Financial Derivatives

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

FINANCIAL DERIVATIVES

FINANCIAL DERIVATIVESFarmer 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.  For more information about Farmer Mac's financial derivatives, see Note 6 in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on February 25, 2020.

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 March 31, 2020 and December 31, 2019:

Table 4.1

	As of March 31, 2020
			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	$	5,099,293	$	4,339	$	(6,583)	2.42%	1.54%		11.64
Receive fixed non-callable	2,201,500		1,303		(9,730)		1.66%	2.06%		2.22
Receive fixed callable	413,000		4,954		(26)		1.36%	1.95%		3.38
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable	458,000		1,434		(11,391)		2.31%	1.22%		5.36
No hedge designation:
Interest rate swaps:
Pay fixed non-callable	339,721		—		(22,683)		3.54%	1.69%		5.32
Receive fixed non-callable	3,111,639		—		—		1.17%	1.39%		1.01
Receive fixed callable	500,000		604		—		1.52%	1.75%		0.86
Basis swaps	2,850,000		58		(3,385)		1.49%	0.66%		0.91
Treasury futures	18,500				(114)				138.07
Credit valuation adjustment			—		117
Total financial derivatives	$	14,991,653	$	12,692	$	(53,795)
Collateral (held)/pledged			(2,525)		225,404
Net amount			$	10,167	$	171,609

	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 March 31, 2020, Farmer Mac expects to reclassify $5.2 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 March 31, 2020. During the three months ended March 31, 2020 and 2019, 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 three months ended March 31, 2020 and 2019:

Table 4.2

	For the Three Months Ended March 31, 2020
	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 on financial derivatives
	(in thousands)
Total amounts presented in the consolidated statement of operations	$	71,517	$	60,596	$	(108,542)	$	(9,298)	$	14,273
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives	(6,152)		(1,877)		1,634		—		(6,395)
Recognized on hedged items	31,826		8,677		(14,276)		—		26,227
Discount amortization recognized on hedged items	—		—		(180)		—		(180)
Income/(expense) related to interest settlements on fair value hedging relationships	$	25,674	$	6,800	$	(12,822)	$	—	$	19,652
(Losses)/gains on fair value hedging relationships:
Recognized on derivatives	$	(293,932)	$	(145,906)	$	58,934	$	—	$	(380,904)
Recognized on hedged items	290,379		145,409		(60,565)		—		375,223
(Losses)/gains on fair value hedging relationships	$	(3,553)	$	(497)	$	(1,631)	$	—	$	(5,681)
Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives	$	—	$	—	$	(439)	$	—	$	(439)
Recognized on hedged items	—		—		(2,123)		—		(2,123)
Discount amortization recognized on hedged items	—		—		(1)		—		(1)
Expense recognized on cash flow hedges	$	—	$	—	$	(2,563)	$	—	$	(2,563)
Losses on financial derivatives not designated in hedging relationships:
Losses on interest rate swaps	$	—	$	—	$	—	$	(6,550)	$	(6,550)
Interest expense on interest rate swaps	—		—		—		(862)		(862)
Treasury futures	—		—		—		(1,886)		(1,886)
Losses on financial derivatives not designated in hedge relationships	$	—	$	—	$	—	$	(9,298)	$	(9,298)

	For The Three Months Ended March 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		Losses on financial derivatives
	(in thousands)
Total amounts presented in the consolidated statement of operations:	$	85,411	$	51,397	$	(114,916)	$	(360)	$	21,532
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives	1,550		(22)		(3,218)		—		(1,690)
Recognized on hedged items	24,565		4,555		(9,922)		—		19,198
Discount amortization recognized on hedged items	—		—		(149)		—		(149)
Income/(expense) related to interest settlements on fair value hedging relationships	$	26,115	$	4,533	$	(13,289)	$	—	$	17,359
Gains/(losses) on fair value hedging relationships:
Recognized on derivatives	$	(58,987)	$	(20,082)	$	8,978	$	—	$	(70,091)
Recognized on hedged items	59,352		16,237		(8,197)		—		67,392
Gains/(losses) on fair value hedging relationships	$	365	$	(3,845)	$	781	$	—	$	(2,699)
Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives	$	—	$	—	$	481	$	—	$	481
Recognized on hedged items	—		—		(2,688)		—		(2,688)
Discount amortization recognized on hedged items	—		—		(1)		—		(1)
Expense recognized on cash flow hedges	$	—	$	—	$	(2,208)	$	—	$	(2,208)
Losses on financial derivatives not designated in hedge relationships:
Gains on interest rate swaps	$	—	$	—	$	—	$	2,168	$	2,168
Interest expense on interest rate swaps	—		—		—		(2,300)		(2,300)
Treasury futures	—		—		—		(228)		(228)
Losses on financial derivatives not designated in hedge relationships	$	—	$	—	$	—	$	(360)	$	(360)

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 March 31, 2020 and December 31, 2019:

Table 4.3

	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)
	March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019
	(in thousands)
Farmer Mac Guaranteed Securities, Available-for-Sale, at fair value	$	4,281,350	$	4,092,611	$	470,588	$	180,215
Loans held for investment, at amortized cost	1,330,359		1,050,335		183,315		37,907
Notes Payable(1)	(2,680,981)		(2,761,052)		(68,045)		(7,433)

⁽¹⁾Carrying amount represents amortized cost.

The following table shows Farmer Mac's credit exposure to interest rate swap counterparties as of March 31, 2020 and December 31, 2019:

Table 4.4

	March 31, 2020
	Gross Amount Recognized(1)		Counterparty Netting		Net Amount Presented in the Consolidated Balance Sheet
	(in thousands)
Assets:
Derivatives
Interest rate swap	$	118,349	$	116,517	$	1,832
Liabilities:
Derivatives
Interest rate swap	$	780,184	$	776,764	$	3,420

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

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

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

As of March 31, 2020, Farmer Mac held $2.5 million of cash and no investment securities as collateral for its derivatives in net asset positions, compared to $2.7 million of cash and no investment securities as collateral for its derivatives in net asset positions as of December 31, 2019.

Farmer Mac posted $19.3 million cash and $206.1 million of investment securities as of March 31, 2020 and posted $0.5 million cash and $131.7 million investment securities as of December 31, 2019.  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 March 31, 2020 and December 31, 2019, it could have been required to settle its obligations under the agreements, but would not have been required to post additional collateral. As of March 31, 2020 and December 31, 2019, 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 $15.0 billion notional amount of interest rate swaps outstanding as of March 31, 2020, $11.9 billion were cleared through the swap clearinghouse, the Chicago Mercantile Exchange ("CME"). 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 CME. During first quarter 2020 and throughout 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. For more information about interest rate swaps cleared through a clearinghouse, see Note 6 in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on February 25, 2020.