UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-Q
__________________________
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 30, 2020August 31, 2021
ORor
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☐ ¨
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-7102
__________________________
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
__________________________
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District of Columbia | | 52-0891669 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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20701 Cooperative Way, | Dulles, | Virginia, | 20166 |
(Address of principal executive offices) (Zip Code) |
Registrant’s telephone number, including area code: (703) 467-1800
__________________________
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
7.35% Collateral Trust Bonds, due 2026 | NRUC 26 | New York Stock Exchange |
5.50% Subordinated Notes, due 2064 | NRUC | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨ ¨ Accelerated filer¨ ¨ Non-accelerated filer x Smaller reporting company ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x
The Registrant is a tax-exempt cooperative and therefore does not issue capital stock.
TABLE OF CONTENTS
MD&A TABLE CROSS REFERENCE INDEX OF MD&A TABLES
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Table | | Description | | Page |
1 | | Summary of Selected Financial Data | | 3 | |
2 | | Average Balances, Interest Income/Interest Expense and Average Yield/Cost | | 12 | |
3 | | Rate/Volume Analysis of Changes in Interest Income/Interest Expense | | 15 | |
4 | | Non-Interest Income | | 18 | |
5 | | Derivative Gains (Losses) | | 19 | |
6 | | Derivative Cash Settlements Expense—Average Notional Amounts and Interest Rates | | 20 | |
7 | | Non-Interest Expense | | 21 | |
8 | | Loans Outstanding by Member Class and Loan Type | | 23 | |
9 | | Historical Retention Rate and Repricing Selection | | 24 | |
10 | | Total Debt Outstanding | | 25 | |
11 | | Member Investments | | 26 | |
12 | | Collateral Pledged | | 27 | |
13 | | Unencumbered Loans | | 28 | |
14 | | Equity | | 29 | |
15 | | Guarantees Outstanding | | 30 | |
16 | | Maturities of Guarantee Obligations | | 31 | |
17 | | Unadvanced Loan Commitments | | 31 | |
18 | | Unadvanced Loan Commitments Maturities of Notional Amount | | 32 | |
19 | | Unconditional Committed Lines of Credit Maturities of Notional Amount | | 33 | |
20 | | Loan Portfolio Security Profile | | 35 | |
21 | | Loan Exposure to 20 Largest Borrowers | | 36 | |
22 | | Troubled Debt Restructured Loans | | 37 | |
23 | | Allowance for Credit Losses | | 40 | |
24 | | Rating Triggers for Derivatives | | 41 | |
25 | | Available Liquidity | | 42 | |
26 | | Committed Bank Revolving Line of Credit Agreements | | 43 | |
27 | | Short-Term Borrowings—Funding Sources | | 44 | |
28 | | Short-Term Borrowings | | 45 | |
29 | | Long-Term and Subordinated Debt Issuances and Repayments | | 46 | |
30 | | Long-Term and Subordinated Debt Principal Maturity and Amortization | | 46 | |
31 | | Projected Sources and Uses of Liquidity from Debt and Investment Activity | | 47 | |
32 | | Credit Ratings | | 48 | |
33 | | Interest Rate Gap Analysis | | 50 | |
34 | | Adjusted Financial Measures—Income Statement | | 51 | |
35 | | TIER and Adjusted TIER | | 52 | |
36 | | Adjusted Financial Measures—Balance Sheet | | 52 | |
37 | | Debt-to-Equity Ratio and Adjusted Debt-to-Equity Ratio | | 53 | |
38 | | Members’ Equity | | 53 | |
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Table | | Description | | Page |
1 | | Summary of Selected Financial Data | | 3 | |
2 | | Average Balances, Interest Income/Interest Expense and Average Yield/Cost | | 12 | |
3 | | Rate/Volume Analysis of Changes in Interest Income/Interest Expense | | 14 | |
4 | | Non-Interest Income | | 16 | |
5 | | Derivative Gains (Losses) | | 17 | |
6 | | Derivatives—Average Notional Amounts and Interest Rates | | 18 | |
7 | | Comparative Swap Curves | | 18 | |
8 | | Non-Interest Expense | | 19 | |
9 | | Loans—Retention Rate and Repricing Selection | | 21 | |
10 | | Total Debt Outstanding | | 22 | |
11 | | Member Investments | | 23 | |
12 | | Equity | | 24 | |
13 | | Loan Portfolio Security Profile | | 27 | |
14 | | Loan Exposure to 20 Largest Borrowers | | 28 | |
15 | | Allowance for Credit Losses by Borrower Member Class and Evaluation Methodology | | 31 | |
16 | | Available Liquidity | | 33 | |
17 | | Committed Bank Revolving Line of Credit Agreements | | 34 | |
18 | | Short-Term Borrowings—Funding Sources | | 35 | |
19 | | Long-Term and Subordinated Debt Issuances and Repayments | | 36 | |
20 | | Long-Term and Subordinated Debt—Scheduled Principal Maturities and Amortization | | 37 | |
21 | | Collateral Pledged | | 38 | |
22 | | Unencumbered Loans | | 38 | |
23 | | Projected Sources and Uses of Funds | | 39 | |
24 | | Credit Ratings | | 40 | |
25 | | Interest Rate Sensitivity Analysis | | 42 | |
26 | | LIBOR-Indexed Financial Instruments | | 43 | |
27 | | Adjusted Net Income | | 44 | |
28 | | TIER and Adjusted TIER | | 45 | |
29 | | Adjusted Liabilities and Equity | | 45 | |
30 | | Debt-to-Equity Ratio and Adjusted Debt-to-Equity Ratio | | 46 | |
31 | | Members’ Equity | | 46 | |
PART I—FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A&A”)
”)
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FORWARD-LOOKING STATEMENTS |
This Quarterly Report on Form 10-Q for the quarterly period ended November 30, 2020August 31, 2021 (“this Report”) 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 1995. Forward-looking statements do 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 estimates 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 developments, many of which, by their nature, are inherently uncertain and outside our control. Forward-looking statements are generally identified by the 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 adequacy of the allowance for credit 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 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. Therefore, you should not place undue reliance on any forward-looking statement and should consider the risks and uncertainties that could cause our current expectations to vary from our forward-looking statements, including, but 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 impact 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 continued spread of a novel coronavirus that causes coronavirus disease 2019 (“COVID-19”) and the factors identifiedlisted and described under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended May 31, 20202021 (“20202021 Form 10-K”), as well as any risk factors identified under “Part II—Item 1A. Risk Factors” in this Report. Forward-looking statements speak only as of the date they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect the impact of events, circumstances or changes in expectations that arise after the date any forward-looking statement is made.
National Rural Utilities Cooperative Finance Corporation (“CFC”) is a member-owned cooperative association incorporated under the laws of the District of Columbia in April 1969. CFC’s principal purpose is to provide its members with financing to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC makes loans to its rural electric members so they can acquire, construct and operate electric distribution systems, generation and transmission (“power supply”) systems and related facilities. CFC also provides its members with credit enhancements in the form of letters of credit and guarantees of debt obligations. As a cooperative, CFC is owned by and exclusively serves its membership, which consists of not-for-profit entities or subsidiaries or affiliates of not-for-profit entities. CFC is exempt from federal income taxes under Section 501(c)(4) of the Internal Revenue Code. As a member-owned cooperative, CFC’s objective is not to maximize profit, but rather to offer members cost-based financial products and services. CFC funds its activities primarily through a combination of public and private issuances of debt securities, member investments and retained equity. As a Section 501(c)(4) tax-exempt, member-owned cooperative, we cannot issue equity securities.
Our financial statements include the consolidated accounts of CFC,National 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: CFC, NCSC and RTFC.
CFC is a member-owned, nonprofit finance cooperative association with a principal purpose of providing financing to its members to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC extends loans to its rural electric members for construction, acquisitions, system and facility repairs and maintenance, enhancements and ongoing operations to support the goal of electric distribution and generation and transmission (“power supply”) systems 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 Section 501(c)(4) tax-exempt, member-owned cooperative, CFC’s objective is not to maximize profit, but rather to offer members cost-based financial products and services. Because CFC is a tax-exempt cooperative, we cannot issue equity securities as a source of funding. CFC’s primary funding sources consist of a combination of public and private issuances of
debt securities, member investments and retained equity. NCSC is a member-owned taxable member-owned cooperative that mayis permitted to provide financing to members of CFC, government or quasi-government entities which own electric utility systems that meet the Rural
Electrification Act definition of “rural,” and for-profit and nonprofit entities that are owned, operated or controlled by, or provide significant benefits to certain members of CFC. RTFC is a taxable Subchapter T member-owned cooperative association that providesassociation. RTFC’s principal purpose is to provide financing forto its rural telecommunications members and their affiliates. CFC and its consolidated entities have not held any foreclosed assets since the fiscal year ended May 31, 2017 (“fiscal year 2017”). See “Item 1. Business—Overview”Business” in our 20202021 Form 10-K for additional information on the business structure, principal purpose, members and core business activities business activities of each of these entities. Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its consolidated entities. All references to members within this document include members, associates and affiliates of CFC and its consolidated entities, except where indicated otherwise.
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 $27,063$28,883 million as of November 30, 2020,August 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 $212$112 million for the sixthree months ended November 30, 2020,August 31, 2021 (“current quarter”), compared with $171$103 million for the sixthree months ended November 30, 2019August 31, 2020 (“same prior year-to-date period”prior-year quarter”). Our adjusted total revenue was $155$85 million for the six months ended November 30, 2020,current quarter, compared with $146$76 million for the same prior year-to-date period.prior-year quarter. We provide information on the financial performance of our business segments in “Note 14—Business Segments.”
The following MD&A is intended to enhance the understanding of our consolidated financial statements by providing material information that we believe is relevant in evaluating our results 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. Management monitors a variety of key indicators and metrics to evaluate our business performance. In addition to financialWe discuss these key measures determined in accordance with generally accepted accounting principles in the United States (“GAAP”), management also evaluates performance based on certain non-GAAP measures and metrics, which we refer to as “adjusted” measures. The following MD&A is intended to provide the reader with an understanding of our consolidated results of operations, financial condition and liquidity by discussing the factors influencing changes from period to period and key measures used by management to evaluate performance, including, among others, net interest income, net interest yield, debt-to-equity ratio and the related non-GAAP adjusted measures, loan activity and credit quality metrics.period. Our MD&A is provided as a supplement to, and should be read in conjunction with, the unaudited consolidated financial statements and related notesincluded in this Report, our audited consolidated financial statements and related notes for the fiscal year ended May 31, 2021 (“fiscal year 2021”) included in our 20202021 Form 10-K and additional information, contained in our 2020 Form 10-K, including the risk factors identifieddiscussed under “Part I—Item“Item 1A. Risk Factors,” contained in our 2021 Form 10-K, as well as additional information contained elsewhere in this Report.
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SUMMARY OF SELECTED FINANCIAL DATA |
Table 1provides a summary of consolidated selected financial data for the three and six months ended November 30, 2020 and 2019, and as of November 30, 2020 and May 31, 2020. In addition to financial measures determined in accordance with GAAP,generally accepted accounting principles in the United States (“U.S. GAAP”), management also evaluates performance based on certain non-GAAP measures and metrics, which we refer to as “adjusted” measures. Our key non-GAAP financial measures are adjusted net income, adjusted net interest income, adjusted interest expense, adjusted net interest yield, adjusted times interest earned ratio (“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:of (i) adjusting interest expense and net interest income to include the impact of net periodic derivative cash settlements expense;expense amounts; (ii) adjusting net income, total liabilities and total equity to exclude the non-cash impact of the accounting for derivative financial instruments; (iii) adjusting total 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 (“AOCI”).
We believe our non-GAAP adjusted measures, which are not a substitute for measures determined under 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:of (i) establishing short- and long-term performance goals; (ii) budgeting and forecasting; (ii)(iii) comparing period-to-period operating results, analyzing changes in results and identifying potential trends; (iii)and (iv) making compensation decisions; and (iv) informing the establishment of short- and long-term strategic goals.decisions. In addition, certain of the financial covenants in our committed bank revolving line of credit agreements and debt indentures are based on these non-GAAP adjusted measures. Wemeasures, as the forward fair value gains and losses related to our interest rate swaps that are excluded from our non-GAAP measures do not affect our cash flows, liquidity or ability to service our debt. We provide
a reconciliation of our non-GAAP adjusted measures to the most comparable U.S. GAAP measures in the section “Non-GAAP Financial Measures.”
2Table 1 provides a summary of selected financial data and the key metrics used by management in evaluating performance for the three months ended August 31, 2021 and 2020, and as of August 31, 2021 and May 31, 2021.
Table 1: Summary of Selected Financial Data(1)
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| | Three Months Ended November 30, | | | | Six Months Ended November 30, | | |
(Dollars in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Statement of operations | | | | | | | | | | | | |
Interest income | | $ | 276,499 | | | $ | 287,037 | | | (4)% | | $ | 556,083 | | | $ | 577,052 | | | (4)% |
Interest expense | | (174,422) | | | (207,871) | | | (16) | | (354,398) | | | (421,142) | | | (16) |
Net interest income | | 102,077 | | | 79,166 | | | 29 | | 201,685 | | | 155,910 | | | 29 |
Fee and other income | | 6,332 | | | 3,842 | | | 65 | | 9,848 | | | 14,783 | | | (33) |
Total revenue | | 108,409 | | | 83,008 | | | 31 | | 211,533 | | | 170,693 | | | 24 |
Benefit (provision) for credit losses | | (1,638) | | | 1,045 | | | ** | | (1,964) | | | 1,015 | | | ** |
Derivative gains (losses)(2) | | 81,287 | | | 183,450 | | | (56) | | 141,563 | | | (212,275) | | | ** |
Investment securities gains (losses) | | (1,361) | | | (114) | | | 1,094 | | 3,298 | | | 1,506 | | | 119 |
Operating expenses(3) | | (24,136) | | | (24,769) | | | (3) | | (46,799) | | | (50,098) | | | (7) |
Other non-interest income (expense)(1) | | (1,778) | | | (929) | | | 91 | | (2,110) | | | 6,250 | | | ** |
Income (loss) before income taxes | | 160,783 | | | 241,691 | | | (33) | | 305,521 | | | (82,909) | | | ** |
Income tax benefit (provision) | | (262) | | | (91) | | | 188 | | (413) | | | 430 | | | ** |
Net income (loss) | | $ | 160,521 | | | $ | 241,600 | | | (34) | | $ | 305,108 | | | $ | (82,479) | | | ** |
| | | | | | | | | | | | |
Adjusted operational financial measures | | | | | | | | | | | | |
Adjusted interest expense(4) | | $ | (204,222) | | | $ | (222,021) | | | (8) | | $ | (411,170) | | | $ | (446,335) | | | (8) |
Adjusted net interest income(4) | | 72,277 | | | 65,016 | | | 11 | | 144,913 | | | 130,717 | | | 11 |
Adjusted total revenue(4) | | 78,609 | | | 68,858 | | | 14 | | 154,761 | | | 145,500 | | | 6 |
Adjusted net income(4) | | 49,434 | | | 44,000 | | | 12 | | 106,773 | | | 104,603 | | | 2 |
| | | | | | | | | | | | |
Selected ratios | | | | | | | | | | | | |
Fixed-charge coverage ratio/TIER(5) | | 1.92 | | | 2.16 | | | (24) bps | | 1.86 | | | 0.80 | | | 106 bps |
Adjusted TIER(4) | | 1.24 | | | 1.20 | | | 4 | | 1.26 | | | 1.23 | | | 3 |
Net interest yield(6) | | 1.48 | % | | 1.17 | % | | 31 | | 1.45 | % | | 1.16 | % | | 29 |
Adjusted net interest yield(4)(7) | | 1.05 | | | 0.96 | | | 9 | | 1.04 | | | 0.97 | | | 7 |
Net charge-off rate(8) | | 0.00 | | | 0.00 | | | — | | 0.00 | | | 0.00 | | | — |
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| | | | | | Three Months Ended August 31, | | | |
(Dollars in thousands) | | | | | | | | 2021 | | 2020 | | Change | |
Statement of operations | | | | | | | | | | | | | |
Net interest income: | | | | | | | | | | | | | |
Interest income | | | | | | | | $ | 283,268 | | | $ | 279,584 | | | 1 | | % |
Interest expense | | | | | | | | (174,777) | | | (179,976) | | | (3) | | |
Net interest income | | | | | | | | | 108,491 | | | | 99,608 | | | 9 | | |
Fee and other income | | | | | | | | 3,941 | | | 3,516 | | | 12 | | |
Total revenue | | | | | | | | | 112,432 | | | | 103,124 | | | 9 | | |
Benefit (provision) for credit losses | | | | | | | | (4,003) | | | (326) | | | 1,128 | | |
Derivative gains (losses): | | | | | | | | | | | | | |
Derivative cash settlements interest expense(2) | | | | | | | | (27,563) | | | (26,972) | | | 2 | | |
Derivative forward value gains (losses)(3) | | | | | | | | (144,600) | | | 87,248 | | | ** | |
Derivative gains (losses) | | | | | | | | | (172,163) | | | | 60,276 | | | ** | |
Other non-interest income | | | | | | | | (2,225) | | | 4,659 | | | ** | |
Operating expenses(4) | | | | | | | | (24,210) | | | (22,663) | | | 7 | | |
Other non-interest expense | | | | | | | | (256) | | | (332) | | | (23) | | |
Income (loss) before income taxes | | | | | | | | (90,425) | | | 144,738 | | | ** | |
Income tax benefit (provision) | | | | | | | | 93 | | | (151) | | | ** | |
Net income (loss) | | | | | | | | $ | (90,332) | | | $ | 144,587 | | | ** | |
| | | | | | | | | | | | | |
Adjusted statement of operations measures | | | | | | | | | | | | | |
Interest income | | | | | | | | $ | 283,268 | | | $ | 279,584 | | | 1 | | |
Interest expense | | | | | | | | (174,777) | | | (179,976) | | | (3) | | |
Include: Derivative cash settlements interest expense(2) | | | | | | | | (27,563) | | | (26,972) | | | 2 | | |
Adjusted interest expense(5) | | | | | | | | (202,340) | | | (206,948) | | | (2) | | |
Adjusted net interest income(5) | | | | | | | | $ | 80,928 | | | $ | 72,636 | | | 11 | | |
| | | | | | | | | | | | | |
Net income (loss) | | | | | | | | $ | (90,332) | | | $ | 144,587 | | | ** | |
Exclude: Derivative forward value gains (losses)(3) | | | | | | | | (144,600) | | | 87,248 | | | ** | |
Adjusted net income(5) | | | | | | | | $ | 54,268 | | | $ | 57,339 | | | (5) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profitability ratios | | | | | | | | | | | | | |
Times interest earned ratio (TIER)(6) | | | | | | | | 0.48 | | | 1.80 | | | (132) | | bps |
Adjusted TIER(5) | | | | | | | | 1.27 | | | 1.28 | | | (1) | | |
Net interest yield(7) | | | | | | | | 1.47 | | % | 1.42 | | % | 5 | | |
Adjusted net interest yield(5)(8) | | | | | | | | 1.09 | | | 1.04 | | | 5 | | |
| | | | | | | | | | | | | |
Credit quality ratios | | | | | | | | | | | | | |
Net charge-off rate(9) | | | | | | | | 0.00 | | 0.00 | | — | | |
Nonperforming loans ratio(10) | | | | | | | | 0.80 | | | 0.84 | | | (4) | | |
Criticized loans ratio(11) | | | | | | | | 3.07 | | | 3.12 | | | (5) | | |
Allowance coverage ratio(12) | | | | | | | | 0.31 | | | 0.30 | | | 1 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | November 30, 2020 | | May 31, 2020 | | Change |
Balance sheet | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | |
Cash, cash equivalents and restricted cash | | | | | | | | $ | 177,191 | | | $ | 680,019 | | | (74)% |
Investment securities | | | | | | | | 584,086 | | | 370,135 | | | 58 |
Loans to members(9) | | | | | | | | 27,062,969 | | | 26,702,380 | | | 1 |
Allowance for credit losses(10) | | | | | | | | (58,989) | | | (53,125) | | | 11 |
Loans to members, net | | | | | | | | 27,003,980 | | | 26,649,255 | | | 1 |
Total assets | | | | | | | | 28,176,102 | | | 28,157,605 | | | — |
Liabilities and equity: | | | | | | | | | | | | |
Short-term borrowings | | | | | | | | 4,687,968 | | | 3,961,985 | | | 18 |
Long-term debt | | | | | | | | 19,070,919 | | | 19,712,024 | | | (3) |
Subordinated deferrable debt | | | | | | | | 986,217 | | | 986,119 | | | — |
Members’ subordinated certificates | | | | | | | | 1,272,374 | | | 1,339,618 | | | (5) |
Total debt outstanding | | | | | | | | 26,017,478 | | | 25,999,746 | | | — |
Total liabilities | | | | | | | | 27,284,383 | | | 27,508,783 | | | (1) |
Total equity | | | | | | | | 891,719 | | | 648,822 | | | 37 |
Guarantees(11) | | | | | | | | 676,858 | | | 820,786 | | | (18) |
| | | | | | | | | | | | |
Selected ratios period end | | | | | | | | | | | | |
Allowance coverage ratio(10)(12) | | | | | | | | 0.22 | % | | 0.20 | % | | 2 bps |
Debt-to-equity ratio(13) | | | | | | | | 30.60 | | | 42.40 | | | (28)% |
Adjusted debt-to-equity ratio(4) | | | | | | | | 5.90 | | | 5.85 | | | 1 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | August 31, 2021 | | May 31, 2021 | | Change | |
Balance sheet | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | |
Cash, cash equivalents and restricted cash | | | | | | | | $ | 311,961 | | | $ | 303,361 | | | 3 | | % |
Investment securities | | | | | | | | 605,285 | | | 611,277 | | | (1) | | |
Loans to members(13) | | | | | | | | 28,882,633 | | | 28,426,961 | | | 2 | | |
Allowance for credit losses | | | | | | | | (89,535) | | | (85,532) | | | 5 | | |
Loans to members, net | | | | | | | | 28,793,098 | | | 28,341,429 | | | 2 | | |
Total assets | | | | | | | | 30,091,747 | | | 29,638,363 | | | 2 | | |
Liabilities and equity: | | | | | | | | | | | | | |
Short-term borrowings | | | | | | | | 5,378,417 | | | 4,582,096 | | | 17 | | |
Long-term debt | | | | | | | | 20,158,891 | | | 20,603,123 | | | (2) | | |
Subordinated deferrable debt | | | | | | | | 986,364 | | | 986,315 | | | — | | |
Members’ subordinated certificates | | | | | | | | 1,253,906 | | | 1,254,660 | | | — | | |
Total debt outstanding | | | | | | | | 27,777,578 | | | 27,426,194 | | | 1 | | |
Total liabilities | | | | | | | | 28,837,527 | | | 28,238,484 | | | 2 | | |
Total equity | | | | | | | | 1,254,220 | | | 1,399,879 | | | (10) | | |
| | | | | | | | | | | | | |
Adjusted balance sheet measures | | | | | | | | | | | | | |
Adjusted total liabilities(5) | | | | | | | | $ | 25,741,166 | | | $ | 25,273,384 | | | 2 | | |
Adjusted total equity(5) | | | | | | | | 4,104,505 | | | 4,106,172 | | | — | | |
Members’ equity(5) | | | | | | | | 1,832,771 | | | 1,836,135 | | | — | | |
| | | | | | | | | | | | | |
Debt ratios | | | | | | | | | | | | | |
Debt-to-equity ratio(14) | | | | | | | | 22.99 | | | 20.17 | | | 14 | | |
Adjusted debt-to-equity ratio(5) | | | | | | | | 6.27 | | | 6.15 | | | 2 | | |
Liquidity coverage ratio(15) | | | | | | | | 0.83 | | 0.99 | | (16) | | |
| | | | | | | | | | | | | |
____________________________
**Calculation of percentage change is not meaningful.
(1)Certain reclassifications may have been made tofor prior periods to conform to the current periodcurrent-period presentation.
(2)Consists of net periodic contractual interest amounts on our interest rate swaps, which we refer to as derivatives cash settlements interest (expense) income, andexpense.
(3)Consists of derivative forward value gains (losses) on 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 amounts, related to derivatives not designated for hedge accounting and amounts reclassified into income related to the cumulative transition adjustment amount recorded in accumulated other comprehensive income as of June 1, 2001, the adoption dateaccounting.
(4)Consists of the derivative accounting guidance requiring derivatives to be reported at fair value on the balance sheet.
(3)Consists oftotal non-interest expense components (i) salaries and employee benefits and the(ii) other general and administrative expenses, components of non-interest expense, each of which areis presented separately on ourthe consolidated statements of operations.
(4)(5)See “Item 7. MD&A—Non-GAAP Financial Measures” in our 2021 Form 10-K for a description of each of our non-GAAP measures. See the section “Non-GAAP Financial Measures” for details ona reconciliation of the calculation of these non-GAAP adjusted measures and the reconciliationpresented in this Report to the most comparable U.S. GAAP measures.measure.
(5)(6)CalculatedCalculated based on net income (loss) plus interest expense for the period divided by interest expense for the period. The fixed-charge coverage ratios and TIER were the same during each period presented because we did not have any capitalized interest during these periods.
(6)(7)Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.
(7)(8)Calculated based on annualized adjusted net interest income for the period divided by average interest-earning assets for the period.
(8)(9)Calculated based on annualized net charge-offs (recoveries) for the period divided by average total loans outstanding for the period.
(9)Consists of the outstanding principal balance of member loans plus unamortized deferred loan origination costs, which totaled $12 million and $11 million as of November 30, 2020 and May 31, 2020, respectively.
(10)On June 1, 2020, we adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit LossesCalculated based on Financial Instruments, which replaces the incurred loss methodology previously used for estimating our allowance for credit losses with an expected loss methodology referred to as the current expected credit loss (“CECL”) model. At adoption, we recorded an increase in our allowance for credit losses of $4 million and a corresponding decrease in retained earnings through a cumulative-effect adjustment.total nonperforming loans at period end divided by total loans outstanding at period end.
(11)ReflectsCalculated based on loans outstanding at period end to borrowers with a borrower risk rating that falls within the criticized risk rating category, which includes special mention, substandard and doubtful, divided by 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 11—Guarantees” for additional information. loans outstanding at period end.
(12)Calculated based on the allowance for credit losses at period end divided by total loans outstanding loans at period end.
(13)Consists of the unpaid principal balance of member loans plus unamortized deferred loan origination costs of $12 million as of both August 31, 2021 and May 31, 2021.
(14)Calculated based on total liabilities at period end divided by total equity at period end.
(15)Calculated based on available liquidity at period end, which totaled $6,585 million and $7,090 million as of August 31, 2021 and May 31, 2021, respectively, divided by the amount of maturing debt obligations over the next 12 months at period end, which totaled $7,892 million and $7,180 million, as of each respective date.
OurAs a member-owned, nonprofit finance cooperative, our primary objective as a member-owned cooperative lender is to provide cost-based financial products to our rural electric utility members with access to affordable, flexible financing products while also maintaining a sound, stable financial position required forand adequate liquidity to meet our financial obligations and maintain ongoing investment-grade credit ratings on our debt instruments. Our objectiveratings. Because maximizing profit is not our primary objective, the interest rates on lending products offered to maximize profit; therefore, the rates we charge our member-borrowersmember borrowers reflect our funding costs plus a spread to cover our operating expenses a provision forand estimated credit losses and generate sufficient earnings sufficient to cover interest owed on our debt obligations and achieve interest coverage to meet ourcertain financial objectives.target goals. Our goal is to earnfinancial goals focus on earning an annual minimum adjusted TIER of 1.10 and to maintainmaintaining an adjusted debt-to-equity ratio at approximately 6.00-to-1 or below.
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 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 the 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. Because our derivative portfolio consists of a higher proportion of pay-fixed swaps, the majority of which are longer dated, than receive-fixed swaps, the majority of which are shorter dated, we generally record derivative losses 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,Therefore, as discussed above under “Summary of Selected Financial Data,” management uses our non-GAAP adjusted resultsmeasures to evaluate our operatingfinancial performance. Our adjusted financial results include the realized net periodic contractual interest expense amounts on our interest rate swap settlement amountsswaps but exclude the impact of unrealized forward fair value gains and losses. Certain of the financial covenants in our committed bank revolving line of credit agreements and debt indentures are also based on our non-GAAP adjusted results, as the forward fair value gains and losses related to 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 $161 million and a TIER of 1.92 for the three months ended November 30, 2020 (“current quarter”). In comparison, we reported net income of $242 million and a TIER of 2.16 for the three months ended November 30, 2019 (“same prior-year quarter”). We reported net income of $305 million and a TIER of 1.86 for the six months ended November 30, 2020, compared with a net loss of $82$90 million and a TIER of 0.800.48 for the current quarter, compared with net income of $145 million and TIER of 1.80 for the same prior year-to-date period.prior-year quarter. The significant variance between our reported results for the current-year periodscurrent quarter and the same prior-year periodsquarter was attributable to mark-to-market changes in the fair value of our derivative instruments. Our debt-to-equity ratio decreasedincreased to 30.6022.99 as of November 30, 2020,August 31, 2021, from 42.4020.17 as of May 31, 2020,2021, primarily due to an increase in equity from our reported net income of $305 million, which was partially offset by a decrease in equity from the combined impact of our reported net loss of $90 million and the authorized patronage capital retirement of patronage capital of $60$58 million authorized by the CFC Board of Directors in July 2020 and paid to members in September 2020.2021.
We experienced a decreasevariance of $81$235 million inbetween our reported net loss of $90 million for the current quarter and our reported net income of $161$145 million for the same prior year quarter. The variance reflected the impact of an unfavorable shift in the change in the fair value of our derivatives of $232 million between periods. We recorded derivative losses of $172 million for the current quarter due to a decrease in the net fair value of our swap portfolio resulting from our reported net incomedecreases in medium- and longer-term swap interest rates. In contrast, we recorded derivative gains of $242$60 million for the same prior-year quarter which was primarily driven by a reduction in derivative gains of $102 million. We recorded derivative gains of $81 million for the current quarter, compared with derivative gains of $183 million for the same prior-year quarter. The derivative gains in each period resulted fromdue to an increase in the net fair value of our swap portfolio which consists predominately of pay-fixed swaps, due to increasesresulting from an increase in medium- and longer-term swap interest rates. The increases in medium- and longer-term swap interest rates, however, were more pronounced during the same prior-year quarter, resulting in higher derivative gains. The decrease in derivative gains was partially offset by
We experienced an increase in netnet interest income of $23$9 million, or 29%9%, to $102$108 million for the current quarter, attributable to the combined impactan increase in average interest-earning assets of $1,559 million, or 6%, and an increase in the net interest yield of 315 basis points, or 26%4%, to 1.48% and an increase in our average interest-earning assets of $575 million, or 2%1.47%. The increase in the net interest yield was largely due to a reduction in our average cost of borrowings of 5822 basis points to 2.70%, partially offset by a decrease in the average yield on interest-earning assets of 25 basis points to 4.01%.
We experienced a variance of $387 million between our reported net income of $305 million for the six months ended November 30, 2020, and our reported net loss of $82 million for the same prior year-to-date period, driven by a favorable shift in derivative fair value changes of $354 million between periods. We recorded derivative gains of $142 million for the six months ended November 30, 2020, due to a net increase in the net fair value of our swap portfolio resulting from an increase in long-term swap interest rates. In contrast, we recorded derivative losses of $212 million during the same prior year-to-date period due to a decrease in the net fair value of our pay-fixed swaps attributable to declines in interest rates across the swap curve. In addition, net interest income increased $46 million, or 29%, to $202 million for the six months ended November 30, 2020, attributable to an increase in the net interest yield of 29 basis points, or 25%, to 1.45% and an increase in average interest-earning assets of $762 million, or 3%. The increase in the net interest yield reflected the impact of a reduction in our average cost of borrowings of 60 basis points to 2.72%2.53%, which was partially offset by a decrease in the average yield on our interest-earning assets of 28 basis16 basis point to 4.00%3.83%.
A decrease The decreases in the average cost of our short-term borrowings of 183 basis points to 0.33% for the current quarter and 197 basis points to 0.39% for the six months ended November 30, 2020 was the primary factor driving the reduction in our overall average cost of borrowings during each period. The respective reductions in our average short-term borrowing cost, as well as the declines in theand average yield on our interest-earning assets reflect in partwere driven by the impact of the overall lowercontinued low interest rate environment. Since November 30, 2019, the end of the same prior-year quarter, the benchmark federal funds rate has decreased 150 basis points asWe recorded a result of the decision by the Federal Open Market Committee (“FOMC”) of the Federal Reserve in March 2020 to lower 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 target federal funds rate range has remained unchanged since that time. Over the last 12 months, the 3-month London Interbank Offered Rate (“LIBOR”) decreased by 168 basis points to 0.23% as of November 30, 2020. While medium- and longer-term interest rates also fell during this 12-month period, the decreases were not as pronounced as the reduction in short-term interest rates.
Other factors affecting the variance between our reported results for the six months ended November 30, 2020 and the same prior year-to-date period include the absence of a gain of $8 million recorded in connection with the sale of land in the prior year-to-date period, a decrease in fee income of $5 million due to a reduction in prepayment fees, and an unfavorable shift in the provision for credit losses of $3$4 million for the current quarter, predominantly attributable to an expense from a benefit amount recordedincrease in the same prior year-to-date period, partially offset by a decrease in other general and administrative expenses of $5 million largelycollective allowance due to reduced travelhigher expected default
rates derived from third-party utility sector default data, which we use to inform the default rates used in measuring our collective allowance for credit losses, and in-person meetingan increase in the asset-specific allowance for loans outstanding to Brazos Electric Power Cooperative, Inc. (“Brazos”). Brazos is a Texas-based CFC power supply borrower that filed for bankruptcy in March 2021 due to its exposure to elevated wholesale electric power costs andduring the cancellationmid-February 2021 polar vortex (the “February 2021 polar vortex”). In comparison, we recorded a provision for credit losses of certain events because ofless than $1 million for the COVID-19 pandemic.same prior-year quarter, primarily attributable to an increase in the allowance resulting from growth in loans outstanding during the period.
Adjusted Non-GAAP Results
Adjusted net income totaled $49$54 million and adjusted TIER was 1.241.27 for the current quarter, compared with adjusted net income of $44$57 million and adjusted TIER of 1.201.28 for the same prior-year quarter. Adjusted net income totaled $107 million and adjusted TIER was 1.26 for the six months ended November 30, 2020, compared with adjusted net income of $105 million and adjusted TIER of 1.23 for the same prior year-to-date period. OurWhile our goal is to maintain an adjusted debt-to-equity ratio increased to 5.90of approximately 6.00-to-1, the adjusted debt-to-equity ratios of 6.27 as of November 30, 2020, from 5.85August 31, 2021 and 6.15 as of May 31, 2020, primarily attributable2021 were above our targeted goal, largely due to a reductionan increase in adjusted equity dueliabilities resulting from additional borrowings to the maturity and redemption of subordinated certificatesfund growth in our loan portfolio and the authorized patronage capital retirement amount,of $58 million by the CFC Board of Directors in July 2021, partially offset by our current-quarter adjusted net income for the current quarter. Our adjusted debt-to-equity ratio of 5.90 as of November 30, 2020, remained below our targeted threshold of 6.00-to-1.income.
We experienced an increase in adjusted net income of $5 million in the current quarter from the same prior-year quarter, largely attributable to an increase in adjustedAdjusted net interest income of $7increased $8 million, or 11%, to $72$81 million for the current quarter. Thequarter, driven by the combined impact of an increase in adjusted net interest income was driven byaverage interest-earning assets of $1,559 million, or 6%, and an increase in the adjusted net interest yield of 95 basis points, or 9%5%, to 1.05% and an increase in average interest-earning assets of $575 million, or 2%1.09%. The increase in our adjusted net interest yield reflected the favorable impact of a reduction in our adjusted average cost of borrowings of 3424 basis points to 3.16%2.92%, which was partially offset by a decrease in the average yield on interest-earning assets of 2516 basis points to 4.01%. As noted above, the lower interest rate environment had a favorable impact on our adjusted average cost of borrowings and contributed to the decrease in the average yield on interest-earnings assets.
We experienced an increase in adjusted net income of $2 million for the six months ended November 30, 2020 from the same prior year-to-date period, due in part to an increase in adjusted net interest income of $14 million, or 11%, to $145 million. The increase in adjusted net interest income was driven by an increase in the adjusted net interest yield of 7 basis points, or 7%, to 1.04% and an increase in average interest-earning assets of $762 million, or 3%. The increase in our
adjusted net interest yield reflected the favorable impact of a reduction in our adjusted average cost of borrowings of 36 basis points to 3.16%, which was partially offset by a decrease in the average yield on interest-earning assets of 28 basis points to 4.00%3.83%, both of which were attributable to the lowercontinued low interest rate environment.
A decrease in other general and administrative expenses of $5 million, largely due to reduced travel and in-person meeting and event costs because of the COVID-19 pandemic, also contributed to the increase in adjusted net income of $2 million for the six months ended November 30, 2020. The combined favorable impact of the increase in adjusted net interest income and reduction in other general and administrative expense of $19 million was partially offset by the absence of a gain of $8 million recorded in connection with our sale of land in the same prior year-to-date period, a decrease in fee income of $5 million due to a reduction in prepayment fees, andwas partially offset by an unfavorable shiftincrease in the provision for credit losses of $3$4 million. As discussed above, the provision for credit losses was $4 million from a benefit recordedfor the current quarter, primarily attributable to an increase in the collective allowance due to higher expected default rates derived from third-party proxy default data and an increase in the asset-specific allowance for loans outstanding to Brazos. The provision for credit losses of less than $1 million for the same prior year-to-dateprior-year quarter was primarily attributable to an increase in loans outstanding during the period.
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.
Lending Activity
Loans to members totaled $27,063$28,883 million as of November 30, 2020,August 31, 2021, an increase of $361$456 million, or 1%2%, from May 31, 2020. The increase was driven primarily by an increase in long-term loans of $492 million, partially offset by a decrease in line of credit loans of $132 million. We experienced increases in CFC distribution loans, NCSC loans and RTFC loans of $453 million, $7 million and $46 million, respectively, and decreases in CFC power supply loans and CFC statewide and associate loans of $135 million and $11 million, respectively. Subsequent to the quarter end, during the month of December 31, 2020, our outstanding loans to members increased by an additional $476 million, driven by2021, reflecting net increases in long-term and line of credit loans of $274$358 million and $202$98 million, respectively. We experienced increases in CFC distribution loans, CFC power supply loans and RTFC loans of $384 million, $67 million and $11 million, respectively, and decreases in CFC statewide and associate loans and NCSC loans of $5 million and $1 million, respectively.
Long-term loan advances totaled $1,271$727 million during the six months ended November 30, 2020,current quarter, of which approximately 85%62% was provided to members for capital expenditures and 5%approximately 35% was provided to members for operating expenses, primarily for the refinancingpayment of loans made by other lenders.elevated wholesale electric power costs incurred during the February 2021 polar vortex. In comparison, long-term loan advances totaled $1,387$807 million during the same prior year-to-date period,prior-year quarter, of which approximately 69%93% was provided to members for capital expenditures and 25%4% was provided for the refinancing of loans made by other lenders. CFC had long-term fixed-rate loans totaling $204$109 million that were scheduled to reprice during the six months ended November 30, 2020.current quarter. Of this total, $198$105 million repriced to a new long-term fixed rate $5 million repriced to a long-term variable rate and $1$4 million was repaid in full. In comparison, CFC had long-term fixed-rate loans totaling $234$79 million that were scheduled to reprice during the same prior year-to-date period,prior-year quarter, of which $224$78 million repriced to a new long-term fixed rate $7 millionand the remainder either repriced to a long-term variable rate $3 million wasor were repaid in full.
Credit Quality
We believe the overall credit quality of our loan portfolio remained highstrong as of November 30, 2020, as evidenced by our continued strong credit performance metrics. We had no delinquent loans as of either November 30, 2020 or MayAugust 31, 2020, and2021. Historically, we have not experienced any loan defaults or charge-offs since fiscal year 2017. During the fourth quarter of the fiscal year ended May 31, 2020 (“fiscal year 2020”), we classified one loan to a CFC power supply borrower, with an outstanding balance of $168 million as of May 31, 2020, as nonperforming, placed the loan on nonaccrual status and established an asset-specific allowance for credit losses of $34 million as of May 31, 2020. Payments received from the borrower on this loan resulted in a reduction in the outstanding balance to $153 million as of November 30, 2020. The asset-specific allowance for credit losses for this nonperforming loan, which remains on nonaccrual status, was $32 million as of November 30, 2020. We had no other loans classified as nonperforming or on nonaccrual status as of November 30, 2020 or May 31, 2020.
Loans outstanding to electric utility organizations represented approximately 98% and 99% of total loans outstanding as of November 30, 2020 and May 31, 2020, respectively. 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.” WeIn addition, we generally lend to members on a senior secured basis, which reduces the risk of loss in the event of a borrower default. Loans outstanding to electric utility organizations of $28,439 million and $27,995 million as of August 31, 2021 and May 31, 2021, respectively, represented approximately 99% of total loans outstanding as of each date. Of our total loans outstanding, 94%93% were secured as of both November 30, 2020August 31, 2021 and May 31, 2020.2021.
The allowance for credit losses for our loan portfolio increasedWe had loans to $59four borrowers, including Brazos, totaling $232 million as of November 30, 2020, from $53August 31, 2021 and $237 million as of May 31, 2020,2021, classified as nonperforming as of each respective date. These nonperforming loans represented 0.80% and 0.84% of total loans outstanding as of August 31, 2021 and May 31, 2021, respectively. Each of the borrowers with loans outstanding classified as nonperforming, except Brazos, has continued to make scheduled loan payments. 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 $86 million and $85 million as of August 31, 2021 and May 31, 2021, respectively, were delinquent as of each respective date. Prior to Brazos’ bankruptcy filing in March 2021, we had not experienced any defaults or charge-offs in our electric utility and telecommunications loan portfolios since fiscal years 2013 and 2017, respectively.
Our allowance for credit losses and allowance coverage ratio increased to 0.22%$90 million and 0.31%, respectively, as of August 31, 2021, from 0.20%. The$86 million and 0.30%, respectively as of May 31, 2021, resulting from a current-quarter addition to the allowance of $4 million, predominantly attributable to an increase in the collective allowance for credit losses was primarily attributabledue to the impact of our June 1, 2020 adoption of the currenthigher expected credit loss (“CECL”) accounting standard, which replaces the incurred loss methodology for estimating credit losses with an expected loss methodology. 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 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 lossesdefault rates based on financial assets measured at amortized costthird-party proxy default data and certain off-balance sheet credit exposures, affects our estimates of the allowance for credit losses for our loan portfolio and the reserve for our off-balance sheet credit exposures related to unadvanced loan commitments and financial guarantees. The adoption of CECL resulted in an increase in ourthe asset-specific allowance for credit losses for our loan portfolio of $4 million and a corresponding decreaseloans outstanding 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.Brazos.
We discussprovide additional information on the credit quality of 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 onloan portfolio and the allowance for credit losses below in the section “Credit Risk—Allowance for Credit Losses” and in “Note 4—Loans” and “Note 5—Allowance for Credit Losses.”Losses” in this Report.
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. Total debt outstanding was $26,017increased $352 million, or 1% to $27,778 million as of November 30, 2020, an increase of $17 million from MayAugust 31, 2020. In the fourth quarter of fiscal year 2020 we increased our cash position to $671 million, as a precaution in case there were disruptions in the capital markets2021, due to Covid-19 that would impact our ability to fund operations in fiscal year 2021. During the first six months of fiscal year 2021 there have not been disruptions in our ability to access the capital markets or in our issuance of debt to our members. As a result we have been able to use the $671 million of cash that was on hand as of May 31, 2020borrowings to fund the majority of our operations through November 30, 2020, at which date our cash balance had been reducedincrease in loans to $167 million. Debt activity during this period consisted of net increases in outstandingmembers. Outstanding dealer commercial paper of $715 million and member commercial paper, select notes and daily liquidity fund notes of $104 million, which together totaled $819 million. This increase was partially offset by net decreases in collateral trust bonds of $351 million, Federal Agricultural Mortgage Corporation (“Farmer Mac”) notes payable of $161 million, medium-term notes of $151 million, borrowings under the United States Department of Agriculture (“USDA”) Guaranteed Underwriter Program (“Guaranteed Underwriter Program”) of $71 million and members’ subordinated certificates of $68 million, which together totaled $802 million. Outstanding dealer commercial paper, which totaled $715$1,010 million as of November 30, 2020,August 31, 2021 was below our targeted maximum threshold of $1,250 million.
On October 8, 2020, we issued $400 million aggregate principal amountAugust 6, 2021, S&P Global Inc. (“S&P”) revised its outlook on CFC to stable from negative, stating that the outlook revision mainly reflected its view that the risk of 1.35% sustainability collateral trust bonds due March 15, 2031. On November 19, 2020, we closed on a $375 million committed loan facility (“Series R”)CFC experiencing substantial further losses stemming 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 amortizationFebruary 2021 polar vortex had diminished. S&P also affirmed CFC’s issuer ratings. On September 13, 2021, Fitch Ratings (“Fitch”) affirmed CFC’s issuer ratings and a final maturity not longer than 30 yearsstable outlook. Our credit ratings by S&P, Moody’s Investors Service (“Moody’s”) and Fitch remain unchanged from August 31, 2021 through the date of this Report.
We provide additional information on our financing activities during the advance.current quarter, 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.”
Liquidity
Our primary sources of funds include member loan principal repayments, securities held in our investment portfolio, committed bank revolving lines of credit, committed loan facilities under the USDA Guaranteed Underwriter Program (“Guaranteed Underwriter Program”), revolving note purchase agreements with The Federal Agricultural Mortgage Corporation (“Farmer Mac”) and proceeds from debt issuances to members, in private placements and in the capital markets. Although as a non-bank financial institution we are not subject to regulatory liquidity requirements, we monitor our liquidity and funding positions on an ongoing basis and assess our ability to meet our scheduled debt obligations and other cash flow requirements based on point-in-time metrics as well as forward-looking projections. Our liquidity and funding assessment takes into consideration amounts available under existing liquidity sources, the expected rollover of member short-term investments and scheduled loan principal repayment amounts, as well as our continued ability to access the private placement and capital markets.
As of November 30, 2020,August 31, 2021, our sources ofavailable liquidity readily available for access totaled $7,317$6,585 million, consisting ofof: (i) $167 million in cash and cash equivalents;equivalents of $303 million; (ii) investments in debt securities with aan aggregate fair value of $552$570 million, which is subject to change based on changes in market value;values; (iii) up to $2,722$2,597 million available for access under committed bank revolving line of credit agreements; (iv) up to $1,275$975 million available under committed loan facilities under the Guaranteed Underwriter Program; and (v) up to $2,601$2,140 million available under a Farmer Mac revolving note purchase agreement, with Farmer Mac, subject to market conditions. In addition to our existing available liquidity of $6,585 million as of August 31, 2021, we expect to receive $1,653 million from scheduled repayments on long-term loans over the next 12 months.
Long-term debtDebt scheduled to mature over the next 12 months totaled $1,742$7,892 million as of November 30, 2020,August 31, 2021, consisting of fixed-rateshort-term borrowings of $5,378 million and long-term and subordinated debt of $697$2,514 million. The short-term borrowings scheduled maturity amount of $5,378 million with a weighted average costconsists of 2.69%, variable-rate debtmember investments of $810$3,643 million, dealer commercial paper of $1,010 million, short-term notes payable of $500 million under the Farmer Mac revolving note purchase agreement and scheduled amortization on borrowings under the Guaranteed Underwriter Programa securities repurchase transaction of $225 million. The long-term and notes payable to Farmer Mac of $235 million. Our available liquidity of $7,317 million as of November 30, 2020, was $5,575 million in excess of, or 3.2 times, our long-termsubordinated debt obligations of $1,742 million over the next 12 months. Wemonths of $2,514 million consists of debt maturities and scheduled debt payment amounts to various sources.
currently believe that
Although our available liquidity along withof $6,585 million as of August 31, 2021, was $1,308 million below our abilitytotal debt obligations over the next 12 months of $7,892 million, we believe we can continue to access the capital marketsroll over member short-term investments, which totaled $3,643 million as a well-known seasoned issuer of debt and to issue debt toAugust 31, 2021, based on our expectation that our members andwill continue to reinvest their excess cash in private placements will be more than sufficient to meet the borrowing needs of our members and to cover the payment of long-term debt maturing over the 12 months subsequent to November 30, 2020.
short-term investment products offered by CFC. Our members historically have maintained a relatively stable level of short-term investments in CFC in the form of commercial paper, select notes, daily liquidity fund notes, and medium-term notes. We believe we can continue to roll over outstanding member short-term debt, which totaled $3,848 million as of November 30, 2020, based on our expectation that our members will continue to reinvest their excess cash in our commercial paper, daily liquidity fund notes, select notes and medium-term notes. Member short-term investments in CFC have averaged $3,372 million over the last 12 fiscal quarter-end reporting periods. In addition, we expect to receive $1,653 million from scheduled long-term loan principal repayments over the next 12 months.
Our available liquidity of $6,585 million as of August 31, 2021, was $2,336 million in excess of, or 1.5 times, our total debt obligations, excluding member short-term investments, over the next 12 months of $4,249 million. Our available liquidity of $6,585 million as of August 31, 2021 plus scheduled long-term loan principal repayments over the next 12 months of $1,653 million, which together total $8,238 million, was $3,989 million in excess of, or 1.9 times, our total debt obligations, excluding member short-term debt, over the next 12 months.
We expect to continue accessing the dealer commercial paper market as a cost-effective means of satisfying our incremental short-term liquidity needs. Although the intra-period amount of outstanding dealer commercial paper outstanding may fluctuate based on our liquidity requirements, we intendour intent is to manage our short-term wholesale funding risk by maintaining outstanding dealer commercial paper outstanding at an amount near or below $1,250 million for the foreseeable future. We expect to continue to be in compliance with the covenants underMaintaining our committed bank revolving line of credit agreements which will allow usand continuing to be in compliance with the covenants of these agreements serve to mitigate roll-overour rollover risk, as we can draw on these facilities, if necessary, to repay dealer or member commercial paper that cannot be refinanced with similar debt. In addition, under master repurchase agreements we have with two banks, we can obtain short-term funding in secured borrowing transactions by selling investment-grade corporate debt securities from our investment securities portfolio subject to an obligation to repurchase the same or similar securities at an agreed-upon price and date.
The issuance of long-term debt, which represents the most significant component of our funding, allows us to reduce our reliance on short-borrowings as well as effectively manage our refinancing and interest rate risk. We expect to continue to issue debt in the private placement and capital markets to meet our funding needs and believe that we have sufficient sources of liquidity to meet our debt obligations and support our operations over the next 12 months and for the foreseeable future.
We provide additional information on our liquidity profile and our primary sources and uses of liquidity and our liquidity profile belowfunds, including projected amounts, by quarter, over each of the next six fiscal quarters through the quarter ending February 28, 2023, in the “Liquidity Risk” section “Liquidity Risk.”of this Report.
COVID-19
The COVID-19 pandemic continues to have an ongoing disruptive impact on the United States (“U.S.”). The continuing duration and severity of the pandemic and its long-term economic impact remain uncertain. CFC is headquartered in the Commonwealth of Virginia and is following workplace guidelines established by the Commonwealth and the U.S. Center for Disease Control and Prevention. We are currently staffing our office at no more than 25% occupancy, with other personnel working remotely, and we have limited travel and in-person meetings. To date, our business resiliency plans and technology systems have effectively supported both remote and on-site operations. Based on current conditions, our expectation is that we will maintain current remote working levels for the foreseeable future assuming there are no changes to governmental and public health directives. Update
We believe that the COVID-19 pandemic has not had any significant negative effect onadversely affected our liquidity, and that our portfolio credit quality remains strong. In the first six monthsprimary objective of fiscal year 2021, we have remained able to access the capital markets, private funding programs andproviding our members forwith the capital required to repay maturing debt, and we have made long-term loan advances of $1.3 billion to our memberscredit products they need to fund their operations. In comparison,operations and that we made $1.4 billion of long-term loan advances in first six monthshave been able to successfully navigate the challenges of the prior year, priorCOVID-19 pandemic to the impacts of COVID-19.date. We also believe that we currently have sufficient liquidity to meet memberthe overall credit quality of our loan demand and repay maturing debt over the next 12 months.portfolio has not been adversely
affected by market, economic and other disruptions caused by the pandemic. Our electric utility cooperative borrowers operate in a sector identified by the United States (“U.S.”) government as one of the 16 critical infrastructure sectors because the nature of the services provided to residential customers and commercial customers in other industrythese 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. While our electric cooperative members continue to be subject to certain state-mandated suspensions on utility shut-offs due to nonpayment, weWe have not experienced any delinquencies in scheduled loan payments or received requests for payment deferrals or covenant relief from our borrowers due to the pandemic. We are in contact with our member borrowers on a continuous basis and, to date, we believe that the pandemic has not had a significant negative impact on their overall financial performance.
OutlookCFC has been able to maintain business continuity throughout the pandemic and has experienced no pandemic-related employee furloughs or layoffs. We currently have a mask policy for all employees at CFC headquarters, regardless of vaccination status, to protect the Next 12 Monthssafety and health of our employees. We also have remote-work options available for most employees while providing in person collaboration at CFC headquarters, as we believe this working model allows CFC to provide the highest quality of service and deliver more effectively on our member-focused mission We continue to monitor and update our practices due to changes in the COVID-19 workplace safety and health standards established by Virginia as they relate to Loudoun County and guidance provided by the CDC.
We believe weAlthough most of the initial restrictions imposed at the onset of the pandemic in the U.S. have been able to navigate the challengesrelaxed or lifted as a result of the distribution of vaccines, the recent surge in COVID-19 pandemiccases could cause federal, state and local governments to date. As noted above, we currently believe that we have sufficient cash flowreimpose certain measures and liquidityrestrictions to cover our existing debt obligationscontain the spread of COVID-19 and meetmitigate public health risks in jurisdictions where significant outbreaks are detected. Such actions could possibly disrupt the borrowing needsbusiness, activities and operations of CFC, as well as the business and operations of our members. Although we believemembers, the overall credit qualityextent to which are highly uncertain and depend on future developments, which include, among others, the severity and duration of the recent COVID-19 resurgence, vaccination rates, the longer-term efficacy of vaccinations and the potential emergence of new, more transmissible severe variants.
As part of our loan portfolio remains high,credit risk management process, we continue to activelymaintain ongoing communications with our members, closely monitor conditionsdevelopments and developments, includingreview key credit metrics of our borrowers, to facilitate the timely identification and active management of loans to borrowers with potential credit weaknesses and assess any notable shifts in the credit quality of our loan portfolio as well as anydue to the pandemic or to other factors. To date, we believe that the pandemic has not had a significant negative impact on the overall financial performance of our financial position. Assuming no material adverse changesmembers.
We provide additional information on actions taken in response to the pandemic to protect the safety and health of our employees under “Item 1. Business—Human Capital” and “Item 7. MD&A—Executive Summary” in our 2021 Form 10-K.
Outlook
As indicated in the credit quality“Liquidity Risk—Projected Near-Term Sources and Uses of Funds” section, we currently anticipate net long-term loan growth over the next 12 months of $696 million. We believe that our borrowers,current projected loan growth, coupled with our current estimated cost of funding this loan growth, will result in a slight increase in our net interest income and adjusted net interest income over this period. However, we expect a slight decrease in our net interest yield and adjusted net interest yield over the next 12 months, as we anticipate an increase in the cost of borrowings needed to fund our projected loan growth over the next 12 months. We expect that our financial performance for the fiscal year ended May 31, 2021 (“fiscal year 2021”) will be comparable to or slightly better than our financial performance for fiscal year 2020, absentadjusted debt-to-equity ratio, which excludes the impact of (i) the non-cash impairment chargederivative forward fair value gains and losses, will remain elevated above our target threshold of $31 million recorded6.00-to-1 in the fourth quarter of fiscal year 2020 resulting from the abandonment of an internal-use software project; (ii) the loan impairment charge of $34 million recorded in the fourth quarter of fiscal year 2020near term due to a projected increase in total debt outstanding to fund the establishmentanticipated growth in our loan portfolio. Our reported income and equity include the impact of an asset-specific allowance for the outstanding loan to the CFC power supply borrower noted above; and (iii) changesperiodic unrealized fluctuations in the fair value of our derivatives and investment securities thatinterest rate swaps. These periodic fluctuations are primarily driven by changes in marketexpected 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 15 years as of August 31, 2021. We therefore exclude the potential impact of derivative forward value gains and prices,losses from our forecasted adjusted net income-related measures.
As noted above, on August 6, 2021, S&P revised its outlook on CFC to stable from negative based on S&P’s view that the risk we would experience substantial further losses stemming from the February 2021 polar vortex had diminished. We continue to believe that the significant adverse financial impact from the surge in wholesale power costs in Texas during the February 2021 polar vortex was primarily limited to our outstanding loan exposure to Brazos and Rayburn Country Electric Cooperative, Inc. (“Rayburn”) and that the overall credit quality of our loan portfolio remained high as of August 31, 2021. Loans outstanding to Brazos and Rayburn of $86 million and $375 million, respectively, together totaled $461 million as of
August 31, 2021, of which $184 million was secured and $277 million was unsecured. In June 2021, Texas enacted securitization legislation that offers financing programs for qualifying electric cooperatives exposed to elevated power costs during the February 2021 polar vortex. We believe Brazos and Rayburn qualify for the financing programs, but we are currently uncertain whether Brazos will utilize the provisions available under this legislation. In filings made with the Public Utility Commission of Texas, Rayburn has stated that it intends to utilize the securitization legislation to finance its elevated power costs and has taken steps to begin the process to do so. However, there are many factors that may impact the outcome of a securitization transaction and the ultimate collectibility of Rayburn’s loans outstanding, which we are unable to predict.
See “Item 1A. Risk Factors” in our 20202021 Form 10-K 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 business, results of operations, financial condition and liquidity.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES |
The preparation of financial statements in accordance with 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 our 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 underin “Note 1—Summary of Significant Accounting Policies” in our 20202021 Form 10-K. Pursuant to our June 1, 2020 adoption of the CECL accounting standard, we have provided updates to certain of our significant accounting policies, including the allowance for credit losses, in “Note 1—Summary of Significant Accounting Policies” of this Report.
We have identified certainCertain accounting policies asare considered critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our results of operations or financial condition. Our most criticalThe determination of the allowance for expected credit losses over the remaining expected life of the loans in our loan portfolio involves a significant degree of management judgment and level of estimation uncertainty. As such, we have identified our accounting policies and estimates involvepolicy governing the determinationestimation of the allowance for credit losses and fair value. Below we have updated ouras a critical accounting policypolicy.We describe our allowance methodology and process for estimating the allowance for credit losses under the CECL model, which involves additional areas involving significant management judgment.“Note 1—Summary of Significant Accounting Policies—Allowance for Credit Losses–Loan Portfolio—Current Methodology” in our 2021 Form 10-K.
PriorWe identify the key inputs used in determining the allowance for loan losses, discuss the assumptions that require the most significant management judgment and provide and disclose the sensitivity of our allowance to hypothetical changes in the adoptionassumptions underlying the calculation of CECL on June 1, 2020, we maintained anour reported allowance based on an estimatefor credit losses of probable incurred losses inherent$86 million as of May 31, 2021 under “Item 7. MD&A—Critical Accounting Policies and Estimates” in our loan portfolio as of each balance sheet date. Under CECL, we are required to maintain an allowance based on a current estimate of credit losses that are expected to occur over2021 Form 10-K. We regularly evaluate the remaining contractual life of the loanskey inputs and assumptions used in our portfolio. The methods utilized to estimatedetermining the allowance for credit losses key assumptions and quantitative and qualitative information considered by management in determining the appropriate allowance for credit losses is discussed in “Note 1—Summary of Significant Accounting Policies” of this Report. The determination of allowance for credit losses entails significant judgment on various risk factors, including our historical loss data, third-party default data and the assessment of a borrower’s capacity to meet its financial obligations. While our estimate of lifetime credit losses is sensitive to each of these inputs, the most notable input that affects the sensitivity of the allowance is the internal risk ratings assigned to each borrower.
We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them, as necessary, based on changing conditions. 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 and other factors relevant to our loan portfolio segments. We did not change our allowance methodology or the nature of the underlying key inputs and assumptions used in measuring our allowance for credit losses during the current quarter. We experienced an increase in our allowance for credit losses of $4 million during the current quarter to $90 million as of August 31, 2021, which was primarily attributable to an increase in the collective allowance due to higher expected default rates derived from third-party proxy default data and an increase in the asset-specific allowance for loans outstanding to Brazos.
Management has discussed the significant judgments, key inputs and assumptions in applying our critical accounting policiespolicy governing the measurement of the allowance for credit losses with the Audit Committee of the CFC Board of Directors. We provide information on the significant judgments and assumptions in measuring fair value under “MD&A—Critical Accounting Policies and Estimates” in our 2020 Form 10-K. See “Item 1A. Risk Factors” in our 2020 Form 10-K for a discussion ofdiscuss the risks associated withand uncertainties related to management’s judgments and estimates in applying our accounting policies that have been identified as a critical accounting policy under “Item 1A. Risk Factors—Regulatory and methods.Compliance Risks” in our 2021 Form 10-K. We provide additional information on the allowance for credit losses under “Credit Risk—Allowance for Credit Losses” section and in “Note 5—Allowance for Credit Losses” in this Report.
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RECENT ACCOUNTING CHANGES AND OTHER DEVELOPMENTS |
Recent Accounting Changes
See “Note 1—Summary of Significant Accounting Policies” forWe provide information on recently adopted accounting standards adopted duringand the current fiscal year, as well asadoption impact on CFC’s consolidated financial statements and recently issued accounting standards not yet required to be adopted and the expected adoption impact in “Note 1—Summary of the adoption of these accounting standards.Significant Accounting Policies.” 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 |
TheThis section below provides a comparative discussion of our consolidated results of operations between the three months ended November 30, 2020August 31, 2021 and 2019 and between the six months ended November 30, 2020 and 2019.2020. Following this section, we provide a comparativediscussion and analysis of material changes between amounts reported on our consolidated balance sheetssheet as of November 30, 2020August 31, 2021 and amounts reported as of May 31, 2020.2021. 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.
Net Interest Income
Net interest income, which is our largest source of revenue, 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 of non-interest bearing funding. We expect net interest income and our net interest yield to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities. We do not fund each individual loan with specific debt. Rather, we attempt to minimize costs and maximize efficiency by proportionately funding large aggregated amounts of loans.
Table 2 presents average balances for the three and six months ended November 30,August 31, 2021 and 2020, and 2019, and for each major category of our interest-earning assets and interest-bearing liabilities, the interest income earned or interest expense incurred, and the average yield or cost. Table 2 also presents non-GAAP adjusted interest expense, adjusted net interest income and adjusted net interest yield, which reflect the inclusion of net accrued periodic derivative cash settlements expense in interest expense. We provide reconciliations of our non-GAAP adjusted measures to the most comparable U.S. GAAP measures under “Non-GAAP Financial Measures.”
Table 2: Average Balances, Interest Income/Interest Expense and Average Yield/Cost
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| | Three Months Ended November 30, |
(Dollars in thousands) | | 2020 | | 2019 |
Assets: | | Average Balance | | Interest Income/Expense | | Average Yield/Cost | | Average Balance | | Interest Income/Expense | | Average Yield/Cost |
Long-term fixed-rate loans(1) | | $ | 24,824,439 | | | $ | 262,200 | | | 4.24 | % | | $ | 23,837,295 | | | $ | 260,714 | | | 4.40 | % |
Long-term variable-rate loans | | 639,626 | | | 3,596 | | | 2.25 | | | 929,958 | | | 8,131 | | | 3.52 | |
Line of credit loans | | 1,300,811 | | | 6,994 | | | 2.16 | | | 1,528,905 | | | 12,678 | | | 3.34 | |
Troubled debt restructuring (“TDR”) loans | | 10,300 | | | 196 | | | 7.63 | | | 11,179 | | | 212 | | | 7.63 | |
Nonperforming loans | | 158,488 | | | — | | | — | | | — | | | — | | | — | |
Other, net(2) | | — | | | (344) | | | — | | | — | | | (287) | | | — | |
Total loans | | 26,933,664 | | | 272,642 | | | 4.06 | | | 26,307,337 | | | 281,448 | | | 4.30 | |
Cash, time deposits and investment securities | | 744,049 | | | 3,857 | | | 2.08 | | | 795,676 | | | 5,589 | | | 2.83 | |
Total interest-earning assets | | $ | 27,677,713 | | | $ | 276,499 | | | 4.01 | % | | $ | 27,103,013 | | | $ | 287,037 | | | 4.26 | % |
Other assets, less allowance for credit losses | | 569,289 | | | | | | | 552,945 | | | | | |
Total assets | | $ | 28,247,002 | | | | | | | $ | 27,655,958 | | | | | |
| | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | |
Short-term borrowings | | $ | 4,127,033 | | | $ | 3,403 | | | 0.33 | % | | $ | 4,108,239 | | | $ | 22,112 | | | 2.16 | % |
Medium-term notes | | 3,597,232 | | | 29,127 | | | 3.25 | | | 3,485,891 | | | 31,440 | | | 3.63 | |
Collateral trust bonds | | 6,792,567 | | | 61,623 | | | 3.64 | | | 7,232,411 | | | 64,523 | | | 3.59 | |
Guaranteed Underwriter Program notes payable | | 6,207,538 | | | 41,168 | | | 2.66 | | | 5,375,091 | | | 39,786 | | | 2.98 | |
Farmer Mac notes payable | | 2,928,966 | | | 12,606 | | | 1.73 | | | 2,962,126 | | | 22,654 | | | 3.08 | |
Other notes payable | | 11,726 | | | 55 | | | 1.88 | | | 21,519 | | | 230 | | | 4.30 | |
Subordinated deferrable debt | | 986,184 | | | 12,893 | | | 5.24 | | | 985,996 | | | 12,884 | | | 5.26 | |
Subordinated certificates | | 1,255,549 | | | 13,547 | | | 4.33 | | | 1,355,773 | | | 14,242 | | | 4.22 | |
Total interest-bearing liabilities | | $ | 25,906,795 | | | $ | 174,422 | | | 2.70 | % | | $ | 25,527,046 | | | $ | 207,871 | | | 3.28 | % |
Other liabilities | | 1,538,818 | | | | | | | 1,116,838 | | | | | |
Total liabilities | | 27,445,613 | | | | | | | 26,643,884 | | | | | |
Total equity | | 801,389 | | | | | | | 1,012,074 | | | | | |
Total liabilities and equity | | $ | 28,247,002 | | | | | | | $ | 27,655,958 | | | | | |
Net interest spread(3) | | | | | | 1.31 | % | | | | | | 0.98 | % |
Impact of non-interest bearing funding(4) | | | | | | 0.17 | | | | | | | 0.19 | |
Net interest income/net interest yield(5) | | | | $ | 102,077 | | | 1.48 | % | | | | $ | 79,166 | | | 1.17 | % |
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Adjusted net interest income/adjusted net interest yield: | | | | | | | | | | | | |
Interest income | | | | $ | 276,499 | | | 4.01 | % | | | | $ | 287,037 | | | 4.26 | % |
Interest expense | | | | 174,422 | | | 2.70 | | | | | 207,871 | | | 3.28 | |
Add: Net periodic derivative cash settlements interest expense(6) | | | | 29,800 | | | 1.32 | | | | | 14,150 | | | 0.54 | |
Adjusted interest expense/adjusted average cost(7) | | | | $ | 204,222 | | | 3.16 | % | | | | $ | 222,021 | | | 3.50 | % |
Adjusted net interest spread(5) | | | | | | 0.85 | % | | | | | | 0.76 | % |
Impact of non-interest bearing funding(4) | | | | | | 0.20 | | | | | | | 0.20 | |
Adjusted net interest income/adjusted net interest yield(8) | | | | $ | 72,277 | | | 1.05 | % | | | | $ | 65,016 | | | 0.96 | % |
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| | Three Months Ended August 31, |
| | 2021 | | 2020 |
(Dollars in thousands) | | Average Balance | | Interest Income/Expense | | Average Yield/Cost | | Average Balance | | Interest Income/Expense | | Average Yield/Cost |
Assets: | | | | | | | | | | | | |
Long-term fixed-rate loans(1) | | $ | 25,446,598 | | | $ | 263,085 | | | 4.10 | % | | $ | 24,607,166 | | | $ | 263,184 | | | 4.24 | % |
Long-term variable-rate loans | | 763,746 | | | 4,278 | | | 2.22 | | | 686,024 | | | 4,400 | | | 2.54 | |
Line of credit loans | | 2,141,864 | | | 11,621 | | | 2.15 | | | 1,416,678 | | | 8,242 | | | 2.31 | |
Troubled debt restructuring (“TDR”) loans | | 9,925 | | | 192 | | | 7.67 | | | 10,781 | | | 207 | | | 7.62 | |
Nonperforming loans | | 233,641 | | | — | | | — | | | 164,758 | | | — | | | — | |
Other, net(2) | | — | | | (357) | | | — | | | — | | | (335) | | | — | |
Total loans | | 28,595,774 | | | 278,819 | | | 3.87 | | | 26,885,407 | | | 275,698 | | | 4.07 | |
Cash, time deposits and investment securities | | 754,485 | | | 4,449 | | | 2.34 | | | 906,308 | | | 3,886 | | | 1.70 | |
Total interest-earning assets | | $ | 29,350,259 | | | $ | 283,268 | | | 3.83 | % | | $ | 27,791,715 | | | $ | 279,584 | | | 3.99 | % |
Other assets, less allowance for credit losses(3) | | 544,647 | | | | | | | 476,024 | | | | | |
Total assets(3) | | $ | 29,894,906 | | | | | | | $ | 28,267,739 | | | | | |
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Liabilities: | | | | | | | | | | | | |
Commercial paper | | $ | 2,523,651 | | | $ | 2,148 | | | 0.34 | % | | $ | 1,751,120 | | | $ | 2,062 | | | 0.47 | % |
Other short-term borrowings | | 1,967,482 | | | 1,245 | | | 0.25 | | | 2,113,767 | | | 2,279 | | | 0.43 | |
Total short-term borrowings | | 4,491,133 | | | 3,393 | | | 0.30 | | | 3,864,887 | | | $ | 4,341 | | | 0.45 | |
Medium-term notes | | 4,315,374 | | | 25,772 | | | 2.37 | | | 3,684,835 | | | 29,887 | | | 3.22 | |
Collateral trust bonds | | 7,193,391 | | | 63,142 | | | 3.48 | | | 6,850,779 | | | 62,593 | | | 3.62 | |
Guaranteed Underwriter Program notes payable | | 6,248,775 | | | 43,570 | | | 2.77 | | | 6,242,813 | | | 42,413 | | | 2.70 | |
Farmer Mac notes payable | | 2,954,384 | | | 12,341 | | | 1.66 | | | 3,052,451 | | | 13,933 | | | 1.81 | |
Other notes payable | | 8,241 | | | 48 | | | 2.31 | | | 11,625 | | | 87 | | | 2.97 | |
Subordinated deferrable debt | | 986,332 | | | 12,882 | | | 5.18 | | | 986,136 | | | 12,890 | | | 5.19 | |
Subordinated certificates | | 1,253,971 | | | 13,629 | | | 4.31 | | | 1,307,879 | | | 13,832 | | | 4.20 | |
Total interest-bearing liabilities | | $ | 27,451,601 | | | $ | 174,777 | | | 2.53 | % | | $ | 26,001,405 | | | $ | 179,976 | | | 2.75 | % |
Other liabilities(3) | | 1,091,762 | | | | | | | 1,591,883 | | | | | |
Total liabilities(3) | | 28,543,363 | | | | | | | 27,593,288 | | | | | |
Total equity(3) | | 1,351,543 | | | | | | | 674,451 | | | | | |
Total liabilities and equity(3) | | $ | 29,894,906 | | | | | | | $ | 28,267,739 | | | | | |
Net interest spread(4) | | | | | | 1.30 | % | | | | | | 1.24 | % |
Impact of non-interest bearing funding(5) | | | | | | 0.17 | | | | | | | 0.18 | |
Net interest income/net interest yield(6) | | | | $ | 108,491 | | | 1.47 | % | | | | $ | 99,608 | | | 1.42 | % |
| | | | | | | | | | | | |
Adjusted net interest income/adjusted net interest yield: | | | | | | | | | | | | |
Interest income | | | | $ | 283,268 | | | 3.83 | % | | | | $ | 279,584 | | | 3.99 | % |
Interest expense | | | | 174,777 | | | 2.53 | | | | | 179,976 | | | 2.75 | |
Add: Net periodic derivative cash settlements interest expense(7) | | | | 27,563 | | | 1.25 | | | | | 26,972 | | | 1.16 | |
Adjusted interest expense/adjusted average cost(8) | | | | $ | 202,340 | | | 2.92 | % | | | | $ | 206,948 | | | 3.16 | % |
Adjusted net interest spread(6) | | | | | | 0.91 | % | | | | | | 0.83 | % |
Impact of non-interest bearing funding(5) | | | | | | 0.18 | | | | | | | 0.21 | |
Adjusted net interest income/adjusted net interest yield(9) | | | | $ | 80,928 | | | 1.09 | % | | | | $ | 72,636 | | | 1.04 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended November 30, |
(Dollars in thousands) | | 2020 | | 2019 |
Assets: | | Average Balance | | Interest Income/Expense | | Average Yield/Cost | | Average Balance | | Interest Income/Expense | | Average Yield/Cost |
Long-term fixed-rate loans(1) | | $ | 24,715,209 | | | $ | 525,384 | | | 4.24 | % | | $ | 23,596,704 | | | $ | 519,192 | | | 4.40 | % |
Long-term variable-rate loans | | 662,952 | | | 7,996 | | | 2.41 | | | 961,704 | | | 17,887 | | | 3.72 | |
Line of credit loans | | 1,359,061 | | | 15,236 | | | 2.24 | | | 1,620,994 | | | 28,711 | | | 3.54 | |
Troubled debt restructuring (“TDR”) loans | | 10,542 | | | 403 | | | 7.62 | | | 11,484 | | | 418 | | | 7.28 | |
Nonperforming loans | | 161,640 | | | — | | | — | | | — | | | — | | | — | |
Other, net(2) | | — | | | (679) | | | — | | | — | | | (571) | | | — | |
Total loans | | 26,909,404 | | | 548,340 | | | 4.06 | | | 26,190,886 | | | 565,637 | | | 4.32 | |
Cash, time deposits and investment securities | | 825,622 | | | 7,743 | | | 1.87 | | | 782,146 | | | 11,415 | | | 2.92 | |
Total interest-earning assets | | $ | 27,735,026 | | | $ | 556,083 | | | 4.00 | % | | $ | 26,973,032 | | | $ | 577,052 | | | 4.28 | % |
Other assets, less allowance for credit losses | | 522,401 | | | | | | | 579,465 | | | | | |
Total assets | | $ | 28,257,427 | | | | | | | $ | 27,552,497 | | | | | |
| | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | |
Short-term borrowings | | $ | 3,995,244 | | | $ | 7,744 | | | 0.39 | % | | $ | 3,809,089 | | | $ | 44,934 | | | 2.36 | % |
Medium-term notes | | 3,641,273 | | | 59,014 | | | 3.23 | | | 3,529,164 | | | 63,516 | | | 3.60 | |
Collateral trust bonds | | 6,821,832 | | | 124,216 | | | 3.63 | | | 7,309,165 | | | 129,904 | | | 3.55 | |
Guaranteed Underwriter Program notes payable | | 6,225,272 | | | 83,581 | | | 2.68 | | | 5,386,771 | | | 80,219 | | | 2.98 | |
Farmer Mac notes payable | | 2,991,046 | | | 26,539 | | | 1.77 | | | 2,997,053 | | | 47,728 | | | 3.18 | |
Other notes payable | | 11,675 | | | 142 | | | 2.43 | | | 22,027 | | | 484 | | | 4.39 | |
Subordinated deferrable debt | | 986,160 | | | 25,783 | | | 5.21 | | | 986,005 | | | 25,766 | | | 5.23 | |
Subordinated certificates | | 1,281,857 | | | 27,379 | | | 4.26 | | | 1,355,960 | | | 28,591 | | | 4.22 | |
Total interest-bearing liabilities | | $ | 25,954,359 | | | $ | 354,398 | | | 2.72 | % | | $ | 25,395,234 | | | $ | 421,142 | | | 3.32 | % |
Other liabilities | | 1,565,495 | | | | | | | 1,064,284 | | | | | |
Total liabilities | | 27,519,854 | | | | | | | 26,459,518 | | | | | |
Total equity | | 737,573 | | | | | | | 1,092,979 | | | | | |
Total liabilities and equity | | $ | 28,257,427 | | | | | | | $ | 27,552,497 | | | | | |
Net interest spread(3) | | | | | | 1.28 | % | | | | | | 0.96 | % |
Impact of non-interest bearing funding(4) | | | | | | 0.17 | | | | | | | 0.20 | |
Net interest income/net interest yield(5) | | | | $ | 201,685 | | | 1.45 | % | | | | $ | 155,910 | | | 1.16 | % |
| | | | | | | | | | | | |
Adjusted net interest income/adjusted net interest yield: | | | | | | | | | | | | |
Interest income | | | | $ | 556,083 | | | 4.00 | % | | | | $ | 577,052 | | | 4.28 | % |
Interest expense | | | | 354,398 | | | 2.72 | | | | | 421,142 | | | 3.32 | |
Add: Net periodic derivative cash settlements interest expense(6) | | | | 56,772 | | | 1.24 | | | | | 25,193 | | | 0.47 | |
Adjusted interest expense/adjusted average cost(7) | | | | $ | 411,170 | | | 3.16 | % | | | | $ | 446,335 | | | 3.52 | % |
Adjusted net interest spread(5) | | | | | | 0.84 | % | | | | | | 0.76 | % |
Impact of non-interest bearing funding(4) | | | | | | 0.20 | | | | | | | 0.21 | |
Adjusted net interest income/adjusted net interest yield(8) | | | | $ | 144,913 | | | 1.04 | % | | | | $ | 130,717 | | | 0.97 | % |
| | | | | | | | | | | | |
_______________________________________________________(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)Consists of late payment fees and net amortization of deferred loan fees and loan origination costs.
(3)
The average balance represents average monthly balances, which is calculated based on the month-end balance as of the beginning of the reporting period and the balances as of the end of each month included in the specified reporting period.(3)(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.
(4)(5)Includes other liabilities and equity.
(5)(6)Net interest yield is calculated based on annualized net interest income for the period divided by total average interest-earning assets for the period.
(6)(7)Represents the impact of net periodic contractual interest amounts on our interest rate swaps during the period. This amount is added to interest expense to derive non-GAAP adjusted interest expense. The average (benefit)/cost associated with derivatives is calculated based on the annualized net periodic swap settlement interest amount 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 $9,049$8,742 million and $10,599$9,225 million for the three months ended November 30,August 31, 2021 and 2020, and 2019, respectively. The average outstanding notional amount of interest rate swaps was $9,138 million and $10,676 million for the six months ended November 30, 2020 and 2019, respectively.
(7)(8)Adjusted interest expense consists of interest expense plus net periodic derivative cash settlements interest expense during the period. Net periodic derivative cash settlement interest amounts are reported on our consolidated statements of operations as a component of derivative gains (losses). Adjusted average cost is calculated based on annualized adjusted interest expense for the period divided by total average interest-bearing liabilities during the period.
(8)(9)Adjusted net interest yield is calculated based on annualized adjusted net interest income for the period divided by total average interest-earning assets for the period.
Table 3 displays the change in net interest income between periods and the extent to which the variance for each category of interest-earning assets and interest-bearing liabilities is attributable to:
(i) changes in volume, which represents the volumechange in the average balances of our interest-earning assets and interest-bearing liabilities or volume and (ii) changes in the rate, which represents the change in the average interest rates of these assets and liabilities. The table also presents the change in adjusted net interest income between periods. Changes that are not solely due to either volume or rate are allocated to these categories on a pro-rata basis based on the absolute value of the change due to average volume and average rate.
Table 3: Rate/Volume Analysis of Changes in Interest Income/Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended August 31, |
| | Three Months Ended November 30, | | Six Months Ended November 30, | | | 2021 versus 2020 |
| | 2020 versus 2019 | | 2020 versus 2019 | |
| | | Total | | Variance Due To:(1) | | Total | | Variance due to:(1) | | | | Total | | Variance Due To:(1) |
(Dollars in thousands) | (Dollars in thousands) | | Variance | | Volume | | Rate | | Variance | | Volume | | Rate | (Dollars in thousands) | | | Variance | | Volume | | Rate |
Interest income: | Interest income: | | | | | | | | | | | | | Interest income: | | | | | | | |
Long-term fixed-rate loans | Long-term fixed-rate loans | | $ | 1,486 | | | $ | 11,540 | | | $ | (10,054) | | | $ | 6,192 | | | $ | 26,100 | | | $ | (19,908) | | Long-term fixed-rate loans | | | $ | (99) | | | $ | 8,978 | | | $ | (9,077) | |
Long-term variable-rate loans | Long-term variable-rate loans | | (4,535) | | | (2,523) | | | (2,012) | | | (9,891) | | | (5,523) | | | (4,368) | | Long-term variable-rate loans | | | (122) | | | 498 | | | (620) | |
Line of credit loans | Line of credit loans | | (5,684) | | | (1,862) | | | (3,822) | | | (13,475) | | | (4,573) | | | (8,902) | | Line of credit loans | | | 3,379 | | | 4,219 | | | (840) | |
TDR loans | TDR loans | | (16) | | | (16) | | | — | | | (15) | | | (33) | | | 18 | | TDR loans | | | (15) | | | (16) | | | 1 | |
| Other, net | Other, net | | (57) | | | — | | | (57) | | | (108) | | | — | | | (108) | | Other, net | | | (22) | | | — | | | (22) | |
Total loans | Total loans | | (8,806) | | | 7,139 | | | (15,945) | | | (17,297) | | | 15,971 | | | (33,268) | | Total loans | | | 3,121 | | | 13,679 | | | (10,558) | |
Cash, time deposits and investment securities | Cash, time deposits and investment securities | | (1,732) | | | (348) | | | (1,384) | | | (3,672) | | | 668 | | | (4,340) | | Cash, time deposits and investment securities | | | 563 | | | (651) | | | 1,214 | |
Total interest income | Total interest income | | (10,538) | | | 6,791 | | | (17,329) | | | (20,969) | | | 16,639 | | | (37,608) | | Total interest income | | | 3,684 | | | 13,028 | | | (9,344) | |
| Interest expense: | Interest expense: | | | | | | Interest expense: | | | |
Short-term borrowings | | (18,709) | | | 162 | | | (18,871) | | | (37,190) | | | 2,325 | | | (39,515) | | |
Commercial paper | | Commercial paper | | | 86 | | | 910 | | | (824) | |
Other short-term borrowings | | Other short-term borrowings | | | (1,034) | | | (158) | | | (876) | |
Total short-term borrowings | | Total short-term borrowings | | | (948) | | | 752 | | | (1,700) | |
Medium-term notes | Medium-term notes | | (2,313) | | | 1,093 | | | (3,406) | | | (4,502) | | | 2,197 | | | (6,699) | | Medium-term notes | | | (4,115) | | | 5,114 | | | (9,229) | |
Collateral trust bonds | Collateral trust bonds | | (2,900) | | | (3,758) | | | 858 | | | (5,688) | | | (8,329) | | | 2,641 | | Collateral trust bonds | | | 549 | | | 3,130 | | | (2,581) | |
Guaranteed Underwriter Program notes payable | Guaranteed Underwriter Program notes payable | | 1,382 | | | 6,288 | | | (4,906) | | | 3,362 | | | 12,741 | | | (9,379) | | Guaranteed Underwriter Program notes payable | | | 1,157 | | | 41 | | | 1,116 | |
Farmer Mac notes payable | Farmer Mac notes payable | | (10,048) | | | (192) | | | (9,856) | | | (21,189) | | | 35 | | | (21,224) | | Farmer Mac notes payable | | | (1,592) | | | (448) | | | (1,144) | |
Other notes payable | Other notes payable | | (175) | | | (104) | | | (71) | | | (342) | | | (227) | | | (115) | | Other notes payable | | | (39) | | | (25) | | | (14) | |
| Subordinated deferrable debt | Subordinated deferrable debt | | 9 | | | 38 | | | (29) | | | 17 | | | 75 | | | (58) | | Subordinated deferrable debt | | | (8) | | | 3 | | | (11) | |
Subordinated certificates | Subordinated certificates | | (695) | | | (1,017) | | | 322 | | | (1,212) | | | (1,488) | | | 276 | | Subordinated certificates | | | (203) | | | (570) | | | 367 | |
Total interest expense | Total interest expense | | (33,449) | | | 2,510 | | | (35,959) | | | (66,744) | | | 7,329 | | | (74,073) | | Total interest expense | | | (5,199) | | | 7,997 | | | (13,196) | |
| Net interest income | Net interest income | | $ | 22,911 | | | $ | 4,281 | | | $ | 18,630 | | | $ | 45,775 | | | $ | 9,310 | | | $ | 36,465 | | Net interest income | | | $ | 8,883 | | | $ | 5,031 | | | $ | 3,852 | |
| Adjusted net interest income: | Adjusted net interest income: | | Adjusted net interest income: | | | |
Interest income | Interest income | | $ | (10,538) | | | $ | 6,791 | | | $ | (17,329) | | | $ | (20,969) | | | $ | 16,639 | | | $ | (37,608) | | Interest income | | | $ | 3,684 | | | $ | 13,028 | | | $ | (9,344) | |
Interest expense | Interest expense | | (33,449) | | | 2,510 | | | (35,959) | | | (66,744) | | | 7,329 | | | (74,073) | | Interest expense | | | (5,199) | | | 7,997 | | | (13,196) | |
Net periodic derivative cash settlements interest expense(2) | Net periodic derivative cash settlements interest expense(2) | | 15,650 | | | (2,036) | | | 17,686 | | | 31,579 | | | (3,571) | | | 35,150 | | Net periodic derivative cash settlements interest expense(2) | | | 591 | | | (1,415) | | | 2,006 | |
Adjusted interest expense(3) | Adjusted interest expense(3) | | (17,799) | | | 474 | | | (18,273) | | | (35,165) | | | 3,758 | | | (38,923) | | Adjusted interest expense(3) | | | (4,608) | | | 6,582 | | | (11,190) | |
Adjusted net interest income | Adjusted net interest income | | $ | 7,261 | | | $ | 6,317 | | | $ | 944 | | | $ | 14,196 | | | $ | 12,881 | | | $ | 1,315 | | Adjusted net interest income | | | $ | 8,292 | | | $ | 6,446 | | | $ | 1,846 | |
____________________________
(1)The changes for each category of interest income and interest expense are divided betweenrepresent changes in either average balances (volume) or average rates for both interest-earning assets and interest-bearing liabilities. We allocate 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.rate variance.
(2)For the net periodic derivative cash settlements interest amount, the variance due to average volume represents the change in the net periodic derivative cash settlements interest expense amount resulting from the change in the average notional amount of derivative contracts outstanding. The variance due to average rate represents the change in the net periodic derivative cash settlements amount resulting from the net difference between the average rate paid and the average rate received for interest rate swaps during the period.
(3)See “Non-GAAP Financial Measures” for additional information on our adjusted non-GAAP measures.
Reported Net Interest Income
Reported net interest income of $102$108 million for the current quarter increased $23$9 million, or 29%9%, from the same prior-year quarter, driven by the combined impactan increase in average interest-earning assets of $1,559 million, or 6%, and an increase in the net interest yield of 315 basis points, or 26%4%, to 1.48% and an increase in average interest-earning assets of $575 million, or 2%1.47%.
•Net Interest Yield: The increase in the net interest yield of 31 basis points, or 26%, was largely due to a reduction in our average cost of borrowings of 58 basis points to 2.70%, partially offset by a decrease in the average yield on interest-earning assets of 25 basis points to 4.01%. The reduction in our average cost of borrowings was primarily driven by a decrease in the average cost of our short-term and variable-rate borrowings due to the decrease in short-term interest rates as the FOMC lowered the benchmark federal funds rate by 150 basis points in March 2020 to a near-zero target range of 0% to 0.25% as part of a series of measures implemented to ease the economic impact of the COVID-19 pandemic. The target federal funds rate range has remained unchanged since that time. While medium- and longer-term interest rates also fell during this 12-month period, the decreases were not as pronounced as the reduction in short-term interest rates. As a result, we experienced a decrease in our average short-term borrowings cost of 183 basis points to 0.33% for the current quarter. The decrease in the average yield on interest-earning assets reflected the combined impact of a reduction in the average yield on our long-term fixed-rate loan portfolio, as the maturity and pay-off of loan advances at higher rates were replaced with new loan advances at lower rates due to the lower interest rate environment, and a reduction in the average yield on our long-term variable-rate and line of credit loan portfolios due to the decline in short-term interest rates over the last 12 months.
•Average Interest-Earning Assets: Assets: The increase in average interest-earning assets of 2%6% during the current quarter was primarily driven byattributable to growth in average total loans of $626$1,710 million, or 2%, largely attributable to6% including an increase in average long-term fixed-rate loans of $987$839 million, or 4%3%, coupled with an increase in average line of credit loans of $725 million, or 51%. The lower interest rate environment has presented an opportunity for members to obtain long-term loan advances to fund capital investments and refinance with us loans made by other lenders at a reduced fixed rate of interest.
Reported net interest income of $202 million for the six months ended November 30, 2020 increased $46 million, or 29%, from the same prior year-to-date period, driven by an increase in the net interest yield of 29 basis points, or 25%, to 1.45% and an The increase in average interest-earning assetsline of 3%.credit loans was largely attributable to loans advanced to one distribution member that experienced an adverse financial impact from restoration costs incurred to repair damage caused by two successive hurricanes and loans advanced to several Texas-based power supply borrowers that incurred increased costs during the February 2021 polar vortex.
•Net Interest Yield:The increase in the net interest yield of 295 basis points, or 25%4%, was largely dueprimarily attributable to a reduction in our average cost of borrowings of 6022 basis points to 2.72%2.53%, partially offset by a decrease in the average yield on interest-earning assets of 2816 basis points to 4.00%3.83%. A decreaseThe decreases in our average cost of borrowings and average yield on interest-earning assets were driven by the continued low interest rate environment. As a result, we experienced significant reductions in the average cost of our short-term borrowings of 197 basis points to 0.39% for the six months ended November 30, 2020 was the primary factor driving the reduction in our overall average cost of borrowings during the period, as indicated in the rate/volume analysis presented above in Table 3. The reduction in our average borrowing cost, as well as the declineand variable-rate funding and in the average yield on our loans, as higher interest rate loans that matured or repriced were replaced by new loans with lower interest rates.
Adjusted Net Interest Income
Adjusted net interest income of $81 million for the current quarter increased $8 million, or 11%, from the same prior-year quarter, driven by the combined impact of an increase in average interest-earning assets reflects in part the impact of the overall lower interest rate environment. The pay-off of higher fixed-rate loan advances were replaced with lower fixed-rate loan advances, contributing to the decline$1,559 million, or 6%, and an increase in the averageadjusted net interest yield on our long-term fixed-rate loan portfolio. We also experienced a reduction in the average yield on our long-term variable-rate and line of credit loan portfolios due5 basis points, or 5%, to the decline in short-term interest rates over the last 12 months.1.09%.
•Average Interest-Earning Assets: The increase in average interest-earning assets of 3%6% during the current quarter was primarily driven by the growth in average total loans of $719$1,710 million, or 3%6%, largely attributable to anthe increase in average long-term fixed-rate and line of credit loans of $1,119 million, or 5%, as the lower interest rate environment presented an opportunity for members to obtain advances to fund capital investments and refinance with us loans made by other lenders at a reduced fixed rate of interest.
Adjusted Net Interest Income
Adjusted net interest income of $72 million for the current quarter increased $7 million, or 11%, from the same prior-year quarter, driven by an increase in the adjusted net interest yield of 9 basis points, or 9%, to 1.05%, and the increase in average interest-earning assets of $575 million, or 2%.
discussed above.
•Adjusted Net Interest Yield: The increase in the adjusted net interest yield of 95 basis points, or 9%5%, reflected the favorable impact of a reduction in our adjusted average cost of borrowings of 3424 basis points to 3.16%2.92%, which was partially offset
by thea decrease in the average yield on interest-earning assets of 2516 basis points to 4.01%. As noted above, the lower interest rate environment had a favorable impact on our adjusted average cost of borrowings and contributed to the decrease in the average yield on interest-earnings assets.
•Average Interest-Earning Assets: The increase in average interest-earning assets of 2% was primarily driven by the growth in average total loans of $626 million, or 2%.
Adjusted net interest income of $145 million for the six months ended November 30, 2020 increased $14 million, or 11%, from the same prior year-to-date period, driven by an increase in the adjusted net interest yield of 7 basis points, or 7%, to 1.04%, and the increase in average interest-earning assets of $762 million, or 3%.
•AdjustedNet Interest Yield: The increase in the adjusted net interest yield of 7 basis points, or 7%, reflected the favorable impact of a reduction in our adjusted average cost of borrowings of 36 basis points to 3.16%, which was partially offset by the decrease in the average yield on interest-earning assets of 28 basis points to 4.00%3.83%, both of which were attributable to the lowercontinued low interest rate environment. The decrease in the average cost of our short-term borrowings was the primary driver of the overall reduction in our average cost of borrowing as indicated in the net interest yield and rate/ volume analysis presented above in Table 2 and Table 3, respectively.
•Average Interest-Earning Assets: The increase in average interest-earning assets of 3% was primarily driven by the growth in average total loans of $719 million, or 3%.
We include the net periodic derivative cash settlements interest settlementexpense 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. We recorded net periodic derivative cash settlements interest expense of $30$28 million for the current quarter, an increase of $16compared with $27 million from the $14 million recorded for the same prior-year quarter. We recorded net periodic derivative cash settlementsThe floating-rate payments on our interest expense of $57 million forrate swaps are typically based on the six months ended November 30, 2020, an increase of $32 million from the $25 million recorded for the same prior year-to-date period.3-month London Interbank Offered Rate (“LIBOR”) rate. Because our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps, wethe net periodic derivative cash settlements interest expense amounts generally record derivative losses whenchange based on changes in the floating interest rates decline and derivative gains when interest rates rise. The floating-rate payments on our interest rate swaps are typically based onamount received each period. When the 3-month LIBOR whichrate increases during the period, the received floating interest amounts on our pay-fixed swaps increase and, conversely, when the 3-month LIBOR swap rate decreases, the received floating interest amounts on our pay-fixed swaps decrease. The 3-month LIBOR rate decreased 16812 basis points over the last 12 months to 0.23%0.12% as of November 30, 2020. TheAugust 31, 2021, resulting in a decrease in the 3-month LIBOR drove thereceived floating interest amounts and contributing to a slight increase in the net periodic derivative cash settlements interest expense amount recorded in the current-year periods.current quarter versus in the same prior-year quarter.
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.
Provision for Credit Losses
WeOur provision for credit losses each period is driven by changes in our measurement of lifetime expected credit losses for our loan portfolio recorded in the allowance for credit losses. Our allowance for credit losses and allowance coverage ratio increased to $90 million and 0.31%, respectively, as of August 31, 2021, from $86 million and 0.30%, respectively as of May 31, 2021, resulting from a current-quarter addition to the allowance of $4 million.
As a result of the current-quarter addition to the allowance, we recorded a provision for credit losses of $2$4 million, for bothwhich was primarily attributable an increase in the three and six months ended November 30, 2020, based oncollective allowance due to higher expected default rates derived from third-party utility sector default data, which we use to inform the CECL model for estimatingdefault rates used in measuring our collective allowance for credit losses.losses, and an increase in the asset-specific allowance for loans outstanding to Brazos. In comparison, we recorded a benefitprovision for credit losses of less than $1 million for both the three and six months ended November 30, 2019, based on the incurred model for estimating our allowance for credit losses.
Under CECL, we are requiredsame prior-year quarter, primarily attributable 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.
As discussed above in “Executive Summary—Credit Quality,” the adoption of CECL resulted in an increase in our allowance for credit losses for our loan portfolio of $4 million and a corresponding decrease to retained earnings of $4 million recorded through a cumulative-effect adjustment. While 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 changesoutstanding during the period in our estimate of lifetime expected credit losses for existing financial instruments subject to CECL, are now recognized in earnings.
The allowance for credit losses for our loan portfolio increased to $59 million as of November 30, 2020, from $53 million as of May 31, 2020, and the allowance coverage ratio increased to 0.22% from 0.20%. The increase in the allowance for credit losses was primarily attributable to the $4 million recorded upon the adoption of CECL on June 1, 2020.period.
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 alsoPolicies—Allowance for Credit Losses—Current Methodology” in our 2021 Form 10-K and provide additional information on theour allowance for credit losses below in the sectionunder “Credit Risk—Allowance for Credit Losses” and in “Note 5—Allowance for Credit Losses.”Losses” in this Report.
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 gains and losses on equity and debt investment securities. In the fourth quarter of fiscal year 2020, we transferred all of 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 4 presents the components of non-interest income recorded in our consolidated statements of operations for the three and six months ended November 30, 2020August 31, 2021 and 2019.2020.
Table 4: Non-Interest Income
| | | | Three Months Ended November 30, | | Six Months Ended November 30, | | | | Three Months Ended August 31, |
(Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (Dollars in thousands) | | | 2021 | | 2020 |
Non-interest income: | | | | | | | | | |
Non-interest income components: | | Non-interest income components: | | | | | |
Fee and other income | Fee and other income | | $ | 6,332 | | | $ | 3,842 | | | $ | 9,848 | | | $ | 14,783 | | Fee and other income | | | $ | 3,941 | | | $ | 3,516 | |
Derivative gains (losses) | Derivative gains (losses) | | 81,287 | | | 183,450 | | | 141,563 | | | (212,275) | | Derivative gains (losses) | | | (172,163) | | | 60,276 | |
Investment securities gains (losses) | Investment securities gains (losses) | | (1,361) | | | (114) | | | 3,298 | | | 1,506 | | Investment securities gains (losses) | | | (2,225) | | | 4,659 | |
Total non-interest income (loss) | | $ | 86,258 | | | $ | 187,178 | | | $ | 154,709 | | | $ | (195,986) | | |
Total non-interest income | | Total non-interest income | | | $ | (170,447) | | | $ | 68,451 | |
The significant variance betweenin non-interest income forbetween the current-year periodscurrent quarter and the same prior-year periodsquarter was primarily attributable to the mark-to-market changes in the fairderivative gains (losses) recognized in our consolidated statements of operations. In addition, we experienced an unfavorable shift in investment securities gains and losses of $7 million, as we recorded losses on investment securities of $2 million in the current quarter versus investment gains of $5 million in the same prior-year quarter, both of which were largely due to changes in the market value of our derivative instruments. The decrease in fee and other income of $5 millioninvestment securities during the six months ended November 30, 2020 was primarily due to a reduction in prepayment fees.each period.
Derivative Gains (Losses)
Our derivative instruments are an integral part of our interest rate risk management strategy. Our principal purpose in using derivatives is to manage our aggregate interest rate risk profile within prescribed risk parameters. The derivative instruments we use primarily include interest rate swaps, which we typically hold to maturity. In addition, we may on occasion use Treasury Lockstreasury locks to manage the interest rate risk associated with debt that is scheduled to reprice in the future. The primary factors affecting the fair value of our derivatives and derivative gains (losses) recorded in our results of operations include changes in interest rates, the shape of the swap curve and the composition of our derivative portfolio. We generally do not designate our interest rate swaps, which currently account for all 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 Locksthe treasury lock as a cash flow hedges. We did not have any derivatives designated as accounting hedges as of November 30, 2020 or May 31, 2020.hedge.
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 ratefloating-rate payments under our swap agreements is 3-month LIBOR. As interest rates decline, pay-fixed swaps generally decrease in value and result in the recognition of derivative losses, as the amount of interest we pay remains fixed, while the amount of interest we receive declines. In contrast, as interest rates 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, the opposite results occur as interest rates decline or rise. Our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed
swaps; therefore, we generally record derivative losses when interest rates decline and derivative gains when interest rates rise. Because our pay-fixed and receive-fixed swaps are referenced to different maturity terms along the swap curve, different changes in the swap curve—parallel, flattening, inversion or steepening—will also impact the fair value of our derivatives.
On July 20, 2021, we executed two treasury lock agreements with an aggregate notional amount of $250 million to lock in the underlying U.S. Treasury interest rate component of interest rate payments on anticipated debt issuances and repricings. The treasury locks, which mature on October 29, 2021, were designated and qualify as cash flow hedges. We therefore recorded changes in the fair value of the treasury locks in AOCI during the current quarter. We had an unrealized gain related to these treasury locks of less than $1 million recorded in AOCI as of August 31, 2021. We did not have any derivatives designated as accounting hedges as of May 31, 2021.
Table 5 presents the components of net derivative gains (losses) recorded in our consolidated statements of operations for the three and six months ended November 30, 2020August 31, 2021 and 2019.2020. Derivative cash settlements interest expense represents the net periodic contractual interest amount for our interest-rate swaps during 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)
| | | Three Months Ended November 30, | | Six Months Ended November 30, | | | Three Months Ended August 31, |
(Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (Dollars in thousands) | | | 2021 | | 2020 |
Derivative gains (losses) attributable to: | Derivative gains (losses) attributable to: | | | | | | | | | Derivative gains (losses) attributable to: | | | | | |
Derivative cash settlements interest expense | Derivative cash settlements interest expense | | $ | (29,800) | | | $ | (14,150) | | | $ | (56,772) | | | $ | (25,193) | | Derivative cash settlements interest expense | | | $ | (27,563) | | | $ | (26,972) | |
Derivative forward value gains (losses) | Derivative forward value gains (losses) | | 111,087 | | | 197,600 | | | 198,335 | | | (187,082) | | Derivative forward value gains (losses) | | | (144,600) | | | 87,248 | |
Derivative gains (losses) | Derivative gains (losses) | | $ | 81,287 | | | $ | 183,450 | | | $ | 141,563 | | | $ | (212,275) | | Derivative gains (losses) | | | $ | (172,163) | | | $ | 60,276 | |
We recorded derivative gainslosses of $81$172 million for the current quarter, compared with derivative gains of $183 million forthree months ended August 31, 2021 due to a decrease in the same prior-year quarter. The derivative gains in each period resulted from an increase in thenet fair value of our swap portfolio which consists predominately of pay-fixed swaps, due to increases in medium- and longer-term swap interest rates. The increasesresulting from decreases in medium- and longer-term swap interest rates, however, were more pronounced during the same prior-year quarter, as depicted belowby the comparative by the comparative August 31, 2021 and May 31, 2021 swap curves presented in the “Comparative Swap Curves” chart, resulting in higher derivative gains relative to the current quarter.Table 7 below.
TheIn contrast, we recorded derivative gains of $142$60 million recorded duringfor the sixthree months ended November 30,August 31, 2020, were attributable due to an increase in the net fair value of our swap portfolio resulting from an increase in long-termlonger-term swap interest rates, as depicted by the November 30,comparative August 31, 2020 and May 31, 2020 comparative swap curves presented in the chartTable 7 below. In contrast, the derivative losses of $212 million during the same prior year-to-date period were attributable to a decrease in the fair value of our pay-fixed swaps due to declines in interest rates across the swap curve, as depicted by the November 30, 2019 and May 31, 2019 comparative swap curves presented in the chart below.
Derivative Cash Settlements
As indicated in Table 5 above and discussed above under “Consolidated Results of Operations—Net Interest Income—Adjusted Net Interest Income, we recorded net periodic derivative cash settlements interest expense of $30$28 million for the current quarter an increase of $16 million from the $14compared with $27 million recorded for the same prior-year quarter. We recorded net periodic derivative cash settlements interest expense of $57 million for the six months ended November 30, 2020, an increase of $32 million from the $25 million recorded for the same prior year-to-date period. The floating-rate payments on our interest rate swaps are typically based on the 3-month LIBOR, which decreased 168 basis points over the last 12 months to 0.23% as of November 30, 2020. The decrease in the 3-month LIBOR drove theslight increase in the net periodic derivative cash settlements interest expense recordedwas attributable to a decrease in the current-year periods.3-month LIBOR over the last 12 months.
As discussed above, our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps, with pay-fixed swaps accounting for approximately 73% and 71% of the outstanding notional amount of our derivative portfolio as of November 30, 2020 and May 31, 2020, respectively. 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.
As discussed above, our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps, with
pay-fixed swaps accounting for approximately 72% and 73% of the outstanding notional amount of our derivative portfolio as of August 31, 2021 and May 31, 2021, respectively.
Table 6: Derivatives—Average Notional Amounts and Interest Rates
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, |
| | 2020 | | 2019 |
(Dollars in thousands) | | Average Notional Balance | | Weighted- Average Rate Paid | | Weighted- Average Rate Received | | Average Notional Balance | | Weighted- Average Rate Paid | | Weighted- Average Rate Received |
Pay-fixed swaps | | $ | 6,516,242 | | | 2.78 | % | | 0.25 | % | | $ | 7,299,322 | | | 2.84 | % | | 2.08 | % |
Receive-fixed swaps | | 2,533,066 | | | 0.98 | | | 2.77 | | | 3,300,099 | | | 2.77 | | | 2.59 | |
Total | | $ | 9,049,308 | | | 2.28 | % | | 0.96 | % | | $ | 10,599,421 | | | 2.82 | % | | 2.24 | % |
| | | | | | | | | | | | |
| | | | Three Months Ended August 31, |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2021 | | 2020 |
| | Six Months Ended November 30, | | Average | | Weighted- | | Average | | Weighted- |
| | | 2020 | | 2019 | | Notional | | Average Rate | | Notional | | Average Rate |
(Dollars in thousands) | (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 | (Dollars in thousands) | | Amount | | Paid | | Received | | Amount | | Paid | | Received |
Interest rate swap type: | | Interest rate swap type: | | | | | | | | | | | | |
Pay-fixed swaps | Pay-fixed swaps | | $ | 6,547,594 | | | 2.78 | % | | 0.31 | % | | $ | 7,326,509 | | | 2.84 | % | | 2.24 | % | Pay-fixed swaps | | $ | 6,342,578 | | | 2.63 | % | | 0.16 | % | | $ | 6,579,420 | | | 2.78 | % | | 0.38 | % |
Receive-fixed swaps | Receive-fixed swaps | | 2,590,257 | | | 1.10 | | | 2.77 | | | 3,349,820 | | | 2.93 | | | 2.57 | | Receive-fixed swaps | | 2,399,000 | | | 0.89 | | | 2.80 | | | 2,646,826 | | | 1.21 | | | 2.76 | |
Total | Total | | $ | 9,137,851 | | | 2.30 | % | | 1.01 | % | | $ | 10,676,329 | | | 2.87 | % | | 2.34 | % | Total | | $ | 8,741,578 | | | 2.15 | % | | 0.88 | % | | $ | 9,226,246 | | | 2.33 | % | | 1.06 | % |
The average remaining maturity of our pay-fixed and receive-fixed swaps was 19 years and three years, respectively, as of August 31, 2021. In comparison, the average remaining maturity of our pay-fixed and receive-fixed swaps was 19 years and four years, respectively, as of November 30,August 31, 2020. In comparison, the average remaining maturity of our pay-fixed and receive-fixed swaps was 18 years and four years, respectively, as of November 30, 2019.
See “Note 9—Derivative Instruments and Hedging Activities” for additional information on our derivative instruments.
Comparative Swap Curves
The chartTable 7 below provides comparative swap curves as of November 30, 2020,August 31, 2021, May 31, 2021, August 31, 2020 May 31, 2020, November 30, 2019 and May 31, 2019.2020.
Table 7: Comparative Swap Curves____________________________
Benchmark rates obtained from Bloomberg.
See “Note 9—Derivative Instruments and Hedging Activities” for additional information on our derivative instruments. Also refer to “Note 14—Fair Value Measurement” to the Consolidated Financial Statements in our 2021 Form 10-K 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 78 presents the components of non-interest expense recorded in our consolidated statements of operations for the three and six months ended November 30, 2020August 31, 2021 and 2019.2020.
Table 7:8: Non-Interest Expense
| | | | Three Months Ended November 30, | | Six Months Ended November 30, | | | | Three Months Ended August 31, |
(Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (Dollars in thousands) | | | 2021 | | 2020 |
Non-interest expense: | | | | | | | | | |
Non-interest expense components: | | Non-interest expense components: | | | | | |
Salaries and employee benefits | Salaries and employee benefits | | $ | (14,011) | | | $ | (12,728) | | | $ | (27,144) | | | $ | (25,670) | | Salaries and employee benefits | | | $ | (13,310) | | | $ | (13,133) | |
Other general and administrative expenses | Other general and administrative expenses | | (10,125) | | | (12,041) | | | (19,655) | | | (24,428) | | Other general and administrative expenses | | | (10,900) | | | (9,530) | |
Losses on early extinguishment of debt | | (1,455) | | | (614) | | | (1,455) | | | (614) | | |
Other non-interest income (expense) | | (323) | | | (315) | | | (655) | | | 6,864 | | |
| Operating expenses | | Operating expenses | | | (24,210) | | | (22,663) | |
Other non-interest expense | | Other non-interest expense | | | (256) | | | (332) | |
Total non-interest expense | Total non-interest expense | | $ | (25,914) | | | $ | (25,698) | | | $ | (48,909) | | | $ | (43,848) | | Total non-interest expense | | | $ | (24,466) | | | $ | (22,995) | |
Non-interestNon-interest expense of $26$24 million for the current quarter was relatively unchangedthree months ended August 31, 2021 increased $1 million, or 6%, from the same prior-year quarter, with theprimarily attributable to an increase in salaries and employee benefits offset by a decrease in other general and administrative expenses. Non-interest expense of $49 million for the six months ended November 30, 2020 increased $5 million, or 12%, from the same prior year-to-date period, primarily due to the absence of a gain of $8 million recorded in connection with our sale of land in the same prior year-to-date period, which was partially offset by a reduction in other general and administrative expenses of $5
million largely due to reducedhigher travel and meeting costs, as we lifted certain restrictions put in place at the onset of the COVID-19 pandemic and resumed business travel and in-person meeting costscorporate meetings and events that were cancelled during the cancellation of certain events because ofprior-year quarter due to the COVID-19 pandemic.
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 incomeloss attributable to noncontrolling interests of less than $1 million for both the three and six months ended November 30, 2020.current quarter. In comparison, we recorded net income attributable to noncontrolling interests of less than $1 million for the three months ended November 30, 2019 and a net loss of $2 million for the six months ended November 30, 2019.same prior-year quarter.
| | |
CONSOLIDATED BALANCE SHEET ANALYSIS |
Total assets of $28,176increased $454 million, or 2%, to $30,092 million as of November 30, 2020 increased $18 million from MayAugust 31, 2020,2021, primarily due to growth in our loan portfolio. TotalSimilarly, we experienced an increase in total liabilities of $27,284$600 million, or 2%, to $28,838 million as of November 30, 2020 decreased by $225 million, or 1%, from MayAugust 31, 2020.2021, largely due to the issuances of debt to partially fund the growth in our loan portfolio. Total equity increased $243decreased $146 million to $892$1,254 million as of November 30, 2020, attributableAugust 31, 2021, due to our reported net incomeloss of $305$90 million as of November 30, 2020, which was partially offset byfor the current quarter and the authorized patronage capital retirement of patronage capital of $60$58 million authorized by the CFC Board of Directors in July 2020 and paid to members in September 2020, and a decrease to retained earnings of $4 million from the cumulative-effect adjustment recorded at adoption of the CECL accounting standard on June 1, 2020.2021.
Below is a discussion of changes in the major components of our assets and liabilities during the six months ended November 30, 2020.current quarter. 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 market risk exposure in accordance with our risk appetite.appetite framework.
Loan Portfolio
We segregate our loan portfolio into portfolio 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 and line of credit loans to our borrowers. Under our long-term loan facilities, a borrower may select a fixed interest rate or a variable interest rate at the time of each loan advance. Line of credit loans are revolving loan facilities and generally have a variable interest rate. We describe and provide additional information on our member classes under “Item 1. Business—Members” and information about our loan programs and loan product types under “Item 1. Business—Loan and Guarantee Programs” in our 2021 Form 10-K.
Loans Outstanding
Table 8 summarizes loansLoans to members by member classtotaled $28,883 million and by loan type,$28,427 million as of November 30, 2020August 31, 2021 and May 31, 2020. As indicated in Table 8, loans2021, respectively. Loans to CFC distribution and power supply borrowers accounted for 96% of total loans to members as of both November 30, 2020August 31, 2021 and May 31, 2020, and long-term fixed-rate loans accounted for 93% and 92% of2021.The increase in loans to members as of November 30, 2020 and May 31, 2020, respectively.
Table 8: Loans Outstanding by Member Class and Loan Type
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | November 30, 2020 | | May 31, 2020 | | |
(Dollars in millions) | | Amount | | % of Total | | Amount | | % of Total | | Change |
Loans by member class: | | | | | | | | | | |
CFC: | | | | | | | | | | |
Distribution | | $ | 21,223 | | | 79 | % | | $ | 20,770 | | | 78 | % | | $ | 453 | |
Power supply | | 4,597 | | | 17 | | | 4,732 | | | 18 | | | (135) | |
Statewide and associate | | 95 | | | — | | | 106 | | | — | | | (11) | |
CFC total | | 25,915 | | | 96 | | | 25,608 | | | 96 | | | 307 | |
NCSC | | 705 | | | 2 | | | 698 | | | 3 | | | 7 | |
RTFC | | 431 | | | 2 | | | 385 | | | 1 | | | 46 | |
Total loans outstanding(1) | | 27,051 | | | 100 | | | 26,691 | | | 100 | | | 360 | |
Deferred loan origination costs | | 12 | | | — | | | 11 | | | — | | | 1 | |
Loans to members | | $ | 27,063 | | | 100 | % | | $ | 26,702 | | | 100 | % | | $ | 361 | |
| | | | | | | | | | |
Loans by type: | | | | | | | | | | |
Long-term loans: | | | | | | | | | | |
Fixed-rate | | $ | 24,981 | | | 93 | % | | $ | 24,472 | | | 92 | % | | $ | 509 | |
Variable-rate | | 639 | | | 2 | | | 656 | | | 2 | | | (17) | |
| | | | | | | | | | |
Total long-term loans | | 25,620 | | | 95 | | | 25,128 | | | 94 | | | 492 | |
Line of credit loans | | 1,431 | | | 5 | | | 1,563 | | | 6 | | | (132) | |
Total loans outstanding(1) | | 27,051 | | | 100 | | | 26,691 | | | 100 | | | 360 | |
Deferred loan origination costs | | 12 | | | — | | | 11 | | | — | | | 1 | |
Loans to members | | $ | 27,063 | | | 100 | % | | $ | 26,702 | | | 100 | % | | $ | 361 | |
____________________________
(1) Represents the unpaid principal balance, net of charge-offs and recoveries, of loans as of the end of each period.
Loans to members totaled $27,063 million as of November 30, 2020, an increase of $361$456 million, or 1%2%, from May 31, 2020. The increase2021, was driven primarily by an increaseattributable to net increases in long-term loans of $492 million, partially offset by a decrease inand line of credit loans of $132 million.$358 million and $98 million, respectively. We experienced increases in CFC distribution loans, NCSCCFC power supply loans and RTFC loans of $453$384 million, $7$67 million and $46$11 million, respectively, and decreases in CFC power supply loans and CFC statewide and associate loans and NCSC loans of $135$5 million and $11$1 million, respectively.
Long-term loan advances totaled $1,271$727 million during the six months ended November 30, 2020,current quarter, of which approximately 85%62% was provided to members for capital expenditures and 5%approximately 35% was provided to members for operating expenses, primarily for the refinancingpayment of loans made by other lenders.elevated wholesale electric power costs incurred during the February 2021 polar vortex. In comparison, long-term loan advances totaled $1,387$807 million during the same prior year-to-date period,prior-year quarter, of which approximately 69%93% was provided to members for capital expenditures and 25%4% was provided for the refinancing of loans made by other lenders.
We provide additional information about our loan product types in “Item 1. Business—Loan Programs” and“Note 4—Loans” in our 2020 Form 10-K. See “Debt—Collateral Pledged” below for information on encumbered and unencumbered loans and “Credit Risk Management” for information on the credit performance and risk profile of our loan portfolio.portfolio below under the section “Credit Risk—Loan Portfolio Credit Risk.” Also refer to “Note 4—Loans” for addition information on our loans to members.
Loan Loans—Retention Rate
Table 9 presentsLong-term fixed-rate loans accounted for 89% and 90%, respectively, of our loans to members of $28,883 million as of August 31, 2021 and $28,427 million as of May 31, 2021. Borrowers that select a summaryfixed rate on a loan advance under a long-term loan facility have the option of choosing a term on the advance between one year and the final maturity date of the optionsloan. At the expiration of a selected by borrowers for CFC’s long-term fixed-rate loans that repriced, in accordance with our standard loan repricing provisions, during the six months ended November 30, 2020 and fiscal year 2020. Atterm, or the repricing date, the borrower hasborrowers have the option ofof: (i) selecting CFC’s current long-term fixed rate for a term ranging from one year up 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 9 displays the retention rate of CFC’s long-term fixed-rate loans that repriced, in accordance with our standard loan repricing provisions, during the three months ended August 31, 2021 and in fiscal year 2021, and the repricing option selected by borrowers for loans retained by CFC.
Table 9: Historical Loans—Retention Rate and Repricing Selection(1)
| | | Six Months Ended | | Fiscal Year Ended | | Three Months Ended | | Fiscal Year Ended |
| | November 30, 2020 | | May 31, 2020 | | August 31, 2021 | | May 31, 2021 |
(Dollars in thousands) | (Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total | (Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total |
Borrower option selected at repricing: | | Borrower option selected at repricing: | | | | | | | | |
Loans retained: | Loans retained: | | | | | | | | | Loans retained: | | | | | | | | |
Long-term fixed rate selected | Long-term fixed rate selected | | $ | 198,024 | | | 97 | % | | $ | 441,165 | | | 95 | % | Long-term fixed rate selected | | $ | 104,583 | | | 96 | % | | $ | 383,939 | | | 97 | % |
Long-term variable rate selected | Long-term variable rate selected | | 4,761 | | | 2 | | | 11,446 | | | 3 | | Long-term variable rate selected | | — | | | — | | | 9,564 | | | 2 | |
Total loans retained by CFC | Total loans retained by CFC | | 202,785 | | | 99 | | | 452,611 | | | 98 | | Total loans retained by CFC | | 104,583 | | | 96 | | | 393,503 | | | 99 | |
Loans repaid | Loans repaid | | 1,508 | | | 1 | | | 10,350 | | | 2 | | Loans repaid | | 4,187 | | | 4 | | | 3,508 | | | 1 | |
Total | Total | | $ | 204,293 | | | 100 | % | | $ | 462,961 | | | 100 | % | Total | | $ | 108,770 | | | 100 | % | | $ | 397,011 | | | 100 | % |
____________________________
(1)Does not includeReflects repricing for CFC long-term fixed-rate loans only. Excludes NCSC and RTFC long-term fixed-rate loans.
As displayed in Table 9, of the loans that repriced during the six months ended November 30, 2020current quarter and during fiscal year 2020,2021, the substantial majority of borrowers selected a new long-term fixed or variable rate. The average annual retention rate, which is calculated based on the election made by the borrower at the repricing date, was 96% for CFC loans that repriced during each of the three fiscal year periodyears ended May 31, 2020.2021.
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, including our members, affiliates and the capital markets, 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 Outstanding
Table 10 displays the composition, by product type, of our outstanding debt as of November 30, 2020August 31, 2021 and May 31, 2020.2021. Table 10 also displays the composition of our debt based on several additional selected attributes.
Table 10: Total Debt Outstanding
| (Dollars in thousands) | (Dollars in thousands) | | November 30, 2020 | | May 31, 2020 | | Change | (Dollars in thousands) | | August 31, 2021 | | May 31, 2021 | | Change |
Debt product type: | Debt product type: | | | | | | | Debt product type: | | | | | | |
Commercial paper: | Commercial paper: | | Commercial paper: | |
Members, at par | Members, at par | | $ | 1,283,132 | | | $ | 1,318,566 | | | $ | (35,434) | | Members, at par | | $ | 1,135,587 | | | $ | 1,124,607 | | | $ | 10,980 | |
Dealer, net of discounts | Dealer, net of discounts | | 714,984 | | | — | | | 714,984 | | Dealer, net of discounts | | 1,009,967 | | | 894,977 | | | 114,990 | |
Total commercial paper | Total commercial paper | | 1,998,116 | | | 1,318,566 | | | 679,550 | | Total commercial paper | | 2,145,554 | | | 2,019,584 | | | 125,970 | |
Select notes to members | Select notes to members | | 1,750,514 | | | 1,597,959 | | | 152,555 | | Select notes to members | | 1,699,382 | | | 1,539,150 | | | 160,232 | |
Daily liquidity fund notes to members | Daily liquidity fund notes to members | | 495,124 | | | 508,618 | | | (13,494) | | Daily liquidity fund notes to members | | 449,266 | | | 460,556 | | | (11,290) | |
Securities sold under repurchase agreements | | Securities sold under repurchase agreements | | 225,435 | | | 200,115 | | | 25,320 | |
Medium-term notes: | Medium-term notes: | | Medium-term notes: | |
Members, at par | Members, at par | | 608,096 | | | 658,959 | | | (50,863) | | Members, at par | | 578,876 | | | 595,037 | | | (16,161) | |
Dealer, net of discounts | Dealer, net of discounts | | 2,968,567 | | | 3,068,793 | | | (100,226) | | Dealer, net of discounts | | 3,644,723 | | | 3,923,385 | | | (278,662) | |
Total medium-term notes | Total medium-term notes | | 3,576,663 | | | 3,727,752 | | | (151,089) | | Total medium-term notes | | 4,223,599 | | | 4,518,422 | | | (294,823) | |
Collateral trust bonds | Collateral trust bonds | | 6,837,349 | | | 7,188,553 | | | (351,204) | | Collateral trust bonds | | 7,196,122 | | | 7,191,944 | | | 4,178 | |
Guaranteed Underwriter Program notes payable | Guaranteed Underwriter Program notes payable | | 6,190,391 | | | 6,261,312 | | | (70,921) | | Guaranteed Underwriter Program notes payable | | 6,229,957 | | | 6,269,303 | | | (39,346) | |
Farmer Mac notes payable | Farmer Mac notes payable | | 2,898,957 | | | 3,059,637 | | | (160,680) | | Farmer Mac notes payable | | 3,359,744 | | | 2,977,909 | | | 381,835 | |
Other notes payable | Other notes payable | | 11,773 | | | 11,612 | | | 161 | | Other notes payable | | 8,249 | | | 8,236 | | | 13 | |
Subordinated deferrable debt | Subordinated deferrable debt | | 986,217 | | | 986,119 | | | 98 | | Subordinated deferrable debt | | 986,364 | | | 986,315 | | | 49 | |
Members’ subordinated certificates: | Members’ subordinated certificates: | | Members’ subordinated certificates: | |
Membership subordinated certificates | Membership subordinated certificates | | 628,589 | | | 630,483 | | | (1,894) | | Membership subordinated certificates | | 628,594 | | | 628,594 | | | — | |
Loan and guarantee subordinated certificates | Loan and guarantee subordinated certificates | | 405,115 | | | 482,965 | | | (77,850) | | Loan and guarantee subordinated certificates | | 386,142 | | | 386,896 | | | (754) | |
Member capital securities | Member capital securities | | 238,670 | | | 226,170 | | | 12,500 | | Member capital securities | | 239,170 | | | 239,170 | | | — | |
Total members’ subordinated certificates | Total members’ subordinated certificates | | 1,272,374 | | | 1,339,618 | | | (67,244) | | Total members’ subordinated certificates | | 1,253,906 | | | 1,254,660 | | | (754) | |
Total debt outstanding | Total debt outstanding | | $ | 26,017,478 | | | $ | 25,999,746 | | | $ | 17,732 | | Total debt outstanding | | $ | 27,777,578 | | | $ | 27,426,194 | | | $ | 351,384 | |
| Security type: | | |
Secured debt | | 61 | % | | 64 | % | | |
Unsecured debt | | 39 | | | 36 | | | |
Total | | 100 | % | | 100 | % | | |
| Funding source: | | |
Members | | 21 | % | | 21 | % | | |
Private placement: | | |
Guaranteed Underwriter Program notes payable | | 24 | | | 24 | | | |
Farmer Mac notes payable | | 11 | | | 12 | | | |
| Total private placement | | 35 | | | 36 | | | |
Capital markets | | 44 | | | 43 | | | |
Total | | 100 | % | | 100 | % | | |
| Interest rate type: | | |
Fixed-rate debt | | 74 | % | | 75 | % | | |
Variable-rate debt | | 26 | | | 25 | | | |
Total | | 100 | % | | 100 | % | | |
| Interest rate type, including the impact of swaps: | | |
Fixed-rate debt(1) | | 90 | % | | 90 | % | | |
Variable-rate debt(2) | | 10 | | | 10 | | | |
Total | | 100 | % | | 100 | % | | |
| Maturity classification:(3) | | |
Short-term borrowings | | 18 | % | | 15 | % | | |
Long-term and subordinated debt(4) | | 82 | | | 85 | | | |
Total | | 100 | % | | 100 | % | | |
| | | | | | | | | | | | | | | | | | | | |
Security type: | | | | | | |
Secured debt | | 61 | % | | 61 | % | | |
Unsecured debt | | 39 | | | 39 | | | |
Total | | 100 | % | | 100 | % | | |
| | | | | | |
Funding source: | | | | | | |
Members | | 18 | % | | 18 | % | | |
Private placement: | | | | | | |
Guaranteed Underwriter Program notes payable | | 23 | | | 23 | | | |
Farmer Mac notes payable | | 12 | | | 11 | | | |
| | | | | | |
Total private placement | | 35 | | | 34 | | | |
Capital markets | | 47 | | | 48 | | | |
Total | | 100 | % | | 100 | % | | |
| | | | | | |
Interest rate type: | | | | | | |
Fixed-rate debt | | 78 | % | | 77 | % | | |
Variable-rate debt | | 22 | | | 23 | | | |
Total | | 100 | % | | 100 | % | | |
| | | | | | |
Interest rate type, including the impact of swaps: | | | | | | |
Fixed-rate debt(1) | | 92 | % | | 93 | % | | |
Variable-rate debt(2) | | 8 | | | 7 | | | |
Total | | 100 | % | | 100 | % | | |
| | | | | | |
Maturity classification:(3) | | | | | | |
Short-term borrowings | | 19 | % | | 17 | % | | |
Long-term and subordinated debt(4) | | 81 | | | 83 | | | |
Total | | 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 our consolidated balance sheets. Maturity classification is based on the original contractual maturity as of the date of issuance of the debt.
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. TotalThe increase in debt outstanding was $26,017outstanding of $352 million, or 1%, to $27,778 million as of November 30, 2020, an increase of $17 million from MayAugust 31, 2020. In the fourth quarter of fiscal year 2020 we increased our cash position2021, was attributable to $671 million, as a precaution in case there were disruptions in the capital markets due to Covid-19 that would impact our ability to fund operations in fiscal year 2021. During the first six months of fiscal year 2021 there have not been disruptions in our ability to access the capital markets or in our issuance of debt to our members. As a result we have been able to use the $671 million of cash that was on hand as of May 31, 2020borrowings to fund the majority of our operations through November 30, 2020, at which date our cash balance had been reducedincrease in loans to $167 million. Debt activity during this period consisted of net increases in outstanding dealermembers. Dealer commercial paper outstanding of $715 million and member commercial paper, select notes and daily liquidity fund notes of $104 million, which together totaled $819 million. This increase was partially offset by net decreases in collateral trust bonds of $351 million, Farmer Mac notes payable of $161 million, medium-term notes of $151 million, borrowings under the Guaranteed Underwriter Program of $71 million and members’ subordinated certificates of $68 million, which together totaled $802 million. Outstanding dealer commercial paper, which totaled $715$1,010 million as of November 30, 2020,August 31, 2021 was below our targeted maximum threshold of $1,250 million.
Below is a summary of significant financing activities during the current quarter:
•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. The decreaseterminations reduced the total commitment amount under the three-year facility to $1,245 million and the five-year facility to $1,355 million, resulting in collateral trust bonds was attributable toan aggregate commitment amount under the redemption in June 2020two facilities of $400$2,600 million.
•On August 18, 2021, we borrowed $500 million, outstanding principal amount of our 2.35% collateral trust bonds due June 15, 2020 and in October 2020 of $350 million outstanding principal amount of our 2.30% collateral trust bonds due November 1, 2020. These decreases were offset by the issuancewhich matures on October 8, 202020, 2021, under the revolving note purchase agreement with Farmer Mac.
•On August 27, 2021, we obtained short-term funding of $400$225 million under a repurchase transaction collateralized by investment-grade corporate debt securities in our investment securities portfolio. We repurchased the securities, which were classified as trading and had an aggregate principal amountfair value of 1.35% sustainability collateral trust bonds due March 15, 2031.$236 million as of August 31, 2021, on September 3, 2021.
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.
Member Investments
Debt securities issued to our members represent an important, stable source of funding. Table 11 displays outstanding member debt outstanding, by product type, as of November 30, 2020August 31, 2021 and May 31, 2020.2021.
Table 11: Member Investments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | November 30, 2020 | | May 31, 2020 | | Change |
(Dollars in thousands) | | Amount | | % of Total (1) | | Amount | | % of Total (1) | |
Member investments: | | | | | | | | | | |
Commercial paper | | $ | 1,283,132 | | 64 | % | | $ | 1,318,566 | | 100 | % | | $ | (35,434) | |
Select notes | | 1,750,514 | | 100 | | | 1,597,959 | | 100 | | | 152,555 | |
Daily liquidity fund notes | | 495,124 | | 100 | | | 508,618 | | 100 | | | (13,494) | |
Medium-term notes | | 608,096 | | 17 | | | 658,959 | | 18 | | | (50,863) | |
Members’ subordinated certificates | | 1,272,374 | | 100 | | | 1,339,618 | | 100 | | | (67,244) | |
Total member investments | | $ | 5,409,240 | | | | $ | 5,423,720 | | | | $ | (14,480) | |
| | | | | | | | | | |
Percentage of total debt outstanding | | 21 | % | | | | 21 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2021 | | May 31, 2021 | | Change |
(Dollars in thousands) | | Amount | | % of Total (1) | | Amount | | % of Total (1) | |
Member investment product type: | | | | | | | | | | |
Commercial paper | | $ | 1,135,587 | | 53 | % | | $ | 1,124,607 | | 56 | % | | $ | 10,980 | |
Select notes | | 1,699,382 | | 100 | | | 1,539,150 | | 100 | | | 160,232 | |
Daily liquidity fund notes | | 449,266 | | 100 | | | 460,556 | | 100 | | | (11,290) | |
Medium-term notes | | 578,876 | | 14 | | | 595,037 | | 13 | | | (16,161) | |
Members’ subordinated certificates | | 1,253,906 | | 100 | | | 1,254,660 | | 100 | | | (754) | |
Total member investments | | $ | 5,117,017 | | | | $ | 4,974,010 | | | | $ | 143,007 | |
| | | | | | | | | | |
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 $5,409 million and accounted for 21%18% of total debt outstanding as of November 30, 2020, compared with $5,424 million, or 21% of total debt outstanding as ofboth August 31, 2021 and May 31, 2020.2021. Over the last twelve fiscal quarters, debt issued to members has averaged $4,857 millionour outstanding member investments as of the end of each quarter end.has averaged $5,035 million.
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 $4,688$5,378 million and accounted for 18%19% of total debt outstanding as of November 30, 2020,August 31, 2021, compared with $3,962$4,582 million or 15%,and 17% of total debt outstanding as of May 31, 2020. 2021.
See “Liquidity Risk” below and for “Note 6—Short-Term Borrowings” for information on the composition of our short-term borrowings.
Long-Term and Subordinated Debt
Long-term debt, defined as debt with an original contractual maturity term of greater than one year, primarily consists of medium-term notes, collateral trust bonds, notes payable under the Guaranteed Underwriter Program and notes payable under our note purchase agreement with Farmer Mac. Subordinated debt consists of subordinated deferrable debt and members’ subordinated certificates. Our subordinated deferrable debt and members’ subordinated certificates have original contractual maturity terms of greater than one year.
Long-term and subordinated debt together totaled $21,329of $22,399 million and $22,844 million as of August 31, 2021 and May 31, 2021, respectively, accounted for 82%81% and 83% of total debt outstanding as of November 30, 2020, compared with $22,038 million, or 85% of total debt outstanding as of May 31, 2020. 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.”
Collateral Pledged
We are required to pledge loans or other collateral in transactions under our collateral trust bond indentures, note purchase agreements with Farmer Mac and bond agreements under the Guaranteed Underwriter Program. We are required to maintain pledged collateral equal to at least 100% of the face amount of outstanding borrowings. However, as discussed below, we typically maintain pledged collateral in excess of the required percentage. Under the provisions of our committed bank revolving line of credit agreements, the excess collateral that we are allowed to pledge cannot exceed 150% of the outstanding borrowings under our collateral trust bond indentures, Farmer Mac note purchase agreements or the Guaranteed Underwriter Program. In certain cases, provided that all conditions of eligibility under the different programs are satisfied, we may withdraw excess pledged collateral or transfer collateral from one borrowing program to another to facilitate a new debt issuance.Equity
Table 12 displays the collateral coverage ratios as of November 30, 2020 and May 31, 2020 for the debt agreements noted above that require us to pledge collateral.
Table 12: Collateral Pledged | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Requirement Coverage Ratios | | |
| | Minimum Debt Indentures | | Maximum Committed Bank Revolving Line of Credit Agreements | | Actual Coverage Ratios(1) |
Debt Agreement | | | | November 30, 2020 | | May 31, 2020 |
Collateral trust bonds 1994 indenture | | 100 | % | | 150 | % | | 128 | % | | 114 | % |
Collateral trust bonds 2007 indenture | | 100 | | | 150 | | | 115 | | | 113 | |
Guaranteed Underwriter Program notes payable | | 100 | | | 150 | | | 118 | | | 120 | |
Farmer Mac notes payable | | 100 | | | 150 | | | 110 | | | 121 | |
Clean Renewable Energy Bonds Series 2009A | | 100 | | | 150 | | | 104 | | | 120 | |
____________________________
(1) Calculated based on the amount of collateral pledged divided by the face amount of outstanding secured debt.
Of our total debt outstanding of $26,017 million as of November 30, 2020, $15,933 million, or 61%, was secured by pledged loans totaling $18,695 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. Total debt outstanding is presented on our consolidated balance sheets net of unamortized discounts and issuance costs; however, our collateral pledging requirements are based on the face amount of secured outstanding debt, which excludes net unamortized discounts and issuance costs.
Table 13 displays the unpaid principal balance of loans pledged for secured debt, the excess collateral pledged and unencumbered loans as of November 30, 2020 and May 31, 2020.
Table 13: Unencumbered Loans
| | | | | | | | | | | | | | |
(Dollars in thousands) | | November 30, 2020 | | May 31, 2020 |
Total loans outstanding(1) | | $ | 27,051,163 | | | 26,690,854 | |
Less: Loans required to be pledged for secured debt (2) | | (16,198,127) | | | (16,784,728) | |
Loans pledged in excess of requirement (2)(3) | | (2,496,593) | | | (2,858,238) | |
Total pledged loans | | (18,694,720) | | | (19,642,966) | |
Unencumbered loans | | $ | 8,356,443 | | | $ | 7,047,888 | |
Unencumbered loans as a percentage of total loans outstanding | | 31 | % | | 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 November 30, 2020 and May 31, 2020, respectively.
(2) Reflects unpaid principal balance of pledged loans.
(3) Excludes cash collateral pledged to secure debt. If there is an event of default under most of our indentures, we can only withdraw the excess collateral if we substitute cash or permitted investments of equal value.
As displayed above in Table 13, we had excess loans pledged as collateral totaling $2,497 million and $2,858 million as of November 30, 2020 and May 31, 2020, respectively. We typically pledge loans in excess of the required amount for the following reasons: (i) our distribution and power supply loans are typically amortizing loans that require scheduled principal payments over the life of the loan, whereas the debt securities issued under secured indentures and agreements typically have bullet maturities; (ii) distribution and power supply borrowers have the option to prepay their loans; and (iii) individual loans may become ineligible for various reasons, some of which may be temporary.
We provide additional information on our borrowings, including the maturity profile, below in “Liquidity Risk.” Also refer to “Note 5—Short-Term Borrowings,” “Note 7—Long-Term Debt,” “Note 8—Subordinated Deferrable Debt” and “Note 9—Members’ Subordinated Certificates” in our 2020 Form 10-K for a more detailed description of each of our debt product types. See “Note 4—Loans—Pledging of Loans” in this Report for additional information related to pledged collateral.
Equity
Table 14 presents the components of total CFC equity and total equity as of November 30, 2020August 31, 2021 and May 31, 2020.2021.
Table 14:12: Equity
| (Dollars in thousands) | (Dollars in thousands) | | November 30, 2020 | | May 31, 2020 | | Change | (Dollars in thousands) | | August 31, 2021 | | May 31, 2021 |
Equity components: | Equity components: | | | | | | | Equity components: | | | | |
Membership fees and educational fund: | Membership fees and educational fund: | | Membership fees and educational fund: | |
Membership fees | Membership fees | | $ | 968 | | | $ | 969 | | | $ | (1) | | Membership fees | | $ | 968 | | | $ | 968 | |
Educational fund | Educational fund | | 1,583 | | | 2,224 | | | (641) | | Educational fund | | 1,788 | | | 2,157 | |
Total membership fees and educational fund | Total membership fees and educational fund | | 2,551 | | | 3,193 | | | (642) | | Total membership fees and educational fund | | 2,756 | | | 3,125 | |
Patronage capital allocated | Patronage capital allocated | | 834,209 | | | 894,066 | | | (59,857) | | Patronage capital allocated | | 866,405 | | | 923,970 | |
Members’ capital reserve | Members’ capital reserve | | 807,320 | | | 807,320 | | | — | | Members’ capital reserve | | 909,749 | | | 909,749 | |
Total allocated equity | Total allocated equity | | 1,644,080 | | | 1,704,579 | | | (60,499) | | Total allocated equity | | 1,778,910 | | | 1,836,844 | |
Unallocated net income (loss): | Unallocated net income (loss): | | Unallocated net income (loss): | |
Prior fiscal year-end cumulative derivative forward value losses(1) | Prior fiscal year-end cumulative derivative forward value losses(1) | | (1,079,739) | | | (348,965) | | | (730,774) | | Prior fiscal year-end cumulative derivative forward value losses(1) | | (461,162) | | | (1,079,739) | |
Year-to-date derivative forward value gains (losses) (1) | Year-to-date derivative forward value gains (losses) (1) | | 197,132 | | | (730,774) | | | 927,906 | | Year-to-date derivative forward value gains (losses) (1) | | (144,464) | | | 618,577 | |
Period-end cumulative derivative forward value losses(1) | Period-end cumulative derivative forward value losses(1) | | (882,607) | | | (1,079,739) | | | 197,132 | | Period-end cumulative derivative forward value losses(1) | | (605,626) | | | (461,162) | |
Other unallocated net income | | 106,591 | | | 3,191 | | | 103,400 | | |
Other unallocated net income (loss) | | Other unallocated net income (loss) | | 53,861 | | | (709) | |
Unallocated net loss | Unallocated net loss | | (776,016) | | | (1,076,548) | | | 300,532 | | Unallocated net loss | | (551,765) | | | (461,871) | |
CFC retained equity | CFC retained equity | | 868,064 | | | 628,031 | | | 240,033 | | CFC retained equity | | 1,227,145 | | | 1,374,973 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (1,746) | | | (1,910) | | | 164 | | Accumulated other comprehensive loss | | 365 | | | (25) | |
Total CFC equity | Total CFC equity | | 866,318 | | | 626,121 | | | 240,197 | | Total CFC equity | | 1,227,510 | | | 1,374,948 | |
Noncontrolling interests | Noncontrolling interests | | 25,401 | | | 22,701 | | | 2,700 | | Noncontrolling interests | | 26,710 | | | 24,931 | |
Total equity | Total equity | | $ | 891,719 | | | $ | 648,822 | | | $ | 242,897 | | Total equity | | $ | 1,254,220 | | | $ | 1,399,879 | |
|
____________________________(1)Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the variable interest entities NCSC and RTFC, which we are required to consolidate. We present the consolidated total derivative forward value gains (losses) in Table 3629 in the “Non-GAAP Financial Measures” section below. Also, see “Note 14—Business Segments” for the statements of operations for CFC.
The decrease in total equity increased $243of $146 million to $892$1,254 million as of November 30, 2020,August 31, 2021 was attributable to our reported net incomeloss of $305$90 million for the six months ended November 30, 2020, which was partially offset bycurrent quarter and the authorized patronage capital retirement of patronage capital of $60$58 million authorized by the CFC Board of Directors in July 20202021.
Allocation and paidRetirement of Patronage Capital
We are subject to membersDistrict of Columbia regulations governing cooperatives, under which CFC is required to make annual allocations of net earnings, if any, in September 2020, and a decrease to retained earnings of $4 million fromaccordance with the cumulative-effect adjustment recorded at adoptionprovisions of the CECL accounting standard on June 1, 2020.District of Columbia cooperative regulations. We describe the allocation requirements under “Item 7. MD&A—Consolidated Balance Sheet Analysis—Equity—Allocation and Retirement of Patronage Capital” in our 2021 Form 10-K.
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 2020,2021, the CFC Board of Directors authorized the allocation of fiscal year 20202021 adjusted net income as follows: $96$90 million to members in the form of patronage capital; $48capital and $102 million to the members’ capital reserve; and $1 million to the cooperative educational fund.reserve. The amount of patronage capital allocated each year by CFC’s Board of Directors 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 July 2020,2021, the CFC Board of Directors also authorized the retirement of patronage capital totaling $60$58 million, consisting of $48which $45 million which represented 50% of the patronage capital allocation for fiscal year 2020,2021, and $12$13 million which represented the portion of the allocation from fiscal year 19941996 net earnings that has been held for 25 years pursuant to the CFC Board of DirectorsDirectors’ policy. This amount was returned to members in cash in September 2020.2021. The remaining portion of the amount allocatedpatronage capital allocation for fiscal year 20202021 will be retained by CFC for 25 years under currentpursuant 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” of our 2020 Form 10-K for additional information.
| | |
OFF-BALANCE SHEET ARRANGEMENTS |
In the ordinary course of business, we engage in financial transactions that are not presented on our 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 guarantees of member obligations and unadvanced loan commitments intended to meet the financial needs of our members.
Guarantees
We provide guarantees for certain contractual obligations of our members to assist them in obtaining various forms of financing. We use the same credit policies and monitoring procedures in providing guarantees as we do for loans and commitments. If a member defaults on its obligation, we are obligated to pay required amounts pursuant to our guarantees. Meeting our guarantee obligations satisfies the underlying obligation of our member systems and prevents the exercise of remedies by the guarantee beneficiary based upon a payment default by a member. In general, the member is required to repay any amount advanced by us with accrued interest, pursuant to the documents evidencing the member’s reimbursement obligation. Table 15 displays the notional amount of our outstanding guarantee obligations, by guarantee type and by company, as of November 30, 2020 and May 31, 2020.
Table 15: Guarantees Outstanding
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | November 30, 2020 | | May 31, 2020 | | Change |
Guarantee type: | | | | | | |
Long-term tax-exempt bonds(1) | | $ | 166,175 | | | $ | 263,875 | | | $ | (97,700) | |
Letters of credit(2) | | 366,552 | | | 413,839 | | | (47,287) | |
Other guarantees | | 144,131 | | | 143,072 | | | 1,059 | |
Total | | $ | 676,858 | | | $ | 820,786 | | | $ | (143,928) | |
| | | | | | |
Company: | | | | | | |
CFC(3) | | $ | 663,905 | | | $ | 810,787 | | | $ | (146,882) | |
NCSC | | 12,953 | | | 9,999 | | | 2,954 | |
| | | | | | |
Total | | $ | 676,858 | | | $ | 820,786 | | | $ | (143,928) | |
____________________________
(1) Represents the outstanding principal amount of long-term fixed-rate and variable-rate guaranteed bonds.
(2)Reflects our maximum potential exposure for letters of credit.
(3)Includes CFC guarantees to NCSC and RTFC members totaling $3 million as of both November 30, 2020 and May 31, 2020.
Of the total notional amount of our outstanding guarantee obligations of $677 million and $821 million as of November 30, 2020 and May 31, 2020, respectively, 44% and 48%, respectively, were secured by a mortgage lien on substantially all of the assets and future revenue of our member cooperatives for which we provide guarantees.
In addition to providing a guarantee on long-term tax-exempt bonds issued by member cooperatives totaling $166 million as of November 30, 2020, we also were the liquidity provider on $146 million of those tax-exempt bonds. As liquidity provider, we may be required to purchase bonds that are tendered or put by investors. Investors provide notice to the remarketing agent that they will tender or put a certain amount of bonds at the next interest rate reset date. If the remarketing agent is unable to sell such bonds to other investors by the next interest rate reset date, we have unconditionally agreed to purchase such bonds. We were not required to perform as liquidity provider pursuant to these obligations during the six months ended November 30, 2020 or fiscal year 2020.
We had outstanding letters of credit for the benefit of our members totaling $367 million as of November 30, 2020. These letters of credit relate to obligations for which we may be required to advance funds based on various trigger events specified in the letter of credit agreements. If we are required to advance funds, the member is obligated to repay the advance amount and accrued interest to us. In addition to these letters of credit, we had master letter of credit facilities in place as of November 30, 2020, under which we may be required to issue letters of credit to third parties for the benefit of our members up to an additional $63 million as of November 30, 2020. All of these master letter of credit facilities were subject to material adverse change clauses at the time of issuance. Prior to issuing a letter of credit under these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and that the borrower is currently in compliance with the letter of credit terms and conditions.
Table 16 presents the maturities of the outstanding notional amount of guarantee obligations of $677 million as of November 30, 2020, in each fiscal year during the five-year period ended May 31, 2025, and thereafter.
Table 16: Maturities of Guarantee Obligations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Outstanding Notional Amount | | Maturities of Guarantee Obligations |
(Dollars in thousands) | | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter |
Guarantees | | $ | 676,858 | | | $ | 76,720 | | | $ | 136,616 | | | $ | 157,228 | | | $ | 35,065 | | | $ | 86,965 | | | $ | 184,264 | |
We recorded a guarantee liability of $11 million as of both November 30, 2020 and May 31, 2020, for our guarantee and liquidity obligations associated with our members’ debt. We provide additional information about our guarantee obligations in “Note 11—Guarantees.”
Unadvanced Loan Commitments
Unadvanced loan commitments represent approved and executed loan contracts for which funds have not been advanced to borrowers. Our line of credit commitments include both contracts that are subject to material adverse change clauses and contracts that are not subject to material adverse change clauses, while our long-term loan commitments are typically subject to material adverse change clauses.
Table 17 displays the amount of unadvanced loan commitments, which consist of line of credit and long-term loan commitments, as of November 30, 2020 and May 31, 2020.
Table 17: Unadvanced Loan Commitments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | November 30, 2020 | | May 31, 2020 | | |
(Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total | | Change |
Line of credit commitments: | | | | | | | | | | |
Conditional(1) | | $ | 5,202,623 | | | 38 | % | | $ | 5,072,921 | | | 38 | % | | $ | 129,702 | |
Unconditional(2) | | 3,293,664 | | | 23 | | | 2,857,029 | | | 21 | | | 436,635 | |
Total line of credit unadvanced commitments | | 8,496,287 | | | 61 | | | 7,929,950 | | | 59 | | | 566,337 | |
Total long-term loan unadvanced commitments(1) | | 5,530,685 | | | 39 | | | 5,458,676 | | | 41 | | | 72,009 | |
Total unadvanced loan commitments | | $ | 14,026,972 | | | 100 | % | | $ | 13,388,626 | | | 100 | % | | $ | 638,346 | |
____________________________
(1)Represents amount related to facilities that are subject to material adverse change clauses.
(2)Represents amount related to facilities that are not subject to material adverse change clauses.
Table 18 presents the maturities, by loan type, of our total unadvanced loan commitments of $14,027 million as of November 30, 2020, in each fiscal year during the five-year period ending May 31, 2025, and thereafter.
Table 18: Unadvanced Loan Commitments Maturities of Notional Amount
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Available Balance | | Notional Maturities of Unadvanced Loan Commitments by Fiscal Year |
(Dollars in thousands) | | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter |
Line of credit loans | | $ | 8,496,287 | | | $ | 296,977 | | | $ | 4,083,654 | | | $ | 1,537,725 | | | $ | 1,198,500 | | | $ | 1,110,540 | | | $ | 268,891 | |
Long-term loans | | 5,530,685 | | | 178,500 | | | 1,201,541 | | | 857,275 | | | 1,624,659 | | | 1,026,988 | | | 641,722 | |
Total | | $ | 14,026,972 | | | $ | 475,477 | | | $ | 5,285,195 | | | $ | 2,395,000 | | | $ | 2,823,159 | | | $ | 2,137,528 | | | $ | 910,613 | |
Unadvanced line of credit commitments and unadvanced long-term loan commitments accounted for 61% and 39%, respectively, of total unadvanced loan commitments as of November 30, 2020. Unadvanced line of credit commitments are typically revolving facilities for periods not to exceed five years and generally serve as supplemental back-up liquidity to our borrowers. Historically, borrowers have not drawn the full commitment amount for line of credit facilities, and we have experienced a very low utilization rate on line of credit loan facilities regardless of whether or not we are obligated to fund the facility if a material adverse change exists. Our unadvanced long-term loan commitments generally have a five-year draw period under which a borrower may advance funds prior to the expiration of the commitment. We expect that the majority of the long-term unadvanced loan commitments of $5,531 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 $14,027 million as of November 30, 2020 is not necessarily representative of our future funding requirements.
Unadvanced Loan Commitments—Conditional
The 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 $10,733 million and $10,532 million as of November 30, 2020 and May 31, 2020, respectively, and accounted for 77% and 79%, respectively, of the combined total of unadvanced line of credit and long-term loan commitments as of each respective date. Prior to making advances on these facilities, we confirm that there has been no material adverse change in the borrower’s business or condition, financial or otherwise, since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. In some cases, the borrower’s access to the full amount of the facility is further constrained by use of proceeds restrictions, imposition of borrower-specific restrictions, or by additional conditions that must be met prior to advancing funds. Since we generally do not charge a fee for the borrower to have an unadvanced amount on a loan facility that is subject to a material adverse change clause, our borrowers tend to request amounts in excess of their immediate estimated loan requirements.
Unadvanced Loan Commitments—Unconditional
Unadvanced loan commitments not subject to material adverse change clauses at the time of each advance consisted of unadvanced committed lines of credit totaling $3,294 million and $2,857 million as of November 30, 2020 and May 31, 2020, respectively. For contracts not subject to a material adverse change clause, we are generally required to advance amounts on the committed facilities as long as the borrower is in compliance with the terms and conditions of the facility.
Syndicated loan facilities, where the pricing is set at a spread over a market index rate as agreed upon by all of the participating financial institutions based on market conditions at the time of syndication, accounted for 91% of unconditional line of credit commitments as of November 30, 2020. The remaining 9% represented unconditional committed line of credit loans, for which any new advance would be made at rates determined by us.
Table 19 presents the maturities of our unadvanced committed lines of credit not subject to a material adverse clause of $3,294 million as of November 30, 2020, in each fiscal year during the five-year period ending May 31, 2025, and thereafter.
Table 19: Unconditional Committed Lines of Credit Maturities of Notional Amount
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Available Balance | | Notional Maturities of Unconditional Committed Lines of Credit by Fiscal Year |
(Dollars in thousands) | | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter |
Committed lines of credit | | $ | 3,293,664 | | | $ | 70,370 | | | $ | 158,768 | | | $ | 1,225,069 | | | $ | 791,085 | | | $ | 948,372 | | | $ | 100,000 | |
See “MD&A—Off-Balance Sheet Arrangements” in our 2020 Form 10-K for additional information on our off-balance sheet arrangements.
Overview
We face a variety of risks that can significantly affect our financial performance, liquidity, reputation and ability to meet the expectations of our members, investors and other stakeholders. As a financial services company, the major categories of risk exposures inherent in our business activities include credit risk, liquidity risk, market risk and operational risk. These risk categories are summarized below.
•Credit riskis 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 cybersecurity risk, 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.
We provide information ona discussion of our risk management framework in our 20202021 Form 10-K under “Item 7. MD&A—Risk Management—Risk Management Framework.”Management” and describe how we manage these risks under each respective MD&A section in our 2021 Form 10-K.
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. Our primary credit exposure is to rural electric cooperatives that provide essential electric services to end-users, the majority of which are residential customers. We also have a limited portfolio of loans to not-for-profitrisk and for-profit telecommunication companies. We provide a discussion of our credit-risk management framework and activities undertaken to manage credit risk in our 2020 Form 10-K under “Item 7. MD&A—Credit Risk—Credit Risk Management.”purchasing investment securities.
Loan Portfolio Credit Risk
As a tax-exempt, member-owned finance cooperative, CFC’s principal focusOur primary credit exposure is loans to provide funding to its rural electric utility cooperative memberscooperatives, which provide essential electric services to assist them in acquiring, constructingend-users, the majority of which are residential customers. We also have a limited portfolio of loans to not-for-profit and operating electric distribution systems, power supply systems and related facilities.for-profit telecommunication companies. Loans outstandingoutstanding to electric utility organizations of $26,620totaled $28,440 million and $26,306$27,995 million as of November 30, 2020August 31, 2021 and May 31, 2020,2021, respectively, accounted for 98% andrepresenting 99% of our total loans outstanding as of each respective date. The remaining loans outstanding in our loan portfolio were to RTFC members, affiliates and associates in the telecommunications industry.industry sector. The substantial majority of loans to our borrowers are long-term fixed-rate loans with terms of up to 35 years. Long-term fixed-rate loans accounted for 89% and 90% of total loans outstanding as of August 31, 2021 and May 31, 2021, respectively.
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 credit concentration risksrisk 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 providingproviding line of credit loans, we generally lend to our members on a senior secured basis. Long-term loans are generally secured on parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower with exceptions typical in utility mortgages. Line of credit loans are generally unsecured. In addition to the collateral pledged to secure our loans, distribution and power supply borrowers also are required to set rates charged to customers to achieve certain specified financial ratios.
Table 2013 presents, by loan type and by company, the amount and percentage of secured and unsecured loans in our loan portfolio as of November 30, 2020August 31, 2021 and May 31, 2020.2021. Of our total loans outstanding, 94%93% were secured as of both November 30, 2020August 31, 2021 and May 31, 2020.2021.
Table 20:13: Loan Portfolio Security Profile
| | | November 30, 2020 | | August 31, 2021 |
(Dollars in thousands) | (Dollars in thousands) | | Secured | | % of Total | | Unsecured | | % of Total | | Total | (Dollars in thousands) | | Secured | | % of Total | | Unsecured | | % of Total | | Total |
Member class: | | Member class: | | | | | | | | | | |
CFC: | | CFC: | |
Distribution | | Distribution | | $ | 21,137,293 | | | 94 | % | | $ | 1,273,639 | | | 6 | % | | $ | 22,410,932 | |
Power supply | | Power supply | | 4,550,922 | | | 87 | | | 670,159 | | 13 | | | 5,221,081 | |
Statewide and associate | | Statewide and associate | | 88,485 | | | 87 | | | 12,927 | | 13 | | | 101,412 | |
Total CFC | | Total CFC | | 25,776,700 | | | 93 | | | 1,956,725 | | | 7 | | | $ | 27,733,425 | |
NCSC | | NCSC | | 679,168 | | | 96 | | | 26,723 | | | 4 | | | 705,891 | |
RTFC | | RTFC | | 412,588 | | | 96 | | | 18,854 | | | 4 | | | 431,442 | |
Total loans outstanding(1) | | Total loans outstanding(1) | | $ | 26,868,456 | | | 93 | | | $ | 2,002,302 | | | 7 | | | $ | 28,870,758 | |
| Loan type: | Loan type: | | | | | | | | | | | Loan type: | |
Long-term loans: | Long-term loans: | | Long-term loans: | |
Long-term fixed-rate loans | | $ | 24,720,033 | | | 99 | % | | $ | 260,683 | | | 1 | % | | $ | 24,980,716 | | |
Long-term variable-rate loans | | 635,766 | | | 99 | | | 3,378 | | | 1 | | | 639,144 | | |
| Fixed rate | | Fixed rate | | $ | 25,427,575 | | | 99 | % | | $ | 220,803 | | | 1 | % | | $ | 25,648,378 | |
Variable rate | | Variable rate | | 880,399 | | | 100 | | | 2,741 | | | — | | | 883,140 | |
Total long-term loans | Total long-term loans | | 25,355,799 | | | 99 | | | 264,061 | | | 1 | | | 25,619,860 | | Total long-term loans | | 26,307,974 | | | 99 | | | 223,544 | | | 1 | | | 26,531,518 | |
Line of credit loans | Line of credit loans | | 200,540 | | | 14 | | | 1,230,763 | | | 86 | | | 1,431,303 | | Line of credit loans | | 560,482 | | | 24 | | | 1,778,758 | | | 76 | | | 2,339,240 | |
Total loans outstanding(1) | Total loans outstanding(1) | | $ | 25,556,339 | | | 94 | | | $ | 1,494,824 | | | 6 | | | $ | 27,051,163 | | Total loans outstanding(1) | | $ | 26,868,456 | | | 93 | | | $ | 2,002,302 | | | 7 | | | $ | 28,870,758 | |
| Company: | | | | | | | | | | |
CFC | | $ | 24,484,975 | | | 94 | % | | $ | 1,429,809 | | | 6 | % | | $ | 25,914,784 | | |
NCSC | | 671,525 | | | 95 | | | 33,193 | | | 5 | | | 704,718 | | |
RTFC | | 399,839 | | | 93 | | | 31,822 | | | 7 | | | 431,661 | | |
Total loans outstanding(1) | | $ | 25,556,339 | | | 94 | | | $ | 1,494,824 | | | 6 | | | $ | 27,051,163 | | |
| | | May 31, 2020 | | May 31, 2021 |
(Dollars in thousands) | (Dollars in thousands) | | Secured | | % of Total | | Unsecured | | % of Total | | Total | (Dollars in thousands) | | Secured | | % of Total | | Unsecured | | % of Total | | Total |
Member class: | | Member class: | | | | | | | | | | |
CFC: | | CFC: | |
Distribution | | Distribution | | $ | 20,702,657 | | | 94 | % | | $ | 1,324,766 | | | 6 | % | | $ | 22,027,423 | |
Power supply | | Power supply | | 4,458,311 | | | 86 | | | 696,001 | | 14 | | | 5,154,312 | |
Statewide and associate | | Statewide and associate | | 88,004 | | | 83 | | | 18,117 | | | 17 | | | 106,121 | |
Total CFC | | Total CFC | | $ | 25,248,972 | | | 93 | | | 2,038,884 | | | 7 | | | 27,287,856 | |
NCSC | | NCSC | | 662,782 | | | 94 | | | 44,086 | | | 6 | | | 706,868 | |
RTFC | | RTFC | | 399,717 | | | 95 | | | 20,666 | | | 5 | | | 420,383 | |
Total loans outstanding(1) | | Total loans outstanding(1) | | $ | 26,311,471 | | | 93 | | | $ | 2,103,636 | | | 7 | | | $ | 28,415,107 | |
| Loan type: | Loan type: | | | | | | | | | | | Loan type: | |
Long-term loans: | Long-term loans: | | 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 | | |
Fixed rate | | Fixed rate | | $ | 25,278,805 | | | 99 | % | | $ | 235,961 | | | 1 | % | | $ | 25,514,766 | |
Variable rate | | Variable rate | | 655,675 | | | 100 | | | 2,904 | | | — | | | 658,579 | |
| Total long-term loans | Total long-term loans | | 24,787,337 | | | 99 | | | 340,370 | | | 1 | | | 25,127,707 | | Total long-term loans | | 25,934,480 | | | 99 | | | 238,865 | | | 1 | | | 26,173,345 | |
Line of credit loans | Line of credit loans | | 191,268 | | | 12 | | | 1,371,879 | | | 88 | | | 1,563,147 | | Line of credit loans | | 376,991 | | | 17 | | | 1,864,771 | | | 83 | | | 2,241,762 | |
Total loans outstanding(1) | Total loans outstanding(1) | | $ | 24,978,605 | | | 94 | | | $ | 1,712,249 | | | 6 | | | $ | 26,690,854 | | Total loans outstanding(1) | | $ | 26,311,471 | | | 93 | | | $ | 2,103,636 | | | 7 | | | $ | 28,415,107 | |
| 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 November 30, 2020both August 31, 2021 and May 31, 2020, respectively.2021.
Credit Concentration
Concentrations of credit may exist when there are amounts loaneda lender has large credit exposures to single borrowers, large credit exposures to borrowers in the same industry sector or engaged in similar activities or large credit exposures to borrowers in a geographic areasregion that would cause themthe borrowers to be similarly impacted by economic or other conditions or when there are large exposures to single borrowers.in the region. As discussed above under “Credit Risk—Loan Portfolio Credit Risk,” because we lend primarily to our rural electric utility cooperative
members, our loan portfolio is inherently subject to single-industry and single-obligor credit concentration risk, and loans outstanding to electric utility organizations represented approximately 98% and 99% of our total loans outstanding loan portfolioof $28,440 million as of November 30, 2020August 31, 2021 and $27,995 million as of May 31, 2020, respectively.
Geographic Concentration
Although our organizational structure and mission results in single-industry concentration, we serve a geographically diverse group of electric and telecommunications borrowers throughout the United States. The number of borrowers with
outstanding loans totaled 894 and 889 as of November 30, 2020 and May 31, 2020, respectively, located in 49 states. Texas accounted for the largest number of borrowers in any one state as of each respective date. In addition, Texas accounted for approximately 15% and 16% of total loans outstanding as of November 30, 2020 and May 31, 2020, respectively, representing the largest concentration of loans outstanding to borrowers in any one state.2021.
Single-Obligor Concentration
Table 2114 displays the outstanding loan exposure for our 20 largest borrowers, by company,member class, as of November 30, 2020August 31, 2021 and May 31, 2020. The2021. Our 20 largest borrowers consisted of 1210 distribution systems and eightand 10 power supply systems as of November 30, 2020. In comparison, the 20 largest borrowers consisted of 11 distribution systemsboth August 31, 2021 and nine power supply systems as of May 31, 2020.2021. The largest total exposure to a single borrower or controlled group represented less than 2% of total loans outstanding as of both November 30, 2020August 31, 2021 and May 31, 2020.2021.
Table 21:14: Loan Exposure to 20 Largest Borrowers
| | | | November 30, 2020 | | May 31, 2020 | | Change | | | August 31, 2021 | | May 31, 2021 | |
(Dollars in thousands) | (Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total | | (Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total | |
By company: | | | | | | | | | | | |
CFC | | $ | 5,600,647 | | | 20 | % | | $ | 5,661,540 | | | 21 | % | | $ | (60,893) | | |
Member class: | | Member class: | | | | | | | | | |
CFC: | | CFC: | | |
Distribution | | Distribution | | $ | 3,325,175 | | | 11 | % | | $ | 3,312,571 | | | 12 | % | |
Power supply | | Power supply | | 2,789,703 | | | 10 | | | 2,665,771 | | | 9 | | |
Total CFC | | Total CFC | | 6,114,878 | | | 21 | | | 5,978,342 | | | 21 | | |
NCSC | NCSC | | 207,516 | | | 1 | | | 215,595 | | | 1 | | | (8,079) | | NCSC | | 201,312 | | | 1 | | | 203,392 | | | 1 | | |
Total loan exposure to 20 largest borrowers | Total loan exposure to 20 largest borrowers | | 5,808,163 | | | 21 | | | 5,877,135 | | | 22 | | | (68,972) | | Total loan exposure to 20 largest borrowers | | 6,316,190 | | | 22 | | | 6,181,734 | | | 22 | | |
Less: Loans covered under Farmer Mac standby purchase commitment | Less: Loans covered under Farmer Mac standby purchase commitment | | (280,973) | | | (1) | | | (313,644) | | | (1) | | | 32,671 | | Less: Loans covered under Farmer Mac standby purchase commitment | | (303,630) | | | (1) | | | (308,580) | | | (1) | | |
Net loan exposure to 20 largest borrowers | Net loan exposure to 20 largest borrowers | | $ | 5,527,190 | | | 20 | % | | $ | 5,563,491 | | | 21 | % | | $ | (36,301) | | Net loan exposure to 20 largest borrowers | | $ | 6,012,560 | | | 21 | % | | $ | 5,873,154 | | | 21 | % | |
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 $535 $493 million and $569$512 million as of November 30, 2020August 31, 2021 and May 31, 2020,2021, respectively. Loan exposure to our 20 largest borrowers covered under the Farmer Mac agreement totaled $281$304 million and $314$309 million as of November 30, 2020August 31, 2021 and May 31, 2020, respectively.2021, respectively, which reduced our exposure to the 20 largest borrowers to 21% as of each respective date. No loans have been put to Farmer Mac for purchase pursuant to this agreement. Our credit exposure is also mitigated by long-term loans guaranteed by RUS. Guaranteed RUS, loanswhich totaled $143$137 million and $147$139 million as of November 30, 2020August 31, 2021 and May 31, 2020,2021, respectively.
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 896 and 892 as of August 31, 2021 and May 31, 2021, respectively, located in 49 states. Of the 896 borrowers with loans outstanding as of August 31, 2021, 50 were electric power supply borrowers. In comparison, of the 892 borrowers with loans outstanding as of May 31, 2021, 49 were electric power supply borrowers. Electric power supply borrowers generally require significantly more capital than electric distribution and telecommunications borrowers.
Texas, which had 68 and 67 borrowers with loans outstanding as of August 31, 2021 and May 31, 2021, respectively, accounted for the largest number of borrowers with loans outstanding in any one state as of each respective date, as well as the largest concentration of loan exposure in any one state. Loans outstanding to Texas-based electric utility organizations totaled $5,102 million and $4,878 million as of August 31, 2021 and May 31, 2021, respectively, and accounted for approximately 18% and 17% of total loans outstanding as of each respective date. Of the loans outstanding to Texas-based electric utility organizations, $170 million and $172 million as of August 31, 2021 and May 31, 2021, respectively, were covered by the Farmer Mac standby repurchase agreement, which slightly reduced our credit risk exposure to Texas-based
borrowers. Of the 50 electric power supply borrowers with loans outstanding as of August 31, 2021, eight were located in Texas.
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.
Despite the economic disruption caused by the COVID-19 pandemic, weWe believe the overall credit quality of our loan portfolio remained highstrong as of November 30, 2020, as evidenced byAugust 31, 2021. Although we experienced an increase in nonperforming and criticized loans in the third quarter of fiscal year 2021 due to the significant adverse financial impact that the elevated wholesale power costs during the February 2021 polar vortex had on Brazos and Rayburn, we continue to believe that our continued strong credit performance metrics. Werisk of loss from conditions during the February 2021 polar vortex is primarily limited to these two CFC Texas-based electric power supply borrowers. Because of its bankruptcy filing in March 2021, Brazos is not permitted to make scheduled loan payments without approval of the bankruptcy court. As such, we have not received scheduled loan payments from Brazos and its loans are delinquent. With the exception of Brazos, all of our borrowers have been making scheduled payments in accordance with the terms of their loan agreements and we had no other delinquent loans as of either November 30, 2020August 31, 2021 or May 31, 2020, and we have not experienced any loan defaults or charge-offs since fiscal year 2017. We had one loan to a CFC power supply borrower that we classified as nonperforming and placed on nonaccrual status in the fourth quarter of fiscal year 2020. The outstanding balance of this nonperforming loan, which remains on nonaccrual status, was $153 million and $168 million as of November 30, 2020 and May 31, 2020, respectively. We had no other loans classified as nonperforming or on nonaccrual status as of November 30, 2020 or May 31, 2020. We provide additional information on this loan below under “Nonperforming Loans” and “Allowance for Credit Losses.”2021.
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.
We didhave not havehad any loan modifications that were required to be accounted for as TDRs during the six months ended November 30, 2020, nor have we had any TDR loan modifications since fiscal year 2016. Table 22 presentsWe had TDR loans outstanding to two borrowers, a CFC electric distribution borrower and a RTFC telecommunications borrower, totaling $10 million as of both August 31, 2021 and May 31, 2021. Since the outstanding amountmodification date, the loans have been performing in accordance with the terms of modified loans accountedtheir respective restructured loan agreement for an extended period of time and were classified as TDRs in prior periodsperforming and the performanceon accrual status as of November 30, 2020August 31, 2021 and May 31, 2020. The outstanding TDR loans for CFC and RTFC each relate to the modification of a loan for one borrower that, at the time of the modification, was experiencing financial difficulty.
Table 22: Troubled Debt Restructured Loans
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | November 30, 2020 | | May 31, 2020 |
(Dollars in thousands) | | Number of Borrowers | | Outstanding Amount(1) | | % of Total Loans Outstanding | | Number of Borrowers | | Outstanding Amount(1) | | % of Total Loans Outstanding |
TDR loans: | | | | | | | | | | | | |
CFC | | 1 | | | $ | 5,379 | | | 0.02 | % | | 1 | | | $ | 5,755 | | | 0.02 | % |
| | | | | | | | | | | | |
RTFC | | 1 | | | 4,842 | | | 0.02 | | | 1 | | | 5,092 | | | 0.02 | |
Total TDR loans | | 2 | | | $ | 10,221 | | | 0.04 | % | | 2 | | | $ | 10,847 | | | 0.04 | % |
| | | | | | | | | | | | |
Performance status of TDR loans: | | | | | | | | | | | | |
Performing TDR loans | | 2 | | | $ | 10,221 | | | 0.04 | % | | 2 | | | 10,847 | | | 0.04 | % |
| | | | | | | | | | | | |
Total TDR loans | | 2 | | | $ | 10,221 | | | 0.04 | % | | 2 | | | $ | 10,847 | | | 0.04 | % |
____________________________
(1) Represents the unpaid principal balance net of charge-offs and recoveries as of the end of each period.
2021. We did not have any TDR loans classified as nonperforming as of either November 30, 2020August 31, 2021 or May 31, 2020.2021. 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, we evaluate TDR loans are evaluated on an individual basis in estimating lifetimemeasuring expected credit losses for these loans.
We provide additional information on TDR loans under the CECL model.“Note 4—Loans—Credit Quality Indicators—Troubled Debt Restructurings.”
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. DuringWe classify such loans as nonperforming at the fourth quarterearlier of fiscal year 2020,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 oneas 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.
We had loans to a CFC power supply borrower, with an outstanding balancefour borrowers, including Brazos, totaling $232 million as of $168August 31, 2021, and $237 million as of May 31, 2020,2021, classified as nonperforming placedas of each respective date. These nonperforming loans represented 0.80% and 0.84% of total loans outstanding as of August 31, 2021 and May 31, 2021, respectively. Each of the borrowers with loans outstanding classified as nonperforming, except Brazos, has continued to make scheduled loan on nonaccrual statuspayments. 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 established an asset-specific allowance for credit lossesits loans outstanding of $34$86 million and $85 million as of August 31, 2021 and May 31, 2020. Under the terms of the loan, which matures in December 2026, the amount the borrower is required to pay in 2024 and 2025 may vary as the payments are contingent on the borrower's financial performance in those years. Based on our review and assessment of the borrower’s most recent forecast and underlying assumptions provided to us in May 2020, we no longer believe that the future expected cash payments from the borrower through the maturity of the loan in December 2026 will be sufficient to repay the outstanding loan balance. We received payments from the borrower on this loan during the six months ended November 30, 2020, which reduced the outstanding balance to $153 million as of November 30, 2020. The asset-specific allowance for credit losses for this loan was $32 million as of November 30, 2020. Although the borrower is not in default and was current with respect to required payments on the loan as of November 30, 2020, we continue to report the loan as2021,
nonperforming. We had no other loans classified as nonperforming or on nonaccrual statusrespectively, were delinquent as of November 30, 2020each respective date. Prior to Brazos’ bankruptcy filing in March 2021, we had not experienced any defaults or May 31, 2020.charge-offs in our electric utility and telecommunications loan portfolios since fiscal years 2013 and 2017, respectively.
We provide additional information on nonperforming loans in “Note 4—Loans—Credit Quality Indicators—Nonperforming Loans.”
Net Charge-Offs
We had no loan defaults, charge-offs or recoveries during the six months ended November 30, 2020 and 2019. Wecurrent quarter, nor during the same prior-year quarter. Prior to Brazos’ bankruptcy filing in March 2021, we had not experienced our last charge-off, which was attributable to a borrower in our RTFC telecommunications loan portfolio, in fiscal year 2017. We now have experienced an extended period of seven consecutive fiscal years for which we have had noany defaults or charge-offs in our electric utility and telecommunications loan portfolio, which accounted for 98%portfolios since fiscal years 2013 and 99% of total loans outstanding as of November 30, 2020 and May 31, 2020,2017, respectively.
In its 51-year history, CFC has experienced only 16 defaults, of which 10 resulted in no loss and six resulted in cumulative historical net charge-offs of $86 million for our electric utility loan portfolio. Of this amount, $67 million was attributable to electric utility power supply cooperatives and $19 million was attributable to electric distribution cooperatives. We discuss the reasons loans to electric utility cooperatives, our principal lending market, typically have a relatively low risk of default above under “Credit Risk—Loan Portfolio Credit Risk.”
In comparison, since RTFC’s inception in 1987, we have experienced 15 defaults and cumulative net charge-offs attributable to telecommunication borrowers totaling $427 million, the most significant of which was a charge-off of $354 million in fiscal year 2011. This charge-off related to outstanding loans to Innovative Communications Corporation (“ICC”), a former RTFC member, and the transfer of ICC’s assets in foreclosure to Caribbean Asset Holdings, LLC.
Borrower Risk Ratings
As part of our management of credit risk, we maintain a credit risk rating framework under which we employ a consistent process for assessing the credit quality of our loan portfolio. We evaluate each borrower and loan facility in our loan portfolio and assign internal borrower and loan facility risk ratings based on consideration of a number of quantitative and qualitative factors. Each risk rating is 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 credit worthinesscreditworthiness of the borrower and probability of default. Our borrower risk ratings align with the U.S. federal banking regulatory agencies credit risk definitions of pass and criticized categories, with the criticized category further segmented among special mention, substandard and doubtful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default.
Criticized loans totaled $432 million and $371 million as of November 30, 2020 and May 31, 2020, respectively, representing approximately 2% and 1% of total loans outstanding, respectively. Criticized loans in the substandard category decreased to $5 million as of November 30, 2020, from $170 million as of May 31, 2020. Loans outstanding to one electric distribution cooperative borrower and its subsidiary totaling $165 million accounted for the substantial majority of the $170 million in the substandard category as of May 31, 2020. Based on updated financial performance information from the borrower, we reassessed and upgraded the risk rating for the borrower from substandard as of May 31, 2020 to special mention as of November 30, 2020. Criticized loans in the doubtful category totaled $153 million and $168 million as of November 30, 2020 and May 31, 2020, respectively. The amount in the doubtful category as of each date is attributable to the loan to the CFC power supply borrower that we classified as nonperforming and placed on nonaccrual status in the fourth quarter of fiscal year 2020, discussed above under “Nonperforming Loans.”
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 estimatingdetermining our allowance for credit losses.
Criticized loans totaled $887 million and $886 million as of August 31, 2021 and May 31, 2021, respectively, and represented approximately 3% of total loans outstanding as of each respective date. 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 amounts due as of August 31, 2021 and May 31, 2021. As noted above under “Nonperforming Loans” Brazos is not permitted to make scheduled loan payments without approval of the bankruptcy court.
We provide additional information on our borrower risk rating classificationsframework in “Note 1—Summary of Significant Accounting” andour 2021 Form 10-K under “Item 7. MD&A Credit Risk—Loan Portfolio Credit Risk—Credit Quality Indicators.” See “Note 4—Loans.”Loans” in this Report for detail, by member class, on loans outstanding in each borrower risk rating category.
Allowance for Credit Losses
As discussed above, we adopted the CECL accounting standard on June 1, 2020, which resulted in an increase in our allowance for credit losses for our loan portfolio of $4 million and a corresponding decrease to retained earnings of $4 million recorded through a cumulative-effect adjustment. The impact on the reserve for credit losses for our off-balance sheet credit exposures related to unadvanced loan commitments and financial guarantees was not material. Under CECL, weWe 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.
Table 23 summarizes changes in theOur allowance for credit losses for the three and six months ended November 30, 2020 and 2019, and presents the allowance components and allowance coverage ratios as of November 30, 2020 and May 31, 2020. The changes in the allowance and the allowance components prior to our adoption of CECL on June 1, 2020 are based on the incurred loss model for estimating the allowance for credit losses. The allowance components, which consistconsists of a collective allowance and an asset-specific allowance. The collective allowance are based on the evaluation method used to measureis established for loans in our loans for credit losses. Loansportfolio that share similar risk characteristics and are therefore evaluated on a collective, or pool, basis in measuring expected credit losses, whilelosses. 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.basis in measuring expected credit losses.
Table 15 presents, by member class, loans outstanding and the related allowance for credit losses and allowance coverage ratio and the allowance components as of August 31, 2021 and May 31, 2021.
Table 23:15: Allowance for Credit Losses by Borrower Member Class and Evaluation Methodology
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Six Months Ended November 30, |
(Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Beginning balance | | $ | 57,351 | | | $ | 17,565 | | | $ | 53,125 | | | $ | 17,535 | |
Cumulative-effect adjustment from adoption of CECL accounting standard | | — | | | — | | | 3,900 | | | — | |
Beginning balance, adjusted | | 57,351 | | | 17,565 | | | 57,025 | | | 17,535 | |
Provision (benefit) for credit losses | | 1,638 | | | (1,045) | | | 1,964 | | | (1,015) | |
Ending balance | | $ | 58,989 | | | $ | 16,520 | | | $ | 58,989 | | | $ | 16,520 | |
| | | | | | | | |
| | | | | | November 30, 2020 | | May 31, 2020 |
Allowance for credit losses by company: | | | | | | | | |
CFC | | | | | | $ | 54,409 | | | $ | 47,438 | |
NCSC | | | | | | 1,341 | | | 806 | |
RTFC | | | | | | 3,239 | | | 4,881 | |
Total allowance for credit losses | | | | | | $ | 58,989 | | | $ | 53,125 | |
| | | | | | | | |
Allowance components: | | | | | | | | |
Collective allowance | | | | | | $ | 26,269 | | | $ | 18,292 | |
Asset-specific allowance | | | | | | 32,720 | | | 34,833 | |
Total allowance for credit losses | | | | | | $ | 58,989 | | | $ | 53,125 | |
| | | | | | | | |
Loans outstanding: | | | | | | | | |
Collectively evaluated loans | | | | | | $ | 26,887,465 | | | $ | 26,512,298 | |
Individually evaluated loans | | | | | | 163,698 | | | 178,556 | |
Total loans outstanding(1) | | | | | | $ | 27,051,163 | | | $ | 26,690,854 | |
| | | | | | | | |
Allowance coverage ratios: | | | | | | | | |
Collective allowance coverage ratio(2) | | | | | | 0.10 | % | | 0.07 | % |
Asset-specific allowance coverage ratio(3) | | | | | | 19.99 | % | | 19.51 | % |
Total allowance coverage ratio(4) | | | | | | 0.22 | % | | 0.20 | % |
Percentage of TDR loans(5) | | | | | | 577.14 | % | | 489.77 | % |
Percentage of nonperforming loans(6) | | | | | | 38.44 | % | | 31.68 | % |
Percentage of nonaccrual loans(7) | | | | | | 38.44 | % | | 31.68 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2021 | | May 31, 2021 | | | |
(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 | | $ | 22,410,932 | | | $ | 15,369 | | | 0.07 | % | | $ | 22,027,423 | | | $ | 13,426 | | | 0.06 | % | | | | | |
Power supply | | 5,221,081 | | | 66,469 | | | 1.27 | | | 5,154,312 | | | 64,646 | | | 1.25 | | | | | | |
Statewide and associate | | 101,412 | | | 1,422 | | | 1.40 | | | 106,121 | | | 1,391 | | | 1.31 | | | | | | |
Total CFC | | 27,733,425 | | | 83,260 | | | 0.30 | | | 27,287,856 | | | 79,463 | | | 0.29 | | | | | | |
NCSC | | 705,891 | | | 1,455 | | | 0.21 | | | 706,868 | | | 1,374 | | | 0.19 | | | | | | |
RTFC | | 431,442 | | | 4,820 | | | 1.12 | | | 420,383 | | | 4,695 | | | 1.12 | | | | | | |
Total | | $ | 28,870,758 | | | $ | 89,535 | | | 0.31 | | | $ | 28,415,107 | | | $ | 85,532 | | | 0.30 | | | | | | |
| | | | | | | | | | | | | | | | | |
Allowance components: | | | | | | | | | | | | | | | | | |
Collective allowance | | $ | 28,629,270 | | | $ | 45,119 | | | 0.16 | % | | $ | 28,167,639 | | | $ | 42,442 | | | 0.15 | % | | | | | |
Asset-specific allowance | | 241,488 | | | 44,416 | | | 18.39 | | | 247,468 | | | 43,090 | | | 17.41 | | | | | | |
Total allowance for credit losses | | $ | 28,870,758 | | | $ | 89,535 | | | 0.31 | | | $ | 28,415,107 | | | $ | 85,532 | | | 0.30 | | | | | | |
| | | | | | | | | | | | | | | | | |
Allowance coverage ratios: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Percentage of nonperforming and nonaccrual loans (3) | | $ | 231,642 | | | | | 38.65 | % | | $ | 237,497 | | | | | 36.01 | % | | | | | |
| | | | | | | | | | | | | | | | | |
_______________________________________________________
(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 November 30, 2020both August 31, 2021 and May 31, 2020, respectively.2021.
(2)Calculated based on the collective allowance component at period endfor credit losses attributable to each member class divided by collectively evaluatedthe related loans outstanding at period end.
(3)Calculated based on the asset-specific allowance component at period end divided by individually evaluated loans outstanding at period end.
(4)Calculated based on the total allowance for credit losses at period end divided by total loans outstanding at period end.
(5)Calculated based on the total allowance for credit losses at period end divided by TDR loans outstanding at period end.
(6)Calculated based on the total allowance for credit losses at period end divided by loans outstanding classified as nonperforming at period end.
(7)Calculated based on the total allowance for credit losses at period end divided by loans outstandingand on nonaccrual status at period end.
TheOur allowance for credit losses for our loan portfolio increased to $59 million as of November 30, 2020, from $53 million as of May 31, 2020, and the allowance coverage ratio increased to 0.22%$90 million and 0.31%, respectively, as of August 31, 2021, from 0.20%$86 million and 0.30%, primarily duerespectively as of May 31, 2021, resulting from a current-quarter addition to the increase in the allowance of $4 million, recorded at adoption of CECL on June 1, 2020.predominantly attributable to an increase in the collective allowance due to higher expected default rates derived from third-party utility sector default data, which we use to inform the default rates used in measuring our collective allowance for credit losses, and an increase in the asset-specific allowance for loans outstanding to Brazos.
40February 2021 Polar Vortex— CFC Texas Exposure
We continue to believe that the significant adverse financial impact from the surge in wholesale power costs in Texas during the February 2021 polar vortex was primarily limited to our outstanding loan exposure to Brazos and Rayburn of $86 million and $375 million, respectively, as of August 31, 2021. In June 2021, Texas enacted securitization legislation that offers financing programs for qualifying electric cooperatives exposed to elevated power costs during the February 2021 polar vortex. We believe Brazos and Rayburn qualify for the financing programs, but we are currently uncertain whether Brazos will utilize the provisions available under this legislation. In filings made with the Public Utility Commission of Texas, Rayburn has stated that it intends to utilize the securitization legislation to finance its elevated power costs and has taken steps to begin the process to do so. However, there are many factors that may impact the outcome of a securitization transaction and the ultimate collectibility of Rayburn’s loans outstanding, which we are unable to predict.
We discuss our methodology for estimating the allowance for credit losses under the CECL model in “Note 1—Summary of Significant Accounting Policies.” SeePolicies—Allowance for Credit Losses” and provide information on the management judgment and uncertainties involved in our determining the allowance for credit losses in “MD&A—Critical Accounting Policies and Estimates—Allowance for Credit Losses” in our 2021 Form 10-K. We provide additional information on our loans and allowance for credit losses under “Note 4—Loans” and “Note 5—Allowance for Credit Losses” for additional information.of this Report.
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 credit worthiness of each counterparty based on our internal counterparty credit risk scoring model; using counterparty-specific credit risk limits; executing master netting arrangements; and diversifying our derivative transactions among multiple counterparties. We also require that our derivative counterparties 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 Investors Service (“Moody’s”) and from AA- to A- by S&P Global Inc. (“S&P”) as of November 30, 2020.August 31, 2021. Our largest counterparty exposure, based on the outstanding notional amount, represented approximately 26% and 25%24% of the total outstanding notional amount of derivatives as of November 30, 2020both August 31, 2021 and May 31, 2020, respectively.2021.
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 Ratings Inc. (“Fitch”) were A2, AA- and A, respectively, as of November 30, 2020.August 31, 2021. Moody’s, S&P and Fitch had our ratings on stable outlook as of November 30, 2020. Table 24 displays theAugust 31, 2021. We had $6,130 million of outstanding notional amounts of our derivative contracts with rating triggers as of November 30, 2020, and theAugust 31, 2021, with required net payments that would be requiredof $427 million 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'scounterparty’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. We provide additional detail on the notional amount and payments due on these derivative contracts in “Note 9—Derivative Instruments and Hedging Activities.”
Table 24: Rating Triggers for Derivatives
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Notional Amount | | Payable Due From CFC | | Receivable Due to CFC | | Net Payable |
Impact of rating downgrade trigger: | | | | | | | | |
Falls below A3/A-(1) | | $ | 43,175 | | | $ | (9,926) | | | $ | — | | | $ | (9,926) | |
Falls below Baa1/BBB+ | | 5,855,400 | | | (584,329) | | | — | | | (584,329) | |
Falls to or below Baa2/BBB (2) | | 412,750 | | | (28,467) | | | — | | | (28,467) | |
| | | | | | | | |
Total | | $ | 6,311,325 | | | $ | (622,722) | | | $ | — | | | $ | (622,722) | |
____________________________
(1) Rating trigger for CFC falls below A3/A-, while rating trigger for counterparty falls below Baa1/BBB+ by Moody’s or S&P, respectively.
(2) Rating trigger for CFC falls to or below Baa2/BBB, while rating trigger for counterparty falls to or below Ba2/BB+ by Moody’s or S&P, respectively.
Table 24 does not includeIn addition, we had 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.Fitch, respectively. The outstanding notional amount of interest rate swaps with this counterparty totaled $215224 million as of November 30, 2020August 31, 2021, and the swaps were in an unrealized loss position of $49$33 million as of November 30, 2020August 31, 2021.
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 $656$450 million as of November 30, 2020,August 31, 2021, compared with $798$344 million as of May 31, 2020.2021. There were no counterparties that fell below the rating trigger levels in our interest swap contracts as of November 30, 2020.August 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” in our 20202021 Form 10-K and “Item 1A. Risk Factors” in this Report for additional information about credit risks related to our business.
We define liquidity as the ability to convert assets into cash quickly and efficiently, maintain access to readily 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. We provide additional information on our liquidity risk-management framework under “Item 7. MD&A—Liquidity Risk—Liquidity Risk Management” in our 2021 Form 10-K.
Our primary sources of liquidityfunds include cash flows from operations, debtmember loan principal repayments, securities held in our investment portfolio, member loan repayments, committed bank revolving lines of credit, committed loan facilities under the Guaranteed Underwriter Program, revolving note purchase agreements with Farmer Mac and proceeds from debt issuances to members, in private placements and in the capital markets. Our primary uses of funds include loan advances to members, principal and interest payments on borrowings, periodic interest settlement payments related to our derivative contracts and operating expenses.
Although as a non-bank financial institution we are not subject to regulatory liquidity requirements, we monitor our liquidity and funding positions on an ongoing basis and assess our ability to issuemeet our scheduled debt inobligations and other cash flow requirements based on point-in-time metrics as well as forward-looking projections. Our liquidity and funding assessment takes into consideration amounts available under existing liquidity sources, the expected rollover of member short-term investments and scheduled loan principal repayment amounts, as well as our continued ability to access the private placement and capital markets, to our members and in private placements. We provide information on our liquidity risk-management framework and activities undertaken to manage liquidity risk under “Item 7. MD&A—Liquidity Risk—Liquidity Risk Management” in our 2020 Form 10-K.markets.
Available 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 $5,378 million and accounted for 19% of total debt outstanding as of August 31, 2021, compared with $4,582 million and 17% of total debt outstanding as of May 31, 2021.
See “Liquidity Risk” below and “Note 6—Short-Term Borrowings” for information on the composition of our short-term borrowings.
Long-Term and Subordinated Debt
Long-term debt, defined as debt with an original contractual maturity term of greater than one year, primarily consists of medium-term notes, collateral trust bonds, notes payable under the Guaranteed Underwriter Program and notes payable under our note purchase agreement with Farmer Mac. Subordinated debt consists of subordinated deferrable debt and members’ subordinated certificates. Long-term and subordinated debt of $22,399 million and $22,844 million as of August 31, 2021 and May 31, 2021, respectively, accounted for 81% and 83% 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 12 presents the components of total CFC equity and total equity as of August 31, 2021 and May 31, 2021.
Table 12: Equity
| | | | | | | | | | | | | | |
(Dollars in thousands) | | August 31, 2021 | | May 31, 2021 |
Equity components: | | | | |
Membership fees and educational fund: | | | | |
Membership fees | | $ | 968 | | | $ | 968 | |
Educational fund | | 1,788 | | | 2,157 | |
Total membership fees and educational fund | | 2,756 | | | 3,125 | |
Patronage capital allocated | | 866,405 | | | 923,970 | |
Members’ capital reserve | | 909,749 | | | 909,749 | |
Total allocated equity | | 1,778,910 | | | 1,836,844 | |
Unallocated net income (loss): | | | | |
Prior fiscal year-end cumulative derivative forward value losses(1) | | (461,162) | | | (1,079,739) | |
Year-to-date derivative forward value gains (losses) (1) | | (144,464) | | | 618,577 | |
Period-end cumulative derivative forward value losses(1) | | (605,626) | | | (461,162) | |
Other unallocated net income (loss) | | 53,861 | | | (709) | |
Unallocated net loss | | (551,765) | | | (461,871) | |
CFC retained equity | | 1,227,145 | | | 1,374,973 | |
Accumulated other comprehensive loss | | 365 | | | (25) | |
Total CFC equity | | 1,227,510 | | | 1,374,948 | |
Noncontrolling interests | | 26,710 | | | 24,931 | |
Total equity | | $ | 1,254,220 | | | $ | 1,399,879 | |
| | | | |
____________________________(1)Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the variable interest entities NCSC and RTFC, which we are required to consolidate. We present the consolidated total derivative forward value gains (losses) in Table 29 in the “Non-GAAP Financial Measures” section below. Also, see “Note 14—Business Segments” for the statements of operations for CFC.
The decrease in total equity of $146 million to $1,254 million as of August 31, 2021 was attributable to our reported net loss of $90 million for the current quarter and the authorized patronage capital retirement of $58 million by the CFC Board of Directors in July 2021.
Allocation and Retirement of Patronage Capital
We are subject to District of Columbia regulations governing cooperatives, under which CFC is required to make annual allocations of net earnings, if any, in accordance with the provisions of the District of Columbia cooperative regulations. We describe the allocation requirements under “Item 7. MD&A—Consolidated Balance Sheet Analysis—Equity—Allocation and Retirement of Patronage Capital” in our 2021 Form 10-K.
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 fiscal year 2021 adjusted net income as follows: $90 million to members in the form of patronage capital and $102 million to the members’ capital reserve. The amount of patronage capital allocated each year by CFC’s Board of Directors 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 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. This amount was returned to members in cash in September 2021. 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.
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 cybersecurity risk, 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.
We provide a discussion of our risk management framework in our 2021 Form 10-K under “Item 7. MD&A—Risk Management” and describe how we manage these risks under each respective MD&A section in our 2021 Form 10-K.
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.
Loan Portfolio Credit Risk
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. Loans outstanding to electric utility organizations totaled $28,440 million and $27,995 million as of August 31, 2021 and May 31, 2021, respectively, representing 99% of our total loans outstanding as of each respective date. The remaining loans outstanding in our loan portfolio were to RTFC members, affiliates and associates in the telecommunications industry sector. The substantial majority of loans to our borrowers are long-term fixed-rate loans with terms of up to 35 years. Long-term fixed-rate loans accounted for 89% and 90% of total loans outstanding as of August 31, 2021 and May 31, 2021, respectively.
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 credit concentration risk 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. Table 13 presents, by loan type and by company, secured and unsecured loans in our loan portfolio as of August 31, 2021 and May 31, 2021. Of our total loans outstanding, 93% were secured as of both August 31, 2021 and May 31, 2021.
Table 13: Loan Portfolio Security Profile
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2021 |
(Dollars in thousands) | | Secured | | % of Total | | Unsecured | | % of Total | | Total |
Member class: | | | | | | | | | | |
CFC: | | | | | | | | | | |
Distribution | | $ | 21,137,293 | | | 94 | % | | $ | 1,273,639 | | | 6 | % | | $ | 22,410,932 | |
Power supply | | 4,550,922 | | | 87 | | | 670,159 | | 13 | | | 5,221,081 | |
Statewide and associate | | 88,485 | | | 87 | | | 12,927 | | 13 | | | 101,412 | |
Total CFC | | 25,776,700 | | | 93 | | | 1,956,725 | | | 7 | | | $ | 27,733,425 | |
NCSC | | 679,168 | | | 96 | | | 26,723 | | | 4 | | | 705,891 | |
RTFC | | 412,588 | | | 96 | | | 18,854 | | | 4 | | | 431,442 | |
Total loans outstanding(1) | | $ | 26,868,456 | | | 93 | | | $ | 2,002,302 | | | 7 | | | $ | 28,870,758 | |
| | | | | | | | | | |
Loan type: | | | | | | | | | | |
Long-term loans: | | | | | | | | | | |
Fixed rate | | $ | 25,427,575 | | | 99 | % | | $ | 220,803 | | | 1 | % | | $ | 25,648,378 | |
Variable rate | | 880,399 | | | 100 | | | 2,741 | | | — | | | 883,140 | |
Total long-term loans | | 26,307,974 | | | 99 | | | 223,544 | | | 1 | | | 26,531,518 | |
Line of credit loans | | 560,482 | | | 24 | | | 1,778,758 | | | 76 | | | 2,339,240 | |
Total loans outstanding(1) | | $ | 26,868,456 | | | 93 | | | $ | 2,002,302 | | | 7 | | | $ | 28,870,758 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | May 31, 2021 |
(Dollars in thousands) | | Secured | | % of Total | | Unsecured | | % of Total | | Total |
Member class: | | | | | | | | | | |
CFC: | | | | | | | | | | |
Distribution | | $ | 20,702,657 | | | 94 | % | | $ | 1,324,766 | | | 6 | % | | $ | 22,027,423 | |
Power supply | | 4,458,311 | | | 86 | | | 696,001 | | 14 | | | 5,154,312 | |
Statewide and associate | | 88,004 | | | 83 | | | 18,117 | | | 17 | | | 106,121 | |
Total 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 | |
| | | | | | | | | | |
Loan type: | | | | | | | | | | |
Long-term loans: | | | | | | | | | | |
Fixed rate | | $ | 25,278,805 | | | 99 | % | | $ | 235,961 | | | 1 | % | | $ | 25,514,766 | |
Variable rate | | 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 | |
____________________________
(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 as of both August 31, 2021 and May 31, 2021.
Credit Concentration
Concentrations of credit may exist when a lender has large credit exposures to single borrowers, large credit exposures to borrowers in the same industry sector or engaged in similar activities or large credit exposures to borrowers in a geographic region that would cause the borrowers to be similarly impacted by economic or other conditions in the region. As discussed above under “Credit Risk—Loan Portfolio Credit Risk,” because we lend primarily to our rural electric utility cooperative
members, our loan portfolio is inherently subject to single-industry and single-obligor credit concentration risk, and loans outstanding to electric utility organizations represented approximately 99% of our total loans outstanding of $28,440 million as of August 31, 2021 and $27,995 million as of May 31, 2021.
Single-Obligor Concentration
Table 14 displays the outstanding loan exposure for our 20 largest borrowers, by member class, as of August 31, 2021 and May 31, 2021. Our 20 largest borrowers consisted of 10 distribution systems and 10 power supply systems as of both August 31, 2021 and May 31, 2021. The largest total exposure to a single borrower or controlled group represented less than 2% of total loans outstanding as of both August 31, 2021 and May 31, 2021.
Table 14: Loan Exposure to 20 Largest Borrowers
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2021 | | May 31, 2021 | |
(Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total | |
Member class: | | | | | | | | | |
CFC: | | | | | | | | | |
Distribution | | $ | 3,325,175 | | | 11 | % | | $ | 3,312,571 | | | 12 | % | |
Power supply | | 2,789,703 | | | 10 | | | 2,665,771 | | | 9 | | |
Total CFC | | 6,114,878 | | | 21 | | | 5,978,342 | | | 21 | | |
NCSC | | 201,312 | | | 1 | | | 203,392 | | | 1 | | |
Total loan exposure to 20 largest borrowers | | 6,316,190 | | | 22 | | | 6,181,734 | | | 22 | | |
Less: Loans covered under Farmer Mac standby purchase commitment | | (303,630) | | | (1) | | | (308,580) | | | (1) | | |
Net loan exposure to 20 largest borrowers | | $ | 6,012,560 | | | 21 | % | | $ | 5,873,154 | | | 21 | % | |
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 $493 million and $512 million as of August 31, 2021 and May 31, 2021, respectively. Loan exposure to our 20 largest borrowers covered under the Farmer Mac agreement totaled $304 million and $309 million as of August 31, 2021 and May 31, 2021, respectively, which reduced our exposure to the 20 largest borrowers to 21% as of each respective date. No loans have been put to Farmer Mac for purchase pursuant to this agreement. Our credit exposure is also mitigated by long-term loans guaranteed by RUS, which totaled $137 million and $139 million as of August 31, 2021 and May 31, 2021, respectively.
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 896 and 892 as of August 31, 2021 and May 31, 2021, respectively, located in 49 states. Of the 896 borrowers with loans outstanding as of August 31, 2021, 50 were electric power supply borrowers. In comparison, of the 892 borrowers with loans outstanding as of May 31, 2021, 49 were electric power supply borrowers. Electric power supply borrowers generally require significantly more capital than electric distribution and telecommunications borrowers.
Texas, which had 68 and 67 borrowers with loans outstanding as of August 31, 2021 and May 31, 2021, respectively, accounted for the largest number of borrowers with loans outstanding in any one state as of each respective date, as well as the largest concentration of loan exposure in any one state. Loans outstanding to Texas-based electric utility organizations totaled $5,102 million and $4,878 million as of August 31, 2021 and May 31, 2021, respectively, and accounted for approximately 18% and 17% of total loans outstanding as of each respective date. Of the loans outstanding to Texas-based electric utility organizations, $170 million and $172 million as of August 31, 2021 and May 31, 2021, respectively, were covered by the Farmer Mac standby repurchase agreement, which slightly reduced our credit risk exposure to Texas-based
borrowers. Of the 50 electric power supply borrowers with loans outstanding as of August 31, 2021, eight were located in Texas.
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.
We believe the overall credit quality of our loan portfolio remained strong as of August 31, 2021. Although we experienced an increase in nonperforming and criticized loans in the third quarter of fiscal year 2021 due to the significant adverse financial impact that the elevated wholesale power costs during the February 2021 polar vortex had on Brazos and Rayburn, we continue to believe that our risk of loss from conditions during the February 2021 polar vortex is primarily limited to these two CFC Texas-based electric power supply borrowers. Because of its bankruptcy filing in March 2021, Brazos is not permitted to make scheduled loan payments without approval of the bankruptcy court. As such, we have not received scheduled loan payments from Brazos and its loans are delinquent. With the exception of Brazos, all of our borrowers have been making scheduled payments in accordance with the terms of their loan agreements and we had no other delinquent loans as of either August 31, 2021 or May 31, 2021.
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.
We have not had any loan modifications that were required to be accounted for as TDRs since fiscal year 2016. We had TDR loans outstanding to two borrowers, a CFC electric distribution borrower and a RTFC telecommunications borrower, totaling $10 million as of both August 31, 2021 and May 31, 2021. Since the modification date, the loans have been performing in accordance with the terms of their respective restructured loan agreement for an extended period of time and were classified as performing and on accrual status as of August 31, 2021 and May 31, 2021. We did not have any TDR loans classified as nonperforming as of August 31, 2021 or May 31, 2021. 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, we evaluate TDR loans on an individual basis in measuring expected credit losses for these loans.
We provide additional information on TDR loans under “Note 4—Loans—Credit Quality Indicators—Troubled Debt Restructurings.”
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 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.
We had loans to four borrowers, including Brazos, totaling $232 million as of August 31, 2021, and $237 million as of May 31, 2021, classified as nonperforming as of each respective date. These nonperforming loans represented 0.80% and 0.84% of total loans outstanding as of August 31, 2021 and May 31, 2021, respectively. Each of the borrowers with loans outstanding classified as nonperforming, except Brazos, has continued to make scheduled loan payments. 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 $86 million and $85 million as of August 31, 2021 and May 31, 2021,
respectively, were delinquent as of each respective date. Prior to Brazos’ bankruptcy filing in March 2021, we had not experienced any defaults or charge-offs in our electric utility and telecommunications loan portfolios since fiscal years 2013 and 2017, respectively.
We provide additional information on nonperforming loans in “Note 4—Loans—Credit Quality Indicators—Nonperforming Loans.”
Net Charge-Offs
We had no loan charge-offs during the current quarter, nor during the same prior-year quarter. Prior to Brazos’ bankruptcy filing in March 2021, we had not experienced any defaults or charge-offs in our electric utility and telecommunications loan portfolios since fiscal years 2013 and 2017, respectively.
Borrower Risk Ratings
As part of our strategy in managing liquiditymanagement of credit risk, and meeting our liquidity objectives, we seek to maintain a substantial levelcredit risk rating framework under which we employ a consistent process for assessing the credit quality of on-balance sheetour loan portfolio. We evaluate each borrower and off-balance sheet sourcesloan facility in our loan portfolio and assign internal borrower and loan facility risk ratings based on consideration of liquidity thata number of quantitative and qualitative factors. We categorize loans in our portfolio based on our internally assigned borrower risk ratings, which are readily availableintended 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, substandard and doubtful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default. Our internally assigned borrower risk ratings serve as the primary credit quality indicator for access to meet our near-term liquidity needs. Table 25 presentsloan portfolio. Because our internal borrower risk ratings provide important information on the sourcesprobability of available liquiditydefault, they are a key input in determining our allowance for credit losses.
Criticized loans totaled $887 million and $886 million as of November 30, 2020August 31, 2021 and May 31, 2020.
Table 25: Available Liquidity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | November 30, 2020 | | May 31, 2020 |
(Dollars in millions) | | Total | | Accessed | | Available | | Total | | Accessed | | Available |
Liquidity sources: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 167 | | | $ | — | | | $ | 167 | | | $ | 671 | | | $ | — | | | $ | 671 | |
Debt securities investment portfolio(1) | | 552 | | | — | | | 552 | | | 309 | | | — | | | 309 | |
Committed bank revolving line of credit agreements—unsecured(2) | | 2,725 | | | 3 | | | 2,722 | | | 2,725 | | | 3 | | | 2,722 | |
Guaranteed Underwriter Program committed facilities—secured(3) | | 8,173 | | | 6,898 | | | 1,275 | | | 7,798 | | | 6,898 | | | 900 | |
Farmer Mac revolving note purchase agreement, dated March 24, 2011, as amended—secured(4) | | 5,500 | | | 2,899 | | | 2,601 | | | 5,500 | | | 3,060 | | | 2,440 | |
Total available liquidity | | $ | 17,117 | | | $ | 9,800 | | | $ | 7,317 | | | $ | 17,003 | | | $ | 9,961 | | | $ | 7,042 | |
____________________________(1)Our portfolio2021, respectively, and represented approximately 3% of equity securities consists primarily of preferred stock securities that are not as readily redeemable; therefore, we have excluded our portfolio of equity securities from our sources of available liquidity.
(2)The committed bank revolving line of credit agreements consist of a three-year and a five-year revolving line of credit agreement. The accessed amount of $3 milliontotal loans outstanding as of both November 30, 2020each respective date. 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 amounts due as of August 31, 2021 and May 31, 2020, relates2021. As noted above under “Nonperforming Loans” Brazos is not permitted 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.
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 committedmake scheduled 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 November 30, 2020. Under our current committed bank revolving line of credit agreements, we have the ability to request up to $300 million of letters of credit, which would result in a reduction in the remaining available amount under the facilities.
Table 26 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 November 30, 2020. We did not have any outstanding borrowings under our bank revolving line of credit agreements as of November 30, 2020.
Table 26: Committed Bank Revolving Line of Credit Agreements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | November 30, 2020 | | | | |
(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 inceptionpayments without approval of the related agreement.bankruptcy court.
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 toWe 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 requirementson our borrower risk rating framework in our 2021 Form 10-K under our committed bank revolving line of credit agreements.“Item 7. MD&A Credit Risk—Loan Portfolio Credit Risk—Credit Quality Indicators.” See “Note 4—Loans” in this Report for detail, by member class, on loans outstanding in each borrower risk rating category.
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. This new commitment increases total funding available to CFC under committed loan facilities from the FFB to $1,275 million. Of this amount, $400 million is availableAllowance 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 preceding description is a summary and is qualified in its entirety by reference to the agreements themselves, which are filed as exhibits to this Report.
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.
Farmer Mac Revolving Note Purchase Agreement—Secured
As indicated in Table 25, 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, through January 11, 2022. This date automatically extends on each anniversary date of the closing for an additional year, unless prior to any such anniversary date, Farmer Mac provides us with a notice that the draw period will not be extended beyond the remaining term. Pursuant to the terms of the Farmer Mac 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. Under this agreement, we had outstanding secured notes payable totaling $2,899 million and $3,060 million as of November 30, 2020 and May 31, 2020, respectively. The amount available for borrowing under this agreement was $2,601 million as of November 30, 2020.Credit Losses
We are required to pledge eligible electric distribution systemmaintain 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. 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 electric power supply systempool, 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.
Table 15 presents, by member class, loans outstanding and the related allowance for credit losses and allowance coverage ratio and the allowance components as of August 31, 2021 and May 31, 2021.
Table 15: Allowance for Credit Losses by Borrower Member Class and Evaluation Methodology
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2021 | | May 31, 2021 | | | |
(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 | | $ | 22,410,932 | | | $ | 15,369 | | | 0.07 | % | | $ | 22,027,423 | | | $ | 13,426 | | | 0.06 | % | | | | | |
Power supply | | 5,221,081 | | | 66,469 | | | 1.27 | | | 5,154,312 | | | 64,646 | | | 1.25 | | | | | | |
Statewide and associate | | 101,412 | | | 1,422 | | | 1.40 | | | 106,121 | | | 1,391 | | | 1.31 | | | | | | |
Total CFC | | 27,733,425 | | | 83,260 | | | 0.30 | | | 27,287,856 | | | 79,463 | | | 0.29 | | | | | | |
NCSC | | 705,891 | | | 1,455 | | | 0.21 | | | 706,868 | | | 1,374 | | | 0.19 | | | | | | |
RTFC | | 431,442 | | | 4,820 | | | 1.12 | | | 420,383 | | | 4,695 | | | 1.12 | | | | | | |
Total | | $ | 28,870,758 | | | $ | 89,535 | | | 0.31 | | | $ | 28,415,107 | | | $ | 85,532 | | | 0.30 | | | | | | |
| | | | | | | | | | | | | | | | | |
Allowance components: | | | | | | | | | | | | | | | | | |
Collective allowance | | $ | 28,629,270 | | | $ | 45,119 | | | 0.16 | % | | $ | 28,167,639 | | | $ | 42,442 | | | 0.15 | % | | | | | |
Asset-specific allowance | | 241,488 | | | 44,416 | | | 18.39 | | | 247,468 | | | 43,090 | | | 17.41 | | | | | | |
Total allowance for credit losses | | $ | 28,870,758 | | | $ | 89,535 | | | 0.31 | | | $ | 28,415,107 | | | $ | 85,532 | | | 0.30 | | | | | | |
| | | | | | | | | | | | | | | | | |
Allowance coverage ratios: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Percentage of nonperforming and nonaccrual loans (3) | | $ | 231,642 | | | | | 38.65 | % | | $ | 237,497 | | | | | 36.01 | % | | | | | |
| | | | | | | | | | | | | | | | | |
___________________________
(1) Represents the unpaid principal balance, net of charge-offs and recoveries of loans as collateralof each period end. Excludes unamortized deferred loan origination costs of $12 million as of both August 31, 2021 and May 31, 2021.
(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.
Our allowance for credit losses and allowance coverage ratio increased to $90 million and 0.31%, respectively, as of August 31, 2021, from $86 million and 0.30%, respectively as of May 31, 2021, resulting from a current-quarter addition to the allowance of $4 million, predominantly attributable to an increase in the collective allowance due to higher expected default rates derived from third-party utility sector default data, which we use to inform the default rates used in measuring our collective allowance for credit losses, and an increase in the asset-specific allowance for loans outstanding to Brazos.
February 2021 Polar Vortex— CFC Texas Exposure
We continue to believe that the significant adverse financial impact from the surge in wholesale power costs in Texas during the February 2021 polar vortex was primarily limited to our outstanding loan exposure to Brazos and Rayburn of $86 million and $375 million, respectively, as of August 31, 2021. In June 2021, Texas enacted securitization legislation that offers financing programs for qualifying electric cooperatives exposed to elevated power costs during the February 2021 polar vortex. We believe Brazos and Rayburn qualify for the financing programs, but we are currently uncertain whether Brazos will utilize the provisions available under this legislation. In filings made with the Public Utility Commission of Texas, Rayburn has stated that it intends to utilize the securitization legislation to finance its elevated power costs and has taken steps to begin the process to do so. However, there are many factors that may impact the outcome of a securitization transaction and the ultimate collectibility of Rayburn’s loans outstanding, which we are unable to predict.
We discuss our methodology for estimating the allowance for credit losses under the CECL model in “Note 1—Summary of Significant Accounting Policies—Allowance for Credit Losses” and provide information on the management judgment and uncertainties involved in our determining the allowance for credit losses in “MD&A—Critical Accounting Policies and Estimates—Allowance for Credit Losses” in our 2021 Form 10-K. We provide additional information on our loans and allowance for credit losses under “Note 4—Loans” and “Note 5—Allowance for Credit Losses” of this Report.
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.
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 August 31, 2021. Our largest counterparty exposure, based on the outstanding notional amount, at leastrepresented approximately 24% of the total outstanding notional amount of derivatives as of both August 31, 2021 and May 31, 2021.
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 total principal amountprevailing fair value, as defined in the agreement, as of notes outstanding under this agreement. See “Consolidated Balance Sheet Analysis—Debt—Collateral Pledged” and “Note 4—Loans” for additional information on pledged collateral.the termination date.
Short-Term BorrowingsOur senior unsecured credit ratings from Moody’s, S&P, and Long-TermFitch were A2, A- and Subordinated DebtA, respectively, as of August 31, 2021. Moody’s, S&P and Fitch had our ratings on stable outlook as of August 31, 2021. We had $6,130 million of outstanding notional amounts of our derivative contracts with rating triggers as of August 31, 2021, with required net payments of $427 million 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. We provide additional detail on the notional amount and payments due on these derivative contracts in “Note 9—Derivative Instruments and Hedging Activities.”
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 andIn addition, we had an interest rate risk.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 $224 million as of August 31, 2021, and the swaps were in an unrealized loss position of $33 million as of August 31, 2021.
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 $450 million as of August 31, 2021, compared with $344 million as of May 31, 2021. There were no counterparties that fell below the rating trigger levels in our interest swap contracts as of August 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” in our 2021 Form 10-K and “Item 1A. Risk Factors” in this Report for additional information about credit risks related to our business.
We define liquidity as the ability to convert assets into cash quickly and efficiently, maintain access to available funding and 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. We provide additional information on our liquidity risk-management framework under “Item 7. MD&A—Liquidity Risk—Liquidity Risk Management” in our 2021 Form 10-K.
Our primary sources of funds include member loan principal repayments, securities held in our investment portfolio, committed bank revolving lines of credit, committed loan facilities under Guaranteed Underwriter Program, revolving note purchase agreements with Farmer Mac and proceeds from debt issuances to members, in private placements and in the capital markets. Our primary uses of funds include loan advances to members, principal and interest payments on borrowings, periodic interest settlement payments related to our derivative contracts and operating expenses.
Although as a non-bank financial institution we are not subject to regulatory liquidity requirements, we monitor our liquidity and funding positions on an ongoing basis and assess our ability to meet our scheduled debt obligations and other cash flow requirements based on point-in-time metrics as well as forward-looking projections. Our liquidity and funding assessment takes into consideration amounts available under existing liquidity sources, the expected rollover of member short-term investments and scheduled loan principal repayment amounts, as well as our continued ability to access the private placement and capital markets.
Short-Term Borrowings
Our short-termShort-term borrowings consist of commercial paper, which we offer to membersborrowings with an original contractual maturity of one year or less and dealers, select notes and daily liquidity fund notes offered to members, and bank-bid notes and medium-term notes offered to members and dealers.
do not include the current portion of long-term debt. Short-term borrowings increased $726totaled $5,378 million to $4,688 million as of November 30, 2020, driven by higher member investments and issuances of dealer commercial paper.
Table 27 displays the composition, by funding source, of our short-term borrowings as of November 30, 2020 and May 31, 2020. Member borrowings accounted for 82% of total short-term borrowings as of November 30, 2020, compared with 94% of total short-term borrowings as of May 31, 2020.
Table 27: Short-Term Borrowings—Funding Sources
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | November 30, 2020 | | May 31, 2020 |
(Dollars in thousands) | | Amount Outstanding | | % of Total Short-Term Borrowings | | Amount Outstanding | | % of Total Short-Term Borrowings |
Funding source: | | | | | | | | |
Members | | $ | 3,847,984 | | | 82 | % | | $ | 3,711,985 | | | 94 | % |
Private placement—Farmer Mac notes payable | | 125,000 | | | 3 | | | 250,000 | | | 6 | |
Capital markets | | 714,984 | | | 15 | | | — | | | — | |
Total | | $ | 4,687,968 | | | 100 | % | | $ | 3,961,985 | | | 100 | % |
Table 28 displays the composition, by product type, of short-term borrowings as of November 30, 2020 and May 31, 2020.
Table 28: Short-Term Borrowings
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | November 30, 2020 | | May 31, 2020 |
(Dollars in thousands) | | Amount Outstanding | | % of Total Debt Outstanding | | Amount Outstanding | | % of Total Debt Outstanding |
Short-term borrowings: | | | | | | | | |
Commercial paper: | | | | | | | | |
Commercial paper to dealers, net of discounts | | $ | 714,984 | | | 3 | % | | $ | — | | | — | % |
Commercial paper to members, at par | | 1,283,132 | | | 5 | | | 1,318,566 | | | 5 | |
Total commercial paper | | 1,998,116 | | | 8 | | | 1,318,566 | | | 5 | |
Select notes to members | | 1,750,514 | | | 7 | | | 1,597,959 | | | 6 | |
Daily liquidity fund notes to members | | 495,124 | | | 2 | | | 508,618 | | | 2 | |
Medium-term notes sold to members | | 319,214 | | | 1 | | | 286,842 | | | 1 | |
Farmer Mac notes payable | | 125,000 | | | — | | | 250,000 | | | 1 | |
Total short-term borrowings | | $ | 4,687,968 | | | 18 | % | | $ | 3,961,985 | | | 15 | % |
Our short-term borrowings of $4,688 million accounted for 18%19% of total debt outstanding as of November 30, 2020,August 31, 2021, compared with $3,962$4,582 million and 15%17% of total debt outstanding as of May 31, 2020. 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. Outstanding dealer commercial paper totaled $715 million as of November 30, 2020, which was below our target threshold. We had no outstanding dealer commercial paper as of May 31, 2020.2021.
See “Liquidity Risk” below and “Note 6—Short-Term Borrowings” for information on the composition of our short-term borrowings.
Long-Term and Subordinated Debt
Long-term debt, defined as debt with an original contractual maturity term of greater than one year, primarily consists of medium-term notes, collateral trust bonds, notes payable under the Guaranteed Underwriter Program and notes payable under our note purchase agreement with Farmer Mac. Subordinated debt consists of subordinated deferrable debt and members’ subordinated certificates. Long-term and subordinated debt of $22,399 million and $22,844 million as of August 31, 2021 and May 31, 2021, respectively, accounted for 81% and 83% 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 12 presents the components of total CFC equity and total equity as of August 31, 2021 and May 31, 2021.
Table 12: Equity
| | | | | | | | | | | | | | |
(Dollars in thousands) | | August 31, 2021 | | May 31, 2021 |
Equity components: | | | | |
Membership fees and educational fund: | | | | |
Membership fees | | $ | 968 | | | $ | 968 | |
Educational fund | | 1,788 | | | 2,157 | |
Total membership fees and educational fund | | 2,756 | | | 3,125 | |
Patronage capital allocated | | 866,405 | | | 923,970 | |
Members’ capital reserve | | 909,749 | | | 909,749 | |
Total allocated equity | | 1,778,910 | | | 1,836,844 | |
Unallocated net income (loss): | | | | |
Prior fiscal year-end cumulative derivative forward value losses(1) | | (461,162) | | | (1,079,739) | |
Year-to-date derivative forward value gains (losses) (1) | | (144,464) | | | 618,577 | |
Period-end cumulative derivative forward value losses(1) | | (605,626) | | | (461,162) | |
Other unallocated net income (loss) | | 53,861 | | | (709) | |
Unallocated net loss | | (551,765) | | | (461,871) | |
CFC retained equity | | 1,227,145 | | | 1,374,973 | |
Accumulated other comprehensive loss | | 365 | | | (25) | |
Total CFC equity | | 1,227,510 | | | 1,374,948 | |
Noncontrolling interests | | 26,710 | | | 24,931 | |
Total equity | | $ | 1,254,220 | | | $ | 1,399,879 | |
| | | | |
____________________________(1)Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the variable interest entities NCSC and RTFC, which we are required to consolidate. We present the consolidated total derivative forward value gains (losses) in Table 29 in the “Non-GAAP Financial Measures” section below. Also, see “Note 14—Business Segments” for the statements of operations for CFC.
The decrease in total equity of $146 million to $1,254 million as of August 31, 2021 was attributable to our reported net loss of $90 million for the current quarter and the authorized patronage capital retirement of $58 million by the CFC Board of Directors in July 2021.
Allocation and Retirement of Patronage Capital
We are subject to District of Columbia regulations governing cooperatives, under which CFC is required to make annual allocations of net earnings, if any, in accordance with the provisions of the District of Columbia cooperative regulations. We describe the allocation requirements under “Item 7. MD&A—Consolidated Balance Sheet Analysis—Equity—Allocation and Retirement of Patronage Capital” in our 2021 Form 10-K.
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 fiscal year 2021 adjusted net income as follows: $90 million to members in the form of patronage capital and $102 million to the members’ capital reserve. The amount of patronage capital allocated each year by CFC’s Board of Directors 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 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. This amount was returned to members in cash in September 2021. 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.
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 cybersecurity risk, 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.
We provide a discussion of our risk management framework in our 2021 Form 10-K under “Item 7. MD&A—Risk Management” and describe how we manage these risks under each respective MD&A section in our 2021 Form 10-K.
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.
Loan Portfolio Credit Risk
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. Loans outstanding to electric utility organizations totaled $28,440 million and $27,995 million as of August 31, 2021 and May 31, 2021, respectively, representing 99% of our total loans outstanding as of each respective date. The remaining loans outstanding in our loan portfolio were to RTFC members, affiliates and associates in the telecommunications industry sector. The substantial majority of loans to our borrowers are long-term fixed-rate loans with terms of up to 35 years. Long-term fixed-rate loans accounted for 89% and 90% of total loans outstanding as of August 31, 2021 and May 31, 2021, respectively.
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 credit concentration risk 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. Table 13 presents, by loan type and by company, secured and unsecured loans in our loan portfolio as of August 31, 2021 and May 31, 2021. Of our total loans outstanding, 93% were secured as of both August 31, 2021 and May 31, 2021.
Table 13: Loan Portfolio Security Profile
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2021 |
(Dollars in thousands) | | Secured | | % of Total | | Unsecured | | % of Total | | Total |
Member class: | | | | | | | | | | |
CFC: | | | | | | | | | | |
Distribution | | $ | 21,137,293 | | | 94 | % | | $ | 1,273,639 | | | 6 | % | | $ | 22,410,932 | |
Power supply | | 4,550,922 | | | 87 | | | 670,159 | | 13 | | | 5,221,081 | |
Statewide and associate | | 88,485 | | | 87 | | | 12,927 | | 13 | | | 101,412 | |
Total CFC | | 25,776,700 | | | 93 | | | 1,956,725 | | | 7 | | | $ | 27,733,425 | |
NCSC | | 679,168 | | | 96 | | | 26,723 | | | 4 | | | 705,891 | |
RTFC | | 412,588 | | | 96 | | | 18,854 | | | 4 | | | 431,442 | |
Total loans outstanding(1) | | $ | 26,868,456 | | | 93 | | | $ | 2,002,302 | | | 7 | | | $ | 28,870,758 | |
| | | | | | | | | | |
Loan type: | | | | | | | | | | |
Long-term loans: | | | | | | | | | | |
Fixed rate | | $ | 25,427,575 | | | 99 | % | | $ | 220,803 | | | 1 | % | | $ | 25,648,378 | |
Variable rate | | 880,399 | | | 100 | | | 2,741 | | | — | | | 883,140 | |
Total long-term loans | | 26,307,974 | | | 99 | | | 223,544 | | | 1 | | | 26,531,518 | |
Line of credit loans | | 560,482 | | | 24 | | | 1,778,758 | | | 76 | | | 2,339,240 | |
Total loans outstanding(1) | | $ | 26,868,456 | | | 93 | | | $ | 2,002,302 | | | 7 | | | $ | 28,870,758 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | May 31, 2021 |
(Dollars in thousands) | | Secured | | % of Total | | Unsecured | | % of Total | | Total |
Member class: | | | | | | | | | | |
CFC: | | | | | | | | | | |
Distribution | | $ | 20,702,657 | | | 94 | % | | $ | 1,324,766 | | | 6 | % | | $ | 22,027,423 | |
Power supply | | 4,458,311 | | | 86 | | | 696,001 | | 14 | | | 5,154,312 | |
Statewide and associate | | 88,004 | | | 83 | | | 18,117 | | | 17 | | | 106,121 | |
Total 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 | |
| | | | | | | | | | |
Loan type: | | | | | | | | | | |
Long-term loans: | | | | | | | | | | |
Fixed rate | | $ | 25,278,805 | | | 99 | % | | $ | 235,961 | | | 1 | % | | $ | 25,514,766 | |
Variable rate | | 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 | |
____________________________
(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 as of both August 31, 2021 and May 31, 2021.
Credit Concentration
Concentrations of credit may exist when a lender has large credit exposures to single borrowers, large credit exposures to borrowers in the same industry sector or engaged in similar activities or large credit exposures to borrowers in a geographic region that would cause the borrowers to be similarly impacted by economic or other conditions in the region. As discussed above under “Credit Risk—Loan Portfolio Credit Risk,” because we lend primarily to our rural electric utility cooperative
members, our loan portfolio is inherently subject to single-industry and single-obligor credit concentration risk, and loans outstanding to electric utility organizations represented approximately 99% of our total loans outstanding of $28,440 million as of August 31, 2021 and $27,995 million as of May 31, 2021.
Single-Obligor Concentration
Table 14 displays the outstanding loan exposure for our 20 largest borrowers, by member class, as of August 31, 2021 and May 31, 2021. Our 20 largest borrowers consisted of 10 distribution systems and 10 power supply systems as of both August 31, 2021 and May 31, 2021. The largest total exposure to a single borrower or controlled group represented less than 2% of total loans outstanding as of both August 31, 2021 and May 31, 2021.
Table 14: Loan Exposure to 20 Largest Borrowers
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2021 | | May 31, 2021 | |
(Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total | |
Member class: | | | | | | | | | |
CFC: | | | | | | | | | |
Distribution | | $ | 3,325,175 | | | 11 | % | | $ | 3,312,571 | | | 12 | % | |
Power supply | | 2,789,703 | | | 10 | | | 2,665,771 | | | 9 | | |
Total CFC | | 6,114,878 | | | 21 | | | 5,978,342 | | | 21 | | |
NCSC | | 201,312 | | | 1 | | | 203,392 | | | 1 | | |
Total loan exposure to 20 largest borrowers | | 6,316,190 | | | 22 | | | 6,181,734 | | | 22 | | |
Less: Loans covered under Farmer Mac standby purchase commitment | | (303,630) | | | (1) | | | (308,580) | | | (1) | | |
Net loan exposure to 20 largest borrowers | | $ | 6,012,560 | | | 21 | % | | $ | 5,873,154 | | | 21 | % | |
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 $493 million and $512 million as of August 31, 2021 and May 31, 2021, respectively. Loan exposure to our 20 largest borrowers covered under the Farmer Mac agreement totaled $304 million and $309 million as of August 31, 2021 and May 31, 2021, respectively, which reduced our exposure to the 20 largest borrowers to 21% as of each respective date. No loans have been put to Farmer Mac for purchase pursuant to this agreement. Our credit exposure is also mitigated by long-term loans guaranteed by RUS, which totaled $137 million and $139 million as of August 31, 2021 and May 31, 2021, respectively.
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 896 and 892 as of August 31, 2021 and May 31, 2021, respectively, located in 49 states. Of the 896 borrowers with loans outstanding as of August 31, 2021, 50 were electric power supply borrowers. In comparison, of the 892 borrowers with loans outstanding as of May 31, 2021, 49 were electric power supply borrowers. Electric power supply borrowers generally require significantly more capital than electric distribution and telecommunications borrowers.
Texas, which had 68 and 67 borrowers with loans outstanding as of August 31, 2021 and May 31, 2021, respectively, accounted for the largest number of borrowers with loans outstanding in any one state as of each respective date, as well as the largest concentration of loan exposure in any one state. Loans outstanding to Texas-based electric utility organizations totaled $5,102 million and $4,878 million as of August 31, 2021 and May 31, 2021, respectively, and accounted for approximately 18% and 17% of total loans outstanding as of each respective date. Of the loans outstanding to Texas-based electric utility organizations, $170 million and $172 million as of August 31, 2021 and May 31, 2021, respectively, were covered by the Farmer Mac standby repurchase agreement, which slightly reduced our credit risk exposure to Texas-based
borrowers. Of the 50 electric power supply borrowers with loans outstanding as of August 31, 2021, eight were located in Texas.
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.
We believe the overall credit quality of our loan portfolio remained strong as of August 31, 2021. Although we experienced an increase in nonperforming and criticized loans in the third quarter of fiscal year 2021 due to the significant adverse financial impact that the elevated wholesale power costs during the February 2021 polar vortex had on Brazos and Rayburn, we continue to believe that our risk of loss from conditions during the February 2021 polar vortex is primarily limited to these two CFC Texas-based electric power supply borrowers. Because of its bankruptcy filing in March 2021, Brazos is not permitted to make scheduled loan payments without approval of the bankruptcy court. As such, we have not received scheduled loan payments from Brazos and its loans are delinquent. With the exception of Brazos, all of our borrowers have been making scheduled payments in accordance with the terms of their loan agreements and we had no other delinquent loans as of either August 31, 2021 or May 31, 2021.
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.
We have not had any loan modifications that were required to be accounted for as TDRs since fiscal year 2016. We had TDR loans outstanding to two borrowers, a CFC electric distribution borrower and a RTFC telecommunications borrower, totaling $10 million as of both August 31, 2021 and May 31, 2021. Since the modification date, the loans have been performing in accordance with the terms of their respective restructured loan agreement for an extended period of time and were classified as performing and on accrual status as of August 31, 2021 and May 31, 2021. We did not have any TDR loans classified as nonperforming as of August 31, 2021 or May 31, 2021. 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, we evaluate TDR loans on an individual basis in measuring expected credit losses for these loans.
We provide additional information on TDR loans under “Note 4—Loans—Credit Quality Indicators—Troubled Debt Restructurings.”
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 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.
We had loans to four borrowers, including Brazos, totaling $232 million as of August 31, 2021, and $237 million as of May 31, 2021, classified as nonperforming as of each respective date. These nonperforming loans represented 0.80% and 0.84% of total loans outstanding as of August 31, 2021 and May 31, 2021, respectively. Each of the borrowers with loans outstanding classified as nonperforming, except Brazos, has continued to make scheduled loan payments. 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 $86 million and $85 million as of August 31, 2021 and May 31, 2021,
respectively, were delinquent as of each respective date. Prior to Brazos’ bankruptcy filing in March 2021, we had not experienced any defaults or charge-offs in our electric utility and telecommunications loan portfolios since fiscal years 2013 and 2017, respectively.
We provide additional information on nonperforming loans in “Note 4—Loans—Credit Quality Indicators—Nonperforming Loans.”
Net Charge-Offs
We had no loan charge-offs during the current quarter, nor during the same prior-year quarter. Prior to Brazos’ bankruptcy filing in March 2021, we had not experienced any defaults or charge-offs in our electric utility and telecommunications loan portfolios since fiscal years 2013 and 2017, respectively.
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. 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, substandard and doubtful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default. Our internally assigned borrower risk ratings 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 determining our allowance for credit losses.
Criticized loans totaled $887 million and $886 million as of August 31, 2021 and May 31, 2021, respectively, and represented approximately 3% of total loans outstanding as of each respective date. 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 amounts due as of August 31, 2021 and May 31, 2021. As noted above under “Nonperforming Loans” Brazos is not permitted to make scheduled loan payments without approval of the bankruptcy court.
We provide additional information on our borrower risk rating framework in our 2021 Form 10-K under “Item 7. MD&A Credit Risk—Loan Portfolio Credit Risk—Credit Quality Indicators.” See “Note 4—Loans” in this Report for detail, by member class, on loans outstanding in each borrower risk rating category.
Allowance for Credit Losses
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. 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.
Table 15 presents, by member class, loans outstanding and the related allowance for credit losses and allowance coverage ratio and the allowance components as of August 31, 2021 and May 31, 2021.
Table 15: Allowance for Credit Losses by Borrower Member Class and Evaluation Methodology
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2021 | | May 31, 2021 | | | |
(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 | | $ | 22,410,932 | | | $ | 15,369 | | | 0.07 | % | | $ | 22,027,423 | | | $ | 13,426 | | | 0.06 | % | | | | | |
Power supply | | 5,221,081 | | | 66,469 | | | 1.27 | | | 5,154,312 | | | 64,646 | | | 1.25 | | | | | | |
Statewide and associate | | 101,412 | | | 1,422 | | | 1.40 | | | 106,121 | | | 1,391 | | | 1.31 | | | | | | |
Total CFC | | 27,733,425 | | | 83,260 | | | 0.30 | | | 27,287,856 | | | 79,463 | | | 0.29 | | | | | | |
NCSC | | 705,891 | | | 1,455 | | | 0.21 | | | 706,868 | | | 1,374 | | | 0.19 | | | | | | |
RTFC | | 431,442 | | | 4,820 | | | 1.12 | | | 420,383 | | | 4,695 | | | 1.12 | | | | | | |
Total | | $ | 28,870,758 | | | $ | 89,535 | | | 0.31 | | | $ | 28,415,107 | | | $ | 85,532 | | | 0.30 | | | | | | |
| | | | | | | | | | | | | | | | | |
Allowance components: | | | | | | | | | | | | | | | | | |
Collective allowance | | $ | 28,629,270 | | | $ | 45,119 | | | 0.16 | % | | $ | 28,167,639 | | | $ | 42,442 | | | 0.15 | % | | | | | |
Asset-specific allowance | | 241,488 | | | 44,416 | | | 18.39 | | | 247,468 | | | 43,090 | | | 17.41 | | | | | | |
Total allowance for credit losses | | $ | 28,870,758 | | | $ | 89,535 | | | 0.31 | | | $ | 28,415,107 | | | $ | 85,532 | | | 0.30 | | | | | | |
| | | | | | | | | | | | | | | | | |
Allowance coverage ratios: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Percentage of nonperforming and nonaccrual loans (3) | | $ | 231,642 | | | | | 38.65 | % | | $ | 237,497 | | | | | 36.01 | % | | | | | |
| | | | | | | | | | | | | | | | | |
___________________________
(1) Represents the unpaid principal balance, net of charge-offs and recoveries of loans as of each period end. Excludes unamortized deferred loan origination costs of $12 million as of both August 31, 2021 and May 31, 2021.
(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.
Our allowance for credit losses and allowance coverage ratio increased to $90 million and 0.31%, respectively, as of August 31, 2021, from $86 million and 0.30%, respectively as of May 31, 2021, resulting from a current-quarter addition to the allowance of $4 million, predominantly attributable to an increase in the collective allowance due to higher expected default rates derived from third-party utility sector default data, which we use to inform the default rates used in measuring our collective allowance for credit losses, and an increase in the asset-specific allowance for loans outstanding to Brazos.
February 2021 Polar Vortex— CFC Texas Exposure
We continue to believe that the significant adverse financial impact from the surge in wholesale power costs in Texas during the February 2021 polar vortex was primarily limited to our outstanding loan exposure to Brazos and Rayburn of $86 million and $375 million, respectively, as of August 31, 2021. In June 2021, Texas enacted securitization legislation that offers financing programs for qualifying electric cooperatives exposed to elevated power costs during the February 2021 polar vortex. We believe Brazos and Rayburn qualify for the financing programs, but we are currently uncertain whether Brazos will utilize the provisions available under this legislation. In filings made with the Public Utility Commission of Texas, Rayburn has stated that it intends to utilize the securitization legislation to finance its elevated power costs and has taken steps to begin the process to do so. However, there are many factors that may impact the outcome of a securitization transaction and the ultimate collectibility of Rayburn’s loans outstanding, which we are unable to predict.
We discuss our methodology for estimating the allowance for credit losses under the CECL model in “Note 1—Summary of Significant Accounting Policies—Allowance for Credit Losses” and provide information on the management judgment and uncertainties involved in our determining the allowance for credit losses in “MD&A—Critical Accounting Policies and Estimates—Allowance for Credit Losses” in our 2021 Form 10-K. We provide additional information on our loans and allowance for credit losses under “Note 4—Loans” and “Note 5—Allowance for Credit Losses” of this Report.
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.
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 August 31, 2021. Our largest counterparty exposure, based on the outstanding notional amount, represented approximately 24% of the total outstanding notional amount of derivatives as of both August 31, 2021 and May 31, 2021.
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 August 31, 2021. Moody’s, S&P and Fitch had our ratings on stable outlook as of August 31, 2021. We had $6,130 million of outstanding notional amounts of our derivative contracts with rating triggers as of August 31, 2021, with required net payments of $427 million 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. We provide additional detail on the notional amount and payments due on these derivative contracts in “Note 9—Derivative Instruments and Hedging Activities.”
In addition, we had 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 $224 million as of August 31, 2021, and the swaps were in an unrealized loss position of $33 million as of August 31, 2021.
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 $450 million as of August 31, 2021, compared with $344 million as of May 31, 2021. There were no counterparties that fell below the rating trigger levels in our interest swap contracts as of August 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” in our 2021 Form 10-K and “Item 1A. Risk Factors” in this Report for additional information about credit risks related to our business.
We define liquidity as the ability to convert assets into cash quickly and efficiently, maintain access to available funding and 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. We provide additional information on our liquidity risk-management framework under “Item 7. MD&A—Liquidity Risk—Liquidity Risk Management” in our 2021 Form 10-K.
Our primary sources of funds include member loan principal repayments, securities held in our investment portfolio, committed bank revolving lines of credit, committed loan facilities under Guaranteed Underwriter Program, revolving note purchase agreements with Farmer Mac and proceeds from debt issuances to members, in private placements and in the capital markets. Our primary uses of funds include loan advances to members, principal and interest payments on borrowings, periodic interest settlement payments related to our derivative contracts and operating expenses.
Although as a non-bank financial institution we are not subject to regulatory liquidity requirements, we monitor our liquidity and funding positions on an ongoing basis and assess our ability to meet our scheduled debt obligations and other cash flow requirements based on point-in-time metrics as well as forward-looking projections. Our liquidity and funding assessment takes into consideration amounts available under existing liquidity sources, the expected rollover of member short-term investments and scheduled loan principal repayment amounts, as well as our continued ability to access the private placement and capital markets.
Available Liquidity
As part of our strategy in managing liquidity risk and meeting our liquidity objectives, we seek to maintain various committed sources of funding that are available to meet our near-term liquidity needs. Table 16 presents our available liquidity, which consists of cash and cash equivalents, our debt securities investment portfolio and amounts under committed credit facilities, as of August 31, 2021 and May 31, 2021.
Table 16: Available Liquidity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2021 | | May 31, 2021 |
(Dollars in millions) | | Total | | Accessed | | Available | | Total | | Accessed | | Available |
Liquidity sources: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 303 | | | $ | — | | | $ | 303 | | | $ | 295 | | | $ | — | | | $ | 295 | |
Debt securities investment portfolio(1) | | 570 | | | — | | | 570 | | | 576 | | | — | | | 576 | |
Committed bank revolving line of credit agreements—unsecured(2) | | 2,600 | | | 3 | | | 2,597 | | | 2,725 | | | 3 | | | 2,722 | |
Guaranteed Underwriter Program committed facilities—secured(3) | | 8,173 | | | 7,198 | | | 975 | | | 8,173 | | | 7,198 | | | 975 | |
Farmer Mac revolving note purchase agreement, dated March 24, 2011, as amended—secured(4) | | 5,500 | | | 3,360 | | | 2,140 | | | 5,500 | | | 2,978 | | | 2,522 | |
Total available liquidity | | $ | 17,146 | | | $ | 10,561 | | | $ | 6,585 | | | $ | 17,269 | | | $ | 10,179 | | | $ | 7,090 | |
____________________________(1)Our portfolio of equity securities consists primarily of preferred stock securities that are not as readily redeemable; therefore, we exclude our portfolio of equity securities from our available liquidity. We had investment-grade corporate debt securities with an aggregate fair value of $236 million and $211 million as of August 31, 2021 and May 31, 2021, respectively, that we transferred and pledged as collateral in short-term repurchase transactions. We repurchased these securities on September 3, 2021 and June 2, 2021, respectively.
(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 August 31, 2021 and May 31, 2021, 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, both of which are reported on our consolidated balance sheets at fair value. The aggregate fair value of the securities in our investment portfolio was $605 million as of August 31, 2021, consisting of debt securities with a fair value of $570 million and equity securities with a fair value of $35 million. In comparison, the aggregate 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.
Our debt securities investment portfolio is intended to serve as an additional source of liquidity. Under master repurchase agreements that we have with two banks, we can obtain short-term funding in secured borrowing transactions by selling investment-grade corporate debt securities from our investment securities portfolio subject to an obligation to repurchase the
same or similar securities at an agreed-upon price and date. On August 27, 2021, we borrowed $225 million under a securities repurchase transaction. On September 3, 2021, we repurchased the underlying pledged debt securities, which had an aggregate fair value of $236 million as of August 31, 2021.
We provide additional information on our investment securities portfolio in “Note 3—Investment Securities.”
Borrowing Capacity Under Committed Credit Facilities
The 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. 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. 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 17 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 August 31, 2021.We did not have any outstanding borrowings under our bank revolving line of credit agreements as of August 31, 2021.
Table 17: Committed Bank Revolving Line of Credit Agreements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2021 | | | | |
(Dollars in millions) | | Total Commitment | | Letters of Credit Outstanding | | Available Amount | | Maturity | | Annual Facility Fee (1) |
Bank revolver agreement term: | | | | | | | | | | |
3-year agreement | | $ | 1,245 | | | $ | — | | | $ | 1,245 | | | November 28, 2024 | | 7.5 bps |
5-year agreement | | 1,355 | | | 3 | | | 1,352 | | | November 28, 2025 | | 10 bps |
Total | | $ | 2,600 | | | $ | 3 | | | $ | 2,597 | | | | | |
____________________________
(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.
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. Each advance is subject to quarterly amortization and a final maturity not longer than 30 years from the date of the advance, and we are required to pledge eligible distribution system loans or power supply system loans as collateral in an amount at least equal to our total outstanding borrowings.
Under this agreement, we had accessed $7,198 million as of both August 31, 2021 and May 31, 2021. We had up to $975 million available for borrowing under the Guaranteed Underwriter Program as of August 31, 2021. 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.
On September 15, 2021, we received a commitment letter for the guarantee by RUS of a $550 million loan facility from the Federal Financing Bank under the Guaranteed Underwriter Program.
Farmer Mac Revolving Note Purchase Agreement—Secured
As indicated in Table 16, 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, through 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.
Under this agreement, we had outstanding secured notes payable totaling $3,360 million and $2,978 million as of August 31, 2021 and May 31, 2021, respectively. We borrowed $500 million under this note purchase agreement with Farmer Mac during the current quarter. The amount available for borrowing under this agreement was $2,140 million as of August 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.
We provide additional information on pledged collateral below under “Pledged Collateral” in this section and in “Note 3—Investment Securities” and “Note 4—Loans.”
Short-Term Borrowings
Our short-term borrowings, which we rely on to meet our daily, near-term funding needs, consist of commercial paper, which we offer to members and dealers, select notes and daily liquidity fund notes offered to members, medium-term notes offered to members and dealers and funds from repurchase secured borrowing transactions.
Short-term borrowing increased $796 million to $5,378 million as of August 31, 2021, and accounted for 19% of total debt outstanding, from $4,582 million as of May 31, 2021 and 17% of total debt outstanding. The increase in short-term borrowings was primarily driven by an advance of $500 million under the Farmer Mac revolving note purchase agreement during the current quarter.
Member investments have historically been our primary source of short-term borrowings. Table 18 displays the composition, by funding source, of our short-term borrowings as of August 31, 2021 and May 31, 2021. As indicated in Table 18, members’ investments represented 68% and 76% of our outstanding short-term borrowings as of August 31, 2021 and May 31, 2021, respectively.
Table 18: Short-Term Borrowings—Funding Sources
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2021 | | May 31, 2021 |
(Dollars in thousands) | | Amount Outstanding | | % of Total Short-Term Borrowings | | Amount Outstanding | | % of Total Short-Term Borrowings |
Funding source: | | | | | | | | |
Members | | $ | 3,643,015 | | | 68 | % | | $ | 3,487,004 | | | 76 | % |
Private placement—Farmer Mac notes payable | | 500,000 | | | 9 | | | — | | | — | |
Capital markets | | 1,235,402 | | | 23 | | | 1,095,092 | | | 24 | |
Total | | $ | 5,378,417 | | | 100 | % | | $ | 4,582,096 | | | 100 | % |
Our intent is to manage our short-term wholesale funding risk by maintaining dealer commercial paper outstanding at an amount near or below $1,250 million for the foreseeable future, although the intra-period amount of dealer commercial
paper outstanding may fluctuate based on our liquidity requirements. Dealer commercial paper outstanding of $1,010 million as of August 31, 2021 and $895 million as of May 31, 2021 was below our targeted maximum threshold of $1,250 million. We had borrowings under securities repurchase transactions of $225 million and $200 million as of August 31, 2021 and May 31, 2021, respectively.
See “Note 6—Short-Term Borrowing” for additional information on our short-term borrowings.
Long-Term and Subordinated Debt
Long-term and subordinated debt, which represents the most significant source of our funding, totaled $22,399 million and $22,844 million as of August 31, 2021 and May 31, 2021, respectively, and accounted for 81% and 83% of total debt outstanding as of each respective date.
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.” Under our effective shelf registration statements filed with the SEC,U.S. Securities and Exchange Commission (“SEC”), we may offer and issue the following debt 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 October 2023; and
•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 2022.
As discussed in “Consolidated Balance Sheet Analysis—Debt,” long-termAlthough we register member capital securities and subordinated debtthe 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 $21,329 millionsenior indebtedness we may incur.
Long-Term Debt and $22,038 million as of November 30, 2020Subordinated Debt—Issuances and May 31, 2020, respectively, accounted for 82% and 85% of total debt outstanding as of each respective date. Repayments
Table 2919 summarizes long-term and subordinated debt issuances and repayments during the sixthree months ended November 30, 2020.August 31, 2021.
Table 29:19: Long-Term and Subordinated Debt Issuances and Repayments
| | | Six Months Ended November 30, 2020 | | Three Months Ended August 31, 2021 |
(Dollars in thousands) | (Dollars in thousands) | | Issuances | | Repayments(1) | | Change | (Dollars in thousands) | | Issuances | | Repayments(1) | | Change |
Long-term and subordinated debt activity: | | | | | | | |
Collateral trust bonds | | $ | 400,000 | | | $ | 755,000 | | | $ | (355,000) | | |
Debt product type: | | Debt product type: | | | | | | |
| | Guaranteed Underwriter Program notes payable | Guaranteed Underwriter Program notes payable | | — | | | 70,921 | | | (70,921) | | Guaranteed Underwriter Program notes payable | | $ | — | | | $ | 39,346 | | | $ | (39,346) | |
Farmer Mac notes payable | Farmer Mac notes payable | | — | | | 35,680 | | | (35,680) | | Farmer Mac notes payable | | — | | | 118,165 | | | (118,165) | |
Medium-term notes sold to members | Medium-term notes sold to members | | 26,717 | | | 109,952 | | | (83,235) | | Medium-term notes sold to members | | 12,800 | | | 25,050 | | | (12,250) | |
Medium-term notes sold to dealers | Medium-term notes sold to dealers | | — | | | 104,166 | | | (104,166) | | Medium-term notes sold to dealers | | 31,834 | | | 311,367 | | | (279,533) | |
| Members’ subordinated certificates | Members’ subordinated certificates | | 13,448 | | | 66,101 | | | (52,653) | | Members’ subordinated certificates | | 33 | | | 787 | | | (754) | |
Total | Total | | $ | 440,165 | | | $ | 1,141,820 | | | $ | (701,655) | | Total | | $ | 44,667 | | | $ | 494,715 | | | $ | (450,048) | |
____________________________
(1) Repayments include principal maturities, scheduled amortization payments, repurchases and redemptions.
Long-Term and Subordinated Debt—Principal Maturity and Amortization
Table 3020 summarizes the scheduled principal maturity and amortization and maturities of the principal amount ofour long-term debt, subordinated deferrable debt and members’ subordinated certificates outstanding of as of November 30, 2020,August 31, 2021, in each fiscal year during the five-year period ending May 31, 2025,2026, and thereafter.
Table 30:20: Long-Term and Subordinated DebtDebt—Scheduled Principal MaturityMaturities and Amortization(1)
| (Dollars in thousands) | (Dollars in thousands) | | Scheduled Amortization(1) | | % of Total | (Dollars in thousands) | | Scheduled Amortization(2) | | % of Total |
Fiscal year ending May 31: | Fiscal year ending May 31: | | | | | Fiscal year ending May 31: | | | | |
2021 | | $ | 967,770 | | | 4 | % | |
2022 | 2022 | | 2,570,699 | | | 12 | | 2022 | | $ | 2,109,765 | | | 10 | % |
2023 | 2023 | | 1,262,402 | | | 6 | | 2023 | | 1,875,095 | | | 8 | |
2024 | 2024 | | 1,148,881 | | | 5 | | 2024 | | 1,663,235 | | | 7 | |
2025 | 2025 | | 837,900 | | | 4 | | 2025 | | 852,876 | | | 4 | |
2026 | | 2026 | | 2,498,412 | | | 11 | |
Thereafter | Thereafter | | 14,835,026 | | | 69 | | Thereafter | | 13,689,467 | | | 60 | |
Total | Total | | $ | 21,622,678 | | | 100 | % | Total | | $ | 22,688,850 | | | 100 | % |
____________________________
(1)Amounts presented are based on the face amount of debt outstanding as of August 31, 2021, and therefore does not include related debt issuance costs and discounts.
(2) Member loan subordinated certificates totaling $206$189 million amortize annually based on the unpaid principal balance of the related loan.
We provide additional information on our financing activities above under “Consolidated Balance Sheet Analysis—Debt” and in “Note 7—Long-Term Debt” and “Note 8—Subordinated Deferrable Debt.”
Debt Securities Investment PortfolioPledged Collateral
We have anUnder our secured borrowing agreements we are required to pledge loans, investment portfolio of debt securities which are classified as trading, that serves as an additional sourceor other collateral and maintain certain pledged collateral ratios. Of our total debt outstanding of liquidity. Our debt securities investment portfolio increased $243 million to $552$27,778 million as of November 30, 2020, from $309August 31, 2021, $17,016 million, or 61%, was secured by pledged loans totaling $19,110 million and pledged investment debt securities with an aggregate fair value of $236 million. In comparison, of our total debt outstanding of $27,426 million as of May 31, 2020, largely due to the purchase of additional securities during the six months ended November 30, 2020. During the fourth quarter of fiscal year 2020, we executed a plan for the orderly liquidation of a portion of our2021, $16,644 million, or 61%, was secured by pledged loans totaling $19,153 million and pledged investment debt securities fromwith an aggregate fair value of $211 million. Following is additional information on the collateral pledging requirements for our investment portfolio due to volatility in the financial markets in mid-March 2020 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 our investment portfolio's size to a level more comparable with the level prior to the liquidation.secured borrowing agreements.
Secured Borrowing Agreements—Pledged Loan Requirements
Our
We are required to pledge loans or other collateral in transactions under our collateral trust bond indentures, bond agreements under the Guaranteed Underwriter Program and note purchase agreements with Farmer Mac. Total debt securities investment portfoliooutstanding is unencumberedpresented on our consolidated balance sheets net of unamortized discounts and structured so that the securities generally have active secondary or resale markets under normal market conditions. The objectiveissuance costs. However, as discussed below, we typically maintain pledged collateral in excess of the portfolio isrequired percentage. Under the provisions of our committed bank revolving line of credit agreements, the excess collateral that we are allowed 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 twopledge cannot exceed 150% of the leading global credit rating agencies, when available,outstanding borrowings under our collateral trust bond indentures, the Guaranteed Underwriter Program or the corresponding equivalent, when not available. Securities rated investment grade, thatFarmer Mac note purchase agreements.
Table 21 displays the collateral coverage ratios pursuant to these secured borrowing agreements as of August 31, 2021 and May 31, 2021.
is those rated Baa3 or higher by Moody’s or BBB- or higher by S&P or BBB- or higher by Fitch, are generally consideredTable 21: Collateral Pledged
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Requirement Coverage Ratios | | |
| | | | Maximum Committed Bank Revolving Line of Credit Agreements | | Actual Coverage Ratios(1) |
| | Minimum Debt Indentures | | | August 31, 2021 | | May 31, 2021 |
Secured borrowing agreement type: | | | | | | | | |
Collateral trust bonds 1994 indenture | | 100 | % | | 150 | % | | 114 | % | | 116 | % |
Collateral trust bonds 2007 indenture | | 100 | | | 150 | | | 113 | | | 115 | |
Guaranteed Underwriter Program notes payable | | 100 | | | 150 | | | 114 | | | 114 | |
Farmer Mac notes payable | | 100 | | | 150 | | | 106 | | | 116 | |
Clean Renewable Energy Bonds Series 2009A | | 100 | | | 150 | | | 109 | | | 120 | |
___________________________
(1) Calculated based on the amount of collateral pledged divided by the rating agenciesface amount of outstanding secured debt.
Table 22 displays the unpaid principal balance of loans pledged for secured debt, the excess collateral pledged and unencumbered loans as of August 31, 2021 and May 31, 2021.
Table 22: Unencumbered Loans
| | | | | | | | | | | | | | |
(Dollars in thousands) | | August 31, 2021 | | May 31, 2021 |
Total loans outstanding(1) | | $ | 28,870,758 | | | $ | 28,415,107 | |
Less: Loans required pledged under secured debt agreements(2) | | (17,046,824) | | | (16,704,335) | |
Loans pledged in excess of required amount(2)(3) | | (2,063,072) | | | (2,448,424) | |
Total pledged loans | | (19,109,896) | | | (19,152,759) | |
Unencumbered loans | | $ | 9,760,862 | | | $ | 9,262,348 | |
| | | | | | | | | | | | | | |
Unencumbered loans as a percentage of total loans outstanding | | 34 | % | | 33 | % |
____________________________
(1) Represents the unpaid principal balance of loans as of the end of each period. Excludes unamortized deferred loan origination costs of $12 million as of both August 31, 2021 and May 31, 2021.
(2) Reflects unpaid principal balance of pledged loans.
(3) Excludes cash collateral pledged to secure debt. If there is an event of default under most of our indentures, we can only withdraw the excess collateral if we substitute cash or permitted investments of equal value.
As displayed above in Table 22, we had excess loans pledged as collateral totaling $2,063 million and $2,448 million as of August 31, 2021 and May 31, 2021, respectively. We typically pledge loans in excess of the required amount for the following reasons: (i) our distribution and power supply loans are typically amortizing loans that require scheduled principal payments over the life of the loan, whereas the debt securities issued under secured indentures and agreements typically have bullet maturities; (ii) distribution and power supply borrowers have the option to prepay their loans; and (iii) individual loans may become ineligible for various reasons, some of which may be of lower credit risk than non-investment grade securities.temporary.
We provide additional information on our borrowings, including the maturity profile, below in “Liquidity Risk” and additional information on pledged loans in “Note 4—Loans” in this Report. For additional detail on each of our debt product types, refer to “Note 5—Short-Term Borrowings,” “Note 7—Long-Term Debt,” “Note 8—Subordinated Deferrable Debt” and “Note 9—Members’ Subordinated Certificates” in our 2021 Form 10-K.
Secured Borrowing Agreements—Pledged Investment Securities
As discussed above in this section, we have master repurchase agreements with two banks whereby we may sell investment-grade corporate debt securities from our investment securities portfolio subject to an obligation to repurchase the same or similar securities at an agreed-upon price and date. Transactions under these repurchase agreements are accounted for as collateralized financing agreements and not as a sale. The obligation to repurchase the securities is reported as securities sold under repurchase agreements, which we include as a component of short-term borrowings on our consolidated balance sheets. We disclose the fair value of the debt securities underlying repurchase transactions; however, the pledged debt
securities remain in the investment debt securities portfolio reported on our consolidated balance sheets. We had borrowings under repurchase transactions of $225 million and $200 million as of August 31, 2021 and May 31, 2021, respectively. We repurchased the pledged debt securities underlying these transactions, which had a fair value of $236 million and $211 million as of August 31, 2021 and May 31, 2021, respectively, within eight days or less of the repurchase transaction dates.
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 and funding 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 information on our unadvanced loan commitments in “Note 3—Investment Securities.4—Loans” and information on our guarantee obligations in “Note 11—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.Funds
Table 3123 below displays a projection of our projectedprimary sources and uses of cash from debt and investment activity,funds, by quarter, over each of the next six fiscal quarters through the quarter ending May 31, 2022.February 28, 2023. Our assumptions also includeprojection is based on the following:following, which includes several assumptions: (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 withmarket-risk management goal of minimizing the mismatch between the cash flows from our financial assets and our financial liabilities; (ii) amounts available under our committed bank revolving lines of credit servingare intended to serve as a backup liquidity facility for commercial paper and on maintaining outstanding dealer commercial paper at an amount below $1,250 million; (ii)source of liquidity; (iii) long-term loan scheduled amortization paymentsrepayment amounts represent the scheduled long-term loan principal payments for long-term loans outstanding as of November 30, 2020,August 31, 2021, plus estimated prepayment amounts on long-term loans; (iv) amounts reported in Table 23 as “other loan repayments” and our current estimate of long-term“other loan prepayments, which the amount and timing ofadvances” are subjectprimarily attributable to change; (iii) other loanexpected repayments and other loan advances primarily relate to lineunder lines of credit repaymentscredit; (v) long-term and advances; (iv) long-termsubordinated debt maturities reflectconsist of both scheduled maturities of outstandingprincipal maturity and amortization amounts and projected principal maturity and amortization amounts on term debt for the periodsoutstanding in each period presented; and (v)(vi) long-term loan advances reflectare based on our current estimateprojection of member demand for loans, the amount and timing of which are subject to change.loans.
Table 31:23: Projected Sources and Uses of Liquidity from Debt and Investment ActivityFunds(1)
| | | | | Projected Sources of Liquidity | | Projected Uses of Liquidity | | | | | | Projected Sources of Funds | | Projected Uses of Funds | | |
(Dollars in millions) | (Dollars in millions) | | | Long-Term Debt Issuance | | Anticipated Long-Term Loan Repayments(2) | | Other Long-Term Repayments(3) | | Total Projected Sources of Liquidity | | Long-Term Debt Maturities(4) | | Long-Term Loan Advances | | Other Loan Advances(5) | | Total Projected Uses of Liquidity | | Other Sources/ (Uses) of Liquidity(6) | | (Dollars in millions) | | | Long-Term Debt Issuance | | Anticipated Long-Term Loan Repayments(2) | | Other Loan Repayments(3) | | Total Projected Sources of Funds | | Long-Term and Subordinated Debt Maturities(4) | | Long-Term Loan Advances | | Other Loan Advances(5) | | Total Projected Uses of Funds | | Other Sources/ (Uses) of Funds(6) | |
| 3Q FY2021 | | | $ | 755 | | | $ | 328 | | | $ | — | | | $ | 1,083 | | | $ | 454 | | | $ | 712 | | | $ | 75 | | | $ | 1,241 | | | $ | 104 | | | |
4Q FY2021 | | | 535 | | | 329 | | | — | | | 864 | | | 707 | | | 345 | | | — | | | 1,052 | | | 124 | | | |
1Q FY2022 | | | 483 | | | 342 | | | — | | | 825 | | | 548 | | | 495 | | | — | | | 1,043 | | | 179 | | | |
2Q FY2022 | 2Q FY2022 | | | 311 | | | 340 | | | — | | | 651 | | | 352 | | | 331 | | | — | | | 683 | | | (29) | | | 2Q FY2022 | | | $ | 1,252 | | | $ | 592 | | | $ | 73 | | | $ | 1,917 | | | $ | 503 | | | $ | 685 | | | $ | 80 | | | $ | 1,268 | | | $ | (832) | | |
3Q FY2022 | 3Q FY2022 | | | 1,703 | | | 325 | | | — | | | 2,028 | | | 1,234 | | | 537 | | | — | | | 1,771 | | | (280) | | | 3Q FY2022 | | | 1,899 | | | 346 | | | 150 | | | 2,395 | | | 1,762 | | | 666 | | | 15 | | | 2,443 | | | 8 | | |
4Q FY2022 | 4Q FY2022 | | | 455 | | | 337 | | | — | | | 792 | | | 547 | | | 531 | | | — | | | 1,078 | | | 223 | | | 4Q FY2022 | | | 568 | | | 347 | | | — | | | 915 | | | 602 | | | 442 | | | 30 | | | 1,074 | | | 100 | | |
1Q FY2023 | | 1Q FY2023 | | | 336 | | | 368 | | | — | | | 704 | | | 452 | | | 556 | | | — | | | 1,008 | | | 304 | | |
2Q FY2023 | | 2Q FY2023 | | | 593 | | | 354 | | | — | | | 947 | | | 740 | | | 541 | | | — | | | 1,281 | | | 274 | | |
3Q FY2023 | | 3Q FY2023 | | | 1,308 | | | 357 | | | — | | | 1,665 | | | 942 | | | 543 | | | — | | | 1,485 | | | (218) | | |
| Total | Total | | | $ | 4,242 | | | $ | 2,001 | | | $ | — | | | $ | 6,243 | | | $ | 3,842 | | | $ | 2,951 | | | $ | 75 | | | $ | 6,868 | | | $ | 321 | | | Total | | | $ | 5,956 | | | $ | 2,364 | | | $ | 223 | | | $ | 8,543 | | | $ | 5,001 | | | $ | 3,433 | | | $ | 125 | | | $ | 8,559 | | | $ | (364) | | |
____________________________
(1) The dates presented represent the end of each quarterly period through the quarter ended May 31, 2022.February 28, 2023.
(2) Anticipated long-term loan repayments include scheduled long-term loan amortizations, anticipated cash repayments at repricing date and loan 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 31,23, we currently project long-term advances of $1,883$2,349 million over the next 12 months, which we anticipate will exceed anticipated long-term loan repayments over the same period of $1,339$1,653 million, byresulting in net loan growth of approximately $544 million. $696 million over the next 12 months.
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
On August 6, 2021, S&P revised its outlook on CFC to stable from negative, stating that the outlook revision mainly reflected its view that the risk of CFC experiencing substantial further losses stemming from the February 2021 polar vortex had diminished. S&P also affirmed CFC’s issuer ratings. On September 13, 2021, Fitch affirmed CFC’s issuer rating and stable outlook. Our credit ratings on numerous factors, including liquidity, capital adequacy, industry position, member support, management, asset quality, quality of earnings and the probability of systemic support. Significant changes in these factors could result in different ratings. During the current quarter, Moody's,by Moody’s, S&P and Fitch affirmed our ratings and outlook.remain unchanged from August 31, 2021 through the date of this Report. Table 3224 displays our credit ratings as of November 30, 2020, which are unchanged from MayAugust 31, 2020, and as of the date of the filing of this Report.2021.
Table 32:24: Credit Ratings
| | | | | | | | | | | | | | | | | | | | |
| | November 30, 2020August 31, 2021 |
| | Moody’s | | S&P | | Fitch |
CFC debt product type: | | | | | | |
Long-term issuer credit rating(1) | | A2 | | AA- | | A |
Senior secured debt(2) | | A1 | | AA- | | A+ |
Senior unsecured debt(3) | | A2 | | AA- | | A |
Subordinated debt | | A3 | | BBB+BBB | | BBB+ |
Commercial paper | | P-1 | | A-1A-2 | | F1 |
Outlook | | Stable | | Stable | | Stable |
___________________________
(1) Based on our senior unsecured debt rating.
(2)Applies to our collateral trust bonds.
(3)Applies to our medium-term notes.
In order to access the commercial paper markets at attractive rates, we believe we need to maintain our current commercial paper credit ratings of P-1 by Moody’s, A-1 by S&P and F1 by Fitch. In addition, the notes payable to the Federal Financing Bank and guaranteed by RUS under the Guaranteed Underwriter Program contain a provision that if during any portion of the fiscal year, our senior secured credit ratings do not have at least two of the following ratings: (i) A3 or higher from Moody’s, (ii) A- or higher from S&P, (iii) A- or higher from Fitch or (iv) an equivalent rating from a successor rating agency to any of the above rating agencies, we may not make cash patronage capital distributions in excess of 5% of total patronage capital. See “Credit Risk—Counterparty Credit Risk—Credit Risk-Related Contingent Features” above for information on credit rating provisions related to our derivative contracts.
Financial Ratios
Our debt-to-equity ratio decreasedincreased to 30.6022.99 as of November 30, 2020,August 31, 2021, from 42.4020.17 as of May 31, 2020,2021, primarily due to the an increase in equity from our reported net income of $305 million, which was partially offset by a decrease in equity as a resultfrom the combined impact of our reported net loss of $90 million and the retirementallocation of patronage capital of $60$58 million authorized by the CFC Board of Directors in July 2020 and paid to members in September 2020, and the decrease to retained earnings of $4 million from the cumulative-effect adjustment recorded at adoption of the CECL accounting standard on June 1, 2020.2021.
Our adjusted debt-to-equity ratio increased above our targeted threshold of 6.00-to-1 to 5.906.27 as of November 30, 2020,August 31, 2021, from 5.856.15 as of May 31, 2020,2021. The increase was primarily attributable to a reductionan increase in adjusted equity dueliabilities resulting from additional borrowings to the maturity of subordinated certificates and the authorized patronage capital retirement amount, partially offset by adjusted net income for the current period.fund growth in our loan 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 November 30, 2020.August 31, 2021.
As discussed above in “Summary of Selected Financial Data,” the financial covenants set forth in our committed bank revolving line of credit agreements and senior debt indentures are based on adjusted financial measures, including adjusted TIER. We provide a reconciliation of adjusted TIER and other non-GAAP measures disclosed in this Report to the most comparable U.S. GAAP measures below in “Non-GAAP Financial Measures.” See “Item 7. MD&A—Non-GAAP Measures” in our 2021 Form 10-K for a discussion of each of our non-GAAP measures and an explanation of the adjustments below in “Non-GAAP Financial Measures.”to derive these measures.
Interest rate risk represents our primary source of market risk. Interest rate risk, is the risk to current or anticipated earnings or equity arising primarily 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 assetsloans and the liabilities funding those assets. The timing ofour loans. We seek to generate stable adjusted net interest income on a sustained and long-term basis by minimizing the mismatch between the cash flows from our financial assets and our financial liabilities. We use derivatives as a tool in matching the duration and repricing characteristics of our interest-rate sensitive assets is impacted by re-pricing characteristics, prepayments and contractual maturities. Our interest rate risk exposure is primarily related to the funding of the fixed-rate loan portfolio.liabilities. We provide a discussionadditional information on our management of how we manage interest rate risk in our 20202021 Form 10-K under “Item 7. MD&A—Market Risk—MarketInterest Rate Risk Management.”
FutureBelow we discuss how we measure interest rate risk. We also provide a status update on actions taken to identify, assess, monitor and mitigate risks associated with the expected discontinuance or unavailability of LIBOR and facilitate an orderly transition from LIBOR as a benchmark interest reference rate to an alternative benchmark rate.
Measurement of Interest Rate Risk
Our Asset Liability Management (“ALM”) framework includes the use of analytic tools and capabilities, which allow us to provide a comprehensive profile of our interest rate risk exposure. We routinely measure and assess our interest rate risk exposure using various methodologies through the use of ALM models that enable us to more accurately measure and monitor our interest rate risk exposure under multiple interest rate scenarios using several different techniques, including, among others, the sensitivity of our net interest and adjusted net interest income to changes in interest rates and duration gap analysis. Below we present two measures we use to assess our interest rate risk exposure: (i) the interest rate sensitivity of our projected net interest income and adjusted net interest income; and (ii) duration gap.
Interest Rate Sensitivity Analysis
We regularly evaluate the sensitivity of our interest-earning assets and the interest-bearing liabilities funding those assets and our net interest income and adjusted net interest income projections under multiple interest rate scenarios. Each month we update our ALM models to reflect our existing balance sheet position and incorporate different assumptions about forecasted changes in our current balance sheet position over the next 12 months. Based on the forecasted balance sheet changes, we generate various projections of net interest income and adjusted net interest income over the next 12 months. Management reviews and assesses these projections and underlying assumptions to identify a baseline projection of net interest income and adjusted net interest income over the 12 months, which reflects what management considers, at the time, as the most likely scenario.
Table 25 presents the estimated percentage impact that a hypothetical instantaneous parallel shift of plus or minus 100 basis points in the interest rate yield curve as of each of the reported dates would have on our baseline 12-month projected net interest income and adjusted net interest income as of these dates. As discussed under “Summary of Selected Financial Data,” we derive adjusted net interest income by adjusting our reported interest expense and net interest income to include the impact of net periodic derivative cash settlements expense amounts. Because short-term interest rates were near zero as of both August 31, 2021 and May 31, 2021, we assumed an interest rate floor rate of 0% if the hypothetical instantaneous interest rate shift of minus 100 basis points resulted in a negative interest rate.
Table 25: Interest Rate Sensitivity Analysis
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2021 | | May 31, 2021 |
Estimated Impact(1) | | + 100 Basis Points | | – 100 Basis Points(2) | | + 100 Basis Points | | – 100 Basis Points(2) |
Net interest income | | (8.13)% | | (1.22)% | | (6.13)% | | (3.34)% |
Derivative cash settlements interest expense | | 7.53% | | (2.07)% | | 8.12% | | (3.01)% |
Adjusted net interest income(3) | | (0.60)% | | (3.29)% | | 1.99% | | (6.35)% |
| | | | | | | | |
| | | | | | | | |
____________________________
(1)The actual impact on our reported and adjusted net interest income may differ significantly from the sensitivity analysis presented.
(2)Floored at a zero percent interest rate.
(3)We include net periodic derivative cash settlement interest expense amounts as a component of interest expense in deriving adjusted net interest income. See the section “Non-GAAP Financial Measures” for a reconciliation of the non-GAAP measures presented in this Report to the most comparable U.S. GAAP measure.
The above interest rate sensitivity analysis takes into consideration existing interest rate-sensitive assets and liabilities as of the reported date and forecasted changes to the balance sheet over the next 12 months under management’s baseline projection. Loans with a fixed interest rate to maturity and loans on nonaccrual status have no impact on the sensitivity measures. As discussed in the “Executive Summary—Outlook” section, we currently anticipate growth in long-term loans outstanding over the next 12 months of $696 million, and we believe that our current projected loan growth, coupled with our current estimated cost of funding this loan growth, will result in a slight increase in our net interest income and adjusted net interest income over the next 12 months.
As indicated in Table 25, a hypothetical instantaneous 100 basis point plus or minus change in interest rates across the yield curve would result in reduction in our projected net interest income over the next 12 months of 8.13% and 1.22%, respectively, as of August 31, 2021, and a reduction in our projected adjusted net interest income over the next 12 months of 0.60% and 3.29%, respectively, as of August 31, 2021. The sensitivity measure changes between August 31, 2021 and May 31, 2021 are primarily attributable to changes in the timing, size, and interest rate type composition of our forecasted balance sheet changes as well as changes in current interest rates and forecasted interest rates.
Duration Gap
The duration gap, which represents the difference between the estimated duration of our interest-earning assets and the estimated duration of our interest-bearing liabilities, summarizes the extent to which the cash-flows for assets and liabilities are matched over time. A positive duration gap indicates that the duration of our interest-earning assets is greater than the duration of our debt and derivatives used in managing the differences in the timing between the maturities or repricing of our loans and the debt funding our loans and therefore an increased exposure to rising interest rates over the long term. Conversely, a negative duration gap indicates that the duration of our interest-earning assets is less than the duration of our debt and derivatives and therefore an increased exposure to declining interest rates over the long term. The duration gap provides a relatively concise and simple measure of the interest rate risk inherent in our balance sheet as of the reported date and does not incorporate projected changes in our balance sheet.
We had a positive duration gap of 4.75 months as of August 31, 2021, compared with a positive duration gap of 1.69 months as of May 31, 2021. We experienced an increase in long-term fixed-rate loans of $134 million during the current quarter; however, our long-term debt decreased $444 million and our short-term borrowings increased $796 million, which together contributed to the widening of the duration gap as of August 31, 2021.
Limitations of Interest Rate Risk Measures
While we believe that the interest income sensitivities and duration 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 particular point in time based on the existing balance sheet and, in some cases, expected future business growth and funding mix assumptions. The strategic actions that management may take to manage our balance sheet may differ significantly from our projections, which could cause our actual interest income to differ substantially from the above sensitivity analysis.
LIBOR Transition
In July 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates the LIBOR index, announced that the FCA intendsit intended to stop requestingcompelling 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 New York established the Alternative Reference Rates Committee (“ARRC”) which is comprised of private-market participants and ex-officio members representing banking and 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, calendar year. Management has formedin 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 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 performed an initial assessment of all of CFC’s LIBOR dependent contracts and financial instruments and the systems, models and processes that may be impacted. The LIBOR working group isbeen closely monitoring and assessing developments with respect to the phasing out of LIBOR transition and providing regular reports to our Chief Financial Officer and the CFC Board of Directors. The Alternative Reference Rate Committee (“ARRC”), a groupAn assessment of diverse private-market participants assembled by the Federal Reserve Boardall of CFC’s LIBOR-based contracts and financial instruments and the Federal Reserve Banksystems, models and processes that may be impacted has been completed. Table 26 summarizes our outstanding LIBOR-indexed financial instruments as of New York, has recommendedAugust 31, 2021 that companies should include hardwired fallback language for originationshave a contractual maturity date after September 30, 2020 and should stop originating LIBOR based loans by June 30, 2021. CFC is2023. These financial instruments are included in amounts reported on our consolidated balance sheets.
Table 26: LIBOR-Indexed Financial Instruments
| | | | | | | | |
(Dollars in millions) | | August 31, 2021 |
Loans to members, performing | | $ | 342 | |
Investment securities | | 50 | |
Debt | | 1,716 | |
| | |
In addition to the processfinancial instruments presented in Table 26, we have outstanding LIBOR-indexed interest rate swaps that have a contractual maturity date after June 30, 2023. The aggregate notional amount of ensuring that allthese interest rate swaps was $7,411 million as of its LIBOR based loans have hardwired fallback language and weAugust 31, 2021, which represented 86% of the total notional amount of our outstanding interest rate swaps of $8,604 million as of August 31, 2021.
We plan to stop originating new LIBOR basedLIBOR-based loans prior to June 30, 2021.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 have confirmed CFC’s adherence to the International Swaps and Derivatives Association, Inc. 2020 LIBOR Fallbacks Protocol for our derivative instruments. 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.
We discuss the risks related to the uncertainty as to the nature of potential changes and other reforms associated with the transition away from and expected replacement of LIBOR as a benchmark interest rate in in our 2020 Form 10-K under “Item 1A. Risk Factors.”
Matched Funding Objective
Our funding objective is to manage the matched funding of asset and liability repricing terms within a range of adjusted total assets (calculated by excluding derivative assets from total assets) deemed appropriate by the Asset Liability Committee based on the current environment and extended outlook for interest rates. We refer to the difference between fixed-rate loans scheduled for amortization or repricing and the fixed-rate liabilities and equity funding those loans asFactors” in our interest rate gap. Our primary strategies for managing our interest rate risk include the use of derivatives and limiting the amount of fixed-rate assets that can be funded by variable-rate debt to a specified percentage of adjusted total assets based on market conditions. We provide our members with many options on loans with regard to interest rates, the term for which the selected interest rate is in effect and the ability to convert or prepay the loan. Long-term loans generally have maturities of up to 35 years. Borrowers may select fixed interest rates for periods of one year through the life of the loan. We do not match fund the majority of our fixed-rate loans with a specific debt issuance at the time the loans are advanced. We generally fund the amount of fixed-rate assets that exceed fixed-rate debt and members’ equity with short-term debt, primarily commercial paper.
2021 Form 10-K.
Interest Rate Gap Analysis
As part of our asset-liability management, we perform a monthly interest rate gap analysis that provides a comparison between the timing of cash flows, by year, for fixed-rate assets scheduled for amortization and repricing and for fixed-rate liabilities and members’ equity maturing. This gap analysis is a useful tool in measuring, monitoring and mitigating the interest rate risk inherent in the funding of fixed-rate assets with variable-rate debt and also helpful in assessing liquidity risk.
Table 33 displays the scheduled amortization and repricing of fixed-rate assets and outstanding fixed-rate liabilities and equity as of November 30, 2020. We exclude variable-rate loans from our interest rate gap analysis, as we do not consider the interest rate risk on these loans to be significant because they are subject to repricing at least monthly. Loans with variable interest rates accounted for 7% and 8% of our total loan portfolio as of November 30, 2020 and May 31, 2020, respectively. Fixed-rate liabilities include debt issued at a fixed rate, as well as variable-rate debt swapped to a fixed rate using interest rate swaps. Fixed-rate debt swapped to a variable rate using interest rate swaps is excluded from the analysis because it is used to match fund our variable-rate loans. With the exception of members’ subordinated certificates, which are generally issued with extended maturities, and commercial paper, our liabilities have average maturities that closely match the repricing terms (but not the maturities) of our fixed-rate loans.
Table 33: Interest Rate Gap Analysis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | Prior to 5/31/21 | | Two Years 6/1/21 to 5/31/23 | | Two Years 6/1/23 to 5/31/25 | | Five Years 6/1/25 to 5/31/30 | | 10 Years 6/1/30 to 5/31/40 | | 6/1/40 and Thereafter | | Total |
Asset amortization and repricing | | $ | 797 | | | $ | 3,386 | | | $ | 3,062 | | | $ | 6,332 | | | $ | 8,015 | | | $ | 3,671 | | | $ | 25,263 | |
Liabilities and members’ equity: | | | | | | | | | | | | | | |
Long-term debt (1)(2) | | $ | 1,202 | | | $ | 3,863 | | | $ | 2,386 | | | $ | 6,292 | | | $ | 5,344 | | | $ | 1,871 | | | $ | 20,958 | |
Subordinated deferrable debt and subordinated certificates(2)(3) | | 7 | | | 404 | | | 161 | | | 491 | | | 153 | | | 854 | | | 2,070 | |
Members’ equity (4) | | — | | | 25 | | | 33 | | | 117 | | | 333 | | | 1,113 | | | 1,621 | |
Total liabilities and members’ equity | | $ | 1,209 | | | $ | 4,292 | | | $ | 2,580 | | | $ | 6,900 | | | $ | 5,830 | | | $ | 3,838 | | | $ | 24,649 | |
Gap (5) | | $ | (412) | | | $ | (906) | | | $ | 482 | | | $ | (568) | | | $ | 2,185 | | | $ | (167) | | | $ | 614 | |
| | | | | | | | | | | | | | |
Cumulative gap | | (412) | | | (1,318) | | | (836) | | | (1,404) | | | 781 | | | 614 | | | |
Cumulative gap as a % of total assets | | (1.46) | % | | (4.68) | % | | (2.97) | % | | (4.98) | % | | 2.77 | % | | 2.18 | % | | |
Cumulative gap as a % of adjusted total assets(6) | | (1.47) | | | (4.70) | | | (2.98) | | | (5.01) | | | 2.79 | | | 2.19 | | | |
____________________________
(1)Includes long-term fixed-rate debt and the net impact of our interest rate swaps.
(2)The maturity presented for debt is based on the call date.
(3)Represents the amount of subordinated deferrable debt and subordinated certificates allocated to fund fixed-rate assets.
(4)Represents the portion of members’ equity and allowance for credit losses allocated to fund fixed-rate assets. See Table 38: Members’ Equity below under “Non-GAAP Financial Measures” for a reconciliation of total CFC equity to members’ equity.
(5)Calculated based on the amount of assets scheduled for amortization and repricing less total liabilities and members’ equity funding those assets.
(6)Adjusted total assets represents total assets reported in our consolidated balance sheets less derivative assets.
When the amount of the cash flows related to fixed-rate assets scheduled for amortization and repricing exceeds the amount of cash flows related to the fixed-rate debt and equity funding those assets, we refer to the difference, or gap, as “warehousing.” When the amount of the cash flows related to fixed-rate assets scheduled for amortization and repricing is less than the amount of the cash flows related to the fixed-rate debt and equity funding those assets, we refer to the gap as “prefunding.” The amount of the gap is an indication of our interest rate and liquidity risk exposure. Our goal is to maintain an unmatched position related to the cash flows for fixed-rate financial assets within a targeted range of adjusted total assets.
Because the substantial majority of our financial assets are fixed-rate, amortizing loans and these loans are primarily funded with bullet debt and equity, our interest rate gap analysis typically reflects a warehouse position. When we are in a warehouse position, we utilize some short-term borrowings to fund the scheduled amortization and repricing of our financial
assets. However, we limit the extent to which we fund our long-term, fixed-rate loans with short-term, variable-rate debt because it exposes us to higher interest rate and liquidity risk. As indicated above in Table 33, we were in a warehouse position of $614 million as of November 30, 2020.
| | |
NON-GAAP FINANCIAL MEASURES |
As discussed above in the section “Summary of Selected Financial Data,” in addition to financial measures determined in accordance with U.S. GAAP, management evaluates performance based on certain non-GAAP measures, which we refer to as “adjusted” measures. We provide a discussion of each of our non-GAAP measures under “Item 7. MD&A—Non-GAAP Measures” in our 2020 Form 10-K. Below we provide a reconciliation of our adjusted measures presented in this Report to the most comparable U.S. GAAP measures. See “Item 7. MD&A—Non-GAAP Measures” in our 2021 Form 10-K for a discussion of each of our non-GAAP measures and an explanation of the adjustments to derive these measures.
Net Income and Adjusted Operational Financial MeasuresNet Income
Table 3427 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 for the three and six months ended November 30, 2020August 31, 2021 and 2019.2020. These adjusted measures are used in the calculation of our adjusted net interest yield and adjusted TIER.
Table 34:27: Adjusted Financial Measures—Net Income Statement
| | | Three Months Ended November 30, | | Six Months Ended November 30, | | | Three Months Ended August 31, |
(Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (Dollars in thousands) | | | 2021 | | 2020 |
Adjusted interest expense: | | | | | | | | | |
Adjusted net interest income: | | Adjusted net interest income: | | | | | |
Interest income | | Interest income | | | $ | 283,268 | | | $ | 279,584 | |
Interest expense | Interest expense | | $ | (174,422) | | | $ | (207,871) | | | $ | (354,398) | | | $ | (421,142) | | Interest expense | | | (174,777) | | | (179,976) | |
Include: Derivative cash settlements interest expense(1) | Include: Derivative cash settlements interest expense(1) | | (29,800) | | | (14,150) | | | (56,772) | | | (25,193) | | Include: Derivative cash settlements interest expense(1) | | | (27,563) | | | (26,972) | |
Adjusted interest expense | Adjusted interest expense | | $ | (204,222) | | | $ | (222,021) | | | $ | (411,170) | | | $ | (446,335) | | Adjusted interest expense | | | (202,340) | | | (206,948) | |
| Adjusted net interest income: | | |
Net interest income | | $ | 102,077 | | | $ | 79,166 | | | $ | 201,685 | | | $ | 155,910 | | |
Include: Derivative cash settlements interest expense(1) | | (29,800) | | | (14,150) | | | (56,772) | | | (25,193) | | |
Adjusted net interest income | Adjusted net interest income | | $ | 72,277 | | | $ | 65,016 | | | $ | 144,913 | | | $ | 130,717 | | Adjusted net interest income | | | $ | 80,928 | | | $ | 72,636 | |
| Adjusted total revenue: | Adjusted total revenue: | | Adjusted total revenue: | | | |
Net interest income | | Net interest income | | | $ | 108,491 | | | $ | 99,608 | |
Fee and other income | | Fee and other income | | | 3,941 | | | 3,516 | |
Total revenue | Total revenue | | $ | 108,409 | | | $ | 83,008 | | | $ | 211,533 | | | $ | 170,693 | | Total revenue | | | 112,432 | | | 103,124 | |
Include: Derivative cash settlements interest expense(1) | Include: Derivative cash settlements interest expense(1) | | (29,800) | | | (14,150) | | | (56,772) | | | (25,193) | | Include: Derivative cash settlements interest expense(1) | | | (27,563) | | | (26,972) | |
Adjusted total revenue | Adjusted total revenue | | $ | 78,609 | | | $ | 68,858 | | | $ | 154,761 | | | $ | 145,500 | | Adjusted total revenue | | | $ | 84,869 | | | $ | 76,152 | |
| Adjusted net income: | Adjusted net income: | | Adjusted net income: | | | |
Net income (loss) | Net income (loss) | | $ | 160,521 | | | $ | 241,600 | | | $ | 305,108 | | | $ | (82,479) | | Net income (loss) | | | $ | (90,332) | | | $ | 144,587 | |
Exclude: Derivative forward value gains (losses)(2) | Exclude: Derivative forward value gains (losses)(2) | | 111,087 | | | 197,600 | | | 198,335 | | | (187,082) | | Exclude: Derivative forward value gains (losses)(2) | | | (144,600) | | | 87,248 | |
Adjusted net income | Adjusted net income | | $ | 49,434 | | | $ | 44,000 | | | $ | 106,773 | | | $ | 104,603 | | Adjusted net income | | | $ | 54,268 | | | $ | 57,339 | |
|
____________________________
(1)Represents the net periodic contractual interest expense amount foron our interest-rate swaps forduring the reporting period.
(2)Represents the change in fair value of our interest rate swaps during the reporting period due to changes in expected future interest rates over the remaining life of our derivative contracts.
We primarily fund our loan portfolio through the issuance of debt. However, we use derivatives as economic hedges as part of our strategy to manage the interest rate risk associated with funding our loan portfolio. We therefore consider the interest expense incurred on our derivatives to be part of funding cost in addition to the interest expense on our debt. As such, we add net periodic derivative cash settlements interest expense amounts to our reported interest expense to derive our adjusted interest expense and
adjusted net interest income. We exclude the unrealized derivative forward value gains and losses from our adjusted total revenue and adjusted net income.
TIER and Adjusted TIER
Table 3528 displays the calculation of our TIER and adjusted TIER for the three and six months ended November 30, 2020August 31, 2021 and 2019.2020.
Table 35:28: TIER and Adjusted TIER
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Six Months Ended November 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
TIER (1) | | 1.92 | | | 2.16 | | | 1.86 | | | 0.80 | |
| | | | | | | | |
Adjusted TIER (2) | | 1.24 | | | 1.20 | | | 1.26 | | | 1.23 | |
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended August 31, |
| | | | | | 2021 | | 2020 |
TIER (1) | | | | | | 0.48 | | | 1.80 | |
| | | | | | | | |
Adjusted TIER (2) | | | | | | 1.27 | | | 1.28 | |
____________________________
(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-EquityLiabilities and Equity and Adjusted Debt-to-EquityLiabilities and Equity
Table 3629 provides a reconciliation between our total liabilities and total equity and the adjusted amounts used in the calculation of our adjusted debt-to-equity ratio as of November 30, 2020August 31, 2021 and May 31, 2020.2021. As indicated in Table 36,29, subordinated debt is treated in the same manner as equity in calculating our adjusted-debt-to-equity ratio.
Table 36:29: Adjusted Financial Measures—Balance SheetLiabilities and Equity
| (Dollars in thousands) | (Dollars in thousands) | | November 30, 2020 | | May 31, 2020 | (Dollars in thousands) | | August 31, 2021 | | May 31, 2021 |
Adjusted total liabilities: | | Adjusted total liabilities: | | | | |
Total liabilities | Total liabilities | | $ | 27,284,383 | | | $ | 27,508,783 | | Total liabilities | | $ | 28,837,527 | | | $ | 28,238,484 | |
Exclude: | Exclude: | | | | | Exclude: | | | | |
Derivative liabilities | Derivative liabilities | | 1,040,528 | | | 1,258,459 | | Derivative liabilities | | 718,921 | | | 584,989 | |
Debt used to fund loans guaranteed by RUS | Debt used to fund loans guaranteed by RUS | | 142,996 | | | 146,764 | | Debt used to fund loans guaranteed by RUS | | 137,170 | | | 139,136 | |
Subordinated deferrable debt | Subordinated deferrable debt | | 986,217 | | | 986,119 | | Subordinated deferrable debt | | 986,364 | | | 986,315 | |
Subordinated certificates | Subordinated certificates | | 1,272,374 | | | 1,339,618 | | Subordinated certificates | | 1,253,906 | | | 1,254,660 | |
Adjusted total liabilities | Adjusted total liabilities | | $ | 23,842,268 | | | $ | 23,777,823 | | Adjusted total liabilities | | $ | 25,741,166 | | | $ | 25,273,384 | |
| Adjusted total equity: | | Adjusted total equity: | |
Total equity | Total equity | | $ | 891,719 | | | $ | 648,822 | | Total equity | | $ | 1,254,220 | | | $ | 1,399,879 | |
| Exclude: | Exclude: | | Exclude: | |
Prior fiscal year-end cumulative derivative forward value losses(1) | Prior fiscal year-end cumulative derivative forward value losses(1) | | (1,088,982) | | | (354,704) | | Prior fiscal year-end cumulative derivative forward value losses(1) | | (467,036) | | | (1,088,982) | |
Year-to-date derivative forward value gains (losses)(1) | Year-to-date derivative forward value gains (losses)(1) | | 198,335 | | | (734,278) | | Year-to-date derivative forward value gains (losses)(1) | | (144,600) | | | 621,946 | |
Period-end cumulative derivative forward value losses(1) | Period-end cumulative derivative forward value losses(1) | | (890,647) | | | (1,088,982) | | Period-end cumulative derivative forward value losses(1) | | (611,636) | | | (467,036) | |
Accumulated other comprehensive income attributable to derivatives(2) | Accumulated other comprehensive income attributable to derivatives(2) | | 1,918 | | | 2,130 | | Accumulated other comprehensive income attributable to derivatives(2) | | 1,621 | | | 1,718 | |
Subtotal | Subtotal | | (888,729) | | | (1,086,852) | | Subtotal | | (610,015) | | | (465,318) | |
Include: | Include: | | | | | Include: | | | | |
Subordinated deferrable debt | Subordinated deferrable debt | | 986,217 | | | 986,119 | | Subordinated deferrable debt | | 986,364 | | | 986,315 | |
Subordinated certificates | Subordinated certificates | | 1,272,374 | | | 1,339,618 | | Subordinated certificates | | 1,253,906 | | | 1,254,660 | |
Subtotal | Subtotal | | 2,258,591 | | | 2,325,737 | | Subtotal | | 2,240,270 | | | 2,240,975 | |
Adjusted total equity | Adjusted total equity | | $ | 4,039,039 | | | $ | 4,061,411 | | Adjusted total equity | | $ | 4,104,505 | | | $ | 4,106,172 | |
|
____________________________
(1) Represents consolidated total derivative forward value gains (losses).
(2) Represents the AOCI amount related to derivatives. See “Note 10—Equity” for the additional components of AOCI.
Debt-to-Equity and Adjusted Debt-to-Equity Ratios
Table 3730 displays the calculations of our debt-to-equity and adjusted debt-to-equity ratios as of November 30, 2020August 31, 2021 and May 31, 2020.2021.
Table 37:30: Debt-to-Equity Ratio and Adjusted Debt-to-Equity Ratio
| (Dollars in thousands) | (Dollars in thousands) | | November 30, 2020 | | May 31, 2020 | (Dollars in thousands) | | August 31, 2021 | | May 31, 2021 |
Debt-to equity ratio: | Debt-to equity ratio: | | | | | Debt-to equity ratio: | | | | |
Total liabilities | Total liabilities | | $ | 27,284,383 | | | $ | 27,508,783 | | Total liabilities | | $ | 28,837,527 | | | $ | 28,238,484 | |
Total equity | Total equity | | 891,719 | | | 648,822 | | Total equity | | 1,254,220 | | | 1,399,879 | |
Debt-to-equity ratio (1) | Debt-to-equity ratio (1) | | 30.60 | | | 42.40 | | Debt-to-equity ratio (1) | | 22.99 | | | 20.17 | |
| Adjusted debt-to-equity ratio: | Adjusted debt-to-equity ratio: | | Adjusted debt-to-equity ratio: | |
Adjusted total liabilities(2) | Adjusted total liabilities(2) | | $ | 23,842,268 | | | $ | 23,777,823 | | Adjusted total liabilities(2) | | $ | 25,741,166 | | | $ | 25,273,384 | |
Adjusted total equity(2) | Adjusted total equity(2) | | 4,039,039 | | | 4,061,411 | | Adjusted total equity(2) | | 4,104,505 | | | 4,106,172 | |
Adjusted debt-to-equity ratio (3) | Adjusted debt-to-equity ratio (3) | | 5.90 | | | 5.85 | | Adjusted debt-to-equity ratio (3) | | 6.27 | | | 6.15 | |
____________________________
(1) Calculated based on total liabilities at period end of the period divided by total equity at period end.
(2) See Table 3629 above for details on the calculation of these non-GAAP adjusted measures and the reconciliation to the most comparable U.S. GAAP measures.
(3) Calculated based on adjusted total liabilities at period end divided by adjusted total equity at period end.
Total CFC Equity and Members’ Equity
Members’ equity represents equity attributableexcludes the noncash impact of derivative forward value gains (losses) and foreign currency adjustments recorded in net income and amounts recorded in accumulated other comprehensive income. Because these amounts generally have not been realized, they are not available to members and are excluded by the CFC members.Board of Directors in determining the annual allocation of adjusted net income to patronage capital, to the members’ capital reserve and to other member funds. Table 3831 provides a reconciliation of members’ equity to total CFC equity as of November 30, 2020August 31, 2021 and May 31, 2020.2021. We present the components of accumulated other comprehensive income in “Note 10—Equity.”
Table 38:31: Members’ Equity
| (Dollars in thousands) | (Dollars in thousands) | | November 30, 2020 | | May 31, 2020 | (Dollars in thousands) | | August 31, 2021 | | May 31, 2021 |
Members’ equity: | Members’ equity: | | | | | Members’ equity: | | | | |
Total CFC equity | Total CFC equity | | $ | 866,318 | | | $ | 626,121 | | Total CFC equity | | $ | 1,227,510 | | | $ | 1,374,948 | |
Exclude: | Exclude: | | Exclude: | |
Accumulated other comprehensive loss | | (1,746) | | | (1,910) | | |
Accumulated other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | | 365 | | | (25) | |
Period-end cumulative derivative forward value losses attributable to CFC(1) | Period-end cumulative derivative forward value losses attributable to CFC(1) | | (882,607) | | | (1,079,739) | | Period-end cumulative derivative forward value losses attributable to CFC(1) | | (605,626) | | | (461,162) | |
Subtotal | Subtotal | | (884,353) | | | (1,081,649) | | Subtotal | | (605,261) | | | (461,187) | |
Members’ equity | Members’ equity | | $ | 1,750,671 | | | $ | 1,707,770 | | Members’ equity | | $ | 1,832,771 | | | $ | 1,836,135 | |
____________________________
(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 14—Business Segments.” The period-end cumulative derivative forward value losses total loss amounts as of November 30, 2020August 31, 2021 and May 31, 20202021 are presented above in Table 36.29.
Item 1. Financial Statements
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | | Three Months Ended November 30, | | Six Months Ended November 30, | | | | Three Months Ended August 31, |
(Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (Dollars in thousands) | | | 2021 | | 2020 |
Interest income | Interest income | | $ | 276,499 | | | $ | 287,037 | | | $ | 556,083 | | | $ | 577,052 | | Interest income | | | $ | 283,268 | | | $ | 279,584 | |
Interest expense | Interest expense | | (174,422) | | | (207,871) | | | (354,398) | | | (421,142) | | Interest expense | | | (174,777) | | | (179,976) | |
Net interest income | Net interest income | | 102,077 | | | 79,166 | | | 201,685 | | | 155,910 | | Net interest income | | | 108,491 | | | 99,608 | |
Benefit (provision) for credit losses | | (1,638) | | | 1,045 | | | (1,964) | | | 1,015 | | |
Net interest income after benefit (provision) for credit losses | | 100,439 | | | 80,211 | | | 199,721 | | | 156,925 | | |
Provision for credit losses | | Provision for credit losses | | | (4,003) | | | (326) | |
Net interest income after provision for credit losses | | Net interest income after provision for credit losses | | | 104,488 | | | 99,282 | |
Non-interest income: | Non-interest income: | | | | | | | | | Non-interest income: | | | | | |
Fee and other income | Fee and other income | | 6,332 | | | 3,842 | | | 9,848 | | | 14,783 | | Fee and other income | | | 3,941 | | | 3,516 | |
Derivative gains (losses) | Derivative gains (losses) | | 81,287 | | | 183,450 | | | 141,563 | | | (212,275) | | Derivative gains (losses) | | | (172,163) | | | 60,276 | |
Investment securities gains (losses) | Investment securities gains (losses) | | (1,361) | | | (114) | | | 3,298 | | | 1,506 | | Investment securities gains (losses) | | | (2,225) | | | 4,659 | |
Total non-interest income | Total non-interest income | | 86,258 | | | 187,178 | | | 154,709 | | | (195,986) | | Total non-interest income | | | (170,447) | | | 68,451 | |
Non-interest expense: | Non-interest expense: | | | | | | | | | Non-interest expense: | | | | | |
Salaries and employee benefits | Salaries and employee benefits | | (14,011) | | | (12,728) | | | (27,144) | | | (25,670) | | Salaries and employee benefits | | | (13,310) | | | (13,133) | |
Other general and administrative expenses | Other general and administrative expenses | | (10,125) | | | (12,041) | | | (19,655) | | | (24,428) | | Other general and administrative expenses | | | (10,900) | | | (9,530) | |
Losses on early extinguishment of debt | | (1,455) | | | (614) | | | (1,455) | | | (614) | | |
| Other non-interest expense | Other non-interest expense | | (323) | | | (315) | | | (655) | | | 6,864 | | Other non-interest expense | | | (256) | | | (332) | |
Total non-interest expense | Total non-interest expense | | (25,914) | | | (25,698) | | | (48,909) | | | (43,848) | | Total non-interest expense | | | (24,466) | | | (22,995) | |
Income (loss) before income taxes | Income (loss) before income taxes | | 160,783 | | | 241,691 | | | 305,521 | | | (82,909) | | Income (loss) before income taxes | | | (90,425) | | | 144,738 | |
Income tax benefit (expense) | | (262) | | | (91) | | | (413) | | | 430 | | |
Income tax benefit (provision) | | Income tax benefit (provision) | | | 93 | | | (151) | |
Net income (loss) | Net income (loss) | | 160,521 | | | 241,600 | | | 305,108 | | | (82,479) | | Net income (loss) | | | (90,332) | | | 144,587 | |
Less: Net (income) loss attributable to noncontrolling interests | Less: Net (income) loss attributable to noncontrolling interests | | (505) | | | (8) | | | (676) | | | 1,649 | | Less: Net (income) loss attributable to noncontrolling interests | | | 438 | | | (171) | |
Net income (loss) attributable to CFC | Net income (loss) attributable to CFC | | $ | 160,016 | | | $ | 241,592 | | | $ | 304,432 | | | $ | (80,830) | | Net income (loss) attributable to CFC | | | $ | (89,894) | | | $ | 144,416 | |
| The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements. | |
55
The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements.
48
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| | | | Three Months Ended November 30, | | Six Months Ended November 30, | | | | Three Months Ended August 31, |
(Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (Dollars in thousands) | | | 2021 | | 2020 |
Net income (loss) | Net income (loss) | | $ | 160,521 | | | $ | 241,600 | | | $ | 305,108 | | | $ | (82,479) | | Net income (loss) | | | $ | (90,332) | | | $ | 144,587 | |
Other comprehensive income (loss): | Other comprehensive income (loss): | | | | | | | | | Other comprehensive income (loss): | | | | | |
| Reclassification of derivative gains to earnings | Reclassification of derivative gains to earnings | | (107) | | | (114) | | | (212) | | | (226) | | Reclassification of derivative gains to earnings | | | (97) | | | (105) | |
Unrealized gains on cash flow hedge | | Unrealized gains on cash flow hedge | | | 416 | | | — | |
Defined benefit plan adjustments | Defined benefit plan adjustments | | 188 | | | 146 | | | 376 | | | 291 | | Defined benefit plan adjustments | | | 71 | | | 188 | |
Other comprehensive income | Other comprehensive income | | 81 | | | 32 | | | 164 | | | 65 | | Other comprehensive income | | | 390 | | | 83 | |
Total comprehensive income (loss) | Total comprehensive income (loss) | | 160,602 | | | 241,632 | | | 305,272 | | | (82,414) | | Total comprehensive income (loss) | | | (89,942) | | | 144,670 | |
Less: Total comprehensive (income) loss attributable to noncontrolling interests | Less: Total comprehensive (income) loss attributable to noncontrolling interests | | (505) | | | (8) | | | (676) | | | 1,649 | | Less: Total comprehensive (income) loss attributable to noncontrolling interests | | | 438 | | | (171) | |
Total comprehensive income (loss) attributable to CFC | Total comprehensive income (loss) attributable to CFC | | $ | 160,097 | | | $ | 241,624 | | | $ | 304,596 | | | $ | (80,765) | | Total comprehensive income (loss) attributable to CFC | | | $ | (89,504) | | | $ | 144,499 | |
| The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements. | |
56
The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements.
49
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| (Dollars in thousands) | (Dollars in thousands) | | November 30, 2020 | | May 31, 2020 | (Dollars in thousands) | | August 31, 2021 | | May 31, 2021 |
Assets: | Assets: | | | | | Assets: | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 167,155 | | | $ | 671,372 | | Cash and cash equivalents | | $ | 302,610 | | | $ | 295,063 | |
Restricted cash (1) | Restricted cash (1) | | 10,036 | | | 8,647 | | Restricted cash (1) | | 9,351 | | | 8,298 | |
Total cash, cash equivalents and restricted cash | Total cash, cash equivalents and restricted cash | | 177,191 | | | 680,019 | | Total cash, cash equivalents and restricted cash | | 311,961 | | | 303,361 | |
Investment securities: | Investment securities: | | Investment securities: | |
Debt securities trading, at fair value ($235,802 and $210,894 pledged as collateral) | | Debt securities trading, at fair value ($235,802 and $210,894 pledged as collateral) | | 569,574 | | | 576,175 | |
Equity securities, at fair value | Equity securities, at fair value | | 32,391 | | | 60,735 | | Equity securities, at fair value | | 35,711 | | | 35,102 | |
Debt securities trading, at fair value | | 551,695 | | | 309,400 | | |
Total investment securities | | 584,086 | | | 370,135 | | |
Total investment securities, at fair value | | Total investment securities, at fair value | | 605,285 | | | 611,277 | |
Loans to members | Loans to members | | 27,062,969 | | | 26,702,380 | | Loans to members | | 28,882,633 | | | 28,426,961 | |
Less: Allowance for credit losses | Less: Allowance for credit losses | | (58,989) | | | (53,125) | | Less: Allowance for credit losses | | (89,535) | | | (85,532) | |
Loans to members, net | Loans to members, net | | 27,003,980 | | | 26,649,255 | | Loans to members, net | | 28,793,098 | | | 28,341,429 | |
Accrued interest receivable | Accrued interest receivable | | 105,145 | | | 117,138 | | Accrued interest receivable | | 106,221 | | | 107,856 | |
Other receivables | Other receivables | | 39,334 | | | 41,099 | | Other receivables | | 38,114 | | | 37,197 | |
Fixed assets, net | Fixed assets, net | | 88,577 | | | 89,137 | | Fixed assets, net | | 94,313 | | | 91,882 | |
| Derivative assets | Derivative assets | | 153,388 | | | 173,195 | | Derivative assets | | 110,909 | | | 121,259 | |
Other assets | Other assets | | 24,401 | | | 37,627 | | Other assets | | 31,846 | | | 24,102 | |
Total assets | Total assets | | $ | 28,176,102 | | | $ | 28,157,605 | | Total assets | | $ | 30,091,747 | | | $ | 29,638,363 | |
| Liabilities: | Liabilities: | | Liabilities: | |
Accrued interest payable | Accrued interest payable | | $ | 123,766 | | | $ | 139,619 | | Accrued interest payable | | $ | 171,542 | | | $ | 123,672 | |
Debt outstanding: | Debt outstanding: | | Debt outstanding: | |
Short-term borrowings | Short-term borrowings | | 4,687,968 | | | 3,961,985 | | Short-term borrowings | | 5,378,417 | | | 4,582,096 | |
Long-term debt | Long-term debt | | 19,070,919 | | | 19,712,024 | | Long-term debt | | 20,158,891 | | | 20,603,123 | |
Subordinated deferrable debt | Subordinated deferrable debt | | 986,217 | | | 986,119 | | Subordinated deferrable debt | | 986,364 | | | 986,315 | |
Members’ subordinated certificates: | Members’ subordinated certificates: | | | | | Members’ subordinated certificates: | | | | |
Membership subordinated certificates | Membership subordinated certificates | | 628,589 | | | 630,483 | | Membership subordinated certificates | | 628,594 | | | 628,594 | |
Loan and guarantee subordinated certificates | Loan and guarantee subordinated certificates | | 405,115 | | | 482,965 | | Loan and guarantee subordinated certificates | | 386,142 | | | 386,896 | |
Member capital securities | Member capital securities | | 238,670 | | | 226,170 | | Member capital securities | | 239,170 | | | 239,170 | |
Total members’ subordinated certificates | Total members’ subordinated certificates | | 1,272,374 | | | 1,339,618 | | Total members’ subordinated certificates | | 1,253,906 | | | 1,254,660 | |
Total debt outstanding | Total debt outstanding | | 26,017,478 | | | 25,999,746 | | Total debt outstanding | | 27,777,578 | | | 27,426,194 | |
| Patronage capital retirement payable | | Patronage capital retirement payable | | 55,345 | | | — | |
Deferred income | Deferred income | | 55,478 | | | 59,303 | | Deferred income | | 48,775 | | | 51,198 | |
Derivative liabilities | Derivative liabilities | | 1,040,528 | | | 1,258,459 | | Derivative liabilities | | 718,921 | | | 584,989 | |
Other liabilities | Other liabilities | | 47,133 | | | 51,656 | | Other liabilities | | 65,366 | | | 52,431 | |
Total liabilities | Total liabilities | | 27,284,383 | | | 27,508,783 | | Total liabilities | | 28,837,527 | | | 28,238,484 | |
| Equity: | Equity: | | Equity: | |
CFC equity: | CFC equity: | | | | | CFC equity: | | | | |
Retained equity | Retained equity | | 868,064 | | | 628,031 | | Retained equity | | 1,227,145 | | | 1,374,973 | |
Accumulated other comprehensive loss | | (1,746) | | | (1,910) | | |
Accumulated other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | | 365 | | | (25) | |
Total CFC equity | Total CFC equity | | 866,318 | | | 626,121 | | Total CFC equity | | 1,227,510 | | | 1,374,948 | |
Noncontrolling interests | Noncontrolling interests | | 25,401 | | | 22,701 | | Noncontrolling interests | | 26,710 | | | 24,931 | |
Total equity | Total equity | | 891,719 | | | 648,822 | | Total equity | | 1,254,220 | | | 1,399,879 | |
Total liabilities and equity | Total liabilities and equity | | $ | 28,176,102 | | | $ | 28,157,605 | | Total liabilities and equity | | $ | 30,091,747 | | | $ | 29,638,363 | |
| ____________________________ | ____________________________ | | ____________________________ | |
(1) Restricted cash consists primarily of member funds held in escrow for certain specifically designed cooperative programs. | (1) Restricted cash consists primarily of member funds held in escrow for certain specifically designed cooperative programs. | (1) Restricted cash consists primarily of member funds held in escrow for certain specifically designed cooperative programs. |
| The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements. | |
57
The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements.
50
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
| | | Three Months Ended November 30, 2020 | | Three Months Ended August 31, 2021 |
(Dollars in thousands) | (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 | (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 August 31, 2020 | | $ | 2,939 | | | $ | 834,209 | | | $ | 807,320 | | | $ | (936,032) | | | $ | 708,436 | | | $ | (1,827) | | | $ | 706,609 | | | $ | 24,895 | | | $ | 731,504 | | |
Net income | | — | | | — | | | — | | | 160,016 | | | 160,016 | | | — | | | 160,016 | | | 505 | | | 160,521 | | |
| | Balance as of May 31, 2021 | | 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 | |
| Net loss | | Net loss | | — | | | — | | | — | | | (89,894) | | | (89,894) | | | — | | | (89,894) | | | (438) | | | (90,332) | |
Other comprehensive income | Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | 81 | | | 81 | | | — | | | 81 | | Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | 390 | | | 390 | | | — | | | 390 | |
Patronage capital retirement | Patronage capital retirement | | — | | | 0 | | | — | | | — | | | 0 | | | — | | | 0 | | | — | | | 0 | | Patronage capital retirement | | — | | | (57,565) | | | — | | | — | | | (57,565) | | | — | | | (57,565) | | | — | | | (57,565) | |
Other | Other | | (388) | | | — | | | — | | | — | | | (388) | | | — | | | (388) | | | 1 | | | (387) | | Other | | (369) | | | — | | | — | | | — | | | (369) | | | — | | | (369) | | | 2,217 | | | 1,848 | |
Balance as of November 30, 2020 | | $ | 2,551 | | | $ | 834,209 | | | $ | 807,320 | | | $ | (776,016) | | | $ | 868,064 | | | $ | (1,746) | | | $ | 866,318 | | | $ | 25,401 | | | $ | 891,719 | | |
Balance as of August 31, 2021 | | Balance as of August 31, 2021 | | $ | 2,756 | | | $ | 866,405 | | | $ | 909,749 | | | $ | (551,765) | | | $ | 1,227,145 | | | $ | 365 | | | $ | 1,227,510 | | | $ | 26,710 | | | $ | 1,254,220 | |
| | | | | Three Months Ended August 31, 2020 |
(Dollars in thousands) | | (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 |
| | | | | Six Months Ended November 30, 2020 | |
Balance as of May 31, 2020 | 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 | | 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 | Cumulative effect from adoption of new accounting standard | | — | | | — | | | — | | | (3,900) | | | (3,900) | | | — | | | (3,900) | | | — | | | (3,900) | | Cumulative effect from adoption of new accounting standard | | — | | | — | | | — | | | (3,900) | | | (3,900) | | | — | | | (3,900) | | | — | | | (3,900) | |
Balance as of June 1, 2020 | 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 | | 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 loss | | — | | | — | | | — | | | 304,432 | | | 304,432 | | | — | | | 304,432 | | | 676 | | | 305,108 | | |
Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | 164 | | | 164 | | | — | | | 164 | | |
Patronage capital retirement | | — | | | (59,857) | | | — | | | — | | | (59,857) | | | — | | | (59,857) | | | — | | | (59,857) | | |
Other | | (642) | | | — | | | — | | | — | | | (642) | | | — | | | (642) | | | 2,024 | | | 1,382 | | |
Balance as of November 30, 2020 | | $ | 2,551 | | | $ | 834,209 | | | $ | 807,320 | | | $ | (776,016) | | | $ | 868,064 | | | $ | (1,746) | | | $ | 866,318 | | | $ | 25,401 | | | $ | 891,719 | | |
| | | Three Months Ended November 30, 2019 | |
(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 August 31, 2019 | | $ | 2,676 | | | $ | 797,756 | | | $ | 759,097 | | | $ | (668,197) | | | $ | 891,332 | | | $ | (114) | | | $ | 891,218 | | | $ | 27,210 | | | $ | 918,428 | | |
Net income | Net income | | — | | | — | | | — | | | 241,592 | | | 241,592 | | | — | | | 241,592 | | | 8 | | | 241,600 | | Net income | | — | | | — | | | — | | | 144,416 | | | 144,416 | | | — | | | 144,416 | | | 171 | | | 144,587 | |
Other comprehensive income | Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | 32 | | | 32 | | | — | | | 32 | | Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | 83 | | | 83 | | | — | | | 83 | |
Patronage capital retirement | Patronage capital retirement | | — | | | 0 | | | — | | | — | | | 0 | | | — | | | 0 | | | (1,933) | | | (1,933) | | Patronage capital retirement | | — | | | (59,857) | | | — | | | — | | | (59,857) | | | — | | | (59,857) | | | — | | | (59,857) | |
Other | Other | | (233) | | | — | | | — | | | — | | | (233) | | | — | | | (233) | | | 0 | | | (233) | | Other | | (254) | | | — | | | — | | | — | | | (254) | | | — | | | (254) | | | 2,023 | | | 1,769 | |
Balance as of November 30, 2019 | | $ | 2,443 | | | $ | 797,756 | | | $ | 759,097 | | | $ | (426,605) | | | $ | 1,132,691 | | | $ | (82) | | | $ | 1,132,609 | | | $ | 25,285 | | | $ | 1,157,894 | | |
| | Six Months Ended November 30, 2019 | |
| Balance as of May 31, 2019 | | $ | 2,982 | | | $ | 860,578 | | | $ | 759,097 | | | $ | (345,775) | | | $ | 1,276,882 | | | $ | (147) | | | $ | 1,276,735 | | | $ | 27,147 | | | $ | 1,303,882 | | |
Net loss | | — | | | — | | | — | | | (80,830) | | | (80,830) | | | — | | | (80,830) | | | (1,649) | | | (82,479) | | |
Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | 65 | | | 65 | | | — | | | 65 | | |
Patronage capital retirement | | — | | | (62,822) | | | — | | | — | | | (62,822) | | | — | | | (62,822) | | | (1,933) | | | (64,755) | | |
Other | | (539) | | | — | | | — | | | — | | | (539) | | | — | | | (539) | | | 1,720 | | | 1,181 | | |
Balance as of November 30, 2019 | | $ | 2,443 | | | $ | 797,756 | | | $ | 759,097 | | | $ | (426,605) | | | $ | 1,132,691 | | | $ | (82) | | | $ | 1,132,609 | | | $ | 25,285 | | | $ | 1,157,894 | | |
| The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements. | |
Balance as of August 31, 2020 | | Balance as of August 31, 2020 | | $ | 2,939 | | | $ | 834,209 | | | $ | 807,320 | | | $ | (936,032) | | | $ | 708,436 | | | $ | (1,827) | | | $ | 706,609 | | | $ | 24,895 | | | $ | 731,504 | |
The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements.
58
51
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) | | | | | | | | | | | | | | |
| | Three Months Ended August 31, |
(Dollars in thousands) | | 2021 | | 2020 |
Cash flows from operating activities: | | | | |
Net income (loss) | | $ | (90,332) | | | $ | 144,587 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Amortization of deferred loan fees | | (2,155) | | | (2,460) | |
Amortization of debt issuance costs and deferred charges | | 2,371 | | | 2,172 | |
Amortization of discount on long-term debt | | 3,145 | | | 2,876 | |
Amortization of issuance costs for bank revolving lines of credit | | 1,223 | | | 1,118 | |
Depreciation and amortization | | 2,018 | | | 1,819 | |
Provision for credit losses | | 4,003 | | | 326 | |
| | | | |
| | | | |
| | | | |
Unrealized (gains) losses on equity and debt securities | | 2,332 | | | (4,366) | |
Derivative forward value (gains) losses | | 144,600 | | | (87,248) | |
Changes in operating assets and liabilities: | | | | |
Accrued interest receivable | | 1,635 | | | 12,376 | |
| | | | |
Accrued interest payable | | 47,870 | | | 42,546 | |
Deferred income | | (268) | | | 383 | |
Other | | 5,874 | | | (10,102) | |
Net cash provided by operating activities | | 122,316 | | | 104,027 | |
| | | | |
Cash flows from investing activities: | | | | |
Advances on loans, net | | (455,651) | | | (226,245) | |
Investments in fixed assets, net | | (4,136) | | | (837) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Purchase of trading securities | | (28,006) | | | (245,095) | |
Proceeds from sales and maturities of trading securities | | 31,773 | | | 30,097 | |
| | | | |
| | | | |
| | | | |
| | | | |
Net cash used in investing activities | | (456,020) | | | (442,080) | |
| | | | |
Cash flows from financing activities: | | | | |
Proceeds from short-term borrowings ≤ 90 days, net | | 849,729 | | | 585,021 | |
Proceeds from short-term borrowings with original maturity > 90 days | | 704,829 | | | 836,241 | |
Repayments of short-term borrowings with original maturity > 90 days | | (758,237) | | | (829,756) | |
Payments for issuance costs for revolving bank lines of credit | | (3,563) | | | — | |
Proceeds from issuance of long-term debt, net of discount and issuance costs | | 44,229 | | | 8,050 | |
Payments for retirement of long-term debt | | (493,929) | | | (543,555) | |
| | | | |
| | | | |
Proceeds from issuance of members’ subordinated certificates | | 33 | | | 3,257 | |
Payments for retirement of members’ subordinated certificates | | (787) | | | (44,030) | |
| | | | |
| | | | |
Net cash provided by financing activities | | 342,304 | | | 15,228 | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | 8,600 | | | (322,825) | |
Beginning cash, cash equivalents and restricted cash | | 303,361 | | | 680,019 | |
Ending cash, cash equivalents and restricted cash | | $ | 311,961 | | | $ | 357,194 | |
| | | | |
Supplemental disclosure of cash flow information: | | | | |
Cash paid for interest | | $ | 118,281 | | | $ | 129,017 | |
Cash paid for income taxes | | 2 | | | — | |
| | | | |
|
| | | | | | | | | | | | | | |
| | Six Months Ended November 30, |
(Dollars in thousands) | | 2020 | | 2019 |
Cash flows from operating activities: | | | | |
Net income (loss) | | $ | 305,108 | | | $ | (82,479) | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Amortization of deferred loan fees | | (4,804) | | | (4,704) | |
Amortization of debt issuance costs and deferred charges | | 6,191 | | | 4,677 | |
Amortization of discount on long-term debt | | 5,838 | | | 5,304 | |
Amortization of issuance costs for bank revolving lines of credit | | 2,223 | | | 3,034 | |
Depreciation and amortization | | 3,637 | | | 4,755 | |
Provision (benefit) for credit losses | | 1,964 | | | (1,015) | |
Loss on early extinguishment of debt | | 1,455 | | | 614 | |
| | | | |
Gain on sale of land | | 0 | | | (7,713) | |
Unrealized gains on equity and debt securities | | (2,985) | | | (1,506) | |
Derivative forward value (gains) losses | | (198,335) | | | 187,082 | |
Changes in operating assets and liabilities: | | | | |
Accrued interest receivable | | 11,993 | | | 2,655 | |
| | | | |
Accrued interest payable | | (15,853) | | | (10,122) | |
Deferred income | | 980 | | | 1,013 | |
Other | | (7,600) | | | (4,041) | |
Net cash provided by operating activities | | 109,812 | | | 97,554 | |
| | | | |
Cash flows from investing activities: | | | | |
Advances on loans, net | | (360,309) | | | (521,215) | |
Investment in fixed assets, net | | (2,682) | | | (6,217) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Proceeds from sale of land | | 0 | | | 21,268 | |
| | | | |
Purchase of trading securities | | (306,215) | | | 0 | |
Proceeds from sales and maturities of trading securities | | 65,562 | | | 0 | |
Proceeds from redemption of equity securities | | 30,000 | | | 25,000 | |
Purchases of held-to-maturity debt securities | | 0 | | | (51,386) | |
Proceeds from maturities of held-to-maturity debt securities | | 0 | | | 43,250 | |
| | | | |
Net cash used in investing activities | | (573,644) | | | (489,300) | |
| | | | |
Cash flows from financing activities: | | | | |
Proceeds from short-term borrowings, net | | 870,478 | | | 1,129,496 | |
Proceeds from short-term borrowings with original maturity > 90 days | | 1,532,452 | | | 1,266,609 | |
Repayments of short-term borrowings with original maturity > 90 days | | (1,676,947) | | | (1,214,807) | |
Payments for issuance costs for revolving bank lines of credit | | 0 | | | (976) | |
Proceeds from issuance of long-term debt, net of discount and issuance costs | | 422,683 | | | 160,595 | |
Payments for retirement of long-term debt | | (1,075,719) | | | (946,828) | |
Payments made for early extinguishment of debt | | (1,455) | | | (614) | |
Payments for issuance costs for subordinated deferrable debt | | 0 | | | (84) | |
Proceeds from issuance of members’ subordinated certificates | | 13,448 | | | 1,427 | |
Payments for retirement of members’ subordinated certificates | | (66,101) | | | (3,504) | |
Payments for retirement of patronage capital | | (57,835) | | | (61,102) | |
Repayments for membership fees, net | | 0 | | | 1 | |
Net cash provided by (used in) financing activities | | (38,996) | | | 330,213 | |
Net decrease in cash, cash equivalents and restricted cash | | (502,828) | | | (61,533) | |
Beginning cash, cash equivalents and restricted cash | | 680,019 | | | 186,204 | |
Ending cash, cash equivalents and restricted cash | | $ | 177,191 | | | $ | 124,671 | |
| | | | |
Supplemental disclosure of cash flow information: | | | | |
Cash paid for interest | | $ | 353,057 | | | $ | 415,069 | |
Cash paid for income taxes | | 69 | | | 18 | |
| | | | |
The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements. |
| | | | |
|
The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements.
52
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | |
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The Company
National Rural Utilities Cooperative Finance Corporation (“CFC”) is a tax-exempt, member-owned cooperative association incorporated under the laws of the District of Columbia in April 1969. CFC’s principal purpose is to provide its members with financing to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC makes loans to its rural electric members so they can acquire, construct and operate electric distribution systems, electric generation and transmission (“power supply”) systems and related facilities. CFC also provides its members with credit enhancements in the form of letters of credit and guarantees of debt obligations. As a cooperative, CFC is owned by and exclusively serves its membership, which consists of not-for-profit entities or subsidiaries or affiliates of not-for-profit entities. CFC is exempt from federal income taxes.
Principles of Consolidation and Basis of Presentation and Use of Estimates
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). and for interim financial statements. These 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. National Cooperative Services Corporation (“NCSC”) and Rural Telephone Finance Cooperative (“RTFC”) are VIEs that are required to be consolidated by CFC. NCSC is a taxable member-owned cooperative that may provide financing to members of CFC, government or quasi-government entities which own electric utility systems that meet the Rural Electrification Act definition of “rural,” and for-profit and nonprofit entities that are owned, operated or controlled by, or provide significant benefits to certain members of CFC. RTFC is a taxable Subchapter T cooperative association that provides financing for its rural telecommunications members and their affiliates. CFC has not had entities that held foreclosed assets since fiscal year 2017. All intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures during the period. Management’s most significant estimates and assumptions involve determining the allowance for credit losses and the fair value of financial assets and liabilities. Actual results could differ from these estimates. We believe these financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations in the interim financial statements are not necessarily indicative of results that may be expected for the full fiscal year. Certain reclassifications have been made to prior periods to conform to the current presentation. Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its consolidated entities.
Risks and UncertaintiesCOVID-19
The novel strain of coronavirus that causes coronavirus disease 2019 (“COVID-19”) continues to spread and adversely impact the economyAlthough many of the United States (“initial restrictions imposed at the onset of the pandemic in the U.S.”). While several U.S. industry sectors have been severely affected by the COVID-19 pandemic, we believe that we have thus far been able to navigate the challengesrelaxed or lifted as a result of the pandemic. Although wedistribution of vaccines, the recent surge in COVID-19 cases could cause federal, state and local governments to reimpose certain measures and restrictions to contain the spread of COVID-19 and mitigate public health risks in jurisdictions where significant outbreaks are detected. We continue to closely monitor developments,developments; however, we cannot predict the future impact of COVID-19 on our operational and financial performance. This impact will depend on several factors, including, among others, the extent to which the manufacturing and distribution of recently developed COVID-19 vaccines are successful in mitigating the severity and duration of the virus over time, potential further economic deterioration and additional,performance, or extended, federal, state and local government orders and regulations that might be imposed, additional federal stimulus efforts, and the specific ways the pandemic may uniquely impactsimpact our members, all of which continue to involve uncertainties.significant uncertainties that depend on future developments, which include, among others, the severity and duration of the recent COVID-19 resurgence, vaccination rates, the longer-term efficacy of vaccinations and the potential emergence of new, more transmissible severe variants.
53
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
New Accounting Standards Adopted in Fiscal Year 2021
Fair Value Measurement—Changes to theAmendments of Certain Securities and Exchange (“SEC”) Disclosure Requirements for Fair Value MeasurementGuidance
On June 1, 2020, we adoptedIn August 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13,2021-06, Fair Value MeasurementPresentation of Financial Statements (Topic 820): Disclosure Framework—Changes205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946), Amendments to the Disclosure Requirements for Fair ValueSEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures About Acquired and Disposed Businesses, and No.33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. Measurement,This update amends certain SEC disclosure guidance that is included in the accounting standards codification to reflect the SEC’s recent issuance of rules intended to modernize and streamline disclosure requirements. We adopted the SEC’s guidance on the presentation of financial statements and update of statistical disclosures for bank and savings and loan registrants in conjunction with the completion of our Annual Report on Form 10-K for the fiscal year ended May 31, 2021 (“2021 Form 10-K”), which removes, adds and modifies certain disclosure requirementswe filed with the SEC on fair value measurements.July 30, 2021. The adoption of this disclosure guidance which resulted only in certain changes to the fair value measurement disclosures presented in “Note 12—Fair Value Measurement” did not otherwise affecthave a material impact on our consolidated financial statements.
Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments
On June 1, 2020, we adopted ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology for estimating credit losses with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) model. The incurred loss model delayed the recognition of credit losses until it was probable that a loss had occurred, while the CECL model requires the immediate recognition of expected credit losses over the contractual term, adjusted as appropriate for estimated prepayments, 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.
The adoption of CECL resulted in an increase in our allowance for credit losses for our loan portfolio of $4 million and a corresponding decrease to retained earnings of $4 million recorded as a cumulative-effect adjustment. The impact on the allowance for credit losses for our off-balance sheet credit exposures related to unadvanced loan commitments and financial guarantees was not material. The increase in the allowance for credit losses for our loan portfolio was attributable to the transition to measuring the allowance based on expected credit losses over the remaining contractual term of loans in our portfolio as required under the CECL model, whereas the allowance under the incurred model did not consider the remaining contractual term of our loans. The transition adjustment was primarily driven by an increase in the allowances for CFC distribution and CFC power supply loans, which have a 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 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. In connection with our adoption of CECL, we have provided an update to certain of our significant accounting policies below under “Updates to Significant Accounting Policies.” We present the expanded credit quality disclosures required under CECL for financial instruments measured at amortized cost in “Note 4—Loans” and “Note 5—Allowance for Credit Losses.” Amounts in periods prior to our adoption of CECL on June 1, 2020, continue to be reported in accordance with previously applicable GAAP.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
New Accounting Standards Issued But Not Yet Adopted
Reference Rate Reform
On March 12, 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions for applying U.S. GAAP on contracts, hedging relationships and other transactions subject to modification due to the expected discontinuance of the London Interbank Offered Rate (“LIBOR”) and other reference rate reform changes to ease the potential accounting and financial burdens related to the expected transition in market reference rates. This guidance permits entities to elect not to apply certain modification accounting requirements to contracts affected by reference rate transition, if certain criteria are met. An entity that makes this election would not be required to remeasure modified contracts at the modification date or reassess a previous accounting determination. The guidance was effective upon issuance on March 12, 2020, and can generally be applied through December 31, 2022. We expect to apply certain of the practical expedients and are in the process of evaluating the timing and application of those elections. Based on our current assessment, we do not believe that the application of this guidance will have a material impact on our consolidated financial statements.
Updates to Significant Accounting Policies
Pursuant to our June 1, 2020 adoption of the CECL accounting standard, we have provided an update to the significant accounting policies presented below.
Loans to Members
We originate loans to members and classify loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff as held for investment. Loans classified as held for investment are reported based on the unpaid principal balance, net of principal charge-offs, and deferred loan origination costs.
As permitted by CECL, we elected to continue reporting accrued interest on loans separately on our consolidated balance sheets as a component of the line item accrued interest receivable rather than as a component of loans to member. Accrued interest receivable amounts generally represent six 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 $90 million and $96 million as of November 30, 2020 and May 31, 2020, respectively. We also elected to exclude accrued interest receivable from the credit quality disclosures required under CECL.
Interest Income
Interest income on performing loans is accrued and recognized as interest income based on the contractual rate of interest.
Loan origination costs and nonrefundable loan fees that meet the definition of loan origination fees are deferred and 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 a troubled debt restructuring (“TDR”) if the borrower is experiencing financial difficulties and a concession is granted to the borrower that we would not otherwise consider. Under CECL, we are required to estimate an allowance for lifetime expected credit losses for TDR loans. As discussed below under “Allowance for Credit Losses—Loan Portfolio— 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
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 term.
We generally classify TDR loans as nonperforming and place the loan on nonaccrual status, although in many cases such loans were already classified as nonperforming prior to modification. These loans may be returned to performing status and the accrual of interest resumed if the borrower performs under the modified terms for an extended period of time, and we expect the borrower to continue to perform in accordance with the modified terms. In certain limited circumstances in which a TDR loan is current at the modification date, the loan may remain on accrual status at the time of modification.
Nonperforming Loans
We classify loans as nonperforming when contractual principal or interest is 90 days past due or when we believe the collection of principal and interest in full is not reasonably assured. When a loan is classified as nonperforming, we generally place the loan on nonaccrual status. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against current period interest income. Interest income on nonaccrual loans is subsequently recognized only upon the receipt of cash payments. However, if we believe the ultimate collectibility of the loan principal is in doubt, cash received is applied against the principal balance of the loan. Nonaccrual loans generally are returned to accrual status when principal and interest becomes and remains current for a specified period and repayment of the remaining contractual principal and interest is reasonably assured.
Charge-Offs
We charge off loans or a portion of a loan when we determine that the loan is uncollectible. The charge-off of uncollectible principal amounts result in a reduction to the allowance for credit losses for our loan portfolio. Recoveries of previously charged off principal amounts result in an increase to the allowance.
Allowance for Credit Losses—Loan Portfolio
We maintain an allowance for credit losses for our loan portfolio that represents management’s current estimate of expected credit losses over the remaining contractual term, adjusted as appropriate for estimated prepayments, of loans in our loan portfolio as of each balance sheet date. The allowance for our loan portfolio is reported on our consolidated balance sheet as a valuation account that is deducted from loans to members to present the net amount we expect to collect over the life of our loans. We are required to immediately recognize an allowance for expected credit losses upon origination of a loan. Adjustments to the allowance each period for changes in our estimate of lifetime expected credit losses for existing loans, or for newly originated loans, are recognized in earnings through the provision for credit losses presented on our consolidated statements of operations.
We estimate our allowance for lifetime expected credit losses for our loan portfolio using a using a probability of default/loss given default methodology. Our allowance for credit losses consists of a collective allowance and an asset-specific allowance. The collective allowance is established for loans in our portfolio that share similar risk characteristics and are therefore evaluated on a collective, or pool, basis in measuring expected credit losses. The asset-specific allowance is established for loans in our portfolio that do not share similar risk characteristics with other loans in our portfolio and are therefore evaluated on an individual basis in measuring expected credit losses. Expected credit losses are estimated based on historical experience, current conditions and forecasts, if applicable, that affect the collectibility of the reported amount.
Since inception in 1969, CFC has experienced limited defaults and losses as the utility sector generally tends to be less sensitive to changes in the economy than other sectors largely due to the essential nature of the service provided. The losses we have incurred were not tied to economic factors, but rather to distinct operating issues related to each borrower. Given that our loss experience has not correlated to specific underlying macroeconomic variables, such as U.S. unemployment rates or gross domestic product (“GDP”) growth, we have not made adjustments to our historical loss rates for any
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
forecasted period. We consider the need, however, to adjust our historical loss information for differences in the specific characteristics of our existing loan portfolio based on an evaluation of relative qualitative factors, such as differences in the composition of our loan portfolio, our underwriting standards, problem loan trends, the quality of our credit review function, the regulatory environment and other pertinent external factors.
Collective Allowance
We employ a quantitative methodology and a qualitative framework to measure the collective component of our allowance for expected credit losses. The first element in our quantitative methodology involves the segmentation of our loan into loan pools that share similar risk characteristics. We divide our portfolio into segments that reflect the member borrower type, which is based on the utility sector of the borrower because the key operational, infrastructure, regulatory, environmental, customer and financial risks of each sector are similar in nature. Our primary member borrower types consist of CFC electric distribution, CFC electric power supply, CFC statewide and associate, NCSC and RTFC telecommunications. Our portfolio segments align with the sectors generally seen in the utilities industry. We further stratify each portfolio into loan pools based on our internal borrower risk ratings, as our borrower risk ratings provide important information on the collectibility of each of our loan portfolio segments. We then apply loss factors, consisting of the probability of default and loss given default, to the scheduled loan-level amortization amounts over the life of the loans for each of our loan pools. Below we discuss the source and basis for the key inputs, which include borrower risk ratings and the loss factors, in measuring expected credit losses for our loan portfolio.
•Borrower Risk Ratings: We evaluate each borrower and loan facility in our loan portfolio and assign internal borrower and loan facility risk ratings based on consideration of a number of quantitative and qualitative factors. Each risk rating is reassessed annually following the receipt of the borrower’s audited financial statements; however, interim risk-rating adjustments may occur as a result of updated information affecting a borrower’s ability to fulfill its obligations or other significant developments and trends. Our internally assigned borrower risk ratings are intended to assess the general credit worthiness of the borrower and probability of default. We use our internal borrower risk ratings, which we map to the equivalent credit ratings by external rating agencies, to differentiate risk within each of our portfolio segments and loan pools. We provide additional information on our borrower risk ratings below in “Note 4—Loans.”
•Probability of Default: The probability of default, or default rate, represents the likelihood that a borrower will default over a particular time horizon. Because of our limited default history, we utilize third-party default data for the utility sector as a proxy to estimate default rates for each of our loan pools. The third-party default data provides historical default rates, based on credit ratings and remaining maturities of outstanding bonds, for the utility sector. Based on the mapping and alignment of our internal borrower risk ratings to equivalent credit ratings provided in the third-party utility default table, we apply the corresponding cumulative default rates to the scheduled amortization amounts over the remaining term of the loans in each of our loan pools.
•Loss Given Default: The loss given default, or loss severity, represents the estimated loss, net of recoveries, on a loan that would be realized in the event of a borrower default. While we utilize third-party default data, we utilize our lifetime historical loss experience to estimate loss given default, or the recovery rate, for each of our loan portfolio segments. We believe our internal historical loss severity rates provide a more reliable estimate than third-party loss severity data due to the organizational structure and operating environment of rural utility cooperatives, our lending practice of generally requiring a senior security position on the assets and revenues of borrowers for long-term loans, the investment our member borrowers have in CFC and therefore the collaborative approach we generally take in working with members in the event that a default occurs.
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
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
did not make a qualitative adjustment to the collective allowance for credit losses measured under our quantitative methodology as of November 30, 2020 or at adoption of CECL on June 1, 2020.
Asset-Specific Allowance
We generally consider nonperforming loans as well as loans that have been or are anticipated to be modified under a troubled debt restructuring for individual evaluation given the risk characteristics of such loans. Factors we consider in measuring the extent of expected credit loss include the payment status, the collateral value, the borrower’s financial condition, guarantor support, the probability of collecting scheduled principal and interest payments when due, anticipated modifications of payment structure or term for troubled borrowers, and recoveries if they can be reasonably estimated. We measure the expected credit loss as the difference between the amortized cost basis in the loan and the present value of the expected future cash flows from the borrower which is generally discounted at the loan’s effective interest rate, or the fair value of the collateral, if the loan is collateral dependent.
Reserve for Credit Losses—Off-Balance Sheet Credit Exposures
We also maintain a reserve for credit losses for our off-balance sheet credit exposures related to unadvanced loan commitments and financial guarantees. Because our business processes and credit risks associated with our off-balance sheet credit exposures are essentially the same as for our loans, we utilize similar processes to measure expected credit losses over the contractual period of our exposure to credit risk arising from these obligations. We include the reserve for expected credit losses for our off-balance sheet credit exposures as a component of other liabilities on our consolidated balance sheets.
| | |
NOTE 2—INTEREST INCOME AND INTEREST EXPENSE |
The following table presentsdisplays the components of interest income, by interest-earning asset type, and interest expense, by debt product type, presented on our consolidated statements of operations for the three and six months ended November 30, 2020August 31, 2021 and 2019.
2020.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 2.1: Interest Income and Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Six Months Ended November 30, |
(Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Interest income: | | | | | | | | |
Long-term fixed-rate loans(1) | | $ | 262,200 | | | $ | 260,714 | | | $ | 525,384 | | | $ | 519,192 | |
Long-term variable-rate loans | | 3,596 | | | 8,131 | | | 7,996 | | | 17,887 | |
Line of credit loans | | 6,994 | | | 12,678 | | | 15,236 | | | 28,711 | |
Troubled debt restructuring (“TDR”) loans | | 196 | | | 212 | | | 403 | | | 418 | |
| | | | | | | | |
Other, net(2) | | (344) | | | (287) | | | (679) | | | (571) | |
Total loans | | 272,642 | | | 281,448 | | | 548,340 | | | 565,637 | |
Cash, time deposits and investment securities | | 3,857 | | | 5,589 | | | 7,743 | | | 11,415 | |
Total interest income | | 276,499 | | | 287,037 | | | 556,083 | | | 577,052 | |
| | | | | | | | |
Interest expense:(3)(4) | | | | | | | | |
Short-term borrowings | | 3,403 | | | 22,112 | | | 7,744 | | | 44,934 | |
Medium-term notes | | 29,127 | | | 31,440 | | | 59,014 | | | 63,516 | |
Collateral trust bonds | | 61,623 | | | 64,523 | | | 124,216 | | | 129,904 | |
Guaranteed Underwriter Program notes payable | | 41,168 | | | 39,786 | | | 83,581 | | | 80,219 | |
Farmer Mac notes payable | | 12,606 | | | 22,654 | | | 26,539 | | | 47,728 | |
Other notes payable | | 55 | | | 230 | | | 142 | | | 484 | |
Subordinated deferrable debt | | 12,893 | | | 12,884 | | | 25,783 | | | 25,766 | |
Subordinated certificates | | 13,547 | | | 14,242 | | | 27,379 | | | 28,591 | |
Total interest expense | | 174,422 | | | 207,871 | | | 354,398 | | | 421,142 | |
| | | | | | | | |
Net interest income | | $ | 102,077 | | | $ | 79,166 | | | $ | 201,685 | | | $ | 155,910 | |
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended August 31, |
(Dollars in thousands) | | | | | | 2021 | | 2020 |
Interest income: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Loans(1)(2) | | | | | | $ | 278,819 | | | $ | 275,698 | |
Investment securities | | | | | | 4,449 | | | 3,886 | |
Total interest income | | | | | | 283,268 | | | 279,584 | |
| | | | | | | | |
Interest expense:(3)(4) | | | | | | | | |
Short-term borrowings | | | | | | 3,393 | | | 4,341 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Long-term debt | | | | | | 144,873 | | | 148,913 | |
| | | | | | | | |
| | | | | | | | |
Subordinated debt | | | | | | 26,511 | | | 26,722 | |
Total interest expense | | | | | | 174,777 | | | 179,976 | |
| | | | | | | | |
Net interest income | | | | | | $ | 108,491 | | | $ | 99,608 | |
____________________________
(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)Consists ofIncludes late payment fees, commitment fees and net amortization of deferred 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 interest 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 balance sheets of $55$49 million and $59$51 million as of November 30, 2020August 31, 2021 and May 31, 2020,2021, respectively, consists primarily of deferred loan conversion fees which totaled $49of $43 million and $53$45 million as of each respective date. Deferred loan conversion fees are recognized in interest income over the remaining period to maturity of loans using the effective interest method.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | |
NOTE 3—INVESTMENT SECURITIES |
We maintain aOur investment securities portfolio consists of debt and equity securities that is intended to serve as a supplemental source of liquidity. We generally record purchases and sales of securities on the trade date. Our current equity security holdings havewith readily determinable fair values. Therefore, we report thesevalues and debt securities atclassified as trading. We therefore record changes in the fair value with changesof our equity and debt securities in earnings and report the fair value recognized in earningschanges on our investment securities as a component of non-interest income in our consolidated statements of operations. In the fourth quarter of fiscal year 2020, we transferred our debt securities from held-to-maturity to trading. As a result, our debt securities were classified as trading as of both November 30, 2020 and May 31, 2020. Debt securities classified as trading are reported at fair value with changes in fair value recognized in earnings as a component of non-interest income on our consolidated statements of operations.
Equity Securities
The following table presents the composition of our equity security holdings and the fair value as of November 30, 2020August 31, 2021 and May 31, 2020.2021.
Table 3.1: Investments in Equity Securities, at Fair Value
| | | | | | | | | | | | | | |
(Dollars in thousands) | | November 30, 2020 | | May 31, 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 | | 27,655 | | | 25,400 | |
Farmer Mac—Class A common stock | | 4,736 | | | 5,095 | |
Total equity securities, at fair value | | $ | 32,391 | | | $ | 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. | | | | | | | | | | | | | | |
(Dollars in thousands) | | August 31, 2021 | | May 31, 2021 |
Equity securities, at fair value: | | | | |
| | | | |
| | | | |
| | | | |
Farmer Mac—Series C non-cumulative preferred stock | | $ | 27,830 | | | $ | 27,450 | |
Farmer Mac—Class A common stock | | 7,881 | | | 7,652 | |
Total equity securities, at fair value | | $ | 35,711 | | | $ | 35,102 | |
We recognized net unrealized gains on our equity securities of less than $1 million and $2 million for the three and six months ended November 30, 2020, respectively. We recognized net unrealized losses on our investments in equity securities of less than $1 million during the three months ended November 30, 2019August 31, 2021 and net unrealized gains of $2 million duringfor the sixthree months ended November 30, 2019.August 31, 2020.
Debt Securities
The following table presents the composition of our investments ininvestment debt securities portfolio and the fair value as of November 30, 2020August 31, 2021 and May 31, 2020.2021.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 3.2: Investments in Debt Securities, at Fair Value
| | | | | | | | | | | | | | |
(Dollars in thousands) | | November 30, 2020 | | May 31, 2020 |
Debt securities, at fair value: | | | | |
Certificates of deposit | | $ | 3,001 | | | $ | 5,585 | |
Commercial paper | | 13,984 | | | 0 | |
| | | | |
Corporate debt securities | | 474,082 | | | 253,153 | |
Commercial mortgage-backed securities (“MBS”): | | | | |
Agency | | 7,548 | | | 7,655 | |
Non-agency | | 1,324 | | | 3,207 | |
Total commercial MBS | | 8,872 | | | 10,862 | |
U.S. state and municipality debt securities | | 8,730 | | | 8,296 | |
| | | | |
Other asset-backed securities(1) | | 43,026 | | | 31,504 | |
Total debt securities, at fair value | | $ | 551,695 | | | $ | 309,400 | |
| | | | | | | | | | | | | | |
(Dollars in thousands) | | August 31, 2021 | | May 31, 2021 |
Debt securities, at fair value: | | | | |
Certificates of deposit | | $ | 1,500 | | | $ | 1,501 | |
Commercial paper | | 10,491 | | | 12,365 | |
| | | | |
Corporate debt securities | | 492,872 | | | 497,944 | |
| | | | |
Commercial agency mortgage-backed securities (“MBS”)(1) | | 8,448 | | | 8,683 | |
| | | | |
| | | | |
U.S. state and municipality debt securities | | 14,487 | | | 11,840 | |
Foreign government debt securities | | 999 | | | 999 | |
Other asset-backed securities(2) | | 40,777 | | | 42,843 | |
Total debt securities trading, at fair value | | $ | 569,574 | | | $ | 576,175 | |
____________________________
(1)Consists of securities backed by the Federal National Mortgage Association (“Fannie Mae”) and the 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 had salesreceived cash proceeds of $2 million on the sale of debt investment securities during the three months ended August 31, 2021 and recorded gains on the sale of these securities of less than $1 million for the three months ended August 31, 2021. We
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
received cash proceeds of $3 million and $6 millionon the sale of debt securities during the three and six months ended November 30,August 31, 2020 respectively, and recorded realized gains related to the sale of these securities of less than $1 million during each period. the three months ended August 31, 2020.
We recognized net unrealized losses on our debt securities of $2$3 million duringfor the three months ended November 30, 2020August 31, 2021 and net unrealized gains $1of $3 million for the sixthree months ended November 30,August 31, 2020. These realized and unrealized amounts are reported as a component of non-interest income on our consolidated statements of operations.
We have master repurchase agreements with 2 banks whereby we may sell investment-grade corporate debt securities from our investment securities portfolio subject to an obligation to repurchase the same or similar securities at an agreed-upon price and date. Transactions under these repurchase agreements are accounted for as collateralized financing agreements and not as a sale. The obligation to repurchase the securities is reported as securities sold under repurchase agreements, which we include as a component of short-term borrowings on our consolidated balance sheets. We disclose the fair value of the debt securities underlying repurchase transactions; however, the pledged debt securities remain in the investment debt securities portfolio amount reported on our consolidated balance sheets.
On August 27, 2021, we borrowed $225 million under a securities repurchase transaction. On September 3, 2021, we repurchased the underlying pledged debt securities, which had a fair value of $236 million as of August 31, 2021. We had pledged debt securities underlying repurchase transactions with a fair value of $211 million as of May 31, 2021.
We segregate our loan portfolio into portfolio 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 and line of credit loans to our borrowers. Under our long-term loan facilities, a borrower may select a fixed interest rate or a variable interest rate at the time of each loan advance. Line of credit loans are revolving loan facilities and generally have a variable interest rate.
Loans to Members
Loans to members consistsconsist 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 loans to members, and unadvanced loan commitments, by member class and by loan type, as of November 30, 2020August 31, 2021 and May 31, 2020.2021.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 4.1: Loans to Members by Member Class and Loan Type
| | | | November 30, 2020 | | May 31, 2020 | | | August 31, 2021 | | May 31, 2021 |
(Dollars in thousands) | (Dollars in thousands) | | Loans Outstanding | | Unadvanced Commitments(1) | | Loans Outstanding | | Unadvanced Commitments(1) | (Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total |
Member class: | Member class: | | | | | | | | | Member class: | | | | | | | | |
CFC: | CFC: | | CFC: | |
Distribution | Distribution | | $ | 21,223,064 | | | $ | 9,127,111 | | | $ | 20,769,653 | | | $ | 8,992,457 | | Distribution | | $ | 22,410,932 | | | 78 | % | | $ | 22,027,423 | | | 78 | % |
Power supply | Power supply | | 4,596,662 | | | 3,843,290 | | | 4,731,506 | | | 3,409,227 | | Power supply | | 5,221,081 | | | 18 | | | 5,154,312 | | | 18 | |
Statewide and associate | Statewide and associate | | 95,058 | | | 166,102 | | | 106,498 | | | 153,626 | | Statewide and associate | | 101,412 | | | — | | | 106,121 | | | — | |
Total CFC | Total CFC | | 25,914,784 | | | 13,136,503 | | | 25,607,657 | | | 12,555,310 | | Total CFC | | 27,733,425 | | | 96 | | | 27,287,856 | | | 96 | |
NCSC | NCSC | | 704,718 | | | 595,002 | | | 697,862 | | | 551,674 | | NCSC | | 705,891 | | | 3 | | | 706,868 | | | 3 | |
RTFC | RTFC | | 431,661 | | | 295,467 | | | 385,335 | | | 281,642 | | RTFC | | 431,442 | | | 1 | | | 420,383 | | | 1 | |
Total loans outstanding(2) | | 27,051,163 | | | 14,026,972 | | | 26,690,854 | | | 13,388,626 | | |
Deferred loan origination costs | | 11,806 | | | — | | | 11,526 | | | — | | |
Total loans outstanding(1) | | Total loans outstanding(1) | | 28,870,758 | | | 100 | | | 28,415,107 | | | 100 | |
Deferred loan origination costs—CFC(2) | | Deferred loan origination costs—CFC(2) | | 11,875 | | | — | | | 11,854 | | | — | |
Loans to members | Loans to members | | $ | 27,062,969 | | | $ | 14,026,972 | | | $ | 26,702,380 | | | $ | 13,388,626 | | Loans to members | | $ | 28,882,633 | | | 100 | % | | $ | 28,426,961 | | | 100 | % |
| Loan type: | Loan type: | | | | | | | | | Loan type: | | | | | | | | |
Long-term loans: | Long-term loans: | | Long-term loans: | |
Fixed rate | Fixed rate | | $ | 24,980,716 | | | $ | — | | | $ | 24,472,003 | | | $ | — | | Fixed rate | | $ | 25,648,378 | | | 89 | % | | $ | 25,514,766 | | | 90 | % |
Variable rate | Variable rate | | 639,144 | | | 5,530,685 | | | 655,704 | | | 5,458,676 | | Variable rate | | 883,140 | | | 3 | | | 658,579 | | | 2 | |
| Total long-term loans | Total long-term loans | | 25,619,860 | | | 5,530,685 | | | 25,127,707 | | | 5,458,676 | | Total long-term loans | | 26,531,518 | | | 92 | | | 26,173,345 | | | 92 | |
Lines of credit | Lines of credit | | 1,431,303 | | | 8,496,287 | | | 1,563,147 | | | 7,929,950 | | Lines of credit | | 2,339,240 | | | 8 | | | 2,241,762 | | | 8 | |
Total loans outstanding(2) | | 27,051,163 | | | 14,026,972 | | | 26,690,854 | | | 13,388,626 | | |
Deferred loan origination costs | | 11,806 | | | — | | | 11,526 | | | — | | |
Total loans outstanding(1) | | Total loans outstanding(1) | | 28,870,758 | | | 100 | | | 28,415,107 | | | 100 | |
Deferred loan origination costs—CFC(2) | | Deferred loan origination costs—CFC(2) | | 11,875 | | | — | | | 11,854 | | | — | |
Loans to members | Loans to members | | $ | 27,062,969 | | | $ | 14,026,972 | | | $ | 26,702,380 | | | $ | 13,388,626 | | Loans to members | | $ | 28,882,633 | | | 100 | % | | $ | 28,426,961 | | | 100 | % |
____________________________
(1)The interest rate on unadvanced loan commitments is not set until an advance is made; therefore, all unadvanced long-term loan commitments are reported as variable rate. However, the borrower may select either a fixed or a variable rate when an advance is drawn under a loan commitment.
(2) Represents the unpaid principal balance, net of charge-offs and recoveries, of loans as of the end of each period.
(2)
Unadvanced Loan Commitments
UnadvancedDeferred loan commitments represent approved and executed loan contracts for which funds have not been advanced to borrowers. The following table displays, by loan type,origination costs are recorded on the available balance under unadvanced loan commitments asbooks of November 30, 2020, and the related maturities in each fiscal year during the five fiscal-year period ended May 31, 2025, and thereafter.
CFC.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 4.2: Unadvanced Loan Commitments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Available Balance | | Notional Maturities of Unadvanced Loan Commitments |
(Dollars in thousands) | | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter |
Line of credit loans | | $ | 8,496,287 | | | $ | 296,977 | | | $ | 4,083,654 | | | $ | 1,537,725 | | | $ | 1,198,500 | | | $ | 1,110,540 | | | $ | 268,891 | |
Long-term loans | | 5,530,685 | | | 178,500 | | | 1,201,541 | | | 857,275 | | | 1,624,659 | | | 1,026,988 | | | 641,722 | |
Total | | $ | 14,026,972 | | | $ | 475,477 | | | $ | 5,285,195 | | | $ | 2,395,000 | | | $ | 2,823,159 | | | $ | 2,137,528 | | | $ | 910,613 | |
Unadvanced line of credit commitments accounted for 61% of total unadvanced loan commitments as of November 30, 2020, while unadvanced long-term loan commitments accounted for 39% 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 $5,531 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 $14,027 million as of November 30, 2020 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 $10,733 million and $10,532 million as of November 30, 2020 and May 31, 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 $3,294 million and $2,857 million as of November 30, 2020 and May 31, 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 table below displays the amount available for advance under unconditional committed lines of credit as of November 30, 2020, and the maturities in each fiscal year during the five-year period ended May 31, 2025, and thereafter.
Table 4.3: Unconditional Committed Lines of Credit—Available Balance
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Available Balance | | Notional Maturities of Unconditional Committed Lines of Credit |
(Dollars in thousands) | | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter |
Committed lines of credit | | $ | 3,293,664 | | | $ | 70,370 | | | $ | 158,768 | | | $ | 1,225,069 | | | $ | 791,085 | | | $ | 948,372 | | | $ | 100,000 | |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Loan Sales
We may transfer from time to time, whole loans and participating interests to third parties. These transfers are made concurrently with the closing of the loan or participation agreement at par value and meet the accounting criteria required for sale accounting. We did not sell any CFC loans during the three months ended August 31, 2021. We sold CFC loans, at par for cash, totaling $96 million and $60$85 million during the sixthree months ended November 30, 2020 and 2019, respectively.August 31, 2020. We recorded immaterial losses uponon the sale of these loans attributable to the unamortized deferred loan origination costs associated with the transferred loans.
Pledged LoansAccrued Interest Receivable
We are requiredreport 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 pledge eligible mortgage notesmembers. 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 amount at least equal to the outstanding balance of our secured debt. The following table summarizesallowance for credit losses for accrued interest receivable on loans outstanding, pledged as collateral to secure our collateral trust bonds, notes payable under the United States Department of Agriculture (“USDA”) Guaranteed Underwriter Program (“Guaranteed Underwriter Program”), notes payable under the revolving note purchase agreement with Farmer Macwhich totaled $91 million and Clean Renewable Energy Bonds, and the corresponding debt outstanding$93 million as of November 30, 2020August 31, 2021 and May 31, 2020. See “Note 6—Short-Term Borrowings” and “Note 7—Long-Term Debt” for information on our borrowings.
Table 4.4: Pledged Loans
| | | | | | | | | | | | | | |
(Dollars in thousands) | | November 30, 2020 | | May 31, 2020 |
Collateral trust bonds: | | | | |
2007 indenture: | | | | |
Distribution system mortgage notes pledged | | $ | 8,024,140 | | | $ | 8,244,202 | |
RUS-guaranteed loans qualifying as permitted investments | | 125,062 | | | 128,361 | |
Total pledged collateral | | $ | 8,149,202 | | | $ | 8,372,563 | |
Collateral trust bonds outstanding | | 7,072,711 | | | 7,422,711 | |
| | | | |
1994 indenture: | | | | |
Distribution system mortgage notes pledged | | $ | 38,252 | | | $ | 39,785 | |
Collateral trust bonds outstanding | | 30,000 | | | 35,000 | |
| | | | |
Guaranteed Underwriter Program: | | | | |
Distribution and power supply system mortgage notes pledged | | $ | 7,306,568 | | | $ | 7,535,931 | |
Notes payable outstanding | | 6,190,391 | | | 6,261,312 | |
| | | | |
Farmer Mac: | | | | |
Distribution and power supply system mortgage notes pledged | | $ | 3,194,401 | | | $ | 3,687,418 | |
Notes payable outstanding | | 2,898,957 | | | 3,059,637 | |
| | | | |
Clean Renewable Energy Bonds Series 2009A: | | | | |
Distribution and power supply system mortgage notes pledged | | $ | 6,297 | | | $ | 7,269 | |
Cash | | 1,103 | | | 395 | |
Total pledged collateral | | $ | 7,400 | | | $ | 7,664 | |
Notes payable outstanding | | 6,068 | | | 6,068 | |
2021, respectively. We also elected to exclude accrued interest receivable from the credit quality disclosures required under CECL.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Credit Concentration
Concentrations of credit may exist when there are amounts loaneda lender has large credit exposures to single borrowers, large credit exposures to borrowers in the same industry sector or engaged in similar activities or large credit exposures to borrowers in a geographic areasregion that would cause themthe borrowers to be similarly impacted by economic or other conditions or when there are large exposures to single borrowers.in the region. As a tax-exempt, member-owned finance cooperative, CFC’s principal focus is to provide funding to its rural electric utility cooperative members to assist them in acquiring, constructing and operating electric distribution systems, power supply systems and related facilities.
Because we lend primarily to our rural electric utility cooperative members, we have had a loan portfolio subject to single-industry and single-obligor concentration risks since our inception in 1969. Loans outstanding to electric utility organizations of $26,620$28,440 million and $26,306$27,995 million as of November 30, 2020August 31, 2021 and May 31, 2020,2021, respectively, accounted for 98% and 99%, respectively, 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.
Geographic Concentration
Although our organizational structure and mission results in single-industry concentration, we serve a geographically diverse group of electric and telecommunications borrowers throughout the United States. The number of borrowers with outstanding loans totaled 894 and 889 as of November 30, 2020 and May 31, 2020, respectively, located in 49 states. Texas accounted for the largest number of borrowers in any one state as of each respective date. In addition, Texas accounted for approximately 15% and 16% of total loans outstanding as of November 30, 2020 and May 31, 2020, respectively, representing the largest concentration of loans outstanding to borrowers in any one state.
Single-Obligor Concentration
The outstanding loan exposure for ourour 20 largest borrowers totaled $5,808$6,316 million and $5,877$6,182 million as of November 30, 2020August 31, 2021 and May 31, 2020,2021, respectively, representing 21% and 22% of total loans outstanding as of each respective date. The 20 largest borrowers consisted of 1210 distribution systems and 810 power supply supply systems as of November 30, 2020. In comparison, the 20 largest borrowers consisted of 11 distribution systemsboth August 31, 2021 and 9 power supply systems as of May 31, 2020.2021. The largest total outstanding exposure to a single borrower or controlled group represented less than 2% of total loans outstanding as of both November 30, 2020August 31, 2021 and May 31, 2020.2021.
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. We are required to pay Farmer Mac a monthly fee based on the unpaid principal balance of loans covered under the purchase commitment. The aggregate unpaid principal balance of designated and Farmer Mac approved loans was $535$493 million and $569$512 million as of November 30, 2020August 31, 2021 and May 31, 2020,2021, respectively. Loan exposure to our 20 largest borrowers covered under the FarmerFarmer Mac agreement totaled $281$304 million and $314$309 million as of November 30, 2020August 31, 2021 and May 31, 2020, respectively.2021, respectively, which reduced our exposure to the 20 largest borrowers to 21% as of each respective date. We have had no loan0 loan defaults andfor loans covered under this agreement; therefore, no0 loans had been put to Farmer Mac for purchase pursuant to thisthe standby purchase agreement as of November 30, 2020.August 31, 2021. Our credit exposure is also mitigated by long-term loans guaranteed by the Rural Utilities Service (“RUS”) of the USDA.RUS. Guaranteed RUS loans totaled $143$137 million and $147$139 million as of November 30, 2020August 31, 2021 and May 31, 2020,2021, respectively.
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 896 and 892 as of August 31, 2021 and May 31, 2021, respectively, located in 49 states. Texas, which had 68 and 67 borrowers with loans outstanding as of August 31, 2021 and May 31, 2021, respectively, 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 $5,102 million and $4,878 million as of August 31, 2021 and May 31, 2021, respectively and accounted for approximately 18% and 17% of total loans outstanding as of each respective date. Of the loans outstanding to Texas-based electric utility organizations, $170 million and $172 million as of August 31, 2021 and May 31, 2021, respectively, were covered by the Farmer Mac standby repurchase agreement, which slightly reduces our Texas loan exposure.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 following table presents the payment status, by member class, of loans outstanding as of November 30, 2020August 31, 2021 and May 31, 2020.2021.
Table 4.5:4.2: Payment Status of Loans Outstanding
| | | | November 30, 2020 | | | August 31, 2021 |
(Dollars in thousands) | (Dollars in thousands) | | Current | | 30-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | Total Loans Outstanding | | Nonaccrual Loans (1) | (Dollars in thousands) | | Current | | 30-89 Days Past Due | | > 90 Days Past Due | | Total Past Due | | Total Loans Outstanding | | Nonaccrual Loans |
Member class: | | Member class: | | | | | | | | | | | | |
CFC: | CFC: | | | | | | | | | | | | | CFC: | | | | | | | | | | | | |
Distribution | Distribution | | $ | 21,223,064 | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 21,223,064 | | $ | 0 | Distribution | | $ | 22,410,932 | | $ | — | | | $ | — | | | $ | — | | | $ | 22,410,932 | | $ | — |
Power supply | Power supply | | 4,596,662 | | 0 | | | 0 | | | 0 | | | 4,596,662 | | 153,477 | Power supply | | 5,135,727 | | 85 | | | 85,269 | | | 85,354 | | | 5,221,081 | | 222,892 |
Statewide and associate | Statewide and associate | | 95,058 | | 0 | | | 0 | | | 0 | | | 95,058 | | 0 | | Statewide and associate | | 101,412 | | — | | | — | | | — | | | 101,412 | | — | |
CFC total | CFC total | | 25,914,784 | | 0 | | | 0 | | | 0 | | | 25,914,784 | | 153,477 | CFC total | | 27,648,071 | | 85 | | | 85,269 | | | 85,354 | | | 27,733,425 | | 222,892 |
NCSC | NCSC | | 704,718 | | 0 | | | 0 | | | 0 | | | 704,718 | | 0 | NCSC | | 705,891 | | — | | | — | | | — | | | 705,891 | | — |
RTFC | RTFC | | 431,661 | | 0 | | | 0 | | | 0 | | | 431,661 | | 0 | RTFC | | 431,442 | | — | | | — | | | — | | | 431,442 | | 8,750 |
Total loans outstanding | Total loans outstanding | | $ | 27,051,163 | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 27,051,163 | | $ | 153,477 | Total loans outstanding | | $ | 28,785,404 | | $ | 85 | | | $ | 85,269 | | | $ | 85,354 | | | $ | 28,870,758 | | $ | 231,642 |
| Percentage of total loans | Percentage of total loans | | 100.00 | % | | 0 | % | | 0 | % | | 0 | % | | 100.00 | % | | 0.57 | % | Percentage of total loans | | 99.70 | % | | — | % | | 0.30 | % | | 0.30 | % | | 100.00 | % | | 0.80 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | May 31, 2020 |
(Dollars in thousands) | | Current | | 30-89 Days Past Due | | 90 Days or More Past Due (1) | | Total Past Due | | Total Loans Outstanding | | Nonaccrual Loans (1) |
CFC: | | | | | | | | | | | | |
Distribution | | $ | 20,769,653 | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 20,769,653 | | $ | 0 |
Power supply | | 4,731,506 | | 0 | | | 0 | | | 0 | | | 4,731,506 | | 167,708 |
Statewide and associate | | 106,498 | | 0 | | | 0 | | | 0 | | | 106,498 | | 0 |
CFC total | | 25,607,657 | | 0 | | | 0 | | | 0 | | | 25,607,657 | | 167,708 |
NCSC | | 697,862 | | 0 | | | 0 | | | 0 | | | 697,862 | | 0 |
RTFC | | 385,335 | | 0 | | | 0 | | | 0 | | | 385,335 | | 0 |
Total loans outstanding | | $ | 26,690,854 | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 26,690,854 | | $ | 167,708 |
| | | | | | | | | | | | |
Percentage of total loans | | 100.00 | % | | 0 | % | | 0 | % | | 0 | % | | 100.00 | % | | 0.63 | % |
____________________________
(1) Consists of 1 loan to a CFC power supply borrower that was classified as nonperforming in the fourth quarter of fiscal year 2020. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | May 31, 2021 |
(Dollars in thousands) | | Current | | 30-89 Days Past Due | | > 90 Days Past Due | | Total Past Due | | Total Loans Outstanding | | Nonaccrual Loans |
Member class: | | | | | | | | | | | | |
CFC: | | | | | | | | | | | | |
Distribution | | $ | 22,027,423 | | $ | — | | | $ | — | | | $ | — | | | $ | 22,027,423 | | $ | — |
Power supply | | 5,069,316 | | 3,400 | | | 81,596 | | | 84,996 | | | 5,154,312 | | 228,312 |
Statewide and associate | | 106,121 | | — | | | — | | | — | | | 106,121 | | — |
CFC total | | 27,202,860 | | 3,400 | | | 81,596 | | | 84,996 | | | 27,287,856 | | 228,312 |
NCSC | | 706,868 | | — | | | — | | | — | | | 706,868 | | — |
RTFC | | 420,383 | | — | | | — | | | — | | | 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 | % |
We had 01 delinquent loansloan totaling $86 million and $85 million as of November 30, 2020 orAugust 31, 2021 and May 31, 2020, and we have 0t experienced any loan defaults or charge-offs since fiscal year 2017. However, we have 1 loan2021, respectively, to Brazos Electric Power Cooperative, Inc. (“Brazos”), a CFC Texas-based power supply borrower, with an outstanding balance of $153 million and $168 million as of November 30, 2020 and May 31, 2020, respectively, thatwhich we classified as nonperforming and placed on nonaccrual status in the fourth quarter of fiscal year 2020. NaN interest income was recognized
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
nonperforming and placed on nonaccrual status in the third quarter of fiscal year 2021 due to Brazos’ bankruptcy filing in March 2021. Brazos is not permitted to make scheduled loan payments without the approval of the bankruptcy court.
The decrease in loans duringon nonaccrual status of $5 million to $232 million as of August 31, 2021 was due to the six months ended November 30, 2020 and 2019. We providereceipt of loan principal payments. See “Nonperforming Loans” below for additional information on this loan below under “Nonperforming Loans.”information.
Troubled Debt Restructurings (“TDR”)
We didhave not had any loan modifications that were required to be accounted for as a TDR during the six months ended November 30, 2020, nor have we had any TDR loan modifications since fiscal year 2016. The following table presents the outstanding balance of modified loans accounted for as TDRs in prior periods and the performance status, by member class, of these loans as of November 30, 2020August 31, 2021 and May 31, 2020.2021.
Table 4.6:4.3: Trouble Debt Restructurings
| | | | November 30, 2020 | | | May 31, 2020 | | | August 31, 2021 | | May 31, 2021 |
(Dollars in thousands) | (Dollars in thousands) | | Number of Borrowers | | Outstanding Amount (1) | | % of Total Loans Outstanding | | | Number of Borrowers | | Outstanding Amount (1) | | % of Total Loans Outstanding | | (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: | TDR loans: | | | | | | | | | | | | | | | TDR loans: | | | | | | | | | | | | |
| Member class: | | Member class: | |
CFC—Distribution | CFC—Distribution | | 1 | | $ | 5,379 | | | 0.02 | % | | | 1 | | $ | 5,755 | | | 0.02 | % | | CFC—Distribution | | 1 | | $ | 5,379 | | | 0.02 | % | | 1 | | $ | 5,379 | | | 0.02 | % |
| RTFC | RTFC | | 1 | | 4,842 | | | 0.02 | | | | 1 | | 5,092 | | | 0.02 | | | RTFC | | 1 | | 4,467 | | | 0.01 | | | 1 | | 4,592 | | | 0.02 | |
Total TDR loans | Total TDR loans | | 2 | | $ | 10,221 | | | 0.04 | % | | | 2 | | $ | 10,847 | | | 0.04 | % | | Total TDR loans | | 2 | | $ | 9,846 | | | 0.03 | % | | 2 | | $ | 9,971 | | | 0.04 | % |
| Performance status of TDR loans: | Performance status of TDR loans: | | | | | Performance status of TDR loans: | |
Performing TDR loans | Performing TDR loans | | 2 | | $ | 10,221 | | | 0.04 | % | | | 2 | | $ | 10,847 | | | 0.04 | % | | Performing TDR loans | | 2 | | $ | 9,846 | | | 0.03 | % | | 2 | | $ | 9,971 | | | 0.04 | % |
Total TDR loans | Total TDR loans | | 2 | | $ | 10,221 | | | 0.04 | % | | | 2 | | $ | 10,847 | | | 0.04 | % | | Total TDR loans | | 2 | | $ | 9,846 | | | 0.03 | % | | 2 | | $ | 9,971 | | | 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 November 30, 2020August 31, 2021 and May 31, 2020.2021. These loans, which have been performing in accordance with the terms of their respective restructured loan agreement for an extended period of time, were classified as performing and on accrual status as of August 31, 2021 or May 31, 2021. We did 0tnot have any TDR loans classified as nonperforming as of November 30, 2020August 31, 2021 or May 31, 2020.2021.
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. DuringThe following table presents the fourth quarter of fiscal year 2020, we classified 1 loan to a CFC power supply borrower with an outstanding balance of $168 millionnonperforming loans, by member class, as of MayAugust 31, 2020, as nonperforming, placed the loan on nonaccrual status and established an asset-specific allowance for credit losses of $34 million as of as of May 31, 2020. Under the terms of the loan, which matures in December 2026, the amount the borrower is required to pay in 2024 and 2025 may vary as the payments are contingent on the borrower's financial performance in those years. Based on our review and assessment of the borrower’s most recent forecast and underlying assumptions provided to us in May 2020, we no longer believe that the future expected cash payments from the borrower through the maturity of the loan in December 2026 will be sufficient to repay the outstanding loan balance. We received payments from the borrower on this loan during the six months ended November 30, 2020, which reduced the outstanding balance to $153 million as of November 30, 2020. The asset-specific allowance for credit losses for this loan was $32 million as of November 30, 2020. Although the borrower is not in default and was current with respect to required payments on the loan as of November 30, 2020, we continue to report the loan as nonperforming and it remains on nonaccrual status. This loan also was categorized as doubtful as of November 30, 20202021 and May 31, 2020. We had 0 other loans classified as nonperforming or on nonaccrual status as of November 30, 2020 or May 31, 2020.2021.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 4.4: Nonperforming Loans
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2021 | | | | May 31, 2021 |
(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 | | $ | 222,892 | | | 0.77 | % | | | | 2 | | $ | 228,312 | | | 0.81 | % | | |
| | | | | | | | | | | | | | | | |
RTFC | | 2 | | 8,750 | | | 0.03 | | | | | 2 | | 9,185 | | | 0.03 | | | |
Total nonperforming loans | | 4 | | $ | 231,642 | | | 0.80 | % | | | | 4 | | $ | 237,497 | | | 0.84 | % | | |
____________________________(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.
We had loans to 4 borrowers, including Brazos, totaling $232 million as of August 31, 2021, and $237 million as of May 31, 2021, classified as nonperforming as of each respective date. These nonperforming loans represented 0.80% and 0.84% of total loans outstanding as of August 31, 2021 and May 31, 2021, respectively. Each of the borrowers with loans outstanding classified as nonperforming, except Brazos, has continued to make scheduled loan payments. 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 $86 million and $85 million as of August 31, 2021 and May 31, 2021, respectively, were delinquent as of each respective date. 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.
Net Charge-Offs
We had 0no loan defaults, charge-offs or recoveries during the three and six months ended November 30, 2020 and 2019. WeAugust 31, 2021, nor during the same prior year-to-date period. Prior to Brazos’ bankruptcy filing, we had not experienced our last charge-off, which was attributable to a borrowerany defaults or charge-offs in our RTFCelectric utility and telecommunications loan portfolio, inportfolios since fiscal year 2017.2013 and 2017, respectively.
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 credit worthinesscreditworthiness of the borrower and probability of default. Our borrower risk ratings align with the U.S. federal banking regulatory agencies credit risk definitions of pass and criticized categories, with the criticized category further segmented among special mention, substandard and doubtful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default. Following
The following is a description of the borrower risk rating categories.
•Pass: Borrowers that are not experiencing difficulty and/or not showing a potential or well-defined credit weakness.
•Special Mention: Borrowers that may be characterized by a potential credit weakness or deteriorating financial condition that is not sufficiently serious to warrant a classification of substandard or doubtful.
•Substandard: Borrowers that display a well-defined credit weakness that may jeopardize the full collection of principal and interest.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
•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.
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 estimatingdetermining our allowance for credit losses.
The following table provides a breakdown of ourTable 4.5 displays total loans outstanding, by borrower risk rating category and by member type,class, as of November 30, 2020August 31, 2021 and May 31, 2020.2021. The borrower risk rating categories presented below correspond to the borrower risk rating categories used in calculating our collective allowance for credit losses. If a parent company provides a guarantee of full repayment of loans of a subsidiary borrower, we include the loans outstanding in the borrower risk ratingrisk-rating category of the guarantor parent company rather than the risk rating category of the subsidiary borrower for purposes of estimatingcalculating the allowance for credit losses. The borrower risk rating categories of loans outstanding presented below correspond to the borrower risk rating categories used in estimating the allowance for credit losses.collective allowance.
In connection with our adoption of CECL, weWe present term loans outstanding as of November 30, 2020,August 31, 2021, by fiscal year of origination for each year during the five-year annual reporting period beginning in fiscal year 2017,2018, and in the aggregate for periods prior to fiscal year 2017.2018. The origination period represents the date CFC advances funds to a borrower, rather than the execution date of a loan facility for a borrower. Revolving loans are presented separately due to the nature of revolving loans. The substantial majority of loans in our portfolio represent fixed-rate advances under secured long-term facilities with terms up to 35 years, and as indicatedindicated in the tableTable 4.5 below, $16,336 million, or 60%, of total loans outstanding of $27,051 million as of
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
November 30, 2020 represent term-loanterm loan advances made to borrowers prior to fiscal year 2017. Our2018 totaled $17,401 million, representing 60% of our total loans outstanding of $28,871 million as of August 31, 2021. The average remaining maturity of our long-term loans, which represent 95%accounted for 92% of total loans outstanding have an average remaining maturity of 18 years as of November 30, 2020.August 31, 2021, was 18 years.
As discussed above, as a tax-exempt, member-owned finance cooperative, CFC’s principal focus is to provide funding to its rural electric utility cooperative members to assist them in acquiring, constructing and operating electric distribution systems, power supply systems and related facilities. As such, since our inception in 1969 we have had an extended repeat lending and repayment history with substantially all of member borrowers through our various loan programs. Our secured long-term loan commitment facilities typically provide a five-yearfive-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 894896 borrowers as of November 30, 2020,August 31, 2021, the number of loans outstanding was 16,51116,557 as of November 30, 2020,August 31, 2021, resulting in an average of 18 loansloans 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 ison our loans has typically been more closely correlated to the risk rating of our borrowers.
63
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 4.7:4.5: Loans Outstanding by Borrower Risk Ratings and Origination Year
| | | November 30, 2020 | | | August 31, 2021 | |
| | Term Loans by Fiscal Year of Origination | | | | Term Loans by Fiscal Year of Origination | | |
(Dollars in thousands) | (Dollars in thousands) | | YTD Q2 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Revolving Loans | | Total | | May 31, 2020 | (Dollars in thousands) | | Q1 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Revolving Loans | | Total | | May 31, 2021 |
Pass | Pass | | | | | | | | | | | | | | | | | | | Pass | | | | | | | | | | | | | | | | | | |
CFC: | CFC: | | CFC: | |
Distribution | Distribution | | $ | 794,560 | | | $ | 1,965,438 | | | $ | 1,251,552 | | | $ | 1,521,610 | | | $ | 1,547,511 | | | $ | 12,950,957 | | | $ | 990,604 | | | $ | 21,022,232 | | | $ | 20,643,737 | | Distribution | | $ | 472,263 | | | $ | 1,749,604 | | | $ | 1,922,216 | | | $ | 1,219,102 | | | $ | 1,485,389 | | | $ | 13,961,703 | | | $ | 1,368,611 | | | $ | 22,178,888 | | | $ | 21,808,099 | |
Power supply | Power supply | | 374,860 | | | 206,977 | | | 444,717 | | | 254,510 | | | 256,850 | | | 2,648,503 | | | 210,043 | | | 4,396,460 | | | 4,516,595 | | Power supply | | 242,032 | | | 566,970 | | | 197,161 | | | 343,104 | | | 250,960 | | | 2,708,825 | | | 285,507 | | | 4,594,559 | | | 4,517,408 | |
Statewide and associate | Statewide and associate | | 75 | | | 23,707 | | | 3,882 | | | 0 | | | 662 | | | 26,638 | | | 23,996 | | | 78,960 | | | 90,274 | | Statewide and associate | | 1,500 | | | 2,431 | | | 21,181 | | | 3,587 | | | — | | | 22,962 | | | 34,038 | | | 85,699 | | | 90,261 | |
CFC total | CFC total | | 1,169,495 | | | 2,196,122 | | | 1,700,151 | | | 1,776,120 | | | 1,805,023 | | | 15,626,098 | | | 1,224,643 | | | 25,497,652 | | | 25,250,606 | | CFC total | | 715,795 | | | 2,319,005 | | | 2,140,558 | | | 1,565,793 | | | 1,736,349 | | | 16,693,490�� | | | 1,688,156 | | | 26,859,146 | | | 26,415,768 | |
NCSC | NCSC | | 16,130 | | | 246,108 | | | 4,529 | | | 58,556 | | | 15,215 | | | 264,014 | | | 100,166 | | | 704,718 | | | 697,862 | | NCSC | | — | | | 41,170 | | | 239,189 | | | 4,302 | | | 43,410 | | | 256,994 | | | 120,826 | | | 705,891 | | | 706,868 | |
RTFC | RTFC | | 71,315 | | | 72,275 | | | 13,155 | | | 29,866 | | | 65,631 | | | 138,250 | | | 26,382 | | | 416,874 | | | 371,507 | | RTFC | | 11,224 | | | 96,314 | | | 48,794 | | | 11,621 | | | 26,082 | | | 193,843 | | | 30,346 | | | 418,224 | | | 406,606 | |
Total pass | Total pass | | $ | 1,256,940 | | | $ | 2,514,505 | | | $ | 1,717,835 | | | $ | 1,864,542 | | | $ | 1,885,869 | | | $ | 16,028,362 | | | $ | 1,351,191 | | | $ | 26,619,244 | | | $ | 26,319,975 | | Total pass | | $ | 727,019 | | | $ | 2,456,489 | | | $ | 2,428,541 | | | $ | 1,581,716 | | | $ | 1,805,841 | | | $ | 17,144,327 | | | $ | 1,839,328 | | | $ | 27,983,261 | | | $ | 27,529,242 | |
| Special mention | Special mention | | Special mention | |
CFC: | CFC: | | CFC: | |
Distribution | Distribution | | $ | 0 | | | $ | 0 | | | $ | 5,243 | | | $ | 958 | | | $ | 4,669 | | | $ | 111,700 | | | $ | 78,262 | | | $ | 200,832 | | | $ | 7,743 | | Distribution | | $ | — | | | $ | 4,973 | | | $ | — | | | $ | 5,174 | | | $ | 945 | | | $ | 12,937 | | | $ | 208,015 | | | $ | 232,044 | | | $ | 219,324 | |
Power supply | Power supply | | 0 | | | 0 | | | 0 | | | 2,351 | | | 8,244 | | | 36,130 | | | 0 | | | 46,725 | | | 0 | | Power supply | | — | | | — | | | — | | | — | | | — | | | 29,000 | | | — | | | 29,000 | | | 29,611 | |
Statewide and associate | Statewide and associate | | 0 | | | 0 | | | 5,000 | | | 4,000 | | | 5,907 | | | 1,191 | | | 0 | | | 16,098 | | | 16,224 | | Statewide and associate | | — | | | — | | | — | | | 5,000 | | | 3,982 | | | 6,731 | | | — | | | 15,713 | | | 15,860 | |
CFC total | CFC total | | 0 | | | 0 | | | 10,243 | | | 7,309 | | | 18,820 | | | 149,021 | | | 78,262 | | | 263,655 | | | 23,967 | | CFC total | | — | | | 4,973 | | | — | | | 10,174 | | | 4,927 | | | 48,668 | | | 208,015 | | | 276,757 | | | 264,795 | |
RTFC | RTFC | | 0 | | | 0 | | | 1,535 | | | 3,207 | | | 3,353 | | | 0 | | | 1,850 | | | 9,945 | | | 8,736 | | RTFC | | — | | | — | | | — | | | — | | | — | | | 4,467 | | | — | | | 4,467 | | | 4,592 | |
Total special mention | Total special mention | | $ | 0 | | | $ | 0 | | | $ | 11,778 | | | $ | 10,516 | | | $ | 22,173 | | | $ | 149,021 | | | $ | 80,112 | | | $ | 273,600 | | | $ | 32,703 | | Total special mention | | $ | — | | | $ | 4,973 | | | $ | — | | | $ | 10,174 | | | $ | 4,927 | | | $ | 53,135 | | | $ | 208,015 | | | $ | 281,224 | | | $ | 269,387 | |
| Substandard | Substandard | | Substandard | |
CFC: | CFC: | | CFC: | |
Distribution | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 118,173 | | |
| Power supply | Power supply | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 47,203 | | Power supply | | $ | — | | | $ | 23,200 | | | $ | — | | | $ | 83,854 | | | $ | — | | | $ | 63,015 | | | $ | 204,560 | | | $ | 374,629 | | | $ | 378,981 | |
CFC total | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 165,376 | | |
RTFC | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 4,842 | | | 0 | | | 4,842 | | | 5,092 | | |
| Total substandard | Total substandard | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 4,842 | | | $ | 0 | | | $ | 4,842 | | | $ | 170,468 | | Total substandard | | $ | — | | | $ | 23,200 | | | $ | — | | | $ | 83,854 | | | $ | — | | | $ | 63,015 | | | $ | 204,560 | | | $ | 374,629 | | | $ | 378,981 | |
| Doubtful | Doubtful | | Doubtful | |
CFC: | CFC: | | CFC: | |
Power supply | Power supply | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 153,477 | | | $ | 0 | | | $ | 153,477 | | | $ | 167,708 | | Power supply | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 137,373 | | | $ | 85,520 | | | $ | 222,893 | | | $ | 228,312 | |
CFC total | CFC total | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 153,477 | | | 0 | | | 153,477 | | | 167,708 | | CFC total | | — | | | — | | | — | | | — | | | — | | | 137,373 | | | 85,520 | | | 222,893 | | | 228,312 | |
RTFC | | RTFC | | — | | | — | | | — | | | 1,348 | | | 2,815 | | | 2,771 | | | 1,817 | | | 8,751 | | | 9,185 | |
Total doubtful | Total doubtful | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 153,477 | | | $ | 0 | | | $ | 153,477 | | | $ | 167,708 | | Total doubtful | | $ | — | | | $ | — | | | $ | — | | | $ | 1,348 | | | $ | 2,815 | | | $ | 140,144 | | | $ | 87,337 | | | $ | 231,644 | | | $ | 237,497 | |
Total criticized loans | | Total criticized loans | | $ | — | | | $ | 28,173 | | | $ | — | | | $ | 95,376 | | | $ | 7,742 | | | $ | 256,294 | | | $ | 499,912 | | | $ | 887,497 | | | $ | 885,865 | |
Total loans outstanding | Total loans outstanding | | $ | 1,256,940 | | | $ | 2,514,505 | | | $ | 1,729,613 | | | $ | 1,875,058 | | | $ | 1,908,042 | | | $ | 16,335,702 | | | $ | 1,431,303 | | | $ | 27,051,163 | | | $ | 26,690,854 | | Total loans outstanding | | $ | 727,019 | | | $ | 2,484,662 | | | $ | 2,428,541 | | | $ | 1,677,092 | | | $ | 1,813,583 | | | $ | 17,400,621 | | | $ | 2,339,240 | | | $ | 28,870,758 | | | $ | 28,415,107 | |
|
Loans to 1 electric distribution cooperative borrowerCriticized loans totaled $887 million and its subsidiary totaling $165$886 million as of August 31, 2021 and May 31, 2020 accounted for the substantial majority2021, respectively, and represented approximately 3% of total loans outstanding as of each respective date. Each of the substandard loanborrowers with loans outstanding in the criticized category, amountwith the exception of the $170 million as of May 31, 2020. Several years ago the electric distribution cooperative borrower established a subsidiary to deploy retail broadband service in underserved rural communities, which led to financial difficulties. The borrower and its subsidiary, however, continued to beBrazos, was current with regard to all principal and interest payments due. Based on updated financial performance information from the borrower, we reassessed and upgraded the risk rating for the borrower from substandardamounts due as of August 31, 2021 and May 31, 20202021.Brazos is not permitted to special mention asmake scheduled loan payments without approval of November 30, 2020. The loans outstanding to this borrower of $164 million as of November 30, 2020 arethe bankruptcy court.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
secured under our typical collateral requirements for long-term loan advances as of November 30, 2020. We currently expect to collect all principal and interest amounts due from the borrower and its subsidiary.Special Mention
The doubtful loan category amountsNaN CFC electric distribution borrower with loans outstanding of $153$232 million and $168$219 million as of November 30, 2020August 31, 2021 and May 31, 2020, are attributable2021, respectively, accounted for the substantial majority of loans in the special mention loan category amount of $281 million and $269 million as of each respective date. This borrower experienced 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 cooperative that experienced a significant adverse financial impact due to its exposure to the elevated power costs during the February 2021 polar vortex, of $375 million and $379 million as of August 31, 2021 and May 31, 2021, respectively, account for the loan amounts in the substandard category as of each respective date. The loans outstanding loan to Rayburn of $375 million as of August 31, 2021 consist of secured loans totaling $163 million and unsecured loans totaling $212 million
Doubtful
Loans outstanding in the CFC power supply borrowerdoubtful category totaled $232 million and $237 million as of August 31, 2021 and May 31, 2021, respectively, and were also classified as nonperforming, as discussed above under “Nonperforming Loans.”
Unadvanced Loan Commitments
Unadvanced loan commitments represent approved and executed loan contracts for which funds have not been advanced to borrowers. The following table presents unadvanced loan commitments, by member class and by loan type, as of August 31, 2021 and May 31, 2021.
Table 4.6: Unadvanced Commitments by Member Class and Loan Type
| | | | | | | | | | | | | | |
(Dollars in thousands) | | August 31, 2021 | | May 31, 2021 |
Member class: | | | | |
CFC: | | | | |
Distribution | | $ | 9,444,692 | | | $ | 9,387,070 | |
Power supply | | 3,861,763 | | | 3,970,698 | |
Statewide and associate | | 168,352 | | | 161,340 | |
Total CFC | | 13,474,807 | | | 13,519,108 | |
NCSC | | 630,864 | | | 551,125 | |
RTFC | | 288,061 | | | 286,806 | |
Total unadvanced commitments | | $ | 14,393,732 | | | $ | 14,357,039 | |
| | | | |
| | | | |
| | | | |
Loan type:(1) | | | | |
Long-term loans: | | | | |
Fixed rate | | $ | — | | | $ | — | |
Variable rate | | 5,637,457 | | | 5,771,813 | |
| | | | |
Total long-term loans | | 5,637,457 | | | 5,771,813 | |
Lines of credit | | 8,756,275 | | | 8,585,226 | |
Total unadvanced commitments | | $ | 14,393,732 | | | $ | 14,357,039 | |
| | | | |
| | | | |
____________________________
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1)The interest rate on unadvanced loan commitments is not set until an advance is made; therefore, all unadvanced long-term loan commitments are reported as variable rate. However, the borrower may select either a fixed or a variable rate when an advance is drawn under a loan commitment.
The following table displays, by loan type, the available balance under unadvanced loan commitments as of August 31, 2021, and the related maturities in each fiscal year during the five-year period ended May 31, 2026, and thereafter.
Table 4.7: Unadvanced Loan Commitments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Available Balance | | Notional Maturities of Unadvanced Loan Commitments |
(Dollars in thousands) | | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter |
Line of credit loans | | $ | 8,756,275 | | | $ | 788,441 | | | $ | 4,538,824 | | | $ | 1,166,917 | | | $ | 1,525,703 | | | $ | 402,696 | | | $ | 333,694 | |
Long-term loans | | 5,637,457 | | | 440,451 | | | 736,294 | | | 1,406,309 | | | 722,760 | | | 985,884 | | | 1,345,759 | |
Total | | $ | 14,393,732 | | | $ | 1,228,892 | | | $ | 5,275,118 | | | $ | 2,573,226 | | | $ | 2,248,463 | | | $ | 1,388,580 | | | $ | 1,679,453 | |
Unadvanced line of credit commitments accounted for 61% of total unadvanced loan commitments as of August 31, 2021, while unadvanced long-term loan commitments accounted for 39% 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 $5,637 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 $14,394 million as of August 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 $11,203 million and $11,312 million as of August 31, 2021 and May 31, 2021, 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 $3,191 million and $3,045 million as of August 31, 2021 and May 31, 2021, 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 as of August 31, 2021, and the related maturity amounts in each fiscal year during the five-year period ending May 31, 2026, and thereafter.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 4.8: 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 | | $ | 3,190,563 | | | $ | 1,708 | | | $ | 829,407 | | | $ | 662,550 | | | $ | 1,243,715 | | | $ | 220,279 | | | $ | 232,904 | |
Pledged Collateral—Loans
We are required to pledge eligible mortgage notes in an amount at least equal to the outstanding balance of our secured debt. Table 4.9 displays the borrowing amount under each of our secured borrowing agreements and the corresponding loans outstanding pledged as collateral as of August 31, 2021 and May 31, 2021. See “Note 6—Short-Term Borrowings” and “Note 7—Long-Term Debt” for information on our secured borrowings and other borrowings.
Table 4.9: Pledged Loans
| | | | | | | | | | | | | | |
(Dollars in thousands) | | August 31, 2021 | | May 31, 2021 |
Collateral trust bonds: | | | | |
2007 indenture: | | | | |
Collateral trust bonds outstanding | | $ | 7,422,711 | | | $ | 7,422,711 | |
Pledged collateral: | | | | |
Distribution system mortgage notes pledged | | 8,299,296 | | | 8,400,293 | |
RUS-guaranteed loans qualifying as permitted investments pledged | | 119,956 | | | 121,679 | |
Total pledged collateral | | 8,419,252 | | | 8,521,972 | |
| | | | |
1994 indenture: | | | | |
Collateral trust bonds outstanding | | $ | 30,000 | | | $ | 30,000 | |
Pledged collateral: | | | | |
Distribution system mortgage notes pledged | | 34,161 | | | 34,924 | |
| | | | |
Guaranteed Underwriter Program: | | | | |
Notes payable outstanding | | $ | 6,229,957 | | | $ | 6,269,303 | |
Pledged collateral: | | | | |
Distribution and power supply system mortgage notes pledged | | 7,080,577 | | | 7,150,240 | |
| | | | |
Farmer Mac: | | | | |
Notes payable outstanding | | $ | 3,359,744 | | | $ | 2,977,909 | |
Pledged collateral: | | | | |
Distribution and power supply system mortgage notes pledged | | 3,571,083 | | | 3,440,307 | |
| | | | |
Clean Renewable Energy Bonds Series 2009A: | | | | |
Notes payable outstanding | | $ | 4,412 | | | $ | 4,412 | |
Pledged collateral: | | | | |
Distribution and power supply system mortgage notes pledged | | 4,823 | | | 5,316 | |
Cash | | 787 | | | 394 | |
Total pledged collateral | | 5,610 | | | 5,710 | |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | |
NOTE 5—ALLOWANCE FOR CREDIT LOSSES |
Upon adoptionWe are required to maintain an allowance based on a current estimate of CECL on June 1, 2020, we recorded an increasecredit losses that are expected to occur over the remaining contractual term of the loans in our portfolio. Our allowance for credit losses consists of a collective allowance and an asset-specific allowance. The collective allowance is established for loans in our loan portfolio of $4 million. The impactthat share similar risk characteristics and are therefore evaluated on the reserve fora collective, or pool, basis in measuring expected credit losseslosses. The asset-specific allowance is established for loans in our off-balanceportfolio 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 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.”losses.
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 three and six months ended November 30, 2020August 31, 2021 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.2020.
Table 5.1: Changes in Allowance for Credit Losses | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, 2020 |
(Dollars in thousands) | | CFC | | NCSC | | RTFC | | Total |
Balance as of August 31, 2020 | | $ | 52,730 | | | $ | 829 | | | $ | 3,792 | | | $ | 57,351 | |
Provision (benefit) for credit losses | | 1,679 | | | 512 | | | (553) | | | 1,638 | |
| | | | | | | | |
Balance as of November 30, 2020 | | $ | 54,409 | | | $ | 1,341 | | | $ | 3,239 | | | $ | 58,989 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended August 31, 2021 |
(Dollars in thousands) | | Distribution | | Power Supply | | Statewide and Associate | | CFC Total | | NCSC | | RTFC | | Total |
Balance as of May 31, 2021 | | $ | 13,426 | | | $ | 64,646 | | | $ | 1,391 | | | $ | 79,463 | | | $ | 1,374 | | | $ | 4,695 | | | $ | 85,532 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Provision for credit losses | | 1,943 | | | 1,823 | | | 31 | | | 3,797 | | | 81 | | | 125 | | | 4,003 | |
| | | | | | | | | | | | | | |
Balance as of August 31, 2021 | | $ | 15,369 | | | $ | 66,469 | | | $ | 1,422 | | | $ | 83,260 | | | $ | 1,455 | | | $ | 4,820 | | | $ | 89,535 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended August 31, 2020 |
(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 | | 449 | | | (779) | | | (23) | | | (353) | | | 38 | | | 641 | | | 326 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Balance as of August 31, 2020 | | $ | 12,037 | | | $ | 39,282 | | | $ | 1,411 | | | $ | 52,730 | | | $ | 829 | | | $ | 3,792 | | | $ | 57,351 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, 2019 |
(Dollars in thousands) | | CFC | | NCSC | | RTFC | | Total |
Balance as of August 31, 2019 | | $ | 12,962 | | | $ | 2,077 | | | $ | 2,526 | | | $ | 17,565 | |
Provision (benefit) for credit losses | | 114 | | | (1,267) | | | 108 | | | (1,045) | |
Balance as of November 30, 2019 | | $ | 13,076 | | | $ | 810 | | | $ | 2,634 | | | $ | 16,520 | |
The following tables present, by member class, the components of our allowance for credit losses as of August 31, 2021 and May 31, 2021.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended November 30, 2020 |
(Dollars in thousands) | | CFC | | NCSC | | RTFC | | Total |
Balance as of May 31, 2020 | | $ | 47,438 | | | $ | 806 | | | $ | 4,881 | | | $ | 53,125 | |
Cumulative-effect adjustment from adoption of CECL accounting standard | | 5,645 | | | (15) | | | (1,730) | | | 3,900 | |
Balance as of June 1, 2020 | | 53,083 | | | 791 | | | 3,151 | | | 57,025 | |
Provision for credit losses | | 1,326 | | | 550 | | | 88 | | | 1,964 | |
| | | | | | | | |
Balance as of November 30, 2020 | | $ | 54,409 | | | $ | 1,341 | | | $ | 3,239 | | | $ | 58,989 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended November 30, 2019 |
(Dollars in thousands) | | CFC | | NCSC | | RTFC | | Total |
Balance as of May 31, 2019 | | $ | 13,120 | | | $ | 2,007 | | | $ | 2,408 | | | $ | 17,535 | |
Provision (benefit) for credit losses | | (44) | | | (1,197) | | | 226 | | | (1,015) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Balance as of November 30, 2019 | | $ | 13,076 | | | $ | 810 | | | $ | 2,634 | | | $ | 16,520 | |
Table 5.2: Allowance for Credit Losses Components
| | | | November 30, 2020 | | | August 31, 2021 |
(Dollars in thousands) | (Dollars in thousands) | | CFC | | NCSC | | RTFC | | Total | (Dollars in thousands) | | Distribution | | Power Supply | | Statewide and Associate | | CFC Total | | NCSC | | RTFC | | Total |
Allowance components: | Allowance components: | | | | | | | | | Allowance components: | | | | | | | | | | | | | | |
Collective allowance | Collective allowance | | $ | 22,178 | | $ | 1,341 | | | $ | 2,750 | | | $ | 26,269 | Collective allowance | | $ | 15,369 | | $ | 25,624 | | $ | 1,422 | | $ | 42,415 | | $ | 1,455 | | $ | 1,249 | | $ | 45,119 |
Asset-specific allowance | Asset-specific allowance | | 32,231 | | 0 | | | 489 | | | 32,720 | Asset-specific allowance | | — | | 40,845 | | — | | 40,845 | | — | | 3,571 | | 44,416 |
Total allowance for credit losses | Total allowance for credit losses | | $ | 54,409 | | $ | 1,341 | | | $ | 3,239 | | | $ | 58,989 | Total allowance for credit losses | | $ | 15,369 | | $ | 66,469 | | $ | 1,422 | | $ | 83,260 | | $ | 1,455 | | $ | 4,820 | | $ | 89,535 |
| Loans outstanding:(1) | Loans outstanding:(1) | | | | | | | | | Loans outstanding:(1) | | | | | | | | |
Collectively evaluated loans | Collectively evaluated loans | | $ | 25,755,928 | | $ | 704,718 | | | $ | 426,819 | | | $ | 26,887,465 | Collectively evaluated loans | | $ | 22,405,553 | | $ | 4,998,189 | | $ | 101,412 | | $ | 27,505,154 | | $ | 705,891 | | $ | 418,225 | | $ | 28,629,270 |
Individually evaluated loans | Individually evaluated loans | | 158,856 | | 0 | | | 4,842 | | | 163,698 | Individually evaluated loans | | 5,379 | | 222,892 | | — | | 228,271 | | — | | 13,217 | | 241,488 |
Total loans outstanding | Total loans outstanding | | $ | 25,914,784 | | $ | 704,718 | | | $ | 431,661 | | | $ | 27,051,163 | Total loans outstanding | | $ | 22,410,932 | | $ | 5,221,081 | | $ | 101,412 | | $ | 27,733,425 | | $ | 705,891 | | $ | 431,442 | | $ | 28,870,758 |
| Allowance ratios: | | |
Collective allowance coverage ratio(2) | | 0.09 | % | | 0.19 | % | | 0.64 | % | | 0.10 | % | |
Asset-specific allowance coverage ratio(3) | | 20.29 | | | 0 | | | 10.10 | | | 19.99 | | |
Total allowance coverage ratio(4) | | 0.21 | | | 0.19 | | | 0.75 | | | 0.22 | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance ratios: | | | | | | | | | | | | | | |
Collective allowance coverage ratio(2) | | 0.07 | % | | 0.51 | % | | 1.40 | % | | 0.15 | % | | 0.21 | % | | 0.30 | % | | 0.16 | % |
Asset-specific allowance coverage ratio(3) | | — | | | 18.33 | | | — | | | 17.89 | | | — | | | 27.02 | | | 18.39 | |
Total allowance coverage ratio(4) | | 0.07 | | | 1.27 | | | 1.40 | | | 0.30 | | | 0.21 | | | 1.12 | | | 0.31 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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(5) | | — | | 39,542 | | — | | 39,542 | | — | | 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:(1) | | | | | | | | | | | | | | |
Collectively evaluated loans | | $ | 22,022,044 | | $ | 4,926,000 | | $ | 106,121 | | $ | 27,054,165 | | | $ | 706,868 | | | $ | 406,606 | | | $ | 28,167,639 | |
Individually evaluated loans(5) | | 5,379 | | 228,312 | | — | | 233,691 | | — | | 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 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | May 31, 2020 |
(Dollars in thousands) | | CFC | | NCSC | | RTFC | | Total |
Allowance components: | | | | | | | | |
Collective allowance | | $ | 13,584 | | $ | 806 | | | $ | 3,902 | | | $ | 18,292 |
Asset-specific allowance | | 33,854 | | 0 | | | 979 | | | 34,833 |
Total allowance for credit losses | | $ | 47,438 | | $ | 806 | | | $ | 4,881 | | | $ | 53,125 |
| | | | | | | | |
Loans outstanding:(1) | | | | | | | | |
Collectively evaluated loans | | $ | 25,434,193 | | $ | 697,862 | | | $ | 380,243 | | | $ | 26,512,298 |
Individually evaluated loans | | 173,464 | | 0 | | | 5,092 | | | 178,556 |
Total loans outstanding | | $ | 25,607,657 | | $ | 697,862 | | | $ | 385,335 | | | $ | 26,690,854 |
| | | | | | | | |
Allowance coverage ratios: | | | | | | | | |
Collective allowance coverage ratio(2) | | 0.05 | % | | 0.12 | % | | 1.03 | % | | 0.07 | % |
Asset-specific allowance coverage ratio(3) | | 19.52 | | | 0 | | | 19.23 | | | 19.51 | |
Total allowance coverage ratio(4) | | 0.19 | | | 0.12 | | | 1.27 | | | 0.20 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance ratios: | | | | | | | | | | | | | | |
Collective allowance coverage ratio(2) | | 0.06 | % | | 0.51 | % | | 1.31 | % | | 0.15 | % | | 0.19 | % | | 0.28 | % | | 0.15 | % |
Asset-specific allowance coverage ratio(3) | | — | | | 17.32 | | | — | | | 16.92 | | | — | | | 25.75 | | | 17.41 | |
Total allowance coverage ratio(4) | | 0.06 | | | 1.25 | | | 1.31 | | | 0.29 | | | 0.19 | | | 1.12 | | | 0.30 | |
____________________________
(1)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 November 30, 2020both August 31, 2021 and May 31, 2020, respectively.2021.
(2)Calculated based on the collective allowance component at period end divided by collectively evaluated loans outstanding at period end.
(3)Calculated based on the asset-specific allowance component at period end divided by individually evaluated loans outstanding at period end.
(4)Calculated based on the total allowance for credit losses at period end divided by total loans outstanding at period end.
(5)
As discussed above in “Note 4—Loans,”In addition, we had 1 loanless than $1 million of letters of credit outstanding to a CFC power supply borrower with an outstanding balance of $153 million and $168 millionBrazos, for which the reserve is included asset-specific allowance as of November 30, 2020 or May 31, 2020, respectively, classified as nonperforming and on nonaccrual status as of each respective date. We evaluated this loan on an individual basis in determining the asset-specific allowance of $32 million and $34 million as of November 30, 2020 and May 31, 2020, respectively.
2021.
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.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 5.3: Individually Impaired Loans—Incurred Loss Model
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | May 31, 2020 | |
(Dollars in thousands) | | Recorded Invested | | Related Allowance | | With Specific Allowance | | With No Specific Allowance | | | |
Individually impaired loans: | | | | | | | | | | | |
CFC | | $ | 173,463 | | | $ | 33,854 | | | $ | 167,708 | | | $ | 5,755 | | | | |
RTFC | | 5,092 | | | 979 | | | 5,092 | | | 0 | | | | |
Total | | $ | 178,555 | | | $ | 34,833 | | | $ | 172,800 | | | $ | 5,755 | | | | |
Our allowance for credit losses and allowance coverage ratio increased to $90 million and 0.31%, respectively, as of August 31, 2021, from $86 million and 0.30%, respectively as of May 31, 2021, resulting from a current-quarter addition to the allowance of $4 million, predominantly attributable to an increase in the collective allowance due to higher expected default rates derived from third-party utility sector default data, which we use to inform the default rates used in measuring our collective allowance for credit losses, and an increase in the asset-specific allowance for loans outstanding to Brazos.
Table 5.4: Average Recorded InvestmentFebruary 2021 Polar Vortex—CFC Texas Exposure
We continue to believe that the significant adverse financial impact from the surge in wholesale power costs in Texas during the February 2021 polar vortex was primarily limited to our outstanding loan exposure to Brazos and Interest Income Recognized on Individually Impaired Loans—Incurred Loss Model
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, 2019 | | Six Months Ended November 30, 2019 |
(Dollars in thousands) | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
Individually impaired loans: | | | | | | | | |
CFC | | $ | 5,755 | | | $ | 144 | | | $ | 5,999 | | | $ | 281 | |
RTFC | | 5,424 | | | 68 | | | 5,485 | | | 137 | |
Total | | $ | 11,179 | | | $ | 212 | | | $ | 11,484 | | | $ | 418 | |
Rayburn of $86 million and $375 million, respectively, as of August 31, 2021. In June 2021, Texas enacted securitization legislation that offers financing programs for qualifying electric cooperatives exposed to elevated power costs during the February 2021 polar vortex. We believe Brazos and Rayburn qualify for the financing programs, but we are currently uncertain whether Brazos will utilize the provisions available under this legislation. In filings made with the Public Utility Commission of Texas, Rayburn has stated that it intends to utilize the securitization legislation to finance its elevated power costs and has taken steps to begin the process to do so. However, there are many factors that may impact the outcome of a securitization transaction and the ultimate collectibility of Rayburn’s loans outstanding, which we are unable to predict.
Reserve for Credit Losses—Unadvanced Loan Commitments
In addition to the allowance for credit losses for our loan portfolio, we maintain an allowance for credit losses for unadvanced loan commitments, which we refer to as our reserve for credit losses because this amount is reported as a component of other liabilities on our consolidated balance sheets. Upon adoption of CECL on June 1, 2020, we began measuring the reserve for credit losses for unadvanced loan commitments based on expected credit losses over the contractual period of our exposure to credit risk arising from our obligation to extend credit, unless that obligation is unconditionally cancellable by us. The reserve for credit losses related to our off-balance sheet exposure for unadvanced loan commitments was less than $1 million as of both November 30, 2020August 31, 2021 and May 31, 2020.2021.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | |
NOTE 6—SHORT-TERM BORROWINGS |
Short-term borrowings consist of borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. Our short-term borrowings totaled $4,688$5,378 million and accounted for 18%19% of total debt outstanding as of November 30, 2020,August 31, 2021, compared with $3,962$4,582 million and 15%17% of total debt outstanding as of May 31, 2020.2021. The following table provides comparative information on our short-term borrowings as of November 30, 2020August 31, 2021 and May 31, 2020.2021.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 6.1: Short-Term Borrowings Sources
| | | | | August 31, 2021 | | May 31, 2021 |
(Dollars in thousands) | (Dollars in thousands) | | November 30, 2020 | | May 31, 2020 | (Dollars in thousands) | | Amount | | % of Total Debt Outstanding | | Amount | | % of Total Debt Outstanding |
Short-term borrowings: | Short-term borrowings: | | | | | Short-term borrowings: | | | | | | | | |
Commercial paper: | Commercial paper: | | Commercial paper: | | |
Commercial paper sold through dealers, net of discounts | | $ | 714,984 | | | $ | 0 | | |
Commercial paper sold directly to members, at par | | 1,283,132 | | | 1,318,566 | | |
Commercial paper dealers, net of discounts | | Commercial paper dealers, net of discounts | | $ | 1,009,967 | | | 4 | % | | $ | 894,977 | | | 3 | % |
Commercial paper members, at par | | Commercial paper members, at par | | 1,135,587 | | | 4 | | | 1,124,607 | | | 4 | |
Total commercial paper | Total commercial paper | | 1,998,116 | | | 1,318,566 | | Total commercial paper | | 2,145,554 | | | 8 | | | 2,019,584 | | | 7 | |
Select notes to members | Select notes to members | | 1,750,514 | | | 1,597,959 | | Select notes to members | | 1,699,382 | | | 6 | | | 1,539,150 | | | 6 | |
Daily liquidity fund notes | Daily liquidity fund notes | | 495,124 | | | 508,618 | | Daily liquidity fund notes | | 449,266 | | | 1 | | | 460,556 | | | 2 | |
Medium-term notes sold to members | Medium-term notes sold to members | | 319,214 | | | 286,842 | | Medium-term notes sold to members | | 358,780 | | | 1 | | | 362,691 | | | 1 | |
Farmer Mac notes payable (1) | Farmer Mac notes payable (1) | | 125,000 | | | 250,000 | | Farmer Mac notes payable (1) | | 500,000 | | | 2 | | | — | | | — | |
Securities sold under repurchase agreements | | Securities sold under repurchase agreements | | 225,435 | | | 1 | | | 200,115 | | | 1 | |
Total short-term borrowings | Total short-term borrowings | | $ | 4,687,968 | | | $ | 3,961,985 | | Total short-term borrowings | | $ | 5,378,417 | | | 19 | % | | $ | 4,582,096 | | | 17 | % |
____________________________
(1) Advanced under the revolving purchase agreement with Farmer Mac dated March 24, 2011. See “Note 7—Long-Term Debt” for additional information on this revolving note purchase agreement.
We have master repurchase agreements with 2 banks whereby we may sell investment-grade corporate debt securities from our investment portfolio subject to an obligation to repurchase the same or similar securities at an agreed-upon price and date. Transactions under these repurchase agreements are accounted for as collateralized financing agreements and not as a sale. The obligation to repurchase the securities is reported as securities sold under repurchase agreements, which we include as a component of short-term borrowings on our consolidated balance sheets. We disclose the fair value of the debt securities underlying repurchase transactions; however, the pledged debt securities remain in the investment debt securities portfolio amount reported on our consolidated balance sheets. On August 27, 2021, we borrowed $225 million under a securities repurchase transaction. On September 3, 2021, we repurchased the underlying pledged debt securities, which had a fair value of $236 million as of August 31, 2021. We had borrowings under repurchase agreements of $200 million as of May 31, 2021.
Committed Bank Revolving Line of Credit Agreements
The total commitment amount under our committed bank revolving line of credit agreements was $2,725 million as of both November 30, 2020 and May 31, 2020. These agreements allow us to request up to $300 million of letters of credit, which, if requested, results in a reduction in the total amount available for our use. The following table presents the amount available for access under our bank revolving line of credit agreements as of November 30, 2020 and MayAugust 31, 2020.2021.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 6.2: Committed Bank Revolving Line of Credit Agreements Available Amounts
| | | November 30, 2020 | | May 31, 2020 | | | | | | August 31, 2021 | | | | |
(Dollars in millions) | (Dollars in millions) | | Total Commitment | | Letters of Credit Outstanding | | Available Amount | | Total Commitment | | Letters of Credit Outstanding | | Available Amount | | Maturity | | Annual Facility Fee (1) | (Dollars in millions) | | Total Commitment | | Letters of Credit Outstanding | | Available Amount | | Maturity | | Annual Facility Fee (1) |
Bank revolving agreements: | | Bank revolving agreements: | | | | | | | | | | |
| 3-year agreement | 3-year agreement | | $ | 1,315 | | | $ | 0 | | | $ | 1,315 | | | $ | 1,315 | | | $ | 0 | | | $ | 1,315 | | | November 28, 2022 | | 7.5 bps | 3-year agreement | | $ | 1,245 | | | $ | — | | | $ | 1,245 | | | November 28, 2024 | | 7.5 bps |
| | 5-year agreement | 5-year agreement | | 1,410 | | | 3 | | | 1,407 | | | 1,410 | | | 3 | | | 1,407 | | | November 28, 2023 | | 10 bps | 5-year agreement | | 1,355 | | | 3 | | | 1,352 | | | November 28, 2025 | | 10 bps |
| Total | Total | | $ | 2,725 | | | $ | 3 | | | $ | 2,722 | | | $ | 2,725 | | | $ | 3 | | | $ | 2,722 | | | Total | | $ | 2,600 | | | $ | 3 | | | $ | 2,597 | | |
____________________________
(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.
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 2 facilities of $2,600 million. These agreements allow us to request up to $300 million of letters of credit, which, if requested, results in a reduction in the total amount available for our use.
As indicated in the table above, we had 0no borrowings outstanding under our committed bank revolving line of credit agreements as of November 30, 2020August 31, 2021 or May 31, 2020.2021. We were in compliance with all covenants and conditions under the agreements as of each respective date.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table displays, by debt product type, long-term debt outstanding as of November 30, 2020August 31, 2021 and May 31, 2020.2021. Long-term debt outstanding totaled $19,071$20,159 million and accounted for 73% of total debt outstanding as of November 30, 2020,August 31, 2021, compared with $19,712$20,603 million and 76%75% of total debt outstanding as of May 31, 2020.2021.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 7.1: Long-Term Debt by Debt Product Type
| (Dollars in thousands) | (Dollars in thousands) | | November 30, 2020 | | May 31, 2020 | (Dollars in thousands) | | August 31, 2021 | | May 31, 2021 |
Secured long-term debt: | Secured long-term debt: | | | | | Secured long-term debt: | | | | |
Collateral trust bonds | Collateral trust bonds | | $ | 7,102,711 | | | $ | 7,457,711 | | Collateral trust bonds | | $ | 7,452,711 | | | $ | 7,452,711 | |
Unamortized discount | Unamortized discount | | (231,975) | | | (236,461) | | Unamortized discount | | (224,080) | | | (227,046) | |
Debt issuance costs | Debt issuance costs | | (33,387) | | | (32,697) | | Debt issuance costs | | (32,509) | | | (33,721) | |
Total collateral trust bonds | Total collateral trust bonds | | 6,837,349 | | | 7,188,553 | | Total collateral trust bonds | | 7,196,122 | | | 7,191,944 | |
Guaranteed Underwriter Program notes payable | Guaranteed Underwriter Program notes payable | | 6,190,391 | | | 6,261,312 | | Guaranteed Underwriter Program notes payable | | 6,229,957 | | | 6,269,303 | |
Farmer Mac notes payable | Farmer Mac notes payable | | 2,773,957 | | | 2,809,637 | | Farmer Mac notes payable | | 2,859,744 | | | 2,977,909 | |
Other secured notes payable | Other secured notes payable | | 6,068 | | | 6,068 | | Other secured notes payable | | 4,412 | | | 4,412 | |
Debt issuance costs | Debt issuance costs | | (31) | | | (117) | | Debt issuance costs | | (19) | | | (22) | |
Total other secured notes payable | Total other secured notes payable | | 6,037 | | | 5,951 | | Total other secured notes payable | | 4,393 | | | 4,390 | |
Total secured notes payable | Total secured notes payable | | 8,970,385 | | | 9,076,900 | | Total secured notes payable | | 9,094,094 | | | 9,251,602 | |
Total secured long-term debt | Total secured long-term debt | | 15,807,734 | | | 16,265,453 | | Total secured long-term debt | | 16,290,216 | | | 16,443,546 | |
Unsecured long-term debt: | Unsecured long-term debt: | | | | | Unsecured long-term debt: | | | | |
Medium-term notes sold through dealers | Medium-term notes sold through dealers | | 2,982,567 | | | 3,086,733 | | Medium-term notes sold through dealers | | 3,664,195 | | | 3,943,728 | |
Medium-term notes sold to members | Medium-term notes sold to members | | 288,882 | | | 372,117 | | Medium-term notes sold to members | | 220,096 | | | 232,346 | |
Subtotal medium-term notes | | 3,271,449 | | | 3,458,850 | | |
Medium term notes sold through dealers and to members | | Medium term notes sold through dealers and to members | | 3,884,291 | | | 4,176,074 | |
Unamortized discount | Unamortized discount | | (709) | | | (997) | | Unamortized discount | | (2,135) | | | (2,307) | |
Debt issuance costs | Debt issuance costs | | (13,291) | | | (16,943) | | Debt issuance costs | | (17,337) | | | (18,036) | |
Total unsecured medium-term notes | Total unsecured medium-term notes | | 3,257,449 | | | 3,440,910 | | Total unsecured medium-term notes | | 3,864,819 | | | 4,155,731 | |
Unsecured notes payable | Unsecured notes payable | | 5,794 | | | 5,794 | | Unsecured notes payable | | 3,886 | | | 3,886 | |
Unamortized discount | Unamortized discount | | (51) | | | (107) | | Unamortized discount | | (27) | | | (35) | |
Debt issuance costs | Debt issuance costs | | (7) | | | (26) | | Debt issuance costs | | (3) | | | (5) | |
Total unsecured notes payable | Total unsecured notes payable | | 5,736 | | | 5,661 | | Total unsecured notes payable | | 3,856 | | | 3,846 | |
Total unsecured long-term debt | Total unsecured long-term debt | | 3,263,185 | | | 3,446,571 | | Total unsecured long-term debt | | 3,868,675 | | | 4,159,577 | |
Total long-term debt | Total long-term debt | | $ | 19,070,919 | | | $ | 19,712,024 | | Total long-term debt | | $ | 20,158,891 | | | $ | 20,603,123 | |
Secured Debt
SecuredLong-term secured debt of $15,808$16,290 million and $16,265$16,444 million as November 30, 2020August 31, 2021 and May 31, 2020,2021, respectively, represented 83%81% and 80% of total long-term debt outstanding as of each respective date. The decrease in long-term secured debt of $458$154 million during the sixthree months ended November 30, 2020August 31, 2021 was primarily attributable to a reduction in collateral trust bonds, notes payable under the Guaranteed Underwriter Programdebt maturities and notes payableamortization under the Farmer Mac revolving note purchase agreement. agreement and GUP. We were in compliance with all covenants and conditions under our debt indentures as of August 31, 2021 and May 31, 2021.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We are required to pledge eligible mortgage notes in an amount at least equal to the outstanding balance of our secured debt. We believe we were in compliance with all covenants and conditions under our debt indentures as of November 30, 2020 and May 31, 2020. See “Note 4—Loans” for information on pledged collateral under our secured debt agreements.
Collateral Trust Bonds
Collateral trust bonds outstanding decreased $351increased $4 million to $6,837$7,196 million as of November 30, 2020. In June 2020, we redeemed all $400 million outstanding principal amount of our 2.35% collateral trust bondsAugust 31, 2021, due June 15, 2020. In
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
October 2020, we redeemed all $350 million outstanding principal amount of our 2.30% collateral trust bonds, due November 1, 2020. On October 8, 2020, we issued $400 million aggregate principal amount of 1.35% sustainability collateral trust bonds due March 15, 2031.to discount amortization.
Guaranteed Underwriter Program Notes Payable
Notes payable outstanding under the Guaranteed Underwriter Program decreased $71$39 million to $6,190$6,230 million as of November 30, 2020. 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. PursuantAugust 31, 2021, due 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.principal amortization. We had up to $1,275$975 million available for access under the Guaranteed Underwriter Program as of November 30, 2020.August 31, 2021.
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 Investors Service (“Moody’s”), (ii) A- or higher from S&P Global Inc. (“S&P”), (iii) A- or higher from Fitch Ratings (“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.
Farmer Mac Notes Payable
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, through January 11, 2022.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. The amount outstanding under this agreement included $125$500 million of short-term borrowings and $2,774$2,860 million of long-term debt as of November 30, 2020.August 31, 2021. The amount available for borrowing totaled $2,601$2,140 million as of November 30, 2020.August 31, 2021.
Unsecured Debt
Long-term unsecured debt of $3,869 million and $4,160 million as of August 31, 2021 and May 31, 2021, respectively, represented 19% and 20% of total long-term debt outstanding as of each respective date. The decrease in long-term unsecured debt of $291 million for the three months ended August 31, 2021 was primarily attributable to dealer medium-term notes maturities.
See “Note 7—Long-Term Debt” in our 20202021 Form 10-K for additional information on our various long-term debt product types.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | |
NOTE 8—SUBORDINATED DEFERRABLE DEBT |
Subordinated deferrable debt represents long-term debt that is subordinated to all debt other than subordinated certificates held by our members. The following table presents, by issuance,We had subordinated deferrable debt outstanding of $986 millionas of November 30, 2020 andAugust 31, 2021, unchanged from May 31, 2020.
Table 8.1: Subordinated Deferrable Debt Outstanding
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Outstanding Amount | | Maturity and Call Dates | |
(Dollars in thousands) | | November 30, 2020 | | May 31, 2020 | | Term in Years | | Maturity | | Call Date | |
Issuances of subordinated notes: | | | | | | | | | | | | |
4.75% issuance 2013 | | $ | 400,000 | | | | $ | 400,000 | | | 30 | | 2043 | | April 30, 2023 | |
5.25% issuance 2016 | | 350,000 | | | | 350,000 | | | 30 | | 2046 | | April 20, 2026 | |
5.50% issuance 2019 | | 250,000 | | | | 250,000 | | | 45 | | 2064 | | May 15, 2024 | |
Total aggregate principal amount | | 1,000,000 | | | | 1,000,000 | | | | | | | | |
Debt issuance costs | | (13,783) | | | | (13,881) | | | | | | | | |
Total subordinated deferrable debt | | $ | 986,217 | | | | $ | 986,119 | | | | | | | | |
2021. See “Note 8—Subordinated Deferrable Debt” in our
20202021 Form 10-K for additional information on the terms and conditions,
including maturity and call dates, of our subordinated deferrable debt outstanding.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | |
NOTE 9—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
We are an end user of derivative financial instruments and do not engage in derivative trading. 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. 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 Lockstreasury locks to manage the interest rate risk associated with future debt issuance or debt that is scheduled to reprice in the future.
Accounting for Derivatives
In accordance with the accounting standards for derivatives and hedging activities, allwe record derivative instruments are recorded at fair value as either a derivative asset or derivative liability on our consolidated balance sheets and classified as either derivative assets or derivative liabilities. Derivatives in a gain position are reported as derivative assets, while derivatives in a loss position are reported as derivative liabilities.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. OurDerivatives in a gain position are reported as derivative assets on our consolidated balance sheets, while derivatives transactionsin a loss position are not collateralized and do not include collateralization agreements with counterparties.reported as derivative liabilities. Accrued interest related to derivative transactionsderivatives 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 recognizedrecorded in earnings together with offsetting changes in the same line item on our consolidated statements of operations as the earnings effectfair value of the hedged item and any related hedged item.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”). Those amounts are reclassified into to earnings using the effective interest method over the term of the forecasted transaction. Any ineffectiveness in the same period during which the forecasted transaction impacts earnings and presentedhedging relationship is recognized as a component of derivative gains (losses) in the same line item on our consolidated statementsstatement of operations as the earnings effect of the related hedged item.operations.
We generally do not designate our interest rate swaps, which represent the substantial majority of our derivatives, for hedge accounting. Therefore,Accordingly, changes in the fair value of our interest rate swaps are reported onin our consolidated statements of operations under derivative gains (losses). If we enter into a Treasury Lock, we typically designate the Treasury LockNet periodic cash settlements expense related to interest rate swaps are classified as aan operating activity in our consolidated statements of cash flow hedge. We did not have any derivatives designated as accounting hedges as of November 30, 2020 or May 31, 2020.flows.
Outstanding We typically designate Treasury 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.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Notional Amount of Derivatives Not Designated as Accounting Hedges
The notional amount is used only as the basis on which interest payments are determined and is not the amount exchanged, nor recorded on our consolidated balance sheets. The following table shows, by derivative instrument type, the outstanding notional amounts andamount, the weighted-average rate paid and the weighted-average interest rate received for our interest rate swaps by type, as of November 30, 2020August 31, 2021 and May 31, 2020. The2021. For the substantial majority of our interest rate swaps use answap agreements, a LIBOR index based on LIBORis currently used as the basis for either the pay or receive leg of the swap agreement.determining variable interest payment amounts each period.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 9.1: Derivative Notional Amount and Weighted Average Rates
| | | | November 30, 2020 | | May 31, 2020 | | | August 31, 2021 | | May 31, 2021 |
(Dollars in thousands) | (Dollars in thousands) | | Notional Amount | | Weighted- Average Rate Paid | | Weighted- Average Rate Received | | Notional Amount | | Weighted- Average Rate Paid | | Weighted- Average Rate Received | (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 | Pay-fixed swaps | | $ | 6,487,447 | | | 2.78 | % | | 0.24 | % | | $ | 6,604,808 | | | 2.78 | % | | 0.88 | % | Pay-fixed swaps | | $ | 6,204,603 | | | 2.62 | % | | 0.14 | % | | $ | 6,579,516 | | | 2.65 | % | | 0.20 | % |
Receive-fixed swaps | Receive-fixed swaps | | 2,399,000 | | | 0.97 | | | 2.80 | | | 2,699,000 | | | 1.54 | | | 2.75 | | Receive-fixed swaps | | 2,399,000 | | | 0.88 | | | 2.80 | | | 2,399,000 | | | 0.92 | | | 2.80 | |
Total interest rate swaps | Total interest rate swaps | | 8,886,447 | | | 2.29 | | | 0.93 | | | 9,303,808 | | | 2.42 | | | 1.42 | | Total interest rate swaps | | $ | 8,603,603 | | | 2.13 | | | 0.88 | | | $ | 8,978,516 | | | 2.19 | | | 0.89 | |
Forward pay-fixed swaps | | 120,000 | | | 3,000 | | | |
Total | | $ | 9,006,447 | | | $ | 9,306,808 | | | |
|
Cash Flow Hedges
On July 20, 2021, we executed 2 treasury lock agreements with an aggregate notional amount of $250 million to lock in the underlying U.S. Treasury interest rate component of interest rate payments on anticipated debt issuances and repricings. The treasury locks, which mature on October 29, 2021, were designated and qualify as cash flow hedges. We therefore recorded changes in the fair value of the treasury locks in AOCI during the current quarter. We had an unrealized gain related to these treasury locks of less than $1 million recorded in AOCI as of August 31, 2021.
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 as of November 30, 2020August 31, 2021 and May 31, 2020.2021.
Table 9.2: Derivative Assets and Liabilities at Fair Value
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | November 30, 2020 | | May 31, 2020 |
(Dollars in thousands) | | Fair Value | | Notional Amount(1) | | Fair Value | | Notional Amount(1) |
Derivative assets: | | | | | | | | |
Interest rate swaps | | $ | 153,388 | | | $ | 2,544,263 | | | $ | 173,195 | | | $ | 2,699,000 | |
| | | | | | | | |
Derivative liabilities: | | | | | | | | |
| | | | | | | | |
Interest rate swaps | | $ | 1,040,528 | | | $ | 6,462,184 | | | $ | 1,258,459 | | | $ | 6,607,808 | |
| | | | | | | | |
____________________________
(1) The notional amount includes $120 million and $3 million notional amount of forward starting swaps, as shown above in Table 9.1: Derivative Notional Amount and Weighted Average Rates, with an effective start date of December 1, 2020 and June 5, 2020, outstanding as of November 30, 2020 and May 31, 2020, respectively. The fair value of these swaps as of November 30, 2020 and May 31, 2020 is included in the above table and in our consolidated financial statements. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2021 | | May 31, 2021 |
(Dollars in thousands) | | Fair Value | | Notional Amount | | Fair Value | | Notional Amount |
Derivative assets: | | | | | | | | |
Treasury rate lock—cash flow hedge | | $ | 416 | | | $ | 250,000 | | | $ | — | | | $ | — | |
Interest rate swaps | | 110,493 | | | 2,566,879 | | | 121,259 | | | 2,560,618 | |
Total derivative assets | | $ | 110,909 | | | $ | 2,816,879 | | | $ | 121,259 | | | $ | 2,560,618 | |
| | | | | | | | |
Derivative liabilities: | | | | | | | | |
| | | | | | | | |
Interest rate swaps | | $ | 718,921 | | | $ | 6,036,724 | | | $ | 584,989 | | | $ | 6,417,898 | |
Total derivative liabilities | | $ | 718,921 | | | $ | 6,036,724 | | | $ | 584,989 | | | $ | 6,417,898 | |
AllWhile 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,parties, we report derivative asset and liability amounts on a gross basis by individual contracts.contract. The following table presents the gross fair value of derivative assets and liabilities reported on our consolidated balance sheets as of November 30, 2020August 31, 2021 and May 31, 2020,2021, and provides information on the impact of netting provisions under our master swap agreements and collateral pledged, if any.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 9.3: Derivative Gross and Net Amounts
| | | November 30, 2020 | | August 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 | | | 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) | (Dollars in thousands) | | Financial Instruments | | Cash Collateral Pledged | | Net Amount | (Dollars in thousands) | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
Derivative assets: | Derivative assets: | | | | | | | | | | | | | Derivative assets: | | | | | | | | | | | | |
Treasury rate lock—cash flow hedge | | Treasury rate lock—cash flow hedge | | $ | 416 | | | $ | — | | | $ | 416 | | | $ | — | | | $ | — | | | $ | 416 | |
Interest rate swaps | Interest rate swaps | | $ | 153,388 | | | $ | 0 | | | $ | 153,388 | | | $ | 153,388 | | | $ | 0 | | | $ | 0 | | Interest rate swaps | | 110,493 | | | — | | | 110,493 | | | 110,493 | | | — | | | — | |
| Derivative liabilities: | Derivative liabilities: | | Derivative liabilities: | |
| Interest rate swaps | Interest rate swaps | | 1,040,528 | | | 0 | | | 1,040,528 | | | 153,388 | | | 0 | | | 887,140 | | Interest rate swaps | | 718,921 | | | — | | | 718,921 | | | 110,493 | | | — | | | 608,428 | |
| | | May 31, 2020 | | 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 | | | 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) | (Dollars in thousands) | | Financial Instruments | | Cash Collateral Pledged | | Net Amount | (Dollars in thousands) | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
Derivative assets: | Derivative assets: | | | | | | | | | | | | | Derivative assets: | | | | | | | | | | | | |
Interest rate swaps | Interest rate swaps | | $ | 173,195 | | | $ | 0 | | | $ | 173,195 | | | $ | 173,195 | | | $ | 0 | | | $ | 0 | | Interest rate swaps | | $ | 121,259 | | | $ | — | | | $ | 121,259 | | | $ | 121,259 | | | $ | — | | | $ | — | |
| Derivative liabilities: | Derivative liabilities: | | Derivative liabilities: | |
| Interest rate swaps | Interest rate swaps | | 1,258,459 | | | 0 | | | 1,258,459 | | | 173,195 | | | 0 | | | 1,085,264 | | Interest rate swaps | | 584,989 | | | — | | | 584,989 | | | 121,259 | | | — | | | 463,730 | |
Impact of Derivatives on Consolidated Statements of Operations
The primary factors affecting the fair value of our derivatives and the derivative gains (losses) recorded in our consolidated statements of operations include changes in interest rates, the shape of the swap curve and the composition of our derivative portfolio. We generally record derivative losses when interest rates decline and derivative gains when interest rates rise, as our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps.
The following table presents the components of the derivative gains (losses) reported in our consolidated statements of operations for the three and six months ended November 30, 2020August 31, 2021 and 2019.2020. Derivative cash settlements interest expense represents the net periodic contractual interest amount for our interest-rate swaps during the reporting period. Derivative forward value gains (losses) represent the change in fair value of our interest rate swaps during the reporting period due to changes in expected future interest rates over the remaining life of our derivative contracts. We classify the derivative cash settlement amounts for the net periodic contractual interest expense on our interest rate swaps as an operating activity in our consolidated statements of cash flows.
Table 9.4: Derivative Gains (Losses)
| | | Three Months Ended November 30, | | Six Months Ended November 30, | | | Three Months Ended August 31, |
(Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (Dollars in thousands) | | | 2021 | | 2020 |
Derivative gains (losses) attributable to: | Derivative gains (losses) attributable to: | | | | | | | | | Derivative gains (losses) attributable to: | | | | | |
Derivative cash settlements interest expense | Derivative cash settlements interest expense | | $ | (29,800) | | | $ | (14,150) | | | $ | (56,772) | | | $ | (25,193) | | Derivative cash settlements interest expense | | | $ | (27,563) | | | $ | (26,972) | |
Derivative forward value gains (losses) | Derivative forward value gains (losses) | | 111,087 | | | 197,600 | | | 198,335 | | | (187,082) | | Derivative forward value gains (losses) | | | (144,600) | | | 87,248 | |
Derivative gains (losses) | Derivative gains (losses) | | $ | 81,287 | | | $ | 183,450 | | | $ | 141,563 | | | $ | (212,275) | | Derivative gains (losses) | | | $ | (172,163) | | | $ | 60,276 | |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As described above, we entered into 2 treasury rate lock agreements that were designated as cash flow hedges of forecasted transactions. Related unrealized gains of less than $1 million were recorded in AOCI for the three months ended August 31, 2021. These cash flow hedges mature on October 29, 2021, when we will reassess the hedges for effectiveness. We did not have any derivatives designated as accounting hedges as of May 31, 2021.
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 August 6, 2021, S&P revised its outlook on CFC to stable from negative, stating that the outlook revision mainly reflected its view that the risk of CFC experiencing substantial further losses stemming from the February 2021 polar vortex had diminished. S&P also affirmed CFC’s issuer ratings. Our senior unsecuredunsecured credit ratings from Moody’s, S&P and Fitch were A2, AA- and A, respectively, as of November 30, 2020.August 31, 2021. Moody’s, S&P and Fitch had our ratings on stable outlook as of November 30, 2020.August 31, 2021. The following table displays the notional amounts of our derivative contracts with rating triggers as of November 30, 2020,August 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 assume that amounts for each counterparty would be netted in accordance with the provisions of the master netting agreements with the counterparty. The net payment amounts are based on the fair value of the underlying derivative instrument, excluding the credit risk valuation adjustment, plus any unpaid accrued interest amounts.
Table 9.5: Derivative Credit Rating Trigger Exposure
| (Dollars in thousands) | (Dollars in thousands) | | Notional Amount | | Payable Due from CFC | | Receivable Due to CFC | | Net Payable | (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: | | | | | | | | | Impact of rating downgrade trigger: | | | | | | | | |
Falls below A3/A-(1) | Falls below A3/A-(1) | | $ | 43,175 | | | $ | (9,926) | | | $ | 0 | | | $ | (9,926) | | Falls below A3/A-(1) | | $ | 41,080 | | | $ | (7,997) | | | $ | — | | | $ | (7,997) | |
Falls below Baa1/BBB+ | Falls below Baa1/BBB+ | | 5,855,400 | | | (584,329) | | | 0 | | | (584,329) | | Falls below Baa1/BBB+ | | 5,685,695 | | | (399,054) | | | — | | | (399,054) | |
Falls to or below Baa2/BBB (2) | Falls to or below Baa2/BBB (2) | | 412,750 | | | (28,467) | | | 0 | | | (28,467) | | Falls to or below Baa2/BBB (2) | | 403,306 | | | (19,655) | | | — | | | (19,655) | |
| Total | Total | | $ | 6,311,325 | | | $ | (622,722) | | | $ | 0 | | | $ | (622,722) | | Total | | $ | 6,130,081 | | | $ | (426,706) | | | $ | — | | | $ | (426,706) | |
____________________________
(1) Rating trigger for CFC falls below A3/A-, while rating trigger for counterparty falls below Baa1/BBB+ by Moody’s or S&P, respectively.
(2) Rating trigger for CFC falls to or below Baa2/BBB, while rating trigger for counterparty falls to or below Ba2/BB+ by Moody’s or S&P, respectively.
We have interest rate swaps with 1 counterparty that are subject to a ratings trigger and early termination provision in the event of a downgrade of CFC’s senior unsecured credit ratings below Baa3, BBB- or BBB- by Moody’s, S&P or Fitch, respectively. The outstanding notional amount of these swaps, which is not included in the above table, totaled $215$224 million as of November 30, 2020.August 31, 2021. These swaps were in an unrealized loss position of $49$33 million as of November 30, 2020.August 31, 2021.
Our largest counterparty exposure, based on the outstanding notional amount, accounted for approximately 26% and 25% of24% the total outstanding notional amount of derivatives as of November 30, 2020both August 31, 2021 and May 31, 2020, respectively.2021. 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 $656$450 million as of November 30, 2020.
August 31, 2021.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Total equity increased $243decreased $146 million to $892$1,254 million as of November 30, 2020,August 31, 2021, attributable to the combined impact of our reported net incomeloss of $305$90 million for the sixthree months ended November 30, 2020, which was partially offset byAugust 31, 2021 and the retirementallocation of patronage capital retirement of $60$58 million authorized by the CFC Board of Directors in July 2020 and paid to members in September 2020, and the decrease to retained earnings of $4 million from the cumulative-effect adjustment recorded at adoption of the CECL accounting standard on June 1, 2020.2021.
Allocation of Earnings and Retirement of Patronage Capital
In July 2020,May 2021, the CFC Board of Directors authorized the allocation of $1 million of net earnings for fiscal year 20202021 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: $96$90 million to members in the form of patronage capital $48and $102 million to the members’ capital reserve and $1 million to the cooperative educational fund.reserve. The amount of patronage capital allocated each year by CFC’s Board of Directors is based on adjusted net income, which excludes the impact of derivative forward value gains (losses). See “MD&A—Non-GAAP Financial Measures” for information on adjusted net income.
In July 2020,2021, the CFC Board of Directors also authorized the retirement of allocated net earnings totaling $60$58 million, consisting of $48which $45 million which represented 50% of the patronage capital allocation for fiscal year 2020,2021 and $12$13 million which represented the portion of the allocation from net earnings for fiscal year 1995 net earnings1996 that has been held for 25 years pursuant to the CFC Board of Directors policy. The authorized patronage capital retirement amount of $60$58 million was returned to members in cash in September 2020.2021. The remaining portion of the amount allocated for fiscal year 20202021 will be retained by CFC for 25 years under current guidelines adopted by the CFC Board of Directors in June 2009.
See “Note 11—Equity” in our 2021 Form 10-K for additional information on our policy for allocation and retirement of patronage capital.
Accumulated Other Comprehensive Income (Loss)
The following table presents, by component, changes in AOCI for the three and six months ended November 30,August 31, 2021 and 2020 and 2019 and the balance of each component as of the end of each respective period.
Table 10.1: Changes in Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, |
| | 2020 | | 2019 |
(Dollars in thousands) | | Derivatives Unrealized Gains(1) | | Defined Benefit Plans Unrealized Losses(2) | | Total | | Derivatives Unrealized Gains(1) | | Defined Benefit Plans Unrealized Losses(2) | | Total |
Beginning balance | | $ | 2,025 | | | $ | (3,852) | | | $ | (1,827) | | | $ | 2,459 | | | $ | (2,573) | | | $ | (114) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(Gains) losses reclassified to earnings | | (107) | | | 188 | | | 81 | | | (114) | | | 146 | | | 32 | |
| | | | | | | | | | | | |
Ending balance | | $ | 1,918 | | | $ | (3,664) | | | $ | (1,746) | | | $ | 2,345 | | | $ | (2,427) | | | $ | (82) | |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | Six Months Ended November 30, | | Three Months Ended August 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 |
(Dollars in thousands) | (Dollars in thousands) | | Derivatives Unrealized Gains(1) | | Defined Benefit Plans Unrealized Losses(2) | | Total | | Derivatives Unrealized Gains(1) | | Defined Benefit Plans Unrealized Losses(2) | | Total | (Dollars in thousands) | | Derivatives Unrealized Gains(1) | | Unrealized Gains (Losses) Cash Flow Hedges | | Defined Benefit Plans Unrealized Losses(2) | | Total | | Derivatives Unrealized Gains(1) | | Defined Benefit Plans Unrealized Losses(2) | | Total |
Beginning balance | Beginning balance | | $ | 2,130 | | | $ | (4,040) | | | $ | (1,910) | | | $ | 2,571 | | | $ | (2,718) | | | $ | (147) | | Beginning balance | | $ | 1,718 | | | $ | — | | | $ | (1,743) | | | $ | (25) | | | $ | 2,130 | | | $ | (4,040) | | | $ | (1,910) | |
| Unrealized gains | | Unrealized gains | | — | | | 416 | | | — | | | 416 | | | — | | | — | | | — | |
(Gains) losses reclassified to earnings | (Gains) losses reclassified to earnings | | (212) | | | 376 | | | 164 | | | (226) | | | 291 | | | 65 | | (Gains) losses reclassified to earnings | | (97) | | | — | | | 71 | | | (26) | | | (105) | | | 188 | | | 83 | |
| Ending balance | Ending balance | | $ | 1,918 | | | $ | (3,664) | | | $ | (1,746) | | | $ | 2,345 | | | $ | (2,427) | | | $ | (82) | | Ending balance | | $ | 1,621 | | | $ | 416 | | | $ | (1,672) | | | $ | 365 | | | $ | 2,025 | | | $ | (3,852) | | | $ | (1,827) | |
____________________________
(1) Reclassified to earnings as a component of the derivative gains (losses) line item presented on our consolidated statements of operations.
(2) Reclassified to earnings as component of the other non-interest expense line item presented on our consolidated statements of operations.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We expect to reclassify less than $1 million of amounts in AOCI related to unrealized derivative gains to earnings over the next 12 months.
We guarantee certain contractual obligations of our members so they may obtain various forms of financing. We use the same credit policies and monitoring procedures in providing guarantees as we do for loans and commitments. If a member system defaults on 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. In general, 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.
The following table displays the notional amount of our outstanding guarantee obligations, by guarantee type and by member class, as of November 30, 2020August 31, 2021 and May 31, 2020.2021.
Table 11.1: Guarantees Outstanding by Type and Member Class
| (Dollars in thousands) | (Dollars in thousands) | | November 30, 2020 | | May 31, 2020 | (Dollars in thousands) | | August 31, 2021 | | May 31, 2021 |
Guarantee type: | Guarantee type: | | | | | Guarantee type: | | | | |
Long-term tax-exempt bonds(1) | Long-term tax-exempt bonds(1) | | $ | 166,175 | | | $ | 263,875 | | Long-term tax-exempt bonds(1) | | $ | 144,325 | | | $ | 145,025 | |
Letters of credit(2) | Letters of credit(2) | | 366,552 | | | 413,839 | | Letters of credit(2) | | 356,055 | | | 389,735 | |
Other guarantees | Other guarantees | | 144,131 | | | 143,072 | | Other guarantees | | 156,317 | | | 154,320 | |
Total | Total | | $ | 676,858 | | | $ | 820,786 | | Total | | $ | 656,697 | | | $ | 689,080 | |
| Member class: | Member class: | | | | | Member class: | | | | |
CFC: | CFC: | | | | | CFC: | | | | |
Distribution | Distribution | | $ | 265,084 | | | $ | 266,301 | | Distribution | | $ | 259,767 | | | $ | 251,023 | |
Power supply | Power supply | | 392,702 | | | 538,532 | | Power supply | | 376,081 | | | 415,984 | |
Statewide and associate(3) | Statewide and associate(3) | | 6,119 | | | 5,954 | | Statewide and associate(3) | | 5,757 | | | 5,523 | |
CFC total | CFC total | | 663,905 | | | 810,787 | | CFC total | | 641,605 | | | 672,530 | |
NCSC | NCSC | | 12,953 | | | 9,999 | | NCSC | | 15,092 | | | 16,550 | |
| Total | Total | | $ | 676,858 | | | $ | 820,786 | | Total | | $ | 656,697 | | | $ | 689,080 | |
____________________________
(1)Represents the outstanding principal amount of long-term fixed-rate and variable-rate guaranteed bonds.
(2)Reflects our maximum potential exposure for letters of credit.
(3) Includes CFC guarantees to NCSC and RTFC members totaling $3 million as of both November 30, 2020August 31, 2021 and May 31, 2020.2021.
Long-term tax-exempt bonds of $166$144 million and $264$145 million as of November 30, 2020August 31, 2021 and May 31, 2020,2021, respectively, included $146 million and $244 million, respectively,consist of adjustable or variable-rate bonds that may be converted to a fixed rate as specified in the applicable indenture for each bond offering. We are unable to determine the maximum amount of
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
interest that we may be required to pay related to the remaining adjustable and variable-rate bonds. Many of these bonds have a call provision that allows us to call the bond in the event of a default, which would limit our exposure to future interest payments on these bonds. Our maximum potential exposure generally is secured by mortgage liens on the members’ assets and future revenue. If a member’s debt is accelerated because of a determination that the interest thereon is not tax-exempt, the member’s obligation to reimburse us for any guarantee payments will be treated as a long-term loan. The remaining long-term tax-exempt bonds of $20 million as of November 30, 2020 are fixed-rate. The maximum potential exposure for these bonds, including the outstanding principal of $20 million and related interest through maturity, totaled $34 million as of November 30, 2020. The maturities for long-term tax-exempt bonds and the related guarantees extend through calendar year 2040.2037.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Of the outstanding letters of credit of $367$356 million and $414$390 million as of November 30, 2020August 31, 2021 and May 31, 2020,2021, respectively, $107$104 million and $106 million, respectively, were secured.secured at each respective date. We did not have any letters of credit outstanding that provided for standby liquidity for adjustable and floating-rate tax-exempt bonds issued for the benefit of our members as of November 30, 2020.August 31, 2021. The maturities for the outstanding letters of credit as of November 30, 2020August 31, 2021 extend through calendar year 2040.
In addition to the letters of credit listed in the table above, under master letter of credit facilities in place as of November 30, 2020,August 31, 2021, we may be required to issue up to an additional $63$65 million in letters of credit to third parties for the benefit of our members. All of our master letter of credit facilities were subject to material adverse change clauses at the time of issuance as of November 30, 2020.August 31, 2021. Prior to issuing a letter of credit, we would confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with the letter of credit terms and conditions.
The maximum potential exposure for other guarantees was $144$156 million and $143$154 million as of November 30, 2020August 31, 2021 and May 31, 2020,2021, respectively, of which $25 million was secured as of both November 30, 2020August 31, 2021 and May 31, 2020.2021. The maturities for these other guarantees listed in the table above extend through calendar year 2025. Guarantees under which our right of recovery from our members was not secured totaled $379$383 million and $426$415 million and represented 56%58% and 52%60% of total guarantees as of November 30, 2020August 31, 2021 and May 31, 2020,2021, respectively.
In addition to the guarantees described above, we were also the liquidity provider for $146$144 million of variable-rate tax-exempt bonds as of November 30, 2020,August 31, 2021, issued for our member cooperatives. While the bonds are in variable-rate mode, in return for a fee, we have unconditionally agreed to purchase bonds tendered or put for redemption if the remarketing agents are unable to sell such bonds to other investors. We were not required to perform as liquidity provider pursuant to these obligations during the sixthree months ended November 30, 2020August 31, 2021 or the prior fiscal year.
Guarantee Liability
We recorded a total guarantee liability for noncontingent and contingent exposures related to guarantees and liquidity obligations of $11$10 million as of both November 30, 2020August 31, 2021 and May 31, 2020.2021. The noncontingent guarantee liability, which pertains to our obligation to stand ready to perform over the term of our guarantees and liquidity obligations we have entered into or modified since January 1, 2003, was $10 million and $9 million as of both November 30, 2020August 31, 2021 and May 31, 2020.2021, respectively. The contingent guarantee liability, which is based on management’s estimate of exposure to losses within our guarantee portfolio, was less than $1 million and $1 million as of both November 30, 2020August 31, 2021 and May 31, 2020.
2021, respectively.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | |
NOTE 12—FAIR VALUE MEASUREMENT |
Fair value, also referred to as an exit price, is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value 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. The 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 levels, in priority order based on the extent to which observable inputs are available to measure fair value, are Level 1, Level 2 and Level 3. The accounting guidance for fair value measurements requires that we maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value.
The following table presents the carrying value and estimated fair value of all of our financial instruments, including those carried at amortized cost, as of November 30, 2020August 31, 2021 and May 31, 2020.2021. The table also displays the classification level within the fair value hierarchy based on the degree of observability of the inputs used in the valuation technique for estimating fair value.
Table 12.1: Fair Value of Financial Instruments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | November 30, 2020 | | Fair Value Measurement Level |
(Dollars in thousands) | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 167,155 | | | $ | 167,155 | | | $ | 167,155 | | | $ | 0 | | | $ | 0 | |
Restricted cash | | 10,036 | | | 10,036 | | | 10,036 | | | 0 | | | 0 | |
| | | | | | | | | | |
Equity securities, at fair value | | 32,391 | | | 32,391 | | | 32,391 | | | 0 | | | 0 | |
Debt securities trading, at fair value | | 551,695 | | | 551,695 | | | 0 | | | 551,695 | | | 0 |
| | | | | | | | | | |
Deferred compensation investments | | 6,474 | | | 6,474 | | | 6,474 | | | 0 | | | 0 | |
Loans to members, net | | 27,003,980 | | | 30,309,240 | | | 0 | | | 0 | | | 30,309,240 | |
Accrued interest receivable | | 105,145 | | | 105,145 | | | 0 | | | 105,145 | | | 0 | |
Derivative assets | | 153,388 | | | 153,388 | | | 0 | | | 153,388 | | | 0 | |
Total financial assets | | $ | 28,030,264 | | | $ | 31,335,524 | | | $ | 216,056 | | | $ | 810,228 | | | $ | 30,309,240 | |
| | | | | | | | | | |
Liabilities: | | | | | | | | | | |
Short-term borrowings | | $ | 4,687,968 | | | $ | 4,688,182 | | | $ | 0 | | | $ | 4,563,182 | | | $ | 125,000 | |
Long-term debt | | 19,070,919 | | | 21,383,031 | | | 0 | | | 11,675,384 | | | 9,707,647 | |
Accrued interest payable | | 123,766 | | | 123,766 | | | 0 | | | 123,766 | | | 0 | |
Guarantee liability | | 10,909 | | | 11,883 | | | 0 | | | 0 | | | 11,883 | |
Derivative liabilities | | 1,040,528 | | | 1,040,528 | | | 0 | | | 1,040,528 | | | 0 | |
Subordinated deferrable debt | | 986,217 | | | 1,083,016 | | | 277,700 | | | 805,316 | | | 0 | |
Members’ subordinated certificates | | 1,272,374 | | | 1,272,374 | | | 0 | | | 0 | | | 1,272,374 | |
Total financial liabilities | | $ | 27,192,681 | | | $ | 29,602,780 | | | $ | 277,700 | | | $ | 18,208,176 | | | $ | 11,116,904 | |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | May 31, 2020 | | Fair Value Measurement Level |
(Dollars in thousands) | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 671,372 | | | $ | 671,372 | | | $ | 671,372 | | | $ | 0 | | | $ | 0 | |
Restricted cash | | 8,647 | | | 8,647 | | | 8,647 | | | 0 | | | 0 | |
| | | | | | | | | | |
Equity securities, at fair value | | 60,735 | | | 60,735 | | | 60,735 | | | 0 | | | 0 | |
Debt securities trading, at fair value | | 309,400 | | | 309,400 | | | 0 | | | 309,400 | | | 0 | |
| | | | | | | | | | |
Deferred compensation investments | | 5,496 | | | 5,496 | | | 5,496 | | | 0 | | | 0 | |
Loans to members, net | | 26,649,255 | | | 29,252,065 | | | 0 | | | 0 | | | 29,252,065 | |
Accrued interest receivable | | 117,138 | | | 117,138 | | | 0 | | | 117,138 | | | 0 | |
Debt service reserve funds | | 14,591 | | | 14,591 | | | 14,591 | | | 0 | | | 0 | |
Derivative assets | | 173,195 | | | 173,195 | | | 0 | | | 173,195 | | | 0 | |
Total financial assets | | $ | 28,009,829 | | | $ | 30,612,639 | | | $ | 760,841 | | | $ | 599,733 | | | $ | 29,252,065 | |
| | | | | | | | | | |
Liabilities: | | | | | | | | | | |
Short-term borrowings | | $ | 3,961,985 | | | $ | 3,963,164 | | | $ | 0 | | | $ | 3,713,164 | | | $ | 250,000 | |
Long-term debt | | 19,712,024 | | | 21,826,337 | | | 0 | | | 11,981,580 | | | 9,844,757 | |
Accrued interest payable | | 139,619 | | | 139,619 | | | 0 | | | 139,619 | | | 0 | |
Guarantee liability | | 10,937 | | | 11,948 | | | 0 | | | 0 | | | 11,948 | |
Derivative liabilities | | 1,258,459 | | | 1,258,459 | | | 0 | | | 1,258,459 | | | 0 | |
Subordinated deferrable debt | | 986,119 | | | 1,030,108 | | | 0 | | | 1,030,108 | | | 0 | |
Members’ subordinated certificates | | 1,339,618 | | | 1,339,618 | | | 0 | | | 0 | | | 1,339,618 | |
Total financial liabilities | | $ | 27,408,761 | | | $ | 29,569,253 | | | $ | 0 | | | $ | 18,122,930 | | | $ | 11,446,323 | |
Table 12.1: Fair Value of Financial Instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2021 | | Fair Value Measurement Level |
(Dollars in thousands) | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 302,610 | | | $ | 302,610 | | | $ | 302,610 | | | $ | — | | | $ | — | |
Restricted cash | | 9,351 | | | 9,351 | | | 9,351 | | | — | | | — | |
| | | | | | | | | | |
Equity securities, at fair value | | 35,711 | | | 35,711 | | | 35,711 | | | — | | | — | |
Debt securities trading, at fair value | | 569,574 | | | 569,574 | | | — | | | 569,574 | | | 0 |
| | | | | | | | | | |
Deferred compensation investments | | 7,694 | | | 7,694 | | | 7,694 | | | — | | | — | |
Loans to members, net | | 28,793,098 | | | 31,066,489 | | | — | | | — | | | 31,066,489 | |
Accrued interest receivable | | 106,221 | | | 106,221 | | | — | | | 106,221 | | | — | |
Derivative assets | | 110,909 | | | 110,909 | | | — | | | 110,909 | | | — | |
Total financial assets | | $ | 29,935,168 | | | $ | 32,208,559 | | | $ | 355,366 | | | $ | 786,704 | | | $ | 31,066,489 | |
| | | | | | | | | | |
Liabilities: | | | | | | | | | | |
Short-term borrowings | | $ | 5,378,417 | | | $ | 5,378,714 | | | $ | — | | | $ | 4,878,702 | | | $ | 500,012 | |
Long-term debt | | 20,158,891 | | | 21,617,017 | | | — | | | 12,314,531 | | | 9,302,486 | |
Accrued interest payable | | 171,542 | | | 171,542 | | | — | | | 171,542 | | | — | |
Guarantee liability | | 9,827 | | | 10,594 | | | — | | | — | | | 10,594 | |
Derivative liabilities | | 718,921 | | | 718,921 | | | — | | | 718,921 | | | — | |
Subordinated deferrable debt | | 986,364 | | | 1,070,253 | | | 271,100 | | | 799,153 | | | — | |
Members’ subordinated certificates | | 1,253,906 | | | 1,253,906 | | | — | | | — | | | 1,253,906 | |
Total financial liabilities | | $ | 28,677,868 | | | $ | 30,220,947 | | | $ | 271,100 | | | $ | 18,882,849 | | | $ | 11,066,998 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | May 31, 2021 | | Fair Value Measurement Level |
(Dollars in thousands) | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 295,063 | | | $ | 295,063 | | | $ | 295,063 | | | $ | — | | | $ | — | |
Restricted cash | | 8,298 | | | 8,298 | | | 8,298 | | | — | | | — | |
| | | | | | | | | | |
Equity securities, at fair value | | 35,102 | | | 35,102 | | | 35,102 | | | — | | | — | |
Debt securities trading, at fair value | | 576,175 | | | 576,175 | | | — | | | 576,175 | | | — | |
| | | | | | | | | | |
Deferred compensation investments | | 7,222 | | | 7,222 | | | 7,222 | | | — | | | — | |
Loans to members, net | | 28,341,429 | | | 29,967,692 | | | — | | | — | | | 29,967,692 | |
Accrued interest receivable | | 107,856 | | | 107,856 | | | — | | | 107,856 | | | — | |
Derivative assets | | 121,259 | | | 121,259 | | | — | | | 121,259 | | | — | |
Total financial assets | | $ | 29,492,404 | | | $ | 31,118,667 | | | $ | 345,685 | | | $ | 805,290 | | | $ | 29,967,692 | |
| | | | | | | | | | |
Liabilities: | | | | | | | | | | |
Short-term borrowings | | $ | 4,582,096 | | | $ | 4,582,329 | | | $ | — | | | $ | 4,582,329 | | | $ | — | |
Long-term debt | | 20,603,123 | | | 21,799,736 | | | — | | | 12,476,073 | | | 9,323,663 | |
Accrued interest payable | | 123,672 | | | 123,672 | | | — | | | 123,672 | | | — | |
Guarantee liability | | 10,041 | | | 10,841 | | | — | | | — | | | 10,841 | |
Derivative liabilities | | 584,989 | | | 584,989 | | | — | | | 584,989 | | | — | |
Subordinated deferrable debt | | 986,315 | | | 1,062,748 | | | 265,200 | | | 797,548 | | | — | |
Members’ subordinated certificates | | 1,254,660 | | | 1,254,660 | | | — | | | — | | | 1,254,660 | |
Total financial liabilities | | $ | 28,144,896 | | | $ | 29,418,975 | | | $ | 265,200 | | | $ | 18,564,611 | | | $ | 10,589,164 | |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For additional information regarding fair value measurements, the fair value hierarchy and a description of the methodologies we use to estimate fair value, see “Note 14—Fair Value Measurement” to the Consolidated Financial Statements in our 20202021 Form 10-K.
Transfers Between Levels
We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy and transfer between Level 1, Level 2, and Level 3 accordingly. Observable market data includes but is not limited to quoted prices and market transactions. Changes in economic conditions or market liquidity generally will drive changes in availability of observable market data. Changes in availability of observable market data, which also may result in changes in the valuation technique used, are generally the cause of transfers between levels. We did not have any transfers between levels for financial instruments measured atinto or out of Level 3 of the fair value on a recurring basis forhierarchy during the sixthree months ended November 30, 2020August 31, 2021 and 2019.2020.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the carrying value and fair value of financial instruments reported in our consolidated financial statements at fair value on a recurring basis as of November 30, 2020August 31, 2021 and May 31, 2020,2021, and the classification of the valuation technique within the fair value hierarchy.
We did
no
t have any assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs during the three months ended August 31, 2021 and 2020.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 12.2: Assets and Liabilities Measured at Fair Value on a Recurring Basis
| | | | November 30, 2020 | | May 31, 2020 | | | August 31, 2021 | | May 31, 2021 |
(Dollars in thousands) | (Dollars in thousands) | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total | (Dollars in thousands) | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
Assets: | Assets: | | | | | | | | | | | | | Assets: | | | | | | | | | | | | |
Equity securities, at fair value | Equity securities, at fair value | | $ | 32,391 | | | $ | 0 | | | $ | 32,391 | | | $ | 60,735 | | | $ | 0 | | | $ | 60,735 | | Equity securities, at fair value | | $ | 35,711 | | | $ | — | | | $ | 35,711 | | | $ | 35,102 | | | $ | — | | | $ | 35,102 | |
Debt securities trading, at fair value | Debt securities trading, at fair value | | 0 | | | 551,695 | | | 551,695 | | | 0 | | | 309,400 | | | 309,400 | | Debt securities trading, at fair value | | — | | | 569,574 | | | 569,574 | | | — | | | 576,175 | | | 576,175 | |
Deferred compensation investments | Deferred compensation investments | | 6,474 | | | 0 | | | 6,474 | | | 5,496 | | | 0 | | | 5,496 | | Deferred compensation investments | | 7,694 | | | — | | | 7,694 | | | 7,222 | | | — | | | 7,222 | |
Derivative assets | Derivative assets | | 0 | | | 153,388 | | | 153,388 | | | 0 | | | 173,195 | | | 173,195 | | Derivative assets | | — | | | 110,909 | | | 110,909 | | | — | | | 121,259 | | | 121,259 | |
| Liabilities: | Liabilities: | | Liabilities: | |
Derivative liabilities | Derivative liabilities | | 0 | | | 1,040,528 | | | 1,040,528 | | | 0 | | | 1,258,459 | | | 1,258,459 | | Derivative liabilities | | $ | — | | | $ | 718,921 | | | $ | 718,921 | | | $ | — | | | $ | 584,989 | | | $ | 584,989 | |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis on our consolidated balance sheets. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as in the application of lower of cost or fair value accounting or when we evaluate assets for impairment. We had certain loans measured at fair value on a nonrecurring basis as of and during the three months ended August 31, 2021. We did not have any assets or liabilities measured at fair value on a nonrecurring basis during the three and six months ended November 30, 2020August 31, 2020.
Collateral-Dependent Loans
Because our loans are classified as held for investment and 2019.carried at amortized cost, we generally do not record loans at fair value on a recurring basis. However, we periodically record nonrecurring fair value adjustments for nonperforming collateral-dependent loans through the allowance for credit losses and provision for credit losses. We had nonperforming collateral-dependent loans outstanding to 2 affiliated RTFC telecommunications borrowers totaling $9 million as of both August 31, 2021 and May 31, 2021. The collateral underlying these loans consisted primarily of U.S. Federal Communications Commission (“FCC”) wireless spectrum licenses. Our estimate of the fair value of these loans was
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
$6 million as of both August 31, 2021 and May 31, 2021. As a result, we recorded a nonrecurring fair value adjustment for these loans of less than $1 million during the three months ended August 31, 2021.
Significant Unobservable Level 3 Inputs
We employ various approaches and techniques to estimate the fair value of loans where we expect repayment to be provided solely by the continued operation or sale of the underlying collateral, including estimated cash flows from the collateral, valuations obtained from third-party specialists and comparable sales data. The technique depends on the nature of the collateral and the extent to which observable inputs are available. Our Credit Risk Management group reviews the valuation technique, including the use of any significant inputs that are not readily observable by market participants, to assess the appropriateness of the technique and the reasonableness of the assumptions involved. The estimated fair value of $6 million as of both August 31, 2021 and May 31, 2021 for the 2 affiliated RTFC nonperforming collateral-dependent loans totaling $9 million as of both August 31, 2021 and May 31, 2021, was derived primarily based on the lower end of limited publicly available sales data for the underlying FCC spectrum licenses collateral.
| | |
NOTE 13—VARIABLE INTEREST ENTITIES |
NCSC and RTFC meet the definition of a VIE because they do not have sufficient equity investment at risk to finance their activities without financial support. CFC is the primary source of funding for NCSC and the sole source of funding for RTFC. Under the terms of management agreements with each company, CFC manages the business operations of NCSC and RTFC. CFC also unconditionally guarantees full indemnification for any loan losses of NCSC and RTFC pursuant to guarantee agreements with each company. CFC earns management and guarantee fees from its agreements with NCSC and RTFC.
All loans that require NCSC board approval also require CFC board approval. CFC is not a member of NCSC and does not elect directors to the NCSC board. If CFC becomes a member of NCSC, it would control the nomination process for 1 NCSC director. NCSC members elect directors to the NCSC board based on 1 vote for each member. NCSC is a Class C member of CFC. All loans that require RTFC board approval also require approval by CFC for funding under RTFC’s credit facilities with CFC. CFC is not a member of RTFC and does not elect directors to the RTFC board. RTFC is a non-voting associate of CFC. RTFC members elect directors to the RTFC board based on 1 vote for each member.
NCSC and RTFC creditors have no recourse against CFC in the event of a default by NCSC and RTFC, unless there is a guarantee agreement under which CFC has guaranteed NCSC or RTFC debt obligations to a third party. The following table provides information on incremental consolidated assets and liabilities of VIEs included in CFC’s consolidated financial statements, after intercompany eliminations, as of November 30, 2020August 31, 2021 and May 31, 2020.2021.
Table 13.1: Consolidated Assets and Liabilities of Variable Interest Entities
| (Dollars in thousands) | (Dollars in thousands) | | November 30, 2020 | | May 31, 2020 | (Dollars in thousands) | | August 31, 2021 | | May 31, 2021 |
Assets: | Assets: | | | | | Assets: | | | | |
Loans outstanding | Loans outstanding | | $ | 1,136,379 | | | $ | 1,083,197 | | Loans outstanding | | $ | 1,137,333 | | | $ | 1,127,251 | |
Other assets | Other assets | | 10,159 | | | 11,352 | | Other assets | | 9,868 | | | 11,343 | |
Total assets | Total assets | | $ | 1,146,538 | | | $ | 1,094,549 | | Total assets | | $ | 1,147,201 | | | $ | 1,138,594 | |
| Liabilities: | Liabilities: | | Liabilities: | |
| Total liabilities | Total liabilities | | $ | 37,352 | | | $ | 38,803 | | Total liabilities | | $ | 30,081 | | | $ | 30,187 | |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table provides information on CFC’s credit commitments to NCSC and RTFC and potential exposure to loss under these commitments as of November 30, 2020August 31, 2021 and May 31, 2020.2021.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 13.2: CFC Exposure Under Credit Commitments to NCSC and RTFC
| (Dollars in thousands) | (Dollars in thousands) | | November 30, 2020 | | May 31, 2020 | (Dollars in thousands) | | August 31, 2021 | | May 31, 2021 |
CFC credit commitments to NCSC and RTFC: | CFC credit commitments to NCSC and RTFC: | | | | | CFC credit commitments to NCSC and RTFC: | | | | |
Total CFC credit commitments | Total CFC credit commitments | | $ | 5,500,000 | | | $ | 5,500,000 | | Total CFC credit commitments | | $ | 5,500,000 | | | $ | 5,500,000 | |
| Outstanding commitments: | Outstanding commitments: | | Outstanding commitments: | |
Borrowings payable to CFC(1) | Borrowings payable to CFC(1) | | 1,112,226 | | | 1,062,103 | | Borrowings payable to CFC(1) | | 1,116,370 | | | 1,107,185 | |
Credit enhancements: | Credit enhancements: | | Credit enhancements: | |
CFC third-party guarantees | CFC third-party guarantees | | 12,953 | | | 9,999 | | CFC third-party guarantees | | 15,092 | | | 16,550 | |
Other credit enhancements | Other credit enhancements | | 10,552 | | | 11,755 | | Other credit enhancements | | 8,523 | | | 8,386 | |
Total credit enhancements(2) | Total credit enhancements(2) | | 23,505 | | | 21,754 | | Total credit enhancements(2) | | 23,615 | | | 24,936 | |
Total outstanding commitments | Total outstanding commitments | | 1,135,731 | | | 1,083,857 | | Total outstanding commitments | | 1,139,985 | | | 1,132,121 | |
CFC credit commitments available(3) | CFC credit commitments available(3) | | $ | 4,364,269 | | | $ | 4,416,143 | | CFC credit commitments available(3) | | $ | 4,360,015 | | | $ | 4,367,879 | |
____________________________
(1) BorrowingsIntercompany borrowings payable by NCSC and RTFC to CFC are eliminated in consolidation.
(2) Excludes interest due on these instruments.
(3) Represents total CFC credit commitments less outstanding commitments as of each period end.
CFC loans to NCSC and RTFC are secured by all assets and revenuerevenue of NCSC and RTFC. CFC’s maximum potential exposure, including interest due, for the credit enhancements totaled $24$23 million as of November 30, 2020. TheAugust 31, 2021. The maturities for obligations guaranteed by CFC extend through 2031.
| | |
NOTE 14—BUSINESS SEGMENTS |
Our activities are conducted through 3 operating segments, which are based on each of the legal entities included in our consolidated financial statements: CFC, NCSC and RTFC. We report segment information for CFC separately, whileseparately; however, we aggregate segment information for NCSC and RTFC into one reportable segment because neither entity meets the quantitative materiality threshold for separate reporting under the accounting guidance governing segment reporting guidance.
Basis of Presentation
We present the results of our business segments on the basis in which management internally evaluates operating performance to establish short- and report combinedlong-term performance goals, develop budgets and forecasts, identify potential trends, allocate resources and make compensation decisions. During the current quarter, we changed the presentation of our segment results to align more closely to the presentation of financial information reviewed regularly by our Chief Executive Officer, the chief operating decision maker, to assess performance and inform the decision-making process in managing our business operations. This presentation change excludes derivative forward value derivative gains and losses from the results of operations results for these entities. The following table presentseach segment and includes net periodic derivative cash settlement expense amounts as a component of interest expense, which represents the only difference between the accounting and reporting for our reportablebusiness segment results of operations and our consolidated total results of operations. We recast the presentation of our business segment results for the three and six months ended November 30, 2020 and 2019, assets attributableprior fiscal year period to each segment as of November 30, 2020 and 2019 and a reconciliation to amounts reported in our consolidated financial statements.align with the current period presentation.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table 14.1: Business Segment InformationReporting Methodology
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, 2020 |
(Dollars in thousands) | | CFC | | NCSC and RTFC | | Elimination | | Consolidated Total |
Statement of operations: | | | | | | | | |
Interest income | | $ | 274,473 | | | $ | 11,008 | | | $ | (8,982) | | | $ | 276,499 | |
Interest expense | | (174,422) | | | (8,982) | | | 8,982 | | | (174,422) | |
Net interest income | | 100,051 | | | 2,026 | | | 0 | | | 102,077 | |
Provision for credit losses | | (1,638) | | | 0 | | | 0 | | | (1,638) | |
Net interest income after provision for credit losses | | 98,413 | | | 2,026 | | | 0 | | | 100,439 | |
Non-interest income: | | | | | | | | |
Fee and other income | | 7,513 | | | 727 | | | (1,908) | | | 6,332 | |
Derivative gains: | | | | | | | | |
Derivative cash settlements interest expense | | (29,370) | | | (430) | | | 0 | | | (29,800) | |
Derivative forward value gains | | 110,349 | | | 738 | | | 0 | | | 111,087 | |
Derivative gains | | 80,979 | | | 308 | | | 0 | | | 81,287 | |
Investment securities losses | | (1,361) | | | 0 | | | 0 | | | (1,361) | |
Total non-interest income | | 87,131 | | | 1,035 | | | (1,908) | | | 86,258 | |
Non-interest expense: | | | | | | | | |
General and administrative expenses | | (23,750) | | | (1,978) | | | 1,592 | | | (24,136) | |
Losses on early extinguishment of debt | | (1,455) | | | 0 | | | 0 | | | (1,455) | |
Other non-interest expense | | (323) | | | (316) | | | 316 | | | (323) | |
Total non-interest expense | | (25,528) | | | (2,294) | | | 1,908 | | | (25,914) | |
Income before income taxes | | 160,016 | | | 767 | | | 0 | | | 160,783 | |
Income tax provision | | 0 | | | (262) | | | 0 | | | (262) | |
Net income | | $ | 160,016 | | | $ | 505 | | | $ | 0 | | | $ | 160,521 | |
The results of our business segments are intended to present the separate results for each of the legal entities included in our consolidated financial statements. As discussed in “Note 13—Variable Interest Entities,” all of NCSC’s and RTFC’s funding is either provided by CFC or guaranteed by CFC, the terms and conditions of which are stipulated in a loan and security agreement and a guarantee agreement between CFC and each legal entity. Pursuant to the guarantee agreement, CFC unconditionally guarantees full indemnification to NCSC and RTFC for any credit losses. In addition, CFC manages the business operations of NCSC and RTFC under a management agreement that automatically renews on an annual basis unless the agreement is terminated by either party.
We report loans and interest and fees earned on loans based on the legal entity that holds the loans. CFC borrows from various sources to fund the operations of CFC, NCSC and RTFC, the cost of which is reflected in CFC’s interest expense. NCSC and RTFC each borrow from CFC to fund loans to their members, the cost of which is reported as interest expense by each legal entity. CFC charges NCSC and RTFC a management fee, which CFC reports as a component of fee and other income. NCSC and RTFC report the management fee charged by CFC as a component of non-interest expense. CFC and NCSC use derivatives, primarily interest rate swaps, to manage interest rate risk. Because we generally do not elect to apply hedge accounting to our interest rate swaps, changes in the fair value of our interest rate swaps are recorded in earnings in our consolidated total results of operations. However, management excludes the impact of derivative forward value gains and losses and includes the net periodic derivative cash settlement interest expense amounts as a component of interest expense in reporting our segment results of operations.
Segment Results and Reconciliation
The following tables display segment results of operations for the three months ended August 31, 2021 and 2020, assets attributable to each segment as of August 31, 2021 and August 31, 2020 and a reconciliation of total segment amounts to our consolidated total amounts.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, 2019 |
(Dollars in thousands) | | CFC | | NCSC and RTFC | | Elimination | | Consolidated Total |
Statement of operations: | | | | | | | | |
Interest income | | $ | 285,036 | | | $ | 11,719 | | | $ | (9,718) | | | $ | 287,037 | |
Interest expense | | (207,759) | | | (9,830) | | | 9,718 | | | (207,871) | |
Net interest income | | 77,277 | | | 1,889 | | | 0 | | | 79,166 | |
Benefit for credit losses | | 1,045 | | | 0 | | | 0 | | | 1,045 | |
Net interest income after benefit for credit losses | | 78,322 | | | 1,889 | | | 0 | | | 80,211 | |
Non-interest income: | | | | | | | | |
Fee and other income | | 5,181 | | | 587 | | | (1,926) | | | 3,842 | |
Derivative gains: | | | | | | | | |
Derivative cash settlements interest expense | | (13,874) | | | (276) | | | 0 | | | (14,150) | |
Derivative forward value gains | | 196,387 | | | 1,213 | | | 0 | | | 197,600 | |
Derivative gains | | 182,513 | | | 937 | | | 0 | | | 183,450 | |
Investment securities losses | | (114) | | | 0 | | | 0 | | | (114) | |
Total non-interest income | | 187,580 | | | 1,524 | | | (1,926) | | | 187,178 | |
Non-interest expense: | | | | | | | | |
General and administrative expenses | | (23,994) | | | (2,420) | | | 1,645 | | | (24,769) | |
| | | | | | | | |
Losses on early extinguishment of debt | | 0 | | | (614) | | | 0 | | | (614) | |
Other non-interest expense | | (316) | | | (280) | | | 281 | | | (315) | |
Total non-interest expense | | (24,310) | | | (3,314) | | | 1,926 | | | (25,698) | |
Income before income taxes | | 241,592 | | | 99 | | | 0 | | | 241,691 | |
Income tax provision | | 0 | | | (91) | | | 0 | | | (91) | |
Net income | | $ | 241,592 | | | $ | 8 | | | $ | 0 | | | $ | 241,600 | |
| | | | | | | | |
Table 14.1: Business Segment Information | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended August 31, 2021 |
(Dollars in thousands) | | CFC | | NCSC and RTFC | | Segment Total | | Reclasses and Adjustments(1) | | Intersegment Eliminations(2) | | Consolidated Total |
Results of operations: | | | | | | | | | | | | |
Interest income | | $ | 281,307 | | | $ | 10,453 | | | $ | 291,760 | | | $ | — | | | $ | (8,492) | | | $ | 283,268 | |
Interest expense | | (174,777) | | | (8,492) | | | (183,269) | | | — | | | 8,492 | | | (174,777) | |
Derivative cash settlements expense | | (27,145) | | | (418) | | | (27,563) | | | 27,563 | | | — | | | — | |
Interest expense | | (201,922) | | | (8,910) | | | (210,832) | | | 27,563 | | | 8,492 | | | (174,777) | |
Net interest income | | 79,385 | | | 1,543 | | | 80,928 | | | 27,563 | | | — | | | 108,491 | |
Provision for credit losses | | (4,003) | | | (206) | | | (4,209) | | | — | | | 206 | | | (4,003) | |
Net interest income after provision for credit losses | | 75,382 | | | 1,337 | | | 76,719 | | | 27,563 | | | 206 | | | 104,488 | |
Non-interest income: | | | | | | | | | | | | |
Fee and other income | | 5,323 | | | 884 | | | 6,207 | | | — | | | (2,266) | | | 3,941 | |
Derivative losses: | | | | | | | | | | | | |
Derivative cash settlements expense | | — | | | — | | | — | | | (27,563) | | | — | | | (27,563) | |
Derivative forward value losses | | — | | | — | | | — | | | (144,600) | | | — | | | (144,600) | |
Derivative losses | | — | | | — | | | — | | | (172,163) | | | — | | | (172,163) | |
Investment securities losses | | (2,225) | | | — | | | (2,225) | | | — | | | — | | | (2,225) | |
Total non-interest income | | 3,098 | | | 884 | | | 3,982 | | | (172,163) | | | (2,266) | | | (170,447) | |
Non-interest expense: | | | | | | | | | | | | |
General and administrative expenses | | (23,654) | | | (2,151) | | | (25,805) | | | — | | | 1,595 | | | (24,210) | |
| | | | | | | | | | | | |
Other non-interest expense | | (256) | | | (465) | | | (721) | | | — | | | 465 | | | (256) | |
Total non-interest expense | | (23,910) | | | (2,616) | | | (26,526) | | | — | | | 2,060 | | | (24,466) | |
Income (loss) before income taxes | | 54,570 | | | (395) | | | 54,175 | | | (144,600) | | | — | | | (90,425) | |
Income tax benefit | | — | | | 93 | | | 93 | | | — | | | — | | | 93 | |
Net income (loss) | | $ | 54,570 | | | $ | (302) | | | $ | 54,268 | | | $ | (144,600) | | | $ | — | | | $ | (90,332) | |
| | | | | | | | | | | | |
| | August 31, 2021 |
| | CFC | | NCSC and RTFC | | Segment Total | | Reclasses and Adjustments(1) | | Intersegment Eliminations(2) | | Consolidated Total |
Assets: | | | | | | | | | | | | |
Total loans outstanding | | $ | 28,849,795 | | | $ | 1,137,333 | | | $ | 29,987,128 | | | $ | — | | | $ | (1,116,370) | | | $ | 28,870,758 | |
Deferred loan origination costs | | 11,875 | | | — | | | 11,875 | | | — | | | — | | | 11,875 | |
Loans to members | | 28,861,670 | | | 1,137,333 | | | 29,999,003 | | | — | | | (1,116,370) | | | 28,882,633 | |
Less: Allowance for credit losses | | (89,535) | | | — | | | (89,535) | | | — | | | — | | | (89,535) | |
Loans to members, net | | 28,772,135 | | | 1,137,333 | | | 29,909,468 | | | — | | | (1,116,370) | | | 28,793,098 | |
Other assets | | 1,288,781 | | | 98,855 | | | 1,387,636 | | | — | | | (88,987) | | | 1,298,649 | |
Total assets | | $ | 30,060,916 | | | $ | 1,236,188 | | | $ | 31,297,104 | | | $ | — | | | $ | (1,205,357) | | | $ | 30,091,747 | |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | Six Months Ended November 30, 2020 | | | Three Months Ended August 31, 2020 |
(Dollars in thousands) | (Dollars in thousands) | | CFC | | NCSC and RTFC | | Elimination | | Consolidated Total | (Dollars in thousands) | | CFC | | NCSC and RTFC | | Segment Total | | Reclasses and Adjustments(1) | | Intersegment Eliminations(2) | | Consolidated Total |
Statement of operations: | | | | | | | | | |
Results of operations: | | Results of operations: | | | | | | | | | | | | |
Interest income | Interest income | | $ | 552,069 | | | $ | 22,016 | | | $ | (18,002) | | | $ | 556,083 | | Interest income | | $ | 277,596 | | | $ | 11,009 | | | $ | 288,605 | | | $ | — | | | $ | (9,021) | | | $ | 279,584 | |
Interest expense | Interest expense | | (354,398) | | | (18,002) | | | 18,002 | | | (354,398) | | Interest expense | | (179,976) | | | (9,021) | | | (188,997) | | | — | | | 9,021 | | | (179,976) | |
Derivative cash settlements expense | | Derivative cash settlements expense | | (26,563) | | | (409) | | | (26,972) | | | 26,972 | | | — | | | — | |
Interest expense | | Interest expense | | (206,539) | | | (9,430) | | | (215,969) | | | 26,972 | | | 9,021 | | | (179,976) | |
Net interest income | Net interest income | | 197,671 | | | 4,014 | | | 0 | | | 201,685 | | Net interest income | | 71,057 | | | 1,579 | | | 72,636 | | | 26,972 | | | — | | | 99,608 | |
Provision for credit losses | | (1,964) | | | 0 | | | 0 | | | (1,964) | | |
Net interest income after provision for credit losses | | 195,707 | | | 4,014 | | | 0 | | | 199,721 | | |
Benefit (provision) for credit losses | | Benefit (provision) for credit losses | | (326) | | | 1,066 | | | 740 | | | — | | | (1,066) | | | (326) | |
Net interest income after benefit (provision) for credit losses | | Net interest income after benefit (provision) for credit losses | | 70,731 | | | 2,645 | | | 73,376 | | | 26,972 | | | (1,066) | | | 99,282 | |
Non-interest income: | Non-interest income: | | | | | | | | | Non-interest income: | |
Fee and other income | Fee and other income | | 12,288 | | | 1,277 | | | (3,717) | | | 9,848 | | Fee and other income | | 4,775 | | | (516) | | | 4,259 | | | — | | | (743) | | | 3,516 | |
Derivative gains: | | |
Derivative cash settlements interest expense | | (55,933) | | | (839) | | | 0 | | | (56,772) | | |
Derivative losses: | | Derivative losses: | |
Derivative cash settlements expense | | Derivative cash settlements expense | | — | | | — | | | — | | | (26,972) | | | — | | | (26,972) | |
Derivative forward value gains | Derivative forward value gains | | 197,132 | | | 1,203 | | | 0 | | | 198,335 | | Derivative forward value gains | | — | | | — | | | — | | | 87,248 | | | — | | | 87,248 | |
Derivative gains | Derivative gains | | 141,199 | | | 364 | | | 0 | | | 141,563 | | Derivative gains | | — | | | — | | | — | | | 60,276 | | | — | | | 60,276 | |
Investment securities gains | Investment securities gains | | 3,298 | | | 0 | | | 0 | | | 3,298 | | Investment securities gains | | 4,659 | | | — | | | 4,659 | | | — | | | — | | | 4,659 | |
Total non-interest income | Total non-interest income | | 156,785 | | | 1,641 | | | (3,717) | | | 154,709 | | Total non-interest income | | 9,434 | | | (516) | | | 8,918 | | | 60,276 | | | (743) | | | 68,451 | |
Non-interest expense: | Non-interest expense: | | | | | | | | | Non-interest expense: | |
General and administrative expenses | General and administrative expenses | | (45,950) | | | (4,035) | | | 3,186 | | | (46,799) | | General and administrative expenses | | (22,200) | | | (2,057) | | | (24,257) | | | — | | | 1,594 | | | (22,663) | |
Losses on early extinguishment of debt | | (1,455) | | | 0 | | | 0 | | | (1,455) | | |
| Other non-interest expense | Other non-interest expense | | (655) | | | (531) | | | 531 | | | (655) | | Other non-interest expense | | (332) | | | (215) | | | (547) | | | — | | | 215 | | | (332) | |
Total non-interest expense | Total non-interest expense | | (48,060) | | | (4,566) | | | 3,717 | | | (48,909) | | Total non-interest expense | | (22,532) | | | (2,272) | | | (24,804) | | | — | | | 1,809 | | | (22,995) | |
Income before income taxes | | 304,432 | | | 1,089 | | | 0 | | | 305,521 | | |
Income (loss) before income taxes | | Income (loss) before income taxes | | 57,633 | | | (143) | | | 57,490 | | | 87,248 | | | — | | | 144,738 | |
Income tax provision | Income tax provision | | 0 | | | (413) | | | 0 | | | (413) | | Income tax provision | | — | | | (151) | | | (151) | | | — | | | — | | | (151) | |
Net income | | $ | 304,432 | | | $ | 676 | | | $ | 0 | | | $ | 305,108 | | |
Net income (loss) | | Net income (loss) | | $ | 57,633 | | | $ | (294) | | | $ | 57,339 | | | $ | 87,248 | | | $ | — | | | $ | 144,587 | |
| | | November 30, 2020 | | August 31, 2020 |
| | CFC | | NCSC and RTFC | | Elimination | | Consolidated Total | | CFC | | NCSC and RTFC | | Segment Total | | Reclasses and Adjustments(1) | | Intersegment Eliminations(2) | | Consolidated Total |
Assets: | Assets: | | | | | | | | | Assets: | | | | | | | | | | | | |
Total loans outstanding | Total loans outstanding | | $ | 27,027,010 | | | $ | 1,136,379 | | | $ | (1,112,226) | | | $ | 27,051,163 | | Total loans outstanding | | $ | 26,895,639 | | | $ | 1,077,439 | | | $ | 27,973,078 | | | $ | — | | | $ | (1,055,979) | | | $ | 26,917,099 | |
Deferred loan origination costs | Deferred loan origination costs | | 11,806 | | | 0 | | | 0 | | | 11,806 | | Deferred loan origination costs | | 11,778 | | | — | | | 11,778 | | | — | | | — | | | 11,778 | |
Loans to members | Loans to members | | 27,038,816 | | | 1,136,379 | | | (1,112,226) | | | 27,062,969 | | Loans to members | | 26,907,417 | | | 1,077,439 | | | 27,984,856 | | | — | | | (1,055,979) | | | 26,928,877 | |
Less: Allowance for credit losses | Less: Allowance for credit losses | | (58,989) | | | 0 | | | 0 | | | (58,989) | | Less: Allowance for credit losses | | (57,351) | | | — | | | (57,351) | | | — | | | — | | | (57,351) | |
Loans to members, net | Loans to members, net | | 26,979,827 | | | 1,136,379 | | | (1,112,226) | | | 27,003,980 | | Loans to members, net | | 26,850,066 | | | 1,077,439 | | | 27,927,505 | | | — | | | (1,055,979) | | | 26,871,526 | |
Other assets | Other assets | | 1,161,963 | | | 102,692 | | | (92,533) | | | 1,172,122 | | Other assets | | 1,380,724 | | | 104,924 | | | 1,485,648 | | | — | | | (94,553) | | | 1,391,095 | |
Total assets | Total assets | | $ | 28,141,790 | | | $ | 1,239,071 | | | $ | (1,204,759) | | | $ | 28,176,102 | | Total assets | | $ | 28,230,790 | | | $ | 1,182,363 | | | $ | 29,413,153 | | | $ | — | | | $ | (1,150,532) | | | $ | 28,262,621 | |
____________________________
(1)Consists of (i) the reclassification of net periodic derivative settlement interest expense amounts, which we report as a component of interest expense for business segment reporting purposes but is included in derivatives gains (losses) in our consolidated total results and (ii) derivative forward value gains and losses, which we exclude from our business segment results but is included in derivatives gains (losses) in our consolidated total results.
(2)Consists of intercompany borrowings payable by NCSC and RTFC to CFC and the interest related to those borrowings, management fees paid by NCSC and RTFC to CFC and other intercompany amounts, all of which are eliminated in consolidation.
88
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended November 30, 2019 |
(Dollars in thousands) | | CFC | | NCSC and RTFC | | Elimination | | Consolidated Total |
Statement of operations: | | | | | | | | |
Interest income | | $ | 573,000 | | | $ | 24,066 | | | $ | (20,014) | | | $ | 577,052 | |
Interest expense | | (420,894) | | | (20,262) | | | 20,014 | | | (421,142) | |
Net interest income | | 152,106 | | | 3,804 | | | 0 | | | 155,910 | |
Benefit for credit losses | | 1,015 | | | 0 | | | 0 | | | 1,015 | |
Net interest income after benefit for credit losses | | 153,121 | | | 3,804 | | | 0 | | | 156,925 | |
Non-interest income: | | | | | | | | |
Fee and other income | | 17,463 | | | 8,408 | | | (11,088) | | | 14,783 | |
Derivative losses: | | | | | | | | |
Derivative cash settlements interest expense | | (24,675) | | | (518) | | | 0 | | | (25,193) | |
Derivative forward value losses | | (186,375) | | | (707) | | | 0 | | | (187,082) | |
Derivative losses | | (211,050) | | | (1,225) | | | 0 | | | (212,275) | |
Investment securities gains | | 1,506 | | | 0 | | | 0 | | | 1,506 | |
Total non-interest income | | (192,081) | | | 7,183 | | | (11,088) | | | (195,986) | |
Non-interest expense: | | | | | | | | |
General and administrative expenses | | (48,733) | | | (4,655) | | | 3,290 | | | (50,098) | |
| | | | | | | | |
Losses on early extinguishment of debt | | 0 | | | (614) | | | 0 | | | (614) | |
Other non-interest income (expense) | | 6,863 | | | (7,797) | | | 7,798 | | | 6,864 | |
Total non-interest expense | | (41,870) | | | (13,066) | | | 11,088 | | | (43,848) | |
Losses before income taxes | | (80,830) | | | (2,079) | | | 0 | | | (82,909) | |
Income tax benefit | | 0 | | | 430 | | | 0 | | | 430 | |
Net losses | | $ | (80,830) | | | $ | (1,649) | | | $ | 0 | | | $ | (82,479) | |
| | | | | | | | |
| | November 30, 2019 |
| | CFC | | NCSC and RTFC | | Elimination | | Consolidated Total |
Assets: | | | | | | | | |
Total loans outstanding | | $ | 26,406,139 | | | $ | 1,058,603 | | | $ | (1,037,863) | | | $ | 26,426,879 | |
Deferred loan origination costs | | 11,302 | | | 0 | | | 0 | | | 11,302 | |
Loans to members | | 26,417,441 | | | 1,058,603 | | | (1,037,863) | | | 26,438,181 | |
Less: Allowance for credit losses | | (16,520) | | | 0 | | | 0 | | | (16,520) | |
Loans to members, net | | 26,400,921 | | | 1,058,603 | | | (1,037,863) | | | 26,421,661 | |
Other assets | | 1,132,171 | | | 106,301 | | | (93,532) | | | 1,144,940 | |
Total assets | | $ | 27,533,092 | | | $ | 1,164,904 | | | $ | (1,131,395) | | | $ | 27,566,601 | |
| | | | | | | | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk, see “Part I—Item 2. MD&A—Market Risk” and “Note 9—Derivative Instruments and Hedging Activities.”
Item 4. Controls and Procedures
As of the end of the period covered by this report, senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting that occurred during the three months ended November 30, 2020August 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. 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 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. We identify and discuss the most significant risk factors of which we are currently aware that could have a material adverse impact on our business, results of operations, financial condition or liquidity in the section “Part I—Item 1A. Risk Factors” in our 20202021 Form 10-K, as filed with the SEC on August 5, 2020.July 30, 2021. We are not aware of any material changes in the risk factors identified in our 20202021 Form 10-K. However, other risks and uncertainties, including those not currently known to us, could also negatively impact our business, results of operations, financial condition and liquidity. Therefore, the risk factors identified and discussed in our 20202021 Form 10-K should not be considered a complete discussion of all the risks and uncertainties we may face. For information on how we manage our key risks, see “Item 7. MD&A—Risk Management” in our 20202021 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are incorporated by reference or filed as part of this Report.
EXHIBIT INDEX
| | | | | | | | |
Exhibit No. | | Description |
10.1* | — | |
10.2* | — | |
10.3* | — | |
10.4* | — | |
31.1* | — | |
31.2* | — | |
32.1† | — | |
32.2† | — | |
101.INS | — | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH* | — | Inline XBRL Taxonomy Extension Schema Document |
101.CAL* | — | Inline XBRL Taxonomy Calculation Linkbase Document |
101.LAB* | — | Inline XBRL Taxonomy Label Linkbase Document |
101.PRE* | — | Inline XBRL Taxonomy Presentation Linkbase Document |
101.DEF* | — | Inline XBRL Taxonomy Definition Linkbase Document |
104 | — | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
____________________________
* Filed herewith this Report.
† Furnished with this Report, which shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
NATIONAL RURAL UTILITIES |
COOPERATIVE FINANCE CORPORATION |
Date: JanuaryOctober 12, 2021
| | | | | |
By: | /s/ J. ANDREW DONYU LING WANG |
| J. Andrew DonYu Ling Wang |
| Senior Vice President and Chief Financial Officer |
| | | | | | | | |
| | | By: | /s//s/ ROBERT E. GEIER |
| | | | Robert E. Geier |
| Controller | | | Vice President and PrincipalChief Accounting Officer |