Financial Derivatives

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Derivatives

FINANCIAL DERIVATIVES

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 or SOFR). 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. The table below includes accrued interest on cleared swaps, but excludes $8.2 million and $6.1 million of accrued interest receivable and $4.5 million and $3.6 million of accrued interest payable on uncleared swaps as of March 31, 2023 and December 31, 2022, respectively. The aforementioned accrued interest on uncleared swaps is included within Accrued Interest Receivable and Accrued Interest Payable on the consolidated balance sheets.

Table 4.1

	As of March 31, 2023
			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	$	10,227,735	$	9,431	$	(48)	4.86%	2.28%		1.57
Pay fixed non-callable	8,344,447		48		(31,690)		2.25%	4.84%		10.65
Receive fixed callable	3,065,577		1,380		(142,980)		4.75%	2.28%		2.85
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable	575,000		22,436		(1,078)		1.93%	5.23%		4.91
No hedge designation:
Interest rate swaps:
Pay fixed non-callable	182,072		578		(460)		3.00%	4.82%		4.39
Receive fixed non-callable	763,753		298		(10)		4.87%	3.40%		0.69
Basis swaps	1,845,384		114		(497)		4.82%	4.89%		2.24
Treasury futures	16,700		614		—				111.25
Netting adjustments(1)			(9,800)		9,800
Total financial derivatives	$	25,020,668	$	25,099	$	(166,963)

(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, 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	$	10,033,750	$	19	$	(4,686)	4.31%	2.03%		1.64
Pay fixed non-callable	8,149,871		13,689		(366)		2.23%	4.33%		10.76
Receive fixed callable	2,764,577		461		(174,757)		4.21%	1.98%		3.18
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable	588,000		27,275		—		1.93%	4.72%		5.05
No hedge designation:
Interest rate swaps:
Pay fixed non-callable	187,479		1,065		(1)		3.05%	4.09%		4.52
Receive fixed non-callable	287,750		—		(130)		4.31%	1.16%		1.76
Basis swaps	1,860,384		112		(456)		4.40%	4.42%		2.46
Treasury futures	6,800		—		(142)				114.38
Netting adjustments(1)			(5,212)		5,212
Total financial derivatives	$	23,878,611	$	37,409	$	(175,326)

(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 March 31, 2023, Farmer Mac expects to reclassify $13.7 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, 2023. During the three months ended March 31, 2023 and 2022, 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, 2023 and 2022:

Table 4.2

	For the Three Months Ended March 31, 2023
	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	$	59,703	$	136,537	$	119,032	$	(236,214)	$	399	$	79,457
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives	6,549		28,909		13,180		(77,467)		—		(28,829)
Recognized on hedged items	6,961		41,971		15,208		(70,975)		—		(6,835)
Premium/discount amortization recognized on hedged items	268		—		—		(691)		—		(423)
Income/(expense) related to interest settlements on fair value hedging relationships	$	13,778	$	70,880	$	28,388	$	(149,133)	$	—	$	(36,087)
Gains/(losses) on fair value hedging relationships:
Recognized on derivatives	$	(27,153)	$	(93,792)	$	(56,681)	$	122,540	$	—	$	(55,086)
Recognized on hedged items	27,428		93,295		56,957		(122,699)		—		54,981
Gains/(losses) on fair value hedging relationships	$	275	$	(497)	$	276	$	(159)	$	—	$	(105)
Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives	$	—	$	—	$	—	$	4,391	$	—	$	4,391
Recognized on hedged items	—		—		—		(7,190)		—		(7,190)
Discount amortization recognized on hedged items	—		—		—		(14)		—		(14)
Expense recognized on cash flow hedges	$	—	$	—	$	—	$	(2,813)	$	—	$	(2,813)
Gains on financial derivatives not designated in hedging relationships:
Gains on interest rate swaps	$	—	$	—	$	—	$	—	$	33	$	33
Interest expense on interest rate swaps	—		—		—		—		(1,625)		(1,625)
Treasury futures	—		—		—		—		1,991		1,991
Gains on financial derivatives not designated in hedge relationships	$	—	$	—	$	—	$	—	$	399	$	399

	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	$	42,920	$	67,247	$	(50,345)	$	16,988	$	82,526
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
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	$	213,851	$	131,932	$	(237,014)	$	—	$	142,194
Recognized on hedged items	(32,726)		(210,648)		(129,607)		236,814		—		(136,167)
Gains/(losses) on fair value hedging relationships	$	699	$	3,203	$	2,325	$	(200)	$	—	$	6,027
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 hedge relationships:
Gains on interest rate swaps	$	—	$	—	$	—	$	—	$	1,617	$	1,617
Interest expense on interest rate swaps	—		—		—		—		(927)		(927)
Treasury futures	—		—		—		—		16,298		16,298
Gains on financial derivatives not designated in hedge relationships	$	—	$	—	$	—	$	—	$	16,988	$	16,988

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, 2023 and December 31, 2022:

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, 2023		December 31, 2022		March 31, 2023		December 31, 2022
	(in thousands)
Investment securities, Available-for-Sale, at fair value	$	1,007,588	$	876,063	$	(79,678)	$	(107,107)
Farmer Mac Guaranteed Securities, Available-for-Sale, at fair value	4,885,795		4,814,784		(253,578)		(346,873)
Loans held for investment, at amortized cost	1,737,378		1,623,301		(270,321)		(327,278)
Notes Payable(1)	(12,753,526)		(12,151,382)		408,387		531,086

(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 March 31, 2023 and December 31, 2022:

Table 4.4

	March 31, 2023
							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	$	24,077	$	—	$	24,077	$	(23,463)	$	—	$	—	$	614
Cleared derivatives	9,800		(9,800)		—		—		—		—		—
Total	$	33,877	$	(9,800)	$	24,077	$	(23,463)	$	—	$	—	$	614
Liabilities:
Uncleared derivatives	$	(123,198)	$	—	$	(123,198)	$	23,463	$	—	$	101,434	$	1,699
Cleared derivatives	(33,291)		9,800		(23,491)		—		205,386		—		181,895
Total	$	(156,489)	$	9,800	$	(146,689)	$	23,463	$	205,386	$	101,434	$	183,594

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

(2)Cash collateral excludes $19.1 million of collateral posted related to counterparties not subject to master netting agreements.

	December 31, 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	$	27,132	$	—	$	27,132	$	(27,132)	$	—	$	—	$	—
Cleared derivatives	14,450		(5,212)		9,238		—		203,993		—		213,231
Total	$	41,582	$	(5,212)	$	36,370	$	(27,132)	$	203,993	$	—	$	213,231
Liabilities:
Uncleared derivatives	$	(149,864)	$	—	$	(149,864)	$	27,132	$	—	$	121,065	$	(1,667)
Cleared derivatives	(5,212)		5,212		—		—		—		—		—
Total	$	(155,076)	$	5,212	$	(149,864)	$	27,132	$	—	$	121,065	$	(1,667)

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

(2)Cash collateral excludes $23.7 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 March 31, 2023 or December 31, 2022, 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, 2023 and December 31, 2022, 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 $25.0 billion notional amount of interest rate swaps outstanding as of March 31, 2023, $20.3 billion were cleared through the swap clearinghouse, the Chicago Mercantile Exchange ("CME"). Of Farmer Mac's $23.9 billion notional amount of interest rate swaps outstanding as of December 31, 2022, $19.5 billion were cleared through the CME. During 2023 and throughout 2022, 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.