Fair Value Measurement

6 Months Ended

Nov. 30, 2021


NOTE 12—FAIR VALUE MEASUREMENT

Fair value, also referred to as an exit price, is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value accounting guidance provides a three-level fair value hierarchy for classifying financial instruments. This hierarchy is based on the markets in which the assets or liabilities trade and whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. The fair value measurement of a financial asset or liability is assigned a level based on the lowest level of any input that is significant to the fair value measurement in its entirety. The levels, in priority order based on the extent to which observable inputs are available to measure fair value, are Level 1, Level 2 and Level 3. The accounting guidance for fair value measurements requires that we maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value.

The following table presents the carrying value and estimated fair value of all of our financial instruments, including those carried at amortized cost, as of November 30, 2021 and May 31, 2021. The table also displays the classification level within the fair value hierarchy based on the degree of observability of the inputs used in the valuation technique for estimating fair value.

Table 12.1: Fair Value of Financial Instruments


	November 30, 2021				Fair Value Measurement Level
(Dollars in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	172,742	$	172,742	$	172,742	$	—	$	—
Restricted cash	11,010		11,010		11,010		—		—

Equity securities, at fair value	37,505		37,505		37,505		—		—
Debt securities trading, at fair value	588,615		588,615		—		588,615

Deferred compensation investments	7,595		7,595		7,595		—		—
Loans to members, net	28,860,735		30,768,917		—		—		30,768,917
Accrued interest receivable	108,381		108,381		—		108,381		—
Derivative assets	78,610		78,610		—		78,610		—
Total financial assets	$	29,865,193	$	31,773,375	$	228,852	$	775,606	$	30,768,917

Liabilities:
Short-term borrowings	$	4,746,935	$	4,747,001	$	—	$	4,747,001	$	—
Long-term debt	20,804,379		22,255,483		—		12,449,548		9,805,935
Accrued interest payable	120,439		120,439		—		120,439		—
Guarantee liability	10,150		10,884		—		—		10,884
Derivative liabilities	615,097		615,097		—		615,097		—
Subordinated deferrable debt	986,415		1,054,992		266,200		788,792		—
Members’ subordinated certificates	1,252,349		1,252,349		—		—		1,252,349
Total financial liabilities	$	28,535,764	$	30,056,245	$	266,200	$	18,720,877	$	11,069,168


	May 31, 2021				Fair Value Measurement Level
(Dollars in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	295,063	$	295,063	$	295,063	$	—	$	—
Restricted cash	8,298		8,298		8,298		—		—

Equity securities, at fair value	35,102		35,102		35,102		—		—
Debt securities trading, at fair value	576,175		576,175		—		576,175		—

Deferred compensation investments	7,222		7,222		7,222		—		—
Loans to members, net	28,341,429		29,967,692		—		—		29,967,692
Accrued interest receivable	107,856		107,856		—		107,856		—
Derivative assets	121,259		121,259		—		121,259		—
Total financial assets	$	29,492,404	$	31,118,667	$	345,685	$	805,290	$	29,967,692

Liabilities:
Short-term borrowings	$	4,582,096	$	4,582,329	$	—	$	4,582,329	$	—
Long-term debt	20,603,123		21,799,736		—		12,476,073		9,323,663
Accrued interest payable	123,672		123,672		—		123,672		—
Guarantee liability	10,041		10,841		—		—		10,841
Derivative liabilities	584,989		584,989		—		584,989		—
Subordinated deferrable debt	986,315		1,062,748		265,200		797,548		—
Members’ subordinated certificates	1,254,660		1,254,660		—		—		1,254,660
Total financial liabilities	$	28,144,896	$	29,418,975	$	265,200	$	18,564,611	$	10,589,164

For additional information regarding fair value measurements, the fair value hierarchy and a description of the methodologies we use to estimate fair value, see “Note 14—Fair Value Measurement” to the Consolidated Financial Statements in our 2021 Form 10-K.

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 into or out of Level 3 of the fair value hierarchy during the six months ended November 30, 2021 and 2020.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the carrying value and fair value of financial instruments reported in our consolidated financial statements at fair value on a recurring basis as of November 30, 2021 and May 31, 2021, and the classification of the valuation technique within the fair value hierarchy. We did not have any assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs during the three and six months ended November 30, 2021 and 2020.

Table 12.2: Assets and Liabilities Measured at Fair Value on a Recurring Basis


	November 30, 2021						May 31, 2021
(Dollars in thousands)	Level 1		Level 2		Total		Level 1		Level 2		Total
Assets:
Equity securities, at fair value	$	37,505	$	—	$	37,505	$	35,102	$	—	$	35,102
Debt securities trading, at fair value	—		588,615		588,615		—		576,175		576,175
Deferred compensation investments	7,595		—		7,595		7,222		—		7,222
Derivative assets	—		78,610		78,610		—		121,259		121,259

Liabilities:
Derivative liabilities	$	—	$	615,097	$	615,097	$	—	$	584,989	$	584,989

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis on our consolidated balance sheets. These assets and liabilities 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 assets for impairment. We had certain loans measured at fair value on a nonrecurring basis during the six months ended November 30, 2021, which were repaid in full in November 2021. We did not have any assets or liabilities measured at fair value on a nonrecurring basis during the six months ended November 30, 2020.

Collateral-Dependent Loans

Because our loans are classified as held for investment and carried at amortized cost, we generally do not record loans at fair value on a recurring basis. However, we periodically record nonrecurring fair value adjustments for nonperforming collateral-dependent loans through the allowance for credit losses and provision for credit losses. We had no nonperforming collateral-dependent loans outstanding as of November 30, 2021. We had nonperforming collateral-dependent loans outstanding to two affiliated RTFC telecommunications borrowers totaling $9 million as of May 31, 2021, which were paid off in November 2021. The collateral underlying these loans consisted primarily of U.S. Federal Communications

Commission (“FCC”) wireless spectrum licenses. Our estimate of the fair value of these loans was $6 million as of May 31, 2021.

Significant Unobservable Level 3 Inputs

We employ various approaches and techniques to estimate the fair value of loans where we expect repayment to be provided solely by the continued operation or sale of the underlying collateral, including estimated cash flows from the collateral, valuations obtained from third-party specialists and comparable sales data. The technique depends on the nature of the collateral and the extent to which observable inputs are available. Our Credit Risk Management group reviews the valuation technique, including the use of any significant inputs that are not readily observable by market participants, to assess the appropriateness of the technique and the reasonableness of the assumptions involved. The estimated fair value of $6 million as of May 31, 2021 for the two affiliated RTFC nonperforming collateral-dependent loans totaling $9 million as of May 31, 2021, was derived primarily based on the lower end of limited publicly available sales data for the underlying FCC spectrum licenses collateral.