FAIR VALUE DISCLOSURES

As of September 30, 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 (i.e., level 3). These financial instruments measured as Level 3 represented 32 percent of total assets and 73 percent of financial instruments measured at fair value as of September 30, 2018. As of December 31, 2017, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $5.5 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 71 percent of financial instruments measured at fair value as of December 31, 2017.

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 nine months of 2018 there were no transfers within 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 nine months of 2017 there was one transfer within the 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 security). 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.

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 September 30, 2018 and December 31, 2017, 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 September 30, 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	$	—	$	—	$	18,961	$	18,961
Floating rate asset-backed securities	—		30,056		—		30,056
Floating rate Government/GSE guaranteed mortgage-backed securities	—		1,336,474		—		1,336,474
Fixed rate GSE guaranteed mortgage-backed securities	—		422		—		422
Fixed rate U.S. Treasuries	838,089		—		—		838,089
Total Investment Securities	838,089		1,366,952		18,961		2,224,002
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	—		—		5,957,304		5,957,304
Total Farmer Mac Guaranteed Securities	—		—		5,957,304		5,957,304
USDA Securities:
Trading	—		—		10,237		10,237
Total USDA Securities	—		—		10,237		10,237
Financial derivatives	—		8,007		—		8,007
Total Assets at fair value	$	838,089	$	1,374,959	$	5,986,502	$	8,199,550
Liabilities:
Financial derivatives	$	10	$	17,831	$	—	$	17,841
Total Liabilities at fair value	$	10	$	17,831	$	—	$	17,841
Non-recurring:
Assets:
Loans held for investment	$	—	$	—	$	317	$	317
REO	—		—		128		128
Total Non-recurring Assets at fair value	$	—	$	—	$	445	$	445



Assets and Liabilities Measured at Fair Value as of December 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	$	—	$	—	$	18,814	$	18,814
Floating rate asset-backed securities	—		34,210		—		34,210
Floating rate Government/GSE guaranteed mortgage-backed securities	—		1,290,187		—		1,290,187
Fixed rate GSE guaranteed mortgage-backed securities	—		486		4,333		4,819
Fixed rate senior agency debt	—		99,951		—		99,951
Fixed rate U.S. Treasuries	767,424		—		—		767,424
Total available-for-sale	767,424		1,424,834		23,147		2,215,405
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	—		—		5,471,914		5,471,914
Total Farmer Mac Guaranteed Securities	—		—		5,471,914		5,471,914
USDA Securities:
Trading	—		—		13,515		13,515
Total USDA Securities	—		—		13,515		13,515
Financial derivatives	—		7,093		—		7,093
Total Assets at fair value	$	767,424	$	1,431,927	$	5,508,576	$	7,707,927
Liabilities:
Financial derivatives	$	36	$	26,563	$	—	$	26,599
Total Liabilities at fair value	$	36	$	26,563	$	—	$	26,599
Non-recurring:
Assets:
Loans held for investment	$	—	$	—	$	508	$	508
Total Non-recurring Assets at fair value	$	—	$	—	$	508	$	508

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 nine months ended September 30, 2018 and 2017.

Table 8.2



Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended September 30, 2018
	Beginning Balance		Purchases		Sales			Settlements			Realized and Unrealized (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	$	19,010	$	—	$	—		$	—		$	—		$	(49	)	$	18,961
Total available-for-sale	19,010		—		—			—			—			(49		)	18,961
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	5,985,806		687,381		—			(689,213		)	(13,432		)	(13,238		)	5,957,304
Total available-for-sale	5,985,806		687,381		—			(689,213		)	(13,432		)	(13,238		)	5,957,304
USDA Securities:
Available-for-sale	—		26,321		(26,321		)	—			—			—			—
Trading⁽¹⁾	10,748		—		—			(508		)	(3		)	—			10,237
Total USDA Securities	10,748		26,321		(26,321		)	(508		)	(3		)	—			10,237
Total Assets at fair value	$	6,015,564	$	713,702	$	(26,321	)	$	(689,721	)	$	(13,435	)	$	(13,287	)	$	5,986,502


⁽¹⁾	Includes unrealized losses of $9,000 attributable to assets still held as of September 30, 2018 that are recorded in "(Losses)/gains on trading securities."



Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended September 30, 2017
	Beginning Balance		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	$	18,518	$	—	$	—		$	—		$	—		$	—		$	18,518
Fixed rate GSE guaranteed mortgage-backed securities	4,651		—		—			(111		)	—			(82		)	4,458
Total available-for-sale	23,169		—		—			(111		)	—			(82		)	22,976
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	5,282,562		193,800		—			(29,851		)	(1,171		)	(1,594		)	5,443,746
Total available-for-sale	5,282,562		193,800		—			(29,851		)	(1,171		)	(1,594		)	5,443,746
USDA Securities:
Available-for-sale	—		40,844		(40,844		)	—			—			—			—
Trading⁽¹⁾	16,294		—		—			(1,430		)	—			—			14,864
Total USDA Securities	16,294		40,844		(40,844		)	(1,430		)	—			—			14,864
Total Assets at fair value	$	5,322,025	$	234,644	$	(40,844	)	$	(31,392	)	$	(1,171	)	$	(1,676	)	$	5,481,586


⁽¹⁾	Includes unrealized gains of $34,000 attributable to assets still held as of September 30, 2017 that are recorded in "(Losses)/gains on trading securities."



Level 3 Assets and Liabilities Measured at Fair Value for the Nine Months Ended September 30, 2018
	Beginning Balance		Cumulative Effect from Change in Hedge Accounting		Purchases		Sales			Settlements			Realized and Unrealized (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	$	18,814	—		$	—	$	—		$	—		$	—		$	147		$	18,961
Fixed rate GSE guaranteed mortgage-backed securities	4,333		—		—		—			(2,137		)	(2,092		)	(104		)	—
Total available-for-sale	23,147		—		—		—			(2,137		)	(2,092		)	43			18,961
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	5,471,914		487		1,646,345		—			(1,128,674		)	(43,230		)	10,462			5,957,304
Total available-for-sale	5,471,914		487		1,646,345		—			(1,128,674		)	(43,230		)	10,462			5,957,304
USDA Securities:
Available-for-sale	—		—		105,628		(105,628		)	—			—			—			—
Trading⁽¹⁾	13,515		—		—		—			(3,302		)	24			—			10,237
Total USDA Securities	13,515		—		105,628		(105,628		)	(3,302		)	24			—			10,237
Total Assets at fair value	$	5,508,576	$	487	$	1,751,973	$	(105,628	)	$	(1,134,113	)	$	(45,298	)	$	10,505		$	5,986,502


⁽¹⁾	Includes unrealized gains of $0.1 million attributable to assets still held as of September 30, 2018 that are recorded in "(Losses)/gains on trading securities."



Level 3 Assets and Liabilities Measured at Fair Value for the Nine Months Ended September 30, 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	$	—	$	—	$	—		$	—		$	—		$	788		$	18,518
Fixed rate GSE guaranteed mortgage-backed securities	$	—	$	7,041	$	—	$	—		$	(334	)	$	—		$	(2,249	)	$	4,458
Total available-for-sale	17,730		7,041		—		—			(334		)	—			(1,461		)	22,976
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	4,853,685		—		927,615		—			(357,006		)	5,166			14,286			5,443,746
Total available-for-sale	4,853,685		—		927,615		—			(357,006		)	5,166			14,286			5,443,746
USDA Securities:
Available-for-sale	—		—		126,939		(126,939		)	—			—			—			—
Trading⁽¹⁾	20,388		—		—		—			(5,440		)	(84		)	—			14,864
Total USDA Securities	20,388		—		126,939		(126,939		)	(5,440		)	(84		)	—			14,864
Total Assets at fair value	$	4,891,803	$	7,041	$	1,054,554	$	(126,939	)	$	(362,780	)	$	5,082		$	12,825		$	5,481,586


⁽¹⁾	Includes unrealized gains of $42,000 attributable to assets still held as of September 30, 2017 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 September 30, 2018 and December 31, 2017.

Table 8.3



	As of September 30, 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	$	18,961	Indicative bids	Range of broker quotes	96.3% - 96.3% (96.3%)
Farmer Mac Guaranteed Securities:
AgVantage	$	5,957,304	Discounted cash flow	Discount rate	2.9% - 4.0% (3.1%)

USDA Securities	$	10,237	Discounted cash flow	Discount rate	3.3% - 5.2% (4.9%)
				CPR	6% - 16% (15%)



	As of December 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	$	18,814	Indicative bids	Range of broker quotes	95.5% - 95.5% (95.5%)
Fixed rate GSE guaranteed mortgage-backed securities	$	4,333	Discounted cash flow	Discount rate	2.9%
				CPR	0 %
Farmer Mac Guaranteed Securities:
AgVantage	$	5,471,914	Discounted cash flow	Discount rate	2.1% - 3.4% (2.4%)

USDA Securities	$	13,515	Discounted cash flow	Discount rate	3.6% - 5.4% (5.0%)
				CPR	7% - 19% (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 September 30, 2018 and December 31, 2017:

Table 8.4



	As of September 30, 2018				As of December 31, 2017
	Fair Value		Carrying Amount		Fair Value		Carrying Amount
	(in thousands)
Financial assets:
Cash and cash equivalents	$	436,152	$	436,152	$	302,022	$	302,022
Investment securities	2,269,877		2,269,034		2,260,969		2,260,437
Farmer Mac Guaranteed Securities	8,002,686		8,024,611		7,588,806		7,598,188
USDA Securities	2,067,583		2,154,111		2,076,396		2,131,365
Loans	5,331,095		5,360,900		5,279,225		5,266,786
Financial derivatives	8,007		8,007		7,093		7,093
Guarantee and commitment fees receivable:
LTSPCs	37,764		36,436		33,871		35,718
Farmer Mac Guaranteed Securities	3,710		3,742		4,323		4,177
Financial liabilities:
Notes payable:
Due within one year	7,363,251		7,378,927		8,079,309		8,089,826
Due after one year	8,348,709		8,419,424		7,445,545		7,432,790
Debt securities of consolidated trusts held by third parties	1,451,781		1,486,733		1,386,652		1,404,945
Financial derivatives	17,841		17,841		26,599		26,599
Guarantee and commitment obligations:
LTSPCs	36,796		35,468		32,976		34,824
Farmer Mac Guaranteed Securities	3,098		3,129		3,722		3,576

The carrying value of cash and cash equivalents is a reasonable estimate of their approximate fair value and is classified as Level 1. Investment securities primarily are valued based on unadjusted quoted prices in active markets 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.