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Accounting Policies | 12 Months Ended
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Dec. 31, 2017
Accounting Policies [Abstract] |
Significant Accounting Policies [Text Block] |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Farmer Mac conform with accounting principles generally accepted in the United States of America ("generally accepted accounting principles" or "GAAP"). The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities (including, but not limited to, the allowance for loan losses, reserve for losses, other-than-temporary impairment of investment securities, and fair value measurements) as of the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The following are the significant accounting policies that Farmer Mac follows in preparing and presenting its consolidated financial statements: Principles of Consolidation The consolidated financial statements include the accounts of Farmer Mac and its three 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; (2) Farmer Mac II LLC, whose principal activity is the operation of substantially all of the business related to the USDA Guarantees line of business – primarily the acquisition of USDA Securities; and (3) Contour Valuation Services, LLC (which began doing business as AgVisory during first quarter 2016), whose principal activity was to appraise agricultural real estate. On May 1, 2017, Farmer Mac transferred its entire 65% ownership interest in AgVisory back to the limited liability company as a company redemption in exchange for $5,000. Farmer Mac recognized a loss of approximately $0.1 million after-tax upon the transfer. The consolidated financial statements also include the accounts of VIEs in which Farmer Mac determined itself to be the primary beneficiary.
(b) | Cash and Cash Equivalents and Statements of Cash Flows
Farmer Mac considers highly liquid investment securities with maturities at the time of purchase of three months or less to be cash equivalents. Changes in the balance of cash and cash equivalents are reported in the consolidated statements of cash flows. The following table sets forth information regarding certain cash and non-cash transactions for the years ended December 31, 2017, 2016, and 2015: Table 2.1
| For the Years Ended December 31,
| 2017 |  | 2016 |  | 2015
| (in thousands)
Cash paid during the period for: |  |  |  |  |
Interest | $ | 161,060 |  |  | $ | 110,609 |  |  | $ | 108,254 |
Income taxes | 39,500 |  |  | 29,500 |  |  | 31,000 |
Non-cash activity: |  |  |  |  |
Real estate owned acquired through loan liquidation | 5,400 |  |  | — |  |  | — |
Loans acquired and securitized as Farmer Mac Guaranteed Securities | 519,219 |  |  | 609,347 |  |  | 336,913 |
Consolidation of Farm & Ranch Guaranteed Securities from off-balance sheet to loans held for investment in consolidated trusts and to debt securities of consolidated trusts held by third parties | 363,475 |  |  | 511,393 |  |  | 336,913 |
Purchases of securities - traded not yet settled | 1,400 |  |  | — |  |  | 20,000 |
Issuance costs on the retirement of Farmer Mac II LLC Preferred Stock | — |  |  | — |  |  | 8,147 |
Unsettled common stock repurchases | — |  |  | — |  |  | 197 |
Transfers of available-for-sale USDA Securities to held-to-maturity | — |  |  | 1,980,327 |  |  | — |
Transfers of available-for-sale Farmer Mac Guaranteed Securities to held-to-maturity | — |  |  | 32,824 |  |  | — |
On October 1, 2016, Farmer Mac transferred $2.0 billion of USDA Securities and $32.8 million of Farmer Mac Guaranteed USDA Securities from available-for-sale to held-to-maturity to reflect Farmer Mac’s positive intent and ability to hold these securities until maturity or payoff. Farmer Mac transferred these securities at fair value as of the date of the transfer, which included a cost basis adjustment of unrealized appreciation in the amount of $73.1 million for the USDA Securities and $0.7 million for the Farmer Mac Guaranteed USDA Securities. The accumulated unrealized appreciation was retained in accumulated other comprehensive income in the amount of $73.8 million. Farmer Mac accounts for held-to-maturity securities at amortized cost. Both the cost basis adjustment and accumulated unrealized appreciation are being amortized as adjustments to the yield on the held-to-maturity USDA Securities over the remaining contractual term of the transferred securities. Transfers of Financial Assets and Liabilities Securities purchased under agreements to resell are treated as collateralized lending transactions. Farmer Mac's counterparties are required to pledge collateral for transactions involving securities purchased under agreements to resell. Farmer Mac considers the types of securities being pledged as collateral when determining how much to lend in these transactions. Additionally, on a daily basis, Farmer Mac reviews the fair values of these securities compared to amounts loaned and derivative counterparty collateral posting thresholds in an effort to minimize exposure to losses. These transactions are reported as securities purchased under agreements to resell in the consolidated balance sheets except for securities purchased under agreements to resell on a weekly or an overnight basis, which are included in cash and cash equivalents in the consolidated balance sheets. Farmer Mac records securities purchased under agreements to resell at the amount loaned in the consolidated balance sheets. The resulting fees for these transactions are included in interest income in the consolidated statements of operations. Investment Securities, Farmer Mac Guaranteed Securities, and USDA Securities Securities for which Farmer Mac has the intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Securities for which Farmer Mac does not have the positive intent and ability to hold to maturity are classified as available-for-sale or trading and are carried at estimated fair value. Unrealized gains and losses on available-for-sale securities are reported as a component of accumulated other comprehensive income in stockholders' equity. For securities classified as trading, unrealized gains and losses are included in earnings. Gains and losses on the sale of available-for-sale and trading securities are determined using the specific identification cost method. Farmer Mac determines the fair value of investment securities using quoted market prices, when available, and evaluates the securities for other-than-temporary impairment. Farmer Mac determines the fair values of certain investment securities for which quoted market prices are not available, Farmer Mac Guaranteed Securities, and USDA Securities based on the present value of the associated expected future cash flows. In estimating the present value of the expected future cash flows, management is required to make estimates and assumptions. The key estimates and assumptions include discount rates and collateral repayment rates. Premiums, discounts, and other deferred costs are amortized to interest income using the effective interest method. Farmer Mac generally receives compensation when loans with yield maintenance provisions underlying Farmer Mac Guaranteed Securities prepay. These yield maintenance payments mitigate Farmer Mac's exposure to reinvestment risk and are calculated such that, when reinvested with the prepaid principal, they should generate substantially the same cash flows that would have been generated had the loans not prepaid. Yield maintenance payments are recognized as interest income in the consolidated statements of operations upon receipt. Loans Loans for which Farmer Mac has the positive intent and ability to hold for the foreseeable future are classified as held for investment and reported at their unpaid principal balance, net of unamortized purchase discounts or premiums. When Farmer Mac consolidates a trust, it recognizes the loans underlying the trust in the consolidated balance sheets as "Loans held for investment in consolidated trusts, at amortized cost." See Note 2(q) for more information on the accounting policy related to consolidation. Non-accrual Loans Non-accrual loans are loans for which it is probable that Farmer Mac will be unable to collect all amounts due according to the contractual terms of the loan agreement and include all loans 90 days or more past due. When a loan becomes 90 days past due, interest accrual on the loan is discontinued and interest previously accrued is reversed against interest income in the current period. The interest on such loans is accounted for on the cash basis until a loan qualifies for return to accrual status. Loans are returned to accrual status when all the principal and interest payments contractually due are collected and certain performance criteria are met. Securitization of Loans Asset securitization involves the transfer of financial assets to another entity in exchange for cash and/or beneficial interests in the assets transferred. Farmer Mac or third parties transfer agricultural real estate mortgage loans or rural utilities loans into trusts that are used as vehicles for the securitization of the transferred loans. The trusts issue Farmer Mac Guaranteed Securities that are beneficial interests in the assets of the trusts, to either Farmer Mac or third party investors. Farmer Mac guarantees the timely payment of principal and interest on the securities issued by the trusts and receives guarantee fees as compensation for its guarantee. Farmer Mac recognizes guarantee fees on the accrual basis over the terms of the Farmer Mac Guaranteed Securities, which generally coincide with the terms of the underlying loans. As such, no guarantee fees are unearned at the end of any reporting period. When Farmer Mac purchases a delinquent loan underlying a Farmer Mac Guaranteed Security, Farmer Mac stops accruing the guarantee fee upon loan purchase. Real Estate Owned Real estate owned ("REO") consists of real estate acquired through loan liquidation and is recorded at fair value less estimated selling cost at acquisition. Fair value is determined by appraisal or other appropriate valuation method. Any excess of the recorded investment in the loan over the fair value less estimated selling costs is charged to the allowance for loan losses. Subsequent to the acquisition, management continues to perform periodic valuations of real estate owned. Declines in the net realizable value (fair value less estimated selling costs) are charged through income and presented in "Real estate owned operating costs, net" on the consolidated statements of operations. Financial Derivatives Farmer Mac enters into financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of certain assets, future cash flows or debt issuance, not for trading or speculative purposes. Farmer Mac enters into interest rate swap contracts principally to adjust the characteristics of its short-term debt to match more closely the cash flow and duration characteristics of its longer-term loans and other assets, and also to adjust the characteristics of its long-term debt to match more closely the cash flow and duration characteristics of its short-term assets, thereby reducing interest rate risk and, often times, deriving an overall lower effective cost of borrowing than would otherwise be available to Farmer Mac in the conventional debt market. Farmer Mac is required to recognize certain contracts and commitments as derivatives when the characteristics of those contracts and commitments meet the definition of a derivative under GAAP. Accounting for financial derivatives differs depending on whether a derivative is designated in a hedge accounting relationship. Derivative instruments designated in fair value hedge accounting relationships mitigate exposure to changes in the fair value of assets or liabilities. Derivative instruments designated in cash flow hedge accounting relationships mitigate exposure to the variability in expected future cash flows or other forecasted transactions. In order to qualify for fair value or cash flow hedge accounting treatment, documentation must indicate the intention to designate the derivative as a hedge of a specific asset, or liability, or a future cash flow. Effectiveness of the hedge is assessed at inception and monitored over the life of the hedging relationship. All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability. Changes in the fair values of financial derivatives not designated as cash flow hedges are reported in "Gains on financial derivatives and hedging activities" in the consolidated statements of operations. For financial derivatives designated in fair value hedging relationships, changes in the fair values of the hedged items related to the risk being hedged are also reported in "Gains on financial derivatives and hedging activities" in the consolidated statements of operations. The accrual of the contractual amounts due on the financial derivative is included as an adjustment to the yield of the hedged item and is reported in net interest income. For financial derivatives designated in cash flow hedging relationships, the effective portion of the derivative gain/loss is recorded in other comprehensive income; amounts are disclosed as a reclassification out of other comprehensive income and affecting net interest income when the hedged forecasted transaction affects earnings. Any ineffective portion of designated hedge transactions is recognized immediately in "Gains on financial derivatives and hedging activities" in the consolidated statements of operations. Farmer Mac has made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to netting provisions on a net basis by counterparty portfolio. See Notes 6 and 13 for more information on financial derivatives. Notes Payable Notes payable are classified as due within one year or due after one year based on the length of time remaining to their contractual maturities. Debt issuance costs and premiums and discounts are deferred and amortized to interest expense using the effective interest method over the contractual life of the related debt. Allowance for Loan Losses and Reserve for Losses Farmer Mac maintains an allowance for losses to cover estimated probable losses incurred as of the balance sheet date on loans held ("allowance for loan losses") and loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities ("reserve for losses") based on available information. Disaggregation by commodity type is performed, where appropriate, in analyzing the need for an allowance for losses. The allowance for losses increases through periodic provisions for loan losses that are charged against net interest income and the reserve for losses increases through provisions for losses that are charged to non-interest expense, and decreases by charge-offs for realized losses, net of recoveries. Negative provisions, or releases from the allowance for losses, generally occur when the estimate of probable losses as of the end of a period is less than the estimate at the beginning of the period. In certain circumstances, for example, when a defaulted loan is purchased out of a guaranteed security or pursuant to an LTSPC, the related reserve for losses is released and a corresponding amount is provided to the allowance for loan losses. The total allowance for losses consists of a general allowance for losses and a specific allowance for individual impaired loans. Charge-offs Farmer Mac records a charge-off against the allowance for losses principally when a loss has been confirmed through the receipt of assets, generally the underlying collateral, in full satisfaction of the loan. The loss equals the excess of the recorded investment in the loan over the fair value of the collateral less estimated selling costs. General Allowance for Losses Farmer Mac's methodology for determining its allowance for losses incorporates Farmer Mac's automated loan classification system. That system scores loans based on criteria such as historical repayment performance, indicators of current financial condition, loan seasoning, loan size and loan-to-value ratio. The allowance methodology captures the migration of loan scores across concurrent and overlapping 3-year time horizons and calculates loss rates separately within each loan classification for (1) loans underlying LTSPCs and (2) loans held and loans underlying Farm & Ranch Guaranteed Securities. The calculated loss rates are applied to the current classification distribution of unimpaired loans in Farmer Mac's portfolio to estimate inherent losses, on the assumption that the historical credit losses and trends used to calculate loss rates will continue in the future. Management evaluates this assumption by taking into consideration several factors, including:
• | economic conditions;
• | geographic and agricultural commodity/product concentrations in the portfolio;
• | the credit profile of the portfolio;
• | delinquency trends of the portfolio;
• | historical charge-off and recovery activities of the portfolio; and
• | other factors to capture current portfolio trends and characteristics that differ from historical experience.
Management believes that its use of this methodology produces a reasonable estimate of probable losses, as of the balance sheet date, for all loans held in the Farm & Ranch portfolio and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs. Farmer Mac separately evaluates the rural utilities loans it owns to determine if there are any probable losses inherent in those assets. Specific Allowance for Impaired Loans Farmer Mac also analyzes certain loans in its portfolio for impairment in accordance with accounting guidance on measuring impairment of individual loans. Farmer Mac's impaired loans generally include loans 90 days or more past due, in foreclosure, restructured, in bankruptcy and certain performing loans that have previously been delinquent or are secured by real estate that produces agricultural commodities or products currently under stress. Farmer Mac uses a risk-based approach in determining the necessity of obtaining updated appraisals on impaired loans. For example, larger exposures associated with highly improved and specialized collateral will generally receive updated appraisals once the loans are identified as impaired. In addition, updated appraisals are always obtained during the foreclosure process. Depending on the risk factors associated with the loan and underlying collateral, which can vary widely depending on the circumstances of the loan and collateral, this can occur early in the foreclosure process, while in other instances this may occur just prior to the transfer of title. As part of its routine credit review process, Farmer Mac often will exercise judgment in discounting an appraisal value due to local real estate trends or the condition of the property (e.g., following an inspection by Farmer Mac or the servicer). In addition, a property appraisal value may be discounted based on the market's reaction to Farmer Mac's asking price for sale of the property. For loans with an updated appraised value, other updated collateral valuation or management's estimate of discounted collateral value, this analysis includes the measurement of the fair value of the underlying collateral for individual loans relative to the total recorded investment, including principal, interest, and advances and net of any charge-offs. In the event that the collateral value does not support the total recorded investment, Farmer Mac specifically provides an allowance for the loan for the difference between the recorded investment and its fair value, less estimated costs to liquidate the collateral. Estimated selling costs are based on historical selling costs incurred by Farmer Mac or management's best estimate of selling costs for a particular property. For the remaining impaired assets without updated valuations, this analysis is performed in the aggregate in consideration of the similar risk characteristics of the assets and historical statistics. Farmer Mac considers appraisals aged more than two years as of the reporting period end date to be outdated. Farmer Mac believes this methodology that uses loan classification scores and historical loss experience is a better indication of impairment for these collateral-dependent loans than other valuation methods. Earnings Per Common Share Basic earnings per common share ("EPS") is based on the weighted-average number of shares of common stock outstanding. Diluted earnings per common share is based on the weighted-average number of shares of common stock outstanding adjusted to include all potentially dilutive common stock options, stock appreciation rights ("SARs"), and non-vested restricted stock awards. The following schedule reconciles basic and diluted EPS for the years ended December 31, 2017, 2016, and 2015: Table 2.2
| For the Years Ended December 31,
| 2017(1) |  | 2016 |  | 2015
| Net Income |  | Weighted-Average Shares |  | $ per Share |  | Net Income |  | Weighted-Average Shares |  | $ per Share |  | Net Income |  | Weighted-Average Shares |  | $ per Share
| (in thousands, except per share amounts)
Basic EPS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income attributable to common stockholders | $ | 71,300 |  |  | 10,594 |  |  | $ | 6.73 |  |  | $ | 64,152 |  |  | 10,477 |  |  | $ | 6.12 |  |  | $ | 47,371 |  |  | 10,949 |  |  | $ | 4.33 |
Effect of dilutive securities(2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Stock options, SARs and restricted stock | — |  |  | 209 |  |  | (0.13 | ) |  | — |  |  | 269 |  |  | (0.15 | ) |  | — |  |  | 360 |  |  | (0.14 | )
Diluted EPS | $ | 71,300 |  |  | 10,803 |  |  | $ | 6.60 |  |  | $ | 64,152 |  |  | 10,746 |  |  | $ | 5.97 |  |  | $ | 47,371 |  |  | 11,309 |  |  | $ | 4.19 |
(1) | For the effect of the adoption of the new Accounting Standard Update 2016-09, "Improvements to Employee Share-Based Payment Accounting," on Basic and Diluted EPS, see Note 2(r) "New Accounting Standards."
(2) | For the years ended December 31, 2017, 2016, and 2015, stock options and SARs of 28,579, 86,907, and 304,132, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the years ended December 31, 2017, 2016, and 2015, contingent shares of non-vested restricted stock of 29,647, 37,284, and 46,303 respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions had not yet been met.
Income Taxes Deferred federal income tax assets and liabilities are established for temporary differences between financial and taxable income and are measured using the current enacted statutory tax rate. New tax reform legislation was enacted on December 22, 2017. This new tax legislation includes a broad range of tax reform provisions, including a reduction to the corporate tax rate, changes to business expense deductions, and changes to taxes on international earnings. U.S. GAAP requires recognition of the effect of changes in tax law and tax rates as a component of the income tax provision related to continuing operations in the period of enactment of the new legislation. This accounting treatment is also required for deferred taxes that were established through a financial statement component other than continuing operations such as other comprehensive income. Thus, Farmer Mac remeasured its deferred tax assets and liabilities using the newly enacted statutory tax rate of 21 percent and recognized a one-time, non-cash charge of $1.4 million to income tax expense. Due to the re-measurement of Farmer Mac's deferred tax assets and liabilities using the newly enacted statutory federal income tax rate of 21 percent, items originally recorded through other comprehensive income do not reflect the new tax rate ("stranded tax effects"). In response, in February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02 "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which provides entities the option to reclassify these stranded tax effects from accumulated other comprehensive income to retained earnings. Farmer Mac elected to adopt ASU 2018-02 for the year ended December 31, 2017. This change in accounting principle resulted in an increase to "Accumulated other comprehensive income, net of tax" and a corresponding decrease to "Retained earnings" of $9.1 million. See Note 2(r) for more information about the adoption of ASU 2018-02 and the effect on Farmer Mac's consolidated financial statements. Income tax expense is equal to the income taxes payable in the current year plus the net change in the deferred tax asset or liability balance. Farmer Mac evaluates its tax positions quarterly to identify and recognize any liabilities related to uncertain tax positions in its federal income tax returns. Farmer Mac uses a two-step approach in which income tax benefits are recognized if, based on the technical merits of a tax position, it is more likely than not (a probability of greater than 50 percent) that the tax position would be sustained upon examination by the taxing authority, which includes all related appeals and litigation process. The amount of tax benefit recognized is then measured at the largest amount of tax benefit that is greater than 50 percent likely to be realized upon settlement with the taxing authority, considering all information available at the reporting date. Farmer Mac's policy for recording interest and penalties associated with uncertain tax positions is to record them as a component of income tax expense. Farmer Mac establishes a valuation allowance for deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. Stock-Based Compensation Farmer Mac accounts for its stock-based employee compensation plans using the grant date fair value method of accounting. Farmer Mac measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award determined using the Black-Scholes option pricing model. The cost is recognized over the period during which an employee is required to provide service in exchange for the award. For performance-based grants, Farmer Mac recognizes the grant-date fair value over the vesting period as long as it remains probable that the performance conditions will be met. If the service or performance conditions are not met, Farmer Mac reverses previously recognized compensation expense upon forfeiture. Farmer Mac recognized $2.7 million $3.3 million, and $3.3 million of compensation expense related to stock options, SARs, and non-vested restricted stock awards for 2017, 2016, and 2015, respectively. The following table presents other comprehensive income activity, the impact on net income of amounts reclassified from each component of AOCI, and the related tax impact for the years ended December 31, 2017, 2016, and 2015: Table 2.4
| For the Years Ended December 31,
| 2017 |  | 2016 |  | 2015
| Before Tax |  | Provision (Benefit) |  | After Tax |  | Before Tax |  | Provision (Benefit) |  | After Tax |  | Before Tax |  | Provision (Benefit) |  | After Tax
| (in thousands)
Other comprehensive income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale-securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Unrealized holding gains/(losses) on available-for-sale-securities | $ | 36,809 |  |  | $ | 12,884 |  |  | $ | 23,925 |  |  | $ | 8,433 |  |  | $ | 2,952 |  |  | $ | 5,481 |  |  | $ | (9,270 | ) |  | $ | (3,244 | ) |  | $ | (6,026 | )
Less reclassification adjustments included in: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gains/(losses) on financial derivatives and hedging activities(1) | (16,845 | ) |  | (5,897 | ) |  | (10,948 | ) |  | (15,375 | ) |  | (5,381 | ) |  | (9,994 | ) |  | (20,125 | ) |  | (7,044 | ) |  | (13,081 | )
Gains/(losses) on sale of available-for-sale investment securities(2) | (89 | ) |  | (31 | ) |  | (58 | ) |  | 9 |  |  | 3 |  |  | 6 |  |  | (10 | ) |  | (4 | ) |  | (6 | )
Other income(3) | 137 |  |  | 48 |  |  | 89 |  |  | 239 |  |  | 84 |  |  | 155 |  |  | (982 | ) |  | (344 | ) |  | (638 | )
Total | $ | 20,012 |  |  | $ | 7,004 |  |  | $ | 13,008 |  |  | $ | (6,694 | ) |  | $ | (2,342 | ) |  | $ | (4,352 | ) |  | $ | (30,387 | ) |  | $ | (10,636 | ) |  | $ | (19,751 | )
Held-to-maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Change in fair value(4) | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 73,835 |  |  | $ | 25,842 |  |  | $ | 47,993 |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Less reclassification adjustments included in: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net interest income(5) | (9,329 | ) |  | (3,265 | ) |  | (6,064 | ) |  | (2,715 | ) |  | (950 | ) |  | (1,765 | ) |  | (9,922 | ) |  | (3,473 | ) |  | (6,449 | )
Total | $ | (9,329 | ) |  | $ | (3,265 | ) |  | $ | (6,064 | ) |  | $ | 71,120 |  |  | $ | 24,892 |  |  | $ | 46,228 |  |  | $ | (9,922 | ) |  | $ | (3,473 | ) |  | $ | (6,449 | )
Cash flow hedges |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Unrealized gains/(losses) on cash flow hedges | $ | 233 |  |  | $ | 81 |  |  | $ | 152 |  |  | $ | 2,443 |  |  | $ | 855 |  |  | $ | 1,588 |  |  | $ | (1,776 | ) |  | $ | (621 | ) |  | $ | (1,155 | )
Less reclassification adjustments included in: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net interest income(6) | 1,813 |  |  | 635 |  |  | 1,178 |  |  | 2,020 |  |  | 707 |  |  | 1,313 |  |  | 1,235 |  |  | 432 |  |  | 803 |
Total | $ | 2,046 |  |  | $ | 716 |  |  | $ | 1,330 |  |  | $ | 4,463 |  |  | $ | 1,562 |  |  | $ | 2,901 |  |  | $ | (541 | ) |  | $ | (189 | ) |  | $ | (352 | )
Other comprehensive income/(loss) | $ | 12,729 |  |  | $ | 4,455 |  |  | $ | 8,274 |  |  | $ | 68,889 |  |  | $ | 24,112 |  |  | $ | 44,777 |  |  | $ | (40,850 | ) |  | $ | (14,298 | ) |  | $ | (26,552 | )
(1) | Relates to the amortization of unrealized gains on hedged items prior to the application of fair value hedge accounting.
(2) | Represents unrealized gains and losses on sales of available-for-sale investment securities.
(3) | Represents amortization of deferred gains related to certain available-for-sale USDA Securities and Farmer Mac Guaranteed USDA Securities.
(4) | Represents the accumulated unrealized gain on the USDA Securities and the Farmer Mac Guaranteed Securities transferred from available-for-sale to held-to-maturity.
(5) | Relates to the amortization of unrealized gains or losses prior to the reclassification of these securities from available-for-sale to held-to-maturity. The amortization of unrealized gains or losses reported in AOCI for held-to-maturity securities will be offset by the amortization of the premium or discount created from the transfer into held-to-maturity securities, which occurred at fair value. These unrealized gains or losses will be recorded over the remaining life of the security with no impact on future net income.
(6) | Relates to the recognition of unrealized gains and losses on cash flow hedges recorded in AOCI.
Long-Term Standby Purchase Commitments Farmer Mac accounts for its LTSPCs as guarantees. Commitment fee income represents a reduction of the commitment obligation based on amortization using the actual prepayment experience on the underlying loans. See Note 2(j) for Farmer Mac's policy for estimating probable losses for LTSPCs and Note 12 for more information on the accounting for LTSPCs. Fair Value Measurement Farmer Mac defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a fair value hierarchy that ranks the quality and reliability of the inputs to valuation techniques used to measure fair value. The hierarchy gives highest rank to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest rank to unobservable inputs (level 3 measurements). Farmer Mac's assessment of the significance of the input to the fair value measurement requires judgment and considers factors specific to the financial instrument. Both observable and unobservable inputs may be used to determine the fair value of financial instruments that Farmer Mac has classified within the level 3 category. As a result, the unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in projected prepayment rates) inputs. See Note 13 for more information regarding fair value measurement. Consolidation of Variable Interest Entities Farmer Mac has interests in various entities that are considered to be VIEs. These interests include investments in securities issued by VIEs, such as Farmer Mac agricultural mortgage-backed securities created pursuant to Farmer Mac's securitization transactions and mortgage and asset-backed trusts that Farmer Mac did not create. The consolidation model uses a qualitative evaluation that requires consolidation of an entity when the reporting enterprise both: (1) has the power to direct matters which significantly impact the activities and success of the entity, and (2) has exposure to benefits and/or losses that could potentially be significant to the entity. The reporting enterprise that meets both these conditions is deemed the primary beneficiary of the VIE. Upon consolidation of a VIE, Farmer Mac accounts for the incremental assets and liabilities initially at their carrying amounts. The VIEs in which Farmer Mac has a variable interest are limited to securitization trusts. The major factor in determining if Farmer Mac is the primary beneficiary is whether Farmer Mac has the power to direct the activities of the trust that potentially have the most significant impact on the economic performance of the trust. Generally, the ability to make decisions regarding default mitigation is evidence of that power. Farmer Mac determined that it is the primary beneficiary for the securitization trusts related to most Farm & Ranch and all Rural Utilities securitization transactions because of its rights as guarantor under both programs to control the default mitigation activities of the trusts. For certain securitization trusts created when loans subject to LTSPCs were converted to Farm & Ranch Guaranteed Securities, Farmer Mac determined that it was not the primary beneficiary since the power to make decisions regarding default mitigation was shared among unrelated parties. For these trusts, the shared power provisions are substantive with respect to decision-making power and relate to the same activity (i.e., default mitigation). For similar securitization transactions where the power to make decisions regarding default mitigation was shared with a related party, Farmer Mac determined that it was the primary beneficiary because the applicable accounting guidance does not permit parties within a related party group to conclude that the power is shared. In the event that a related party status changes, consolidation or deconsolidation of these securitization trusts could occur. For those trusts that Farmer Mac is the primary beneficiary, the assets and liabilities are presented on the consolidated balance sheets as "Loans held for investment in consolidated trusts, at amortized cost" and "Debt securities of consolidated trusts held by third parties," respectively. These assets can only be used to satisfy the obligations of the related trust. For those trusts in which Farmer Mac has a variable interest but is not the primary beneficiary, Farmer Mac's interests are presented as either "Farmer Mac Guaranteed Securities," "USDA Securities," or "Investment securities" on the consolidated balance sheets. Farmer Mac's involvement in VIEs classified as Farmer Mac Guaranteed Securities or USDA Securities include securitization trusts under the USDA Guarantees line of business and certain trusts related to AgVantage securities. In the case of USDA guaranteed trusts, Farmer Mac is not determined to be the primary beneficiary because it does not have the decision-making power over default mitigation activities. Based on the USDA's program authority over the servicing and default mitigation activities of the USDA guaranteed portions of loans, Farmer Mac believes that the USDA has the power to direct the activities that most significantly impact the trust's economic performance. Farmer Mac does not have exposure to losses that could be significant to the trust and there are no triggers that would result in Farmer Mac superseding the USDA's authority with regard to directing the activities of the trust. For the AgVantage trusts, Farmer Mac currently does not have the power to direct the activities that have the most significant economic impact to the trust unless, as guarantor, there is a default by the issuer of the trust securities. Should there be a default, Farmer Mac would reassess whether it is the primary beneficiary of those trusts. The amounts disclosed in the tables below represent Farmer Mac's holdings of a portion of the beneficial interests issued by these AgVantage Trusts. For VIEs classified as investment securities, which include auction-rate certificates, asset-backed securities, and government-sponsored enterprise ("GSE")-guaranteed mortgage-backed securities, Farmer Mac is determined not to be the primary beneficiary because of the lack of voting rights or other powers to direct the activities of the trust. The following tables present, by line of business, details about the consolidation of VIEs: The following tables present, by line of business, details about the consolidation of VIEs: Table 2.5
| 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. The borrower remittances had 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 outstanding face amount of investment securities to represent maximum exposure to loss.
(4) | Includes auction-rate certificates, asset-backed securities, and government-sponsored enterprise ("GSE")-guaranteed mortgage-backed securities.
(5) | The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.
| Consolidation of Variable Interest Entities
| As of December 31, 2016
| Farm & Ranch |  | USDA Guarantees |  | Rural Utilities |  | Institutional Credit |  | Corporate |  | Total
| (in thousands)
On-Balance Sheet: |  |  |  |  |  |  |  |  |  |  |
Consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |
Loans held for investment in consolidated trusts, at amortized cost | $ | 1,132,966 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1,132,966 |
Debt securities of consolidated trusts held by third parties (1) | 1,142,704 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1,142,704 |
Unconsolidated VIEs: |  |  |  |  |  |  |  |  |  |  |
Farmer Mac Guaranteed Securities: |  |  |  |  |  |  |  |  |  |  |
Carrying value (2) | — |  |  | 36,042 |  |  | — |  |  | 30,347 |  |  | — |  |  | 66,389 |
Maximum exposure to loss (3) | — |  |  | 35,599 |  |  | — |  |  | 30,000 |  |  | — |  |  | 65,599 |
Investment securities: |  |  |  |  |  |  |  |  |  |  |
Carrying value (4) | — |  |  | — |  |  | — |  |  | — |  |  | 827,874 |  |  | 827,874 |
Maximum exposure to loss (3) (4) | — |  |  | — |  |  | — |  |  | — |  |  | 825,909 |  |  | 825,909 |
Off-Balance Sheet: |  |  |  |  |  |  |  |  |  |  |
Unconsolidated VIEs: |  |  |  |  |  |  |  |  |  |  |
Farmer Mac Guaranteed Securities: |  |  |  |  |  |  |  |  |  |  |
Maximum exposure to loss (3) (5) | 415,441 |  |  | 103,976 |  |  | — |  |  | 970,000 |  |  | — |  |  | 1,489,417 |
(1) | Includes borrower remittances of $9.7 million, which have not been passed through to third party investors as of December 31, 2016.
(2) | Includes $0.4 million of unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees line of business. Includes fair value adjustments related to the Institutional Credit line of business of $0.3 million.
(3) | Farmer Mac uses unpaid principal balance and the outstanding face amount of investment securities to represent maximum exposure to loss.
(4) | Includes auction-rate certificates, asset-backed securities, and GSE-guaranteed mortgage-backed securities.
(5) | The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.
New Accounting Standards In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," which provides new guidance intended to simplify several aspects of accounting and presentation for employee share-based payment transactions. The ASU became effective for Farmer Mac on January 1, 2017. The adoption of the new guidance had the following effect on Farmer Mac's financial position, results of operations, and cash flows:
• | Consolidated Statements of Operations - The ASU requires the recognition of all net tax benefits related to share-based compensation awards in the income tax provision. Previously, these amounts were recognized in additional paid-in capital. Net tax benefits related to share-based compensation awards of $0.9 million were recognized as a reduction to income tax expense for the year ended December 31, 2017 in the consolidated statement of operations. Net tax benefits result from the excess of the tax deduction over the compensation expense recognized under GAAP for share-based compensation awards. That excess arises because the tax deduction is based upon the value of share-based awards upon their exercise (or vesting, in the case of restricted stock units), whereas the compensation expense under GAAP is based upon the value of the share-based awards upon their grant date.
The ASU also changed the calculation of diluted earnings per share. GAAP requires the "treasury stock method" to determine the number of dilutive securities in calculating diluted earnings per share. The ASU changed the calculation of "assumed proceeds" under the treasury stock method to exclude the amount of net tax benefits that would have been recognized in additional paid-in capital under the previous accounting standard. This change in the calculation reduces the amount of shares assumed to have been repurchased under the treasury stock method, thus increasing the number of dilutive shares. Both of these changes in the guidance were applied prospectively beginning January 1, 2017 and for the year ended December 31, 2017. For the year ended December 31, 2017, the change in the recognition of all net tax benefits related to share-based compensation awards in the income tax provision resulted in an increase of $0.08 in basic earnings per share and $0.05 in diluted earnings per share. The change in the guidance for the calculation of diluted earnings per share had an immaterial impact on diluted earnings per share. Additionally, the ASU allows companies to choose to either include an estimate of forfeitures expected to occur in share-based compensation expense or account for them as they occur. Previously, GAAP required companies to include an estimate of forfeitures expected to occur in their share-based compensations expense. Farmer Mac has elected to account for forfeitures in compensation expense as they occur. The cumulative impact of the change in the treatment of forfeitures was not material for the year ended ended December 31, 2017.
• | Consolidated Statements of Cash Flows - The ASU requires excess tax benefits from share-based employee awards to be reported within operating activities. Previously, these cash flows were reported within financing activities. Farmer Mac has applied this guidance prospectively, resulting in an increase in net cash provided by operating activities and a corresponding decrease in net cash provided by financing activities of $0.9 million for the year ended December 31, 2017.
The ASU requires employee taxes paid when an employer withholds shares for tax purposes to be reported within financing activities. Under the previous guidance, these cash flows were included in operating activities. These changes were required to be applied on a retrospective basis. As a result, the consolidated statement of cash flows for prior periods was revised, resulting in an increase in net cash provided by operating activities and a decrease in net cash provided by financing activities of $4.1 million and $0.5 million, respectively, for the years ended December 31, 2016 and 2015, compared to previously reported amounts. The amount of employee taxes paid for shares withheld was $2.5 million for the year ended December 31, 2017. In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses," which will require entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will be required to use forward-looking information to form their credit loss estimates. The ASU will also require enhanced disclosures to help users of financial statements better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The new standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Farmer Mac is currently developing its accounting policy, planning for changes to its loss estimation methodologies and evaluating the impact that the new guidance will have on its consolidated financial statements. That impact will primarily be from the new requirement to recognize all expected losses rather than just incurred losses as of the reporting date. In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities," which shortens the amortization period for certain callable debt securities held at a premium by requiring the premium to be amortized to the earliest call date. The ASU does not require an accounting change for securities held at a discount. The new standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. Farmer Mac does not expect that adoption of the new guidance will have a material effect on Farmer Mac's financial position, results of operations, or cash flows. In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which amends hedge accounting recognition and presentation requirements to better align a reporting entity's risk management activities and hedge accounting. The new guidance reduces the complexity and simplifies the application of hedge accounting by eliminating the requirement to separately measure and report hedge ineffectiveness and by requiring the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Early adoption of the new guidance is permitted in any interim or annual period after issuance of the ASU. Farmer Mac adopted the new guidance as of January 1, 2018. The adoption of the new guidance did not have a material effect on Farmer Mac's financial position, results of operation, or cash flows. In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which provides the option for entities to reclassify from accumulated other comprehensive income to retained earnings the stranded tax effects resulting from the Tax Cut and Jobs Act enacted in December 2017. The amount of the reclassification would be the difference between (1) the amount initially recorded in other comprehensive income at the previous federal corporate tax rate (35 percent) and (2) the amount that would have been charged to other comprehensive income at the newly enacted corporate tax rate (21 percent). The new standard is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption of the new guidance is permitted in any interim or annual period for which financial statements have not yet been issued. Farmer Mac elected to adopt the new guidance for the year ended December 31, 2017. This change in accounting guidance resulted in an increase to "Accumulated other comprehensive income, net of tax" and a corresponding decrease to "Retained earnings" of $9.1 million in Farmer Mac's consolidated balance sheets. The adoption of the new guidance did not have an effect on Farmer Mac's results of operation or cash flows. Reclassifications Certain reclassifications of prior period information were made to conform to the current period presentation.

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