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Equity

12 Months Ended

Dec. 31, 2019

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 2019, 2018, and 2017, Farmer Mac paid a quarterly dividend of $0.70, $0.58, and $0.36 per share on all classes of its common stock. Farmer Mac's ability to declare and pay dividends on its common stock could be restricted if it fails to comply with applicable capital requirements.

Farmer Mac's board of directors approved a share repurchase program during third quarter 2015 authorizing Farmer Mac to repurchase up to $25.0 million of its outstanding Class C non-voting common stock. The share repurchase program, last modified on March 14, 2019, authorizes Farmer Mac to repurchase to up to $10.0 million of Farmer Mac's outstanding Class C non-voting common stock. Farmer Mac did not repurchase any shares during 2019 under this program. As of December 31, 2019, 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, and has not repurchased any shares since first quarter 2016. The program expires at the end of March 2021.

Preferred Stock

On May 13, 2019, Farmer Mac issued 4.0 million shares of $5.700% Non-Cumulative Preferred Stock, Series D ("Series D Preferred Stock"), which has a par value and liquidation preference of $25.00 per share, or $100.0 million aggregate outstanding.

On June 12, 2019, Farmer Mac used part of the net proceeds from the sale of the Series D Preferred Stock to redeem and repurchase all $75.0 million aggregate outstanding of Farmer Mac's $6.875% Non-Cumulative Preferred Stock, Series B ("Series B Preferred Stock"), plus any declared and unpaid dividends through and including the redemption date. As a result of the retirement of the Series B Preferred Stock, Farmer Mac recognized $2.0 million of deferred issuance costs, which is presented as "Loss on retirement of preferred stock" on the consolidated statements of operations

The following table presents the Series A Preferred Stock, the Series C Preferred Stock, and the Series D Preferred Stock (collectively referred to as the "Outstanding Preferred Stock") as of December 31, 2019:

Table 9.1



Name	Issuance Date	Shares Issued	Annual Dividend Rate⁽³⁾		Liquidation Value		Redemption Date⁽⁴⁾
Series A	January 17, 2013	2,400,000	5.875	%	$	25.00	Any Time
Series C⁽¹⁾	June 20, 2014	3,000,000	6.000	%	$	25.00	July 18, 2024
Series D⁽²⁾	May 13, 2019	4,000,000	5.700	%	$	25.00	July 17, 2024

⁽¹⁾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%.

⁽²⁾Farmer Mac has the option to redeem the preferred stock on any quarterly dividend payment date on and after July 17, 2024.

⁽³⁾Dividends on all series of Outstanding Preferred Stock are non-cumulative, which means that if Farmer Mac's board of directors has not declared a dividend before the applicable dividend payment date for any dividend period, such dividend will not be paid or cumulate, and Farmer Mac will have no obligation to pay dividends for such dividend period, whether or not dividends on any series of Outstanding Preferred Stock are declared for any future dividend period.

⁽⁴⁾Farmer Mac has the right but not the obligation to redeem.

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, direct costs of $1.6 million related to the issuance of the Series C Preferred Stock, and direct costs of $3.3 million related to the issuance of the Series D Preferred Stock.

For the first and second quarters of 2019, and each quarter in 2018 and 2017, 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.

For second quarter 2019, Farmer Mac also paid $0.2626 per share on the Series B Preferred Stock for the period from but not including April 17, 2019 to and including the June 12, 2019 redemption date.

For third and fourth quarter 2019, 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;

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

•$0.35625 per share on its 5.700% Non-Cumulative Preferred Stock, Series D.

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 2019 have an exercise price of $82.76 per share, SARs granted during 2018 have an exercise price of $86.15 per share, and SARs granted during 2017 have an exercise price of $60.84 per share. During 2019, 2018, and 2017, restricted stock awards were granted to employees, officers, and directors with vesting periods of one to three years.

The following tables summarize stock options, SARs, and non-vested restricted stock activity for the years ended December 31, 2019, 2018, and 2017:

Table 9.2


	For the Years Ended December 31,
	2019				2018					2017
	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	124,960	$	38.38	163,272	$	32.95	367,535	$	30.18
Granted	24,582	82.76		10,122	86.15		24,657	60.84
Exercised	(40,851)	35.61		(48,434)	30.06		(111,278)	31.47
Canceled	(9,855)	79.45		—	—		(117,642)	31.55
Outstanding, end of year	98,836	46.47		124,960	38.38		163,272	32.95
Exercisable at end of year	72,696	34.07		95,675	31.41		93,085	28.57

	For the Years Ended December 31,
	2019				2018					2017
	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	80,153	$	60.98	95,015	$	44.39	138,497	$	34.63
Granted	41,735	80.51		32,070	84.03		45,828	59.79
Canceled	(17,054)	74.97		(1,098)	86.15		(28,815)	42.15
Vested and issued	(42,237)	52.65		(45,834)	42.12		(60,495)	34.77
Outstanding, end of year	62,597	75.81		80,153	60.98		95,015	44.39

The cancellations of stock options, SARs, and non-vested restricted stock during 2019, 2018, and 2017 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.

Cash is not received from exercises of SARs or the vesting and issuance of restricted stock. During 2019, 2018, and 2017, 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 $1.0 million, $1.5 million, and $2.6 million, respectively. During 2019 and 2018, Farmer Mac recognized $0.4 million and $0.9 million, respectively, of tax benefits recognized in income tax expense associated with stock compensation activity.

During 2019, 2018, and 2017, Farmer Mac recorded a net decrease to additional paid-in capital of $1.8 million, $2.7 million, and $2.6 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 2019, Farmer Mac issued 768 shares of Class C

non-voting common stock with a fair value of $60,000 to the 4 directors who made that election. 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.

As of December 31, 2019, Farmer Mac had no stock options outstanding. The following tables summarize information regarding SARs and non-vested restricted stock outstanding as of December 31, 2019:

Table 9.3


SARs:
	Outstanding			Exercisable			Vested or Expected to Vest
Range of Exercise Prices	SARs	Weighted- Average Remaining Contractual Life	SARs	Weighted- Average Remaining Contractual Life	SARs	Weighted- Average Remaining Contractual Life
$10.00 - $24.99	14,000	1.6 years	14,000	1.6 years	14,000	1.6 years
25.00 - 39.99	51,449	4.7 years	51,449	4.7 years	51,449	4.7 years
40.00 - 54.99	—	0.0 years	—	0.0 years	—	0.0 years
55.00 - 69.99	6,619	7.3 years	3,873	7.3 years	6,619	7.3 years
70.00 - 84.99	19,422	9.3 years	—	0.0 years	19,422	9.3 years
85.00 - 99.99	7,346	8.3 years	3,374	8.3 years	7,346	8.3 years
	98,836		72,696		98,836

Non-vested Restricted Stock:
	Outstanding			Expected to Vest
Weighted- Average Grant-Date Fair Value	Non-vested Restricted Stock	Weighted-Average Remaining Contractual Life	Non-vested Restricted Stock	Weighted-Average Remaining Contractual Life
$35.00 - $49.99	—	0.0 years	—	0.0 years
50.00 - 64.99	13,535	0.3 years	13,535	0.3 years
65.00 - 79.99	15,851	1.9 years	15,851	1.9 years
80.00 - 94.99	33,211	1.4 years	33,211	1.4 years
	62,597		62,597

As of December 31, 2019 and 2018, the intrinsic value of SARs, and non-vested restricted stock outstanding, exercisable, and vested or expected to vest was $8.9 million and $7.9 million, respectively. During 2019, 2018, and 2017, the total intrinsic value of options and SARs exercised was $1.9 million, $3.0 million, and $3.8 million, respectively. As of December 31, 2019, there was $2.7 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 1.8 years.

The weighted-average grant date fair values of options, SARs, and restricted stock awards granted in 2019, 2018, and 2017 were $58.27, $69.38, and $44.93 per share, respectively. Under the fair value-based method of accounting for stock-based compensation cost, Farmer Mac recognized compensation expense of $2.3 million, $2.5 million, and $2.7 million during 2019, 2018, and 2017, respectively.

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

Table 9.4


	For the Year Ended December 31,
	2019	2018	2017
Risk-free interest rate	2.5%	2.7%	2.3%
Expected years until exercise	6 years	6 years	6 years
Expected stock volatility	33.8%	33.0%	34.8%
Dividend yield	3.4%	2.7%	2.4%

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 2019, 2018, and 2017 was $80.51, $84.03, and $59.79 per share, respectively, which is based on the closing price of the stock on the date granted.

Capital Requirements

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, 2019 and 2018, 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, 2019, Farmer Mac's minimum capital requirement was $618.8 million and its core capital level was $815.4 million, which was $196.6 million above the minimum capital requirement as of that date. 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.

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.