Common Stock

Farmer Mac has three classes of common stock outstanding:


•	Class A voting common stock, which may be held only by banks, insurance companies, and other financial institutions or similar entities that are not institutions of the Farm Credit System. By federal statute, no holder of Class A voting common stock may directly or indirectly be a beneficial owner of more than 33% of the outstanding shares of Class A voting common stock.


•	Class B voting common stock, which may be held only by institutions of the Farm Credit System. There are no restrictions on the maximum holdings of Class B voting common stock.


•	Class C non-voting common stock, which has no ownership restrictions.

During 2018, 2017, and 2016, Farmer Mac paid a quarterly dividend of $0.58, $0.36, and $0.26, respectively, per share on all classes of its common stock. Farmer Mac's ability to declare and pay dividends on its common stock could be restricted if it fails to comply with applicable capital requirements.

Farmer Mac's board of directors approved a share repurchase program during third quarter 2015 authorizing Farmer Mac to repurchase up to $25.0 million of its outstanding Class C non-voting common stock for two years. In August 2017, Farmer Mac's board of directors approved the continuation of the share repurchase program on its existing terms through August 2019 for the repurchase of up to $5.4 million of Farmer Mac's outstanding Class C non-voting common stock. This is the amount that was remaining under the share repurchase program that Farmer Mac's board of directors originally authorized in third quarter 2015 for the repurchase of up to $25 million of outstanding Class C non-voting common stock. Farmer Mac did not repurchase any shares during 2018 or 2017 under this program. As of December 31, 2018 and December 31, 2017, Farmer Mac had repurchased approximately 668,000 shares of Class C non-voting common stock at a cost of approximately $19.6 million under the share repurchase program.

Preferred Stock

On January 17, 2013, Farmer Mac issued 2.4 million shares of 5.875% Non-Cumulative Preferred Stock, Series A (the "Series A Preferred Stock"). On March 25, 2014, Farmer Mac issued 3.0 million shares of 6.875% Non-Cumulative Preferred Stock, Series B (the "Series B Preferred Stock"). On June 20, 2014, Farmer Mac issued 3.0 million shares of 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C (the "Series C Preferred Stock"). The Series A Preferred Stock, the Series B Preferred Stock, and the Series C Preferred Stock (collectively referred to as the "Outstanding Preferred Stock") each has a par value of $25.00 per share and a liquidation preference of $25.00 per share. The Series A Preferred Stock and the Series B Preferred Stock pay an annual dividend rate of 5.875% and 6.875%, respectively, for the life of the securities. The Series C Preferred Stock pays an annual dividend rate of 6.000% from the date of issuance to and including the quarterly payment date occurring on July 17, 2024, and thereafter, at a floating rate equal to three-month LIBOR plus 3.26%. Farmer Mac has the right, but not the obligation, to redeem the Series A Preferred Stock at any time on and after January 17, 2018, the Series B Preferred Stock at any time on and after April 17, 2019, and the Series C Preferred Stock at any time on and after July 18, 2024, all at a price equal to the then-applicable liquidation preference. Dividends on all series of Outstanding Preferred Stock are non-cumulative, which means that if Farmer Mac's board of directors has not declared a dividend before the applicable dividend payment date for any dividend period, such dividend will not be paid or cumulate, and Farmer Mac will have no obligation to pay dividends for such dividend period, whether or not dividends on any series of Outstanding Preferred Stock are declared for any future dividend period. Farmer Mac incurred direct costs of $1.7 million related to the issuance of the Series A Preferred Stock, direct costs of $1.9 million related to the issuance of the Series B Preferred Stock, and direct costs of $1.6 million related to the issuance of the Series C Preferred Stock. As of December 31, 2018, Farmer Mac had 2.4 million shares of Series A Preferred Stock outstanding, 3.0 million shares of Series B Preferred Stock outstanding, and 3.0 million of Series C Preferred Stock outstanding.

For 2018, 2017 and 2016, Farmer Mac paid the following quarterly dividends on its outstanding preferred stock:


•	$0.3672 per share on its 5.875% Non-Cumulative Preferred Stock, Series A;


•	$0.4297 per share on its 6.875% Non-Cumulative Preferred Stock, Series B; and


•	$0.3750 per share on its 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C.

Farmer Mac's ability to declare and pay dividends on its preferred stock could be restricted if it fails to comply with applicable capital requirements. Farmer Mac's preferred stock is included as a component of core capital for regulatory and statutory capital compliance measurements.

Equity-Based Incentive Compensation Plans

Farmer Mac's Amended and Restated 2008 Omnibus Incentive Compensation Plan authorizes the grant of restricted stock, stock options, and SARs, among other alternative forms of equity-based compensation, to Farmer Mac's directors, officers, and employees. SARs awarded to officers and employees vest annually in thirds. Farmer Mac has not granted SARs to directors since 2008. If not exercised or cancelled earlier due to the termination of employment, SARs granted to officers or employees expire after 10 years from the grant date. For all SARs granted, the exercise price is equal to the closing price of Farmer Mac's Class C non-voting common stock on the date of grant. SARs granted during 2018 have an exercise price of $86.15 per share, SARs granted during 2017 have an exercise price of $60.84 per share, and SARs granted during 2016 have an exercise price of $35.75 per share. During 2018, 2017, and 2016, restricted stock awards were granted to directors with a vesting period of one year, to officers with a vesting period of three years provided certain performance targets are met, to officers vesting annually in thirds, and to employees with a vesting period of three years. During 2018, a restricted stock award was also granted to Farmer Mac's President and Chief Executive Officer, which will "cliff" vest on March 31, 2021 if he is still employed by Farmer Mac on that date.

The following tables summarize stock options, SARs, and non-vested restricted stock activity for the years ended December 31, 2018, 2017, and 2016:

Table 9.1



	For the Year Ended December 31,
	2018				2017				2016
	Stock Options and SARs		Weighted- Average Exercise Price		Stock Options and SARs		Weighted- Average Exercise Price		Stock Options and SARs		Weighted- Average Exercise Price
Outstanding, beginning of year	163,272		$	32.95	367,535		$	30.18	747,573		$	26.68
Granted	10,122		86.15		24,657		60.84		51,975		35.75
Exercised	(48,434	)	30.06		(111,278	)	31.47		(431,346	)	24.77
Canceled	—		—		(117,642	)	31.55		(667	)	35.60
Outstanding, end of year	124,960		38.38		163,272		32.95		367,535		30.18
Exercisable at end of year	95,675		31.41		93,085		28.57		208,274		27.41

	For the Year Ended December 31,
	2018				2017				2016
	Non-vested Restricted Stock		Weighted- Average Grant Date Fair Value		Non-vested Restricted Stock		Weighted- Average Grant Date Fair Value		Non-vested Restricted Stock		Weighted- Average Grant Date Fair Value
Outstanding, beginning of year	95,015		$	44.39	138,497		$	34.63	132,651		$	32.12
Granted	32,070		84.03		45,828		59.79		76,617		36.33
Canceled	(1,098	)	86.15		(28,815	)	42.15		(1,360	)	35.75
Vested and issued	(45,834	)	42.12		(60,495	)	34.77		(69,411	)	31.69
Outstanding, end of year	80,153		60.98		95,015		44.39		138,497		34.63

The cancellations of stock options, SARs, and non-vested restricted stock during 2018, 2017, and 2016 were due to unvested awards terminating in accordance with the provisions of the applicable equity compensation plans or award agreements upon directors' or employees' departures from Farmer Mac.

Farmer Mac generally receives cash when stock options are exercised. Cash is not received from exercises of SARs or the vesting and issuance of restricted stock. Farmer Mac received no cash from the exercise of stock options during 2018, $0.2 million during 2017, and $0.5 million during 2016. During 2018, 2017, and 2016, the reduction of income taxes payable as a result of the deduction for the exercise of stock options and SARs and the vesting or accelerated tax elections of restricted stock was $1.5 million, $2.6 million, and $3.6 million, respectively. During both 2018 and 2017, Farmer Mac recognized $0.9 million, respectively, of tax benefits recognized in income tax expense associated with stock compensation activity.

During 2018, 2017, and 2016, Farmer Mac recorded a net decrease to additional paid-in capital of $2.7 million, $2.6 million, and $3.1 million, respectively, related to stock-based compensation awards.

Farmer Mac has a policy that permits directors of Farmer Mac to elect to receive shares of Class C non-voting common stock in lieu of cash retainers. During 2018, Farmer Mac issued 174 shares of Class C non-voting common stock with a fair value of $14,000 to the 4 directors who made that election. During 2017, Farmer Mac issued 698 shares of Class C non-voting common stock with a fair value of $41,000 to the 4 directors who made that election. During 2016, Farmer Mac issued 1,130 shares of Class C non-voting common stock with a fair value of $41,000 to the 4 directors who made that election.

As of December 31, 2018, Farmer Mac had no stock options outstanding. The following tables summarize information regarding SARs and non-vested restricted stock outstanding as of December 31, 2018:

Table 9.2



	Outstanding		Exercisable		Vested or Expected to Vest
Range of Exercise Prices	SARs	Weighted- Average Remaining Contractual Life	SARs	Weighted- Average Remaining Contractual Life	SARs	Weighted- Average Remaining Contractual Life
$10.00 - $24.99	16,000	2.6 years	16,000	2.6 years	16,000	2.6 years
25.00 - 39.99	86,462	6.1 years	76,629	5.9 years	86,462	6.1 years
40.00 - 54.99	—	0.0 years	—	0.0 years	—	0.0 years
55.00 - 69.99	12,376	8.3 years	3,046	8.3 years	12,376	8.3 years
70.00 - 84.99	—	0.0 years	—	0.0 years	—	0.0 years
85.00 - 99.99	10,122	9.3 years	—	0.0 years	10,122	9.3 years
	124,960		95,675		124,960

	Outstanding		Expected to Vest
Weighted- Average Grant-Date Fair Value	Non-vested Restricted Stock	Weighted-Average Remaining Contractual Life	Non-vested Restricted Stock	Weighted-Average Remaining Contractual Life
$35.00 - $49.99	27,505	0.3 years	27,505	0.3 years
50.00 - 64.99	21,848	1.3 years	21,848	1.3 years
65.00 - 79.99	3,578	2.2 years	3,578	2.2 years
80.00 - 94.99	27,222	1.6 years	27,222	1.6 years
	80,153		80,153

As of December 31, 2018 and 2017, the intrinsic value of options, SARs, and non-vested restricted stock outstanding, exercisable, and vested or expected to vest was $7.9 million and $14.8 million, respectively. During 2018, 2017, and 2016, the total intrinsic value of options and SARs exercised was $3.0 million, $3.8 million, and $7.6 million, respectively. As of December 31, 2018, there was $2.6 million of total unrecognized compensation cost related to non-vested SARs and restricted stock awards. This cost is expected to be recognized over a weighted-average period of 1.7 years.

The weighted-average grant date fair values of options, SARs, and restricted stock awards granted in 2018, 2017, and 2016 were $69.38, $44.93, and $25.11 per share, respectively. Under the fair value-based method of accounting for stock-based compensation cost, Farmer Mac recognized compensation expense of $2.5 million, $2.7 million, and $3.3 million during 2018, 2017, and 2016, respectively.

The fair values of stock options and SARs were estimated using the Black-Scholes option pricing model based on the following assumptions:

Table 9.3



	For the Year Ended December 31,
	2018	2017	2016
Risk-free interest rate	2.7%	2.3%	1.5%
Expected years until exercise	6 years	6 years	5 years
Expected stock volatility	33.0%	34.8%	34.7%
Dividend yield	2.7%	2.4%	2.9%

The risk-free interest rates used in the model were based on the U.S. Treasury yield curve in effect at the grant date. Farmer Mac used historical data to estimate the timing of option exercises and stock option cancellation rates used in the model. Expected volatilities were based on historical volatility of Farmer Mac's Class C non-voting common stock. The dividend yields were based on the expected dividends as a percentage of the value of Farmer Mac's Class C non-voting common stock on the grant date.

Because restricted stock awards will be issued upon vesting regardless of the stock price, expected stock volatility is not considered in determining grant date fair value. Restricted stock awards also accrue dividends which are paid at vesting. The weighted-average grant date fair value of the restricted stock awarded in 2018, 2017, and 2016 was $84.03, $59.79, and $36.33 per share, respectively, which is based on the closing price of the stock on the date granted.

Capital Requirements

Farmer Mac is subject to the following capital requirements:


•	Statutory minimum capital requirement – Farmer Mac's statutory minimum capital level is an amount of core capital (stockholders' equity less accumulated other comprehensive income) equal to the sum of 2.75% of Farmer Mac's aggregate on-balance sheet assets, as calculated for regulatory purposes, plus 0.75% of the aggregate off-balance sheet obligations of Farmer Mac, specifically including:


◦	the unpaid principal balance of outstanding Farmer Mac Guaranteed Securities;


◦	instruments issued or guaranteed by Farmer Mac that are substantially equivalent to Farmer Mac Guaranteed Securities, including LTSPCs; and


◦	other off-balance sheet obligations of Farmer Mac.


•	Statutory critical capital requirement – Farmer Mac's critical capital level is an amount of core capital equal to 50% of the total minimum capital requirement at that time.


•	Risk-based capital requirement – Farmer Mac's charter directs the Farm Credit Administration ("FCA"), an independent agency in the executive branch of the United States government that regulates Farmer Mac, to establish a risk-based capital stress test for Farmer Mac, using specified stress-test parameters.

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

As of December 31, 2018, Farmer Mac's minimum capital requirement was $545.0 million and its core capital level was $727.6 million, which was $182.6 million above the minimum capital requirement as of that date. As of December 31, 2017, Farmer Mac's minimum capital requirement was $520.3 million and its core capital level was $657.1 million, which was $136.8 million above the minimum capital requirement as of that date.

In accordance with FCA's rule on Farmer Mac's capital planning, and as part of Farmer Mac's capital plan, Farmer Mac has adopted a policy for maintaining a sufficient level of Tier 1 capital (consisting of retained earnings, paid-in-capital, common stock, and qualifying preferred stock) and imposing restrictions on Tier 1-eligible dividends and any discretionary bonus payments in the event that this capital falls below specified thresholds.