FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended May 31, 2021 (“this Report” or “2021 Form 10-K”) contains certain statements that are considered “forward-looking statements” as defined in 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 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,other matters, 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, economic conditions and regulatory or technological changes within the rural electric industry, the costs and effectsimpact of legal or governmental proceedings involving us or our members, general economic conditions, governmental monetary and fiscal policies, the occurrence and effect of natural disasters, including severe weather events or public health emergencies, such as the emergence in 2019 and spread of a novel coronavirus that causes coronavirus disease 2019 (“COVID-19”) and the factors listed and described under “Item 1A. Risk Factors” ofin this Report. ExceptForward-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 theany forward-looking statement is made.
PART I
Item 1. Business
| OVERVIEW |
Our financial statements include the consolidated accounts of National Rural Utilities Cooperative Finance Corporation (“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. CFC and its consolidated entities have not held any foreclosed assets since the fiscal year ended May 31, 2017. Our principal operations are currently organized for management reporting purposes into three business segments, which are based on the accounts of each of the legal entities included in our consolidated financial statements and discussed below.
The business affairs of CFC, NCSC and RTFC are governed by separate boards of directors for each entity. We provide information on CFC’s corporate governance in “Item 10. Directors, Executive Officers and Corporate Governance.” We provide information on the members of each of these entities below in “Item 1. Business—Members” and describe the financing products offered to members by each entity under “Item 1. Business—Loan and Guarantee Programs.” Information on the financial performance of our business segments is disclosed in “Note 16—Business Segments.” 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, except where indicated otherwise.
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CFC
CFC is a member-owned, nonprofit finance 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 makesextends loans to its rural electric members so they can acquire, constructfor construction, acquisitions, system and operatefacility repairs and maintenance, enhancements and ongoing operations to support the goal of electric distribution and generation and transmission (“power supply”) systems and related facilities.of providing reliable, affordable power to the customers they service. 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 members cost-based financial products and services. As described below under “Allocation and Retirement of Patronage Capital,” CFC annually allocates its net earnings, which consist of net income excluding the effect of certain noncash accounting entries, toto: (i) a cooperative educational fund; (ii) a general reserve, if necessary; (iii) members based on each member’s patronage of CFC’s loan programs during the year; and (iv) a members’ capital reserve. 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, weCFC cannot issue equity securities.
NCSC is a taxable cooperative incorporated in 1981 in the District of Columbia as a member-owned cooperative association. The principal purpose of NCSC is to provide financing to its members, entities eligible to be members of CFC and the for-profit and nonprofitnot-for-profit entities that are owned, operated or controlled by, or provide significant benefit to Class A,
B and C members of CFC. See “Members” below for a description of our member classes. NCSC’s membership consists of distribution systems, power supply systems and statewide and regional associations that were members of CFC as of May 31, 2018.2021. CFC, which is the primary source of funding for NCSC, manages NCSC’s business operations under a management agreement that is automatically renewable on an annual basis unless terminated by either party. NCSC pays CFC a fee and, in exchange, CFC reimburses NCSC for loan losses under a guarantee agreement. As a taxable cooperative, NCSC pays income tax based on its reported taxable income and deductions. NCSC is headquartered with CFC in Dulles, Virginia.
RTFC
RTFC is a taxable Subchapter T cooperative association originally incorporated in South Dakota in 1987 and reincorporated as a member-owned cooperative association in the District of Columbia in 2005. RTFC’s principal purpose is to provide financing for its rural telecommunications members and their affiliates. RTFC’s membership consists of a combination of not-for-profit and for-profit entities. CFC is the sole lender to and manages theRTFC’s business operations of RTFC through a management agreement that is automatically renewable on an annual basis unless terminated by either party. RTFC pays CFC a fee and, in exchange, CFC reimburses RTFC for loan losses under a guarantee agreement. As permitted under Subchapter T of the Internal Revenue Code, RTFC pays income tax based on its taxable income, excluding patronage-sourced earnings allocated to its patrons. RTFC is headquartered with CFC in Dulles, Virginia.
| OUR BUSINESS | ||
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Focus on Electric Lending
Maintain Diversified Funding Sources
We strive to maintain diversified funding sources beyond capital market offerings of debt securities. We offer various short- and long-term unsecured investment products to our members and affiliates, including commercial paper, select notes, daily liquidity fund notes, medium-term notes and subordinated certificates. While weWe continue to issue debt securities, such as secured collateral trust bonds, unsecured medium-term notes and dealer commercial paper, in the capital markets, wemarkets. We also have access to funds through bank revolving line of credit arrangements, government-guaranteed programs such as funding from the Federal Financing Bank that is guaranteed by RUS through the Guaranteed Underwriter Program of the USDA (the “Guaranteed Underwriter Program”), as well as private placement note purchase agreements with the Federal Agricultural Mortgage Corporation (“Farmer Mac”). We provide additional information on our funding sources in “Item 7. MD&A—Consolidated Balance Sheet Analysis,” “Item 7. MD&A—Liquidity Risk,” “Note 5—6—Short-Term Borrowings,” “Note 6—7—Long-Term Debt,” “Note 7—8—Subordinated Deferrable Debt” and “Note 8—9—Members’ Subordinated Certificates.”
Our consolidated membership, after taking into consideration entities that are members of both CFC and NCSC and eliminating overlapping members between CFC, NCSC and RTFC, totaled 1,424 members and 246 associates as of May 31, 2021, compared with 1,439 members and 232 associates as of May 31, 2020.
CFC
CFC lends to its members and associates. NCSC lendsassociates and also provides credit enhancements in the form of guarantees of debt obligations and letters of credit. Membership in CFC is limited to cooperative or not-for-profit rural electric systems that are eligible to borrow from RUS under its Electric Loan Program and affiliates of these entities. CFC categorizes its members, all of which are not-for-profit entities or subsidiaries or affiliates of not-for-profit entities, into classes based on member type because the demands and needs of each member class differs. Affiliates represent holding companies, subsidiaries and other entities that are owned, controlled or operated by members. Members are not required to have outstanding loans from RUS as a condition of borrowing from CFC. CFC membership consists of members in 49 states and three U.S. territories. In addition to members, CFC has associates that are nonprofit groups or entities organized on a cooperative basis that are owned, controlled or operated by members and are engaged in or plan to engage in furnishing non-electric services primarily for the benefit of the ultimate consumers of CFC members. Associates are not eligible to vote on matters put to a vote of the membership. CFC’s members, by member class, and associates were as follows as of May 31, 2021.
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| CFC Member | ||||||||||||||
| Member Type | Class | May 31, 2021 | ||||||||||||
| Distribution systems | A | 842 | ||||||||||||
| Power supply systems | B | 67 | ||||||||||||
| Statewide and regional associations, including NCSC | C | 62 | ||||||||||||
National association of cooperatives(1) | D | 1 | ||||||||||||
| Total CFC members | 972 | |||||||||||||
| Associates, including RTFC | 46 | |||||||||||||
| Total CFC members and associates | 1,018 | |||||||||||||
____________________________
(1) National Rural Electric Cooperative Association is our sole class D member.
NCSC
Membership in NCSC includes organizations that are Class A, B and C members of CFC, or eligible for such membership and are approved for membership by the NCSC Board of Directors. In addition to members, NCSC has associates that may include members of CFC, entities eligible to be members of CFC and for-profit and nonprofitnot-for-profit entities that are owned, operatedcontrolled or controlledoperated by, or provide significant benefit to, Class A, B, and C members of CFC. All of NCSC’s members also were CFC members. members as of May 31, 2021. CFC is not, however, a member of NCSC. NCSC’s members and associates were as follows as of May 31, 2021.
| CFC Member | ||||||||||||||
| Member Type | Class | May 31, 2021 | ||||||||||||
| Distribution systems | A | 447 | ||||||||||||
| Power supply systems | B | 3 | ||||||||||||
| Statewide associations | C | 6 | ||||||||||||
| Total NCSC members | 456 | |||||||||||||
| Associates | 195 | |||||||||||||
| Total NCSC members and associates | 651 | |||||||||||||
RTFC
Membership in RTFC is limited to cooperative corporations, nonprofit corporations, private corporations, public corporations, utility districts and other public bodies that are approved by the RTFC Board of Directors and are actively borrowing or are eligible to borrow from RUS’s traditional infrastructure loan program. These companies must be engaged directly or indirectly in furnishing telephone services as the licensed incumbent carrier. Holding companies, subsidiaries and other organizations that are owned, controlled or operated by members, which are referred to as affiliates, are eligible to borrow from RTFC. Associates are organizations that provide non-telephone or non-telecommunications services to rural telecommunications companies that are approved by the RTFC Board of Directors. Neither affiliates nor associates are eligible to vote on matters put to a vote of the membership. CFC and NCSC are not members of RTFC. RTFC’s members and associates were as follows as of May 31, 2021.
| Member Type | May 31, 2021 | |||||||
| Members | 453 | |||||||
| Associates | 6 | |||||||
| Total RTFC members and associates | 459 | |||||||
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| LOAN AND GUARANTEE PROGRAMS | ||
CFC lends to its members organizations affiliated with itsand associates and also provides credit enhancements in the form of guarantees of debt obligations and letters of credit. NCSC and RTFC also lend and provide credit enhancements to their members and associates. See “Item 1. Business—Members” for additionalFor information on the entities that comprise our membership. Loans to NCSC associates may require a guaranteemembership of repayment to NCSC from the CFC member cooperative with which it is affiliated. CFC, NCSC and RTFC, loanssee “Item 1. Business—Members.”
CFC, NCSC and RTFC loan commitments generally contain provisions that restrict further borrower advances or trigger an event of default if there is any material adverse change in the business or condition, financial or otherwise, of the borrower. Below is additional information on the loan and guarantee programs offered by CFC, NCSC and RTFC.
CFC Loan Programs
Long-Term Loans
CFC’s long-term loans generally have the following characteristics:
•terms of up to 35 years on a senior secured basis and terms of up to five years on an unsecured basis;
•amortizing, bullet maturity or serial payment structures;
•the property, plant and equipment financed by and securing the long-term loan has a useful life generally equal to or in excess of the loan maturity;
•flexibility for the borrower to select a fixed interest rate for periods of one to 35 years or a variable interest rate; and
•the ability for the borrower to select various tranches with either a fixed or variable interest rate for each tranche.
Borrowers typically have the option of selecting a fixed or variable interest rate at the time of each advance on long-term loan facilities. When selecting a fixed rate, the borrower has the option to choose a fixed rate for a term of one year through the final maturity of the loan. When the selected fixed interest rate term expires, the borrower may select another fixed rate for a term of one year through the remaining loan maturity or the current variable rate. Long-term fixed rates are set daily for new loan advances and loans that reprice. The fixed rate on each loan is generally determined on the day the loan is advanced or repriced based on the term selected. The variable rate is set on the first day of each month.
To be in compliance with the covenants in the loan agreement and eligible for loan advances, distribution systems generally must maintain an average modified debt service coverage ratio, as defined in the loan agreement, of 1.35 or greater. CFC may make long-term loans to distribution systems, on a case-by-case basis, that do not meet thesethis general criteria.criterion. Power supply systems generally are required: (i) to maintain an average modified debt service coverage ratio, as defined in the loan agreement, of 1.00 or greater; (ii) to establish and collect rates and other revenue in an amount to yield margins for interest, as defined in an indenture, in each fiscal year sufficient to equal at least 1.00; or (iii) both. CFC may make long-term loans to power supply systems, on a case-by-case basis, that may include other requirements, such as maintenance of a minimum equity level.
Line of Credit Loans
Line of credit loans are designed primarily to assist borrowers with liquidity and cash management and are generally advanced at variable interest rates. Line of credit loans are typically revolving facilities. Certain line of credit loans require the borrower to pay off the principal balance for at least five consecutive business days at least once during each 12-month period. Line of credit loans are generally unsecured and may be conditional or unconditional facilities.
Line of credit loans can be made on an emergency basis when financing is needed quickly to address weather-related or other unexpected events and can also arebe made available as interim financing when a member either receives RUS approval to obtain a loan and is awaiting its initial advance of funds or submits a loan application that is pending approval from RUS (sometimes referred to as “bridge loans”). In these cases, when the borrower receives the RUS loan advance, the funds must be used to repay the bridge loans.
Syndicated Line of Credit Loans
A syndicated line of credit loan is typically a large financing offered by a group of lenders that work together to provide funds for a single borrower. Syndicated loans are generally unsecured, floating-rate loans that can be provided on a
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revolving or term basis for tenors that range from several months to five years. Syndicated financings are arranged for borrowers on a case-by-case basis. CFC may act as lead lender, arranger and/or administrative agent for the syndicated facilities. CFC uses itswill syndicate these line of credit facilities on a best efforts to syndicate the loan requirements of certain borrowers. The success of such efforts depends on the financial position and credit quality of the borrower as well as market conditions.effort basis.
NCSC Loan Programs
NCSC makes loans to electric cooperatives and their subsidiaries that provide non-electric services in the energy and telecommunication industries as well as to entities that provide substantial benefit to CFC members, including eligible solar energy providers and investor-owned utilities. Loans to NCSC associates may require a guarantee of repayment to NCSC from the CFC member cooperative with which it is affiliated.
Long-Term Loans
NCSC’s long-term loans generally have the following characteristics:
•terms offrom 7 to up to 3530 years on a senior secured orbasis and terms of up to five years on an unsecured basis;
•amortizing, balloon, bullet maturity or serial payment structures;
•the property, plant and equipment financed by and securing the long-term loan has a useful life equal to or in excess of the loan maturity;
•flexibility for the borrower to select a fixed interest rate for periods of one to 3530 years or a variable interest rate; and
•the ability for the borrower to select various tranches with either a fixed or variable interest rate for each tranche.
NCSC allows borrowers to select a fixed interest rate or a variable interest rate at the time of each advance on long-term loan facilities. When selecting a fixed rate, the borrower has the option to choose a fixed rate for a term of one year through the final maturity of the loan. When the selected fixed interest rate term expires, the borrower may select another fixed rate for a term of one year through the remaining loan maturity or the current variable rate. The fixed rate on a loan generally is determined on the day the loan is advanced or repriced based on the term selected. The variable rate is set on the first day of each month.
Line of Credit Loans
NCSC also provides revolving line of credit loans to assist borrowers with liquidity and cash management on terms similar to those provided by CFC as described herein.
RTFC Loan Programs
Long-Term Loans
RTFC’s long-term loans generally have the following characteristics:
•terms not exceeding 10 years on a senior secured basis and terms of up to five years on an unsecured basis;
•amortizing or bullet maturity payment structures;
•the property, plant and equipment financed by and securing the long-term loan has a useful life generally equal to or in excess of the loan maturity;
•flexibility for the borrower to select a fixed interest rate for periods from one year to the final loan maturity or a variable interest rate; and
•the ability for the borrower to select various tranches with either a fixed or variable interest rate for each tranche.
When a selected fixed interest rate term expires, generally the borrower may select another fixed-rate term or the current variable rate. The fixed rate on a loan is generally determined on the day the loan is advanced or converted to a fixed rate based on the term selected. The variable rate is set on the first day of each month.
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To borrow from RTFC, a rural telecommunication system generally must be able to demonstrate the ability to achieve and maintain an annual debt service coverage ratio of 1.25. RTFC may make long-term loans to rural telecommunication systems, on a case-by-case basis, that do not meet this general criterion.
Line of Credit Loans
Loan Features and Options
Interest Rates
As a member-owned cooperative finance organization, we areCFC is a cost-based lender. As such, our interest rates are set based on a yield that we believe will generate a reasonable level of earnings to cover our cost of funding, general and administrative expenses and provision for credit losses. Long-term fixed rates are set daily for new loan loss provision.advances and loans that reprice. The fixed rate on each loan is generally determined on the day the loan is advanced or repriced based on the term selected. The variable rate is established monthly. Various standardized discounts may reduce the stated interest rates for borrowers meeting certain criteria related to performance, volume, collateral and equity requirements.
Conversion Option
Generally, a borrower may convert a long-term loan from a variable interest rate to a fixed interest rate at any time without a fee and convert a long-term loan from a fixed rate to another fixed rate or to a variable rate at any time based on current loan policies.generally subject to a make-whole premium fee.
Prepayment Option
Generally, borrowers may prepay long-term fixed-rate loans at any time, subject to payment of an administrative fee and a make-whole premium, and prepay long-term variable-rate loans at any time, subject to payment of an administrative fee. Line of credit loans may be prepaid at any time without a fee.
Loan Security
Long-term loans made by CFC typically are senior secured on parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower, subject to standard liens typical in utility mortgages such as those related to taxes, worker’s compensation awards, mechanics’ and similar liens, rights-of-way and governmental rights. We are able to obtain liens on parity with liens for the benefit of RUS because RUS’ form of mortgage expressly provides for other lenders such as CFC to have a parity lien position if the borrower satisfies certain conditions or obtains a written lien accommodation from RUS. When we make loans to borrowers that have existing loans from RUS, we generally require those borrowers to either obtain such a lien accommodation or satisfy the conditions necessary for our loan to be secured on parity under the mortgage with the loan from RUS. As noted above, CFC line of credit loans generally are unsecured.
We provide additional information on our loan programs in the sections “Item 7. MD&A—Consolidated Balance Sheet Analysis,” “MD&A—Off-Balance Sheet Arrangements” and “MD“Item 7. MD&A—Credit Risk.”
Guarantee Programs
When we guarantee our members’ debt obligations, we use the same credit policies and monitoring procedures for guarantees as for loans. If a member system defaults in its obligation to pay debt service, then we are obligated to pay any required amounts under 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 system. The member system is required to repay any amount advanced by us with interest pursuant to the documents evidencing the member system’s reimbursement obligation. We were not required to perform pursuant to any of our guarantee obligations during the year ended May 31, 2018.
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Guarantees of Long-Term Tax-Exempt Bonds
We guarantee debt issued for our members’ construction or acquisition of pollution control, solid waste disposal, industrial development and electric distribution facilities. Governmental authorities issue such debt on a nonrecourse basis and the interest thereon is exempt from federal taxation. The proceeds of the offering are made available to the member system, which in turn is obligated to pay the governmental authority amounts sufficient to service the debt.
If a system defaults for failure to make the debt payments and any available debt service reserve funds have been exhausted, we are obligated to pay scheduled debt service under our guarantee. Such payment will prevent the occurrence of an event of payment default that would otherwise permit acceleration of the bond issue. The system is required to repay any amount that we advance pursuant to our guarantee plus interest on that advance. This repayment obligation, together with the interest thereon, is typically senior secured on parity with other lenders (including, in most cases, RUS), by a lien on substantially all of the system’s assets. If the security instrument is a common mortgage with RUS, then in general, we may not exercise remedies for up to two years following default. However, if the debt is accelerated under the common mortgage because of a determination that the related interest is not tax-exempt, the system’s obligation to reimburse us for any guarantee payments will be treated as a long-term loan. The system is required to pay us initial and/or ongoing guarantee fees in connection with these transactions.
Certain guaranteed long-term debt bears interest at variable rates that are adjusted at intervals of one to 270 days including weekly, every five weeks or semi-annually to a level favorable to their resale or auction at par. If funding sources are available, the member that issued the debt may choose a fixed interest rate on the debt. When the variable rate is reset, holders of variable-rate debt have the right to tender the debt for purchase at par. In some transactions, we have committed to purchase this debt as liquidity provider if it cannot otherwise be re-marketed. If we hold the securities, the member cooperative pays us the interest earned on the bonds or interest calculated based on our short-term variable interest rate, whichever is greater. The system is required to pay us stand-by liquidity fees in connection with these transactions.
Letters of Credit
In exchange for a fee, we issue irrevocable letters of credit to support members’ obligations to energy marketers, other third parties and to the USDA Rural Business and Cooperative DevelopmentBusiness-Cooperative Service. Each letter of credit is supported by a reimbursement agreement with the member on whose behalf the letter of credit was issued. In the event a beneficiary draws on a letter of credit, the agreement generally requires the member to reimburse us within one year from the date of the draw, with interest accruing from the draw date at our line of credit variable interest rate.
The U.S. Federal Communications Commission (“FCC”) has designated CFC as an acceptable source for letters of credit in support of USDA and FCC programs that encourage deployment of high-speed broadband services throughout rural America. The designation allows CFC to provide credit support for rural electric cooperatives and telecommunication cooperativesproviders that participate in programs designed to increase deployment of broadband services to underserved rural areas.
Other Guarantees
We may provide other guarantees as requested by our members. Other guarantees are generally unsecured with guarantee fees payable to us.
We provide additional information on our guarantee programs and outstanding guarantee amounts as of May 31, 20182021 and 20172020 in “Item 7. MD&A—Off-Balance Sheet Arrangements,” “Item 7. MD&A—Credit Risk—Loan and Guarantee Portfolio Credit Risk” and “Note 12—13—Guarantees.”
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| INVESTMENT POLICY | ||
We invest funds in accordance with policies adopted by our board of directors. Pursuant to our current investment policy, an Investment Management Committee was established to oversee and administer our investments with the objective of seeking returns consistent with the preservation of principal and maintenance of adequate liquidity. The Investment Management Committee may direct funds to be invested in:in direct obligations of, or obligations guaranteed by, the United States (“U.S.”) or agencies thereof and investments in government-sponsored enterprises, certain financial institutions in the form of overnight investment products and Eurodollar deposits, bankers’ acceptances, certificates of deposit, working capital acceptances or other deposits. Other permitted investments include highly rated obligations, such as commercial paper, certain obligations of foreign governments, municipal securities, asset backedasset-backed securities, mortgage-backed securities and certain corporate bonds. In addition, we may invest in overnight or term repurchase agreements. Investments are denominated in U.S. dollars exclusively. All of these investments are subject to requirements and limitations set forth in our investment policy.
| INDUSTRY | ||
Overview
CFC aggregates the combined strength of its rural electric member cooperatives to access the public capital markets and other funding sources. CFC works cooperatively with RUS; however, CFC is not a federal agency or a government-sponsored enterprise. Our members are not required to have outstanding loans from RUS as a condition of borrowing from CFC. CFC meets the financial needs of its rural electric members by:
•providing financing to RUS-eligible rural electric utility systems for infrastructure, including for those facilities that are not eligible for financing from RUS;
•providing bridge loans required by borrowers in anticipation of receiving RUS funding;
•providing financial products not otherwise available from RUS, including lines of credit, letters of credit, guarantees on tax-exempt financing, weather-related disaster recoveryemergency lines of credit, unsecured loans and investment products such as commercial paper, select notes, medium-term notes and member capital securities, select notessecurities; and medium-term notes;
•meeting the financing needs of those rural electric systems that repay or prepay their RUS loans and replace the government loans with private capital; andcapital.
Electric Member Operating Environment
In general, electric cooperatives have not been significantly impacted by the effects of retail deregulation. There were 19 states that had adopted programs that allow consumers to choose their supplier of electricity as of May 31, 2018.2021. Depending on the state, the choices can range from being limited to commercial and industrial consumers to “retail choice” for all consumers. In most states, cooperatives have been exempted from or have been allowed to opt out of the regulations allowing for competition. In states offering retail competition, it is important to note that while consumers may be able to
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choose their energy supplier, the electric utility still receives compensation for the necessary service of delivering electricity to consumers through its utility transmission and distribution plant.
The electric utility industry is facing a potential decrease to kilowatt-hour sales due to technology advances that increase energy efficiency of all appliances and devices used in the home and in businesses as well as from distributed generation in the form of rooftop solar and home generators (“behind-the-meter generation”). Electric cooperatives are facing the same issues, but in general to a lesser extent than investor-owned power systems. To date, we have not seen negative impacts in the electric cooperative financial results due to behind-the-meter generation.
Electric cooperatives have options available to mitigate the impact of such issues, such as rate structures to ensure that costs are appropriately recovered for grid and other necessary ancillary services. To date,services and the use of electricity for end-uses that would otherwise be powered by fossil fuels where doing so reduces emissions and saves consumers money (“beneficial electrification”). The push away from fossil fuel use may continue the trend toward beneficial electrification such as the adoption of electric vehicles, which may increase kilowatt-hour sales to many utilities. Beneficial electrification may also improve the utilities’ ability to balance load profiles by leveraging and balancing consumer and system assets such as electric vehicles and battery storage.
Facilitation of Rural Broadband Expansion by Electric Cooperatives
Many electric cooperatives are making investments in fiber to support core electric plant communications. Some of these electric cooperatives are leveraging these fiber assets to offer broadband services, either directly or through partnering with local telecommunication companies and others. Over 30 electric cooperatives were awarded approximately $250 million in federal funding through the Connect America Fund Phase II auction (“CAF II”) process by the FCC that was held in 2018. The awarded funds are being distributed over a 10-year period. More than 190 electric cooperatives, many of which are already offering or building out projects, were awarded approximately $1.6 billion though the FCC’s Rural Development Opportunity Fund (“RDOF”). Those funds also will be distributed over a 10-year period. As federal and state governments increase funding opportunities for electric cooperatives in order to offer broadband services, we have not seen negative impactswill continue to increase our credit support, which may include loans and/or letters of credit, to borrowers who participate in CAF II, RDOF and other programs designed to increase broadband services in rural areas. Loans outstanding to our members related to the electric cooperative financial results due to behind-the-meter generation.construction and operation of broadband services totaled approximately $854 million as of May 31, 2021.
Regulatory Oversight of Electric Cooperatives
There are 11 states in which some or all electric cooperatives are subject to state regulatory oversight of their rates and tariffs (terms and conditions) by state utility commissions.commissions and do not have a right to opt out of regulation. Those states are Arizona, Arkansas, Hawaii, Kentucky, Louisiana, Maine, Maryland, New Mexico, Vermont, Virginia and West Virginia.
Regulatory jurisdiction by state commissions generally includes rate and tariff regulation, the issuance of securities and the enforcement of service territory as provided for by state law.
The Federal Energy Regulatory Commission (“FERC”) has regulatory authority over three aspects of electric power, as provided for under Parts II and III of the Federal Power Act (“FPA”) provide the Federal Energy Regulatory Commission (“FERC”) with regulatory authority over three aspects of electric power::
•the transmission of electric energy in interstate commerce;
•the sale of electric energy at wholesale in interstate commerce; and
•the approval and enforcement of reliability standards affecting all users, owners and operators of the bulk power system.
Our electric distribution and power supply members are subject to regulation by various federal, regional, state and local authorities with respect to the environmental effects of their operations. At the federal level, the U.S. Environmental Protection Agency (“EPA”) from time to time proposes rulemakings that could force the electric utility industry to incur capital costs to comply with potential new regulations and possibly retire coal-fired generating capacity. Since there are only 11 states in which some or all electric cooperatives are subject to state regulatory oversight of their rates and tariffs, in most cases any associated costs of compliance can be passed on to cooperative consumers without additional regulatory approval. One
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On June 19, 2019, the EPA rulemaking isissued the final Affordable Clean Power PlanEnergy (“CPP”ACE”). rule. Falling under Section 111(d) of the federalFederal Clean Air Act, the CPP is designedACE rule addresses existing sources of emissions and sets a framework under which states should develop plans establishing standards of performance for their existing emissions sources and then submit those plans to cut carbon emissions (from 2005 levels)the EPA for approval. States will have three years from existing fossil fuel-fired power plants by 32% by 2030. The CPP is presently under legal review by United Statesthe date of the final rule to prepare and submit a plan that establishes a standard of performance. A coalition of 23 states, several local governments and several environmental organizations filed a lawsuit against the EPA challenging the ACE rule in the U.S. Court of Appeals for the District of Columbia CircuitD.C. Circuit. On January 19, 2021, the court vacated the ACE rule and the United States Supreme Court has stayed the rule pending disposition of this appeal. On October 16, 2017,directed the EPA officially proposed to repealconsider the CPP. In a future regulatory action,greenhouse gas standards. A petition for certiorari has been filed with the EPA is expected to replace the CPP with a more narrowly focused rule.
U.S. Supreme Court.
| LENDING COMPETITION | ||
Overview
RUS is the largest lender to electric cooperatives. RUS providescooperatives, providing them with long-term secured loans. CFC provides financial products and services to its members, primarily in the form of long-term secured and short-term unsecured loans, to its electric cooperative members to supplement RUS financing, to provide loans to members that have elected not to borrow from RUS, and to bridge long-term financing provided by RUS. We also offer other financing options, such as credit support in the form of letters of credit and guarantees, loan syndications and loan participations. Our credit products are tailored to meet the specific needs of each borrower, and we often offer specific transaction structures that our competitors do not provide. CFC also offers certain risk-mitigation products and interest rate discounts on secured, long-term loans for its members that meet performance, volume, collateral and equity requirements.
Primary Lending Competitors
CFC’s primary competitor is CoBank, ACB a federally chartered instrumentality of the United StatesU.S. that is a member of the Farm Credit System. CFC also competes with banks, other financial institutions and the capital markets to provide loans and other financial products to our members. As a result, we are competing with the customer service, pricing and funding options our members are able to obtain from these sources. We attempt to minimize the effect of competition by offering a variety of loan options and value-added services and by leveraging the working relationships developed with the majority of our members over the past 4952 years. Further, on an annual basis, we allocate substantially all net earnings to members (i) in the form of patronage capital, which reduces our members’ effective cost of borrowing, and (ii) through the members’ capital reserve. The value-added services that we provide include, but are not limited to, benchmarking tools, financial models, publications and various conferences, meetings and training workshops.
| December 31, | ||||||||||||||
| 2017 | 2016 | |||||||||||||
| (Dollars in thousands) | Debt Outstanding | % of Total | Debt Outstanding | % of Total | ||||||||||
Total long-term debt reported by members:(1) | ||||||||||||||
| Distribution | $ | 48,147,703 | $ | 47,362,415 | ||||||||||
| Power supply | 47,862,984 | 47,853,905 | ||||||||||||
| Less: Long-term debt funded by RUS | (39,180,420 | ) | (39,273,545 | ) | ||||||||||
| Members’ non-RUS long-term debt | $ | 56,830,267 | $ | 55,942,775 | ||||||||||
| Funding source of members’ long-term debt: | ||||||||||||||
| Long-term debt funded by CFC | $ | 22,671,264 | 40 | % | $ | 22,083,606 | 39 | % | ||||||
| Long-term debt funded by other lenders | 34,159,003 | 60 | 33,859,169 | 61 | ||||||||||
| Members’ non-RUS long-term debt | $ | 56,830,267 | 100 | % | $ | 55,942,775 | 100 | % | ||||||
| December 31, | ||||||||||||||
| 2017 | 2016 | |||||||||||||
| (Dollars in thousands) | Debt Outstanding | % of Total | Debt Outstanding | % of Total | ||||||||||
| Distribution | $ | 18,489,086 | 82 | % | $ | 17,825,633 | 81 | % | ||||||
| Power supply | 4,182,178 | 18 | 4,257,973 | 19 | ||||||||||
| Long-term debt funded by CFC | $ | 22,671,264 | 100 | % | $ | 22,083,606 | 100 | % | ||||||
We are not able to specifically identify the amount of debt our members have outstanding to CoBank, ACB from either the annual financial and statistical reports our members file with us or from CoBank, ACB’s public disclosure; however, we believe CoBank, ACB is the additional lender, along with CFC and RUS, with significant long-term debt outstanding to rural electric cooperatives.
Rural Electric Lending Market
Most of our rural electric borrowers are non-for-profit, private companies owned by the members they serve. As such, there is limited publicly available information to accurately determine the overall size of the rural electric lending market. We utilize the annual financial and statistical reports submitted to us by our members to estimate the overall size of the rural electric lending market. The substantial majority of our members have a fiscal year-end that corresponds with the calendar year-end. Therefore, the annual information we use to estimate the size of the rural electric market is typically based on the calendar year-end rather than CFC’s fiscal year-end.
Based on financial data submitted to us by our electric utility members, we present the long-term debt outstanding to CFC by member class, RUS and other lenders in the electric cooperative industry as of December 31, 2020 and 2019 in the table below. The data presented as of December 31, 2020, were based on information reported by 811 distribution systems and 52 power supply systems. The data presented as of December 31, 2019, were based on information reported by 800 distribution systems and 53 power supply systems.
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| December 31, | ||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||
| (Dollars in thousands) | Debt Outstanding | % of Total | Debt Outstanding | % of Total | ||||||||||||||||||||||
Total long-term debt reported by members:(1) | ||||||||||||||||||||||||||
| Distribution | $ | 52,274,309 | $ | 49,976,016 | ||||||||||||||||||||||
| Power supply | 44,830,704 | 43,958,889 | ||||||||||||||||||||||||
| Less: Long-term debt funded by RUS | (39,660,041) | (39,214,146) | ||||||||||||||||||||||||
| Members’ non-RUS long-term debt | $ | 57,444,972 | $ | 54,720,759 | ||||||||||||||||||||||
| Funding sources of members’ long-term debt: | ||||||||||||||||||||||||||
| Long-term debt funded by CFC by member class: | ||||||||||||||||||||||||||
| Distribution | $ | 20,382,616 | 36 | % | $ | 19,540,233 | 36 | % | ||||||||||||||||||
| Power supply | 4,723,956 | 8 | 4,398,516 | 8 | ||||||||||||||||||||||
| Long-term debt funded by CFC | 25,106,572 | 44 | 23,938,749 | 44 | ||||||||||||||||||||||
| Long-term debt funded by other lenders | 32,338,400 | 56 | 30,782,010 | 56 | ||||||||||||||||||||||
| Members’ non-RUS long-term debt | $ | 57,444,972 | 100 | % | $ | 54,720,759 | 100 | % | ||||||||||||||||||
____________________________
(1) Reported amounts are based on member-provided financial information, which may not have been subject to audit by an independent accounting firm.
While we believe our estimates of the overall size of the rural electric lending market serve as a useful tool in gauging the size of this lending sector, they should be viewed as estimates rather than precise measures as there are certain limitations in our estimation methodology, including, but not limited to, the following:
•Although certain underlying data included in the financial and statistical reports provided to us by members may have been audited by an independent accounting firm, our accumulation of the data from these reports has not been subject to a review for accuracy by an independent accounting firm.
•The data presented is not necessarily inclusive of all members because in some cases our receipt of annual member financial and statistical reports may be delayed and not received in a timely manner to incorporate into our market estimates.
•The financial and statistical reports submitted by members include information on indebtedness to RUS, but the reports do not include comprehensive data on indebtedness to other lenders and are not on a consolidated basis.
| REGULATION | ||
General
CFC, NCSC and RTFC are not subject to direct federal regulatory oversight or supervision with regard to lending. CFC, NCSC and RTFC are subject to state and local jurisdiction commercial lending and tax laws that pertain to business conducted in each state, including but not limited to lending laws, usury laws and laws governing mortgages. These state and local laws regulate the manner in which we make loans and conduct other types of transactions. The statutes, regulations and policies to which the companies are subject may change at any time. In addition, the interpretation and application by regulators of the laws and regulations to which we are subject may change from time to time. Certain of our contractual arrangements, such as those pertaining to funding obtained through the Guaranteed Underwriter Program, provide for the Federal Financing Bank and RUS to periodically review and assess CFC’s compliance with program terms and conditions.
Derivatives Regulation
CFC engages in over-the-counter (“OTC”) derivative transactions to manage interest rate risk. As an end user of derivative financial instruments, CFC is subject to regulations that apply to derivatives generally. The Dodd-Frank Act (“DFA”), enacted July 2010, resulted in, among other things, comprehensive regulation of the over-the-counter (“OTC”)OTC derivatives market. The DFA
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provides for an extensive framework for the regulation of OTC derivatives, including mandatory clearing, exchange
trading and transaction reporting of certain OTC derivatives. In August 2013,Subsequent to the enactment of the DFA, the U.S. CommoditiesCommodity Futures Trading Commission (“CFTC”) issued a final rule, “Clearing Exemption for Certain Swaps Entered into by Cooperatives,” which created an exemption from mandatory clearing for cooperatives. In April 2016, the CFTC issued aThe CFTC’s final rule, “Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants,” which includes an exemption from margin requirements for uncleared swaps for cooperatives that are financial end users. CFC is an exempt cooperative end user of derivative financial instruments and does not participate in the derivatives markets for speculative, trading or investing purposes and does not make a market in derivatives.
CFC’s bylaws provide that cooperative or nonprofit corporations, public corporations, utility districtssuccess in providing industry expertise and other public bodies that received or are eligible to receive a loan or commitment for a loan from RUS or any successor agency (as well as subsidiaries, federations or statewide and regional associations that are wholly owned or controlled by such entities) are eligible for membership. One of the criteria for eligibility for RUS financing is a “rural area” test. CFC relies on the definition of “rural” as specified in the Rural Electrification Act, as amended. “Rural” is defined in the Rural Electrification Act as any area other than a city, town or unincorporated area that has a population of less than 20,000, or any area within the service area of a borrower who, at the date of enactment of the Food, Conservation and Energy Act of 2008, had an outstanding RUS electric loan. The definition of “rural” under the act permits an area to be defined as “rural” regardless of the development of such area subsequent to the approval of the outstanding loan. Thus, those entities that received or qualify for financing from RUS are eligible to apply for membership, upon approval of membership by the CFC Board of Directors, and subsequently to borrow from CFC regardless of whether there is an outstanding loan with RUS. There are no requirements to maintain membership, although the board has the authority to suspend a member under certain circumstances. CFC has not suspended a member to date.
this period. We had 254248 and 253 employees as of May 31, 2018.2021 and 2020, respectively, all of which were located in the U.S. The slight decrease in the number of employees during fiscal year 2021 was primarily due to natural attrition.
Because attracting, developing and retaining high-level talent is a key component of our human capital objectives, we seek to provide competitive compensation and benefits packages. In establishing base salary amounts, we take into account market and industry competitive data. We encourage regular, ongoing employee performance feedback and conduct annual performance reviews of each employee, which are intended to evaluate individual performance, achievements and contributions to the company, identify development opportunities and serve as a basis for awarding annual merit increases. In addition to base salary amounts, we offer annual incentive bonus plan opportunities that are based on attainment of a scorecard of targeted corporate goals established at the beginning of each fiscal year. Attainment of each of the annual scorecard goals requires the collective engagement and effort of employees across the company, which we believe thatincentivizes employees to work together across teams and fosters an overall collaborative working environment.
We place a high priority on the health and wellness of our relations withemployees. We therefore offer various programs intended to promote the physical, mental and financial well-being of employees. Our benefits offerings include vacation and leave programs; health, dental, vision, life and disability insurance coverage; and flexible spending and health savings plans, most of which are funded in whole or in part by CFC. We make investments in the future financial security of our employees are good.by offering retirement plans that consist of a 401(k) plan with a company match component and an employer-funded defined benefit retirement plan in which CFC makes an annual contribution in an amount that approximates 17% of each employee’s base salary, which we believe helps in our efforts to engage employees, retain high-performing employees and reduce turnover. We also offer programs and resources intended to promote work-life balance, assist in navigating life events and improve employee well-being, such as flexible work schedules, remote work options, an employee assistance program, legal insurance and identity theft coverage services.
As part of our efforts to promote an engaged, inclusive and collaborative workplace culture, we encourage employees to expand their capabilities and enhance their career potential through employer-funded onsite training, external training, tuition assistance and professional events. In fiscal year 2021, CFC employees completed more than 3,632 training hours through our internal corporate training classes and resources as well as through our support of employees’ enrollment in external professional training opportunities. We seek to tailor our training programs to evolving events and employee interests. Examples of training programs offered in the reporting period include Unconscious Bias & Allyship, Inclusive Leadership, Leading Virtual Teams, Personal Finance and Adapting to Change. We also support employee development
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though a company-sponsored Toastmasters chapter, guest speakers from cooperative partners and staff trips to local electric cooperatives to allow new employees to learn first-hand how their efforts contribute to our members’ success.
The onset of the COVID-19 pandemic in March 2020 introduced numerous, unprecedented challenges. Our priorities during the COVID-19 pandemic, which continues to persist, have been to protect the health and safety of our employees while also ensuring that we are able to meet the needs of our electric cooperative borrowers as they operate in a sector that provides an essential service to residential and commercial customers. We responded promptly to these challenges, taking a number of precautionary steps to safeguard our business operations and employees, including, but not limited to, implementing remote work arrangements, limiting employee travel and in-person meetings, providing flexible work schedules to accommodate school and childcare challenges and offering training to help our employees adapt to the changes in our work environment.
In July 2021, following the expiration on June 30, 2021 of the state of emergency declared in March 2020 by Virginia’s governor in response to the pandemic and the lifting of all COVID-19 restrictions in Virginia, subject to certain exceptions, we brought 100% of our staff back to CFC’s corporate headquarters building, which continues to adhere to the COVID-19 workplace safety and health standards established by Virginia and guidance provided by the CDC. While we have been able to maintain business continuity throughout the pandemic and experienced no pandemic-related employee furloughs or layoffs, we believe we can provide the highest quality of service and deliver more effectively on our member-focused mission, which requires a significant number of member-facing staff working collaboratively with other staff, by resuming full-time, in-office work.
| AVAILABLE INFORMATION | ||
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports, are available for free at www.nrucfc.coop as soon as reasonably practicable after they are electronically filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”). These reports also are available for free on the SEC’s website at www.sec.gov. Information posted on our website is not incorporated by reference into this Form 10-K.
Item 1A. Risk Factors
Our 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. If anyThe discussion below addresses the most significant risks, of the events or circumstances described in the following risks actually occur,which we are currently aware, that could have a material adverse impact on our business, liquidity, financial condition, or results of operations could be adversely affected. The risks described below are the risks we consider to be material to our business. Otheror liquidity. However, other risks and uncertainties, including those not currently known to us, could also negatively impact our business, financial condition, results of operations and financial condition.liquidity. Therefore, the following 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.” You should consider the following risks together with all of the other information in this Annual Report on Form 10-K.report.
| RISK FACTORS | ||
Credit Risks
We are subject to credit risk that a borrower or other counterparty may not be able to meet its contractual obligations in accordance with agreed-upon terms, which could have a material adverse effect on our financial condition, results of operations and liquidity. Because we lend primarily to U.S. rural electric utility systems, we also are inherently subject to single-industry and single-obligor concentration risks.
As a lender, our primary credit risk arises from the extension of credit to borrowers. Our loan portfolio, which represents the largest component of assets on our balance sheet, accounts for the substantial majority of our credit risk exposure. Loans outstanding to electric utility organizations represented approximately 99% of our total loans outstanding as of May 31, 2021. We had 892 borrowers with loans outstanding as of May 31, 2021, and our 20 largest borrowers accounted for 22% of total loans outstanding as of May 31, 2021. The largest total exposure to a single borrower or controlled group represented less than 2% of total loans outstanding as of May 31, 2021. Texas historically has had the largest number of borrowers with
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loans outstanding and the largest loan concentration in any one state. Loans outstanding to Texas borrowers represented 17% of total loans outstanding as of May 31, 2021.
We face the risk that the principal of, or interest on, a loan will not be paid timely or at all or that the value of any underlying collateral securing a loan will be insufficient to cover our outstanding exposure. A deterioration in the financial condition of a borrower or underlying collateral could impair the ability of a borrower to repay a loan or our ability to recover unpaid amounts from the underlying collateral. We maintain an internal risk rating system in which we assign a rating to each borrower and credit facility that are intended to reflect the ability of a borrower to repay its obligations and assess the probability of default. Unforeseen events and developments that affect specific borrowers or that occur in a region where we have a high concentration of credit risk, such as the February 2021 polar vortex, may result in significant risk rating downgrades. Such an event may result in an increase in delinquent, nonperforming and criticized loans and net charge-offs and an increase in our credit risk.
We establish an allowance for credit losses for estimated expected credit losses in our loan portfolio. Because the process for determining our allowance for credit losses requires significant, complex judgments about the ability of borrowers to repay their loans, we identified the estimation of our allowance for credit losses as a critical accounting policy. Our borrower risk ratings are a key input in establishing our allowance for credit losses. Therefore, the deterioration in the financial condition of a borrower may result in a significant increase in our allowance for credit losses and provision for credit losses and may have a material adverse impact on our results of operations, financial condition and liquidity. In addition, we might underestimate expected credit losses and have credit losses in excess of the established allowance for credit losses if we fail to timely identify a deterioration in a borrower’s financial condition or due to other factors, such as if the methodology and process we use in assigning risk ratings and making judgments in extending credit to our borrowers does not accurately capture the level of our credit risk exposure or our historical loss experience proves to be not indicative of our expected future losses.
Adverse changes, developments or uncertainties in the rural electric utility industry could adversely impact the operations or financial performance of our member electric cooperatives, which, in turn, could have an adverse impact on our financial results.
Our focus as a member-owned finance cooperative is on lending to our rural member electric utility cooperatives, which is the primary source of our revenue. As a result of lending primarily to our members, we have a loan portfolio with single-industry concentration. Loans to rural electric utility cooperatives accounted for approximately 99% of our total loans outstanding as of May 31, 2021. While we historically have experienced limited defaults and very low credit losses in our electric utility loan portfolio, factors that may have a negative impact on the operations of our member rural electric cooperatives include but are not limited to, the price and availability of distributed energy resources, regulatory or compliance factors related to managing greenhouse gas emissions (including the potential for stranded assets) and extreme weather conditions related to climate change. The factors listed above, individually or in combination, could result in declining sales or increased power supply and operating costs and could potentially cause a deterioration in the financial performance of our members and the value of the collateral securing their loans. This could impair their ability to repay us in accordance with the terms of their loans. In such case, it may be necessary to increase our allowance for credit losses, which would result in an increase in the provision for credit losses and a decrease in our net income.
Advances in technology may change the way electricity is generated and transmitted, which could adversely affect the business operations of our members and negatively impact the credit quality of our loan portfolio and financial results.
Advances in technology could reduce demand for power supply systems and distribution services. The development of alternative technologies that produce electricity, including solar cells, wind power and microturbines, has expanded and could ultimately provide affordable alternative sources of electricity and permit end users to adopt distributed generation systems that would allow them to generate electricity for their own use. As these and other technologies, including energy conservation measures, are created, developed and improved, the quantity and frequency of electricity usage by rural customers could decline. Advances in technology and conservation that cause our electric system members’ power supply, transmission and/or distribution facilities to become obsolete prior to the maturity of loans secured by these assets could have an adverse impact on the ability of our members to repay such loans, which could result in an increase in nonperforming or restructured loans. These conditions could negatively impact the credit quality of our loan portfolio and financial results.
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We may obtain entities or other assets through foreclosure, which would subject us to the same performance and financial risks as any other owner or operator of similar businesses or assets.
As a financial institution, from time to time we may obtain entities and assets of borrowers in default through foreclosure proceedings. If we become the owner and operator of entities or assets obtained through foreclosure, we are subject to the same performance and financial risks as any other owner or operator of similar assets or entities. In particular, the value of the foreclosed assets or entities may deteriorate and have a negative impact on our results of operations. We assess foreclosed assets, if any, for impairment periodically as required under generally accepted accounting principles in the U.S. (“U.S. GAAP.”) Impairment charges, if required, represent a reduction to earnings in the period of the charge. There may be substantial judgment used in the determination of whether such assets are impaired and in the calculation of the amount of the impairment. In addition, when foreclosed assets are sold to a third party, the sale price we receive may be below the amount previously recorded in our financial statements, which will result in a loss being recorded in the period of the sale.
The nonperformance of our derivative counterparties could impair our financial results.
We use interest rate swaps to manage our interest rate risk. There is a risk that the counterparties to these agreements will not perform as agreed, which could adversely affect our results of operations. The nonperformance of a counterparty on an agreement would result in the derivative no longer being an effective risk-management tool, which could negatively affect our overall interest rate risk position. In addition, if a counterparty fails to perform on our derivative obligation, we could incur a financial loss to replace the derivative with another counterparty and/or a loss through the failure of the counterparty to pay us amounts owed. We were in a net payable position for all of our interest rate swaps, after taking into consideration master netting agreements, of $464 million as of May 31, 2021.
A decline in our credit rating could trigger payments under our derivative agreements, which could impair our financial results.
We have certain interest rate swaps that contain credit risk-related contingent features referred to as rating triggers. Under certain rating triggers, if the credit rating for either counterparty falls to the level specified in the agreement, the other counterparty may, but is not obligated to, terminate the agreement. If either counterparty terminates the agreement, a net payment may be due from one counterparty to the other based on the prevailing fair value, excluding credit risk, of the underlying derivative instrument. These rating triggers are based on our senior unsecured credit ratings by Moody’s Investors Service (“Moody’s”) and S&P Global Inc. (“S&P”). Based on our interest rate swap agreements subject to rating triggers, if all agreements for which we owe amounts were terminated as of May 31, 2021 and our senior unsecured ratings fell below Baa2 by Moody’s or below BBB by S&P, we would have been required to make a payment of up to $328 million as of that date. In addition, if our senior unsecured ratings fell below Baa3 by Moody’s, below BBB- by S&P or below BBB- by Fitch Ratings Inc. (“Fitch”), we would have been required to make a payment of up to $22 million as of that date. In calculating the required payments, we only consider agreements that, when netted for each counterparty pursuant to a master netting agreement, would require a payment upon termination. In the event that we are required to make a payment as a result of a rating trigger, it could have a material adverse impact on our financial results.
Liquidity Risks
If we are unable to access the capital markets or other external sources for funding, our liquidity position may be negatively affected and we may not have sufficient funds to meet all of our financial obligations as they become due.
We depend on access to the capital markets and other sources of financing, such as our investment portfolio, repurchase agreements, bank revolving credit agreements, investments from our members, private debt issuances through Farmer Mac and through the Guaranteed Underwriter Program, to fund new loan advances and refinance our long- and short-term debt and, if necessary, to fulfill our obligations under our guarantee and repurchase agreements. Market disruptions, downgrades to our long-term and/or short-term debt ratings, adverse changes in our business or performance, downturns in the electric industry and other events over which we have no control may deny or limit our access to the capital markets and/or subject us to higher costs for such funding. Our access to other sources of funding also could be limited by the same factors, by adverse changes in the business or performance of our members, by the banks committed to our revolving credit agreements or Farmer Mac, or by changes in federal law or the Guaranteed Underwriter Program. Our funding needs are determined primarily by scheduled short- and long-term debt maturities and the amount of our loan advances to our borrowers relative to the scheduled payment amortization of loans previously made by us. If we are unable to timely issue debt into the capital markets or obtain funding from other sources, we may not have the funds to meet all of our obligations as they become due.
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A reduction in the credit ratings for our debt could adversely affect our liquidity and/or cost of debt.
Our credit ratings are important to maintaining our liquidity position. We currently contract with three nationally recognized statistical rating organizations to receive ratings for our secured and unsecured debt and our commercial paper. In order to access the commercial paper markets at current levels, we believe that we need to maintain our current ratings for commercial paper of P1P-1 from Moody’s, Investors Service (“Moody’s”), A-1A-2 from S&P Global Inc. (“S&P”) and F-1F1 from
Our ability to maintain compliance with the covenants related to our revolving credit agreements, collateral trust bond and medium-term note indentures and debt agreements could affect our ability to retire patronage capital, result in the acceleration of the repayment of certain debt obligations, adversely impact our credit ratings and hinder our ability to obtain financing.
We must maintain compliance with all covenants and conditions related to our revolving credit agreements and debt indentures. We are required to maintain a minimum average adjusted times interest earned ratio (“adjusted TIER”) for the six most recent fiscal quarters of 1.025 and an adjusted leverage ratio of no more than 10-to-1. In addition, we must maintain loans pledged as collateral for various debt issuances at or below 150% of the related secured debt outstanding as a condition to borrowing under our revolving credit agreements. If we were unable to borrow under the revolving credit agreements, our short-term debt ratings would likely decline, and our ability to issue commercial paper could become significantly impaired. Our revolving credit agreements also require that we earn a minimum annual adjusted TIER of 1.05 in order to retire patronage capital to members. See “MD“Item 7. MD&A—Non-GAAP Financial Measures” for additional information on our adjusted measures and a reconciliation to the most comparable U.S. GAAP measures.
We are required to pledge eligible distribution system or power supply system loans as collateral equal to at least 100% of the outstanding balance of debt issued under a revolving note purchase agreement with Farmer Mac. We also are required to pledge distribution or power supply loans as collateral equal to at least 100% of the outstanding balance of debt under the Guaranteed Underwriter Program. Collateral coverage less than 100% for either of these debt programs constitutes an event of default, which if not cured within 30 days, could result in creditors accelerating the repayment of the outstanding debt principal before the stated maturity. An acceleration of the repayment of debt could pose a liquidity risk if we had insufficient cash or committed credit available to repay the debt. In addition, we would be unable to issue new debt securities under the applicable debt agreement, which could impair our ability to fund new loan advances and refinance maturing debt.
Market Risks
Changes in the level and direction of interest rates or our ability to successfully manage interest rate risk could adversely affect our financial results and condition.
Our earnings are largely dependent on net interest income. Our interest rate risk exposure is primarily related to the funding of a fixed-rate loan portfolio. We have a matched funding objective that is intended to manage the funding of asset and liability repricing terms within a range of total assets based on the current environment and extended outlook for interest rates. We maintain a limited unmatched position, or interest rate gap, on our fixed-rate assets within a targeted range of adjusted total assets to provide us with funding flexibility.
in the relationship between short-term rates and long-term rates
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may affect the pricing of loans to borrowers and our cost of funds, which could adversely affect the difference between the interest that we earn on assets and the interest we pay on liabilities used to fund assets. Such changes may also affect our abilityresult in increased costs to hedge various forms of market andexisting interest rate risk andwhich may decrease the effectiveness of those hedges in helping to manage such risks, which could cause our interest rate gap to exceed our targeted range and have an adverse impact on the net interest income, earnings and cash flows. See “Item 7. MD&A—Market Risk” for additional information.
The uncertainty as to the nature of potential changes or other reforms in the London Interbank Offered Rate (“LIBOR”) benchmark interest rate may adversely affect our financial condition and results of operations.
We have loans, derivative contracts, debt securities and other financial instruments with attributes that are subjecteither directly or indirectly dependent on LIBOR. In 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that the FCA intends to credit risk that a borrowerstop persuading or other counterparty may not be ablecompelling banks to meet its contractual obligations in accordance with agreed-upon terms, which could result in significantly higher, unexpected losses.
Regulators and various financial industry groups have sponsored or formed committees (e.g., the Federal Reserve-sponsored Alternative Reference Rates Committee (“ARRC”) to, among other things, facilitate the identification of an alternative benchmark index to replace LIBOR, and publish consultations on recommended practices for transitioning away from LIBOR, including (i) the utilization of recommended fallback language for LIBOR-linked financial instruments, and (ii) development of alternative pricing methodologies for recommended alternative benchmarks such as the Secured Overnight Financing Rate (“SOFR”). SOFR is a measure of May 31, 2018, the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on our assessmentdirectly observable U.S. Treasury-based repurchase transactions. While the ARRC has selected SOFR as its recommended alternative to U.S. dollar LIBOR, other replacement rates have emerged as alternatives, including, but not limited to the Bloomberg Short-Term Bank Yield Index (“BSBY”). At this time, there is no consensus as to whether SOFR, BSBY or another rate will become acceptable alternatives to LIBOR. We are not able to predict how SOFR, BSBY or an alternate rate will perform in comparison to LIBOR in response to changing market conditions, what the effect of credit losses inherent in our loan portfolio assuch rate’s implementation may be on the markets for floating-rate financial instruments or whether such rates will be vulnerable to manipulation.
The replacement of each balance sheet date, taking into consideration management's continuing evaluation of credit risk related to: industry concentrations; macro-economic conditions; specific credit risks; loan loss experience; current loan portfolio quality; present politicalLIBOR creates operational and regulatory conditions; and unidentified losses and risks inherent in the current loan portfolio.market risks. We consider the process for determining the amount of the allowance as onewill continue to assess all of our critical accounting policies because it involves significant judgmentscontracts and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impactfinancial instruments that are directly or indirectly dependent on our results of operations or financial condition. Management believes that the allowance for loan losses appropriately reflects credit losses inherent in our loan portfolio as of May 31, 2018. However, our actual credit losses could exceed our estimate of probable losses dueLIBOR to changes in economic conditions that adversely affect borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control. In those cases, we may be required to increase the allowance for loan losses through an increase in the provision for loan losses, which would reduce net income and may have a material adverse effect on our financial results.
Breaches of our information technology systems, or those managed by third parties, may damage relationships with our members or subject us to reputational, financial, legal or operational consequences.
Cyber-related attacks pose a risk to the security of our members’ strategic business information and the confidentiality and integrity of our data, which includesinclude strategic and proprietary information. Security breaches may occur through the actions of third parties, employee error, malfeasance, technology failures or other irregularities. Any such breach or unauthorized access could result in a loss of this information, a loss of integrity of this information, a delay or inability to provide service of affected products, damage to our reputation, including a loss of confidence in the security of our products and services, and significant legal and financial exposure. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently, we may be unable to anticipate these techniques or implement adequate preventative measures. As a result, cyber-related attacks may remain undetected for an extended period and may be costly to remediate.
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Our business depends on the reliable and secure operation of computer systems, network infrastructure and other information technology managed by third parties including, but not limited to:to, our service providers for external storage and processing of our information on cloud-based systems; our consulting and advisory firms and contractors that have access to our confidential and proprietary data; and administrators for our employee payroll and benefits management. We have limited control and visibility over third-party systems that we rely on for our business. The occurrence of a cyber-related
attack, breach, unauthorized access or other cybersecurity event could result in damage to our third parties’ operations. The failure of third parties to provide services agreed upon through service levelservice-level agreements, whether as a result of the occurrence of a cyber-related attack or other event, could result in the loss of access to our data, the loss of integrity of our data, disruptions to our corporate functions, loss of business opportunities or reputational damage, or otherwise adversely impact our financial results and result incause significant costs and liabilities.
While CFC maintains insurance coverage that, subject to policy terms and conditions, covers certain aspects of cyber risks, including business interruptions caused by cyber-related attacks on information technology systems managed by third parties, such insurance coverage may be insufficient to cover all losses. Our failure to comply with applicable laws and regulations regarding data security and privacy could result in fines, sanctions and litigation. Additionally, new regulation in the areas of data security and privacy may increase our costs and our members’ costs.
Our elected directors also serve as officers or directors of certain of our individual member cooperatives, which may result in a potential conflict of interest with respect to loans, guarantees and extensions of credit that we may make to or on behalf of such member cooperatives.
In accordance with our charter documents and the purpose for which we were formed, we lend only to our members and associates. CFC’s directors are elected or appointed from our membership, with 10 director positions filled by directors of members, 10 director positions filled by general managers or chief executive officers of members, two positions appointed by NRECA and one at-large position that must, among other things, be a director, financial officer, general manager or chief executive of one of our members. CFC currently has loans outstanding to members that are affiliated with CFC directors and may periodically extend new loans to such members. The relationship of CFC’s directors to our members may give rise to conflicts of interests from time to time. See “Item 13. Certain Relationships and Related Transactions, and Director Independence—Review and Approval of Transactions with Related Persons” for a description of our policies with regard to approval of loans to members affiliated with CFC directors.
Natural or man-made disasters, including widespread health emergencies such as the COVID-19 pandemic, or other similar external events beyond our control, could disrupt our business and adversely affect our results of operations and financial condition.
Our operations may be subject to disruption due to the occurrence of natural disasters, acts of terrorism or war, public health emergencies, such as the ongoing COVID-19 pandemic, or other unexpected or disastrous conditions, events or emergencies beyond our control, some of which may be intensified by the effects of a government response to the event, or climate change and changing weather patterns.
COVID-19 resulted in the declaration of the COVID-19 outbreak as a pandemic by the World Health Organization and has caused significant economic and financial turmoil both in the U.S. and around the world. In early July 2021, pursuant to the lifting of restrictions in the Commonwealth of Virginia where our headquarters are located, we implemented a policy that required 100% of employees that work at headquarters to return to the office full-time subject to certain exceptions. While most states have allowed all businesses to resume operations at normal capacity, there continues to be uncertainty regarding the manner and timing in which all businesses will return to all of their business operations. If federal, state or local authorities impose new or additional restrictions in response to COVID-19 variants, such actions could disrupt the business, activities and operations of our members, as well our business and operations.
There is significant uncertainty about the duration and severity of the COVID-19 pandemic. The effect of the recent surge in COVID-19 variants in the U.S. and certain measures that may be taken by federal, state and local governments, in the U.S. to contain the spread, could adversely impact our business, results of operations and financial condition. The extent to which the COVID-19 pandemic impacts us will depend on future developments that are highly uncertain and cannot be predicted including, but not limited to, the duration and spread of the pandemic, its severity, actions taken to contain COVID-19 and mitigate its effects, and how quickly and to what extent normal economic and operating conditions resume.
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Although we have implemented a business continuity management program that we enhance on an ongoing basis, there can be no assurance that the program will adequately mitigate the risks of business disruptions. Further, events such as natural disasters and public health emergencies may divert our attention away from normal operations and limit necessary resources. We generally must resume operations promptly following any interruption. If we were to suffer a disruption or interruption and were not able to resume normal operations within a period consistent with industry standards, our business, financial condition or results of operations could be adversely affected in a material manner. In addition, depending on the nature and duration of the disruption or interruption, we might become vulnerable to fraud, additional expense or other losses, or to a loss of business.
Competition from other lenders could adversely impact our financial results.
We compete with other lenders for the portion of the rural utility loan demand for which RUS will not lend and for loans to members that have elected not to borrow from RUS. The primary competition for the non-RUS loan volume is from CoBank, ACB, a federally chartered instrumentality of the U.S. that is a member of the Farm Credit System. As a government-sponsored enterprise, CoBank, ACB has the benefit of an implied government guarantee with respect to its funding. Competition may limit our ability to raise rates to adequately cover increases in costs, which could have an adverse impact on our results of operations, and increasing interest rates to cover costs could cause a reduction in new lending business.
Regulatory and Compliance Risks
Loss of our tax-exempt status could adversely affect our earnings.
CFC has been recognized by the Internal Revenue ServiceIRS as an organization for which income is exempt from federal taxation under Section 501(c)(4) of the Internal Revenue Code (other than any net income from an unrelated trade or business). In order to maintain CFC’s tax-exempt status, it must continue to operate exclusively for the promotion of social welfare by operating on a cooperative basis for the benefit of its members by providing them cost-based financial products and services consistent with sound financial management, and no part of CFC’s netearnings may inure to the benefit of any private shareholder or individual other than the allocation or return of net earnings or capital to its members in accordance with CFC’s bylaws and incorporating statute in effect in 1996.
If CFC were to lose its status as a 501(c)(4) organization, it would become a taxable cooperative and would be required to pay income tax based on its taxable income. If this event occurred, we would evaluate all options available to modify CFC’s structure and/or operations to minimize any potential tax liability.
As a tax-exempt cooperative and nonbank financial institution, our lending activities are not subject to the regulations and oversight of U.S. financial regulators such as the Federal Reserve, the Federal Deposit Insurance Corporation or the Office of Comptroller of Currency. Because we are not under the purview of such regulation, we could engage in activities that could expose us to greater credit, market and liquidity risk, reduce our safety and soundness and adversely affect our financial results.
Financial institutions subject to regulations, oversight and monitoring by U.S. financial regulators are required to maintain specified levels of capital and may be restricted from engaging in certain lending-related and other activities that could adversely affect the safety and soundness of the financial institution or are considered conflicts of interest. As a tax-exempt, nonbank financial institution, we are not subject to the same oversight and supervision. There is no federal financial regulator that monitors compliance with our risk policies and practices or that identifies and addresses potential deficiencies that could adversely affect our financial results. Without regulatory oversight and monitoring, there is a greater potential for us to engage in activities that could pose a risk to our safety and soundness relative to regulated financial institutions.
Changes in accounting standards or assumptions in applying accounting policies could adverselymaterially impact our financial results.statements.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Some of these policies require the use of estimates and assumptions that may affect the reported carrying amount of our assets or liabilities and our results of operations. We compete with other lenders forconsider the portionaccounting policies that require management to make difficult, subjective and complex judgments about matters that are inherently uncertain as our most critical accounting policies. The use of the rural utility loan demand for which RUS will not lendreasonably different estimates and for loans to members that have elected not to borrow from RUS. The primary competition for the non-RUS loan volume is from CoBank, ACB, a federally chartered instrumentality of the United States that is a member of the Farm Credit System. As a government-sponsored enterprise, CoBank, ACB has the benefit of an implied government guarantee with respect to its funding. Competition may limit our ability to raise rates to adequately cover increases in costs, whichassumptions could have an adversea material impact on our results of operations,financial statements
20
or if the assumptions, estimates or judgments were incorrectly made, we could be required to correct and increasing interest rates to cover costs could cause a reduction in new lending business.
restate prior-period financial statements. In accordance with our charter documents and the purpose for which we were formed, we lend only to our members and associates. CFC’s directors are elected or appointed from our membership, with 10 director positions filled by directors of members, 10 director positions filled by general managers or chief executive officers of members, two positions appointed
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
CFC owns an office building, with approximately 141,000 gross square feet of office, meeting and storage spacefootage, in Loudoun County, Virginia, that serves as its headquarters in Loudoun County, Virginia.headquarters.
Item 3. Legal Proceedings
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.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Not applicable.
Item 6. Reserved
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
We conduct our operations through three business segments, which are based on each 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 $28,427 million as of May 31, 2021, of which 96% was attributable to CFC. We generated total revenue, which consists of net interest income and fee and other income, of $433 million for fiscal year ended May 31, 2021 (“fiscal year 2021”), compared with $353 million for fiscal year ended May 31, 2020 (“fiscal year 2020”). Our adjusted total revenue was $318 million for fiscal year 2021, compared with $297 million for fiscal year 2020. We provide information on the financial performance of our business segments in “Note 16—Business Segments.”
Management monitors a variety of key indicators and metrics to evaluate our business performance. In addition to financial measures determined in accordance with generally accepted accounting principles in the United States (“GAAP”),U.S. GAAP, management also evaluates performance based on certain non-GAAP measures, and metrics, which we refer to as “adjusted” measures. CertainWe identify our non-GAAP adjusted measures and describe our use of these measures below under “Summary of Selected Financial Data.”
The following MD&A is intended to enhance the understanding of our consolidated financial covenant provisionsstatements by providing material information that we believe is relevant in evaluating our credit agreements are alsoresults of operations, financial condition and liquidity and the potential impact of material known events or uncertainties that, based on management’s assessment, are reasonably likely to cause the financial information included in this Report not to be necessarily indicative of our future financial performance. Our MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and related notes for the fiscal year ended May 31, 2021 included in this Report and additional information contained elsewhere in this Report, including the risk factors discussed under “Item 1A. Risk Factors.”
| SUMMARY OF SELECTED FINANCIAL DATA | ||
Table 1 provides a summary of consolidated selected reported financial data and non-GAAP financial measures.adjusted measures for each fiscal year in the five-year period ended May 31, 2021. 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 U.S. 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 of (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 U.S. 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) establishing short- and long-term performance goals; (ii) budgeting and forecasting; (iii) comparing period-to-period operating results, analyzing changes in results and identifying potential trends; and (iv) making compensation decisions. In addition, certain of the financial covenants in our committed bank revolving line of credit agreements and debt indentures are based on non-GAAP adjusted
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measures. See “Item 7. MD&A—Non-GAAP Financial Measures” forWe provide a detailed reconciliation of theseour non-GAAP adjusted measures to the most comparable U.S. GAAP measures.measures in the section “Non-GAAP Financial Measures.”
| Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended May 31, | 2021 vs. | 2020 vs. | |||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| Statements of operations | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest income | $ 1,116,601 | $ 1,151,286 | $ 1,135,670 | $ 1,077,357 | $ 1,036,634 | (3) | % | 1 | % | ||||||||||||||||||||||||||||||||||||||
| Interest expense | (702,063) | (821,089) | (836,209) | (792,735) | (741,738) | (14) | (2) | ||||||||||||||||||||||||||||||||||||||||
| Net interest income | 414,538 | 330,197 | 299,461 | 284,622 | 294,896 | 26 | 10 | ||||||||||||||||||||||||||||||||||||||||
| Fee and other income | 18,929 | 22,961 | 15,355 | 17,578 | 19,713 | (18) | 50 | ||||||||||||||||||||||||||||||||||||||||
| Total revenue | 433,467 | 353,158 | 314,816 | 302,200 | 314,609 | 23 | 12 | ||||||||||||||||||||||||||||||||||||||||
| Benefit (provision) for credit losses | (28,507) | (35,590) | 1,266 | 18,575 | (5,978) | (20) | ** | ||||||||||||||||||||||||||||||||||||||||
| Derivative gains (losses): | |||||||||||||||||||||||||||||||||||||||||||||||
Derivative cash settlements interest expense(2) | (115,645) | (55,873) | (43,611) | (74,281) | (84,478) | 107 | 28 | ||||||||||||||||||||||||||||||||||||||||
Derivative forward value gains (losses)(3) | 621,946 | (734,278) | (319,730) | 306,002 | 179,381 | ** | 130 | ||||||||||||||||||||||||||||||||||||||||
| Derivative gains (losses) | 506,301 | (790,151) | (363,341) | 231,721 | 94,903 | ** | 117 | ||||||||||||||||||||||||||||||||||||||||
| Other non-interest income (expense) | 1,495 | 9,431 | (1,799) | — | (1,749) | (84) | ** | ||||||||||||||||||||||||||||||||||||||||
Non-interest expense(4) | (97,780) | (127,438) | (101,941) | (92,827) | (87,982) | (23) | 25 | ||||||||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | 814,976 | (590,590) | (150,999) | 459,669 | 313,803 | ** | 291 | ||||||||||||||||||||||||||||||||||||||||
| Income tax benefit (provision) | (998) | 1,160 | (211) | (2,305) | (1,704) | ** | ** | ||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 813,978 | $ | (589,430) | $ | (151,210) | $ | 457,364 | $ | 312,099 | ** | 290 | |||||||||||||||||||||||||||||||||||
| Adjusted operational financial measures | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest income | $ 1,116,601 | $ 1,151,286 | $ 1,135,670 | $ 1,077,357 | $ 1,036,634 | (3) | 1 | ||||||||||||||||||||||||||||||||||||||||
| Interest expense | (702,063) | (821,089) | (836,209) | (792,735) | (741,738) | (14) | (2) | ||||||||||||||||||||||||||||||||||||||||
Include: Derivative cash settlements interest expense(2) | (115,645) | (55,873) | (43,611) | (74,281) | (84,478) | 107 | 28 | ||||||||||||||||||||||||||||||||||||||||
Adjusted interest expense(5) | (817,708) | (876,962) | (879,820) | (867,016) | (826,216) | (7) | — | ||||||||||||||||||||||||||||||||||||||||
Adjusted net interest income(5) | $ | 298,893 | $ | 274,324 | $ | 255,850 | $ | 210,341 | $ | 210,418 | 9 | 7 | |||||||||||||||||||||||||||||||||||
| Net income (loss) | $ 813,978 | $ | (589,430) | $ | (151,210) | $ 457,364 | $ 312,099 | ** | 290 | ||||||||||||||||||||||||||||||||||||||
Exclude: Derivative forward value gains (losses)(3) | 621,946 | (734,278) | (319,730) | 306,002 | 179,381 | ** | 130 | ||||||||||||||||||||||||||||||||||||||||
Adjusted net income(5) | $ | 192,032 | $ | 144,848 | $ | 168,520 | $ | 151,362 | $ | 132,718 | 33 | (14) | |||||||||||||||||||||||||||||||||||
| Selected ratios | |||||||||||||||||||||||||||||||||||||||||||||||
Times interest earned ratio (TIER)(6) | 2.16 | 0.28 | 0.82 | 1.58 | 1.42 | 188 | bps | (54) | bps | ||||||||||||||||||||||||||||||||||||||
Adjusted TIER(5) | 1.23 | 1.17 | 1.19 | 1.17 | 1.16 | 6 | (2) | ||||||||||||||||||||||||||||||||||||||||
Net interest yield(7) | 1.47 | % | 1.21 | % | 1.14 | % | 1.12 | % | 1.20 | % | 26 | 7 | |||||||||||||||||||||||||||||||||||
Adjusted net interest yield(5)(8) | 1.06 | 1.00 | 0.97 | 0.83 | 0.86 | 6 | 3 | ||||||||||||||||||||||||||||||||||||||||
Net charge-off rate(9) | 0.00 | 0.00 | 0.00 | 0.00 | 0.01 | — | — | ||||||||||||||||||||||||||||||||||||||||
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| Year Ended May 31, | Change | |||||||||||||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | 2015 | 2014 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||
| Statement of operations | ||||||||||||||||||||||||
| Interest income | $ | 1,077,357 | $ | 1,036,634 | $ | 1,012,636 | $ | 952,976 | $ | 957,540 | 4% | 2% | ||||||||||||
| Interest expense | (792,735 | ) | (741,738 | ) | (681,850 | ) | (635,684 | ) | (654,655 | ) | 7 | 9 | ||||||||||||
| Net interest income | 284,622 | 294,896 | 330,786 | 317,292 | 302,885 | (3) | (11) | |||||||||||||||||
| Fee and other income | 17,578 | 19,713 | 21,785 | 36,783 | 17,762 | (11) | (10) | |||||||||||||||||
| Total revenue | 302,200 | 314,609 | 352,571 | 354,075 | 320,647 | (4) | (11) | |||||||||||||||||
| Benefit (provision) for loan losses | 18,575 | (5,978 | ) | 646 | 21,954 | (3,498 | ) | ** | ** | |||||||||||||||
Derivative gains (losses) (1) | 231,721 | 94,903 | (309,841 | ) | (196,999 | ) | (34,421 | ) | 144 | ** | ||||||||||||||
| Results of operations of foreclosed assets | — | (1,749 | ) | (6,899 | ) | (120,148 | ) | (13,494 | ) | ** | (75) | |||||||||||||
Operating expenses(2) | (90,884 | ) | (86,226 | ) | (86,343 | ) | (76,530 | ) | (72,566 | ) | 5 | 0 | ||||||||||||
| Other non-interest expense | (1,943 | ) | (1,756 | ) | (1,593 | ) | (870 | ) | (1,738 | ) | 11 | 10 | ||||||||||||
| Income (loss) before income taxes | 459,669 | 313,803 | (51,459 | ) | (18,518 | ) | 194,930 | 46 | ** | |||||||||||||||
| Income tax expense | (2,305 | ) | (1,704 | ) | (57 | ) | (409 | ) | (2,004 | ) | 35 | 2,889 | ||||||||||||
| Net income (loss) | $ | 457,364 | $ | 312,099 | $ | (51,516 | ) | $ | (18,927 | ) | $ | 192,926 | 47 | ** | ||||||||||
| Adjusted operational financial measures | ||||||||||||||||||||||||
Adjusted interest expense(3) | $ | (867,016 | ) | $ | (826,216 | ) | $ | (770,608 | ) | $ | (718,590 | ) | $ | (728,617 | ) | 5% | 7% | |||||||
Adjusted net interest income(3) | 210,341 | 210,418 | 242,028 | 234,386 | 228,923 | 0 | (13) | |||||||||||||||||
Adjusted net income(3) | 151,362 | 132,718 | 169,567 | 95,166 | 153,385 | 14 | (22) | |||||||||||||||||
| Selected ratios | ||||||||||||||||||||||||
Fixed-charge coverage ratio/TIER(4) | 1.58 | 1.42 | 0.92 | 0.97 | 1.29 | 16 bps | 50 bps | |||||||||||||||||
Adjusted TIER(3) | 1.17 | 1.16 | 1.22 | 1.13 | 1.21 | 1 | (6) | |||||||||||||||||
Net interest yield(5) | 1.12 | % | 1.20 | % | 1.43 | % | 1.47 | % | 1.42 | % | (8) | (23) | ||||||||||||
Adjusted net interest yield(3)(6) | 0.83 | 0.86 | 1.05 | 1.08 | 1.07 | (3) | (19) | |||||||||||||||||
Net charge-off rate(7) | 0.00 | 0.01 | 0.00 | 0.00 | 0.01 | (1) | 1 | |||||||||||||||||
| Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended May 31, | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | vs. 2020 | vs. 2019 | ||||||||||||||||||||||||||||||||||||||||
| Balance sheets | |||||||||||||||||||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash | $ 303,361 | $ 680,019 | $ 186,204 | $ 238,824 | $ 188,421 | (55) | % | 265 | % | ||||||||||||||||||||||||||||||||||||||
| Investment securities | 611,277 | 370,135 | 652,977 | 609,851 | 92,554 | 65 | (43) | ||||||||||||||||||||||||||||||||||||||||
Loans to members(10) | 28,426,961 | 26,702,380 | 25,916,904 | 25,178,608 | 24,367,044 | 6 | 3 | ||||||||||||||||||||||||||||||||||||||||
Allowance for credit losses(11) | (85,532) | (53,125) | (17,535) | (18,801) | (37,376) | 61 | 203 | ||||||||||||||||||||||||||||||||||||||||
| Loans to members, net | 28,341,429 | 26,649,255 | 25,899,369 | 25,159,807 | 24,329,668 | 6 | 3 | ||||||||||||||||||||||||||||||||||||||||
| Total assets | 29,638,363 | 28,157,605 | 27,124,372 | 26,690,204 | 25,205,692 | 5 | 4 | ||||||||||||||||||||||||||||||||||||||||
| Liabilities and equity: | |||||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | 4,582,096 | 3,961,985 | 3,607,726 | 3,795,910 | 3,342,900 | 16 | 10 | ||||||||||||||||||||||||||||||||||||||||
| Long-term debt | 20,603,123 | 19,712,024 | 19,210,793 | 18,714,960 | 17,955,594 | 5 | 3 | ||||||||||||||||||||||||||||||||||||||||
| Subordinated deferrable debt | 986,315 | 986,119 | 986,020 | 742,410 | 742,274 | — | — | ||||||||||||||||||||||||||||||||||||||||
| Members’ subordinated certificates | 1,254,660 | 1,339,618 | 1,357,129 | 1,379,982 | 1,419,025 | (6) | (1) | ||||||||||||||||||||||||||||||||||||||||
| Total debt outstanding | 27,426,194 | 25,999,746 | 25,161,668 | 24,633,262 | 23,459,793 | 5 | 3 | ||||||||||||||||||||||||||||||||||||||||
| Total liabilities | 28,238,484 | 27,508,783 | 25,820,490 | 25,184,351 | 24,106,887 | 3 | 7 | ||||||||||||||||||||||||||||||||||||||||
| Total equity | 1,399,879 | 648,822 | 1,303,882 | 1,505,853 | 1,098,805 | 116 | (50) | ||||||||||||||||||||||||||||||||||||||||
| Adjusted balance sheet measures | |||||||||||||||||||||||||||||||||||||||||||||||
Adjusted total liabilities(5) | $ | 25,273,384 | $ | 23,777,823 | $ | 22,931,626 | $ | 22,625,162 | $ | 21,392,856 | 6 | 4 | |||||||||||||||||||||||||||||||||||
Adjusted total equity(5) | 4,106,172 | 4,061,411 | 3,999,164 | 3,661,239 | 3,597,378 | 1 | 2 | ||||||||||||||||||||||||||||||||||||||||
Members’ equity(5) | 1,836,135 | 1,707,770 | 1,625,847 | 1,496,620 | 1,389,303 | 8 | 5 | ||||||||||||||||||||||||||||||||||||||||
| Selected ratios period end | |||||||||||||||||||||||||||||||||||||||||||||||
Allowance coverage ratio(11)(13) | 0.30 | % | 0.20 | % | 0.07 | % | 0.07 | % | 0.15 | % | 10 | bps | 13 | bps | |||||||||||||||||||||||||||||||||
Nonperforming loans ratio(14) | 0.84 | 0.63 | — | — | — | 21 | 63 | ||||||||||||||||||||||||||||||||||||||||
Debt-to-equity ratio(15) | 20.17 | 42.40 | 19.80 | 16.72 | 21.94 | (52) | % | 114 | % | ||||||||||||||||||||||||||||||||||||||
Adjusted debt-to-equity ratio(5) | 6.15 | 5.85 | 5.73 | 6.18 | 5.95 | 5 | 2 | ||||||||||||||||||||||||||||||||||||||||
| Year Ended May 31, | Change | |||||||||||||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | 2015 | 2014 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||
| Balance sheet | �� | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 230,999 | $ | 166,615 | $ | 204,540 | $ | 248,836 | $ | 338,715 | 39% | (19)% | ||||||||||||
| Investment securities | 608,851 | 92,554 | 87,940 | 84,472 | 55,177 | 558 | 5 | |||||||||||||||||
Loans to members(8) | 25,178,608 | 24,367,044 | 23,162,696 | 21,469,017 | 20,476,642 | 3 | 5 | |||||||||||||||||
| Allowance for loan losses | (18,801 | ) | (37,376 | ) | (33,258 | ) | (33,690 | ) | (56,429 | ) | (50) | 12 | ||||||||||||
| Loans to members, net | 25,159,807 | 24,329,668 | 23,129,438 | 21,435,327 | 20,420,213 | 3 | 5 | |||||||||||||||||
| Total assets | 26,690,204 | 25,205,692 | 24,270,200 | 22,846,059 | 22,190,685 | 6 | 4 | |||||||||||||||||
| Short-term borrowings | 3,795,910 | 3,342,900 | 2,938,848 | 3,127,754 | 4,099,331 | 14 | 14 | |||||||||||||||||
| Long-term debt | 18,714,960 | 17,955,594 | 17,473,603 | 16,244,794 | 14,475,635 | 4 | 3 | |||||||||||||||||
| Subordinated deferrable debt | 742,410 | 742,274 | 742,212 | 395,699 | 395,627 | 0 | 0 | |||||||||||||||||
| Members’ subordinated certificates | 1,379,982 | 1,419,025 | 1,443,810 | 1,505,420 | 1,612,191 | (3) | (2) | |||||||||||||||||
| Total debt outstanding | 24,633,262 | 23,459,793 | 22,598,473 | 21,273,667 | 20,582,784 | 5 | 4 | |||||||||||||||||
| Total liabilities | 25,184,351 | 24,106,887 | 23,452,822 | 21,934,273 | 21,220,311 | 4 | 3 | |||||||||||||||||
| Total equity | 1,505,853 | 1,098,805 | 817,378 | 911,786 | 970,374 | 37 | 34 | |||||||||||||||||
Guarantees(9) | 805,161 | 889,617 | 909,208 | 986,500 | 1,064,822 | (9) | (2) | |||||||||||||||||
| Selected ratios—period end | ||||||||||||||||||||||||
Allowance coverage ratio(10) | 0.07 | % | 0.15 | % | 0.14 | % | 0.16 | % | 0.28 | % | (8) bps | 1 bp | ||||||||||||
Debt-to-equity ratio(11) | 16.72 | 21.94 | 28.69 | 24.06 | 21.87 | (522) | (675) | |||||||||||||||||
Adjusted debt-to-equity ratio(3) | 6.18 | 5.95 | 5.82 | 6.26 | 5.90 | 23 | 13 | |||||||||||||||||
____________________________
**Calculation 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 net periodic contractual interest amounts on our interest rate swapswaps, which we refer to as derivatives cash settlements andinterest (expense) income.
(3)Consists of derivative forward value gains (losses). Derivative cash settlement amounts represent net periodic contractual interest accruals related to derivatives not designated for hedge accounting. Derivative forward value gains (losses), which 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.
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allowance for credit losses of $4 million and a corresponding decrease in retained earnings through a cumulative-effect adjustment. Our allowance for credit losses prior to June 1, 2020 was determined based on the incurred loss methodology.
(12)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 12—13—Guarantees” for additional information.
(14)Calculated based on total nonperforming loans at period end divided by total loans outstanding at period end.
We are subject to period-to-period volatility in our reported U.S. GAAP results due to changes in market conditions and differences in the way our financial assets and liabilities are accounted for under U.S. 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 U.S. 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 for our interest rate swaps. As a result, the mark-to-market changes in our interest rate swaps are recorded in earnings. Based onBecause our derivative portfolio consists of a higher proportion of pay-fixed swaps, the compositionmajority of our interest ratewhich are longer dated, than receive-fixed swaps, the majority of which are shorter dated, 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 the periodic cash settlement amounts of our interest rate swaps. As such, management uses our non-GAAP adjusted non-GAAP results to evaluate our operating performance. Our adjusted results include realized net periodic interest rate swap settlement amounts but exclude the impact of unrealized forward fair value gains and losses. OurCertain of the financial covenants in our committed bank revolving line of credit agreements and debt covenantsindentures are also based on our non-GAAP adjusted results, as the forward fair value gains and losses related to our interest rate swaps do not affect our cash flows, liquidity or ability to service our debt.
Financial Performance
Reported Results
We reported net income of $457$814 million for fiscal year 2021 (“current fiscal year”), which resulted in a TIER of 2.16. In comparison, we reported a net loss of $589 million and a TIER of 1.580.28 for fiscal year ended May 31, 20182020 (“prior fiscal year”). The significant variance between our current and prior fiscal year 2018”), compared with a net incomereported results was attributable to mark-to-market changes in the fair value of $312 million and a TIER of 1.42 for fiscal year 2017, and a net loss of $52 million and a TIER of 0.92 for fiscal year 2016.our derivative instruments. Our debt-to-equity ratio decreased to 16.7220.17 as of May 31, 2018,2021, from 21.9442.40 as of May 31, 2017,2020, primarily due to an increase in equity resulting from our reported net income of $457$814 million for fiscal year 2018,2021, which was partially offset by patronage capital retirement of $45$60 million authorized by the CFC Board of Directors in July 2020 and paid to members in September 2017.2020.
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value of our derivatives of $1,296 million between periods. We recorded derivative gains of $506 million in fiscal year 2021 due to an increase in the net fair value of our swap portfolio attributable to increases in medium- and longer-term swap interest rates. In contrast, we recorded derivative losses of $24$790 million in fiscal year 2020 due to a decrease in the net fair value of our swap portfolio resulting from declines in interest rates across the swap curve. In addition, net interest income increased $84 million, or 26%, to $415 million in fiscal year 2021, attributable to the combined impact of an increase in our reported net interest yield of 26 basis points, or 21%, to 1.47% and an increase in average interest-earning assets of $859 million, or 3%. The increase in the net interest yield was largely driven by a reduction in our average cost of borrowings of 53 basis points to 2.66%, which was partially offset by a decrease in net interest incomethe average yield on interest-earning assets of $10 million and an increase in operating expenses of $5 million. We recognized derivative gains of $232 million in fiscal year 2018, compared with derivative gains of $95 million in the prior fiscal year, both of which were attributable to a net increase in the fair value of our pay-fixed swaps as interest rates increased across the swap curve during each period. The increase in interest rates, however, was more pronounced during fiscal year 2018, which resulted in significantly higher derivative gains relative to fiscal year 2017. We recorded a benefit for loan losses of $18 million in fiscal year 2018, compared with a provision of $6 million in fiscal year 2017. The benefit for loan losses was attributable to a reduction in our allowance for loan losses due to changes in the loss severity, or recovery rate, assumptions used in determining the collective allowance for our electric distribution and power supply loan portfolios to reflect management’s current assessment of expected losses in the event of default on a loan in these portfolios. The decrease in net interest income resulted from compression in the net interest yield, which was partially offset by an increase of 3% in average interest-earning assets. The net interest yield declined by 825 basis points to 1.12%, reflecting the impact of an overall increase3.95%.
The decreases in our average cost of funds due to the increase inborrowings and average yield on interest-earning assets were driven by lower interest rates on our short-term borrowings and line of credit and variable-rate loans attributable to a steep decline in short-term interest rates since the onset of the COVID-19 pandemic. In mid-March 2020, the Federal Open Market Committee (“FOMC”) of the Federal Reserve lowered the federal funds rate 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 pandemic.The benchmark federal funds rate has remained at this near-zero target range since March 2020. During fiscal year 2021, the 3-month LIBOR decreased 21 basis points to 0.13% as of May 31, 2021. In contrast, medium- and longer-term interest rates began trending up in fiscal year 2021, following significant declines during fiscal year 2018, which resulted in2020. The 10-year swap rate increased 92 basis points to 1.56% as ofMay 31, 2021, while the 30-year swap rate increased 106 basis points to 2.00% as of May 31, 2021.
We recorded a higher average costprovision for our short-term and variable-rate borrowings.
Adjusted Non-GAAP Results
Our adjusted net income totaled $151increased $47 million and ourto $192 million in fiscal year 2021, resulting in an adjusted TIER was 1.17 forof 1.23, from $145 million in fiscal year 2018, compared with adjusted net income of $133 million2020 and adjusted TIER of 1.16 for fiscal year 2017, and adjusted net income of $170 million and adjusted TIER of 1.22 for fiscal year 2016.1.17. Our adjusted debt-to-equity ratio increased above our target threshold of 6.00-to-1 to 6.186.15 as of May 31, 2018,2021, from 5.955.85 as of May 31, 2017, predominately due2020. The increase was primarily attributable to an increase in debt outstandingadjusted liabilities due to additional borrowings to fund the growth in our loan growth.portfolio.
The increase in adjusted net income of $18$47 million was attributable to an increase in adjusted net interest income of $25 million and the absence of the non-cash impairment charge of $31 million recorded in fiscal year 2018 from fiscal year 2017 was primarily driven2020 due to management’s decision to abandon a software project to develop an internal-use loan origination and servicing platform, partially offset by the favorable shiftdecrease in the provision for loancredit losses of $24$7 million partially offsetdiscussed above. The increase in adjusted net interest income of $25 million, or 9%, to $299 million for fiscal year 2021 was driven by the combined impact of an increase in operating expensesthe adjusted net interest yield of $5 million. While6 basis points, or 6%, to 1.06% and an increase in average interest-earning assets of $859 million, or 3%. The increase in our adjusted net interest yield decreased by 3 basis pointswas attributable to 0.83%, largely due to an increasea reduction in our adjusted average cost of borrowings adjusted net interest income of $210 million was flat because of the increase in average interest-earning assets of 3%.
See “Non-GAAP Financial Measures” for additional information on our adjusted measures, including a reconciliation of these measures to the most comparable U.S. GAAP measures.
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Lending Activity
Loans to members totaled $28,427 million as of May 31, 2021, an increase of $1,725 million, or 6%, from May 31, 2020. The increase was driven by increases in long-term and line of credit loans of $1,046 million and $679 million, respectively. Of the $679 million increase in line of credit loans, approximately 38% was attributable to borrowings under emergency line of credit loans for weather-related events. We experienced increases in CFC distribution loans, CFC power supply loans, RTFC loans and NCSC loans of $107 million.$1,258 million, $423 million, $35 million and $9 million, respectively.
Long-term loan advances totaled $2,203$2,514 million during fiscal year 2018, with2021, of which approximately 67% of those advances86% was provided to members for capital expenditures and 8% was provided for the refinancing of loans made by other lenders. In comparison, long-term loan advances totaled $2,422 million during fiscal year 2020, of which approximately 80% was provided to members for capital expenditures and 24%15% was provided for the refinancing of loans made by other lenders. CFC had long-term fixed-rate loans totaling $904$397 million that were scheduled to reprice during fiscal year 2018.2021. Of this total, $742amount, $384 million repriced to a new long-term fixed rate; $157rate, $10 million repriced to a long-term variable rate;rate and $5$3 million was repaid in full. In comparison, CFC had long-term fixed-rate loans totaling $463 million that were scheduled to reprice during fiscal year 2020, of which $441 million repriced to a new long-term fixed rate, $11 million repriced to a long-term variable rate and $10 million was repaid in full.
Credit Quality
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.” Loans outstanding to electric utility organizations of $27,995 million and $26,306 million as of May 31, 2021 and 2020, respectively, represented approximately 99% of total loans outstanding as of each date. In addition, 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, 93% and 94% were secured as of May 31, 2021 and 2020, respectively.
Texas historically has accounted for the largest number of borrowers with loans outstanding in any one state and also the largest concentration of loan exposure in any one state. Loans outstanding to Texas-based electric utility organizations totaled $4,878 million and $4,222 million as of May 31, 2021 and 2020, respectively, and accounted for 17% and 16% of total loans outstanding as of each respective date. Of the loans outstanding to Texas-based electric utility organizations, $172 million and $181 million as of May 31, 2021 and 2020, respectively, were covered by the Federal Agricultural Mortgage Corporation (“Farmer Mac”) standby repurchase agreement, which slightly reduces our Texas loan exposure.
In mid-February 2021, Texas and several neighboring states experienced a series of severe winter storms and record-low temperatures as a result of the polar vortex. The freezing conditions affected power demand, supply and market prices in Texas, triggering unprecedented increases in electrical power load demand in combination with significant reductions in power supply across Texas, including a loss of almost half of the electric generation within the Electric Reliability Council of Texas (“ERCOT”) service area. ERCOT raised wholesale electric power prices per megawatt-hour to the amount of $9,000, to spur greater power generation by providing a financial incentive for power generators in the state to remain on-line. According to ERCOT data, pre-storm wholesale power prices were less than $50 per megawatt-hour. ERCOT also initiated controlled rolling power outages, which impacted millions of residential and commercial customers, to protect and maintain the stability of the Texas electric grid.
The surge in wholesale electricity prices had a direct financial impact primarily on certain electric power supply utilities, including a significant adverse financial impact on two CFC Texas-based electric power supply borrowers, Brazos and Rayburn. These power supply borrowers had insufficient generation supply during the February 2021 polar vortex and were forced, at the height of the surge in power prices, to purchase power at peak prices to meet the electric demand of their member distribution system customers. On March 1, 2021, we were informed that Brazos filed for Chapter 11 bankruptcy protection. In the third quarter of fiscal year 2021, we downgraded Brazos’ borrower risk rating from a rating within the pass category to doubtful, classified its loans outstanding as nonperforming, placed the loans on nonaccrual status, and reversed unpaid interest amounts previously accrued and recognized in interest income. We had loans outstanding to Brazos of $85 million as of May 31, 2021, pursuant to a syndicated Bank of America revolving credit agreement, of which $64 million was unsecured and $21 million was secured. The secured amount is based on the set-off provisions of the revolving credit
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agreement, which was approved by the bankruptcy court. In the third quarter of fiscal year 2021, we also made a material downgrade in the borrower risk rating for Rayburn from a rating within the pass category to special mention. We further downgraded Rayburn’s borrower risk rating to substandard in the fourth quarter of fiscal year 2021. Loans outstanding to Rayburn consisted of secured loans of $167 million and unsecured loans of $212 million, which together totaled $379 million as of May 31, 2021.
Under the terms of the syndicated Bank of America revolving credit agreement, in the event of bankruptcy by Brazos, each lending participant is permitted to hold any deposited or investment funds from Brazos, up to the amount of the participant’s exposure to Brazos pursuant to the agreement, for set-off against such exposure to Brazos. The total so held by all participants is required to be shared among the participants in accordance with the pro rata share of each participant in the agreement. As of the bankruptcy filing date, funds on deposit from or invested by Brazos with participating lenders of the agreement, available for set-off against Brazos’ obligations, totaled $124 million. Based on our exposure of $85 million under the $500 million syndicated Bank of America agreement, our pro rata share set-off right is 17%, or approximately $21 million. The set-off rights have been agreed to and confirmed by Brazos and the bankruptcy court. In order to allow Brazos to access such deposited or invested funds, the lenders have been granted adequate protection liens and super-priority claims in an amount equal to the diminution of value of the amount available for set-off.
In mid-June 2021, the Texas governor signed into law a bill that offers a financing program intended to provide relief to retail electric providers that incurred extraordinary costs due to exposure to elevated power costs during the February 2021 polar vortex. The bill allows qualifying electric cooperatives to securitize these costs and issue bonds directly or through a special purpose vehicle legal entity, with a requirement that payments on the bonds be made over a period not to exceed 30 years. We provide information about the financing program offered pursuant to the provisions of this bill under “Credit Risk—Allowance for Credit Losses.” While Brazos and Rayburn are eligible to utilize the provisions of this bill, we are currently uncertain whether they will elect to do so.
Nonperforming loans increased $69 million to $237 million, or 0.84% of total loans outstanding as of May 31, 2021, from $168 million, or 0.63% of total loans outstanding, as of May 31, 2020, primarily due to our classification of the loans outstanding of $85 million to Brazos as nonperforming as a result of its bankruptcy filing. In addition to Brazos, we classified loans outstanding to two affiliated RTFC telecommunications borrowers as nonperforming during fiscal year 2021. Loans outstanding to these RTFC borrowers totaled $9 million as of May 31, 2021. Although we experienced an increase in nonperforming and criticized loans due to the polar vortex-related impact on Brazos and Rayburn, we believe the overall credit quality of our loan portfolio remained strong as of May 31, 2021, as the adverse impact on the credit quality of our loan portfolio from the February 2021 polar vortex is primarily limited to these two Texas-based electric power supply borrowers. Prior to Brazos’ bankruptcy filing, we had not experienced any defaults or charge-offs in our electric utility and telecommunications loan portfolios since fiscal years 2013 and 2017, respectively. Brazos is not permitted to make scheduled loan payments without approval of the bankruptcy court. As a result, we have not received payments from Brazos, and its loans outstanding of $85 million were delinquent as of May 31, 2021. In comparison, we had no delinquent loans as of May 31, 2020.
Our allowance for credit losses and allowance coverage ratio increased to $86 million and 0.30%, respectively, as of May 31, 2021, from $53 million and 0.20%, respectively, as of May 31, 2020. The increase was primarily due to an addition to the allowance of $33 million in fiscal year 2021, attributable to the material risk rating downgrades of Brazos and Rayburn.
On June 1, 2020, we adopted the CECL accounting standard, which replaces the incurred loss methodology for estimating credit losses with an expected loss methodology. We used the modified retrospective approach in our adoption of CECL, 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 reserve for credit losses for our off-balance sheet credit exposures related to unadvanced loan commitments and financial guarantees was not material. While CECL had no impact on our earnings at adoption on June 1, 2020, subsequent estimates of 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, are now recognized in earnings. Our reported allowance for credit losses prior to June 1, 2020 was determined based on the incurred loss methodology.
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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 MD&A sections “Critical Accounting Policies and Estimates” and “Credit Risk—Allowance for Credit Losses” and in “Note 5—Allowance for Credit Losses.”
Financing Activity
We 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 fiscal year 2018, our debt also increased. Total debt outstanding was $24,633increased $1,426 million, or 5%, to $27,426 million as of May 31, 2018, an2021, due to borrowings to fund the increase in loans to members. Outstanding dealer commercial paper of $1,173$895 million or 5%,as of May 31, 2021 was below our targeted maximum threshold of $1,250 million.
On March 5, 2021, S&P issued a downgrade of our long-term issuer credit rating, citing a shift from “Strong” to “Adequate” in its view of CFC’s risk position due to CFC’s loan portfolio concentration in the State of Texas. S&P also revised its outlook on CFC to negative based on the potential for additional elevated credit stress posed by Texas electric cooperatives due to the February 2021 polar vortex. The downgrade of CFC’s long-term issuer credit rating by S&P resulted in a downgrade of: (i) our senior secured and senior unsecured debt ratings to A- from A; (ii) our subordinated debt rating to BBB from BBB+; and (iii) our short-term issuer credit and commercial paper ratings to A-2 from A-1, each with a negative outlook. Our credit ratings by Moody’s and Fitch remain unchanged from May 31, 2017. The increase was primarily attributable to an increase in dealer medium-term notes2020, and as of $638 million; an increase in the Federal Agricultural Mortgage Corporation (“Farmer Mac”) notes payabledate of $378 million; an aggregate increase in member commercial paper, select notes and daily liquidity fund notes of $230 million; and an increase in dealer commercial paper outstanding of $65 million. These increases were partially offset by a decrease in notes payable to the Federal Financing Bank and guaranteed by RUS under the Guaranteed Underwriter Program of $129 million.this Report.
We provide additional information on our financing activities belowduring fiscal year 2021, as well as information on the amendment to and extension of our three-year and five-year committed bank revolving line of credit agreements under “Consolidated Balance Sheet Analysis—Debt” and “Liquidity Risk.”
Debt scheduled to mature over the next 12 months totaled $7,180 million as of May 31, 2021, consisting of short-term borrowings of $4,582 million and long-term debt of $2,598 million. The short-term borrowings scheduled maturity amount of $4,582 million consists of member investments of $3,487 million, dealer commercial paper of $895 million and secured borrowings under securities repurchase agreements of $200 million. The long-term debt scheduled maturity amount of $2,598 million consists of fixed-rate debt totaling $1,537 million with a weighted average cost of 2.33%, variable-rate debt totaling $810 million and scheduled amortization on borrowings under the Guaranteed Underwriter Program and notes payable to Farmer Mac totaling $251 million. Our available liquidity of $7,090 million as of May 31, 2021, was $90 million below our total debt obligations over the next 12 months of $7,180 million and $3,598 million in excess of, or two times, our long-term debt and dealer commercial paper obligations over the next 12 months of $2,598 million and $895 million, respectively, which together total $3,493 million.
Our members historically have maintained a relatively stable level of short-term investments in CFC in the form of daily liquidity fund notes, commercial paper, select notes and medium-term notes. Member short-term investments in CFC averaged $3,639 million over the last six fiscal quarter-end reporting periods. We believe we can continue to roll over the outstanding member short-term debt, of $2,632which totaled $3,487 million as of May 31, 2018,2021, 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 wethese short-term investment products offered by CFC. We expect to continue accessing the dealer commercial paper market to help meetas a cost-effective means of satisfying our incremental 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 roll-overrollover risk, as we can draw on these facilities to repay dealer or member commercial paper that cannot be refinanced with similar debt.
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We provide additional information on our primary sources and uses of liquidity and our liquidity profile below in the section “Liquidity Risk.”
COVID-19
Our priorities during the COVID-19 pandemic, which continues to persist, have been to protect the health and safety of our employees, while also ensuring that we are able to meet the needs of our electric cooperative borrowers as they operate in a sector that provides an essential service to residential and commercial customers. In mid-June 2020, we implemented a return-to-work plan that included a rotating work schedule in which the in-office occupancy level at our corporate headquarters building located in Loudoun County, Virginia, was limited to approximately 25% of normal capacity and other measures to protect the well-being of our employees, as well as comply with Virginia’s reopening guidelines. In early May 2021, as Virginia eased some COVID-19 restrictions, we moved toward more normal operations by bringing staff back to our corporate office under a gradual transition schedule, with appropriate workplace protocols to mitigate risk and maintain the safety of our employees in compliance with federal, state and local laws and guidance from the CDC. In July 2021, following the expiration on June 30, 2021 of the state of emergency declared in March 2020 by Virginia’s governor in response to the pandemic and the lifting of all COVID-19 restrictions in Virginia, subject to certain exceptions, we brought 100% of our staff back to CFC’s corporate headquarters building, which continues to adhere to the COVID-19 workplace safety and health standards established by Virginia and guidance provided by the CDC. While we have been able to maintain business continuity throughout the pandemic and experienced no pandemic-related employee furloughs or layoffs, we believe we can provide the highest quality of service and deliver more effectively on our member-focused mission, which requires a significant number of member-facing staff working collaboratively with other staff, by resuming full-time, in-office work.
While several U.S. industry sectors have been severely affected by the COVID-19 pandemic, we believe we have been able to navigate the challenges of the COVID-19 pandemic to date and that the pandemic has not had any significant negative effect on our liquidity. During fiscal year 2021, we continued to be able to access the capital markets, private funding programs and our members for the funds required to repay maturing debt and provide loan advances to our members for capital improvements and to fund their operations. We also believe that the credit quality of our loan portfolio has remained strong throughout the pandemic. Our electric utility cooperative borrowers operate in a sector identified by the U.S. government as one of the 16 critical infrastructure sectors because the nature of the services provided in these sectors are considered essential and vital in supporting and maintaining the overall functioning of the U.S. economy. Historically, the utility sector in which our electric utility borrowers operate has been resilient to economic downturns. We have not subjectexperienced any delinquencies in scheduled loan payments or received requests for payment deferrals from our borrowers due to bank regulatory capital rules,the pandemic. We are in contact with our member borrowers on a continuous basis, closely monitoring developments and key credit metrics to facilitate the timely identification of loans with potential credit weaknesses and assess any notable shifts in the credit quality of our loan portfolio. To date, we generally aimbelieve that the pandemic has not had a significant negative impact on the overall financial performance of our members.
Recent Developments
On March 10, 2021, the CFC Board of Directors appointed J. Andrew Don, who had served as CFC’s Senior Vice President and Chief Financial Officer since 2013, to maintainsucceed Sheldon C. Petersen as CFC’s Chief Executive Officer (“CEO”), effective May 3, 2021. We do not anticipate any fundamental changes in CFC’s overall business model as a result of this leadership change. As a member-owned cooperative, we plan to continue working with our members to ensure that CFC is able to meet their financing needs, as well as provide industry expertise and strategic services to aid them in delivering affordable and reliable essential services to their communities.
Outlook
We currently anticipate growth in loans outstanding over the next 12 months. Assuming the yield curve remains steep during this period, we believe our anticipated growth in loans outstanding will contribute to an increase in our net interest income, net interest yield, adjusted net interest income and adjusted net interest yield over the next 12 months. We expect that our adjusted debt-to-equity ratio, atwhich excludes the impact of derivative forward fair value gains and losses, will remain elevated above our target threshold of 6.00-to-1 in the near term due to a projected increase in total debt outstanding to fund the anticipated growth in our loan portfolio. Our reported income and equity include the impact of periodic
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unrealized fluctuations in the fair value of our interest rate swaps. These periodic fluctuations are primarily driven by changes in expected interest rates over the life of the swaps, which we are unable to predict because the majority of our swaps are long-term, with an average remaining life of approximately or below 6.00-to-1. Our adjusted debt-to-equity ratio was 6.1814 years as of May 31, 2018, above2021. We therefore exclude the potential impact of derivative forward value gains and losses from our targeted threshold dueforecasted adjusted net income-related measures.
Despite S&P’s downgrade of our issuer credit ratings in March 2021, we believe that the overall credit quality of our loan portfolio remained high as of May 31, 2021, as the significant adverse financial impact from the surge in wholesale power costs in Texas during the February 2021 polar vortex was primarily limited to the increase in debtour exposure to Brazos and Rayburn. Our estimate of expected credit losses on loans outstanding to fund loan growth. Duethese two borrowers, which together totaled $464 million as of May 31, 2021, involves significant judgment and assumptions that are based on information available to anticipated asset growth,us as of the date of this Report. Although Texas enacted legislation in mid-June 2021 that offers financing programs for qualifying electric cooperatives exposed to power costs during the February 2021 polar vortex, we expectare currently uncertain whether Brazos and Rayburn will utilize the provisions available under the legislation.
See “Item 1A. Risk Factors” for a discussion of the potential adverse impact of natural disasters, including weather-related events such as the February 2021 polar vortex, and widespread health emergencies, such as COVID-19, on our adjusted debt-to-equity ratio to be above 6.00-to-1 over the next 12 months.business, results of operations, financial condition and liquidity.
| CRITICAL ACCOUNTING POLICIES AND ESTIMATES | ||
The preparation of financial statements in accordance with U.S. 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.”
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Some of the key inputs we use in in determining the appropriate allowance for credit losses are more readily quantifiable, such as our historical loss data and third-party default data, while other inputs require more qualitative judgment, such as our internally assigned borrower risk ratings that are intended to assess a borrower’s capacity to meet its financial obligations and provide information on the probability of default. Degrees of imprecision exist in each of these inputs due in part to subjective judgments involved and an inherent lag in the data available to quantify current conditions and events that may affect our credit loss estimate.
Our internally assigned borrower risk ratings serve as the primary credit quality indicator for our loan portfolio. We perform an annual comprehensive review of each of our borrowers, following the receipt of the borrower’s annual audited financial statements, to reassess the borrower’s risk rating. In addition, 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 Credit Risk Management Group and Corporate Credit Committee review and provide rigorous oversight and governance around our internally assigned risk ratings to ensure that the ratings process is consistent. In addition, we engage third-party credit risk management experts to conduct an independent annual review of our risk rating system to validate the overall integrity of our rating system. This review involves an evaluation of the accuracy and timeliness of individual risk ratings and the overall effectiveness of our risk-rating framework relative to the risk profile of our credit exposures. While we have a robust risk-rating process, changes in our borrower risk ratings may not always directly coincide with changes in the risk profile of an individual borrower due to the timing of the rating process and a potential lag in the receipt of information necessary to evaluate the impact of emerging developments and current conditions on the risk ratings of our borrower. Although our allowance for credit losses is sensitive to each key input, shifts in the credit risk ratings of our borrowers generally have the most notable impact on our allowance for credit losses.
Allowance for Credit Losses
Our allowance for loancredit losses includes a collective allowance for loans in our portfolio that are not individually impaired and a specific allowance for loans identified as individually impaired. Our allowance for loan losses decreased by $18 million to $19was $86 million as of May 31, 2018, from $372021, consisting of an allowance for loans collectively evaluated of $43 million and an allowance for loans individually evaluated of $43 million. The allowance coverage ratio was 0.30% as of May 31, 2017.
Key Assumptions
Determining the appropriateness of the allowance for loancredit losses is subject to numerous estimates and assumptions requiring significant management judgment about matters that involve a high degree of subjectivity and are difficult to predict. The key assumptions in determining our collective allowance that require significant management judgment and may have a material impact on the amount of the allowance include:include the segmentation of our evaluation of the risk profile of various loan portfolio segments andportfolio; our internally assigned borrower risk ratings; the estimated loss emergence period; the selection of third-party proxy data to estimate the probability of default; our historicalthe loss experience and assumptions regardingseverity or recovery ratesrate in the event of default;default for each portfolio segment; and management’s judgmentconsideration of qualitative factors that may cause estimated credit losses associated with our existing loan portfolio to differ from our historical loss experience.
As discussed below in “Credit Risk—Loan Portfolio Credit Risk,” CFC has experienced only 17 defaults in its 52-year history, and prior to Brazos we had no defaults in our electric utility loan portfolio since fiscal year 2013. As such, we have a limited history of defaults to develop reasonable and supportable estimated probability of default rates for our existing loan portfolio. We therefore utilize third-party default data for the selection and evaluationutility sector as a proxy to estimate probability of qualitativefactors to assess the overall current level of exposure withindefault rates for our loan portfolio. portfolio segments. However, we utilize our internal 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 experience serves as a more reliable estimate of loss severity than third-party 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 revenue of borrowers for long-term loans, the approach we take in working with borrowers that may be experiencing operational or financial issues and other factors discussed in “Credit Risk—Loan Portfolio Credit Risk.”
The key assumptions in determining our specificasset-specific allowance that require significant management judgment and may have a material impact on the amount of the allowance include estimatingthe determination that a loan is individually evaluated, measuring the amount and timing of expectedfuture cash flows from impairedfor individually evaluated loans that are not collateral-dependent and estimating the value of the underlying collateral each of which impacts loss severity and certain cash flow assumptions. for individually evaluated loans that are collateral-dependent.
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The degree to which any particular assumption affects the allowance for loancredit losses depends on the severity of the change and its relationship to the other assumptions.
We regularly evaluate the underlying assumptions used in determining the allowance for loancredit losses and periodically update our assumptions to better reflect present conditions, including current trends in credit performance and borrower risk profile, portfolio concentration risk, changes in risk-management practices, changes in the regulatory environment, general economic trends and other factors specific to our loan portfolio segments. InWe did not change the fourth quarternature of fiscal year 2018, we increased the recovery rate assumptionsunderlying inputs used in determining the collective allowance for our electric distribution and power supply loan portfolios to reflect management’s current assessment of expected losses in the event of default on a loan in these portfolios. The increase in recovery rate assumptions for these electric utility loan portfolios was the primary driver of the $18 million reduction in our allowance for loancredit losses to $19 million as of May 31, 2018, from $37 million as of
Sensitivity Analysis
As noted above, our allowance for credit losses is sensitive to a variety of factors. While management uses its best judgment to assess loss data and other factors to determine the allowance for loancredit losses, changes in our loss assumptions, adjustments to assigned borrower risk ratings, the use of alternate external data sources or other factors could affect our estimate of probable credit losses inherent in the portfolio as of each balance sheet date, which would also impact the related provision for loancredit losses recognized in our consolidated statements of operations. For example, changes in the inputs below, without taking into consideration the impact of other potential offsetting or correlated inputs, would have the following effect on our allowance of loancredit losses as of May 31, 2018.2021.
•A 10% increase or decrease in the default rates for all of our portfolio segments would result in a corresponding increase or decrease of approximately $2$4 million.
•A 1% increase or decrease in the recovery rates for all of our portfolio segments would result in a corresponding decrease or increase of approximately $4$10 million.
•A one-notch downgrade in the internal borrower risk ratings for our entire loan portfolio would result in an increase of approximately $22$23 million, while a one-notch upgrade would result in a decrease of approximately $11$27 million.
These sensitivity analyses are intended to provide an indication of the isolated impact of hypothetical alternative assumptions on our allowance for loancredit losses. Because management evaluates a variety of factors and inputs in determining the allowance for loancredit losses, these sensitivity analyses are not considered probable and do not imply an expectation of
future changes in loss rates or borrower risk ratings. Given current processes employed in estimating the allowance for loancredit losses, management believes the inherent loss rates and currently assigned risk ratings are appropriate. It is possible that others performing the analyses, given the same information, may at any point in time reach different reasonable conclusions that could be significant to our consolidated financial statements.
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. Management has discussed significant judgments and assumptions in applying our critical accounting policies with the Audit Committee of the CFC Board of Directors. We also provide additional information on the methodology for determining the allowance for loancredit losses in “Note 1—Summary of Significant Accounting Policies”the “Credit Risk—Allowance for Credit Losses” section and changes in our allowance for loan losses in “Note 4—Loans.5—Allowance for Credit Losses.” Also refer tosee the “Credit Risk—Loan Portfolio Credit Risk—Credit Quality Indicators” section and “Note 4—Loans” forwhere we provide information on credit metrics and discuss the overall credit quality of our loan portfolios.portfolio.
| 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 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.
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| CONSOLIDATED RESULTS OF OPERATIONS | ||
The section below provides a comparative discussion of our consolidated results of operations between fiscal year 2018years 2021 and 2017 and between fiscal year 2017 and 2016.2020. Following this section, we provide a comparativediscussion and analysis of material changes in amounts reported on our consolidated balance sheetssheet as of May 31, 2018 and 2017.2021 from amounts reported as of May 31, 2020. You should read these sections together with our “Executive Summary—Outlook for the Next 12 Months”Outlook” where we discuss trends and other factors that we expect will affect our future results of operations. See “Item 7. MD&A—Consolidated Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended May 31, 2020 (“2020 Form 10-K”) for a comparative discussion of our consolidated results of operations between fiscal year 2020 and the fiscal year ended May 31, 2019 (“fiscal year 2019”).
Net Interest Income
Net interest income represents the difference between the interest income earned on our interest-earning assets, which includes 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 fromof 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 12 presents our average balance sheetsbalances for fiscal years 2018, 20172021, 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 12 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 U.S. GAAP measures under “Non-GAAP Financial Measures.”
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Table 1:2: Average Balances, Interest Income/Interest Expense and Average Yield/Cost
| Year Ended May 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 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 | |||||||||||||||||||||||||||||||||||||||||||||||
Long-term fixed-rate loans(1) | $ | 24,978,267 | $ | 1,051,524 | 4.21 | % | $ | 23,890,577 | $ | 1,043,918 | 4.37 | % | $ | 22,811,905 | $ | 1,012,277 | 4.44 | % | ||||||||||||||||||||||||||||||||||||||
| Long-term variable-rate loans | 645,819 | 14,976 | 2.32 | 891,541 | 31,293 | 3.51 | 1,093,455 | 41,219 | 3.77 | |||||||||||||||||||||||||||||||||||||||||||||||
| Line of credit loans | 1,626,092 | 35,596 | 2.19 | 1,718,364 | 55,140 | 3.21 | 1,609,629 | 57,847 | 3.59 | |||||||||||||||||||||||||||||||||||||||||||||||
| Troubled debt restructuring (“TDR”) loans | 10,328 | 790 | 7.65 | 11,238 | 836 | 7.44 | 12,183 | 846 | 6.94 | |||||||||||||||||||||||||||||||||||||||||||||||
| Nonperforming loans | 185,554 | — | — | 5,957 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
Other, net(2) | — | (1,381) | — | — | (1,304) | — | — | (1,128) | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total loans | 27,446,060 | 1,101,505 | 4.01 | 26,517,677 | 1,129,883 | 4.26 | 25,527,172 | 1,111,061 | 4.35 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash, time deposits and investment securities | 796,566 | 15,096 | 1.90 | 866,013 | 21,403 | 2.47 | 838,599 | 24,609 | 2.93 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-earning assets | $ | 28,242,626 | $ | 1,116,601 | 3.95 | % | $ | 27,383,690 | $ | 1,151,286 | 4.20 | % | $ | 26,365,771 | $ | 1,135,670 | 4.31 | % | ||||||||||||||||||||||||||||||||||||||
Other assets, less allowance for credit losses(3) | 537,506 | 551,378 | 879,817 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets(3) | $ | 28,780,132 | $ | 27,935,068 | $ | 27,245,588 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial paper | $ | 2,189,558 | $ | 8,330 | 0.38 | % | $ | 2,318,112 | $ | 45,713 | 1.97 | % | $ | 2,413,784 | $ | 62,175 | 2.58 | % | ||||||||||||||||||||||||||||||||||||||
| Other short-term borrowings | 2,148,767 | 6,400 | 0.30 | 1,795,351 | 32,282 | 1.80 | 1,315,455 | 30,679 | 2.33 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Total short-term borrowings | 4,338,325 | 14,730 | 0.34 | 4,113,463 | 77,995 | 1.90 | 3,729,239 | 92,854 | 2.49 | |||||||||||||||||||||||||||||||||||||||||||||||
| Medium-term notes | 3,904,603 | 113,582 | 2.91 | 3,551,973 | 125,954 | 3.55 | 3,813,666 | 133,797 | 3.51 | |||||||||||||||||||||||||||||||||||||||||||||||
| Collateral trust bonds | 6,938,534 | 249,248 | 3.59 | 7,185,910 | 257,396 | 3.58 | 7,334,957 | 273,413 | 3.73 | |||||||||||||||||||||||||||||||||||||||||||||||
| Guaranteed Underwriter Program notes payable | 6,146,410 | 167,403 | 2.72 | 5,581,854 | 162,929 | 2.92 | 5,045,478 | 147,895 | 2.93 | |||||||||||||||||||||||||||||||||||||||||||||||
| Farmer Mac notes payable | 2,844,252 | 50,818 | 1.79 | 2,986,469 | 87,617 | 2.93 | 2,807,705 | 90,942 | 3.24 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other notes payable | 10,246 | 241 | 2.35 | 17,586 | 671 | 3.82 | 28,044 | 1,237 | 4.41 | |||||||||||||||||||||||||||||||||||||||||||||||
| Subordinated deferrable debt | 986,209 | 51,551 | 5.23 | 986,035 | 51,527 | 5.23 | 759,838 | 38,628 | 5.08 | |||||||||||||||||||||||||||||||||||||||||||||||
| Subordinated certificates | 1,270,385 | 54,490 | 4.29 | 1,349,454 | 57,000 | 4.22 | 1,369,051 | 57,443 | 4.20 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | $ | 26,438,964 | $ | 702,063 | 2.66 | % | $ | 25,772,744 | $ | 821,089 | 3.19 | % | $ | 24,887,978 | $ | 836,209 | 3.36 | % | ||||||||||||||||||||||||||||||||||||||
Other liabilities(3) | 1,380,414 | 1,141,884 | 816,074 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities(3) | 27,819,378 | 26,914,628 | 25,704,052 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total equity(3) | 960,754 | 1,020,440 | 1,541,536 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and equity(3) | $ | 28,780,132 | $ | 27,935,068 | $ | 27,245,588 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest spread(4) | 1.29 | % | 1.01 | % | 0.95 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Impact of non-interest bearing funding(5) | 0.18 | 0.20 | 0.19 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income/net interest yield(6) | $ | 414,538 | 1.47 | % | $ | 330,197 | 1.21 | % | $ | 299,461 | 1.14 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Adjusted net interest income/adjusted net interest yield: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest income | $ | 1,116,601 | 3.95 | % | $ | 1,151,286 | 4.20 | % | $ | 1,135,670 | 4.31 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | 702,063 | 2.66 | 821,089 | 3.19 | 836,209 | 3.36 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Add: Net periodic derivative cash settlements interest expense(7) | 115,645 | 1.28 | 55,873 | 0.55 | 43,611 | 0.40 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Adjusted interest expense/adjusted average cost(8) | $ | 817,708 | 3.09 | % | $ | 876,962 | 3.40 | % | $ | 879,820 | 3.54 | % | ||||||||||||||||||||||||||||||||||||||||||||
Adjusted net interest spread(6) | 0.86 | % | 0.80 | % | 0.77 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Impact of non-interest bearing funding(5) | 0.20 | 0.20 | 0.20 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjusted net interest income/adjusted net interest yield(9) | $ | 298,893 | 1.06 | % | $ | 274,324 | 1.00 | % | $ | 255,850 | 0.97 | % | ||||||||||||||||||||||||||||||||||||||||||||
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| Year Ended May 31, | |||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||
Long-term fixed-rate loans(1) | $ | 22,570,209 | $ | 1,000,492 | 4.43 | % | $ | 21,896,200 | $ | 980,173 | 4.48 | % | $ | 20,734,387 | $ | 959,701 | 4.63 | % | |||||||||||||||
| Long-term variable-rate loans | 925,910 | 27,152 | 2.93 | 799,412 | 19,902 | 2.49 | 708,801 | 19,858 | 2.80 | ||||||||||||||||||||||||
| Line of credit loans | 1,402,555 | 38,195 | 2.72 | 1,124,471 | 25,389 | 2.26 | 1,031,548 | 24,864 | 2.41 | ||||||||||||||||||||||||
TDR loans (2) | 12,885 | 889 | 6.90 | 14,349 | 905 | 6.31 | 12,947 | 512 | 3.95 | ||||||||||||||||||||||||
| Nonperforming loans | — | — | — | — | — | — | 3,164 | 142 | 4.49 | ||||||||||||||||||||||||
Other income, net(3) | — | (1,185 | ) | — | — | (1,082 | ) | — | — | (1,088 | ) | — | |||||||||||||||||||||
| Total loans | 24,911,559 | 1,065,543 | 4.28 | 23,834,432 | 1,025,287 | 4.30 | 22,490,847 | 1,003,989 | 4.46 | ||||||||||||||||||||||||
| Cash, time deposits and investment securities | 512,517 | 11,814 | 2.31 | 734,095 | 11,347 | 1.55 | 639,060 | 8,647 | 1.35 | ||||||||||||||||||||||||
| Total interest-earning assets | $ | 25,424,076 | $ | 1,077,357 | 4.24 | % | $ | 24,568,527 | $ | 1,036,634 | 4.22 | % | $ | 23,129,907 | $ | 1,012,636 | 4.38 | % | |||||||||||||||
| Other assets, less allowance for loan losses | 644,563 | 574,682 | 808,479 | ||||||||||||||||||||||||||||||
| Total assets | $ | 26,068,639 | $ | 25,143,209 | $ | 23,938,386 | |||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||
| Short-term borrowings | $ | 3,294,573 | $ | 50,616 | 1.54 | % | $ | 3,185,084 | $ | 26,684 | 0.84 | % | $ | 2,995,530 | $ | 14,728 | 0.49 | % | |||||||||||||||
| Medium-term notes | 3,361,484 | 111,814 | 3.33 | 3,345,410 | 99,022 | 2.96 | 3,412,061 | 86,270 | 2.53 | ||||||||||||||||||||||||
| Collateral trust bonds | 7,625,182 | 336,079 | 4.41 | 7,293,251 | 340,854 | 4.67 | 6,917,265 | 333,338 | 4.82 | ||||||||||||||||||||||||
| Guaranteed Underwriter Program notes payable | 4,956,417 | 140,551 | 2.84 | 4,873,520 | 142,661 | 2.93 | 4,649,532 | 143,240 | 3.08 | ||||||||||||||||||||||||
| Farmer Mac notes payable | 2,578,793 | 56,004 | 2.17 | 2,355,324 | 33,488 | 1.42 | 2,124,552 | 20,529 | 0.97 | ||||||||||||||||||||||||
| Other notes payable | 33,742 | 1,509 | 4.47 | 39,314 | 1,780 | 4.53 | 44,621 | 2,051 | 4.60 | ||||||||||||||||||||||||
| Subordinated deferrable debt | 742,336 | 37,661 | 5.07 | 742,203 | 37,657 | 5.07 | 435,488 | 21,245 | 4.88 | ||||||||||||||||||||||||
| Subordinated certificates | 1,396,449 | 58,501 | 4.19 | 1,433,657 | 59,592 | 4.16 | 1,458,376 | 60,449 | 4.14 | ||||||||||||||||||||||||
| Total interest-bearing liabilities | $ | 23,988,976 | $ | 792,735 | 3.30 | % | $ | 23,267,763 | $ | 741,738 | 3.19 | % | $ | 22,037,425 | $ | 681,850 | 3.09 | % | |||||||||||||||
| Other liabilities | 822,745 | 921,749 | 1,036,907 | ||||||||||||||||||||||||||||||
| Total liabilities | 24,811,721 | 24,189,512 | 23,074,332 | ||||||||||||||||||||||||||||||
| Total equity | 1,256,918 | 953,697 | 864,054 | ||||||||||||||||||||||||||||||
| Total liabilities and equity | $ | 26,068,639 | $ | 25,143,209 | $ | 23,938,386 | |||||||||||||||||||||||||||
Net interest spread(4) | 0.94 | % | 1.03 | % | 1.29 | % | |||||||||||||||||||||||||||
Impact of non-interest bearing funding(5) | 0.18 | 0.17 | 0.14 | ||||||||||||||||||||||||||||||
Net interest income/net interest yield(6) | $ | 284,622 | 1.12 | % | $ | 294,896 | 1.20 | % | $ | 330,786 | 1.43 | % | |||||||||||||||||||||
| Adjusted net interest income/adjusted net interest yield: | |||||||||||||||||||||||||||||||||
| Interest income | $ | 1,077,357 | 4.24 | % | $ | 1,036,634 | 4.22 | % | $ | 1,012,636 | 4.38 | % | |||||||||||||||||||||
| Interest expense | 792,735 | 3.30 | 741,738 | 3.19 | 681,850 | 3.09 | |||||||||||||||||||||||||||
Add: Net accrued periodic derivative cash settlement(7) | 74,281 | 0.69 | 84,478 | 0.80 | 88,758 | 0.89 | |||||||||||||||||||||||||||
Adjusted interest expense/adjusted average cost(8) | $ | 867,016 | 3.61 | % | $ | 826,216 | 3.55 | % | $ | 770,608 | 3.50 | % | |||||||||||||||||||||
Adjusted net interest spread(4) | 0.63 | % | 0.67 | % | 0.88 | % | |||||||||||||||||||||||||||
| Impact of non-interest bearing funding | 0.20 | 0.19 | 0.17 | ||||||||||||||||||||||||||||||
Adjusted net interest income/adjusted net interest yield(9) | $ | 210,341 | 0.83 | % | $ | 210,418 | 0.86 | % | $ | 242,028 | 1.05 | % | |||||||||||||||||||||
(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)Average balance is calculated based on a month-end average balance.
(4)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)Includes other liabilities and equity.
(6)Net interest yield is calculated based on net interest income for the period divided by total average interest-earning assets for the period.
(7)Represents the impact of net accrued periodic contractual interest amounts on our interest rate swap settlementsswaps 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 net accrued periodic swap settlement interest rate swap settlementsamount during the period divided by the average outstanding notional amount of derivatives during the period. The average outstanding notional amount of interest rate swaps was $10,816$9,062 million, $10,590$10,180 million and $9,993$10,968 million for fiscal year 2018, 2017years 2021, 2020 and 2016,2019, respectively.
(8)Adjusted interest expense representsconsists of interest expense plus net accrued periodic derivative cash settlements interest rate swap settlementsexpense 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 adjusted interest expense for the period divided by total average interest-bearing liabilities during the period.
(9)Adjusted net interest yield is calculated based on adjusted net interest income for the period divided by total average interest-earning assets for the period.
Table 23 displays the change in net interest income between periods and the extent to which the variance is attributable to: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. Because of the numerous simultaneous volume and rate changes during any period, it is not possible to precisely allocate such changes between volume and rate. 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.
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Table 2:3: Rate/Volume Analysis of Changes in Interest Income/Interest Expense
| 2021 versus 2020 | 2020 versus 2019 | |||||||||||||||||||||||||||||||||||||
| Total | Variance Due To:(1) | Total | Variance Due To:(1) | |||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Variance | Volume | Rate | Variance | Volume | Rate | ||||||||||||||||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||||||||||||||||
| Long-term fixed-rate loans | $ | 7,606 | $ | 47,527 | $ | (39,921) | $ | 31,641 | $ | 47,866 | $ | (16,225) | ||||||||||||||||||||||||||
| Long-term variable-rate loans | (16,317) | (8,625) | (7,692) | (9,926) | (7,611) | (2,315) | ||||||||||||||||||||||||||||||||
| Line of credit loans | (19,544) | (2,961) | (16,583) | (2,707) | 3,908 | (6,615) | ||||||||||||||||||||||||||||||||
| TDR loans | (46) | (68) | 22 | (10) | (66) | 56 | ||||||||||||||||||||||||||||||||
| Other, net | (77) | — | (77) | (176) | — | (176) | ||||||||||||||||||||||||||||||||
| Total loans | (28,378) | 35,873 | (64,251) | 18,822 | 44,097 | (25,275) | ||||||||||||||||||||||||||||||||
| Cash, time deposits and investment securities | (6,307) | (1,716) | (4,591) | (3,206) | 804 | (4,010) | ||||||||||||||||||||||||||||||||
| Total interest income | $ | (34,685) | $ | 34,157 | $ | (68,842) | $ | 15,616 | $ | 44,901 | $ | (29,285) | ||||||||||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||||||||||||||||
| Commercial paper | $ | (37,383) | $ | (2,535) | $ | (34,848) | $ | (16,462) | $ | (2,464) | $ | (13,998) | ||||||||||||||||||||||||||
| Other short-term borrowings | (25,882) | 6,355 | (32,237) | 1,603 | 11,192 | (9,589) | ||||||||||||||||||||||||||||||||
| Total short-term borrowing | (63,265) | 3,820 | (67,085) | (14,859) | 8,728 | (23,587) | ||||||||||||||||||||||||||||||||
| Medium-term notes | (12,372) | 12,504 | (24,876) | (7,843) | (9,181) | 1,338 | ||||||||||||||||||||||||||||||||
| Collateral trust bonds | (8,148) | (8,861) | 713 | (16,017) | (5,556) | (10,461) | ||||||||||||||||||||||||||||||||
| Guaranteed Underwriter Program notes payable | 4,474 | 16,479 | (12,005) | 15,034 | 15,722 | (688) | ||||||||||||||||||||||||||||||||
| Farmer Mac notes payable | (36,799) | (4,172) | (32,627) | (3,325) | 5,790 | (9,115) | ||||||||||||||||||||||||||||||||
| Other notes payable | (430) | (280) | (150) | (566) | (461) | (105) | ||||||||||||||||||||||||||||||||
| Subordinated deferrable debt | 24 | 9 | 15 | 12,899 | 11,499 | 1,400 | ||||||||||||||||||||||||||||||||
| Subordinated certificates | (2,510) | (3,340) | 830 | (443) | (822) | 379 | ||||||||||||||||||||||||||||||||
| Total interest expense | (119,026) | 16,159 | (135,185) | (15,120) | 25,719 | (40,839) | ||||||||||||||||||||||||||||||||
| Net interest income | $ | 84,341 | $ | 17,998 | $ | 66,343 | $ | 30,736 | $ | 19,182 | $ | 11,554 | ||||||||||||||||||||||||||
| Adjusted net interest income: | ||||||||||||||||||||||||||||||||||||||
| Interest income | $ | (34,685) | $ | 34,157 | $ | (68,842) | $ | 15,616 | $ | 44,901 | $ | (29,285) | ||||||||||||||||||||||||||
| Interest expense | (119,026) | 16,159 | (135,185) | (15,120) | 25,719 | (40,839) | ||||||||||||||||||||||||||||||||
Net periodic derivative cash settlements interest expense(2) | 59,772 | (6,137) | 65,909 | 12,262 | (3,136) | 15,398 | ||||||||||||||||||||||||||||||||
Adjusted interest expense(3) | (59,254) | 10,022 | (69,276) | (2,858) | 22,583 | (25,441) | ||||||||||||||||||||||||||||||||
| Adjusted net interest income | $ | 24,569 | $ | 24,135 | $ | 434 | $ | 18,474 | $ | 22,318 | $ | (3,844) | ||||||||||||||||||||||||||
| 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||||||||
| Total | Variance due to:(1) | Total | Variance due to:(1) | |||||||||||||||||||||
| (Dollars in thousands) | Variance | Volume | Rate | Variance | Volume | Rate | ||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||
| Long-term fixed-rate loans | $ | 20,319 | $ | 30,172 | $ | (9,853 | ) | $ | 20,472 | $ | 53,775 | $ | (33,303 | ) | ||||||||||
| Long-term variable-rate loans | 7,250 | 3,149 | 4,101 | 44 | 2,539 | (2,495 | ) | |||||||||||||||||
| Line of credit loans | 12,806 | 6,279 | 6,527 | 525 | 2,240 | (1,715 | ) | |||||||||||||||||
| Restructured loans | (16 | ) | (92 | ) | 76 | 393 | 55 | 338 | ||||||||||||||||
| Nonperforming loans | — | — | — | (142 | ) | (142 | ) | — | ||||||||||||||||
| Other income, net | (103 | ) | — | (103 | ) | 6 | — | 6 | ||||||||||||||||
| Total loans | 40,256 | 39,508 | 748 | 21,298 | 58,467 | (37,169 | ) | |||||||||||||||||
| Cash, time deposits and investment securities | 467 | (3,425 | ) | 3,892 | 2,700 | 1,286 | 1,414 | |||||||||||||||||
| Interest income | $ | 40,723 | $ | 36,083 | $ | 4,640 | $ | 23,998 | $ | 59,753 | $ | (35,755 | ) | |||||||||||
| Interest expense: | ||||||||||||||||||||||||
| Short-term borrowings | $ | 23,932 | $ | 917 | $ | 23,015 | $ | 11,956 | $ | 932 | $ | 11,024 | ||||||||||||
| Medium-term notes | 12,792 | 476 | 12,316 | 12,752 | (1,685 | ) | 14,437 | |||||||||||||||||
| Collateral trust bonds | (4,775 | ) | 15,513 | (20,288 | ) | 7,516 | 18,118 | (10,602 | ) | |||||||||||||||
| Guaranteed Underwriter Program notes payable | (2,110 | ) | 2,427 | (4,537 | ) | (579 | ) | 6,900 | (7,479 | ) | ||||||||||||||
| Farmer Mac notes payable | 22,516 | 3,177 | 19,339 | 12,959 | 2,230 | 10,729 | ||||||||||||||||||
| Other notes payable | (271 | ) | (252 | ) | (19 | ) | (271 | ) | (244 | ) | (27 | ) | ||||||||||||
| Subordinated deferrable debt | 4 | 7 | (3 | ) | 16,412 | 14,963 | 1,449 | |||||||||||||||||
| Subordinated certificates | (1,091 | ) | (1,547 | ) | 456 | (857 | ) | (1,025 | ) | 168 | ||||||||||||||
| Interest expense | 50,997 | 20,718 | 30,279 | 59,888 | 40,189 | 19,699 | ||||||||||||||||||
| Net interest income | $ | (10,274 | ) | $ | 15,365 | $ | (25,639 | ) | $ | (35,890 | ) | $ | 19,564 | $ | (55,454 | ) | ||||||||
| Adjusted net interest income: | ||||||||||||||||||||||||
| Interest income | $ | 40,723 | $ | 36,083 | $ | 4,640 | $ | 23,998 | $ | 59,753 | $ | (35,755 | ) | |||||||||||
| Interest expense | 50,997 | 20,718 | 30,279 | 59,888 | 40,189 | 19,699 | ||||||||||||||||||
Net accrued periodic derivative cash settlements(2) | (10,197 | ) | 1,802 | (11,999 | ) | (4,280 | ) | 5,304 | (9,584 | ) | ||||||||||||||
Adjusted interest expense(3) | 40,800 | 22,520 | 18,280 | 55,608 | 45,493 | 10,115 | ||||||||||||||||||
| Adjusted net interest income | $ | (77 | ) | $ | 13,563 | $ | (13,640 | ) | $ | (31,610 | ) | $ | 14,260 | $ | (45,870 | ) | ||||||||
(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.
37
Reported Net Interest Income
Reported net interest income of $285$415 million for fiscal year 2018 decreased by $102021 increased $84 million, or 3%26%, from fiscal year 2017,2020, driven by a decreasethe combined impact of an increase in the net interest yield of 7% (821% (26 basis points) to 1.12%, which was partially offset by1.47% and an increase in average interest-earning assets of $859 million, or 3%.
•Net Interest Yield: The decreaseincrease in the net interest yield in fiscal year 2018of 26 basis points, or 21%, was primarily dueattributable to an increasea reduction in our average cost of funds,borrowings of 53 basis points to 2.66%, which was partially offset by a slight increase in the average yield on our interest-earning assets. Our average cost of funds increased by 11 basis points to 3.30% for fiscal year 2018, 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 2.32% as of May 31, 2018, an increase of 111 basis points from May 31, 2017, while the federal funds target rate was 1.75%, up 75 basis points from May 31, 2017.The average yield on interest-earning assets increased by 2 basis points to 4.24%, largely due to increases in rates on variable rate loans and a higher yield on time deposits and investment securities.
•Average Interest-Earning Assets: The increase in average interest-earning assets of 3% during fiscal year 20172021 was primarily attributable todriven by growth in average total loans of $1,344$928 million, or 6%4%, over the priorfrom fiscal year as2020, primarily attributable to an increase in average long-term fixed-rate loans of $1,088 million, or 5%. The lower interest rate 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 Income
Adjusted net interest income of $210$299 million infor fiscal year 2018 was flat compared to2021 increased $25 million, or 9%, from fiscal year 2017, as the decrease2020, driven by an increase in the adjusted net interest yield of 3% (36 basis points)points, or 6%, to 0.83% was offset by1.06% , and the increase in average interest-earning assets of 3%. The decrease in the adjusted net interest yield was driven by an increase in the adjusted average cost of funds of 6 basis points to 3.61%, attributable to the increase in short-term interest rates that resulted in a higher average cost for our short-term and variable-rate borrowings.
•Adjusted Net Interest Yield: The increase in the adjusted net interest yield of 18% (196 basis points)points, or 6%, reflected the favorable impact of a reduction in our adjusted average cost of borrowings of 31 basis points to 0.86%3.09%, which was partially offset by the increase in average interest-earning assets of 6%. Thea decrease in the adjusted net interest yield was attributable to the combined impact of the decline in the average yield on interest-earning assets of 25 basis points to 3.95%, both of which were attributable to the lower interest rate environment. Reductions in the average yields on line-of-credit and an increasevariable-rate loans drove the decrease in the average yield on interest-earning assets, while reductions in interest rates on our short-term and variable-rate borrowings drove the reduction in our adjusted average cost of funds.borrowings.
We include the net periodic derivative interest settlement amounts on our interest rate swaps in the calculation of our adjusted average cost of borrowings, which, as a result, also impacts the calculation of adjusted net interest income and adjusted net interest yield include the impact of net accrued periodic derivative cash settlements during the year.yield. We recorded net periodic derivative cash settlementsettlements interest expense of $74$116 million in fiscal year 2018 compared with $842021, an increase of $60 million, and $89or 107%, from $56 million in fiscal years 2017year 2020. 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 2016, respectively. 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 21 basis points over the last 12 months to 0.13% as of May 31, 2021. The decrease in the 3-month LIBOR drove the increase in the net periodic derivative cash settlements interest expense recorded in fiscal year 2021.
See “Non-GAAP Financial Measures” for additional information on our adjusted measures, including a reconciliation of these measures to the most comparable U.S. GAAP measures.
38
Provision for LoanCredit 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 our portfolio. Prior to the adoption of CECL using the modified retrospective approach on June 1, 2020, we determine is necessary formaintained an allowance based on an estimate of probable incurred loan losses inherent in our loan portfolio as of each balance sheet date.
We discuss our methodology for estimating the fourth quarter of fiscal year 2018, we increased the recovery rate
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.the debt securities in our held-to-maturity investment portfolio to trading. As a result, we discontinued the reporting of 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 34 presents the components of non-interest income (loss) recorded in our consolidated resultsstatements of operations for fiscal years 2018, 20172021, 2020 and 2016.2019.
Table 3:4: Non-Interest Income
| Year Ended May 31, | Year Ended May 31, | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | (Dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||||||||||
| Non-interest income: | ||||||||||||||||||||||||||||||||
| Non-interest income components: | Non-interest income components: | |||||||||||||||||||||||||||||||
| Fee and other income | $ | 17,578 | $ | 19,713 | $ | 21,785 | Fee and other income | $ | 18,929 | $ | 22,961 | $ | 15,355 | |||||||||||||||||||
| Derivative gains (losses) | 231,721 | 94,903 | (309,841 | ) | Derivative gains (losses) | 506,301 | (790,151) | (363,341) | ||||||||||||||||||||||||
| Results of operations of foreclosed assets | — | (1,749 | ) | (6,899 | ) | |||||||||||||||||||||||||||
| Total non-interest income | $ | 249,299 | $ | 112,867 | $ | (294,955 | ) | |||||||||||||||||||||||||
| Investment securities gains (losses) | Investment securities gains (losses) | 1,495 | 9,431 | (1,799) | ||||||||||||||||||||||||||||
| Total non-interest income (loss) | Total non-interest income (loss) | $ | 526,725 | $ | (757,759) | $ | (349,785) | |||||||||||||||||||||||||
The significant variances in non-interest income between fiscal years were primarily attributable to changes in netthe derivative gains (losses) recognized in our consolidated statements of operations.operations during each fiscal year. In addition, we experienced a decrease of $8 million in our investment securities gains, primarily due to changes in the fair market value and a decrease in fee and other income of $4 million due to lower prepayment fees than in the same prior-year period.
Derivative Gains (Losses)
Our derivative instruments are an integral part of our interest rate risk-managementrisk 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
39
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 swap curve and the composition of our derivative portfolio. We generally do not designate our interest rate swaps, which currently account for the substantial majority ofall 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, if we execute a treasury lock, we typically designate treasury locks as cash flow hedges. We entered into onethe treasury lock agreement, which was designated as a cash flow hedge of a forecasted transaction, during fiscal year 2018.hedge. We did not have any derivatives designated as accounting hedges during fiscal year 2017as of May 31, 2021 or 2016.May 31, 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 4 displaysAs interest rates decline, pay-fixed swaps generally decrease in value and result in the average notionalrecognition of derivative losses, as the amount outstanding, byof interest we pay remains fixed, while the amount of interest we receive declines. In contrast, as interest rates rise, 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, agreement type, and the weighted-averageopposite results occur as interest rate paid and received for interest
| Year Ended May 31, | ||||||||||||||||||||||||||||||
| 2018 | 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 | Average Notional Balance | Weighted- Average Rate Paid | Weighted- Average Rate Received | |||||||||||||||||||||
| Pay-fixed swaps | $ | 7,007,207 | 2.82 | % | 1.58 | % | $ | 6,675,617 | 2.89 | % | 0.90 | % | $ | 6,322,338 | 3.03 | % | 0.45 | % | ||||||||||||
| Receive-fixed swaps | 3,808,794 | 2.16 | 2.60 | 3,914,479 | 1.34 | 2.71 | 3,670,585 | 0.88 | 2.97 | |||||||||||||||||||||
| Total | $ | 10,816,001 | 2.58 | % | 1.94 | % | $ | 10,590,096 | 2.32 | % | 1.57 | % | $ | 9,992,923 | 2.24 | % | 1.38 | % | ||||||||||||
Table 5 presents the components of net derivative gains (losses) recorded in our consolidated resultsstatements of operations. 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 applicable reporting period due to changes in expected future interest rates over the remaining life of our derivative contracts.
Table 5: Derivative Gains (Losses)
| Year Ended May 31, | Year Ended May 31, | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | (Dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||||||||||
| Derivative gains (losses) attributable to: | Derivative gains (losses) attributable to: | |||||||||||||||||||||||||||||||
| Derivative cash settlements | $ | (74,281 | ) | $ | (84,478 | ) | $ | (88,758 | ) | |||||||||||||||||||||||
| Derivative cash settlements interest expense | Derivative cash settlements interest expense | $ | (115,645) | $ | (55,873) | $ | (43,611) | |||||||||||||||||||||||||
| Derivative forward value gains (losses) | 306,002 | 179,381 | (221,083 | ) | Derivative forward value gains (losses) | 621,946 | (734,278) | (319,730) | ||||||||||||||||||||||||
| Derivative gains (losses) | $ | 231,721 | $ | 94,903 | $ | (309,841 | ) | Derivative gains (losses) | $ | 506,301 | $ | (790,151) | $ | (363,341) | ||||||||||||||||||
The net derivative gains of $232$506 million in fiscal year 20182021 were largely attributabledue to a netan increase in the net fair value of our pay-fixed swaps asswap portfolio, attributable to increases in medium- and longer-term swap interest rates, increased across the swap curve, as depicted by the comparative May 31, 20182021 and May 31, 2020 swap curvecurves presented in the above chart. As depicted in the comparative swap curves, the general level of market interest rates as of the end of fiscal year 2018 was higher relative to the general level of market rates as of the end of fiscal year 2017, resulting in the recognition of significantly higher net derivative gain amounts.Table 7 below.
The net derivative gainslosses of $95$790 million in fiscal year 20172020 were primarily attributabledue to a net increasedecrease in the net fair value of our swaps dueswap portfolio attributable to an overall increasedeclines in interest rates across the swap curve, as depicted by the comparative May 31, 20172020 and May 31, 2019 swap curvecurves presented in theTable 7 below.
Derivative Cash Settlements
As indicated in Table 5 above, chart.
Table 6 displays, by interest rate swap agreement type, the average outstanding notional amount and the weighted-average interest rate paid and received for the net periodic derivative cash settlements interest expense during each respective period.
40
Pay-fixed swaps accounted for approximately 73% and 71% of the outstanding notional amount of our derivative portfolio as of May 31, 2021 and 2020, respectively.
Table 6: Derivatives—Average Notional Amounts and Interest Rates
| Year Ended May 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Average | Weighted- | Average | Weighted- | Average | Weighted- | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Notional | Average Rate | Notional | Average Rate | Notional | Average Rate | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Paid | Received | Amount | Paid | Received | Amount | Paid | Received | |||||||||||||||||||||||||||||||||||||||||||||||
| Pay-fixed swaps | $ | 6,566,734 | 2.73 | % | 0.27 | % | $ | 7,092,961 | 2.82 | % | 1.91 | % | $ | 7,352,704 | 2.83 | % | 2.53 | % | ||||||||||||||||||||||||||||||||||||||
| Receive-fixed swaps | 2,494,890 | 1.03 | 2.78 | 3,086,705 | 2.62 | 2.64 | 3,615,781 | 3.15 | 2.53 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 9,061,624 | 2.26 | % | 0.96 | % | $ | 10,179,666 | 2.76 | % | 2.13 | % | $ | 10,968,485 | 2.93 | % | 2.53 | % | ||||||||||||||||||||||||||||||||||||||
The average remaining maturity of our pay-fixed and receive-fixed swaps due to a flatteningwas 19 years and three years, respectively, as of May 31, 2021. In comparison, the swap curve resulting from an increase in short-term interest ratesaverage remaining maturity of our pay-fixed and a decline in long-term interest rates,receive-fixed swaps was 20 years and four years, respectively, as depicted by theof May 31, 2020.
Comparative Swap Curves
Table 7 table below depicts comparative swap curves as of May 31, 20162021, 2020, 2019 and 2015 in the above chart.2018.
Table 7: Comparative Swap Curves
____________________________Benchmark rates obtained from Bloomberg.
See “Note 1—Summary of Significant Accounting Policies—Derivative Instruments” and “Note 9—10—Derivative Instruments and Hedging Activities” for additional information on our derivative instruments. Also refer to “Note 13—14—Fair Value Measurement” for information on how we estimate the fair value of our derivative instruments.
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 68 presents the components of non-interest expense recorded in our consolidated resultsstatements of operations in fiscal years 2018, 20172021, 2020 and 2016.2019.
Table 6:8: Non-Interest Expense
| Year Ended May 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Non-interest expense components: | ||||||||||||||||||||
| Salaries and employee benefits | $ | (55,258) | $ | (54,522) | $ | (49,824) | ||||||||||||||
| Other general and administrative expenses | (39,447) | (46,645) | (43,342) | |||||||||||||||||
| Losses on early extinguishment of debt | (1,456) | (683) | (7,100) | |||||||||||||||||
| Other non-interest expense | (1,619) | (25,588) | (1,675) | |||||||||||||||||
| Total non-interest expense | $ | (97,780) | $ | (127,438) | $ | (101,941) | ||||||||||||||
| Year Ended May 31, | ||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | |||||||||
| Non-interest expense: | ||||||||||||
| Salaries and employee benefits | $ | (51,422 | ) | $ | (47,769 | ) | $ | (44,590 | ) | |||
| Other general and administrative expenses | (39,462 | ) | (38,457 | ) | (41,753 | ) | ||||||
| Gains (losses) on early extinguishment of debt | — | 192 | (333 | ) | ||||||||
| Other non-interest expense | (1,943 | ) | (1,948 | ) | (1,260 | ) | ||||||
| Total non-interest expense | $ | (92,827 | ) | $ | (87,982 | ) | $ | (87,936 | ) | |||
Non-interest expense of $93$98 million for fiscal year 2018 increased by $52021 decreased $30 million, or 6%23%, from fiscal year 2017,2020. The decrease was primarily attributable to the absence of a non-cash impairment charge of $31 million recorded in the fourth quarter of fiscal 2020 due to management’s decision to abandon a software project to develop an increase in salariesinternal-use loan origination and employee benefits expenses. Non-interest expenses of $88 million in fiscal year 2017 was relatively unchanged from fiscal year 2016, as an increase in salaries and employee benefits expenses was largely offset byservicing platform. We also experienced a decreasereduction in other general and administrative expenses.expenses of $7 million largely due to reduced travel and in-person meeting costs and the cancellation of certain events because of the COVID-19 pandemic, which was offset by the absence of a gain of $8 million recorded in fiscal year 2020 in connection with our sale of land.
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’s earnings.
We recorded a net income attributable to noncontrolling interests of $2 million in fiscal year 2018, compared with2021. In comparison we recorded a net incomeloss attributable to noncontrolling interests of $4 million and $2 million in fiscal year 2017years 2020 and a net loss of $22019, respectively.
| CONSOLIDATED BALANCE SHEET ANALYSIS | ||
Total assets increased $1,481 million, or 5%, in fiscal year 2016.
Below is a discussion of changes in the major components of our assets and liabilities during fiscal year 2018.2021. 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 our liquidity requirements for the company and our customers, and our market risk exposure in accordance with our risk appetite.appetite framework.
42
Loan Portfolio
We segregate our loan portfolio into segments based on the borrower member class, 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 of 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. We also offer a conversion option to members with long-term loan agreements, which allows borrowers to change the rate and term prior to the repricing date. Borrowers are generally charged a conversion fee when converting from a fixed tohave a variable rate, or a fixed rate to another fixedinterest rate. We describe and provide additional information on our member classes in “Item 1. Business—Members” and information about our loan programs and loan product types in “Item 1. Business—Loan and Guarantee Programs.”
Loans Outstanding
Table 7 summarizes9 presents loans to members, by loan type andoutstanding, by member class for the five-year period endedand by loan product type, as of May 31, 2018.2021 and 2020. As indicated in Table 7,9, loans to CFC distribution and power supply borrowers accounted for 96% of total loans to members as of both May 31, 2021 and 2020, and long-term fixed-rate loans accounted for 90% and 91%92% of loans to members as of May 31, 20182021 and 2017,2020, respectively.
Table 7: Loans 9: Loans—Outstanding Amount by Type and Member Class and Loan Type
| May 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Member class: | Amount | % of Total | Amount | % of Total | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CFC: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distribution | $ | 22,027,423 | 78 | % | $ | 20,769,653 | 78 | % | $ | 1,257,770 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Power supply | 5,154,312 | 18 | 4,731,506 | 18 | 422,806 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Statewide and associate | 106,121 | — | 106,498 | — | (377) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CFC | 27,287,856 | 96 | 25,607,657 | 96 | 1,680,199 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NCSC | 706,868 | 3 | 697,862 | 3 | 9,006 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| RTFC | 420,383 | 1 | 385,335 | 1 | 35,048 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total loans outstanding(1) | 28,415,107 | 100 | % | 26,690,854 | 100 | % | 1,724,253 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deferred loan origination costs—CFC(2) | 11,854 | — | 11,526 | — | 328 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans to members | $ | 28,426,961 | 100 | % | $ | 26,702,380 | 100 | % | $ | 1,724,581 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loan type: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Long-term loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed-rate | $ | 25,514,766 | 90 | % | $ | 24,472,003 | 92 | % | $ | 1,042,763 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Variable-rate | 658,579 | 2 | 655,704 | 2 | 2,875 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total long-term loans | 26,173,345 | 92 | 25,127,707 | 94 | 1,045,638 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Line of credit loans | 2,241,762 | 8 | 1,563,147 | 6 | 678,615 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total loans outstanding(1) | 28,415,107 | 100 | % | 26,690,854 | 100 | % | 1,724,253 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deferred loan origination costs—CFC(2) | 11,854 | — | 11,526 | — | 328 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans to members | $ | 28,426,961 | 100 | % | $ | 26,702,380 | 100 | % | $ | 1,724,581 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| May 31, | |||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||
| Loans by type: | Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | |||||||||||||||||||||||||
| Long-term loans: | |||||||||||||||||||||||||||||||||||
| Fixed-rate | $ | 22,696 | 90 | % | $ | 22,137 | 91 | % | $ | 21,391 | 93 | % | $ | 19,722 | 92 | % | $ | 18,360 | 89 | % | |||||||||||||||
| Variable-rate | 1,040 | 4 | 847 | 3 | 757 | 3 | 699 | 3 | 772 | 4 | |||||||||||||||||||||||||
| Total long-term loans | 23,736 | 94 | 22,984 | 94 | 22,148 | 96 | 20,421 | 95 | 19,132 | 93 | |||||||||||||||||||||||||
| Lines of credit | 1,432 | 6 | 1,372 | 6 | 1,005 | 4 | 1,038 | 5 | 1,335 | 7 | |||||||||||||||||||||||||
| Total loans outstanding | $ | 25,168 | 100 | % | $ | 24,356 | 100 | % | $ | 23,153 | 100 | % | $ | 21,459 | 100 | % | $ | 20,467 | 100 | % | |||||||||||||||
| Deferred loan origination costs | 11 | — | 11 | — | 10 | — | 10 | — | 10 | — | |||||||||||||||||||||||||
| Loans to members | $ | 25,179 | 100 | % | $ | 24,367 | 100 | % | $ | 23,163 | 100 | % | $ | 21,469 | 100 | % | $ | 20,477 | 100 | % | |||||||||||||||
| Loans by member class: | |||||||||||||||||||||||||||||||||||
| CFC: | |||||||||||||||||||||||||||||||||||
| Distribution | $ | 19,552 | 78 | % | $ | 18,825 | 77 | % | $ | 17,674 | 77 | % | $ | 16,095 | 75 | % | $ | 15,035 | 74 | % | |||||||||||||||
| Power supply | 4,397 | 18 | 4,505 | 19 | 4,401 | 19 | 4,181 | 20 | 4,086 | 20 | |||||||||||||||||||||||||
| Statewide and associate | 70 | — | 58 | — | 55 | — | 65 | — | 68 | — | |||||||||||||||||||||||||
| CFC total | 24,019 | 96 | 23,388 | 96 | 22,130 | 96 | 20,341 | 95 | 19,189 | 94 | |||||||||||||||||||||||||
| NCSC | 786 | 3 | 614 | 3 | 681 | 3 | 732 | 3 | 828 | 4 | |||||||||||||||||||||||||
| RTFC | 363 | 1 | 354 | 1 | 342 | 1 | 386 | 2 | 450 | 2 | |||||||||||||||||||||||||
| Total loans outstanding | $ | 25,168 | 100 | % | $ | 24,356 | 100 | % | $ | 23,153 | 100 | % | $ | 21,459 | 100 | % | $ | 20,467 | 100 | % | |||||||||||||||
| Deferred loan origination costs | 11 | 11 | 10 | — | 10 | — | 10 | — | |||||||||||||||||||||||||||
| Loans to members | $ | 25,179 | 100 | % | $ | 24,367 | 100 | % | $ | 23,163 | 100 | % | $ | 21,469 | 100 | % | $ | 20,477 | 100 | % | |||||||||||||||
(1) Represents the unpaid principal balance, net of charge-offs and recoveries, of loans as of the end of each period.
(2)Deferred loan origination costs are recorded on the books of CFC.
Loans to members totaled $25,179$28,427 million as of May 31, 2018,2021, an increase of $812$1,725 million, or 3%6%, from May 31, 2017.2020. The increase in loans was primarily due todriven by an increase in long-term and line of credit loans of $1,046 million and $679 million, respectively. We experienced increases in CFC distribution loans, of $726 million, an increase in NCSC loans of
Long-term loan advances totaled $2,203$2,514 million during fiscal year 2018, with2021, of which approximately 67% of those advances86% was provided to members for capital expenditures and 8% was provided for the refinancing of loans made by other lenders. In comparison,
43
long-term loan advances totaled $2,422 million during fiscal year 2020, of which approximately 80% was provided to members for capital expenditures and 24%15% was provided for the refinancing of loans made by other lenders.
We provide additionaladditional information onabout our loan product types in “Item 1. Business—Loan Programs” and“Note Guarantee Programs” and “Note 4—Loans.” See “Debt—Collateral Pledged” below for information on encumbered and unencumbered loans and “Credit Risk—Credit Risk Management” for information on the credit risk profile of our loan portfolio.
Table 810 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 past three fiscal yearsyears. At the repricing date, the borrower has the option of (i) selecting CFC’s current long-term fixed rate for a term ranging from one year to the full remaining term of the loan; (ii) selecting CFC’s current long-term variable rate; or (iii) repaying the loan in full.
Table 10: Loans—Historical Retention Rate and provides information onRepricing Selection(1)
| May 31, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||||||||||||||||||||||
| Loans retained: | ||||||||||||||||||||||||||||||||||||||
| Long-term fixed rate selected | $ | 383,939 | 97 | % | $ | 441,165 | 95 | % | $ | 568,252 | 75 | % | ||||||||||||||||||||||||||
| Long-term variable rate selected | 9,564 | 2 | 11,446 | 3 | 123,636 | 16 | ||||||||||||||||||||||||||||||||
| Total loans retained by CFC | 393,503 | 99 | 452,611 | 98 | 691,888 | 91 | ||||||||||||||||||||||||||||||||
| Loans repaid | 3,508 | 1 | 10,350 | 2 | 69,250 | 9 | ||||||||||||||||||||||||||||||||
| Total | $ | 397,011 | 100 | % | $ | 462,961 | 100 | % | $ | 761,138 | 100 | % | ||||||||||||||||||||||||||
____________________________
(1) Does not include NCSC and RTFC loans.
As displayed in Table 10, of the percentage of loans that repriced to either another fixed-rate termover the last three fiscal years, the substantial majority of borrowers selected a new long-term fixed or a variable rate. The average retention rate, is calculated based on the election made by the borrower at the repricing date. The average annual retention rate of CFC’sdate, was 96% for CFC loans that repriced loans has been 98% overduring the last three fiscal years.
| May 31, | |||||||||||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||||||||
| (Dollars in thousands) | Amount | % of Total | Amount | % of Total | Amount | % of Total | |||||||||||||||
| Loans retained: | |||||||||||||||||||||
| Long-term fixed rate selected | $ | 741,792 | 82 | % | $ | 824,415 | 84 | % | $ | 1,001,118 | 93 | % | |||||||||
| Long-term variable rate selected | 157,539 | 17 | 137,835 | 14 | 54,796 | 5 | |||||||||||||||
| Total loans retained by CFC | 899,331 | 99 | 962,250 | 98 | 1,055,914 | 98 | |||||||||||||||
Loans repaid(2) | 4,637 | 1 | 25,076 | 2 | 22,415 | 2 | |||||||||||||||
| Total | $ | 903,968 | 100 | % | $ | 987,326 | 100 | % | $ | 1,078,329 | 100 | % | |||||||||
| Fixed Rate | Variable Rate | ||||||||||||||
| (Dollars in thousands) | Scheduled Principal Payments | Weighted-Average Interest Rate | Scheduled Principal Payments | Total Scheduled Principal Payments | |||||||||||
| Fiscal year: | |||||||||||||||
| 2019 | $ | 1,131,941 | 4.33 | % | $ | 94,966 | $ | 1,226,907 | |||||||
| 2020 | 1,168,011 | 4.40 | 77,192 | 1,245,203 | |||||||||||
| 2021 | 1,168,748 | 4.43 | 53,445 | 1,222,193 | |||||||||||
| 2022 | 1,148,220 | 4.48 | 49,092 | 1,197,312 | |||||||||||
| 2023 | 1,157,297 | 4.54 | 43,467 | 1,200,764 | |||||||||||
| Thereafter | 16,921,968 | 4.66 | 721,329 | 17,643,297 | |||||||||||
| Total | $ | 22,696,185 | 4.60 | $ | 1,039,491 | $ | 23,735,676 | ||||||||
Debt
We utilize both short-term borrowings and long-term debt 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 rollover 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 Product Types
We offer various short- and long-term unsecured debt securities to our members and affiliates, including commercial paper, select notes, daily liquidity fund notes, medium-term notes and subordinated certificates. We also issue commercial paper, medium-term notes and collateral trust bonds in the capital markets. Additionally, we have access to funds under borrowing arrangements with banks, private placements and U.S. government agencies. Table 1011 displays our primary funding sources and their selected key attributes.
44
Table 10: 11: Debt—Debt Product Types
| Debt Product Type: | Maturity Range | Market | Secured/Unsecured | |||||||||||||||||
| Short-term funding programs: | ||||||||||||||||||||
| Commercial paper | 1 to 270 days | Capital markets, members and affiliates | Unsecured | |||||||||||||||||
| Select notes | 30 to 270 days | Members and affiliates | Unsecured | |||||||||||||||||
| Daily liquidity fund notes | Demand note | Members and affiliates | Unsecured | |||||||||||||||||
| Securities sold under repurchase agreements | 1 to 90 days | Capital markets | Secured | |||||||||||||||||
| Other funding programs: | ||||||||||||||||||||
| Medium-term notes | 9 months to 30 years | Capital markets, members and affiliates | Unsecured | |||||||||||||||||
Collateral trust bonds(1) | Up to 30 years | Capital markets | Secured | |||||||||||||||||
Guaranteed Underwriter Program notes payable(2) | Up to | U.S. government | Secured | |||||||||||||||||
Farmer Mac notes payable(3) | Up to 30 years | Private placement | Secured | |||||||||||||||||
Other notes payable(4) | Up to | Private placement | Both | |||||||||||||||||
Subordinated deferrable debt(5) | Up to | Capital markets | Unsecured | |||||||||||||||||
Members’ subordinated certificates(6) | Up to 100 years | Members | Unsecured | |||||||||||||||||
| Revolving credit agreements | Bank institutions | Unsecured | ||||||||||||||||||
____________________________
(1)Collateral trust bonds are secured by the pledge of permitted investments and eligible mortgage notes from distribution system borrowers in an amount at least equal to the outstanding principal amount of collateral trust bonds.
(2)Represents notes payable under the Guaranteed Underwriter Program, which supports the Rural Economic Development Loan and Grant program. The Federal Financing Bank provides the financing for these notes, and RUS provides a guarantee of repayment. We are required to pledge eligible mortgage notes from distribution and power supply system borrowers in an amount at least equal to the outstanding principal amount of the notes payable.
(3)We are required to pledge eligible mortgage notes from distribution and power supply system borrowers in an amount at least equal to the outstanding principal amount under note purchase agreements with Farmer Mac.
(4)Other notes payable consist of unsecured and secured Clean Renewable Energy Bonds and unsecured notes payable issued by NCSC.Bonds. We are required to pledge eligible mortgage notes from distribution and power supply system borrowers in an amount at least equal to the outstanding principal amount under the Clean Renewable Energy Bonds Series 2009A note purchase agreement.
(5)Subordinated deferrable debt is subordinate and junior to senior debt and debt obligations we guarantee, but senior to subordinated certificates. We have the right at any time, and from time to time, during the term of the subordinated deferrable debt to suspend interest payments for a maximum period of 20 consecutive quarters.quarters for $1,000 par notes, or a maximum period of 40 consecutive quarters for $25 par notes. To date, we have not exercised our option to suspend interest payments. We have the right to call the subordinated deferrable debt, at par, any time after 10 years.years for $1,000 par notes or 5 years for $25 par notes.
(6)Members’ subordinated certificates consist of membership subordinated certificates, loan and guarantee certificates and member capital securities, and are subordinated and junior to senior debt, subordinated debt and debt obligations we guarantee. Membership subordinated certificates generally mature 100 years subsequent to issuance. Loan and guarantee subordinated certificates have the same maturity as the related long-term loan. Some certificates also may amortize annually based on the outstanding loan balance. Member capital securities mature 30 years subsequent to issuance. Member capital securities are callable at par beginning 10 years subsequent to the issuance and anytime thereafter.
Debt Outstanding
Table 1112 displays the composition, by product type, of our outstanding debt and the weighted average interest rate as of May 31, 2018, 20172021 and 2016.2020. Table 1112 also displays the composition of our debt based on several additional selected attributes.
45
Table 11:12: Total Debt Outstanding and Weighted-Average Interest Rates
| May 31, | |||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Outstanding Amount | Weighted- Average Interest Rate | Outstanding Amount | Weighted- Average Interest Rate | Change | ||||||||||||||||||||||||||||||||||||
| Debt product type: | |||||||||||||||||||||||||||||||||||||||||
| Commercial Paper: | |||||||||||||||||||||||||||||||||||||||||
| Members, at par | $ | 1,124,607 | 0.14 | % | $ | 1,318,566 | 0.34 | % | $ | (193,959) | |||||||||||||||||||||||||||||||
| Dealer, net of discounts | 894,977 | 0.16 | — | — | 894,977 | ||||||||||||||||||||||||||||||||||||
| Total commercial paper | 2,019,584 | 0.15 | 1,318,566 | 0.34 | 701,018 | ||||||||||||||||||||||||||||||||||||
| Select notes to members | 1,539,150 | 0.30 | 1,597,959 | 0.75 | (58,809) | ||||||||||||||||||||||||||||||||||||
| Daily liquidity fund notes to members | 460,556 | 0.08 | 508,618 | 0.10 | (48,062) | ||||||||||||||||||||||||||||||||||||
| Securities sold under repurchase agreements | 200,115 | 0.30 | — | — | 200,115 | ||||||||||||||||||||||||||||||||||||
| Medium-term notes: | |||||||||||||||||||||||||||||||||||||||||
| Members, at par | 595,037 | 1.28 | 658,959 | 2.32 | (63,922) | ||||||||||||||||||||||||||||||||||||
| Dealer, net of discounts | 3,923,385 | 2.31 | 3,068,793 | 3.34 | 854,592 | ||||||||||||||||||||||||||||||||||||
| Total medium-term notes | 4,518,422 | 2.17 | 3,727,752 | 3.16 | 790,670 | ||||||||||||||||||||||||||||||||||||
| Collateral trust bonds | 7,191,944 | 3.15 | 7,188,553 | 3.23 | 3,391 | ||||||||||||||||||||||||||||||||||||
| Guaranteed Underwriter Program notes payable | 6,269,303 | 2.76 | 6,261,312 | 2.74 | 7,991 | ||||||||||||||||||||||||||||||||||||
| Farmer Mac notes payable | 2,977,909 | 1.68 | 3,059,637 | 1.99 | (81,728) | ||||||||||||||||||||||||||||||||||||
| Other notes payable | 8,236 | 1.68 | 11,612 | 1.37 | (3,376) | ||||||||||||||||||||||||||||||||||||
| Subordinated deferrable debt | 986,315 | 5.11 | 986,119 | 5.11 | 196 | ||||||||||||||||||||||||||||||||||||
| Members’ subordinated certificates: | |||||||||||||||||||||||||||||||||||||||||
| Membership subordinated certificates | 628,594 | 4.95 | 630,483 | 4.95 | (1,889) | ||||||||||||||||||||||||||||||||||||
| Loan and guarantee subordinated certificates | 386,896 | 2.89 | 482,965 | 2.92 | (96,069) | ||||||||||||||||||||||||||||||||||||
| Member capital securities | 239,170 | 5.00 | 226,170 | 5.00 | 13,000 | ||||||||||||||||||||||||||||||||||||
| Total members’ subordinated certificates | 1,254,660 | 4.32 | 1,339,618 | 4.22 | (84,958) | ||||||||||||||||||||||||||||||||||||
| Total debt outstanding | $ | 27,426,194 | 2.42 | % | $ | 25,999,746 | 2.72 | % | $ | 1,426,448 | |||||||||||||||||||||||||||||||
| Security type: | |||||||||||||||||||||||||||||||||||||||||
| Secured debt | 61 | % | 64 | % | |||||||||||||||||||||||||||||||||||||
| Unsecured debt | 39 | 36 | |||||||||||||||||||||||||||||||||||||||
| Total | 100 | % | 100 | % | |||||||||||||||||||||||||||||||||||||
| Funding source: | |||||||||||||||||||||||||||||||||||||||||
| Members | 18 | % | 21 | % | |||||||||||||||||||||||||||||||||||||
| Private placement: | |||||||||||||||||||||||||||||||||||||||||
| Guaranteed Underwriter Program notes payable | 23 | 24 | |||||||||||||||||||||||||||||||||||||||
| Farmer Mac notes payable | 11 | 12 | |||||||||||||||||||||||||||||||||||||||
| Total private placement | 34 | 36 | |||||||||||||||||||||||||||||||||||||||
| Capital markets | 48 | 43 | |||||||||||||||||||||||||||||||||||||||
| Total | 100 | % | 100 | % | |||||||||||||||||||||||||||||||||||||
| Interest rate type: | |||||||||||||||||||||||||||||||||||||||||
| Fixed-rate debt | 77 | % | 75 | % | |||||||||||||||||||||||||||||||||||||
| Variable-rate debt | 23 | 25 | |||||||||||||||||||||||||||||||||||||||
| Total | 100 | % | 100 | % | |||||||||||||||||||||||||||||||||||||
| Interest rate type including the impact of swaps: | |||||||||||||||||||||||||||||||||||||||||
Fixed-rate debt(1) | 93 | % | 90 | % | |||||||||||||||||||||||||||||||||||||
Variable-rate debt(2) | 7 | 10 | |||||||||||||||||||||||||||||||||||||||
| Total | 100 | % | 100 | % | |||||||||||||||||||||||||||||||||||||
Maturity classification:(3) | |||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | 17 | % | 15 | % | |||||||||||||||||||||||||||||||||||||
Long-term and subordinated debt(4) | 83 | 85 | |||||||||||||||||||||||||||||||||||||||
| Total | 100 | % | 100 | % | |||||||||||||||||||||||||||||||||||||
46
| May 31, | |||||||||||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||||||||
| (Dollars in thousands) | Outstanding Amount | Weighted- Average Interest Rate | Outstanding Amount | Weighted- Average Interest Rate | Outstanding Amount | Weighted- Average Interest Rate | |||||||||||||||
| Debt product type: | |||||||||||||||||||||
| Commercial paper: | |||||||||||||||||||||
| Members, at par | $ | 1,202,105 | 1.89 | % | $ | 928,158 | 0.95 | % | $ | 848,007 | 0.45 | % | |||||||||
| Dealer, net of discounts | 1,064,266 | 1.87 | 999,691 | 0.93 | 659,935 | 0.43 | |||||||||||||||
| Total commercial paper | 2,266,371 | 1.88 | 1,927,849 | 0.94 | 1,507,942 | 0.44 | |||||||||||||||
| Select notes to members | 780,472 | 2.04 | 696,889 | 1.12 | 701,849 | 0.62 | |||||||||||||||
| Daily liquidity fund notes to members | 400,635 | 1.50 | 527,990 | 0.80 | 525,959 | 0.34 | |||||||||||||||
| Medium-term notes: | |||||||||||||||||||||
| Members, at par | 643,821 | 2.31 | 612,951 | 1.97 | 654,058 | 1.66 | |||||||||||||||
| Dealer, net of discounts | 3,002,979 | 3.51 | 2,364,671 | 3.48 | 2,648,369 | 3.02 | |||||||||||||||
| Total medium-term notes | 3,646,800 | 3.30 | 2,977,622 | 3.17 | 3,302,427 | 2.75 | |||||||||||||||
| Collateral trust bonds | 7,639,093 | 3.89 | 7,634,048 | 4.08 | 7,253,096 | 4.28 | |||||||||||||||
| Guaranteed Underwriter Program notes payable | 4,856,143 | 2.85 | 4,985,484 | 2.83 | 4,777,111 | 2.98 | |||||||||||||||
| Farmer Mac notes payable | 2,891,496 | 2.88 | 2,513,389 | 1.71 | 2,303,123 | 1.15 | |||||||||||||||
| Other notes payable | 29,860 | 3.42 | 35,223 | 3.55 | 40,944 | 3.61 | |||||||||||||||
| Subordinated deferrable debt | 742,410 | 4.98 | 742,274 | 4.98 | 742,212 | 4.98 | |||||||||||||||
| Members’ subordinated certificates: | |||||||||||||||||||||
| Membership subordinated certificates | 630,448 | 4.94 | 630,098 | 4.94 | 630,063 | 4.94 | |||||||||||||||
| Loan and guarantee subordinated certificates | 528,386 | 2.93 | 567,830 | 3.02 | 593,701 | 2.99 | |||||||||||||||
| Member capital securities | 221,148 | 5.00 | 221,097 | 5.00 | 220,046 | 5.00 | |||||||||||||||
| Total members’ subordinated certificates | 1,379,982 | 4.18 | 1,419,025 | 4.18 | 1,443,810 | 4.14 | |||||||||||||||
| Total debt outstanding | $ | 24,633,262 | 3.25 | % | $ | 23,459,793 | 3.07 | % | $ | 22,598,473 | 3.03 | % | |||||||||
| Security type: | |||||||||||||||||||||
| Unsecured debt | 37 | % | 35 | % | 37 | % | |||||||||||||||
| Secured debt | 63 | 65 | 63 | ||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | |||||||||||||||
| Funding source: | |||||||||||||||||||||
| Members | 18 | % | 18 | % | 18 | % | |||||||||||||||
| Private placement: | |||||||||||||||||||||
| Guaranteed Underwriter Program notes payable | 20 | 21 | 21 | ||||||||||||||||||
| Farmer Mac notes payable | 12 | 11 | 10 | ||||||||||||||||||
| Other | — | — | 1 | ||||||||||||||||||
| Total private placement | 32 | 32 | 32 | ||||||||||||||||||
| Capital markets | 50 | 50 | 50 | ||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | |||||||||||||||
| Interest rate type: | |||||||||||||||||||||
| Fixed-rate debt | 74 | % | 74 | % | 74 | % | |||||||||||||||
| Variable-rate debt | 26 | 26 | 26 | ||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | |||||||||||||||
| Interest rate type including the impact of swaps: | |||||||||||||||||||||
Fixed-rate debt(1) | 87 | % | 87 | % | 88 | % | |||||||||||||||
Variable-rate debt(2) | 13 | 13 | 12 | ||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | |||||||||||||||
Maturity classification:(3) | |||||||||||||||||||||
| Short-term borrowings | 15 | % | 14 | % | 13 | % | |||||||||||||||
Long-term and subordinated debt(4) | 85 | 86 | 87 | ||||||||||||||||||
| Total | 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 theour consolidated balance sheets. Maturity classification is based on the original contractual maturity as of the date of issuance of the debt.
Below is a summary of significant financing activities during fiscal year 2018.2021:
•On October 8, 2020, we issued $400 million aggregate principal amount of 1.35% sustainability collateral trust bonds due March 15, 2031. On February 8, 2021, we issued $350 million of aggregate principal amount of 1.65% collateral trust bonds due June 15, 2031. In February 2021, we issued dealer medium-term notes totaling $1,425 million.
•On November 9, 2017,19, 2020, we closed on a $750$375 million committed loan facility (“Series M”R”) from the Federal Financing Bank under the Guaranteed Underwriter Program.
•On May 25, 2021, we borrowed $200 million at any time through January 11, 2022.under a securities repurchase agreement and pledged as collateral investment debt securities classified as trading, the fair value of which was $211 million as of May 31, 2021. We repurchased these investment debt securities on June 2, 2021.
Member Investments
Debt securities issued to our members represent an important, stable source of funding. Table 1213 displays outstanding member debt, by debt product type, as of May 31, 20182021 and 2017.2020.
Table 12:13: Member Investments
| May 31, | Change | |||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | % of Total (1) | Amount | % of Total (1) | ||||||||||||||||||||||||||||
| Member investment product type: | ||||||||||||||||||||||||||||||||
| Commercial paper | $ | 1,124,607 | 56 | % | $ | 1,318,566 | 100 | % | $ | (193,959) | ||||||||||||||||||||||
| Select notes | 1,539,150 | 100 | 1,597,959 | 100 | (58,809) | |||||||||||||||||||||||||||
| Daily liquidity fund notes | 460,556 | 100 | 508,618 | 100 | (48,062) | |||||||||||||||||||||||||||
| Medium-term notes | 595,037 | 13 | 658,959 | 18 | (63,922) | |||||||||||||||||||||||||||
| Members’ subordinated certificates | 1,254,660 | 100 | 1,339,618 | 100 | (84,958) | |||||||||||||||||||||||||||
| Total member investments | $ | 4,974,010 | $ | 5,423,720 | $ | (449,710) | ||||||||||||||||||||||||||
| Percentage of total debt outstanding | 18 | % | 21 | % | ||||||||||||||||||||||||||||
| May 31, | Increase/(Decrease) | |||||||||||||||||
| 2018 | 2017 | |||||||||||||||||
| (Dollars in thousands) | Amount | % of Total (1) | Amount | % of Total (1) | ||||||||||||||
| Commercial paper | $ | 1,202,105 | 53 | % | $ | 928,158 | 48 | % | $ | 273,947 | ||||||||
| Select notes | 780,472 | 100 | 696,889 | 100 | 83,583 | |||||||||||||
| Daily liquidity fund notes | 400,635 | 100 | 527,990 | 100 | (127,355 | ) | ||||||||||||
| Medium-term notes | 643,821 | 18 | 612,951 | 20 | 30,870 | |||||||||||||
| Members’ subordinated certificates | 1,379,982 | 100 | 1,419,025 | 100 | (39,043 | ) | ||||||||||||
| Total outstanding member debt | $ | 4,407,015 | $ | 4,185,013 | $ | 222,002 | ||||||||||||
| Percentage of total debt outstanding | 18 | % | 18 | % | ||||||||||||||
(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 $4,974 million and accounted for 18% of total debt outstanding as of both May 31, 2018 and 2017.2021, compared with $5,424 million, or 21%, of total debt outstanding as of May 31, 2020. Over the last three fiscal years, outstanding member investments as of the end of each quarterly reporting period have averaged $4,328 million on a quarterly basis.$4,995 million.
47
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 $3,796$4,582 million and accounted for 15%17% of total debt outstanding as of May 31, 2018,2021, compared with $3,343$3,962 million, or 14%15%, of total debt outstanding as of May 31, 2017.2020. See Table 32: Short-Term Borrowings below under “Liquidity Risk” below and in “Note 5—6—Short-Term Borrowings” for detailinformation 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 totaled $20,837of $22,844 million and $22,038 million as of May 31, 2021 and 2020, respectively, accounted for 83% and 85% of total debt outstanding as of
| Requirement/Limit | Actual(1) | |||||||||||
Debt Indenture Minimum | Committed Bank Revolving Line of Credit Agreements Maximum | May 31, | ||||||||||
| Debt Agreement | 2018 | 2017 | ||||||||||
| Collateral trust bonds 1994 indenture | 100 | % | 150 | % | 111 | % | 117 | % | ||||
| Collateral trust bonds 2007 indenture | 100 | 150 | 114 | 115 | ||||||||
| Guaranteed Underwriter Program notes payable | 100 | 150 | 119 | 117 | ||||||||
| Farmer Mac notes payable | 100 | 150 | 115 | 117 | ||||||||
| Clean Renewable Energy Bonds Series 2009A | 100 | 150 | 109 | 113 | ||||||||
| May 31, | ||||||||
| (Dollars in thousands) | 2018 | 2017 | ||||||
Total loans outstanding(1) | $ | 25,167,494 | $ | 24,356,330 | ||||
Less: Loans required to be pledged for secured debt (2) | (15,677,138 | ) | (15,435,062 | ) | ||||
Loans pledged in excess of requirement(2)(3) | (2,467,444 | ) | (2,505,804 | ) | ||||
| Total pledged loans | $ | (18,144,582 | ) | $ | (17,940,866 | ) | ||
| Unencumbered loans | $ | 7,022,912 | $ | 6,415,464 | ||||
| Unencumbered loans as a percentage of total loans | 28 | % | 26 | % | ||||
each respective date. We provide additional information on our borrowings, including the maturity profile,long-term debt below inunder “Liquidity Risk.” Refer to “Note 4—Loans—Pledging of Loans” for additional information related to pledged collateral. Also refer to “Note 5—Short-Term Borrowings”, “Note 6—Long-Term Debt”,Risk” and in “Note 7—Subordinated DeferrableLong-Term Debt” and “Note 8—Members’ Subordinated Certificates” for a more detailed description of each of our debt types.Deferrable Debt.”
Equity
Table 1514 presents the components of total CFC equity total equity and total members’ equity as of May 31, 20182021 and 2017. As displayed in Table 15, total members’ equity excludes the impact of cumulative unrealized derivative forward value gains (losses) recorded in earnings.2020.
Table 15:14: Equity
| May 31, | Change | |||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||||||||
| Equity components: | ||||||||||||||||||||
| Membership fees and educational fund: | ||||||||||||||||||||
| Membership fees | $ | 968 | $ | 969 | $ | (1) | ||||||||||||||
| Educational fund | 2,157 | 2,224 | (67) | |||||||||||||||||
| Total membership fees and educational fund | 3,125 | 3,193 | (68) | |||||||||||||||||
| Patronage capital allocated | 923,970 | 894,066 | 29,904 | |||||||||||||||||
| Members’ capital reserve | 909,749 | 807,320 | 102,429 | |||||||||||||||||
| Total allocated equity | 1,836,844 | 1,704,579 | 132,265 | |||||||||||||||||
| Unallocated net income (loss): | ||||||||||||||||||||
Prior fiscal year-end cumulative derivative forward value losses(1) | (1,079,739) | (348,965) | (730,774) | |||||||||||||||||
Year-to-date derivative forward value gains (losses) (1) | 618,577 | (730,774) | 1,349,351 | |||||||||||||||||
Period-end cumulative derivative forward value losses(1) | (461,162) | (1,079,739) | 618,577 | |||||||||||||||||
| Other unallocated net income | (709) | 3,191 | (3,900) | |||||||||||||||||
| Unallocated net loss | (461,871) | (1,076,548) | 614,677 | |||||||||||||||||
| CFC retained equity | 1,374,973 | 628,031 | 746,942 | |||||||||||||||||
| Accumulated other comprehensive loss | (25) | (1,910) | 1,885 | |||||||||||||||||
| Total CFC equity | 1,374,948 | 626,121 | 748,827 | |||||||||||||||||
| Noncontrolling interests | 24,931 | 22,701 | 2,230 | |||||||||||||||||
| Total equity | $ | 1,399,879 | $ | 648,822 | $ | 751,057 | ||||||||||||||
| May 31, | Change | |||||||||||
| (Dollars in thousands) | 2018 | 2017 | ||||||||||
| Membership fees and education fund: | ||||||||||||
| Membership fees | $ | 969 | $ | 971 | $ | (2 | ) | |||||
| Educational fund | 1,976 | 1,929 | 47 | |||||||||
| Total membership fees and educational fund | 2,945 | 2,900 | 45 | |||||||||
| Patronage capital allocated | 811,493 | 761,701 | 49,792 | |||||||||
| Members’ capital reserve | 687,785 | 630,305 | 57,480 | |||||||||
| Unallocated net loss: | ||||||||||||
| Prior year-end cumulative derivative forward value losses | (332,525 | ) | (507,904 | ) | 175,379 | |||||||
Current year derivative forward value gains(1) | 301,694 | 175,379 | 126,315 | |||||||||
| Current year-end cumulative derivative forward value losses | (30,831 | ) | (332,525 | ) | 301,694 | |||||||
| Other unallocated net loss | (5,603 | ) | (5,603 | ) | — | |||||||
| Unallocated net loss | (36,434 | ) | (338,128 | ) | 301,694 | |||||||
| CFC retained equity | 1,465,789 | 1,056,778 | 409,011 | |||||||||
| Accumulated other comprehensive income (loss) | 8,544 | 13,175 | (4,631 | ) | ||||||||
| Total CFC equity | 1,474,333 | 1,069,953 | 404,380 | |||||||||
| Noncontrolling interests | 31,520 | 28,852 | 2,668 | |||||||||
| Total equity | $ | 1,505,853 | $ | 1,098,805 | $ | 407,048 | ||||||
| Members’ equity: | ||||||||||||
| Total CFC equity | $ | 1,474,333 | $ | 1,069,953 | $ | 404,380 | ||||||
| Excludes: | ||||||||||||
| Accumulated other comprehensive income | 8,544 | 13,175 | (4,631 | ) | ||||||||
| Current year-end cumulative derivative forward value losses | (30,831 | ) | (332,525 | ) | 301,694 | |||||||
| Subtotal | (22,287 | ) | (319,350 | ) | 297,063 | |||||||
Total members’ equity(2) | $ | 1,496,620 | $ | 1,389,303 | $ | 107,317 | ||||||
(1)Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the variable interest
48
entities NCSC and RTFC, which we are required to consolidate. SeeWe present the consolidated total derivative forward value gains (losses) in Table 38 in the “Non-GAAP Financial Measures” section below. Also, see “Note 14—16—Business Segments” for the statements of operations for CFC.
Total equity increased by $407$751 million during fiscal year 20182021 to $1,506$1,400 million as of May 31, 2018,2021, primarily attributable to our reported net income of $457$814 million, which was partially offset by the retirement of patronage capital retirement of $45$60 million in September 2017.
Allocation and Retirement of Patronage Capital
District of Columbia cooperative law requires cooperatives to allocate net earnings to patrons, to a general reserve in an amount sufficient to maintain a balance of at least 50% of paid-up capital and to a cooperative educational fund, as well as permits additional allocations to board-approved reserves. District of Columbia cooperative law also requires that a cooperative’s net earnings be allocated to all patrons in proportion to their individual patronage capital; $57 millionand each patron’s allocation be distributed to the members’ capital reserve and $1 million topatron unless the patron agrees that the cooperative educational fund. The amount of patronage capital allocated each year by CFC’smay retain its share as additional capital. Pursuant to these provisions, the CFC Board of Directors is required to make annual allocations of net earnings, if any. CFC’s net earnings for determining allocations 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 May 2021, the CFC Board of Directors authorized the allocation of $1 million of net earnings for fiscal year 2021 to the cooperative educational fund. In July 2018,2021, the CFC Board of Directors authorized the allocation of net earnings for fiscal year 2021 as follows: $90 million to members in the form of patronage capital and $102 million to the members’ capital reserve. In July 2021, the CFC Board of Directors also authorized the retirement of patronage capital totaling $48$58 million, of which $45 million represented 50% of the patronage capital allocation for fiscal year 2018.2021 and $13 million represented the portion of the allocation from fiscal year 1996 net earnings that has been held for 25 years pursuant to the CFC Board of Directors’ policy. We expect to return thisthe authorized patronage capital retirement amount of $58 million to members in cash in the firstsecond quarter of fiscal year 2019.2022. The remaining portion of the allocated amountpatronage capital allocation for fiscal year 2021 will be retained by CFC for 25 years underpursuant to the guidelines adopted by the CFC Board of Directors in June 2009.
In July 2017,May 2020, the CFC Board of Directors authorized the allocation of $1 million of net earnings for fiscal year 2020 to the cooperative educational fund. In July 2020 the CFC Board of Directors authorized the allocation of net earnings for fiscal year 2020 as follows: $96 million to members in the form of patronage capital and $48 million to the members’ capital reserve. In July 2020, the CFC Board of Directors also authorized the retirement of allocated net earningspatronage capital totaling $45$60 million, of which $48 million represented 50% of the patronage capital amount of $90 million allocated to membersallocation for fiscal year 2017. The $452020 and $12 million represented the portion of the allocation from net earnings for fiscal year 1995 that has been held for 25 years pursuant to the CFC Board of Directors’ policy. This amount was returned to members in cash in September 2017.2020. The remaining portion of the patronage capital allocation for fiscal year 2020 will be retained by CFC for 25 years pursuant to the 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” in our 2020 Form 10-K and “Note 11—Equity” for additional information.
49
| May 31, | Increase/ (Decrease) | |||||||||||
| (Dollars in thousands) | 2018 | 2017 | ||||||||||
| Guarantee type: | ||||||||||||
| Long-term tax-exempt bonds | $ | 316,985 | $ | 468,145 | $ | (151,160 | ) | |||||
| Letters of credit | 343,970 | 307,321 | 36,649 | |||||||||
| Other guarantees | 144,206 | 114,151 | 30,055 | |||||||||
| Total | $ | 805,161 | $ | 889,617 | $ | (84,456 | ) | |||||
| Company: | ||||||||||||
| CFC | $ | 793,156 | $ | 874,920 | $ | (81,764 | ) | |||||
| NCSC | 10,431 | 13,123 | (2,692 | ) | ||||||||
| RTFC | 1,574 | 1,574 | — | |||||||||
| Total | $ | 805,161 | $ | 889,617 | $ | (84,456 | ) | |||||
| Outstanding Amount | Maturities of Guarantee Obligations | |||||||||||||||||||||||||||
| (Dollars in thousands) | 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | ||||||||||||||||||||||
| Guarantees | $ | 805,161 | $ | 265,684 | $ | 66,142 | $ | 121,700 | $ | 27,515 | $ | 160,541 | $ | 163,579 | ||||||||||||||
| May 31, | Increase/ (Decrease) | |||||||||||||||||
| 2018 | 2017 | |||||||||||||||||
| (Dollars in thousands) | Amount | % of Total | Amount | % of Total | ||||||||||||||
| Line of credit commitments: | ||||||||||||||||||
Conditional(1) | $ | 4,835,434 | 38 | % | $ | 5,170,393 | 41 | % | $ | (334,959 | ) | |||||||
Unconditional(2) | 2,857,350 | 23 | 2,602,262 | 21 | 255,088 | |||||||||||||
| Total line of credit unadvanced commitments | 7,692,784 | 61 | 7,772,655 | 62 | (79,871 | ) | ||||||||||||
Total long-term loan unadvanced commitments(1) | 4,952,834 | 39 | 4,802,319 | 38 | 150,515 | |||||||||||||
| Total unadvanced loan commitments | $ | 12,645,618 | 100 | % | $ | 12,574,974 | 100 | % | $ | 70,644 | ||||||||
Available Balance | Notional Maturities of Unadvanced Loan Commitments | |||||||||||||||||||||||||||
| (Dollars in thousands) | 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | ||||||||||||||||||||||
| Line of credit | $ | 7,692,784 | $ | 4,168,751 | $ | 710,763 | $ | 805,508 | $ | 770,971 | $ | 1,211,791 | $ | 25,000 | ||||||||||||||
| Long-term loans | 4,952,834 | 883,840 | 586,005 | 652,499 | 1,714,338 | 1,104,185 | 11,967 | |||||||||||||||||||||
| Total | $ | 12,645,618 | $ | 5,052,591 | $ | 1,296,768 | $ | 1,458,007 | $ | 2,485,309 | $ | 2,315,976 | $ | 36,967 | ||||||||||||||
Available Balance | Notional Maturities of Unconditional Committed Lines of Credit | |||||||||||
| (Dollars in thousands) | 2019 | 2020 | 2021 | 2022 | 2023 | |||||||
| Committed lines of credit | $2,857,350 | $279,285 | $435,151 | $444,326 | $644,178 | $1,054,410 | ||||||
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 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-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 and risk guidelines, in the context of CFC’s mission and strategic objectives and initiatives.
Risk-Management Framework
Our risk-management framework consists of defined policies, procedures and risk tolerances that are intended to align with CFC’s mission. The CFC Board of Directors is responsible for risk governance by approving the enterprise risk-management framework and providing oversight on risk policies, risk appetite, guidelines and our performance against established goals. In fulfilling its risk governance responsibility, the CFC Board of Directors receives periodic reports on business activities from management. The CFC Board of Directors reviews CFC’s risk profile and management’s assessment of those risks throughout the year at its periodic meetings. The board also establishes CFC’s loan policies and has established a Loan Committee of the board comprising no fewer than 10 directors that reviews the performance of the loan portfolio in accordance with those policies. For additional information about the role of the CFC Board of Directors in risk governance and oversight, see “Item 10. Directors, Executive Officers and Corporate Governance.”
Management is responsible for execution of the risk-management framework, risk policy formation and daily management of the risks associated with our business. Management executes its responsibility by establishing processes for identifying, measuring, assessing, managing, monitoring and reporting risks. Management and operating groups maintain policies and procedures, specific to each major risk category, to identify and measure our primary risk exposures at the transaction, obligor and portfolio levels and ensure that our exposures remain within prescribed limits. Management also is responsible for establishing and maintaining internal controls to mitigate key risks. We have a number of management-level risk oversight committees across the organization and groups within the organization that have a defined set of authorities and responsibilities specific to one or more risk types, including the Corporate Credit Committee, Credit Risk Management
group, Treasury group, Asset Liability Committee, Investment Management Committee, Corporate Compliance, group, Internal Audit group, Business Technology Services group and Disclosure Committee. These risk oversight committees and groups collectively help management facilitate enterprise-wide understanding and monitoring of CFC’s risk profile and the control processes with respect to our inherent risks. Management and the risk oversight committees periodically report actual results, significant current and emerging risks, initiatives and risk-management concerns to the CFC Board of Directors.
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| CREDIT RISK | ||
Our loan portfolio, which represents the largest component of assets on our balance sheet, and guarantees accountaccounts for the substantial majority of our credit risk exposure. We also engage in certain non-lending activities that may give rise to counterparty credit and counterparty settlement risk, including the purchase of investment securities andsuch as entering into derivative transactions to manage interest rate risk.risk and purchasing investment securities. Our primary credit exposure is loans to rural electric cooperatives, thatwhich 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.
Credit Risk Management
We manage portfolio and borrower credit risk related to our loan portfolio 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.portfolio.
Loan and Guarantee Portfolio Credit Risk
As a 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 $27,995 million and $26,306 million as of May 31, 2021 and 2020, respectively, represented 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 inherently 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 core 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.
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Table 2115 presents, by loan type and by company, the amount and percentage of secured and unsecured loans in our loan portfolio as of May 31, 20182021 and 2017.2020. Of our total loans outstanding, 93% and 94% were secured and 7% were unsecured as of May 31, 2018. Of our total loans outstanding, 92% were secured2021 and 8% were unsecured as of May 31, 2017.2020, respectively.
Table 21 :15: Loan Portfolio Security Profile(1)
| May 31, 2021 | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Secured | % of Total | Unsecured | % of Total | Total | |||||||||||||||||||||||||||
| Loan type: | ||||||||||||||||||||||||||||||||
| Long-term loans: | ||||||||||||||||||||||||||||||||
| Long-term fixed-rate loans | $ | 25,278,805 | 99 | % | $ | 235,961 | 1 | % | $ | 25,514,766 | ||||||||||||||||||||||
| Long-term variable-rate loans | 655,675 | 100 | 2,904 | — | 658,579 | |||||||||||||||||||||||||||
| Total long-term loans | 25,934,480 | 99 | 238,865 | 1 | 26,173,345 | |||||||||||||||||||||||||||
| Line of credit loans | 376,991 | 17 | 1,864,771 | 83 | 2,241,762 | |||||||||||||||||||||||||||
Total loans outstanding(1) | $ | 26,311,471 | 93 | $ | 2,103,636 | 7 | $ | 28,415,107 | ||||||||||||||||||||||||
| Company: | ||||||||||||||||||||||||||||||||
| CFC | $ | 25,248,972 | 93 | % | $ | 2,038,884 | 7 | % | $ | 27,287,856 | ||||||||||||||||||||||
| NCSC | 662,782 | 94 | 44,086 | 6 | 706,868 | |||||||||||||||||||||||||||
| RTFC | 399,717 | 95 | 20,666 | 5 | 420,383 | |||||||||||||||||||||||||||
Total loans outstanding(1) | $ | 26,311,471 | 93 | $ | 2,103,636 | 7 | $ | 28,415,107 | ||||||||||||||||||||||||
| May 31, 2018 | May 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Secured | % of Total | Unsecured | % of Total | Total | (Dollars in thousands) | Secured | % of Total | Unsecured | % of Total | Total | |||||||||||||||||||||||||||||||||||||||
| Loan type: | Loan type: | |||||||||||||||||||||||||||||||||||||||||||||||||
| Long-term loans: | Long-term loans: | |||||||||||||||||||||||||||||||||||||||||||||||||
| Long-term fixed-rate loans | $ | 22,220,087 | 98 | % | $ | 476,098 | 2 | % | $ | 22,696,185 | Long-term fixed-rate loans | $ | 24,137,145 | 99 | % | $ | 334,858 | 1 | % | $ | 24,472,003 | |||||||||||||||||||||||||||||
| Long-term variable-rate loans | 996,970 | 96 | 42,521 | 4 | 1,039,491 | Long-term variable-rate loans | 650,192 | 99 | 5,512 | 1 | 655,704 | |||||||||||||||||||||||||||||||||||||||
| Total long-term loans | 23,217,057 | 98 | 518,619 | 2 | 23,735,676 | Total long-term loans | 24,787,337 | 99 | 340,370 | 1 | 25,127,707 | |||||||||||||||||||||||||||||||||||||||
| Line of credit loans | 69,097 | 5 | 1,362,721 | 95 | 1,431,818 | Line of credit loans | 191,268 | 12 | 1,371,879 | 88 | 1,563,147 | |||||||||||||||||||||||||||||||||||||||
| Total loans outstanding | $ | 23,286,154 | 93 | $ | 1,881,340 | 7 | $ | 25,167,494 | ||||||||||||||||||||||||||||||||||||||||||
Total loans outstanding(1) | Total loans outstanding(1) | $ | 24,978,605 | 94 | $ | 1,712,249 | 6 | $ | 26,690,854 | |||||||||||||||||||||||||||||||||||||||||
| Company: | Company: | |||||||||||||||||||||||||||||||||||||||||||||||||
| CFC | $ | 22,233,592 | 93 | % | $ | 1,784,327 | 7 | % | $ | 24,017,919 | CFC | $ | 23,977,438 | 94 | % | $ | 1,630,219 | 6 | % | $ | 25,607,657 | |||||||||||||||||||||||||||||
| NCSC | 703,396 | 89 | 83,061 | 11 | 786,457 | NCSC | 638,488 | 91 | 59,374 | 9 | 697,862 | |||||||||||||||||||||||||||||||||||||||
| RTFC | 349,166 | 96 | 13,952 | 4 | 363,118 | RTFC | 362,679 | 94 | 22,656 | 6 | 385,335 | |||||||||||||||||||||||||||||||||||||||
| Total loans outstanding | $ | 23,286,154 | 93 | $ | 1,881,340 | 7 | $ | 25,167,494 | ||||||||||||||||||||||||||||||||||||||||||
Total loans outstanding(1) | Total loans outstanding(1) | $ | 24,978,605 | 94 | $ | 1,712,249 | 6 | $ | 26,690,854 | |||||||||||||||||||||||||||||||||||||||||
____________________________
| May 31, 2017 | ||||||||||||||||||
| (Dollars in thousands) | 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 | ||||||||
| Long-term variable-rate loans | 795,326 | 94 | 52,093 | 6 | 847,419 | |||||||||||||
| Total long-term loans | 22,299,197 | 97 | 684,912 | 3 | 22,984,109 | |||||||||||||
| Line of credit loans | 54,258 | 4 | 1,317,963 | 96 | 1,372,221 | |||||||||||||
| Total loans outstanding | $ | 22,353,455 | 92 | $ | 2,002,875 | 8 | $ | 24,356,330 | ||||||||||
| Company: | ||||||||||||||||||
| CFC | $ | 21,591,723 | 92 | % | $ | 1,796,264 | 8 | % | $ | 23,387,987 | ||||||||
| NCSC | 424,636 | 69 | 189,288 | 31 | 613,924 | |||||||||||||
| RTFC | 337,096 | 95 | 17,323 | 5 | 354,419 | |||||||||||||
| Total loans outstanding | $ | 22,353,455 | 92 | $ | 2,002,875 | 8 | $ | 24,356,330 | ||||||||||
(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 May 31, 2018 and 2017.
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 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, power
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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 StatesU.S. The consolidated number of borrowers with loans outstanding totaled 892 and its territories, including all 50 states, the District of Columbia, American Samoa and Guam. Our consolidated membership totaled 1,449 members and 216 associates889 as of May 31, 2018. Despite our credit concentrations, we historically have experienced limited defaults2021 and very low credit losses2020, respectively, located in our electric loan portfolio. In fiscal year 2018, for49 states. Of the fifth consecutive fiscal year, we had no payment defaults, charge-offs, delinquent loans or nonperforming loans in our electric utility loan portfolio.
Texas, which had 67 borrowers with loans outstanding as of both May 31, 2021 and 2020, accounted for the largest number of borrowers with loans outstanding in any one state as of each respective date. Texas also accounted for the largest concentration of loan exposure in any one state as of each respective date. Loans outstanding to Texas-based electric utility organizations totaled $4,878 million and $4,222 million as of May 31, 2021 and 2020, respectively, and accounted for 17% and 16% of total loans outstanding as of each respective date. Of the loans outstanding to Texas-based electric utility organizations, $172 million and $181 million as of May 31, 2021 and 2020, respectively, were covered by the Farmer Mac standby repurchase agreement, which slightly reduced our 67credit risk exposure to Texas borrowers. Of the 49 electric power supply borrowers eight were located in Texaswith loans outstanding as of May 31, 2018.2021, seven were located in Texas.
Table 22 presents16 provides a breakdown, by state or U.S. territory, of the total number of CFC, NCSCborrowers with loans outstanding as of May 31, 2021 and RTFC2020 and the outstanding loan exposure to borrowers and thein each jurisdiction as a percentage of total loans outstanding by state or U.S. territoryof $28,415 million and $26,691 million as of May 31, 20182021 and 2017.2020, respectively.
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Table 22:16: Loan Geographic Concentration
| May 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| U.S. State/Territory | Number of Borrowers | % of Total Loans Outstanding | Number of Borrowers | % of Total Loans Outstanding | ||||||||||||||||||||||
| Alabama | 24 | 2.28 | % | 22 | 2.29 | % | ||||||||||||||||||||
| Alaska | 16 | 3.48 | 16 | 3.55 | ||||||||||||||||||||||
| Arizona | 11 | 0.80 | 11 | 0.82 | ||||||||||||||||||||||
| Arkansas | 20 | 2.21 | 20 | 2.32 | ||||||||||||||||||||||
| California | 4 | 0.12 | 4 | 0.13 | ||||||||||||||||||||||
| Colorado | 27 | 5.70 | 26 | 5.89 | ||||||||||||||||||||||
| Delaware | 3 | 0.31 | 3 | 0.40 | ||||||||||||||||||||||
| Florida | 18 | 3.84 | 18 | 4.15 | ||||||||||||||||||||||
| Georgia | 45 | 5.42 | 45 | 5.18 | ||||||||||||||||||||||
| Hawaii | 2 | 0.36 | 2 | 0.40 | ||||||||||||||||||||||
| Idaho | 11 | 0.40 | 11 | 0.46 | ||||||||||||||||||||||
| Illinois | 31 | 3.22 | 32 | 3.51 | ||||||||||||||||||||||
| Indiana | 39 | 3.21 | 39 | 3.11 | ||||||||||||||||||||||
| Iowa | 34 | 2.32 | 34 | 2.37 | ||||||||||||||||||||||
| Kansas | 29 | 4.13 | 31 | 4.40 | ||||||||||||||||||||||
| Kentucky | 23 | 2.65 | 23 | 2.81 | ||||||||||||||||||||||
| Louisiana | 9 | 1.95 | 10 | 0.92 | ||||||||||||||||||||||
| Maine | 3 | 0.08 | 2 | 0.03 | ||||||||||||||||||||||
| Maryland | 2 | 1.56 | 2 | 1.64 | ||||||||||||||||||||||
| Massachusetts | 1 | 0.21 | 1 | 0.23 | ||||||||||||||||||||||
| Michigan | 11 | 1.32 | 12 | 1.00 | ||||||||||||||||||||||
| Minnesota | 48 | 2.38 | 48 | 2.50 | ||||||||||||||||||||||
| Mississippi | 20 | 1.58 | 20 | 1.50 | ||||||||||||||||||||||
| Missouri | 46 | 5.65 | 45 | 5.42 | ||||||||||||||||||||||
| Montana | 25 | 0.77 | 25 | 0.75 | ||||||||||||||||||||||
| Nebraska | 12 | 0.10 | 12 | 0.11 | ||||||||||||||||||||||
| Nevada | 8 | 0.80 | 8 | 0.94 | ||||||||||||||||||||||
| New Hampshire | 2 | 0.30 | 1 | 0.30 | ||||||||||||||||||||||
| New Jersey | 2 | 0.06 | 2 | 0.07 | ||||||||||||||||||||||
| New Mexico | 13 | 0.20 | 14 | 0.23 | ||||||||||||||||||||||
| New York | 13 | 0.43 | 9 | 0.21 | ||||||||||||||||||||||
| North Carolina | 28 | 3.08 | 28 | 3.42 | ||||||||||||||||||||||
| North Dakota | 14 | 2.90 | 15 | 3.22 | ||||||||||||||||||||||
| Ohio | 27 | 2.18 | 27 | 2.27 | ||||||||||||||||||||||
| Oklahoma | 27 | 3.40 | 26 | 3.08 | ||||||||||||||||||||||
| Oregon | 19 | 1.27 | 19 | 1.33 | ||||||||||||||||||||||
| Pennsylvania | 16 | 1.78 | 16 | 1.92 | ||||||||||||||||||||||
| Rhode Island | 1 | 0.02 | 1 | 0.02 | ||||||||||||||||||||||
| South Carolina | 24 | 2.77 | 21 | 2.93 | ||||||||||||||||||||||
| South Dakota | 29 | 0.64 | 29 | 0.72 | ||||||||||||||||||||||
| Tennessee | 16 | 0.71 | 17 | 0.73 | ||||||||||||||||||||||
| Texas | 67 | 17.17 | 67 | 15.82 | ||||||||||||||||||||||
| Utah | 4 | 0.92 | 5 | 1.10 | ||||||||||||||||||||||
| Vermont | 5 | 0.18 | 5 | 0.20 | ||||||||||||||||||||||
| Virginia | 17 | 1.08 | 18 | 1.23 | ||||||||||||||||||||||
| Washington | 10 | 1.12 | 10 | 1.22 | ||||||||||||||||||||||
| West Virginia | 2 | 0.04 | 2 | 0.04 | ||||||||||||||||||||||
| Wisconsin | 23 | 1.82 | 24 | 1.89 | ||||||||||||||||||||||
| Wyoming | 11 | 1.08 | 11 | 1.22 | ||||||||||||||||||||||
| Total | 892 | 100.00 | % | 889 | 100.00 | % | ||||||||||||||||||||
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| May 31, | ||||||||||||
| 2018 | 2017 | |||||||||||
| U.S. State/Territory | Number of Borrowers | % of Total Loans Outstanding | Number of Borrowers | % of Total Loans Outstanding | ||||||||
| Texas | 70 | 15.11 | % | 73 | 14.86 | % | ||||||
| Georgia | 48 | 5.83 | 44 | 5.77 | ||||||||
| Missouri | 48 | 5.43 | 48 | 5.27 | ||||||||
| Colorado | 26 | 5.41 | 26 | 5.27 | ||||||||
| Kansas | 30 | 4.77 | 31 | 4.57 | ||||||||
| Alaska | 17 | 3.79 | 16 | 3.61 | ||||||||
| Florida | 17 | 3.70 | 17 | 3.17 | ||||||||
| Illinois | 29 | 3.65 | 27 | 3.43 | ||||||||
| North Dakota | 18 | 3.42 | 18 | 3.62 | ||||||||
| South Carolina | 23 | 3.05 | 23 | 3.12 | ||||||||
| North Carolina | 28 | 3.01 | 28 | 3.17 | ||||||||
| Indiana | 37 | 2.89 | 38 | 3.04 | ||||||||
| Kentucky | 25 | 2.86 | 24 | 3.02 | ||||||||
| Oklahoma | 26 | 2.86 | 26 | 2.95 | ||||||||
| Minnesota | 53 | 2.84 | 54 | 2.98 | ||||||||
| Alabama | 27 | 2.28 | 27 | 2.26 | ||||||||
| Arkansas | 20 | 2.26 | 21 | 2.36 | ||||||||
| Ohio | 28 | 2.10 | 28 | 2.14 | ||||||||
| Pennsylvania | 17 | 2.04 | 17 | 2.02 | ||||||||
| Iowa | 39 | 2.00 | 39 | 1.90 | ||||||||
| Wisconsin | 24 | 1.91 | 24 | 1.68 | ||||||||
| Maryland | 2 | 1.67 | 2 | 2.06 | ||||||||
| Mississippi | 19 | 1.58 | 18 | 1.56 | ||||||||
| Oregon | 22 | 1.42 | 22 | 1.43 | ||||||||
| Utah | 6 | 1.39 | 6 | 1.61 | ||||||||
| Washington | 11 | 1.34 | 11 | 1.32 | ||||||||
| Virginia | 19 | 1.25 | 18 | 1.42 | ||||||||
| Louisiana | 10 | 1.25 | 10 | 1.21 | ||||||||
| Nevada | 6 | 1.00 | 5 | 1.35 | ||||||||
| Wyoming | 13 | 0.99 | 15 | 1.09 | ||||||||
| Michigan | 13 | 0.92 | 14 | 0.62 | ||||||||
| South Dakota | 31 | 0.86 | 32 | 0.93 | ||||||||
| Montana | 25 | 0.78 | 25 | 0.71 | ||||||||
| Arizona | 11 | 0.73 | �� | 11 | 0.81 | |||||||
| Hawaii | 2 | 0.52 | 2 | 0.60 | ||||||||
| Idaho | 12 | 0.51 | 12 | 0.56 | ||||||||
| Tennessee | 18 | 0.51 | 17 | 0.36 | ||||||||
| Delaware | 3 | 0.44 | 3 | 0.48 | ||||||||
| New Hampshire | 1 | 0.36 | 1 | 0.37 | ||||||||
| New Mexico | 16 | 0.27 | 16 | 0.29 | ||||||||
| Massachusetts | 1 | 0.24 | 1 | 0.25 | ||||||||
| Vermont | 5 | 0.21 | 4 | 0.19 | ||||||||
| California | 4 | 0.13 | 4 | 0.14 | ||||||||
| Nebraska | 13 | 0.12 | 16 | 0.13 | ||||||||
| New York | 7 | 0.12 | 6 | 0.12 | ||||||||
| New Jersey | 2 | 0.07 | 2 | 0.07 | ||||||||
| West Virginia | 2 | 0.06 | 2 | 0.06 | ||||||||
| Maine | 3 | 0.04 | 3 | 0.04 | ||||||||
| District of Columbia | 1 | 0.01 | 1 | 0.01 | ||||||||
| Total | 928 | 100.00 | % | 928 | 100.00 | % | ||||||
Single-Obligor Concentration
Table 2317 displays the combinedoutstanding loan exposure of loans and guarantees outstanding of thefor our 20 largest borrowers, by exposure type and by company, as of May 31, 20182021 and 2017.2020. The 20 borrowers with the largest exposure consisted of nine distribution systems, 10 power supply systems and one NCSC associate member as of May 31, 2018. The 20 borrowers with the largest exposure consisted of 10 distribution systems and 10 power supply systems as of May 31, 2021. The 20 largest borrowers consisted of 11 distribution systems and nine power supply systems and one NCSC associate member as of May 31, 2017.2020. The largest total exposure to a single borrower or controlled group represented approximatelyless than 2% of total loans and guarantees outstanding as of both May 31, 20182021 and 2017.2020.
Table 23: Credit17: Loan Exposure to 20 Largest Borrowers
| May 31, | Change | |||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | % of Total | Amount | % of Total | ||||||||||||||||||||||||||||
| Company: | ||||||||||||||||||||||||||||||||
| CFC | $ | 5,978,342 | 21 | % | $ | 5,661,540 | 21 | % | $ | 316,802 | ||||||||||||||||||||||
| NCSC | 203,392 | 1 | 215,595 | 1 | (12,203) | |||||||||||||||||||||||||||
| Total loan exposure to 20 largest borrowers | 6,181,734 | 22 | 5,877,135 | 22 | 304,599 | |||||||||||||||||||||||||||
| Less: Loans covered under Farmer Mac standby purchase commitment | (308,580) | (1) | (313,644) | (1) | 5,064 | |||||||||||||||||||||||||||
| Net loan exposure to 20 largest borrowers | $ | 5,873,154 | 21 | % | $ | 5,563,491 | 21 | % | $ | 309,663 | ||||||||||||||||||||||
| May 31, | Change | |||||||||||||||||
| 2018 | 2017 | |||||||||||||||||
| (Dollars in thousands) | Amount | % of Total | Amount | % of Total | ||||||||||||||
| By exposure type: | ||||||||||||||||||
| Loans | $ | 5,613,991 | 22 | % | $ | 5,749,885 | 23 | % | $ | (135,894 | ) | |||||||
| Guarantees | 347,138 | 1 | 354,619 | 1 | (7,481 | ) | ||||||||||||
| Total exposure to 20 largest borrowers | 5,961,129 | 23 | 6,104,504 | 24 | (143,375 | ) | ||||||||||||
| Less: Loans covered under Farmer Mac standby purchase commitment | (354,694 | ) | (1 | ) | (351,699 | ) | (1 | ) | (2,995 | ) | ||||||||
| Net exposure to 20 largest borrowers | $ | 5,606,435 | 22 | % | $ | 5,752,805 | 23 | % | $ | (146,370 | ) | |||||||
| By company: | ||||||||||||||||||
| CFC | $ | 5,703,723 | 22 | % | $ | 5,899,709 | 23 | % | $ | (195,986 | ) | |||||||
| NCSC | 257,406 | 1 | 204,795 | 1 | 52,611 | |||||||||||||
| Total exposure to 20 largest borrowers | 5,961,129 | 23 | 6,104,504 | 24 | (143,375 | ) | ||||||||||||
| Less: Loans covered under Farmer Mac standby purchase commitment | (354,694 | ) | (1 | ) | (351,699 | ) | (1 | ) | (2,995 | ) | ||||||||
| Net exposure to 20 largest borrowers | $ | 5,606,435 | 22 | % | $ | 5,752,805 | 23 | % | $ | (146,370 | ) | |||||||
As part of our strategy in managing credit exposure to large borrowers, we entered into a long-term standby purchase commitment agreement with Farmer 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 $512 million and $569 million as of May 31, 2021 and 2020, respectively. Loan exposure to our 20 largest borrowers covered under the Farmer Mac agreement totaled $309 million and $314 million as of May 31, 2021 and 2020, respectively. No loans had been put to Farmer Mac for purchase pursuant to this agreement as of May 31, 2021. Our credit exposure is also mitigated by long-term loans guaranteed by RUS. Guaranteed RUS loans totaled $139 million and $147 million as of May 31, 2021 and 2020, respectively.
Credit PerformanceQuality 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 nonperforming loans, economic trendsof our borrowers and other indicationsindicators 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. InternalPayment status trends and internal risk ratings and payment status trends are indicators, among others, of the probability of borrower default and leveloverall credit quality of credit risk in our loan portfolio.
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.modification
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We have not had any loan modifications that were required to be accounted for as TDRs since fiscal year 2016. Table 2418 presents the carrying valueoutstanding amount of modified loans modifiedaccounted for as TDRs in prior periods, by member class, and the performance status of these loans as of May 31, 2021 and 2020. The TDR loans outstanding 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.
Table 18: Troubled Debt Restructured Loans
| May 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 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 | $ | 5,756 | 0.02 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| RTFC | 1 | 4,592 | 0.02 | 1 | 5,092 | 0.02 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total TDR loans | 2 | $ | 9,971 | 0.04 | % | 2 | $ | 10,848 | 0.04 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Performance status of TDR loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing TDR loans | 2 | $ | 9,971 | 0.04 | % | 2 | $ | 10,848 | 0.04 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total TDR loans | 2 | $ | 9,971 | 0.04 | % | 2 | $ | 10,848 | 0.04 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
____________________________
(1) Represents the unpaid principal balance net of charge-offs and recoveries as of the end of each period.
We did not have any TDR loans classified as nonperforming as of the last five fiscal years. Our last modification of a loan that met the definition of a TDR occurred in fiscal year 2017.either May 31, 2021 or May 31, 2020. Although TDR loans may be returned to performing status if the borrower performs under the modified terms of the loan for an extended period of time, TDR loans are considered individually impaired.evaluated on an individual basis in estimating lifetime expected credit losses under the CECL model for determining the allowance for credit losses.
| May 31, | |||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | Carrying Amount | % of Total Loans | Carrying Amount | % of Total Loans | Carrying Amount | % of Total Loans | Carrying Amount | % of Total Loans | Carrying Amount | % of Total Loans | |||||||||||||||||||||||||
| TDR loans: | |||||||||||||||||||||||||||||||||||
| CFC | $ | 6,507 | 0.03 | % | $ | 6,581 | 0.02 | % | $ | 6,716 | 0.03 | % | $ | 7,221 | 0.03 | % | $ | 7,584 | 0.04 | % | |||||||||||||||
| NCSC | — | — | — | — | — | — | 294 | — | — | — | |||||||||||||||||||||||||
| RTFC | 6,092 | 0.02 | 6,592 | 0.03 | 10,598 | 0.04 | 4,221 | 0.02 | — | — | |||||||||||||||||||||||||
| Total TDR loans | $ | 12,599 | 0.05 | % | $ | 13,173 | 0.05 | % | $ | 17,314 | 0.07 | % | $ | 11,736 | 0.05 | % | $ | 7,584 | 0.04 | % | |||||||||||||||
| Performance status of TDR loans: | |||||||||||||||||||||||||||||||||||
| Performing TDR loans | $ | 12,599 | 0.05 | % | $ | 13,173 | 0.05 | % | $ | 13,808 | 0.06 | % | $ | 11,736 | 0.05 | % | $ | 7,584 | 0.04 | % | |||||||||||||||
| Nonperforming TDR loans | — | — | — | — | 3,506 | 0.01 | — | — | — | — | |||||||||||||||||||||||||
| Total TDR loans | $ | 12,599 | 0.05 | % | $ | 13,173 | 0.05 | % | $ | 17,314 | 0.07 | % | $ | 11,736 | 0.05 | % | $ | 7,584 | 0.04 | % | |||||||||||||||
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 loans as nonperforming at the earlier of the date when we determine: (i) interest or principal payments on the loan is past due 90 days or more; (ii) as a result of court proceedings, the collection of interest or principal payments based on the original contractual terms is not expected; or (iii) the full and timely collection of interest or principal is otherwise uncertain. Once 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 earnings. Table 25 below19 presents the outstanding balance of nonperforming loans, by member class, as of May 31, 2021 and 2020.
Table 19: Nonperforming Loans
| May 31, | |||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Number of Borrowers | Outstanding Amount (1) | % of Total Loans Outstanding | Number of Borrowers | Outstanding Amount (1) | % of Total Loans Outstanding | |||||||||||||||||||||||||||||||||||
| Nonperforming loans: | |||||||||||||||||||||||||||||||||||||||||
CFC—Power supply(2) | 2 | $ | 228,312 | 0.81 | % | 1 | $ | 167,708 | 0.63 | % | |||||||||||||||||||||||||||||||
| RTFC | 2 | 9,185 | 0.03 | — | — | — | |||||||||||||||||||||||||||||||||||
| Total nonperforming loans | 4 | $ | 237,497 | 0.84 | % | 1 | $ | 167,708 | 0.63 | % | |||||||||||||||||||||||||||||||
____________________________
(1) Represents the unpaid principal balance net of charge-offs and recoveries as of the end of each period.
(2) In addition, we had less than $1 million letters of credit outstanding to Brazos as of May 31, 2021.
Nonperforming loans increased $69 million to $237 million, or 0.84% of total loans outstanding as of May 31, 2021, from $168 million, or 0.63% of total loans outstanding, as of May 31, 2020, primarily due to our classification of the last fiveloans
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outstanding of $85 million to Brazos as nonperforming in fiscal years.
| May 31, | |||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | % of Total Loans | Amount | % of Total Loans | Amount | % of Total Loans | Amount | % of Total Loans | Amount | % of Total Loans | |||||||||||||||||||||||||
| Nonperforming loans: | |||||||||||||||||||||||||||||||||||
| CFC | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | |||||||||||||||
| NCSC | — | — | — | — | — | — | — | — | 400 | — | |||||||||||||||||||||||||
| RTFC | — | — | — | — | — | — | — | — | 1,695 | 0.01 | |||||||||||||||||||||||||
| Total | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 2,095 | 0.01 | % | |||||||||||||||
outstanding to these RTFC borrowers totaled $9 million as of May 31, 2021. Brazos is not permitted to make scheduled loan payments without approval of the bankruptcy court. As a result, we have not received payments from Brazos, and its loans outstanding of $85 million were delinquent as of May 31, 2021. In comparison, we had no delinquent loans as of May 31, 2020. We provide additional information on Brazos and the credit qualityimpact of the February 2021 polar vortex on our loan portfolio in “Note 4—Loans.Texas-based borrowers below under “Credit Risk—Allowance for Credit Losses.”
One loan to another CFC power supply borrower, with an outstanding balance of $143 million and $168 million as of May 31, 2021 and 2020, respectively, accounted for the majority of nonperforming loans as of May 31, 2021, and the entire amount of nonperforming loans as of May 31, 2020. Under the terms of this 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 forecast and underlying assumptions provided to us in May 2020, we no longer believed that the future expected cash payments from the borrower through the maturity of the loan in December 2026 would be sufficient to repay the outstanding loan balance. We therefore classified this loan as nonperforming, placed the loan on nonaccrual status and established an asset-specific allowance for credit losses as of May 31, 2020. Payments received from the borrower on this loan during fiscal year 2021 reduced the outstanding balance to $143 million as of May 31, 2021. While the borrower is not in default and was current with respect to required payments on the loan as of May 31, 2021, we have continued to report the loan as nonperforming based on the expectation that we will not recover the full principal amount.
Net Charge-Offs
Charge-offs represent the amount of a loan that has been removed from our consolidated balance sheet when the loan is deemed uncollectible. Generally the amount of a charge-off is the recorded investment in excess of the fair value of the expected cash flows from the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral securing the loan. We report charge-offs net of amounts recovered on previously charged off loans. Table 26 presents charge-offs, net of recoveries, and the net charge-off rate for each of the last five fiscal years.
| Year Ended May 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| Charge-offs: | ||||||||||||||||||||
| RTFC | $ | — | $ | 2,119 | $ | — | $ | 999 | $ | 1,606 | ||||||||||
| Recoveries: | ||||||||||||||||||||
| CFC | — | (159 | ) | (214 | ) | (214 | ) | (212 | ) | |||||||||||
| RTFC | — | (100 | ) | — | — | — | ||||||||||||||
| Total recoveries | — | (259 | ) | (214 | ) | (214 | ) | (212 | ) | |||||||||||
| Net charge-offs (recoveries) | $ | — | $ | 1,860 | $ | (214 | ) | $ | 785 | $ | 1,394 | |||||||||
| Average total loans outstanding | $ | 24,911,559 | $ | 23,834,432 | $ | 22,490,847 | $ | 20,821,944 | $ | 20,412,340 | ||||||||||
Net charge-off rate(1) | 0.00 | % | 0.01 | % | 0.00 | % | 0.00 | % | 0.01 | % | ||||||||||
We had no loan defaults ordid not experience any charge-offs during fiscal year 2018. The gross charge-offs of $5 million over the last five fiscal years were all attributable2021, 2020 or 2019. Prior to our RTFC telecommunications loan portfolio. We now haveBrazos’ bankruptcy filing, we had not experienced an extended period of five consecutive fiscal years for which we have had noany defaults or charge-offs in our electric utility loan portfolio.portfolio since fiscal year 2013 and in our telecommunications loan portfolio since fiscal year 2017.
In our 52-year history, we have experienced only 17 defaults in our electric utility loan portfolio, which includes our most recent default by Brazos due to its bankruptcy filing in March 2021. Of the 16 defaults prior to Brazos, one remains unresolved with an expected ultimate resolution date in calendar year 2025, nine resulted in no loss and six resulted in cumulative net charge-offs of $86 million. Of this amount, $67 million was attributable to five electric power supply cooperatives and $19 million was attributable to one electric distribution cooperatives. We cite the factors that have historically contributed to the relatively low risk of default by our electric utility cooperatives, our principal lending market, above under “Credit Risk—Loan Portfolio Credit Risk.”
In comparison, since inception in 1987, RTFC has experienced 15 defaults and cumulative net charge-offs of $427 million in our telecommunications loan portfolio, the most significant of which was a charge-off of $354 million in fiscal year 2011. We recorded this charge-off, which related to loans outstanding to Innovative Communications Corporation (“ICC”), a former RTFC member, pursuant to 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 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. We categorize loans in our portfolio based on our internally assigned borrower risk ratings, which are intended to assess the general creditworthiness of the borrower and probability of default. Our borrower risk ratings are alignedalign with the U.S. federal banking regulatory agencyagencies credit risk rating definitions of pass and criticized classifications,categories, with loans classified asthe criticized category further classified assegmented among special mention,
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substandard orand doubtful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default. Loans with borrowers classified
We use our internal risk ratings to measure 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 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 criticized totaled $178the primary credit quality indicator for our loan portfolio. Because our internal borrower risk ratings provide important information on the probability of default, they are a key input in estimating our allowance for credit losses.
Criticized loans increased $515 million or 0.7%,to $886 million as of May 31, 2021, from $371 million as of May 31, 2020, representing approximately 3% and 1% of total loans outstanding as of each respective date. The increase was primarily due to the material borrower risk-ratings downgrades of Brazos and Rayburn in fiscal year 2021 due to their exposure to elevated power costs during the February 2021 polar vortex. Brazos and Rayburn had loans outstanding of $85 million and $379 million, respectively, as of May 31, 2018. Of2021, together totaling $464 million. Prior to the downgrades of the borrower risk ratings for Brazos and Rayburn to a rating in the “criticized” category, each borrower had a rating in the “pass” category. The increase also reflects the impact of a risk rating downgrade of a CFC electric distribution borrower made in fiscal year 2021. We downgraded the risk rating of this amount, $171borrower, which had loans outstanding of $219 million as of May 31, 2021, from a rating in the “pass” category to a rating in “criticized” category. The risk rating downgrade for this CFC electric distribution borrower was classifiedattributable to the adverse financial impact from restoration costs incurred to repair damage caused by two successive hurricanes. We expect that the borrower will receive grant funds from the Federal Emergency Management Agency and the state where it is located for reimbursement of the hurricane damage-related restoration costs. Each of the borrowers downgraded to a criticized rating in fiscal year 2021, except Brazos, was current with regard to scheduled principal and interest amounts due as substandard. In comparison, loans with borrowers classified as criticized totaled $120 million, or 0.5%, of totalMay 31, 2021. As noted above under “Nonperforming Loans,” Brazos is not permitted to make scheduled loan payments without approval of the bankruptcy court. As a result, we have not received payments from Brazos, and its loans outstanding of $85 million were delinquent as of May 31, 2017. Of2021.
The increase in criticized loans of $683 million attributable to the risk rating downgrades of the three borrowers discussed above was partially offset by an upgrade in the risk rating of a CFC electric distribution borrower and its subsidiary from a rating in the “criticized” category to a rating in the “pass” category in fiscal year 2021. The upgrade in the risk rating for this amount, $8borrower, which had loans outstanding of $146 million was classified as
We provide additional information on our borrower risk rating classifications, including the amount of loans outstanding in each of the risk rating classifications.criticized loan categories of special mention, substandard and doubtful, in “Note 1—Summary of Significant Accounting Policies” and “Note 4—Loans.”
Allowance for LoanCredit Losses
Table 20 presents, by member borrower type, loans outstanding and the related allowance for credit losses and allowance coverage ratio as of May 31, 2021 and the allowance components. The allowance components, which are based on the evaluation method used to measure credit losses, consist of a collective allowance and an asset-specific allowance. 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. The allowance for
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credit losses as of May 31, 2020 is based on the incurred loss model, as our effective date for the past five fiscal yearsadoption of CECL was June 1, 2020.
Table 20: Allowance for Credit Losses by Borrower Member Class and a comparisonEvaluation Methodology
| May 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Loans Outstanding(1) | Allowance for Credit Losses | Allowance Coverage Ratio (2) | Loans Outstanding (1) | Allowance for Credit Losses | Allowance Coverage Ratio (2) | |||||||||||||||||||||||||||||||||||||||||||||||
| Member class: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| CFC: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distribution | $ | 22,027,423 | $ | 13,426 | 0.06 | % | $ | 20,769,653 | $ | 8,002 | 0.04 | % | |||||||||||||||||||||||||||||||||||||||||
| Power supply | 5,154,312 | 64,646 | 1.25 | 4,731,506 | 38,027 | 0.80 | |||||||||||||||||||||||||||||||||||||||||||||||
| Statewide and associate | 106,121 | 1,391 | 1.31 | 106,498 | 1,409 | 1.32 | |||||||||||||||||||||||||||||||||||||||||||||||
| CFC total | 27,287,856 | 79,463 | 0.29 | 25,607,657 | 47,438 | 0.19 | |||||||||||||||||||||||||||||||||||||||||||||||
| NCSC | 706,868 | 1,374 | 0.19 | 697,862 | 806 | 0.12 | |||||||||||||||||||||||||||||||||||||||||||||||
| RTFC | 420,383 | 4,695 | 1.12 | 385,335 | 4,881 | 1.27 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 28,415,107 | $ | 85,532 | 0.30 | $ | 26,690,854 | $ | 53,125 | 0.20 | |||||||||||||||||||||||||||||||||||||||||||
| Allowance components: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Collective allowance | $ | 28,167,639 | $ | 42,442 | 0.15 | % | $ | 26,512,298 | $ | 18,292 | 0.07 | % | |||||||||||||||||||||||||||||||||||||||||
| Asset-specific allowance | 247,468 | 43,090 | 17.41 | 178,556 | 34,833 | 19.51 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total allowance for credit losses | $ | 28,415,107 | $ | 85,532 | 0.30 | $ | 26,690,854 | $ | 53,125 | 0.20 | |||||||||||||||||||||||||||||||||||||||||||
| Allowance coverage ratios: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Percentage of nonperforming and nonaccrual loans (3) | $ | 237,497 | 36.01 | % | $ | 167,708 | 31.68 | % | |||||||||||||||||||||||||||||||||||||||||||||
___________________________
(1) Represents the unpaid principal balance, net of the allowance by companycharge-offs and recoveries of loans as of the end of each of those years.
| Year Ended May 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| Beginning balance | $ | 37,376 | $ | 33,258 | $ | 33,690 | $ | 56,429 | $ | 54,325 | ||||||||||
| Provision (benefit) for loan losses | (18,575 | ) | 5,978 | (646 | ) | (21,954 | ) | 3,498 | ||||||||||||
| Net (charge-offs) recoveries | — | (1,860 | ) | 214 | (785 | ) | (1,394 | ) | ||||||||||||
| Ending balance | $ | 18,801 | $ | 37,376 | $ | 33,258 | $ | 33,690 | $ | 56,429 | ||||||||||
| Allowance for loan losses by company: | ||||||||||||||||||||
| CFC | $ | 12,300 | $ | 29,499 | $ | 24,559 | $ | 23,716 | $ | 45,600 | ||||||||||
| NCSC | 2,082 | 2,910 | 3,134 | 5,441 | 6,547 | |||||||||||||||
| RTFC | 4,419 | 4,967 | 5,565 | 4,533 | 4,282 | |||||||||||||||
| Total | $ | 18,801 | $ | 37,376 | $ | 33,258 | $ | 33,690 | $ | 56,429 | ||||||||||
| Allowance coverage ratios: | ||||||||||||||||||||
Total loans outstanding(1) | $ | 25,167,494 | $ | 24,356,330 | $ | 23,152,517 | $ | 21,459,220 | $ | 20,466,925 | ||||||||||
| Percentage of total loans outstanding | 0.07 | % | 0.15 | % | 0.14 | % | 0.16 | % | 0.28 | % | ||||||||||
| Percentage of total nonperforming loans outstanding | — | — | — | — | 2,693.51 | |||||||||||||||
| Percentage of total performing TDR loans outstanding | 149.23 | 283.73 | 240.86 | 287.07 | 744.05 | |||||||||||||||
| Percentage of total nonperforming TDR loans outstanding | — | — | 948.60 | — | — | |||||||||||||||
| Percentage of loans on nonaccrual status | — | — | 948.60 | 287.07 | 583.00 | |||||||||||||||
(3)Calculated based on the total allowance for credit losses at period end divided by loans outstanding classified as nonperforming and on nonaccrual status at period end.
The allowance for credit losses increased $32 million to $19$86 million as of May 31, 2018, from $37 million as of
The increase in the collective allowance of $24 million was primarily driven by the risk rating downgrade of Rayburn, a CFC Texas-based power supply borrower with loans outstanding of $379 million as of May 31, 2018,2021, from 0.15%a pass rating to a criticized rating in fiscal year 2021, coupled with a decrease we made in the recovery rate assumption for power supply loans during fiscal year 2021 and the addition to the collective allowance of $4 million upon our adoption of CECL using the modified retrospective approach on June 1, 2020. The increase in the asset-specific allowance of $8 million was primarily driven by the classification of loans outstanding to Brazos totaling $85 million as of May 31, 2017. 2021 as nonperforming due to its bankruptcy filing.
As indicated above in Table 20 , the increase in the allowance was largely attributable to CFC power supply loans. While there was not a material change in the allowance coverage ratios for most of our member classes, the allowance coverage ratio for CFC power supply loans increased 45 basis points to 1.25% as of May 31, 2021, from 0.80% as of May 31, 2020. Below we provide additional information on the primary conditions and factors that contributed to the allowance increase for CFC power supply loans and recent developments that we expect will have an impact on our estimated credit losses.
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Texas Polar Vortex
In mid-February 2021, Texas and several neighboring states experienced a series of severe winter storms and record-low temperatures as a result of a polar vortex. The freezing conditions affected power demand, supply and market prices in Texas, triggering unprecedented increases in electrical power load demand in combination with significant reductions in power supply across Texas, including a loss of almost half of the electric generation within the ERCOT service area. ERCOT raised wholesale electric power prices to $9,000 per megawatt-hour, to spur greater power generation by providing a financial incentive for power generators in the state to remain on-line. According to ERCOT data, pre-storm wholesale power prices were less than $50 per megawatt-hour. ERCOT also initiated controlled rolling power outages, which impacted millions of residential and commercial customers, to protect and maintain the stability of the Texas electric grid.
Impact of Texas Polar Vortex
The surge in wholesale electricity prices had a direct financial impact primarily on certain electric power supply utilities, including a significant adverse financial impact on two CFC Texas-based electric power supply borrowers, Brazos and Rayburn. These power supply borrowers had insufficient generation supply during the February 2021 polar vortex and were forced, at the height of the surge in power prices, to purchase power at peak prices to meet the electric demand of their member distribution system customers. On March 1, 2021, we were informed that Brazos filed for Chapter 11 bankruptcy protection. In fiscal year 2021, we downgraded Brazos’ borrower risk rating from a rating within the pass category to doubtful, classified its loans outstanding as nonperforming, placed the loans on nonaccrual status, and reversed unpaid interest amounts previously accrued and recognized in interest income. We had loans outstanding to Brazos of $85 million as of May 31, 2021, pursuant to a syndicated Bank of America revolving credit agreement, of which $64 million was unsecured and $21 million was secured. In the third quarter of fiscal year 2021, we also made a material downgrade in the borrower risk rating for Rayburn from a rating within the pass category to special mention. We further downgraded Rayburn’s borrower risk rating to substandard in the fourth quarter of fiscal year 2018, we increased the recovery rate assumptions used in determining the collective allowance for our electric distribution2021. Loans outstanding to Rayburn consisted of secured loans of $167 million and power supply loan portfolios to reflect management’s current assessmentunsecured loans of expected losses in the event of default on a loan in these portfolios. The increase in recovery rate assumptions for these portfolios was the primary driver of the $18$212 million, reduction in the allowance for loan losses. As discussed above, our electric utility loan portfolio has continued to exhibit strong credit performance. In fiscal year 2018, for the fifth consecutive fiscal year, we had no payment defaults, charge-offs, delinquent loans or nonperforming loans in our electric utility loan portfolio. In addition, 93% of the loans in our total loan portfolio were secured as of May 31, 2018, up from 92% as of May 31, 2017.
Under the terms of the syndicated Bank of America revolving credit agreement, in the event of bankruptcy by Brazos, each lending participant is permitted to hold any deposited or investment funds from Brazos, up to the amount of the participant’s exposure to Brazos pursuant to the agreement, for set-off against such exposure to Brazos. The total held by all but $7participants is required to be shared among the participants in accordance with the pro rata share of each participant in the agreement. As of the bankruptcy filing date, funds on deposit from or invested by Brazos with participating lenders of the agreement, available for set-off against Brazos’ obligations, totaled $124 million. Based on our exposure of $85 million under the $500 million syndicated Bank of America agreement, our pro rata share set-off right is 17%, or approximately $21 million. The set-off rights have been agreed to and confirmed by Brazos and the bankruptcy court. In order to allow Brazos to access such deposited or invested funds, the lenders have been granted adequate protection liens and super-priority claims in an amount equal to the diminution of value of the amount available for set-off.
Texas Enactment of Legislation to Address Certain Polar-Vortex Related Costs
On June 18, 2021, the Texas governor signed into law Senate Bill 1580, the electric cooperative securitization bill, which is secured under our typical collateral requirements for long-term loan advances. They are currentbecame effective immediately with regardthe governor’s signature. This bill allows electric cooperatives to all principal and interest payments and have never been delinquent. Because the borrower operates in a territory that is not rate-regulated, it has the ability to adjust its electric rates to cover operatingsecuritize extraordinary costs and service debt. We currently expectexpenses incurred due to collect all principal and interestexposure to high power costs during the February 2021 polar vortex, including amounts due from them. Accordingly,owed to ERCOT. Qualifying cooperatives may issue bonds directly or through a special purpose vehicle legal entity. Payments on the loans outstanding to this borrower and its subsidiary were not deemedbonds are required to be impaired asmade over a period not to exceed 30 years. The bill also requires that cooperatives that owe ERCOT use all means necessary to securitize the amount owed, calculated according to ERCOT’s protocols in effect during the period of May 31, 2018.the February 2021 polar vortex, and stipulates that failure to pay such amount may result in being barred from the ERCOT-administered power market by the PUCT. While Brazos and Rayburn are eligible to utilize the provisions of this bill, we are currently uncertain whether they will elect to do so.
| (Dollars in thousands) | Notional Amount | Payable Due From CFC | Receivable Due to CFC | Net (Payable)/Receivable | ||||||||||||
| Impact of rating downgrade trigger: | ||||||||||||||||
Falls below A3/A-(1) | $ | 54,890 | $ | (9,355 | ) | $ | — | $ | (9,355 | ) | ||||||
| Falls below Baa1/BBB+ | 7,164,065 | (60,054 | ) | 38,057 | (21,997 | ) | ||||||||||
Falls to or below Baa2/BBB (2) | 530,980 | — | 4,533 | 4,533 | ||||||||||||
| Falls below Baa3/BBB- | 257,271 | (11,625 | ) | — | (11,625 | ) | ||||||||||
| Total | $ | 8,007,206 | $ | (81,034 | ) | $ | 42,590 | $ | (38,444 | ) | ||||||
Equity
Table 14 presents the components of $1total CFC equity and total equity as of May 31, 2021 and 2020.
Table 14: Equity
| May 31, | Change | |||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||||||||
| Equity components: | ||||||||||||||||||||
| Membership fees and educational fund: | ||||||||||||||||||||
| Membership fees | $ | 968 | $ | 969 | $ | (1) | ||||||||||||||
| Educational fund | 2,157 | 2,224 | (67) | |||||||||||||||||
| Total membership fees and educational fund | 3,125 | 3,193 | (68) | |||||||||||||||||
| Patronage capital allocated | 923,970 | 894,066 | 29,904 | |||||||||||||||||
| Members’ capital reserve | 909,749 | 807,320 | 102,429 | |||||||||||||||||
| Total allocated equity | 1,836,844 | 1,704,579 | 132,265 | |||||||||||||||||
| Unallocated net income (loss): | ||||||||||||||||||||
Prior fiscal year-end cumulative derivative forward value losses(1) | (1,079,739) | (348,965) | (730,774) | |||||||||||||||||
Year-to-date derivative forward value gains (losses) (1) | 618,577 | (730,774) | 1,349,351 | |||||||||||||||||
Period-end cumulative derivative forward value losses(1) | (461,162) | (1,079,739) | 618,577 | |||||||||||||||||
| Other unallocated net income | (709) | 3,191 | (3,900) | |||||||||||||||||
| Unallocated net loss | (461,871) | (1,076,548) | 614,677 | |||||||||||||||||
| CFC retained equity | 1,374,973 | 628,031 | 746,942 | |||||||||||||||||
| Accumulated other comprehensive loss | (25) | (1,910) | 1,885 | |||||||||||||||||
| Total CFC equity | 1,374,948 | 626,121 | 748,827 | |||||||||||||||||
| Noncontrolling interests | 24,931 | 22,701 | 2,230 | |||||||||||||||||
| Total equity | $ | 1,399,879 | $ | 648,822 | $ | 751,057 | ||||||||||||||
____________________________
(1)Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the variable interest
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entities NCSC and RTFC, which we are required to consolidate. We present the consolidated total derivative forward value gains (losses) in Table 38 in the “Non-GAAP Financial Measures” section below. Also, see “Note 16—Business Segments” for the statements of operations for CFC.
Total equity increased $751 million during fiscal year 2021 to $1,400 million as of May 31, 2018.2021, primarily attributable to our reported net income of $814 million, which was partially offset by the retirement of patronage capital of $60 million authorized by the CFC Board of Directors in July 2020 and paid to members in September 2020.
Allocation and Retirement of Patronage Capital
District of Columbia cooperative law requires cooperatives to allocate net earnings to patrons, to a general reserve in an amount sufficient to maintain a balance of at least 50% of paid-up capital and to a cooperative educational fund, as well as permits additional allocations to board-approved reserves. District of Columbia cooperative law also requires that a cooperative’s net earnings be allocated to all patrons in proportion to their individual patronage and each patron’s allocation be distributed to the patron unless the patron agrees that the cooperative may retain its share as additional capital. Pursuant to these provisions, the CFC Board of Directors is required to make annual allocations of net earnings, if any. CFC’s net earnings for determining allocations is based on non-GAAP adjusted net income, which excludes the impact of derivative forward value gains (losses). We 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.”
In May 2021, the CFC Board of Directors authorized the allocation of $1 million of net earnings for fiscal year 2021 to the cooperative educational fund. In July 2021, the CFC Board of Directors authorized the allocation of net earnings for fiscal year 2021 as follows: $90 million to members in the form of patronage capital and $102 million to the members’ capital reserve. In July 2021, the CFC Board of Directors also authorized the retirement of patronage capital totaling $58 million, of which $45 million represented 50% of the patronage capital allocation for fiscal year 2021 and $13 million represented the portion of the allocation from fiscal year 1996 net earnings that has been held for 25 years pursuant to the CFC Board of Directors’ policy. We expect to return the authorized patronage capital retirement amount of $58 million to members in cash in the second quarter of fiscal year 2022. The remaining portion of the patronage capital allocation for fiscal year 2021 will be retained by CFC for 25 years pursuant to the guidelines adopted by the CFC Board of Directors in June 2009.
In May 2020, the CFC Board of Directors authorized the allocation of $1 million of net earnings for fiscal year 2020 to the cooperative educational fund. In July 2020 the CFC Board of Directors authorized the allocation of net earnings for fiscal year 2020 as follows: $96 million to members in the form of patronage capital and $48 million to the members’ capital reserve. In July 2020, the CFC Board of Directors also authorized the retirement of patronage capital totaling $60 million, of which $48 million represented 50% of the patronage capital allocation for fiscal year 2020 and $12 million represented the portion of the allocation from net earnings for fiscal year 1995 that has been held for 25 years pursuant to the CFC Board of Directors’ policy. This amount was returned to members in cash in September 2020. The remaining portion of the patronage capital allocation for fiscal year 2020 will be retained by CFC for 25 years pursuant to the 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 41 of the last 42 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” in our 2020 Form 10-K and “Note 11—Equity” for additional information.
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| RISK MANAGEMENT | ||
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, including natural disasters or public health emergencies, such as the current COVID-19 pandemic. Operational risk also includes compliance risk, fiduciary risk, reputational risk and litigation risk.
Effective risk management is critical to our overall operations and to 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-management framework that is intended to govern the principal risks we face in conducting our business and the aggregate fair value amount of risk we are willing to accept, referred to as risk appetite and risk guidelines, in the context of CFC’s mission and strategic objectives and initiatives.
Risk-Management Framework
Our risk-management framework consists of defined policies, procedures and risk tolerances that are intended to align with CFC’s mission. The CFC Board of Directors is responsible for risk governance by approving the enterprise risk-management framework and providing oversight on risk policies, risk appetite, guidelines and our performance against established goals. In fulfilling its risk governance responsibility, the CFC Board of Directors receives periodic reports on business activities from management. The CFC Board of Directors reviews CFC’s risk profile and management’s assessment of those risks throughout the year at its periodic meetings. The board also establishes CFC’s loan policies and has established a Loan Committee of the board comprising no fewer than 10 directors that reviews the performance of the loan portfolio in accordance with those policies. For additional information about the role of the CFC Board of Directors in risk governance and oversight, see “Item 10. Directors, Executive Officers and Corporate Governance.”
Management is responsible for execution of the risk-management framework, risk policy formation and daily management of the risks associated with our business. Management executes its responsibility by establishing processes for identifying, measuring, assessing, managing, monitoring and reporting risks. Management and operating groups maintain policies and procedures, specific to each major risk category, to identify and measure our primary risk exposures at the transaction, obligor and portfolio levels and ensure that our exposures remain within prescribed limits. Management also is responsible for establishing and maintaining internal controls to mitigate key risks. We have a number of management-level risk oversight committees across the organization and groups within the organization that have a defined set of authorities and responsibilities specific to one or more risk types, including the Corporate Credit Committee, Credit Risk Management group, Treasury group, Asset Liability Committee, Investment Management Committee, Corporate Compliance, Internal Audit group, Business Technology Services group and Disclosure Committee. These risk oversight committees and groups collectively help management facilitate enterprise-wide understanding and monitoring of CFC’s risk profile and the control processes with respect to our inherent risks. Management and the risk oversight committees periodically report actual results, significant current and emerging risks, initiatives and risk-management concerns to the CFC Board of Directors.
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| CREDIT RISK | ||
Our loan portfolio, which represents the largest component of assets on our balance sheet, accounts for the substantial majority of our credit valuation adjustment, of allrisk exposure. We also engage in certain non-lending activities that may give rise to counterparty credit risk, such as entering into derivative transactions to manage interest rate swapsrisk and purchasing investment securities. Our primary credit exposure is loans to rural electric cooperatives, which 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.
Credit Risk Management
We manage credit risk related to our loan portfolio 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 triggers that weresystem in which we assign a net liability position was $81rating 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.
Loan Portfolio Credit Risk
As a 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 $27,995 million and $26,306 million as of May 31, 2018. There were no counterparties that fell below the rating trigger levels2021 and 2020, respectively, represented 99% of total loans outstanding as of each respective date. The remaining loans outstanding in our interest swap contractsportfolio 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 inherently 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 core 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, including security provisions, credit concentration, credit quality indicators and our allowance for credit 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.
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Table 15 presents, by loan type and by company, the amount and percentage of secured and unsecured loans in our loan portfolio as of May 31, 2018. If2021 and 2020. Of our total loans outstanding, 93% and 94% were secured as of May 31, 2021 and 2020, respectively.
Table 15: Loan Portfolio Security Profile
| May 31, 2021 | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Secured | % of Total | Unsecured | % of Total | Total | |||||||||||||||||||||||||||
| Loan type: | ||||||||||||||||||||||||||||||||
| Long-term loans: | ||||||||||||||||||||||||||||||||
| Long-term fixed-rate loans | $ | 25,278,805 | 99 | % | $ | 235,961 | 1 | % | $ | 25,514,766 | ||||||||||||||||||||||
| Long-term variable-rate loans | 655,675 | 100 | 2,904 | — | 658,579 | |||||||||||||||||||||||||||
| Total long-term loans | 25,934,480 | 99 | 238,865 | 1 | 26,173,345 | |||||||||||||||||||||||||||
| Line of credit loans | 376,991 | 17 | 1,864,771 | 83 | 2,241,762 | |||||||||||||||||||||||||||
Total loans outstanding(1) | $ | 26,311,471 | 93 | $ | 2,103,636 | 7 | $ | 28,415,107 | ||||||||||||||||||||||||
| Company: | ||||||||||||||||||||||||||||||||
| CFC | $ | 25,248,972 | 93 | % | $ | 2,038,884 | 7 | % | $ | 27,287,856 | ||||||||||||||||||||||
| NCSC | 662,782 | 94 | 44,086 | 6 | 706,868 | |||||||||||||||||||||||||||
| RTFC | 399,717 | 95 | 20,666 | 5 | 420,383 | |||||||||||||||||||||||||||
Total loans outstanding(1) | $ | 26,311,471 | 93 | $ | 2,103,636 | 7 | $ | 28,415,107 | ||||||||||||||||||||||||
| 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 $12 million and $11 million as of May 31, 2021 and 2020, respectively.
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 loans outstanding as of both May 31, 2021 and 2020.
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Geographic Concentration
Although our organizational structure and mission results in single-industry concentration, we serve a counterparty has a credit rating that falls belowgeographically diverse group of electric and telecommunications borrowers throughout the rating trigger level specifiedU.S. The consolidated number of borrowers with loans outstanding totaled 892 and 889 as of May 31, 2021 and 2020, respectively, located in 49 states. Of the interest swap contract, we have892 borrowers with loans outstanding as of May 31, 2021, 49 were electric power supply borrowers. In comparison, of the option889 borrowers with loans outstanding as of May 31, 2020, 52 were electric power supply borrowers. Electric power supply borrowers generally require significantly more capital than electric distribution and telecommunications borrowers.
Texas, which had 67 borrowers with loans outstanding as of both May 31, 2021 and 2020, accounted for the largest number of borrowers with loans outstanding in any one state as of each respective date. Texas also accounted for the largest concentration of loan exposure in any one state as of each respective date. Loans outstanding to terminate all derivatives withTexas-based electric utility organizations totaled $4,878 million and $4,222 million as of May 31, 2021 and 2020, respectively, and accounted for 17% and 16% of total loans outstanding as of each respective date. Of the counterparty. However, we generally do not terminate such agreements prematurely becauseloans outstanding to Texas-based electric utility organizations, $172 million and $181 million as of May 31, 2021 and 2020, respectively, were covered by the Farmer Mac standby repurchase agreement, which slightly reduced our interest rate swaps are critical to our matched funding strategy to mitigate interest rate risk.
Table 16 provides a breakdown, by state or U.S. territory, of the total number of borrowers with loans outstanding as of May 31, 2021 and 2020 and the outstanding loan exposure to borrowers in each jurisdiction as a percentage of total loans outstanding of $28,415 million and $26,691 million as of May 31, 2021 and 2020, respectively.
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| May 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| U.S. State/Territory | Number of Borrowers | % of Total Loans Outstanding | Number of Borrowers | % of Total Loans Outstanding | ||||||||||||||||||||||
| Alabama | 24 | 2.28 | % | 22 | 2.29 | % | ||||||||||||||||||||
| Alaska | 16 | 3.48 | 16 | 3.55 | ||||||||||||||||||||||
| Arizona | 11 | 0.80 | 11 | 0.82 | ||||||||||||||||||||||
| Arkansas | 20 | 2.21 | 20 | 2.32 | ||||||||||||||||||||||
| California | 4 | 0.12 | 4 | 0.13 | ||||||||||||||||||||||
| Colorado | 27 | 5.70 | 26 | 5.89 | ||||||||||||||||||||||
| Delaware | 3 | 0.31 | 3 | 0.40 | ||||||||||||||||||||||
| Florida | 18 | 3.84 | 18 | 4.15 | ||||||||||||||||||||||
| Georgia | 45 | 5.42 | 45 | 5.18 | ||||||||||||||||||||||
| Hawaii | 2 | 0.36 | 2 | 0.40 | ||||||||||||||||||||||
| Idaho | 11 | 0.40 | 11 | 0.46 | ||||||||||||||||||||||
| Illinois | 31 | 3.22 | 32 | 3.51 | ||||||||||||||||||||||
| Indiana | 39 | 3.21 | 39 | 3.11 | ||||||||||||||||||||||
| Iowa | 34 | 2.32 | 34 | 2.37 | ||||||||||||||||||||||
| Kansas | 29 | 4.13 | 31 | 4.40 | ||||||||||||||||||||||
| Kentucky | 23 | 2.65 | 23 | 2.81 | ||||||||||||||||||||||
| Louisiana | 9 | 1.95 | 10 | 0.92 | ||||||||||||||||||||||
| Maine | 3 | 0.08 | 2 | 0.03 | ||||||||||||||||||||||
| Maryland | 2 | 1.56 | 2 | 1.64 | ||||||||||||||||||||||
| Massachusetts | 1 | 0.21 | 1 | 0.23 | ||||||||||||||||||||||
| Michigan | 11 | 1.32 | 12 | 1.00 | ||||||||||||||||||||||
| Minnesota | 48 | 2.38 | 48 | 2.50 | ||||||||||||||||||||||
| Mississippi | 20 | 1.58 | 20 | 1.50 | ||||||||||||||||||||||
| Missouri | 46 | 5.65 | 45 | 5.42 | ||||||||||||||||||||||
| Montana | 25 | 0.77 | 25 | 0.75 | ||||||||||||||||||||||
| Nebraska | 12 | 0.10 | 12 | 0.11 | ||||||||||||||||||||||
| Nevada | 8 | 0.80 | 8 | 0.94 | ||||||||||||||||||||||
| New Hampshire | 2 | 0.30 | 1 | 0.30 | ||||||||||||||||||||||
| New Jersey | 2 | 0.06 | 2 | 0.07 | ||||||||||||||||||||||
| New Mexico | 13 | 0.20 | 14 | 0.23 | ||||||||||||||||||||||
| New York | 13 | 0.43 | 9 | 0.21 | ||||||||||||||||||||||
| North Carolina | 28 | 3.08 | 28 | 3.42 | ||||||||||||||||||||||
| North Dakota | 14 | 2.90 | 15 | 3.22 | ||||||||||||||||||||||
| Ohio | 27 | 2.18 | 27 | 2.27 | ||||||||||||||||||||||
| Oklahoma | 27 | 3.40 | 26 | 3.08 | ||||||||||||||||||||||
| Oregon | 19 | 1.27 | 19 | 1.33 | ||||||||||||||||||||||
| Pennsylvania | 16 | 1.78 | 16 | 1.92 | ||||||||||||||||||||||
| Rhode Island | 1 | 0.02 | 1 | 0.02 | ||||||||||||||||||||||
| South Carolina | 24 | 2.77 | 21 | 2.93 | ||||||||||||||||||||||
| South Dakota | 29 | 0.64 | 29 | 0.72 | ||||||||||||||||||||||
| Tennessee | 16 | 0.71 | 17 | 0.73 | ||||||||||||||||||||||
| Texas | 67 | 17.17 | 67 | 15.82 | ||||||||||||||||||||||
| Utah | 4 | 0.92 | 5 | 1.10 | ||||||||||||||||||||||
| Vermont | 5 | 0.18 | 5 | 0.20 | ||||||||||||||||||||||
| Virginia | 17 | 1.08 | 18 | 1.23 | ||||||||||||||||||||||
| Washington | 10 | 1.12 | 10 | 1.22 | ||||||||||||||||||||||
| West Virginia | 2 | 0.04 | 2 | 0.04 | ||||||||||||||||||||||
| Wisconsin | 23 | 1.82 | 24 | 1.89 | ||||||||||||||||||||||
| Wyoming | 11 | 1.08 | 11 | 1.22 | ||||||||||||||||||||||
| Total | 892 | 100.00 | % | 889 | 100.00 | % | ||||||||||||||||||||
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Single-Obligor Concentration
Table 17 displays the outstanding loan exposure for our 20 largest borrowers, by company, as of May 31, 2021 and 2020. The 20 largest borrowers consisted of 10 distribution systems and 10 power supply systems as of May 31, 2021. The 20 largest borrowers consisted of 11 distribution systems and nine power supply systems as of May 31, 2020. The largest total exposure to be the abilitya single borrower or controlled group represented less than 2% of total loans outstanding as of both May 31, 2021 and 2020.
Table 17: Loan Exposure to access funding or convert assets to cash quickly and efficiently, or to rollover or issue new debt, both under normal operating conditions and under periods of market stress, at a reasonable cost to ensure that we can meet borrower loan requests and other short-term cash obligations.20 Largest Borrowers
| May 31, | Change | |||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | % of Total | Amount | % of Total | ||||||||||||||||||||||||||||
| Company: | ||||||||||||||||||||||||||||||||
| CFC | $ | 5,978,342 | 21 | % | $ | 5,661,540 | 21 | % | $ | 316,802 | ||||||||||||||||||||||
| NCSC | 203,392 | 1 | 215,595 | 1 | (12,203) | |||||||||||||||||||||||||||
| Total loan exposure to 20 largest borrowers | 6,181,734 | 22 | 5,877,135 | 22 | 304,599 | |||||||||||||||||||||||||||
| Less: Loans covered under Farmer Mac standby purchase commitment | (308,580) | (1) | (313,644) | (1) | 5,064 | |||||||||||||||||||||||||||
| Net loan exposure to 20 largest borrowers | $ | 5,873,154 | 21 | % | $ | 5,563,491 | 21 | % | $ | 309,663 | ||||||||||||||||||||||
As part of our strategy in meeting our liquidity objectives,managing credit exposure to large borrowers, we seekentered into a long-term standby purchase commitment agreement with Farmer Mac during fiscal year 2016. Under this agreement, we may designate certain long-term loans to maintain accessbe covered under the commitment, subject to liquidityapproval by Farmer Mac, and in the formevent 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 both on-balance sheetdesignated and off-balance sheet funding sources that are readily accessible for immediate liquidity needs. Table 29 below presents the components of our liquidity reserve and a comparison of the amounts available as of May 31, 2018 and 2017.
| May 31, | ||||||||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||||||
| (Dollars in millions) | Total | Accessed | Available | Total | Accessed | Available | ||||||||||||||||||
| Cash and cash equivalents | $ | 231 | $ | — | $ | 231 | $ | 167 | $ | — | $ | 167 | ||||||||||||
Committed bank revolving line of credit agreements—unsecured(1) | 3,085 | 3 | 3,082 | 3,165 | 1 | 3,164 | ||||||||||||||||||
Guaranteed Underwriter Program committed facilities—secured(2) | 6,548 | 5,323 | 1,225 | 5,798 | 5,073 | 725 | ||||||||||||||||||
Farmer Mac revolving note purchase agreement, dated March 24, 2011, as amended—secured(3) | 5,200 | 2,791 | 2,409 | 4,500 | 2,513 | 1,987 | ||||||||||||||||||
| Farmer Mac revolving note purchase agreement, dated July 31, 2015, as amended—secured | 300 | 100 | 200 | 300 | — | 300 | ||||||||||||||||||
| Total | $ | 15,364 | $ | 8,217 | $ | 7,147 | $ | 13,930 | $ | 7,587 | $ | 6,343 | ||||||||||||
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 probability of borrower default and overall credit quality of our loan portfolio.
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 troubled 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 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
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We have not had any loan modifications that were required to be accounted for as TDRs since fiscal year 2016. Table 18 presents the outstanding amount of modified loans accounted for as TDRs in prior periods, by member class, and the performance status of these loans as of May 31, 2021 and 2020. The TDR loans outstanding 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.
Table 18: Troubled Debt Restructured Loans
| May 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 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 | $ | 5,756 | 0.02 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| RTFC | 1 | 4,592 | 0.02 | 1 | 5,092 | 0.02 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total TDR loans | 2 | $ | 9,971 | 0.04 | % | 2 | $ | 10,848 | 0.04 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Performance status of TDR loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing TDR loans | 2 | $ | 9,971 | 0.04 | % | 2 | $ | 10,848 | 0.04 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total TDR loans | 2 | $ | 9,971 | 0.04 | % | 2 | $ | 10,848 | 0.04 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
____________________________
(1) Represents the unpaid principal balance net of charge-offs and recoveries as of the end of each period.
We did not have any TDR loans classified as nonperforming as of either May 31, 2021 or May 31, 2020. Although TDR loans may be returned to performing status if the borrower performs under the modified terms of the loan for an extended period of time, TDR loans are evaluated on an individual basis in estimating lifetime expected credit losses under the CECL model for determining the allowance for credit losses.
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 loans as nonperforming at the earlier of the date when we determine: (i) interest or principal payments on the loan is past due 90 days or more; (ii) as a result of court proceedings, the collection of interest or principal payments based on the original contractual terms is not expected; or (iii) the full and timely collection of interest or principal is otherwise uncertain. Once 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 earnings. Table 19 presents the outstanding borrowings under our bank revolving linebalance of credit agreementsnonperforming loans, by member class, as of May 31, 2018.2021 and 2020.
Table 30: Committed Bank Revolving Line19: Nonperforming Loans
| May 31, | |||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Number of Borrowers | Outstanding Amount (1) | % of Total Loans Outstanding | Number of Borrowers | Outstanding Amount (1) | % of Total Loans Outstanding | |||||||||||||||||||||||||||||||||||
| Nonperforming loans: | |||||||||||||||||||||||||||||||||||||||||
CFC—Power supply(2) | 2 | $ | 228,312 | 0.81 | % | 1 | $ | 167,708 | 0.63 | % | |||||||||||||||||||||||||||||||
| RTFC | 2 | 9,185 | 0.03 | — | — | — | |||||||||||||||||||||||||||||||||||
| Total nonperforming loans | 4 | $ | 237,497 | 0.84 | % | 1 | $ | 167,708 | 0.63 | % | |||||||||||||||||||||||||||||||
____________________________
(1) Represents the unpaid principal balance net of Credit Agreements
| May 31, 2018 | ||||||||||||||||
| (Dollars in millions) | Total Commitment | Letters of Credit Outstanding | Net Available for Advance | Maturity | Annual Facility Fee (1) | |||||||||||
| 3-year agreement | $ | 1,492 | $ | — | $ | 1,492 | November 20, 2020 | 7.5 bps | ||||||||
| 5-year agreement | 1,593 | 3 | 1,590 | November 20, 2022 | 10 bps | |||||||||||
| Total | $ | 3,085 | $ | 3 | $ | 3,082 | ||||||||||
Nonperforming loans increased $69 million to $237 million, or rating triggers that would limit the banks’ obligations0.84% of total loans outstanding as of May 31, 2021, from $168 million, or 0.63% of total loans outstanding, as of May 31, 2020, primarily due to provide funding under the termsour classification of the agreements; however,loans
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outstanding of $85 million to Brazos as nonperforming in fiscal year 2021 as a result of its bankruptcy filing. In addition to Brazos, we must be in compliance with the covenantsclassified loans outstanding to draw on the facilities. We have been and expecttwo affiliated RTFC telecommunications borrowers as nonperforming during fiscal year 2021. Loans outstanding 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 “Financial Ratios” and “Debt Covenants” below for additional information, including the specific financial ratio requirements under our committed bank revolving line of credit agreements.
One loan to another CFC power supply borrower, with 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. This revolving note purchase agreement allows us to 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 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 timebalance 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 $2,791$143 million and $2,513$168 million as of May 31, 20182021 and 2017,2020, respectively, underaccounted for the Farmer Mac revolving note purchase agreementmajority of $5,200 million. The available borrowingnonperforming loans as of May 31, 2021, and the entire amount totaled $2,409of nonperforming loans as of May 31, 2020. Under the terms of this 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 forecast and underlying assumptions provided to us in May 2020, we no longer believed that the future expected cash payments from the borrower through the maturity of the loan in December 2026 would be sufficient to repay the outstanding loan balance. We therefore classified this loan as nonperforming, placed the loan on nonaccrual status and established an asset-specific allowance for credit losses as of May 31, 2020. Payments received from the borrower on this loan during fiscal year 2021 reduced the outstanding balance to $143 million as of May 31, 2018.2021. While the borrower is not in default and was current with respect to required payments on the loan as of May 31, 2021, we have continued to report the loan as nonperforming based on the expectation that we will not recover the full principal amount.
Net Charge-Offs
Charge-offs represent the amount of a loan that has been removed from our consolidated balance sheet when the loan is deemed uncollectible. Generally the amount of a charge-off is the recorded investment in excess of the fair value of the expected cash flows from the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral securing the loan. We report charge-offs net of amounts recovered on previously charged off loans. We did not experience any charge-offs during fiscal years 2021, 2020 or 2019. Prior to Brazos’ bankruptcy filing, we had not experienced any defaults or charge-offs in our electric utility loan portfolio since fiscal year 2013 and in our telecommunications loan portfolio since fiscal year 2017.
In our 52-year history, we have experienced only 17 defaults in our electric utility loan portfolio, which includes our most recent default by Brazos due to its bankruptcy filing in March 2021. Of the 16 defaults prior to Brazos, one remains unresolved with an expected ultimate resolution date in calendar year 2025, nine resulted in no loss and six resulted in cumulative net charge-offs of $86 million. Of this amount, $67 million was attributable to five electric power supply cooperatives and $19 million was attributable to one electric distribution cooperatives. We cite the factors that have historically contributed to the relatively low risk of default by our electric utility cooperatives, our principal lending market, above under “Credit Risk—Loan Portfolio Credit Risk.”
In comparison, since inception in 1987, RTFC has experienced 15 defaults and cumulative net charge-offs of $427 million in our telecommunications loan portfolio, the most significant of which was a charge-off of $354 million in fiscal year 2011. We recorded this charge-off, which related to loans outstanding to Innovative Communications Corporation (“ICC”), a former RTFC member, pursuant to 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 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. We categorize loans in our portfolio based on our internally assigned borrower risk ratings, which are intended to assess the general creditworthiness 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,
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substandard and doubtful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default.
We use our internal risk ratings to measure 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 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 the primary credit quality indicator for our loan portfolio. Because our internal borrower risk ratings provide important information on the probability of default, they are a key input in estimating our allowance for credit losses.
Criticized loans increased $515 million to $886 million as of May 31, 2021, from $371 million as of May 31, 2020, representing approximately 3% and 1% of total loans outstanding as of each respective date. The increase was primarily due to the material borrower risk-ratings downgrades of Brazos and Rayburn in fiscal year 2021 due to their exposure to elevated power costs during the February 2021 polar vortex. Brazos and Rayburn had loans outstanding of $85 million and $379 million, respectively, as of May 31, 2021, together totaling $464 million. Prior to the downgrades of the borrower risk ratings for Brazos and Rayburn to a rating in the “criticized” category, each borrower had a rating in the “pass” category. The increase also reflects the impact of a risk rating downgrade of a CFC electric distribution borrower made in fiscal year 2021. We downgraded the risk rating of this borrower, which had loans outstanding of $219 million as of May 31, 2021, from a rating in the “pass” category to a rating in “criticized” category. The risk rating downgrade for this CFC electric distribution borrower was attributable to the adverse financial impact from restoration costs incurred to repair damage caused by two successive hurricanes. We expect that the borrower will receive grant funds from the Federal Emergency Management Agency and the state where it is located for reimbursement of the hurricane damage-related restoration costs. Each of the borrowers downgraded to a criticized rating in fiscal year 2021, except Brazos, was current with regard to scheduled principal and interest amounts due as of May 31, 2021. As noted above under “Nonperforming Loans,” Brazos is not permitted to make scheduled loan payments without approval of the bankruptcy court. As a result, we have not received payments from Brazos, and its loans outstanding of $85 million were delinquent as of May 31, 2021.
The increase in criticized loans of $683 million attributable to the risk rating downgrades of the three borrowers discussed above was partially offset by an upgrade in the risk rating of a CFC electric distribution borrower and its subsidiary from a rating in the “criticized” category to a rating in the “pass” category in fiscal year 2021. The upgrade in the risk rating for this borrower, which had loans outstanding of $146 million as of May 31, 2021, was attributable to the borrower’s improved financial performance.
We provide additional information on our borrower risk rating classifications, including the amount of loans outstanding in each of the criticized loan categories of special mention, substandard and doubtful, in “Note 1—Summary of Significant Accounting Policies” and “Note 4—Loans.”
Allowance for Credit Losses
We adopted the CECL accounting standard using the modified retrospective approach 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 reserve for credit losses for our off-balance sheet credit exposures related to unadvanced loan commitments and financial guarantees from the adoption of CECL was not material. 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 our portfolio. 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. We discuss our methodology for estimating the allowance for credit losses under the CECL and incurred loss models in “Note 1—Summary of Significant Accounting Policies.”
Table 20 presents, by member borrower type, loans outstanding and the related allowance for credit losses and allowance coverage ratio as of May 31, 2021 and the allowance components. The allowance components, which are based on the evaluation method used to measure credit losses, consist of a collective allowance and an asset-specific allowance. 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. The allowance for
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credit losses as of May 31, 2020 is based on the incurred loss model, as our effective date for the adoption of CECL was June 1, 2020.
Table 20: Allowance for Credit Losses by Borrower Member Class and Evaluation Methodology
| May 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Loans Outstanding(1) | Allowance for Credit Losses | Allowance Coverage Ratio (2) | Loans Outstanding (1) | Allowance for Credit Losses | Allowance Coverage Ratio (2) | |||||||||||||||||||||||||||||||||||||||||||||||
| Member class: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| CFC: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distribution | $ | 22,027,423 | $ | 13,426 | 0.06 | % | $ | 20,769,653 | $ | 8,002 | 0.04 | % | |||||||||||||||||||||||||||||||||||||||||
| Power supply | 5,154,312 | 64,646 | 1.25 | 4,731,506 | 38,027 | 0.80 | |||||||||||||||||||||||||||||||||||||||||||||||
| Statewide and associate | 106,121 | 1,391 | 1.31 | 106,498 | 1,409 | 1.32 | |||||||||||||||||||||||||||||||||||||||||||||||
| CFC total | 27,287,856 | 79,463 | 0.29 | 25,607,657 | 47,438 | 0.19 | |||||||||||||||||||||||||||||||||||||||||||||||
| NCSC | 706,868 | 1,374 | 0.19 | 697,862 | 806 | 0.12 | |||||||||||||||||||||||||||||||||||||||||||||||
| RTFC | 420,383 | 4,695 | 1.12 | 385,335 | 4,881 | 1.27 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 28,415,107 | $ | 85,532 | 0.30 | $ | 26,690,854 | $ | 53,125 | 0.20 | |||||||||||||||||||||||||||||||||||||||||||
| Allowance components: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Collective allowance | $ | 28,167,639 | $ | 42,442 | 0.15 | % | $ | 26,512,298 | $ | 18,292 | 0.07 | % | |||||||||||||||||||||||||||||||||||||||||
| Asset-specific allowance | 247,468 | 43,090 | 17.41 | 178,556 | 34,833 | 19.51 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total allowance for credit losses | $ | 28,415,107 | $ | 85,532 | 0.30 | $ | 26,690,854 | $ | 53,125 | 0.20 | |||||||||||||||||||||||||||||||||||||||||||
| Allowance coverage ratios: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Percentage of nonperforming and nonaccrual loans (3) | $ | 237,497 | 36.01 | % | $ | 167,708 | 31.68 | % | |||||||||||||||||||||||||||||||||||||||||||||
___________________________
(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 and $11 million as of May 31, 2021 and 2020.
(2)Calculated based on the allowance for credit losses attributable to each member class divided by the related loans outstanding at period end.
(3)Calculated based on the total allowance for credit losses at period end divided by loans outstanding classified as nonperforming and on nonaccrual status at period end.
The allowance for credit losses increased $32 million to $86 million as of May 31, 2021, and the allowance coverage ratio increased to 0.30%. Of the $32 million increase in the allowance, $24 million was attributable to the collective allowance and $8 million was attributable to the asset-specific allowance.
The increase in the collective allowance of $24 million was primarily driven by the risk rating downgrade of Rayburn, a CFC Texas-based power supply borrower with loans outstanding of $379 million as of May 31, 2021, from a pass rating to a criticized rating in fiscal year 2021, coupled with a decrease we made in the recovery rate assumption for power supply loans during fiscal year 2021 and the addition to the collective allowance of $4 million upon our adoption of CECL using the modified retrospective approach on June 1, 2020. The increase in the asset-specific allowance of $8 million was primarily driven by the classification of loans outstanding to Brazos totaling $85 million as of May 31, 2021 as nonperforming due to its bankruptcy filing.
As indicated above in Table 20 , the increase in the allowance was largely attributable to CFC power supply loans. While there was not a material change in the allowance coverage ratios for most of our member classes, the allowance coverage ratio for CFC power supply loans increased 45 basis points to 1.25% as of May 31, 2021, from 0.80% as of May 31, 2020. Below we provide additional information on the primary conditions and factors that contributed to the allowance increase for CFC power supply loans and recent developments that we expect will have an impact on our estimated credit losses.
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Texas Polar Vortex
In mid-February 2021, Texas and several neighboring states experienced a series of severe winter storms and record-low temperatures as a result of a polar vortex. The freezing conditions affected power demand, supply and market prices in Texas, triggering unprecedented increases in electrical power load demand in combination with significant reductions in power supply across Texas, including a loss of almost half of the electric generation within the ERCOT service area. ERCOT raised wholesale electric power prices to $9,000 per megawatt-hour, to spur greater power generation by providing a financial incentive for power generators in the state to remain on-line. According to ERCOT data, pre-storm wholesale power prices were less than $50 per megawatt-hour. ERCOT also initiated controlled rolling power outages, which impacted millions of residential and commercial customers, to protect and maintain the stability of the Texas electric grid.
Impact of Texas Polar Vortex
The surge in wholesale electricity prices had a direct financial impact primarily on certain electric power supply utilities, including a significant adverse financial impact on two CFC Texas-based electric power supply borrowers, Brazos and Rayburn. These power supply borrowers had insufficient generation supply during the February 2021 polar vortex and were forced, at the height of the surge in power prices, to purchase power at peak prices to meet the electric demand of their member distribution system customers. On March 1, 2021, we were informed that Brazos filed for Chapter 11 bankruptcy protection. In fiscal year 2021, we downgraded Brazos’ borrower risk rating from a rating within the pass category to doubtful, classified its loans outstanding as nonperforming, placed the loans on nonaccrual status, and reversed unpaid interest amounts previously accrued and recognized in interest income. We had loans outstanding to Brazos of $85 million as of May 31, 2021, pursuant to a syndicated Bank of America revolving credit agreement, of which $64 million was unsecured and $21 million was secured. In the third quarter of fiscal year 2021, we also made a material downgrade in the borrower risk rating for Rayburn from a rating within the pass category to special mention. We further downgraded Rayburn’s borrower risk rating to substandard in the fourth quarter of fiscal year 2021. Loans outstanding to Rayburn consisted of secured loans of $167 million and unsecured loans of $212 million, which together totaled $379 million as of May 31, 2021. On March 12, 2021, the Public Utility Commission of Texas (“PUCT”) ordered ERCOT to extend the deadline for filing an invoice, settlement statements or resettlement statement dispute or exception to an invoice, settlement statement, or resettlement statement, related to ERCOT operating days from February 14, 2021 to February 19, 2021, to six months after ERCOT posted the invoice, settlement statement, or resettlement statement. Rayburn received an invoice for February 14, 2021 on February 16, 2021 and as a result the deadline for disputing this invoice is August 16, 2021.
Under the terms of the secondsyndicated Bank of America revolving note purchasecredit agreement, with Farmer Mac dated July 31, 2015, we can borrowin the event of bankruptcy by Brazos, each lending participant is permitted to hold any deposited or investment funds from Brazos, up to $300the amount of the participant’s exposure to Brazos pursuant to the agreement, for set-off against such exposure to Brazos. The total held by all participants is required to be shared among the participants in accordance with the pro rata share of each participant in the agreement. As of the bankruptcy filing date, funds on deposit from or invested by Brazos with participating lenders of the agreement, available for set-off against Brazos’ obligations, totaled $124 million. Based on our exposure of $85 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 outstanding borrowings$500 million syndicated Bank of $100 million as of May 31, 2018 under this revolving note purchaseAmerica agreement, with Farmer Mac. This advance was repaidour pro rata share set-off right is 17%, or approximately $21 million. The set-off rights have been agreed to and confirmed by Brazos and the bankruptcy court. In order to allow Brazos to access such deposited or invested funds, the lenders have been granted adequate protection liens and super-priority claims in full subsequent to May 31, 2018. The available borrowingan amount totaled $200 million as of May 31, 2018. We had no notes payable outstanding under this revolving note purchase agreement with Farmer Mac as of May 31, 2017. The second revolving note purchase agreement with Farmer Mac was amended effective July 31, 2018 to extended the maturity to December 20, 2023. Priorequal to the maturity date, Farmer Macdiminution of value of the amount available for set-off.
Texas Enactment of Legislation to Address Certain Polar-Vortex Related Costs
On June 18, 2021, the Texas governor signed into law Senate Bill 1580, the electric cooperative securitization bill, which became effective immediately with the governor’s signature. This bill allows electric cooperatives to securitize extraordinary costs and expenses incurred due to exposure to high power costs during the February 2021 polar vortex, including amounts owed to ERCOT. Qualifying cooperatives may terminateissue bonds directly or through a special purpose vehicle legal entity. Payments on the agreement on periodic facility renewal dates set forth in the agreement upon 30 days written notice to us. We may terminate the agreement upon 30 days written notice at any time.
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| May 31, | ||||||||||||||
| 2018 | 2017 | |||||||||||||
| (Dollars in thousands) | Outstanding Amount | % of Total Short-Term Borrowings | Outstanding Amount | % of Total Short-Term Borrowings | ||||||||||
| Funding source: | ||||||||||||||
| Members | $ | 2,631,644 | 69 | % | $ | 2,343,209 | 70 | % | ||||||
| Capital markets | 1,164,266 | 31 | 999,691 | 30 | ||||||||||
| Total short-term borrowings | $ | 3,795,910 | 100 | % | $ | 3,342,900 | 100 | % | ||||||
| May 31, 2018 | |||||||||||||||||
| (Dollars in thousands) | Amount Outstanding | Weighted- Average Interest Rate | Weighted-Average Maturity | Maximum Month-End Outstanding Amount | Average Outstanding Amount | ||||||||||||
| Short-term borrowings: | |||||||||||||||||
| Commercial paper: | |||||||||||||||||
| Commercial paper to dealers, net of discounts | $ | 1,064,266 | 1.87 | % | 14 days | $ | 2,548,147 | $ | 942,931 | ||||||||
| Commercial paper to members, at par | 1,202,105 | 1.89 | 34 days | 1,268,515 | 1,005,624 | ||||||||||||
| Total commercial paper | 2,266,371 | 1.88 | 25 days | 3,447,274 | 1,948,555 | ||||||||||||
| Select notes to members | 780,472 | 2.04 | 44 days | 780,472 | 727,313 | ||||||||||||
| Daily liquidity fund notes to members | 400,635 | 1.50 | 1 day | 866,065 | 618,705 | ||||||||||||
| Medium-term notes sold to members | 248,432 | 1.90 | 150 days | 248,432 | 217,122 | ||||||||||||
| Farmer Mac revolving facility | 100,000 | 2.23 | 61 days | 100,000 | 548 | ||||||||||||
| Total short-term borrowings | $ | 3,795,910 | 1.88 | 35 days | $ | 3,512,243 | |||||||||||
| May 31, 2017 | |||||||||||||||||
| (Dollars in thousands) | Amount Outstanding | Weighted- Average Interest Rate | Weighted-Average Maturity | Maximum Month-End Outstanding Amount | Average Outstanding Amount | ||||||||||||
| Short-term borrowings: | |||||||||||||||||
| Commercial paper: | |||||||||||||||||
| Commercial paper to dealers, net of discounts | $ | 999,691 | 0.93 | % | 13 days | $ | 2,048,954 | $ | 988,538 | ||||||||
| Commercial paper to members, at par | 928,158 | 0.95 | 24 days | 1,080,737 | 928,082 | ||||||||||||
| Total commercial paper | 1,927,849 | 0.94 | 18 days | 3,006,148 | 1,916,620 | ||||||||||||
| Select notes | 696,889 | 1.12 | 43 days | 840,990 | 726,276 | ||||||||||||
| Daily liquidity fund notes | 527,990 | 0.80 | 1 day | 687,807 | 542,188 | ||||||||||||
| Medium-term notes sold to members | 190,172 | 1.50 | 144 days | 203,246 | 194,045 | ||||||||||||
| Total short-term borrowings | $ | 3,342,900 | 0.99 | 28 days | $ | 3,379,129 | |||||||||||
| May 31, 2016 | |||||||||||||||||
| (Dollars in thousands) | Amount Outstanding | Weighted- Average Interest Rate | Weighted-Average Maturity | Maximum Month-End Outstanding Amount | Average Outstanding Amount | ||||||||||||
| Short-term borrowings: | |||||||||||||||||
| Commercial paper: | |||||||||||||||||
| Commercial paper to dealers, net of discounts | $ | 659,935 | 0.43 | % | 24 days | $ | 1,639,835 | $ | 944,928 | ||||||||
| Commercial paper to members, at par | 848,007 | 0.45 | 9 days | 1,001,361 | 789,723 | ||||||||||||
| Total commercial paper | 1,507,942 | 0.44 | 17 days | 2,445,894 | 1,734,651 | ||||||||||||
| Select notes | 701,849 | 0.62 | 43 days | 845,805 | 709,285 | ||||||||||||
| Daily liquidity fund notes | 525,959 | 0.34 | 1 day | 740,142 | 551,594 | ||||||||||||
| Medium-term notes sold to members | 203,098 | 1.05 | 161 days | 213,260 | 199,078 | ||||||||||||
| Total short-term borrowings | $ | 2,938,848 | 0.51 | 31 days | $ | 3,194,608 | |||||||||||
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 of $22,844 million and $22,038 million as of May 31, 2021 and 2020, respectively, accounted for 83% and 85%, of total debt outstanding as of each respective date. We provide additional information on our long-term debt below under “Liquidity Risk” and in “Note 7—Long-Term Debt” and “Note 8—Subordinated Deferrable Debt.”
Equity
Table 14 presents the components of total CFC equity and total equity as of May 31, 2021 and 2020.
Table 14: Equity
| May 31, | Change | |||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||||||||
| Equity components: | ||||||||||||||||||||
| Membership fees and educational fund: | ||||||||||||||||||||
| Membership fees | $ | 968 | $ | 969 | $ | (1) | ||||||||||||||
| Educational fund | 2,157 | 2,224 | (67) | |||||||||||||||||
| Total membership fees and educational fund | 3,125 | 3,193 | (68) | |||||||||||||||||
| Patronage capital allocated | 923,970 | 894,066 | 29,904 | |||||||||||||||||
| Members’ capital reserve | 909,749 | 807,320 | 102,429 | |||||||||||||||||
| Total allocated equity | 1,836,844 | 1,704,579 | 132,265 | |||||||||||||||||
| Unallocated net income (loss): | ||||||||||||||||||||
Prior fiscal year-end cumulative derivative forward value losses(1) | (1,079,739) | (348,965) | (730,774) | |||||||||||||||||
Year-to-date derivative forward value gains (losses) (1) | 618,577 | (730,774) | 1,349,351 | |||||||||||||||||
Period-end cumulative derivative forward value losses(1) | (461,162) | (1,079,739) | 618,577 | |||||||||||||||||
| Other unallocated net income | (709) | 3,191 | (3,900) | |||||||||||||||||
| Unallocated net loss | (461,871) | (1,076,548) | 614,677 | |||||||||||||||||
| CFC retained equity | 1,374,973 | 628,031 | 746,942 | |||||||||||||||||
| Accumulated other comprehensive loss | (25) | (1,910) | 1,885 | |||||||||||||||||
| Total CFC equity | 1,374,948 | 626,121 | 748,827 | |||||||||||||||||
| Noncontrolling interests | 24,931 | 22,701 | 2,230 | |||||||||||||||||
| Total equity | $ | 1,399,879 | $ | 648,822 | $ | 751,057 | ||||||||||||||
____________________________
(1)Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the variable interest
48
entities NCSC and RTFC, which we are required to consolidate. We present the consolidated total derivative forward value gains (losses) in Table 38 in the “Non-GAAP Financial Measures” section below. Also, see “Note 16—Business Segments” for the statements of operations for CFC.
Total equity increased $751 million during fiscal year 2021 to $1,400 million as of May 31, 2021, primarily attributable to our reported net income of $814 million, which was partially offset by the retirement of patronage capital of $60 million authorized by the CFC Board of Directors in July 2020 and paid to members in September 2020.
Allocation and Retirement of Patronage Capital
District of Columbia cooperative law requires cooperatives to allocate net earnings to patrons, to a general reserve in an amount sufficient to maintain a balance of at least 50% of paid-up capital and to a cooperative educational fund, as well as permits additional allocations to board-approved reserves. District of Columbia cooperative law also requires that a cooperative’s net earnings be allocated to all patrons in proportion to their individual patronage and each patron’s allocation be distributed to the patron unless the patron agrees that the cooperative may retain its share as additional capital. Pursuant to these provisions, the CFC Board of Directors is required to make annual allocations of net earnings, if any. CFC’s net earnings for determining allocations is based on non-GAAP adjusted net income, which excludes the impact of derivative forward value gains (losses). We 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.”
In May 2021, the CFC Board of Directors authorized the allocation of $1 million of net earnings for fiscal year 2021 to the cooperative educational fund. In July 2021, the CFC Board of Directors authorized the allocation of net earnings for fiscal year 2021 as follows: $90 million to members in the form of patronage capital and $102 million to the members’ capital reserve. In July 2021, the CFC Board of Directors also authorized the retirement of patronage capital totaling $58 million, of which $45 million represented 50% of the patronage capital allocation for fiscal year 2021 and $13 million represented the portion of the allocation from fiscal year 1996 net earnings that has been held for 25 years pursuant to the CFC Board of Directors’ policy. We expect to return the authorized patronage capital retirement amount of $58 million to members in cash in the second quarter of fiscal year 2022. The remaining portion of the patronage capital allocation for fiscal year 2021 will be retained by CFC for 25 years pursuant to the guidelines adopted by the CFC Board of Directors in June 2009.
In May 2020, the CFC Board of Directors authorized the allocation of $1 million of net earnings for fiscal year 2020 to the cooperative educational fund. In July 2020 the CFC Board of Directors authorized the allocation of net earnings for fiscal year 2020 as follows: $96 million to members in the form of patronage capital and $48 million to the members’ capital reserve. In July 2020, the CFC Board of Directors also authorized the retirement of patronage capital totaling $60 million, of which $48 million represented 50% of the patronage capital allocation for fiscal year 2020 and $12 million represented the portion of the allocation from net earnings for fiscal year 1995 that has been held for 25 years pursuant to the CFC Board of Directors’ policy. This amount was returned to members in cash in September 2020. The remaining portion of the patronage capital allocation for fiscal year 2020 will be retained by CFC for 25 years pursuant to the 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 41 of the last 42 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” in our 2020 Form 10-K and “Note 11—Equity” for additional information.
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| RISK MANAGEMENT | ||
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, including natural disasters or public health emergencies, such as the current COVID-19 pandemic. Operational risk also includes compliance risk, fiduciary risk, reputational risk and litigation risk.
Effective risk management is critical to our overall operations and to 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-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 and risk guidelines, in the context of CFC’s mission and strategic objectives and initiatives.
Risk-Management Framework
Our risk-management framework consists of defined policies, procedures and risk tolerances that are intended to align with CFC’s mission. The CFC Board of Directors is responsible for risk governance by approving the enterprise risk-management framework and providing oversight on risk policies, risk appetite, guidelines and our performance against established goals. In fulfilling its risk governance responsibility, the CFC Board of Directors receives periodic reports on business activities from management. The CFC Board of Directors reviews CFC’s risk profile and management’s assessment of those risks throughout the year at its periodic meetings. The board also establishes CFC’s loan policies and has established a Loan Committee of the board comprising no fewer than 10 directors that reviews the performance of the loan portfolio in accordance with those policies. For additional information about the role of the CFC Board of Directors in risk governance and oversight, see “Item 10. Directors, Executive Officers and Corporate Governance.”
Management is responsible for execution of the risk-management framework, risk policy formation and daily management of the risks associated with our business. Management executes its responsibility by establishing processes for identifying, measuring, assessing, managing, monitoring and reporting risks. Management and operating groups maintain policies and procedures, specific to each major risk category, to identify and measure our primary risk exposures at the transaction, obligor and portfolio levels and ensure that our exposures remain within prescribed limits. Management also is responsible for establishing and maintaining internal controls to mitigate key risks. We have a number of management-level risk oversight committees across the organization and groups within the organization that have a defined set of authorities and responsibilities specific to one or more risk types, including the Corporate Credit Committee, Credit Risk Management group, Treasury group, Asset Liability Committee, Investment Management Committee, Corporate Compliance, Internal Audit group, Business Technology Services group and Disclosure Committee. These risk oversight committees and groups collectively help management facilitate enterprise-wide understanding and monitoring of CFC’s risk profile and the control processes with respect to our inherent risks. Management and the risk oversight committees periodically report actual results, significant current and emerging risks, initiatives and risk-management concerns to the CFC Board of Directors.
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| CREDIT RISK | ||
Our loan portfolio, which represents the largest component of assets on our balance sheet, accounts for the substantial majority of our credit risk exposure. We also engage in certain non-lending activities that may give rise to counterparty credit risk, such as entering into derivative transactions to manage interest rate risk and purchasing investment securities. Our primary credit exposure is loans to rural electric cooperatives, which 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.
Credit Risk Management
We manage credit risk related to our loan portfolio 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.
Loan Portfolio Credit Risk
As a 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 $27,995 million and $26,306 million as of May 31, 2021 and 2020, respectively, represented 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 inherently 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 core 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, including security provisions, credit concentration, credit quality indicators and our allowance for credit 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.
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Table 15 presents, by loan type and by company, the amount and percentage of secured and unsecured loans in our loan portfolio as of May 31, 2021 and 2020. Of our total loans outstanding, 93% and 94% were secured as of May 31, 2021 and 2020, respectively.
Table 15: Loan Portfolio Security Profile
| May 31, 2021 | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Secured | % of Total | Unsecured | % of Total | Total | |||||||||||||||||||||||||||
| Loan type: | ||||||||||||||||||||||||||||||||
| Long-term loans: | ||||||||||||||||||||||||||||||||
| Long-term fixed-rate loans | $ | 25,278,805 | 99 | % | $ | 235,961 | 1 | % | $ | 25,514,766 | ||||||||||||||||||||||
| Long-term variable-rate loans | 655,675 | 100 | 2,904 | — | 658,579 | |||||||||||||||||||||||||||
| Total long-term loans | 25,934,480 | 99 | 238,865 | 1 | 26,173,345 | |||||||||||||||||||||||||||
| Line of credit loans | 376,991 | 17 | 1,864,771 | 83 | 2,241,762 | |||||||||||||||||||||||||||
Total loans outstanding(1) | $ | 26,311,471 | 93 | $ | 2,103,636 | 7 | $ | 28,415,107 | ||||||||||||||||||||||||
| Company: | ||||||||||||||||||||||||||||||||
| CFC | $ | 25,248,972 | 93 | % | $ | 2,038,884 | 7 | % | $ | 27,287,856 | ||||||||||||||||||||||
| NCSC | 662,782 | 94 | 44,086 | 6 | 706,868 | |||||||||||||||||||||||||||
| RTFC | 399,717 | 95 | 20,666 | 5 | 420,383 | |||||||||||||||||||||||||||
Total loans outstanding(1) | $ | 26,311,471 | 93 | $ | 2,103,636 | 7 | $ | 28,415,107 | ||||||||||||||||||||||||
| 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 $12 million and $11 million as of May 31, 2021 and 2020, respectively.
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 loans outstanding as of both May 31, 2021 and 2020.
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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 U.S. The consolidated number of borrowers with loans outstanding totaled 892 and 889 as of May 31, 2021 and 2020, respectively, located in 49 states. Of the 892 borrowers with loans outstanding as of May 31, 2021, 49 were electric power supply borrowers. In comparison, of the 889 borrowers with loans outstanding as of May 31, 2020, 52 were electric power supply borrowers. Electric power supply borrowers generally require significantly more capital than electric distribution and telecommunications borrowers.
Texas, which had 67 borrowers with loans outstanding as of both May 31, 2021 and 2020, accounted for the largest number of borrowers with loans outstanding in any one state as of each respective date. Texas also accounted for the largest concentration of loan exposure in any one state as of each respective date. Loans outstanding to Texas-based electric utility organizations totaled $4,878 million and $4,222 million as of May 31, 2021 and 2020, respectively, and accounted for 17% and 16% of total loans outstanding as of each respective date. Of the loans outstanding to Texas-based electric utility organizations, $172 million and $181 million as of May 31, 2021 and 2020, respectively, were covered by the Farmer Mac standby repurchase agreement, which slightly reduced our credit risk exposure to Texas borrowers. Of the 49 electric power supply borrowers with loans outstanding as of May 31, 2021, seven were located in Texas.
Table 16 provides a breakdown, by state or U.S. territory, of the total number of borrowers with loans outstanding as of May 31, 2021 and 2020 and the outstanding loan exposure to borrowers in each jurisdiction as a percentage of total loans outstanding of $28,415 million and $26,691 million as of May 31, 2021 and 2020, respectively.
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Table 16: Loan Geographic Concentration
| May 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| U.S. State/Territory | Number of Borrowers | % of Total Loans Outstanding | Number of Borrowers | % of Total Loans Outstanding | ||||||||||||||||||||||
| Alabama | 24 | 2.28 | % | 22 | 2.29 | % | ||||||||||||||||||||
| Alaska | 16 | 3.48 | 16 | 3.55 | ||||||||||||||||||||||
| Arizona | 11 | 0.80 | 11 | 0.82 | ||||||||||||||||||||||
| Arkansas | 20 | 2.21 | 20 | 2.32 | ||||||||||||||||||||||
| California | 4 | 0.12 | 4 | 0.13 | ||||||||||||||||||||||
| Colorado | 27 | 5.70 | 26 | 5.89 | ||||||||||||||||||||||
| Delaware | 3 | 0.31 | 3 | 0.40 | ||||||||||||||||||||||
| Florida | 18 | 3.84 | 18 | 4.15 | ||||||||||||||||||||||
| Georgia | 45 | 5.42 | 45 | 5.18 | ||||||||||||||||||||||
| Hawaii | 2 | 0.36 | 2 | 0.40 | ||||||||||||||||||||||
| Idaho | 11 | 0.40 | 11 | 0.46 | ||||||||||||||||||||||
| Illinois | 31 | 3.22 | 32 | 3.51 | ||||||||||||||||||||||
| Indiana | 39 | 3.21 | 39 | 3.11 | ||||||||||||||||||||||
| Iowa | 34 | 2.32 | 34 | 2.37 | ||||||||||||||||||||||
| Kansas | 29 | 4.13 | 31 | 4.40 | ||||||||||||||||||||||
| Kentucky | 23 | 2.65 | 23 | 2.81 | ||||||||||||||||||||||
| Louisiana | 9 | 1.95 | 10 | 0.92 | ||||||||||||||||||||||
| Maine | 3 | 0.08 | 2 | 0.03 | ||||||||||||||||||||||
| Maryland | 2 | 1.56 | 2 | 1.64 | ||||||||||||||||||||||
| Massachusetts | 1 | 0.21 | 1 | 0.23 | ||||||||||||||||||||||
| Michigan | 11 | 1.32 | 12 | 1.00 | ||||||||||||||||||||||
| Minnesota | 48 | 2.38 | 48 | 2.50 | ||||||||||||||||||||||
| Mississippi | 20 | 1.58 | 20 | 1.50 | ||||||||||||||||||||||
| Missouri | 46 | 5.65 | 45 | 5.42 | ||||||||||||||||||||||
| Montana | 25 | 0.77 | 25 | 0.75 | ||||||||||||||||||||||
| Nebraska | 12 | 0.10 | 12 | 0.11 | ||||||||||||||||||||||
| Nevada | 8 | 0.80 | 8 | 0.94 | ||||||||||||||||||||||
| New Hampshire | 2 | 0.30 | 1 | 0.30 | ||||||||||||||||||||||
| New Jersey | 2 | 0.06 | 2 | 0.07 | ||||||||||||||||||||||
| New Mexico | 13 | 0.20 | 14 | 0.23 | ||||||||||||||||||||||
| New York | 13 | 0.43 | 9 | 0.21 | ||||||||||||||||||||||
| North Carolina | 28 | 3.08 | 28 | 3.42 | ||||||||||||||||||||||
| North Dakota | 14 | 2.90 | 15 | 3.22 | ||||||||||||||||||||||
| Ohio | 27 | 2.18 | 27 | 2.27 | ||||||||||||||||||||||
| Oklahoma | 27 | 3.40 | 26 | 3.08 | ||||||||||||||||||||||
| Oregon | 19 | 1.27 | 19 | 1.33 | ||||||||||||||||||||||
| Pennsylvania | 16 | 1.78 | 16 | 1.92 | ||||||||||||||||||||||
| Rhode Island | 1 | 0.02 | 1 | 0.02 | ||||||||||||||||||||||
| South Carolina | 24 | 2.77 | 21 | 2.93 | ||||||||||||||||||||||
| South Dakota | 29 | 0.64 | 29 | 0.72 | ||||||||||||||||||||||
| Tennessee | 16 | 0.71 | 17 | 0.73 | ||||||||||||||||||||||
| Texas | 67 | 17.17 | 67 | 15.82 | ||||||||||||||||||||||
| Utah | 4 | 0.92 | 5 | 1.10 | ||||||||||||||||||||||
| Vermont | 5 | 0.18 | 5 | 0.20 | ||||||||||||||||||||||
| Virginia | 17 | 1.08 | 18 | 1.23 | ||||||||||||||||||||||
| Washington | 10 | 1.12 | 10 | 1.22 | ||||||||||||||||||||||
| West Virginia | 2 | 0.04 | 2 | 0.04 | ||||||||||||||||||||||
| Wisconsin | 23 | 1.82 | 24 | 1.89 | ||||||||||||||||||||||
| Wyoming | 11 | 1.08 | 11 | 1.22 | ||||||||||||||||||||||
| Total | 892 | 100.00 | % | 889 | 100.00 | % | ||||||||||||||||||||
54
Single-Obligor Concentration
Table 17 displays the outstanding loan exposure for our 20 largest borrowers, by company, as of May 31, 2021 and 2020. The 20 largest borrowers consisted of 10 distribution systems and 10 power supply systems as of May 31, 2021. The 20 largest borrowers consisted of 11 distribution systems and nine 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 May 31, 2021 and 2020.
Table 17: Loan Exposure to 20 Largest Borrowers
| May 31, | Change | |||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | % of Total | Amount | % of Total | ||||||||||||||||||||||||||||
| Company: | ||||||||||||||||||||||||||||||||
| CFC | $ | 5,978,342 | 21 | % | $ | 5,661,540 | 21 | % | $ | 316,802 | ||||||||||||||||||||||
| NCSC | 203,392 | 1 | 215,595 | 1 | (12,203) | |||||||||||||||||||||||||||
| Total loan exposure to 20 largest borrowers | 6,181,734 | 22 | 5,877,135 | 22 | 304,599 | |||||||||||||||||||||||||||
| Less: Loans covered under Farmer Mac standby purchase commitment | (308,580) | (1) | (313,644) | (1) | 5,064 | |||||||||||||||||||||||||||
| Net loan exposure to 20 largest borrowers | $ | 5,873,154 | 21 | % | $ | 5,563,491 | 21 | % | $ | 309,663 | ||||||||||||||||||||||
As part of our strategy in managing credit exposure to large borrowers, we entered into a long-term standby purchase commitment agreement with Farmer 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 $512 million and $569 million as of May 31, 2021 and 2020, respectively. Loan exposure to our 20 largest borrowers covered under the Farmer Mac agreement totaled $309 million and $314 million as of May 31, 2021 and 2020, respectively. No loans had been put to Farmer Mac for purchase pursuant to this agreement as of May 31, 2021. Our credit exposure is also mitigated by long-term loans guaranteed by RUS. Guaranteed RUS loans totaled $139 million and $147 million as of May 31, 2021 and 2020, 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 probability of borrower default and overall credit quality of our loan portfolio.
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 troubled 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 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
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We have not had any loan modifications that were required to be accounted for as TDRs since fiscal year 2016. Table 18 presents the outstanding amount of modified loans accounted for as TDRs in prior periods, by member class, and the performance status of these loans as of May 31, 2021 and 2020. The TDR loans outstanding 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.
Table 18: Troubled Debt Restructured Loans
| May 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 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 | $ | 5,756 | 0.02 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| RTFC | 1 | 4,592 | 0.02 | 1 | 5,092 | 0.02 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total TDR loans | 2 | $ | 9,971 | 0.04 | % | 2 | $ | 10,848 | 0.04 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Performance status of TDR loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing TDR loans | 2 | $ | 9,971 | 0.04 | % | 2 | $ | 10,848 | 0.04 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total TDR loans | 2 | $ | 9,971 | 0.04 | % | 2 | $ | 10,848 | 0.04 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
____________________________
(1) Represents the unpaid principal balance net of charge-offs and recoveries as of the end of each period.
We did not have any TDR loans classified as nonperforming as of either May 31, 2021 or May 31, 2020. Although TDR loans may be returned to performing status if the borrower performs under the modified terms of the loan for an extended period of time, TDR loans are evaluated on an individual basis in estimating lifetime expected credit losses under the CECL model for determining the allowance for credit losses.
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 loans as nonperforming at the earlier of the date when we determine: (i) interest or principal payments on the loan is past due 90 days or more; (ii) as a result of court proceedings, the collection of interest or principal payments based on the original contractual terms is not expected; or (iii) the full and timely collection of interest or principal is otherwise uncertain. Once 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 earnings. Table 19 presents the outstanding balance of nonperforming loans, by member class, as of May 31, 2021 and 2020.
Table 19: Nonperforming Loans
| May 31, | |||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Number of Borrowers | Outstanding Amount (1) | % of Total Loans Outstanding | Number of Borrowers | Outstanding Amount (1) | % of Total Loans Outstanding | |||||||||||||||||||||||||||||||||||
| Nonperforming loans: | |||||||||||||||||||||||||||||||||||||||||
CFC—Power supply(2) | 2 | $ | 228,312 | 0.81 | % | 1 | $ | 167,708 | 0.63 | % | |||||||||||||||||||||||||||||||
| RTFC | 2 | 9,185 | 0.03 | — | — | — | |||||||||||||||||||||||||||||||||||
| Total nonperforming loans | 4 | $ | 237,497 | 0.84 | % | 1 | $ | 167,708 | 0.63 | % | |||||||||||||||||||||||||||||||
____________________________
(1) Represents the unpaid principal balance net of charge-offs and recoveries as of the end of each period.
(2) In addition, we had less than $1 million letters of credit outstanding to Brazos as of May 31, 2021.
Nonperforming loans increased $69 million to $237 million, or 0.84% of total loans outstanding as of May 31, 2021, from $168 million, or 0.63% of total loans outstanding, as of May 31, 2020, primarily due to our classification of the loans
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outstanding of $85 million to Brazos as nonperforming in fiscal year 2021 as a result of its bankruptcy filing. In addition to Brazos, we classified loans outstanding to two affiliated RTFC telecommunications borrowers as nonperforming during fiscal year 2021. Loans outstanding to these RTFC borrowers totaled $9 million as of May 31, 2021. Brazos is not permitted to make scheduled loan payments without approval of the bankruptcy court. As a result, we have not received payments from Brazos, and its loans outstanding of $85 million were delinquent as of May 31, 2021. In comparison, we had no delinquent loans as of May 31, 2020. We provide additional information on Brazos and the impact of the February 2021 polar vortex on our Texas-based borrowers below under “Credit Risk—Allowance for Credit Losses.”
One loan to another CFC power supply borrower, with an outstanding balance of $143 million and $168 million as of May 31, 2021 and 2020, respectively, accounted for the majority of nonperforming loans as of May 31, 2021, and the entire amount of nonperforming loans as of May 31, 2020. Under the terms of this 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 forecast and underlying assumptions provided to us in May 2020, we no longer believed that the future expected cash payments from the borrower through the maturity of the loan in December 2026 would be sufficient to repay the outstanding loan balance. We therefore classified this loan as nonperforming, placed the loan on nonaccrual status and established an asset-specific allowance for credit losses as of May 31, 2020. Payments received from the borrower on this loan during fiscal year 2021 reduced the outstanding balance to $143 million as of May 31, 2021. While the borrower is not in default and was current with respect to required payments on the loan as of May 31, 2021, we have continued to report the loan as nonperforming based on the expectation that we will not recover the full principal amount.
Net Charge-Offs
Charge-offs represent the amount of a loan that has been removed from our consolidated balance sheet when the loan is deemed uncollectible. Generally the amount of a charge-off is the recorded investment in excess of the fair value of the expected cash flows from the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral securing the loan. We report charge-offs net of amounts recovered on previously charged off loans. We did not experience any charge-offs during fiscal years 2021, 2020 or 2019. Prior to Brazos’ bankruptcy filing, we had not experienced any defaults or charge-offs in our electric utility loan portfolio since fiscal year 2013 and in our telecommunications loan portfolio since fiscal year 2017.
In our 52-year history, we have experienced only 17 defaults in our electric utility loan portfolio, which includes our most recent default by Brazos due to its bankruptcy filing in March 2021. Of the 16 defaults prior to Brazos, one remains unresolved with an expected ultimate resolution date in calendar year 2025, nine resulted in no loss and six resulted in cumulative net charge-offs of $86 million. Of this amount, $67 million was attributable to five electric power supply cooperatives and $19 million was attributable to one electric distribution cooperatives. We cite the factors that have historically contributed to the relatively low risk of default by our electric utility cooperatives, our principal lending market, above under “Credit Risk—Loan Portfolio Credit Risk.”
In comparison, since inception in 1987, RTFC has experienced 15 defaults and cumulative net charge-offs of $427 million in our telecommunications loan portfolio, the most significant of which was a charge-off of $354 million in fiscal year 2011. We recorded this charge-off, which related to loans outstanding to Innovative Communications Corporation (“ICC”), a former RTFC member, pursuant to 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 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. We categorize loans in our portfolio based on our internally assigned borrower risk ratings, which are intended to assess the general creditworthiness 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,
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substandard and doubtful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default.
We use our internal risk ratings to measure 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 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 the primary credit quality indicator for our loan portfolio. Because our internal borrower risk ratings provide important information on the probability of default, they are a key input in estimating our allowance for credit losses.
Criticized loans increased $515 million to $886 million as of May 31, 2021, from $371 million as of May 31, 2020, representing approximately 3% and 1% of total loans outstanding as of each respective date. The increase was primarily due to the material borrower risk-ratings downgrades of Brazos and Rayburn in fiscal year 2021 due to their exposure to elevated power costs during the February 2021 polar vortex. Brazos and Rayburn had loans outstanding of $85 million and $379 million, respectively, as of May 31, 2021, together totaling $464 million. Prior to the downgrades of the borrower risk ratings for Brazos and Rayburn to a rating in the “criticized” category, each borrower had a rating in the “pass” category. The increase also reflects the impact of a risk rating downgrade of a CFC electric distribution borrower made in fiscal year 2021. We downgraded the risk rating of this borrower, which had loans outstanding of $219 million as of May 31, 2021, from a rating in the “pass” category to a rating in “criticized” category. The risk rating downgrade for this CFC electric distribution borrower was attributable to the adverse financial impact from restoration costs incurred to repair damage caused by two successive hurricanes. We expect that the borrower will receive grant funds from the Federal Emergency Management Agency and the state where it is located for reimbursement of the hurricane damage-related restoration costs. Each of the borrowers downgraded to a criticized rating in fiscal year 2021, except Brazos, was current with regard to scheduled principal and interest amounts due as of May 31, 2021. As noted above under “Nonperforming Loans,” Brazos is not permitted to make scheduled loan payments without approval of the bankruptcy court. As a result, we have not received payments from Brazos, and its loans outstanding of $85 million were delinquent as of May 31, 2021.
The increase in criticized loans of $683 million attributable to the risk rating downgrades of the three borrowers discussed above was partially offset by an upgrade in the risk rating of a CFC electric distribution borrower and its subsidiary from a rating in the “criticized” category to a rating in the “pass” category in fiscal year 2021. The upgrade in the risk rating for this borrower, which had loans outstanding of $146 million as of May 31, 2021, was attributable to the borrower’s improved financial performance.
We provide additional information on our borrower risk rating classifications, including the amount of loans outstanding in each of the criticized loan categories of special mention, substandard and doubtful, in “Note 1—Summary of Significant Accounting Policies” and “Note 4—Loans.”
Allowance for Credit Losses
We adopted the CECL accounting standard using the modified retrospective approach 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 reserve for credit losses for our off-balance sheet credit exposures related to unadvanced loan commitments and financial guarantees from the adoption of CECL was not material. 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 our portfolio. 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. We discuss our methodology for estimating the allowance for credit losses under the CECL and incurred loss models in “Note 1—Summary of Significant Accounting Policies.”
Table 20 presents, by member borrower type, loans outstanding and the related allowance for credit losses and allowance coverage ratio as of May 31, 2021 and the allowance components. The allowance components, which are based on the evaluation method used to measure credit losses, consist of a collective allowance and an asset-specific allowance. 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. The allowance for
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credit losses as of May 31, 2020 is based on the incurred loss model, as our effective date for the adoption of CECL was June 1, 2020.
Table 20: Allowance for Credit Losses by Borrower Member Class and Evaluation Methodology
| May 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Loans Outstanding(1) | Allowance for Credit Losses | Allowance Coverage Ratio (2) | Loans Outstanding (1) | Allowance for Credit Losses | Allowance Coverage Ratio (2) | |||||||||||||||||||||||||||||||||||||||||||||||
| Member class: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| CFC: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distribution | $ | 22,027,423 | $ | 13,426 | 0.06 | % | $ | 20,769,653 | $ | 8,002 | 0.04 | % | |||||||||||||||||||||||||||||||||||||||||
| Power supply | 5,154,312 | 64,646 | 1.25 | 4,731,506 | 38,027 | 0.80 | |||||||||||||||||||||||||||||||||||||||||||||||
| Statewide and associate | 106,121 | 1,391 | 1.31 | 106,498 | 1,409 | 1.32 | |||||||||||||||||||||||||||||||||||||||||||||||
| CFC total | 27,287,856 | 79,463 | 0.29 | 25,607,657 | 47,438 | 0.19 | |||||||||||||||||||||||||||||||||||||||||||||||
| NCSC | 706,868 | 1,374 | 0.19 | 697,862 | 806 | 0.12 | |||||||||||||||||||||||||||||||||||||||||||||||
| RTFC | 420,383 | 4,695 | 1.12 | 385,335 | 4,881 | 1.27 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 28,415,107 | $ | 85,532 | 0.30 | $ | 26,690,854 | $ | 53,125 | 0.20 | |||||||||||||||||||||||||||||||||||||||||||
| Allowance components: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Collective allowance | $ | 28,167,639 | $ | 42,442 | 0.15 | % | $ | 26,512,298 | $ | 18,292 | 0.07 | % | |||||||||||||||||||||||||||||||||||||||||
| Asset-specific allowance | 247,468 | 43,090 | 17.41 | 178,556 | 34,833 | 19.51 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total allowance for credit losses | $ | 28,415,107 | $ | 85,532 | 0.30 | $ | 26,690,854 | $ | 53,125 | 0.20 | |||||||||||||||||||||||||||||||||||||||||||
| Allowance coverage ratios: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Percentage of nonperforming and nonaccrual loans (3) | $ | 237,497 | 36.01 | % | $ | 167,708 | 31.68 | % | |||||||||||||||||||||||||||||||||||||||||||||
___________________________
(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 and $11 million as of May 31, 2021 and 2020.
(2)Calculated based on the allowance for credit losses attributable to each member class divided by the related loans outstanding at period end.
(3)Calculated based on the total allowance for credit losses at period end divided by loans outstanding classified as nonperforming and on nonaccrual status at period end.
The allowance for credit losses increased $32 million to $86 million as of May 31, 2021, and the allowance coverage ratio increased to 0.30%. Of the $32 million increase in the allowance, $24 million was attributable to the collective allowance and $8 million was attributable to the asset-specific allowance.
The increase in the collective allowance of $24 million was primarily driven by the risk rating downgrade of Rayburn, a CFC Texas-based power supply borrower with loans outstanding of $379 million as of May 31, 2021, from a pass rating to a criticized rating in fiscal year 2021, coupled with a decrease we made in the recovery rate assumption for power supply loans during fiscal year 2021 and the addition to the collective allowance of $4 million upon our adoption of CECL using the modified retrospective approach on June 1, 2020. The increase in the asset-specific allowance of $8 million was primarily driven by the classification of loans outstanding to Brazos totaling $85 million as of May 31, 2021 as nonperforming due to its bankruptcy filing.
As indicated above in Table 20 , the increase in the allowance was largely attributable to CFC power supply loans. While there was not a material change in the allowance coverage ratios for most of our member classes, the allowance coverage ratio for CFC power supply loans increased 45 basis points to 1.25% as of May 31, 2021, from 0.80% as of May 31, 2020. Below we provide additional information on the primary conditions and factors that contributed to the allowance increase for CFC power supply loans and recent developments that we expect will have an impact on our estimated credit losses.
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Texas Polar Vortex
In mid-February 2021, Texas and several neighboring states experienced a series of severe winter storms and record-low temperatures as a result of a polar vortex. The freezing conditions affected power demand, supply and market prices in Texas, triggering unprecedented increases in electrical power load demand in combination with significant reductions in power supply across Texas, including a loss of almost half of the electric generation within the ERCOT service area. ERCOT raised wholesale electric power prices to $9,000 per megawatt-hour, to spur greater power generation by providing a financial incentive for power generators in the state to remain on-line. According to ERCOT data, pre-storm wholesale power prices were less than $50 per megawatt-hour. ERCOT also initiated controlled rolling power outages, which impacted millions of residential and commercial customers, to protect and maintain the stability of the Texas electric grid.
Impact of Texas Polar Vortex
The surge in wholesale electricity prices had a direct financial impact primarily on certain electric power supply utilities, including a significant adverse financial impact on two CFC Texas-based electric power supply borrowers, Brazos and Rayburn. These power supply borrowers had insufficient generation supply during the February 2021 polar vortex and were forced, at the height of the surge in power prices, to purchase power at peak prices to meet the electric demand of their member distribution system customers. On March 1, 2021, we were informed that Brazos filed for Chapter 11 bankruptcy protection. In fiscal year 2021, we downgraded Brazos’ borrower risk rating from a rating within the pass category to doubtful, classified its loans outstanding as nonperforming, placed the loans on nonaccrual status, and reversed unpaid interest amounts previously accrued and recognized in interest income. We had loans outstanding to Brazos of $85 million as of May 31, 2021, pursuant to a syndicated Bank of America revolving credit agreement, of which $64 million was unsecured and $21 million was secured. In the third quarter of fiscal year 2021, we also made a material downgrade in the borrower risk rating for Rayburn from a rating within the pass category to special mention. We further downgraded Rayburn’s borrower risk rating to substandard in the fourth quarter of fiscal year 2021. Loans outstanding to Rayburn consisted of secured loans of $167 million and unsecured loans of $212 million, which together totaled $379 million as of May 31, 2021. On March 12, 2021, the Public Utility Commission of Texas (“PUCT”) ordered ERCOT to extend the deadline for filing an invoice, settlement statements or resettlement statement dispute or exception to an invoice, settlement statement, or resettlement statement, related to ERCOT operating days from February 14, 2021 to February 19, 2021, to six months after ERCOT posted the invoice, settlement statement, or resettlement statement. Rayburn received an invoice for February 14, 2021 on February 16, 2021 and as a result the deadline for disputing this invoice is August 16, 2021.
Under the terms of the syndicated Bank of America revolving credit agreement, in the event of bankruptcy by Brazos, each lending participant is permitted to hold any deposited or investment funds from Brazos, up to the amount of the participant’s exposure to Brazos pursuant to the agreement, for set-off against such exposure to Brazos. The total held by all participants is required to be shared among the participants in accordance with the pro rata share of each participant in the agreement. As of the bankruptcy filing date, funds on deposit from or invested by Brazos with participating lenders of the agreement, available for set-off against Brazos’ obligations, totaled $124 million. Based on our exposure of $85 million under the $500 million syndicated Bank of America agreement, our pro rata share set-off right is 17%, or approximately $21 million. The set-off rights have been agreed to and confirmed by Brazos and the bankruptcy court. In order to allow Brazos to access such deposited or invested funds, the lenders have been granted adequate protection liens and super-priority claims in an amount equal to the diminution of value of the amount available for set-off.
Texas Enactment of Legislation to Address Certain Polar-Vortex Related Costs
On June 18, 2021, the Texas governor signed into law Senate Bill 1580, the electric cooperative securitization bill, which became effective immediately with the governor’s signature. This bill allows electric cooperatives to securitize extraordinary costs and expenses incurred due to exposure to high power costs during the February 2021 polar vortex, including amounts owed to ERCOT. Qualifying cooperatives may issue bonds directly or through a special purpose vehicle legal entity. Payments on the bonds are required to be made over a period not to exceed 30 years. The bill also requires that cooperatives that owe ERCOT use all means necessary to securitize the amount owed, calculated according to ERCOT’s protocols in effect during the period of the February 2021 polar vortex, and stipulates that failure to pay such amount may result in being barred from the ERCOT-administered power market by the PUCT. While Brazos and Rayburn are eligible to utilize the provisions of this bill, we are currently uncertain whether they will elect to do so.
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Counterparty Credit Risk
We are exposed to counterparty credit risk related to the performance of the parties with which we enter into financial transactions, primarily for derivative instruments, cash and time deposit accounts and our investment 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 monitoring the overall creditworthiness 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 be a participant in one of our committed bank revolving line of credit agreements. Our active derivative counterparties had credit ratings ranging from Aa2 to Baa2 by Moody’s and from AA- to A- by S&P as of May 31, 2021. Our largest counterparty exposure, based on the outstanding notional amount, represented approximately 24% and 25% of the total outstanding notional amount of derivatives as of May 31, 2021 and 2020, respectively.
Credit Risk-Related Contingent Features
Our derivative contracts typically contain mutual early-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 below 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 prevailing fair value, as defined in the agreement, as of the termination date.
Our senior unsecured credit ratings from Moody’s, S&P and Fitch were A2, A- and A, respectively, as of May 31, 2021. Moody’s and Fitch had our ratings on stable outlook as of May 31, 2021. S&P had our ratings on negative outlook as of May 31, 2021. As discussed below under “Liquidity Risk—Credit Ratings,” on March 5, 2021, S&P downgraded our senior unsecured credit ratings from A to A- with a negative outlook. No action on our ratings had been taken by Moody’s or Fitch as of the date of this Report. Table 21displays the outstanding notional amounts of our derivative contracts with rating triggers as of May 31, 2021, 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, 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 21: Rating Triggers for Derivatives
| (Dollars in thousands) | Notional Amount | Payable Due From CFC | Receivable Due to CFC | Net (Payable)/Receivable | ||||||||||||||||||||||
| Impact of rating downgrade trigger: | ||||||||||||||||||||||||||
Falls below A3/A-(1) | $ | 41,080 | $ | (8,168) | $ | — | $ | (8,168) | ||||||||||||||||||
| Falls below Baa1/BBB+ | 6,031,373 | (304,922) | — | (304,922) | ||||||||||||||||||||||
Falls to or below Baa2/BBB (2) | 407,712 | (14,835) | — | (14,835) | ||||||||||||||||||||||
| Total | $ | 6,480,165 | $ | (327,925) | $ | — | $ | (327,925) | ||||||||||||||||||
___________________________
(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 21 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, respectively. The outstanding notional amount of interest rate swaps with this counterparty totaled $222 million as of May 31, 2021, and the swaps were in an unrealized loss position of $22 million as of May 31, 2021.
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The aggregate fair value amount, including the credit valuation adjustment, of all interest rate swaps with rating triggers that were in a net liability position was $344 million as of May 31, 2021, 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 May 31, 2021. 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 prior to maturity because our interest rate swaps are critical to our matched funding strategy to mitigate interest rate risk.
See “Item 1A. Risk Factors” for additional information about credit risks related to our business.
| LIQUIDITY RISK | ||
We define liquidity as the ability to convert assets into cash quickly and efficiently, maintain access to available funding and to roll over or issue new debt under normal operating conditions and periods of CFC-specific and/or market stress, to ensure that we can meet borrower loan requests, pay current and future obligations and fund our operations on a cost-effective basis. Our primary sources of liquidity include cash flows from operations, member loan repayments, securities held in our investment portfolio, committed bank revolving lines of credit, committed loan facilities under 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. Our primary uses of liquidity include loan advances to members, principal and interest payments on borrowings, periodic settlement payments related to derivative contracts and operating expenses.
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 other financial obligations, issue new debt and fund our operations on a cost-effective basis under normal operating conditions as well as under CFC-specific and/or market stress conditions. We engage in various activities to manage liquidity risk and achieve 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.
Available Liquidity
As part of our strategy in managing liquidity risk and meeting our liquidity objectives, we seek to maintain various sources of liquidity that are available to meet our near-term liquidity needs. Table 22 presents the sources of liquidity available for access as of May 31, 2021 and 2020.
Table 22: AvailableLiquidity
| May 31, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Total | Accessed | Available | Total | Accessed | Available | ||||||||||||||||||||||||||||||||
| Liquidity sources: | ||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 295 | N/A | $ | 295 | $ | 671 | N/A | $ | 671 | ||||||||||||||||||||||||||||
Debt securities investment portfolio(1) | 576 | N/A | 576 | 309 | N/A | 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) | 8,173 | 7,198 | 975 | 7,798 | 6,898 | 900 | ||||||||||||||||||||||||||||||||
Farmer Mac revolving note purchase agreement, dated March 24, 2011, as amended—secured(4) | 5,500 | 2,978 | 2,522 | 5,500 | 3,060 | 2,440 | ||||||||||||||||||||||||||||||||
| Total available liquidity | $ | 17,269 | $ | 10,179 | $ | 7,090 | $ | 17,003 | $ | 9,961 | $ | 7,042 | ||||||||||||||||||||||||||
____________________________
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(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. As part of a securities repurchase transaction, we pledged $211 million of our debt investment securities as of May 31, 2021. We repurchased these securities on June 2, 2021.
(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 $3 million as of both May 31, 2021 and May 31, 2020 relates to letters of credit issued pursuant to the five-year revolving line of credit agreement.
(3)The committed facilities under the Guaranteed Underwriter Program are not revolving.
(4)Availability subject to market conditions.
Investment Securities Portfolio
We have an investment portfolio of debt securities classified as trading and equity securities, which are reported on our consolidated balance sheets at fair value. The fair value of the securities in our investment portfolio was $611 million as of May 31, 2021, consisting of debt securities with a fair value of $576 million and equity securities with a fair value of $35 million. In comparison, the fair value of the securities in our investment portfolio was $370 million as of May 31, 2020, consisting of debt securities with a fair value of $309 million and equity securities with a fair value of $61 million.
Our debt securities investment portfolio, which increased $267 million to $576 million as of May 31, 2021, is intended to serve as an additional source of liquidity. The increase in our debt securities investment portfolio during fiscal year 2021 was largely due to the purchase of additional securities. During the fourth quarter of fiscal year 2020, we executed a plan for the orderly liquidation of a portion of our debt securities from our investment portfolio due to volatility in the financial markets at that time and the potential for future disruptions caused by the COVID-19 pandemic. As volatility across financial markets stabilized during the first quarter of our fiscal year 2021, we gradually purchased additional securities to restore the amount of our debt securities investment portfolio to a level more comparable with the level prior to the liquidation.
Our debt securities investment portfolio is 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 our investment securities portfolio in “Note 3—Investment Securities.”
Borrowing Capacity Under Current Facilities
Following is a discussion of our borrowing capacity and key terms and conditions under our revolving line of 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 $2,725 million of commitments under committed bank revolving line of credit agreements as of May 31, 2021. 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.
Table 23 presents the total commitment amount under our committed bank revolving line of credit agreements, outstanding letters of credit and the amount available for access as of May 31, 2021. We did not have any outstanding borrowings under our bank revolving line of credit agreements as of May 31, 2021.
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Table 23: Committed Bank Revolving Line of Credit Agreements
| May 31, 2021 | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | Total Commitment | Letters of Credit Outstanding | Available Amount | Maturity | Annual Facility Fee (1) | |||||||||||||||||||||||||||
| 3-year agreement | $ | 1,315 | $ | — | $ | 1,315 | November 28, 2022 | 7.5 bps | ||||||||||||||||||||||||
| 5-year agreement | 1,410 | 3 | 1,407 | November 28, 2023 | 10 bps | |||||||||||||||||||||||||||
| Total | $ | 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 “Financial Ratios” and “Debt Covenants” below for additional information, including the specific financial ratio requirements under our committed bank revolving line of credit agreements.
Subsequent to our fiscal year-end, on June 7, 2021, we amended the three-year and five-year committed bank revolving line of credit agreements to extend the maturity dates to November 28, 2024 and November 28, 2025, respectively, and to terminate certain bank commitments totaling $70 million under the three-year agreement and $55 million under the five-year agreement. As a result, the total commitment amount under the three-year facility and the five-year facility is $1,245 million and $1,355 million, respectively, resulting in a combined total commitment amount under the two facilities of $2,600 million.
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, supporting the USDA Rural Economic Development Loan and Grant program. The borrowings under this program are guaranteed by RUS.
On November 19, 2020, we closed on a $375 million committed loan facility (“Series R”) from the Federal Financing Bank under the Guaranteed Underwriter Program. Pursuant to this facility, we may borrow any time before July 15, 2025. Each advance is subject to quarterly amortization and a final maturity not longer than 30 years from the date of the advance. We borrowed $300 million and redeemed $150 million of notes payable outstanding under the Guaranteed Underwriter Program during the year ended May 31, 2021. This new commitment increases total funding available to CFC under committed loan facilities from the Federal Financing Bank (“FFB”) to $975 million. Of this amount, $100 million is available for advance through July 15, 2023, $500 million is available for advance through July 15, 2024 and $375 million is available for advance through July 15, 2025.
The notes payable to FFB 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.
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” for additional information on pledged collateral.
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Farmer Mac Revolving Note Purchase Agreement—Secured
As indicated in Table 22, we have a 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. On May 20, 2021, we amended our revolving note purchase agreement with Farmer Mac to automatically extend the draw period from January 11, 2022 to June 30, 2026, with successive automatic one-year renewals without notice by either party. Beginning June 30, 2025, the revolving note purchase agreement is subject to termination of the draw period by Farmer Mac upon 425 days’ prior written notice. Pursuant to this revolving note purchase agreement, we 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 agreement, we had outstanding secured notes payable totaling $2,978 million and $3,060 million as of May 31, 2021 and 2020, respectively. We borrowed $500 million under this note purchase agreement with Farmer Mac during the year ended May 31, 2021. The amount available for borrowing under this agreement was $2,522 million as of May 31, 2021.
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 this agreement. See “Consolidated Balance Sheet Analysis—Debt—Collateral Pledged” and “Note 4—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 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 borrowings consist of commercial paper, which we offer to members and dealers, select notes and daily liquidity fund notes offered to members, bank-bid notes, medium-term notes offered to members and dealers and securities sold under repurchase agreements. Table 24 displays information on the composition, by product type, of our outstanding short-term borrowings as of May 31, 2021 and 2020.
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Table 24: Short-Term Borrowings—Outstanding Amount and Weighted-Average Interest Rates
| May 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| (Dollars in thousands) | Outstanding Amount | Weighted- Average Interest Rate | Outstanding Amount | Weighted-Average Interest Rate | ||||||||||||||||||||||
| Short-term borrowings: | ||||||||||||||||||||||||||
| Commercial paper: | ||||||||||||||||||||||||||
| Commercial paper sold through dealers, net of discounts | $ | 894,977 | 0.16 | % | $ | — | — | % | ||||||||||||||||||
| Commercial paper sold directly to members, at par | 1,124,607 | 0.14 | 1,318,566 | 0.34 | ||||||||||||||||||||||
| Total commercial paper | 2,019,584 | 0.15 | 1,318,566 | 0.34 | ||||||||||||||||||||||
| Select notes to members | 1,539,150 | 0.30 | 1,597,959 | 0.75 | ||||||||||||||||||||||
| Daily liquidity fund notes | 460,556 | 0.08 | 508,618 | 0.10 | ||||||||||||||||||||||
| Medium-term notes sold to members | 362,691 | 0.42 | 286,842 | 1.64 | ||||||||||||||||||||||
Farmer Mac notes payable (1) | — | — | 250,000 | 1.06 | ||||||||||||||||||||||
| Securities sold under repurchase agreements | 200,115 | 0.30 | — | — | ||||||||||||||||||||||
| Total short-term borrowings outstanding | $ | 4,582,096 | 0.22 | $ | 3,961,985 | 0.62 | ||||||||||||||||||||
___________________________
(1)Advanced under the revolving note purchase agreement with Farmer Mac dated March 24, 2011. See “Note 7—Long-Term Debt” for additional information on this revolving note purchase agreement with Farmer Mac.
Our short-term borrowings increased $620 million to $4,582 million as of May 31, 2021, and accounted for 17% of total debt outstanding, from $3,962 million as of May 31, 2020 and 15% of total debt outstanding. The weighted-average cost of our outstanding short-term borrowings decreased to 0.22% as of May 31, 2021, from 0.62% as of May 31, 2020. The weighted-average maturity of our short-term borrowings decreased to 38 days as of May 31, 2021, from 50 days as of May 31, 2020.
The increase in short-term borrowings was driven primarily by issuances of dealer commercial paper and secured borrowings under a repurchase agreement. Outstanding dealer commercial paper totaled $895 million as of May 31, 2021. We had no outstanding dealer commercial paper as of May 31, 2020. Although the intra-period amount of outstanding dealer commercial paper may fluctuate based on our liquidity requirements, 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. In fiscal year 2021, we entered into two master repurchase agreements under which we may sell debt securities from our investment portfolio to the counterparty with a commitment to repurchase such securities back from the counterparty. The transactions pursuant to these repurchase agreements do not quality for sale accounting. We therefore are required to account for the transactions as secured borrowings.
Table 25 displays our outstanding short-term borrowings, by funding source, as May 31, 2021 and 2020.
Table 25: Short-Term Borrowings—Funding Sources
| May 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| (Dollars in thousands) | Outstanding Amount | % of Total Short-Term Borrowings | Outstanding Amount | % of Total Short-Term Borrowings | ||||||||||||||||||||||
| Funding source: | ||||||||||||||||||||||||||
| Members | $ | 3,487,004 | 76 | % | $ | 3,711,985 | 94 | % | ||||||||||||||||||
| Private placement—Farmer Mac notes payable | — | — | 250,000 | 6 | ||||||||||||||||||||||
| Capital markets | 1,095,092 | 24 | — | — | ||||||||||||||||||||||
| Total | $ | 4,582,096 | 100 | % | $ | 3,961,985 | 100 | % | ||||||||||||||||||
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Members accounted for 76% of the source of our outstanding short-term borrowings as of May 31, 2021, down from 94% as of May 31, 2020.
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 effectively 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 Act,, 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 U.S. Securities and subordinatedExchange Commission (“SEC”), we may offer and issue the following debt securities under which we can register securities:
•an unlimited amount of collateral trust bonds until October 2023;
•an unlimited amount of senior and subordinated debt securities, including medium-term notes, member capital securities and subordinated deferrable debt, until November 2020. Pursuant to our effective shelf registration statements filed with the SEC, we may offerOctober 2023; and issue the following debt securities:
•daily liquidity fund notes up to $20,000 million in the aggregate—with a $3,000 million limit on the aggregate principal amount outstanding at any time—until March 2019.2022.
Although we register member capital securities and the daily liquidity fund notes with the SEC, these securities are not available for sale to the general public. Medium-term notes are available for sale to both the general public and members.
Notwithstanding the foregoing, we have contractual limitations with respect to the amount of senior indebtedness we may incur.
As discussed in “Consolidated“Consolidated Balance Sheet Analysis—Debt,” long-term long-term and subordinated debt totaled $20,837of $22,844 million and $22,038 million as of May 31, 2021 and 2020, respectively, accounted for 83% and 85% of total debt outstanding as of May 31, 2018, compared with $20,117 million, or 86%, of total debt outstanding as of May 31, 2017.each respective date. 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. Table 3326 summarizes long-term and subordinated debt issuances and repayments during fiscal year 2018.2021.
Table 33: Issuances and Repayments of26: Long-Term and Subordinated Debt(1) Issuances and Repayments
| Year Ended May 31, 2021 | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Issuances | Repayments (1) | Change | |||||||||||||||||||||||||||||
| Debt product type: | ||||||||||||||||||||||||||||||||
| Collateral trust bonds | $ | 750,000 | $ | 755,000 | $ | (5,000) | ||||||||||||||||||||||||||
| Guaranteed Underwriter Program notes payable | 300,000 | 292,009 | 7,991 | |||||||||||||||||||||||||||||
| Farmer Mac notes payable | 500,000 | 331,728 | 168,272 | |||||||||||||||||||||||||||||
| Medium-term notes sold to members | 60,146 | 199,917 | (139,771) | |||||||||||||||||||||||||||||
| Medium-term notes sold to dealers | 1,461,235 | 604,240 | 856,995 | |||||||||||||||||||||||||||||
| Other notes payable | — | 3,564 | (3,564) | |||||||||||||||||||||||||||||
| Members’ subordinated certificates | 14,292 | 84,659 | (70,367) | |||||||||||||||||||||||||||||
| Total | $ | 3,085,673 | $ | 2,271,117 | $ | 814,556 | ||||||||||||||||||||||||||
| Year Ended May 31, 2018 | ||||||||||||
| (Dollars in thousands) | Issuances | Repayments (1) | Increase/(Decrease) | |||||||||
Long-term and subordinated debt activity:(2) | ||||||||||||
| Collateral trust bonds | $ | 700,000 | $ | 705,000 | $ | (5,000 | ) | |||||
| Guaranteed Underwriter Program notes payable | 250,000 | 379,374 | (129,374 | ) | ||||||||
| Farmer Mac notes payable | 325,000 | 46,893 | 278,107 | |||||||||
| Medium-term notes sold to members | 230,130 | 257,520 | (27,390 | ) | ||||||||
| Medium-term notes sold to dealers | 856,166 | 216,650 | 639,516 | |||||||||
| Other notes payable | — | 5,565 | (5,565 | ) | ||||||||
| Members’ subordinated certificates | 6,136 | 45,180 | (39,044 | ) | ||||||||
| Total | $ | 2,367,432 | $ | 1,656,182 | $ | 711,250 | ||||||
(1)Repayments include principal maturities, scheduled amortization payments, repurchases and redemptions.
We provide additional information on our financing activities above under “Consolidated Balance Sheet Analysis—Debt” and on the weighted-average interest rates on our long-term debt and subordinated certificates in “Note 6—7—Long-Term Debt”,Debt,” “Note 7—8—Subordinated Deferrable Debt” and “Note 8—9—Members’ Subordinated Certificates”.Certificates.”
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million, or 61%, was secured by pledged loans totaling $19,153 million and 2017, respectively. We intendpledged investments totaling $211 million. In comparison, of our total debt outstanding of $26,000 million as of May 31, 2020, $16,515 million, or 64%, was secured by pledged loans totaling $19,643 million. Following is additional information on the collateral pledging requirements for our investment portfoliosecured borrowing agreements.
Secured Borrowing Agreements—Pledged Loan Requirements
We are required to remain adequately liquid to serve as a contingent supplemental source of liquidity for unanticipated liquidity needs.
sheets net of unamortized discounts and issuance costs. Our investment portfolio is unencumberedcollateral pledging requirements are based, however, on the face amount of secured outstanding debt, which excludes net unamortized discounts and structured so that securities have active secondary or resale markets under normal market conditions. The objectiveissuance costs. We are required to maintain pledged collateral equal to at least 100% of the portfolioface amount of outstanding borrowings. However, as discussed below, we typically maintain pledged collateral in excess of the required 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, the Guaranteed Underwriter Program or the Farmer Mac note purchase agreements. 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 27 displays the collateral coverage ratios pursuant to these secured borrowing agreements as of May 31, 2021 and 2020.
Table 27: Collateral Pledged
| Requirement Coverage Ratios | Actual Coverage Ratios(1) | |||||||||||||||||||||||||
| Minimum Debt Indentures | Maximum Committed Bank Revolving Line of Credit Agreements | May 31, | ||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Secured borrowing agreement: | ||||||||||||||||||||||||||
| Collateral trust bonds 1994 indenture | 100 | % | 150 | % | 116 | % | 114 | % | ||||||||||||||||||
| Collateral trust bonds 2007 indenture | 100 | 150 | 115 | 113 | ||||||||||||||||||||||
| Guaranteed Underwriter Program notes payable | 100 | 150 | 114 | 120 | ||||||||||||||||||||||
| Farmer Mac notes payable | 100 | 150 | 116 | 121 | ||||||||||||||||||||||
| Clean Renewable Energy Bonds Series 2009A | 100 | 150 | 120 | 120 | ||||||||||||||||||||||
____________________________
(1) Calculated based on the amount of collateral pledged divided by the face amount of outstanding secured debt.
Table 28 displays the unpaid principal balance of loans pledged for secured debt, the excess collateral pledged and unencumbered loans as of May 31, 2021 and 2020.
Table 28: Unencumbered Loans
| May 31, | ||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||
Total loans outstanding(1) | $ | 28,415,107 | $ | 26,690,854 | ||||||||||
Less: Loans required to be pledged for secured debt (2) | (16,704,335) | (16,784,728) | ||||||||||||
Loans pledged in excess of requirement(2)(3) | (2,448,424) | (2,858,238) | ||||||||||||
| Total pledged loans | $ | (19,152,759) | $ | (19,642,966) | ||||||||||
| Unencumbered loans | $ | 9,262,348 | $ | 7,047,888 | ||||||||||
| Unencumbered loans as a percentage of total loans outstanding | 33% | 26 | % | |||||||||||
____________________________
(1)Represents the unpaid principal balance of loans as of the end of each period. Excludes unamortized deferred loan origination costs of $12 million and $11 million as of May 31, 2021 and 2020, respectively.
(2)Reflects unpaid principal balance of pledged loans.
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(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 28, we had excess loans pledged as collateral totaling $2,448 million and $2,858 million as of May 31, 2021 and 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 achieve returns commensurate with the levelprepay their loans; and (iii) individual loans may become ineligible for various reasons, some of risk assumed subject to CFC’s investment policy and guidelines and liquidity requirements.which may be temporary.
We provide additional information on available-for-saleour borrowings, including the maturity profile, below in “Liquidity Risk.” Also refer to “Note 6—Short-Term Borrowings,” “Note 7—Long-Term Debt,” “Note 8—Subordinated Deferrable Debt” and held-to-maturity investment“Note 9—Members’ Subordinated Certificates” for additional information on each of our debt product types. See “Note 4—Loans—Pledged Loans” for additional information related to pledged collateral.
Secured Borrowing Agreements—Pledged Investment Securities
In fiscal year 2021, we entered into two master repurchase agreements under which we may transfer debt securities held infrom our investment debt securities portfolio to the counterparty with a commitment to repurchase the transferred securities back from the counterparty. The transactions pursuant to these repurchase agreements do not quality for sale accounting. We therefore are required to account for the transactions as secured borrowings. The transferred debt securities represent pledged collateral for the secured borrowings under the repurchase agreements.
On May 25, 2021, we borrowed $200 million under the repurchase agreements and transferred debt securities to the counterparty. On June 2, 2021, we repurchased the transferred debt securities, which had a fair value of $211 million as of May 31, 2021. We report the transferred debt securities as pledged collateral on our consolidated balance sheet as of May 31, 2021.
Member Loan Repayments
Table 29 displays future scheduled loan principal payment amounts, by member class and by loan type, on loans outstanding as of May 31, 2021, disaggregated by amounts due (i) in one year or less; (ii) after one year up to five years; (iii) after five years up to 15 years; and (iv) after 15 years.
Table 29: Loans—Maturities of Scheduled Principal Payments
| May 31, 2021 | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Due ≤ 1 Year | Due > 1 Year Up to 5 Years | Due > 5 Years Up to 15 Years | Due After 15 Years | Total | |||||||||||||||||||||||||||
| Member class: | ||||||||||||||||||||||||||||||||
| CFC: | ||||||||||||||||||||||||||||||||
| Distribution | $ | 2,074,765 | $ | 4,258,198 | $ | 9,123,783 | $ | 6,570,677 | $ | 22,027,423 | ||||||||||||||||||||||
| Power supply | 605,433 | 1,337,364 | 1,851,289 | 1,360,226 | 5,154,312 | |||||||||||||||||||||||||||
| Statewide and associate | 9,316 | 63,697 | 16,625 | 16,483 | 106,121 | |||||||||||||||||||||||||||
| Total CFC | 2,689,514 | 5,659,259 | 10,991,697 | 7,947,386 | 27,287,856 | |||||||||||||||||||||||||||
| NCSC | 106,025 | 185,076 | 317,343 | 98,424 | 706,868 | |||||||||||||||||||||||||||
| RTFC | 40,619 | 150,116 | 229,648 | — | 420,383 | |||||||||||||||||||||||||||
| Total loans outstanding | $ | 2,836,158 | $ | 5,994,451 | $ | 11,538,688 | $ | 8,045,810 | $ | 28,415,107 | ||||||||||||||||||||||
| Loan type: | ||||||||||||||||||||||||||||||||
| Fixed rate | $ | 1,342,258 | $ | 5,100,545 | $ | 11,283,853 | $ | 7,788,110 | $ | 25,514,766 | ||||||||||||||||||||||
| Variable rate | 1,493,900 | 893,906 | 254,835 | 257,700 | 2,900,341 | |||||||||||||||||||||||||||
| Total loans outstanding | $ | 2,836,158 | $ | 5,994,451 | $ | 11,538,688 | $ | 8,045,810 | $ | 28,415,107 | ||||||||||||||||||||||
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Contractual Obligations
Our contractual obligations affect both our short- and long-term liquidity needs. Our most significant contractual obligations include scheduled payments on our debt obligations. Table 30 displays scheduled amounts due on our debt obligations in each of the next five fiscal years and thereafter. The amounts presented reflect undiscounted future cash payment amounts due pursuant to these obligations, aggregated by the type of contractual obligation. The table excludes certain obligations where the obligation is short-term, such as trade payables, or where the amount is not fixed and determinable, such as derivatives subject to valuation based on market factors. The timing of actual future payments may differ from those presented due to a number of factors, such as discretionary debt redemptions or changes in interest rates that may impact our expected future cash interest payments.
Table 30: Contractual Obligations(1)
| Fiscal Year Ended May 31, | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | |||||||||||||||||||||||||||||||||||||
| Short-term borrowings | $ | 4,582 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 4,582 | ||||||||||||||||||||||||||||||
| Long-term debt | 2,598 | 1,844 | 1,652 | 842 | 2,428 | 11,520 | 20,884 | |||||||||||||||||||||||||||||||||||||
| Subordinated deferrable debt | — | — | — | — | — | 1,000 | 1,000 | |||||||||||||||||||||||||||||||||||||
Members’ subordinated certificates(2) | 7 | 19 | 11 | 10 | 55 | 1,153 | 1,255 | |||||||||||||||||||||||||||||||||||||
| Total long-term and subordinated debt | 2,605 | 1,863 | 1,663 | 852 | 2,483 | 13,673 | 23,139 | |||||||||||||||||||||||||||||||||||||
Contractual interest on long-term debt(3) | 644 | 597 | 558 | 528 | 482 | 5,038 | 7,847 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 7,831 | $ | 2,460 | $ | 2,221 | $ | 1,380 | $ | 2,965 | $ | 18,711 | $ | 35,568 | ||||||||||||||||||||||||||||||
____________________________
(1)Callable debt is included in this table at its contractual maturity.
(2 Member loan subordinated certificates totaling $190 million are amortizing annually based on the unpaid principal balance of the related loan. Amortization payments on these certificates totaled $13 million in fiscal year 2021 and represented 7% of amortizing loan subordinated certificates outstanding.
(3) Represents the amounts of future interest payments on long-term and subordinated debt outstanding as of May 31, 2021, based on the contractual terms of the securities. These amounts were determined based on certain assumptions, including that variable-rate debt continues to accrue interest at the contractual rates in effect as of May 31, 2021 until maturity, and redeemable debt continues to accrue interest until its contractual maturity.
Off-Balance Sheet Arrangements
In the ordinary course of business, we engage in financial transactions that are not presented on our consolidated balance sheets, or may be recorded on our 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 unadvanced loan commitments intended to meet the financial needs of our members and guarantees of member obligations, which may affect our liquidity requirements based on the likelihood that borrowers will advance funds under the loan commitments or we will be required to perform under the guarantee obligations. We provide additional information about our unadvanced loan commitments, including amounts outstanding, in “Note 3—Investment Securities.4—Loans” and our guarantee obligations in “Note 13—Guarantees.”
Our contractual obligations affect both our short- and Useslong-term liquidity needs. Our most significant contractual obligations include scheduled payments on our debt obligations. Table 30 displays scheduled amounts due on our debt obligations in each of Liquiditythe next five fiscal years and thereafter. The amounts presented reflect undiscounted future cash payment amounts due pursuant to these obligations, aggregated by the type of contractual obligation. The table excludes certain obligations where the obligation is short-term, such as trade payables, or where the amount is not fixed and determinable, such as derivatives subject to valuation based on market factors. The timing of actual future payments may differ from those presented due to a number of factors, such as discretionary debt redemptions or changes in interest rates that may impact our expected future cash interest payments.
| Fiscal Year Ended May 31, | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | |||||||||||||||||||||||||||||||||||||
| Short-term borrowings | $ | 4,582 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 4,582 | ||||||||||||||||||||||||||||||
| Long-term debt | 2,598 | 1,844 | 1,652 | 842 | 2,428 | 11,520 | 20,884 | |||||||||||||||||||||||||||||||||||||
| Subordinated deferrable debt | — | — | — | — | — | 1,000 | 1,000 | |||||||||||||||||||||||||||||||||||||
Members’ subordinated certificates(2) | 7 | 19 | 11 | 10 | 55 | 1,153 | 1,255 | |||||||||||||||||||||||||||||||||||||
| Total long-term and subordinated debt | 2,605 | 1,863 | 1,663 | 852 | 2,483 | 13,673 | 23,139 | |||||||||||||||||||||||||||||||||||||
Contractual interest on long-term debt(3) | 644 | 597 | 558 | 528 | 482 | 5,038 | 7,847 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 7,831 | $ | 2,460 | $ | 2,221 | $ | 1,380 | $ | 2,965 | $ | 18,711 | $ | 35,568 | ||||||||||||||||||||||||||||||
____________________________
(1)Callable debt is included in this table at its contractual maturity.
(2 Member loan subordinated certificates totaling $190 million are amortizing annually based on the unpaid principal balance of liquidity include cash flows from operations, short-term borrowings, our liquidity reservethe related loan. Amortization payments on these certificates totaled $13 million in fiscal year 2021 and represented 7% of amortizing loan subordinated certificates outstanding.
(3) Represents the issuanceamounts of future interest payments on long-term and subordinated debt as well as loan principal and interest payments. Our primary uses of liquidity include loan advances to members, principal and interest payments on borrowings, periodic settlement payments related to derivative contracts and operating expenses.
Off-Balance Sheet Arrangements
In the ordinary course of business, we engage in financial transactions that are not presented on our consolidated balance sheets, or may be recorded on our 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 unadvanced loan commitments intended to meet the financial needs of our members and guarantees of member obligations, which may affect our liquidity requirements based on the likelihood that borrowers will advance funds under the loan commitments or we will be required to perform under the guarantee obligations. We provide additional information about our unadvanced loan commitments, including amounts outstanding, in “Note 4—Loans” 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.guarantee obligations in “Note 13—Guarantees.”
| 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) | |||||||||||||||||||||||||||
| 1Q FY 2019 | $ | 635 | $ | 395 | $ | — | $ | 1,030 | $ | 466 | $ | 522 | $ | 95 | $ | 1,083 | $ | (53 | ) | |||||||||||||||||
| 2Q FY 2019 | 1,350 | 317 | 55 | 1,722 | 1,301 | 446 | — | 1,747 | 38 | |||||||||||||||||||||||||||
| 3Q FY 2019 | 1,250 | 291 | — | 1,541 | 780 | 586 | — | 1,366 | (77 | ) | ||||||||||||||||||||||||||
| 4Q FY 2019 | 400 | 320 | — | 720 | 477 | 304 | — | 781 | (52 | ) | ||||||||||||||||||||||||||
| 1Q FY 2020 | 195 | 312 | — | 507 | 167 | 408 | — | 575 | 65 | |||||||||||||||||||||||||||
| 2Q FY 2020 | 700 | 281 | 55 | 1,036 | 678 | 396 | — | 1,074 | 24 | |||||||||||||||||||||||||||
| Total | $ | 4,530 | $ | 1,916 | $ | 110 | $ | 6,556 | $ | 3,869 | $ | 2,662 | $ | 95 | $ | 6,626 | $ | (55 | ) | |||||||||||||||||
Contractual Obligations
Our contractual obligations affect both our short- and long-term liquidity needs. Table 35 displays aggregated information about the listed categories of ourOur most significant contractual obligations as of May 31, 2018. The table provides informationinclude scheduled payments on the contractual maturity profile of our debt securities basedobligations. Table 30 displays scheduled amounts due on our debt obligations in each of the next five fiscal years and thereafter. The amounts presented reflect undiscounted future cash payment amounts due pursuant to these obligations, aggregated by the type of contractual obligation. The table excludes certain obligations where the obligation is short-term, such as trade payables, or where the amount is not fixed and determinable, such as derivatives subject to valuation based on market factors. The timing of actual future payments may differ from those presented due to a number of factors, such as discretionary debt redemptions or changes in interest rates that may impact our expected future cash interest payments.
Table 35:30: Contractual Obligations(1)
| Fiscal Year Ended May 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | (Dollars in millions) | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | $ | 3,796 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 3,796 | Short-term borrowings | $ | 4,582 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 4,582 | |||||||||||||||||||||||||||||||||||||||||||
| Long-term debt | 2,745 | 1,463 | 1,737 | 1,577 | 1,128 | 10,065 | 18,715 | Long-term debt | 2,598 | 1,844 | 1,652 | 842 | 2,428 | 11,520 | 20,884 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subordinated deferrable debt | — | — | — | — | — | 742 | 742 | Subordinated deferrable debt | — | — | — | — | — | 1,000 | 1,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Members’ subordinated certificates(2) | 10 | 13 | 43 | 15 | 31 | 1,268 | 1,380 | Members’ subordinated certificates(2) | 7 | 19 | 11 | 10 | 55 | 1,153 | 1,255 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total long-term and subordinated debt | 2,755 | 1,476 | 1,780 | 1,592 | 1,159 | 12,075 | 20,837 | Total long-term and subordinated debt | 2,605 | 1,863 | 1,663 | 852 | 2,483 | 13,673 | 23,139 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Contractual interest on long-term debt(3) | 642 | 565 | 524 | 484 | 439 | 4,767 | 7,421 | Contractual interest on long-term debt(3) | 644 | 597 | 558 | 528 | 482 | 5,038 | 7,847 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total specified contractual obligations | $ | 7,193 | $ | 2,041 | $ | 2,304 | $ | 2,076 | $ | 1,598 | $ | 16,842 | $ | 32,054 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | Total | $ | 7,831 | $ | 2,460 | $ | 2,221 | $ | 1,380 | $ | 2,965 | $ | 18,711 | $ | 35,568 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
____________________________
(1)Callable debt is included in this table at its contractual maturity.
(3) Represents the amounts of future interest payments on long-term and subordinated debt outstanding as of May 31, 2018,2021, based on the contractual terms of the securities. These amounts were determined based on certain assumptions, including that variable-rate debt continues to accrue interest at the contractual rates in effect as of May 31, 20182021 until maturity, and redeemable debt continues to accrue interest until its contractual maturity.
Off-Balance Sheet Arrangements
In the ordinary course of business, we engage in financial transactions that are not presented on our consolidated balance sheets, or may be recorded on our 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 unadvanced loan commitments intended to meet the financial needs of our members and guarantees of member obligations, which may affect our liquidity requirements based on the likelihood that borrowers will advance funds under the loan commitments or we will be required to perform under the guarantee obligations. We provide additional information about our unadvanced loan commitments, including amounts outstanding, in “Note 4—Loans” and our guarantee obligations in “Note 13—Guarantees.”
Projected Near-Term Sources and Uses of Liquidity
As discussed above, our primary sources of liquidity include cash flows from operations, member loan repayments, committed bank revolving lines of credit, committed loan facilities, short-term borrowings and funds from the issuance of long-term and subordinated debt. Our primary uses of liquidity include loan advances to members, principal and interest payments on borrowings, periodic settlement payments related to derivative contracts and operating expenses.
Table 31 below displays our projected sources and uses of cash from debt and investment activity, by quarter, over the next six quarters through the quarter ended November 30, 2022. 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
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as of May 31, 2021, 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 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) | |||||||||||||||||||||||||||||||||||||||||||||||
| 1Q FY 2022 | $ | 533 | $ | 372 | $ | 84 | $ | 989 | $ | 552 | $ | 794 | $ | — | $ | 1,346 | $ | 126 | ||||||||||||||||||||||||||||||||||||||
| 2Q FY 2022 | 62 | 352 | 196 | 610 | 402 | 450 | — | 852 | 239 | |||||||||||||||||||||||||||||||||||||||||||||||
| 3Q FY 2022 | 1,733 | 350 | 65 | 2,148 | 1,408 | 552 | — | 1,960 | (229) | |||||||||||||||||||||||||||||||||||||||||||||||
| 4Q FY 2022 | 351 | 351 | 64 | 766 | 594 | 436 | — | 1,030 | 205 | |||||||||||||||||||||||||||||||||||||||||||||||
| 1Q FY 2023 | 307 | 370 | — | 677 | 457 | 572 | — | 1,029 | 292 | |||||||||||||||||||||||||||||||||||||||||||||||
| 2Q FY 2023 | 648 | 357 | — | 1,005 | 733 | 548 | — | 1,281 | 275 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 3,634 | $ | 2,152 | $ | 409 | $ | 6,195 | $ | 4,146 | $ | 3,352 | $ | — | $ | 7,498 | $ | 908 | ||||||||||||||||||||||||||||||||||||||
____________________________
(1)The dates presented represent the end of each quarterly period through the quarter ended November 30, 2022.
(2) Anticipated long-term loan repayments include scheduled long-term loan amortizations, anticipated cash repayments at repricing date and sales.
(3)Other loan repayments include anticipated short-term loan repayments.
(4)Long-term debt maturities also include 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 31, we currently project long-term advances of $2,232 million over the next 12 months, which we anticipate will exceed anticipated long-term loan repayments over the same period of $1,425 million by approximately $807 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, funding diversity, capital adequacy, industry position, member support, management, asset quality, quality of earnings stability and the probability of systemic support. Significant changes in these factors could result in different ratings.
On March 5, 2021, S&P issued a downgrade of our long-term issuer credit rating, citing a shift from “Strong” to “Adequate” in its view of CFC’s risk position due to CFC’s loan portfolio concentration in the State of Texas. S&P also revised its outlook on CFC to negative based on the potential for additional elevated credit stress posed by Texas electric cooperatives due to the February 2021 polar vortex. The downgrade of CFC’s long-term issuer credit rating by S&P resulted in a downgrade of (i) our senior secured and senior unsecured debt ratings to A- from A; (ii) our subordinated debt rating to BBB from BBB+; and (iii) our short-term issuer credit and commercial paper ratings to A-2 from A-1, each with a negative outlook. Table 3632 displays our credit ratings as of May 31, 2018, which were2021. Our credit ratings by Moody’s and Fitch remain unchanged from May 31, 2020, and as of the date of the filing of this Report.
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Table 36:32: Credit Ratings
| May 31, | ||||||||||||||||||||
| Moody’s | S&P | Fitch | ||||||||||||||||||
Long-term issuer credit rating(1) | A2 | A | ||||||||||||||||||
Senior secured debt(2) | A1 | A+ | ||||||||||||||||||
Senior unsecured debt(3) | A2 | A | ||||||||||||||||||
| Subordinated debt | A3 | BBB+ | ||||||||||||||||||
| Commercial paper | P-1 | F1 | ||||||||||||||||||
| Outlook | Stable | Stable | ||||||||||||||||||
___________________________
(1)Based on our senior unsecured debt rating.
(2)Applies to our collateral trust bonds.
(3)Applies to our medium-term notes.
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 16.72-to-120.17 as of May 31, 2018,2021, 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 $457$814 million for thefiscal year ended May 31, 2018,2021 which was partially offset by a decrease in equity from the retirement of $60 million in patronage capital retirementauthorized by the CFC Board of $45 millionDirectors in July 2020 and paid to members in September 2017.2020.
Our adjusted debt-to-equity ratio increased above our targeted threshold of 6.00-to-1 to 6.18-to-16.15 as of May 31, 2018,2021, from 5.95-to-15.85 as of May 31, 2017, largely due2020, The increase was primarily attributable to an increase in debt outstandingadjusted liabilities due to additional borrowings to fund growth in our loan portfolio growth.portfolio. We provide a reconciliation of our adjusted debt-to-equity ratio to the most comparable U.S. 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 believe we were in compliance with all covenants and conditions under our committed bank revolving line of credit agreements and senior debt indentures as of May 31, 2018.2021.
As discussed above in “Item 6—Selected“Introduction” and “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 reportReport to the most comparable U.S. GAAP measures and an explanation of the adjustments below in “Non-GAAP Financial Measures.”
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| MARKET RISK | ||
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 fromas movements in interest rates. Thisrates can have a significant impact on the earnings and safety and soundness of a financial institution. We are exposed to interest rate risk resultsprimarily from the differences in the timing between the timingmaturities or repricing of cash flows on our assets due to contractual maturities, re-pricing characteristics and prepaymentsloans and the liabilities funding those assets.our loans. Below we discuss how we manage and measure interest rate risk. We also include a discussion about the current status of our preparation in transitioning from LIBOR as an interest reference rate to an alternative rate.
Interest Rate Risk Management
Our interest rate risk exposuremanagement objective is primarily related to prudently manage the funding of the fixed-rate loan portfolio. Our Asset Liability Committee provides oversight for maintaining our interest rate position within a prescribed policy range using approved strategies. The Asset Liability Committee reviews a completedifference between interest-earning assets and interest-bearing liabilities in order to mitigate interest rate risk analysis, reviews proposed modifications, if any, to our interest ratein accordance with CFC’s board policy and risk management strategylimits 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 exposure and financial forecasts. The Asset Liability Committee also discusses the composition of fixed-rate versus variable-rate loans, new funding opportunities, changes to the nature and mix of assets and liabilities for structural mismatches, and interest rate swap transactions.
Measurement of Interest Rate Risk
We routinely measure and assess our interest rate risk includeexposure using various methodologies. We implemented enhancements to our Asset Liability Management (“ALM”) framework that expanded our analytic tools and capabilities, which allowed us to provide a more comprehensive profile of our interest rate risk exposure. As a result of these enhancements, we are able to more accurately measure and monitor our interest rate risk exposure under multiple interest rate scenarios using several different techniques, including, among others, the usesensitivity of derivativesour net interest and limiting the amount of fixed-rate assets that can be funded by variable-rate debtadjusted net interest income to a specified percentage of adjusted total assets based on market conditions.
Interest Rate Sensitivity Analysis
Our ALM models, which we use to evaluate the sensitivity of our interest-earning assets and the abilityinterest-bearing liabilities funding those assets under different interest rate scenarios, are updated monthly to convertreflect our current balance sheet position. We then overlay our current balance sheet position with management’s forecast assumptions to generate a baseline projection of net interest income and adjusted net interest income over the next 12 months. Table 33 presents the estimated percentage impact on our projected base-line net interest income and adjusted net interest income, which includes the impact of derivative cash settlements interest expense, over the next 12 months resulting from a hypothetical instantaneous parallel shift of plus or prepayminus 100 basis points in the loan. Long-term loans generally have maturitiesinterest rate yield curve as of up to 35 years.
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Table 33: Interest Rate Sensitivity Analysis(1)
| May 31, 2021 | May 31, 2020 | |||||||||||||||||||||||||
Estimated Impact(2) | + 100 Basis Points | – 100 Basis Points(3) | + 100 Basis Points | – 100 Basis Points(3) | ||||||||||||||||||||||
| Net interest income | (6.13)% | (3.34)% | (8.20)% | (2.30)% | ||||||||||||||||||||||
| Derivative cash settlements interest expense | 8.12% | (3.01)% | 8.34% | (4.32)% | ||||||||||||||||||||||
Adjusted net interest income(4) | 1.99% | (6.35)% | 0.14% | (6.62)% | ||||||||||||||||||||||
____________________________
(1)Applies to all rate-sensitive assets and liabilities including fixed-rate loans with a specific debt issuancerepricing date within the next 12 months and forecasted new loan growth; no impact on fixed-rate loans that are priced to maturity and nonperforming loans that are held at zero interest rate until maturity.
(2)Actual net interest income (including adjusted) may differ significantly from the timebelow referenced sensitivity analysis.
(3)Floored at zero percent interest rate.
(4)Includes derivative cash settlements that represent amounts received from or paid to counterparties.
Duration Gap
The duration gap is the loansdifference between the estimated duration of assets and liabilities, which is calculated using an ALM model. The duration gap summarizes the extent to which cash-flows for assets and liabilities are advanced. We fundmatched over time. A positive duration gap denotes that the amountduration of fixed-rateour assets that exceed fixed-rateis greater than the duration of our debt and members’ equity with short-term debt, primarily commercial paper.
Limitations of Interest Rate Risk Measures
While we believe that the interest income sensitivities and 2017, respectively. Fixed-rate liabilities include debt issuedduration gap measures provided are useful tools in assessing our interest rate risk exposure, there are inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. These measures should be understood as estimates rather than as precise measurements. The interest rate sensitivity analyses only contemplate certain hypothetical movements in interest rates and are performed 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 since it is used to match fund the variable-rate loan pool. 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.
| (Dollars in millions) | Prior to 5/31/19 | Two Years 6/1/19 to 5/31/21 | Two Years 6/1/21 to 5/31/23 | Five Years 6/1/23 to 5/31/28 | 10 Years 6/1/28 to 5/31/38 | 6/1/38 and Thereafter | Total | |||||||||||||||||||||
| Asset amortization and repricing | $ | 1,870 | $ | 3,239 | $ | 2,958 | $ | 5,531 | $ | 6,549 | $ | 2,937 | $ | 23,084 | ||||||||||||||
| Liabilities and members’ equity: | ||||||||||||||||||||||||||||
Long-term debt (1) | $ | 2,500 | $ | 3,107 | $ | 2,421 | $ | 5,610 | $ | 4,523 | $ | 1,147 | $ | 19,308 | ||||||||||||||
| Subordinated certificates | 16 | 52 | 48 | 977 | 154 | 578 | 1,825 | |||||||||||||||||||||
Members’ equity(2) | 48 | 23 | 24 | 105 | 293 | 875 | 1,368 | |||||||||||||||||||||
Total liabilities and members’ equity(3) | $ | 2,564 | $ | 3,182 | $ | 2,493 | $ | 6,692 | $ | 4,970 | $ | 2,600 | $ | 22,501 | ||||||||||||||
Gap (4) | $ | (694 | ) | $ | 57 | $ | 465 | $ | (1,161 | ) | $ | 1,579 | $ | 337 | $ | 583 | ||||||||||||
| Cumulative gap | (694 | ) | (637 | ) | (172 | ) | (1,333 | ) | 246 | 583 | ||||||||||||||||||
| Cumulative gap as a % of total assets | (2.60 | )% | (2.39 | )% | (0.64 | )% | (4.99 | )% | 0.92 | % | 2.18 | % | ||||||||||||||||
Cumulative gap as a % of adjusted total assets (5) | (2.62 | ) | (2.41 | ) | (0.65 | ) | (5.04 | ) | 0.93 | 2.20 | ||||||||||||||||||
LIBOR Transition
In July 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates the LIBOR index, announced that it intended to stop compelling banks to submit the rates required to calculate LIBOR after December 31, 2021. Following this announcement, the Federal Reserve Board and the Federal Reserve Bank of assets amortizingNew York established the Alternative Reference Rates Committee (“ARRC”) which is comprised of private-market participants and repricing less total liabilitiesex-officio members representing banking and members’ equity.financial sector regulators. The ARRC has recommended the Secured Overnight Financing Rate (“SOFR”) as the alternative reference rate.
In November 2020, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued a joint statement encouraging financial institutions to cease entering into new contracts that use U.S. dollar-denominated (“USD”) LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021, in order to facilitate an orderly, safe and sound LIBOR transition. The joint statement indicated that new contracts entered into before December 31, 2021 should either utilize a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation.
In March 2021, the FCA and the Intercontinental Exchange (“ICE”) Benchmark Administration, the administrator for LIBOR, concurrently confirmed the intention to stop requiring banks to submit the rates required to calculate LIBOR after
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December 31, 2021 for one-week and two-month LIBOR and June 30, 2023 for all remaining LIBOR tenors. Pursuant to the announcement, one-week and two-month LIBOR will cease to be published or lose representativeness immediately after December 31, 2021, and all remaining USD LIBOR tenors will cease to be published or lose representativeness immediately after June 30, 2023.
We established 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 develop a strategic transition plan. The LIBOR working group has been closely monitoring and assessing developments with respect to the LIBOR transition and providing regular reports to our Chief Financial Officer and the CFC Board of Directors. An assessment of all of CFC’s LIBOR-based contracts and financial instruments and the systems, models and processes that may be impacted has been completed. We have confirmed CFC’s adherence to the International Swaps and Derivatives Association, Inc. 2020 LIBOR Fallbacks Protocol for our derivative instruments. We plan to stop originating new LIBOR-based loans prior to December 31, 2021, and we have been working to ensure that new LIBOR-based loans and existing LIBOR-based loans otherwise being amended include hardwired fallback language. We are also closely monitoring the development of alternative credit-sensitive rates in addition to SOFR such as the Bloomberg Short Term Bank Yield index.
Table 34 summarizes our LIBOR-indexed financial instruments outstanding as of May 31, 2021 that have a contractual maturity date after June 30, 2023. These financial instruments are included in amounts reported inon our consolidated balance sheets less derivative assets.sheets.
| (Dollars in millions) | May 31, 2021 | |||||||
| Loans to members, performing | $ | 413 | ||||||
| Investment securities | 49 | |||||||
| Debt | 1,733 | |||||||
In addition, we have LIBOR-indexed derivatives with a notional amount of fixed-rate assets that are funded with short-term and variable-rate debt$7,479 million as of May 31, 2018. The gap2021 that have a contractual maturity date after June 30, 2023.
We discuss the risks related to the uncertainty as to the nature of $583 million represented 2.18%potential changes and other reforms associated with the transition away from and expected replacement of total assets and 2.20% of adjusted total assets (total assets excluding derivative assets)LIBOR as of
| Principal Amortization and Maturities | ||||||||||||||||||||||||||||||||
Outstanding Balance | Fair Value | Remaining Years | ||||||||||||||||||||||||||||||
| (Dollars in millions) | 2019 | 2020 | 2021 | 2022 | 2023 | |||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||
| Time deposits | $ | 101 | $ | 101 | $ | 101 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| Investment securities, available for sale | $ | 89 | $ | 89 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 89 | ||||||||||||||||
| Investment securities, held to maturity | $ | 520 | $ | 516 | $ | 23 | $ | 59 | $ | 101 | $ | 113 | $ | 141 | $ | 83 | ||||||||||||||||
| Average rate | 2.91 | % | 1.81 | % | 2.43 | % | 2.79 | % | 2.96 | % | 2.96 | % | 3.56 | % | ||||||||||||||||||
Long-term fixed-rate loans (1) | $ | 22,696 | $ | 21,714 | $ | 1,132 | $ | 1,168 | $ | 1,169 | $ | 1,148 | $ | 1,157 | $ | 16,922 | ||||||||||||||||
| Average rate | 4.60 | % | 4.33 | % | 4.40 | % | 4.43 | % | 4.48 | % | 4.54 | % | 4.66 | % | ||||||||||||||||||
| Long-term variable-rate loans | $ | 1,039 | $ | 1,039 | $ | 95 | $ | 77 | $ | 53 | $ | 49 | $ | 43 | $ | 722 | ||||||||||||||||
| Average rate | 3.39 | % | — | — | — | — | — | — | ||||||||||||||||||||||||
| Line of credit loans | $ | 1,432 | $ | 1,432 | $ | 1,432 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| Average rate | 3.09 | % | 3.09 | % | — | — | — | — | ��� | |||||||||||||||||||||||
| Liabilities and equity: | ||||||||||||||||||||||||||||||||
Short-term borrowings (2) | $ | 3,796 | $ | 3,796 | $ | 3,796 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| Average rate | 1.88 | % | 1.88 | % | — | — | — | — | — | |||||||||||||||||||||||
| Long-term debt | $ | 18,715 | $ | 18,909 | $ | 2,745 | $ | 1,463 | $ | 1,737 | $ | 1,577 | $ | 1,128 | $ | 10,065 | ||||||||||||||||
| Average rate | 3.39 | % | 5.47 | % | 2.24 | % | 2.64 | % | 2.79 | % | 2.67 | % | 3.30 | % | ||||||||||||||||||
| Subordinated deferrable debt | $ | 742 | $ | 766 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 742 | ||||||||||||||||
| Average rate | 4.98 | % | — | — | — | — | — | 4.98 | % | |||||||||||||||||||||||
Members’ subordinated certificates (3) | $ | 1,380 | $ | 1,380 | $ | 10 | $ | 13 | $ | 43 | $ | 15 | $ | 31 | $ | 1,268 | ||||||||||||||||
| Average rate | 4.18 | % | 2.82 | % | 2.85 | % | 3.64 | % | 2.92 | % | 2.70 | % | 4.27 | % | ||||||||||||||||||
| (Dollars in thousands) | Repricing Amount | Weighted-Average Interest Rate | |||||
| 2019 | $ | 756,283 | 4.48 | % | |||
| 2020 | 521,833 | 4.66 | |||||
| 2021 | 430,680 | 4.43 | |||||
| 2022 | 393,109 | 4.66 | |||||
| 2023 | 328,004 | 4.93 | |||||
| Thereafter | 1,346,704 | 5.07 | |||||
| Total | $ | 3,776,613 | |||||
| OPERATIONAL RISK | ||
Operational risk represents the risk of loss resulting from conducting our operations, including, but not limited to, the execution of unauthorized transactions by employees; errors relating to loan documentation, transaction processing and technology; the inability to perfect liens on collateral; breaches of internal control and information systems; and the risk of fraud by employees or persons outside the company. This risk of loss also includes potential legal actions that could arise as a result of operational deficiencies, noncompliance with covenants in our revolving credit agreements and indentures, employee misconduct or adverse business decisions. In the event of a breakdown in internal controls, improper access to or operation of systems or improper employee actions, we could incur financial loss. Operational/business risk also may also include breaches of our technology and information systems resulting from unauthorized access to confidential information or from internal or external threats, such as cyberattacks.
Operational risk is inherent in all business activities. The management of such risk is important to the achievement of our objectives. We maintain business policies and procedures, employee training, an internal control framework, and a comprehensive business continuity and disaster recovery plan that are intended to provide a sound operational environment. Our business policies and controls have been designed to manage operational risk at appropriate levels given our financial strength, the business environment and markets in which we operate, the nature of our businesses, and considering factors such as competition and regulation. Our Corporate Compliance group monitors compliance with established procedures and applicable law that are designed to ensure adherence to generally accepted conduct, ethics and business practices defined in our corporate policies. We provide employee compliance training programs, including information protection, suspicious activity reportingRegulation FD
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(“Fair Disclosure”) compliance and operational risk. Our Internal Audit group examines the design and operating effectiveness of our operational, compliance and financial reporting internal controls on an ongoing basis.
Our business continuity and disaster recovery plan establishes the basic principles and framework necessary to ensure emergency response, resumption, restoration and permanent recovery of CFC’s operations and business activities during a business interruption event. This plan includes a duplication of our operating systems at an offsiteoff-site facility coupled with an extensive business continuity and recovery process to leverage those remote systems. Each of our departments is required to develop, exercise, test and maintain business resumption plans for the recovery of business functions and processing resources to minimize disruption for our members and other parties with whom we do business. We conduct disaster recovery exercises periodically that include both the information technology group and business areas. The business resumption plans are based on a risk assessment that considers potential losses due to unavailability of service versus the cost of resumption. These plans anticipate a variety of probable scenarios ranging from local to regional crises.
Cybersecurity risk is managed as part of our overall management of operational risk. Cyber-related attacks pose a risk to the security of our members’ strategic business information and the confidentiality and integrity of our data, which includes strategic and proprietary information. Because such an attack could materially affecthave a material adverse impact on our operations, our boardthe CFC Board of directors places particular emphasis onDirectors is actively engaged in the oversight of our continuous efforts in monitoring and managing the risks associated with the ever-evolving nature of cybersecurity risks. At each regularly scheduled board of directors meeting,threats. Each quarter, or more frequently as requested by the board of directors, management provides reports on CFC’s security operations, including any cybersecurity incidents, management’s efforts to manage any incidents and any other related information requested from management. On at least an annual basis, the board of directors reviews management reports concerning the disclosure controls and procedures in place to enable CFC to make accurate and timely disclosures about any material cybersecurity events. Additionally, upon the occurrence of a material cybersecurity incident, the board of directors will be notified of the event so it may properly evaluate such incident, including management’s remediation plan.
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Table 35 provides a summary of condensed quarterly financial information for fiscal years 2021 and 2020.
Table 35: Selected Quarterly Financial Data
| Year Ended May 31, 2021 | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Aug 31, 2020 | Nov 30, 2020 | Feb 28, 2021 | May 31, 2021 | Total | |||||||||||||||||||||||||||
| Interest income | $ | 279,584 | $ | 276,499 | $ | 278,172 | $ | 282,346 | $ | 1,116,601 | ||||||||||||||||||||||
| Interest expense | (179,976) | (174,422) | (173,040) | (174,625) | (702,063) | |||||||||||||||||||||||||||
| Net interest income | 99,608 | 102,077 | 105,132 | 107,721 | 414,538 | |||||||||||||||||||||||||||
| Benefit (provision) for credit losses | (326) | (1,638) | (33,023) | 6,480 | (28,507) | |||||||||||||||||||||||||||
| Net interest income after benefit (provision) for credit losses | 99,282 | 100,439 | 72,109 | 114,201 | 386,031 | |||||||||||||||||||||||||||
| Non-interest income: | ||||||||||||||||||||||||||||||||
| Derivative gains | 60,276 | 81,287 | 330,196 | 34,542 | 506,301 | |||||||||||||||||||||||||||
| Other non-interest income | 8,175 | 4,971 | 1,012 | 6,266 | 20,424 | |||||||||||||||||||||||||||
| Total non-interest income | 68,451 | 86,258 | 331,208 | 40,808 | 526,725 | |||||||||||||||||||||||||||
| Non-interest expense | (22,995) | (25,914) | (23,863) | (25,008) | (97,780) | |||||||||||||||||||||||||||
| Income before income taxes | 144,738 | 160,783 | 379,454 | 130,001 | 814,976 | |||||||||||||||||||||||||||
| Income tax provision | (151) | (262) | (507) | (78) | (998) | |||||||||||||||||||||||||||
| Net income | 144,587 | 160,521 | 378,947 | 129,923 | 813,978 | |||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | (171) | (505) | (1,213) | (422) | (2,311) | |||||||||||||||||||||||||||
| Net income attributable to CFC | $ | 144,416 | $ | 160,016 | $ | 377,734 | $ | 129,501 | $ | 811,667 | ||||||||||||||||||||||
| Year Ended May 31, 2020 | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Aug 31, 2019 | Nov 30, 2019 | Feb 29, 2020 | May 31, 2020 | Total | |||||||||||||||||||||||||||
| Interest income | $ | 290,015 | $ | 287,037 | $ | 287,195 | $ | 287,039 | $ | 1,151,286 | ||||||||||||||||||||||
| Interest expense | (213,271) | (207,871) | (203,040) | (196,907) | (821,089) | |||||||||||||||||||||||||||
| Net interest income | 76,744 | 79,166 | 84,155 | 90,132 | 330,197 | |||||||||||||||||||||||||||
| Provision for credit losses | (30) | 1,045 | (2,382) | (34,223) | (35,590) | |||||||||||||||||||||||||||
| Net interest income after provision for credit losses | 76,714 | 80,211 | 81,773 | 55,909 | 294,607 | |||||||||||||||||||||||||||
| Non-interest income: | ||||||||||||||||||||||||||||||||
| Derivative gains (losses) | (395,725) | 183,450 | (337,936) | (239,940) | (790,151) | |||||||||||||||||||||||||||
| Other non-interest income | 12,561 | 3,728 | 4,396 | 11,707 | 32,392 | |||||||||||||||||||||||||||
| Total non-interest income (loss) | (383,164) | 187,178 | (333,540) | (228,233) | (757,759) | |||||||||||||||||||||||||||
| Non-interest expense | (18,150) | (25,698) | (25,628) | (57,962) | (127,438) | |||||||||||||||||||||||||||
| Income (loss) before income taxes | (324,600) | 241,691 | (277,395) | (230,286) | (590,590) | |||||||||||||||||||||||||||
| Income tax benefit (provision) | 521 | (91) | 426 | 304 | 1,160 | |||||||||||||||||||||||||||
| Net income (loss) | (324,079) | 241,600 | (276,969) | (229,982) | (589,430) | |||||||||||||||||||||||||||
| Less: Net (income) loss attributable to noncontrolling interests | 1,657 | (8) | 1,405 | 1,136 | 4,190 | |||||||||||||||||||||||||||
| Net income (loss) attributable to CFC | $ | (322,422) | $ | 241,592 | $ | (275,564) | $ | (228,846) | $ | (585,240) | ||||||||||||||||||||||
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We experienced a variance of $360 million between our reported net income of $130 million in the fourth quarter of fiscal year 2021 and our reported net loss of $230 million in the fourth quarter of fiscal year 2020. The variance was primarily driven by a favorable shift in derivative fair value changes of $275 million. We recorded derivative gains of $35 million in the fourth quarter of fiscal year 2021, attributable to an increase in the net fair value of our swap portfolio resulting from increases in medium- and longer-term swap interest rates during the quarter. In contrast, we recorded derivative losses of $240 million in the fourth quarter of fiscal year 2020, attributable to a decrease in the net fair value of our swap portfolio due to declines in interest rates across the swap curve.
In addition, net interest income increased $18 million, or 20%, to financial measures determined$108 million in accordance with GAAP, management evaluates performance based on certain non-GAAP measures,the fourth quarter of fiscal year 2021, attributable to the combined impact of an increase in the net interest yield and an increase in average interest-earning assets. We also experienced a favorable shift in the provision of credit losses of $41 million in the fourth quarter of fiscal year 2021. The shift was largely attributable to the absence of the asset-specific addition to the allowance for credit losses of $34 million in the fourth quarter of 2020, which we referestablished for a CFC power supply borrower in conjunction with our classification of a loan to this borrower totaling $168 million as “adjusted” measures. nonperforming as of May 31, 2020.
Other notable items contributing to the variance between our reported results for the fourth quarter of fiscal year 2021 and 2020 include the absence of a non-cash software impairment charge of $31 million recorded in the fourth quarter of fiscal year 2020 due to management’s decision to abandon a project to develop an internal-use loan origination and servicing platform.
| NON-GAAP FINANCIAL MEASURES | ||
Below we provide a discussion ofdiscuss each of these non-GAAP adjusted measures and provide a reconciliation of our adjusted measures to the most comparable U.S. GAAP measures in this section.measures. We believe our non-GAAP adjusted metrics,measures, which are not a substitute for U.S. 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 usesevaluates performance based on these metrics to compare operating results across financial reporting periods, for internal budgeting and forecasting purposes for compensation decisions and forof (i) establishing short- and long-term strategic planningperformance goals; (ii) budgeting and forecasting; (iii) comparing period-to-period operating results, analyzing changes in results and identifying potential trends; and (iv) making compensation decisions. In addition, certain of the financial covenants in our committed bank revolving line of credit agreements and debt indentures are based on ournon-GAAP adjusted measures.
Statements of Operations Non-GAAP Adjustments
We use derivatives to manage interest rate risk on our funding of the loan portfolio. The derivative cash settlements representexpense represents the amount that we receive from or pay to our counterparties based on the interest rate indexes in our derivatives that do not qualify for hedge accounting. We adjust the reported interest expense to include the derivative cash settlements.settlements expense. We use the adjusted cost of funding to set interest rates on loans to our members and believe that the interest expense adjusted to include derivative cash settlements expense represents our total cost of funding for the period. TIER calculated by adding the derivative cash settlements expense to the interest expense reflects management’s perspective on our operations and, therefore, we believe that it represents a useful financial measure for investors.
The derivative forward value gains (losses) and foreign currency adjustments do not represent our cash inflows or outflows during the current period and, therefore, do not affect our current ability to cover our debt service obligations. The derivative forward value gains (losses) included in the derivative gains (losses) line of the statement of operations represents a present value estimate of the future cash inflows or outflows that will be recognized as net cash settlements expense for all periods through the maturity of our derivatives that do not qualify for hedge accounting. We have not issued foreign-denominated debt since 2007, and as of May 31, 20182021 and 2017,2020, there were no foreign currency derivative instruments outstanding.
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For operational management and decision-making purposes, we subtract derivative forward value gains (losses) and foreign currency adjustments from our net income when calculating TIER and for other net income presentation purposes. In addition, since the derivative forward value gains (losses) and foreign currency adjustments do not represent current periodcurrent-period cash flows, we do not allocate such funds to our members and, therefore, exclude the derivative forward value gains (losses) and foreign currency adjustments from net income in calculating the amount of net income to be allocated to our members. TIER calculated by excluding the derivative forward value gains (losses) and foreign currency adjustments from net income reflects management’s perspective on our operations and, therefore, we believe that it represents a useful financial measure for investors.
Total equity includes the noncash impact of derivative forward value gains (losses) and foreign currency adjustments recorded in net income. It also includes as a component of accumulated other comprehensive income the impact of changes in the fair value of derivatives designated as cash flow hedges as well as the remaining transition adjustment recorded when we adopted the accounting guidance that required all derivatives be recorded on the balance sheet at fair value. In evaluating our debt-to-equity ratio discussed further below, we make adjustments to equity similar to the adjustments made in calculating TIER. We exclude from total equity the cumulative impact of changes in derivative forward value gains (losses) and foreign currency adjustments and amounts included in accumulated other comprehensive income related to derivatives designated for cash flow hedge accounting and the remaining derivative transition adjustment to derive non-GAAP adjusted equity.
Adjusted Operational Financial Measures
Table 4036 provides a reconciliation of adjusted interest expense, adjusted net interest income, adjusted total revenue and adjusted net income to the comparable U.S. GAAP measures. TheThese adjusted amountsmeasures are used in the calculation of our adjusted net interest yield and adjusted TIER for each fiscal years 2018, 2017, 2016, 2015 and 2014.year in the five-year period ended May 31, 2021.
Table 40:36: Adjusted Financial Measures — Measures—Income Statement
| Year Ended May 31, | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
| Adjusted net interest income: | ||||||||||||||||||||||||||||||||
| Interest income | $ | 1,116,601 | $ | 1,151,286 | $ | 1,135,670 | $ | 1,077,357 | $ | 1,036,634 | ||||||||||||||||||||||
| Interest expense | (702,063) | (821,089) | (836,209) | (792,735) | (741,738) | |||||||||||||||||||||||||||
Include: Derivative cash settlements interest expense(1) | (115,645) | (55,873) | (43,611) | (74,281) | (84,478) | |||||||||||||||||||||||||||
| Adjusted interest expense | (817,708) | (876,962) | (879,820) | (867,016) | (826,216) | |||||||||||||||||||||||||||
| Adjusted net interest income | $ | 298,893 | $ | 274,324 | $ | 255,850 | $ | 210,341 | $ | 210,418 | ||||||||||||||||||||||
| Adjusted total revenue: | ||||||||||||||||||||||||||||||||
| Net interest income | $ | 414,538 | $ | 330,197 | $ | 299,461 | $ | 284,622 | $ | 294,896 | ||||||||||||||||||||||
| Fee and other income | 18,929 | 22,961 | 15,355 | 17,578 | 19,713 | |||||||||||||||||||||||||||
| Total revenue | 433,467 | 353,158 | 314,816 | 302,200 | 314,609 | |||||||||||||||||||||||||||
Include: Derivative cash settlements interest expense(1) | (115,645) | (55,873) | (43,611) | (74,281) | (84,478) | |||||||||||||||||||||||||||
| Adjusted total revenue | $ | 317,822 | $ | 297,285 | $ | 271,205 | $ | 227,919 | $ | 230,131 | ||||||||||||||||||||||
| Adjusted net income: | ||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 813,978 | $ | (589,430) | $ | (151,210) | $ | 457,364 | $ | 312,099 | ||||||||||||||||||||||
Exclude: Derivative forward value gains (losses)(2) | 621,946 | (734,278) | (319,730) | 306,002 | 179,381 | |||||||||||||||||||||||||||
| Adjusted net income | $ | 192,032 | $ | 144,848 | $ | 168,520 | $ | 151,362 | $ | 132,718 | ||||||||||||||||||||||
____________________________
(1)Represents the net periodic contractual interest amount on our interest rate swaps during 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.
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| Year Ended May 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| Interest expense | $ | (792,735 | ) | $ | (741,738 | ) | $ | (681,850 | ) | $ | (635,684 | ) | $ | (654,655 | ) | |||||
| Include: Derivative cash settlements | (74,281 | ) | (84,478 | ) | (88,758 | ) | (82,906 | ) | (73,962 | ) | ||||||||||
| Adjusted interest expense | $ | (867,016 | ) | $ | (826,216 | ) | $ | (770,608 | ) | $ | (718,590 | ) | $ | (728,617 | ) | |||||
| Net interest income | $ | 284,622 | $ | 294,896 | $ | 330,786 | $ | 317,292 | $ | 302,885 | ||||||||||
| Include: Derivative cash settlements | (74,281 | ) | (84,478 | ) | (88,758 | ) | (82,906 | ) | (73,962 | ) | ||||||||||
| Adjusted net interest income | $ | 210,341 | $ | 210,418 | $ | 242,028 | $ | 234,386 | $ | 228,923 | ||||||||||
| Net income (loss) | $ | 457,364 | $ | 312,099 | $ | (51,516 | ) | $ | (18,927 | ) | $ | 192,926 | ||||||||
| Exclude: Derivative forward value gains (losses) | 306,002 | 179,381 | (221,083 | ) | (114,093 | ) | 39,541 | |||||||||||||
| Adjusted net income | $ | 151,362 | $ | 132,718 | $ | 169,567 | $ | 95,166 | $ | 153,385 | ||||||||||
We primarily fund our loan portfolio through the issuance of debt. However, we use derivatives as economic hedges as part of our strategy to manage the interest rate risk associated with funding 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 adjusted net interest income. We exclude the unrealized derivative forward value of derivativesgains and losses from our adjusted total revenue and adjusted net income.
TIER and Adjusted TIER
Table 41 presents37 displays the calculation of our TIER and adjusted TIER for each fiscal year in the yearsfive-year period ended May 2018, 2017, 2016, 2015 and 2014.31, 2021.
Table 41:37: TIER and Adjusted TIER
| Year Ended May 31, | Year Ended May 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | 2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||||||||
TIER (1) | 1.58 | 1.42 | 0.92 | 0.97 | 1.29 | TIER (1) | 2.16 | 0.28 | 0.82 | 1.58 | 1.42 | ||||||||||||||||||||||||||||||||||||
Adjusted TIER (2) | 1.17 | 1.16 | 1.22 | 1.13 | 1.21 | Adjusted TIER (2) | 1.23 | 1.17 | 1.19 | 1.17 | 1.16 | ||||||||||||||||||||||||||||||||||||
____________________________
(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
Management relies on the adjusted debt-to-equity ratio as a key measure in managing our business. We therefore believe that this adjusted measure, in combination with the comparable U.S. GAAP measure, is useful to investors in evaluating performance.our financial condition. We adjust the comparable U.S. GAAP measure to:
•exclude debt used to fund loans that are guaranteed by RUS from total liabilities;
•exclude from total liabilities, and add to total equity, debt with equity characteristics issued to our members and in the capital markets; and
•exclude the noncash impact of derivative financial instruments and foreign currency adjustments from total liabilities and total equity.
We are an eligible lender under aan RUS loan guarantee program. Loans issued under this program carry the U.S. government’s guarantee of all interest and principal payments. We have little or no risk associated with the collection of principal and interest payments on these loans. Therefore, we believe there is little or no risk related to the repayment of the liabilities used to fund RUS-guaranteed loans and we subtract such liabilities from total liabilities to calculate our adjusted debt-to-equity ratio.
Members may be required to purchase subordinated certificates as a condition of membership and as a condition to obtaining a loan or guarantee. The subordinated certificates are accounted for as debt under U.S. GAAP. The subordinated certificates have long-dated maturities and pay no interest or pay interest that is below market, and under certain conditions we are prohibited from making interest payments to members on the subordinated certificates. For computing our adjusted debt-to-equity ratio we subtract members’ subordinated certificates from total liabilities and add members’ subordinated certificates to total equity.
We also sell subordinated deferrable debt in the capital markets with maturities of up to 30 years and the option to defer interest payments. The characteristics of subordination, deferrable interest and long-dated maturity are all equity characteristics. For computingIn calculating our adjusted debt-to-equity ratio, we subtract subordinated deferrable debt from total liabilities and add it to total equity.
We record derivative instruments at fair value on our consolidated balance sheets. For computing our adjusted debt-to-equity ratio we exclude the noncash impact of our derivative accounting from liabilities and equity. Also, for computing our
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adjusted debt-to-equity ratio we exclude the impact of foreign currency valuation adjustments from liabilities and equity. The debt-to-equity ratio adjusted to exclude the effect of foreign currency translation reflect management’s perspective on our operations and, therefore, we believe is a useful financial measure for investors.
Table 4238 provides a reconciliation between theour total liabilities and total equity used to calculate the debt-to-equity ratio and the adjusted amounts used in the calculation of our adjusted debt-to-equity ratio as of the end of each fiscal year in the five-year period ended May 31, 2018, 2017, 2016, 2015 and 2014.2021. As indicated in the following table, below, subordinated debt is treated in the same manner as equity in calculating our adjusted-debt-to-equityadjusted debt-to-equity ratio.
Table 42:38: Adjusted Financial Measures — Measures—Balance Sheet
| May 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| Total liabilities | $ | 25,184,351 | $ | 24,106,887 | $ | 23,452,822 | $ | 21,934,273 | $ | 21,220,311 | ||||||||||
| Exclude: | ||||||||||||||||||||
| Derivative liabilities | 275,932 | 385,337 | 594,820 | 408,382 | 388,208 | |||||||||||||||
| Debt used to fund loans guaranteed by RUS | 160,865 | 167,395 | 173,514 | 179,241 | 201,863 | |||||||||||||||
| Subordinated deferrable debt | 742,410 | 742,274 | 742,212 | 395,699 | 395,627 | |||||||||||||||
| Subordinated certificates | 1,379,982 | 1,419,025 | 1,443,810 | 1,505,420 | 1,612,191 | |||||||||||||||
| Adjusted total liabilities | $ | 22,625,162 | $ | 21,392,856 | $ | 20,498,466 | $ | 19,445,531 | $ | 18,622,422 | ||||||||||
| Total equity | $ | 1,505,853 | $ | 1,098,805 | $ | 817,378 | $ | 911,786 | $ | 970,374 | ||||||||||
| Exclude: | ||||||||||||||||||||
Prior-year cumulative derivative forward value losses | (340,976 | ) | (520,357 | ) | (299,274 | ) | (185,181 | ) | (224,722 | ) | ||||||||||
| Current-year cumulative derivative forward value (gains) losses | 306,002 | 179,381 | (221,083 | ) | (114,093 | ) | 39,541 | |||||||||||||
Accumulated other comprehensive income (1) | 1,980 | 3,702 | 4,487 | 5,371 | 6,320 | |||||||||||||||
| Include: | ||||||||||||||||||||
| Subordinated certificates | 1,379,982 | 1,419,025 | 1,443,810 | 1,505,420 | 1,612,191 | |||||||||||||||
| Subordinated deferrable debt | 742,410 | 742,274 | 742,212 | 395,699 | 395,627 | |||||||||||||||
| Adjusted total equity | $ | 3,661,239 | $ | 3,597,378 | $ | 3,519,270 | $ | 3,106,808 | $ | 3,157,053 | ||||||||||
| May 31, | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
| Total liabilities | $ | 28,238,484 | $ | 27,508,783 | $ | 25,820,490 | $ | 25,184,351 | $ | 24,106,887 | ||||||||||||||||||||||
| Exclude: | ||||||||||||||||||||||||||||||||
| Derivative liabilities | 584,989 | 1,258,459 | 391,724 | 275,932 | 385,337 | |||||||||||||||||||||||||||
| Debt used to fund loans guaranteed by RUS | 139,136 | 146,764 | 153,991 | 160,865 | 167,395 | |||||||||||||||||||||||||||
| Subordinated deferrable debt | 986,315 | 986,119 | 986,020 | 742,410 | 742,274 | |||||||||||||||||||||||||||
| Subordinated certificates | 1,254,660 | 1,339,618 | 1,357,129 | 1,379,982 | 1,419,025 | |||||||||||||||||||||||||||
| Adjusted total liabilities | $ | 25,273,384 | $ | 23,777,823 | $ | 22,931,626 | $ | 22,625,162 | $ | 21,392,856 | ||||||||||||||||||||||
| Total equity | $ | 1,399,879 | $ | 648,822 | $ | 1,303,882 | $ | 1,505,853 | $ | 1,098,805 | ||||||||||||||||||||||
| Exclude: | ||||||||||||||||||||||||||||||||
Prior fiscal year-end cumulative derivative forward value losses(1) | (1,088,982) | (354,704) | (34,974) | (340,976) | (520,357) | |||||||||||||||||||||||||||
Year-to-date derivative forward value gains (losses)(1) | 621,946 | (734,278) | (319,730) | 306,002 | 179,381 | |||||||||||||||||||||||||||
Period-end cumulative derivative forward value losses(1) | (467,036) | (1,088,982) | (354,704) | (34,974) | (340,976) | |||||||||||||||||||||||||||
Accumulated other comprehensive income attributable to derivatives(2) | 1,718 | 2,130 | 2,571 | 1,980 | 3,702 | |||||||||||||||||||||||||||
| Subtotal | (465,318) | (1,086,852) | (352,133) | (32,994) | (337,274) | |||||||||||||||||||||||||||
| Include: | ||||||||||||||||||||||||||||||||
| Subordinated deferrable debt | 986,315 | 986,119 | 986,020 | 742,410 | 742,274 | |||||||||||||||||||||||||||
| Subordinated certificates | 1,254,660 | 1,339,618 | 1,357,129 | 1,379,982 | 1,419,025 | |||||||||||||||||||||||||||
| Subtotal | 2,240,975 | 2,325,737 | 2,343,149 | 2,122,392 | 2,161,299 | |||||||||||||||||||||||||||
| Adjusted total equity | $ | 4,106,172 | $ | 4,061,411 | $ | 3,999,164 | $ | 3,661,239 | $ | 3,597,378 | ||||||||||||||||||||||
____________________________
(1) Represents consolidated total derivative forward value gains (losses).
(2) Represents the AOCI amount related to derivatives. See “Note 10—11—Equity” for a breakoutthe additional components of our AOCI components.AOCI.
Table 4339 displays the calculations of our debt-to-equity and adjusted debt-to-equity ratios as of the yearsend of each fiscal year during the five-year period ended May 31, 2018, 2017, 2016, 2015 and 2014.2021.
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Table 43:39: Debt-to-Equity Ratio and Adjusted Debt-to-Equity Ratio
| May 31, | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
| Debt-to-equity ratio: | ||||||||||||||||||||||||||||||||
| Total liabilities | $ | 28,238,484 | $ | 27,508,783 | $ | 25,820,490 | $ | 25,184,351 | $ | 24,106,887 | ||||||||||||||||||||||
| Total equity | 1,399,879 | 648,822 | 1,303,882 | 1,505,853 | 1,098,805 | |||||||||||||||||||||||||||
Debt-to-equity ratio (1) | 20.17 | 42.40 | 19.80 | 16.72 | 21.94 | |||||||||||||||||||||||||||
| Adjusted debt-to-equity ratio: | ||||||||||||||||||||||||||||||||
Adjusted total liabilities(2) | $ | 25,273,384 | $ | 23,777,823 | $ | 22,931,626 | $ | 22,625,162 | $ | 21,392,856 | ||||||||||||||||||||||
Adjusted total equity(2) | 4,106,172 | 4,061,411 | 3,999,164 | 3,661,239 | 3,597,378 | |||||||||||||||||||||||||||
Adjusted debt-to-equity ratio (3) | 6.15 | 5.85 | 5.73 | 6.18 | 5.95 | |||||||||||||||||||||||||||
| May 31, | |||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||
Debt-to-equity ratio (1) | 16.72 | 21.94 | 28.69 | 24.06 | 21.87 | ||||||||||
Adjusted debt-to-equity ratio (2) | 6.18 | 5.95 | 5.82 | 6.26 | 5.90 | ||||||||||
(1) Calculated based on total liabilities as of theat period end of the period divided by total equity asat period end.
(2)See Table 38 above for details on the calculation of these non-GAAP adjusted measures and the end ofreconciliation to the period.most comparable U.S. GAAP measures.
Members’ Equity
Table 44 provides40 presents a reconciliation of members’ equity to total CFC equity as of May 31, 20182021 and 2017.2020.
Table 44:40: Members’ Equity
| May 31, | ||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||
| Members’ equity: | ||||||||||||||
| Total CFC equity | $ | 1,374,948 | $ | 626,121 | ||||||||||
| Exclude: | ||||||||||||||
| Accumulated other comprehensive loss | (25) | (1,910) | ||||||||||||
Period-end cumulative derivative forward value losses attributable to CFC(1) | (461,162) | (1,079,739) | ||||||||||||
| Subtotal | (461,187) | (1,081,649) | ||||||||||||
| Members’ equity | $ | 1,836,135 | $ | 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 16—Business Segments.” The period-end cumulative derivative forward value total loss amounts as of May 31, 2021 and 2020 are presented above in Table 38.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
| May 31, | ||||||||
| (Dollars in thousands) | 2018 | 2017 | ||||||
| Members’ equity: | ||||||||
| Total CFC equity | $ | 1,474,333 | $ | 1,069,953 | ||||
| Excludes: | ||||||||
| Accumulated other comprehensive income | 8,544 | 13,175 | ||||||
| Current year-end cumulative derivative forward value losses | (30,831 | ) | (332,525 | ) | ||||
| Subtotal | (22,287 | ) | (319,350 | ) | ||||
| Members’ equity | $ | 1,496,620 | $ | 1,389,303 | ||||
For quantitative and qualitative disclosures about market risk, see “Item 7. MD&A—Market Risk” and “MD&A—Consolidated Results of Operations—Non-Interest Income—Derivatives Gains (Losses)”and also “Note 9—10—Derivative Instruments and Hedging Activities.”
Item 8. Financial Statements and Supplementary Data
| Page | ||||||||||||||
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Members
National Rural Utilities Cooperative Finance Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of National Rural Utilities Cooperative Finance Corporation and subsidiaries (the Company) as of May 31, 20182021 and 2017,2020, the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the years in the three‑yearthree-year period ended May 31, 2018,2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 20182021 and 2017,2020, and the results of its operations and its cash flows for each of the years in the three‑yearthree-year period ended May 31, 2018,2021, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.
Assessment of the allowance for credit losses of loans evaluated on a collective basis
As discussed in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for credit losses for loans evaluated on a collective basis (the collective ACL) was $42.4 million as of May 31, 2021. The collective ACL includes the measure of expected credit losses on a collective (pool) basis for those loans that share similar risk characteristics. The Company estimates the collective ACL using a probability of default (PD) and loss given default (LGD) methodology. The Company segments its loan portfolio into pools based on member borrower type, which is based on the utility sector of the borrower, and further by internal borrower risk ratings. The Company then applies
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loss factors, consisting of the PD and LGD, to the scheduled loan-level amortization amounts over the life of the loans of each of the identified pools. Due to a limited history of defaults in the portfolio, the Company utilizes third-party default data tables for the utility sector as a proxy to estimate default rates for each of the pools. Based on the mapping of internal borrower risk rating to equivalent credit rating provided in the third party utility default tables, the Company applies corresponding cumulative default rates to the scheduled loan amortization amounts over the remaining life of loan in each of the pools. For estimation of an LGD the Company utilizes its lifetime historical loss experience for each of the portfolio segments. The Company estimates that, based on historical experience, expected credit losses will not be affected by changes in economic conditions and therefore, the Company has not made adjustments to the historical rates for any economic forecasts. The Company considers the need to adjust the historical loss information for differences in the specific characteristics of its existing loan portfolio based on an evaluation of relevant qualitative factors, such as differences in the composition of the loan portfolio, underwriting standards, problem loan trends, the quality of Company’s credit review functions, as well as changes in the regulatory environment and other pertinent external factors that may impact the amount of future credit losses.
We identified the assessment of the collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective ACL due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the collective ACL methodology, portfolio segmentation, and the methods used to estimate the PD and LGD and their significant assumptions, including third-party proxy default data for the utility sector, and borrower risk ratings. The assessment also included an evaluation of the conceptual soundness of the collective ACL methodology. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design of certain internal controls related to the Company’s measurement of the collective ACL estimate, including controls over the:
•development of the collective ACL methodology
•identification and determination of the method and significant assumptions used to develop the PD and LGD
•analysis of credit quality trends and ratios.
We evaluated the Company’s process to develop the collective ACL estimate by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:
•evaluating the Company’s collective ACL methodology for compliance with U.S. generally accepted accounting principles
•evaluating the conceptual soundness and the judgments made by the Company relative to the development of the PD and LGD by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
•determining whether the loan portfolio is segmented by similar risk characteristics by comparing to the Company’s business environment and relevant industry practices
•testing individual borrower risk ratings for a selection of borrowers by evaluating the financial performance of the borrower, sources of repayment, and any relevant guarantees or underlying collateral
•evaluating the appropriateness of mapping and alignment of internal borrower risk ratings to equivalent credit ratings provided in the third party utility default table.
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We also assessed sufficiency of the audit evidence obtained related to the collective ACL estimate by evaluating the:
•cumulative results of the audit procedures
•qualitative aspects of the Company’s accounting practices
•potential bias in the accounting estimate.
/s/ KPMG LLP
We have served as the Company’s auditor since 2013.
McLean, Virginia
July 31, 201830, 2021
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended May 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Interest income | $ | 1,116,601 | $ | 1,151,286 | $ | 1,135,670 | ||||||||||||||
| Interest expense | (702,063) | (821,089) | (836,209) | |||||||||||||||||
| Net interest income | 414,538 | 330,197 | 299,461 | |||||||||||||||||
| Benefit (provision) for credit losses | (28,507) | (35,590) | 1,266 | |||||||||||||||||
| Net interest income after benefit (provision) for credit losses | 386,031 | 294,607 | 300,727 | |||||||||||||||||
| Non-interest income: | ||||||||||||||||||||
| Fee and other income | 18,929 | 22,961 | 15,355 | |||||||||||||||||
| Derivative gains (losses) | 506,301 | (790,151) | (363,341) | |||||||||||||||||
| Investment securities gains (losses) | 1,495 | 9,431 | (1,799) | |||||||||||||||||
| Total non-interest income | 526,725 | (757,759) | (349,785) | |||||||||||||||||
| Non-interest expense: | ||||||||||||||||||||
| Salaries and employee benefits | (55,258) | (54,522) | (49,824) | |||||||||||||||||
| Other general and administrative expenses | (39,447) | (46,645) | (43,342) | |||||||||||||||||
| Losses on early extinguishment of debt | (1,456) | (683) | (7,100) | |||||||||||||||||
| Other non-interest expense | (1,619) | (25,588) | (1,675) | |||||||||||||||||
| Total non-interest expense | (97,780) | (127,438) | (101,941) | |||||||||||||||||
| Income (loss) before income taxes | 814,976 | (590,590) | (150,999) | |||||||||||||||||
| Income tax benefit (provision) | (998) | 1,160 | (211) | |||||||||||||||||
| Net income (loss) | 813,978 | (589,430) | (151,210) | |||||||||||||||||
| Less: Net (income) loss attributable to noncontrolling interests | (2,311) | 4,190 | 1,979 | |||||||||||||||||
| Net income (loss) attributable to CFC | $ | 811,667 | $ | (585,240) | $ | (149,231) | ||||||||||||||
| The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. | ||||||||||||||||||||
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| Year Ended May 31, | ||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | |||||||||
| Interest income | $ | 1,077,357 | $ | 1,036,634 | $ | 1,012,636 | ||||||
| Interest expense | (792,735 | ) | (741,738 | ) | (681,850 | ) | ||||||
| Net interest income | 284,622 | 294,896 | 330,786 | |||||||||
| Benefit (provision) for loan losses | 18,575 | (5,978 | ) | 646 | ||||||||
| Net interest income after benefit (provision) for loan losses | 303,197 | 288,918 | 331,432 | |||||||||
| Non-interest income: | ||||||||||||
| Fee and other income | 17,578 | 19,713 | 21,785 | |||||||||
| Derivative gains (losses) | 231,721 | 94,903 | (309,841 | ) | ||||||||
| Results of operations of foreclosed assets | — | (1,749 | ) | (6,899 | ) | |||||||
| Total non-interest income | 249,299 | 112,867 | (294,955 | ) | ||||||||
| Non-interest expense: | ||||||||||||
| Salaries and employee benefits | (51,422 | ) | (47,769 | ) | (44,590 | ) | ||||||
| Other general and administrative expenses | (39,462 | ) | (38,457 | ) | (41,753 | ) | ||||||
| Gains (losses) on early extinguishment of debt | — | 192 | (333 | ) | ||||||||
| Other non-interest expense | (1,943 | ) | (1,948 | ) | (1,260 | ) | ||||||
| Total non-interest expense | (92,827 | ) | (87,982 | ) | (87,936 | ) | ||||||
| Income (loss) before income taxes | 459,669 | 313,803 | (51,459 | ) | ||||||||
| Income tax expense | (2,305 | ) | (1,704 | ) | (57 | ) | ||||||
| Net income (loss) | 457,364 | 312,099 | (51,516 | ) | ||||||||
| Less: Net (income) loss attributable to noncontrolling interests | (2,178 | ) | (2,193 | ) | 1,863 | |||||||
| Net income (loss) attributable to CFC | $ | 455,186 | $ | 309,906 | $ | (49,653 | ) | |||||
| See accompanying notes to consolidated financial statements. | ||||||||||||
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| Year Ended May 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Net income (loss) | $ | 813,978 | $ | (589,430) | $ | (151,210) | ||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||
| Unrealized gains on cash flow hedges | 0 | 0 | 1,059 | |||||||||||||||||
| Reclassification of derivative gains to earnings | (412) | (441) | (468) | |||||||||||||||||
| Defined benefit plan adjustments | 2,297 | (1,322) | (488) | |||||||||||||||||
| Other comprehensive income (loss) | 1,885 | (1,763) | 103 | |||||||||||||||||
| Total comprehensive income (loss) | 815,863 | (591,193) | (151,107) | |||||||||||||||||
| Less: Total comprehensive (income) loss attributable to noncontrolling interests | (2,311) | 4,190 | 1,979 | |||||||||||||||||
| Total comprehensive income (loss) attributable to CFC | $ | 813,552 | $ | (587,003) | $ | (149,128) | ||||||||||||||
| The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. | ||||||||||||||||||||
88
| Year Ended May 31, | ||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | |||||||||
| Net income (loss) | $ | 457,364 | $ | 312,099 | $ | (51,516 | ) | |||||
| Other comprehensive income (loss): | ||||||||||||
| Unrealized gains (losses) on available-for-sale investment securities | (3,222 | ) | 4,614 | 3,468 | ||||||||
| Unrealized losses on foreclosed assets | — | — | (5,575 | ) | ||||||||
| Unrealized losses on cash flow hedges | (1,059 | ) | — | — | ||||||||
| Reclassification of losses on foreclosed assets to net income | — | 9,823 | — | |||||||||
| Reclassification of derivative gains to net income | (663 | ) | (785 | ) | (888 | ) | ||||||
| Defined benefit plan adjustments | 313 | (1,535 | ) | (31 | ) | |||||||
| Other comprehensive income (loss) | (4,631 | ) | 12,117 | (3,026 | ) | |||||||
| Total comprehensive income (loss) | 452,733 | 324,216 | (54,542 | ) | ||||||||
| Less: Total comprehensive (income) loss attributable to noncontrolling interests | (2,178 | ) | (2,193 | ) | 1,867 | |||||||
| Total comprehensive income (loss) attributable to CFC | $ | 450,555 | $ | 322,023 | $ | (52,675 | ) | |||||
| See accompanying notes to consolidated financial statements. | ||||||||||||
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
| May 31, | ||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||
| Assets: | ||||||||||||||
| Cash and cash equivalents | $ | 295,063 | $ | 671,372 | ||||||||||
Restricted cash (1) | 8,298 | 8,647 | ||||||||||||
| Total cash, cash equivalents and restricted cash | 303,361 | 680,019 | ||||||||||||
| Investment securities: | ||||||||||||||
| Debt securities trading, at fair value ($210,894 pledged as collateral) | 576,175 | 309,400 | ||||||||||||
| Equity securities, at fair value | 35,102 | 60,735 | ||||||||||||
| Total investment securities, at fair value | 611,277 | 370,135 | ||||||||||||
| Loans to members | 28,426,961 | 26,702,380 | ||||||||||||
| Less: Allowance for credit losses | (85,532) | (53,125) | ||||||||||||
| Loans to members, net | 28,341,429 | 26,649,255 | ||||||||||||
| Accrued interest receivable | 107,856 | 117,138 | ||||||||||||
| Other receivables | 37,197 | 41,099 | ||||||||||||
| Fixed assets, net | 91,882 | 89,137 | ||||||||||||
| Derivative assets | 121,259 | 173,195 | ||||||||||||
| Other assets | 24,102 | 37,627 | ||||||||||||
| Total assets | $ | 29,638,363 | $ | 28,157,605 | ||||||||||
| Liabilities: | ||||||||||||||
| Accrued interest payable | $ | 123,672 | $ | 139,619 | ||||||||||
| Debt outstanding: | ||||||||||||||
| Short-term borrowings | 4,582,096 | 3,961,985 | ||||||||||||
| Long-term debt | 20,603,123 | 19,712,024 | ||||||||||||
| Subordinated deferrable debt | 986,315 | 986,119 | ||||||||||||
| Members’ subordinated certificates: | ||||||||||||||
| Membership subordinated certificates | 628,594 | 630,483 | ||||||||||||
| Loan and guarantee subordinated certificates | 386,896 | 482,965 | ||||||||||||
| Member capital securities | 239,170 | 226,170 | ||||||||||||
| Total members’ subordinated certificates | 1,254,660 | 1,339,618 | ||||||||||||
| Total debt outstanding | 27,426,194 | 25,999,746 | ||||||||||||
| Deferred income | 51,198 | 59,303 | ||||||||||||
| Derivative liabilities | 584,989 | 1,258,459 | ||||||||||||
| Other liabilities | 52,431 | 51,656 | ||||||||||||
| Total liabilities | 28,238,484 | 27,508,783 | ||||||||||||
| Equity: | ||||||||||||||
| CFC equity: | ||||||||||||||
| Retained equity | 1,374,973 | 628,031 | ||||||||||||
| Accumulated other comprehensive loss | (25) | (1,910) | ||||||||||||
| Total CFC equity | 1,374,948 | 626,121 | ||||||||||||
| Noncontrolling interests | 24,931 | 22,701 | ||||||||||||
| Total equity | 1,399,879 | 648,822 | ||||||||||||
| Total liabilities and equity | $ | 29,638,363 | $ | 28,157,605 | ||||||||||
| ____________________________ | ||||||||||||||
(1) Restricted cash consists primarily of member funds held in escrow for certain specifically designed cooperative programs. | ||||||||||||||
| The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. | ||||||||||||||
89
| May 31, | ||||||||
| (Dollars in thousands) | 2018 | 2017 | ||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | 230,999 | $ | 166,615 | ||||
| Restricted cash | 7,825 | 21,806 | ||||||
| Time deposits | 101,000 | 226,000 | ||||||
| Investment securities: | ||||||||
| Available for sale, at fair value | 89,332 | 92,554 | ||||||
| Held to maturity, at amortized cost | 519,519 | — | ||||||
| Total investment securities | 608,851 | 92,554 | ||||||
| Loans to members | 25,178,608 | 24,367,044 | ||||||
| Less: Allowance for loan losses | (18,801 | ) | (37,376 | ) | ||||
| Loans to members, net | 25,159,807 | 24,329,668 | ||||||
| Accrued interest receivable | 127,442 | 111,493 | ||||||
| Other receivables | 39,220 | 45,469 | ||||||
| Fixed assets, net | 116,031 | 122,260 | ||||||
| Derivative assets | 244,526 | 49,481 | ||||||
| Other assets | 54,503 | 40,346 | ||||||
| Total assets | $ | 26,690,204 | $ | 25,205,692 | ||||
| Liabilities: | ||||||||
| Accrued interest payable | $ | 149,284 | $ | 137,476 | ||||
| Debt outstanding: | ||||||||
| Short-term borrowings | 3,795,910 | 3,342,900 | ||||||
| Long-term debt | 18,714,960 | 17,955,594 | ||||||
| Subordinated deferrable debt | 742,410 | 742,274 | ||||||
| Members’ subordinated certificates: | ||||||||
| Membership subordinated certificates | 630,448 | 630,098 | ||||||
| Loan and guarantee subordinated certificates | 528,386 | 567,830 | ||||||
| Member capital securities | 221,148 | 221,097 | ||||||
| Total members’ subordinated certificates | 1,379,982 | 1,419,025 | ||||||
| Total debt outstanding | 24,633,262 | 23,459,793 | ||||||
| Deferred income | 65,922 | 73,972 | ||||||
| Derivative liabilities | 275,932 | 385,337 | ||||||
| Other liabilities | 59,951 | 50,309 | ||||||
| Total liabilities | 25,184,351 | 24,106,887 | ||||||
| Commitments and contingencies | ||||||||
| Equity: | ||||||||
| CFC equity: | ||||||||
| Retained equity | 1,465,789 | 1,056,778 | ||||||
| Accumulated other comprehensive income | 8,544 | 13,175 | ||||||
| Total CFC equity | 1,474,333 | 1,069,953 | ||||||
| Noncontrolling interests | 31,520 | 28,852 | ||||||
| Total equity | 1,505,853 | 1,098,805 | ||||||
| Total liabilities and equity | $ | 26,690,204 | $ | 25,205,692 | ||||
| See accompanying notes to consolidated financial statements. | ||||||||
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
| (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 (Loss) | Total CFC Equity | Non-controlling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of May 31, 2018 | $ | 2,945 | $ | 811,493 | $ | 687,785 | $ | (36,434) | $ | 1,465,789 | $ | 8,544 | $ | 1,474,333 | $ | 31,520 | $ | 1,505,853 | ||||||||||||||||||||||||||||||||||||||
| Cumulative effect from adoption of new accounting standard | — | — | — | 8,794 | 8,794 | (8,794) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 1, 2018 | 2,945 | 811,493 | 687,785 | (27,640) | 1,474,583 | (250) | 1,474,333 | 31,520 | 1,505,853 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 1,000 | 96,592 | 71,312 | (318,135) | (149,231) | — | (149,231) | (1,979) | (151,210) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 103 | 103 | — | 103 | |||||||||||||||||||||||||||||||||||||||||||||||
| Patronage capital retirement | — | (47,507) | — | — | (47,507) | — | (47,507) | (2,908) | (50,415) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | (963) | — | — | — | (963) | — | (963) | 514 | (449) | |||||||||||||||||||||||||||||||||||||||||||||||
| 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 income (loss) | 1,000 | 96,310 | 48,223 | (730,773) | (585,240) | — | (585,240) | (4,190) | (589,430) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (1,763) | (1,763) | — | (1,763) | |||||||||||||||||||||||||||||||||||||||||||||||
| Patronage capital retirement | — | (62,822) | — | — | (62,822) | — | (62,822) | (1,933) | (64,755) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | (789) | — | — | — | (789) | — | (789) | 1,677 | 888 | |||||||||||||||||||||||||||||||||||||||||||||||
| 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 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 | 900 | 89,761 | 102,429 | 618,577 | 811,667 | — | 811,667 | 2,311 | 813,978 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 1,885 | 1,885 | — | 1,885 | |||||||||||||||||||||||||||||||||||||||||||||||
| Patronage capital retirement | — | (59,857) | — | — | (59,857) | — | (59,857) | (2,054) | (61,911) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | (968) | — | — | — | (968) | — | (968) | 1,973 | 1,005 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of May 31, 2021 | $ | 3,125 | $ | 923,970 | $ | 909,749 | $ | (461,871) | $ | 1,374,973 | $ | (25) | $ | 1,374,948 | $ | 24,931 | $ | 1,399,879 | ||||||||||||||||||||||||||||||||||||||
| The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
90
| (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 | |||||||||||||||||||||||||||
| Balance as of May 31, 2015 | $ | 2,743 | $ | 668,980 | $ | 501,731 | $ | (293,212 | ) | $ | 880,242 | $ | 4,080 | $ | 884,322 | $ | 27,464 | $ | 911,786 | |||||||||||||||||
| Net income (loss) | 1,000 | 84,257 | 85,917 | (220,827 | ) | (49,653 | ) | — | (49,653 | ) | (1,863 | ) | (51,516 | ) | ||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (3,022 | ) | (3,022 | ) | (4 | ) | (3,026 | ) | |||||||||||||||||||||||
| Patronage capital retirement | — | (39,384 | ) | — | — | (39,384 | ) | — | (39,384 | ) | — | (39,384 | ) | |||||||||||||||||||||||
| Other | (971 | ) | — | (429 | ) | 429 | (971 | ) | — | (971 | ) | 489 | (482 | ) | ||||||||||||||||||||||
| Balance as of May 31, 2016 | $ | 2,772 | $ | 713,853 | $ | 587,219 | $ | (513,610 | ) | $ | 790,234 | $ | 1,058 | $ | 791,292 | $ | 26,086 | $ | 817,378 | |||||||||||||||||
| Net income | 1,000 | 90,441 | 43,086 | 175,379 | 309,906 | — | 309,906 | 2,193 | 312,099 | |||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 12,117 | 12,117 | — | 12,117 | |||||||||||||||||||||||||||
| Patronage capital retirement | — | (42,593 | ) | — | 103 | (42,490 | ) | — | (42,490 | ) | — | (42,490 | ) | |||||||||||||||||||||||
| Other | (872 | ) | — | — | — | (872 | ) | — | (872 | ) | 573 | (299 | ) | |||||||||||||||||||||||
| 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 | 1,000 | 95,012 | 57,480 | 301,694 | 455,186 | — | 455,186 | 2,178 | 457,364 | |||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (4,631 | ) | (4,631 | ) | — | (4,631 | ) | ||||||||||||||||||||||||
| Patronage capital retirement | — | (45,220 | ) | — | — | (45,220 | ) | — | (45,220 | ) | — | (45,220 | ) | |||||||||||||||||||||||
| Other | (955 | ) | — | — | — | (955 | ) | — | (955 | ) | 490 | (465 | ) | |||||||||||||||||||||||
| Balance as of May 31, 2018 | $ | 2,945 | $ | 811,493 | $ | 687,785 | $ | (36,434 | ) | $ | 1,465,789 | $ | 8,544 | $ | 1,474,333 | $ | 31,520 | $ | 1,505,853 | |||||||||||||||||
| See accompanying notes to consolidated financial statements. | ||||||||||||||||||||||||||||||||||||
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended May 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||
| Net income (loss) | $ | 813,978 | $ | (589,430) | $ | (151,210) | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
| Amortization of deferred loan fees | (9,390) | (9,309) | (10,009) | |||||||||||||||||
| Amortization of debt issuance costs and deferred charges | 10,608 | 9,095 | 10,439 | |||||||||||||||||
| Amortization of discount on long-term debt | 11,925 | 10,896 | 10,605 | |||||||||||||||||
| Amortization of issuance costs for bank revolving lines of credit | 4,434 | 4,972 | 5,324 | |||||||||||||||||
| Depreciation and amortization | 7,959 | 9,238 | 9,305 | |||||||||||||||||
| Provision (benefit) for credit losses | 28,507 | 35,590 | (1,266) | |||||||||||||||||
| Loss on early extinguishment of debt | 1,456 | 683 | 7,100 | |||||||||||||||||
| Fixed assets impairment | 0 | 31,284 | 0 | |||||||||||||||||
| Gain on sale of land | 0 | (7,713) | 0 | |||||||||||||||||
| Unrealized (gains) losses on equity and debt securities | (1,015) | (5,975) | 1,799 | |||||||||||||||||
| Derivative forward value (gains) losses | (621,946) | 734,278 | 319,730 | |||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||
| Accrued interest receivable | 9,282 | 16,467 | (6,163) | |||||||||||||||||
| Accrued interest payable | (15,947) | (19,378) | 9,713 | |||||||||||||||||
| Deferred income | 1,285 | 10,973 | 2,077 | |||||||||||||||||
| Other | (1,181) | (12,456) | (10,401) | |||||||||||||||||
| Net cash provided by operating activities | 239,955 | 219,215 | 197,043 | |||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Advances on loans, net | (1,724,253) | (785,190) | (738,171) | |||||||||||||||||
| Investments in fixed assets, net | (9,862) | (9,565) | (14,725) | |||||||||||||||||
| Proceeds from sale of land | 0 | 21,268 | 0 | |||||||||||||||||
| Net proceeds from time deposits | 0 | 0 | 100,000 | |||||||||||||||||
| Purchase of trading securities | (397,522) | (3,883) | 0 | |||||||||||||||||
| Proceeds from sales and maturities of trading securities | 127,875 | 277,687 | 0 | |||||||||||||||||
| Proceeds from redemption of equity securities | 30,000 | 25,000 | 0 | |||||||||||||||||
| Purchases of held-to-maturity debt securities | 0 | (76,339) | (80,123) | |||||||||||||||||
| Proceeds from maturities of held-to-maturity debt securities | 0 | 69,726 | 35,340 | |||||||||||||||||
| Net cash used in investing activities | (1,973,762) | (481,296) | (697,679) | |||||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Proceeds from (repayments of) short-term borrowings, net | 808,252 | (208,340) | (452,618) | |||||||||||||||||
| Proceeds from short-term borrowings with original maturity > 90 days | 3,081,069 | 3,022,910 | 1,652,005 | |||||||||||||||||
| Repayments of short-term borrowings with original maturity > 90 days | (3,269,210) | (2,460,311) | (1,387,571) | |||||||||||||||||
| Payments for issuance costs for revolving bank lines of credit | 0 | (1,025) | (2,382) | |||||||||||||||||
| Proceeds from issuance of long-term debt, net of discount and issuance costs | 3,055,220 | 2,156,711 | 3,281,595 | |||||||||||||||||
| Payments for retirement of long-term debt | (2,186,458) | (1,675,288) | (2,806,639) | |||||||||||||||||
| Payments made for early extinguishment of debt | (1,456) | (683) | (7,100) | |||||||||||||||||
| Payments for issuance costs for subordinated deferrable debt | 0 | (84) | (6,535) | |||||||||||||||||
| Proceeds from issuance of subordinated deferrable debt | 0 | 0 | 250,000 | |||||||||||||||||
| Proceeds from issuance of members’ subordinated certificates | 14,292 | 9,621 | 1,986 | |||||||||||||||||
| Payments for retirement of members’ subordinated certificates | (84,659) | (24,572) | (24,861) | |||||||||||||||||
| Payments for retirement of patronage capital | (59,889) | (63,035) | (49,860) | |||||||||||||||||
| Repayments for membership fees, net | (12) | (8) | (4) | |||||||||||||||||
| Net cash provided by financing activities | 1,357,149 | 755,896 | 448,016 | |||||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | (376,658) | 493,815 | (52,620) | |||||||||||||||||
| Beginning cash, cash equivalents and restricted cash | 680,019 | 186,204 | 238,824 | |||||||||||||||||
| Ending cash, cash equivalents and restricted cash | $ | 303,361 | $ | 680,019 | $ | 186,204 | ||||||||||||||
| The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. | ||||||||||||||||||||
91
| Year Ended May 31, | ||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income (loss) | $ | 457,364 | $ | 312,099 | $ | (51,516 | ) | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Amortization of deferred loan fees | (11,296 | ) | (14,072 | ) | (18,751 | ) | ||||||
| Amortization of debt issuance costs and deferred charges | 10,456 | 9,484 | 8,478 | |||||||||
| Amortization of discount on long-term debt | 10,164 | 9,501 | 8,693 | |||||||||
| Amortization of issuance costs for bank revolving lines of credit | 5,346 | 5,531 | 5,535 | |||||||||
| Depreciation and amortization | 7,931 | 7,173 | 7,327 | |||||||||
| Provision (benefit) for loan losses | (18,575 | ) | 5,978 | (646 | ) | |||||||
| Results of operations of foreclosed assets | — | 1,749 | 6,899 | |||||||||
| Derivative forward value (gains) losses | (306,002 | ) | (179,381 | ) | 221,083 | |||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accrued interest receivable | (15,949 | ) | 1,778 | (6,225 | ) | |||||||
| Accrued interest payable | 11,808 | 4,480 | 9,299 | |||||||||
| Deferred income | 3,246 | 9,393 | 21,822 | |||||||||
| Other | 741 | 5,855 | 15,560 | |||||||||
| Net cash provided by operating activities | 155,234 | 179,568 | 227,558 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Advances on loans, net | (811,164 | ) | (1,145,673 | ) | (1,693,084 | ) | ||||||
| Investment in fixed assets | (15,194 | ) | (17,793 | ) | (9,806 | ) | ||||||
| Net cash proceeds from sale of foreclosed assets | — | 51,042 | 5,414 | |||||||||
| Proceeds from foreclosed assets | — | — | (4,349 | ) | ||||||||
| Net proceeds from time deposits | 125,000 | 114,000 | 145,000 | |||||||||
| Purchases of held-to-maturity investments | (510,598 | ) | — | — | ||||||||
| Proceeds from maturities of held-to-maturity investments | 1,394 | — | — | |||||||||
| Change in restricted cash | 13,981 | (17,178 | ) | (4,143 | ) | |||||||
| Net cash used in investing activities | (1,196,581 | ) | (1,015,602 | ) | (1,560,968 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from (repayments of) short-term borrowings, net | 126,211 | 409,871 | (154,072 | ) | ||||||||
| Proceeds from short-term borrowings with original maturity greater than 90 days | 1,331,910 | 1,003,185 | 890,242 | |||||||||
| Repayments of short term-debt with original maturity greater than 90 days | (1,005,111 | ) | (1,009,004 | ) | (925,076 | ) | ||||||
| Payments for issuance costs for revolving bank lines of credit | (2,441 | ) | (2,548 | ) | (3,009 | ) | ||||||
| Proceeds from issuance of long-term debt, net of discount and issuance costs | 2,349,885 | 2,923,868 | 2,920,669 | |||||||||
| Payments for retirement of long-term debt | (1,611,002 | ) | (2,460,730 | ) | (1,709,283 | ) | ||||||
| Payments for issuance costs for subordinated deferrable debt | — | (68 | ) | — | ||||||||
| Proceeds from issuance of subordinated debt | — | — | 346,433 | |||||||||
| Proceeds from issuance of members’ subordinated certificates | 6,136 | 3,626 | 5,654 | |||||||||
| Payments for retirement of members’ subordinated certificates | (45,180 | ) | (28,220 | ) | (43,596 | ) | ||||||
| Payments for retirement of patronage capital | (44,667 | ) | (41,871 | ) | (38,848 | ) | ||||||
| Repayments for membership fees, net | (10 | ) | — | — | ||||||||
| Net cash provided by financing activities | 1,105,731 | 798,109 | 1,289,114 | |||||||||
| Net increase (decrease) in cash and cash equivalents | 64,384 | (37,925 | ) | (44,296 | ) | |||||||
| Beginning cash and cash equivalents | 166,615 | 204,540 | 248,836 | |||||||||
| Ending cash and cash equivalents | $ | 230,999 | $ | 166,615 | $ | 204,540 | ||||||
| See accompanying notes to consolidated financial statements. | ||||||||||||
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended May 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||||||||
| Cash paid for interest | $ | 687,145 | $ | 805,086 | $ | 801,966 | ||||||||||||||
| Cash paid for income taxes | 219 | 20 | 112 | |||||||||||||||||
| Noncash financing and investing activities: | ||||||||||||||||||||
| Net decrease in debt service reserve funds/debt service reserve certificates | $ | 0 | $ | 2,560 | $ | 0 | ||||||||||||||
| The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. | ||||||||||||||||||||
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| Year Ended May 31, | ||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | |||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Cash paid for interest | $ | 766,059 | $ | 712,742 | $ | 649,845 | ||||||
| Cash paid for income taxes | 321 | 407 | 72 | |||||||||
| Noncash financing and investing activities: | ||||||||||||
| Loan provided in connection with the sale of foreclosed assets | $ | — | $ | 60,000 | $ | — | ||||||
| See accompanying notes to consolidated financial statements. | ||||||||||||
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 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.
National Cooperative Services Corporation (“NCSC”) is a taxable cooperative incorporated in 1981 in the District of Columbia as a member-owned cooperative association. NCSC’s principal purpose is to provide financing to members of CFC, entities eligible to be members of CFC and the for-profit and nonprofit entities that are owned, operated or controlled by or provide significant benefit to certain members of CFC. NCSC’s membership consists of distribution systems, power supply systems and statewide and regional associations that are members of CFC. CFC is the primary source of funding for NCSC and manages NCSC’s business operations under a management agreement that is automatically renewable on an annual basis unless terminated by either party. NCSC pays CFC a fee and, in exchange, CFC reimburses NCSC for loan losses under a guarantee agreement. As a taxable cooperative, NCSC pays income tax based on its reported taxable income and deductions. NCSC is headquartered with CFC in Dulles, Virginia.
Rural Telephone Finance Cooperative (“RTFC”) is a taxable Subchapter T cooperative association originally incorporated in South Dakota in 1987 and reincorporated as a member-owned cooperative association in the District of Columbia in 2005. RTFC’s principal purpose is to provide financing for its rural telecommunications members and their affiliates. RTFC’s membership consists of a combination of not-for-profit and for-profit entities. CFC is the sole lender to and manages the business operations of RTFC through a management agreement that is automatically renewable on an annual basis unless terminated by either party. RTFC pays CFC a fee and, in exchange, CFC reimburses RTFC for loan losses under a guarantee agreement. As permitted under Subchapter T of the Internal Revenue Code, RTFC pays income tax based on its net income, excluding patronage-sourced earnings allocated to its patrons. RTFC is headquartered with CFC in Dulles, Virginia.
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Thedisclosures during the period. Management's most significant estimates and assumptions involve determining the allowance for loancredit losses and the fair value of financial assets and liabilities. While management makes its best judgment, actual amounts orActual results could differ from these estimates. Certain reclassifications have been made to previously reported amountsprior periods to conform to the current-periodcurrent presentation.
Risks and Uncertainties
While the novel strain of coronavirus that causes coronavirus disease 2019 (“COVID-19”) continues to persist, disruptions caused by the virus have been significantly reduced as a result of the manufacturing and distribution of recently developed COVID-19 vaccines. Although most of the initial restrictions have been relaxed or lifted, the risk of future COVID-19 outbreaks remains. New information may emerge regarding the severity of COVID-19 variants or the effectiveness of the vaccines developed, causing federal, state and local governments to take additional actions to contain COVID-19 or to treat its impact. We continue to closely monitor developments; however, we cannot predict the future impact of COVID-19 on
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
our operational and financial performance, or the specific ways the pandemic uniquely impacts our members, all of which continue to involve uncertainties.
Principles of Consolidation
The accompanying 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 not0t have any entities that held foreclosed assets as of May 31, 20182021 or May 31, 2017.2020. All intercompany balances and transactions have been eliminated. NCSC and RTFC are VIEs that are required to be consolidated by CFC. Unless stated otherwise, references to “we, “our” or “us” relate to CFC and its consolidated entities.
Variable Interest Entities
A VIE is an entity that has a total equity investment at risk that is not sufficient to finance its activities without additional subordinated financial support provided by another party, or where the group of equity holders does not have:have (i) the ability to make decisions about the entity’s activities that most significantly impact its economic performance; (ii) the obligation to absorb the entity’s expected losses; or (iii) the right to receive the entity’s expected residual returns.
NCSC and RTFC meet the definition of variable interest entitiesVIEs because they do not have sufficient equity investment at risk to finance their activities without additional financial support. When evaluating an entity for possible consolidation, we must determine whether or not we have a variable interest in the entity. If it is determined that we do not have a variable interest in the entity, no further analysis is required and we do not consolidate the entity. If we have a variable interest in the entity, we must evaluate whether we are the primary beneficiary based on an assessment of quantitative and qualitative factors. We are considered the primary beneficiary holder if we have a controlling financial interest in the VIE that provides (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. We consolidate the results of NCSC and RTFC with CFC because CFC is the primary beneficiary holder.
Cash and Cash Equivalents
Cash, certificates of deposit due from banks and other investments with original maturities of less than 90 days are classified as cash and cash equivalents.
Restricted Cash
Restricted cash, which consists primarily of member funds held in escrow for certain specifically designed cooperative programs, totaled $8 million and $22$9 million as of May 31, 20182021 and 2017,2020, respectively. On July 1, 2016, CFC completed 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 million of the sale proceeds was deposited into escrow to fund potential indemnification claims following the closing. Of this amount, $14.5 million was designated to cover general indemnification claims and has been released back to us. The remaining $1.5 million was designated to cover indemnification of certain tax liens and remains in escrow. We continue to be liable for certain indemnification obligations, if raised and substantiated, regardless of whether amounts are held in escrow.
Investment Securities
Our investment securities portfolio consists of equity and debt securities. We record purchases and sales of securities on a trade-date basis. We currently classifyThe accounting and accountmeasurement framework for our investment securities as either available for sale (“AFS”) or held to maturity (“HTM”) baseddiffers depending on our investment strategythe security type 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans to Members
As permitted by the current expected credit loss (“CECL”) model, 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 members. 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 $93 million and $96 million as of May 31, 2021 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 generally 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 past duea troubled debt restructuring (“TDR”) if the borrower is experiencing financial difficulties and a fullconcession 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—Asset-Specific Allowance,” 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 will be executed with the borrower and when we expect the modification to affect the timing or amount of payments and/or the payment of interestterm.
We generally classify TDR loans as nonperforming and principal is not received within 30 days of its due date. Loans areplace the loan on nonaccrual status, although in many cases such loans were already classified as nonperforming whenprior to modification. These loans may be returned to performing status and the collectionaccrual of interest resumed if the borrower performs under the modified terms for an extended period of time, and principal has become 90 days past due; court proceedings indicate that collection of interest and principalwe 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 termsprincipal or interest is unlikely;90 days past due or when we believe the full and timely collection of principal and interest or principal becomes otherwise.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Charge-Offs
We may modify the termscharge off loans or a portion of a loan to maximizewhen we determine that the collectionloan is uncollectible. The charge-off of uncollectible principal amounts due when a borrower is experiencing financial difficulties. Concessionary modifications are classified as troubled debt restructurings (“TDRs”) unless the modification results in onlya reduction to the allowance for credit losses for our loan portfolio. Recoveries of previously charged off principal amounts result in an insignificant delay in paymentsincrease to be received. All of our restructured loans are considered TDRs.the allowance.
Allowance for Credit Losses—Loan LossesPortfolio
Current Allowance Methodology
Beginning June 1, 2020, the allowance for credit losses is determined based on 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 credit losses 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 maintainimmediately recognize an allowance for loanexpected credit losses that represents management’supon origination of a loan. Adjustments to the allowance each period for changes in our estimate of lifetime expected credit losses 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 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 borrowers’ creditworthiness, and accordingly our loss experience, has not correlated to specific underlying macroeconomic variables, such as U.S. unemployment rates or gross domestic product (“GDP”) growth, we have not made adjustments to our historical loss rates for any economic forecast. 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, as well as changes in the regulatory environment and other pertinent external factors that may impact the amount of future credit losses.
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 portfolio into loan pools that share similar risk characteristics. We disaggregate our loan 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•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 creditworthiness 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 provide 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 revenue 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.
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 May 31, 2021 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 generally 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.
Prior Allowance Methodology
Prior to June 1, 2020, the allowance for credit losses was determined based the incurred loss model under which management estimated probable losses inherent in our loan portfolio as of each balance sheet date. Our allowance for loanWe used a probability of default/loss given default methodology in estimating probable losses consists of a collective allowance for loans in our portfolio that are not individually impaired and a specific allowance for loans identified as individually impaired.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unadvanced Loan Commitments
Unadvanced commitments represent amounts for which we have approved and executed loan contracts, but the funds have not been advanced. The majority of the unadvanced commitments reported represent amounts that are subject to material adverse change clauses at the time of the loan advance. Prior to making an advance on these facilities, 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 loan terms and conditions. The remaining unadvanced commitments relate to line of credit loans that are not subject to a material adverse change clause at the time of each loan advance. As such, we would be required to advance amounts on these committed facilities as long as the borrower is in compliance with the terms and conditions of the loan commitment.
Unadvanced loan commitments related to line of credit loans are typically for periods not to exceed five years and are generally revolving facilities used for working capital and backup liquidity purposes. Historically, we have experienced a very low utilization rate on line of credit loan facilities, whether or not there is a material adverse change clause. Since we generally do not charge a fee on the unadvanced portion of the majority of our loan facilities, our borrowers will typically request long-term facilities to fund construction work plans and other capital expenditures for periods of up to five years and draw down on the facility over that time. In addition, borrowers will typically request an amount in excess of their immediate estimated loan requirements to avoid the expense related to seeking additional loan funding for unexpected items. These factors contribute to our expectation that the majority of the unadvanced line of credit loan commitments will expire without being fully drawn upon and that the total unadvanced amount does not necessarily represent future cash funding
requirements.
Reserve for Unadvanced Loan CommitmentsCredit 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 committed linesfinancial 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 measure expected credit losses for our off-balance sheet exposures, after adjusting for the probability of credit. Thisfunding these exposures. consistent with the methodology used for our funded outstanding exposures. We include the reserve is includedfor expected credit losses for our off-balance sheet credit exposures as a component of other liabilities on our consolidated balance sheets, and changes in the reserve are included in other non-interest expense on our consolidated statements of operations. Our estimate of the reserve for potential losses on these commitments takes into consideration various factors, including the existence of a material adverse change clause, the historical utilization of the committed lines of credit, the probability of funding, historical loss experience on unadvanced loan commitments and other inputs along with management judgment consistent with the methodology used to determine our allowance for loan losses.sheets.
Fixed Assets
Fixed assets are recorded at cost less accumulated depreciation. We recognize depreciation expense for each category of our depreciable fixed assets on a straight-line basis over the estimated useful life, which ranges from three to 40 years. We recognized depreciation expense ofof $8 million, $7$9 million and $7and $9 million in fiscal year 2018, 2017years 2021, 2020 and 2016,2019, respectively. The following table below displays the components of our fixed assets. Our headquarters facility in Loudoun County, Virginia, which is owned by CFC, is included as a component of building and building equipment.
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| May 31, | ||||||||
| (Dollars in thousands) | 2018 | 2017 | ||||||
| Building and building equipment | $ | 50,210 | $ | 50,236 | ||||
| Furniture and fixtures | 6,080 | 5,852 | ||||||
| Computer software and hardware | 45,389 | 40,469 | ||||||
| Other | 1,006 | 1,034 | ||||||
| Depreciable fixed assets | 102,685 | 97,591 | ||||||
| Less: Accumulated depreciation | (47,705 | ) | (41,274 | ) | ||||
| Net depreciable fixed assets | 54,980 | 56,317 | ||||||
| Land | 23,796 | 37,847 | ||||||
| Software development | 37,255 | 28,096 | ||||||
| Fixed assets, net | $ | 116,031 | $ | 122,260 | ||||
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 1.1: Fixed Assets
| May 31, | ||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||
| Building and building equipment | $ | 50,090 | $ | 50,087 | ||||||||||
| Furniture and fixtures | 6,039 | 6,015 | ||||||||||||
| Computer software and hardware | 54,582 | 49,944 | ||||||||||||
| Other | 1,048 | 1,051 | ||||||||||||
| Depreciable fixed assets | 111,759 | 107,097 | ||||||||||||
| Less: Accumulated depreciation | (66,777) | (59,007) | ||||||||||||
| Net depreciable fixed assets | 44,982 | 48,090 | ||||||||||||
| Land | 23,796 | 23,796 | ||||||||||||
| Software development in progress | 23,104 | 17,251 | ||||||||||||
| Fixed assets, net | $ | 91,882 | $ | 89,137 | ||||||||||
In fiscal year 2020, management made a decision to abandon a project to develop an internal-use loan origination and servicing platform. The project was intended to update our loan platform to provide increased functionality and flexibility and enhance the dispositionoperational efficiency of this property is probable within the next 12 months, there can be no assurance that the disposition will be consummated in accordance with the termsour lending, loan servicing and loan accounting processes. As a result of the agreement.
Foreclosed Assets
Foreclosed assets acquired through our lending activities in satisfaction of indebtedness may be held in operating entities created and controlled by CFC and presented separately in our consolidated balance sheets under foreclosed assets, net. These assets are initially recorded at estimated fair value as of the date of acquisition. Subsequent to acquisition, foreclosed assets not classified as held for sale are evaluated for impairment, and the results of operations and any impairment are reported on our consolidated statements of operations under results of operations of foreclosed assets. When foreclosed assets meet the accounting criteria to be classified as held for sale, they are recorded at the lower of cost or fair value less estimated cost to sell at the date of transfer, with the amount at the date of transfer representing the new cost basis. Subsequent changes are recognized in our consolidated statements of operations under results of operations of foreclosed assets. We also review foreclosed assets classified as held for sale each reporting period to determine whether the existing carrying amounts are fully recoverable in comparison to estimated fair values. We did not0t carry any foreclosed assets on our consolidated balance sheet as of May 31, 20182021 or May 31, 2017.2020.
Securities Sold Under Repurchase Agreements
We enter into repurchase agreements to sell investment securities. These transactions are accounted for as collateralized financing transactions and are recorded on our consolidated balance sheets as part of short-term borrowings at the amounts at which the securities were sold.
Debt
We report debt at cost net of unamortized issuance costs and discounts or premiums. Issuance costs, discounts and premiums are deferred and amortized into interest expense using the effective interest method or a method approximating the effective interest method over the legal maturity of each bond issue. Short-term borrowings consist of borrowings with an original
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contractual maturity of one year or less and do not include the current portion of long-term debt. Borrowings with an original contractual maturity of greater than one year are classified as long-term debt.
Derivative Instruments
We are an end user of derivative financial instruments and do not engage in derivative trading. We use derivatives, primarily interest rate swaps and treasuryTreasury rate locks, to manage interest rate risk. Derivatives may be privately negotiated contracts, which are often referred to as over-the-counter (“OTC”) derivatives, or they may be listed and traded on an exchange. We generally engage in OTC derivative transactions.
In accordance with the accounting standards for derivatives and hedging activities, we record derivative instruments at fair value as either a derivative asset or derivative liability on our consolidated balance sheets. 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 position are reported as derivative assets on our consolidated balance sheets, while derivatives in a loss position are reported as derivative liabilities. Accrued interest related to derivatives is reported on our consolidated balance sheets as a component of either accrued interest receivable 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 changes in the fair value of the hedged item and any related ineffectiveness. Changes in the fair value of derivatives designated as qualifying cash flow
hedges are recorded as a component of other comprehensive income (“OCI”), to the extent that the hedge relationships are effective, and reclassified from accumulated other comprehensive income (“AOCI”) to earnings using the effective interest method over the term 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.
We generally do not designate interest rate swaps, which represent the substantial majority 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). Net periodic cash settlements expense related to interest rate swaps are classified as an operating activity in our consolidated statements of cash flows.
We typically designate treasuryTreasury rate locks as cash flow hedges of forecasted debt issuances or repricings. Changes in the fair value of treasury locks designated as cash flow hedges are recorded as a component of OCI and reclassified from AOCI into interest expense when the forecasted transaction occurs using the effective interest method. Any ineffectiveness is recognized as a component of derivative gains (losses) in our consolidated statements of operations.
Guarantee Liability
We maintain a guarantee liability that represents our contingent and noncontingent exposure related to guarantees and standby liquidity obligations associated with our members’ debt. The guarantee liability is included in the other liabilities line item on the consolidated balance sheet, and the provision for guarantee liability is reported in non-interest expense as a separate line item on the consolidated statement of operations.
The contingent portion of the guarantee liability represents management’s estimate of our exposure to losses within the guarantee portfolio. The methodology used to estimate the contingent guarantee liability is consistent with the methodology used to determine the allowance for loan losses.credit losses under the CECL model.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We have recorded a noncontingent guarantee liability for all new or modified guarantees since January 1, 2003. Our noncontingent guarantee liability represents our 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. Our noncontingent obligation is estimated based on guarantee and liquidity fees charged for guarantees issued, which represents management’s estimate of the fair value of our obligation to stand ready to perform. The fees are deferred and amortized using the straight-line method into interest income over the term of the guarantee.
Fair Value Valuation Processes
We present certain financial instruments at fair value, including available-for-sale investmentequity and debt securities, and derivatives. Fair value 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 (also referred to as an exit price). We have various processes and controls in place to ensure that fair value is reasonably estimated. We consider observable prices in the principal market in our valuations where possible. Fair value estimates were developed at the reporting date and may not necessarily be indicative of amounts that could ultimately be realized in a market transaction at a future date. With the exception of redeeming debt under early redemption provisions, terminating derivative instruments under early-termination provisions and allowing borrowers to prepay their loans, we held and intend to hold all financial instruments to maturity excluding common stock and preferred stock investments that have no stated maturity.maturity and our trading debt securities.
Fair Value Hierarchy
The fair value accounting guidance provides a three-level fair value hierarchy for classifying financial instruments. This hierarchy is based on the markets in which the assets or liabilities trade and whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. Fair value measurement of a financial asset or liability is assigned a level based on the lowest level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are summarized below:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2: Observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities
Level 3: Unobservable inputs
The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted prices in active markets or observable market parameters. When quoted prices and observable data in active markets are not fully available, management’s judgment is necessary to estimate fair value. Changes in market conditions, such as reduced liquidity in the capital markets or changes in secondary market activities, may reduce the availability and reliability of quoted prices or observable data used to determine fair value.
Membership Fees
Members are charged a one-time membership fee based on member class. CFC distribution system members, power supply system members and national associations of cooperatives pay a $1,000 membership fee. CFC service organization members pay a $200 membership fee and CFC associates pay a $1,000 fee. RTFC voting members pay a $1,000 membership fee and RTFC associates pay a $100 fee. NCSC members pay a $100 membership fee. Membership fees are accounted for as members’ equity.
Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, we are a party to financial instruments with off-balance sheet risk to meet the financing needs of our member borrowers. These financial instruments include committed lines of credit, standby letters of credit and guarantees of members’ obligations.
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Year Ended May 31, | ||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | |||||||||
| Interest income by interest-earning asset type: | ||||||||||||
Long-term fixed-rate loans(1) | $ | 1,000,492 | $ | 980,173 | $ | 959,701 | ||||||
| Long-term variable-rate loans | 27,152 | 19,902 | 19,858 | |||||||||
| Line of credit loans | 38,195 | 25,389 | 24,864 | |||||||||
TDR loans(2) | 889 | 905 | 512 | |||||||||
| Nonperforming loans | — | — | 142 | |||||||||
Other income, net(3) | (1,185 | ) | (1,082 | ) | (1,088 | ) | ||||||
| Total loans | 1,065,543 | 1,025,287 | 1,003,989 | |||||||||
| Cash, time deposits and investment securities | 11,814 | 11,347 | 8,647 | |||||||||
| Total interest income | $ | 1,077,357 | $ | 1,036,634 | $ | 1,012,636 | ||||||
| Year Ended May 31, | ||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | |||||||||
Interest expense by debt product type:(1)(2) | ||||||||||||
| Short-term borrowings | $ | 50,616 | $ | 26,684 | $ | 14,728 | ||||||
| Medium-term notes | 111,814 | 99,022 | 86,270 | |||||||||
| Collateral trust bonds | 336,079 | 340,854 | 333,338 | |||||||||
| Guaranteed Underwriter Program notes payable | 140,551 | 142,661 | 143,240 | |||||||||
| Farmer Mac notes payable | 56,004 | 33,488 | 20,529 | |||||||||
| Other notes payable | 1,509 | 1,780 | 2,051 | |||||||||
| Subordinated deferrable debt | 37,661 | 37,657 | 21,245 | |||||||||
| Subordinated certificates | 58,501 | 59,592 | 60,449 | |||||||||
| Total interest expense | $ | 792,735 | $ | 741,738 | $ | 681,850 | ||||||
Early Extinguishment of Debt
We redeem outstanding debt early from time to time to manage liquidity and interest rate risk. When we redeem outstanding debt early, we recognize a gain or loss related to the difference between the amount paid to redeem the debt and the net book value of the extinguished debt as a component of non-interest expense in the gain (loss) on early extinguishment of debt line item..
Income Taxes
While CFC is exempt under Section 501(c)(4) of the Internal Revenue Code, it is subject to tax on unrelated business taxable income. NCSC is a taxable cooperative that pays income tax on the full amount of its reportable taxable income and allowable deductions. RTFC is a taxable cooperative under Subchapter T of the Internal Revenue Code and is not subject to income taxes on income from patronage sources that is allocated to its borrowers, as long as the allocation is properly noticed and at least 20% of the amount allocated is retired in cash prior to filing the applicable tax return.
The income tax benefit (expense) recorded in the consolidated statement of operations represents the income tax benefit (expense) at the applicable combined federal and state income tax rates resulting in a statutory tax rate. The statutory tax rate for NCSC and RTFC was 34% and 35%, respectively, for fiscal year 2018. The statutory tax rate for NCSC and RTFC was 38% and 40%, respectively, for fiscal year 2017 and thefederal statutory tax rate for both NCSC and RTFC was 38%21% for each of fiscal year 2016.years 2021, 2020 and 2019. Substantially all ofof the income tax expense recorded in our consolidated statements of operations relates to NCSC. NCSC had a deferred tax asset of $2 million and $4$3 million as ofof May 31, 20182021 and 2017,2020, respectively, primarily arising from differences in the accounting and tax treatment for derivatives. We believe that it is more likely than not that the deferred tax assets will be realized through taxable earnings.
Fair Value Measurement—Changes to the Disclosure Requirements for Fair Value Measurement
On June 1, 2020, we adopted Accounting Standards Update (“ASU”) 2017-12, Derivatives2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair ValueMeasurement, which removes, adds and Hedging—Targeted Improvements to Accounting for Hedging Activities, which expands the types of risk-management strategies that qualify for hedge accounting treatment to more closely align the results of hedge accounting with the economics ofmodifies certain risk-management activities and simplifies certain hedge documentation and assessment requirement. It also eliminates the concept of separately recording hedge ineffectiveness and expands disclosure requirements.requirements on fair value measurements. 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 before the effective date. The guidance is effective for us beginning June 1, 2019. Hedge accounting is elective, and we currently apply hedge accounting on a limited basis, specifically when we enter into treasury rate lock agreements. If we continue to elect not to apply hedge accounting to our interest rate swaps, the adoption of this guidance, which resulted only in certain changes to the new guidance willfair value measurement disclosures presented in “Note 14—Fair Value Measurement” did not have a material impact onotherwise 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 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, for 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.
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We adopted CECL using the modified retrospective approach, 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 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 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 CECL had no impact on our earnings at adoption on June 1, 2020, subsequent estimates of lifetime expected credit losses for newly recognized loans, unadvanced loan commitments and Other Costfinancial guarantees, as well as changes during the period in our estimate of lifetime expected credit losses for existing financial instruments subject to CECL, are now recognized in earnings. 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 U.S. GAAP.
Reference Rate Reform
On March 2017, FASB12, 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-08, Receivables—Nonrefundable Fees2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and Other Costs,which shortens the amortization periodexceptions for the premiumapplying U.S. GAAP on certain callable debt securitiescontracts, hedging relationships and other transactions subject to modification due to the earliest callexpected 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 rather the maturity date.or reassess a previous accounting determination. The guidance is applicablewas effective upon issuance on March 12, 2020, and can generally be applied through December 31, 2022. We expect to any individual debt security, purchased at a premium, with an explicit and noncontingent call feature with a fixed price on a preset date. The guidance does not impact the accounting for purchased callable debt securities held at a discount; the discount will continue to amortize to the maturity 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. Adoptionapply certain of the guidance requires modified retrospection transition aspractical expedients and are in the process of evaluating the beginningtiming and application of the period of adoption through a cumulative-effect adjustment to retained earnings. Wethose elections. Based on our current assessment, we do not expectbelieve that the adoptionapplication of this guidance will have a material impact on our consolidated financial statements.
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2— | ||
Table 2.1: Interest Income and Interest Expense
| Year Ended May 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Interest income: | ||||||||||||||||||||
Loans(1)(2) | $ | 1,101,505 | $ | 1,129,883 | $ | 1,111,061 | ||||||||||||||
| Investment securities | 15,096 | 21,403 | 24,609 | |||||||||||||||||
| Total interest income | 1,116,601 | 1,151,286 | 1,135,670 | |||||||||||||||||
Interest expense:(3)(4) | ||||||||||||||||||||
| Short-term borrowings | 14,730 | 77,995 | 92,854 | |||||||||||||||||
| Long-term debt | 581,292 | 634,567 | 647,284 | |||||||||||||||||
| Subordinated debt | 106,041 | 108,527 | 96,071 | |||||||||||||||||
| Total interest expense | 702,063 | 821,089 | 836,209 | |||||||||||||||||
| Net interest income | $ | 414,538 | $ | 330,197 | $ | 299,461 | ||||||||||||||
____________________________
(1)Includes loan conversion fees, which are generally deferred and recognized in interest income over the period to maturity using the effective interest method.
(2)Includes late payment fees, commitment fees and net amortization of VIEs includeddeferred loan fees and loan origination costs.
(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 in CFC’sinterest expense immediately as incurred.
(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. Based on the nature of the fees, the amount is either recognized immediately as incurred or deferred and recognized in interest expense ratably over the term of the arrangement.
Deferred income reported on our consolidated financial statements, after applying intercompany eliminations,balance sheets of $51 million and $59 million as of May 31, 20182021 and 2017.
| May 31, | ||||||||
| (Dollars in thousands) | 2018 | 2017 | ||||||
| Total loans outstanding | $ | 1,149,574 | $ | 968,343 | ||||
| Other assets | 10,280 | 10,157 | ||||||
| Total assets | $ | 1,159,854 | $ | 978,500 | ||||
| Long-term debt | $ | 8,000 | $ | 10,000 | ||||
| Other liabilities | 33,923 | 36,899 | ||||||
| Total liabilities | $ | 41,923 | $ | 46,899 | ||||
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| May 31, | ||||||||
| (Dollars in thousands) | 2018 | 2017 | ||||||
| CFC credit commitments | $ | 5,500,000 | $ | 5,500,000 | ||||
| Outstanding commitments: | ||||||||
Borrowings payable to CFC(1) | 1,116,465 | 931,686 | ||||||
| Credit enhancements: | ||||||||
| CFC third-party guarantees | 12,005 | 14,697 | ||||||
| Other credit enhancements | 14,655 | 20,963 | ||||||
Total credit enhancements(2) | 26,660 | 35,660 | ||||||
| Total outstanding commitments | 1,143,125 | 967,346 | ||||||
| CFC available credit commitments | $ | 4,356,875 | $ | 4,532,654 | ||||
| NOTE 3—INVESTMENT SECURITIES | ||
Equity Securities
The following table presents the composition of our equity security holdings and the fair value as of May 31, 2021 and 2020.
Table 3.1: Investments in Equity Securities, at Fair Value
| May 31, | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||||||||||||||||||||
| Equity securities, at fair value: | ||||||||||||||||||||||||||||||||
| Farmer Mac—Series A non-cumulative preferred stock | $ | 0 | $ | 30,240 | ||||||||||||||||||||||||||||
| Farmer Mac—Series C non-cumulative preferred stock | 27,450 | 25,400 | ||||||||||||||||||||||||||||||
| Farmer Mac—Class A common stock | 7,652 | 5,095 | ||||||||||||||||||||||||||||||
| Total equity securities, at fair value | $ | 35,102 | $ | 60,735 | ||||||||||||||||||||||||||||
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.
We recognized net unrealized gains on our equity securities of $4 million for the fiscal year ended May 31, 2021 and net unrealized losses of $2 million for fiscal years ended May 31, 2020 and 2019. These unrealized amounts are reported as a component of non-interest income on our consolidated statements of operations. For additional information on our investments in equity securities, see “Note 1—Summary of Significant Accounting Policies” and “Note 11—Equity—Accumulated Other Comprehensive Income.”
Debt Securities
Pursuant to our investment policy 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 Investors Service (“Moody’s”) or BBB- or higher by S&P Global Inc. (“S&P”) or BBB- or higher by Fitch Ratings Inc. (“Fitch”), are generally considered by the rating agencies to be of lower credit risk than non-investment grade securities. We have the positive intent and ability to hold these securities to maturity. As such, we have classified them as held to maturity on our consolidated balance sheets. We did not have any securities classified as HTM as of May 31, 2017.
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| May 31, 2018 | ||||||||||||||||
| (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 | $ | 480 | $ | — | $ | 30,480 | ||||||||
| Farmer Mac—series B non-cumulative preferred stock | 25,000 | 1,000 | — | 26,000 | ||||||||||||
| Farmer Mac—series C non-cumulative preferred stock | 25,000 | 872 | — | 25,872 | ||||||||||||
| Farmer Mac—class A common stock | 538 | 6,442 | — | 6,980 | ||||||||||||
| Total investment securities, available for sale | 80,538 | 8,794 | — | 89,332 | ||||||||||||
| Held to maturity: | ||||||||||||||||
| Certificates of deposit | 4,148 | — | — | 4,148 | ||||||||||||
| Commercial paper | 9,134 | — | — | 9,134 | ||||||||||||
| U.S. agency debt securities | 2,000 | 16 | — | 2,016 | ||||||||||||
| Corporate debt securities | 455,721 | 714 | (4,595 | ) | 451,840 | |||||||||||
| Commercial MBS: | ||||||||||||||||
| Agency | 7,024 | 63 | — | 7,087 | ||||||||||||
| Non-agency | 3,453 | 3 | (3 | ) | 3,453 | |||||||||||
| Total commercial MBS | 10,477 | 66 | (3 | ) | 10,540 | |||||||||||
| U.S. state and municipality debt securities | 2,147 | 24 | — | 2,171 | ||||||||||||
| Foreign government debt securities | 1,241 | 9 | — | 1,250 | ||||||||||||
Other ABS(1) | 34,651 | 11 | (215 | ) | 34,447 | |||||||||||
| Total investment securities, held to maturity | 519,519 | 840 | (4,813 | ) | 515,546 | |||||||||||
| Total investment securities | $ | 600,057 | $ | 9,634 | $ | (4,813 | ) | $ | 604,878 | |||||||
The following table presents the composition of our investments in trading debt securities and the fair value as of May 31, 2021 and 2020.
Table 3.2: Investments in Debt Securities Trading, at Fair Value
| May 31, | ||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||
| Debt securities, at fair value: | ||||||||||||||
| Certificates of deposit | $ | 1,501 | $ | 5,585 | ||||||||||
| Commercial paper | 12,365 | 0 | ||||||||||||
| Corporate debt securities | 497,944 | 253,153 | ||||||||||||
| Commercial MBS: | ||||||||||||||
Agency(1) | 8,683 | 7,655 | ||||||||||||
| Non-agency | 0 | 3,207 | ||||||||||||
| Total commercial MBS | 8,683 | 10,862 | ||||||||||||
| U.S. state and municipality debt securities | 11,840 | 8,296 | ||||||||||||
| Foreign government debt securities | 999 | 0 | ||||||||||||
Other ABS(2) | 42,843 | 31,504 | ||||||||||||
| Total debt securities trading, at fair value | $ | 576,175 | $ | 309,400 | ||||||||||
____________________________
(1)Consists of securities backed by Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”).
(2)Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.
We received cash proceeds of $6 million on the sale of debt securities at fair value during the year ended May 31, 2021, and recorded realized losses related to the sale of these securities of less than $1 million for the year ended May 31, 2021. We received cash proceeds of $239 million on the sale of debt securities at fair value during the year ended May 31, 2020, and recorded realized gains related to the sale of these securities of $3 million for the year ended May 31, 2020. We did 0t sell any of our debt investment securities during the year ended May 31, 2019, and therefore have 0t recorded any realized gains or losses during fiscal year 2019.
| 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 | ||||||||
We recognized net unrealized losses on our debt securities of $3 million for the year ended May 31, 2021 and net unrealized gains of $8 million for the year ended May 31, 2020. These realized and unrealized amounts are reported as a component of non-interest income on our consolidated statements of operations. For additional information on the unrealized gains (losses) losses recorded on our AFS investmentinvestments in debt securities, see “Note 10—Equity—Accumulated Other Comprehensive Income.1—Summary of Significant Accounting Policies.”
We also pledge debt securities as collateral under our repurchase agreements. Debt securities with a carrying value of $211 million as of May 31, 2021 were pledged as collateral for securities sold under repurchase agreements.
106
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| May 31, 2018 | ||||||||||||||||||||||||
| 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 | ||||||||||||||||||
| Held to maturity: | ||||||||||||||||||||||||
| Corporate debt securities | $ | 280,139 | $ | (4,595 | ) | $ | — | $ | — | $ | 280,139 | $ | (4,595 | ) | ||||||||||
| Commercial MBS, non-agency | 1,451 | (3 | ) | — | — | 1,451 | (3 | ) | ||||||||||||||||
Other ABS(1) | 27,012 | (215 | ) | — | — | 27,012 | (215 | ) | ||||||||||||||||
| Total investment securities | $ | 308,602 | $ | (4,813 | ) | $ | — | $ | — | $ | 308,602 | $ | (4,813 | ) | ||||||||||
| May 31, 2018 | ||||||||||||||||||||
| (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 | $ | 4,148 | $ | — | $ | — | $ | — | $ | 4,148 | ||||||||||
| Commercial paper | 9,134 | — | — | — | 9,134 | |||||||||||||||
| U.S. agency debt securities | — | 2,000 | — | — | 2,000 | |||||||||||||||
| Corporate debt securities | 9,111 | 377,384 | 69,226 | — | 455,721 | |||||||||||||||
| Commercial MBS: | ||||||||||||||||||||
| Agency | — | — | 7,024 | — | 7,024 | |||||||||||||||
| Non-agency | — | — | — | 3,453 | 3,453 | |||||||||||||||
| Total commercial MBS | — | — | 7,024 | 3,453 | 10,477 | |||||||||||||||
| U.S. state and municipality debt securities | — | — | 2,147 | — | 2,147 | |||||||||||||||
| Foreign government debt securities | — | 1,241 | — | — | 1,241 | |||||||||||||||
Other ABS(1) | — | 33,357 | 1,294 | — | 34,651 | |||||||||||||||
| Total | $ | 22,393 | $ | 413,982 | $ | 79,691 | $ | 3,453 | $ | 519,519 | ||||||||||
| Fair value: | ||||||||||||||||||||
| Certificates of deposit | $ | 4,148 | $ | — | $ | — | $ | — | $ | 4,148 | ||||||||||
| Commercial paper | 9,134 | — | — | — | 9,134 | |||||||||||||||
| U.S. agency debt securities | — | 2,016 | — | — | 2,016 | |||||||||||||||
| Corporate debt securities | 9,056 | 373,284 | 69,500 | — | 451,840 | |||||||||||||||
| Commercial MBS: | ||||||||||||||||||||
| Agency | — | — | 7,087 | — | 7,087 | |||||||||||||||
| Non-agency | — | — | — | 3,453 | 3,453 | |||||||||||||||
| Total commercial MBS | — | — | 7,087 | 3,453 | 10,540 | |||||||||||||||
| U.S. state and municipality debt securities | — | — | 2,171 | — | 2,171 | |||||||||||||||
| Foreign government debt securities | — | 1,250 | — | — | 1,250 | |||||||||||||||
Other ABS(1) | — | 33,157 | 1,290 | — | 34,447 | |||||||||||||||
| Total | $ | 22,338 | $ | 409,707 | $ | 80,048 | $ | 3,453 | $ | 515,546 | ||||||||||
Weighted-average coupon(2) | 1.81 | % | 2.84 | % | 3.60 | % | 2.74 | % | 2.91 | % | ||||||||||
| NOTE 4—LOANS | ||
We offer fixed- and variable-rate loans under secured long-term facilities with terms up to 35 years and line of credit loans. Borrowers may choose betweenUnder secured long-term facilities, borrowers have the option of selecting a fixed interest rate or a variable interest rate for periodsa period of one to 35 years.years for each long-term loan advance. When a selected fixed interest rate term expires, the borrower may select another fixed-rate term or a variable rate. We consider these fixed-Line of credit loans are revolving loan facilities that typically have a variable interest rate and variable-rate loans, which have repricing terms, as long-term loans.are generally unsecured. Collateral and security requirements for advances on loan commitments are identical to those required at the time of the initial loan approval.
Loans to Members
Loans to members consist of total loans outstanding, which reflects the unpaid principal balance, net of charge-offs and recoveries, of loans and deferred loan origination costs. The following table presents the outstanding principal balance of loans to members including deferred loan origination costs, and unadvanced loan commitments, by member class and by loan type, and member class, as of May 31, 20182021 and 2017.2020.
| May 31, | ||||||||||||||||
| 2018 | 2017 | |||||||||||||||
| (Dollars in thousands) | Loans Outstanding | Unadvanced Commitments (1) | Loans Outstanding | Unadvanced Commitments (1) | ||||||||||||
| Loan type: | ||||||||||||||||
| Long-term loans: | ||||||||||||||||
| Fixed rate | $ | 22,696,185 | $ | — | $ | 22,136,690 | $ | — | ||||||||
| Variable rate | 1,039,491 | 4,952,834 | 847,419 | 4,802,319 | ||||||||||||
| Total long-term loans | 23,735,676 | 4,952,834 | 22,984,109 | 4,802,319 | ||||||||||||
| Lines of credit | 1,431,818 | 7,692,784 | 1,372,221 | 7,772,655 | ||||||||||||
| Total loans outstanding | 25,167,494 | 12,645,618 | 24,356,330 | 12,574,974 | ||||||||||||
| Deferred loan origination costs | 11,114 | — | 10,714 | — | ||||||||||||
| Loans to members | $ | 25,178,608 | $ | 12,645,618 | $ | 24,367,044 | $ | 12,574,974 | ||||||||
| Member class: | ||||||||||||||||
| CFC: | ||||||||||||||||
| Distribution | $ | 19,551,511 | $ | 8,188,376 | $ | 18,825,366 | $ | 8,295,146 | ||||||||
| Power supply | 4,397,353 | 3,407,095 | 4,504,791 | 3,276,113 | ||||||||||||
| Statewide and associate | 69,055 | 128,025 | 57,830 | 144,406 | ||||||||||||
| Total CFC | 24,017,919 | 11,723,496 | 23,387,987 | 11,715,665 | ||||||||||||
| NCSC | 786,457 | 624,663 | 613,924 | 584,944 | ||||||||||||
| RTFC | 363,118 | 297,459 | 354,419 | 274,365 | ||||||||||||
| Total loans outstanding | 25,167,494 | 12,645,618 | 24,356,330 | 12,574,974 | ||||||||||||
| Deferred loan origination costs | 11,114 | — | 10,714 | — | ||||||||||||
| Loans to members | $ | 25,178,608 | $ | 12,645,618 | $ | 24,367,044 | $ | 12,574,974 | ||||||||
| May 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| (Dollars in thousands) | Loans Outstanding | Unadvanced Commitments (1) | Loans Outstanding | Unadvanced Commitments (1) | ||||||||||||||||||||||
| Member class: | ||||||||||||||||||||||||||
| CFC: | ||||||||||||||||||||||||||
| Distribution | $ | 22,027,423 | $ | 9,387,070 | $ | 20,769,653 | $ | 8,992,457 | ||||||||||||||||||
| Power supply | 5,154,312 | 3,970,698 | 4,731,506 | 3,409,227 | ||||||||||||||||||||||
| Statewide and associate | 106,121 | 161,340 | 106,498 | 153,626 | ||||||||||||||||||||||
| Total CFC | 27,287,856 | 13,519,108 | 25,607,657 | 12,555,310 | ||||||||||||||||||||||
| NCSC | 706,868 | 551,125 | 697,862 | 551,674 | ||||||||||||||||||||||
| RTFC | 420,383 | 286,806 | 385,335 | 281,642 | ||||||||||||||||||||||
Total loans outstanding(2) | 28,415,107 | 14,357,039 | 26,690,854 | 13,388,626 | ||||||||||||||||||||||
| Deferred loan origination costs | 11,854 | — | 11,526 | — | ||||||||||||||||||||||
| Loans to members | $ | 28,426,961 | $ | 14,357,039 | $ | 26,702,380 | $ | 13,388,626 | ||||||||||||||||||
| Loan type: | ||||||||||||||||||||||||||
| Long-term loans: | ||||||||||||||||||||||||||
| Fixed rate | $ | 25,514,766 | $ | — | $ | 24,472,003 | $ | — | ||||||||||||||||||
| Variable rate | 658,579 | 5,771,813 | 655,704 | 5,458,676 | ||||||||||||||||||||||
| Total long-term loans | 26,173,345 | 5,771,813 | 25,127,707 | 5,458,676 | ||||||||||||||||||||||
| Lines of credit | 2,241,762 | 8,585,226 | 1,563,147 | 7,929,950 | ||||||||||||||||||||||
Total loans outstanding(2) | 28,415,107 | 14,357,039 | 26,690,854 | 13,388,626 | ||||||||||||||||||||||
| Deferred loan origination costs | 11,854 | — | 11,526 | — | ||||||||||||||||||||||
| Loans to members | $ | 28,426,961 | $ | 14,357,039 | $ | 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Available Balance | Notional Maturities of Unadvanced Loan Commitments | |||||||||||||||||||||||||||
| (Dollars in thousands) | 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | ||||||||||||||||||||||
| Line of credit loans | $ | 7,692,784 | $ | 4,168,751 | $ | 710,763 | $ | 805,508 | $ | 770,971 | $ | 1,211,791 | $ | 25,000 | ||||||||||||||
| Long-term loans | 4,952,834 | 883,840 | 586,005 | 652,499 | 1,714,338 | 1,104,185 | 11,967 | |||||||||||||||||||||
| Total | $ | 12,645,618 | $ | 5,052,591 | $ | 1,296,768 | $ | 1,458,007 | $ | 2,485,309 | $ | 2,315,976 | $ | 36,967 | ||||||||||||||
Available Balance | Notional Maturities of Unconditional Committed Lines of Credit | |||||||||||
| (Dollars in thousands) | 2019 | 2020 | 2021 | 2022 | 2023 | |||||||
| Committed lines of credit | $2,857,350 | $279,285 | $435,151 | $444,326 | $644,178 | $1,054,410 | ||||||
Loan Sales
We transfer, from time to time, whole loans and participating interests to third parties under our directparties. These transfers are made concurrently with the closing of the loan sale program. Our transfer of loans, which isor participation agreement at par value and sold concurrently with loan closing, meetsmeet the applicable accounting criteria required for sale accounting. Accordingly,Therefore, we remove the transferred loans or participating interests from our consolidated balance sheets when control has been surrendered and recognize a gain or loss.loss on the sale. We retain thea servicing performance obligationsobligation on thesethe transferred loans and recognize related servicing fees on an accrual basis over the period for which servicing activity is provided, as we believe the servicing fee represents adequate compensation. We doOther than the servicing performance obligation, we have not holdretained any continuing interest in the loans sold to date other than servicing performance obligations. Wedate. In addition, we have no obligation to repurchase loans from the purchaser,that are sold, except in the case of breaches of representations and warranties.
We sold CFC loans, with outstanding balances totaling $119 million, $58 million and $99 million at par for cash, totaling $126 million, $151 million and $35 million in fiscal years 2018, 20172021, 2020 and 2016,2019, respectively. We recorded immaterial losses uponon the sale of these loans attributable to the unamortized deferred loan origination costs associated with the transferred loans.
| May 31, | ||||||||
| (Dollars in thousands) | 2018 | 2017 | ||||||
| Collateral trust bonds: | ||||||||
| 2007 indenture: | ||||||||
| Distribution system mortgage notes | $ | 8,643,344 | $ | 8,740,572 | ||||
| RUS-guaranteed loans qualifying as permitted investments | 140,680 | 146,373 | ||||||
| Total pledged collateral | $ | 8,784,024 | $ | 8,886,945 | ||||
| Collateral trust bonds outstanding | 7,697,711 | 7,697,711 | ||||||
| 1994 indenture: | ||||||||
| Distribution system mortgage notes | $ | 243,418 | $ | 263,007 | ||||
| Collateral trust bonds outstanding | 220,000 | 225,000 | ||||||
| Farmer Mac: | ||||||||
| Distribution and power supply system mortgage notes | $ | 3,331,775 | $ | 2,942,456 | ||||
| Notes payable outstanding | 2,891,496 | 2,513,389 | ||||||
| Clean Renewable Energy Bonds Series 2009A: | ||||||||
| Distribution and power supply system mortgage notes | $ | 12,615 | $ | 14,943 | ||||
| Cash | 415 | 481 | ||||||
| Total pledged collateral | $ | 13,030 | $ | 15,424 | ||||
| Notes payable outstanding | 11,556 | 13,214 | ||||||
| Federal Financing Bank: | ||||||||
| Distribution and power supply system mortgage notes | $ | 5,772,750 | $ | 5,833,515 | ||||
| Notes payable outstanding | 4,856,375 | 4,985,748 | ||||||
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 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. We serve electric and telecommunications members throughout the United States and its territories, including 50 states, the District of Columbia, American Samoa and Guam. Our consolidated membership totaled 1,449 members and 216 associates as of May 31, 2018. Texas had the largest concentration of outstanding loans to borrowers in any one state, with approximately 15% of total loans outstanding as of both May 31, 2018 and 2017. As a result of lending
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. Despiterisks since our credit concentration risks, we historically have experienced limited defaults and very low credit lossesinception in our electric loan portfolio.
1969. Loans outstanding to electric utility organizations represented approximatelyof $27,995 million and $26,306 million as of May 31, 2021 and 2020, respectively, accounted for 99% of total loans outstanding as of both May 31, 2018, unchanged from May 31, 2017.2021 and 2020. The remaining loans outstanding 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 U.S. The combinednumber of borrowers with outstanding loans totaled 892 and 889 as of May 31, 2021 and 2020, respectively, located in 49 states. Texas accounted for the largest number of borrowers in any one state and also the largest concentration of loan exposure in any one state as of each respective date. Loans outstanding to Texas-based electric utility organizations totaled $4,878 million and $4,222 million as of May 31, 2021 and 2020, respectively, and accounted for approximately 17% and 16% of total loans outstanding as of each respective date. Of the loans outstanding to Texas-based electric utility organizations, $172 million and guarantees$181 million as of May 31, 2021 and 2020, respectively, were covered by the Farmer Mac standby repurchase agreement, which slightly reduces our Texas loan exposure.
Single-Obligor Concentration
The outstanding loan exposure for our 20 largest borrowers represented 23%totaled $6,182 million and 24% of our total combined exposure$5,877 million as of May 31, 20182021 and 2017, respectively. The 20 largest borrowers consisted2020, respectively, representing 22% of nine distribution systems, 10 power supply systems and one NCSC associate membertotal loans outstanding as of May 31, 2018.each respective date. The 20 largest borrowers consisted of 10 distribution systems nineand 10 power supply systems and one NCSC associate member as of May 31, 2017.2021. The 20 largest borrowers consisted of 11 distribution systems and 9 power supply systems as of May 31, 2020. The largest total loan and guarantee outstanding exposure to
a single borrower or controlled group represented approximatelyless than 2% of total loans and guarantees outstanding as of both May 31, 20182021 and 2017.
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 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $660 million and $843 million as of May 31, 2018 and 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. NoThe aggregate unpaid principal balance of designated and Farmer Mac-approved loans was $512 million and $569 million as of May 31, 2021 and 2020, respectively. Loan exposure to our 20 largest borrowers covered under the Farmer Mac agreement totaled $309 million and $314 million as of May 31, 2021 and 2020, respectively, which reduced our exposure to the 20 largest borrowers to 21% as of each respective date. We have had 0 loan defaults for loans covered under this agreement; therefore, 0 loans had been put to FarmerFarmer Mac for purchase pursuant to thisthe standby purchase agreement as of May 31, 2018. Also, we had2021. Our credit exposure is also mitigated by long-term loans totaling $161guaranteed by the RUS. Guaranteed RUS loans totaled $139 million and $167$147 million as of May 31, 20182021 and 2017, respectively, guaranteed by RUS.2020, 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 probability of borrower default and overall credit quality of our loan portfolio.
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 tables below presentfollowing table presents the payment status, by member class, of loans outstanding by member class as of May 31, 20182021 and 2017. As indicated in the table, we did not have any past due loans as2020.
Table 4.2: Payment Status of either May 31, 2018 or May 31, 2017.Loans Outstanding
| May 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Current | 30-89 Days Past Due | 90 Days or More Past Due | Total Past Due | Total Loans Outstanding | Nonaccrual Loans | ||||||||||||||||||||||||||||||||
| CFC: | ||||||||||||||||||||||||||||||||||||||
| Distribution | $ | 22,027,423 | $ | 0 | $ | 0 | $ | 0 | $ | 22,027,423 | $ | 0 | ||||||||||||||||||||||||||
| Power supply | 5,069,316 | 3,400 | 81,596 | 84,996 | 5,154,312 | 228,312 | ||||||||||||||||||||||||||||||||
| Statewide and associate | 106,121 | 0 | 0 | 0 | 106,121 | 0 | ||||||||||||||||||||||||||||||||
| CFC total | 27,202,860 | 3,400 | 81,596 | 84,996 | 27,287,856 | 228,312 | ||||||||||||||||||||||||||||||||
| NCSC | 706,868 | 0 | 0 | 0 | 706,868 | 0 | ||||||||||||||||||||||||||||||||
| RTFC | 420,383 | 0 | 0 | 0 | 420,383 | 9,185 | ||||||||||||||||||||||||||||||||
| Total loans outstanding | $ | 28,330,111 | $ | 3,400 | $ | 81,596 | $ | 84,996 | $ | 28,415,107 | $ | 237,497 | ||||||||||||||||||||||||||
| Percentage of total loans | 99.70 | % | 0.01 | % | 0.29 | % | 0.30 | % | 100.00 | % | 0.84 | % | ||||||||||||||||||||||||||
109
| May 31, 2018 | ||||||||||||||||||||||||
| (Dollars in thousands) | Current | 30-89 Days Past Due | 90 Days or More Past Due (1) | Total Past Due | Total Loans Outstanding | Nonaccrual Loans | ||||||||||||||||||
| CFC: | �� | |||||||||||||||||||||||
| Distribution | $ | 19,551,511 | $ | — | $ | — | $ | — | $ | 19,551,511 | $ | — | ||||||||||||
| Power supply | 4,397,353 | — | — | — | 4,397,353 | — | ||||||||||||||||||
| Statewide and associate | 69,055 | — | — | — | 69,055 | — | ||||||||||||||||||
| CFC total | 24,017,919 | — | — | — | 24,017,919 | — | ||||||||||||||||||
| NCSC | 786,457 | — | — | — | 786,457 | — | ||||||||||||||||||
| RTFC | 363,118 | — | — | — | 363,118 | — | ||||||||||||||||||
| Total loans outstanding | $ | 25,167,494 | $ | — | $ | — | $ | — | $ | 25,167,494 | $ | — | ||||||||||||
| Percentage of total loans | 100.00 | % | — | % | — | % | — | % | 100.00 | % | — | % | ||||||||||||
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| May 31, 2017 | 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 | (Dollars in thousands) | Current | 30-89 Days Past Due | 90 Days or More Past Due | Total Past Due | Total Loans Outstanding | Nonaccrual Loans | |||||||||||||||||||||||||||||||||||||||||||||||||
| CFC: | CFC: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distribution | $ | 18,825,366 | $ | — | $ | — | $ | — | $ | 18,825,366 | $ | — | Distribution | $ | 20,769,653 | $ | 0 | $ | 0 | $ | 0 | $ | 20,769,653 | $ | 0 | |||||||||||||||||||||||||||||||||||||
| Power supply | 4,504,791 | — | — | — | 4,504,791 | — | Power supply | 4,731,506 | 0 | 0 | 0 | 4,731,506 | 167,708 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Statewide and associate | 57,830 | — | — | — | 57,830 | — | Statewide and associate | 106,498 | 0 | 0 | 0 | 106,498 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||
| CFC total | 23,387,987 | — | — | — | 23,387,987 | — | CFC total | 25,607,657 | 0 | — | 0 | 25,607,657 | 167,708 | |||||||||||||||||||||||||||||||||||||||||||||||||
| NCSC | 613,924 | — | — | — | 613,924 | — | NCSC | 697,862 | 0 | 0 | 0 | 697,862 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||
| RTFC | 354,419 | — | — | — | 354,419 | — | RTFC | 385,335 | 0 | 0 | 0 | 385,335 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans outstanding | $ | 24,356,330 | $ | — | $ | — | $ | — | $ | 24,356,330 | $ | — | Total loans outstanding | $ | 26,690,854 | $ | 0 | $ | 0 | $ | 0 | $ | 26,690,854 | $ | 167,708 | |||||||||||||||||||||||||||||||||||||
| Percentage of total loans | 100.00 | % | — | % | — | % | — | % | 100.00 | % | — | % | Percentage of total loans | 100.00 | % | 0 | % | 0 | % | 0 | % | 100.00 | % | 0.63 | % | |||||||||||||||||||||||||||||||||||||
Troubled Debt Restructurings
We did not0t have any loans modifiedloan modifications that were required to be accounted for as TDRsa TDR during the year ended May 31, 2018.2021, nor have we had any TDR 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 and the unadvanced loan commitments related to the TDR loans, by member class, as of May 31, 20182021 and 2017.2020.
Table 4.3: Trouble Debt Restructurings
| May 31, | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 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 | $ | 5,756 | 0.02 | % | ||||||||||||||||||||||||||||||||||
| RTFC | 1 | 4,592 | 0.02 | 1 | 5,092 | 0.02 | ||||||||||||||||||||||||||||||||||||||
| Total TDR loans | 2 | $ | 9,971 | 0.04 | % | 2 | $ | 10,848 | 0.04 | % | ||||||||||||||||||||||||||||||||||
| Performance status of TDR loans: | ||||||||||||||||||||||||||||||||||||||||||||
| Performing TDR loans | 2 | $ | 9,971 | 0.04 | % | 2 | $ | 10,848 | 0.04 | % | ||||||||||||||||||||||||||||||||||
| Total TDR loans | 2 | $ | 9,971 | 0.04 | % | 2 | $ | 10,848 | 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 1 borrower that, at the time of the modification, was experiencing financial difficulty. There were 0 unadvanced commitments related to these loans as of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| May 31, | ||||||||||||||||||||||
| 2018 | 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 | 6,092 | 0.02 | % | — | 6,592 | 0.03 | — | |||||||||||||||
| Total performing TDR loans | 12,599 | 0.05 | % | — | 13,173 | 0.05 | — | |||||||||||||||
| Total TDR loans | $ | 12,599 | 0.05 | % | $ | — | $ | 13,173 | 0.05 | % | $ | — | ||||||||||
May 31, 2021 or May 31, 2020. We did not0t have any TDR loans classified as nonperforming as of May 31, 20182021 or May 31, 2017.2020. TDR loans classified as performing as of May 31, 20182021 and 20172020 were performing in accordance with the terms of their respective restructured loan agreement and on accrual status as of the respective reported dates. One
The CFC borrower with athe TDR loan also had a1 line of credit as of May 31, 2021 and 2 lines of credit as of May 31, 2020. The line of credit facility restricted for fuel purchases only, totaling $6 million as of both May 31, 20182021 and 2017. The2020, is restricted for fuel purchases only. There were 0 outstanding amountloans under this facility as of May 31, 2021. Outstanding loans under this facility totaled less than $1 million as of both May 31, 20182020 and 2017, and waswere classified as performingperforming. The other line of credit facility for $2 million as of each respective date.May 31, 2020, was put in place during fiscal year 2019 to provide bridge funding for electric work plan expenditures in anticipation of receiving RUS funding. Outstanding loans under this facility totaled $2 million as of May 31, 2020, and were classified as performing.
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. We did not have anyThe following table presents the outstanding balance of nonperforming loans, classifiedby member class, as of May 31, 2021 and 2020.
Table 4.4: Nonperforming Loans
| May 31, | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Number of Borrowers | Outstanding Amount (1) | % of Total Loans Outstanding | Number of Borrowers | Outstanding Amount (1) | % of Total Loans Outstanding | ||||||||||||||||||||||||||||||||||||||
| Nonperforming loans: | ||||||||||||||||||||||||||||||||||||||||||||
CFC—Power supply(2) | 2 | $ | 228,312 | 0.81 | % | 1 | $ | 167,708 | 0.63 | % | ||||||||||||||||||||||||||||||||||
| RTFC | 2 | 9,185 | 0.03 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||
| Total nonperforming loans | 4 | $ | 237,497 | 0.84 | % | 1 | $ | 167,708 | 0.63 | % | ||||||||||||||||||||||||||||||||||
____________________________
(1) Represents the unpaid principal balance net of charge-offs and recoveries as of the end of each period.
(2) In addition, we had less than $1 million letters of credit outstanding to Brazos as of May 31, 2021.
Nonperforming loans increased $69 million to $237 million, or 0.84%, of total loans outstanding as of May 31, 2021, from $168 million, or 0.63%, of total loans outstanding as of May 31, 2020, primarily due to our classification of the loans outstanding of $85 million to Brazos, a CFC Texas-based power supply borrower, as nonperforming during fiscal year 2021 as a result of its bankruptcy filing as described below.
During the February 2021 polar vortex that affected Texas and several neighboring states, as the freezing conditions impacted power demand, Brazos had insufficient generation supply and was forced, to purchase power at peak prices to meet the electric demand of its member distribution customers. On March 1, 2021, we were informed that Brazos filed for Chapter 11 bankruptcy protection. In the third quarter of fiscal year 2021, we downgraded Brazos’ borrower risk rating from a rating within the pass category to doubtful, classified its loans outstanding as nonperforming, placed the loans on nonaccrual status, and reversed unpaid interest amounts previously accrued and recognized in interest income. We had loans outstanding to Brazos of $85 million as of either May 31, 2018 or2021, pursuant to a syndicated Bank of America revolving credit agreement, of which $64 million was unsecured and $21 million was secured based on the set-off provisions of the revolving credit agreement approved by the bankruptcy court. In addition to Brazos, we classified loans outstanding to 2 affiliated RTFC telecommunications borrowers as nonperforming during fiscal year. Loans outstanding to these RTFC borrowers totaled $9 million as of May 31, 2017.2021.
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the terms of the syndicated Bank of America revolving credit agreement, in the event of bankruptcy by Brazos, each lending participant is permitted to hold any deposited or investment funds from Brazos, up to the amount of the participant’s exposure to Brazos pursuant to the agreement, for set-off against such exposure to Brazos. The total so held by all participants is required to be shared among the participants in accordance with the pro rata share of each participant in the agreement. As of the bankruptcy filing date, funds on deposit from or invested by Brazos with participating lenders of the agreement, available for set-off against Brazos’ obligations, totaled $124 million. Based on our exposure of $85 million under the $500 million syndicated Bank of America agreement, our pro rata share set-off right is 17%, or approximately $21 million. The set-off rights have been agreed to and confirmed by Brazos and the bankruptcy court. In order to allow Brazos to access such deposited or invested funds, the lenders have been granted adequate protection liens and super-priority claims in an amount equal to the diminution of value of the amount available for set-off.
NaN loan to another CFC power supply borrower, with an outstanding balance of $143 million and $168 million as of May 31, 2021 and 2020, respectively, accounted for the majority of nonperforming loans as of May 31, 2021, and the entire amount of nonperforming loans as of May 31, 2020. Under the terms of this 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 forecast and underlying assumptions provided to us in May 2020, we no longer believed that the future expected cash payments from the borrower through the maturity of the loan in December 2026 would be sufficient to repay the outstanding loan balance. We therefore classified this loan as nonperforming, placed the loan on nonaccrual status and established an asset-specific allowance for credit losses as of May 31, 2020. We received payments from the fiscalborrower on this loan during the current year-to-date period, reducing the outstanding balance to $143 million as of May 31, 2021. While the borrower is not in default and was current with respect to required payments on the loan as of May 31, 2021, we have continued to report the loan as nonperforming.
Net Charge-Offs
Charge-offs represent the amount of a loan that has been removed from our consolidated balance sheet when the loan is deemed uncollectible. Generally the amount of a charge-off is the recorded investment in excess of the fair value of the expected cash flows from the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral securing the loan. We report charge-offs net of amounts recovered on previously charged-off loans. We had 0 charge-offs during the years ended May 31, 2018,2021, 2020 and 2019. Prior to Brazos’ bankruptcy filing, we had not experienced any defaults or charge-offs in our electric utility and telecommunications loan portfolios since fiscal year 2013 and 2017, and 2016.
| Year Ended May 31, | ||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | |||||||||
| Performing TDR loans | $ | — | $ | — | $ | 166 | ||||||
| Nonperforming TDR loans | — | 31 | 109 | |||||||||
| Total | $ | — | $ | 31 | $ | 275 | ||||||
| May 31, | ||||||||||||||||
| 2018 | 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 | 6,092 | 1,198 | 6,592 | 1,640 | ||||||||||||
| Total impaired loans | $ | 12,599 | $ | 1,198 | $ | 13,173 | $ | 1,640 | ||||||||
| Average Recorded Investment | Interest Income Recognized | |||||||||||||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||||||||
| CFC | $ | 6,524 | $ | 6,613 | $ | 6,842 | $ | 571 | $ | 562 | $ | 390 | ||||||||||||
| RTFC | 6,361 | 7,736 | 9,823 | 318 | 343 | 264 | ||||||||||||||||||
| Total impaired loans | $ | 12,885 | $ | 14,349 | $ | 16,665 | $ | 889 | $ | 905 | $ | 654 | ||||||||||||
As part of our management of credit risk, managementwe maintain a credit risk-rating framework under which we employ a consistent process we monitor andfor 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 assessments. Our borrower risk ratings are intended to assess probability of default.factors. Each risk rating is reassessed annually following the receipt of the borrower’s audited financial statements; however, interim risk-rating downgrades or upgradesadjustments 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 creditworthiness of the borrower and probability of default. Our borrower risk ratings are alignedalign with the U.S. federal banking regulatory agency credit risk rating definitions of pass and criticized classifications,categories, with the criticized divided betweencategory 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 each rating category.the borrower risk-rating categories.
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•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.
•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 or weaknesses that make full collection of principal and interest, on the basis of currently known facts, conditions and collateral values, highly questionable and improbable.
In connection with our adoption of CECL, we present term loans outstanding as of May 31, 2021, by fiscal year of origination for each year during the five-year annual reporting period beginning in fiscal year 2017, and in the aggregate for periods 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. As indicated in Table 4.5 below, term loan advances made to borrowers prior to fiscal year 2017 totaled $15,825 million, representing 56% of our total loans outstanding of $28,415 million as of May 31, 2021. The average remaining maturity of our long-term loans, which accounted for 92% of total loans outstanding as of May 31, 2021, was 18 years.
As discussed above, as a 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 892 borrowers as of May 31, 2021, the number of loans outstanding was 16,575 as of May 31, 2021, 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 on our loans has typically been more closely correlated to the risk rating of our borrowers.
113
| May 31, 2018 | ||||||||||||||||||||
| (Dollars in thousands) | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
| CFC: | ||||||||||||||||||||
| Distribution | $ | 19,429,121 | $ | 6,853 | $ | 115,537 | $ | — | $ | 19,551,511 | ||||||||||
| Power supply | 4,348,328 | — | 49,025 | — | 4,397,353 | |||||||||||||||
| Statewide and associate | 69,055 | — | — | — | 69,055 | |||||||||||||||
| CFC total | 23,846,504 | 6,853 | 164,562 | — | 24,017,919 | |||||||||||||||
| NCSC | 786,457 | — | — | — | 786,457 | |||||||||||||||
| RTFC | 356,503 | 523 | 6,092 | — | 363,118 | |||||||||||||||
| Total loans outstanding | $ | 24,989,464 | $ | 7,376 | $ | 170,654 | $ | — | $ | 25,167,494 | ||||||||||
| May 31, 2017 | ||||||||||||||||||||
| (Dollars in thousands) | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
| CFC: | ||||||||||||||||||||
| Distribution | $ | 18,715,810 | $ | 109,556 | $ | — | $ | — | $ | 18,825,366 | ||||||||||
| Power supply | 4,504,791 | — | — | — | 4,504,791 | |||||||||||||||
| Statewide and associate | 56,654 | 1,176 | — | — | 57,830 | |||||||||||||||
| CFC total | 23,277,255 | 110,732 | — | — | 23,387,987 | |||||||||||||||
| NCSC | 612,592 | 1,332 | — | — | 613,924 | |||||||||||||||
| RTFC | 346,944 | — | 7,475 | — | 354,419 | |||||||||||||||
| Total loans outstanding | $ | 24,236,791 | $ | 112,064 | $ | 7,475 | $ | — | $ | 24,356,330 | ||||||||||
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 4.5: Loans Outstanding by Borrower Risk Ratings and Origination Year
| May 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Term Loans by Fiscal Year of Origination | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans | Total | May 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CFC: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distribution | $ | 1,768,491 | $ | 1,935,368 | $ | 1,227,223 | $ | 1,497,479 | $ | 1,520,593 | $ | 12,654,148 | $ | 1,204,797 | $ | 21,808,099 | $ | 20,643,737 | ||||||||||||||||||||||||||||||||||||||
| Power supply | 568,917 | 201,122 | 345,496 | 252,783 | 259,358 | 2,510,572 | 379,160 | 4,517,408 | 4,516,595 | |||||||||||||||||||||||||||||||||||||||||||||||
| Statewide and associate | 2,491 | 22,028 | 3,686 | 0 | 547 | 23,534 | 37,975 | 90,261 | 90,274 | |||||||||||||||||||||||||||||||||||||||||||||||
| CFC total | 2,339,899 | 2,158,518 | 1,576,405 | 1,750,262 | 1,780,498 | 15,188,254 | 1,621,932 | 26,415,768 | 25,250,606 | |||||||||||||||||||||||||||||||||||||||||||||||
| NCSC | 41,506 | 241,576 | 4,379 | 44,848 | 14,325 | 248,127 | 112,107 | 706,868 | 697,862 | |||||||||||||||||||||||||||||||||||||||||||||||
| RTFC | 98,797 | 50,011 | 12,138 | 27,356 | 65,035 | 131,936 | 21,333 | 406,606 | 371,507 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total pass | 2,480,202 | 2,450,105 | 1,592,922 | 1,822,466 | 1,859,858 | 15,568,317 | 1,755,372 | 27,529,242 | 26,319,975 | |||||||||||||||||||||||||||||||||||||||||||||||
| Special mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CFC: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distribution | 5,000 | 0 | 5,197 | 950 | 0 | 13,177 | 195,000 | 219,324 | 7,743 | |||||||||||||||||||||||||||||||||||||||||||||||
| Power supply | 0 | 0 | 0 | 0 | 0 | 29,611 | 0 | 29,611 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||
| Statewide and associate | 0 | 0 | 5,000 | 4,000 | 5,704 | 1,156 | 0 | 15,860 | 16,224 | |||||||||||||||||||||||||||||||||||||||||||||||
| CFC total | 5,000 | 0 | 10,197 | 4,950 | 5,704 | 43,944 | 195,000 | 264,795 | 23,967 | |||||||||||||||||||||||||||||||||||||||||||||||
| RTFC | 0 | 0 | 0 | 0 | 0 | 4,592 | 0 | 4,592 | 8,736 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total special mention | 5,000 | 0 | 10,197 | 4,950 | 5,704 | 48,536 | 195,000 | 269,387 | 32,703 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CFC: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distribution | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 118,173 | |||||||||||||||||||||||||||||||||||||||||||||||
| Power supply | 23,600 | 0 | 85,839 | 0 | 0 | 64,982 | 204,560 | 378,981 | 47,203 | |||||||||||||||||||||||||||||||||||||||||||||||
| CFC total | 23,600 | 0 | 85,839 | 0 | 0 | 64,982 | 204,560 | 378,981 | 165,376 | |||||||||||||||||||||||||||||||||||||||||||||||
| RTFC | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 5,092 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total substandard | 23,600 | 0 | 85,839 | 0 | 0 | 64,982 | 204,560 | 378,981 | 170,468 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CFC: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Power supply | 0 | 0 | 0 | 0 | 0 | 143,316 | 84,996 | 228,312 | 167,708 | |||||||||||||||||||||||||||||||||||||||||||||||
| CFC total | 0 | 0 | 0 | 0 | 0 | 143,316 | 84,996 | 228,312 | 167,708 | |||||||||||||||||||||||||||||||||||||||||||||||
| RTFC | 0 | 0 | 1,411 | 2,947 | 2,993 | 0 | 1,834 | 9,185 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total doubtful | 0 | 0 | 1,411 | 2,947 | 2,993 | 143,316 | 86,830 | 237,497 | 167,708 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total criticized loans | 28,600 | 0 | 97,447 | 7,897 | 8,697 | 256,834 | 486,390 | 885,865 | 370,879 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total loans outstanding | $ | 2,508,802 | $ | 2,450,105 | $ | 1,690,369 | $ | 1,830,363 | $ | 1,868,555 | $ | 15,825,151 | $ | 2,241,762 | $ | 28,415,107 | $ | 26,690,854 | ||||||||||||||||||||||||||||||||||||||
Criticized loans classified as substandard of $163increased $515 million was attributable to the downgrade of an electric distribution cooperative and its subsidiary$886 million as of May 31, 2018. The electric distribution cooperative provides its customers with distribution and transmission services and is in the early stages of deploying retail broadband service. The borrower is currently experiencing financial difficulties due to recent net losses and weak cash flows. Pursuant to our risk rating guidelines, the borrower’s current financial condition warranted a downgrade to a substandard rating2021, from $371 million as of May 31, 2018.2020, representing approximately 3% and 1% of total loans outstanding as of each respective date. The borrowerincrease was attributable to increases in loans outstanding in the special mention, substandard and its subsidiary aredoubtful categories. Each of the borrowers with loans outstanding in the criticized category, with the exception of Brazos, was current with regard to all principal and interest payments and have never been delinquent. The borrower operates in a territory that is not rate-regulated and has the ability to adjust its electric rates to cover operating costs and service debt. Of the outstanding amount, all but $7 million is secured under our typical collateral requirements for long-term loan advances. We currently expect to collect all principal and interest amounts due from the borrower and its subsidiary. Accordingly, the loans outstanding to this borrower and its subsidiary were not deemed to be impaired as of May 31, 2018.
114
| Year Ended May 31, 2018 | ||||||||||||||||
| (Dollars in thousands) | CFC | NCSC | RTFC | Total | ||||||||||||
| Balance as of May 31, 2017 | $ | 29,499 | $ | 2,910 | $ | 4,967 | $ | 37,376 | ||||||||
| Benefit for loan losses | (17,199 | ) | (828 | ) | (548 | ) | (18,575 | ) | ||||||||
| Balance as of May 31, 2018 | $ | 12,300 | $ | 2,082 | $ | 4,419 | $ | 18,801 | ||||||||
| Year Ended May 31, 2017 | ||||||||||||||||
| (Dollars in thousands) | CFC | NCSC | RTFC | Total | ||||||||||||
| Balance as of May 31, 2016 | $ | 24,559 | $ | 3,134 | $ | 5,565 | $ | 33,258 | ||||||||
| Provision (benefit) for loan losses | 4,781 | (224 | ) | 1,421 | 5,978 | |||||||||||
| Charge-offs | — | — | (2,119 | ) | (2,119 | ) | ||||||||||
| Recoveries | 159 | — | 100 | 259 | ||||||||||||
| Net (charge-offs) recoveries | 159 | — | (2,019 | ) | (1,860 | ) | ||||||||||
| Balance as of May 31, 2017 | $ | 29,499 | $ | 2,910 | $ | 4,967 | $ | 37,376 | ||||||||
| Year Ended May 31, 2016 | ||||||||||||||||
| (Dollars in thousands) | CFC | NCSC | RTFC | Total | ||||||||||||
| Balance as of May 31, 2015 | $ | 23,716 | $ | 5,441 | $ | 4,533 | $ | 33,690 | ||||||||
| Provision (benefit) for loan losses | 629 | (2,307 | ) | 1,032 | (646 | ) | ||||||||||
| Recoveries | 214 | — | — | 214 | ||||||||||||
| Balance as of May 31, 2016 | $ | 24,559 | $ | 3,134 | $ | 5,565 | $ | 33,258 | ||||||||
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| May 31, 2018 | ||||||||||||||||
| (Dollars in thousands) | CFC | NCSC | RTFC | Total | ||||||||||||
| Ending balance of the allowance: | ||||||||||||||||
| Collective allowance | $ | 12,300 | $ | 2,082 | $ | 3,221 | $ | 17,603 | ||||||||
| Specific allowance | — | — | 1,198 | 1,198 | ||||||||||||
| Total ending balance of the allowance | $ | 12,300 | $ | 2,082 | $ | 4,419 | $ | 18,801 | ||||||||
| Recorded investment in loans: | ||||||||||||||||
| Collectively evaluated loans | $ | 24,011,412 | $ | 786,457 | $ | 357,026 | $ | 25,154,895 | ||||||||
| Individually evaluated loans | 6,507 | — | 6,092 | 12,599 | ||||||||||||
| Total recorded investment in loans | $ | 24,017,919 | $ | 786,457 | $ | 363,118 | $ | 25,167,494 | ||||||||
Total recorded investment in loans, net (1) | $ | 24,005,619 | $ | 784,375 | $ | 358,699 | $ | 25,148,693 | ||||||||
| May 31, 2017 | ||||||||||||||||
| (Dollars in thousands) | CFC | NCSC | RTFC | Total | ||||||||||||
| Ending balance of the allowance: | ||||||||||||||||
| 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 | ||||||||
NaN CFC electric distribution and power supply loan portfolios to reflect management’s updated assessment of expected recovery rates inborrower totaling $219 million accounted for the event of a borrower default. The increase in recovery rate assumptions for these loan portfolios was the primary driversubstantial majority of the $18 million reduction in our allowance forspecial mention loan losses to $19category amount of $269 million as of May 31, 2018,2021. The CFC electric distribution borrower with loans outstanding of $219 million as of May 31, 2021 was downgraded to special mention in fiscal year 2021, from $37a rating within the pass category as of May 31, 2020. The downgrade was attributable to an adverse financial impact from restoration costs incurred to repair damage caused by two successive hurricanes. We expect that the borrower will receive grant funds from the Federal Emergency Management Agency and the state where it is located for reimbursement of the hurricane damage-related restoration costs.
Substandard
Loans outstanding to Rayburn Country Electric Cooperative, Inc. (“Rayburn”), a CFC Texas-based electric power supply borrower, consisted of secured loans of $167 million and unsecured loans of $212 million, which together totaled $379 million as of May 31, 2017. Our electric utility loan portfolio has continued to exhibit strong credit performance. In fiscal year 2018,2021, and accounted for the fifth consecutive fiscal year, we had no payment defaults, charge-offs, delinquent loans or nonperforming loans in our electric utilitysubstandard loan portfolio. Although we downgraded one electric distribution cooperative and its subsidiary, which had combined total loans outstandingcategory amount of $165$379 million to substandard as of May 31, 2018, we believe that,2021. Rayburn was downgraded to substandard in fiscal year 2021, from a rating within the pass category as of May 31, 2020. The downgrade was attributable to the significant adverse financial impact from exposure to the elevated power costs during the February 2021 polar vortex.
NaN CFC electric distribution borrower and its subsidiary with loans totaling $146 million as of May 31, 2021, was upgraded to a risk rating grade in the eventpass category in fiscal year 2021, from a substandard rating as of default, we would recover substantially all of the outstanding amountMay 31, 2020, based on the historical average recovery ratesborrower’s improved financial performance.
Doubtful
The increase in loans outstanding in the doubtful category to $237 million as of May 31, 2021, from $168 million as of May 31, 2020 was attributable to the downgrades in the borrower risk ratings of Brazos and 2 affiliated RTFC telecommunications borrowers and the classification of loans outstanding to these borrowers of $85 million and $9 million, respectively, as nonperforming as of May 31, 2021, discussed above under “Nonperforming Loans.”
On June 18, 2021, the Texas governor signed into law Senate Bill 1580, the electric cooperative securitization bill, which became effective immediately with the governor’s signature. This bill allows electric cooperatives to securitize extraordinary costs and expenses incurred due to exposure to high power costs during the February 2021 polar vortex, including amounts owed to Electric Reliability Council of Texas (“ERCOT”). Qualifying cooperatives may issue bonds directly or through a special purpose vehicle legal entity. Payments on the bonds are required to be made over a period not to exceed 30 years. The bill also requires that cooperatives that owe ERCOT use all means necessary to securitize the amount owed, calculated according to ERCOT’s protocols in effect during the period of the February 2021 polar vortex, and stipulates that failure to pay such amount may result in being barred from the ERCOT-administered power market by the Public Utility Commission of Texas. While Brazos and Rayburn are eligible to utilize the provisions of this bill, we are currently uncertain whether they will elect to do so.
Unadvanced Loan Commitments
Unadvanced loan commitments represent approved and executed loan contracts for defaulted loanswhich funds have not been advanced to borrowers. The following table displays, by loan type, the available balance under unadvanced loan commitments as of May 31, 2021 and the related maturities in our electric distributioneach fiscal year during the five-year period ended May 31, 2026, and power supply loan portfolios.thereafter.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 4.6: Unadvanced Loan Commitments
| Available Balance | Notional Maturities of Unadvanced Loan Commitments | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | ||||||||||||||||||||||||||||||||||||||
| Line of credit loans | $ | 8,585,226 | $ | 4,333,891 | $ | 1,523,158 | $ | 1,169,922 | $ | 1,061,235 | $ | 378,815 | $ | 118,205 | ||||||||||||||||||||||||||||||
| Long-term loans | 5,771,813 | 1,140,280 | 758,417 | 1,672,458 | 890,629 | 1,123,215 | 186,814 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 14,357,039 | $ | 5,474,171 | $ | 2,281,575 | $ | 2,842,380 | $ | 1,951,864 | $ | 1,502,030 | $ | 305,019 | ||||||||||||||||||||||||||||||
Unadvanced line of credit commitments accounted for 60% of total unadvanced loan commitments as of May 31, 2021, 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 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 draw funds prior to the expiration of the commitment. We expect that the majority of the long-term unadvanced loan commitments of $5,772 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 $14,357 million as of May 31, 2021 is not necessarily representative of our future funding 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 $11,312 million and $10,532 million as of May 31, 2021 and 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 $3,045 million and $2,857 million as of May 31, 2021 and 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 summarizes the available balance under unconditional committed lines of credit and the related maturities by fiscal year and thereafter, as of May 31, 2021.
Table 4.7: Unconditional Committed Lines of Credit—Available Balance
| Available Balance | Notional Maturities of Unconditional Committed Lines of Credit | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | |||||||||||||||||||||||||||||||||||
| Committed lines of credit | $ | 3,044,515 | $ | 3,423 | $ | 1,147,724 | $ | 682,998 | $ | 926,344 | $ | 229,120 | $ | 54,906 | |||||||||||||||||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pledged 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 loans outstanding pledged as collateral to secure our collateral trust bonds, notes payable under the USDA Guaranteed Underwriter Program (“Guaranteed Underwriter Program”), notes payable under the revolving note purchase agreement with Farmer Mac and Clean Renewable Energy Bonds, and the corresponding debt outstanding as of May 31, 2021 and 2020. See “Note 6—Short-Term Borrowings” and “Note 7—Long-Term Debt” for information on our borrowings.
Table 4.8: Pledged Loans
| May 31, | ||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||
| Collateral trust bonds: | ||||||||||||||
| 2007 indenture: | ||||||||||||||
| Distribution system mortgage notes pledged | $ | 8,400,293 | $ | 8,244,202 | ||||||||||
| RUS-guaranteed loans qualifying as permitted investments | 121,679 | 128,361 | ||||||||||||
| Total pledged collateral | $ | 8,521,972 | $ | 8,372,563 | ||||||||||
| Collateral trust bonds outstanding | 7,422,711 | 7,422,711 | ||||||||||||
| 1994 indenture: | ||||||||||||||
| Distribution system mortgage notes pledged | $ | 34,924 | $ | 39,785 | ||||||||||
| Collateral trust bonds outstanding | 30,000 | 35,000 | ||||||||||||
| Guaranteed Underwriter Program: | ||||||||||||||
| Distribution and power supply system mortgage notes pledged | $ | 7,150,240 | $ | 7,535,931 | ||||||||||
| Notes payable outstanding | 6,269,303 | 6,261,312 | ||||||||||||
| Farmer Mac: | ||||||||||||||
| Distribution and power supply system mortgage notes pledged | $ | 3,440,307 | $ | 3,687,418 | ||||||||||
| Notes payable outstanding | 2,977,909 | 3,059,637 | ||||||||||||
| Clean Renewable Energy Bonds Series 2009A: | ||||||||||||||
| Distribution and power supply system mortgage notes pledged | $ | 5,316 | $ | 7,269 | ||||||||||
| Cash | 394 | 395 | ||||||||||||
| Total pledged collateral | $ | 5,710 | $ | 7,664 | ||||||||||
| Notes payable outstanding | 4,412 | 6,068 | ||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 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 sheet 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 Portfolio
The following tables summarize, by member class, changes in the allowance for credit losses for our loan portfolio and present the allowance components for the years ended May 31, 2021, 2020 and 2019. 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. 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 5.1: Changes in Allowance for Credit Losses
| Year Ended May 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Distribution | Power Supply | Statewide and Associate | CFC Total | NCSC | RTFC | Total | |||||||||||||||||||||||||||||||||||||
| Balance as of May 31, 2020 | $ | 8,002 | $ | 38,027 | $ | 1,409 | $ | 47,438 | $ | 806 | $ | 4,881 | $ | 53,125 | ||||||||||||||||||||||||||||||
| Cumulative-effect adjustment from adoption of CECL accounting standard | 3,586 | 2,034 | 25 | 5,645 | (15) | (1,730) | 3,900 | |||||||||||||||||||||||||||||||||||||
| Balance as of June 1, 2020 | 11,588 | 40,061 | 1,434 | 53,083 | 791 | 3,151 | 57,025 | |||||||||||||||||||||||||||||||||||||
| Provision (benefit) for credit losses | 1,838 | 24,585 | (43) | 26,380 | 583 | 1,544 | 28,507 | |||||||||||||||||||||||||||||||||||||
| Balance as of May 31, 2021 | $ | 13,426 | $ | 64,646 | $ | 1,391 | $ | 79,463 | $ | 1,374 | $ | 4,695 | $ | 85,532 | ||||||||||||||||||||||||||||||
| Year Ended May 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Distribution | Power Supply | Statewide and Associate | CFC Total | NCSC | RTFC | Total | |||||||||||||||||||||||||||||||||||||
| Balance as of May 31, 2019 | $ | 7,483 | $ | 4,253 | $ | 1,384 | $ | 13,120 | $ | 2,007 | $ | 2,408 | $ | 17,535 | ||||||||||||||||||||||||||||||
| Provision (benefit) for credit losses | 519 | 33,774 | 25 | 34,318 | (1,201) | 2,473 | 35,590 | |||||||||||||||||||||||||||||||||||||
| Balance as of May 31, 2020 | $ | 8,002 | $ | 38,027 | $ | 1,409 | $ | 47,438 | $ | 806 | $ | 4,881 | $ | 53,125 | ||||||||||||||||||||||||||||||
| Year Ended May 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Distribution | Power Supply | Statewide and Associate | CFC Total | NCSC | RTFC | Total | |||||||||||||||||||||||||||||||||||||
| Balance as of May 31, 2018 | $ | 7,611 | $ | 4,588 | $ | 101 | $ | 12,300 | $ | 2,082 | $ | 4,419 | $ | 18,801 | ||||||||||||||||||||||||||||||
| Provision (benefit) for credit losses | (128) | (335) | 1,283 | 820 | (75) | (2,011) | (1,266) | |||||||||||||||||||||||||||||||||||||
| Balance as of May 31, 2019 | $ | 7,483 | $ | 4,253 | $ | 1,384 | $ | 13,120 | $ | 2,007 | $ | 2,408 | $ | 17,535 | ||||||||||||||||||||||||||||||
The following tables present, by member class, the components of our allowance for credit losses as of May 31, 2021 and 2020.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 5.2: Allowance for Credit Losses Components
| May 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Distribution | Power Supply | Statewide and Associate | CFC Total | NCSC | RTFC | Total | |||||||||||||||||||||||||||||||||||||
| Allowance components: | ||||||||||||||||||||||||||||||||||||||||||||
| Collective allowance | $ | 13,426 | $ | 25,104 | $ | 1,391 | $ | 39,921 | $ | 1,374 | $ | 1,147 | $ | 42,442 | ||||||||||||||||||||||||||||||
Asset-specific allowance(1) | 0 | 39,542 | 0 | 39,542 | 0 | 3,548 | 43,090 | |||||||||||||||||||||||||||||||||||||
| Total allowance for credit losses | $ | 13,426 | $ | 64,646 | $ | 1,391 | $ | 79,463 | $ | 1,374 | $ | 4,695 | $ | 85,532 | ||||||||||||||||||||||||||||||
Loans outstanding:(2) | ||||||||||||||||||||||||||||||||||||||||||||
| Collectively evaluated loans | $ | 22,022,044 | $ | 4,926,000 | $ | 106,121 | $ | 27,054,165 | $ | 706,868 | $ | 406,606 | $ | 28,167,639 | ||||||||||||||||||||||||||||||
Individually evaluated loans(1) | 5,379 | 228,312 | 0 | 233,691 | 0 | 13,777 | 247,468 | |||||||||||||||||||||||||||||||||||||
| Total loans outstanding | $ | 22,027,423 | $ | 5,154,312 | $ | 106,121 | $ | 27,287,856 | $ | 706,868 | $ | 420,383 | $ | 28,415,107 | ||||||||||||||||||||||||||||||
| Allowance ratios: | ||||||||||||||||||||||||||||||||||||||||||||
Collective allowance coverage ratio(3) | 0.06 | % | 0.51 | % | 1.31 | % | 0.15 | % | 0.19 | % | 0.28 | % | 0.15 | % | ||||||||||||||||||||||||||||||
Asset-specific allowance coverage ratio(4) | 0 | 17.32 | 0 | 16.92 | 0 | 25.75 | 17.41 | |||||||||||||||||||||||||||||||||||||
Total allowance coverage ratio(5) | 0.06 | 1.25 | 1.31 | 0.29 | 0.19 | 1.12 | 0.30 | |||||||||||||||||||||||||||||||||||||
| May 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Distribution | Power Supply | Statewide and Associate | CFC Total | NCSC | RTFC | Total | |||||||||||||||||||||||||||||||||||||
| Allowance components: | ||||||||||||||||||||||||||||||||||||||||||||
| Collective allowance | $ | 8,002 | $ | 4,173 | $ | 1,409 | $ | 13,584 | $ | 806 | $ | 3,902 | $ | 18,292 | ||||||||||||||||||||||||||||||
| Asset-specific allowance | 0 | 33,854 | 0 | 33,854 | 0 | 979 | 34,833 | |||||||||||||||||||||||||||||||||||||
| Total allowance for credit losses | $ | 8,002 | $ | 38,027 | $ | 1,409 | $ | 47,438 | $ | 806 | $ | 4,881 | $ | 53,125 | ||||||||||||||||||||||||||||||
Loans outstanding:(2) | ||||||||||||||||||||||||||||||||||||||||||||
| Collectively evaluated loans | $ | 20,763,897 | $ | 4,563,798 | $ | 106,498 | $ | 25,434,193 | $ | 697,862 | $ | 380,243 | $ | 26,512,298 | ||||||||||||||||||||||||||||||
| Individually evaluated loans | 5,756 | 167,708 | 0 | 173,464 | 0 | 5,092 | 178,556 | |||||||||||||||||||||||||||||||||||||
| Total loans outstanding | $ | 20,769,653 | $ | 4,731,506 | $ | 106,498 | $ | 25,607,657 | $ | 697,862 | $ | 385,335 | $ | 26,690,854 | ||||||||||||||||||||||||||||||
| Allowance coverage ratios: | ||||||||||||||||||||||||||||||||||||||||||||
Collective allowance coverage ratio(3) | 0.04 | % | 0.09 | % | 1.32 | % | 0.05 | % | 0.12 | % | 1.03 | % | 0.07 | % | ||||||||||||||||||||||||||||||
Asset-specific allowance coverage ratio(4) | 0 | 20.19 | 0 | 19.52 | 0 | 19.23 | 19.51 | |||||||||||||||||||||||||||||||||||||
Total allowance coverage ratio(5) | 0.04 | 0.80 | 1.32 | 0.19 | 0.12 | 1.27 | 0.20 | |||||||||||||||||||||||||||||||||||||
___________________________
(1)In addition, we had less than $1 million letters of credit outstanding to Brazos, for which the reserve is included in the asset-specific allowance as of May 31, 2021.
(2)Represents the unpaid principal amount of loans as of the end of each period. Excludes unamortized deferred loan origination costs of $12 million and $11 million as of May 31, 2021 and 2020, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3)Calculated based on the collective allowance component at period-end divided by collectively evaluated loans outstanding at period-end.
(4)Calculated based on the asset-specific allowance component at period-end divided by individually evaluated loans outstanding at period-end.
(5)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 increased $32 million to $86 million as of May 31, 2021, and the allowance coverage ratio increased to 0.30%. Of the $32 million increase in the allowance, $24 million was attributable to the collective allowance and $8 million was attributable to the asset-specific allowance.
The increase in the collective allowance of $24 million was primarily driven by the risk-rating downgrade of Rayburn Country Electric Cooperative, Inc. (“Rayburn”), a CFC Texas-based power supply borrower with loans outstanding of $379 million as of May 31, 2021, from a pass rating to a criticized rating in fiscal year 2021 coupled with a decrease we made in the recovery rate assumption for power supply loans during fiscal year 2021 and the addition to the collective allowance of $4 million upon our adoption of CECL on June 1, 2020.
The increase in the asset-specific allowance of $8 million was primarily driven by the risk-rating downgrade of Brazos, a CFC Texas-based power supply borrower, in fiscal year 2021 and the classification of Brazos’ loans outstanding, which totaled $85 million as of May 31, 2021, as nonperforming due to the bankruptcy filing by Brazos as discussed above in “Note 4—Loans.”
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, 2020 | ||||||||||||||||||||||||||
| (Dollars in thousands) | Recorded Investment | Related Allowance | With Specific Allowance | With No Specific Allowance | ||||||||||||||||||||||
| Individually impaired loans: | ||||||||||||||||||||||||||
| CFC | $ | 173,464 | $ | 33,854 | $ | 167,708 | $ | 5,756 | ||||||||||||||||||
| RTFC | 5,092 | 979 | 5,092 | 0 | ||||||||||||||||||||||
| Total | $ | 178,556 | $ | 34,833 | $ | 172,800 | $ | 5,756 | ||||||||||||||||||
The following tables present, by company, the components of our recorded investment and interest income recognized for the years ended May 31, 2020 and 2019.
Table 5.4: Average Recorded Investment and Interest Income Recognized on Individually Impaired Loans—Incurred Loss Model
| Year Ended May 31, | Year Ended May 31, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| (Dollars in thousands) | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||||||||||
| CFC | $ | 11,834 | $ | 6,322 | $ | 568 | $ | 553 | ||||||||||||||||||
| RTFC | 5,361 | 5,861 | 268 | 293 | ||||||||||||||||||||||
| Total impaired loans | $ | 17,195 | $ | 12,183 | $ | 836 | $ | 846 | ||||||||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reserve for Credit Losses—Unadvanced Loan Commitments
| NOTE | ||
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 $4,582 million and accounted for 17% of total debt outstanding as of May 31, 2021, compared with $3,962 million, or 15% of total debt outstanding, as of May 31, 2020. The following table provides comparative information on our short-term borrowings and weighted-average interest rates as of May 31, 20182021 and 2017.2020.
| May 31, | ||||||||||||||
| 2018 | 2017 | |||||||||||||
| (Dollars in thousands) | Amount | Weighted- Average Interest Rate | Amount | Weighted-Average Interest Rate | ||||||||||
| Short-term borrowings: | ||||||||||||||
| Commercial paper sold through dealers, net of discounts | $ | 1,064,266 | 1.87 | % | $ | 999,691 | 0.93 | % | ||||||
| Commercial paper sold directly to members, at par | 1,202,105 | 1.89 | 928,158 | 0.95 | ||||||||||
| Select notes | 780,472 | 2.04 | 696,889 | 1.12 | ||||||||||
| Daily liquidity fund notes | 400,635 | 1.50 | 527,990 | 0.80 | ||||||||||
| Medium-term notes sold to members | 248,432 | 1.90 | 190,172 | 1.50 | ||||||||||
Farmer Mac notes payable (1) | 100,000 | 2.23 | — | — | ||||||||||
| Total short-term borrowings | $ | 3,795,910 | 1.88 | $ | 3,342,900 | 0.99 | ||||||||
| May 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Weighted- Average Interest Rate | Amount | Weighted-Average Interest Rate | ||||||||||||||||||||||
| Short-term borrowings: | ||||||||||||||||||||||||||
| Commercial paper: | ||||||||||||||||||||||||||
| Commercial paper sold through dealers, net of discounts | $ | 894,977 | 0.16 | % | $ | 0 | 0 | % | ||||||||||||||||||
| Commercial paper sold directly to members, at par | 1,124,607 | 0.14 | 1,318,566 | 0.34 | ||||||||||||||||||||||
| Total commercial paper | 2,019,584 | 0.15 | 1,318,566 | 0.34 | ||||||||||||||||||||||
| Select notes to members | 1,539,150 | 0.30 | 1,597,959 | 0.75 | ||||||||||||||||||||||
| Daily liquidity fund notes | 460,556 | 0.08 | 508,618 | 0.10 | ||||||||||||||||||||||
| Medium-term notes sold to members | 362,691 | 0.42 | 286,842 | 1.64 | ||||||||||||||||||||||
Farmer Mac notes payable (1) | 0 | 0 | 250,000 | 1.06 | ||||||||||||||||||||||
| Securities sold under repurchase agreements | 200,115 | 0.30 | 0 | 0 | ||||||||||||||||||||||
| Total short-term borrowings | $ | 4,582,096 | 0.22 | $ | 3,961,985 | 0.62 | ||||||||||||||||||||
___________________________
(1)Advanced under the revolving note purchase agreement with Farmer Mac dated July 31, 2015.March 24, 2011. See “Note 6—7—Long-Term Debt” for additional information on this revolving note purchase agreement with Farmer Mac.agreement.
We issue commercial paper for periods of one to 270 days. We also issue select notes for periods ranging from 30 to 270 days. Select notes are unsecured obligations that do not require backup bank lines of credit for liquidity purposes. These notes require a larger minimum investment than our commercial paper sold to members and, as a result, offer a higher interest rate than our commercial paper. We also issue daily liquidity fund notes, which are unsecured obligations that do not require backup bank lines of credit for liquidity purposes. We also issue medium-term notes, which represent unsecured obligations that may be issued through dealers in the capital markets or directly to our members.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We also enter into repurchase agreements to sell investment securities. These transactions are accounted for as collateralized borrowings. On May 25, 2021, we borrowed $200 million under a securities repurchase agreement and pledged as collateral investment securities classified as trading, the fair value of which was $211 million as of May 31, 2021. We repurchased these securities on June 2, 2021.
Committed Bank Revolving Line of Credit Agreements
for our use. The following table presents the total commitment, the net amount available for use and the outstanding letters of creditaccess under our committed bank revolving line of credit agreements as of May 31, 20182021 and 2017.2020.
| May 31, | ||||||||||||||||||||||||||||
| 2018 | 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 | 1,492 | — | 1,492 | — | — | — | November 20, 2020 | 7.5 bps | ||||||||||||||||||||
| Total 3-year agreement | 1,492 | — | 1,492 | 1,533 | — | 1,533 | ||||||||||||||||||||||
| 5-year agreement | — | — | — | 1,632 | 1 | 1,631 | November 19, 2021 | 10 bps | ||||||||||||||||||||
| 5-year agreement | 1,593 | 3 | 1,590 | — | — | — | November 20, 2022 | 10 bps | ||||||||||||||||||||
| Total 5-year agreement | 1,593 | 3 | 1,590 | 1,632 | 1 | 1,631 | ||||||||||||||||||||||
| Total | $ | 3,085 | $ | 3 | $ | 3,082 | $ | 3,165 | $ | 1 | $ | 3,164 | ||||||||||||||||
| May 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 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 | $ | 1,315 | $ | 0 | $ | 1,315 | $ | 1,315 | $ | 0 | $ | 1,315 | November 28, 2022 | 7.5 bps | ||||||||||||||||||||||||||||||||||||
| 5-year agreement | 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.
As indicated in the table above we had no0 borrowings outstanding under our committed bank revolving line of credit agreements as of May 31, 20182021 and 2017, and we2020. We were in compliance with all covenants and conditions under the agreements as of each respective date.
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE | ||
The following table displays long-term debt outstanding, by debt product type, and the weighted-average interest rates, byrate and maturity date for each debt product type, as of May 31, 20182021 and 2017.2020. Long-term debt outstanding totaled $20,603 million and accounted for 75% of total debt outstanding as of May 31, 2021, compared with $19,712 million and 76% of total debt outstanding as of May 31, 2020. Long-term debt with fixed- and variable-rate accounted for 89% and 11%, respectively, of our total long-term debt outstanding as of May 31, 2021, compared with 86% and 14%, respectively, of our total long-term debt outstanding as of May 31, 2020.
| May 31, | ||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||
| (Dollars in thousands) | Amount | Weighted- Average Interest Rate | Maturity Date | Amount | Weighted- Average Interest Rate | Maturity Date | ||||||||||||
| Unsecured long-term debt: | ||||||||||||||||||
| Medium-term notes sold through dealers | $ | 3,026,472 | 3.51 | % | 2018-2032 | $ | 2,386,956 | 3.48 | % | 2018-2032 | ||||||||
| Medium-term notes sold to members | 395,389 | 2.56 | 2018-2037 | 422,779 | 2.18 | 2017-2037 | ||||||||||||
| Subtotal medium-term notes | 3,421,861 | 3.40 | 2,809,735 | 3.29 | ||||||||||||||
| Unamortized discount | (1,256 | ) | (382 | ) | ||||||||||||||
| Debt issuance costs | (22,237 | ) | (21,903 | ) | ||||||||||||||
| Total unsecured medium-term notes | 3,398,368 | 2,787,450 | ||||||||||||||||
| Unsecured notes payable: | 18,892 | 3.84 | 2022-2023 | 22,799 | 3.98 | 2022-2023 | ||||||||||||
| Unamortized discount | (277 | ) | (379 | ) | ||||||||||||||
| Debt issuance costs | (68 | ) | (94 | ) | ||||||||||||||
| Total unsecured notes payable | 18,547 | 3.84 | 22,326 | 3.98 | ||||||||||||||
| Total unsecured long-term debt | 3,416,915 | 3.40 | 2,809,776 | 3.29 | ||||||||||||||
| Secured long-term debt: | ||||||||||||||||||
| Collateral trust bonds | 7,917,711 | 3.89 | 2018-2032 | 7,922,711 | 4.08 | 2018-2032 | ||||||||||||
| Unamortized discount | (250,421 | ) | (258,329 | ) | ||||||||||||||
| Debt issuance costs | (28,197 | ) | (30,334 | ) | ||||||||||||||
| Total collateral trust bonds | 7,639,093 | 7,634,048 | ||||||||||||||||
| Guaranteed Underwriter Program notes payable | 4,856,375 | 2.85 | 2025-2038 | 4,985,748 | 2.83 | 2025-2037 | ||||||||||||
| Debt issuance costs | (232 | ) | (264 | ) | ||||||||||||||
| Total Guaranteed Underwriter Program notes payable | 4,856,143 | 4,985,484 | ||||||||||||||||
| Farmer Mac notes payable | 2,791,496 | 2.90 | 2018-2048 | 2,513,389 | 1.71 | 2018-2047 | ||||||||||||
| Other secured notes payable | 11,556 | 2.74 | 2024 | 13,214 | 2.81 | 2024 | ||||||||||||
| Debt issuance costs | (243 | ) | (317 | ) | ||||||||||||||
| Total other secured notes payable | 11,313 | 12,897 | ||||||||||||||||
| Total secured notes payable | 7,658,952 | 2.87 | 7,511,770 | 2.45 | ||||||||||||||
| Total secured long-term debt | 15,298,045 | 3.39 | 15,145,818 | 3.29 | ||||||||||||||
| Total long-term debt | $ | 18,714,960 | 3.39 | $ | 17,955,594 | 3.29 | ||||||||||||
Table 7.1: Long-Term Debt—Debt Product Types and Weighted-Average Interest Rates
| May 31, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Weighted- Average Interest Rate | Maturity Date | Amount | Weighted- Average Interest Rate | Maturity Date | ||||||||||||||||||||||||||||||||
| Secured long-term debt: | ||||||||||||||||||||||||||||||||||||||
| Collateral trust bonds | $ | 7,452,711 | 3.15 | % | 2022-2049 | $ | 7,457,711 | 3.23 | % | 2020-2049 | ||||||||||||||||||||||||||||
| Unamortized discount | (227,046) | (236,461) | ||||||||||||||||||||||||||||||||||||
| Debt issuance costs | (33,721) | (32,697) | ||||||||||||||||||||||||||||||||||||
| Total collateral trust bonds | 7,191,944 | 7,188,553 | ||||||||||||||||||||||||||||||||||||
| Guaranteed Underwriter Program notes payable | 6,269,303 | 2.76 | 2025-2041 | 6,261,312 | 2.74 | 2025-2040 | ||||||||||||||||||||||||||||||||
| Farmer Mac notes payable | 2,977,909 | 1.68 | 2021-2049 | 2,809,637 | 2.07 | 2020-2049 | ||||||||||||||||||||||||||||||||
| Other secured notes payable | 4,412 | 3.14 | 2021-2023 | 6,068 | 2.69 | 2020-2023 | ||||||||||||||||||||||||||||||||
| Debt issuance costs | (22) | (117) | ||||||||||||||||||||||||||||||||||||
| Total other secured notes payable | 4,390 | 5,951 | ||||||||||||||||||||||||||||||||||||
| Total secured notes payable | 9,251,602 | 0 | 9,076,900 | 2.53 | ||||||||||||||||||||||||||||||||||
| Total secured long-term debt | 16,443,546 | 2.74 | 16,265,453 | 2.85 | ||||||||||||||||||||||||||||||||||
| Unsecured long-term debt: | ||||||||||||||||||||||||||||||||||||||
| Medium-term notes sold through dealers | 3,943,728 | 2.31 | 2021-2032 | 3,086,733 | 3.34 | 2020-2032 | ||||||||||||||||||||||||||||||||
| Medium-term notes sold to members | 232,346 | 2.61 | 2021-2037 | 372,117 | 2.85 | 2020-2037 | ||||||||||||||||||||||||||||||||
| Subtotal medium-term notes | 4,176,074 | 0 | 3,458,850 | 3.29 | ||||||||||||||||||||||||||||||||||
| Unamortized discount | (2,307) | (997) | ||||||||||||||||||||||||||||||||||||
| Debt issuance costs | (18,036) | (16,943) | ||||||||||||||||||||||||||||||||||||
| Total unsecured medium-term notes | 4,155,731 | 3,440,910 | ||||||||||||||||||||||||||||||||||||
| Unsecured notes payable | 3,886 | 0 | 2021-2023 | 5,794 | 0 | 2020-2023 | ||||||||||||||||||||||||||||||||
| Unamortized discount | (35) | (107) | ||||||||||||||||||||||||||||||||||||
| Debt issuance costs | (5) | (26) | ||||||||||||||||||||||||||||||||||||
| Total unsecured notes payable | 3,846 | 5,661 | ||||||||||||||||||||||||||||||||||||
| Total unsecured long-term debt | 4,159,577 | 2.33 | 3,446,571 | 3.29 | ||||||||||||||||||||||||||||||||||
| Total long-term debt | $ | 20,603,123 | 2.66 | $ | 19,712,024 | 2.92 | ||||||||||||||||||||||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the principal amount of long-term debt maturing in each of the five fiscal years subsequent to May 31, 20182021 and thereafter.
| (Dollars in thousands) | Amount Maturing | Weighted-Average Interest Rate | |||||
| 2019 | $ | 2,745,434 | 5.47 | % | |||
| 2020 | 1,462,907 | 2.24 | |||||
| 2021 | 1,737,341 | 2.64 | |||||
| 2022 | 1,576,418 | 2.79 | |||||
| 2023 | 1,127,810 | 2.67 | |||||
| Thereafter | 10,065,050 | 3.30 | |||||
| Total | $ | 18,714,960 | 3.39 | ||||
| (Dollars in thousands) | Maturity Amount | Weighted-Average Interest Rate | ||||||||||||
| 2022 | $ | 2,597,519 | 1.81 | % | ||||||||||
| 2023 | 1,843,775 | 1.65 | ||||||||||||
| 2024 | 1,652,300 | 2.18 | ||||||||||||
| 2025 | 842,377 | 2.76 | ||||||||||||
| 2026 | 2,428,251 | 2.86 | ||||||||||||
| Thereafter | 11,520,073 | 3.03 | ||||||||||||
| Total | $ | 20,884,295 | 2.66 | |||||||||||
Secured Debt
Long-term secured debt of $16,444 million and $16,265 million as of May 31, 2021 and 2020, respectively, represented 80% and 83% of total long-term debt outstanding as of each respective date. The increase in long-term secured debt of $179 million for the year ended May 31, 2021 was primarily attributable to advances under the Farmer Mac revolving note purchase agreement. We are required to pledge eligible mortgage notes represent unsecured obligations that may be issued through dealers in an amount at least equal to the capital markets or directly tooutstanding balance of our members.secured debt. We believe we were in compliance with all covenants and conditions under our debt indentures as of May 31, 2021 and 2020. See “Note 4—Loans” for information on pledged collateral under our secured debt agreements.
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.
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The notes 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 any of 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” for additional information on the collateral pledged to secure notes payable under this program.
Farmer Mac Notes Payable
We have two revolving note purchase agreements with Farmer Mac, which together allow us to borrow up to $5,500 million from Farmer Mac. On February 26, 2018, we amended our firsta revolving note purchase agreement with Farmer Mac, dated March 24, 2011. Under the2011, as amended, agreement,under which we can currently borrow up to $5,500 million from Farmer Mac, at any time, subject to market conditions, up to $5,200 million at any time through January 11, 2022, and such date shall automatically extend on each anniversary date of the closing for
Unsecured Debt
Long-term unsecured debt of $4,160 million and 2017.$3,447 million as of May 31, 2021 and 2020, respectively, represented 20% and 17% of total long-term debt outstanding as of each respective date. The increase in long-term unsecured debt of $712 million for the year ended May 31, 2021 was primarily attributable to dealer medium-term notes issuances.
Medium-Term Notes
Medium-term notes represent unsecured obligations that may be issued through dealers in the capital markets or directly to our members.
On February 8, 2021, we issued $500 million aggregate principal amount of 0.35% dealer medium-term notes due February 8, 2024. On February 16, 2021, we issued $250 million aggregate principal amount of 3-month LIBOR dealer medium-term notes due February 16, 2023. On February 24, 2021, we issued $600 million aggregate principal amount of 1.00% dealer medium-term notes due June 15, 2026. On February 24, 2021, we also issued $75 million aggregate principal amount of 0.25% dealer medium-term notes due February 24, 2023.
| NOTE | ||
Subordinated deferrable debt isrepresents long-term debt that is subordinated to our outstandingall debt and senior toother than subordinated certificates held by our members. Our 4.75% and 5.25% subordinated debt due 2043 and 2046, respectively, was issued for a term of up to 30 years, pays interest semi-annually, may be called at par after 10 years, converts to a variable rate after 10 years and allows us to defer the payment of interest for one or more consecutive interest periods not exceeding five consecutive years. Our 5.50% subordinated debt due 2064 was issued for a term of up to 45 years, pays interest quarterly, may be called at par after five years and allows us to defer the payment of interest for one or more consecutive interest periods not exceeding 40 consecutive quarterly periods. To date, we have not exercised our right to defer interest payments.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents, by issuance, subordinated deferrable debt outstanding and the weighted-average interest rates as of May 31, 20182021 and 2017.2020.
| May 31, | ||||||||||||||
| 2018 | 2017 | |||||||||||||
| (Dollars in thousands) | Amount | Weighted- Average Interest Rate | Amount | Weighted-Average Interest Rate | ||||||||||
| 4.75% due 2043 with a call date of April 30, 2023 | $ | 400,000 | 4.75 | % | $ | 400,000 | 4.75 | % | ||||||
| 5.25% due 2046 with a call date of April 20, 2026 | 350,000 | 5.25 | 350,000 | 5.25 | ||||||||||
| Debt issuance costs | (7,590 | ) | (7,726 | ) | ||||||||||
| Total subordinated deferrable debt | $ | 742,410 | 4.98 | $ | 742,274 | 4.98 | ||||||||
| May 31, | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Maturity and Call Dates | ||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Outstanding Amount | Weighted- Average Interest Rate | Outstanding Amount | Weighted-Average Interest Rate | Term in Years | Maturity | Call Date | |||||||||||||||||||||||||||||||||||||
| Issuances of subordinated notes: | ||||||||||||||||||||||||||||||||||||||||||||
| 4.75% issuance 2013 | $ | 400,000 | 4.75 | % | $ | 400,000 | 4.75 | % | 30 | 2043 | April 30, 2023 | |||||||||||||||||||||||||||||||||
| 5.25% issuance 2016 | 350,000 | 5.25 | 350,000 | 5.25 | 30 | 2046 | April 20, 2026 | |||||||||||||||||||||||||||||||||||||
| 5.50% issuance 2019 | 250,000 | 5.50 | 250,000 | 5.50 | 45 | 2064 | May 15, 2024 | |||||||||||||||||||||||||||||||||||||
| Total aggregate principal amount | 1,000,000 | 1,000,000 | ||||||||||||||||||||||||||||||||||||||||||
| Debt issuance costs | (13,685) | (13,881) | ||||||||||||||||||||||||||||||||||||||||||
| Total subordinated deferrable debt | $ | 986,315 | 5.11 | $ | 986,119 | 5.11 | ||||||||||||||||||||||||||||||||||||||
| NOTE | ||
Membership Subordinated Certificates
Prior to June 2009, CFC members were required to purchase membership subordinated certificates as a condition of membership. Such certificates are interest-bearing, unsecured, subordinated debt. Members may purchase the certificates over time as a percentage of the amount they borrow from CFC. Membership certificates typically have an original maturity of 100 years and pay interest at 5% semi-annually. The weighted-average maturity for all membership subordinated certificates outstanding was 58 years and 59 years as of May 31, 2018 and 2017, respectively. NCSC and RTFC members are not requiredNo requirement to purchase membership certificates as a condition of membership.has existed for NCSC or RTFC members.
Loan and Guarantee Subordinated Certificates
Members obtaining long-term loans, certain line of credit loans or guarantees may be required to purchase additional loan or guarantee subordinated certificates with each such loan or guarantee based on the borrower’s debt-to-equity ratio with CFC. These certificates are unsecured, subordinated debt and may be interest bearing or non-interest bearing.
Under our current policy, most borrowers requesting standard loans are not required to buy subordinated certificates as a condition of a loan or guarantee. Borrowers meeting certain criteria, including but not limited to, high leverage ratios, or borrowers requesting large facilities, may be required to purchase loan or guarantee subordinated certificates or member capital securities (described below) as a condition of the loan. Loan subordinated certificates have the same maturity as the related long-term loan. Some certificates may amortize annually based on the outstanding loan balance.
The interest rates payable on guarantee subordinated certificates purchased in conjunction with our guarantee program vary in accordance with applicable CFC policy. Guarantee subordinated certificates have the same maturity as the related guarantee.
Member Capital Securities
CFC offers member capital securities to its voting members. Member capital securities are interest-bearing, unsecured obligations of CFC, which are subordinate to all existing and future senior and subordinated indebtedness of CFC held by
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
non-members of CFC, but rank proportionally to our member subordinated certificates. Member capital securities mature 30 years from the date of issuance, typically pay interest at 5% and are callable at par at our option 10 years from the date of issuance and anytime thereafter. The interest rate for new member capital securities issuance is set at the time of issuance. These securities represent voluntary investments in CFC by the members.
The following table displays members’ subordinated certificates and the weighted-average interest rates as of May 31, 20182021 and 2017.2020.
| May 31, | ||||||||||||||
| 2018 | 2017 | |||||||||||||
| (Dollars in thousands) | Amounts Outstanding | Weighted- Average Interest Rate | Amounts Outstanding | Weighted- Average Interest Rate | ||||||||||
| Membership subordinated certificates: | ||||||||||||||
| Certificates maturing 2020 through 2118 | $ | 630,173 | $ | 629,011 | ||||||||||
Subscribed and unissued (1) | 275 | 1,087 | ||||||||||||
| Total membership subordinated certificates | 630,448 | 4.94 | % | 630,098 | 4.94 | % | ||||||||
| Loan and guarantee subordinated certificates: | ||||||||||||||
| Interest-bearing loan subordinated certificates maturing through 2045 | 300,738 | 310,518 | ||||||||||||
| Non-interest-bearing loan subordinated certificates maturing through 2047 | 162,263 | 171,862 | ||||||||||||
Subscribed and unissued (1) | 57 | 61 | ||||||||||||
| Total loan subordinated certificates | 463,058 | 2.71 | 482,441 | 2.70 | ||||||||||
| Interest-bearing guarantee subordinated certificates maturing through 2044 | 48,177 | 68,238 | ||||||||||||
| Non-interest-bearing guarantee subordinated certificates maturing through 2043 | 17,151 | 17,151 | ||||||||||||
| Total guarantee subordinated certificates | 65,328 | 4.50 | 85,389 | 4.85 | ||||||||||
| Total loan and guarantee subordinated certificates | 528,386 | 2.93 | 567,830 | 3.02 | ||||||||||
| Member capital securities: | ||||||||||||||
| Securities maturing through 2048 | 221,148 | 5.00 | 221,097 | 5.00 | ||||||||||
| Total members’ subordinated certificates | $ | 1,379,982 | 4.18 | $ | 1,419,025 | 4.18 | ||||||||
| May 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| (Dollars in thousands) | Amounts Outstanding | Weighted- Average Interest Rate | Amounts Outstanding | Weighted- Average Interest Rate | ||||||||||||||||||||||
| Membership subordinated certificates: | ||||||||||||||||||||||||||
| Certificates maturing 2021 through 2119 | $ | 628,582 | $ | 630,467 | ||||||||||||||||||||||
Subscribed and unissued (1) | 12 | 16 | ||||||||||||||||||||||||
| Total membership subordinated certificates | 628,594 | 4.95 | % | 630,483 | 4.95 | % | ||||||||||||||||||||
| Loan and guarantee subordinated certificates: | ||||||||||||||||||||||||||
| Interest-bearing loan subordinated certificates maturing through 2047 | 223,067 | 280,372 | ||||||||||||||||||||||||
| Non-interest-bearing loan subordinated certificates maturing through 2047 | 132,203 | 144,258 | ||||||||||||||||||||||||
Subscribed and unissued (1) | 45 | 45 | ||||||||||||||||||||||||
| Total loan subordinated certificates | 355,315 | 2.61 | 424,675 | 2.71 | ||||||||||||||||||||||
| Interest-bearing guarantee subordinated certificates maturing through 2044 | 31,581 | 43,700 | ||||||||||||||||||||||||
| Non-interest-bearing guarantee subordinated certificates maturing through 2037 | 0 | 14,590 | ||||||||||||||||||||||||
| Total guarantee subordinated certificates | 31,581 | 6.06 | 58,290 | 4.43 | ||||||||||||||||||||||
| Total loan and guarantee subordinated certificates | 386,896 | 2.89 | 482,965 | 2.92 | ||||||||||||||||||||||
| Member capital securities: | ||||||||||||||||||||||||||
| Securities maturing through 2050 | 239,170 | 5.00 | 226,170 | 5.00 | ||||||||||||||||||||||
| Total members’ subordinated certificates | $ | 1,254,660 | 4.32 | $ | 1,339,618 | 4.22 | ||||||||||||||||||||
___________________________
(1) The subscribed and unissued subordinated certificates represent subordinated certificates that members are required to purchase. Upon collection of full payment of the subordinated certificate amount, the certificate will be reclassified from subscribed and unissued to outstanding.
The weighted-average maturity for all membership subordinated certificates outstanding was 56 years as of both May 31, 2021 and 2020. The following table presents the amount of members’ subordinated certificates maturing in each of the five fiscal years followingsubsequent to May 31, 20182021 and thereafter.
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| (Dollars in thousands) | Amount Maturing(1) | Weighted-Average Interest Rate | |||||
| 2019 | $ | 9,818 | 2.82 | % | |||
| 2020 | 13,360 | 2.85 | |||||
| 2021 | 42,932 | 3.64 | |||||
| 2022 | 14,381 | 2.92 | |||||
| 2023 | 30,908 | 2.70 | |||||
| Thereafter | 1,268,251 | 4.27 | |||||
| Total | $ | 1,379,650 | 4.18 | ||||
| (Dollars in thousands) | Amount Maturing(1) | Weighted-Average Interest Rate | ||||||||||||
| 2022 | $ | 6,879 | 2.64 | % | ||||||||||
| 2023 | 18,820 | 3.87 | ||||||||||||
| 2024 | 10,635 | 2.46 | ||||||||||||
| 2025 | 10,458 | 2.87 | ||||||||||||
| 2026 | 55,073 | 2.88 | ||||||||||||
| Thereafter | 1,152,739 | 4.44 | ||||||||||||
| Total | $ | 1,254,604 | 4.32 | |||||||||||
___________________________
(1)Excludes $0.3$0.06 million in subscribed and unissued member subordinated certificates for which a payment has been received, but no certificate has been issued. Amortizing member loan subordinated certificates totaling $274$190 million are amortizing annually based on the unpaid principal balance of the
related loan. Amortization payments on these certificates totaled $16$13 million in fiscal year 20182021 and represented 6%7% of amortizing loan subordinated certificates outstanding.
| NOTE | ||
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 OTC derivatives, or they may be listed and traded on an exchange. We generally engage in OTC derivative transactions. 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 future debt issuance or debt that is scheduled to reprice in the future.
| May 31, | ||||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | Notional Amount | Weighted- Average Rate Paid | Weighted- Average Rate Received | Notional Amount | Weighted- Average Rate Paid | Weighted- Average Rate Received | ||||||||||||||
| Pay-fixed swaps | $ | 6,987,999 | 2.83 | % | 2.30 | % | $ | 6,807,013 | 2.85 | % | 1.16 | % | ||||||||
| Receive-fixed swaps | 3,824,000 | 2.93 | 2.50 | 3,699,000 | 1.72 | 2.64 | ||||||||||||||
| Total interest rate swaps | 10,811,999 | 2.86 | 2.37 | 10,506,013 | 2.46 | 1.68 | ||||||||||||||
| Forward pay-fixed swaps | 256,154 | 285,383 | ||||||||||||||||||
| Total | $ | 11,068,153 | $ | 10,791,396 | ||||||||||||||||
| May 31, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Notional Amount | Weighted- Average Rate Paid | Weighted- Average Rate Received | Notional Amount | Weighted- Average Rate Paid | Weighted- Average Rate Received | ||||||||||||||||||||||||||||||||
| Pay-fixed swaps | $ | 6,579,516 | 2.65 | % | 0.20 | % | $ | 6,604,808 | 2.78 | % | 0.88 | % | ||||||||||||||||||||||||||
| Receive-fixed swaps | 2,399,000 | 0.92 | 2.80 | 2,699,000 | 1.54 | 2.75 | ||||||||||||||||||||||||||||||||
| Subtotal | 8,978,516 | 2.19 | 0.89 | 9,303,808 | 2.42 | 1.42 | ||||||||||||||||||||||||||||||||
| Forward pay-fixed swaps | 0 | 3,000 | ||||||||||||||||||||||||||||||||||||
| Total interest rate swaps | $ | 8,978,516 | $ | 9,306,808 | ||||||||||||||||||||||||||||||||||
The following table presents the maturities, for each of the next five fiscal years and thereafter based on the notional amount of our interest rate swaps as of May 31, 2018.2021.
128
| Notional Amount | Notional Amortization and Maturities | |||||||||||||
| (Dollars in thousands) | 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | ||||||||
| Interest rate swaps | $11,068,153 | $499,999 | $1,318,007 | $476,998 | $487,310 | $350,590 | $7,935,249 | |||||||
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 10.2: Derivative Notional Amount Maturities
| Notional Amount | Notional Amortization and Maturities | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | ||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | $8,978,516 | $735,554 | $558,159 | $643,849 | $100,000 | $798,822 | $6,142,132 | |||||||||||||||||||||||||||||||||||||
Impact of Derivatives on Consolidated Balance Sheets
The following table displays the fair value of the derivative assets and derivative liabilities, by derivatives type, recorded on our consolidated balance sheets and the related outstanding notional amount by derivatives type as of May 31, 20182021 and 2017.2020.
| May 31, | ||||||||||||||||
| 2018 | 2017 | |||||||||||||||
| (Dollars in thousands) | Fair Value | Notional Balance | Fair Value | Notional Balance | ||||||||||||
| Derivative assets: | ||||||||||||||||
| Interest rate swaps | $ | 244,526 | $ | 5,264,971 | $ | 49,481 | $ | 3,754,120 | ||||||||
| Derivative liabilities: | ||||||||||||||||
| Treasury rate lock—cash flow hedge | $ | (1,059 | ) | $ | 100,000 | $ | — | $ | — | |||||||
| Interest rate swaps | (274,873 | ) | 5,803,182 | (385,337 | ) | 7,037,276 | ||||||||||
| Total derivative liabilities | $ | (275,932 | ) | $ | 5,903,182 | $ | (385,337 | ) | $ | 7,037,276 | ||||||
| May 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| (Dollars in thousands) | Fair Value | Notional Amount | Fair Value | Notional Amount(1) | ||||||||||||||||||||||
| Derivative assets: | ||||||||||||||||||||||||||
| Interest rate swaps | $ | 121,259 | $ | 2,560,618 | $ | 173,195 | $ | 2,699,000 | ||||||||||||||||||
| Derivative liabilities: | ||||||||||||||||||||||||||
| Interest rate swaps | $ | 584,989 | $ | 6,417,898 | $ | 1,258,459 | $ | 6,607,808 | ||||||||||||||||||
(1) The notional amount includes $3 million notional amount of forward starting swaps, as shown above in Table 10.1: Derivative Notional Amount and Weighted Average Rates, with an effective start date of June 5, 2020, outstanding as of May 31, 2020. The fair value of these swaps as of May 31, 2020 is included in the above table and in our consolidated financial statements.
All of our master swap agreements include 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, in “Note 1—Summary of Significant Accounting Policies,” 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 consolidated balance sheets as of May 31, 20182021 and 2017,2020, and provides information on the impact of netting provisions and collateral pledged.pledged, if any.
Table 10.4: Derivative Gross and Net Amounts
| May 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| 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 | $ | 121,259 | $ | 0 | $ | 121,259 | $ | 121,259 | $ | 0 | $ | 0 | ||||||||||||||||||||||||||
| Derivative liabilities: | ||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | 584,989 | 0 | 584,989 | 121,259 | 0 | 463,730 | ||||||||||||||||||||||||||||||||
129
| May 31, 2018 | ||||||||||||||||||||||||
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 | $ | 244,526 | $ | — | $ | 244,526 | $ | 196,633 | $ | — | $ | 47,893 | ||||||||||||
| Derivative liabilities: | ||||||||||||||||||||||||
| Treasury rate lock—cash flow hedge | 1,059 | — | 1,059 | — | — | 1,059 | ||||||||||||||||||
| Interest rate swaps | 274,873 | — | 274,873 | 196,633 | — | 78,240 | ||||||||||||||||||
| May 31, 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 | $ | 49,481 | $ | — | $ | 49,481 | $ | 49,481 | $ | — | $ | — | ||||||||||||
| Derivative liabilities: | ||||||||||||||||||||||||
| Interest rate swaps | 385,337 | — | 385,337 | 49,481 | — | 335,856 | ||||||||||||||||||
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 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 | |||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Financial Instruments | Cash Collateral Pledged | Net Amount | |||||||||||||||||||||||||||||||||||
| Derivative assets: | ||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | 173,195 | $ | 0 | $ | 173,195 | $ | 173,195 | $ | 0 | $ | 0 | ||||||||||||||||||||||||||
| Derivative liabilities: | ||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | 1,258,459 | 0 | 1,258,459 | 173,195 | 0 | 1,085,264 | ||||||||||||||||||||||||||||||||
Impact of Derivatives on Consolidated Statements of Operations
The primary factors affecting the fair value of our derivatives and AOCIthe 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.
| Year Ended May 31, | ||||||||||||
| (Dollars in thousands) | 2018 | 2017 | 2016 | |||||||||
| Derivative cash settlements | $ | (74,281 | ) | $ | (84,478 | ) | $ | (88,758 | ) | |||
| Derivative forward value gains (losses) | 306,002 | 179,381 | (221,083 | ) | ||||||||
| Derivative gains (losses) | $ | 231,721 | $ | 94,903 | $ | (309,841 | ) | |||||
Table 10.5: Derivative Gains (Losses)
| Year Ended May 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Derivative gains (losses) attributable to: | ||||||||||||||||||||
| Derivative cash settlements interest expense | $ | (115,645) | $ | (55,873) | $ | (43,611) | ||||||||||||||
| Derivative forward value gains (losses) | 621,946 | (734,278) | (319,730) | |||||||||||||||||
| Derivative gains (losses) | $ | 506,301 | $ | (790,151) | $ | (363,341) | ||||||||||||||
Credit Risk-Related Contingent Features
Our derivative contracts typically contain mutual early-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 below 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 prevailing fair value, as defined in the agreement, as of the termination date.
On March 5, 2021, S&P downgraded our senior unsecured credit ratings from A to A- with a negative outlook. Our senior unsecured credit ratings from Moody’s, and S&P and Fitch were A2, A- and A, respectively, as of May 31, 2018. Both2021. Moody’s and S&PFitch had our ratings on stable outlook as of May 31, 2018.2021. S&P had our ratings on negative outlook as of May 31, 2021. As of the date of the filing of this Report, no action has been taken by Moody’s and Fitch on our ratings. The following tabledisplays the notional amounts of our derivative contracts with rating triggers as of May 31, 2018,2021, 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
130
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 10.6: Derivative Credit Rating Trigger Exposure
| (Dollars in thousands) | Notional Amount | Payable Due from CFC | Receivable Due to CFC | Net (Payable)/Receivable | (Dollars in thousands) | Notional Amount | Payable Due from CFC | Receivable Due to CFC | Net Payable | |||||||||||||||||||||||||||||||||
| Impact of rating downgrade trigger: | Impact of rating downgrade trigger: | |||||||||||||||||||||||||||||||||||||||||
Falls below A3/A-(1) | $ | 54,890 | $ | (9,355 | ) | $ | — | $ | (9,355 | ) | Falls below A3/A-(1) | $ | 41,080 | $ | (8,168) | $ | 0 | $ | (8,168) | |||||||||||||||||||||||
| Falls below Baa1/BBB+ | 7,164,065 | (60,054 | ) | 38,057 | (21,997 | ) | Falls below Baa1/BBB+ | 6,031,373 | (304,922) | 0 | (304,922) | |||||||||||||||||||||||||||||||
Falls to or below Baa2/BBB (2) | 530,980 | — | 4,533 | 4,533 | Falls to or below Baa2/BBB (2) | 407,712 | (14,835) | 0 | (14,835) | |||||||||||||||||||||||||||||||||
| Falls below Baa3/BBB- | 257,271 | (11,625 | ) | — | (11,625 | ) | ||||||||||||||||||||||||||||||||||||
| Total | $ | 8,007,206 | $ | (81,034 | ) | $ | 42,590 | $ | (38,444 | ) | Total | $ | 6,480,165 | $ | (327,925) | $ | 0 | $ | (327,925) | |||||||||||||||||||||||