Financial Derivatives

3 Months Ended

Mar. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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, 2021, as filed with the SEC on February 28, 2022.

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, 2022 and December 31, 2021:

Table 4.1


	As of March 31, 2022
			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	$	7,209,418	$	8,657	$	(1,589)	1.92%	0.37%		11.00
Receive fixed non-callable	6,565,729		279		(11,149)		0.42%	0.91%		2.16
Receive fixed callable	1,883,577		—		(90,594)		0.25%	1.04%		3.90
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable	617,000		15,900		(70)		1.92%	0.74%		5.64
No hedge designation:
Interest rate swaps:
Pay fixed non-callable	227,918		265		(1,638)		3.24%	0.37%		4.72
Receive fixed non-callable	1,038,750		—		—		0.35%	0.40%		0.87

Basis swaps	1,393,911		191		(435)		0.45%	0.48%		3.56
Treasury futures	73,300		1,039		(128)				124.12
Credit valuation adjustment			(2)		29
Total financial derivatives	$	19,009,603	$	26,329	$	(105,574)
Collateral (held)/pledged			—		262,394
Net amount			$	26,329	$	156,820


	As of December 31, 2021
			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	$	6,238,438	$	11,554	$	(583)	2.06%	0.13%		11.64
Receive fixed non-callable	5,884,529		15		(8,383)		0.17%	0.88%		2.27
Receive fixed callable	1,571,577		103		(17,612)		0.01%	0.80%		4.17
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable	570,000		6,905		(2,763)		1.93%	0.49%		5.72
No hedge designation:
Interest rate swaps:
Pay fixed non-callable	229,062		—		(4,641)		3.22%	0.16%		4.95
Receive fixed non-callable	1,377,250		—		—		0.13%	0.43%		0.97

Basis swaps	1,608,911		489		(280)		0.17%	0.20%		3.31
Treasury futures	67,600		73		—				130.58
Credit valuation adjustment			—		14
Total financial derivatives	$	17,547,367	$	19,139	$	(34,248)
Collateral (held)/pledged			—		194,519
Net amount			$	19,139	$	160,271

As of March 31, 2022, Farmer Mac expects to reclassify $1.2 million after-tax from accumulated other comprehensive income to earnings over the next twelve months related to cash flow hedges. 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, 2022. During the three months ended March 31, 2022 and 2021, 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 tables summarize the net income/(expense) recognized in the consolidated statements of operations related to derivatives for the three months ended March 31, 2022 and 2021:

Table 4.2


	For the Three Months Ended March 31, 2022
	Net Income/(Expense) Recognized in Consolidated Statement of Operations on Derivatives
	Net Interest Income								Non-Interest Income		Total
	Interest Income Investments and Cash Equivalents		Interest Income Farmer Mac Guaranteed Securities and USDA Securities		Interest Income Loans		Total Interest Expense		Gains on financial derivatives
	(in thousands)
Total amounts presented in the consolidated statement of operations	$	5,716	$	39,257	$	67,247	$	(50,345)	$	16,074	$	77,949
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives	(1,484)		(21,644)		(6,946)		14,200		—		(15,874)
Recognized on hedged items	2,597		31,929		12,619		(18,157)		—		28,988
Premium/discount amortization recognized on hedged items	(414)		—		—		(440)		—		(854)
Income/(expense) related to interest settlements on fair value hedging relationships	$	699	$	10,285	$	5,673	$	(4,397)	$	—	$	12,260

Gains/(losses) on fair value hedging relationships:
Recognized on derivatives	$	33,425	$	210,188	$	131,932	$	(237,014)	$	—	$	138,531
Recognized on hedged items	(32,726)		(210,648)		(129,607)		236,814		—		(136,167)
Gains/(losses) on fair value hedging relationships	$	699	$	(460)	$	2,325	$	(200)	$	—	$	2,364

Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives	$	—	$	—	$	—	$	(2,011)	$	—	$	(2,011)
Recognized on hedged items	—		—		—		(787)		—		(787)
Discount amortization recognized on hedged items	—		—		—		(13)		—		(13)
Expense recognized on cash flow hedges	$	—	$	—	$	—	$	(2,811)	$	—	$	(2,811)

Gains on financial derivatives not designated in hedging relationships:
Gains on interest rate swaps	$	—	$	—	$	—	$	—	$	703	$	703
Interest expense on interest rate swaps	—		—		—		—		(927)		(927)

Treasury futures	—		—		—		—		16,298		16,298
Gains on financial derivatives not designated in hedge relationships	$	—	$	—	$	—	$	—	$	16,074	$	16,074


	For the Three Months Ended March 31, 2021
	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 on financial derivatives
	(in thousands)
Total amounts presented in the consolidated statement of operations:	$	42,404	$	59,494	$	(54,176)	$	4,293	$	52,015
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives	(21,437)		(6,572)		9,481		—		(18,528)
Recognized on hedged items	30,775		11,487		(11,808)		—		30,454
Discount amortization recognized on hedged items	—		—		(221)		—		(221)
Income/(expense) related to interest settlements on fair value hedging relationships	$	9,338	$	4,915	$	(2,548)	$	—	$	11,705

(Losses)/gains on fair value hedging relationships:
Recognized on derivatives	$	168,078	$	145,771	$	(29,455)	$	—	$	284,394
Recognized on hedged items	(168,801)		(144,749)		29,501		—		(284,049)
(Losses)/gains on fair value hedging relationships	$	(723)	$	1,022	$	46	$	—	$	345

Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives	$	—	$	—	$	(1,746)	$	—	$	(1,746)
Recognized on hedged items	—		—		(655)		—		(655)
Discount amortization recognized on hedged items	—		—		(7)		—		(7)
Expense recognized on cash flow hedges	$	—	$	—	$	(2,408)	$	—	$	(2,408)

Gains on financial derivatives not designated in hedge relationships:
Gains on interest rate swaps	$	—	$	—	$	—	$	1,470	$	1,470
Interest expense on interest rate swaps	—		—		—		2,223		2,223

Treasury futures	—		—		—		600		600
Gains on financial derivatives not designated in hedge relationships	$	—	$	—	$	—	$	4,293	$	4,293

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, 2022 and December 31, 2021:

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, 2022		December 31, 2021		March 31, 2022		December 31, 2021
	(in thousands)
Investment securities, Available-for-Sale, at fair value	$	520,485	$	458,653	$	(33,944)	$	(1,218)
Farmer Mac Guaranteed Securities, Available-for-Sale, at fair value(1)	4,826,536		4,276,002		(4,129)		206,520
Loans held for investment, at amortized cost(2)	1,672,092		1,668,142		(115,775)		13,832

Notes Payable(3)	(8,024,125)		(7,083,535)		279,191		42,377

(1)Includes $1.2 million and $1.3 million of hedging adjustments on discontinued hedging relationships as of March 31, 2022 and December 31, 2021, respectively.

(2)Includes $1.2 million of hedging adjustments on a discontinued hedging relationship as of both March 31, 2022 and December 31, 2021.

(3)Carrying amount represents amortized cost.

The following table shows Farmer Mac's credit exposure to interest rate swap counterparties as of March 31, 2022 and December 31, 2021:

Table 4.4


	March 31, 2022
	Gross Amount Recognized(1)		Counterparty Netting		Net Amount Presented in the Consolidated Balance Sheet
	(in thousands)
Assets:
Derivatives
Interest rate swap	$	258,067	$	232,963	$	25,104
Liabilities:
Derivatives
Interest rate swap	$	399,497	$	381,928	$	17,569

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


	December 31, 2021
	Gross Amount Recognized(1)		Counterparty Netting		Net Amount Presented in the Consolidated Balance Sheet
	(in thousands)
Assets:
Derivatives
Interest rate swaps	$	91,130	$	91,130	$	—
Liabilities:
Derivatives
Interest rate swaps	$	404,063	$	386,249	$	17,814

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

As of both March 31, 2022 and December 31, 2021, Farmer Mac held no cash or investment securities as collateral for its derivatives in net asset positions.

Farmer Mac posted $78.5 million cash and $183.9 million of investment securities as of March 31, 2022 and posted $16.6 million cash and $177.9 million investment securities as of December 31, 2021. 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, 2022 or December 31, 2021, 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, 2022 and December 31, 2021, 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 $18.9 billion notional amount of interest rate swaps outstanding as of March 31, 2022, $16.0 billion were cleared through the swap clearinghouse, the Chicago Mercantile Exchange ("CME"). Of Farmer Mac's $17.5 billion notional amount of interest rate swaps outstanding as of December 31, 2021, $14.9 billion were cleared through the CME. During first quarter 2022 and throughout 2021, Farmer Mac continued the use of non-cleared basis swaps to prepare for the transition away from the use of LIBOR as a reference rate.