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Federal Agricultural Mortgage (AGM)

Filed: 9 Aug 18, 8:51am


As filed with the Securities and Exchange Commission on August 9, 2018

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

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
Commission File Number 001-14951 
 ____________________________________________________________

logo2016a13.jpg
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
Federally chartered instrumentality
of the United States
 52-1578738
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. employer identification number)
   
1999 K Street, N.W., 4th Floor,
Washington, D.C.
 20006
(Address of principal executive offices) (Zip code)
(202) 872-7700
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes        x                               No           o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes        x                                No          o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated fileroAccelerated filerx
Non-accelerated filer
o (Do not check if smaller reporting company)
 
  Smaller reporting companyo
  Emerging growth companyo
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 7(a)(2)(B) of the Securities Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes        o                                No           x
As of August 1, 2018, the registrant had outstanding 1,030,780 shares of Class A voting common stock, 500,301 shares of Class B voting common stock, and 9,137,500 shares of Class C non-voting common stock.






Table of Contents


2



PART I

Item 1.Financial Statements


3



FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 As of
 June 30, 2018 December 31, 2017
 (in thousands)
Assets:   
Cash and cash equivalents$430,812
 $302,022
Investment securities: 
  
Available-for-sale, at fair value2,324,598
 2,215,405
Held-to-maturity, at amortized cost45,032
 45,032
Total Investment Securities2,369,630
 2,260,437
Farmer Mac Guaranteed Securities: 
  
Available-for-sale, at fair value5,985,806
 5,471,914
Held-to-maturity, at amortized cost2,093,092
 2,126,274
Total Farmer Mac Guaranteed Securities8,078,898
 7,598,188
USDA Securities: 
  
Trading, at fair value10,748
 13,515
Held-to-maturity, at amortized cost2,112,618
 2,117,850
Total USDA Securities2,123,366
 2,131,365
Loans: 
  
Loans held for investment, at amortized cost3,916,127
 3,873,755
Loans held for investment in consolidated trusts, at amortized cost1,443,246
 1,399,827
Allowance for loan losses(6,789) (6,796)
Total loans, net of allowance5,352,584
 5,266,786
Real estate owned, at lower of cost or fair value56
 139
Financial derivatives, at fair value8,011
 7,093
Interest receivable (includes $17,019 and $17,373, respectively, related to consolidated trusts)156,194
 155,278
Guarantee and commitment fees receivable39,915
 39,895
Deferred tax asset, net
 2,048
Prepaid expenses and other assets67,305
 29,023
Total Assets$18,626,771
 $17,792,274
    
Liabilities and Equity: 
  
Liabilities: 
  
Notes payable: 
  
Due within one year$7,774,301
 $8,089,826
Due after one year8,416,896
 7,432,790
Total notes payable16,191,197
 15,522,616
Debt securities of consolidated trusts held by third parties1,449,888
 1,404,945
Financial derivatives, at fair value20,164
 26,599
Accrued interest payable (includes $14,559 and $14,631, respectively, related to consolidated trusts)88,506
 75,402
Guarantee and commitment obligation38,428
 38,400
Accounts payable and accrued expenses67,295
 14,096
Deferred tax liability, net2,832
 
Reserve for losses2,249
 2,070
Total Liabilities17,860,559
 17,084,128
Commitments and Contingencies (Note 6)

 

Equity: 
  
Preferred stock: 
  
Series A, par value $25 per share, 2,400,000 shares authorized, issued and outstanding58,333
 58,333
Series B, par value $25 per share, 3,000,000 shares authorized, issued and outstanding73,044
 73,044
      Series C, par value $25 per share, 3,000,000 shares authorized, issued and outstanding73,382
 73,382
Common stock: 
  
Class A Voting, $1 par value, no maximum authorization, 1,030,780 shares outstanding1,031
 1,031
Class B Voting, $1 par value, no maximum authorization, 500,301 shares outstanding500
 500
Class C Non-Voting, $1 par value, no maximum authorization, 9,136,194 shares and 9,087,670 shares outstanding, respectively9,136
 9,088
Additional paid-in capital117,684
 118,979
Accumulated other comprehensive income, net of tax73,410
 51,085
Retained earnings359,692
 322,704
Total Equity766,212
 708,146
Total Liabilities and Equity$18,626,771
 $17,792,274
The accompanying notes are an integral part of these consolidated financial statements.



4



FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 For the Three Months Ended For the Six Months Ended
 June 30, 2018 June 30, 2017 June 30, 2018
 June 30, 2017
 (in thousands, except per share amounts)
Interest income:       
Investments and cash equivalents$12,095
 $8,368
 $23,558
 $15,611
Farmer Mac Guaranteed Securities and USDA Securities74,179
 50,106
 136,609
 92,628
Loans49,396
 39,573
 95,049
 76,425
Total interest income135,670
 98,047
 255,216
 184,664
Total interest expense91,737
 58,316
 168,054
 107,862
Net interest income43,933
 39,731
 87,162
 76,802
(Provision for)/release of loan losses(424) (327) 7
 (964)
Net interest income after (provision for)/release of loan losses43,509
 39,404
 87,169
 75,838
Non-interest income:       
Guarantee and commitment fees3,481
 3,472
 6,980
 7,316
Gains/(losses) on financial derivatives and hedging activities2,534
 (617) (1,316) 1,869
Gains/(losses) on trading securities11
 (2) 27
 (84)
Gains on sale of real estate owned34
 757
 34
 752
Other income320
 134
 894
 687
Non-interest income6,380
 3,744
 6,619
 10,540
Non-interest expense:       
Compensation and employee benefits6,936
 6,682
 13,590
 12,999
General and administrative5,202
 3,921
 9,528
 7,721
Regulatory fees625
 625
 1,250
 1,250
Real estate owned operating costs, net
 23
 16
 23
Provision for/(release of) reserve for losses158
 139
 179
 (54)
Non-interest expense12,921
 11,390
 24,563
 21,939
Income before income taxes36,968
 31,758
 69,225
 64,439
Income tax expense7,332
 11,124
 13,770
 21,910
Net income29,636
 20,634
 55,455
 42,529
Less: Net loss attributable to non-controlling interest
 150
 
 165
Net income attributable to Farmer Mac29,636
 20,784
 55,455
 42,694
Preferred stock dividends(3,296) (3,296) (6,591) (6,591)
Net income attributable to common stockholders$26,340
 $17,488
 $48,864
 $36,103
        
Earnings per common share and dividends:       
Basic earnings per common share$2.47
 $1.65
 $4.59
 $3.41
Diluted earnings per common share$2.45
 $1.62
 $4.55
 $3.35
Common stock dividends per common share$0.58
 $0.36
 $1.16
 $0.72
The accompanying notes are an integral part of these consolidated financial statements.


5



FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 For the Three Months Ended For the Six Months Ended
 June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017
 (in thousands)
Net income$29,636
 $20,634
 $55,455
 $42,529
Other comprehensive income before taxes:       
Net unrealized gains on available-for-sale securities996
 5,333
 22,224
 20,170
Net changes in held-to-maturity securities(1,546) (2,125) (2,856) (5,612)
Net unrealized gains/(losses) on cash flow hedges2,194
 (1,848) 8,857
 (1,219)
Other comprehensive income before tax1,644
 1,360
 28,225
 13,339
Income tax expense related to other comprehensive income(345) (476) (5,927) (4,669)
Other comprehensive income net of tax1,299
 884
 22,298
 8,670
Comprehensive income30,935
 21,518
 77,753
 51,199
Less: comprehensive loss attributable to non-controlling interest
 150
 
 165
Comprehensive income attributable to Farmer Mac$30,935
 $21,668
 $77,753
 $51,364
The accompanying notes are an integral part of these consolidated financial statements.


6



FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
           Accumulated      
         Additional Other      
 Preferred Stock Common Stock Paid-In Comprehensive Retained Non-controlling Total
 Shares Amount Shares Amount Capital Income/(Loss) Earnings Interest Equity
 (in thousands)
Balance as of December 31, 20168,400
 $204,759
 10,539
 $10,539
 $118,655
 $33,758
 $275,714
 $222
 $643,647
Net income/(loss):                 
Attributable to Farmer Mac
 
 
 
 
 
 42,694
 
 42,694
Attributable to non-controlling interest
 
 
 
 
 
 
 (165) (165)
Other comprehensive income, net of tax
 
 
 
 
 8,670
 
 
 8,670
Cash dividends:                 
Preferred stock
 
 
 
 
 
 (6,591) 
 (6,591)
Common stock
 
 
 
 
 
 (7,616) 
 (7,616)
Issuance of Class C Common Stock
 
 65
 65
 225
 
 
 
 290
Stock-based compensation cost
 
 
 
 1,784
 
 
 
 1,784
Other stock-based award activity
 
 
 
 (1,727) 
 
 
 (1,727)
Redemption of interest in subsidiary
 
 
 
 
 
 
 (57) (57)
Balance as of June 30, 20178,400
 $204,759
 10,604
 $10,604
 $118,937
 $42,428
 $304,201
 $
 $680,929
                  
Balance as of December 31, 20178,400
 $204,759
 10,619
 $10,619
 $118,979
 $51,085
 $322,704
 $
 $708,146
Cumulative effect from change in hedge accounting
 
 
 
 
 27
 471
 
 498
Balance as of January 1, 20188,400
 $204,759
 10,619
 $10,619
 $118,979
 $51,112
 $323,175
 $
 $708,644
Net income:                 
Attributable to Farmer Mac
 
 
 
 
 
 55,455
 
 55,455
Other comprehensive income, net of tax
 
 
 
 
 22,298
 
 
 22,298
Cash dividends:                 
Preferred stock
 
 
 
 
 
 (6,591) 
 (6,591)
Common stock
 
 
 
 
 
 (12,347) 
 (12,347)
Issuance of Class C Common Stock
 
 48
 48
 7
 
 
 
 55
Stock-based compensation cost
 
 
 
 1,269
 
 
 
 1,269
Other stock-based award activity
 
 
 
 (2,571) 
 
 
 (2,571)
Balance as of June 30, 20188,400
 $204,759
 10,667
 $10,667
 $117,684
 $73,410
 $359,692
 $
 $766,212
The accompanying notes are an integral part of these consolidated financial statements.


7



FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 For the Six Months Ended
 June 30, 2018 June 30, 2017
 (in thousands)
Cash flows from operating activities:   
Net income$55,455
 $42,529
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 Securities1,536
 534
Amortization of debt premiums, discounts and issuance costs13,701
 11,479
Net change in fair value of trading securities, hedged assets, and financial derivatives26,100
 (12,122)
(Gains)/losses on sale of real estate owned(34) (752)
Total provision for losses172
 910
Excess tax benefits related to stock-based awards903
 832
Deferred income taxes(2,457) 2,095
Other
 100
Stock-based compensation expense1,269
 1,784
Proceeds from repayment of loans purchased as held for sale62,078
 32,510
Net change in:   
Interest receivable(879) (3,700)
Guarantee and commitment fees receivable8
 320
Other assets(12,877) 300
Accrued interest payable13,104
 14,260
Other liabilities4,075
 (488)
Net cash provided by operating activities162,154
 90,591
Cash flows from investing activities: 
  
Purchases of available-for-sale investment securities(539,667) (271,684)
Purchases of Farmer Mac Guaranteed Securities and USDA Securities(1,843,294) (2,108,174)
Purchases of loans held for investment(491,858) (678,710)
Purchases of defaulted loans(721) (415)
Proceeds from repayment of available-for-sale investment securities403,018
 508,409
Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Securities1,331,245
 618,340
Proceeds from repayment of loans purchased as held for investment335,808
 250,111
Proceeds from sale of Farmer Mac Guaranteed Securities196,290
 247,975
Proceeds from sale of real estate owned101
 6,144
Net cash used by investing activities(609,078) (1,428,004)
Cash flows from financing activities: 
  
Proceeds from issuance of discount notes21,036,787
 27,501,915
Proceeds from issuance of medium-term notes4,103,234
 5,257,762
Payments to redeem discount notes(21,157,585) (29,090,607)
Payments to redeem medium-term notes(3,313,236) (2,206,300)
Payments to third parties on debt securities of consolidated trusts(72,031) (54,949)
Proceeds from common stock issuance7
 232
Tax payments related to share-based awards(2,523) (1,669)
Dividends paid on common and preferred stock(18,939) (14,207)
Net cash provided/(used) by financing activities575,714
 1,392,177
Net increase in cash and cash equivalents128,790
 54,764
Cash and cash equivalents at beginning of period302,022
 265,229
Cash and cash equivalents at end of period$430,812
 $319,993
  The accompanying notes are an integral part of these consolidated financial statements.



8



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

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The interim unaudited consolidated financial statements of the Federal Agricultural Mortgage Corporation ("Farmer Mac") and subsidiaries have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). These interim unaudited consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial position and the results of operations and cash flows of Farmer Mac and subsidiaries for the interim periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements have been omitted as permitted by SEC rules and regulations. The December 31, 2017 consolidated balance sheet presented in this report has been derived from Farmer Mac's audited 2017 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the consolidated financial statements as of the dates and for the periods presented. These interim unaudited consolidated financial statements should be read in conjunction with the 2017 consolidated financial statements of Farmer Mac and subsidiaries included in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 8, 2018. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year. Presented below are Farmer Mac's significant accounting policies that contain updated information for the three months ended June 30, 2018.

Principles of Consolidation

The consolidated financial statements include the accounts of Farmer Mac and its two subsidiaries during the year: (1) Farmer Mac Mortgage Securities Corporation ("FMMSC"), whose principal activities are to facilitate the purchase and issuance of Farmer Mac Guaranteed Securities; and (2) Farmer Mac II LLC, whose principal activity is the operation of substantially all of the business related to the USDA Guarantees line of business – primarily the acquisition of USDA Securities. The consolidated financial statements also include the accounts of VIEs in which Farmer Mac determined itself to be the primary beneficiary. The accounts of Contour Valuation Services, LLC (which began doing business as AgVisory during first quarter 2016) ("AgVisory"), Farmer Mac's former majority-owned subsidiary, are also included through June 30, 2017. Farmer Mac redeemed its ownership interest in AgVisory on May 1, 2017.



9



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



Table 1.1
 Consolidation of Variable Interest Entities
 As of June 30, 2018
 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$1,443,246
 $
 $
 $
 $
 $1,443,246
Debt securities of consolidated trusts held by third parties (1)
1,449,888
 
 
 
 
 1,449,888
   Unconsolidated VIEs:           
   Farmer Mac Guaranteed Securities:           
      Carrying value (2)

 29,206
 
 
 
 29,206
      Maximum exposure to loss (3)

 28,938
 
 
 
 28,938
   Investment securities:           
        Carrying value (4)

 
 
 
 917,479
 917,479
        Maximum exposure to loss (3) (4)

 
 
 
 917,260
 917,260
Off-Balance Sheet:           
 Unconsolidated VIEs:           
   Farmer Mac Guaranteed Securities:           
      Maximum exposure to loss (3) (5)
297,833
 325,652
 
 
 
 623,485
(1) 
Includes borrower remittances of $6.6 million. The borrower remittances had not been passed through to third party investors as of June 30, 2018.
(2) 
Includes $0.3 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.



10



 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
(1) 
Includes borrower remittances of $5.1 million, which have not been passed through to third party investors as of December 31, 2017.
(2) 
Includes $0.3 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 the outstanding face amount of investment securities to represent maximum exposure to loss.
(4) 
Includes auction-rate certificates, asset-backed securities, and GSE-guaranteed mortgage-backed securities.
(5) 
The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.


(a)Statements of Cash Flows 

The following table sets forth information regarding certain cash and non-cash transactions for the six months ended June 30, 2018 and 2017:


Table 1.2

 For the Six Months Ended
 June 30, 2018 June 30, 2017
 (in thousands)
Non-cash activity:   
Real estate owned acquired through loan liquidation
 5,261
Loans acquired and securitized as Farmer Mac Guaranteed Securities196,290
 247,975
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 parties116,983
 161,880
Purchases of securities - traded not yet settled48,600
 50,000





11



(b)Earnings Per Common Share

Basic earnings per common share ("EPS") is based on the weighted-average number of shares of common stock outstanding.  Diluted earnings per common share is based on the weighted-average number of shares of common stock outstanding adjusted to include all potentially dilutive common stock options, stock appreciation rights ("SARs"), and non-vested restricted stock awards.  The following schedule reconciles basic and diluted EPS for the three and six months ended June 30, 2018 and 2017:

Table 1.3
 For the Three Months Ended
 June 30, 2018 June 30, 2017
 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$26,340
 10,658
 $2.47
 $17,488
 10,600
 $1.65
Effect of dilutive securities(1)
 
  
    
  
  
Stock options, SARs and restricted stock
 84
 (0.02) 
 183
 (0.03)
Diluted EPS$26,340
 10,742
 $2.45
 $17,488
 10,783
 $1.62
(1) 
For the three months ended June 30, 2018, no SARs were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive, compared to 24,907 stock options and SARs for the three months ended June 30, 2017. For the three months ended June 30, 2018 and 2017, contingent shares of non-vested restricted stock of 13,138 and 32,892, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions had not yet been met.

 For the Six Months Ended
 June 30, 2018 June 30, 2017
 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$48,864
 10,640
 $4.59
 $36,103
 10,576
 $3.41
Effect of dilutive securities(1)
 
  
        
Stock options, SARs and restricted stock
 102
 (0.04) 
 207
 (0.06)
Diluted EPS$48,864
 10,742
 $4.55
 $36,103
 10,783
 $3.35
(1)  
For the six months ended June 30, 2018, 25,062 SARs were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive, compared to 37,832 stock options and SARs for the six months ended June 30, 2017. For the six months ended June 30, 2018 and 2017, contingent shares of non-vested restricted stock of 13,138 and 32,892, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions had not yet been met.


(c)Comprehensive Income

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



12



The following table presents the changes in accumulated other comprehensive income ("AOCI"), net of tax, by component for the three and six months ended June 30, 2018 and 2017:

Table 1.4

 As of June 30, 2018 As of June 30, 2017
 Available-for-Sale Securities Held-to-Maturity Securities Cash Flow Hedges Total Available-for-Sale Securities Held-to-Maturity Securities Cash Flow Hedges Total
 (in thousands)
For the Three Months Ended:               
Beginning Balance$15,094
 $47,201
 $9,816
 $72,111
 $(4,742) $43,485
 $2,801
 $41,544
Other comprehensive income/(loss) before reclassifications2,209
 
 1,778
 3,987
 6,191
 
 (1,500) 4,691
Amounts reclassified from AOCI(1,421) (1,222) (45) (2,688) (2,725) (1,381) 299
 (3,807)
Net comprehensive income/(loss)788
 (1,222) 1,733
 1,299
 3,466
 (1,381) (1,201) 884
Ending Balance$15,882
 $45,979
 $11,549
 $73,410
 $(1,276) $42,104
 $1,600
 $42,428
                
For the Six Months Ended:               
Beginning Balance$(1,676) $48,236
 $4,525
 $51,085
 $(14,387) $45,752
 $2,393
 $33,758
Cumulative effect from change in hedge accounting
 
 27
 27
 
 
 
 
Adjusted Beginning Balance(1,676) 48,236
 4,552
 51,112
 (14,387) 45,752
 2,393
 33,758
Other comprehensive income/(loss) before reclassifications20,396
 
 6,831
 27,227
 18,413
 
 (1,426) 16,987
Amounts reclassified from AOCI(2,838) (2,257) 166
 (4,929) (5,302) (3,648) 633
 (8,317)
Net comprehensive income/(loss)17,558
 (2,257) 6,997
 22,298
 13,111
 (3,648) (793) 8,670
Ending Balance$15,882
 $45,979
 $11,549
 $73,410
 $(1,276) $42,104
 $1,600
 $42,428




13



The following table presents other comprehensive income activity, the impact on net income of amounts reclassified from each component of AOCI, and the related tax impact for the three and six months ended June 30, 2018 and 2017:

Table 1.5

 For the Three Months Ended
 June 30, 2018 June 30, 2017
 Before Tax Provision (Benefit) After Tax Before Tax Provision (Benefit) After Tax
 (in thousands)
Other comprehensive income:           
Available-for-sale-securities:           
Unrealized holding gains on available-for-sale-securities$2,795
 $586
 $2,209
 $9,525
 $3,334

$6,191
Less reclassification adjustments included in:      
    
Net Interest Income(1)
(1,791) (376) (1,415) 
 
 
Gains/(losses) on financial derivatives and hedging activities(1)

 
 
 (4,186) (1,465) (2,721)
Other income(2)
(8) (2) (6) (6) (2) (4)
Total$996
 $208
 $788
 $5,333
 $1,867
 $3,466
Held-to-maturity securities:           
Less reclassification adjustments included in:           
Net interest income(3)
(1,546) (324) (1,222) (2,125) (744) (1,381)
Total$(1,546) $(324) $(1,222) $(2,125) $(744) $(1,381)
Cash flow hedges           
Unrealized gains/(losses) on cash flow hedges$2,251
 $473
 $1,778
 $(2,309) $(809) $(1,500)
Less reclassification adjustments included in:           
Net interest income(4)
(57) (12) (45) 461
 162
 299
Total$2,194
 $461
 $1,733
 $(1,848) $(647) $(1,201)
Other comprehensive income$1,644
 $345
 $1,299
 $1,360
 $476
 $884
(1) 
Relates to the amortization of unrealized gains on hedged items prior to the application of fair value hedge accounting.
(2) 
Represents amortization of deferred gains related to certain available-for-sale USDA Securities and Farmer Mac Guaranteed USDA Securities.
(3) 
Relates to the amortization of unrealized gains or losses prior to the reclassification of these securities from available-for-sale to held-to-maturity. The amortization of unrealized gains or losses reported in AOCI for held-to-maturity securities will be offset by the amortization of the premium or discount created from the transfer into held-to-maturity securities, which occurred at fair value. These unrealized gains or losses will be recorded over the remaining life of the security with no impact on future net income.
(4) 
Relates to the recognition of unrealized gains and losses on cash flow hedges recorded in AOCI.



14



 For the Six Months Ended
 June 30, 2018 June 30, 2017
 Before Tax Provision (Benefit) After Tax Before Tax Provision (Benefit) After Tax
 (in thousands)
Other comprehensive income:           
Available-for-sale-securities:           
Unrealized holding gains on available-for-sale-securities$25,817
 $5,421
 $20,396
 $28,328
 $9,915
 $18,413
Less reclassification adjustments included in:           
Net Interest Income(1)
(3,578) (752) (2,826) 
 
 
Gains/(losses) on financial derivatives and hedging activities(1)

 
 
 (8,145) (2,851) (5,294)
Other income(2)
(15) (3) (12) (13) (5) (8)
Total$22,224
 $4,666
 $17,558
 $20,170
 $7,059
 $13,111
Held-to-maturity securities:           
Less reclassification adjustments included in:           
Net interest income(3)
(2,856) (599) (2,257) (5,612) (1,964) (3,648)
Total$(2,856) $(599) $(2,257) $(5,612) $(1,964) $(3,648)
Cash flow hedges           
Unrealized gains/(losses) on cash flow hedges$8,647
 $1,816
 $6,831
 $(2,192) $(766) $(1,426)
Less reclassification adjustments included in:           
Net interest income(4)
210
 44
 166
 973
 340
 633
Total$8,857
 $1,860
 $6,997
 $(1,219) $(426) $(793)
Other comprehensive income$28,225
 $5,927
 $22,298
 $13,339
 $4,669
 $8,670
(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.



(d) New Accounting Standards

In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, "Leases," which provides new guidance intended to improve financial reporting about leasing transactions. The ASU requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The ASU also requires new disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Farmer Mac does not expect that adoption of the new guidance will have a material effect on Farmer Mac’s financial position, results of operations, or cash flows.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses," which will require entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Entities will be required to use forward-looking information to 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


15



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 first quarter 2018 Farmer Mac adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which amends hedge accounting recognition and presentation requirements to better align a reporting entity's risk management activities and hedge accounting. The new guidance reduces the complexity and simplifies the application of hedge accounting by eliminating the requirement to separately measure and report hedge ineffectiveness and by requiring the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The cumulative-effect adjustment to retained earnings as of January 1, 2018 reflected application of the new guidance and did not have a material effect on Farmer Mac's financial position, results of operations, or cash flows.

(e)Reclassifications

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



16



2.INVESTMENT SECURITIES

The following tables set forth information about Farmer Mac's investment securities as of June 30, 2018 and December 31, 2017:
 
Table 2.1

 As of June 30, 2018
 Amount Outstanding Unamortized Premium/(Discount) Amortized
Cost
 Unrealized
Gains
 Unrealized
Losses
 Fair Value
 (in thousands)
Available-for-sale:           
Floating rate auction-rate certificates backed by Government guaranteed student loans$19,700
 $
 $19,700
 $
 $(690) $19,010
Floating rate asset-backed securities31,531
 (132) 31,399
 25
 (103) 31,321
Floating rate Government/GSE guaranteed mortgage-backed securities1,367,091
 1,796
 1,368,887
 1,250
 (2,012) 1,368,125
Fixed rate GSE guaranteed mortgage-backed securities(1)
416
 
 416
 23
 
 439
Fixed rate U.S. Treasuries909,921
 (2,714) 907,207
 
 (1,504) 905,703
Total available-for-sale2,328,659
 (1,050) 2,327,609
 1,298
 (4,309) 2,324,598
Held-to-maturity:           
Fixed rate Government/GSE guaranteed mortgage-backed securities45,032
 
 45,032
 831
 
 45,863
Total investment securities$2,373,691
 $(1,050) $2,372,641
 $2,129
 $(4,309) $2,370,461
(1) 
During second quarter 2018, the remaining premium of an interest-only security was fully amortized because the issuer called the security upon full prepayment of the underlying mortgage loan that collateralized the security.


 As of December 31, 2017
 Amount Outstanding Unamortized Premium/(Discount) Amortized
Cost
 Unrealized
Gains
 Unrealized
Losses
 Fair Value
 (in thousands)
Available-for-sale:           
Floating rate auction-rate certificates backed by Government guaranteed student loans$19,700
 $
 $19,700
 $
 $(886) $18,814
Floating rate asset-backed securities34,462
 (154) 34,308
 22
 (120) 34,210
Floating rate Government/GSE guaranteed mortgage-backed securities1,289,123
 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 debt100,000
 
 100,000
 
 (49) 99,951
Fixed rate U.S. Treasuries770,852
 (1,836) 769,016
 
 (1,592) 767,424
Total available-for-sale2,214,588
 2,365
 2,216,953
 4,467
 (6,015) 2,215,405
Held-to-maturity:           
Fixed rate Government/GSE guaranteed mortgage-backed securities45,032
 
 45,032
 532
 
 45,564
Total investment securities$2,259,620
 $2,365
 $2,261,985
 $4,999
 $(6,015) $2,260,969
(1) 
Fair value includes $4.3 million of an interest-only security with a notional amount of $143.7 million.

Farmer Mac did not sell any securities from its available-for-sale investment portfolio during the three and six months ended June 30, 2018 and 2017.



17



As of June 30, 2018 and December 31, 2017, unrealized losses on available-for-sale investment securities were as follows:

Table 2.2

 As of June 30, 2018
 Available-for-Sale Securities
 Unrealized loss position for
less than 12 months
 Unrealized loss position for
more than 12 months
 Fair Value Unrealized
Loss
 Fair Value Unrealized
Loss
 (in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student loans$
 $
 $19,010
 $(690)
Floating rate asset-backed securities
 
 20,996
 (103)
Floating rate Government/GSE guaranteed mortgage-backed securities437,975
 (799) 195,425
 (1,213)
Fixed rate U.S. Treasuries863,715
 (1,489) 34,987
 (15)
Total$1,301,690
 $(2,288) $270,418
 $(2,021)

 As of December 31, 2017
 Available-for-Sale Securities
 Unrealized loss position for
less than 12 months
 Unrealized loss position for
more than 12 months
 Fair Value Unrealized
Loss
 Fair Value Unrealized
Loss
 (in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student loans$
 $
 $18,814
 $(886)
Floating rate asset-backed securities
 
 23,145
 (120)
Floating rate Government/GSE guaranteed mortgage-backed securities292,522
 (2,337) 221,641
 (1,031)
Fixed rate U.S. Treasuries742,442
 (1,572) 24,983
 (20)
Fixed rate senior agency debt
 
 99,951
 (49)
Total$1,034,964
 $(3,909) $388,534
 $(2,106)

The unrealized losses presented above are principally due to a general widening of market spreads and an increase in the levels of interest rates from the dates of acquisition to June 30, 2018 and December 31, 2017, as applicable. The resulting decrease in fair values reflects an increase in the perceived risk by the financial markets related to those securities. As of June 30, 2018 and December 31, 2017, all of the investment securities in an unrealized loss position either were backed by the full faith and credit of the U.S. government or had credit ratings of at least "AA+." The unrealized losses were on 100 and 91 individual investment securities as of June 30, 2018 and December 31, 2017, respectively.

As of June 30, 2018, 44 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $2.0 million. 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.  Securities in unrealized loss positions for 12 months or longer have a fair value as of June 30, 2018 that is, on average, approximately 99.3 percent of their amortized cost basis. Farmer Mac believes that all of these unrealized losses are recoverable within a reasonable period of time by way of maturity or changes in credit spreads. Accordingly, Farmer Mac has concluded that none of the unrealized losses on


18



these available-for-sale investment securities are other-than-temporary impairment as of June 30, 2018 and December 31, 2017.

As of June 30, 2018, Farmer Mac owned $45.0 million of held-to-maturity investment securities at amortized cost with a fair value of $45.9 million and a weighted average yield of 3.0 percent. 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 trading investment securities as of June 30, 2018 and December 31, 2017.

The amortized cost, fair value, and weighted-average yield of available-for-sale investment securities by remaining contractual maturity as of June 30, 2018 are set forth below. Asset-backed and mortgage-backed securities are included based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets.

Table 2.3

 As of June 30, 2018
 Available-for-Sale Securities
 Amortized
Cost
 Fair Value Weighted-
Average
Yield
 (dollars in thousands)
Due within one year$890,555
 $889,077
 1.18%
Due after one year through five years234,693
 234,979
 2.40%
Due after five years through ten years520,939
 521,199
 2.35%
Due after ten years681,422
 679,343
 2.41%
Total$2,327,609
 $2,324,598
 1.92%



19



3.FARMER MAC GUARANTEED SECURITIES AND USDA SECURITIES

The following tables set forth information about on-balance sheet Farmer Mac Guaranteed Securities and USDA Securities as of June 30, 2018 and December 31, 2017:

Table 3.1

 As of June 30, 2018
 Unpaid Principal Balance Unamortized Premium/(Discount) Amortized
Cost
 Unrealized
Gains
 Unrealized
Losses
 Fair Value
 (in thousands)
Held-to-maturity:           
AgVantage$2,064,274
 $(388) $2,063,886
 $495
 $(19,139) $2,045,242
Farmer Mac Guaranteed USDA Securities28,938
 268
 29,206
 139
 
 29,345
Total Farmer Mac Guaranteed Securities2,093,212
 (120) 2,093,092
 634
 (19,139) 2,074,587
USDA Securities2,053,219
 59,399
 2,112,618
 
 (78,433) 2,034,185
Total held-to-maturity$4,146,431
 $59,279
 $4,205,710
 $634
 $(97,572) $4,108,772
Available-for-sale:           
AgVantage$6,016,055
 $(167) $6,015,888
 $17,446
 $(47,528) $5,985,806
Trading:     
  
  
  
USDA Securities$10,306
 $788
 $11,094
 $23
 $(369) $10,748

 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 Securities29,980
 319
 30,299
 108
 (73) 30,334
Total Farmer Mac Guaranteed Securities2,126,734
 (460) 2,126,274
 2,119
 (11,502) 2,116,891
USDA Securities2,055,050
 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




20



As of June 30, 2018 and December 31, 2017, unrealized losses on held-to-maturity and available-for-sale on-balance sheet Farmer Mac Guaranteed Securities and USDA Securities were as follows:

Table 3.2

 As of June 30, 2018
 Held-to-Maturity and Available-for-Sale Securities
 Unrealized loss position for
less than 12 months
 Unrealized loss position for
more than 12 months
 Fair Value Unrealized
Loss
 Fair Value Unrealized
Loss
 (in thousands)
Held-to-maturity:       
AgVantage$559,980
 $(7,944) $863,805
 $(11,195)
Farmer Mac Guaranteed USDA Securities
 
 
 
USDA Securities41,205
 (433) 1,992,980
 (78,000)
Total held-to-maturity$601,185
 $(8,377) $2,856,785
 $(89,195)
        
Available-for-sale:       
AgVantage$1,129,733
 $(14,618) $1,570,177
 $(32,910)

 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 Securities24,721
 (73) 
 
USDA Securities451
 (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)

The unrealized losses presented above are principally due to higher interest rates from the date of acquisition to June 30, 2018 and December 31, 2017, as applicable. In addition, the unrealized losses on the held-to-maturity USDA Securities as of both June 30, 2018 and December 31, 2017 reflect their increased cost basis resulting from their transfer to held-to-maturity as of October 1, 2016. The credit exposure related to Farmer Mac's USDA Guarantees line of business is covered by the full faith and credit guarantee of the United States. The unrealized losses from AgVantage securities were on 46 available-for-sale securities as of June 30, 2018. There were 47 held-to-maturity AgVantage securities with an unrealized loss as of June 30, 2018. The unrealized losses from AgVantage securities were on 36 available-for-sale securities as of December 31, 2017. There were unrealized losses from 23 held-to-maturity securities as of December 31, 2017. As of June 30, 2018, 16 available-for-sale AgVantage securities had been in a loss position for more than 12 months with a total unrealized loss of $32.9 million.


21



As of December 31, 2017, 16 available-for-sale AgVantage securities had been in a loss position for more than 12 months with a total unrealized loss of $37.5 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 impaired as of either June 30, 2018 or December 31, 2017.  Farmer Mac does not intend to sell these securities, and it is not more likely than not that Farmer Mac will be required to sell the securities before recovery of the amortized cost basis.

During the three and six months ended June 30, 2018 and 2017, Farmer Mac realized no gains or losses from the sale of Farmer Mac Guaranteed Securities and USDA Securities.

The amortized cost, fair value, and weighted-average yield of available-for-sale and held-to-maturity Farmer Mac Guaranteed Securities and USDA Securities by remaining contractual maturity as of June 30, 2018 are set forth below. The balances presented are based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets.

Table 3.3

 As of June 30, 2018
 Available-for-Sale Securities
 Amortized
Cost
 Fair Value Weighted-
Average
Yield
 (dollars in thousands)
Due within one year$1,389,395
 $1,389,339
 2.62%
Due after one year through five years2,485,919
 2,479,556
 2.83%
Due after five years through ten years826,277
 806,385
 3.08%
Due after ten years1,314,297
 1,310,526
 3.12%
Total$6,015,888
 $5,985,806
 2.88%
 As of June 30, 2018
 Held-to-Maturity Securities
 Amortized
Cost
 Fair Value Weighted-
Average
Yield
 (dollars in thousands)
Due within one year$769,783
 $766,311
 2.10%
Due after one year through five years1,368,924
 1,351,656
 2.77%
Due after five years through ten years212,947
 205,159
 3.30%
Due after ten years1,854,056
 1,785,646
 3.50%
Total$4,205,710
 $4,108,772
 2.99%

As of June 30, 2018, Farmer Mac owned trading USDA Securities with an amortized cost of $11.1 million, a fair value of $10.7 million, and a weighted-average yield of 5.26 percent. As of December 31, 2017, Farmer Mac owned trading USDA Securities with an amortized cost of $13.9 million, a fair value of $13.5 million, and a weighted-average yield of 5.33 percent.  



22




4.FINANCIAL DERIVATIVES

Farmer Mac enters into financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of certain assets, future cash flows, or debt issuance, and not for trading or speculative purposes.  Certain financial derivatives are designated as fair value hedges of fixed rate assets, primarily classified as available-for-sale, to protect against fair value changes in the assets related to a benchmark interest rate (e.g., LIBOR). Other financial derivatives are designated as cash flow hedges to mitigate the volatility of future interest rate payments on floating rate debt. Farmer Mac manages the interest rate risk related to loans it has committed to acquire, but has not yet permanently funded, through the use of forward sale contracts on the debt of other GSEs and futures contracts involving U.S. Treasury securities. Farmer Mac uses forward sale contracts on GSE securities to reduce its interest rate exposure to changes in both U.S. Treasury rates and spreads on Farmer Mac debt.  The notional amounts of these contracts are determined based on a duration-matched hedge ratio between the hedged item and the hedge instrument. Gains or losses generated by these hedge transactions are expected to offset changes in funding costs. All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability.

Effective first quarter 2018, Farmer Mac adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." This ASU reduces the complexity of hedge accounting by eliminating the requirement to separately measure and report hedge ineffectiveness and by requiring the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the income or expense effect from the hedged item. Upon the adoption of the ASU, Farmer Mac elected to retrospectively designate the hedged risk of its fair value hedges as the risk of changes in fair value resulting from changes in the benchmark interest rate component of the contractual coupon cash flows. Farmer Mac made this election for its fair value hedges designated upon the inception of the hedging instruments. For fair value hedges designated 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 operations, or cash flows.


















23



The following tables summarize information related to Farmer Mac's financial derivatives on a gross basis without giving consideration to master netting arrangements as of June 30, 2018 and December 31, 2017:

Table 4.1
  As of June 30, 2018
    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$2,432,032
 $2,744
 $(4,416) 2.13% 2.34%   8.58
Receive fixed non-callable2,151,700
 652
 (4,042) 2.20% 1.69%   1.73
Cash flow hedges:             
Interest rate swaps:             
Pay fixed non-callable409,500
 3,265
 (231) 2.28% 2.42%   5.93
No hedge designation:             
Interest rate swaps:             
Pay fixed non-callable323,292
 1,407
 (9,762) 3.71% 2.33%   6.62
Receive fixed non-callable3,401,094
 17
 (1,020) 2.09% 1.81%   0.84
Basis swaps1,419,000
 
 (574) 2.01% 1.88%   1.13
Treasury futures39,500
 
 (123)     119.88
  
Credit valuation adjustment  (74) 4
        
Total financial derivatives$10,176,118
 $8,011
 $(20,164)           
Collateral pledged  
 24,940
        
Net amount  $8,011
 $4,776
        


24



  As of December 31, 2017
    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$2,086,347
 $5,240
 $(5,990) 1.88% 1.40%   5.46
Receive fixed non-callable1,559,700
 110
 (4,033) 1.38% 1.45%   1.68
Cash flow hedges:             
Interest rate swaps:             
Pay fixed non-callable365,500
 1,402
 (138) 2.16% 1.74%   5.84
No hedge designation:             
Interest rate swaps:             
Pay fixed non-callable345,333
 339
 (16,352) 3.79% 1.40%   6.68
Receive fixed non-callable3,409,916
 
 
 1.25% 1.24%   0.92
Basis swaps1,053,500
 18
 (106) 1.33% 1.42%   0.91
Treasury futures40,000
 
 (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)        

Changes in the fair values of financial derivatives not designated as cash flow or fair value hedges are reported in "Gains/(losses) on financial derivatives and hedging activities" in the consolidated statements of operations. For financial derivatives designated in fair value hedge 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 reported in "Net interest income" in the consolidated statements of operations. Interest accruals on derivatives designated in fair value hedge relationships are also recorded in "Net interest income" in the consolidated statements of operations. For financial derivatives designated in cash flow hedge relationships, the unrealized gain or loss on the derivative is recorded in other comprehensive income. Because the hedging instrument is an interest rate swap and the hedged forecasted transactions are future interest payments on variable rate debt, amounts recorded in accumulated other comprehensive income are reclassified to "Total interest expense" in conjunction with the recognition of interest expense on the debt. As of June 30, 2018, Farmer Mac expects to reclassify $1.6 million after tax, from accumulated other comprehensive income to earnings over the next twelve months. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to June 30, 2018. During the three and six months ended June 30, 2018 and 2017, there were no gains or losses from interest rate swaps designated as cash flow hedges reclassified to earnings because it became probable that the original forecasted transaction would not occur.



25



The following table summarizes the net income/(expense) recognized in the consolidated statements of operations related to derivatives for the three and six months ended June 30, 2018 and 2017:

Table 4.2

 For the Three Months Ended June 30, 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 Gains/(losses) on financial derivatives and hedging activities 
 (in thousands)
Total amounts presented in the consolidated statement of operations:$74,179
 $49,396
 $(91,737) $2,534
 $34,372
Income/(expense) related to interest settlements on fair value hedging relationships:         
Recognized on derivatives681
 (165) (2,320) 
 (1,804)
Recognized on hedged items15,923
 1,545
 (10,074) 
 7,394
Discount amortization recognized on hedged items
 
 (188) 
 (188)
Income/(expense) related to interest settlements on fair value hedging relationships$16,604
 $1,380
 $(12,582) $
 $5,402
          
Gains/(losses) on fair value hedging relationships:         
Recognized on derivatives12,485
 2,235
 (2,731) 
 11,989
Recognized on hedged items(10,849) (2,472) 3,194
 
 (10,127)
Gains/(losses) on fair value hedging relationships$1,636
 $(237) $463
 $
 $1,862
          
Expense related to interest settlements on cash flow hedging relationships:         
Interest settlements reclassified from AOCI into net income on derivatives
 
 57
 
 57
Recognized on hedged items
 
 (2,330) 
 (2,330)
Discount amortization recognized on hedged items
 
 (2) 
 (2)
Expense recognized on cash flow hedges$
 $
 $(2,275) $
 $(2,275)
          
Gains/(losses) on financial derivatives not designated in hedge relationships:         
Interest rate swaps
 
 
 2,396
 2,396
Treasury futures
 
 
 138
 138
Gains/(losses) on financial derivatives not designated in hedge relationships$
 $
 $
 $2,534
 $2,534


26



 For the Three Months Ended June 30, 2017
 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 and hedging activities 
 (in thousands)
Total amounts presented in the consolidated statement of operations$50,106
 $39,573
 $(58,316) $(617) $30,746
Income/(expense) related to interest settlements on fair value hedging relationships:         
Recognized on derivatives(2,826) (208) 1,257
 
 (1,777)
Recognized on hedged items11,633
 583
 (5,056) 
 7,160
Discount amortization recognized on hedged items
 
 (120) 
 (120)
Income/(expense) related to interest settlements on fair value hedging relationships$8,807
 $375
 $(3,919) $
 $5,263
          
Gains/(losses) on fair value hedging relationships:         
Recognized on derivatives(1)

 
 
 (8,568) (8,568)
Recognized on hedged items
 
 
 9,988
 9,988
Gains/(losses) on fair value hedging relationships$
 $
 $
 $1,420
 $1,420
          
Expense related to interest settlements on cash flow hedging relationships:         
Interest settlements reclassified from AOCI into net income on derivatives$
 $
 $(497) $
 $(497)
Recognized on hedged items
 
 (845) 
 (845)
Discount amortization recognized on hedged items
 
 (1) 
 (1)
Losses recognized in income for hedge ineffectiveness
 
 
 (146) (146)
Expense recognized on cash flow hedges$
 $
 $(1,343) $(146) $(1,489)
          
Gains/(losses) on financial derivatives not designated in hedging relationships:         
Interest rate swaps$
 $
 $
 $(1,648) $(1,648)
Agency forwards
 
 
 (189) (189)
Treasury futures
 
 
 (54) (54)
Gains/(losses) on financial derivatives not designated in hedge relationships$
 $
 $
 $(1,891) $(1,891)
(1) 
Included in the assessment of hedge effectiveness as of June 30, 2017, but excluded from the amounts in the table, were losses of $1.3 million for the three months ended June 30, 2017, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amount recognized as hedge ineffectiveness for the three months ended June 30, 2017 were gains of $0.1 million.


27



 For the Six Months Ended June 30, 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 Gains/(losses) on financial derivatives and hedging activities 
 (in thousands)
Total amounts presented in the consolidated statement of operations:$136,609
 $95,049
 $(168,054) $(1,316) $62,288
Income/(expense) related to interest settlements on fair value hedging relationships:         
Recognized on derivatives(807) (463) (2,614) 
 (3,884)
Recognized on hedged items29,409
 2,959
 (18,628) 
 13,740
Discount amortization recognized on hedged items
 
 (353) 
 (353)
Income/(expense) related to interest settlements on fair value hedging relationships$28,602
 $2,496
 $(21,595) $
 $9,503
          
Gains/(losses) on fair value hedging relationships:         
Recognized on derivatives32,934
 8,655
 (12,377) 
 29,212
Recognized on hedged items(29,797) (9,045) 14,331
 
 (24,511)
Gains/(losses) on fair value hedging relationships$3,137
 $(390) $1,954
 $
 $4,701
          
Expense related to interest settlements on cash flow hedging relationships:         
Interest settlements reclassified from AOCI into net income on derivatives
 
 (210) 
 (210)
Recognized on hedged items
 
 (4,110) 
 (4,110)
Discount amortization recognized on hedged items
 
 (4) 
 (4)
Expense recognized on cash flow hedges$
 $
 $(4,324) $
 $(4,324)
          
(Losses)/gains on financial derivatives not designated in hedge relationships:         
Interest rate swaps
 
 
 (1,679) (1,679)
Treasury futures
 
 
 363
 363
(Losses)/gains on financial derivatives not designated in hedge relationships$
 $
 $
 $(1,316) $(1,316)



28



 For the Six Months Ended June 30, 2017
 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 and hedging activities 
 (in thousands)
Total amounts presented in the consolidated statement of operations$92,628
 $76,425
 $(107,862) $1,869
 $63,060
Income/(expense) related to interest settlements on fair value hedging relationships:         
Recognized on derivatives(5,984) (425) 1,440
 
 (4,969)
Recognized on hedged items22,226
 1,099
 (7,764) 
 15,561
Discount amortization recognized on hedged items
 
 (190) 
 (190)
Income/(expense) related to interest settlements on fair value hedging relationships$16,242
 $674
 $(6,514) $
 $10,402
          
Gains/(losses) on fair value hedging relationships:         
Recognized on derivatives(1)

 
 
 (7,041) (7,041)
Recognized on hedged items
 
 
 4,584
 4,584
Gains/(losses) on fair value hedging relationships$
 $
 $
 $(2,457) $(2,457)
          
Expense related to interest settlements on cash flow hedging relationships:         
Interest settlements reclassified from AOCI into net income on derivatives$
 $
 $(1,040) $
 $(1,040)
Recognized on hedged items
 
 (1,496) 
 (1,496)
Discount amortization recognized on hedged items
 
 (2) 
 (2)
Losses recognized in income for hedge ineffectiveness
 
 
 (175) (175)
Expense recognized on cash flow hedges$
 $
 $(2,538) $(175) $(2,713)
          
Gains/(losses) on financial derivatives not designated in hedging relationships:         
Interest rate swaps$
 $
 $
 $5,036
 $5,036
Agency forwards
 
 
 (588) (588)
Treasury futures
 
 
 53
 53
Gains/(losses) on financial derivatives not designated in hedge relationships$
 $
 $
 $4,501
 $4,501
(1) 
Included in the assessment of hedge effectiveness as of June 30, 2017, but excluded from the amounts in the table, were gains of $2.3 million for the six months ended June 30, 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 six months ended June 30, 2017 were losses of $0.1 million.



29



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 June 30, 2018 and December 31, 2017:

Table 4.3

 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)
 June 30, 2018 December 31, 2017 June 30, 2018 December 31, 2017
 (in thousands)
Farmer Mac Guaranteed Securities, Available-for-Sale, at fair value$2,223,750
 $1,928,220
 $(52,164) $(22,853)
Loans held for investment, at amortized cost162,884
 149,304
 (9,088) (189)
Notes Payable, due after one year(1)(2)
(2,345,273) (1,552,935) 20,072
 5,836
(1) 
Carrying amount represents amortized cost.
(2) 
Includes $0.4 million of hedging adjustments on a discontinued hedging relationship.

As of June 30, 2018 and December 31, 2017, Farmer Mac's credit exposure to interest rate swap counterparties, excluding netting arrangements and any adjustment for nonperformance risk, but including accrued interest, was $71.5 million and $28.5 million, respectively; however, including netting arrangements and accrued interest, Farmer Mac's credit exposure was $2.0 million and $0.5 million as of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018, Farmer Mac held no cash as collateral for its derivatives in net asset positions resulting in uncollateralized net asset positions of $2.0 million. As of December 31, 2017, Farmer Mac held no cash collateral for its derivatives in net asset positions, resulting in uncollateralized net asset positions of $0.5 million.

As of June 30, 2018 and December 31, 2017, the fair value of Farmer Mac's derivatives in a net liability position including accrued interest but excluding netting arrangements and any adjustment for nonperformance risk, was $55.3 million and $58.2 million, respectively; however, including netting arrangements and accrued interest, the fair value of Farmer Mac's derivatives in a net liability position at the counterparty level was $0.7 million and $28.0 million as of June 30, 2018 and December 31, 2017, respectively.  Farmer Mac posted cash of $20,000 and $24.9 million of investment securities as of June 30, 2018 and posted cash of $0.1 million and $24.8 million investment securities as of December 31, 2017.  Farmer Mac records posted cash as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of prepaid expenses and other assets. Any investment securities posted as collateral are included in the investment securities balances on the consolidated balance sheets.  If Farmer Mac had breached certain provisions of the derivative contracts as of June 30, 2018 and December 31, 2017, it could have been required to settle its obligations under the agreements or post additional collateral of none and $3.1 million, respectively. As of June 30, 2018 and December 31, 2017, there were no financial derivatives in a net payable position where Farmer Mac was required to pledge collateral which the counterparty had the right to sell or repledge.

For certain derivatives, Farmer Mac clears interest rate swaps through a clearinghouse, the Chicago Mercantile Exchange ("CME"). Farmer Mac posts initial and variation margin to this clearinghouse through which centrally-cleared derivatives and futures contracts are traded. These collateral postings expose Farmer Mac to institutional credit risk in the event that either the clearinghouse or the futures commission merchant that Farmer Mac uses to post collateral to the clearinghouse fails to meet its


30



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 $10.1 billion notional amount of interest rate swaps outstanding as of June 30, 2018, $8.8 billion were cleared through the swap clearinghouse. Of Farmer Mac's $8.8 billion notional amount of interest rate swaps outstanding as of December 31, 2017, $7.9 billion were cleared through the swap clearinghouse.


5.LOANS AND ALLOWANCE FOR LOSSES

Loans

Farmer Mac classifies loans as either held for investment or held for sale. Loans held for investment are recorded at the unpaid principal balance, net of unamortized premium or discount and other cost adjustments. Loans held for sale are reported at the lower of cost or fair value determined on a pooled basis. As of June 30, 2018 and December 31, 2017, Farmer Mac had no loans held for sale. The following table displays the composition of the loan balances as of June 30, 2018 and December 31, 2017:

Table 5.1

 As of June 30, 2018 As of December 31, 2017
 Unsecuritized In Consolidated Trusts Total Unsecuritized In Consolidated Trusts Total
 (in thousands)
Farm & Ranch$2,935,712
��$1,443,246
 $4,378,958
 $2,798,906
 $1,399,827
 $4,198,733
Rural Utilities991,819
 
 991,819
 1,076,291
 
 1,076,291
Total unpaid principal balance(1)
3,927,531
 1,443,246
 5,370,777
 3,875,197
 1,399,827
 5,275,024
Unamortized premiums, discounts, and other cost basis adjustments(11,404) 
 (11,404) (1,442) 
 (1,442)
Total loans3,916,127
 1,443,246
 5,359,373
 3,873,755
 1,399,827
 5,273,582
Allowance for loan losses(5,339) (1,450) (6,789) (5,493) (1,303) (6,796)
Total loans, net of allowance$3,910,788
 $1,441,796
 $5,352,584
 $3,868,262
 $1,398,524
 $5,266,786
(1) 
Unpaid principal balance is the basis of presentation in disclosures of outstanding balances for Farmer Mac's lines of business.

Allowance for Losses

Farm & Ranch

Farmer Mac maintains an allowance for losses presented in two components on its consolidated balance sheets: (1) an allowance for loan losses to account for estimated probable losses on loans held, and (2) a reserve for losses to account for estimated probable losses on loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities).  Farmer Mac's total allowance for losses was $9.0 million as of June 30, 2018 and $8.9 million as of December 31, 2017. See Note 6 for more information about off-balance sheet Farmer Mac Guaranteed Securities and LTSPCs.  



31



The following is a summary of the changes in the total allowance for losses for the three and six months ended June 30, 2018 and 2017:

Table 5.2
 As of June 30, 2018 As of June 30, 2017
 Allowance
for Loan
Losses
 Reserve
for Losses
 Total
Allowance
for Losses
 Allowance
for Loan
Losses
 Reserve
for Losses
 Total
Allowance
for Losses
 (in thousands)
For the Three Months Ended           
Beginning Balance$6,365
 $2,091
 $8,456
 $5,811
 $1,827
 $7,638
Provision for losses424
 158
 582
 327
 139
 466
Ending Balance$6,789
 $2,249
 $9,038
 $6,138
 $1,966
 $8,104
            
For the Six Months Ended           
Beginning Balance6,796
 2,070
 8,866
 5,415
 2,020
 7,435
(Release of)/provision for losses(7) 179
 172
 964
 (54) 910
Charge-offs$
 $
 $
 $(241) $
 $(241)
Ending Balance$6,789
 $2,249
 $9,038
 $6,138
 $1,966
 $8,104

During second quarter 2018, Farmer Mac recorded a provision to both its allowance for loan losses and reserve for losses of $0.4 million and $0.2 million, respectively. The net provisions to the total allowance for loan losses recorded during second quarter 2018 were attributable to (1) a modest decline in overall portfolio credit quality, and (2) an increase in the general allowance due to net volume growth in both on and off-balance sheet Farm & Ranch loans, primarily related to new agricultural storage and processing loans purchased during second quarter 2018. Farmer Mac recorded no charge-offs to its allowance for loan losses during second quarter 2018.

During second quarter 2017, Farmer Mac recorded provisions to its allowance for loan losses and reserve for losses of $0.3 million and $0.1 million, respectively. The provisions to the allowance for loan losses recorded during the second quarter 2017 were primarily attributable to an increase in the general allowance due to overall net volume growth in on-balance sheet Farm & Ranch loans. The provision to the reserve for losses recorded during the second quarter 2017 was primarily attributable to an increase in the general reserve due to downgrades in risk ratings on certain unimpaired crop and permanent planting loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities. Farmer Mac recorded no charge-offs to its allowance for loan losses during the second quarter 2017.



32



The following tables present the changes in the total allowance for losses for the three and six months ended June 30, 2018 and 2017 by commodity type:

Table 5.3

 June 30, 2018
 Crops Permanent
Plantings
 Livestock Part-time
Farm
 Ag. Storage and
Processing
 Other Total
 (in thousands)
For the Three Months Ended:             
Beginning Balance$3,793
 $2,479
 $1,236
 $413
 $522
 $13
 $8,456
Provision for/(release of) losses332
 (111) 86
 35
 198
 42
 582
Ending Balance$4,125
 $2,368
 $1,322
 $448
 $720
 $55
 $9,038
              
For the Six Months Ended:             
Beginning Balance$4,081
 $2,469
 $1,211
 $481
 $606
 $18
 $8,866
Provision for/(release of) losses44
 (101) 111
 (33) 114
 37
 172
Ending Balance$4,125
 $2,368
 $1,322
 $448
 $720
 $55
 $9,038

 June 30, 2017
 Crops Permanent
Plantings
 Livestock Part-time
Farm
 Ag. Storage and
Processing
 Other Total
 (in thousands)
For the Three Months Ended:             
Beginning Balance$3,562
 $1,870
 $1,379
 $324
 $472
 $31
 $7,638
Provision for/(release of) losses173
 294
 (145) 73
 86
 (15) 466
Ending Balance$3,735
 $2,164
 $1,234
 $397
 $558
 $16
 $8,104
              
For the Six Months Ended:             
Beginning Balance$3,365
 $1,723
 $1,375
 $405
 $533
 $34
 $7,435
Provision for/(release of) losses598
 441
 (128) (8) 25
 (18) 910
Charge-offs(228) 
 (13) 
 
 
 (241)
Ending Balance$3,735
 $2,164
 $1,234
 $397
 $558
 $16
 $8,104




33




The following tables present the unpaid principal balances of loans held and loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities) and the related total allowance for losses by impairment method and commodity type as of June 30, 2018 and December 31, 2017:

Table 5.4

  As of June 30, 2018
 Crops Permanent
Plantings
 Livestock Part-time
Farm
 Ag. Storage and
Processing
 Other Total
  (in thousands)
Ending Balance:             
Collectively evaluated for impairment:             
On-balance sheet$2,424,914
 $837,083
 $677,830
 $292,445
 $10,496
 $4,567
 $4,247,335
Off-balance sheet1,256,165
 501,328
 654,115
 162,146
 58,062
 3,604
 2,635,420
Total$3,681,079
 $1,338,411
 $1,331,945
 $454,591
 $68,558
 $8,171
 $6,882,755
Individually evaluated for impairment:             
On-balance sheet$65,878
 $40,694
 $16,558
 $8,493
 $
 $
 $131,623
Off-balance sheet10,946
 12,736
 6,360
 904
 
 73
 31,019
Total$76,824
 $53,430
 $22,918
 $9,397
 $
 $73
 $162,642
Total Farm & Ranch loans:             
On-balance sheet$2,490,792
 $877,777
 $694,388
 $300,938
 $10,496
 $4,567
 $4,378,958
Off-balance sheet1,267,111
 514,064
 660,475
 163,050
 58,062
 3,677
 2,666,439
Total$3,757,903
 $1,391,841
 $1,354,863
 $463,988
 $68,558
 $8,244
 $7,045,397
Allowance for Losses: 
  
  
  
  
  
  
Collectively evaluated for impairment:             
On-balance sheet$2,260
 $918
 $741
 $271
 $10
 $24
 $4,224
Off-balance sheet622
 182
 212
 54
 710
 5
 1,785
Total$2,882
 $1,100
 $953
 $325
 $720
 $29
 $6,009
Individually evaluated for impairment:             
On-balance sheet$987
 $1,211
 $241
 $101
 $
 $25
 $2,565
Off-balance sheet256
 57
 128
 22
 
 1
 464
Total$1,243
 $1,268
 $369
 $123
 $
 $26
 $3,029
Total Farm & Ranch loans:             
On-balance sheet$3,247
 $2,129
 $982
 $372
 $10
 $49
 $6,789
Off-balance sheet878
 239
 340
 76
 710
 6
 2,249
Total$4,125
 $2,368
 $1,322
 $448
 $720
 $55
 $9,038



34



  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 sheet1,236,392
 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 sheet8,904
 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 sheet1,245,296
 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 sheet546
 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 sheet224
 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 sheet770
 362
 301
 68
 562
 7
 2,070
Total$4,081
 $2,469
 $1,211
 $481
 $606
 $18
 $8,866



35



The following tables present by commodity type the unpaid principal balances, recorded investment, and specific allowance for losses related to impaired loans and the recorded investment in loans on nonaccrual status as of June 30, 2018 and December 31, 2017:

Table 5.5
  As of June 30, 2018
 Crops Permanent
Plantings
 Livestock Part-time
Farm
 Ag. Storage and
Processing
 Other Total
  (in thousands)
Impaired Loans:             
With no specific allowance:             
Recorded investment$13,239
 $12,564
 $7,816
 $3,060
 $
 $
 $36,679
Unpaid principal balance13,249
 12,565
 7,822
 3,062
 
 
 36,698
With a specific allowance: 
  
  
  
  
  
  
Recorded investment(1)
63,535
 40,835
 15,089
 6,331
 
 73
 125,863
Unpaid principal balance63,575
 40,865
 15,096
 6,335
 
 73
 125,944
Associated allowance1,243
 1,268
 369
 123
 
 26
 3,029
Total: 
  
  
  
  
  
  
Recorded investment76,774
 53,399
 22,905
 9,391
 
 73
 162,542
Unpaid principal balance76,824
 53,430
 22,918
 9,397
 
 73
 162,642
Associated allowance1,243
 1,268
 369
 123
 
 26
 3,029
              
Recorded investment of loans on nonaccrual status(2)
$27,442
 $26,066
 $5,142
 $4,453
 $
 $
 $63,103
(1) 
Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $123.5 million (76 percent) of impaired loans as of June 30, 2018, which resulted in a specific allowance of $2.6 million.
(2) 
Includes $27.4 million of loans that are less than 90 days delinquent but which have not met Farmer Mac's performance criteria for returning to accrual status.
  As of December 31, 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 balance14,418
 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 balance62,314
 37,146
 9,376
 6,711
 
 76
 115,623
Associated allowance1,431
 1,063
 242
 146
 
 2
 2,884
Total: 
  
  
  
  
  
  
Recorded investment76,726
 40,415
 20,547
 8,663
 
 720
 147,071
Unpaid principal balance76,732
 40,419
 20,548
 8,664
 
 720
 147,083
Associated allowance1,431
 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.


36



The following table presents by commodity type the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2018 and 2017:

Table 5.6

 June 30, 2018
 Crops Permanent
Plantings
 Livestock Part-time
Farm
 Ag. Storage and
Processing
 Other Total
  (in thousands)
For the Three Months Ended:             
Average recorded investment in impaired loans$72,041
 $49,919
 $23,453
 $9,214
 $

$392
 $155,019
Income recognized on impaired loans327
 492
 60
 62
 
 
 941
              
For the Six Months Ended:             
Average recorded investment in impaired loans$74,527
 $45,945
 $21,361
 $8,780
 $
 $557
 $151,170
Income recognized on impaired loans719
 664
 139
 117
 
 
 1,639

 June 30, 2017
 Crops Permanent
Plantings
 Livestock Part-time
Farm
 Ag. Storage and
Processing
 Other Total
  (in thousands)
For the Three Months Ended:             
Average recorded investment in impaired loans$65,295
 $33,222
 $12,557
 $7,926
 $
 $40
 $119,040
Income recognized on impaired loans160
 68
 22
 71
 
 
 321
              
For the Six Months Ended:             
Average recorded investment in impaired loans$61,226
 $32,292
 $13,497
 $8,119
 $
 $27
 $115,161
Income recognized on impaired loans462
 220
 199
 174
 
 
 1,055


For the three and six months ended June 30, 2018, there were no troubled debt restructurings ("TDRs"). For the three and six months ended June 30, 2017, the recorded investment of loans determined to be TDRs was $0.2 million both before and after restructuring. As of June 30, 2018 and 2017, there were no TDRs identified during the previous 12 months that were in default under the modified terms. The impact of TDRs on Farmer Mac's allowance for loan losses was immaterial for the three and six months ended June 30, 2018 and 2017.

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 three and six months ended June 30, 2018 and 2017 and the outstanding balances and carrying amounts of all such loans as of June 30, 2018 and December 31, 2017:


37




Table 5.7

 For the Three Months Ended For the Six Months Ended
 June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017
 ($ in thousands)
Unpaid principal balance at acquisition date:       
Loans underlying LTSPCs$
 $
 $
 $311
Loans underlying off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities)
 104
 721
 104
Total unpaid principal balance at acquisition date
 104
 721
 415
Contractually required payments receivable
 105
 730
 416
Impairment recognized subsequent to acquisition
 
 
 
Release of allowance for all outstanding acquired defaulted loans
 128
 
 142
        
Number of defaulted loans purchased
 1
 4
 4

 As of
 June 30, 2018 December 31, 2017
 (in thousands)
Outstanding balance$19,131
 $18,866
Carrying amount17,776
 17,691




38



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 June 30, 2018, there were no delinquencies and no probable losses inherent in Farmer Mac's Rural Utilities loan portfolio and Farmer Mac had not experienced credit losses on any Rural Utilities loans.

Table 5.8

 
90-Day Delinquencies(1)
 Net Credit (Recoveries)/Losses
 As of For the Six Months Ended
 June 30, 2018 December 31, 2017 June 30, 2018 June 30, 2017
 (in thousands)
On-balance sheet assets:       
Farm & Ranch:       
Loans$35,744
 $47,881
 $(18) $(488)
Total on-balance sheet$35,744
 $47,881
 $(18) $(488)
Off-balance sheet assets: 
    
  
Farm & Ranch: 
    
  
LTSPCs$7,332
 $563
 $
 $
Total off-balance sheet$7,332
 $563
 $
 $
Total$43,076
 $48,444
 $(18) $(488)
(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 $35.7 million of on-balance sheet loans reported as 90-day delinquencies as of June 30, 2018, $0.7 million were loans subject to "removal-of-account" provisions. Of the $47.9 million of on-balance sheet loans reported as 90-day delinquencies as of December 31, 2017, $0.3 million were loans subject to "removal-of-account" provisions.

Credit Quality Indicators


39




The following tables present credit quality indicators related to Farm & Ranch loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities as of June 30, 2018 and December 31, 2017:  

Table 5.9
  As of June 30, 2018
 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$2,315,593
 $829,733
 $651,584
 $287,055
 $10,496
 $4,567
 $4,099,028
Special mention(2)
109,471
 7,350
 26,248
 5,847
 
 
 148,916
Substandard(3)
65,728
 40,694
 16,556
 8,036
 
 
 131,014
Total on-balance sheet$2,490,792
 $877,777
 $694,388
 $300,938
 $10,496
 $4,567
 $4,378,958
Off-Balance Sheet:             
Acceptable$1,146,495
 $463,043
 $610,263
 $156,667
 $56,698
 $2,945
 $2,436,111
Special mention(2)
76,110
 24,774
 32,839
 921
 
 158
 134,802
Substandard(3)
44,506
 26,247
 17,373
 5,462
 1,364
 574
 95,526
Total off-balance sheet$1,267,111
 $514,064
 $660,475
 $163,050
 $58,062
 $3,677
 $2,666,439
Total Ending Balance:             
Acceptable$3,462,088
 $1,292,776
 $1,261,847
 $443,722
 $67,194
 $7,512
 $6,535,139
Special mention(2)
185,581
 32,124
 59,087
 6,768
 
 158
 283,718
Substandard(3)
110,234
 66,941
 33,929
 13,498
 1,364
 574
 226,540
Total$3,757,903
 $1,391,841
 $1,354,863
 $463,988
 $68,558
 $8,244
 $7,045,397
              
Commodity analysis of past due loans(1)
 
  
  
  
  
  
  
On-balance sheet$17,290
 $8,363
 $6,654
 $3,437
 $
 $
 $35,744
Off-balance sheet5,747
 
 1,085
 500
 
 
 7,332
90 days or more past due$23,037
 $8,363
 $7,739
 $3,937
 $
 $
 $43,076
(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.



40



  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 sheet151
 
 
 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.



41



Concentrations of Credit Risk

The following table sets forth the geographic and commodity/collateral diversification, the range of original loan-to-value ratios, and the range in the size of borrower exposure for all Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs as of June 30, 2018 and December 31, 2017:

Table 5.10
 As of
  June 30, 2018 December 31, 2017
  (in thousands)
By commodity/collateral type:   
Crops$3,757,903
 $3,657,945
Permanent plantings1,391,841
 1,367,563
Livestock1,354,863
 1,334,958
Part-time farm463,988
 433,628
Ag. Storage and Processing68,558
 58,761
Other8,244
 14,731
Total$7,045,397
 $6,867,586
By geographic region(1):
 
  
Northwest$819,607
 $740,991
Southwest2,170,739
 2,093,213
Mid-North2,279,960
 2,244,094
Mid-South879,945
 908,603
Northeast305,288
 296,264
Southeast589,858
 584,421
Total$7,045,397
 $6,867,586
By original loan-to-value ratio(2):
 
  
0.00% to 40.00%$1,314,094
 $1,322,422
40.01% to 50.00%1,762,371
 1,733,671
50.01% to 60.00%2,440,299
 2,385,605
60.01% to 70.00%1,235,630
 1,150,914
70.01% to 80.00%268,002
 248,799
80.01% to 90.00%25,001
 26,175
Total$7,045,397
 $6,867,586
By size of borrower exposure(3):
   
Less than $1,000,000$2,427,187
 $2,379,596
$1,000,000 to $4,999,9992,729,196
 2,627,617
$5,000,000 to $9,999,999908,347
 867,574
$10,000,000 to $24,999,999565,184
 584,896
$25,000,000 to $50,000,000415,483
 407,903
Total$7,045,397
 $6,867,586
(1) 
Geographic regions:  Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).
(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.



42



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.

6.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.

The following table presents the maximum principal amount of potential undiscounted future payments that Farmer Mac could be required to make under all off-balance sheet Farmer Mac Guaranteed Securities as of June 30, 2018 and December 31, 2017, not including offsets provided by any recourse provisions, recoveries from third parties, or collateral for the underlying loans:

Table 6.1
Outstanding Balance of Off-Balance Sheet Farmer Mac Guaranteed Securities
  As of June 30, 2018 As of December 31, 2017
  (in thousands)
Farm & Ranch:   
Guaranteed Securities$297,833
 $333,511
USDA Guarantees:   
Farmer Mac Guaranteed USDA Securities325,652
 254,217
Institutional Credit: 
  
AgVantage Securities11,556
 11,556
Revolving floating rate AgVantage facility(1)
300,000
 300,000
Total off-balance sheet Farmer Mac Guaranteed Securities$935,041
 $899,284
(1) 
Relates to a revolving floating rate AgVantage facility subject to specified contractual terms. Farmer Mac receives a fixed fee based on the full dollar amount of the facility.

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

Table 6.2
 For the Six Months Ended
  June 30, 2018 June 30, 2017
  (in thousands)
Proceeds from new securitizations$196,290
 $247,975
Guarantee fees received1,063
 1,701
Purchases of assets from the trusts(721) (104)

Farmer Mac has recorded a liability for its obligation to stand ready under the guarantee in the guarantee and commitment obligation on the consolidated balance sheets.  This liability approximated $3.2 million


43



as of June 30, 2018 and $3.6 million as of December 31, 2017. As of June 30, 2018 and December 31, 2017, the weighted-average remaining maturity of all loans underlying off-balance sheet Farmer Mac Guaranteed Securities, excluding AgVantage securities, was 9.7 years and 10.0 years, respectively. As of June 30, 2018 and December 31, 2017, the weighted-average remaining maturity of the off-balance sheet AgVantage securities was 0.3 years and 0.8 years, respectively.

Long-Term Standby Purchase Commitments

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

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 $3.0 billion and $3.1 billion as of June 30, 2018 and December 31, 2017, respectively.

As of June 30, 2018 and December 31, 2017, the weighted-average remaining maturity of all loans underlying LTSPCs was 15.5 years and 15.3 years, respectively.  For those LTSPCs issued or modified on or after January 1, 2003, Farmer Mac has recorded a liability for its obligation to stand ready under the commitment in the guarantee and commitment obligation on the consolidated balance sheets.  This liability approximated $35.2 million as of June 30, 2018 and $34.8 million as of December 31, 2017.



44




7.EQUITY

Common Stock

For the first and second quarter 2018, Farmer Mac paid a quarterly dividend of $0.58 per share on all classes of its common stock. For each quarter in 2017, Farmer Mac paid a quarterly dividend of $0.36 per share on all classes of its common stock.

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.

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 June 30, 2018 and December 31, 2017, the minimum capital requirement was greater than the risk-based capital requirement. Farmer Mac's ability to declare and pay dividends could be restricted if it fails to comply with applicable capital requirements.

As of June 30, 2018, Farmer Mac's minimum capital requirement was $543.2 million and its core capital level was $692.8 million, which was $149.6 million above the minimum capital requirement as of that date. As of December 31, 2017, Farmer Mac's minimum capital requirement was $520.3 million and its core capital level was $657.1 million, which was $136.8 million above the minimum capital requirement as of that date.

In accordance with FCA's rule on Farmer Mac's capital planning, and as part of Farmer Mac's capital plan, Farmer Mac has adopted a policy for maintaining a sufficient level of Tier 1 capital (consisting of retained


45



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.


8.FAIR VALUE DISCLOSURES

As of June 30, 2018, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $6.0 billion whose fair values were estimated by management in the absence of readily determinable fair values (i.e., level 3).  These financial instruments measured as Level 3 represented 32 percent of total assets and 72 percent of financial instruments measured at fair value as of June 30, 2018. As of December 31, 2017, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $5.5 billion whose fair values were estimated by management in the absence of readily determinable fair values.  These financial instruments measured as level 3 represented 31 percent of total assets and 71 percent of financial instruments measured at fair value as of December 31, 2017.

Transfers in and/or out of the different levels within the fair value hierarchy are based on the fair values of the assets and liabilities as of the beginning of the reporting period. During the first half of 2018 there were no transfers within fair value hierarchy for fair value measurements of Farmer Mac's investment securities, Farmer Mac Guaranteed Securities, USDA Securities, and financial derivatives. During the first half of 2017 there was one transfer within the fair value hierarchy from Level 2 to Level 3 for the fair value measurement of a fixed-rate GSE guaranteed mortgage-backed security (interest-only security). The transfer to Level 3 was because unobservable inputs became significant to the overall estimate of the fair value of the security as of March 31, 2017. During second quarter 2018 the remaining premium of this interest-only security held in that portfolio was fully amortized because the issuer called the security upon full prepayment of the underlying mortgage loan that collateralized the security.


46



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 June 30, 2018 and December 31, 2017, respectively, and indicate the fair value hierarchy of the valuation techniques used by Farmer Mac to determine such fair value:

Table 8.1
Assets and Liabilities Measured at Fair Value as of June 30, 2018
 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$
 $
 $19,010
 $19,010
Floating rate asset-backed securities
 31,321
 
 31,321
Floating rate Government/GSE guaranteed mortgage-backed securities
 1,368,125
 
 1,368,125
Fixed rate GSE guaranteed mortgage-backed securities
 439
 
 439
Fixed rate U.S. Treasuries905,703
 
 
 905,703
Total Investment Securities905,703
 1,399,885
 19,010
 2,324,598
Farmer Mac Guaranteed Securities: 
  
  
  
Available-for-sale: 
  
  
  
AgVantage
 
 5,985,806
 5,985,806
Total Farmer Mac Guaranteed Securities
 
 5,985,806
 5,985,806
USDA Securities: 
  
  
  
Trading
 
 10,748
 10,748
Total USDA Securities
 
 10,748
 10,748
Financial derivatives
 8,011
 
 8,011
Total Assets at fair value$905,703
 $1,407,896
 $6,015,564
 $8,329,163
Liabilities: 
  
  
  
Financial derivatives$123
 $20,041
 $
 $20,164
Total Liabilities at fair value$123
 $20,041
 $
 $20,164
Non-recurring: 
  
  
  
Assets: 
  
  
  
Loans held for investment$
 $
 $343
 $343
Total Non-recurring Assets at fair value$
 $
 $343
 $343



47



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. Treasuries767,424
 
 
 767,424
Total available-for-sale767,424
 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
 $
 $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





48




The following tables present additional information about assets and liabilities measured at fair value on a recurring basis for which Farmer Mac has used significant unobservable inputs to determine fair value. Net transfers in and/or out of Level 3 are based on the fair values of the assets and liabilities as of the beginning of the reporting period. There were no liabilities measured at fair value using significant unobservable inputs during the three and six months ended June 30, 2018 and 2017.


Table 8.2
 
Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended June 30, 2018
  Beginning
Balance
 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$19,010
 $
 $
 $
 $
 $
 $19,010
Fixed rate GSE guaranteed mortgage-backed securities4,120
 
 
 (2,028) (2,092) 
 
Total available-for-sale23,130
 
 
 (2,028) (2,092) 
 19,010
Farmer Mac Guaranteed Securities: 
  
  
    
    
Available-for-sale: 
  
  
    
    
AgVantage5,839,387
 303,517
 
 (149,193) (10,850) 2,945
 5,985,806
Total available-for-sale5,839,387
 303,517
 
 (149,193) (10,850) 2,945
 5,985,806
USDA Securities: 
  
  
    
    
Available-for-sale
 45,014
 (45,014) 
 
 
 
Trading(1)
11,558
 
 
 (821) 11
 
 10,748
Total USDA Securities11,558
 45,014
 (45,014) (821) 11
 
 10,748
Total Assets at fair value$5,874,075
 $348,531
 $(45,014) $(152,042) $(12,931) $2,945
 $6,015,564
(1) 
Includes unrealized gains of $11,000 attributable to assets still held as of June 30, 2018 that are recorded in "Gains/(losses) on trading securities."



49



Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended June 30, 2017
  Beginning
Balance
 Purchases Sales Settlements Realized and
Unrealized Gains/(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$18,124
 $
 $
 $
 $
 $394
 $18,518
Fixed rate GSE guaranteed mortgage-backed securities$4,819
 $
 $
 $(111) $
 $(57) $4,651
Total available-for-sale22,943
 
 
 (111) 
 337
 23,169
Farmer Mac Guaranteed Securities: 
  
  
    
    
Available-for-sale: 
  
  
    
    
AgVantage5,243,046
 194,288
 
 (165,248) 9,552
 924
 5,282,562
Total available-for-sale5,243,046
 194,288
 
 (165,248) 9,552
 924
 5,282,562
USDA Securities: 
  
  
    
    
Available-for-sale
 53,506
 (53,506) 
 
 
 
Trading(1)
18,602
 
 
 (2,306) (2) 
 16,294
Total USDA Securities18,602
 53,506
 (53,506) (2,306) (2) 
 16,294
Total Assets at fair value$5,284,591
 $247,794
 $(53,506) $(167,665) $9,550
 $1,261
 $5,322,025
(1) 
Includes unrealized gains of $0.1 million attributable to assets still held as of June 30, 2017 that are recorded in "Gains/(losses) on trading securities."


50



Level 3 Assets and Liabilities Measured at Fair Value for the Six Months Ended June 30, 2018
  Beginning
Balance
 Cumulative Effect from Change in Hedge Accounting 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$18,814
 
 $
 $
 $
 $
 $196
 $19,010
Fixed rate GSE guaranteed mortgage-backed securities4,333
 
 
 
 (2,137) (2,092) (104) 
Total available-for-sale23,147
 
 
 
 (2,137) (2,092) 92
 19,010
Farmer Mac Guaranteed Securities: 
    
  
    
    
Available-for-sale: 
    
  
    
    
AgVantage5,471,914
 487
 958,964
 
 (439,461) (29,798) 23,700
 5,985,806
Total available-for-sale5,471,914
 487
 958,964
 
 (439,461) (29,798) 23,700
 5,985,806
USDA Securities: 
    
  
    
    
Available-for-sale
 
 79,307
 (79,307) 
 
 
 
Trading(1)
13,515
 
 
 
 (2,794) 27
 
 10,748
Total USDA Securities13,515
 
 79,307
 (79,307) (2,794) 27
 
 10,748
Total Assets at fair value$5,508,576
 $487
 $1,038,271
 $(79,307) $(444,392) $(31,863) $23,792
 $6,015,564
(1) 
Includes unrealized gains of $0.1 million attributable to assets still held as of June 30, 2018 that are recorded in "Gains/(losses) on trading securities."








51



Level 3 Assets and Liabilities Measured at Fair Value for the Six Months Ended June 30, 2017
  Beginning
Balance
 Transfers in Purchases Sales Settlements Realized and
Unrealized Gains/(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
 $
 $
 $
 $
 $
 $788
 $18,518
Fixed rate GSE guaranteed mortgage-backed securities$
 $7,041
 $
 $
 $(223) $
 $(2,167) $4,651
Total available-for-sale17,730
 7,041
 
 
 (223) 
 (1,379) 23,169
Farmer Mac Guaranteed Securities: 
    
  
    
    
Available-for-sale: 
    
  
    
    
AgVantage4,853,685
 
 733,815
 
 (327,155) 6,337
 15,880
 5,282,562
Total available-for-sale4,853,685
 
 733,815
 
 (327,155) 6,337
 15,880
 5,282,562
USDA Securities: 
    
  
    
    
Available-for-sale
 
 86,095
 (86,095) 
 
 
 
Trading(1)
20,388
 
 
 
 (4,010) (84) 
 16,294
Total USDA Securities20,388
 
 86,095
 (86,095) (4,010) (84) 
 16,294
Total Assets at fair value$4,891,803
 $7,041
 $819,910
 $(86,095) $(331,388) $6,253
 $14,501
 $5,322,025
(1) 
Includes unrealized gains of $7,000 attributable to assets still held as of June 30, 2017 that are recorded in "Gains/(losses) on trading securities."







52



The following tables present additional information about the significant unobservable inputs, such as discount rates and constant prepayment rates ("CPR"), used in the fair value measurements categorized in level 3 of the fair value hierarchy as of June 30, 2018 and December 31, 2017.

Table 8.3
  As of June 30, 2018
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 $19,010
 Indicative bids Range of broker quotes 96.5% - 96.5% (96.5%)
Farmer Mac Guaranteed Securities:        
AgVantage $5,985,806
 Discounted cash flow Discount rate 2.7% - 4.0% (2.9%)
         
USDA Securities $10,748
 Discounted cash flow Discount rate 3.3% - 5.2% (4.9%)
      CPR 7% - 17% (16%)

  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%)

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



53



Disclosures on Fair Value of Financial Instruments

The following table sets forth the estimated fair values and carrying values for financial assets, liabilities, and guarantees and commitments as of June 30, 2018 and December 31, 2017:

Table 8.4

 As of June 30, 2018 As of December 31, 2017
 Fair Value Carrying
Amount
 Fair Value Carrying
Amount
 (in thousands)
Financial assets:       
Cash and cash equivalents$430,812
 $430,812
 $302,022
 $302,022
Investment securities2,370,461
 2,369,630
 2,260,969
 2,260,437
Farmer Mac Guaranteed Securities8,060,393
 8,078,898
 7,588,806
 7,598,188
USDA Securities2,044,933
 2,123,366
 2,076,396
 2,131,365
Loans5,337,868
 5,352,584
 5,279,225
 5,266,786
Financial derivatives8,011
 8,011
 7,093
 7,093
Guarantee and commitment fees receivable:       
LTSPCs37,181
 36,141
 33,871
 35,718
Farmer Mac Guaranteed Securities3,783
 3,774
 4,323
 4,177
Financial liabilities:       
Notes payable:       
Due within one year7,761,788
 7,774,301
 8,079,309
 8,089,826
Due after one year8,369,155
 8,416,896
 7,445,545
 7,432,790
Debt securities of consolidated trusts held by third parties1,416,899
 1,449,888
 1,386,652
 1,404,945
Financial derivatives20,164
 20,164
 26,599
 26,599
Guarantee and commitment obligations:       
LTSPCs36,243
 35,202
 32,976
 34,824
Farmer Mac Guaranteed Securities3,234
 3,226
 3,722
 3,576

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


54



are derived using a Monte Carlo simulation model. Different market assumptions and estimation methodologies could significantly affect estimated fair value amounts.



55



9.BUSINESS SEGMENT REPORTING

The following tables present core earnings for Farmer Mac's operating segments and a reconciliation to consolidated net income for the three and six months ended June 30, 2018 and 2017:

Table 9.1
Core Earnings by Business Segment
For the Three Months Ended June 30, 2018
 Farm & Ranch USDA Guarantees 
Rural 
Utilities
 Institutional Credit Corporate Reconciling
Adjustments
 Consolidated Net Income
 (in thousands)
Net interest income$15,889
 $5,072
 $3,313
 $18,805
 $854
 $
 $43,933
Less: reconciling adjustments(1)(2)(3)(4)
(2,542) (674) (390) (3,585) (580) 7,771
 
Net effective spread13,347
 4,398
 2,923
 15,220
 274
 7,771
 
Guarantee and commitment fees(2)
4,488
 190
 402
 91
 
 (1,690) 3,481
Other income/(expense)(3)
341
 8
 5
 
 (209) 2,754
 2,899
Non-interest income/(loss)4,829
 198
 407
 91
 (209) 1,064
 6,380
              
Provision for loan losses(424) 
 
 
 
 
 (424)
              
Provision for reserve for losses(158) 
 
 
 
 
 (158)
Other non-interest expense(4,954) (1,312) (739) (2,030) (3,728) 
 (12,763)
Non-interest expense(5)
(5,112) (1,312) (739) (2,030) (3,728) 
 (12,921)
Core earnings before income taxes12,640
 3,284
 2,591
 13,281
 (3,663) 8,835
(6) 
36,968
Income tax (expense)/benefit(2,654) (690) (544) (2,789) 1,200
 (1,855) (7,332)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest9,986
 2,594
 2,047
 10,492
 (2,463) 6,980
(6) 
29,636
Preferred stock dividends
 
 
 
 (3,296) 
 (3,296)
Segment core earnings/(losses)$9,986
 $2,594
 $2,047
 $10,492
 $(5,759) $6,980
(6) 
$26,340
              
Total assets at carrying value$4,428,172
 $2,177,345
 $995,068
 $8,144,763
 $2,881,423
 $
 $18,626,771
Total on- and off-balance sheet program assets at principal balance$7,045,397
 $2,418,115
 $1,669,440
 $8,391,885
 
 
 $19,524,837
(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/(losses) 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 directly attributable costs and an allocation of indirectly attributable costs based on employee headcount.
(6) 
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.




56



Core Earnings by Business Segment
For the Three Months Ended June 30, 2017
 Farm & Ranch USDA Guarantees Rural 
Utilities
 Institutional Credit Corporate 
Reconciling
Adjustments
 Consolidated Net Income
 (in thousands)
Net interest income$13,338
 $5,176
 $3,003
 $15,431
 $2,783
 $
 $39,731
Less: reconciling adjustments(1)(2)(3)(4)
(2,180) (625) (334) (964) (294) 4,397
 
Net effective spread11,158
 4,551
 2,669
 14,467
 2,489
 4,397
 
Guarantee and commitment fees(2)
4,191
 99
 487
 165
 
 (1,470) 3,472
Other income/(expense)(3)(5)
994
 11
 5
 
 (146) (592) 272
Non-interest income/(loss)5,185
 110
 492
 165
 (146) (2,062) 3,744
              
Provision for loan losses(327) 
 
 
 
 
 (327)
              
Provision for reserve for losses(139) 
 
 
 
 
 (139)
Other non-interest expense(4,446) (1,166) (643) (1,622) (3,374) 
 (11,251)
Non-interest expense(6)
(4,585) (1,166) (643) (1,622) (3,374) 
 (11,390)
Core earnings before income taxes11,431
 3,495
 2,518
 13,010
 (1,031) 2,335
(7) 
31,758
Income tax (expense)/benefit(4,001) (1,223) (881) (4,554) 352
 (817) (11,124)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest7,430
 2,272
 1,637
 8,456
 (679) 1,518
(7) 
20,634
Preferred stock dividends
 
 
 
 (3,296) 
 (3,296)
Non-controlling interest
 
 
 
 150
 
 150
Segment core earnings/(losses)$7,430
 $2,272
 $1,637
 $8,456
 $(3,825) $1,518
(7) 
$17,488
              
Total assets at carrying value$3,958,344
 $2,141,569
 $1,038,383
 $7,425,774
 $2,703,315
 $
 $17,267,385
Total on- and off-balance sheet program assets at principal balance$6,426,518
 $2,237,013
 $1,883,909
 $7,711,418
 $
 $
 $18,258,858
(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/(losses) 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 employee headcount.
(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.



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Core Earnings by Business Segment
For the Six Months Ended June 30, 2018
 Farm & Ranch USDA Guarantees 
Rural 
Utilities
 Institutional Credit Corporate Reconciling
Adjustments
 Consolidated Net Income
 (in thousands)
Net interest income$30,830
 $10,142
 $5,850
 $36,637
 $3,703
 $
 $87,162
Less: reconciling adjustments(1)(2)(3)(4)
(4,943) (1,344) 23
 (6,593) (1,042) 13,899
 
Net effective spread25,887
 8,798
 5,873
 30,044
 2,661
 13,899
 
Guarantee and commitment fees(2)
8,867
 356
 851
 180
 
 (3,274) 6,980
Other income/(expense)(3)
899
 13
 10
 
 (349) (934) (361)
Non-interest income/(loss)9,766
 369
 861
 180
 (349) (4,208) 6,619
              
Provision for loan losses7
 
 
 
 
 
 7
              
Provision for reserve for losses(179) 
 
 
 
 
 (179)
Other non-interest expense(9,474) (2,505) (1,412) (3,876) (7,117) 
 (24,384)
Non-interest expense(5)
(9,653) (2,505) (1,412) (3,876) (7,117) 
 (24,563)
Core earnings before income taxes26,007
 6,662
 5,322
 26,348
 (4,805) 9,691
(6) 
69,225
Income tax (expense)/benefit(5,461) (1,399) (1,118) (5,533) 1,775
 (2,034) (13,770)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest20,546
 5,263
 4,204
 20,815
 (3,030) 7,657
(6) 
55,455
Preferred stock dividends
 
 
 
 (6,591) 
 (6,591)
Segment core earnings/(losses)$20,546
 $5,263
 $4,204
 $20,815
 $(9,621) $7,657
(6) 
$48,864
              
Total assets at carrying value$4,428,172
 $2,177,345
 $995,068
 $8,144,763
 $2,881,423
 $
 $18,626,771
Total on- and off-balance sheet program assets at principal balance$7,045,397
 $2,418,115
 $1,669,440
 $8,391,885
 
 
 $19,524,837
(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/(losses) 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 directly attributable costs and an allocation of indirectly attributable costs based on employee headcount.
(6) 
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.





58



Core Earnings by Business Segment
For the Six Months Ended June 30, 2017
 Farm & Ranch USDA Guarantees Rural 
Utilities
 Institutional Credit Corporate 
Reconciling
Adjustments
 Consolidated Net Income
 (in thousands)
Net interest income$26,092
 $10,459
 $5,951
 $28,933
 $5,367
 $
 $76,802
Less: reconciling adjustments(1)(2)(3)(4)
(4,423) (1,347) (714) (1,851) (607) 8,942
 
Net effective spread21,669
 9,112
 5,237
 27,082
 4,760
 8,942
 
Guarantee and commitment fees(2)
8,486
 173
 979
 620
 
 (2,942) 7,316
Other income/(expense)(3)(5)
1,188
 25
 10
 
 121
 1,880
 3,224
Non-interest income/(loss)9,674
 198
 989
 620
 121
 (1,062) 10,540
              
Provision for loan losses(964) 
 
 
 
 
 (964)
              
Provision for reserve for losses54
 
 
 
 
 
 54
Other non-interest expense(8,511) (2,253) (1,230) (3,143) (6,856) 
 (21,993)
Non-interest expense(6)
(8,457) (2,253) (1,230) (3,143) (6,856) 
 (21,939)
Core earnings before income taxes21,922
 7,057
 4,996
 24,559
 (1,975) 7,880
(7) 
64,439
Income tax (expense)/benefit(7,673) (2,470) (1,748) (8,596) 1,336
 (2,759) (21,910)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest14,249
 4,587
 3,248
 15,963
 (639) 5,121
(7) 
42,529
Preferred stock dividends
 
 
 
 (6,591) 
 (6,591)
Non-controlling interest
 
 
 
 165
 
 165
Segment core earnings/(losses)$14,249
 $4,587
 $3,248
 $15,963
 $(7,065) $5,121
(7) 
$36,103
              
Total assets at carrying value$3,958,344
 $2,141,569
 $1,038,383
 $7,425,774
 $2,703,315
 $
 $17,267,385
Total on- and off-balance sheet program assets at principal balance$6,426,518
 $2,237,013
 $1,883,909
 $7,711,418
 
 
 $18,258,858
(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/(losses) 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 employee headcount.
(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.


10.INCOME TAXES

As a result of the changes to the U.S. tax code resulting from legislation enacted in December 2017, Farmer Mac's effective tax rate decreased from 35.5 percent for the year ended December 31, 2017 to 19.9 percent for the first half of 2018. The effective tax rate was lower than the statutory corporate tax rate in first half of 2018 due to net tax benefits recognized related to exercises of share-based compensation awards during first quarter 2018.



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

Financial information included in this report is consolidated to include the accounts of Farmer Mac and its two subsidiaries – Farmer Mac Mortgage Securities Corporation and Farmer Mac II LLC. The accounts of Contour Valuation Services, LLC (which began doing business as AgVisory during first quarter 2016) ("AgVisory"), Farmer Mac's former majority-owned subsidiary, are also included through June 30, 2017. Farmer Mac redeemed its ownership interest in AgVisory on May 1, 2017. This discussion and analysis of financial condition and results of operations should be read together with: (1) the interim unaudited consolidated financial statements and the related notes that appear elsewhere in this report; and (2) Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 8, 2018.


FORWARD-LOOKING STATEMENTS

Some statements made in this report, and in particular in the "Management's Discussion & Analysis of Financial Condition and Results of Operations" section, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 pertaining to management's current expectations as to Farmer Mac's future financial results, business prospects, and business developments.  Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements. These statements typically are accompanied by, and identified with, terms such as "anticipates," "believes," "expects," "intends," "plans," "potential," "may," "should," and similar phrases.  This report includes forward-looking statements addressing Farmer Mac's:
 
prospects for earnings;
prospects for growth in business volume;
trends in net interest income and net effective spread;
trends in portfolio credit quality, delinquencies, 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 Farmer Mac's Annual Report on Form 10-K for the fiscal period ended December 31, 2017 filed with the SEC on March 8, 2018, and uncertainties regarding:
 
the availability to Farmer Mac of debt and equity financing and, if available, the reasonableness of rates and terms;


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legislative or regulatory developments that could affect Farmer Mac, its sources of business, or the agricultural or rural utilities industries;
fluctuations in the fair value of assets held by Farmer Mac and its subsidiaries;
the rate and direction of development of the secondary market for agricultural mortgage and rural utilities loans, including lender interest in Farmer Mac's products and the secondary market provided by Farmer Mac;
the general rate of growth in agricultural mortgage and rural utilities indebtedness;
the effect of economic conditions, including the effects of drought and other weather-related conditions and fluctuations in agricultural real estate values, on agricultural mortgage lending and borrower repayment capacity;
the effect of any changes in Farmer Mac's executive leadership;
developments in the financial markets, including possible investor, analyst, and rating agency reactions to events involving government-sponsored enterprises, including Farmer Mac;
changes in the level and direction of interest rates, which could, among other things, affect the value of collateral securing Farmer Mac's agricultural mortgage loan assets;
the degree to which Farmer Mac is exposed to basis risk, which results from fluctuations in Farmer Mac's borrowing costs relative to market indexes such as LIBOR; and
volatility in commodity prices relative to costs of production, changes in U.S. trade policies, and/or fluctuations in export demand for U.S. agricultural products.

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



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Overview

Farmer Mac increased its outstanding business volume by $145.4 million from the end of first quarter 2018 to $19.5 billion as of June 30, 2018. The primary driver of the increase was net portfolio growth of $104.6 million in Farm & Ranch loans. Farmer Mac also grew its portfolio of AgVantage securities by $66.0 million. Farmer Mac's overall credit quality declined modestly during second quarter 2018 compared to first quarter 2018, as reflected by the increase in dollars in total allowance for losses and the slight increase in dollars in substandard assets. Farmer Mac's 90-day delinquencies decreased modestly both in dollars and as a percentage of the Farm & Ranch portfolio. Farmer Mac's substandard assets rate and 90-day delinquencies rate each remained below Farmer Mac's historical averages.

Farmer Mac experienced a payoff transaction in second quarter 2018 related to a legacy security held within its investment portfolio, which is not related to any of Farmer Mac's four lines of business. Specifically, the remaining $2.0 million in premium of an interest-only security held in that portfolio was fully amortized (the "Interest-Only Amortization") because the issuer called the security upon full prepayment of the underlying mortgage loan that collateralized the security. This redemption reduced net interest income and net effective spread by $2.0 million and net income attributable to common stockholders and core earnings by $1.6 million after tax for second quarter 2018. However, Farmer Mac received a net after-tax economic benefit of $3.2 million as a result of the transactions related to this interest-only security that occurred over a five-year period. For more information about this payoff transaction, see "—Net Interest Income and Net Effective Spread" below and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Net Interest Income." Farmer Mac does not currently hold any other interest-only securities in its investment portfolio.

As a result of the changes to the U.S. tax code resulting from legislation enacted in December 2017, Farmer Mac's effective tax rate decreased from 35.5 percent for the year ended December 31, 2017 to 19.9 percent for the six months ended June 30, 2018. Farmer Mac also increased its 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 both the first and second quarter 2018.

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."
 
Net Income and Core Earnings

Farmer Mac's net income attributable to common stockholders for second quarter 2018 was $26.3 million, compared to $22.5 million in first quarter 2018 and $17.5 million in second quarter 2017.

The $3.8 million sequential increase in net income attributable to common stockholders was driven by: (1) an increase in gains in fair value of financial derivatives and hedged assets of $5.0 million after tax; and (2) a $0.6 million after-tax increase in net interest income, which includes the $1.6 million after-tax negative impact of the Interest-Only Amortization. The increase was offset in part by (1) a $0.8 million after-tax increase in the provision for loan losses; and (2) a $0.7 million after-tax increase in general and administrative ("G&A") expenses. The increase in G&A expenses was primarily due to a $0.3 million


62



after-tax increase in hiring or hiring-related expenses, including expenses related to the search process for Farmer Mac's next President and Chief Executive Officer, and a $0.2 million after-tax increase in servicing advances. Servicing advances are potentially recoverable expenses paid by Farmer Mac on behalf of borrowers for items such as legal fees, appraisal fees, insurance, and taxes to protect Farmer Mac's interest in the collateral underlying a mortgage loan.

The $8.8 million year-over-year increase in net income attributable to common stockholders was driven by: (1) an increase of $3.3 million after tax in net interest income, which includes a $1.6 million after-tax negative impact of the Interest-Only Amortization; and (2) a $2.5 million after-tax increase in gains in fair value of financial derivatives and hedged assets. Also contributing to the year-over-year increase was the impact of the lower federal corporate income tax rate, which resulted in a $5.2 million decrease in income tax expense. These increases were offset in part by: (1) a $1.2 million after-tax increase in non-interest expense in second quarter 2018, primarily attributable to higher compensation and employee benefits expenses and higher G&A expenses; and (2) a decrease in net realized gains of $0.6 million after tax on the sale of real estate owned properties.

Farmer Mac's non-GAAP core earnings for second quarter 2018 were $19.4 million, compared to $21.8 million in first quarter 2018 and $16.0 million in second quarter 2017.

The $2.4 million sequential decrease in core earnings was primarily attributable to: (1) a $0.7 million after-tax decrease in net effective spread, which includes the $1.6 million after-tax negative impact of the Interest-Only Amortization; (2) a $0.9 million after-tax increase in operating expenses, primarily due to an increase in G&A expenses, including hiring and hiring-related expenses and servicing advances, and an increase in compensation and benefits expenses; and (3) a $0.7 million after-tax increase in credit-related expenses due to a provision for the total allowance for losses of $0.5 million after tax in second quarter 2018 compared to a release to the allowance for losses of $0.3 million after tax in first quarter 2018.
  
The $3.4 million year-over-year increase in core earnings was primarily attributable to: (1) a $0.7 million after-tax increase in net effective spread, which includes a $1.6 million after-tax negative impact of the Interest-Only Amortization; and (2) a $4.8 million decrease in income tax expense attributable to the lower federal corporate income tax rate. The year-over-year increase in core earnings was offset in part by a $1.2 million after-tax increase in operating expenses. The increase in operating expenses was primarily attributable to an increase in G&A expenses, including expenses related to: (1) continued technology and business infrastructure investments; (2) an increase in headcount and the search process for Farmer Mac's next President and Chief Executive Officer; (3) new leases for office space entered into during 2017; and (4) legal fees related to general corporate matters. Also contributing to the offset was a $0.6 million after-tax decrease in net realized gains on the sale of real estate owned properties.

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."



63



Net Interest Income and Net Effective Spread

Net interest income was $43.9 million for second quarter 2018, compared to $43.2 million for first quarter 2018 and $39.7 million for second quarter 2017. The overall net interest yield was 0.96 percent for second quarter 2018, compared to 0.98 percent for first quarter 2018 and 0.95 percent for second quarter 2017.

The $0.7 million sequential increase in net interest income was driven primarily by 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 2017 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 relationships. Another factor contributing to the increase was a decrease in net yield adjustments related to amortizations of premiums and discounts on assets consolidated at fair value.
The 2 basis point sequential decrease in net interest yield was primarily attributable to the Interest-Only Amortization, which had a 5 basis point negative impact during second quarter 2018. In December 2011, Farmer Mac purchased a pre-payable, structured adjustable rate mortgage-backed security (the "Original Bond") for $152.3 million. The Original Bond had a contractual coupon rate of three-month LIBOR plus 97 basis points. In 2012, due to actions of the central banks around the world, credit spreads decreased and market liquidity increased, resulting in a 67 basis point decline in market spreads of similar newly issued bonds. This decline in market spreads created an incentive for the borrower on the underlying mortgage loan that collateralized the Original Bond to prepay the loan. Because of the large unpaid principal balance on the Original Bond held by Farmer Mac, its open prepayment option, and a significant differential between its contractual coupon rate and the then-current market rate, Farmer Mac had to match fund the Original Bond with short-term debt to continue holding it, which became inefficient from a liquidity perspective. Therefore, Farmer Mac sold the Original Bond at its fair value to the issuer through a dealer for a $3.1 million after-tax gain and the issuer re-securitized the Original Bond into a par security and an interest-only security. The par security was sold to a third party investor and Farmer Mac purchased the interest-only security at a $4.2 million premium ($3.1 million after tax) in second quarter 2013. Farmer Mac earned $4.8 million pre-tax ($3.2 million after tax) of interest income over the five-year period that it held the interest-only security in its investment portfolio. As a result of this series of transactions, Farmer Mac eliminated the funding pressure that resulted from holding the Original Bond and received an overall net economic benefit of $3.2 million after tax.

The $4.2 million year-over-year increase in net interest income was driven by net growth in on-balance sheet AgVantage securities, Farm & Ranch loans, 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. 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 relationships. Also contributing to the increase were the fair value changes on financial derivatives and corresponding financial assets and liabilities in fair value hedge relationships. Effective first quarter 2018, Farmer Mac adopted Accounting Standard Update ("ASU") 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The new accounting guidance requires the changes in the fair value of both the financial derivative designated in a fair value hedge relationship and the corresponding hedged item to be recorded in the same line item in Farmer Mac's consolidated statements of operations. Thus, Farmer Mac recognizes changes in fair value of both the financial derivatives and corresponding hedged items within net interest income in its consolidated statements of operations. Prior


64



to first quarter 2018, changes in the fair value of financial derivatives designated in a fair value hedge relationship were recognized in "Gains/(losses) on financial derivatives and hedging activities" in Farmer Mac's consolidated statements of operations. The increase was offset in part by the impact of the Interest-Only Amortization. The 1 basis point year-over-year increase in net interest yield was primarily driven by an increase in the aforementioned fair value changes on financial derivatives and corresponding financial assets and liabilities in fair value hedge relationships included in net interest income in second quarter 2018. This increase was offset in part by the impact of the Interest-Only Amortization, which had a 5 basis point negative impact for the quarter.

Net effective spread, a non-GAAP measure, was $36.2 million for second quarter 2018, compared to $37.1 million in first quarter 2018 and $35.3 million in second quarter 2017. In percentage terms, net effective spread was 0.86 percent for second quarter 2018, compared to 0.91 percent in first quarter 2018 and 0.91 percent in second quarter 2017. Farmer Mac uses net effective spread as an alternative measure to net interest income because management believes it is a useful metric that reflects the economics of the net spread between all the assets owned by Farmer Mac and all related funding, including any associated derivatives, some of which may not be included in net interest income.

The $0.9 million sequential decrease in net effective spread in dollars was primarily attributable to the $2.0 million negative impact of the Interest-Only Amortization. The decrease was offset in part by: (1) growth in on-balance sheet AgVantage securities and Farm & Ranch loans, which increased net effective spread by $0.7 million; and (2) an increase in the amount of cash basis interest income recognized on non-accrual Farm & Ranch loans, which increased net effective spread by $0.5 million. The 5 basis point sequential decrease was primarily attributable to the Interest-Only Amortization.

The $0.9 million year-over-year increase in net effective spread in dollars was primarily attributable to the growth in outstanding business volume, which increased net effective spread by approximately $2.7 million. The increase was offset by a $2.0 million negative impact of the Interest-Only Amortization. The 5 basis point year-over-year decrease in net effective spread in percentage terms was primarily attributable to the Interest-Only Amortization.

For more information about Farmer Mac's use of net effective spread as a financial measure, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures." For a reconciliation of net interest income to net effective spread, see Table 7 in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Net Interest Income."

Business Volume

Farmer Mac added $1.3 billion of new business volume during second quarter 2018. The new business volume included purchases of $825.2 million of AgVantage securities, purchases of $224.1 million of newly originated Farm & Ranch loans, Farm & Ranch loans added under LTSPCs of $126.1 million, purchases of $84.9 million of USDA Securities, and the issuance of $45.0 million of Farmer Mac Guaranteed USDA Securities. Taking into account maturities and paydowns on existing assets, Farmer Mac's outstanding business volume was $19.5 billion as of June 30, 2018, an increase of $145.4 million from March 31, 2018, and $517.5 million from December 31, 2017.



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Capital

As of June 30, 2018, Farmer Mac's core capital level was $692.8 million, which was $149.6 million above the minimum capital level required by Farmer Mac's statutory charter.  As of December 31, 2017, Farmer Mac's core capital level was $657.1 million, which was $136.8 million above the minimum capital requirement. The increase in capital in excess of the minimum capital level was due primarily to an increase in retained earnings.

Credit Quality

As of June 30, 2018, Farmer Mac's total allowance for losses was $9.0 million (0.13 percent of the Farm & Ranch portfolio), compared to $8.5 million (0.12 percent of the Farm & Ranch portfolio) as of March 31, 2018 and $8.9 million (0.13 percent of the Farm & Ranch portfolio) as of December 31, 2017. The $0.6 million provision in second quarter 2018 for the total allowance for losses was primarily attributable to: (1) a modest decline in overall portfolio credit quality; and (2) an increase in the general allowance due to net volume growth in both on and off-balance sheet Farm & Ranch loans, primarily related to new agricultural storage and processing loans purchased during second quarter 2018.

As of June 30, 2018, Farmer Mac's substandard assets were $226.5 million (3.2 percent of the Farm & Ranch portfolio), compared to $221.2 million (3.2 percent of the Farm & Ranch portfolio) as of March 31, 2018 and $221.3 million (3.2 percent of the Farm & Ranch portfolio) as of December 31, 2017. Farmer Mac's substandard asset volume increased modestly in dollars as assets newly classified as substandard slightly exceeded assets that were paid off, paid down, or upgraded in risk rating. As of June 30, 2018, the loan volume migrating into the substandard asset category was primarily comprised of feedgrains, oilseeds, and other crops.

As of June 30, 2018, Farmer Mac's 90-day delinquencies were $43.1 million (0.61 percent of the Farm & Ranch portfolio), compared to $47.6 million (0.69 percent of the Farm & Ranch portfolio) as of March 31, 2018 and $48.4 million (0.71 percent of the Farm & Ranch portfolio) as of December 31, 2017. The sequential decrease in 90-day delinquencies is consistent with the seasonal pattern of Farmer Mac's 90-day delinquencies fluctuating from quarter to quarter, both in dollars and as a percentage of the outstanding Farm & Ranch portfolio, with higher levels generally observed at the end of the first and third quarters and lower levels generally observed at the end of the second and fourth quarters of each year as a result of the annual (January 1st) and semi-annual (January 1st and July 1st) payment terms of most Farm & Ranch loans.

For more information about Farmer Mac's credit metrics, including 90-day delinquencies, the total allowance for losses, and substandard assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."

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


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alternative measures in understanding Farmer Mac's economic performance, transaction economics, and business trends.

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

Core Earnings and Core Earnings Per Share

Core earnings and core earnings per share principally differ from net income attributable to common stockholders and earnings per common share, respectively, by excluding the effects of fair value fluctuations. These fluctuations are not expected to have a cumulative net impact on Farmer Mac's financial condition or results of operations reported in accordance with GAAP if the related financial instruments are held to maturity, as is expected. Among other items, these fair value fluctuations have included unrealized gains or losses on financial derivatives and hedging activities. Specifically, 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, as a result of a change in variation margin rules implemented by the Chicago Mercantile Exchange ("CME"), the central clearinghouse used by Farmer Mac, and subsequently confirmed by the U.S. Commodity Futures Trading Commission ("CFTC"), the variation margin amounts exchanged between Farmer Mac and its counterparties on cleared derivatives are considered as partial settlement of each respective derivatives contract rather than collateral pledged by a counterparty. Therefore, Farmer Mac presents its cleared derivatives portfolio net of variation margin payments on its consolidated balance sheets and recognizes realized gains or losses as a result of these payments on its consolidated statements of operations. Farmer Mac 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, the effects of realized gains or losses resulting from the exchange of variation margin on its cleared derivatives portfolio are excluded in the calculations of core earnings and core earnings per share.

Core earnings and core earnings per share also differ from net income attributable to common stockholders and earnings per common share, respectively, by excluding specified infrequent or unusual transactions that Farmer Mac believes are not indicative of future operating results and that may not reflect the trends and economic financial performance of Farmer Mac's core business. Accordingly, the one-time, non-cash charge to income tax expense due to the re-measurement of the net deferred tax asset was excluded from core earnings and core earnings per share. Farmer Mac re-measured its net deferred tax asset at a lower federal corporate tax rate due to the enactment of new tax legislation on December 22, 2017. This charge is excluded from core earnings and core earnings per share because it is not a frequently occurring transaction, is a non-cash charge, and is not indicative of future operating results. For a reconciliation of Farmer Mac's net income attributable to common stockholders to core earnings and of earnings per common share to core earnings per share, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations."


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Net Effective Spread

Farmer Mac uses net effective spread to measure the net spread Farmer Mac earns between its interest-earning assets and the related net funding costs of these assets. Net effective spread differs from net interest income and net interest yield because it excludes: (1) the amortization of premiums and discounts on assets consolidated at fair value that are amortized as adjustments to yield in interest income over the contractual or estimated remaining lives of the underlying assets; (2) interest income and interest expense related to consolidated trusts with beneficial interests owned by third parties, which are presented on Farmer Mac's consolidated balance sheets as "Loans held for investment in consolidated trusts, at amortized cost"; and (3) beginning January 1, 2018, the fair value changes of financial derivatives and the corresponding assets or liabilities designated in a fair value hedge relationship. Farmer Mac excludes from net effective spread the premiums and discounts on assets consolidated at fair value because they either do not reflect actual cash premiums paid for the assets at acquisition or are not expected to have an economic effect on Farmer Mac's financial performance if the assets are held to maturity, as is expected. Farmer Mac also excludes from net effective spread the interest income and interest expense associated with the consolidated trusts and the average balance of the loans underlying these trusts to reflect management's view that the net interest income Farmer Mac earns on the related Farmer Mac Guaranteed Securities owned by third parties is effectively a guarantee fee. Accordingly, the excluded interest income and interest expense associated with consolidated trusts is reclassified to guarantee and commitment fees for purposes of determining Farmer Mac's core earnings.

Effective in first quarter 2018, Farmer Mac adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." Prior to first quarter 2018, gains and losses on financial derivatives were included in "(Losses)/gains due to fair value changes" whether or not they were designated in hedge relationships. Beginning in first quarter 2018, gains and losses on financial derivatives in hedge relationships are included in either interest income or interest expense depending on the corresponding hedged financial asset or liability, respectively. Farmer Mac excludes from net effective spread those fair value changes of financial derivatives and the corresponding assets or liabilities designated in fair value hedge relationships because they are not expected to have an economic effect on Farmer Mac's financial performance if the financial derivatives and corresponding hedged items are held to maturity, as is expected.

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

Net effective spread also includes the net effects of terminations or net settlements on financial derivatives and hedging activities. 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


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management's view of the complete net spread between an asset and all of its related funding, including any associated derivatives, whether or not they are designated in a hedge relationship. For additional details on the specific components that relate to the net effects of terminations or net settlements on financial derivatives and hedging activities, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations."
For a reconciliation of net interest income and net interest yield to net effective spread, see Table 6 in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Net Interest Income."

Results of Operations

Farmer Mac's net income attributable to common stockholders for the three months ended June 30, 2018 was $26.3 million ($2.45 per diluted common share), compared to $17.5 million ($1.62 per diluted common share) for the same period in 2017. For the six months ended June 30, 2018, Farmer Mac's net income attributable to common stockholders was $48.9 million ($4.55 per diluted common share), compared to $36.1 million ($3.35 per diluted common share) for the same period in 2017. Farmer Mac's non-GAAP core earnings for the three months ended June 30, 2018 were $19.4 million ($1.80 per diluted common share), compared to $16.0 million ($1.48 per diluted common share) for the same period in 2017. Farmer Mac's non-GAAP core earnings for the six months ended June 30, 2018 were $41.2 million ($3.84 per diluted common share) compared to $31.0 million ($2.87 per diluted common share) for the same period in 2017. 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:



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Table 1
Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings
 For the Three Months Ended
 June 30, 2018 June 30, 2017
 (in thousands, except per share amounts)
Net income attributable to common stockholders$26,340
 $17,488
Less reconciling items: 
  
Gains on financial derivatives and hedging activities due to fair value changes8,396
 2,221
Unrealized gains/(losses) on trading securities11
 (2)
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value196
 (117)
Net effects of terminations or net settlements on financial derivatives and hedging activities(1)
232
 232
Income tax effect related to reconciling items(1,855) (816)
Sub-total6,980
 1,518
Core earnings$19,360
 $15,970
    
Composition of Core Earnings:   
Revenues:   
Net effective spread(2)
$36,162
 $35,334
Guarantee and commitment fees(3)
5,171
 4,942
Other(4)
111
 107
Total revenues41,444
 40,383
    
Credit related expense/(income)(GAAP):   
Provision for losses582
 466
REO operating expenses
 23
Gains on sale of REO(34) (757)
Total credit related expense/(income)548
 (268)
    
Operating expenses (GAAP):   
Compensation and employee benefits6,936
 6,682
General and administrative5,202
 3,921
Regulatory fees625
 625
Total operating expenses12,763
 11,228
    
Net earnings28,133
 29,423
Income tax expense(5)
5,477
 10,307
Net loss attributable to non-controlling interest (GAAP)
 (150)
Preferred stock dividends (GAAP)3,296
 3,296
Core earnings$19,360
 $15,970
    
Core earnings per share:   
  Basic$1.82
 $1.51
  Diluted1.80
 1.48
Weighted-average shares:   
  Basic10,658
 10,600
  Diluted10,742
 10,783

(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" and the information set forth below.


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(2) 
Net effective spread is a non-GAAP measure. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread" for an explanation of net effective spread. See Table 6 for a reconciliation of net interest income to net effective spread.
(3) 
Includes interest income and interest expense related to consolidated trusts owned by third parties reclassified from net interest income to guarantee and commitment fees to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee on the consolidated Farmer Mac Guaranteed Securities.
(4) 
Reflects reconciling adjustments for the reclassification to exclude expenses related to interest rate swaps not designated as hedges and 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.
(5) 
Includes the tax impact of non-GAAP reconciling items between net income attributable to common stockholders and core earnings.



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Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings
 For the Six Months Ended
 June 30, 2018 June 30, 2017
 (in thousands, except per share amounts)
Net income attributable to common stockholders$48,864
 $36,103
Less reconciling items: 
  
Gains on financial derivatives and hedging activities due to fair value changes8,681
 7,026
Unrealized gains/(losses) on trading securities27
 (84)
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value(490) (244)
Net effects of terminations or net settlements on financial derivatives and hedging activities(1)
1,474
 1,180
Income tax effect related to reconciling items(2,035) (2,757)
Sub-total7,657
 5,121
Core earnings$41,207
 $30,982
    
Composition of Core Earnings:   
Revenues:   
Net effective spread(2)
$73,263
 $67,860
Guarantee and commitment fees(3)
10,254
 10,258
Other(4)
539
 592
Total revenues84,056
 78,710
    
Credit related expense (GAAP):   
Provision for losses172
 910
REO operating expenses16
 23
Gains on sale of REO(34) (752)
Total credit related expense154
 181
    
Operating expenses (GAAP):   
Compensation and employee benefits13,590
 12,999
General and administrative9,528
 7,721
Regulatory fees1,250
 1,250
Total operating expenses24,368
 21,970
    
Net earnings59,534
 56,559
Income tax expense(5)
11,736
 19,151
Net loss attributable to non-controlling interest (GAAP)
 (165)
Preferred stock dividends (GAAP)6,591
 6,591
Core earnings$41,207
 $30,982
    
Core earnings per share:   
  Basic$3.87
 $2.93
  Diluted3.84
 2.87
Weighted-average shares:   
  Basic10,640
 10,576
  Diluted10,742
 10,783
(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" and the information set forth below.
(2) 
Net effective spread is a non-GAAP measure. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread" for an explanation of net effective spread. See Table 6 for a reconciliation of net interest income to net effective spread.


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


Table 2

Reconciliation of GAAP Basic Earnings Per Share to Core Earnings - Basic Earnings Per Share
  For the Three Months Ended For the Six Months Ended
  June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017
 (in thousands, except per share amounts)
GAAP - Basic EPS$2.47
 $1.65
 $4.59
 $3.41
Less reconciling items:       
Gains on financial derivatives and hedging activities due to fair value changes0.79
 0.22
 0.82
 0.65
Unrealized gains/(losses) on trading securities
 
 
 (0.01)
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value0.02
 (0.01) (0.05) (0.02)
Net effects of terminations or net settlements on financial derivatives and hedging activities0.02
 0.02
 0.14
 0.12
Income tax effect related to reconciling items(0.18) (0.09) (0.19) (0.26)
Sub-total0.65
 0.14
 0.72
 0.48
Core Earnings - Basic EPS$1.82
 $1.51
 $3.87
 $2.93
        
Shares used in per share calculation (GAAP and Core Earnings)10,658
 10,600
 10,640
 10,576

Reconciliation of GAAP Diluted Earnings Per Share to Core Earnings - Diluted Earnings Per Share
  For the Three Months Ended For the Six Months Ended
  June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017
 (in thousands, except per share amounts)
GAAP - Diluted EPS$2.45
 $1.62
 $4.55
 $3.35
Less reconciling items:       
Gains on financial derivatives and hedging activities due to fair value changes0.78
 0.21
 0.81
 0.65
Unrealized gains/(losses) on trading securities
 
 
 (0.01)
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value0.02
 (0.01) (0.05) (0.02)
Net effects of terminations or net settlements on financial derivatives and hedging activities0.02
 0.02
 0.14
 0.12
Income tax effect related to reconciling items(0.17) (0.08) (0.19) (0.26)
Sub-total0.65
 0.14
 0.71
 0.48
Core Earnings - Diluted EPS$1.80
 $1.48
 $3.84
 $2.87
        
Shares used in per share calculation (GAAP and Core Earnings)10,742
 10,783
 10,742
 10,783




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

1. Gains on financial derivatives and hedging activities due to fair value changes. The table below calculates the non-GAAP reconciling item for gains/(losses) on financial derivatives and hedging activities due to fair value changes.

Table 3

Non-GAAP Reconciling Items for Gains/(Losses) on Financial Derivatives and Hedging Activities
  For the Three Months Ended For the Six Months Ended
  June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017
 (in thousands)
Fair value hedges:       
 (Losses)/gains due to fair value changes (see Table 4.2)$1,862
 $1,420
 $4,701
 $(2,457)
Initial cash payment received at inception of swap(1)
(175) 
 (449) 
No hedge designation:       
  (Losses)/gains due to fair value changes (see Table 8)6,709
 801
 4,429
 9,483
Gains on financial derivatives and hedging activities due to fair value changes

$8,396
 $2,221
 $8,681
 $7,026
(1) 
Relates to initial cash payments received at the inception of a swap designated in a fair value hedge. These initial cash payments were previously recognized in "Gains/(losses) on financial derivatives and hedging activities" in the statement of operations. Upon adoption of ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," for financial derivatives designated in fair value hedge relationships, the changes in the fair values of the derivative and the associated hedged item are recorded within net interest income. For core earnings purposes, these initial cash payments are deferred and amortized as net yield adjustments over the term of the related debt.
2. Unrealized gains/(losses) on trading securities. The unrealized gains/(losses) on trading securities are reported on Farmer Mac's consolidated statements of operations, which represent changes during the period in fair values for trading assets remaining on Farmer Mac's balance sheet as of the end of the reporting period.
3. Amortization of premiums/discounts and deferred gains on assets consolidated at fair value. The amount of this non-GAAP reconciling item is the recorded amount of premium, discount, or deferred gain amortization during the reporting period on those assets for which the premium, discount, or deferred gain was based on the application of an accounting principle (e.g., consolidation of variable interest entities) rather than on a cash transaction (e.g., a purchase price premium or discount).
4. The net effects of terminations or net settlements on financial derivatives and hedging activities. 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


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of the swaps are recognized in "Gains on financial derivatives and hedging activities," whereas the economically offsetting discount on the associated hedged debt is amortized over the term of the debt as an adjustment to its yield. For core earnings purposes, these initial cash payments are deferred and amortized as net yield adjustments over the term of the related debt, which generally ranges from 3 to 15 years.
The following sections provide more detail regarding specific components of Farmer Mac's results of operations.

Net Interest Income.  The following table provides information regarding interest-earning assets and funding for the six months ended June 30, 2018 and 2017. The average balance of non-accruing loans is included in the average balance of loans, Farmer Mac Guaranteed Securities, and USDA Securities presented, though the related income is accounted for on a cash basis.  Therefore, as the average balance of non-accruing loans and the income received increases or decreases, the net interest income and yield will fluctuate accordingly.  The average balance of loans in consolidated trusts with beneficial interests owned by third parties is disclosed in the net effect of consolidated trusts and is not included in the average balances of interest-earning assets and interest-bearing liabilities.  The interest income and expense associated with these trusts are shown in the net effect of consolidated trusts. 

Table 4

  For the Six Months Ended
 June 30, 2018 June 30, 2017
 Average
Balance
 Income/
Expense
 Average
Rate
 Average
Balance
 Income/
Expense
 Average
Rate
 (dollars in thousands)
Interest-earning assets:           
Cash and investments$2,749,770
 $23,558
 1.71% $2,791,522
 $15,611
 1.12%
Loans, Farmer Mac Guaranteed Securities and USDA Securities(1)
13,832,070
 205,259
 2.97% 12,162,589
 148,194
 2.44%
Total interest-earning assets16,581,840
 228,817
 2.76% 14,954,111
 163,805
 2.19%
Funding: 
  
    
  
  
Notes payable due within one year3,726,865
 29,457
 1.58% 5,657,478
 23,152
 0.82%
Notes payable due after one year(2)
12,139,318
 115,472
 1.90% 8,672,316
 66,793
 1.54%
Total interest-bearing liabilities(3)
15,866,183
 144,929
 1.83% 14,329,794
 89,945
 1.26%
Net non-interest-bearing funding715,657
 
  
 624,317
 
  
Total funding16,581,840
 144,929
 1.75% 14,954,111
 89,945
 1.20%
Net interest income/yield prior to consolidation of certain trusts16,581,840
 83,888
 1.01% 14,954,111
 73,860
 0.99%
Net effect of consolidated trusts(4)
1,411,749
 3,274
 0.46% 1,173,014
 2,942
 0.50%
Net interest income/yield$17,993,589
 $87,162
 0.97% $16,127,125
 $76,802
 0.95%
(1) 
Excludes interest income of $26.4 million and $20.9 million in the first half of 2018 and 2017, 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 $23.1 million and $17.9 million in the first half of 2018 and 2017, 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 $87.2 million for the six months ended June 30, 2018, compared to $76.8 million for the same period in 2017. The overall net interest yield was 0.97 percent for the six months ended June 30, 2018, compared to 0.95 percent for the same period in 2017.



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The $10.4 million increase in net interest income for the six months ended June 30, 2018 compared to the same period in 2017 was driven by net growth in on-balance sheet AgVantage securities, Farm & Ranch loans, 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. The effect on net interest income occurred because interest expense does not include the expense on financial derivatives not designated in hedge relationships. Also contributing to the increase were the fair value changes on financial derivatives and corresponding financial assets and liabilities in fair value hedge relationships. The increase was offset in part by the $1.6 million after-tax negative impact of the Interest-Only Amortization. In December 2011, Farmer Mac purchased the Original Bond for $152.3 million. The Original Bond had a contractual coupon rate of three-month LIBOR plus 97 basis points. In 2012, due to actions of the central banks around the world, credit spreads decreased and market liquidity increased, resulting in a 67 basis point decline in market spreads of similar newly issued bonds. This decline in market spreads created an incentive for the borrower on the underlying mortgage loan that collateralized the Original Bond to prepay such loan. Because of the large unpaid principal balance on the Original Bond held by Farmer Mac, its open prepayment option, and a significant differential between its contractual coupon rate and the then-current market rate, Farmer Mac had to match fund the Original Bond with short-term debt to continue holding it, which became inefficient from a liquidity perspective. Therefore, Farmer Mac sold the Original Bond at its fair value to the issuer through a dealer for a $3.1 million after-tax gain and the issuer re-securitized the Original Bond into a par security and an interest-only security. The par security was sold to a third party investor and Farmer Mac purchased the interest-only security at a $4.2 million premium in second quarter 2013. Farmer Mac earned $4.8 million pre-tax ($3.2 million after tax) of interest income over the five-year period that it held the interest-only security in its investment portfolio. As a result of this series of transactions, Farmer Mac realized a $3.1 million after-tax gain upon the sale of the Original Bond in second quarter 2013 and earned $3.2 million after tax of interest income over the five-year period that it held the interest-only security in its investment portfolio, which was partially offset by the $3.1 million after-tax amortization of the premium that was paid to purchase the interest-only security. Overall, Farmer Mac received a net economic benefit of $3.2 million after tax.

The 2 basis point year-over-year increase in net interest yield was primarily driven by an increase in the aforementioned fair value changes on financial derivatives and corresponding financial assets and liabilities in fair value hedge relationships, offset in part by the impact of the Interest-Only Amortization.

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



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Table 5

  For the Six Months Ended June 30, 2018 Compared to Same Period in 2017
 Increase/(Decrease) Due to
 Rate Volume Total
 (in thousands)
Income from interest-earning assets:     
Cash and investments$8,184
 $(237) $7,947
Loans, Farmer Mac Guaranteed Securities and USDA Securities35,010
 22,055
 57,065
Total43,194
 21,818
 65,012
Expense from other interest-bearing liabilities44,504
 10,480
 54,984
Change in net interest income prior to consolidation of certain trusts(1)
$(1,310) $11,338
 $10,028
(1) 
Excludes the effect of debt in consolidated trusts with beneficial interests owned by third parties.  

The following table presents a reconciliation of net interest income and net interest yield to net effective spread.  Net effective spread is measured by: including (1) expenses related to undesignated financial derivatives and hedging activities, which consists of income or expense related to contractual amounts due on financial derivatives not designated in hedge relationships (the income or expense related to financial derivatives designated in hedge relationships is already included in net interest income), and (2) the amortization of losses due to terminations or net settlements of financial derivatives and hedging activities; and excluding (3) the amortization of premiums and discounts on assets consolidated at fair value, (4) the net effects of consolidated trusts with beneficial interests owned by third parties, and (5) beginning in first quarter of 2018, the fair value changes of financial derivatives and corresponding financial assets or liabilities in fair value hedge 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 of net effective spread.

Table 6
  For the Three Months Ended For the Six Months Ended
 June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017
 Dollars Yield Dollars Yield Dollars Yield Dollars Yield
 (dollars in thousands)
Net interest income/yield$43,933
 0.96 % $39,731
 0.95 % $87,162
 0.97 % $76,802
 0.95 %
Net effects of consolidated trusts(1,690) 0.04 % (1,470) 0.04 % (3,274) 0.04 % (2,942) 0.04 %
Expense related to undesignated financial derivatives(3,998) (0.09)% (2,775) (0.07)% (6,299) (0.08)% (5,642) (0.07)%
Amortization of premiums/discounts on assets consolidated at fair value(188) (0.01)% 124
  % 506
 0.01 % 258
  %
Amortization of losses due to terminations or net settlements on financial derivatives and hedging activities(33)  % (276) (0.01)% (131)  % (616) (0.01)%
Fair value changes on fair value hedge relationships(1,862) (0.04)% 
  % $(4,701) (0.06)% $
  %
Net effective spread$36,162
 0.86 % $35,334
 0.91 % $73,263
 0.88 % $67,860
 0.91 %

Net effective spread was $36.2 million and $73.3 million for the three and six months ended June 30, 2018 compared to $35.3 million and $67.9 million for the same periods in 2017, respectively. In percentage terms, net effective spread for the three and six months ended June 30, 2018 was 0.86 percent and 0.88 percent, respectively, compared to 0.91 percent for both the same periods in 2017.


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For the first six months of 2018 compared to the same period in 2017, the $5.4 million increase in net effective spread in dollars was primarily due to: (1) growth in outstanding business volume, which increased net effective spread by approximately $6.7 million; and (2) a $1.0 million increase in the amount of cash basis interest income recognized on nonaccrual Farm & Ranch loans. The increase was offset in part by a $1.6 million after-tax impact of the Interest-Only Amortization. The 3 basis point year-over-year decrease in net effective spread in percentage terms was primarily attributable to: (1) the dilutive effect of the refinancing in second quarter 2017 of a $1.0 billion AgVantage security, $970.0 million of which was previously held by third-party investors and reported as off-balance sheet business volume in the Institutional Credit line of business; and (2) the Interest-Only Amortization.

See Note 9 to the consolidated financial statements for more information regarding net interest income and net effective spread from Farmer Mac's individual business segments. 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 the three months ended June 30, 2018 and 2017:

Table 7
 As of June 30, 2018 As of June 30, 2017
 Allowance
for Loan
Losses
 Reserve
for Losses
 Total
Allowance
for Losses
 Allowance
for Loan
Losses
 Reserve
for Losses
 Total
Allowance
for Losses
 (in thousands)
For the Three Months Ended:           
Beginning Balance$6,365
 $2,091
 $8,456
 $5,811
 $1,827
 $7,638
Provision for losses424
 158
 582
 327
 139
 466
Ending Balance$6,789
 $2,249
 $9,038
 $6,138
 $1,966
 $8,104
            
For the Six Months Ended:           
Beginning Balance$6,796
 $2,070
 $8,866
 $5,415
 $2,020
 $7,435
(Release of)/provision for losses(7) $179
 $172
 964
 (54) 910
Charge-offs
 $
 $
 (241) 
 (241)
Ending Balance$6,789
 $2,249
 $9,038
 $6,138
 $1,966
 $8,104

The provision for the allowance for loan losses recorded during the three months ended June 30, 2018 were attributable to: (1) a modest decline in overall portfolio credit quality; and (2) an increase in the general allowance due to net volume growth in both on and off-balance sheet Farm & Ranch loans, primarily related to new agricultural storage and processing loans purchased during second quarter 2018. The net release of the allowance for loan losses recorded during the six months ended June 30, 2018 were attributable to (1) paydowns or payoffs of loans with an existing allowance in amounts that exceeded the increase in the allowance associated with net volume growth in Farm & Ranch loans recorded during the six months ended June 30, 2018, and (2) paydowns on existing substandard loans or an improvement in the risk ratings of certain substandard loans, which resulted in a decrease in the amount of substandard assets rated in the lowest credit quality tier. The net provision for the reserve for losses recorded during the three and six months ended June 30, 2018 was primarily attributable to a net increase in the balance of loans underlying LTSPCs.


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The provision for the allowance for loan losses recorded during the three and six months ended June 30, 2017 were attributable to an increase in the general allowance due to overall net volume growth in on-balance sheet Farm & Ranch loans. The provision for the allowance for loan losses recorded during the six months ended June 30, 2017 were also attributable to 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 downgrade in risk ratings on certain loans. The increase was offset in part by a modest decline in loss rates used to estimate probable losses. The provision for the reserve for losses recorded during the three months ended June 30, 2017 was primarily attributable to an increase in the general reserve due to downgrades in risk ratings on certain unimpaired crop and permanent planting loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities. The releases of the reserve for losses recorded during the six months ended June 30, 2017 was primarily attributable to a net decrease in the balance of loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities. The charge-offs recorded during the first half of 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 $5.4million and recognized a $0.8 million gain on sale of REO.

See Note 5 to the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."

Guarantee and Commitment Fees.  Guarantee and commitment fees, which compensate Farmer Mac for assuming the credit risk on loans underlying off-balance sheet Farmer Mac Guaranteed Securities and LTSPCs, were $3.5 million and $7.0 million for the three and six months ended June 30, 2018, compared to $3.5 million and $7.3 million for the same periods in 2017, respectively. The decrease in guarantee and commitment fees for the six months ended June 30, 2018 compared to the same period in 2017 was attributable to the refinancing of a $1.0 billion AgVantage security with Metropolitan Life Insurance Company ("MetLife") in April 2017 into 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 was reported as off-balance sheet business volume in the Institutional Credit line of business on which Farmer Mac earned a guarantee fee.

(Losses)/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 losses of $2.5 million and $1.3 million for the three and six months ended June 30, 2018, respectively, compared to net losses of $0.6 million and net gains of $1.9 million for the same periods in 2017, respectively.



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The components of gains and losses on financial derivatives and hedging activities for the three and six months ended June 30, 2018 and 2017 are summarized in the following table:

Table 8
 For the Three Months Ended For the Six Months Ended
 June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017
 (in thousands)
Fair value hedges:       
(Losses)/gains due to fair value changes:       
Financial derivatives(2)
$
 $(8,568) 

 $(7,041)
Hedged items
 9,988
 

 4,584
(Losses)/gains on fair value hedging activities
 1,420
 
 (2,457)
Cash flow hedges:       
Loss recognized (ineffective portion)
 (146) 

 (175)
Losses on cash flow hedges
 (146) 

 (175)
No hedge designation:       
(Losses)/Gains due to fair value changes6,709
 801
 4,429
 9,483
Accrual of contractual payments(3,998) (2,629) (6,299) (5,467)
Gains/(losses) due to terminations or net settlements(177) (63) 554
 485
(Losses)/gains on financial derivatives not designated in hedging relationships2,534
 (1,891) (1,316) 4,501
(Losses)/gains on financial derivatives and hedging activities$2,534
 $(617) $(1,316) $1,869
(1) 
Effective in first quarter 2018, Farmer Mac adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." For financial derivatives designated in fair value hedge relationships, changes in the fair values of the derivative and the associated hedged item are recorded within net interest income. For financial derivatives designated in cash flow hedge relationships, changes in the fair values of the derivative and the associated hedged item are recorded within accumulated other comprehensive income and reclassified to net interest income when the hedged item impacts earnings.
(2) 
Included in the assessment of hedge effectiveness as of June 30, 2017, but excluded from the amounts in the table, were losses of $1.3 million and gains of $2.3 million for the three and six months ended June 30, 2017, respectively, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amounts recognized as hedge ineffectiveness for the three and six months ended June 30, 2017 were gains of $0.1 million and losses of $0.1 million, respectively.

The adoption of the new hedge accounting guidance ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," effective first quarter 2018, impacted the presentation in Table 8 above. Beginning in first quarter 2018, gains and losses due to fair value changes on financial derivatives designated in fair value hedge relationships are included in either interest income or interest expense depending on the corresponding hedged financial asset or liability, respectively. For cash flow hedges, both the effective and ineffective portions of the changes in the fair values of the derivative instruments are recorded in accumulated other comprehensive income (AOCI) and reclassified to net interest income when the hedged item impacts earnings. Thus, for first half 2018, the table above only presents changes in the fair values of Farmer Mac's open financial derivative positions that are not designated in hedge relationships. Prior to first quarter 2018, gains and losses on financial derivatives were included in "(Losses)/gains due to fair value changes" whether or not they were designated in hedge relationships. Thus, for first half 2017, the table above presents gains and losses on all financial derivatives in "(Losses)/gains due to fair value changes." These changes in fair value are primarily the result of fluctuations in long-term interest rates. The accrual of periodic cash settlements for interest paid or received from Farmer Mac's interest rate swaps that are not designated in hedge relationships is shown as expense related to financial derivatives.  Payments or receipts to terminate derivative positions or net cash settled forward sales contracts on the debt of other GSEs and U.S. Treasury futures that are not designated in hedge relationships and initial cash payments received upon the inception of certain swaps not designated in a hedge relationship are included in "Gains/(losses) due to terminations or net settlements" in the table above. For swaps not designated in a hedge relationship, when


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there is no direct payment arrangement between a swap dealer counterparty and a debt dealer issuing Farmer Mac's medium-term notes for a particular transaction, Farmer Mac may receive an initial cash payment from the swap dealer at the inception of the swap to offset dollar-for-dollar the amount of the discount on the associated hedged debt. Changes in the fair value of these swaps are recognized immediately in "Gains/(losses) on financial derivatives and hedging activities," whereas the offsetting discount on the hedged debt is amortized over the term of the debt as an adjustment to its yield. The amounts of initial cash payments received by Farmer Mac vary depending upon the number of the aforementioned type of swaps it executes during a quarter.
   
Gains/(Losses) on Trading Securities.  During the three and six months ended June 30, 2018, Farmer Mac recorded $11,000 and $27,000 of unrealized gains on trading securities, respectively, compared to unrealized losses of $2,000 and $0.1 million for the three and six months ended June 30, 2017, respectively.

Gains on Sale of Real Estate Owned (REO). During both the three and six months ended June 30, 2018, Farmer Mac realized net gains of $34,000 on the sales of REO properties, compared to net gains of $0.8 million for both the three and six months ended June 30, 2017.

Other Income. Other income totaled $0.3 million and $0.9 million for the three and six months ended June 30, 2018, respectively, compared to $0.1 million and $0.7 million for the same periods in 2017, respectively. The increase in other income for the three and six months ended June 30, 2018 was primarily attributable to the collection of $0.3 million and $0.8 million, respectively, in late fees received on Farm & Ranch loans, compared to $0.1 million and $0.3 million for the same periods in 2017. The increase was offset by the recognition of $0.1 million and $0.4 million during the three and six months ended June 30, 2017, respectively, of appraisal fees received by Farmer Mac's former consolidated appraisal company subsidiary, AgVisory, compared to none for the same periods in 2018. As of May 1, 2017, Farmer Mac transferred its entire 65% ownership interest in AgVisory back to the limited liability company. Farmer Mac recognized a loss of approximately $0.1 million upon the transfer.

Compensation and Employee Benefits.  Compensation and employee benefits were $6.9 million and $13.6 million for the three and six months ended June 30, 2018, respectively, compared to $6.7 million and $13.0 million for the same periods in 2017, respectively. The increase in compensation and employee benefits for both the three and six months ended June 30, 2018 compared to the same periods in 2017 was due primarily to an increase in headcount and related employee health insurance costs and higher payouts of variable incentive compensation resulting from actual performance exceeding certain performance target amounts during 2017, which was paid in 2018.

General and Administrative Expenses.  G&A expenses were $5.2 million and $9.5 million for the three and six months ended June 30, 2018, respectively, compared to $3.9 million and $7.7 million for the same periods in 2017, respectively. The increase in G&A expenses for the three months ended June 30, 2018 compared to the same period in 2017 was due primarily to higher expenses related to: (1) continued technology and business infrastructure investments; (2) an increase in headcount and the search process for Farmer Mac's next President and Chief Executive Officer; (3) new leases for office space entered into during 2017; and (4) legal fees related to general corporate matters. The increase for the six months ended June 30, 2018 compared to the same period in 2017 was caused by all of the same reasons described above, though the increase in legal fees related to general corporate matters for this time period also included fees related to the development of new products, a higher number of AgVantage transactions, and the termination of employment of Farmer Mac's former President and Chief Executive Officer.


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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 $0.6 million and $1.3 million for the three and six months ended June 30, 2018, respectively, compared to $0.6 million and $1.3 million for the same periods in 2017, respectively. 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 $7.3 million and $13.8 million for the three and six months ended June 30, 2018, respectively, compared to $11.1 million and $21.9 million for same periods in 2017, respectively. The decrease in income tax expense in the first half of 2018 compared to the first half of 2017 was primarily due to a lower effective tax rate under the new tax legislation enacted in December 2017. The effective tax rate for the first half of 2018 was lower than the statutory corporate tax rate due to the effect of exercises of share-based compensation awards during the first half of 2018.

Business Volume.  During second quarter 2018, Farmer Mac added $1.3 billion of new business volume, compared to $1.9 billion in second quarter 2017. Specifically, Farmer Mac:

purchased $825.2 million of AgVantage securities;
purchased $224.1 million of newly originated Farm & Ranch loans;
added $126.1 million of Farm & Ranch loans under LTSPCs;
purchased $84.9 million of USDA Securities; and
issued $45.0 million of Farmer Mac Guaranteed USDA Securities.


Farmer Mac's outstanding business volume was $19.5 billion as of June 30, 2018, an increase of $145.4 million from March 31, 2018. The increase in Farmer Mac's outstanding business volume was driven by net portfolio growth in Farm & Ranch loans of $104.6 million and AgVantage securities of $66.0 million.

The new business volume in Farmer Mac's Institutional Credit line of business during second quarter 2018 included purchases of AgVantage securities in the amounts of $500.0 million from MetLife and $175.0 million from Rabo Agrifinance, Inc. ("Rabo"). The proceeds of these purchases were used to refinance AgVantage securities of the same amounts issued by MetLife and Rabo, respectively, that matured in second quarter 2018 and in early July 2018. Farmer Mac also experienced net portfolio growth of $29.9 million in AgVantage securities from smaller institutional customers in second quarter 2018.

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.



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

Table 9
New Business Volume – Farmer Mac Loan Purchases, Guarantees, LTSPCs, and AgVantage Securities
 For the Three Months Ended For the Six Months Ended
 June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017
 (in thousands)
Farm & Ranch:       
Loans$224,101
 $312,217
 $483,212
 $626,354
LTSPCs126,066
 55,899
 285,131
 169,160
USDA Guarantees:       
USDA Securities84,946
 115,755
 174,178
 208,310
Farmer Mac Guaranteed USDA Securities45,014
 53,506
 79,307
 92,052
Rural Utilities:       
Loans
 25,000
 8,645
 52,341
Institutional Credit:       
AgVantage securities825,203
 1,296,757
 1,638,540
 1,858,164
Total purchases, guarantees, LTSPCs, and AgVantage securities$1,305,330
 $1,859,134
 $2,669,013
 $3,006,381

New business volume for loans purchased within the Farm & Ranch line of business for the first half of 2018 decreased from the same period of 2017 due to the purchase of six large loans totaling $156.9 million during the first half of 2017 compared to the purchase of one large loan totaling $20.0 million during the first half of 2018. Excluding these larger-sized purchases, the year-to-date new business volume for loans purchased within the Farm & Ranch line of business during 2018 is in line with that of 2017. During the first half of 2018, Farmer Mac purchased 1,073 Farm & Ranch loans with an average unpaid principal balance of $450,000, compared to 1,074 Farm & Ranch loans purchased with an average unpaid principal balance of $585,000 during the same period in 2017. The increase in new business volume for loans added under LTSPCs within the Farm & Ranch line of business in the first half of 2018 compared to the first half of 2017 reflected an increase in demand among Farm Credit System institutions for the LTSPC product. The moderate decrease in new business volume in the USDA Guarantees line of business in the first half of 2018 compared to the same period in 2017 reflected an increase in competition for these loans, a rising rate environment that limits the number of borrowers seeking to refinance, and a decline in the use of USDA guaranteed loan programs by lenders as borrowers seek alternative financing, including loans directly from the USDA. Loan purchase volume in the Rural Utilities line of business decreased in the first half of 2018 compared to the first half of 2017 primarily as a result of a lack of loan purchase opportunities for larger, more competitive loans to rural utilities borrowers. 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 lower in the first half of 2018 compared to the first half of 2017 primarily due to a decrease in the amount of AgVantage securities purchased from MetLife that matured and were refinanced in 2018 compared to 2017 ($1.4 billion in AgVantage securities matured and were refinanced in the first half of 2017 and $1.0 billion in AgVantage securities matured and were refinanced in first half 2018).



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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 both the second quarter of 2018 and 2017 was less than one year. Of those loans, 55 percent and 61 percent had principal amortization periods longer than the maturity date, resulting in balloon payments at maturity, with a weighted-average remaining term to maturity of 17.7 years and 13.1 years, respectively.

During second quarter 2018 and 2017, Farmer Mac securitized some of the Farm & Ranch loans it had purchased and sold the resulting Farmer Mac Guaranteed Securities in the amounts of $20.1 million and $44.9 million, respectively. Farmer Mac consolidates these loans and presents them as "Loans held for investment in consolidated trusts, at amortized cost" on the consolidated balance sheets. For the three and six months ended June 30, 2018 none and $29.8 million, respectively, of Farmer Mac Guaranteed Securities were sold to Zions First National Bank, which is a related party to Farmer Mac, compared to none and $56.5 million for the same periods in 2017, respectively.

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

Table 10
 For the Three Months Ended For the Six Months Ended
 June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017
 (in thousands)
Loans securitized and sold as Farm & Ranch Guaranteed Securities$20,074
 $44,862
 $116,982
 $161,880
Farmer Mac Guaranteed USDA Securities45,014
 53,506
 79,307
 92,052
AgVantage securities825,203
 1,296,757
 1,638,540
 1,858,164
Total Farmer Mac Guaranteed Securities issuances$890,291
 $1,395,125
 $1,834,829
 $2,112,096



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

Table 11
Lines of Business - Outstanding Business Volume
 As of June 30, 2018 As of December 31, 2017
 (in thousands)
On-balance sheet:   
Farm & Ranch:   
Loans$2,935,712
 $2,798,906
Loans held in trusts:   
Beneficial interests owned by third party investors1,443,246
 1,399,827
USDA Guarantees:   
USDA Securities2,063,525
 2,068,017
Farmer Mac Guaranteed USDA Securities28,938
 29,980
Rural Utilities:   
Loans991,819
 1,076,291
Institutional Credit:   
AgVantage securities8,080,329
 7,593,322
Total on-balance sheet$15,543,569
 $14,966,343
Off-balance sheet:   
Farm & Ranch:   
LTSPCs$2,368,606
 $2,335,342
Guaranteed Securities297,833
 333,511
USDA Guarantees:   
Farmer Mac Guaranteed USDA Securities325,652
 254,217
Rural Utilities:   
LTSPCs(1)
677,621
 806,342
Institutional Credit:   
AgVantage securities11,556
 11,556
Revolving floating rate AgVantage facility(2)
300,000
 300,000
Total off-balance sheet$3,981,268
 $4,040,968
Total$19,524,837
 $19,007,311
(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 June 30, 2018 and December 31, 2017.
(2) 
During the first half of 2018, $100.0 million of this facility was drawn and subsequently repaid. During 2017, $100.0 million of this facility was drawn and subsequently repaid. Farmer Mac receives a fixed fee based on the full dollar amount of the facility. If the counterparty draws on the facility, the amounts drawn will be in the form of AgVantage securities, and Farmer Mac will earn interest income on those securities.




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The following table summarizes by maturity date the scheduled principal amortization of loans held, loans underlying off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities) and LTSPCs, USDA Securities, and Farmer Mac Guaranteed USDA Securities as of June 30, 2018:

Table 12
Schedule of Principal Amortization as of June 30, 2018
 Loans Held Loans Underlying Off-Balance Sheet Farmer Mac Guaranteed Securities and LTSPCs  USDA Securities and Farmer Mac Guaranteed USDA Securities Total
 (in thousands)
2018116,689
 129,120
 45,375
 291,184
2019218,601
 258,744
 112,170
 589,515
2020240,000
 237,625
 106,483
 584,108
2021248,689
 271,353
 108,805
 628,847
2022217,131
 208,392
 112,364
 537,887
Thereafter4,329,667
 2,238,826
 1,932,918
 8,501,411
Total$5,370,777
 $3,344,060
 $2,418,115
 $11,132,952

Of the $19.5 billion outstanding principal balance of volume included in Farmer Mac's four lines of business as of June 30, 2018, $8.4 billion were AgVantage securities included in the Institutional Credit line of business.  Unlike business volume in the form of purchased loans, USDA Securities, and loans underlying LTSPCs and non-AgVantage Farmer Mac Guaranteed Securities, most AgVantage securities do not require periodic payments of principal based on amortization schedules and instead have fixed maturity dates when the secured general obligation is due. The following table summarizes by maturity date the outstanding principal amount of both on- and off-balance sheet AgVantage securities as of June 30, 2018:

Table 13
AgVantage Balances by Year of Maturity
 As of
 June 30, 2018
 (in thousands)
2018(1)
1,573,952
20191,426,804
20201,243,812
20211,363,222
2022590,448
Thereafter(2)
2,193,647
Total$8,391,885
(1) 
Includes the expiration of the $300.0 million revolving floating rate AgVantage facility, which was refinanced in July 2018.
(2) 
Includes various maturities ranging from 2023 to 2048.

The weighted-average remaining maturity of the outstanding AgVantage securities shown in the table above was 4.7 years as of June 30, 2018.  



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As part of fulfilling its guarantee obligations for Farm & Ranch Guaranteed Securities and commitments to purchase eligible loans underlying LTSPCs, Farmer Mac purchases defaulted loans, all of which are at least 90 days delinquent or in material non-monetary default at the time of purchase, out of the loan pools underlying those securities and LTSPCs, and records the purchased loans as such on its balance sheet.  The purchase price for a defaulted loan purchased out of a pool of loans backing Farm & Ranch Guaranteed Securities is the then-current outstanding principal balance of the loan plus accrued and unpaid interest.  The purchase price for a defaulted loan purchased under an LTSPC is the then-current outstanding principal balance of the loan, with accrued and unpaid interest on the defaulted loan.  The purchase price of a defaulted loan is not an indicator of the expected loss on that loan; many other factors affect expected loss, if any, on any loan so purchased. There were no delinquent loans purchased out of securitized pools during second quarter 2018. During the first half of 2017, the delinquent loans purchased out of securitized pools had a weighted-average age of 8 years. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."

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

Table 14
 For the Three Months Ended For the Six Months Ended
 June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017
 (in thousands)
Defaulted loans purchased underlying Farm & Ranch Guaranteed Securities owned by third party investors$
 $104
 $721
 $104
Defaulted loans purchased underlying LTSPCs
 
 
 311
Total loan purchases$
 $104
 $721
 $415

Outlook  

Farmer Mac continues to provide a stable source of liquidity, capital, and risk management tools as the secondary market that helps meet the financing needs of rural America. While the pace of Farmer Mac's growth will depend on the capital and liquidity needs of the participants in the rural financing business, Farmer Mac foresees opportunities for continued growth across all four of its lines of business, driven by several key factors:

As agricultural and rural utilities lenders seek to manage equity capital requirements under regulatory frameworks or seek to reduce exposure due to lending limits or concentration limits, Farmer Mac can provide relief for those institutions through loan purchases, guarantees, or LTSPCs.
Growth opportunities for lenders in the rural utilities industry exist under Farmer Mac's Institutional Credit line of business, as it provides a competitive source of debt funding for these lenders, including the National Rural Utilities Cooperative Finance Corporation ("CFC"), currently the only lender that participates in Farmer Mac's Rural Utilities line of business.
As a result of targeted marketing and brand awareness initiatives, product development efforts, and continued interest in the agricultural asset class from institutional investors, Farmer Mac's lender network and Institutional Credit customer base continues to expand, which may generate additional demand for Farmer Mac's products from new sources.


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Consolidation, expansion, and vertical integration occurring across many sectors of the agricultural industry and in agricultural banking, coupled with Farmer Mac's new and expanded business relationships with larger regional and national lenders, continues to influence Farmer Mac's loan demand and the average transaction size within Farmer Mac's Farm & Ranch line of business.

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

Expense Outlook. Farmer Mac continues to expand its investments in human capital, technology, and business infrastructure to increase capacity and efficiency as it seeks to accommodate the aforementioned growth opportunities and achieve its long-term strategic objectives. Accordingly, Farmer Mac expects the annual increases in its operating expenses to be above historical averages over the next several years. Specifically, Farmer Mac believes that aggregate compensation and employee benefits and general and administrative expenses will increase approximately 15 percent in 2018 relative to 2017, with increases likely to remain elevated in 2019.

CEO Search. In December 2017, Farmer Mac appointed Lowell L. Junkins, the chairman of its board of directors, to serve as the Acting President and CEO of Farmer Mac following the termination of employment of Farmer Mac's former President and CEO while Farmer Mac conducts 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. Farmer Mac's board expects to hire 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 the demand for and supply of agricultural commodities and products on a domestic and global basis, which can vary largely as a result of global production trends, international trade policies, weather patterns, access to water supply, and harvest conditions.

Net cash income, as reported by the USDA and one of its benchmark measures of economic activity in the agricultural industry, has declined significantly since reaching a cyclical peak in 2013. However, changes in farm income levels are largely localized and depend on producer region and commodity production type. The USDA estimates that aggregate net cash income levels rose in 2017 due to higher commodity quantities sold and stabilizing commodity prices. Farmland values have weakened in the Midwest region, where producers are most exposed to changes in the grain markets. In this region, data released by the USDA indicates an average decline in farmland values of between 0.5 percent and 1.8 percent in 2017. In all other regions, farmland value averages are reported to be flat to increasing. For example, data released by the USDA indicates that Pacific state farmland values increased an average of 8.7 percent in 2017. While regional averages for farmland values provide a good barometer for the overall movement in U.S. farmland values, economic forces affecting land markets are highly localized and some markets may experience greater volatility than state or national averages indicate.

Over the past few decades, the U.S. agricultural industry has become increasingly connected to global trade, and agricultural export demand depends significantly on trading relationships in numerous foreign markets, as well as on foreign exchange rates. A slowdown in global economic growth or a tightening in


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trade policies and agreements could also adversely affect the demand for certain U.S. agricultural exports, which may result in downward pressure on commodity prices. For example, the series of reciprocal import tariffs that were placed on various agricultural products by China and the U.S. during 2018 has materially affected the market prices for these products, including soybeans produced in the U.S. Additionally, tariffs placed on imports of U.S. agricultural products into Mexico have dampened price outlooks for a different set of agricultural products. At the same time, the U.S. dollar strengthened by approximately 3 percent during the first half of 2018, as measured by the U.S. Dollar Index, which has decreased the competitiveness of U.S. agricultural exports and thereby has diminished their global demand and driven down producer profits. Farmer Mac believes that its portfolio is sufficiently diverse by product and production region to be able to withstand any short-term market volatility that may arise as a result of changes in trade policy or sentiment. However, a prolonged trade dispute between one or more primary agricultural markets could put significant financial stress on the U.S. agricultural industry.

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 indications 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. 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. Farmer Mac believes that its portfolio remains sufficiently diversified, both geographically and by commodity, and that its portfolio has been underwritten to high credit quality standards. Accordingly, Farmer Mac believes that its portfolio is well-positioned to endure reasonably foreseeable volatility in farmland values and commodity prices. Farmer Mac also continues to closely monitor sector profitability, economic and weather conditions, and agricultural land value and geographic trends to tailor underwriting practices to changing conditions. For more information about the loan balances, loan-to-value ratios, 90-day delinquencies, and substandard asset rate for the Farm & Ranch loans in Farmer Mac's portfolio as of June 30, 2018, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."

Farmer Mac continues to monitor the establishment and evolution of legislation and regulations, as well as the status of various international trade agreements and partnerships, that could affect farmers, ranchers, rural lenders, and rural America in general. The 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 could be replaced by new legislation or extended. Various federal agricultural policies, including those affecting crop subsidies, crop insurance, commodity support programs, Farm Services Agency (FSA) guaranteed loan limits, and other aspects of agricultural production, in effect under the current U.S. Farm Bill may be altered with the enactment of new legislation. Other legislation and regulations focused on groundwater management practices, including in California, may result in tighter restrictions on groundwater usage that could negatively affect agricultural producers in the future. As the Trump administration and the U.S. Congress continue their review of existing regulations and promote new legislative or regulatory proposals and policies, Farmer Mac will monitor the effects that any changes in legislation or regulation could have on Farmer Mac or its customers.

Farmer Mac's marketing and brand awareness initiatives directed towards the Farm & Ranch line of business focus on lenders that have demonstrated a commitment to agricultural lending based on their lending history. Farmer Mac directs its outreach efforts to these lenders through direct personal contact,


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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 within 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 about conditions in the agricultural economy. In the Farm & Ranch line of business, Farmer Mac is experiencing continued demand for its loan products. Demand for Farmer Mac's secondary market tools also depends on the fluctuating needs of rural lenders as they seek to maintain liquidity and adequate capital levels.

Farmer Mac also directs marketing efforts towards the agricultural industry by trying to identify and develop relationships with potential issuers of AgVantage securities, including insurance company agricultural lenders, agricultural finance companies, and bank and non-bank agricultural lenders such as agricultural mortgage funds, who can pledge loans as collateral to obtain financing as part of Farmer Mac's Institutional Credit line of business. As part of these efforts, Farmer Mac has increased its focus on wholesale financing for institutional investors in agricultural assets that qualify as eligible collateral under Farmer Mac's charter. Farmer Mac has tailored a version of its AgVantage product to this type of issuer, which is referred to as the Farm Equity AgVantage product. Farmer Mac also offers other AgVantage products tailored to fund investors in agricultural mortgages. Farmer Mac directs its outreach efforts to these potential issuers through its business relationships within the agricultural community and through executive outreach to institutions whose profile presents opportunity to benefit from wholesale financing. As institutional investment in agricultural assets continues to grow, Farmer Mac believes that it is in a unique position to help increase access to capital for these types of counterparties and thereby provide a new source of capital to benefit rural America. Farmer Mac believes there is opportunity to expand this type of business as both the trend toward institutional investment in agricultural assets and awareness of Farmer Mac's AgVantage product offerings continue to grow. For more information about the AgVantage products, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Institutional" in this report.

Rural Utilities Industry. Demand for capital within the rural utilities industry generally remains moderate, which has resulted in an ongoing high level of competition between rural utilities cooperative lenders that could reduce loan growth opportunities for the lender that participates in Farmer Mac's Rural Utilities line of business. Farmer Mac believes there are growth opportunities within its Institutional Credit line of business because the wholesale funding rates that Farmer Mac provides may be highly competitive compared to other available sources of debt funding for rural utilities cooperative lenders.

Balance Sheet Review

Assets.  Farmer Mac's total assets as of June 30, 2018 were $18.6 billion, compared to $17.8 billion as of December 31, 2017.  The increase in total assets was primarily attributable to an increase in total Farmer Mac Guaranteed Securities, cash and cash equivalents, and investment securities.

As of June 30, 2018, Farmer Mac had $0.4 billion of cash and cash equivalents and $2.4 billion of investment securities compared to $0.3 billion of cash and cash equivalents and $2.3 billion of investment securities. As of June 30, 2018, Farmer Mac had $8.1 billion of Farmer Mac Guaranteed Securities, $5.4 billion of loans, net of allowance, and $2.1 billion of USDA Securities. This compares to $7.6 billion of


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Farmer Mac Guaranteed Securities, $5.3 billion of loans, net of allowance, and $2.1 billion of USDA Securities as of December 31, 2017.

Liabilities.  Farmer Mac's total liabilities were $17.9 billion as of June 30, 2018, compared to $17.1 billion as of December 31, 2017.  The increase in total liabilities was primarily attributable to an increase in total notes payable.

Equity.  As of June 30, 2018, Farmer Mac had total equity of $766.2 million, compared to $708.1 million as of December 31, 2017. The increase in total equity was a result of an increase in retained earnings and accumulated other comprehensive income. The increase in accumulated other comprehensive income was due to increases in fair value on certain floating-rate AgVantage securities.

Off-Balance Sheet Arrangements 

Farmer Mac offers approved lenders two credit enhancement alternatives to increase their liquidity or lending capacity while retaining the cash flow benefits of their loans: (1) Farmer Mac Guaranteed Securities, which are available through each of the Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit lines of business; and (2) LTSPCs, which are available through the Farm & Ranch and Rural Utilities lines of business. For securitization trusts where Farmer Mac is the primary beneficiary, the trust assets and liabilities are included on Farmer Mac's consolidated balance sheet. For securitization trusts where Farmer Mac is not the primary beneficiary and in the event of de-consolidation, both of these alternatives result in the creation of off-balance sheet obligations for Farmer Mac. See Note 6 to the consolidated financial statements for more information about consolidation and Farmer Mac's off-balance sheet business activities.

Risk Management

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

Farmer Mac generally assumes 100 percent of the credit risk on loans held and loans underlying LTSPCs in the Farm & Ranch and Rural Utilities lines of business and loans underlying Farm & Ranch Guaranteed Securities. Farmer Mac has direct credit exposure to the loans in non-AgVantage transactions but only indirect credit exposure to loans that secure AgVantage transactions because AgVantage securities represent a general obligation of an issuer that is, in turn, secured by eligible loans. Non-AgVantage transactions like loan purchases, LTSPCs, and "pass-through" guaranteed securities that represent beneficial interests in the underlying loans do not include a general obligation of a counterparty as a separate source of repayment. For the reasons described in more detail below, Farmer Mac excludes its assets in the USDA Guarantees line of business, the loans in the Rural Utilities line of business, and AgVantage securities in the Institutional Credit line of business from the loan-level credit risk metrics it discloses.

Farmer Mac's direct credit exposure to Farm & Ranch loans held and loans underlying Farm & Ranch Guaranteed Securities and LTSPCs as of June 30, 2018 was $7.0 billion across 48 states. Farmer Mac has


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established underwriting, collateral valuation, and documentation standards for agricultural real estate mortgage loans and believes that these standards mitigate the risk of loss from borrower defaults and provide guidance about the management, administration, and conduct of underwriting and appraisals to all participating and potential lenders.  These standards were developed based on industry practices for agricultural real estate mortgage loans and are designed to assess the creditworthiness of the borrower, as well as the value of the collateral securing the loan.  Farmer Mac evaluates and adjusts these standards on an ongoing basis based on current and anticipated market conditions.  For more information about Farmer Mac's underwriting and collateral valuation standards for Farm & Ranch loans, see "Business—Farmer Mac's Lines of Business—Farm & Ranch—Underwriting and Collateral Valuation (Appraisal) Standards" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 8, 2018.

Farmer Mac's direct credit exposure to Rural Utilities loans held and loans underlying LTSPCs as of June 30, 2018 was $1.7 billion across 39 states, of which $1.2 billion were loans to electric distribution cooperatives and $0.4 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" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 8, 2018. As of June 30, 2018, there were no delinquencies in Farmer Mac's portfolio of Rural Utilities loans, and Farmer Mac has not experienced any credit losses on Rural Utilities loans since Congress authorized 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 June 30, 2018, Farmer Mac had not experienced any credit losses on any AgVantage securities and does not expect to incur any such losses in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Institutional" for more information about Farmer Mac's credit risk on AgVantage securities.

The credit exposure of Farmer Mac and Farmer Mac II LLC on USDA Securities, including those underlying Farmer Mac Guaranteed USDA Securities, is covered by the full faith and credit of the United States.  Therefore, Farmer Mac believes that Farmer Mac and Farmer Mac II LLC have little or no credit risk exposure in the USDA Guarantees line of business because of the USDA guarantee.  As of June 30, 2018, neither Farmer Mac nor Farmer Mac II LLC had experienced any credit losses on any business under the USDA Guarantees line of business, and neither expects to incur any such losses in the future.



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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 upon the market value of a property, as determined in accordance with Farmer Mac's collateral valuation standards.  As of June 30, 2018 and December 31, 2017, the average unpaid loan balances for loans outstanding in the Farm & Ranch line of business was $640,000 and $642,000, respectively. The original loan-to-value ratio is based on the original appraised value that has not been indexed to provide a current market value or reflect amortization of loans. 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: (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 was calculated 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. The weighted-average original loan-to-value ratio for Farm & Ranch loans purchased during second quarter 2018 was 46 percent, compared to 44 percent for loans purchased during second quarter 2017. The weighted-average original loan-to-value ratio for all Farm & Ranch loans held and all loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs was approximately 51 percent as of both June 30, 2018 and December 31, 2017. The weighted-average original loan-to-value ratio for all 90-day delinquencies was 53 percent and 52 percent, respectively, as of June 30, 2018 and December 31, 2017.

The weighted-average current loan-to-value ratio, which is the loan-to-value ratio based on original appraised value but which reflects loan amortization since purchase, for Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs was approximately 45 percent as of both June 30, 2018 and December 31, 2017.

Farmer Mac maintains an allowance for loan losses to cover estimated probable losses on loans held and a reserve for losses to cover estimated probable losses on loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities.  The methodology that Farmer Mac uses to determine the level of its allowance for losses is described in Note 2(j) to the consolidated financial statements included in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 8, 2018. 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.



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The following table summarizes the changes in the components of Farmer Mac's total allowance for losses for the three and six months ended June 30, 2018 and 2017:

Table 15
 As of June 30, 2018 As of June 30, 2017
 Allowance
for Loan
Losses
 Reserve
for Losses
 Total
Allowance
for Losses
 Allowance
for Loan
Losses
 Reserve
for Losses
 Total
Allowance
for Losses
 (in thousands)
For the Three Months Ended:           
Beginning Balance$6,365
 $2,091
 $8,456
 $5,811
 $1,827
 $7,638
Provision for losses424
 158
 582
 327
 139
 466
Ending Balance$6,789
 $2,249
 $9,038
 $6,138
 $1,966
 $8,104
            
For the Six Months Ended:           
Beginning Balance$6,796
 $2,070
 $8,866
 $5,415
 $2,020
 $7,435
(Release of)/provision for losses(7) 179
 172
 964
 (54) 910
Charge-offs
 
 
 (241) 
 (241)
Ending Balance$6,789
 $2,249
 $9,038
 $6,138
 $1,966
 $8,104

Activity affecting the allowance for loan losses and reserve for losses is discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Provision for and Release of Allowance for Loan Losses and Reserve for Losses." As of June 30, 2018, Farmer Mac's total allowance for losses totaled $9.0 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 $8.9 million, or 0.13 percent, as of December 31, 2017.

As of June 30, 2018, Farmer Mac individually evaluated $39.0 million of the $162.5 million of recorded investment in impaired assets for collateral shortfalls against updated appraised values, other updated collateral valuations, or discounted values. For the remaining $123.5 million of impaired assets for which updated valuations were not available, Farmer Mac evaluated them in the aggregate in consideration of their similar risk characteristics and historical statistics. Farmer Mac recorded specific allowances of $3.0 million for undercollateralized assets as of June 30, 2018. Farmer Mac's general allowances were $6.0 million as of June 30, 2018.

There were no charge-offs recorded during the first six months of 2018. The charge-offs recorded during first six months of 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 June 30, 2018, Farmer Mac's 90-day delinquencies were $43.1 million (0.61 percent of the Farm & Ranch portfolio), compared to $48.4 million (0.71 percent of the Farm & Ranch portfolio) as of December 31, 2017 and $41.9 million (0.65 percent of the Farm & Ranch portfolio) as of June 30, 2017. Those 90-day delinquencies were comprised of 54 delinquent loans as of June 30, 2018, compared with 51 delinquent loans as of


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December 31, 2017 and 42 delinquent loans as of June 30, 2017. The decrease in 90-day delinquencies compared to December 31, 2017 is primarily attributable to the paydown on two large permanent planting loans to a single borrower that resulted in the loans becoming current. Farmer Mac's 90-day delinquencies have historically fluctuated from quarter to quarter, both in dollars and as a percentage of the outstanding Farm & Ranch portfolio, with higher levels generally observed at the end of the first and third quarters and lower levels generally observed at the end of the second and fourth quarters of each year as a result of the annual (January 1st) and semi-annual (January 1st and July 1st) payment terms of most Farm & Ranch loans. Farmer Mac believes that it remains adequately collateralized on its delinquent loans. Farmer Mac expects that over time its 90-day delinquency rate will revert closer to Farmer Mac's historical average, and possibly exceed it (which it did in third quarter 2017), due to macroeconomic factors and the cyclical nature of the agricultural economy. Farmer Mac's average 90-day delinquency rate as a percentage of its Farm & Ranch portfolio over the last 15 years is approximately 1 percent. The highest 90-day delinquency rate observed during that period occurred in 2009 at approximately 2 percent, which coincided with increased delinquencies in loans within Farmer Mac's then-held ethanol loan portfolio that Farmer Mac no longer holds.

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

Table 16
 Farm & Ranch Line of Business 90-Day
Delinquencies
 Percentage
 (dollars in thousands)
As of:     
June 30, 2018$7,045,397
 $43,076
 0.61%
March 31, 20186,932,002
 47,560
 0.69%
December 31, 20176,867,586
 48,444
 0.71%
September 30, 20176,557,030
 66,381
 1.01%
June 30, 20176,426,518
 41,901
 0.65%
March 31, 20176,240,467
 50,807
 0.81%
December 31, 20166,139,304
 21,038
 0.34%
September 30, 20166,004,728
 18,377
 0.31%
June 30, 20165,830,533
 22,093
 0.38%

When analyzing the overall risk profile of its lines of business, Farmer Mac considers more than the Farm & Ranch loan delinquency percentages provided above. The lines of business also include AgVantage securities and Rural Utilities loans held and underlying LTSPCs, neither of which have any delinquencies, and USDA Securities, which are backed by the full faith and credit of the United States. Across all of Farmer Mac's lines of business, 90-day delinquencies represented 0.22 percent of total outstanding business volume as of June 30, 2018, compared to 0.25 percent as of December 31, 2017 and 0.23 percent as of June 30, 2017.



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The following table presents outstanding Farm & Ranch loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities and 90-day delinquencies as of June 30, 2018 by year of origination, geographic region, commodity/collateral type, original loan-to-value ratio, and range in the size of borrower exposure:

Table 17
Farm & Ranch 90-Day Delinquencies as of June 30, 2018
 Distribution of Farm & Ranch Line of Business Farm & Ranch Line of Business 
90-Day Delinquencies(1)
 Percentage
 (dollars in thousands)
By year of origination:       
2008 and prior12% 823,782
 11,229
 1.36%
20091% 100,390
 479
 0.48%
20102% 157,686
 
 %
20113% 234,355
 6,511
 2.78%
20128% 546,054
 1,649
 0.30%
201311% 775,417
 3,032
 0.39%
20149% 628,515
 838
 0.13%
201511% 791,544
 10,206
(2) 
1.29%
201616% 1,153,517
 7,659
 0.66%
201719% 1,304,223
 1,473
 0.11%
20188% 529,914
 
 %
Total100% $7,045,397
 $43,076
 0.61%
By geographic region(3):
 
  
  
  
Northwest12% $819,607
 $6,984
 0.85%
Southwest31% 2,170,739
 7,877
 0.36%
Mid-North32% 2,279,960
 5,695
 0.25%
Mid-South13% 879,945
 11,787
 1.34%
Northeast4% 305,288
 6,863
 2.25%
Southeast8% 589,858
 3,870
 0.66%
Total100% $7,045,397
 $43,076
 0.61%
By commodity/collateral type:   
  
  
Crops53% $3,757,903
 $23,037
 0.61%
Permanent plantings20% 1,391,841
 8,363
 0.60%
Livestock19% 1,354,863
 7,739
 0.57%
Part-time farm7% 463,988
 3,937
 0.85%
Ag. Storage and Processing1% 68,558
 
 %
Other
 8,244
 
 %
Total100% $7,045,397
 $43,076
 0.61%
By original loan-to-value ratio(4):
       
0.00% to 40.00%19% $1,314,094
 $3,186
 0.24%
40.01% to 50.00%25% 1,762,371
 14,049
 0.80%
50.01% to 60.00%35% 2,440,299
 18,386
 0.75%
60.01% to 70.00%17% 1,235,630
 6,420
 0.52%
70.01% to 80.00%(5)
4% 268,002
 732
 0.27%
80.01% to 90.00%(5)
% 25,001
 303
 1.21%
Total100% $7,045,397
 $43,076
 0.61%
By size of borrower exposure(6):
       
Less than $1,000,00034% $2,427,187
 $11,209
 0.46%
$1,000,000 to $4,999,99939% 2,729,196
 16,457
 0.60%
$5,000,000 to $9,999,99913% 908,347
 15,410
(2) 
1.70%
$10,000,000 to $24,999,9998% 565,184
 
 %
$25,000,000 to $50,000,0006% 415,483
 
 %
Total100% $7,045,397
 $43,076
 0.61%
(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.



96



(2) 
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.
(3) 
Geographic regions:  Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).
(4) 
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, set forth as follows: (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.
(5) 
Primarily part-time farm loans. Loans with an original loan-to-value ratio of greater than 80% are required to have private mortgage insurance.
(6) 
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 June 30, 2018, Farmer Mac's substandard assets were $226.5 million (3.2 percent of the Farm & Ranch portfolio), compared to $221.3 million (3.2 percent of the Farm & Ranch portfolio) as of December 31, 2017. Those substandard assets were comprised of 333 loans as of June 30, 2018 and 307 loans as of December 31, 2017. As of June 30, 2018, substandard asset volume includes several large exposures and represents a relatively diverse set of commodities. Farmer Mac's substandard asset volume increased modestly in dollars as assets newly classified as substandard slightly exceeded assets that were paid off, paid down, or upgraded in risk rating. As of June 30, 2018, the loan volume migrating into the substandard asset category was primarily comprised of feedgrains, oilseeds, and other crops. Farmer Mac expects that over time its substandard asset rate will eventually revert closer to, and possibly exceed, Farmer Mac's historical average due to macroeconomic factors and the cyclical nature of the agricultural economy. Farmer Mac's average substandard assets as a percentage of its Farm & Ranch portfolio over the last 15 years is approximately 4 percent. The highest substandard asset rate observed during that period occurred in 2010 at approximately 8 percent, 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 increase 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 5 to the consolidated financial statements for more information regarding credit quality indicators related to Farm & Ranch loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities.



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The following table presents Farmer Mac's cumulative net credit losses relative to the cumulative original balance for all Farm & Ranch loans purchased and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities as of June 30, 2018 by year of origination, geographic region, and commodity/collateral type.  The purpose of this information is to present information regarding losses relative to original Farm & Ranch purchases, guarantees, and commitments.

Table 18
Farm & Ranch Credit Losses Relative to Cumulative
Original Loans, Guarantees, and LTSPCs as of June 30, 2018
 Cumulative Original Loans, Guarantees and LTSPCs  Cumulative Net Credit Losses/(Recoveries)  Cumulative Loss Rate
 (dollars in thousands)
By year of origination:     
2008 and prior14,142,383
 28,480
 0.20 %
2009552,114
 1,544
 0.28 %
2010663,580
 5
  %
2011769,495
 3,661
 0.48 %
20121,149,269
 
  %
20131,411,785
 
  %
2014978,868
 
 ��� %
20151,094,229
 (540) (0.05)%
20161,404,299
 
  %
20171,472,209
 
  %
2018558,864
 
  %
Total$24,197,095
 $33,150
 0.14 %
By geographic region(1):
 
  
  
Northwest$3,198,124
 $11,191
 0.35 %
Southwest8,453,145
 8,167
 0.10 %
Mid-North6,112,533
 12,830
 0.21 %
Mid-South2,867,149
 (211) (0.01)%
Northeast1,418,062
 201
 0.01 %
Southeast2,148,082
 972
 0.05 %
Total$24,197,095
 $33,150
 0.14 %
By commodity/collateral type: 
  
  
Crops$11,119,981
 $2,887
 0.03 %
Permanent plantings5,140,456
 9,368
 0.18 %
Livestock5,696,598
 3,877
 0.07 %
Part-time farm1,391,210
 1,345
 0.10 %
Ag. Storage and Processing692,962
 15,673
 2.26 %
Other155,888
 
  %
Total$24,197,095
 $33,150
 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.


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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.


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

Table 19
 As of June 30, 2018
 Farm & Ranch Concentrations by Commodity Type within Geographic Region
 Crops Permanent
Plantings
 Livestock Part-time
Farm
 Ag. Storage and
Processing
 Other Total
 (dollars in thousands)
By geographic region(1):
             
Northwest$402,517
 $100,806
 $246,559
 $69,320
 $
 $405
 $819,607
 5.7% 1.4% 3.5% 1.0% % % 11.6%
Southwest543,184
 1,065,899
 433,678
 79,054
 44,829
 4,095
 2,170,739
 7.7% 15.1% 6.2% 1.1% 0.6% 0.1% 30.8%
Mid-North1,937,574
 17,469
 193,153
 119,955