NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP /DC/
10-Ks and 10-Qs
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
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For the quarterly period ended
August 31, 2018
OR
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☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number: 1-7102
__________________________
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
__________________________
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District of Columbia
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52-0891669
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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20701 Cooperative Way, Dulles, Virginia, 20166
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(Address of principal executive offices) (Zip Code)
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Registrant’s telephone number, including area code:
(703) 467-1800
__________________________
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 ☒ 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
☒
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☒ 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
☒
TABLE OF CONTENTS
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Page
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i
INDEX OF MD&A TABLES
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Table
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Description
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Page
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1
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Summary of Selected Financial Data
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2
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2
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Average Balances, Interest Income/Interest Expense and Average Yield/Cost
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8
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3
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Rate/Volume Analysis of Changes in Interest Income/Interest Expense
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10
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4
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Non-Interest Income
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12
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5
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Derivative Average Notional Amounts and Average Interest Rates
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12
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6
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Derivative Gains (Losses)
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13
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7
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Non-Interest Expense
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14
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8
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Loans Outstanding by Type and Member Class
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15
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9
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Historical Retention Rate and Repricing Selection
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16
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10
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Total Debt Outstanding
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17
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11
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Member Investments
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18
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12
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Collateral Pledged
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19
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13
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Unencumbered Loans
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20
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14
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Guarantees Outstanding
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21
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15
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Maturities of Guarantee Obligations
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22
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16
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Unadvanced Loan Commitments
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22
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17
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Notional Maturities of Unadvanced Loan Commitments
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22
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18
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Maturities of Notional Amount of Unconditional Committed Lines of Credit
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23
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19
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Loan Portfolio Security Profile
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25
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20
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Credit Exposure to 20 Largest Borrowers
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26
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21
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Troubled Debt Restructured Loans
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28
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22
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Allowance for Loan Losses
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29
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23
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Rating Triggers for Derivatives
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30
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24
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Available Liquidity
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31
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25
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Committed Bank Revolving Line of Credit Agreements
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32
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26
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Short-Term Borrowings—Funding Sources
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33
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27
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Short-Term Borrowings
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34
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28
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Issuances and Maturities of Long-Term and Subordinated Debt
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34
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29
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Principal Maturity of Long-Term and Subordinated Debt
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35
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30
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Projected Sources and Uses of Liquidity
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36
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31
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Credit Ratings
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36
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32
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Interest Rate Gap Analysis
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38
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33
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Adjusted Financial Measures—Income Statement
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39
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34
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TIER and Adjusted TIER
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40
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35
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Adjusted Financial Measures—Balance Sheet
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40
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36
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Debt-to-Equity Ratio
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40
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37
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Members’ Equity
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41
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ii
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A
”
)
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FORWARD-LOOKING STATEMENTS
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This Quarterly Report on Form 10-Q contains certain statements that are considered “forward-looking statements” within the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identified by our 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 appropriateness of the allowance for loan losses, operating income and expenses, leverage and debt-to-equity ratios, borrower financial performance, impaired loans, and sources and uses of liquidity, are forward-looking statements. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, actual results and performance may differ materially from our forward-looking statements due to several factors. Factors that could cause future results to vary from our forward-looking statements include, but are not limited to, general economic conditions, legislative changes including those that could affect our tax status, governmental monetary and fiscal policies, demand for our loan products, lending competition, changes in the quality or composition of our loan portfolio, changes in our ability to access external financing, changes in the credit ratings on our debt, valuation of collateral supporting impaired loans, charges associated with our operation or disposition of foreclosed assets, technological changes within the rural electric utility industry, regulatory and economic conditions in the rural electric industry, nonperformance of counterparties to our derivative agreements, the costs and effects of legal or governmental proceedings involving us or our members and the factors listed and described under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended May 31,
2018
(“
2018
Form 10-K”). Except as required by law, we undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date on which the statement is made.
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INTRODUCTION
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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, 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 Cooperative Services Corporation (“NCSC”), Rural Telephone Finance Cooperative (“RTFC”) and subsidiaries created and controlled by CFC to hold foreclosed assets resulting from defaulted loans or bankruptcy. NCSC is a taxable member-owned cooperative that may provide financing to members of CFC, government or quasi-government entities which own electric utility systems that meet the Rural Electrification Act definition of “rural” 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 did not hold, and did not have any subsidiaries or other entities that held, foreclosed assets as of
August 31, 2018
or
May 31, 2018
. See “Item 1. Business—Overview” in our
2018
Form 10-K for additional information on the business activities of each of these entities. Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its consolidated entities. All references to members within this document include members, associates and affiliates of CFC and its consolidated entities.
1
Our principal operations are currently organized for management reporting purposes into three business segments: CFC, NCSC and RTFC. Management monitors a variety of key indicators to evaluate our business performance. The following MD&A is intended to provide the reader with an understanding of our results of operations, financial condition and liquidity by discussing the factors influencing changes from period to period and the key measures used by management to evaluate performance, such as net interest income, net interest yield, loan growth, debt-to-equity ratio, and credit quality metrics. We provide additional information on the financial performance of each of our business segments in “Note 13—Business Segments.” The MD&A section is provided as a supplement to, and should be read in conjunction with our unaudited condensed consolidated financial statements and related notes in this Report, our audited consolidated financial statements and related notes in our
2018
Form 10-K and additional information contained in our
2018
Form 10-K, including the risk factors discussed under “Part I—Item 1A. Risk Factors,” as well as any risk factors identified under “Part II—Item 1A. Risk Factors” in this Report.
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SUMMARY OF SELECTED FINANCIAL DATA
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Table
1
provides a summary of consolidated selected financial data for the
three months ended August 31, 2018 and 2017
, and as of
August 31, 2018 and May 31, 2018
. In addition to financial measures determined in accordance with generally accepted accounting principles in the United States (“GAAP”), management also evaluates performance based on certain non-GAAP measures and metrics, which we refer to as “adjusted” measures. Certain financial covenant provisions in our credit agreements are also based on non-GAAP financial measures. Our key non-GAAP financial measures are adjusted net income, adjusted net interest income, adjusted interest expense, adjusted net interest yield, adjusted times interest earned ratio (“adjusted TIER”) and adjusted debt-to-equity ratio. The most comparable GAAP measures are net income, net interest income, interest expense, net interest yield, TIER and debt-to-equity ratio, respectively. The primary adjustments we make to calculate these non-GAAP measures consist of (i) adjusting interest expense and net interest income to include the impact of net periodic derivative cash settlements; (ii) adjusting net income, senior debt and total equity to exclude the non-cash impact of the accounting for derivative financial instruments; (iii) adjusting senior debt 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. We believe our non-GAAP adjusted measures, which are not a substitute for GAAP and may not be consistent with similarly titled non-GAAP measures used by other companies, provide meaningful information and are useful to investors because management evaluates performance based on these metrics, and certain financial covenants in our committed bank revolving line of credit agreements and debt indentures are based on adjusted measures. See “Non-GAAP Financial Measures” for a detailed reconciliation of these adjusted measures to the most comparable GAAP measures.
Table
1
: Summary of Selected Financial Data
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Three Months Ended August 31,
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||||||||||
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(Dollars in thousands)
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2018
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2017
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Change
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Statement of income
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Interest income
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$
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278,491
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$
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265,915
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5%
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Interest expense
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(210,231
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)
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(192,731
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)
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9
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Net interest income
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68,260
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73,184
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(7)
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Fee and other income
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3,185
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3,945
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(19)
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Total revenue
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71,445
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77,129
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(7)
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Benefit for loan losses
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109
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298
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(63)
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Derivative gains (losses)
(1)
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7,183
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(46,198
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)
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**
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Results of operations of foreclosed assets
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—
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(24
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)
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**
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Operating expenses
(2)
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(23,205
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)
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(21,636
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)
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7
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Other non-interest expense
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(7,494
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)
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(522
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)
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1,336
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Income before income taxes
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48,038
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9,047
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431
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Income tax expense
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(60
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)
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(32
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)
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88
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Net income
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$
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47,978
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$
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9,015
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432
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2
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Three Months Ended August 31,
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2018
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2017
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Change
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Adjusted operational financial measures
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||||||||||
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Adjusted interest expense
(3)
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$
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(223,060
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)
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$
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(212,953
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)
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5%
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Adjusted net interest income
(3)
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55,431
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52,962
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5
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Adjusted net income
(3)
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27,966
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34,991
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(20)
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Selected ratios
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Fixed-charge coverage ratio/TIER
(4)
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1.23
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1.05
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18 bps
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Adjusted TIER
(3)
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1.13
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1.16
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(3)
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Net interest yield
(5)
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1.04
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%
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1.16
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%
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(12)
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Adjusted net interest yield
(3)(6)
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0.85
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0.84
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1
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|||||
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August 31, 2018
|
May 31, 2018
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Change
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||||||||
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Balance sheet
|
||||||||||
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Cash, cash equivalents and restricted cash
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$
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274,502
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$
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238,824
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15%
|
|||
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Investment securities
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642,360
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609,851
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5
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|||||
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Loans to members
(7)
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25,182,654
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25,178,608
|
|
—
|
|||||
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Allowance for loan losses
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(18,692
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)
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(18,801
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)
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(1)
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|||||
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Loans to members, net
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25,163,962
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25,159,807
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—
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|||||
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Total assets
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26,676,207
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26,690,204
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—
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|||||
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Short-term borrowings
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3,793,136
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3,795,910
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—
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|||||
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Long-term debt
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18,674,932
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18,714,960
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—
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|||||
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Subordinated deferrable debt
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742,445
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742,410
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—
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|||||
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Members’ subordinated certificates
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1,378,097
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1,379,982
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—
|
|||||
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Total debt outstanding
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24,588,610
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24,633,262
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—
|
|||||
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Total liabilities
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25,169,631
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25,184,351
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—
|
|||||
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Total equity
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1,506,576
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1,505,853
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—
|
|||||
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Guarantees
(8)
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776,687
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805,161
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(4)
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Selected ratios period end
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|||||||||
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Allowance coverage ratio
(9)
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0.07
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%
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0.07
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%
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—
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|||||
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Debt-to-equity ratio
(10)
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16.71
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16.72
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(1)
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|||||
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Adjusted debt-to-equity ratio
(3)
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6.21
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6.18
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3
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|||||
** Calculation of percentage change is not meaningful.
(1)
Consists of interest rate swap cash settlements and forward value gains (losses). Derivative cash settlement amounts represent net periodic contractual interest accruals related to derivatives not designated for hedge accounting. Derivative forward value gains (losses) represent changes in fair value during the period, excluding net periodic contractual interest accruals, related to derivatives not designated for hedge accounting and expense amounts reclassified into income related to the cumulative transition loss recorded in accumulated other comprehensive income as of June 1, 2001, as a result of the adoption of the derivative accounting guidance that required derivatives to be reported at fair value on the balance sheet.
(2)
Consists of salaries and employee benefits and the other general and administrative expenses components of non-interest expense, each of which are presented separately on our consolidated statements of income.
(3)
See “Non-GAAP Financial Measures” for details on the calculation of these non-GAAP adjusted measures and the reconciliation to the most comparable GAAP measures.
(4)
Calculated based on net income (loss) plus interest expense for the period divided by interest expense for the period. The fixed-charge coverage ratios and TIER were the same during each period presented because we did not have any capitalized interest during these periods.
(5)
Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.
(6)
Calculated based on annualized adjusted net interest income for the period divided by average interest-earning assets for the period.
(7)
Consists of the outstanding principal balance of member loans plus unamortized deferred loan origination costs, which totaled
$11 million
as of both
August 31, 2018
and
May 31, 2018
.
(8)
Reflects the total amount of member obligations for which CFC has guaranteed payment to a third party as of the end of each period. This amount represents our maximum exposure to loss, which significantly exceeds the guarantee liability recorded on our consolidated balance sheets. See “Note 11—Guarantees” for additional information.
3
(9)
Calculated based on the allowance for loan losses at period end divided by total outstanding loans at period end.
(10)
Calculated based on total liabilities at period end divided by total equity at period end.
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EXECUTIVE SUMMARY
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Our primary objective as a member-owned cooperative lender is to provide cost-based financial products to our rural electric members while maintaining a sound financial position required for investment-grade credit ratings on our debt instruments. Our objective is not to maximize net income; therefore, the rates we charge our member-borrowers reflect our adjusted interest expense plus a spread to cover our operating expenses, a provision for loan losses and earnings sufficient to achieve interest coverage to meet our financial objectives. Our goal is to earn an annual minimum adjusted TIER of 1.10 and to maintain an adjusted debt-to-equity ratio at approximately or below 6.00-to-1.
We are subject to period-to-period volatility in our reported GAAP results due to changes in market conditions and differences in the way our financial assets and liabilities are accounted for under GAAP. Our financial assets and liabilities expose us to interest-rate risk. We use derivatives, primarily interest rate swaps, as part of our strategy in managing this risk. Our derivatives are intended to economically hedge and manage the interest-rate sensitivity mismatch between our financial assets and liabilities. We are required under GAAP to carry derivatives at fair value on our consolidated balance sheet; however, the financial assets and liabilities for which we use derivatives to economically hedge are carried at amortized cost. Changes in interest rates and spreads result in periodic fluctuations in the fair value of our derivatives, which may cause volatility in our earnings because we do not apply hedge accounting for our interest rate swaps. As a result, the mark-to-market changes in our interest rate swaps are recorded in earnings. Based on the composition of our interest rate swaps, we generally record derivative losses in earnings when interest rates decline and derivative gains when interest rates rise. This earnings volatility generally is not indicative of the underlying economics of our business, as the derivative forward fair value gains or losses recorded each period may or may not be realized over time, depending on the terms of our derivative instruments and future changes in market conditions that impact the periodic cash settlement amounts of our interest rate swaps. As such, management uses our adjusted non-GAAP results to evaluate our operating performance. Our adjusted results include realized net periodic interest rate swap settlement amounts but exclude the impact of unrealized forward fair value gains and losses. Our financial debt covenants 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
$48 million
and a TIER of
1.23
for the quarter ended
August 31, 2018
(“current quarter”), compared with net income of
$9 million
and a TIER of
1.05
for the same prior-year quarter. Our debt-to-equity ratio decreased slightly to
16.71
as of
August 31, 2018
, from
16.72
as of
May 31, 2018
, primarily due to a decline in liabilities as equity remained relatively unchanged. In July 2018, the CFC Board of Directors authorized the allocation of patronage capital of $95 million for fiscal year 2018 and the retirement of 50% of this amount, or
$48 million
, which was returned to members in August 2018. The increase in equity from our reported net income of
$48 million
for the current quarter was offset by the retirement of patronage capital.
The variance of
$39 million
between our reported net income of
$48 million
for the current quarter and our net income of
$9 million
for the same prior-year quarter was primarily driven by a favorable shift in the mark-to-market changes in the fair value of our derivatives. We recognized derivative gains of
$7 million
in the current quarter due to a net increase in the fair value of our pay-fixed swaps resulting from a slight rise in medium- and long-term interest rates. In contrast, we recognized derivative losses of
$46 million
during the comparable prior-year quarter, mainly due to a modest flattening of the swap curve as interest rates on the shorter end of the curve rose while medium- and long-term interest rates declined slightly. The favorable shift of $53 million in the fair value of our derivatives was offset in part by the recognition of losses of
$7 million
on the early extinguishment of debt, a decrease in net interest income of
$5 million
and an increase in operating expenses of
$2 million
. The decrease in net interest income resulted from compression in the net interest yield, which was partially offset by an increase in average interest-earning assets of
$1,068 million
, or 4%. Net interest yield declined by
12
basis points to
1.04%
, primarily driven by an increase in our overall average cost of funds due to a higher average cost for our short-term and variable-rate borrowings resulting from the rise in short-term interest rates.
4
Adjusted Non-GAAP Results
Our adjusted net income totaled
$28 million
and our adjusted TIER was
1.13
for the current quarter, compared with adjusted net income of
$35 million
and adjusted TIER of
1.16
for the same prior-year quarter. Our adjusted debt-to-equity ratio increased to
6.21
as of
August 31, 2018
, from
6.18
as of
May 31, 2018
, primarily attributable to a decrease in adjusted equity due to the patronage capital retirement of
$48 million
, which more than offset our adjusted net income of
$28 million
.
The decrease in adjusted net income of
$7 million
in the current quarter from the comparable prior-year quarter was primarily driven by losses on the early extinguishment of debt of
$7 million
and an increase in operating expenses of
$2 million
, offset in part by an increase in adjusted net interest income of
$2 million
. The increase in adjusted net interest income was attributable to the increase in average interest-earning assets
$1,068 million
and a slight increase in the adjusted interest yield of
1
basis point to
0.85%
.
Lending Activity and Credit Performance
Loans to members totaled
$25,183 million
as of
August 31, 2018
, relatively unchanged from
May 31, 2018
. CFC distribution loans increased by
$87 million
, which was offset by decreases in CFC power supply loans, NCSC loans and RTFC loans of
$76 million
,
$6 million
and
$5 million
, respectively.
Long-term loan advances totaled
$468 million
during the current quarter, with approximately
71%
of those advances for capital expenditures by members and
25%
for the refinancing of loans made by other lenders. CFC had long-term fixed-rate loans totaling
$193 million
that were scheduled to reprice during the current quarter. Of this total,
$96 million
repriced to a new long-term fixed rate;
$48 million
repriced to a long-term variable rate; and
$49 million
was repaid in full.
The overall credit quality of our loan portfolio remained high as of
August 31, 2018
, as evidenced by our strong credit performance metrics. We had no delinquent or nonperforming loans as of
August 31, 2018
, and no loan defaults or charge-offs during the current quarter. Outstanding loans to electric utility organizations represented approximately 99% of total outstanding loan portfolio as of
August 31, 2018
, unchanged from
May 31, 2018
. We historically have had limited defaults and losses on loans in our electric utility loan portfolio. We generally lend to members on a senior secured basis, which reduces the risk of loss in the event of a borrower default. Of our total loans outstanding, 93% were secured and 7% were unsecured as of both August 31, 2018 and
May 31, 2018
.
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
$24,589 million
as of
August 31, 2018
, relatively unchanged from
May 31, 2018
, as loans to members also remained flat. Decreases in collateral trust bonds, dealer commercial paper and Federal Agricultural Mortgage Corporation (“Farmer Mac”) notes payable of
$296 million
,
$135 million
, and
$114 million
, respectively, were largely offset by increases in dealer medium-term notes of
$291 million
and in member commercial paper, select notes and daily liquidity fund notes of
$238 million
. Outstanding dealer commercial paper of
$929 million
and
$1,064 million
as of
August 31, 2018
and
May 31, 2018
, respectively, was below our maximum threshold of $1,250 million.
We provide additional information on our financing activities below under
“Consolidated Balance Sheet Analysis—Debt” and “Liquidity Risk.”
Outlook for the Next 12 Months
We currently expect that our net interest income, adjusted net interest income, net income, adjusted net income, tier, adjusted tier, net interest yield and adjusted net interest yield will increase over the next 12 months as a result of a projected decrease in our average cost of funds. Long-term debt scheduled to mature over the next 12 months totaled
$2,820 million
as of
August 31, 2018
. Included in this amount is $880 million aggregate principal amount of higher-cost collateral trust bonds with a weighted average coupon rate of 9.60%, scheduled to mature on November 1, 2018. On July 12, 2018, we redeemed
$300 million
of our 10.375% collateral trust bonds due November 1, 2018, leaving a remaining outstanding principal
5
amount of
$700 million
. We expect that we will be able to replace this higher-cost debt with lower-cost funding, which will reduce our aggregate weighted average cost of funds.
We believe we have sufficient liquidity from the combination of existing cash and cash equivalents, member loan repayments, committed bank revolving lines of credit, committed loan facilities from the Federal Financing Bank guaranteed by RUS under the Guaranteed Underwriter Program (“Guaranteed Underwriter Program”), revolving note purchase agreements with Farmer Mac and our ability to issue debt in the capital markets, to our members and in private placements, to meet the demand for member loan advances and satisfy our obligations to repay long-term debt maturing over the next 12 months. As of
August 31, 2018
, sources of liquidity readily available for access totaled
$7,295 million
, consisting of (i)
$266 million
in cash and cash equivalents; (ii) up to
$1,225 million
available under committed loan facilities under the Guaranteed Underwriter Program; (iii) up to
$3,082 million
available under committed bank revolving line of credit agreements; (iv) up to
$300 million
available under a committed revolving note purchase agreement with Farmer Mac; and (v) up to
$2,422 million
available under a revolving note purchase agreement with Farmer Mac, subject to market conditions. On August 17, 2018, we executed a commitment letter for a
$750 million
loan facility under the Guaranteed Underwriter Program. The amount available for access under the Guaranteed Underwriter Program, based on amounts advanced to us as of
August 31, 2018
, will increase to
$1,975 million
upon closing of the facility.
We believe we can continue to roll over the outstanding member short-term debt of
$2,864 million
as of
August 31, 2018
, based on our expectation that our members will continue to reinvest their excess cash in our commercial paper, daily liquidity fund notes, select notes and medium-term notes. Although we expect to continue accessing the dealer commercial paper market to help meet our liquidity needs, we intend 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. We expect to continue to be in compliance with the covenants under our committed bank revolving line of credit agreements, which will allow us to mitigate roll-over risk, as we can draw on these facilities to repay dealer or member commercial paper that cannot be refinanced with similar debt.
While we are not subject to bank regulatory capital rules, we generally aim to maintain an adjusted debt-to-equity ratio at approximately or below 6.00-to-1. Our adjusted debt-to-equity ratio was
6.21
as of
August 31, 2018
, above our targeted threshold due to the decrease in adjusted equity resulting from the patronage capital retirement of $48 million during the quarter. We expect that our adjusted debt-to-equity ratio will decrease during the remainder of the fiscal year due to an increase in equity from earnings. As a result, we believe our adjusted debt-to equity ratio will decrease closer to our target ratio of 6.00-to-1 over the next 12 months.
|
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
|
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the amount of assets, liabilities, income and expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which we use management’s judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a discussion of our significant accounting policies under “Note 1—Summary of Significant Accounting Policies” in our
2018
Form 10-K.
We have identified certain accounting policies as critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our results of operations or financial condition. Our most critical accounting policies and estimates involve the determination of the allowance for loan losses and fair value. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. There were no material changes in the key inputs and assumptions used in our critical accounting policies during the current quarter. Management has discussed significant judgments and assumptions in applying our critical accounting policies with the Audit Committee of our board of directors. We provide additional information on our critical accounting policies and estimates under “MD&A—Critical Accounting Policies and Estimates” in our
2018
Form 10-K. See “Item 1A. Risk Factors” in our
2018
Form 10-K for a discussion of the risks associated with management’s judgments and estimates in applying our accounting policies and methods.
6
|
RECENT ACCOUNTING CHANGES AND OTHER DEVELOPMENTS
|
See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted during the current quarter, as well as recently issued accounting standards not yet required to be adopted and the expected impact of the adoption of these accounting standards. To the extent we believe the adoption of new accounting standards has had or will have a material impact on our consolidated results of operations, financial condition or liquidity, we also discuss the impact in the applicable section(s) of this MD&A.
|
CONSOLIDATED RESULTS OF OPERATIONS
|
The section below provides a comparative discussion of our condensed consolidated results of operations between the
three months ended August 31, 2018 and 2017
. Following this section, we provide a comparative analysis of our condensed consolidated balance sheets as of
August 31, 2018 and May 31, 2018
. You should read these sections together with our “Executive Summary—Outlook for the Next 12 Months” where we discuss trends and other factors that we expect will affect our future results of operations.
Net Interest Income
Net interest income represents the difference between the interest income earned on our interest-earning assets, which 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 from non-interest bearing funding. We expect net interest income and our net interest yield to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities. We do not fund each individual loan with specific debt. Rather, we attempt to minimize costs and maximize efficiency by proportionately funding large aggregated amounts of loans.
Table
2
presents average balances for the
three months ended August 31, 2018 and 2017
, 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 in interest expense. We provide reconciliations of our non-GAAP adjusted measures to the most comparable GAAP measures under “Non-GAAP Financial Measures.”
7
Table
2
: Average Balances, Interest Income/Interest Expense and Average Yield/Cost
|
Three Months Ended August 31,
|
||||||||||||||||||||||
|
(Dollars in thousands)
|
2018
|
2017
|
||||||||||||||||||||
|
Assets:
|
Average Balance
|
Interest Income/Expense
|
Average Yield/Cost
|
Average Balance
|
Interest Income/Expense
|
Average Yield/Cost
|
||||||||||||||||
|
Long-term fixed-rate loans
(1)
|
$
|
22,695,516
|
|
$
|
251,801
|
|
4.40
|
%
|
$
|
22,371,291
|
|
$
|
249,364
|
|
4.42
|
%
|
||||||
|
Long-term variable-rate loans
|
1,071,550
|
|
9,381
|
|
3.47
|
|
842,968
|
|
5,863
|
|
2.76
|
|
||||||||||
|
Line of credit loans
|
1,422,853
|
|
11,633
|
|
3.24
|
|
1,353,349
|
|
8,707
|
|
2.55
|
|
||||||||||
|
TDR loans
(2)
|
12,552
|
|
218
|
|
6.89
|
|
13,122
|
|
226
|
|
6.83
|
|
||||||||||
|
Other income, net
(3)
|
—
|
|
(325
|
)
|
—
|
|
—
|
|
(232
|
)
|
—
|
|
||||||||||
|
Total loans
|
25,202,471
|
|
272,708
|
|
4.29
|
|
24,580,730
|
|
263,928
|
|
4.26
|
|
||||||||||
|
Cash, time deposits and investment securities
|
809,409
|
|
5,783
|
|
2.83
|
|
363,645
|
|
1,987
|
|
2.17
|
|
||||||||||
|
Total interest-earning assets
|
$
|
26,011,880
|
|
$
|
278,491
|
|
4.25
|
%
|
$
|
24,944,375
|
|
$
|
265,915
|
|
4.23
|
%
|
||||||
|
Other assets, less allowance for loan losses
|
726,260
|
|
560,169
|
|
||||||||||||||||||
|
Total assets
|
$
|
26,738,140
|
|
|
|
$
|
25,504,544
|
|
|
|
|
|
||||||||||
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Short-term borrowings
|
$
|
3,519,995
|
|
$
|
19,419
|
|
2.19
|
%
|
$
|
3,223,476
|
|
$
|
10,539
|
|
1.30
|
%
|
||||||
|
Medium-term notes
|
3,757,196
|
|
32,410
|
|
3.42
|
|
3,010,730
|
|
25,116
|
|
3.31
|
|
||||||||||
|
Collateral trust bonds
|
7,474,361
|
|
77,705
|
|
4.12
|
|
7,635,433
|
|
85,277
|
|
4.43
|
|
||||||||||
|
Guaranteed Underwriter Program notes payable
|
4,848,435
|
|
35,334
|
|
2.89
|
|
4,995,723
|
|
35,602
|
|
2.83
|
|
||||||||||
|
Farmer Mac notes payable
|
2,790,527
|
|
21,111
|
|
3.00
|
|
2,507,545
|
|
11,490
|
|
1.82
|
|
||||||||||
|
Other notes payable
|
29,877
|
|
322
|
|
4.28
|
|
35,243
|
|
390
|
|
4.39
|
|
||||||||||
|
Subordinated deferrable debt
|
742,422
|
|
9,417
|
|
5.03
|
|
742,285
|
|
9,416
|
|
5.03
|
|
||||||||||
|
Subordinated certificates
|
1,377,954
|
|
14,513
|
|
4.18
|
|
1,417,872
|
|
14,901
|
|
4.17
|
|
||||||||||
|
Total interest-bearing liabilities
|
$
|
24,540,767
|
|
$
|
210,231
|
|
3.40
|
%
|
$
|
23,568,307
|
|
$
|
192,731
|
|
3.24
|
%
|
||||||
|
Other liabilities
|
697,954
|
|
|
853,196
|
|
|
||||||||||||||||
|
Total liabilities
|
25,238,721
|
|
|
24,421,503
|
|
|
||||||||||||||||
|
Total equity
|
1,499,419
|
|
1,083,041
|
|
|
|||||||||||||||||
|
Total liabilities and equity
|
$
|
26,738,140
|
|
|
|
$
|
25,504,544
|
|
|
|
||||||||||||
|
Net interest spread
(4)
|
|
|
0.85
|
%
|
|
|
|
|
0.99
|
%
|
||||||||||||
|
Benefit from non-interest bearing funding
(5)
|
0.19
|
|
0.17
|
|
||||||||||||||||||
|
Net interest income/net interest yield
(6)
|
$
|
68,260
|
|
1.04
|
%
|
$
|
73,184
|
|
1.16
|
%
|
||||||||||||
|
Adjusted net interest income/adjusted net interest yield:
|
|
|
||||||||||||||||||||
|
Interest income
|
$
|
278,491
|
|
4.25
|
%
|
$
|
265,915
|
|
4.23
|
%
|
||||||||||||
|
Interest expense
|
210,231
|
|
3.40
|
|
192,731
|
|
3.24
|
|
||||||||||||||
|
Add: Net accrued periodic derivative cash settlements
(7)
|
12,829
|
|
0.46
|
|
20,222
|
|
0.75
|
|
||||||||||||||
|
Adjusted interest expense/adjusted average cost
(8)
|
$
|
223,060
|
|
3.61
|
%
|
|
|
$
|
212,953
|
|
3.58
|
%
|
||||||||||
|
Adjusted net interest spread
(4)
|
0.64
|
%
|
|
0.65
|
%
|
|||||||||||||||||
|
Benefit from non-interest bearing funding
(5)
|
0.21
|
|
0.19
|
|
||||||||||||||||||
|
Adjusted net interest income/adjusted net interest yield
(9)
|
$
|
55,431
|
|
0.85
|
%
|
|
$
|
52,962
|
|
|
0.84
|
%
|
||||||||||
____________________________
(1)
Interest income on long-term, fixed-rate loans includes loan conversion fees, which are generally deferred and recognized as interest income using the effective interest method.
(2)
Troubled debt restructuring (“TDR”) loans.
8
(3)
Consists of late payment fees and net amortization of deferred loan fees and loan origination costs.
(4)
Net interest spread represents the difference between the average yield on total average interest-earning assets and the average cost of total average interest-bearing liabilities. Adjusted net interest spread represents the difference between the average yield on total average interest-earning assets and the adjusted average cost of total average interest-bearing liabilities.
(5)
Includes other liabilities and equity.
(6)
Net interest yield is calculated based on annualized net interest income for the period divided by total average interest-earning assets for the period.
(7)
Represents the impact of net accrued periodic interest rate swap settlements 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 annualized net accrued periodic interest rate swap settlements during the period divided by the average outstanding notional amount of derivatives during the period. The average outstanding notional amount of interest rate swaps was $
10,955 million
and $
10,682 million
for the
three months ended August 31, 2018 and 2017
, respectively.
(8)
Adjusted interest expense represents interest expense plus net accrued periodic interest rate swap cash settlements during the period. Net accrued periodic derivative cash settlements are reported on our consolidated statements of income as a component of derivative gains (losses). Adjusted average cost is calculated based on annualized adjusted interest expense for the period divided by total average interest-bearing liabilities during the period.
(9)
Adjusted net interest yield is calculated based on annualized adjusted net interest income for the period divided by total average interest-earning assets for the period.
Table
3
displays the change in net interest income between periods and the extent to which the variance is attributable to: (i) changes in the volume of our interest-earning assets and interest-bearing liabilities or (ii) changes in the interest rates of these assets and liabilities. The table also presents the change in adjusted net interest income between periods. Changes that are not solely due to either volume or rate are allocated to these categories on a pro-rata basis based on the absolute value of the change due to average volume and average rate.
9
Table
3
: Rate/Volume Analysis of Changes in Interest Income/Interest Expense
|
Three Months Ended August 31,
|
||||||||||||
|
2018 versus 2017
|
||||||||||||
|
|
Total
|
Variance due to:
(1)
|
||||||||||
|
(Dollars in thousands)
|
Variance
|
Volume
|
Rate
|
|||||||||
|
Interest income:
|
|
|
|
|||||||||
|
Long-term fixed-rate loans
|
$
|
2,437
|
|
$
|
3,614
|
|
$
|
(1,177
|
)
|
|||
|
Long-term variable-rate loans
|
3,518
|
|
1,590
|
|
1,928
|
|
||||||
|
Line of credit loans
|
2,926
|
|
447
|
|
2,479
|
|
||||||
|
Restructured loans
|
(8
|
)
|
(10
|
)
|
2
|
|
||||||
|
Other income, net
|
(93
|
)
|
—
|
|
(93
|
)
|
||||||
|
Total loans
|
8,780
|
|
5,641
|
|
3,139
|
|
||||||
|
Cash, time deposits and investment securities
|
3,796
|
|
2,436
|
|
1,360
|
|
||||||
|
Interest income
|
12,576
|
|
8,077
|
|
4,499
|
|
||||||
|
Interest expense:
|
|
|
||||||||||
|
Short-term borrowings
|
8,880
|
|
969
|
|
7,911
|
|
||||||
|
Medium-term notes
|
7,294
|
|
6,227
|
|
1,067
|
|
||||||
|
Collateral trust bonds
|
(7,572
|
)
|
(1,799
|
)
|
(5,773
|
)
|
||||||
|
Guaranteed Underwriter Program notes payable
|
(268
|
)
|
(1,050
|
)
|
782
|
|
||||||
|
Farmer Mac notes payable
|
9,621
|
|
1,297
|
|
8,324
|
|
||||||
|
Other notes payable
|
(68
|
)
|
(59
|
)
|
(9
|
)
|
||||||
|
Subordinated deferrable debt
|
1
|
|
2
|
|
(1
|
)
|
||||||
|
Subordinated certificates
|
(388
|
)
|
(420
|
)
|
32
|
|
||||||
|
Interest expense
|
17,500
|
|
5,167
|
|
12,333
|
|
||||||
|
Net interest income
|
$
|
(4,924
|
)
|
$
|
2,910
|
|
$
|
(7,834
|
)
|
|||
|
Adjusted net interest income:
|
||||||||||||
|
Interest income
|
$
|
12,576
|
|
$
|
8,077
|
|
$
|
4,499
|
|
|||
|
Interest expense
|
17,500
|
|
5,167
|
|
12,333
|
|
||||||
|
Net accrued periodic derivative cash settlements
(2)
|
(7,393
|
)
|
516
|
|
(7,909
|
)
|
||||||
|
Adjusted interest expense
(3)
|
10,107
|
|
5,683
|
|
4,424
|
|
||||||
|
Adjusted net interest income
|
$
|
2,469
|
|
$
|
2,394
|
|
$
|
75
|
|
|||
____________________________
(1)
The changes for each category of interest income and interest expense are divided between the portion of change attributable to the variance in volume and the portion of change attributable to the variance in rate for that category. The amount attributable to the combined impact of volume and rate has been allocated to each category based on the proportionate absolute dollar amount of change for that category.
(2)
For net accrued periodic derivative cash settlements, the variance due to average volume represents the change in derivative cash settlements resulting from the change in the average notional amount of derivative contracts outstanding. The variance due to average rate represents the change in derivative cash settlements 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.
Net interest income of
$68 million
for the current quarter decreased by
$5 million
, or
7%
, from the comparable prior-year quarter, driven by a decrease in net interest yield of
10%
(
12
basis points) to
1.04%
, which was partially offset by an increase in average interest-earning assets of
4%
.
|
•
|
Net Interest Yield:
The decrease in the net interest yield for the current quarter was primarily due to an increase in our average cost of funds. Our average cost of funds increased by
16
basis points during the current quarter to
3.40%
, largely due to increases in the cost of our short-term and variable-rate debt resulting from the rise in short-term interest rates.
|
10
The 3-month London Interbank Offered Rate (“LIBOR”) was 2.32% as of
August 31, 2018
, an increase of 100 basis points from
August 31, 2017
, while the federal funds target rate was 2.00% as of
August 31, 2018
, up 75 basis points from
August 31, 2017
.
|
•
|
Average Interest-Earning Assets:
The increase of
$1,068 million
, or 4%, in average interest-earning assets during the current quarter was attributable to growth in average total loans of
$622 million
, as members obtained advances to fund capital investments and refinanced with us loans made by other lenders, and an increase in average investment securities of $543 million.
|
Adjusted net interest income of
$55 million
for the current quarter increased by
$2 million
, or
5%
, from the comparable prior-year quarter, due to the combined impact of an increase in average interest-earning assets of
4%
and a slight increase in the adjusted net interest yield of
1%
(
1
basis point) to
0.85%
. The increase in the adjusted net interest yield reflected the combined impact of increases in the average yield on interest-earning assets and the benefit from non-interest bearing funding, which were partially offset by an increase in the adjusted average cost of debt.
Our adjusted net interest income and adjusted net interest yield include the impact of net accrued periodic derivative cash settlements during the period. We recorded net periodic derivative cash settlement expense of
$13 million
and
$20 million
for the
three months ended August 31, 2018 and 2017
, respectively. See “Non-GAAP Financial Measures” for additional information on our adjusted measures.
Provision for Loan Losses
Our provision for loan losses in each period is primarily driven by the level of allowance that we determine is necessary for probable incurred loan losses inherent in our loan portfolio as of each balance sheet date.
We recorded a benefit for loan losses of less than $1 million for both the current quarter and comparable prior-year quarter. The credit quality and performance statistics of our loan portfolio continued to remain strong. We had no payment defaults, charge-offs, delinquent loans or nonperforming loans in our loan portfolio during the current quarter or the comparable prior-year quarter.
We provide additional information on our allowance for loan losses under “Credit Risk—Allowance for Loan Losses” and “Note 5—Allowance for Loan Losses” of this report. For additional information on our allowance methodology, see “MD&A—Critical Accounting Policies and Estimates” and “Note 1—Summary of Significant Accounting Policies” in our
2018
Form 10-K.
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 results of operations of foreclosed assets.
Table
4
presents the components of non-interest income recorded in results of operations for the
three months ended August 31, 2018 and 2017
.
11
Table
4
: Non-Interest Income
|
|
Three Months Ended August 31,
|
|||||||
|
(Dollars in thousands)
|
2018
|
|
2017
|
|||||
|
Non-interest income:
|
||||||||
|
Fee and other income
|
$
|
3,185
|
|
$
|
3,945
|
|
||
|
Derivative gains (losses)
|
7,183
|
|
(46,198
|
)
|
||||
|
Results of operations of foreclosed assets
|
—
|
|
(24
|
)
|
||||
|
Total non-interest income
|
$
|
10,368
|
|
$
|
(42,277
|
)
|
||
The significant variances in non-interest income between periods were primarily attributable to changes in net derivative gains (losses) recognized in our consolidated statements of income.
Derivative Gains (Losses)
Our derivative instruments are an integral part of our interest rate risk management strategy. Our principal purpose in using derivatives is to manage our aggregate interest rate risk profile within prescribed risk parameters. The derivative instruments we use primarily include interest rate swaps, which we typically hold to maturity. In addition, we may on occasion use treasury locks to manage the interest rate risk associated with debt that is scheduled to reprice in the future. The primary factors affecting the fair value of our derivatives and derivative gains (losses) recorded in our results of operations include changes in interest rates, the shape of the swap curve and the composition of our derivative portfolio. We generally do not designate our interest rate swaps, which currently account for the substantial majority of our derivatives, for hedge accounting. Accordingly, changes in the fair value of interest rate swaps are reported in our consolidated statements of income under derivative gains (losses). However, we typically designate treasury locks as cash flow hedges. We entered into one treasury lock agreement, which was designated as a cash flow hedge of a forecasted transaction as of
August 31, 2018
and
May 31, 2018
.
We currently use two types of interest rate swap agreements: (i) we pay a fixed rate and receive a variable rate (“pay-fixed swaps”); and (ii) we pay a variable rate and receive a fixed rate (“receive-fixed swaps”). The benchmark variable rate for the substantial majority of the floating rate payments under our swap agreements is LIBOR. Table
5
displays the average notional amount outstanding, by swap agreement type, and the weighted-average interest rate paid and received for interest rate swap settlements during the
three months ended August 31, 2018 and 2017
. As indicated in Table
5
, our interest rate swap portfolio currently consists of a higher proportion of pay-fixed swaps than receive-fixed swaps. The profile of our interest rate swap portfolio, however, may change as a result of changes in market conditions and actions taken to manage exposure to interest rate risk.
Table
5
: Derivative Average Notional Amounts and Average Interest Rates
|
Three Months Ended August 31,
|
||||||||||||||||||||
|
|
2018
|
2017
|
||||||||||||||||||
|
(Dollars in thousands)
|
Average
Notional
Balance
|
Weighted-
Average
Rate Paid
|
Weighted-
Average
Rate Received
|
Average
Notional
Balance
|
Weighted-
Average
Rate Paid
|
Weighted-
Average
Rate Received
|
||||||||||||||
|
Pay-fixed swaps
|
$
|
7,194,857
|
|
2.69
|
%
|
2.24
|
%
|
$
|
6,955,697
|
|
2.84
|
%
|
1.27
|
%
|
||||||
|
Receive-fixed swaps
|
3,760,141
|
|
2.96
|
|
2.52
|
|
3,726,717
|
|
1.83
|
|
2.64
|
|
||||||||
|
Total
|
$
|
10,954,998
|
|
2.78
|
%
|
2.34
|
%
|
$
|
10,682,414
|
|
2.49
|
%
|
1.75
|
%
|
||||||
The average remaining maturity of our pay-fixed and receive-fixed swaps was 19 years and four years, respectively, as of both
August 31, 2018
and
2017
.
Pay-fixed swaps generally decrease in value as interest rates decline and increase in value as interest rates rise. In contrast, receive-fixed swaps generally increase in value as interest rates decline and decrease in value as interest rates rise. Because
12
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 or steepening—will result in differences in the fair value of our derivatives. The chart below provides comparative swap curves as of the end of
August 31, 2018
,
May 31, 2018
,
August 31, 2017
and May 31, 2017.
____________________________
Benchmark rates obtained from Bloomberg.
Table
6
presents the components of net derivative gains (losses) recorded in results of operations for the
three months ended August 31, 2018 and 2017
. Derivative cash settlements represent the net periodic contractual interest amount for our interest-rate swaps for 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.
Table
6
: Derivative Gains (Losses)
|
Three Months Ended August 31,
|
||||||||
|
(Dollars in thousands)
|
2018
|
2017
|
||||||
|
Derivative gains (losses) attributable to:
|
||||||||
|
Derivative cash settlements
|
$
|
(12,829
|
)
|
$
|
(20,222
|
)
|
||
|
Derivative forward value gains (losses)
|
20,012
|
|
(25,976
|
)
|
||||
|
Derivative gains (losses)
|
$
|
7,183
|
|
$
|
(46,198
|
)
|
||
The net derivative gains of
$7 million
in the current quarter were attributable to a
net increase in the fair value of our pay-fixed swaps
resulting from a slight increase in medium- and long-term interest rates, as depicted by the
August 31, 2018
swap curve presented in the above chart.
13
The net derivative losses of
$46 million
in the same prior-year quarter were due to a net decrease in the fair value of our interest rate swaps resulting from a modest flattening of the swap curve, as interest rates on the shorter end of the curve rose while medium and longer-term interest rates declined slightly, as depicted by the
May 31, 2017
and
August 31, 2017
swap curves presented in the above chart.
See “Note 9—Derivative Instruments and Hedging Activities” for additional information on our derivative instruments.
Non-Interest Expense
Non-interest expense consists of salaries and employee benefit expense, general and administrative expenses, losses on early extinguishment of debt and other miscellaneous expenses.
Table
7
presents the components of non-interest expense recorded in results of operations for the
three months ended August 31, 2018 and 2017
.
Table
7
: Non-Interest Expense
|
|
Three Months Ended August 31,
|
|||||||
|
(Dollars in thousands)
|
2018
|
2017
|
||||||
|
Non-interest expense:
|
||||||||
|
Salaries and employee benefits
|
$
|
(12,682
|
)
|
$
|
(11,823
|
)
|
||
|
Other general and administrative expenses
|
(10,523
|
)
|
(9,813
|
)
|
||||
|
Losses on early extinguishment of debt
|
(7,100
|
)
|
—
|
|
||||
|
Other non-interest expense
|
(394
|
)
|
(522
|
)
|
||||
|
Total non-interest expense
|
$
|
(30,699
|
)
|
$
|
(22,158
|
)
|
||
Non-interest expense of
$31 million
for the current quarter increased by
$9 million
, or
39%
, from the comparable prior-year quarter. The increase was largely due to the loss on early extinguishment of debt of $7 million, attributable to the premium paid for the early redemption of
$300 million
of the
$1 billion
collateral trust bonds, with a coupon rate of
10.375%
, that mature on November 1, 2018.
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 net income attributable to noncontrolling interests of less than $1 million for the current quarter. In comparison we recorded a net loss attributable to noncontrolling interests of less than $1 million for the same prior-year quarter.
|
|
Total assets of
$26,676 million
as of
August 31, 2018
decreased slightly by
$14 million
from
May 31, 2018
. Total liabilities of
$25,170 million
as of
August 31, 2018
decreased slightly by
$15 million
from
May 31, 2018
. Total equity of
$1,507 million
as of
August 31, 2018
remained relatively unchanged from
May 31, 2018
, as our reported net income of
$48 million
during the current quarter was offset by patronage capital retirement of
$48 million
in August 2018.
Following is a discussion of changes in the major components of our assets and liabilities during the
three months ended August 31, 2018
. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to manage liquidity requirements for the company and our customers and our market risk exposure in accordance with our risk appetite.
14
Loan Portfolio
We offer long-term fixed- and variable-rate loans and line of credit variable-rate loans. The substantial majority of loans in our portfolio represent advances under secured long-term facilities with terms up to 35 years. Borrowers have the option of selecting a fixed or variable interest rate for each advance for periods ranging from one year to the final maturity of the facility. Line of credit loans are typically revolving facilities and are generally unsecured.
Loans Outstanding
Table
8
summarizes loans to members, by loan type and by member class, as of
August 31, 2018 and May 31, 2018
. As indicated in Table
8
, long-term fixed-rate loans accounted for
90%
of loans to members as of both
August 31, 2018 and May 31, 2018
.
Table
8
: Loans Outstanding by Type and Member Class
|
August 31, 2018
|
May 31, 2018
|
|
||||||||||||||||
|
(Dollars in thousands)
|
Amount
|
% of Total
|
Amount
|
% of Total
|
Change
|
|||||||||||||
|
Loans by type:
|
||||||||||||||||||
|
Long-term loans:
|
|
|
|
|
|
|||||||||||||
|
Fixed-rate
|
$
|
22,682,597
|
|
90
|
%
|
$
|
22,696,185
|
|
90
|
%
|
$
|
(13,588
|
)
|
|||||
|
Variable-rate
|
1,111,679
|
|
5
|
|
1,039,491
|
|
4
|
|
72,188
|
|
||||||||
|
Total long-term loans
|
23,794,276
|
|
95
|
|
23,735,676
|
|
94
|
|
58,600
|
|
||||||||
|
Lines of credit
|
1,377,160
|
|
5
|
|
1,431,818
|
|
6
|
|
(54,658
|
)
|
||||||||
|
Total loans outstanding
|
25,171,436
|
|
100
|
|
25,167,494
|
|
100
|
|
3,942
|
|
||||||||
|
Deferred loan origination costs
|
|
11,218
|
|
|
—
|
|
|
11,114
|
|
|
—
|
|
|
104
|
|
|||
|
Loans to members
|
|
$
|
25,182,654
|
|
|
100
|
%
|
|
$
|
25,178,608
|
|
|
100
|
%
|
|
$
|
4,046
|
|
|
Loans by member class:
|
|
|
|
|
|
|||||||||||||
|
CFC:
|
|
|
|
|
|
|||||||||||||
|
Distribution
|
$
|
19,638,104
|
|
78
|
%
|
$
|
19,551,511
|
|
78
|
%
|
$
|
86,593
|
|
|||||
|
Power supply
|
4,320,866
|
|
18
|
|
4,397,353
|
|
18
|
|
(76,487
|
)
|
||||||||
|
Statewide and associate
|
72,959
|
|
—
|
|
69,055
|
|
—
|
|
3,904
|
|
||||||||
|
CFC total
|
24,031,929
|
|
96
|
|
24,017,919
|
|
96
|
|
14,010
|
|
||||||||
|
NCSC
|
780,892
|
|
3
|
|
786,457
|
|
3
|
|
(5,565
|
)
|
||||||||
|
RTFC
|
358,615
|
|
1
|
|
363,118
|
|
1
|
|
(4,503
|
)
|
||||||||
|
Total loans outstanding
|
25,171,436
|
|
100
|
|
25,167,494
|
|
100
|
|
3,942
|
|
||||||||
|
Deferred loan origination costs
|
11,218
|
|
—
|
|
11,114
|
|
—
|
|
104
|
|
||||||||
|
Loans to members
|
$
|
25,182,654
|
|
100
|
%
|
$
|
25,178,608
|
|
100
|
%
|
$
|
4,046
|
|
|||||
Loans to members totaled
$25,183 million
as of
August 31, 2018
, relatively unchanged from
May 31, 2018
. CFC distribution loans increased by
$87 million
, which was offset by decreases in CFC power supply loans, NCSC loans and RTFC loans of
$76 million
,
$6 million
and
$5 million
, respectively. Long-term loan advances totaled
$468 million
during the current quarter, with approximately
71%
of those advances for capital expenditures by members and
25%
for the refinancing of loans made by other lenders.
We provide ad
ditional information on our loan product types in
“Item 1. Business—Loan Programs
” and
“Note 4—Loans”
in our
2018
Form 10-K.
See “Debt—
Collateral Pledged
” below for information on encumbered and unencumbered loans and “Credit Risk Management” for information on the credit risk profile of our loan portfolio.
15
Loan Retention Rate
Table
9
presents a comparison between the historical retention rate of CFC’s long-term fixed-rate loans that repriced, in accordance with our standard loan provisions, during the
three months ended August 31, 2018
and loans that repriced during fiscal year 2018, and provides information on the percentage of loans that repriced to either another fixed-rate term or a variable rate. The retention rate is calculated based on the election made by the borrower at the repricing date. The average annual retention rate of CFC’s repriced loans has been 98% over the last three fiscal years.
Table
9
: Historical Retention Rate and Repricing Selection
(1)
|
Three Months Ended
|
Fiscal Year Ended
|
|||||||||||||
|
August 31, 2018
|
May 31, 2018
|
|||||||||||||
|
(Dollars in thousands)
|
Amount
|
% of Total
|
Amount
|
% of Total
|
||||||||||
|
Loans retained:
|
|
|
|
|
||||||||||
|
Long-term fixed rate selected
|
$
|
95,963
|
|
50
|
%
|
$
|
741,792
|
|
82
|
%
|
||||
|
Long-term variable rate selected
|
48,082
|
|
25
|
|
157,539
|
|
17
|
|
||||||
|
Total loans retained by CFC
|
144,045
|
|
75
|
|
899,331
|
|
99
|
|
||||||
|
Loans repaid
(2)
|
48,858
|
|
25
|
|
4,637
|
|
1
|
|
||||||
|
Total
|
$
|
192,903
|
|
100
|
%
|
$
|
903,968
|
|
100
|
%
|
||||
____________________________
(1)
Does not include NCSC and RTFC loans.
(2)
Includes loans totaling $1 million as of
May 31, 2018
that were converted to new loans at the repricing date and transferred to a third party as part of our direct loan sale program. See “Note 4—Loans” for information on our sale of loans.
Debt
We utilize both short-term borrowings and long-term debt as part of our funding strategy and asset/liability interest rate risk management. We seek to maintain diversified funding sources across products, programs and markets to manage funding concentrations and reduce our liquidity or debt rollover risk. Our funding sources include a variety of secured and unsecured debt securities in a wide range of maturities to our members and affiliates and in the capital markets.
Debt Outstanding
Table
10
displays the composition, by product type, of our outstanding debt as of
August 31, 2018 and May 31, 2018
. Table
10
also displays the composition of our debt based on several additional selected attributes.
16
Table
10
: Total Debt Outstanding
|
(Dollars in thousands)
|
August 31, 2018
|
May 31, 2018
|
Change
|
|||||||||
|
Debt product type:
|
||||||||||||
|
Commercial paper:
|
||||||||||||
|
Members, at par
|
$
|
1,286,441
|
|
$
|
1,202,105
|
|
$
|
84,336
|
|
|||
|
Dealer, net of discounts
|
929,380
|
|
1,064,266
|
|
(134,886
|
)
|
||||||
|
Total commercial paper
|
2,215,821
|
|
2,266,371
|
|
(50,550
|
)
|
||||||
|
Select notes to members
|
799,240
|
|
780,472
|
|
18,768
|
|
||||||
|
Daily liquidity fund notes to members
|
535,090
|
|
400,635
|
|
134,455
|
|
||||||
|
Medium-term notes:
|
|
|
||||||||||
|
Members, at par
|
631,733
|
|
643,821
|
|
(12,088
|
)
|
||||||
|
Dealer, net of discounts
|
3,294,200
|
|
3,002,979
|
|
291,221
|
|
||||||
|
Total medium-term notes
|
3,925,933
|
|
3,646,800
|
|
279,133
|
|
||||||
|
Collateral trust bonds
|
7,343,569
|
|
7,639,093
|
|
(295,524
|
)
|
||||||
|
Guaranteed Underwriter Program notes payable
|
4,840,976
|
|
4,856,143
|
|
(15,167
|
)
|
||||||
|
Farmer Mac notes payable
|
2,777,532
|
|
2,891,496
|
|
(113,964
|
)
|
||||||
|
Other notes payable
|
29,907
|
|
29,860
|
|
47
|
|
||||||
|
Subordinated deferrable debt
|
742,445
|
|
742,410
|
|
35
|
|
||||||
|
Members’ subordinated certificates:
|
||||||||||||
|
Membership subordinated certificates
|
630,448
|
|
630,448
|
|
—
|
|
||||||
|
Loan and guarantee subordinated certificates
|
526,479
|
|
528,386
|
|
(1,907
|
)
|
||||||
|
Member capital securities
|
221,170
|
|
221,148
|
|
22
|
|
||||||
|
Total members’ subordinated certificates
|
1,378,097
|
|
1,379,982
|
|
(1,885
|
)
|
||||||
|
Total debt outstanding
|
$
|
24,588,610
|
|
$
|
24,633,262
|
|
|
$
|
(44,652
|
)
|
||
|
Security type:
|
||||||||||||
|
Unsecured debt
|
39
|
%
|
37
|
%
|
||||||||
|
Secured debt
|
61
|
|
63
|
|
||||||||
|
Total
|
100
|
%
|
100
|
%
|
||||||||
|
Funding source:
|
||||||||||||
|
Members
|
19
|
%
|
18
|
%
|
||||||||
|
Private placement:
|
||||||||||||
|
Guaranteed Underwriter Program notes payable
|
20
|
|
20
|
|
||||||||
|
Farmer Mac notes payable
|
11
|
|
12
|
|
||||||||
|
Total private placement
|
31
|
|
32
|
|
||||||||
|
Capital markets
|
50
|
|
50
|
|
||||||||
|
Total
|
100
|
%
|
100
|
%
|
||||||||
|
Interest rate type:
|
||||||||||||
|
Fixed-rate debt
|
73
|
%
|
74
|
%
|
||||||||
|
Variable-rate debt
|
27
|
|
26
|
|
||||||||
|
Total
|
100
|
%
|
100
|
%
|
||||||||
|
Interest rate type, including the impact of swaps:
|
||||||||||||
|
Fixed-rate debt
(1)
|
88
|
%
|
87
|
%
|
||||||||
|
Variable-rate debt
(2)
|
12
|
|
13
|
|
||||||||
|
Total
|
100
|
%
|
100
|
%
|
||||||||
|
Maturity classification:
(3)
|
||||||||||||
|
Short-term borrowings
|
15
|
%
|
15
|
%
|
||||||||
|
Long-term and subordinated debt
(4)
|
85
|
|
85
|
|
||||||||
|
Total
|
100
|
%
|
100
|
%
|
||||||||
____________________________
17
(1)
Includes variable-rate debt that has been swapped to a fixed rate, net of any fixed-rate debt that has been swapped to a variable rate.
(2)
Includes fixed-rate debt that has been swapped to a variable rate, net of any variable-rate debt that has been swapped to a fixed rate. Also includes commercial paper notes, which generally have maturities of less than 90 days. The interest rate on commercial paper notes does not change once the note has been issued; however, the interest rate for new commercial paper issuances changes daily.
(3)
Borrowings with an original contractual maturity of one year or less are classified as short-term borrowings. Borrowings with an original contractual maturity of greater than one year are classified as long-term debt.
(4)
Consists of long-term debt, subordinated deferrable debt and total members’ subordinated debt reported on the condensed consolidated balance sheets. Maturity classification is based on the original contractual maturity as of the date of issuance of the debt.
Our outstanding debt volume generally increases and decreases in response to member loan demand. Total debt outstanding was
$24,589 million
as of
August 31, 2018
, relatively unchanged from
May 31, 2018
, as loans to members also remained relatively flat. Decreases in collateral trust bonds, dealer commercial paper and Farmer Mac notes payable of
$296 million
,
$135 million
and
$114 million
, respectively, were largely offset by an increase in dealer medium-term notes of
$291 million
and a combined increase in member commercial paper, select notes and daily liquidity fund notes of
$238 million
.
We had outstanding collateral trust bonds of $1 billion aggregate principal amount with a coupon rate of 10.375% due November 1, 2018. On July 12, 2018, we redeemed
$300 million
of these bonds, leaving a remaining outstanding principal amount of
$700 million
as of
August 31, 2018
.
Member Investments
Debt securities issued to our members represent an important, stable source of funding. Table
11
displays outstanding member debt, by debt product type, as of
August 31, 2018 and May 31, 2018
.
Table
11
: Member Investments
|
|
August 31, 2018
|
May 31, 2018
|
Change
|
|||||||||||||||
|
(Dollars in thousands)
|
Amount
|
% of Total
(1)
|
Amount
|
% of Total
(1)
|
||||||||||||||
|
Commercial paper
|
$
|
1,286,441
|
|
58
|
%
|
$
|
1,202,105
|
|
53
|
%
|
$
|
84,336
|
|
|||||
|
Select notes
|
799,240
|
|
100
|
|
780,472
|
|
100
|
|
18,768
|
|
||||||||
|
Daily liquidity fund notes
|
535,090
|
|
100
|
|
400,635
|
|
100
|
|
134,455
|
|
||||||||
|
Medium-term notes
|
631,733
|
|
16
|
|
643,821
|
|
18
|
|
(12,088
|
)
|
||||||||
|
Members’ subordinated certificates
|
1,378,097
|
|
100
|
|
1,379,982
|
|
100
|
|
(1,885
|
)
|
||||||||
|
Total outstanding member debt
|
$
|
4,630,601
|
|
|
$
|
4,407,015
|
|
|
$
|
223,586
|
|
|||||||
|
Percentage of total debt outstanding
|
19
|
%
|
|
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 accounted for
19%
and
18%
of total debt outstanding as of
August 31, 2018 and May 31, 2018
, respectively. Over the last three fiscal years, outstanding member investments have averaged $4,366 million on a quarterly basis.
Short-Term Borrowings
Short-term borrowings consist of borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. Short-term borrowings totaled
$3,793 million
and accounted for
15%
of total debt outstanding as of
August 31, 2018
, compared with
$3,796 million
, or
15%
, of total debt outstanding as of
May 31, 2018
. See “Liquidity Risk” below and for “Note 6—Short-Term Borrowings” for information on the composition of our short-term borrowings.
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
18
under our note purchase agreement with Farmer Mac. Subordinated debt consists of subordinated deferrable debt and members’ subordinated certificates. Our subordinated deferrable debt and members’ subordinated certificates have original contractual maturity terms of greater than one year.
Long-term and subordinated debt totaled
$20,795 million
and accounted for
85%
of total debt outstanding as of
August 31, 2018
, compared with
$20,837 million
, or
85%
, of total debt outstanding as of
May 31, 2018
. 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 borrowing transactions under our collateral trust bond indentures, note purchase agreements with Farmer Mac and bond agreements under the Guaranteed Underwriter Program. We are required to maintain pledged collateral equal to at least 100% of the face amount of outstanding borrowings. However, we typically maintain pledged collateral in excess of the required percentage to ensure that required collateral levels are maintained and to facilitate the timely execution of debt issuances by reducing or eliminating the lead time to pledge additional collateral. Under the provisions of our committed bank revolving line of credit agreements, the excess collateral that we are allowed to pledge cannot exceed 150% of the outstanding borrowings under our collateral trust bond indentures, Farmer Mac note purchase agreements or the Guaranteed Underwriter Program. In certain cases, provided that all conditions of eligibility under the different programs are satisfied, we may withdraw excess pledged collateral or transfer collateral from one borrowing program to another to facilitate a new debt issuance.
Table
12
displays the collateral coverage ratios as of
August 31, 2018 and May 31, 2018
for the debt agreements noted above that require us to pledge collateral.
Table
12
: Collateral Pledged
|
|
Requirement/Limit
|
|||||||||||
|
Debt Indenture
Minimum
|
Committed Bank Revolving Line of Credit Agreements
Maximum
|
Actual
(1)
|
||||||||||
|
Debt Agreement
|
August 31, 2018
|
May 31, 2018
|
||||||||||
|
Collateral trust bonds 1994 indenture
|
100
|
%
|
150
|
%
|
109
|
%
|
111
|
%
|
||||
|
Collateral trust bonds 2007 indenture
|
100
|
|
150
|
|
115
|
|
114
|
|
||||
|
Guaranteed Underwriter Program notes payable
|
100
|
|
150
|
|
115
|
|
119
|
|
||||
|
Farmer Mac notes payable
|
100
|
|
150
|
|
115
|
|
115
|
|
||||
|
Clean Renewable Energy Bonds Series 2009A
|
100
|
|
150
|
|
105
|
|
109
|
|
||||
____________________________
(1)
Calculated based on the amount of collateral pledged divided by the face amount of outstanding secured debt.
Of our total debt outstanding of
$24,589 million
as of
August 31, 2018
,
$14,973 million
, or
61%
, was secured by pledged loans totaling
$17,550 million
. In comparison, of our total debt outstanding of
$24,633 million
as of
May 31, 2018
,
$15,398 million
, or
63%
, was secured by pledged loans totaling
$18,145 million
. Total debt outstanding on our condensed consolidated balance sheet is presented net of unamortized discounts and issuance costs. However, our collateral pledging requirements are based on the face amount of secured outstanding debt, which does not take into consideration the impact of 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
August 31, 2018 and May 31, 2018
.
19
Table
13
: Unencumbered Loans
|
(Dollars in thousands)
|
August 31, 2018
|
May 31, 2018
|
||||||
|
Total loans outstanding
(1)
|
$
|
25,171,436
|
|
$
|
25,167,494
|
|
||
|
Less: Loans required to be pledged for secured debt
(2)
|
(15,247,775
|
)
|
(15,677,138
|
)
|
||||
|
Loans pledged in excess of requirement
(2)(3)
|
(2,302,414
|
)
|
(2,467,444
|
)
|
||||
|
Total pledged loans
|
(17,550,189
|
)
|
(18,144,582
|
)
|
||||
|
Unencumbered loans
|
$
|
7,621,247
|
|
$
|
7,022,912
|
|
||
|
Unencumbered loans as a percentage of total loans
|
30
|
%
|
28
|
%
|
||||
____________________________
(1)
Represents the unpaid principal amount of loans as of the end of each period presented and excludes unamortized deferred loan origination costs of
$11 million
as of both
August 31, 2018 and May 31, 2018
.
(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
$2,302 million
and
$2,467 million
as of
August 31, 2018 and May 31, 2018
, respectively. We typically pledge loans in excess of the required amount for the following reasons: (i) our distribution and power supply loans are typically amortizing loans that require scheduled principal payments over the life of the loan, whereas the debt securities issued under secured indentures and agreements typically have bullet maturities; (ii) distribution and power supply borrowers have the option to prepay their loans; and (iii) individual loans may become ineligible for various reasons, some of which may be temporary.
We provide additional information on our borrowings, including the maturity profile, below in “Liquidity Risk.” Refer to “Note 4—Loans—Pledging of Loans” for additional information related to pledged collateral. Also refer to “Note 5—Short-Term Borrowings,” “Note 6—Long-Term Debt,” “Note 7—Subordinated Deferrable Debt” and “Note 8—Members’ Subordinated Certificates” in our
2018
Form 10-K for a more detailed description of each of our debt product types.
Equity
Total equity of
$1,507 million
as of
August 31, 2018
remained relatively unchanged from May 31, 2018, as our reported net income of
$48 million
for the current quarter was offset by the patronage capital retirement of
$48 million
in August 2018.
In July
2018
, the CFC Board of Directors authorized the allocation of fiscal year
2018
adjusted net income as follows:
$95 million
to members in the form of patronage capital;
$57 million
to the members’ capital reserve; and
$1 million
to the cooperative educational fund. The amount of patronage capital allocated each year by CFC’s Board of Directors is based on adjusted non-GAAP net income, which excludes the impact of derivative forward value gains (losses). See “Non-GAAP Financial Measures” for information on adjusted net income.
In July
2018
, the CFC Board of Directors also authorized the retirement of patronage capital totaling
$48 million
, which represented
50%
of the patronage capital allocation for fiscal year
2018
. This amount was returned to members in cash in August 2018. The remaining portion of the allocated amount will be retained by CFC for 25 years under 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
39
of the last
40
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
2018
Form 10-K for additional information.
20
|
OFF-BALANCE SHEET ARRANGEMENTS
|
In the ordinary course of business, we engage in financial transactions that are not presented on our condensed consolidated balance sheets, or may be recorded on our condensed consolidated balance sheets in amounts that are different from the full contract or notional amount of the transaction. Our off-balance sheet arrangements consist primarily of guarantees of member obligations and unadvanced loan commitments intended to meet the financial needs of our members.
Guarantees
We provide guarantees for certain contractual obligations of our members to assist them in obtaining various forms of financing. We use the same credit policies and monitoring procedures in providing guarantees as we do for loans and commitments. If a member defaults on its obligation, we are obligated to pay required amounts pursuant to our guarantees. Meeting our guarantee obligations satisfies the underlying obligation of our member systems and prevents the exercise of remedies by the guarantee beneficiary based upon a payment default by a member. In general, the member is required to repay any amount advanced by us with accrued interest, pursuant to the documents evidencing the member’s reimbursement obligation. Table
14
displays the notional amount of our outstanding guarantee obligations, by guarantee type and by company, as of
August 31, 2018 and May 31, 2018
.
Table
14
: Guarantees Outstanding
|
(Dollars in thousands)
|
August 31, 2018
|
May 31, 2018
|
Change
|
|||||||||
|
Guarantee type:
|
|
|
|
|||||||||
|
Long-term tax-exempt bonds
|
$
|
316,385
|
|
$
|
316,985
|
|
$
|
(600
|
)
|
|||
|
Letters of credit
|
316,731
|
|
343,970
|
|
(27,239
|
)
|
||||||
|
Other guarantees
|
143,571
|
|
144,206
|
|
(635
|
)
|
||||||
|
Total
|
$
|
776,687
|
|
$
|
805,161
|
|
$
|
(28,474
|
)
|
|||
|
Company:
|
|
|
|
|
||||||||
|
CFC
|
$
|
762,908
|
|
$
|
793,156
|
|
$
|
(30,248
|
)
|
|||
|
NCSC
|
12,205
|
|
10,431
|
|
1,774
|
|
||||||
|
RTFC
|
1,574
|
|
1,574
|
|
—
|
|
||||||
|
Total
|
$
|
776,687
|
|
$
|
805,161
|
|
$
|
(28,474
|
)
|
|||
Of the total notional amount of our outstanding guarantee obligations of
$777 million
and
$805 million
as of
August 31, 2018 and May 31, 2018
, respectively, 59% and 57%, 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
$316 million
as of
August 31, 2018
, we also were the liquidity provider on
$249 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
three months ended August 31, 2018
or the prior fiscal year.
We had outstanding letters of credit for the benefit of our members totaling
$317 million
as of
August 31, 2018
. 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
August 31, 2018
, under which we may be required to issue letters of credit to third parties for the benefit of our members up to an additional
$67 million
as of
August 31, 2018
. All of our master letter of credit facilities as of
August 31, 2018
were subject to material adverse change clauses at the time of issuance. Prior to issuing a letter of credit under these
21
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
15
presents the maturities for each of the next five fiscal years and thereafter of the notional amount of our outstanding guarantee obligations as of
August 31, 2018
.
Table
15
: Maturities of Guarantee Obligations
|
|
Outstanding
Amount |
Maturities of Guarantee Obligations
|
||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2019
|
2020
|
2021
|
2022
|
2023
|
Thereafter
|
||||||||||||||||||||||
|
Guarantees
|
$
|
776,687
|
|
$
|
187,100
|
|
$
|
113,103
|
|
$
|
121,756
|
|
$
|
27,650
|
|
$
|
162,499
|
|
$
|
164,579
|
|
|||||||
We recorded a guarantee liability of
$10 million
and
$11 million
as of
August 31, 2018 and May 31, 2018
, respectively, 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
16
displays the amount of unadvanced loan commitments, which consist of line of credit and long-term loan commitments, as of
August 31, 2018 and May 31, 2018
.
Table
16
: Unadvanced Loan Commitments
|
August 31, 2018
|
May 31, 2018
|
|||||||||||||||||
|
(Dollars in thousands)
|
Amount
|
% of Total
|
Amount
|
% of Total
|
Change
|
|||||||||||||
|
Line of credit commitments:
|
||||||||||||||||||
|
Conditional
(1)
|
$
|
4,858,370
|
|
37
|
%
|
$
|
4,835,434
|
|
38
|
%
|
$
|
22,936
|
|
|||||
|
Unconditional
(2)
|
2,946,596
|
|
23
|
|
2,857,350
|
|
23
|
|
89,246
|
|
||||||||
|
Total line of credit unadvanced commitments
|
7,804,966
|
|
|
60
|
|
7,692,784
|
|
61
|
|
112,182
|
|
|||||||
|
Total long-term loan unadvanced commitments
(1)
|
5,103,629
|
|
|
40
|
|
4,952,834
|
|
39
|
|
150,795
|
|
|||||||
|
Total unadvanced loan commitments
|
$
|
12,908,595
|
|
|
100
|
%
|
$
|
12,645,618
|
|
100
|
%
|
$
|
262,977
|
|
||||
____________________________
(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
17
presents the amount of unadvanced loan commitments, by loan type, as of
August 31, 2018
and the maturities of the commitment amounts for each of the next five fiscal years and thereafter.
Table
17
: Notional Maturities of Unadvanced Loan Commitments
|
|
Available
Balance
|
Notional Maturities of Unadvanced Loan Commitments
|
||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2019
|
2020
|
2021
|
2022
|
2023
|
Thereafter
|
||||||||||||||||||||||
|
Line of credit loans
|
$
|
7,804,966
|
|
$
|
504,426
|
|
$
|
4,144,522
|
|
$
|
889,426
|
|
$
|
860,833
|
|
$
|
1,304,869
|
|
$
|
100,890
|
|
|||||||
|
Long-term loans
|
5,103,629
|
|
732,028
|
|
556,221
|
|
620,100
|
|
1,652,454
|
|
1,224,865
|
|
317,961
|
|
||||||||||||||
|
Total
|
$
|
12,908,595
|
|
$
|
1,236,454
|
|
$
|
4,700,743
|
|
$
|
1,509,526
|
|
$
|
2,513,287
|
|
$
|
2,529,734
|
|
$
|
418,851
|
|
|||||||
22
Unadvanced line of credit commitments accounted for
60%
of total unadvanced loan commitments as of
August 31, 2018
, while unadvanced long-term loan commitments accounted for
40%
of total unadvanced loan commitments. Unadvanced line of credit commitments are typically revolving facilities for periods not to exceed five years. Unadvanced line of credit commitments generally serve as supplemental back-up liquidity to our borrowers. Historically, borrowers have not drawn the full commitment amount for line of credit facilities, and we have experienced a very low utilization rate on line of credit loan facilities regardless of whether or not we are obligated to fund the facility where a material adverse change exists. Our unadvanced long-term loan commitments have a five-year draw period under which a borrower may advance funds prior to the expiration of the commitment. We expect that the majority of the long-term unadvanced loan commitments of
$5,104 million
will be advanced prior to the expiration of the commitment.
Because we historically have experienced a very low utilization rate on line of credit loan facilities, which account for the majority of our total unadvanced loan commitments, we believe the unadvanced loan commitment total of
$12,909 million
as of
August 31, 2018
is not necessarily representative of our future funding requirements.
Unadvanced Loan Commitments—Conditional
The substantial majority of our line of credit commitments and all our unadvanced long-term loan commitments include material adverse change clauses. Unadvanced loan commitments subject to material adverse change clauses totaled
$9,962 million
and
$9,789 million
as of
August 31, 2018 and May 31, 2018
, respectively, and accounted for
77%
of the combined total of unadvanced line of credit and long-term loan commitments as of both
August 31, 2018 and May 31, 2018
. Prior to making advances on these facilities, we confirm that there has been no material adverse change in the borrower’s business or condition, financial or otherwise, since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. In some cases, the borrower’s access to the full amount of the facility is further constrained by use of proceeds restrictions, imposition of borrower-specific restrictions, or by additional conditions that must be met prior to advancing funds. Since we generally do not charge a fee for the borrower to have an unadvanced amount on a loan facility that is subject to a material adverse change clause, our borrowers tend to request amounts in excess of their immediate estimated loan requirements.
Unadvanced Loan Commitments—Unconditional
Unadvanced loan commitments not subject to material adverse change clauses at the time of each advance consisted of unadvanced committed lines of credit totaling
$2,947 million
and
$2,857 million
as of
August 31, 2018 and May 31, 2018
, 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 86% of unconditional line of credit commitments as of
August 31, 2018
. The remaining 14% represented unconditional committed line of credit loans, which under any new advance would be made at rates determined by us.
Table
18
presents the maturities for each of the next five fiscal years and thereafter of the notional amount of unconditional committed lines of credit not subject to a material adverse change clause as of
August 31, 2018
.
Table
18
: Maturities of Notional Amount of Unconditional Committed Lines of Credit
|
|
Available
Balance
|
Notional Maturities of Unconditional Committed Lines of Credit
|
||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2019
|
2020
|
2021
|
2022
|
2023
|
Thereafter
|
||||||||||||||||||||||
|
Committed lines of credit
|
$
|
2,946,596
|
|
$
|
218,571
|
|
$
|
458,236
|
|
$
|
454,348
|
|
$
|
609,513
|
|
$
|
1,147,488
|
|
$
|
58,440
|
|
|||||||
See “MD&A—Off-Balance Sheet Arrangements” in our
2018
Form 10-K for additional information on our off-balance sheet arrangements.
23
|
RISK MANAGEMENT
|
Overview
We face a variety of risks that can significantly affect our financial performance, liquidity, reputation and ability to meet the expectations of our members, investors and other stakeholders. As a financial services company, the major categories of risk exposures inherent in our business activities include credit risk, liquidity risk, market risk and operational risk. These risk categories are summarized below.
|
•
|
Credit risk
is the risk that a borrower or other counterparty will be unable to meet its obligations in accordance with agreed-upon terms.
|
|
•
|
Liquidity risk
is the risk that we will be unable to fund our operations and meet our contractual obligations or that we will be unable to fund new loans to borrowers at a reasonable cost and tenor in a timely manner.
|
|
•
|
Market risk
is the risk that changes in market variables, such as movements in interest rates, may adversely affect the match between the timing of the contractual maturities, re-pricing and prepayments of our financial assets and the related financial liabilities funding those assets.
|
|
•
|
Operational risk
is the risk of loss resulting from inadequate or failed internal controls, processes, systems, human error or external events. Operational risk also includes compliance risk, fiduciary risk, reputational risk and litigation risk.
|
Effective risk management is critical to our overall operations and to achieving our primary objective of providing cost-based financial products to our rural electric members while maintaining the sound financial results required for investment-grade credit ratings on our rated debt instruments. Accordingly, we have a risk-management framework that is intended to govern the principal risks we face in conducting our business and the aggregate amount of risk we are willing to accept, referred to as risk appetite, in the context of CFC’s mission and strategic objectives and initiatives. We provide information on our risk management framework in our
2018
Form 10-K under “Item 7. MD&A—Risk Management—Risk Management Framework.”
|
CREDIT RISK
|
Our loan portfolio, which represents the largest component of assets on our balance sheet, and guarantees account for the substantial majority of our credit risk exposure. We also engage in certain non-lending activities that may give rise to credit and counterparty settlement risk, including the purchase of investment securities and entering into derivative transactions to manage interest rate risk. Our primary credit exposure is to rural electric cooperatives that provide essential electric services to end-users, the majority of which are residential customers. We also have a limited portfolio of loans to not-for-profit and for-profit telecommunication companies. We provide a discussion of our credit risk management processes and activities in our
2018
Form 10-K under “Item 7. MD&A—Credit Risk—Credit Risk Management.”
Loan and Guarantee Portfolio Credit Risk
Below we provide information on the credit risk profile of our loan portfolio and guarantees, including security provisions, loan concentration, credit performance and our allowance for loan losses.
Security Provisions
Except when providing line of credit loans, we generally lend to our members on a senior secured basis. Long-term loans are generally secured on parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower with exceptions typical in utility mortgages. Line of credit loans are generally unsecured. In addition to the collateral pledged to secure our loans, distribution and power supply borrowers also are required to set rates charged to customers to achieve certain specified financial ratios.
24
Table
19
presents, by loan type and by company, the amount and percentage of secured and unsecured loans in our loan portfolio as of
August 31, 2018 and May 31, 2018
. Of our total loans outstanding,
93%
were secured and
7%
were unsecured as of both
August 31, 2018
and
May 31, 2018
.
Table
19
: Loan Portfolio Security Profile
|
August 31, 2018
|
||||||||||||||||||
|
(Dollars in thousands)
|
Secured
|
% of Total
|
Unsecured
|
% of Total
|
Total
|
|||||||||||||
|
Loan type:
|
||||||||||||||||||
|
Long-term loans:
|
||||||||||||||||||
|
Long-term fixed-rate loans
|
$
|
22,226,067
|
|
98
|
%
|
$
|
456,530
|
|
2
|
%
|
$
|
22,682,597
|
|
|||||
|
Long-term variable-rate loans
|
1,100,584
|
|
99
|
|
11,095
|
|
1
|
|
1,111,679
|
|
||||||||
|
Total long-term loans
|
23,326,651
|
|
98
|
|
467,625
|
|
2
|
|
23,794,276
|
|
||||||||
|
Line of credit loans
|
80,510
|
|
6
|
|
1,296,650
|
|
94
|
|
1,377,160
|
|
||||||||
|
Total loans outstanding
(1)
|
$
|
23,407,161
|
|
93
|
|
$
|
1,764,275
|
|
7
|
|
$
|
25,171,436
|
|
|||||
|
Company:
|
|
|
|
|
||||||||||||||
|
CFC
|
$
|
22,363,216
|
|
93
|
%
|
$
|
1,668,713
|
|
7
|
%
|
$
|
24,031,929
|
|
|||||
|
NCSC
|
700,593
|
|
90
|
|
80,299
|
|
10
|
|
780,892
|
|
||||||||
|
RTFC
|
343,352
|
|
96
|
|
15,263
|
|
4
|
|
358,615
|
|
||||||||
|
Total loans outstanding
(1)
|
$
|
23,407,161
|
|
93
|
|
$
|
1,764,275
|
|
7
|
|
$
|
25,171,436
|
|
|||||
|
May 31, 2018
|
||||||||||||||||||
|
(Dollars in thousands)
|
Secured
|
% of Total
|
Unsecured
|
% of Total
|
Total
|
|||||||||||||
|
Loan type:
|
||||||||||||||||||
|
Long-term loans:
|
||||||||||||||||||
|
Long-term fixed-rate loans
|
$
|
22,220,087
|
|
98
|
%
|
$
|
476,098
|
|
2
|
%
|
$
|
22,696,185
|
|
|||||
|
Long-term variable-rate loans
|
996,970
|
|
96
|
|
42,521
|
|
4
|
|
1,039,491
|
|
||||||||
|
Total long-term loans
|
23,217,057
|
|
98
|
|
518,619
|
|
2
|
|
23,735,676
|
|
||||||||
|
Line of credit loans
|
69,097
|
|
5
|
|
1,362,721
|
|
95
|
|
1,431,818
|
|
||||||||
|
Total loans outstanding
(1)
|
$
|
23,286,154
|
|
93
|
|
$
|
1,881,340
|
|
7
|
|
$
|
25,167,494
|
|
|||||
|
Company:
|
|
|
|
|
||||||||||||||
|
CFC
|
$
|
22,233,592
|
|
93
|
%
|
$
|
1,784,327
|
|
7
|
%
|
$
|
24,017,919
|
|
|||||
|
NCSC
|
703,396
|
|
89
|
|
83,061
|
|
11
|
|
786,457
|
|
||||||||
|
RTFC
|
349,166
|
|
96
|
|
13,952
|
|
4
|
|
363,118
|
|
||||||||
|
Total loans outstanding
(1)
|
$
|
23,286,154
|
|
93
|
|
$
|
1,881,340
|
|
7
|
|
$
|
25,167,494
|
|
|||||
____________________________
(1)
Represents the unpaid principal amount of loans as of the end of each period presented and excludes deferred loan origination costs of
$11 million
as of both
August 31, 2018 and May 31, 2018
.
As part of our strategy in managing our credit risk exposure, we entered into a long-term standby purchase commitment agreement with Farmer Mac in fiscal year 2016. Under this agreement, we may designate certain loans to be covered under the commitment, as approved 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 outstanding principal balance of loans covered under this agreement totaled
$651 million
as of
August 31, 2018
, compared with
$660 million
as of
May 31, 2018
. 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 loans totaled
$159 million
and
$161 million
as of
August 31, 2018
and
May 31, 2018
, respectively.
25
Credit Concentration
Concentrations may exist when there are amounts loaned to borrowers engaged in similar activities or in geographic areas that would cause them to be similarly impacted by economic or other conditions or when there are large exposures to single borrowers. As a tax-exempt, member-owned finance cooperative, CFC’s principal focus is to provide funding to its rural electric utility cooperative members to assist them in acquiring, constructing and operating electric distribution, power supply systems and related facilities. Because we lend primarily to our rural electric utility cooperative members, we have a loan portfolio subject to single-industry and single-obligor concentrations. Outstanding loans to electric utility organizations represented approximately
99%
of our total outstanding loan portfolio as of
August 31, 2018
, unchanged from
May 31, 2018
. 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 and its territories, including all
50
states, the District of Columbia, American Samoa and Guam. Our consolidated membership totaled
1,449
members and
216
associates as of
August 31, 2018
. Texas had the largest concentration of outstanding loans to borrowers in any one state, with approximately
15%
of total loans outstanding as of both
August 31, 2018 and May 31, 2018
.
Single-Obligor Concentration
Table
20
displays the combined exposure of loans and guarantees of the 20 largest borrowers, by exposure type and by company, as of
August 31, 2018
and
May 31, 2018
. The 20 borrowers with the largest exposure consisted of
nine
distribution systems,
10
power supply systems and
one
NCSC associate member as of both
August 31, 2018 and May 31, 2018
. The largest total outstanding exposure to a single borrower or controlled group represented approximately
2%
of total loans and guarantees outstanding as of both
August 31, 2018 and May 31, 2018
.
Table
20
: Credit Exposure to 20 Largest Borrowers
|
|
August 31, 2018
|
May 31, 2018
|
Change
|
|||||||||||||||
|
(Dollars in thousands)
|
Amount
|
% of Total
|
Amount
|
% of Total
|
||||||||||||||
|
By exposure type:
|
|
|
|
|
|
|||||||||||||
|
Loans
|
$
|
5,541,193
|
|
22
|
%
|
$
|
5,613,991
|
|
22
|
%
|
$
|
(72,798
|
)
|
|||||
|
Guarantees
|
343,229
|
|
1
|
|
347,138
|
|
1
|
|
(3,909
|
)
|
||||||||
|
Total exposure to 20 largest borrowers
|
5,884,422
|
|
23
|
|
5,961,129
|
|
23
|
|
(76,707
|
)
|
||||||||
|
Less: Loans covered under Farmer Mac standby purchase commitment
|
(351,325
|
)
|
(1
|
)
|
(354,694
|
)
|
(1
|
)
|
3,369
|
|
||||||||
|
Net exposure to 20 largest borrowers
|
$
|
5,533,097
|
|
22
|
%
|
$
|
5,606,435
|
|
22
|
%
|
$
|
(73,338
|
)
|
|||||
|
By company:
|
|
|
|
|
|
|||||||||||||
|
CFC
|
$
|
5,628,880
|
|
22
|
%
|
$
|
5,703,723
|
|
22
|
%
|
$
|
(74,843
|
)
|
|||||
|
NCSC
|
255,542
|
|
1
|
|
257,406
|
|
1
|
|
(1,864
|
)
|
||||||||
|
Total exposure to 20 largest borrowers
|
5,884,422
|
|
23
|
|
5,961,129
|
|
23
|
|
(76,707
|
)
|
||||||||
|
Less: Loans covered under Farmer Mac standby purchase commitment
|
(351,325
|
)
|
(1
|
)
|
(354,694
|
)
|
(1
|
)
|
3,369
|
|
||||||||
|
Net exposure to 20 largest borrowers
|
$
|
5,533,097
|
|
22
|
%
|
$
|
5,606,435
|
|
22
|
%
|
$
|
(73,338
|
)
|
|||||
Although CFC has been exposed to single-industry and single-obligor concentrations since inception in 1969, we historically have experienced limited defaults and very low credit losses in our electric loan portfolio. The likelihood of default and loss for our electric cooperative borrowers, which account for the substantial majority of our outstanding loans, has been low due to several factors. First, as discussed above, we generally lend to our members on a senior secured basis. Second, 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. Third, electric cooperatives face limited competition, as they tend to operate in exclusive territories not serviced by public investor-owned utilities. Fourth, the majority 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. Finally, they tend to adhere to a conservative
26
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.
Credit Quality
Assessing the overall credit quality of our loan portfolio and measuring our credit risk is an ongoing process that involves tracking payment status, the internal risk ratings of our borrowers, troubled debt restructurings, nonperforming and impaired loans, charge-offs 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. Internal risk ratings and payment status trends are indicators, among others, of the probability of borrower default and level of credit risk in our loan portfolio.
The overall credit quality of our loan portfolio remained high, as evidenced by our strong asset performance metrics, including low levels of criticized exposure. We generally lend to members on a senior secured basis, which reduces the risk of loss in the event of a borrower default. As displayed in Table
19
above,
93%
of our total outstanding loans were secured as of both
August 31, 2018 and May 31, 2018
. We had no delinquent or nonperforming loans as of
August 31, 2018 and May 31, 2018
. In addition, we had no loan defaults or charge-offs during the current quarter.
Borrower Risk Ratings
Our borrower risk ratings are intended to align with banking regulatory agency credit risk rating definitions of pass and criticized classifications, with loans classified as criticized further classified as special mention, substandard or doubtful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default. Loans with borrowers classified as criticized totaled
$186 million
, or
0.7%
, of total loans outstanding as of
August 31, 2018
. Of this amount,
$179 million
, was classified as substandard. In comparison, loans with borrowers classified as criticized totaled
$178 million
, or
0.7%
, of total loans outstanding as of
May 31, 2018
. Of this amount,
$171 million
was classified as substandard. We did not have any loans classified as doubtful as of
August 31, 2018
or May 31, 2018. See “Note 4—Loans” for a description of each of the risk rating classifications.
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 placed on nonaccrual status, although in many cases such loans were already on nonaccrual status prior to modification. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against earnings. These loans may be returned to performing status and the accrual of interest resumed if the borrower performs under the modified terms for an extended period of time, and we expect the borrower to continue to perform in accordance with the modified terms. In certain limited circumstances in which a TDR loan is current at the modification date, the loan may remain on accrual status at the time of modification.
Table
21
presents the carrying value of loans modified as TDRs and the performance status as of
August 31, 2018 and May 31, 2018
. Our last modification of a loan that met the definition of a TDR occurred in fiscal year 2017. Although TDR loans may be returned to performing status if the borrower performs under the modified terms of the loan for an extended period of time, TDR loans are considered individually impaired.
27
Table
21
: Troubled Debt Restructured Loans
|
August 31, 2018
|
May 31, 2018
|
|||||||||||||
|
(Dollars in thousands)
|
Carrying Amount
|
% of Total Loans Outstanding
|
Carrying Amount
|
% of Total Loans Outstanding
|
||||||||||
|
TDR loans:
|
||||||||||||||
|
CFC
|
$
|
6,261
|
|
0.03
|
%
|
$
|
6,507
|
|
0.03
|
%
|
||||
|
RTFC
|
5,967
|
|
0.02
|
|
6,092
|
|
0.02
|
|
||||||
|
Total TDR loans
|
$
|
12,228
|
|
0.05
|
%
|
$
|
12,599
|
|
0.05
|
%
|
||||
|
Performance status of TDR loans:
|
||||||||||||||
|
Performing TDR loans
|
$
|
12,228
|
|
0.05
|
%
|
$
|
12,599
|
|
0.05
|
%
|
||||
As indicated in Table
21
above, we did not have any TDR loans classified as nonperforming as of
August 31, 2018
or
May 31, 2018
.
Nonperforming Loans
In addition to TDR loans that may be classified as nonperforming, we also may have nonperforming loans that have not been modified as a TDR loan. We classify such loans as nonperforming at the earlier of the date when we determine: (i) interest or principal payments on the loan is past due 90 days or more; (ii) as a result of court proceedings, the collection of interest or principal payments based on the original contractual terms is not expected; or (iii) the full and timely collection of interest or principal is otherwise uncertain. Once a loan is classified as nonperforming, we generally place the loan on nonaccrual status. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against earnings. We had no loans classified as nonperforming as of
August 31, 2018
or
May 31, 2018
.
Net Charge-Offs
Charge-offs represent the amount of a loan that has been removed from our consolidated balance sheet when the loan is deemed uncollectible. Generally the amount of a charge-off is the recorded investment in excess of the fair value of the expected cash flows from the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral securing the loan. We report charge-offs net of amounts recovered on previously charged off loans. We had no loan defaults or charge-offs during the
three months ended August 31, 2018 and 2017
.
Historical Loan Losses
In its 49-year history, CFC has experienced only 16 defaults and cumulative net charge-offs totaling $86 million for the 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 Concentration.”
In comparison, since RTFC’s inception in 1987, we have had 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.
Outstanding loans to electric utility organizations totaled
$24,813 million
and accounted for
99%
of our total outstanding loan portfolio as of
August 31, 2018
, while outstanding RTFC telecommunications loans totaled
$359 million
and accounted for
1%
of our total outstanding loan portfolio as of
August 31, 2018
.
We provide additional information on the credit quality of our loan portfolio in “Note 4—Loans.”
28
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of probable losses inherent in our loan portfolio as of each balance sheet date. We determine the allowance based on borrower risk ratings, historical loss experience, specific problem loans, economic conditions and other pertinent factors that, in management’s judgment, may affect the risk of loss in our loan portfolio.
Table
22
summarizes changes in the allowance for loan losses for the
three months ended August 31, 2018 and 2017
, and provides a comparison of the allowance by company as of
August 31, 2018 and May 31, 2018
.
Table
22
: Allowance for Loan Losses
|
Three Months Ended August 31,
|
||||||||
|
(Dollars in thousands)
|
2018
|
2017
|
||||||
|
Beginning balance
|
$
|
18,801
|
|
$
|
37,376
|
|
||
|
Benefit for loan losses
|
(109
|
)
|
(298
|
)
|
||||
|
Ending balance
|
$
|
18,692
|
|
$
|
37,078
|
|
||
|
August 31, 2018
|
May 31, 2018
|
|||||||
|
Allowance for loan losses by company:
|
|
|||||||
|
CFC
|
$
|
12,508
|
|
$
|
12,300
|
|
||
|
NCSC
|
2,012
|
|
2,082
|
|
||||
|
RTFC
|
4,172
|
|
4,419
|
|
||||
|
Total
|
$
|
18,692
|
|
$
|
18,801
|
|
||
|
Allowance coverage ratios:
|
||||||||
|
Total loans outstanding
(1)
|
$
|
25,171,436
|
|
$
|
25,167,494
|
|
||
|
Percentage of total loans outstanding
|
0.07
|
%
|
0.07
|
%
|
||||
____________________________
(1)
Represents the unpaid principal amount of loans as of the end of each period presented and excludes unamortized deferred loan origination costs of
$11 million
as of both
August 31, 2018 and May 31, 2018
.
Our allowance for loan losses was
$19 million
as of
August 31, 2018
, relatively unchanged from
May 31, 2018
, with an allowance coverage ratio of
0.07%
as of both
August 31, 2018
and
May 31, 2018
. We had no loans classified as nonperforming as of
August 31, 2018
or
May 31, 2018
. We experienced no charge-offs during the
three months ended August 31, 2018 and 2017
. Loans designated as individually impaired totaled
$12 million
and
$13 million
as of
August 31, 2018 and May 31, 2018
, respectively, and the specific allowance related to those loans totaled
$1 million
as of both
August 31, 2018 and May 31, 2018
.
See “MD&A—Critical Accounting Policies and Estimates—Allowance for Loan Losses” and “Note 1—Summary of Significant Accounting Policies” in our
2018
Form 10-K for additional information on the methodology for determining our allowance for loan losses and the key assumptions. See “Note 4—Loans” of this report for additional information on the credit quality of our loan portfolio.
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.
29
We manage our derivative counterparty credit risk by requiring that derivative counterparties participate in one of our committed bank revolving line of credit agreements; 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. Our derivative counterparties had credit ratings ranging from Aa2 to Baa2 by Moody’s Investors Service (“Moody’s”) and from AA- to BBB+ by S&P Global Inc. (“S&P”) as of
August 31, 2018
. 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, 2018 and May 31, 2018
.
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 and S&P were A2 and A, respectively, as of
August 31, 2018
. Both Moody’s and S&P had our ratings on stable outlook as of
August 31, 2018
. Table
23
displays the notional amounts of our derivative contracts with rating triggers as of
August 31, 2018
, and the payments that would be required if the contracts were terminated as of that date because of a
downgrade of our unsecured credit ratings or the counterparty’s unsecured credit ratings below A3/A-, below Baa1/BBB+, to or below Baa2/BBB, below Baa3/BBB-, or to or below Ba2/BB+ by Moody’s or S&P,
respectively. In calculating the payment amounts that would be required upon termination of the derivative contracts, we assumed that the amounts for each counterparty would be netted in accordance with the provisions of the counterparty's master netting agreements. The net payment amounts are based on the fair value of the underlying derivative instrument, excluding the credit risk valuation adjustment, plus any unpaid accrued interest amounts.
Table
23
: Rating Triggers for Derivatives
|
(Dollars in thousands)
|
Notional
Amount
|
Payable Due From CFC
|
Receivable Due to CFC
|
Net (Payable)/Receivable
|
||||||||||||
|
Impact of rating downgrade trigger:
|
|
|
|
|
||||||||||||
|
Falls below A3/A-
(1)
|
$
|
54,890
|
|
$
|
(8,767
|
)
|
$
|
—
|
|
$
|
(8,767
|
)
|
||||
|
Falls below Baa1/BBB+
|
7,355,092
|
|
(53,994
|
)
|
44,183
|
|
(9,811
|
)
|
||||||||
|
Falls to or below Baa2/BBB
(2)
|
528,919
|
|
—
|
|
5,012
|
|
5,012
|
|
||||||||
|
Falls below Baa3/BBB-
|
255,641
|
|
(10,523
|
)
|
—
|
|
(10,523
|
)
|
||||||||
|
Total
|
$
|
8,194,542
|
|
$
|
(73,284
|
)
|
$
|
49,195
|
|
$
|
(24,089
|
)
|
||||
____________________________
(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 outstanding notional amount of derivatives with one counterparty subject to a ratings trigger and early termination provision in the event of a downgrade of CFC’s senior unsecured credit ratings below Baa3, BBB- or BBB- by Moody’s, S&P or
Fitch Ratings Inc. (“Fitch”)
, respectively, which is not included in the above table, totaling
$265 million
as of
August 31, 2018
. These contracts were in an unrealized loss position of
$3 million
as of
August 31, 2018
.
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
$75 million
as of
August 31, 2018
. There were no counterparties that fell below the rating trigger levels in our interest swap contracts as of
August 31, 2018
. 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 prematurely because our interest rate swaps are critical to our matched funding strategy to mitigate interest rate risk.
See “Item 1A. Risk Factors” in our
2018
Form 10-K for additional information about credit risk related to our business.
30
|
LIQUIDITY RISK
|
We define liquidity as the ability to convert assets to cash quickly and efficiently, maintain access to readily available funding and rollover or issue new debt, under both normal operating conditions and periods of CFC-specific and/or market stress, to ensure that we can meet borrower loan requests, pay current and future obligations and fund our operations on a cost-effective basis. Our primary sources of liquidity include cash flows from operations, member loan repayments, committed bank revolving lines of credit, committed loan facilities under the Guaranteed Underwriter Program, revolving note purchase agreements with Farmer Mac and our ability to issue debt in the capital markets, to our members and in private placements. We provide a discussion of our liquidity risk-management framework and activities undertaken to manage liquidity risk in our
2018
Form 10-K under “Item 7. MD&A—Liquidity Risk—Liquidity Risk Management.”
Available Liquidity
As part of our strategy in managing liquidity risk and meeting our liquidity objectives, we seek to maintain a substantial level of on-balance sheet and off-balance sheet sources of liquidity that are readily available for access to meet our near-term liquidity needs. Table
24
presents the sources of our available liquidity as of
August 31, 2018
, compared with
May 31, 2018
.
Table
24
: Available Liquidity
|
August 31, 2018
|
May 31, 2018
|
|||||||||||||||||||||||
|
(Dollars in millions)
|
Total
|
Accessed
|
Available
|
Total
|
Accessed
|
Available
|
||||||||||||||||||
|
Cash and cash equivalents
|
$
|
266
|
|
$
|
—
|
|
$
|
266
|
|
$
|
231
|
|
$
|
—
|
|
$
|
231
|
|
||||||
|
Committed bank revolving line of credit agreements—unsecured
(1)
|
3,085
|
|
3
|
|
3,082
|
|
3,085
|
|
3
|
|
3,082
|
|
||||||||||||
|
Guaranteed Underwriter Program committed facilities—secured
(2)
|
6,548
|
|
5,323
|
|
1,225
|
|
6,548
|
|
5,323
|
|
1,225
|
|
||||||||||||
|
Farmer Mac revolving note purchase agreement, dated March 24, 2011, as amended—secured
(3)
|
5,200
|
|
2,778
|
|
2,422
|
|
5,200
|
|
2,791
|
|
2,409
|
|
||||||||||||
|
Farmer Mac revolving note purchase agreement, dated July 31, 2015, as amended—secured
|
300
|
|
—
|
|
300
|
|
300
|
|
100
|
|
200
|
|
||||||||||||
|
Total
|
$
|
15,399
|
|
$
|
8,104
|
|
$
|
7,295
|
|
$
|
15,364
|
|
$
|
8,217
|
|
$
|
7,147
|
|
||||||
(1)
The committed bank revolving line of credit agreements consist of a three-year and a five-year line of credit agreement. The accessed amount of
$3 million
as of
August 31, 2018 and May 31, 2018
, relates to letters of credit issued pursuant to the five-year line of credit agreement.
(2)
The committed facilities under the Guaranteed Underwriter Program are not revolving.
(3)
Availability subject to market conditions.
We believe we have sufficient liquidity from the available on- and off-balance sheet liquidity sources presented above in Table 24 and our ability to issue debt to meet demand for member loan advances and satisfy our obligations to repay long-term debt maturing over the next 12 months.
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, committed loan facilities under the Guaranteed Underwriter Program and our revolving note purchase agreements with Farmer Mac.
Committed Bank Revolving Line of Credit Agreements—Unsecured
Our committed bank revolving lines of credit may be used for general corporate purposes; however, we generally rely on them as a backup source of liquidity for our member and dealer commercial paper. We had
$3,085 million
of commitments under committed bank revolving line of credit agreements as of
August 31, 2018
. Under our current committed bank
31
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
25
presents the total commitment, the net amount available for use and the outstanding letters of credit under our committed bank revolving line of credit agreements as of
August 31, 2018
. We did not have any outstanding borrowings under our bank revolving line of credit agreements as of
August 31, 2018
.
Table
25
: Committed Bank Revolving Line of Credit Agreements
|
August 31, 2018
|
|
|
||||||||||||||
|
(Dollars in millions)
|
Total Commitment
|
Letters of Credit Outstanding
|
Net Available for Advance
|
Maturity
|
Annual Facility Fee
(1)
|
|||||||||||
|
3-year agreement
|
$
|
1,492
|
|
$
|
—
|
|
$
|
1,492
|
|
November 20, 2020
|
7.5 bps
|
|||||
|
5-year agreement
|
1,593
|
|
3
|
|
1,590
|
|
November 20, 2022
|
10 bps
|
||||||||
|
Total
|
$
|
3,085
|
|
$
|
3
|
|
$
|
3,082
|
|
|
|
|||||
____________________________
(1)
Facility fee based on CFC’s senior unsecured credit ratings in accordance with the established pricing schedules at the inception of the related agreement.
Our committed bank revolving line of credit agreements do not contain a material adverse change clause or rating triggers that would limit the banks’ obligations to provide funding under the terms of the agreements; however, we must be in compliance with the covenants to draw on the facilities. We have been and expect to continue to be in compliance with the covenants under our committed bank revolving line of credit agreements. As such, we could draw on these facilities to repay dealer or member commercial paper that cannot be rolled over. See “Financial Ratios and Debt Covenants” below for additional information, including the specific financial ratio requirements under our committed bank revolving line of credit agreements.
Guaranteed Underwriter Program Committed Facilities—Secured
Under the Guaranteed Underwriter Program, we can borrow from the Federal Financing Bank and use the proceeds to refinance existing indebtedness. As part of the program, we pay fees, based on outstanding borrowings, that support the USDA Rural Economic Development Loan and Grant program. The borrowings under this program are guaranteed by RUS.
The amount available for access under the Guaranteed Underwriter Program was
$1,225 million
as of
August 31, 2018
. Of this amount, $100 million is available for advance through January 15, 2019, $375 million is available for advance through October 15, 2019 and $750 million is available through July 15, 2022. On August 17, 2018, we executed a commitment letter for the guarantee by RUS of a
$750 million
loan facility from the Federal Financing Bank under the Guaranteed Underwriter Program. The amount available for access under the Guaranteed Underwriter Program, based on amounts advanced to us as of
August 31, 2018
, will increase to
$1,975 million
upon closing of the facility.
We are required to pledge eligible distribution system 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 Agreements—Secured
As indicated in Table
24
, we have two revolving note purchase agreements with Farmer Mac, which together allow us to borrow up to
$5,500 million
from Farmer Mac. On February 26, 2018, we amended our first revolving note purchase agreement with Farmer Mac, dated March 24, 2011. Under the amended agreement, we can borrow, subject to market conditions, up to
$5,200 million
at any time through January 11, 2022, and such date shall automatically extend on each anniversary date of the closing for an additional year, unless prior to any such anniversary date, Farmer Mac provides us with a notice that the draw period will not be extended beyond the remaining term. This revolving note purchase agreement allows us to borrow, repay and re-borrow funds at any time through maturity, as market conditions permit, provided that the outstanding principal amount at any time does not exceed the total available under the agreement. Each borrowing under the note purchase agreement is evidenced by a pricing agreement setting forth the interest rate, maturity date and other related
32
terms as we may negotiate with Farmer Mac at the time of each such borrowing. We may select a fixed rate or variable rate at the time of each advance with a maturity as determined in the applicable pricing agreement. We had outstanding secured notes payable totaling
$2,778 million
and
$2,791 million
as of
August 31, 2018 and May 31, 2018
, respectively, under the Farmer Mac revolving note purchase agreement of
$5,200 million
. The available borrowing amount totaled
$2,422 million
as of
August 31, 2018
.
Our second revolving note purchase agreement with Farmer Mac, dated July 31, 2015, was amended effective July 31, 2018, to extend the maturity to December 20, 2023. Prior to the maturity date, Farmer Mac may terminate the agreement upon 30 days written notice to us on periodic facility renewal dates, the first of which is January 31, 2019. Subsequent facility renewal dates are on each June 20 or December 20 thereafter until the maturity date. We may terminate the agreement upon 30 days written notice at any time. Under the terms of the first revolving note purchase agreement with Farmer Mac described above, the
$5,200 million
commitment will increase to
$5,500 million
in the event the second revolving note purchase agreement is terminated. Under the terms of the amended second revolving note purchase agreement with Farmer Mac, we can borrow up to
$300 million
at any time through December 20, 2023 at a fixed spread over LIBOR. This agreement also allows us to borrow, repay and re-borrow funds at any time through maturity, provided that the outstanding principal amount at any time does not exceed the total available under the agreement. We had no outstanding notes payable under this agreement as of
August 31, 2018
. We had outstanding borrowings of $100 million as of
May 31, 2018
under this revolving note purchase agreement with Farmer Mac.
Pursuant to both Farmer Mac revolving note purchase agreements, 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. See “Consolidated Balance Sheet Analysis—Debt—Collateral Pledged” and “Note 4—Loans” for additional information on pledged collateral.
Short-Term Borrowings and Long-Term and Subordinated Debt
A
dditional funding is provided by short-term borrowings and issuances of long-term and subordinated debt. We rely on short-term borrowings as a
source to meet
our daily, near-term funding needs.
Long-term and subordinated debt represents the most significant component of our funding. The issuance of long-term debt allows us to reduce our reliance on short-term borrowings and effectively manage our refinancing and interest rate risk.
Short-Term Borrowings
Our short-term borrowings consist of commercial paper, which we offer to members and dealers, select notes and daily liquidity fund notes offered to members, and bank-bid notes and medium-term notes offered to members and dealers.
Table
26
displays the composition, by funding source, of our short-term borrowings as of
August 31, 2018
and
May 31, 2018
. Member borrowings accounted for
75%
of total short-term borrowings as of
August 31, 2018
, compared with
69%
of total short-term borrowings as of
May 31, 2018
.
Table
26
: Short-Term Borrowings
—
Funding Sources
|
August 31, 2018
|
May 31, 2018
|
|||||||||||||
|
(Dollars in thousands)
|
Amount
Outstanding
|
% of Total Short-Term Borrowings
|
Amount
Outstanding |
% of Total Short-Term Borrowings
|
||||||||||
|
Funding source:
|
||||||||||||||
|
Members
|
$
|
2,863,756
|
|
75
|
%
|
$
|
2,631,644
|
|
69
|
%
|
||||
|
Capital markets
|
929,380
|
|
25
|
|
1,164,266
|
|
31
|
|
||||||
|
Total
|
$
|
3,793,136
|
|
100
|
%
|
$
|
3,795,910
|
|
100
|
%
|
||||
33
Table
27
displays the composition, by product type, of our short-term borrowings
as of
August 31, 2018 and May 31, 2018
.
Table
27
: Short-Term Borrowings
|
August 31, 2018
|
May 31, 2018
|
|||||||||||||
|
(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
|
$
|
929,380
|
|
4
|
%
|
$
|
1,064,266
|
|
4
|
%
|
||||
|
Commercial paper to members, at par
|
1,286,441
|
|
5
|
|
1,202,105
|
|
5
|
|
||||||
|
Total commercial paper
|
2,215,821
|
|
9
|
|
2,266,371
|
|
9
|
|
||||||
|
Select notes to members
|
799,240
|
|
3
|
|
780,472
|
|
3
|
|
||||||
|
Daily liquidity fund notes to members
|
535,090
|
|
2
|
|
400,635
|
|
2
|
|
||||||
|
Medium-term notes to members
|
242,985
|
|
1
|
|
248,432
|
|
1
|
|
||||||
|
Farmer Mac revolving facility
|
—
|
|
—
|
|
100,000
|
|
—
|
|
||||||
|
Total short-term borrowings
|
$
|
3,793,136
|
|
15
|
%
|
$
|
3,795,910
|
|
15
|
%
|
||||
Our short-term borrowings of
$3,793 million
as of
August 31, 2018
remained at a level consistent with short-term borrowings as of
May 31, 2018
. 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 of
$929 million
and
$1,064 million
as of
August 31, 2018
and
May 31, 2018
, respectively, was below our maximum threshold of $1,250 million.
Long-Term and Subordinated 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.” See “Item 7. MD&A—Liquidity Risk” in our
2018
Form 10-K for additional information on our shelf registration statements with the SEC.
As discussed in
“
Consolidated Balance Sheet Analysis—Debt,
”
l
ong-term and subordinated debt totaled
$20,795 million
and accounted for
85%
of total debt outstanding as of
August 31, 2018
, almost unchanged from
$20,837 million
, or
85%
, of total debt outstanding as of
May 31, 2018
. Table
28
summarizes long-term and subordinated debt issuances and repayments during the
three months ended August 31, 2018
.
Table
28
: Issuances and Repayments of Long-Term and Subordinated Debt
(1)
|
Three Months Ended August 31, 2018
|
||||||||||||
|
(Dollars in thousands)
|
Issuances
|
Repayments
(2)
|
Change
|
|||||||||
|
Long-term and subordinated debt activity:
|
|
|
||||||||||
|
Collateral trust bonds
|
$
|
—
|
|
$
|
300,000
|
|
$
|
(300,000
|
)
|
|||
|
Guaranteed Underwriter Program notes payable
|
—
|
|
15,399
|
|
(15,399
|
)
|
||||||
|
Farmer Mac notes payable
|
—
|
|
13,965
|
|
(13,965
|
)
|
||||||
|
Medium-term notes sold to members
|
48,388
|
|
55,029
|
|
(6,641
|
)
|
||||||
|
Medium-term notes sold to dealers
|
301,639
|
|
10,892
|
|
290,747
|
|
||||||
|
Members’ subordinated certificates
|
471
|
|
2,378
|
|
(1,907
|
)
|
||||||
|
Total
|
$
|
350,498
|
|
$
|
397,663
|
|
$
|
(47,165
|
)
|
|||
____________________________
(1)
Amounts exclude unamortized debt issuance costs and discounts.
(2)
Repayments include principal maturities, scheduled amortization payments, repurchases and redemptions.
34
Table
29
summarizes the scheduled amortization of the principal amount of long-term debt, subordinated deferrable debt and members’ subordinated certificates as of
August 31, 2018
.
Table
29
: Principal Maturity of Long-Term and Subordinated Debt
|
(Dollars in thousands)
|
Amount
Maturing
(1)
|
% of Total
|
|||||
|
Fiscal year ending:
|
|||||||
|
May 31, 2019
|
$
|
2,369,725
|
|
12
|
%
|
||
|
May 31, 2020
|
1,518,406
|
|
7
|
|
|||
|
May 31, 2021
|
1,793,683
|
|
9
|
|
|||
|
May 31, 2022
|
1,891,835
|
|
9
|
|
|||
|
May 31, 2023
|
1,148,293
|
|
5
|
|
|||
|
Thereafter
|
12,073,212
|
|
58
|
|
|||
|
Total
|
$
|
20,795,154
|
|
100
|
%
|
||
____________________________
(1)
Excludes $0.3 million in subscribed and unissued member subordinated certificates for which a payment has been received. Member loan subordinated certificates totaling $273 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.”
Investment Portfolio
In addition to our primary sources of liquidity discussed above, we have an investment portfolio composed of equity securities and held-to-maturity debt securities.
We intend for our investment portfolio,
which totaled
$642 million
and
$710 million
as of
August 31, 2018 and May 31, 2018
, respectively,
to remain adequately liquid to serve as a contingent supplemental source of liquidity for unanticipated liquidity needs.
Pursuant to our investment policy and guidelines, all fixed-income debt securities, at the time of purchase, must be rated at least investment grade and on stable outlook based on external credit ratings from at least two of the leading global credit rating agencies, when available, or the corresponding equivalent, when not available. Securities rated investment grade, that is those rated Baa3 or higher by Moody’s or BBB- or higher by S&P or BBB- or higher by Fitch, are generally considered by the rating agencies to be of lower credit risk than non-investment grade securities. We have the positive intent and ability to hold these securities to maturity. As such, we have classified them as held to maturity on our condensed consolidated balance sheet.
Our investment portfolio is unencumbered and structured so that securities have active secondary or resale markets under normal market conditions. The objective of the portfolio is to achieve returns
commensurate with the level of risk assumed subject to CFC’s investment policy and guidelines and liquidity requirements.
We provide additional information on our investment securities in “Note 3—Investment Securities.”
Projected Near-Term Sources and Uses of Liquidity
As discussed above, our primary sources of liquidity include cash flows from operations, member loan repayments, committed bank revolving lines of credit, committed loan facilities, short-term borrowings and funds from the issuance of long-term and subordinated debt. Our primary uses of liquidity include loan advances to members, principal and interest payments on borrowings, periodic settlement payments related to derivative contracts, and operating expenses.
Table
30
below displays our projected sources and uses of cash, by quarter, over the next six quarters through the quarter ending
February 29, 2020
. Our projected liquidity position reflects our current plan to expand our investment portfolio. Our assumptions also include the following: (i) the estimated issuance of long-term debt, including collateral trust bonds and private placement of term debt, is based on maintaining a matched funding position within our loan portfolio with our bank revolving lines of credit serving as a backup liquidity facility for commercial paper and on maintaining outstanding dealer commercial paper at an amount below $1,250 million; (ii) long-term loan scheduled amortization payments represent the
35
scheduled long-term loan payments for loans outstanding as of
August 31, 2018
, and our current estimate of long-term loan prepayments, which the amount and timing of are subject to change; (iii) other loan repayments and other loan advances primarily relate to line of credit repayments and advances; (iv) long-term debt maturities reflect scheduled maturities of outstanding term debt for the periods presented; and (v) long-term loan advances reflect our current estimate of member demand for loans, the amount and timing of which are subject to change.
Table
30
: Projected Sources and Uses of Liquidity
(1)
|
|
Projected Sources of Liquidity
|
Projected Uses of Liquidity
|
||||||||||||||||||||||||||||||
|
(Dollars in millions)
|
Long-Term Debt Issuance
|
Anticipated Long-Term
Loan Repayments (2) |
Other Loan Repayments
(3)
|
Total Projected
Sources of Liquidity |
Long-Term Debt Maturities
(4)
|
Long-Term
Loan Advances |
Total Projected
Uses of Liquidity |
Other Sources/ (Uses) of Liquidity
(5)
|
||||||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||
|
2Q FY 2019
|
$
|
1,000
|
|
$
|
340
|
|
$
|
—
|
|
$
|
1,340
|
|
$
|
1,299
|
|
$
|
403
|
|
$
|
1,702
|
|
$
|
277
|
|
||||||||
|
3Q FY 2019
|
1,050
|
|
300
|
|
55
|
|
1,405
|
|
777
|
|
585
|
|
1,362
|
|
(48
|
)
|
||||||||||||||||
|
4Q FY 2019
|
650
|
|
284
|
|
—
|
|
934
|
|
506
|
|
296
|
|
802
|
|
(228
|
)
|
||||||||||||||||
|
1Q FY 2020
|
270
|
|
328
|
|
—
|
|
598
|
|
238
|
|
305
|
|
543
|
|
(40
|
)
|
||||||||||||||||
|
2Q FY 2020
|
670
|
|
340
|
|
—
|
|
1,010
|
|
685
|
|
438
|
|
1,123
|
|
68
|
|
||||||||||||||||
|
3Q FY 2020
|
620
|
|
308
|
|
—
|
|
928
|
|
566
|
|
438
|
|
1,004
|
|
55
|
|
||||||||||||||||
|
Total
|
$
|
4,260
|
|
$
|
1,900
|
|
$
|
55
|
|
$
|
6,215
|
|
$
|
4,071
|
|
$
|
2,465
|
|
$
|
6,536
|
|
$
|
84
|
|
||||||||
____________________________
(1)
The dates presented represent the end of each quarterly period through the quarter ending
February 29, 2020
.
(2)
Anticipated long-term loan repayments include scheduled long-term loan amortizations, anticipated cash repayments at repricing date and sales.
(3)
Other loan repayments include anticipated short-term loan repayments.
(4)
Long-term debt maturities also include medium-term notes with an original maturity of one year or less and expected early redemptions of debt.
(5)
Includes net increase or decrease to dealer commercial paper, and purchases and maturity of investments.
As displayed in Table
30
, we currently project long-term advances of
$1,589 million
over the next 12 months, which we anticipate will exceed anticipated loan repayments over the same period of
$1,252 million
by approximately
$337 million
. The estimates presented above are developed at a particular point in time based on our expected future business growth and funding. Our actual results and future estimates may vary, perhaps significantly, from the current projections, as a result of changes in market conditions, management actions or other factors.
Credit Ratings
Our funding and liquidity, borrowing capacity, ability to access capital markets and other sources of funds and the cost of these funds are partially dependent on our credit ratings.
Rating agencies base their ratings on numerous factors, including liquidity, capital adequacy, industry position, member support, management, asset quality, quality of earnings and the probability of systemic support. Significant changes in these factors could result in different ratings. Table
31
displays our credit ratings as of
August 31, 2018
, which were unchanged as of the date of the filing of this Report.
Table
31
: Credit Ratings
|
August 31, 2018
|
||||||
|
Moody’s
|
S&P
|
Fitch
|
||||
|
Long-term issuer credit rating
(1)
|
A2
|
A
|
A
|
|||
|
Senior secured debt
(2)
|
A1
|
A
|
A+
|
|||
|
Senior unsecured debt
(3)
|
A2
|
A
|
A
|
|||
|
Subordinated debt
|
A3
|
BBB+
|
BBB+
|
|||
|
Commercial paper
|
P-1
|
A-1
|
F1
|
|||
|
Outlook
|
Stable
|
Stable
|
Stable
|
|||
___________________________
(1)
Based on our senior unsecured debt rating.
(2)
Applies to our collateral trust bonds.
36
(3)
Applies to our medium-term notes.
During fiscal year 2018, Moody’s and S&P affirmed our ratings and outlook. On October 1, 2018, Fitch affirmed our ratings and outlook. In order to access the commercial paper markets at attractive rates, we believe we need to maintain our current commercial paper credit ratings of P-1 by Moody’s, A-1 by S&P and F1 by Fitch. In addition, the notes payable to the Federal Financing Bank and guaranteed by RUS under the Guaranteed Underwriter Program contain a provision that if during any portion of the fiscal year, our senior secured credit ratings do not have at least two of the following ratings: (i) A3 or higher from Moody’s, (ii) A- or higher from S&P, (iii) A- or higher from Fitch or (iv) an equivalent rating from a successor rating agency to any of the above rating agencies, we may not make cash patronage capital distributions in excess of 5% of total patronage capital. See “Credit Risk—Counterparty Credit Risk—Credit Risk-Related Contingent Features” above for information on credit rating provisions related to our derivative contracts.
Financial Ratios
Our debt-to-equity ratio decreased slightly to
16.71
-to-1 as of
August 31, 2018
, from
16.72
-to-1 as of
May 31, 2018
, primarily due to a decline in liabilities as equity remained relatively unchanged. In July 2018, the CFC Board of Directors authorized the allocation of patronage capital of $95 million for fiscal year 2018 and the retirement of 50% of this amount, or
$48 million
, which was returned to members in August 2018. The increase in equity from our reported net income of
$48 million
for the current quarter was offset by the retirement of patronage capital.
Our adjusted debt-to-equity ratio increased to
6.21
-to-1 as of
August 31, 2018
, from
6.18
-to-1 as of
May 31, 2018
, due to the decrease in adjusted equity resulting from the CFC Board of Directors authorization in the current quarter to retire patronage capital of
$48 million
. We provide a reconciliation of our adjusted debt-to-equity ratio to the most comparable GAAP measure and an explanation of the adjustments below in “Non-GAAP Financial Measures.”
Debt Covenants
As part of our short-term and long-term borrowing arrangements, we are subject to various financial and operational covenants. If we fail to maintain specified financial ratios, such failure could constitute a default by CFC of certain debt covenants under our committed bank revolving line of credit agreements and senior debt indentures. We were in compliance with all covenants and conditions under our committed bank revolving line of credit agreements and senior debt indentures as of
August 31, 2018
.
As discussed above in “Summary of Selected Financial Data,” the financial covenants set forth in our committed bank revolving line of credit agreements and senior debt indentures are based on adjusted financial measures, including adjusted TIER. We provide a reconciliation of adjusted TIER and other non-GAAP measures disclosed in this report to the most comparable GAAP measures and an explanation of the adjustments below in “Non-GAAP Financial Measures.”
|
MARKET RISK
|
Interest rate risk represents our primary source of market risk. Interest rate risk is the risk to current or anticipated earnings or equity arising primarily from movements in interest rates. This risk results from differences between the timing of cash flows on our assets and the liabilities funding those assets. The timing of cash flows of our assets is impacted by re-pricing characteristics, prepayments and contractual maturities. Our interest rate risk exposure is primarily related to the funding of the fixed-rate loan portfolio. We provide a discussion of how we manage interest rate risk in our
2018
Form 10-K under “Item 7. MD&A—Market Risk—Market Risk Management.”
Matched Funding Objective
Our funding objective is to manage the matched funding of asset and liability repricing terms within a range of adjusted total assets (calculated by excluding derivative assets from total assets) deemed appropriate by the Asset Liability Committee based on the current environment and extended outlook for interest rates. We refer to the difference between fixed-rate loans scheduled for amortization or repricing and the fixed-rate liabilities and equity funding those loans as our interest rate gap. Our primary strategies for managing our interest rate risk include the use of derivatives and limiting the amount of fixed-rate assets that can be funded by variable-rate debt to a specified percentage of adjusted total assets based on market conditions.
37
We provide our members with many options on loans with regard to interest rates, the term for which the selected interest rate is in effect and the ability to convert or prepay the loan. Long-term loans generally have maturities of up to 35 years. Borrowers may select fixed interest rates for periods of one year through the life of the loan. We do not match fund the majority of our fixed-rate loans with a specific debt issuance at the time the loans are advanced. We fund the amount of fixed-rate assets that exceed fixed-rate debt and members’ equity with short-term debt, primarily commercial paper.
Interest Rate Gap Analysis
To monitor and mitigate interest rate risk in the funding of fixed-rate loans, we perform a monthly interest rate gap analysis that provides a comparison between fixed-rate assets repricing or maturing by year and fixed-rate liabilities and members’ equity maturing by year.
We maintain an unmatched position on our fixed-rate assets within a targeted range of adjusted total assets. The limited unmatched position is intended to provide flexibility to ensure that we are able to match the current maturing portion of long-term fixed-rate loans based on maturity date and the opportunity in the current low interest rate environment to increase the gross yield on our fixed rate assets without taking what we would consider to be excessive risk.
Table
32
displays the scheduled amortization and repricing of fixed-rate assets and liabilities outstanding as of
August 31, 2018
. We exclude variable-rate loans from our interest rate gap analysis, as we do not consider the interest rate risk on these loans to be significant because they are subject to repricing at least monthly. Loans with variable interest rates accounted for
10%
of our total loan portfolio as of both
August 31, 2018 and May 31, 2018
. 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 since it is used to match fund the variable-rate loan pool. With the exception of members’ subordinated certificates, which are generally issued with extended maturities, and commercial paper, our liabilities have average maturities that closely match the repricing terms (but not the maturities) of our fixed-rate loans.
Table
32
: Interest Rate Gap Analysis
|
(Dollars in millions)
|
Prior to 5/31/19
|
Two Years 6/1/19 to 5/31/21
|
Two Years 6/1/21 to
5/31/23 |
Five Years 6/1/23 to
5/31/28 |
10 Years 6/1/28 to 5/31/38
|
6/1/38 and Thereafter
|
Total
|
|||||||||||||||||||||
|
Asset amortization and repricing
|
$
|
1,396
|
|
$
|
3,292
|
|
$
|
2,965
|
|
$
|
5,636
|
|
$
|
6,705
|
|
$
|
3,102
|
|
$
|
23,096
|
|
|||||||
|
Liabilities and members’ equity:
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Long-term debt
(1)
|
$
|
2,064
|
|
$
|
3,308
|
|
$
|
2,988
|
|
$
|
5,746
|
|
$
|
4,288
|
|
$
|
1,192
|
|
$
|
19,586
|
|
|||||||
|
Subordinated certificates
|
12
|
|
43
|
|
57
|
|
972
|
|
154
|
|
576
|
|
1,814
|
|
||||||||||||||
|
Members’ equity
(2)
|
—
|
|
23
|
|
24
|
|
105
|
|
293
|
|
919
|
|
1,364
|
|
||||||||||||||
|
Total liabilities and members’ equity
(3)
|
$
|
2,076
|
|
$
|
3,374
|
|
$
|
3,069
|
|
$
|
6,823
|
|
$
|
4,735
|
|
$
|
2,687
|
|
$
|
22,764
|
|
|||||||
|
Gap
(4)
|
$
|
(680
|
)
|
$
|
(82
|
)
|
$
|
(104
|
)
|
$
|
(1,187
|
)
|
$
|
1,970
|
|
$
|
415
|
|
$
|
332
|
|
|||||||
|
Cumulative gap
|
(680
|
)
|
(762
|
)
|
(866
|
)
|
(2,053
|
)
|
(83
|
)
|
332
|
|
|
|||||||||||||||
|
Cumulative gap as a % of total assets
|
(2.55
|
)%
|
(2.86
|
)%
|
(3.25
|
)%
|
(7.70
|
)%
|
(0.31
|
)%
|
1.24
|
%
|
|
|||||||||||||||
|
Cumulative gap as a % of adjusted total assets
(5)
|
(2.57
|
)
|
(2.88
|
)
|
(3.28
|
)
|
(7.77
|
)
|
(0.31
|
)
|
1.26
|
|
|
|||||||||||||||
____________________________
(1)
Includes long-term fixed-rate debt and net fixed-rate swaps.
(2)
Includes the portion of the allowance for loan losses and subordinated deferrable debt allocated to fund fixed-rate assets and excludes noncash adjustments from the accounting for derivative financial instruments.
(3)
Debt is presented based on call date.
(4)
Calculated based on the amount of assets amortizing and repricing less total liabilities and members’ equity.
(5)
Adjusted total assets represents total assets reported in our condensed consolidated balance sheets less derivative assets.
The difference, or interest rate gap, of
$332 million
between the fixed-rate loans scheduled for amortization or repricing of
$23,096 million
and the fixed-rate liabilities and equity funding the loans of
$22,764 million
presented in Table
32
reflects the amount of fixed-rate assets that are funded with short-term and variable-rate debt as of
August 31, 2018
. The gap of
38
$332 million
represented
1.24%
of total assets and
1.26%
of adjusted total assets (total assets excluding derivative assets) as of
August 31, 2018
. As discussed above, we manage this gap within a prescribed range because funding long-term, fixed-rate loans with short-term and variable-rate debt may expose us to higher interest rate and liquidity risk.
|
NON-GAAP FINANCIAL MEASURES
|
In addition to financial measures determined in accordance with GAAP, management evaluates performance based on certain non-GAAP measures, which we refer to as “adjusted” measures. We provide a discussion of each of these non-GAAP measures in our
2018
Form 10-K under “Item 7. MD&A—Non-GAAP Measures.” Below we provide a reconciliation of our adjusted measures to the most comparable GAAP measures in this section. We believe our non-GAAP adjusted metrics, which are not a substitute for GAAP and may not be consistent with similarly titled non-GAAP measures used by other companies, provide meaningful information and are useful to investors because management uses these metrics to compare operating results across financial reporting periods, for internal budgeting and forecasting purposes, for compensation decisions and for short- and long-term strategic planning decisions. In addition, certain of the financial covenants in our committed bank revolving line of credit agreements and debt indentures are based on our adjusted measures.
Table
33
provides a reconciliation of adjusted interest expense, adjusted net interest income and adjusted net income to the comparable GAAP measures
three months ended August 31, 2018 and 2017
. The adjusted amounts are used in the calculation of our adjusted net interest yield and adjusted TIER.
Table
33
: Adjusted Financial Measures — Income Statement
|
Three Months Ended August 31,
|
||||||||
|
(Dollars in thousands)
|
2018
|
2017
|
||||||
|
Interest expense
|
$
|
(210,231
|
)
|
$
|
(192,731
|
)
|
||
|
Include: Derivative cash settlements
|
(12,829
|
)
|
(20,222
|
)
|
||||
|
Adjusted interest expense
|
$
|
(223,060
|
)
|
$
|
(212,953
|
)
|
||
|
Net interest income
|
$
|
68,260
|
|
$
|
73,184
|
|
||
|
Include: Derivative cash settlements
|
(12,829
|
)
|
(20,222
|
)
|
||||
|
Adjusted net interest income
|
$
|
55,431
|
|
$
|
52,962
|
|
||
|
Net income
|
$
|
47,978
|
|
$
|
9,015
|
|
||
|
Exclude: Derivative forward value gains (losses)
|
20,012
|
|
(25,976
|
)
|
||||
|
Adjusted net income
|
$
|
27,966
|
|
$
|
34,991
|
|
||
We consider the cost of derivatives to be an inherent cost of funding and hedging our loan portfolio and, therefore, economically similar to the interest expense that we recognize on debt issued for funding. We therefore include derivative cash settlements in our adjusted interest expense and exclude the unrealized forward value of derivatives from our adjusted net income.
TIER and Adjusted TIER
Table
34
presents our TIER and adjusted TIER for the
three months ended August 31, 2018 and 2017
.
39
Table
34
: TIER and Adjusted TIER
|
Three Months Ended August 31,
|
||||||
|
|
2018
|
2017
|
||||
|
TIER
(1)
|
1.23
|
|
1.05
|
|
||
|
Adjusted TIER
(2)
|
1.13
|
|
1.16
|
|
||
____________________________
(1)
TIER is calculated based on net income plus interest expense for the period divided by interest expense for the period.
(2)
Adjusted TIER is calculated based on adjusted net income plus adjusted interest expense for the period divided by adjusted interest expense for the period.
Debt-to-Equity and Adjusted Debt-to-Equity
Table
35
provides a reconciliation between the liabilities and equity used to calculate the debt-to-equity ratio and the adjusted debt-to-equity ratio as of
August 31, 2018 and May 31, 2018
. As indicated in the table below, subordinated debt is treated in the same manner as equity in calculating our adjusted-debt-to-equity ratio.
Table
35
: Adjusted Financial Measures — Balance Sheet
|
(Dollars in thousands)
|
August 31, 2018
|
|
May 31, 2018
|
|||||
|
Total liabilities
|
$
|
25,169,631
|
|
$
|
25,184,351
|
|
||
|
Exclude:
|
|
|
||||||
|
Derivative liabilities
|
267,675
|
|
275,932
|
|
||||
|
Debt used to fund loans guaranteed by RUS
|
159,179
|
|
160,865
|
|
||||
|
Subordinated deferrable debt
|
742,445
|
|
742,410
|
|
||||
|
Subordinated certificates
|
1,378,097
|
|
1,379,982
|
|
||||
|
Adjusted total liabilities
|
$
|
22,622,235
|
|
$
|
22,625,162
|
|
||
|
Total equity
|
$
|
1,506,576
|
|
$
|
1,505,853
|
|
||
|
Exclude:
|
|
|||||||
|
Prior year-end cumulative derivative forward value losses
|
(34,974
|
)
|
(340,976
|
)
|
||||
|
Current year cumulative derivative forward value gains
|
20,012
|
|
306,002
|
|
||||
|
Accumulated other comprehensive income
(1)
|
1,885
|
|
1,980
|
|
||||
|
Include:
|
||||||||
|
Subordinated certificates
|
1,378,097
|
|
1,379,982
|
|
||||
|
Subordinated deferrable debt
|
742,445
|
|
742,410
|
|
||||
|
Adjusted total equity
|
$
|
3,640,195
|
|
$
|
3,661,239
|
|
||
____________________________
(1)
Represents the AOCI related to derivatives. See “Note 10—Equity” for a breakout of our AOCI components.
Table
36
displays the calculations of our debt-to-equity and adjusted debt-to-equity ratios as of
August 31, 2018
and
May 31, 2018
.
Table
36
: Debt-to-Equity Ratio
|
|
August 31, 2018
|
May 31, 2018
|
||||
|
Debt-to-equity ratio
(1)
|
16.71
|
|
16.72
|
|
||
|
Adjusted debt-to-equity ratio
(2)
|
6.21
|
|
6.18
|
|
||
____________________________
(1)
Calculated based on total liabilities as of the end of the period divided by total equity as of the end of the period.
(2)
Calculated based on adjusted total liabilities at period end divided by adjusted total equity at period end.
40
Members
’
Equity
Table
37
provides a reconciliation of members’ equity to total CFC equity as of
August 31, 2018
and
May 31, 2018
.
Table
37
: Members’ Equity
|
(Dollars in thousands)
|
August 31, 2018
|
May 31, 2018
|
||||||
|
Members’ equity:
|
||||||||
|
Total CFC equity
|
$
|
1,474,491
|
|
$
|
1,474,333
|
|
||
|
Excludes:
|
||||||||
|
Accumulated other comprehensive income (loss)
|
(214
|
)
|
8,544
|
|
||||
|
Current year-end cumulative derivative forward value losses
|
(11,160
|
)
|
(30,831
|
)
|
||||
|
Subtotal
|
(11,374
|
)
|
(22,287
|
)
|
||||
|
Members’ equity
|
$
|
1,485,865
|
|
$
|
1,496,620
|
|
||
41
|
Item 1.
|
Financial Statements
|
|
Page
|
|||
42
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
|
|
Three Months Ended August 31,
|
|||||||
|
(Dollars in thousands)
|
2018
|
|
2017
|
|||||
|
Interest income
|
$
|
278,491
|
|
$
|
265,915
|
|
||
|
Interest expense
|
(210,231
|
)
|
(192,731
|
)
|
||||
|
Net interest income
|
68,260
|
|
73,184
|
|
||||
|
Benefit for loan losses
|
109
|
|
298
|
|
||||
|
Net interest income after benefit for loan losses
|
68,369
|
|
73,482
|
|
||||
|
Non-interest income:
|
|
|
|
|
||||
|
Fee and other income
|
3,185
|
|
3,945
|
|
||||
|
Derivative gains (losses)
|
7,183
|
|
(46,198
|
)
|
||||
|
Results of operations of foreclosed assets
|
—
|
|
(24
|
)
|
||||
|
Total non-interest income
|
10,368
|
|
(42,277
|
)
|
||||
|
Non-interest expense:
|
|
|
|
|
||||
|
Salaries and employee benefits
|
(12,682
|
)
|
(11,823
|
)
|
||||
|
Other general and administrative expenses
|
(10,523
|
)
|
(9,813
|
)
|
||||
|
Losses on early extinguishment of debt
|
(7,100
|
)
|
—
|
|
||||
|
Other non-interest expense
|
(394
|
)
|
(522
|
)
|
||||
|
Total non-interest expense
|
(30,699
|
)
|
(22,158
|
)
|
||||
|
Income before income taxes
|
48,038
|
|
9,047
|
|
||||
|
Income tax expense
|
(60
|
)
|
(32
|
)
|
||||
|
Net income
|
47,978
|
|
9,015
|
|
||||
|
Less: Net (income) loss attributable to noncontrolling interests
|
(13
|
)
|
118
|
|
||||
|
Net income attributable to CFC
|
$
|
47,965
|
|
$
|
9,133
|
|
||
|
See accompanying notes to condensed consolidated financial statements.
|
||||||||
43
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
|
Three Months Ended August 31,
|
|||||||
|
(Dollars in thousands)
|
2018
|
2017
|
||||||
|
Net income
|
$
|
47,978
|
|
$
|
9,015
|
|
||
|
Other comprehensive income (loss):
|
|
|
|
|
||||
|
Unrealized losses on equity securities
|
—
|
|
(1,151
|
)
|
||||
|
Unrealized gains on cash flow hedge
|
24
|
|
—
|
|
||||
|
Reclassification of derivative gains to net income
|
(119
|
)
|
(192
|
)
|
||||
|
Defined benefit plan adjustments
|
131
|
|
127
|
|
||||
|
Other comprehensive income (loss)
|
36
|
|
(1,216
|
)
|
||||
|
Total comprehensive income
|
48,014
|
|
7,799
|
|
||||
|
Less: Total comprehensive (income) loss attributable to noncontrolling interests
|
(13
|
)
|
118
|
|
||||
|
Total comprehensive income attributable to CFC
|
$
|
48,001
|
|
$
|
7,917
|
|
||
|
See accompanying notes to condensed consolidated financial statements.
|
||||||||
44
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
(Dollars in thousands)
|
August 31, 2018
|
|
May 31, 2018
|
|||||
|
Assets:
|
||||||||
|
Cash and cash equivalents
|
$
|
265,905
|
|
$
|
230,999
|
|
||
|
Restricted cash
|
8,597
|
|
7,825
|
|
||||
|
Total cash, cash equivalents and restricted cash
|
274,502
|
|
238,824
|
|
||||
|
Time deposits
|
—
|
|
100,000
|
|
||||
|
Investment securities:
|
||||||||
|
Equity securities
|
88,606
|
|
89,332
|
|
||||
|
Debt securities held to maturity, at amortized cost
|
553,754
|
|
520,519
|
|
||||
|
Total investment securities
|
642,360
|
|
609,851
|
|
||||
|
Loans to members
|
25,182,654
|
|
25,178,608
|
|
||||
|
Less: Allowance for loan losses
|
(18,692
|
)
|
(18,801
|
)
|
||||
|
Loans to members, net
|
25,163,962
|
|
25,159,807
|
|
||||
|
Accrued interest receivable
|
124,343
|
|
127,442
|
|
||||
|
Other receivables
|
38,299
|
|
39,220
|
|
||||
|
Fixed assets, net
|
117,549
|
|
116,031
|
|
||||
|
Derivative assets
|
256,186
|
|
244,526
|
|
||||
|
Other assets
|
59,006
|
|
54,503
|
|
||||
|
Total assets
|
$
|
26,676,207
|
|
$
|
26,690,204
|
|
||
|
Liabilities:
|
|
|
||||||
|
Accrued interest payable
|
$
|
205,898
|
|
$
|
149,284
|
|
||
|
Debt outstanding:
|
||||||||
|
Short-term borrowings
|
3,793,136
|
|
3,795,910
|
|
||||
|
Long-term debt
|
18,674,932
|
|
18,714,960
|
|
||||
|
Subordinated deferrable debt
|
742,445
|
|
742,410
|
|
||||
|
Members’ subordinated certificates:
|
|
|
|
|
||||
|
Membership subordinated certificates
|
630,448
|
|
630,448
|
|
||||
|
Loan and guarantee subordinated certificates
|
526,479
|
|
528,386
|
|
||||
|
Member capital securities
|
221,170
|
|
221,148
|
|
||||
|
Total members’ subordinated certificates
|
1,378,097
|
|
1,379,982
|
|
||||
|
Total debt outstanding
|
24,588,610
|
|
24,633,262
|
|
||||
|
Deferred income
|
63,711
|
|
65,922
|
|
||||
|
Derivative liabilities
|
267,675
|
|
275,932
|
|
||||
|
Other liabilities
|
43,737
|
|
59,951
|
|
||||
|
Total liabilities
|
25,169,631
|
|
25,184,351
|
|
||||
|
Equity:
|
||||||||
|
CFC equity:
|
|
|
|
|
||||
|
Retained equity
|
1,474,705
|
|
1,465,789
|
|
||||
|
Accumulated other comprehensive income (loss)
|
(214
|
)
|
8,544
|
|
||||
|
Total CFC equity
|
1,474,491
|
|
1,474,333
|
|
||||
|
Noncontrolling interests
|
32,085
|
|
31,520
|
|
||||
|
Total equity
|
1,506,576
|
|
1,505,853
|
|
||||
|
Total liabilities and equity
|
$
|
26,676,207
|
|
$
|
26,690,204
|
|
||
|
See accompanying notes to condensed consolidated financial statements.
|
||||||||
45
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
|
(Dollars in thousands)
|
Membership
Fees and Educational Fund |
Patronage
Capital Allocated |
Members’
Capital Reserve |
Unallocated
Net Income (Loss) |
CFC
Retained Equity |
Accumulated
Other Comprehensive Income (Loss) |
Total
CFC Equity |
Non-controlling
Interests |
Total
Equity |
|||||||||||||||||||||||||||
|
Balance as of May 31, 2018
|
$
|
2,945
|
|
$
|
811,493
|
|
$
|
687,785
|
|
$
|
(36,434
|
)
|
$
|
1,465,789
|
|
$
|
8,544
|
|
$
|
1,474,333
|
|
$
|
31,520
|
|
$
|
1,505,853
|
|
|||||||||
|
Cumulative effect from adoption of new accounting standard
|
—
|
|
—
|
|
—
|
|
8,794
|
|
8,794
|
|
(8,794
|
)
|
—
|
|
—
|
|
—
|
|
||||||||||||||||||
|
Balance as of June 1, 2018
|
2,945
|
|
811,493
|
|
687,785
|
|
(27,640
|
)
|
1,474,583
|
|
(250
|
)
|
1,474,333
|
|
31,520
|
|
1,505,853
|
|
||||||||||||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
47,965
|
|
47,965
|
|
—
|
|
47,965
|
|
13
|
|
47,978
|
|
||||||||||||||||||
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
36
|
|
36
|
|
—
|
|
36
|
|
||||||||||||||||||
|
Patronage capital retirement
|
—
|
|
(47,507
|
)
|
—
|
|
—
|
|
(47,507
|
)
|
—
|
|
(47,507
|
)
|
—
|
|
(47,507
|
)
|
||||||||||||||||||
|
Other
|
(336
|
)
|
—
|
|
—
|
|
—
|
|
(336
|
)
|
—
|
|
(336
|
)
|
552
|
|
216
|
|
||||||||||||||||||
|
Balance as of August 31, 2018
|
$
|
2,609
|
|
$
|
763,986
|
|
$
|
687,785
|
|
$
|
20,325
|
|
$
|
1,474,705
|
|
$
|
(214
|
)
|
$
|
1,474,491
|
|
$
|
32,085
|
|
$
|
1,506,576
|
|
|||||||||
|
Balance as of May 31, 2017
|
$
|
2,900
|
|
$
|
761,701
|
|
$
|
630,305
|
|
$
|
(338,128
|
)
|
$
|
1,056,778
|
|
$
|
13,175
|
|
$
|
1,069,953
|
|
$
|
28,852
|
|
$
|
1,098,805
|
|
|||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
9,133
|
|
9,133
|
|
—
|
|
9,133
|
|
(118
|
)
|
9,015
|
|
||||||||||||||||||
|
Other comprehensive loss
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,216
|
)
|
(1,216
|
)
|
—
|
|
(1,216
|
)
|
||||||||||||||||||
|
Patronage capital retirement
|
—
|
|
(45,220
|
)
|
—
|
|
—
|
|
(45,220
|
)
|
—
|
|
(45,220
|
)
|
—
|
|
(45,220
|
)
|
||||||||||||||||||
|
Other
|
(356
|
)
|
—
|
|
—
|
|
—
|
|
(356
|
)
|
—
|
|
(356
|
)
|
552
|
|
196
|
|
||||||||||||||||||
|
Balance as of August 31, 2017
|
$
|
2,544
|
|
$
|
716,481
|
|
$
|
630,305
|
|
$
|
(328,995
|
)
|
$
|
1,020,335
|
|
$
|
11,959
|
|
$
|
1,032,294
|
|
$
|
29,286
|
|
$
|
1,061,580
|
|
|||||||||
|
See accompanying notes to condensed consolidated financial statements.
|
||||||||||||||||||||||||||||||||||||
46
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
(UNAUDITED)
|
|
Three Months Ended August 31,
|
|||||||
|
(Dollars in thousands)
|
2018
|
2017
|
||||||
|
Cash flows from operating activities:
|
|
|
||||||
|
Net income
|
$
|
47,978
|
|
$
|
9,015
|
|
||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
||||||
|
Amortization of deferred loan fees
|
(2,609
|
)
|
(3,229
|
)
|
||||
|
Amortization of debt issuance costs and deferred charges
|
3,003
|
|
2,478
|
|
||||
|
Amortization of discount on long-term debt
|
2,802
|
|
2,473
|
|
||||
|
Amortization of issuance costs for bank revolving lines of credit
|
1,328
|
|
1,317
|
|
||||
|
Depreciation and amortization
|
2,230
|
|
1,862
|
|
||||
|
Benefit for loan losses
|
(109
|
)
|
(298
|
)
|
||||
|
Loss on early extinguishment of debt
|
7,100
|
|
—
|
|
||||
|
Derivative forward value (gains) losses
|
(20,012
|
)
|
25,976
|
|
||||
|
Changes in operating assets and liabilities:
|
|
|
||||||
|
Accrued interest receivable
|
3,099
|
|
(422
|
)
|
||||
|
Accrued interest payable
|
56,614
|
|
57,996
|
|
||||
|
Deferred income
|
398
|
|
(57
|
)
|
||||
|
Other
|
(20,092
|
)
|
(9,156
|
)
|
||||
|
Net cash provided by operating activities
|
81,730
|
|
87,955
|
|
||||
|
Cash flows from investing activities:
|
|
|
||||||
|
Advances on loans, net
|
(3,942
|
)
|
(274,696
|
)
|
||||
|
Investment in fixed assets
|
(4,253
|
)
|
(3,410
|
)
|
||||
|
Net proceeds from time deposits
|
100,000
|
|
100,000
|
|
||||
|
Purchases of held-to-maturity investments
|
(40,684
|
)
|
—
|
|
||||
|
Proceeds from maturities of held-to-maturity investments
|
7,339
|
|
—
|
|
||||
|
Net cash provided by (used in) investing activities
|
58,460
|
|
(178,106
|
)
|
||||
|
Cash flows from financing activities:
|
|
|
||||||
|
Proceeds from (repayments of) short-term borrowings, net
|
29,246
|
|
(301,261
|
)
|
||||
|
Proceeds from short-term borrowings with original maturity greater than 90 days
|
296,242
|
|
273,436
|
|
||||
|
Repayments of short term-debt with original maturity greater than 90 days
|
(328,262
|
)
|
(240,415
|
)
|
||||
|
Proceeds from issuance of long-term debt, net of discount and issuance costs
|
349,509
|
|
580,008
|
|
||||
|
Payments for retirement of long-term debt
|
(395,284
|
)
|
(111,700
|
)
|
||||
|
Payments made on early extinguishment of debt
|
(7,100
|
)
|
—
|
|
||||
|
Proceeds from issuance of members’ subordinated certificates
|
471
|
|
1,627
|
|
||||
|
Payments for retirement of members’ subordinated certificates
|
(2,378
|
)
|
(2,445
|
)
|
||||
|
Payments for retirement of patronage capital
|
(46,956
|
)
|
(4,859
|
)
|
||||
|
Net cash (used in) provided by financing activities
|
(104,512
|
)
|
194,391
|
|
||||
|
Net increase in cash, cash equivalents and restricted cash
|
35,678
|
|
104,240
|
|
||||
|
Beginning cash, cash equivalents and restricted cash
|
238,824
|
|
188,421
|
|
||||
|
Ending cash, cash equivalents and restricted cash
|
$
|
274,502
|
|
$
|
292,661
|
|
||
|
Supplemental disclosure of cash flow information:
|
|
|
||||||
|
Cash paid for interest
|
$
|
148,063
|
|
$
|
129,785
|
|
||
|
Cash paid for income taxes
|
—
|
|
25
|
|
||||
|
See accompanying notes to condensed consolidated financial statements.
|
||||||||
47
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
The Company
National Rural Utilities Cooperative Finance Corporation (“CFC”) is a member-owned cooperative association incorporated under the laws of the District of Columbia in April 1969. CFC’s principal purpose is to provide its members with financing to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC makes loans to its rural electric members so they can acquire, construct and operate electric distribution, 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.
Basis of Presentation and Use of Estimates
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures during the period. Management’s most significant estimates and assumptions involve determining the allowance for loan 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 for interim periods are not necessarily indicative of results for the entire fiscal year. Certain reclassifications have been made to prior periods to conform to the current presentation.
The accompanying financial statements should be read in conjunction with the audited consolidated financial statements, and related notes thereto, included in CFC’s Annual Report on Form 10-K for the fiscal year ended
May 31, 2018
(“
2018
Form 10-K”). Refer to “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K for a discussion of our significant accounting policies.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of CFC, variable interest entities (“VIEs”) where CFC is the primary beneficiary and subsidiary entities created and controlled by CFC to hold foreclosed assets. CFC did not have any entities that held foreclosed assets as of
August 31, 2018
or
May 31, 2018
. All intercompany balances and transactions have been eliminated. National Cooperative Services Corporation (“NCSC”) and Rural Telephone Finance Cooperative (“RTFC”) are VIEs which 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. Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its consolidated entities.
Restricted Cash
Restricted cash, totaled
$9 million
and
$8 million
as of
August 31, 2018
and
May 31, 2018
, respectively, and consists primarily of member funds held in escrow for certain specifically designated cooperative programs.
48
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Interest Income
The following table presents interest income, by interest-earning asset category, for the
three months ended August 31, 2018 and 2017
.
|
Three Months Ended August 31,
|
||||||||
|
(Dollars in thousands)
|
2018
|
|
2017
|
|||||
|
Interest income by interest-earning asset type:
|
||||||||
|
Long-term fixed-rate loans
(1)
|
$
|
251,801
|
|
$
|
249,364
|
|
||
|
Long-term variable-rate loans
|
9,381
|
|
5,863
|
|
||||
|
Line of credit loans
|
11,633
|
|
8,707
|
|
||||
|
TDR loans
(2)
|
218
|
|
226
|
|
||||
|
Other income, net
(3)
|
(325
|
)
|
(232
|
)
|
||||
|
Total loans
|
272,708
|
|
263,928
|
|
||||
|
Cash, time deposits and investment securities
|
5,783
|
|
1,987
|
|
||||
|
Total interest income
|
$
|
278,491
|
|
$
|
265,915
|
|
||
____________________________
(1)
Includes loan conversion fees, which are generally deferred and recognized as interest income using the effective interest method.
(2)
Troubled debt restructured (“TDR”) loans.
(3)
Consists of late payment fees and net amortization of deferred loan fees and loan origination costs.
Deferred income of
$64 million
and
$66 million
as of
August 31, 2018 and May 31, 2018
, respectively, consists primarily of deferred loan conversion fees totaling
$58 million
and
$60 million
, respectively. Deferred loan conversion fees are recognized in interest income using the effective interest method.
Interest Expense
The following table presents interest expense, by debt product type, for the
three months ended August 31, 2018 and 2017
.
|
Three Months Ended August 31,
|
||||||||
|
(Dollars in thousands)
|
2018
|
2017
|
||||||
|
Interest expense by debt product type:
(1)(2)
|
|
|
||||||
|
Short-term borrowings
|
$
|
19,419
|
|
$
|
10,539
|
|
||
|
Medium-term notes
|
32,410
|
|
25,116
|
|
||||
|
Collateral trust bonds
|
77,705
|
|
85,277
|
|
||||
|
Guaranteed Underwriter Program notes payable
|
35,334
|
|
35,602
|
|
||||
|
Farmer Mac notes payable
|
21,111
|
|
11,490
|
|
||||
|
Other notes payable
|
322
|
|
390
|
|
||||
|
Subordinated deferrable debt
|
9,417
|
|
9,416
|
|
||||
|
Subordinated certificates
|
14,513
|
|
14,901
|
|
||||
|
Total interest expense
|
$
|
210,231
|
|
$
|
192,731
|
|
||
____________________________
(1)
Includes amortization of debt discounts and debt issuance costs, which are generally deferred and recognized as interest expense using the effective interest method. Issuance costs related to dealer commercial paper, however, are recognized as interest expense immediately as incurred.
49
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(2)
Includes fees related to funding arrangements, such as up-front fees paid to banks participating in our committed bank revolving line of credit agreements. Depending on the nature of the fee, amounts may be deferred and recognized as interest expense ratably over the term of the arrangement or recognized immediately as incurred.
Recent Accounting Changes and Other Developments
Accounting Standards Adopted in Fiscal Year 2019
Statement of Cash Flows—Restricted Cash
In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18,
Statement of Cash Flows—Restricted Cash,
which addresses the presentation of restricted cash in the statement of cash flows. The guidance requires that the statement of cash flows explain the change in the beginning-of-period and end-of-period total of cash, cash equivalents and restricted cash. Under previous guidance, we were required to explain the total change in cash and cash equivalents during the period. We adopted this guidance on June 1, 2018 on a retrospective basis. We made corresponding changes on our consolidated balance sheet to present a total for cash and cash equivalents and restricted cash.
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, FASB issued ASU 2016-01,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,
which amends certain aspects of the recognition, measurement, presentation and disclosure of certain financial instruments, including equity investments and liabilities measured at fair value under the fair value option. Under this guidance, investments in equity securities must be measured at fair value through earnings, with certain exceptions, and entities can no longer classify investments in equity securities as available for sale or trading. We adopted this guidance on June 1, 2018 on a modified retrospective basis and recorded a cumulative-effect adjustment that increased retained earnings by
$9 million
as a result of the transition adjustment to reclassify unrealized gains related to our equity securities from accumulated other comprehensive income (“AOCI”) to retained earnings. As a result of adopting this guidance, our investments in equity securities are no longer classified as available for sale and unrealized holding gains and losses are recorded in earnings. Previously, our equity securities were classified as available for sale and unrealized holding gains and losses were recorded in other comprehensive income.
Revenue from Contracts with Customers
In May 2014, FASB issued ASU 2014-09,
Revenue from Contracts with Customers,
which modifies the guidance used to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets. This guidance applies to all contracts with customers to provide goods or services in the ordinary course of business, except for certain contracts specifically excluded from the scope, including financial instruments, guarantees, insurance contracts and leases. As a financial institution, substantially all of our revenue is in the form of interest income derived from financial instruments, primarily our investments in loans and securities. We adopted this guidance on June 1, 2018. Given the scope exception for financial instruments, the adoption of the guidance did not have an impact on our condensed consolidated financial statements and does not affect our accounting.
Accounting Standards Issued But Not Yet Adopted
Fair Value Measurement—Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, FASB issued ASU 2018-13,
Fair Value Measurement—Changes to the Disclosure Requirements for Fair Value
Measurement,
which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The guidance is effective for public entities for fiscal years beginning after December 15, 2019, including interim periods within those years. Early adoption is permitted in any interim period or fiscal
50
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
year before the effective date. The guidance is effective for us beginning June 1, 2020. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
Derivatives and Hedging—Targeted Improvements to Accounting for Hedging Activities
In August 2017, FASB issued ASU 2017-12,
Derivatives and Hedging—Targeted Improvements to Accounting for Hedging Acti
vities, which expands the types of risk management strategies that qualify for hedge accounting treatment to more closely align the results of hedge accounting with the economics of certain risk management activities and simplifies certain hedge documentation and assessment requirement. It also eliminates the concept of separately recording hedge ineffectiveness and expands disclosure requirements. The guidance is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted in any interim period or fiscal year before the effective date. The guidance is effective for us beginning June 1, 2019. Hedge accounting is elective, and we currently apply hedge accounting on a limited basis, specifically when we enter into treasury rate lock agreements. If we continue to elect not to apply hedge accounting to our interest rate swaps, the adoption of the new guidance will not have a material impact on our consolidated financial statements.
Receivables—Nonrefundable Fees and Other Cost
In March 2017, FASB issued ASU 2017-08,
Receivables—Nonrefundable Fees and Other
Costs,
which shortens the amortization period for the premium on certain callable debt securities to the earliest call date rather the maturity date. The guidance is applicable to any individual debt security, purchased at a premium, with an explicit and noncontingent call feature with a fixed price on a preset date. The guidance does not impact the accounting for purchased callable debt securities held at a discount; the discount will continue to amortize to the maturity date. The guidance is effective for public entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This update is effective for us beginning June 1, 2019. Adoption of the guidance requires modified retrospection transition as of the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments
In June 2016, FASB issued ASU 2016-13,
Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments,
which replaces the existing incurred loss impairment model and establishes a single allowance framework based on a current expected credit loss model for financial assets carried at amortized cost, including loans and held-to-maturity debt securities. The current expected loss model requires an entity to estimate the credit losses expected over the life of the credit exposure upon initial recognition of that exposure when the financial asset is originated or acquired, which will generally result in earlier recognition of credit losses. The guidance also amends the other-than-temporary model for available-for-sale debt securities by requiring the use of an allowance, rather than directly reducing the carrying value of the security. The new guidance also requires expanded credit quality disclosures. The new standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. This update is effective for us beginning June 1, 2020. We do not expect to early adopt this guidance. Upon adoption, we will be required to record a cumulative-effect adjustment to retained earnings. The impact on our consolidated financial statements from the adoption of this new guidance will depend on the composition and risk profile of our loan portfolio as of the date of adoption.
|
|
NCSC and RTFC meet the definition of a VIE because they do not have sufficient equity investment at risk to finance their activities without financial support. CFC is the primary source of funding for NCSC and the sole source of funding for RTFC. Under the terms of management agreements, CFC manages the business operations of NCSC and RTFC. CFC also
51
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
unconditionally guarantees full indemnification for any loan losses of NCSC and RTFC pursuant to guarantee agreements with each company. CFC earns management and guarantee fees from its agreements with NCSC and RTFC.
NCSC and RTFC creditors have no recourse against CFC in the event of a default by NCSC and RTFC, unless there is a guarantee agreement under which CFC has guaranteed NCSC or RTFC debt obligations to a third party. The following table provides information on incremental consolidated assets and liabilities of VIEs included in CFC’s condensed consolidated financial statements, after intercompany eliminations, as of
August 31, 2018 and May 31, 2018
.
|
(Dollars in thousands)
|
August 31, 2018
|
May 31, 2018
|
||||||
|
Total loans outstanding
|
$
|
1,139,508
|
|
$
|
1,149,574
|
|
||
|
Other assets
|
10,897
|
|
10,280
|
|
||||
|
Total assets
|
$
|
1,150,405
|
|
$
|
1,159,854
|
|
||
|
Long-term debt
|
$
|
8,000
|
|
$
|
8,000
|
|
||
|
Other liabilities
|
33,943
|
|
33,923
|
|
||||
|
Total liabilities
|
$
|
41,943
|
|
$
|
41,923
|
|
||
The following table provides information on CFC’s credit commitments to NCSC and RTFC, and its potential exposure to loss as of
August 31, 2018 and May 31, 2018
.
|
(Dollars in thousands)
|
August 31, 2018
|
|
May 31, 2018
|
|||||
|
CFC credit commitments
|
$
|
5,500,000
|
|
$
|
5,500,000
|
|
||
|
Outstanding commitments:
|
||||||||
|
Borrowings payable to CFC
(1)
|
1,106,813
|
|
1,116,465
|
|
||||
|
Credit enhancements:
|
||||||||
|
CFC third-party guarantees
|
13,779
|
|
12,005
|
|
||||
|
Other credit enhancements
|
14,314
|
|
14,655
|
|
||||
|
Total credit enhancements
(2)
|
28,093
|
|
26,660
|
|
||||
|
Total outstanding commitments
|
1,134,906
|
|
1,143,125
|
|
||||
|
CFC available credit commitments
|
$
|
4,365,094
|
|
$
|
4,356,875
|
|
||
____________________________
(1)
Borrowings payable to CFC are eliminated in consolidation.
(2)
Excludes interest due on these instruments.
CFC loans to NCSC and RTFC are secured by all assets and revenue of NCSC and RTFC. CFC’s maximum potential exposure, including interest due, for the credit enhancements totaled
$30 million
. The maturities for obligations guaranteed by CFC extend through 2031.
52
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
We currently hold investments in equity and debt securities. We record purchases and sales of our investment securities on a trade-date basis. The accounting and measurement framework for investment securities differs depending on the security type and the classification.
Equity Securities
We previously had investments in equity securities that were classified as available for sale as of May 31, 2018. The unrealized gains and losses on these securities were recorded in other comprehensive income. Effective with our
June 1, 2018 adoption of the financial instrument accounting standard on the recognition and measurement of financial assets and financial liabilities, unrealized gains and losses on equity securities are required to be recorded in earnings. The following table presents the fair value of our equity securities, all of which had readily determinable fair values, as of
August 31, 2018 and May 31, 2018
.
|
(Dollars in thousands)
|
August 31, 2018
|
May 31, 2018
|
||||||
|
Equity securities at fair value:
|
||||||||
|
Farmer Mac—series A non-cumulative preferred stock
|
$
|
30,372
|
|
$
|
30,480
|
|
||
|
Farmer Mac—series B non-cumulative preferred stock
|
25,880
|
|
26,000
|
|
||||
|
Farmer Mac—series C non-cumulative preferred stock
|
26,440
|
|
25,872
|
|
||||
|
Farmer Mac—class A common stock
|
5,914
|
|
6,980
|
|
||||
|
Total equity securities at fair value
|
$
|
88,606
|
|
$
|
89,332
|
|
||
We recorded unrealized losses on our investments in equity securities of
$1 million
in earnings during the three months ended
August 31, 2018
. These unrealized losses are presented in fee and other income on our condensed consolidated statements of income. We recorded unrealized losses on our investments in equity securities of
$1 million
in other comprehensive income during the three months ended
August 31, 2017
. For additional information on our investments in equity securities, see “Note 1—Summary of Significant Accounting Policies” and “Note 10—Equity—Accumulated Other Comprehensive Income.”
Debt Securities
We currently classify and account for our investments in debt securities as held to maturity (“HTM”) because we have the positive intent and ability to hold these securities to maturity. If we acquire debt securities that we may sell prior to maturity in response to changes in our investment strategy, liquidity needs, credit risk mitigating considerations, market risk profile or for other reasons, we would classify such securities as available for sale. We report debt securities classified as HTM on our condensed consolidated balance sheets at amortized cost. Interest income, including amortization of premiums and accretion of discounts, is generally recognized over the contractual life of the securities based on the effective yield method.
Pursuant to our investment policy guidelines, all fixed-income debt securities, at the time of purchase, must be rated at least investment grade and on stable outlook based on external credit ratings from at least two of the leading global credit rating agencies, when available, or the corresponding equivalent, when not available. Securities rated investment grade, that is those rated Baa3 or higher by Moody’s Investors Service (“Moody’s”) or BBB- or higher by S&P or BBB- or higher by Fitch Ratings Inc. (“Fitch”), are generally considered by the rating agencies to be of lower credit risk than non-investment grade securities.
53
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Amortized Cost and Fair Value of Debt Securities
The following tables present the amortized cost and fair value of our investment securities and the corresponding gross unrealized gains and losses, by classification category and major security type, as of
August 31, 2018 and May 31, 2018
.
|
|
|
August 31, 2018
|
||||||||||||||
|
(Dollars in thousands)
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
||||||||
|
Debt securities held to maturity:
|
||||||||||||||||
|
Certificates of deposit
|
$
|
3,650
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3,650
|
|
||||
|
Commercial paper
|
9,037
|
|
—
|
|
—
|
|
9,037
|
|
||||||||
|
U.S. agency debt securities
|
2,431
|
|
12
|
|
—
|
|
2,443
|
|
||||||||
|
Corporate debt securities
|
468,059
|
|
737
|
|
(4,430
|
)
|
464,366
|
|
||||||||
|
Commercial MBS:
|
||||||||||||||||
|
Agency
|
7,342
|
|
50
|
|
(1
|
)
|
7,391
|
|
||||||||
|
Non-agency
|
3,453
|
|
2
|
|
(4
|
)
|
3,451
|
|
||||||||
|
Total commercial MBS
|
10,795
|
|
52
|
|
(5
|
)
|
10,842
|
|
||||||||
|
U.S. state and municipality debt securities
|
9,617
|
|
37
|
|
—
|
|
9,654
|
|
||||||||
|
Foreign government debt securities
|
1,241
|
|
5
|
|
—
|
|
1,246
|
|
||||||||
|
Other ABS
(1)
|
48,924
|
|
14
|
|
(202
|
)
|
48,736
|
|
||||||||
|
Total debt securities held to maturity
|
$
|
553,754
|
|
$
|
857
|
|
$
|
(4,637
|
)
|
$
|
549,974
|
|
||||
|
|
|
May 31, 2018
|
||||||||||||||
|
(Dollars in thousands)
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
||||||||
|
Debt securities held to maturity:
|
||||||||||||||||
|
Certificates of deposit
|
$
|
5,148
|
|
$
|
—
|
|
$
|
—
|
|
$
|
5,148
|
|
||||
|
Commercial paper
|
9,134
|
|
—
|
|
—
|
|
9,134
|
|
||||||||
|
U.S. agency debt securities
|
2,000
|
|
16
|
|
—
|
|
2,016
|
|
||||||||
|
Corporate debt securities
|
455,721
|
|
714
|
|
(4,595
|
)
|
451,840
|
|
||||||||
|
Commercial MBS:
|
||||||||||||||||
|
Agency
|
7,024
|
|
63
|
|
—
|
|
7,087
|
|
||||||||
|
Non-agency
|
3,453
|
|
3
|
|
(3
|
)
|
3,453
|
|
||||||||
|
Total commercial MBS
|
10,477
|
|
66
|
|
(3
|
)
|
10,540
|
|
||||||||
|
U.S. state and municipality debt securities
|
2,147
|
|
24
|
|
—
|
|
2,171
|
|
||||||||
|
Foreign government debt securities
|
1,241
|
|
9
|
|
—
|
|
1,250
|
|
||||||||
|
Other ABS
(1)
|
34,651
|
|
11
|
|
(215
|
)
|
34,447
|
|
||||||||
|
Total debt securities held to maturity
|
$
|
520,519
|
|
$
|
840
|
|
$
|
(4,813
|
)
|
$
|
516,546
|
|
||||
____________________________
(1)
Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.
54
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Debt Securities in Gross Unrealized Loss Position
An unrealized loss exists when the fair value of an individual security is less than its amortized cost basis. The following table presents the fair value and gross unrealized losses for debt securities in a gross loss position, aggregated by security type, and the length of time the securities have been in a continuous unrealized loss position as of
August 31, 2018
and
May 31, 2018
. The securities are segregated between investments that have been in a continuous unrealized loss position for less than 12 months and 12 months or more based on the point in time that the fair value declined below the amortized cost basis.
|
August 31, 2018
|
||||||||||||||||||||||||
|
Unrealized Loss Position Less than 12 Months
|
Unrealized Loss Position 12 Months or Longer
|
Total
|
||||||||||||||||||||||
|
(Dollars in thousands)
|
Fair Value
|
Gross Unrealized Losses
|
Fair Value
|
Gross Unrealized Losses
|
Fair Value
|
Gross Unrealized Losses
|
||||||||||||||||||
|
Debt securities held to maturity:
|
||||||||||||||||||||||||
|
Corporate bonds
|
$
|
274,163
|
|
$
|
(4,430
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
274,163
|
|
$
|
(4,430
|
)
|
||||||
|
Commercial MBS:
|
||||||||||||||||||||||||
|
Agency
|
341
|
|
(1
|
)
|
—
|
|
—
|
|
341
|
|
(1
|
)
|
||||||||||||
|
Non-agency
|
1,450
|
|
(4
|
)
|
—
|
|
—
|
|
1,450
|
|
(4
|
)
|
||||||||||||
|
Total commercial MBS
|
1,791
|
|
(5
|
)
|
—
|
|
—
|
|
1,791
|
|
(5
|
)
|
||||||||||||
|
Other ABS
(1)
|
33,674
|
|
(202
|
)
|
—
|
|
—
|
|
33,674
|
|
(202
|
)
|
||||||||||||
|
Total investment securities
|
$
|
309,628
|
|
$
|
(4,637
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
309,628
|
|
|
$
|
(4,637
|
)
|
||
|
May 31, 2018
|
||||||||||||||||||||||||
|
Unrealized Loss Position Less than 12 Months
|
Unrealized Loss Position 12 Months or Longer
|
Total
|
||||||||||||||||||||||
|
(Dollars in thousands)
|
Fair Value
|
Gross Unrealized Losses
|
Fair Value
|
Gross Unrealized Losses
|
Fair Value
|
Gross Unrealized Losses
|
||||||||||||||||||
|
Held to maturity:
|
||||||||||||||||||||||||
|
Corporate debt securities
|
$
|
280,139
|
|
$
|
(4,595
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
280,139
|
|
$
|
(4,595
|
)
|
||||||
|
Commercial MBS, non-agency
|
1,451
|
|
(3
|
)
|
—
|
|
—
|
|
1,451
|
|
(3
|
)
|
||||||||||||
|
Other ABS
(1)
|
27,012
|
|
(215
|
)
|
—
|
|
—
|
|
27,012
|
|
(215
|
)
|
||||||||||||
|
Total investment securities
|
$
|
308,602
|
|
$
|
(4,813
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
308,602
|
|
$
|
(4,813
|
)
|
||||||
____________________________
(1)
Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.
55
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Other-Than-Temporary Impairment
We conduct periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other than temporary. The number of individual securities in an unrealized loss position was
271
as of
August 31, 2018
. We have assessed each security with gross unrealized losses included in the above table for credit impairment. As part of that assessment, we concluded that the unrealized losses are driven by changes in market interest rates rather than by adverse changes in the credit quality of these securities. Based on our assessment, we expect to recover the entire amortized cost basis of these securities, as we do not intend to sell any of the securities and have concluded that it is more likely than not that we will not be required to sell prior to recovery of the amortized cost basis. Accordingly, we currently consider the impairment of these securities to be temporary.
Contractual Maturity and Yield
The following table presents, by major security type, the remaining contractual maturity based on amortized cost and fair value of our HTM investment securities as of
August 31, 2018
and
May 31, 2018
. Because borrowers may have the right to call or prepay certain obligations, the expected maturities of our investments may differ from the scheduled contractual maturities presented below.
56
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
August 31, 2018
|
||||||||||||||||||||
|
(Dollars in thousands)
|
Due in 1 Year or Less
|
Due > 1 Year through 5 Years
|
Due > 5 Years through 10 Years
|
Due >10 Years
|
Total
|
|||||||||||||||
|
Amortized cost:
|
||||||||||||||||||||
|
Certificates of deposit
|
$
|
3,650
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3,650
|
|
|||||
|
Commercial paper
|
9,037
|
|
—
|
|
—
|
|
—
|
|
9,037
|
|
||||||||||
|
U.S. agency debt securities
|
—
|
|
2,431
|
|
—
|
|
—
|
|
2,431
|
|
||||||||||
|
Corporate debt securities
|
14,347
|
|
382,249
|
|
71,463
|
|
—
|
|
468,059
|
|
||||||||||
|
Commercial MBS:
|
||||||||||||||||||||
|
Agency
|
—
|
|
342
|
|
7,000
|
|
—
|
|
7,342
|
|
||||||||||
|
Non-agency
|
—
|
|
—
|
|
—
|
|
3,453
|
|
3,453
|
|
||||||||||
|
Total commercial MBS
|
—
|
|
342
|
|
7,000
|
|
3,453
|
|
10,795
|
|
||||||||||
|
U.S. state and municipality debt securities
|
—
|
|
5,484
|
|
4,133
|
|
—
|
|
9,617
|
|
||||||||||
|
Foreign government debt securities
|
—
|
|
1,241
|
|
—
|
|
—
|
|
1,241
|
|
||||||||||
|
Other ABS
(1)
|
—
|
|
46,483
|
|
2,441
|
|
—
|
|
48,924
|
|
||||||||||
|
Total
|
$
|
27,034
|
|
$
|
438,230
|
|
$
|
85,037
|
|
$
|
3,453
|
|
$
|
553,754
|
|
|||||
|
Fair value:
|
||||||||||||||||||||
|
Certificates of deposit
|
$
|
3,650
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3,650
|
|
|||||
|
Commercial paper
|
9,037
|
|
—
|
|
—
|
|
—
|
|
9,037
|
|
||||||||||
|
U.S. agency debt securities
|
—
|
|
2,443
|
|
—
|
|
—
|
|
2,443
|
|
||||||||||
|
Corporate debt securities
|
14,283
|
|
378,300
|
|
71,783
|
|
—
|
|
464,366
|
|
||||||||||
|
Commercial MBS:
|
||||||||||||||||||||
|
Agency
|
—
|
|
341
|
|
7,050
|
|
—
|
|
7,391
|
|
||||||||||
|
Non-Agency
|
—
|
|
—
|
|
—
|
|
3,451
|
|
3,451
|
|
||||||||||
|
Total Commercial MBS
|
—
|
|
341
|
|
7,050
|
|
3,451
|
|
10,842
|
|
||||||||||
|
U.S. State and Municipality Debt Securities
|
—
|
|
5,492
|
|
4,162
|
|
—
|
|
9,654
|
|
||||||||||
|
Foreign Government Debt Securities
|
—
|
|
1,246
|
|
—
|
|
—
|
|
1,246
|
|
||||||||||
|
Other ABS
(1)
|
—
|
|
46,290
|
|
2,446
|
|
—
|
|
48,736
|
|
||||||||||
|
Total
|
$
|
26,970
|
|
$
|
434,112
|
|
$
|
85,441
|
|
$
|
3,451
|
|
$
|
549,974
|
|
|||||
|
Weighted average coupon
(2)
|
2.00
|
%
|
2.85
|
%
|
3.56
|
%
|
2.89
|
%
|
2.92
|
%
|
||||||||||
57
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
May 31, 2018
|
||||||||||||||||||||
|
(Dollars in thousands)
|
Due in 1 Year or Less
|
Due > 1 Year through 5 Years
|
Due > 5 Years through 10 Years
|
Due >10 Years
|
Total
|
|||||||||||||||
|
Amortized cost:
|
||||||||||||||||||||
|
Certificates of deposit
|
$
|
5,148
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
5,148
|
|
|||||
|
Commercial paper
|
9,134
|
|
—
|
|
—
|
|
—
|
|
9,134
|
|
||||||||||
|
U.S. agency debt securities
|
—
|
|
2,000
|
|
—
|
|
—
|
|
2,000
|
|
||||||||||
|
Corporate debt securities
|
9,111
|
|
377,384
|
|
69,226
|
|
—
|
|
455,721
|
|
||||||||||
|
Commercial MBS:
|
||||||||||||||||||||
|
Agency
|
—
|
|
—
|
|
7,024
|
|
—
|
|
7,024
|
|
||||||||||
|
Non-Agency
|
—
|
|
—
|
|
—
|
|
3,453
|
|
3,453
|
|
||||||||||
|
Total Commercial MBS
|
—
|
|
—
|
|
7,024
|
|
3,453
|
|
10,477
|
|
||||||||||
|
U.S. State and Municipality Debt Securities
|
—
|
|
—
|
|
2,147
|
|
—
|
|
2,147
|
|
||||||||||
|
Foreign Government Debt Securities
|
—
|
|
1,241
|
|
—
|
|
—
|
|
1,241
|
|
||||||||||
|
Other ABS
(1)
|
—
|
|
33,357
|
|
1,294
|
|
—
|
|
34,651
|
|
||||||||||
|
Total
|
$
|
23,393
|
|
$
|
413,982
|
|
$
|
79,691
|
|
$
|
3,453
|
|
$
|
520,519
|
|
|||||
|
Fair value:
|
||||||||||||||||||||
|
Certificates of deposit
|
$
|
5,148
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
5,148
|
|
|||||
|
Commercial paper
|
9,134
|
|
—
|
|
—
|
|
—
|
|
9,134
|
|
||||||||||
|
U.S. agency debt securities
|
—
|
|
2,016
|
|
—
|
|
—
|
|
2,016
|
|
||||||||||
|
Corporate debt securities
|
9,056
|
|
373,284
|
|
69,500
|
|
—
|
|
451,840
|
|
||||||||||
|
Commercial MBS:
|
||||||||||||||||||||
|
Agency
|
—
|
|
—
|
|
7,087
|
|
—
|
|
7,087
|
|
||||||||||
|
Non-Agency
|
—
|
|
—
|
|
—
|
|
3,453
|
|
3,453
|
|
||||||||||
|
Total Commercial MBS
|
—
|
|
—
|
|
7,087
|
|
3,453
|
|
10,540
|
|
||||||||||
|
U.S. State and Municipality Debt Securities
|
—
|
|
—
|
|
2,171
|
|
—
|
|
2,171
|
|
||||||||||
|
Foreign Government Debt Securities
|
—
|
|
1,250
|
|
—
|
|
—
|
|
1,250
|
|
||||||||||
|
Other ABS
(1)
|
—
|
|
33,157
|
|
1,290
|
|
—
|
|
34,447
|
|
||||||||||
|
Total
|
$
|
23,338
|
|
$
|
409,707
|
|
$
|
80,048
|
|
$
|
3,453
|
|
$
|
516,546
|
|
|||||
|
Weighted average coupon
(2)
|
1.81
|
%
|
2.84
|
%
|
3.60
|
%
|
2.74
|
%
|
2.91
|
%
|
||||||||||
____________________________
(1)
Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.
(2)
Calculated based on the weighted average coupon rate, which excludes the impact of amortization of premium and accretion of discount.
The average contractual maturity and weighted average coupon of our HTM investment securities was
four years
and
2.92%
, respectively, as of
August 31, 2018
. The average credit rating of these securities, based on the equivalent lowest credit rating by Moody’s, S&P and Fitch was A2, A and A, respectively, as of
August 31, 2018
.
Realized Gains and Losses
We did not sell any of our investment securities during the
three months ended August 31, 2018
, and therefore have not recorded any realized gains or losses.
58
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Loans, which are classified as held for investment, are carried at the outstanding unpaid principal balance net of unamortized loan origination costs. The following table presents the outstanding principal balance of loans to members, including deferred loan origination costs, and unadvanced loan commitments by loan type and member class, as of
August 31, 2018 and May 31, 2018
.
|
|
August 31, 2018
|
May 31, 2018
|
||||||||||||||
|
(Dollars in thousands)
|
Loans
Outstanding
|
Unadvanced
Commitments
(1)
|
Loans
Outstanding
|
Unadvanced
Commitments
(1)
|
||||||||||||
|
Loan type:
|
|
|
|
|
||||||||||||
|
Long-term loans:
|
||||||||||||||||
|
Fixed rate
|
$
|
22,682,597
|
|
$
|
—
|
|
$
|
22,696,185
|
|
$
|
—
|
|
||||
|
Variable rate
|
1,111,679
|
|
5,103,629
|
|
1,039,491
|
|
4,952,834
|
|
||||||||
|
Total long-term loans
|
23,794,276
|
|
5,103,629
|
|
23,735,676
|
|
4,952,834
|
|
||||||||
|
Lines of credit
|
1,377,160
|
|
7,804,966
|
|
1,431,818
|
|
7,692,784
|
|
||||||||
|
Total loans outstanding
|
25,171,436
|
|
12,908,595
|
|
25,167,494
|
|
12,645,618
|
|
||||||||
|
Deferred loan origination costs
|
|
11,218
|
|
|
—
|
|
|
11,114
|
|
|
—
|
|
||||
|
Loans to members
|
|
$
|
25,182,654
|
|
|
$
|
12,908,595
|
|
|
$
|
25,178,608
|
|
|
$
|
12,645,618
|
|
|
Member class:
|
|
|
|
|
||||||||||||
|
CFC:
|
|
|
|
|
||||||||||||
|
Distribution
|
$
|
19,638,104
|
|
$
|
8,384,392
|
|
$
|
19,551,511
|
|
$
|
8,188,376
|
|
||||
|
Power supply
|
4,320,866
|
|
3,463,774
|
|
4,397,353
|
|
3,407,095
|
|
||||||||
|
Statewide and associate
|
72,959
|
|
140,227
|
|
69,055
|
|
128,025
|
|
||||||||
|
Total CFC
|
24,031,929
|
|
11,988,393
|
|
24,017,919
|
|
11,723,496
|
|
||||||||
|
NCSC
|
780,892
|
|
614,200
|
|
786,457
|
|
624,663
|
|
||||||||
|
RTFC
|
358,615
|
|
306,002
|
|
363,118
|
|
297,459
|
|
||||||||
|
Total loans outstanding
|
25,171,436
|
|
12,908,595
|
|
25,167,494
|
|
12,645,618
|
|
||||||||
|
Deferred loan origination costs
|
11,218
|
|
—
|
|
11,114
|
|
—
|
|
||||||||
|
Loans to members
|
$
|
25,182,654
|
|
$
|
12,908,595
|
|
$
|
25,178,608
|
|
$
|
12,645,618
|
|
||||
____________________________
(1)
The interest rate on unadvanced loan commitments is not set until an advance is made; therefore, all long-term unadvanced loan commitments are reported as variable-rate. However, the borrower may select either a fixed or a variable rate when an advance on a commitment is made.
Unadvanced Loan Commitments
Unadvanced loan commitments represent approved and executed loan contracts for which funds have not been advanced to borrowers. The following table summarizes the available balance under unadvanced loan commitments as of
August 31, 2018
and the related maturities by fiscal year and thereafter by loan type:
59
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Available
Balance
|
Notional Maturities of Unadvanced Loan Commitments
|
||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2019
|
2020
|
2021
|
2022
|
2023
|
Thereafter
|
||||||||||||||||||||||
|
Line of credit loans
|
$
|
7,804,966
|
|
|
$
|
504,426
|
|
|
$
|
4,144,522
|
|
|
$
|
889,426
|
|
|
$
|
860,833
|
|
|
$
|
1,304,869
|
|
|
$
|
100,890
|
|
|
|
Long-term loans
|
5,103,629
|
|
|
732,028
|
|
|
556,221
|
|
|
620,100
|
|
|
1,652,454
|
|
|
1,224,865
|
|
|
317,961
|
|
||||||||
|
Total
|
$
|
12,908,595
|
|
|
$
|
1,236,454
|
|
|
$
|
4,700,743
|
|
|
$
|
1,509,526
|
|
|
$
|
2,513,287
|
|
|
$
|
2,529,734
|
|
|
$
|
418,851
|
|
|
Unadvanced line of credit commitments accounted for
60%
of total unadvanced loan commitments as of
August 31, 2018
, while unadvanced long-term loan commitments accounted for
40%
of total unadvanced loan commitments. Unadvanced line of credit commitments are typically revolving facilities for periods not to exceed five years. Unadvanced line of credit commitments generally serve as supplemental back-up liquidity to our borrowers. Historically, borrowers have not drawn the full commitment amount for line of credit facilities, and we have experienced a very low utilization rate on line of credit loan facilities regardless of whether or not we are obligated to fund the facility where a material adverse change exists.
Our unadvanced long-term loan commitments have a five-year draw period under which a borrower may advance funds prior to the expiration of the commitment. We expect that the majority of the long-term unadvanced loan commitments of
$5,104 million
will be advanced prior to the expiration of the commitment.
Because we historically have experienced a very low utilization rate on line of credit loan facilities, which account for the majority of our total unadvanced loan commitments, we believe the unadvanced loan commitment total of
$12,909 million
as of
August 31, 2018
is not necessarily representative of our future funding cash requirements.
Unadvanced Loan Commitments—Conditional
The substantial majority of our line of credit commitments and all of our unadvanced long-term loan commitments include material adverse change clauses. Unadvanced loan commitments subject to material adverse change clauses totaled
$9,962 million
and
$9,789 million
as of
August 31, 2018 and May 31, 2018
, respectively. Prior to making an advance on these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. In some cases, the borrower’s access to the full amount of the facility is further constrained by the designated purpose, imposition of borrower-specific restrictions or by additional conditions that must be met prior to advancing funds.
Unadvanced Loan Commitments—Unconditional
Unadvanced loan commitments not subject to material adverse change clauses at the time of each advance consisted of unadvanced committed lines of credit totaling
$2,947 million
and
$2,857 million
as of
August 31, 2018 and May 31, 2018
, respectively. As such, we are required to advance amounts on these committed facilities as long as the borrower is in compliance with the terms and conditions of the facility.
The following table summarizes the available balance under unconditional committed lines of credit, and the related maturities by fiscal year and thereafter, as of
August 31, 2018
.
|
|
Available
Balance
|
Notional Maturities of Unconditional Committed Lines of Credit
|
||||||||||||
|
(Dollars in thousands)
|
2019
|
2020
|
2021
|
2022
|
2023
|
Thereafter
|
||||||||
|
Committed lines of credit
|
$2,946,596
|
$218,571
|
$458,236
|
$454,348
|
$609,513
|
$1,147,488
|
$58,440
|
|||||||
60
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Loan Sales
We transfer, from time to time, loans to third parties under our direct loan sale program. We did
no
t have any loan sales during the
three months ended August 31, 2018
. We sold CFC loans with outstanding balances totaling
$70 million
, at par for cash, during the
three months ended August 31, 2017
. We recorded immaterial losses upon the sale of these loans, attributable to the unamortized deferred loan origination costs associated with the transferred loans.
Pledging of Loans
We are required to pledge eligible mortgage notes in an amount at least equal to the outstanding balance of our secured debt. The following table summarizes our loans outstanding as collateral pledged to secure our collateral trust bonds, Clean Renewable Energy Bonds, notes payable to Farmer Mac and notes payable under the Guaranteed Underwriter Program of the USDA (“Guaranteed Underwriter Program”) and the amount of the corresponding debt outstanding as of
August 31, 2018 and May 31, 2018
. See “Note 6—Short-Term Borrowings” and “Note 7—Long-Term Debt” for information on our borrowings.
|
(Dollars in thousands)
|
August 31, 2018
|
May 31, 2018
|
||||||
|
Collateral trust bonds:
|
|
|
||||||
|
2007 indenture:
|
|
|
||||||
|
Distribution system mortgage notes
|
$
|
8,393,917
|
|
$
|
8,643,344
|
|
||
|
RUS-guaranteed loans qualifying as permitted investments
|
139,208
|
|
140,680
|
|
||||
|
Total pledged collateral
|
$
|
8,533,125
|
|
$
|
8,784,024
|
|
||
|
Collateral trust bonds outstanding
|
7,397,711
|
|
7,697,711
|
|
||||
|
1994 indenture:
|
|
|
||||||
|
Distribution system mortgage notes
|
$
|
239,509
|
|
$
|
243,418
|
|
||
|
Collateral trust bonds outstanding
|
220,000
|
|
220,000
|
|
||||
|
Farmer Mac:
|
|
|
||||||
|
Distribution and power supply system mortgage notes
|
$
|
3,204,521
|
|
$
|
3,331,775
|
|
||
|
Notes payable outstanding
|
2,777,532
|
|
2,891,496
|
|
||||
|
Clean Renewable Energy Bonds Series 2009A:
|
|
|
||||||
|
Distribution and power supply system mortgage notes
|
$
|
12,178
|
|
$
|
12,615
|
|
||
|
Cash
|
671
|
|
415
|
|
||||
|
Total pledged collateral
|
$
|
12,849
|
|
$
|
13,030
|
|
||
|
Notes payable outstanding
|
11,556
|
|
11,556
|
|
||||
|
Federal Financing Bank:
|
||||||||
|
Distribution and power supply system mortgage notes
|
$
|
5,560,856
|
|
$
|
5,772,750
|
|
||
|
Notes payable outstanding
|
4,840,976
|
|
4,856,375
|
|
||||
Credit Concentration
As a tax-exempt, member-owned finance cooperative, CFC’s principal focus is to provide funding to its rural electric utility cooperative members to assist them in acquiring, constructing and operating electric distribution, power supply systems and related facilities. We serve electric and telecommunications members throughout the United States and its territories,
61
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
including
50
states, the District of Columbia, American Samoa and Guam. Our consolidated membership totaled
1,449
members and
216
associates as of
August 31, 2018
. Texas had the largest concentration of outstanding loans to borrowers in any one state, with approximately
15%
of total loans outstanding as of both
August 31, 2018 and May 31, 2018
. Because we lend primarily to our rural electric utility cooperative members, we have a loan portfolio subject to single-industry and single-obligor concentration risks.
Loans outstanding to electric utility organizations represented approximately
99%
of total loans outstanding as of
August 31, 2018
, unchanged from
May 31, 2018
. The remaining loans outstanding in our portfolio were to RTFC members, affiliates and associates in the telecommunications industry. The combined exposure of loans and guarantees outstanding for our
20
largest borrowers was
23%
as of both
August 31, 2018 and May 31, 2018
. The
20
largest borrowers consisted of
nine
distribution systems,
10
power supply systems and
one
NCSC associate member as of both
August 31, 2018 and May 31, 2018
. The largest total outstanding exposure to a single borrower or controlled group represented approximately
2%
of total loans and guarantees outstanding as of both
August 31, 2018 and May 31, 2018
.
As part of our strategy in managing our credit exposure, 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
$651 million
and
$660 million
as of
August 31, 2018 and May 31, 2018
, respectively. Under the agreement, we are required to pay Farmer Mac a monthly fee based on the unpaid principal balance of loans covered under the purchase commitment. No loans had been put to Farmer Mac for purchase, pursuant to this agreement, as of
August 31, 2018
. Also, we had long-term loans totaling
$159 million
and
$161 million
as of
August 31, 2018 and May 31, 2018
, respectively, guaranteed by RUS.
Credit Quality
Assessing the overall credit quality of our loan portfolio and measuring our credit risk is an ongoing process that involves tracking payment status, charge-offs, troubled debt restructurings, nonperforming and impaired loans, 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. Internal risk ratings and payment status trends are indicators, among others, of the probability of borrower default and level of credit risk in our loan portfolio.
Payment Status of Loans
The tables below present the payment status of loans outstanding by member class as of
August 31, 2018 and May 31, 2018
. As indicated in the table, we did not have any past due loans as of either
August 31, 2018
or
May 31, 2018
.
62
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
August 31, 2018
|
|||||||||||||||||||||||
|
(Dollars in thousands)
|
Current
|
30-89 Days Past Due
|
90 Days or More
Past Due
(1)
|
Total
Past Due
|
Total Financing
Receivables
|
Nonaccrual Loans
|
||||||||||||||||||
|
CFC:
|
|
|
|
|
|
|
||||||||||||||||||
|
Distribution
|
$
|
19,638,104
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
19,638,104
|
|
$
|
—
|
|
||||||
|
Power supply
|
4,320,866
|
|
—
|
|
—
|
|
—
|
|
4,320,866
|
|
—
|
|
||||||||||||
|
Statewide and associate
|
72,959
|
|
—
|
|
—
|
|
—
|
|
72,959
|
|
—
|
|
||||||||||||
|
CFC total
|
24,031,929
|
|
—
|
|
—
|
|
—
|
|
24,031,929
|
|
—
|
|
||||||||||||
|
NCSC
|
780,892
|
|
—
|
|
—
|
|
—
|
|
780,892
|
|
—
|
|
||||||||||||
|
RTFC
|
358,615
|
|
—
|
|
—
|
|
—
|
|
358,615
|
|
—
|
|
||||||||||||
|
Total loans outstanding
|
$
|
25,171,436
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
25,171,436
|
|
$
|
—
|
|
||||||
|
Percentage of total loans
|
100.00
|
%
|
—
|
%
|
—
|
%
|
—
|
%
|
100.00
|
%
|
—
|
%
|
||||||||||||
|
|
May 31, 2018
|
|||||||||||||||||||||||
|
(Dollars in thousands)
|
Current
|
30-89 Days Past Due
|
90 Days or More
Past Due
(1)
|
Total
Past Due |
Total Financing
Receivables |
Nonaccrual Loans
|
||||||||||||||||||
|
CFC:
|
|
|
|
|
|
|
||||||||||||||||||
|
Distribution
|
$
|
19,551,511
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
19,551,511
|
|
$
|
—
|
|
||||||
|
Power supply
|
4,397,353
|
|
—
|
|
—
|
|
—
|
|
4,397,353
|
|
—
|
|
||||||||||||
|
Statewide and associate
|
69,055
|
|
—
|
|
—
|
|
—
|
|
69,055
|
|
—
|
|
||||||||||||
|
CFC total
|
24,017,919
|
|
—
|
|
—
|
|
—
|
|
24,017,919
|
|
—
|
|
||||||||||||
|
NCSC
|
786,457
|
|
—
|
|
—
|
|
—
|
|
786,457
|
|
—
|
|
||||||||||||
|
RTFC
|
363,118
|
|
—
|
|
—
|
|
—
|
|
363,118
|
|
—
|
|
||||||||||||
|
Total loans outstanding
|
$
|
25,167,494
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
25,167,494
|
|
$
|
—
|
|
||||||
|
Percentage of total loans
|
100.00
|
%
|
—
|
%
|
—
|
%
|
—
|
%
|
100.00
|
%
|
—
|
%
|
||||||||||||
____________________________
(1)
All loans 90 days or more past due are on nonaccrual status.
Troubled Debt Restructurings
We did not have any loans modified as TDRs during the
three months ended August 31, 2018
. The following table provides a summary of loans modified as TDRs in prior periods, the performance status of these loans and the unadvanced loan commitments related to the TDR loans, by member class, as of
August 31, 2018 and May 31, 2018
.
63
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
August 31, 2018
|
May 31, 2018
|
||||||||||||||||||||
|
(Dollars in thousands)
|
Loans
Outstanding
|
% of Total Loans
|
Unadvanced
Commitments
|
Loans
Outstanding
|
% of Total Loans
|
Unadvanced
Commitments
|
||||||||||||||||
|
TDR loans:
|
|
|
|
|
||||||||||||||||||
|
Performing TDR loans:
|
|
|
|
|
||||||||||||||||||
|
CFC/Distribution
|
$
|
6,261
|
|
0.03
|
%
|
$
|
—
|
|
$
|
6,507
|
|
0.03
|
%
|
$
|
—
|
|
||||||
|
RTFC
|
5,967
|
|
0.02
|
|
—
|
|
6,092
|
|
0.02
|
|
—
|
|
||||||||||
|
Total performing TDR loans
|
12,228
|
|
0.05
|
|
—
|
|
12,599
|
|
0.05
|
|
—
|
|
||||||||||
|
Total TDR loans
|
$
|
12,228
|
|
0.05
|
%
|
$
|
—
|
|
$
|
12,599
|
|
0.05
|
%
|
$
|
—
|
|
||||||
We did not have any TDR loans classified as nonperforming as of
August 31, 2018
or
May 31, 2018
. TDR loans classified as performing as of
August 31, 2018 and May 31, 2018
were performing in accordance with the terms of their respective restructured loan agreement and on accrual status as of the respective reported dates.
One
borrower with a TDR loan also had a line of credit facility, restricted for fuel purchases only, totaling
$6 million
as of both
August 31, 2018
and
May 31, 2018
. The outstanding amount under this facility totaled less than
$1 million
as of both
August 31, 2018
and
May 31, 2018
, and was classified as performing as of each respective date.
Nonperforming Loans
In addition to TDR loans that may be classified as nonperforming, we also may have nonperforming loans that have not been modified as a TDR. We did not have any loans classified as nonperforming as of either
August 31, 2018
or
May 31, 2018
.
We had no foregone interest income for loans on nonaccrual status during the
three months ended August 31, 2018 and 2017
.
Impaired Loans
The following table provides information on loans classified as individually impaired loans as of
August 31, 2018 and May 31, 2018
.
|
|
August 31, 2018
|
May 31, 2018
|
||||||||||||||
|
(Dollars in thousands)
|
Recorded
Investment
|
Related
Allowance
|
Recorded
Investment
|
Related
Allowance
|
||||||||||||
|
With no specific allowance recorded:
|
|
|
|
|
||||||||||||
|
CFC
|
$
|
6,261
|
|
$
|
—
|
|
$
|
6,507
|
|
$
|
—
|
|
||||
|
With a specific allowance recorded:
|
|
|
|
|
||||||||||||
|
RTFC
|
5,967
|
|
1,175
|
|
6,092
|
|
1,198
|
|
||||||||
|
Total impaired loans
|
$
|
12,228
|
|
$
|
1,175
|
|
$
|
12,599
|
|
$
|
1,198
|
|
||||
The following table presents, by company, the average recorded investment for individually impaired loans and the interest income recognized on these loans for the
three months ended August 31, 2018 and 2017
.
64
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
Three Months Ended August 31,
|
||||||||||||||||
|
2018
|
2017
|
2018
|
2017
|
|||||||||||||
|
(Dollars in thousands)
|
Average Recorded Investment
|
Interest Income Recognized
|
||||||||||||||
|
CFC
|
$
|
6,504
|
|
$
|
6,574
|
|
$
|
142
|
|
$
|
144
|
|
||||
|
RTFC
|
6,048
|
|
6,548
|
|
76
|
|
82
|
|
||||||||
|
Total impaired loans
|
$
|
12,552
|
|
$
|
13,122
|
|
$
|
218
|
|
$
|
226
|
|
||||
Net Charge-Offs
Charge-offs represent the amount of a loan that has been removed from our consolidated balance sheet when the loan is deemed uncollectible. Generally the amount of a charge-off is the recorded investment in excess of the fair value of the expected cash flows from the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral securing the loan. We report charge-offs net of amounts recovered on previously charged off loans. We had no loan defaults or charge-offs during the
three months ended August 31, 2018
or 2017.
Internal Risk Ratings of Loans
As part of our credit risk management process, we monitor and evaluate each borrower and loan in our loan portfolio and assign internal borrower and loan facility risk ratings based on quantitative and qualitative assessments. Our borrower risk ratings are intended to assess probability of default. Each risk rating is reassessed annually following the receipt of the borrower’s audited financial statements; however, interim risk-rating downgrades or upgrades may occur as a result of significant developments or trends. Our borrower risk ratings are intended to align with banking regulatory agency credit risk rating definitions of pass and criticized classifications, with criticized divided between special mention, substandard and doubtful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default. Following is a description of each rating category.
|
•
|
Pass
: Borrowers that are not experiencing difficulty and/or not showing a potential or well-defined credit weakness.
|
|
•
|
Special Mention
: Borrowers that may be characterized by a potential credit weakness or deteriorating financial condition that is not sufficiently serious to warrant a classification of substandard or doubtful.
|
|
•
|
Substandard
: Borrowers that display a well-defined credit weakness that may jeopardize the full collection of principal and interest.
|
|
•
|
Doubtful
: Borrowers that have a well-defined credit weakness or weaknesses that make full collection of principal and interest, on the basis of currently known facts, conditions and collateral values, highly questionable and improbable.
|
Loans to borrowers in the pass, special mention and substandard categories are generally considered not to be individually impaired and are included in the loan pools for determining the collective reserve component of the allowance for loan losses. Loans to borrowers in the doubtful category are considered to be impaired and are therefore individually assessed for impairment in determining the specific reserve component of the allowance for loan losses.
65
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables present total loans outstanding, by member class and borrower risk rating category, based on the risk ratings used in the estimation of our allowance for loan losses as of
August 31, 2018 and May 31, 2018
.
|
|
August 31, 2018
|
|||||||||||||||||||
|
(Dollars in thousands)
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Total
|
|||||||||||||||
|
CFC:
|
|
|
||||||||||||||||||
|
Distribution
|
$
|
19,507,777
|
|
$
|
6,358
|
|
$
|
123,969
|
|
$
|
—
|
|
$
|
19,638,104
|
|
|||||
|
Power supply
|
4,272,061
|
|
—
|
|
48,805
|
|
—
|
|
4,320,866
|
|
||||||||||
|
Statewide and associate
|
72,959
|
|
—
|
|
—
|
|
—
|
|
72,959
|
|
||||||||||
|
CFC total
|
23,852,797
|
|
6,358
|
|
172,774
|
|
—
|
|
24,031,929
|
|
||||||||||
|
NCSC
|
780,892
|
|
—
|
|
—
|
|
—
|
|
780,892
|
|
||||||||||
|
RTFC
|
352,202
|
|
446
|
|
5,967
|
|
—
|
|
358,615
|
|
||||||||||
|
Total loans outstanding
|
$
|
24,985,891
|
|
$
|
6,804
|
|
$
|
178,741
|
|
$
|
—
|
|
$
|
25,171,436
|
|
|||||
|
May 31, 2018
|
||||||||||||||||||||
|
(Dollars in thousands)
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Total
|
|||||||||||||||
|
CFC:
|
|
|
||||||||||||||||||
|
Distribution
|
$
|
19,429,121
|
|
$
|
6,853
|
|
$
|
115,537
|
|
$
|
—
|
|
$
|
19,551,511
|
|
|||||
|
Power supply
|
4,348,328
|
|
—
|
|
49,025
|
|
—
|
|
4,397,353
|
|
||||||||||
|
Statewide and associate
|
69,055
|
|
—
|
|
—
|
|
—
|
|
69,055
|
|
||||||||||
|
CFC total
|
23,846,504
|
|
6,853
|
|
164,562
|
|
—
|
|
24,017,919
|
|
||||||||||
|
NCSC
|
786,457
|
|
—
|
|
—
|
|
—
|
|
786,457
|
|
||||||||||
|
RTFC
|
356,503
|
|
523
|
|
6,092
|
|
—
|
|
363,118
|
|
||||||||||
|
Total loans outstanding
|
$
|
24,989,464
|
|
$
|
7,376
|
|
$
|
170,654
|
|
$
|
—
|
|
$
|
25,167,494
|
|
|||||
We had loans to one electric distribution cooperative borrower and its subsidiary totaling
$173 million
and
$165 million
as of
August 31, 2018 and May 31, 2018
, respectively, that were classified as substandard. The electric distribution cooperative owns and operates a distribution and transmission system and is in the early stages of deploying retail broadband service. The borrower is currently experiencing financial difficulties due to recent net losses and weak cash flows. The borrower and its subsidiary are current with regard to all principal and interest payments and have never been delinquent. The borrower operates in a territory that is not rate-regulated and has the ability to adjust its electric rates to cover operating costs and service debt. Of the outstanding amount, all but
$17 million
and
$7 million
was secured under our typical collateral requirements for long-term loan advances as of
August 31, 2018 and May 31, 2018
, respectively. We currently expect to collect all principal and interest amounts due from the borrower and its subsidiary. Accordingly, the loans outstanding to this borrower and its subsidiary were not deemed to be impaired as of either August 31, 2018 or May 31, 2018.
|
|
We maintain an allowance for loan losses that represents management’s estimate of probable losses inherent in our loan portfolio as of each balance sheet date. Our allowance for loan losses consists of a collective allowance for loans in our portfolio that are not individually impaired and a specific allowance for loans identified as individually impaired. The allowance for loan losses is reported separately on the consolidated balance sheet, and the provision for loan losses is separately reported on our consolidated statement of income.
66
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables summarize changes, by company, in the allowance for loan losses as of and for the
three months ended August 31, 2018 and 2017
.
|
|
Three Months Ended August 31, 2018
|
|||||||||||||||
|
(Dollars in thousands)
|
CFC
|
NCSC
|
RTFC
|
Total
|
||||||||||||
|
Balance as of May 31, 2018
|
$
|
12,300
|
|
$
|
2,082
|
|
$
|
4,419
|
|
$
|
18,801
|
|
||||
|
Provision (benefit) for loan losses
|
208
|
|
(70
|
)
|
(247
|
)
|
(109
|
)
|
||||||||
|
Balance as of August 31, 2018
|
$
|
12,508
|
|
$
|
2,012
|
|
$
|
4,172
|
|
$
|
18,692
|
|
||||
|
|
Three Months Ended August 31, 2017
|
|||||||||||||||
|
(Dollars in thousands)
|
CFC
|
NCSC
|
RTFC
|
Total
|
||||||||||||
|
Balance as of May 31, 2017
|
$
|
29,499
|
|
$
|
2,910
|
|
$
|
4,967
|
|
$
|
37,376
|
|
||||
|
Provision (benefit) for loan losses
|
22
|
|
(174
|
)
|
(146
|
)
|
(298
|
)
|
||||||||
|
Balance as of August 31, 2017
|
$
|
29,521
|
|
$
|
2,736
|
|
$
|
4,821
|
|
$
|
37,078
|
|
||||
The tables below present, by company, the components of our allowance for loan losses and the recorded investment of the related loans as of
August 31, 2018 and May 31, 2018
.
|
|
August 31, 2018
|
|||||||||||||||
|
(Dollars in thousands)
|
CFC
|
NCSC
|
RTFC
|
Total
|
||||||||||||
|
Ending balance of the allowance:
|
|
|
|
|
||||||||||||
|
Collective allowance
|
$
|
12,508
|
|
$
|
2,012
|
|
$
|
2,997
|
|
$
|
17,517
|
|
||||
|
Specific allowance
|
—
|
|
—
|
|
1,175
|
|
1,175
|
|
||||||||
|
Total ending balance of the allowance
|
$
|
12,508
|
|
$
|
2,012
|
|
$
|
4,172
|
|
$
|
18,692
|
|
||||
|
Recorded investment in loans:
|
|
|
|
|
||||||||||||
|
Collectively evaluated loans
|
$
|
24,025,668
|
|
$
|
780,892
|
|
$
|
352,648
|
|
$
|
25,159,208
|
|
||||
|
Individually evaluated loans
|
6,261
|
|
—
|
|
5,967
|
|
12,228
|
|
||||||||
|
Total recorded investment in loans
|
$
|
24,031,929
|
|
$
|
780,892
|
|
$
|
358,615
|
|
$
|
25,171,436
|
|
||||
|
Total recorded investment in loans, net
(1)
|
$
|
24,019,421
|
|
$
|
778,880
|
|
$
|
354,443
|
|
$
|
25,152,744
|
|
||||
67
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
May 31, 2018
|
|||||||||||||||
|
(Dollars in thousands)
|
CFC
|
NCSC
|
RTFC
|
Total
|
||||||||||||
|
Ending balance of the allowance:
|
|
|
|
|
||||||||||||
|
Collective allowance
|
$
|
12,300
|
|
$
|
2,082
|
|
$
|
3,221
|
|
$
|
17,603
|
|
||||
|
Specific allowance
|
—
|
|
—
|
|
1,198
|
|
1,198
|
|
||||||||
|
Total ending balance of the allowance
|
$
|
12,300
|
|
$
|
2,082
|
|
$
|
4,419
|
|
$
|
18,801
|
|
||||
|
Recorded investment in loans:
|
|
|
|
|
||||||||||||
|
Collectively evaluated loans
|
$
|
24,011,412
|
|
$
|
786,457
|
|
$
|
357,026
|
|
$
|
25,154,895
|
|
||||
|
Individually evaluated loans
|
6,507
|
|
—
|
|
6,092
|
|
12,599
|
|
||||||||
|
Total recorded investment in loans
|
$
|
24,017,919
|
|
$
|
786,457
|
|
$
|
363,118
|
|
$
|
25,167,494
|
|
||||
|
Total recorded investment in loans, net
(1)
|
$
|
24,005,619
|
|
$
|
784,375
|
|
$
|
358,699
|
|
$
|
25,148,693
|
|
||||
____________________________
(1)
Excludes unamortized deferred loan origination costs of
$11 million
as of both
August 31, 2018 and May 31, 2018
.
In addition to the allowance for loan losses, we also maintain a reserve for unadvanced loan commitments at a level estimated by management to provide for probable losses under these commitments as of each balance sheet date, which was less than
$1 million
as of both
August 31, 2018 and May 31, 2018
.
|
|
||||
Short-term borrowings consist of borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. Our short-term borrowings totaled
$3,793 million
and accounted for
15%
of total debt outstanding as of
August 31, 2018
, compared with
$3,796 million
, or
15%
, of total debt outstanding as of
May 31, 2018
. The following table displays short-term borrowings outstanding as of
August 31, 2018 and May 31, 2018
.
|
(Dollars in thousands)
|
August 31, 2018
|
|
May 31, 2018
|
|||||
|
Short-term borrowings:
|
|
|
||||||
|
Commercial paper sold through dealers, net of discounts
|
$
|
929,380
|
|
$
|
1,064,266
|
|
||
|
Commercial paper sold directly to members, at par
|
1,286,441
|
|
1,202,105
|
|
||||
|
Select notes
|
799,240
|
|
780,472
|
|
||||
|
Daily liquidity fund notes
|
535,090
|
|
400,635
|
|
||||
|
Farmer Mac revolving facility
|
—
|
|
100,000
|
|
||||
|
Medium-term notes sold to members
|
242,985
|
|
248,432
|
|
||||
|
Total short-term borrowings
|
$
|
3,793,136
|
|
$
|
3,795,910
|
|
||
Committed Bank Revolving Line of Credit Agreements
We had
$3,085 million
of commitments under committed bank revolving line of credit agreements as of both
August 31, 2018 and May 31, 2018
. 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.
68
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents the total commitment, the net amount available for use and the outstanding letters of credit under our committed bank revolving line of credit agreements as of
August 31, 2018 and May 31, 2018
.
|
August 31, 2018
|
|
May 31, 2018
|
|
|
|
|
||||||||||||||||||||||
|
(Dollars in millions)
|
Total Commitment
|
|
Letters of Credit Outstanding
|
|
Net Available for Use
|
|
Total Commitment
|
|
Letters of Credit Outstanding
|
|
Net Available for Use
|
|
Maturity
|
|
Annual Facility Fee
(1)
|
|||||||||||||
|
3-year agreement
|
$
|
1,492
|
|
$
|
—
|
|
$
|
1,492
|
|
$
|
1,492
|
|
$
|
—
|
|
$
|
1,492
|
|
November 20, 2020
|
7.5 bps
|
||||||||
|
5-year agreement
|
1,593
|
|
3
|
|
1,590
|
|
1,593
|
|
3
|
|
1,590
|
|
November 20, 2022
|
10 bps
|
||||||||||||||
|
Total
|
$
|
3,085
|
|
$
|
3
|
|
$
|
3,082
|
|
$
|
3,085
|
|
$
|
3
|
|
$
|
3,082
|
|
||||||||||
____________________________
(1)
Facility fee determined by CFC’s senior unsecured credit ratings based on the pricing schedules put in place at the inception of the related agreement.
We had
no
borrowings outstanding under our committed bank revolving line of credit agreements as of
August 31, 2018
or
May 31, 2018
, and we were in compliance with all covenants and conditions under the agreements as of each date.
69
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
||||
The following table displays long-term debt outstanding, by debt type, as of
August 31, 2018 and May 31, 2018
.
|
(Dollars in thousands)
|
August 31, 2018
|
May 31, 2018
|
||||||
|
Unsecured long-term debt:
|
|
|
||||||
|
Medium-term notes sold through dealers
|
$
|
3,317,219
|
|
$
|
3,026,472
|
|
||
|
Medium-term notes sold to members
|
388,748
|
|
395,389
|
|
||||
|
Subtotal medium-term notes
|
3,705,967
|
|
3,421,861
|
|
||||
|
Unamortized discount
|
(1,175
|
)
|
(1,256
|
)
|
||||
|
Debt issuance costs
|
(21,844
|
)
|
(22,237
|
)
|
||||
|
Total unsecured medium-term notes
|
3,682,948
|
|
3,398,368
|
|
||||
|
Unsecured notes payable
|
18,892
|
|
18,892
|
|
||||
|
Unamortized discount
|
(253
|
)
|
(277
|
)
|
||||
|
Debt issuance costs
|
(62
|
)
|
(68
|
)
|
||||
|
Total unsecured notes payable
|
18,577
|
|
18,547
|
|
||||
|
Total unsecured long-term debt
|
3,701,525
|
|
3,416,915
|
|
||||
|
Secured long-term debt:
|
|
|
|
|
||||
|
Collateral trust bonds
|
7,617,711
|
|
7,917,711
|
|
||||
|
Unamortized discount
|
(247,723
|
)
|
(250,421
|
)
|
||||
|
Debt issuance costs
|
(26,419
|
)
|
(28,197
|
)
|
||||
|
Total collateral trust bonds
|
7,343,569
|
|
7,639,093
|
|
||||
|
Guaranteed Underwriter Program notes payable
|
4,840,976
|
|
4,856,375
|
|
||||
|
Debt issuance costs
|
—
|
|
(232
|
)
|
||||
|
Total Guaranteed Underwriter Program notes payable
|
4,840,976
|
|
4,856,143
|
|
||||
|
Farmer Mac notes payable
|
2,777,532
|
|
2,791,496
|
|
||||
|
Other secured notes payable
|
11,556
|
|
11,556
|
|
||||
|
Debt issuance costs
|
(226
|
)
|
(243
|
)
|
||||
|
Total other secured notes payable
|
11,330
|
|
11,313
|
|
||||
|
Total secured notes payable
|
7,629,838
|
|
7,658,952
|
|
||||
|
Total secured long-term debt
|
14,973,407
|
|
15,298,045
|
|
||||
|
Total long-term debt
|
$
|
18,674,932
|
|
$
|
18,714,960
|
|
||
Collateral Trust Bonds
Collateral trust bonds represent secured obligations sold to investors in the capital markets. Collateral trust bonds are secured by the pledge of mortgage notes or eligible securities in an amount at least equal to the principal balance of the bonds outstanding.
On July 12, 2018, we redeemed
$300 million
of the
$1 billion
10.375%
collateral trust bonds due November 1, 2018, at a premium of
$7 million
.
70
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Secured Notes Payable
We had outstanding secured notes payable totaling
$4,841 million
and
$4,856 million
as of
August 31, 2018 and May 31, 2018
, respectively, under bond purchase agreements with the Federal Financing Bank and a bond guarantee agreement with RUS issued under the Guaranteed Underwriter Program, which provides guarantees to the Federal Financing Bank. We pay RUS a fee of 30 basis points per year on the total amount outstanding. We had up to
$1,225 million
available for access under the Guaranteed Underwriter Program as of
August 31, 2018
.
We are required to pledge eligible distribution system or power supply system loans as collateral in an amount at least equal to the total principal amount of notes outstanding under the Guaranteed Underwriter Program. See “Note 4—Loans” for additional information on the collateral pledged to secure notes payable under this program.
We have two revolving note purchase agreements with Farmer Mac, which together allow us to borrow up to
$5,500 million
from Farmer Mac. On February 26, 2018, we amended our first revolving note purchase agreement with Farmer Mac, dated March 24, 2011. Under the amended agreement, we can currently borrow, subject to market conditions, up to
$5,200 million
at any time through January 11, 2022, and such date shall automatically extend on each anniversary date of the closing for an additional year, unless prior to any such anniversary date, Farmer Mac provides us with a notice that the draw period will not be extended beyond the remaining term. This revolving note purchase agreement allows us to borrow, repay and re-borrow funds at any time through maturity, as market conditions permit, provided that the outstanding principal amount at any time does not exceed the total available under the agreement. Each borrowing under the revolving note purchase agreement is evidenced by a pricing agreement setting forth the interest rate, maturity date and other related terms as we may negotiate with Farmer Mac at the time of each such borrowing. We may select a fixed rate or variable rate at the time of each advance with a maturity as determined in the applicable pricing agreement. Under this note purchase agreement with Farmer Mac, we had outstanding secured notes payable totaling
$2,778 million
and
$2,791 million
as of
August 31, 2018 and May 31, 2018
, respectively.
Our second revolving note purchase agreement with Farmer Mac, dated July 31, 2015, was amended effective July 31, 2018 to extend the maturity to December 20, 2023. Prior to the maturity date, Farmer Mac may terminate the agreement upon 30 days written notice to us on periodic facility renewal dates, the first of which is January 31, 2019. Subsequent facility renewal dates are on each June 20 or December 20 thereafter until the maturity date. We may terminate the agreement upon 30 days written notice at any time. Under the terms of the first revolving note purchase agreement with Farmer Mac described above, the
$5,200 million
commitment will increase to
$5,500 million
in the event the second revolving note purchase agreement is terminated. Under the terms of the amended second revolving note purchase agreement with Farmer Mac, we can borrow up to
$300 million
at any time through December 20, 2023 at a fixed spread over LIBOR. This agreement also allows us to borrow, repay and re-borrow funds at any time through maturity, provided that the outstanding principal amount at any time does not exceed the total available under the agreement.
We 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 each of our Farmer Mac revolving note purchase agreements. See “Note 4—Loans” for additional information on the collateral pledged to secure notes payable under these programs.
We were in compliance with all covenants and conditions under our senior debt indentures as of
August 31, 2018 and May 31, 2018
.
71
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
||||
The following table presents subordinated deferrable debt outstanding as of
August 31, 2018 and May 31, 2018
.
|
(Dollars in thousands)
|
August 31, 2018
|
May 31, 2018
|
||||||
|
4.75% due 2043 with a call date of April 30, 2023
|
$
|
400,000
|
|
$
|
400,000
|
|
||
|
5.25% due 2046 with a call date of April 20, 2026
|
350,000
|
|
350,000
|
|
||||
|
Debt issuance costs
|
(7,555
|
)
|
(7,590
|
)
|
||||
|
Total subordinated deferrable debt
|
$
|
742,445
|
|
$
|
742,410
|
|
||
|
|
We are an end user of derivative financial instruments and do not engage in derivative trading. We use derivatives, primarily interest rate swaps and Treasury rate locks, to manage interest rate risk. Derivatives may be privately negotiated contracts, which are often referred to as over-the-counter (“OTC”) derivatives, or they may be listed and traded on an exchange. We generally engage in OTC derivative transactions.
Accounting for Derivatives
In accordance with the accounting standards for derivatives and hedging activities, we record derivative instruments at fair value as either a derivative asset or derivative liability on our condensed consolidated balance sheets. We report derivative asset and liability amounts on a gross basis based on individual contracts, which does not take into consideration the effects of master netting agreements or collateral netting. Derivatives in a gain position are reported as derivative assets on our condensed consolidated balance sheets, while derivatives in a loss position are reported as derivative liabilities. Accrued interest related to derivatives is reported on our condensed consolidated balance sheets as a component of either accrued interest and other receivables 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 and derivative forward value amounts, are recognized in our consolidated statements of income under derivative gains (losses). If we elect hedge accounting treatment for derivatives, we formally document, designate and assess the effectiveness of the hedge relationship. Changes in the fair value of derivatives designated as qualifying fair value hedges are recorded in earnings together with offsetting changes in the fair value of the hedged item and any related ineffectiveness. Changes in the fair value of derivatives designated as qualifying cash flow hedges are recorded as a component of OCI, to the extent that the hedge relationships are effective, and reclassified AOCI to earnings using the effective interest method over the term of the forecasted transaction. Any ineffectiveness in the hedging relationship is recognized as a component of derivative gains (losses) in our consolidated statement of income.
We generally do not designate interest rate swaps, which currently represent all of our outstanding derivatives, for hedge accounting. Accordingly, changes in the fair value of interest rate swaps are reported in our consolidated statements of income under derivative gains (losses). Net periodic cash settlements related to interest rate swaps are classified as an operating activity in our consolidated statements of cash flows.
Outstanding Notional Amount of Derivatives not Designated as Accounting Hedges
The notional amount provides an indication of the volume of our derivatives activity, but this amount is not recorded on our condensed consolidated balance sheets. The notional amount is used only as the basis on which interest payments are determined and is not the amount exchanged. The following table shows the outstanding notional amounts and the weighted-average rate paid and received for our interest rate swaps, by type, as of
August 31, 2018 and May 31, 2018
. The
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
substantial majority of our interest rate swaps use an index based on the London Interbank Offered Rate (“LIBOR”) for either the pay or receive leg of the swap agreement.
|
|
August 31, 2018
|
May 31, 2018
|
||||||||||||||||||
|
(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
|
$
|
7,474,762
|
|
2.82
|
%
|
2.34
|
%
|
$
|
6,987,999
|
|
2.83
|
%
|
2.30
|
%
|
||||||
|
Receive-fixed swaps
|
3,699,000
|
|
2.96
|
|
2.52
|
|
3,824,000
|
|
2.93
|
|
2.50
|
|
||||||||
|
Total interest rate swaps
|
11,173,762
|
|
2.87
|
|
2.40
|
|
10,811,999
|
|
2.86
|
|
2.37
|
|
||||||||
|
Forward pay-fixed swaps
|
65,000
|
|
256,154
|
|
||||||||||||||||
|
Total
|
$
|
11,238,762
|
|
$
|
11,068,153
|
|
||||||||||||||
Cash Flow Hedge
In anticipation of the repricing of
$100 million
in notes payable outstanding under the Guaranteed Underwriter Program, we entered into a treasury rate lock agreement with a notional amount of
$100 million
on May 25, 2018. The agreement, which matures on October 12, 2018, was designated as a cash flow hedge of the forecasted transaction. This cash flow hedge was recorded at fair value on our condensed consolidated balance sheets as of
August 31, 2018
, and the related unrealized loss of
$1 million
was recorded in AOCI.
Impact of Derivatives on Condensed Consolidated Balance Sheets
The following table displays the fair value of the derivative assets and derivative liabilities recorded on our condensed consolidated balance sheets and the related outstanding notional amount of our interest rate swaps by derivatives type, as of
August 31, 2018
and
May 31, 2018
.
|
|
August 31, 2018
|
May 31, 2018
|
||||||||||||||
|
(Dollars in thousands)
|
Fair Value
|
Notional Balance
|
Fair Value
|
Notional Balance
|
||||||||||||
|
Derivative assets:
|
||||||||||||||||
|
Interest rate swaps
|
$
|
256,186
|
|
$
|
5,391,495
|
|
$
|
244,526
|
|
$
|
5,264,971
|
|
||||
|
Derivative liabilities:
|
||||||||||||||||
|
Treasury rate lock—cash flow hedge
|
$
|
1,036
|
|
$
|
100,000
|
|
$
|
1,059
|
|
$
|
100,000
|
|
||||
|
Interest rate swaps
|
266,639
|
|
5,847,267
|
|
274,873
|
|
5,803,182
|
|
||||||||
|
Total derivative liabilities
|
$
|
267,675
|
|
$
|
5,947,267
|
|
$
|
275,932
|
|
$
|
5,903,182
|
|
||||
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, we report derivative asset and liability amounts on a gross basis by individual contracts. The following table presents the gross fair value of derivative assets and liabilities reported on our condensed consolidated balance sheets as of
August 31, 2018 and May 31, 2018
, and provides information on the impact of netting provisions and collateral pledged.
73
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
August 31, 2018
|
||||||||||||||||||||||||
|
Gross Amount
of Recognized
Assets/ Liabilities
|
Gross Amount
Offset in the
Balance Sheet
|
Net Amount of Assets/ Liabilities
Presented
in the
Balance Sheet
|
Gross Amount
Not Offset in the
Balance Sheet
|
|||||||||||||||||||||
|
(Dollars in thousands)
|
Financial
Instruments
|
Cash
Collateral
Pledged
|
Net
Amount
|
|||||||||||||||||||||
|
Derivative assets:
|
||||||||||||||||||||||||
|
Interest rate swaps
|
$
|
256,186
|
|
$
|
—
|
|
$
|
256,186
|
|
$
|
196,187
|
|
$
|
—
|
|
$
|
59,999
|
|
||||||
|
Derivative liabilities:
|
||||||||||||||||||||||||
|
Treasury rate lock—cash flow hedge
|
1,036
|
|
—
|
|
1,036
|
|
—
|
|
—
|
|
1,036
|
|
||||||||||||
|
Interest rate swaps
|
266,639
|
|
—
|
|
266,639
|
|
196,187
|
|
—
|
|
70,452
|
|
||||||||||||
|
May 31, 2018
|
||||||||||||||||||||||||
|
Gross Amount
of Recognized
Assets/ Liabilities
|
Gross Amount
Offset in the
Balance Sheet
|
Net Amount of Assets/ Liabilities
Presented
in the
Balance Sheet
|
Gross Amount
Not Offset in the
Balance Sheet
|
|||||||||||||||||||||
|
(Dollars in thousands)
|
Financial
Instruments
|
Cash
Collateral
Pledged
|
Net
Amount
|
|||||||||||||||||||||
|
Derivative assets:
|
||||||||||||||||||||||||
|
Interest rate swaps
|
$
|
244,526
|
|
$
|
—
|
|
$
|
244,526
|
|
$
|
196,633
|
|
$
|
—
|
|
$
|
47,893
|
|
||||||
|
Derivative liabilities:
|
||||||||||||||||||||||||
|
Treasury rate lock—cash flow hedge
|
1,059
|
|
—
|
|
1,059
|
|
—
|
|
—
|
|
1,059
|
|
||||||||||||
|
Interest rate swaps
|
274,873
|
|
—
|
|
274,873
|
|
196,633
|
|
—
|
|
78,240
|
|
||||||||||||
Impact of Derivatives on Condensed Consolidated Statements of Income and AOCI
Derivative gains (losses) reported in our condensed consolidated statements of income consist of derivative cash settlements and derivative forward value gains (losses). Derivative cash settlements represent net contractual interest expense accruals on interest rate swaps during the period. The derivative forward value gains (losses) represent the change in fair value of our interest rate swaps during the reporting period due to changes in the estimate of future interest rates over the remaining life of our derivative contracts.
The following table presents the components of the derivative gains (losses) reported in our condensed consolidated statements of income for our interest rate swaps for the
three months ended August 31, 2018 and 2017
.
|
Three Months Ended August 31,
|
||||||||
|
(Dollars in thousands)
|
2018
|
2017
|
||||||
|
Derivative cash settlements
|
$
|
(12,829
|
)
|
$
|
(20,222
|
)
|
||
|
Derivative forward value gains (losses)
|
20,012
|
|
(25,976
|
)
|
||||
|
Derivative gains (losses)
|
$
|
7,183
|
|
$
|
(46,198
|
)
|
||
As described above, during fiscal year 2018, we entered into a treasury rate lock agreement that was designated as a cash flow hedge of a forecasted transaction. A related unrealized gain of less than
$1 million
was recorded in AOCI for the
three months ended August 31, 2018
.
74
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 and S&P were A2 and A, respectively, as of
August 31, 2018
. Both Moody’s and S&P had our ratings on stable outlook as of
August 31, 2018
. The following table displays the notional amounts of our derivative contracts with rating triggers as of
August 31, 2018
, and the payments that would be required if the contracts were terminated as of that date because of a
downgrade of our unsecured credit ratings or the counterparty’s unsecured credit ratings below A3/A-, below Baa1/BBB+, to or below Baa2/BBB, below Baa3/BBB-, or to or below Ba2/BB+ by Moody’s or S&P,
respectively. In calculating the payment amounts that would be required upon termination of the derivative contracts, we assumed that the amounts for each counterparty would be netted in accordance with the provisions of the master netting agreements for each 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.
|
(Dollars in thousands)
|
Notional
Amount
|
Payable Due from CFC
|
Receivable
Due to CFC
|
Net (Payable)/Receivable
|
||||||||||||
|
Impact of rating downgrade trigger:
|
|
|
|
|
||||||||||||
|
Falls below A3/A-
(1)
|
|
$
|
54,890
|
|
|
$
|
(8,767
|
)
|
|
$
|
—
|
|
|
$
|
(8,767
|
)
|
|
Falls below Baa1/BBB+
|
7,355,092
|
|
|
(53,994
|
)
|
|
44,183
|
|
|
(9,811
|
)
|
|||||
|
Falls to or below Baa2/BBB
(2)
|
528,919
|
|
|
—
|
|
|
5,012
|
|
|
5,012
|
|
|||||
|
Falls below Baa3/BBB-
|
255,641
|
|
(10,523
|
)
|
—
|
|
(10,523
|
)
|
||||||||
|
Total
|
$
|
8,194,542
|
|
|
$
|
(73,284
|
)
|
|
$
|
49,195
|
|
|
$
|
(24,089
|
)
|
|
____________________________
(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 outstanding notional amount of derivatives with one counterparty 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, which is not included in the above table, totaling
$265 million
as of
August 31, 2018
. These contracts were in an unrealized loss position of
$3 million
as of
August 31, 2018
.
Our largest counterparty exposure, based on the outstanding notional amount, accounted for approximately
24%
of the total outstanding notional amount of derivatives as of both
August 31, 2018 and May 31, 2018
. The aggregate fair value amount, including the credit risk valuation adjustment, of all interest rate swaps with rating triggers that were in a net liability position was
$75 million
as of
August 31, 2018
.
|
|
Total equity of
$1,507 million
as of
August 31, 2018
remained relatively unchanged compared to
May 31, 2018
, as our reported net income of
$48 million
for the
three months ended August 31, 2018
, was offset by the patronage capital retirement of
$48 million
in August 2018. The following table presents the components of equity as of
August 31, 2018 and May 31, 2018
.
75
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
(Dollars in thousands)
|
August 31, 2018
|
May 31, 2018
|
||||||
|
Membership fees
|
$
|
969
|
|
$
|
969
|
|
||
|
Educational fund
|
1,640
|
|
1,976
|
|
||||
|
Total membership fees and educational fund
|
2,609
|
|
2,945
|
|
||||
|
Patronage capital allocated
|
763,986
|
|
811,493
|
|
||||
|
Members’ capital reserve
|
687,785
|
|
687,785
|
|
||||
|
Unallocated net income (loss):
|
||||||||
|
Prior year-end cumulative derivative forward value losses
(1)
|
(30,831
|
)
|
(332,525
|
)
|
||||
|
Current year derivative forward value gains
(1)
|
19,671
|
|
301,694
|
|
||||
|
Current period-end cumulative derivative forward value losses
(1)
|
(11,160
|
)
|
(30,831
|
)
|
||||
|
Other unallocated net income (loss)
|
31,485
|
|
(5,603
|
)
|
||||
|
Unallocated net income (loss)
|
20,325
|
|
(36,434
|
)
|
||||
|
CFC retained equity
|
1,474,705
|
|
1,465,789
|
|
||||
|
Accumulated other comprehensive income (loss)
|
(214
|
)
|
8,544
|
|
||||
|
Total CFC equity
|
1,474,491
|
|
1,474,333
|
|
||||
|
Noncontrolling interests
|
32,085
|
|
31,520
|
|
||||
|
Total equity
|
$
|
1,506,576
|
|
$
|
1,505,853
|
|
||
____________________________
(1)
Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the consolidated variable interest entities NCSC and RTFC. See “Note 13—Business Segments” for the separate statements of income for CFC .
In July
2018
, the CFC Board of Directors authorized the allocation of the fiscal year
2018
net earnings as follows:
$95 million
to members in the form of patronage,
$57 million
to the members’ capital reserve and
$1 million
to the cooperative educational fund. The amount of patronage capital allocated each year by CFC’s Board of Directors is based on adjusted net income, which excludes the impact of derivative forward value gains (losses). See “MD&A—Non-GAAP Financial Measures” for information on adjusted net income.
In July
2018
, the CFC Board of Directors authorized the retirement of allocated net earnings totaling
$48 million
, representing
50%
of the fiscal year
2018
allocation. This amount was returned to members in cash in August 2018. The remaining portion of the allocated amount will be retained by CFC for 25 years under 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
39
of the last
40
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
2018
Form 10-K for additional information.
76
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Accumulated Other Comprehensive Income (Loss)
The following tables summarize, by component, the activity in AOCI as of and for the
three months ended August 31, 2018 and 2017
.
|
|
Three Months Ended August 31, 2018
|
|||||||||||||||||||
|
(Dollars in thousands)
|
Unrealized Gains (Losses)
Equity Securities
|
Unrealized Gains
Derivatives
|
Unrealized Gains (Losses) Cash Flow Hedges
|
Unrealized Losses Defined Benefit Plan
|
Total
|
|||||||||||||||
|
Beginning balance
|
$
|
8,794
|
|
$
|
3,039
|
|
$
|
(1,059
|
)
|
$
|
(2,230
|
)
|
$
|
8,544
|
|
|||||
|
Cumulative effect of changes from adoption of new accounting standards
(1)
|
(8,794
|
)
|
—
|
|
—
|
|
—
|
|
(8,794
|
)
|
||||||||||
|
Unrealized gains
|
—
|
|
—
|
|
24
|
|
—
|
|
24
|
|
||||||||||
|
(Gains) losses reclassified into earnings
|
—
|
|
(119
|
)
|
—
|
|
131
|
|
12
|
|
||||||||||
|
Other comprehensive income (loss)
|
—
|
|
(119
|
)
|
24
|
|
131
|
|
36
|
|
||||||||||
|
Ending balance
|
$
|
—
|
|
$
|
2,920
|
|
$
|
(1,035
|
)
|
$
|
(2,099
|
)
|
$
|
(214
|
)
|
|||||
|
|
Three Months Ended August 31, 2017
|
|||||||||||||||||||
|
(Dollars in thousands)
|
Unrealized Gains (Losses)
Equity Securities
|
Unrealized Gains
Derivatives
|
Unrealized Gains (Losses) Cash Flow Hedges
|
Unrealized Losses Defined Benefit Plan
|
Total
|
|||||||||||||||
|
Beginning balance
|
$
|
12,016
|
|
$
|
3,531
|
|
$
|
171
|
|
$
|
(2,543
|
)
|
$
|
13,175
|
|
|||||
|
Unrealized losses
|
(1,151
|
)
|
—
|
|
—
|
|
—
|
|
(1,151
|
)
|
||||||||||
|
Gains (losses) reclassified into earnings
|
—
|
|
(124
|
)
|
(68
|
)
|
127
|
|
(65
|
)
|
||||||||||
|
Other comprehensive income (loss)
|
(1,151
|
)
|
(124
|
)
|
(68
|
)
|
127
|
|
(1,216
|
)
|
||||||||||
|
Ending balance
|
$
|
10,865
|
|
$
|
3,407
|
|
$
|
103
|
|
$
|
(2,416
|
)
|
$
|
11,959
|
|
|||||
____________________________
(1)
Represents the adjustment to AOCI as a result of the new accounting standards adopted during the
three months ended August 31, 2018
, see “Note 1—Summary of Significant Accounting Policies.
We expect to reclassify less than
$1 million
of amounts in AOCI related to unrealized derivative gains into earnings over the next 12 months.
77
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
The following table summarizes total guarantees, by type of guarantee and by member class, as of
August 31, 2018
and
May 31, 2018
.
|
(Dollars in thousands)
|
August 31, 2018
|
May 31, 2018
|
||||||
|
Total by type:
|
|
|
||||||
|
Long-term tax-exempt bonds
(1)
|
$
|
316,385
|
|
$
|
316,985
|
|
||
|
Letters of credit
(2)
|
316,731
|
|
343,970
|
|
||||
|
Other guarantees
|
143,571
|
|
144,206
|
|
||||
|
Total
|
$
|
776,687
|
|
$
|
805,161
|
|
||
|
Total by member class:
|
|
|
||||||
|
CFC:
|
|
|
||||||
|
Distribution
|
$
|
197,527
|
|
$
|
201,993
|
|
||
|
Power supply
|
561,999
|
|
587,837
|
|
||||
|
Statewide and associate
|
3,382
|
|
3,326
|
|
||||
|
CFC total
|
762,908
|
|
793,156
|
|
||||
|
NCSC
|
12,205
|
|
10,431
|
|
||||
|
RTFC
|
1,574
|
|
1,574
|
|
||||
|
Total
|
$
|
776,687
|
|
$
|
805,161
|
|
||
____________________________
(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.
Long-term tax-exempt bonds of
$316 million
and
$317 million
as of
August 31, 2018 and May 31, 2018
, respectively, included
$249 million
and
$250 million
, respectively, of adjustable or variable-rate bonds that may be converted to a fixed rate as specified in the applicable indenture for each bond offering. We are unable to determine the maximum amount of interest that we may be required to pay related to the remaining adjustable and variable-rate bonds. Many of these bonds have a call provision that allows us to call the bond in the event of a default, which would limit our exposure to future interest payments on these bonds. Our maximum potential exposure generally is secured by mortgage liens on the members’ assets and future revenue. If a member’s debt is accelerated because of a determination that the interest thereon is not tax-exempt, the member’s obligation to reimburse us for any guarantee payments will be treated as a long-term loan. The remaining long-term tax-exempt bonds of
$67 million
as of
August 31, 2018
are fixed-rate. The maximum potential exposure for these bonds, including the outstanding principal of
$67 million
and related interest through maturity, totaled
$94 million
as of
August 31, 2018
. The maturities for long-term tax-exempt bonds and the related guarantees extend through calendar year 2042.
Of the outstanding letters of credit of
$317 million
and
$344 million
as of
August 31, 2018 and May 31, 2018
, respectively,
$119 million
and
$120 million
, respectively, were secured. We did not have any letters of credit outstanding that provided for standby liquidity for adjustable and floating-rate tax-exempt bonds issued for the benefit of our members as of
August 31, 2018
. The maturities for the outstanding letters of credit as of
August 31, 2018
extend through calendar year 2028.
In addition to the letters of credit listed in the table above, under master letter of credit facilities in place as of
August 31, 2018
, we may be required to issue up to an additional
$67 million
in letters of credit to third parties for the benefit of our
78
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
members. All of our master letter of credit facilities were subject to material adverse change clauses at the time of issuance as of
August 31, 2018
. 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 million
and
$145 million
as of
August 31, 2018 and May 31, 2018
, respectively, all of which were unsecured. 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
$316 million
and
$344 million
and represented
41%
and
43%
of total guarantees as of
August 31, 2018 and May 31, 2018
, respectively.
In addition to the guarantees described above, we were also the liquidity provider for
$249 million
of variable-rate tax-exempt bonds as of
August 31, 2018
, 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
three months ended August 31, 2018
or the prior fiscal year.
Guarantee Liability
As of
August 31, 2018 and May 31, 2018
, we recorded a guarantee liability of
$10 million
and
$11 million
respectively, which represents the contingent and noncontingent exposures related to guarantees and liquidity obligations. The contingent guarantee liability was
$1 million
as of both
August 31, 2018 and May 31, 2018
, based on management’s estimate of exposure to losses within the guarantee portfolio. The remaining balance of the total guarantee liability of
$9 million
and
$10 million
as of
August 31, 2018 and May 31, 2018
, respectively, relates to our noncontingent obligation to stand ready to perform over the term of our guarantees and liquidity obligations that we have entered into or modified since January 1, 2003.
|
|
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of certain assets and liabilities on a recurring or nonrecurring basis. The accounting guidance for fair value measurements and disclosures establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The levels of the fair value hierarchy, in priority order, include Level 1, Level 2 and Level 3. For additional information regarding the fair value hierarchy and a description of the methodologies we use to measure fair value, see “Note 13—Fair Value Measurement” to the Consolidated Financial Statements in our
2018
Form 10-K.
The following tables present the carrying value and fair value for all of our financial instruments, including those carried at amortized cost, as of
August 31, 2018 and May 31, 2018
. The tables also display the classification within the fair value hierarchy of the valuation technique used in estimating fair value.
79
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
August 31, 2018
|
Fair Value Measurement Level
|
||||||||||||||||||
|
(Dollars in thousands)
|
Carrying Value
|
Fair Value
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||||
|
Assets:
|
|
|
|
|
||||||||||||||||
|
Cash and cash equivalents
|
$
|
265,905
|
|
$
|
265,905
|
|
$
|
265,905
|
|
$
|
—
|
|
$
|
—
|
|
|||||
|
Restricted cash
|
8,597
|
|
8,597
|
|
8,597
|
|
—
|
|
—
|
|
||||||||||
|
Equity securities
|
88,606
|
|
88,606
|
|
88,606
|
|
—
|
|
—
|
|
||||||||||
|
Debt securities held-to-maturity
|
553,754
|
|
549,974
|
|
—
|
|
549,974
|
|
—
|
|
||||||||||
|
Deferred compensation investments
|
5,626
|
|
5,626
|
|
5,626
|
|
—
|
|
—
|
|
||||||||||
|
Loans to members, net
|
25,163,962
|
|
24,071,721
|
|
—
|
|
—
|
|
24,071,721
|
|
||||||||||
|
Accrued interest receivable
|
124,343
|
|
124,343
|
|
—
|
|
124,343
|
|
—
|
|
||||||||||
|
Debt service reserve funds
|
17,151
|
|
17,151
|
|
17,151
|
|
—
|
|
—
|
|
||||||||||
|
Derivative assets
|
256,186
|
|
256,186
|
|
—
|
|
256,186
|
|
—
|
|
||||||||||
|
Liabilities:
|
|
|
||||||||||||||||||
|
Short-term borrowings
|
$
|
3,793,136
|
|
$
|
3,793,280
|
|
$
|
—
|
|
$
|
3,793,280
|
|
$
|
—
|
|
|||||
|
Long-term debt
|
18,674,932
|
|
18,842,450
|
|
—
|
|
11,345,230
|
|
7,497,220
|
|
||||||||||
|
Accrued interest payable
|
205,898
|
|
205,898
|
|
—
|
|
205,898
|
|
—
|
|
||||||||||
|
Guarantee liability
|
9,858
|
|
9,630
|
|
—
|
|
—
|
|
9,630
|
|
||||||||||
|
Derivative liabilities
|
267,675
|
|
267,675
|
|
—
|
|
267,675
|
|
—
|
|
||||||||||
|
Subordinated deferrable debt
|
742,445
|
|
762,678
|
|
—
|
|
762,678
|
|
—
|
|
||||||||||
|
Members’ subordinated certificates
|
1,378,097
|
|
1,378,097
|
|
—
|
|
—
|
|
1,378,097
|
|
||||||||||
|
|
May 31, 2018
|
Fair Value Measurement Level
|
||||||||||||||||||
|
(Dollars in thousands)
|
Carrying Value
|
Fair Value
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||||
|
Assets:
|
|
|
|
|
||||||||||||||||
|
Cash and cash equivalents
|
$
|
230,999
|
|
$
|
230,999
|
|
$
|
230,999
|
|
$
|
—
|
|
$
|
—
|
|
|||||
|
Restricted cash
|
7,825
|
|
7,825
|
|
7,825
|
|
—
|
|
—
|
|
||||||||||
|
Time deposits
|
100,000
|
|
100,000
|
|
—
|
|
100,000
|
|
—
|
|
||||||||||
|
Equity securities
|
89,332
|
|
89,332
|
|
89,332
|
|
—
|
|
—
|
|
||||||||||
|
Debt securities held to maturity
|
520,519
|
|
516,546
|
|
—
|
|
516,546
|
|
—
|
|
||||||||||
|
Deferred compensation investments
|
5,194
|
|
5,194
|
|
5,194
|
|
—
|
|
—
|
|
||||||||||
|
Loans to members, net
|
25,159,807
|
|
24,167,886
|
|
—
|
|
—
|
|
24,167,886
|
|
||||||||||
|
Accrued interest receivable
|
127,442
|
|
127,442
|
|
—
|
|
127,442
|
|
—
|
|
||||||||||
|
Debt service reserve funds
|
17,151
|
|
17,151
|
|
17,151
|
|
—
|
|
—
|
|
||||||||||
|
Derivative assets
|
244,526
|
|
244,526
|
|
—
|
|
244,526
|
|
—
|
|
||||||||||
|
Liabilities:
|
|
|
||||||||||||||||||
|
Short-term borrowings
|
$
|
3,795,910
|
|
$
|
3,795,799
|
|
$
|
—
|
|
$
|
3,695,799
|
|
$
|
100,000
|
|
|||||
|
Long-term debt
|
18,714,960
|
|
18,909,276
|
|
—
|
|
11,373,216
|
|
7,536,060
|
|
||||||||||
|
Accrued interest payable
|
149,284
|
|
149,284
|
|
—
|
|
149,284
|
|
—
|
|
||||||||||
|
Guarantee liability
|
10,589
|
|
10,454
|
|
—
|
|
—
|
|
10,454
|
|
||||||||||
|
Derivative liabilities
|
275,932
|
|
275,932
|
|
—
|
|
275,932
|
|
—
|
|
||||||||||
|
Subordinated deferrable debt
|
742,410
|
|
766,088
|
|
—
|
|
766,088
|
|
—
|
|
||||||||||
|
Members’ subordinated certificates
|
1,379,982
|
|
1,380,004
|
|
—
|
|
—
|
|
1,380,004
|
|
||||||||||
80
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Transfers Between Levels
We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy and transfer between Level 1, Level 2, and Level 3 accordingly. Observable market data includes but is not limited to quoted prices and market transactions. Changes in economic conditions or market liquidity generally will drive changes in availability of observable market data. Changes in availability of observable market data, which also may result in changes in the valuation technique used, are generally the cause of transfers between levels. We did not have any transfers between levels for financial instruments measured at fair value on a recurring basis for the
three months ended August 31, 2018 and 2017
.
Recurring Fair Value Measurements
The following table presents the carrying value and fair value of financial instruments reported in our condensed consolidated financial statements at fair value on a recurring basis as of
August 31, 2018 and May 31, 2018
, and the classification of the valuation technique within the fair value hierarchy.
|
|
August 31, 2018
|
May 31, 2018
|
||||||||||||||||||||||
|
(Dollars in thousands)
|
Level 1
|
Level 2
|
Total
|
Level 1
|
Level 2
|
Total
|
||||||||||||||||||
|
Equity securities
|
$
|
88,606
|
|
$
|
—
|
|
$
|
88,606
|
|
$
|
89,332
|
|
$
|
—
|
|
$
|
89,332
|
|
||||||
|
Deferred compensation investments
|
5,626
|
|
—
|
|
5,626
|
|
5,194
|
|
—
|
|
5,194
|
|
||||||||||||
|
Derivative assets
|
—
|
|
256,186
|
|
256,186
|
|
—
|
|
244,526
|
|
244,526
|
|
||||||||||||
|
Derivative liabilities
|
—
|
|
267,675
|
|
267,675
|
|
—
|
|
275,932
|
|
275,932
|
|
||||||||||||
Nonrecurring Fair Value
We did not have any assets or liabilities reported in our condensed consolidated financial statements at fair value on a nonrecurring basis during the
three months ended August 31, 2018 and 2017
.
Significant Unobservable Level 3 Inputs
Impaired Loans
We utilize the fair value of estimated cash flows or the collateral underlying the loan to determine the fair value and specific allowance for impaired loans. The valuation technique used to determine fair value of the impaired loans provided by both our internal staff and third-party specialists includes market multiples (i.e., comparable companies). The significant unobservable inputs used in the determination of fair value for individually impaired loans is a multiple of earnings before interest, taxes, depreciation and amortization based on various factors (i.e., financial condition of the borrower). In estimating the fair value of the collateral, we may use third-party valuation specialists, internal estimates or a combination of both. The significant unobservable inputs for estimating the fair value of impaired collateral-dependent loans are reviewed by our Credit Risk Management group to assess the reasonableness of the assumptions used and the accuracy of the work performed. In cases where we rely on third-party inputs, we use the final unadjusted third-party valuation analysis as support for any adjustments to our consolidated financial statements and disclosures.
Because of the limited amount of impaired loans as of
August 31, 2018 and May 31, 2018
, we do not believe that potential changes in the significant unobservable inputs used in the determination of the fair value for impaired loans will have a material impact on the fair value measurement of these assets or our results of operations.
81
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
The following tables display segment results for the
three months ended August 31, 2018 and 2017
, and assets attributable to each segment as of
August 31, 2018
and
August 31, 2017
.
|
|
Three Months Ended August 31, 2018
|
|||||||||||||||
|
(Dollars in thousands)
|
CFC
|
Other
|
Elimination
|
Consolidated Total
|
||||||||||||
|
Statement of income:
|
|
|
|
|
||||||||||||
|
Interest income
|
$
|
276,243
|
|
$
|
12,984
|
|
$
|
(10,736
|
)
|
$
|
278,491
|
|
||||
|
Interest expense
|
(210,050
|
)
|
(10,917
|
)
|
10,736
|
|
(210,231
|
)
|
||||||||
|
Net interest income
|
66,193
|
|
2,067
|
|
—
|
|
68,260
|
|
||||||||
|
Benefit for loan losses
|
109
|
|
—
|
|
—
|
|
109
|
|
||||||||
|
Net interest income after benefit for loan losses
|
66,302
|
|
2,067
|
|
—
|
|
68,369
|
|
||||||||
|
Non-interest income:
|
||||||||||||||||
|
Fee and other income
|
4,473
|
|
564
|
|
(1,852
|
)
|
3,185
|
|
||||||||
|
Derivative gains (losses):
|
||||||||||||||||
|
Derivative cash settlements
|
(12,562
|
)
|
(267
|
)
|
—
|
|
(12,829
|
)
|
||||||||
|
Derivative forward value gains
|
19,671
|
|
341
|
|
—
|
|
20,012
|
|
||||||||
|
Derivative gains
|
7,109
|
|
74
|
|
—
|
|
7,183
|
|
||||||||
|
Total non-interest income
|
11,582
|
|
638
|
|
(1,852
|
)
|
10,368
|
|
||||||||
|
Non-interest expense:
|
||||||||||||||||
|
General and administrative expenses
|
(22,425
|
)
|
(2,374
|
)
|
1,594
|
|
(23,205
|
)
|
||||||||
|
Losses on early extinguishment of debt
|
(7,100
|
)
|
—
|
|
—
|
|
(7,100
|
)
|
||||||||
|
Other non-interest expense
|
(394
|
)
|
(258
|
)
|
258
|
|
(394
|
)
|
||||||||
|
Total non-interest expense
|
(29,919
|
)
|
(2,632
|
)
|
1,852
|
|
(30,699
|
)
|
||||||||
|
Income before income taxes
|
47,965
|
|
73
|
|
—
|
|
48,038
|
|
||||||||
|
Income tax expense
|
—
|
|
(60
|
)
|
—
|
|
(60
|
)
|
||||||||
|
Net income
|
$
|
47,965
|
|
$
|
13
|
|
$
|
—
|
|
$
|
47,978
|
|
||||
|
August 31, 2018
|
||||||||||||||||
|
CFC
|
Other
|
Elimination
|
Consolidated Total
|
|||||||||||||
|
Assets:
|
|
|
|
|
||||||||||||
|
Total loans outstanding
|
$
|
25,138,742
|
|
$
|
1,139,507
|
|
$
|
(1,106,813
|
)
|
$
|
25,171,436
|
|
||||
|
Deferred loan origination costs
|
11,218
|
|
—
|
|
—
|
|
11,218
|
|
||||||||
|
Loans to members
|
25,149,960
|
|
1,139,507
|
|
(1,106,813
|
)
|
25,182,654
|
|
||||||||
|
Less: Allowance for loan losses
|
(18,692
|
)
|
—
|
|
—
|
|
(18,692
|
)
|
||||||||
|
Loans to members, net
|
25,131,268
|
|
1,139,507
|
|
(1,106,813
|
)
|
25,163,962
|
|
||||||||
|
Other assets
|
1,501,315
|
|
106,902
|
|
(95,972
|
)
|
1,512,245
|
|
||||||||
|
Total assets
|
$
|
26,632,583
|
|
$
|
1,246,409
|
|
$
|
(1,202,785
|
)
|
$
|
26,676,207
|
|
||||
82
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Three Months Ended August 31, 2017
|
|||||||||||||||
|
(Dollars in thousands)
|
CFC
|
Other
|
Elimination
|
Consolidated Total
|
||||||||||||
|
Statement of income:
|
|
|
|
|
||||||||||||
|
Interest income
|
$
|
263,411
|
|
$
|
10,949
|
|
$
|
(8,445
|
)
|
$
|
265,915
|
|
||||
|
Interest expense
|
(192,505
|
)
|
(8,671
|
)
|
8,445
|
|
(192,731
|
)
|
||||||||
|
Net interest income
|
70,906
|
|
2,278
|
|
—
|
|
73,184
|
|
||||||||
|
Benefit for loan losses
|
298
|
|
—
|
|
—
|
|
298
|
|
||||||||
|
Net interest income after benefit for loan losses
|
71,204
|
|
2,278
|
|
—
|
|
73,482
|
|
||||||||
|
Non-interest income:
|
||||||||||||||||
|
Fee and other income
|
3,888
|
|
400
|
|
(343
|
)
|
3,945
|
|
||||||||
|
Derivative gains (losses):
|
|
|
|
|
|
|
|
|
||||||||
|
Derivative cash settlements
|
(19,564
|
)
|
(658
|
)
|
(20,222
|
)
|
||||||||||
|
Derivative forward value gains (losses)
|
(26,111
|
)
|
135
|
|
—
|
|
(25,976
|
)
|
||||||||
|
Derivative losses
|
(45,675
|
)
|
(523
|
)
|
—
|
|
(46,198
|
)
|
||||||||
|
Results of operations of foreclosed assets
|
(24
|
)
|
—
|
|
—
|
|
(24
|
)
|
||||||||
|
Total non-interest income
|
(41,811
|
)
|
(123
|
)
|
(343
|
)
|
(42,277
|
)
|
||||||||
|
Non-interest expense:
|
||||||||||||||||
|
General and administrative expenses
|
(19,738
|
)
|
(1,898
|
)
|
—
|
|
(21,636
|
)
|
||||||||
|
Other non-interest expense
|
(522
|
)
|
(343
|
)
|
343
|
|
(522
|
)
|
||||||||
|
Total non-interest expense
|
(20,260
|
)
|
(2,241
|
)
|
343
|
|
(22,158
|
)
|
||||||||
|
Income (loss) before income taxes
|
9,133
|
|
(86
|
)
|
—
|
|
9,047
|
|
||||||||
|
Income tax expense
|
—
|
|
(32
|
)
|
—
|
|
(32
|
)
|
||||||||
|
Net income (loss)
|
$
|
9,133
|
|
$
|
(118
|
)
|
$
|
—
|
|
$
|
9,015
|
|
||||
|
August 31, 2017
|
||||||||||||||||
|
CFC
|
Other
|
Elimination
|
Consolidated Total
|
|||||||||||||
|
Assets:
|
|
|
|
|
||||||||||||
|
Total loans outstanding
|
$
|
24,595,584
|
|
$
|
1,011,420
|
|
$
|
(975,978
|
)
|
$
|
24,631,026
|
|
||||
|
Deferred loan origination costs
|
11,051
|
|
—
|
|
—
|
|
11,051
|
|
||||||||
|
Loans to members
|
24,606,635
|
|
1,011,420
|
|
(975,978
|
)
|
24,642,077
|
|
||||||||
|
Less: Allowance for loan losses
|
(37,078
|
)
|
—
|
|
—
|
|
(37,078
|
)
|
||||||||
|
Loans to members, net
|
24,569,557
|
|
1,011,420
|
|
(975,978
|
)
|
24,604,999
|
|
||||||||
|
Other assets
|
864,334
|
|
107,146
|
|
(95,953
|
)
|
875,527
|
|
||||||||
|
Total assets
|
$
|
25,433,891
|
|
$
|
1,118,566
|
|
$
|
(1,071,931
|
)
|
$
|
25,480,526
|
|
||||
83
|
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 August 31, 2018
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
|
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
|
Refer to “Part I— Item 1A. Risk Factors” in our
2018
Form 10-K for information regarding factors that could affect our results of operations, financial condition and liquidity. We are not aware of any material changes in the risk factors set forth under “Part I— Item 1A. Risk Factors” in our
2018
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.
84
The following exhibits are incorporated by reference or filed as part of this Report.
EXHIBIT INDEX
|
Exhibit No.
|
Description
|
|
|
12*
|
—
|
|
|
31.1*
|
—
|
|
|
31.2*
|
—
|
|
|
32.1†
|
—
|
|
|
32.2†
|
—
|
|
|
101.INS*
|
—
|
XBRL Instance Document
|
|
101.SCH*
|
—
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL*
|
—
|
XBRL Taxonomy Calculation Linkbase Document
|
|
101.LAB*
|
—
|
XBRL Taxonomy Label Linkbase Document
|
|
101.PRE*
|
—
|
XBRL Taxonomy Presentation Linkbase Document
|
|
101.DEF*
|
—
|
XBRL Taxonomy Definition Linkbase Document
|
____________________________
*
Indicates a document being filed with this Report.
†
Indicates a document that is 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.
85
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:
October 10, 2018
|
By:
|
/s/ J. ANDREW DON
|
|
J. Andrew Don
|
|
|
Senior Vice President and Chief Financial Officer
|
|
|
By:
|
/s/ ROBERT E. GEIER
|
|
Robert E. Geier
|
|
|
Controller (Principal Accounting Officer)
|
|
86
TABLE OF CONTENTS
Part I Financial InformationItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations ( Md&a )Item 1. Financial StatementsNote 1 Summary Of Significant Accounting PoliciesNote 2 Variable Interest EntitiesNote 3 Investment SecuritiesNote 4 LoansNote 5 Allowance For Loan LossesNote 6 Short-term BorrowingsNote 7 Long-term DebtNote 8 Subordinated Deferrable DebtNote 9 Derivative Instruments and Hedging ActivitiesNote 10 EquityNote 11 GuaranteesNote 12 Fair Value MeasurementNote 13 Business SegmentsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits