Financial Derivatives

9 Months Ended

Sep. 30, 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. The table below includes accrued interest on cleared swaps, but excludes $4.3 million and $3.0 million of accrued interest receivable and $1.5 million and $1.9 million of accrued interest payable on uncleared swaps as of September 30, 2022 and December 31, 2021, respectively. The aforementioned accrued interest on uncleared swaps is included within Accrued Interest Receivable and Accrued Interest Payable on the Consolidated Balance Sheet.

Table 4.1


	As of September 30, 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:
Receive fixed non-callable	$	8,984,779	$	125	$	(10,282)	2.87%	1.56%		1.79
Pay fixed non-callable	7,866,679		29,089		(429)		2.07%	2.85%		11.18
Receive fixed callable	2,491,077		—		(184,088)		2.76%	1.58%		3.34
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable	607,000		29,525		(4)		1.94%	3.39%		5.23
No hedge designation:
Interest rate swaps:
Pay fixed non-callable	197,032		1,611		(44)		3.10%	2.61%		4.62
Receive fixed non-callable	404,350		—		(345)		2.88%	0.46%		1.39

Basis swaps	1,818,911		310		(572)		3.02%	3.15%		2.63
Treasury futures	32,700		536		(18)				113.64
Netting adjustments(1)			(11,228)		11,228
Total financial derivatives	$	22,402,528	$	49,968	$	(184,554)

(1)Amounts represent the application of the netting requirements that allow Farmer Mac to settle positive and negative positions, including accrued interest, held or placed with the same clearing agent.


	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	$	205	$	(9,525)	2.06%	0.13%		11.64
Receive fixed non-callable	5,884,529		974		(1,475)		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		5,426		(3,095)		1.93%	0.49%		5.72
No hedge designation:
Interest rate swaps:
Pay fixed non-callable	229,062		52		(4,807)		3.22%	0.16%		4.95
Receive fixed non-callable	1,377,250		115		(132)		0.13%	0.43%		0.97

Basis swaps	1,608,911		507		(296)		0.17%	0.20%		3.31
Treasury futures	67,600		73		—				130.58
Credit valuation adjustment			—		14
Netting adjustments(1)			(1,374)		1,374
Total financial derivatives	$	17,547,367	$	6,081	$	(35,554)

As of September 30, 2022, Farmer Mac expects to reclassify $12.9 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 September 30, 2022. During the three and nine months ended September 30, 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 and nine months ended September 30, 2022 and 2021:

Table 4.2


	For the Three Months Ended September 30, 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	$	21,581	$	74,695	$	97,514	$	(125,937)	$	772	$	68,625
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives	957		(350)		1,837		(22,679)		—		(20,235)
Recognized on hedged items	4,617		35,763		14,857		(35,263)		—		19,974
Premium/discount amortization recognized on hedged items	(59)		—		—		(549)		—		(608)
Income/(expense) related to interest settlements on fair value hedging relationships	$	5,515	$	35,413	$	16,694	$	(58,491)	$	—	$	(869)

Gains/(losses) on fair value hedging relationships:
Recognized on derivatives	$	49,373	$	201,864	$	105,683	$	(197,884)	$	—	$	159,036
Recognized on hedged items	(52,308)		(204,765)		(100,490)		197,902		—		(159,661)
Gains/(losses) on fair value hedging relationships	$	(2,935)	$	(2,901)	$	5,193	$	18	$	—	$	(625)

Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives	$	—	$	—	$	—	$	1,072	$	—	$	1,072
Recognized on hedged items	—		—		—		(4,046)		—		(4,046)
Discount amortization recognized on hedged items	—		—		—		(15)		—		(15)
Expense recognized on cash flow hedges	$	—	$	—	$	—	$	(2,989)	$	—	$	(2,989)

Gains on financial derivatives not designated in hedging relationships:
Gains on interest rate swaps	$	—	$	—	$	—	$	—	$	5,054	$	5,054
Interest expense on interest rate swaps	—		—		—		—		(2,613)		(2,613)

Treasury futures	—		—		—		—		(1,669)		(1,669)
Gains on financial derivatives not designated in hedge relationships	$	—	$	—	$	—	$	—	$	772	$	772


	For the Three Months Ended September 30, 2021
	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		Losses on financial derivatives
	(in thousands)
Total amounts presented in the consolidated statement of operations	$	4,121	$	42,339	$	61,923	$	(49,467)	$	(888)	$	58,028
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives	(141)		(20,925)		(6,911)		10,886		—		(17,091)
Recognized on hedged items	274		28,937		11,817		(12,940)		—		28,088
Discount amortization recognized on hedged items	—		—		—		(287)		—		(287)
Income/(expense) related to interest settlements on fair value hedging relationships	$	133	$	8,012	$	4,906	$	(2,341)	$	—	$	10,710

Gains/(losses) on fair value hedging relationships:
Recognized on derivatives	$	1,827	$	33,972	$	19,652	$	(9,727)	$	—	$	45,724
Recognized on hedged items	(1,737)		(31,523)		(19,184)		8,712		—		(43,732)
Gains/(losses) on fair value hedging relationships	$	90	$	2,449	$	468	$	(1,015)	$	—	$	1,992

Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives	$	—	$	—	$	—	$	(1,932)	$	—	$	(1,932)
Recognized on hedged items	—		—		—		(685)		—		(685)
Discount amortization recognized on hedged items	—		—		—		(11)		—		(11)
Expense recognized on cash flow hedges	$	—	$	—	$	—	$	(2,628)	$	—	$	(2,628)

Losses on financial derivatives not designated in hedging relationships:
Losses on interest rate swaps	$	—	$	—	$	—	$	—	$	(634)	$	(634)
Interest expense on interest rate swaps	—		—		—		—		168		168

Treasury futures	—		—		—		—		(422)		(422)
Losses on financial derivatives not designated in hedge relationships	$	—	$	—	$	—	$	—	$	(888)	$	(888)


	For the Nine Months Ended September 30, 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	$	38,497	$	169,231	$	241,393	$	(251,816)	$	21,551	$	218,856
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives	(1,536)		(37,687)		(9,568)		(3,831)		—		(52,622)
Recognized on hedged items	10,433		102,123		41,146		(76,862)		—		76,840
Premium/discount amortization recognized on hedged items	(816)		—		—		(1,478)		—		(2,294)
Income/(expense) related to interest settlements on fair value hedging relationships	$	8,081	$	64,436	$	31,578	$	(82,171)	$	—	$	21,924

Gains/(losses) on fair value hedging relationships:
Recognized on derivatives	$	106,935	$	563,897	$	347,034	$	(523,432)	$	—	$	494,434
Recognized on hedged items	(108,002)		(564,679)		(337,443)		521,643		—		(488,481)
Gains/(losses) on fair value hedging relationships	$	(1,067)	$	(782)	$	9,591	$	(1,789)	$	—	$	5,953

Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives	$	—	$	—	$	—	$	(2,094)	$	—	$	(2,094)
Recognized on hedged items	—		—		—		(6,654)		—		(6,654)
Discount amortization recognized on hedged items	—		—		—		(43)		—		(43)
Expense recognized on cash flow hedges	$	—	$	—	$	—	$	(8,791)	$	—	$	(8,791)

Gains on financial derivatives not designated in hedging relationships:
Gains on interest rate swaps	$	—	$	—	$	—	$	—	$	10,954	$	10,954
Interest expense on interest rate swaps	—		—		—		—		(5,496)		(5,496)

Treasury futures	—		—		—		—		16,093		16,093
Gains on financial derivatives not designated in hedge relationships	$	—	$	—	$	—	$	—	$	21,551	$	21,551


	For the Nine Months Ended September 30, 2021
	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		Losses on financial derivatives
			(in thousands)
Total amounts presented in the consolidated statement of operations:	$	14,107	$	127,976	$	181,631	$	(155,599)	$	2,581	$	170,696
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives	(177)		(63,966)		(20,185)		30,178		—		(54,150)
Recognized on hedged items	341		90,278		34,940		(36,889)		—		88,670
Discount amortization recognized on hedged items	—		—		—		(765)		—		(765)
Income/(expense) related to interest settlements on fair value hedging relationships	$	164	$	26,312	$	14,755	$	(7,476)	$	—	$	33,755

Gains/(losses) on fair value hedging relationships:
Recognized on derivatives	$	1,651	$	154,188	$	100,276	$	(41,838)	$	—	$	214,277
Recognized on hedged items	(1,549)		(150,445)		(99,955)		39,104		—		(212,845)
Gains/(losses) on fair value hedging relationships	$	102	$	3,743	$	321	$	(2,734)	$	—	$	1,432

Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives	$	—	$	—	$	—	$	(5,454)	$	—	$	(5,454)
Recognized on hedged items	—		—		—		(1,983)		—		(1,983)
Discount amortization recognized on hedged items	—		—		—		(25)		—		(25)
Expense recognized on cash flow hedges	$	—	$	—	$	—	$	(7,462)	$	—	$	(7,462)

(Losses)/gains on financial derivatives not designated in hedge relationships:
Losses on interest rate swaps	$	—	$	—	$	—	$	—	$	(662)	$	(662)
Interest expense on interest rate swaps	—		—		—		—		3,489		3,489

Treasury futures	—		—		—		—		(246)		(246)
Losses on financial derivatives not designated in hedge relationships	$	—	$	—	$	—	$	—	$	2,581	$	2,581

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 September 30, 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)
	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
	(in thousands)
Investment securities, Available-for-Sale, at fair value	$	773,071	$	458,653	$	(109,220)	$	(1,218)
Farmer Mac Guaranteed Securities, Available-for-Sale, at fair value	4,624,461		4,276,002		(358,160)		206,520
Loans held for investment, at amortized cost	1,610,641		1,668,142		(323,559)		13,832

Notes Payable(1)	(10,700,388)		(7,081,150)		566,406		39,992

(1)Carrying amount represents amortized cost.

The following tables present the fair value of financial assets and liabilities, based on the terms of Farmer Mac's master netting arrangements as of September 30, 2022 and December 31, 2021:

Table 4.4


	September 30, 2022
							Gross Amounts Not Offset in the Consolidated Balance Sheet
	Gross Amount Recognized		Gross Amounts offset in the Consolidated Balance Sheet		Net Amount Presented in the Consolidated Balance Sheet(1)		Netting Adjustments		Financial instruments pledged		Cash Collateral(2)		Net Amount
	(in thousands)
Assets:
Uncleared derivatives	$	29,347	$	—	$	29,347	$	(28,811)	$	—	$	—	$	536
Cleared derivatives	30,840		(11,228)		19,612		—		205,874		—		225,486
Total	$	60,187	$	(11,228)	$	48,959	$	(28,811)	$	205,874	$	—	$	226,022

Liabilities:
Uncleared derivatives	$	(158,031)	$	—	$	(158,031)	$	28,811	$	—	$	126,630	$	(2,590)
Cleared derivatives	(11,228)		11,228		—		—		—		—		—
Total	$	(169,259)	$	11,228	$	(158,031)	$	28,811	$	—	$	126,630	$	(2,590)

(1)Amounts presented may not agree to the consolidated balance sheet related to counterparties not subject to master netting agreements.

(2)Cash collateral excludes $24.0 million of collateral posted related to counterparties not subject to master netting agreements.


	December 31, 2021
							Gross Amounts Not Offset in the Consolidated Balance Sheet
	Gross Amount Recognized		Gross Amounts offset in the Consolidated Balance Sheet		Net Amount Presented in the Consolidated Balance Sheet(1)		Netting Adjustments		Financial instruments pledged		Cash Collateral(2)		Net Amount
	(in thousands)
Assets:
Uncleared derivatives	$	6,081	$	—	$	6,081	$	(6,008)	$	—	$	—	$	73
Cleared derivatives	1,374		(1,374)		—		—		—		—		—
Total	$	7,455	$	(1,374)	$	6,081	$	(6,008)	$	—	$	—	$	73

Liabilities:
Uncleared derivatives	$	(23,368)	$	—	$	(23,368)	$	6,008	$	—	$	14,339	$	(3,021)
Cleared derivatives	(10,993)		1,374		(9,619)		—		177,878		—		168,259
Total	$	(34,361)	$	1,374	$	(32,987)	$	6,008	$	177,878	$	14,339	$	165,238

(1)Amounts presented may not agree to the consolidated balance sheet related to counterparties not subject to master netting agreements.

(2)Cash collateral excludes $2.3 million of collateral posted related to counterparties not subject to master netting agreements.

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 September 30, 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 September 30, 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 $22.4 billion notional amount of interest rate swaps outstanding as of September 30, 2022, $18.5 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 the first nine months of 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.