UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-Q
__________________________
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☒ xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended November 30, 2017August 31, 2020
OR
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☐¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File Number: 1-7102
__________________________
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
__________________________
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| | |
| District of Columbia | | 52-0891669 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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| 20701 Cooperative Way, Dulles, Virginia, 20166 |
| (Address of principal executive offices) (Zip Code) |
Registrant’s telephone number, including area code: (703) 467-1800
__________________________
Securities registered pursuant to Section 12(b) of the Act:
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| | |
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
| 7.35% Collateral Trust Bonds, due 2026 | NRUC 26 | New York Stock Exchange |
| 5.50% Subordinated Notes, due 2064 | NRUC | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ xNo ☐
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒x No ☐¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ ¨ Accelerated filer ☐ ¨ Non-accelerated filer ☒x Smaller reporting company ☐ ¨Emerging growth company ☐¨
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ☐
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ ¨No ☒x
TABLE OF CONTENTS
INDEX OF MD&A TABLESTABLE CROSS REFERENCE INDEX
| | | Table | | Description | | Page | | Description | | Page |
| — | | MD&A Tables: | | | |
| 1 | | Summary of Selected Financial Data | | 2 |
| | Summary of Selected Financial Data | | 3 |
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| 2 | | Average Balances, Interest Income/Interest Expense and Average Yield/Cost | | 8 |
| | Average Balances, Interest Income/Interest Expense and Average Yield/Cost | | 11 |
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| 3 | | Rate/Volume Analysis of Changes in Interest Income/Interest Expense | | 11 |
| | Rate/Volume Analysis of Changes in Interest Income/Interest Expense | | 13 |
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| 4 | | Non-Interest Income | | 13 |
| | Non-Interest Income | | 15 |
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| 5 | | Derivative Average Notional Amounts and Average Interest Rates | | 14 |
| | Derivative Gains (Losses) | | 16 |
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| 6 | | Derivative Gains (Losses) | | 15 |
| | Derivative Cash Settlements Expense—Average Notional Amounts and Interest Rates | | 17 |
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| 7 | | Non-Interest Expense | | 16 |
| | Non-Interest Expense | | 18 |
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| 8 | | Loans Outstanding by Type and Member Class | | 17 |
| | Loans Outstanding by Member Class and Loan Type | | 19 |
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| 9 | | Historical Retention Rate and Repricing Selection | | 18 |
| | Historical Retention Rate and Repricing Selection | | 20 |
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| 10 | | Total Debt Outstanding | | 19 |
| | Total Debt Outstanding | | 21 |
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| 11 | | Member Investments | | 20 |
| | Member Investments | | 22 |
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| 12 | | Collateral Pledged | | 21 |
| | Collateral Pledged | | 23 |
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| 13 | | Unencumbered Loans | | 22 |
| | Unencumbered Loans | | 24 |
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| 14 | | Guarantees Outstanding | | 23 |
| | Equity | | 25 |
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| 15 | | Maturities of Guarantee Obligations | | 24 |
| | Guarantees Outstanding | | 26 |
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| 16 | | Unadvanced Loan Commitments | | 24 |
| | Maturities of Guarantee Obligations | | 27 |
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| 17 | | Notional Maturities of Unadvanced Loan Commitments | | 24 |
| | Unadvanced Loan Commitments | | 27 |
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| 18 | | Maturities of Notional Amount of Unconditional Committed Lines of Credit | | 25 |
| | Unadvanced Loan Commitments Maturities of Notional Amount | | 28 |
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| 19 | | Loan Portfolio Security Profile | | 27 |
| | Unconditional Committed Lines of Credit Maturities of Notional Amount | | 29 |
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| 20 | | Credit Exposure to 20 Largest Borrowers | | 29 |
| | Loan Portfolio Security Profile | | 31 |
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| 21 | | TDR Loans | | 30 |
| | Loan Exposure to 20 Largest Borrowers | | 32 |
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| 22 | | Net Charge-Offs (Recoveries) | | 30 |
| | Troubled Debt Restructured Loans | | 33 |
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| 23 | | Allowance for Loan Losses | | 31 |
| | Allowance for Credit Losses | | 35 |
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| 24 | | Rating Triggers for Derivatives | | 32 |
| | Rating Triggers for Derivatives | | 37 |
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| 25 | | Liquidity Reserve | | 33 |
| | Available Liquidity | | 38 |
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| 26 | | Committed Bank Revolving Line of Credit Agreements | | 34 |
| | Committed Bank Revolving Line of Credit Agreements | | 38 |
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| 27 | | Short-Term Borrowings | | 35 |
| | Short-Term Borrowings—Funding Sources | | 40 |
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| 28 | | Issuances and Maturities of Long-Term and Subordinated Debt | | 36 |
| | Short-Term Borrowings | | 40 |
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| 29 | | Principal Maturity of Long-Term and Subordinated Debt | | 36 |
| | Long-Term and Subordinated Debt Issuances and Repayments | | 41 |
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| 30 | | Projected Sources and Uses of Liquidity | | 38 |
| | Long-Term and Subordinated Debt Principal Maturity | | 41 |
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| 31 | | Credit Ratings | | 38 |
| | Projected Sources and Uses of Liquidity from Debt and Investment Activity | | 42 |
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| 32 | | Interest Rate Gap Analysis | | 40 |
| | Credit Ratings | | 43 |
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| 33 | | Adjusted Financial Measures — Income Statement | | 41 |
| | Interest Rate Gap Analysis | | 45 |
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| 34 | | TIER and Adjusted TIER | | 42 |
| | Adjusted Financial Measures—Income Statement | | 46 |
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| 35 | | Adjusted Financial Measures — Balance Sheet | | 42 |
| | TIER and Adjusted TIER | | 47 |
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| 36 | | Debt-to-Equity Ratio | | 43 |
| | Adjusted Financial Measures—Balance Sheet | | 47 |
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| 37 | | | Debt-to-Equity Ratio and Adjusted Debt-to-Equity Ratio | | 48 |
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| 38 | | | Members’ Equity | | 48 |
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PART I—FINANCIAL INFORMATION
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) |
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| FORWARD-LOOKING STATEMENTS |
This Quarterly Report on Form 10-Q for the quarterly period ended August 31, 2020 (“this Report”) contains certain statements that are considered “forward-looking statements” as defined and within the meaning of the safe-harbor provisions of the Private Securities Litigation Reform Act of 1933, as amended, and the Exchange Act of 1934, as amended. 1995. Forward-looking statements which aredo not represent historical facts or statements of current conditions. Instead, forward-looking statements represent management’s current beliefs and expectations, based on certain assumptions and describeestimates made by, and information available to, management at the time the statements are made, regarding our future plans, strategies, operations, financial results or other events and expectations,developments, many of which, by their nature, are inherently uncertain and outside our control. Forward-looking statements are generally identified by ourthe use of words such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity” and similar expressions, whether in the negative or affirmative. All statements about future expectations or projections, including statements about loan volume, the appropriatenessadequacy of the allowance for loancredit losses, operating income and expenses, leverage and debt-to-equity ratio,ratios, borrower financial performance, impaired loans, and sources and uses of liquidity, are forward-looking statements. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, actual results and performance may differ materially from our forward-looking statements due to several factors. Factorsstatements. Therefore, you should not place undue reliance on any forward-looking statement and should consider the risks and uncertainties that could cause future resultsour current expectations to vary from our forward-looking statements include,including, but are not limited to, general economic conditions, legislative changes including those that could affect our tax status, governmental monetary and fiscal policies, demand for our loan products, lending competition, changes in the quality or composition of our loan portfolio, changes in our ability to access external financing, changes in the credit ratings on our debt, valuation of collateral supporting impaired loans, charges associated with our operation or disposition of foreclosed assets, technological changes within the rural electric utility industry, regulatory and economic conditions in the rural electric industry, nonperformance of counterparties to our derivative agreements, the costs and effectsimpact of legal or governmental proceedings involving us or our members, the occurrence and effect of natural disasters or public health emergencies, such as the emergence in 2019 and continued spread of a novel coronavirus that causes coronavirus disease 2019 (“COVID-19”), which was declared a global pandemic by the World Health Organization (“WHO”) in March 2020, and the factors listed and describedidentified under “Item 1A. Risk Factors” ofin our Annual Report on Form 10-K for the fiscal year ended May 31, 20172020 (“20172020 Form 10-K”). Except, as well as any risk factors identified under “Part II—Item 1A. Risk Factors” in this Report. Forward-looking statements speak only as of the date they are made, and, except as required by law, we undertake no obligation to update or publicly release any revisions to forward-looking statementsstatement to reflect the impact of events, circumstances or changes in expectations that arise after the date on which the forward-looking statement is made.
National Rural Utilities Cooperative Finance Corporation (“CFC”) is a member-owned cooperative association incorporated under the laws of the District of Columbia in April 1969. CFC’s principal purpose is to provide its members with financing to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC makes loans to its rural electric members so they can acquire, construct and operate electric distribution systems, generation and transmission (“power supply”) systems and related facilities. CFC also provides its members with credit enhancements in the form of letters of credit and guarantees of debt obligations. As a cooperative, CFC is owned by and exclusively serves its membership, which consists of not-for-profit entities or subsidiaries or affiliates of not-for-profit entities. CFC is exempt from federal income taxes under Section 501(c)(4) of the Internal Revenue Code. As a member-owned cooperative, CFC’s objective is not to maximize profit, but rather to offer its members cost-based financial products and services. CFC funds its activities primarily through a combination of public and private issuances of debt securities, member investments and retained equity. As a Section 501(c)(4) tax-exempt, member-owned cooperative, we cannot issue equity securities.
Our financial statements include the consolidated accounts of CFC, National Cooperative Services Corporation (“NCSC”), Rural Telephone Finance Cooperative (“RTFC”) and subsidiaries created and controlled by CFC to hold foreclosed assets resulting from defaulted loans or bankruptcy. NCSC is a taxable member-owned cooperative that may provide financing to
members of CFC, government or quasi-government entities which own electric utility systems that meet the Rural Electrification Act definition of “rural”“rural,” and for-profit and nonprofit entities that are owned, operated or controlled by, or provide significant benefits to certain members of CFC. RTFC is a taxable Subchapter T cooperative association that provides financing for its rural telecommunications members and their affiliates. CFC didand its consolidated entities have not haveheld any entities that held foreclosed assets as of November 30, 2017 or May 31,since fiscal year 2017. See “Item 1. Business—Overview” ofin our 20172020 Form 10-K for additional information on the business activities of each of these entities. Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its consolidated entities. All references to members within this document include members, associates and affiliates of CFC and its consolidated entities.entities, except where indicated otherwise.
We conduct our operations through three business segments, which are based on of the legal entities included in our consolidated financial statements: CFC, NCSC and RTFC. CFC’s business operations account for the substantial majority of our loans and revenue. Loans to members totaled $26,929 million as of August 31, 2020, of which 96% was attributable to CFC. We generated total revenue, which consists of net interest income and fee and other income, of $103 million for the three months ended August 31, 2020 (“current quarter”), compared with $88 million for the three months ended August 31, 2019 (“same prior-year quarter”). Our adjusted total revenue was $76 million for the current quarter, compared with $77 million for the same prior-year quarter. We provide information on the financial performance of our business segments in “Note 14—Business Segments.”
Management monitors a variety of key indicators to evaluate our business performance. The following MD&A is intended to provide the reader with an understanding of our results of operations, financial condition and liquidity by discussing the drivers of changes from period to period and the key measures used by management to evaluate performance, such as net interest income, net interest yield, loan growth, debt-to-equity ratio, growth and credit quality metrics. MD&A is provided as a supplement to, and should be read in conjunction with our unaudited condensed consolidated financial statements and related notes in this Report, our audited consolidated financial statements and related notes in our 2017 Form 10-K and additional information contained in our 2017 Form 10-K, including the risk factors discussed under “Part I—Item 1A. Risk Factors,” as well as any risk factors identified under “Part II—Item 1A. Risk Factors” in this Report.
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SUMMARY OF SELECTED FINANCIAL DATA |
Table 1provides a summary of consolidated selected financial data for the three and six months ended November 30, 2017 and 2016, and as of November 30, 2017 and May 31, 2017. In addition to financial measures determined in accordance with generally accepted accounting principles in the United States (“GAAP”), management also evaluates performance based on certain non-GAAP measures and metrics, which we refer to as “adjusted” measures. CertainThe following MD&A is intended to provide the reader with an understanding of our consolidated results of operations, financial covenant provisionscondition and liquidity by discussing the factors influencing changes from period to period and key measures used by management to evaluate performance, including, among others, net interest income, net interest yield, debt-to-equity ratio and the related non-GAAP adjusted measures, loan activity and credit quality metrics. Our MD&A is provided as a supplement to, and should be read in conjunction with the unaudited consolidated financial statements and related notes in this Report, our audited consolidated financial statements and related notes in our credit agreements are2020 Form 10-K and additional information contained in our 2020 Form 10-K, including the risk factors identified under “Part I—Item 1A. Risk Factors,” as well as additional information contained elsewhere in this Report.
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| SUMMARY OF SELECTED FINANCIAL DATA |
Table 1provides a summary of consolidated selected financial data for the three months ended August 31, 2020 and 2019, and as of August 31, 2020 and May 31, 2020. In addition to financial measures determined in accordance with GAAP, management also evaluates performance based on certain non-GAAP financialmeasures, which we refer to as “adjusted” measures. Our key non-GAAP financial measures are adjusted net income, adjusted net interest income, adjusted interest expense, adjusted net interest yield, adjusted times interest earned ratio (“adjusted TIER”)TIER and adjusted debt-to-equity ratio. The most comparable GAAP measures are net income, net interest income, interest expense, net interest yield, TIER and debt-to-equity ratio, respectively. The primary adjustments we make to calculate these non-GAAP measures consist ofof: (i) adjusting interest expense and net interest income to include the impact of net periodic derivative cash settlements;settlements expense; (ii) adjusting net income, senior debttotal liabilities and total equity to exclude the non-cash impact of the accounting for derivative financial instruments; (iii) adjusting senior debttotal liabilities to exclude the amount that funds CFC member loans guaranteed by RUS, subordinated deferrable debt and members’ subordinated certificates; and (iv) adjusting total equity to include subordinated deferrable debt and members’ subordinated certificates and exclude cumulative derivative forward value gains and losses and accumulated other comprehensive income.income (“AOCI”). We believe our non-GAAP adjusted measures, which are not a substitute for GAAP and may not be consistent with similarly titled non-GAAP measures used by other companies, provide meaningful information and are useful to investors because management evaluates performance based on these metrics for purposes of: (i) budgeting and forecasting; (ii) comparing period-to-period operating results, analyzing changes in results and identifying potential trends; (iii) making compensation decisions; and (iv) informing the establishment of short- and long-term strategic goals. In addition, certain of the financial covenants in our committed bank revolving line of credit agreements and debt indentures are based on these non-GAAP adjusted measures. See “Non-GAAP Financial Measures” forWe provide a detailed reconciliation of theseour non-GAAP adjusted measures to the most comparable GAAP measures.measures in the section “Non-GAAP Financial Measures.”
Table 1: Summary of Selected Financial Data(1)
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| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended November 30, | | | | Six Months Ended November 30, | | |
| (Dollars in thousands) | | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| Statement of operations | | | | | | | | | | | | |
| Interest income | | $ | 265,823 |
| | $ | 257,156 |
| | 3% | | $ | 531,738 |
| | $ | 513,991 |
| | 3% |
| Interest expense | | (195,170 | ) | | (183,654 | ) | | 6 | | (387,901 | ) | | (364,734 | ) | | 6 |
| Net interest income | | 70,653 |
| | 73,502 |
| | (4) | | 143,837 |
| | 149,257 |
| | (4) |
| Fee and other income | | 5,542 |
| | 5,097 |
| | 9 | | 9,487 |
| | 9,627 |
| | (1) |
| Total net revenue | | 76,195 |
| | 78,599 |
| | (3) | | 153,324 |
| | 158,884 |
| | (3) |
| Benefit (provision) for loan losses | | 304 |
| | (738 | ) | | ** | | 602 |
| | (2,666 | ) | | ** |
Derivative gains(1) | | 125,593 |
| | 340,660 |
| | (63) | | 79,395 |
| | 152,367 |
| | (48) |
| Results of operations of foreclosed assets | | (10 | ) | | (549 | ) | | (98) | | (34 | ) | | (1,661 | ) | | (98) |
Operating expenses(2) | | (21,914 | ) | | (20,632 | ) | | 6 | | (43,550 | ) | | (41,491 | ) | | 5 |
| Other non-interest expense | | (618 | ) | | (517 | ) | | 20 | | (1,140 | ) | | (960 | ) | | 19 |
| Income before income taxes | | 179,550 |
| | 396,823 |
| | (55) | | 188,597 |
| | 264,473 |
| | (29) |
| Income tax expense | | (827 | ) | | (1,519 | ) | | (46) | | (859 | ) | | (1,430 | ) | | (40) |
| Net income | | $ | 178,723 |
| | $ | 395,304 |
| | (55) | | $ | 187,738 |
| | $ | 263,043 |
| | (29) |
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| | | | | | | | | | |
| | | Three Months Ended August 31, | | |
| (Dollars in thousands) | | 2020 | | 2019 | | Change |
| Statement of operations | | | | | | |
| Interest income | | $ | 279,584 |
| | $ | 290,015 |
| | (4)% |
| Interest expense | | (179,976 | ) | | (213,271 | ) | | (16) |
| Net interest income | | 99,608 |
| | 76,744 |
| | 30 |
| Fee and other income | | 3,516 |
| | 10,941 |
| | (68) |
| Total revenue | | 103,124 |
| | 87,685 |
| | 18 |
| Provision for credit losses | | (326 | ) | | (30 | ) | | 987 |
Derivative gains (losses)(2) | | 60,276 |
| | (395,725 | ) | | ** |
| Investment securities gains | | 4,659 |
| | 1,620 |
| | 188 |
Operating expenses(3) | | (22,663 | ) | | (25,329 | ) | | (11) |
Other non-interest (expense) income(1) | | (332 | ) | | 7,179 |
| | ** |
| Income (loss) before income taxes | | 144,738 |
| | (324,600 | ) | | ** |
| Income tax (provision) benefit | | (151 | ) | | 521 |
| | ** |
| Net income (loss) | | $ | 144,587 |
| | $ | (324,079 | ) | | ** |
| | | | | | | |
| Adjusted operational financial measures | | | | | | |
Adjusted interest expense(4) | | $ | (206,948 | ) | | $ | (224,314 | ) | | (8) |
Adjusted net interest income(4) | | 72,636 |
| | 65,701 |
| | 11 |
Adjusted total revenue(4) | | 76,152 |
| | 76,642 |
| | (1) |
Adjusted net income(4) | | 57,339 |
| | 60,603 |
| | (5) |
| | | | | | | |
| Selected ratios | | | | | | |
Fixed-charge coverage ratio/TIER(5) | | 1.80 |
| | — |
| | 180 bps |
Adjusted TIER(4) | | 1.28 |
| | 1.27 |
| | 1 |
Net interest yield(6) | | 1.42 | % | | 1.14 | % | | 28 |
Adjusted net interest yield(4)(7) | | 1.04 |
| | 0.97 |
| | 7 |
Net charge-off rate(8) | | 0.00 |
| | 0.00 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended November 30, | | | | Six Months Ended November 30, | | |
| | | 2017 | | 2016 | | Change | | 2017 |
| 2016 | | Change |
| Adjusted operational financial measures | | | | | | | | | | | | |
Adjusted interest expense(3) | | $ | (214,805 | ) | | $ | (205,241 | ) | | 5% | | $ | (427,758 | ) | | $ | (409,711 | ) | | 4% |
Adjusted net interest income(3) | | 51,018 |
| | 51,915 |
| | (2) | | 103,980 |
| | 104,280 |
| | — |
Adjusted net income(3) | | 33,495 |
| | 33,057 |
| | 1 | | 68,486 |
| | 65,699 |
| | 4 |
| | | | | | | | | | | | | |
| Selected ratios | | | | | | | | | | | | |
Fixed-charge coverage ratio/TIER (4) | | 1.92 |
| | 3.15 |
| | (123) bps | | 1.48 |
| | 1.72 |
| | (24) bps |
Adjusted TIER(3) | | 1.16 |
| | 1.16 |
| | — | | 1.16 |
| | 1.16 |
| | — |
Net interest yield(5) | | 1.12 | % | | 1.21 | % | | (9) | | 1.14 | % | | 1.23 | % | | (9) |
Adjusted net interest yield(3)(6) | | 0.81 |
| | 0.86 |
| | (5) | | 0.83 |
| | 0.86 |
| | (3) |
Net charge-off rate(7) | | — |
| | — |
| | — | | — |
| | 0.02 |
| | (2) |
| | | | | | | | | | | | | |
| | | | | | | | | November 30, 2017 | | May 31, 2017 | | Change |
| Balance sheet | | | | | | | | | | | | |
| Cash and cash equivalents | | | | | | | | $ | 280,315 |
| | $ | 166,615 |
| | 68% |
| Investment securities | | | | | | | | 339,566 |
| | 92,554 |
| | 267 |
Loans to members(8) | | | | | | | | 24,824,691 |
| | 24,367,044 |
| | 2 |
| Allowance for loan losses | | | | | | | | (36,774 | ) | | (37,376 | ) | | (2) |
| Loans to members, net | | | | | | | | 24,787,917 |
| | 24,329,668 |
| | 2 |
| Total assets | | | | | | | | 25,880,243 |
| | 25,205,692 |
| | 3 |
| Short-term borrowings | | | | | | | | 3,557,192 |
| | 3,342,900 |
| | 6 |
| Long-term debt | | | | | | | | 18,386,819 |
| | 17,955,594 |
| | 2 |
| Subordinated deferrable debt | | | | | | | | 742,341 |
| | 742,274 |
| | — |
| Members’ subordinated certificates | | | | | | | | 1,399,675 |
| | 1,419,025 |
| | (1) |
| Total debt outstanding | | | | | | | | 24,086,027 |
| | 23,459,793 |
| | 3 |
| Total liabilities | | | | | | | | 24,640,195 |
| | 24,106,887 |
| | 2 |
| Total equity | | | | | | | | 1,240,048 |
| | 1,098,805 |
| | 13 |
Guarantees(9) | | | | | | | | 662,496 |
| | 889,617 |
| | (26) |
| | | | | | | | | | | | | |
| Selected ratios period end | | | | | | | | | | | |
|
Allowance coverage ratio(10) | | | | | | | | 0.15 | % | | 0.15 | % | | — |
Debt-to-equity ratio(11) | | | | | | | | 19.87 |
| | 21.94 |
| | (207) |
Adjusted debt-to-equity ratio(3) | | | | | | | | 6.12 |
| | 5.95 |
| | 17 |
|
| | | | | | | | | | |
| | | August 31, 2020 | | May 31, 2020 | | Change |
| Balance sheet | | | | | | |
| Cash, cash equivalents and restricted cash | | $ | 357,194 |
| | $ | 680,019 |
| | (47)% |
| Investment securities | | 589,792 |
| | 370,135 |
| | 59 |
Loans to members(9) | | 26,928,877 |
| | 26,702,380 |
| | 1 |
Allowance for credit losses(10) | | (57,351 | ) | | (53,125 | ) | | 8 |
| Loans to members, net | | 26,871,526 |
| | 26,649,255 |
| | 1 |
| Total assets | | 28,262,621 |
| | 28,157,605 |
| | — |
| Short-term borrowings | | 4,553,491 |
| | 3,961,985 |
| | 15 |
| Long-term debt | | 19,181,520 |
| | 19,712,024 |
| | (3) |
| Subordinated deferrable debt | | 986,166 |
| | 986,119 |
| | — |
| Members’ subordinated certificates | | 1,298,845 |
| | 1,339,618 |
| | (3) |
| Total debt outstanding | | 26,020,022 |
| | 25,999,746 |
| | — |
| Total liabilities | | 27,531,117 |
| | 27,508,783 |
| | — |
| Total equity | | 731,504 |
| | 648,822 |
| | 13 |
Guarantees(11) | | 683,246 |
| | 820,786 |
| | (17) |
| | | | | | | |
| Selected ratios period end | | | | | |
|
Allowance coverage ratio(10)(12) | | 0.21 | % | | 0.20 | % | | — |
Debt-to-equity ratio(13) | | 37.64 |
| | 42.40 |
| | (476) |
Adjusted debt-to-equity ratio(4) | | 5.96 |
| | 5.85 |
| | 11 |
** ChangeCalculation of percentage change is not meaningful.
(1)Certain reclassifications have been made to prior periods to conform to the current period presentation.
(2)Consists of derivativenet periodic contractual interest amounts on our interest rate swaps, which we refer to as derivatives cash settlements interest (expense) income, and derivative forward value gains (losses). Derivative cash settlement amounts represent net periodic contractual interest accruals related to on derivatives not designated for hedge accounting. Derivative forward value gains (losses) represent changes in fair value during the period, excluding net periodic contractual interest accruals,amounts, related to derivatives not designated for hedge accounting and expense amounts reclassified into income related to the cumulative transition lossadjustment amount recorded in accumulated other comprehensive income as of June 1, 2001, as a result of the adoption date of the derivative accounting guidance that requiredrequiring derivatives to be reported at fair value on the balance sheet.
(2)(3)Consists of salaries and employee benefits and the other general and administrative expenses components of non-interest expense, each of which are presented separately on our consolidated statements of operations.
(3)(4)See “Non-GAAP Financial Measures” for details on the calculation of these non-GAAP adjusted measures and the reconciliation to the most comparable GAAP measures.
(4)(5)Calculated based on net income (loss) plus interest expense for the period divided by interest expense for the period. The fixed-charge coverage ratios and TIER were the same during each period presented because we did not have any capitalized interest during these periods.
(5)(6)Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.
(6)(7)Calculated based on annualized adjusted net interest income for the period divided by average interest-earning assets for the period.
(7)(8)Calculated based on annualized net charge-offs (recoveries) for the period divided by average total outstanding loans for the period.
(8)(9)Consists of the outstanding principal balance of member loans plus unamortized deferred loan origination costs, which totaled $11$12 million as of both November 30, 2017August 31, 2020 and May 31, 2017.2020.
(9)(10)On June 1, 2020, we adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology previously used for estimating our allowance for credit losses with an expected loss methodology referred to as the current expected credit loss (“CECL”) model. At adoption, we recorded an increase in our allowance for credit losses of $4 million and a corresponding decrease in retained earnings through a cumulative-effect adjustment.
(11)Reflects the total amount of member obligations for which CFC has guaranteed payment to a third party as of the end of each period. This amount represents our maximum exposure to loss, which significantly exceeds the guarantee liability recorded on our consolidated balance sheets. See “Note 10—11—Guarantees” for additional information.
(10)(12)Calculated based on the allowance for loancredit losses at period end divided by total outstanding loans at period end.
(11)(13)Calculated based on total liabilities at period end divided by total equity at period end.
Our primary objective as a member-owned cooperative lender is to provide cost-based financial products to our rural electric members while maintaining a sound financial position required for investment-grade credit ratings on our debt instruments. Our objective is not to maximize net income;profit; therefore, the rates we charge our member-borrowers reflect our adjusted interest expensefunding costs plus a spread to cover our operating expenses, a provision for loancredit losses and earnings sufficient to achieve interest coverage to meet our financial objectives. Our goal is to earn an annual minimum adjusted TIER of 1.10 and to maintain an adjusted debt-to-equity ratio at approximately 6.00-to-1 or below 6.00-to-1.below.
We are subject to period-to-period volatility in our reported GAAP results due to changes in market conditions and differences in the way our financial assets and liabilities are accounted for under GAAP. Our financial assets and liabilities expose us to interest-rate risk. We use derivatives, primarily interest rate swaps, as part of our strategy in managing this risk. Our derivatives are intended to economically hedge and manage the interest-rate sensitivity mismatch between our financial assets and liabilities. We are required under GAAP to carry derivatives at fair value on our consolidated balance sheet;sheets; however, the financial assets and liabilities for which we use derivatives to economically hedge are carried at amortized cost. Changes in interest rates and spreadsthe shape of the swap curve result in periodic fluctuations in the fair value of our derivatives, which may cause volatility in our earnings because we do not apply hedge accounting.accounting for our interest rate swaps. As a result, the mark-to-market changes in our derivativesinterest rate swaps are recorded in earnings. Based on the compositionBecause our derivative portfolio consists of our derivatives,a higher proportion of pay-fixed swaps than receive-fixed swaps, we generally record derivative losses in earnings when interest rates decline and derivative gains when interest rates rise. This earnings volatility generally is not indicative of the underlying economics of our business, as the derivative forward fair value gains or losses recorded each period may or may not be realized over time, depending on the terms of our derivative instruments and future changes in market conditions that impact actual derivativethe periodic cash settlement amounts.amounts of our interest rate swaps. As such, management uses our non-GAAP adjusted non- GAAP results whichto evaluate our operating performance. Our adjusted results include realized net periodic derivative settlementsinterest rate swap settlement amounts but exclude the impact of unrealized derivativeforward fair value gains and losses. Certain of the financial covenants in our committed bank revolving line of credit agreements and debt indentures are also based on our non-GAAP adjusted results, as the forward fair value gains and losses related to evaluate our operating performance. Because derivative forward fair value gains and lossesinterest rate swaps do not impactaffect our cash flows, liquidity or ability to service our debt costs, our financial debt covenants are also based on our non-GAAP adjusted results.debt.
Financial Performance
Reported Results
We reported net income of $179$145 million and a TIER of 1.921.80 for the quarter ended November 30, 2017 (“current quarter”), compared withquarter. In comparison, we reported a net incomeloss of $395$324 million and a TIER of 3.15 for the same prior-year quarter. Wequarter, which resulted in no TIER coverage. The significant variance between our reported net income of $188 million and a TIER of 1.48results for the six months ended November 30, 2017, compared with a net income of $263 millioncurrent quarter and a TIER of 1.72 for the same prior-year period.quarter was attributable to mark-to-market changes in the fair value of our derivative instruments. Our debt-to-equity ratio decreased to 19.87-to-137.64 as of November 30, 2017,August 31, 2020, from 21.94-to-142.40 as of May 31, 2017,2020, primarily due to an increase in equity resulting from our reported net income of $188$145 million, for the six months ended November 30, 2017, which was partially offset by a decrease in equity as a result of the CFC Board of Directors’ authorization in the current quarter to retire patronage capital retirement of $45$60 million, which we returned to members in September 2017.2020.
The variance of $217$469 million between our reported net income of $179$145 million infor the current quarter and our reported net incomeloss of $395$324 million for the same prior-year quarter was driven primarily by mark-to-market changesa shift of $456 million in the derivative fair value of our derivatives.changes recorded in each period. We recognizedrecorded net derivative gains of $126$60 million infor the current quarter which were largely attributable to a net increase in the fair value of our pay-fixed swaps as interest rates increased across the yield curve. In comparison, we recognized derivative gains of $341 million in the same prior-year quarter, attributabledue to a net increase in the fair value of our swap portfolio, which consists predominately of pay-fixed swaps, dueprimarily attributable to an increase in medium-term and longer-termlong-term swap interest rates and a general steepening of the yield curve.rates. In addition,comparison, we experienced a decrease inrecorded net interest income of $3 million as a result of compression in the net
interest yield and an increase in operating expenses of $1 million, which were partially offset by a favorable shift in the provision for loanderivative losses of $1 million. Our net interest yield was 1.12%$396 million for the current quarter, a decrease of 9 basis points from the same prior-year quarter due to an increase in our cost of funds.
The variance of $75 million between our reporteda net income of $188 million for the six months ended November 30, 2017 and our net income of $263 million for the same prior-year period was also driven primarily by mark-to-market changesdecrease in the fair value of our derivatives. We recognized derivative gains of $79 million for the six months ended November 30, 2017, largely dueswap portfolio primarily attributable to the increasea decline in interest rates across the yield curve. In comparison, we recognized derivative gains of $152 million in the same prior-year period, attributable to the increase in medium-termswap curve, with medium- and longer-term interest rates during the period. In addition, we experiencedexperiencing a decrease in netsteeper decline than short-term rates. Net interest income of $5increased $23 million, dueor 30%, to $100 million for the compressioncurrent quarter, attributable to an increase in the net interest yield of 28 basis points, or 25%, to 1.42% and an increase in operating expensesour average interest-earning assets of $2$947 million, which wereor 4%. The increase in the net interest yield was largely due to a reduction in our average cost of borrowings of 61 basis points to 2.75%, partially offset by a favorable shiftdecrease in the provision for loan lossesaverage yield on interest-earning assets of $3 million. Our net interest yield31 basis points to 3.99%. The reduction in the overall average cost of borrowings was 1.14%driven by a decrease in the average cost of our short-term borrowings of 213 basis points to 0.45% for the six months ended November 30, 2017, a decreasecurrent quarter.
The decreases in our average borrowing cost and average yield on interest-earning assets reflect in part the impact of 9 basis points fromthe overall lower interest rate environment. Since August 31, 2019, the end of the same prior-year quarter, the Federal Open Market Committee (“FOMC”) of the Federal Reserve has lowered the benchmark federal funds rate by 200 basis points, including a 150 basis point reduction in March 2020 to a near zero target range of 0% to 0.25% as part of a series of measures implemented to ease the economic impact of the COVID-19 crisis. Over the last 12 months, the 3-month London Interbank Offered Rate (“LIBOR”) decreased by190 basis points to 0.24% as of August 31, 2020. Medium- and longer-term interest rates also fell during this 12-month period, but the decreases were not as pronounced as the decrease in short-term interest rates.
Other factors affecting the variance between our results for the current quarter and the same prior-year quarter include a decrease in fee income of $7 million due to an increasea reduction in our costprepayment fees and the absence of funds.a gain of $8 million recorded in connection with the sale of land in the same prior-year quarter.
Adjusted Non-GAAP Results
OurAdjusted net income totaled $57 million and adjusted TIER was 1.28 for the current quarter, compared with adjusted net income totaled $33of $61 million and our adjusted TIER was 1.16of 1.27 for both the current quarter and the same prior-year quarter. Our adjusted net income totaled $68 million and adjusted TIER was 1.16 for the six months ended November 30, 2017, compared with adjusted net income of $66 million and adjusted TIER of 1.16 for the same prior-year period. Our adjusted debt-to-equity ratio increased to 6.12-to-15.96 as of November 30, 2017,August 31, 2020, from 5.95-to-15.85 as of May 31, 2017, largely2020, primarily attributable to a reduction in adjusted equity due to an increase in debt outstanding to fund loan growth.
Whilethe maturity of subordinated certificates and the authorized patronage capital retirement amount, partially offset by adjusted net income for the current quarter and six months ended November 30, 2017quarter. Our adjusted debt-to-equity ratio of 5.96 as of August 31, 2020, remained relatively unchangedbelow our targeted threshold of 6.00-to-1.
The decrease in adjusted net income of $4 million in the current quarter from the same prior-year periods,quarter was largely attributable to the combined impact of the decrease in fee income of $7 million due to a reduction in prepayment fees and the absence of the gain of $8 million recorded in connection with the sale of land in the same prior-year quarter, which was partially offset by an increase in adjusted net interest income decreased slightly dueof $7 million, or 11%, to compression$73 million for the current quarter. The increase in adjusted net interest income was driven by an increase in the adjusted net interest yield resulting fromof 7 basis points, or 7%, to 1.04% and an increase in our costaverage interest-earning assets of funds.$947 million, or 4%. The combined impact of the decrease in adjusted net interest income and the increase in operating expenses was offset by the favorable shift in the provision for loan losses. Ourour adjusted net interest yield was 0.81% and 0.83% for current quarter andreflected the six months ended November 30, 2017, respectively,favorable impact of a decrease of 5 basis points and 3 basis points, respectively, from the same prior-year period due to an increasereduction in our adjusted average cost of funds.borrowings of 37 basis points to 3.16%, which was partially offset by a decrease in the average yield on interest-earning assets of 31 basis points to 3.99%. As noted above, the lower interest rate environment had a favorable impact on our adjusted average cost of borrowings and contributed to the decrease in the average yield on interest-earnings assets.
See “Non-GAAP Financial Measures” for additional information on our adjusted measures, including a reconciliation of these measures to the most comparable GAAP measures.
Lending Activity
Loans to members totaled $24,825$26,929 million as of November 30, 2017,August 31, 2020, an increase of $458$227 million, or 2%1%, from May 31, 2017.2020. The increase was primarily due todriven by an increase in CFC distributionlong-term loans of $405$385 million, an increase in NCSC loans of $126 million and an increase in RTFC loans of $17 million, which were partially offset by a decrease in line of credit loans of $159 million. CFC distribution loans and RTFC loans increased by $242 million and $11 million, respectively. NCSC loans, CFC statewide and associate loans and CFC power supply loans of $91 million.decreased by $17 million, $8 million and $2 million, respectively.
Long-term loan advances totaled $1,127$807 million during the six months ended November 30, 2017, withcurrent quarter, of which approximately 58% of those advances93% was provided to members for capital expenditures and approximately 4% was provided for the refinancing of loans made by other lenders. In comparison, long-term loan advances totaled $888 million during the same prior-year quarter, of which approximately 73% was provided to members for capital expenditures and 31%approximately 19% was provided for the refinancing of loans made by other lenders. CFC had long-term fixed-rate loans totaling $519$79 million that were scheduled to reprice during the six months ended November 30, 2017.current quarter. Of this total, $441$78 million repriced to a new long-term fixed rate $78 millionand the remainder either repriced to a long-term variable rate and $1 millionor were repaid in full. In comparison, CFC had long-term fixed-rate loans totaling $110 million that were scheduled to reprice during the same prior-year quarter, of which $109 million repriced to a new long-term fixed rate and $1 million was repaid in full.
Credit Quality
Despite the economic disruption caused by COVID-19, the overall credit quality of our loan portfolio remained high as of August 31, 2020, as evidenced by our continued strong credit performance metrics. We had no delinquent loans as of August 31, 2020 or May 31, 2020, and we have not experienced any loan defaults or charge-offs since fiscal year 2017. During the fourth quarter of fiscal year 2020, we classified one loan to a CFC power supply borrower with an outstanding balance of $168 million as of May 31, 2020, as nonperforming, placed the loan on nonaccrual status and established an asset-specific allowance for credit losses of $34 million as of May 31, 2020. We received payments from the borrower on this loan during the current quarter, which reduced the outstanding balance to $161 million as of August 31, 2020. The asset-specific allowance for credit losses for this loan, which we continue to report as nonperforming and remains on nonaccrual status, was $33 million as of August 31, 2020. We had no other loans classified as nonperforming or on nonaccrual status as of August 31, 2020 or May 31, 2020.
Loans outstanding to electric utility organizations represented approximately 99% of total loans outstanding as of both August 31, 2020 and May 31, 2020. We historically have had limited defaults and losses on loans in our electric utility loan portfolio largely because of the essential nature of the service provided by electric utility cooperatives as well as other factors, such as limited rate regulation and competition, which we discuss further in the section “Credit Risk—Loan Portfolio Credit Risk.” We generally lend to members on a senior secured basis, which reduces the risk of loss in the event of a borrower default. Of our total loans outstanding, 94% were secured as of August 31, 2020 and May 31, 2020.
On June 1, 2020, we adopted ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology for estimating credit losses with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) model. The incurred loss model delayed the recognition of credit losses until it was probable that a loss had occurred, while the CECL model requires the immediate recognition of expected credit losses over the contractual term, adjusted as appropriate for estimated prepayments, of financial instruments that fall within the scope of CECL at the date of origination or purchase of the financial instrument. The CECL model, which is applicable to the measurement of credit losses on financial assets measured at amortized cost and certain off-balance sheet credit exposures, affects our estimates of the allowance for credit losses for our loan portfolio and our off-balance sheet credit exposures related to unadvanced loan commitments and financial guarantees.The adoption of CECL resulted in an increase in our allowance for credit losses for our loan portfolio of $4 million and a corresponding decrease to retained earnings of $4 million recorded through a cumulative-effect adjustment. The impact on the allowance for credit losses for our off-balance sheet credit exposures related to unadvanced loan commitments and financial guarantees was not material. While the adoption of CECL had no impact on our earnings, subsequent to our adoption on June 1, 2020, lifetime expected credit losses for newly recognized loans, unadvanced loan commitments and financial guarantees, as well as changes during the period in our estimate of lifetime expected credit losses for existing financial instruments subject to CECL, will be recognized in earnings.
The allowance for credit losses for our loan portfolio increased to $57 million as of August 31, 2020, from $53 million as of May 31, 2020, and the allowance coverage ratio increased to 0.21% from 0.20%, primarily due to the increase in the allowance of $4 million recorded at adoption of CECL on June 1, 2020. We discuss our methodology for estimating the allowance for credit losses under the CECL model in “Note 1—Summary of Significant Accounting Policies” of this Report. We also provide information on the allowance for credit losses below in the section “Credit Risk—Allowance for Credit Losses” and in “Note 5—Allowance for Credit Losses.”
Financing Activity
OurWe issue debt primarily to fund growth in our loan portfolio. As such, our outstanding debt volume generally increases and decreases in response to member loan demand. As total outstanding loans increased during the six months ended November 30, 2017, our debt volume also increased. Total debt outstanding was $24,086$26,020 million as of November 30, 2017,August 31, 2020, an increase of $626$20 million or 3%, from May 31, 2017. The increase was primarily attributable to a2020. Debt activity during the current quarter consisted of net increaseincreases in outstanding member commercial paper, select notes and daily liquidity fund notes of $543$297 million aand dealer commercial paper of $300 million, which together totaled $597 million. This increase was partially offset by net increasedecreases in dealercollateral trust bonds of $396 million, medium-term notes of $394$86 million, and a net increase in notes payable to the Federal Financing Bankborrowings under the United States Department of Agriculture (“USDA”) Guaranteed Underwriter Program of the USDA (“Guaranteed Underwriter Program”) of $74$35 million and Federal Agricultural Mortgage Corporation (“Farmer Mac”) notes payable of $18 million, which together totaled $535 million. These increases were partially offset by a net decrease inOutstanding dealer commercial paper outstandingtotaled $300 million as of $420August 31, 2020, below our targeted maximum threshold of $1,250 million.
On November 9, 2017, we closed on a $750 million committed loan facility (“Series M”) from the Federal Financing Bank under the Guaranteed Underwriter Program. Pursuant to this facility, we may borrow any time before July 15, 2022. EachLiquidity
advance is subject to quarterly amortization and a final maturity not longer than 20 years from the advance date. With the closingAs of this committed loan facility, the amountAugust 31, 2020, our sources of liquidity readily available for access under the Guaranteed Underwriter Program increasedtotaled $6,956 million, consisting of (i) $348 million in cash and cash equivalents; (ii) $528 million in debt investment securities; (iii) up to $1,375$2,722 million as of November 30, 2017.
On November 20, 2017, we amended and restated the three-year and five-yearavailable for access under committed bank revolving line of credit agreements to extend the maturity dates to November 20, 2020 and November 20, 2022, respectively, and to terminate certain third-party bank commitments totaling $40 million under the three-year agreement and $40 million under the five-year agreement. The total commitment amount from third-parties under the amended three-year and five-year bank revolving line of credit agreements is $1,493 million and $1,592 million, respectively, resulting in a combined total commitment amount under the two facilities of $3,085 million.
We provide additional information on our financing activities below under “Consolidated Balance Sheet Analysis—Debt” and “Liquidity Risk.”
Outlook for the Next 12 Months
We currently expect the amount of long-term loan advances to exceed anticipated loan repayments over the next 12 months. We have scheduled maturities of higher-cost debt over the next 12 months, including $1,875 million in collateral trust bonds with a weighted average coupon rate of 8.18%. We expect that we will be able to replace this higher-cost debt with lower-cost funding, which will reduce our aggregate weighted average funding cost. As a result of the anticipated decrease in our funding cost, we expect that our net interest income, net interest yield, adjusted net interest income and adjusted net interest yield will increase.
Long-term debt scheduled to mature over the next 12 months totaled $2,880 million as of November 30, 2017. In addition, during the third quarter of fiscal year 2018 we expect to redeem $325 million of long-term debt prior to maturity. We believe we have sufficient liquidity from the combination of existing cash, member loan repayments, committed bank revolving lines of credit and our ability to issue debt in the capital markets, to our members and in private placements, to meet the demand for member loan advances and satisfy our obligations to repay long-term debt maturing over the next 12 months. As of November 30, 2017, we had access to liquidity reserves totaling $7,047 million, which consisted of (i) $280 million in cash and cash equivalents (ii)agreements; (iv) up to $1,375$900 million available under committed loan facilities under the Guaranteed Underwriter Program, (iii) up to $3,083 million available under committed bank revolving line of credit agreements, (iv) up to $300 million available under a committed revolving note purchase agreement with Farmer Mac,Program; and (v) up to $2,009$2,458 million available under a revolving note purchase agreement with Farmer Mac, subject to market conditions.
The face value of long-term debt scheduled to mature over the next 12 months totaled $2,269 million as of August 31, 2020, consisting of fixed-rate debt of $1,395 million with a weighted average cost of 2.35%, variable-rate debt of $645 million and scheduled amortization on borrowings under the Guaranteed Underwriter Program and notes payable to Farmer Mac of $229 million. Our available liquidity of $6,956 million as of August 31, 2020, was $4,687 million, or 2.1 times, in excess of our long-term debt obligations of $2,269 million over the next 12 months. We currently believe that our available liquidity along with our ability to access the capital markets as a well-known seasoned issuer of debt and to issue debt to our members and in private placements will be more than sufficient to cover our debt obligations to meet the borrowing needs of our members and satisfy our obligations to repay long-term debt maturing over the next 12 months subsequent to August 31, 2020.
Our members historically have maintained a relatively stable level of short-term investments in CFC in the form of commercial paper, select notes, daily liquidity fund notes and medium-term notes. We believe we can continue to roll over outstanding member short-term debt of $2,977$4,003 million as of November 30, 2017,August 31, 2020, based on our expectation that our members will continue to reinvest their excess cash in our commercial paper, daily liquidity fund notes, select notes and medium-term notes. Although weWe expect to continue accessing the dealer commercial paper market to help meetas a cost-effective means of satisfying our short-term liquidity needs. Although the intra-period amount of outstanding dealer commercial paper may fluctuate based on our liquidity needs,requirements, we intend to manage our short-term wholesale funding risk by maintaining outstanding dealer commercial paper at an amount near or below $1,250 million for the foreseeable future. We expect to continue to be in compliance with the covenants under our committed bank revolving line of credit agreements, which will allow us to mitigate our roll-over risk, as we can draw on these facilities to repay dealer or member commercial paper that cannot be refinanced with similar debt.
rolled over.
We provide additional information on our primary sources and uses of liquidity and our liquidity profile below in the section “Liquidity Risk.”
COVID-19
We continue to adhere to the COVID-19 guidelines established by the Centers for Disease Control and Prevention and the World Health Organization and orders issued by state and local governments where we operate. In mid-June 2020, following the announcement by the governor of phased reopening dates and guidelines for Virginia, we implemented a return-to-work policy that included, as part of our physical distancing measures, assigning employees to physically separate teams and a staggered weekly in-office rotation schedule for each team to limit the number of employees present at any given time, face mask covering requirements and an enhanced cleaning program to maintain the well-being of our employees as well as comply with Virginia’s reopening guidelines. Our current expectation is that we will maintain the return-to-work policy
implemented in mid-June for the near term. To date, our business resiliency plans and technology systems have effectively supported both remote and on-site operations.
We have been working with our members not only as a lender, but also by offering a full range of products, services, tools and training designed to help cooperatives continue to deliver uninterrupted, essential utility services to their customers and successfully manage the ongoing challenges of the COVID-19 pandemic.
Outlook for the Next 12 Months
We have been able to navigate the challenges of the COVID-19 pandemic reasonably well to date. As noted above, we currently believe that we have sufficient cash flow and liquidity to cover our debt obligations as well as meet the borrowing needs of our members. While there continues to be uncertainty about the duration and severity of the COVID-19 pandemic and the extent of its future economic impact, our borrowers operate in an industry sector that historically has been resilient to economic downturns. Our electric utility cooperative members, which have a strong track record in preparing for and responding to emergencies, thus far, have been able to manage the challenges and pressures presented by the COVID-19 pandemic. To date, the COVID-19 pandemic has not had a material adverse impact on the operations and financial performance of the substantial majority of our borrowers. Thus far, we have not experienced any delinquencies in scheduled loan payments from our borrowers or received requests for payment deferrals or covenant relief.
While the overall credit quality of our loan portfolio remains high, we are not subjectcontinue to bank regulatory capital rules,actively monitor conditions and developments, including key credit metrics of our borrowers, to facilitate the timely identification of loans with potential credit weaknesses and assess any notable shifts in the credit quality of our loan portfolio as well as any impact on our financial position. Assuming no material adverse change in the overall credit quality of our borrowers, we generally aimexpect that our financial performance for fiscal year 2021 will be comparable to maintainor slightly better than our financial performance for fiscal year 2020, absent the impact of (i) the non-cash impairment charge of $31 million recorded in the fourth quarter of fiscal year 2020 resulting from the abandonment of an adjusted debt-to-equity ratio at approximately or below 6.00-to-1. Our adjusted debt-to-equity ratio was 6.12 asinternal-use software project; (ii) the loan impairment charge of November 30, 2017, above our targeted threshold$34 million recorded in the fourth quarter of fiscal year 2020 due to the increaseestablishment of an asset-specific allowance for the outstanding loan to the CFC power supply borrower noted above; and (iii) changes in debt outstandingthe fair value of our derivatives and investment securities that are driven by changes in market interest rates and prices, which we are unable to fund loan growth. Due to anticipated asset growth, we expectpredict.
See “Item 1A. Risk Factors” in our adjusted debt-to-equity ratio to be above 6.00-to-1 over2020 Form 10-K for a discussion of the next 12 months.potential adverse impact of COVID-19 on our business, results of operations, financial condition and liquidity.
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| CRITICAL ACCOUNTING POLICIES AND ESTIMATES |
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in theour consolidated financial statements. Understanding our accounting policies and the extent to which we use management’s judgment and estimates in
applying these policies is integral to understanding our financial statements. We provide a discussion of our significant accounting policies under “Note 1—Summary of Significant Accounting Policies” in our 20172020 Form 10-K. Pursuant to our June 1, 2020 adoption of the CECL accounting standard, we have provided updates to certain of our significant accounting policies, including the allowance for credit losses, in “Note 1—Summary of Significant Accounting Policies” of this Report.
We have identified certain accounting policies as critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our results of operations or financial condition. Our most critical accounting policies and estimates involve the determination of the allowance for loancredit losses and fair value. Below we have updated our critical accounting policy for the allowance for credit losses under the CECL model, which involves additional areas involving significant management judgment.
Prior to the adoption of CECL on June 1, 2020, we maintained an allowance based on an estimate of probable incurred losses inherent in our loan portfolio as of each balance sheet date. Under CECL, we are required to maintain an allowance based on a current estimate of credit losses that are expected to occur over the remaining contractual life of the loans in our
portfolio. The methods utilized to estimate the allowance for credit losses, key assumptions and quantitative and qualitative information considered by management in determining the appropriate allowance for credit losses is discussed in “Note 1—Summary of Significant Accounting Policies” of this Report. The determination of allowance for credit losses entails significant judgment on various risk factors, including our historical loss data, third-party default data and the assessment of a borrower’s capacity to meet its financial obligations. While our estimate of lifetime credit losses is sensitive to each of these inputs, the most notable input that affects the sensitivity of the allowance is the internal risk ratings assigned to each borrower.
We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. There were no material changes in the key inputs and assumptions used in our critical accounting policies during the six months ended November 30, 2017. Management has discussed significant judgments and assumptions in applying our critical accounting policies with the Audit Committee of our boardthe CFC Board of directors.Directors. We provide additional information on our critical accounting policiesthe significant judgments and estimatesassumptions in measuring fair value under “MD&A—Critical Accounting Policies and Estimates” in our 20172020 Form 10-K. See “Item 1A. Risk Factors” in our 20172020 Form 10-K for a discussion of the risks associated with management’s judgments and estimates in applying our accounting policies and methods.
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| RECENT ACCOUNTING CHANGES AND OTHER DEVELOPMENTS |
Recent Accounting Changes
See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted during the current quarter,fiscal year, as well as recently issued accounting standards not yet required to be adopted and the expected impact of the adoption of these accounting standards. To the extent we believe the adoption of new accounting standards has had or will have a material impact on our consolidated results of operations, financial condition or liquidity, we also discuss the impact in the applicable section(s) of this MD&A. We also discuss the expected impact of H.R. 1, the Tax Cuts and Jobs Act (“The Act”), which the President of the United States signed and enacted into law on December 22, 2017.
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| CONSOLIDATED RESULTS OF OPERATIONS |
The section below provides a comparative discussion of our condensed consolidated results of operations between the three months ended November 30, 2017August 31, 2020 and 2016 and the six months ended November 30, 2017 and 2016.2019. Following this section, we provide a comparative analysis of our condensed consolidated balance sheets as of November 30, 2017August 31, 2020 and May 31, 2017.2020. You should read these sections together with our “Executive Summary—Outlook for the Next 12 Months” where we discuss trends and other factors that we expect will affect our future results of operations.
Net Interest Income
Net interest income represents the difference between the interest income earned on our interest-earning assets, which includeincludes loans and investment securities, and the interest expense on our interest-bearing liabilities. Our net interest yield represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities plus the impact from non-interest bearing funding. We expect net interest income and our net interest yield to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities. We do not fund each individual loan with specific debt. Rather, we attempt to minimize costs and maximize efficiency by proportionately funding large aggregated amounts of loans.
Table 2 presents our average balance sheetsbalances for the three and six months ended November 30, 2017August 31, 2020 and 2016,2019, and for each major category of our interest-earning assets and interest-bearing liabilities, the interest income earned or interest expense incurred, and the average yield or cost. Table 2 also presents non-GAAP adjusted interest expense, adjusted net interest income and adjusted net interest yield, which reflect the inclusion of net accrued periodic derivative cash settlements expense in interest expense. We provide reconciliations of our non-GAAP adjusted measures to the most comparable GAAP measures under “Non-GAAP Financial Measures.”
Table 2: Average Balances, Interest Income/Interest Expense and Average Yield/Cost
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended November 30, |
| (Dollars in thousands) | | 2017 | | 2016 |
| Assets: | | Average Balance | | Interest Income/Expense | | Average Yield/Cost | | Average Balance | | Interest Income/Expense | | Average Yield/Cost |
Long-term fixed-rate loans(1) | | $ | 22,458,429 |
| | $ | 248,926 |
| | 4.45 | % | | $ | 21,772,579 |
| | $ | 243,817 |
| | 4.49 | % |
| Long-term variable-rate loans | | 886,257 |
| | 6,097 |
| | 2.76 |
| | 751,460 |
| | 4,987 |
| | 2.66 |
|
| Line of credit loans | | 1,330,776 |
| | 8,588 |
| | 2.59 |
| | 1,046,826 |
| | 5,553 |
| | 2.13 |
|
TDR loans(2) | | 12,929 |
| | 222 |
| | 6.89 |
| | 13,505 |
| | 231 |
| | 6.86 |
|
Other income, net(3) | | — |
| | (306 | ) | | — |
| | — |
| | (281 | ) | | — |
|
| Total loans | | 24,688,391 |
| | 263,527 |
| | 4.28 |
| | 23,584,370 |
| | 254,307 |
| | 4.32 |
|
| Cash, time deposits and investment securities | | 528,158 |
| | 2,296 |
| | 1.74 |
| | 761,354 |
| | 2,849 |
| | 1.50 |
|
| Total interest-earning assets | | $ | 25,216,549 |
| | $ | 265,823 |
| | 4.23 | % | | $ | 24,345,724 |
| | $ | 257,156 |
| | 4.24 | % |
| Other assets, less allowance for loan losses | | 526,627 |
| | | | | | 624,014 |
| | | | |
| Total assets | | $ | 25,743,176 |
| | | | | | $ | 24,969,738 |
| | | | |
| | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | |
| Short-term debt | | $ | 2,998,298 |
| | $ | 10,116 |
| | 1.35 | % | | $ | 3,037,831 |
| | $ | 5,409 |
| | 0.71 | % |
| Medium-term notes | | 3,375,389 |
| | 27,544 |
| | 3.27 |
| | 3,399,885 |
| | 24,705 |
| | 2.91 |
|
| Collateral trust bonds | | 7,637,919 |
| | 85,321 |
| | 4.48 |
| | 7,256,608 |
| | 84,951 |
| | 4.70 |
|
| Guaranteed Underwriter Program notes payable | | 5,066,574 |
| | 35,688 |
| | 2.83 |
| | 4,862,958 |
| | 36,216 |
| | 2.99 |
|
| Farmer Mac notes payable | | 2,496,587 |
| | 11,947 |
| | 1.92 |
| | 2,288,013 |
| | 7,587 |
| | 1.33 |
|
| Other notes payable | | 35,295 |
| | 391 |
| | 4.44 |
| | 41,026 |
| | 458 |
| | 4.48 |
|
| Subordinated deferrable debt | | 742,319 |
|
| 9,417 |
| | 5.09 |
| | 742,187 |
|
| 9,411 |
| | 5.09 |
|
| Subordinated certificates | | 1,415,352 |
| | 14,746 |
| | 4.18 |
| | 1,442,871 |
| | 14,917 |
| | 4.15 |
|
| Total interest-bearing liabilities | | $ | 23,767,733 |
| | $ | 195,170 |
| | 3.29 | % | | $ | 23,071,379 |
| | $ | 183,654 |
| | 3.19 | % |
| Other liabilities | | 842,246 |
| | | | | | 1,101,635 |
| | | | |
| Total liabilities | | 24,609,979 |
| | | | | | 24,173,014 |
| | | | |
| Total equity | | 1,133,197 |
| | | | | | 796,724 |
| | | | |
| Total liabilities and equity | | $ | 25,743,176 |
| | | | | | $ | 24,969,738 |
| | | | |
| | | | | | | | | | | | | |
Net interest spread(4) | | | | | | 0.94 | % | | | | | | 1.05 | % |
Impact of non-interest bearing funding(5) | | | | | | 0.18 |
| | | | | | 0.16 |
|
Net interest income/net interest yield(6) | | | | $ | 70,653 |
| | 1.12 | % | | | | $ | 73,502 |
| | 1.21 | % |
| | | | | | | | | | | | | |
| Adjusted net interest income/adjusted net interest yield: | | | | | | | | | | | | |
| Interest income | | | | $ | 265,823 |
| | 4.23 | % | | | | $ | 257,156 |
| | 4.24 | % |
| Interest expense | | | | 195,170 |
| | 3.29 |
| | | | 183,654 |
| | 3.19 |
|
Add: Net accrued periodic derivative cash settlements(7) | | | | 19,635 |
| | 0.72 |
| | | | 21,587 |
| | 0.81 |
|
Adjusted interest expense/adjusted average cost(8) | | | | $ | 214,805 |
| | 3.63 | % | | | | $ | 205,241 |
| | 3.57 | % |
| | | | | | | | | | | | | |
Adjusted net interest spread(4) | | | | | | 0.60 | % | | | | | | 0.67 | % |
| Impact of non-interest bearing funding | | | | | | 0.21 |
| | | | | | 0.19 |
|
Adjusted net interest income/adjusted net interest yield(9) | | | | $ | 51,018 |
| | 0.81 | % | | | | $ | 51,915 |
| | 0.86 | % |
| | | | | Six Months Ended November 30, | | Three Months Ended August 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2020 | | 2019 |
| Assets: | | Average Balance | | Interest Income/Expense | | Average Yield/Cost | | Average Balance | | Interest Income/Expense | | Average Yield/Cost | | Average Balance | | Interest Income/Expense | | Average Yield/Cost | | Average Balance | | Interest Income/Expense | | Average Yield/Cost |
Long-term fixed-rate loans(1) | | $ | 22,414,622 |
| | $ | 498,290 |
| | 4.43 | % | | $ | 21,698,651 |
| | $ | 487,945 |
| | 4.49 | % | | $ | 24,607,166 |
| | $ | 263,184 |
| | 4.24 | % | | $ | 23,358,728 |
| | $ | 258,528 |
| | 4.40 |
|
| Long-term variable-rate loans | | 864,494 |
| | 11,960 |
| | 2.76 |
| | 740,594 |
| | 9,514 |
| | 2.56 |
| | 686,024 |
| | 4,400 |
| | 2.54 |
| | 993,105 |
| | 9,756 |
| | 3.91 |
|
| Line of credit loans | | 1,342,124 |
| | 17,295 |
| | 2.57 |
| | 1,045,303 |
| | 11,519 |
| | 2.20 |
| | 1,416,678 |
| | 8,242 |
| | 2.31 |
| | 1,712,082 |
| | 16,033 |
| | 3.73 |
|
TDR loans(2) | | 13,026 |
| | 448 |
| | 6.86 |
| | 15,374 |
| | 449 |
| | 5.83 |
| |
Other income, net(3) | | — |
| | (538 | ) | | — |
| | — |
| | (565 | ) | | — |
| |
| Troubled debt restructuring (“TDR”) loans | | | 10,781 |
| | 207 |
| | 7.62 |
| | 11,786 |
| | 206 |
| | 6.95 |
|
| Nonperforming loans | | | 164,758 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other, net(2) | | | — |
| | (335 | ) | | — |
| | — |
| | (334 | ) | | — |
|
| Total loans | | 24,634,266 |
| | 527,455 |
| | 4.27 |
| | 23,499,922 |
| | 508,862 |
| | 4.32 |
| | 26,885,407 |
| | 275,698 |
| | 4.07 |
| | 26,075,701 |
| | 284,189 |
| | 4.34 |
|
| Cash, time deposits and investment securities | | 445,452 |
| | 4,283 |
| | 1.92 |
| | 687,575 |
| | 5,129 |
| | 1.49 |
| | 906,308 |
| | 3,886 |
| | 1.70 |
| | 768,763 |
| | 5,826 |
| | 3.01 |
|
| Total interest-earning assets | | $ | 25,079,718 |
| | $ | 531,738 |
| | 4.23 | % | | $ | 24,187,497 |
| | $ | 513,991 |
| | 4.24 | % | | $ | 27,791,715 |
| | $ | 279,584 |
| | 3.99 | % | | $ | 26,844,464 |
| | $ | 290,015 |
| | 4.30 | % |
| Other assets, less allowance for loan losses | | 543,490 |
| | | | | | 643,236 |
| | | | | |
| Other assets, less allowance for credit losses | | | 476,024 |
| | | | | | 605,697 |
| | | | |
| Total assets | | $ | 25,623,208 |
| |
|
| | | | $ | 24,830,733 |
| |
|
| |
|
| | $ | 28,267,739 |
| | | | | | $ | 27,450,161 |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | | |
|
| |
|
| |
|
| |
|
| |
|
| | | | | | | | | | | | |
| Short-term borrowings | | $ | 3,111,502 |
| | $ | 20,655 |
| | 1.32 | % | | $ | 2,980,748 |
| | $ | 10,291 |
| | 0.69 | % | | $ | 3,864,887 |
| | $ | 4,341 |
| | 0.45 | % | | $ | 3,513,191 |
| | $ | 22,822 |
| | 2.58 | % |
| Medium-term notes | | 3,192,063 |
| | 52,660 |
| | 3.29 |
| | 3,341,054 |
| | 48,290 |
| | 2.88 |
| | 3,684,835 |
| | 29,887 |
| | 3.22 |
| | 3,571,967 |
| | 32,076 |
| | 3.57 |
|
| Collateral trust bonds | | 7,636,669 |
| | 170,598 |
| | 4.46 |
| | 7,255,508 |
| | 170,000 |
| | 4.67 |
| | 6,850,779 |
| | 62,593 |
| | 3.62 |
| | 7,385,085 |
| | 65,381 |
| | 3.52 |
|
| Guaranteed Underwriter Program notes payable | | 5,030,955 |
| | 71,290 |
| | 2.83 |
| | 4,818,512 |
| | 71,988 |
| | 2.98 |
| | 6,242,813 |
| | 42,413 |
| | 2.70 |
| | 5,398,324 |
| | 40,433 |
| | 2.98 |
|
| Farmer Mac notes payable | | 2,502,096 |
| | 23,437 |
| | 1.87 |
| | 2,292,798 |
| | 14,486 |
| | 1.26 |
| | 3,052,451 |
| | 13,933 |
| | 1.81 |
| | 3,031,600 |
| | 25,074 |
| | 3.29 |
|
| Other notes payable | | 35,269 |
| | 781 |
| | 4.42 |
| | 40,996 |
| | 916 |
| | 4.46 |
| | 11,625 |
| | 87 |
| | 2.97 |
| | 22,529 |
| | 254 |
| | 4.49 |
|
| Subordinated deferrable debt | | 742,302 |
| | 18,833 |
| | 5.06 |
| | 742,171 |
| | 18,837 |
| | 5.06 |
| | 986,136 |
|
| 12,890 |
| | 5.19 |
| | 986,014 |
|
| 12,882 |
| | 5.20 |
|
| Subordinated certificates | | 1,416,619 |
| | 29,647 |
| | 4.17 |
| | 1,442,753 |
| | 29,926 |
| | 4.14 |
| | 1,307,879 |
| | 13,832 |
| | 4.20 |
| | 1,356,145 |
| | 14,349 |
| | 4.21 |
|
| Total interest-bearing liabilities | | $ | 23,667,475 |
| | $ | 387,901 |
| | 3.27 | % | | $ | 22,914,540 |
| | $ | 364,734 |
| | 3.17 | % | | $ | 26,001,405 |
| | $ | 179,976 |
| | 2.75 | % | | $ | 25,264,855 |
| | $ | 213,271 |
| | 3.36 | % |
| Other liabilities | | 847,751 |
| | | |
| | 1,127,727 |
| |
| | | | 1,591,883 |
| | | | | | 1,012,301 |
| | | | |
| Total liabilities | | 24,515,226 |
| | | |
| | 24,042,267 |
| |
| | | | 27,593,288 |
| | | | | | 26,277,156 |
| | | | |
| Total equity | | 1,107,982 |
| | | | | | 788,466 |
| |
| | | | 674,451 |
| | | | | | 1,173,005 |
| | | | |
| Total liabilities and equity | | $ | 25,623,208 |
| |
|
| | | | $ | 24,830,733 |
| |
|
| | | | $ | 28,267,739 |
| | | | | | $ | 27,450,161 |
| | | | |
| | | | | | | | | | | | | | |
Net interest spread(4)(3) | | | |
|
| | 0.96 | % | |
|
| |
|
| | 1.07 | % | | | | | �� | 1.24 | % | | | | | | 0.94 | % |
Impact of non-interest bearing funding(5) | | | | | | 0.18 |
| | | | | | 0.16 |
| |
Impact of non-interest bearing funding(4) | | | | | | | 0.18 |
| | | | | | 0.20 |
|
Net interest income/net interest yield(6)(5) | | | | $ | 143,837 |
| | 1.14 | % | | | | $ | 149,257 |
| | 1.23 | % | | | | $ | 99,608 |
| | 1.42 | % | | | | $ | 76,744 |
| | 1.14 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjusted net interest income/adjusted net interest yield: | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| Interest income | | | | $ | 531,738 |
| | 4.23 | % | | | | $ | 513,991 |
| | 4.24 | % | | | | $ | 279,584 |
| | 3.99 | % | | | | $ | 290,015 |
| | 4.30 | % |
| Interest expense | | | | 387,901 |
| | 3.27 |
| | | | 364,734 |
| | 3.17 |
| | | | 179,976 |
| | 2.75 |
| | | | 213,271 |
| | 3.36 |
|
Add: Net accrued periodic derivative cash settlements(7) | | | | 39,857 |
| | 0.74 |
| | | | 44,977 |
| | 0.85 |
| |
Add: Net periodic derivative cash settlements interest expense(6) | | | | | 26,972 |
| | 1.16 |
| | | | 11,043 |
| | 0.41 |
|
Adjusted interest expense/adjusted average cost(8)(7) | | | | $ | 427,758 |
| | 3.60 | % | |
|
| | $ | 409,711 |
| | 3.57 | % | | | | $ | 206,948 |
| | 3.16 | % | | | | $ | 224,314 |
| | 3.53 | % |
Adjusted net interest spread(5) | | | | | | | 0.83 | % | | | | | | 0.77 | % |
Impact of non-interest bearing funding(4) | | | | | | | 0.21 | % | | | | | | 0.20 | % |
Adjusted net interest income/adjusted net interest yield(8) | | | | | $ | 72,636 |
| | 1.04 | % | | | | $ | 65,701 |
| | 0.97 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted net interest spread(4) | | | | | | 0.63 | % | |
| | | | 0.67 | % | |
| Impact of non-interest bearing funding | | | | | | 0.20 |
| | | | | | 0.19 |
| |
Adjusted net interest income/adjusted net interest yield(9) | | | | $ | 103,980 |
| | 0.83 | % | |
| | $ | 104,280 |
|
| 0.86 | % | |
____________________________
(1)Interest income on long-term, fixed-rate loans includes loan conversion fees, which are generally deferred and recognized as interest income using the effective interest method.
(2)Troubled debt restructuring (“TDR”) loans.
(3)Consists of late payment fees and net amortization of deferred loan fees and loan origination costs.
(4)(3)Net interest spread represents the difference between the average yield on total average interest-earning assets and the average cost of total average interest-bearing liabilities. Adjusted net interest spread represents the difference between the average yield on total average interest-earning assets and the adjusted average cost of total average interest-bearing liabilities.
(5)(4)Includes other liabilities and equity.
(6)(5)Net interest yield is calculated based on annualized net interest income for the period divided by total average interest-earning assets for the period.
(7)(6)Represents the impact of net accrued periodic derivative cash settlementscontractual interest amounts on our interest rate swaps during the period, whichperiod. This amount is added to interest expense to derive non-GAAP adjusted interest expense. The average (benefit)/cost associated with derivatives is calculated based on the annualized net accrued periodic derivative cash settlementsswap settlement interest amount during the period divided by the average outstanding notional amount of derivatives during the period. The average outstanding notional amount of derivativesinterest rate swaps was $10,902$9,225 million and $10,651$10,752 million for the three months ended November 30, 2017August 31, 2020 and 2016, respectively. The average outstanding notional amount of derivatives was $10,791 million and $10,494 million for the six months ended November 30, 2017 and 2016,2019, respectively.
(8)(7)Adjusted interest expense representsconsists of interest expense plus net accrued periodic derivative cash settlements interest expense during the period. Net accrued periodic derivative cash settlementssettlement interest amounts are reported on our consolidated statements of operations as a component of derivative gains (losses). Adjusted average cost is calculated based on annualized adjusted interest expense for the period divided by total average interest-bearing liabilities during the period.
(9)(8)Adjusted net interest yield is calculated based on annualized adjusted net interest income for the period divided by total average interest-earning assets for the period.
Table 3 displays the change in net interest income between periods and the extent to which the variance is attributable to:
(i) changes in the volume of our interest-earning assets and interest-bearing liabilities or (ii) changes in the interest rates of these assets and liabilities. The table also presents the change in adjusted net interest income between periods. Changes that are not solely due to either volume or rate are allocated to these categories on a pro-rata basis based on the absolute value of the change due to average volume and average rate.
Table 3: Rate/Volume Analysis of Changes in Interest Income/Interest Expense | | | | | Three Months Ended November 30, | | Six Months Ended November 30,
| | Three Months Ended August 31, |
| | | 2017 versus 2016 | | 2017 versus 2016 | | 2020 versus 2019 |
| | | | | Variance due to:(1) | | | | Variance due to:(1) | | Total | | Variance Due To:(1) |
| (Dollars in thousands) | | Total Variance | | Volume | | Rate | | Total Variance | | Volume | | Rate | | Variance | | Volume | | Rate |
| Interest income: | | | | | | | | | | | | | | | | | | |
| Long-term fixed-rate loans | | $ | 5,109 |
| | $ | 7,680 |
| | $ | (2,571 | ) | | $ | 10,345 |
| | $ | 16,100 |
| | $ | (5,755 | ) | | $ | 4,656 |
| | $ | 14,564 |
| | $ | (9,908 | ) |
| Long-term variable-rate loans | | 1,110 |
| | 895 |
| | 215 |
| | 2,446 |
| | 1,592 |
| | 854 |
| | (5,356 | ) | | (2,998 | ) | | (2,358 | ) |
| Line of credit loans | | 3,035 |
| | 1,506 |
| | 1,529 |
| | 5,776 |
| | 3,271 |
| | 2,505 |
| | (7,791 | ) | | (2,730 | ) | | (5,061 | ) |
| Restructured loans | | (9 | ) | | (10 | ) | | 1 |
| | (1 | ) | | (69 | ) | | 68 |
| |
| Other income, net | | (25 | ) | | — |
| | (25 | ) | | 27 |
| | — |
| | 27 |
| |
| TDR loans | | | 1 |
| | (17 | ) | | 18 |
|
| Other, net | | | (1 | ) | | — |
| | (1 | ) |
| Total loans | | 9,220 |
| | 10,071 |
| | (851 | ) | | 18,593 |
| | 20,894 |
| | (2,301 | ) | | (8,491 | ) | | 8,819 |
| | (17,310 | ) |
| Cash, time deposits and investment securities | | (553 | ) | | (873 | ) | | 320 |
| | (846 | ) | | (1,806 | ) | | 960 |
| | (1,940 | ) | | 1,061 |
| | (3,001 | ) |
| Interest income | | 8,667 |
| | 9,198 |
| | (531 | ) | | 17,747 |
| | 19,088 |
| | (1,341 | ) | |
| Total interest income | | | (10,431 | ) | | 9,880 |
| | (20,311 | ) |
| | | | | | | | | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | | | | | | | | |
| Short-term borrowings | | 4,707 |
| | (70 | ) | | 4,777 |
| | 10,364 |
| | 451 |
| | 9,913 |
| | (18,481 | ) | | 2,353 |
| | (20,834 | ) |
| Medium-term notes | | 2,839 |
| | (178 | ) | | 3,017 |
| | 4,370 |
| | (2,153 | ) | | 6,523 |
| | (2,189 | ) | | 1,104 |
| | (3,293 | ) |
| Collateral trust bonds | | 370 |
| | 4,464 |
| | (4,094 | ) | | 598 |
| | 8,931 |
| | (8,333 | ) | | (2,788 | ) | | (4,564 | ) | | 1,776 |
|
| Guaranteed Underwriter Program notes payable | | (528 | ) | | 1,518 |
| | (2,046 | ) | | (698 | ) | | 3,174 |
| | (3,872 | ) | | 1,980 |
| | 6,453 |
| | (4,473 | ) |
| Farmer Mac notes payable | | 4,360 |
| | 692 |
| | 3,668 |
| | 8,951 |
| | 1,322 |
| | 7,629 |
| | (11,141 | ) | | 242 |
| | (11,383 | ) |
| Other notes payable | | (67 | ) | | (64 | ) | | (3 | ) | | (135 | ) | | (128 | ) | | (7 | ) | | (167 | ) | | (123 | ) | | (44 | ) |
| Subordinated deferrable debt | | 6 |
| | 2 |
| | 4 |
| | (4 | ) | | 3 |
| | (7 | ) | | 8 |
| | 37 |
| | (29 | ) |
| Subordinated certificates | | (171 | ) | | (285 | ) | | 114 |
| | (279 | ) | | (542 | ) | | 263 |
| | (517 | ) | | (473 | ) | | (44 | ) |
| Interest expense | | 11,516 |
| | 6,079 |
| | 5,437 |
| | 23,167 |
| | 11,058 |
| | 12,109 |
| |
| Total interest expense | | | (33,295 | ) | | 5,029 |
| | (38,324 | ) |
| | | | | | | | |
| Net interest income | | $ | (2,849 | ) | | $ | 3,119 |
| | $ | (5,968 | ) | | $ | (5,420 | ) | | $ | 8,030 |
| | $ | (13,450 | ) | | $ | 22,864 |
| | $ | 4,851 |
| | $ | 18,013 |
|
| | | | | | | | | | | | | | | | | | | |
| Adjusted net interest income: | | | | | | | | | | | | | | | | | | |
| Interest income | | $ | 8,667 |
| | $ | 9,198 |
| | $ | (531 | ) | | $ | 17,747 |
| | $ | 19,088 |
| | $ | (1,341 | ) | | $ | (10,431 | ) | | $ | 9,880 |
| | $ | (20,311 | ) |
| Interest expense | | 11,516 |
| | 6,079 |
| | 5,437 |
| | 23,167 |
| | 11,058 |
| | 12,109 |
| | (33,295 | ) | | 5,029 |
| | (38,324 | ) |
Net accrued periodic derivative cash settlements(2) | | (1,952 | ) | | 508 |
| | (2,460 | ) | | (5,120 | ) | | 1,276 |
| | (6,396 | ) | |
Net periodic derivative cash settlements interest expense(2) | | | 15,929 |
| | (1,542 | ) | | 17,471 |
|
Adjusted interest expense(3) | | 9,564 |
| | 6,587 |
| | 2,977 |
| | 18,047 |
| | 12,334 |
| | 5,713 |
| | (17,366 | ) | | 3,487 |
| | (20,853 | ) |
| Adjusted net interest income | | $ | (897 | ) | | $ | 2,611 |
| | $ | (3,508 | ) | | $ | (300 | ) | | $ | 6,754 |
| | $ | (7,054 | ) | | $ | 6,935 |
| | $ | 6,393 |
| | $ | 542 |
|
____________________________
(1)The changes for each category of interest income and interest expense are divided between the portion of change attributable to the variance in volume and the portion of change attributable to the variance in rate for that category. The amount attributable to the combined impact of volume and rate has been allocated to each category based on the proportionate absolute dollar amount of change for that category.
(2)For the net accrued periodic derivative cash settlements interest amount, the variance due to average volume represents the change in the net periodic derivative cash settlements interest amount resulting from the change in the average notional amount of derivative contracts outstanding. The variance due to average rate represents the change in the net periodic derivative cash settlements amount resulting from the net difference between the average rate paid and the average rate received for interest rate swaps during the period.
(3)See “Non-GAAP Financial Measures” for additional information on our adjusted non-GAAP measures.
Reported Net Interest Income
NetReported net interest income of $71$100 million for the current quarter decreased by $3increased $23 million, or 4%30%, from the same prior-year quarter, driven by a decreasean increase in the net interest yield of 7% (928 basis points)points, or 25%, to 1.12%, which was partially offset by1.42% and an increase in average interest-earning assets of 4%.
Net Interest Yield: The increase in the net interest incomeyield of $144 million for28 basis points, or 25%, was largely due to a reduction in our average cost of borrowings of 61 basis points to 2.75%, partially offset by a decrease in the six months ended November 30, 2017 decreased by $5 million, or 4%, from the same prior-year period,average yield on interest-earning assets of 31 basis points to 3.99%. The reduction in our average cost of borrowings was primarily driven by a decrease in netthe average cost of our short-term and variable-rate borrowings due to a decrease in short-term interest rates as the FOMC lowered the benchmark federal funds rate by 200 basis points over the last 12 months, including a 150 basis point reduction in March 2020 to a near zero target range of 0% to 0.25% as part of a series of measures implemented to ease the economic impact of the COVID-19 crisis. The average cost of our short-term borrowings decreased 213 basis points to 0.45% for the current quarter. The decrease in the average yield of 7% (9 basis points) to 1.14%, which was partially offset by an increase in averageon interest-earning assets reflected the combined impact of 4%.a reduction in the average yield on our long-term fixed-rate loan portfolio, as the maturity and pay-off of loan advances at higher rates were replaced with new loan advances at lower rates due to the lower interest rate environment, and a reduction in the average yield on our long-term variable-rate and line of credit loan portfolios due to the decline in short-term interest rates over the last 12 months.
Average Interest-Earning Assets: The increase in average interest-earning assets for the current quarter and six months ended November 30, 2017of 4% was primarily attributable todriven by growth in average total loans of $1,104$810 million, or 5% and $1,1343%, largely attributable to an increase in average long-term fixed-rate loans of $1,248 million, or 5%, respectively, overas the same prior-year periods, aslower interest rate environment presented an opportunity for members obtainedto obtain advances to fund capital investments and refinancedrefinance with us loans made by other lenders.lenders at a reduced fixed rate of interest.
Adjusted Net Interest Yield: The decrease in the net interest yield for the current quarter and six months ended November 30, 2017 was largely due to an increase in our average cost of funds, as the average yield on interest-earning assets remained relatively stable. Our average cost of funds increased by 10 basis points during both the current quarter and six months ended November 30, 2017 to 3.29% and 3.27%, respectively, largely due to increases in the cost of our short-term and variable-rate debt resulting from an increase in short-term interest rates. The 3-month London Interbank Offered Rate (“LIBOR”) was 1.49% as of November 30, 2017, an increase of 55 basis points from the same prior-year period, while the federal funds rate ranged from 1.00% to 1.25% as November 30, 2017, up 75 basis points from the end of the same prior-year period.
Income
Adjusted net interest income of $51$73 million for the current quarter decreased by $1increased $7 million, or 2%11%, from the same prior-year quarter, driven by a decreasean increase in the adjusted net interest yield of 6% (57 basis points)points, or 7%, to 0.81%1.04%, and the increase in average interest-earning assets of $947 million, or 4%.
AdjustedNet Interest Yield: The increase in the adjusted net interest yield 7 basis points, or 7%, reflected the favorable impact of a reduction in our adjusted average cost of borrowings of 37 basis points to 3.16%, which was partially offset by anthe decrease in the average yield on interest-earning assets of 31 basis points to 3.99%. The reduction in our adjusted average cost of borrowings was largely attributable to the decrease in the average cost of our short-term and variable-rate borrowings and a partially offsetting increase in net periodic derivative cash settlements expense, both of which resulted from the decline in short-term interest rates over the last 12 months. As noted above, the decrease in the average yield on interest-earning assets reflected the combined impact of a reduction in the average yield on our long-term fixed-rate loan portfolio, as the maturity and pay-off of loan advances at higher rates were replaced with new loan advances at lower rates due to the lower interest rate environment, and a reduction in the average yield on our long-term variable-rate and line of credit loan portfolios from the decline in short-term interest rates over the last 12 months.
Average Interest-Earning Assets: The increase in average interest-earning assets of 4% was primarily driven by the growth in average total loans of $810 million, or 3%. The decrease
We include the net periodic derivative interest settlement amounts on our interest rate swaps in the adjusted net interest yield was primarily attributable to an increase in thecalculation of our adjusted average cost of fundsborrowings, which, as a result, also impacts the calculation of 6 basis points to 3.63%.
Adjusted net interest income of $104 million for the six months ended November 30, 2017 was flat compared to the same prior-year period. The decrease in the adjusted net interest yield of 3% (3 basis points) to 0.83% was offset by an increase in average interest-earning assets of 4%. The decrease in the adjusted net interest yield was primarily attributable to an increase in the adjusted average cost of funds of 3 basis points to 3.60%.
Our adjusted net interest income and adjusted net interest yield include the impact of net accrued periodic derivative cash settlements during the period.yield. We recorded net periodic derivative cash settlementsettlements interest expense of $20 million and $22$27 million for the three months ended November 30, 2017 and 2016, respectively, and $40current quarter, an increase of $16 million and $45from the $11 million recorded for the sixsame prior-year quarter. Because our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps, we generally record derivative losses when interest rates decline and derivative gains when interest rates rise. The floating-rate payments on our interest rate swaps are typically based on the 3-month LIBOR, which decreased by 190 basis points over the last 12 months ended November 30, 2017 and 2016, respectively.to 0.24% as of August 31, 2020. The decrease in the 3-month LIBOR drove the increase of $16 million in the net periodic derivative cash settlements interest expense recorded in the current quarter. See “Non-GAAP Financial Measures” for additional information on our adjusted measures, including a reconciliation of these measures to the most comparable GAAP measures.
Provision for LoanCredit Losses
OurWe recorded a provision for loancredit losses of less than $1 million for the current quarter under the CECL model for estimating our allowance for credit losses. We also recorded a provision for credit losses of less than $1 million for the same prior-year quarter under the incurred model for estimating our allowance for credit losses.
Under CECL, we are required to maintain an allowance based on a current estimate of credit losses that are expected to occur over the remaining contractual term of the loans in each period is primarily driven byour portfolio. Prior to the leveladoption of CECL on June 1, 2020, we maintained an allowance that we determine is necessary forbased on an estimate of probable incurred loan losses inherent in our loan portfolio as of each balance sheet date.
As discussed above in “Executive Summary—Credit Quality,” the adoption of CECL resulted in an increase in our allowance for credit losses for our loan portfolio of $4 million and a corresponding decrease to retained earnings of $4 million recorded through a cumulative-effect adjustment. While the adoption of CECL had no impact on our earnings, subsequent to our adoption on June 1, 2020, lifetime expected credit losses for newly recognized loans, unadvanced loan commitments and financial guarantees, as well as changes during the period in our estimate of lifetime expected credit losses for existing financial instruments subject to CECL, will be recognized in earnings.
The allowance for credit losses for our loan portfolio increased to $57 million as of August 31, 2020, from $53 million as of May 31, 2020, and the allowance coverage ratio increased to 0.21% from 0.20%, primarily due to the increase in the allowance of $4 million recorded at adoption of CECL on June 1, 2020.
We recorded a benefitdiscuss our methodology for loan losses of less than $1 million forestimating the current quarter and $1 million for the six months ended November 30, 2017, respectively, compared with a provision for loan losses of $1 million and $3 million, respectively, for the same prior-year periods. The credit quality and performance statistics of our loan portfolio continued to remain strong. We experienced no charge-offs during the three and six months ended November 30, 2017 and we had no loans classified as nonperforming as of the end of the period. In comparison, we recorded a net charge-off of $2 million during the six months ended November 30, 2016.
We provide additional information on our allowance for loancredit losses under “Credit Risk—Allowance for Loan Losses” and “Note 4—Loans and Commitments” of this Report. For additional information on our allowance methodology, see “MD&A—Critical Accounting Policies and Estimates” andthe CECL model in “Note 1—Summary of Significant Accounting Policies” of this Report. We also provide information on the allowance for credit losses below in our 2017 Form 10-K.
the section “Credit Risk—Allowance for Credit Losses” and in “Note 5—Allowance for Credit Losses.”
Non-Interest Income
Non-interest income consists of fee and other income, gains and losses on derivatives not accounted for in hedge accounting relationships and resultsgains and losses on equity and debt investment securities. In the fourth quarter of operationsfiscal year 2020, we transferred all of foreclosed assets.
We recorded non-interest income of $131 million and $89 million for the three and six months ended November 30, 2017, respectively. In comparison, we recorded non-interest income of $345 million and $160 million for the three and six months ended November 30, 2016, respectively. The significant variances in non-interest income for the three and six months ended November 30, 2017 from the same prior year periods were primarily attributable to changes in net derivative gains recognizeddebt securities in our consolidated statementsheld-to-maturity investment portfolio to trading. As a result, we discontinued the reporting of operations.our debt securities at amortized cost and began reporting these securities at fair value and recognizing the related unrealized gains and losses in earnings.
Table 4 presents the components of non-interest income recorded in our condensed consolidated results of operations(expense) for the three and six months ended November 30, 2017August 31, 2020 and 2016.2019.
Table 4: Non-Interest Income
| | | | | Three Months Ended November 30, | | Six Months Ended November 30, | | Three Months Ended August 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2017 |
| 2016 | | 2020 | | 2019 |
| Non-interest income: | | | | | | | | | | | | |
| Fee and other income | | $ | 5,542 |
| | $ | 5,097 |
| | $ | 9,487 |
| | $ | 9,627 |
| | $ | 3,516 |
| | $ | 10,941 |
|
| Derivative gains | | 125,593 |
| | 340,660 |
| | 79,395 |
| | 152,367 |
| |
| Results of operations of foreclosed assets | | (10 | ) | | (549 | ) | | (34 | ) | | (1,661 | ) | |
| Total non-interest income | | $ | 131,125 |
| | $ | 345,208 |
| | $ | 88,848 |
| | $ | 160,333 |
| |
| Derivative gains (losses) | | | 60,276 |
| | (395,725 | ) |
| Investment securities gains | | | 4,659 |
| | 1,620 |
|
| Total non-interest income (loss) | | | $ | 68,451 |
| | $ | (383,164 | ) |
The significant variance between non-interest income for the current quarter and the same prior-year quarter was attributable to the mark-to-market changes in the fair value of our derivative instruments. In addition, fee and other income decreased $7 million due to a reduction in prepayment fees.
Derivative Gains (Losses)
Our derivative instruments are an integral part of our interest rate risk management strategy. Our principal purpose in using derivatives is to manage our aggregate interest rate risk profile within prescribed risk parameters. The derivative instruments
we use primarily include interest rate swaps, which we typically hold to maturity. In addition, we may on occasion use treasury locks to manage the interest rate risk associated with debt that is scheduled to reprice in the future. The primary factors affecting the fair value of our derivatives and derivative gains (losses) recorded in our results of operations include changes in interest rates, the shape of the yieldswap curve and the composition of our derivative portfolio. We generally do not designate our interest rate swaps, which currently account for all of our derivatives, for hedge accounting. Accordingly, changes in the fair value of interest rate swaps are reported in our consolidated statements of operations under derivative gains (losses). However, we typically designate treasury locks as cash flow hedges. We did not have any derivatives designated as accounting hedges as of November 30, 2017August 31, 2020 or May 31, 2017.2020.
We currently use two types of interest rate swap agreements: (i) we pay a fixed rate of interest and receive a variable rate of interest (“pay-fixed swaps”); and (ii) we pay a variable rate of interest and receive a fixed rate of interest (“receive-fixed swaps”). The interest amounts are based on a specified notional balance, which is used for calculation purposes only. The benchmark variable rate for the substantial majority of the floating rate payments under our swap agreements is 3-month LIBOR. Table 5 displays the average notional amount outstanding, by swap agreement type, and the weighted-averageAs interest rate paid and received for derivative cash settlements during the three and six months ended November 30, 2017 and 2016. As indicated in Table 5, our derivative portfolio currently consists of a higher proportion ofrates decline, pay-fixed swaps than receive-fixed swaps. The profile of our derivative portfolio, however, may change as a result of changes in market conditions and actions taken to manage our interest rate risk.
Table 5: Derivative Average Notional Amounts and Average Interest Rates |
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended November 30, |
| | | 2017 | | 2016 |
| (Dollars in thousands) | | Average Notional Balance | | Weighted- Average Rate Paid | | Weighted- Average Rate Received | | Average Notional Balance | | Weighted- Average Rate Paid | | Weighted- Average Rate Received |
| Pay-fixed swaps | | $ | 7,052,629 |
| | 2.84 | % | | 1.35 | % | | $ | 6,786,130 |
| | 2.91 | % | | 0.82 | % |
| Receive-fixed swaps | | 3,849,001 |
| | 1.91 |
| | 2.63 |
| | 3,864,934 |
| | 1.24 |
| | 2.78 |
|
| Total | | $ | 10,901,630 |
| | 2.51 | % | | 1.80 | % | | $ | 10,651,064 |
| | 2.31 | % | | 1.53 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended November 30, |
| | | 2017 | | 2016 |
| | | Average Notional Balance | | Weighted- Average Rate Paid | | Weighted- Average Rate Received | | Average Notional Balance | | Weighted- Average Rate Paid | | Weighted- Average Rate Received |
| Pay-fixed swaps | | $ | 7,003,898 |
| | 2.84 | % | | 1.31 | % | | $ | 6,812,841 |
| | 2.91 | % | | 0.75 | % |
| Receive-fixed swaps | | 3,787,525 |
| | 1.87 |
| | 2.63 |
| | 3,680,967 |
| | 1.14 |
| | 2.80 |
|
| Total | | $ | 10,791,423 |
| | 2.50 | % | | 1.77 | % | | $ | 10,493,808 |
| | 2.29 | % | | 1.47 | % |
The average remaining maturity of our pay-fixed and receive-fixed swaps was 19 years and four years, respectively, as of November 30, 2017, unchanged from fiscal year end May 31, 2017. In comparison, the average remaining maturity of our pay-fixed and receive-fixed swaps was 18 years and three years, respectively, as of November 30, 2016.
Pay-fixed swaps generally decrease in value and result in the recognition of derivative losses, as the amount of interest we pay remains fixed, while the amount of interest we receive declines. In contrast, as interest rates decline and increase in value as interest rates rise. In contrast, receive-fixedrise, pay-fixed swaps generally increase in value and result in the recognition of derivative gains, as the amount of interest we pay remains fixed, but the amount we receive increases. With a receive-fixed swap, the opposite results occur as interest rates decline and decrease in value as interest ratesor rise. Because our pay-fixed and receive-fixed swaps are referenced to different maturity terms along the swap yield curve, different changes in the swap yield curve—parallel, flattening, inversion or steepening—will result in differences inalso impact the fair value of our derivatives. The chart below provides comparative swap yield curves as of the end of November 30, 2017, August 31, 2017, May 31, 2017, November 30, 2016 and May 31, 2016.
____________________________
Benchmark rates obtained from Bloomberg.
Table 65 presents the components of net derivative gains (losses) recorded in our condensed consolidated resultsstatements of operations for the three and six months ended November 30, 2017August 31, 2020 and 2016 .2019. Derivative cash settlements representinterest expense represents the net periodic contractual interest amount for our interest-rate swaps forduring the reporting period. Derivative forward value gains (losses) represent the change in fair value of our interest rate swaps during the reporting period due to changes in expected future interest rates over the remaining life of our derivative contracts. We generally record derivative losses when interest rates decline and derivative gains when interest rates rise, as our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps.
Table 6:5: Derivative Gains (Losses)
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended November 30, | | Six Months Ended November 30, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Derivative gains (losses) attributable to: | | | | | | | | |
| Derivative cash settlements | | $ | (19,635 | ) | | $ | (21,587 | ) | | $ | (39,857 | ) | | $ | (44,977 | ) |
| Derivative forward value gains | | 145,228 |
| | 362,247 |
| | 119,252 |
| | 197,344 |
|
| Derivative gains | | $ | 125,593 |
| | $ | 340,660 |
| | $ | 79,395 |
| | $ | 152,367 |
|
|
| | | | | | | | |
| | | Three Months Ended August 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Derivative gains (losses) attributable to: | | | | |
| Derivative cash settlements interest expense | | $ | (26,972 | ) | | $ | (11,043 | ) |
| Derivative forward value gains (losses) | | 87,248 |
| | (384,682 | ) |
| Derivative gains (losses) | | $ | 60,276 |
| | $ | (395,725 | ) |
The net derivative gains of $126 million and $79$60 million for the three and six months ended November 30, 2017, respectively,current quarter were largely attributabledue to a net increase in the fair value of our pay-fixed swaps asswap portfolio, primarily attributable to an increase in long-term swap interest rates increased acrossas depicted by the yield curve.August 31, 2020 and May 31, 2020 swap curves displayed below in the “Comparative Swap Curves” chart.
The net derivative gainslosses of $341 million and $152$396 million for the three and six months ended November 30, 2016, respectively, same prior-year quarter were primarily attributabledue to a net increasedecrease in the fair value of our pay-fixed swaps dueswap portfolio, primarily attributable to an increasea decline in medium-terminterest rates across the swap curve, with medium- and longer-term interest rates experiencing a steeper decline than short-term rates as depicted by the August 31, 2019 and a general steepeningMay 31, 2019 swap curves displayed below in the “Comparative Swap Curves” chart.
Pay-fixed swaps accounted for approximately 72% and 71% of the yield curve duringoutstanding notional amount of our derivative portfolio as of August 31, 2020 and May 31, 2020, respectively. The profile of our derivative portfolio, however, may change as a result of changes in market conditions and actions taken to manage exposure to interest rate risk. The average remaining maturity of our pay-fixed and receive-fixed swaps was 19 years and four years, respectively, as of August 31, 2020. In comparison, the periods.average remaining maturity of our pay-fixed and receive-fixed swaps was 18 years and four years, respectively, as of August 31, 2019.
Derivative Cash Settlements
As indicated in Table 5 above, we recorded net periodic derivative cash settlements interest expense of $27 million for the current quarter, an increase of $16 million from the $11 million recorded for the same prior-year quarter. The increase was driven by the decrease in the 3-month LIBOR of 190 basis points over the last 12 months to 0.24% as of August 31, 2020. Table 6 displays, by interest rate swap agreement type, the average notional amount outstanding and the weighted-average interest rate paid and received for the net periodic derivative cash settlements interest expense during each respective period.
Table 6: Derivative Cash Settlements Expense—Average Notional Amounts and Interest Rates |
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended August 31, |
| | | 2020 | | 2019 |
| (Dollars in thousands) | | Average Notional Balance | | Weighted- Average Rate Paid | | Weighted- Average Rate Received | | Average Notional Balance | | Weighted- Average Rate Paid | | Weighted- Average Rate Received |
| Pay-fixed swaps | | $ | 6,579,420 |
| | 2.78 | % | | 0.38 | % | | $ | 7,353,402 |
| | 2.84 | % | | 2.39 | % |
| Receive-fixed swaps | | 2,646,826 |
| | 1.21 |
| | 2.76 |
| | 3,399,000 |
| | 3.09 |
| | 2.56 |
|
| Total | | $ | 9,226,246 |
| | 2.33 | % | | 1.06 | % | | $ | 10,752,402 |
| | 2.92 | % | | 2.44 | % |
| | | | | | | | | | | | | |
Comparative Swap Curves
The chart below provides comparative swap curves as of August 31, 2020, May 31, 2020, August 31, 2019 and May 31, 2019.
____________________________
Benchmark rates obtained from Bloomberg.
See “Note 8—9—Derivative Instruments and Hedging Activities” for additional information on our derivative instruments.
Results of Operations of Foreclosed Assets
Results of operations of foreclosed assets consists of the operating results of entities controlled by CFC that hold foreclosed assets, impairment charges related to those entities, gains or losses related to the disposition of the entities and potential subsequent charges related to those assets. On July 1, 2016, we completed the sale of Caribbean Asset Holdings, LLC (“CAH”). As a result, we did not carry any foreclosed assets on our consolidated balance sheet as of November 30, 2017 or May 31, 2017.
We recorded charges related to CAH of less than $1 million for the three and six months ended November 30, 2017. These charges were attributable to legal fees. We recorded charges related to CAH of $1 million and $2 million for the three and six months ended November 30, 2016, respectively, attributable to the combined impact of adjustments recorded at the closing date of the sale of CAH, post-closing purchase price adjustments and certain legal costs incurred pertaining to CAH.
In connection with the sale of CAH, $16 million of the sale proceeds was deposited into escrow to fund potential indemnification claims for a period of 15 months following the closing. On September 27, 2017, we received a claim notice from the purchaser of CAH asserting potential indemnification claims and seeking funding from the escrow. On November 10, 2017, funds held in escrow totaling $13 million were released to CFC. The remaining $3 million remains in escrow for claims under evaluation for indemnification.
Non-Interest Expense
Non-interest expense consists of salaries and employee benefit expense, general and administrative expenses, gains and losses on the early extinguishment of debt and other miscellaneous expenses.
Table 7 presents the components of non-interest expense recorded in our condensed consolidated resultsstatements of operations for the three and six months ended November 30, 2017August 31, 2020 and 2016.2019.
Table 7: Non-Interest Expense
| | | | | Three Months Ended November 30, | | Six Months Ended November 30, | | Three Months Ended August 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 |
| Non-interest expense: | | | | | | | | | | | | |
| Salaries and employee benefits | | $ | (12,009 | ) | | $ | (11,451 | ) | | $ | (23,832 | ) | | $ | (22,875 | ) | | $ | (13,133 | ) | | $ | (12,942 | ) |
| Other general and administrative expenses | | (9,905 | ) | | (9,181 | ) | | (19,718 | ) | | (18,616 | ) | | (9,530 | ) | | (12,387 | ) |
| Other non-interest expense | | (618 | ) | | (517 | ) | | (1,140 | ) | | (960 | ) | |
| Other non-interest (expense) income | | | (332 | ) | | 7,179 |
|
| Total non-interest expense | | $ | (22,532 | ) | | $ | (21,149 | ) | | $ | (44,690 | ) | | $ | (42,451 | ) | | $ | (22,995 | ) | | $ | (18,150 | ) |
Non-interest expense of $23 million for the current quarter increased by $1$5 million, or 7%27%, from the same prior-year quarter. Non-interest expensequarter, primarily due to the absence of $45a gain of $8 million forrecorded in connection with the six months ended November 30, 2017 increased by $2 million, 5%, fromsale of land in the same prior-year period. These increases were primarily attributable to higher expenses related to salaries and employee benefits and other general and administrative operating expenses.quarter.
Net Income (Loss) Attributable to Noncontrolling Interests
Net income (loss) attributable to noncontrolling interests represents 100% of the results of operations of NCSC and RTFC, as the members of NCSC and RTFC own or control 100% of the interest in their respective companies. The fluctuations in net income (loss) attributable to noncontrolling interests are primarily due to changes in the fair value of NCSC’s derivative instruments recognized in NCSC'sNCSC’s earnings.
We recorded net income attributable to noncontrolling interests of less than $1 million during both the three and six months ended November 30, 2017. In comparison, we recorded net income attributable to noncontrolling interests of $3 million and $2 million for the three and six months ended November 30, 2016, respectively.current quarter, compared with a net loss of $2 million for the same prior-year quarter.
|
|
| CONSOLIDATED BALANCE SHEET ANALYSIS |
Total assets of $25,880$28,263 million as of November 30, 2017August 31, 2020 increased by $675$105 million or 3%, from May 31, 2017,2020, primarily due to growth in our loan portfolio. Total liabilities of $24,640$27,531 million as of November 30, 2017 increased by $533 million, or 2%,August 31, 2020 was relatively unchanged from May 31, 2017, largely due to debt issuances to fund loan growth.2020. Total equity increased by $141$83 million to $1,240$732 million as of November 30, 2017,August 31, 2020, attributable to our reported net income of $188$145 million for the six months ended November 30, 2017,current quarter, which was partially offset by the retirement of patronage capital retirement of $45 million.$60 million authorized by the CFC Board of Directors during the current quarter and a decrease to retained earnings of $4 million from the cumulative-effect adjustment recorded at adoption of the CECL accounting standard on June 1, 2020.
Following is a discussion of changes in the major components of our assets and liabilities during the sixthree months ended November 30, 2017.August 31, 2020. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to manage liquidity requirements for the company and our customers, and our market risk exposure in accordance with our risk appetite.
Loan Portfolio
We segregate our loan portfolio into portfolio segments based on the member class of the borrower, which consists of CFC distribution, CFC power supply, CFC statewide and associate, NCSC and RTFC. We offer both long-term fixed- and variable-rate loans and line of credit variable-rate loans. The substantial majority ofloan loans into our portfolio represent advances under securedborrowers. Under our long-term loan facilities, with terms up to 35 years. Borrowers have the option of selectinga borrower may select a fixed interest rate or a variable interest rate forat the time of each advance for periods ranging from one year to the final maturity of the facility.loan advance. Line of credit loans are typically revolving loan facilities and are generally unsecured.have a variable interest rate.
Loans Outstanding
Table 8 summarizes loans to members, by member class and by loan type, and by member class, as of November 30, 2017August 31, 2020 and May 31, 2017.2020. As indicated in Table 8, loans to CFC distribution and power supply borrowers accounted for 96% of total loans to members as of both August 31, 2020 and May 31, 2020, and long-term fixed-rate loans accounted for 90% and 91%92% of loans to members as of November 30, 2017 and May 31, 2017, respectively.each date.
Table 8: Loans Outstanding by TypeMember Class and Member ClassLoan Type
| | | | | November 30, 2017 | | May 31, 2017 | | Increase/ | | August 31, 2020 | | May 31, 2020 | |
|
| (Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total | | (Decrease) | |
| Loans by type: | | | | | | | | | | | |
| Long-term loans: | | | | | | | | | | | |
| Fixed-rate | | $ | 22,415,833 |
| | 90 | % | | $ | 22,136,690 |
| | 91 | % | | $ | 279,143 |
| |
| Variable-rate | | 906,453 |
| | 4 |
| | 847,419 |
| | 3 |
| | 59,034 |
| |
| Total long-term loans | | 23,322,286 |
| | 94 |
| | 22,984,109 |
| | 94 |
| | 338,177 |
| |
| Lines of credit | | 1,491,256 |
| | 6 |
| | 1,372,221 |
| | 6 |
| | 119,035 |
| |
| Total loans outstanding | | 24,813,542 |
| | 100 |
| | 24,356,330 |
| | 100 |
| | 457,212 |
| |
| Deferred loan origination costs |
| 11,149 |
|
| — |
|
| 10,714 |
|
| — |
|
| 435 |
| |
| Loans to members |
| $ | 24,824,691 |
|
| 100 | % |
| $ | 24,367,044 |
|
| 100 | % |
| $ | 457,647 |
| |
| | | | | | | | | | | | |
| (Dollars in millions) | | | Amount | | % of Total | | Amount | | % of Total | | Change |
| Loans by member class: | | | | | | | | | | | | | | | | | | | | |
| CFC: | | | | | | | | | | | | | | | | | | | | |
| Distribution | | $ | 19,230,740 |
| | 78 | % | | $ | 18,825,366 |
| | 77 | % | | $ | 405,374 |
| | $ | 21,012 |
| | 78 | % | | $ | 20,770 |
| | 78 | % | | $ | 242 |
|
| Power supply | | 4,414,257 |
| | 18 |
| | 4,504,791 |
| | 19 |
| | (90,534 | ) | | 4,730 |
| | 18 |
| | 4,732 |
| | 18 |
| | (2 | ) |
| Statewide and associate | | 57,107 |
| | — |
| | 57,830 |
| | — |
| | (723 | ) | | 98 |
| | — |
| | 106 |
| | — |
| | (8 | ) |
| CFC total | | 23,702,104 |
| | 96 |
| | 23,387,987 |
| | 96 |
| | 314,117 |
| | 25,840 |
| | 96 |
| | 25,608 |
| | 96 |
| | 232 |
|
| NCSC | | 739,707 |
| | 3 |
| | 613,924 |
| | 3 |
| | 125,783 |
| | 681 |
| | 3 |
| | 698 |
| | 3 |
| | (17 | ) |
| RTFC | | 371,731 |
| | 1 |
| | 354,419 |
| | 1 |
| | 17,312 |
| | 396 |
| | 1 |
| | 385 |
| | 1 |
| | 11 |
|
| Total loans outstanding | | 24,813,542 |
| | 100 |
| | 24,356,330 |
| | 100 |
| | 457,212 |
| |
Total loans outstanding(1) | | | 26,917 |
| | 100 |
| | 26,691 |
| | 100 |
| | 226 |
|
| Deferred loan origination costs | | 11,149 |
| | — |
| | 10,714 |
| | — |
| | 435 |
| | 12 |
| | — |
| | 11 |
| | — |
| | 1 |
|
| Loans to members | | $ | 24,824,691 |
| | 100 | % | | $ | 24,367,044 |
| | 100 | % | | $ | 457,647 |
| | $ | 26,929 |
| | 100 | % | | $ | 26,702 |
| | 100 | % | | $ | 227 |
|
| | | | | | | | | | | | |
| Loans by type: | | | | | | | | | | | |
| Long-term loans: | | | |
| | | | | | | | |
| Fixed-rate | | | $ | 24,817 |
| | 92 | % | | $ | 24,472 |
| | 92 | % | | $ | 345 |
|
| Variable-rate | | | 696 |
| | 3 |
| | 656 |
| | 2 |
| | 40 |
|
| Total long-term loans | | | 25,513 |
| | 95 |
| | 25,128 |
| | 94 |
| | 385 |
|
| Line of credit loans | | | 1,404 |
| | 5 |
| | 1,563 |
| | 6 |
| | (159 | ) |
Total loans outstanding(1) | | | 26,917 |
| | 100 |
| | 26,691 |
| | 100 |
| | 226 |
|
| Deferred loan origination costs | |
| 12 |
|
| — |
|
| 11 |
|
| — |
|
| 1 |
|
| Loans to members | |
| $ | 26,929 |
|
| 100 | % |
| $ | 26,702 |
|
| 100 | % |
| $ | 227 |
|
____________________________
(1) Represents the unpaid principal balance, net of charge-offs and recoveries, of loans as of the end of each period.
Loans to members totaled $24,825$26,929 million as of November 30, 2017,August 31, 2020, an increase of $458$227 million, or 2%1%, from May 31, 2017.2020. The increase was primarily due todriven by an increase in CFC distributionlong-term loans of $405$385 million, an increase in NCSC loans of $126 million and an increase in RTFC loans of $17 million, which was partially offset by a decrease in line of credit loans of $159 million. CFC distribution loans and RTFC loans increased by $242 million and $11 million, respectively. NCSC loans, CFC statewide and associate loans and CFC power supply loans of $91 million. decreased by $17 million, $8 million and $2 million, respectively.
Long-term loan advances totaled $1,127$807 million during the six months ended November 30, 2017, withcurrent quarter, of which approximately 58% of those advances93% was provided to members for capital expenditures and approximately 4% was provided for the refinancing of loans made by other lenders. In comparison, long-term loan advances totaled $888 million during the same prior-year quarter, of which approximately 73% was provided to members for capital expenditures and 31%approximately 19% was provided for the refinancing of loans made by other lenders.
We provide additional information on our loan product types in “Item 1. Business—Loan Programs” and “Note 4—Loans and Commitments”Loans” in our 20172020 Form 10-K. See “Debt—Secured Borrowings”Collateral Pledged” below for information on encumbered and unencumbered loans and “Credit Risk Management” for information on the credit risk profile of our loan portfolio.
Loan Retention Rate
Table 9 presents a comparison betweensummary of the historical retention rate ofoptions selected by borrowers for CFC’s long-term fixed-rate loans that repriced, in accordance with our standard loan repricing provisions, during the sixthree months ended November 30, 2017August 31, 2020 and loans that repriced during fiscal year 2017, and provides information on2020. At the percentage of loans that repriced to either another fixed-rate term or a variable rate. The retention rate is calculated based on the election made byrepricing date, the borrower athas the repricing date. The average annual retentionoption of (i) selecting CFC’s current long-term fixed rate for a term of between one year and up to the final maturity of the loan; (ii) selecting CFC’s repriced loans has been 97% overcurrent long-term variable rate; or (iii) repaying the last three fiscal years.loan in full.
Table 9: Historical Retention Rate and Repricing Selection(1) | | | | | Six Months Ended | | Fiscal Year Ended | | Three Months Ended | | Fiscal Year Ended |
| | | November 30, 2017 | | May 31, 2017 | | August 31, 2020 | | May 31, 2020 |
| (Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total | | Amount | | % of Total | | Amount | | % of Total |
| Loans retained: | | | | | | | | | | | | | | | | |
| Long-term fixed rate selected | | $ | 440,556 |
| | 85 | % | | $ | 824,415 |
| | 84 | % | | $ | 78,301 |
| | 99 | % | | $ | 441,165 |
| | 95 | % |
| Long-term variable rate selected | | 77,746 |
| | 15 |
| | 137,835 |
| | 14 |
| | 319 |
| | — |
| | 11,446 |
| | 3 |
|
| Loans repriced and sold by CFC | | — |
| | — |
| | 1,401 |
| | — |
| |
| Total loans retained by CFC | | 518,302 |
| | 100 |
| | 963,651 |
| | 98 |
| | 78,620 |
| | 99 |
| | 452,611 |
| | 98 |
|
| Total loans repaid | | 1,165 |
| | — |
| | 23,675 |
| | 2 |
| |
| Loans repaid | | | 408 |
| | 1 |
| | 10,350 |
| | 2 |
|
| Total | | $ | 519,467 |
| | 100 | % | | $ | 987,326 |
| | 100 | % | | $ | 79,028 |
| | 100 | % | | $ | 462,961 |
| | 100 | % |
____________________________
(1)Does not include NCSC and RTFC loans.
As displayed in Table 9, of the loans that repriced during the three months ended August 31, 2020 and fiscal year 2020, the substantial majority of borrowers selected a new long-term fixed or variable rate. The average retention rate, which is calculated based on the election made by the borrower at the repricing date, was 96% for CFC loans that repriced during the three fiscal year period ended May 31, 2020.
Debt
We utilize both short-term borrowings and long-term borrowingsdebt as part of our funding strategy and asset/liability interest rate risk management. We seek to maintain diversified funding sources across products, programs and markets to manage funding concentrations and reduce our liquidity or debt roll-overrollover risk. Our funding sources include a variety of secured and unsecured debt securities in a wide range of maturities to our members and affiliates and in the capital markets.
Debt Outstanding
Table 10 displays the composition, by product type, of our outstanding debt as of November 30, 2017August 31, 2020 and May 31, 2017.2020. Table 10 also displays the composition of our debt based on several additional selected attributes.
Table 10: Total Debt Outstanding | | | (Dollars in thousands) | | November 30, 2017 | | May 31, 2017 | | Increase/
(Decrease) | | August 31, 2020 | | May 31, 2020 | | Change |
| Debt product type: | | | | | | | | | | | | |
| Commercial paper: | | | | | | | | | | | | |
| Members, at par | | $ | 1,133,057 |
| | $ | 928,158 |
| | $ | 204,899 |
| | $ | 1,421,582 |
| | $ | 1,318,566 |
| | $ | 103,016 |
|
| Dealer, net of discounts | | 579,859 |
| | 999,691 |
| | (419,832 | ) | | 299,998 |
| | — |
| | 299,998 |
|
| Total commercial paper | | 1,712,916 |
| | 1,927,849 |
| | (214,933 | ) | | 1,721,580 |
| | 1,318,566 |
| | 403,014 |
|
| Select notes to members | | 770,376 |
| | 696,889 |
| | 73,487 |
| | 1,655,029 |
| | 1,597,959 |
| | 57,070 |
|
| Daily liquidity fund notes to members | | 866,065 |
| | 527,990 |
| | 338,075 |
| | 645,036 |
| | 508,618 |
| | 136,418 |
|
| Medium-term notes: | | | | | |
|
| | | | | |
|
|
| Members, at par | | 612,402 |
| | 612,951 |
| | (549 | ) | | 598,248 |
| | 658,959 |
| | (60,711 | ) |
| Dealer, net of discounts | | 2,758,190 |
| | 2,364,671 |
| | 393,519 |
| | 3,043,323 |
| | 3,068,793 |
| | (25,470 | ) |
| Total medium-term notes | | 3,370,592 |
| | 2,977,622 |
| | 392,970 |
| | 3,641,571 |
| | 3,727,752 |
| | (86,181 | ) |
| Collateral trust bonds | | 7,637,324 |
| | 7,634,048 |
| | 3,276 |
| | 6,792,448 |
| | 7,188,553 |
| | (396,105 | ) |
| Guaranteed Underwriter Program notes payable | | 5,059,943 |
| | 4,985,484 |
| | 74,459 |
| | 6,225,855 |
| | 6,261,312 |
| | (35,457 | ) |
| Farmer Mac notes payable | | 2,491,463 |
| | 2,513,389 |
| | (21,926 | ) | | 3,041,843 |
| | 3,059,637 |
| | (17,794 | ) |
| Other notes payable | | 35,332 |
| | 35,223 |
| | 109 |
| | 11,649 |
| | 11,612 |
| | 37 |
|
| Subordinated deferrable debt | | 742,341 |
| | 742,274 |
| | 67 |
| | 986,166 |
| | 986,119 |
| | 47 |
|
| Members’ subordinated certificates: | | | | | | | | | | | | |
| Membership subordinated certificates | | 630,391 |
| | 630,098 |
| | 293 |
| | 630,483 |
| | 630,483 |
| | — |
|
| Loan and guarantee subordinated certificates | | 548,187 |
| | 567,830 |
| | (19,643 | ) | | 439,742 |
| | 482,965 |
| | (43,223 | ) |
| Member capital securities | | 221,097 |
| | 221,097 |
| | — |
| | 228,620 |
| | 226,170 |
| | 2,450 |
|
| Total members’ subordinated certificates | | 1,399,675 |
| | 1,419,025 |
| | (19,350 | ) | | 1,298,845 |
| | 1,339,618 |
| | (40,773 | ) |
| Total debt outstanding | | $ | 24,086,027 |
| | $ | 23,459,793 |
|
| $ | 626,234 |
| | $ | 26,020,022 |
| | $ | 25,999,746 |
|
| $ | 20,276 |
|
| | | | | | | | | | | | | |
| Security type: | | | | | | | | | | | | |
| Secured debt | | | 62 | % | | 64 | % | | |
| Unsecured debt | | 37 | % | | 35 | % | | | | 38 |
| | 36 |
| | |
| Secured debt | | 63 |
| | 65 |
| | | |
| Total | | 100 | % | | 100 | % | | | | 100 | % | | 100 | % | | |
| | | | | | | | | | | | | |
| Funding source: | | | | | | | | | | | | |
| Members | | 20 | % | | 18 | % | | | | 21 | % | | 21 | % | | |
| Private placement: | | | | | | | | | | | | |
| Guaranteed Underwriter Program notes payable | | 21 |
| | 21 |
| | | | 24 |
| | 24 |
| | |
| Farmer Mac notes payable | | 10 |
| | 11 |
| | | | 12 |
| | 12 |
| | |
| Other | | — |
| | — |
| | | |
| Total private placement | | 31 |
| | 32 |
| | | | 36 |
| | 36 |
| | |
| Capital markets | | 49 |
| | 50 |
| | | | 43 |
| | 43 |
| | |
| Total | | 100 | % | | 100 | % | | | | 100 | % | | 100 | % | | |
| | | | | | | | | | | | | |
| Interest rate type: | | | | | | | | | | | | |
| Fixed-rate debt | | 73 | % | | 74 | % | | | | 72 | % | | 75 | % | | |
| Variable-rate debt | | 27 |
| | 26 |
| | | | 28 |
| | 25 |
| | |
| Total | | 100 | % | | 100 | % | | | | 100 | % | | 100 | % | | |
| | | | | | | | |
| Interest rate type, including the impact of swaps: | | | | | | | | | | | | |
Fixed-rate debt(1) | | 86 | % | | 87 | % | | | | 88 | % | | 90 | % | | |
Variable-rate debt(2) | | 14 |
| | 13 |
| | | | 12 |
| | 10 |
| | |
| Total | | 100 | % | | 100 | % | | | | 100 | % | | 100 | % | | |
| | | | | | | | | | | | | |
Maturity classification:(3) | | | | | | | | | | | | |
| Short-term borrowings | | 15 | % | | 14 | % | | | | 17 | % | | 15 | % | | |
Long-term and subordinated debt(4) | | 85 |
| | 86 |
| | | | 83 |
| | 85 |
| | |
| Total | | 100 | % | | 100 | % | | | | 100 | % | | 100 | % | | |
____________________________
(1) Includes variable-rate debt that has been swapped to a fixed rate, net of any fixed-rate debt that has been swapped to a variable rate.
(2) Includes fixed-rate debt that has been swapped to a variable rate, net of any variable-rate debt that has been swapped to a fixed rate. Also includes commercial paper notes, which generally have maturities of less than 90 days. The interest rate on commercial paper notes does not change once the note has been issued; however, the interest rate for new commercial paper issuances changes daily.
(3) Borrowings with an original contractual maturity of one year or less are classified as short-term borrowings. Borrowings with an original contractual maturity of greater than one year are classified as long-term debt.
(4) Consists of long-term debt, subordinated deferrable debt and total members’ subordinated debt reported on the condensedour consolidated balance sheets. Maturity classification is based on the original contractual maturity as of the date of issuance of the debt.
Our outstanding debt volume generally increases and decreases in response to member loan demand. As outstanding loan balances increased during the six months ended November 30, 2017, our debt volume also increased. Total debt outstanding was $24,086$26,020 million as of November 30, 2017,August 31, 2020, an increase of $626$20 million or 3%, from May 31, 2017. The increase was primarily attributable to a2020. Debt activity during the current quarter consisted of net increaseincreases in outstanding member commercial paper, select notes and daily liquidity fund notes of $543$297 million aand dealer commercial paper of $300 million, which together totaled $597 million. This increase was partially offset by net increasedecreases in dealercollateral trust bonds of $396 million, medium-term notes of $394$86 million, and a net increase in notes payableborrowings under the Guaranteed Underwriter Program of $74 million. These increases were partially offset by a net decrease in dealer commercial paper outstanding$35 million and Farmer Mac notes payable of $420$18 million, which together totaled $535 million.
Below is a summaryThe decrease in collateral trust bonds was attributable to the redemption of significant financing activities during the six months ended$400 million outstanding principal amount of our 2.35% collateral trust bonds due June 15, 2020. On October 1, 2020, we redeemed all $350 million outstanding principal amount of our 2.30% collateral trust bonds due November 30, 2017.
On November 9, 2017, we closed a $750 million committed loan facility (“Series M”) from the Federal Financing Bank under the Guaranteed Underwriter Program.
On November 20, 2017, we amended and restated the three-year and five-year committed bank revolving line of credit agreements to extend the maturity dates to November 20, 2020 and November 20, 2022, respectively, and to terminate certain third-party bank commitments.1, 2020.
Member Investments
Debt securities issued to our members represent an important, stable source of funding. Table 11 displays outstanding member debt, by debt product type, as of November 30, 2017August 31, 2020 and May 31, 2017.2020.
Table 11: Member Investments
| | | | | November 30, 2017 | | May 31, 2017 | | Increase/ (Decrease) | | August 31, 2020 | | May 31, 2020 | | Change |
| (Dollars in thousands) | | Amount | | % of Total (1) | | Amount | | % of Total (1) | | | Amount | | % of Total (1) | | Amount | | % of Total (1) | |
| Member investments: | | | | | | | | | | | |
| Commercial paper | | $ | 1,133,057 |
| | 66 | % | | $ | 928,158 |
| | 48 | % | | $ | 204,899 |
| | $ | 1,421,582 |
| | 83 | % | | $ | 1,318,566 |
| | 100 | % | | $ | 103,016 |
|
| Select notes | | 770,376 |
| | 100 |
| | 696,889 |
| | 100 |
| | 73,487 |
| | 1,655,029 |
| | 100 |
| | 1,597,959 |
| | 100 |
| | 57,070 |
|
| Daily liquidity fund notes | | 866,065 |
| | 100 |
| | 527,990 |
| | 100 |
| | 338,075 |
| | 645,036 |
| | 100 |
| | 508,618 |
| | 100 |
| | 136,418 |
|
| Medium-term notes | | 612,402 |
| | 18 |
| | 612,951 |
| | 20 |
| | (549 | ) | | 598,248 |
| | 16 |
| | 658,959 |
| | 18 |
| | (60,711 | ) |
| Members’ subordinated certificates | | 1,399,675 |
| | 100 |
| | 1,419,025 |
| | 100 |
| | (19,350 | ) | | 1,298,845 |
| | 100 |
| | 1,339,618 |
| | 100 |
| | (40,773 | ) |
| Total outstanding member debt | | $ | 4,781,575 |
| | | | $ | 4,185,013 |
| | | | $ | 596,562 |
| |
| Total member investments | | | $ | 5,618,740 |
| | | | $ | 5,423,720 |
| | | | $ | 195,020 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Percentage of total debt outstanding | | 20 | % | | | | 18 | % | | | | |
| | 22 | % | | | | 21 | % | | | | |
|
____________________________
(1) Represents outstanding debt attributable to members for each debt product type as a percentage of the total outstanding debt for each debt product type.
Member investments totaled $5,619 million and accounted for 20% and 18%22% of total debt outstanding as of November 30, 2017 andAugust 31, 2020, compared with $5,424 million, or 21% of total debt outstanding as of May 31, 2017, respectively.2020. Over the last three fiscal years, outstanding member investments havetwelve quarters, debt issued to members has averaged $4,273$4,805 million on a quarterly basis.as of each quarter end.
Short-Term Borrowings
Short-term borrowings consist of borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. Short-term borrowings totaled $3,557$4,553 million and accounted for 15%17% of total debt
outstanding as of November 30, 2017,August 31, 2020, compared with $3,343$3,962 million, or 14%15%, of total debt outstanding as of May 31, 2017.2020. See Table 27 under “Liquidity Risk” below and for “Note 6—Short-Term Borrowings” for information on the composition of our short-term borrowings.
Long-Term and Subordinated Debt
Long-term debt, defined as debt with an original contractual maturity term of greater than one year, primarily consists of medium-term notes, collateral trust bonds, notes payable under the Guaranteed Underwriter Program and notes payable under our note purchase agreement with Farmer Mac. Subordinated debt consists of subordinated deferrable debt and members’ subordinated certificates. Our subordinated deferrable debt and members’ subordinated certificates have original contractual maturity terms of greater than one year.
Long-term and subordinated debt together totaled $20,529$21,467 million and accounted for 85%83% of total debt outstanding as of November 30, 2017,August 31, 2020, compared with $20,117$22,038 million, or 86%,85% of total debt outstanding as of May 31, 2017. As discussed above, the increase2020. We provide additional information on our long-term debt below under “Liquidity Risk” and in total debt outstanding, including long-term“Note 7—Long-Term Debt” and subordinated debt, was primarily due to the issuance of debt to fund the growth in our loan and investments portfolios.“Note 8—Subordinated Deferrable Debt.”
Collateral Pledged
We are required to pledge loans or other collateral in borrowing transactions under our collateral trust bond indentures, note purchase agreements with Farmer Mac and bond agreements under the Guaranteed Underwriter Program. We are required to maintain pledged collateral equal to at least 100% of the face amount of outstanding borrowings. However, as discussed below, we typically maintain pledged collateral in excess of the required percentage to ensure that required collateral levels are maintained and to facilitate the timely execution of debt issuances by reducing or eliminating the lead time to pledge additional collateral.percentage. Under the provisions of our committed bank revolving line of credit agreements, the excess collateral that we are allowed to pledge cannot exceed 150% of the outstanding borrowings under our collateral trust bond indentures, Farmer Mac note purchase agreements or the Guaranteed Underwriter Program. In certain cases, provided that all conditions of eligibility under the different programs are satisfied, we may withdraw excess pledged collateral or transfer collateral from one borrowing program to another to facilitate a new debt issuance.
Table 12 displays the collateral coverage ratios as of November 30, 2017August 31, 2020 and May 31, 20172020 for the debt agreements noted above that require us to pledge collateral.
Table 12: Collateral Pledged
| | | | | Requirement/Limit | | | | Requirement Coverage Ratios | | |
| | | Debt Indenture Minimum | | Committed Bank Revolving Line of Credit Agreements Maximum | | Actual(1) | | Minimum Debt Indentures | | Maximum Committed Bank Revolving Line of Credit Agreements | | Actual Coverage Ratios(1) |
| Debt Agreement | | November 30, 2017 | | May 31, 2017 | | August 31, 2020 | | May 31, 2020 |
| Collateral trust bonds 1994 indenture | | 100 | % | | 150 | % | | 115 | % | | 117 | % | | 100 | % | | 150 | % | | 111 | % | | 114 | % |
| Collateral trust bonds 2007 indenture | | 100 |
| | 150 |
| | 113 |
| | 115 |
| | 100 |
| | 150 |
| | 118 |
| | 113 |
|
| Guaranteed Underwriter Program notes payable | | 100 |
| | 150 |
| | 116 |
| | 117 |
| | 100 |
| | 150 |
| | 120 |
| | 120 |
|
| Farmer Mac notes payable | | 100 |
| | 150 |
| | 115 |
| | 117 |
| | 100 |
| | 150 |
| | 120 |
| | 121 |
|
| Clean Renewable Energy Bonds Series 2009A | | 100 |
| | 150 |
| | 106 |
| | 113 |
| | 100 |
| | 150 |
| | 112 |
| | 120 |
|
____________________________
(1) Calculated based on the amount of collateral pledged divided by the face amount of outstanding secured debt.
Of our total debt outstanding of $24,086$26,020 million as of November 30, 2017, $15,202August 31, 2020, $16,066 million, or 63%62%, was secured by pledged loans totaling $17,691$19,457 million. In comparison, of our total debt outstanding of $23,460$26,000 million as of May 31, 2017, $15,1462020, $16,515 million, or 65%64%, was secured by pledged loans totaling $17,941$19,643 million. Total debt outstanding is presented on our condensed consolidated balance sheet is presentedsheets net of unamortized discounts and issuance costs. However,costs; however, our collateral pledging requirements are based on the face amount of secured outstanding debt, which does not take into consideration the impact ofexcludes net unamortized discounts and issuance costs.
Table 13 displays the unpaid principal balance of loans pledged for secured debt, the excess collateral pledged and unencumbered loans as of November 30, 2017August 31, 2020 and May 31, 2017.2020.
Table 13: Unencumbered Loans
| | | (Dollars in thousands) | | November 30, 2017 | | May 31, 2017 | | August 31, 2020 | | May 31, 2020 |
Total loans outstanding(1) | | $ | 24,813,542 |
| | $ | 24,356,330 |
| | $ | 26,917,099 |
| | 26,690,854 |
|
Less: Loans required to be pledged for secured debt (2) | | (15,482,581 | ) | | (15,435,062 | ) | | (16,331,477 | ) | | (16,784,728 | ) |
Loans pledged in excess of requirement (2)(3) | | (2,208,115 | ) | | (2,505,804 | ) | | (3,125,847 | ) | | (2,858,238 | ) |
| Total pledged loans | | (17,690,696 | ) | | (17,940,866 | ) | | (19,457,324 | ) | | (19,642,966 | ) |
| Unencumbered loans | | $ | 7,122,846 |
| | $ | 6,415,464 |
| | $ | 7,459,775 |
| | $ | 7,047,888 |
|
| Unencumbered loans as a percentage of total loans | | 29 | % | | 26 | % | |
| Unencumbered loans as a percentage of total loans outstanding | | | 28 | % | | 26 | % |
____________________________
(1) ReflectsRepresents the unpaid principal balance.balance of loans as of the end of each period. Excludes unamortized deferred loan origination costs of $11$12 million as of both November 30, 2017August 31, 2020 and May 31, 2017.2020.
(2) Reflects unpaid principal balance of pledged loans.
(3) Excludes cash collateral pledged to secure debt. If there is an event of default under most of our indentures, we can only withdraw the excess collateral if we substitute cash or permitted investments of equal value.
As displayed above in Table 13, we had excess loans pledged as collateral totaling $2,208$3,126 million and $2,506$2,858 million as of November 30, 2017August 31, 2020 and May 31, 2017,2020, respectively. We typically pledge loans in excess of the required amount for the following reasons: (i) our distribution and power supply loans are typically amortizing loans that require scheduled principal payments over the life of the loan, whereas the debt securities issued under secured indentures and agreements typically have bullet maturities; (ii) distribution and power supply borrowers have the option to prepay their loans; and (iii) individual loans may become ineligible for various reasons, some of which may be temporary.
We provide additional information on our borrowings, including the maturity profile, below in “Liquidity Risk.” Refer to “Note 4—Loans and Commitments—Pledging of Loans” for additional information related to pledged collateral. Also refer to “Note 6—5—Short-Term Borrowings,” “Note 7—Long-Term Debt,” “Note 8—Subordinated Deferrable Debt” and “Note 9—Members’ Subordinated Certificates” in our 20172020 Form 10-K for a more detailed description of each of our debt product types. See “Note 4—Loans—Pledging of Loans” in this Report for additional information related to pledged collateral.
Equity
Table 14 presents the components of total CFC equity and total equity as of August 31, 2020 and May 31, 2020.
Table 14: Equity
|
| | | | | | | | | | | | |
| (Dollars in thousands) | | August 31, 2020 | | May 31, 2020 | | Change |
| Equity components: | | | | | | |
| Membership fees and educational fund: | | | | | | |
| Membership fees | | $ | 969 |
| | $ | 969 |
| | $ | — |
|
| Educational fund | | 1,970 |
| | 2,224 |
| | (254 | ) |
| Total membership fees and educational fund | | 2,939 |
| | 3,193 |
| | (254 | ) |
| Patronage capital allocated | | 834,209 |
| | 894,066 |
| | (59,857 | ) |
| Members’ capital reserve | | 807,320 |
| | 807,320 |
| | — |
|
| Total allocated equity | | 1,644,468 |
| | 1,704,579 |
| | (60,111 | ) |
| Unallocated net income (loss): | | | | | |
|
|
Prior year-end cumulative derivative forward value losses(1) | | (1,079,739 | ) | | (348,965 | ) | | (730,774 | ) |
Year-to-date derivative forward value gains (losses) (1) | | 86,783 |
| | (730,774 | ) | | 817,557 |
|
Period-end cumulative derivative forward value losses(1) | | (992,956 | ) | | (1,079,739 | ) | | 86,783 |
|
| Other unallocated net income | | 56,924 |
| | 3,191 |
| | 53,733 |
|
| Unallocated net loss | | (936,032 | ) | | (1,076,548 | ) | | 140,516 |
|
| CFC retained equity | | 708,436 |
| | 628,031 |
| | 80,405 |
|
| Accumulated other comprehensive loss | | (1,827 | ) | | (1,910 | ) | | 83 |
|
| Total CFC equity | | 706,609 |
| | 626,121 |
| | 80,488 |
|
| Noncontrolling interests | | 24,895 |
| | 22,701 |
| | 2,194 |
|
| Total equity | | $ | 731,504 |
| | $ | 648,822 |
| | $ | 82,682 |
|
(1)Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the variable interest entities NCSC and RTFC, which we are required to consolidate. We present the consolidated total derivative forward value gains (losses) in Table 36 in the “Non-GAAP Financial Measures” section below. Also, see “Note 14—Business Segments” for the statements of operations for CFC.
Total equity increased by $141$83 million to $1,240$732 million as of November 30, 2017. The increase was primarilyAugust 31, 2020, attributable to our reported net income of $188$145 million for the six months ended November 30, 2017,current quarter, which was partially offset by the retirement of patronage capital retirement of $45$60 million authorized by the CFC Board of Directors during the current quarter and a decrease to retained earnings of $4 million from the cumulative-effect adjustment recorded at adoption of the CECL accounting standard on June 1, 2020. The retired patronage capital amount was paid to members in September 2017.2020.
In July 2017,2020, the CFC Board of Directors authorized the allocation of fiscal year 20172020 adjusted net income as follows: $90$96 million to members in the form of patronage capital; $43$48 million to the members’ capital reserve; and $1 million to the Cooperative Educational Fund.cooperative educational fund. The amount of patronage capital allocated each year by CFC’s Board of Directors is based on non-GAAP adjusted non-GAAP net income, which excludes the impact of derivative forward value gains (losses). SeeWe provide a reconciliation of our adjusted net income to our reported net income and an explanation of the adjustments below in “Non-GAAP Financial Measures” for information on adjusted net income.Measures.”
In July 2017,2020, the CFC Board of Directors also authorized the retirement of patronage capital totaling $45$60 million, consisting of $48 million, which represented 50% of the patronage capital allocation for fiscal year 20172020, and $12 million, which represented the portion of the allocation from fiscal year 1994 net earnings that has been held for 25 years pursuant to the CFC Board of patronage capital of $90 million. WeDirectors policy. This amount was returned the $45 million to members in cash in September 2017.2020. The remaining portion of the amount allocated amountfor fiscal year 2020 will be retained by CFC for 25 years under current guidelines adopted by the CFC Board of Directors in June 2009.
The CFC Board of Directors is required to make annual allocations of adjusted net income, if any. CFC has made annual retirements of allocated net earnings in 3841 of the last 3942 fiscal years; however, future retirements of allocated amounts are determined based on CFC’s financial condition. The CFC Board of Directors has the authority to change the current practice
for allocating and retiring net earnings at any time, subject to applicable laws. See “Item 1. Business—Allocation and Retirement of Patronage Capital” of our 20172020 Form 10-K for additional information.
|
|
| OFF-BALANCE SHEET ARRANGEMENTS |
In the ordinary course of business, we engage in financial transactions that are not presented on our condensed consolidated balance sheets, or may be recorded on our condensed consolidated balance sheets in amounts that are different from the full contract or notional amount of the transaction. Our off-balance sheet arrangements consist primarily of guarantees of member obligations and unadvanced loan commitments intended to meet the financial needs of our members.
Guarantees
We provide guarantees for certain contractual obligations of our members to assist them in obtaining various forms of financing. We use the same credit policies and monitoring procedures in providing guarantees as we do for loans and commitments. If a member defaults on its obligation, we are obligated to pay required amounts pursuant to our guarantees. Meeting our guarantee obligations satisfies the underlying obligation of our member systems and prevents the exercise of remedies by the guarantee beneficiary based upon a payment default by a member. In general, the member is required to repay any amount advanced by us with accrued interest, pursuant to the documents evidencing the member’s reimbursement obligation. Table 1415 displays the notional amount of our outstanding guarantee obligations, by guarantee type and by company, as of November 30, 2017August 31, 2020 and May 31, 2017.2020.
Table 14:15: Guarantees Outstanding
| | | (Dollars in thousands) | | November 30, 2017 | | May 31, 2017 | | Increase/
(Decrease) | | August 31, 2020 | | May 31, 2020 | | Change |
| Guarantee type: | | | | | | | | | | | | |
Long-term tax-exempt bonds | | $ | 318,425 |
| | $ | 468,145 |
| | $ | (149,720 | ) | | $ | 186,075 |
| | $ | 263,875 |
| | $ | (77,800 | ) |
Letters of credit | | 230,117 |
| | 307,321 |
| | (77,204 | ) | | 353,896 |
| | 413,839 |
| | (59,943 | ) |
| Other guarantees | | 113,954 |
| | 114,151 |
| | (197 | ) | | 143,275 |
| | 143,072 |
| | 203 |
|
| Total | | $ | 662,496 |
| | $ | 889,617 |
| | $ | (227,121 | ) | | $ | 683,246 |
| | $ | 820,786 |
| | $ | (137,540 | ) |
| | | | | | | | | | | | | |
| Company: | | |
| | | | | | |
| | | | |
CFC | | $ | 645,695 |
| | $ | 874,920 |
| | $ | (229,225 | ) | | $ | 673,477 |
| | $ | 810,787 |
| | $ | (137,310 | ) |
| NCSC | | 15,227 |
| | 13,123 |
| | 2,104 |
| | 9,769 |
| | 9,999 |
| | (230 | ) |
| RTFC | | 1,574 |
| | 1,574 |
| | — |
| |
| Total | | $ | 662,496 |
| | $ | 889,617 |
| | $ | (227,121 | ) | | $ | 683,246 |
| | $ | 820,786 |
| | $ | (137,540 | ) |
____________________________
(1) Represents the outstanding principal amount of long-term fixed-rate and variable-rate guaranteed bonds.
(2)Reflects our maximum potential exposure for letters of credit.
(3)Includes CFC guarantees to NCSC and RTFC members totaling $3 million as of August 31, 2020 and May 31, 2020.
Of the total notional amount of our outstanding guarantee obligations of $662$683 million and $890$821 million as of November 30, 2017August 31, 2020 and May 31, 2017,2020, respectively, 54%46% and 67%48%, respectively, were secured by a mortgage lien on substantially all of the assets and future revenue of the borrowers. We recordedour member cooperatives for which we provide guarantees.
In addition to providing a guarantee liability of $8 million and $15on long-term tax-exempt bonds issued by member cooperatives totaling $186 million as of November 30, 2017 and MayAugust 31, 2017, respectively, related to the contingent and noncontingent exposures for guarantee and liquidity obligations associated with our members’ debt.
We2020, we also were the liquidity provider for long-term variable-rate, tax-exempt bonds issued for our member cooperatives totaling $251 million as of November 30, 2017. We also provide a guarantee of payment of principal and interest for $251on $166 million of these long-term variable-rate,those tax-exempt bonds, which is included above in Table 14 as a component of the long-term tax-exempt bonds of $318 million as of November 30, 2017.bonds. As liquidity provider, on these tax-exempt bonds, we may be required to purchase bonds that are tendered or put by investors. Investors provide notice to the remarketing agent that they will tender or put a certain amount of bonds at the next interest rate reset date. If the remarketing agent is unable to sell such bonds to other investors by the next interest rate reset date, we have unconditionally agreed to purchase such bonds. We were not required to perform as liquidity provider pursuant to these obligations during the sixthree months ended November 30, 2017August 31, 2020 or the prior fiscal year.
We had outstanding letters of credit for the benefit of our members totaling $230$354 million as of November 30, 2017, which are relatedAugust 31, 2020. These letters of credit relate to obligations for which we may be required to advance funds based on various trigger events
specified in the lettersletter of credit agreements. If we are required to advance funds, the member is obligated to repay the advance amount and accrued interest to us.
In addition to thethese letters of credit, presented in Table 14, we had master letter of credit facilities in place as of November 30, 2017,August 31, 2020, under which we may be required to issue up to an additional $65 million in letters of credit to third parties for the benefit of our members.members up to an additional $71 million as of August 31, 2020. All of ourthese master letter of credit facilities as of November 30, 2017 were subject to material adverse
change clauses at the time of issuance. Prior to issuing a letter of credit under these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and that the borrower is currently in compliance with the letter of credit terms and conditions.
Table 1516 presents the maturities for each of the next five fiscal years and thereafter of theoutstanding notional amount of our outstanding guarantee obligations of $683 million as of November 30, 2017.August 31, 2020, in each fiscal year during the five-year period ended May 31, 2025, and thereafter.
Table 15:16: Maturities of Guarantee Obligations | | | | | Outstanding
Amount | | Maturities of Guaranteed Obligations | | Outstanding
Notional Amount | | Maturities of Guarantee Obligations |
| (Dollars in thousands) | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter |
| Guarantees | | $ | 662,496 |
| | $ | 168,729 |
| | $ | 108,460 |
| | $ | 52,057 |
| | $ | 109,486 |
| | $ | 31,613 |
| | $ | 192,151 |
| | $ | 683,247 |
| | $ | 132,821 |
| | $ | 98,896 |
| | $ | 157,228 |
| | $ | 32,348 |
| | $ | 83,775 |
| | $ | 178,179 |
|
We recorded a guarantee liability of $10 million and $11 million as of August 31, 2020 and May 31, 2020, respectively, for our guarantee and liquidity obligations associated with our members’ debt. We provide additional information about our guarantee obligations in “Note 10—11—Guarantees.”
Unadvanced Loan Commitments
Unadvanced loan commitments represent approved and executed loan contracts for which funds have not been advanced to borrowers. Our line of credit commitments include both contracts that are subject to material adverse change clauses and contracts that are not subject to material adverse change clauses, while our long-term loan commitments are typically subject to material adverse change clauses.
Table 1617 displays the amount of unadvanced loan commitments, which consist of line of credit and long-term loan commitments, as of November 30, 2017August 31, 2020 and May 31, 2017.2020.
Table 16:17: Unadvanced Loan Commitments | | | | | November 30, 2017 | | May 31, 2017 | | Increase/ | | August 31, 2020 | | May 31, 2020 | | |
| (Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total | | (Decrease) | | Amount | | % of Total | | Amount | | % of Total | | Change |
| Line of credit commitments: | | | | | | | | | | | | | | | | | | | | |
Conditional(1) | | $ | 4,790,605 |
| | 38 | % | | $ | 5,170,393 |
| | 41 | % | | $ | (379,788 | ) | | $ | 5,119,518 |
| | 37 | % | | $ | 5,072,921 |
| | 38 | % | | $ | 46,597 |
|
Unconditional(2) | | 2,784,511 |
| | 22 |
| | 2,602,262 |
| | 21 |
| | 182,249 |
| | 3,074,095 |
| | 23 |
| | 2,857,029 |
| | 21 |
| | 217,066 |
|
| Total line of credit unadvanced commitments | | 7,575,116 |
|
| 60 |
| | 7,772,655 |
| | 62 |
| | (197,539 | ) | | 8,193,613 |
|
| 60 |
| | 7,929,950 |
| | 59 |
| | 263,663 |
|
Total long-term loan unadvanced commitments(1) | | 4,950,905 |
|
| 40 |
| | 4,802,319 |
| | 38 |
| | 148,586 |
| | 5,461,029 |
|
| 40 |
| | 5,458,676 |
| | 41 |
| | 2,353 |
|
| Total unadvanced loan commitments | | $ | 12,526,021 |
|
| 100 | % | | $ | 12,574,974 |
| | 100 | % | | $ | (48,953 | ) | | $ | 13,654,642 |
|
| 100 | % | | $ | 13,388,626 |
| | 100 | % | | $ | 266,016 |
|
____________________________
(1)Represents amount related to facilities that are subject to material adverse change clauses.
(2)Represents amount related to facilities that are not subject to material adverse change clauses.
Table 1718 presents the amountmaturities, by loan type, of our total unadvanced loan commitments by loan type,of $13,655 million as of November 30, 2017 andAugust 31, 2020, in each fiscal year during the maturities of the commitment amounts for each of the next five fiscal yearsfive-year period ended May 31, 2025, and thereafter.
Table 17: Notional18: Unadvanced Loan Commitments Maturities of Unadvanced Loan CommitmentsNotional Amount | | | | | Available Balance | | Notional Maturities of Unadvanced Loan Commitments | | Available Balance | | Notional Maturities of Unadvanced Loan Commitments |
| (Dollars in thousands) | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter |
| Line of credit loans | | $ | 7,575,116 |
| | $ | 342,159 |
| | $ | 4,343,222 |
| | $ | 641,613 |
| | $ | 950,998 |
| | $ | 773,772 |
| | $ | 523,352 |
| | $ | 8,193,613 |
| | $ | 487,556 |
| | $ | 4,047,076 |
| | $ | 1,357,059 |
| | $ | 1,063,694 |
| | $ | 1,079,137 |
| | $ | 159,091 |
|
| Long-term loans | | 4,950,905 |
| | 215,806 |
| | 986,952 |
| | 649,436 |
| | 676,899 |
| | 1,885,338 |
| | 536,474 |
| | 5,461,029 |
| | 312,622 |
| | 1,273,237 |
| | 906,698 |
| | 1,633,259 |
| | 1,018,758 |
| | 316,455 |
|
| Total | | $ | 12,526,021 |
| | $ | 557,965 |
| | $ | 5,330,174 |
| | $ | 1,291,049 |
| | $ | 1,627,897 |
| | $ | 2,659,110 |
| | $ | 1,059,826 |
| | $ | 13,654,642 |
| | $ | 800,178 |
| | $ | 5,320,313 |
| | $ | 2,263,757 |
| | $ | 2,696,953 |
| | $ | 2,097,895 |
| | $ | 475,546 |
|
Unadvanced line of credit commitments accounted for 60% of total unadvanced loan commitments as of November 30, 2017,August 31, 2020, while unadvanced long-term loan commitments accounted for 40% of total unadvanced loan commitments.
Unadvanced line of credit commitments are typically revolving facilities for periods not to exceed five years. Unadvanced line of credit commitmentsyears and generally serve as supplemental back-up liquidity to our borrowers. Historically, borrowers have not drawn the full commitment amount for line of credit facilities, and we have experienced a very low utilization rate on line of credit loan facilities regardless of whether or not we are obligated to fund the facility where a material adverse change exists. Our unadvanced long-term loan commitments generally have a five-year draw period under which a borrower may advance funds prior to the expiration of the commitment. We expect that the majority of the long-term unadvanced loan commitments of $4,951$5,461 million will be advanced prior to the expiration of the commitment.
Because we historically have experienced a very low utilization rate on line of credit loan facilities, which account for the majority of our total unadvanced loan commitments, we believe the unadvanced loan commitment total of $12,526$13,655 million as of November 30, 2017August 31, 2020 is not necessarily representative of our future funding cash requirements.
Unadvanced Loan Commitments—Conditional
The substantial majority of our line of credit commitments and all our unadvanced long-term loan commitments include material adverse change clauses. Unadvanced loan commitments subject to material adverse change clauses totaled $9,741$10,581 million and $9,973$10,532 million as of November 30, 2017August 31, 2020 and May 31, 2017,2020, respectively, and accounted for 78% and 79%, respectively, of the combined total of unadvanced line of credit and long-term loan commitments as of November 30, 2017 and May 31, 2017, respectively.each respective date. Prior to making advances on these facilities, we confirm that there has been no material adverse change in the borrower’s business or condition, financial or otherwise, since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. In some cases, the borrower’s access to the full amount of the facility is further constrained by use of proceeds restrictions, imposition of borrower-specific restrictions, or by additional conditions that must be met prior to advancing funds. Since we generally do not charge a fee for the borrower to have an unadvanced amount on a loan facility that is subject to a material adverse change clause, our borrowers tend to request amounts in excess of their immediate estimated loan requirements.
Unadvanced Loan Commitments—Unconditional
Unadvanced loan commitments not subject to material adverse change clauses at the time of each advance consisted of unadvanced committed lines of credit totaling $2,785$3,074 million and $2,602$2,857 million as of November 30, 2017August 31, 2020 and May 31, 2017,2020, respectively. For contracts not subject to a material adverse change clause, we are generally required to advance amounts on the committed facilities as long as the borrower is in compliance with the terms and conditions of the facility.
Syndicated loan facilities, where the pricing is set at a spread over LIBORa market index rate as agreed upon by all of the participating banksfinancial institutions based on market conditions at the time of syndication, accounted for 85%91% of unconditional line of credit commitments as of November 30, 2017.August 31, 2020. The remaining 15%9% represented unconditional committed line of credit loans, for which under any new advance would be made at rates determined by us based on our cost, and we have the option to pass on to the borrower any cost increase related to the advance.us.
Table 1819 presents the maturities for each of the next five fiscal years and thereafter of the notional amount of unconditionalour unadvanced committed lines of credit not subject to a material adverse change clause of $3,074 million as of November 30, 2017.August 31, 2020, in each fiscal year during the five-year period ended May 31, 2025, and thereafter.
Table 18: Maturities of Notional Amount of19: Unconditional Committed Lines of Credit Maturities of Notional Amount
| | | | | Available Balance | | Notional Maturities of Unconditional Committed Lines of Credit | | Available Balance | | Notional Maturities of Unconditional Committed Lines of Credit |
| (Dollars in thousands) | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter |
| Committed lines of credit | | $ | 2,784,511 |
| | $ | 130,000 |
| | $ | 517,130 |
| | $ | 395,711 |
| | $ | 630,631 |
| | $ | 677,818 |
| | $ | 433,221 |
| | $ | 3,074,095 |
| | $ | 120,020 |
| | $ | 242,006 |
| | $ | 1,068,391 |
| | $ | 716,378 |
| | $ | 927,300 |
| | $ | — |
|
See “MD&A—Off-Balance Sheet Arrangements” in our 20172020 Form 10-K for additional information on our off-balance sheet arrangements.
Overview
We face a variety of risks that can significantly affect our financial performance, liquidity, reputation and ability to meet the expectations of our members, investors and other stakeholders. As a financial services company, the major categories of risk exposures inherent in our business activities include credit risk, liquidity risk, market risk and operational risk. These risk categories are summarized below.
Credit risk is the risk that a borrower or other counterparty will be unable to meet its obligations in accordance with agreed-upon terms.
Liquidity risk is the risk that we will be unable to fund our operations and meet our contractual obligations or that we will be unable to fund new loans to borrowers at a reasonable cost and tenor in a timely manner.
Market risk is the risk that changes in market variables, such as movements in interest rates, may adversely affect the match between the timing of the contractual maturities, re-pricing and prepayments of our financial assets and the related financial liabilities funding those assets.
Operational risk is the risk of loss resulting from inadequate or failed internal controls, processes, systems, human error or external events.events, including natural disasters or public health emergencies, such as the current COVID-19 global pandemic. Operational risk also includes compliance risk, fiduciary risk, reputational risk and litigation risk.
Effective risk management is critical to our overall operations and into achieving our primary objective of providing cost-based financial products to our rural electric members while maintaining the sound financial results required for investment-grade credit ratings on our rated debt instruments. Accordingly, we have a risk managementrisk-management framework that is intended to govern the principal risks we face in conducting our business and the aggregate amount of risk we are willing to accept, referred to as risk appetite, in the context of CFC’s mission and strategic objectives and initiatives. We provide information on our risk management framework in our 20172020 Form 10-K under “Item 7. MD&A—Risk Management—Risk Management Framework.”
Our loan portfolio, which represents the largest component of assets on our balance sheet, and guarantees account for the substantial majority of our credit risk exposure. We also engage in certain non-lending activities that may give rise to credit and counterparty settlement risk, including the purchase of investment securities and entering into derivative transactions to manage our interest rate risk. Our primary credit exposure is to rural electric cooperatives that provide essential electric services to end-users, the majority of which are residential customers. We also have a limited portfolio of loans to not-for-profit and for-profit telecommunication companies.
We provide a discussion of our credit-risk management framework and activities undertaken to manage credit risk in our 2020 Form 10-K under “Item 7. MD&A—Credit Risk—Credit Risk Management
We manage portfolio and borrower credit risk consistent with credit policies established by the CFC Board of Directors and through credit underwriting, approval and monitoring processes and practices adopted by management. Our board-established credit policies include guidelines regarding the types of credit products we offer, limits on credit we extend to individual borrowers, approval authorities delegated to management, and use of syndications and loan sales. We maintain an internal risk rating system in which we assign a rating to each borrower and credit facility. We review and update the risk ratings at least annually. Assigned risk ratings inform our credit approval, borrower monitoring and portfolio review processes. Our Corporate Credit Committee approves individual credit actions within its own authority and together with our Credit Risk Management group, establishes standards for credit underwriting, oversees credits deemed to be higher risk, reviews assigned risk ratings for accuracy, and monitors the overall credit quality and performance statistics of our loan portfolio and guarantees.
Management.”
Loan and Guarantee Portfolio Credit Risk
As a tax-exempt, member-owned finance cooperative, CFC’s principal focus is to provide funding to its rural electric utility cooperative members to assist them in acquiring, constructing and operating electric distribution systems, power supply systems and related facilities. Loans outstanding to electric utility organizations of $26,521 million and $26,306 million as of August 31, 2020 and May 31, 2020, respectively, accounted for 99% of total loans outstanding as of each respective date. The remaining loans outstanding in our portfolio were to RTFC members, affiliates and associates in the telecommunications industry.
Because we lend primarily to our rural electric utility cooperative members, we have had a loan portfolio subject to single-industry and single-obligor concentration risks since our inception in 1969. We historically, however, have experienced limited defaults and losses in our electric utility loan portfolio due to several factors. First, the majority of our electric cooperative borrowers operate in states where electric cooperatives are not subject to rate regulation. Thus, they are able to make rate adjustments to pass along increased costs to the end customer without first obtaining state regulatory approval, allowing them to cover operating costs and generate sufficient earnings and cash flows to service their debt obligations. Second, electric cooperatives face limited competition, as they tend to operate in exclusive territories not serviced by public investor-owned utilities. Third, electric cooperatives typically are consumer-owned, not-for-profit entities that provide an essential service to end-users, the majority of which are residential customers. Fourth, electric cooperatives tend to adhere to a conservative business strategy model that has historically resulted in a relatively stable, resilient operating environment and overall strong financial performance and credit strength for the electric cooperative network. Finally, we generally lend to our members on a senior secured basis, which reduces the risk of loss in the event of a borrower default.
Below we provide information on the credit risk profile of our loan portfolio, and guarantees, including security provisions, loancredit concentration, credit performancequality indicators and our allowance for loancredit losses.
Security Provisions
Except when providing line of credit loans, we generally lend to our members on a senior secured basis. Long-term loans are generally secured on parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower with exceptions typical in utility mortgages. Line of credit loans are generally unsecured. In addition to the collateral pledged to secure our loans, distribution and power supply borrowers also are required to set rates charged to customers to achieve certain specified financial ratios.
Table 1920 presents, by loan type and by company, the amount and percentage of secured and unsecured loans in our loan portfolio as of November 30, 2017August 31, 2020 and May 31, 2017.2020. Of our total loans outstanding, 92%94% were secured and 8% were unsecured as of both November 30, 2017August 31, 2020 and May 31, 2017.
Table 19: Loan Portfolio Security Profile(1)
|
| | | | | | | | | | | | | | | | | | |
| | | November 30, 2017 |
| (Dollars in thousands) | | Secured | | % of Total | | Unsecured | | % of Total | | Total |
| Loan type: | | | | | | | | | | |
| Long-term loans: | | | | | | | | | | |
| Long-term fixed-rate loans | | $ | 21,825,249 |
| | 97 | % | | $ | 590,584 |
| | 3 | % | | $ | 22,415,833 |
|
| Long-term variable-rate loans | | 857,907 |
| | 95 |
| | 48,546 |
| | 5 |
| | 906,453 |
|
| Total long-term loans | | 22,683,156 |
| | 97 |
| | 639,130 |
| | 3 |
| | 23,322,286 |
|
| Line of credit loans | | 72,505 |
| | 5 |
| | 1,418,751 |
| | 95 |
| | 1,491,256 |
|
| Total loans outstanding | | $ | 22,755,661 |
| | 92 | % | | $ | 2,057,881 |
| | 8 | % | | $ | 24,813,542 |
|
| | | | | | | | | | | |
| Company: | | | | | | | | | | |
| CFC | | $ | 21,814,316 |
| | 92 | % | | $ | 1,887,788 |
| | 8 | % | | $ | 23,702,104 |
|
| NCSC | | 588,161 |
| | 80 |
| | 151,546 |
| | 20 |
| | 739,707 |
|
| RTFC | | 353,184 |
| | 95 |
| | 18,547 |
| | 5 |
| | 371,731 |
|
| Total loans outstanding | | $ | 22,755,661 |
| | 92 | % | | $ | 2,057,881 |
| | 8 | % | | $ | 24,813,542 |
|
Table 20: Loan Portfolio Security Profile
| | | | | May 31, 2017 | | August 31, 2020 |
| (Dollars in thousands) | | Secured | | % of Total | | Unsecured | | % of Total | | Total | | Secured | | % of Total | | Unsecured | | % of Total | | Total |
| Loan type: | | | | | | | | | | | | | | | | | | | | |
| Long-term loans: | | | | | | | | | | | | | | | | | | | | |
| Long-term fixed-rate loans | | $ | 21,503,871 |
| | 97 | % | | $ | 632,819 |
| | 3 | % | | $ | 22,136,690 |
| | $ | 24,538,566 |
| | 99 | % | | $ | 278,762 |
| | 1 | % | | $ | 24,817,328 |
|
| Long-term variable-rate loans | | 795,326 |
| | 94 |
| | 52,093 |
| | 6 |
| | 847,419 |
| | 691,788 |
| | 99 |
| | 3,612 |
| | 1 |
| | 695,400 |
|
| Total long-term loans | | 22,299,197 |
| | 97 |
| | 684,912 |
| | 3 |
| | 22,984,109 |
| | 25,230,354 |
| | 99 |
| | 282,374 |
| | 1 |
| | 25,512,728 |
|
| Line of credit loans | | 54,258 |
| | 4 |
| | 1,317,963 |
| | 96 |
| | 1,372,221 |
| | 196,018 |
| | 14 |
| | 1,208,353 |
| | 86 |
| | 1,404,371 |
|
| Total loans outstanding | | $ | 22,353,455 |
| | 92 |
| | $ | 2,002,875 |
| | 8 |
| | $ | 24,356,330 |
| |
Total loans outstanding(1) | | | $ | 25,426,372 |
| | 94 |
| | $ | 1,490,727 |
| | 6 |
| | $ | 26,917,099 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Company: | | | | | | | | | | | | | | | | | | | | |
| CFC | | $ | 21,591,723 |
| | 92 | % | | $ | 1,796,264 |
| | 8 | % | | $ | 23,387,987 |
| | $ | 24,421,263 |
| | 95 | % | | $ | 1,418,397 |
| | 5 | % | | $ | 25,839,660 |
|
| NCSC | | 424,636 |
| | 69 |
| | 189,288 |
| | 31 |
| | 613,924 |
| | 638,275 |
| | 94 |
| | 43,046 |
| | 6 |
| | 681,321 |
|
| RTFC | | 337,096 |
| | 95 |
| | 17,323 |
| | 5 |
| | 354,419 |
| | 366,834 |
| | 93 |
| | 29,284 |
| | 7 |
| | 396,118 |
|
| Total loans outstanding | | $ | 22,353,455 |
| | 92 |
| | $ | 2,002,875 |
| | 8 |
| | $ | 24,356,330 |
| |
Total loans outstanding(1) | | | $ | 25,426,372 |
| | 94 |
| | $ | 1,490,727 |
| | 6 |
| | $ | 26,917,099 |
|
|
| | | | | | | | | | | | | | | | | | |
| | | May 31, 2020 |
| (Dollars in thousands) | | Secured | | % of Total | | Unsecured | | % of Total | | Total |
| Loan type: | | | | | | | | | | |
| Long-term loans: | | | | | | | | | | |
| Long-term fixed-rate loans | | $ | 24,137,145 |
| | 99 | % | | $ | 334,858 |
| | 1 | % | | $ | 24,472,003 |
|
| Long-term variable-rate loans | | 650,192 |
| | 99 |
| | 5,512 |
| | 1 |
| | 655,704 |
|
| Total long-term loans | | 24,787,337 |
| | 99 |
| | 340,370 |
| | 1 |
| | 25,127,707 |
|
| Line of credit loans | | 191,268 |
| | 12 |
| | 1,371,879 |
| | 88 |
| | 1,563,147 |
|
Total loans outstanding(1) | | $ | 24,978,605 |
| | 94 |
| | $ | 1,712,249 |
| | 6 |
| | $ | 26,690,854 |
|
| | | | | | | | | | | |
| Company: | | | | | | | | | | |
| CFC | | $ | 23,977,438 |
| | 94 | % | | $ | 1,630,219 |
| | 6 | % | | $ | 25,607,657 |
|
| NCSC | | 638,488 |
| | 91 |
| | 59,374 |
| | 9 |
| | 697,862 |
|
| RTFC | | 362,679 |
| | 94 |
| | 22,656 |
| | 6 |
| | 385,335 |
|
Total loans outstanding(1) | | $ | 24,978,605 |
| | 94 |
| | $ | 1,712,249 |
| | 6 |
| | $ | 26,690,854 |
|
____________________________
(1) Represents the unpaid principal balance, net of charge-offs and recoveries, of loans as of the end of each period. Excludes unamortized deferred loan origination costs of $11$12 million as of both November 30, 2017August 31, 2020 and May 31, 2017.2020.
Credit Concentration
Concentrations may exist when there are amounts loaned to borrowers engaged in similar activities or in geographic areas that would cause them to be similarly impacted by economic or other conditions or when there are large exposures to single borrowers. As discussed above under “Credit Risk—Loan Portfolio Credit Risk,” loans outstanding to electric utility organizations represented approximately 99% of our total outstanding loan portfolio as of August 31, 2020, unchanged from May 31, 2020.
Geographic Concentration
Although our organizational structure and mission results in single-industry concentration, we serve a geographically diverse group of electric and telecommunications borrowers throughout the United States. The number of borrowers with
outstanding loans totaled 888 and 889 as of August 31, 2020 and May 31, 2020, respectively, located in 49 states. Texas accounted for the largest number of borrowers in any one state as of each respective date. In addition, Texas accounted for approximately 16% of total loans outstanding as of both August 31, 2020 and May 31, 2020, representing the largest concentration of loans outstanding to borrowers in any one state.
Single-Obligor Concentration
Table 21 displays the outstanding loan exposure for our 20 largest borrowers, by company, as of August 31, 2020 and May 31, 2020. The 20 largest borrowers consisted of 12 distribution systems and eight power supply systems as of August 31, 2020. In comparison, the 20 largest borrowers consisted of 11 distribution systems and 9 power supply systems as of May 31, 2020. The largest total exposure to a single borrower or controlled group represented less than 2% of total loans outstanding as of both August 31, 2020 and May 31, 2020.
Table 21: Loan Exposure to 20 Largest Borrowers
|
| | | | | | | | | | | | | | | | | | |
| | | August 31, 2020 | | May 31, 2020 | | Change |
| (Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total | |
| By company: | | | | | | | | | | |
| CFC | | $ | 5,700,033 |
| | 21 | % | | $ | 5,661,540 |
| | 21 | % | | $ | 38,493 |
|
| NCSC | | 209,561 |
| | 1 |
| | 215,595 |
| | 1 |
| | (6,034 | ) |
| Total loan exposure to 20 largest borrowers | | 5,909,594 |
| | 22 |
| | 5,877,135 |
| | 22 |
| | 32,459 |
|
| Less: Loans covered under Farmer Mac standby purchase commitment | | (285,001 | ) | | (1 | ) | | (313,644 | ) | | (1 | ) | | 28,643 |
|
| Net loan exposure to 20 largest borrowers | | $ | 5,624,593 |
| | 21 | % | | $ | 5,563,491 |
| | 21 | % | | $ | 61,102 |
|
As part of our strategy in managing our credit risk exposure to large borrowers, we entered into a long-term standby purchase commitment agreement with Farmer Mac on August 31, 2015, as amended on May 31,during fiscal year 2016. Under this agreement, we may designate certain long-term loans to be covered under the commitment, as approvedsubject to approval by Farmer Mac, and in the event any such loan later goes into payment default for at least 90 days, upon request by us, Farmer Mac must purchase such loan at par value. The outstandingaggregate unpaid principal balance of designated and Farmer Mac approved loans covered under this agreement totaled $792was $551 million and $569 million as of November 30, 2017, compared with $843August 31, 2020 and May 31, 2020, respectively. Loan exposure to our 20 largest borrowers covered under the Farmer Mac agreement totaled $285 million and $314 million as of August 31, 2020 and May 31, 2017.2020, respectively. No loans have been put to Farmer Mac for purchase pursuant to this agreement. In addition, RUS guaranteedOur credit exposure is also mitigated by long-term loans totaling $164guaranteed by RUS. Guaranteed RUS loans totaled $145 million and $167$147 million as of November 30, 2017August 31, 2020 and May 31, 2017,2020, respectively.
Credit ConcentrationQuality Indicators
As a tax-exempt, member-owned finance cooperative, CFC’s principal purpose is to provide funding to America’s rural electric utility cooperatives to assist them in acquiring, constructing and operating electric distribution, transmission and related facilities. We serve electric and telecommunications members throughoutAssessing the United States and its territories, including 49 states, the Districtoverall credit quality of Columbia, American Samoa and Guam. Texas had the largest concentration of outstanding loans to borrowers in any one state, with approximately 15% of total loans outstanding as of both November 30, 2017 and May 31, 2017. Our consolidated membership totaled 1,459 members and 217 associates as of November 30, 2017. As such, we have aour loan portfolio with single-industry and single-obligor concentration risk. Outstanding loans to electric utility organizations represented approximately 99% of the total outstanding loan portfolio as of November 30, 2017, unchanged from May 31, 2017. The remaining outstanding loans in our portfolio were to RTFC members, affiliates and associates in the telecommunications industry.
Single-Obligor Concentration
Table 20 displays the outstanding exposure of the 20 largest borrowers, by exposure type and by company, as of November 30, 2017 and May 31, 2017. The 20 largest borrowers consisted of 10 distribution systems, 9 power supply systems and 1 NCSC associate member as of both November 30, 2017 and May 31, 2017. The largest total outstanding exposure to a single borrower or controlled group represented approximately 2% of total loans and guarantees outstanding as of both November 30, 2017 and May 31, 2017.
Table 20: Credit Exposure to 20 Largest Borrowers
|
| | | | | | | | | | | | | | | | | | |
| | | November 30, 2017 | | May 31, 2017 | | Change |
| (Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total | |
| By exposure type: | | | | | | | | | | |
| Loans | | $ | 5,832,139 |
| | 23 | % | | $ | 5,749,885 |
| | 23 | % | | $ | 82,254 |
|
| Guarantees | | 129,070 |
| | — |
| | 354,619 |
| | 1 |
| | (225,549 | ) |
| Total exposure to 20 largest borrowers | | 5,961,209 |
| | 23 |
| | 6,104,504 |
| | 24 |
| | (143,295 | ) |
| Less: Loans covered under Farmer Mac standby purchase commitment | | (367,464 | ) | | (1 | ) | | (351,699 | ) | | (1 | ) | | (15,765 | ) |
| Net exposure to 20 largest borrowers | | $ | 5,593,745 |
| | 22 | % | | $ | 5,752,805 |
| | 23 | % | | $ | (159,060 | ) |
| | | | | | | | | | | |
| By company: | | | | | | | | | | |
| CFC | | $ | 5,711,341 |
| | 22 | % | | $ | 5,899,709 |
| | 23 | % | | $ | (188,368 | ) |
| NCSC | | 249,868 |
| | 1 |
| | 204,795 |
| | 1 |
| | 45,073 |
|
| Total exposure to 20 largest borrowers | | 5,961,209 |
| | 23 |
| | 6,104,504 |
| | 24 |
| | (143,295 | ) |
| Less: Loans covered under Farmer Mac standby purchase commitment | | (367,464 | ) | | (1 | ) | | (351,699 | ) | | (1 | ) | | (15,765 | ) |
| Net exposure to 20 largest borrowers | | $ | 5,593,745 |
| | 22 | % | | $ | 5,752,805 |
| | 23 | % | | $ | (159,060 | ) |
Credit Performance
As part ofmeasuring our credit risk managementis an ongoing process wethat involves tracking payment status, troubled debt restructurings, nonperforming loans, charge-offs, the internal risk ratings of our borrowers and other indicators of credit risk. We monitor and evaluatesubject each borrower and loan facility in our loan portfolio and assign numeric internalto an individual risk ratingsassessment based on quantitative and qualitative assessments. Our ratings are intended to align with the federal banking regulatory credit risk rating classification definitions of pass, special mention, substandardfactors. Payment status trends and doubtful. The special mention, substandard, and doubtful categories are intended to comply with the definition of criticized loans by the banking regulatory authorities. Internalinternal risk ratings and payment status trends are indicators, among others, of the levelprobability of borrower default and overall credit risk inquality of our loan portfolio.
TheDespite the economic disruption caused by COVID-19, the overall credit riskquality of our loan portfolio remained low,high as of August 31, 2020, as evidenced by our continued strong asset quality metrics, including senior secured positions on most of ourcredit performance metrics. We had no delinquent loans and low levels of criticized exposure, nonaccrual loans and charge-offs. As displayed in Table 19 above, 92% of our total outstanding loans were secured as of both November 30, 2017August 31, 2020 or May 31, 2020, and we have not experienced any loan defaults or charge-offs since fiscal year 2017. We had one loan to a CFC power supply borrower that we classified as nonperforming and placed on nonaccrual status in the fourth quarter of fiscal year 2020. The outstanding balance of this loan, which we continue to report as nonperforming, was $161 million and $168 million as of August 31, 2020 and May 31, 2017. As displayed in “Note 4—Loans and Commitments,” 0.5% of the2020, respectively. We had no other loans in our portfolio were classified as criticizednonperforming or on nonaccrual status as of both November 30, 2017 andAugust 31, 2020 or May 31, 2017. Below we2020. We provide additional information on certain additional credit quality indicators, including modified loans that are considered to be troubled debt restructurings (“TDRs”), nonperforming loansthis loan below under “Nonperforming Loans” and net charge-offs.“Allowance for Credit Losses.”
Troubled Debt Restructurings
We actively monitor problem loans and, from time to time, attempt to work with borrowers to manage such exposures through loan workouts or modifications that better align with the borrower’s current ability to pay. A loan restructuring or modification of terms is accounted for as a TDRtroubled debt restructuring (“TDR”) if, for economic or legal reasons related to the borrower’s financial difficulties, a concession is granted to the borrower that we would not otherwise consider. TDR loans generally are initially classified as nonperforming and placed on nonaccrual status, although in many cases such loans were already on nonaccrual statusclassified as nonperforming prior to modification. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against earnings. These loans may be returned to performing status and the accrual of interest resumed if the borrower performs under the modified terms for an extended period of time, and we expect the borrower to continue to perform in accordance with the modified terms. In certain limited circumstances in which a TDR loan is current at the modification date, the loan may remain on accrual status at the time of modification.
We did not have any loan modifications that were required to be accounted for as TDRs during the three months ended August 31, 2020, nor have we had any TRD loan modifications since fiscal year 2016. Table 2122 presents the carrying valueoutstanding amount of modified loans modifiedaccounted for as TDRs in prior periods and the performance status as of November 30, 2017August 31, 2020 and May 31, 2017. These2020. The outstanding TDR loans were considered individually impairedfor CFC and RTFC each relate to the modification of a loan for one borrower that, at the time of the modification, was experiencing financial difficulty.
Table 22: Troubled Debt Restructured Loans
|
| | | | | | | | | | | | | | | | | | | | |
| | | August 31, 2020 | | May 31, 2020 |
| (Dollars in thousands) | | Number of Borrowers | | Outstanding Amount(1) | | % of Total Loans Outstanding | | Number of Borrowers | | Outstanding Amount(1) | | % of Total Loans Outstanding |
| TDR loans: | | | | | | | | | | | | |
| CFC | | 1 |
| | $ | 5,379 |
| | 0.02 | % | | 1 |
| | $ | 5,755 |
| | 0.02 | % |
| RTFC | | 1 |
| | 4,967 |
| | 0.02 |
| | 1 |
| | 5,092 |
| | 0.02 |
|
| Total TDR loans | | 2 |
| | $ | 10,346 |
| | 0.04 | % | | 2 |
| | $ | 10,847 |
| | 0.04 | % |
| | | | | | | | | | | | | |
| Performance status of TDR loans: | | | | | | | | | | | | |
| Performing TDR loans | | 2 |
| | $ | 10,346 |
| | 0.04 | % | | 2 |
| | 10,847 |
| | 0.04 | % |
| Total TDR loans | | 2 |
| | $ | 10,346 |
| | 0.04 | % | | 2 |
| | $ | 10,847 |
| | 0.04 | % |
____________________________
(1) Represents the unpaid principal balance net of charge-offs and recoveries as of the end of each period presented.period.
Table 21: TDR Loans
|
| | | | | | | | | | | | | | |
| | | November 30, 2017 | | May 31, 2017 |
| (Dollars in thousands) | | Carrying Amount | | % of Total Loans Outstanding | | Carrying Amount | | % of Total Loans Outstanding |
| TDR loans: | | | | | | | | |
| CFC | | $ | 6,507 |
| | 0.03 | % | | $ | 6,581 |
| | 0.02 | % |
| RTFC | | 6,341 |
| | 0.02 |
| | 6,592 |
| | 0.03 |
|
| Total TDR loans | | $ | 12,848 |
| | 0.05 | % | | $ | 13,173 |
| | 0.05 | % |
| | | | | | | | | |
| Performance status of TDR loans: | | | | | | | | |
| Performing TDR loans | | $ | 12,848 |
| | 0.05 | % | | $ | 13,173 |
| | 0.05 | % |
As indicated in Table 21, weWe did not have any TDR loans classified as nonperforming as of November 30, 2017August 31, 2020 or May 31, 2017.2020. Although TDR loans classified asmay be returned to performing as of November 30, 2017 and May 31, 2017 were performing in accordance withstatus if the borrower performs under the modified terms of their respective restructuredthe loan agreement andfor an extended period of time, TDR loans are evaluated on accrual status as ofan individual basis in estimating lifetime expected credit losses under the respective reported dates.CECL model.
Nonperforming Loans
In addition to TDR loans that may be classified as nonperforming, we also may have nonperforming loans that have not been modified as a TDR loan. We classify such loansTDR. During the fourth quarter of fiscal year 2020, we classified one loan to a CFC power supply borrower with an outstanding balance of $168 million as of May 31, 2020, as nonperforming, atplaced the earlierloan on nonaccrual status and established an asset-specific allowance for credit losses of $34 million as of May 31, 2020. Under the terms of the date whenloan, which matures in December 2026, the amount the borrower is required to pay in 2024 and 2025 may vary as the payments are contingent on the borrower's financial performance in those years. Based on our review and assessment of the borrower’s most recent forecast and underlying assumptions provided to us in May 2020, we determine: (i) interest or principalno longer believe that the future expected cash payments from the borrower through the maturity of the loan in December 2026 will be sufficient to repay the outstanding loan balance. We received payments from the borrower on this loan during the current quarter, which reduced the outstanding balance to $161 million as of August 31, 2020. The asset-specific allowance for credit losses for this loan was $33 million as of August 31, 2020. Although the borrower is not in default and was current with respect to required payments on the loan as of August 31, 2020, we continue to report the loan as nonperforming. We had no other loans classified as nonperforming or on nonaccrual status as of August 31, 2020 or May 31, 2020.
Net Charge-Offs
We had no loan defaults, charge-offs or recoveries during the three months ended August 31, 2020 and 2019. We experienced our last charge-off, which was attributable to a borrower in our RTFC telecommunications loan portfolio, in fiscal year 2017. We now have experienced an extended period of seven consecutive fiscal years for which we have had no charge-offs in our electric utility loan portfolio, which accounted for 99% of total loans outstanding as of August 31, 2020 and May 31, 2020.
In its 51-year history, CFC has experienced only 16 defaults, of which 10 resulted in no loss and six resulted in cumulative historical net charge-offs of $86 million for our electric utility loan portfolio. Of this amount, $67 million was attributable to electric utility power supply cooperatives and $19 million was attributable to electric distribution cooperatives. We discuss the reasons loans to electric utility cooperatives, our principal lending market, typically have a relatively low risk of default above under “Credit Risk—Loan Portfolio Credit Risk.”
In comparison, since RTFC’s inception in 1987, we have experienced 15 defaults and cumulative net charge-offs attributable to telecommunication borrowers totaling $427 million, the most significant of which was a charge-off of $354 million in fiscal year 2011. This charge-off related to outstanding loans to Innovative Communications Corporation (“ICC”), a former RTFC member, and the transfer of ICC’s assets in foreclosure to Caribbean Asset Holdings, LLC.
Borrower Risk Ratings
As part of our management of credit risk, we maintain a credit risk rating framework under which we employ a consistent process for assessing the credit quality of our loan portfolio. We evaluate each borrower and loan facility in our loan portfolio and assign internal borrower and loan facility risk ratings based on consideration of a number of quantitative and qualitative factors. Each risk rating is past due 90 days or more; (ii)reassessed annually following the receipt of the borrower’s audited financial statements; however, interim risk-rating adjustments may occur as a result of court proceedings, the collection of interestupdated information affecting a borrower’s ability to fulfill its obligations or principal paymentsother significant developments and trends. We categorize loans in our portfolio based on our internally assigned borrower risk ratings, which are intended to assess the original contractual termsgeneral credit worthiness of the borrower and probability of default. Our borrower risk ratings align with the U.S. federal banking regulatory agencies credit risk definitions of pass and criticized categories, with the criticized category further segmented among special mention, substandard and doubtful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default.
Criticized loans totaled $362 million and $371 million as of August 31, 2020 and May 31, 2020, respectively, representing approximately 1% of total loans outstanding as of each date. Criticized loans in the substandard category decreased to $5 million as of August 31, 2020, from $170 million as of May 31, 2020. Loans outstanding to one electric distribution cooperative borrower and its subsidiary totaling $165 million accounted for the substantial majority of the $170 million in the substandard category as of May 31, 2020. Based on updated financial performance information from the borrower, we reassessed and upgraded the risk rating for the borrower from substandard to special mention as of August 31, 2020. Criticized loans in the doubtful category totaled $161 million and $168 million as of August 31, 2020 and May 31, 2020, respectively. The amount in the doubtful category as of each date is not expected; or (iii)attributable to the full and timely collection of interest or principal is otherwise uncertain. Once a loan isto the CFC power supply borrower that we classified as nonperforming we generally place the loan on nonaccrual status. Interest accrued but not collected at the date a loan isand placed on nonaccrual status is reversed against earnings. in the fourth quarter of fiscal year 2020, discussed above under “Nonperforming Loans.”
We had nouse our internal risk ratings to measure the credit risk of each borrower and loan facility, identify or confirm problem or potential problem loans classifiedin a timely manner, differentiate risk within each of our portfolio segments, assess the overall credit quality of our loan portfolio and manage overall risk levels. Our internally assigned borrower risk ratings, which we map to equivalent credit ratings by external credit rating agencies, serve as nonperforming asthe primary credit quality indicator for our loan portfolio. Because our internal borrower risk ratings provide important information on the collectibility of November 30, 2017 or May 31, 2017. In addition, we did not have any past due loans aseach of either November 30, 2017 or May 31, 2017.our loan portfolio segments, they are a key input in estimating our allowance for credit losses.
We provide additional information on the credit quality of our loan portfolioborrower risk rating classifications in “Note 4—Loans1—Summary of Significant Accounting” and Commitments.“Note 4—Loans.”
Net Charge-Offs
Table 22 presents charge-offs, net of recoveries, and the net charge-off rate for the three and six months ended November 30, 2017 and 2016.
Table 22: Net Charge-Offs (Recoveries)
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended November 30, | | Six Months Ended November 30, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2017 |
| 2016 |
| Charge-offs: | | | | | | | | |
| RTFC | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,119 |
|
| Recoveries: | | | | | | | | |
| CFC | | — |
| | (53 | ) | | — |
| | (106 | ) |
| Net charge-offs (recoveries) | | $ | — |
| | $ | (53 | ) | | $ | — |
| | $ | 2,013 |
|
| | | | | | | | | |
| Average total loans outstanding | | $ | 24,688,391 |
| | $ | 23,584,370 |
| | $ | 24,634,266 |
| | $ | 23,499,922 |
|
| | | | | | | | | |
Net charge-off rate(1) | | — | % | | — | % | | — | % | | 0.02 | % |
____________________________
(1)Calculated based on annualized net charge-offs (recoveries) for the period divided by average total outstanding loans for the period.
As displayed in Table 22, we experienced no charge-offs during the current quarter and the six months ended November 30, 2017. Charge-offs totaled $2 million during the six months ended November 30, 2016, all of which were related to
telecommunications loans in the RTFC portfolio. Our average annual net charge-off rate has been less than 0.01% over the last three fiscal years.
Allowance for LoanCredit Losses
TheAs discussed above, we adopted the CECL accounting standard on June 1, 2020, which resulted in an increase in our allowance for credit losses for our loan portfolio of $4 million and a corresponding decrease to retained earnings of $4 million recorded through a cumulative-effect adjustment. The impact on the allowance for credit losses is determinedfor our off-balance sheet credit exposures related to unadvanced loan commitments and financial guarantees was not material. Under CECL, we are required to maintain an allowance based upon evaluationon a current estimate of credit losses that are expected to occur over the remaining contractual term of the loan portfolio, past loss experience, specific problem loans economic conditions and other pertinent factors that, in management’s judgment, could affectour portfolio. Prior to the riskadoption of loss in the loan portfolio. We review and adjust theCECL on June 1, 2020, we maintained an allowance quarterly to cover estimatedbased on an estimate of probable incurred losses inherent in our loan portfolio as of each balance sheet date.
Table 23 summarizes changes in the allowance for loancredit losses for the three and six months ended November 30, 2017August 31, 2020 and 2016,2019, and provides a comparison ofpresents the allowance by companycomponents and allowance coverage ratios as of November 30, 2017August 31, 2020 and May 31, 2017.2020. The changes in the allowance and the allowance components prior to our adoption of CECL on June 1, 2020 are based on the incurred loss model for estimating the allowance for credit losses. The allowance components, which consist of a collective allowance and an asset-specific allowance, are based on the evaluation method used to measure our loans for credit losses. Loans that share similar risk characteristics are evaluated on a collective basis in measuring credit losses, while loans that do not share similar risk characteristics with other loans in our portfolio are evaluated on an individual basis.
Table 23: Allowance for LoanCredit Losses
| | | | | Three Months Ended November 30, | | Six Months Ended November 30, | | Three Months Ended August 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 |
| Beginning balance | | $ | 37,078 |
| | $ | 33,120 |
| | $ | 37,376 |
| | $ | 33,258 |
| | 53,125 |
| | $ | 17,535 |
|
| (Benefit) provision for loan losses | | (304 | ) | | 738 |
| | (602 | ) | | 2,666 |
| |
| Net recoveries (charge-offs) | | — |
| | 53 |
| | — |
| | (2,013 | ) | |
| Cumulative-effect adjustment from adoption of CECL accounting standard | | | 3,900 |
| | — |
|
| Beginning balance, adjusted | | | 57,025 |
| | 17,535 |
|
| Provision for credit losses | | | 326 |
| | 30 |
|
| Ending balance | | $ | 36,774 |
| | $ | 33,911 |
| | $ | 36,774 |
| | $ | 33,911 |
| | $ | 57,351 |
| | $ | 17,565 |
|
| | | | | | | | | | | | | |
| | | | | | | November 30, 2017 | | May 31, 2017 | | August 31, 2020 | | May 31, 2020 |
| Allowance for loan losses by company: | | | | | | | | | |
| Allowance for credit losses by company: | | | | | |
| CFC | | | | | | $ | 28,799 |
| | $ | 29,499 |
| | $ | 52,730 |
| | $ | 47,438 |
|
| NCSC | | | | | | 3,117 |
| | 2,910 |
| | 829 |
| | 806 |
|
| RTFC | | | | | | 4,858 |
| | 4,967 |
| | 3,792 |
| | 4,881 |
|
| Total | | | | | | $ | 36,774 |
| | $ | 37,376 |
| |
| Total allowance for credit losses | | | $ | 57,351 |
| | $ | 53,125 |
|
| | | | | | |
| Allowance components: | | | | | |
| Collective allowance | | | $ | 23,519 |
| | 18,292 |
|
| Asset-specific allowance | | | 33,832 |
| | 34,833 |
|
| Total allowance for credit losses | | | $ | 57,351 |
| | $ | 53,125 |
|
| | | | | | |
| Loans outstanding: | | | | | |
| Collectively evaluated loans | | | $ | 26,745,276 |
| | $ | 26,512,298 |
|
| Individually evaluated loans | | | 171,823 |
| | 178,556 |
|
Total loans outstanding(1) | | | $ | 26,917,099 |
| | $ | 26,690,854 |
|
| | | | | | | | | | | | | |
| Allowance coverage ratios: | | | | | | | | | | | | |
| Loans to members | | | | | | $ | 24,824,691 |
| | $ | 24,367,044 |
| |
| Percentage of loans to members | | | | | | 0.15 | % | | 0.15 | % | |
Collective allowance coverage ratio(2) | | | 0.09 | % | | 0.07 | % |
Asset-specific allowance coverage ratio(3) | | | 19.69 | % | | 19.51 | % |
Total allowance coverage ratio(4) | | | 0.21 | % | | 0.20 | % |
____________________________
(1)Represents the unpaid principal balance, net of charge-offs and recoveries, of loans as of each period end. Excludes unamortized deferred loan origination costs of $12 million as of August 31, 2020 and May 31, 2020.
(2)Calculated based on the collective allowance component at period end divided by collectively evaluated loans outstanding at period end.
(3)Calculated based on the asset-specific allowance component at period end divided by individually evaluated loans outstanding at period end.
(4)Calculated based on the total allowance for credit losses at period end divided by total loans outstanding at period end.
The allowance for credit losses for our loan losses of $37portfolio increased to $57 million as of November 30, 2017 decreased slightlyAugust 31, 2020, from fiscal year end$53 million as of May 31, 2017, while2020, and the allowance coverage ratio remained unchangedincreased to 0.21% from 0.20%, primarily due to the increase in the allowance of $4 million recorded at 0.15%. The credit quality and performance statisticsadoption of our loan portfolio continued to remain strong. We experienced no charge-offs during the three and six months ended November 30, 2017 and we had no loans classified as nonperforming as of the end of the period. In comparison, we recorded a net charge-off of $2 million during the six months ended November 30, 2016. Loans designated as individually impaired totaled $13 million as of both November 30, 2017 and May 31, 2017, and the specific allowance related to these loans totaled $1 million and $2 million, respectively.CECL on June 1, 2020.
For additional information onWe discuss our methodology for determiningestimating the allowance for loancredit losses seeunder CECL in “Note 1—Summary of Significant Accounting Policies” in our 2017 Form 10-K.Policies.” See “Note 4—LoansLoans” and Commitments” of this Report“Note 5—Allowance for Credit Losses” for additional information on the credit quality of our loan portfolio and the allowance for loan losses.information.
Counterparty Credit Risk
We are exposed to counterparty credit risk related to the performance of the parties with which we enteredenter into financial transactions, primarily for derivative instruments, cash and time depositsdeposit accounts and our investment securities that we have with various financial institutions.security holdings. To mitigate this risk, we only enter into these transactions with financial institutions with investment-grade ratings. Our cash and time deposits with financial institutions generally have an original maturity of less than one year.
We manage our derivative counterparty credit risk by requiringmonitoring the overall credit worthiness of each counterparty based on our internal counterparty credit risk scoring model; using counterparty-specific credit risk limits; executing master netting arrangements; and diversifying our derivative transactions among multiple counterparties. We also require that our derivative counterparties participatebe a participant in one of our committed bank revolving line of credit agreements, monitoring the overall credit worthiness of each counterparty, using counterparty specific credit risk limits, executing master netting arrangements and diversifying our derivative transactions among multiple counterparties.agreements. Our active derivative counterparties had credit ratings ranging from A1Aa2 to Baa2 by Moody’s Investors Service (“Moody’s”) and from AA- to A-BBB+ by S&P Global RatingsInc. (“S&P”) as of November 30, 2017.August 31, 2020. Our largest counterparty exposure, based on the outstanding notional amount, represented approximately 23%25% of the total outstanding notional amount of derivatives as of both November 30, 2017August 31, 2020 and May 31, 2017, respectively.2020.
Credit Risk-Related Contingent Features
Our derivative contracts typically contain mutual early terminationearly-termination provisions, generally in the form of a credit rating trigger. Under the mutual credit rating trigger provisions, either counterparty may, but is not obligated to, terminate and settle the agreement if the credit rating of the other counterparty falls tobelow a level specified in the agreement. If a derivative contract is terminated, the amount to be received or paid by us would be equal to the mark-to-marketprevailing fair value, as defined in the agreement, as of the termination date.
Our senior unsecured credit ratings from Moody’s and S&P were A2 and A, respectively, as of November 30, 2017.August 31, 2020. Both Moody’s and S&P had our ratings on stable outlook as of November 30, 2017.August 31, 2020. Table 24 displays the notional amounts of our derivative contracts with rating triggers as of November 30, 2017,August 31, 2020, and the payments that would be required if the contracts were terminated as of that date because of a downgrade of our unsecured credit ratings or the counterparty’s unsecured credit ratings below A3/A-, below Baa1/BBB+, to or below Baa2/BBB, below Baa3/BBB-, or to or below Ba2/BB+ by Moody’s or S&P, respectively. In calculating the payment amounts that would be required upon termination of the derivative contracts, we assumed that the amounts for each counterparty would be netted in accordance with the provisions of the counterparty's master netting agreements. The net payment amounts are based on the fair value of the underlying derivative instrument, excluding the credit risk valuation adjustment, plus any unpaid accrued interest amounts.
Table 24: Rating Triggers for Derivatives
| | | (Dollars in thousands) | | Notional Amount | | Payable Due From CFC | | Receivable Due to CFC | | Net (Payable)/Receivable | | Notional Amount | | Payable Due From CFC | | Receivable Due to CFC | | Net (Payable)/Receivable |
| Impact of rating downgrade trigger: | | | | | | | | | | | | | | | | |
Falls below A3/A-(1) | | $ | 56,985 |
| | $ | (11,670 | ) | | $ | — |
| | $ | (11,670 | ) | | $ | 45,860 |
| | $ | (10,614 | ) | | $ | — |
| | $ | (10,614 | ) |
| Falls below Baa1/BBB+ | | 7,236,383 |
| | (143,459 | ) | | 7,428 |
| | (136,031 | ) | | 6,029,690 |
| | (634,659 | ) | | — |
| | (634,659 | ) |
Falls to or below Baa2/BBB (2) | | 455,152 |
| | — |
| | 1,577 |
| | 1,577 |
| | 417,041 |
| | (31,630 | ) | | — |
| | (31,630 | ) |
| Falls below Baa3/BBB- | | 264,981 |
| | (18,102 | ) | | — |
| | (18,102 | ) | | 44,877 |
| | (15,097 | ) | | — |
| | (15,097 | ) |
| Total | | $ | 8,013,501 |
| | $ | (173,231 | ) | | $ | 9,005 |
| | $ | (164,226 | ) | | $ | 6,537,468 |
| | $ | (692,000 | ) | | $ | — |
| | $ | (692,000 | ) |
____________________________
(1) Rating trigger for CFC falls below A3/A-, while rating trigger for counterparty falls below Baa1/BBB+ by Moody’s or S&P, respectively.
(2) Rating trigger for CFC falls to or below Baa2/BBB, while rating trigger for counterparty falls to or below Ba2/BB+ by Moody’s or S&P, respectively.
Table 24 does not include an interest rate swap agreement with one counterparty that is subject to a ratings trigger and early termination provision in the event of a downgrade of CFC’s senior unsecured credit ratings below Baa3, BBB- or BBB- by Moody’s, S&P or Fitch Ratings Inc. (“Fitch”). The outstanding notional amount of interest rate swaps with this counterparty totaled $205 million as of August 31, 2020, and the swaps were in an unrealized loss position of $56 million as of August 31, 2020.
The aggregate fair value amount, including the credit risk valuation adjustment, of all interest rate swaps with rating triggers that were in a net liability position was $173$734 million as of November 30, 2017.August 31, 2020, compared with $798 million as of May 31, 2020. There were no counterparties that fell below the rating trigger levels in our interest swap contracts as of November 30, 2017.August 31, 2020. If a counterparty has a credit rating that falls below the rating trigger level specified in the interest swap contract, we have the option to terminate all derivatives with the counterparty. However, we generally do not terminate such agreements earlyprior to maturity because our interest rate swaps are critical to our matched funding strategy.strategy to mitigate interest rate risk.
See “Item 1A. Risk Factors” in our 20172020 Form 10-K and “Item 1A. Risk Factors” in this Report for additional information about credit riskrisks related to our business.
We considerdefine liquidity to beas the ability to access funding or convert assets tointo cash quickly and efficiently, ormaintain access to rolloverreadily available funding and to roll-over or issue new debt both under normal operating conditions and under periods of CFC-specific and/or market stress, at a reasonable cost to ensure that we can meet borrower loan requests, pay current and other short-term cash obligations.
Liquidity Risk Management
Our liquidity risk management framework is designed to meet our liquidity objectives of providing a reliable source of funding to members, meet maturing debt and otherfuture obligations issue new debt and fund our operations on a cost-effective basisbasis. Our primary sources of liquidity include cash flows from operations, member loan repayments, committed bank revolving lines of credit, committed loan facilities under normal operating conditions as well as under CFC-specific and/or market stress conditions.the Guaranteed Underwriter Program, revolving note purchase agreements with Farmer Mac and our ability to issue debt in the capital markets, to our members and in private placements. We engage in variousprovide information on our liquidity risk-management framework and activities undertaken to manage liquidity risk and achieveunder “Item 7. MD&A—Liquidity Risk—Liquidity Risk Management” in our liquidity objectives. Our Asset Liability Committee establishes guidelines that are intended to ensure that we maintain sufficient, diversified sources of liquidity to cover potential funding requirements as well as unanticipated contingencies. Our Treasury group develops strategies to manage our targeted liquidity position, projects our funding needs under various scenarios, including adverse circumstances, and monitors our liquidity position on an ongoing basis.2020 Form 10-K.
Available Liquidity Reserve
As part of our strategy in managing liquidity risk and meeting our liquidity objectives, we seek to maintain access to liquidity in the forma substantial level of both on-balance sheet and off-balance sheet funding sources of liquidity that are readily accessibleavailable for immediateaccess to meet our near-term liquidity needs. Table 25 below presents the componentssources of ourreadily available liquidity reserve and a comparison of the amounts available as of November 30, 2017August 31, 2020 and May 31, 2017.2020.
Table 25: Available Liquidity Reserve
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | November 30, 2017 | | May 31, 2017 |
| (Dollars in millions) | | Total | | Accessed | | Available | | Total | | Accessed | | Available |
| Cash and cash equivalents | | $ | 280 |
| | $ | — |
| | $ | 280 |
| | $ | 167 |
| | $ | — |
| | $ | 167 |
|
Committed bank revolving line of credit agreements—unsecured(1) | | 3,085 |
| | 2 |
| | 3,083 |
| | 3,165 |
| | 1 |
| | 3,164 |
|
Guaranteed Underwriter Program committed facilities—secured(2) | | 6,548 |
| | 5,173 |
| | 1,375 |
| | 5,798 |
| | 5,073 |
| | 725 |
|
Farmer Mac revolving note purchase agreement, dated March 24, 2011—secured(3) | | 4,500 |
| | 2,491 |
| | 2,009 |
| | 4,500 |
| | 2,513 |
| | 1,987 |
|
| Farmer Mac revolving note purchase agreement, dated July 31, 2015—secured | | 300 |
| | — |
| | 300 |
| | 300 |
| | — |
| | 300 |
|
| Total | | $ | 14,713 |
| | $ | 7,666 |
| | $ | 7,047 |
| | $ | 13,930 |
| | $ | 7,587 |
| | $ | 6,343 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | August 31, 2020 | | May 31, 2020 |
| (Dollars in millions) | | Total | | Accessed | | Available | | Total | | Accessed | | Available |
| Liquidity sources: | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 348 |
| | $ | — |
| | $ | 348 |
| | $ | 671 |
| | $ | — |
| | $ | 671 |
|
Debt securities investment portfolio(1) | | 528 |
| | — |
| | 528 |
| | 309 |
| | — |
| | 309 |
|
Committed bank revolving line of credit agreements—unsecured(2) | | 2,725 |
| | 3 |
| | 2,722 |
| | 2,725 |
| | 3 |
| | 2,722 |
|
Guaranteed Underwriter Program committed facilities—secured(3) | | 7,798 |
| | 6,898 |
| | 900 |
| | 7,798 |
| | 6,898 |
| | 900 |
|
Farmer Mac revolving note purchase agreement, dated March 24, 2011, as amended—secured(4) | | 5,500 |
| | 3,042 |
| | 2,458 |
| | 5,500 |
| | 3,060 |
| | 2,440 |
|
| Total available liquidity | | $ | 16,899 |
| | $ | 9,943 |
| | $ | 6,956 |
| | $ | 17,003 |
| | $ | 9,961 |
| | $ | 7,042 |
|
(1)Our portfolio of equity securities consists primarily of preferred stock securities that are not as readily redeemable; therefore, we have excluded our portfolio of equity securities from our sources of available liquidity.
(2)The committed bank revolving line of credit agreements consist of a three-year and a five-year revolving line of credit agreement. The accessed amount of $2 million and $1$3 million as of November 30, 2017August 31, 2020 and May 31, 2017, respectively,2020, relates to letters of credit issued pursuant
to the five-year revolving line of credit agreement.
(2)(3)The committed facilities under the Guaranteed UnderwritingUnderwriter Program are not revolving.
(3) (4)Availability subject to market conditions.
Borrowing Capacity Under Current Facilities
In addition to cash, our liquidity reserve includes access to funds under committed revolving line of credit agreements with banks, committed loan facilities under the Guaranteed Underwriter Program and our revolving note purchase agreements with Farmer Mac. Following is a discussion of our borrowing capacity and key terms and conditions under eachour revolving line of these facilities.
credit agreements with banks and committed loan facilities under the Guaranteed Underwriter Program and revolving note purchase agreements with Farmer Mac.
Committed Bank Revolving Line of Credit Agreements—Unsecured
Our committed bank revolving lines of credit may be used for general corporate purposes; however, we generally rely on them as a backup source of liquidity for our member and dealer commercial paper. We had $3,085$2,725 million of commitments under committed bank revolving line of credit agreements as of November 30, 2017.August 31, 2020. Under our current committed bank revolving line of credit agreements, we have the ability to request up to $300 million of letters of credit, which would result in a reduction in the remaining available amount under the facilities.
On November 20, 2017, we amended and restated the three-year and five-year committed bank revolving line of credit agreements to extend the maturity dates to November 20, 2020 and November 20, 2022, respectively, and to terminate certain third-party bank commitments totaling $40 million under the three-year agreement and $40 million under the five- year agreement. As a result, the total commitment amount from third-parties under the three-year facility and the five-year facility is $1,493 million and $1,592 million, respectively, resulting in a combined total commitment amount under the two facilities of $3,085 million.
Table 26 presents the total commitment the net amount available for use and the outstanding letters of credit under our committed bank revolving line of credit agreements, outstanding letters of credit and the amount available for access as of November 30, 2017.August 31, 2020. We did not have any outstanding borrowings under our bank revolving line of credit agreements as of November 30, 2017.August 31, 2020.
Table 26: Committed Bank Revolving Line of Credit Agreements
| | | | | November 30, 2017 | | | | | | August 31, 2020 | | | | |
| (Dollars in millions) | | Total Commitment | | Letters of Credit Outstanding | | Net Available for Advance | | Maturity | | Annual Facility Fee (1) | | Total Commitment | | Letters of Credit Outstanding | | Available Amount | | Maturity | | Annual Facility Fee (1) |
| 3-year agreement | | $ | 1,493 |
| | $ | — |
| | $ | 1,493 |
| | November 20, 2020 | | 7.5 bps | | $ | 1,315 |
| | $ | — |
| | $ | 1,315 |
| | November 28, 2022 | | 7.5 bps |
| 5-year agreement | | 1,592 |
| | 2 |
| | 1,590 |
| | November 20, 2022 | | 10 bps | | 1,410 |
| | 3 |
| | 1,407 |
| | November 28, 2023 | | 10 bps |
| Total | | $ | 3,085 |
| | $ | 2 |
| | $ | 3,083 |
| | | | | | $ | 2,725 |
| | $ | 3 |
| | $ | 2,722 |
| | | | |
____________________________
(1)Facility fee based on CFC’s senior unsecured credit ratings in accordance with the established pricing schedules at the inception of the related agreement.
Our committed bank revolving line of credit agreements do not contain a material adverse change clause or rating triggers that would limit the banks’ obligations to provide funding under the terms of the agreements; however, we must be in
compliance with the covenants to draw on the facilities. We have been and expect to continue to be in compliance with the covenants under our committed bank revolving line of credit agreements. As such, we could draw on these facilities to repay dealer or member commercial paper that cannot be rolled over. See “Debt Covenants“Financial Ratios and Financial Ratios”Debt Covenants” below for additional information, including the specific financial ratio requirements under our committed bank revolving line of credit agreements.
Guaranteed Underwriter Program Committed Facilities—Secured
Under the Guaranteed Underwriter Program, we can borrow from the Federal Financing Bank and use the proceeds to make new loans and refinance existing indebtedness. As part of the program, we pay fees, based on outstanding borrowings that supportsupporting the USDA Rural Economic Development Loan and Grant program. The borrowings under this program are guaranteed by RUS.
On November 9, 2017, we closed on a $750 We had up to $900 million committed loan facility (“Series M”) from the Federal Financing Bankavailable for borrowing under the Guaranteed Underwriter Program. Pursuant toProgram as of August 31, 2020. Of this facility, we may borrow any time beforeamount, $400 million is available for advance through July 15, 2022.2023 and $500 million is available for advance through July 15, 2024. Each advance is subject to quarterly amortization and a final maturity not longer than 2030 years from the advance date. The closingdate of this committedthe advance. On September 16, 2020, we received a commitment letter for the guarantee by RUS for a $375 million loan facility increasedfrom the amount available for accessFederal Financing Bank under the Guaranteed Underwriter Program to $1,375 million as of November 30, 2017. Of this amount, $250 million is available for advance through January 15, 2019, $375 million is available for advance through October 15, 2019 and $750 million is available through July 15, 2022.Program.
We are required to pledge eligible distribution system loans or power supply system loans as collateral in an amount at least equal to the total outstanding borrowings under the Guaranteed Underwriter Program. See “Consolidated Balance Sheet Analysis—Debt—Collateral Pledged” and “Note 4—Loans and Commitments”Loans” for additional information on pledged collateral.
Farmer Mac Revolving Note Purchase Agreements—Agreement—Secured
As indicated in Table 25, we have two revolving note purchase agreements with Farmer Mac, which together allow us to borrow up to $4,800 million from Farmer Mac. Under the terms of the firsta revolving note purchase agreement with Farmer Mac, dated March 24, 2011, as amended, under which we can borrow up to $5,500 million from Farmer Mac at any time, subject to market conditions, up to $4,500 million at any time through January 11, 2020, and such2022. This date shall automatically extendextends on each anniversary date of the closing for an additional year, unless prior to any such anniversary date, Farmer Mac provides us with a notice that the draw period will not be extended beyond the remaining term. ThisPursuant to the terms of the Farmer Mac revolving note purchase agreement, allows us towe can borrow, repay and re-borrow funds at any time through maturity, as market conditions permit, provided that the outstanding principal amount at any time does not exceed the total available under the agreement. Each borrowing under the note purchaseUnder this agreement, is evidenced by a pricing agreement setting forth the interest rate, maturity date and other related terms as we may negotiate with Farmer Mac at the time of each such borrowing. We may select a fixed rate or variable rate at the time of each advance with a maturity as determined in the applicable pricing agreement. We had outstanding secured notes payable totaling $2,491$3,042 million and $2,513$3,060 million as of November 30, 2017August 31, 2020 and May 31, 2017, respectively,2020, respectively. The amount available for borrowing under the Farmer Mac revolving note purchasethis agreement of $4,500 million. The available borrowing amount totaled $2,009was $2,458 million as of November 30, 2017.August 31, 2020.
Under the terms of the second revolving note purchase agreement with Farmer Mac dated July 31, 2015, we can borrow up to $300 million at any time through July 31, 2018 at a fixed spread over LIBOR. This agreement also allows us to borrow, repay and re-borrow funds at any time through maturity, provided that the outstanding principal amount at any time does not exceed the total available under the agreement. We had no outstanding notes payable under this agreement as of November 30, 2017 and May 31, 2017. We currently do not expect to renew this agreement.
Pursuant to both Farmer Mac revolving note purchase agreements, we are required to pledge eligible electric distribution system or electric power supply system loans as collateral in an amount at least equal to the total principal amount of notes outstanding.outstanding under this agreement. See “Consolidated Balance Sheet Analysis—Debt—Collateral Pledged” and “Note 4—Loans and Commitments”Loans” for additional information on pledged collateral.
Short-Term Borrowings and Long-Term and Subordinated Debt
Additional funding is provided by short-term borrowings and issuances of long-term and subordinated debt. We rely on short-term borrowings which we refer to as our short-term funding portfolio, as a source to meet our daily, near-term funding needs. Long-term and subordinated debt represents the most significant component of our funding. The issuance of long-term debt allows us to reduce our reliance on short-term borrowings and effectively manage our refinancing and interest rate risk.
Short-Term Borrowings
Our short-term funding portfolio consistsborrowings consist of commercial paper, which we offer to members and dealers, select notes and daily liquidity fund notes offered to members, and bank-bid notes and medium-term notes offered to members and dealers.
Short-term borrowings of $4,553 million as of August 31, 2020, reflected an increase of $592 million from May 31, 2020, driven by higher member investments and issuances of dealer commercial paper.
Table 27 displays the composition, by funding source, of our short-term borrowings as of November 30, 2017August 31, 2020 and May 31, 2017.2020. Member borrowings accounted for 88% of total short-term borrowings as of August 31, 2020, compared with 94% of total short-term borrowings as of May 31, 2020.
Table 27: Short-Term Borrowings—Funding Sources
|
| | | | | | | | | | | | | | |
| | | August 31, 2020 | | May 31, 2020 |
| (Dollars in thousands) | | Amount Outstanding | | % of Total Short-Term Borrowings | | Amount
Outstanding | | % of Total Short-Term Borrowings |
| Funding source: | | | | | | | | |
| Members | | $ | 4,003,493 |
| | 88 | % | | $ | 3,711,985 |
| | 94 | % |
| Private placement—Farmer Mac notes payable | | 250,000 |
| | 5 |
| | 250,000 |
| | 6 |
|
| Capital markets | | 299,998 |
| | 7 |
| | — |
| | — |
|
| Total | | $ | 4,553,491 |
| | 100 | % | | $ | 3,961,985 |
| | 100 | % |
Table 28 displays the composition, by product type, of our short-term borrowings as of August 31, 2020 and May 31, 2020.
Table 27:28: Short-Term Borrowings
| | | | | November 30, 2017 | | May 31, 2017 | | August 31, 2020 | | May 31, 2020 |
| (Dollars in thousands) | | Amount Outstanding | | % of Total Debt Outstanding | | Amount
Outstanding | | % of Total Debt Outstanding | | Amount Outstanding | | % of Total Debt Outstanding | | Amount
Outstanding | | % of Total Debt Outstanding |
| Short-term borrowings: | | | | | | | | | | | | | | | | |
| Commercial paper: | | | | | | | | | | | | | | | | |
| Commercial paper sold through dealers, net of discounts | | $ | 579,859 |
| | 2 | % | | $ | 999,691 |
| | 4 | % | |
| Commercial paper sold directly to members, at par | | 1,133,057 |
| | 5 |
| | 928,158 |
| | 4 |
| |
| Commercial paper to dealers, net of discounts | | | $ | 299,998 |
| | 1 | % | | $ | — |
| | — | % |
| Commercial paper to members, at par | | | 1,421,582 |
| | 6 |
| | 1,318,566 |
| | 5 |
|
| Total commercial paper | | 1,712,916 |
| | 7 |
| | 1,927,849 |
| | 8 |
| | 1,721,580 |
| | 7 |
| | 1,318,566 |
| | 5 |
|
| Select notes | | 770,376 |
| | 3 |
| | 696,889 |
| | 3 |
| |
| Daily liquidity fund notes | | 866,065 |
| | 4 |
| | 527,990 |
| | 2 |
| |
| Select notes to members | | | 1,655,029 |
| | 6 |
| | 1,597,959 |
| | 6 |
|
| Daily liquidity fund notes to members | | | 645,036 |
| | 2 |
| | 508,618 |
| | 2 |
|
| Medium-term notes sold to members | | 207,835 |
| | 1 |
| | 190,172 |
| | 1 |
| | 281,846 |
| | 1 |
| | 286,842 |
| | 1 |
|
| Farmer Mac notes payable | | | 250,000 |
| | 1 |
| | 250,000 |
| | 1 |
|
| Total short-term borrowings | | $ | 3,557,192 |
| | 15 | % | | $ | 3,342,900 |
| | 14 | % | | $ | 4,553,491 |
| | 17 | % | | $ | 3,961,985 |
| | 15 | % |
Our short-term borrowings totaled $3,557of $4,553 million and accounted for 15%17% of total debt outstanding as of November 30, 2017,August 31, 2020, compared with $3,343$3,962 million or 14%,and 15% of total debt outstanding as of May 31, 2017. Of the total outstanding2020. Commercial paper to dealers totaled $300 million as of August 31, 2020. In comparison, we had no commercial paper $580 million and $1,000 million was issued to dealers outstanding as of November 30, 2017 and May 31, 2017,
respectively. We intend2020. Our intent is to manage our short-term wholesale funding risk by maintaining outstanding dealer commercial paper at an amount below $1,250 million for the foreseeable future.
Long-Term and Subordinated Debt
Long-term and subordinated debt represents the most significant component of our funding. The issuance of long-term debt allows us to reduce our reliance on short-term borrowings and manage our refinancing and interest rate risk, due in part to the multi-year contractual maturity structure of long-term debt. In addition to access to private debt facilities, we also issue debt in the public capital markets. Pursuant to Rule 405 of the Securities ActUnder the SEC rules,, we are classified as a “well-known seasoned issuer.” In November 2017, we filed a newUnder our effective shelf registration statement for our seniorstatements filed with the SEC, we may offer and subordinatedissue the following debt securities under which we can register securities:
an unlimited amount of collateral trust bonds until September 2022;
an unlimited amount of senior and subordinated debt securities, including medium-term notes, member capital securities and subordinated deferrable debt, until November 2020. Notwithstanding2020; and
daily liquidity fund notes up to $20,000 million in the foregoing, we have contractual limitations aggregate—with respecta $3,000 million limit on the aggregate principal amount outstanding at any time—until March 2022.
We intend to thefile a new registration statement registering an unlimited amount of senior indebtedness we may incur. See “MD&A—Liquidity Risk”and subordinated debt securities, including medium-term notes, member capital securities and subordinated deferrable debt prior to the expiration of our 2017 Form 10-K for additional information on ourthe existing shelf registration statements with the SEC.statement in November 2020.
As discussed in “Consolidated Balance Sheet Analysis—Debt,” long-term and subordinated debt totaled $20,529of $21,467 million and $22,038 million as of August 31, 2020 and May 31, 2020, respectively, accounted for 83% and 85% of total debt outstanding as of November 30, 2017, compared with $20,117 million, or 86%, of total debt outstanding as of May 31, 2017. The increase in total debt outstanding, including long-term and subordinated debt, was primarily due to the issuance of debt to fund loan portfolio growth.each respective date. Table 2829 summarizes long-term and subordinated debt issuances and principal maturities and amortizations, including repurchases and redemptions,repayments during the sixthree months ended November 30, 2017.August 31, 2020.
Table 28: Issuances and Maturities of29: Long-Term and Subordinated Debt Issuances and Repayments(1)
| | | | | Six Months Ended November 30, 2017 | | Three Months Ended August 31, 2020 |
| (Dollars in thousands) | | Issuances | | Maturities | | Increase/Decrease | | Issuances | | Repayments(2) | | Change |
Long-term and subordinated debt activity:(1) | | | | | | | | | | | | |
| Collateral trust bonds | | $ | — |
| | $ | 5,000 |
| | $ | (5,000 | ) | | $ | — |
| | $ | 400,000 |
| | $ | (400,000 | ) |
| Guaranteed Underwriter Program notes payable | | 100,000 |
| | 25,556 |
| | 74,444 |
| | — |
| | 35,457 |
| | (35,457 | ) |
| Farmer Mac notes payable | | — |
| | 21,925 |
| | (21,925 | ) | | — |
| | 17,794 |
| | (17,794 | ) |
| Medium-term notes sold to members | | 125,335 |
| | 143,547 |
| | (18,212 | ) | | 8,050 |
| | 63,765 |
| | (55,715 | ) |
| Medium-term notes sold to dealers | | 402,592 |
| | 7,791 |
| | 394,801 |
| | — |
| | 26,539 |
| | (26,539 | ) |
| Other notes payable | | | — |
| | — |
| | — |
|
| Members’ subordinated certificates | | 3,989 |
| | 23,340 |
| | (19,351 | ) | | 3,257 |
| | 44,030 |
| | (40,773 | ) |
| Total | | $ | 631,916 |
| | $ | 227,159 |
| | $ | 404,757 |
| | $ | 11,307 |
| | $ | 587,585 |
| | $ | (576,278 | ) |
____________________________
(1)Amounts exclude unamortized debt issuance costs and discounts.
(2)Repayments include principal maturities, scheduled amortization payments, repurchases and redemptions.
Table 2930 summarizes the scheduled amortization of the principal amount of long-term debt, subordinated deferrable debt and members’ subordinated certificates outstanding as of November 30, 2017.August 31, 2020, in each fiscal year during the five-year period ended May 31, 2025, and thereafter.
Table 29: Principal Maturity of30: Long-Term and Subordinated Debt Principal Maturity
|
| | | | | | | |
| (Dollars in thousands) | | Amount Maturing (1) | | % of Total |
| Fiscal year ending: | | | | |
| May 31, 2018 | | $ | 1,065,619 |
| | 5 | % |
| May 31, 2019 | | 2,672,139 |
| | 13 |
|
| May 31, 2020 | | 1,428,928 |
| | 7 |
|
| May 31, 2021 | | 1,323,843 |
| | 6 |
|
| May 31, 2022 | | 1,573,604 |
| | 8 |
|
| Thereafter | | 12,463,802 |
| | 61 |
|
| Total | | $ | 20,527,935 |
| | 100 | % |
|
| | | | | | | |
| (Dollars in thousands) | | Scheduled Amortization(1) | | % of Total |
| Fiscal year ending May 31: | | | | |
| 2021 | | $ | 1,504,092 |
| | 7 | % |
| 2022 | | 2,535,954 |
| | 12 |
|
| 2023 | | 1,243,063 |
| | 6 |
|
| 2024 | | 1,130,890 |
| | 5 |
|
| 2025 | | 830,070 |
| | 4 |
|
| Thereafter | | 14,222,402 |
| | 66 |
|
| Total | | $ | 21,466,471 |
| | 100 | % |
____________________________
(1)Excludes $1$0.06 million in subscribed and unissued member subordinated certificates for which a payment has been received. Member loan subordinated certificates totaling $290$207 million amortize annually based on the unpaid principal balance of the related loan.
On January 2, 2018, we provided notice to RUS that on January 16, 2018 we will redeem $325 million of notes payable outstanding under the Guaranteed Underwriter Program, with an original maturity of April 15, 2026.
We provide additional information on our financing activities above under “Consolidated Balance Sheet Analysis—Debt.”
Debt Securities Investment Portfolio
In addition to our primary sources of liquidity discussed above, weWe have an investment portfolio composed of time deposits, available-for-sale investment securities and held-to-maturity investmentdebt securities, which totaled $391are classified as trading, that serves as an additional source of liquidity. Our debt securities investment portfolio increased $218 million and $319to $528 million as of November 30, 2017 andAugust 31, 2020, from $309 million as of May 31, 2017, respectively. We intend for our investment portfolio2020, largely due to remain adequately liquid to serve as a contingent supplemental sourcethe purchase of liquidity for unanticipated liquidity needs.additional securities during the current quarter. During the fourth
During the second
quarter of fiscal year 2018,2020, we commencedexecuted a plan for the purchaseorderly liquidation of additional investment securities, consisting primarilya portion of certificates of deposit, commercial paper, corporateour debt securities commercial mortgage-backed securities, and other asset-backed securities. Pursuant tofrom our investment policy guidelines, all fixed-income securities, atportfolio due to disruptions in the time of purchase, must be rated at least investment grade based on externalcapital and credit ratings, when available, or the corresponding equivalent, when not available. Securities rated investment grade, that is those rated Baa3 or higher by Moody’s or BBB- or higher by S&P, are generally consideredmarkets in mid-March 2020 caused by the rating agencies to be of lowerCOVID-19 pandemic. As the volatility in the capital and credit risk than non-investment grade securities. We have the positive intent and ability to hold thesemarkets eased, we purchased additional securities to maturity. As such, we have classified them as heldincrease our investment portfolio total to maturity on our condensed consolidated balance sheet.a level more comparable with the level prior to the market disruptions.
Our debt securities investment portfolio is unencumbered and structured so that the securities generally have active secondary or resale markets under normal market conditions. The objective of the portfolio is to achieve returns commensurate with the level of risk assumed subject to CFC’s investment policy and guidelines and liquidity requirements. Pursuant to our investment policy and guidelines, all fixed-income debt securities, at the time of purchase, must be rated at least investment grade and on stable outlook based on external credit ratings from at least two of the leading global credit rating agencies, when available, or the corresponding equivalent, when not available. Securities rated investment grade, that is those rated Baa3 or higher by Moody’s or BBB- or higher by S&P or BBB- or higher by Fitch, are generally considered by the rating agencies to be of lower credit risk than non-investment grade securities.
We provide additional information on available-for-sale and held-to-maturityour investment securities held in our our investment portfolio in “Note 3—Investment Securities.”
Projected Near-Term Sources and Uses of Liquidity
As discussed above, our primary sources of liquidity include cash flows from operations, ourmember loan repayments, committed bank revolving lines of credit, committed loan facilities, short-term funding portfolio, our liquidity reserveborrowings and funds from the issuance of long-term and subordinated debt, as well as loan principal and interest payments.debt. Our primary uses of liquidity include loan advances to members, principal and interest payments on borrowings, periodic settlement payments related to derivative contracts, costs related to the disposition of foreclosed assets and operating expenses.
Table 3031 below displays our projected sources and uses of cash from debt and investment activity, by quarter, over the next six quarters through the quarter ending MayAugust 31, 2019. Our projected liquidity position, reflects our current plan to expand our investment portfolio.2021. Our assumptions also include the following: (i) the estimated issuance of long-term debt, including collateral trust bonds and private placement of term debt, is based on maintaining a matched funding position within our loan portfolio with our bank revolving lines of credit serving as a backup liquidity facility for commercial paper and on maintaining outstanding dealer commercial paper at an amount below $1,250 million; (ii) long-term loan scheduled amortization payments represent the scheduled long-term loan payments for loans outstanding as of November 30, 2017,August 31, 2020, and our current estimate of long-term loan prepayments, which the amount and timing of are subject to change; (iii) other loan repayments and other loan advances primarily relate to line of credit repayments and advances; (iv) long-term debt maturities reflect scheduled maturities of outstanding term debt for the periods presented; and (v) long-term loan advances reflect our current estimate of member demand for loans, the amount and timing of which are subject to change.
Table 30:31: Projected Sources and Uses of Liquidity from Debt and Investment Activity(1)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Projected Sources of Liquidity | | Projected Uses of Liquidity | | |
| (Dollars in millions) | | Long-Term Debt Issuance | | Anticipated Long-Term
Loan Repayments(2) | | Other Loan Repayments(3) | | Total Projected
Sources of
Liquidity | | Long-Term Debt Maturities(4) | | Long-Term
Loan Advances | | Other Loan Advances(5) | | Total Projected
Uses of
Liquidity | | Other Sources/ (Uses) of Liquidity(6) |
| | | | | | | | | | | | | | | | | | | |
| 3Q FY 2018 | | $ | 1,070 |
| | $ | 309 |
| | $ | 36 |
| | $ | 1,415 |
| | $ | 1,141 |
| | $ | 741 |
| | $ | 62 |
| | $ | 1,944 |
| | $ | 463 |
|
| 4Q FY 2018 | | 490 |
| | 286 |
| | — |
| | 776 |
| | 333 |
| | 307 |
| | — |
| | 640 |
| | (141 | ) |
| 1Q FY 2019 | | 385 |
| | 305 |
| | 52 |
| | 742 |
| | 162 |
| | 313 |
| | — |
| | 475 |
| | (262 | ) |
| 2Q FY 2019 | | 1,335 |
| | 323 |
| | — |
| | 1,658 |
| | 1,569 |
| | 290 |
| | 13 |
| | 1,872 |
| | 227 |
|
| 3Q FY 2019 | | 845 |
| | 291 |
| | — |
| | 1,136 |
| | 696 |
| | 493 |
| | — |
| | 1,189 |
| | 28 |
|
| 4Q FY 2019 | | 585 |
| | 272 |
| | — |
| | 857 |
| | 398 |
| | 485 |
| | — |
| | 883 |
| | 40 |
|
| Total | | $ | 4,710 |
| | $ | 1,786 |
| | $ | 88 |
| | $ | 6,584 |
| | $ | 4,299 |
| | $ | 2,629 |
| | $ | 75 |
| | $ | 7,003 |
| | $ | 355 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Projected Sources of Liquidity | | Projected Uses of Liquidity | | |
| (Dollars in millions) | | Long-Term Debt Issuance | | Anticipated Long-Term
Loan Repayments(2) | | Other
Long-Term
Repayments(3) | | Total Projected
Sources of
Liquidity | | Long-Term Debt Maturities(4) | | Long-Term
Loan Advances | | Other Loan Advances(5) | | Total Projected
Uses of
Liquidity | | Other Sources/ (Uses) of Liquidity(6) |
| 2Q FY 2021 | | $ | 563 |
| | $ | 358 |
| | $ | 75 |
| | $ | 996 |
| | $ | 593 |
| | $ | 579 |
| | $ | — |
| | $ | 1,172 |
| | $ | 50 |
|
| 3Q FY2021 | | 461 |
| | 344 |
| | — |
| | 805 |
| | 454 |
| | 474 |
| | — |
| | 928 |
| | 205 |
|
| 4Q FY2021 | | 121 |
| | 333 |
| | — |
| | 454 |
| | 707 |
| | 352 |
| | — |
| | 1,059 |
| | 535 |
|
| 1Q FY2022 | | 552 |
| | 352 |
| | — |
| | 904 |
| | 516 |
| | 486 |
| | — |
| | 1,002 |
| | 58 |
|
| 2Q FY2022 | | 35 |
| | 321 |
| | — |
| | 356 |
| | 269 |
| | 466 |
| | — |
| | 735 |
| | 316 |
|
| 3Q FY2022 | | 1,421 |
| | 318 |
| | — |
| | 1,739 |
| | 1,233 |
| | 467 |
| | — |
| | 1,700 |
| | (64 | ) |
| Total | | $ | 3,153 |
| | $ | 2,026 |
| | $ | 75 |
| | $ | 5,254 |
| | $ | 3,772 |
| | $ | 2,824 |
| | $ | — |
| | $ | 6,596 |
| | $ | 1,100 |
|
____________________________
(1) The dates presented represent the end of each quarterly period through the quarter ending Mayended August 31, 2019.2021.
(2) Anticipated long-term loan repayments include scheduled long-term loan amortizations, repricingsanticipated cash repayments at repricing date and loan sales.
(3) Other loan repayments include anticipated short-term loan repayments.
(4) Long-term debt maturities also includesinclude medium-term notes with an original maturity of one year or less and expected early redemptions of debt.
(5)Other loan advances include anticipated short-term loan advances.
(6) Includes net increase or decrease to dealer commercial paper, member commercial paper and select notes, and purchases and maturity of investments.
As displayed in Table 30,31, we currently project long-term advances of $1,651$1,891 million over the next 12 months, which we anticipate will exceed anticipated loan repayments over the same period of $1,223$1,387 million by approximately $428$504 million. The estimates presented above are developed at a particular point in time based on our expected future business growth and funding. Our actual results and future estimates may vary, perhaps significantly, from the current projections, as a result of changes in market conditions, management actions or other factors.
Credit Ratings
Our funding and liquidity, borrowing capacity, ability to access capital markets and other sources of funds and the cost of these funds are partially dependent on our credit ratings. Rating agencies base their ratings on numerous factors, including liquidity, capital adequacy, industry position, member support, management, asset quality, quality of earnings and the probability of systemic support. Significant changes in these factors could result in different ratings. Table 3132 displays our credit ratings as of November 30, 2017,August 31, 2020, which wereare unchanged from May 31, 2020, and as of the date of the filing of this Report.
Table 31:32: Credit Ratings
|
| | | | | | |
| | | November 30, 2017August 31, 2020 |
| | | Moody’s | | S&P | | Fitch |
Long-term issuer credit rating(1) | | A2 | | A | | A |
Senior secured debt(2) | | A1 | | A | | A+ |
Senior unsecured debt(3) | | A2 | | A | | A |
| Subordinated debt | | A3 | | BBB+ | | BBB+ |
| Commercial paper | | P-1 | | A-1 | | F1 |
| Outlook | | Stable | | Stable | | Stable |
___________________________
(1) Based on our senior unsecured debt rating.
(2)Applies to our collateral trust bonds.
(3)Applies to our medium-term notes.
During the three months ended November 30, 2017, Moody’s and S&P affirmed our ratings and outlook. In order to access the commercial paper markets at attractive rates, we believe we need to maintain our current commercial paper credit ratings of P-1 by Moody’s, A-1 by S&P and F1 by Fitch. In addition, the notes payable to the Federal Financing Bank and guaranteed by RUS under the Guaranteed Underwriter Program contain a provision that if during any portion of the fiscal
year, our senior secured credit ratings do not have at least two of the following ratings: (i) A3 or higher from Moody’s, (ii) A- or higher from S&P, (iii) A- or higher from Fitch or (iv) an equivalent rating from a successor rating agency to any of the above rating agencies, we may not make cash patronage capital distributions in excess of 5% of total patronage capital. See “Credit Risk—Counterparty Credit Risk—Credit Risk-Related Contingent Features” above for information on credit rating provisions related to our derivative contracts.
Financial Ratios
Our debt-to-equity ratio decreased to 19.87-to-137.64 as of November 30, 2017,August 31, 2020, from 21.94-to-142.40 as of May 31, 2017,2020, primarily due to the an increase in equity resulting from our reported net income of $188$145 million, for the six months ended November 30, 2017, which was partially offset by a decrease in equity as a result of the CFC Board of Directors’ authorization in the current quarter to retire patronage capital retirement of $45$60 million, which we returned to members in September 2017.2020.
Our adjusted debt-to-equity ratio increased to 6.12-to-15.96 as of November 30, 2017,August 31, 2020, from 5.95-to-15.85 as of May 31, 2017, largely2020, primarily attributable to a reduction in adjusted equity due to an increase in debt outstanding to fund loan growth.the maturity of subordinated certificates and the authorized patronage capital retirement amount, partially offset by adjusted net income for the current quarter. We provide a reconciliation of our adjusted debt-to-equity ratio to the most comparable GAAP measure and an explanation of the adjustments below in “Non-GAAP Financial Measures.”
Debt Covenants
As part of our short-term and long-term borrowing arrangements, we are subject to various financial and operational covenants. If we fail to maintain specified financial ratios, such failure could constitute a default by CFC of certain debt covenants under our committed bank revolving line of credit agreements and senior debt indentures. We were in compliance with all covenants and conditions under our committed bank revolving line of credit agreements and senior debt indentures as of November 30, 2017.August 31, 2020.
As discussed above in “Summary of Selected Financial Data,” the financial covenants set forth in our committed bank revolving line of credit agreements and senior debt indentures are based on adjusted financial measures, including adjusted TIER. We provide a reconciliation of adjusted TIER and other non-GAAP measures disclosed in this Report to the most comparable GAAP measures and an explanation of the adjustments below in “Non-GAAP Financial Measures.”
Interest rate risk represents our primary source of market risk. Interest rate risk is the risk to current or anticipated earnings or equity arising primarily from movements in interest rates that may result inrates. This risk results from differences between the timing of contractual maturities, re-pricing characteristics and prepaymentscash flows on our assets and their related liabilities.
Interest Rate Risk Management
the liabilities funding those assets. The timing of cash flows of our assets is impacted by re-pricing characteristics, prepayments and contractual maturities. Our interest rate risk exposure is primarily related to the funding of the fixed-rate loan portfolio. Our Asset Liability Committee provides oversight over maintaining our interest rate position withinWe provide a prescribed policy range using approved strategies. The Asset Liability Committee reviews a completediscussion of how we manage interest rate risk analysis, reviews proposed modifications, if any,in our 2020 Form 10-K under “Item 7. MD&A—Market Risk—Market Risk Management.”
Future of LIBOR
In 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates the LIBOR index, announced that the FCA intends to our interest rate risk management strategystop requesting banks to submit the rates required to calculate LIBOR after 2021. Management has formed a cross-functional LIBOR working group to identify CFC’s exposure, assess the potential risks related to the transition from LIBOR to a new index and considers adopting strategy changes. Our Asset Liability Committee monitors interest rate risk and meets quarterly to review and discuss information such as national economic forecasts, federal funds and interest rate forecasts, interest rate gap analysis, our liquidity position, loan and debt maturities, short-term and long-term funding needs, anticipated loan demands, credit concentration risk, derivative counterparty exposuredevelop a strategic transition plan. The LIBOR working group has performed an initial assessment of all of the CFC’s LIBOR dependent contracts and financial forecasts.instruments and the systems, models and processes that may be impacted. The Asset Liability Committee also discussesLIBOR working group will closely monitor and assess developments with respect to the compositionphasing out of fixed-rate versus variable-rate lending, new funding opportunities, changesLIBOR and provide regular reports to the Chief Financial Officer and the CFC Board of Directors. We discuss the risks related to the uncertainty as to the nature of potential changes or other reforms associated with the transition away from and mixexpected replacement of assets and liabilities for structural mismatches, andLIBOR as a benchmark interest rate swap transactions.in in our 2020 Form 10-K under “Item 1A. Risk Factors.”
Matched Funding Objective
Our funding objective is to manage the matched funding of asset and liability repricing terms within a range of adjusted total assets (calculated by excluding derivative assets from total assets) deemed appropriate by the Asset Liability Committee based on the current environment and extended outlook for interest rates. We refer to the difference between fixed-rate loans
scheduled for amortization or repricing and the fixed-rate liabilities and equity funding those loans as our interest rate gap. Our primary strategies for managing our interest rate risk include the use of derivatives and limiting the amount of fixed-rate assets that can be funded by variable-rate debt to a specified percentage of adjusted total assets based on market conditions.
We provide our members with many options on loans with regard to interest rates, the term for which the selected interest rate is in effect and the ability to convert or prepay the loan. Long-term loans generally have maturities of up to 35 years. Borrowers may select fixed interest rates for periods of one year through the life of the loan. We do not match fund the majority of our fixed-rate loans with a specific debt issuance at the time the loans are advanced. We fund the amount of fixed-rate assets that exceed fixed-rate debt and members’ equity with short-term debt, primarily commercial paper.
Interest Rate Gap Analysis
To monitor and mitigate interest rate risk in the fundingAs part of fixed-rate loans,our asset-liability management, we perform a monthly interest rate gap analysis that provides a comparison between the timing of cash flows, by year, for fixed-rate assets scheduled for amortization and repricing or maturing by year and for fixed-rate liabilities and members’ equity maturing by year.
We maintain an unmatched position on ourmaturing. This gap analysis is a useful tool in measuring, monitoring and mitigating the interest rate risk inherent in the funding of fixed-rate assets within a targeted range of adjusted total assets. The limited unmatched position is intended to provide flexibility to ensure that we are able to match the current maturing portion of long-term fixed rate loans based on maturity datewith variable-rate debt and the opportunityalso helpful in the current low interest rate environment to increase the gross yield on our fixed rate assets without taking what we would consider to be excessiveassessing liquidity risk.
Table 3233 displays the scheduled amortization and repricing of fixed-rate assets and outstanding fixed-rate liabilities outstandingand equity as of November 30, 2017.August 31, 2020. We exclude variable-rate loans from our interest rate gap analysis, as we do not consider the interest rate risk on these loans to be significant because they are subject to repricing at least monthly. Loans with variable interest rates accounted for 10% and 9%8% of our total loan portfolio as of November 30, 2017August 31, 2020 and May 31, 2017, respectively.2020. Fixed-rate liabilities include debt issued at a fixed rate, as well as variable-rate debt swapped to a fixed rate using interest rate swaps. Fixed-rate debt swapped to a variable rate using interest rate swaps is excluded from the analysis sincebecause it is used to match fund theour variable-rate loan pool.loans. With the exception of members’ subordinated certificates, which are generally issued with extended maturities, and commercial paper, our liabilities have average maturities that closely match the repricing terms (but not the maturities) of our fixed-rate loans.
Table 32:33: Interest Rate Gap Analysis | | | (Dollars in millions) | | Prior to 5/31/18 | | Two Years 6/1/18 to 5/31/20 | | Two Years 6/1/20 to
5/31/22 | | Five Years 6/1/22 to
5/31/27 | | 10 Years 6/1/27 to 5/31/37 | | 6/1/37 and Thereafter | | Total | | Prior to 5/31/21 | | Two Years 6/1/21 to 5/31/23 | | Two Years 6/1/23 to
5/31/25 | | Five Years 6/1/25 to
5/31/30 | | 10 Years 6/1/30 to 5/31/40 | | 6/1/40 and Thereafter | | Total |
| Asset amortization and repricing | | $ | 987 |
| | $ | 3,409 |
| | $ | 2,847 |
| | $ | 5,551 |
| | $ | 6,652 |
| | $ | 2,970 |
| | $ | 22,416 |
| | $ | 1,286 |
| | $ | 3,293 |
| | $ | 2,988 |
| | $ | 6,189 |
| | $ | 7,759 |
| | $ | 3,575 |
| | $ | 25,090 |
|
| Liabilities and members’ equity: | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | |
Long-term debt | | $ | 1,909 |
| | $ | 3,687 |
| | $ | 2,249 |
| | $ | 5,331 |
| | $ | 4,206 |
| | $ | 1,298 |
| | $ | 18,680 |
| | $ | 1,620 |
| | $ | 3,722 |
| | $ | 2,362 |
| | $ | 6,172 |
| | $ | 4,877 |
| | $ | 1,870 |
| | $ | 20,623 |
|
| Subordinated certificates | | 11 |
| | 36 |
| | 69 |
| | 946 |
| | 162 |
| | 665 |
| | 1,889 |
| |
Subordinated deferrable debt and subordinated certificates(2)(3) | | | 10 |
| | 417 |
| | 159 |
| | 484 |
| | 150 |
| | 807 |
| | 2,027 |
|
Members’ equity (1)(4) | | — |
| | 23 |
| | 24 |
| | 108 |
| | 297 |
| | 856 |
| | 1,308 |
| | 54 |
| | 25 |
| | 33 |
| | 116 |
| | 332 |
| | 1,052 |
| | 1,612 |
|
Total liabilities and members’ equity(2) | | $ | 1,920 |
| | $ | 3,746 |
| | $ | 2,342 |
| | $ | 6,385 |
| | $ | 4,665 |
| | $ | 2,819 |
| | $ | 21,877 |
| | $ | 1,684 |
| | $ | 4,164 |
| | $ | 2,554 |
| | $ | 6,772 |
| | $ | 5,359 |
| | $ | 3,729 |
| | $ | 24,262 |
|
Gap (3)(5) | | $ | (933 | ) | | $ | (337 | ) | | $ | 505 |
| | $ | (834 | ) | | $ | 1,987 |
| | $ | 151 |
| | $ | 539 |
| | $ | (398 | ) | | $ | (871 | ) | | $ | 434 |
| | $ | (583 | ) | | $ | 2,400 |
| | $ | (154 | ) | | $ | 828 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative gap | | (933 | ) | | (1,270 | ) | | (765 | ) | | (1,599 | ) | | 388 |
| | 539 |
| | | | (398 | ) | | (1,269 | ) | | (835 | ) | | (1,418 | ) | | 982 |
| | 828 |
| | |
| Cumulative gap as a % of total assets | | (3.61 | )% | | (4.91 | )% | | (2.96 | )% | | (6.18 | )% | | 1.50 | % | | 2.08 | % | | | | (1.41 | )% | | (4.49 | )% | | (2.95 | )% | | (5.02 | )% | | 3.47 | % | | 2.93 | % | | |
Cumulative gap as a % of adjusted total assets(4)(6) | | (3.62 | ) | | (4.92 | ) | | (2.97 | ) | | (6.20 | ) | | 1.50 |
| | 2.09 |
| | | | (1.42 | ) | | (4.52 | ) | | (2.97 | ) | | (5.05 | ) | | 3.50 |
| | 2.95 |
| | |
____________________________
(1)Includes long-term fixed-rate debt and the portionnet impact of the allowance for loan losses and subordinated deferrable debt allocated to fund fixed-rate assets and excludes noncash adjustments from the accounting for derivative financial instruments.our interest rate swaps.
(2) DebtThe maturity presented for debt is presented based on the call date.
(3)Represents the amount of subordinated deferrable debt and subordinated certificates allocated to fund fixed-rate assets.
(4)Represents the portion of members’ equity and allowance for credit losses allocated to fund fixed-rate assets. See Table 38: Members’ Equity below under “Non-GAAP Financial Measures” for a reconciliation of total CFC equity to members’ equity.
(5)Calculated based on the amount of assets amortizingscheduled for amortization and repricing less total liabilities and members’ equity.equity funding those assets.
(4)(6)Adjusted total assets represents total assets reported in our condensed consolidated balance sheets less derivative assets.
When the amount of the cash flows related to fixed-rate assets scheduled for amortization and repricing exceeds the amount of cash flows related to the fixed-rate debt and equity funding those assets, we refer to the difference, or gap, as “warehousing.” When the amount of the cash flows related to fixed-rate assets scheduled for amortization and repricing is less than the amount of the cash flows related to the fixed-rate debt and equity funding those assets, we refer to the gap as “prefunding.” The amount of the gap is an indication of our interest rate and liquidity risk exposure. Our goal is to maintain an unmatched position related to the cash flows for fixed-rate financial assets within a targeted range of adjusted total assets.
Because the substantial majority of our financial assets are fixed-rate, amortizing loans and these loans are primarily funded with bullet debt and equity, our interest rate gap analysis typically reflects a warehouse position. When we are in a
The difference, or interest rate gap, of $539 million betweenwarehouse position, we utilize some short-term borrowings to fund the fixed-rate loans scheduled for amortization orand repricing of $22,416 million andour financial assets. However, we limit the fixed-rate liabilities and equity funding the loans of $21,877 million presented in Table 32 reflects the amount of fixed-rate assets that are funded with short-term and variable-rate debt as of November 30, 2017. The gap of $539 million represented 2.08% of total assets and 2.09% of adjusted total assets (total assets excluding derivative assets) as of November 30, 2017. As discussed above,extent to which we manage this gap within a prescribed range because fundingfund our long-term, fixed-rate loans with short-term, and variable-rate debt may exposebecause it exposes us to higher interest rate and liquidity risk. As indicated above in Table 33, we were in a warehouse position of $828 million as of August 31, 2020.
|
|
| NON-GAAP FINANCIAL MEASURES |
InAs discussed above in the section “Summary of Selected Financial Data,” in addition to financial measures determined in accordance with GAAP, management evaluates performance based on certain non-GAAP measures, which we refer to as “adjusted” measures. We provide a discussion of each of theseour non-GAAP measures in our 2017 Form 10-K under “Item 7. MD&A—Non-GAAP Measures.”Measures” in our 2020 Form 10-K. Below we provide a reconciliation of our adjusted measures presented in this Report to the most comparable GAAP measures in this section. We believe our non-GAAP adjusted metrics, which are not a substitute for GAAP and may not be consistent with similarly titled non-GAAP measures used by other companies, provide meaningful information and are useful to investors because management uses these metrics to compare operating results across financial reporting periods, for internal budgeting and forecasting purposes, for compensation decisions and for short- and long-term strategic planning decisions. In addition, certain of the financial covenants in our committed bank revolving line of credit agreements and debt indentures are based on our adjusted measures.
Statements of Operations Non-GAAP AdjustmentsAdjusted Operational Financial Measures
Table 3334 provides a reconciliation of adjusted interest expense, adjusted net interest income, adjusted total revenue and adjusted net income to the comparable GAAP measures three and six months ended November 30, 2017 and 2016. Themeasures. These adjusted amountsmeasures are used in the calculation of our adjusted net interest yield and adjusted TIER.
Table 33:34: Adjusted Financial Measures — Measures—Income Statement | | | | | Three Months Ended November 30, | | Six Months Ended November 30, | | Three Months Ended August 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 |
| Adjusted interest expense: | | | | | |
| Interest expense | | $ | (195,170 | ) | | $ | (183,654 | ) | | $ | (387,901 | ) | | $ | (364,734 | ) | | $ | (179,976 | ) | | $ | (213,271 | ) |
| Include: Derivative cash settlements | | (19,635 | ) | | (21,587 | ) | | (39,857 | ) | | (44,977 | ) | |
Include: Derivative cash settlements interest expense(1) | | | (26,972 | ) | | (11,043 | ) |
| Adjusted interest expense | | $ | (214,805 | ) | | $ | (205,241 | ) | | $ | (427,758 | ) | | $ | (409,711 | ) | | $ | (206,948 | ) | | $ | (224,314 | ) |
| | | | | | | | | | | | | |
| Adjusted net interest income: | | | | | |
| Net interest income | | $ | 70,653 |
| | $ | 73,502 |
| | $ | 143,837 |
| | $ | 149,257 |
| | $ | 99,608 |
| | $ | 76,744 |
|
| Include: Derivative cash settlements | | (19,635 | ) | | (21,587 | ) | | (39,857 | ) | | (44,977 | ) | |
Include: Derivative cash settlements interest expense(1) | | | (26,972 | ) | | (11,043 | ) |
| Adjusted net interest income | | $ | 51,018 |
| | $ | 51,915 |
| | $ | 103,980 |
| | $ | 104,280 |
| | $ | 72,636 |
| | $ | 65,701 |
|
| | | | | | | | | | | | | |
| Net income | | $ | 178,723 |
| | $ | 395,304 |
| | $ | 187,738 |
| | $ | 263,043 |
| |
| Exclude: Derivative forward value gains | | 145,228 |
| | 362,247 |
| | 119,252 |
| | 197,344 |
| |
| Adjusted total revenue: | | | | | |
| Total revenue | | | $ | 103,124 |
| | $ | 87,685 |
|
Include: Derivative cash settlements interest expense(1) | | | (26,972 | ) | | (11,043 | ) |
| Adjusted total revenue | | | $ | 76,152 |
| | $ | 76,642 |
|
| | | | | | |
| Adjusted net income: | | | | | |
| Net income (loss) | | | $ | 144,587 |
| | $ | (324,079 | ) |
Exclude: Derivative forward value gains (losses)(2) | | | 87,248 |
| | (384,682 | ) |
| Adjusted net income | | $ | 33,495 |
| | $ | 33,057 |
| | $ | 68,486 |
| | $ | 65,699 |
| | $ | 57,339 |
| | $ | 60,603 |
|
____________________________
(1)Represents the net periodic contractual interest amount for our interest-rate swaps for the reporting period.
(2)Represents the change in fair value of our interest rate swaps during the reporting period due to changes in expected future interest rates over the remaining life of our derivative contracts.
We primarily fund our loan portfolio through the issuance of debt. However, we use derivatives as a supplemental source of funding and to economically hedge the interest rate risk associated with our loan portfolio. We therefore consider the cost ofinterest expense incurred on our derivatives to be an inherent costpart of funding and hedging our loan portfolio and, therefore, economically similarcost in addition to the interest expense thaton our debt. As such, we recognize on debt issued for funding. We therefore includeadd derivative cash settlements ininterest expense to our reported interest expense to derive our adjusted interest expense and exclude the unrealized forward value of derivatives from our adjusted net income.
adjusted net interest income. We exclude the unrealized derivative forward value gains and losses from our adjusted total revenue and adjusted net income.
TIER and Adjusted TIER
Table 3435 presentsdisplays the calculation of our TIER and adjusted TIER for the three and six months ended November 30, 2017August 31, 2020 and 2016.2019.
Table 34:35: TIER and Adjusted TIER
| | | | | Three Months Ended November 30, | | Six Months Ended November 30, | | Three Months Ended August 31, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 |
TIER (1) | | 1.92 |
| | 3.15 |
| | 1.48 |
| | 1.72 |
| | 1.80 |
| | — |
|
| | | | | | | | | | | | | |
Adjusted TIER (2) | | 1.16 |
| | 1.16 |
| | 1.16 |
| | 1.16 |
| | 1.28 |
| | 1.27 |
|
____________________________
(1)TIER is calculated based on our net income (loss) plus interest expense for the period divided by interest expense for the period.
(2)Adjusted TIER is calculated based on adjusted net income (loss) plus adjusted interest expense for the period divided by adjusted interest expense for the period.
Debt-to-Equity and Adjusted Debt-to-Equity
Table 3536 provides a reconciliation between theour total liabilities and total equity used to calculate the debt-to-equity and the adjusted amounts used in the calculation of our adjusted debt-to-equity ratiosratio as of November 30, 2017August 31, 2020 and May 31, 2017.2020. As indicated in the table below,Table 36, subordinated debt is treated in the same manner as equity in calculating our adjusted-debt-to-equity ratio.
Table 35:36: Adjusted Financial Measures — Measures—Balance Sheet | | | (Dollars in thousands) | | November 30, 2017 |
| May 31, 2017 | | August 31, 2020 |
| May 31, 2020 |
| Total liabilities | | $ | 24,640,195 |
| | $ | 24,106,887 |
| | $ | 27,531,117 |
| | $ | 27,508,783 |
|
| Exclude: | | | | | | | | |
| Derivative liabilities | | 304,307 |
| | 385,337 |
| | 1,165,585 |
| | 1,258,459 |
|
| Debt used to fund loans guaranteed by RUS | | 164,172 |
| | 167,395 |
| | 144,891 |
| | 146,764 |
|
| Subordinated deferrable debt | | 742,341 |
| | 742,274 |
| | 986,166 |
| | 986,119 |
|
| Subordinated certificates | | 1,399,675 |
| | 1,419,025 |
| | 1,298,845 |
| | 1,339,618 |
|
| Adjusted total liabilities | | $ | 22,029,700 |
| | $ | 21,392,856 |
| | $ | 23,935,630 |
| | $ | 23,777,823 |
|
| | | | | | | | | |
| Total equity | | $ | 1,240,048 |
| | $ | 1,098,805 |
| | $ | 731,504 |
| | $ | 648,822 |
|
| Exclude: | | | | | |
Prior fiscal year-end cumulative derivative forward value losses(1) | | | (1,088,982 | ) | | (354,704 | ) |
Current year derivative forward value gains (losses)(1) | | | 87,248 |
| | (734,278 | ) |
Period-end cumulative derivative forward value losses(1) | | | (1,001,734 | ) | | (1,088,982 | ) |
Accumulated other comprehensive income attributable to derivatives(2) | | | 2,025 |
| | 2,130 |
|
| Subtotal | | | (999,709 | ) | | (1,086,852 | ) |
| Include: | |
| | | | | | |
| Subordinated deferrable debt | | 742,341 |
| | 742,274 |
| | 986,166 |
| | 986,119 |
|
| Subordinated certificates | | 1,399,675 |
| | 1,419,025 |
| | 1,298,845 |
| | 1,339,618 |
|
| Total subordinated debt and certificates | | 2,142,016 |
| | 2,161,299 |
| |
| Exclude: | | | | | |
| Prior year-end cumulative derivative forward value losses | | (340,976 | ) | | (520,357 | ) | |
| Current year derivative forward value gains | | 119,252 |
| | 179,381 |
| |
| Total cumulative derivative forward value losses | | (221,724 | ) | | (340,976 | ) | |
Accumulated other comprehensive income (1) | | 3,316 |
| | 3,702 |
| |
| Subtotal | | | 2,285,011 |
| | 2,325,737 |
|
| Adjusted total equity | | $ | 3,600,472 |
| | $ | 3,597,378 |
| | $ | 4,016,225 |
| | $ | 4,061,411 |
|
____________________________
(1) Represents consolidated total derivative forward value gains (losses).
(2) Represents the AOCI amount related to derivatives. See “Note 9—10—Equity” for a breakoutthe additional components of our AOCI components.AOCI.
Table 3637 displays the calculations of our debt-to-equity and adjusted debt-to-equity ratios as of November 30, 2017August 31, 2020 and May 31, 2017.2020.
Table 36:37: Debt-to-Equity Ratio and Adjusted Debt-to-Equity Ratio
| | | (Dollars in thousands) | | | August 31, 2020 | | May 31, 2020 |
| Debt-to equity ratio: | | | | | |
| Total liabilities | | | $ | 27,531,117 |
| | $ | 27,508,783 |
|
| Total equity | | | 731,504 |
| | 648,822 |
|
Debt-to-equity ratio (1) | | | 37.64 |
| | 42.40 |
|
| | | November 30, 2017 | | May 31, 2017 | | | | |
Debt-to-equity ratio (1) | | 19.87 |
| | 21.94 |
| |
Adjusted debt-to-equity ratio (2) | | 6.12 |
| | 5.95 |
| |
| Adjusted debt-to-equity ratio: | | | | | |
Adjusted total liabilities(2) | | | $ | 23,935,630 |
| | $ | 23,777,823 |
|
Adjusted total equity(2) | | | 4,016,225 |
| | 4,061,411 |
|
Adjusted debt-to-equity ratio (3) | | | 5.96 |
| | 5.85 |
|
____________________________
(1) Calculated based on total liabilities as of theat period end of the period divided by total equity as of the end of the period.at period end.
(2)See Table 36 above for details on the calculation of these non-GAAP adjusted measures and the reconciliation to the most comparable GAAP measures.
(3) Calculated based on adjusted total liabilities at period end divided by adjusted total equity at period end.
Members’ Equity
Members’ equity represents equity attributable to CFC members. Table 38 provides a reconciliation of members’ equity to total CFC equity as of August 31, 2020 and May 31, 2020.
Table 38: Members’ Equity
|
| | | | | | | | |
| (Dollars in thousands) | | August 31, 2020 | | May 31, 2020 |
| Members’ equity: | | | | |
| Total CFC equity | | $ | 706,609 |
| | $ | 626,121 |
|
| Exclude: | | | | |
| Accumulated other comprehensive loss | | (1,827 | ) | | (1,910 | ) |
Period-end cumulative derivative forward value losses attributable to CFC(1) | | (992,956 | ) | | (1,079,739 | ) |
| Subtotal | | (994,783 | ) | | (1,081,649 | ) |
| Members’ equity | | $ | 1,701,392 |
| | $ | 1,707,770 |
|
____________________________
(1)Represents period-end cumulative derivative forward value losses for CFC only, as total CFC equity does not include the noncontrolling interests of the variable interest entities NCSC and RTFC, which we are required to consolidate. We report the separate results of operations for CFC in “Note 15—Business Segments.” The period-end cumulative derivative forward value losses total amounts as of August 31, 2020 and May 31, 2020 are presented above in Table 36.
| |
| Item 1. | Financial Statements |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | | | Three Months Ended November 30, | | Six Months Ended November 30, | | Three Months Ended August 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2017 |
| 2016 | | 2020 | | 2019 |
| Interest income | | $ | 265,823 |
| | $ | 257,156 |
| | $ | 531,738 |
| | $ | 513,991 |
| | $ | 279,584 |
| | $ | 290,015 |
|
| Interest expense | | (195,170 | ) | | (183,654 | ) | | (387,901 | ) | | (364,734 | ) | | (179,976 | ) | | (213,271 | ) |
| Net interest income | | 70,653 |
| | 73,502 |
| | 143,837 |
| | 149,257 |
| | 99,608 |
| | 76,744 |
|
| Benefit (provision) for loan losses | | 304 |
| | (738 | ) | | 602 |
| | (2,666 | ) | |
| Net interest income after benefit (provision) for loan losses | | 70,957 |
| | 72,764 |
| | 144,439 |
| | 146,591 |
| |
| Provision for credit losses | | | (326 | ) | | (30 | ) |
| Net interest income after provision for credit losses | | | 99,282 |
| | 76,714 |
|
| Non-interest income: | | |
| | |
| | |
| | |
| | |
| | |
|
| Fee and other income | | 5,542 |
| | 5,097 |
| | 9,487 |
| | 9,627 |
| | 3,516 |
| | 10,941 |
|
| Derivative gains | | 125,593 |
| | 340,660 |
| | 79,395 |
| | 152,367 |
| |
| Results of operations of foreclosed assets | | (10 | ) | | (549 | ) | | (34 | ) | | (1,661 | ) | |
| Derivative gains (losses) | | | 60,276 |
| | (395,725 | ) |
| Investment securities gains | | | 4,659 |
| | 1,620 |
|
| Total non-interest income | | 131,125 |
| | 345,208 |
| | 88,848 |
| | 160,333 |
| | 68,451 |
| | (383,164 | ) |
| Non-interest expense: | | |
| | |
| | |
| | |
| | |
| | |
|
| Salaries and employee benefits | | (12,009 | ) | | (11,451 | ) | | (23,832 | ) | | (22,875 | ) | | (13,133 | ) | | (12,942 | ) |
| Other general and administrative expenses | | (9,905 | ) | | (9,181 | ) | | (19,718 | ) | | (18,616 | ) | | (9,530 | ) | | (12,387 | ) |
| Other non-interest expense | | (618 | ) | | (517 | ) | | (1,140 | ) | | (960 | ) | | (332 | ) | | 7,179 |
|
| Total non-interest expense | | (22,532 | ) | | (21,149 | ) | | (44,690 | ) | | (42,451 | ) | | (22,995 | ) | | (18,150 | ) |
| Income before income taxes | | 179,550 |
| | 396,823 |
| | 188,597 |
| | 264,473 |
| |
| Income tax expense | | (827 | ) | | (1,519 | ) | | (859 | ) | | (1,430 | ) | |
| Net income | | 178,723 |
| | 395,304 |
| | 187,738 |
| | 263,043 |
| |
| Less: Net income attributable to noncontrolling interests | | (1,150 | ) | | (2,575 | ) | | (1,032 | ) | | (1,885 | ) | |
| Net income attributable to CFC | | $ | 177,573 |
| | $ | 392,729 |
| | $ | 186,706 |
| | $ | 261,158 |
| |
| Income (loss) before income taxes | | | 144,738 |
| | (324,600 | ) |
| Income tax (provision) benefit | | | (151 | ) | | 521 |
|
| Net income (loss) | | | 144,587 |
| | (324,079 | ) |
| Less: Net (income) loss attributable to noncontrolling interests | | | (171 | ) | | 1,657 |
|
| Net income (loss) attributable to CFC | | | $ | 144,416 |
| | $ | (322,422 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| See accompanying notes to condensed consolidated financial statements. | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements. | | The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements. |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended November 30, | | Six Months Ended November 30, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Net income | | $ | 178,723 |
| | $ | 395,304 |
| | $ | 187,738 |
| | $ | 263,043 |
|
| Other comprehensive income (loss): | | |
| | |
| | |
| | |
|
| Unrealized gains (losses) on available-for-sale investment securities | | 8 |
| | (1,761 | ) | | (1,143 | ) | | (1,772 | ) |
| Reclassification of losses on foreclosed assets to net income | | — |
| | — |
| | — |
| | 9,823 |
|
| Reclassification of derivative gains to net income | | (194 | ) | | (199 | ) | | (386 | ) | | (396 | ) |
| Defined benefit plan adjustments | | 126 |
| | 44 |
| | 253 |
| | 88 |
|
| Other comprehensive income (loss) | | (60 | ) | | (1,916 | ) | | (1,276 | ) | | 7,743 |
|
| Total comprehensive income | | 178,663 |
| | 393,388 |
| | 186,462 |
| | 270,786 |
|
| Less: Total comprehensive income attributable to noncontrolling interests | | (1,150 | ) | | (2,575 | ) | | (1,032 | ) | | (1,885 | ) |
| Total comprehensive income attributable to CFC | | $ | 177,513 |
| | $ | 390,813 |
| | $ | 185,430 |
| | $ | 268,901 |
|
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| See accompanying notes to condensed consolidated financial statements. |
|
| | | | | | | | |
| | | Three Months Ended August 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Net income (loss) | | $ | 144,587 |
| | $ | (324,079 | ) |
| Other comprehensive income (loss): | | |
| | |
|
| Reclassification of derivative gains to earnings | | (105 | ) | | (112 | ) |
| Defined benefit plan adjustments | | 188 |
| | 145 |
|
| Other comprehensive income | | 83 |
| | 33 |
|
| Total comprehensive income (loss) | | 144,670 |
| | (324,046 | ) |
| Less: Total comprehensive (income) loss attributable to noncontrolling interests | | (171 | ) | | 1,657 |
|
| Total comprehensive income (loss) attributable to CFC | | $ | 144,499 |
| | $ | (322,389 | ) |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements. |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| | | (Dollars in thousands) | | November 30, 2017 |
| May 31, 2017 | | August 31, 2020 |
| May 31, 2020 |
| Assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 280,315 |
| | $ | 166,615 |
| | $ | 347,818 |
| | $ | 671,372 |
|
Restricted cash | | 11,323 |
| | 21,806 |
| | 9,376 |
| | 8,647 |
|
| Time deposits | | 51,000 |
| | 226,000 |
| |
| Total cash, cash equivalents and restricted cash | | | 357,194 |
| | 680,019 |
|
| Investment securities: | | | | | | | | |
| Available for sale, at fair value | | 91,411 |
| | 92,554 |
| |
| Held to maturity, at amortized cost | | 248,155 |
| | — |
| |
| Equity securities, at fair value | | | 62,266 |
| | 60,735 |
|
| Debt securities trading, at fair value | | | 527,526 |
| | 309,400 |
|
| Total investment securities | | 339,566 |
| | 92,554 |
| | 589,792 |
| | 370,135 |
|
| Loans to members | | 24,824,691 |
| | 24,367,044 |
| | 26,928,877 |
| | 26,702,380 |
|
| Less: Allowance for loan losses | | (36,774 | ) | | (37,376 | ) | |
| Less: Allowance for credit losses | | | (57,351 | ) | | (53,125 | ) |
| Loans to members, net | | 24,787,917 |
| | 24,329,668 |
| | 26,871,526 |
| | 26,649,255 |
|
| Accrued interest receivable | | 116,770 |
| | 111,493 |
| | 104,762 |
| | 117,138 |
|
| Other receivables | | 38,410 |
| | 45,469 |
| | 39,701 |
| | 41,099 |
|
| Fixed assets, net | | 125,444 |
| | 122,260 |
| | 88,245 |
| | 89,137 |
|
| Derivative assets | | 87,453 |
| | 49,481 |
| | 167,463 |
| | 173,195 |
|
| Other assets | | 42,045 |
| | 40,346 |
| | 43,938 |
| | 37,627 |
|
| Total assets | | $ | 25,880,243 |
| | $ | 25,205,692 |
| | $ | 28,262,621 |
| | $ | 28,157,605 |
|
| | | | | | | | | |
| Liabilities: | |
|
| | | |
|
| | |
| Accrued interest payable | | $ | 143,085 |
| | $ | 137,476 |
| | $ | 182,166 |
| | $ | 139,619 |
|
| Debt outstanding: | | | | | | | | |
| Short-term borrowings | | 3,557,192 |
| | 3,342,900 |
| | 4,553,491 |
| | 3,961,985 |
|
| Long-term debt | | 18,386,819 |
| | 17,955,594 |
| | 19,181,520 |
| | 19,712,024 |
|
| Subordinated deferrable debt | | 742,341 |
| | 742,274 |
| | 986,166 |
| | 986,119 |
|
| Members’ subordinated certificates: | | |
| | |
| | |
| | |
|
| Membership subordinated certificates | | 630,391 |
| | 630,098 |
| | 630,483 |
| | 630,483 |
|
| Loan and guarantee subordinated certificates | | 548,187 |
| | 567,830 |
| | 439,742 |
| | 482,965 |
|
| Member capital securities | | 221,097 |
| | 221,097 |
| | 228,620 |
| | 226,170 |
|
| Total members’ subordinated certificates | | 1,399,675 |
| | 1,419,025 |
| | 1,298,845 |
| | 1,339,618 |
|
| Total debt outstanding | | 24,086,027 |
| | 23,459,793 |
| | 26,020,022 |
| | 25,999,746 |
|
| Patronage capital retirement payable | | | 57,835 |
| | — |
|
| Deferred income | | 67,690 |
| | 73,972 |
| | 57,225 |
| | 59,303 |
|
| Derivative liabilities | | 304,307 |
| | 385,337 |
| | 1,165,585 |
| | 1,258,459 |
|
| Other liabilities | | 39,086 |
| | 50,309 |
| | 48,284 |
| | 51,656 |
|
| Total liabilities | | 24,640,195 |
| | 24,106,887 |
| | 27,531,117 |
| | 27,508,783 |
|
| | | | | | | | | |
| Commitments and contingencies | |
|
| |
|
| |
| | | | | | |
| Equity: | | | | | | | | |
| CFC equity: | | |
| | |
| | |
| | |
|
| Retained equity | | 1,197,730 |
| | 1,056,778 |
| | 708,436 |
| | 628,031 |
|
| Accumulated other comprehensive income | | 11,899 |
| | 13,175 |
| |
| Accumulated other comprehensive loss | | | (1,827 | ) | | (1,910 | ) |
| Total CFC equity | | 1,209,629 |
| | 1,069,953 |
| | 706,609 |
| | 626,121 |
|
| Noncontrolling interests | | 30,419 |
| | 28,852 |
| | 24,895 |
| | 22,701 |
|
| Total equity | | 1,240,048 |
| | 1,098,805 |
| | 731,504 |
| | 648,822 |
|
| Total liabilities and equity | | $ | 25,880,243 |
| | $ | 25,205,692 |
| | $ | 28,262,621 |
| | $ | 28,157,605 |
|
| | | | | | | | | |
____________________________ | | | | | |
(1) Restricted cash consists primarily of member funds held in escrow for certain specifically designed cooperative programs. | | (1) Restricted cash consists primarily of member funds held in escrow for certain specifically designed cooperative programs. |
| | | | | | |
| See accompanying notes to condensed consolidated financial statements. | |
| The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements. | | The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements. |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | Three Months Ended August 31, 2020 |
| (Dollars in thousands) | | Membership
Fees and
Educational
Fund | | Patronage
Capital
Allocated | | Members’
Capital
Reserve | | Unallocated
Net Income
(Loss) | | CFC
Retained
Equity | | Accumulated
Other
Comprehensive
Income | | Total
CFC
Equity | | Non-controlling
Interests | | Total
Equity | | Membership
Fees and
Educational
Fund | | Patronage
Capital
Allocated | | Members’
Capital
Reserve | | Unallocated
Net
(Loss) Income | | CFC
Retained
Equity | | Accumulated
Other
Comprehensive
Income (Loss) | | Total
CFC
Equity | | Non-controlling
Interests | | Total
Equity |
| Balance as of May 31, 2017 | | $ | 2,900 |
| | $ | 761,701 |
| | $ | 630,305 |
| | $ | (338,128 | ) | | $ | 1,056,778 |
| | $ | 13,175 |
| | $ | 1,069,953 |
| | $ | 28,852 |
| | $ | 1,098,805 |
| |
| Net income | | — |
| | — |
| | — |
| | 186,706 |
| | 186,706 |
| | — |
| | 186,706 |
| | 1,032 |
| | 187,738 |
| |
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,276 | ) | | (1,276 | ) | |
|
| | (1,276 | ) | |
| Patronage capital retirement | | — |
| | (45,220 | ) | | — |
| | — |
| | (45,220 | ) | | — |
| | (45,220 | ) | | — |
| | (45,220 | ) | |
| Other | | (534 | ) | | — |
| | — |
| | — |
| | (534 | ) | | — |
| | (534 | ) | | 535 |
| | 1 |
| |
| Balance as of November 30, 2017 | | $ | 2,366 |
| | $ | 716,481 |
| | $ | 630,305 |
| | $ | (151,422 | ) | | $ | 1,197,730 |
| | $ | 11,899 |
| | $ | 1,209,629 |
| | $ | 30,419 |
| | $ | 1,240,048 |
| |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Balance as of May 31, 2016 | | $ | 2,772 |
| | $ | 713,853 |
| | $ | 587,219 |
| | $ | (513,610 | ) | | $ | 790,234 |
| | $ | 1,058 |
| | $ | 791,292 |
| | $ | 26,086 |
| | $ | 817,378 |
| |
| Balance as of May 31, 2020 | | | $ | 3,193 |
| | $ | 894,066 |
| | $ | 807,320 |
| | $ | (1,076,548 | ) | | $ | 628,031 |
| | $ | (1,910 | ) | | $ | 626,121 |
| | $ | 22,701 |
| | $ | 648,822 |
|
| Cumulative-effect adjustment from adoption of new accounting standard | | | — |
| | — |
| | — |
| | (3,900 | ) | | (3,900 | ) | | — |
| | (3,900 | ) | | — |
| | (3,900 | ) |
| Balance as of June 1, 2020 | | | 3,193 |
| | 894,066 |
| | 807,320 |
| | (1,080,448 | ) | | 624,131 |
| | (1,910 | ) | | 622,221 |
| | 22,701 |
| | 644,922 |
|
| Net income | | — |
| | — |
| | — |
| | 261,158 |
| | 261,158 |
| | — |
| | 261,158 |
| | 1,885 |
| | 263,043 |
| | — |
| | — |
| | — |
| | 144,416 |
| | 144,416 |
| | — |
| | 144,416 |
| | 171 |
| | 144,587 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 7,743 |
| | 7,743 |
| | — |
| | 7,743 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 83 |
| | 83 |
| | — |
| | 83 |
|
| Patronage capital retirement | | — |
| | (42,129 | ) | | — |
| | — |
| | (42,129 | ) | | — |
| | (42,129 | ) | | — |
| | (42,129 | ) | | — |
| | (59,857 | ) | | — |
| | — |
| | (59,857 | ) | | — |
| | (59,857 | ) | | — |
| | (59,857 | ) |
| Other | | (578 | ) | | — |
| | — |
| | — |
| | (578 | ) | | — |
| | (578 | ) | | 620 |
| | 42 |
| | (254 | ) | | — |
| | — |
| | — |
| | (254 | ) | | — |
| | (254 | ) | | 2,023 |
| | 1,769 |
|
| Balance as of November 30, 2016 | | $ | 2,194 |
| | $ | 671,724 |
| | $ | 587,219 |
| | $ | (252,452 | ) | | $ | 1,008,685 |
| | $ | 8,801 |
| | $ | 1,017,486 |
| | $ | 28,591 |
| | $ | 1,046,077 |
| |
| Balance as of August 31, 2020 | | | $ | 2,939 |
| | $ | 834,209 |
| | $ | 807,320 |
| | $ | (936,032 | ) | | $ | 708,436 |
| | $ | (1,827 | ) | | $ | 706,609 |
| | $ | 24,895 |
| | $ | 731,504 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Three Months Ended August 31, 2019 |
| (Dollars in thousands) | | | Membership
Fees and
Educational
Fund | | Patronage
Capital
Allocated | | Members’
Capital
Reserve | | Unallocated
Net
Loss | | CFC
Retained
Equity | | Accumulated
Other
Comprehensive
(Loss) Income | | Total
CFC
Equity | | Non-controlling
Interests | | Total
Equity |
| Balance as of May 31, 2019 | | | $ | 2,982 |
| | $ | 860,578 |
| | $ | 759,097 |
| | $ | (345,775 | ) | | $ | 1,276,882 |
| | $ | (147 | ) | | $ | 1,276,735 |
| | $ | 27,147 |
| | $ | 1,303,882 |
|
| Net loss | | | — |
| | — |
| | — |
| | (322,422 | ) | | (322,422 | ) | | — |
| | (322,422 | ) | | (1,657 | ) | | (324,079 | ) |
| Other comprehensive income | | | — |
| | — |
| | — |
| | — |
| | — |
| | 33 |
| | 33 |
| | — |
| | 33 |
|
| Patronage capital retirement | | | — |
| | (62,822 | ) | | — |
| | — |
| | (62,822 | ) | | — |
| | (62,822 | ) | |
|
| | (62,822 | ) |
| Other | | | (306 | ) | | — |
| | — |
| | — |
| | (306 | ) | | — |
| | (306 | ) | | 1,720 |
| | 1,414 |
|
| Balance as of August 31, 2019 | | | $ | 2,676 |
| | $ | 797,756 |
| | $ | 759,097 |
| | $ | (668,197 | ) | | $ | 891,332 |
| | $ | (114 | ) | | $ | 891,218 |
| | $ | 27,210 |
| | $ | 918,428 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| See accompanying notes to condensed consolidated financial statements. | |
| | | | | | | | | | | | | | | | | | | | |
| The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements. | | The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements. |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| | | | | | | | |
| | | Six Months Ended November 30, |
| (Dollars in thousands) | | 2017 | | 2016 |
| Cash flows from operating activities: | | | | |
| Net income | | $ | 187,738 |
| | $ | 263,043 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Amortization of deferred loan fees | | (6,149 | ) | | (6,024 | ) |
| Amortization of debt issuance costs and deferred charges | | 5,148 |
| | 4,619 |
|
| Amortization of discount on long-term debt | | 4,943 |
| | 4,666 |
|
| Amortization of issuance costs for bank revolving bank line of credit | | 2,768 |
| | 2,925 |
|
| Depreciation and amortization of fixed assets | | 3,769 |
| | 3,578 |
|
| Provision (benefit) for loan losses | | (602 | ) | | 2,666 |
|
| Results of operations of foreclosed assets | | — |
| | 1,661 |
|
| Derivative forward value gains | | (119,252 | ) | | (197,344 | ) |
| Changes in operating assets and liabilities: | | | | |
| Accrued interest receivable | | (5,277 | ) | | 520 |
|
| Accrued interest payable | | 5,609 |
| | 2,559 |
|
| Deferred income | | (133 | ) | | 1,784 |
|
| Other | | (7,589 | ) | | (5,711 | ) |
| Net cash provided by operating activities | | 70,973 |
| | 78,942 |
|
| | | | | |
| Cash flows from investing activities: | | | | |
| Advances on loans | | (4,185,985 | ) | | (3,925,089 | ) |
| Principal collections on loans | | 3,728,773 |
| | 3,295,412 |
|
| Net investment in fixed assets | | (6,437 | ) | | (11,294 | ) |
| Net cash proceeds from sale of foreclosed assets | | — |
| | 47,094 |
|
| Proceeds from foreclosed assets | | — |
| | 4,036 |
|
| Net proceeds from (investments in) time deposits | | 175,000 |
| | (300,000 | ) |
| Purchases of held-to-maturity investments | | (248,181 | ) | | — |
|
| Change in restricted cash | | 10,483 |
| | (17,644 | ) |
| Net cash used in investing activities | | (526,347 | ) | | (907,485 | ) |
| | | | | |
| Cash flows from financing activities: | | | | |
| Proceeds from short-term borrowings, net | | 181,501 |
| | 750,466 |
|
| Proceeds from short-term borrowings with original maturity greater than 90 days | | 570,060 |
| | 443,960 |
|
| Repayments of short term-debt with original maturity greater than 90 days | | (537,269 | ) | | (469,314 | ) |
| Payments for issuance costs for revolving bank lines of credit | | (2,402 | ) | | (2,478 | ) |
| Proceeds from issuance of long-term debt, net of issuance costs | | 625,021 |
| | 690,277 |
|
| Payments for retirement of long-term debt | | (203,819 | ) | | (555,874 | ) |
| Payments for issuance costs for subordinated deferrable debt | | — |
| | (68 | ) |
| Proceeds from issuance of members’ subordinated certificates | | 3,989 |
| | 1,660 |
|
| Payments for retirement of members’ subordinated certificates | | (23,340 | ) | | (3,020 | ) |
| Payments for retirement of patronage capital | | (44,667 | ) | | (41,510 | ) |
| Net cash provided by financing activities | | 569,074 |
| | 814,099 |
|
| Net increase (decrease) in cash and cash equivalents | | 113,700 |
| | (14,444 | ) |
| Beginning cash and cash equivalents | | 166,615 |
| | 204,540 |
|
| Ending cash and cash equivalents | | $ | 280,315 |
| | $ | 190,096 |
|
| | | | | |
| Supplemental disclosure of cash flow information: | | | | |
| Cash paid for interest | | $ | 374,098 |
| | $ | 349,965 |
|
| Cash paid for income taxes | | 152 |
| | 383 |
|
| | | | | |
| See accompanying notes to condensed consolidated financial statements. |
|
| | | | | | | | |
| | | Three Months Ended August 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Cash flows from operating activities: | | | | |
| Net income (loss) | | $ | 144,587 |
| | $ | (324,079 | ) |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Amortization of deferred loan fees | | (2,460 | ) | | (2,332 | ) |
| Amortization of debt issuance costs and deferred charges | | 2,172 |
| | 2,357 |
|
| Amortization of discount on long-term debt | | 2,876 |
| | 2,626 |
|
| Amortization of issuance costs for bank revolving lines of credit | | 1,118 |
| | 1,268 |
|
| Depreciation and amortization | | 1,819 |
| | 2,374 |
|
| Provision for credit losses | | 326 |
| | 30 |
|
| Gain on sale of land | | — |
| | (7,713 | ) |
| Unrealized gains on equity and debt securities | | (4,366 | ) | | (1,620 | ) |
| Derivative forward value losses | | (87,248 | ) | | 384,682 |
|
| Changes in operating assets and liabilities: | | | | |
| Accrued interest receivable | | 12,376 |
| | 485 |
|
| Accrued interest payable | | 42,546 |
| | 50,934 |
|
| Deferred income | | 383 |
| | (43 | ) |
| Other | | (10,102 | ) | | (9,160 | ) |
| Net cash provided by operating activities | | 104,027 |
| | 99,809 |
|
| | | | | |
| Cash flows from investing activities: | | | | |
| Advances on loans, net | | (226,245 | ) | | (382,936 | ) |
| Investment in fixed assets | | (837 | ) | | (3,087 | ) |
| Proceeds from sale of land | | — |
| | 21,618 |
|
| Purchase of trading securities | | (245,095 | ) | | — |
|
| Proceeds from sales and maturities of trading securities | | 30,097 |
| | — |
|
| Proceeds from redemption of equity securities | | — |
| | 25,000 |
|
| Purchases of held-to-maturity debt securities | | — |
| | (23,650 | ) |
| Proceeds from maturities of held-to-maturity debt securities | | — |
| | 19,533 |
|
| Net cash used in investing activities | | (442,080 | ) | | (343,522 | ) |
| | | | | |
| Cash flows from financing activities: | | | | |
| Proceeds from short-term borrowings, net | | 585,021 |
| | 355,750 |
|
| Proceeds from short-term borrowings with original maturity > 90 days | | 836,241 |
| | 679,062 |
|
| Repayments of short-term borrowings with original maturity > 90 days | | (829,756 | ) | | (614,892 | ) |
| Proceeds from issuance of long-term debt, net of discount and issuance costs | | 8,050 |
| | 94,256 |
|
| Payments for retirement of long-term debt | | (543,555 | ) | | (215,751 | ) |
| Payments for issuance costs for subordinated deferrable debt | | — |
| | (84 | ) |
| Proceeds from issuance of members’ subordinated certificates | | 3,257 |
| | 1,289 |
|
| Payments for retirement of members’ subordinated certificates | | (44,030 | ) | | (1,933 | ) |
| Net cash provided by financing activities | | 15,228 |
| | 297,697 |
|
| Net increase (decrease) in cash, cash equivalents and restricted cash | | (322,825 | ) | | 53,984 |
|
| Beginning cash, cash equivalents and restricted cash | | 680,019 |
| | 186,204 |
|
| Ending cash, cash equivalents and restricted cash | | 357,194 |
| | 240,188 |
|
| | | | | |
| Supplemental disclosure of cash flow information: | | | | |
| Cash paid for interest | | $ | 129,017 |
| | $ | 155,330 |
|
| | | | | |
| The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements. |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
| NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The Company
National Rural Utilities Cooperative Finance Corporation (“CFC”) is a member-owned cooperative association incorporated under the laws of the District of Columbia in April 1969. CFC’s principal purpose is to provide its members with financing to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC makes loans to its rural electric members so they can acquire, construct and operate electric distribution systems, electric generation and transmission (“power supply”) systems and related facilities. CFC also provides its members with credit enhancements in the form of letters of credit and guarantees of debt obligations. As a cooperative, CFC is owned by and exclusively serves its membership, which consists of not-for-profit entities or subsidiaries or affiliates of not-for-profit entities. CFC is exempt from federal income taxes.
Principles of Consolidation and Basis of Presentation and Use of Estimates
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and should be read in conjunction with the audited consolidated financial statements, and related notes thereto, included in CFC’s Annual Report on Form 10-K for the fiscal year ended May 31, 2017 (“2017 Form 10-K”). We believe that all necessary adjustments, which consisted only of normal recurring items, have been included in the accompanying financial statements to present fairly the results of the interim periods. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures. While management makes its best judgment, actual amounts or results could differ from these estimates. Our most significant estimates and assumptions involve determining the allowance for loan losses and the fair value of financial assets and liabilities. The results of operations in the interim financial statements is not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year ending May 31, 2018.
Principles of Consolidation
The accompanying condensedThese consolidated financial statements include the accounts of CFC, variable interest entities (“VIEs”) where CFC is the primary beneficiary and subsidiary entities created and controlled by CFC to hold foreclosed assets. CFC did not have any entities that held foreclosed assets as of November 30, 2017 or May 31, 2017. All intercompany balances and transactions have been eliminated. National Cooperative Services Corporation (“NCSC”) and Rural Telephone Finance Cooperative (“RTFC”) are VIEs whichthat are required to be consolidated by CFC. NCSC is a taxable member-owned cooperative that may provide financing to members of CFC, government or quasi-government entities which own electric utility systems that meet the Rural Electrification Act definition of “rural”,“rural,” and for-profit and nonprofit entities that are owned, operated or controlled by, or provide significant benefits to certain members of CFC. RTFC is a taxable Subchapter T cooperative association that provides financing for its rural telecommunications members and their affiliates. CFC has not had entities that held foreclosed assets since fiscal year 2017. All intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures during the period. Management’s most significant estimates and assumptions involve determining the allowance for credit losses and the fair value of financial assets and liabilities. Actual results could differ from these estimates. We believe these financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations in the interim financial statements are not necessarily indicative of results that may be expected for the full fiscal year. Certain reclassifications have been made to prior periods to conform to the current presentation. Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its consolidated entities.
Restricted CashRisks and Uncertainties
Restricted cash, which totaled $11 million and $22 million as of November 30, 2017 and May 31, 2017, respectively, consisted primarily of funds held in escrow. On July 1, 2016, CFC completedWe have considered the sale of Caribbean Asset Holdings, LLC (“CAH”), an entity that held foreclosed assets, to ATN VI Holdings, LLC. In connection with the sale, $16 millionimpact of the sale proceedsemergence in 2019 and continued spread of a novel strain of coronavirus that causes coronavirus disease 2019 (“COVID-19”), which was deposited into escrowdeclared a global pandemic by the World Health Organization (“WHO”) in March 2020, on our consolidated financial statements. Although the effects of COVID-19 and the response to fundthe virus have negatively impacted financial markets and overall economic conditions, we have been able to navigate the challenges of the pandemic reasonably well. We have been monitoring developments closely, and the future impact of COVID-19 on our operations is highly uncertain and cannot be predicted. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including, among others, the duration and severity of the COVID-19 pandemic, the ultimate impact on our members, potential indemnification claims for a periodfurther disruption and deterioration in the corporate debt markets and additional, or extended, federal, state and local government orders and regulations that might be imposed in response to the pandemic, all of 15 months following the closing. On September 27, 2017, we received a claim notice from the purchaser of CAH asserting potential indemnification claims and seeking funding from the escrow. On November 10, 2017, funds held in escrow totaling $13 million were released to CFC. The remaining $3 million remains in escrow for claims under evaluation for indemnification.which are uncertain.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
New Accounting Standards Adopted in Fiscal Year 2021
Fair Value Measurement—Changes to the Disclosure Requirements for Fair Value Measurement
On June 1, 2020, we adopted Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair ValueMeasurement, which removes, adds and modifies certain disclosure requirements on fair value measurements. The adoption of this guidance, which resulted only in certain changes to the fair value measurement disclosures presented in “Note 12—Fair Value Measurement” did not otherwise affect our consolidated financial statements.
Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments
On June 1, 2020, we adopted ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology for estimating credit losses with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) model. The incurred loss model delayed the recognition of credit losses until it was probable that a loss had occurred, while the CECL model requires the immediate recognition of expected credit losses over the contractual term, adjusted as appropriate for estimated prepayments, of financial instruments that fall within the scope of CECL at the date of origination or purchase of the financial instrument. The CECL model, which is applicable to the measurement of credit losses on financial assets measured at amortized cost and certain off-balance sheet credit exposures, affects our estimates of the allowance for credit losses for our loan portfolio and our off-balance sheet credit exposures related to unadvanced loan commitments and financial guarantees. In measuring lifetime expected credit losses, management is required to take into consideration relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount of the financial instrument.
The adoption of CECL resulted in an increase in our allowance for credit losses for our loan portfolio of $4 million and a corresponding decrease to retained earnings of $4 million recorded as a cumulative-effect adjustment. The impact on the allowance for credit losses for our off-balance sheet credit exposures related to unadvanced loan commitments and financial guarantees was not material. The increase in the allowance for credit losses for our loan portfolio was attributable to the transition to measuring the allowance based on expected credit losses over the remaining contractual term of loans in our portfolio as required under the CECL model, whereas the allowance under the incurred model did not consider the remaining contractual term of our loans. The transition adjustment was primarily driven by an increase in the allowances for CFC distribution and CFC power supply loans, which have a much longer remaining contractual term than the estimated loss emergence period of five years we used in estimating probable losses in our loan portfolio under the incurred loss model.
While the adoption of CECL had no impact on our earnings, subsequent to our adoption on June 1, 2020, lifetime expected credit losses for newly recognized loans, unadvanced loan commitments and financial guarantees, as well as changes during the period in our estimate of lifetime expected credit losses for existing financial instruments subject to CECL, will be recognized in earnings. In connection with our adoption of CECL, we have provided an update to certain of our significant accounting policies below under “Updates to Significant Accounting Policies.” We present the expanded credit quality disclosures required under CECL for financial instruments measured at amortized cost in “Note 4—Loans” and “Note 5—Allowance for Credit Losses.” Amounts in periods prior to our adoption of CECL on June 1, 2020, continue to be reported in accordance with previously applicable GAAP.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
New Accounting Standards Issued But Not Yet Adopted
Reference Rate Reform
On March 12, 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform(Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions for applying GAAP on contracts, hedging relationships and other transactions subject to modification due to the expected discontinuance of the London Interbank Offered Rate (“LIBOR”) and other reference rate reform changes to ease the potential accounting and financial burdens related to the expected transition in market reference rates. This guidance permits entities to elect not to apply certain modification accounting requirements to contracts affected by reference rate transition, if certain criteria are met. An entity that makes this election would not be required to remeasure modified contracts at the modification date or reassess a previous accounting determination. The guidance was effective upon issuance on March 12, 2020, and can generally be applied through December 31, 2022. We expect to apply certain of the practical expedients and are in the process of evaluating the timing and application of those elections. Based on our current assessment, we do not believe that the application of this guidance will have a material impact on our consolidated financial statements.
Updates to Significant Accounting Policies
Pursuant to our June 1, 2020 adoption of the CECL accounting standard, we have provided an update to the significant accounting policies presented below.
Loans to Members
We originate loans to members and classify loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff as held for investment. Loans classified as held for investment are reported based on the unpaid principal balance, net of principal charge-offs, and deferred loan origination costs.
As permitted by CECL, we elected to continue reporting accrued interest on loans separately on our consolidated balance sheets as a component of the line item accrued interest receivable rather than as a component of loans to member. Accrued interest receivable amounts generally represent three months or less of accrued interest on loans outstanding. Because our policy is to write off past due accrued interest receivable in a timely manner, we elected not to measure an allowance for credit losses for accrued interest receivable on loans outstanding, which totaled $86 million and $96 million as of August 31, 2020 and May 31, 2020, respectively. We also elected to exclude accrued interest receivable from the credit quality disclosures required under CECL.
Interest Income
Interest income on performing loans is accrued and recognized as interest income based on the contractual rate of interest.
Loan origination costs and nonrefundable loan fees that meet the definition of loan origination fees are deferred and recognized in interest income as yield adjustments over the period to maturity of the loan using the effective interest method.
Troubled Debt Restructurings
A loan modification is considered a troubled debt restructuring (“TDR”) if the borrower is experiencing financial difficulties and a concession is granted to the borrower that we would not otherwise consider. Under CECL, we are required to estimate an allowance for lifetime expected credit losses for TDR loans. As discussed below under “Allowance for Credit Losses—Loan Portfolio,” TDR loans are evaluated on an individual basis in estimating expected credit losses. Credit losses for anticipated TDRs are accounted for similarly to TDRs and are identified when there is a reasonable expectation that a TDR
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
will be executed with the borrower and when we expect the modification to affect the timing or amount of payments and/or the payment term.
We generally classify TDR loans as nonperforming and place the loan on nonaccrual status, although in many cases such loans were already classified as nonperforming prior to modification. These loans may be returned to performing status and the accrual of interest resumed if the borrower performs under the modified terms for an extended period of time, and we expect the borrower to continue to perform in accordance with the modified terms. In certain limited circumstances in which a TDR loan is current at the modification date, the loan may remain on accrual status at the time of modification.
Nonperforming Loans
We classify loans as nonperforming when contractual principal or interest is 90 days past due or when we believe the collection of principal and interest in full is not reasonably assured. When a loan is classified as nonperforming, we generally place the loan on nonaccrual status. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against current period interest income. Interest income on nonaccrual loans is subsequently recognized only upon the receipt of cash payments. However, if we believe the ultimate collectibility of the loan principal is in doubt, cash received is applied against the principal balance of the loan. Nonaccrual loans generally are returned to accrual status when principal and interest becomes and remains current for a specified period and repayment of the remaining contractual principal and interest is reasonably assured.
Charge-Offs
We charge off loans or a portion of a loan when we determine that the loan is uncollectible. The charge-off of uncollectible principal amounts result in a reduction to the allowance for credit losses for our loan portfolio. Recoveries of previously charged off principal amounts result in an increase to the allowance.
Allowance for Credit Losses—Loan Portfolio
We maintain an allowance for credit losses for our loan portfolio that represents management’s current estimate of expected credit losses over the remaining contractual term, adjusted as appropriate for estimated prepayments, of loans in our loan portfolio as of each balance sheet date. The allowance for our loan portfolio is reported on our consolidated balance sheet as a valuation account that is deducted from loans to members to present the net amount we expect to collect over the life of our loans. We are required to immediately recognize an allowance for expected credit losses upon origination of a loan. Adjustments to the allowance each period for changes in our estimate of lifetime expected credit losses for existing loans, or for newly originated loans, are recognized in earnings through the provision for credit losses presented on our consolidated statements of operations.
We estimate our allowance for lifetime expected credit losses for our loan portfolio using a using a probability of default/loss given default methodology. Our allowance for credit losses consists of a collective allowance and an asset-specific allowance. The collective allowance is established for loans in our portfolio that share similar risk characteristics and are therefore evaluated on a collective, or pool, basis in measuring expected credit losses. The asset-specific allowance is established for loans in our portfolio that do not share similar risk characteristics with other loans in our portfolio and are therefore evaluated on an individual basis in measuring expected credit losses. Expected credit losses are estimated based on historical experience, current conditions and forecasts, if applicable, that affect the collectibility of the reported amount.
Since inception in 1969, CFC has experienced limited defaults and losses as the utility sector generally tends to be less sensitive to changes in the economy than other sectors largely due to the essential nature of the service provided. The losses we have incurred were not tied to economic factors, but rather to distinct operating issues related to each borrower. Given that our loss experience has not correlated to specific underlying macroeconomic variables, such as U.S. unemployment rates or gross national domestic (“GDP”) growth, we have not made adjustments to our historical loss rates for any
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
forecasted period. We consider the need, however, to adjust our historical loss information for differences in the specific characteristics of our existing loan portfolio based on an evaluation of relative qualitative factors, such as differences in the composition of our loan portfolio, our underwriting standards, problem loan trends, the quality of our credit review function, the regulatory environment and other pertinent external factors.
Collective Allowance
We employ a quantitative methodology and a qualitative framework to measure the collective component of our allowance for expected credit losses. The first element in our quantitative methodology involves the segmentation of our loan into loan pools that share similar risk characteristics. We divide our portfolio into segments that reflect the member borrower type, which is based on the utility sector of the borrower because the key operational, infrastructure, regulatory, environmental, customer and financial risks of each sector are similar in nature. Our primary member borrower types consist of CFC electric distribution, CFC electric power supply, CFC statewide and associate, NCSC and RTFC telecommunications. Our portfolio segments align with the sectors generally seen in the utilities industry. We further stratify each portfolio into loan pools based on our internal borrower risk ratings, as our borrower risk ratings provide important information on the collectibility of each of our loan portfolio segments. We then apply loss factors, consisting of the probability of default and loss given default, to the scheduled loan-level amortization amounts over the life of the loans for each of our loan pools. Below we discuss the source and basis for the key inputs, which include borrower risk ratings and the loss factors, in measuring expected credit losses for our loan portfolio.
Borrower Risk Ratings: We evaluate each borrower and loan facility in our loan portfolio and assign internal borrower and loan facility risk ratings based on consideration of a number of quantitative and qualitative factors. Each risk rating is reassessed annually following the receipt of the borrower’s audited financial statements; however, interim risk-rating adjustments may occur as a result of updated information affecting a borrower’s ability to fulfill its obligations or other significant developments and trends. Our internally assigned borrower risk ratings are intended to assess the general credit worthiness of the borrower and probability of default. We use our internal borrower risk ratings, which we map to the equivalent credit ratings by external rating agencies, to differentiate risk within each of our portfolio segments and loan pools. We provide additional information on our borrower risk ratings below in “Note 4—Loans.”
Probability of Default: The probability of default, or default rate, represents the likelihood that a borrower will default over a particular time horizon. Because of our limited default history, we utilize third-party default data for the utility sector as a proxy to estimate default rates for each of our loan pools. The third-party default data provides historical default rates, based on credit ratings and remaining maturities of outstanding bonds, for the utility sector. Based on the mapping and alignment of our internal borrower risk ratings to equivalent credit ratings provided in the third-party utility default table, we apply the corresponding cumulative default rates to the scheduled amortization amounts over the remaining term of the loans in each of our loan pools.
Loss Given Default: The loss given default, or loss severity, represents the estimated loss, net of recoveries, on a loan that would be realized in the event of a borrower default. While we utilize third-party default data, we utilize our lifetime historical loss experience to estimate loss given default, or the recovery rate, for each of our loan portfolio segments. We believe our internal historical loss severity rates provide a more reliable estimate than third-party loss severity data due to the organizational structure and operating environment of rural utility cooperatives, our lending practice of generally requiring a senior security position on the assets and revenues of borrowers for long-term loans, the investment our member borrowers have in CFC and therefore the collaborative approach we generally take in working with members in the event that a default occurs.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In addition to the quantitative methodology used in our collective measurement of expected credit losses, management performs a qualitative evaluation and analyses of relevant factors, such as changes in risk-management practices, current and past underwriting standards, specific industry issues and trends and other subjective factors. Based on our assessment, we did not make a qualitative adjustment to the collective allowance for credit losses measured under our quantitative methodology as of August 31, 2020 or at adoption of CECL on June 1, 2020.
Asset-Specific Allowance
We generally consider nonperforming loans as well as loans that have been or are anticipated to be modified under a troubled debt restructuring for individual evaluation given the risk characteristics of such loans. Factors we consider in measuring the extent of expected credit loss include the payment status, the collateral value, the borrower’s financial condition, guarantor support, the probability of collecting scheduled principal and interest payments when due, anticipated modifications of payment structure or term for troubled borrowers, and recoveries if they can be reasonably estimated. We measure the expected credit loss as the difference between the amortized cost basis in the loan and the present value of the expected future cash flows from the borrower which is generally discounted at the loan’s effective interest rate, or the fair value of the collateral, if the loan is collateral dependent.
Reserve for Credit Losses—Off-Balance Sheet Credit Exposures
We also maintain a reserve for credit losses for our off-balance sheet credit exposures related to unadvanced loan commitments and financial guarantees. Because our business processes and credit risks associated with our off-balance sheet credit exposures are essentially the same as for our loans, we utilize similar processes to measure expected credit losses over the contractual period of our exposure to credit risk arising from these obligations. We include the reserve for expected credit losses for our off-balance sheet credit exposures as a component of other liabilities on our consolidated balance sheets.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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| NOTE 2—INTEREST INCOME AND INTEREST EXPENSE |
The following table presents the components of interest income, by interest-earning asset category, for the threetype, and six months ended November 30, 2017 and 2016.interest expense, by debt product type, presented on our consolidated statements of operations.
Table 2.1: Interest Income and Interest Expense | | | | | Three Months Ended November 30, | | Six Months Ended November 30, | | Three Months Ended August 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2017 |
| 2016 | | 2020 | | 2019 |
| Interest income by interest-earning asset type: | | | | | | | | | |
| Interest income: | | | | | |
Long-term fixed-rate loans(1) | | $ | 248,926 |
| | $ | 243,817 |
| | $ | 498,290 |
| | $ | 487,945 |
| | $ | 263,184 |
| | $ | 258,528 |
|
| Long-term variable-rate loans | | 6,097 |
| | 4,987 |
| | 11,960 |
| | 9,514 |
| | 4,400 |
| | 9,756 |
|
| Line of credit loans | | 8,588 |
| | 5,553 |
| | 17,295 |
| | 11,519 |
| | 8,242 |
| | 16,033 |
|
TDR loans(2) | | 222 |
| | 231 |
| | 448 |
| | 449 |
| |
Other income, net(3) | | (306 | ) | | (281 | ) | | (538 | ) | | (565 | ) | |
| Troubled debt restructuring (“TDR”) loans | | | 207 |
| | 206 |
|
Other, net(2) | | | (335 | ) | | (334 | ) |
| Total loans | | 263,527 |
| | 254,307 |
| | 527,455 |
| | 508,862 |
| | 275,698 |
| | 284,189 |
|
| Cash, time deposits and investment securities | | 2,296 |
| | 2,849 |
| | 4,283 |
| | 5,129 |
| | 3,886 |
| | 5,826 |
|
| Total interest income | | $ | 265,823 |
| | $ | 257,156 |
| | $ | 531,738 |
| | $ | 513,991 |
| | 279,584 |
| | 290,015 |
|
| | | | | | |
Interest expense:(3)(4) | | | | | |
| Short-term borrowings | | | 4,341 |
| | 22,822 |
|
| Medium-term notes | | | 29,887 |
| | 32,076 |
|
| Collateral trust bonds | | | 62,593 |
| | 65,381 |
|
| Guaranteed Underwriter Program notes payable | | | 42,413 |
| | 40,433 |
|
| Farmer Mac notes payable | | | 13,933 |
| | 25,074 |
|
| Other notes payable | | | 87 |
| | 254 |
|
| Subordinated deferrable debt | | | 12,890 |
| | 12,882 |
|
| Subordinated certificates | | | 13,832 |
| | 14,349 |
|
| Total interest expense | | | 179,976 |
| | 213,271 |
|
| | | | | | |
| Net interest income | | | $ | 99,608 |
| | $ | 76,744 |
|
____________________________
(1)Includes loan conversion fees, which are generally deferred and recognized asin interest income over the period to maturity using the effective interest method.
(2)Troubled debt restructuring (“TDR”) loans.
(3)Consists of late payment fees, commitment fees and net amortization of deferred loan fees and loan origination costs.
Deferred income of $68 million and $74 million as of November 30, 2017 and May 31, 2017, respectively, consists primarily of deferred loan conversion fees totaling $63 million and $68 million, respectively.
Interest Expense
The following table presents interest expense, by debt product type, for the three and six months ended November 30, 2017 and 2016.
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended November 30, | | Six Months Ended November 30, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Interest expense by debt product type:(1)(2) | | | | | | | | |
| Short-term borrowings | | $ | 10,116 |
| | $ | 5,409 |
| | $ | 20,655 |
| | $ | 10,291 |
|
| Medium-term notes | | 27,544 |
| | 24,705 |
| | 52,660 |
| | 48,290 |
|
| Collateral trust bonds | | 85,321 |
| | 84,951 |
| | 170,598 |
| | 170,000 |
|
| Guaranteed Underwriter Program notes payable | | 35,688 |
| | 36,216 |
| | 71,290 |
| | 71,988 |
|
| Farmer Mac notes payable | | 11,947 |
| | 7,587 |
| | 23,437 |
| | 14,486 |
|
| Other notes payable | | 391 |
| | 458 |
| | 781 |
| | 916 |
|
| Subordinated deferrable debt | | 9,417 |
| | 9,411 |
| | 18,833 |
| | 18,837 |
|
| Subordinated certificates | | 14,746 |
| | 14,917 |
| | 29,647 |
| | 29,926 |
|
| Total interest expense | | $ | 195,170 |
| | $ | 183,654 |
| | $ | 387,901 |
| | $ | 364,734 |
|
____________________________
(1)(3) Includes amortization of debt discounts and debt issuance costs, which are generally deferred and recognized as interest expense over the period to maturity using the effective interest method. Issuance costs related to dealer commercial paper, however, are recognized asin interest expense immediately as incurred.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(2)(4) Includes fees related to funding arrangements, such as up-front fees paid to banks participating in our committed bank revolving line of credit agreements. DependingBased on the nature of the fee, amounts may befees, the amount is either recognized immediately as incurred or deferred and recognized asin interest expense ratably over the term of the arrangement or recognized immediately as incurred.arrangement.
Recently Issued But Not Yet Adopted Accounting Standards and Tax Reform
Tax Cuts and Jobs Act
On December 22, 2017, the President of the United States signed and enacted into law H.R. 1, the Tax Cuts and Jobs Act (“The Act”), which, except for certain provisions, is effective for tax years beginning on or after January 1, 2018. The Act significantly changes existing U.S. tax law and includes numerous provisions that will affect businesses. One of the primary changes is a reduction in the federal statutory corporate U.S.Deferred income tax rate to 21% percent from 35% and other changes that impact business-related exclusions, deductions and credits. CFC is exempt from federal income tax under Section 501(c)(4) of the Internal Revenue Code. NCSC is subject to federal income tax; however, NCSC’s annual taxable income and federal income tax is not material to our consolidated results of operations, financial position or liquidity. RTFC is subject to federal income tax; however, the allocation of patronage capital to its members is a deduction that historically has resulted in a significant reduction in its annual taxable income and federal income tax. Therefore, we do not expect The Act to have a material impactreported on our consolidated resultsbalance sheets of operations, financial condition or liquidity.
Derivatives$57 million and Hedging—Targeted Improvements$59 million as of August 31, 2020 and May 31, 2020, respectively, consists primarily of deferred loan conversion fees, which totaled $51 million and $53 million as of each respective date. Deferred loan conversion fees are recognized in interest income over the period to Accounting for Hedging Activities
In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging—Targeted Improvements to Accounting for Hedging Activities, which is intended to simplify and amend the application of hedge accounting to more clearly portray the economics of an entity’s risk management strategies in its financial statements. The new guidance will make more financial and nonfinancial hedging strategies eligible for hedge accounting, reduce complexity in fair value hedges of interest rate risk and eases certain documentation and assessment requirements of hedge effectiveness. It also changes how companies assess effectiveness and amends the presentation and disclosure requirements. The guidance is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted in any interim period or fiscal year beforematurity using the effective date. The guidance is effective for us beginning June 1, 2019. We currently do not apply hedge accounting. If we continue to not apply hedge accounting to our derivatives, the adoption of the new guidance will have no impact on our consolidated financial statements.
Receivables—Nonrefundable Fees and Other Cost
In March 2017, FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs,which shortens the amortization period for the premium on certain purchased callable debt securities, that have a set call date and price, to the earliest call date. The guidance is effective for public entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This update is effective for us beginning June 1, 2019. The adoption of this guidance will change the amortization period to the earliest call date for our purchased callable debt securities held at a premium; however, we do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
Statement of Cash Flows—Restricted Cash
In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows—Restricted Cash, which requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for public entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This update is effective for us beginning June
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1, 2018. The adoption of this guidance will change the presentation of restricted cash presented on our statement of cash flows; however, it will have no impact on our consolidated results of operations, financial condition or liquidity.
Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the accounting for credit losses on certain financial assets to an expected loss model from the incurred loss model currently in use. The new guidance will likely result in earlier recognition of credit losses based on measuring the expected credit losses over the estimated life of financial assets held at each reporting date. The expected loss model will be the basis for determining the allowance for credit losses for loans and leases, unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured at amortized cost. In addition, the new guidance modifies the other-than-temporary impairment model for available-for-sale debt securities to require the recognition of credit losses through a valuation allowance, which allows for the reversal of credit impairments in future periods. The ASU will also require enhanced disclosures to help users of financial statements better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The new standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. This update is effective for us beginning June 1, 2020. Upon adoption, we will be required to record a cumulative-effect adjustment to retained earnings. The impact on our consolidated financial statements from the adoption of this new guidance will depend on the composition and risk profile of our loan portfolio as of the date of adoption. We do not expect to early adopt this guidance.
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which amends certain aspects of the recognition, measurement, presentation and disclosure of certain financial instruments, including equity investments and liabilities measured at fair value under the fair value option. The guidance also updates fair value presentation and disclosure requirements for financial instruments measured at amortized cost. The ASU requires investments in equity securities that do not result in consolidation and are not accounted for under the equity method to be measured at fair value with changes in the fair value recognized through net income, unless one of two available exceptions apply. For financial liabilities where the fair value option has been elected, the portion of the total change in fair value caused by changes in the company’s own credit risk is required to be presented separately in OCI. The classification and measurement guidance is effective for public entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This update will be effective for us beginning June 1, 2018. Upon adoption, we will be required to reclassify the gain (loss) related to our equity investment securities classified as available-for-sale from accumulated other comprehensive income (“AOCI”) to retained earnings as a cumulative-effect adjustment and begin recording future changes in fair value through earnings. We had a gain of $11 million recorded in AOCI for our available-for-sale equity investments as of November 30, 2017. The impact on our consolidated financial statements at adoption will depend on the net unrealized gains (losses) recorded in AOCI for these equity investments as of the date of adoption.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which modifies the guidance used to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other guidance. The new guidance is effective for us beginning June 1, 2018. Because the scope of the guidance explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, securities, and derivatives, which account for the substantial majority of our revenues, we do not expect that the adoption of the guidance will have a material impact, if any, on our consolidated financial statements.method.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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NOTE 2—VARIABLE INTEREST ENTITIES |
NCSC and RTFC meet the definition of a VIE because they do not have sufficient equity investment at risk to finance their activities without financial support. CFC is the primary source of funding for NCSC and the sole source of funding for RTFC. Under the terms of management agreements, CFC manages the business operations of NCSC and RTFC. CFC also unconditionally guarantees full indemnification for any loan losses of NCSC and RTFC pursuant to guarantee agreements with each company. CFC earns management and guarantee fees from its agreements with NCSC and RTFC.
NCSC and RTFC creditors have no recourse against CFC in the event of a default by NCSC and RTFC, unless there is a guarantee agreement under which CFC has guaranteed NCSC or RTFC debt obligations to a third party. The following table provides information on incremental consolidated assets and liabilities of VIE’s included in CFC’s condensed consolidated financial statements, after applying intercompany eliminations, as of November 30, 2017 and May 31, 2017.
|
| | | | | | | | |
| (Dollars in thousands) | | November 30, 2017 | | May 31, 2017 |
| Total loans outstanding | | $ | 1,111,438 |
| | $ | 968,343 |
|
| Other assets | | 10,477 |
| | 10,157 |
|
| Total assets | | $ | 1,121,915 |
| | $ | 978,500 |
|
| | | | | |
| Long-term debt | | $ | 10,000 |
| | $ | 10,000 |
|
| Other liabilities | | 38,202 |
| | 36,899 |
|
| Total liabilities | | $ | 48,202 |
| | $ | 46,899 |
|
The following table provides information on CFC’s credit commitments to NCSC and RTFC, and its potential exposure to loss as of November 30, 2017 and May 31, 2017.
|
| | | | | | | | |
| (Dollars in thousands) | | November 30, 2017 |
| May 31, 2017 |
| CFC credit commitments | | $ | 5,500,000 |
| | $ | 5,500,000 |
|
| Outstanding commitments: | | | | |
Borrowings payable to CFC(1) | | 1,075,319 |
| | 931,686 |
|
| CFC third-party guarantees | | 16,801 |
| | 14,697 |
|
| Other credit enhancements | | 19,052 |
| | 20,963 |
|
| Total credit enhancements | | 35,853 |
| | 35,660 |
|
| Total outstanding commitments | | 1,111,172 |
| | 967,346 |
|
| CFC available credit commitments | | $ | 4,388,828 |
| | $ | 4,532,654 |
|
____________________________
(1) Borrowings payable to CFC are eliminated in consolidation.
CFC loans to NCSC and RTFC are secured by all assets and revenues of NCSC and RTFC. CFC’s maximum potential exposure for the credit enhancements totaled $39 million. The maturities for obligations guaranteed by CFC extend through 2031.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
| NOTE 3—INVESTMENT SECURITIES |
We maintain a portfolio of debt and equity securities that is intended to serve as a supplemental source of liquidity. We generally record purchases and sales of securities on a trade-date basis. The accounting and measurement framework for investmentthe trade date. Our current equity security holdings have readily determinable fair values. Therefore, we report these securities differs depending on the security classification. We currently classify and account for our investment securities as either available for sale (“AFS”) or held to maturity (“HTM”) based on our investment strategy and management’s assessment of our intent and ability to hold the securities until maturity. Securities that we may sell prior to maturity in response to changes in our investment strategy, liquidity needs, credit risk mitigating considerations, market risk profile or for other reasons are classified as AFS. Securities that we have the positive intent and ability to hold until maturity are classified as HTM.
We report securities classified as AFS on our condensed consolidated balance sheets at fair value with unrealized gains or losses recordedchanges in fair value recognized in earnings as a component of accumulated other comprehensivenon-interest income (“AOCI”). We report securities classified as HTM onin our condensed consolidated balance sheets at amortized cost. Interest income on fixed-income securities, including amortizationstatements of premiums and accretion of discounts, is generally recognized overoperations. In the contractual life of the securities based on the effective yield method.
We did not have any securities classified as HTM as of May 31, 2017. During the secondfourth quarter of fiscal year 2018,2020, we commenced the purchase of additional investment securities, consisting primarily of certificates of deposit, commercial paper, corporatetransferred our debt securities commercial mortgage-backedfrom held-to-maturity to trading. As a result, our debt securities (“MBS”)were classified as trading as of both August 31, 2020 and other asset-backedMay 31, 2020. Debt securities (“ABS”). We have the positive intent and ability to hold these securities to maturity. As such, we have classified them as held to maturitytrading are reported at fair value with changes in fair value recognized in earnings as a component of non-interest income on our condensed consolidated balance sheet.statements of operations.
Pursuant to our investment policy guidelines, all fixed-income securities, at the time of purchase, must be rated at least investment grade based on external credit ratings, when available, or the corresponding equivalent, when not available. Securities rated investment grade, that is those rated Baa3 or higher by Moody’s Investors Service (“Moody’s”) or BBB- or higher by S&P Global Ratings (“S&P”), are generally considered by the rating agencies to be of lower credit risk than non-investment grade securities.
Amortized Cost and Fair Value of InvestmentEquity Securities
The following tables presenttable presents the amortized costcomposition of our equity security holdings and the fair value our investment securities and the corresponding gross unrealized gains and losses, by classification category and major security type, as of November 30, 2017August 31, 2020 and May 31, 2017.2020.
Table 3.1: Investments in Equity Securities, at Fair Value
|
| | | | | | | | |
| (Dollars in thousands) | | August 31, 2020 | | May 31, 2020 |
| Equity securities, at fair value: | | | | |
| Farmer Mac—Series A and Series C non-cumulative preferred stock | | $ | 57,376 |
| | $ | 55,640 |
|
| Farmer Mac—Class A common stock | | 4,890 |
| | 5,095 |
|
| Total equity securities, at fair value | | $ | 62,266 |
| | $ | 60,735 |
|
We recognized net unrealized gains on our equity securities of $2 million for both the three months ended August 31, 2020 and the three months ended August 31, 2019.
On September 19, 2020, Farmer Mac redeemed all of the outstanding shares of its 5.875% Series A non-cumulative preferred stock at a redemption price of $25.00 per share, plus any declared and unpaid dividends through and including the redemption date. We held 1.2 million shares of Farmer Mac’s Series A non-cumulative preferred stock at an amortized cost of $25 per share as of the redemption date, which was equal to the per share redemption price.
Debt Securities
The following table presents the composition of our debt security holdings and the fair value as of August 31, 2020 and May 31, 2020.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| | | November 30, 2017 |
| (Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Available for sale: | | | | | | | | |
| Farmer Mac—Series A Non-Cumulative Preferred Stock | | $ | 30,000 |
| | $ | 1,032 |
| | $ | — |
| | $ | 31,032 |
|
| Farmer Mac—Series B Non-Cumulative Preferred Stock | | 25,000 |
| | 1,924 |
| | — |
| | 26,924 |
|
| Farmer Mac—Series C Non-Cumulative Preferred Stock | | 25,000 |
| | 2,750 |
| | — |
| | 27,750 |
|
| Farmer Mac—Class A Common Stock | | 538 |
| | 5,167 |
| | — |
| | 5,705 |
|
| Total investment securities, available-for-sale | | 80,538 |
| | 10,873 |
| | — |
| | 91,411 |
|
| | | | | | | | | |
| Held to maturity: | | | | | | | | |
| Certificates of deposit | | 4,146 |
| | 1 |
| | (1 | ) | | 4,146 |
|
| Commercial paper | | 7,196 |
| | 1 |
| | (1 | ) | | 7,196 |
|
| Corporate bonds | | 210,099 |
| | 5 |
| | (872 | ) | | 209,232 |
|
| Commercial MBS, non-agency | | 4,041 |
| | — |
| | (3 | ) | | 4,038 |
|
Other ABS(1) | | 22,673 |
| | — |
| | (28 | ) | | 22,645 |
|
| Total investment securities, held-to-maturity | | 248,155 |
| | 7 |
| | (905 | ) | | 247,257 |
|
| | | | | | | | | |
| Total investment securities | | $ | 328,693 |
| | $ | 10,880 |
|
| $ | (905 | ) |
| $ | 338,668 |
|
____________________________
(1)Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.Table 3.2: Investments in Debt Securities, at Fair Value
|
| | | | | | | | | | | | | | | | |
| | | May 31, 2017 |
| (Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Available for sale:
| | | | | | | | |
| Farmer Mac—Series A Non-Cumulative Preferred Stock | | $ | 30,000 |
| | $ | 1,585 |
| | $ | — |
| | $ | 31,585 |
|
| Farmer Mac—Series B Non-Cumulative Preferred Stock | | 25,000 |
| | 1,940 |
| | — |
| | 26,940 |
|
| Farmer Mac—Series C Non-Cumulative Preferred Stock | | 25,000 |
| | 4,150 |
| | — |
| | 29,150 |
|
| Farmer Mac—Class A Common Stock | | 538 |
| | 4,341 |
| | — |
| | 4,879 |
|
| Total investment securities, available-for-sale | | $ | 80,538 |
| | $ | 12,016 |
| | $ | — |
| | $ | 92,554 |
|
For additional information on the unrealized gains (losses) losses recorded on our available-for-sale investment securities, see “Note 9—Equity—Accumulated Other Comprehensive Income.”
Investment Securities in Gross Unrealized Loss Position
An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. The following table presents the fair value and gross unrealized losses for investments in a gross loss position, aggregated by security type, and the length of time the securities have been in a continuous unrealized loss position as of November 30, 2017. The securities are segregated between investments that have been in a continuous unrealized loss position for less than twelve months and twelve months or more based on the point in time that the fair value declined below the amortized cost basis. We did not have any investment securities in a gross unrealized loss position as of May 31, 2017.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | November 30, 2017 | |
| | | Unrealized Loss Position Less than 12 Months | | Unrealized Loss Position 12 Months or Longer | | Total | | | | | | | |
| (Dollars in thousands) | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | August 31, 2020 | | May 31, 2020 |
| Held to maturity: | | | | | | | | | | | | | |
| Debt securities, at fair value: | | | | | |
| Certificates of deposit | | $ | 1,898 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | 1,898 |
| | $ | (1 | ) | | $ | 5,007 |
| | $ | 5,585 |
|
| Commercial paper | | 5,594 |
| | (1 | ) | | — |
| | — |
| | 5,594 |
| | (1 | ) | | 5,993 |
| | — |
|
| Corporate bonds | | 200,170 |
| | (872 | ) | | — |
| | — |
| | 200,170 |
| | (872 | ) | |
| Commercial MBS, non-agency | | 4,038 |
| | (3 | ) | | — |
| | — |
| | 4,038 |
| | (3 | ) | |
| Corporate debt securities | | | 454,286 |
| | 253,153 |
|
| Commercial mortgage-backed securities (“MBS”): | | | | | |
| Agency | | | 7,703 |
| | 7,655 |
|
| Non-agency | | | 1,321 |
| | 3,207 |
|
| Total commercial MBS | | | 9,024 |
| | 10,862 |
|
| U.S. state and municipality debt securities | | | 8,423 |
| | 8,296 |
|
Other asset-backed securities(1) | | 22,645 |
| | (28 | ) | | — |
| | — |
| | 22,645 |
| | (28 | ) | | 44,793 |
| | 31,504 |
|
| Total | | $ | 234,345 |
| | $ | (905 | ) | | $ | — |
| | $ | — |
| | $ | 234,345 |
| | $ | (905 | ) | |
| Total debt securities, at fair value | | | $ | 527,526 |
| | $ | 309,400 |
|
____________________________
(1)Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.
Other-Than-Temporary Impairment
We conduct periodic reviews of allsold debt investment securities with unrealized lossestotaling $3 million and realized a gain related to evaluate whether the impairment is other than temporary. The number of individual securities in an unrealized loss position was 170 as of November 30, 2017. We have assessed each security with gross unrealized losses included in the above table for credit impairment. As part of that assessment, we concluded that the unrealized losses are primarily driven by changes in market interest rates rather than by adverse changes in the credit quality of these securities. Based on our assessment, we expect to recover the entire amortized cost basissale of these securities as we do not intend to sell any of the securities and believe that it is more likelyless than not that we will not be required to sell prior to recovery of the amortized cost basis. Accordingly, we currently consider the impairment of these securities to be temporary.
Contractual Maturity and Yield
The following table presents, by major security type, the remaining contractual maturity based on amortized cost and fair value as of November 30, 2017 of our HTM investment securities. Because borrowers may have the right to call or prepay certain obligations, the expected maturities of our investments may differ from the scheduled contractual maturities presented below.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | |
| | | November 30, 2017 |
| (Dollars in thousands) | | Due in 1 Year or Less | | Due > 1 Year through 5 Years | | Due > 5 Years through 10 Years | | Due >10 Years | | Total |
| Amortized cost: | | | | | | | | | | |
| Certificates of deposit | | $ | 4,146 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,146 |
|
| Commercial paper | | 7,196 |
| | — |
| | — |
| | — |
| | 7,196 |
|
| Corporate bonds | | — |
| | 193,477 |
| | 16,622 |
| | — |
| | 210,099 |
|
| Commercial MBS, non-agency | | — |
| | — |
| | — |
| | 4,041 |
| | 4,041 |
|
Other asset-backed securities(1) | | — |
| | 20,681 |
| | 1,992 |
| | — |
| | 22,673 |
|
| Total | | $ | 11,342 |
| | $ | 214,158 |
| | $ | 18,614 |
| | $ | 4,041 |
| | $ | 248,155 |
|
| | | | | | | | | | | |
| Fair value: | | | | | | | | | | |
| Certificates of deposit | | $ | 4,146 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,146 |
|
| Commercial paper | | 7,196 |
| | — |
| | — |
| | — |
| | 7,196 |
|
| Corporate bonds | | — |
| | 192,677 |
| | 16,555 |
| | — |
| | 209,232 |
|
| Commercial MBS, non-agency | | — |
| | — |
| | — |
| | 4,038 |
| | 4,038 |
|
Other ABS(1) | | — |
| | 20,653 |
| | 1,992 |
| | — |
| | 22,645 |
|
| Total | | $ | 11,342 |
| | $ | 213,330 |
| | $ | 18,547 |
| | $ | 4,038 |
| | $ | 247,257 |
|
| | | | | | | | | | | |
Weighted average coupon(2) | | 0.60 | % | | 2.68 | % | | 2.95 | % | | 2.20 | % | | 2.60 | % |
____________________________
(1)Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.
(2)Calculated based on the weighted average coupon rate, which excludes the impact of amortization of premium and accretion of discount.
The average contractual maturity and weighted average coupon of our HTM investment securities was four years and 2.60%, respectively, as of November 30, 2017. The average credit rating of these securities, based on their lowest credit rating by Moody’s and S&P was A3 and A-, respectively, as of November 30, 2017.
Realized Gains and Losses
We have not sold any of our investment securities$1 million during the three and six months ended November 30, 2017 and 2016, and therefore have not recorded any realizedAugust 31, 2020. We recognized net unrealized gains or losses.on our debt securities of $3 million for the three months ended August 31, 2020.
|
|
NOTE 4—LOANS AND COMMITMENTS |
Loans,We segregate our loan portfolio into portfolio segments based on the member class of the borrower, which are classified as held for investment, are carriedconsists of CFC distribution, CFC power supply, CFC statewide and associate, NCSC and RTFC. We offer both long-term and line of credit loan loans to our borrowers. Under our long-term loan facilities, a borrower may select a fixed interest rate or a variable interest rate at the time of each loan advance. Line of credit loans are revolving loan facilities and generally have a variable interest rate.
Loans to Members
Loans to members consists of total loans outstanding, which reflects the unpaid principal balance, net of unamortizedcharge-offs and recoveries, of loans and deferred loan origination costs. The following table presents loans outstanding,to members and unadvanced loan commitments, by member class and by loan type, and by member class, as of November 30, 2017August 31, 2020 and May 31, 2017.2020.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 4.1: Loans to Members by Member Class and Loan Type
| | | | | November 30, 2017 | | May 31, 2017 | | August 31, 2020 | | May 31, 2020 |
| (Dollars in thousands) | | Loans Outstanding | | Unadvanced Commitments(1) | | Loans Outstanding | | Unadvanced Commitments(1) | | Loans Outstanding | | Unadvanced Commitments(1) | | Loans Outstanding | | Unadvanced Commitments(1) |
| Loan type: | | | | | | | | | |
| Long-term loans: | | | | | | | | | |
| Fixed rate | | $ | 22,415,833 |
| | $ | — |
| | $ | 22,136,690 |
| | $ | — |
| |
| Variable rate | | 906,453 |
| | 4,950,905 |
| | 847,419 |
| | 4,802,319 |
| |
| Total long-term loans | | 23,322,286 |
| | 4,950,905 |
| | 22,984,109 |
| | 4,802,319 |
| |
| Lines of credit | | 1,491,256 |
| | 7,575,116 |
| | 1,372,221 |
| | 7,772,655 |
| |
| Total loans outstanding | | 24,813,542 |
| | 12,526,021 |
| | 24,356,330 |
| | 12,574,974 |
| |
| Deferred loan origination costs |
| 11,149 |
|
| — |
|
| 10,714 |
|
| — |
| |
| Loans to members |
| $ | 24,824,691 |
|
| $ | 12,526,021 |
|
| $ | 24,367,044 |
|
| $ | 12,574,974 |
| |
| | | | | | | | | | |
| Member class: | | | | | | | | | | | | | | | | |
| CFC: | | | | | | | | | | | | | | | | |
| Distribution | | $ | 19,230,740 |
| | $ | 8,098,698 |
| | $ | 18,825,366 |
| | $ | 8,295,146 |
| | $ | 21,012,216 |
| | $ | 8,970,802 |
| | $ | 20,769,653 |
| | $ | 8,992,457 |
|
| Power supply | | 4,414,257 |
| | 3,412,557 |
| | 4,504,791 |
| | 3,276,113 |
| | 4,730,101 |
| | 3,673,711 |
| | 4,731,506 |
| | 3,409,227 |
|
| Statewide and associate | | 57,107 |
| | 127,622 |
| | 57,830 |
| | 144,406 |
| | 97,343 |
| | 155,041 |
| | 106,498 |
| | 153,626 |
|
| Total CFC | | 23,702,104 |
| | 11,638,877 |
| | 23,387,987 |
| | 11,715,665 |
| | 25,839,660 |
| | 12,799,554 |
| | 25,607,657 |
| | 12,555,310 |
|
| NCSC | | 739,707 |
| | 591,119 |
| | 613,924 |
| | 584,944 |
| | 681,321 |
| | 557,550 |
| | 697,862 |
| | 551,674 |
|
| RTFC | | 371,731 |
| | 296,025 |
| | 354,419 |
| | 274,365 |
| | 396,118 |
| | 297,538 |
| | 385,335 |
| | 281,642 |
|
| Total loans outstanding | | 24,813,542 |
| | 12,526,021 |
| | 24,356,330 |
| | 12,574,974 |
| |
Total loans outstanding(2) | | | 26,917,099 |
| | 13,654,642 |
| | 26,690,854 |
| | 13,388,626 |
|
| Deferred loan origination costs | | 11,149 |
| | — |
| | 10,714 |
| | — |
| | 11,778 |
| | — |
| | 11,526 |
| | — |
|
| Loans to members | | $ | 24,824,691 |
| | $ | 12,526,021 |
| | $ | 24,367,044 |
| | $ | 12,574,974 |
| | $ | 26,928,877 |
| | $ | 13,654,642 |
| | $ | 26,702,380 |
| | $ | 13,388,626 |
|
| | | | | | | | | | |
| Loan type: | | | | | | | | | |
| Long-term loans: | | | | | | | | | |
| Fixed rate | | | $ | 24,817,328 |
| | $ | — |
| | $ | 24,472,003 |
| | $ | — |
|
| Variable rate | | | 695,400 |
| | 5,461,029 |
| | 655,704 |
| | 5,458,676 |
|
| Total long-term loans | | | 25,512,728 |
| | 5,461,029 |
| | 25,127,707 |
| | 5,458,676 |
|
| Lines of credit | | | 1,404,371 |
| | 8,193,613 |
| | 1,563,147 |
| | 7,929,950 |
|
Total loans outstanding(2) | | | 26,917,099 |
| | 13,654,642 |
| | 26,690,854 |
| | 13,388,626 |
|
| Deferred loan origination costs | |
| 11,778 |
|
| — |
|
| 11,526 |
|
| — |
|
| Loans to members | |
| $ | 26,928,877 |
|
| $ | 13,654,642 |
|
| $ | 26,702,380 |
|
| $ | 13,388,626 |
|
____________________________
(1)The interest rate on unadvanced loan commitments is not set until an advance is made; therefore, all unadvanced long-term unadvanced loan commitments are reported as variable-rate.variable rate. However, the borrower may select either a fixed or a variable rate when an advance onis drawn under a commitment is made.loan commitment.
(2) Represents the unpaid principal balance, net of charge-offs and recoveries, of loans as of the end of each period.
Unadvanced Loan Commitments
Unadvanced loan commitments represent approved and executed loan contracts for which funds have not been advanced to borrowers. The following table summarizesdisplays, by loan type, the available balance under unadvanced loan commitments as of November 30, 2017August 31, 2020, and the related maturities byin each fiscal year during the five fiscal-year period ended May 31, 2025, and thereafter by loan type:thereafter.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 4.2: Unadvanced Loan Commitments | | | | | Available Balance | | Notional Maturities of Unadvanced Loan Commitments | | Available Balance | | Notional Maturities of Unadvanced Loan Commitments |
| (Dollars in thousands) | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter |
| Line of credit loans | | $ | 7,575,116 |
|
| $ | 342,159 |
|
| $ | 4,343,222 |
|
| $ | 641,613 |
|
| $ | 950,998 |
|
| $ | 773,772 |
|
| $ | 523,352 |
| | $ | 8,193,613 |
|
| $ | 487,556 |
|
| $ | 4,047,076 |
|
| $ | 1,357,059 |
|
| $ | 1,063,694 |
|
| $ | 1,079,137 |
|
| $ | 159,091 |
|
| Long-term loans | | 4,950,905 |
|
| 215,806 |
|
| 986,952 |
|
| 649,436 |
|
| 676,899 |
|
| 1,885,338 |
|
| 536,474 |
| | 5,461,029 |
|
| 312,622 |
|
| 1,273,237 |
|
| 906,698 |
|
| 1,633,259 |
|
| 1,018,758 |
|
| 316,455 |
|
| Total | | $ | 12,526,021 |
|
| $ | 557,965 |
|
| $ | 5,330,174 |
|
| $ | 1,291,049 |
|
| $ | 1,627,897 |
|
| $ | 2,659,110 |
|
| $ | 1,059,826 |
| | $ | 13,654,642 |
|
| $ | 800,178 |
|
| $ | 5,320,313 |
|
| $ | 2,263,757 |
|
| $ | 2,696,953 |
|
| $ | 2,097,895 |
|
| $ | 475,546 |
|
Unadvanced line of credit commitments accounted for 60% of total unadvanced loan commitments as of November 30, 2017,August 31, 2020, while unadvanced long-term loan commitments accounted for 40% of total unadvanced loan commitments. Unadvanced line of credit commitments are typically revolving facilities for periods not to exceed five years. Unadvanced
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
line of credit commitments generally serve as supplemental back-up liquidity to our borrowers. Historically, borrowers have not drawn the full commitment amount for line of credit facilities, and we have experienced a very low utilization rate on line of credit loan facilities regardless of whether or not we are obligated to fund the facility where a material adverse change exists.
Our unadvanced long-term loan commitments have a five-year draw period under which a borrower may advancedraw funds prior to the expiration of the commitment. We expect that the majority of the long-term unadvanced loan commitments of $4,951$5,461 million will be advanced prior to the expiration of the commitment.
Because we historically have experienced a very low utilization rate on line of credit loan facilities, which account for the majority of our total unadvanced loan commitments, we believe the unadvanced loan commitment total of $12,526$13,655 million as of November 30, 2017August 31, 2020 is not necessarily representative of our future funding cash requirements.
Unadvanced Loan Commitments—Conditional
The substantial majority of our line of credit commitments and all of our unadvanced long-term loan commitments include material adverse change clauses. Unadvanced loan commitments subject to material adverse change clauses totaled $9,741$10,581 million and $9,973$10,532 million as of November 30, 2017August 31, 2020 and May 31, 2017,2020, respectively. Prior to making an advance on these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. In some cases, the borrower’s access to the full amount of the facility is further constrained by the designated purpose, imposition of borrower-specific restrictions or by additional conditions that must be met prior to advancing funds.
Unadvanced Loan Commitments—Unconditional
Unadvanced loan commitments not subject to material adverse change clauses at the time of each advance consisted of unadvanced committed lines of credit totaling $2,785$3,074 million and $2,602$2,857 million as of November 30, 2017August 31, 2020 and May 31, 2017,2020, respectively. As such, we are required to advance amounts on these committed facilities as long as the borrower is in compliance with the terms and conditions of the facility.
The following table summarizesbelow displays the amount available balancefor advance under unconditional committed lines of credit as of August 31, 2020, and the related maturities byin each fiscal year during the five-year period ended May 31, 2025, and thereafter, asthereafter.
Table 4.3: Unconditional Committed Lines of November 30, 2017.Credit—Available Balance
| | | | | Available Balance | | Notional Maturities of Unconditional Committed Lines of Credit | | Available Balance | | Notional Maturities of Unconditional Committed Lines of Credit |
| (Dollars in thousands) | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter |
| Committed lines of credit | | $2,784,511 | | $130,000 | | $517,130 | | $395,711 | | $630,631 | | $677,818 | | $433,221 | | $ | 3,074,095 |
| | $ | 120,020 |
| | $ | 242,006 |
| | $ | 1,068,391 |
| | $ | 716,378 |
| | $ | 927,300 |
| | $ | — |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Loan Sales
We transfer, from time to time, whole loans and participating interests to third parties under our direct loan sale program.parties. We sold CFC loans, with outstanding balances totaling $110 million and $31 million, at par for cash, totaling $85 million and $20 million during the sixthree months ended November 30, 2017August 31, 2020 and 2016,2019, respectively. We recorded immaterial losses upon the sale of these loans attributable to the unamortized deferred loan origination costs associated with the transferred loans.
Pledging ofPledged Loans
We are required to pledge eligible mortgage notes in an amount at least equal to the outstanding balance of our secured debt. The following table summarizes our loans outstanding pledged as collateral pledged to secure our collateral trust bonds, notes payable under the United States Department of Agriculture (“USDA”) Guaranteed Underwriter Program (“Guaranteed Underwriter Program”), notes payable under the revolving note purchase agreement with Farmer Mac and Clean Renewable Energy Bonds, notes payable to Farmer Mac and notes payable to the Federal Financing Bank and guaranteed by RUS under the Guaranteed Underwriter Program of the USDA (“Guaranteed Underwriter Program”) and the amountcorresponding debt outstanding as of theAugust 31, 2020 and May 31, 2020. See “Note 6—Short-Term Borrowings” and “Note 7—Long-Term Debt” for information on our borrowings.
|
| | | | | | | | |
| (Dollars in thousands) | | August 31, 2020 | | May 31, 2020 |
| Collateral trust bonds: | | | | |
| 2007 indenture: | | | | |
| Distribution system mortgage notes pledged | | $ | 8,162,005 |
| | $ | 8,244,202 |
|
| RUS-guaranteed loans qualifying as permitted investments | | 126,722 |
| | 128,361 |
|
| Total pledged collateral | | $ | 8,288,727 |
| | $ | 8,372,563 |
|
| Collateral trust bonds outstanding | | 7,022,711 |
| | 7,422,711 |
|
| | | | | |
| 1994 indenture: | | | | |
| Distribution system mortgage notes pledged | | $ | 39,016 |
| | $ | 39,785 |
|
| Collateral trust bonds outstanding | | 35,000 |
| | 35,000 |
|
| | | | | |
| Guaranteed Underwriter Program: | | | | |
| Distribution and power supply system mortgage notes pledged | | $ | 7,457,756 |
| | $ | 7,535,931 |
|
| Notes payable outstanding | | 6,225,855 |
| | 6,261,312 |
|
| | | | | |
| Farmer Mac: | | | | |
| Distribution and power supply system mortgage notes pledged | | $ | 3,665,038 |
| | $ | 3,687,418 |
|
| Notes payable outstanding | | 3,041,843 |
| | 3,059,637 |
|
| | | | | |
| Clean Renewable Energy Bonds Series 2009A: | | | | |
| Distribution and power supply system mortgage notes pledged | | $ | 6,787 |
| | $ | 7,269 |
|
| Cash | | 708 |
| | 395 |
|
| Total pledged collateral | | $ | 7,495 |
| | $ | 7,664 |
|
| Notes payable outstanding | | 6,068 |
| | 6,068 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
corresponding debt outstanding as of November 30, 2017 and May 31, 2017. See “Note 5—Short-Term Borrowings” and “Note 6—Long-Term Debt” for information on our borrowings.
|
| | | | | | | | |
| (Dollars in thousands) | | November 30, 2017 | | May 31, 2017 |
| Collateral trust bonds: | | | | |
| 2007 indenture: | | | | |
| Distribution system mortgage notes | | $ | 8,527,458 |
| | $ | 8,740,572 |
|
| RUS-guaranteed loans qualifying as permitted investments | | 143,564 |
| | 146,373 |
|
| Total pledged collateral | | $ | 8,671,022 |
| | $ | 8,886,945 |
|
| Collateral trust bonds outstanding | | 7,697,711 |
| | 7,697,711 |
|
| | | | | |
| 1994 indenture: | | | | |
| Distribution system mortgage notes | | $ | 253,323 |
| | $ | 263,007 |
|
| Collateral trust bonds outstanding | | 220,000 |
| | 225,000 |
|
| | | | | |
| Farmer Mac: | | | | |
| Distribution and power supply system mortgage notes | | $ | 2,876,351 |
| | $ | 2,942,456 |
|
| Notes payable outstanding | | 2,491,464 |
| | 2,513,389 |
|
| | | | | |
| Clean Renewable Energy Bonds Series 2009A: | | | | |
| Distribution and power supply system mortgage notes | | $ | 13,950 |
| | $ | 14,943 |
|
| Cash | | 1,225 |
| | 481 |
|
| Total pledged collateral | | $ | 15,175 |
| | $ | 15,424 |
|
| Notes payable outstanding | | 13,214 |
| | 13,214 |
|
| | | | | |
| Federal Financing Bank: | | | | |
| Distribution and power supply system mortgage notes | | $ | 5,876,050 |
| | $ | 5,833,515 |
|
| Notes payable outstanding | | 5,060,192 |
| | 4,985,748 |
|
Credit Concentration
We serve electric and telecommunications members throughout the United States and its territories, including 49 states, the District of Columbia, American Samoa and Guam. Texas had the largest concentration of outstanding loansConcentrations may exist when there are amounts loaned to borrowers engaged in any one state, with approximately 15%similar activities or in geographic areas that would cause them to be similarly impacted by economic or other conditions or when there are large exposures to single borrowers. As a tax-exempt, member-owned finance cooperative, CFC’s principal focus is to provide funding to its rural electric utility cooperative members to assist them in acquiring, constructing and operating electric distribution systems, power supply systems and related facilities. Because we lend primarily to our rural electric utility cooperative members, we have had a loan portfolio subject to single-industry and single-obligor concentration risks since our inception in 1969. Loans outstanding to electric utility organizations of $26,521 million and $26,306 million as of August 31, 2020 and May 31, 2020, respectively, accounted for 99% of total loans outstanding as of both November 30, 2017 and May 31, 2017. Our consolidated membership totaled 1,459 members and 217 associates as of November 30, 2017. As such, we have a loan portfolio with single-industry and single-obligor concentration risk. Outstanding loans to electric utility organizations represented approximately 99% of the total outstanding loan portfolio as of November 30, 2017, unchanged from May 31, 2017.each respective date. The remaining loans outstanding loans in our portfolio were to RTFC members, affiliates and associates in the telecommunications industry.
Geographic Concentration
Although our organizational structure and mission results in single-industry concentration, we serve a geographically diverse group of electric and telecommunications borrowers throughout the United States. The number of borrowers with outstanding loans totaled 888 and 889 as of August 31, 2020 and May 31, 2020, respectively, located in 49 states. Texas accounted for the largest number of borrowers in any one state as of each respective date. In addition, Texas accounted for approximately 16% of total loans outstanding as of both August 31, 2020 and May 31, 2020, representing the largest concentration of loans outstanding to borrowers in any one state.
Single-Obligor Concentration
The outstanding loan exposure of thefor our 20 largest borrowers was 23%totaled $5,910 million and 24%$5,877 million as of November 30, 2017August 31, 2020 and May 31, 2017, respectively.2020, respectively, representing 22% of total loans outstanding as of each respective date. The 20 largest borrowers consisted of 1012 distribution systems 9and eight power supply systems and 1 NCSC associate member as of both November 30, 2017August 31, 2020. In comparison, the 20 largest borrowers consisted of 11 distribution systems and nine power supply systems as of May 31, 2017.2020. The largest total outstanding exposure to a single borrower or controlled group represented approximatelyless than 2% of total loans and guarantees outstanding as of both November 30, 2017August 31, 2020 and May 31, 2017.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Credit Quality
We closely monitor loan performance trends to manage and evaluate our credit risk exposure. We seek to provide a balance between meeting the credit needs of our members, while also ensuring the sound credit quality of our loan portfolio. Payment status and internal risk ratings are key indicators, among others, of the level of credit risk in our loan portfolio.2020.
As part of our strategy in managing our credit risk exposure to large borrowers, we entered into a long-term standby purchase commitment agreement with Farmer Mac.Mac during fiscal year 2016. Under this agreement, we may designate certain long-term loans to be covered under the commitment, subject to approval by Farmer Mac, and in the event any such loan later goes into payment default for at least 90 days, upon request by us, Farmer Mac must purchase such loan at par value. The aggregate unpaid principal balance of designated and Farmer Mac approved loans was $792 million and $843 million as of November 30, 2017 and May 31, 2017, respectively. Under the agreement, weWe are required to pay Farmer Mac a monthly fee based on the unpaid principal balance of loans covered under the purchase commitment. The aggregate unpaid principal balance of designated and Farmer Mac approved loans was $551 million and $569 million as of August 31, 2020 and May 31, 2020, respectively. Loan exposure to our 20 largest borrowers covered under the Farmer Mac agreement totaled $285 million and $314 million as of August 31, 2020 and May 31, 2020, respectively. No loans had been put to Farmer Mac for purchase, pursuant to this agreement, as of November 30, 2017. Also, we hadAugust 31, 2020. Our credit exposure is also mitigated by long-term loans totaling $164 million and $167 million as of November 30, 2017 and May 31, 2017, respectively, that were guaranteed by the Rural Utilities Service (“RUS”) of the United States Department of Agriculture.
Payment Status of Loans
The tables below present the payment status ofUSDA. Guaranteed RUS loans outstanding by member classtotaled $145 million and $147 million as of November 30, 2017August 31, 2020 and May 31, 2017. As indicated2020, respectively.
Credit Quality Indicators
Assessing the overall credit quality of our loan portfolio and measuring our credit risk is an ongoing process that involves tracking payment status, troubled debt restructurings, nonperforming loans, charge-offs, the internal risk ratings of our borrowers and other indicators of credit risk. We monitor and subject each borrower and loan facility in our loan portfolio to an individual risk assessment based on quantitative and qualitative factors. Payment status trends and internal risk ratings are indicators, among others, of the table, we did not have any past due loans asprobability of either November 30, 2017 or May 31, 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | November 30, 2017 |
| (Dollars in thousands) | | Current | | 30-89 Days Past Due | | 90 Days or More Past Due (1) | | Total Past Due | | Total Financing Receivables | | Nonaccrual Loans |
| CFC: | | | | | | | | | | | | |
| Distribution | | $ | 19,230,740 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 19,230,740 |
| | $ | — |
|
| Power supply | | 4,414,257 |
| | — |
| | — |
| | — |
| | 4,414,257 |
| | — |
|
| Statewide and associate | | 57,107 |
| | — |
| | — |
| | — |
| | 57,107 |
| | — |
|
| CFC total | | 23,702,104 |
| | — |
| | — |
| | — |
| | 23,702,104 |
| | — |
|
| NCSC | | 739,707 |
| | — |
| | — |
| | — |
| | 739,707 |
| | — |
|
| RTFC | | 371,731 |
| | — |
| | — |
| | — |
| | 371,731 |
| | — |
|
| Total loans outstanding | | $ | 24,813,542 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 24,813,542 |
| | $ | — |
|
| | | | | | | | | | | | | |
| Percentage of total loans | | 100.00 | % | | — | % | | — | % | | — | % | | 100.00 | % | | — | % |
borrower default and overall credit quality of our loan portfolio.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Payment Status of Loans
Loans are considered delinquent when contractual principal or interest amounts become past due 30 days or more following the scheduled payment due date. Loans are placed on nonaccrual status when payment of principal or interest is 90 days or more past due or management determines that the full collection of principal and interest is doubtful. The following table presents the payment status, by member class, of loans outstanding as of August 31, 2020 and May 31, 2020.
Table 4.5: Payment Status of Loans Outstanding | | | | | May 31, 2017 | | August 31, 2020 |
| (Dollars in thousands) | | Current | | 30-89 Days Past Due | | 90 Days or More Past Due (1) | | Total
Past Due | | Total Financing
Receivables | | Nonaccrual Loans | | Current | | 30-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | Total Loans Outstanding | | Nonaccrual Loans (1) |
| CFC: | | | | | | | | | | | | | | | | | | | | | | | | |
| Distribution | | $ | 18,825,366 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 18,825,366 |
| | $ | — |
| | $ | 21,012,216 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 21,012,216 |
| | $ | — |
|
| Power supply | | 4,504,791 |
| | — |
| | — |
| | — |
| | 4,504,791 |
| | — |
| | 4,730,101 |
| | — |
| | — |
| | — |
| | 4,730,101 |
| | 161,477 |
|
| Statewide and associate | | 57,830 |
| | — |
| | — |
| | — |
| | 57,830 |
| | — |
| | 97,343 |
| | — |
| | — |
| | — |
| | 97,343 |
| | — |
|
| CFC total | | 23,387,987 |
| | — |
| | — |
| | — |
| | 23,387,987 |
| | — |
| | 25,839,660 |
| | — |
| | — |
| | — |
| | 25,839,660 |
| | 161,477 |
|
| NCSC | | 613,924 |
| | — |
| | — |
| | — |
| | 613,924 |
| | — |
| | 681,321 |
| | — |
| | — |
| | — |
| | 681,321 |
| | — |
|
| RTFC | | 354,419 |
| | — |
| | — |
| | — |
| | 354,419 |
| | — |
| | 396,118 |
| | — |
| | — |
| | — |
| | 396,118 |
| | — |
|
| Total loans outstanding | | $ | 24,356,330 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 24,356,330 |
| | $ | — |
| | $ | 26,917,099 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 26,917,099 |
| | $ | 161,477 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Percentage of total loans | | 100.00 | % | | — | % | | — | % | | — | % | | 100.00 | % | | — | % | | 100.00 | % | | — | % | | — | % | | — | % | | 100.00 | % | | 0.60 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | May 31, 2020 |
| (Dollars in thousands) | | Current | | 30-89 Days Past Due | | 90 Days or More Past Due (1) | | Total
Past Due | | Total Loans Outstanding | | Nonaccrual Loans (1) |
| CFC: | | | | | | | | | | | | |
| Distribution | | $ | 20,769,653 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 20,769,653 |
| | $ | — |
|
| Power supply | | 4,731,506 |
| | — |
| | — |
| | — |
| | 4,731,506 |
| | 167,708 |
|
| Statewide and associate | | 106,498 |
| | — |
| | — |
| | — |
| | 106,498 |
| | — |
|
| CFC total | | 25,607,657 |
| | — |
| | — |
| | — |
| | 25,607,657 |
| | 167,708 |
|
| NCSC | | 697,862 |
| | — |
| | — |
| | — |
| | 697,862 |
| | — |
|
| RTFC | | 385,335 |
| | — |
| | — |
| | — |
| | 385,335 |
| | — |
|
| Total loans outstanding | | $ | 26,690,854 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 26,690,854 |
| | $ | 167,708 |
|
| | | | | | | | | | | | | |
| Percentage of total loans | | 100.00 | % | | — | % | | — | % | | — | % | | 100.00 | % | | 0.63 | % |
____________________________
(1) AllConsists of one loan to a CFC power supply borrower that was classified as nonperforming in the fourth quarter of fiscal year 2020.
We had no delinquent loans 90 daysas of August 31, 2020 or more past due areMay 31, 2020, and we have not experienced any loan defaults or charge-offs since fiscal year 2017. However, we have one loan to a CFC power supply borrower with an outstanding balance of $161 million and $168 million as of August 31, 2020 and May 31, 2020, respectively, that we classified as nonperforming and placed on nonaccrual status.status in the fourth quarter of fiscal year 2020. No interest income was recognized on nonaccrual loans during the three months ended August 31, 2020 and 2019. We provide additional information on this loan below under “Nonperforming Loans.”
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Troubled Debt Restructured (“TDR”) LoansRestructurings
We did not havehad any loans modifiedloan modifications that were required to be accounted for as TDRsa TDR during the sixthree months ended November 30, 2017.August 31, 2020, nor have we had any TRD loan modifications since fiscal year 2016. The following table provides a summarypresents the outstanding balance of modified loans modifiedaccounted for as TDRs in prior periods and the performance status, by member class, of these loans as of August 31, 2020 and May 31, 2020.
Table 4.6: Trouble Debt Restructurings |
| | | | | | | | | | | | | | | | | | |
| | | August 31, 2020 | | | | May 31, 2020 |
| (Dollars in thousands) | | Number of Borrowers | | Outstanding Amount (1) | | % of Total Loans Outstanding | | Number of Borrowers | | Outstanding Amount (1) | | % of Total Loans Outstanding |
| TDR loans: | | | | | | | | | | | | |
| CFC—Distribution | | 1 | | $ | 5,379 |
| | 0.02 | % | | 1 | | $ | 5,755 |
| | 0.02 | % |
| RTFC | | 1 | | 4,967 |
| | 0.02 |
| | 1 | | 5,092 |
| | 0.02 |
|
| Total TDR loans | | 2 | | $ | 10,346 |
| | 0.04 | % | | 2 | | $ | 10,847 |
| | 0.04 | % |
| | | | | | | | | | | | | |
| Performance status of TDR loans: | | | | | | | | | | | | |
| Performing TDR loans | | 2 | | $ | 10,346 |
| | 0.04 | % | | 2 | | $ | 10,847 |
| | 0.04 | % |
| Total TDR loans | | 2 | | $ | 10,346 |
| | 0.04 | % | | 2 | | $ | 10,847 |
| | 0.04 | % |
____________________________
(1) Represents the unpaid principal balance net of charge-offs and recoveries as of the end of each period.
The outstanding TDR loans for CFC and RTFC each relate to the modification of a loan for one borrower that, at the time of the modification, was experiencing financial difficulty. There were no unadvanced loan commitments related to the TDRthese loans by member class, as of November 30, 2017August 31, 2020 and May 31, 2017.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | November 30, 2017 | | May 31, 2017 |
| (Dollars in thousands) | | Loans Outstanding | | % of Total Loans | | Unadvanced Commitments | | Loans Outstanding | | % of Total Loans | | Unadvanced Commitments |
| TDR loans: | | | | | | | | | | | | |
| Performing TDR loans: | | | | | | | | | | | | |
| CFC/Distribution | | $ | 6,507 |
| | 0.03 | % | | $ | — |
| | $ | 6,581 |
| | 0.02 | % | | $ | — |
|
| RTFC | | 6,341 |
| | 0.02 |
| | — |
| | 6,592 |
| | 0.03 |
| | — |
|
| Total performing TDR loans | | 12,848 |
| | 0.05 |
| | — |
| | 13,173 |
| | 0.05 |
| | — |
|
| Total TDR loans | | $ | 12,848 |
| | 0.05 | % | | $ | — |
| | $ | 13,173 |
| | 0.05 | % | | $ | — |
|
2020. We did not have any TDR loans classified as nonperforming as of November 30, 2017August 31, 2020 or May 31, 2017. TDR loans classified as performing as of November 30, 2017 and May 31, 2017 were performing in accordance with the terms of their respective restructured loan agreement and on accrual status as of the respective reported dates. One borrower with a TDR loan also had a line of credit facility, restricted for fuel purchases only, totaling $6 million as of both November 30, 2017 and May 31, 2017. The outstanding amount under this facility totaled approximately $1 million and $0.5 million as of November 30, 2017 and May 31, 2017, respectively, and was classified as performing as of each respective date.2020.
Nonperforming Loans
In addition to TDR loans that may be classified as nonperforming, we also may have nonperforming loans that have not been modified as a TDR loan.TDR. During the fourth quarter of fiscal year 2020, we classified one loan to a CFC power supply borrower with an outstanding balance of $168 million as of May 31, 2020, as nonperforming, placed the loan on nonaccrual status and established an asset-specific allowance for credit losses of $34 million as of as of May 31, 2020. Under the terms of the loan, which matures in December 2026, the amount the borrower is required to pay in 2024 and 2025 may vary as the payments are contingent on the borrower's financial performance in those years. Based on our review and assessment of the borrower’s most recent forecast and underlying assumptions provided to us in May 2020, we no longer believe that the future expected cash payments from the borrower through the maturity of the loan in December 2026 will be sufficient to repay the outstanding loan balance. We didreceived payments from the borrower on this loan during the current quarter, which reduced the outstanding balance to $161 million as of August 31, 2020. The asset-specific allowance for credit losses for this loan was $33 million as of August 31, 2020. Although the borrower is not have anyin default and was current with respect to required payments on the loan as of August 31, 2020, we continue to report the loan as nonperforming and it remains on nonaccrual status. This loan also was categorized as doubtful as of August 31, 2020 and May 31, 2020. We had no other loans classified as nonperforming or on nonaccrual status as of November 30, 2017August 31, 2020 or May 31, 2017.2020.
We had no foregone interest income for loans on nonaccrual status during the three and six months ended November 30,
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2017. We had foregone interest income for loans on nonaccrual status totaling $31 thousand during the six months ended November 30, 2016.Net Charge-Offs
Impaired Loans
The following table provides information on loans classified as individually impaired loans as of November 30, 2017We had no loan defaults, charge-offs or recoveries during the three months ended August 31, 2020 and May 31,2019. We experienced our last charge-off, which was attributable to a borrower in our RTFC telecommunications loan portfolio, in fiscal year 2017.
|
| | | | | | | | | | | | | | | | |
| | | November 30, 2017 | | May 31, 2017 |
| (Dollars in thousands) | | Recorded Investment | | Related Allowance | | Recorded Investment | | Related Allowance |
| With no specific allowance recorded: | | | | | | | | |
| CFC | | $ | 6,507 |
| | $ | — |
| | $ | 6,581 |
| | $ | — |
|
| | | | | | | | | |
| With a specific allowance recorded: | | | | | | | | |
| RTFC | | 6,341 |
| | 1,330 |
| | 6,592 |
| | 1,640 |
|
| Total impaired loans | | $ | 12,848 |
| | $ | 1,330 |
| | $ | 13,173 |
| | $ | 1,640 |
|
The following table presents, by company, the average recorded investmentAs part of our management of credit risk, we maintain a credit risk rating framework under which we employ a consistent process for individually impaired loans and the interest income recognized on these loans for the three and six months ended November 30, 2017 and 2016.
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended November 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in thousands) | | Average Recorded Investment | | Interest Income Recognized |
| CFC | | $ | 6,507 |
| | $ | 6,581 |
| | $ | 142 |
| | $ | 144 |
|
| RTFC | | 6,423 |
| | 6,924 |
| | 80 |
| | 87 |
|
| Total impaired loans | | $ | 12,930 |
| | $ | 13,505 |
| | $ | 222 |
| | $ | 231 |
|
|
| | | | | | | | | | | | | | | | |
| | | Six Months Ended November 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in thousands) | | Average Recorded Investment | | Interest Income Recognized |
| CFC | | $ | 6,541 |
| | $ | 6,645 |
| | $ | 286 |
| | $ | 274 |
|
| RTFC | | 6,486 |
| | 8,729 |
| | 162 |
| | 175 |
|
| Total impaired loans | | $ | 13,027 |
| | $ | 15,374 |
| | $ | 448 |
| | $ | 449 |
|
Internal Risk Ratings of Loans
We evaluateassessing the credit quality of our loans using anloan portfolio. We evaluate each borrower and loan facility in our loan portfolio and assign internal borrower and loan facility risk rating system that employs similar criteria for all member classes. Our internal risk rating system isratings based on a determinationconsideration of a borrower’s risknumber of default utilizing both quantitative and qualitative measurements.factors. Each risk rating is reassessed annually following the receipt of the borrower’s audited financial statements; however, interim risk rating downgrades or upgradesrisk-rating adjustments may occur as a result of updated information affecting a borrower’s ability to fulfill its obligations or other significant developments orand trends. We categorize loans in our portfolio based on our internally assigned borrower risk ratings, which are intended to assess the general credit worthiness of the borrower and probability of default. Our borrower risk ratings fall intoalign with the following fourU.S. federal banking regulatory agencies credit risk definitions of pass and criticized categories, based onwith the criteria identified below.criticized category further segmented among special mention, substandard and doubtful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default. Following is a description of the borrower risk rating categories.
Pass: Borrowers that are not experiencing difficulty and/or not showing a potential or well-defined credit weakness.
Special Mention: Borrowers that may be characterized by a potential credit weakness or deteriorating financial condition that is not sufficiently serious to warrant a classification of substandard or doubtful.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Substandard: Borrowers that display a well-defined credit weakness that may jeopardize the full collection of principal and interest.
Doubtful: Borrowers that have a well-defined credit weakness and theor weaknesses that make full collection of principal and interest, ison the basis of currently known facts, conditions and collateral values, highly questionable orand improbable.
LoansWe use our internal risk ratings to borrowersmeasure the credit risk of each borrower and loan facility, identify or confirm problem or potential problem loans in a timely manner, differentiate risk within each of our portfolio segments, assess the pass and special mention categories are generally included in the collectiveoverall credit quality of our loan portfolio and manage overall risk levels. Our internally assigned borrower risk ratings, which we map to equivalent credit ratings by external credit rating agencies, serve as the primary credit quality indicator for purposesour loan portfolio. Because our internal borrower risk ratings provide important information on the collectibility of determining theeach of our loan portfolio segments, they are a key input in estimating our allowance for loancredit losses. Loans to borrowers in the substandard and doubtful categories are generally considered to be individually impaired and therefore reflected in the impaired loan portfolio. The special mention, substandard, and doubtful categories are intended to comply with the definition of criticized loans by the banking regulatory authorities.
The following tables presenttable provides a breakdown of our total loans outstanding, by member class and borrower risk rating category based on the risk ratings used in the estimation of our allowance for loan lossesand member type, as of November 30, 2017August 31, 2020 and May 31, 2017.2020. If a parent company provides a guarantee of full repayment of loans of a subsidiary borrower, we include the loans outstanding in the borrower risk rating category of the guarantor parent company rather than the risk rating category of the subsidiary borrower for purposes of estimating the allowance for credit losses. The borrower risk rating categories of loans outstanding presented below correspond to the borrower risk rating categories used in estimating the allowance for credit losses.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | |
| | | November 30, 2017 |
| (Dollars in thousands) | | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
| CFC: | | | | | | | | | | |
| Distribution | | $ | 19,122,976 |
| | $ | 107,764 |
| | $ | — |
| | $ | — |
| | $ | 19,230,740 |
|
| Power supply | | 4,414,257 |
| | — |
| | — |
| | — |
| | 4,414,257 |
|
| Statewide and associate | | 57,107 |
| | — |
| | — |
| | — |
| | 57,107 |
|
| CFC total | | 23,594,340 |
| | 107,764 |
| | — |
| | — |
| | 23,702,104 |
|
| NCSC | | 739,707 |
| | — |
| | — |
| | — |
| | 739,707 |
|
| RTFC | | 365,390 |
| | — |
| | 6,341 |
| | — |
| | 371,731 |
|
| Total loans outstanding | | $ | 24,699,437 |
| | $ | 107,764 |
| | $ | 6,341 |
| | $ | — |
| | $ | 24,813,542 |
|
In connection with our adoption of CECL, we present term loans outstanding as of August 31, 2020, by fiscal year of origination for each year during the five-year annual reporting period beginning in fiscal year 2017, and in aggregate prior to fiscal year 2017. The origination period represents the date CFC advances funds to a borrower, rather than the execution date of a loan facility for a borrower. Revolving loans are presented separately due to the nature of revolving loans. The substantial majority of loans in our portfolio represent fixed-rate advances under secured long-term facilities with terms up to 35 years, and as indicated in the table below, $16,608 million, or 62%, of total loans outstanding of $26,917 million as of August 31, 2020 represent term-loan advances made to borrowers prior to fiscal year 2017.
As discussed above, as a tax-exempt, member-owned finance cooperative, CFC’s principal focus is to provide funding to its rural electric utility cooperative members to assist them in acquiring, constructing and operating electric distribution systems, power supply systems and related facilities. As such, since our inception in 1969 we have had an extended repeat lending and repayment history with substantially all of member borrowers through our various loan programs. Our secured long-term loan commitment facilities typically provide a five-year draw period under which a borrower may draw funds prior to the expiration of the commitment. Because our electric utility cooperative borrowers must make substantial annual capital investments to maintain operations and ensure delivery of the essential service provided by electric utilities, they require a continuous inflow of funds to finance infrastructure upgrades and new asset purchases. Due to the funding needs of electric utility cooperatives, a CFC borrower generally has multiple loans outstanding under advances drawn in different years. While the number of borrowers with loans outstanding was 888 borrowers as of August 31, 2020, the number of loans outstanding was 16,569 as of August 31, 2020, resulting in an average of 19 loans outstanding per borrower. Our borrowers, however, are subject to cross-default under the terms of our loan agreements. Therefore, if a borrower defaults on one loan, the borrower is considered in default on all outstanding loans. Due to these factors, we historically have not observed a correlation between the year of origination of our loans and default risk. Instead, default risk is more closely correlated to the risk rating of our borrowers.
Table 4.7: Loans Outstanding by Borrower Risk Ratings and Origination Year
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | August 31, 2020 | | |
| | | May 31, 2017 | | Term Loans by Fiscal Year of Origination | | | | | | |
| (Dollars in thousands) | | Pass | | Special Mention | | Substandard | | Doubtful | | Total | | Q1 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Revolving Loans | | Total | | May 31, 2020 |
| Pass | | | | | | | | | | | | | | | | | | | |
| CFC: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Distribution | | $ | 18,715,810 |
| | $ | 109,556 |
| | $ | — |
| | $ | — |
| | $ | 18,825,366 |
| | $ | 468,438 |
| | $ | 1,978,080 |
| | $ | 1,264,632 |
| | $ | 1,533,073 |
| | $ | 1,563,130 |
| | $ | 13,160,291 |
| | $ | 921,764 |
| | $ | 20,889,408 |
| | $ | 20,643,737 |
|
| Power supply | | 4,504,791 |
| | — |
| | — |
| | — |
| | 4,504,791 |
| | 294,223 |
| | 210,030 |
| | 451,539 |
| | 257,350 |
| | 259,332 |
| | 2,703,549 |
| | 345,634 |
| | 4,521,657 |
| | 4,516,595 |
|
| Statewide and associate | | 56,654 |
| | 1,176 |
| | — |
| | — |
| | 57,830 |
| | 75 |
| | 24,537 |
| | 3,978 |
| | — |
| | 718 |
| | 27,508 |
| | 24,356 |
| | 81,172 |
| | 90,274 |
|
| CFC total | | 23,277,255 |
| | 110,732 |
| | — |
| | — |
| | 23,387,987 |
| | 762,736 |
| | 2,212,647 |
| | 1,720,149 |
| | 1,790,423 |
| | 1,823,180 |
| | 15,891,348 |
| | 1,291,754 |
| | 25,492,237 |
| | 25,250,606 |
|
| NCSC | | 612,592 |
| | 1,332 |
| | — |
| | — |
| | 613,924 |
| | 12,476 |
| | 248,220 |
| | 4,603 |
| | 58,797 |
| | 15,587 |
| | 271,827 |
| | 69,813 |
| | 681,323 |
| | 697,862 |
|
| RTFC | | 346,944 |
| | — |
| | 7,475 |
| | — |
| | 354,419 |
| | 31,977 |
| | 74,146 |
| | 13,653 |
| | 31,086 |
| | 65,921 |
| | 142,064 |
| | 22,638 |
| | 381,485 |
| | 371,507 |
|
| Total pass | | | 807,189 |
| | 2,535,013 |
| | 1,738,405 |
| | 1,880,306 |
| | 1,904,688 |
| | 16,305,239 |
| | 1,384,205 |
| | 26,555,045 |
| | 26,319,975 |
|
| | | | | | | | | | | | | | | | | | | | |
| Special mention | | | | | | | | | | | | | | | | | | | |
| CFC: | | | | | | | | | | | | | | | | | | | |
| Distribution | | | — |
| | — |
| | — |
| | — |
| | 4,694 |
| | 99,198 |
| | 18,916 |
| | 122,808 |
| | 7,743 |
|
| Power supply | | | — |
| | — |
| | — |
| | 2,362 |
| | 8,293 |
| | 36,309 |
| | — |
| | 46,964 |
| | — |
|
| Statewide and associate | | | — |
| | — |
| | 5,000 |
| | 4,000 |
| | 5,963 |
| | 1,208 |
| | — |
| | 16,171 |
| | 16,224 |
|
| CFC total | | | — |
| | — |
| | 5,000 |
| | 6,362 |
| | 18,950 |
| | 136,715 |
| | 18,916 |
| | 185,943 |
| | 23,967 |
|
| RTFC | | | — |
| | — |
| | 1,596 |
| | 3,334 |
| | 3,487 |
| | — |
| | 1,250 |
| | 9,667 |
| | 8,736 |
|
| Total special mention | | | — |
| | — |
| | 6,596 |
| | 9,696 |
| | 22,437 |
| | 136,715 |
| | 20,166 |
| | 195,610 |
| | 32,703 |
|
| | | | | | | | | | | | | | | | | | | | |
| Substandard | | | | | | | | | | | | | | | | | | | |
| CFC: | | | | | | | | | | | | | | | | | | | |
| Distribution | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 118,173 |
|
| Power supply | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 47,203 |
|
| CFC total | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 165,376 |
|
| RTFC | | | — |
| | — |
| | — |
| | — |
| | — |
| | 4,967 |
| | — |
| | 4,967 |
| | 5,092 |
|
| Total substandard | | | — |
| | — |
| | — |
| | — |
| | — |
| | 4,967 |
| | — |
| | 4,967 |
| | 170,468 |
|
| | | | | | | | | | | | | | | | | | | | |
| Doubtful | | | | | | | | | | | | | | | | | | | |
| CFC: | | | | | | | | | | | | | | | | | | | |
| Power supply | | | — |
| | — |
| | — |
| | — |
| | — |
| | 161,477 |
| | — |
| | 161,477 |
| | 167,708 |
|
| CFC total | | | — |
| | — |
| | — |
| | — |
| | — |
| | 161,477 |
| | — |
| | 161,477 |
| | 167,708 |
|
| Total doubtful | | | — |
| | — |
| | — |
| | — |
| | — |
| | 161,477 |
| | — |
| | 161,477 |
| | 167,708 |
|
| Total loans outstanding | | $ | 24,236,791 |
| | $ | 112,064 |
| | $ | 7,475 |
| | $ | — |
| | $ | 24,356,330 |
| | $ | 807,189 |
| | $ | 2,535,013 |
| | $ | 1,745,001 |
| | $ | 1,890,002 |
| | $ | 1,927,125 |
| | $ | 16,608,398 |
| | $ | 1,404,371 |
| | $ | 26,917,099 |
| | $ | 26,690,854 |
|
Loans to one electric distribution cooperative borrower and its subsidiary totaling $165 million as of May 31, 2020 accounted for the substantial majority of the substandard loan category amount of the $170 million as of May 31, 2020. Several years ago the electric distribution cooperative borrower established a subsidiary to deploy retail broadband service in underserved rural communities, which led to financial difficulties. The borrower and its subsidiary, however, continued to be current with regard to all principal and interest payments due. Based on updated financial performance information from the borrower, we reassessed and upgraded the risk rating for the borrower from substandard to special mention as of August 31, 2020. The loans outstanding to this borrower of $164 million as of August 31, 2020 are secured under our typical collateral requirements for long-term loan advances as of August 31, 2020. We currently expect to collect all principal and interest amounts due from the borrower and its subsidiary.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The doubtful loan category amounts of $161 million and $168 million as of August 31, 2020 and May 31, 2020, are attributable to the outstanding loan to the CFC power supply borrower discussed above under “Nonperforming Loans.”
|
|
| NOTE 5—ALLOWANCE FOR CREDIT LOSSES |
Upon adoption of CECL on June 1, 2020, we recorded an increase in our allowance for credit losses for our loan portfolio of $4 million. The impact on the reserve for expected credit losses for our off-balance credit exposures related to unadvanced loan commitments and financial guarantees was not material. Additional information on our adoption of CECL is provided in “Note 1—Summary of Significant Accounting Policies.”
Allowance for Credit Losses—Loan LossesPortfolio
We maintain anThe following tables summarize changes in the allowance for credit losses for our loan losses at a level estimated by management to provide for probable losses inherentportfolio and present the allowance components. The changes in the loan portfolio asallowance and the allowance components prior to our adoption of each balance sheet date. OurCECL on June 1, 2020 are based on the incurred loss model. The allowance for loan losses consistscomponents, which consist of an amount for loans collectively evaluated for impairment, referred to as oura collective allowance and an amountasset-specific allowance, are based on the evaluation method used to measure our loans for credit losses. Loans that share similar risk characteristics are evaluated on a collective basis in measuring credit losses, while loans designated as individually impaired, referred to asthat do not share similar risk characteristics with other loans in our specific allowance.portfolio are evaluated on an individual basis.
Table 5.1: Changes in Allowance for Credit Losses |
| | | | | | | | | | | | | | | | |
| | | Three Months Ended August 31, 2020 |
| (Dollars in thousands) | | CFC | | NCSC | | RTFC | | Total |
| Balance as of May 31, 2020 | | $ | 47,438 |
| | $ | 806 |
| | $ | 4,881 |
| | $ | 53,125 |
|
| Cumulative-effect adjustment from adoption of CECL accounting standard | | 5,645 |
| | (15 | ) | | (1,730 | ) | | 3,900 |
|
| Balance as of June 1, 2020 | | 53,083 |
| | 791 |
| | 3,151 |
| | 57,025 |
|
| (Benefit) provision for credit losses | | (353 | ) | | 38 |
| | 641 |
| | 326 |
|
| Balance as of August 31, 2020 | | $ | 52,730 |
| | $ | 829 |
| | $ | 3,792 |
| | $ | 57,351 |
|
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended August 31, 2019 |
| (Dollars in thousands) | | CFC | | NCSC | | RTFC | | Total |
| Balance as of May 31, 2019 | | $ | 13,120 |
| | $ | 2,007 |
| | $ | 2,408 |
| | $ | 17,535 |
|
| (Benefit) provision for credit losses | | (158 | ) | | 70 |
| | 118 |
| | 30 |
|
| Balance as of August 31, 2019 | | $ | 12,962 |
| | 2,077 |
| | 2,526 |
| | 17,565 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables summarize changes, by company, in the allowanceTable 5.2: Allowance for loan losses as of and for the three and six months ended November 30, 2017 and 2016. |
| | | | | | | | | | | | | | | | |
| | | Three Months Ended November 30, 2017 |
| (Dollars in thousands) | | CFC | | NCSC | | RTFC | | Total |
| Balance as of August 31, 2017 | | $ | 29,521 |
| | $ | 2,736 |
| | $ | 4,821 |
| | $ | 37,078 |
|
| Provision (benefit) for loan losses | | (722 | ) | | 381 |
| | 37 |
| | (304 | ) |
| Balance as of November 30, 2017 | | $ | 28,799 |
| | $ | 3,117 |
| | $ | 4,858 |
| | $ | 36,774 |
|
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended November 30, 2016 |
| (Dollars in thousands) | | CFC | | NCSC | | RTFC | | Total |
| Balance as of August 31, 2016 | | $ | 25,062 |
| | $ | 3,281 |
| | $ | 4,777 |
| | $ | 33,120 |
|
| Provision (benefit) for loan losses | | 742 |
| | 383 |
| | (387 | ) | | 738 |
|
| Recoveries | | 53 |
| | — |
| | — |
| | 53 |
|
| Balance as of November 30, 2016 | | $ | 25,857 |
| | $ | 3,664 |
| | $ | 4,390 |
| | $ | 33,911 |
|
|
| | | | | | | | | | | | | | | | |
| | | Six Months Ended November 30, 2017 |
| (Dollars in thousands) | | CFC | | NCSC | | RTFC | | Total |
| Balance as of May 31, 2017 | | $ | 29,499 |
| | $ | 2,910 |
| | $ | 4,967 |
| | $ | 37,376 |
|
| Provision (benefit) for loan losses | | (700 | ) | | 207 |
| | (109 | ) | | (602 | ) |
| Balance as of November 30, 2017 | | $ | 28,799 |
| | $ | 3,117 |
| | $ | 4,858 |
| | $ | 36,774 |
|
|
| | | | | | | | | | | | | | | | |
| | | Six Months Ended November 30, 2016 |
| (Dollars in thousands) | | CFC | | NCSC | | RTFC | | Total |
| Balance as of May 31, 2016 | | $ | 24,559 |
| | $ | 3,134 |
| | $ | 5,565 |
| | $ | 33,258 |
|
| Provision for loan losses | | 1,192 |
| | 530 |
| | 944 |
| | 2,666 |
|
| Charge-offs | | — |
| | — |
| | (2,119 | ) | | (2,119 | ) |
| Recoveries | | 106 |
| | — |
| | — |
| | 106 |
|
| Net (charge-offs) recoveries | | 106 |
| | — |
| | (2,119 | ) | | (2,013 | ) |
| Balance as of November 30, 2016 | | $ | 25,857 |
| | $ | 3,664 |
| | $ | 4,390 |
| | $ | 33,911 |
|
|
| | | | | | | | | | | | | | | | |
| | | August 31, 2020 |
| (Dollars in thousands) | | CFC | | NCSC | | RTFC | | Total |
| Allowance components: | | | | | | | | |
| Collective allowance | | $ | 19,914 |
| | $ | 829 |
| | $ | 2,776 |
| | $ | 23,519 |
|
| Asset-specific allowance | | 32,816 |
| | — |
| | 1,016 |
| | 33,832 |
|
| Total allowance for credit losses | | $ | 52,730 |
| | $ | 829 |
| | $ | 3,792 |
| | $ | 57,351 |
|
| | | | | | | | | |
Loans outstanding:(1) | | | | | | | | |
| Collectively evaluated loans | | $ | 25,672,804 |
| | $ | 681,321 |
| | $ | 391,151 |
| | $ | 26,745,276 |
|
| Individually evaluated loans | | 166,856 |
| | — |
| | 4,967 |
| | 171,823 |
|
| Total loans outstanding | | $ | 25,839,660 |
| | $ | 681,321 |
| | $ | 396,118 |
| | $ | 26,917,099 |
|
| | | | | | | | | |
| Allowance ratios: | | | | | | | | |
Collective allowance coverage ratio(2) | | 0.08 | % | | 0.12 | % | | 0.71 | % | | 0.09 | % |
Asset-specific allowance coverage ratio(3) | | 19.67 |
| | — |
| | 20.46 |
| | 19.69 |
|
Total allowance coverage ratio(4) | | 0.20 |
| | 0.12 |
| | 0.96 |
| | 0.21 |
|
The tables below present, by company, |
| | | | | | | | | | | | | | | | |
| | | May 31, 2020 |
| (Dollars in thousands) | | CFC | | NCSC | | RTFC | | Total |
| Allowance components: | | | | | | | | |
| Collective allowance | | $ | 13,584 |
| | $ | 806 |
| | $ | 3,902 |
| | $ | 18,292 |
|
| Asset-specific allowance | | 33,854 |
| | — |
| | 979 |
| | 34,833 |
|
| Total allowance for credit losses | | $ | 47,438 |
| | $ | 806 |
| | $ | 4,881 |
| | $ | 53,125 |
|
| | | | | | | | | |
Loans outstanding:(1) | | | | | | | | |
| Collectively evaluated loans | | $ | 25,434,193 |
| | $ | 697,862 |
| | $ | 380,243 |
| | $ | 26,512,298 |
|
| Individually evaluated loans | | 173,464 |
| | — |
| | 5,092 |
| | 178,556 |
|
| Total loans outstanding | | $ | 25,607,657 |
| | $ | 697,862 |
| | $ | 385,335 |
| | $ | 26,690,854 |
|
| | | | | | | | | |
| Allowance coverage ratios: | | | | | | | | |
Collective allowance coverage ratio(2) | | 0.05 | % | | 0.12 | % | | 1.03 | % | | 0.07 | % |
Asset-specific allowance coverage ratio(3) | | 19.52 |
| | — |
| | 19.23 |
| | 19.51 |
|
Total allowance coverage ratio(4) | | 0.19 |
| | 0.12 |
| | 1.27 |
| | 0.20 |
|
____________________________
(1)Represents the componentsunpaid principal amount of our allowance for loan losses and the recorded investment of the related loans as of November 30, 2017the end of each period. Excludes unamortized deferred loan origination costs of $12 million as of both August 31, 2020 and May 31, 2017.2020.
(2)Calculated based on the collective allowance component at period end divided by collectively evaluated loans outstanding at period end.
(3)Calculated based on the asset-specific allowance component at period end divided by individually evaluated loans outstanding at period end.
(4)Calculated based on the total allowance for credit losses at period end divided by total loans outstanding at period end.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| | | November 30, 2017 |
| (Dollars in thousands) | | CFC | | NCSC | | RTFC | | Total |
| Allowance by company: | | | | | | | | |
| Collective allowance | | $ | 28,799 |
| | $ | 3,117 |
| | $ | 3,528 |
| | $ | 35,444 |
|
| Specific allowance | | — |
| | — |
| | 1,330 |
| | 1,330 |
|
| Total allowance for loan losses | | $ | 28,799 |
| | $ | 3,117 |
| | $ | 4,858 |
| | $ | 36,774 |
|
| | | | | | | | | |
| Recorded investment in loans: | | | | | | | | |
| Collectively evaluated loans | | $ | 23,695,597 |
| | $ | 739,707 |
| | $ | 365,390 |
| | $ | 24,800,694 |
|
| Individually evaluated loans | | 6,507 |
| | — |
| | 6,341 |
| | 12,848 |
|
| Total recorded investment in loans | | $ | 23,702,104 |
| | $ | 739,707 |
| | $ | 371,731 |
| | $ | 24,813,542 |
|
| | | | | | | | | |
Total recorded investment in loans, net(1) | | $ | 23,673,305 |
| | $ | 736,590 |
| | $ | 366,873 |
| | $ | 24,776,768 |
|
Individually Impaired Loans Under Incurred Loss Methodology
Prior to our adoption of CECL on June 1, 2020, we assessed loan impairment on a collective basis unless we considered a loan to be impaired. We assessed loan impairment on an individual basis when, based on current information, it was probable that we would not receive all principal and interest amounts due in accordance with the contractual terms of the original loan agreement. In connection with our adoption of CECL, we no longer provide information on impaired loans. The following table provides information on loans previously classified as individually impaired under the incurred loss model for determining the allowance for credit losses.
Table 5.3: Individually Impaired Loans—Incurred Loss Model
|
| | | | | | | | | | | | | | | | |
| | | May 31, 2017 |
| (Dollars in thousands) | | CFC | | NCSC | | RTFC | | Total |
| Allowance by company: | | | | | | | | |
| Collective allowance | | $ | 29,499 |
| | $ | 2,910 |
| | $ | 3,327 |
| | $ | 35,736 |
|
| Specific allowance | | — |
| | — |
| | 1,640 |
| | 1,640 |
|
| Total ending balance of the allowance | | $ | 29,499 |
| | $ | 2,910 |
| | $ | 4,967 |
| | $ | 37,376 |
|
| | | | | | | | | |
| Recorded investment in loans: | | | | | | | | |
| Collectively evaluated loans | | $ | 23,381,406 |
| | $ | 613,924 |
| | $ | 347,827 |
| | $ | 24,343,157 |
|
| Individually evaluated loans | | 6,581 |
| | — |
| | 6,592 |
| | 13,173 |
|
| Total recorded investment in loans | | $ | 23,387,987 |
| | $ | 613,924 |
| | $ | 354,419 |
| | $ | 24,356,330 |
|
| | | | | | | | | |
Total recorded investment in loans, net(1) | | $ | 23,358,488 |
| | $ | 611,014 |
| | $ | 349,452 |
| | $ | 24,318,954 |
|
____________________________
(1) Excludes unamortized deferred loan origination costs $11 million as of both November 30, 2017 and May 31, 2017. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | May 31, 2020 | | Three Months Ended August 31, 2019 |
| (Dollars in thousands) | | Recorded Invested | | Related Allowance | | With Specific Allowance | | With No Specific Allowance | | Average Recorded Investment | | Interest Income Recognized |
| Individually impaired loans: | | | | | | | | | | | | |
| CFC | | $ | 173,463 |
| | $ | 33,854 |
| | $ | 167,708 |
| | $ | 5,755 |
| | $ | 6,239 |
| | $ | 137 |
|
| RTFC | | 5,092 |
| | 979 |
| | 5,092 |
| | — |
| | 5,547 |
| | 69 |
|
| Total | | $ | 178,555 |
| | $ | 34,833 |
| | $ | 172,800 |
| | $ | 5,755 |
| | $ | 11,786 |
| | $ | 206 |
|
Reserve for Credit Losses—Unadvanced Loan Commitments
We alsoIn addition to the allowance for credit losses for our loan portfolio, we maintain a reservean allowance for unadvanced loan commitments at a level estimated by management to provide for probablecredit losses under these commitments as of each balance sheet dated. Unadvanced loan commitments are analyzed and segregated by loan type and risk using our internal risk rating scales. We use these risk classifications, in combination with the probability of commitment usage, and any other pertinent information to estimate a reserve for unadvanced loan commitments, which we recordrefer to as our reserve for credit losses because this amount is reported as a liabilitycomponent of other liabilities on our condensed consolidated balance sheets. Upon adoption of CECL on June 1, 2020, we began measuring the reserve for credit losses for unadvanced loan commitments based on expected credit losses over the contractual period of our exposure to credit risk arising from our obligation to extend credit, unless that obligation is unconditionally cancellable by us. The reserve for thesecredit losses related to our off-balance sheet exposure for unadvanced loan commitments was $0.1less than $1 million as of both November 30, 2017August 31, 2020 and May 31, 2017.2020.
|
| | | | |
NOTE 5—6—SHORT-TERM BORROWINGS |
Short-term borrowings consist of borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. Our short-term borrowings totaled $3,557$4,553 million and accounted for 15%17% of total debt outstanding as of November 30, 2017,August 31, 2020, compared with $3,343$3,962 million or 14%,and 15% of total debt outstanding as of May 31, 2017. 2020. The following table provides comparative information on our short-term borrowings as of August 31, 2020 and May 31, 2020.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 6.1: Short-Term Borrowings Sources
|
| | | | | | | | |
| (Dollars in thousands) | | August 31, 2020 |
| May 31, 2020 |
| Short-term borrowings: | | | | |
| Commercial paper: | | | | |
| Commercial paper sold through dealers, net of discounts | | $ | 299,998 |
| | $ | — |
|
| Commercial paper sold directly to members, at par | | 1,421,582 |
| | 1,318,566 |
|
| Total commercial paper | | 1,721,580 |
| | 1,318,566 |
|
| Select notes to members | | 1,655,029 |
| | 1,597,959 |
|
| Daily liquidity fund notes | | 645,036 |
| | 508,618 |
|
| Medium-term notes sold to members | | 281,846 |
| | 286,842 |
|
Farmer Mac notes payable (1) | | 250,000 |
| | 250,000 |
|
| Total short-term borrowings | | $ | 4,553,491 |
| | $ | 3,961,985 |
|
____________________________
(1) Advanced under the revolving purchase agreement with Farmer Mac dated March 24, 2011. See “Note 7—Long-Term Debt” for additional information on this revolving note purchase agreement.
Committed Bank Revolving Line of Credit Agreements
We had $3,085 million and $3,165 million of commitments under committed bank revolving line of credit agreements as of November 30, 2017 and May 31, 2017, respectively. Under our current committed bank revolving line of credit agreements, we have the abilityhad a total commitment of $2,725 million as of both August 31, 2020 and May 31, 2020. These agreements allow us to request up to $300 million of letters of credit, which would result in a reduction inreduce the remaining amount available amount under the facilities.
On November 20, 2017, we amended and restated the three-year and five-year committed bank revolving line of credit agreements to extend the maturity dates to November 20, 2020 and November 20, 2022, respectively, and to terminate certain third-party bank commitments totaling $40 million under the three-year agreement and $40 million under the five- year agreement. As a result, the total commitment amount from third-parties under the three-year facility and the five-year facility is $1,493 million and $1,592 million, respectively, resulting in a combined total commitment amount under the two facilities of $3,085 million.
for our use. The following table presents the total commitment, letters of credit outstanding and the net amount available for use and the outstanding letters of credit under our committed bank revolving line of credit agreementsaccess as of November 30, 2017August 31, 2020 and May 31, 2017.2020.
Table 6.1: Committed Bank Revolving Line of Credit Agreements Available Amounts
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | November 30, 2017 |
| May 31, 2017 |
| |
| |
| (Dollars in millions) | | Total Commitment |
| Letters of Credit Outstanding |
| Net Available for Use |
| Total Commitment |
| Letters of Credit Outstanding |
| Net Available for Use |
| Maturity |
| Annual Facility Fee (1) |
| 3-year agreement | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,533 |
| | $ | — |
| | $ | 1,533 |
| | November 19, 2019 | | 7.5 bps |
| 3-year agreement | | 1,493 |
| | — |
| | 1,493 |
| | — |
| | — |
| | — |
| | November 20, 2020 | | 7.5 bps |
| Total 3-year agreement | | 1,493 |
| | — |
| | 1,493 |
| | 1,533 |
| | — |
| | 1,533 |
| | | | |
| 5-year agreement | | — |
| | — |
| | — |
| | 1,632 |
| | 1 |
| | 1,631 |
| | November 19, 2021 | | 10 bps |
| 5-year agreement | | 1,592 |
| | 2 |
| | 1,590 |
| | — |
| | — |
| | — |
| | November 20, 2022 | | 10 bps |
| Total 5-year agreement | | 1,592 |
|
| 2 |
|
| 1,590 |
|
| 1,632 |
|
| 1 |
|
| 1,631 |
|
| |
| |
| Total | | $ | 3,085 |
| | $ | 2 |
| | $ | 3,083 |
| | $ | 3,165 |
| | $ | 1 |
| | $ | 3,164 |
| | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | August 31, 2020 | | May 31, 2020 |
| |
| |
| (Dollars in millions) | | Total Commitment |
| Letters of Credit Outstanding |
| Available Amount |
| Total Commitment |
| Letters of Credit Outstanding |
| Available Amount |
| Maturity |
| Annual Facility Fee (1) |
| 3-year agreement, 2022 | | 1,315 |
| | — |
| | 1,315 |
| | 1,315 |
| | — |
| | 1,315 |
| | November 28, 2022 | | 7.5 bps |
| 5-year agreement, 2023 | | 1,410 |
| | 3 |
| | 1,407 |
| | 1,410 |
| | 3 |
| | 1,407 |
| | November 28, 2023 | | 10 bps |
| Total | | 2,725 |
| | 3 |
| | 2,722 |
| | 2,725 |
| | 3 |
| | 2,722 |
| | | | |
____________________________
(1) Facility fee determined by CFC’s senior unsecured credit ratings based on the pricing schedules put in place at the inception of the related agreement.
We had no borrowings outstanding under our committed bank revolving line of credit agreements as of August 31, 2020 or May 31, 2020, and we were in compliance with all covenants and conditions under our committed bank revolving line of credit agreements and there were no borrowings outstanding under thesethe agreements as of November 30, 2017 and May 31, 2017.each date.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table displays long-term debt outstanding, by debt type, as of November 30, 2017August 31, 2020 and May 31, 2017.2020.
Table 7.1: Long-Term Debt by Debt Type
| | | (Dollars in thousands) | | November 30, 2017 | | May 31, 2017 | | August 31, 2020 | | May 31, 2020 |
| Secured long-term debt: | | | |
| | |
|
| Collateral trust bonds | | | $ | 7,057,711 |
| | $ | 7,457,711 |
|
| Unamortized discount | | | (233,748 | ) | | (236,461 | ) |
| Debt issuance costs | | | (31,515 | ) | | (32,697 | ) |
| Total collateral trust bonds | | | 6,792,448 |
| | 7,188,553 |
|
| Guaranteed Underwriter Program notes payable | | | 6,225,855 |
| | 6,261,312 |
|
| Farmer Mac notes payable | | | 2,791,843 |
| | 2,809,637 |
|
| Other secured notes payable | | | 6,068 |
| | 6,068 |
|
| Debt issuance costs | | | (101 | ) | | (117 | ) |
| Total other secured notes payable | | | 5,967 |
| | 5,951 |
|
| Total secured notes payable | | | 9,023,665 |
| | 9,076,900 |
|
| Total secured long-term debt | | | 15,816,113 |
| | 16,265,453 |
|
| Unsecured long-term debt: | | | | | | | | |
| Medium-term notes sold through dealers | | $ | 2,781,757 |
| | $ | 2,386,956 |
| | 3,060,194 |
| | 3,086,733 |
|
| Medium-term notes sold to members | | 404,567 |
| | 422,779 |
| | 316,402 |
| | 372,117 |
|
| Subtotal medium-term notes | | 3,186,324 |
| | 2,809,735 |
| | 3,376,596 |
| | 3,458,850 |
|
| Unamortized discount | | (375 | ) | | (382 | ) | | (852 | ) | | (997 | ) |
| Debt issuance costs | | (23,192 | ) | | (21,903 | ) | | (16,019 | ) | | (16,943 | ) |
| Total unsecured medium-term notes | | 3,162,757 |
| | 2,787,450 |
| | 3,359,725 |
| | 3,440,910 |
|
| Unsecured notes payable | | 22,799 |
| | 22,799 |
| | 5,794 |
| | 5,794 |
|
| Unamortized discount | | (324 | ) | | (379 | ) | | (90 | ) | | (107 | ) |
| Debt issuance costs | | (80 | ) | | (94 | ) | | (22 | ) | | (26 | ) |
| Total unsecured notes payable | | 22,395 |
| | 22,326 |
| | 5,682 |
| | 5,661 |
|
| Total unsecured long-term debt | | 3,185,152 |
| | 2,809,776 |
| | 3,365,407 |
| | 3,446,571 |
|
| Secured long-term debt: | | |
| | |
| |
| Collateral trust bonds | | 7,917,711 |
| | 7,922,711 |
| |
| Unamortized discount | | (253,449 | ) | | (258,329 | ) | |
| Debt issuance costs | | (26,938 | ) | | (30,334 | ) | |
| Total collateral trust bonds | | 7,637,324 |
| | 7,634,048 |
| |
| Guaranteed Underwriter Program notes payable | | 5,060,192 |
| | 4,985,748 |
| |
| Debt issuance costs | | (249 | ) | | (264 | ) | |
| Total Guaranteed Underwriter Program notes payable | | 5,059,943 |
| | 4,985,484 |
| |
| Farmer Mac notes payable | | 2,491,463 |
| | 2,513,389 |
| |
| Other secured notes payable | | 13,214 |
| | 13,214 |
| |
| Debt issuance costs | | (277 | ) | | (317 | ) | |
| Total other secured notes payable | | 12,937 |
| | 12,897 |
| |
| Total secured notes payable | | 7,564,343 |
| | 7,511,770 |
| |
| Total secured long-term debt | | 15,201,667 |
| | 15,145,818 |
| |
| Total long-term debt | | $ | 18,386,819 |
| | $ | 17,955,594 |
| | $ | 19,181,520 |
| | $ | 19,712,024 |
|
Medium-Term Notes
Medium-term notes represent unsecured obligations that may be issued through dealers in the capital markets or directly to our members.
Collateral Trust Bonds
Collateral trust bonds represent secured obligations sold to investors in the capital markets. Collateral trust bonds are secured by the pledge of mortgage notes or eligible securities in an amount at least equal to the principal balance of the bonds outstanding. In June 2020, we redeemed all $400 million outstanding principal amount of our 2.35% collateral trust
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
bonds due June 15, 2020. On October 1, 2020, we redeemed all $350 million outstanding principal amount of our 2.30% collateral trust bonds, due November 1, 2020.
Secured Notes Payable
We had outstanding secured notes payable totaling $5,060$6,226 million and $4,985$6,261 million as of November 30, 2017August 31, 2020 and May 31, 2017,2020, respectively, under bond purchase agreements with the Federal Financing Bank and a bond guarantee agreement with RUS issued under the Guaranteed Underwriter Program, which provides guarantees to the Federal Financing Bank. We pay RUS a fee of 30 basis points per year on the total amount outstanding. We had up to $900 million available for access under the Guaranteed Underwriter Program as of August 31, 2020. On November 9, 2017,September 16, 2020, we closed onreceived a $750commitment letter for the guarantee by RUS for a $375 million committed loan facility (“Series M”) from the Federal Financing Bank under the Guaranteed Underwriter Program. Pursuant to this facility, we may borrow any time before July 15, 2022. Each advance is subject to quarterly amortization and a final maturity not longer than 20 years from the advance date.
The closing of this committed loan facility increased the amount available for accessnotes outstanding under the Guaranteed Underwriter Program contain a provision that if during any portion of the fiscal year, our senior secured credit ratings do not have at least two of the following ratings: (i) A3 or higher from Moody’s, (ii) A- or higher from S&P, (iii) A- or higher from Fitch, or (iv) an equivalent rating from a successor rating agency to $1,375 million asany of November 30, 2017.
the above rating agencies, we may not make cash patronage capital distributions in excess of 5% of total patronage capital. We are required to pledge eligible distribution system or power supply system loans as collateral in an amount at least equal to the total principal amount of notes outstanding under the Guaranteed Underwriter Program. See “Note 4—Loans and Commitments”Loans” for additional information on the collateral pledged to secure notes payable under this program.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We have two revolving note purchase agreements with Farmer Mac, which together allow us to borrow up to $4,800 million from Farmer Mac. Under the terms of the firsta revolving note purchase agreement with Farmer Mac, dated March 24, 2011, as amended, under which we can borrow up to $5,500 million from Farmer Mac at any time, subject to market conditions, up to $4,500 million at any time through January 11, 2020, and such2022. This date shall automatically extendextends on each anniversary date of the closing for an additional year, unless prior to any such anniversary date, Farmer Mac provides us with a notice that the draw period will not be extended beyond the remaining term. ThisPursuant to the terms of the Farmer Mac revolving note purchase agreement, allows us towe can borrow, repay and re-borrow funds at any time through maturity, as market conditions permit, provided that the outstanding principal amount at any time does not exceed the total available under the agreement. Each borrowing under the revolving note purchase agreement is evidenced by a pricing agreement setting forth the interest rate, maturity date and other related terms as we may negotiate with Farmer Mac at the time of each such borrowing. We may select a fixed rate or variable rate at the time of each advance with a maturity as determined in the applicable pricing agreement. Under this note purchase agreement, with Farmer Mac, we had outstanding secured notes payable totaling $2,491$2,792 million and $2,513$2,810 million as of November 30, 2017August 31, 2020 and May 31, 2017,2020, respectively. The amount available for borrowing under this agreement was $2,458 million as of August 31, 2020.
UnderPursuant to the terms of the secondFarmer Mac revolving note purchase agreement, with Farmer Mac dated July 31, 2015, we can borrow up to $300 million at any time through July 31, 2018 at a fixed spread over LIBOR. This agreement also allows us to borrow, repay and re-borrow funds at any time through maturity, provided that the outstanding principal amount at any time does not exceed the total available under the agreement. We had no notes payable outstanding under this revolving note purchase agreement with Farmer Mac as of November 30, 2017 and May 31, 2017.
We are required to pledge eligible electric distribution system or electric power supply system loans as collateral in an amount at least equal to the total principal amount of notes outstanding under each of our Farmer Mac revolving note purchase agreements.outstanding. See “Note 4—Loans and Commitments”Loans” for additional information on the collateral pledged to secure notes payable under these programs.collateral.
We were in compliance with all covenants and conditions under our senior debt indentures as of November 30, 2017August 31, 2020 and May 31, 2017.2020.
|
| | | | |
NOTE 7—8—SUBORDINATED DEFERRABLE DEBT |
Subordinated deferrable debt is long-term debt that is subordinated to our outstanding debt and senior to subordinated certificates held by our members. The following table presents our issuances of subordinated deferrable debt outstanding as of November 30, 2017August 31, 2020 and May 31, 2017.2020.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 8.1: Subordinated Deferrable Debt Outstanding
| | | | | November 30, 2017 | | May 31, 2017 | | | | | | | |
| (Dollars in thousands) | | Amount | | Amount | | August 31, 2020 | | May 31, 2020 |
| Subordinated deferrable debt: | | | | | |
| 4.75% due 2043 with a call date of April 30, 2023 | | $ | 400,000 |
| | $ | 400,000 |
| | $ | 400,000 |
| | $ | 400,000 |
|
| 5.25% due 2046 with a call date of April 20, 2026 | | 350,000 |
| | 350,000 |
| | 350,000 |
| | 350,000 |
|
| 5.50% due 2064 with a call date of May 15, 2024 | | | 250,000 |
| | 250,000 |
|
| Debt issuance costs | | (7,659 | ) | | (7,726 | ) | | (13,834 | ) | | (13,881 | ) |
| Total subordinated deferrable debt | | $ | 742,341 |
| | $ | 742,274 |
| | $ | 986,166 |
| | $ | 986,119 |
|
See “Note 8—Subordinated Deferrable Debt” in our 2020 Form 10-K for additional information on the terms of our subordinated deferrable debt outstanding.
|
|
NOTE 8—9—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
Use of Derivatives
We are an end user of derivative financial instruments and do not engage in derivative trading. We use derivatives, primarily interest rate swaps and Treasury rate locks, to manage interest rate risk. Derivatives may be privately negotiated contracts, which are often referred to as over-the-counterother-the-counter (“OTC”) derivatives, or they may be listed and traded on an exchange. We generally engage in OTC derivative transactions.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Our derivative instruments are an integral part of our interest rate risk management strategy. Our principal purpose in using derivatives is to manage our aggregate interest rate risk profile within prescribed risk parameters. The derivative instruments we use primarily include interest rate swaps, which we typically hold to maturity. In addition, we may on occasion use treasury locks to manage the interest rate risk associated with debt that is scheduled to reprice in the future.
Accounting for Derivatives
In accordance with the accounting standards for derivatives and hedging activities, we recordall derivative instruments are recorded at fair value on our consolidated balance sheets and classified as either a derivative assetassets or derivative liability on our condensed consolidated balance sheets.liabilities. Derivatives in a gain position are reported as derivative assets, while derivatives in a loss position are reported as derivative liabilities. We report derivative asset and liability amounts on a gross basis based on individual contracts, which does not take into consideration the effects of master netting agreements or collateral netting. Derivatives in a gain positionOur derivatives transactions are reported as derivative assets on our condensed consolidated balance sheets, while derivatives in a loss position are reported as derivative liabilities.not collateralized and do not include collateralization agreements with counterparties. Accrued interest related to derivativesderivative transactions is reported on our condensed consolidated balance sheets as a component of either accrued interest and other receivablesreceivable or accrued interest payable.
If we do not elect hedge accounting treatment, changes in the fair value of derivative instruments, which consist of net accrued periodic derivative cash settlements expense and derivative forward value amounts, are recognized in our consolidated statements of operations under derivative gains (losses). If we elect hedge accounting treatment for derivatives, we formally document, designate and assess the effectiveness of the hedge relationship. Changes in the fair value of derivatives designated as qualifying fair value hedges are recorded in earnings together with offsetting changesrecognized in the fair valuesame line item on our consolidated statements of operations as the earnings effect of the related hedged item and any related ineffectiveness.item. Changes in the fair value of derivatives designated as qualifying cash flow hedges are recorded as a component of OCI, toAOCI. Those amounts are reclassified into earnings in the extent thatsame period during which the hedge relationships are effective,forecasted transaction impacts earnings and reclassified AOCI topresented in the same line item on our consolidated statements of operations as the earnings using the effective interest method over the termeffect of the forecasted transaction. Any ineffectiveness in the hedging relationship is recognized as a component of derivative gains (losses) in our consolidated statement of operations.related hedged item.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We generally do not designate our interest rate swaps which currently represent all of our outstanding derivatives, for hedge accounting. Accordingly,Therefore, changes in the fair value of our interest rate swaps are reported inon our consolidated statements of operations under derivative gains (losses). Net periodicIf we enter into a treasury lock, we typically designate the treasury lock as a cash settlements related to interest rate swaps are classifiedflow hedge. We did not have any derivatives designated as an operating activity in our consolidated statementsaccounting hedges as of cash flows.August 31, 2020 or May 31, 2020.
Outstanding Notional Amount of Derivatives Not Designated as Accounting Hedges
The notional amount provides an indication of the volume of our derivatives activity, but this amount is not recorded on our condensed consolidated balance sheets. The notional amount is used only as the basis on which interest payments are determined and is not the amount exchanged. The following table shows the outstanding notional amounts and the weighted-average rate paid and received for our interest rate swaps, by type, as of November 30, 2017August 31, 2020 and May 31, 2017.2020. The substantial majority of our interest rate swaps use an index based on the London Interbank Offered Rate (“LIBOR”)LIBOR for either the pay or receive leg of the swap agreement.
Table 9.1: Derivative Notional Amount and Weighted Average Rates
| | | | | November 30, 2017 | | May 31, 2017 | | August 31, 2020 | | May 31, 2020 |
| (Dollars in thousands) | | Notional Amount | | Weighted- Average Rate Paid | | Weighted- Average Rate Received | | Notional
Amount | | Weighted-
Average
Rate Paid | | Weighted-
Average
Rate Received | | Notional Amount | | Weighted- Average Rate Paid | | Weighted- Average Rate Received | | Notional
Amount | | Weighted-
Average
Rate Paid | | Weighted-
Average
Rate Received |
| Pay-fixed swaps | | $ | 6,974,906 |
| | 2.84 | % | | 1.39 | % | | $ | 6,807,013 |
| | 2.85 | % | | 1.16 | % | | $ | 6,540,816 |
| | 2.79 | % | | 0.29 | % | | $ | 6,604,808 |
| | 2.78 | % | | 0.88 | % |
| Receive-fixed swaps | | 3,849,000 |
| | 1.94 |
| | 2.63 |
| | 3,699,000 |
| | 1.72 |
| | 2.64 |
| | 2,599,000 |
| | 1.01 |
| | 2.76 |
| | 2,699,000 |
| | 1.54 |
| | 2.75 |
|
| Total interest rate swaps | | 10,823,906 |
| | 2.52 |
| | 1.83 |
| | 10,506,013 |
| | 2.46 |
| | 1.68 |
| | 9,139,816 |
| | 2.28 |
| | 0.99 |
| | 9,303,808 |
| | 2.42 |
| | 1.42 |
|
| Forward pay-fixed swaps | | 226,255 |
| | | | | | 285,383 |
| | | | | | 120,000 |
| | | | | | 3,000 |
| | | | |
| Total | | $ | 11,050,161 |
| | | | | | $ | 10,791,396 |
| | | | | | $ | 9,259,816 |
| | | | | | $ | 9,306,808 |
| | | | |
Impact of Derivatives on Condensed Consolidated Balance Sheets
The following table displays the fair value of the derivative assets and derivative liabilities, by derivatives type, recorded on our condensed consolidated balance sheets and the related outstanding notional amount of our interest rate swaps as of November 30, 2017August 31, 2020 and May 31, 2017.
2020.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 9.2: Derivative Assets and Liabilities at Fair Value
|
| | | | | | | | | | | | | | | | |
| | | November 30, 2017 | | May 31, 2017 |
| (Dollars in thousands) | | Fair Value | | Notional Balance | | Fair Value | | Notional Balance |
| Derivative assets | | $ | 87,453 |
| | $ | 3,916,647 |
| | $ | 49,481 |
| | $ | 3,754,120 |
|
| Derivative liabilities | | (304,307 | ) | | 7,133,514 |
| | (385,337 | ) | | 7,037,276 |
|
| Total | | $ | (216,854 | ) | | $ | 11,050,161 |
| | $ | (335,856 | ) | | $ | 10,791,396 |
|
|
| | | | | | | | | | | | | | | | |
| | | August 31, 2020 | | May 31, 2020 |
| (Dollars in thousands) | | Fair Value | | Notional Amount | | Fair Value | | Notional Amount |
| Derivative assets: | | | | | | | | |
| Interest rate swaps | | $ | 167,463 |
| | $ | 2,722,000 |
| | $ | 173,195 |
| | $ | 2,699,000 |
|
| | | | | | | | | |
| Derivative liabilities: | | | | | | | | |
| Interest rate swaps | | $ | 1,165,585 |
| | $ | 6,537,816 |
| | $ | 1,258,459 |
| | $ | 6,607,808 |
|
All of our master swap agreements include legally enforceable netting provisions that allow for offsetting of all contracts with a given counterparty in the event of default by one of the two parties. However, as indicated above, we report derivative asset and liability amounts on a gross basis by individual contracts. The following table presents the gross fair value of derivative assets and liabilities reported on our condensed consolidated balance sheets as of November 30, 2017August 31, 2020 and May 31, 2017,2020, and provides information on the impact of netting provisions and collateral pledged.pledged, if any.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 9.3: Derivative Gross and Net Amounts
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | August 31, 2020 |
| | | Gross Amount of Recognized Assets/ Liabilities | | Gross Amount Offset in the Balance Sheet | | Net Amount of Assets/ Liabilities Presented in the Balance Sheet | | Gross Amount Not Offset in the Balance Sheet | | |
| (Dollars in thousands) | | | | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
| Derivative assets: | | | | | | | | | | | | |
| Interest rate swaps | | $ | 167,463 |
| | $ | — |
| | $ | 167,463 |
| | $ | 167,463 |
| | $ | — |
| | $ | — |
|
| Derivative liabilities: | | | | | | | | | | | | |
| Interest rate swaps | | 1,165,585 |
| | — |
| | 1,165,585 |
| | 167,463 |
| | — |
| | 998,122 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | November 30, 2017 |
| | | Gross Amount of Recognized Assets/ Liabilities | | Gross Amount Offset in the Balance Sheet | | Net Amount of Assets/ Liabilities Presented in the Balance Sheet | | Gross Amount Not Offset in the Balance Sheet | | |
| (Dollars in thousands) | | | | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
| Derivative assets: | | | | | | | | | | | | |
| Interest rate swaps | | $ | 87,453 |
| | $ | — |
| | $ | 87,453 |
| | $ | 79,373 |
| | $ | — |
| | $ | 8,080 |
|
| Derivative liabilities: | | | | | | | | | | | | |
| Interest rate swaps | | 304,307 |
| | — |
| | 304,307 |
| | 79,373 |
| | — |
| | 224,934 |
|
| | | | | May 31, 2017 | | May 31, 2020 |
| | | Gross Amount of Recognized Assets/ Liabilities | | Gross Amount Offset in the Balance Sheet | | Net Amount of Assets/ Liabilities Presented in the Balance Sheet | | Gross Amount Not Offset in the Balance Sheet | | | | Gross Amount of Recognized Assets/ Liabilities | | Gross Amount Offset in the Balance Sheet | | Net Amount of Assets/ Liabilities Presented in the Balance Sheet | | Gross Amount Not Offset in the Balance Sheet | | |
| (Dollars in thousands) | | Financial Instruments | | Cash Collateral Pledged | | Net Amount | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
| Derivative assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | | $ | 49,481 |
| | $ | — |
| | $ | 49,481 |
| | $ | 49,481 |
| | $ | — |
| | $ | — |
| | $ | 173,195 |
| | $ | — |
| | $ | 173,195 |
| | $ | 173,195 |
| | $ | — |
| | $ | — |
|
| Derivative liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | | 385,337 |
| | — |
| | 385,337 |
| | 49,481 |
| | — |
| | 335,856 |
| | 1,258,459 |
| | — |
| | 1,258,459 |
| | 173,195 |
| | — |
| | 1,085,264 |
|
Impact of Derivatives on Condensed Consolidated Statements of Operations
DerivativeThe primary factors affecting the fair value of our derivatives and the derivative gains (losses) recorded in our consolidated statements of operations include changes in interest rates, the shape of the swap curve and the composition of our derivative portfolio. We generally record derivative losses when interest rates decline and derivative gains when interest rates rise, as our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps.
The following table presents the components of the derivative gains (losses) reported in our condensed consolidated statements of operations consist of derivative cash settlementsfor the three months ended August 31, 2020 and derivative forward value gains (losses).2019. Derivative cash settlements representinterest expense represents the net periodic contractual interest expense accruals on interest rateamount for our interest-rate swaps during the reporting period. The derivativeDerivative forward value gains (losses) represent the change in fair value of our interest rate swaps during the reporting period due to changes in the estimate ofexpected future interest rates over the remaining life of our derivative contracts.
The following table presents the components of We classify the derivative gains (losses) reported in our condensed consolidated statements of operationscash settlement amounts for the net periodic contractual interest expense on our interest rate swaps for the three and six months ended November 30, 2017 and 2016.as an operating activity in our consolidated statements of cash flows.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 9.4: Derivative Gains (Losses)
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended November 30, | | Six Months Ended November 30, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Derivative cash settlements | | $ | (19,635 | ) | | $ | (21,587 | ) | | $ | (39,857 | ) | | $ | (44,977 | ) |
| Derivative forward value gains | | 145,228 |
| | 362,247 |
| | 119,252 |
| | 197,344 |
|
| Derivative gains | | $ | 125,593 |
| | $ | 340,660 |
| | $ | 79,395 |
| | $ | 152,367 |
|
|
| | | | | | | | |
| | | Three Months Ended August 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Derivative gains (losses) attributable to: | | | | |
| Derivative cash settlements interest expense | | $ | (26,972 | ) | | $ | (11,043 | ) |
| Derivative forward value gains (losses) | | 87,248 |
| | (384,682 | ) |
| Derivative gains (losses) | | $ | 60,276 |
| | $ | (395,725 | ) |
Credit-Risk-RelatedCredit Risk-Related Contingent Features
Our derivative contracts typically contain mutual early terminationearly-termination provisions, generally in the form of a credit rating trigger. Under the mutual credit rating trigger provisions, either counterparty may, but is not obligated to, terminate and settle the agreement if the credit rating of the other counterparty falls tobelow a level specified in the agreement. If a derivative contract is terminated, the amount to be received or paid by us would be equal to the mark-to-marketprevailing fair value, as defined in the agreement, as of the termination date.
Our senior unsecured credit ratings from Moody’s and S&P were A2 and A, respectively, as of November 30, 2017.August 31, 2020. Both Moody’s and S&P had our ratings on stable outlook as of November 30, 2017.August 31, 2020. The following table displays the notional amounts of our derivative contracts with rating triggers as of November 30, 2017August 31, 2020, and the payments that would be required if the contracts were terminated as of that date because of a downgrade of our unsecured credit ratings or the counterparty’s unsecured credit ratings below A3/A-, below Baa1/BBB+, to or below Baa2/BBB, below Baa3/BBB-, or to or below Ba2/BB+ by Moody’s or S&P, respectively. In calculating the payment amounts that would be required upon termination of the derivative contracts, we assumedassume that the amounts for each counterparty would be netted in accordance with the provisions of the master netting agreements for eachwith the counterparty. The net payment amounts are based on the fair value of the underlying derivative instrument, excluding the credit risk valuation adjustment, plus any unpaid accrued interest amounts.
Table 9.5: Derivative Credit Rating Trigger Exposure
| | | (Dollars in thousands) | | Notional Amount | | Payable Due From CFC | | Receivable Due to CFC | | Net (Payable)/Receivable | | Notional Amount | | Payable Due from CFC | | Receivable Due to CFC | | Net (Payable)/Receivable |
| Impact of rating downgrade trigger: | | | | | | | | | | | | | | | | |
Falls below A3/A-(1) |
| $ | 56,985 |
|
| $ | (11,670 | ) |
| $ | — |
|
| $ | (11,670 | ) |
| $ | 45,860 |
|
| $ | (10,614 | ) |
| $ | — |
|
| $ | (10,614 | ) |
| Falls below Baa1/BBB+ | | 7,236,383 |
|
| (143,459 | ) |
| 7,428 |
|
| (136,031 | ) | | 6,029,690 |
|
| (634,659 | ) |
| — |
|
| (634,659 | ) |
Falls to or below Baa2/BBB (2) | | 455,152 |
|
| — |
|
| 1,577 |
|
| 1,577 |
| | 417,041 |
|
| (31,630 | ) |
| — |
|
| (31,630 | ) |
| Falls below Baa3/BBB- | | 264,981 |
| | (18,102 | ) | | — |
| | (18,102 | ) | | 44,877 |
| | (15,097 | ) | | — |
| | (15,097 | ) |
| Total | | $ | 8,013,501 |
|
| $ | (173,231 | ) |
| $ | 9,005 |
|
| $ | (164,226 | ) | | $ | 6,537,468 |
|
| $ | (692,000 | ) |
| $ | — |
|
| $ | (692,000 | ) |
____________________________
(1) Rating trigger for CFC falls below A3/A-, while rating trigger for counterparty falls below Baa1/BBB+ by Moody’s or S&P, respectively.
(2) Rating trigger for CFC falls to or below Baa2/BBB, while rating trigger for counterparty falls to or below Ba2/BB+ by Moody’s or S&P, respectively.
We have interest rate swaps with one counterparty that are subject to a ratings trigger and early termination provision in the event of a downgrade of CFC’s senior unsecured credit ratings below Baa3, BBB- or BBB- by Moody’s, S&P or Fitch, respectively. The outstanding notional amount of these swaps, which is not included in the above table, totaled $205 million as of August 31, 2020. These swaps were in an unrealized loss position of $56 million as of August 31, 2020.
Our largest counterparty exposure, based on the outstanding notional amount, representedaccounted for approximately 23%25% of the total outstanding notional amount of derivatives as of both November 30, 2017August 31, 2020 and May 31, 2017, respectively.2020. The aggregate fair value amount,
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
including the credit risk valuation adjustment, of all interest rate swaps with rating triggers that were in a net liability position was $173$734 million as of November 30, 2017.August 31, 2020.
Total equity increased by $141$83 million to $1,240$732 million as of November 30, 2017. The increase was primarilyAugust 31, 2020, attributable to the combined impact of our reported net income of $188$145 million for the sixthree months ended November 30, 2017,August 31, 2020, which was partially offset by the retirement of patronage capital retirement of $45$60 million in September 2017. The following table presentsauthorized by the componentsCFC Board of equity asDirectors during the current quarter and the decrease to retained earnings of November 30, 2017 and May 31, 2017.
$4 million from the cumulative-effect adjustment recorded at adoption of the CECL accounting standard on June 1, 2020.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | |
| (Dollars in thousands) | | November 30, 2017 | | May 31, 2017 |
| Membership fees | | $ | 968 |
| | $ | 971 |
|
| Educational fund | | 1,398 |
| | 1,929 |
|
| Total membership fees and educational fund | | 2,366 |
| | 2,900 |
|
| Patronage capital allocated | | 716,481 |
| | 761,701 |
|
| Members’ capital reserve | | 630,305 |
| | 630,305 |
|
| Unallocated net loss: | | | | |
Prior year-end cumulative derivative forward value losses(1) | | (332,525 | ) | | (507,904 | ) |
Current year derivative forward value gains (1) | | 117,340 |
| | 175,379 |
|
Current period-end cumulative derivative forward value losses(1) | | (215,185 | ) | | (332,525 | ) |
| Other unallocated net income (loss) | | 63,763 |
| | (5,603 | ) |
| Unallocated net loss | | (151,422 | ) | | (338,128 | ) |
| CFC retained equity | | 1,197,730 |
| | 1,056,778 |
|
| Accumulated other comprehensive income | | 11,899 |
| | 13,175 |
|
| Total CFC equity | | 1,209,629 |
| | 1,069,953 |
|
| Noncontrolling interests | | 30,419 |
| | 28,852 |
|
| Total equity | | $ | 1,240,048 |
| | $ | 1,098,805 |
|
____________________________
(1)Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interestsAllocation of the consolidated variable interest entities NCSCEarnings and RTFC. See “Note 12—Business Segments” for the separate statementsRetirement of operations for CFC .Patronage Capital
In July 2017,2020, the CFC Board of Directors authorized the allocation of the fiscal year 2017 adjusted2020 net incomeearnings as follows: $90$96 million to members in the form of patronage capital; $43capital, $48 million to the members’ capital reserve;reserve and $1 million to the Cooperative Educational Fund.cooperative educational fund. The amount of patronage capital allocated each year by CFC’s Board of Directors is based on adjusted net income, which excludes the impact of derivative forward value gains (losses). See “MD&A—Non-GAAP Financial Measures” for information on adjusted net income.
In July 2017,2020, the CFC Board of Directors authorized the retirement of patronage capitalallocated net earnings totaling $45$60 million, consisting of $48 million, which represented 50% of the patronage capital allocation for fiscal year 20172020, and $12 million, which represented the portion of the allocation from fiscal year 1995 net earnings that has been held for 25 years pursuant to the CFC Board of Directors policy. The authorized patronage capital retirement amount of $90 million. We$60 million was returned the $45 million to members in cash in September 2017.2020. The remaining portion of the amount allocated amountfor fiscal year 2020 will be retained by CFC for 25 years under current guidelines adopted by the CFC Board of Directors in June 2009.
The CFC Board of Directors is required to make annual allocations of adjusted net income, if any. CFC has made annual retirements of allocated net earnings in 38 of the last 39 fiscal years; however, future retirements of allocated amounts are determined based on CFC’s financial condition. The CFC Board of Directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable laws. See “Item 1. Business—Allocation and Retirement of Patronage Capital” of our 2017 Form 10-K for additional information.
Accumulated Other Comprehensive Income (Loss)
The following tables summarize,table presents, by component, the activitychanges in AOCI as of and for the three and six months ended November 30, 2017August 31, 2020 and 2016.2019 and the balance of each component as of the end of each respective period.
Table 10.1: Changes in Accumulated Other Comprehensive Income (Loss)
|
| | | | | | | | | | | | |
| | | Three Months Ended August 31, 2020 |
| (Dollars in thousands) | | Derivatives Unrealized Gains(1) | | Defined Benefit Plans Unrealized Losses(2) | | Total |
| Beginning balance | | $ | 2,130 |
| | $ | (4,040 | ) | | $ | (1,910 | ) |
| (Gains) losses reclassified to earnings | | (105 | ) | | 188 |
| | 83 |
|
| Ending balance | | $ | 2,025 |
| | $ | (3,852 | ) | | $ | (1,827 | ) |
|
| | | | | | | | | | | | |
| | | Three Months Ended August 31, 2019 |
| (Dollars in thousands) | | Derivatives Unrealized Gains(1) | | Defined Benefit Plans Unrealized Losses(2) | | Total |
| Beginning balance | | $ | 2,571 |
| | $ | (2,718 | ) | | $ | (147 | ) |
| (Gains) losses reclassified to earnings | | (112 | ) | | 145 |
| | 33 |
|
| Ending balance | | $ | 2,459 |
| | $ | (2,573 | ) | | $ | (114 | ) |
| | | | | | | |
____________________________
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended November 30, 2017 |
| (Dollars in thousands) | | Unrealized Gains (Losses) AFS Securities | | Unrealized Gains
Derivatives | | Unrealized Losses Foreclosed Assets | | Unrealized Losses Defined Benefit Plan | | Total |
| Beginning balance | | $ | 10,865 |
| | $ | 3,510 |
| | $ | — |
| | $ | (2,416 | ) | | $ | 11,959 |
|
| Unrealized gains | | 8 |
| | — |
| | — |
| | — |
| | 8 |
|
| Losses reclassified into earnings | | — |
| | — |
| | — |
| | 126 |
| | 126 |
|
| Gains reclassified into earnings | | — |
| | (194 | ) | | — |
| | — |
| | (194 | ) |
| Other comprehensive income (loss) | | 8 |
| | (194 | ) | | — |
| | 126 |
| | (60 | ) |
| Ending balance | | $ | 10,873 |
| | $ | 3,316 |
| | $ | — |
| | $ | (2,290 | ) | | $ | 11,899 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended November 30, 2016 |
| (Dollars in thousands) | | Unrealized Gains (Losses) AFS Securities | | Unrealized Gains Derivatives | | Unrealized Losses Foreclosed Assets | | Unrealized Losses Defined Benefit Plan | | Total |
| Beginning balance | | $ | 7,391 |
| | $ | 4,290 |
| | $ | — |
| | $ | (964 | ) | | $ | 10,717 |
|
| Unrealized losses | | (1,761 | ) | | — |
| | — |
| | — |
| | (1,761 | ) |
| Losses reclassified into earnings | | — |
| | — |
| | — |
| | 44 |
| | 44 |
|
| Gains reclassified into earnings | | — |
| | (199 | ) | | — |
| | — |
| | (199 | ) |
| Other comprehensive income (loss) | | (1,761 | ) | | (199 | ) | | — |
| | 44 |
| | (1,916 | ) |
| Ending balance | | $ | 5,630 |
| | $ | 4,091 |
| | $ | — |
| | $ | (920 | ) | | $ | 8,801 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended November 30, 2017 |
| (Dollars in thousands) | | Unrealized Gains (Losses) AFS Securities | | Unrealized Gains Derivatives | | Unrealized Losses Foreclosed Assets | | Unrealized Losses Defined Benefit Plan | | Total |
| Beginning balance | | $ | 12,016 |
| | $ | 3,702 |
| | $ | — |
| | $ | (2,543 | ) | | $ | 13,175 |
|
| Unrealized losses | | (1,143 | ) | | — |
| | — |
| | — |
| | (1,143 | ) |
| Losses reclassified into earnings | | — |
| | — |
| | — |
| | 253 |
| | 253 |
|
| Gains reclassified into earnings | | — |
| | (386 | ) | | — |
| | — |
| | (386 | ) |
| Other comprehensive income (loss) | | (1,143 | ) | | (386 | ) | | — |
| | 253 |
| | (1,276 | ) |
| Ending balance | | $ | 10,873 |
| | $ | 3,316 |
| | $ | — |
| | $ | (2,290 | ) | | $ | 11,899 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended November 30, 2016 |
| (Dollars in thousands) | | Unrealized Gains (Losses) AFS Securities | | Unrealized Gains Derivatives | | Unrealized Losses Foreclosed Assets | | Unrealized Losses Defined Benefit Plan | | Total |
| Beginning balance | | $ | 7,402 |
| | $ | 4,487 |
| | $ | (9,823 | ) | | $ | (1,008 | ) | | $ | 1,058 |
|
| Unrealized losses | | (1,772 | ) | | — |
| | — |
| | — |
| | (1,772 | ) |
| Losses reclassified into earnings | | — |
| | — |
| | 9,823 |
| | 88 |
| | 9,911 |
|
| Gains reclassified into earnings | | — |
| | (396 | ) | | — |
| | — |
| | (396 | ) |
| Other comprehensive income (loss) | | (1,772 | ) | | (396 | ) | | 9,823 |
| | 88 |
| | 7,743 |
|
| Ending balance | | $ | 5,630 |
| | $ | 4,091 |
| | $ | — |
| | $ | (920 | ) | | $ | 8,801 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(2) Reclassified to earnings as component of the other non-interest expense line item presented on our consolidated statements of operations.
We expect to reclassify approximately $0.5less than $1 million of amounts in AOCI related to unrealized derivative gains intoto earnings over the next 12 months.
The following table summarizes total guarantees,displays the notional amount of our outstanding guarantee obligations, by guarantee type of guarantee and by member class, as of November 30, 2017August 31, 2020 and May 31, 2017.2020.
Table 11.1: Guarantees Outstanding by Type and Member Class
| | | (Dollars in thousands) | | November 30, 2017 | | May 31, 2017 | | August 31, 2020 | | May 31, 2020 |
| Total by type: | | | | | |
| Guarantee type: | | | | | |
Long-term tax-exempt bonds(1) | | $ | 318,425 |
| | $ | 468,145 |
| | $ | 186,075 |
| | $ | 263,875 |
|
Letters of credit(2) | | 230,117 |
| | 307,321 |
| | 353,896 |
| | 413,839 |
|
| Other guarantees | | 113,954 |
| | 114,151 |
| | 143,275 |
| | 143,072 |
|
| Total | | $ | 662,496 |
| | $ | 889,617 |
| | $ | 683,246 |
| | $ | 820,786 |
|
| | | | | | | | | |
| Total by member class: | | | | | |
| Member class: | | | | | |
| CFC: | | | | | | | | |
| Distribution | | $ | 129,066 |
| | $ | 126,188 |
| | $ | 258,366 |
| | $ | 266,301 |
|
| Power supply | | 511,624 |
| | 743,678 |
| | 409,001 |
| | 538,532 |
|
Statewide and associate | | 5,005 |
| | 5,054 |
| | 6,110 |
| | 5,954 |
|
| CFC total | | 645,695 |
| | 874,920 |
| | 673,477 |
| | 810,787 |
|
| NCSC | | 15,227 |
| | 13,123 |
| | 9,769 |
| | 9,999 |
|
| RTFC | | 1,574 |
| | 1,574 |
| |
| Total | | $ | 662,496 |
| | $ | 889,617 |
| | $ | 683,246 |
| | $ | 820,786 |
|
____________________________
(1)Represents the outstanding principal amount of long-term fixed-rate and variable-rate guaranteed bonds.
(2)Reflects our maximum potential exposure for letters of credit.
(3)Includes CFC guarantees to NCSC and RTFC members totaling $3 million as of August 31, 2020 and May 31, 2020.
Long-term tax-exempt bonds of $318$186 million and $468$264 million as of November 30, 2017August 31, 2020 and May 31, 2017,2020, respectively, consisted of $251included $166 million and $400$244 million, respectively, of adjustable or variable-rate bonds that may be converted to a fixed rate as specified in the applicable indenture for each bond offering. We are unable to determine the maximum amount of interest that we may be required to pay related to the remaining adjustable and variable-rate bonds. Many of these bonds have a call provision that allows us to call the bond in the event of a default, which would limit our exposure to future interest payments on these bonds. Our maximum potential exposure generally is secured by mortgage liens on the members’ assets and future revenue. If a member’s debt is accelerated because of a determination that the interest thereon is not tax-exempt, the member’s obligation to reimburse us for any guarantee payments will be treated as a long-term loan. The remaining long-term tax-exempt bonds of $67$20 million as of November 30, 2017August 31, 2020 are fixed-rate. The maximum potential exposure for these bonds, including the outstanding principal of $67$20 million and related interest through maturity, totaled $96$34 million as of November 30, 2017.August 31, 2020. The maturities for long-term tax-exempt bonds and the related guarantees extend through calendar year 2042.2040.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Of the outstanding letters of credit of $230$354 million and $307$414 million as of November 30, 2017August 31, 2020 and May 31, 2017,2020, respectively, $42$103 million and $125$106 million, respectively, waswere secured. We did not have any letters of credit outstanding that provided for standby liquidity for adjustable and floating-rate tax-exempt bonds issued for the benefit of our members as of November 30, 2017. Letters of credit include $76 million to provide the standby liquidity for adjustable and floating-rate tax-exempt bonds issued for the benefit of our members as of MayAugust 31, 2017. Security provisions include a mortgage lien on
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
substantially all of the member’s assets, future revenue and the member’s investment in our commercial paper.2020. The maturities for the outstanding letters of credit as November 30, 2017of August 31, 2020 extend through calendar year 2027.2039.
In addition to the letters of credit listed in the table above, under master letter of credit facilities in place as of November 30, 2017,August 31, 2020, we may be required to issue up to an additional $65$71 million in letters of credit to third parties for the benefit of our members. All of our master letter of credit facilities were subject to material adverse change clauses at the time of issuance as of November 30, 2017.August 31, 2020. Prior to issuing a letter of credit, we would confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with the letter of credit terms and conditions.
The maximum potential exposure for other guarantees was $115$143 million as of both November 30, 2017August 31, 2020 and May 31, 2017, all2020, of which were unsecured.$25 million was secured as of both August 31, 2020 and May 31, 2020. The maturities for these other guarantees listed in the table above extend through calendar year 2025.
Guarantees under which our right of recovery from our members was not secured totaled $302$369 million and $297$426 million and represented 46%54% and 33%52% of total guarantees as of November 30, 2017August 31, 2020 and May 31, 2017,2020, respectively.
In addition to the guarantees described above, we were also the liquidity provider for $251$166 million of variable-rate tax-exempt bonds as of November 30, 2017,August 31, 2020, issued for our member cooperatives. While the bonds are in variable-rate mode, in return for a fee, we have unconditionally agreed to purchase bonds tendered or put for redemption if the remarketing agents are unable to sell such bonds to other investors. We were not required to perform as liquidity provider pursuant to these obligations during the sixthree months ended November 30, 2017August 31, 2020 or the prior fiscal year.
Guarantee Liability
As of November 30, 2017 and May 31, 2017, weWe recorded a total guarantee liability of $8 millionfor noncontingent and $15 million respectively, which represents the contingent and noncontingent exposures related to guarantees and liquidity obligations. The contingent guarantee liability was $1obligations of $10 million and $11 million as of both November 30, 2017August 31, 2020 and May 31, 2017, based on management’s estimate of exposure to losses within the guarantee portfolio.2020, respectively. The remaining balance of the totalnoncontingent guarantee liability, of $7 million and $14 million as of November 30, 2017 and May 31, 2017, respectively, relateswhich pertains to our noncontingent obligation to stand ready to perform over the term of our guarantees and liquidity obligations that we have entered into or modified since January 1, 2003.2003, was $9 million and $10 million as of August 31, 2020 and May 31, 2020, respectively. The contingent guarantee liability, which is based on management’s estimate of exposure to losses within our guarantee portfolio, was $1 million as of both August 31, 2020 and May 31, 2020.
|
|
NOTE 11—12—FAIR VALUE MEASUREMENT |
We useFair 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 measurementsaccounting guidance provides a three-level fair value hierarchy for classifying financial instruments. This hierarchy is based on the initial recordingmarkets 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 certain assetsa 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 liabilities and periodic remeasurement of certain assets and liabilities on a recurring or nonrecurring basis.Level 3. The accounting guidance for fair value measurements requires that we maximize the use of observable inputs and disclosures establishes a three-level fair value hierarchy that prioritizesminimize the use of unobservable inputs into the valuation techniques used to measurein determining 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 2017 Form 10-K.
The following tables presenttable presents the carrying value and estimated fair value forof all of our financial instruments, including those carried at amortized cost, as of November 30, 2017August 31, 2020 and May 31, 2017.2020. The tablestable also displaydisplays the classification level within the fair value hierarchy based on the degree of observability of the inputs used in the valuation technique used infor estimating fair value.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 12.1: Fair Value of Financial Instruments
|
| | | | | | | | | | | | | | | | | | | | |
| | | August 31, 2020 | | Fair Value Measurement Level |
| (Dollars in thousands) | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 347,818 |
| | $ | 347,818 |
| | $ | 347,818 |
| | $ | — |
| | $ | — |
|
| Restricted cash | | 9,376 |
| | 9,376 |
| | 9,376 |
| | — |
| | — |
|
| Equity securities, at fair value | | 62,266 |
| | 62,266 |
| | 62,266 |
| | — |
| | — |
|
| Debt securities trading, at fair value | | 527,526 |
| | 527,526 |
| | — |
| | 527,526 |
| | — |
|
| Deferred compensation investments | | 6,159 |
| | 6,159 |
| | 6,159 |
| | — |
| | — |
|
| Loans to members, net | | 26,871,526 |
| | 30,200,954 |
| | — |
| | — |
| | 30,200,954 |
|
| Accrued interest receivable | | 104,762 |
| | 104,762 |
| | — |
| | 104,762 |
| | — |
|
| Debt service reserve funds | | 14,591 |
| | 14,591 |
| | 14,591 |
| | — |
| | — |
|
| Derivative assets | | 167,463 |
| | 167,463 |
| | — |
| | 167,463 |
| | — |
|
| Total financial assets | | $ | 28,111,487 |
| | $ | 31,440,915 |
| | $ | 440,210 |
| | $ | 799,751 |
| | $ | 30,200,954 |
|
| | | | | | | | | | | |
| Liabilities: | | | | | | | | | | |
| Short-term borrowings | | $ | 4,553,491 |
| | $ | 4,552,523 |
| | $ | — |
| | $ | 4,302,523 |
| | $ | 250,000 |
|
| Long-term debt | | 19,181,520 |
| | 21,548,208 |
| | — |
| | 11,759,472 |
| | 9,788,736 |
|
| Accrued interest payable | | 182,166 |
| | 182,166 |
| | — |
| | 182,166 |
| | — |
|
| Guarantee liability | | 10,320 |
| | 11,322 |
| | — |
| | — |
| | 11,322 |
|
| Derivative liabilities | | 1,165,585 |
| | 1,165,585 |
| | — |
| | 1,165,585 |
| | — |
|
| Subordinated deferrable debt | | 986,166 |
| | 1,064,046 |
| | — |
| | 1,064,046 |
| | — |
|
| Members’ subordinated certificates | | 1,298,845 |
| | 1,298,845 |
| | — |
| | — |
| | 1,298,845 |
|
| Total financial liabilities | | $ | 27,378,093 |
| | $ | 29,822,695 |
| | $ | — |
| | $ | 18,473,792 |
| | $ | 11,348,903 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | November 30, 2017 | | Fair Value Measurement Level | | May 31, 2020 | | Fair Value Measurement Level |
| (Dollars in thousands) | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 280,315 |
| | $ | 280,315 |
| | $ | 280,315 |
| | $ | — |
| | $ | — |
| | $ | 671,372 |
| | $ | 671,372 |
| | $ | 671,372 |
| | $ | — |
| | $ | — |
|
| Restricted cash | | 11,323 |
| | 11,323 |
| | 11,323 |
| | — |
| | — |
| | 8,647 |
| | 8,647 |
| | 8,647 |
| | — |
| | — |
|
| Time deposits | | 51,000 |
| | 51,000 |
| | | | 51,000 |
| | | |
| Investment securities, available-for-sale | | 91,411 |
| | 91,411 |
| | 91,411 |
| | — |
| | — |
| |
| Investment securities, held-to-maturity | | 248,155 |
| | 247,257 |
| | — |
| | 247,257 |
| | — |
| |
| Equity securities, at fair value | | | 60,735 |
| | 60,735 |
| | 60,735 |
| | — |
| | — |
|
| Debt securities trading, at fair value | | | 309,400 |
| | 309,400 |
| | — |
| | 309,400 |
| | — |
|
| Deferred compensation investments | | 5,176 |
| | 5,176 |
| | 5,176 |
| | — |
| | — |
| | 5,496 |
| | 5,496 |
| | 5,496 |
| | — |
| | — |
|
| Loans to members, net | | 24,787,917 |
| | 24,351,976 |
| | — |
| | — |
| | 24,351,976 |
| | 26,649,255 |
| | 29,252,065 |
| | — |
| | — |
| | 29,252,065 |
|
| Accrued interest receivable | | 116,770 |
| | 116,770 |
| | — |
| | 116,770 |
| | — |
| | 117,138 |
| | 117,138 |
| | — |
| | 117,138 |
| | — |
|
| Debt service reserve funds | | 17,151 |
| | 17,151 |
| | 17,151 |
| | — |
| | — |
| | 14,591 |
| | 14,591 |
| | 14,591 |
| | — |
| | — |
|
| Derivative assets | | 87,453 |
| | 87,453 |
| | — |
| | 87,453 |
| | — |
| | 173,195 |
| | 173,195 |
| | — |
| | 173,195 |
| | — |
|
| Total financial assets | | | $ | 28,009,829 |
| | $ | 30,612,639 |
| | $ | 760,841 |
| | $ | 599,733 |
| | $ | 29,252,065 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Short-term borrowings | | $ | 3,557,192 |
| | $ | 3,556,637 |
| | $ | 1,446,065 |
| | $ | 2,110,572 |
| | $ | — |
| | $ | 3,961,985 |
| | $ | 3,963,164 |
| | $ | — |
| | $ | 3,713,164 |
| | $ | 250,000 |
|
| Long-term debt | | 18,386,819 |
| | 18,975,545 |
| | — |
| | 11,452,351 |
| | 7,523,194 |
| | 19,712,024 |
| | 21,826,337 |
| | — |
| | 11,981,580 |
| | 9,844,757 |
|
| Accrued interest payable | | 143,085 |
| | 143,085 |
| | — |
| | 143,085 |
| | — |
| | 139,619 |
| | 139,619 |
| | — |
| | 139,619 |
| | — |
|
| Guarantee liability | | 8,211 |
| | 8,423 |
| | — |
| | — |
| | 8,423 |
| | 10,937 |
| | 11,948 |
| | — |
| | — |
| | 11,948 |
|
| Derivative liabilities | | 304,307 |
| | 304,307 |
| | — |
| | 304,307 |
| | — |
| | 1,258,459 |
| | 1,258,459 |
| | — |
| | 1,258,459 |
| | — |
|
| Subordinated deferrable debt | | 742,341 |
| | 789,430 |
| | — |
| | 789,430 |
| | — |
| | 986,119 |
| | 1,030,108 |
| | — |
| | 1,030,108 |
| | — |
|
| Members’ subordinated certificates | | 1,399,675 |
| | 1,399,697 |
| | — |
| | — |
| | 1,399,697 |
| | 1,339,618 |
| | 1,339,618 |
| | — |
| | — |
| | 1,339,618 |
|
| Total financial liabilities | | | $ | 27,408,761 |
| | $ | 29,569,253 |
| | $ | — |
| | $ | 18,122,930 |
| | $ | 11,446,323 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | May 31, 2017 | | Fair Value Measurement Level |
| (Dollars in thousands) | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 166,615 |
| | $ | 166,615 |
| | $ | 166,615 |
| | $ | — |
| | $ | — |
|
| Restricted cash | | 21,806 |
| | 21,806 |
| | 21,806 |
| | — |
| | — |
|
| Time deposits | | 226,000 |
| | 226,000 |
| | — |
| | 226,000 |
| | — |
|
| Investment securities, available-for-sale | | 92,554 |
| | 92,554 |
| | 92,554 |
| | — |
| | — |
|
| Deferred compensation investments | | 4,693 |
| | 4,693 |
| | 4,693 |
| | — |
| | — |
|
| Loans to members, net | | 24,329,668 |
| | 24,182,724 |
| | — |
| | — |
| | 24,182,724 |
|
| Accrued interest receivable | | 111,493 |
| | 111,493 |
| | — |
| | 111,493 |
| | — |
|
| Debt service reserve funds | | 17,151 |
| | 17,151 |
| | 17,151 |
| | — |
| | — |
|
| Derivative assets | | 49,481 |
| | 49,481 |
| | — |
| | 49,481 |
| | — |
|
| | | | | | | | | | | |
| Liabilities: | | | | | | | | | | |
| Short-term borrowings | | $ | 3,342,900 |
| | $ | 3,342,990 |
| | $ | 1,527,990 |
| | $ | 1,815,000 |
| | $ | — |
|
| Long-term debt | | 17,955,594 |
| | 18,744,331 |
| | — |
| | 11,215,290 |
| | 7,529,041 |
|
| Accrued interest payable | | 137,476 |
| | 137,476 |
| | — |
| | 137,476 |
| | — |
|
| Guarantee liability | | 15,241 |
| | 16,204 |
| | — |
| | — |
| | 16,204 |
|
| Derivative liabilities | | 385,337 |
| | 385,337 |
| | — |
| | 385,337 |
| | — |
|
| Subordinated deferrable debt | | 742,274 |
| | 788,079 |
| | — |
| | 788,079 |
| | — |
|
| Members’ subordinated certificates | | 1,419,025 |
| | 1,419,048 |
| | — |
| | — |
| | 1,419,048 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Investment Securities, Held-to-Maturity, Fair Value
As discussed above in “Note 3—Investment Securities,” we did not have any securities classified as HTM as of May 31, 2017. During the second quarter of fiscal year 2018, we commenced the purchase ofFor additional investment securities, consisting primarily of certificates of deposit, commercial paper and corporate debt securities, commercial MBS and other ABS traded in secondary markets. We designated these securities as HTM.
Management estimatesinformation regarding fair value measurements, the fair value hierarchy and a description of our HTM securities utilizing the assistance of third-party pricing services. Methodologies employed, controls relied upon and inputs used by third-party pricing vendors are subjectmethodologies we use to management review when such services are provided. This review may consist of, in part, obtaining and evaluating control reports issued and pricing methodology materials distributed. We review the pricing methodologies provided by the vendors in order to determine if observable market information is being used to determine theestimate fair value, versus unobservable inputs. Investment securities tradedsee “Note 14—Fair Value Measurement” to the Consolidated Financial Statements in secondary markets are typically valued using unadjusted vendor prices. These investment securities, which include those measured using unadjusted vendor prices, are generally classified as Level 2 because the valuation typically involves using quoted market prices for similar securities, pricing models, discounted cash flow analyses using significant observable market where available or a combination of multiple valuation techniques for which all significant
assumptions are observable in the market.our 2020 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 between levels for financial instruments measured at fair value on a recurring basis for the sixthree months ended November 30, 2017August 31, 2020 and 2016.2019.
RecurringAssets and Liabilities Measured at Fair Value Measurementson a Recurring Basis
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, 2017August 31, 2020 and May 31, 2017,2020, and the classification of the valuation technique within the fair value hierarchy.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | November 30, 2017 | | May 31, 2017 |
| (Dollars in thousands) | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| Investment securities, available for sale | | $ | 91,411 |
| | $ | — |
| | $ | 91,411 |
| | $ | 92,554 |
| | $ | — |
| | $ | 92,554 |
|
| Deferred compensation investments | | 5,176 |
| | — |
| | 5,176 |
| | 4,693 |
| | — |
| | 4,693 |
|
| Derivative assets | | — |
| | 87,453 |
| | 87,453 |
| | — |
| | 49,481 |
| | 49,481 |
|
| Derivative liabilities | | — |
| | 304,307 |
| | 304,307 |
| | — |
| | 385,337 |
| | 385,337 |
|
Nonrecurring Fair Value
We did not have any assets reported in our condensed consolidated financial statements at fair value on a nonrecurring basis as of November 30, 2017 and May 31, 2017 and there were no unrealized losses for the three and six months ended November 30, 2017 and 2016 related to these assets.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Significant Unobservable Level 3 InputsTable 12.2: Assets and Liabilities Measured at Fair Value on a Recurring Basis
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | August 31, 2020 | | May 31, 2020 |
| (Dollars in thousands) | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| Assets: | | | | | | | | | | | | |
| Equity securities, at fair value | | $ | 62,266 |
| | $ | — |
| | $ | 62,266 |
| | $ | 60,735 |
| | $ | — |
| | $ | 60,735 |
|
| Debt securities trading, at fair value | | — |
| | 527,526 |
| | 527,526 |
| | — |
| | 309,400 |
| | 309,400 |
|
| Deferred compensation investments | | 6,159 |
| | — |
| | 6,159 |
| | 5,496 |
| | — |
| | 5,496 |
|
| Derivative assets | | — |
| | 167,463 |
| | 167,463 |
| | — |
| | 173,195 |
| | 173,195 |
|
| | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | |
| Derivative liabilities | | — |
| | 1,165,585 |
| | 1,165,585 |
| | — |
| | 1,258,459 |
| | 1,258,459 |
|
Impaired LoansAssets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We utilize themay be required, from time to time, to measure certain assets at fair value of estimated cash flows or the collateral underlying the loan to determine theon a nonrecurring basis on our consolidated balance sheets. These assets are not measured at fair value and specific allowance for impaired loans. The valuation technique usedon an ongoing basis but are subject to determine fair value of the impaired loans provided by both our internal staff and third-party specialists includes market multiples (i.e., comparable companies). The significant unobservable inputs usedadjustments in certain circumstances, such as in the determinationapplication of lower of cost or fair value accounting or when we evaluate assets for individually impaired loans is a multiple of earnings before interest, taxes, depreciation and amortization based on various factors (i.e., financial condition of the borrower). In estimating theimpairment. We did not have any assets measured at fair value ofon a nonrecurring basis during the collateral, we may use third-party valuation specialists, internal estimatesthree months ended August 31, 2020 or a combination of both. The significant unobservable inputs for estimatingduring the fair value of impaired collateral-dependent loans are reviewed by our Credit Risk Management group to assess the reasonableness of the assumptions used and the accuracy of the work performed. In cases where we rely on third-party inputs, we use the final unadjusted third-party valuation analysis as support for any adjustments to our consolidated financial statements and disclosures.
Because of the limited amount of impaired loans as of November 30, 2017 and Maythree months ended August 31, 2017, we do not believe that potential changes in the significant unobservable inputs used in the determination of the fair value for impaired loans will have a material impact on the fair value measurement of these assets or our results of operations.2019.
|
|
NOTE 12—BUSINESS SEGMENTS13—VARIABLE INTEREST ENTITIES |
NCSC and RTFC meet the definition of a VIE because they do not have sufficient equity investment at risk to finance their activities without financial support. CFC is the primary source of funding for NCSC and the sole source of funding for RTFC. Under the terms of management agreements with each company, CFC manages the business operations of NCSC and RTFC. CFC also unconditionally guarantees full indemnification for any loan losses of NCSC and RTFC pursuant to guarantee agreements with each company. CFC earns management and guarantee fees from its agreements with NCSC and RTFC.
NCSC and RTFC creditors have no recourse against CFC in the event of a default by NCSC and RTFC, unless there is a guarantee agreement under which CFC has guaranteed NCSC or RTFC debt obligations to a third party. The following tables display segment results for the threetable provides information on incremental consolidated assets and six months ended November 30, 2017 and 2016, and assets attributable to each segmentliabilities of VIEs included in CFC’s consolidated financial statements, after intercompany eliminations, as of November 30, 2017August 31, 2020 and November 30, 2016.May 31, 2020.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13.1: Consolidated Assets and Liabilities of Variable Interest Entities
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | Three Months Ended November 30, 2017 |
| (Dollars in thousands) | | CFC | | Other | | Elimination | | Consolidated Total |
| Statement of operations: | | | | | | | | |
| Interest income | | $ | 263,180 |
| | $ | 12,257 |
| | $ | (9,614 | ) | | $ | 265,823 |
|
| Interest expense | | (194,943 | ) | | (9,841 | ) | | 9,614 |
| | (195,170 | ) |
| Net interest income | | 68,237 |
| | 2,416 |
| | — |
| | 70,653 |
|
| Benefit for loan losses | | 304 |
| | — |
| | — |
| | 304 |
|
| Net interest income after benefit for loan losses | | 68,541 |
| | 2,416 |
| | — |
| | 70,957 |
|
| Non-interest income: | | | | | | | | |
| Fee and other income | | 5,490 |
| | 301 |
| | (249 | ) | | 5,542 |
|
| Derivative gains (losses): | | | | | | | | |
| Derivative cash settlements | | (18,990 | ) | | (645 | ) | | — |
| | (19,635 | ) |
| Derivative forward value gains | | 143,452 |
| | 1,776 |
| | — |
| | 145,228 |
|
| Derivative gains | | 124,462 |
| | 1,131 |
| | — |
| | 125,593 |
|
| Results of operations of foreclosed assets | | (10 | ) | | — |
| | — |
| | (10 | ) |
| Total non-interest income | | 129,942 |
| | 1,432 |
| | (249 | ) | | 131,125 |
|
| Non-interest expense: | | | | | | | | |
| General and administrative expenses | | (20,292 | ) | | (1,622 | ) | | — |
| | (21,914 | ) |
| Losses on early extinguishment of debt | | — |
| | — |
| | — |
| | — |
|
| Other non-interest expense | | (618 | ) | | (249 | ) | | 249 |
| | (618 | ) |
| Total non-interest expense | | (20,910 | ) | | (1,871 | ) | | 249 |
| | (22,532 | ) |
| Income before income taxes | | 177,573 |
| | 1,977 |
| | — |
| | 179,550 |
|
| Income tax expense | | — |
| | (827 | ) | | — |
| | (827 | ) |
| Net income | | $ | 177,573 |
| | $ | 1,150 |
| | $ | — |
| | $ | 178,723 |
|
| | | | | | | | | |
|
| | | | | | | | |
| (Dollars in thousands) | | August 31, 2020 | | May 31, 2020 |
| Assets: | | | | |
| Loans outstanding | | $ | 1,077,439 |
| | $ | 1,083,197 |
|
| Other assets | | 10,371 |
| | 11,352 |
|
| Total assets | | $ | 1,087,810 |
| | $ | 1,094,549 |
|
| | | | | |
| Liabilities: | | | | |
| Long-term debt | | $ | — |
| | $ | — |
|
| Other liabilities | | 37,397 |
| | 38,803 |
|
| Total liabilities | | $ | 37,397 |
| | $ | 38,803 |
|
The following table provides information on CFC’s credit commitments to NCSC and RTFC and potential exposure to loss under these commitments as of August 31, 2020 and May 31, 2020.
13.2: CFC Exposure Under Credit Commitments to NCSC and RTFC
|
| | | | | | | | |
| (Dollars in thousands) | | August 31, 2020 |
| May 31, 2020 |
| CFC credit commitments to NCSC and RTFC: | | | | |
| Total CFC credit commitments | | $ | 5,500,000 |
| | $ | 5,500,000 |
|
| | | | | |
| Outstanding commitments: | | | | |
Borrowings payable to CFC(1) | | 1,055,979 |
| | 1,062,103 |
|
| Credit enhancements: | | | | |
| CFC third-party guarantees | | 9,769 |
| | 9,999 |
|
| Other credit enhancements | | 11,290 |
| | 11,755 |
|
Total credit enhancements(2) | | 21,059 |
| | 21,754 |
|
| Total outstanding commitments | | 1,077,038 |
| | 1,083,857 |
|
CFC credit commitments available(3) | | $ | 4,422,962 |
| | $ | 4,416,143 |
|
____________________________
(1) Borrowings payable to CFC are eliminated in consolidation.
(2) Excludes interest due on these instruments.
(3) Represents total CFC credit commitments less outstanding commitments as of each period end.
CFC loans to NCSC and RTFC are secured by all assets and revenue of NCSC and RTFC. CFC’s maximum potential exposure, including interest due, for the credit enhancements totaled $21 million as of August 31, 2020. The maturities for obligations guaranteed by CFC extend through 2031.
|
|
| NOTE 14—BUSINESS SEGMENTS |
Our activities are conducted through three operating segments, which are based on each of the legal entities included in our consolidated financial statements: CFC, NCSC and RTFC. We report segment information for CFC separately, while we aggregate NCSC and RTFC and report combined segment information for these entities. The following table presents our reportable business segment results for the three months ended August 31, 2020 and 2019, assets attributable to each segment as of August 31, 2020 and 2019 and a reconciliation to amounts reported in our consolidated financial statements.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 14.1: Business Segment Information
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended November 30, 2016 | | Three Months Ended August 31, 2020 |
| (Dollars in thousands) | | CFC | | Other | | Elimination | | Consolidated Total | | CFC | | NCSC and RTFC | | Elimination | | Consolidated Total |
| Statement of operations: | | | | | | | | | | | | | | | | |
| Interest income | | $ | 254,689 |
| | $ | 11,129 |
| | $ | (8,662 | ) | | $ | 257,156 |
| | $ | 277,596 |
| | $ | 11,009 |
| | $ | (9,021 | ) | | $ | 279,584 |
|
| Interest expense | | (183,395 | ) | | (8,934 | ) | | 8,675 |
| | (183,654 | ) | | (179,976 | ) | | (9,021 | ) | | 9,021 |
| | (179,976 | ) |
| Net interest income | | 71,294 |
| | 2,195 |
| | 13 |
| | 73,502 |
| | 97,620 |
| | 1,988 |
| | — |
| | 99,608 |
|
| Provision for loan losses | | (738 | ) | | — |
| | — |
| | (738 | ) | |
| Net interest income after provision for loan losses | | 70,556 |
| | 2,195 |
| | 13 |
| | 72,764 |
| |
| (Provision) benefit for credit losses | | | (326 | ) | | 1,066 |
| | (1,066 | ) | | (326 | ) |
| Net interest income after (provision) benefit for credit losses | | | 97,294 |
| | 3,054 |
| | (1,066 | ) | | 99,282 |
|
| Non-interest income: | | | | | | | |
| | | | | | | | |
| Fee and other income | | 4,628 |
| | 1,727 |
| | (1,258 | ) | | 5,097 |
| | 4,775 |
| | (516 | ) | | (743 | ) | | 3,516 |
|
| Derivative gains (losses): | | | | | | | |
|
| | | | | | | | |
| Derivative cash settlements | | (20,821 | ) | | (766 | ) | | — |
| | (21,587 | ) | |
| Derivative cash settlements interest expense | | | (26,563 | ) | | (409 | ) | | — |
| | (26,972 | ) |
| Derivative forward value gains | | 358,423 |
| | 3,824 |
| | — |
| | 362,247 |
| | 86,783 |
| | 465 |
| | — |
| | 87,248 |
|
| Derivative gains | | 337,602 |
| | 3,058 |
| | — |
| | 340,660 |
| | 60,220 |
| | 56 |
| | — |
| | 60,276 |
|
| Results of operations of foreclosed assets | | (549 | ) | | — |
| | — |
| | (549 | ) | |
| Investment securities gains | | | 4,659 |
| | — |
| | — |
| | 4,659 |
|
| Total non-interest income | | 341,681 |
| | 4,785 |
| | (1,258 | ) | | 345,208 |
| | 69,654 |
| | (460 | ) | | (743 | ) | | 68,451 |
|
| Non-interest expense: | | | | | | | |
| | | | | | | | |
| General and administrative expenses | | (18,991 | ) | | (1,641 | ) | | — |
| | (20,632 | ) | | (22,200 | ) | | (2,057 | ) | | 1,594 |
| | (22,663 | ) |
| Other non-interest expense | | (517 | ) | | (1,245 | ) | | 1,245 |
| | (517 | ) | | (332 | ) | | (215 | ) | | 215 |
| | (332 | ) |
| Total non-interest expense | | (19,508 | ) | | (2,886 | ) | | 1,245 |
| | (21,149 | ) | | (22,532 | ) | | (2,272 | ) | | 1,809 |
| | (22,995 | ) |
| Income before income taxes | | 392,729 |
| | 4,094 |
| | — |
| | 396,823 |
| | 144,416 |
| | 322 |
| | — |
| | 144,738 |
|
| Income tax expense | | — |
| | (1,519 | ) | | — |
| | (1,519 | ) | |
| Income tax provision | | | — |
| | (151 | ) | | — |
| | (151 | ) |
| Net income | | $ | 392,729 |
| | $ | 2,575 |
| | $ | — |
| | $ | 395,304 |
| | $ | 144,416 |
| | $ | 171 |
| | $ | — |
| | $ | 144,587 |
|
| | | | | | | | | | | | | | | | | |
| | | | August 31, 2020 |
| | | | CFC | | NCSC and RTFC | | Elimination | | Consolidated Total |
| Assets: | | | | | | | | | |
| Total loans outstanding | | | $ | 26,895,639 |
| | $ | 1,077,439 |
| | $ | (1,055,979 | ) | | $ | 26,917,099 |
|
| Deferred loan origination costs | | | 11,778 |
| | — |
| | — |
| | 11,778 |
|
| Loans to members | | | 26,907,416 |
| | 1,077,439 |
| | (1,055,979 | ) | | 26,928,877 |
|
| Less: Allowance for credit losses | | | (57,351 | ) | | — |
| | — |
| | (57,351 | ) |
| Loans to members, net | | | 26,850,065 |
| | 1,077,439 |
| | (1,055,979 | ) | | 26,871,526 |
|
| Other assets | | | 1,380,725 |
| | 104,924 |
| | (94,554 | ) | | 1,391,095 |
|
| Total assets | | | $ | 28,230,790 |
| | $ | 1,182,363 |
| | $ | (1,150,533 | ) | | $ | 28,262,621 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| | | Six Months Ended November 30, 2017 |
| (Dollars in thousands) | | CFC | | Other | | Elimination | | Consolidated Total |
| Statement of operations: | | | | | | | | |
| Interest income | | $ | 526,591 |
| | $ | 23,206 |
| | $ | (18,059 | ) | | $ | 531,738 |
|
| Interest expense | | (387,448 | ) | | (18,512 | ) | | 18,059 |
| | (387,901 | ) |
| Net interest income | | 139,143 |
| | 4,694 |
| | — |
| | 143,837 |
|
| Benefit for loan losses | | 602 |
| | — |
| | — |
| | 602 |
|
| Net interest income after benefit for loan losses | | 139,745 |
| | 4,694 |
| | — |
| | 144,439 |
|
| Non-interest income: | | | | | | | | |
| Fee and other income | | 9,378 |
| | 701 |
| | (592 | ) | | 9,487 |
|
| Derivative gains (losses): | | | | | | | | |
| Derivative cash settlements | | (38,554 | ) | | (1,303 | ) | | — |
| | (39,857 | ) |
| Derivative forward value gains | | 117,341 |
| | 1,911 |
| | — |
| | 119,252 |
|
| Derivative gains | | 78,787 |
| | 608 |
| | — |
| | 79,395 |
|
| Results of operations of foreclosed assets | | (34 | ) | | — |
| | — |
| | (34 | ) |
| Total non-interest income | | 88,131 |
| | 1,309 |
| | (592 | ) | | 88,848 |
|
| Non-interest expense: | | | | | | | | |
| General and administrative expenses | | (40,030 | ) | | (3,520 | ) | | — |
| | (43,550 | ) |
| Other non-interest expense | | (1,140 | ) | | (592 | ) | | 592 |
| | (1,140 | ) |
| Total non-interest expense | | (41,170 | ) | | (4,112 | ) | | 592 |
| | (44,690 | ) |
| Income before income taxes | | 186,706 |
| | 1,891 |
| | — |
| | 188,597 |
|
| Income tax expense | | — |
| | (859 | ) | | — |
| | (859 | ) |
| Net income | | $ | 186,706 |
| | $ | 1,032 |
| | $ | — |
| | $ | 187,738 |
|
| | | | | | | | | |
| | | November 30, 2017 |
| | | CFC | | Other | | Elimination | | Consolidated Total |
| Assets: | | | | | | | | |
| Loans to members | | $ | 24,788,572 |
| | $ | 1,111,438 |
| | $ | (1,075,319 | ) | | $ | 24,824,691 |
|
| Less: Allowance for loan losses | | (36,774 | ) | | — |
| | — |
| | (36,774 | ) |
| Loans to members, net | | 24,751,798 |
| | 1,111,438 |
| | (1,075,319 | ) | | 24,787,917 |
|
| Other assets | | 1,081,850 |
| | 107,516 |
| | (97,040 | ) | | 1,092,326 |
|
| Total assets | | $ | 25,833,648 |
| | $ | 1,218,954 |
| | $ | (1,172,359 | ) | | $ | 25,880,243 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | Six Months Ended November 30, 2016 | | Three Months Ended August 31, 2019 |
| (Dollars in thousands) | | CFC | | Other | | Elimination | | Consolidated Total | | CFC | | NCSC and RTFC | | Elimination | | Consolidated Total |
| Statement of operations: | | | | | | | | | | | | | | | | |
| Interest income | | $ | 508,706 |
| | $ | 22,351 |
| | $ | (17,066 | ) | | $ | 513,991 |
| | $ | 287,964 |
| | $ | 12,347 |
| | $ | (10,296 | ) | | $ | 290,015 |
|
| Interest expense | | (364,227 | ) | | (17,610 | ) | | 17,103 |
| | (364,734 | ) | | (213,135 | ) | | (10,432 | ) | | 10,296 |
| | (213,271 | ) |
| Net interest income | | 144,479 |
| | 4,741 |
| | 37 |
| | 149,257 |
| | 74,829 |
| | 1,915 |
| | — |
| | 76,744 |
|
| Provision for loan losses | | (2,666 | ) | | — |
| | — |
| | (2,666 | ) | |
| Net interest income after provision for loan losses | | 141,813 |
| | 4,741 |
| | 37 |
| | 146,591 |
| |
| Provision for credit losses | | | (30 | ) | | — |
| | — |
| | (30 | ) |
| Net interest income after provision for credit loses | | | 74,799 |
| | 1,915 |
| | — |
| | 76,714 |
|
| Non-interest income: | | | | | | | | | | | | | | | | |
| Fee and other income | | 8,956 |
| | 2,624 |
| | (1,953 | ) | | 9,627 |
| | 12,282 |
| | 7,821 |
| | (9,162 | ) | | 10,941 |
|
| Derivative gains (losses): | |
|
| |
|
| |
|
| |
|
| |
| Derivative cash settlements | | (43,430 | ) | | (1,547 | ) | | — |
| | (44,977 | ) | |
| Derivative forward value gains | | 194,210 |
| | 3,134 |
| | — |
| | 197,344 |
| |
| Derivative gains | | 150,780 |
| | 1,587 |
| | — |
| | 152,367 |
| |
| Results of operations of foreclosed assets | | (1,661 | ) | | — |
| | — |
| | (1,661 | ) | |
| Derivative losses: | | | | | | | | | |
| Derivative cash settlements interest expense | | | (10,801 | ) | | (242 | ) | | — |
| | (11,043 | ) |
| Derivative forward value losses | | | (382,762 | ) | | (1,920 | ) | | — |
| | (384,682 | ) |
| Derivative losses | | | (393,563 | ) | | (2,162 | ) | | — |
| | (395,725 | ) |
| Investment securities gains | | | 1,620 |
| | — |
| | — |
| | 1,620 |
|
| Total non-interest income | | 158,075 |
| | 4,211 |
| | (1,953 | ) | | 160,333 |
| | (379,661 | ) | | 5,659 |
| | (9,162 | ) | | (383,164 | ) |
| Non-interest expense: | | | | | | | | | | | | | | | | |
| General and administrative expenses | | (37,770 | ) | | (3,721 | ) | | — |
| | (41,491 | ) | | (24,739 | ) | | (2,235 | ) | | 1,645 |
| | (25,329 | ) |
| Other non-interest expense | | (960 | ) | | (1,916 | ) | | 1,916 |
| | (960 | ) | | 7,179 |
| | (7,517 | ) | | 7,517 |
| | 7,179 |
|
| Total non-interest expense | | (38,730 | ) | | (5,637 | ) | | 1,916 |
| | (42,451 | ) | | (17,560 | ) | | (9,752 | ) | | 9,162 |
| | (18,150 | ) |
| Income before income taxes | | 261,158 |
| | 3,315 |
| | — |
| | 264,473 |
| |
| Income tax expense | | — |
| | (1,430 | ) | | — |
| | (1,430 | ) | |
| Net income | | $ | 261,158 |
| | $ | 1,885 |
| | $ | — |
| | $ | 263,043 |
| |
| Loss before income taxes | | | (322,422 | ) | | (2,178 | ) | | — |
| | (324,600 | ) |
| Income tax benefit | | | — |
| | 521 |
| | — |
| | 521 |
|
| Net loss | | | $ | (322,422 | ) | | $ | (1,657 | ) | | $ | — |
| | $ | (324,079 | ) |
| | | | | | | | | | | | | | | | | |
| | | November 30, 2016 | | August 31, 2019 |
| | | CFC | | Other | | Elimination | | Consolidated Total | | CFC | | NCSC and RTFC | | Elimination | | Consolidated Total |
| Assets: | | | | | | | | | | | | | | | | |
| Total loans outstanding | | | $ | 26,258,810 |
| | $ | 1,048,892 |
| | $ | (1,019,103 | ) | | $ | 26,288,599 |
|
| Deferred loan origination costs | | | 11,239 |
| | — |
| | — |
| | 11,239 |
|
| Loans to members | | $ | 23,813,591 |
| | $ | 1,037,545 |
| | $ | (1,000,424 | ) | | $ | 23,850,712 |
| | 26,270,049 |
| | 1,048,892 |
| | (1,019,103 | ) | | 26,299,838 |
|
| Less: Allowance for loan losses | | (33,911 | ) | | — |
| | — |
| | (33,911 | ) | |
| Less: Allowance for credit losses | | | (17,565 | ) | | — |
| | — |
| | (17,565 | ) |
| Loans to members, net | | 23,779,680 |
| | 1,037,545 |
| | (1,000,424 | ) | | 23,816,801 |
| | 26,252,484 |
| | 1,048,892 |
| | (1,019,103 | ) | | 26,282,273 |
|
| Other assets | | 1,318,908 |
| | 112,264 |
| | (100,252 | ) | | 1,330,920 |
| | 1,286,409 |
| | 105,290 |
| | (95,216 | ) | | 1,296,483 |
|
| Total assets | | $ | 25,098,588 |
| | $ | 1,149,809 |
| | $ | (1,100,676 | ) | | $ | 25,147,721 |
| | $ | 27,538,893 |
| | $ | 1,154,182 |
| | $ | (1,114,319 | ) | | $ | 27,578,756 |
|
| |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
For quantitative and qualitative disclosures about market risk, see “Part I—Item 2. MD&A—Market Risk” and “Note 8—9—Derivative Instruments and Hedging Activities.”
| |
| Item 4. | Controls and Procedures |
As of the end of the period covered by this report, senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting that occurred during the three months ended November 30, 2017August 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In addition, subsequent to August 31, 2020, we have not experienced material changes in our internal control over financial reporting resulting from our transition in mid-March 2020 from an office-based working culture to remote working, currently on a staggered basis, for the substantial majority of employees due to the COVID-19 pandemic. We continue to monitor COVID-19 developments to assess potential changes in our operating environment and determine whether it is necessary to develop and implement significant new processes, procedures and controls in response to developments.
PART II—OTHER INFORMATION
From time to time, CFC is subject to certain legal proceedings and claims in the ordinary course of business, including litigation with borrowers related to enforcement or collection actions. Management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, liquidity or results of operations. CFC establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Accordingly, no reserve has been recorded with respect to any legal proceedings at this time.
ReferOur financial condition, results of operations and liquidity are subject to various risks and uncertainties, some of which are inherent in the financial services industry and others of which are more specific to our own business. We identify and discuss the most significant risk factors of which we are currently aware that could have a material adverse impact on our business, results of operations, financial condition or liquidity in the section “Part I—Item 1A. Risk Factors” in our 20172020 Form 10-K, for information regarding factors that could affect our results of operations, financial condition and liquidity.as filed with the SEC on August 5, 2020. We are not aware of any material changes in the risk factors set forth under “Part I— Item 1A. Risk Factors”identified in our 20172020 Form 10-K. However, other risks and uncertainties, including those not currently known to us, could also negatively impact our business, results of operations, financial condition and liquidity. Therefore, the risk factors identified and discussed in our 2020 Form 10-K should not be considered a complete discussion of all the risks and uncertainties we may face. For information on how we manage our key risks, see “Item 7. MD&A—Risk Management” in our 2020 Form 10-K.
| |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable.
| |
| Item 3. | Defaults Upon Senior Securities |
Not applicable.
| |
| Item 4. | Mine Safety Disclosures |
Not applicable.
None.
Item 6. Exhibits
The following exhibits are incorporated by reference or filed as part of this Report.
EXHIBIT INDEX
|
| | |
| Exhibit No. | | Description |
10.1* 3.2* | — | |
10.2* | — | |
10.3* | — | |
10.4* | — | |
10.5* | — | |
10.6* | — | |
12* | — | |
| 31.1* | — | |
| 31.2* | — | |
| 32.1† | — | |
| 32.2† | — | |
| 101.INS* | — | XBRL Instance Document |
| 101.SCH* | — | XBRL Taxonomy Extension Schema Document |
| 101.CAL* | — | XBRL Taxonomy Calculation Linkbase Document |
| 101.LAB* | — | XBRL Taxonomy Label Linkbase Document |
| 101.PRE* | — | XBRL Taxonomy Presentation Linkbase Document |
| 101.DEF* | — | XBRL Taxonomy Definition Linkbase Document |
____________________________
*Indicates a document being filed withFiled herewith this Report.
†Indicates a document that is furnishedFurnished with this Report, which shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
| NATIONAL RURAL UTILITIES |
| COOPERATIVE FINANCE CORPORATION |
Date: January 11, 2018October 15, 2020
|
| |
| By: | /s/ J. ANDREW DON |
| | J. Andrew Don |
| | Senior Vice President and Chief Financial Officer |
|
| |
| By: | /s/ ROBERT E. GEIER |
| | Robert E. Geier |
| | Controller (Principaland Principal Accounting Officer) Officer |
