NOTE 12—FAIR VALUE MEASUREMENT

We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of certain assets and liabilities on a recurring or nonrecurring basis. The accounting guidance for fair value measurements and disclosures establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The levels of the fair value hierarchy, in priority order, include Level 1, Level 2 and Level 3. For additional information regarding the fair value hierarchy and a description of the methodologies we use to measure fair value, see “Note 14—Fair Value Measurement” to the Consolidated Financial Statements in our 2019 Form 10-K.

The following tables present the carrying value and fair value for all of our financial instruments, including those carried at amortized cost, as of November 30, 2019 and May 31, 2019. The tables also display the classification within the fair value hierarchy of the valuation technique used in estimating fair value.



	November 30, 2019				Fair Value Measurement Level
(Dollars in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	114,033	$	114,033	$	114,033	$	—	$	—
Restricted cash	10,638		10,638		10,638		—		—
Equity securities	63,809		63,809		63,809		—		—
Debt securities held-to-maturity	573,547		583,439		—		583,439		—
Deferred compensation investments	5,682		5,682		5,682		—		—
Loans to members, net	26,421,661		28,008,555		—		—		28,008,555
Accrued interest receivable	130,950		130,950		—		130,950		—
Debt service reserve funds	17,151		17,151		17,151		—		—
Derivative assets	53,174		53,174		—		53,174		—

Liabilities:
Short-term borrowings	$	4,789,024	$	4,789,768	$	—	$	4,639,768	$	150,000
Long-term debt	18,434,451		19,783,264		—		11,153,207		8,630,057
Accrued interest payable	148,875		148,875		—		148,875		—
Guarantee liability	13,489		13,763		—		—		13,763
Derivative liabilities	591,027		591,027		—		591,027		—
Subordinated deferrable debt	986,026		1,052,215		—		1,052,215		—
Members’ subordinated certificates	1,355,052		1,355,052		—		—		1,355,052



	May 31, 2019				Fair Value Measurement Level
(Dollars in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	177,922	$	177,922	$	177,922	$	—	$	—
Restricted cash	8,282		8,282		8,282		—		—
Equity securities	87,533		87,533		87,533		—		—
Debt securities held-to-maturity	565,444		570,549		—		570,549		—
Deferred compensation investments	4,984		4,984		4,984		—		—
Loans to members, net	25,899,369		25,743,503		—		—		25,743,503
Accrued interest receivable	133,605		133,605		—		133,605		—
Debt service reserve funds	17,151		17,151		17,151		—		—
Derivative assets	41,179		41,179		—		41,179		—

Liabilities:
Short-term borrowings	$	3,607,726	$	3,608,259	$	—	$	3,608,259	$	—
Long-term debt	19,210,793		20,147,183		—		11,482,715		8,664,468
Accrued interest payable	158,997		158,997		—		158,997		—
Guarantee liability	13,666		13,307		—		—		13,307
Derivative liabilities	391,724		391,724		—		391,724		—
Subordinated deferrable debt	986,020		1,004,707		—		1,004,707		—
Members’ subordinated certificates	1,357,129		1,357,129		—		—		1,357,129

Transfers Between Levels

We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy and transfer between Level 1, Level 2, and Level 3 accordingly. Observable market data includes but is not limited to quoted prices and market transactions. Changes in economic conditions or market liquidity generally will drive changes in availability of observable market data. Changes in availability of observable market data, which also may result in changes in the valuation technique used, are generally the cause of transfers between levels. We did not have any transfers between levels for financial instruments measured at fair value on a recurring basis for the six months ended November 30, 2019 and 2018.

Recurring Fair Value Measurements

The following table presents the carrying value and fair value of financial instruments reported in our condensed consolidated financial statements at fair value on a recurring basis as of November 30, 2019 and May 31, 2019, and the classification of the valuation technique within the fair value hierarchy.



	November 30, 2019						May 31, 2019
(Dollars in thousands)	Level 1		Level 2		Total		Level 1		Level 2		Total
Equity securities	$	63,809	$	—	$	63,809	$	87,533	$	—	$	87,533
Deferred compensation investments	5,682		—		5,682		4,984		—		4,984
Derivative assets	—		53,174		53,174		—		41,179		41,179
Derivative liabilities	—		591,027		591,027		—		391,724		391,724

Nonrecurring Fair Value

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis on our condensed consolidated balance sheets. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as in the application of lower of cost or fair value accounting or when we evaluate for impairment. Assets measured at fair value on a nonrecurring basis and still held during the six months ended November 30, 2019 and 2018 consisted of certain impaired loans. Fair value measurement adjustments for individually impaired loans are recorded in the provision for loan losses on our condensed consolidated statements of operations. The fair value of these assets is determined based on the use of significant unobservable inputs, which are considered Level 3 in the fair value hierarchy. We did not have any nonrecurring fair value measurement adjustments recorded in earnings attributable to these assets during the three and six months ended November 30, 2019 and 2018.

Significant Unobservable Level 3 Inputs

Impaired Loans

The fair value of impaired loans is typically measured based on the present value of expected future cash flows. Our estimate of expected future cash flows incorporates, among other items, assumptions regarding default rates, loss severities, the amounts and timing of prepayments, as well as the characteristics of the loan. If we expect repayment to be provided solely by the continued operation or sale of the underlying collateral, the fair value of the collateral less estimated costs to sell is used as the basis for measuring fair value. We employ various approaches and techniques to determine the fair value of collateral-dependent loans, including developing market multiples and obtaining valuations from third-party specialists. The significant unobservable inputs used in measuring the fair value of collateral-dependent loans include estimated cash flows before interest, taxes, depreciation and amortization and market multiples for comparable companies. Our Credit Risk Management group reviews the unobservable inputs to assess the reasonableness of the assumptions used and the accuracy of the work performed. We did not have any impaired collateral-dependent loans as of November 30, 2019 or May 31, 2019.