Fair Value Disclosures

6 Months Ended

Jun. 30, 2019

Fair Value Disclosures [Abstract]

FAIR VALUE DISCLOUSRE

FAIR VALUE DISCLOSURES

As of June 30, 2019, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $7.1 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 34% of total assets and 71% of financial instruments measured at fair value as of June 30, 2019. As of December 31, 2018, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $6.0 billion whose fair values were estimated by management in the absence of readily determinable fair values.  These financial instruments measured as level 3 represented 32% of total assets and 73% of financial instruments measured at fair value as of December 31, 2018.

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 half of both 2019 and 2018, 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.

The following tables present information about Farmer Mac's assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018, 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 June 30, 2019
	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	$	—	$	—	$	19,208	$	19,208
Floating rate asset-backed securities	—		25,802		—		25,802
Floating rate Government/GSE guaranteed mortgage-backed securities	—		1,603,370		—		1,603,370
Fixed rate GSE guaranteed mortgage-backed securities	—		358		—		358
Fixed rate U.S. Treasuries	1,273,766		—		—		1,273,766
Total Investment Securities	1,273,766		1,629,530		19,208		2,922,504
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	—		—		7,035,668		7,035,668
Total Farmer Mac Guaranteed Securities	—		—		7,035,668		7,035,668
USDA Securities:
Trading	—		—		9,201		9,201
Total USDA Securities	—		—		9,201		9,201
Financial derivatives	—		7,560		—		7,560
Total Assets at fair value	$	1,273,766	$	1,637,090	$	7,064,077	$	9,974,933
Liabilities:
Financial derivatives	$	188	$	27,241	$	—	$	27,429
Total Liabilities at fair value	$	188	$	27,241	$	—	$	27,429

Assets and Liabilities Measured at Fair Value as of December 31, 2018
	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	$	—	$	—	$	18,715	$	18,715
Floating rate asset-backed securities	—		28,678		—		28,678
Floating rate Government/GSE guaranteed mortgage-backed securities	—		1,377,454		—		1,377,454
Fixed rate GSE guaranteed mortgage-backed securities	—		403		—		403
Fixed rate U.S. Treasuries	792,602		—		—		792,602
Total available-for-sale	792,602		1,406,535		18,715		2,217,852
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	—		—		5,974,497		5,974,497
Total Farmer Mac Guaranteed Securities	—		—		5,974,497		5,974,497
USDA Securities:
Trading	—		—		9,999		9,999
Total USDA Securities	—		—		9,999		9,999
Financial derivatives	—		7,487		—		7,487
Total Assets at fair value	$	792,602	$	1,414,022	$	6,003,211	$	8,209,835
Liabilities:
Financial derivatives	$	188	$	19,445	$	—	$	19,633
Total Liabilities at fair value	$	188	$	19,445	$	—	$	19,633

There were no significant assets or liabilities measured at fair value on a non-recurring basis as of June 30, 2019 or December 31, 2018.

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 and six months ended June 30, 2019 and 2018.

Table 8.2

Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended June 30, 2019
	Beginning Balance		Purchases		Sales			Settlements			Realized and Unrealized Gains included in Income		Unrealized Gains/(Losses) included in Other Comprehensive Income			Ending Balance
	(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	18,912	$	—	$	—		$	—		$	—	$	296		$	19,208
Total available-for-sale	18,912		—		—			—			—		296			19,208
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	6,441,624		613,764		—			(98,579		)	114,638		(35,779		)	7,035,668
Total available-for-sale	6,441,624		613,764		—			(98,579		)	114,638		(35,779		)	7,035,668
USDA Securities:
Available-for-sale	—		29,419		(29,419		)	—			—		—			—
Trading	9,487		—		—			(347		)	61		—			9,201
Total USDA Securities	9,487		29,419		(29,419		)	(347		)	61		—			9,201
Total Assets at fair value	$	6,470,023	$	643,183	$	(29,419	)	$	(98,926	)	$	114,699	$	(35,483	)	$	7,064,077

Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended June 30, 2018
	Beginning Balance		Purchases		Sales			Settlements			Realized and Unrealized (Losses)/Gains included in Income			Unrealized Gains included in Other Comprehensive Income		Ending Balance
	(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	19,010	$	—	$	—		$	—		$	—		$	—	$	19,010
Fixed rate GSE guaranteed mortgage-backed securities	4,120		—		—			(2,028		)	(2,092		)	—		—
Total available-for-sale	23,130		—		—			(2,028		)	(2,092		)	—		19,010
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	5,839,387		303,517		—			(149,193		)	(10,850		)	2,945		5,985,806
Total available-for-sale	5,839,387		303,517		—			(149,193		)	(10,850		)	2,945		5,985,806
USDA Securities:
Available-for-sale	—		45,014		(45,014		)	—			—			—		—
Trading(1)	11,558		—		—			(821		)	11			—		10,748
Total USDA Securities	11,558		45,014		(45,014		)	(821		)	11			—		10,748
Total Assets at fair value	$	5,874,075	$	348,531	$	(45,014	)	$	(152,042	)	$	(12,931	)	$	2,945	$	6,015,564

⁽¹⁾  Includes unrealized gains of $11,000 attributable to assets still held as of June 30, 2018 that are recorded in "Gains on trading securities."

Level 3 Assets and Liabilities Measured at Fair Value for the Six Months Ended June 30, 2019
	Beginning Balance		Purchases		Sales			Settlements			Realized and Unrealized Gains included in Income		Unrealized Gains/(Losses) included in Other Comprehensive Income			Ending Balance
	(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	18,715	$	—	$	—		$	—		$	—	$	493		$	19,208
Total available-for-sale	18,715		—		—			—			—		493			19,208
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	5,974,497		1,390,096		—			(470,312		)	173,990		(32,603		)	7,035,668
Total available-for-sale	5,974,497		1,390,096		—			(470,312		)	173,990		(32,603		)	7,035,668
USDA Securities:
Available-for-sale	—		48,347		(48,347		)	—			—		—			—
Trading	9,999		—		—			(903		)	105		—			9,201
Total USDA Securities	9,999		48,347		(48,347		)	(903		)	105		—			9,201
Total Assets at fair value	$	6,003,211	$	1,438,443	$	(48,347	)	$	(471,215	)	$	174,095	$	(32,110	)	$	7,064,077

Level 3 Assets and Liabilities Measured at Fair Value for the Six Months Ended June 30, 2018
	Beginning Balance		Cumulative Effect from Change in Hedge Accounting		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	$	18,814	$	—	$	—	$	—		$	—		$	—		$	196		$	19,010
Fixed rate GSE guaranteed mortgage-backed securities	4,333		—		—		—			(2,137		)	(2,092		)	(104		)	—
Total available-for-sale	23,147		—		—		—			(2,137		)	(2,092		)	92			19,010
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	5,471,914		487		958,964		—			(439,461		)	(29,798		)	23,700			5,985,806
Total available-for-sale	5,471,914		487		958,964		—			(439,461		)	(29,798		)	23,700			5,985,806
USDA Securities:
Available-for-sale	—		—		79,307		(79,307		)	—			—			—			—
Trading(1)	13,515		—		—		—			(2,794		)	27			—			10,748
Total USDA Securities	13,515		—		79,307		(79,307		)	(2,794		)	27			—			10,748
Total Assets at fair value	$	5,508,576	$	487	$	1,038,271	$	(79,307	)	$	(444,392	)	$	(31,863	)	$	23,792		$	6,015,564

⁽¹⁾  Includes unrealized gains of $0.1 million attributable to assets still held as of June 30, 2018 that are recorded in "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 June 30, 2019 and December 31, 2018:

Table 8.3

	As of June 30, 2019
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	$	19,208	Indicative bids	Range of broker quotes	97.5% - 97.5% (97.5%)
Farmer Mac Guaranteed Securities:
AgVantage	$	7,035,668	Discounted cash flow	Discount rate	2.7% - 4.0% (3.0%)
USDA Securities	$	9,201	Discounted cash flow	Discount rate	3.0% - 5.2% (4.9%)
				CPR	8% - 20% (19%)

	As of December 31, 2018
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	$	18,715	Indicative bids	Range of broker quotes	95.0% - 95.0% (95.0%)
Farmer Mac Guaranteed Securities:
AgVantage	$	5,974,497	Discounted cash flow	Discount rate	3.0% - 4.4% (3.3%)
USDA Securities	$	9,999	Discounted cash flow	Discount rate	3.2% - 5.2% (4.9%)
				CPR	7% - 17% (16%)

The significant unobservable input used in the fair value measurements of AgVantage Farmer Mac Guaranteed Securities is the discount rate commensurate with the risks involved. Typically, significant increases (decreases) in this input 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. Conversely, in a declining interest rate environment, Farmer Mac would expect average discount rates to decrease. Prepayment rates are not presented in the table above for AgVantage securities because they generally have fixed maturity dates when the secured general obligations are due and don't prepay.

The significant unobservable inputs used in the fair value measurements of USDA Securities are the prepayment rate and discount rate 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.

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 June 30, 2019 and December 31, 2018:

Table 8.4

	As of June 30, 2019				As of December 31, 2018
	Fair Value		Carrying Amount		Fair Value		Carrying Amount
	(in thousands)
Financial assets:
Cash and cash equivalents	$	396,602	$	396,602	$	425,256	$	425,256
Investment securities	2,968,265		2,967,536		2,263,446		2,262,884
Farmer Mac Guaranteed Securities	8,627,877		8,614,843		8,061,903		8,071,115
USDA Securities	2,141,866		2,137,579		2,113,946		2,176,173
Loans	6,403,950		6,316,005		5,512,781		5,515,052
Financial derivatives	7,560		7,560		7,487		7,487
Guarantee and commitment fees receivable:
LTSPCs	33,678		35,835		37,461		36,870
Farmer Mac Guaranteed Securities	2,721		2,974		3,424		3,496
Financial liabilities:
Notes payable:
Due within one year	9,937,380		9,939,589		7,744,388		7,757,050
Due after one year	8,360,759		8,247,829		8,473,558		8,486,647
Debt securities of consolidated trusts held by third parties	1,583,839		1,570,862		1,501,754		1,528,957
Financial derivatives	27,429		27,429		19,633		19,633
Guarantee and commitment obligations:
LTSPCs	32,549		34,706		36,471		35,880
Farmer Mac Guaranteed Securities	2,287		2,540		2,731		2,803

The carrying value of cash and cash equivalents is a reasonable estimate of their approximate fair value and is classified as Level 1. The fair value of investments in U.S. Treasuries are valued based on unadjusted quoted prices in active markets and are classified as Level 1. A significant portion of Farmer Mac's investment portfolio is valued using a reputable nationally recognized third-party pricing service. The prices obtained are non-binding and generally representative of recent market trades and are classified as Level 2. 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. Financial derivatives primarily are valued using unadjusted counterparty valuations and are classified as Level 2. 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. 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. 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.