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Fair Value Disclosures
3 Months Ended
Mar. 31, 2017
Fair Value Disclosures [Abstract]  
Fair Value Disclosure
FAIR VALUE DISCLOSURES

As of March 31, 2017, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $5.3 billion whose fair values were estimated by management in the absence of readily determinable fair values (i.e., level 3).  These financial instruments measured as level 3 represented 33 percent of total assets and 68 percent of financial instruments measured at fair value as of March 31, 2017. As of December 31, 2016, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $4.9 billion whose fair values were estimated by management in the absence of readily determinable fair values.  These financial instruments measured as level 3 represented 31 percent of total assets and 65 percent of financial instruments measured at fair value as of December 31, 2016.

Net transfers in and/or out of the different levels within the fair value hierarchy are based on the fair values of the assets and liabilities as of the beginning of the reporting period. During the first three months of 2017 there was one transfer within fair value hierarchy from Level 2 to Level 3 for the fair value measurement of a fixed-rate GSE guaranteed mortgage-backed security (interest only strip). The transfer to Level 3 was because unobservable inputs became significant to the overall estimate of the fair value of the security as of March 31, 2017. There were no transfers within the fair value hierarchy for fair value measurements of Farmer Mac's investment securities, Farmer Mac Guaranteed Securities, USDA Securities, and financial derivatives during the first three months of 2016. See Note 3 for information about the transfer of available-for-sale USDA and Farmer Mac Guaranteed USDA securities to held-to-maturity as of October 1, 2016.

The following tables present information about Farmer Mac's assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2017 and December 31, 2016, respectively, and indicate the fair value hierarchy of the valuation techniques used by Farmer Mac to determine such fair value:

Table 8.1
Assets and Liabilities Measured at Fair Value as of March 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Recurring:
 
Assets:
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$

 
$

 
$
18,124

 
$
18,124

Floating rate asset-backed securities

 
40,370

 

 
40,370

Floating rate corporate debt securities

 
10,060

 

 
10,060

Floating rate Government/GSE guaranteed mortgage-backed securities

 
1,344,690

 

 
1,344,690

Fixed rate GSE guaranteed mortgage-backed securities

 
558

 
4,819

 
5,377

Floating rate GSE subordinated debt

 
67,576

 

 
67,576

Fixed rate senior agency debt

 
187,065

 

 
187,065

Fixed rate U.S. Treasuries
805,982

 

 

 
805,982

Total Investment Securities
805,982

 
1,650,319

 
22,943

 
2,479,244

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 

Available-for-sale:
 

 
 

 
 

 
 

AgVantage

 

 
5,243,046

 
5,243,046

Total Farmer Mac Guaranteed Securities

 

 
5,243,046

 
5,243,046

USDA Securities:
 

 
 

 
 

 
 

Trading

 

 
18,602

 
18,602

Total USDA Securities

 

 
18,602

 
18,602

Financial derivatives
8

 
2,666

 

 
2,674

Total Assets at fair value
$
805,990

 
$
1,652,985

 
$
5,284,591

 
$
7,743,566

Liabilities:
 

 
 

 
 

 
 

Financial derivatives
$

 
$
32,054

 
$

 
$
32,054

Total Liabilities at fair value
$

 
$
32,054

 
$

 
$
32,054

Non-recurring:
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Loans held for investment
$

 
$

 
$
1,260

 
$
1,260

REO

 

 
4,978

 
4,978

Total Non-recurring Assets at fair value
$

 
$

 
$
6,238

 
$
6,238


Assets and Liabilities Measured at Fair Value as of December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Recurring:
 
Assets:
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$

 
$

 
$
17,730

 
$
17,730

Floating rate asset-backed securities

 
43,851

 

 
43,851

Floating rate corporate debt securities

 
10,041

 

 
10,041

Floating rate Government/GSE guaranteed mortgage-backed securities

 
1,361,029

 

 
1,361,029

Fixed rate GSE guaranteed mortgage-backed securities

 
7,625

 

 
7,625

Floating rate GSE subordinated debt

 
66,953

 

 
66,953

Fixed rate senior agency debt

 
187,133

 

 
187,133

Fixed rate U.S. Treasuries
821,489

 

 

 
821,489

Total Investment Securities
821,489

 
1,676,632

 
17,730

 
2,515,851

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 

Available-for-sale:
 

 
 

 
 

 
 

AgVantage

 

 
4,853,685

 
4,853,685

Total Farmer Mac Guaranteed Securities

 

 
4,853,685

 
4,853,685

USDA Securities:
 

 
 

 
 

 
 

Trading

 

 
20,388

 
20,388

Total USDA Securities

 

 
20,388

 
20,388

Financial derivatives

 
23,182

 

 
23,182

Total Assets at fair value
$
821,489

 
$
1,699,814

 
$
4,891,803

 
$
7,413,106

Liabilities:
 

 
 

 
 

 
 

Financial derivatives
$
155

 
$
57,997

 
$

 
$
58,152

Total Liabilities at fair value
$
155

 
$
57,997

 
$

 
$
58,152

Non-recurring:
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Loans held for investment
$

 
$

 
$
2,799

 
$
2,799

REO
$

 
$

 
$
349

 
$
349

Total Non-recurring Assets at fair value
$

 
$

 
$
3,148

 
$
3,148




The following tables present additional information about assets and liabilities measured at fair value on a recurring basis for which Farmer Mac has used significant unobservable inputs to determine fair value. Net transfers in and/or out of level 3 are based on the fair values of the assets and liabilities as of the beginning of the reporting period. There were no liabilities measured at fair value using significant unobservable inputs during the three months ended March 31, 2017 and 2016.

Table 8.2
 
Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended March 31, 2017
  
Beginning
Balance
 
Transfers in
 
Purchases
 
Sales
 
Settlements
 
Realized and
Unrealized Gains/(Losses) included
in Income
 
Unrealized
Gains/(Losses)
included in Other
Comprehe -nsive
Income
 
Ending
Balance
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
17,730

 

 
$

 
$

 
$

 
$

 
$
394

 
$
18,124

Fixed rate GSE guaranteed mortgage-backed securities

 
7,041

 

 

 
(112
)
 

 
(2,110
)
 
4,819

Total available-for-sale
17,730

 
7,041

 

 

 
(112
)
 

 
(1,716
)
 
22,943

Farmer Mac Guaranteed Securities:
 

 
 
 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale:
 

 
 
 
 

 
 

 
 
 
 

 
 
 
 

AgVantage
4,853,685

 

 
539,527

 

 
(161,907
)
 
(3,215
)
 
14,956

 
5,243,046

Total available-for-sale
4,853,685

 

 
539,527

 

 
(161,907
)
 
(3,215
)
 
14,956

 
5,243,046

USDA Securities:
 

 
 
 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale

 

 
32,589

 
(32,589
)
 

 

 

 

Trading(1)
20,388

 

 

 

 
(1,704
)
 
(82
)
 

 
18,602

Total USDA Securities
20,388

 

 
32,589

 
(32,589
)
 
(1,704
)
 
(82
)
 

 
18,602

Total Assets at fair value
$
4,891,803

 
$
7,041

 
$
572,116

 
$
(32,589
)

$
(163,723
)
 
$
(3,297
)

$
13,240


$
5,284,591


(1) 
Includes unrealized losses of $44,000 attributable to assets still held as of March 31, 2017 that are recorded in "(Losses)/gains on trading securities."


Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended March 31, 2016
  
Beginning
Balance
 
Purchases
 
Sales
 
Settlements
 
Realized and
Unrealized (Losses)/Gains included
in Income
 
Unrealized
Gains/(Losses)
included in Other
Comprehen-sive
Income
 
Ending
Balance
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
44,924

 
$

 
$
(26,806
)
 
$

 
$
6

 
$
(394
)
 
$
17,730

Total available-for-sale
44,924

 

 
(26,806
)
 

 
6

 
(394
)
 
17,730

Trading:
 

 
 

 
 

 
 
 
 

 
 
 
 

Floating rate asset-backed securities(1)
491

 

 

 
(206
)
 
98

 

 
383

Total trading
491

 

 

 
(206
)
 
98

 

 
383

Total Investment Securities
45,415

 

 
(26,806
)
 
(206
)
 
104

 
(394
)
 
18,113

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale:
 

 
 

 
 

 
 
 
 

 
 
 
 

AgVantage
4,121,244

 
915,531

 

 
(512,530
)
 
24,298

 
(13,733
)
 
4,534,810

Farmer Mac Guaranteed USDA Securities
31,361

 

 

 
(498
)
 

 
(169
)
 
30,694

Total Farmer Mac Guaranteed Securities
4,152,605

 
915,531

 

 
(513,028
)
 
24,298

 
(13,902
)
 
4,565,504

USDA Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale
1,888,344

 
98,974

 
(3,648
)
 
(84,193
)
 

 
8,537

 
1,908,014

Trading(2)
28,975

 

 

 
(2,365
)
 
259

 

 
26,869

Total USDA Securities
1,917,319

 
98,974

 
(3,648
)
 
(86,558
)
 
259

 
8,537

 
1,934,883

Total Assets at fair value
$
6,115,339

 
$
1,014,505

 
$
(30,454
)
 
$
(599,792
)
 
$
24,661

 
$
(5,759
)
 
$
6,518,500

(1) 
Unrealized gains are attributable to assets still held as of March 31, 2016 and are recorded in "(Losses)/gains on trading securities."
(2) 
Includes unrealized gains of $0.2 million attributable to assets still held as of March 31, 2016 that are recorded in "(Losses)/gains on trading securities."


The following tables present additional information about the significant unobservable inputs, such as discount rates and constant prepayment rates ("CPR"), used in the fair value measurements categorized in level 3 of the fair value hierarchy as of March 31, 2017 and December 31, 2016.

Table 8.3
 
 
As of March 31, 2017
Financial Instruments
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted-Average)
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
 
$
18,124

 
Indicative bids
 
Range of broker quotes
 
92.0% - 92.0% (92.0%)
Fixed rate GSE guaranteed mortgage-backed securities
 
$
4,819

 
Discounted cash flow
 
Discount rate
 
3.4%
 
 
 
 
 
 
CPR
 
0 %
Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
AgVantage
 
$
5,243,046

 
Discounted cash flow
 
Discount rate
 
1.7% - 3.3% (2.0%)
 
 
 
 
 
 
 
 
 
USDA Securities
 
$
18,602

 
Discounted cash flow
 
Discount rate
 
3.7% - 5.3% (5.0%)
 
 
 
 
 
 
CPR
 
9% - 19% (17%)

 
 
As of December 31, 2016
Financial Instruments
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted-Average)
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
 
$
17,730

 
Indicative bids
 
Range of broker quotes
 
90.0% - 90.0% (90.0%)
Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
AgVantage
 
$
4,853,685

 
Discounted cash flow
 
Discount rate
 
1.5% - 3.3% (1.9%)
 
 
 
 
 
 
 
 
 
USDA Securities
 
$
20,388

 
Discounted cash flow
 
Discount rate
 
4.0% - 5.3% (5.0%)
 
 
 
 
 
 
CPR
 
13% - 18% (17%)

The significant unobservable inputs used in the fair value measurements of Farmer Mac Guaranteed Securities and USDA Securities are prepayment rates and discount rates commensurate with the risks involved. Typically, significant increases (decreases) in any of these inputs in isolation may result in materially lower (higher) fair value measurements. Generally, in a rising interest rate environment, Farmer Mac would expect average discount rates to increase and would likely expect a corresponding decrease in forecasted prepayment rates. Conversely, in a declining interest rate environment, Farmer Mac would expect average discount rates to decrease and would likely expect a corresponding increase in forecasted prepayment rates. Prepayment rates are not presented in the table above for AgVantage securities because they generally do not pay down principal based on amortization schedules but instead typically have fixed maturity dates when the secured general obligations are due.

Disclosures on Fair Value of Financial Instruments

The following table sets forth the estimated fair values and carrying values for financial assets, liabilities, and guarantees and commitments as of March 31, 2017 and December 31, 2016:

Table 8.4

 
As of March 31, 2017
 
As of December 31, 2016
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
313,641

 
$
313,641

 
$
265,229

 
$
265,229

Investment securities
2,479,244

 
2,479,244

 
2,515,851

 
2,515,851

Farmer Mac Guaranteed Securities
6,321,194

 
6,317,732

 
6,006,694

 
6,002,916

USDA Securities
1,978,216

 
2,044,424

 
1,934,023

 
2,029,613

Loans
4,663,885

 
4,635,230

 
4,481,019

 
4,507,435

Financial derivatives
2,674

 
2,674

 
23,182

 
23,182

Guarantee and commitment fees receivable:
 
 
 
 
 
 
 
LTSPCs
34,137

 
32,926

 
34,720

 
32,656

Farmer Mac Guaranteed Securities
5,791

 
5,822

 
6,197

 
6,215

Financial liabilities:
 
 
 
 
 
 
 
Notes payable:
 
 
 
 
 
 
 
Due within one year
7,613,484

 
7,616,431

 
8,439,515

 
8,440,123

Due after one year
6,345,661

 
6,300,750

 
5,260,497

 
5,222,977

Debt securities of consolidated trusts held by third parties
1,199,226

 
1,212,792

 
1,107,513

 
1,142,704

Financial derivatives
32,054

 
32,054

 
58,152

 
58,152

Guarantee and commitment obligations:
 
 
 
 
 
 
 
LTSPCs
33,300

 
32,089

 
33,860

 
31,796

Farmer Mac Guaranteed Securities
4,682

 
4,713

 
5,467

 
5,486



The carrying value of cash and cash equivalents is a reasonable estimate of their approximate fair value and is classified as level 1 within the fair value hierarchy. Investment securities primarily are valued based on unadjusted quoted prices in active markets and are classified as level 2 within the fair value hierarchy. Farmer Mac internally models the fair value of its loan portfolio, including loans held for investment and loans held for investment in consolidated trusts, Farmer Mac Guaranteed Securities, and USDA Securities by discounting the projected cash flows of these instruments at projected interest rates. The fair values are based on the present value of expected cash flows using management's best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discount rates commensurate with the risks involved. These fair value measurements do not take into consideration the fair value of the underlying property and are classified as level 3 within the fair value hierarchy. Financial derivatives primarily are valued using unadjusted counterparty valuations and are classified as level 2 within the fair value hierarchy. The fair value of the guarantee fees receivable/obligation and debt securities of consolidated trusts are estimated based on the present value of expected future cash flows of the underlying mortgage assets using management's best estimate of certain key assumptions, which include prepayments speeds, forward yield curves, and discount rates commensurate with the risks involved and are classified as level 3 within the fair value hierarchy. Notes payable are valued by discounting the expected cash flows of these instruments using a yield curve derived from market prices observed for similar agency securities and are also classified as level 3 within the fair value hierarchy. Because the cash flows of Farmer Mac's financial instruments may be interest rate path dependent, estimated fair values and projected discount rates for level 3 financial instruments are derived using a Monte Carlo simulation model. Different market assumptions and estimation methodologies could significantly affect estimated fair value amounts.