FAIR VALUE DISCLOSURES

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit price).

In determining fair value, Farmer Mac uses various valuation approaches, including market and income based approaches. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. When available, the fair value of Farmer Mac's financial instruments is based on quoted market prices, valuation techniques that use observable market-based inputs, or unobservable inputs that are corroborated by market data. Pricing information obtained from third parties is internally validated for reasonableness prior to use in the consolidated financial statements. Farmer Mac's accounting polices for fair value measurement and a description of the fair value techniques used for instruments measured at fair value is discussed in

Note 2(p) and Note 13 to the consolidated financial statements included in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 13, 2014.

Fair value measurements related to financial instruments that are reported at fair value in the consolidated financial statements each period are referred to as recurring fair value measurements. Fair value measurements related to financial instruments that are not reported at fair value each period but are subject to fair value adjustments in certain circumstances are referred to as nonrecurring fair value measurements.

Fair Value Classification and Transfers

The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The following three levels are used to classify fair value measurements:


Level 1	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.


Level 2	Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.


Level 3	Prices or valuations that require unobservable inputs that are significant to the fair value measurement.

As of March 31, 2014, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $5.2 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 38 percent of total assets and 68 percent of financial instruments measured at fair value as of March 31, 2014. As of December 31, 2013, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $6.8 billion whose fair values were estimated by management in the absence of readily determinable fair values. These financial instruments measured as level 3 represented 51 percent of total assets and 73 percent of financial instruments measured at fair value as of December 31, 2013.

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. 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 2014 and 2013. See Note 1(a) for information about the transfer of available-for-sale Farmer Mac Guaranteed Securities to held-to-maturity as of January 1, 2014.

The following tables present information about Farmer Mac's assets and liabilities measured at fair value on a recurring and nonrecurring basis as of March 31, 2014 and December 31, 2013, 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, 2014
	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	$	—	$	—	$	64,963	$	64,963
Floating rate asset-backed securities	—		178,195		—		178,195
Floating rate corporate debt securities	—		107,542		—		107,542
Fixed rate corporate debt securities	—		55,190		—		55,190
Floating rate Government/GSE guaranteed mortgage-backed securities	—		649,014		203		649,217
Fixed rate GSE guaranteed mortgage-backed securities	—		8,584		—		8,584
Floating rate GSE subordinated debt	—		63,385		—		63,385
Fixed rate GSE preferred stock	—		81,640		—		81,640
Fixed rate taxable municipal bonds	—		22,107		—		22,107
Fixed rate senior agency debt	—		518,915		—		518,915
Floating rate U.S. Treasuries	74,958		—		—		74,958
Fixed rate U.S. Treasuries	644,396		—		—		644,396
Total available-for-sale	719,354		1,684,572		65,166		2,469,092
Trading:
Floating rate asset-backed securities	—		—		923		923
Total trading	—		—		923		923
Total Investment Securities	719,354		1,684,572		66,089		2,470,015
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	—		—		3,467,655		3,467,655
Farmer Mac Guaranteed USDA Securities	—		—		21,608		21,608
Total Farmer Mac Guaranteed Securities	—		—		3,489,263		3,489,263
USDA Securities:
Available-for-sale	—		—		1,600,659		1,600,659
Trading	—		—		51,102		51,102
Total USDA Securities	—		—		1,651,761		1,651,761
Financial derivatives	15		11,342		—		11,357
Total Assets at fair value	$	719,369	$	1,695,914	$	5,207,113	$	7,622,396
Liabilities:
Financial derivatives	$	—	$	73,726	$	161	$	73,887
Total Liabilities at fair value	$	—	$	73,726	$	161	$	73,887
Nonrecurring:
Assets:
Loans held for investment	$	—	$	—	$	6,033	$	6,033
REO	—		—		1,704		1,704
Total Nonrecurring Assets at fair value	$	—	$	—	$	7,737	$	7,737



Assets and Liabilities Measured at Fair Value as of December 31, 2013
	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	$	—	$	—	$	65,285	$	65,285
Floating rate asset-backed securities	—		166,104		—		166,104
Floating rate corporate debt securities	—		109,769		—		109,769
Fixed rate corporate debt	—		55,141		—		55,141
Floating rate Government/GSE guaranteed mortgage-backed securities	—		621,064		205		621,269
Fixed rate GSE guaranteed mortgage-backed securities	—		8,657		—		8,657
Floating rate GSE subordinated debt	—		63,385		—		63,385
Fixed rate GSE preferred stock	—		83,161		—		83,161
Fixed rate taxable municipal bonds	—		30,681		—		30,681
Fixed rate senior agency debt	—		524,062		—		524,062
Fixed rate U.S. Treasuries	755,633		—		—		755,633
Total available-for-sale	755,633		1,662,024		65,490		2,483,147
Trading:
Floating rate asset-backed securities	—		—		928		928
Total trading	—		—		928		928
Total Investment Securities	755,633		1,662,024		66,418		2,484,075
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	—		—		5,070,366		5,070,366
Farmer Mac Guaranteed USDA Securities	—		—		21,234		21,234
Total Farmer Mac Guaranteed Securities	—		—		5,091,600		5,091,600
USDA Securities:
Available-for-sale	—		—		1,553,669		1,553,669
Trading	—		—		58,344		58,344
Total USDA Securities	—		—		1,612,013		1,612,013
Financial derivatives	—		19,718		—		19,718
Total Assets at fair value	$	755,633	$	1,681,742	$	6,770,031	$	9,207,406
Liabilities:
Financial derivatives	$	1	$	75,472	$	235	$	75,708
Total Liabilities at fair value	$	1	$	75,472	$	235	$	75,708
Nonrecurring:
Assets:
Loans held for investment	—		—		4,420		4,420
REO	—		—		1,818		1,818
Total Nonrecurring Assets at fair value	$	—	$	—	$	6,238	$	6,238

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.

Table 8.2



Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended March 31, 2014
	Beginning Balance			Purchases		Sales		Settlements			Realized and Unrealized Gains included in Income		Unrealized Gains/(Losses) included in Other Comprehen-sive Income			Transfers Out			Ending Balance
	(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	65,285		$	—	$	—	$	—		$	—	$	(322	)	$	—		$	64,963
Floating rate Government/GSE guaranteed mortgage-backed securities	205			—		—		(4		)	—		2			—			203
Total available-for-sale	65,490			—		—		(4		)	—		(320		)	—			65,166
Trading:
Floating rate asset-backed securities (1)	928			—		—		(283		)	278		—			—			923
Total trading	928			—		—		(283		)	278		—			—			923
Total Investment Securities	66,418			—		—		(287		)	278		(320		)	—			66,089
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	5,070,366			170,000		—		(176,269		)	2,750		12,894			(1,612,086		)	3,467,655
Farmer Mac Guaranteed USDA Securities	21,234			—		—		(171		)	—		545			—			21,608
Total Farmer Mac Guaranteed Securities	5,091,600			170,000		—		(176,440		)	2,750		13,439			(1,612,086		)	3,489,263
USDA Securities:
Available-for-sale	1,553,669			67,984		—		(60,455		)	—		39,461			—			1,600,659
Trading (2)	58,344			—		—		(7,619		)	377		—			—			51,102
Total USDA Securities	1,612,013			67,984		—		(68,074		)	377		39,461			—			1,651,761
Total Assets at fair value	$	6,770,031		$	237,984	$	—	$	(244,801	)	$	3,405	$	52,580		$	(1,612,086	)	$	5,207,113
Liabilities:
Financial derivatives (3)	$	(235	)	$	—	$	—	$	—		$	74	$	—		$	—		$	(161	)
Total Liabilities at fair value	$	(235	)	$	—	$	—	$	—		$	74	$	—		$	—		$	(161	)


(1)	Unrealized gains are attributable to assets still held as of March 31, 2014 and are recorded in "Gains on trading assets."


(2)	Includes unrealized gains of $0.7 million attributable to assets still held as of March 31, 2014 that are recorded in "Gains on trading assets."


(3)	Unrealized gains are attributable to liabilities still held as of March 31, 2014 and are recorded in "(Losses)/gains on financial derivatives and hedging activities."



Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended March 31, 2013
	Beginning Balance			Purchases		Sales		Settlements			Realized and Unrealized Gains/ (Losses) 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	$	63,159		$	—	$	—	$	—		$	—		$	2,054		$	65,213
Floating rate Government/GSE guaranteed mortgage-backed securities	—			233		—		—			—			—			233
Total available-for-sale	63,159			233		—		—			—			2,054			65,446
Trading:
Floating rate asset-backed securities (1)	1,247			—		—		(314		)	196			—			1,129
Total trading	1,247			—		—		(314		)	196			—			1,129
Total Investment Securities	64,406			233		—		(314		)	196			2,054			66,575
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	4,739,577			425,000		—		(77,933		)	(3,138		)	(10,624		)	5,072,882
Farmer Mac Guaranteed USDA Securities	26,681			—		—		(383		)	—			900			27,198
Total Farmer Mac Guaranteed Securities	4,766,258			425,000		—		(78,316		)	(3,138		)	(9,724		)	5,100,080
USDA Securities:
Available-for-sale	1,486,595			122,187		—		(69,202		)	—			29,580			1,569,160
Trading (2)	104,188			—		—		(16,931		)	14			—			87,271
Total USDA Securities	1,590,783			122,187		—		(86,133		)	14			29,580			1,656,431
Total Assets at fair value	$	6,421,447		$	547,420	$	—	$	(164,763	)	$	(2,928	)	$	21,910		$	6,823,086
Liabilities:
Financial derivatives (3)	$	(691	)	$	—	$	—	$	—		$	159		$	—		$	(532	)
Total Liabilities at fair value	$	(691	)	$	—	$	—	$	—		$	159		$	—		$	(532	)


(1)	Unrealized gains are attributable to assets still held as of March 31, 2013 and are recorded in "Gains on trading assets."


(2)	Includes unrealized losses of $0.1 million attributable to assets still held as of March 31, 2013 that are recorded in "Gains on trading assets."


(3)	Unrealized gains are attributable to liabilities still held as of March 31, 2013 and are recorded in "(Losses)/gains on financial derivatives and hedging activities."

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, 2014 and December 31, 2013.

Table 8.3



	March 31, 2014
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	$	64,963	Indicative bids	Range of broker quotes	82.0% - 92.0% (87.7%)
Floating rate asset-backed securities	$	923	Discounted cash flow	Discount rate	12.2% - 20.9% (16.6%)
				CPR	10%
Floating rate Government/GSE guaranteed mortgage-backed securities	$	203	Discounted cash flow	Discount rate	1.7% - 1.7% (1.7%)
				CPR	6%
Farmer Mac Guaranteed Securities:
AgVantage	$	3,467,655	Discounted cash flow	Discount rate	0.8% - 2.2% (1.5%)
Farmer Mac Guaranteed USDA Securities	$	21,608	Discounted cash flow	Discount rate	0.8% - 3.2% (1.8%)
				CPR	8% - 15% (13%)
USDA Securities	$	1,651,761	Discounted cash flow	Discount rate	1.1% - 5.2% (3.2%)
				CPR	0% - 15% (6%)
Liabilities:
Financial Derivatives:
Basis swaps	$	161	Discounted cash flow	Discount rate	0.6% - 2.4% (1.2%)
				CPR	10% - 11% (10%)



	December 31, 2013
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	$	65,285	Indicative bids	Range of broker quotes	82.0% - 92.0% (88.1%)
Floating rate asset-backed securities	$	928	Discounted cash flow	Discount rate	13.0% - 22.5% (17.7%)
				CPR	10%
Floating rate Government/GSE guaranteed mortgage-backed securities	$	205	Discounted cash flow	Discount rate	1.8% - 1.8% (1.8%)
				CPR	6%
Farmer Mac Guaranteed Securities:
AgVantage	$	5,070,366	Discounted cash flow	Discount rate	0.9% - 3.6% (1.8%)
Farmer Mac Guaranteed USDA Securities	$	21,234	Discounted cash flow	Discount rate	0.9% - 3.2% (1.9%)
				CPR	7% - 14% (11%)
USDA Securities	$	1,612,013	Discounted cash flow	Discount rate	1.2% - 5.3% (3.4%)
				CPR	0% - 23% (5%)
Liabilities:
Financial Derivatives:
Basis swaps	$	235	Discounted cash flow	Discount rate	0.7% - 2.3% (1.3%)
				CPR	10% - 11% (10%)

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 the Farm & Ranch and Rural Utilities securities structured as 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, 2014 and December 31, 2013:

Table 8.4



	March 31, 2014				December 31, 2013
	Fair Value		Carrying Amount		Fair Value		Carrying Amount
	(in thousands)
Financial assets:
Cash and cash equivalents	$	866,585	$	866,585	$	749,313	$	749,313
Investment securities	2,470,015		2,470,015		2,484,075		2,484,075
Farmer Mac Guaranteed Securities	5,151,607		5,149,533		5,091,600		5,091,600
USDA Securities	1,651,761		1,651,761		1,612,013		1,612,013
Loans	3,272,039		3,243,768		3,138,932		3,193,248
Financial derivatives	11,357		11,357		19,718		19,718
Guarantee and commitment fees receivable:
LTSPCs	33,875		28,631		33,807		27,244
Farmer Mac Guaranteed Securities	16,481		15,242		18,470		16,660
Financial liabilities:
Notes payable:
Due within one year	7,362,684		7,354,271		7,353,356		7,338,781
Due after one year	5,049,460		5,036,375		4,977,942		5,001,169
Debt securities of consolidated trusts held by third parties	313,327		312,643		257,512		261,760
Financial derivatives	73,887		73,887		75,708		75,708
Guarantee and commitment obligations:
LTSPCs	32,919		27,675		32,856		26,293
Farmer Mac Guaranteed Securities	14,207		12,968		15,185		13,374

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 sale, 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.