collateralization level is established at the timewhen the AgVantage facility is entered into with the counterparty and does not change during the life of the AgVantage securities issued under the facility.facility without Farmer Mac's consent. In AgVantage transactions, the corporate obligor is
typically required to remove from the pool of pledged collateral any loan that becomes more than 30 days delinquent in the payment of principal or interest and to substitute an eligible loan that is current in payment to maintain the minimum required collateralization level. Since the onset of the COVID-19 pandemic, Farmer Mac has approved and expects to continue to approve payment deferments on loans collateralizing AgVantage securities, allowing the AgVantage counterparty to keep these loans in its collateral pool without replacing them. The criteria currently in place for approving payment deferments for these loans is similar to the criteria Farmer Mac has established for loans in its Farm & Ranch portfolio that are affected by the COVID-19 pandemic.
In the event of a default on the general obligation,an AgVantage security, Farmer Mac would have recourse to the pledged collateral and have rights to the ongoing borrower payments of principal and interest. For Farm Equity AgVantage counterparties and smaller financial funds or entities, Farmer Mac also requires that the counterparty generally (1) maintain a higher collateralization level either through a higher overcollateralization percentage or through lower loan-to-value ratio thresholds and higher overcollateralization than required for traditional AgVantage securities and (2) comply with specified financial covenants for the life of the related AgVantage security to avoid default. For a more detailed description of AgVantage securities, see "Business—Farmer Mac's Lines of Business—Institutional Credit—AgVantage Securities.Credit."
The unpaid principal balance of outstanding on-balance sheet AgVantage securities secured by loans eligible for the Farm & Ranch line of business totaled $5.1$5.2 billion as of December 31, 20172020 and $3.7$5.5 billion as of December 31, 2016.2019. The unpaid principal balance of on-balance sheet AgVantage securities secured by loans eligible for the Rural Utilities line of business totaled $2.5$2.6 billion as of December 31, 2017
2020 and $2.3$2.9 billion as of December 31, 2016.2019. The unpaid principal balance of outstanding off-balance sheet AgVantage securities totaled $0.3 billion as of December 31, 2017 and $1.3 billion$4.4 million as of December 31, 2016. The decrease in the unpaid principal balance2020 and $7.6 million as of outstandingDecember 31, 2019. A $0.3 billion off-balance sheet AgVantage securities from year-end 2016revolving line of credit facility was attributable to the refinancing of a $1.0 billion AgVantage security that matured in April 2017 into three new on-balance sheet AgVantage securities. Previously, $970.0 million of this $1.0 billion maturing AgVantage security was reported as off-balance sheet business volume because it was owned by third party investors. For more information about this AgVantage transaction, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Business Volume."terminated during fourth quarter 2019.
The following table provides information about the issuers of AgVantage securities, as well as the required collateralization levels for those transactions as of December 31, 20172020 and 2016:December 31, 2019:
Table 2433
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2020 | | As of December 31, 2019 |
| Counterparty | | Balance | | Credit Rating | | Required Collateralization | | Balance | | Credit Rating | | Required Collateralization |
| | | (dollars in thousands) |
| AgVantage: | | | | | | | | | | | | |
| CFC | | $ | 2,570,249 | | | A | | 100% | | $ | 2,949,500 | | | A | | 100% |
| MetLife | | 2,375,000 | | | AA- | | 103% | | 2,550,000 | | | AA- | | 103% |
| Rabo AgriFinance | | 2,050,000 | | | None | | 110% | | 2,225,000 | | | None | | 110% |
Other(1) | | 551,654 | | | None | | 106% to 125% | | 436,041 | | | None | | 106% to 125% |
Farm Equity AgVantage(2) | | 192,456 | | | None | | 110% | | 279,705 | | | None | | 110% |
| Total outstanding | | $ | 7,739,359 | | | | | | | $ | 8,440,246 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | As of December 31, 2017 | | As of December 31, 2016 |
| Counterparty | | Balance | | Credit Rating | | Required Collateralization | | Balance | | Credit Rating | | Required Collateralization |
| | | (dollars in thousands) |
| AgVantage: | | | | | | | | | | | | |
| MetLife | | $ | 2,550,000 |
| | AA- | | 103% | | $ | 2,550,000 |
| | AA- | | 103% |
CFC(1) | | 2,800,188 |
| | A | | 100% | | 2,594,402 |
| | A | | 100% |
| Rabo AgriFinance | | 2,075,000 |
| | None | | 106% | | 1,800,000 |
| | None | | 106% |
Other(2) | | 199,959 |
| | (3) | | 106% to 125% | | 86,373 |
| | (3) | | 106% to 125% |
Farm Equity AgVantage(4) | | 279,731 |
| | None | | 110% | | 256,911 |
| | None | | 110% |
| Total outstanding | | $ | 7,904,878 |
| | | | | | $ | 7,287,686 |
| | | | |
| |
(1)
| Includes $300.0 million related to a revolving floating rate AgVantage facility. Farmer Mac receives a fixed fee based on the full dollar amount of the facility. |
| |
(2)
| Consists of AgVantage securities issued by 6 different issuers as of both December 31, 2017 and 2016. |
| |
(3)
| Consists of AgVantage securities from 6 different issuers without a credit rating as of both December 31, 2017 and 2016. |
| |
(4)
| Consists of AgVantage securities from 5 different issuers as of December 31, 2017 and 3 different issuers as of December 31, 2016. |
(2)Consists of AgVantage securities issued by 4 and 5 different issuers as of December 31, 2020 and December 31, 2019, respectively.
Farmer Mac manages institutional credit risk related to lenders and servicers by requiring those institutions to meet Farmer Mac's standards for creditworthiness. Farmer Mac monitors the financial condition of those institutions by evaluating financial statements and bank credit rating agency reports. For more information about Farmer Mac's lender eligibility requirements, see "Business—Farmer
Mac's Lines of Business—Farm & Ranch—Approved Lenders" and "Business—Farmer Mac's Lines of Business—Rural Utilities—Approved Lenders."
Farmer Mac manages institutional credit risk related to its interest rate swap counterparties through collateralization provisions contained in each of its swap agreements that variesvary based on the market value of its swapsswap portfolio with each counterparty. Furthermore, Farmer Mac isand its interest rate swap counterparties are required to fully collateralize itstheir derivatives positions without any minimum threshold for cleared swap transactions, as well as for non-cleared swap transactions entered into after March 1, 2017, the effective date of new rules that established zero threshold requirements for the exchange of variation margin between Farmer Mac and its swap dealer counterparties in such transactions.2017. Farmer Mac transacts interest rate swaps with multiple counterparties to ensure a more even distributionreduce counterparty credit exposure concentration. Farmer Mac's usage of institutional credit risk relatedcleared derivatives has increased over time as has its exposure to its swap transactions. As a resultclearinghouses. The usage 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.reduces Farmer Mac's exposure to individual counterparties with the central clearinghouse acting to settle the change in value of contracts on a daily basis. Credit risk related to interest rate swap contracts is discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Interest Rate Risk" and Note 6 to the consolidated financial statements.
Credit Risk–Other Investments. As of December 31, 2017,2020, Farmer Mac had $0.3$1.0 billion of cash and cash equivalents and $2.3$3.9 billion of investment securities. The management of the credit risk inherent in these investments is governed by Farmer Mac's internal policies as well as the Liquidity and Investment Regulations for Farmer Mac, which were issued by FCA regulations,and which establish criteria for investments that are eligible for Farmer Mac's investment portfolio, including limitations on asset class, dollar amount, issuer concentration, and credit quality. 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.
TheFarmer Mac's Liquidity and Investment Regulations and internal policies require that investments held in Farmer Mac's policies generally require each investment or issuerportfolio meet the following creditworthiness standards: (1) at a minimum, at least one obligor of anthe investment to be highly rated by a nationally recognized statistical rating organization ("NRSRO"). Investments in mortgage securities and asset-backed securities are required tomust have a rating invery strong capacity to meet financial commitments for 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 onelife of the two highest categories; corporate debt securities with maturitiesinvestment, even under severely adverse or stressful conditions, and generally present a very low risk of three years or less are requireddefault; (2) if the obligor whose capacity to be ratedmeet financial commitments is being relied upon to meet the standard set forth in onesubparagraph (1) is located outside 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, the investment must also be fully guaranteed by a U.S. government agency; and (3) the investment must exhibit low credit risk and other risk characteristics consistent with the purpose or 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 approvedpurposes for direct investment by which it is held.
Farmer Mac.
TheMac's Liquidity and Investment Regulations and Farmer Mac'sinternal policies also establish concentration limits, which are intended to limit exposure to any one counterparty. Although thesingle entity, issuer, or obligor. Farmer Mac's Liquidity and Investment Regulations limit Farmer Mac's total credit exposure to any single entity, issuer, or obligor of securities and uncollateralized financial derivatives to 25 percent10% of Farmer Mac's regulatory capital (as($102.4 million as of December 31, 2017, 25 percent of Farmer Mac's regulatory capital was $166.5 million),2020). However, Farmer Mac's current policy limits this total credit exposure to 5 percent5% of its regulatory capital (as($51.2 million as of December 31, 2017, 5 percent of Farmer Mac's regulatory capital was $33.3 million)2020). These exposure limits do not apply to obligations of the United StatesU.S. government agencies or GSEs, thoughalthough Farmer Mac is restricted byMac's current policy restricts investing more than 100% of regulatory capital in the senior non-convertible debt securities of any one GSE.
Although the Liquidity and InvestmentInvestments Regulations and its own policy from investing more than 100 percentdo not establish limits on the maximum amount, expressed as a percentage of its regulatory capitalFarmer Mac's investment portfolio, that can be invested in any one GSE.each eligible asset class, Farmer Mac's internal policies set forth asset class limits as part of Farmer Mac's overall risk management framework.
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 and expects a final rule to be issued during 2018. 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 financial assets retained on its balance sheet because of possible timing differences in the cash flows due to maturity, paydown, or repricing of the assets and related liabilities.debt together with financial derivatives. This risk is primarily related to loans, held,loan participation interests, Farmer Mac Guaranteed Securities, (excluding AgVantage securities),USDA Securities, and USDA Securitiescertain investment securities due to the abilitycontractual right of borrowers to prepay their loans before the scheduled maturities, thereby increasing the risk of asset and liability cash flow mismatches.maturities. Cash flow mismatches in adue to changing interest rate environmentrates can reduce the earnings of Farmer Mac if assets repayprepay 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, orreduced. Alternatively, Farmer Mac could see a drop in income if assets repay more slowly than expected in a rising interest rate environment and the associated debt must be replaced by higher-cost debt. As discussed below, Farmer Mac manages this interest rate risk by funding assets purchased with liabilities matching the duration and cash flow characteristics of the assets purchased.
Interest Rate Risk Management
The goal of interest rate risk management at Farmer Mac is to create and maintainmanage the balance sheet in a portfoliomanner that generates stable earnings and value across a variety of interest rate environments. Recognizing that interest rate sensitivity may change with the passage of time and as interest rates change, Farmer Mac regularly assesses this exposure on a regular basis and, if necessary, readjustsadjusts its portfolio of funded financial assets, liabilities, and liabilities by:financial derivatives.
purchasing assets inFarmer Mac's objective is to maintain its exposure to interest rate risk within appropriate limits, as approved by Farmer Mac's board of directors. Farmer Mac's management-level Asset and Liability
Committee ("ALCO") provides oversight and approves strategies to maintain interest rate risk within the ordinary course of business;board-established limits.
refinancing existing liabilities; or
using financial derivatives to alter the characteristics of existing assets or liabilities.
Farmer Mac's primary strategy for managing interest rate risk is to fund asset purchases with liabilitiesdebt that together with financial derivatives have similar duration and cash flowconvexity characteristics so that they will perform similarly asand help to mitigate impacts from interest rates change. To match these characteristics, changes across the yield curve. As part of this debt issuance strategy, Farmer Mac seeks to issue a blend of liabilities and enter into financial derivative transactions across a variety of maturities to approximately align the liability cash flows with the forecasted asset cash flows.
Farmer Mac issues discount notes and both callable and non-callable medium-term notes across a spectrum of maturities. Farmer Mac issues callablematurities to execute its debt issuance strategy. Callable debt is issued to offset themitigate prepayment risk associated with some loans. By using a blend of liabilities that includescertain funded financial assets held on balance sheet. In general, as interest rates decline, prepayments typically increase, and Farmer Mac is able to extinguish certain callable debt issuances. Therefore, these callable liabilities are reduced around the same time and amount of the asset prepayments. The interest rate sensitivities of the liabilitiesdebt together with financial derivatives tend to increase or decrease as interest rates change in a manner that fully or partially offset similar to changes in the interest rate sensitivities of the funded financial assets. In addition, Farmer Mac also usesenters into financial derivatives, primarily interest rate swaps, to better match the durations of Farmer Mac's assets and liabilities, thereby reducing overall sensitivity to changing interest rate sensitivity.rates.
Taking into consideration the prepayment provisions and the default probabilities associated with its loanportfolio of retained assets, Farmer Mac usesincorporates behavioral prepayment models to projectwhen projecting and valuevaluing 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 subsequentfuture prepayment forecasts.
Yield maintenance provisions and other prepayment penalties contained in certain agricultural real estate mortgage loans and most rural utilities loans reduce, but do not eliminate, prepayment risk. Those provisions require borrowers to make an additional payment when they prepay their loans, thus compensating Farmer Mac for the shortened duration of the prepaid loan. As of December 31, 2017, approximately 2 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 4 percent of all loans with fixed interest rates). Of the Farm & Ranch loans purchased in 2017, 5 percent had yield maintenance or another form of prepayment protection. As of December 31, 2017, none of Farmer Mac's USDA Securities had yield maintenance provisions; however, 4 percent contained other prepayment penalties. Of the USDA Securities purchased in 2017, 10 percent contained various forms of prepayment penalties. As of December 31, 2017, 65 percent of the Rural Utilities loans owned by Farmer Mac had yield maintenance provisions. Of the Rural Utilities loans purchased in 2017, 84 percent 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, changesChanges in interest rates may affect loanasset prepayment rates which may, in turn, affectimpact durations and values of the loans.assets. 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.assets.
Farmer Mac is also subject to interest rate risk on loans and securities that Farmer Mac has committed to acquire but has not yet purchased (other than delinquent loans purchased through LTSPCs) but has not yet purchased.LTSPCs or loans designated for securitization under a forward purchase agreement). When Farmer Mac commits to purchase those loans,these assets, it is exposed to interest rate risk between the time it commits to purchase the loans and the time it either:
issues debt to retainfund the loans in its portfolio; or
sells Farmer Mac Guaranteed Securities backed by thepurchase of those loans.
Farmer Mac manages the interest rate risk related to these loans and the related issuance of Farmer Mac Guaranteed Securities or debt, through the use of forward sale contracts on the debt securities of other GSEs and/orby using futures contracts involving U.S. Treasury securities.securities and other financial derivatives. Farmer Mac usesenters into U.S. Treasury futures contracts as a hedge against the level of interest rates, while forward sale contracts on GSE securities reduce its interest rate exposure to changes in both U.S. Treasury rates and spreads on Farmer Mac debt and certain Farmer Mac Guaranteed Securities. Issuing debt to fund the loans as investments does not fully eliminate interest rate risk due to the possible timing differences in the cash flows of the assets and related liabilities, as discussed above.rates.
Farmer Mac's $0.3$1.0 billion of cash and cash equivalents mature within three months and are generally funded with discount notesdebt having similar maturities. As of December 31, 2017, $2.182020, $3.6 billion of the $2.26$3.9 billion of investment securities (96 percent(93%) were floating rate securities with rates that adjust within one year or fixed rate securities with original maturities between three months and one year. ThoseThe floating rate securities are
funded with effectively floating rate debt that closely matches the rate adjustment datesfrequency of the associated investments. As of December 31, 2017,The fixed rate investment securities are generally funded in a manner consistent with Farmer Mac had outstanding discount notes of $1.7 billion, medium-term notesMac's overall funding strategy that mature within one year of $6.4 billion,approximates a duration and medium-term notes that mature after one year of $7.4 billion.convexity match.
Interest Rate Risk Metrics
Farmer Mac regularly stress tests and runs simulations on its portfolio of financial assets and liabilities for interest rate risk and usesexamines a variety of metrics to quantify and manage its interest rate risk. These metrics include sensitivity to interest rate movements of market value of equity ("MVE") and projected net effective spread ("NES") as well as duration gap analysis. MVE represents management's estimate of the present value of all future cash flows from on- and off-balance sheet assets, liabilities, and financial derivatives, discounted at current interest rates and appropriate spreads. However, MVE is not indicative of the market value of Farmer Mac as a going concern because these market values are theoretical and do not reflect future business activities. The MVE sensitivity analysis is used to measuremeasures the degree to which the market values of Farmer Mac's assets, liabilities, and liabilitiesfinancial derivatives are estimated to change for a given change in interest rates. Because this analysis evaluates the impacteffect of interest rate movements on the value of all future cash flows, this measure provides an evaluation of Farmer Mac's long-term interest rate risk.
Farmer Mac's NES simulation represents the difference between projected income over the next twelve months from the current portfolio of interest-earning assets and interest expense produced by the related funding, including associated financial derivatives. Farmer Mac's NES may be affectedimpacted by changes in market interest rates resulting from timing differences between maturities and re-pricing characteristics of assets and liabilities.liabilities together with the associated financial derivatives. The direction and magnitude of any such effect depends on the direction and magnitude of the change in interest rates across the yield curve as well as the composition of Farmer Mac's portfolio. The NES forecastsimulation represents an estimate of the net effective spread income that Farmer Mac's current portfolio is expected to produce over a twelve-month horizon. As a result, the NES simulation sensitivity statistics provide a short-term view of Farmer Mac's sensitivity to interest rate sensitivity.shocks.
Duration is a measure of a financial instrument's fair value sensitivity to small changes in interest rates. Duration gap is the difference between thenet estimated durations of Farmer Mac's funded assets, debt, and liabilities.financial derivatives. Because duration is a measure of marketfair value sensitivity, duration gap summarizesquantifies the extent to which estimated marketfair value sensitivities for assets and liabilities are matched. Duration gap provides a relatively concise measure of the interest rate risk inherent in Farmer Mac's outstanding portfolio.
A positive duration gap denotes that the duration of Farmer Mac's funded assets is greater than the duration of its liabilities.debt and financial derivatives. A positive duration gap indicates that the marketfair value changes of Farmer Mac's funded assets is more sensitive to small interest rate movements than is the marketfair value changes of its liabilities.debt and financial derivatives. Conversely, a negative duration gap indicates that fair value changes of Farmer Mac's funded assets are less sensitive to small interest rate movements than arefair value changes of its liabilities.debt and financial derivatives. A duration gap of zero indicates that with small changes in interest rate movements the fair value change of Farmer Mac's assets is effectively offset by the fair value change of its debt and financial derivatives.
Each of the interest rate metrics is produced using asset/liability models and is derived based on management's best estimates of factors such as projectedforward interest rates across the yield curve, interest rate volatility, and asset prepayment speeds. Accordingly, these metrics should be understood asare estimates rather than as precise measurements. In addition, actualActual results may differ to the extent there are material changes to Farmer Mac's financial asset portfolio or changes in funding or hedging strategies undertaken to mitigate unfavorable sensitivities to interest rate changes.
The following schedule summarizes the results of Farmer Mac's MVE and NES sensitivity analysis as of December 31, 20172020 and 2016December 31, 2019 to an immediate and instantaneous uniform or "parallel" shift in the yield curve:
Table 2534
| | | | | | | | | | | | | | |
| | | Percentage Change in MVE from Base Case |
Interest Rate Scenario(1) | | As of December 31, 2020(1) | | As of December 31, 2019 |
| +100 basis points | | 4.9 | % | | 2.7 | % |
| -100 basis points | | (0.2) | % | | (8.4) | % |
|
| | | | | | |
| | | Percentage Change in MVE from Base Case |
| Interest Rate Scenario | | As of December 31, 2017 | | As of December 31, 2016 |
| +100 basis points | | (1.1 | )% | | (2.5 | )% |
| -50 basis points | | (1.8 | )% | | (0.8 | )% |
| | | | | | | | | | | | | | |
| | | Percentage Change in NES from Base Case |
Interest Rate Scenario(2) | | As of December 31, 2020(1) | | As of December 31, 2019(2) |
| +100 basis points | | 3.9 | % | | 0.5 | % |
| -100 basis points | | — | % | | 1.0 | % |
|
| | | | | | |
| | | Percentage Change in NES from Base Case |
| Interest Rate Scenario | | As of December 31, 2017 | | As of December 31, 2016 |
| +100 basis points | | 4.4 | % | | 3.0 | % |
| -50 basis points | | (1.3 | )% | | (2.1 | )% |
Farmer Mac's board(1)The down 100 basis points shock scenario was replaced in 2020 with a proportional shock relative to 50% of directors has established policies and procedures regarding MVE and NES sensitivity. These policies include the measurement of MVE and NES sensitivity to more severe decreasing interest3-month Treasury bill rate, scenarios that are consistent in magnitude with the increasing interest rate scenarios. However, givenapproval of the current low interest rate environment, those rate scenarios producedFinancial Risk Committee of the Board of Directors. The replacement down shock scenario was negative interest rates during 20164 basis points as of December 31, 2020.
(2)The NES shock scenario of +100 and periods-100 basis points as of 2017,December 31, 2019 were updated (from 0.8% and as a result, do not produce results that are meaningful. Consequently, Farmer Mac currently measures and reports MVE and0.1%, respectively) to conform the underlying NES sensitivity to a down 50 basis point interest rate shock.components of the shock scenario with the reported NES.
As of December 31, 2017,2020, Farmer Mac's effective duration gap was negative 0.91.6 months, compared to positive 0.1negative 1.2 months as of December 31, 2016. During 2017, short-term interest2019. In 2020, Farmer Mac updated its duration gap measure to funded assets, debt, and financial derivatives; the previously reported duration gap as of December 31, 2019 was negative 2.5 months. Interest rates increased materially while longer-term interest rates decreased.decreased significantly during 2020 with the 2-year and 10-year US Treasury Note yield-to-maturity dropping by approximately 145 basis points and 100 basis points, respectively, versus year-end 2019. This rate movement reducedcontributed to reducing the duration of Farmer Mac's funded assets relativecompared to its liabilities and financial derivatives, thereby widening slightly Farmer Mac's duration gap. Despite this rate movement,Furthermore, as of December 31, 2020, Farmer Mac's overall interest rate sensitivity remained stable and at relatively low levels throughout 2017.Mac implemented a replacement behavioral prepayment model that also contributed to a widening duration gap.
Financial Derivatives Transactions
The economic effects of financial derivatives are included in Farmer Mac's MVE, NES, and duration gap analyses. Farmer Mac enters into the following types of financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of funded assets, future cash flows, credit exposure, and debt issuance, and not for trading or speculative purposes:
•"pay-fixed" interest rate swaps, in which Farmer Mac pays fixed rates of interest to, and receives floating rates of interest from, counterparties;
•"receive-fixed" interest rate swaps, in which Farmer Mac receives fixed rates of interest from, and pays floating rates of interest to, counterparties; and
•"basis swaps," in which Farmer Mac pays variable rates of interest based on one index to, and receives variable rates of interest based on another index from, counterparties.
As of December 31, 2017,2020, Farmer Mac had $8.8$15.4 billion combined notional amount of interest rate swaps, with terms ranging from less than one year to twenty-fivethirty years, of which $2.8$6.3 billion were pay-fixed interest rate swaps, $4.9$5.5 billion were receive-fixed interest rate swaps, and $1.1$3.6 billion were basis swaps.
Farmer Mac enters into interest rate swap contracts to synthetically adjust the characteristics of its debt to match more closely match the cash flow and duration characteristics of its loans and otherfinancial assets thereby reducing interest rate risk and often times deriving an overall lower effective costwith those of borrowing than would otherwise be available toits liabilities. For example, Farmer Mac in the conventional debt market. Specifically,transacts pay-
fixed interest rate swaps synthetically convert the variable cash flows relatedand issues floating rate debt to the forecasted issuance of short-term debt into effectively create fixed rate medium-term notesfunding that match the anticipatedapproximately matches duration and interest rate characteristics ofwith the corresponding assets.assets being funded. Farmer Mac evaluates the overall cost of using the swap market in conjunction with debt issuance as a funding alternative to duration-matched debt and usesenters into interest rate swaps to manage specific interest rate risks for specific transactions. across the balance sheet.
Certain financial derivatives are designated as fair value hedges of fixed rate assets classified as available-for-saleavailable for sale or liabilities to protect against fair value changes in the assets or liabilities related to a benchmark interest rate (e.g., LIBOR)LIBOR and SOFR). Furthermore,Also, certain financial derivatives are designated as cash flow hedges to mitigate the volatility of future interest rate payments on floating rate debt.
Farmer Mac has used callable interest rate swaps (in conjunction with the issuance of short-term debt) as an alternative to callable medium-term notes with equivalently structured maturities and call options. The call options on the swaps are designed to match the prepayment options on those assets without prepayment protection. The blended durations of the swaps are also designed to match the duration of the related assets over their estimated lives. If the assets prepay, the swaps can be called and the short-term debt repaid; if the assets do not prepay, the swaps remain outstanding and the short-term debt is rolled over, effectively providing fixed rate callable funding over the lives of the related assets. Thus, the economics of the assets are closely matched to the economics of the interest rate swap and funding combination.
As discussed in Note 6 to the consolidated financial statements, all financial derivatives are recorded on the balance sheet at fair value as derivative assets or as derivative liabilities. Changes in the fair values of undesignated financial derivatives are reported in "Gains"(Losses)/gains on financial derivatives and hedging activities"derivatives" in the consolidated statements of operations. For financial derivatives designated in fair value hedge accounting relationships, changes in the fair values of the hedged items related to the risk being hedged are also reported in "Gains on financial derivatives and hedging activities""Net interest income" in the consolidated statements of operations. The accrualInterest accruals on derivatives designated in fair value hedge accounting relationships are also recorded in "Net interest income" in the consolidated statements 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.operations. For financial derivatives designated in cash flow hedge accounting relationships, the effective portion ofunrealized gain or loss on the derivative gain/loss is recorded in other comprehensive income. AmountsBecause the hedging instrument is an interest rate swap and the hedged forecasted transactions are disclosed as a reclassification out offuture interest payments on variable rate debt, amounts recorded in accumulated other comprehensive income and affecting netare reclassified to "Total interest income whenexpense" in conjunction with the hedged transaction occurs and affects earnings. Any ineffective portionrecognition of designated hedge transactions is recognized immediately in "Gainsinterest expense on financial derivatives and hedging activities."the debt. All of Farmer Mac's financial derivatives transactions are conducted under standard collateralized agreements that limit Farmer Mac's potential credit exposure to any counterparty. As of December 31, 2017,2020 and December 31, 2019, Farmer Mac had $0.5 millionno uncollateralized net exposures to three counterparties. As of December 31, 2016, exposures.
Re-funding and repricing risk
Farmer Mac had uncollateralizedis subject to re-funding and repricing risk on any floating rate assets that are not funded to contractual maturity. Re-funding and repricing risk arises from potential changes in funding costs when Farmer Mac funds floating rate, or synthetic floating rate, assets with floating rate liabilities with shorter maturities. Changes in Farmer Mac's funding costs relative to the benchmark market index rate to which the assets are indexed can cause changes to net exposures of $0.2 millioninterest income when debt matures and is reissued to two counterparties.continue funding those assets.
Basis Risk
In addition, to being exposed to the risk of asset and liability cash flow mismatches, Farmer Mac is exposed to the risk related to changes in its cost of funds relative to floating rate market indexes (such as LIBOR) on some of the floating rate assets it holds. This exposure is referred to as "basis risk." Somemany of Farmer Mac's floating rate assets reset on rate adjustment dates onmay prepay before the basis of a floating rate market index, whereas the related debt thatcontractual maturity date. Farmer Mac issuedis also subject to fund thosere-funding and repricing risk on a portion of its fixed rate assets until their maturities may be refinanced onas a result of its use of pay-fixed receive-floating interest rate swaps that effectively convert the basis of Farmer Mac’s cost of funds at a particular time. Basis risk arisesrequired funding needed from the potential variability between the rates at which thosefixed rate to floating rate. These fixed rate assets are then effectively synthetically floating rate assets reset and the rates at which that require floating rate funding.
Farmer Mac can issue debt to fund those assets. Farmer Mac can fund thesemeet floating rate assetsfunding needs in several ways, including:
•issuing short-term discount notes with maturities that match the reset period of the assets;
•issuing floating rate medium-term notes with maturities and reset frequencies that match the maturities of the assets;assets being funded;
•issuing non-maturity matched, floating rate medium-term notes;notes with reset frequencies that match the assets being funded; or
•issuing non-maturity matched, fixed-ratefixed rate discount notes or medium-term notes swapped to floating rate to match the interest rate reset dates of the assets as an alternative source of effectively floating rate funding.
To meet floating rate funding needs, Farmer Mac primarily uses the last two options identified in the list above to fund these floatingfrequently issues shorter-term floating-rate medium-term notes or fixed rate assets because this funding strategy is usually the most effective way to provide anmedium-term notes paired with a received-fixed interest rate match, maintainswap because these alternatives generally provide a suitable liquidity profile, and lower Farmer Mac’s cost of funds.funding while generating an effective interest rate match. As funding for these floating rate assets matures, Farmer Mac seeks to refinance the debt associated with these assets in a similar fashion to achieve an appropriate interest rate match forin the remaining lifecontext of the assets. Farmer Mac's overall liability issuance and liquidity management strategies.
However, if the rates onfunding cost of Farmer Mac’s discount notes or medium-term notes deterioratewere to increase relative to LIBORthe benchmark market index to which the assets are being funded during the time between when these floating rate assets were first funded and when Farmer Mac refinancesrefinanced the associated debt, Farmer Mac iswould be exposed to a commensurate reduction in its net effective spread on the associated assets. Conversely, if the ratesfunding cost on Farmer Mac’s discount notes or medium-term notes improvewere to decrease relative to LIBOR (or a different market index) during that time, Farmer Mac would benefit from a commensurate increase in its net effective spread on those assets.
Farmer MacMac's liability issuance strategy targets balancing liquidity risk and re-funding and repricing risk while maintaining an appropriate liability management profile that 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, combinedconsistent 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 onrisk tolerance. ALCO regularly reviews Farmer Mac's discount notes or medium-term notes wereliability issuance strategy to improve relative to LIBOR, Farmer Mac would benefit from a commensurate increase in its net interest incomeappropriately manage re-funding and net effective spread.repricing risk.
To mitigate this basis risk, Farmer Mac seeks to issue debt of sufficient maturity to reduce the frequency of required refinancing of that debt over the life of the associated asset. As of December 31, 2017,2020, Farmer Mac held $6.6$6.4 billion of floating-ratefloating rate assets in its lines of business and its liquidity investment portfolio that reset based on the basis of floating rate market indexes, primarily one-month and three-month LIBOR. As of the same date, Farmer Mac also had $2.8$6.3 billion of interest rate swaps outstanding where Farmer Mac pays a fixed rate of interest and receives a floating rate of interest.
Adjustments toFollowing a period of market volatility in the first half of 2020, Farmer Mac's funding relative to LIBOR stabilized with spreads modestly higher compared to historical averages. Farmer Mac regularly adjusts its funding strategies to take advantagemitigate the effects of lowerspread variability and seeks to maintain an effective funding cost LIBOR-based funding opportunities, as well as a generally favorable LIBOR-based funding market, has enabledin the context of its overall liability management and liquidity management strategies.
Discontinuation of LIBOR
As described in "Risk Factors—Market Risk", Farmer Mac faces risks associated with the reform, replacement, or discontinuation of the LIBOR benchmark interest rate and the transition to reduce its funding costs in 2017. LIBOR-based funding markets have returned to levels thatan alternative benchmark interest rate. We are generally consistent with Farmer Mac's historical experience, andcurrently evaluating the potential effect on our business of the replacement of the LIBOR benchmark interest rate.
As of December 31, 2020, Farmer Mac believesheld $5.1 billion of floating rate assets in its lines of business and its investment portfolio, had issued $4.7 billion of floating rate debt, and had entered into $14.6 billion notional amount of interest rate swaps, each of which reset based on LIBOR. In addition, our Non-Cumulative Series C Preferred Stock currently pays a fixed rate of interest until July 17, 2024. It becomes
redeemable at our option on July 18, 2024 and thereafter pays interest at a floating rate equal to three-month LIBOR plus 3.260%.
The market transition away from LIBOR and towards an alternative benchmark interest rate indices that additional material improvementsmay be developed is expected to be complicated and may require the development of term and credit adjustments to accommodate for differences between the benchmark interest rate indices. The transition may also result in different financial performance for previously booked transactions, require different hedging strategies, or require renegotiation of previously booked transactions. As of December 31, 2020, we had $1.0 billion outstanding in medium-term notes based on the near-term are less likely.Secured Overnight Financing Rate (SOFR), a potential alternative benchmark interest rate.
Liquidity and Capital Resources
Farmer Mac's primary sources of funds to meet its liquidity and funding needs are the proceeds of its debt issuances, guarantee and commitment fees, net effective spread, loan repayments, and maturities of AgVantage securities. Farmer Mac regularly accesses the capital markets for funding, and Farmer Mac has maintained access to the capital markets at favorable rates throughout 20162020 and 2017. 2019. Farmer Mac funds its purchases of eligible loan assets, USDA Securities, Farmer Mac Guaranteed Securities, and investment assets and finances its operations primarily by issuing debt obligations of various maturities in the public capital markets. As of December 31, 2020, Farmer Mac had outstanding discount notes of $1.8 billion, medium-term notes that mature within one year of $8.9 billion, and medium-term notes that mature after one year of $11.0 billion.
Assuming continued access to the capital markets, Farmer Mac believes it has sufficient liquidity and capital resources to support its operations for the next 12 months and for the foreseeable future. Farmer Mac also has a liquidity contingency funding plan to manage unanticipated disruptions in its access to the capital markets. That plan involves borrowing through repurchase agreement arrangements and the sale of liquid assets. Farmer Mac is required tomust maintain a minimum of 90 days of liquidity under the Liquidity and Investment Regulations.Regulations prescribed for Farmer Mac by FCA. In accordance with the methodology for calculating available days of liquidity prescribed byunder those regulations, Farmer Mac maintained ana monthly average of 195196 days of liquidity during 20172020 and had 172207 days of liquidity as of December 31, 2017.
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.
2020. ALCO regularly reviews Farmer Mac's board of directors has authorizedliquidity position and ensures the issuance of up to $18.0 billion of discount notes and medium-term notes (of which $15.5 billion was outstanding as of December 31, 2017), 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 businessrequired minimums 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.maintained.
Farmer Mac maintains cash, cash equivalents (including U.S. Treasury securities and other short-term money market instruments), and other investment securities that can be drawn upon for liquidity needs. Farmer Mac's current policies authorize liquidity investments in:
•obligations of or fully guaranteed by the United States or a U.S. government agency;
•obligations of or fully guaranteed by GSEs;
•municipal securities;
•international and multilateral development bank obligations;
•money market instruments;
•diversified investment funds;
•asset-backed securities;
•corporate debt securities; and
•mortgage-backed securities.
The following table presents these assets as of December 31, 20172020 and 2016:December 31, 2019:
Table 2635
| | | | | | | | | | | |
| | As of December 31, 2020 | | As of December 31, 2019 |
| | (in thousands) |
| Cash and cash equivalents | $ | 1,033,941 | | | $ | 604,381 | |
| Investment securities: | | | |
| Guaranteed by U.S. Government and its agencies | 1,935,056 | | | 1,842,640 | |
| Guaranteed by GSEs | 1,944,497 | | | 1,143,323 | |
| Asset-backed securities | 19,171 | | | 18,912 | |
| Total | $ | 4,932,665 | | | $ | 3,609,256 | |
The increase in the investment portfolio since December 31, 2019 was to provide a greater level of liquidity in response to market disruptions driven by the COVID-19 pandemic, to prepare for the possibility of future volatility in the debt capital markets, and to support program asset growth as the overall funding needs for the balance sheet increased.
|
| | | | | | | |
| | As of December 31, 2017 | | As of December 31, 2016 |
|
| | (in thousands) |
| Cash and cash equivalents | $ | 302,022 |
| | $ | 265,229 |
|
| Investment securities: | |
| | |
|
| Guaranteed by U.S. Government and its agencies | 1,331,490 |
| | 1,423,850 |
|
| Guaranteed by GSEs | 893,843 |
| | 1,044,261 |
|
| Corporate debt securities | — |
| | 10,041 |
|
| Asset-backed securities | 35,104 |
| | 37,699 |
|
| Total | $ | 2,562,459 |
| | $ | 2,781,080 |
|
Capital Requirements. Farmer Mac is subject to the following statutory capital requirements – minimum, critical, and risk-based. Farmer Mac is required tomust comply with the higher of the minimum capital requirement and the risk-based capital requirement. The minimum capital requirement is expressed as a percentage of on-balance sheet assets and off-balance sheet obligations. The critical capital requirement is equal to one-half of the minimum capital amount. Farmer Mac's statutory charter does not specify the required level of risk-based capital but directs FCA to establish a risk-based capital stress test for Farmer Mac, using specified stress test parameters. Certain enforcement powers are given to FCA depending on Farmer Mac's compliance with these capital standards. As of December 31, 2017,2020, Farmer Mac was in compliance with its statutory capital requirements and was classified as within "level I"1" (the highest compliance level). See Note 9 to the consolidated financial statements for more information about Farmer Mac's capital position and see "Business—Government Regulation of Farmer Mac—Capital Standards" 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, and qualifying preferred stock). That policy imposes restrictions onrestricts Tier 1-eligible dividends and any discretionary bonus payments if Tier 1 capital falls below specified thresholds. As of December 31, 20172020 and 2016,December 31, 2019, Farmer Mac's Tier 1 capital ratio was 12.6%14.1% and 12.7%12.9%, respectively. The decrease from year-end 2016 was the result of the adoption of ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,"for the year ended December 31, 2017. Excluding the effects of the adoption of ASU 2018-02, Farmer Mac'sincrease in our Tier 1 capital ratio increased aswas due to the marginal impact offact that capital growth, which reflects the issuance of the Series E and Series F Preferred Stock, partially offset by the redemption of the Series A Preferred Stock, outpaced the marginal impact of growth in risk weightedrisk-weighted assets during 2017. 2020. As of December 31, 2020, Farmer Mac was in compliance with its capital adequacy policy. Farmer Mac does not expect its compliance on an ongoing basis with FCA's rule on capital planning, including Farmer Mac's policy on Tier 1 capital, to materially affect Farmer Mac's operations or financial condition.
For more information about the capital requirements applicable to Farmer Mac'sMac, its capital adequacy policy, and FCA's rule on capital planning, see "Business—Government Regulation of Farmer Mac—Capital Standards." As of December 31, 2017,See Note 9 to the consolidated financial statements for more information about Farmer Mac was in compliance with itsMac's capital adequacy policy.position.
Contractual ObligationsDiscount and Medium-term Notes. The following table presents the amount and timing of Farmer Mac's known, fixed, and determinable contractualdiscount and medium-term note obligations by payment date as of December 31, 2017.2020. The payment amounts represent those amounts contractually due to the recipientinvestor (including return of discount and interest on debt) and do not include unamortized premiums or discounts or other similar carrying value adjustments.
Table 2736
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One Year
or Less | | One to
Three Years | | Three to
Five Years | | Over Five
Years | | Total |
| | (in thousands) |
Discount notes(1) | $ | 1,797,659 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,797,659 | |
Medium-term notes(1) | 8,949,870 | | | 5,816,659 | | | 2,271,750 | | | 2,972,372 | | | 20,010,651 | |
Interest payments on fixed rate medium-term notes(2) | 163,320 | | | 226,095 | | | 134,352 | | | 255,575 | | | 779,342 | |
Interest payments on floating rate medium-term notes(3) | 11,455 | | | 10,679 | | | 7,423 | | | 6,015 | | | 35,572 | |
|
| | | | | | | | | | | | | | | | | | | |
| | One Year
or Less | | One to
Three Years | | Three to
Five Years | | Over Five
Years | | Total |
| | (in thousands) |
Discount notes(1) | $ | 1,730,472 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,730,472 |
|
Medium-term notes(1) | 6,365,557 |
| | 4,494,563 |
| | 1,642,930 |
| | 1,308,721 |
| | 13,811,771 |
|
Interest payments on fixed rate medium-term notes(2) | 150,367 |
| | 188,227 |
| | 101,077 |
| | 156,412 |
| | 596,083 |
|
Interest payments on floating rate medium-term notes(3) | 41,235 |
| | 24,681 |
| | 10,725 |
| | 14,886 |
| | 91,527 |
|
Operating lease obligations(4) | 1,814 |
| | 3,857 |
| | 3,975 |
| | 3,305 |
| | 12,951 |
|
Purchase obligations(5) | 1,869 |
| | 1,511 |
| | 193 |
| | — |
| | 3,573 |
|
| |
(1)
| Future events, including additional issuance of discount notes and medium-term notes and refinancing of those notes, could cause actual payments to differ significantly from these amounts. For more information regarding discount notes and medium-term notes, see Note 7 to the consolidated financial statements. |
| |
(2)
| Interest payments on callable medium-term notes are calculated based on contractual maturity. Future calls of these notes could cause actual interest payments to differ significantly from the amounts presented. |
| |
(3)
| Calculated using the effective interest rates as of December 31, 2017. As a result, these amounts do not reflect the effects of changes in the contractual interest rates effective on future interest rate reset dates. |
| |
(4)
| Includes amounts due under non-cancellable operating leases for office space and office equipment. See Note 12 to the consolidated financial statements for more information regarding Farmer Mac's minimum lease payments for office space. |
| |
(5)
| Includes minimum amounts due under non-cancellable agreements to purchase goods or services that are enforceable and legally binding and specify all significant terms. These agreements include, among others, agreements for the provision of consulting services, information technology support, equipment maintenance, and financial analysis software and services. The amounts actually paid under these agreements will likely be higher due to the variable components of some of these agreements under which the ultimate obligation owed is determined by reference to actual usage or hours worked. The table does not include amounts due under agreements that are cancellable without penalty or further payment as of December 31, 2017 and therefore do not represent enforceable and legally binding obligations. The table also does not include payments that are based on a varying outstanding loan volume (such as servicing fees), as those payments are not known, fixed, and determinable contractual obligations. |
(2)Interest payments on callable medium-term notes are calculated based on maturity. Future calls of these notes could cause actual interest payments to differ significantly from the amounts presented.
(3)Calculated using the effective interest rates as of December 31, 2020. As a result, these amounts do not reflect the effects of changes in the interest rates effective on future interest rate reset dates.
Farmer Mac enters into financial derivatives contracts under which it either receives cash from counterparties, or is required to pay cash to them, depending on changes in interest rates. Financial derivatives are carried on the consolidated balance sheets at fair value, representing the net present value of expected future cash payments or receipts based on market interest rates as of the balance sheet date adjusted for the consideration of credit risk of Farmer Mac and its counterparties. The fair values of the contracts change daily as market interest rates change. Because the financial derivative liabilities recorded on the consolidated balance sheet as of December 31, 20172020 do not represent the amounts that may ultimately be paid under the financial derivative contracts, those liabilities are not included in the table of contractual obligations presented above. FurtherMore information regardingabout financial derivatives is included in Note 2(h)2(e) and Note 6 to the consolidated financial statements.
Contingent Liabilities. In conducting its loan purchase activities, Farmer Mac enters into mandatory delivery commitments to purchase agricultural real estate mortgage loans and USDA Securities. In conducting its LTSPC activities, Farmer Mac enters into arrangements whereby it commits, subject to the terms of the applicable LTSPC agreement, to a future purchase of one or more loans from an identified poolpools of eligible loans that met Farmer Mac's standards atwhen the time theapplicable transaction was entered into and Farmer Mac assumed the credit risk on the loans. The following table presents these significant commitments:
Table 2837
| | | | | | | | | | | |
| | As of December 31, |
| | 2020 | | 2019 |
| | (in thousands) |
| LTSPCs | $ | 2,881,856 | | | $ | 3,002,349 | |
| Mandatory commitments to purchase loans and USDA Securities | 125,811 | | | 65,056 | |
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | (in thousands) |
LTSPCs(1) | $ | 3,141,684 |
| | $ | 3,088,007 |
|
| Mandatory commitments to purchase loans and USDA Securities | 54,347 |
| | 114,486 |
|
| |
(1)
| As of both December 31, 2017 and 2016, includes $20.0 million related to one-year loan purchase commitments on which Farmer Mac receives a nominal unused commitment fee. |
For more information about Farmer Mac's commitments to purchase loans, see Note 12 to the consolidated financial statements.
Off-Balance Sheet Arrangements
Farmer Mac offers approved lenders two credit enhancement alternatives to increase their liquidity or lending capacity while retaining the cash flow benefits of their loans: (1) Farmer Mac Guaranteed Securities, which are available through each of the Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit lines of business; and (2) LTSPCs, which are available through the Farm & Ranch and Rural Utilities lines of business. For securitization trusts where Farmer Mac is the primary beneficiary,
the trust assets and liabilities are included on Farmer Mac's consolidated balance sheet. For securitization trusts where Farmer Mac is not the remainder of these transactions,primary beneficiary and in the event of deconsolidation,de-consolidation, both of these alternatives result in the creation ofcreate off-balance sheet obligations for Farmer Mac. See Note 12 to the consolidated financial statements for more information about consolidation and Farmer Mac's off-balance sheet business activities.
As of December 31, 20172020 and 2016,2019, outstanding off-balance sheet LTSPCs and Farmer Mac Guaranteed Securities totaled $4.0$3.3 billion and $4.9$3.5 billion, respectively. The following table presents the balance of outstanding LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities as of December 31, 20172020 and 2016:2019:
Table 2938
| | | | | | | | | | | |
Outstanding Balance of LTSPCs and
Off-Balance Sheet Farmer Mac Guaranteed Securities |
| | As of December 31, |
| | 2020 | | 2019 |
| | (in thousands) |
| Farm & Ranch obligations: | | | |
| LTSPCs | $ | 2,325,431 | | | $ | 2,393,071 | |
| Farm & Ranch Guaranteed Securities | 79,312 | | | 107,322 | |
| Total Farm & Ranch obligations | 2,404,743 | | | 2,500,393 | |
| USDA Guarantees obligations: | | | |
| Farmer Mac Guaranteed USDA Securities | 299,298 | | | 389,216 | |
| Rural Utilities obligations: | | | |
| LTSPCs | 556,425 | | | 609,278 | |
| Institutional Credit obligations: | | | |
| AgVantage Securities | 4,412 | | | 7,567 | |
| | | |
| | | |
| Total off-balance sheet | $ | 3,264,878 | | | $ | 3,506,454 | |
|
| | | | | | | |
Outstanding Balance of LTSPCs and
Off-Balance Sheet Farmer Mac Guaranteed Securities |
| | As of December 31, |
| | 2017 | | 2016 |
| | (in thousands) |
| Farm & Ranch obligations: | | | |
| LTSPCs | $ | 2,335,342 |
| | $ | 2,209,409 |
|
| Farm & Ranch Guaranteed Securities | 333,511 |
| | 415,441 |
|
| Total Farm & Ranch obligations | 2,668,853 |
| | 2,624,850 |
|
| USDA Guarantees obligations: | | | |
| Farmer Mac Guaranteed USDA Securities | 254,217 |
| | 103,976 |
|
| Rural Utilities obligations: | | | |
LTSPCs(1) | 806,342 |
| | 878,598 |
|
| Institutional Credit obligations: | | | |
AgVantage Securities(2) | 11,556 |
| | 983,214 |
|
Revolving floating rate AgVantage facility(3) | 300,000 |
| | 300,000 |
|
| Total Institutional Credit obligations | 311,556 |
| | 1,283,214 |
|
| Total off-balance sheet | $ | 4,040,968 |
| | $ | 4,890,638 |
|
| |
(1)
| As of both December 31, 2017 and 2016, includes $20.0 million related to one-year loan purchase commitments on which Farmer Mac receives a nominal unused commitment fee. |
| |
(2)
| In April 2017, Farmer Mac purchased and retained $1.0 billion in AgVantage securities from MetLife. MetLife used the proceeds from Farmer Mac's purchase of $1.0 billion in AgVantage securities to refinance an AgVantage security of the same amount that matured in April 2017. Previously, $970.0 million of the maturing $1.0 billion AgVantage security had been sold to third parties and reported as off-balance sheet business volume in the Institutional Credit line of business. |
| |
(3)
| During 2017, $100.0 million of this facility was drawn and subsequently repaid. During 2016, this facility was not 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 in the form of AgVantage securities, and Farmer Mac will earn interest income on those securities. |
See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees" and Notes 2(d)2(b), 2(f)2(d), 5 and 12 to the consolidated financial statements for more information about Farmer Mac Guaranteed Securities and Notes 2(o)2(l) and 12 to the consolidated financial statements for more information about LTSPCs.
Regulatory Matters
The Dodd-Frank Act contains a variety of provisions designed to regulate financial markets. Certain provisionsSection 4013 of the Dodd-FrankCARES Act including those regarding derivatives, corporate governance, and executive compensation, applythat was signed into law on March 27, 2020 provides financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of the COVID-19 pandemic. On April 10, 2020, Farmer Mac’s prudential regulator, FCA (through OSMO) issued guidance to Farmer Mac.Mac to encourage Farmer Mac doesto work with its lending and servicing partners in approving servicing actions for borrowers impacted by COVID-19, including working with other Farm Credit System institutions on approvals for loans to which statutory borrower rights are attached (primarily in LTSPCs), as well as guidance on reporting TDRs for lines of business affected by the COVID-19 outbreak. The FCA's guidance on TDRs was consistent with the guidance provided by other financial regulatory agencies and the Financial Accounting Standards Board that short-term modifications made on a good faith basis in response to the COVID-19 national emergency are not expectTDRs when the borrower was not past due on loan payments before the March 13, 2020 presidential proclamation declaring the COVID-19 outbreak a national emergency.
In response to the COVID-19 pandemic and the related economic effects, Congress passed a series of stimulus measures (including the CARES Act) that anydelivered more than $35 billion in emergency aid to farmers and ranchers in 2020. In addition, through funding provided in the various COVID-19 stimulus packages, the USDA oversaw the purchase and delivery of $4.5 billion in food to food banks, churches, community organizations, schools, and tribal organizations through the final rulesFarmers to Families Food Box Program during 2020. These purchases have helped support commodity prices and serve millions of Americans in need. On December 27, 2020, President Trump signed into law a bill providing for, among other measures, $13 billion in additional support for U.S. agriculture through direct payments and food support funding that have been adopted underis scheduled to be disbursed in 2021.
With the Dodd-Frank Act or that may be adopted will havestart of a material effect on Farmer Mac's business activitiesnew Congress and operations or financial condition.President Biden's Administration, Farmer Mac will continuecontinues to monitor all applicable developments in the implementation of the Dodd-Frank Actlegislation and expects to be able to adapt successfully to any new applicable legislative and regulatory requirements.
On December 7, 2017,regulations that could affect Farmer Mac, disclosed that it had terminated the employment of its former Presidentfarmers, ranchers, rural lenders, and Chief Executive Officer, Timothy L. Buzby, due to violations of company policies unrelatedrural America in general.
to Farmer Mac's financial or business performance. Shortly after that disclosure, FCA issued a press release to state that OSMO would be conducting oversight and examination activities that are expected and customary in this type of situation with a regulated entity and to clarify that FCA examinations are not public. Farmer Mac has been cooperating with OSMO in its follow-up requests for information related to the change in leadership at Farmer Mac and the events leading up to that change. Farmer Mac does not expect that this will have a material effect on its business activities and operations or financial condition.
Other Matters
The expected effects of recently issued accounting pronouncements on the consolidated financial statements are presented in Note 2(r)2(p) to the consolidated financial statements.
Supplemental Information
The following tables present quarterly and annual information regardingabout new business volume, repayments, and outstanding business volume:
Table 3039
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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: | | | | | | | | | | | | | |
| December 31, 2020 | $ | 731,434 | | | $ | 141,332 | | | $ | 180,520 | | | $ | 189,729 | | | $ | — | | | $ | 96,424 | | | $ | 1,339,439 | |
| September 30, 2020 | 740,823 | | | 94,495 | | | 225,494 | | | 62,300 | | | — | | | 211,908 | | | 1,335,020 | |
| June 30, 2020 | 609,284 | | | 85,390 | | | 224,016 | | | 339,366 | | | 19,500 | | | 430,024 | | | 1,707,580 | |
| March 31, 2020 | 401,853 | | | 73,674 | | | 147,906 | | | 152,668 | | | — | | | 560,395 | | | 1,336,496 | |
| December 31, 2019 | 602,750 | | | 65,614 | | | 143,565 | | | 102,900 | | | — | | | 371,075 | | | 1,285,904 | |
| September 30, 2019 | 309,805 | | | 125,022 | | | 113,664 | | | 117,279 | | | — | | | 402,611 | | | 1,068,381 | |
| June 30, 2019 | 248,152 | | | 57,321 | | | 118,335 | | | 105,000 | | | — | | | 659,447 | | | 1,188,255 | |
| March 31, 2019 | 203,156 | | | 91,215 | | | 57,223 | | | 546,198 | | | — | | | 825,417 | | | 1,723,209 | |
| December 31, 2018 | 285,008 | | | 80,840 | | | 90,297 | | | 3,000 | | | — | | | 585,814 | | | 1,044,959 | |
| | | | | | | | | | | | | |
| For the year ended: | | | | | | | | | | | | | |
| December 31, 2020 | $ | 2,483,394 | | | $ | 394,891 | | | $ | 777,936 | | | $ | 744,063 | | | $ | 19,500 | | | $ | 1,298,751 | | | $ | 5,718,535�� | |
| December 31, 2019 | 1,363,863 | | | 339,172 | | | 432,787 | | | 871,377 | | | — | | | 2,258,550 | | | 5,265,749 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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: | | | | | | | | | | | | | |
| December 31, 2017 | $ | 204,917 |
| | $ | 282,809 |
| | $ | 100,024 |
| | $ | 15,000 |
| | $ | — |
| | $ | 234,753 |
| | $ | 837,503 |
|
| September 30, 2017 | 298,274 |
| | 102,774 |
| | 131,298 |
| | 70,000 |
| | — |
| | 290,995 |
| | 893,341 |
|
| June 30, 2017 | 312,217 |
| | 55,899 |
| | 169,261 |
| | 25,000 |
| | — |
| | 1,296,757 |
| | 1,859,134 |
|
| March 31, 2017 | 314,137 |
| | 113,261 |
| | 131,101 |
| | 27,341 |
| | — |
| | 561,407 |
| | 1,147,247 |
|
| December 31, 2016 | 243,692 |
| | 117,265 |
| | 129,343 |
| | 10,800 |
| | 20,000 |
| | 247,154 |
| | 768,254 |
|
| September 30, 2016 | 282,690 |
| | 155,657 |
| | 119,201 |
| | 20,000 |
| | — |
| | 528,234 |
| | 1,105,782 |
|
| 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 |
|
| | | | | | | | | | | | | | |
| For the year ended: | | | | | | | | | | | | | |
| December 31, 2017 | 1,129,545 |
| | 554,743 |
| | 531,684 |
| | 137,341 |
| | — |
| | 2,383,912 |
| | 4,737,225 |
|
| December 31, 2016 | 966,023 |
| | 399,095 |
| | 481,257 |
| | 50,491 |
| | 441,404 |
| | 2,098,852 |
| | 4,437,122 |
|
Table 40
Table 31 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | $ | 175,613 | | | $ | 4,213 | | | $ | 26,895 | | | $ | 29,120 | | | $ | 37,062 | | | $ | 19,528 | | | $ | 676,567 | | | $ | 968,998 | |
| Unscheduled | 231,342 | | | 2,242 | | | 95,264 | | | 99,811 | | | 1,610 | | | — | | | — | | | 430,269 | |
| December 31, 2020 | $ | 406,955 | | | $ | 6,455 | | | $ | 122,159 | | | $ | 128,931 | | | $ | 38,672 | | | $ | 19,528 | | | $ | 676,567 | | | $ | 1,399,267 | |
| | | | | | | | | | | | | | | |
| Scheduled | $ | 174,986 | | | $ | 2,524 | | | $ | 32,276 | | | $ | 29,654 | | | $ | 54,513 | | | $ | 14,100 | | | $ | 547,236 | | | $ | 855,289 | |
| Unscheduled | 326,025 | | | 1,934 | | | 66,074 | | | 138,518 | | | — | | | — | | | — | | | 532,551 | |
| September 30, 2020 | $ | 501,011 | | | $ | 4,458 | | | $ | 98,350 | | | $ | 168,172 | | | $ | 54,513 | | | $ | 14,100 | | | $ | 547,236 | | | $ | 1,387,840 | |
| | | | | | | | | | | | | | | |
| Scheduled | $ | 101,264 | | | $ | 3,043 | | | $ | 39,010 | | | $ | 37,879 | | | $ | 23,589 | | | $ | 25,132 | | | $ | 471,295 | | | $ | 701,212 | |
| Unscheduled | 248,890 | | | 4,034 | | | 92,177 | | | 154,536 | | | 3,935 | | | — | | | — | | | 503,572 | |
| June 30, 2020 | $ | 350,154 | | | $ | 7,077 | | | $ | 131,187 | | | $ | 192,415 | | | $ | 27,524 | | | $ | 25,132 | | | $ | 471,295 | | | $ | 1,204,784 | |
| | | | | | | | | | | | | | | |
| Scheduled | $ | 128,768 | | | $ | 6,132 | | | $ | 50,393 | | | $ | 43,069 | | | $ | 34,235 | | | $ | 13,593 | | | $ | 304,540 | | | $ | 580,730 | |
| Unscheduled | 191,260 | | | 3,888 | | | 60,442 | | | 78,806 | | | — | | | — | | | — | | | 334,396 | |
| March 31, 2020 | $ | 320,028 | | | $ | 10,020 | | | $ | 110,835 | | | $ | 121,875 | | | $ | 34,235 | | | $ | 13,593 | | | $ | 304,540 | | | $ | 915,126 | |
| | | | | | | | | | | | | | | |
| Scheduled | $ | 57,488 | | | $ | 4,737 | | | $ | 39,878 | | | $ | 25,142 | | | $ | 10,317 | | | $ | 10,551 | | | $ | 656,095 | | | $ | 804,208 | |
| Unscheduled | 105,671 | | | 3,247 | | | 74,121 | | | 66,011 | | | 34,063 | | | — | | | 13,000 | | | 296,113 | |
| December 31, 2019 | $ | 163,159 | | | $ | 7,984 | | | $ | 113,999 | | | $ | 91,153 | | | $ | 44,380 | | | $ | 10,551 | | | $ | 669,095 | | | $ | 1,100,321 | |
| | | | | | | | | | | | | | | |
| Scheduled | $ | 97,421 | | | $ | 3,095 | | | $ | 22,713 | | | $ | 27,853 | | | $ | 31,656 | | | $ | 8,692 | | | $ | 441,575 | | | $ | 633,005 | |
| Unscheduled | 129,676 | | | 2,663 | | | 76,883 | | | 39,442 | | | — | | | — | | | 1,088 | | | 249,752 | |
| September 30, 2019 | $ | 227,097 | | | $ | 5,758 | | | $ | 99,596 | | | $ | 67,295 | | | $ | 31,656 | | | $ | 8,692 | | | $ | 442,663 | | | $ | 882,757 | |
| | | | | | | | | | | | | | | |
| Scheduled | $ | 39,879 | | | $ | 3,758 | | | $ | 58,779 | | | $ | 38,676 | | | $ | 6,951 | | | $ | 17,092 | | | $ | 612,964 | | | $ | 778,099 | |
| Unscheduled | 64,912 | | | 3,399 | | | 58,979 | | | 43,044 | | | — | | | — | | | — | | | 170,334 | |
| June 30, 2019 | $ | 104,791 | | | $ | 7,157 | | | $ | 117,758 | | | $ | 81,720 | | | $ | 6,951 | | | $ | 17,092 | | | $ | 612,964 | | | $ | 948,433 | |
| | | | | | | | | | | | | | | |
| Scheduled | $ | 112,973 | | | $ | 5,843 | | | $ | 74,054 | | | $ | 41,266 | | | $ | 31,492 | | | $ | 7,660 | | | $ | 470,812 | | | $ | 744,100 | |
| Unscheduled | 67,608 | | | 1,798 | | | 50,482 | | | 46,798 | | | 24,448 | | | — | | | 5,587 | | | 196,721 | |
| March 31, 2019 | $ | 180,581 | | | $ | 7,641 | | | $ | 124,536 | | | $ | 88,064 | | | $ | 55,940 | | | $ | 7,660 | | | $ | 476,399 | | | $ | 940,821 | |
| | | | | | | | | | | | | | | |
| Scheduled | $ | 36,006 | | | $ | 8,331 | | | $ | 35,682 | | | $ | 24,793 | | | $ | 6,321 | | | $ | 16,062 | | | $ | 568,277 | | | $ | 695,472 | |
| Unscheduled | 56,299 | | | 9,257 | | | 33,319 | | | 21,135 | | | 20,538 | | | — | | | — | | | 140,548 | |
| December 31, 2018 | $ | 92,305 | | | $ | 17,588 | | | $ | 69,001 | | | $ | 45,928 | | | $ | 26,859 | | | $ | 16,062 | | | $ | 568,277 | | | $ | 836,020 | |
| | | | | | | | | | | | | | | |
| For the year ended: | | | | | | | | | | | | | | | |
| Scheduled | $ | 580,631 | | | $ | 15,912 | | | $ | 148,574 | | | $ | 139,722 | | | $ | 149,399 | | | $ | 72,353 | | | $ | 1,999,638 | | | $ | 3,106,229 | |
| Unscheduled | 997,517 | | | 12,098 | | | 313,957 | | | 471,671 | | | 5,545 | | | — | | | — | | | 1,800,788 | |
| December 31, 2020 | $ | 1,578,148 | | | $ | 28,010 | | | $ | 462,531 | | | $ | 611,393 | | | $ | 154,944 | | | $ | 72,353 | | | $ | 1,999,638 | | | $ | 4,907,017 | |
| | | | | | | | | | | | | | | |
| Scheduled | $ | 307,761 | | | $ | 17,433 | | | $ | 195,424 | | | $ | 132,937 | | | $ | 80,416 | | | $ | 43,995 | | | $ | 2,181,446 | | | $ | 2,959,412 | |
| Unscheduled | 367,867 | | | 11,107 | | | 260,465 | | | 195,295 | | | 58,511 | | | — | | | 19,675 | | | 912,920 | |
| December 31, 2019 | $ | 675,628 | | | $ | 28,540 | | | $ | 455,889 | | | $ | 328,232 | | | $ | 138,927 | | | $ | 43,995 | | | $ | 2,201,121 | | | $ | 3,872,332 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | $ | 25,848 |
| | $ | 14,371 |
| | $ | 36,806 |
| — |
| $ | 22,381 |
| — |
| $ | 315 |
| — |
| $ | 13,621 |
| — |
| $ | 231,717 |
| | $ | 345,059 |
|
| Unscheduled | 49,229 |
| | 6,941 |
| | 43,975 |
| — |
| 24,385 |
| — |
| 4,876 |
| — |
| — |
| — |
| — |
| | 129,406 |
|
| December 31, 2017 | $ | 75,077 |
| | $ | 21,312 |
| | $ | 80,781 |
| | $ | 46,766 |
| | $ | 5,191 |
| | $ | 13,621 |
| | $ | 231,717 |
| | $ | 474,465 |
|
| | | | | | | | | | | | | | | | |
| Scheduled | $ | 61,961 |
| | $ | 6,735 |
| | $ | 21,409 |
| | $ | 24,163 |
| | $ | 27,191 |
| | $ | 39,816 |
| | $ | 100,571 |
| | $ | 281,846 |
|
| Unscheduled | 49,894 |
| | 5,861 |
| | 124,676 |
| | 45,192 |
| | 457 |
| | — |
| | — |
| | 226,080 |
|
| September 30, 2017 | $ | 111,855 |
| | $ | 12,596 |
| | $ | 146,085 |
| | $ | 69,355 |
| | $ | 27,648 |
| | $ | 39,816 |
| | $ | 100,571 |
| | $ | 507,926 |
|
| | | | | | | | | | | | | | | | |
| Scheduled | $ | 21,687 |
| | $ | 9,116 |
| | $ | 41,821 |
| | $ | 35,169 |
| | $ | — |
| | $ | 9,885 |
| | $ | 1,166,922 |
| | $ | 1,284,600 |
|
| Unscheduled | 51,442 |
| | 10,737 |
| | 47,262 |
| | 46,776 |
| | — |
| | — |
| | 4,000 |
| | 160,217 |
|
| June 30, 2017 | $ | 73,129 |
| | $ | 19,853 |
| | $ | 89,083 |
| | $ | 81,945 |
| | $ | — |
| | $ | 9,885 |
| | $ | 1,170,922 |
| | $ | 1,444,817 |
|
| | | | | | | | | | | | | | | | |
| Scheduled | $ | 70,394 |
| | $ | 16,184 |
| | $ | 48,375 |
| | $ | 36,322 |
| | $ | 26,909 |
| | $ | 8,934 |
| | $ | 161,451 |
| | $ | 368,569 |
|
| Unscheduled | 114,811 |
| | 11,985 |
| | 64,486 |
| | 39,457 |
| | 814 |
| | — |
| | 102,059 |
| | 333,612 |
|
| March 31, 2017 | $ | 185,205 |
| | $ | 28,169 |
| | $ | 112,861 |
| | $ | 75,779 |
| | $ | 27,723 |
| | $ | 8,934 |
| | $ | 263,510 |
| | $ | 702,181 |
|
| | | | | | | | | | | | | | | | |
| Scheduled | $ | 20,566 |
| | $ | 15,209 |
| | $ | 21,546 |
| | $ | 21,325 |
| | $ | — |
| | $ | 15,929 |
| | $ | 311,739 |
| | $ | 406,314 |
|
| Unscheduled | 47,156 |
| | 10,767 |
| | 111,137 |
| | 34,477 |
| | 4,427 |
| | — |
| | 2,240 |
| | 210,204 |
|
| December 31, 2016 | $ | 67,722 |
| | $ | 25,976 |
| | $ | 132,683 |
| | $ | 55,802 |
| | $ | 4,427 |
| | $ | 15,929 |
| | $ | 313,979 |
| | $ | 616,518 |
|
| | | | | | | | | | | | | | | | |
| Scheduled | $ | 47,221 |
| | $ | 7,954 |
| | $ | 39,192 |
| | $ | 22,626 |
| | $ | 26,522 |
| | $ | 58,177 |
| | $ | 559,895 |
| | $ | 761,587 |
|
| Unscheduled | 85,583 |
| | 17,108 |
| | 67,094 |
| | 36,099 |
| | 2,108 |
| | — |
| | 5,000 |
| | 212,992 |
|
| September 30, 2016 | $ | 132,804 |
| | $ | 25,062 |
| | $ | 106,286 |
| | $ | 58,725 |
| | $ | 28,630 |
| | $ | 58,177 |
| | $ | 564,895 |
| | $ | 974,579 |
|
| | | | | | | | | | | | | | | | |
| 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 |
|
| | | | | | | | | | | | | | | | |
| For the year ended: | | | | | | | | | | | | | | | |
| Scheduled | $ | 179,890 |
| | $ | 46,406 |
| | $ | 148,411 |
| | $ | 118,035 |
| | $ | 54,415 |
| | $ | 72,256 |
| | $ | 1,660,661 |
| | $ | 2,280,074 |
|
| Unscheduled | 265,376 |
| | 35,524 |
| | 280,399 |
| | 155,810 |
| | 6,147 |
| | — |
| | 106,059 |
| | 849,315 |
|
| December 31, 2017 | $ | 445,266 |
| | $ | 81,930 |
| | $ | 428,810 |
| | $ | 273,845 |
| | $ | 60,562 |
| | $ | 72,256 |
| | $ | 1,766,720 |
| | $ | 3,129,389 |
|
| | | | | | | | | | | | | | | | |
| Scheduled | $ | 121,111 |
| | $ | 50,905 |
| | $ | 137,967 |
| | $ | 121,354 |
| | $ | 52,570 |
| | $ | 85,670 |
| | $ | 1,528,180 |
| | $ | 2,097,757 |
|
| Unscheduled | 288,433 |
| | 47,705 |
| | 304,992 |
| | 183,805 |
| | 6,535 |
| | — |
| | 7,240 |
| | 838,710 |
|
| December 31, 2016 | $ | 409,544 |
| | $ | 98,610 |
| | $ | 442,959 |
| | $ | 305,159 |
| | $ | 59,105 |
| | $ | 85,670 |
| | $ | 1,535,420 |
| | $ | 2,936,467 |
|
Table 3241
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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: | | | | | | | | | | | | | | | |
| December 31, 2020 | $ | 6,176,438 | | | $ | 79,312 | | | $ | 2,325,431 | | | $ | 2,786,718 | | | $ | 2,260,412 | | | $ | 556,425 | | | $ | 7,739,359 | | | $ | 21,924,095 | |
| September 30, 2020 | 5,857,324 | | | 85,767 | | | 2,306,258 | | | 2,735,129 | | | 2,109,355 | | | 575,953 | | | 8,319,502 | | | 21,989,288 | |
| June 30, 2020 | 5,617,512 | | | 90,225 | | | 2,310,113 | | | 2,677,807 | | | 2,101,568 | | | 590,053 | | | 8,654,830 | | | 22,042,108 | |
| March 31, 2020 | 5,358,382 | | | 97,302 | | | 2,355,910 | | | 2,646,206 | | | 1,789,726 | | | 595,685 | | | 8,696,101 | | | 21,539,312 | |
| December 31, 2019 | 5,276,557 | | | 107,322 | | | 2,393,071 | | | 2,620,175 | | | 1,671,293 | | | 609,278 | | | 8,440,246 | | | 21,117,942 | |
| September 30, 2019 | 4,836,966 | | | 115,306 | | | 2,441,456 | | | 2,567,763 | | | 1,612,773 | | | 619,829 | | | 8,738,266 | | | 20,932,359 | |
| June 30, 2019 | 4,754,258 | | | 121,064 | | | 2,416,030 | | | 2,521,394 | | | 1,527,150 | | | 628,521 | | | 8,778,318 | | | 20,746,735 | |
| March 31, 2019 | 4,610,897 | | | 128,221 | | | 2,476,467 | | | 2,484,779 | | | 1,429,101 | | | 645,613 | | | 8,731,835 | | | 20,506,913 | |
| December 31, 2018 | 4,588,322 | | | 135,862 | | | 2,509,787 | | | 2,515,620 | | | 938,843 | | | 653,273 | | | 8,382,817 | | | 19,724,524 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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: | | | | | | | | | | | | | | | |
| December 31, 2017 | $ | 4,198,733 |
| | $ | 333,511 |
| | $ | 2,335,342 |
| | $ | 2,352,214 |
| | $ | 1,076,291 |
| | $ | 806,342 |
| | $ | 7,904,878 |
| | $ | 19,007,311 |
|
| September 30, 2017 | 4,068,893 |
| | 354,823 |
| | 2,133,314 |
| | 2,298,956 |
| | 1,066,482 |
| | 819,963 |
| | 7,901,842 |
| | 18,644,273 |
|
| June 30, 2017 | 3,882,474 |
| | 367,419 |
| | 2,176,625 |
| | 2,237,013 |
| | 1,024,130 |
| | 859,779 |
| | 7,711,418 |
| | 18,258,858 |
|
| March 31, 2017 | 3,643,386 |
| | 387,272 |
| | 2,209,809 |
| | 2,149,697 |
| | 999,130 |
| | 869,664 |
| | 7,585,583 |
| | 17,844,541 |
|
| December 31, 2016 | 3,514,454 |
| | 415,441 |
| | 2,209,409 |
| | 2,094,375 |
| | 999,512 |
| | 878,598 |
| | 7,287,686 |
| | 17,399,475 |
|
| September 30, 2016 | 3,338,484 |
| | 441,417 |
| | 2,224,827 |
| | 2,020,834 |
| | 993,139 |
| | 874,527 |
| | 7,354,511 |
| | 17,247,739 |
|
| 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 |
|
Table 3342
| | | | | | | | | | | | | | | | | | | | | | | |
| 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: | | | | | | | |
| December 31, 2020 | $ | 11,330,414 | | | $ | 2,816,840 | | | $ | 4,511,964 | | | $ | 18,659,218 | |
| September 30, 2020 | 10,879,372 | | | 2,811,547 | | | 5,013,640 | | | 18,704,559 | |
| June 30, 2020 | 10,793,629 | | | 2,845,266 | | | 5,076,445 | | | 18,715,340 | |
| March 31, 2020 | 10,296,598 | | | 2,818,869 | | | 4,996,478 | | | 18,111,945 | |
| December 31, 2019 | 10,045,712 | | | 2,863,199 | | | 4,702,577 | | | 17,611,488 | |
| September 30, 2019 | 9,642,802 | | | 2,850,000 | | | 4,549,689 | | | 17,042,491 | |
| June 30, 2019 | 9,446,117 | | | 2,825,151 | | | 4,601,917 | | | 16,873,185 | |
| March 31, 2019 | 9,206,082 | | | 2,720,639 | | | 4,643,506 | | | 16,570,227 | |
| December 31, 2018 | 8,325,347 | | | 2,717,505 | | | 4,705,169 | | | 15,748,021 | |
|
| | | | | | | | | | | | | | | |
| 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: | | | | | | | |
| December 31, 2017 | $ | 7,158,014 |
| | $ | 2,499,203 |
| | $ | 5,309,126 |
| | $ | 14,966,343 |
|
| September 30, 2017 | 6,921,477 |
| | 2,447,923 |
| | 5,426,757 |
| | 14,796,157 |
|
| June 30, 2017 | 6,722,463 |
| | 2,406,120 |
| | 5,226,982 |
| | 14,355,565 |
|
| March 31, 2017 | 5,373,283 |
| | 2,330,819 |
| | 5,255,146 |
| | 12,959,248 |
|
| December 31, 2016 | 5,346,011 |
| | 2,274,535 |
| | 4,888,291 |
| | 12,508,837 |
|
| September 30, 2016 | 5,278,332 |
| | 2,212,946 |
| | 4,869,765 |
| | 12,361,043 |
|
| 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 |
|
The following table presents the quarterly net effective spread (a non-GAAP measure) by segment:
Table 3443
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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: | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020(1) | $ | 20,313 | | | 1.75 | % | | $ | 6,786 | | | 1.10 | % | | $ | 7,322 | | | 1.35 | % | | $ | 17,401 | | | 0.85 | % | | $ | 2,700 | | | 0.22 | % | | $ | 54,522 | | | 0.98 | % |
| September 30, 2020 | 18,025 | | | 1.67 | % | | 5,865 | | | 0.97 | % | | 6,939 | | | 1.32 | % | | 18,601 | | | 0.87 | % | | 2,372 | | | 0.23 | % | | 51,802 | | | 0.96 | % |
| June 30, 2020 | 16,733 | | | 1.71 | % | | 4,689 | | | 0.81 | % | | 5,516 | | | 1.15 | % | | 18,782 | | | 0.86 | % | | 749 | | | 0.08 | % | | 46,469 | | | 0.89 | % |
| March 31, 2020 | 14,938 | | | 1.64 | % | | 4,625 | | | 0.81 | % | | 4,920 | | | 1.14 | % | | 17,702 | | | 0.84 | % | | 1,978 | | | 0.21 | % | | 44,163 | | | 0.89 | % |
December 31, 2019(1) | 16,374 | | | 1.90 | % | | 4,363 | | | 0.78 | % | | 4,871 | | | 1.17 | % | | 18,008 | | | 0.85 | % | | 2,375 | | | 0.27 | % | | 45,991 | | | 0.95 | % |
| September 30, 2019 | 13,181 | | | 1.66 | % | | 4,314 | | | 0.79 | % | | 4,502 | | | 1.16 | % | | 17,807 | | | 0.84 | % | | 2,657 | | | 0.30 | % | | 42,461 | | | 0.90 | % |
| June 30, 2019 | 13,335 | | | 1.72 | % | | 4,097 | | | 0.76 | % | | 3,996 | | | 1.10 | % | | 17,371 | | | 0.82 | % | | 2,556 | | | 0.34 | % | | 41,355 | | | 0.91 | % |
| March 31, 2019 | 12,737 | | | 1.70 | % | | 3,964 | | | 0.74 | % | | 3,233 | | | 1.12 | % | | 16,373 | | | 0.79 | % | | 2,494 | | | 0.35 | % | | 38,801 | | | 0.89 | % |
| December 31, 2018 | 13,288 | | | 1.79 | % | | 4,630 | | | 0.85 | % | | 2,833 | | | 1.19 | % | | 15,751 | | | 0.80 | % | | 2,353 | | | 0.36 | % | | 38,855 | | | 0.93 | % |
(1)See Note 14 to the consolidated financial statements for a reconciliation of GAAP net interest income by line of business to net effective spread by line of business for the years ended December 31, 2020 and 2019.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Effective Spread by Line of Business | | |
| | Farm & Ranch | | USDA Guarantees | | Rural Utilities | | Institutional Credit | | Corporate | | Net Effective Spread(1) |
| | Dollars | | Yield | | Dollars | | Yield | | Dollars | | Yield | | Dollars | | Yield | | Dollars | | Yield | | Dollars | | Yield |
| | (dollars in thousands) |
| For the quarter ended: | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2017(2) | $ | 12,396 |
| | 1.80 | % | | $ | 4,979 |
| | 0.93 | % | | $ | 3,057 |
| | 1.14 | % | | $ | 14,800 |
| | 0.78 | % | | $ | 2,235 |
| | 0.35 | % | | $ | 37,467 |
| | 0.93 | % |
| September 30, 2017 | 11,303 |
| | 1.73 | % | | 4,728 |
| | 0.90 | % | | 2,765 |
| | 1.07 | % | | 14,455 |
| | 0.78 | % | | 2,725 |
| | 0.41 | % | | 35,976 |
| | 0.91 | % |
| June 30, 2017 | 11,158 |
| | 1.77 | % | | 4,551 |
| | 0.87 | % | | 2,669 |
| | 1.06 | % | | 14,467 |
| | 0.81 | % | | 2,489 |
| | 0.36 | % | | 35,334 |
| | 0.91 | % |
| March 31, 2017 | 10,511 |
| | 1.77 | % | | 4,561 |
| | 0.89 | % | | 2,568 |
| | 1.04 | % | | 12,615 |
| | 0.82 | % | | 2,271 |
| | 0.32 | % | | 32,526 |
| | 0.90 | % |
December 31, 2016(2) | 10,131 |
| | 1.75 | % | | 5,152 |
| | 1.04 | % | | 2,530 |
| | 1.02 | % | | 11,636 |
| | 0.78 | % | | 1,999 |
| | 0.26 | % | | 31,448 |
| | 0.88 | % |
| September 30, 2016 | 10,476 |
| | 1.86 | % | | 4,994 |
| | 1.03 | % | | 2,541 |
| | 1.01 | % | | 11,431 |
| | 0.75 | % | | 2,239 |
| | 0.24 | % | | 31,681 |
| | 0.85 | % |
| June 30, 2016 | 9,644 |
| | 1.74 | % | | 4,392 |
| | 0.92 | % | | 2,459 |
| | 0.98 | % | | 11,412 |
| | 0.77 | % | | 2,596 |
| | 0.29 | % | | 30,503 |
| | 0.83 | % |
| March 31, 2016 | 9,238 |
| | 1.67 | % | | 4,118 |
| | 0.87 | % | | 2,438 |
| | 0.99 | % | | 11,093 |
| | 0.80 | % | | 2,553 |
| | 0.26 | % | | 29,440 |
| | 0.81 | % |
| December 31, 2015 | 9,168 |
| | 1.68 | % | | 4,332 |
| | 0.92 | % | | 2,747 |
| | 1.10 | % | | 10,902 |
| | 0.80 | % | | 2,306 |
| | 0.26 | % | | 29,455 |
| | 0.84 | % |
| |
(1)
| Net effective spread is a non-GAAP measure. Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread to also include the net effects of terminations or net settlements on financial derivatives and hedging activities. All prior period information has been recast to reflect the revised net effective spread methodology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread" for more information regarding the explanation of net effective spread. |
| |
(2)
| See Note 14 to the consolidated financial statements for a reconciliation of GAAP net interest income by line of business to net effective spread by line of business for the years ended December 31, 2017 and 2016. |
The following table presents quarterly core earnings (a non-GAAP measure) reconciled to net income attributable to common stockholders:
Table 3544
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Core Earnings by Quarter End |
| December 2020 | | September 2020 | | June 2020 | | March 2020 | | December 2019 | | September 2019 | | June 2019 | | March 2019 | | December 2018 |
| (in thousands) |
| Revenues: | | | | | | | | | | | | | | | | | |
| Net effective spread | $ | 54,522 | | | $ | 51,802 | | | $ | 46,469 | | | $ | 44,163 | | | $ | 45,991 | | | $ | 42,461 | | | $ | 41,355 | | | $ | 38,801 | | | $ | 38,855 | |
| Guarantee and commitment fees | 4,652 | | | 4,659 | | | 4,943 | | | 4,896 | | | 5,432 | | | 5,208 | | | 5,276 | | | 5,419 | | | 5,309 | |
| Other | 512 | | | 453 | | | 1,048 | | | 674 | | | 100 | | | 389 | | | 777 | | | 509 | | | (129) | |
| Total revenues | 59,686 | | | 56,914 | | | 52,460 | | | 49,733 | | | 51,523 | | | 48,058 | | | 47,408 | | | 44,729 | | | 44,035 | |
| | | | | | | | | | | | | | | | | |
| Credit related expense/(income): | | | | | | | | | | | | | | | | | |
| Provision for/(release of) losses | 2,973 | | | 1,200 | | | 51 | | | 3,831 | | | 2,851 | | | 623 | | | 420 | | | (393) | | | 166 | |
| REO operating expenses | — | | | — | | | — | | | — | | | — | | | — | | | 64 | | | — | | | — | |
| Losses/(gains) on sale of REO | 22 | | | — | | | — | | | (485) | | | — | | | — | | | — | | | — | | | — | |
| Total credit related expense/(income) | 2,995 | | | 1,200 | | | 51 | | | 3,346 | | | 2,851 | | | 623 | | | 484 | | | (393) | | | 166 | |
| | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | |
| Compensation and employee benefits | 9,497 | | | 8,791 | | | 8,087 | | | 10,127 | | | 6,732 | | | 7,654 | | | 6,770 | | | 7,606 | | | 7,167 | |
| General and administrative | 6,274 | | | 5,044 | | | 5,295 | | | 5,363 | | | 5,773 | | | 5,253 | | | 4,689 | | | 4,596 | | | 5,829 | |
| Regulatory fees | 750 | | | 725 | | | 725 | | | 725 | | | 725 | | | 688 | | | 687 | | | 688 | | | 687 | |
| Total operating expenses | 16,521 | | | 14,560 | | | 14,107 | | | 16,215 | | | 13,230 | | | 13,595 | | | 12,146 | | | 12,890 | | | 13,683 | |
| | | | | | | | | | | | | | | | | |
| Net earnings | 40,170 | | | 41,154 | | | 38,302 | | | 30,172 | | | 35,442 | | | 33,840 | | | 34,778 | | | 32,232 | | | 30,186 | |
| Income tax expense | 8,470 | | | 8,297 | | | 8,016 | | | 6,598 | | | 7,526 | | | 7,018 | | | 7,351 | | | 6,715 | | | 6,431 | |
| | | | | | | | | | | | | | | | | |
| Preferred stock dividends | 5,269 | | | 5,166 | | | 3,939 | | | 3,431 | | | 3,432 | | | 3,427 | | | 3,785 | | | 3,296 | | | 3,296 | |
| Core earnings | $ | 26,431 | | | $ | 27,691 | | | $ | 26,347 | | | $ | 20,143 | | | $ | 24,484 | | | $ | 23,395 | | | $ | 23,642 | | | $ | 22,221 | | | $ | 20,459 | |
| | | | | | | | | | | | | | | | | |
| Reconciling items: | | | | | | | | | | | | | | | | | |
| (Losses)/gains on undesignated financial derivatives due to fair value changes | (1,758) | | | (4,149) | | | 8,700 | | | (6,484) | | | 4,469 | | | (7,117) | | | 10,485 | | | 2,240 | | | (96) | |
| Gains/(losses) on hedging activities due to fair value changes | 3,827 | | | (5,245) | | | (2,676) | | | (5,925) | | | (220) | | | (4,535) | | | (1,438) | | | (2,817) | | | (853) | |
| Unrealized gains/(losses) on trading assets | 223 | | | (258) | | | (20) | | | 106 | | | 172 | | | 49 | | | 61 | | | 44 | | | 57 | |
| Net effects of amortization of premiums/discounts and deferred gains on assets consolidated at fair value | (77) | | | 97 | | | 35 | | | 3 | | | 40 | | | (7) | | | (139) | | | (16) | | | 67 | |
| Net effects of terminations or net settlements on financial derivatives | 1,583 | | | 233 | | | 720 | | | (1,300) | | | 1,339 | | | 232 | | | (592) | | | 110 | | | (312) | |
| Issuance costs on the retirement of preferred stock | — | | | (1,667) | | | — | | | — | | | — | | | — | | | (1,956) | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| Income tax effect related to reconciling items | (798) | | | 1,957 | | | (1,419) | | | 2,856 | | | (1,218) | | | 2,389 | | | (1,759) | | | 92 | | | 238 | |
| Net income attributable to common stockholders | $ | 29,431 | | | $ | 18,659 | | | $ | 31,687 | | | $ | 9,399 | | | $ | 29,066 | | | $ | 14,406 | | | $ | 28,304 | | | $ | 21,874 | | | $ | 19,560 | |
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Core Earnings by Quarter Ended |
| | December 2017 | | September 2017 | | June 2017 | | March 2017 | | December 2016 | | September 2016 | | June 2016 | | March 2016 | | December 2015 |
| | (in thousands) |
| Revenues: | | | | | | | | | | | | | | | | | |
| Net effective spread | $ | 37,467 |
| | $ | 35,976 |
| | $ | 35,334 |
| | $ | 32,526 |
| | $ | 31,448 |
| | $ | 31,681 |
| | $ | 30,503 |
| | $ | 29,440 |
| | $ | 29,455 |
|
| Guarantee and commitment fees | 5,157 |
| | 4,935 |
| | 4,942 |
| | 5,316 |
| | 5,158 |
| | 4,533 |
| | 4,810 |
| | 4,669 |
| | 4,730 |
|
| Other | 69 |
| | 274 |
| | 107 |
| | 485 |
| | 545 |
| | 713 |
| | 466 |
| | 346 |
| | 267 |
|
| Total revenues | 42,693 |
| | 41,185 |
| | 40,383 |
| | 38,327 |
| | 37,151 |
| | 36,927 |
| | 35,779 |
| | 34,455 |
| | 34,452 |
|
| | | | | | | | | | | | | | | | | | |
| Credit related (income)/expense: | | | | | | | | | | | | | | | | | |
| Provision for/(release of) losses | 464 |
| | 384 |
| | 466 |
| | 444 |
| | 512 |
| | (31 | ) | | 458 |
| | 63 |
| | (49 | ) |
| REO operating expenses | — |
| | — |
| | 23 |
| | — |
| | — |
| | — |
| | — |
| | 39 |
| | 44 |
|
| (Gains)/losses on sale of REO | (964 | ) | | (32 | ) | | (757 | ) | | 5 |
| | — |
| | (15 | ) | | — |
| | — |
| | — |
|
| Total credit related (income)/expense | (500 | ) | | 352 |
| | (268 | ) | | 449 |
| | 512 |
| | (46 | ) | | 458 |
| | 102 |
| | (5 | ) |
| | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | |
| Compensation and employee benefits | 5,247 |
| | 5,987 |
| | 6,682 |
| | 6,317 |
| | 5,949 |
| | 5,438 |
| | 5,611 |
| | 5,774 |
| | 5,385 |
|
| General and administrative | 4,348 |
| | 3,890 |
| | 3,921 |
| | 3,800 |
| | 4,352 |
| | 3,474 |
| | 3,757 |
| | 3,526 |
| | 3,238 |
|
| Regulatory fees | 625 |
| | 625 |
| | 625 |
| | 625 |
| | 625 |
| | 613 |
| | 612 |
| | 613 |
| | 613 |
|
| Total operating expenses | 10,220 |
| | 10,502 |
| | 11,228 |
| | 10,742 |
| | 10,926 |
| | 9,525 |
| | 9,980 |
| | 9,913 |
| | 9,236 |
|
| | | | | | | | | | | | | | | | | | |
| Net earnings | 32,973 |
| | 30,331 |
| | 29,423 |
| | 27,136 |
| | 25,713 |
| | 27,448 |
| | 25,341 |
| | 24,440 |
| | 25,221 |
|
| Income tax expense | 11,796 |
| | 10,268 |
| | 10,307 |
| | 8,844 |
| | 9,189 |
| | 9,577 |
| | 8,979 |
| | 8,568 |
| | 8,876 |
|
Net (loss)/income attributable to non-controlling interest(1) | — |
| | — |
| | (150 | ) | | (15 | ) | | 28 |
| | (18 | ) | | (16 | ) | | (28 | ) | | (60 | ) |
| Preferred stock dividends | 3,296 |
| | 3,295 |
| | 3,296 |
| | 3,295 |
| | 3,296 |
| | 3,295 |
| | 3,296 |
| | 3,295 |
| | 3,296 |
|
| Core earnings | $ | 17,881 |
| | $ | 16,768 |
| | $ | 15,970 |
| | $ | 15,012 |
| | $ | 13,200 |
| | $ | 14,594 |
| | $ | 13,082 |
| | $ | 12,605 |
| | $ | 13,109 |
|
| | | | | | | | | | | | | | | | | | |
| Reconciling items: | | | | | | | | | | | | | | | | | |
| (Losses)/gains on financial derivatives and hedging activities due to fair value changes | (264 | ) | | 2,737 |
| | 2,221 |
| | 4,805 |
| | 17,233 |
| | 1,460 |
| | (2,076 | ) | | (2,989 | ) | | 2,743 |
|
| Unrealized gains/(losses) on trading assets | 60 |
| | — |
| | (2 | ) | | (82 | ) | | (474 | ) | | 1,182 |
| | 394 |
| | 358 |
| | 696 |
|
| Amortization of premiums/discounts and deferred gains on assets consolidated at fair value | (129 | ) | | (954 | ) | | (117 | ) | | (127 | ) | | (40 | ) | | (157 | ) | | (371 | ) | | (281 | ) | | (263 | ) |
| Net effects of terminations or net settlements on financial derivatives and hedging activities | 632 |
| | 862 |
| | 232 |
| | 948 |
| | 2,150 |
| | 238 |
| | 398 |
| | (608 | ) | | (217 | ) |
| Re-measurement of net deferred tax asset due to enactment of new tax legislation | (1,365 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Income tax effect related to reconciling items | (105 | ) | | (926 | ) | | (816 | ) | | (1,941 | ) | | (6,604 | ) | | (953 | ) | | 579 |
| | 1,232 |
| | (1,036 | ) |
| Net income attributable to common stockholders | $ | 16,710 |
| | $ | 18,487 |
| | $ | 17,488 |
| | $ | 18,615 |
| | $ | 25,465 |
| | $ | 16,364 |
| | $ | 12,006 |
| | $ | 10,317 |
| | $ | 15,032 |
|
| |
(1)
| As of May 1, 2017, Farmer Mac transferred its entire 65% ownership interest in AgVisory back to the limited liability company. |
| |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Farmer Mac is exposed to market risk from changes in interest rates. Farmer Mac manages this market risk by entering into various financial transactions, including financial derivatives, and by monitoring and
measuring its exposure to changes in interest rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Interest Rate Risk" for more information about Farmer Mac's exposure to interest rate risk and its strategies to manage that risk. For information regardingabout Farmer Mac's use of financial derivatives and related accounting policies, see Note 6 to the consolidated financial statements.
| |
Item 8. | Financial Statements |
Item 8.Financial Statements
Management's Report on Internal Control over Financial Reporting
The management of Farmer Mac is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed under the supervision of Farmer Mac's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Farmer Mac's financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Farmer Mac's internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Farmer Mac; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Farmer Mac are being made only in accordance with authorizations of management and directors of Farmer Mac; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Farmer Mac's assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of Farmer Mac's Chief Executive Officer and Chief Financial Officer, Farmer Mac's management assessed the effectiveness of Farmer Mac's internal control over financial reporting as of December 31, 2017.2020. In making this assessment, Farmer Mac's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on its evaluation under the COSO criteria, management concluded that Farmer Mac's internal control over financial reporting as of December 31, 20172020 was effective.
Farmer Mac's independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of Farmer Mac's internal control over financial reporting as of December 31, 2017,2020, as stated in their report appearing below.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of the Federal Agricultural Mortgage Corporation:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of the Federal Agricultural Mortgage Corporation and its subsidiaries (the “Company”) as of December 31, 20172020 and 20162019, and the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2017,2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016, 2019, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2017 2020in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for credit losses in 2020.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management'sManagement’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Available-for-sale AgVantage Farmer Mac Guaranteed Securities
As disclosed by management, the Company guarantees and purchases general obligations of lenders and other financial institutions that are secured by pools of the types of loans eligible for purchase under Farmer Mac's Farm & Ranch, USDA Guarantees, or Rural Utilities lines of business, which are referred to as AgVantage securities. As described in Notes 5 and 13 to the consolidated financial statements, the total unpaid principal balance of available-for-sale AgVantage securities as of December 31, 2020 was $6.6 billion, and the fair value of the available-for-sale AgVantage securities of December 31, 2020 was $6.9
billion. The fair value of AgVantage securities is estimated using a discounted cash flow model. The significant unobservable input used is the discount rate commensurate with the risks involved.
The principal considerations for our determination that performing procedures relating to the valuation of available-for-sale AgVantage securities is a critical audit matter are (i) the high degree of audit effort in performing procedures and evaluating audit evidence related to the discount rate assumption used by management in the valuation of the available-for-sale AgVantage securities, and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of available-for-sale AgVantage securities, including controls over the model, data and assumption. These procedures also included, among others, (i) the involvement of professionals with specialized skill and knowledge to assist in developing an independent range of prices for a sample of available-for-sale AgVantage securities, and (ii) comparing management’s estimate to the independently developed range to evaluate the reasonableness of management’s estimate. Developing the independent range of prices involved testing the completeness and accuracy of data provided by management and independently developing the discount rate assumption.
/s/PricewaterhouseCoopers LLP
McLean, VAVirginia
March 8, 2018February 25, 2021
We have served as the Company’s auditor since 2010.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | As of | | As of |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2020 | | December 31, 2019 |
| | (in thousands) | | (in thousands) |
| Assets: | | | | Assets: | | | |
| Cash and cash equivalents | $ | 302,022 |
| | $ | 265,229 |
| Cash and cash equivalents | $ | 1,033,941 | | | $ | 604,381 | |
| Investment securities: | |
| | |
| Investment securities: | | | |
| Available-for-sale, at fair value | 2,215,405 |
| | 2,515,851 |
| |
| Available-for-sale, at fair value (amortized cost of $3,843,666 and $2,961,430, respectively) | | Available-for-sale, at fair value (amortized cost of $3,843,666 and $2,961,430, respectively) | 3,853,692 | | | 2,959,843 | |
| Held-to-maturity, at amortized cost | 45,032 |
| | — |
| Held-to-maturity, at amortized cost | 45,032 | | | 45,032 | |
| Total Investment Securities | 2,260,437 |
| | 2,515,851 |
| Total Investment Securities | 3,898,724 | | | 3,004,875 | |
| Farmer Mac Guaranteed Securities: | |
| | |
| Farmer Mac Guaranteed Securities: | | | |
| Available-for-sale, at fair value | 5,471,914 |
| | 4,853,685 |
| |
| Available-for-sale, at fair value (amortized cost of $6,594,992 and $7,016,971, respectively) | | Available-for-sale, at fair value (amortized cost of $6,594,992 and $7,016,971, respectively) | 6,947,701 | | | 7,143,025 | |
| Held-to-maturity, at amortized cost | 2,126,274 |
| | 1,149,231 |
| Held-to-maturity, at amortized cost | 1,175,792 | | | 1,447,451 | |
| Total Farmer Mac Guaranteed Securities | 7,598,188 |
| | 6,002,916 |
| Total Farmer Mac Guaranteed Securities | 8,123,493 | | | 8,590,476 | |
| USDA Securities: | |
| | |
| USDA Securities: | | | |
| Trading, at fair value | 13,515 |
| | 20,388 |
| Trading, at fair value | 6,695 | | | 8,913 | |
| Held-to-maturity, at amortized cost | 2,117,850 |
| | 2,009,225 |
| Held-to-maturity, at amortized cost | 2,473,626 | | | 2,232,160 | |
| Total USDA Securities | 2,131,365 |
| | 2,029,613 |
| Total USDA Securities | 2,480,321 | | | 2,241,073 | |
| Loans: | |
| | |
| Loans: | | | |
| | Loans held for investment, at amortized cost | 3,873,755 |
| | 3,379,884 |
| Loans held for investment, at amortized cost | 7,261,933 | | | 5,390,977 | |
| Loans held for investment in consolidated trusts, at amortized cost | 1,399,827 |
| | 1,132,966 |
| Loans held for investment in consolidated trusts, at amortized cost | 1,287,045 | | | 1,600,917 | |
| Allowance for loan losses | (6,796 | ) | | (5,415 | ) | |
| Allowance for losses | | Allowance for losses | (13,832) | | | (10,454) | |
| Total loans, net of allowance | 5,266,786 |
| | 4,507,435 |
| Total loans, net of allowance | 8,535,146 | | | 6,981,440 | |
| Real estate owned, at lower of cost or fair value | 139 |
| | 1,528 |
| |
| | Financial derivatives, at fair value | 7,093 |
| | 23,182 |
| Financial derivatives, at fair value | 17,468 | | | 10,519 | |
| Interest receivable (includes $17,373 and $12,584, respectively, related to consolidated trusts) | 155,278 |
| | 122,782 |
| |
| Interest receivable (includes $16,401 and $20,568, respectively, related to consolidated trusts) | | Interest receivable (includes $16,401 and $20,568, respectively, related to consolidated trusts) | 186,429 | | | 199,195 | |
| Guarantee and commitment fees receivable | 39,895 |
| | 38,871 |
| Guarantee and commitment fees receivable | 37,113 | | | 38,442 | |
| Deferred tax asset, net | 2,048 |
| | 12,291 |
| Deferred tax asset, net | 18,321 | | | 16,510 | |
| Prepaid expenses and other assets | 29,023 |
| | 86,322 |
| Prepaid expenses and other assets | 24,545 | | | 22,463 | |
| Total Assets | $ | 17,792,274 |
| | $ | 15,606,020 |
| Total Assets | $ | 24,355,501 | | | $ | 21,709,374 | |
| | | | | | | | |
| Liabilities and Equity: | |
| | |
| Liabilities and Equity: | | | |
| Liabilities: | |
| | |
| Liabilities: | | | |
| Notes payable: | |
| | |
| |
| Due within one year | $ | 8,089,826 |
| | $ | 8,440,123 |
| |
| Due after one year | 7,432,790 |
| | 5,222,977 |
| |
| Total notes payable | 15,522,616 |
| | 13,663,100 |
| |
| | Notes payable | | Notes payable | $ | 21,848,917 | | | $ | 19,098,648 | |
| Debt securities of consolidated trusts held by third parties | 1,404,945 |
| | 1,142,704 |
| Debt securities of consolidated trusts held by third parties | 1,323,786 | | | 1,616,504 | |
| Financial derivatives, at fair value | 26,599 |
| | 58,152 |
| Financial derivatives, at fair value | 29,892 | | | 27,042 | |
| Accrued interest payable (includes $14,631 and $10,881, respectively, related to consolidated trusts) | 75,402 |
| | 49,700 |
| |
| Accrued interest payable (includes $14,370 and $18,018, respectively, related to consolidated trusts) | | Accrued interest payable (includes $14,370 and $18,018, respectively, related to consolidated trusts) | 92,738 | | | 106,959 | |
| Guarantee and commitment obligation | 38,400 |
| | 37,282 |
| Guarantee and commitment obligation | 35,535 | | | 36,700 | |
| Accounts payable and accrued expenses | 14,096 |
| | 9,415 |
| Accounts payable and accrued expenses | 28,879 | | | 22,081 | |
| | Reserve for losses | 2,070 |
| | 2,020 |
| Reserve for losses | 3,277 | | | 2,164 | |
| Total Liabilities | 17,084,128 |
| | 14,962,373 |
| Total Liabilities | 23,363,024 | | | 20,910,098 | |
| Commitments and Contingencies (Note 12) |
|
| |
|
| Commitments and Contingencies (Note 12) | 0 | | 0 |
| Equity: | |
| | |
| Equity: | | | |
| Preferred stock: | |
| | |
| 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 A, par value $25 per share, 2,400,000 shares authorized, issued and outstanding as of December 31, 2019 (redemption value $60,000,000) | | Series A, par value $25 per share, 2,400,000 shares authorized, issued and outstanding as of December 31, 2019 (redemption value $60,000,000) | 0 | | | 58,333 | |
| Series C, par value $25 per share, 3,000,000 shares authorized, issued and outstanding | 73,382 |
| | 73,382 |
| Series C, par value $25 per share, 3,000,000 shares authorized, issued and outstanding | 73,382 | | | 73,382 | |
| Series D, par value $25 per share, 4,000,000 shares authorized, issued and outstanding | | Series D, par value $25 per share, 4,000,000 shares authorized, issued and outstanding | 96,659 | | | 96,659 | |
| Series E, par value $25 per share, 3,180,000 shares authorized, issued and outstanding | | Series E, par value $25 per share, 3,180,000 shares authorized, issued and outstanding | 77,003 | | | 0 | |
| Series F, par value $25 per share, 4,800,000 shares authorized, issued and outstanding | | Series F, par value $25 per share, 4,800,000 shares authorized, issued and outstanding | 116,160 | | | 0 | |
| Common stock: | |
| | |
| Common stock: | | | |
| Class A Voting, $1 par value, no maximum authorization, 1,030,780 shares outstanding | 1,031 |
| | 1,031 |
| 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 B Voting, $1 par value, no maximum authorization, 500,301 shares outstanding | 500 | | | 500 | |
| Class C Non-Voting, $1 par value, no maximum authorization, 9,087,670 shares and 9,007,481 shares outstanding, respectively | 9,088 |
| | 9,008 |
| |
| Class C Non-Voting, $1 par value, no maximum authorization, 9,205,897 shares and 9,180,744 shares outstanding, respectively | | Class C Non-Voting, $1 par value, no maximum authorization, 9,205,897 shares and 9,180,744 shares outstanding, respectively | 9,206 | | | 9,181 | |
| Additional paid-in capital | 118,979 |
| | 118,655 |
| Additional paid-in capital | 122,899 | | | 119,304 | |
| Accumulated other comprehensive income, net of tax | 51,085 |
| | 33,758 |
| |
| Accumulated other comprehensive loss, net of tax | | Accumulated other comprehensive loss, net of tax | (13,923) | | | (16,161) | |
| Retained earnings | 322,704 |
| | 275,714 |
| Retained earnings | 509,560 | | | 457,047 | |
| Total Stockholders' Equity | 708,146 |
| | 643,425 |
| |
| Non-controlling interest | — |
| | 222 |
| |
| Total Equity | 708,146 |
| | 643,647 |
| Total Equity | 992,477 | | | 799,276 | |
| Total Liabilities and Equity | $ | 17,792,274 |
| | $ | 15,606,020 |
| Total Liabilities and Equity | $ | 24,355,501 | | | $ | 21,709,374 | |
The accompanying notes are an integral part of these consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands, except per share amounts) |
| Interest income: | | | | | |
| Investments and cash equivalents | $ | 34,586 |
| | $ | 27,042 |
| | $ | 13,338 |
|
| Farmer Mac Guaranteed Securities and USDA Securities | 203,796 |
| | 150,281 |
| | 134,443 |
|
| Loans | 162,150 |
| | 134,577 |
| | 117,042 |
|
| Total interest income | 400,532 |
| | 311,900 |
| | 264,823 |
|
| Total interest expense | 242,885 |
| | 171,626 |
| | 139,016 |
|
| Net interest income | 157,647 |
| | 140,274 |
| | 125,807 |
|
| Provision for loan losses | (1,708 | ) | | (1,065 | ) | | (2,388 | ) |
| Net interest income after provision for loan losses | 155,939 |
| | 139,209 |
| | 123,419 |
|
| Non-interest income: | | | | | |
| Guarantee and commitment fees | 14,114 |
| | 14,868 |
| | 14,077 |
|
| Gains on financial derivatives and hedging activities | 753 |
| | 2,311 |
| | 2,531 |
|
| (Losses)/gains on trading securities | (24 | ) | | 1,460 |
| | 1,220 |
|
| Gains/(losses) on sale of available-for-sale investment securities | 89 |
| | (9 | ) | | 9 |
|
| Gains/(losses) on sale of real estate owned | 1,748 |
| | 15 |
| | (1 | ) |
| Other income | 832 |
| | 1,823 |
| | 2,305 |
|
| Non-interest income | 17,512 |
| | 20,468 |
| | 20,141 |
|
| Non-interest expense: | | | | | |
| Compensation and employee benefits | 24,233 |
| | 22,772 |
| | 22,047 |
|
| General and administrative | 15,959 |
| | 15,109 |
| | 13,111 |
|
| Regulatory fees | 2,500 |
| | 2,463 |
| | 2,413 |
|
| Real estate owned operating costs, net | 23 |
| | 39 |
| | 91 |
|
| Provision for/(release of) reserve for losses | 50 |
| | (63 | ) | | (2,180 | ) |
| Non-interest expense | 42,765 |
| | 40,320 |
| | 35,482 |
|
| Income before income taxes | 130,686 |
| | 119,357 |
| | 108,078 |
|
| Income tax expense | 46,369 |
| | 42,057 |
| | 34,239 |
|
| Net income | 84,317 |
| | 77,300 |
| | 73,839 |
|
| Less: Net loss/(income) attributable to non-controlling interest | 165 |
| | 34 |
| | (5,139 | ) |
| Net income attributable to Farmer Mac | 84,482 |
| | 77,334 |
| | 68,700 |
|
| Preferred stock dividends | (13,182 | ) | | (13,182 | ) | | (13,182 | ) |
| Loss on retirement of preferred stock | — |
| | — |
| | (8,147 | ) |
| Net income attributable to common stockholders | $ | 71,300 |
| | $ | 64,152 |
| | $ | 47,371 |
|
| | | | | | |
| Earnings per common share and dividends: | | | | | |
| Basic earnings per common share | $ | 6.73 |
| | $ | 6.12 |
| | $ | 4.33 |
|
| Diluted earnings per common share | $ | 6.60 |
| | $ | 5.97 |
| | $ | 4.19 |
|
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (in thousands, except per share amounts) |
| Interest income: | | | | | |
| Investments and cash equivalents | $ | 42,144 | | | $ | 81,522 | | | $ | 55,179 | |
| Farmer Mac Guaranteed Securities and USDA Securities | 227,691 | | | 333,896 | | | 290,953 | |
| Loans | 233,699 | | | 229,675 | | | 198,152 | |
| Total interest income | 503,534 | | | 645,093 | | | 544,284 | |
| Total interest expense | 312,946 | | | 471,958 | | | 369,848 | |
| Net interest income | 190,588 | | | 173,135 | | | 174,436 | |
| Provision for losses | (7,805) | | | (3,504) | | | (238) | |
| Net interest income after provision for losses | 182,783 | | | 169,631 | | | 174,198 | |
| Non-interest income/(expense): | | | | | |
| Guarantee and commitment fees | 12,549 | | | 13,666 | | | 13,976 | |
| (Losses)/gains on financial derivatives | (246) | | | 5,282 | | | (3,687) | |
| Gains on trading securities | 50 | | | 326 | | | 81 | |
| Losses on sale of available-for-sale investment securities | 0 | | | (236) | | | 0 | |
| Gains/(losses) on sale of real estate owned | 463 | | | 0 | | | (7) | |
| (Provision)/release of reserve for losses | (250) | | | 3 | | | (97) | |
| Other income | 3,487 | | | 1,904 | | | 1,377 | |
| Non-interest income/(expense) | 16,053 | | | 20,945 | | | 11,643 | |
| Operating expenses: | | | | | |
| Compensation and employee benefits | 36,502 | | | 28,762 | | | 27,534 | |
| General and administrative | 21,976 | | | 20,311 | | | 19,707 | |
| Regulatory fees | 2,925 | | | 2,788 | | | 2,562 | |
| Real estate owned operating costs, net | 0 | | | 64 | | | 16 | |
| Operating expenses | 61,403 | | | 51,925 | | | 49,819 | |
| Income before income taxes | 137,433 | | | 138,651 | | | 136,022 | |
| Income tax expense | 28,785 | | | 29,105 | | | 27,942 | |
| | | | | |
| | | | | |
| Net income | 108,648 | | | 109,546 | | | 108,080 | |
| Preferred stock dividends | (17,805) | | | (13,940) | | | (13,182) | |
| Loss on retirement of preferred stock | (1,667) | | | (1,956) | | | 0 | |
| Net income attributable to common stockholders | $ | 89,176 | | | $ | 93,650 | | | $ | 94,898 | |
| | | | | |
| Earnings per common share: | | | | | |
| Basic earnings per common share | $ | 8.31 | | | $ | 8.76 | | | $ | 8.91 | |
| Diluted earnings per common share | $ | 8.27 | | | $ | 8.69 | | | $ | 8.83 | |
The accompanying notes are an integral part of these consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Net income | $ | 84,317 |
| | $ | 77,300 |
| | $ | 73,839 |
|
| Other comprehensive income before taxes: | | | | | |
| Net unrealized gains/(losses) on available-for-sale securities | 20,012 |
| | (6,694 | ) | | (30,387 | ) |
| Net changes in held-to-maturity securities | (9,329 | ) | | 71,120 |
| | (9,922 | ) |
| Net unrealized gains/(losses) on cash flow hedges | 2,046 |
| | 4,463 |
| | (541 | ) |
| Other comprehensive (loss)/income before tax | 12,729 |
| | 68,889 |
| | (40,850 | ) |
| Income tax expense related to other comprehensive (loss)/income | (4,455 | ) | | (24,112 | ) | | 14,298 |
|
| Other comprehensive (loss)/income net of tax | 8,274 |
| | 44,777 |
| | (26,552 | ) |
| Comprehensive income | 92,591 |
| | 122,077 |
| | 47,287 |
|
| Less: comprehensive loss attributable to non-controlling interest | 165 |
| | 34 |
| | (5,139 | ) |
| Comprehensive income attributable to Farmer Mac | $ | 92,756 |
| | $ | 122,111 |
| | $ | 42,148 |
|
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Net income | $ | 108,648 | | | $ | 109,546 | | | $ | 108,080 | |
| Other comprehensive income/(loss) before taxes: | | | | | |
| Net unrealized gains/(losses) on available-for-sale securities | 37,291 | | | (22,831) | | | (29,980) | |
| Net changes in held-to-maturity securities | (12,677) | | | (13,415) | | | (6,067) | |
| Net unrealized (losses)/gains on cash flow hedges | (21,780) | | | (15,801) | | | 2,938 | |
| Other comprehensive income/(loss) before tax | 2,834 | | | (52,047) | | | (33,109) | |
| Income tax (expense)/benefit related to other comprehensive income/(loss) | (596) | | | 10,930 | | | 6,953 | |
| Other comprehensive income/(loss) net of tax | 2,238 | | | (41,117) | | | (26,156) | |
| | | | | |
| | | | | |
| Comprehensive income | $ | 110,886 | | | $ | 68,429 | | | $ | 81,924 | |
The accompanying notes are an integral part of these consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 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 January 1, 2015 | 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 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 68,700 |
| | — |
| | 68,700 |
|
| Attributable to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (214 | ) | | (214 | ) |
| Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | (26,552 | ) | | — |
| | — |
| | (26,552 | ) |
| Cash dividends: | | | | | | | | | | | | | | | | | |
| Preferred stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13,182 | ) | | — |
| | (13,182 | ) |
| Common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,000 | ) | | — |
| | (7,000 | ) |
| Issuance of Class C Common Stock | — |
| | — |
| | 112 |
| | 112 |
| | 1,620 |
| | — |
| | — |
| | — |
| | 1,732 |
|
| Repurchase of Class C Common Stock | — |
| | — |
| | (362 | ) | | (362 | ) | | — |
| | — |
| | (10,156 | ) | | — |
| | (10,518 | ) |
| Stock-based compensation cost | — |
| | — |
| | — |
| | — |
| | 3,269 |
| | — |
| | — |
| | — |
| | 3,269 |
|
| Other stock-based award activity | — |
| | — |
| | — |
| | — |
| | (586 | ) | | — |
| | — |
| | — |
| | (586 | ) |
| Investment in subsidiary - non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 242 |
| | 242 |
|
| Redemption of Farmer Mac II LLC preferred stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,147 | ) | | (235,853 | ) | | (244,000 | ) |
| 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 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 77,334 |
| | — |
| | 77,334 |
|
| Attributable to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (34 | ) | | (34 | ) |
| Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | 44,777 |
| | — |
| | — |
| | 44,777 |
|
| Cash dividends: | | | | | | | | | | | | | | | | | |
| Preferred stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13,182 | ) | | — |
| | (13,182 | ) |
| Common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (10,885 | ) | | — |
| | (10,885 | ) |
| Issuance of Class C Common Stock | — |
| | — |
| | 159 |
| | 159 |
| | 534 |
| | — |
| | — |
| | — |
| | 693 |
|
| Repurchase of Class C Common Stock | — |
| | — |
| | (307 | ) | | (307 | ) | | — |
| | — |
| | (8,781 | ) | | — |
| | (9,088 | ) |
| Stock-based compensation cost | — |
| | — |
| | — |
| | — |
| | 3,343 |
| | — |
| | — |
| | — |
| | 3,343 |
|
| Other stock-based award activity | — |
| | — |
| | — |
| | — |
| | (3,084 | ) | | — |
| | — |
| | — |
| | (3,084 | ) |
| Investment in subsidiary - non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 53 |
| | 53 |
|
| Balance as of December 31, 2016 | 8,400 |
| | $ | 204,759 |
| | 10,539 |
| | $ | 10,539 |
| | $ | 118,655 |
| | $ | 33,758 |
| | $ | 275,714 |
| | $ | 222 |
| | $ | 643,647 |
|
| Net income/(loss): | | | | | | | | | | | | | | | | | |
| Attributable to Farmer Mac | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 84,482 |
| | — |
| | 84,482 |
|
| Attributable to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (165 | ) | | (165 | ) |
| Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | 8,274 |
| | — |
| | — |
| | 8,274 |
|
| Reclassification of stranded tax effects due to enactment of new tax legislation | — |
| | — |
| | — |
| | — |
| | — |
| | 9,053 |
| | (9,053 | ) | | — |
| | — |
|
| Cash dividends: | | | | | | | | | | | | | | | | | |
| Preferred stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13,182 | ) | | — |
| | (13,182 | ) |
| Common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (15,257 | ) | | — |
| | (15,257 | ) |
| Issuance of Class C Common Stock | — |
| | — |
| | 80 |
| | 80 |
| | 231 |
| | — |
| | — |
| | — |
| | 311 |
|
| Stock-based compensation cost | — |
| | — |
| | — |
| | — |
| | 2,701 |
| | — |
| | — |
| | — |
| | 2,701 |
|
| Other stock-based award activity | — |
| | — |
| | — |
| | — |
| | (2,608 | ) | | — |
| | — |
| | — |
| | (2,608 | ) |
| Redemption of interest in subsidiary | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (57 | ) | | (57 | ) |
| Balance as of December 31, 2017 | 8,400 |
| | $ | 204,759 |
| | 10,619 |
| | $ | 10,619 |
| | $ | 118,979 |
| | $ | 51,085 |
| | $ | 322,704 |
| | $ | — |
| | $ | 708,146 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | Additional | | Other | | | | |
| Preferred Stock | | Common Stock | | Paid-In | | Comprehensive | | Retained | | Total |
| Shares | | Amount | | Shares | | Amount | | Capital | | Income/(Loss) | | Earnings | | Equity |
| (in thousands) |
| Balance as of January 1, 2018 | 8,400 | | | $ | 204,759 | | | 10,619 | | | $ | 10,619 | | | $ | 118,979 | | | $ | 51,112 | | | $ | 323,175 | | | $ | 708,644 | |
| Net Income | — | | | — | | | — | | | — | | | — | | | — | | | 108,080 | | | 108,080 | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (26,156) | | | — | | | (26,156) | |
| Cash dividends: | | | | | | | | | | | | | | | |
| Preferred stock | — | | | — | | | — | | | — | | | — | | | — | | | (13,182) | | | (13,182) | |
| Common stock (cash dividend of $0.58 per share) | — | | | — | | | — | | | — | | | — | | | — | | | (24,722) | | | (24,722) | |
| Issuance of Class C Common Stock | — | | | — | | | 50 | | | 50 | | | 7 | | | — | | | — | | | 57 | |
| | | | | | | | | | | | | | | |
| Stock-based compensation cost | — | | | — | | | — | | | — | | | 2,518 | | | — | | | — | | | 2,518 | |
| Other stock-based award activity | — | | | — | | | — | | | — | | | (2,682) | | | — | | | — | | | (2,682) | |
| Balance as of December 31, 2018 | 8,400 | | | $ | 204,759 | | | 10,669 | | | $ | 10,669 | | | $ | 118,822 | | | $ | 24,956 | | | $ | 393,351 | | | $ | 752,557 | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | 109,546 | | | 109,546 | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (41,117) | | | — | | | (41,117) | |
| Cash dividends: | | | | | | | | | | | | | | | |
| Preferred stock | — | | | — | | | — | | | — | | | — | | | — | | | (13,940) | | | (13,940) | |
| Common stock (cash dividend of $0.70 per share) | — | | | — | | | — | | | — | | | — | | | — | | | (29,954) | | | (29,954) | |
| Issuance of Series D Preferred Stock | 4,000 | | | 96,659 | | | — | | | — | | | — | | | — | | | — | | | 96,659 | |
| Redemption of Series B Preferred Stock | (3,000) | | | (73,044) | | | — | | | — | | | — | | | — | | | — | | | (73,044) | |
| Loss on retirement of preferred stock | — | | | — | | | — | | | — | | | — | | | — | | | (1,956) | | | (1,956) | |
| Issuance of Class C Common Stock | — | | | — | | | 43 | | | 43 | | | 44 | | | — | | | — | | | 87 | |
| Stock-based compensation cost | — | | | — | | | — | | | — | | | 2,258 | | | — | | | — | | | 2,258 | |
| Other stock-based award activity | — | | | — | | | — | | | — | | | (1,820) | | | — | | | — | | | (1,820) | |
| Balance as of December 31, 2019 | 9,400 | | | $ | 228,374 | | | 10,712 | | | $ | 10,712 | | | $ | 119,304 | | | $ | (16,161) | | | $ | 457,047 | | | $ | 799,276 | |
| Cumulative effect adjustment from adoption of current expected credit loss standard | — | | | — | | | — | | | — | | | — | | | — | | | (2,099) | | | $ | (2,099) | |
| Balances as of January 1, 2020 | 9,400 | | | $ | 228,374 | | | 10,712 | | | $ | 10,712 | | | $ | 119,304 | | | $ | (16,161) | | | $ | 454,948 | | | $ | 797,177 | |
| Net Income | — | | | — | | | — | | | — | | | — | | | — | | | 108,648 | | | 108,648 | |
| Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | — | | | 2,238 | | | — | | | 2,238 | |
| Cash dividends: | | | | | | | | | | | | | | | |
| Preferred stock | — | | | — | | | — | | | — | | | — | | | — | | | (17,805) | | | (17,805) | |
| Common stock (cash dividend of $0.80 per share) | — | | | — | | | — | | | — | | | — | | | — | | | (34,333) | | | (34,333) | |
| Issuance of Series E preferred stock | 3,180 | | | 77,003 | | | — | | | — | | | — | | | — | | | — | | | 77,003 | |
| Issuance of Series F preferred stock | 4,800 | | | 116,160 | | | — | | | — | | | — | | | — | | | — | | | 116,160 | |
| Redemption of Series A preferred stock | (2,400) | | | (58,333) | | | — | | | — | | | — | | | — | | | — | | | (58,333) | |
| Loss on retirement of preferred stock | — | | | — | | | — | | | — | | | — | | | — | | | (1,667) | | | (1,667) | |
| Issuance of Class C Common Stock | — | | | — | | | 29 | | | 29 | | | 56 | | | — | | | — | | | 85 | |
| Repurchase of Class C Common Stock | — | | | — | | | (4) | | | (4) | | | — | | | — | | | (231) | | | (235) | |
| Stock-based compensation cost | — | | | — | | | — | | | — | | | 4,128 | | | — | | | — | | | 4,128 | |
| Other stock-based award activity | — | | | — | | | — | | | — | | | (589) | | | — | | | — | | | (589) | |
| Balance as of December 31, 2020 | 14,980 | | | $ | 363,204 | | | 10,737 | | | $ | 10,737 | | | $ | 122,899 | | | $ | (13,923) | | | $ | 509,560 | | | $ | 992,477 | |
The accompanying notes are an integral part of these consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 108,648 | | | $ | 109,546 | | | $ | 108,080 | |
| 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 | 8,343 | | | (10,399) | | | (1,104) | |
| Amortization of debt premiums, discounts, and issuance costs | 21,319 | | | 50,052 | | | 30,207 | |
| Net change in fair value of trading securities, hedged assets, and financial derivatives | (256,466) | | | (220,080) | | | (23,747) | |
| Gain/(loss) on sale of real estate owned | (463) | | | 0 | | | 7 | |
| Total provision for allowance for losses | 8,055 | | | 3,501 | | | 335 | |
| Excess tax benefits related to stock-based awards | (440) | | | 449 | | | 946 | |
| Deferred income taxes | (2,406) | | | 789 | | | 2,625 | |
| Other | 0 | | | 236 | | | 0 | |
| Stock-based compensation expense | 4,128 | | | 2,258 | | | 2,517 | |
| Purchases of loans held for sale | (59,150) | | | 0 | | | (25,000) | |
| Proceeds from the sale of loans held for sale | 15,000 | | | 0 | | | 25,000 | |
| Proceeds from repayment of loans purchased as held for sale | 59,370 | | | 54,195 | | | 92,060 | |
| Net change in: | | | | | |
| Interest receivable | 11,054 | | | (19,080) | | | (25,866) | |
| Guarantee and commitment fees receivable | 164 | | | (59) | | | (188) | |
| Other assets | (3,348) | | | (2,744) | | | (6,435) | |
| Accrued interest payable | (14,221) | | | 10,216 | | | 21,341 | |
| Other liabilities | 5,866 | | | 1,421 | | | (747) | |
| Net cash (used in)/provided by operating activities | (94,547) | | | (19,699) | | | 200,031 | |
| Cash flows from investing activities: | | | | | |
| Purchases of available-for-sale investment securities | (2,852,658) | | | (2,166,376) | | | (1,221,392) | |
| | | | | |
| Purchases of Farmer Mac Guaranteed Securities and USDA Securities | (2,074,701) | | | (2,691,104) | | | (3,470,832) | |
| Purchases of loans held for investment | (3,167,198) | | | (2,234,715) | | | (947,495) | |
| Purchases of defaulted loans | (6,272) | | | (469) | | | (1,483) | |
| Proceeds from repayment of available-for-sale investment securities | 1,961,895 | | | 1,425,402 | | | 1,242,310 | |
| Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Securities | 2,517,957 | | | 2,190,702 | | | 2,813,041 | |
| Proceeds from repayment of loans purchased as held for investment | 1,715,663 | | | 758,192 | | | 611,344 | |
| Proceeds from sale of available-for-sale investment securities | 0 | | | 12,367 | | | 0 | |
| Proceeds from sale of Farmer Mac Guaranteed Securities | 165,054 | | | 321,414 | | | 382,929 | |
| Proceeds from sale of real estate owned | 4,169 | | | 0 | | | 116 | |
| Net cash used in investing activities | (1,736,091) | | | (2,384,587) | | | (591,462) | |
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of discount notes | 68,548,733 | | | 64,642,545 | | | 41,726,788 | |
| Proceeds from issuance of medium-term notes | 13,509,754 | | | 10,195,775 | | | 7,692,845 | |
| Payments to redeem discount notes | (68,960,492) | | | (64,079,322) | | | (41,891,576) | |
| Payments to redeem medium-term notes | (10,414,765) | | | (7,970,126) | | | (6,834,057) | |
| | | | | |
| Payments to third parties on debt securities of consolidated trusts | (504,807) | | | (181,493) | | | (138,806) | |
| Proceeds from common stock issuance | 56 | | | 44 | | | 7 | |
| | | | | |
| Retirement of preferred stock | (60,000) | | | (75,000) | | | 0 | |
| Proceeds from preferred stock issuance, net of stock issuance costs | 193,163 | | | 96,659 | | | 0 | |
| Tax payments related to share-based awards | (560) | | | (1,777) | | | (2,631) | |
| Purchases of common stock | (235) | | | 0 | | | 0 | |
| Dividends paid on common and preferred stock | (50,649) | | | (43,894) | | | (37,905) | |
| Net cash provided by financing activities | 2,260,198 | | | 2,583,411 | | | 514,665 | |
| Net change in cash and cash equivalents | 429,560 | | | 179,125 | | | 123,234 | |
| Cash and cash equivalents at beginning of period | 604,381 | | | 425,256 | | | 302,022 | |
| Cash and cash equivalents at end of period | $ | 1,033,941 | | | $ | 604,381 | | | $ | 425,256 | |
| Cash paid during the period for: | | | | | |
| Interest | 283,335 | | | 365,526 | | | 268,728 | |
| Income taxes | 30,000 | | | 23,100 | | | 30,882 | |
| Non-cash activity: | | | | | |
| Real estate owned acquired through loan liquidation | 0 | | | 0 | | | 128 | |
| Loans acquired and securitized as Farmer Mac Guaranteed Securities | 165,054 | | | 321,414 | | | 382,929 | |
| Consolidation of Farmer Mac Guaranteed Securities from off-balance sheet to loans held for investment in consolidated trusts and to debt securities of consolidated trusts held by third parties | 165,054 | | | 263,561 | | | 255,080 | |
| Reclassification of defaulted loans from loans held for investment in consolidated trusts to loans held for investment | 47,036 | | | 5,479 | | | 7,748 | |
| Reclassification of loans held for sale to loans held for investment | 44,150 | | | 0 | | | 0 | |
| Capitalized interest | 1,348 | | | 0 | | | 0 | |
| | | | | |
| Charge-off from the allowance for losses | 5,759 | | | — | | | — | |
| Purchases of securities - traded, not yet settled | 0 | | | 0 | | | (1,400) | |
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 84,317 |
| | $ | 77,300 |
| | $ | 73,839 |
|
| 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 | 1,739 |
| | 1,828 |
| | 2,889 |
|
| Amortization of debt premiums, discounts and issuance costs | 22,858 |
| | 31,757 |
| | 15,060 |
|
| Net change in fair value of trading securities, hedged assets, and financial derivatives | (11,187 | ) | | (15,086 | ) | | (12,144 | ) |
| (Gains)/losses on sale of real estate owned | (1,748 | ) | | (15 | ) | | 1 |
|
| Total provision for losses | 1,758 |
| | 1,002 |
| | 208 |
|
| Excess tax benefits related to stock-based awards | 860 |
| | — |
| | — |
|
| Deferred income taxes | 3,221 |
| | 4,103 |
| | 3,992 |
|
| Other | 11 |
| | 9 |
| | (9 | ) |
| Stock-based compensation expense | 2,702 |
| | 3,343 |
| | 3,269 |
|
| Proceeds from repayment of trading investment securities | — |
| | 2,212 |
| | 657 |
|
| Proceeds from repayment of loans purchased as held for sale | 70,630 |
| | 70,087 |
| | 95,592 |
|
| Net change in: | | | | | |
| Interest receivable | (32,468 | ) | | (9,922 | ) | | (5,826 | ) |
| Guarantee and commitment fees receivable | 94 |
| | 1,318 |
| | (727 | ) |
| Other assets | 3,641 |
| | 43,560 |
| | 8,454 |
|
| Accrued interest payable | 25,702 |
| | 2,079 |
| | (734 | ) |
| Other liabilities | 2,881 |
| | (884 | ) | | 377 |
|
| Net cash provided by operating activities | 175,011 |
| | 212,691 |
| | 184,898 |
|
| Cash flows from investing activities: | |
| | |
| | |
| Purchases of available-for-sale investment securities | (979,671 | ) | | (1,753,423 | ) | | (2,403,910 | ) |
| Purchases of held-to-maturity investment securities | (45,032 | ) | | — |
| | — |
|
| Purchases of Farmer Mac Guaranteed Securities and USDA Securities | (2,913,514 | ) | | (2,579,980 | ) | | (1,180,570 | ) |
| Purchases of loans held for investment | (1,266,926 | ) | | (1,016,515 | ) | | (837,176 | ) |
| Purchases of defaulted loans | (5,981 | ) | | (2,516 | ) | | (16,907 | ) |
| Proceeds from repayment of available-for-sale investment securities | 1,326,779 |
| | 1,725,045 |
| | 1,489,074 |
|
| Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Securities | 1,063,178 |
| | 1,834,672 |
| | 967,173 |
|
| Proceeds from repayment of loans purchased as held for investment | 435,356 |
| | 402,897 |
| | 311,136 |
|
| Proceeds from sale of available-for-sale investment securities | 10,218 |
| | 186,769 |
| | 83,735 |
|
| Proceeds from sale of Farmer Mac Guaranteed Securities | 519,219 |
| | 609,347 |
| | 336,913 |
|
| Proceeds from sale of real estate owned | 8,099 |
| | 295 |
| | (1 | ) |
| Net cash used by investing activities | (1,848,275 | ) | | (593,409 | ) | | (1,250,533 | ) |
| Cash flows from financing activities: | |
| | |
| | |
| Proceeds from issuance of discount notes | 51,980,890 |
| | 95,036,368 |
| | 97,129,959 |
|
| Proceeds from issuance of medium-term notes | 8,600,860 |
| | 6,519,115 |
| | 4,375,368 |
|
| Payments to redeem discount notes | (54,064,438 | ) | | (97,918,539 | ) | | (95,424,765 | ) |
| Payments to redeem medium-term notes | (4,675,300 | ) | | (4,083,450 | ) | | (4,842,281 | ) |
| Excess tax benefits related to stock-based awards | — |
| | 1,428 |
| | 154 |
|
| Payments to third parties on debt securities of consolidated trusts | (101,218 | ) | | (82,209 | ) | | (47,574 | ) |
| Proceeds from common stock issuance | 238 |
| | 553 |
| | 1,689 |
|
| Tax payments related to share-based awards | (2,536 | ) | | (4,103 | ) | | (543 | ) |
| Common stock repurchased | — |
| | (9,286 | ) | | (10,320 | ) |
| Investment in subsidiary - non-controlling interest | — |
| | 53 |
| | 242 |
|
| Retirement 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 | (28,439 | ) | | (24,067 | ) | | (20,182 | ) |
| Net cash provided/(used) by financing activities | 1,710,057 |
| | (564,137 | ) | | 912,332 |
|
| Net increase in cash and cash equivalents | 36,793 |
| | (944,855 | ) | | (153,303 | ) |
| Cash and cash equivalents at beginning of period | 265,229 |
| | 1,210,084 |
| | 1,363,387 |
|
| Cash and cash equivalents at end of period | $ | 302,022 |
| | $ | 265,229 |
| | $ | 1,210,084 |
|
The accompanying notes are an integral part of these consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.ORGANIZATION
The Federal Agricultural Mortgage Corporation ("Farmer Mac") is a stockholder-owned, federally chartered instrumentality of the United States established under Title VIII of the Farm Credit Act of 1971, as amended (12 U.S.C. §§ 2279aa et seq.), which is sometimes referred to as Farmer Mac's charter. Farmer Mac was originally created by the United States Congress to provide a secondary market for a variety of loans made to borrowers in rural America. This secondary market is designed to increase the availability of long-term credit at stable interest rates to America's rural communities and to provide rural borrowers with the benefits of capital markets pricing and product innovation. Since Farmer Mac's inception, Congress has expanded Farmer Mac's charter to authorize Farmer Mac to create the USDA Guarantees line of business and to purchase, and guarantee securities backed by, loans made by cooperative lenders to finance electrification and telecommunications systems in rural areas.
Farmer Mac's main secondary market activities are:include:
•purchasing eligible loans directly from lenders;
•providing advances against eligible loans by purchasing obligations secured by those loans;
•securitizing assets and guaranteeing the payment of principal and interest on the resulting securities that represent interests in, or obligations secured by, pools of eligible loans; and
•issuing long-term standby purchase commitments ("LTSPCs") for eligible loans.
As of December 31, 2017 and 2016, the total outstanding balance in all of Farmer Mac's lines of business was $19.0 billion and $17.4 billion, respectively.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Under the Farm & Ranch line of business, Farmer Mac purchases eligible mortgage loans secured by first liens on agricultural real estate, which includes part-time farms and rural housing ("Farm & Ranch loans"). Farmer Mac also guarantees securities representing interests in pools of mortgage loans eligible for the Farm & Ranch line of business, which are referred to as "Farm & Ranch Guaranteed Securities." Additionally, Farmer Mac commits to purchase, subject to the terms of the applicable LTSPC agreement, eligible Farm & Ranch mortgage loans. To be eligible, loans must meet Farmer Mac's credit underwriting, collateral valuation, documentation, and other specified standards. As of December 31, 2017 and 2016, outstanding loans held by Farmer Mac, loans that either backed off-balance sheet Farm & Ranch Guaranteed Securities or were subject to LTSPCs, and other Farm & Ranch Guaranteed Securities totaled $6.9 billion and $6.1 billion, respectively.
Under the USDA Guarantees line of business, Farmer Mac II LLC, a subsidiary of Farmer Mac, purchases the portions of certain agricultural, rural development, business and industry, and community facilities loans guaranteed by the United States Department of Agriculture under the Consolidated Farm and Rural Development Act (7 U.S.C. §§ 1921 et seq.). USDA-guaranteed portions are referred to and presented on the consolidated balance sheets as "USDA Securities." Farmer Mac II LLC also purchases USDA Securities in exchange for issuing securities to third parties backed by those USDA Securities, which are then also guaranteed by Farmer Mac. These issued securities are referred to and presented on the consolidated balance sheets as Farmer Mac Guaranteed USDA Securities. As of December 31, 2017 and 2016, outstanding Farmer Mac Guaranteed USDA Securities and USDA Securities totaled $2.4 billion and $2.1 billion, respectively.
Farmer Mac's authorized activities under the Rural Utilities line of business are similar to those conducted under the Farm & Ranch line of business – purchases of, and guarantees of securities backed by, eligible rural utilities loans, as well as the issuance of LTSPCs for pools of eligible rural utilities loans ("Rural Utilities loans"). To be eligible, loans must meet Farmer Mac's credit underwriting and other specified standards. As of both December 31, 2017 and 2016, the aggregate outstanding principal balance of Rural Utilities loans held or subject to LTSPCs was $1.9 billion.
Under the Institutional Credit line of business, Farmer Mac guarantees and purchases general obligations of lenders that are secured by pools of loans that would be eligible under Farmer Mac's Farm & Ranch, USDA Guarantees, or Rural Utilities lines of business. AgVantage® is a registered trademark of Farmer Mac used to designate Farmer Mac's guarantees of securities related to these general obligations of lenders that are secured by pools of eligible loans and that comprise the Institutional Credit line of business. As of December 31, 2017 and 2016, outstanding securities held or guaranteed by Farmer Mac in its Institutional Credit line of business totaled $7.9 billion and $7.3 billion, respectively.
Farm & Ranch Guaranteed Securities, Farmer Mac Guaranteed USDA Securities, and AgVantage Securities are collectively referred to as "Farmer Mac Guaranteed Securities." The assets collateralizing Farmer Mac Guaranteed Securities include (1) loans or loan participation interests eligible for purchase under either the Farm & Ranch or Rural Utilities lines of business or (2) USDA Securities eligible for purchase under the USDA Guarantees line of business. Farmer Mac guarantees the timely payment of principal and interest on the resulting Farmer Mac Guaranteed Securities. Farmer Mac may retain Farmer Mac Guaranteed Securities in its portfolio or sell them to third parties.
Farmer Mac's two principal sources of revenue are:
interest income earned on assets held on balance sheet, net of related funding costs and interest payments and receipts on financial derivatives; and
guarantee and commitment fees received in connection with outstanding Farmer Mac Guaranteed Securities and LTSPCs.
Farmer Mac funds its purchases of eligible loan assets and liquidity investment assets primarily by issuing debt obligations of various maturities in the public capital markets. As of December 31, 2017, Farmer Mac had $1.7 billion of discount notes and $13.8 billion of medium-term notes outstanding. The proceeds of debt issuance are invested in loan purchases, Farmer Mac Guaranteed Securities, and liquidity investment assets in accordance with policies established by Farmer Mac's board of directors that comply with regulations promulgated by the Farm Credit Administration ("FCA").
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2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The accounting and reporting policies of Farmer Mac conform with accounting principles generally accepted in the United States of America ("generally accepted accounting principles" or "GAAP"). The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities (including, but not limited to, the allowance for loan losses, reserve for losses, other-than-temporary impairment of investment securities, and fair value measurements) as of the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ
from those estimates. The following are the significant accounting policies that Farmer Mac follows in preparing and presenting its consolidated financial statements:
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(a) | Principles of Consolidation |
(a)Principles of Consolidation
The consolidated financial statements include the accounts of Farmer Mac and its three2 subsidiaries during the year: (1) Farmer Mac Mortgage Securities Corporation ("FMMSC"), whose principal activities are to facilitate the purchase and issuance of Farmer Mac Guaranteed Securities; and (2) Farmer Mac II LLC, whose principal activity is the operation of substantially all of the business related to the USDA Guarantees line of business – primarily the acquisition of USDA Securities; and (3) Contour Valuation Services, LLC (which began doing business as AgVisory during first quarter 2016), whose principal activity was to appraise agricultural real estate. On May 1, 2017, Farmer Mac transferred its entire 65% ownership interest in AgVisory back to the limited liability company as a company redemption in exchange for $5,000. Farmer Mac recognized a loss of approximately $0.1 million after-tax upon the transfer.Securities. The consolidated financial statements also include the accounts of VIEsVariable Interest Entities ("VIEs") in which Farmer Mac determined itself to be the primary beneficiary.
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(b) | Cash and Cash Equivalents and Statements of Cash Flows |
(b)Cash and Cash Equivalents
Farmer Mac considers highly liquid investment securities with maturities at the time of purchase of three months or less to be cash equivalents. Changes in the balance of cash and cash equivalents are reported in the consolidated statements of cash flows.
The following table sets forth information regarding certain cash and non-cash transactions for the years ended December 31, 2017, 2016, and 2015:
Table 2.1
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Cash paid during the period for: | | | | | |
| Interest | $ | 161,060 |
| | $ | 110,609 |
| | $ | 108,254 |
|
| Income taxes | 39,500 |
| | 29,500 |
| | 31,000 |
|
| Non-cash activity: | | | | | |
| Real estate owned acquired through loan liquidation | 5,400 |
| | — |
| | — |
|
| Loans acquired and securitized as Farmer Mac Guaranteed Securities | 519,219 |
| | 609,347 |
| | 336,913 |
|
| 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 | 363,475 |
| | 511,393 |
| | 336,913 |
|
| Purchases of securities - traded not yet settled | 1,400 |
| | — |
| | 20,000 |
|
| Issuance costs on the retirement of Farmer Mac II LLC Preferred Stock | — |
| | — |
| | 8,147 |
|
| Unsettled common stock repurchases | — |
| | — |
| | 197 |
|
| Transfers of available-for-sale USDA Securities to held-to-maturity | — |
| | 1,980,327 |
| | — |
|
| Transfers of available-for-sale Farmer Mac Guaranteed Securities to held-to-maturity | — |
| | 32,824 |
| | — |
|
On October 1, 2016, Farmer Mac transferred $2.0 billion of USDA
(c)Investment Securities, and $32.8 million of Farmer Mac Guaranteed USDA Securities from available-for-sale to held-to-maturity to reflect Farmer Mac’s positive intent and ability to hold these securities until maturity or payoff. Farmer Mac transferred these
securities at fair value as of the date of the transfer, which included a cost basis adjustment of unrealized appreciation in the amount of $73.1 million for the USDA Securities, and $0.7 million for the Farmer Mac Guaranteed USDA Securities. The accumulated unrealized appreciation was retained in accumulated other comprehensive income in the amount of $73.8 million. Farmer Mac accounts for held-to-maturity securities at amortized cost. Both the cost basis adjustment and accumulated unrealized appreciation are being amortized as adjustments to the yield on the held-to-maturity USDA Securities over the remaining contractual term of the transferred securities.
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(c) | Transfers of Financial Assets and Liabilities |
Securities purchased under agreements to resell are treated as collateralized lending transactions. Farmer Mac's counterparties are required to pledge collateral for transactions involving securities purchased under agreements to resell. Farmer Mac considers the types of securities being pledged as collateral when determining how much to lend in these transactions. Additionally, on a daily basis, Farmer Mac reviews the fair values of these securities compared to amounts loaned and derivative counterparty collateral posting thresholds in an effort to minimize exposure to losses. These transactions are reported as securities purchased under agreements to resell in the consolidated balance sheets except for securities purchased under agreements to resell on a weekly or an overnight basis, which are included in cash and cash equivalents in the consolidated balance sheets. Farmer Mac records securities purchased under agreements to resell at the amount loaned in the consolidated balance sheets. The resulting fees for these transactions are included in interest income in the consolidated statements of operations.
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(d) | Investment Securities, Farmer Mac Guaranteed Securities, and USDA Securities |
Securities for which Farmer Mac has the intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Securities for which Farmer Mac does not have the positive intent and ability to hold to maturity are classified as available-for-sale or trading and are carried at estimated fair value. Unrealized gains and losses on available-for-sale securities are reported as a component of accumulated other comprehensive income in stockholders' equity. For securities classified as trading, unrealized gains and losses are included in earnings. Gains and losses on the sale of available-for-sale and trading securities are determined using the specific identification cost method.
Farmer Mac determines the fair value of investment securities using quoted market prices, when available, and evaluates the securities for other-than-temporary impairment. Farmer Mac determines the fair values of certain investment securities for which quoted market prices are not available, Farmer Mac Guaranteed Securities, and USDA Securities based on the present value of the associated expected future cash flows. In estimating the present value of the expected future cash flows, management is required to make estimates and assumptions. The key estimates and assumptions include discount rates and collateral repayment rates. Premiums, discounts, and other deferred costs are amortized to interest income using the effective interest method.
Farmer Mac generally receives compensation when loans with yield maintenance provisions underlying Farmer Mac Guaranteed Securities prepay. These yield maintenance payments mitigate Farmer Mac's exposure to reinvestment risk and are calculated such that, when reinvested with the prepaid principal, they should generate substantially the same cash flows that would have been generated had the loans not
prepaid. Yield maintenance payments are recognized as interest income in the consolidated statements of operations upon receipt.
(d)Loans
Loans for which Farmer Mac has the positive intent and ability to hold for the foreseeable future are classified as held for investment and reported at their unpaid principal balance, net of unamortized purchase discounts or premiums. Loans for which Farmer Mac does not have the positive intent and ability to hold for the foreseeable future are classified as held for sale and reported at the lower of cost or fair value determined on a pooled basis. Farmer Mac de-recognizes sold loans, and recognizes any associated gain or loss, when they have been isolated from Farmer Mac, the buyer has the right to pledge or exchange them, and Farmer Mac does not maintain effective control over them. When Farmer Mac consolidates a trust, it recognizes the loans underlying the trust in the consolidated balance sheets as "Loans held for investment in consolidated trusts, at amortized cost." See Note 2(q)2(p) for more information on the accounting policy related to consolidation.
Non-accrual Loans
Non-accrual loans are loans for which it is probable that Farmer Mac will be unable to collect all amounts due according to the contractual terms of the loan agreement and include all loans 90 days or more past due. When a loan becomes 90 days past due, interest accrual on the loan is discontinued and interest previously accrued is reversed against interest income in the current period. The interest on such loans is accounted for on the cash basis until a loan qualifies for return to accrual status. Loans are returned to accrual status when all the principal and interest payments contractually due are collected and certain performance criteria are met.
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(f) | Securitization of Loans |
Troubled Debt Restructuring ("TDR")
A modification to the contractual terms of a loan that results in granting a concession to a borrower experiencing financial difficulties is considered a TDR. Farmer Mac has granted a concession when, as a result of the restructuring, it does not expect to collect all amounts due in a timely manner, including interest accrued at the original contract rate. In making its determination of whether a borrower is experiencing financial difficulties, Farmer Mac considers several factors, including whether (1) the borrower has declared or is in the process of declaring bankruptcy, (2) there is substantial doubt as to whether the borrower will continue to be a going concern, and (3) the borrower can obtain funds from other sources at an effective interest rate at or near a current market interest rate for debt with similar risk characteristics.
(e)Securitization
Securitization involves the transfer of financial assets to another entity in exchange for cash and/or beneficial interests in the assets transferred. Farmer Mac or third parties transfer agricultural real estate mortgage loans, Rural Utilities loans, or rural utilities loansUSDA securities into trusts that are used as vehicles for the securitization of the transferred loans.financial assets. The trusts issue Farmer Mac Guaranteed Securities that are beneficial interests in the assets of the trusts, to either Farmer Mac or third party investors. Farmer Mac guarantees the timely payment of principal and interest on the securities issued by the trusts and receives guarantee fees as compensation for its guarantee. Farmer Mac recognizes guarantee fees on the accrual basis over the terms of the Farmer Mac Guaranteed Securities, which generally coincide with the terms of the underlying loans. As such, no guarantee fees are unearned at the end of any reporting period.
Farmer Mac is required to perform under its guarantee obligation when the underlying loans for the off-balance sheet Farmer Mac Guaranteed Securities do not make their scheduled installment payments. When a loan underlying a Farm & Ranch Guaranteed Security becomes 90 days or more past due, Farmer Mac may, in its sole discretion, repurchase the loan from the trust and generally does repurchase such loans, thereby reducing the principal balance of the outstanding Farm & Ranch Guaranteed Security. When Farmer Mac purchases a delinquent loan underlying a Farmer Mac Guaranteed Security, Farmer Mac stops accruing the guarantee fee upon loan purchase.
Real estate owned ("REO") consists of real estate acquired throughIf Farmer Mac repurchases a loan liquidation andthat is recorded at fair value less estimated selling cost at acquisition. Fair value is determined by appraisal or other appropriate valuation method. Any excesscollateral for a Farmer Mac Guaranteed Security, Farmer Mac would have the right to enforce the terms of the recordedloan, and in the event of a default, would have access to the underlying collateral. Farmer Mac typically recovers its investment in the defaulted loans purchased either through borrower payments, loan overpayoffs, payments by third parties, or foreclosure and sale of the fair value less estimated selling costs is chargedproperty securing the loans.
Farmer Mac has recourse to the allowanceUSDA for any amounts advanced for the timely payment of principal and interest on Farmer Mac Guaranteed USDA Securities. That recourse is the USDA guarantee, a full-faith-and-credit obligation of the United States that becomes enforceable if a lender fails to repurchase the USDA-guaranteed portion from its owner within 30 days after written demand from the owner when (a) the borrower under the guaranteed loan losses. Subsequentis in default not less than 60 days in the payment of any principal or interest due on the USDA-guaranteed portion, or (b) the lender has failed to remit to the acquisition, management continues to perform periodic valuations of real estate owned. Declines inowner the net realizable value (fair value less estimated selling costs) are charged through income and presented in "Real estate owned operating costs, net"payment made by the borrower on the consolidated statementsUSDA-guaranteed portion or any related loan subsidy within 30 days after the lender's receipt of operations.
the payment.
(f)Financial Derivatives
Farmer Mac enters into financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of certain assets, future cash flows or debt issuance, not for trading or speculative purposes. Farmer Mac enters into interest rate swap contracts principally to adjust the characteristics of its short-term debt to match more closely the cash flow and duration characteristics of its longer-term loans and other assets, and also to adjust the characteristics of its long-term debt to match more closely the cash flow and duration characteristics of its short-term assets, thereby reducing interest rate risk and, often times, deriving an overall lower effective cost of borrowing than would otherwise be available to Farmer Mac in the conventional debt market. Farmer Mac is required to recognize certain contracts and commitments as derivatives when the characteristics of those contracts and commitments meet the definition of a derivative under GAAP.
Accounting for financial derivatives differs depending on whether a derivative is designated in a hedge accounting relationship. Derivative instruments designated in fair value hedge accounting relationships mitigate exposure to changes in the fair value of assets or liabilities. Derivative instruments designated in cash flow hedge accounting relationships mitigate exposure to the variability in expected future cash flows or other forecasted transactions. In order to qualify for fair value or cash flow hedge accounting treatment, documentation must indicate the intention to designate the derivative as a hedge of a specific asset, or liability, or a future cash flow. Effectiveness of the hedge is assessed atbefore the end of the quarter of inception and monitored over the life of the hedging relationship.
All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability. Changes in the fair values of financial derivatives not designated as cash flow or fair value hedges arewere reported in "Gains"(Losses)/gains on financial derivatives and hedging activities"derivatives" in the consolidated statements of operations. For financial derivatives designated in fair value hedginghedge accounting relationships, changes in the fair values of the hedged items related to the risk being hedged are also reported in "Gains on financial derivatives and hedging activities""Net interest income" in the consolidated statements of operations. The accrualInterest accruals on derivatives designated in fair value hedge relationships are also recorded in "Net interest income" in the consolidated statements 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.operations. For financial derivatives designated in cash flow hedginghedge relationships, the effective portion ofunrealized gain or loss on the derivative gain/loss is recorded in other comprehensive income;income. Because the hedging instrument is an interest rate swap and the hedged forecasted transactions are future interest payments on variable rate debt, amounts are disclosed as a reclassification out ofrecorded in accumulated other comprehensive income and affecting netare reclassified to "Total interest income whenexpense" in conjunction with the hedged forecasted transaction affects earnings. Any ineffective portionrecognition of designated hedge transactions is recognized immediately in "Gainsinterest expense on financial derivatives and hedging activities" in the consolidated statements of operations.debt.
Farmer Mac has made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to netting provisions on a net basis by counterparty portfolio. See Notes 6 and 13 for more information on financial derivatives.
(g)Notes payable are classified as due within one year or due after one year based on the length of time remaining to their contractual maturities. Payable
Debt issuance costs and premiums and discounts are deferred and amortized to interest expense using the effective interest method over the contractual life of the related debt.
(h)Allowance for Losses and Reserve for Losses
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(j) | Allowance for Loan Losses and Reserve for Losses |
Current Expected Credit Loss ("CECL")
On January 1, 2020, Farmer Mac adopted Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under CECL, Farmer Mac's allowance for credit losses represents the difference between the carrying amount of the related financial instruments and the present value of their expected cash flows discounted at their effective interest rates, as of the respective balance sheet date. Under CECL, Farmer Mac's reserve for credit losses represents the difference between the outstanding amount of off-balance sheet credit exposures and the present value of their expected cash flows discounted at their effective interest rates.
Farmer Mac maintains an allowance for credit losses to cover current expected credit losses as of the balance sheet date for on-balance sheet investment securities, loans held for investment, and Farmer Mac Guaranteed Securities (collectively referred to as "allowance for losses"). Additionally, Farmer Mac maintains a reserve for credit losses to cover current expected credit losses as of the balance sheet date for off-balance sheet loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities (collectively referred to as "reserve for losses"). Both the allowance for losses and reserve for losses are based on historical information and reasonable and supportable forecasts.
Farmer Mac has never experienced a credit loss in its Rural Utilities line of business. Upon the adoption of CECL, Farmer Mac measures its expected credit losses for the expected life of all financial instruments, including its Rural Utilities loans. To estimate expected credit losses on these loans, Farmer Mac relies upon industry historical credit loss data from ratings agencies and publicly available information as disclosed in the securities filings of other major lenders who serve the utilities industry.
The allowance for losses increases through periodic provisions for loan losses that are charged against net interest income and the reserve for losses increases through provisions for losses that are charged to non-interest expense. Both the allowance for losses and reserve for losses are decreased by charge-offs for realized losses, net of recoveries. Releases from the allowance for losses or reserve for losses occur when the estimate of expected credit losses as of the end of a period is less than the estimate at the beginning of the period.
The total allowance for losses consists of the allowance for losses and the reserve for losses.
Charge-offs, under CECL
Farmer Mac records a charge-off from the allowance for losses when either a) a loan, or a portion of a loan, is deemed uncollectible; or b) a loss has been confirmed through the receipt of assets, generally the underlying collateral, in full satisfaction of the loan. The charge-off equals the excess of the recorded investment in the loan over the fair value of the collateral less estimated selling costs.
Estimation Methodology, under CECL
Farmer Mac bases its methodology for determining its current estimate of expected losses on a statistical model, which incorporates credit loss history and reasonable and supportable forecasts. Farmer Mac's estimation methodology includes the following key components:
•An economic model for each portfolio, including Farm & Ranch, Rural Utilities, and Institutional Credit;
•A migration matrix for each portfolio that reasonably predicts the movement of each financial asset among various risk categories over the course of each asset's expected life (the migration matrix forms the basis for our estimate of the probability of default of each financial asset);
•A loss-given-default ("LGD") model that reasonably predicts the amount of loss that Farmer Mac would incur upon the default of each financial asset;
•An economic factor forecast that updates the migration matrix model and the LGD model with current assumptions for the economic indicators that Farmer Mac has determined are most correlated with or relevant to the performance of each portfolio of assets (including Gross Domestic Product ("GDP"), credit spreads, unemployment rates, land values, and commodity prices); and
•A discounted cash flow analysis, which relies upon each of the above model outputs, plus the contractual terms of each financial asset, and the effective interest rate of each financial asset.
Management evaluates these assumptions by considering many relevant factors, including:
•economic conditions;
•geographic and agricultural commodity/product concentrations in the portfolio;
•the credit profile of the portfolio, including risk ratings and financial metrics;
•delinquency trends of the portfolio;
•historical charge-off and recovery activities of the portfolio; and
•other factors to capture current portfolio trends and characteristics that differ from historical experience.
Management believes that its methodology produces a reasonable estimate of expected credit losses, as of the balance sheet date, for the expected life of all of its financial assets.
Allowance for Loss on Available-for-Sale (AFS) Securities, under CECL
To measure current expected credit losses on impaired AFS securities, Farmer Mac first considers those impaired securities that: 1) Farmer Mac does not intend to sell, and 2) it is not more likely than not that Farmer Mac will be required to sell before recovering its amortized cost basis. In assessing whether a credit loss exists, Farmer Mac compares the present value, discounted at the security's effective interest rate, of cash flows expected to be collected from an impaired AFS debt security to its amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized cost basis of the impaired security, a credit loss exists and Farmer Mac records an allowance for loss for that credit loss. However, the amount of that allowance is limited by the amount that the security’s fair value is less than its amortized cost basis. Accrued interest receivable is recorded separately on the Consolidated Balance Sheet, and the allowance for credit losses excludes uncollectible accrued interest receivable.
Collateral Dependent Assets ("CDAs"), under CECL
CDAs are loans, loans underlying LTSPCs, or off-balance sheet credit exposures in which the borrower is either in foreclosure or is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral by Farmer Mac. Farmer Mac estimates the current expected credit loss on CDAs based upon the appraised value of the collateral, the costs to sell it, and any applicable credit protection such as a guarantee.
COVID-19 Payment Deferments
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. Section 4013 of the CARES Act titled “Temporary Relief from Troubled Debt Restructurings” provides financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to troubled debt restructurings (“TDRs”) for a limited period of time to account for the effects of the novel coronavirus disease 2019 ("COVID-19"). On April 10, 2020, Farmer Mac’s prudential regulator, the Office of Secondary Market Oversight (OSMO) within the Farm Credit Administration (FCA), issued guidance to Farmer Mac on loan servicing and reporting TDRs for lines of business affected by the COVID-19 outbreak. This guidance was consistent with the guidance provided by other financial regulatory agencies and the Financial Accounting Standards Board that short-term modifications made on a good faith basis in response to the COVID-19 national emergency are not TDRs when the borrower was not past due on loan payments before the March 13, 2020 presidential proclamation declaring the COVID-19 outbreak a national emergency.
During second quarter 2020, Farmer Mac implemented the guidance from FCA by granting up to 6-month payment deferments to borrowers who have been economically impacted by COVID-19. Farmer Mac deems loans under a COVID-19 payment deferment not to be past due and continues to accrue interest on those loans. Furthermore, Farmer Mac does not consider a payment deferment on any such loan to be a troubled debt restructuring. In estimating expected credit losses on Farm & Ranch loans held for investment, Farmer Mac does consider payment deferments along with other available credit and economic information that pertains to that portfolio.
Probable Incurred Credit Loss (prior to January 1, 2020)
Prior to January 1, 2020, Farmer Mac maintained an allowance for losses to cover estimated probable losses incurred as of the balance sheet date on loans held ("allowance for loan losses") and loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities ("reserve for losses") based on available information. Disaggregation byby: commodity type, isportfolio, and risk rating; was performed, where appropriate, in analyzing the need for an allowance for losses.
The allowance for losses increases through periodic provisions for loan losses that are charged against net interest income and the reserve for losses increases through provisions for losses that are charged to non-interest expense, and decreases by charge-offs for realized losses, net of recoveries. Negative provisions, or releases from the allowance for losses, generally occur when the estimate of probable losses as of the end of a period is less than the estimate at the beginning of the period. In certain circumstances, for example, when a defaulted loan is purchased out of a guaranteed security or pursuant to an LTSPC, the related reserve for losses is released and a corresponding amount is provided to the allowance for loan losses.
The total allowance for losses consists of a general allowance for losses and a specific allowance for individual impaired loans.
Charge-offs
Farmer Mac records a charge-off against the allowance for losses principally when a loss has been confirmed through the receipt of assets, generally the underlying collateral, in full satisfaction of the loan. The loss equals the excess of the recorded investment in the loan over the fair value of the collateral less estimated selling costs.
General Allowance for Loss, for Probable Incurred Credit Losses
Prior to January 1, 2020, Farmer Mac's methodology for determiningto determine its allowance for losses incorporatesincorporated Farmer Mac's automated loan classification system. That system scoresscored loans based on criteria such as historical repayment performance, indicators of current financial condition, loan seasoning, loan size and loan-to-value ratio. The previous allowance methodology capturescaptured the migration of loan scores across concurrent and overlapping 3-year time horizons and calculatescalculated loss rates separately within each loan classification for (1) loans underlying LTSPCs and (2) loans held and loans underlying Farm & Ranch Guaranteed Securities. The calculated loss rates arewere applied to the current classification distribution of unimpaired loans in Farmer Mac's portfolio to estimate inherent losses, onunder the assumption that the historical credit losses and trends used to calculate loss rates willwould continue in the future.
Management evaluates this assumption by taking into consideration severalevaluated those assumptions through considering many relevant factors, including:
• economic conditions;
• geographic and agricultural commodity/product concentrations in the portfolio;
• the credit profile of the portfolio;
• delinquency trends of the portfolio;
• historical charge-off and recovery activities of the portfolio; and
• other factors to capture current portfolio trends and characteristics that differ from historical experience.
Prior to January 1, 2020, Management believesbelieved that its use of thisthat methodology producesproduced a reasonable estimate of probable losses incurred as of the balance sheet date, for all loans held in the Farm & Ranch portfolio and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs.
Prior to January 1, 2020, Farmer Mac separately evaluatesevaluated the rural utilitiesRural Utilities loans it ownsowned to determine if there arewere any probable losses inherent in those assets.
Specific Allowance for Impaired Loans
Prior to January 1, 2020, Farmer Mac also analyzes certainanalyzed individual loans in its portfolio for impairment in accordance with accounting guidance on measuring impairment ofimpairment. Those individual loans. Farmer Mac's impaired loans generally includeincluded loans 90 days or more past due, in foreclosure, restructured, in bankruptcy and certain performing loans that havehad previously been delinquent or arewere secured by real estate that producesproduced agricultural commodities or products currentlythen under stress.
Farmer Mac uses a risk-based approach in determining the necessity of obtaining updated appraisals on impaired loans. For example, larger exposures associated with highly improved and specialized collateral will generally receive updated appraisals once the loans are identified as impaired. In addition, updated appraisals are always obtained during the foreclosure process. Depending on the risk factors associated with the loan and underlying collateral, which can vary widely depending on the circumstances of the loan and collateral, this can occur early in the foreclosure process, while in other instances this may occur just prior to the transfer of title. As part of its routine credit review process, Farmer Mac often will exercise judgment in discounting an appraisal value due to local real estate trends or the condition of the property (e.g., following an inspection by Farmer Mac or the servicer). In addition, a property appraisal value may be discounted based on the market's reaction to Farmer Mac's asking price for sale of the property.
(i)Earnings Per Common Share
For loans with an updated appraised value, other updated collateral valuation or management's estimate of discounted collateral value, this analysis includes the measurement of the fair value of the underlying collateral for individual loans relative to the total recorded investment, including principal, interest, and advances and net of any charge-offs. In the event that the collateral value does not support the total recorded investment, Farmer Mac specifically provides an allowance for the loan for the difference between the recorded investment and its fair value, less estimated costs to liquidate the collateral. Estimated selling costs are based on historical selling costs incurred by Farmer Mac or management's best estimate of selling costs for a particular property. For the remaining impaired assets without updated valuations, this analysis is performed in the aggregate in consideration of the similar risk characteristics of the assets and historical statistics. Farmer Mac considers appraisals aged more than two years as of the reporting period end date to be outdated. Farmer Mac believes this methodology that uses loan classification scores and historical loss experience is a better indication of impairment for these collateral-dependent loans than other valuation methods.
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(k) | Earnings Per Common Share |
Basic earnings per common share ("EPS") is based on the daily weighted-average number of shares of common stock outstanding. Diluted earnings per common share is based on the daily weighted-average number of shares of common stock outstanding adjusted to include all potentially dilutive common stock options, stock appreciation rights ("SARs"), and non-vestedunvested restricted stock awards. The following schedule reconciles basic and diluted EPS for the years ended December 31, 2017, 2016,2020, 2019 and 2015:2018:
Table 2.22.1
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Net
Income | | Weighted-Average Shares | | $ per
Share | | 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 | $ | 89,176 | | | 10,728 | | | $ | 8.31 | | | $ | 93,650 | | | 10,696 | | | $ | 8.76 | | | $ | 94,898 | | | 10,654 | | | $ | 8.91 | |
Effect of dilutive securities(1) | | | | | | | | | | | | | | | | | |
| SARs and restricted stock | — | | | 58 | | | (0.04) | | | — | | | 82 | | | (0.07) | | | — | | | 92 | | | (0.08) | |
| Diluted EPS | $ | 89,176 | | | 10,786 | | | $ | 8.27 | | | $ | 93,650 | | | 10,778 | | | $ | 8.69 | | | $ | 94,898 | | | 10,746 | | | $ | 8.83 | |
(1)For the years ended December 31, 2020, 2019, and 2018, SARs and restricted stock of 74,336, 43,374, and 15,812, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the years ended December 31, 2020, 2019, and 2018, contingent shares of unvested restricted stock of 12,680, 10,349, and 13,138, 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.
(j)Income Taxes
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017(1) | | 2016 | | 2015 |
| | Net
Income | | Weighted-Average Shares | | $ per
Share | | 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 | $ | 71,300 |
| | 10,594 |
| | $ | 6.73 |
| | $ | 64,152 |
| | 10,477 |
| | $ | 6.12 |
| | $ | 47,371 |
| | 10,949 |
| | $ | 4.33 |
|
Effect of dilutive securities(2) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Stock options, SARs and restricted stock | — |
| | 209 |
| | (0.13 | ) | | — |
| | 269 |
| | (0.15 | ) | | — |
| | 360 |
| | (0.14 | ) |
| Diluted EPS | $ | 71,300 |
| | 10,803 |
| | $ | 6.60 |
| | $ | 64,152 |
| | 10,746 |
| | $ | 5.97 |
| | $ | 47,371 |
| | 11,309 |
| | $ | 4.19 |
|
| |
(1)
| For the effect of the adoption of the new Accounting Standard Update 2016-09, "Improvements to Employee Share-Based Payment Accounting," on Basic and Diluted EPS, see Note 2(r) "New Accounting Standards."
|
| |
(2)
| For the years ended December 31, 2017, 2016, and 2015, stock options and SARs of 28,579, 86,907, and 304,132, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the years ended December 31, 2017, 2016, and 2015, contingent shares of non-vested restricted stock of 29,647, 37,284, and 46,303 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. |
Deferred federal income tax assets and liabilities are established for temporary differences between financial and taxable income and are measured using the current enacted statutory tax rate. New tax reform legislation was enacted on December 22, 2017. This new tax legislation includes a broad range of tax reform provisions, including a reduction to the corporate tax rate, changes to business expense deductions, and changes to taxes on international earnings. U.S. GAAP requires recognition of the effect of changes in tax law and tax rates as a component of the income tax provision related to continuing operations in the period of enactment of the new legislation. This accounting treatment is also required for deferred taxes that were established through a financial statement component other than continuing operations such as other comprehensive income. Thus, Farmer Mac remeasured its deferred tax assets and liabilities using the newly enacted statutory tax rate of 21 percent and recognized a one-time, non-cash charge of $1.4 million to income tax expense.
Due to the re-measurement of Farmer Mac's deferred tax assets and liabilities using the newly enacted statutory federal income tax rate of 21 percent, items originally recorded through other comprehensive income do not reflect the new tax rate ("stranded tax effects"). In response, in February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02 "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,"which provides entities the option to reclassify these stranded tax effects from accumulated other comprehensive income to retained earnings. Farmer Mac elected to adopt ASU 2018-02 for the year ended December 31, 2017. This change in accounting principle resulted in an increase to "Accumulated other comprehensive income, net of tax" and a corresponding decrease to "Retained earnings" of $9.1 million. See Note 2(r) for more information about the adoption of ASU 2018-02 and the effect on Farmer Mac's consolidated financial statements.
Income tax expense is equal to the income taxes payable in the current year plus the net change in the deferred tax asset or liability balance.
Deferred tax assets are measured at rates in effect when they arise. To the extent rates change, the deferred tax asset will be adjusted to reflect the new rate. A increase in corporate tax rates would result in an increase in the value of the deferred tax asset.
Farmer Mac evaluates its tax positions quarterly to identify and recognize any liabilities related to uncertain tax positions in its federal income tax returns. Farmer Mac uses a two-step approach in which income tax benefits are recognized if, based on the technical merits of a tax position, it is more likely than not (a probability of greater than 50 percent)50%) that the tax position would be sustained upon examination by the taxing authority, which includes all related appeals and litigation process. The amount of tax benefit recognized is then measured at the largest amount of tax benefit that is greater than 50 percent50% likely to be realized upon settlement with the taxing authority, considering all information available at the reporting date. Farmer Mac's policy for recording interest and penalties associated with uncertain tax positions is to record them as a component of income tax expense. Farmer Mac establishes a valuation allowance for deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining its deferred tax asset valuation allowance, Farmer Mac considered its taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback and carryforward periods available under the tax law and the impact of possible tax planning strategies.
| |
(m) | Stock-Based Compensation |
(k)Stock-Based Compensation
Farmer Mac accounts for its stock-based employee compensation plans using the grant date fair value method of accounting. Farmer Mac measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award determined using the Black-Scholes option pricing model. The cost is recognized over the period during which an employee is required to provide service in exchange for the award. For performance-based grants, Farmer Mac recognizes the grant-date fair value over the vesting period as long as it remains probable that the performance conditions will be met. If the service or performance conditions are not met, Farmer Mac reverses previously recognized compensation expense upon forfeiture.
Farmer Mac recognized $2.7$4.1 million, $3.3$2.3 million, and $3.3$2.5 million of compensation expense related to stock options, SARs, and non-vested restricted stock awards for 2017, 2016,2020, 2019, and 2015,2018, respectively.
(l)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.
The following table presents the changes in accumulated other comprehensive income ("AOCI"), net of tax, by component for the years ended December 31, 2017, 2016,2020, 2019, and 2015.2018:
Table 2.32.2
| | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-Sale Securities | | Held-to-Maturity Securities | | Cash Flow Hedges | | Total |
| (in thousands) |
| Balance as of January 1, 2018 | $ | (1,676) | | | $ | 48,236 | | | $ | 4,552 | | | $ | 51,112 | |
| Other comprehensive (loss)/income before reclassifications | (19,151) | | | 0 | | | 2,571 | | | (16,580) | |
| Amounts reclassified from AOCI | (4,533) | | | (4,793) | | | (250) | | | (9,576) | |
| Net comprehensive (loss)/income | (23,684) | | | (4,793) | | | 2,321 | | | (26,156) | |
| Balance as of December 31, 2018 | $ | (25,360) | | | $ | 43,443 | | | $ | 6,873 | | | $ | 24,956 | |
| Other comprehensive loss before reclassifications | (14,976) | | | 0 | | | (11,561) | | | (26,537) | |
| Amounts reclassified from AOCI | (3,061) | | | (10,598) | | | (921) | | | (14,580) | |
| Net comprehensive loss | (18,037) | | | (10,598) | | | (12,482) | | | (41,117) | |
| Balance as of December 31, 2019 | $ | (43,397) | | | $ | 32,845 | | | $ | (5,609) | | | $ | (16,161) | |
| Other comprehensive income/(loss) before reclassifications | 32,739 | | | 0 | | | (21,606) | | | 11,133 | |
| Amounts reclassified from AOCI | (3,279) | | | (10,016) | | | 4,400 | | | (8,895) | |
| Net comprehensive income/(loss) | 29,460 | | | (10,016) | | | (17,206) | | | 2,238 | |
| Balance as of December 31, 2020 | $ | (13,937) | | | $ | 22,829 | | | $ | (22,815) | | | $ | (13,923) | |
|
| | | | | | | | | | | | | | | |
| | Available-for-Sale Securities | | Held-to-Maturity Securities | | Cash Flow Hedges | | Total |
| | (in thousands) |
| Balance as of January 1, 2015 | $ | 9,716 |
| | $ | 5,973 |
| | $ | (156 | ) | | $ | 15,533 |
|
| Other comprehensive loss before reclassifications | (6,026 | ) | | — |
| | (1,155 | ) | | (7,181 | ) |
| Amounts reclassified from AOCI | (13,725 | ) | | (6,449 | ) | | 803 |
| | (19,371 | ) |
| Net comprehensive loss | (19,751 | ) | | (6,449 | ) | | (352 | ) | | (26,552 | ) |
| Balance as of December 31, 2015 | $ | (10,035 | ) | | $ | (476 | ) | | $ | (508 | ) | | $ | (11,019 | ) |
| Other comprehensive income before reclassifications | 5,481 |
| | 47,993 |
| | 1,588 |
| | 55,062 |
|
| Amounts reclassified from AOCI | (9,833 | ) | | (1,765 | ) | | 1,313 |
| | (10,285 | ) |
| Net comprehensive (loss)/income | (4,352 | ) | | 46,228 |
| | 2,901 |
| | 44,777 |
|
| Balance as of December 31, 2016 | $ | (14,387 | ) | | $ | 45,752 |
| | $ | 2,393 |
| | $ | 33,758 |
|
| Other comprehensive income before reclassifications | 23,925 |
| | — |
| | 152 |
| | 24,077 |
|
| Amounts reclassified from AOCI | (10,917 | ) | | (6,064 | ) | | 1,178 |
| | (15,803 | ) |
| Net comprehensive income/(loss) | 13,008 |
| | (6,064 | ) | | 1,330 |
| | 8,274 |
|
| Stranded tax effects reclassified from AOCI due to enactment of new tax legislation | (297 | ) | | 8,548 |
| | 802 |
| | 9,053 |
|
| Balance as of December 31, 2017 | $ | (1,676 | ) | | $ | 48,236 |
| | $ | 4,525 |
| | $ | 51,085 |
|
The following table presents other comprehensive income activity, the impact on net income of amounts reclassified from each component of AOCI, and the related tax impact for the years ended December 31, 2017, 2016,2020, 2019, and 2015:2018:
Table 2.42.3
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Before Tax | | Provision (Benefit) | | After Tax | | Before Tax | | Provision (Benefit) | | After Tax | | Before Tax | | Provision (Benefit) | | After Tax |
| (in thousands) |
| Other comprehensive income: | | | | | | | | | | | | | | | | | |
| Available-for-sale-securities: | | | | | | | | | | | | | | | | | |
| Unrealized holding gains/(losses) on available-for-sale securities | $ | 41,442 | | | $ | 8,703 | | | $ | 32,739 | | | $ | (18,958) | | | $ | (3,982) | | | $ | (14,976) | | | $ | (24,241) | | | $ | (5,090) | | | $ | (19,151) | |
| Less reclassification adjustments included in: | | | | | | | | | | | | | | | | | |
Net interest income(1) | (3,895) | | | (818) | | | (3,077) | | | (3,834) | | | (805) | | | (3,029) | | | (5,784) | | | (1,215) | | | (4,569) | |
Gains on sale of available-for-sale investment securities(2) | 0 | | | 0 | | | 0 | | | 236 | | | 50 | | | 186 | | | 0 | | | 0 | | | 0 | |
Other income(2) | (256) | | | (54) | | | (202) | | | (275) | | | (57) | | | (218) | | | 45 | | | 9 | | | 36 | |
| Total | $ | 37,291 | | | $ | 7,831 | | | $ | 29,460 | | | $ | (22,831) | | | $ | (4,794) | | | $ | (18,037) | | | $ | (29,980) | | | $ | (6,296) | | | $ | (23,684) | |
| Held-to-maturity securities: | | | | | | | | | | | | | | | | | |
| Less reclassification adjustments included in: | | | | | | | | | | | | | | | | | |
Net interest income(3) | (12,677) | | | (2,661) | | | (10,016) | | | (13,415) | | | (2,817) | | | (10,598) | | | (6,067) | | | (1,274) | | | (4,793) | |
| Total | $ | (12,677) | | | $ | (2,661) | | | $ | (10,016) | | | $ | (13,415) | | | $ | (2,817) | | | $ | (10,598) | | | $ | (6,067) | | | $ | (1,274) | | | $ | (4,793) | |
| Cash flow hedges | | | | | | | | | | | | | | | | | |
| Unrealized (losses)/gains on cash flow hedges | $ | (27,350) | | | $ | (5,744) | | | $ | (21,606) | | | $ | (14,635) | | | $ | (3,074) | | | $ | (11,561) | | | $ | 3,254 | | | $ | 683 | | | $ | 2,571 | |
| Less reclassification adjustments included in: | | | | | | | | | | | | | | | | | |
Net interest income(4) | 5,570 | | | 1,170 | | | 4,400 | | | (1,166) | | | (245) | | | (921) | | | (316) | | | (66) | | | (250) | |
| Total | $ | (21,780) | | | $ | (4,574) | | | $ | (17,206) | | | $ | (15,801) | | | $ | (3,319) | | | $ | (12,482) | | | $ | 2,938 | | | $ | 617 | | | $ | 2,321 | |
| Other comprehensive income/(loss) | $ | 2,834 | | | $ | 596 | | | $ | 2,238 | | | $ | (52,047) | | | $ | (10,930) | | | $ | (41,117) | | | $ | (33,109) | | | $ | (6,953) | | | $ | (26,156) | |
(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.
(m) Guarantees
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | Before Tax | | Provision (Benefit) | | After Tax | | Before Tax | | Provision (Benefit) | | After Tax | | Before Tax | | Provision (Benefit) | | After Tax |
| | (in thousands) |
| Other comprehensive income: | | | | | | | | | | | | | | | | | |
| Available-for-sale-securities: | | | | | | | | | | | | | | | | | |
| Unrealized holding gains/(losses) on available-for-sale-securities | $ | 36,809 |
| | $ | 12,884 |
| | $ | 23,925 |
| | $ | 8,433 |
| | $ | 2,952 |
| | $ | 5,481 |
| | $ | (9,270 | ) | | $ | (3,244 | ) | | $ | (6,026 | ) |
| Less reclassification adjustments included in: | | | | | | | | | | | | | | | | | |
Gains/(losses) on financial derivatives and hedging activities(1) | (16,845 | ) | | (5,897 | ) | | (10,948 | ) | | (15,375 | ) | | (5,381 | ) | | (9,994 | ) | | (20,125 | ) | | (7,044 | ) | | (13,081 | ) |
Gains/(losses) on sale of available-for-sale investment securities(2) | (89 | ) | | (31 | ) | | (58 | ) | | 9 |
| | 3 |
| | 6 |
| | (10 | ) | | (4 | ) | | (6 | ) |
Other income(3) | 137 |
| | 48 |
| | 89 |
| | 239 |
| | 84 |
| | 155 |
| | (982 | ) | | (344 | ) | | (638 | ) |
| Total | $ | 20,012 |
| | $ | 7,004 |
| | $ | 13,008 |
| | $ | (6,694 | ) | | $ | (2,342 | ) | | $ | (4,352 | ) | | $ | (30,387 | ) | | $ | (10,636 | ) | | $ | (19,751 | ) |
| Held-to-maturity securities: | | | | | | | | | | | | | | | | | |
Change in fair value(4) | $ | — |
| | $ | — |
| | $ | — |
| | $ | 73,835 |
| | $ | 25,842 |
| | $ | 47,993 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Less reclassification adjustments included in: | | | | | | | | | | | | | | | | | |
Net interest income(5) | (9,329 | ) | | (3,265 | ) | | (6,064 | ) | | (2,715 | ) | | (950 | ) | | (1,765 | ) | | (9,922 | ) | | (3,473 | ) | | (6,449 | ) |
| Total | $ | (9,329 | ) | | $ | (3,265 | ) | | $ | (6,064 | ) | | $ | 71,120 |
| | $ | 24,892 |
| | $ | 46,228 |
| | $ | (9,922 | ) | | $ | (3,473 | ) | | $ | (6,449 | ) |
| Cash flow hedges | | | | | | | | | | | | | | | | | |
| Unrealized gains/(losses) on cash flow hedges | $ | 233 |
| | $ | 81 |
| | $ | 152 |
| | $ | 2,443 |
| | $ | 855 |
| | $ | 1,588 |
| | $ | (1,776 | ) | | $ | (621 | ) | | $ | (1,155 | ) |
| Less reclassification adjustments included in: | | | | | | | | | | | | | | | | | |
Net interest income(6) | 1,813 |
| | 635 |
| | 1,178 |
| | 2,020 |
| | 707 |
| | 1,313 |
| | 1,235 |
| | 432 |
| | 803 |
|
| Total | $ | 2,046 |
| | $ | 716 |
| | $ | 1,330 |
| | $ | 4,463 |
| | $ | 1,562 |
| | $ | 2,901 |
| | $ | (541 | ) | | $ | (189 | ) | | $ | (352 | ) |
| Other comprehensive income/(loss) | $ | 12,729 |
| | $ | 4,455 |
| | $ | 8,274 |
| | $ | 68,889 |
| | $ | 24,112 |
| | $ | 44,777 |
| | $ | (40,850 | ) | | $ | (14,298 | ) | | $ | (26,552 | ) |
| |
(1)
| Relates to the amortization of unrealized gains on hedged items prior to the application of fair value hedge accounting. |
| |
(2)
| Represents unrealized gains and losses on sales of available-for-sale investment securities. |
| |
(3)
| Represents amortization of deferred gains related to certain available-for-sale USDA Securities and Farmer Mac Guaranteed USDA Securities. |
| |
(4)
| Represents the accumulated unrealized gain on the USDA Securities and the Farmer Mac Guaranteed Securities transferred from available-for-sale to held-to-maturity. |
| |
(5)
| Relates to the amortization of unrealized gains or losses prior to the reclassification of these securities from available-for-sale to held-to-maturity. The amortization of unrealized gains or losses reported in AOCI for held-to-maturity securities will be offset by the amortization of the premium or discount created from the transfer into held-to-maturity securities, which occurred at fair value. These unrealized gains or losses will be recorded over the remaining life of the security with no impact on future net income. |
| |
(6)
| Relates to the recognition of unrealized gains and losses on cash flow hedges recorded in AOCI. |
| |
(o) | Long-Term Standby Purchase Commitments |
Farmer Mac accounts for its LTSPCs as guarantees. CommitmentLTSPCs and securitization trusts where Farmer Mac is not the primary beneficiary result in the creation of off-balance sheet obligations for Farmer Mac. Farmer Mac records, at the inception of an off-balance sheet guarantee or LTSPC, a liability for the fair value of its obligation to stand ready to perform under the terms of each guarantee or LTSPC and an asset that is equal to the fair value of the fees that will be received over the life of each guarantee or LTSPC. The fair values of the guarantee obligation and asset at inception are based on the present value of
expected cash flows using management's best estimate of certain key assumptions, which include prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. Because the cash flows of these instruments may be interest rate path dependent, these values and projected discount rates are derived using a Monte Carlo simulation model. The guarantee obligation and corresponding asset are later amortized into guarantee and commitment fee income represents a reduction ofin relation to the commitment obligation based on amortization usingdecrease in the actual prepayment experienceunpaid principal balance on the underlying agricultural real estate mortgage and Rural Utilities loans.
See Note 2(j)2(h) for Farmer Mac's policy for estimating probable losses for LTSPCs and Note 12 for more information on the accounting for LTSPCs.
(n) Fair Value Measurement
153
| |
(p) | Fair Value Measurement |
Farmer Mac defines fair value asis the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes adate. In determining fair value, Farmer Mac uses various valuation approaches, including market and income based approaches. When available, the fair value of Farmer Mac's financial instruments is based on quoted market prices, valuation techniques that use observable market-based inputs, or unobservable inputs that are corroborated by market data. Pricing information obtained from third parties is internally validated for reasonableness before use in the consolidated financial statements.
Fair value measurements related to financial instruments that are reported at fair value in the consolidated financial statements each period are referred to as recurring fair value measurements. Fair value measurements related to financial instruments that are not reported at fair value each period but are subject to fair value adjustments in certain circumstances are referred to as nonrecurring fair value measurements.
Fair Value Classification and Transfers
The fair value hierarchy that ranks the quality and reliability of the inputs to valuation techniquesinformation used to measuredetermine fair value.values. The hierarchy gives highest rankpriority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest rankpriority to unobservable inputs. The following three levels are used to classify fair value measurements:
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 Quoted prices in markets that are not active or financial instruments for which all significant inputs (levelare observable, either directly or indirectly.
Level 3 measurements).Prices or valuations that require unobservable inputs that are significant to the fair value measurement.
Farmer Mac performs a detailed analysis of the assets and liabilities carried at fair value to determine the appropriate level based on the transparency of the inputs used in the valuation techniques. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Farmer Mac's assessment of the significance of thea particular input to the fair value measurement of an instrument requires judgment and considersconsideration of factors specific to the instrument. While Farmer Mac believes its valuation methods are appropriate and consistent with those of other market participants, using different methodologies or assumptions to
determine fair value could result in a materially different estimate of fair value for some financial instrument. Bothinstruments.
The following is a description of the fair value techniques used for instruments measured at fair value as well as the general classification of those instruments under the valuation hierarchy described above.
Recurring Fair Value Measurements and Classification
Available-for-Sale and Trading Investment Securities
The fair value of investments in U.S. Treasuries is based on unadjusted quoted prices in active markets. Farmer Mac classifies these fair value measurements as "Level 1."
For a significant portion of Farmer Mac's investment portfolio, including most asset-backed securities, senior agency debt securities, and Government/GSE guaranteed mortgage-backed securities, fair value is primarily determined using a reputable and nationally recognized third-party pricing service. The prices obtained are non-binding and generally representative of recent market trades. The fair value of certain asset-backed and Government guaranteed mortgage-backed securities are estimated based on quotations from brokers or dealers. Farmer Mac corroborates its primary valuation source by obtaining a secondary price from another independent third-party pricing service. Farmer Mac classifies these fair value measurements as "Level 2."
For certain investment securities that are thinly traded or not quoted, Farmer Mac estimates fair value using internally-developed models that employ a discounted cash flow approach. Farmer Mac maximizes the use of observable market data, including prices of financial instruments with similar maturities and unobservable inputs maycharacteristics, interest rate yield curves, measures of volatility, and prepayment rates. Farmer Mac generally considers a market to be used to determinethinly traded or not quoted if the following conditions exist: (1) there are few transactions for the financial instruments; (2) the prices in the market are not current; (3) the price quotes vary significantly either over time or among independent pricing services or dealers; or (4) there is limited availability of public market information. Farmer Mac classifies these fair value measurements as "Level 3."
Available-for-Sale and Trading Farmer Mac Guaranteed Securities and USDA Securities
Farmer Mac estimates the fair value of its Farmer Mac Guaranteed Securities and USDA Securities by discounting the projected cash flows of these instruments at projected interest rates. The fair values are based on the present value of expected cash flows using management's best estimate of certain key assumptions, which include prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. Farmer Mac classifies these fair value measurements as Level 3 because there is limited market activity and therefore little or no price transparency. On a sample basis, Farmer Mac corroborates the fair value of its Farmer Mac Guaranteed Securities and USDA Securities by obtaining a secondary valuation from an independent third-party service.
Financial Derivatives
The fair value of exchange-traded U.S. Treasury futures is based on unadjusted quoted prices for identical financial instruments. Farmer Mac classifies these fair value measurements as Level 1.
Farmer Mac's derivative portfolio consists primarily of interest rate swaps and forward sales contracts on the debt of other GSEs. Farmer Mac estimates the fair value of these financial instruments thatprimarily based upon the counterparty valuations. Farmer Mac has classified withininternally values its derivative portfolio using a discounted cash flow valuation technique and obtains a secondary valuation for certain interest rate swaps to corroborate the level 3 category. As a result,counterparty valuations. Farmer Mac also regularly reviews the unrealized gains and losses for assets and liabilities withincounterparty valuations as part of the level 3 category may include changes incollateral exchange process. Farmer Mac classifies these fair value that were attributable to both observable (e.g., changes in marketmeasurements as Level 2.
Certain basis swaps are non-standard interest rates)rate swap structures and are therefore internally modeled using significant assumptions and unobservable (e.g., changesinputs, resulting in projectedLevel 3 classification. Farmer Mac uses a discounted cash flow valuation technique, using management's best estimate of certain key assumptions, which include prepayment rates) inputs. speeds, forward yield curves, and discount rates commensurate with the risks involved.
See Note 13 for more information regarding fair value measurement.
| |
(q) | Consolidation of Variable Interest Entities |
(o)Consolidation of Variable Interest Entities
Farmer Mac has interests in various entities that are considered to be VIEs. These interests include investments in securities issued by VIEs, such as Farmer Mac agricultural mortgage-backed securities created pursuant to Farmer Mac's securitization transactions and mortgage and asset-backed trusts that Farmer Mac did not create. The consolidation model uses a qualitative evaluation that requires consolidation of an entity when the reporting enterprise both: (1) has the power to direct matters which significantly impact the activities and success of the entity, and (2) has exposure to benefits and/or losses that could potentially be significant to the entity. The reporting enterprise that meets both these conditions is deemed the primary beneficiary of the VIE. Upon consolidation of a VIE, Farmer Mac accounts for the incremental assets and liabilities initially at their carrying amounts.
The VIEs in which Farmer Mac has a variable interest are limited to securitization trusts. The major factor in determining if Farmer Mac is the primary beneficiary is whether Farmer Mac has the power to direct the activities of the trust that potentially have the most significant impact on the economic performance of the trust. Generally, the ability to make decisions regarding default mitigation is evidence of that power. Farmer Mac determined that it is the primary beneficiary for the securitization trusts related to most Farm & Ranch and all Rural Utilities securitization transactions because of its rights as guarantor under both programs to control the default mitigation activities of the trusts. For certain securitization trusts created when loans subject to LTSPCs were converted to Farm & Ranch Guaranteed Securities, Farmer Mac determined that it was not the primary beneficiary since the power to make decisions regarding default mitigation was shared among unrelated parties. For these trusts, the shared power provisions are substantive with respect to decision-making power and relate to the same activity (i.e., default mitigation). For similar securitization transactions where the power to make decisions regarding default mitigation was shared with a related party, Farmer Mac determined that it was the primary beneficiary because the applicable accounting guidance does not permit parties within a related party group to conclude that the power is shared. In the event that a related party status changes, consolidation or deconsolidation of these securitization trusts could occur.
For those trusts that Farmer Mac is the primary beneficiary, the assets and liabilities are presented on the consolidated balance sheets as "Loans held for investment in consolidated trusts, at amortized cost" and
"Debt "Debt securities of consolidated trusts held by third parties," respectively. These assets can only be used to satisfy the obligations of the related trust.
For those trusts in which Farmer Mac has a variable interest but is not the primary beneficiary, Farmer Mac's interests are presented as either "Farmer Mac Guaranteed Securities," "USDA Securities," or "Investment securities" on the consolidated balance sheets. Farmer Mac's involvement in VIEs classified as Farmer Mac Guaranteed Securities or USDA Securities include securitization trusts under the USDA Guarantees line of business and certain trusts related to AgVantage securities.business. In the case of USDA guaranteed trusts, Farmer Mac is not determined to be the primary beneficiary because it does not have the decision-making power over default mitigation activities. Based on the USDA's program authority over the servicing and default mitigation activities of the USDA guaranteed portions of loans, Farmer Mac believes that the USDA has the power to direct the activities that most significantly impact the trust's economic performance. Farmer Mac does not have exposure to losses that could be significant to the trust and there are no triggers that would result in Farmer Mac superseding the USDA's authority with regard to directing the activities of the trust. For the AgVantage trusts, Farmer Mac currently does not have the power to direct the activities that have the most significant economic impact to the trust unless, as guarantor, there is a default by the issuer of the trust securities. Should there be a default, Farmer Mac would reassess whether it is the primary beneficiary of those trusts. The amounts disclosed in the tables below represent Farmer Mac's holdings of a portion of the beneficial interests issued by these AgVantage Trusts. For VIEs classified as investment securities, which include auction-rate certificates, asset-backed securities, and government-sponsored enterprise ("GSE")-guaranteed guaranteed mortgage-backed securities, Farmer Mac is determined not to be the primary beneficiary because of the lack of voting rights or other powers to direct the activities of the trust. The following tables present, by line of business, details about the consolidation of VIEs:
The following tables present, by line of business, details about the consolidation of VIEs:
Table 2.52.4
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidation of Variable Interest Entities |
| As of December 31, 2020 |
| Farm & Ranch | | USDA Guarantees | | | | | | Corporate | | Total |
| (in thousands) |
| On-Balance Sheet: | | | | | | | | | | | |
| Consolidated VIEs: | | | | | | | | | | | |
| Loans held for investment in consolidated trusts, at amortized cost | $ | 1,287,045 | | | $ | 0 | | | | | | | $ | 0 | | | $ | 1,287,045 | |
Debt securities of consolidated trusts held by third parties (1) | 1,323,786 | | | 0 | | | | | | | 0 | | | 1,323,786 | |
| Unconsolidated VIEs: | | | | | | | | | | | |
| Farmer Mac Guaranteed Securities: | | | | | | | | | | | |
Carrying value (2) | 0 | | | 34,537 | | | | | | | 0 | | | 34,537 | |
Maximum exposure to loss (3) | 0 | | | 34,456 | | | | | | | 0 | | | 34,456 | |
| Investment securities: | | | | | | | | | | | |
Carrying value (4) | 0 | | | 0 | | | | | | | 1,918,672 | | | 1,918,672 | |
Maximum exposure to loss (3) (4) | 0 | | | 0 | | | | | | | 1,909,535 | | | 1,909,535 | |
| Off-Balance Sheet: | | | | | | | | | | | |
| Unconsolidated VIEs: | | | | | | | | | | | |
| Farmer Mac Guaranteed Securities: | | | | | | | | | | | |
Maximum exposure to loss (3) (5) | 79,312 | | | 299,298 | | | | | | | 0 | | | 378,610 | |
(1)Includes borrower remittances of $36.7 million. The borrower remittances had not been passed through to third party investors as of December 31, 2020.
(2)Includes $0.1 million of unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees line of business.
(3)Farmer Mac uses unpaid principal balance and outstanding face amount of investment securities to represent maximum exposure to loss.
(4)Includes auction-rate certificates, asset-backed securities, and government-sponsored enterprise ("GSE")-guaranteed mortgage-backed securities.
(5)The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Consolidation of Variable Interest Entities |
| | As of December 31, 2017 |
| | Farm & Ranch | | USDA Guarantees | | Rural Utilities | | Institutional Credit | | Corporate | | Total |
| | (in thousands) |
| On-Balance Sheet: | | | | | | | | | | | |
| Consolidated VIEs: | | | | | | | | | | | |
| Loans held for investment in consolidated trusts, at amortized cost | $ | 1,399,827 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,399,827 |
|
Debt securities of consolidated trusts held by third parties (1) | 1,404,945 |
| | — |
| | — |
| | — |
| | — |
| | 1,404,945 |
|
| Unconsolidated VIEs: | | | | | | | | | | | |
| Farmer Mac Guaranteed Securities: | | | | | | | | | | | |
Carrying value (2) | — |
| | 30,300 |
| | — |
| | — |
| | — |
| | 30,300 |
|
Maximum exposure to loss (3) | — |
| | 29,980 |
| | — |
| | — |
| | — |
| | 29,980 |
|
| Investment securities: | | | | | | | | | | | |
Carrying value (4) | — |
| | — |
| | — |
| | — |
| | 783,964 |
| | 783,964 |
|
Maximum exposure to loss (3) (4) | — |
| | — |
| | — |
| | — |
| | 783,916 |
| | 783,916 |
|
| Off-Balance Sheet: | | | | | | | | | | | |
| Unconsolidated VIEs: | | | | | | | | | | | |
| Farmer Mac Guaranteed Securities: | | | | | | | | | | | |
Maximum exposure to loss (3) (5) | 333,511 |
| | 254,217 |
| | — |
| | — |
| | — |
| | 587,728 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidation of Variable Interest Entities |
| As of December 31, 2019 |
| Farm & Ranch | | USDA Guarantees | | | | | | Corporate | | Total |
| (in thousands) |
| On-Balance Sheet: | | | | | | | | | | | |
| Consolidated VIEs: | | | | | | | | | | | |
| Loans held for investment in consolidated trusts, at amortized cost | $ | 1,600,917 | | | $ | 0 | | | | | | | $ | 0 | | | $ | 1,600,917 | |
Debt securities of consolidated trusts held by third parties (1) | 1,616,504 | | | 0 | | | | | | | 0 | | | 1,616,504 | |
| Unconsolidated VIEs: | | | | | | | | | | | |
| Farmer Mac Guaranteed Securities: | | | | | | | | | | | |
Carrying value (2) | 0 | | | 32,041 | | | | | | | 0 | | | 32,041 | |
Maximum exposure to loss (3) | 0 | | | 31,887 | | | | | | | 0 | | | 31,887 | |
| Investment securities: | | | | | | | | | | | |
Carrying value (4) | 0 | | | 0 | | | | | | | 1,117,203 | | | 1,117,203 | |
Maximum exposure to loss (3) (4) | 0 | | | 0 | | | | | | | 1,120,765 | | | 1,120,765 | |
| Off-Balance Sheet: | | | | | | | | | | | |
| Unconsolidated VIEs: | | | | | | | | | | | |
| Farmer Mac Guaranteed Securities: | | | | | | | | | | | |
Maximum exposure to loss (3) (5) | 107,322 | | | 389,216 | | | | | | | 0 | | | 496,538 | |
(1)Includes borrower remittances of $15.6 million. The borrower remittances had not been passed through to third party investors as of December 31, 2019.
(2)Includes $0.2 million of unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees line of business.
(3)Farmer Mac uses unpaid principal balance and outstanding face amount of investment securities to represent maximum exposure to loss.
(4)Includes auction-rate certificates, asset-backed securities, and government-sponsored enterprise ("GSE")-guaranteed mortgage-backed securities.
(5)The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.
(p)New Accounting Standards
Recently Adopted Accounting Guidance
| | | | | | | | | | | |
| Standard | Description | Date of Adoption | Effect on Consolidated Financial Statements |
(1)ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
| Includes borrower remittances of $5.1 million.This Update required entities to measure all expected credit losses for financial assets held at amortized cost at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts, as well as requiring entities to use forward-looking information to form their credit loss estimates. | January 1, 2020 | In 2020 Farmer Mac adopted the new guidance. The borrower remittances had not been passed throughcumulative-effect adjustment to third party investorsretained earnings as of December 31, 2017. |
| January 1, 2020 reflected application of the new guidance and did not have a material effect on Farmer Mac's financial position, results of operations, or cash flows. For more information on the transition adjustment see Table 2.5 below. |
(2)ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
| Includes $0.3 millionThe amendments in this Update shorten the amortization period for certain callable debt securities held at a premium by requiring the premium to be amortized to the earliest call date. There is no required accounting change for securities held at a discount in this Update. | January 1, 2020 | The adoption of unamortized premiums and discounts andthis Update did not have a material effect on Farmer Mac's financial position, results of operations, or cash flows. |
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement | The amendments in this Update modify the disclosure requirements on fair value adjustments related tomeasurements in Topic 820, Fair Value Measurements, including the USDA Guarantees lineconsideration of business. |
| costs and benefits. Certain disclosure requirements were either removed, modified, or added. | January 1, 2020 | The adoption of this Update did not have a material effect on Farmer Mac's financial position, results of operations, or cash flows. |
(3)ASU 2020-04 and 2021-01, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
| The amendments in this Update provide optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting. They provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. | January 1, 2020 | Farmer Mac uses unpaid principal balanceadopted optional expedients specific to discounting transition on a retrospective basis, and outstanding face amountas a result of investment securities to represent maximum exposure to loss.this election, the discounting transition did not have a material effect on Farmer Mac's financial position, results of operations, or cash flows. |
| |
(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. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Consolidation of Variable Interest Entities |
| | As of December 31, 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 | $ | 1,132,966 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,132,966 |
|
Debt securities of consolidated trusts held by third parties (1) | 1,142,704 |
| | — |
| | — |
| | — |
| | — |
| | 1,142,704 |
|
| Unconsolidated VIEs: | | | | | | | | | | | |
| Farmer Mac Guaranteed Securities: | | | | | | | | | | | |
Carrying value (2) | — |
| | 36,042 |
| | — |
| | 30,347 |
| | — |
| | 66,389 |
|
Maximum exposure to loss (3) | — |
| | 35,599 |
| | — |
| | 30,000 |
| | — |
| | 65,599 |
|
| Investment securities: | | | | | | | | | | | |
Carrying value (4) | — |
| | — |
| | — |
| | — |
| | 827,874 |
| | 827,874 |
|
Maximum exposure to loss (3) (4) | — |
| | — |
| | — |
| | — |
| | 825,909 |
| | 825,909 |
|
| Off-Balance Sheet: | | | | | | | | | | | |
| Unconsolidated VIEs: | | | | | | | | | | | |
| Farmer Mac Guaranteed Securities: | | | | | | | | | | | |
Maximum exposure to loss (3) (5) | 415,441 |
| | 103,976 |
| | — |
| | 970,000 |
| | — |
| | 1,489,417 |
|
| |
(1)
| Includes borrower remittances of $9.7 million, which have not been passed through to third party investors as of December 31, 2016. |
| |
(2)
| Includes $0.4 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 $0.3 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. |
(r) New Accounting Standards
In March 2016,The following table presents the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," which provides new guidance intended to simplify several aspectsimpact of accounting and presentation for employee share-based payment transactions. The ASU became effective for Farmer Macadopting CECL on January 1, 2017. The adoption of the new guidance had the following effect2020 on Farmer Mac's financial position, results of operations,our allowance and cash flows:retained earnings:
Consolidated Statements of Operations - The ASU requires the recognition of all net tax benefits related to share-based compensation awards in the income tax provision. Previously, these amounts were recognized in additional paid-in capital. Net tax benefits related to share-based compensation awards of $0.9 million were recognized as a reduction to income tax expense for the year ended December 31, 2017 in the consolidated statement of operations. Net tax benefits result from the excess of the tax deduction over the compensation expense recognized under GAAP for share-based compensation awards. That excess arises because the tax deduction is based upon the value of share-based awards upon their exercise (or vesting, in the case of restricted stock units), whereas the compensation expense under GAAP is based upon the value of the share-based awards upon their grant date.
Table 2.5 | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | Transition Adjustment | | January 1, 2020 |
| | (in thousands) |
| Allowance: | | | | | | |
| Farm & Ranch: | | | | | | |
| Loans | | $ | 10,454 | | | $ | (3,909) | | | $ | 6,545 | |
| Long-term standby purchase commitments and guarantees | | 2,164 | | | (148) | | | 2,016 | |
| Rural Utilities: | | | | | | |
| Loans | | 0 | | | 5,378 | | | 5,378 | |
| Long-term standby purchase commitments | | 0 | | | 1,011 | | | 1,011 | |
| Farmer Mac Guaranteed Securities: | | | | | | |
| AgVantage | | 0 | | | 315 | | | 315 | |
| Investment Securities | | 0 | | | 9 | | | 9 | |
| Total Allowance | | $ | 12,618 | | | $ | 2,656 | | | $ | 15,274 | |
| | | | | | |
| Retained Earnings | | $ | 457,047 | | | $ | (2,099) | | | $ | 454,948 | |
The ASU also changed the calculation of diluted earnings per share. GAAP requires the "treasury stock method" to determine the number of dilutive securities in calculating diluted earnings per share. The ASU changed the calculation of "assumed proceeds" under the treasury stock method to exclude the amount of net tax benefits that would have been recognized in additional paid-in capital under the previous accounting standard. This change in the calculation reduces the amount of shares assumed to have been repurchased under the treasury stock method, thus increasing the number of dilutive shares.
Both of these changes in the guidance were applied prospectively beginning January 1, 2017 and for the year ended December 31, 2017. For the year ended December 31, 2017, the change in the recognition of all net tax benefits related to share-based compensation awards in the income tax provision resulted in an increase of $0.08 in basic earnings per share and $0.05 in diluted earnings per share. The change in the guidance for the calculation of diluted earnings per share had an immaterial impact on diluted earnings per share.
Additionally, the ASU allows companies to choose to either include an estimate of forfeitures expected to occur in share-based compensation expense or account for them as they occur. Previously, GAAP required companies to include an estimate of forfeitures expected to occur in their share-based compensations expense. Farmer Mac has elected to account for forfeitures in compensation expense as they occur. The cumulative impact of the change in the treatment of forfeitures was not material for the year ended ended December 31, 2017.
Consolidated Statements of Cash Flows - The ASU requires excess tax benefits from share-based employee awards to be reported within operating activities. Previously, these cash flows were reported within financing activities. Farmer Mac has applied this guidance prospectively, resulting in an increase in net cash provided by operating activities and a corresponding decrease in net cash provided by financing activities of $0.9 million for the year ended December 31, 2017.
The ASU requires employee taxes paid when an employer withholds shares for tax purposes to be reported within financing activities. Under the previous guidance, these cash flows were included in operating activities. These changes were required to be applied on a retrospective basis. As a result, the consolidated statement of cash flows for prior periods was revised, resulting in an increase in net cash provided by operating activities and a decrease in net cash provided by financing activities of $4.1 million and $0.5 million, respectively, for the years ended December 31, 2016 and 2015, compared to previously reported amounts. The amount of employee taxes paid for shares withheld was $2.5 million for the year ended December 31, 2017.
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 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 developing its accounting policy, planning for changes to its loss estimation methodologies and evaluating the impact that the new guidance will have on its consolidated financial statements. That
impact will primarily be from the new requirement to recognize all expected losses rather than just incurred losses as of the reporting date.
In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities," which shortens the amortization period for certain callable debt securities held at a premium by requiring the premium to be amortized to the earliest call date. The ASU does not require an accounting change for securities held at a discount. The new standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. Farmer Mac does not expect that adoption of the new guidance will have a material effect on Farmer Mac's financial position, results of operations, or cash flows.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which amends hedge accounting recognition and presentation requirements to better align a reporting entity's risk management activities and hedge accounting. The new guidance reduces the complexity and simplifies the application of hedge accounting by eliminating the requirement to separately measure and report hedge ineffectiveness and by requiring the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Early adoption of the new guidance is permitted in any interim or annual period after issuance of the ASU. Farmer Mac adopted the new guidance as of January 1, 2018. The adoption of the new guidance did not have a material effect on Farmer Mac's financial position, results of operation, or cash flows.
In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which provides the option for entities to reclassify from accumulated other comprehensive income to retained earnings the stranded tax effects resulting from the Tax Cut and Jobs Act enacted in December 2017. The amount of the reclassification would be the difference between (1) the amount initially recorded in other comprehensive income at the previous federal corporate tax rate (35 percent) and (2) the amount that would have been charged to other comprehensive income at the newly enacted corporate tax rate (21 percent). The new standard is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption of the new guidance is permitted in any interim or annual period for which financial statements have not yet been issued. Farmer Mac elected to adopt the new guidance for the year ended December 31, 2017. This change in accounting guidance resulted in an increase to "Accumulated other comprehensive income, net of tax" and a corresponding decrease to "Retained earnings" of $9.1 million in Farmer Mac's consolidated balance sheets. The adoption of the new guidance did not have an effect on Farmer Mac's results of operation or cash flows.
Certain reclassifications of prior period information were made to conform to the current period presentation.
| |
3. | RELATED PARTY TRANSACTIONS |
3.RELATED PARTY TRANSACTIONS
Farmer Mac considers an entity to be a related party if (1) the entity holds at least 5 percent5% of a class of Farmer Mac voting common stock or (2) the institution has an affiliation with a Farmer Mac director and conducts material business with Farmer Mac. As provided by Farmer Mac's statutory charter, only banks, insurance companies, and other financial institutions or similar entities may hold Farmer Mac's Class A
voting common stock and only institutions of the Farm Credit System may hold Farmer Mac's Class B voting common stock. Farmer Mac's statutory charter also provides that Class A stockholders elect five5members of Farmer Mac's 15-member board of directors and that Class B stockholders elect five5 members of the board of directors. Additionally, in orderFarmer Mac generally requires financial institutions to participate in the Farm & Ranch program, a financial institution must own a requisite amount of Farmer Mac's common stock, based on the size and type of institution.institution, to participate in the Farm & Ranch line of business. As a result of these requirements, Farmer Mac conducts business with related parties in the normal course of Farmer Mac's business. All related party transactions were conducted with terms and conditions comparable to those available to any other participant in Farmer Mac's lines of business not related to Farmer Mac.
Zions FirstBancorporation, National BankAssociation:
Farmer Mac considers Zions FirstBancorporation, National BankAssociation and its affiliates ("Zions") a related party due to the ownership bybecause Zions owns approximately 31.2% of approximately 31.2 percent ofFarmer Mac's Class A voting common stock. The following transactions occurred between Farmer Mac and Zions during 2017, 2016,2020, 2019, and 2015:2018:
Table 3.1
| | | | For the Year Ended December 31, | | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
| | (in thousands) | | (in thousands) |
| Unpaid Principal Balance: | | | | | | Unpaid Principal Balance: | |
| Purchases: | | | | | | Purchases: | | | | | |
| Loans | $ | 126,449 |
| | $ | 153,140 |
| | $ | 178,890 |
| Loans | $ | 177,143 | | | $ | 129,040 | | | $ | 114,719 | |
| USDA Securities | 20,368 |
| | 16,600 |
| | 13,718 |
| USDA Securities | 10,764 | | | 8,875 | | | 19,120 | |
| Sales of Farmer Mac Guaranteed Securities | 128,924 |
| | 273,586 |
| | 255,338 |
| Sales of Farmer Mac Guaranteed Securities | 41,247 | | | 163,134 | | | 68,721 | |
The purchases of loans from Zions under the Farm & Ranch line of business represented approximately 11.2 percent, 15.9 percent,7.1%, 9.5%, and 23.9 percent11.9% of Farm & Ranch loan purchases for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively, and 7.5 percent, 11.2 percent6.2%, 7.6% and 15.2 percent,8.2%, respectively, of total new Farm & Ranch business volume. The purchases of USDA Securities from Zions under the USDA Guarantees line of business represented approximately 3.8 percent, 3.4 percent,1.4%, 2.1%, and 3.6 percent4.2% of purchases in that line of business for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively. Outstanding Farm & Ranch loans, USDA Securities, and AgVantage securities purchased from Zions represented 5.0 percent4.1% and 5.3 percent,4.5%, respectively, of Farmer Mac's outstanding business volume as of December 31, 20172020 and 2016.2019.
Zions retained servicing fees of $11.5$11.8 million, $9.9$12.2 million, and $9.3$11.6 million in 2017, 2016,2020, 2019, and 2015,2018, respectively, for its work as a Farmer Mac servicer.
National Rural Utilities Cooperative Financial Corporation:
Farmer Mac considers the National Rural Utilities Cooperative Financial Corporation ("CFC") a related party due to its ownershipbecause CFC owns approximately 7.9% of approximately 7.9 percent ofFarmer Mac's Class A voting common stock.stock and because a member of Farmer Mac's board of directors has an affiliation with CFC. The following transactions occurred between Farmer Mac and CFC during 2017, 2016,2020, 2019, and 2015:2018:
Table 3.2
| | | Farmer Mac Loan Purchases and Guarantees | Farmer Mac Loan Purchases and Guarantees | Farmer Mac Loan Purchases and Guarantees |
| | For the Year Ended December 31, | | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
| | (in thousands) | | (in thousands) |
| Unpaid Principal Balance: | | | | | | Unpaid Principal Balance: | | | | |
| Loans | $ | 137,341 |
| | $ | 50,491 |
| | $ | 108,337 |
| Loans | $ | 272,943 | | | $ | 85,000 | | | $ | 11,645 | |
| Off-balance sheet revolving line of credit | | Off-balance sheet revolving line of credit | 19,500 | | | 0 | | | 0 | |
| On-balance sheet AgVantage Securities | 350,000 |
| | 250,000 |
| | 380,000 |
| On-balance sheet AgVantage Securities | 250,000 | | | 575,000 | | | 675,000 | |
| Off-balance sheet revolving floating rate AgVantage facility | — |
| | — |
| | 300,000 |
| Off-balance sheet revolving floating rate AgVantage facility | 0 | | | 0 | | | 300,000 | |
| LTSPCs | — |
| | 441,404 |
| | 522,262 |
| |
| | Total purchases and guarantees | $ | 487,341 |
| | $ | 741,895 |
| | $ | 1,310,599 |
| Total purchases and guarantees | $ | 542,443 | | | $ | 660,000 | | | $ | 986,645 | |
The transactions with CFC represented 100 percent36.7% of Farmer Mac's volume of loan purchases and LTSPC transactionspurchase volume under the Rural Utilities line of business for 2017, 2016,2020, compared to 9.8% of Farmer Mac's loan purchase volume for 2019 and 2015,100% for 2018. These transactions represented 14.7 percent, 11.9 percent,19.2%, 25.5%, and 65.2 percent29.5% of AgVantage securities volume under the Institutional Credit line of business for 2017, 2016,2020, 2019, and 2015,2018, respectively, and represented 10.3 percent, 16.7 percent,9.5%, 12.5%, and 40.6 percent19.1% of total purchases, guarantees, and LTSPCs for 2017, 2016,2020, 2019, and 2015,2018, respectively. Of Farmer Mac's total outstanding business volume as of December 31, 20172020 and 2016,2019, Rural Utilities loans, loans under LTSPCs, and AgVantage securities issued by CFC represented 24.6 percent19.2% and 25.7 percent,21.2%, respectively. For the years ended December 31, 2017, 2016, and 2015, Farmer Mac earned guarantee fees of $0.1 million.
Farmer Mac had interest receivable of $5.2$5.3 million and $3.2$9.2 million as of December 31, 20172020 and 2016,2019, respectively, and earned interest income of $43.9$63.1 million, $27.6$97.3 million, and $15.9$76.8 million during 2017, 2016,2020, 2019, and 2015,2018, respectively, related to its AgVantage transactions with CFC.
As of both December 31, 20172020 and 20162019, Farmer Mac had $0.2$0.1 million of commitment fees receivable from CFC and earned commitment fees of $2.2$1.3 million, $2.01.7 million, and $0.5$1.9 million, respectively for 2017, 2016,2020, 2019, and 2015.2018.
CFC retained servicing fees of $3.5 million, $3.3 million, $3.2 million and $3.3$3.6 million in 2017, 2016,2020, 2019, and 2015,2018, respectively, for its work as a Farmer Mac central servicer.
CoBank:
Farmer Mac considers CoBank a related party because CoBank owns approximately 32.6% of Farmer Mac's Class B voting common stock and because a member of Farmer Mac's board of directors had an affiliation with CoBank through the end of 2019.
Farmer Mac purchased $416.8 million and $776.4 million of loans and participations from CoBank, under the Rural Utilities line of business in 2020 and 2019, respectively. The transactions with CoBank represented 56.0% and 89.1% of Farmer Mac's loan purchase transactions under the Rural Utilities line of business for 2020 and 2019, respectively. During 2018, Farmer Mac did not do any business with CoBank through any of its lines of business.
CoBank retained servicing fees of $2.3 million and $1.2 million in 2020 and 2019, respectively, for its work as a Farmer Mac central servicer. During 2018, CoBank was not a Farmer Mac central servicer.
AgFirst Farm Credit Bank:
Farmer Mac has a related party relationship withconsiders AgFirst Farm Credit Bank ("AgFirst") resulting froma related party because AgFirst being a holder ofowns approximately 16.8 percent16.8% of Farmer MacMac's Class B voting common stock.
AgFirst entered into $40.0$32.5 million, $36.4$26.7 million, and $28.5$26.6 million of LTSPC transactions in 2017, 2016,2020, 2019, and 2015,2018, respectively, and the aggregate balance of LTSPCs outstanding as of December 31, 20172020 and 20162019 was $353.8$331.2 millionand$331.3 $332.4 million, respectively. In each of 2020, 2019, and 2018, Farmer Mac received from AgFirst $1.1 million, $1.1 million, and $1.2 million in commitment fees in 2017, 2016, and 2015, respectively,from AgFirst, and had $0.1 million of commitment fees receivable as of both December 31, 20172020 and 2016.2019.
AgFirst owns certain securities backed by rural housing loans. Farmer Mac guarantees the last ten percent of losses (based on the original principal balance at the time of pooling) from each loan in the pool
backing those securities. As of December 31, 20172020 and 2016,2019, the outstanding balance of those securities
owned by AgFirst was $11.5$5.5 million and $19.7$7.0 million, respectively. Farmer Mac received guarantee fees of $38,000$25,000, $45,000,29,000, and $0.1 million$33,000 in 2017, 2016,2020, 2019, and 2015,2018, respectively, on those securities.
Farm Credit Bank of Texas:
Farmer Mac has a related party relationship withconsiders Farm Credit Bank of Texas resulting froma related party because the bank being a holder ofowns approximately 7.7 percent7.7% of Farmer MacMac's Class B voting common stock and because a member of Farmer Mac's board of directors has an affiliation with that entity.stock. Farmer Mac received from Farm Credit Bank of Texas commitment fees of $1.0$1.2 million, $1.1 million, and $0.7$1.0 million in 2017, 2016,2020, 2019, and 2015,2018, respectively. The aggregate amount of LTSPCs outstanding with Farm Credit Bank of Texas as of December 31, 20172020 and 20162019 was $250.3$304.9 million and $237.9$270.3 million, respectively. In 2017, 2016,2020, 2019, and 2015,2018, Farm Credit Bank of Texas retained $0.2$0.1 million, $0.3$0.1 million, and $0.3$0.2 million, respectively, in servicing fees for its work as a Farmer Mac central servicer.
Other Related Party Transactions:
Farmer Mac purchased $28.5 million, $24.7 million, and $21.1 million in loans from First Dakota National Bank in 2017, 2016, and 2015, respectively. Farmer Mac entered into $0.4 million, $0.0 million, and $7.8 million of new LTSPCs in 2017, 2016, and 2015, respectively, with First Dakota National Bank. First Dakota National Bank retained servicing fees of $1.2 million, $1.1 million, and $1.0 million in 2017, 2016, and 2015, respectively, for its work as a Farmer Mac servicer. Farmer Mac purchased $5.4 million, $1.3 million, and $2.1 million in USDA Securities fromconsiders Bath State Bank in 2017, 2016, and 2015, respectively. These institutions had aFarm Credit of Florida related party relationship with Farmer Macparties because a member of Farmer Mac's board of directors is affiliated with each of those entities. Farmer Mac purchased $9.2 million, $4.0 million, and $2.0 million in USDA Securities from Bath State Bank in 2020, 2019, and 2018, respectively.
Farmer Mac owned $70.0purchased $0.2 million of subordinated debt issued by CoBank asFarm & Ranch loans from Farm Credit of December 31, 2016. During 2017, the subordinated debt was called and redeemed by CoBank.Florida in 2020. Farmer Mac has a related party relationship with CoBank because CoBank is a major holder (32.6 percent)did 0t purchase any loans from Farm Credit of Farmer Mac Class B voting common stock and because a member of Farmer Mac's board of directors has an affiliation with that entity.Florida in 2019 or 2018.
4.INVESTMENT SECURITIES
162
The following tables set forth information about Farmer Mac's investment securities as of December 31, 20172020 and 2016:December 31, 2019:
Table 4.1
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 |
| Amount Outstanding | | Unamortized Premium/(Discount) | | Amortized Cost(1) | | Allowance for losses(2) | | Unrealized
Gains | | Unrealized
Losses | | Fair Value |
| | (in thousands) |
| Available-for-sale: | | | | | | | | | | | | | |
| Floating rate auction-rate certificates backed by Government guaranteed student loans | $ | 19,700 | | | $ | 0 | | | $ | 19,700 | | | $ | (36) | | | $ | 0 | | | $ | (493) | | | $ | 19,171 | |
| Floating rate asset-backed securities | 6,232 | | | 0 | | | 6,232 | | | 0 | | | 0 | | | (1) | | | 6,231 | |
| | | | | | | | | | | | | |
| Floating rate Government/GSE guaranteed mortgage-backed securities | 2,350,963 | | | (44) | | | 2,350,919 | | | 0 | | | 12,150 | | | (3,043) | | | 2,360,026 | |
| Fixed rate GSE guaranteed mortgage-backed securities | 279 | | | 0 | | | 279 | | | 0 | | | 34 | | | 0 | | | 313 | |
| Fixed rate U.S. Treasuries | 1,449,408 | | | 17,128 | | | 1,466,536 | | | 0 | | | 1,458 | | | (43) | | | 1,467,951 | |
| Total available-for-sale | 3,826,582 | | | 17,084 | | | 3,843,666 | | | (36) | | | 13,642 | | | (3,580) | | | 3,853,692 | |
| Held-to-maturity: | | | | | | | | | | | | | |
Floating rate Government/GSE guaranteed mortgage-backed securities(3) | 45,032 | | | 0 | | | 45,032 | | | 0 | | | 1,201 | | | 0 | | | 46,233 | |
| Total investment securities | $ | 3,871,614 | | | $ | 17,084 | | | $ | 3,888,698 | | | $ | (36) | | | $ | 14,843 | | | $ | (3,580) | | | $ | 3,899,925 | |
(1)Amounts presented exclude $9.0 million of accrued interest receivable on investment securities as of December 31, 2020.
(2)Represents the amount of impairment that has resulted from credit-related factors, and therefore was recognized in the consolidated statement of operations as a provision for losses. Amount excludes unrealized losses relating to non-credit factors.
(3)The held-to-maturity investment securities had a weighted average yield of 1.5% as of December 31, 2020.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 |
| | Amount Outstanding | | Unamortized Premium/(Discount) | | Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair Value |
| | (in thousands) |
| Available-for-sale: | | | | | | | | | | | |
| Floating rate auction-rate certificates backed by Government guaranteed student loans | $ | 19,700 |
| | $ | — |
| | $ | 19,700 |
| | $ | — |
| | $ | (886 | ) | | $ | 18,814 |
|
| Floating rate asset-backed securities | 34,462 |
| | (154 | ) | | 34,308 |
| | 22 |
| | (120 | ) | | 34,210 |
|
| Floating rate Government/GSE guaranteed mortgage-backed securities | 1,289,123 |
| | 2,217 |
| | 1,291,340 |
| | 2,215 |
| | (3,368 | ) | | 1,290,187 |
|
Fixed rate GSE guaranteed mortgage-backed securities(1) | 451 |
| | 2,138 |
| | 2,589 |
| | 2,230 |
| | — |
| | 4,819 |
|
| Fixed rate senior agency debt | 100,000 |
| | — |
| | 100,000 |
| | — |
| | (49 | ) | | 99,951 |
|
| Fixed rate U.S. Treasuries | 770,852 |
| | (1,836 | ) | | 769,016 |
| | — |
| | (1,592 | ) | | 767,424 |
|
| Total available-for-sale | 2,214,588 |
| | 2,365 |
| | 2,216,953 |
| | 4,467 |
| | (6,015 | ) | | 2,215,405 |
|
| Held-to-maturity: | | | | | | | | | | | |
| Fixed rate Government/GSE guaranteed mortgage-backed securities | 45,032 |
| | — |
| | 45,032 |
| | 532 |
| | — |
| | 45,564 |
|
| Total investment securities | $ | 2,259,620 |
| | $ | 2,365 |
| | $ | 2,261,985 |
| | $ | 4,999 |
| | $ | (6,015 | ) | | $ | 2,260,969 |
|
| |
(1)
| Fair value includes $4.3 million of an interest-only security with a notional amount of $143.7 million. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| Amount Outstanding | | Unamortized Premium/(Discount) | | Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair Value |
| | (in thousands) |
| Available-for-sale: | | | | | | | | | | | |
| Floating rate auction-rate certificates backed by Government guaranteed student loans | $ | 19,700 | | | $ | 0 | | | $ | 19,700 | | | $ | 0 | | | $ | (788) | | | $ | 18,912 | |
| Floating rate asset-backed securities | 11,092 | | | 0 | | | 11,092 | | | 0 | | | (7) | | | 11,085 | |
| Floating rate Government/GSE guaranteed mortgage-backed securities | 1,633,731 | | | 1,174 | | | 1,634,905 | | | 2,414 | | | (4,736) | | | 1,632,583 | |
| Fixed rate GSE guaranteed mortgage-backed securities | 315 | | | 0 | | | 315 | | | 25 | | | 0 | | | 340 | |
| Fixed rate U.S. Treasuries | 1,295,210 | | | 208 | | | 1,295,418 | | | 1,520 | | | (15) | | | 1,296,923 | |
| Total available-for-sale | 2,960,048 | | | 1,382 | | | 2,961,430 | | | 3,959 | | | (5,546) | | | 2,959,843 | |
| Held-to-maturity: | | | | | | | | | | | |
Floating rate Government/GSE guaranteed mortgage-backed securities(1) | 45,032 | | | 0 | | | 45,032 | | | 953 | | | 0 | | | 45,985 | |
| Total investment securities | $ | 3,005,080 | | | $ | 1,382 | | | $ | 3,006,462 | | | $ | 4,912 | | | $ | (5,546) | | | $ | 3,005,828 | |
(1)The held-to-maturity investment securities had a weighted average yield of 3.3% as of December 31, 2019. |
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 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 | 44,442 |
| | (202 | ) | | 44,240 |
| | 1 |
| | (390 | ) | | 43,851 |
|
| Floating rate corporate debt securities | 10,000 |
| | — |
| | 10,000 |
| | 41 |
| | — |
| | 10,041 |
|
| Floating rate Government/GSE guaranteed mortgage-backed securities | 1,359,700 |
| | 2,827 |
| | 1,362,527 |
| | 1,768 |
| | (3,266 | ) | | 1,361,029 |
|
Fixed rate GSE guaranteed mortgage-backed securities(1) | 538 |
| | 2,582 |
| | 3,120 |
| | 4,505 |
| | — |
| | 7,625 |
|
| Floating rate GSE subordinated debt | 70,000 |
| | — |
| | 70,000 |
| | — |
| | (3,047 | ) | | 66,953 |
|
| Fixed rate senior agency debt | 187,295 |
| | 106 |
| | 187,401 |
| | — |
| | (268 | ) | | 187,133 |
|
| Fixed rate U.S. Treasuries | 821,619 |
| | 359 |
| | 821,978 |
| | 47 |
| | (536 | ) | | 821,489 |
|
| Total available-for-sale | 2,513,294 |
| | 5,672 |
| | 2,518,966 |
| | 6,362 |
| | (9,477 | ) | | 2,515,851 |
|
| Total investment securities | $ | 2,513,294 |
| | $ | 5,672 |
| | $ | 2,518,966 |
| | $ | 6,362 |
| | $ | (9,477 | ) | | $ | 2,515,851 |
|
| |
(1)
| Fair value includes $7.0 million of an interest-only security with a notional amount of $146.1 million. |
Farmer Mac did not sell any securities from its available-for-sale investment portfolio during the years ended December 31, 2020 or 2018. During the year ended December 31, 2017,2019, Farmer Mac received proceeds of $10.2$12.4 million from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $0.1 million. During the year ended December 31, 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. During the year ended December 31, 2015,
Farmer Mac received proceeds of $83.7 million from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $0.1$0.2 million.
As of December 31, 20172020 and 2016,December 31, 2019, unrealized losses on available-for-sale investment securities were as follows:
Table 4.2
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 |
| | Available-for-Sale Securities |
| Unrealized loss position for
less than 12 months | | Unrealized loss position for
more than 12 months |
| Fair Value | | Unrealized
Loss | | Fair Value | | Unrealized
Loss |
| | (dollars in thousands) |
| Floating rate auction-rate certificates backed by Government guaranteed student loans | $ | 0 | | | $ | 0 | | | $ | 19,171 | | | $ | (493) | |
| Floating rate asset-backed securities | 0 | | | 0 | | | 6,231 | | | (1) | |
| Floating rate Government/GSE guaranteed mortgage-backed securities | 172,842 | | | (593) | | | 324,423 | | | (2,450) | |
| | | | | | | |
| Fixed rate U.S. Treasuries | 364,320 | | | (43) | | | 0 | | | 0 | |
| | | | | | | |
| Total | $ | 537,162 | | | $ | (636) | | | $ | 349,825 | | | $ | (2,944) | |
| | | | | | | |
| Number of securities in loss position | | | 27 | | | | | 62 | |
| | | | As of December 31, 2017 | | As of December 31, 2019 |
| | Available-for-Sale Securities | | Available-for-Sale Securities |
| | Unrealized loss position for
less than 12 months | | Unrealized loss position for
more than 12 months | | Unrealized loss position for
less than 12 months | | Unrealized loss position for
more than 12 months |
| | Fair Value | | Unrealized
Loss | | Fair Value | | Unrealized
Loss | | Fair Value | | Unrealized
Loss | | Fair Value | | Unrealized
Loss |
| | (in thousands) | | (dollars in thousands) |
| Floating rate auction-rate certificates backed by Government guaranteed student loans | $ | — |
| | $ | — |
| | $ | 18,814 |
| | $ | (886 | ) | Floating rate auction-rate certificates backed by Government guaranteed student loans | $ | 0 | | | $ | 0 | | | $ | 18,912 | | | $ | (788) | |
| Floating rate asset-backed securities | — |
| | — |
| | 23,145 |
| | (120 | ) | Floating rate asset-backed securities | 2,583 | | | (1) | | | 8,502 | | | (6) | |
| Floating rate Government/GSE guaranteed mortgage-backed securities | 292,522 |
| | (2,337 | ) | | 221,641 |
| | (1,031 | ) | Floating rate Government/GSE guaranteed mortgage-backed securities | 841,993 | | | (2,244) | | | 436,621 | | | (2,492) | |
| Fixed rate U.S. Treasuries | 742,442 |
| | (1,572 | ) | | 24,983 |
| | (20 | ) | Fixed rate U.S. Treasuries | 35,107 | | | (15) | | | 0 | | | 0 | |
| Fixed rate senior agency debt | — |
| | — |
| | 99,951 |
| | (49 | ) | |
| Total | $ | 1,034,964 |
| | $ | (3,909 | ) | | $ | 388,534 |
| | $ | (2,106 | ) | Total | $ | 879,683 | | | $ | (2,260) | | | $ | 464,035 | | | $ | (3,286) | |
| | Number of securities in loss position | | Number of securities in loss position | | 57 | | | 62 | |
|
| | | | | | | | | | | | | | | |
| | As of December 31, 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 | 4,654 |
| | (10 | ) | | 38,077 |
| | (380 | ) |
| Floating rate Government/GSE guaranteed mortgage-backed securities | 384,586 |
| | (1,030 | ) | | 442,041 |
| | (2,236 | ) |
| Floating rate GSE subordinated debt | — |
| | — |
| | 66,953 |
| | (3,047 | ) |
| Fixed rate U.S. Treasuries | 732,371 |
| | (536 | ) | | — |
| | — |
|
| Fixed rate senior agency debt | 187,133 |
| | (268 | ) | | — |
| | — |
|
| Total | $ | 1,308,744 |
| | $ | (1,844 | ) | | $ | 564,801 |
| | $ | (7,633 | ) |
The unrealized losses presented above are principally due to a general widening of market spreads and an increasechanges in the levels of interest rates from the dates of acquisition to December 31, 20172020 and 2016,December 31, 2019, as applicable. The resulting decrease in fair values reflects an increase in the perceived risk by the financial markets related to those securities. As of both December 31, 2017,2020 and December 31, 2019, all of the investment securities in an unrealized loss position either were backed by the full faith and credit of the U.S. government or had credit ratings of at least "AA+." As of December 31, 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-." The unrealized losses were on 91 and 97 individual investment securities as of December 31, 2017 and 2016, respectively.
As of December 31, 2017, 51 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $2.1 million. As of December 31, 2016, 36 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $7.6 million. Securities in unrealized loss positions for 12 months or longer have a fair value as of December 31, 20172020 that is, on average, approximately 99.5 percent99.2% of their amortized cost basis. Farmer Mac believes that all of these unrealized losses are recoverable within a reasonable period of time by way of maturity or changes in credit spreads. Accordingly, Farmer Mac has concluded that none of the unrealized losses on these available-for-sale investment securities are other-than-temporary impairment as of December 31, 2017 and 2016.
As of December 31, 2017, Farmer Mac owned $45.0 million of held-to-maturity investment securities at amortized cost with a fair value of $45.6 million and a weighted average yield of 2.5 percent. Farmer Mac did not own any held-to-maturity investment securities as of December 31, 2016. Farmer Mac did not own any trading investment securities as of December 31, 2017 and 2016.
The amortized cost, fair value, and weighted-average yield of available-for-sale investment securities by remaining contractual maturity as of December 31, 20172020 are set forth below. Asset-backed and mortgage-backed securities are included based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets.
Table 4.3
| | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Available-for-Sale Securities |
| Amortized
Cost | | Fair Value | | Weighted-
Average
Yield |
| | (dollars in thousands) |
| Due within one year | $ | 1,192,119 | | | $ | 1,193,525 | | | 1.97% |
| Due after one year through five years | 622,016 | | | 622,930 | | | 1.30% |
| Due after five years through ten years | 1,157,692 | | | 1,165,188 | | | 0.64% |
| Due after ten years | 871,839 | | | 872,049 | | | 0.68% |
| Total | $ | 3,843,666 | | | $ | 3,853,692 | | | 1.17% |
|
| | | | | | | | | |
| | As of December 31, 2017 |
| | Available-for-Sale Securities |
| | Amortized
Cost | | Fair Value | | Weighted-
Average
Yield |
| | (dollars in thousands) |
| Due within one year | $ | 799,132 |
| | $ | 797,762 |
| | 1.02% |
| Due after one year through five years | 339,562 |
| | 338,157 |
| | 1.78% |
| Due after five years through ten years | 319,231 |
| | 320,961 |
| | 1.87% |
| Due after ten years | 759,028 |
| | 758,525 |
| | 1.93% |
| Total | $ | 2,216,953 |
| | $ | 2,215,405 |
| | 1.57% |
5.FARMER MAC GUARANTEED SECURITIES AND USDA SECURITIES
| |
5. | FARMER MAC GUARANTEED SECURITIES AND USDA SECURITIES |
The following tables set forth information about on-balance sheet Farmer Mac Guaranteed Securities and USDA Securities as of December 31, 20172020 and 2016:December 31, 2019:
Table 5.1
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 |
| Unpaid Principal Balance | | Unamortized Premium/(Discount) | | Amortized Cost(1) | | Allowance for losses(2) | | Unrealized
Gains | | Unrealized
Losses | | Fair Value |
| | (in thousands) |
| Held-to-maturity: | | | | | | | | | | | | | |
| AgVantage | $ | 1,141,430 | | | $ | (55) | | | $ | 1,141,375 | | | $ | (120) | | | $ | 23,986 | | | $ | (61) | | | $ | 1,165,180 | |
| Farmer Mac Guaranteed USDA Securities | 34,456 | | | 81 | | | 34,537 | | | 0 | | | 1,273 | | | 0 | | | 35,810 | |
| Total Farmer Mac Guaranteed Securities | 1,175,886 | | | 26 | | | 1,175,912 | | | (120) | | | 25,259 | | | (61) | | | 1,200,990 | |
| USDA Securities | 2,446,550 | | | 27,076 | | | 2,473,626 | | | 0 | | | 157,748 | | | (560) | | | 2,630,814 | |
| Total held-to-maturity | $ | 3,622,436 | | | $ | 27,102 | | | $ | 3,649,538 | | | $ | (120) | | | $ | 183,007 | | | $ | (621) | | | $ | 3,831,804 | |
| Available-for-sale: | | | | | | | | | | | | | |
| AgVantage | $ | 6,593,518 | | | $ | 1,474 | | | $ | 6,594,992 | | | $ | (310) | | | $ | 368,257 | | | $ | (15,238) | | | $ | 6,947,701 | |
| Trading: | | | | | | | | | | | | | |
USDA Securities(3) | $ | 6,413 | | | $ | 198 | | | $ | 6,611 | | | $ | 0 | | | $ | 84 | | | $ | 0 | | | $ | 6,695 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 |
| | Unpaid Principal Balance | | Unamortized Premium/(Discount) | | Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair Value |
| | (in thousands) |
| Held-to-maturity: | | | | | | | | | | | |
| AgVantage | $ | 2,096,754 |
| | $ | (779 | ) | | $ | 2,095,975 |
| | $ | 2,011 |
| | $ | (11,429 | ) | | $ | 2,086,557 |
|
| Farmer Mac Guaranteed USDA Securities | 29,980 |
| | 319 |
| | 30,299 |
| | 108 |
| | (73 | ) | | 30,334 |
|
| Total Farmer Mac Guaranteed Securities | 2,126,734 |
| | (460 | ) | | 2,126,274 |
| | 2,119 |
| | (11,502 | ) | | 2,116,891 |
|
| USDA Securities | 2,055,050 |
| | 62,800 |
| | 2,117,850 |
| | — |
| | (54,969 | ) | | 2,062,881 |
|
| Total held-to-maturity | $ | 4,181,784 |
| | $ | 62,340 |
| | $ | 4,244,124 |
| | $ | 2,119 |
| | $ | (66,471 | ) | | $ | 4,179,772 |
|
| Available-for-sale: | | | | | | | | | | | |
| AgVantage | $ | 5,496,569 |
| | $ | (182 | ) | | $ | 5,496,387 |
| | $ | 21,838 |
| | $ | (46,311 | ) | | $ | 5,471,914 |
|
| Trading: | | | | | |
| | |
| | |
| | |
|
| USDA Securities | $ | 12,966 |
| | $ | 922 |
| | $ | 13,888 |
| | $ | 28 |
| | $ | (401 | ) | | $ | 13,515 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2016 |
| | Unpaid Principal Balance | | Unamortized Premium/(Discount) | | Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair Value |
| | (in thousands) |
| Held-to-maturity: | | | | | | | | | | | |
| AgVantage | $ | 1,115,465 |
| | $ | (2,276 | ) | | $ | 1,113,189 |
| | $ | 7,187 |
| | $ | (3,175 | ) | | $ | 1,117,201 |
|
| Farmer Mac Guaranteed USDA Securities | 35,599 |
| | 443 |
| | 36,042 |
| | 5 |
| | (239 | ) | | 35,808 |
|
| Total Farmer Mac Guaranteed Securities | 1,151,064 |
| | (1,833 | ) | | 1,149,231 |
| | 7,192 |
| | (3,414 | ) | | 1,153,009 |
|
| USDA Securities | 1,935,440 |
| | 73,785 |
| | 2,009,225 |
| | — |
| | (95,590 | ) | | 1,913,635 |
|
| Total held-to-maturity | $ | 3,086,504 |
| | $ | 71,952 |
| | $ | 3,158,456 |
| | $ | 7,192 |
| | $ | (99,004 | ) | | $ | 3,066,644 |
|
| Available-for-sale: | | | | | | | | | | | |
| AgVantage | $ | 4,889,007 |
| | $ | (103 | ) | | $ | 4,888,904 |
| | $ | 28,715 |
| | $ | (63,934 | ) | | $ | 4,853,685 |
|
| Trading: | | | | | |
| | |
| | |
| | |
|
| USDA Securities | $ | 19,360 |
| | $ | 1,377 |
| | $ | 20,737 |
| | $ | 41 |
| | $ | (390 | ) | | $ | 20,388 |
|
On October 1, 2016, Farmer Mac transferred $2.0 billion of USDA Securities(1)Amounts presented exclude $32.3 million, $44.7 million, and $32.8$0.2 million of Farmer Mac Guaranteed USDA Securities fromaccrued interest receivable on available-for-sale, to held-to-maturity, to reflect Farmer Mac’s positive intent and ability to hold thesetrading securities, until maturity or payoff. Farmer Mac transferred these securities at fair valuerespectively, as of the date of the transfer, which included a cost basis adjustment of unrealized appreciation inDecember 31, 2020.
(2)Represents the amount of $73.1 million for the USDA Securitiesimpairment that has resulted from credit-related factors, and $0.7 million for the Farmer Mac Guaranteed USDA Securities. The accumulated unrealized appreciationtherefore was retained in accumulated other comprehensive incomerecognized in the amountstatement of $73.8 million, before tax. Farmer Mac accountsfinancial operations as a provision for held-to-maturitylosses. Amount excludes unrealized losses relating to non-credit factors.
(3)The trading USDA securities at amortized cost. Both the cost basis adjustment and accumulated unrealized appreciation are amortizedhad a weighted average yield of 5.05% as an adjustment to theof December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| Unpaid Principal Balance | | Unamortized Premium/(Discount) | | Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair Value |
| | (in thousands) |
| Held-to-maturity: | | | | | | | | | | | |
| AgVantage | $ | 1,415,584 | | | $ | (174) | | | $ | 1,415,410 | | | $ | 15,300 | | | $ | (164) | | | $ | 1,430,546 | |
| Farmer Mac Guaranteed USDA Securities | 31,887 | | | 154 | | | 32,041 | | | 839 | | | 0 | | | 32,880 | |
| Total Farmer Mac Guaranteed Securities | 1,447,471 | | | (20) | | | 1,447,451 | | | 16,139 | | | (164) | | | 1,463,426 | |
| USDA Securities | 2,190,671 | | | 41,489 | | | 2,232,160 | | | 54,356 | | | (758) | | | 2,285,758 | |
| Total held-to-maturity | $ | 3,638,142 | | | $ | 41,469 | | | $ | 3,679,611 | | | $ | 70,495 | | | $ | (922) | | | $ | 3,749,184 | |
| Available-for-sale: | | | | | | | | | | | |
| AgVantage | $ | 7,017,095 | | | $ | (124) | | | $ | 7,016,971 | | | $ | 161,316 | | | $ | (35,262) | | | $ | 7,143,025 | |
| Trading: | | | | | | | | | | | |
USDA Securities(1) | $ | 8,400 | | | $ | 479 | | | $ | 8,879 | | | $ | 61 | | | $ | (27) | | | $ | 8,913 | |
(1)The trading USDA securities had a weighted average yield on the held-to-maturity USDA Securities over the remaining term of the transferred securities.5.20% as of December 31, 2019.
As of December 31, 20172020 and 2016,December 31, 2019, unrealized losses on held-to-maturity and available-for-sale on-balance sheet Farmer Mac Guaranteed Securities and USDA Securities were as follows:
Table 5.2
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| | Held-to-Maturity and Available-for-Sale Securities |
| Unrealized loss position for
less than 12 months | | Unrealized loss position for
more than 12 months |
| Fair Value | | Unrealized
Loss | | Fair Value | | Unrealized
Loss |
| | (in thousands) |
| Held-to-maturity: | | | | | | | |
| AgVantage | $ | 49,939 | | | $ | (61) | | | $ | 0 | | | $ | 0 | |
| Farmer Mac Guaranteed USDA Securities | 0 | | | 0 | | | 0 | | | 0 | |
| USDA Securities | 0 | | | 0 | | | 21,061 | | | (560) | |
| Total held-to-maturity | $ | 49,939 | | | $ | (61) | | | $ | 21,061 | | | $ | (560) | |
| | | | | | | |
| Available-for-sale: | | | | | | | |
| AgVantage | $ | 133,703 | | | $ | (231) | | | $ | 981,757 | | | $ | (15,007) | |
|
| | | | | | | | | | | | | | | |
| | As of December 31, 2017 |
| | Held-to-Maturity and Available-for-Sale Securities |
| | Unrealized loss position for
less than 12 months | | Unrealized loss position for
more than 12 months |
| | Fair Value | | Unrealized
Loss | | Fair Value | | Unrealized
Loss |
| | (in thousands) |
| Held-to-maturity: | | | | | | | |
| AgVantage | $ | 1,304,160 |
| | $ | (8,094 | ) | | $ | 351,664 |
| | $ | (3,335 | ) |
| Farmer Mac Guaranteed USDA Securities | 24,721 |
| | (73 | ) | | — |
| | — |
|
| USDA Securities | 451 |
| | (2 | ) | | 2,062,429 |
| | (54,967 | ) |
| Total held-to-maturity | $ | 1,329,332 |
| | $ | (8,169 | ) | | $ | 2,414,093 |
| | $ | (58,302 | ) |
| | | | | | | | |
| Available-for-sale: | | | | | | | |
| AgVantage | $ | 1,273,965 |
| | $ | (8,819 | ) | | $ | 1,759,377 |
| | $ | (37,492 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2019 |
| | Held-to-Maturity and Available-for-Sale Securities |
| Unrealized loss position for
less than 12 months | | Unrealized loss position for
more than 12 months |
| Fair Value | | Unrealized
Loss | | Fair Value | | Unrealized
Loss |
| | (in thousands) |
| Held-to-maturity: | | | | | | | |
| AgVantage | $ | 0 | | | $ | 0 | | | $ | 301,836 | | | $ | (164) | |
| USDA Securities | 0 | | | 0 | | | 27,089 | | | (758) | |
| Total held-to-maturity | $ | 0 | | | $ | 0 | | | $ | 328,925 | | | $ | (922) | |
| | | | | | | |
| Available-for-sale: | | | | | | | |
| AgVantage | $ | 225,239 | | | $ | (2,203) | | | $ | 1,394,802 | | | $ | (33,059) | |
|
| | | | | | | | | | | | | | | |
| | As of December 31, 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) |
| Held-to-maturity: | | | | | | | |
| AgVantage | $ | 358,575 |
| | $ | (3,175 | ) | | $ | — |
| | $ | — |
|
| Farmer Mac Guaranteed USDA Securities | 30,575 |
| | (239 | ) | | — |
| | — |
|
| USDA Securities | 1,816,366 |
| | (95,582 | ) | | 97,270 |
| | (8 | ) |
| Total held-to-maturity | $ | 2,205,516 |
| | $ | (98,996 | ) | | $ | 97,270 |
| | $ | (8 | ) |
| | | | | | | | |
| Available-for-sale: | | | | | | | |
| AgVantage | $ | 982,538 |
| | $ | (18,482 | ) | | $ | 1,131,930 |
| | $ | (45,452 | ) |
The unrealized losses presented above are principally due to higherchanges in interest rates from the date of acquisition to December 31, 20172020 and 2016,December 31, 2019, as applicable. In addition, theThe unrealized losses on the held-to-maturity USDA Securities as of both December 31, 20172020 and 2016December 31, 2019 reflect their increased cost basis resulting from their transfer to held-to-maturity as of October 1, 2016, as described above. 2016.
The credit exposure related to Farmer Mac's USDA Guarantees line of business is covered by the full faith and credit guarantee of the United States. States of America. As of December 31, 2020, Farmer Mac had executed COVID-19 payment deferments on loans with unpaid principal balances of $92.9 million underlying USDA Securities.
The unrealized losses from AgVantage securities were on 3611 and 17 available-for-sale securities as of December 31, 2017.2020 and December 31, 2019, respectively. There were 232 and 4 held-to-maturity AgVantage securities with an unrealized loss as of December 31, 2017. The unrealized losses from AgVantage securities were on 22 available-for-sale securities as of2020 and December 31, 2016. There were 7 unrealized losses from held-to-maturity securities as of December 31, 2016.2019,
respectively. As of December 31, 2017, 162020 and December 31, 2019, 7 and 13 available-for-sale AgVantage securities, respectively, had been in a loss position for more than 12 months with a total unrealized loss of $37.5 million.months.
As of December 31, 2016, 10 available-for-sale AgVantage securities had been in a loss position for more than 12 months with a total unrealized loss of $45.5 million. Farmer Mac has concluded that none of the unrealized losses on its held-to-maturity Farmer Mac Guaranteed Securities and USDA Securities and available-for-sale Farmer Mac Guaranteed Securities are other-than-temporary impairment as of either December 31, 2017 or December 31, 2016. Farmer Mac does not intend to sell these securities, and it is not more likely than not that Farmer Mac will be required to sell the securities before recovery of the amortized cost basis.
During the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, Farmer Mac had no sales of Farmer Mac Guaranteed Securities or USDA Securities and, therefore, Farmer Mac realized no gains or losses from the sale of Farmer Mac Guaranteed Securities and USDA Securities.losses.
The amortized cost, fair value, and weighted-average yield of available-for-sale and held-to-maturity Farmer Mac Guaranteed Securities and USDA Securities by remaining contractual maturity as of December 31, 20172020 are set forth below. The balances presented are based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets.
Table 5.3
| | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Available-for-Sale Securities |
| Amortized Cost(1) | | Fair Value | | Weighted-
Average
Yield |
| | (dollars in thousands) |
| Due within one year | $ | 1,212,051 | | | $ | 1,216,431 | | | 1.52 | % |
| Due after one year through five years | 2,861,186 | | | 2,971,603 | | | 2.41 | % |
| Due after five years through ten years | 1,016,527 | | | 1,092,170 | | | 2.36 | % |
| Due after ten years | 1,505,228 | | | 1,667,497 | | | 2.55 | % |
| Total | $ | 6,594,992 | | | $ | 6,947,701 | | | 2.27 | % |
(1)Amounts presented exclude $32.3 million of accrued interest receivable.
| | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Held-to-Maturity Securities |
| Amortized Cost(1) | | Fair Value | | Weighted-
Average
Yield |
| | (dollars in thousands) |
| Due within one year | $ | 526,374 | | | $ | 529,401 | | | 2.79 | % |
| Due after one year through five years | 683,135 | | | 706,287 | | | 3.12 | % |
| Due after five years through ten years | 255,180 | | | 269,945 | | | 2.89 | % |
| Due after ten years | 2,184,849 | | | 2,326,171 | | | 3.19 | % |
| Total | $ | 3,649,538 | | | $ | 3,831,804 | | | 3.07 | % |
(1)Amounts presented exclude $44.7 million of accrued interest receivable.
6.FINANCIAL DERIVATIVES
|
| | | | | | | | | | |
| | As of December 31, 2017 |
| | Available-for-Sale Securities |
| | Amortized
Cost | | Fair Value | | Weighted-
Average
Yield |
| | (dollars in thousands) |
| Due within one year | $ | 1,181,845 |
| | $ | 1,182,729 |
| | 2.10 | % |
| Due after one year through five years | 2,477,266 |
| | 2,478,433 |
| | 2.27 | % |
| Due after five years through ten years | 814,996 |
| | 812,786 |
| | 2.90 | % |
| Due after ten years | 1,022,280 |
| | 997,966 |
| | 2.14 | % |
| Total | $ | 5,496,387 |
| | $ | 5,471,914 |
| | 2.30 | % |
|
| | | | | | | | | | |
| | As of December 31, 2017 |
| | Held-to-Maturity Securities |
| | Amortized
Cost | | Fair Value | | Weighted-
Average
Yield |
| | (dollars in thousands) |
| Due within one year | $ | 866,294 |
| | $ | 864,819 |
| | 1.73 | % |
| Due after one year through five years | 1,293,467 |
| | 1,284,120 |
| | 2.29 | % |
| Due after five years through ten years | 202,137 |
| | 197,048 |
| | 3.09 | % |
| Due after ten years | 1,882,226 |
| | 1,833,785 |
| | 3.36 | % |
| Total | $ | 4,244,124 |
| | $ | 4,179,772 |
| | 2.68 | % |
As of December 31, 2017, Farmer Mac owned trading USDA Securities with an amortized cost of $13.9 million, a fair value of $13.5 million, and a weighted-average yield of 5.33 percent. As of December 31, 2016, Farmer Mac owned trading USDA Securities with an amortized cost of $20.7 million, a fair value of $20.4 million, and a weighted-average yield of 5.44 percent.
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 changes in a benchmark interest rate (i.e.(e.g., LIBOR). OtherCertain other financial derivatives are designated as cash flow hedges to mitigate the volatility of future interest rate payments on floating rate debt. Certain financial derivatives are not designated in hedge accounting relationships.
Farmer Mac manages the interest rate risk related to loans it has committed to acquire, but has not yet permanently funded, primarily through the use of forward sale contracts on the debt of other GSEs and futures contracts involving U.S. Treasury securities. Farmer Mac uses forward sale contracts on GSE securities to reduce its interest rate exposure to changes in both U.S. Treasury rates and spreads on Farmer Mac debt. The notional amounts of these contracts are determined based onFarmer Mac aims to achieve a duration-matched hedge ratio between the hedged item and the hedge instrument. Gains or losses generated by these hedge transactions are expected to offset changes in funding costs.
All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability. Changes in the fair values of
The following tables summarize information related to Farmer Mac's financial derivatives not designatedon a gross basis without giving consideration to master netting arrangements as cash flow hedges are reported in "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, which are primarily fixed rate AgVantage securities and fixed rate medium-term notes, related to the risk being hedged are also reported in "Gains on financial derivatives and hedging activities" in the consolidated statements of operations. Interest accruals on derivatives designated in fair value hedge accounting relationships are recorded in "Net interest income" in the consolidated statements of operations. For the years ended December 31, 2017, 2016,2020 and 2015, the amount of interest expense recognized on those derivatives was $8.8 million, $16.4 million, and $22.8 million, respectively. For financial derivatives designated in cash flow hedge accounting relationships, the effective portion of the derivative gain/loss is recorded in other comprehensive income and any ineffective portion is recognized immediately in "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 accumulated other comprehensive income are reclassified to "Total interest expense" in conjunction with the recognition of interest expense on the debt. For years ended December 31, 2017, 2016, and 2015, $1.8 million, $2.0 million and $1.2 million, respectively, was reclassified out of accumulated other comprehensive income into interest expense. 2019:
Table 6.1
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 |
| | | | Fair Value | | Weighted-
Average
Pay Rate | | Weighted-
Average Receive Rate | | Weighted-
Average
Forward
Price | | Weighted-
Average
Remaining
Term (in years) |
| | Notional Amount | | Asset | | (Liability) | | | | |
| | (dollars in thousands) |
| Fair value hedges: | | | | | | | | | | | | | |
| Interest rate swaps: | | | | | | | | | | | | | |
| Pay fixed non-callable | $ | 5,463,303 | | | $ | 10,157 | | | $ | (2,585) | | | 2.26% | | 0.21% | | | | 11.95 |
| Receive fixed non-callable | 2,611,029 | | | 2 | | | (8,755) | | | 0.32% | | 1.61% | | | | 2.10 |
| Receive fixed callable | 343,500 | | | 3,108 | | | (4) | | | 0.16% | | 1.78% | | | | 3.16 |
| Cash flow hedges: | | | | | | | | | | | | | |
| Interest rate swaps: | | | | | | | | | | | | | |
| Pay fixed non-callable | 472,000 | | | 2,584 | | | (8,771) | | | 2.04% | | 0.57% | | | | 6.04 |
| No hedge designation: | | | | | | | | | | | | | |
| Interest rate swaps: | | | | | | | | | | | | | |
| Pay fixed non-callable | 339,090 | | | 0 | | | (9,675) | | | 2.38% | | 0.19% | | | | 4.23 |
| Receive fixed non-callable | 2,359,220 | | | 0 | | | 0 | | | 0.16% | | 0.87% | | | | 1.07 |
| Receive fixed callable | 200,000 | | | 1 | | | (12) | | | 0.13% | | 0.15% | | | | 0.72 |
| Basis swaps | 3,628,911 | | | 1,617 | | | (43) | | | 0.18% | | 0.23% | | | | 2.03 |
| Treasury futures | 30,500 | | | 0 | | (82) | | | | | | | 137.81 | | | |
| Credit valuation adjustment | | | (1) | | | 35 | | | | | | | | | |
| Total financial derivatives | $ | 15,447,553 | | | $ | 17,468 | | | $ | (29,892) | | | | | | | | | |
| Collateral (held)/pledged | | | (1,345) | | | 212,263 | | | | | | | | | |
| Net amount | | | $ | 16,123 | | | $ | 182,371 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| | | | Fair Value | | Weighted-
Average
Pay Rate | | Weighted-
Average Receive Rate | | Weighted-
Average
Forward
Price | | Weighted-
Average
Remaining
Term (in years) |
| | Notional Amount | | Asset | | (Liability) | | | | |
| | (dollars in thousands) |
| Fair value hedges: | | | | | | | | | | | | | |
| Interest rate swaps: | | | | | | | | | | | | | |
| Pay fixed non-callable | $ | 4,955,686 | | | $ | 7,163 | | | $ | (3,281) | | | 2.47% | | 1.93% | | | | 11.26 |
| Receive fixed non-callable | 1,413,200 | | | 76 | | | (5,329) | | | 1.88% | | 2.13% | | | | 1.25 |
| Receive fixed callable | 524,000 | | | 476 | | | (772) | | | 1.52% | | 1.91% | | | | 2.83 |
| Cash flow hedges: | | | | | | | | | | | | | |
| Interest rate swaps: | | | | | | | | | | | | | |
| Pay fixed non-callable | 428,000 | | | 1,882 | | | (1,514) | | | 2.36% | | 2.12% | | | | 5.43 |
| No hedge designation: | | | | | | | | | | | | | |
| Interest rate swaps: | | | | | | | | | | | | | |
| Pay fixed non-callable | 342,745 | | | 7 | | | (14,046) | | | 3.55% | | 2.00% | | | | 5.51 |
| Receive fixed non-callable | 3,124,148 | | | 49 | | | (1,637) | | | 1.88% | | 2.06% | | | | 1.66 |
| Receive fixed callable | 525,000 | | | 79 | | | (80) | | | 1.64% | | 1.68% | | | | 0.83 |
| Basis swaps | 2,670,000 | | | 787 | | | (395) | | | 1.86% | | 1.76% | | | | 0.90 |
| Treasury futures | 39,400 | | | 0 | | | (51) | | | | | | | 128.29 | | | |
| Credit valuation adjustment | | | — | | | 63 | | | | | | | | | |
| Total financial derivatives | $ | 14,022,179 | | | $ | 10,519 | | | $ | (27,042) | | | | | | | | | |
| Collateral (held)/pledged | | | (2,685) | | | 132,129 | | | | | | | | | |
| Net amount | | | $ | 7,834 | | | $ | 105,087 | | | | | | | | | |
As of December 31, 2017,2020, Farmer Mac expects to reclassify $0.1$5.3 million after-tax,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 toafter December 31, 2017.2020. During the years ended December 31, 2017, 2016, 2020and 2015,2019, there were no0 gains or losses from interest rate swaps designated as cash flow hedges reclassified to earnings because it becamewas probable that the originaloriginally forecasted transactiontransactions would not occur.
Farmer Mac adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" early as of January 1, 2018. This ASU reduces the complexity of hedge accounting by eliminating the requirement to separately measure and report hedge ineffectiveness and by requiring the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the income or expense effect from the hedged item. Upon the adoption of the ASU, Farmer Mac elected to retrospectively designate the hedged risk of its fair value hedges as the risk of changes in fair value from changes in the benchmark interest rate component of the contractual coupon cash flows. Farmer Mac made this election for its fair value hedges designated upon the inception of hedging instruments. For fair value hedges designated subsequent to the inception of the hedging instruments, Farmer Mac continues to designate the hedged risk as the risk of changes in fair value based on total contractual coupon cash flows. The adoption of the new guidance did not have a material effect on Farmer Mac's financial position, results of operation, or cash flows.
The following tables summarize information related to Farmer Mac's financial derivatives on a gross basis without giving consideration to master netting arrangements as of December 31, 2017 and 2016 andtable summarizes the effects of financial derivatives onnet income/(expense) recognized in the consolidated statements of operations related to derivatives for the years ended December 31, 2017, 2016,2020, 2019, and 2015:2018:
|
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 |
| | | | 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 | $ | 2,086,347 |
| | $ | 5,240 |
| | $ | (5,990 | ) | | 1.88% | | 1.40% | | | | 5.46 |
| Receive fixed non-callable | 1,559,700 |
| | 110 |
| | (4,033 | ) | | 1.38% | | 1.45% | | | | 1.68 |
| Cash flow hedges: | | | | | | | | | | | | | |
| Interest rate swaps: | | | | | | | | | | | | | |
| Pay fixed non-callable | 365,500 |
| | 1,402 |
| | (138 | ) | | 2.16% | | 1.74% | | | | 5.84 |
| No hedge designation: | | | | | | | | | | | | | |
| Interest rate swaps: | | | | | | | | | | | | | |
| Pay fixed non-callable | 345,333 |
| | 339 |
| | (16,352 | ) | | 3.79% | | 1.40% | | | | 6.68 |
| Receive fixed non-callable | 3,409,916 |
| | — |
| | — |
| | 1.25% | | 1.24% | | | | 0.92 |
| Basis swaps | 1,053,500 |
| | 18 |
| | (106 | ) | | 1.33% | | 1.42% | | | | 0.91 |
| Treasury futures | 40,000 |
| | — |
| | (36 | ) | | | | | | 123.96 |
| | |
| Credit valuation adjustment | | | (16 | ) | | 56 |
| | | | | | | | |
| Total financial derivatives | $ | 8,860,296 |
| | $ | 7,093 |
| | $ | (26,599 | ) | | | | | | | | |
| Collateral pledged | | | — |
| | 24,926 |
| | | | | | | | |
| Net amount | | | $ | 7,093 |
| | $ | (1,673 | ) | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 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 | $ | 1,642,609 |
| | $ | 18,508 |
| | $ | (18,909 | ) | | 1.73% | | 0.90% | | | | 4.70 |
| Cash flow hedges: | | | | | | | | | | | | | |
| Interest rate swaps: | | | | | | | | | | | | | |
| Pay fixed non-callable | 207,000 |
| | 3,706 |
| | (955 | ) | | 2.18% | | 1.11% | | | | 7.28 |
| No hedge designation: | | | | | | | | | | | | | |
| Interest rate swaps: | | | | | | | | | | | | | |
| Pay fixed non-callable | 435,827 |
| | 339 |
| | (32,951 | ) | | 4.06% | | 0.89% | | | | 5.90 |
| Receive fixed non-callable | 4,991,821 |
| | 607 |
| | (5,064 | ) | | 0.74% | | 0.75% | | | | 0.60 |
| Receive fixed callable | 30,000 |
| | — |
| | (33 | ) | | 0.82% | | 0.58% | | | | 0.33 |
| Basis swaps | 765,000 |
| | 36 |
| | (243 | ) | | 0.78% | | 0.78% | | | | 0.87 |
| Treasury futures | 28,000 |
| | — |
| | (155 | ) | | | | | | 123.73 |
| | |
| Credit valuation adjustment | | | (14 | ) | | 158 |
| | | | | | | | |
| Total financial derivatives | $ | 8,100,257 |
| | $ | 23,182 |
| | $ | (58,152 | ) | | | | | | | | |
| Collateral pledged | | | — |
| | 25,643 |
| | | | | | | | |
| Net amount | | | $ | 23,182 |
| | $ | (32,509 | ) | | | | | | | | |
Table 6.2
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, 2020 |
| Net Income/(Expense) Recognized in Consolidated Statement of Operations on Derivatives |
| Net Interest Income | | Non-Interest Income | | Total |
| Interest Income Farmer Mac Guaranteed Securities and USDA Securities | | Interest Income Loans | | Total Interest Expense | | Losses on financial derivatives | |
| (in thousands) |
| Total amounts presented in the consolidated statement of operations | $ | 227,691 | | | $ | 233,699 | | | $ | (312,946) | | | $ | (246) | | | $ | 148,198 | |
| Income/(expense) related to interest settlements on fair value hedging relationships: | | | | | | | | | |
| Recognized on derivatives | (60,056) | | | (19,135) | | | 26,386 | | | 0 | | | (52,805) | |
| Recognized on hedged items | 126,170 | | | 40,793 | | | (51,230) | | | 0 | | | 115,733 | |
| Discount amortization recognized on hedged items | 0 | | | 0 | | | (745) | | | 0 | | | (745) | |
| Income/(expense) related to interest settlements on fair value hedging relationships | $ | 66,114 | | | $ | 21,658 | | | $ | (25,589) | | | $ | 0 | | | $ | 62,183 | |
| | | | | | | | | |
| (Losses)/gains on fair value hedging relationships: | | | | | | | | | |
| Recognized on derivatives | $ | (206,281) | | | $ | (76,565) | | | $ | 43,332 | | | $ | 0 | | | $ | (239,514) | |
| Recognized on hedged items | 202,624 | | | 73,426 | | | (45,720) | | | 0 | | | 230,330 | |
| (Losses)/gains on fair value hedging relationships | $ | (3,657) | | | $ | (3,139) | | | $ | (2,388) | | | $ | 0 | | | $ | (9,184) | |
| | | | | | | | | |
| Expense related to interest settlements on cash flow hedging relationships: | | | | | | | | | |
| Interest settlements reclassified from AOCI into net income on derivatives | $ | 0 | | | $ | 0 | | | $ | (5,570) | | | $ | 0 | | | $ | (5,570) | |
| Recognized on hedged items | 0 | | | 0 | | | (4,553) | | | 0 | | | (4,553) | |
| Discount amortization recognized on hedged items | 0 | | | 0 | | | (13) | | | 0 | | | (13) | |
| Expense recognized on cash flow hedges | $ | 0 | | | $ | 0 | | | $ | (10,136) | | | $ | 0 | | | $ | (10,136) | |
| | | | | | | | | |
| (Losses)/gains on financial derivatives not designated in hedging relationships: | | | | | | | | | |
| Losses on interest rate swaps | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (4,204) | | | $ | (4,204) | |
| Interest expense on interest rate swaps | 0 | | | 0 | | | 0 | | | 5,808 | | | 5,808 | |
| | | | | | | | | |
| Treasury futures | 0 | | | 0 | | | 0 | | | (1,850) | | | (1,850) | |
| (Losses)/gains on financial derivatives not designated in hedge relationships | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (246) | | | $ | (246) | |
|
| | | | | | | | | | | |
| | Gains on financial derivatives and hedging activities |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Fair value hedges: | | | | | |
Interest rate swaps(1) | $ | 1,694 |
| | $ | 25,365 |
| | $ | 5,965 |
|
| Hedged items | (2,413 | ) | | (20,322 | ) | | 3,100 |
|
| (Losses)/gains on fair value hedges | (719 | ) | | 5,043 |
| | 9,065 |
|
| Cash flow hedges: | | | | | |
| Loss recognized (ineffective portion) | (320 | ) | | (353 | ) | | (551 | ) |
| Losses on cash flow hedges | (320 | ) | | (353 | ) | | (551 | ) |
| No hedge designation: | | | | | |
| Interest rate swaps | 2,040 |
| | (1,991 | ) | | (3,204 | ) |
| Agency forwards | (588 | ) | | (226 | ) | | (2,440 | ) |
| Treasury futures | 340 |
| | (162 | ) | | (339 | ) |
| Gains/(losses) on financial derivatives not designated in hedging relationships | 1,792 |
| | (2,379 | ) | | (5,983 | ) |
| Gains on financial derivatives and hedging activities | $ | 753 |
| | $ | 2,311 |
| | $ | 2,531 |
|
| |
(1)
| Included in the assessment of hedge effectiveness as of December 31, 2017, but excluded from the amounts in the table, were gains of $0.1 million for the year ended December 31, 2017, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amounts recognized as hedge ineffectiveness for the year ended December 31, 2017 were gains of $0.6 million. The comparable amounts as of December 31, 2016 were losses of $5.2 million for the year ended December 31, 2016, attributable to the fair value of the swaps at the inception of the hedging relationship and, accordingly, gains of $0.2 million for the year ended December 31, 2016, attributable to hedge ineffectiveness. The comparable amounts as of December 31, 2015 were losses of $9.2 million for the year ended December 31, 2015, attributable to the fair value of the swaps at the inception of the hedging relationship and, accordingly, gains of $0.1 million for the year ended December 31, 2015, attributable to hedge ineffectiveness. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For The Year Ended December 31, 2019 |
| Net Income/(Expense) Recognized in Consolidated Statement of Operations on Derivatives |
| Net Interest Income | | Non-Interest Income | | Total |
| Interest Income
Farmer Mac Guaranteed Securities and USDA Securities | | Interest Income Loans | | Total Interest Expense | | Gains/(losses) on financial derivatives | |
| (in thousands) |
| Total amounts presented in the consolidated statement of operations: | $ | 333,896 | | | $ | 229,675 | | | $ | (471,958) | | | $ | 5,282 | | | $ | 96,895 | |
| Income/(expense) related to interest settlements on fair value hedging relationships: | | | | | | | | | |
| Recognized on derivatives | (2,177) | | | (2,053) | | | (6,227) | | | 0 | | | (10,457) | |
| Recognized on hedged items | 118,609 | | | 26,352 | | | (45,309) | | | 0 | | | 99,652 | |
| Discount amortization recognized on hedged items | 0 | | | 0 | | | (631) | | | 0 | | | (631) | |
| Income/(expense) related to interest settlements on fair value hedging relationships | $ | 116,432 | | | $ | 24,299 | | | $ | (52,167) | | | $ | 0 | | | $ | 88,564 | |
| | | | | | | | | |
| (Losses)/gains on fair value hedging relationships: | | | | | | | | | |
| Recognized on derivatives | $ | (184,478) | | | $ | (50,141) | | | $ | 18,401 | | | $ | 0 | | | $ | (216,218) | |
| Recognized on hedged items | 181,144 | | | 43,194 | | | (16,027) | | | 0 | | | 208,311 | |
| (Losses)/gains on fair value hedging relationships | $ | (3,334) | | | $ | (6,947) | | | $ | 2,374 | | | $ | 0 | | | $ | (7,907) | |
| | | | | | | | | |
| Expense related to interest settlements on cash flow hedging relationships: | | | | | | | | | |
| Interest settlements reclassified from AOCI into net income on derivatives | $ | 0 | | | $ | 0 | | | $ | 1,166 | | | $ | 0 | | | $ | 1,166 | |
| Recognized on hedged items | 0 | | | 0 | | | (10,569) | | | 0 | | | (10,569) | |
| Discount amortization recognized on hedged items | 0 | | | 0 | | | (4) | | | 0 | | | (4) | |
| Expense recognized on cash flow hedges | $ | 0 | | | $ | 0 | | | $ | (9,407) | | | $ | 0 | | | $ | (9,407) | |
| | | | | | | | | |
| Gains on financial derivatives not designated in hedge relationships: | | | | | | | | | |
| Gains on interest rate swaps | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 10,321 | | | $ | 10,321 | |
| Interest expense on interest rate swaps | 0 | | | 0 | | | 0 | | | (4,213) | | | (4,213) | |
| | | | | | | | | |
| Treasury futures | 0 | | | 0 | | | 0 | | | (826) | | | (826) | |
| Gains on financial derivatives not designated in hedge relationships | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 5,282 | | | $ | 5,282 | |
As
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For The Year Ended December, 2018 |
| Net Income/(Expense) Recognized in Consolidated Statement of Operations on Derivatives |
| Net Interest Income | | Non-Interest Income | | Total |
| Interest Income
Farmer Mac Guaranteed Securities and USDA Securities | | Interest Income Loans | | Total Interest Expense | | (Losses)/gains on financial derivatives | |
| (in thousands) |
| Total amounts presented in the consolidated statement of operations: | $ | 290,953 | | | $ | 198,152 | | | $ | (369,848) | | | $ | (3,687) | | | $ | 115,570 | |
| Income/(expense) related to interest settlements on fair value hedging relationships: | | | | | | | | | |
| Recognized on derivatives | 1,861 | | | (630) | | | (7,995) | | | 0 | | | (6,764) | |
| Recognized on hedged items | 65,238 | | | 6,284 | | | (36,837) | | | 0 | | | 34,685 | |
| Discount amortization recognized on hedged items | 0 | | | 0 | | | (668) | | | 0 | | | (668) | |
| Income/(expense) related to interest settlements on fair value hedging relationships | $ | 67,099 | | | $ | 5,654 | | | $ | (45,500) | | | $ | 0 | | | $ | 27,253 | |
| | | | | | | | | |
| Gains/(losses) on fair value hedging relationships: | | | | | | | | | |
| Recognized on derivatives | $ | (20,279) | | | $ | 5,031 | | | $ | 835 | | | $ | 0 | | | $ | (14,413) | |
| Recognized on hedged items | 21,460 | | | (5,243) | | | 3,137 | | | 0 | | | 19,354 | |
| Gains/(losses) on fair value hedging relationships | $ | 1,181 | | | $ | (212) | | | $ | 3,972 | | | $ | 0 | | | $ | 4,941 | |
| | | | | | | | | |
| Expense related to interest settlements on cash flow hedging relationships: | | | | | | | | | |
| Interest settlements reclassified from AOCI into net income on derivatives | $ | 0 | | | $ | 0 | | | $ | 316 | | | $ | 0 | | | $ | 316 | |
| Recognized on hedged items | 0 | | | 0 | | | (9,182) | | | 0 | | | (9,182) | |
| Discount amortization recognized on hedged items | 0 | | | 0 | | | (6) | | | 0 | | | (6) | |
| Expense recognized on cash flow hedges | $ | 0 | | | $ | 0 | | | $ | (8,872) | | | $ | 0 | | | $ | (8,872) | |
| | | | | | | | | |
| Losses on financial derivatives not designated in hedge relationships: | | | | | | | | | |
| Gains on interest rate swaps | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 7,206 | | | $ | 7,206 | |
| Interest expense on interest rate swaps | 0 | | | 0 | | | 0 | | | (10,920) | | | (10,920) | |
| | | | | | | | | |
| Treasury futures | 0 | | | 0 | | | 0 | | | 27 | | | 27 | |
| Losses on financial derivatives not designated in hedge relationships | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (3,687) | | | $ | (3,687) | |
The following table shows the carrying amount and associated cumulative basis adjustment related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships as of December 31, 20172020 and 2016,December 31, 2019:
Table 6.3
| | | | | | | | | | | | | | | | | | | | | | | |
| Hedged Items in Fair Value Relationship |
| Carrying Amount of Hedged Assets/(Liabilities) | | Cumulative Amount of Fair Value Hedging Adjustments included in the Carrying Amount of the Hedged Assets/(Liabilities) |
| December 31, 2020 | | December 31, 2019 | | December 31, 2020 | | December 31, 2019 |
| (in thousands) |
Farmer Mac Guaranteed Securities, Available-for-Sale, at fair value(1) | $ | 4,244,027 | | | $ | 4,092,611 | | | $ | 382,825 | | | $ | 180,215 | |
Loans held for investment, at amortized cost(2) | 1,692,609 | | | 1,050,335 | | | 111,333 | | | 37,907 | |
| | | | | | | |
Notes Payable(3) | (3,006,140) | | | (2,761,052) | | | (53,240) | | | (7,433) | |
(1)Includes $1.6 million of hedging adjustments on discontinued hedging relationships as of December 31, 2020.
(2)Includes $1.4 million of hedging adjustments on a discontinued hedging relationship as of December 31, 2020.
(3)Carrying amount represents amortized cost.
The following table shows Farmer Mac's credit exposure to interest rate swap counterparties excludingas of December 31, 2020 and December 31, 2019:
Table 6.4
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Gross Amount Recognized(1) | | Counterparty Netting | | Net Amount Presented in the Consolidated Balance Sheet |
| (in thousands) |
| Assets: | | | | | |
| Derivatives | | | | | |
| Interest rate swap | $ | 112,287 | | | $ | 111,761 | | | $ | 526 | |
| Liabilities: | | | | | |
| Derivatives | | | | | |
| Interest rate swap | $ | 620,236 | | | $ | 595,867 | | | $ | 24,369 | |
(1)Gross amount excludes netting arrangements and any adjustment for nonperformance risk, but includingincludes accrued interest, was $28.5 million and $24.5 million, respectively; however, includinginterest.
| | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Gross Amount Recognized(1) | | Counterparty Netting | | Net Amount Presented in the Consolidated Balance Sheet |
| (in thousands) |
| Assets: | | | | | |
| Derivatives | | | | | |
| Interest rate swaps | $ | 56,139 | | | $ | 53,771 | | | $ | 2,368 | |
| Liabilities: | | | | | |
| Derivatives | | | | | |
| Interest rate swaps | $ | 305,584 | | | $ | 291,326 | | | $ | 14,258 | |
(1)Gross amount excludes netting arrangements and any adjustment for nonperformance risk, but includes accrued interest, Farmer Mac's credit exposure was $0.5 million and $0.2 million as of December 31, 2017 2016, respectively. interest.
As of December 31, 2017,2020, Farmer Mac held no $1.3 million of cash and 0 investment securities as collateral for its derivatives in net asset positions, resulting in uncollateralized net asset positionscompared to $2.7 million of $0.5 million. As of December 31, 2016, Farmer Mac held no cash and 0 investment securities as collateral for its derivatives in net asset positions resulting in uncollateralized net asset positions of $0.2 million.
As of December 31, 2017 and 2016, 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 $58.2 million and $65.7 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 $28.0 million and $41.4 million as of December 31, 2017 and 2016, respectively. 2019.
Farmer Mac posted $11.2 million cash of $0.1 million and $24.8$201.1 million of investment securities as of December 31, 20172020 and posted $0.5 million cash of $1.0 million and $24.6$131.7 million investment securities as of December 31, 2016.2019. Farmer Mac records posted cash as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of prepaid expenses and other assets. Any investment securities posted as collateral are included in the investment securities balances on the consolidated balance sheets. If Farmer Mac had breached certain provisions of the derivative contracts as of December 31, 20172020 and 2016,December 31, 2019, it could have been required to settle its obligations under the agreements, orbut would not have been required to post additional collateral of $3.1 millionand $15.8 million, respectively.collateral. As of December 31, 20172020 and 2016,December 31, 2019, there were no0 financial derivatives in a net payable position where Farmer Mac was required to pledge collateral which the counterparty had the right to sell or repledge.
For certain derivatives, Farmer Mac clears interest rate swaps through a clearinghouse, the Chicago Mercantile Exchange ("CME"). Farmer Mac posts initial and variation margins to this clearinghouse through which centrally-cleared derivatives and futures contracts are traded. These collateral postings expose Farmer Mac to institutional credit risk in the event that either the clearinghouse or the futures commission merchant that Farmer Mac uses to post collateral to the clearinghouse fails to meet its 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 $8.8$15.4 billion notional amount of interest rate swaps outstanding as of December 31, 2017, $7.92020, $12.8 billion were cleared through the swap clearinghouses.clearinghouse, the Chicago Mercantile Exchange ("CME"). Of Farmer Mac's $8.1$14.0 billion notional amount of interest rate swaps outstanding as of December 31, 2016, $6.92019, $11.0 billion were cleared through swap clearinghouses.
Effective January 3, 2017, the CME implemented a change in its rules related to the exchange of variation margin. Specifically, the exchange of variation margin between derivatives counterparties is now deemed by CME to be a partial settlement of each respective derivative contract rather than as collateral pledged by a counterparty. Accordingly, beginning in first quarter 2017,CME. During 2020 and throughout 2019, Farmer Mac presentedincreased its cleared derivatives portfolio netuse of variation margin payments on its consolidated balance sheets and recognized realized gains or lossesnon-cleared basis swaps as it began to prepare for the transition away from the use of LIBOR as a result of these payments within "Gains on financial derivatives and hedging activities" on its consolidated statements of operations. Prior to first quarter 2017, Farmer Mac accounted for variation margin as collateral and associated unrealized gains or losses on those centrally cleared derivative contracts. Farmer Mac included those unrealized gains or losses within "Gains/(losses) on financial derivatives and hedging activities" in its consolidated statements of operations prior to firstreference rate.
quarter 2017. See Note 14 for information about the effect of this rule change on the calculation of core earnings beginning in 2017.
Farmer Mac's borrowings consist of discount notes and medium-term notes, both of which are unsecured general obligations of Farmer Mac. Discount notes generally have original maturities of 1.0 year or less, whereas medium-term notes generally have maturities of 0.5 years to 15.0 years.
The following tables set forth information related to Farmer Mac's borrowings as of December 31, 20172020 and 2016:December 31, 2019:
Table 7.1
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| Outstanding as of December 31 | | Average Outstanding During the Year |
| | Amount | | Weighted- Average Rate | | Amount | | Weighted- Average Rate |
| | (dollars in thousands) |
| Due within one year: | | | | | | | |
| Discount notes | $ | 1,797,175 | | | 0.11 | % | | $ | 2,343,702 | | | 0.63 | % |
| Medium-term notes | 2,645,146 | | | 0.19 | % | | 1,593,253 | | | 0.60 | % |
| Current portion of medium-term notes | 6,304,061 | | | 0.90 | % | | | | |
| Total due within one year | $ | 10,746,382 | | | 0.59 | % | | | | |
| Due after one year: | | | | | | | |
| Medium-term notes due in: | | | | | | | |
| Two years | $ | 3,004,203 | | | 1.00 | % | | | | |
| Three years | 2,809,551 | | | 1.24 | % | | | | |
| Four years | 927,119 | | | 1.67 | % | | | | |
| Five years | 1,342,250 | | | 1.03 | % | | | | |
| Thereafter | 2,966,172 | | | 1.92 | % | | | | |
| Total due after one year | $ | 11,049,295 | | | 1.37 | % | | | | |
| Total principal net of discounts | $ | 21,795,677 | | | 0.98 | % | | | | |
| Hedging adjustments | 53,240 | | | | | | | |
| Total | $ | 21,848,917 | | | | | | | |
|
| | | | | | | | | | | | | |
| | December 31, 2017 |
| | Outstanding as of December 31 | | Average Outstanding During the Year |
| | Amount | | Weighted- Average Rate | | Amount | | Weighted- Average Rate |
| | (dollars in thousands) |
| Due within one year: | | | | | | | |
| Discount notes | $ | 1,724,969 |
| | 1.20 | % | | $ | 2,262,582 |
| | 0.86 | % |
| Medium-term notes | 2,560,211 |
| | 1.27 | % | | 2,885,966 |
| | 1.04 | % |
| Current portion of long-term notes | 3,804,646 |
| | 1.23 | % | | |
| | |
|
| Total due within one year | $ | 8,089,826 |
| | 1.24 | % | | |
| | |
|
| Due after one year: | |
| | |
| | |
| | |
|
| Medium-term notes due in: | |
| | |
| | |
| | |
|
| 2019 | $ | 2,644,734 |
| | 1.48 | % | | |
| | |
|
| 2020 | 1,842,143 |
| | 1.68 | % | | |
| | |
|
| 2021 | 849,263 |
| | 1.85 | % | | |
| | |
|
| 2022 | 790,564 |
| | 2.03 | % | | | | |
| Thereafter | 1,306,086 |
| | 3.05 | % | | |
| | |
|
| Total due after one year | 7,432,790 |
| | 1.91 | % | | |
| | |
|
| Total | $ | 15,522,616 |
| | 1.56 | % | | |
| | |
|
| | | | December 31, 2016 | | December 31, 2019 |
| | Outstanding as of December 31 | | Average Outstanding During the Year | | Outstanding as of December 31 | | Average Outstanding During the Year |
| | Amount | | Weighted- Average Rate | | Amount | | Weighted- Average Rate | | Amount | | Weighted- Average Rate | | Amount | | Weighted- Average Rate |
| | (dollars in thousands) | | (dollars in thousands) |
| Due within one year: | | | | | | | | Due within one year: | | | | | | | |
| Discount notes | $ | 3,789,137 |
| | 0.59 | % | | $ | 5,753,425 |
| | 0.50 | % | Discount notes | $ | 2,194,177 | | | 1.72 | % | | $ | 1,977,214 | | | 2.25 | % |
| Medium-term notes | 2,495,202 |
| | 0.70 | % | | 1,551,094 |
| | 0.57 | % | Medium-term notes | 1,152,770 | | | 1.98 | % | | 1,780,517 | | | 2.33 | % |
| Current portion of long-term notes | 2,155,784 |
| | 0.90 | % | | |
| | |
| |
| Current portion of medium-term notes | | Current portion of medium-term notes | 6,672,135 | | | 1.85 | % | |
| Total due within one year | $ | 8,440,123 |
| | 0.70 | % | | |
| | |
| Total due within one year | $ | 10,019,082 | | | 1.84 | % | | | | |
| Due after one year: | |
| | |
| | |
| | |
| Due after one year: | | | | | | | |
| Medium-term notes due in: | |
| | |
| | |
| | |
| Medium-term notes due in: | | | | | | | |
| 2018 | $ | 1,733,121 |
| | 1.08 | % | | |
| | |
| |
| 2019 | 1,283,869 |
| | 1.32 | % | | |
| | |
| |
| 2020 | 495,096 |
| | 1.50 | % | | |
| | |
| |
| 2021 | 602,037 |
| | 1.83 | % | | | | | |
| Two years | | Two years | $ | 3,696,699 | | | 2.04 | % | | | | |
| Three years | | Three years | 1,592,315 | | | 2.15 | % | | | | |
| Four years | | Four years | 1,202,817 | | | 2.27 | % | | | | |
| Five years | | Five years | 762,003 | | | 2.25 | % | |
| Thereafter | 1,108,854 |
| | 3.01 | % | | |
| | |
| Thereafter | 1,818,299 | | | 2.89 | % | | | | |
| Total due after one year | 5,222,977 |
| | 1.68 | % | | |
| | |
| Total due after one year | $ | 9,072,133 | | | 2.28 | % | | | | |
| Total principal net of discounts | | Total principal net of discounts | $ | 19,091,215 | | | 2.05 | % | | | | |
| Hedging adjustments | | Hedging adjustments | 7,433 | | |
| Total | $ | 13,663,100 |
| | 1.07 | % | | |
| | |
| Total | $ | 19,098,648 | | |
The maximum amount of Farmer Mac's discount notes outstanding at any month end during each of the years ended December 31, 20172020 and 20162019 was $3.3$2.6 billion and $6.9$2.3 billion, respectively.
Callable medium-term notes give Farmer Mac the option to redeem the debt at par value on a specified call date or at any time on or after a specified call date. The following table summarizes by maturity date the amounts and costs for Farmer Mac debt callable in 20182021 as of December 31, 2017:2020:
Table 7.2
| | | | | | | | | | | |
| Debt Callable in 2021 as of December 31, 2020, by Maturity |
| Amount | | Weighted-Average Rate |
| (dollars in thousands) |
| Maturity: | | | |
| 2022 | $ | 243,410 | | | 0.42 | % |
| 2023 | 592,529 | | | 0.97 | % |
| 2024 | 119,898 | | | 1.56 | % |
| 2025 | 306,683 | | | 1.08 | % |
| Thereafter | 670,657 | | | 1.51 | % |
| Total | $ | 1,933,177 | | | 1.15 | % |
|
| | | | | | |
| Debt Callable in 2018 as of December 31, 2017 |
| | Amount | | Weighted-Average Rate |
| | (dollars in thousands) |
| Maturity: | | | |
| 2019 | $ | 71,944 |
| | 1.35 | % |
| 2020 | 158,817 |
| | 1.80 | % |
| 2021 | 192,717 |
| | 1.77 | % |
| 2022 | 145,757 |
| | 2.20 | % |
| Thereafter | 178,267 |
| | 2.90 | % |
| Total | $ | 747,502 |
| | 2.09 | % |
The following schedule summarizes the earliest interest rate reset date, or debt maturities, of total borrowings outstanding as of December 31, 2017,2020, including callable and non-callable medium-term notes, assuming callable notes are redeemed at the initial call date:
Table 7.3
| | | | | | | | | | | |
| Earliest Interest Rate Reset Date, or Debt Maturities, of Borrowings Outstanding |
| Amount | | Weighted-Average Rate |
| | (dollars in thousands) |
| Debt with interest rate resets, or debt maturities in: | | | |
| 2021 | $ | 12,805,994 | | | 0.55 | % |
| 2022 | 2,123,372 | | | 1.34 | % |
| 2023 | 2,390,730 | | | 1.39 | % |
| 2024 | 884,138 | | | 1.74 | % |
| 2025 | 1,126,871 | | | 1.15 | % |
| Thereafter | 2,464,572 | | | 2.19 | % |
| Total principal net of discounts | $ | 21,795,677 | | | 0.98 | % |
|
| | | | | |
| | Earliest Interest Rate Reset Date of Borrowings Outstanding |
| | Amount | | Weighted-Average Rate |
| | (dollars in thousands) |
| Debt with interest rate resets in: | | | |
| 2018 | $ | 9,291,949 |
| | 1.28% |
| 2019 | 2,176,327 |
| | 1.49% |
| 2020 | 1,526,236 |
| | 1.71% |
| 2021 | 744,336 |
| | 1.89% |
| 2022 | 719,609 |
| | 2.08% |
| Thereafter | 1,064,159 |
| | 3.31% |
| Total | $ | 15,522,616 |
| | 1.56% |
During 2017the years ended December 31, 2020 and 2016,2019, Farmer Mac called $24.0 million$3.1 billion and $1.3$1.5 billion of callable medium-term notes, respectively. The decrease in market interest rates throughout 2020 led to an increase in called medium-term notes compared to the prior year.
Authority to Borrow from the U.S. Treasury
Farmer Mac's statutory charter authorizes it, upon satisfying certain conditions, to borrow up to $1.5 billion from the U.S. Treasury through the issuance of debt obligations to the U.S. Treasury. Any funds borrowed from the U.S. Treasury may be used solely for the purpose of fulfillingto fulfill Farmer Mac's guarantee obligations. Any debt obligations issued by Farmer Mac under this authority would bear interest at a rate determined by the U.S. Treasury, taking into consideration the average rate on outstanding marketable obligations of the United States as of the last day of the last calendar month ending before the date of the purchase of the obligations from Farmer Mac. The charter requires Farmer Mac to repurchase any of its debt obligations held by the U.S. Treasury within a reasonable time. As of December 31, 2017,2020, Farmer Mac had not used this borrowing authority and does not expect to use this borrowing authority in the future.authority.
Gains on Repurchase of Outstanding Debt
NoNaN outstanding debt repurchases were made in 2017, 2016,the years ended December 31, 2020, 2019, or 2015.2018.
| |
8. | LOANS AND ALLOWANCE FOR LOSSES |
Loans
Farmer Mac classifies loans as either held for investment or held for sale. Loans held for investment are recorded at the unpaid principal balance, net of unamortized premium or discount and other cost basis adjustments. Loans held for sale are reported at the lower of cost or fair value determined on a pooled
basis. During the year ended December 31, 2020, Farmer Mac acquired $59.2 million in loans held for sale, of which it sold $15.0 million during the year, and reclassified $44.2 million as loans held for investment. As of both December 31, 20172020 and 2016,December 31, 2019, Farmer Mac had no0 loans held for sale.
The following table includes loans held for investment and displays the composition of the loan balances as of December 31, 20172020 and 2016:December 31, 2019:
Table 8.1
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020(1) | | As of December 31, 2019(2) |
| Unsecuritized | | In Consolidated Trusts | | Total | | Unsecuritized | | In Consolidated Trusts | | Total |
| (in thousands) |
| Farm & Ranch | $ | 4,889,393 | | | $ | 1,287,045 | | | $ | 6,176,438 | | | $ | 3,675,640 | | | $ | 1,600,917 | | | $ | 5,276,557 | |
| Rural Utilities | 2,260,412 | | | 0 | | | 2,260,412 | | | 1,671,293 | | | 0 | | | 1,671,293 | |
Total unpaid principal balance(3) | 7,149,805 | | | 1,287,045 | | | 8,436,850 | | | 5,346,933 | | | 1,600,917 | | | 6,947,850 | |
| Unamortized premiums, discounts, fair value hedge basis adjustment, and other cost basis adjustments | 112,128 | | | 0 | | | 112,128 | | | 44,044 | | | 0 | | | 44,044 | |
| Total loans | 7,261,933 | | | 1,287,045 | | | 8,548,978 | | | 5,390,977 | | | 1,600,917 | | | 6,991,894 | |
| Allowance for losses | (12,943) | | | (889) | | | (13,832) | | | (8,853) | | | (1,601) | | | (10,454) | |
| Total loans, net of allowance | $ | 7,248,990 | | | $ | 1,286,156 | | | $ | 8,535,146 | | | $ | 5,382,124 | | | $ | 1,599,316 | | | $ | 6,981,440 | |
(1)Allowance for losses reflects the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," effective January 1, 2020. |
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 | | As of December 31, 2016 |
| | Unsecuritized | | In Consolidated Trusts | | Total | | Unsecuritized | | In Consolidated Trusts | | Total |
| | (in thousands) |
| Farm & Ranch | $ | 2,798,906 |
| | $ | 1,399,827 |
| | $ | 4,198,733 |
| | $ | 2,381,488 |
| | $ | 1,132,966 |
| | $ | 3,514,454 |
|
| Rural Utilities | 1,076,291 |
| | — |
| | 1,076,291 |
| | 999,512 |
| | — |
| | 999,512 |
|
Total unpaid principal balance(1) | 3,875,197 |
| | 1,399,827 |
| | 5,275,024 |
| | 3,381,000 |
| | 1,132,966 |
| | 4,513,966 |
|
| Unamortized premiums, discounts and other cost basis adjustments | (1,442 | ) | | — |
| | (1,442 | ) | | (1,116 | ) | | — |
| | (1,116 | ) |
| Total loans | 3,873,755 |
| | 1,399,827 |
| | 5,273,582 |
| | 3,379,884 |
| | 1,132,966 |
| | 4,512,850 |
|
| Allowance for loan losses | (5,493 | ) | | (1,303 | ) | | (6,796 | ) | | (4,437 | ) | | (978 | ) | | (5,415 | ) |
| Total loans, net of allowance | $ | 3,868,262 |
| | $ | 1,398,524 |
| | $ | 5,266,786 |
| | $ | 3,375,447 |
| | $ | 1,131,988 |
| | $ | 4,507,435 |
|
| |
(1)
| Unpaid principal balance is the basis of presentation in disclosures of outstanding balances for Farmer Mac's lines of business. |
(3)Unpaid principal balance is the basis of presentation in disclosures of outstanding balances for Farmer Mac's lines of business.
Allowance for Losses
Farm & Ranch
Farmer Mac maintains anThe following table is a summary, by asset type, of the allowance for losses presented in two components on its consolidated balance sheets: as of December 31, 2020 and December 31, 2019:
Table 8.2
| | | | | | | | | | | |
| December 31, 2020(1) | | December 31, 2019(2) |
| Allowance for Losses | | Allowance for Losses |
| (in thousands) |
| Loans: | | | |
| Farm & Ranch | $ | 3,745 | | | $ | 10,454 | |
| Rural Utilities | 10,087 | | | 0 | |
| Total | $ | 13,832 | | | $ | 10,454 | |
(1)Allowance for losses reflects the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," effective January 1, 2020.
(2)Prior to the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," effective January 1, 2020, Farmer Mac maintained an allowance for loan losses to account forcover estimated probable incurred losses on loans held, and (2) a reserve for losses to account for estimated probable losses on loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities). Farmer Mac's total allowance for losses was $8.9 million as of December 31, 2017 and $7.4 million as of December 31, 2016. See Note 12 for more information about off-balance sheet Farmer Mac Guaranteed Securities and LTSPCs.
held.
The following is a summary of the changes in the total allowance for losses for each year in the three-year period ended December 31, 2017:2020:
Table 8.28.3
| | | | | | | | | | | |
| Farm & Ranch | | Rural Utilities |
| Allowance for Losses | | Allowance for Losses |
| (in thousands) |
Balance as of December 31, 2017(1) | $ | 6,796 | | | $ | 0 | |
| Provision for losses | 238 | | | 0 | |
| Charge-offs | (17) | | | 0 | |
Balance as of December 31, 2018(1) | $ | 7,017 | | | $ | 0 | |
| Provision for losses | 3,504 | | | 0 | |
| Charge-offs | (67) | | | 0 | |
Balance as of December 31, 2019(1) | $ | 10,454 | | | $ | 0 | |
| Cumulative effect adjustment from adoption of current expected credit loss standard | (3,909) | | | 5,378 | |
| Adjusted Beginning Balance | 6,545 | | | 5,378 | |
| (Release of)/provision for losses | 2,959 | | | 4,709 | |
| | | |
| Charge-offs | (5,759) | | | 0 | |
Balance as of December 31, 2020(2)(3)(4) | $ | 3,745 | | | $ | 10,087 | |
|
| | | | | | | | | | | |
| | Allowance
for Loan
Losses | | Reserve
for Losses | | Total
Allowance
for Losses |
| | (in thousands) |
| Balance as of December 31, 2014 | $ | 5,864 |
| | $ | 4,263 |
| | $ | 10,127 |
|
| Provision for/(release of) losses | 2,388 |
| | (2,180 | ) | | 208 |
|
| Charge-offs | (3,772 | ) | | — |
| | (3,772 | ) |
| Balance as of December 31, 2015 | $ | 4,480 |
| | $ | 2,083 |
| | $ | 6,563 |
|
| Provision for/(release of) losses | 1,065 |
| | (63 | ) | | 1,002 |
|
| Charge-offs | (130 | ) | | — |
| | (130 | ) |
| Balance as of December 31, 2016 | $ | 5,415 |
| | $ | 2,020 |
| | $ | 7,435 |
|
| Provision for/(release of) losses | 1,708 |
| | 50 |
| | 1,758 |
|
| Charge-offs | (327 | ) | | — |
| | (327 | ) |
| Balance as of December 31, 2017 | $ | 6,796 |
| | $ | 2,070 |
| | $ | 8,866 |
|
During 2017,(1)Prior to the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," effective January 1, 2020, Farmer Mac recorded net provisions to itsmaintained an allowance for loan losses and reserveto cover estimated probable incurred losses on loans held.
(2)Allowance for losses reflects the adoption of $1.7ASU 2016-13, "Financial Instruments - Credit Losses," effective January 1, 2020.
(3)Allowance for losses for Farm & Ranch includes 0 allowance for collateral dependent assets secured by agricultural real estate.
(4)Allowance for losses for Rural Utilities includes 0 allowance for collateral dependent assets.
The cumulative transition adjustment decrease of $3.9 million in the Farm & Ranch portfolio was primarily attributable to differences in the way that the two loss models measure the impact of low loan-to-value ratios in that portfolio. Under the previous accounting standard, Farmer Mac's estimated incurred loss model was based on historical weighted-average loss rates from realized losses within commodities and $0.1risk ratings. The historical weighted average loss rates were then applied to sub-portfolios, as disaggregated by commodity and risk rating, to calculate the general allowance. Under the CECL accounting standard, Farmer Mac's current expected credit losses are calculated individually based on the expected probability of default and the expected loss-given-default for each loan. The low loan-to-value ratios in the Farm & Ranch portfolio result in low individual losses-given-default. Thus, our expected credit losses as of January 1, 2020 were less than our estimate of incurred losses as of December 31, 2019.
The cumulative transition adjustment increase of $5.4 million respectively. in the Rural Utilities portfolio was primarily attributable to the change from measuring incurred probable credit losses to measuring expected credit losses over the expected lives of these loans. Farmer Mac has never realized a credit loss in its Rural Utilities portfolio. Additionally, these loans have strong credit ratings and performance, which supported Farmer Mac's estimate of no incurred credit losses under the previous accounting standard. Upon the adoption of CECL, Farmer Mac is now required to measure its expected credit losses for the entire expected life of all financial instruments, including its Rural Utilities loans. To estimate expected credit losses on these loans, Farmer Mac relies upon industry data from ratings agencies and publicly available information as disclosed in the securities filings of other major lenders who serve the utilities industry. Under CECL, Farmer Mac's loss allowance model for these loans is primarily impacted by the long-term maturities of the loans and their low probability of prepayment. In addition, the highly-specialized nature of power generation and transmission and other rural infrastructure facilities results in significant expected
losses given default even though the probability of default is low. Thus, the long-term expected lives of these loans combined with high losses given default result in an estimate of expected losses although we have never realized a credit loss in this portfolio.
The provision to the allowance for Rural Utilities loan losses of $4.7 million recorded during the year ended December 31, 2020 was primarily attributable to the impact of net provisionsnew loan volume in the Rural Utilities portfolio and the impact of economic factor forecasts on the Rural Utilities portfolio, especially continued expected higher unemployment, as a result of the COVID-19 pandemic and the resulting economic volatility. The provision to the allowance for Farm & Ranch loan losses of $3.0 million recorded during the year ended December 31, 2020 was primarily related to the Farm & Ranch agricultural storage & processing loan secured by a specialized poultry facility that Farmer Mac has deemed to be a CDA. The provision was more than offset by charge-offs from the allowance of $5.8 million, primarily related to the specialized poultry loan because a portion of the loan was deemed to be uncollectible.
The provision to the allowance for loan losses recorded during 2017 were primarily attributable to (1) an increase in the general allowance due to overall net volume growth in on-balance sheet Farm & Ranch loans, and (2) an increase in the specific allowance for certain impaired on-balance sheet crop and permanent planting loans resulting from both an increase in the outstanding balance of such loans and downgrades in risk ratings on certain of those loans. The net provision to the reserve for losses recorded during 20172019 was primarily attributable to an increasea specific reserve on a single specialized poultry loan, a decrease in the general reserve due to downgrades in risk ratings on certain unimpaired Agricultural Storageoverall credit quality, and Processing loans underlying LTSPCs. Farmer Mac recorded $0.3 million of charge-offs to itsnet portfolio growth. The allowance for loan losses during 2017.
During 2016, Farmer Mac recorded provisions to its allowance for loan losses of $1.1 million and releases to its reserve for losses of $0.1 million. The provisions to the allowance for loan losses recorded during 2016 were attributable to an increase in the general allowance due to overall net volume growth in on-balance sheet Farm & Ranch portfolio, as a percentage of outstanding loan volume, increased slightly from the previous year. The total provision for losses increased by $3.2 million, during 2019 as compared to 2018, primarily due to the specific reserve on the single specialized poultry loan mentioned above and a decrease in overall credit quality combined with net portfolio growth.
During 2018, the total allowance for losses increased because of increased loan volume within Farmer Mac's Farm & Ranch portfolio. The total allowance for losses in the Farm & Ranch portfolio, as a percentage of outstanding loan volume, remained consistent with recent years. The total provision for losses decreased by $1.4 million during 2018 as compared to 2017 primarily due to decreased loan growth year-over-year and modestly improved credit quality in the Farm & Ranch portfolio.
The following table presents the unpaid principal balances by delinquency status of Farmer Mac's loans and downgradesnon-performing assets as of December 31, 2020:
Table 8.4
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Accruing | | | | |
| Current(5) | | 30-59 Days | | 60-89 Days | | 90 Days and Greater(2) | | Total Past Due | | Nonaccrual loans(3)(4) | | Total Loans |
| (in thousands) |
Loans(1): | | | | | | | | | | | | | |
| Farm & Ranch | $ | 6,055,154 | | | $ | 4,582 | | | $ | 632 | | | $ | 1,072 | | | $ | 6,286 | | | $ | 114,998 | | | $ | 6,176,438 | |
| Rural Utilities | 2,260,412 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 2,260,412 | |
| Total | $ | 8,315,566 | | | $ | 4,582 | | | $ | 632 | | | $ | 1,072 | | | $ | 6,286 | | | $ | 114,998 | | | $ | 8,436,850 | |
(1)Amounts represent unpaid principal balance of risk rated loans, which is the basis Farmer Mac uses to analyze its portfolio, and recorded investment of past due loans.
(2)Includes loans in risk ratingsconsolidated trusts with beneficial interests owned by third parties that are 90 days or more past due.
(3)Includes loans that are 90 days or more past due, in foreclosure, or in bankruptcy with at least one missed payment, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.
(4)Includes $44.2 million of nonaccrual loans for certain loans. The releases to the reserve for losses recorded duringwhich there was no associated allowance. During the year ended December 31, 2016 were attributable to the release of a specific reserve on an impaired livestock loan underlying an LTSPC that was required to be removed from the LTSPC pool by the originator during 2016.2020, Farmer Mac recorded $0.1received $4.4 million in interest on nonaccrual loans.
(5)Includes $145.5 million of charge-offsunpaid principal balance related to its allowance for loan losses during 2016.
During 2015,Farm & Ranch loans that Farmer Mac recorded provisions to its allowance for loan losses of $2.4 million and releases to its reserve for losses of $2.2 million. The provisions to the allowance for loan losses recorded during 2015 were primarily attributable to the establishment ofhas executed a specific allowance for two Agricultural Storage and Processing loans that financed one canola facility. Farmer Mac recognized a charge-off of $3.7 million in fourth quarter 2015 on those loans. The provisions to the allowance for losses were offset by the reduction in the specific allowance for a permanent planting loan based on the updated appraised value of the collateral underlying such loan and releases to the general reserve from the reserve for losses due to substantial paydowns of Agricultural Storage and Processing loansunderlying LTSPCs due to repayments of these loans at par.
COVID-19 payment deferment.
The following tables present the changes in the total allowance for losses for the years ended December 31, 2017, 2016, and 2015 by commodity type:
Table 8.3
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2017 |
| | Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Other | | Total |
| | (in thousands) |
| Beginning Balance | $ | 3,365 |
| | $ | 1,723 |
| | $ | 1,375 |
| | $ | 405 |
| | $ | 533 |
| | $ | 34 |
| | $ | 7,435 |
|
| Provision for/(release of) losses | 944 |
| | 816 |
| | (151 | ) | | 92 |
| | 73 |
| | (16 | ) | | 1,758 |
|
| Charge-offs | (228 | ) | | (70 | ) | | (13 | ) | | (16 | ) | | — |
| | — |
| | (327 | ) |
| Ending Balance | $ | 4,081 |
| | $ | 2,469 |
| | $ | 1,211 |
| | $ | 481 |
| | $ | 606 |
| | $ | 18 |
| | $ | 8,866 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2016 |
| | Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Other | | Total |
| | (in thousands) |
| Beginning Balance | $ | 2,791 |
| | $ | 931 |
| | $ | 1,781 |
| | $ | 408 |
| | $ | 649 |
| | $ | 3 |
| | $ | 6,563 |
|
| Provision for/(release of) losses | 574 |
| | 792 |
| | (406 | ) | | 127 |
| | (116 | ) | | 31 |
| | 1,002 |
|
| Charge-offs | — |
| | — |
| | — |
| | (130 | ) | | — |
| | — |
| | (130 | ) |
| Ending Balance | $ | 3,365 |
| | $ | 1,723 |
| | $ | 1,375 |
| | $ | 405 |
| | $ | 533 |
| | $ | 34 |
| | $ | 7,435 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2015 |
| | Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Other | | Total |
| | (in thousands) |
| Beginning Balance | $ | 2,519 |
| | $ | 2,159 |
| | $ | 1,423 |
| | $ | 467 |
| | $ | 3,552 |
| | $ | 7 |
| | $ | 10,127 |
|
| Provision for/(release of) losses | 272 |
| | (1,228 | ) | | 358 |
| | 52 |
| | 758 |
| | (4 | ) | | 208 |
|
| Charge-offs | — |
| | — |
| | — |
| | (111 | ) | | (3,661 | ) | | — |
| | (3,772 | ) |
| Ending Balance | $ | 2,791 |
| | $ | 931 |
| | $ | 1,781 |
| | $ | 408 |
| | $ | 649 |
| | $ | 3 |
| | $ | 6,563 |
|
The following tables presenttable presents the unpaid principal balances of loans held and loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities) and the related total allowance for losses by impairment method and commodity type as of December 31, 2017 and 2016:2019:
Table 8.48.5
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Other | | Total |
| | (in thousands) |
| Ending Balance: | | | | | | | | | | | | | |
| Collectively evaluated for impairment | $ | 2,664,362 | | | $ | 1,161,900 | | | $ | 871,341 | | | $ | 356,920 | | | $ | 10,360 | | | $ | 4,597 | | | $ | 5,069,480 | |
| Individually evaluated for impairment | 108,815 | | | 51,256 | | | 39,962 | | | 7,044 | | | 0 | | | 0 | | | 207,077 | |
| Total Farm & Ranch loans | $ | 2,773,177 | | | $ | 1,213,156 | | | $ | 911,303 | | | $ | 363,964 | | | $ | 10,360 | | | $ | 4,597 | | | $ | 5,276,557 | |
| Allowance for Losses: | | | | | | | | | | | | | |
| Collectively evaluated for impairment | $ | 1,880 | | | $ | 1,362 | | | $ | 714 | | | $ | 249 | | | $ | 47 | | | $ | 4 | | | $ | 4,256 | |
| Individually evaluated for impairment | 2,628 | | | 1,008 | | | 2,447 | | | 115 | | | 0 | | | 0 | | | 6,198 | |
| Total Farm & Ranch loans | $ | 4,508 | | | $ | 2,370 | | | $ | 3,161 | | | $ | 364 | | | $ | 47 | | | $ | 4 | | | $ | 10,454 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 |
| | Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Other | | Total |
| | (in thousands) |
| Ending Balance: | | | | | | | | | | | | | |
| Collectively evaluated for impairment: | | | | | | | | | | | | | |
| On-balance sheet | $ | 2,344,821 |
| | $ | 794,478 |
| | $ | 635,768 |
| | $ | 269,337 |
| | $ | 13,023 |
| | $ | 9,030 |
| | $ | 4,066,457 |
|
| Off-balance sheet | 1,236,392 |
| | 532,666 |
| | 678,642 |
| | 155,627 |
| | 45,738 |
| | 4,981 |
| | 2,654,046 |
|
| Total | $ | 3,581,213 |
| | $ | 1,327,144 |
| | $ | 1,314,410 |
| | $ | 424,964 |
| | $ | 58,761 |
| | $ | 14,011 |
| | $ | 6,720,503 |
|
| Individually evaluated for impairment: | | | | | | | | | | | | | |
| On-balance sheet | $ | 67,828 |
| | $ | 38,180 |
| | $ | 17,766 |
| | $ | 7,858 |
| | $ | — |
| | $ | 644 |
| | $ | 132,276 |
|
| Off-balance sheet | 8,904 |
| | 2,239 |
| | 2,782 |
| | 806 |
| | — |
| | 76 |
| | 14,807 |
|
| Total | $ | 76,732 |
| | $ | 40,419 |
| | $ | 20,548 |
| | $ | 8,664 |
| | $ | — |
| | $ | 720 |
| | $ | 147,083 |
|
| Total Farm & Ranch loans: | | | | | | | | | | | | | |
| On-balance sheet | $ | 2,412,649 |
| | $ | 832,658 |
| | $ | 653,534 |
| | $ | 277,195 |
| | $ | 13,023 |
| | $ | 9,674 |
| | $ | 4,198,733 |
|
| Off-balance sheet | 1,245,296 |
| | 534,905 |
| | 681,424 |
| | 156,433 |
| | 45,738 |
| | 5,057 |
| | 2,668,853 |
|
| Total | $ | 3,657,945 |
| | $ | 1,367,563 |
| | $ | 1,334,958 |
| | $ | 433,628 |
| | $ | 58,761 |
| | $ | 14,731 |
| | $ | 6,867,586 |
|
| Allowance for Losses: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Collectively evaluated for impairment: | | | | | | | | | | | | | |
| On-balance sheet | $ | 2,104 |
| | $ | 1,101 |
| | $ | 738 |
| | $ | 287 |
| | $ | 44 |
| | $ | 11 |
| | $ | 4,285 |
|
| Off-balance sheet | 546 |
| | 305 |
| | 231 |
| | 48 |
| | 562 |
| | 5 |
| | 1,697 |
|
| Total | $ | 2,650 |
| | $ | 1,406 |
| | $ | 969 |
| | $ | 335 |
| | $ | 606 |
| | $ | 16 |
| | $ | 5,982 |
|
| Individually evaluated for impairment: | | | | | | | | | | | | | |
| On-balance sheet | $ | 1,207 |
| | $ | 1,006 |
| | $ | 172 |
| | $ | 126 |
| | $ | — |
| | $ | — |
| | $ | 2,511 |
|
| Off-balance sheet | 224 |
| | 57 |
| | 70 |
| | 20 |
| | — |
| | 2 |
| | 373 |
|
| Total | $ | 1,431 |
| | $ | 1,063 |
| | $ | 242 |
| | $ | 146 |
| | $ | — |
| | $ | 2 |
| | $ | 2,884 |
|
| Total Farm & Ranch loans: | | | | | | | | | | | | | |
| On-balance sheet | $ | 3,311 |
| | $ | 2,107 |
| | $ | 910 |
| | $ | 413 |
| | $ | 44 |
| | $ | 11 |
| | $ | 6,796 |
|
| Off-balance sheet | 770 |
| | 362 |
| | 301 |
| | 68 |
| | 562 |
| | 7 |
| | 2,070 |
|
| Total | $ | 4,081 |
| | $ | 2,469 |
| | $ | 1,211 |
| | $ | 481 |
| | $ | 606 |
| | $ | 18 |
| | $ | 8,866 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 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 | $ | 2,115,450 |
| | $ | 569,360 |
| | $ | 537,859 |
| | $ | 183,660 |
| | $ | 11,545 |
| | $ | 8,894 |
| | $ | 3,426,768 |
|
| Off-balance sheet | 1,241,851 |
| | 437,575 |
| | 752,473 |
| | 131,889 |
| | 36,506 |
| | 4,503 |
| | 2,604,797 |
|
| Total | $ | 3,357,301 |
| | $ | 1,006,935 |
| | $ | 1,290,332 |
| | $ | 315,549 |
| | $ | 48,051 |
| | $ | 13,397 |
| | $ | 6,031,565 |
|
| Individually evaluated for impairment: | | | | | | | | | | | | | |
| On-balance sheet | $ | 41,648 |
| | $ | 27,770 |
| | $ | 10,658 |
| | $ | 7,610 |
| | $ | — |
| | $ | — |
| | $ | 87,686 |
|
| Off-balance sheet | 11,549 |
| | 2,735 |
| | 4,854 |
| | 915 |
| | — |
| | — |
| | 20,053 |
|
| Total | $ | 53,197 |
| | $ | 30,505 |
| | $ | 15,512 |
| | $ | 8,525 |
| | $ | — |
| | $ | — |
| | $ | 107,739 |
|
| Total Farm & Ranch loans: | | | | | | | | | | | | | |
| On-balance sheet | $ | 2,157,098 |
| | $ | 597,130 |
| | $ | 548,517 |
| | $ | 191,270 |
| | $ | 11,545 |
| | $ | 8,894 |
| | $ | 3,514,454 |
|
| Off-balance sheet | 1,253,400 |
| | 440,310 |
| | 757,327 |
| | 132,804 |
| | 36,506 |
| | 4,503 |
| | 2,624,850 |
|
| Total | $ | 3,410,498 |
| | $ | 1,037,440 |
| | $ | 1,305,844 |
| | $ | 324,074 |
| | $ | 48,051 |
| | $ | 13,397 |
| | $ | 6,139,304 |
|
| Allowance for Losses: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Collectively evaluated for impairment: | | | | | | | | | | | | | |
| On-balance sheet | $ | 2,000 |
| | $ | 652 |
| | $ | 735 |
| | $ | 193 |
| | $ | 22 |
| | $ | 28 |
| | $ | 3,630 |
|
| Off-balance sheet | 420 |
| | 281 |
| | 241 |
| | 54 |
| | 511 |
| | 6 |
| | 1,513 |
|
| Total | $ | 2,420 |
| | $ | 933 |
| | $ | 976 |
| | $ | 247 |
| | $ | 533 |
| | $ | 34 |
| | $ | 5,143 |
|
| Individually evaluated for impairment: | | | | | | | | | | | | | |
| On-balance sheet | $ | 613 |
| | $ | 770 |
| | $ | 270 |
| | $ | 132 |
| | $ | — |
| | $ | — |
| | $ | 1,785 |
|
| Off-balance sheet | 332 |
| | 20 |
| | 129 |
| | 26 |
| | — |
| | — |
| | 507 |
|
| Total | $ | 945 |
| | $ | 790 |
| | $ | 399 |
| | $ | 158 |
| | $ | — |
| | $ | — |
| | $ | 2,292 |
|
| Total Farm & Ranch loans: | | | | | | | | | | | | | |
| On-balance sheet | $ | 2,613 |
| | $ | 1,422 |
| | $ | 1,005 |
| | $ | 325 |
| | $ | 22 |
| | $ | 28 |
| | $ | 5,415 |
|
| Off-balance sheet | 752 |
| | 301 |
| | 370 |
| | 80 |
| | 511 |
| | 6 |
| | 2,020 |
|
| Total | $ | 3,365 |
| | $ | 1,723 |
| | $ | 1,375 |
| | $ | 405 |
| | $ | 533 |
| | $ | 34 |
| | $ | 7,435 |
|
The following tables presenttable presents by commodity type the unpaid principal balances, recorded investment, and specific allowance for losses related to impaired loans and the recorded investment in loans on nonaccrual status as of December 31, 2017 and 2016:2019:
Table 8.58.6
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Other | | Total |
| | (in thousands) |
| Impaired Loans: | | | | | | | | | | | | | |
| With no specific allowance: | | | | | | | | | | | | | |
| Recorded investment | $ | 30,846 | | | $ | 16,696 | | | $ | 3,195 | | | $ | 1,398 | | | $ | 0 | | | $ | 56 | | | $ | 52,191 | |
| Unpaid principal balance | 30,741 | | | 16,638 | | | 3,185 | | | 1,394 | | | 0 | | | 56 | | | 52,014 | |
| With a specific allowance: | | | | | | | | | | | | | |
Recorded investment(1) | 84,044 | | | 36,852 | | | 47,113 | | | 6,376 | | | 0 | | | 0 | | | 174,385 | |
| Unpaid principal balance | 83,772 | | | 36,732 | | | 46,984 | | | 6,356 | | | 0 | | | 0 | | | 173,844 | |
| Associated allowance | 2,725 | | | 1,051 | | | 2,636 | | | 129 | | | 0 | | | 0 | | | 6,541 | |
| Total: | | | | | | | | | | | | | |
| Recorded investment | 114,890 | | | 53,548 | | | 50,308 | | | 7,774 | | | 0 | | | 56 | | | 226,576 | |
| Unpaid principal balance | 114,513 | | | 53,370 | | | 50,169 | | | 7,750 | | | 0 | | | 56 | | | 225,858 | |
| Associated allowance | 2,725 | | | 1,051 | | | 2,636 | | | 129 | | | 0 | | | 0 | | | 6,541 | |
| | | | | | | | | | | | | |
Recorded investment of loans on nonaccrual status(2) | $ | 34,037 | | | $ | 22,849 | | | $ | 28,441 | | | $ | 2,454 | | | $ | 0 | | | $ | 0 | | | $ | 87,781 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 |
| | Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Other | | Total |
| | (in thousands) |
| Impaired Loans: | | | | | | | | | | | | | |
| With no specific allowance: | | | | | | | | | | | | | |
| Recorded investment | $ | 14,417 |
| | $ | 3,272 |
| | $ | 11,171 |
| | $ | 1,953 |
| | $ | — |
| | $ | 644 |
| | $ | 31,457 |
|
| Unpaid principal balance | 14,418 |
| | 3,273 |
| | 11,172 |
| | 1,953 |
| | — |
| | 644 |
| | 31,460 |
|
| With a specific allowance: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Recorded investment(1) | 62,309 |
| | 37,143 |
| | 9,376 |
| | 6,710 |
| | — |
| | 76 |
| | 115,614 |
|
| Unpaid principal balance | 62,314 |
| | 37,146 |
| | 9,376 |
| | 6,711 |
| | — |
| | 76 |
| | 115,623 |
|
| Associated allowance | 1,431 |
| | 1,063 |
| | 242 |
| | 146 |
| | — |
| | 2 |
| | 2,884 |
|
| Total: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Recorded investment | 76,726 |
| | 40,415 |
| | 20,547 |
| | 8,663 |
| | — |
| | 720 |
| | 147,071 |
|
| Unpaid principal balance | 76,732 |
| | 40,419 |
| | 20,548 |
| | 8,664 |
| | — |
| | 720 |
| | 147,083 |
|
| Associated allowance | 1,431 |
| | 1,063 |
| | 242 |
| | 146 |
| | — |
| | 2 |
| | 2,884 |
|
| | | | | | | | | | | | | | |
Recorded investment of loans on nonaccrual status(2) | $ | 27,630 |
| | $ | 25,701 |
| | $ | 5,333 |
| | $ | 4,929 |
| | $ | — |
| | $ | — |
| | $ | 63,593 |
|
| |
(1)
| Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $113.2 million (77 percent) of impaired loans as of December 31, 2017, which resulted in a specific allowance of $2.7 million. |
| |
(2)
| Includes $15.7 million of loans that are less than 90 days delinquent but which have not met Farmer Mac's performance criteria for returning to accrual status. |
(1)Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $159.1 million (70%) of impaired loans as of December 31, 2019, which resulted in a specific allowance of $3.0 million. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2016 |
| | Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Other | | Total |
| | (in thousands) |
| Impaired Loans: | | | | | | | | | | | | | |
| With no specific allowance: | | | | | | | | | | | | | |
| Recorded investment | $ | 20,761 |
| | $ | 3,683 |
| | $ | 1,054 |
| | $ | 1,970 |
| | $ | — |
| | $ | — |
| | $ | 27,468 |
|
| Unpaid principal balance | 20,816 |
| | 3,688 |
| | 1,055 |
| | 1,975 |
| | — |
| | — |
| | 27,534 |
|
| With a specific allowance: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Recorded investment(1) | 32,326 |
| | 26,748 |
| | 14,322 |
| | 6,535 |
| | — |
| | — |
| | 79,931 |
|
| Unpaid principal balance | 32,381 |
| | 26,817 |
| | 14,457 |
| | 6,550 |
| | — |
| | — |
| | 80,205 |
|
| Associated allowance | 945 |
| | 790 |
| | 399 |
| | 158 |
| | — |
| | — |
| | 2,292 |
|
| Total: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Recorded investment | 53,087 |
| | 30,431 |
| | 15,376 |
| | 8,505 |
| | — |
| | — |
| | 107,399 |
|
| Unpaid principal balance | 53,197 |
| | 30,505 |
| | 15,512 |
| | 8,525 |
| | — |
| | — |
| | 107,739 |
|
| Associated allowance | 945 |
| | 790 |
| | 399 |
| | 158 |
| | — |
| | — |
| | 2,292 |
|
| | | | | | | | | | | | | | |
Recorded investment of loans on nonaccrual status(2) | $ | 13,405 |
| | $ | 10,785 |
| | $ | 2,696 |
| | $ | 5,256 |
| | $ | — |
| | $ | — |
| | $ | 32,142 |
|
| |
(1)
| Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $76.5 million (71 percent) of impaired loans as of December 31, 2016, which resulted in a specific allowance of $1.6 million. |
| |
(2)
| Includes $12.4 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. |
(2)Includes $30.1 million of loans that are less than 90 days delinquent but which have not met Farmer Mac's performance criteria for returning to accrual status.
The following table presents by commodity type the average recorded investment and interest income recognized on impaired loans for the year ended December 31, 2017 and 2016:2019:
Table 8.6
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Other | | Total |
| | (in thousands) |
| For the Year Ended: | | | | | | | | | | | | | |
| Average recorded investment in impaired loans | $ | 71,154 |
| | $ | 37,597 |
| | $ | 15,913 |
| | $ | 8,135 |
| | $ | — |
| | $ | 381 |
| | $ | 133,180 |
|
| Income recognized on impaired loans | 696 |
| | 530 |
| | 238 |
| | 289 |
| | — |
| | — |
| | 1,753 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Other | | Total |
| | (in thousands) |
| For the Year Ended: | | | | | | | | | | | | | |
| Average recorded investment in impaired loans | $ | 33,252 |
| | $ | 24,737 |
| | $ | 14,450 |
| | $ | 8,396 |
| | $ | 1,968 |
| | $ | — |
| | $ | 82,803 |
|
| Income recognized on impaired loans | 136 |
| | 866 |
| | 238 |
| | 329 |
| | — |
| | — |
| | 1,569 |
|
A modification to the contractual terms of a loan that results in granting a concession to a borrower experiencing financial difficulties is considered a troubled debt restructuring ("TDR"). Farmer Mac has granted a concession when, as a result of the restructuring, it does not expect to collect all amounts due in a timely manner, including interest accrued at the original contract rate. In making its determination of whether a borrower is experiencing financial difficulties, Farmer Mac considers several factors, including whether (1) the borrower has declared or is in the process of declaring bankruptcy, (2) there is substantial doubt as to whether the borrower will continue to be a going concern, and (3) the borrower can obtain funds from other sources at an effective interest rate at or near a current market interest rate for debt with similar risk characteristics. Farmer Mac evaluates TDRs similarly to other impaired loans for purposes of the allowance for losses.
For the year ended December 31, 2017, the recorded investment of loans determined to be troubled debt restructurings ("TDRs") was $0.2 million both before and after restructuring. For the year ended December 31 2016, there were no TDRs. For the year ended December 31, 2015, the recorded investment of loans determined to be TDRs was $1.1 million both before and after restructuring. As of December 31, 2017 and 2016, 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 year ended December 31, 2017 and 2016.
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.
The following tables present information related to Farmer Mac's acquisition of defaulted loans for the years ended December 31, 2017, 2016, and 2015 and the outstanding balances and carrying amounts of all such loans as of December 31, 2017 and 2016:
Table 8.7
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Other | | Total |
| | (in thousands) |
| For the Year Ended: | | | | | | | | | | | | | |
| Average recorded investment in impaired loans | $ | 101,053 | | | $ | 44,986 | | | $ | 36,054 | | | $ | 7,953 | | | $ | 0 | | | $ | 60 | | | $ | 190,106 | |
| Income recognized on impaired loans | 1,157 | | | 625 | | | 687 | | | 284 | | | 0 | | | 0 | | | 2,753 | |
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | ($ in thousands) |
| Unpaid principal balance at acquisition date: | | | | | |
| Loans underlying LTSPCs | $ | 311 |
| | $ | 398 |
| | $ | 13,500 |
|
| Loans underlying off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities) | 5,670 |
| | 2,118 |
| | 3,407 |
|
| Total unpaid principal balance at acquisition date | 5,981 |
| | 2,516 |
| | 16,907 |
|
| Contractually required payments receivable | 6,018 |
| | 2,544 |
| | 17,036 |
|
| Impairment recognized subsequent to acquisition | 60 |
| | 208 |
| | 3,772 |
|
| Recovery/release of allowance for all outstanding acquired defaulted loans | 171 |
| | 67 |
| | 1,019 |
|
| | | | | | |
| Number of defaulted loans purchased | 13 |
| | 8 |
| | 6 |
|
|
| | | | | | | |
| | As of |
| | December 31, 2017 | | December 31, 2016 |
| | (in thousands) |
| Outstanding balance | $ | 18,866 |
| | $ | 14,669 |
|
| Carrying amount | 17,691 |
| | 13,069 |
|
Net credit losses and 90-day delinquencies as of and for the periods indicated for loans held and loans underlying off-balance sheet securities representing interests in pools of eligible Farm & Ranch loans ("Farm & Ranch Guaranteed Securities") and LTSPCs are presented in the table below. As of December 31, 2017,2019, there were no delinquencies and no probable losses inherent in Farmer Mac's Rural Utilities loan portfolio and Farmer Mac had not experienced credit losses on any Rural Utilities loans.
Table 8.8
| | | | | | | | | | | | | | | | | |
| 90-Day Delinquencies(1) | | Net Credit Losses |
| | As of | | For the Year Ended |
| | December 31, 2019 | | December 31, 2019 | | December 31, 2018 |
| | (in thousands) |
| Farm & Ranch loans | $ | 57,719 | | | $ | 131 | | | $ | 40 | |
(1)Includes loans that are 90 days or more past due, in foreclosure, or in bankruptcy with at least one missed payment, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan. |
| | | | | | | | | | | | | | | | | | | |
| | 90-Day Delinquencies(1) | | Net Credit (Recoveries)/Losses |
| | As of | | For the Year Ended |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| | (in thousands) |
| On-balance sheet assets: | | | | | | | | | |
| Farm & Ranch: | | | | | | | | | |
| Loans | $ | 47,881 |
| | $ | 19,757 |
| | $ | (1,397 | ) | | $ | 154 |
| | $ | 3,853 |
|
| Total on-balance sheet | $ | 47,881 |
| | $ | 19,757 |
| | $ | (1,397 | ) | | $ | 154 |
| | $ | 3,853 |
|
| Off-balance sheet assets: | |
| | | | |
| | |
| | |
| Farm & Ranch: | |
| | | | |
| | |
| | |
| LTSPCs | $ | 563 |
| | $ | 1,281 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Total off-balance sheet | $ | 563 |
| | $ | 1,281 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Total | $ | 48,444 |
| | $ | 21,038 |
| | $ | (1,397 | ) | | $ | 154 |
| | $ | 3,853 |
|
| |
(1)
| Includes loans and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are 90 days or more past due, in foreclosure, or in bankruptcy with at least one missed payment, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan. |
Of the $47.9 million of on-balance sheet loans reported as 90-day delinquencies asRural Utilities
As of December 31, 2017, $0.3 million were loans subject to "removal-of-account" provisions. Of the $19.8 million of on-balance sheet loans reported as 90-day delinquencies as of December 31, 2016, $0.1 million were loans subject to "removal-of-account" provisions.
Rural Utilities
No2019, no allowance for losses hashad been provided for Farmer Mac's Rural Utilities line of business based on the performance of the loans in this line of business and the credit quality of the collateral supporting these loans, as well as Farmer Mac's counterparty risk analysis. As of December 31, 2017,2019, there were no delinquencies or probable losses inherent in Farmer Mac's Rural Utilities loans held or underlying LTSPCs.
Credit Quality Indicators
The following tables present credit quality indicators related to Farm & Ranch loans held and Rural Utilities loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securitiesheld as of December 31, 2017 and 2016: 2020, by year of origination:
Table 8.9
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 |
| | 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 | $ | 2,274,912 |
| | $ | 771,600 |
| | $ | 617,527 |
| | $ | 260,854 |
| | $ | 13,023 |
| | $ | 9,030 |
| | $ | 3,946,946 |
|
Special mention(2) | 70,063 |
| | 22,878 |
| | 18,405 |
| | 8,483 |
| | — |
| | — |
| | 119,829 |
|
Substandard(3) | 67,674 |
| | 38,180 |
| | 17,602 |
| | 7,858 |
| | — |
| | 644 |
| | 131,958 |
|
| Total on-balance sheet | $ | 2,412,649 |
| | $ | 832,658 |
| | $ | 653,534 |
| | $ | 277,195 |
| | $ | 13,023 |
| | $ | 9,674 |
| | $ | 4,198,733 |
|
| Off-Balance Sheet: | | | | | | | | | | | | | |
| Acceptable | $ | 1,132,196 |
| | $ | 478,573 |
| | $ | 634,633 |
| | $ | 150,906 |
| | $ | 42,723 |
| | $ | 4,294 |
| | $ | 2,443,325 |
|
Special mention(2) | 76,778 |
| | 26,134 |
| | 31,451 |
| | 1,647 |
| | — |
| | 169 |
| | 136,179 |
|
Substandard(3) | 36,322 |
| | 30,198 |
| | 15,340 |
| | 3,880 |
| | 3,015 |
| | 594 |
| | 89,349 |
|
| Total off-balance sheet | $ | 1,245,296 |
| | $ | 534,905 |
| | $ | 681,424 |
| | $ | 156,433 |
| | $ | 45,738 |
| | $ | 5,057 |
| | $ | 2,668,853 |
|
| Total Ending Balance: | | | | | | | | | | | | | |
| Acceptable | $ | 3,407,108 |
| | $ | 1,250,173 |
| | $ | 1,252,160 |
| | $ | 411,760 |
| | $ | 55,746 |
| | $ | 13,324 |
| | $ | 6,390,271 |
|
Special mention(2) | 146,841 |
| | 49,012 |
| | 49,856 |
| | 10,130 |
| | — |
| | 169 |
| | 256,008 |
|
Substandard(3) | 103,996 |
| | 68,378 |
| | 32,942 |
| | 11,738 |
| | 3,015 |
| | 1,238 |
| | 221,307 |
|
| Total | $ | 3,657,945 |
| | $ | 1,367,563 |
| | $ | 1,334,958 |
| | $ | 433,628 |
| | $ | 58,761 |
| | $ | 14,731 |
| | $ | 6,867,586 |
|
| | | | | | | | | | | | | | |
Commodity analysis of past due loans(1) | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| On-balance sheet | $ | 21,702 |
| | $ | 18,833 |
| | $ | 3,835 |
| | $ | 3,511 |
| | $ | — |
| | $ | — |
| | $ | 47,881 |
|
| Off-balance sheet | 151 |
| | — |
| | — |
| | 412 |
| | — |
| | — |
| | 563 |
|
| 90 days or more past due | $ | 21,853 |
| | $ | 18,833 |
| | $ | 3,835 |
| | $ | 3,923 |
| | $ | — |
| | $ | — |
| | $ | 48,444 |
|
| |
(1)
| Amounts represent unpaid principal balance of risk-rated loans, which is the basis Farmer Mac uses to analyze its portfolio, and recorded investment of past due loans. |
| |
(2)
| Assets in the "Special mention" category generally have potential weaknesses due to performance issues but are currently considered to be adequately 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. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Year of Origination: | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans - Amortized Cost Basis | | Total |
| (in thousands) |
Farm & Ranch(1): | | | | | | | | | | | | | | | |
| Internally Assigned Risk Rating: | | | | | | | | | | | | | | | |
| Acceptable | $ | 1,947,618 | | | $ | 774,315 | | | $ | 484,345 | | | $ | 500,768 | | | $ | 465,277 | | | $ | 1,068,693 | | | $ | 535,742 | | | $ | 5,776,758 | |
Special mention(2) | 70,171 | | | 79,744 | | | 18,317 | | | 8,530 | | | 13,111 | | | 21,328 | | | 7,656 | | | 218,857 | |
Substandard(3) | 3,400 | | | 5,821 | | | 21,879 | | | 52,709 | | | 37,173 | | | 50,582 | | | 9,259 | | | 180,823 | |
| Total | $ | 2,021,189 | | | $ | 859,880 | | | $ | 524,541 | | | $ | 562,007 | | | $ | 515,561 | | | $ | 1,140,603 | | | $ | 552,657 | | | $ | 6,176,438 | |
| | | | | | | | | | | | | | | |
| For the Year Ended: | | | | | | | | | | | | | | | |
| Current period charge-offs | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 5,365 | | | $ | 0 | | | $ | 394 | | | $ | 0 | | | $ | 5,759 | |
| Current period recoveries | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Current period Farm & Ranch net charge-offs | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 5,365 | | | $ | 0 | | | $ | 394 | | | $ | 0 | | | $ | 5,759 | |
(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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Year of Origination: | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans - Amortized Cost Basis | | Total |
| (in thousands) |
Rural Utilities(1): | | | | | | | | | | | | | | | |
| Internally Assigned Risk Rating: | | | | | | | | | | | | | | | |
| Acceptable | $ | 667,489 | | | $ | 809,921 | | | $ | 8,260 | | | $ | 89,842 | | | $ | 31,275 | | | $ | 641,145 | | | $ | 12,480 | | | $ | 2,260,412 | |
Special mention(2) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Substandard(3) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | $ | 667,489 | | | $ | 809,921 | | | $ | 8,260 | | | $ | 89,842 | | | $ | 31,275 | | | $ | 641,145 | | | $ | 12,480 | | | $ | 2,260,412 | |
| | | | | | | | | | | | | | | |
| For the Year Ended: | | | | | | | | | | | | | | | |
| Current period charge-offs | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Current period recoveries | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Current period Rural Utilities net charge-offs | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
(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. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 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 | $ | 2,080,227 |
| | $ | 568,221 |
| | $ | 504,784 |
| | $ | 179,288 |
| | $ | 11,545 |
| | $ | 8,894 |
| | $ | 3,352,959 |
|
Special mention(2) | 35,223 |
| | 1,139 |
| | 33,075 |
| | 4,372 |
| | — |
| | — |
| | 73,809 |
|
Substandard(3) | 41,648 |
| | 27,770 |
| | 10,658 |
| | 7,610 |
| | — |
| | — |
| | 87,686 |
|
| Total on-balance sheet | $ | 2,157,098 |
| | $ | 597,130 |
| | $ | 548,517 |
| | $ | 191,270 |
| | $ | 11,545 |
| | $ | 8,894 |
| | $ | 3,514,454 |
|
| Off-Balance Sheet | | | | | | | | | | | | | |
| Acceptable | $ | 1,201,144 |
| | $ | 403,256 |
| | $ | 724,056 |
| | $ | 125,440 |
| | $ | 34,537 |
| | $ | 3,916 |
| | $ | 2,492,349 |
|
Special mention(2) | 20,422 |
| | 16,881 |
| | 15,341 |
| | 2,344 |
| | — |
| | 6 |
| | 54,994 |
|
Substandard(3) | 31,834 |
| | 20,173 |
| | 17,930 |
| | 5,020 |
| | 1,969 |
| | 581 |
| | 77,507 |
|
| Total off-balance sheet | $ | 1,253,400 |
| | $ | 440,310 |
| | $ | 757,327 |
| | $ | 132,804 |
| | $ | 36,506 |
| | $ | 4,503 |
| | $ | 2,624,850 |
|
| Total Ending Balance: | | | | | | | | | | | | | |
| Acceptable | $ | 3,281,371 |
| | $ | 971,477 |
| | $ | 1,228,840 |
| | $ | 304,728 |
| | $ | 46,082 |
| | $ | 12,810 |
| | $ | 5,845,308 |
|
Special mention(2) | 55,645 |
| | 18,020 |
| | 48,416 |
| | 6,716 |
| | — |
| | 6 |
| | 128,803 |
|
Substandard(3) | 73,482 |
| | 47,943 |
| | 28,588 |
| | 12,630 |
| | 1,969 |
| | 581 |
| | 165,193 |
|
| Total | $ | 3,410,498 |
| | $ | 1,037,440 |
| | $ | 1,305,844 |
| | $ | 324,074 |
| | $ | 48,051 |
| | $ | 13,397 |
| | $ | 6,139,304 |
|
| | | | | | | | | | | | | | |
Commodity analysis of past due loans(1) | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| On-balance sheet | $ | 13,449 |
| | $ | 3,245 |
| | $ | 669 |
| | $ | 2,394 |
| | $ | — |
| | $ | — |
| | $ | 19,757 |
|
| Off-balance sheet | 373 |
| | 407 |
| | 38 |
| | 463 |
| | — |
| | — |
| | 1,281 |
|
| 90 days or more past due | $ | 13,822 |
| | $ | 3,652 |
| | $ | 707 |
| | $ | 2,857 |
| | $ | — |
| | $ | — |
| | $ | 21,038 |
|
| |
(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. |
(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.
Concentrations of Credit Risk
The following table sets forth the geographic and commodity/collateral diversification, the range of original loan-to-value ratios, and the range in the size of borrower exposure for allpresents credit quality indicators related to Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs as of December 31, 2017 and 2016:
2019:
Table 8.10
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Other | | Total |
| | (in thousands) |
Internally Assigned Risk Rating(1) | | | | | | | | | | | | | |
| Acceptable | $ | 2,556,956 | | | $ | 1,050,160 | | | $ | 825,234 | | | $ | 343,329 | | | $ | 10,360 | | | $ | 4,597 | | | $ | 4,790,636 | |
Special mention(2) | 107,406 | | | 111,739 | | | 46,107 | | | 13,591 | | | 0 | | | 0 | | | 278,843 | |
Substandard(3) | 108,815 | | | 51,257 | | | 39,962 | | | 7,044 | | | 0 | | | 0 | | | 207,078 | |
| Total | $ | 2,773,177 | | | $ | 1,213,156 | | | $ | 911,303 | | | $ | 363,964 | | | $ | 10,360 | | | $ | 4,597 | | | $ | 5,276,557 | |
| | | | | | | | | | | | | |
Commodity analysis of past due loans(1) | $ | 21,167 | | | $ | 15,828 | | | $ | 19,354 | | | $ | 1,370 | | | $ | 0 | | | $ | 0 | | | $ | 57,719 | |
(1)Amounts represent unpaid principal balance of risk-rated loans, which is the basis Farmer Mac uses to analyze its portfolio, and recorded investment of past due loans.
(2)Assets in the "Special mention" category generally have potential weaknesses due to performance issues but are currently considered to be adequately secured.
(3)Substandard assets have a well-defined weakness or weaknesses and there is a distinct possibility that some loss will be sustained if deficiencies are not corrected.
|
| | | | | | | |
| | As of |
| | December 31, 2017 | | December 31, 2016 |
| | (in thousands) |
| By commodity/collateral type: | | | |
| Crops | $ | 3,657,945 |
| | $ | 3,410,498 |
|
| Permanent plantings | 1,367,563 |
| | 1,037,440 |
|
| Livestock | 1,334,958 |
| | 1,305,844 |
|
| Part-time farm | 433,628 |
| | 324,074 |
|
| Ag. Storage and Processing | 58,761 |
| | 48,051 |
|
| Other | 14,731 |
| | 13,397 |
|
| Total | $ | 6,867,586 |
| | $ | 6,139,304 |
|
By geographic region(1): | |
| | |
|
| Northwest | $ | 740,991 |
| | $ | 657,403 |
|
| Southwest | 2,093,213 |
| | 1,791,745 |
|
| Mid-North | 2,244,094 |
| | 2,104,867 |
|
| Mid-South | 908,603 |
| | 837,121 |
|
| Northeast | 296,264 |
| | 229,679 |
|
| Southeast | 584,421 |
| | 518,489 |
|
| Total | $ | 6,867,586 |
| | $ | 6,139,304 |
|
By original loan-to-value ratio(2): | |
| | |
|
| 0.00% to 40.00% | $ | 1,322,422 |
| | $ | 1,220,432 |
|
| 40.01% to 50.00% | 1,733,671 |
| | 1,466,047 |
|
| 50.01% to 60.00% | 2,385,605 |
| | 2,078,099 |
|
| 60.01% to 70.00% | 1,150,914 |
| | 1,167,395 |
|
| 70.01% to 80.00% | 248,799 |
| | 191,664 |
|
| 80.01% to 90.00% | 26,175 |
| | 15,667 |
|
| Total | $ | 6,867,586 |
| | $ | 6,139,304 |
|
By size of borrower exposure(3): | | | |
| Less than $1,000,000 | $ | 2,379,596 |
| | $ | 2,195,103 |
|
| $1,000,000 to $4,999,999 | 2,627,617 |
| | 2,398,843 |
|
| $5,000,000 to $9,999,999 | 867,574 |
| | 782,171 |
|
| $10,000,000 to $24,999,999 | 584,896 |
| | 469,681 |
|
| $25,000,000 to $50,000,000 | 407,903 |
| | 293,506 |
|
| Total | $ | 6,867,586 |
| | $ | 6,139,304 |
|
| |
(1)
| Geographic regions: Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN). |
| |
(2)
| As of second quarter 2017, Farmer Mac revised its calculation of the original loan-to-value ratio of a loan to combine for any cross-collateralized loans: (i) the original loan principal balance amounts in the numerator and (ii) the original appraised property values in the denominator. In previous periods, the ratio was calculated on a loan-by-loan basis without considering the effects of any cross-collateralization. Prior period information has been reclassified to conform to the current period calculation and presentation. |
| |
(3)
| Includes multiple loans to the same borrower or borrower-related entities. |
9.EQUITY
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.
Common Stock
Farmer Mac has three classes of common stock outstanding:
•Class A voting common stock, which may be held only by banks, insurance companies, and other financial institutions or similar entities that are not institutions of the Farm Credit System. By federal statute, no holder of Class A voting common stock may directly or indirectly be a beneficial owner of more than 33 percent33% of the outstanding shares of Class A voting common stock.
•Class B voting common stock, which may be held only by institutions of the Farm Credit System. There are no restrictions on the maximum holdings of Class B voting common stock.
•Class C non-voting common stock, which has no ownership restrictions.
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 December 31, 2017, Farmer Mac had repurchased approximately 668,000 shares of Class C non-voting common stock at a cost of approximately $19.6 million pursuant to the share repurchase program. In August 2017, Farmer Mac's board of directors approved the continuation of the share repurchase program on its existing terms through August 2019 for the repurchase of up to $5.4 million of Farmer Mac's outstanding Class C non-voting common stock, which is the amount that was remaining under the share repurchase program originally authorized in third quarter 2015.
During 2017, 2016,2020, 2019, and 2015,2018, Farmer Mac paid a quarterly dividend of $0.36, $0.26,$0.80, $0.70, and $0.16, respectively,$0.58 per share on all classes of its common stock. Farmer Mac's ability to declare and pay dividends on its common stock could be restricted if it fails to comply with applicable capital requirements.
Farmer Mac's board of directors approved a share repurchase program during third quarter 2015 authorizing Farmer Mac to repurchase up to $25.0 million of its outstanding Class C non-voting common stock. The share repurchase program, last modified on March 14, 2019, authorized Farmer Mac to repurchase up to $10.0 million of Farmer Mac's outstanding Class C non-voting common stock. During first quarter 2020, Farmer Mac repurchased approximately 4,000 shares of Class C non-voting common stock at a cost of approximately $0.2 million. Shortly after these repurchases were completed, Farmer Mac indefinitely suspended its share repurchase program in an effort to preserve capital and liquidity in view of market volatility and uncertainty caused by the COVID-19 pandemic. As of December 31, 2020, Farmer Mac had repurchased approximately 673,000 shares of Class C non-voting common stock at a cost of approximately $19.8 millionunder the share repurchase program since 2015. The program expires at the end of March 2021.
Preferred Stock
On January 17, 2013,August 20, 2020, Farmer Mac issued 2.44.8 million shares of 5.875 percent5.250% Non-Cumulative Preferred Stock, Series F ("Series F Preferred Stock"), which has a par value and liquidation preference of $25.00 per share, or $120.0 million aggregate outstanding. Farmer Mac incurred direct costs of $3.8 million related to the issuance of the Series F Preferred Stock. The dividend rate on the Series F Preferred Stock will remain at a non-cumulative, fixed rate of 5.250% per year, when, as, and if a dividend is declared by the Board of Directors of Farmer Mac, for so long as the Series F Preferred Stock remains outstanding. The Series F Preferred Stock has no maturity date, but Farmer Mac has the option to redeem the Series F Preferred Stock at any time on any dividend payment date on and after October 17, 2025.
On September 19, 2020, Farmer Mac used part of the net proceeds from the sale of the Series F Preferred Stock to redeem and repurchase all $60.0 million aggregate outstanding of Farmer Mac's 5.875% Non-Cumulative Preferred Stock, Series A (the "Series("Series A Preferred Stock"). On March 25, 2014,, plus any declared and unpaid dividends through and including the redemption date. As a result of the retirement of the Series A
Preferred Stock, Farmer Mac recognized $1.7 million of deferred issuance costs, which is presented as "Loss on retirement of preferred stock" on the consolidated statements of operations.
In May 2020, Farmer Mac issued 3.03.18 million shares of 6.875 percent5.750% Non-Cumulative Preferred Stock, Series B (the "Series BE ("Series E Preferred Stock"). On June 20, 2014,, which has a par value and liquidation preference of $25.00 per share, or $79.5 million aggregate outstanding. Farmer Mac issued 3.0incurred direct costs of $2.5 million sharesrelated to the issuance of 6.000 percent Fixed-to-Floating Rate Non-Cumulativethe Series E Preferred Stock. The dividend rate on the Series E Preferred Stock will remain at a non-cumulative, fixed rate of 5.750% per year, when, as, and if a dividend is declared by the Board of Directors of Farmer Mac, for so long as the Series C (the "Series CE Preferred Stock").Stock remains outstanding. The Series AE Preferred Stock has no maturity date, but Farmer Mac has the option to redeem the preferred stock at any time on any dividend payment date on and after July 17, 2025.
The following table presents the Series C Preferred Stock, the Series BD Preferred Stock, the Series E Preferred Stock, and the Series CF Preferred Stock (collectively referred to as the "Outstanding Preferred Stock") each has a par valueas of $25.00 per share and a liquidation preference of $25.00 per share. The Series A Preferred Stock and the Series B Preferred Stock pay an annual dividend rate of 5.875 percent and 6.875 percent, respectively, for the life of the securities. December 31, 2020:
Table 9.1
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Name | | Issuance Date | | Issuance Cost | | Shares Issued | | Annual Dividend Rate(3) | | Liquidation Value | | Redemption Date(4) |
Series C(1) | | June 20, 2014 | | $ | 1,618,583 | | | 3,000,000 | | 6.000 | % | | $ | 25.00 | | | July 18, 2024 |
Series D(2) | | May 13, 2019 | | $ | 3,340,456 | | | 4,000,000 | | 5.700 | % | | $ | 25.00 | | | July 17, 2024 |
| Series E | | May 20, 2020 | | $ | 2,496,750 | | | 3,180,000 | | 5.750 | % | | $ | 25.00 | | | July 17, 2025 |
| Series F | | August 20, 2020 | | $ | 3,839,902 | | | 4,800,000 | | 5.250 | % | | $ | 25.00 | | | October 17, 2025 |
(1)The Series C Preferred Stock pays an annual dividend rate of 6.000 percent6.000% from the date of issuance to and including the quarterly payment date occurring on July 17, 2024, and thereafter, at a floating rate equal to three-month LIBOR plus 3.263.26%.
percent. (2)Farmer Mac has the right, but not the obligation,option to redeem the Series A Preferred Stock atpreferred stock on any time on and after January 17, 2018, the Series B Preferred Stock at any time on and after April 17, 2019, and the Series C Preferred Stock at any timequarterly dividend payment date on and after July 18, 2024, all at a price equal to the then-applicable liquidation preference. 17, 2024.
(3)Dividends on all series of Outstanding Preferred Stock are non-cumulative, which means that if Farmer Mac's board of directors has not declared a dividend before the applicable dividend payment date for any dividend period, such dividend will not be paid or cumulate, and Farmer Mac will have no obligation to pay dividends for such dividend period, whether or not dividends on any series of Outstanding Preferred Stock are declared for any future dividend period.
(4)Farmer Mac incurred direct costs of $1.7 million relatedhas the right but not the obligation to redeem.
The following tables present the issuance ofquarterly dividends paid by Farmer Mac on its outstanding preferred during 2020, 2019, and 2018:
Table 9.2
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 |
| 1st Quarter | | 2nd Quarter(1) | | 3rd Quarter(2)(3) | | 4th Quarter |
| 5.875% Non-Cumulative Preferred Stock, Series A | $ | 0.3672 | | | $ | 0.3672 | | | $ | 0.2530 | | | $ | 0 | |
| 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C | 0.3750 | | 0.3750 | | 0.3750 | | 0.3750 |
| 5.700% Non-Cumulative Preferred Stock, Series D | 0.3563 | | 0.3563 | | 0.3563 | | 0.3563 |
| 5.750% Non-Cumulative Preferred Stock, Series E | 0 | | 0.2276 | | 0.3594 | | 0.3594 |
| 5.250% Non-Cumulative Preferred Stock, Series F | 0 | | 0 | | 0.2078 | | 0.3281 |
(1)For second quarter 2020, dividend payment includes $0.2276 per share on the Series E Preferred Stock for the period from but not including May 20, 2020 (issuance date) to and including the July 17, 2020.
(2)For third quarter 2020 dividend payment includes $0.2530 per share on the Series A Preferred Stock direct costs of $1.9 million relatedfor the period from but not including July 17, 2020 to and including the issuance ofSeptember 19, 2020 redemption date.
(3)For third quarter 2020, dividend payment includes $0.2078 per share on the Series F Preferred Stock for the period from but not including August 20, 2020 (issuance date) to and including the October 17, 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| 2019 |
| 1st Quarter | | 2nd Quarter(1)(2) | | 3rd Quarter | | 4th Quarter |
| 5.875% Non-Cumulative Preferred Stock, Series A | $ | 0.3672 | | | $ | 0.3672 | | | $ | 0.3672 | | | $ | 0.3672 | |
| 6.875% Non-Cumulative Preferred Stock, Series B | 0.4297 | | 0.2626 | | 0 | | 0 |
| 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C | 0.3750 | | 0.3750 | | 0.3750 | | 0.3750 |
| 5.700% Non-Cumulative Preferred Stock, Series D | 0 | | 0.2533 | | 0.3563 | | 0.3563 |
(1)For second quarter 2019, dividend payment includes $0.2626 per share on the Series B Preferred Stock for the period from but not including April 17, 2019 to and direct costs of $1.6 million related toincluding the issuance of the Series C Preferred Stock. As of December 31, 2017, Farmer Mac had 2.4 million shares of Series A Preferred Stock outstanding, 3.0 millionshares of Series B Preferred Stock outstanding, and 3.0 millionof Series C Preferred Stock outstanding.June 12, 2019 redemption date.
(2)For 2017, 2016 and 2015, Farmer Mac paid the following quarterly dividends on its outstanding preferred stock:
$0.3672second quarter 2019, dividend payment includes $0.2533 per share on its 5.875% Non-Cumulativethe Series D Preferred Stock Series A;for the period from but not including May 13, 2019 (issuance date) to and including July 17, 2019.
$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. | | | | | | | | | | | | | | | | | | | | | | | |
| 2018 |
| 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter |
| 5.875% Non-Cumulative Preferred Stock, Series A | $ | 0.3672 | | | $ | 0.3672 | | | $ | 0.3672 | | | $ | 0.3672 | |
| 6.875% Non-Cumulative Preferred Stock, Series B | 0.4297 | | | 0.4297 | | | 0.4297 | | | 0.4297 | |
| 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C | 0.3750 | | | 0.3750 | | | 0.3750 | | | 0.3750 | |
Farmer Mac's ability to declare and pay dividends on its preferred stock could be restricted if it fails to comply with applicable capital requirements. Farmer Mac's preferred stock is included as a component of core capital for regulatory and statutory capital compliance measurements.
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. The accrual of declared dividends on Farmer Mac II LLC Preferred Stock prior to its redemption is presented in "Net income attributable to non-controlling interest" on the consolidated statements of operations on a pre-tax basis and the consolidated tax benefit is included in "Income tax expense" on the consolidated statements of operations.
Equity-Based Incentive Compensation Plans
Farmer Mac's Amended and Restated 2008 Omnibus Incentive Compensation Plan authorizes the grantsgrant of restricted stock stock options, and SARs, among other alternative forms of equity-based compensation, to Farmer Mac's directors, officers, and other employees. SARs awarded to officers and employees vest annually in thirds. Farmer Mac has not granted SARs to directors since 2008. If not exercised or terminatedcancelled earlier
due to the termination of employment, SARs granted to officers or employees expire after 10 years from the grant date. For all SARs granted, the exercise price is equal to the closing price of Farmer Mac's Class C non-voting common stock on the date of grant. SARs granted during 20172020 have an exercise price ranging from $72.26 to $75.16 per share, SARs granted during 2019 have an exercise price of $60.84 per share, SARs granted during 2016 have an exercise price of $35.75$82.76 per share, and SARs granted during 20152018 have an exercise prices ranging from $28.17 to $32.39price of $86.15 per share. During 2017, 2016,2020, 2019, and 2015,2018, restricted stock awards were granted to employees, officers, and directors with a vesting periodperiods of one year, to officers with a vesting period of three years provided certain performance targets are met, to officers vesting annually in thirds, and to employees with a vesting period of three years.
The following tables summarize stock options, SARs and non-vested restricted stock activity for the years ended December 31, 2017, 2016,2020, 2019, and 2015:2018:
Table 9.19.3
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| SARs | | Weighted-
Average
Exercise
Price | | SARs | | Weighted-
Average
Exercise
Price | | SARs | | Weighted-
Average
Exercise
Price |
| Outstanding, beginning of year | 98,836 | | | $ | 46.47 | | | 124,960 | | | $ | 38.38 | | | 163,272 | | | $ | 32.95 | |
| Granted | 34,881 | | | 74.80 | | | 24,582 | | | 82.76 | | | 10,122 | | | 86.15 | |
| Exercised | (15,912) | | | 26.93 | | | (40,851) | | | 35.61 | | | (48,434) | | | 30.06 | |
| Canceled | (1,388) | | | 86.15 | | | (9,855) | | | 79.45 | | | 0 | | | 0 | |
| Outstanding, end of year | 116,417 | | | 57.16 | | | 98,836 | | | 46.47 | | | 124,960 | | | 38.38 | |
| Exercisable at end of year | 66,602 | | | 42.08 | | | 72,696 | | | 34.07 | | | 95,675 | | | 31.41 | |
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | Non-vested
Restricted
Stock | | Weighted-
Average
Grant Date
Fair Value | | Non-vested
Restricted
Stock | | Weighted-
Average
Grant Date
Fair Value | | Non-vested
Restricted
Stock | | Weighted-
Average
Grant Date
Fair Value |
| Outstanding, beginning of year | 62,597 | | | $ | 75.81 | | | 80,153 | | | $ | 60.98 | | | 95,015 | | | $ | 44.39 | |
| Granted | 53,471 | | | 66.02 | | | 41,735 | | | 80.51 | | | 32,070 | | | 84.03 | |
| Canceled | (4,042) | | | 69.66 | | | (17,054) | | | 74.97 | | | (1,098) | | | 86.15 | |
| Vested and issued | (28,070) | | | 70.13 | | | (42,237) | | | 52.65 | | | (45,834) | | | 42.12 | |
| Outstanding, end of year | 83,956 | | | 71.76 | | | 62,597 | | | 75.81 | | | 80,153 | | | 60.98 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | Stock
Options
and
SARs | | Weighted-
Average
Exercise
Price | | Stock
Options
and
SARs | | Weighted-
Average
Exercise
Price | | Stock
Options
and
SARs | | Weighted-
Average
Exercise
Price |
| Outstanding, beginning of year | 367,535 |
| | $ | 30.18 |
| | 747,573 |
| | $ | 26.68 |
| | 718,143 |
| | $ | 25.12 |
|
| Granted | 24,657 |
| | 60.84 |
| | 51,975 |
| | 35.75 |
| | 119,110 |
| | 32.25 |
|
| Exercised | (111,278 | ) | | 31.47 |
| | (431,346 | ) | | 24.77 |
| | (86,680 | ) | | 21.32 |
|
| Canceled | (117,642 | ) | | 31.55 |
| | (667 | ) | | 35.60 |
| | (3,000 | ) | | 30.05 |
|
| Outstanding, end of year | 163,272 |
| | 32.95 |
| | 367,535 |
| | 30.18 |
| | 747,573 |
| | 26.68 |
|
| Exercisable at end of year | 93,085 |
| | 28.57 |
| | 208,274 |
| | 27.41 |
| | 543,698 |
| | 24.34 |
|
| | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | Non-vested
Restricted
Stock | | Weighted-
Average
Grant Date
Fair Value | | Non-vested
Restricted
Stock | | Weighted-
Average
Grant Date
Fair Value | | Non-vested
Restricted
Stock | | Weighted-
Average
Grant Date
Fair Value |
| Outstanding, beginning of year | 138,497 |
| | $ | 34.63 |
| | 132,651 |
| | $ | 32.12 |
| | 103,772 |
| | $ | 31.24 |
|
| Granted | 45,828 |
| | 59.79 |
| | 76,617 |
| | 36.33 |
| | 76,616 |
| | 32.14 |
|
| Canceled | (28,815 | ) | | 42.15 |
| | (1,360 | ) | | 35.75 |
| | — |
| | — |
|
| Vested and issued | (60,495 | ) | | 34.77 |
| | (69,411 | ) | | 31.69 |
| | (47,737 | ) | | 30.25 |
|
| Outstanding, end of year | 95,015 |
| | 44.39 |
| | 138,497 |
| | 34.63 |
| | 132,651 |
| | 32.12 |
|
The cancellations of stock options, SARs and non-vested restricted stock during 2017, 2016,2020, 2019, and 20152018 were due to unvested awards terminating in accordance with the provisions of the applicable equity compensation plans or award agreements upon directors' or employees' departures from Farmer Mac.
Farmer Mac generally receives cash when stock options are exercised. Cash is not received from exercises of SARs or the vesting and issuance of restricted stock. Farmer Mac received $0.2 million from the exercise of stock options during 2017, $0.5 million during 2016,During 2020, 2019, and $1.7 million during 2015. During 2017, 2016, and 2015,2018, the reduction of income taxes payable as a result of the deduction for the
exercise of stock options and SARs and the vesting or accelerated tax elections of restricted stock was $2.6$0.5 million, $3.6$1.0 million, and $0.8$1.5 million, respectively. Also reflected during 2017 was $0.9During 2020 and 2019, Farmer Mac recognized $8,900 and $0.4 million, respectively, of tax benefits recognized in income tax expense associated with stock compensation activity that was subject to ASU 2016-09 accounting guidance, “Improvements to Employee Share-Based Payment Accounting,”adopted in first quarter 2017. More information about the adoption of ASU 2016-09activity.
During 2020, 2019, and the effect on Farmer Mac's financial position, results of operations, and cash flows is included in Note 2(r).
During 2017, 2016, and 20152018, Farmer Mac recorded a net decrease to additional paid-in capital of $2.6$0.6 million, $3.1$1.8 million, and $0.6$2.7 million, respectively,related to stock-based compensation awards.
Farmer Mac has a policy that permits directors of Farmer Mac to elect to receive shares of Class C non-voting common stock in lieu of cash retainers. During 2017, Farmer Mac issued 698 shares of Class C non-voting common stock with a fair value of $41,000 to the 4 directors who made that election. During 2016, Farmer Mac issued 1,130 shares of Class C non-voting common stock with a fair value of $41,000 to the 4 directors who made that election. During 2015, Farmer Mac issued 491 shares of Class C non-voting common stock with a fair value of $14,000 to the 4 directors who made that election.
As of December 31, 2017,2020, Farmer Mac had no0 stock options outstanding. The following tables summarize information regarding SARs and non-vested restricted stock outstanding as of December 31, 2017:2020:
Table 9.29.4
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SARs: | | | | | | | | | | | | |
| | | Outstanding | | Exercisable | | Vested or Expected to Vest |
Range of
Exercise Prices | | SARs | | Weighted-
Average Remaining Contractual Life | | SARs | | Weighted-
Average Remaining Contractual Life | | SARs | | Weighted-
Average Remaining Contractual Life |
| $10.00 - $24.99 | | 9,000 | | | 1.1 years | | 9,000 | | | 1.1 years | | 9,000 | | | 1.1 years |
| 25.00 - 39.99 | | 40,537 | | | 3.7 years | | 40,537 | | | 3.7 years | | 40,537 | | | 3.7 years |
| 40.00 - 54.99 | | 0 | | | 0.0 years | | 0 | | | 0.0 years | | 0 | | | 0.0 years |
| 55.00 - 69.99 | | 6,619 | | | 6.3 years | | 6,619 | | | 6.3 years | | 6,619 | | | 6.3 years |
| 70.00 - 84.99 | | 54,303 | | | 8.9 years | | 6,474 | | | 8.3 years | | 54,303 | | | 8.9 years |
| 85.00 - 99.99 | | 5,958 | | | 7.3 years | | 3,972 | | | 7.3 years | | 5,958 | | | 7.3 years |
| | 116,417 | | | | | 66,602 | | | | | 116,417 | | | |
| | | | | | | | | | | | |
| Non-vested Restricted Stock: | | | | | | | | | | |
| | | Outstanding | | Expected to Vest | | | | |
Weighted-
Average
Grant-Date
Fair Value | | Non-vested Restricted Stock | | Weighted-Average Remaining Contractual
Life | | Non-vested Restricted Stock | | Weighted-Average Remaining Contractual
Life | | | | |
| $35.00 - $49.99 | | 0 | | | 0.0 years | | 0 | | | 0.0 years | | | | |
| 50.00 - 64.99 | | 19,622 | | | 2.2 years | | 19,622 | | | 2.2 years | | | | |
| 65.00 - 79.99 | | 43,804 | | | 1.4 years | | 43,804 | | | 1.4 years | | | | |
| 80.00 - 94.99 | | 20,530 | | | 0.8 years | | 20,530 | | | 0.8 years | | | | |
| | 83,956 | | | | | 83,956 | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | | Outstanding | | Exercisable | | Vested or Expected to Vest |
Range of
Exercise Prices | | SARs | | Weighted-
Average Remaining Contractual Life | | SARs | | Weighted-
Average Remaining Contractual Life | | SARs | | Weighted-
Average Remaining Contractual Life |
| $5.00 - $14.99 | | 11,000 |
| | 2.5 years | | 11,000 |
| | 2.5 years | | 11,000 |
| | 2.5 years |
| 15.00 - 24.99 | | 14,000 |
| | 4.0 years | | 14,000 |
| | 4.0 years | | 14,000 |
| | 4.0 years |
| 25.00 - 34.99 | | 82,689 |
| | 6.8 years | | 46,163 |
| | 6.5 years | | 82,689 |
| | 6.8 years |
| 35.00 - 44.99 | | 41,588 |
| | 7.5 years | | 21,922 |
| | 6.9 years | | 41,588 |
| | 7.5 years |
| 45.00 - 54.99 | | — |
| | 0.0 years | | — |
| | 0.0 years | | — |
| | 0.0 years |
| 55.00 - 64.99 | | 13,995 |
| | 9.3 years | | — |
| | 0.0 years | | 13,995 |
| | 9.3 years |
| | | 163,272 |
| | | | 93,085 |
| | | | 163,272 |
| | |
| | | | | | | | | | | | | |
| | | Outstanding | | Expected to Vest | | |
| | |
Weighted-
Average
Grant-Date
Fair Value | | Non-vested Restricted Stock | | Weighted-Average Remaining Contractual
Life | | Non-vested Restricted Stock | | Weighted-Average Remaining Contractual
Life | | |
| | |
| $25.00 - $34.99 | | 6,778 |
| | 0.1 years | | 6,778 |
| | 0.1 years | | | | |
| 35.00 - 44.99 | | 50,882 |
| | 1.5 years | | 50,882 |
| | 1.5 years | | | | |
| 45.00 - 54.99 | | — |
| | 0.0 years | | — |
| | 0.0 years | | | | |
| 55.00 - 64.99 | | 37,355 |
| | 2.3 years | | 37,355 |
| | 2.3 years | | | | |
| | | 95,015 |
| | | | 95,015 |
| | | | | | |
The weighted average exercise price of the 163,272 SARs vested or expected to vest as of December 31, 2017 was $32.95.
As of December 31, 20172020 and 2016,2019, the intrinsic value of options, SARs, and non-vested restricted stock outstanding, exercisable, and vested or expected to vest was $14.8$8.5 million and $17.4$8.9 million, respectively. During 2017, 2016,2020, 2019, and 2015,2018, the total intrinsic value of options and SARs exercised was $3.8$0.7 million, $7.6$1.9 million, and $0.9$3.0 million, respectively. As of December 31, 2017,2020, there was $2.3$2.4 million of total unrecognized compensation cost related to non-vested SARs and restricted stock awards. This cost is expected to be recognized over a weighted-average period of 1.71.8 years.
The weighted-average grant date fair values of options, SARs and restricted stock awards granted in 2017, 2016,2020, 2019, and 20152018 were $44.93, $25.11,$45.91, $58.27, and $17.97$69.38 per share, respectively. Under the fair value-based method of accounting for stock-based compensation cost, Farmer Mac recognized compensation expense of $2.7$4.1 million, $3.3$2.3 million, and $3.3$2.5 million during 2017, 2016,2020, 2019, and 2015,2018, respectively.
The fair valuesvalue of stock options and SARs werewas estimated using the Black-Scholes option pricing model based on the following assumptions:
Table 9.39.5
| | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Risk-free interest rate | 0.9% | | 2.5% | | 2.7% |
| Expected years until exercise | 6 years | | 6 years | | 6 years |
| Expected stock volatility | 34.3% | | 33.8% | | 33.0% |
| Dividend yield | 4.2% | | 3.4% | | 2.7% |
|
| | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Risk-free interest rate | 2.3% | | 1.5% | | 1.2% |
| Expected years until exercise | 6 years | | 5 years | | 4 years |
| Expected stock volatility | 34.8% | | 34.7% | | 38.0% |
| Dividend yield | 2.4% | | 2.9% | | 2.0% |
The risk-free interest rates used in the model were based on the U.S. Treasury yield curve in effect at the grant date. Farmer Mac used historical data to estimate the timing of option exercises and stock option cancellation rates used in the model. Expected volatilities were based on historical volatility of Farmer Mac's Class C non-voting common stock. The dividend yields were based on the expected dividends as a percentage of the value of Farmer Mac's Class C non-voting common stock on the grant date.
Because restricted stock awards will be issued upon vesting regardless of the stock price, expected stock volatility is not considered in determining grant date fair value. Restricted stock awards also accrue dividends which are paid at vesting. The weighted-average grant date fair value of the restricted stock awarded in 2017, 2016,2020, 2019, and 20152018 was $59.79, $36.33,$66.02, $80.51, and $32.14$84.03 per share, respectively, which is based on the closing price of the stock on the date granted.
Capital Requirements
Farmer Mac is subject to the following capital requirements:
Statutory minimum capital requirement – Farmer Mac's statutory minimum capital level is an amount of core capital (stockholders' equity less accumulated other comprehensive income) equal to the sum of 2.75 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 the Farm Credit Administration ("FCA"), an independent agency in the executive branch of the United States government that regulates Farmer Mac, to establish a risk-based capital stress test for Farmer Mac, using specified stress-test parameters.
Farmer Mac is required to comply with the higher of the minimum capital requirement and the risk-based capital requirement. As of both December 31, 20172020 and 2016,December 31, 2019, the minimum capital requirement was greater than the risk-based capital requirement. Farmer Mac's ability to declare and pay dividends could be restricted if it fails to comply with applicable capital requirements.
As of December 31, 2017,2020, Farmer Mac's minimum capital requirement was $520.3$680.9 million and its core capital level was $657.1 million,$1.0 billion, which was $136.8$325.5 million above the minimum capital requirement as of that date. As of December 31, 2016,2019, Farmer Mac's minimum capital requirement was $466.5$618.8 million and its core capital level was $609.7$815.4 million, which was $143.2$196.6 million above the minimum capital requirement as of that date.
In accordance with FCA'sthe Farm Credit Administration's rule on Farmer Mac's capital planning, and as part of Farmer Mac's capital plan, Farmer Mac has adopted a policy for maintaining a sufficient level of Tier 1 capital (consisting of retained earnings, paid-in-capital, common stock, and qualifying preferred stock) and imposing restrictions on Tier 1-eligible dividends and any discretionary bonus payments in the event that this capital falls below specified thresholds.
10.INCOME TAXES
Farmer Mac is subject to federal corporate income taxes but is exempt from state and local corporate income taxes. The components of the federal corporate income tax expense for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 were as follows:
| | | | For the Year Ended December 31, | | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
| | (in thousands) | | (in thousands) |
| Current income tax expense | $ | 43,148 |
| | $ | 37,954 |
| | $ | 30,247 |
| Current income tax expense | $ | 30,634 | | | $ | 28,316 | | | $ | 25,317 | |
| Deferred income tax (benefit)/expense | 3,221 |
| | 4,103 |
| | 3,992 |
| |
| Deferred income tax expense | | Deferred income tax expense | (1,849) | | | 789 | | | 2,625 | |
| Income tax expense | $ | 46,369 |
| | $ | 42,057 |
| | $ | 34,239 |
| Income tax expense | $ | 28,785 | | | $ | 29,105 | | | $ | 27,942 | |
A reconciliation of income tax at the statutory federal corporate income tax rate to the income tax expense for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 is as follows:
Table 10.2
| | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (dollars in thousands) |
| Tax expense at statutory rate | $ | 28,861 | | | $ | 29,117 | | | $ | 28,564 | |
| Excess tax benefits related to stock-based awards | (9) | | | (449) | | | (946) | |
| Valuation allowance | 0 | | | 49 | | | 0 | |
| Other | (67) | | | 388 | | | 324 | |
| Income tax expense | $ | 28,785 | | | $ | 29,105 | | | $ | 27,942 | |
| Statutory tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (dollars in thousands) |
| Tax expense at statutory rate | $ | 45,740 |
| | $ | 41,775 |
| | $ | 37,827 |
|
| Re-measurement of net deferred tax asset due to enactment of new tax legislation | 1,365 |
| | — |
| | — |
|
| Excess tax benefits related to stock-based awards | (860 | ) | | — |
| | — |
|
| Income from non-controlling interest | — |
| | — |
| | (1,874 | ) |
| Loss on retirement of preferred stock | — |
| | — |
| | (1,901 | ) |
| Valuation allowance | 4 |
| | 21 |
| | 33 |
|
| Other | 120 |
| | 261 |
| | 154 |
|
| Income tax expense | $ | 46,369 |
| | $ | 42,057 |
| | $ | 34,239 |
|
| Statutory tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
The components of the deferred tax assets and liabilities as of December 31, 20172020 and 20162019 were as follows:
| | | | As of December 31, | | As of December 31, |
| | 2017 | | 2016 | | 2020 | | 2019 |
| | (in thousands) | | (in thousands) |
| Deferred tax assets: | | | | Deferred tax assets: | | | |
| Basis differences related to financial derivatives | $ | 6,800 |
| | $ | 15,917 |
| Basis differences related to financial derivatives | $ | 100,099 | | | $ | 51,177 | |
| Basis differences related to hedged items | 5,661 |
| | 9,307 |
| |
| | Unrealized losses on securities | | Unrealized losses on securities | 0 | | | 2,805 | |
| Allowance for losses | 1,862 |
| | 2,602 |
| Allowance for losses | 3,690 | | | 2,650 | |
| Unrealized losses on cash flow hedges | | Unrealized losses on cash flow hedges | 6,065 | | | 1,491 | |
| Compensation and benefits | | Compensation and benefits | 1,020 | | | 819 | |
| Stock-based compensation | 532 |
| | 1,648 |
| Stock-based compensation | 1,027 | | | 571 | |
| Capital loss carryforwards and other-than-temporary impairment | 36 |
| | 56 |
| Capital loss carryforwards and other-than-temporary impairment | 86 | | | 86 | |
| Valuation allowance | (36 | ) | | (56 | ) | Valuation allowance | (86) | | | (86) | |
| Compensation and Benefits | 778 |
| | 1,222 |
| |
| Other | 74 |
| | 2 |
| Other | 341 | | | 88 | |
| Total deferred tax assets | 15,707 |
| | 30,698 |
| Total deferred tax assets | 112,242 | | | 59,601 | |
| Deferred tax liability: | |
| | |
| Deferred tax liability: | | | |
| Basis differences related to hedged items | | Basis differences related to hedged items | 91,460 | | | 42,940 | |
| Unrealized gains on securities | 12,376 |
| | 16,889 |
| Unrealized gains on securities | 2,364 | | | 0 | |
| | Other | 1,283 |
| | 1,518 |
| Other | 97 | | | 151 | |
| Total deferred tax liability | 13,659 |
| | 18,407 |
| Total deferred tax liability | 93,921 | | | 43,091 | |
| Net deferred tax asset | $ | 2,048 |
| | $ | 12,291 |
| Net deferred tax asset | $ | 18,321 | | | $ | 16,510 | |
A valuation allowance is required to reduce a deferred tax asset to an amount that is more likely than not to be realized. Future realization of the tax benefit from a deferred tax asset depends on the existence of sufficient taxable income of the appropriate character. After the evaluation of both positive and negative objective evidence regarding the likelihood that its deferred tax assets will be realized, Farmer Mac established a valuation allowance of $36,000 and $56,000, respectively,$86,000 as of both December 31, 20172020 and 2016,2019, which was attributable to capital loss carryforwards on investment securities. Farmer Mac did not establish a valuation allowance for the remainder of its deferred tax assets because it believes it is more likely than not that those deferred tax assets will be realized. In determining its deferred tax asset valuation allowance, Farmer Mac considered its taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback and carryforward periods available under the tax law
and the impact of possible tax planning strategies. On December 31, 2016, $5.9 million of capital loss carryforwards expired and Farmer Mac removed $2.1 million of corresponding deferred tax assets and the related deferred tax asset valuation allowance. As of December 31, 2017, no2020, 0 capital loss carryforwards expired. As of December 31, 2017,2020, the amount of capital loss carryforwards was $0.2$0.4 million. These capital loss carryforwards will expire beginning in 2021.
Deferred tax assets are measured at rates in effect when they arise. To the extent rates change, the deferred tax asset will be adjusted to reflect the new rate. A reduction in corporate tax rates would result in a reduction in the value of the deferred tax asset. The Tax Cuts and Jobs Act was enacted on December 22, 2017. This new legislation provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended, that was in effect through the end of 2017 and includes a reduction of the federal corporate income tax rate from 35 percent to 21 percent, effective January 1, 2018. As a result of this reduction in the federal corporate income tax rate, Farmer Mac re-measured its net deferred tax asset at the newly enacted 21 percent federal corporate income tax rate and thus reduced its value by $1.4 million. Accordingly, Farmer Mac recorded an increase to income tax expense of $1.4 million or an increase of 1.04 percent in Farmer Mac's effective tax rate for 2017. As of December 31, 2017, Farmer Mac has completed the accounting for the income tax effects related to the new tax legislation. See Note 2(l) for more information about the accounting policy for income taxes.
As of December 31, 20172020 and 2016,2019, Farmer Mac did not identify any uncertain tax positions.
Farmer Mac did not incur0t have any unrecognized tax benefits for the years ended December 31, 2017, 2016,2020, 2019, and 2015.2018.
Tax years 20152017 through 20172020 remain subject to examination.
11.EMPLOYEE BENEFITS
Farmer Mac makes contributions to a defined contribution retirement plan for all of its employees. Farmer Mac contributed 13.2 percent13.2% of the lesser of an employee's gross salary and the maximum compensation permitted under the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") ($270,000285,000 for 2017, $265,0002020, $280,000 for 2016,2019, and $265,000$275,000 for 2015)2018), plus 5.7 percent5.7% of the difference between: (1) the lesser of the gross salary and the amount established under EGTRRA;EGTRRA and (2) the Social
Security Taxable Wage Base. Employees are fully vested after having been employed for approximately 3 years. Expenses for this plan for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 were $1.5$2.2 million, $1.3$1.9 million, and $1.2$1.8 million, respectively.
Farmer Mac established a Nonqualified Deferred Compensation Plan (the "NQDC("NQDC Plan") for its executive officers effective May 1, 2017. Under the NQDC Plan, Farmer Mac credits the account of each participant each calendar year with an amount equal to 18.9 percent18.9% of the difference between (i)between: (1) the amount established under EGTRRA and (ii)(2) a participant’s gross annual base salary, which for purposes of calculating employer credits under the NQDC Plan is capped at $700,000 for Farmer Mac’s Chief Executive Officer and $500,000 for all other participants. This fixed contribution percentage is the same formula used for determining employer contributions to Farmer Mac’s defined contribution retirement plan based on an employee’s gross annual base salary that is above the amount established under EGTRRA for that year. Expenses for the NQDC Plan were $0.2 million, $0.1 million, and $0.1 million for the yearyears ended December 31, 2017 were $0.1 million.2020, 2019, and 2018, respectively.
| |
12. | GUARANTEES AND LONG-TERM STANDBY PURCHASE COMMITMENTS |
Farmer Mac offers two credit enhancement alternatives to direct loan purchases that allow approved lenders the ability to retain the cash flow benefits of their loans and increase their liquidity and lending capacity: (1) Farmer Mac Guaranteed Securities, which are available through each of the Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit lines of business, and (2) LTSPCs, which are available through the Farm & Ranch or the Rural Utilities lines of business. LTSPCs and securitization trusts where Farmer Mac is not the primary beneficiary result in the creation of off-balance sheet obligations for Farmer Mac. Farmer Mac records, at the inception of an off-balance sheet guarantee or LTSPC, a liability for the fair value of its obligation to stand ready to perform under the terms of each guarantee or LTSPC and an asset that is equal to the fair value of the fees that will be received over the life of each guarantee or LTSPC. The fair values of the guarantee obligation and asset at inception are based on the present value of expected cash flows using management's best estimate of certain key assumptions, which include prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. Because the cash flows of these instruments may be interest rate path dependent, these values and projected discount rates are derived using a Monte Carlo simulation model. The guarantee obligation and corresponding asset are subsequently amortized into guarantee and commitment fee income in relation to the decline in the unpaid principal balance on the underlying agricultural real estate mortgage and rural utilities loans.
The contractual terms of Farmer Mac's off-balance sheet guarantees and LTSPCs range from less than 1 year to 30 years. However, the actual term of each guarantee or LTSPC may be significantly less than the contractual term based on the prepayment characteristics of the related loans. Farmer Mac's maximum potential exposure under these off-balance sheet guarantees and LTSPCs is comprised of the unpaid principal balance of the underlying loans. Guarantees issued or modified on or after January 1, 2003 are recorded in the consolidated balance sheets. Farmer Mac's maximum potential exposure was $4.0$3.3 billion and $4.9$3.5 billion as of December 31, 20172020 and 2016,2019, respectively. Farmer Mac's maximum potential exposure for guarantees issued prior tobefore January 1, 2003, which are not recorded on the consolidated balance sheets, was $28.0$10.8 million and $40.1$15.5 million as of December 31, 20172020 and 2016,2019, respectively. The maximum exposure from these guarantees and LTSPCs is not representative of the actual loss Farmer Mac is likely to incur, based on historical loss experience. In the event Farmer Mac was required to make payments under its guarantees or LTSPCs, Farmer Mac would have the right to enforce the terms of the loans, and in the event of default, would have access to the underlying collateral. For information on Farmer Mac's methodology for determining the reserve for losses for its financial guarantees, see Note 2(j) and Note 8.2(h). The following table presents changes in Farmer Mac's guarantee and commitment obligations in the consolidated balance sheets for the years ended December 31, 2017, 2016,2020, 2019, and 2015:2018:
Table 12.1
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Beginning balance, January 1 | $ | 37,282 |
| | $ | 38,609 |
| | $ | 37,925 |
|
Additions to the guarantee and commitment obligation(1) | 7,683 |
| | 6,725 |
| | 8,207 |
|
| Amortization of the guarantee and commitment obligation | (6,565 | ) | | (8,052 | ) | | (7,523 | ) |
| Ending balance, December 31 | $ | 38,400 |
| | $ | 37,282 |
| | $ | 38,609 |
|
| |
(1)
| Represents the fair value of the guarantee and commitment obligation at inception. |
| | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Beginning balance, January 1 | $ | 36,700 | | | $ | 38,683 | | | $ | 38,400 | |
Additions to the guarantee and commitment obligation(1) | 5,210 | | | 4,398 | | | 6,202 | |
| Amortization of the guarantee and commitment obligation | (6,375) | | | (6,381) | | | (5,919) | |
| Ending balance, December 31 | $ | 35,535 | | | $ | 36,700 | | | $ | 38,683 | |
(1)Represents the fair value of the guarantee and commitment obligation at inception.
Off-Balance Sheet Farmer Mac Guaranteed Securities
Agricultural real estate mortgage loans, rural utilities loans, and other related assets may be placed into trusts to securitize the transferred assets and the Farmer Mac-guaranteed beneficial interests in the trusts are sold to investors. Farmer Mac is obligated under its guarantee to ensure that the investors receive timely payments of principal and interest based on the underlying loans, regardless of whether the trust has actually received such scheduled loan payments. As consideration for Farmer Mac's assumption of the credit risk on these securities, Farmer Mac receives guarantee fees that are recognized as earned on an accrual basis over the life of the loans and based upon the outstanding balance of the Farmer Mac Guaranteed Security.
Farmer Mac is required to perform under its obligation when the underlying loans for the off-balance sheet Farmer Mac Guaranteed Securities do not make their scheduled installment payments. When a loan underlying a Farm & Ranch Guaranteed Security becomes 90 days or more past due, Farmer Mac may, in its sole discretion, repurchase the loan from the trust and generally does repurchase such loans, thereby reducing the principal balance of the outstanding Farm & Ranch Guaranteed Security.
The following table presents the maximum principal amount of potential undiscounted future payments that Farmer Mac could be required to make under all off-balance sheet Farmer Mac Guaranteed Securities as of December 31, 20172020 and 2016,2019, not including offsets provided by any recourse provisions, recoveries from third parties, or collateral for the underlying loans:
Table 12.2
| | | | | | | | | | | |
| Outstanding Balance of Off-Balance Sheet Farmer Mac Guaranteed Securities |
| | As of December 31, 2020 | | As of December 31, 2019 |
| | (in thousands) |
| Farm & Ranch: | | | |
| Farmer Mac Guaranteed Securities | $ | 79,312 | | | $ | 107,322 | |
| USDA Guarantees: | | | |
| Farmer Mac Guaranteed USDA Securities | 299,298 | | | 389,216 | |
| Institutional Credit: | | | |
| AgVantage Securities | 4,412 | | | 7,567 | |
| Total off-balance sheet Farmer Mac Guaranteed Securities | $ | 383,022 | | | $ | 504,105 | |
|
| | | | | | | |
| Outstanding Balance of Off-Balance Sheet Farmer Mac Guaranteed Securities |
| | As of December 31, 2017 | | As of December 31, 2016 |
| | (in thousands) |
| Farm & Ranch: | | | |
| Guaranteed Securities | $ | 333,511 |
| | $ | 415,441 |
|
| USDA Guarantees: | | | |
| Farmer Mac Guaranteed USDA Securities | 254,217 |
| | 103,976 |
|
| Institutional Credit: | |
| | |
|
| AgVantage Securities | 11,556 |
| | 983,214 |
|
Revolving floating rate AgVantage facility(1) | 300,000 |
| | 300,000 |
|
| Total off-balance sheet Farmer Mac Guaranteed Securities | $ | 899,284 |
| | $ | 1,802,631 |
|
| |
(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. |
If Farmer Mac repurchases a loan that is collateral for a Farmer Mac Guaranteed Security, Farmer Mac would have the right to enforce the terms of the loan, and in the event of a default, would have access to the underlying collateral. Farmer Mac typically recovers its investment in the defaulted loans purchased either through borrower payments, loan payoffs, payments by third parties, or foreclosure and sale of the property securing the loans.
Farmer Mac has recourse to the USDA for any amounts advanced for the timely payment of principal and interest on Farmer Mac Guaranteed USDA Securities. That recourse is the USDA guarantee, a full-faith-and-credit obligation of the United States that becomes enforceable if a lender fails to repurchase the USDA-guaranteed portion from its owner within 30 days after written demand from the owner when (a) the borrower under the guaranteed loan is in default not less than 60 days in the payment of any principal
or interest due on the USDA-guaranteed portion, or (b) the lender has failed to remit to the owner the payment made by the borrower on the USDA-guaranteed portion or any related loan subsidy within 30 days after the lender's receipt of the payment.
Eligible loans and other eligible assets may be placed into trusts to securitizethat are used as vehicles for the securitization of the transferred assets and the Farmer Mac-guaranteed beneficial interests in the trusts are sold to investors. The following table summarizes the significant cash flows received from and paid to trusts used for Farmer Mac securitizations:
Table 12.3
| | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Proceeds from new securitizations | $ | 165,054 | | | $ | 321,414 | | | $ | 382,929 | |
| Guarantee fees received | 1,365 | | | 1,413 | | | 1,920 | |
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Proceeds from new securitizations | $ | 519,219 |
| | $ | 609,347 |
| | $ | 336,913 |
|
| Guarantee fees received | 2,610 |
| | 3,552 |
| | 4,028 |
|
| Purchases of assets from the trusts | (5,670 | ) | | (2,118 | ) | | (3,407 | ) |
Farmer Mac has recordedpresents a liability for its obligation to stand ready under theits guarantee in the guarantee"Guarantee and commitment obligationobligation" on the consolidated balance sheets. ThisThe following table presents the liability approximated $3.6 million as of December 31, 2017 and $5.5 million as of December 31, 2016. As of December 31, 2017 and 2016, the weighted-average remaining maturity of all loans underlying off-balance sheet Farmer Mac Guaranteed Securities, excluding AgVantage securities, was 10.0 years and 10.7 years, respectively. As of December 31, 2017 and 2016, the weighted-average remaining maturity of the off-balance sheet AgVantage securities was 0.8 years and 0.7 years, respectively.Securities:
Table 12.4
| | | | | | | | | | | |
| As of December 31, 2020 | | As of December 31, 2019 |
| (dollars in thousands) |
| Guarantee and commitment obligation | $ | 1,625 | | | $ | 2,230 | |
| Weighted average remaining maturity: | | | |
| Farmer Mac Guaranteed Securities | 9.5 years | | 9.8 years |
| AgVantage Securities | 4.0 years | | 5.0 years |
Long-Term Standby Purchase Commitments
An LTSPC is a commitment by Farmer Mac to purchase eligible loans from an identified pool of loans under specified circumstances set forth in the applicable agreement, either for cash or in exchange for Farmer Mac Guaranteed Securities, on one or more undetermined future dates. As consideration for its assumption of the credit risk on loans underlying an LTSPC, Farmer Mac receives a commitment fee payable monthly in arrears.
An LTSPC permits a lender to nominate from its portfolio an identified pool of loans for participation in the Farm & Ranch or the Rural Utilities line of business, which are retained in the lender's portfolio and serviced by the lender. Farmer Mac reviews the loan pool to confirm that it conforms to Farmer Mac's underwriting standards. Upon Farmer Mac's approval of the eligible loans, the lender effectively transfers the credit risk on those loans to Farmer Mac, thereby reducing the lender's credit and concentration risk exposures and, consequently, its regulatory capital requirements and its loss reserve requirements. Credit risk is transferred through Farmer Mac's commitment to purchase the identified loans from the counterparty based on Farmer Mac's original credit review and acceptance of the credit risk on the loans.
The specific events or circumstances that would require Farmer Mac to purchase some or all of the loans subject to LTSPCs include: (1) the failure of the borrower under any loan to make installment payments under that loan for a period of either 90 days or 120 days (depending on the provisions of the applicable agreement); or (2) the determination by the holder of the LTSPC to sell or exchange some or all of the loans under the LTSPC to Farmer Mac.
Farmer Mac purchases loans subjecthas recorded a liability for its obligation to an LTSPC at:
par ifstand ready under the loans become delinquent for either 90 days or 120 days (dependingguarantee in the guarantee and commitment obligation on the agreement) or are in material non-monetary default, with accrued and unpaid interest onconsolidated balance sheets. The following table presents the defaulted loans payable out of any future loan payments or liquidation proceeds; or
fair value or in exchange for Farm & Ranch Guaranteed Securities (inliability, the Farm & Ranch line of business, if the loans are not delinquent), in accordance with the terms of the applicable agreement.
The maximum principal amount of potential undiscounted future payments that Farmer Mac could be requested to make under all LTSPCs, not including offsets provided by any recourse provisions, recoveries from third parties, or collateral for the underlying loans, was $3.1 billion as of both December 31, 2017 and 2016, respectively.
As of December 31, 2017 and 2016,well as the weighted-average remaining maturity of all loans underlying LTSPCs was 15.3 years and 15.1 years, respectively. For thoseLTSPCs:
Table 12.5
| | | | | | | | | | | |
| As of December 31, 2020 | | As of December 31, 2019 |
| (dollars in thousands) |
Guarantee and commitment obligation(1) | $ | 33,909 | | | $ | 34,470 | |
| Maximum principal amount | 2,881,856 | | | 3,002,349 | |
| Weighted-average remaining maturity | 15.3 years | | 15.2 years |
(1) Relates to 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 $34.8 million as of December 31, 2017 and $31.8 million as of December 31, 2016.2003.
Commitments
Farmer Mac enters into mandatory and optional delivery commitments to purchase loans. Most loan purchase commitments entered into by Farmer Mac are mandatory commitments, in which Farmer Mac charges a fee to extend or cancel the commitment. As of December 31, 20172020 and 2016,2019, commitments to purchase Farm & Ranch loans and USDA Guarantees totaled $46.3$125.8 million and $114.5$65.1 million, respectively, all of which were mandatory commitments. As of December 31, 2017, commitments to purchase Rural Utilities loans totaled $8.0 million. As of December 31, 2016,2020, there were no0 commitments to purchase Rural Utilities loans. Any optional loan purchase commitments are sold forward under optional commitments to deliver Farmer Mac Guaranteed Securities that may be canceled by Farmer Mac without penalty.
Reserve for Farmer Mac's office space for eachLosses
The following table is a summary, by asset type, of the years ended December 31, 2017, 2016, and 2015 was $1.6 million, $1.3 million, and $1.3 million, respectively. The future minimum lease payments under Farmer Mac's non-cancellable leasesreserve for its office space and other contractual obligationslosses as of December 31, 2017 are as follows:2020 and December 31, 2019:
Table 12.412.6
| | | | | | | | | | | |
| December 31, 2020(1) | | December 31, 2019(2) |
| Reserve for Losses | | Reserve for Losses |
| (in thousands) |
| Farm & Ranch: | | | |
| LTSPCs and Farmer Mac Guaranteed Securities | $ | 2,097 | | | $ | 2,164 | |
| Rural Utilities | | | |
| LTSPCs | 1,180 | | | 0 | |
| Total | $ | 3,277 | | | $ | 2,164 | |
(1)Reserve for losses reflects the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," in first quarter 2020.
(2)Prior to the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," in first quarter 2020, Farmer Mac maintained a reserve for losses to cover estimated probable incurred losses on loans underlying LTSPCs and off-balance sheet Farm & Ranch Farmer Mac Guaranteed Securities.
The following is a summary of the changes in the reserve for losses for each year in the three-year period ended December 31, 2020:
Table 12.7
| | | | | | | | | | | |
| Farm & Ranch | | Rural Utilities |
| Reserve for Losses | | Reserve for Losses |
| (in thousands) |
Balance as of December 31, 2017(1) | $ | 2,070 | | | $ | 0 | |
| Provision for losses | 97 | | | 0 | |
Balance as of December 31, 2018(1) | $ | 2,167 | | | $ | 0 | |
| (Release of)/provision for losses | (3) | | | 0 | |
Balance as of December 31, 2019(1) | $ | 2,164 | | | $ | 0 | |
| Cumulative effect adjustment from adoption of current expected credit loss standard | (148) | | | 1,011 | |
| Adjusted Beginning Balance | 2,016 | | | 1,011 | |
| Provision for losses | 81 | | | 169 | |
Balance as of December 31, 2020(2) | $ | 2,097 | | | $ | 1,180 | |
(1)Prior to the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," in first quarter 2020, Farmer Mac maintained a reserve for losses to cover estimated probable incurred losses on loans underlying LTSPCs and off-balance sheet Farm & Ranch Farmer Mac Guaranteed Securities.
(2)Reserve for losses reflects the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," in first quarter 2020.
The provision to the reserve for losses recorded during the year ended December 31, 2020 was primarily due to credit downgrades in the LTSPC portfolio.
|
| | | | | | | |
| | Future Minimum Lease Payments | | Other Contractual Obligations |
| | (in thousands) |
| 2018 | $ | 1,814 |
| | $ | 1,869 |
|
| 2019 | 1,931 |
| | 835 |
|
| 2020 | 1,925 |
| | 676 |
|
| 2021 | 1,965 |
| | 193 |
|
| 2022 | 2,011 |
| | — |
|
| Thereafter | 3,305 |
| | — |
|
| Total | $ | 12,951 |
| | $ | 3,573 |
|
The following table presents the unpaid principal balances by delinquency status of Farm & Ranch loans underlying LTSPCs. Farm & Ranch Farmer Mac Guaranteed Securities, Rural Utilities loans underlying LTSPCs, and non-performing assets as of December 31, 2020:
Other contractual obligationsTable 12.8
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Current(2) | | 30-59 Days | | 60-89 Days | | 90 Days and Greater(1) | | Total Past Due | | Total Loans |
| (in thousands) |
| Farm and Ranch: | | | | | | | | | | | |
| LTSPCs and Farmer Mac Guaranteed Securities | $ | 2,389,777 | | | $ | 2,189 | | | $ | 1,344 | | | $ | 11,433 | | | $ | 14,966 | | | $ | 2,404,743 | |
| Rural Utilities: | | | | | | | | | | | |
| LTSPCs | $ | 556,425 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 556,425 | |
(1)Includes loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are 90 days of more past due, in foreclosure, or in bankruptcy with at least one missed payment, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.
(2)Includes $193.7 million of unpaid principal balance related to Farm & Ranch LTSPCs for which the lender has notified Farmer Mac of an executed COVID-19 payment deferment.
The following table presents the unpaid principal balances of Farm & Ranch loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities) and the related reserve for losses by impairment method and commodity type as of December 31, 2019:
Table 12.9
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Other | | Total |
| | (in thousands) |
| Ending Balance: | | | | | | | | | | | | | |
| Collectively evaluated for impairment: | $ | 1,151,983 | | | $ | 511,991 | | | $ | 581,377 | | | $ | 167,395 | | | $ | 66,106 | | | $ | 2,760 | | | $ | 2,481,612 | |
| Individually evaluated for impairment: | 5,698 | | | 2,114 | | | 10,207 | | | 706 | | | 0 | | | 56 | | | 18,781 | |
| Total Farm & Ranch | $ | 1,157,681 | | | $ | 514,105 | | | $ | 591,584 | | | $ | 168,101 | | | $ | 66,106 | | | $ | 2,816 | | | $ | 2,500,393 | |
| Allowance for Losses: | | | | | | | | | | | | | |
| Collectively evaluated for impairment: | $ | 599 | | | $ | 96 | | | $ | 308 | | | $ | 50 | | | $ | 767 | | | $ | 1 | | | $ | 1,821 | |
| Individually evaluated for impairment: | 97 | | | 43 | | | 189 | | | 14 | | | 0 | | | 0 | | | 343 | |
| Total Farm & Ranch | $ | 696 | | | $ | 139 | | | $ | 497 | | | $ | 64 | | | $ | 767 | | | $ | 1 | | | $ | 2,164 | |
Net credit losses and 90-day delinquencies as of and for the periods indicated for loans underlying off-balance sheet securities representing interests in pools of eligible Farm & Ranch LTSPCs are presented in the table above include minimum amounts due under non-cancellable agreements to purchase goods or servicesbelow. As of December 31, 2019, there were no delinquencies and no probable losses inherent in Farmer Mac's Rural Utilities LTSPCs portfolio and Farmer Mac had not experienced credit losses on any Rural Utilities LTSPCs.
Table 12.10
| | | | | | | | | | | | | | | | | |
| 90-Day Delinquencies(1) | | Net Credit Losses/(Recoveries) |
| | As of | | For the Years Ended |
| | December 31, 2019 | | December 31, 2019 | | December 31, 2018 |
| | (in thousands) |
| Farm & Ranch LTSPCs and Farmer Mac Guaranteed Securities | $ | 3,235 | | | $ | 0 | | | $ | 0 | |
(1)Includes loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are enforceable90 days or more past due, in foreclosure, or in bankruptcy with at least one missed payment, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.
Credit Quality Indicators
The following tables present credit quality indicators related to Farm & Ranch loans underlying LTSPCs, Farm & Ranch Farmer Mac Guaranteed Securities, and legally binding and specify all significant terms. These agreements include, among others, agreements forRural Utilities loans underlying LTSPCs as of December 31, 2020, by year of origination:
Table 12.11
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Year of Origination: | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans - Amortized Cost Basis | | Total |
| (in thousands) |
| Farm & Ranch LTSPCs and Farmer Mac Guaranteed Securities: | | | | | | | | | | | | | | | |
| Internally Assigned Risk Rating: | | | | | | | | | | | | | | | |
| Acceptable | $ | 178,213 | | | $ | 213,620 | | | $ | 183,948 | | | $ | 237,042 | | | $ | 207,296 | | | $ | 969,860 | | | $ | 211,620 | | | $ | 2,201,599 | |
Special mention(1) | 3,920 | | | 1,742 | | | 1,502 | | | 5,603 | | | 19,644 | | | 50,004 | | | 10,058 | | | 92,473 | |
Substandard(2) | 264 | | | 10,250 | | | 12,611 | | | 14,578 | | | 7,841 | | | 60,602 | | | 4,525 | | | 110,671 | |
| Total | $ | 182,397 | | | $ | 225,612 | | | $ | 198,061 | | | $ | 257,223 | | | $ | 234,781 | | | $ | 1,080,466 | | | $ | 226,203 | | | $ | 2,404,743 | |
| | | | | | | | | | | | | | | |
| For the Year Ended: | | | | | | | | | | | | | | | |
| Current period charge-offs | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Current period recoveries | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Current period Farm & Ranch net charge-offs | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
(1)Assets in the provision of consulting services, information technology support, equipment maintenance, and financial analysis software and services. The amounts actually paid under these agreements will likely be higher"Special mention" category generally have potential weaknesses due to the variable components ofperformance issues but are currently considered to be adequately secured.
(2)Substandard assets have a well-defined weakness or weaknesses and there is a distinct possibility that some of these agreements under which the ultimate obligation owed is determined by reference to actual usage or hours worked.
loss will be sustained if deficiencies are not corrected.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Year of Origination: | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans - Amortized Cost Basis | | Total |
| (in thousands) |
| Rural Utilities LTSPCs: | | | | | | | | | | | | | | | |
| Internally Assigned Risk Rating: | | | | | | | | | | | | | | | |
| Acceptable | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 549,405 | | | $ | 7,020 | | | $ | 556,425 | |
Special mention(1) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Substandard(2) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 549,405 | | | $ | 7,020 | | | $ | 556,425 | |
| | | | | | | | | | | | | | | |
| For the Year Ended: | | | | | | | | | | | | | | | |
| Current period charge-offs | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Current period recoveries | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Current period Rural Utilities net charge-offs | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| |
13. | FAIR VALUE DISCLOSURES |
(1)Assets in the "Special mention" category generally have potential weaknesses due to performance issues but are currently considered to be adequately secured.
Fair Value Measurement(2)Substandard assets have a well-defined weakness or weaknesses and there is a distinct possibility that some loss will be sustained if deficiencies are not corrected.
Fair valueThe following table presents credit quality indicators related to Farm & Ranch loans underlying LTSPCs and off-balance sheet Farm & Ranch Farmer Mac Guaranteed Securities as of December 31, 2019:
Table 12.12
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| Crops | | Permanent
Plantings | | Livestock | | Part-time
Farm | | Ag. Storage and
Processing | | Other | | Total |
| | (in thousands) |
Internally Assigned Risk Rating(1) | | | | | | | | | | | | | |
| Acceptable | $ | 1,033,002 | | | $ | 484,601 | | | $ | 521,341 | | | $ | 161,361 | | | $ | 66,106 | | | $ | 2,594 | | | $ | 2,269,005 | |
Special mention(2) | 68,372 | | | 22,909 | | | 35,618 | | | 1,612 | | | 0 | | | 0 | | | 128,511 | |
Substandard(3) | 56,307 | | | 6,595 | | | 34,625 | | | 5,128 | | | 0 | | | 222 | | | 102,877 | |
| Total | $ | 1,157,681 | | | $ | 514,105 | | | $ | 591,584 | | | $ | 168,101 | | | $ | 66,106 | | | $ | 2,816 | | | $ | 2,500,393 | |
| | | | | | | | | | | | | |
Commodity analysis of past due loans(1) | $ | 1,493 | | | $ | 196 | | | $ | 1,066 | | | $ | 480 | | | $ | 0 | | | $ | 0 | | | $ | 3,235 | |
(1)Amounts represent unpaid principal balance of risk-rated loans, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit price). In determining fair value,basis Farmer Mac uses various valuation approaches, including marketto analyze its portfolio, and income based approaches. The fair value hierarchy requires an entity to maximize the userecorded investment of observable inputs and minimize the use of unobservable inputs when measuring fair value. When available, the fair value of Farmer Mac's financial instruments is based on quoted market prices, valuation techniques that use observable market-based inputs, or unobservable inputs that are corroborated by market data. Pricing information obtained from third parties is internally validated for reasonableness prior to usepast due loans.
(2)Assets in the consolidated financial statements. Farmer Mac's accounting policies for fair value measurement"Special mention" category generally have potential weaknesses due to performance issues but are discussed in Note 2(p).currently considered to be adequately secured.
Fair value measurements related to financial instruments(3)Substandard assets have a well-defined weakness or weaknesses and there is a distinct possibility that are reported at fair value in the consolidated financial statements each period are referred to as recurring fair value measurements. Fair value measurements related to financial instruments thatsome loss will be sustained if deficiencies are not reported at fair value each period but are subject to fair value adjustments in certain circumstances are referred to as nonrecurring fair value measurements.corrected.
13.FAIR VALUE DISCLOSURES
Fair Value Classification and Transfers
The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The following three levels are used to classify fair value measurements:
| |
Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| |
Level 2 | Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly. |
| |
Level 3 | Prices or valuations that require unobservable inputs that are significant to the fair value measurement. |
Farmer Mac performs a detailed analysis of the assets and liabilities carried at fair value to determine the appropriate level based on the transparency of the inputs used in the valuation techniques. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Farmer Mac's assessment of the significance of a particular input to the fair value measurement of an instrument requires judgment and consideration of factors specific to the instrument. While Farmer Mac believes its valuation methods are appropriate and consistent with those of other market participants, using different methodologies or assumptions to determine fair value could result in a materially different estimate of fair value for some financial instruments.
The following is a description of the fair value techniques used for instruments measured at fair value as well as the general classification of such instruments pursuant to the valuation hierarchy described above.
Recurring Fair Value Measurements and Classification
Available-for-Sale and Trading Investment Securities
The fair value of investments in U.S. Treasuries is based on unadjusted quoted prices in active markets. Farmer Mac classifies these fair value measurements as "Level 1."
For a significant portion of Farmer Mac's investment portfolio, including most asset-backed securities, corporate debt securities, senior agency debt securities, Government/GSE guaranteed mortgage-backed securities, and preferred stock issued by GSEs, fair value is primarily determined using a reputable and nationally recognized third-party pricing service. The prices obtained are non-binding and generally representative of recent market trades. The fair value of certain asset-backed and Government guaranteed mortgage-backed securities are estimated based on quotations from brokers or dealers. Farmer Mac corroborates its primary valuation source by obtaining a secondary price from another independent third-party pricing service. Farmer Mac classifies these fair value measurements as "Level 2."
For certain investment securities that are thinly traded or not quoted, Farmer Mac estimates fair value using internally-developed models that employ a discounted cash flow approach. Farmer Mac maximizes the use of observable market data, including prices of financial instruments with similar maturities and characteristics, interest rate yield curves, measures of volatility and prepayment rates. Farmer Mac generally considers a market to be thinly traded or not quoted if the following conditions exist: (1) there are few transactions for the financial instruments; (2) the prices in the market are not current; (3) the price quotes vary significantly either over time or among independent pricing services or dealers; or (4) there is limited availability of public market information. Farmer Mac classifies these fair value measurements as "Level 3."
Available-for-Sale and Trading Farmer Mac Guaranteed Securities and USDA Securities
Farmer Mac estimates the fair value of its Farmer Mac Guaranteed Securities and USDA Securities by discounting the projected cash flows of these instruments at projected interest rates. The fair values are based on thetables present value of expected cash flows using management's best estimate of certain key assumptions, which include prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. Farmer Mac classifies these fair value measurements as Level 3 because there is limited market activity and therefore little or no price transparency. On a sample basis, Farmer Mac corroborates the fair value of its Farmer Mac Guaranteed Securities and USDA Securities by obtaining a secondary valuation from an independent third-party service.
Financial Derivatives
The fair value of exchange-traded U.S. Treasury futures is based on unadjusted quoted prices for identical financial instruments. Farmer Mac classifies these fair value measurements as Level 1.
Farmer Mac's derivative portfolio consists primarily of interest rate swaps and forward sales contracts on the debt of other GSEs. Farmer Mac estimates the fair value of these financial instruments primarily based upon the counterparty valuations. Farmer Mac internally values its derivative portfolio using a discounted cash flow valuation technique and obtains a secondary valuation for certain interest rate swaps to corroborate the counterparty valuations. Farmer Mac also regularly reviews the counterparty valuations as part of the collateral exchange process. Farmer Mac classifies these fair value measurements as Level 2.
Certain basis swaps are non-standard interest rate swap structures and are therefore internally modeled using significant assumptions and unobservable inputs, resulting in Level 3 classification. Farmer Mac uses a discounted cash flow valuation technique, using management's best estimate of certain key assumptions, which include prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved.
As of December 31, 2017 and 2016, the consideration of Farmer Mac's and the counterparties' credit risk resulted in an adjustment of $40,000 and $0.1 million to the valuations of Farmer Mac's derivative portfolio. See Note 2(h) and Note 6 for more information about Farmer Mac's derivative portfolio.
Nonrecurring Fair Value Measurements and Classification
Loans Held for Investment
Certain loans in Farmer Mac's held for investment loan portfolio are measured at fair value when they are determined to be impaired. For these impaired loans, the fair value of the loan generally is based on the fair value of the underlying property, which is determined by recent third-party appraisals. Farmer Mac uses net realizable value (fair value less estimated costs to sell) as a reasonable estimate of fair value and classifies the fair values as Level 3 measurements in the tables below.
When recent third-party appraisals are not available, Farmer Mac measures loan impairment in the aggregate in consideration of the similar risk characteristics of the assets and historical statistics, and does not include these impaired loans in the tables below.
Real Estate Owned
Farmer Mac initially records REO properties at net realizable value and subsequently measures them at the lower of carrying value or net realizable value. The fair value of the REO generally is based on third-party appraisals. Farmer Mac classifies the REO fair values as Level 3 measurements. Farmer Mac uses net realizable value as a reasonable estimate of fair value in the tables below.
Fair Value Classification and Transfers
As of December 31, 2017, Farmer Mac's assets and liabilities recordedmeasured at fair value included financial instruments valued at $5.5 billion whoseon a recurring basis as of December 31, 2020 and 2019, respectively, and indicate the fair values were estimatedvalue hierarchy of the valuation techniques used by management in the absence of readily determinableFarmer Mac to determine such fair values (i.e., level 3). These financial instruments measured as value:
Table 13.1
| | | | | | | | | | | | | | | | | | | | | | | |
| Assets and Liabilities Measured at Fair Value as of December 31, 2020 |
| | Level 1 | | Level 2 | | Level 3(1) | | Total |
| | (in thousands) |
| Recurring: | |
| Assets: | | | | | | | |
| Investment Securities: | | | | | | | |
| Available-for-sale: | | | | | | | |
| Floating rate auction-rate certificates backed by Government guaranteed student loans | $ | 0 | | | $ | 0 | | | $ | 19,171 | | | $ | 19,171 | |
| Floating rate asset-backed securities | 0 | | | 6,231 | | | 0 | | | 6,231 | |
| | | | | | | |
| Floating rate Government/GSE guaranteed mortgage-backed securities | 0 | | | 2,360,026 | | | 0 | | | 2,360,026 | |
| Fixed rate GSE guaranteed mortgage-backed securities | 0 | | | 313 | | | 0 | | | 313 | |
| | | | | | | |
| Fixed rate U.S. Treasuries | 1,467,951 | | | 0 | | | 0 | | | 1,467,951 | |
| Total Investment Securities | 1,467,951 | | | 2,366,570 | | | 19,171 | | | 3,853,692 | |
| Farmer Mac Guaranteed Securities: | | | | | | | |
| Available-for-sale: | | | | | | | |
| AgVantage | 0 | | | 0 | | | 6,947,701 | | | 6,947,701 | |
| Total Farmer Mac Guaranteed Securities | 0 | | | 0 | | | 6,947,701 | | | 6,947,701 | |
| USDA Securities: | | | | | | | |
| Trading | 0 | | | 0 | | | 6,695 | | | 6,695 | |
| Total USDA Securities | 0 | | | 0 | | | 6,695 | | | 6,695 | |
| Financial derivatives | 0 | | | 17,468 | | | 0 | | | 17,468 | |
| Total Assets at fair value | $ | 1,467,951 | | | $ | 2,384,038 | | | $ | 6,973,567 | | | $ | 10,825,556 | |
| Liabilities: | | | | | | | |
| Financial derivatives | $ | 82 | | | $ | 29,810 | | | $ | 0 | | | $ | 29,892 | |
| Total Liabilities at fair value | $ | 82 | | | $ | 29,810 | | | $ | 0 | | | $ | 29,892 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1) Level 3 represented 31 percentassets represent 29% of total assets and 71 percent65% of financial instruments measured at fair value as of December 31, 2017. As of December 31, 2016, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $4.9 billion whose fair values were estimated by management in the absence of readily determinable fair values. These financial instruments measured as level 3
value.
| | | | | | | | | | | | | | | | | | | | | | | |
| Assets and Liabilities Measured at Fair Value as of December 31, 2019 |
| | Level 1 | | Level 2 | | Level 3(1) | | Total |
| | (in thousands) |
| Recurring: | |
| Assets: | | | | | | | |
| Investment Securities: | | | | | | | |
| Available-for-sale: | | | | | | | |
| Floating rate auction-rate certificates backed by Government guaranteed student loans | $ | 0 | | | $ | 0 | | | $ | 18,912 | | | $ | 18,912 | |
| Floating rate asset-backed securities | 0 | | | 11,085 | | | 0 | | | 11,085 | |
| Floating rate Government/GSE guaranteed mortgage-backed securities | 0 | | | 1,632,583 | | | 0 | | | 1,632,583 | |
| Fixed rate GSE guaranteed mortgage-backed securities | 0 | | | 340 | | | 0 | | | 340 | |
| Fixed rate U.S. Treasuries | 1,296,923 | | | 0 | | | 0 | | | 1,296,923 | |
| Total available-for-sale | 1,296,923 | | | 1,644,008 | | | 18,912 | | | 2,959,843 | |
| Farmer Mac Guaranteed Securities: | | | | | | | |
| Available-for-sale: | | | | | | | |
| AgVantage | 0 | | | 0 | | | 7,143,025 | | | 7,143,025 | |
| Total Farmer Mac Guaranteed Securities | 0 | | | 0 | | | 7,143,025 | | | 7,143,025 | |
| USDA Securities: | | | | | | | |
| Trading | 0 | | | 0 | | | 8,913 | | | 8,913 | |
| Total USDA Securities | 0 | | | 0 | | | 8,913 | | | 8,913 | |
| Financial derivatives | 0 | | | 10,519 | | | 0 | | | 10,519 | |
| Total Assets at fair value | $ | 1,296,923 | | | $ | 1,654,527 | | | $ | 7,170,850 | | | $ | 10,122,300 | |
| Liabilities: | | | | | | | |
| Financial derivatives | $ | 51 | | | $ | 26,991 | | | $ | 0 | | | $ | 27,042 | |
| Total Liabilities at fair value | $ | 51 | | | $ | 26,991 | | | $ | 0 | | | $ | 27,042 | |
represented 31 percent(1) Level 3 assets represent 33% of total assets and 65 percent71% of financial instruments measured at fair value.
There were no significant assets or liabilities measured at fair value on a non-recurring basis as of December 31, 2016.2020 or December 31, 2019.
Transfers in and/or out of the different levels within the fair value hierarchy are based on the fair values of the assets and liabilities as of the beginning of the reporting period. During 2017both 2020 and 2019, there was one transfer within fair value hierarchy from Level 2 to Level 3 for the fair value measurement of a fixed-rate GSE guaranteed mortgage-backed security (interest-only strip). The transfer to Level 3 was because unobservable inputs became significant to the overall estimate of the fair value of the security as of March 31, 2017. There were no transfers within the fair value hierarchy for fair value measurements of Farmer Mac's investment securities, Farmer Mac Guaranteed Securities, USDA Securities, and financial derivatives during 2016 or 2015. See Note 2(b) and Note 5 for information about the transfer of available-for-sale USDA and Farmer Mac Guaranteed USDA securities to held-to-maturity as of October 1, 2016.
The following tables present information about Farmer Mac's assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2017 and 2016, respectively, and indicate the fair value hierarchy of the valuation techniques used by Farmer Mac to determine such fair value:
|
| | | | | | | | | | | | | | | | |
| Assets and Liabilities Measured at Fair Value as of December 31, 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (in thousands) |
| Recurring: | |
| Assets: | | | | | | | |
| Investment Securities: | | | | | | | |
| Available-for-sale: | | | | | | | |
| Floating rate auction-rate certificates backed by Government guaranteed student loans | $ | — |
| | $ | — |
| | $ | 18,814 |
| | $ | 18,814 |
|
| Floating rate asset-backed securities | — |
| | 34,210 |
| | — |
| | 34,210 |
|
| Floating rate Government/GSE guaranteed mortgage-backed securities | — |
| | 1,290,187 |
| | — |
| | 1,290,187 |
|
| Fixed rate GSE guaranteed mortgage-backed securities | — |
| | 486 |
| | 4,333 |
| | 4,819 |
|
| Fixed rate senior agency debt | — |
| | 99,951 |
| | — |
| | 99,951 |
|
| Fixed rate U.S. Treasuries | 767,424 |
| | — |
| | — |
| | 767,424 |
|
| Total Investment Securities | 767,424 |
| | 1,424,834 |
| | 23,147 |
| | 2,215,405 |
|
| Farmer Mac Guaranteed Securities: | |
| | |
| | |
| | |
|
| Available-for-sale: | |
| | |
| | |
| | |
|
| AgVantage | — |
| | — |
| | 5,471,914 |
| | 5,471,914 |
|
| Total Farmer Mac Guaranteed Securities | — |
| | — |
| | 5,471,914 |
| | 5,471,914 |
|
| USDA Securities: | |
| | |
| | |
| | |
|
| Trading | — |
| | — |
| | 13,515 |
| | 13,515 |
|
| Total USDA Securities | — |
| | — |
| | 13,515 |
| | 13,515 |
|
| Financial derivatives | — |
| | 7,093 |
| | — |
| | 7,093 |
|
| Total Assets at fair value | $ | 767,424 |
| | $ | 1,431,927 |
| | $ | 5,508,576 |
| | $ | 7,707,927 |
|
| Liabilities: | |
| | |
| | |
| | |
|
| Financial derivatives | $ | 36 |
| | $ | 26,563 |
| 140,449 |
| $ | — |
| | $ | 26,599 |
|
| Total Liabilities at fair value | $ | 36 |
| | $ | 26,563 |
| | $ | — |
| | $ | 26,599 |
|
| Non-recurring: | |
| | |
| | |
| | |
|
| Assets: | |
| | |
| | |
| | |
|
| Loans held for investment | $ | — |
| | $ | — |
| | $ | 508 |
| | $ | 508 |
|
| Total Non-recurring Assets at fair value | $ | — |
| | $ | — |
| | $ | 508 |
| | $ | 508 |
|
derivatives.
|
| | | | | | | | | | | | | | | | |
| Assets and Liabilities Measured at Fair Value as of December 31, 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 | — |
| | 43,851 |
| | — |
| | 43,851 |
|
| Floating rate corporate debt securities | — |
| | 10,041 |
| | — |
| | 10,041 |
|
| Floating rate Government/GSE guaranteed mortgage-backed securities | — |
| | 1,361,029 |
| | — |
| | 1,361,029 |
|
| Fixed rate GSE guaranteed mortgage-backed securities | — |
| | 7,625 |
| | — |
| | 7,625 |
|
| Floating rate GSE subordinated debt | — |
| | 66,953 |
| | — |
| | 66,953 |
|
| Fixed rate senior agency debt | — |
| | 187,133 |
| | — |
| | 187,133 |
|
| Fixed rate U.S. Treasuries | 821,489 |
| | — |
| | — |
| | 821,489 |
|
| Total available-for-sale | 821,489 |
| | 1,676,632 |
| | 17,730 |
| | 2,515,851 |
|
| Farmer Mac Guaranteed Securities: | |
| | |
| | |
| | |
|
| Available-for-sale: | |
| | |
| | |
| | |
|
| AgVantage | — |
| | — |
| | 4,853,685 |
| | 4,853,685 |
|
| Total Farmer Mac Guaranteed Securities | — |
| | — |
| | 4,853,685 |
| | 4,853,685 |
|
| USDA Securities: | |
| | |
| | |
| | |
|
| Trading | — |
| | — |
| | 20,388 |
| | 20,388 |
|
| Total USDA Securities | — |
| | — |
| | 20,388 |
| | 20,388 |
|
| Financial derivatives | — |
| | 23,182 |
| | — |
| | 23,182 |
|
| Total Assets at fair value | $ | 821,489 |
| | $ | 1,699,814 |
| | $ | 4,891,803 |
| | $ | 7,413,106 |
|
| Liabilities: | |
| | |
| | |
| | |
|
| Financial derivatives | $ | 155 |
| | $ | 57,997 |
| 140,449 |
| $ | — |
| | $ | 58,152 |
|
| Total Liabilities at fair value | $ | 155 |
| | $ | 57,997 |
| | $ | — |
| | $ | 58,152 |
|
| Non-recurring: | |
| | |
| | |
| | |
|
| Assets: | |
| | |
| | |
| | |
|
| Loans held for investment | $ | — |
| | $ | — |
| | $ | 2,799 |
| | $ | 2,799 |
|
| REO | — |
| | — |
| | 349 |
| | 349 |
|
| Total Non-recurring Assets at fair value | $ | — |
| | $ | — |
| | $ | 3,148 |
| | $ | 3,148 |
|
The following tables present additional information about assets and liabilities measured at fair value on a recurring basis for which Farmer Mac has used significant unobservable inputs to determine fair value. Net transfers in and/or out of Level 3 are based on the fair values of the assets and liabilities as of the beginning of the reporting period. There were no liabilities measured at fair value using significant unobservable inputs during the years ended December 31, 20172020 and 2016.2019.
Table 13.2
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2020 |
| Beginning Balance | | Purchases | | Sales | | Settlements | | Allowance for Losses | | Realized and
unrealized gains included
in Income | | Unrealized gains
included in Other
Comprehensive
Income | | Ending Balance |
| (in thousands) |
| Recurring: | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | |
| Investment Securities: | | | | | | | | | | | | | | | |
| Available-for-sale: | | | | | | | | | | | | | | | |
| Floating rate auction-rate certificates backed by Government guaranteed student loans | $ | 18,912 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (36) | | | $ | 0 | | | $ | 295 | | | $ | 19,171 | |
| Total available-for-sale | 18,912 | | | 0 | | | 0 | | | 0 | | | (36) | | | 0 | | | 295 | | | 19,171 | |
| Farmer Mac Guaranteed Securities: | | | | | | | | | | | | | | | |
| Available-for-sale: | | | | | | | | | | | | | | | |
| AgVantage | 7,143,025 | | | 974,237 | | | 0 | | | (1,397,861) | | | (309) | | | 202,706 | | | 25,903 | | | 6,947,701 | |
| Total available-for-sale | 7,143,025 | | | 974,237 | | | 0 | | | (1,397,861) | | | (309) | | | 202,706 | | | 25,903 | | | 6,947,701 | |
| USDA Securities: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Trading | 8,913 | | | 0 | | | 0 | | | (2,269) | | | 0 | | | 51 | | | 0 | | | 6,695 | |
| Total USDA Securities | 8,913 | | | 0 | | | 0 | | | (2,269) | | | 0 | | 51 | | | 0 | | | 6,695 | |
| Total Assets at fair value | $ | 7,170,850 | | | $ | 974,237 | | | $ | 0 | | | $ | (1,400,130) | | | $ | (345) | | | $ | 202,757 | | | $ | 26,198 | | | $ | 6,973,567 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2017 |
| | Beginning
Balance | | Transfers in | | Purchases | | Sales | | Settlements | | Realized and
Unrealized (Losses) included
in Income | | Unrealized
Gains/(Losses)
included in Other
Comprehe- nsive
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 |
| | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,084 |
| | $ | 18,814 |
|
| Fixed rate GSE guaranteed mortgage-backed securities | — |
| | 7,041 |
| | — |
| | — |
| | (444 | ) | | — |
| | (2,264 | ) | | 4,333 |
|
| Total available-for-sale | 17,730 |
| | 7,041 |
| | — |
| | — |
| | (444 | ) | | — |
| | (1,180 | ) | | 23,147 |
|
| Farmer Mac Guaranteed Securities: | |
| | | | |
| | |
| | | | |
| | | | |
|
| Available-for-sale: | |
| | | | |
| | |
| | | | |
| | | | |
|
| AgVantage | 4,853,685 |
| | — |
| | 1,134,132 |
| | — |
| | (526,650 | ) | | (7,625 | ) | | 18,372 |
| | 5,471,914 |
|
| Total available-for-sale | 4,853,685 |
| | — |
| | 1,134,132 |
| | — |
| | (526,650 | ) | | (7,625 | ) | | 18,372 |
| | 5,471,914 |
|
| USDA Securities: | |
| | | | |
| | |
| | | | |
| | | | |
|
| Available-for-sale | — |
| | — |
| | 155,744 |
| | (155,744 | ) | | — |
| | — |
| | — |
| | — |
|
Trading(1) | 20,388 |
| | — |
| | — |
| | — |
| | (6,849 | ) | | (24 | ) | | — |
| | 13,515 |
|
| Total USDA Securities | 20,388 |
| | — |
| | 155,744 |
| | (155,744 | ) | | (6,849 | ) | | (24 | ) | | — |
| | 13,515 |
|
| Total Assets at fair value | $ | 4,891,803 |
| | $ | 7,041 |
| | $ | 1,289,876 |
| | $ | (155,744 | ) | | $ | (533,943 | ) | | $ | (7,649 | ) | | $ | 17,192 |
| | $ | 5,508,576 |
|
| |
(1)
| Includes unrealized gains of $0.1 million attributable to assets still held as of December 31, 2017 that are recorded in "(Losses)/gains on trading securities."
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2019 |
| | Beginning
Balance | | Purchases | | Sales | | Settlements | | Realized and
unrealized gains included
in Income | | Unrealized gains/(losses)
included in Other
Comprehensive
Income | | Ending
Balance |
| | (in thousands) |
| Recurring: | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | |
| Investment Securities: | | | | | | | | | | | | | |
| Available-for-sale: | | | | | | | | | | | | | |
| Floating rate auction-rate certificates backed by Government guaranteed student loans | $ | 18,715 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 197 | | | $ | 18,912 | |
| Total available-for-sale | 18,715 | | | 0 | | | 0 | | | 0 | | | 0 | | | 197 | | | 18,912 | |
| Farmer Mac Guaranteed Securities: | | | | | | | | | | | | | |
| Available-for-sale: | | | | | | | | | | | | | |
| AgVantage | 5,974,497 | | | 2,033,713 | | | 0 | | | (1,020,294) | | | 181,144 | | | (26,035) | | | 7,143,025 | |
| Total available-for-sale | 5,974,497 | | | 2,033,713 | | | 0 | | | (1,020,294) | | | 181,144 | | | (26,035) | | | 7,143,025 | |
| USDA Securities: | | | | | | | | | | | | | |
| Available-for-sale | 0 | | | 57,853 | | | (57,853) | | | 0 | | | 0 | | | 0 | | | 0 | |
| Trading | 9,999 | | | 0 | | | 0 | | | (1,412) | | | 326 | | | 0 | | | 8,913 | |
| Total USDA Securities | 9,999 | | | 57,853 | | | (57,853) | | | (1,412) | | | 326 | | | 0 | | | 8,913 | |
| Total Assets at fair value | $ | 6,003,211 | | | $ | 2,091,566 | | | $ | (57,853) | | | $ | (1,021,706) | | | $ | 181,470 | | | $ | (25,838) | | | $ | 7,170,850 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2018 |
| | Beginning
Balance | | Cumulative Effect from Change in Hedge Accounting | | Purchases | | Sales | | Settlements | | Realized and
unrealized (losses)/gains included
in Income | | Unrealized gains/(losses)
included in Other
Comprehensive
Income | | Ending
Balance |
| | (in thousands) |
| Recurring: | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | |
| Investment Securities: | | | | | | | | | | | | | | | |
| Available-for-sale: | | | | | | | | | | | | | | | |
| Floating rate auction-rate certificates backed by Government guaranteed student loans | $ | 18,814 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (99) | | | $ | 18,715 | |
| Fixed rate GSE guaranteed mortgage-backed securities | 4,333 | | | 0 | | | 0 | | | 0 | | | (2,137) | | | (2,092) | | | (104) | | | 0 | |
| Total available-for-sale | 23,147 | | | 0 | | | 0 | | | 0 | | | (2,137) | | | (2,092) | | | (203) | | | 18,715 | |
| Farmer Mac Guaranteed Securities: | | | | | | | | | | | | | | | |
| Available-for-sale: | | | | | | | | | | | | | | | |
| AgVantage | 5,471,914 | | | 487 | | | 2,177,546 | | | 0 | | | (1,670,402) | | | 21,459 | | | (26,507) | | | 5,974,497 | |
| Total available-for-sale | 5,471,914 | | | 487 | | | 2,177,546 | | | 0 | | | (1,670,402) | | | 21,459 | | | (26,507) | | | 5,974,497 | |
| USDA Securities: | | | | | | | | | | | | | | | |
| Available-for-sale | 0 | | | 0 | | | 127,850 | | | (127,850) | | | 0 | | | 0 | | | 0 | | | 0 | |
Trading(1) | 13,515 | | | 0 | | | 0 | | | 0 | | | (3,597) | | | 81 | | | 0 | | | 9,999 | |
| Total USDA Securities | 13,515 | | | 0 | | | 127,850 | | | (127,850) | | | (3,597) | | | 81 | | | 0 | | | 9,999 | |
| Total Assets at fair value | $ | 5,508,576 | | | $ | 487 | | | $ | 2,305,396 | | | $ | (127,850) | | | $ | (1,676,136) | | | $ | 19,448 | | | $ | (26,710) | | | $ | 6,003,211 | |
(1) Includes unrealized gains of $0.1 million attributable to assets still held as of December 31, 2018 that are recorded in "Gains on trading securities."
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2016 |
| | Beginning
Balance | | Purchases | | Sales | | Settlements | | Realized and
Unrealized Gains/(losses) included
in Income | | Unrealized(Losses)/Gains
included in Other
Comprehe-nsive
Income | | Transfers Out | | Ending
Balance |
| | (in thousands) |
| Recurring: | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | |
| Investment Securities: | | | | | | | | | | | | | | | |
| Available-for-sale: | | | | | | | | | | | | | | | |
| Floating rate auction-rate certificates backed by Government guaranteed student loans | $ | 44,924 |
| | $ | — |
| | $ | (26,806 | ) | | $ | — |
| | $ | 6 |
| | $ | (394 | ) | | $ | — |
| | $ | 17,730 |
|
| Total available-for-sale | 44,924 |
| | — |
| | (26,806 | ) | | — |
| | 6 |
| | (394 | ) | | — |
| | 17,730 |
|
| Trading: | |
| | |
| | |
| | | | |
| | | | | | |
|
Floating rate asset-backed securities(1) | 491 |
| | — |
| | — |
| | (2,213 | ) | | 1,722 |
| | — |
| | — |
| | — |
|
| Total trading | 491 |
| | — |
| | — |
| | (2,213 | ) | | 1,722 |
| | — |
| | — |
| | — |
|
| Total Investment Securities | 45,415 |
| | — |
| | (26,806 | ) | | (2,213 | ) | | 1,728 |
| | (394 | ) | | — |
| | 17,730 |
|
| Farmer Mac Guaranteed Securities: | |
| | |
| | |
| | | | |
| | | | | | |
|
| Available-for-sale: | |
| | |
| | |
| | | | |
| | | | | | |
|
| AgVantage | 4,121,244 |
| | 1,430,392 |
| | — |
| | (706,446 | ) | — |
| (20,944 | ) | | 29,439 |
| | — |
| | 4,853,685 |
|
Farmer Mac Guaranteed USDA Securities(2) | 31,361 |
| | 4,100 |
| | — |
| | (3,240 | ) | | — |
| | 603 |
| | (32,824 | ) | | — |
|
| Total Farmer Mac Guaranteed Securities | 4,152,605 |
| | 1,434,492 |
| | — |
| | (709,686 | ) | | (20,944 | ) | | 30,042 |
| | (32,824 | ) | | 4,853,685 |
|
| USDA Securities: | |
| | |
| | |
| | | | |
| | | | | | |
|
| Available-for-sale | 1,888,344 |
| | 391,240 |
| | (97,954 | ) | | (237,262 | ) | | — |
| | 35,959 |
| | (1,980,327 | ) | | — |
|
Trading(3) | 28,975 |
| | — |
| | — |
| | (8,325 | ) | | (262 | ) | | — |
| | — |
| | 20,388 |
|
| Total USDA Securities | 1,917,319 |
| | 391,240 |
| | (97,954 | ) | | (245,587 | ) | | (262 | ) | | 35,959 |
| | (1,980,327 | ) | | 20,388 |
|
| Total Assets at fair value | $ | 6,115,339 |
| | $ | 1,825,732 |
| | $ | (124,760 | ) | | $ | (957,486 | ) | | $ | (19,478 | ) | | $ | 65,607 |
| | $ | (2,013,151 | ) | | $ | 4,891,803 |
|
| |
(1)
| None of the unrealized gains are attributable to assets still held as of December 31, 2016 and are recorded in "(Losses)/gains on trading securities."
|
| |
(2)
| Includes $32.8 million of Farmer Mac Guaranteed USDA Securities and $2.0 billion of USDA Securities transferred from available-for-sale to held-to-maturity on October 1, 2016. |
| |
(3)
| Includes unrealized losses of $0.3 million attributable to assets still held as of December 31, 2016 that are recorded in "(Losses)/gains on trading securities."
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2015 |
| | Beginning
Balance | | Purchases | | Sales | | Settlements | | Realized and
Unrealized (Losses)/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 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (100 | ) | | $ | 4,448 |
| | $ | 44,924 |
|
| Total available-for-sale | 40,576 |
| | — |
| | — |
| | — |
| | (100 | ) | | 4,448 |
| | 44,924 |
|
| Trading: | |
| | |
| | |
| | | | |
| | | | |
|
Floating rate asset-backed securities(1) | 689 |
| | — |
| | — |
| | (657 | ) | | 459 |
| | — |
| | 491 |
|
| Total trading | 689 |
| | — |
| | — |
| | (657 | ) | | 459 |
| | — |
| | 491 |
|
| Total Investment Securities | 41,265 |
| | — |
| | — |
| | (657 | ) | | 359 |
| | 4,448 |
| | 45,415 |
|
| Farmer Mac Guaranteed Securities: | |
| | |
| | |
| | | | |
| | | | |
|
| Available-for-sale: | |
| | |
| | |
| | | | |
| | | | |
|
| AgVantage | 3,631,662 |
| | 678,566 |
| | — |
| | (138,687 | ) | | 3,090 |
| | (53,387 | ) | | 4,121,244 |
|
| Farmer Mac Guaranteed USDA Securities | 27,619 |
| | 13,314 |
| | — |
| | (9,482 | ) | | — |
| | (90 | ) | | 31,361 |
|
| Total Farmer Mac Guaranteed Securities | 3,659,281 |
| | 691,880 |
| | — |
| | (148,169 | ) | | 3,090 |
| | (53,477 | ) | | 4,152,605 |
|
| USDA Securities: | |
| | |
| | |
| | | | |
| | | | |
|
| Available-for-sale | 1,731,222 |
| | 363,621 |
| | — |
| | (233,385 | ) | | — |
| | 26,886 |
| | 1,888,344 |
|
Trading(2) | 40,310 |
| | — |
| | — |
| | (12,096 | ) | | 761 |
| | — |
| | 28,975 |
|
| Total USDA Securities | 1,771,532 |
| | 363,621 |
| | — |
| | (245,481 | ) | | 761 |
| | 26,886 |
| | 1,917,319 |
|
| Total Assets at fair value | $ | 5,472,078 |
| | $ | 1,055,501 |
| | $ | — |
| | $ | (394,307 | ) | | $ | 4,210 |
| | $ | (22,143 | ) | | $ | 6,115,339 |
|
| |
(1)
| Unrealized gains are attributable to assets still held as of December 31, 2015 and are recorded in "(Losses)/gains on trading securities"
|
| |
(2)
| Includes unrealized gains of $0.9 million attributable to assets still held as of December 31, 2015 that are recorded in "(Losses)/gains on trading securities."
|
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 levelLevel 3 of the fair value hierarchy as of December 31, 20172020 and 2016.2019:
Table 13.3
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 |
| Financial Instruments | | Fair Value | | Valuation Technique | | Unobservable Input | | Range (Weighted-Average) |
| | (in thousands) |
| Assets: | | | | | | | | |
| Investment securities: | | | | | | | | |
| Floating rate auction-rate certificates backed by Government guaranteed student loans | | $ | 19,171 | | | Indicative bids | | Range of broker quotes | | 97.5% - 97.5% (97.5%) |
| Farmer Mac Guaranteed Securities: | | | | | | | | |
| AgVantage | | $ | 6,947,701 | | | Discounted cash flow | | Discount rate | | 0.8% - 2.3% (1.3%) |
| | | | | | | | |
| USDA Securities | | $ | 6,695 | | | Discounted cash flow | | Discount rate | | 0.9% - 1.9% (1.4%) |
| | | | | | CPR | | 25% - 49% (44%) |
|
| | | | | | | | | | |
| | | As of December 31, 2017 |
| Financial Instruments | | Fair Value | | Valuation Technique | | Unobservable Input | | Range (Weighted-Average) |
| | | (in thousands) |
| Assets: | | | | | | | | |
| Investment securities: | | | | | | | | |
| Floating rate auction-rate certificates backed by Government guaranteed student loans | | $ | 18,814 |
| | Indicative bids | | Range of broker quotes | | 95.5% - 95.5% (95.5%) |
| Fixed rate GSE guaranteed mortgage-backed securities | | $ | 4,333 |
| | Discounted cash flow | | Discount rate | | 2.9% |
| | | | | | | CPR | | 0 % |
| Farmer Mac Guaranteed Securities: | | | | | | | | |
| AgVantage | | $ | 5,471,914 |
| | Discounted cash flow | | Discount rate | | 2.1% - 3.4% (2.4%) |
| | | | | | | | | |
| USDA Securities | | $ | 13,515 |
| | Discounted cash flow | | Discount rate | | 3.6% - 5.4% (5.0%) |
| | | | | | | CPR | | 7% - 19% (17%) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| Financial Instruments | | Fair Value | | Valuation Technique | | Unobservable Input | | Range (Weighted-Average) |
| | (in thousands) |
| Assets: | | | | | | | | |
| Investment securities: | | | | | | | | |
| Floating rate auction-rate certificates backed by Government guaranteed student loans | | $ | 18,912 | | | Indicative bids | | Range of broker quotes | | 96.0% - 96.0% (96.0%) |
| Farmer Mac Guaranteed Securities: | | | | | | | | |
| AgVantage | | $ | 7,143,025 | | | Discounted cash flow | | Discount rate | | 2.3% - 5.5% (2.6%) |
| | | | | | | | |
| USDA Securities | | $ | 8,913 | | | Discounted cash flow | | Discount rate | | 2.3% - 2.6% (2.1%) |
| | | | | | CPR | | 10% - 21% (19%) |
|
| | | | | | | | | | |
| | | As of December 31, 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%) |
| Farmer Mac Guaranteed Securities: | | | | | | | | |
| AgVantage | | $ | 4,853,685 |
| | Discounted cash flow | | Discount rate | | 1.5% - 3.3% (1.9%) |
| | | | | | | | | |
| USDA Securities | | $ | 20,388 |
| | Discounted cash flow | | Discount rate | | 4.0% - 5.3% (5.0%) |
| | | | | | | CPR | | 13% - 18% (17%) |
The significant unobservable inputs used in the fair value measurements of Farmer Mac Guaranteed Securities and USDA Securities are the prepayment ratesrate and discount ratesrate 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.
Disclosures on Fair Value of Financial Instruments
The following table sets forth the estimated fair values and carrying values for financial assets, liabilities, and guarantees and commitments as of December 31, 20172020 and 2016:2019:
Table 13.4
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 | | As of December 31, 2019 |
| | Fair Value | | Carrying
Amount | | Fair Value | | Carrying
Amount |
| | (in thousands) |
| Financial assets: | | | | | | | |
| Cash and cash equivalents | $ | 1,033,941 | | | $ | 1,033,941 | | | $ | 604,381 | | | $ | 604,381 | |
| Investment securities | 3,899,925 | | | 3,898,724 | | | 3,005,828 | | | 3,004,875 | |
| Farmer Mac Guaranteed Securities | 8,148,691 | | | 8,123,493 | | | 8,606,451 | | | 8,590,476 | |
| USDA Securities | 2,637,509 | | | 2,480,321 | | | 2,294,671 | | | 2,241,073 | |
| Loans | 9,167,525 | | | 8,535,146 | | | 7,317,091 | | | 6,981,440 | |
| Financial derivatives | 17,468 | | | 17,468 | | | 10,519 | | | 10,519 | |
| Guarantee and commitment fees receivable | 34,115 | | | 37,113 | | | 36,732 | | | 38,442 | |
| Financial liabilities: | | | | | | | |
| Notes payable | 22,130,263 | | | 21,848,917 | | | 19,234,079 | | | 19,098,648 | |
| Debt securities of consolidated trusts held by third parties | 1,390,330 | | | 1,323,786 | | | 1,663,177 | | | 1,616,504 | |
| Financial derivatives | 29,892 | | | 29,892 | | | 27,042 | | | 27,042 | |
| Guarantee and commitment obligations | 32,537 | | | 35,535 | | | 34,990 | | | 36,700 | |
|
| | | | | | | | | | | | | | | |
| | As of December 31, 2017 | | As of December 31, 2016 |
| | Fair Value | | Carrying
Amount | | Fair Value | | Carrying
Amount |
| | (in thousands) |
| Financial assets: | | | | | | | |
| Cash and cash equivalents | $ | 302,022 |
| | $ | 302,022 |
| | $ | 265,229 |
| | $ | 265,229 |
|
| Investment securities | 2,260,969 |
| | 2,260,437 |
| | 2,515,851 |
| | 2,515,851 |
|
| Farmer Mac Guaranteed Securities | 7,588,806 |
| | 7,598,188 |
| | 6,006,694 |
| | 6,002,916 |
|
| USDA Securities | 2,076,396 |
| | 2,131,365 |
| | 1,934,023 |
| | 2,029,613 |
|
| Loans | 5,279,225 |
| | 5,266,786 |
| | 4,481,019 |
| | 4,507,435 |
|
| Financial derivatives | 7,093 |
| | 7,093 |
| | 23,182 |
| | 23,182 |
|
| Guarantee and commitment fees receivable: | | | | | | | |
| LTSPCs | 33,871 |
| | 35,718 |
| | 34,720 |
| | 32,656 |
|
| Farmer Mac Guaranteed Securities | 4,323 |
| | 4,177 |
| | 6,197 |
| | 6,215 |
|
| Financial liabilities: | | | | | | | |
| Notes payable: | | | | | | | |
| Due within one year | 8,079,309 |
| | 8,089,826 |
| | 8,439,515 |
| | 8,440,123 |
|
| Due after one year | 7,445,545 |
| | 7,432,790 |
| | 5,260,497 |
| | 5,222,977 |
|
| Debt securities of consolidated trusts held by third parties | 1,386,652 |
| | 1,404,945 |
| | 1,107,513 |
| | 1,142,704 |
|
| Financial derivatives | 26,599 |
| | 26,599 |
| | 58,152 |
| | 58,152 |
|
| Guarantee and commitment obligations: | | | | | | | |
| LTSPCs | 32,976 |
| | 34,824 |
| | 33,860 |
| | 31,796 |
|
| Farmer Mac Guaranteed Securities | 3,722 |
| | 3,576 |
| | 5,467 |
| | 5,486 |
|
The carrying value of cash and cash equivalents is a reasonable estimate of their approximate fair value and is classified as Level 1. Investment securities primarilyThe fair value of investments in U.S. Treasuries are valued based on unadjusted quoted prices in active markets and are classified as Level 1. A significant portion of Farmer Mac's investment portfolio is valued using a reputable nationally recognized third-party pricing service. The prices obtained are non-binding and generally representative of recent market trades and are classified as Level 2. Farmer Mac internally models the fair value of its loan portfolio, including loans held for investment and loans held for investment in consolidated trusts, Farmer Mac Guaranteed Securities, and USDA Securities by discounting the projected cash flows of these instruments at projected interest rates. The fair values are based on the present value of expected cash flows using management's best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discount rates commensurate with the risks involved. These fair value measurements do not take into consideration the fair value of the underlying property and are classified as Level 3. Financial derivatives primarily are valued using unadjusted counterparty valuations and are classified as Level 2. The fair value of the guarantee fees receivable/obligation and debt securities of consolidated trusts are estimated based on the present value of expected future cash flows of the underlying mortgage assets using management's best estimate of certain key assumptions, which include prepayments speeds, forward yield curves, and discount rates commensurate with the risks involved and are classified as Level 3. Notes payable are valued by discounting the expected cash flows of these instruments using a yield curve derived from market prices observed for similar agency securities and are also classified as Level 3. Because the cash flows of Farmer Mac's financial instruments may be interest rate path dependent, estimated fair values and projected discount rates for Level 3 financial instruments
are derived using a Monte Carlo simulation model. Different market assumptions and estimation methodologies could significantly affect estimated fair value amounts.
| |
14. | BUSINESS SEGMENT REPORTING |
14.BUSINESS SEGMENT REPORTING
Farmer Mac's operations consist of four4 operating segments – Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit. The Institutional Credit segment comprises Farmer Mac's purchases and guarantees of AgVantage securities related to general obligations of lenders that are secured by pools of eligible loans.
Farmer Mac uses these four segments to manage business risk, and eachEach segment is based on distinct products and distinct business activities. In addition to these four operating segments, a corporate segment is presented. That segment represents activity in Farmer Mac's investment portfolio and other corporate activities. Each operating segment's financial results include directly attributable revenues and expenses. Corporate charges for administrative expenses that are not directly attributable to an operating segment are allocated to each segment based on headcount.
Farmer Mac uses core earningsthe non-GAAP financial measure "core earnings" to measure corporate economic performance and develop financial plans because, in management's view, core earnings is a useful alternative measure in understanding Farmer Mac's economic performance, transaction economics, and business trends. CoreThe main difference between core earnings principally differs fromand net income attributable to common stockholders by excludingis that core earnings excludes the effects of fair value fluctuations, which are not expected to have a cumulative net impact on financial condition or results of operations reported in accordance with generally accepted accounting principles ("GAAP") if the related financial instruments are held to maturity, as is generally expected. Core earnings also differs from net income attributable to common stockholders by excluding specified infrequent or unusual transactions that Farmer Mac believes are not indicative of future operating results and that may not reflect the trends and economic financial performance of Farmer Mac's core business. This corporate economic performance measure may not be comparable to similarly labeled measures disclosed by other companies.
Farmer Mac uses net effective spread to measure the net spread Farmer Mac earns between its interest-earning assets and the related net funding costs of these assets. Net effective spread differs from net interest income and net interest yield because it excludes: (1) the amortization of premiums and discounts on assets consolidated at fair value that are amortized as adjustments to yield in interest income over the contractual or estimated remaining lives of the underlying assets; (2) interest income and interest expense related to consolidated trusts with beneficial interests owned by third parties, which are presented on Farmer Mac's consolidated balance sheets as "Loans held for investment in consolidated trusts, at amortized cost"; and (3) the fair value changes of financial derivatives and the corresponding assets or liabilities designated in a fair value hedge accounting relationship.
The financial information presented below reflects the accounts of Farmer Mac and its subsidiaries on a consolidated basis. Accordingly, the core earnings for Farmer Mac's reportable operating segments will differ from the stand-alone financial statements of Farmer Mac's subsidiaries. These differences will be due to various factors, including the exclusion of unrealized gains and losses related to fair value changes of trading assets and financial derivatives, as well as the allocation of certain expenses such as dividends and interest expense related to the issuance of capital and the issuance of indebtedness managed at the corporate level. The allocation of general and administrative expenses that are not directly attributable to an operating segment may also result in differences.
The following tables present core earnings for Farmer Mac's operating segments and a reconciliation to consolidated net income for the years ended December 31, 2017, 20162020, 2019, and 2015:2018:
Table 14.1
| | Core Earnings by Business Segment | | Core Earnings by Business Segment |
| For the Year Ended December 31, 2020 | | For the Year Ended December 31, 2020 |
| | | Farm & Ranch | | USDA Guarantees | | Rural Utilities | | Institutional Credit | | Corporate | | Reconciling
Adjustments | | Consolidated Net Income |
| | | | | | | | | | | | | | | | | | | (in thousands) |
| Core Earnings by Business Segment | |
| For the Year Ended December 31, 2017 | |
| | Farm & Ranch | | USDA Guarantees | | Rural Utilities | | Institutional Credit | | Corporate | | Reconciling
Adjustments | | Consolidated Net Income | |
| | (in thousands) | |
| Net interest income | $ | 54,290 |
| | $ | 21,106 |
| | $ | 11,598 |
| | $ | 59,842 |
| | $ | 10,811 |
| | $ | — |
| | $ | 157,647 |
| Net interest income | $ | 73,901 | | | $ | 19,570 | | | $ | 21,963 | | | $ | 67,953 | | | $ | 7,201 | | | $ | 0 | | | $ | 190,588 | |
Less: reconciling adjustments(1)(2)(3)(4) | (8,922 | ) | | (2,287 | ) | | (539 | ) | | (3,505 | ) | | (1,091 | ) | | 16,344 |
| | — |
| |
Less: reconciling adjustments(1)(2)(3) | | Less: reconciling adjustments(1)(2)(3) | (3,892) | | | 2,395 | | | 2,734 | | | 4,533 | | | 598 | | | (6,368) | | | 0 | |
| Net effective spread | 45,368 |
| | 18,819 |
| | 11,059 |
| | 56,337 |
| | 9,720 |
| | 16,344 |
| | — |
| Net effective spread | 70,009 | | | 21,965 | | | 24,697 | | | 72,486 | | | 7,799 | | | (6,368) | | | 0 | |
Guarantee and commitment fees(2) | 17,175 |
| | 456 |
| | 1,914 |
| | 805 |
| | — |
| | (6,236 | ) | | 14,114 |
| Guarantee and commitment fees(2) | 16,957 | | | 850 | | | 1,314 | | | 29 | | | 0 | | | (6,601) | | | 12,549 | |
Other income/(expense)(3)(5) | 2,449 |
| | 43 |
| | 20 |
| | — |
| | 171 |
| | 715 |
| | 3,398 |
| |
Other income/(expense)(3) | | Other income/(expense)(3) | 2,556 | | | 1,098 | | | 32 | | | 0 | | | (536) | | | 604 | | | 3,754 | |
| Non-interest income/(loss) | 19,624 |
| | 499 |
| | 1,934 |
| | 805 |
| | 171 |
| | (5,521 | ) | | 17,512 |
| Non-interest income/(loss) | 19,513 | | | 1,948 | | | 1,346 | | | 29 | | | (536) | | | (5,997) | | | 16,303 | |
| | | | | | | | | | | | | | | |
| Provision for loan losses | (1,708 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,708 | ) | |
| Release of losses | | Release of losses | (2,959) | | | 0 | | | (4,709) | | | (110) | | | (27) | | | 0 | | | (7,805) | |
| | | | | | | | | | | | | | | |
| Provision for reserve for losses | (50 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (50 | ) | Provision for reserve for losses | (81) | | | 0 | | | (169) | | | 0 | | | 0 | | | 0 | | | (250) | |
| Other non-interest expense | (16,554 | ) | | (4,384 | ) | | (2,430 | ) | | (6,439 | ) | | (12,908 | ) | | — |
| | (42,715 | ) | Other non-interest expense | (22,414) | | | (7,270) | | | (6,224) | | | (8,784) | | | (16,711) | | | 0 | | | (61,403) | |
Non-interest expense(6) | (16,604 | ) | | (4,384 | ) | | (2,430 | ) | | (6,439 | ) | | (12,908 | ) | | — |
| | (42,765 | ) | |
Non-interest expense(4) | | Non-interest expense(4) | (22,495) | | | (7,270) | | | (6,393) | | | (8,784) | | | (16,711) | | | 0 | | | (61,653) | |
| Core earnings before income taxes | 46,680 |
| | 14,934 |
| | 10,563 |
| | 50,703 |
| | (3,017 | ) | | 10,823 |
| (7) | 130,686 |
| Core earnings before income taxes | 64,068 | | | 16,643 | | | 14,941 | | | 63,621 | | | (9,475) | | | (12,365) | | (5) | 137,433 | |
| Income tax (expense)/benefit | (16,338 | ) | | (5,227 | ) | | (3,696 | ) | | (17,746 | ) | | 1,792 |
| | (5,154 | ) | (8) | (46,369 | ) | Income tax (expense)/benefit | (13,454) | | | (3,495) | | | (3,137) | | | (13,361) | | | 2,066 | | | 2,596 | | | (28,785) | |
| Core earnings before preferred stock dividends and attribution of income to non-controlling interest | 30,342 |
| | 9,707 |
| | 6,867 |
| | 32,957 |
| | (1,225 | ) | | 5,669 |
| (7) | 84,317 |
| |
| Core earnings before preferred stock dividends | | Core earnings before preferred stock dividends | 50,614 | | | 13,148 | | | 11,804 | | | 50,260 | | | (7,409) | | | (9,769) | | (5) | 108,648 | |
| Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | (13,182 | ) | | — |
| | (13,182 | ) | Preferred stock dividends | 0 | | | 0 | | | 0 | | | 0 | | | (17,805) | | | 0 | | | (17,805) | |
| Non-controlling interest | — |
| | — |
| | — |
| | — |
| | 165 |
| | — |
| | 165 |
| |
| Loss on retirement of preferred stock | | Loss on retirement of preferred stock | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (1,667) | | | (1,667) | |
| Segment core earnings/(losses) | $ | 30,342 |
| | $ | 9,707 |
| | $ | 6,867 |
| | $ | 32,957 |
| | $ | (14,242 | ) | | $ | 5,669 |
| (7) | $ | 71,300 |
| Segment core earnings/(losses) | $ | 50,614 | | | $ | 13,148 | | | $ | 11,804 | | | $ | 50,260 | | | $ | (25,214) | | | $ | (11,436) | | (5) | $ | 89,176 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets at carrying value | $ | 4,274,693 |
| | $ | 2,195,189 |
| | $ | 1,088,986 |
| | $ | 7,627,749 |
| | $ | 2,605,657 |
| | $ | — |
| | $ | 17,792,274 |
| Total assets at carrying value | $ | 6,305,975 | | | $ | 2,553,176 | | | $ | 2,365,996 | | | $ | 8,128,489 | | | $ | 5,001,865 | | | $ | 0 | | | $ | 24,355,501 | |
| Total on- and off-balance sheet program assets at principal balance | $ | 6,867,586 |
| | $ | 2,352,214 |
| | $ | 1,882,633 |
| | $ | 7,904,878 |
| | $ | — |
| | $ | — |
| | $ | 19,007,311 |
| Total on- and off-balance sheet program assets at principal balance | $ | 8,581,181 | | | $ | 2,786,718 | | | $ | 2,816,837 | | | $ | 7,739,359 | | | $ | 0 | | | $ | 0 | | | $ | 21,924,095 | |
| |
(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 "Gains on financial derivatives and hedging activities" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
|
| |
(4)
| Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread, a component of core earnings, to also include the net effects of gains/(losses) due to terminations or net settlements on financial derivatives and hedging activities. All prior period information has been recast to reflect the revised methodology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread." |
| |
(5)
| 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. In 2016 and prior periods, fair value adjustments on financial derivatives included variation margin payment amounts because those amounts were considered to be collateral of the related exposure and were accounted for as unrealized gains or losses. However, effective first quarter 2017, CME implemented a change in its rules related to the exchange of variation margin, whereby variation margin payments are considered to be a partial settlement of the respective derivatives contracts rather than as pledged collateral, and accounted for as realized gains and losses. See Note 4 for more information about this rule change. Farmer Mac believes that even though these variation margin amounts are now accounted for as realized gains or losses on financial derivatives and hedging activities as a result of the CME rule change, their economic character will remain the same as they were before the change. This is not expected to have a cumulative net impact on Farmer Mac's financial condition or results of operations reported in accordance with GAAP because the related financial instruments are expected to be held to maturity. Therefore, beginning in 2017, this reconciling adjustment includes realized gains and losses on financial derivatives centrally cleared through CME resulting from the exchange of variation margin. As a result, core earnings subsequent to 2016 will be presented on a consistent basis with core earnings in 2016 and prior periods. |
| |
(6)
| Includes directly attributable costs and an allocation of indirectly attributable costs based on staffing. |
| |
(7)
| Net adjustments to reconcile to the corresponding income measures: core earnings before income taxes reconciled to income before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest reconciled to net income; and segment core earnings reconciled to net income attributable to common stockholders. |
| |
(8)
| Includes the non-recurring, non-cash charge to income tax expense resulting from the re-measurement of the net deferred tax asset at a reduced corporate federal income tax rate due to the enactment of new tax legislation on December 22, 2017. See "Notes to Consolidated Financial Statements—Income Taxes." |
(1)Includes the amortization of premiums and discounts on assets consolidated at fair value, originally included in interest income, to reflect core earnings amounts.
(2)Includes the reclassification of interest income and interest expense from consolidated trusts owned by third parties to guarantee and commitment fees, to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee.
(3)Includes the reclassification of interest expense related to interest rate swaps not designated as hedges, which are included in "(Losses)/gains on financial derivatives" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
(4)Includes directly attributable costs and an allocation of indirectly attributable costs based on employee headcount.
(5)Net adjustments to reconcile to the corresponding income measures: core earnings before income taxes reconciled to income before income taxes; core earnings before preferred stock dividends reconciled to net income; and segment core earnings reconciled to net income attributable to common stockholders.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Core Earnings by Business Segment |
| For the Year Ended December 31, 2019 |
| Farm & Ranch | | USDA Guarantees | | Rural
Utilities | | Institutional Credit | | Corporate | | Reconciling Adjustments | | Consolidated Net Income |
| | (in thousands) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net interest income | $ | 65,098 | | | $ | 17,470 | | | $ | 10,459 | | | $ | 69,039 | | | $ | 11,069 | | | $ | 0 | | | $ | 173,135 | |
Less: reconciling adjustments(1)(2)(3) | (9,471) | | | (732) | | | 6,143 | | | 520 | | | (987) | | | 4,527 | | | 0 | |
| Net effective spread | 55,627 | | | 16,738 | | | 16,602 | | | 69,559 | | | 10,082 | | | 4,527 | | | 0 | |
Guarantee and commitment fees(2) | 18,593 | | | 958 | | | 1,412 | | | 372 | | | 0 | | | (7,669) | | | 13,666 | |
Other income/(expense)(3) | 1,397 | | | 174 | | | 38 | | | 0 | | | 166 | | | 5,501 | | | 7,276 | |
| Non-interest income/(loss) | 19,990 | | | 1,132 | | | 1,450 | | | 372 | | | 166 | | | (2,168) | | | 20,942 | |
| | | | | | | | | | | | | |
| Provision for loan losses | (3,504) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (3,504) | |
| | | | | | | | | | | | | |
| Release of reserve for losses | 3 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 3 | |
| Other non-interest expense | (19,375) | | | (5,757) | | | (3,898) | | | (8,390) | | | (14,505) | | | 0 | | | (51,925) | |
Non-interest expense(4) | (19,372) | | | (5,757) | | | (3,898) | | | (8,390) | | | (14,505) | | | 0 | | | (51,922) | |
| Core earnings before income taxes | 52,741 | | | 12,113 | | | 14,154 | | | 61,541 | | | (4,257) | | | 2,359 | | (5) | 138,651 | |
| Income tax (expense)/benefit | (11,076) | | | (2,545) | | | (2,972) | | | (12,924) | | | 907 | | | (495) | | | (29,105) | |
| Core earnings before preferred stock dividends | 41,665 | | | 9,568 | | | 11,182 | | | 48,617 | | | (3,350) | | | 1,864 | | (5) | 109,546 | |
| Preferred stock dividends | 0 | | | 0 | | | 0 | | | 0 | | | (13,940) | | | 0 | | | (13,940) | |
| Loss on retirement of preferred stock | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (1,956) | | | (1,956) | |
| Segment core earnings/(losses) | $ | 41,665 | | | $ | 9,568 | | | $ | 11,182 | | | $ | 48,617 | | | $ | (17,290) | | | $ | (92) | | (5) | $ | 93,650 | |
| | | | | | | | | | | | | |
| Total assets at carrying value | $ | 5,408,302 | | | $ | 2,311,932 | | | $ | 1,717,405 | | | $ | 8,606,912 | | | $ | 3,664,823 | | | $ | 0 | | | $ | 21,709,374 | |
| Total on- and off-balance sheet program assets at principal balance | $ | 7,776,950 | | | $ | 2,620,175 | | | $ | 2,280,571 | | | $ | 8,440,246 | | | $ | 0 | | | $ | 0 | | | $ | 21,117,942 | |
(1)Includes the amortization of premiums and discounts on assets consolidated at fair value, originally included in interest income, to reflect core earnings amounts.
(2)Includes the reclassification of interest income and interest expense from consolidated trusts owned by third parties to guarantee and commitment fees, to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee.
(3)Includes the reclassification of interest expense related to interest rate swaps not designated as hedges, which are included in "(Losses)/gains on financial derivatives" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
(4)Includes directly attributable costs and an allocation of indirectly attributable costs based on employee headcount.
(5)Net adjustments to reconcile to the corresponding income measures: core earnings before income taxes reconciled to income before income taxes; core earnings before preferred stock dividends reconciled to net income; and segment core earnings reconciled to net income attributable to common stockholders.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Core Earnings by Business Segment |
| For the Year Ended December 31, 2016 |
| | Farm & Ranch | | USDA Guarantees | | Rural
Utilities | | Institutional Credit | | Corporate | | Reconciling Adjustments | | Consolidated Net Income |
| | (in thousands) |
| Net interest income | $ | 47,219 |
| | $ | 21,865 |
| | $ | 11,739 |
| | $ | 48,756 |
| | $ | 10,695 |
| | $ | — |
| | $ | 140,274 |
|
Less: reconciling adjustments(1)(2)(3)(4) | (7,729 | ) | | (3,210 | ) | | (1,771 | ) | | (3,184 | ) | | (1,308 | ) | | 17,202 |
| | — |
|
| Net effective spread | 39,490 |
| | 18,655 |
| | 9,968 |
| | 45,572 |
| | 9,387 |
| | 17,202 |
| | — |
|
Guarantee and commitment fees(2) | 15,542 |
| | 101 |
| | 1,694 |
| | 1,833 |
| | — |
| | (4,302 | ) | | 14,868 |
|
Other income/(expense)(3)(5) | 539 |
| | 222 |
| | 2 |
| | — |
| | 1,322 |
| | 3,515 |
| | 5,600 |
|
| Non-interest income/(loss) | 16,081 |
| | 323 |
| | 1,696 |
| | 1,833 |
| | 1,322 |
| | (787 | ) | | 20,468 |
|
| | | | | | | | | | | | | | |
| Provision for loan losses | (1,065 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,065 | ) |
| | | | | | | | | | | | | | |
| Provision for reserve for losses | 63 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 63 |
|
| Other non-interest expense | (16,206 | ) | | (4,200 | ) | | (2,856 | ) | | (3,786 | ) | | (13,335 | ) | | — |
| | (40,383 | ) |
Non-interest expense(6) | (16,143 | ) | | (4,200 | ) | | (2,856 | ) | | (3,786 | ) | | (13,335 | ) | | — |
| | (40,320 | ) |
| Core earnings before income taxes | 38,363 |
| | 14,778 |
| | 8,808 |
| | 43,619 |
| | (2,626 | ) | | 16,415 |
| (7) | 119,357 |
|
| Income tax (expense)/benefit | (13,428 | ) | | (5,173 | ) | | (3,083 | ) | | (15,265 | ) | | 636 |
| | (5,744 | ) | | (42,057 | ) |
| Core earnings before preferred stock dividends and attribution of income to non-controlling interest | 24,935 |
| | 9,605 |
| | 5,725 |
| | 28,354 |
| | (1,990 | ) | | 10,671 |
| (7) | 77,300 |
|
| Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | (13,182 | ) | | — |
| | (13,182 | ) |
| Non-controlling interest | — |
| | — |
| | — |
| | — |
| | 34 |
| | — |
| | 34 |
|
| Segment core earnings/(losses) | $ | 24,935 |
| | $ | 9,605 |
| | $ | 5,725 |
| | $ | 28,354 |
| | $ | (15,138 | ) | | $ | 10,671 |
| (7) | $ | 64,152 |
|
| | | | | | | | | | | | | | |
| Total assets at carrying value | $ | 3,582,098 |
| | $ | 2,096,503 |
| | $ | 1,012,014 |
| | $ | 6,008,574 |
| | $ | 2,906,831 |
| | $ | — |
| | $ | 15,606,020 |
|
| Total on- and off-balance sheet program assets at principal balance | 6,139,304 |
| | 2,094,375 |
| | 1,878,110 |
| | 7,287,686 |
| | — |
| | — |
| | $ | 17,399,475 |
|
| |
(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 "Gains on financial derivatives and hedging activities" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
|
| |
(4)
| Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread, a component of core earnings, to also include the net effects of gains/(losses) due to terminations or net settlements on financial derivatives and hedging activities. All prior period information has been recast to reflect the revised methodology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread." |
| |
(5)
| 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. |
| |
(6)
| Includes directly attributable costs and an allocation of indirectly attributable costs based on staffing. |
| |
(7)
| Net adjustments to reconcile to the corresponding income measures: core earnings before income taxes reconciled to income before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest reconciled to net income; and segment core earnings reconciled to net income attributable to common stockholders. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Core Earnings by Business Segment |
| For the Year Ended December 31, 2018 |
| Farm & Ranch | | USDA Guarantees | | Rural
Utilities | | Institutional Credit | | Corporate | | Reconciling Adjustments | | Consolidated Net Income |
| | (in thousands) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net interest income | $ | 62,951 | | | $ | 20,554 | | | $ | 12,505 | | | $ | 69,321 | | | $ | 9,105 | | | $ | 0 | | | $ | 174,436 | |
Less: reconciling adjustments(1)(2)(3) | (9,889) | | | (2,499) | | | (922) | | | (7,884) | | | (2,047) | | | 23,241 | | | 0 | |
| Net effective spread | 53,062 | | | 18,055 | | | 11,583 | | | 61,437 | | | 7,058 | | | 23,241 | | | 0 | |
Guarantee and commitment fees(2) | 17,976 | | | 797 | | | 1,599 | | | 360 | | | 0 | | | (6,756) | | | 13,976 | |
Other income/(expense)(3) | 1,371 | | | 20 | | | 33 | | | 0 | | | (913) | | | (2,747) | | | (2,236) | |
| Non-interest income/(loss) | 19,347 | | | 817 | | | 1,632 | | | 360 | | | (913) | | | (9,503) | | | 11,740 | |
| | | | | | | | | | | | | |
| Provision for loan losses | (238) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (238) | |
| | | | | | | | | | | | | |
| Release of reserve for losses | (97) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (97) | |
| Other non-interest expense | (19,026) | | | (5,309) | | | (3,062) | | | (8,011) | | | (14,411) | | | 0 | | | (49,819) | |
Non-interest expense(4) | (19,123) | | | (5,309) | | | (3,062) | | | (8,011) | | | (14,411) | | | 0 | | | (49,916) | |
| Core earnings before income taxes | 53,048 | | | 13,563 | | | 10,153 | | | 53,786 | | | (8,266) | | | 13,738 | | (5) | 136,022 | |
| Income tax (expense)/benefit | (11,140) | | | (2,848) | | | (2,133) | | | (11,295) | | | 2,361 | | | (2,887) | | | (27,942) | |
| Core earnings before preferred stock dividends | 41,908 | | | 10,715 | | | 8,020 | | | 42,491 | | | (5,905) | | | 10,851 | | (5) | 108,080 | |
| Preferred stock dividends | 0 | | | 0 | | | 0 | | | 0 | | | (13,182) | | | 0 | | | (13,182) | |
| | | | | | | | | | | | | |
| Segment core earnings/(losses) | $ | 41,908 | | | $ | 10,715 | | | $ | 8,020 | | | $ | 42,491 | | | $ | (19,087) | | | $ | 10,851 | | (5) | $ | 94,898 | |
| | | | | | | | | | | | | |
| Total assets at carrying value | $ | 4,701,736 | | | $ | 2,240,906 | | | $ | 945,282 | | | $ | 8,089,410 | | | $ | 2,716,994 | | | $ | 0 | | | $ | 18,694,328 | |
| Total on- and off-balance sheet program assets at principal balance | $ | 7,233,972 | | | $ | 2,515,620 | | | $ | 1,592,115 | | | $ | 8,382,817 | | | $ | 0 | | | $ | 0 | | | $ | 19,724,524 | |
(1)Includes the amortization of premiums and discounts on assets consolidated at fair value, originally included in interest income, to reflect core earnings amounts.
(2)Includes the reclassification of interest income and interest expense from consolidated trusts owned by third parties to guarantee and commitment fees, to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee.
(3)Includes the reclassification of interest expense related to interest rate swaps not designated as hedges, which are included in "(Losses)/gains on financial derivatives" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
(4)Includes directly attributable costs and an allocation of indirectly attributable costs based on employee headcount.
(5)Net adjustments to reconcile to the corresponding income measures: core earnings before income taxes reconciled to income before income taxes; core earnings before preferred stock dividends reconciled to net income; and segment core earnings reconciled to net income attributable to common stockholders.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Core Earnings by Business Segment |
| For the Year Ended December 31, 2015 |
| | Farm & Ranch | | USDA Guarantees | | Rural Utilities | | Institutional Credit | | Corporate | | Reconciling
Adjustments | | Consolidated Net Income |
| | (in thousands) |
| Net interest income | $ | 43,271 |
| | $ | 17,750 |
| | $ | 11,728 |
| | $ | 44,971 |
| | $ | 8,087 |
| | $ | — |
| | $ | 125,807 |
|
Less: reconciling adjustments(1)(2)(3)(4) | (5,308 | ) | | (638 | ) | | (723 | ) | | (1,512 | ) | | (198 | ) | | 8,379 |
| | — |
|
| Net effective spread | 37,963 |
| | 17,112 |
| | 11,005 |
| | 43,459 |
| | 7,889 |
| | 8,379 |
| | — |
|
Guarantee and commitment fees(2) | 15,076 |
| | 17 |
| | 397 |
| | 1,665 |
| | — |
| | (3,078 | ) | | 14,077 |
|
Other income/(expense)(3)(5) | 1,039 |
| | 100 |
| | 25 |
| | — |
| | 74 |
| | 4,826 |
| | 6,064 |
|
| Non-interest income/(loss) | 16,115 |
| | 117 |
| | 422 |
| | 1,665 |
| | 74 |
| | 1,748 |
| | 20,141 |
|
| | | | | | | | | | | | | | |
| Provision for loan losses | (2,388 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (2,388 | ) |
| | | | | | | | | | | | | | |
| Release of reserve for losses | 2,180 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,180 |
|
| Other non-interest expense | (16,876 | ) | | (3,449 | ) | | (3,364 | ) | | (2,109 | ) | | (11,864 | ) | | — |
| | (37,662 | ) |
Non-interest expense(6) | (14,696 | ) | | (3,449 | ) | | (3,364 | ) | | (2,109 | ) | | (11,864 | ) | | — |
| | (35,482 | ) |
| Core earnings before income taxes | 36,994 |
| | 13,780 |
| | 8,063 |
| | 43,015 |
| | (3,901 | ) | | 10,127 |
| (7) | 108,078 |
|
| Income tax (expense)/benefit | (12,956 | ) | | (4,826 | ) | | (2,828 | ) | | (15,038 | ) | | 3,053 |
| | (1,644 | ) | | (34,239 | ) |
| Core earnings before preferred stock dividends and attribution of income to non-controlling interest | 24,038 |
| | 8,954 |
| | 5,235 |
| | 27,977 |
| | (848 | ) | | 8,483 |
| (7) | 73,839 |
|
| Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | (13,182 | ) | | — |
| | (13,182 | ) |
| Non-controlling interest | — |
| | — |
| | — |
| | — |
| | (5,139 | ) | | — |
| | (5,139 | ) |
| Loss on retirement of preferred stock | — |
| | — |
| | — |
| | — |
| | — |
| | (8,147 | ) | | (8,147 | ) |
| Segment core earnings/(losses) | $ | 24,038 |
| | $ | 8,954 |
| $ | — |
| $ | 5,235 |
| $ | — |
| $ | 27,977 |
| $ | — |
| $ | (19,169 | ) | $ | — |
| $ | 336 |
| (7) | $ | 47,371 |
|
| | | | | | | | | | | | | | |
| Total assets at carrying value | $ | 3,041,386 |
| | $ | 1,977,609 |
| | $ | 1,019,279 |
| | $ | 5,420,195 |
| | $ | 4,081,885 |
| | $ | — |
| | $ | 15,540,354 |
|
| Total on- and off-balance sheet program assets at principal balance | $ | 5,725,299 |
| | $ | 1,918,277 |
| | $ | 1,530,990 |
| | $ | 6,724,254 |
| | | | $ | — |
| | $ | 15,898,820 |
|
| |
(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 "Gains on financial derivatives and hedging activities" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
|
| |
(4)
| Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread, a component of core earnings, to also include the net effects of gains/(losses) due to terminations or net settlements on financial derivatives and hedging activities. All prior period information has been recast to reflect the revised methodology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread." |
| |
(5)
| 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. |
| |
(6)
| Includes directly attributable costs and an allocation of indirectly attributable costs based on staffing. |
| |
(7)
| Net adjustments to reconcile to the corresponding income measures: core earnings before income taxes reconciled to income before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest reconciled to net income; and segment core earnings reconciled to net income attributable to common stockholders. |
| |
15. | QUARTERLY FINANCIAL INFORMATION (UNAUDITED) |
Table 15.1
|
| | | | | | | | | | | | | | | |
| | 2017 Quarter Ended |
| | Dec. 31 | | Sept. 30 | | June 30 | | Mar. 31 |
| | (in thousands, except per share amounts) |
| Interest income: | | | | | | | |
| Interest income | $ | 111,371 |
| | $ | 104,497 |
| | $ | 98,047 |
| | $ | 86,617 |
|
| Interest expense | 70,088 |
| | 64,935 |
| | 58,316 |
| | 49,546 |
|
| Net interest income | 41,283 |
| | 39,562 |
| | 39,731 |
| | 37,071 |
|
| Provision for loan losses | (474 | ) | | (270 | ) | | (327 | ) | | (637 | ) |
| Net interest income after provision for loan losses | 40,809 |
| | 39,292 |
| | 39,404 |
| | 36,434 |
|
| Non-interest income: | |
| | |
| | |
| | |
|
| Guarantee and commitment fees | 3,484 |
| | 3,314 |
| | 3,472 |
| | 3,844 |
|
| (Losses)/gains on financial derivatives and hedging activities | (1,777 | ) | | 661 |
| | (617 | ) | | 2,486 |
|
| Gains/(losses) on trading assets | 60 |
| | — |
| | (2 | ) | | (82 | ) |
| Gains on sale of available-for-sale investment securities | — |
| | 89 |
| | — |
| | — |
|
| Gains/(losses) on sale of real estate owned | 964 |
| | 32 |
| | 757 |
| | (5 | ) |
| Other (loss)/income | (58 | ) | | 203 |
| | 134 |
| | 553 |
|
| Non-interest income | 2,673 |
| | 4,299 |
| | 3,744 |
| | 6,796 |
|
| Non-interest expense | 10,210 |
| | 10,616 |
| | 11,390 |
| | 10,549 |
|
| Income before income taxes | 33,272 |
| | 32,975 |
| | 31,758 |
| | 32,681 |
|
| Income tax expense | 13,266 |
| | 11,193 |
| | 11,124 |
| | 10,786 |
|
| Net income | 20,006 |
| | 21,782 |
| | 20,634 |
| | 21,895 |
|
Less: Net loss attributable to non-controlling
interest | — |
| | — |
| | 150 |
| | 15 |
|
| Net income attributable to Farmer Mac | 20,006 |
| | 21,782 |
| | 20,784 |
| | 21,910 |
|
| Preferred stock dividends | (3,296 | ) | | (3,295 | ) | | (3,296 | ) | | (3,295 | ) |
| Net income attributable to common stockholders | $ | 16,710 |
| | $ | 18,487 |
| | $ | 17,488 |
| | $ | 18,615 |
|
| | | | | | | | |
| Earnings per common share: | |
| | |
| | |
| | |
|
| Basic earnings per common share | $ | 1.57 |
| | $ | 1.74 |
| | $ | 1.65 |
| | $ | 1.76 |
|
| Diluted earnings per common share | $ | 1.55 |
| | $ | 1.71 |
| | $ | 1.62 |
| | $ | 1.73 |
|
|
| | | | | | | | | | | | | | | |
| | 2016 Quarter Ended |
| | Dec. 31 | | Sept. 30 | | June 30 | | Mar. 31 |
| | (in thousands, except per share amounts) |
| Interest income: | | | | | | | |
| Interest income | $ | 81,241 |
| | $ | 79,532 |
| | $ | 77,236 |
| | $ | 73,891 |
|
| Interest expense | 44,528 |
| | 43,969 |
| | 42,878 |
| | 40,251 |
|
| Net interest income | 36,713 |
| | 35,563 |
| | 34,358 |
| | 33,640 |
|
| Provision for loan losses | (461 | ) | | (191 | ) | | (364 | ) | | (49 | ) |
| Net interest income after provision for loan losses | 36,252 |
| | 35,372 |
| | 33,994 |
| | 33,591 |
|
| Non-interest income/(loss): | | | | | | | |
|
| Guarantee and commitment fees | 3,789 |
| | 3,798 |
| | 3,655 |
| | 3,626 |
|
| Gains/(losses) on financial derivatives and hedging activities | 15,390 |
| | (1,601 | ) | | (4,696 | ) | | (6,782 | ) |
| (Losses)/gains on trading assets | (474 | ) | | 1,182 |
| | 394 |
| | 358 |
|
| Losses on sale of available-for-sale investment securities | — |
| | — |
| | — |
| | (9 | ) |
| Gains on sale of real estate owned | — |
| | 15 |
| | — |
| | — |
|
| Other income | 602 |
| | 707 |
| | 413 |
| | 101 |
|
| Non-interest income/(loss) | 19,307 |
| | 4,101 |
| | (234 | ) | | (2,706 | ) |
| Non-interest expense | 10,977 |
| | 9,303 |
| | 10,074 |
| | 9,966 |
|
| Income before income taxes | 44,582 |
| | 30,170 |
| | 23,686 |
| | 20,919 |
|
| Income tax expense | 15,793 |
| | 10,529 |
| | 8,400 |
| | 7,335 |
|
| Net income | 28,789 |
| | 19,641 |
| | 15,286 |
| | 13,584 |
|
Less: Net income)/loss attributable to non-controlling
interest | (28 | ) | | 18 |
| | 16 |
| | 28 |
|
| Net income attributable to Farmer Mac | 28,761 |
| | 19,659 |
| | 15,302 |
| | 13,612 |
|
| Preferred stock dividends | (3,296 | ) | | (3,295 | ) | | (3,296 | ) | | (3,295 | ) |
| Net income attributable to common stockholders | $ | 25,465 |
| | $ | 16,364 |
| | $ | 12,006 |
| | $ | 10,317 |
|
| | | | | | | | |
| Earnings per common share: | | | | | | | |
|
| Basic earnings per common share | $ | 2.42 |
| | $ | 1.56 |
| | $ | 1.15 |
| | $ | 0.99 |
|
| Diluted earnings per common share | $ | 2.38 |
| | $ | 1.54 |
| | $ | 1.13 |
| | $ | 0.94 |
|
| |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| |
Item 9A. | Controls and Procedures |
Item 9A.Controls and Procedures
Management's Evaluation of Disclosure Controls and Procedures. Farmer Mac maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its periodic filings under the Securities Exchange Act of 1934 (the “Exchange(“Exchange Act”), including this Annual Report on Form 10-K, is recorded, processed, summarized, and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to Farmer Mac's management on a timely basis to allow decisions regardingabout required disclosure. Management, including Farmer Mac's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Farmer Mac's disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2017.2020.
Farmer Mac carried out the evaluation of the effectiveness of its disclosure controls and procedures, required by paragraph (b) of Exchange Act Rules 13a-15 and 15d-15, under the supervision and with the
participation of management, including the Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Farmer Mac's disclosure controls and procedures were effective as of December 31, 2017.2020.
Management's Report on Internal Control Over Financial Reporting.See "Financial Statements—Management's Report on Internal Control Over Financial Reporting" in Item 8 of this Annual Report on Form 10-K.
Attestation Report of Independent Registered Public Accounting Firm. See "Financial Statements—Report of Independent Registered Public Accounting Firm" in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting. There were no changes in Farmer Mac's internal control over financial reporting during the three months ended December 31, 20172020 that have materially affected, or are reasonably likely to materially affect, Farmer Mac's internal control over financial reporting.
Item 9B.Other Information
(a) None.
PART III
| |
Item 10. | Directors, Executive Officers, and Corporate Governance |
Item 10.Directors, Executive Officers, and Corporate Governance
The information required by this Item is incorporated by reference to Farmer Mac's definitive proxy statement to be filed on or about April 2, 2018.5, 2021.
Item 11.Executive Compensation
The information required by this Item is incorporated by reference to Farmer Mac's definitive proxy statement to be filed on or about April 2, 2018.5, 2021.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated by reference to Farmer Mac's definitive proxy statement to be filed on or about April 2, 2018.5, 2021.
Item 13.Certain Relationships and Related Transactions and Director Independence
The information required by this Item is incorporated by reference to Farmer Mac's definitive proxy statement to be filed on or about April 2, 2018.5, 2021.
PART IV
Item 14.Principal Accountant Fees and Services
The information required by this Item is incorporated by reference to Farmer Mac's definitive proxy statement to be filed on or about April 2, 2018.5, 2021.
Item 15.Exhibits and Financial Statement Schedules
217
a.(1) Financial Statements.
PART IV
| |
Item 15. | Exhibits and Financial Statement Schedules |
| |
(a) | (1) Financial Statements. |
Refer to Item 8 above.
(2) Financial Statement Schedules.
There are no schedules because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or in notes thereto.
b.Exhibits
| | | | | | | | | | | | | | | | | | | | |
| * | | 4.2 | | — | | | | — | | |
| * | | 4.3 | | — | | | | — | | |
| * | | 4.5 | | — | | | | — | | |
* | | | | — | | |
* | | | | — | | |
* | | | | — | | |
* | | | | — | | |
| * | | 4.5.1 | | — | | | | — | | |
†* | | 4.6 | | — | |
|
| * | — | 4.6.1 | | — | | |
| * | | 4.7 | | — | | |
| * | | 4.7.1 | | — | | |
| * | | 4.8 | | — | | |
| * | | 4.8.1 | | — | | |
| * | | 4.9 | | — | | |
| †* | | 10.1 | | — | | |
| †* | | 10.2 | | — | | |
| †* | | 10.3 | | — | | |
| †* | | 10.3.1 | | — | | | | — | | |
| †* | | 10.3.2 | | — | | | | — | | |
| †* | | 10.3.3 | | — | | | | — | | |
| †* | | 10.3.4 | | — | | | | — | | |
| †* | | 10.3.5 | | — | | | | — | | |
| †* | | 10.3.6 | | — | | | | — | | |
| †* | | 10.3.7 | | — | | | | — | | |
†* | | | | — | | |
|
| †* | | 10.3.8 | | — | | |
| †* | Incorporated by reference | 10.3.9 | | — | | |
†** | Filed with this report. |
# | Portions of this exhibit have been omitted pursuant to a request for confidential treatment. |
† | Management contract or compensatory plan. |
|
| | 10.3.10 | | — | | |
†* | | | | — | | |
†* | | | | — | | |
| †* | | 10.3.11 | | — | | | | — | | |
| †* | | 10.3.12 | | — | | |
| †* | — | 10.4 | | — | | |
| †* | | 10.5 | | — | | | | — | | |
| | | | | | | | | | | | | | | | | | | | |
| †* | | 10.6 | | — | | | | — | | |
| †* | | 10.7 | | — | | | | — | | |
| †* | | 10.8 | | — | | | | — | | |
| †** | | 10.9 | | — | | | | — | | |
| *# | | 10.10 | | — | | | | — | | |
| *# | | 10.10.1 | | — | | | | — | | |
| *# | | 10.10.2 | | — | | | | — | | |
*# | | 10.16 | | — | | | | — | | |
* | | | | — | | |
* | | | | — | | |
* | | | | — | | |
* | | | | — | | |
* | | | | — | | |
| * | | 10.16.1 | | — | | | | — | | |
|
| |
| * | Incorporated by reference to the indicated prior filing. |
** | Filed with this report. |
# | Portions of this exhibit have been omitted pursuant to a request for confidential treatment. |
† | Management contract or compensatory plan. |
|
| | 10.16.2 | | — | | |
* | | | | — | | |
| * | | 10.18 | | — | | | | — | | |
| * | | 10.19 | | — | | | | — | | |
*# | | 10.25 | | — | | | | — | | |
* | | | | — | | |
* | | | | — | | |
*# | | | | | | |
* | | | | — | | |
| * | | 10.26 | | — | | | | — | | |
| * | | 10.27 | | — | | | | — | | |
| * | | 10.28 | | — | | |
| * | — | 10.29 | | — | | |
| * | | 10.30 | | — | | |
| * | | 10.31 | | — | | |
| * | | 10.32 | | — | | |
| * | | 21 | | — | | |
| ** | | 31.1 | | — | | | | — | | |
| ** | | 31.2 | | — | | | | — | | |
| | | | | | | | | | | | | | | | | | | | |
| ** | | 32 | | — | | | | — | | |
| ** | | 101.INS | | — | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| ** | | 101.SCH | | — | | Inline XBRL Taxonomy Extension Schema |
| ** | | 101.CAL | | — | | Inline XBRL Taxonomy Extension Calculation |
| ** | | 101.DEF | | — | | Inline XBRL Taxonomy Extension Definition |
| ** | | 101.LAB | | — | | Inline XBRL Taxonomy Extension Label |
| ** | | 101.PRE | | — | | Inline XBRL Taxonomy Extension Presentation |
| ** | | 104 | | — | | Cover Page Inline Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document included as Exhibit 101 |
a.
|
| | | | |
| * | Incorporated by reference to the indicated prior filing. |
| ** | Filed with this report. |
| # | Portions of this exhibit have been omitted pursuant to a request for confidential treatment. |
| † | Management contract or compensatory plan. |
Item 16.Form 10-K Summary
221
| |
Item 16. | Form 10-K Summary |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
|
| | | | | | | | | | |
/s/ Lowell L. JunkinsBradford T. Nordholm | | March 8, 2018February 25, 2021 |
| By: | Lowell L. JunkinsBradford T. Nordholm | | Date |
| Acting President and | | |
| Chief Executive Officer | | |
| (Principal Executive Officer) | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Name | | Title | | Date |
| | | | |
| | | | |
Name | | Title | | Date |
| | | | |
| | | | |
/s/ Lowell L. JunkinsLaJuana S. Wilcher | | ChairmanChair of the Board and Director | | March 8, 2018February 25, 2021 |
Lowell L. JunkinsLaJuana S. Wilcher | | | | |
| | | | |
/s/ Lowell L. JunkinsBradford T. Nordholm | | Acting President and Chief Executive Officer | | March 8, 2018February 25, 2021 |
Lowell L. JunkinsBradford T. Nordholm | | Officer | | |
| | (Principal Executive Officer) | | |
| | | | |
/s/ R. Dale Lynch | | Executive Vice President – Chief Financial | | March 8, 2018 |
R. Dale Lynch | | Officer and Treasurer
(Principal Financial Officer)
| | |
| | | | |
/s/ Gregory N. Ramsey | | Controller | | March 8, 2018 |
Gregory N. Ramsey | | (Principal Accounting Officer) | | |
|
| | | | |
Name | | Title | | Date |
| /s/ Aparna Ramesh | | Executive Vice President – Chief Financial | | February 25, 2021 |
| Aparna Ramesh | | Officer and Treasurer
(Principal Financial Officer) | | |
| | | | |
| /s/ Gregory N. Ramsey | | Vice President – Controller | | February 25, 2021 |
| Gregory N. Ramsey | | (Principal Accounting Officer) | | |
| | | | | | | | | | | | | | |
| Name | | Title | | Date |
| | | | |
| | | | |
| | | | |
| /s/ Dennis L. Brack | | Director | | March 8, 2018February 25, 2021 |
| Dennis L. Brack | | | | |
| | | | |
| | | | |
/s/ Chester J. Culver | | Director | | March 8, 2018 |
Chester J. Culver | | | | |
| | | | |
| | | | |
| /s/ Richard H. Davidson | | Director | | March 8, 2018February 25, 2021 |
| Richard H. Davidson | | | | |
| | | | |
| | | | |
| /s/ Everett M. Dobrinski | | Director | | February 25, 2021 |
| Everett M. Dobrinski | | | | |
| | | | |
| | | | |
| /s/ James R. Engebretsen | | Director | | March 8, 2018February 25, 2021 |
| James R. Engebretsen | | | | |
| | | | |
| | | | |
/s/ Dennis A. Everson | | Director | | March 8, 2018 |
Dennis A. Everson | | | | |
| | | | |
| | | | |
| /s/ Sara L. Faivre | | Director | | March 8, 2018February 25, 2021 |
| Sara L. Faivre | | | | |
| | | | |
| | | | |
/s/ Douglas A. FeltonAmy H. Gales
| | Director | | March 8, 2018February 25, 2021 |
Douglas A. FeltonAmy H. Gales
| | | | |
| | | | |
| | | | |
/s/ Douglas L. Flory | | Director | | March 8, 2018 |
Douglas L. Flory | | | | |
| | | | |
| | | | |
/s/ Thomas W. Hill | | Director | | March 8, 2018 |
Thomas W. Hill | | | | |
| | | | |
| | | | |
/s/ Mitchell A. Johnson
| | Director | | March 8, 2018February 25, 2021 |
Mitchell A. Johnson
| | | | |
| | | | |
| | | | |
/s/ Clark B. MaxwellLowell L. Junkins | | Director | | March 8, 2018February 25, 2021 |
Clark B. MaxwellLowell L. Junkins | | | | |
| | | | |
| | | | |
/s/ Bruce J. SherrickRobert G. Sexton
| | Director | | March 8, 2018February 25, 2021 |
Bruce J. SherrickRobert G. Sexton
| | | | |
| | | | |
| | | | |
/s/ Daniel L. Shaw
| | Director | | February 25, 2021 |
| Daniel L. Shaw | | | | |
| | | | |
| | | | |
/s/ Charles A. Stones
| | Director | | February 25, 2021 |
Charles A. Stones
| | | | |
| | | | |
| | | | |
| /s/ Myles J. Watts | | Director | | March 8, 2018February 25, 2021 |
| Myles J. Watts | | | | |
| | | | |
| | | | |
/s/ Douglas E. WilhelmTodd P. Ware | | Director | | March 8, 2018February 25, 2021 |
Douglas E. WilhelmTodd P. Ware | | | | |
