Fair Value Disclosures

9 Months Ended

Sep. 30, 2020

Fair Value Classification and Transfers

The following tables present information about Farmer Mac's assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019, respectively, and indicate the fair value hierarchy of the valuation techniques used by Farmer Mac to determine such fair value:

Table 9.1


Assets and Liabilities Measured at Fair Value as of September 30, 2020
	Level 1		Level 2		Level 3(1)		Total
	(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	—	$	—	$	19,072	$	19,072
Floating rate asset-backed securities	—		9,201		—		9,201

Floating rate Government/GSE guaranteed mortgage-backed securities	—		2,286,033		—		2,286,033
Fixed rate GSE guaranteed mortgage-backed securities	—		318		—		318

Fixed rate U.S. Treasuries	1,217,566		—		—		1,217,566
Total Investment Securities	1,217,566		2,295,552		19,072		3,532,190
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	—		—		7,511,638		7,511,638
Total Farmer Mac Guaranteed Securities	—		—		7,511,638		7,511,638
USDA Securities:
Trading	—		—		6,830		6,830
Total USDA Securities	—		—		6,830		6,830
Financial derivatives	9		12,828		—		12,837
Total Assets at fair value	$	1,217,575	$	2,308,380	$	7,537,540	$	11,063,495
Liabilities:
Financial derivatives	$	—	$	37,357	$	—	$	37,357
Total Liabilities at fair value	$	—	$	37,357	$	—	$	37,357

Non-recurring:
Assets
Loans held for sale	$	—	$	—	$	22,086	$	22,086
Total non-recurring assets at fair value	$	—	$	—	$	22,086	$	22,086

(1) Level 3 assets represent 32% of total assets and 68% of financial instruments measured at fair value.


Assets and Liabilities Measured at Fair Value as of December 31, 2019
	Level 1		Level 2		Level 3(1)		Total
	(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	—	$	—	$	18,912	$	18,912
Floating rate asset-backed securities	—		11,085		—		11,085
Floating rate Government/GSE guaranteed mortgage-backed securities	—		1,632,583		—		1,632,583
Fixed rate GSE guaranteed mortgage-backed securities	—		340		—		340
Fixed rate U.S. Treasuries	1,296,923		—		—		1,296,923
Total available-for-sale	1,296,923		1,644,008		18,912		2,959,843
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	—		—		7,143,025		7,143,025
Total Farmer Mac Guaranteed Securities	—		—		7,143,025		7,143,025
USDA Securities:
Trading	—		—		8,913		8,913
Total USDA Securities	—		—		8,913		8,913
Financial derivatives	—		10,519		—		10,519
Total Assets at fair value	$	1,296,923	$	1,654,527	$	7,170,850	$	10,122,300
Liabilities:
Financial derivatives	$	51	$	26,991	$	—	$	27,042
Total Liabilities at fair value	$	51	$	26,991	$	—	$	27,042

(1) Level 3 assets represent 33% of total assets and 71% of financial instruments measured at fair value.

There were no significant assets or liabilities measured at fair value on a non-recurring basis as of September 30, 2020 or December 31, 2019.

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 2020 and 2019, 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 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, 2020 and 2019.

Table 9.2


Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended September 30, 2020
	Beginning Balance		Purchases		Sales		Settlements		Allowance for losses		Realized and unrealized gains/(losses) 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	$	18,283	$	—	$	—	$	—	$	1	$	—	$	788	$	19,072
Total available-for-sale	18,283		—		—		—		1		—		788		19,072
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	7,898,387		122,892		—		(513,864)		(96)		(41,832)		46,151		7,511,638
Total available-for-sale	7,898,387		122,892		—		(513,864)		(96)		(41,832)		46,151		7,511,638
USDA Securities:

Trading	7,786		—		—		(697)		—		(259)		—		6,830
Total USDA Securities	7,786		—		—		(697)				(259)		—		6,830
Total Assets at fair value	$	7,924,456	$	122,892	$	—	$	(514,561)	$	(95)	$	(42,091)	$	46,939	$	7,537,540


Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended September 30, 2019
	Beginning Balance		Purchases		Sales		Settlements		Realized and unrealized gains/(losses) 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	$	19,208	$	—	$	—	$	—	$	—	$	—	$	19,208
Total available-for-sale	19,208		—		—		—		—		—		19,208
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	7,035,668		340,148		—		(254,593)		84,164		(22,846)		7,182,541
Total available-for-sale	7,035,668		340,148		—		(254,593)		84,164		(22,846)		7,182,541
USDA Securities:
Available-for-sale	—		9,506		(9,506)		—		—		—		—
Trading	9,201		—		—		(307)		49		—		8,943
Total USDA Securities	9,201		9,506		(9,506)		(307)		49		—		8,943
Total Assets at fair value	$	7,064,077	$	349,654	$	(9,506)	$	(254,900)	$	84,213	$	(22,846)	$	7,210,692


Level 3 Assets and Liabilities Measured at Fair Value for the Nine Months Ended September 30, 2020
	Beginning Balance		Purchases		Sales		Settlements		Allowance for Losses		Realized and unrealized gains/(losses) 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	$	—	$	—	$	—	$	(37)	$	—	$	197	$	19,072
Total available-for-sale	18,912		—		—		—		(37)		—		197		19,072
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage	7,143,025		958,368		—		(826,380)		(330)		257,597		(20,642)		7,511,638
Total available-for-sale	7,143,025		958,368		—		(826,380)		(330)		257,597		(20,642)		7,511,638
USDA Securities:

Trading	8,913		—		—		(1,910)		—		(173)		—		6,830
Total USDA Securities	8,913		—		—		(1,910)				(173)		—		6,830
Total Assets at fair value	$	7,170,850	$	958,368	$	—	$	(828,290)	$	(367)	$	257,424	$	(20,445)	$	7,537,540


Level 3 Assets and Liabilities Measured at Fair Value for the Nine Months Ended September 30, 2019
	Beginning Balance		Purchases		Sales		Settlements		Realized and unrealized gains/(losses) 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		1,730,244		—		(724,906)		258,155		(55,449)		7,182,541
Total available-for-sale	5,974,497		1,730,244		—		(724,906)		258,155		(55,449)		7,182,541
USDA Securities:
Available-for-sale	—		57,853		(57,853)		—		—		—		—
Trading	9,999		—		—		(1,210)		154		—		8,943
Total USDA Securities	9,999		57,853		(57,853)		(1,210)		154		—		8,943
Total Assets at fair value	$	6,003,211	$	1,788,097	$	(57,853)	$	(726,116)	$	258,309	$	(54,956)	$	7,210,692

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, 2020 and December 31, 2019:

Table 9.3

As of September 30, 2020

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

19,072

Indicative bids

Range of broker quotes

97.0% - 97.0% (97.0%)

Farmer Mac Guaranteed Securities:

AgVantage

7,511,638

Discounted cash flow

Discount rate

0.8% - 2.3% (1.2%)

USDA Securities

6,830

Discounted cash flow

Discount rate

1.3% - 3.3% (2.6%)

CPR

23% - 49% (43%)

As of December 31, 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

18,912

Indicative bids

Range of broker quotes

96.0% - 96.0% (96.0%)

Farmer Mac Guaranteed Securities:

AgVantage

7,143,025

Discounted cash flow

Discount rate

2.3% - 5.5% (2.6%)

USDA Securities

8,913

Discounted cash flow

Discount rate

2.3% - 2.6% (2.1%)

CPR

10% - 21% (19%)

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 September 30, 2020 and December 31, 2019:

Table 9.4


	As of September 30, 2020				As of December 31, 2019
	Fair Value		Carrying Amount		Fair Value		Carrying Amount
	(in thousands)
Financial assets:
Cash and cash equivalents	$	910,592	$	910,592	$	604,381	$	604,381
Investment securities	3,578,375		3,577,222		3,005,828		3,004,875
Farmer Mac Guaranteed Securities	8,739,103		8,712,208		8,606,451		8,590,476
USDA Securities	2,522,001		2,417,678		2,294,671		2,241,073
Loans	8,450,522		8,105,647		7,317,091		6,981,440
Financial derivatives	12,837		12,837		10,519		10,519
Guarantee and commitment fees receivable	34,801		36,664		36,732		38,442
Financial liabilities:
Notes payable	21,893,043		21,589,285		19,234,079		19,098,648
Debt securities of consolidated trusts held by third parties	1,337,741		1,292,416		1,663,177		1,616,504
Financial derivatives	37,357		37,357		27,042		27,042
Guarantee and commitment obligations	33,278		35,140		34,990		36,700

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.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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