Financial Derivatives

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Farmer Mac enters into financial derivative transactions to protect against risk from the effects of market price, or interest rate movements, on the value of certain assets, future cash flows, or debt issuance, and not for trading or speculative purposes. Certain financial derivatives are designated as fair value hedges of fixed rate assets, classified as available-for-sale, to protect against fair value changes in the assets related to changes in a benchmark interest rate (e.g., LIBOR). Certain other financial derivatives are designated as cash flow hedges to mitigate the volatility of future interest rate payments on floating rate debt. Certain financial derivatives are not designated in hedge accounting relationships.

Farmer Mac manages the interest rate risk related to loans it has committed to acquire, but has not yet permanently funded, primarily through the use of forward sale contracts on the debt of other GSEs and futures contracts involving U.S. Treasury securities. Farmer Mac uses forward sale contracts on GSE securities to reduce its interest rate exposure to changes in both U.S. Treasury rates and spreads on Farmer Mac debt. Farmer Mac aims to achieve a duration-matched hedge ratio between the hedged item and the hedge instrument. Gains or losses generated by these hedge transactions are expected to offset changes in funding costs. All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability.

The following tables summarize information related to Farmer Mac's financial derivatives on a gross basis without giving consideration to master netting arrangements as of December 31, 2019 and 2018:

Table 6.1


	As of December 31, 2019
			Fair Value					Weighted- Average Pay Rate	Weighted- Average Receive Rate	Weighted- Average Forward Price	Weighted- Average Remaining Term (in years)
	Notional Amount		Asset		(Liability)
	(dollars in thousands)
Fair value hedges:
Interest rate swaps:
Pay fixed non-callable	$	4,955,686	$	7,163	$	(3,281)	2.47%	1.93%		11.26
Receive fixed non-callable	1,413,200		76		(5,329)		1.88%	2.13%		1.25
Receive fixed callable	524,000		476		(772)		1.52%	1.91%		2.83
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable	428,000		1,882		(1,514)		2.36%	2.12%		5.43
No hedge designation:
Interest rate swaps:
Pay fixed non-callable	342,745		7		(14,046)		3.55%	2.00%		5.51
Receive fixed non-callable	3,124,148		49		(1,637)		1.88%	2.06%		1.66
Receive fixed callable	525,000		79		(80)		1.64%	1.68%		0.83
Basis swaps	2,670,000		787		(395)		1.86%	1.76%		0.90
Treasury futures	39,400				(51)				128.29
Credit valuation adjustment			—		63
Total financial derivatives	$	14,022,179	$	10,519	$	(27,042)
Collateral (held)/pledged			(2,685)		132,129
Net amount			$	7,834	$	105,087


	As of December 31, 2018
			Fair Value					Weighted- Average Pay Rate	Weighted- Average Receive Rate	Weighted- Average Forward Price	Weighted- Average Remaining Term (in years)
	Notional Amount		Asset		(Liability)
	(dollars in thousands)
Fair value hedges:
Interest rate swaps:
Pay fixed non-callable	$	3,097,084	$	3,004	$	(4,326)	2.42%	2.58%		9.75
Receive fixed non-callable	1,871,200		547		(4,484)		2.50%	1.84%		1.58
Receive fixed callable	160,000		338		(28)		2.35%	3.06%		2.91
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable	373,000		2,441		(99)		2.40%	2.83%		6.12
No hedge designation:
Interest rate swaps:
Pay fixed non-callable	316,664		796		(10,399)		3.69%	2.52%		6.25
Receive fixed non-callable	2,347,371		—		—		2.37%	2.10%		0.86
Basis swaps	1,770,026		421		(130)		2.45%	2.49%		1.27
Treasury futures	20,400		—		(188)				121.09
Credit valuation adjustment			(60)		21
Total financial derivatives	$	9,955,745	$	7,487	$	(19,633)
Collateral (held)/pledged			(1,778)		47,018
Net amount			$	5,709	$	27,385

As of December 31, 2019, Farmer Mac expects to reclassify $0.9 million after tax from accumulated other comprehensive income to earnings over the next twelve months. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges after December 31, 2019. During the years ended December 31, 2019 and 2018, there were no gains or losses from interest rate swaps designated as cash flow hedges reclassified to earnings because it was probable that the originally forecasted transactions would occur.

The following table summarizes the net income/(expense) recognized in the consolidated statements of operations related to derivatives for the years ended December 31, 2019, 2018, and 2017:

Table 6.2


	For the Year Ended December 31, 2019
	Net Income/(Expense) Recognized in Consolidated Statement of Operations on Derivatives
	Net Interest Income										Non-Interest Income	Total
	Interest Income Farmer Mac Guaranteed Securities and USDA Securities		Interest Income Loans		Total Interest Expense		Gains/(losses) on financial derivatives
	(in thousands)
Total amounts presented in the consolidated statement of operations	$	333,896	$	229,675	$	(471,958)	$	5,282	$	96,895
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives	(2,177)		(2,053)		(6,227)		—		(10,457)
Recognized on hedged items	118,609		26,352		(45,309)		—		99,652
Discount amortization recognized on hedged items	—		—		(631)		—		(631)
Income/(expense) related to interest settlements on fair value hedging relationships	$	116,432	$	24,299	$	(52,167)	$	—	$	88,564

(Losses)/gains on fair value hedging relationships:
Recognized on derivatives	$	(184,478)	$	(50,141)	$	18,401	$	—	$	(216,218)
Recognized on hedged items	181,144		43,194		(16,027)		—		208,311
(Losses)/gains on fair value hedging relationships	$	(3,334)	$	(6,947)	$	2,374	$	—	$	(7,907)

Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives	$	—	$	—	$	1,166	$	—	$	1,166
Recognized on hedged items	—		—		(10,569)		—		(10,569)
Discount amortization recognized on hedged items	—		—		(4)		—		(4)
Expense recognized on cash flow hedges	$	—	$	—	$	(9,407)	$	—	$	(9,407)

Gains on financial derivatives not designated in hedging relationships:
Gains on interest rate swaps	$	—	$	—	$	—	$	10,321	$	10,321
Interest expense on interest rate swaps	—		—		—		(4,213)		(4,213)

Treasury futures	—		—		—		(826)		(826)
Gains on financial derivatives not designated in hedge relationships	$	—	$	—	$	—	$	5,282	$	5,282


	For the Year Ended December 31, 2018
	Net Income/(Expense) Recognized in Consolidated Statement of Operations on Derivatives
	Net Interest Income										Non-Interest Income	Total
	Interest Income Farmer Mac Guaranteed Securities and USDA Securities		Interest Income Loans		Total Interest Expense		(Losses)/gains on financial derivatives
	(in thousands)
Total amounts presented in the consolidated statement of operations:	$	290,953	$	198,152	$	(369,848)	$	(3,687)	$	115,570
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives	1,861		(630)		(7,995)		—		(6,764)
Recognized on hedged items	65,238		6,284		(36,837)		—		34,685
Discount amortization recognized on hedged items	—		—		(668)		—		(668)
Income/(expense) related to interest settlements on fair value hedging relationships	$	67,099	$	5,654	$	(45,500)	$	—	$	27,253

Gains/(losses) on fair value hedging relationships:
Recognized on derivatives	$	(20,279)	$	5,031	$	835	$	—	$	(14,413)
Recognized on hedged items	21,460		(5,243)		3,137		—		19,354
Gains/(losses) on fair value hedging relationships	$	1,181	$	(212)	$	3,972	$	—	$	4,941

Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives	$	—	$	—	$	316	$	—	$	316
Recognized on hedged items	—		—		(9,182)		—		(9,182)
Discount amortization recognized on hedged items	—		—		(6)		—		(6)
Expense recognized on cash flow hedges	$	—	$	—	$	(8,872)	$	—	$	(8,872)

Losses on financial derivatives not designated in hedge relationships:
Gains on interest rate swaps	$	—	$	—	$	—	$	7,206	$	7,206
Interest expense on interest rate swaps	—		—		—		(10,920)		(10,920)

Treasury futures	—		—		—		27		27
Losses on financial derivatives not designated in hedge relationships	$	—	$	—	$	—	$	(3,687)	$	(3,687)


	For the Year Ended December 31, 2017
	Net Income/(Expense) Recognized in Consolidated Statement of Operations on Derivatives
	Net Interest Income										Non-Interest Income	Total
	Interest Income Farmer Mac Guaranteed Securities and USDA Securities		Interest Income Loans		Total Interest Expense		Gains/(losses) on financial derivatives
	(in thousands)
Total amounts presented in the consolidated statement of operations	$	203,796	$	162,150	$	(242,885)	$	753	$	123,814
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives	(10,346)		(1,141)		2,642		—		(8,845)
Recognized on hedged items	46,389		3,379		(14,283)		—		35,485
Discount amortization recognized on hedged items	—		—		(345)		—		(345)
Income/(expense) related to interest settlements on fair value hedging relationships	$	36,043	$	2,238	$	(11,986)	$	—	$	26,295

(Losses)/gains on fair value hedging relationships:
Recognized on derivatives	$	—	$	—	$	—	$	1,694	$	1,694
Recognized on hedged items	—		—		—		(2,413)		(2,413)
(Losses)/gains on fair value hedging relationships	$	—	$	—	$	—	$	(719)	$	(719)

Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives	$	—	$	—	$	(1,974)	$	—	$	(1,974)
Recognized on hedged items	—		—		(4,133)		—		(4,133)
Discount amortization recognized on hedged items	—		—		(5)		—		(5)
Losses recognized in income for hedge ineffectiveness	—		—		—		(320)		(320)
Expense recognized on cash flow hedges	$	—	$	—	$	(6,112)	$	(320)	$	(6,432)

Gains on financial derivatives not designated in hedging relationships:
Gains on interest rate swaps	$	—	$	—	$	—	$	12,240	$	12,240
Interest expense on interest rate swaps	—		—		—		(10,200)		(10,200)
Agency forwards	—		—		—		(588)		(588)
Treasury futures	—		—		—		340		340
Gains on financial derivatives not designated in hedge relationships	$	—	$	—	$	—	$	1,792	$	1,792

⁽¹⁾Included in the assessment of hedge effectiveness as of December 31, 2017, but excluded from the amounts in the table, were gains of $0.1 million for the year ended December 31, 2017, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amount recognized as hedge ineffectiveness for the year ended December 31, 2017 were gains of $0.6 million.

The following table shows the carrying amount and associated cumulative basis adjustment related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships as of December 31, 2019 and 2018:

Table 6.3


	Hedged Items in Fair Value Relationship
	Carrying Amount of Hedged Assets/(Liabilities)						Cumulative Amount of Fair Value Hedging Adjustments included in the Carrying Amount of the Hedged Assets/(Liabilities)
	December 31, 2019		December 31, 2018		December 31, 2019		December 31, 2018
	(in thousands)
Farmer Mac Guaranteed Securities, Available-for-Sale, at fair value	$	4,092,611	$	2,882,919	$	180,215	$	(906)
Loans held for investment, at amortized cost	1,050,335		194,617		37,907		(5,287)

Notes Payable, due after one year⁽¹⁾	(2,761,052)		(2,021,356)		(7,433)		8,785

⁽¹⁾Carrying amount represents amortized cost.

The following table shows Farmer Mac's credit exposure to interest rate swap counterparties as of December 31, 2019 and 2018:

Table 6.4


	December 31, 2019
	Gross Amount Recognized⁽¹⁾		Counterparty Netting		Net Amount Presented in the Consolidated Balance Sheet
	(in thousands)
Assets:
Derivatives
Interest rate swap	$	56,139	$	53,771	$	2,368
Liabilities:
Derivatives
Interest rate swap	$	305,584	$	291,326	$	14,258

⁽¹⁾Gross amount excludes netting arrangements and any adjustment for nonperformance risk, but includes accrued interest.


	December 31, 2018
	Gross Amount Recognized⁽¹⁾		Counterparty Netting		Net Amount Presented in the Consolidated Balance Sheet
	(in thousands)
Assets:
Derivatives
Interest rate swaps	$	51,267	$	48,124	$	3,143
Liabilities:
Derivatives
Interest rate swaps	$	78,437	$	64,568	$	13,869

⁽¹⁾Gross amount excludes netting arrangements and any adjustment for nonperformance risk, but includes accrued interest.

As of December 31, 2019, Farmer Mac held $2.7 million of cash and no investment securities as collateral for its derivatives in net asset positions, compared to $0.7 million of cash and $1.1 million of investment securities as collateral for its derivatives in net asset positions as of December 31, 2018.

Farmer Mac posted $0.5 million cash and $131.7 million of investment securities as of December 31, 2019 and posted no cash and $47.0 million investment securities as of December 31, 2018. Farmer Mac records posted cash as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of prepaid expenses and other assets. Any investment securities posted as collateral are included in the investment securities balances on the consolidated balance sheets. If Farmer Mac had breached certain provisions of the derivative contracts as of December 31, 2019 and 2018, it could have been required to settle its obligations under the agreements, but would not have been required to post additional collateral. As of December 31, 2019 and 2018, there were no financial derivatives in a net payable position where Farmer Mac was required to pledge collateral which the counterparty had the right to sell or repledge.

Of Farmer Mac's $14.0 billion notional amount of interest rate swaps outstanding as of December 31, 2019, $11.0 billion were cleared through the swap clearinghouse, the Chicago Mercantile Exchange ("CME"). Of Farmer Mac's $9.9 billion notional amount of interest rate swaps outstanding as of December 31, 2018, $8.5 billion were cleared through the swap clearinghouse. During 2019, the Company increased its use of non-cleared basis swaps as it began to prepare for the transition away from the use of LIBOR as a reference rate.