Loans

3 Months Ended

Mar. 31, 2020

Receivables [Abstract]

LOANS

LOANS

Loans

Loans held for investment are recorded at the unpaid principal balance, net of unamortized premium or discount and other cost basis adjustments. The following table displays the composition of the loan balances as of March 31, 2020 and December 31, 2019:

Table 5.1

	As of March 31, 2020(1)						As of December 31, 2019(2)
	Unsecuritized		In Consolidated Trusts		Total		Unsecuritized		In Consolidated Trusts		Total
	(in thousands)
Farm & Ranch	$	3,817,693	$	1,540,689	$	5,358,382	$	3,675,640	$	1,600,917	$	5,276,557
Rural Utilities	1,789,726		—		1,789,726		1,671,293		—		1,671,293
Total unpaid principal balance(3)	5,607,419		1,540,689		7,148,108		5,346,933		1,600,917		6,947,850
Unamortized premiums, discounts, fair value hedge basis adjustment, and other cost basis adjustments	181,972		—		181,972		44,044		—		44,044
Total loans	5,789,391		1,540,689		7,330,080		5,390,977		1,600,917		6,991,894
Allowance for losses	(13,663)		(1,193)		(14,856)		(8,853)		(1,601)		(10,454)
Total loans, net of allowance	$	5,775,728	$	1,539,496	$	7,315,224	$	5,382,124	$	1,599,316	$	6,981,440

⁽¹⁾Allowance for losses reflects the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," in first quarter 2020.

⁽²⁾Prior to the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," in first quarter 2020, Farmer Mac maintained an allowance for losses to cover estimated probable incurred losses on loans held.

⁽³⁾Unpaid principal balance is the basis of presentation in disclosures of outstanding balances for Farmer Mac's lines of business.

Allowance for Losses

The following table is a summary, by asset type, of the allowance for losses as of March 31, 2020 and December 31, 2019:

Table 5.2

	March 31, 2020(1)		December 31, 2019(2)
	Allowance for Losses		Allowance for Losses
	(in thousands)
Loans:
Farm & Ranch	$	7,353	$	10,454
Rural Utilities	7,503		—
Total	$	14,856	$	10,454

⁽¹⁾Allowance for losses reflects the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," in first quarter 2020.

⁽²⁾Prior to the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," in first quarter 2020, Farmer Mac maintained an allowance for loan losses to cover estimated probable incurred losses on loans held.

The following is a summary of the changes in the allowance for losses for the three month period ended March 31, 2020 and 2019:

Table 5.3

	For the Three Months Ended
	March 31, 2020(1)		March 31, 2019(2)
	Allowance for Losses		Allowance for Losses
	(in thousands)
Farm & Ranch:
Balance as of December 31,	$	10,454	$	7,017
Cumulative effect adjustment from adoption of current expected credit loss standard	(3,909)		—
Balance as of January 1,	6,545		7,017
Provision for/(release of) losses	$	808	$	(264)
Charge-offs	—		—
Ending Balance(3)	$	7,353	$	6,753
Rural Utilities:
Balance as of December 31,	$	—	$	—
Cumulative effect adjustment from adoption of current expected credit loss standard	5,378		—
Balance as of January 1,	5,378		—
Provision for/(release of) losses	$	2,125	$	—
Charge-offs	—		—
Ending Balance(4)	$	7,503	$	—

⁽¹⁾Allowance for losses reflects the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," in first quarter 2020.

⁽²⁾Prior to the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," in first quarter 2020, Farmer Mac maintained an allowance for loan losses to cover estimated probable incurred losses on loans held.

⁽³⁾Allowance for losses includes $2.2 million for collateral dependent assets secured by commercial real estate.

⁽⁴⁾Allowance for losses includes no allowance for collateral dependent assets.

The cumulative transition adjustment decrease of $3.9 million in the Farm & Ranch portfolio was primarily driven by differences in the way that the two loss models measure the impact of low loan-to-value ratios in that portfolio. Under the previous accounting standard, the Company's estimated incurred loss model was based on historical weighted-average loss rates from realized losses within commodities and risk ratings. The historical weighted average loss rates were then applied to sub-portfolios, as

disaggregated by commodity and risk rating, to calculate the general allowance. Under the CECL accounting standard, the Company's current expected credit losses are calculated individually based on the expected probability of default and the expected loss-given-default for each loan. The low loan-to-value ratios in the Farm & Ranch portfolio result in low individual losses-given-default. Thus, our expected credit losses as of January 1, 2020 were less than our estimate of incurred losses as of December 31, 2019.

The cumulative transition adjustment increase of $5.4 million in the Rural Utilities portfolio was primarily driven by the change from measuring incurred probable credit losses to measuring expected credit losses over the expected lives of these loans. The Company has never experienced a credit loss in its Rural Utilities portfolio. Additionally, these loans have strong credit ratings and performance, which supported the Company's estimate of no incurred credit losses under the previous accounting standard. Upon the adoption of CECL, the Company is now required to measure its expected credit losses for the entire expected life of all financial instruments, including its Rural Utilities loans. To estimate expected credit losses on these loans, the Company relies upon industry data from ratings agencies and publicly available information as disclosed in the securities filings of other major lenders who serve the utilities industry. Under the CECL accounting standard, the Company's loss allowance model for these loans is primarily impacted by the long-term maturities of the loans and their low probability of prepayment. In addition, the highly-specialized nature of power generation and transmission facilities results in significant losses given default even though the probability of default is low. Thus, the long-term expected lives of these loans combined with high losses given default result in an estimate of expected losses although we have never incurred a credit loss in this portfolio.

The provision to the allowance for loan losses recorded during first quarter 2020 was primarily due to the impact of updated economic factor forecasts, particularly higher credit spreads and expected higher unemployment, as a result of the COVID-19 pandemic and the resulting economic volatility. In addition, economic factor forecasts for lower commodity prices uniquely impacted the Farm & Ranch portfolio.

During first quarter 2019, the net release to the allowance for loan losses was primarily due to a decrease in Farm & Ranch outstanding business volume and lower specific allowance amounts on loans that Farmer Mac identified as impaired and individually evaluated. This was offset in part by a modest decline in credit quality during the first quarter of 2019. Farmer Mac recorded no charge-offs to its allowance for loan losses during first quarter 2019.

The following table presents the unpaid principal balances by delinquency status of Farmer Mac's loans and non-performing assets as of March 31, 2020:

Table 5.4

	As of March 31, 2020
	Accruing
	Current		30-59 Days		60-89 Days		90 Days and Greater(1)		Total Past Due		Nonaccrual loans(2)(3)		Total Loans
	(in thousands)
Loans:
Farm & Ranch	$	5,206,313	$	4,821	$	3,024	$	22,152	$	29,997	$	122,072	$	5,358,382
Rural Utilities	1,789,726		—		—		—		—		—		1,789,726
Total	$	6,996,039	$	4,821	$	3,024	$	22,152	$	29,997	$	122,072	$	7,148,108

⁽¹⁾Includes loans in consolidated trusts with beneficial interests owned by third parties that are 90 days or more past due.

⁽²⁾Includes loans that are 90 days or more past due, in foreclosure, or in bankruptcy with at least one missed payment, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.

⁽³⁾Includes $24.0 million of nonaccrual loans for which there was no associated allowance. During the three months ended March 31, 2020, Farmer Mac received $1.0 million in interest on nonaccrual loans.

The following tables present the unpaid principal balances of loans held and the related total allowance for losses by impairment method and commodity type as of December 31, 2019:

Table 5.5

	As of December 31, 2019
	Crops		Permanent Plantings		Livestock		Part-time Farm		Ag. Storage and Processing		Other		Total
	(in thousands)
Ending Balance:
Collectively evaluated for impairment	$	2,664,362	$	1,161,900	$	871,341	$	356,920	$	10,360	$	4,597	$	5,069,480
Individually evaluated for impairment	108,815		51,256		39,962		7,044		—		—		207,077
Total Farm & Ranch loans	$	2,773,177	$	1,213,156	$	911,303	$	363,964	$	10,360	$	4,597	$	5,276,557
Allowance for Losses:
Collectively evaluated for impairment	$	1,880	$	1,362	$	714	$	249	$	47	$	4	$	4,256
Individually evaluated for impairment	2,628		1,008		2,447		115		—		—		6,198
Total Farm & Ranch loans	$	4,508	$	2,370	$	3,161	$	364	$	47	$	4	$	10,454

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 December 31, 2019:

Table 5.6

	As of December 31, 2019
	Crops		Permanent Plantings		Livestock		Part-time Farm		Ag. Storage and Processing		Other		Total
	(in thousands)
Impaired Loans:
With no specific allowance:
Recorded investment	$	30,846	$	16,696	$	3,195	$	1,398	$	—	$	56	$	52,191
Unpaid principal balance	30,741		16,638		3,185		1,394		—		56		52,014
With a specific allowance:
Recorded investment(1)	84,044		36,852		47,113		6,376		—		—		174,385
Unpaid principal balance	83,772		36,732		46,984		6,356		—		—		173,844
Associated allowance	2,725		1,051		2,636		129		—		—		6,541
Total:
Recorded investment	114,890		53,548		50,308		7,774		—		56		226,576
Unpaid principal balance	114,513		53,370		50,169		7,750		—		56		225,858
Associated allowance	2,725		1,051		2,636		129		—		—		6,541
Recorded investment of loans on nonaccrual status(2)	$	34,037	$	22,849	$	28,441	$	2,454	$	—	$	—	$	87,781

⁽¹⁾Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $159.1 million (70%) of impaired loans as of December 31, 2019, which resulted in a specific allowance of $3.0 million.

⁽²⁾Includes $30.1 million of loans that are less than 90 days delinquent but which have not met Farmer Mac's performance criteria for returning to accrual status.

The following table presents by commodity type the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2019:

Table 5.7

	March 31, 2019
	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	$	88,653	$	40,495	$	28,123	$	7,730	$	—	$	65	$	165,066
Income recognized on impaired loans	322		299		113		67		—		—		801

Net credit losses and 90-day delinquencies as of and for the periods indicated for loans held are presented in the table below.  As of December 31, 2019, there were no delinquencies and no probable losses inherent in Farmer Mac's Rural Utilities loan portfolio and Farmer Mac had not experienced credit losses on any Rural Utilities loans.

Table 5.8

	90-Day Delinquencies(1)		Net Credit Losses/(Recoveries)
	As of		For the Three Months Ended
	December 31, 2019		March 31, 2019
	(in thousands)
Farm & Ranch loans	$	57,719	$	—

⁽¹⁾Includes loans that are 90 days or more past due, in foreclosure, or in bankruptcy with at least one missed payment, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.

Of the $57.7 million of on-balance sheet loans reported as 90-day delinquencies as of December 31, 2019, no loans were subject to "removal-of-account" provisions.

Rural Utilities

As of December 31, 2019, no allowance for losses had been provided for Farmer Mac's Rural Utilities line of business based on the performance of the loans in this line of business and the credit quality of the collateral supporting these loans, as well as Farmer Mac's counterparty risk analysis. As of December 31, 2019, there were no delinquencies or probable losses inherent in Farmer Mac's Rural Utilities loans held or underlying LTSPCs.

Credit Quality Indicators

The following tables present credit quality indicators related to Farm & Ranch loans and Rural Utilities loans held as of March 31, 2020, by year of origination:

Table 5.9

	As of March 31, 2020
	Year of Origination:
	2020		2019		2018		2017		2016		Prior		Revolving Loans - Amortized Cost Basis		Total
	(in thousands)
Farm & Ranch:
Internally Assigned Risk Rating:
Acceptable	$	286,971	$	819,220	$	588,761	$	688,649	$	555,678	$	1,452,711	$	468,114	$	4,860,104
Special mention(1)	9,916		159,523		36,786		20,937		32,227		18,283		9,230		286,902
Substandard(2)	—		4,431		16,938		58,407		41,973		78,189		11,438		211,376
Total	$	296,887	$	983,174	$	642,485	$	767,993	$	629,878	$	1,549,183	$	488,782	$	5,358,382
Current period charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Current period recoveries	—		—		—		—		—		—		—		—
Current period Farm & Ranch net charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

⁽¹⁾Assets in the "Special mention" category generally have potential weaknesses due to performance issues but are currently considered to be adequately secured.  

⁽²⁾Substandard assets have a well-defined weakness or weaknesses and there is a distinct possibility that some loss will be sustained if deficiencies are not corrected.

	As of March 31, 2020
	Year of Origination:
	2020		2019		2018		2017		2016		Prior		Revolving Loans - Amortized Cost Basis		Total
	(in thousands)
Rural Utilities:
Internally Assigned Risk Rating:
Acceptable	$	152,385	$	836,763	$	8,337	$	92,568	$	31,829	$	662,830	$	—	$	1,784,712
Special mention(1)	—		—		—		—		—		—		—		—
Substandard(2)	—		—		—		—		—		5,014		—		5,014
Total	$	152,385	$	836,763	$	8,337	$	92,568	$	31,829	$	667,844	$	—	$	1,789,726
Current period charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Current period recoveries	—		—		—		—		—		—		—		—
Current period Rural Utilities net charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

⁽¹⁾Assets in the "Special mention" category generally have potential weaknesses due to performance issues but are currently considered to be adequately secured.  

⁽²⁾Substandard assets have a well-defined weakness or weaknesses and there is a distinct possibility that some loss will be sustained if deficiencies are not corrected.

The following table presents credit quality indicators related to Farm & Ranch loans held as of December 31, 2019:

Table 5.10

	As of December 31, 2019
	Crops		Permanent Plantings		Livestock		Part-time Farm		Ag. Storage and Processing		Other		Total
	(in thousands)
Internally Assigned Risk Rating(1)
Acceptable	$	2,556,956	$	1,050,160	$	825,234	$	343,329	$	10,360	$	4,597	$	4,790,636
Special mention(2)	107,406		111,739		46,107		13,591		—		—		278,843
Substandard(3)	108,815		51,257		39,962		7,044		—		—		207,078
Total	$	2,773,177	$	1,213,156	$	911,303	$	363,964	$	10,360	$	4,597	$	5,276,557
Commodity analysis of past due loans(1)	$	21,167	$	15,828	$	19,354	$	1,370	$	—	$	—	$	57,719

⁽¹⁾Amounts represent unpaid principal balance of risk-rated loans, which is the basis Farmer Mac uses to analyze its portfolio, and recorded investment of past due loans. 

⁽²⁾Assets in the "Special mention" category generally have potential weaknesses due to performance issues but are currently considered to be adequately secured.  

⁽³⁾Substandard assets have a well-defined weakness or weaknesses and there is a distinct possibility that some loss will be sustained if deficiencies are not corrected.