NOTE 3—INVESTMENT SECURITIES

We currently hold investments in equity and debt securities. We record purchases and sales of our investment securities on a trade-date basis. Investments are denominated in US dollars exclusively. The accounting and measurement framework for investment securities differs depending on the security type and the classification. See “Note 1—Summary of Significant Accounting Policies” for additional information on our investment securities

Equity Securities

The following table presents the fair value of our equity securities, all of which had readily determinable fair values, as of May 31, 2019 and 2018.



	May 31,
(Dollars in thousands)	2019		2018
Equity securities at fair value:
Farmer Mac—Series A, B and C non-cumulative preferred stock	$	82,445	$	82,352
Farmer Mac—class A common stock	5,088		6,980
Total equity securities at fair value	$	87,533	$	89,332

We recognized net unrealized losses on our investments in equity securities of $2 million for the year ended May 31, 2019. These unrealized amounts are reported as a component of non-interest income on our consolidated statements of operations.

We recorded unrealized losses on our investments in equity securities of $3 million in other comprehensive income during the year ended May 31, 2018. For additional information on our investments in equity securities, see “Note 1—Summary of Significant Accounting Policies” and “Note 11—Equity—Accumulated Other Comprehensive Income.”

On June 12, 2019, Farmer Mac redeemed its Series B non-cumulative preferred stock at a redemption price of $25.00 per share, plus any declared and unpaid dividends through and including the redemption date. The amortized cost of our investment in the Farmer Mac Series B non-cumulative preferred stock was $25 million as of May 31, 2019, which equals the per share redemption price.

Debt Securities

Pursuant to our investment policy guidelines, all fixed-income debt securities, at the time of purchase, must be rated at least investment grade and on stable outlook based on external credit ratings from at least two of the leading global credit rating agencies, when available, or the corresponding equivalent, when not available. Securities rated investment grade, that is those rated Baa3 or higher by Moody’s Investors Service (“Moody’s”) or BBB- or higher by S&P or BBB- or higher by Fitch Ratings Inc. (“Fitch”), are generally considered by the rating agencies to be of lower credit risk than non-investment grade securities.

Amortized Cost and Fair Value of Debt Securities

The following tables present the amortized cost and fair value of our debt securities and the corresponding gross unrealized gains and losses, by classification category and major security type, as of May 31, 2019 and 2018.



	May 31, 2019
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Debt securities held to maturity:
Certificates of deposit	$	1,000	$	—	$	—		$	1,000
Commercial paper	12,395		—		—			12,395
U.S. agency debt securities	3,207		108		—			3,315
Corporate debt securities	478,578		4,989		(912		)	482,655
Commercial MBS:
Agency	7,255		291		—			7,546
Non-agency	3,453		—		(7		)	3,446
Total commercial MBS	10,708		291		(7		)	10,992
U.S. state and municipality debt securities	9,608		352		—			9,960
Foreign government debt securities	1,254		42		—			1,296
Other ABS⁽¹⁾	48,694		290		(48		)	48,936
Total debt securities, held to maturity	$	565,444	$	6,072	$	(967	)	$	570,549



	May 31, 2018
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Debt securities held to maturity:
Certificates of deposit	$	5,148	$	—	$	—		$	5,148
Commercial paper	9,134		—		—			9,134
U.S. agency debt securities	2,000		16		—			2,016
Corporate debt securities	455,721		714		(4,595		)	451,840
Commercial MBS:
Agency	7,024		63		—			7,087
Non-agency	3,453		3		(3		)	3,453
Total commercial MBS	10,477		66		(3		)	10,540
U.S. state and municipality debt securities	2,147		24		—			2,171
Foreign government debt securities	1,241		9		—			1,250
Other ABS⁽¹⁾	34,651		11		(215		)	34,447
Total debt securities, held to maturity	$	520,519	$	840	$	(4,813	)	$	516,546

^{____________________________}

⁽¹⁾Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.

Debt Securities in Gross Unrealized Loss Position

An unrealized loss exists when the fair value of an individual security is less than its amortized cost basis. The following table presents the fair value and gross unrealized losses for debt securities in a gross loss position, aggregated by security type, and the length of time the securities have been in a continuous unrealized loss position as of May 31, 2019 and 2018. The securities are segregated between investments that have been in a continuous unrealized loss position for less than 12 months and 12 months or more based on the point in time that the fair value declined below the amortized cost basis.



	May 31, 2019
	Unrealized Loss Position Less than 12 Months					Unrealized Loss Position 12 Months or Longer					Total
(Dollars in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Debt securities held to maturity:
Commercial paper⁽¹⁾	$	2,688	$	—		$	—	$	—		$	2,688	$	—
Corporate debt securities	45,999		(198		)	164,086		(714		)	210,085		(912		)
Commercial MBS, non-agency	1,996		(4		)	1,448		(3		)	3,444		(7		)
Other ABS⁽²⁾	1,982		(4		)	13,840		(44		)	15,822		(48		)
Total debt securities held to maturity	$	52,665	$	(206	)	$	179,374	$	(761	)	$	232,039	$	(967	)



	May 31, 2018
	Unrealized Loss Position Less than 12 Months					Unrealized Loss Position 12 Months or Longer				Total
(Dollars in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Debt securities held to maturity:
Corporate debt securities	$	280,139	$	(4,595	)	$	—	$	—	$	280,139	$	(4,595	)
Commercial MBS, non-agency	1,451		(3		)	—		—		1,451		(3		)
Other ABS⁽²⁾	27,012		(215		)	—		—		27,012		(215		)
Total debt securities held to maturity	$	308,602	$	(4,813	)	$	—	$	—	$	308,602	$	(4,813	)

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⁽¹⁾Unrealized losses on the commercial paper investments are less than $1,000.

⁽²⁾Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.

Other-Than-Temporary Impairment

We conduct periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other than temporary. The number of individual securities in an unrealized loss position was 187 as of May 31, 2019. We have assessed each security with gross unrealized losses included in the above table for credit impairment. As part of that assessment, we concluded that the unrealized losses are driven by changes in market interest rates rather than by adverse changes in the credit quality of these securities. Based on our assessment, we expect to recover the entire amortized cost basis of these securities, as we do not intend to sell any of the securities and have concluded that it is more likely than not that we will not be required to sell prior to recovery of the amortized cost basis. Accordingly, we currently consider the impairment of these securities to be temporary.

Contractual Maturity and Yield

The following table presents, by major security type, the remaining contractual maturity based on amortized cost and fair value of our HTM investment securities as of May 31, 2019 and 2018. Because borrowers may have the right to call or prepay certain obligations, the expected maturities of our investments may differ from the scheduled contractual maturities presented below.



	May 31, 2019
(Dollars in thousands)	Due in 1 Year or Less			Due >1 Year through 5 Years			Due >5 Years through 10 Years			Due >10 Years			Total
Amortized cost:
Certificates of deposit	$	—		$	1,000		$	—		$	—		$	1,000
Commercial paper	12,395			—			—			—			12,395
U.S. agency debt securities	—			2,678			529			—			3,207
Corporate debt securities	51,923			414,788			11,867			—			478,578
Commercial MBS:
Agency	—			310			6,945			—			7,255
Non-agency	—			—			—			3,453			3,453
Total commercial MBS	—			310			6,945			3,453			10,708
U.S. state and municipality debt securities	—			9,608			—			—			9,608
Foreign government debt securities	—			1,254			—			—			1,254
Other ABS⁽¹⁾	510			45,730			2,454			—			48,694
Total	$	64,828		$	475,368		$	21,795		$	3,453		$	565,444

Fair value:
Certificates of deposit	$	—		$	1,000		$	—		$	—		$	1,000
Commercial paper	12,395			—			—			—			12,395
U.S. agency debt securities	—			2,769			546			—			3,315
Corporate debt securities	51,818			418,606			12,231			—			482,655
Commercial MBS:
Agency	—			317			7,229			—			7,546
Non-agency	—			—			—			3,446			3,446
Total Commercial MBS	—			317			7,229			3,446			10,992
U.S. State and Municipality Debt Securities	—			9,960			—			—			9,960
Foreign Government Debt Securities	—			1,296			—			—			1,296
Other ABS⁽¹⁾	509			45,916			2,511			—			48,936
Total	$	64,722		$	479,864		$	22,517		$	3,446		$	570,549

Weighted-average coupon⁽²⁾	2.08		%	3.10		%	3.07		%	3.26		%	2.98		%



	May 31, 2018
(Dollars in thousands)	Due in 1 Year or Less			Due > 1 Year through 5 Years			Due > 5 Years through 10 Years			Due >10 Years			Total
Amortized cost:
Certificates of deposit	$	5,148		$	—		$	—		$	—		$	5,148
Commercial paper	9,134			—			—			—			9,134
U.S. agency debt securities	—			2,000			—			—			2,000
Corporate debt securities	9,111			377,384			69,226			—			455,721
Commercial MBS:
Agency	—			—			7,024			—			7,024
Non-Agency	—			—			—			3,453			3,453
Total Commercial MBS	—			—			7,024			3,453			10,477
U.S. State and Municipality Debt Securities	—			—			2,147			—			2,147
Foreign Government Debt Securities	—			1,241			—			—			1,241
Other ABS⁽¹⁾	—			33,357			1,294			—			34,651
Total	$	23,393		$	413,982		$	79,691		$	3,453		$	520,519

Fair value:
Certificates of deposit	$	5,148		$	—		$	—		$	—		$	5,148
Commercial paper	9,134			—			—			—			9,134
U.S. agency debt securities	—			2,016			—			—			2,016
Corporate debt securities	9,056			373,284			69,500			—			451,840
Commercial MBS:
Agency	—			—			7,087			—			7,087
Non-Agency	—			—			—			3,453			3,453
Total Commercial MBS	—			—			7,087			3,453			10,540
U.S. State and Municipality Debt Securities	—			—			2,171			—			2,171
Foreign Government Debt Securities	—			1,250			—			—			1,250
Other ABS⁽¹⁾	—			33,157			1,290			—			34,447
Total	$	23,338		$	409,707		$	80,048		$	3,453		$	516,546

Weighted average coupon⁽²⁾	1.81		%	2.84		%	3.60		%	2.74		%	2.91		%

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⁽¹⁾Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.

⁽²⁾Calculated based on the weighted-average coupon rate, which excludes the impact of amortization of premium and accretion of discount.

The average contractual maturity and weighted-average coupon of our HTM investment securities was three years and 2.98%, respectively, as of May 31, 2019. The average credit rating of these securities, based on the equivalent lowest credit rating by Moody’s, S&P and Fitch was A2, A and A, respectively, as of May 31, 2019.

Realized Gains and Losses

We did not sell any of our investment securities during either of the years ended May 31, 2019 and May 31, 2018, and therefore have not recorded any realized gains or losses.