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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x
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
February 29, 2020
OR
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¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number: 1-7102
__________________________
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
__________________________
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District of Columbia
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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
__________________________
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Trading Symbol(s)
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Name of Each Exchange on Which Registered
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7.35% Collateral Trust Bonds, due 2026
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NRUC 26
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New York Stock Exchange
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5.50% Subordinated Notes, due 2064
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NRUC
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New York Stock Exchange
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
x
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
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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3
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2
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Liquidity Sources
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9
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3
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Debt Maturities Over Next 12 Months—March 31, 2020
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10
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4
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Average Balances, Interest Income/Interest Expense and Average Yield/Cost
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13
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5
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Rate/Volume Analysis of Changes in Interest Income/Interest Expense
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16
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6
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Non-Interest Income
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19
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7
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Derivative Gains (Losses)
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20
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8
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Derivative Cash Settlements Expense—Average Notional Amounts and Interest Rates
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20
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9
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Non-Interest Expense
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22
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10
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Loans Outstanding by Type and Member Class
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23
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11
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Historical Retention Rate and Repricing Selection
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24
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12
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Total Debt Outstanding
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25
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13
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Member Investments
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27
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14
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Collateral Pledged
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28
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15
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Unencumbered Loans
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28
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16
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Equity
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29
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17
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Guarantees Outstanding
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30
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18
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Maturities of Guarantee Obligations
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31
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19
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Unadvanced Loan Commitments
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31
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20
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Notional Maturities of Unadvanced Loan Commitments
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32
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21
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Maturities of Notional Amount of Unconditional Committed Lines of Credit
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33
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22
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Loan Portfolio Security Profile
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34
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23
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Loan Exposure to 20 Largest Borrowers
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36
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24
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Troubled Debt Restructured Loans
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37
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25
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Allowance for Loan Losses
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38
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26
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Rating Triggers for Derivatives
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39
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27
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Available Liquidity
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40
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28
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Committed Bank Revolving Line of Credit Agreements
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42
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29
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Short-Term Borrowings—Funding Sources
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43
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30
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Short-Term Borrowings
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44
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31
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Issuances and Repayments of Long-Term and Subordinated Debt
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45
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32
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Principal Maturity of Long-Term and Subordinated Debt
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45
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33
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Projected Sources and Uses of Liquidity from Debt and Investment Activity
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47
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34
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Credit Ratings
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47
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35
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Interest Rate Gap Analysis
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49
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36
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Adjusted Financial Measures—Income Statement
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51
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37
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TIER and Adjusted TIER
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51
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38
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Adjusted Financial Measures—Balance Sheet
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52
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39
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Debt-to-Equity Ratio
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52
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40
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Members’ Equity
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52
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ii
PART I—FINANCIAL INFORMATION
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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 (this “Report”) 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, the impact of natural disasters or public health emergencies, such as the current outbreak of a novel strain of coronavirus (“COVID-19”) that the World Health Organization (“WHO”) declared a global pandemic in March 2020, 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,
2019
(“
2019
Form 10-K”) and under “Item 1A. Risk Factors” of this Report. 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 systems, generation and transmission (“power supply”) systems and related facilities. CFC also provides its members with credit enhancements in the form of letters of credit and guarantees of debt obligations. As a cooperative, CFC is owned by and exclusively serves its membership, which consists of not-for-profit entities or subsidiaries or affiliates of not-for-profit entities. CFC is exempt from federal income taxes under Section 501(c)(4) of the Internal Revenue Code. As a member-owned cooperative, CFC’s objective is not to maximize profit, but rather to offer members cost-based financial products and services. CFC funds its activities primarily through a combination of public and private issuances of debt securities, member investments and retained equity. As a Section 501(c)(4) tax-exempt, member-owned cooperative, we cannot issue equity securities.
Our financial statements include the consolidated accounts of CFC, National 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 and its consolidated entities have not held any foreclosed assets since the quarter ended August 31, 2017. See “Item 1. Business—Overview” in our
2019
Form 10-K for additional information on the business activities of each of these entities. Unless stated otherwise, references to
1
“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.
Our principal operations are organized for management reporting purposes into three business segments: CFC, NCSC and RTFC. Loans to members totaled
$26,823 million
as of
February 29, 2020
, of which
96%
was attributable to CFC. We generated total revenue, which consists of net interest income and fee and other income, of
$258 million
for the
nine months ended February 29, 2020
, compared with
$235 million
for the same prior-year period. The substantial majority of our total revenue is attributable to CFC. We provide information on the financial performance of each of our business segments in “Note 13—Business Segments.”
Management monitors a variety of key indicators to evaluate our business performance. The following MD&A is intended to provide the reader with an understanding of our consolidated 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, credit quality metrics and also non-GAAP measures. 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
2019
Form 10-K and additional information contained in our
2019
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 and
nine months ended February 29, 2020 and February 28, 2019
, and as of
February 29, 2020 and May 31, 2019
. 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 expense; (ii) adjusting net income, total liabilities and total equity to exclude the non-cash impact of the accounting for derivative financial instruments; (iii) adjusting total liabilities to exclude the amount that funds CFC member loans guaranteed by RUS, subordinated deferrable debt and members’ subordinated certificates; and (iv) adjusting total equity to include subordinated deferrable debt and members’ subordinated certificates and exclude cumulative derivative forward value gains and losses and accumulated other comprehensive income (“AOCI”). We believe our non-GAAP adjusted measures, which are not a substitute for 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.
2
Table
1
: Summary of Selected Financial Data
(1)
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Three Months Ended
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Nine Months Ended
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|||||||||||||||||||
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(Dollars in thousands)
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February 29, 2020
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February 28, 2019
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Change
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February 29, 2020
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February 28, 2019
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Change
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Statement of operations:
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Interest income
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$
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287,195
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$
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285,566
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1%
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$
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864,247
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$
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845,310
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2%
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||||||
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Interest expense
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(203,040
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)
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(207,335
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)
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(2)
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(624,182
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)
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(621,732
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)
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—
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Net interest income
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84,155
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78,231
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8
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240,065
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223,578
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7
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Fee and other income
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3,647
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3,714
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(2)
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18,430
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11,220
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|
64
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Total revenue
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87,802
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81,945
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7
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258,495
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234,798
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10
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Benefit (provision) for loan losses
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(2,382
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)
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(182
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)
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1,209
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(1,367
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)
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1,715
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**
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Derivative losses
(2)
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(337,936
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)
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(132,174
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)
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156
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(550,211
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)
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(61,648
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)
|
793
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||||||||||
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Unrealized gains (losses) on equity securities
(1)
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749
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2,144
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(65)
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2,255
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(201
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)
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**
|
||||||||||
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Operating expenses
(3)
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(25,269
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)
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(22,998
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)
|
10
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(75,367
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)
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(70,073
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)
|
8
|
||||||||||
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Other non-interest (expense) income
(1)
|
(359
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)
|
(355
|
)
|
1
|
5,891
|
|
(8,204
|
)
|
**
|
||||||||||
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Income (loss) before income taxes
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(277,395
|
)
|
(71,620
|
)
|
287
|
(360,304
|
)
|
96,387
|
|
**
|
||||||||||
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Income tax benefit (expense)
|
426
|
|
149
|
|
186
|
856
|
|
(154
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)
|
**
|
||||||||||
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Net income (loss)
|
$
|
(276,969
|
)
|
$
|
(71,471
|
)
|
288
|
$
|
(359,448
|
)
|
$
|
96,233
|
|
**
|
||||||
|
Adjusted operational financial measures
|
||||||||||||||||||||
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Adjusted interest expense
(4)
|
$
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(217,394
|
)
|
$
|
(217,134
|
)
|
—
|
$
|
(663,729
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)
|
$
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(656,165
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)
|
1
|
||||||
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Adjusted net interest income
(4)
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69,801
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|
68,432
|
|
2
|
200,518
|
|
189,145
|
|
6
|
||||||||||
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Adjusted net income
(4)
|
46,613
|
|
50,904
|
|
(8)
|
151,216
|
|
123,448
|
|
22
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||||||||||
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Selected ratios
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||||||||||||||||||||
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Fixed-charge coverage ratio/TIER
(5)
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(0.36
|
)
|
0.66
|
|
(102) bps
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0.42
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|
1.15
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(73) bps
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Adjusted TIER
(4)
|
1.21
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|
1.23
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(2)
|
1.23
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1.19
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4
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Net interest yield
(6)
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1.23
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%
|
1.19
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%
|
4
|
1.18
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%
|
1.14
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%
|
4
|
||||||||||
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Adjusted net interest yield
(4)(7)
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1.02
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|
1.04
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(2)
|
0.99
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|
0.96
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3
|
||||||||||
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Net charge-off rate
(8)
|
0.00
|
|
0.00
|
|
—
|
0.00
|
|
0.00
|
|
—
|
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3
|
February 29, 2020
|
May 31, 2019
|
Change
|
||||||||
|
Balance sheet
|
||||||||||
|
Cash, cash equivalents and restricted cash
|
$
|
63,428
|
|
$
|
186,204
|
|
(66)%
|
|||
|
Investment securities
|
636,533
|
|
652,977
|
|
(3)
|
|||||
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Loans to members
(9)
|
26,822,530
|
|
25,916,904
|
|
3
|
|||||
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Allowance for loan losses
|
(18,902
|
)
|
(17,535
|
)
|
8
|
|||||
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Loans to members, net
|
26,803,628
|
|
25,899,369
|
|
3
|
|||||
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Total assets
|
27,946,182
|
|
27,124,372
|
|
3
|
|||||
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Short-term borrowings
|
4,275,388
|
|
3,607,726
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|
19
|
|||||
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Long-term debt
|
19,190,693
|
|
19,210,793
|
|
—
|
|||||
|
Subordinated deferrable debt
|
986,072
|
|
986,020
|
|
—
|
|||||
|
Members’ subordinated certificates
|
1,340,373
|
|
1,357,129
|
|
(1)
|
|||||
|
Total debt outstanding
|
25,792,526
|
|
25,161,668
|
|
3
|
|||||
|
Total liabilities
|
27,065,441
|
|
25,820,490
|
|
5
|
|||||
|
Total equity
|
880,741
|
|
1,303,882
|
|
(32)
|
|||||
|
Guarantees
(10)
|
798,988
|
|
837,435
|
|
(5)
|
|||||
|
Selected ratios period end
|
|
|||||||||
|
Allowance coverage ratio
(11)
|
0.07
|
%
|
0.07
|
%
|
—
|
|||||
|
Debt-to-equity ratio
(12)
|
30.73
|
|
19.80
|
|
1,093
|
|||||
|
Adjusted debt-to-equity ratio
(4)
|
5.80
|
|
5.73
|
|
7
|
|||||
** Calculation of percentage change is not meaningful.
(1)
Certain reclassifications have been made to prior periods to conform to the current period presentation.
(2)
Consists of interest rate swap cash settlements income (expense) 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 amounts reclassified into income related to the cumulative transition adjustment 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.
(3)
Consists of salaries and employee benefits and the other general and administrative expenses components of non-interest expense, each of which are presented separately on our condensed consolidated statements of operations.
(4)
See “Non-GAAP Financial Measures” for details on the calculation of these non-GAAP adjusted measures and the reconciliation to the most comparable GAAP measures.
(5)
Calculated based on net income (loss) plus interest expense for the period divided by interest expense for the period. The fixed-charge coverage ratios and TIER were the same during each period presented because we did not have any capitalized interest during these periods.
(6)
Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.
(7)
Calculated based on annualized adjusted net interest income for the period divided by average interest-earning assets for the period.
(8)
Calculated based on annualized net charge-offs (recoveries) for the period divided by average total outstanding loans for the period.
(9)
Consists of the outstanding principal balance of member loans plus unamortized deferred loan origination costs, which totaled
$11 million
as of both
February 29, 2020
and
May 31, 2019
.
(10)
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.
(11)
Calculated based on the allowance for loan losses at period end divided by total outstanding loans at period end.
(12)
Calculated based on total liabilities at period end divided by total equity at period end.
4
|
EXECUTIVE SUMMARY
|
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 profit; therefore, the rates we charge our member-borrowers reflect our funding costs 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 6.00-to-1 or below.
We are subject to period-to-period volatility in our reported GAAP results due to changes in market conditions and differences in the way our financial assets and liabilities are accounted for under GAAP. Our financial assets and liabilities expose us to interest-rate risk. We use derivatives, primarily interest rate swaps, as part of our strategy in managing this risk. Our derivatives are intended to economically hedge and manage the interest-rate sensitivity mismatch between our financial assets and liabilities. We are required under GAAP to carry derivatives at fair value on our consolidated balance sheet; however, the financial assets and liabilities for which we use derivatives to economically hedge are carried at amortized cost. Changes in interest rates and the shape of the swap curve result in periodic fluctuations in the fair value of our derivatives, which may cause volatility in our earnings because we do not apply hedge accounting for our interest rate swaps. As a result, the mark-to-market changes in our interest rate swaps are recorded in earnings. Because our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps, we generally record derivative losses when interest rates decline and derivative gains when interest rates rise. This earnings volatility generally is not indicative of the underlying economics of our business, as the derivative forward fair value gains or losses recorded each period may or may not be realized over time, depending on the terms of our derivative instruments and future changes in market conditions that impact the periodic cash settlement amounts of our interest rate swaps. As such, 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 a net loss of
$277 million
for the quarter ended
February 29, 2020
(“current quarter”), which resulted in no TIER coverage. In comparison, we reported a net loss of
$71 million
and a TIER of
0.66
for the same prior-year quarter. We reported a net loss of
$359 million
and a TIER of
0.42
for the
nine months ended February 29, 2020
, compared with net income of
$96 million
and a TIER of
1.15
for the same prior-year period. The significant variance between our reported results for the current year periods and the same prior-year periods was primarily attributable to mark-to-market changes in the fair value of our derivative instruments resulting from interest rate changes. Our debt-to-equity ratio increased to
30.73
as of
February 29, 2020
, from
19.80
as of
May 31, 2019
, due to the combined impact of an increase in debt to fund growth in our loan portfolio, an increase in the fair value of derivative liabilities and a decrease in equity resulting from our reported net loss of
$359 million
for the
nine months ended February 29, 2020
and patronage capital retirement of
$63 million
during the first quarter of fiscal year 2020.
The variance of
$206 million
between our reported net loss of
$277 million
for the current quarter and our reported net loss of
$71 million
for the same prior-year quarter was driven by an increase in derivative losses of
$206 million
. We recorded derivative losses of
$338 million
and
$132 million
for the current quarter and same prior-year quarter, respectively. The derivative losses in both periods were primarily attributable to a decrease in the fair value of our pay-fixed swaps resulting from a decline in interest rates across the swap curve. The decrease in interest rates, however, was more pronounced during the current quarter relative to the same prior-year quarter, resulting in significantly higher derivative losses. Net interest income, which accounted for
96%
and
95%
of total revenue for the current quarter and same prior-year quarter, respectively, increased by
$6 million
, or
8%
, to
$84 million
. The increase was attributable to the combined impact of an increase in our average interest-earning assets of
$784 million
, or
3%
, and an increase in the net interest yield of
4
basis points, or
3%
, to
1.23%
.
5
The variance of
$455 million
between our reported net loss of
$359 million
for the
nine months ended February 29, 2020
, and our reported net income of
$96 million
for the same prior-year period was driven by an unfavorable shift in derivative fair value changes of
$489 million
. We recorded derivative losses of
$550 million
and
$62 million
for the
nine months ended February 29, 2020 and February 28, 2019
, respectively, largely due to a decrease in the fair value of our pay-fixed swaps in both periods, resulting from a decline in interest rates across the swap curve during the
nine months ended February 29, 2020
and a decline in medium- and longer-term interest rates during the comparable prior-year period. Net interest income, which accounted for
93%
and
95%
of total revenue for the
nine months ended February 29, 2020 and February 28, 2019
, respectively, increased
$16 million
, or
7%
, to
$240 million
. The increase was attributable to the combined impact of an increase in average interest-earning assets of
$914 million
, or
3%
, and an increase in the net interest yield of
4
basis points, or
4%
, to
1.18%
. The increase in the net interest yield was due to a reduction in our average cost of funds of
10
basis points to
3.26%
, which was partially offset by a decrease in the average yield on interest-earning assets of
6
basis point to
4.25%
. The decrease in our average cost of funds reflects the impact of the interest savings from the repayment of the 10.375% collateral trust bonds in the first half of fiscal year 2019 and the replacement of this debt with lower-cost funding, combined with a decrease in the average cost of our short-term and variable-rate funding due to a decrease in short-term interest rates during fiscal year 2020, as the 3-month London Interbank Offered Rate (“LIBOR”) decreased by 116 basis points to 1.46% and the federal funds rate decreased by 75 basis points to 1.75% during the last twelve months.
Other factors affecting the variance between our results for the
nine months ended February 29, 2020
and the comparable prior-year period include an increase in fee income of
$7 million
due to higher prepayment fees, a gain of $8 million recorded in connection with the July 22, 2019 sale of land and the absence of the loss of $7 million on the early redemption of $300 million of 10.375% collateral trust bonds recorded in the same prior-year period.
Adjusted Non-GAAP Results
Our adjusted net income totaled
$47 million
and adjusted TIER was
1.21
for the current quarter, compared with adjusted net income of
$51 million
and adjusted TIER of
1.23
for the same prior-year quarter. Adjusted net income totaled
$151 million
and adjusted TIER was
1.23
for the
nine months ended February 29, 2020
, compared with adjusted net income of
$123 million
and adjusted TIER of
1.19
for the same prior-year period. While our adjusted debt-to-equity ratio increased to
5.80
as of
February 29, 2020
, from
5.73
as of
May 31, 2019
, primarily attributable to an increase in debt to fund loan growth, it remained below our targeted threshold of 6.00-to-1.
The decrease in adjusted net income of
$4 million
in the current quarter from the comparable prior-year quarter was primarily attributable to an increase of
$2 million
in both the provision for loan losses and operating expenses during the current quarter. Adjusted net interest income of
$70 million
increased slightly by
$1 million
, or
2%
, compared with the same prior-year quarter, as the increase in average interest-earning assets of
$784 million
, or
3%
, was partially offset by the decrease in our adjusted net interest yield of
2
basis points, or
2%
, to
1.02%
. The decrease in our adjusted net interest yield of
2
basis points was driven by a decline in the average yield on interest-earning assets of
14
basis points to
4.20%
, which was partially offset by a reduction in our adjusted average cost of funds of
10
basis points to
3.39%
.
The increase in adjusted net income of
$28 million
for the
nine months ended February 29, 2020
from the same prior-year period was attributable to an increase in adjusted net interest income of
$11 million
, or
6%
, to
$201 million
, the increase in fee income of
$7 million
due to higher prepayment fees, the gain of $8 million recorded in connection with the sale of land in July 2019 and the absence of the loss of $7 million on the early redemption of collateral trust bonds recorded in the same prior-year period. The increase in our adjusted net interest income of
6%
was driven by the increase in our average interest-earning assets of
3%
and an increase in our adjusted net interest yield of
3
basis points, or
3%
, to
0.99%
. Our adjusted net interest yield reflected the combined favorable impact of a reduction in our adjusted average cost of funds of
7
basis points to
3.47%
and an increased benefit from non-interest bearing funding of 2 basis points to
0.21
%, which was partially offset by a decrease in the average yield on interest-earning assets of
6
basis point to
4.25%
. The reduction in our adjusted average cost of funds was also largely attributable to the interest savings from the repayment of the 10.375% collateral trust bonds in the first half of fiscal year 2019 and the replacement of this debt with lower-cost funding, combined with a decrease in the average cost of our short-term and variable-rate funding due to a decrease in short-term interest rates during fiscal year 2020, as the 3-month LIBOR decreased by 116 basis points to 1.46% and the federal funds rate decreased by 75 basis points to 1.75% during the last twelve months.
6
See “Non-GAAP Financial Measures” for additional information on our adjusted measures, including a reconciliation of these measures to the most comparable GAAP measures.
Lending Activity
Loans to members totaled
$26,823 million
as of
February 29, 2020
, an increase of
$906 million
, or
3%
, from
May 31, 2019
. The increase in loans was driven by a net increase in long-term loans of
$858 million
. CFC distribution loans, CFC power supply loans, CFC statewide and associate loans and RTFC loans increased by
$842 million
,
$103 million
,
$9 million
and
$8 million
, respectively, while NCSC loans decreased by
$57 million
.
Long-term loan advances totaled
$1,950 million
during the
nine months ended February 29, 2020
, with approximately
77%
of those advances for capital expenditures by members and
18%
for the refinancing of loans made by other lenders. In comparison, long-term loan advances totaled
$1,441 million
during the same prior-year period, with approximately
85%
of those advances for capital expenditures and
13%
for the refinancing of loans made by other lenders. CFC had long-term fixed-rate loans totaling
$350 million
that were scheduled to reprice during the
nine months ended February 29, 2020
. Of this total,
$330 million
repriced to a new long-term fixed rate,
$10 million
repriced to a long-term variable rate and
$10 million
was repaid in full. In comparison, CFC had long-term fixed-rate loans totaling $676 million that were scheduled to reprice during the same prior-year period, of which $490 million repriced to a new long-term fixed rate, $119 million repriced to a long-term variable rate and $67 million was repaid in full.
Credit Quality
The overall credit quality of our loan portfolio remained high as of
February 29, 2020
, as evidenced by our continued strong credit performance metrics. We had no delinquent or nonperforming loans as of
February 29, 2020
, and we have not experienced any loan defaults or charge-offs since fiscal year 2017. Outstanding loans to electric utility organizations represented approximately
99%
of total outstanding loan portfolio as of
February 29, 2020
, unchanged from
May 31, 2019
. 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
February 29, 2020
, compared to
92%
secured and
8%
unsecured as of
May 31, 2019
. The allowance for loan losses was
$19 million
as of
February 29, 2020
, compared with
$18 million
as of
May 31, 2019
, and the allowance coverage ratio was
0.07%
as of both
February 29, 2020
and
May 31, 2019
.
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 increased by
$631 million
, or
3%
, to
$25,793 million
as of
February 29, 2020
, from
May 31, 2019
, due to an increase in borrowings to fund the increase in loans to members. The increase was primarily attributable to a net increase in member commercial paper, select notes and daily liquidity fund notes totaling
$324 million
, a net increase in dealer commercial paper outstanding of
$300 million
, a net increase in medium-term notes of
$205 million
and a net increase in borrowings under USDA’s Guaranteed Underwriter Program (“Guaranteed Underwriter Program”) of
$255 million
. These increases were partially offset by a net decrease in collateral trust bonds of
$199 million
and a net decrease in Federal Agricultural Mortgage Corporation (“Farmer Mac”) notes payable of
$228 million
. Outstanding dealer commercial paper totaled
$1,245 million
as of
February 29, 2020
, below our targeted maximum threshold of $1,250 million.
On November 26, 2019, we amended the three-year and five-year committed bank revolving line of credit agreements to extend the maturity date of the three-year agreement to November 28, 2022, and to terminate certain bank commitments totaling
$125 million
under the three-year agreement and
$125 million
under the five-year agreement. The total commitment amount under the amended three-year and five-year bank revolving line of credit agreements is
$1,315 million
and
$1,410 million
, respectively, resulting in a combined total commitment amount under the two facilities of
$2,725 million
.
On December 20, 2019, we terminated the
$300 million
revolving note purchase agreement with Farmer Mac. As a result of
the termination of this revolving note purchase agreement, the commitment amount under the $5,200 million revolving note purchase agreement with Farmer Mac increased to
$5,500 million
effective December 20, 2019.
7
On February 13, 2020, we closed on a
$500 million
committed loan facility (“Series P”) from the Federal Financing Bank under the Guaranteed Underwriter Program. Pursuant to this facility, we may borrow any time before July 15, 2024. Each advance is subject to quarterly amortization and a final maturity not longer than 30 years from the date of the advance. With the closing of this committed loan facility, the amount available for access under the Guaranteed Underwriter Program increased to
$1,525 million
as of
February 29, 2020
.
Recent Developments
COVID-19
COVID-19 has spread globally, including to every state in the United States, and has resulted in the WHO declaring COVID-19 to be a global pandemic. On March 13, 2020, the United States declared a national emergency with respect to COVID-19. The initial 15-day social distancing guidelines issued by the U.S. federal government, which were due to expire on March 30, 2020, have been extended through April 30, 2020, and may be extended further, as a measure to reduce the escalation of the spread of COVID-19 in the United States. More than 40 states and certain U.S. territories, including the District of Columbia, have issued orders requiring the closure of non-essential businesses and/or requiring residents to stay at home. We are following guidelines established by the Centers for Disease Control and WHO and orders issued by the state and local governments where we operate. We have taken a number of precautionary steps to safeguard our business and our employees from COVID-19, including, but not limited to, implementing employee travel restrictions and telecommuting arrangements, while maintaining business continuity so that we can continue to deliver service to and meet the demands of our members. As of March 18, 2020, most of our employees were working remotely, with only certain operationally critical employees working on site at our headquarters. We are monitoring and assessing the impact of the COVID-19 pandemic on a daily basis to ensure that we continue to adhere to guidelines and orders issued by federal, state and local governments.
The effects of COVID-19 and the response to the virus have negatively impacted financial markets and overall economic conditions. On March 27, 2020, the U.S. President signed into law a $2.2 trillion relief bill, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), that is intended to provide emergency relief to several groups and individuals impacted by the COVID-19 pandemic. Among the numerous provisions contained in the CARES Act is the creation of a $349 billion Paycheck Protection Program that provides federal government loan forgiveness for Small Business Administration Section 7(a) loans for small businesses, which may include our members or our members’ customers, to pay up to eight weeks of basic expenses, including utilities such as electric and telephone bills. The CARES Act also adds $45 billion for the disaster relief fund administered by the Federal Emergency Management Agency (“FEMA”) that our members may rely on to restore power after storms and emergencies. In addition, the CARES Act includes funds totaling $900 million for the Low-Income Home Energy Assistance Program, which may assist low-income and moderate-income consumers located in our members’ territories in paying their utility bills. We will continue to evaluate the provisions of the CARES Act and its impact on CFC and our employees as well as our rural utility member cooperatives and their customers.
Liquidity Update
In light of the extreme volatility and disruptions in the capital and credit markets in early March 2020 resulting from the COVID-19 crisis, including a significant decline in corporate debt and equity issuances and a deterioration in the commercial paper market, we took a number of precautionary actions in March to enhance our financial flexibility by bolstering our cash position to ensure we have adequate cash readily available to meet both expected and unexpected cash needs without adversely affecting our daily operations. These actions included, but are not limited to, drawing additional advances under our committed credit facilities, revising our objective for the use of our held-to-maturity investment portfolio from previously serving as a supplemental source of liquidity to serving as a readily available source of liquidity and executing a plan for the orderly liquidation of a portion of debt securities from our investment portfolio. We borrowed an additional $625 million under the Guaranteed Underwriter Program and $250 million under the Farmer Mac note purchase agreement. Table
2
below displays our liquidity sources as of March 31, 2020.
8
Table
2
: Liquidity Sources
|
March 31, 2020
|
||||||||||||
|
(Dollars in millions)
|
Total
|
Accessed
|
Available
|
|||||||||
|
Cash and cash equivalents
|
$
|
857
|
|
$
|
—
|
|
$
|
857
|
|
|||
|
Committed bank revolving line of credit agreements—unsecured
(1)
|
2,725
|
|
3
|
|
2,722
|
|
||||||
|
Guaranteed Underwriter Program committed facilities—secured
(2)
|
7,798
|
|
6,898
|
|
900
|
|
||||||
|
Farmer Mac revolving note purchase agreement, dated March 24, 2011, as amended—secured
(3)
|
5,500
|
|
3,074
|
|
2,426
|
|
||||||
|
Subtotal
|
$
|
16,880
|
|
$
|
9,975
|
|
$
|
6,905
|
|
|||
|
Investment securities, excluding equity securities
(4)
|
546
|
|
—
|
|
546
|
|
||||||
|
Scheduled principal payments on long-term loans
(5)
|
1,310
|
|
—
|
|
1,310
|
|
||||||
|
Total sources of liquidity
|
$
|
18,736
|
|
$
|
9,975
|
|
$
|
8,761
|
|
|||
____________________________
(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 March 31, 2020 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.
(4)
Due to our decision in March 2020 to revise our objective for the use of our held-to-maturity investment portfolio from previously serving as a supplemental source of liquidity to serving as a readily available source of liquidity, we transferred the securities in this portfolio to trading. As such, we are now including this portfolio of debt securities as part of our available liquidity. Our portfolio of equity securities consists primarily of preferred stock securities that are not as readily redeemable; therefore, we have excluded this investment portfolio from our sources of liquidity.
(5)
Represents scheduled principal payments over the next 12 months on long-term loans.
Due largely to the actions undertaken in March, we increased our cash position to
$857 million
as of March 31, 2020, up from
$56 million
as
February 29, 2020
. As of March 31, 2020, we had $6,048 million in remaining committed financing capacity under our bank revolving line of credit agreements, the Guaranteed Underwriter Program and the Farmer Mac note purchase agreement.
Subsequent to our cash management actions in early March, the Federal Open Market Committee (“FOMC”) unveiled a set of aggressive measures to cushion the economic impact of the global COVID-19 crisis, including, among others, cutting the federal funds rate by 100 basis points to a range of 0.00% to 0.25% and establishing a series of emergency credit facilities in an effort to support the flow of credit in the economy, ease liquidity pressure and calm market turmoil. While volatility in the financial markets remains elevated, overall market liquidity concerns have eased since the actions taken by the FOMC.
Our access to funding has not been interrupted to an extent that the ability to meet our obligations has been compromised, As such, we suspended the plan for the orderly liquidation of a portion of debt securities in our investment portfolio. Table
3
displays our debt maturities over the 12 months subsequent to March 31, 2020.
9
Table
3
: Debt Maturities Over Next 12 Months—March 31, 2020
|
(Dollars in thousands)
|
Debt Maturities Next 12 Months
|
|||
|
Debt product type:
|
||||
|
Commercial paper:
|
||||
|
Members, at par
|
$
|
1,184,577
|
|
|
|
Dealer, net of discounts
|
1,242,980
|
|
||
|
Total commercial paper
|
2,427,557
|
|
||
|
Select notes to members
|
1,439,816
|
|
||
|
Daily liquidity fund notes to members
|
470,905
|
|
||
|
Medium-term notes:
|
||||
|
Members, at par
|
496,366
|
|
||
|
Dealer, at par
|
610,268
|
|
||
|
Total medium-term notes
|
1,106,634
|
|
||
|
Collateral trust bonds, at par
|
755,000
|
|
||
|
Guaranteed Underwriter Program notes payable
|
135,513
|
|
||
|
Farmer Mac notes payable
|
531,461
|
|
||
|
Other notes payable
|
3,564
|
|
||
|
Subordinated deferrable debt
|
—
|
|
||
|
Members’ subordinated certificates
|
38,208
|
|
||
|
Total debt maturities over next 12 months as of March 31, 2020
|
$
|
6,908,658
|
|
|
|
Less: Short-term member investments
(1)
|
(3,591,664
|
)
|
||
|
Total debt maturities over next 12 months, excluding short-term member investments as of March 31, 2020
|
$
|
3,316,994
|
|
|
____________________________
(1)
Includes short-term member investments in the form of commercial paper, select notes, daily liquidity fund notes and medium-term notes.
As indicated in the above tables, our available liquidity of
$8,761 million
as of March 31, 2020 was $1,852 million, or 1.3 times, in excess of our expected debt obligations of
$6,909 million
over the next 12 months. Our members historically have maintained a relatively stable level of short-term investments in CFC in the form of commercial paper, select notes, daily liquidity fund notes and medium-term notes. We currently expect that our members will continue to reinvest their excess cash in these short-term investments. Our maturing debt obligations over the next 12 months, excluding short-term member investments of
$3,592 million
, totaled
$3,317 million
as of March 31, 2020. Our available liquidity of
$8,761 million
as of March 31, 2020 was $5,444 million, or 2.6 times, in excess of this amount.
Although we currently believe that our excess liquidity along with the ability to access the capital markets as a well-known seasoned issuer of debt will be more than sufficient to cover our debt obligations over the next 12 months subsequent to March 31, 2020, as well as meet the borrowing needs of our members, we continue to review actions that we may take to further enhance our financial flexibility in the event that market conditions deteriorate further and for an extended period.
We provide additional information on our management of liquidity risk, our primary sources and uses of liquidity and our liquidity profile below under “Liquidity.”
Asset Impairment
In April 2020, management determined that we would not complete an ongoing project to develop a new internal-use loan origination and servicing platform with the current vendor. The project was intended to update our loan platform to provide increased functionality and flexibility and enhance the operational efficiency of our lending, loan servicing and loan accounting processes. As a result of the decision to abandon the existing project and select a new vendor, we recognized a non-cash impairment charge of
$31 million
in the fourth quarter of fiscal year 2020. This non-cash impairment charge represents the total capitalized amount, which is included as a component of fixed assets, on our consolidated balance sheet as of March 31, 2020, for the development of this platform.
10
Outlook for the Next 12 Months
The spread of COVID-19 has had, and is expected to continue to have, direct effects on our business and operations. The broader implications of COVID-19 on the operations and overall financial performance of our members is uncertain due to the currently unknowable duration and severity of the COVID-19 pandemic. The extent of the impact of COVID-19 on our operational and financial performance over the next 12 months is likewise currently uncertain and will depend on certain developments, including, among others, the ultimate impact of COVID-19 on our members, potential further disruption and deterioration in the corporate debt markets and additional, or extended, federal, state and local government orders and regulations that might be imposed in response to the pandemic, all of which are uncertain.
See “Item 1A. Risk Factors” for a discussion of the potential adverse impact of COVID-19 on our business, results of operations and financial condition.
|
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
2019
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. 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
2019
Form 10-K. See “Item 1A. Risk Factors” in our
2019
Form 10-K for a discussion of the risks associated with management’s judgments and estimates in applying our accounting policies and methods.
|
RECENT ACCOUNTING CHANGES AND OTHER DEVELOPMENTS
|
Recent Accounting Changes
See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted during the current year, as well as recently issued accounting standards not yet required to be adopted and the expected impact of the adoption of these accounting standards. To the extent we believe the adoption of new accounting standards has had or will have a material impact on our consolidated results of operations, financial condition or liquidity, we also discuss the impact in the applicable section(s) of this MD&A.
11
|
CONSOLIDATED RESULTS OF OPERATIONS
|
The section below provides a comparative discussion of our condensed consolidated results of operations between the
three months ended February 29, 2020 and February 28, 2019
and the
nine months ended February 29, 2020 and February 28, 2019
. Following this section, we provide a comparative analysis of our condensed consolidated balance sheets as of
February 29, 2020
and
May 31, 2019
. 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
4
presents average balances for the three and
nine months ended February 29, 2020 and February 28, 2019
, and for each major category of our interest-earning assets and interest-bearing liabilities, the interest income earned or interest expense incurred, and the average yield or cost. Table
4
also presents non-GAAP adjusted interest expense, adjusted net interest income and adjusted net interest yield, which reflect the inclusion of net accrued periodic derivative cash settlements expense in interest expense. We provide reconciliations of our non-GAAP adjusted measures to the most comparable GAAP measures under “Non-GAAP Financial Measures.”
12
Table
4
: Average Balances, Interest Income/Interest Expense and Average Yield/Cost
|
Three Months Ended
|
||||||||||||||||||||||
|
(Dollars in thousands)
|
February 29, 2020
|
February 28, 2019
|
||||||||||||||||||||
|
Assets:
|
Average Balance
|
Interest Income/Expense
|
Average Yield/Cost
|
Average Balance
|
Interest Income/Expense
|
Average Yield/Cost
|
||||||||||||||||
|
Long-term fixed-rate loans
(1)
|
$
|
23,957,348
|
|
$
|
261,036
|
|
4.38
|
%
|
$
|
22,821,326
|
|
$
|
251,149
|
|
4.46
|
%
|
||||||
|
Long-term variable-rate loans
|
929,992
|
|
7,552
|
|
3.27
|
|
1,107,669
|
|
10,711
|
|
3.92
|
|
||||||||||
|
Line of credit loans
|
1,757,380
|
|
13,378
|
|
3.06
|
|
1,861,104
|
|
17,178
|
|
3.74
|
|
||||||||||
|
TDR loans
(2)
|
11,053
|
|
210
|
|
7.64
|
|
12,060
|
|
209
|
|
7.03
|
|
||||||||||
|
Other income, net
(3)
|
—
|
|
(419
|
)
|
—
|
|
—
|
|
(291
|
)
|
—
|
|
||||||||||
|
Total loans
|
26,655,773
|
|
281,757
|
|
4.25
|
|
25,802,159
|
|
278,956
|
|
4.38
|
|
||||||||||
|
Cash, time deposits and investment securities
|
834,920
|
|
5,438
|
|
2.62
|
|
904,775
|
|
6,610
|
|
2.96
|
|
||||||||||
|
Total interest-earning assets
|
$
|
27,490,693
|
|
$
|
287,195
|
|
4.20
|
%
|
$
|
26,706,934
|
|
$
|
285,566
|
|
4.34
|
%
|
||||||
|
Other assets, less allowance for loan losses
|
482,234
|
|
1,141,344
|
|
||||||||||||||||||
|
Total assets
|
$
|
27,972,927
|
|
$
|
27,848,278
|
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||||||||
|
Short-term borrowings
|
$
|
4,824,675
|
|
$
|
21,185
|
|
1.77
|
%
|
$
|
4,105,330
|
|
$
|
27,070
|
|
2.67
|
%
|
||||||
|
Medium-term notes
|
3,408,324
|
|
30,860
|
|
3.64
|
|
3,888,915
|
|
34,329
|
|
3.58
|
|
||||||||||
|
Collateral trust bonds
|
6,937,982
|
|
62,914
|
|
3.65
|
|
7,215,271
|
|
61,405
|
|
3.45
|
|
||||||||||
|
Guaranteed Underwriter Program notes payable
|
5,379,993
|
|
39,708
|
|
2.97
|
|
5,074,697
|
|
36,911
|
|
2.95
|
|
||||||||||
|
Farmer Mac notes payable
|
2,930,004
|
|
21,220
|
|
2.91
|
|
2,808,774
|
|
23,691
|
|
3.42
|
|
||||||||||
|
Other notes payable
|
14,226
|
|
97
|
|
2.74
|
|
27,592
|
|
302
|
|
4.44
|
|
||||||||||
|
Subordinated deferrable debt
|
986,041
|
|
|
12,881
|
|
5.25
|
|
742,491
|
|
|
9,416
|
|
5.14
|
|
||||||||
|
Subordinated certificates
|
1,345,250
|
|
14,175
|
|
4.24
|
|
1,363,731
|
|
14,211
|
|
4.23
|
|
||||||||||
|
Total interest-bearing liabilities
|
$
|
25,826,495
|
|
$
|
203,040
|
|
3.16
|
%
|
$
|
25,226,801
|
|
$
|
207,335
|
|
3.33
|
%
|
||||||
|
Other liabilities
|
1,064,666
|
|
1,002,547
|
|
||||||||||||||||||
|
Total liabilities
|
26,891,161
|
|
26,229,348
|
|
||||||||||||||||||
|
Total equity
|
1,081,766
|
|
1,618,930
|
|
||||||||||||||||||
|
Total liabilities and equity
|
$
|
27,972,927
|
|
$
|
27,848,278
|
|
||||||||||||||||
|
Net interest spread
(4)
|
1.04
|
%
|
1.01
|
%
|
||||||||||||||||||
|
Impact of non-interest bearing funding
(5)
|
0.19
|
|
0.18
|
|
||||||||||||||||||
|
Net interest income/net interest yield
(6)
|
$
|
84,155
|
|
1.23
|
%
|
$
|
78,231
|
|
1.19
|
%
|
||||||||||||
|
Adjusted net interest income/adjusted net interest yield:
|
||||||||||||||||||||||
|
Interest income
|
$
|
287,195
|
|
4.20
|
%
|
$
|
285,566
|
|
4.34
|
%
|
||||||||||||
|
Interest expense
|
203,040
|
|
3.16
|
|
207,335
|
|
3.33
|
|
||||||||||||||
|
Add: Net accrued periodic derivative cash settlement
(7)
|
14,354
|
|
0.58
|
|
9,799
|
|
0.36
|
|
||||||||||||||
|
Adjusted interest expense/adjusted average cost
(8)
|
$
|
217,394
|
|
3.39
|
%
|
$
|
217,134
|
|
3.49
|
%
|
||||||||||||
|
Adjusted net interest spread
(4)
|
0.81
|
%
|
0.85
|
%
|
||||||||||||||||||
|
Impact of non-interest bearing funding
(5)
|
0.21
|
|
0.19
|
|
||||||||||||||||||
|
Adjusted net interest income/adjusted net interest yield
(9)
|
$
|
69,801
|
|
1.02
|
%
|
$
|
68,432
|
|
1.04
|
%
|
||||||||||||
13
|
Nine Months Ended
|
||||||||||||||||||||||
|
(Dollars in thousands)
|
February 29, 2020
|
February 28, 2019
|
||||||||||||||||||||
|
Assets:
|
Average Balance
|
Interest Income/Expense
|
Average Yield/Cost
|
Average Balance
|
Interest Income/Expense
|
Average Yield/Cost
|
||||||||||||||||
|
Long-term fixed-rate loans
(1)
|
$
|
23,716,480
|
|
$
|
780,228
|
|
4.39
|
%
|
$
|
22,734,570
|
|
$
|
756,290
|
|
4.45
|
%
|
||||||
|
Long-term variable-rate loans
|
951,172
|
|
25,439
|
|
3.57
|
|
1,091,929
|
|
30,158
|
|
3.69
|
|
||||||||||
|
Line of credit loans
|
1,666,290
|
|
42,089
|
|
3.37
|
|
1,543,686
|
|
40,563
|
|
3.51
|
|
||||||||||
|
TDR loans
(2)
|
11,341
|
|
628
|
|
7.40
|
|
12,267
|
|
638
|
|
6.95
|
|
||||||||||
|
Other income, net
(3)
|
—
|
|
(990
|
)
|
—
|
|
—
|
|
(867
|
)
|
—
|
|
||||||||||
|
Total loans
|
26,345,283
|
|
847,394
|
|
4.30
|
|
25,382,452
|
|
826,782
|
|
4.35
|
|
||||||||||
|
Cash, time deposits and investment securities
|
799,673
|
|
16,853
|
|
2.82
|
|
848,767
|
|
18,528
|
|
2.92
|
|
||||||||||
|
Total interest-earning assets
|
$
|
27,144,956
|
|
$
|
864,247
|
|
4.25
|
%
|
$
|
26,231,219
|
|
$
|
845,310
|
|
4.31
|
%
|
||||||
|
Other assets, less allowance for loan losses
|
547,173
|
|
984,554
|
|
||||||||||||||||||
|
Total assets
|
$
|
27,692,129
|
|
|
|
$
|
27,215,773
|
|
|
|
|
|
||||||||||
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Short-term borrowings
|
$
|
4,146,382
|
|
$
|
66,119
|
|
2.13
|
%
|
$
|
3,811,774
|
|
$
|
69,108
|
|
2.42
|
%
|
||||||
|
Medium-term notes
|
3,489,031
|
|
94,376
|
|
3.61
|
|
3,851,758
|
|
100,555
|
|
3.49
|
|
||||||||||
|
Collateral trust bonds
|
7,185,889
|
|
192,818
|
|
3.58
|
|
7,319,359
|
|
208,044
|
|
3.80
|
|
||||||||||
|
Guaranteed Underwriter Program notes payable
|
5,384,520
|
|
119,927
|
|
2.98
|
|
4,918,616
|
|
107,259
|
|
2.92
|
|
||||||||||
|
Farmer Mac notes payable
|
2,974,785
|
|
68,948
|
|
3.10
|
|
2,718,697
|
|
64,499
|
|
3.17
|
|
||||||||||
|
Other notes payable
|
19,436
|
|
581
|
|
3.99
|
|
29,139
|
|
946
|
|
4.34
|
|
||||||||||
|
Subordinated deferrable debt
|
986,017
|
|
38,647
|
|
5.24
|
|
742,456
|
|
28,250
|
|
5.09
|
|
||||||||||
|
Subordinated certificates
|
1,352,403
|
|
42,766
|
|
4.22
|
|
1,372,977
|
|
43,071
|
|
4.19
|
|
||||||||||
|
Total interest-bearing liabilities
|
$
|
25,538,463
|
|
$
|
624,182
|
|
3.26
|
%
|
$
|
24,764,776
|
|
$
|
621,732
|
|
3.36
|
%
|
||||||
|
Other liabilities
|
1,064,411
|
|
|
891,089
|
|
|
||||||||||||||||
|
Total liabilities
|
26,602,874
|
|
|
25,655,865
|
|
|
||||||||||||||||
|
Total equity
|
1,089,255
|
|
1,559,908
|
|
|
|||||||||||||||||
|
Total liabilities and equity
|
$
|
27,692,129
|
|
|
|
$
|
27,215,773
|
|
|
|
||||||||||||
|
Net interest spread
(4)
|
|
|
0.99
|
%
|
|
|
|
|
0.95
|
%
|
||||||||||||
|
Impact of non-interest bearing funding
(5)
|
0.19
|
|
0.19
|
|
||||||||||||||||||
|
Net interest income/net interest yield
(6)
|
$
|
240,065
|
|
1.18
|
%
|
$
|
223,578
|
|
1.14
|
%
|
||||||||||||
|
Adjusted net interest income/adjusted net interest yield:
|
|
|
||||||||||||||||||||
|
Interest income
|
$
|
864,247
|
|
4.25
|
%
|
$
|
845,310
|
|
4.31
|
%
|
||||||||||||
|
Interest expense
|
624,182
|
|
3.26
|
|
621,732
|
|
3.36
|
|
||||||||||||||
|
Add: Net accrued periodic derivative cash settlement
(7)
|
39,547
|
|
0.51
|
|
34,433
|
|
0.42
|
|
||||||||||||||
|
Adjusted interest expense/adjusted average cost
(8)
|
$
|
663,729
|
|
3.47
|
%
|
|
|
$
|
656,165
|
|
3.54
|
%
|
||||||||||
|
Adjusted net interest spread
(4)
|
0.78
|
%
|
|
0.77
|
%
|
|||||||||||||||||
|
Impact of non-interest bearing funding
(5)
|
0.21
|
|
0.19
|
|
||||||||||||||||||
|
Adjusted net interest income/adjusted net interest yield
(9)
|
$
|
200,518
|
|
0.99
|
%
|
|
$
|
189,145
|
|
|
0.96
|
%
|
||||||||||
____________________________
(1)
Interest income on long-term, fixed-rate loans includes loan conversion fees, which are generally deferred and recognized as interest income using the effective interest method.
(2)
Troubled debt restructuring (“TDR”) loans.
(3)
Consists of late payment fees and net amortization of deferred loan fees and loan origination costs.
14
(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
$9,997 million
and
$10,980 million
for the
three months ended February 29, 2020 and February 28, 2019
, respectively. The average outstanding notional amount of interest rate swaps was
$10,451 million
and
$11,019 million
for the
nine months ended February 29, 2020 and February 28, 2019
, respectively.
(8)
Adjusted interest expense consists of interest expense plus net accrued periodic interest rate swap cash settlements expense during the period. Net accrued periodic derivative cash settlements are reported on our condensed consolidated statements of operations as a component of derivative gains (losses). Adjusted average cost is calculated based on annualized adjusted interest expense for the period divided by total average interest-bearing liabilities during the period.
(9)
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
5
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.
15
Table
5
: Rate/Volume Analysis of Changes in Interest Income/Interest Expense
|
Three Months Ended February 29, 2020 versus February 28, 2019
|
Nine Months Ended February 29, 2020 versus February 28, 2019
|
|||||||||||||||||||||||
|
|
Total
|
Variance due to:
(1)
|
Total
|
Variance due to:
(1)
|
||||||||||||||||||||
|
(Dollars in thousands)
|
Variance
|
Volume
|
Rate
|
Variance
|
Volume
|
Rate
|
||||||||||||||||||
|
Interest income:
|
|
|
|
|
|
|
||||||||||||||||||
|
Long-term fixed-rate loans
|
$
|
9,887
|
|
$
|
14,703
|
|
$
|
(4,816
|
)
|
$
|
23,938
|
|
$
|
33,391
|
|
$
|
(9,453
|
)
|
||||||
|
Long-term variable-rate loans
|
(3,159
|
)
|
(1,643
|
)
|
(1,516
|
)
|
(4,719
|
)
|
(3,863
|
)
|
(856
|
)
|
||||||||||||
|
Line of credit loans
|
(3,800
|
)
|
(822
|
)
|
(2,978
|
)
|
1,526
|
|
3,262
|
|
(1,736
|
)
|
||||||||||||
|
Restructured loans
|
1
|
|
(16
|
)
|
17
|
|
(10
|
)
|
(48
|
)
|
38
|
|
||||||||||||
|
Other income, net
|
(128
|
)
|
—
|
|
(128
|
)
|
(123
|
)
|
—
|
|
(123
|
)
|
||||||||||||
|
Total loans
|
2,801
|
|
12,222
|
|
(9,421
|
)
|
20,612
|
|
32,742
|
|
(12,130
|
)
|
||||||||||||
|
Cash, time deposits and investment securities
|
(1,172
|
)
|
(459
|
)
|
(713
|
)
|
(1,675
|
)
|
(1,056
|
)
|
(619
|
)
|
||||||||||||
|
Interest income
|
1,629
|
|
11,763
|
|
(10,134
|
)
|
18,937
|
|
31,686
|
|
(12,749
|
)
|
||||||||||||
|
Interest expense:
|
|
|
|
|
||||||||||||||||||||
|
Short-term borrowings
|
(5,885
|
)
|
5,009
|
|
(10,894
|
)
|
(2,989
|
)
|
6,136
|
|
(9,125
|
)
|
||||||||||||
|
Medium-term notes
|
(3,469
|
)
|
(3,991
|
)
|
522
|
|
(6,179
|
)
|
(9,386
|
)
|
3,207
|
|
||||||||||||
|
Collateral trust bonds
|
1,509
|
|
(1,867
|
)
|
3,376
|
|
(15,226
|
)
|
(3,606
|
)
|
(11,620
|
)
|
||||||||||||
|
Guaranteed Underwriter Program notes payable
|
2,797
|
|
2,547
|
|
250
|
|
12,668
|
|
10,268
|
|
2,400
|
|
||||||||||||
|
Farmer Mac notes payable
|
(2,471
|
)
|
1,229
|
|
(3,700
|
)
|
4,449
|
|
6,140
|
|
(1,691
|
)
|
||||||||||||
|
Other notes payable
|
(205
|
)
|
(145
|
)
|
(60
|
)
|
(365
|
)
|
(314
|
)
|
(51
|
)
|
||||||||||||
|
Subordinated deferrable debt
|
3,465
|
|
3,193
|
|
272
|
|
10,397
|
|
9,302
|
|
1,095
|
|
||||||||||||
|
Subordinated certificates
|
(36
|
)
|
(76
|
)
|
40
|
|
(305
|
)
|
(606
|
)
|
301
|
|
||||||||||||
|
Interest expense
|
(4,295
|
)
|
5,899
|
|
(10,194
|
)
|
2,450
|
|
17,934
|
|
(15,484
|
)
|
||||||||||||
|
Net interest income
|
$
|
5,924
|
|
$
|
5,864
|
|
$
|
60
|
|
$
|
16,487
|
|
$
|
13,752
|
|
$
|
2,735
|
|
||||||
|
Adjusted net interest income:
|
||||||||||||||||||||||||
|
Interest income
|
$
|
1,629
|
|
$
|
11,763
|
|
$
|
(10,134
|
)
|
$
|
18,937
|
|
$
|
31,686
|
|
$
|
(12,749
|
)
|
||||||
|
Interest expense
|
(4,295
|
)
|
5,899
|
|
(10,194
|
)
|
2,450
|
|
17,934
|
|
(15,484
|
)
|
||||||||||||
|
Net accrued periodic derivative cash settlements expense
(2)
|
4,555
|
|
(803
|
)
|
5,358
|
|
5,114
|
|
(1,746
|
)
|
6,860
|
|
||||||||||||
|
Adjusted interest expense
(3)
|
260
|
|
5,096
|
|
(4,836
|
)
|
7,564
|
|
16,188
|
|
(8,624
|
)
|
||||||||||||
|
Adjusted net interest income
|
$
|
1,369
|
|
$
|
6,667
|
|
$
|
(5,298
|
)
|
$
|
11,373
|
|
$
|
15,498
|
|
$
|
(4,125
|
)
|
||||||
____________________________
(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.
Reported Net Interest Income
Reported net interest income of
$84 million
for the current quarter was up
$6 million
, or
8%
, from the comparable prior-year quarter, primarily driven by an increase in the net interest yield of
3%
(
4
basis points) to
1.23%
and an increase in average interest-earning assets of
3%
.
16
|
•
|
Net Interest Yield:
The increase of
4
basis points in the net interest yield for the current quarter was due to a decrease in the average cost of funds of
17
basis points to
3.16%
, partially offset by a decrease in the average yield on interest-earning assets of
14
basis points to
4.20%
. The decrease in our average cost of funds was due to a decrease in the average cost of our short-term and variable-rate funding due to a decrease in short-term interest rates during fiscal year 2020. The decrease in the average yield on interest-earning assets was primarily attributable to an
8
basis point decrease in the average yield on our long-term fixed rate loan portfolio, as new loan advances were made at lower rates due to a decline in medium- and long-term interest rates since February 28, 2019. We also experienced a decrease in the average yield on our line of credit and variable-rate loans due to the overall decline in short-term interest rates since February 28, 2019.
|
|
•
|
Average Interest-Earning Assets:
The increase in average interest-earning assets of
3%
during the current quarter was driven by growth in average total loans of
$854 million
, or
3%
, as members obtained advances to fund capital investments and refinanced with us loans made by other lenders.
|
Reported net interest income of
$240 million
for the
nine months ended February 29, 2020
was up
$16 million
, or
7%
, from the comparable prior-year period, driven by an increase in the net interest yield of
4%
(
4
basis points) to
1.18%
, coupled with an increase in average interest-earning assets of
3%
.
|
•
|
Net Interest Yield:
The increase of
4
basis points in the net interest yield was due to a decrease in the average cost of funds of
10
basis points to
3.26%
, partially offset by a decrease in the average yield on interest-earning assets of
6
basis point to
4.25%
. The decrease in our average cost of funds was largely due to the interest cost savings from the repayment of the $1 billion aggregate principal amount of the 10.375% collateral trust bonds in the first half of fiscal year 2019 and the replacement of this debt with lower-cost funding, combined with a decrease in the average cost of our short-term and variable-rate funding due to a decrease in short-term interest rates during fiscal year 2020, as the 3-month LIBOR decreased by 116 basis points to 1.46% and the federal funds rate decreased by 75 basis points to 1.75% during the last twelve months. The decrease in the average yield on interest-earning assets was primarily attributable to a
6
basis point decrease in the average yield on our long-term fixed rate loan portfolio, as new loan advances were made at lower rates due to a decline in medium- and long-term interest rates since February 28, 2019.
|
|
•
|
Average Interest-Earning Assets:
The increase in average interest-earning assets of
3%
during the
nine months ended February 29, 2020
was driven by growth in average total loans of
$963 million
, or
4%
, as members obtained advances to fund capital investments and refinanced with us loans made by other lenders.
|
Adjusted Net Interest Income
Adjusted net interest income of
$70 million
for the current quarter increased slightly by
$1 million
, or
2%
, from the comparable prior-year quarter, as the increase in average interest-earning assets of
3%
was partially offset by the decrease in the adjusted net interest yield of
2
basis points, or
2%
, to
1.02%
.
|
•
|
Adjusted
Net Interest Yield
: The decrease in the adjusted net interest yield was primarily due to a decrease in the average yield on interest-earning assets of
14
basis points to
4.20%
, partially offset by a reduction in our adjusted average cost of funds of
10
basis points to
3.39%
. As noted above, the decrease in the average yield on interest-earning assets was primarily attributable to an
8
basis point decrease in the average yield on our long-term fixed rate loan portfolio, as new loan advances were made at lower rates due to a decline in medium- and long-term interest rates since February 28, 2019. We also experienced a decrease in the average yield on our line of credit and variable-rate loans due to the overall decline in short-term interest rates since February 28, 2019. The reduction in our adjusted average cost of funds was due to a decrease in the average cost of our short-term and variable-rate funding due to a decrease in short-term interest rates during fiscal year 2020.
|
|
•
|
Average Interest-Earning Assets:
The increase in average interest-earning assets of
3%
was driven by the growth in average total loans of
$854 million
.
|
Adjusted net interest income of
$201 million
for the
nine months ended February 29, 2020
was up
$11 million
, or
6%
, from the comparable prior-year period, driven by an increase in the adjusted net interest yield of
3
basis points, or
3%
, to
0.99%
and the increase in average interest-earning assets of
3%
.
17
|
•
|
Adjusted
Net Interest Yield
: The increase in the adjusted net interest yield was due to the combined favorable impact of a reduction in our adjusted average cost of funds of
7
basis points to
3.47%
and an increased benefit from non-interest bearing funding of 2 basis points to
0.21
%, which was partially offset by the decrease in the average yield on interest-earning assets of
6
basis point to
4.25%
. The reduction in our adjusted average cost of funds was largely attributable to the interest cost savings from the repayment of the $1 billion aggregate principal amount of the 10.375% collateral trust bonds and the replacement of this debt with lower-cost funding, combined with a decrease in the average cost of our short-term and variable-rate funding due to a decrease in short-term interest rates during fiscal year 2020, as the 3-month LIBOR decreased by 116 basis points to 1.46% and the federal funds rate decreased by 75 basis points to 1.75% during the last twelve months. The decrease in the average yield on interest-earning assets was attributable to a
6
basis point decrease in the average yield on our long-term fixed rate loan portfolio, as new loan advances were made at lower rates due to a decline in medium- and long-term interest rates since February 28, 2019.
|
|
•
|
Average Interest-Earning Assets:
The increase in average interest-earning assets of
3%
was driven by the growth in average total loans of
$963 million
.
|
We include net accrued periodic derivative cash settlements during the period in the calculation of our adjusted average cost of funds, which, as a result, also impacts the calculation of adjusted net interest income and adjusted net interest yield. Net periodic derivative cash settlement expense totaled
$14 million
for the current quarter, compared with
$10 million
for the same prior-year quarter. Net periodic derivative cash settlement expense totaled
$40 million
for the
nine months ended February 29, 2020
, compared with
$34 million
for the same prior-year period. See “Non-GAAP Financial Measures” for additional information on our adjusted measures, including a reconciliation of these measures to the most comparable GAAP measures.
Provision for 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. The allowance for loan losses was
$19 million
and
$18 million
as of
February 29, 2020
and
May 31, 2019
, respectively.
We recorded a provision for loan losses of
$2 million
and
$1 million
for the three and
nine months ended February 29, 2020
. In comparison, we recorded a provision for loan losses of less than $1 million for the
three months ended February 28, 2019
and a benefit for loan losses of
$2 million
for the
nine months ended February 28, 2019
. The credit quality and performance statistics of our loan portfolio remained strong as of
February 29, 2020
. We had no payment defaults or charge-offs during the quarter, and no delinquent loans or nonperforming loans in our loan portfolio as of
February 29, 2020
or
May 31, 2019
.
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 a description of our methodology for determining the allowance for loan losses, see “MD&A—Critical Accounting Policies and Estimates—Allowance for Loan Losses” and “Note 1—Summary of Significant Accounting Policies—Allowance for Loan Losses” in our
2019
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 unrealized gains and losses on equity securities.
Table
6
presents the components of non-interest income for the three and
nine months ended February 29, 2020 and February 28, 2019
.
18
Table
6
: Non-Interest Income
|
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
(Dollars in thousands)
|
February 29, 2020
|
February 28, 2019
|
February 29, 2020
|
|
February 28, 2019
|
|||||||||||
|
Non-interest income:
|
||||||||||||||||
|
Fee and other income
|
$
|
3,647
|
|
$
|
3,714
|
|
$
|
18,430
|
|
$
|
11,220
|
|
||||
|
Derivative losses
|
(337,936
|
)
|
(132,174
|
)
|
(550,211
|
)
|
(61,648
|
)
|
||||||||
|
Unrealized gains (losses) on equity securities
|
749
|
|
2,144
|
|
2,255
|
|
(201
|
)
|
||||||||
|
Total non-interest income
|
$
|
(333,540
|
)
|
$
|
(126,316
|
)
|
$
|
(529,526
|
)
|
$
|
(50,629
|
)
|
||||
The significant variance in non-interest income between periods was primarily attributable to changes in the net derivative gains (losses) recognized in our condensed consolidated statements of operations. In addition, fee and other income increased by
$7 million
due to higher prepayment fees during the
nine months ended February 29, 2020
.
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 all our derivatives, for hedge accounting. Accordingly, changes in the fair value of interest rate swaps are reported in our condensed consolidated statements of operations under derivative gains (losses). However, we typically designate treasury locks as cash flow hedges. We did not have any derivatives designated as accounting hedges as of
February 29, 2020
or
May 31, 2019
.
We currently use two types of interest rate swap agreements: (i) we pay a fixed rate of interest and receive a variable rate of interest (“pay-fixed swaps”); and (ii) we pay a variable rate of interest and receive a fixed rate of interest (“receive-fixed swaps”). The interest amounts are based on a specified notional balance, which is used for calculation purposes only. The benchmark variable rate for the substantial majority of the floating rate payments under our swap agreements is 3-month LIBOR. As interest rates decline, pay-fixed swaps generally decrease in value and result in the recognition of derivative losses, as the amount of interest we pay remains fixed, while the amount of interest we receive declines. In contrast, as interest rates rise, pay-fixed swaps generally increase in value and result in the recognition of derivative gains, as the amount of interest we pay remains fixed, but the amount we receive increases. With a receive-fixed swap, the opposite results occur as interest rates decline or rise. Because our pay-fixed and receive-fixed swaps are referenced to different maturity terms along the swap curve, different changes in the swap curve—parallel, flattening, inversion or steepening—will also impact the fair value of our derivatives.
Table
7
presents the components of net derivative gains (losses) recorded in our results of operations. Derivative cash settlements expense represents 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.
19
Table
7
: Derivative Gains (Losses)
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
(Dollars in thousands)
|
February 29, 2020
|
February 28, 2019
|
February 29, 2020
|
February 28, 2019
|
||||||||||||
|
Derivative losses attributable to:
|
||||||||||||||||
|
Derivative cash settlements expense
|
$
|
(14,354
|
)
|
$
|
(9,799
|
)
|
$
|
(39,547
|
)
|
$
|
(34,433
|
)
|
||||
|
Derivative forward value losses
|
(323,582
|
)
|
(122,375
|
)
|
(510,664
|
)
|
(27,215
|
)
|
||||||||
|
Derivative losses
|
$
|
(337,936
|
)
|
$
|
(132,174
|
)
|
$
|
(550,211
|
)
|
$
|
(61,648
|
)
|
||||
The net derivative losses of
$338 million
for the three months ended
February 29, 2020
were attributable to a net decrease in the fair value of our pay-fixed swaps resulting from a decrease in interest rates across the swap curve during the current quarter, with medium- and long-term rates experiencing a greater decline than short-term interest rates. The net derivative losses of
$550 million
for the
nine months ended February 29, 2020
were attributable to a net decrease in the fair value of our pay-fixed swaps resulting from a decline in interest rates across the swap curve. The swap curve remained inverted, as short-term interest rates continued to exceed medium- and long-term interest rates as of the end of the current quarter, as depicted by the
February 29, 2020
, November 30, 2019 and
May 31, 2019
swap curves presented in the comparative swap curves chart below.
The net derivative losses of
$132 million
and
$62 million
in the three and
nine months ended February 28, 2019
, respectively, were attributable to a decrease in the fair value of our pay-fixed swaps resulting from a decrease in medium- and longer-term interest rates as depicted by the
February 28, 2019
and May 31, 2018 swap curves presented in the comparative swap curves chart below.
Our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps, with pay-fixed swaps representing approximately
71%
and
68%
of the outstanding notional amount of our derivative portfolio as of
February 29, 2020
and
May 31, 2019
, respectively. 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. The average remaining maturity of our pay-fixed and receive-fixed swaps was 19 years and four years, respectively, as of both
February 29, 2020
and
February 28, 2019
.
Derivative Cash Settlements
As indicated in Table
7
above, net periodic derivative cash settlement expense totaled
$14 million
and
$40 million
for the three and
nine months ended February 29, 2020
, respectively. In comparison, net periodic derivative cash settlement expense totaled
$10 million
and
$34 million
for the three and
nine months ended February 28, 2019
, respectively. Table
8
displays, by swap agreement type, the average notional amount outstanding and the weighted-average interest rate paid and received for derivative cash settlements during each respective period.
Table
8
: Derivative Cash Settlements Expense—Average Notional Amounts and Interest Rates
|
Three Months Ended
|
||||||||||||||||||||
|
|
February 29, 2020
|
February 28, 2019
|
||||||||||||||||||
|
(Dollars in thousands)
|
Average
Notional
Balance
|
Weighted-
Average
Rate Paid
|
Weighted-
Average
Rate Received
|
Average
Notional
Balance
|
Weighted-
Average
Rate Paid
|
Weighted-
Average
Rate Received
|
||||||||||||||
|
Pay-fixed swaps
|
$
|
7,047,332
|
|
2.82
|
%
|
1.89
|
%
|
$
|
7,373,993
|
|
2.83
|
%
|
2.73
|
%
|
||||||
|
Receive-fixed swaps
|
2,949,549
|
|
2.58
|
|
2.69
|
|
3,605,666
|
|
3.30
|
|
2.53
|
|
||||||||
|
Total
|
$
|
9,996,881
|
|
2.75
|
%
|
2.12
|
%
|
$
|
10,979,659
|
|
2.99
|
%
|
2.66
|
%
|
||||||
20
|
Nine Months Ended
|
||||||||||||||||||||
|
|
February 29, 2020
|
February 28, 2019
|
||||||||||||||||||
|
(Dollars in thousands)
|
Average
Notional
Balance
|
Weighted-
Average
Rate Paid
|
Weighted-
Average
Rate Received
|
Average
Notional
Balance
|
Weighted-
Average
Rate Paid
|
Weighted-
Average
Rate Received
|
||||||||||||||
|
Pay-fixed swaps
|
$
|
7,233,790
|
|
2.83
|
%
|
2.12
|
%
|
$
|
7,330,332
|
|
2.82
|
%
|
2.50
|
%
|
||||||
|
Receive-fixed swaps
|
3,216,883
|
|
2.82
|
|
2.61
|
|
3,688,835
|
|
3.10
|
|
2.52
|
|
||||||||
|
Total
|
$
|
10,450,673
|
|
2.83
|
%
|
2.27
|
%
|
$
|
11,019,167
|
|
2.92
|
%
|
2.50
|
%
|
||||||
Comparative Swap Curves
The chart below provides comparative swap curves as of the end of
February 29, 2020
, November 30, 2019,
May 31, 2019
,
February 28, 2019
and May 31, 2018.
____________________________
Benchmark rates obtained from Bloomberg.
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, gains and losses on the early extinguishment of debt and other miscellaneous expenses.
21
Table
9
presents the components of non-interest expense recorded in results of operations for the three and
nine months ended February 29, 2020 and February 28, 2019
.
Table
9
: Non-Interest Expense
|
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
(Dollars in thousands)
|
February 29, 2020
|
February 28, 2019
|
February 29, 2020
|
February 28, 2019
|
||||||||||||
|
Non-interest expense:
|
||||||||||||||||
|
Salaries and employee benefits
|
$
|
(12,895
|
)
|
$
|
(13,020
|
)
|
$
|
(38,565
|
)
|
$
|
(38,094
|
)
|
||||
|
Other general and administrative expenses
|
(12,374
|
)
|
(9,978
|
)
|
(36,802
|
)
|
(31,979
|
)
|
||||||||
|
Losses on early extinguishment of debt
|
(69
|
)
|
—
|
|
(683
|
)
|
(7,100
|
)
|
||||||||
|
Other non-interest (expense) income
|
(290
|
)
|
(355
|
)
|
6,574
|
|
(1,104
|
)
|
||||||||
|
Total non-interest expense
|
$
|
(25,628
|
)
|
$
|
(23,353
|
)
|
$
|
(69,476
|
)
|
$
|
(78,277
|
)
|
||||
Non-interest expense of
$26 million
for the current quarter increased by $3 million, or
10%
, from the comparable prior-year quarter, primarily due to increases in general and administrative expenses.
Non-interest expense of
$69 million
for the
nine months ended February 29, 2020
decreased by
$9 million
, or
11%
, from the same prior-year period. The decrease was largely due to the $8 million gain recorded in connection with the July 22, 2019 sale of land and the absence of the loss of $7 million on the early redemption of $300 million of 10.375% collateral trust bonds recorded in the same prior-year period, partially offset by increases in general and administrative expenses.
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 loss attributable to noncontrolling interests of
$1 million
and
$3 million
for the three and
nine months ended February 29, 2020
, respectively. In comparison, we recorded net loss attributable to noncontrolling interests of
$1 million
and less than $1 million for the three and
nine months ended February 28, 2019
, respectively.
|
CONSOLIDATED BALANCE SHEET ANALYSIS
|
Total assets of
$27,946 million
as of
February 29, 2020
increased by
$822 million
, or
3%
, from
May 31, 2019
, primarily due to growth in our loan portfolio. Total liabilities of
$27,065 million
as of
February 29, 2020
increased by
$1,245 million
, or
5%
, from
May 31, 2019
, primarily due to debt issuances to fund loan growth and an increase in our derivative liabilities, attributable to a decrease in the fair value of our pay-fixed swaps. Total equity decreased by
$423 million
to
$881 million
as of
February 29, 2020
, attributable to our reported net loss of
$359 million
during the
nine months ended February 29, 2020
and the patronage capital retirement of
$63 million
during the first quarter of fiscal year 2020.
Following is a discussion of changes in the major components of our assets and liabilities during the
nine months ended February 29, 2020
. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to manage liquidity requirements for the company and our market risk exposure in accordance with our risk appetite.
Loan Portfolio
We offer long-term loans that provide borrowers the option to select fixed- and variable-rate loan advances and line of credit loans. The substantial majority of loans in our portfolio represent fixed-rate advances under secured long-term facilities with terms up to 35 years. Line of credit loans are typically variable-rate revolving facilities and are generally unsecured.
22
Loans Outstanding
Table
10
summarizes loans to members, by loan type and by member class, as of
February 29, 2020 and May 31, 2019
. As indicated in Table
10
, long-term fixed-rate loans accounted for
90%
and
89%
of loans to members as of
February 29, 2020 and May 31, 2019
, respectively.
Table
10
: Loans Outstanding by Type and Member Class
|
February 29, 2020
|
May 31, 2019
|
|
||||||||||||||||
|
(Dollars in thousands)
|
Amount
|
% of Total
|
Amount
|
% of Total
|
Change
|
|||||||||||||
|
Loans by type:
|
||||||||||||||||||
|
Long-term loans:
|
|
|
|
|
|
|||||||||||||
|
Fixed-rate
|
$
|
24,087,516
|
|
90
|
%
|
$
|
23,094,253
|
|
89
|
%
|
$
|
993,263
|
|
|||||
|
Variable-rate
|
931,642
|
|
3
|
|
1,066,880
|
|
4
|
|
(135,238
|
)
|
||||||||
|
Total long-term loans
|
25,019,158
|
|
93
|
|
24,161,133
|
|
93
|
|
858,025
|
|
||||||||
|
Lines of credit
|
1,791,943
|
|
7
|
|
1,744,531
|
|
7
|
|
47,412
|
|
||||||||
|
Total loans outstanding
|
26,811,101
|
|
100
|
|
25,905,664
|
|
100
|
|
905,437
|
|
||||||||
|
Deferred loan origination costs
|
|
11,429
|
|
|
—
|
|
|
11,240
|
|
|
—
|
|
|
189
|
|
|||
|
Loans to members
|
|
$
|
26,822,530
|
|
|
100
|
%
|
|
$
|
25,916,904
|
|
|
100
|
%
|
|
$
|
905,626
|
|
|
Loans by member class:
|
|
|
|
|
|
|||||||||||||
|
CFC:
|
|
|
|
|
|
|||||||||||||
|
Distribution
|
$
|
20,997,144
|
|
78
|
%
|
$
|
20,155,266
|
|
78
|
%
|
$
|
841,878
|
|
|||||
|
Power supply
|
4,681,862
|
|
18
|
|
4,578,841
|
|
18
|
|
103,021
|
|
||||||||
|
Statewide and associate
|
92,473
|
|
—
|
|
83,569
|
|
—
|
|
8,904
|
|
||||||||
|
CFC total
|
25,771,479
|
|
96
|
|
24,817,676
|
|
96
|
|
953,803
|
|
||||||||
|
NCSC
|
686,061
|
|
3
|
|
742,888
|
|
3
|
|
(56,827
|
)
|
||||||||
|
RTFC
|
353,561
|
|
1
|
|
345,100
|
|
1
|
|
8,461
|
|
||||||||
|
Total loans outstanding
|
26,811,101
|
|
100
|
|
25,905,664
|
|
100
|
|
905,437
|
|
||||||||
|
Deferred loan origination costs
|
11,429
|
|
—
|
|
11,240
|
|
—
|
|
189
|
|
||||||||
|
Loans to members
|
$
|
26,822,530
|
|
100
|
%
|
$
|
25,916,904
|
|
100
|
%
|
$
|
905,626
|
|
|||||
Loans to members totaled
$26,823 million
as of
February 29, 2020
, an increase of
$906 million
, or
3%
, from
May 31, 2019
. The increase in loans was driven by a net increase in long-term loans of
$858 million
. CFC distribution loans, CFC power supply loans, CFC statewide and associate loans and RTFC loans increased by
$842 million
,
$103 million
,
$9 million
and
$8 million
, respectively, while NCSC loans decreased by
$57 million
.
Long-term loan advances totaled
$1,950 million
during the
nine months ended February 29, 2020
, with approximately
77%
of those advances for capital expenditures by members and
18%
for the refinancing of loans made by other lenders. In comparison, long-term loan advances totaled
$1,441 million
during the same prior-year period, with approximately
85%
of those advances for capital expenditures by members and
13%
for 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
2019
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.
Loan Retention Rate
Table
11
presents a summary of the options selected by borrowers for CFC’s long-term fixed-rate loans that repriced, in accordance with our standard loan repricing provisions, during the
nine months ended February 29, 2020
and during fiscal year
2019
. At the repricing date, the borrower has the option of (i) selecting CFC’s current long-term fixed rate for a term of
23
between one year and up to the final maturity of the loan; (ii) selecting CFC’s current long-term variable rate; or (iii) repaying the loan in full.
Table
11
: Historical Retention Rate and Repricing Selection
(1)
|
Nine Months Ended
|
Fiscal Year Ended
|
|||||||||||||
|
February 29, 2020
|
May 31, 2019
|
|||||||||||||
|
(Dollars in thousands)
|
Amount
|
% of Total
|
Amount
|
% of Total
|
||||||||||
|
Loans retained:
|
|
|
|
|
||||||||||
|
Long-term fixed rate selected
|
$
|
330,258
|
|
94
|
%
|
$
|
568,252
|
|
75
|
%
|
||||
|
Long-term variable rate selected
|
9,678
|
|
3
|
|
123,636
|
|
16
|
|
||||||
|
Total loans retained by CFC
|
339,936
|
|
97
|
|
691,888
|
|
91
|
|
||||||
|
Loans repaid
|
10,349
|
|
3
|
|
69,250
|
|
9
|
|
||||||
|
Total
|
$
|
350,285
|
|
100
|
%
|
$
|
761,138
|
|
100
|
%
|
||||
____________________________
(1)
Does not include NCSC and RTFC loans.
As shown in Table
11
, of the loans that repriced during the
nine months ended February 29, 2020
and fiscal year
2019
, the substantial majority of borrowers selected a new long-term fixed or variable rate. The average retention rate, which is calculated based on the election made by the borrower at the repricing date, was 96% for CFC loans that repriced during the three fiscal year period ended
May 31, 2019
.
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
12
displays the composition, by product type, of our outstanding debt as of
February 29, 2020 and May 31, 2019
. Table
12
also displays the composition of our debt based on several additional selected attributes.
24
Table
12
: Total Debt Outstanding
|
(Dollars in thousands)
|
February 29, 2020
|
May 31, 2019
|
Change
|
|||||||||
|
Debt product type:
|
||||||||||||
|
Commercial paper:
|
||||||||||||
|
Members, at par
|
$
|
1,046,043
|
|
$
|
1,111,795
|
|
$
|
(65,752
|
)
|
|||
|
Dealer, net of discounts
|
1,244,773
|
|
944,616
|
|
300,157
|
|
||||||
|
Total commercial paper
|
2,290,816
|
|
2,056,411
|
|
234,405
|
|
||||||
|
Select notes to members
|
1,352,309
|
|
1,023,952
|
|
328,357
|
|
||||||
|
Daily liquidity fund notes to members
|
360,016
|
|
298,817
|
|
61,199
|
|
||||||
|
Medium-term notes:
|
|
|
||||||||||
|
Members, at par
|
676,236
|
|
625,626
|
|
50,610
|
|
||||||
|
Dealer, net of discounts
|
3,096,224
|
|
2,942,045
|
|
154,179
|
|
||||||
|
Total medium-term notes
|
3,772,460
|
|
3,567,671
|
|
204,789
|
|
||||||
|
Collateral trust bonds
|
7,184,664
|
|
7,383,732
|
|
(199,068
|
)
|
||||||
|
Guaranteed Underwriter Program notes payable
|
5,665,403
|
|
5,410,507
|
|
254,896
|
|
||||||
|
Farmer Mac notes payable
|
2,827,340
|
|
3,054,914
|
|
(227,574
|
)
|
||||||
|
Other notes payable
|
13,073
|
|
22,515
|
|
(9,442
|
)
|
||||||
|
Subordinated deferrable debt
|
986,072
|
|
986,020
|
|
52
|
|
||||||
|
Members’ subordinated certificates:
|
||||||||||||
|
Membership subordinated certificates
|
630,479
|
|
630,474
|
|
5
|
|
||||||
|
Loan and guarantee subordinated certificates
|
487,724
|
|
505,485
|
|
(17,761
|
)
|
||||||
|
Member capital securities
|
222,170
|
|
221,170
|
|
1,000
|
|
||||||
|
Total members’ subordinated certificates
|
1,340,373
|
|
1,357,129
|
|
(16,756
|
)
|
||||||
|
Total debt outstanding
|
$
|
25,792,526
|
|
$
|
25,161,668
|
|
|
$
|
630,858
|
|
||
|
Security type:
|
||||||||||||
|
Secured debt
|
61
|
%
|
63
|
%
|
||||||||
|
Unsecured debt
|
39
|
|
37
|
|
||||||||
|
Total
|
100
|
%
|
100
|
%
|
||||||||
|
Funding source:
|
||||||||||||
|
Members
|
19
|
%
|
18
|
%
|
||||||||
|
Private placement:
|
||||||||||||
|
Guaranteed Underwriter Program notes payable
|
22
|
|
21
|
|
||||||||
|
Farmer Mac notes payable
|
11
|
|
12
|
|
||||||||
|
Total private placement
|
33
|
|
33
|
|
||||||||
|
Capital markets
|
48
|
|
49
|
|
||||||||
|
Total
|
100
|
%
|
100
|
%
|
||||||||
|
Interest rate type:
|
||||||||||||
|
Fixed-rate debt
|
76
|
%
|
77
|
%
|
||||||||
|
Variable-rate debt
|
24
|
|
23
|
|
||||||||
|
Total
|
100
|
%
|
100
|
%
|
||||||||
|
Interest rate type, including the impact of swaps:
|
||||||||||||
|
Fixed-rate debt
(1)
|
91
|
%
|
93
|
%
|
||||||||
|
Variable-rate debt
(2)
|
9
|
|
7
|
|
||||||||
|
Total
|
100
|
%
|
100
|
%
|
||||||||
|
Maturity classification:
(3)
|
||||||||||||
|
Short-term borrowings
|
17
|
%
|
14
|
%
|
||||||||
|
Long-term and subordinated debt
(4)
|
83
|
|
86
|
|
||||||||
|
Total
|
100
|
%
|
100
|
%
|
||||||||
25
____________________________
(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. As outstanding loan balances increased during the
nine months ended February 29, 2020
, our debt volume also increased. Total debt outstanding of
$25,793 million
as of
February 29, 2020
, increased by
$631 million
or
3%
, from
May 31, 2019
, due to an increase in borrowings to fund the increase in loans to members. The increase was primarily attributable to net increases in member commercial paper, select notes and daily liquidity fund notes of
$324 million
, a net increase in dealer commercial paper outstanding of
$300 million
, a net increase in medium-term notes of
$205 million
and a net increase in borrowings under the Guaranteed Underwriter Program of
$255 million
. These increases were partially offset by a net decrease in collateral trust bonds of
$199 million
and a net decrease in Farmer Mac notes payable of
$228 million
.
Below is a summary of significant financing activities during the
nine months ended February 29, 2020
.
|
•
|
On October 15, 2019, we redeemed the
$300 million
outstanding principal amount of our
2.30%
collateral trust bonds due November 15, 2019 at par.
|
|
•
|
On November 15, 2019, we redeemed the
$6 million
outstanding principal amount of our
9.07%
notes payable due May 15, 2022, at a premium of approximatively
$1 million
.
|
|
•
|
On November 26, 2019 we amended the three-year and five-year committed bank revolving line of credit agreements to extend the maturity date of the three-year agreement to November 28, 2022, and to terminate certain third-party bank commitments under each agreement, which resulted in a reduction of $250 million in the total commitment amount under our committed bank revolving line of credit agreements.
|
|
•
|
On December 20, 2019, we terminated the
$300 million
revolving note purchase agreement with Farmer Mac. As a result of the termination of this revolving note purchase agreement, the commitment amount under the $5,200 million revolving note purchase agreement with Farmer Mac increased to
$5,500 million
effective December 20, 2019.
|
|
•
|
On December 27, 2019, we redeemed
$400 million
outstanding principal amount of our
2.00%
collateral trust bonds due January 27, 2020 at par.
|
|
•
|
On February 5, 2020, we issued
$500 million
aggregate principal amount of
1.75%
dealer medium-term notes due 2022.
|
|
•
|
On February 5, 2020, we issued
$500 million
aggregate principal amount of
2.40%
collateral trust bonds due 2030.
|
|
•
|
On February 13, 2020, we closed on a
$500 million
committed loan facility (“Series P”) from the Federal Financing Bank under the Guaranteed Underwriter Program.
|
Member Investments
Debt securities issued to our members represent an important, stable source of funding. Table
13
displays outstanding member debt, by debt product type, as of
February 29, 2020 and May 31, 2019
.
26
Table
13
: Member Investments
|
|
February 29, 2020
|
May 31, 2019
|
Change
|
|||||||||||||||
|
(Dollars in thousands)
|
Amount
|
% of Total
(1)
|
Amount
|
% of Total
(1)
|
||||||||||||||
|
Commercial paper
|
$
|
1,046,043
|
|
46
|
%
|
$
|
1,111,795
|
|
54
|
%
|
$
|
(65,752
|
)
|
|||||
|
Select notes
|
1,352,309
|
|
100
|
|
1,023,952
|
|
100
|
|
328,357
|
|
||||||||
|
Daily liquidity fund notes
|
360,016
|
|
100
|
|
298,817
|
|
100
|
|
61,199
|
|
||||||||
|
Medium-term notes
|
676,236
|
|
18
|
|
625,626
|
|
18
|
|
50,610
|
|
||||||||
|
Members’ subordinated certificates
|
1,340,373
|
|
100
|
|
1,357,129
|
|
100
|
|
(16,756
|
)
|
||||||||
|
Total outstanding member debt
|
$
|
4,774,977
|
|
|
$
|
4,417,319
|
|
|
$
|
357,658
|
|
|||||||
|
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 totaled
$4,775 million
and accounted for
19%
of total debt outstanding as of
February 29, 2020
, compared with
$4,417 million
, or
18%
, of total debt outstanding as of
May 31, 2019
. Over the last three fiscal years, total outstanding member investments as of the end of each quarterly reporting period has averaged $4,601 million.
Short-Term Borrowings
Short-term borrowings consist of borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. Short-term borrowings totaled
$4,275 million
and accounted for
17%
of total debt outstanding as of
February 29, 2020
, compared with
$3,608 million
, or
14%
, of total debt outstanding as of
May 31, 2019
. See “Liquidity Risk” below and for “Note 6—Short-Term Borrowings” for information on the composition of our short-term borrowings.
Long-Term and Subordinated Debt
Long-term debt, defined as debt with an original contractual maturity term of greater than one year, primarily consists of medium-term notes, collateral trust bonds, notes payable under the Guaranteed Underwriter Program and notes payable under our note purchase agreement with Farmer Mac. Subordinated debt consists of subordinated deferrable debt and members’ subordinated certificates. Our subordinated deferrable debt and members’ subordinated certificates have original contractual maturity terms of greater than one year.
Long-term and subordinated debt totaled
$21,517 million
and accounted for
83%
of total debt outstanding as of
February 29, 2020
, compared with
$21,554 million
, or
86%
, of total debt outstanding as of
May 31, 2019
. We provide additional information on our long-term debt below under “Liquidity Risk” and in “Note 7—Long-Term Debt” and “Note 8—Subordinated Deferrable Debt.”
Collateral Pledged
We are required to pledge loans or other collateral in transactions under our collateral trust bond indentures, note purchase agreements with Farmer Mac and bond agreements under the Guaranteed Underwriter Program. We are required to maintain pledged collateral equal to at least 100% of the face amount of outstanding borrowings. However, as discussed below, we typically maintain pledged collateral in excess of the required percentage. Under the provisions of our committed bank revolving line of credit agreements, the excess collateral that we are allowed to pledge cannot exceed 150% of the outstanding borrowings under our collateral trust bond indentures, Farmer Mac note purchase agreements or the Guaranteed Underwriter Program. In certain cases, provided that all conditions of eligibility under the different programs are satisfied, we may withdraw excess pledged collateral or transfer collateral from one borrowing program to another to facilitate a new debt issuance.
Table
14
displays the collateral coverage ratios as of
February 29, 2020 and May 31, 2019
for the debt agreements noted above that require us to pledge collateral.
27
Table
14
: Collateral Pledged
|
|
Requirement/Limit
|
|||||||||||
|
Debt Indenture
Minimum
|
Committed Bank Revolving Line of Credit Agreements
Maximum
|
Actual
(1)
|
||||||||||
|
Debt Agreement
|
February 29, 2020
|
May 31, 2019
|
||||||||||
|
Collateral trust bonds 1994 indenture
|
100
|
%
|
150
|
%
|
128
|
%
|
118
|
%
|
||||
|
Collateral trust bonds 2007 indenture
|
100
|
|
150
|
|
114
|
|
117
|
|
||||
|
Guaranteed Underwriter Program notes payable
|
100
|
|
150
|
|
116
|
|
114
|
|
||||
|
Farmer Mac notes payable
|
100
|
|
150
|
|
132
|
|
123
|
|
||||
|
Clean Renewable Energy Bonds Series 2009A
|
100
|
|
150
|
|
122
|
|
112
|
|
||||
____________________________
(1)
Calculated based on the amount of collateral pledged divided by the face amount of outstanding secured debt.
Of our total debt outstanding of
$25,793 million
as of
February 29, 2020
,
$15,685 million
, or
61%
, was secured by pledged loans totaling
$18,798 million
. In comparison, of our total debt outstanding of
$25,162 million
as of
May 31, 2019
,
$15,858 million
, or
63%
, was secured by pledged loans totaling
$18,877 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
15
displays the unpaid principal balance of loans pledged for secured debt, the excess collateral pledged and unencumbered loans as of
February 29, 2020 and May 31, 2019
.
Table
15
: Unencumbered Loans
|
(Dollars in thousands)
|
February 29, 2020
|
May 31, 2019
|
||||||
|
Total loans outstanding
(1)
|
$
|
26,811,101
|
|
$
|
25,905,664
|
|
||
|
Less: Loans required to be pledged for secured debt
(2)
|
(15,958,021
|
)
|
(16,137,357
|
)
|
||||
|
Loans pledged in excess of requirement
(2)(3)
|
(2,839,890
|
)
|
(2,739,248
|
)
|
||||
|
Total pledged loans
|
(18,797,911
|
)
|
(18,876,605
|
)
|
||||
|
Unencumbered loans
|
$
|
8,013,190
|
|
$
|
7,029,059
|
|
||
|
Unencumbered loans as a percentage of total loans
|
30
|
%
|
27
|
%
|
||||
____________________________
(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
February 29, 2020 and May 31, 2019
.
(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
15
, we had excess loans pledged as collateral totaling
$2,840 million
and
$2,739 million
as of
February 29, 2020 and May 31, 2019
, 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 7—Long-Term Debt,” “Note 8—Subordinated Deferrable Debt” and “Note 9—Members’ Subordinated Certificates” in our
2019
Form 10-K for a more detailed description of each of our debt product types.
28
Equity
Table
16
presents the components of total CFC equity and total equity as of
February 29, 2020 and May 31, 2019
.
Table
16
: Equity
|
(Dollars in thousands)
|
February 29, 2020
|
May 31, 2019
|
Change
|
|||||||||
|
Membership fees and educational fund:
|
||||||||||||
|
Membership fees
|
$
|
969
|
|
$
|
969
|
|
$
|
—
|
|
|||
|
Educational fund
|
1,297
|
|
2,013
|
|
(716
|
)
|
||||||
|
Total membership fees and educational fund
|
2,266
|
|
2,982
|
|
(716
|
)
|
||||||
|
Patronage capital allocated
|
797,756
|
|
860,578
|
|
(62,822
|
)
|
||||||
|
Members’ capital reserve
|
759,097
|
|
759,097
|
|
—
|
|
||||||
|
Total allocated equity
|
1,559,119
|
|
1,622,657
|
|
(63,538
|
)
|
||||||
|
Unallocated net income (loss):
|
|
|
||||||||||
|
Prior year-end cumulative derivative forward value losses
(1)
|
(348,965
|
)
|
(30,831
|
)
|
(318,134
|
)
|
||||||
|
Current year derivative forward value losses
(1)
|
(508,404
|
)
|
(318,134
|
)
|
(190,270
|
)
|
||||||
|
Current period-end cumulative derivative forward value losses
(1)
|
(857,369
|
)
|
(348,965
|
)
|
(508,404
|
)
|
||||||
|
Other unallocated net income
|
155,200
|
|
3,190
|
|
152,010
|
|
||||||
|
Unallocated net loss
|
(702,169
|
)
|
(345,775
|
)
|
(356,394
|
)
|
||||||
|
CFC retained equity
|
856,950
|
|
1,276,882
|
|
(419,932
|
)
|
||||||
|
Accumulated other comprehensive loss
|
(45
|
)
|
(147
|
)
|
102
|
|
||||||
|
Total CFC equity
|
856,905
|
|
1,276,735
|
|
(419,830
|
)
|
||||||
|
Noncontrolling interests
|
23,836
|
|
27,147
|
|
(3,311
|
)
|
||||||
|
Total equity
|
$
|
880,741
|
|
$
|
1,303,882
|
|
$
|
(423,141
|
)
|
|||
(1)
Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the variable interest entities NCSC and RTFC, which we are required to consolidate. See “Note 13—Business Segments” for the statements of operations for CFC.
Total equity decreased by
$423 million
to
$881 million
as of
February 29, 2020
, attributable to our reported net loss of
$359 million
during the
nine months ended February 29, 2020
and the patronage capital retirement of
$63 million
during the first quarter of fiscal year 2020.
In July
2019
, the CFC Board of Directors authorized the allocation of fiscal year
2019
adjusted net income as follows:
$97 million
to members in the form of patronage capital;
$71 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 non-GAAP adjusted net income, which excludes the impact of derivative forward value gains (losses). We provide a reconciliation of our adjusted net income to our reported net income and an explanation of the adjustments below in “Non-GAAP Financial Measures.”
In July
2019
, the CFC Board of Directors also authorized the retirement of patronage capital totaling
$63 million
, consisting of $48 million, which represented
50%
of the patronage capital allocation for fiscal year
2019
, and $15 million, which represented the portion of the allocation from fiscal year 1994 net earnings that has been held for 25 years pursuant to the CFC Board of Directors policy. This amount was returned to members in cash in September 2019. The remaining portion of the amount allocated for fiscal year
2019
will be retained by CFC for 25 years under current guidelines adopted by the CFC Board of Directors in June 2009.
The CFC Board of Directors is required to make annual allocations of adjusted net income, if any. CFC has made annual retirements of allocated net earnings in
40
of the last
41
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
29
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
2019
Form 10-K for additional information.
|
OFF-BALANCE SHEET ARRANGEMENTS
|
In the ordinary course of business, we engage in financial transactions that are not presented on our condensed consolidated balance sheets, or may be recorded on our condensed consolidated balance sheets in amounts that are different from the full contract or notional amount of the transaction. Our off-balance sheet arrangements consist primarily of guarantees of member obligations and unadvanced loan commitments intended to meet the financial needs of our members.
Guarantees
We provide guarantees for certain contractual obligations of our members to assist them in obtaining various forms of financing. We use the same credit policies and monitoring procedures in providing guarantees as we do for loans and commitments. If a member defaults on its obligation, we are obligated to pay required amounts pursuant to our guarantees. Meeting our guarantee obligations satisfies the underlying obligation of our member systems and prevents the exercise of remedies by the guarantee beneficiary based upon a payment default by a member. In general, the member is required to repay any amount advanced by us with accrued interest, pursuant to the documents evidencing the member’s reimbursement obligation. Table
17
displays the notional amount of our outstanding guarantee obligations, by guarantee type and by company, as of
February 29, 2020 and May 31, 2019
.
Table
17
: Guarantees Outstanding
|
(Dollars in thousands)
|
February 29, 2020
|
May 31, 2019
|
Change
|
|||||||||
|
Guarantee type:
|
|
|
|
|||||||||
|
Long-term tax-exempt bonds
|
$
|
308,245
|
|
$
|
312,190
|
|
$
|
(3,945
|
)
|
|||
|
Letters of credit
|
343,970
|
|
379,001
|
|
(35,031
|
)
|
||||||
|
Other guarantees
|
146,773
|
|
146,244
|
|
529
|
|
||||||
|
Total
|
$
|
798,988
|
|
$
|
837,435
|
|
$
|
(38,447
|
)
|
|||
|
Company:
|
|
|
|
|
||||||||
|
CFC
|
$
|
786,423
|
|
$
|
827,344
|
|
$
|
(40,921
|
)
|
|||
|
NCSC
|
12,565
|
|
8,517
|
|
4,048
|
|
||||||
|
RTFC
|
—
|
|
1,574
|
|
(1,574
|
)
|
||||||
|
Total
|
$
|
798,988
|
|
$
|
837,435
|
|
$
|
(38,447
|
)
|
|||
Of the total notional amount of our outstanding guarantee obligations of
$799 million
and
$837 million
as of
February 29, 2020 and May 31, 2019
, respectively, 56% and 55%, 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
$308 million
as of
February 29, 2020
, we also were the liquidity provider on
$245 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
nine months ended February 29, 2020
or the prior fiscal year.
We had outstanding letters of credit for the benefit of our members totaling
$344 million
as of
February 29, 2020
. These letters of credit relate to obligations for which we may be required to advance funds based on various trigger events specified in the letter of credit agreements. If we are required to advance funds, the member is obligated to repay the advance amount and accrued interest to us. In addition to these letters of credit, we had master letter of credit facilities in place as of
February 29, 2020
, under which we may be required to issue letters of credit to third parties for the benefit of our
30
members up to an additional
$70 million
as of
February 29, 2020
. All of our master letter of credit facilities as of
February 29, 2020
were subject to material adverse change clauses at the time of issuance. Prior to issuing a letter of credit under these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and that the borrower is currently in compliance with the letter of credit terms and conditions.
Table
18
presents the maturities for each of the next five fiscal years and thereafter of the notional amount of our outstanding guarantee obligations of
$799 million
as of
February 29, 2020
.
Table
18
: Maturities of Guarantee Obligations
|
|
Outstanding
Amount |
Maturities of Guarantee Obligations
|
||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
||||||||||||||||||||||
|
Guarantees
|
$
|
798,988
|
|
$
|
17,944
|
|
$
|
273,503
|
|
$
|
27,745
|
|
$
|
158,781
|
|
$
|
33,028
|
|
$
|
287,987
|
|
|||||||
We recorded a guarantee liability of
$13 million
and
$14 million
as of
February 29, 2020 and May 31, 2019
, 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
19
displays the amount of unadvanced loan commitments, which consist of line of credit and long-term loan commitments, as of
February 29, 2020 and May 31, 2019
.
Table
19
: Unadvanced Loan Commitments
|
February 29, 2020
|
May 31, 2019
|
|||||||||||||||||
|
(Dollars in thousands)
|
Amount
|
% of Total
|
Amount
|
% of Total
|
Change
|
|||||||||||||
|
Line of credit commitments:
|
||||||||||||||||||
|
Conditional
(1)
|
$
|
4,848,016
|
|
36
|
%
|
$
|
4,845,306
|
|
37
|
%
|
$
|
2,710
|
|
|||||
|
Unconditional
(2)
|
3,000,139
|
|
23
|
|
2,943,616
|
|
22
|
|
56,523
|
|
||||||||
|
Total line of credit unadvanced commitments
|
7,848,155
|
|
|
59
|
|
7,788,922
|
|
59
|
|
59,233
|
|
|||||||
|
Total long-term loan unadvanced commitments
(1)
|
5,445,168
|
|
|
41
|
|
5,448,636
|
|
41
|
|
(3,468
|
)
|
|||||||
|
Total unadvanced loan commitments
|
$
|
13,293,323
|
|
|
100
|
%
|
$
|
13,237,558
|
|
100
|
%
|
$
|
55,765
|
|
||||
____________________________
(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
20
presents the amount of unadvanced loan commitments, by loan type, as of
February 29, 2020
and the maturities of the commitment amounts for each of the next five fiscal years and thereafter.
31
Table
20
: Notional Maturities of Unadvanced Loan Commitments
|
|
Available
Balance
|
Notional Maturities of Unadvanced Loan Commitments
|
||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
||||||||||||||||||||||
|
Line of credit loans
|
$
|
7,848,155
|
|
$
|
71,827
|
|
$
|
3,988,057
|
|
$
|
566,254
|
|
$
|
1,269,017
|
|
$
|
1,010,428
|
|
$
|
942,572
|
|
|||||||
|
Long-term loans
|
5,445,168
|
|
122,358
|
|
481,510
|
|
1,280,976
|
|
935,815
|
|
1,678,346
|
|
946,163
|
|
||||||||||||||
|
Total
|
$
|
13,293,323
|
|
$
|
194,185
|
|
$
|
4,469,567
|
|
$
|
1,847,230
|
|
$
|
2,204,832
|
|
$
|
2,688,774
|
|
$
|
1,888,735
|
|
|||||||
Unadvanced line of credit commitments accounted for
59%
of total unadvanced loan commitments as of
February 29, 2020
, while unadvanced long-term loan commitments accounted for
41%
of total unadvanced loan commitments. Unadvanced line of credit commitments are typically revolving facilities for periods not to exceed five years and generally serve as supplemental back-up liquidity to our borrowers. Historically, borrowers have not drawn the full commitment amount for line of credit facilities, and we have experienced a very low utilization rate on line of credit loan facilities regardless of whether or not we are obligated to fund the facility where a material adverse change exists. Our unadvanced long-term loan commitments generally have a five-year draw period under which a borrower may advance funds prior to the expiration of the commitment. We expect that the majority of the long-term unadvanced loan commitments of
$5,445 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
$13,293 million
as of
February 29, 2020
is not necessarily representative of our future funding requirements.
Unadvanced Loan Commitments—Conditional
The 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
$10,293 million
and
$10,294 million
as of
February 29, 2020 and May 31, 2019
, respectively, and accounted for
77%
and
78%
, respectively, of the combined total of unadvanced line of credit and long-term loan commitments as of both
February 29, 2020 and May 31, 2019
. Prior to making advances on these facilities, we confirm that there has been no material adverse change in the borrower’s business or condition, financial or otherwise, since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. In some cases, the borrower’s access to the full amount of the facility is further constrained by use of proceeds restrictions, imposition of borrower-specific restrictions, or by additional conditions that must be met prior to advancing funds. Since we generally do not charge a fee for the borrower to have an unadvanced amount on a loan facility that is subject to a material adverse change clause, our borrowers tend to request amounts in excess of their immediate estimated loan requirements.
Unadvanced Loan Commitments—Unconditional
Unadvanced loan commitments not subject to material adverse change clauses at the time of each advance consisted of unadvanced committed lines of credit totaling
$3,000 million
and
$2,944 million
as of
February 29, 2020 and May 31, 2019
, 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 90% of unconditional line of credit commitments as of
February 29, 2020
. The remaining 10% represented unconditional committed line of credit loans, for which any new advance would be made at rates determined by us.
Table
21
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
February 29, 2020
.
32
Table
21
: Maturities of Notional Amount of Unconditional Committed Lines of Credit
|
|
Available
Balance
|
Notional Maturities of Unconditional Committed Lines of Credit
|
||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
||||||||||||||||||||||
|
Committed lines of credit
|
$
|
3,000,139
|
|
$
|
370
|
|
$
|
266,022
|
|
$
|
172,506
|
|
$
|
1,046,556
|
|
$
|
711,660
|
|
$
|
803,025
|
|
|||||||
See “MD&A—Off-Balance Sheet Arrangements” in our
2019
Form 10-K for additional information on our off-balance sheet arrangements.
|
RISK MANAGEMENT
|
Overview
We face a variety of risks that can significantly affect our financial performance, liquidity, reputation and ability to meet the expectations of our members, investors and other stakeholders. As a financial services company, the major categories of risk exposures inherent in our business activities include credit risk, liquidity risk, market risk and operational risk. These risk categories are summarized below.
|
•
|
Credit risk
is the risk that a borrower or other counterparty will be unable to meet its obligations in accordance with agreed-upon terms.
|
|
•
|
Liquidity risk
is the risk that we will be unable to fund our operations and meet our contractual obligations or that we will be unable to fund new loans to borrowers at a reasonable cost and tenor in a timely manner.
|
|
•
|
Market risk
is the risk that changes in market variables, such as movements in interest rates, may adversely affect the match between the timing of the contractual maturities, re-pricing and prepayments of our financial assets and the related financial liabilities funding those assets.
|
|
•
|
Operational risk
is the risk of loss resulting from inadequate or failed internal controls, processes, systems, human error or external events, including natural disasters or public health emergencies, such as the current COVID-19 global pandemic. Operational risk also includes compliance risk, fiduciary risk, reputational risk and litigation risk.
|
Effective risk management is critical to our overall operations and 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
2019
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
2019
Form 10-K under “Item 7. MD&A—Credit Risk—Credit Risk Management.”
33
Loan Portfolio Credit Risk
Below we provide information on the credit risk profile of our loan portfolio, 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.
Table
22
presents, by loan type and by company, the amount and percentage of secured and unsecured loans in our loan portfolio as of
February 29, 2020 and May 31, 2019
. Of our total loans outstanding,
93%
were secured and
7%
were unsecured as of
February 29, 2020
. In comparison, of our total loans outstanding,
92%
were secured and
8%
were unsecured as of
May 31, 2019
.
Table
22
: Loan Portfolio Security Profile
|
February 29, 2020
|
||||||||||||||||||
|
(Dollars in thousands)
|
Secured
|
% of Total
|
Unsecured
|
% of Total
|
Total
|
|||||||||||||
|
Loan type:
|
||||||||||||||||||
|
Long-term loans:
|
||||||||||||||||||
|
Long-term fixed-rate loans
|
$
|
23,743,753
|
|
99
|
%
|
$
|
343,763
|
|
1
|
%
|
$
|
24,087,516
|
|
|||||
|
Long-term variable-rate loans
|
925,818
|
|
99
|
|
5,824
|
|
1
|
|
931,642
|
|
||||||||
|
Total long-term loans
|
24,669,571
|
|
99
|
|
349,587
|
|
1
|
|
25,019,158
|
|
||||||||
|
Line of credit loans
|
161,046
|
|
9
|
|
1,630,897
|
|
91
|
|
1,791,943
|
|
||||||||
|
Total loans outstanding
(1)
|
$
|
24,830,617
|
|
93
|
|
$
|
1,980,484
|
|
7
|
|
$
|
26,811,101
|
|
|||||
|
Company:
|
|
|
|
|
||||||||||||||
|
CFC
|
$
|
23,853,941
|
|
93
|
%
|
$
|
1,917,538
|
|
7
|
%
|
$
|
25,771,479
|
|
|||||
|
NCSC
|
634,598
|
|
92
|
|
51,463
|
|
8
|
|
686,061
|
|
||||||||
|
RTFC
|
342,078
|
|
97
|
|
11,483
|
|
3
|
|
353,561
|
|
||||||||
|
Total loans outstanding
(1)
|
$
|
24,830,617
|
|
93
|
|
$
|
1,980,484
|
|
7
|
|
$
|
26,811,101
|
|
|||||
34
|
May 31, 2019
|
||||||||||||||||||
|
(Dollars in thousands)
|
Secured
|
% of Total
|
Unsecured
|
% of Total
|
Total
|
|||||||||||||
|
Loan type:
|
||||||||||||||||||
|
Long-term loans:
|
||||||||||||||||||
|
Long-term fixed-rate loans
|
$
|
22,674,330
|
|
98
|
%
|
$
|
419,923
|
|
2
|
%
|
$
|
23,094,253
|
|
|||||
|
Long-term variable-rate loans
|
1,058,434
|
|
99
|
|
8,446
|
|
1
|
|
1,066,880
|
|
||||||||
|
Total long-term loans
|
23,732,764
|
|
98
|
|
428,369
|
|
2
|
|
24,161,133
|
|
||||||||
|
Line of credit loans
|
121,741
|
|
7
|
|
1,622,790
|
|
93
|
|
1,744,531
|
|
||||||||
|
Total loans outstanding
(1)
|
$
|
23,854,505
|
|
92
|
|
$
|
2,051,159
|
|
8
|
|
$
|
25,905,664
|
|
|||||
|
Company:
|
|
|
|
|
||||||||||||||
|
CFC
|
$
|
22,861,414
|
|
92
|
%
|
$
|
1,956,262
|
|
8
|
%
|
$
|
24,817,676
|
|
|||||
|
NCSC
|
664,618
|
|
89
|
|
78,270
|
|
11
|
|
742,888
|
|
||||||||
|
RTFC
|
328,473
|
|
95
|
|
16,627
|
|
5
|
|
345,100
|
|
||||||||
|
Total loans outstanding
(1)
|
$
|
23,854,505
|
|
92
|
|
$
|
2,051,159
|
|
8
|
|
$
|
25,905,664
|
|
|||||
____________________________
(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
February 29, 2020 and May 31, 2019
.
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
$577 million
as of
February 29, 2020
, compared with
$619 million
as of
May 31, 2019
. 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
$149 million
and
$154 million
as of
February 29, 2020
and
May 31, 2019
, respectively.
Credit Concentration
Concentrations may exist when there are amounts loaned to borrowers engaged in similar activities or in geographic areas that would cause them to be similarly impacted by economic or other conditions or when there are large exposures to single borrowers. As a tax-exempt, member-owned finance cooperative, CFC’s principal focus is to provide funding to its rural electric utility cooperative members to assist them in acquiring, constructing and operating electric distribution systems, power supply systems and related facilities. Because we lend primarily to our rural electric utility cooperative members, we have a loan portfolio subject to single-industry and single-obligor concentration risks. Outstanding loans to electric utility organizations represented approximately
99%
of our total outstanding loan portfolio as of
February 29, 2020
, unchanged from
May 31, 2019
. 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, with a total of
894
borrowers located in
49
states as of
February 29, 2020
. Loans to borrowers in Texas accounted for
16%
and
15%
of total loans outstanding as of
February 29, 2020 and May 31, 2019
, respectively, representing the largest concentration of outstanding loans to borrowers and the largest number of borrowers in any one state.
Single-Obligor Concentration
Table
23
displays the outstanding loan exposure for the 20 largest borrowers, by company, as of
February 29, 2020
and
May 31, 2019
. The
20
largest borrowers consisted of
11
distribution systems and
nine
power supply systems as of
February 29, 2020
. The
20
largest borrowers consisted of
10
distribution systems,
nine
power supply systems and
one
NCSC associate as of
May 31, 2019
. The largest total exposure to a single borrower or controlled group represented approximately
2%
of total loans outstanding as of both
February 29, 2020 and May 31, 2019
.
35
Table
23
: Loan Exposure to 20 Largest Borrowers
|
|
February 29, 2020
|
May 31, 2019
|
Change
|
|||||||||||||||
|
(Dollars in thousands)
|
Amount
|
% of Total
|
Amount
|
% of Total
|
||||||||||||||
|
By company:
|
|
|
|
|
|
|||||||||||||
|
CFC
|
$
|
5,581,785
|
|
21
|
%
|
$
|
5,369,879
|
|
21
|
%
|
$
|
211,906
|
|
|||||
|
NCSC
|
219,541
|
|
1
|
|
245,559
|
|
1
|
|
(26,018
|
)
|
||||||||
|
Total loan exposure to 20 largest borrowers
|
5,801,326
|
|
22
|
|
5,615,438
|
|
22
|
|
185,888
|
|
||||||||
|
Less: Loans covered under Farmer Mac standby purchase commitment
|
(317,541
|
)
|
(1
|
)
|
(360,012
|
)
|
(1
|
)
|
42,471
|
|
||||||||
|
Net loan exposure to 20 largest borrowers
|
$
|
5,483,785
|
|
21
|
%
|
$
|
5,255,426
|
|
21
|
%
|
$
|
228,359
|
|
|||||
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
99%
of our outstanding loans as of
February 29, 2020
, 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 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 credit performance metrics, including low levels of criticized exposure. As displayed in Table
22
above,
93%
and
92%
of our total outstanding loans were secured as of
February 29, 2020 and May 31, 2019
, respectively. We had no delinquent or nonperforming loans as of
February 29, 2020 and May 31, 2019
. In addition, we had no loan defaults or charge-offs during the
nine months ended February 29, 2020
.
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
$206 million
, or
0.77%
, of total loans outstanding as of
February 29, 2020
. Of this amount,
$172 million
, was classified as substandard. In comparison, loans with borrowers classified as criticized totaled
$202 million
, or
0.78%
, of total loans outstanding as of
May 31, 2019
. Of this amount,
$176 million
was classified as substandard. We did not have any loans classified as doubtful as of
February 29, 2020
or
May 31, 2019
. 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
36
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
24
presents the carrying value of loans modified as TDRs and the performance status as of
February 29, 2020 and May 31, 2019
. 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.
Table
24
: Troubled Debt Restructured Loans
|
February 29, 2020
|
May 31, 2019
|
|||||||||||||
|
(Dollars in thousands)
|
Carrying Amount
|
% of Total Loans Outstanding
|
Carrying Amount
|
% of Total Loans Outstanding
|
||||||||||
|
TDR loans:
|
||||||||||||||
|
CFC
|
$
|
5,755
|
|
0.02
|
%
|
$
|
6,261
|
|
0.03
|
%
|
||||
|
RTFC
|
5,217
|
|
0.02
|
|
5,592
|
|
0.02
|
|
||||||
|
Total TDR loans
|
$
|
10,972
|
|
0.04
|
%
|
$
|
11,853
|
|
0.05
|
%
|
||||
|
Performance status of TDR loans:
|
||||||||||||||
|
Performing TDR loans
|
$
|
10,972
|
|
0.04
|
%
|
$
|
11,853
|
|
0.05
|
%
|
||||
As indicated in Table
24
above, we did not have any TDR loans classified as nonperforming as of
February 29, 2020
or
May 31, 2019
. During the quarter ended
February 29, 2020
, we amended the restructured loan agreement for the RTFC TDR loan to extend the maturity by two years. The TDR loan will continue to amortize monthly through maturity and will remain on accrual status.
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 have not had any loans classified as nonperforming other than TDR loans, since the fiscal year ended May 31, 2014.
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
nine months ended February 29, 2020 and February 28, 2019
.
37
Historical Loan Losses
In its 50-year history, CFC has experienced only 16 defaults, of which 10 resulted in no loss and six resulted in cumulative historical net charge-offs of $86 million for our electric utility loan portfolio. Of this amount, $67 million was attributable to electric utility power supply cooperatives and $19 million was attributable to electric distribution cooperatives. We discuss the reasons loans to electric utility cooperatives, our principal lending market, typically have a relatively low risk of default above under “Credit 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
$26,457 million
and accounted for
99%
of our total outstanding loan portfolio as of
February 29, 2020
, while outstanding RTFC telecommunications loans totaled
$354 million
and accounted for
1%
of our total outstanding loan portfolio as of
February 29, 2020
.
We provide additional information on the credit quality of our loan portfolio in “Note 4—Loans.”
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
25
summarizes changes in the allowance for loan losses for the three and
nine months ended February 29, 2020 and February 28, 2019
, and provides a comparison of the allowance by company as of
February 29, 2020 and May 31, 2019
.
Table
25
: Allowance for Loan Losses
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
(Dollars in thousands)
|
February 29, 2020
|
February 28, 2019
|
February 29, 2020
|
February 28, 2019
|
||||||||||||
|
Beginning balance
|
$
|
16,520
|
|
$
|
16,904
|
|
$
|
17,535
|
|
$
|
18,801
|
|
||||
|
Provision (benefit) for loan losses
|
2,382
|
|
182
|
|
1,367
|
|
(1,715
|
)
|
||||||||
|
Ending balance
|
$
|
18,902
|
|
$
|
17,086
|
|
$
|
18,902
|
|
$
|
17,086
|
|
||||
|
|
||||||||||||||||
|
February 29, 2020
|
May 31, 2019
|
|||||||||||||||
|
Allowance for loan losses by company:
|
|
|||||||||||||||
|
CFC
|
$
|
13,229
|
|
$
|
13,120
|
|
||||||||||
|
NCSC
|
857
|
|
2,007
|
|
||||||||||||
|
RTFC
|
4,816
|
|
2,408
|
|
||||||||||||
|
Total
|
$
|
18,902
|
|
$
|
17,535
|
|
||||||||||
|
Allowance coverage ratios:
|
||||||||||||||||
|
Total loans outstanding
(1)
|
$
|
26,811,101
|
|
$
|
25,905,664
|
|
||||||||||
|
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
February 29, 2020 and May 31, 2019
.
Our allowance for loan losses was
$19 million
as of
February 29, 2020
, compared with
$18 million
as of
May 31, 2019
. The allowance coverage ratio was
0.07%
as of both
February 29, 2020
and
May 31, 2019
. We had no loans classified as
38
nonperforming as of
February 29, 2020
or
May 31, 2019
. We experienced no charge-offs during the three and
nine months ended February 29, 2020 and February 28, 2019
. Loans designated as individually impaired totaled
$11 million
and
$12 million
as of
February 29, 2020 and May 31, 2019
, respectively, and the specific allowance related to those loans totaled
$1 million
as of both
February 29, 2020 and May 31, 2019
.
See “MD&A—Critical Accounting Policies and Estimates—Allowance for Loan Losses” and “Note 1—Summary of Significant Accounting Policies” in our
2019
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.
We manage our derivative counterparty credit risk by monitoring the overall credit worthiness of each counterparty based on our internal counterparty credit risk scoring model; using counterparty-specific credit risk limits; executing master netting arrangements; and diversifying our derivative transactions among multiple counterparties. We also require that our derivative counterparties be a participant in one of our committed bank revolving line of credit agreements. Our active derivative counterparties had credit ratings ranging from Aa2 to Baa2 by Moody’s Investors Service (“Moody’s”) and from AA- to BBB+ by S&P Global Inc. (“S&P”) as of
February 29, 2020
. Our largest counterparty exposure, based on the outstanding notional amount, represented approximately
25%
and
23%
of the total outstanding notional amount of derivatives as of
February 29, 2020 and May 31, 2019
, respectively.
Credit Risk-Related Contingent Features
Our derivative contracts typically contain mutual early-termination provisions, generally in the form of a credit rating trigger. Under the mutual credit rating trigger provisions, either counterparty may, but is not obligated to, terminate and settle the agreement if the credit rating of the other counterparty falls below a level specified in the agreement. If a derivative contract is terminated, the amount to be received or paid by us would be equal to the prevailing fair value, as defined in the agreement, as of the termination date.
Our senior unsecured credit ratings from Moody’s and S&P were A2 and A, respectively, as of
February 29, 2020
. Both Moody’s and S&P had our ratings on stable outlook as of
February 29, 2020
. Table
26
displays the notional amounts of our derivative contracts with rating triggers as of
February 29, 2020
, and the payments that would be required if the contracts were terminated as of that date because of a
downgrade of our unsecured credit ratings or the counterparty’s unsecured credit ratings below A3/A-, below Baa1/BBB+, to or below Baa2/BBB, below Baa3/BBB-, or to or below Ba2/BB+ by Moody’s or S&P,
respectively. In calculating the payment amounts that would be required upon termination of the derivative contracts, we assumed that the amounts for each counterparty would be netted in accordance with the provisions of the counterparty's master netting agreements. The net payment amounts are based on the fair value of the underlying derivative instrument, excluding the credit risk valuation adjustment, plus any unpaid accrued interest amounts.
Table
26
: 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)
|
$
|
45,860
|
|
$
|
(10,614
|
)
|
$
|
—
|
|
$
|
(10,614
|
)
|
||||
|
Falls below Baa1/BBB+
|
6,217,389
|
|
(554,316
|
)
|
—
|
|
(554,316
|
)
|
||||||||
|
Falls to or below Baa2/BBB
(2)
|
425,542
|
|
(25,911
|
)
|
—
|
|
(25,911
|
)
|
||||||||
|
Falls below Baa3/BBB-
|
45,680
|
|
(13,992
|
)
|
—
|
|
(13,992
|
)
|
||||||||
|
Total
|
$
|
6,734,471
|
|
$
|
(604,833
|
)
|
$
|
—
|
|
$
|
(604,833
|
)
|
||||
39
____________________________
(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
$165 million
as of
February 29, 2020
. These contracts were in an unrealized loss position of
$50 million
as of
February 29, 2020
.
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
$633 million
as of
February 29, 2020
. There were no counterparties that fell below the rating trigger levels in our interest swap contracts as of
February 29, 2020
. If a counterparty has a credit rating that falls below the rating trigger level specified in the interest swap contract, we have the option to terminate all derivatives with the counterparty. However, we generally do not terminate such agreements 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
2019
Form 10-K and “Item 1A. Risk Factors” in this Report for additional information about credit risk related to our business.
|
LIQUIDITY RISK
|
We define liquidity as the ability to convert assets into 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
2019
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
27
presents the sources of our available liquidity as of
February 29, 2020
and
May 31, 2019
.
Table
27
: Available Liquidity
|
February 29, 2020
|
May 31, 2019
|
|||||||||||||||||||||||
|
(Dollars in millions)
|
Total
|
Accessed
|
Available
|
Total
|
Accessed
|
Available
|
||||||||||||||||||
|
Cash and cash equivalents
|
$
|
56
|
|
$
|
—
|
|
$
|
56
|
|
$
|
178
|
|
$
|
—
|
|
$
|
178
|
|
||||||
|
Committed bank revolving line of credit agreements—unsecured
(1)
|
2,725
|
|
3
|
|
2,722
|
|
2,975
|
|
3
|
|
2,972
|
|
||||||||||||
|
Guaranteed Underwriter Program committed facilities—secured
(2)
|
7,798
|
|
6,273
|
|
1,525
|
|
7,298
|
|
5,948
|
|
1,350
|
|
||||||||||||
|
Farmer Mac revolving note purchase agreement, dated March 24, 2011, as amended—secured
(3)
|
5,500
|
|
2,827
|
|
2,673
|
|
5,200
|
|
3,055
|
|
2,145
|
|
||||||||||||
|
Farmer Mac revolving note purchase agreement, dated July 31, 2015, as amended—secured
(4)
|
—
|
|
—
|
|
—
|
|
300
|
|
—
|
|
300
|
|
||||||||||||
|
Total
|
$
|
16,079
|
|
$
|
9,103
|
|
$
|
6,976
|
|
$
|
15,951
|
|
$
|
9,006
|
|
$
|
6,945
|
|
||||||
(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 both
February 29, 2020 and May 31, 2019
, 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.
40
(3)
Availability subject to market conditions.
(4)
This Farmer Mac revolving note purchase agreement was terminated effective December 20, 2019.
Liquidity Update
As discussed above in “Executive Summary—Recent Developments—Liquidity Update,” in light of the extreme volatility and disruptions in the capital and credit markets in early March 2020 resulting from the COVID-19 crisis, including a significant decline in corporate debt and equity issuances and a deterioration in the commercial paper market, we took a number of precautionary actions in March to enhance our financial flexibility by bolstering our cash position to ensure we have adequate cash readily available to meet both expected and unexpected cash needs without adversely affecting our daily operations. These actions included, but are not limited to, drawing additional advances under our committed credit facilities, revising our objective for the use of our held-to-maturity investment portfolio from previously serving as a supplemental source of liquidity to serving as a readily available source of liquidity and executing a plan for the orderly liquidation of a portion of debt securities in our investment portfolio. We borrowed an additional $625 million under the Guaranteed Underwriter Program and $250 million under the Farmer Mac note purchase agreement. Due largely to the actions undertaken in March, we increased our cash position to
$857 million
as of March 31, 2020, up from
$56 million
as of
February 29, 2020
.
Subsequent to our cash management actions in early March, the FOMC unveiled a set of aggressive measures to cushion the economic impact of the global COVID-19 crisis, including, among others, cutting the federal funds rate by 100 basis points to a range of 0.00% to 0.25% and establishing a series of emergency credit facilities in an effort to support the flow of credit in the economy, ease liquidity pressure and calm market turmoil. While volatility in the financial markets remains elevated, overall market liquidity concerns have eased since the actions taken by the FOMC. Our access to funding, however, has not been interrupted to an extent that the ability to meet our obligations has been compromised. As such, we suspended the plan for the orderly liquidation of a portion of debt securities in our investment portfolio.
Although we currently believe we have sufficient liquidity from the available on- and off-balance sheet liquidity sources and our ability to issue debt in the capital markets to meet demand for member loan advances and satisfy our obligations to repay long-term debt maturing over the next 12 months, we continue to review actions that we may take to further enhance our financial flexibility in the event that market conditions deteriorate further and for an extended period.
Borrowing Capacity Under Current Facilities
Following is a discussion of our borrowing capacity and key terms and conditions under our revolving line of credit agreements with banks and committed loan facilities under the Guaranteed Underwriter Program and revolving note purchase agreements with Farmer Mac.
Committed Bank Revolving Line of Credit Agreements—Unsecured
Our committed bank revolving lines of credit may be used for general corporate purposes; however, we generally rely on them as a backup source of liquidity for our member and dealer commercial paper. We had
$2,725 million
of commitments under committed bank revolving line of credit agreements as of
February 29, 2020
. Under our current committed bank revolving line of credit agreements, we have the ability to request up to
$300 million
of letters of credit, which would result in a reduction in the remaining available amount under the facilities.
On November 26, 2019, we amended the three-year and five-year committed bank revolving line of credit agreements to extend the maturity date of the three-year agreement to November 28, 2022, and to terminate certain bank commitments totaling
$125 million
under the three-year agreement and
$125 million
under the five-year agreement. The total commitment amount under the amended three-year and five-year bank revolving line of credit agreements is
$1,315 million
and
$1,410 million
, respectively, resulting in a combined total commitment amount under the two facilities of
$2,725 million
.
Table
28
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
February 29, 2020
. We did not have any outstanding borrowings under our bank revolving line of credit agreements as of
February 29, 2020
.
41
Table
28
: Committed Bank Revolving Line of Credit Agreements
|
February 29, 2020
|
|
|
||||||||||||||
|
(Dollars in millions)
|
Total Commitment
|
Letters of Credit Outstanding
|
Net Available for Advance
|
Maturity
|
Annual Facility Fee
(1)
|
|||||||||||
|
3-year agreement
|
$
|
1,315
|
|
$
|
—
|
|
$
|
1,315
|
|
November 28, 2022
|
7.5 bps
|
|||||
|
5-year agreement
|
1,410
|
|
3
|
|
1,407
|
|
November 28, 2023
|
10 bps
|
||||||||
|
Total
|
$
|
2,725
|
|
$
|
3
|
|
$
|
2,722
|
|
|
|
|||||
____________________________
(1)
Facility fee based on CFC’s senior unsecured credit ratings in accordance with the established pricing schedules at the inception of the related agreement.
Our committed bank revolving line of credit agreements do not contain a material adverse change clause or rating triggers that would limit the banks’ obligations to provide funding under the terms of the agreements; however, we must be in compliance with the covenants to draw on the facilities. We have been and expect to continue to be in compliance with the covenants under our committed bank revolving line of credit agreements. As such, we could draw on these facilities to repay dealer or member commercial paper that cannot be rolled over. See “Financial Ratios and Debt Covenants” below for additional information, including the specific financial ratio requirements under our committed bank revolving line of credit agreements.
Guaranteed Underwriter Program Committed Facilities—Secured
Under the Guaranteed Underwriter Program, we can borrow from the Federal Financing Bank and use the proceeds to make new loans and refinance existing indebtedness. As part of the program, we pay fees, based on outstanding borrowings supporting the USDA Rural Economic Development Loan and Grant program. The borrowings under this program are guaranteed by RUS.
On February 13, 2020, we closed on a
$500 million
committed loan facility (“Series P”) from the Federal Financing Bank under the Guaranteed Underwriter Program. Pursuant to this facility, we may borrow any time before July 15, 2024. Each advance is subject to quarterly amortization and a final maturity not longer than 30 years from the date of the advance. During the
nine months ended February 29, 2020
, we borrowed
$325 million
under our committed loan facilities with the Federal Financing Bank. We had up to
$1,525 million
available for access under the Guaranteed Underwriter Program as of
February 29, 2020
. Of this amount, $275 million is available for advance through July 15, 2022, $750 million is available for advance through July 15, 2023 and $500 million is available for advance through July 15, 2024. Subsequent to quarter end, we borrowed an additional $625 million under our committed loan facilities with the Federal Financing Bank.
We are required to pledge eligible distribution system loans or power supply system loans as collateral in an amount at least equal to the total outstanding borrowings under the Guaranteed Underwriter Program. See “Consolidated Balance Sheet Analysis—Debt—Collateral Pledged” and “Note 4—Loans” for additional information on pledged collateral.
Farmer Mac Revolving Note Purchase Agreements—Secured
As indicated in Table
27
, we had one revolving note purchase agreement with Farmer Mac as of
February 29, 2020
, which allowed us to borrow up to
$5,500 million
from Farmer Mac. Under this revolving note purchase agreement, dated March 24, 2011, as amended, we can borrow up to
$5,500 million
as of
February 29, 2020
, at any time, subject to market conditions, through January 11, 2022. This date automatically extends on each anniversary date of the closing for an additional year, unless prior to any such anniversary date, Farmer Mac provides us with a notice that the draw period will not be extended beyond the remaining term. Pursuant to this revolving note purchase agreement, we can borrow, repay and re-borrow funds at any time through maturity, as market conditions permit, provided that the outstanding principal amount at any time does not exceed the total available under the agreement. We had outstanding secured notes payable totaling
$2,827 million
and
$3,055 million
as of
February 29, 2020 and May 31, 2019
, respectively, under this Farmer Mac revolving note purchase agreement. The available borrowing amount totaled
$2,673 million
as of
February 29, 2020
. Subsequent to quarter end, we borrowed an additional $250 million under our revolving note purchase agreement with Farmer Mac.
42
As of
May 31, 2019
, we had a second revolving note purchase agreement with Farmer Mac, dated July 31, 2015, as amended, under which we could borrow up to
$300 million
at any time through December 20, 2023 at a fixed spread over LIBOR. This agreement also allowed us to borrow, repay and re-borrow funds at any time through maturity, provided that the outstanding principal amount at any time does not exceed the total available under the agreement. We had no notes payable outstanding under this agreement as of
May 31, 2019
. On December 20, 2019, we terminated the
$300 million
revolving note purchase agreement with Farmer Mac. As a result of the termination of this revolving note purchase agreement, the commitment amount under the $5,200 million revolving note purchase agreement with Farmer Mac discussed above, increased to $5,500 million, effective December 20, 2019.
Pursuant to the Farmer Mac revolving note purchase 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. 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
29
displays the composition, by funding source, of our short-term borrowings as of
February 29, 2020
and
May 31, 2019
. Member borrowings accounted for
71%
of total short-term borrowings as of
February 29, 2020
, compared with
74%
of total short-term borrowings as of
May 31, 2019
.
Table
29
: Short-Term Borrowings
—
Funding Sources
|
February 29, 2020
|
May 31, 2019
|
|||||||||||||
|
(Dollars in thousands)
|
Amount
Outstanding
|
% of Total Short-Term Borrowings
|
Amount
Outstanding |
% of Total Short-Term Borrowings
|
||||||||||
|
Funding source:
|
||||||||||||||
|
Members
|
$
|
3,030,615
|
|
71
|
%
|
$
|
2,663,110
|
|
74
|
%
|
||||
|
Capital markets
|
1,244,773
|
|
29
|
|
944,616
|
|
26
|
|
||||||
|
Total
|
$
|
4,275,388
|
|
100
|
%
|
$
|
3,607,726
|
|
100
|
%
|
||||
43
Table
30
displays the composition, by product type, of our short-term borrowings
as of
February 29, 2020
and
May 31, 2019
.
Table
30
: Short-Term Borrowings
|
February 29, 2020
|
May 31, 2019
|
|||||||||||||
|
(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
|
$
|
1,244,773
|
|
5
|
%
|
$
|
944,616
|
|
4
|
%
|
||||
|
Commercial paper to members, at par
|
1,046,043
|
|
4
|
|
1,111,795
|
|
4
|
|
||||||
|
Total commercial paper
|
2,290,816
|
|
9
|
|
2,056,411
|
|
8
|
|
||||||
|
Select notes to members
|
1,352,309
|
|
5
|
|
1,023,952
|
|
4
|
|
||||||
|
Daily liquidity fund notes to members
|
360,016
|
|
2
|
|
298,817
|
|
1
|
|
||||||
|
Medium-term notes sold to members
|
272,247
|
|
1
|
|
228,546
|
|
1
|
|
||||||
|
Total short-term borrowings
|
$
|
4,275,388
|
|
17
|
%
|
$
|
3,607,726
|
|
14
|
%
|
||||
Our short-term borrowings totaled
$4,275 million
and accounted for
17%
of total debt outstanding as of
February 29, 2020
, compared with
$3,608 million
, or
14%
of total debt outstanding as of
May 31, 2019
. Of the total commercial paper,
$1,245 million
, or
5%
of total debt outstanding, was issued to dealers as of
February 29, 2020
, compared with
$945 million
, or
4%
of total debt outstanding, that was issued to dealers as of
May 31, 2019
. Our intent is to manage our short-term wholesale funding risk by maintaining outstanding dealer commercial paper at an amount below $1,250 million for the foreseeable future.
Long-Term and Subordinated Debt
In addition to access to private debt facilities, we also issue debt in the public capital markets. Pursuant to Rule 405 of the Securities Act
, we are classified as a “well-known seasoned issuer.” In September 2019, we filed a new shelf registration statement for our collateral trust bonds under which we can issue an unlimited amount of collateral trust bonds until September 2022. On February 5, 2020, we issued
$500 million
aggregate principal amount of
2.40%
collateral trust bonds due 2030 and $500 million aggregate principal amount of 1.75% dealer medium-term notes due 2022. See “Item 7. MD&A—Liquidity Risk” in our
2019
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
$21,517 million
and accounted for
83%
of total debt outstanding as of
February 29, 2020
, from
$21,554 million
, or
86%
, of total debt outstanding as of
May 31, 2019
. Table
31
summarizes long-term and subordinated debt issuances and repayments during the
nine months ended February 29, 2020
.
44
Table
31
: Issuances and Repayments of Long-Term and Subordinated Debt
(1)
|
Nine Months Ended February 29, 2020
|
||||||||||||
|
(Dollars in thousands)
|
Issuances
|
Repayments
(2)
|
Change
|
|||||||||
|
Long-term and subordinated debt activity:
|
|
|
||||||||||
|
Collateral trust bonds
|
$
|
500,000
|
|
$
|
705,000
|
|
$
|
(205,000
|
)
|
|||
|
Guaranteed Underwriter Program notes payable
|
325,000
|
|
70,104
|
|
254,896
|
|
||||||
|
Farmer Mac notes payable
|
—
|
|
227,574
|
|
(227,574
|
)
|
||||||
|
Medium-term notes sold to members
|
171,592
|
|
164,683
|
|
6,909
|
|
||||||
|
Medium-term notes sold to dealers
|
509,904
|
|
357,173
|
|
152,731
|
|
||||||
|
Other notes payable
|
—
|
|
9,565
|
|
(9,565
|
)
|
||||||
|
Members’ subordinated certificates
|
2,993
|
|
19,749
|
|
(16,756
|
)
|
||||||
|
Total
|
$
|
1,509,489
|
|
$
|
1,553,848
|
|
$
|
(44,359
|
)
|
|||
____________________________
(1)
Amounts exclude unamortized debt issuance costs and discounts.
(2)
Repayments include principal maturities, scheduled amortization payments, repurchases and redemptions.
Table
32
summarizes the scheduled amortization of the principal amount of long-term debt, subordinated deferrable debt and members’ subordinated certificates as of
February 29, 2020
.
Table
32
: Principal Maturity of Long-Term and Subordinated Debt
|
(Dollars in thousands)
|
Amount
Maturing
(1)
|
% of Total
|
|||||
|
Fiscal year ending:
|
|||||||
|
May 31, 2020
|
$
|
135,076
|
|
1
|
%
|
||
|
May 31, 2021
|
1,999,024
|
|
9
|
|
|||
|
May 31, 2022
|
2,493,775
|
|
11
|
|
|||
|
May 31, 2023
|
1,212,801
|
|
6
|
|
|||
|
May 31, 2024
|
1,107,120
|
|
5
|
|
|||
|
Thereafter
|
14,569,285
|
|
68
|
|
|||
|
Total
|
$
|
21,517,081
|
|
100
|
%
|
||
____________________________
(1)
Excludes $0.06 million in subscribed and unissued member subordinated certificates for which a payment has been received. Member loan subordinated certificates totaling $237 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, which totaled
$637 million
and
$653 million
as of
February 29, 2020 and May 31, 2019
, respectively, composed of equity securities and debt securities classified as held to maturity. 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.
The decrease in our investment portfolio of
$16 million
during the
nine months ended February 29, 2020
, was primarily attributable to the redemption by Farmer Mac of its Series B non-cumulative preferred stock on June 12, 2019, at a redemption price of $25.00 per share, plus any declared and unpaid dividends through and including the redemption date. The amortized cost of our investment in the Farmer Mac Series B non-cumulative preferred stock was $25 million as of the redemption date, which equaled the per share redemption price.
45
Our investment portfolio is unencumbered and structured so that the securities generally have active secondary or resale markets under normal market conditions. The objective of the portfolio is to achieve returns
commensurate with the level of risk assumed subject to CFC’s investment policy and guidelines and liquidity requirements. We initially
structured our investment portfolio
to remain adequately liquid to serve as a contingent supplemental source of liquidity for unanticipated liquidity needs. Because we had the positive intent and ability to hold purchased debt securities to maturity, we designated these securities as held to maturity and included them in our held-to-maturity investment portfolio.
Our held-to-maturity investment portfolio totaled
$572 million
and
$565 million
as of
February 29, 2020 and May 31, 2019
, respectively. The average contractual maturity and weighted average coupon of our held-to-maturity investment securities was
three years
and
2.87%
, respectively, as of
February 29, 2020
.
We continued to have the positive intent and ability to hold to maturity debt securities in our held-to-maturity investment portfolio as
of
February 29, 2020
. As such, these securities were classified as held to maturity on our condensed consolidated balance sheet as of this date. As discussed above under “Liquidity Update,” subsequent to the end of the current quarter, management revised its objective for the use of our held-to-maturity investment portfolio from previously serving as a supplemental source of liquidity to serving as a readily available source of liquidity and executed a plan for the orderly liquidation of a portion of debt securities in our investment portfolio due to the extreme volatility and disruptions in the capital and credit markets in early March 2020. We therefore transferred the securities in our held-to-maturity investment portfolio to trading and, in conjunction with the transfer, recognized an unrealized gain of $2 million in earnings in the fourth quarter of fiscal year 2020. As noted above, we subsequently suspended the execution of the plan for the orderly liquidation of a portion of debt securities in our investment portfolio.
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
33
below displays our projected sources and uses of cash from debt and investment activity, by quarter, over the next six quarters through the quarter ending
August 31, 2021
. Our assumptions also include the following: (i) the estimated issuance of long-term debt, including collateral trust bonds and private placement of term debt, is based on maintaining a matched funding position within our loan portfolio with our bank revolving lines of credit serving as a backup liquidity facility for commercial paper and on maintaining outstanding dealer commercial paper at an amount below $1,250 million; (ii) long-term loan scheduled amortization payments represent the scheduled long-term loan payments for loans outstanding as of
February 29, 2020
, and our current estimate of long-term loan prepayments, which the amount and timing of are subject to change; (iii) other loan repayments and other loan advances primarily relate to line of credit repayments and advances; (iv) long-term debt maturities reflect scheduled maturities of outstanding term debt for the periods presented; and (v) long-term loan advances reflect our current estimate of member demand for loans, the amount and timing of which are subject to change.
46
Table
33
: Projected Sources and Uses of Liquidity from Debt and Investment Activity
(1)
|
|
Projected Sources of Liquidity
|
Projected Uses of Liquidity
|
||||||||||||||||||||||||||||||||||
|
(Dollars in millions)
|
Long-Term Debt Issuance
|
Anticipated Long-Term
Loan Repayments (2) |
Other Loan Repayments
(3)
|
Total Projected
Sources of Liquidity |
Long-Term Debt Maturities
(4)
|
Long-Term
Loan Advances |
Other Loan Advances
(5)
|
Total Projected
Uses of Liquidity |
Other Sources/ (Uses) of Liquidity
(6)
|
|||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
|
4Q FY 2020
|
$
|
965
|
|
$
|
360
|
|
$
|
55
|
|
$
|
1,380
|
|
$
|
237
|
|
$
|
534
|
|
$
|
414
|
|
$
|
1,185
|
|
$
|
153
|
|
|||||||||
|
1Q FY 2021
|
550
|
|
377
|
|
—
|
|
927
|
|
596
|
|
536
|
|
—
|
|
1,132
|
|
(34
|
)
|
||||||||||||||||||
|
2Q FY 2021
|
750
|
|
344
|
|
—
|
|
1,094
|
|
585
|
|
374
|
|
—
|
|
959
|
|
(21
|
)
|
||||||||||||||||||
|
3Q FY 2021
|
850
|
|
324
|
|
—
|
|
1,174
|
|
397
|
|
473
|
|
—
|
|
870
|
|
150
|
|
||||||||||||||||||
|
4Q FY 2021
|
500
|
|
321
|
|
—
|
|
821
|
|
580
|
|
326
|
|
—
|
|
906
|
|
94
|
|
||||||||||||||||||
|
1Q FY 2022
|
545
|
|
325
|
|
—
|
|
870
|
|
480
|
|
411
|
|
—
|
|
891
|
|
53
|
|
||||||||||||||||||
|
Total
|
$
|
4,160
|
|
$
|
2,051
|
|
$
|
55
|
|
$
|
6,266
|
|
$
|
2,875
|
|
$
|
2,654
|
|
$
|
414
|
|
$
|
5,943
|
|
$
|
395
|
|
|||||||||
____________________________
(1)
The dates presented represent the end of each quarterly period through the quarter ending
August 31, 2021
.
(2)
Anticipated long-term loan repayments include scheduled long-term loan amortizations, anticipated cash repayments at repricing date and sales.
(3)
Other loan repayments include anticipated short-term loan repayments.
(4)
Long-term debt maturities also include medium-term notes with an original maturity of one year or less and expected early redemptions of debt.
(5)
Other loan advances include anticipated short-term loan advances.
(6)
Includes net increase or decrease to dealer commercial paper, member commercial paper and select notes, and purchases and maturity of investments.
As displayed in Table
33
, we currently project long-term advances of
$1,917 million
over the next 12 months, which we anticipate will exceed anticipated loan repayments over the same period of
$1,405 million
by approximately
$512 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
34
displays our credit ratings as of
February 29, 2020
. During the current quarter, Moody's, S&P and Fitch affirmed our ratings and outlook. Our credit ratings as of
February 29, 2020
are unchanged from
May 31, 2019
, and as of the date of the filing of this Report.
Table
34
: Credit Ratings
|
February 29, 2020
|
||||||
|
Moody’s
|
S&P
|
Fitch
|
||||
|
Long-term issuer credit rating
(1)
|
A2
|
A
|
A
|
|||
|
Senior secured debt
(2)
|
A1
|
A
|
A+
|
|||
|
Senior unsecured debt
(3)
|
A2
|
A
|
A
|
|||
|
Subordinated debt
|
A3
|
BBB+
|
BBB+
|
|||
|
Commercial paper
|
P-1
|
A-1
|
F1
|
|||
|
Outlook
|
Stable
|
Stable
|
Stable
|
|||
___________________________
(1)
Based on our senior unsecured debt rating.
(2)
Applies to our collateral trust bonds.
(3)
Applies to our medium-term notes.
47
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 increased to
30.73
as of
February 29, 2020
, from
19.80
as of
May 31, 2019
, due to the combined impact of an increase in debt to fund loan growth, an increase in derivative liabilities and a decrease in equity resulting from our reported net loss of
$359 million
and the patronage capital retirement of
$63 million
during the first quarter of fiscal year 2020.
Our adjusted debt-to-equity ratio increased to
5.80
as of
February 29, 2020
, from
5.73
as of
May 31, 2019
, primarily attributable to an increase in debt outstanding to fund loan growth. 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
February 29, 2020
.
As discussed above in “Summary of Selected Financial Data,” the financial covenants set forth in our committed bank revolving line of credit agreements and senior debt indentures are based on adjusted financial measures, including adjusted TIER. We provide a reconciliation of adjusted TIER and other non-GAAP measures disclosed in this Report to the most comparable GAAP measures and an explanation of the adjustments below in “Non-GAAP Financial Measures.”
|
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
2019
Form 10-K under “Item 7. MD&A—Market Risk—Market Risk Management.”
Future of LIBOR
In 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates the LIBOR index, announced that the FCA intends to stop requesting banks to submit the rates required to calculate LIBOR after 2021. Management has formed a cross-functional LIBOR working group to identify CFC’s exposure, assess the potential risks related to the transition from LIBOR to a new index and develop a strategic transition plan. The LIBOR working group has performed an initial assessment of all of the CFC’s LIBOR dependent contracts and financial instruments and the systems, models and processes that may be impacted. The LIBOR working group will closely monitor and assess developments with respect to the phasing out of LIBOR and provide regular reports to the Chief Financial Officer and the CFC Board of Directors. We discuss the risks related to the uncertainty as to the nature of potential changes or other reforms associated with the
48
transition away from and expected replacement of LIBOR as a benchmark interest rate in in our
2019
Form 10-K under “Item 1A. Risk Factors.”
Matched Funding Objective
Our funding objective is to manage the matched funding of asset and liability repricing terms within a range of adjusted total assets (calculated by excluding derivative assets from total assets) deemed appropriate by the Asset Liability Committee based on the current environment and extended outlook for interest rates. We refer to the difference between fixed-rate loans scheduled for amortization or repricing and the fixed-rate liabilities and equity funding those loans as our interest rate gap. Our primary strategies for managing our interest rate risk include the use of derivatives and limiting the amount of fixed-rate assets that can be funded by variable-rate debt to a specified percentage of adjusted total assets based on market conditions. We provide our members with many options on loans with regard to interest rates, the term for which the selected interest rate is in effect and the ability to convert or prepay the loan. Long-term loans generally have maturities of up to 35 years. Borrowers may select fixed interest rates for periods of one year through the life of the loan. We do not match fund the majority of our fixed-rate loans with a specific debt issuance at the time the loans are advanced. We fund the amount of fixed-rate assets that exceed fixed-rate debt and members’ equity with short-term debt, primarily commercial paper.
Interest Rate Gap Analysis
As part of our asset-liability management, we perform a monthly interest rate gap analysis that provides a comparison between the timing of cash flows, by year, for fixed-rate assets scheduled for amortization and repricing and for fixed-rate liabilities and members’ equity maturing. This gap analysis is a useful tool in measuring, monitoring and mitigating the interest rate risk inherent in the funding of fixed-rate assets with variable-rate debt and also helpful in assessing liquidity risk.
Table
35
displays the scheduled amortization and repricing of fixed-rate assets and outstanding fixed-rate liabilities and equity as of
February 29, 2020
. We exclude variable-rate loans from our interest rate gap analysis, as we do not consider the interest rate risk on these loans to be significant because they are subject to repricing at least monthly. Loans with variable interest rates accounted for
10%
and
11%
of our total loan portfolio as of
February 29, 2020
and
May 31, 2019
, respectively. Fixed-rate liabilities include debt issued at a fixed rate, as well as variable-rate debt swapped to a fixed rate using interest rate swaps. Fixed-rate debt swapped to a variable rate using interest rate swaps is excluded from the analysis because it is used to match fund our variable-rate loans. With the exception of members’ subordinated certificates, which are generally issued with extended maturities, and commercial paper, our liabilities have average maturities that closely match the repricing terms (but not the maturities) of our fixed-rate loans.
Table
35
: Interest Rate Gap Analysis
|
(Dollars in millions)
|
Prior to 5/31/20
|
Two Years 6/1/20 to 5/31/22
|
Two Years 6/1/22 to
5/31/24 |
Five Years 6/1/24 to
5/31/29 |
10 Years 6/1/29 to 5/31/39
|
6/1/39 and Thereafter
|
Total
|
|||||||||||||||||||||
|
Asset amortization and repricing
|
$
|
447
|
|
$
|
3,450
|
|
$
|
2,951
|
|
$
|
6,230
|
|
$
|
7,780
|
|
$
|
3,658
|
|
$
|
24,516
|
|
|||||||
|
Liabilities and members’ equity:
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Long-term debt
(1)(2)
|
$
|
417
|
|
$
|
4,602
|
|
$
|
2,469
|
|
$
|
6,227
|
|
$
|
5,500
|
|
$
|
2,017
|
|
$
|
21,232
|
|
|||||||
|
Subordinated deferrable debt and subordinated certificates
(2)(3)
|
3
|
|
37
|
|
410
|
|
609
|
|
152
|
|
808
|
|
2,019
|
|
||||||||||||||
|
Members’ equity
(4)
|
—
|
|
21
|
|
28
|
|
110
|
|
308
|
|
1,059
|
|
1,526
|
|
||||||||||||||
|
Total liabilities and members’ equity
|
$
|
420
|
|
$
|
4,660
|
|
$
|
2,907
|
|
$
|
6,946
|
|
$
|
5,960
|
|
$
|
3,884
|
|
$
|
24,777
|
|
|||||||
|
Gap
(5)
|
$
|
27
|
|
$
|
(1,210
|
)
|
$
|
44
|
|
$
|
(716
|
)
|
$
|
1,820
|
|
$
|
(226
|
)
|
$
|
(261
|
)
|
|||||||
|
Cumulative gap
|
27
|
|
(1,183
|
)
|
(1,139
|
)
|
(1,855
|
)
|
(35
|
)
|
(261
|
)
|
|
|||||||||||||||
|
Cumulative gap as a % of total assets
|
0.10
|
%
|
(4.23
|
)%
|
(4.08
|
)%
|
(6.64
|
)%
|
(0.13
|
)%
|
(0.93
|
)%
|
|
|||||||||||||||
|
Cumulative gap as a % of adjusted total assets
(6)
|
0.10
|
|
(4.25
|
)
|
(4.09
|
)
|
(6.67
|
)
|
(0.13
|
)
|
(0.94
|
)
|
|
|||||||||||||||
____________________________
(1)
Includes long-term fixed-rate debt and the net impact of our interest rate swaps.
49
(2)
The maturity presented for debt is based on the call date.
(3)
Represents the amount of subordinated deferrable debt and subordinated certificates allocated to fund fixed-rate assets.
(4)
Represents the portion of members’ equity and loan loss allowance allocated to fund fixed-rate assets. See Table
40
: Members’ Equity below under “Non-GAAP Financial Measures” for a reconciliation of total CFC equity to members’ equity.
(5)
Calculated based on the amount of assets scheduled for amortization and repricing less total liabilities and members’ equity funding those assets.
(6)
Adjusted total assets represents total assets reported in our condensed consolidated balance sheets less derivative assets.
When the amount of the cash flows related to fixed-rate assets scheduled for amortization and repricing exceeds the amount of cash flows related to the fixed-rate debt and equity funding those assets, we refer to the difference, or gap, as “warehousing.” When the amount of the cash flows related to fixed-rate assets scheduled for amortization and repricing is less than the amount of the cash flows related to the fixed-rate debt and equity funding those assets, we refer to the gap as “prefunding.” The amount of the gap is an indication of our interest rate and liquidity risk exposure. Our goal is to maintain an unmatched position related to the cash flows for fixed-rate financial assets within a targeted range of adjusted total assets.
Because the substantial majority of our financial assets are fixed-rate, amortizing loans and these loans are primarily funded with bullet debt and equity, our interest rate gap analysis typically reflects a warehouse position. When we are in a warehouse position, we utilize some short-term borrowings to fund the scheduled amortization and repricing of our financial assets. However, we limit the extent to which we fund our long-term, fixed-rate loans with short-term, variable-rate debt because it exposes us to higher interest rate and liquidity risk.
As indicated above in Table
35
, we were in a prefunded position of
$261 million
as of
February 29, 2020
, rather than our typical warehouse position. The prefunded position was primarily attributable to our issuance of long‐term fixed-rate debt at an attractive coupon rate due to a relative flat yield curve environment. We do not expect to maintain a prefunded position as we expect to continue to fund long-term fixed-rate loans in the future.
|
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
2019
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.
Statements of Operations Non-GAAP Adjustments
Table
36
provides a reconciliation of adjusted interest expense, adjusted net interest income and adjusted net income to the comparable GAAP measures for the three and
nine months ended February 29, 2020 and February 28, 2019
. The adjusted amounts are used in the calculation of our adjusted net interest yield and adjusted TIER.
50
Table
36
: Adjusted Financial Measures—Income Statement
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
(Dollars in thousands)
|
February 29, 2020
|
February 28, 2019
|
February 29, 2020
|
February 28, 2019
|
||||||||||||
|
Interest expense
|
$
|
(203,040
|
)
|
$
|
(207,335
|
)
|
$
|
(624,182
|
)
|
$
|
(621,732
|
)
|
||||
|
Include: Derivative cash settlements expense
|
(14,354
|
)
|
(9,799
|
)
|
(39,547
|
)
|
(34,433
|
)
|
||||||||
|
Adjusted interest expense
|
$
|
(217,394
|
)
|
$
|
(217,134
|
)
|
$
|
(663,729
|
)
|
$
|
(656,165
|
)
|
||||
|
Net interest income
|
$
|
84,155
|
|
$
|
78,231
|
|
$
|
240,065
|
|
$
|
223,578
|
|
||||
|
Include: Derivative cash settlements expense
|
(14,354
|
)
|
(9,799
|
)
|
(39,547
|
)
|
(34,433
|
)
|
||||||||
|
Adjusted net interest income
|
$
|
69,801
|
|
$
|
68,432
|
|
$
|
200,518
|
|
$
|
189,145
|
|
||||
|
Net income (loss)
|
$
|
(276,969
|
)
|
$
|
(71,471
|
)
|
$
|
(359,448
|
)
|
$
|
96,233
|
|
||||
|
Exclude: Derivative forward value losses
|
(323,582
|
)
|
(122,375
|
)
|
(510,664
|
)
|
(27,215
|
)
|
||||||||
|
Adjusted net income
|
$
|
46,613
|
|
$
|
50,904
|
|
$
|
151,216
|
|
$
|
123,448
|
|
||||
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 expense in our adjusted interest expense and exclude the unrealized forward value of derivatives from our adjusted net income.
TIER and Adjusted TIER
Table
37
displays the calculation of our TIER and adjusted TIER for the three and
nine months ended February 29, 2020 and February 28, 2019
.
Table
37
: TIER and Adjusted TIER
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||
|
|
February 29, 2020
|
February 28, 2019
|
February 29, 2020
|
February 28, 2019
|
||||||||
|
TIER
(1)
|
(0.36
|
)
|
0.66
|
|
0.42
|
|
1.15
|
|
||||
|
Adjusted TIER
(2)
|
1.21
|
|
1.23
|
|
1.23
|
|
1.19
|
|
||||
____________________________
(1)
TIER is calculated based on our net income (loss) plus interest expense for the period divided by interest expense for the period.
(2)
Adjusted TIER is calculated based on adjusted net income (loss) plus adjusted interest expense for the period divided by adjusted interest expense for the period.
Debt-to-Equity and Adjusted Debt-to-Equity
Table
38
provides a reconciliation between our total liabilities and total equity and the amounts used to calculate our adjusted debt-to-equity ratio as of
February 29, 2020 and May 31, 2019
. As indicated in Table
38
, subordinated debt is treated in the same manner as equity in calculating our adjusted-debt-to-equity ratio.
51
Table
38
: Adjusted Financial Measures—Balance Sheet
|
(Dollars in thousands)
|
February 29, 2020
|
|
May 31, 2019
|
|||||
|
Total liabilities
|
$
|
27,065,441
|
|
$
|
25,820,490
|
|
||
|
Exclude:
|
|
|
||||||
|
Derivative liabilities
|
979,610
|
|
391,724
|
|
||||
|
Debt used to fund loans guaranteed by RUS
|
148,735
|
|
153,991
|
|
||||
|
Subordinated deferrable debt
|
986,072
|
|
986,020
|
|
||||
|
Subordinated certificates
|
1,340,373
|
|
1,357,129
|
|
||||
|
Adjusted total liabilities
|
$
|
23,610,651
|
|
$
|
22,931,626
|
|
||
|
Total equity
|
$
|
880,741
|
|
$
|
1,303,882
|
|
||
|
Exclude:
|
||||||||
|
Prior fiscal year-end cumulative derivative forward value losses
|
(354,704
|
)
|
(34,974
|
)
|
||||
|
Current year derivative forward value losses
|
(510,664
|
)
|
(319,730
|
)
|
||||
|
Accumulated other comprehensive income attributable to derivatives
(1)
|
2,236
|
|
2,571
|
|
||||
|
Include:
|
||||||||
|
Subordinated deferrable debt
|
986,072
|
|
986,020
|
|
||||
|
Subordinated certificates
|
1,340,373
|
|
1,357,129
|
|
||||
|
Adjusted total equity
|
$
|
4,070,318
|
|
$
|
3,999,164
|
|
||
____________________________
(1)
Represents AOCI related to derivatives. See “Note 10—Equity” for the components of AOCI.
Table
39
displays the calculations of our debt-to-equity and adjusted debt-to-equity ratios as of
February 29, 2020
and
May 31, 2019
.
Table
39
: Debt-to-Equity Ratio
|
|
February 29, 2020
|
May 31, 2019
|
||||
|
Debt-to-equity ratio
(1)
|
30.73
|
|
19.80
|
|
||
|
Adjusted debt-to-equity ratio
(2)
|
5.80
|
|
5.73
|
|
||
____________________________
(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 as of the end of the period divided by adjusted total equity as of the end of the period.
Members
’
Equity
Members’ equity represents equity attributable to CFC members. Table
40
provides a reconciliation of members’ equity to total CFC equity as of
February 29, 2020
and
May 31, 2019
.
Table
40
: Members’ Equity
|
(Dollars in thousands)
|
February 29, 2020
|
May 31, 2019
|
||||||
|
Members’ equity:
|
||||||||
|
Total CFC equity
|
$
|
856,905
|
|
$
|
1,276,735
|
|
||
|
Excludes:
|
||||||||
|
Accumulated other comprehensive loss
|
(45
|
)
|
(147
|
)
|
||||
|
Current period-end cumulative derivative forward value losses
|
(857,369
|
)
|
(348,965
|
)
|
||||
|
Subtotal
|
(857,414
|
)
|
(349,112
|
)
|
||||
|
Members’ equity
|
$
|
1,714,319
|
|
$
|
1,625,847
|
|
||
52
|
Item 1.
|
Financial Statements
|
|
Page
|
|||
53
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
(Dollars in thousands)
|
February 29, 2020
|
February 28, 2019
|
February 29, 2020
|
|
February 28, 2019
|
|||||||||||
|
Interest income
|
$
|
287,195
|
|
$
|
285,566
|
|
$
|
864,247
|
|
$
|
845,310
|
|
||||
|
Interest expense
|
(203,040
|
)
|
(207,335
|
)
|
(624,182
|
)
|
(621,732
|
)
|
||||||||
|
Net interest income
|
84,155
|
|
78,231
|
|
240,065
|
|
223,578
|
|
||||||||
|
Benefit (provision) for loan losses
|
(2,382
|
)
|
(182
|
)
|
(1,367
|
)
|
1,715
|
|
||||||||
|
Net interest income after benefit (provision) for loan losses
|
81,773
|
|
78,049
|
|
238,698
|
|
225,293
|
|
||||||||
|
Non-interest income:
|
|
|
|
|
|
|
|
|
||||||||
|
Fee and other income
|
3,647
|
|
3,714
|
|
18,430
|
|
11,220
|
|
||||||||
|
Derivative losses
|
(337,936
|
)
|
(132,174
|
)
|
(550,211
|
)
|
(61,648
|
)
|
||||||||
|
Unrealized gains (losses) on equity securities
|
749
|
|
2,144
|
|
2,255
|
|
(201
|
)
|
||||||||
|
Total non-interest income
|
(333,540
|
)
|
(126,316
|
)
|
(529,526
|
)
|
(50,629
|
)
|
||||||||
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
||||||||
|
Salaries and employee benefits
|
(12,895
|
)
|
(13,020
|
)
|
(38,565
|
)
|
(38,094
|
)
|
||||||||
|
Other general and administrative expenses
|
(12,374
|
)
|
(9,978
|
)
|
(36,802
|
)
|
(31,979
|
)
|
||||||||
|
Losses on early extinguishment of debt
|
(69
|
)
|
—
|
|
(683
|
)
|
(7,100
|
)
|
||||||||
|
Other non-interest (expense) income
|
(290
|
)
|
(355
|
)
|
6,574
|
|
(1,104
|
)
|
||||||||
|
Total non-interest expense
|
(25,628
|
)
|
(23,353
|
)
|
(69,476
|
)
|
(78,277
|
)
|
||||||||
|
Income (loss) before income taxes
|
(277,395
|
)
|
(71,620
|
)
|
(360,304
|
)
|
96,387
|
|
||||||||
|
Income tax benefit (expense)
|
426
|
|
149
|
|
856
|
|
(154
|
)
|
||||||||
|
Net income (loss)
|
(276,969
|
)
|
(71,471
|
)
|
(359,448
|
)
|
96,233
|
|
||||||||
|
Less: Net loss attributable to noncontrolling interests
|
1,405
|
|
539
|
|
3,054
|
|
60
|
|
||||||||
|
Net income (loss) attributable to CFC
|
$
|
(275,564
|
)
|
$
|
(70,932
|
)
|
$
|
(356,394
|
)
|
$
|
96,293
|
|
||||
|
See accompanying notes to condensed consolidated financial statements.
|
||||||||||||||||
54
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
(Dollars in thousands)
|
February 29, 2020
|
February 28, 2019
|
February 29, 2020
|
February 28, 2019
|
||||||||||||
|
Net income (loss)
|
$
|
(276,969
|
)
|
$
|
(71,471
|
)
|
$
|
(359,448
|
)
|
$
|
96,233
|
|
||||
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
||||||||
|
Unrealized gains on cash flow hedge
|
—
|
|
—
|
|
—
|
|
1,059
|
|
||||||||
|
Reclassification of derivative gains to net income
|
(109
|
)
|
(115
|
)
|
(335
|
)
|
(354
|
)
|
||||||||
|
Defined benefit plan adjustments
|
146
|
|
130
|
|
437
|
|
392
|
|
||||||||
|
Other comprehensive income
|
37
|
|
15
|
|
102
|
|
1,097
|
|
||||||||
|
Total comprehensive income (loss)
|
(276,932
|
)
|
(71,456
|
)
|
(359,346
|
)
|
97,330
|
|
||||||||
|
Less: Total comprehensive loss attributable to noncontrolling interests
|
1,405
|
|
539
|
|
3,054
|
|
60
|
|
||||||||
|
Total comprehensive income (loss) attributable to CFC
|
$
|
(275,527
|
)
|
$
|
(70,917
|
)
|
$
|
(356,292
|
)
|
$
|
97,390
|
|
||||
|
See accompanying notes to condensed consolidated financial statements.
|
||||||||||||||||
55
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
(Dollars in thousands)
|
February 29, 2020
|
|
May 31, 2019
|
|||||
|
Assets:
|
||||||||
|
Cash and cash equivalents
|
$
|
55,616
|
|
$
|
177,922
|
|
||
|
Restricted cash
|
7,812
|
|
8,282
|
|
||||
|
Total cash, cash equivalents and restricted cash
|
63,428
|
|
186,204
|
|
||||
|
Investment securities:
|
||||||||
|
Equity securities
|
64,558
|
|
87,533
|
|
||||
|
Debt securities held-to-maturity, at amortized cost
|
571,975
|
|
565,444
|
|
||||
|
Total investment securities
|
636,533
|
|
652,977
|
|
||||
|
Loans to members
|
26,822,530
|
|
25,916,904
|
|
||||
|
Less: Allowance for loan losses
|
(18,902
|
)
|
(17,535
|
)
|
||||
|
Loans to members, net
|
26,803,628
|
|
25,899,369
|
|
||||
|
Accrued interest receivable
|
124,357
|
|
133,605
|
|
||||
|
Other receivables
|
34,520
|
|
36,712
|
|
||||
|
Fixed assets, net
|
121,220
|
|
120,627
|
|
||||
|
Derivative assets
|
118,067
|
|
41,179
|
|
||||
|
Other assets
|
44,429
|
|
53,699
|
|
||||
|
Total assets
|
$
|
27,946,182
|
|
$
|
27,124,372
|
|
||
|
Liabilities:
|
|
|
||||||
|
Accrued interest payable
|
$
|
190,628
|
|
$
|
158,997
|
|
||
|
Debt outstanding:
|
||||||||
|
Short-term borrowings
|
4,275,388
|
|
3,607,726
|
|
||||
|
Long-term debt
|
19,190,693
|
|
19,210,793
|
|
||||
|
Subordinated deferrable debt
|
986,072
|
|
986,020
|
|
||||
|
Members’ subordinated certificates:
|
|
|
|
|
||||
|
Membership subordinated certificates
|
630,479
|
|
630,474
|
|
||||
|
Loan and guarantee subordinated certificates
|
487,724
|
|
505,485
|
|
||||
|
Member capital securities
|
222,170
|
|
221,170
|
|
||||
|
Total members’ subordinated certificates
|
1,340,373
|
|
1,357,129
|
|
||||
|
Total debt outstanding
|
25,792,526
|
|
25,161,668
|
|
||||
|
Deferred income
|
52,752
|
|
57,989
|
|
||||
|
Derivative liabilities
|
979,610
|
|
391,724
|
|
||||
|
Other liabilities
|
49,925
|
|
50,112
|
|
||||
|
Total liabilities
|
27,065,441
|
|
25,820,490
|
|
||||
|
Equity:
|
||||||||
|
CFC equity:
|
|
|
|
|
||||
|
Retained equity
|
856,950
|
|
1,276,882
|
|
||||
|
Accumulated other comprehensive loss
|
(45
|
)
|
(147
|
)
|
||||
|
Total CFC equity
|
856,905
|
|
1,276,735
|
|
||||
|
Noncontrolling interests
|
23,836
|
|
27,147
|
|
||||
|
Total equity
|
880,741
|
|
1,303,882
|
|
||||
|
Total liabilities and equity
|
$
|
27,946,182
|
|
$
|
27,124,372
|
|
||
|
See accompanying notes to condensed consolidated financial statements.
|
||||||||
56
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
|
Three Months Ended February 29, 2020
|
||||||||||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
Membership
Fees and Educational Fund |
Patronage
Capital Allocated |
Members’
Capital Reserve |
Unallocated
Net Income (Loss) |
CFC
Retained Equity |
Accumulated
Other Comprehensive Income (Loss) |
Total
CFC Equity |
Non-controlling
Interests |
Total
Equity |
|||||||||||||||||||||||||||
|
Balance as of November 30, 2019
|
$
|
2,443
|
|
$
|
797,756
|
|
$
|
759,097
|
|
$
|
(426,605
|
)
|
$
|
1,132,691
|
|
$
|
(82
|
)
|
$
|
1,132,609
|
|
$
|
25,285
|
|
$
|
1,157,894
|
|
|||||||||
|
Net loss
|
—
|
|
—
|
|
—
|
|
(275,564
|
)
|
(275,564
|
)
|
—
|
|
(275,564
|
)
|
(1,405
|
)
|
(276,969
|
)
|
||||||||||||||||||
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
37
|
|
37
|
|
—
|
|
37
|
|
||||||||||||||||||
|
Patronage capital retirement
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||||||||||
|
Other
|
(177
|
)
|
—
|
|
—
|
|
—
|
|
(177
|
)
|
—
|
|
(177
|
)
|
(44
|
)
|
(221
|
)
|
||||||||||||||||||
|
Balance as of February 29, 2020
|
$
|
2,266
|
|
$
|
797,756
|
|
$
|
759,097
|
|
$
|
(702,169
|
)
|
$
|
856,950
|
|
$
|
(45
|
)
|
$
|
856,905
|
|
$
|
23,836
|
|
$
|
880,741
|
|
|||||||||
|
Nine Months Ended February 29, 2020
|
||||||||||||||||||||||||||||||||||||
|
Balance as of May 31, 2019
|
$
|
2,982
|
|
$
|
860,578
|
|
$
|
759,097
|
|
$
|
(345,775
|
)
|
$
|
1,276,882
|
|
$
|
(147
|
)
|
$
|
1,276,735
|
|
$
|
27,147
|
|
$
|
1,303,882
|
|
|||||||||
|
Net loss
|
—
|
|
—
|
|
—
|
|
(356,394
|
)
|
(356,394
|
)
|
—
|
|
(356,394
|
)
|
(3,054
|
)
|
(359,448
|
)
|
||||||||||||||||||
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
102
|
|
102
|
|
—
|
|
102
|
|
||||||||||||||||||
|
Patronage capital retirement
|
—
|
|
(62,822
|
)
|
—
|
|
—
|
|
(62,822
|
)
|
—
|
|
(62,822
|
)
|
(1,933
|
)
|
(64,755
|
)
|
||||||||||||||||||
|
Other
|
(716
|
)
|
—
|
|
—
|
|
—
|
|
(716
|
)
|
—
|
|
(716
|
)
|
1,676
|
|
960
|
|
||||||||||||||||||
|
Balance as of February 29, 2020
|
$
|
2,266
|
|
$
|
797,756
|
|
$
|
759,097
|
|
$
|
(702,169
|
)
|
$
|
856,950
|
|
$
|
(45
|
)
|
$
|
856,905
|
|
$
|
23,836
|
|
$
|
880,741
|
|
|||||||||
|
Three Months Ended February 28, 2019
|
||||||||||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
Membership
Fees and Educational Fund |
Patronage
Capital Allocated |
Members’
Capital Reserve |
Unallocated
Net Income (Loss) |
CFC
Retained Equity |
Accumulated
Other Comprehensive Income (Loss) |
Total
CFC Equity |
Non-controlling
Interests |
Total
Equity |
|||||||||||||||||||||||||||
|
Balance as of November 30, 2018
|
$
|
2,400
|
|
$
|
763,986
|
|
$
|
687,785
|
|
$
|
139,585
|
|
$
|
1,593,756
|
|
$
|
832
|
|
$
|
1,594,588
|
|
$
|
32,550
|
|
$
|
1,627,138
|
|
|||||||||
|
Net loss
|
—
|
|
—
|
|
—
|
|
(70,932
|
)
|
(70,932
|
)
|
—
|
|
(70,932
|
)
|
(539
|
)
|
(71,471
|
)
|
||||||||||||||||||
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
15
|
|
15
|
|
—
|
|
15
|
|
||||||||||||||||||
|
Patronage capital retirement
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(2,908
|
)
|
(2,908
|
)
|
||||||||||||||||||
|
Other
|
(128
|
)
|
—
|
|
—
|
|
—
|
|
(128
|
)
|
—
|
|
(128
|
)
|
(34
|
)
|
(162
|
)
|
||||||||||||||||||
|
Balance as of February 28, 2019
|
$
|
2,272
|
|
$
|
763,986
|
|
$
|
687,785
|
|
$
|
68,653
|
|
$
|
1,522,696
|
|
$
|
847
|
|
$
|
1,523,543
|
|
$
|
29,069
|
|
$
|
1,552,612
|
|
|||||||||
|
Nine Months Ended February 28, 2019
|
||||||||||||||||||||||||||||||||||||
|
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
|
—
|
|
—
|
|
—
|
|
96,293
|
|
96,293
|
|
—
|
|
96,293
|
|
(60
|
)
|
96,233
|
|
||||||||||||||||||
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,097
|
|
1,097
|
|
—
|
|
1,097
|
|
||||||||||||||||||
|
Patronage capital retirement
|
—
|
|
(47,507
|
)
|
—
|
|
—
|
|
(47,507
|
)
|
—
|
|
(47,507
|
)
|
(2,908
|
)
|
(50,415
|
)
|
||||||||||||||||||
|
Other
|
(673
|
)
|
—
|
|
—
|
|
—
|
|
(673
|
)
|
—
|
|
(673
|
)
|
517
|
|
(156
|
)
|
||||||||||||||||||
|
Balance as of February 28, 2019
|
$
|
2,272
|
|
$
|
763,986
|
|
$
|
687,785
|
|
$
|
68,653
|
|
$
|
1,522,696
|
|
$
|
847
|
|
$
|
1,523,543
|
|
$
|
29,069
|
|
$
|
1,552,612
|
|
|||||||||
|
See accompanying notes to condensed consolidated financial statements.
|
||||||||||||||||||||||||||||||||||||
57
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine Months Ended
|
|||||||
|
(Dollars in thousands)
|
February 29, 2020
|
February 28, 2019
|
||||||
|
Cash flows from operating activities:
|
|
|
||||||
|
Net income (loss)
|
$
|
(359,448
|
)
|
$
|
96,233
|
|
||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
||||||
|
Amortization of deferred loan fees
|
(6,999
|
)
|
(7,650
|
)
|
||||
|
Amortization of debt issuance costs and deferred charges
|
6,870
|
|
8,067
|
|
||||
|
Amortization of discount on long-term debt
|
8,029
|
|
8,036
|
|
||||
|
Amortization of issuance costs for bank revolving lines of credit
|
3,854
|
|
4,056
|
|
||||
|
Depreciation and amortization
|
7,219
|
|
6,693
|
|
||||
|
Provision (benefit) for loan losses
|
1,367
|
|
(1,715
|
)
|
||||
|
Loss on early extinguishment of debt
|
683
|
|
7,100
|
|
||||
|
Gain on sale of land
|
(7,713
|
)
|
—
|
|
||||
|
Unrealized (gains)/losses on equity securities
|
(2,255
|
)
|
201
|
|
||||
|
Derivative forward value losses
|
510,664
|
|
27,215
|
|
||||
|
Changes in operating assets and liabilities:
|
|
|
||||||
|
Accrued interest receivable
|
9,248
|
|
(3,228
|
)
|
||||
|
Accrued interest payable
|
31,631
|
|
41,227
|
|
||||
|
Deferred income
|
2,112
|
|
2,351
|
|
||||
|
Other
|
(5,310
|
)
|
(14,900
|
)
|
||||
|
Net cash provided by operating activities
|
199,952
|
|
173,686
|
|
||||
|
Cash flows from investing activities:
|
|
|
||||||
|
Advances on loans, net
|
(905,437
|
)
|
(838,942
|
)
|
||||
|
Investment in fixed assets
|
(8,153
|
)
|
(10,254
|
)
|
||||
|
Proceeds from sale of land
|
21,268
|
|
—
|
|
||||
|
Net proceeds from time deposits
|
—
|
|
100,000
|
|
||||
|
Proceeds from redemption of equity securities
|
25,000
|
|
—
|
|
||||
|
Purchases of held-to-maturity debt securities
|
(76,339
|
)
|
(66,039
|
)
|
||||
|
Proceeds from maturities of held-to-maturity debt securities
|
69,726
|
|
25,252
|
|
||||
|
Net cash used in investing activities
|
(873,935
|
)
|
(789,983
|
)
|
||||
|
Cash flows from financing activities:
|
|
|
||||||
|
Proceeds from (repayments of) short-term borrowings, net
|
618,527
|
|
(176,885
|
)
|
||||
|
Proceeds from short-term borrowings with original maturity greater than 90 days
|
1,920,660
|
|
1,028,749
|
|
||||
|
Repayments of short term-debt with original maturity greater than 90 days
|
(1,871,525
|
)
|
(995,833
|
)
|
||||
|
Payments for issuance costs for revolving bank lines of credit
|
(1,025
|
)
|
(2,382
|
)
|
||||
|
Proceeds from issuance of long-term debt, net of discount and issuance costs
|
1,499,236
|
|
3,178,198
|
|
||||
|
Payments for retirement of long-term debt
|
(1,534,099
|
)
|
(2,344,199
|
)
|
||||
|
Payments made for early extinguishment of debt
|
(683
|
)
|
(7,100
|
)
|
||||
|
Payments for issuance costs for subordinated deferrable debt
|
(84
|
)
|
—
|
|
||||
|
Proceeds from issuance of members’ subordinated certificates
|
2,993
|
|
1,781
|
|
||||
|
Payments for retirement of members’ subordinated certificates
|
(19,749
|
)
|
(24,366
|
)
|
||||
|
Payments for retirement of patronage capital
|
(63,035
|
)
|
(49,860
|
)
|
||||
|
Repayments for membership fees, net
|
(9
|
)
|
(2
|
)
|
||||
|
Net cash provided by financing activities
|
551,207
|
|
608,101
|
|
||||
|
Net decrease in cash, cash equivalents and restricted cash
|
(122,776
|
)
|
(8,196
|
)
|
||||
|
Beginning cash, cash equivalents and restricted cash
|
186,204
|
|
238,824
|
|
||||
|
Ending cash, cash equivalents and restricted cash
|
$
|
63,428
|
|
$
|
230,628
|
|
||
|
Supplemental disclosure of cash flow information:
|
|
|
||||||
|
Cash paid for interest
|
$
|
566,567
|
|
$
|
562,714
|
|
||
|
Cash paid for income taxes
|
18
|
|
93
|
|
||||
|
See accompanying notes to condensed consolidated financial statements.
|
||||||||
58
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
The Company
National Rural Utilities Cooperative Finance Corporation (“CFC”) is a member-owned cooperative association incorporated under the laws of the District of Columbia in April 1969. CFC’s principal purpose is to provide its members with financing to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC makes loans to its rural electric members so they can acquire, construct and operate electric distribution systems, 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, 2019
(“
2019
Form 10-K”). Refer to “Note 1—Summary of Significant Accounting Policies” in our 2019 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
no
t have any entities that held foreclosed assets as of
February 29, 2020
or
May 31, 2019
. All intercompany balances and transactions have been eliminated. National Cooperative Services Corporation (“NCSC”) and Rural Telephone Finance Cooperative (“RTFC”) are VIEs that are required to be consolidated by CFC. NCSC is a taxable member-owned cooperative that may provide financing to members of CFC, government or quasi-government entities which own electric utility systems that meet the Rural Electrification Act definition of “rural,” and for-profit and nonprofit entities that are owned, operated or controlled by, or provide significant benefits to certain members of CFC. RTFC is a taxable Subchapter T cooperative association that provides financing for its rural telecommunications members and their affiliates. Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its consolidated entities.
Restricted Cash
Restricted cash, which consists primarily of member funds held in escrow for certain specifically designed cooperative programs, totaled
$8 million
as of both
February 29, 2020
and
May 31, 2019
.
59
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Assets Held for Sale
On March 14, 2018, CFC entered into a purchase and sale agreement (“the agreement”), which was subsequently amended, for the sale of a parcel of land, consisting of approximately 28 acres, located in Loudoun County, Virginia. We designated the property, which had a carrying value of
$14 million
, as held for sale and reclassified it from fixed assets, net to other assets on our consolidated balance sheet. On July 22, 2019, we closed on the sale of the land and received net proceeds of
$22 million
, resulting in a gain of
$8 million
on the sale of this property, which is reported in other non-interest income (expense) on our condensed consolidated statements of operations.
Interest Income
The following table presents interest income, by interest-earning asset category, for the three and
nine months ended February 29, 2020 and February 28, 2019
.
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
(Dollars in thousands)
|
February 29, 2020
|
February 28, 2019
|
February 29, 2020
|
|
February 28, 2019
|
|||||||||||
|
Interest income by interest-earning asset type:
|
||||||||||||||||
|
Long-term fixed-rate loans
(1)
|
$
|
261,036
|
|
$
|
251,149
|
|
$
|
780,228
|
|
$
|
756,290
|
|
||||
|
Long-term variable-rate loans
|
7,552
|
|
10,711
|
|
25,439
|
|
30,158
|
|
||||||||
|
Line of credit loans
|
13,378
|
|
17,178
|
|
42,089
|
|
40,563
|
|
||||||||
|
TDR loans
(2)
|
210
|
|
209
|
|
628
|
|
638
|
|
||||||||
|
Other income, net
(3)
|
(419
|
)
|
(291
|
)
|
(990
|
)
|
(867
|
)
|
||||||||
|
Total loans
|
281,757
|
|
278,956
|
|
847,394
|
|
826,782
|
|
||||||||
|
Cash, time deposits and investment securities
|
5,438
|
|
6,610
|
|
16,853
|
|
18,528
|
|
||||||||
|
Total interest income
|
$
|
287,195
|
|
$
|
285,566
|
|
$
|
864,247
|
|
$
|
845,310
|
|
||||
____________________________
(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, commitment fees and net amortization of deferred loan fees and loan origination costs.
Deferred income of
$53 million
and
$58 million
as of
February 29, 2020 and May 31, 2019
, respectively, consists primarily of deferred loan conversion fees totaling
$46 million
and
$52 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 and
nine months ended February 29, 2020 and February 28, 2019
.
60
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
(Dollars in thousands)
|
February 29, 2020
|
February 28, 2019
|
February 29, 2020
|
February 28, 2019
|
||||||||||||
|
Interest expense by debt product type:
(1)(2)
|
|
|
|
|
||||||||||||
|
Short-term borrowings
|
$
|
21,185
|
|
$
|
27,070
|
|
$
|
66,119
|
|
$
|
69,108
|
|
||||
|
Medium-term notes
|
30,860
|
|
34,329
|
|
94,376
|
|
100,555
|
|
||||||||
|
Collateral trust bonds
|
62,914
|
|
61,405
|
|
192,818
|
|
208,044
|
|
||||||||
|
Guaranteed Underwriter Program notes payable
|
39,708
|
|
36,911
|
|
119,927
|
|
107,259
|
|
||||||||
|
Farmer Mac notes payable
|
21,220
|
|
23,691
|
|
68,948
|
|
64,499
|
|
||||||||
|
Other notes payable
|
97
|
|
302
|
|
581
|
|
946
|
|
||||||||
|
Subordinated deferrable debt
|
12,881
|
|
9,416
|
|
38,647
|
|
28,250
|
|
||||||||
|
Subordinated certificates
|
14,175
|
|
14,211
|
|
42,766
|
|
43,071
|
|
||||||||
|
Total interest expense
|
$
|
203,040
|
|
$
|
207,335
|
|
$
|
624,182
|
|
$
|
621,732
|
|
||||
____________________________
(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.
(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 2020
Derivatives and Hedging—Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging—Targeted Improvements to Accounting for Hedging Activities
(Topic 815)
, 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. We adopted this guidance on 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. The adoption of this guidance did not have an impact on our consolidated financial statements or cash flows. If we continue to elect not to apply hedge accounting to our interest rate swaps, the guidance will not have an impact on our consolidated financial statements or cash flows.
Receivables—Nonrefundable Fees and Other Cost
In March 2017, the FASB issued ASU 2017-08,
Receivables—Nonrefundable Fees and Other
Costs
(Subtopic 310-20)
,
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 guidance is effective for public entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We adopted this guidance on June 1, 2019. The adoption of this guidance did not have a material impact on our consolidated financial statements or cash flows.
61
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Leases
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
which provides new guidance that is intended to improve financial reporting about leasing transactions. The new guidance requires the recognition of a right-of use asset and lease liability on the consolidated balance sheet by lessees for those leases classified as operating leases under previous guidance. It also requires new disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. We adopted this guidance on June 1, 2019. The adoption of this guidance did not have a material impact on our consolidated financial statements or cash flows.
Accounting Standards Issued But Not Yet Adopted
Fair Value Measurement—Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement—Changes to the Disclosure Requirements for Fair Value
Measurement (Topic 820),
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 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 or cash flows.
Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326),
which replaces the existing incurred credit loss model and establishes a single credit loss framework based on a current expected credit loss (“CECL”) model for financial assets carried at amortized cost, including loans and held-to-maturity debt securities. CECL requires an entity to estimate 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 expands credit quality disclosures and 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. A modified retrospective approach is required at adoption with a cumulative effect adjustment to retained earnings as of the adoption date. The effective date for our adoption of CECL is June 1, 2020.
We have made significant efforts in completing the development of our CECL model and are conducting parallel runs and testing of the model, validating data inputs and making refinements as necessary. We are also identifying and fulfilling additional data needs for new disclosures and reporting requirements, drafting accounting policies and refining our procedures, controls and governance documentation to comply with CECL. We expect to continue these efforts through the remainder of fiscal year 2020. Due to the significant uncertainty of the impact of the current outbreak of a novel strain of coronavirus (“COVID-19”) on the economy, the business operations of our members and credit quality of our loan portfolio, we currently are unable to provide an estimate of the impact of CECL on our allowance for loan losses at adoption. The ultimate impact of CECL on our allowance for loan losses will depend on the size, composition and credit quality of our portfolio at the time of adoption, as well as any refinements to our models, methodology and other key assumptions.
62
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
NOTE 2—VARIABLE INTEREST ENTITIES
|
NCSC and RTFC meet the definition of a VIE because they do not have sufficient equity investment at risk to finance their activities without financial support. CFC is the primary source of funding for NCSC and the sole source of funding for RTFC. Under the terms of management agreements with each company, CFC manages the business operations of NCSC and RTFC. CFC also unconditionally guarantees full indemnification for any loan losses of NCSC and RTFC pursuant to guarantee agreements with each company. CFC earns management and guarantee fees from its agreements with NCSC and RTFC.
NCSC and RTFC creditors have no recourse against CFC in the event of a default by NCSC and RTFC, unless there is a guarantee agreement under which CFC has guaranteed NCSC or RTFC debt obligations to a third party. The following table provides information on incremental consolidated assets and liabilities of VIEs included in CFC’s condensed consolidated financial statements, after intercompany eliminations, as of
February 29, 2020 and May 31, 2019
.
|
(Dollars in thousands)
|
February 29, 2020
|
May 31, 2019
|
||||||
|
Total loans outstanding
|
$
|
1,039,622
|
|
$
|
1,087,988
|
|
||
|
Other assets
|
11,284
|
|
10,963
|
|
||||
|
Total assets
|
$
|
1,050,906
|
|
$
|
1,098,951
|
|
||
|
Long-term debt
|
$
|
—
|
|
$
|
6,000
|
|
||
|
Other liabilities
|
34,671
|
|
33,385
|
|
||||
|
Total liabilities
|
$
|
34,671
|
|
$
|
39,385
|
|
||
The following table provides information on CFC’s credit commitments to NCSC and RTFC, and its potential exposure to loss as of
February 29, 2020 and May 31, 2019
.
|
(Dollars in thousands)
|
February 29, 2020
|
|
May 31, 2019
|
|||||
|
CFC credit commitments
|
$
|
5,500,000
|
|
$
|
5,500,000
|
|
||
|
Outstanding commitments:
|
||||||||
|
Borrowings payable to CFC
(1)
|
1,018,833
|
|
1,059,629
|
|
||||
|
Credit enhancements:
|
||||||||
|
CFC third-party guarantees
|
12,564
|
|
10,091
|
|
||||
|
Other credit enhancements
|
10,511
|
|
14,251
|
|
||||
|
Total credit enhancements
(2)
|
23,075
|
|
24,342
|
|
||||
|
Total outstanding commitments
|
1,041,908
|
|
1,083,971
|
|
||||
|
CFC available credit commitments
|
$
|
4,458,092
|
|
$
|
4,416,029
|
|
||
____________________________
(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
$23 million
as of
February 29, 2020
. The maturities for obligations guaranteed by CFC extend through 2031.
63
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
NOTE 3—INVESTMENT SECURITIES
|
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
The following table presents the fair value of our equity securities, all of which had readily determinable fair values, as of
February 29, 2020 and May 31, 2019
.
|
(Dollars in thousands)
|
February 29, 2020
|
May 31, 2019
|
||||||
|
Equity securities at fair value:
|
||||||||
|
Farmer Mac—Series A, B and C non-cumulative preferred stock
|
$
|
59,200
|
|
$
|
82,445
|
|
||
|
Farmer Mac—class A common stock
|
5,358
|
|
5,088
|
|
||||
|
Total equity securities at fair value
|
$
|
64,558
|
|
$
|
87,533
|
|
||
We recognized net unrealized gains on our investments in equity securities of
$1 million
and
$2 million
during the three and
nine months ended February 29, 2020
, respectively. We recognized net unrealized gains on our investments in equity securities of
$2 million
during the three months ended
February 28, 2019
and net unrealized losses of less than
$1 million
during the
nine months ended February 28, 2019
. These unrealized amounts are reported as a component of non-interest income on our condensed consolidated statements of operations.
On June 12, 2019, Farmer Mac redeemed its Series B non-cumulative preferred stock at a redemption price of
$25.00
per share, plus any declared and unpaid dividends through and including the redemption date. The amortized cost of our investment in the Farmer Mac Series B non-cumulative preferred stock was
$25 million
as of the redemption date, which equaled the per share redemption price.
Debt Securities
We currently classify and account for our investments in debt securities as held to maturity 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 held to maturity 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.
64
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 debt securities and the corresponding gross unrealized gains and losses, by classification category and major security type, as of
February 29, 2020 and May 31, 2019
.
|
|
|
February 29, 2020
|
||||||||||||||
|
(Dollars in thousands)
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
||||||||
|
Debt securities held-to-maturity:
|
||||||||||||||||
|
Certificates of deposit
|
$
|
9,135
|
|
$
|
1
|
|
$
|
—
|
|
$
|
9,136
|
|
||||
|
Commercial paper
|
2,494
|
|
—
|
|
—
|
|
2,494
|
|
||||||||
|
U.S. treasury and agency debt securities
|
4,569
|
|
266
|
|
—
|
|
4,835
|
|
||||||||
|
Corporate debt securities
|
485,409
|
|
13,327
|
|
(27
|
)
|
498,709
|
|
||||||||
|
Commercial MBS:
|
||||||||||||||||
|
Agency
|
7,213
|
|
553
|
|
—
|
|
7,766
|
|
||||||||
|
Non-agency
|
3,327
|
|
—
|
|
(5
|
)
|
3,322
|
|
||||||||
|
Total commercial MBS
|
10,540
|
|
553
|
|
(5
|
)
|
11,088
|
|
||||||||
|
U.S. state and municipality debt securities
|
9,602
|
|
699
|
|
—
|
|
10,301
|
|
||||||||
|
Foreign government debt securities
|
1,264
|
|
68
|
|
—
|
|
1,332
|
|
||||||||
|
Other ABS
(1)
|
48,962
|
|
566
|
|
—
|
|
49,528
|
|
||||||||
|
Total debt securities held-to-maturity
|
$
|
571,975
|
|
$
|
15,480
|
|
$
|
(32
|
)
|
$
|
587,423
|
|
||||
|
|
|
May 31, 2019
|
||||||||||||||
|
(Dollars in thousands)
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
||||||||
|
Debt securities held-to-maturity:
|
||||||||||||||||
|
Certificates of deposit
|
$
|
1,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,000
|
|
||||
|
Commercial paper
|
12,395
|
|
—
|
|
—
|
|
12,395
|
|
||||||||
|
U.S. agency debt securities
|
3,207
|
|
108
|
|
—
|
|
3,315
|
|
||||||||
|
Corporate debt securities
|
478,578
|
|
4,989
|
|
(912
|
)
|
482,655
|
|
||||||||
|
Commercial MBS:
|
||||||||||||||||
|
Agency
|
7,255
|
|
291
|
|
—
|
|
7,546
|
|
||||||||
|
Non-agency
|
3,453
|
|
—
|
|
(7
|
)
|
3,446
|
|
||||||||
|
Total commercial MBS
|
10,708
|
|
291
|
|
(7
|
)
|
10,992
|
|
||||||||
|
U.S. state and municipality debt securities
|
9,608
|
|
352
|
|
—
|
|
9,960
|
|
||||||||
|
Foreign government debt securities
|
1,254
|
|
42
|
|
—
|
|
1,296
|
|
||||||||
|
Other ABS
(1)
|
48,694
|
|
290
|
|
(48
|
)
|
48,936
|
|
||||||||
|
Total debt securities held-to-maturity
|
$
|
565,444
|
|
$
|
6,072
|
|
$
|
(967
|
)
|
$
|
570,549
|
|
||||
____________________________
(1)
Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.
65
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
February 29, 2020
and
May 31, 2019
. 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.
|
February 29, 2020
|
||||||||||||||||||||||||
|
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 debt securities
|
$
|
5,470
|
|
$
|
(2
|
)
|
$
|
4,783
|
|
$
|
(25
|
)
|
$
|
10,253
|
|
$
|
(27
|
)
|
||||||
|
Commercial MBS, non-agency
|
3,318
|
|
(5
|
)
|
—
|
|
—
|
|
3,318
|
|
(5
|
)
|
||||||||||||
|
Other ABS
(1) (2)
|
9
|
|
—
|
|
—
|
|
—
|
|
9
|
|
—
|
|
||||||||||||
|
Total debt securities held-to-maturity
|
$
|
8,797
|
|
$
|
(7
|
)
|
|
$
|
4,783
|
|
|
$
|
(25
|
)
|
|
$
|
13,580
|
|
|
$
|
(32
|
)
|
||
|
May 31, 2019
|
||||||||||||||||||||||||
|
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:
|
||||||||||||||||||||||||
|
Commercial paper
(2)
|
$
|
2,688
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,688
|
|
$
|
—
|
|
||||||
|
Corporate debt securities
|
45,999
|
|
(198
|
)
|
164,086
|
|
(714
|
)
|
210,085
|
|
(912
|
)
|
||||||||||||
|
Commercial MBS, non-agency
|
1,996
|
|
(4
|
)
|
1,448
|
|
(3
|
)
|
3,444
|
|
(7
|
)
|
||||||||||||
|
Other ABS
(1)
|
1,982
|
|
(4
|
)
|
13,840
|
|
(44
|
)
|
15,822
|
|
(48
|
)
|
||||||||||||
|
Total debt securities held-to-maturity
|
$
|
52,665
|
|
$
|
(206
|
)
|
$
|
179,374
|
|
$
|
(761
|
)
|
$
|
232,039
|
|
$
|
(967
|
)
|
||||||
____________________________
(1)
Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.
(2)
Unrealized losses on the other ABS and commercial paper investments are less than
$1,000
.
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
12
as of
February 29, 2020
. 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.
66
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 held-to-maturity investment securities as of
February 29, 2020
and
May 31, 2019
. 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.
|
February 29, 2020
|
||||||||||||||||||||
|
(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
|
$
|
8,135
|
|
$
|
1,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
9,135
|
|
|||||
|
Commercial paper
|
2,494
|
|
—
|
|
—
|
|
—
|
|
2,494
|
|
||||||||||
|
U.S. treasury and agency debt securities
|
—
|
|
3,217
|
|
1,352
|
|
—
|
|
4,569
|
|
||||||||||
|
Corporate debt securities
|
70,757
|
|
406,648
|
|
8,004
|
|
—
|
|
485,409
|
|
||||||||||
|
Commercial MBS:
|
||||||||||||||||||||
|
Agency
|
—
|
|
7,213
|
|
—
|
|
—
|
|
7,213
|
|
||||||||||
|
Non-agency
|
—
|
|
—
|
|
—
|
|
3,327
|
|
3,327
|
|
||||||||||
|
Total commercial MBS
|
—
|
|
7,213
|
|
—
|
|
3,327
|
|
10,540
|
|
||||||||||
|
U.S. state and municipality debt securities
|
—
|
|
9,602
|
|
—
|
|
—
|
|
9,602
|
|
||||||||||
|
Foreign government debt securities
|
—
|
|
1,264
|
|
—
|
|
—
|
|
1,264
|
|
||||||||||
|
Other ABS
(1)
|
347
|
|
46,051
|
|
2,564
|
|
—
|
|
48,962
|
|
||||||||||
|
Total
|
$
|
81,733
|
|
$
|
474,995
|
|
$
|
11,920
|
|
$
|
3,327
|
|
$
|
571,975
|
|
|||||
|
Fair value:
|
||||||||||||||||||||
|
Certificates of deposit
|
$
|
8,136
|
|
$
|
1,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
9,136
|
|
|||||
|
Commercial paper
|
2,494
|
|
—
|
|
—
|
|
—
|
|
2,494
|
|
||||||||||
|
U.S. treasury and agency debt securities
|
—
|
|
3,409
|
|
1,426
|
|
—
|
|
4,835
|
|
||||||||||
|
Corporate debt securities
|
70,991
|
|
419,455
|
|
8,263
|
|
—
|
|
498,709
|
|
||||||||||
|
Commercial MBS:
|
||||||||||||||||||||
|
Agency
|
—
|
|
7,766
|
|
—
|
|
—
|
|
7,766
|
|
||||||||||
|
Non-Agency
|
—
|
|
—
|
|
—
|
|
3,322
|
|
3,322
|
|
||||||||||
|
Total commercial MBS
|
—
|
|
7,766
|
|
—
|
|
3,322
|
|
11,088
|
|
||||||||||
|
U.S. state and municipality debt securities
|
—
|
|
10,301
|
|
—
|
|
—
|
|
10,301
|
|
||||||||||
|
Foreign government debt securities
|
—
|
|
1,332
|
|
—
|
|
—
|
|
1,332
|
|
||||||||||
|
Other ABS
(1)
|
347
|
|
46,583
|
|
2,598
|
|
—
|
|
49,528
|
|
||||||||||
|
Total
|
$
|
81,968
|
|
$
|
489,846
|
|
$
|
12,287
|
|
$
|
3,322
|
|
$
|
587,423
|
|
|||||
|
Weighted average coupon
(2)
|
2.48
|
%
|
2.94
|
%
|
2.73
|
%
|
2.49
|
%
|
2.87
|
%
|
||||||||||
67
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
May 31, 2019
|
||||||||||||||||||||
|
(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
|
$
|
—
|
|
$
|
1,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,000
|
|
|||||
|
Commercial paper
|
12,395
|
|
—
|
|
—
|
|
—
|
|
12,395
|
|
||||||||||
|
U.S. agency debt securities
|
—
|
|
2,678
|
|
529
|
|
—
|
|
3,207
|
|
||||||||||
|
Corporate debt securities
|
51,923
|
|
414,788
|
|
11,867
|
|
—
|
|
478,578
|
|
||||||||||
|
Commercial MBS:
|
||||||||||||||||||||
|
Agency
|
—
|
|
310
|
|
6,945
|
|
—
|
|
7,255
|
|
||||||||||
|
Non-agency
|
—
|
|
—
|
|
—
|
|
3,453
|
|
3,453
|
|
||||||||||
|
Total Commercial MBS
|
—
|
|
310
|
|
6,945
|
|
3,453
|
|
10,708
|
|
||||||||||
|
U.S. state and municipality debt securities
|
—
|
|
9,608
|
|
—
|
|
—
|
|
9,608
|
|
||||||||||
|
Foreign government debt securities
|
—
|
|
1,254
|
|
—
|
|
—
|
|
1,254
|
|
||||||||||
|
Other ABS
(1)
|
510
|
|
45,730
|
|
2,454
|
|
—
|
|
48,694
|
|
||||||||||
|
Total
|
$
|
64,828
|
|
$
|
475,368
|
|
$
|
21,795
|
|
$
|
3,453
|
|
$
|
565,444
|
|
|||||
|
Fair value:
|
||||||||||||||||||||
|
Certificates of deposit
|
$
|
—
|
|
$
|
1,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,000
|
|
|||||
|
Commercial paper
|
12,395
|
|
—
|
|
—
|
|
—
|
|
12,395
|
|
||||||||||
|
U.S. agency debt securities
|
—
|
|
2,769
|
|
546
|
|
—
|
|
3,315
|
|
||||||||||
|
Corporate debt securities
|
51,818
|
|
418,606
|
|
12,231
|
|
—
|
|
482,655
|
|
||||||||||
|
Commercial MBS:
|
||||||||||||||||||||
|
Agency
|
—
|
|
317
|
|
7,229
|
|
—
|
|
7,546
|
|
||||||||||
|
Non-agency
|
—
|
|
—
|
|
—
|
|
3,446
|
|
3,446
|
|
||||||||||
|
Total commercial MBS
|
—
|
|
317
|
|
7,229
|
|
3,446
|
|
10,992
|
|
||||||||||
|
U.S. state and municipality debt securities
|
—
|
|
9,960
|
|
—
|
|
—
|
|
9,960
|
|
||||||||||
|
Foreign government debt securities
|
—
|
|
1,296
|
|
—
|
|
—
|
|
1,296
|
|
||||||||||
|
Other ABS
(1)
|
509
|
|
45,916
|
|
2,511
|
|
—
|
|
48,936
|
|
||||||||||
|
Total
|
$
|
64,722
|
|
$
|
479,864
|
|
$
|
22,517
|
|
$
|
3,446
|
|
$
|
570,549
|
|
|||||
|
Weighted average coupon
(2)
|
2.08
|
%
|
3.10
|
%
|
3.07
|
%
|
3.26
|
%
|
2.98
|
%
|
||||||||||
____________________________
(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 held-to-maturity investment securities was
three years
and
2.87%
, respectively, as of
February 29, 2020
. 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
February 29, 2020
.
68
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Realized Gains and Losses
We did not sell any of our debt securities during the three and
nine months ended February 29, 2020
, and therefore have not recorded any realized gains or losses. In connection with Farmer Mac’s early redemption of its Series B non-cumulative preferred stock, we recorded a realized loss on equity securities of
$0.2 million
for the
nine months ended February 29, 2020
.
Subsequent Events
In light of the extreme volatility and disruptions in the capital and credit markets in early March 2020 resulting from the COVID-19 crisis, including a significant decline in corporate debt and equity issuances and a deterioration in the commercial paper market, we took a number of precautionary actions in March to enhance our financial flexibility by bolstering our cash position to ensure we have adequate cash readily available to meet both expected and unexpected cash needs without adversely affecting our daily operations. These actions included, among others, revising our objective for the use of our held-to-maturity investment portfolio from previously serving as a supplemental source of liquidity to serving as a readily available source of liquidity and executing a plan for the orderly liquidation of a portion of debt securities in our investment portfolio. We therefore transferred the securities in our held-to-maturity investment portfolio to trading and, in conjunction with the transfer, recognized an unrealized gain of
$2 million
in earnings in the fourth quarter of fiscal year 2020. We subsequently suspended the plan for the orderly liquidation of a portion of debt securities in our investment portfolio.
|
NOTE 4—LOANS
|
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
February 29, 2020 and May 31, 2019
.
69
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
February 29, 2020
|
May 31, 2019
|
||||||||||||||
|
(Dollars in thousands)
|
Loans
Outstanding
|
Unadvanced
Commitments
(1)
|
Loans
Outstanding
|
Unadvanced
Commitments
(1)
|
||||||||||||
|
Loan type:
|
|
|
|
|
||||||||||||
|
Long-term loans:
|
||||||||||||||||
|
Fixed rate
|
$
|
24,087,516
|
|
$
|
—
|
|
$
|
23,094,253
|
|
$
|
—
|
|
||||
|
Variable rate
|
931,642
|
|
5,445,168
|
|
1,066,880
|
|
5,448,636
|
|
||||||||
|
Total long-term loans
|
25,019,158
|
|
5,445,168
|
|
24,161,133
|
|
5,448,636
|
|
||||||||
|
Lines of credit
|
1,791,943
|
|
7,848,155
|
|
1,744,531
|
|
7,788,922
|
|
||||||||
|
Total loans outstanding
|
26,811,101
|
|
13,293,323
|
|
25,905,664
|
|
13,237,558
|
|
||||||||
|
Deferred loan origination costs
|
|
11,429
|
|
|
—
|
|
|
11,240
|
|
|
—
|
|
||||
|
Loans to members
|
|
$
|
26,822,530
|
|
|
$
|
13,293,323
|
|
|
$
|
25,916,904
|
|
|
$
|
13,237,558
|
|
|
Member class:
|
|
|
|
|
||||||||||||
|
CFC:
|
|
|
|
|
||||||||||||
|
Distribution
|
$
|
20,997,144
|
|
$
|
8,743,436
|
|
$
|
20,155,266
|
|
$
|
8,773,018
|
|
||||
|
Power supply
|
4,681,862
|
|
3,518,993
|
|
4,578,841
|
|
3,466,680
|
|
||||||||
|
Statewide and associate
|
92,473
|
|
169,893
|
|
83,569
|
|
165,687
|
|
||||||||
|
Total CFC
|
25,771,479
|
|
12,432,322
|
|
24,817,676
|
|
12,405,385
|
|
||||||||
|
NCSC
|
686,061
|
|
542,323
|
|
742,888
|
|
552,840
|
|
||||||||
|
RTFC
|
353,561
|
|
318,678
|
|
345,100
|
|
279,333
|
|
||||||||
|
Total loans outstanding
|
26,811,101
|
|
13,293,323
|
|
25,905,664
|
|
13,237,558
|
|
||||||||
|
Deferred loan origination costs
|
11,429
|
|
—
|
|
11,240
|
|
—
|
|
||||||||
|
Loans to members
|
$
|
26,822,530
|
|
$
|
13,293,323
|
|
$
|
25,916,904
|
|
$
|
13,237,558
|
|
||||
____________________________
(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
February 29, 2020
and the related maturities by fiscal year and thereafter by loan type:
|
|
Available
Balance
|
Notional Maturities of Unadvanced Loan Commitments
|
||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
||||||||||||||||||||||
|
Line of credit loans
|
$
|
7,848,155
|
|
|
$
|
71,827
|
|
|
$
|
3,988,057
|
|
|
$
|
566,254
|
|
|
$
|
1,269,017
|
|
|
$
|
1,010,428
|
|
|
$
|
942,572
|
|
|
|
Long-term loans
|
5,445,168
|
|
|
122,358
|
|
|
481,510
|
|
|
1,280,976
|
|
|
935,815
|
|
|
1,678,346
|
|
|
946,163
|
|
||||||||
|
Total
|
$
|
13,293,323
|
|
|
$
|
194,185
|
|
|
$
|
4,469,567
|
|
|
$
|
1,847,230
|
|
|
$
|
2,204,832
|
|
|
$
|
2,688,774
|
|
|
$
|
1,888,735
|
|
|
Unadvanced line of credit commitments accounted for
59%
of total unadvanced loan commitments as of
February 29, 2020
, while unadvanced long-term loan commitments accounted for
41%
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
70
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
$5,445 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
$13,293 million
as of
February 29, 2020
is not necessarily representative of our future funding requirements.
Unadvanced Loan Commitments—Conditional
The substantial majority of our line of credit commitments and all of our unadvanced long-term loan commitments include material adverse change clauses. Unadvanced loan commitments subject to material adverse change clauses totaled
$10,293 million
and
$10,294 million
as of
February 29, 2020 and May 31, 2019
, respectively. Prior to making an advance on these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. In some cases, the borrower’s access to the full amount of the facility is further constrained by the designated purpose, imposition of borrower-specific restrictions or by additional conditions that must be met prior to advancing funds.
Unadvanced Loan Commitments—Unconditional
Unadvanced loan commitments not subject to material adverse change clauses at the time of each advance consisted of unadvanced committed lines of credit totaling
$3,000 million
and
$2,944 million
as of
February 29, 2020 and May 31, 2019
, 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
February 29, 2020
.
|
|
Available
Balance
|
Notional Maturities of Unconditional Committed Lines of Credit
|
||||||||||||
|
(Dollars in thousands)
|
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
||||||||
|
Committed lines of credit
|
$3,000,139
|
$370
|
$266,022
|
$172,506
|
$1,046,556
|
$711,660
|
$803,025
|
|||||||
Loan Sales
We transfer, from time to time, loans to third parties. We sold CFC loans with outstanding balances totaling
$87 million
, at par for cash, during the
nine months ended February 29, 2020
. We did not have any loan sales during the nine months ended
February 28, 2019
. 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 USDA’s Guaranteed Underwriter Program
71
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(“Guaranteed Underwriter Program”) and the amount of the corresponding debt outstanding as of
February 29, 2020 and May 31, 2019
. See “Note 6—Short-Term Borrowings” and “Note 7—Long-Term Debt” for information on our borrowings.
|
(Dollars in thousands)
|
February 29, 2020
|
May 31, 2019
|
||||||
|
Collateral trust bonds:
|
|
|
||||||
|
2007 indenture:
|
|
|
||||||
|
Distribution system mortgage notes
|
$
|
8,340,565
|
|
$
|
8,775,231
|
|
||
|
RUS-guaranteed loans qualifying as permitted investments
|
130,101
|
|
134,678
|
|
||||
|
Total pledged collateral
|
$
|
8,470,666
|
|
$
|
8,909,909
|
|
||
|
Collateral trust bonds outstanding
|
7,422,711
|
|
7,622,711
|
|
||||
|
1994 indenture:
|
|
|
||||||
|
Distribution system mortgage notes
|
$
|
44,882
|
|
$
|
47,331
|
|
||
|
Collateral trust bonds outstanding
|
35,000
|
|
40,000
|
|
||||
|
Farmer Mac:
|
|
|
||||||
|
Distribution and power supply system mortgage notes
|
$
|
3,729,209
|
|
$
|
3,751,798
|
|
||
|
Notes payable outstanding
|
2,827,340
|
|
3,054,914
|
|
||||
|
Clean Renewable Energy Bonds Series 2009A:
|
|
|
||||||
|
Distribution and power supply system mortgage notes
|
$
|
9,200
|
|
$
|
10,349
|
|
||
|
Cash
|
—
|
|
415
|
|
||||
|
Total pledged collateral
|
$
|
9,200
|
|
$
|
10,764
|
|
||
|
Notes payable outstanding
|
7,567
|
|
9,225
|
|
||||
|
Federal Financing Bank:
|
||||||||
|
Distribution and power supply system mortgage notes
|
$
|
6,543,954
|
|
$
|
6,157,218
|
|
||
|
Notes payable outstanding
|
5,665,403
|
|
5,410,507
|
|
||||
Credit Concentration
Concentrations may exist when there are amounts loaned to borrowers engaged in similar activities or in geographic areas that would cause them to be similarly impacted by economic or other conditions or when there are large exposures to single borrowers. As a tax-exempt, member-owned finance cooperative, CFC’s principal focus is to provide funding to its rural electric utility cooperative members to assist them in acquiring, constructing and operating electric distribution systems, power supply systems and related facilities. We serve electric and telecommunications members throughout the United States, with a total of
894
borrowers located in
49
states as of
February 29, 2020
. Loans to borrowers in Texas accounted for approximately
16%
and
15%
of total loans outstanding as of
February 29, 2020 and May 31, 2019
, respectively, representing the largest concentration of outstanding loans to borrowers and the largest number of borrowers in any one state.
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
February 29, 2020
, unchanged from
May 31, 2019
. The remaining loans outstanding in our portfolio were to RTFC members, affiliates and associates in the telecommunications industry. The outstanding loan exposure for our
20
largest borrowers was
22%
as of both
February 29, 2020 and May 31, 2019
. The
20
72
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
largest borrowers consisted of
11
distribution systems and
nine
power supply systems as of
February 29, 2020
. The
20
largest borrowers consisted of
10
distribution systems,
nine
power supply systems and
one
NCSC associate as of
May 31, 2019
. The largest total outstanding exposure to a single borrower or controlled group represented approximately
2%
of total loans outstanding as of both
February 29, 2020 and May 31, 2019
.
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
$577 million
and
$619 million
as of
February 29, 2020 and May 31, 2019
, 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
February 29, 2020
. Also, we had long-term loans totaling
$149 million
and
$154 million
as of
February 29, 2020 and May 31, 2019
, 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.
Borrower Risk Ratings
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.
73
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 as of
February 29, 2020 and May 31, 2019
. If a parent company provides a guarantee of full repayment of loans of a subsidiary borrower, we group the outstanding loans in the borrower risk rating category of the guarantor parent company instead of the risk rating category of the subsidiary borrower for purposes of estimating the allowance for loan losses. The borrower risk ratings for loans outstanding presented in the tables below are based on this risk rating grouping.
|
|
February 29, 2020
|
|||||||||||||||||||
|
(Dollars in thousands)
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Total
|
|||||||||||||||
|
CFC:
|
|
|
||||||||||||||||||
|
Distribution
|
$
|
20,869,205
|
|
$
|
8,617
|
|
$
|
119,322
|
|
$
|
—
|
|
$
|
20,997,144
|
|
|||||
|
Power supply
|
4,634,423
|
|
—
|
|
47,439
|
|
—
|
|
4,681,862
|
|
||||||||||
|
Statewide and associate
|
76,232
|
|
16,241
|
|
—
|
|
—
|
|
92,473
|
|
||||||||||
|
CFC total
|
25,579,860
|
|
24,858
|
|
166,761
|
|
—
|
|
25,771,479
|
|
||||||||||
|
NCSC
|
686,061
|
|
—
|
|
—
|
|
—
|
|
686,061
|
|
||||||||||
|
RTFC
|
339,293
|
|
9,051
|
|
5,217
|
|
—
|
|
353,561
|
|
||||||||||
|
Total loans outstanding
|
$
|
26,605,214
|
|
$
|
33,909
|
|
$
|
171,978
|
|
$
|
—
|
|
$
|
26,811,101
|
|
|||||
|
May 31, 2019
|
||||||||||||||||||||
|
(Dollars in thousands)
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Total
|
|||||||||||||||
|
CFC:
|
|
|
||||||||||||||||||
|
Distribution
|
$
|
20,022,193
|
|
$
|
10,375
|
|
$
|
122,698
|
|
$
|
—
|
|
$
|
20,155,266
|
|
|||||
|
Power supply
|
4,530,708
|
|
—
|
|
48,133
|
|
—
|
|
4,578,841
|
|
||||||||||
|
Statewide and associate
|
68,569
|
|
15,000
|
|
—
|
|
—
|
|
83,569
|
|
||||||||||
|
CFC total
|
24,621,470
|
|
25,375
|
|
170,831
|
|
—
|
|
24,817,676
|
|
||||||||||
|
NCSC
|
742,888
|
|
—
|
|
—
|
|
—
|
|
742,888
|
|
||||||||||
|
RTFC
|
339,508
|
|
—
|
|
5,592
|
|
—
|
|
345,100
|
|
||||||||||
|
Total loans outstanding
|
$
|
25,703,866
|
|
$
|
25,375
|
|
$
|
176,423
|
|
$
|
—
|
|
$
|
25,905,664
|
|
|||||
The substantial majority of the loans in the substandard category are attributable to loans to one electric distribution cooperative borrower and its subsidiary totaling
$167 million
and
$171 million
as of
February 29, 2020 and May 31, 2019
, respectively. The electric distribution cooperative borrower owns and operates a distribution and transmission system. Several years ago, it established a subsidiary to deploy retail broadband service in underserved rural communities. Although the borrower has experienced financial difficulties due to recent net losses and liquidity constraints, the borrower and its subsidiary are current with regard to all principal and interest payments and have never been delinquent. The borrower, which operates in a territory that is not rate-regulated, increased its electric and broadband rates in March 2019 and has begun taking other actions to improve its financial performance and liquidity. All of the loans outstanding to this borrower were secured under our typical collateral requirements for long-term loan advances as of
February 29, 2020
. 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
February 29, 2020
.
Payment Status of Loans
The following tables present the payment status of loans outstanding by member class as of
February 29, 2020
and
May 31, 2019
. As indicated in the table, we did not have any past due loans as of either
February 29, 2020
or
May 31, 2019
.
74
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
February 29, 2020
|
|||||||||||||||||||||||
|
(Dollars in thousands)
|
Current
|
30-89 Days Past Due
|
90 Days or More
Past Due
(1)
|
Total
Past Due
|
Total Loans Outstanding
|
Nonaccrual Loans
|
||||||||||||||||||
|
CFC:
|
|
|
|
|
|
|
||||||||||||||||||
|
Distribution
|
$
|
20,997,144
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
20,997,144
|
|
$
|
—
|
|
||||||
|
Power supply
|
4,681,862
|
|
—
|
|
—
|
|
—
|
|
4,681,862
|
|
—
|
|
||||||||||||
|
Statewide and associate
|
92,473
|
|
—
|
|
—
|
|
—
|
|
92,473
|
|
—
|
|
||||||||||||
|
CFC total
|
25,771,479
|
|
—
|
|
—
|
|
—
|
|
25,771,479
|
|
—
|
|
||||||||||||
|
NCSC
|
686,061
|
|
—
|
|
—
|
|
—
|
|
686,061
|
|
—
|
|
||||||||||||
|
RTFC
|
353,561
|
|
—
|
|
—
|
|
—
|
|
353,561
|
|
—
|
|
||||||||||||
|
Total loans outstanding
|
$
|
26,811,101
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
26,811,101
|
|
$
|
—
|
|
||||||
|
Percentage of total loans
|
100.00
|
%
|
—
|
%
|
—
|
%
|
—
|
%
|
100.00
|
%
|
—
|
%
|
||||||||||||
|
|
May 31, 2019
|
|||||||||||||||||||||||
|
(Dollars in thousands)
|
Current
|
30-89 Days Past Due
|
90 Days or More
Past Due
(1)
|
Total
Past Due |
Total Loans Outstanding
|
Nonaccrual Loans
|
||||||||||||||||||
|
CFC:
|
|
|
|
|
|
|
||||||||||||||||||
|
Distribution
|
$
|
20,155,266
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
20,155,266
|
|
$
|
—
|
|
||||||
|
Power supply
|
4,578,841
|
|
—
|
|
—
|
|
—
|
|
4,578,841
|
|
—
|
|
||||||||||||
|
Statewide and associate
|
83,569
|
|
—
|
|
—
|
|
—
|
|
83,569
|
|
—
|
|
||||||||||||
|
CFC total
|
24,817,676
|
|
—
|
|
—
|
|
—
|
|
24,817,676
|
|
—
|
|
||||||||||||
|
NCSC
|
742,888
|
|
—
|
|
—
|
|
—
|
|
742,888
|
|
—
|
|
||||||||||||
|
RTFC
|
345,100
|
|
—
|
|
—
|
|
—
|
|
345,100
|
|
—
|
|
||||||||||||
|
Total loans outstanding
|
$
|
25,905,664
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
25,905,664
|
|
$
|
—
|
|
||||||
|
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
nine months ended February 29, 2020
. 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
February 29, 2020 and May 31, 2019
.
75
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
February 29, 2020
|
May 31, 2019
|
||||||||||||||||||||
|
(Dollars in thousands)
|
Loans
Outstanding
|
% of Total Loans
|
Unadvanced
Commitments
|
Loans
Outstanding
|
% of Total Loans
|
Unadvanced
Commitments
|
||||||||||||||||
|
TDR loans:
|
|
|
|
|
||||||||||||||||||
|
Performing TDR loans:
|
|
|
|
|
||||||||||||||||||
|
CFC/Distribution
|
$
|
5,755
|
|
0.02
|
%
|
$
|
—
|
|
$
|
6,261
|
|
0.03
|
%
|
$
|
—
|
|
||||||
|
RTFC
|
5,217
|
|
0.02
|
|
—
|
|
5,592
|
|
0.02
|
|
—
|
|
||||||||||
|
Total performing TDR loans
|
10,972
|
|
0.04
|
|
—
|
|
11,853
|
|
0.05
|
|
—
|
|
||||||||||
|
Total TDR loans
|
$
|
10,972
|
|
0.04
|
%
|
$
|
—
|
|
$
|
11,853
|
|
0.05
|
%
|
$
|
—
|
|
||||||
We did not have any TDR loans classified as nonperforming as of
February 29, 2020
or
May 31, 2019
. TDR loans classified as performing as of
February 29, 2020 and May 31, 2019
were performing in accordance with the terms of their respective restructured loan agreement and on accrual status as of the respective reported dates. The TDR loan outstanding amount for RTFC relates to a loan with one borrower. During the quarter ended February 29, 2020, we amended the restructured loan agreement with the borrower to extend the maturity by two years. The loan will continue to amortize monthly through the extended maturity date and will remain on accrual status.
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
February 29, 2020
or
May 31, 2019
.
We had no foregone interest income for loans on nonaccrual status during the three and
nine months ended February 29, 2020 and February 28, 2019
.
Impaired Loans
The following table provides information on loans classified as individually impaired as of
February 29, 2020 and May 31, 2019
.
|
|
February 29, 2020
|
May 31, 2019
|
||||||||||||||
|
(Dollars in thousands)
|
Recorded
Investment
|
Related
Allowance
|
Recorded
Investment
|
Related
Allowance
|
||||||||||||
|
With no specific allowance recorded:
|
|
|
|
|
||||||||||||
|
CFC
|
$
|
5,755
|
|
$
|
—
|
|
$
|
6,261
|
|
$
|
—
|
|
||||
|
With a specific allowance recorded:
|
|
|
|
|
||||||||||||
|
RTFC
|
5,217
|
|
1,065
|
|
5,592
|
|
1,021
|
|
||||||||
|
Total impaired loans
|
$
|
10,972
|
|
$
|
1,065
|
|
$
|
11,853
|
|
$
|
1,021
|
|
||||
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 and
nine months ended February 29, 2020 and February 28, 2019
.
76
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
Three Months Ended
|
||||||||||||||||
|
February 29, 2020
|
February 28, 2019
|
February 29, 2020
|
February 28, 2019
|
|||||||||||||
|
(Dollars in thousands)
|
Average Recorded Investment
|
Interest Income Recognized
|
||||||||||||||
|
CFC
|
$
|
5,755
|
|
$
|
6,261
|
|
$
|
143
|
|
$
|
137
|
|
||||
|
RTFC
|
5,300
|
|
5,800
|
|
67
|
|
72
|
|
||||||||
|
Total impaired loans
|
$
|
11,055
|
|
$
|
12,061
|
|
$
|
210
|
|
$
|
209
|
|
||||
|
Nine Months Ended
|
||||||||||||||||
|
February 29, 2020
|
February 28, 2019
|
February 29, 2020
|
February 28, 2019
|
|||||||||||||
|
(Dollars in thousands)
|
Average Recorded Investment
|
Interest Income Recognized
|
||||||||||||||
|
CFC
|
$
|
5,918
|
|
$
|
6,343
|
|
$
|
424
|
|
$
|
416
|
|
||||
|
RTFC
|
5,423
|
|
5,924
|
|
204
|
|
222
|
|
||||||||
|
Total impaired loans
|
$
|
11,341
|
|
$
|
12,267
|
|
$
|
628
|
|
$
|
638
|
|
||||
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 and
nine months ended February 29, 2020 and February 28, 2019
.
|
NOTE 5—ALLOWANCE FOR LOAN LOSSES
|
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 condensed consolidated statements of operations.
The following tables summarize changes, by company, in the allowance for loan losses as of and for the three and
nine months ended February 29, 2020 and February 28, 2019
.
|
|
Three Months Ended February 29, 2020
|
|||||||||||||||
|
(Dollars in thousands)
|
CFC
|
NCSC
|
RTFC
|
Total
|
||||||||||||
|
Balance as of November 30, 2019
|
$
|
13,076
|
|
$
|
810
|
|
$
|
2,634
|
|
$
|
16,520
|
|
||||
|
Provision for loan losses
|
153
|
|
47
|
|
2,182
|
|
2,382
|
|
||||||||
|
Balance as of February 29, 2020
|
$
|
13,229
|
|
$
|
857
|
|
$
|
4,816
|
|
$
|
18,902
|
|
||||
77
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Three Months Ended February 28, 2019
|
|||||||||||||||
|
(Dollars in thousands)
|
CFC
|
NCSC
|
RTFC
|
Total
|
||||||||||||
|
Balance as of November 30, 2018
|
$
|
12,174
|
|
$
|
1,969
|
|
$
|
2,761
|
|
$
|
16,904
|
|
||||
|
Provision (benefit) for loan losses
|
146
|
|
116
|
|
(80
|
)
|
182
|
|
||||||||
|
Balance as of February 28, 2019
|
$
|
12,320
|
|
$
|
2,085
|
|
$
|
2,681
|
|
$
|
17,086
|
|
||||
|
|
Nine Months Ended February 29, 2020
|
|||||||||||||||
|
(Dollars in thousands)
|
CFC
|
NCSC
|
RTFC
|
Total
|
||||||||||||
|
Balance as of May 31, 2019
|
$
|
13,120
|
|
$
|
2,007
|
|
$
|
2,408
|
|
$
|
17,535
|
|
||||
|
Provision (benefit) for loan losses
|
109
|
|
(1,150
|
)
|
2,408
|
|
1,367
|
|
||||||||
|
Balance as of February 29, 2020
|
$
|
13,229
|
|
$
|
857
|
|
$
|
4,816
|
|
$
|
18,902
|
|
||||
|
|
Nine Months Ended February 28, 2019
|
|||||||||||||||
|
(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
|
20
|
|
3
|
|
(1,738
|
)
|
(1,715
|
)
|
||||||||
|
Balance as of February 28, 2019
|
$
|
12,320
|
|
$
|
2,085
|
|
$
|
2,681
|
|
$
|
17,086
|
|
||||
The following tables present, by company, the components of our allowance for loan losses and the recorded investment of the related loans as of
February 29, 2020 and May 31, 2019
.
|
|
February 29, 2020
|
|||||||||||||||
|
(Dollars in thousands)
|
CFC
|
NCSC
|
RTFC
|
Total
|
||||||||||||
|
Ending balance of the allowance:
|
|
|
|
|
||||||||||||
|
Collective allowance
|
$
|
13,229
|
|
$
|
857
|
|
$
|
3,751
|
|
$
|
17,837
|
|
||||
|
Specific allowance
|
—
|
|
—
|
|
1,065
|
|
1,065
|
|
||||||||
|
Total ending balance of the allowance
|
$
|
13,229
|
|
$
|
857
|
|
$
|
4,816
|
|
$
|
18,902
|
|
||||
|
Recorded investment in loans:
|
|
|
|
|
||||||||||||
|
Collectively evaluated loans
|
$
|
25,765,724
|
|
$
|
686,061
|
|
$
|
348,344
|
|
$
|
26,800,129
|
|
||||
|
Individually evaluated loans
|
5,755
|
|
—
|
|
5,217
|
|
10,972
|
|
||||||||
|
Total recorded investment in loans
|
$
|
25,771,479
|
|
$
|
686,061
|
|
$
|
353,561
|
|
$
|
26,811,101
|
|
||||
|
Total recorded investment in loans, net
(1)
|
$
|
25,758,250
|
|
$
|
685,204
|
|
$
|
348,745
|
|
$
|
26,792,199
|
|
||||
|
Allowance coverage ratio:
|
||||||||||||||||
|
Allowance as a percentage of total recorded investment in loans
|
0.05
|
%
|
0.12
|
%
|
1.36
|
%
|
0.07
|
%
|
||||||||
78
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
May 31, 2019
|
|||||||||||||||
|
(Dollars in thousands)
|
CFC
|
NCSC
|
RTFC
|
Total
|
||||||||||||
|
Ending balance of the allowance:
|
|
|
|
|
||||||||||||
|
Collective allowance
|
$
|
13,120
|
|
$
|
2,007
|
|
$
|
1,387
|
|
$
|
16,514
|
|
||||
|
Specific allowance
|
—
|
|
—
|
|
1,021
|
|
1,021
|
|
||||||||
|
Total ending balance of the allowance
|
$
|
13,120
|
|
$
|
2,007
|
|
$
|
2,408
|
|
$
|
17,535
|
|
||||
|
Recorded investment in loans:
|
|
|
|
|
||||||||||||
|
Collectively evaluated loans
|
$
|
24,811,415
|
|
$
|
742,888
|
|
$
|
339,508
|
|
$
|
25,893,811
|
|
||||
|
Individually evaluated loans
|
6,261
|
|
—
|
|
5,592
|
|
11,853
|
|
||||||||
|
Total recorded investment in loans
|
$
|
24,817,676
|
|
$
|
742,888
|
|
$
|
345,100
|
|
$
|
25,905,664
|
|
||||
|
Total recorded investment in loans, net
(1)
|
$
|
24,804,556
|
|
$
|
740,881
|
|
$
|
342,692
|
|
$
|
25,888,129
|
|
||||
|
Allowance coverage ratio:
|
||||||||||||||||
|
Allowance as a percentage of total recorded investment in loans
|
0.05
|
%
|
0.27
|
%
|
0.70
|
%
|
0.07
|
%
|
||||||||
____________________________
(1)
Excludes unamortized deferred loan origination costs of
$11 million
as of both
February 29, 2020 and May 31, 2019
.
As noted above in “Note 4—Loans,” we did not have any loans classified as nonperforming as of either
February 29, 2020
or
May 31, 2019
.
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
February 29, 2020 and May 31, 2019
.
|
NOTE 6—SHORT-TERM BORROWINGS
|
||||
Short-term borrowings consist of borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. Our short-term borrowings totaled
$4,275 million
and accounted for
17%
of total debt outstanding as of
February 29, 2020
, compared with
$3,608 million
, or
14%
, of total debt outstanding as of
May 31, 2019
. The following table provides comparative information on our short-term borrowings as of
February 29, 2020 and May 31, 2019
.
|
(Dollars in thousands)
|
February 29, 2020
|
|
May 31, 2019
|
|||||
|
Short-term borrowings:
|
|
|
||||||
|
Commercial paper:
|
||||||||
|
Commercial paper sold through dealers, net of discounts
|
$
|
1,244,773
|
|
$
|
944,616
|
|
||
|
Commercial paper sold directly to members, at par
|
1,046,043
|
|
1,111,795
|
|
||||
|
Total commercial paper
|
2,290,816
|
|
2,056,411
|
|
||||
|
Select notes to members
|
1,352,309
|
|
1,023,952
|
|
||||
|
Daily liquidity fund notes to members
|
360,016
|
|
298,817
|
|
||||
|
Medium-term notes to members
|
272,247
|
|
228,546
|
|
||||
|
Total short-term borrowings
|
$
|
4,275,388
|
|
$
|
3,607,726
|
|
||
79
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Committed Bank Revolving Line of Credit Agreements
We had
$2,725 million
and
$2,975 million
of commitments under committed bank revolving line of credit agreements as of
February 29, 2020 and May 31, 2019
, respectively. Under our current committed bank revolving line of credit agreements, we have the ability to request up to
$300 million
of letters of credit, which would result in a reduction in the remaining available amount under the facilities.
On November 26, 2019, we amended the three-year and five-year committed bank revolving line of credit agreements to extend the maturity date of the three-year agreement to November 28, 2022, and to terminate certain bank commitments totaling
$125 million
under the three-year agreement and
$125 million
under the five-year agreement. As a result, the total commitment amount from third-parties under the three-year facility and the five-year facility is
$1,315 million
and
$1,410 million
, respectively, resulting in a combined total commitment amount under the two facilities of
$2,725 million
.
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
February 29, 2020 and May 31, 2019
.
|
February 29, 2020
|
|
May 31, 2019
|
|
|
|
|
||||||||||||||||||||||
|
(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
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,440
|
|
$
|
—
|
|
$
|
1,440
|
|
November 28, 2021
|
7.5 bps
|
||||||||
|
3-year agreement
|
1,315
|
|
—
|
|
1,315
|
|
—
|
|
—
|
|
—
|
|
November 28, 2022
|
7.5 bps
|
||||||||||||||
|
Total 3-year agreement
|
1,315
|
|
—
|
|
1,315
|
|
1,440
|
|
—
|
|
1,440
|
|
||||||||||||||||
|
5-year agreement
|
1,410
|
|
3
|
|
1,407
|
|
1,535
|
|
3
|
|
1,532
|
|
November 28, 2023
|
10 bps
|
||||||||||||||
|
Total
|
$
|
2,725
|
|
$
|
3
|
|
$
|
2,722
|
|
$
|
2,975
|
|
$
|
3
|
|
$
|
2,972
|
|
||||||||||
____________________________
(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
February 29, 2020
or
May 31, 2019
, and we were in compliance with all covenants and conditions under the agreements as of each date.
80
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
NOTE 7—LONG-TERM DEBT
|
||||
The following table displays long-term debt outstanding, by debt type, as of
February 29, 2020 and May 31, 2019
.
|
(Dollars in thousands)
|
February 29, 2020
|
May 31, 2019
|
||||||
|
Secured long-term debt:
|
|
|
|
|
||||
|
Collateral trust bonds
|
$
|
7,457,711
|
|
$
|
7,662,711
|
|
||
|
Unamortized discount
|
(239,133
|
)
|
(244,643
|
)
|
||||
|
Debt issuance costs
|
(33,914
|
)
|
(34,336
|
)
|
||||
|
Total collateral trust bonds
|
7,184,664
|
|
7,383,732
|
|
||||
|
Guaranteed Underwriter Program notes payable
|
5,665,403
|
|
5,410,507
|
|
||||
|
Farmer Mac notes payable
|
2,827,340
|
|
3,054,914
|
|
||||
|
Other secured notes payable
|
7,567
|
|
9,225
|
|
||||
|
Debt issuance costs
|
(133
|
)
|
(178
|
)
|
||||
|
Total other secured notes payable
|
7,434
|
|
9,047
|
|
||||
|
Total secured notes payable
|
8,500,177
|
|
8,474,468
|
|
||||
|
Total secured long-term debt
|
15,684,841
|
|
15,858,200
|
|
||||
|
Unsecured long-term debt:
|
||||||||
|
Medium-term notes sold through dealers
|
3,115,106
|
|
2,962,375
|
|
||||
|
Medium-term notes sold to members
|
403,989
|
|
397,080
|
|
||||
|
Subtotal medium-term notes
|
3,519,095
|
|
3,359,455
|
|
||||
|
Unamortized discount
|
(1,104
|
)
|
(931
|
)
|
||||
|
Debt issuance costs
|
(17,778
|
)
|
(19,399
|
)
|
||||
|
Total unsecured medium-term notes
|
3,500,213
|
|
3,339,125
|
|
||||
|
Unsecured notes payable
|
5,794
|
|
13,701
|
|
||||
|
Unamortized discount
|
(124
|
)
|
(187
|
)
|
||||
|
Debt issuance costs
|
(31
|
)
|
(46
|
)
|
||||
|
Total unsecured notes payable
|
5,639
|
|
13,468
|
|
||||
|
Total unsecured long-term debt
|
3,505,852
|
|
3,352,593
|
|
||||
|
Total long-term debt
|
$
|
19,190,693
|
|
$
|
19,210,793
|
|
||
Medium-Term Notes
Medium-term notes represent unsecured obligations that may be issued through dealers in the capital markets or directly to our members.
On February 5, 2020, we issued
$500 million
aggregate principal amount of
1.75%
dealer medium-term notes due 2022.
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.
81
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On October 15, 2019, we redeemed the
$300 million
outstanding principal amount of our
2.30%
collateral trust bonds due November 15, 2019 at par.
On December 27, 2019, we redeemed
$400 million
outstanding principal amount of our
2.00%
collateral trust bonds due January 27, 2020 at par.
On February 5, 2020, we issued
$500 million
aggregate principal amount of
2.40%
collateral trust bonds due 2030.
Secured Notes Payable
We had outstanding secured notes payable totaling
$5,665 million
and
$5,411 million
as of
February 29, 2020
and
May 31, 2019
, 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. On February 13, 2020, we closed on a
$500 million
committed loan facility (“Series P”) from the Federal Financing Bank under the Guaranteed Underwriter Program. Pursuant to this facility, we may borrow any time before July 15, 2024. Each advance is subject to quarterly amortization and a final maturity not longer than 30 years from the date of the advance. During the
nine months ended February 29, 2020
, we borrowed
$325 million
under our committed loan facilities with the Federal Financing Bank. We had up to
$1,525 million
available for access under the Guaranteed Underwriter Program as of
February 29, 2020
.
The notes outstanding under the Guaranteed Underwriter Program contain a provision that if during any portion of the fiscal year, our senior secured credit ratings do not have at least two of the following ratings: (i) A3 or higher from Moody’s, (ii) A- or higher from S&P, (iii) A- or higher from Fitch, or (iv) an equivalent rating from a successor rating agency to any of the above rating agencies, we may not make cash patronage capital distributions in excess of
5%
of total patronage capital. We are required to pledge eligible distribution system or power supply system loans as collateral in an amount at least equal to the total principal amount of notes outstanding under the Guaranteed Underwriter Program. See “Note 4—Loans” for additional information on the collateral pledged to secure notes payable under this program.
We had one revolving note purchase agreement with Farmer Mac as of
February 29, 2020
, which allowed us to borrow up to
$5,500 million
from Farmer Mac. Under this revolving note purchase agreement, dated March 24, 2011, as amended, we can borrow up to
$5,500 million
as of
February 29, 2020
, at any time, subject to market conditions, through January 11, 2022. This date automatically extends on each anniversary date of the closing for an additional year, unless prior to any such anniversary date, Farmer Mac provides us with a notice that the draw period will not be extended beyond the remaining term. Pursuant to this revolving note purchase agreement, we can borrow, repay and re-borrow funds at any time through maturity, as market conditions permit, provided that the outstanding principal amount at any time does not exceed the total available under the agreement. We had outstanding secured notes payable totaling
$2,827 million
and
$3,055 million
as of
February 29, 2020 and May 31, 2019
, respectively, under this Farmer Mac revolving note purchase agreement. The available borrowing amount totaled
$2,673 million
as of
February 29, 2020
.
As of
May 31, 2019
, we had a second revolving note purchase agreement with Farmer Mac, dated July 31, 2015, as amended, under which we could borrow up to
$300 million
at any time through December 20, 2023 at a fixed spread over London Interbank Offered Rate (“LIBOR”). This agreement also allowed us to borrow, repay and re-borrow funds at any time through maturity, provided that the outstanding principal amount at any time does not exceed the total available under the agreement. We had no notes payable outstanding under this agreement as of
May 31, 2019
. On December 20, 2019, we terminated the
$300 million
revolving note purchase agreement with Farmer Mac. As a result of the termination of this revolving note purchase agreement, the commitment amount under the
$5,200 million
revolving note purchase agreement with Farmer Mac discussed above, increased to
$5,500 million
, effective December 20, 2019.
82
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Pursuant to the Farmer Mac revolving note purchase 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. See “Note 4—Loans” for additional information on pledged collateral.
Unsecured Notes Payable
On November 15, 2019, we redeemed the
$6 million
outstanding principal amount of our
9.07%
notes payable due May 15, 2022, at a premium of less than
$1 million
.
We were in compliance with all covenants and conditions under our senior debt indentures as of
February 29, 2020
and
May 31, 2019
.
|
NOTE 8—SUBORDINATED DEFERRABLE DEBT
|
||||
The following table presents subordinated deferrable debt outstanding as of
February 29, 2020 and May 31, 2019
. See “Note 8—Subordinated Deferrable Debt” of our
2019
Form 10-K for additional information on the terms of our subordinated deferrable debt outstanding.
|
(Dollars in thousands)
|
February 29, 2020
|
May 31, 2019
|
||||||
|
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
|
|
||||
|
5.50% due 2064 with a call date of May 15, 2024
|
250,000
|
|
250,000
|
|
||||
|
Debt issuance costs
|
(13,928
|
)
|
(13,980
|
)
|
||||
|
Total subordinated deferrable debt
|
$
|
986,072
|
|
$
|
986,020
|
|
||
|
NOTE 9—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
|
We are an end user of derivative financial instruments and do not engage in derivative trading. We use derivatives, primarily interest rate swaps and Treasury rate locks, to manage interest rate risk. Derivatives may be privately negotiated contracts, which are often referred to as OTC derivatives, or they may be listed and traded on an exchange. We generally engage in OTC derivative transactions.
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. Our derivatives transactions are not collateralized and do not include collateralization agreements with counterparties. 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 receivable or accrued interest payable.
If we do not elect hedge accounting treatment, changes in the fair value of derivative instruments, which consist of net accrued periodic derivative cash settlements expense and derivative forward value amounts, are recognized in our condensed consolidated statements of operations under derivative gains (losses). If we elect hedge accounting treatment for derivatives, we formally document, designate and assess the effectiveness of the hedge relationship. Changes in the fair
83
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
value of derivatives designated as qualifying fair value hedges are recognized in the same line item on our condensed consolidated statements of operations as the earnings effect of the related hedged item. Changes in the fair value of derivatives designated as qualifying cash flow hedges are recorded as a component of AOCI. Those amounts are reclassified into earnings in the same period during which the forecasted transaction impacts earnings and presented in the same line item on our condensed consolidated statements of operations as the earnings effect of the related hedged item.
We generally do not designate interest rate swaps, which represented all of our outstanding derivatives as of
February 29, 2020
, for hedge accounting. Accordingly, changes in the fair value of interest rate swaps are reported in our condensed consolidated statements of operations under derivative gains (losses). Net periodic cash settlements expense related to interest rate swaps are classified as an operating activity in our consolidated statements of cash flows.
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
February 29, 2020 and May 31, 2019
. The substantial majority of our interest rate swaps use an index based on LIBOR for either the pay or receive leg of the swap agreement.
|
|
February 29, 2020
|
May 31, 2019
|
||||||||||||||||||
|
(Dollars in thousands)
|
Notional
Amount
|
Weighted-
Average
Rate Paid
|
Weighted-
Average
Rate Received
|
Notional
Amount |
Weighted-
Average Rate Paid |
Weighted-
Average Rate Received |
||||||||||||||
|
Pay-fixed swaps
|
$
|
6,761,122
|
|
2.77
|
%
|
1.81
|
%
|
$
|
7,379,280
|
|
2.83
|
%
|
2.60
|
%
|
||||||
|
Receive-fixed swaps
|
2,699,000
|
|
2.53
|
|
2.75
|
|
3,399,000
|
|
3.25
|
|
2.56
|
|
||||||||
|
Total interest rate swaps
|
9,460,122
|
|
2.70
|
|
2.08
|
|
10,778,280
|
|
2.97
|
|
2.58
|
|
||||||||
|
Forward pay-fixed swaps
|
—
|
|
65,000
|
|
||||||||||||||||
|
Total
|
$
|
9,460,122
|
|
$
|
10,843,280
|
|
||||||||||||||
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
February 29, 2020
and
May 31, 2019
.
|
|
February 29, 2020
|
May 31, 2019
|
||||||||||||||
|
(Dollars in thousands)
|
Fair Value
|
Notional Balance
|
Fair Value
|
Notional Balance
|
||||||||||||
|
Derivative assets:
|
||||||||||||||||
|
Interest rate swaps
|
$
|
118,067
|
|
$
|
2,699,000
|
|
$
|
41,179
|
|
$
|
2,332,104
|
|
||||
|
Derivative liabilities:
|
||||||||||||||||
|
Interest rate swaps
|
$
|
979,610
|
|
$
|
6,761,122
|
|
$
|
391,724
|
|
$
|
8,511,176
|
|
||||
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
84
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
assets and liabilities reported on our condensed consolidated balance sheets as of
February 29, 2020 and May 31, 2019
, and provides information on the impact of netting provisions and collateral pledged, if any.
|
February 29, 2020
|
||||||||||||||||||||||||
|
Gross Amount
of Recognized
Assets/ Liabilities
|
Gross Amount
Offset in the
Balance Sheet
|
Net Amount of Assets/ Liabilities
Presented
in the
Balance Sheet
|
Gross Amount
Not Offset in the
Balance Sheet
|
|||||||||||||||||||||
|
(Dollars in thousands)
|
Financial
Instruments
|
Cash
Collateral
Pledged
|
Net
Amount
|
|||||||||||||||||||||
|
Derivative assets:
|
||||||||||||||||||||||||
|
Interest rate swaps
|
$
|
118,067
|
|
$
|
—
|
|
$
|
118,067
|
|
$
|
118,067
|
|
$
|
—
|
|
$
|
—
|
|
||||||
|
Derivative liabilities:
|
||||||||||||||||||||||||
|
Interest rate swaps
|
979,610
|
|
—
|
|
979,610
|
|
118,067
|
|
—
|
|
861,543
|
|
||||||||||||
|
May 31, 2019
|
||||||||||||||||||||||||
|
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
|
$
|
41,179
|
|
$
|
—
|
|
$
|
41,179
|
|
$
|
41,176
|
|
$
|
—
|
|
$
|
3
|
|
||||||
|
Derivative liabilities:
|
||||||||||||||||||||||||
|
Interest rate swaps
|
391,724
|
|
—
|
|
391,724
|
|
41,176
|
|
—
|
|
350,548
|
|
||||||||||||
Impact of Derivatives on Condensed Consolidated Statements of Operations
Derivative gains (losses) reported in our condensed consolidated statements of operations consist of derivative cash settlements expense and derivative forward value gains (losses). Derivative cash settlements expense represents 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 operations for our interest rate swaps for the three and
nine months ended February 29, 2020 and February 28, 2019
.
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
(Dollars in thousands)
|
February 29, 2020
|
February 28, 2019
|
February 29, 2020
|
February 28, 2019
|
||||||||||||
|
Derivative losses attributable to:
|
||||||||||||||||
|
Derivative cash settlements expense
|
$
|
(14,354
|
)
|
$
|
(9,799
|
)
|
$
|
(39,547
|
)
|
$
|
(34,433
|
)
|
||||
|
Derivative forward value losses
|
(323,582
|
)
|
(122,375
|
)
|
(510,664
|
)
|
(27,215
|
)
|
||||||||
|
Derivative losses
|
$
|
(337,936
|
)
|
$
|
(132,174
|
)
|
$
|
(550,211
|
)
|
$
|
(61,648
|
)
|
||||
85
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
February 29, 2020
. Both Moody’s and S&P had our ratings on stable outlook as of
February 29, 2020
. The following table displays the notional amounts of our derivative contracts with rating triggers as of
February 29, 2020
, and the payments that would be required if the contracts were terminated as of that date because of a
downgrade of our unsecured credit ratings or the counterparty’s unsecured credit ratings below A3/A-, below Baa1/BBB+, to or below Baa2/BBB, below Baa3/BBB-, or to or below Ba2/BB+ by Moody’s or S&P,
respectively. In calculating the payment amounts that would be required upon termination of the derivative contracts, we assumed that the amounts for each counterparty would be netted in accordance with the provisions of the 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)
|
|
$
|
45,860
|
|
|
$
|
(10,614
|
)
|
|
$
|
—
|
|
|
$
|
(10,614
|
)
|
|
Falls below Baa1/BBB+
|
6,217,389
|
|
|
(554,316
|
)
|
|
—
|
|
|
(554,316
|
)
|
|||||
|
Falls to or below Baa2/BBB
(2)
|
425,542
|
|
|
(25,911
|
)
|
|
—
|
|
|
(25,911
|
)
|
|||||
|
Falls below Baa3/BBB-
|
45,680
|
|
(13,992
|
)
|
—
|
|
(13,992
|
)
|
||||||||
|
Total
|
$
|
6,734,471
|
|
|
$
|
(604,833
|
)
|
|
$
|
—
|
|
|
$
|
(604,833
|
)
|
|
____________________________
(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
$165 million
as of
February 29, 2020
. These contracts were in an unrealized loss position of
$50 million
as of
February 29, 2020
.
Our largest counterparty exposure, based on the outstanding notional amount, accounted for approximately
25%
and
23%
of the total outstanding notional amount of derivatives as of
February 29, 2020 and May 31, 2019
, respectively. 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
$633 million
as of
February 29, 2020
.
|
NOTE 10—EQUITY
|
Total equity decreased by
$423 million
to
$881 million
as of
February 29, 2020
. The decrease was primarily attributable to our reported net loss of
$359 million
for the
nine months ended February 29, 2020
and the patronage capital retirement of
$63 million
during the first quarter of fiscal year 2020.
In July
2019
, the CFC Board of Directors authorized the allocation of the fiscal year
2019
net earnings as follows:
$97 million
to members in the form of patronage,
$71 million
to the members’ capital reserve and
$1 million
to the cooperative
86
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
2019
, the CFC Board of Directors authorized the retirement of allocated net earnings totaling
$63 million
, consisting of
$48 million
, which represented
50%
of the patronage capital allocation for fiscal year
2019
, and
$15 million
, which represented the portion of the allocation from fiscal year 1994 net earnings that has been held for 25 years pursuant to the CFC Board of Directors policy. This amount was returned to members in cash in September 2019. The remaining portion of the amount allocated for fiscal year
2019
will be retained by CFC for 25 years under current guidelines adopted by the CFC Board of Directors in June 2009.
The CFC Board of Directors is required to make annual allocations of adjusted net income, if any. CFC has made annual retirements of allocated net earnings in
40
of the last
41
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
2019
Form 10-K for additional information.
Accumulated Other Comprehensive Income (Loss)
The following tables summarize, by component, the activity in AOCI as of and for the three and
nine months ended February 29, 2020 and February 28, 2019
.
|
|
Three Months Ended February 29, 2020
|
|||||||||||||||||||
|
(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
|
$
|
—
|
|
$
|
2,345
|
|
$
|
—
|
|
$
|
(2,427
|
)
|
$
|
(82
|
)
|
|||||
|
(Gains) losses reclassified into earnings
|
—
|
|
(109
|
)
|
—
|
|
146
|
|
37
|
|
||||||||||
|
Ending balance
|
$
|
—
|
|
$
|
2,236
|
|
$
|
—
|
|
$
|
(2,281
|
)
|
$
|
(45
|
)
|
|||||
|
|
Three Months Ended February 28, 2019
|
|||||||||||||||||||
|
(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
|
$
|
—
|
|
$
|
2,800
|
|
$
|
—
|
|
$
|
(1,968
|
)
|
$
|
832
|
|
|||||
|
(Gains) losses reclassified into earnings
|
—
|
|
(115
|
)
|
—
|
|
130
|
|
15
|
|
||||||||||
|
Ending balance
|
$
|
—
|
|
$
|
2,685
|
|
$
|
—
|
|
$
|
(1,838
|
)
|
$
|
847
|
|
|||||
|
|
Nine Months Ended February 29, 2020
|
|||||||||||||||||||
|
(Dollars in thousands)
|
Unrealized Gains (Losses)
Equity Securities
|
Unrealized Gains
Derivatives
(1
)
|
Unrealized Gains (Losses) Cash Flow Hedges
|
Unrealized Losses Defined Benefit Plan
(
2)
|
Total
|
|||||||||||||||
|
Beginning balance
|
$
|
—
|
|
$
|
2,571
|
|
$
|
—
|
|
$
|
(2,718
|
)
|
$
|
(147
|
)
|
|||||
|
(Gains) losses reclassified into earnings
|
—
|
|
(335
|
)
|
—
|
|
437
|
|
102
|
|
||||||||||
|
Ending balance
|
$
|
—
|
|
$
|
2,236
|
|
$
|
—
|
|
$
|
(2,281
|
)
|
$
|
(45
|
)
|
|||||
87
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Nine Months Ended February 28, 2019
|
|||||||||||||||||||
|
(Dollars in thousands)
|
Unrealized Gains (Losses)
Equity Securities
|
Unrealized Gains
Derivatives
(1)
|
Unrealized Gains (Losses) Cash Flow Hedges
|
Unrealized Losses Defined Benefit Plan
(
2)
|
Total
|
|||||||||||||||
|
Beginning balance
|
$
|
8,794
|
|
$
|
3,039
|
|
$
|
(1,059
|
)
|
$
|
(2,230
|
)
|
$
|
8,544
|
|
|||||
|
Cumulative effect of changes from adoption of new accounting standard
|
(8,794
|
)
|
—
|
|
—
|
|
—
|
|
(8,794
|
)
|
||||||||||
|
Unrealized gains
|
—
|
|
—
|
|
1,059
|
|
—
|
|
1,059
|
|
||||||||||
|
(Gains) losses reclassified into earnings
|
—
|
|
(354
|
)
|
—
|
|
392
|
|
38
|
|
||||||||||
|
Other comprehensive income (loss)
|
—
|
|
(354
|
)
|
1,059
|
|
392
|
|
1,097
|
|
||||||||||
|
Ending balance
|
$
|
—
|
|
$
|
2,685
|
|
$
|
—
|
|
$
|
(1,838
|
)
|
$
|
847
|
|
|||||
____________________________
(1)
Amounts are reclassified into income in the derivative forward value gains (losses) component of the derivative gains (losses) line item of our condensed consolidated statements of operations.
(2)
Amounts are reclassified into income in the other general and administrative expenses line item of our condensed consolidated statements of operations.
We expect to reclassify less than
$1 million
of amounts in AOCI related to unrealized derivative gains into earnings over the next 12 months.
|
NOTE 11—GUARANTEES
|
The following table summarizes total guarantees, by type of guarantee and by member class, as of
February 29, 2020
and
May 31, 2019
.
|
(Dollars in thousands)
|
February 29, 2020
|
May 31, 2019
|
||||||
|
Total by type:
|
|
|
||||||
|
Long-term tax-exempt bonds
(1)
|
$
|
308,245
|
|
$
|
312,190
|
|
||
|
Letters of credit
(2)
|
343,970
|
|
379,001
|
|
||||
|
Other guarantees
|
146,773
|
|
146,244
|
|
||||
|
Total
|
$
|
798,988
|
|
$
|
837,435
|
|
||
|
Total by member class:
|
|
|
||||||
|
CFC:
|
|
|
||||||
|
Distribution
|
$
|
249,078
|
|
$
|
235,919
|
|
||
|
Power supply
|
531,950
|
|
586,717
|
|
||||
|
Statewide and associate
|
5,395
|
|
4,708
|
|
||||
|
CFC total
|
786,423
|
|
827,344
|
|
||||
|
NCSC
|
12,565
|
|
8,517
|
|
||||
|
RTFC
|
—
|
|
1,574
|
|
||||
|
Total
|
$
|
798,988
|
|
$
|
837,435
|
|
||
____________________________
(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.
88
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Long-term tax-exempt bonds of
$308 million
and
$312 million
as of
February 29, 2020 and May 31, 2019
, respectively, included
$245 million
and
$247 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
$63 million
as of
February 29, 2020
are fixed-rate. The maximum potential exposure for these bonds, including the outstanding principal of
$63 million
and related interest through maturity, totaled
$88 million
as of
February 29, 2020
. The maturities for long-term tax-exempt bonds and the related guarantees extend through calendar year 2042.
Of the outstanding letters of credit of
$344 million
and
$379 million
as of
February 29, 2020 and May 31, 2019
, respectively,
$110 million
and
$126 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
February 29, 2020
. The maturities for the outstanding letters of credit as of
February 29, 2020
extend through calendar year 2039.
In addition to the letters of credit listed in the table above, under master letter of credit facilities in place as of
February 29, 2020
, we may be required to issue up to an additional
$70 million
in letters of credit to third parties for the benefit of our members. All of our master letter of credit facilities were subject to material adverse change clauses at the time of issuance as of
February 29, 2020
. Prior to issuing a letter of credit, we would confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with the letter of credit terms and conditions.
The maximum potential exposure for other guarantees was
$147 million
and
$146 million
as of
February 29, 2020 and May 31, 2019
, respectively, of which
$25 million
was secured as of both
February 29, 2020 and May 31, 2019
. 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
$355 million
and
$374 million
and represented
44%
and
45%
of total guarantees as of
February 29, 2020 and May 31, 2019
, respectively.
In addition to the guarantees described above, we were also the liquidity provider for
$245 million
of variable-rate tax-exempt bonds as of
February 29, 2020
, issued for our member cooperatives. While the bonds are in variable-rate mode, in return for a fee, we have unconditionally agreed to purchase bonds tendered or put for redemption if the remarketing agents are unable to sell such bonds to other investors. We were not required to perform as liquidity provider pursuant to these obligations during the
nine months ended February 29, 2020
or the prior fiscal year.
Guarantee Liability
As of
February 29, 2020 and May 31, 2019
, we recorded a guarantee liability of
$13 million
and
$14 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
February 29, 2020 and May 31, 2019
, based on management’s estimate of exposure to losses within the guarantee portfolio. The remaining balance of the total guarantee liability of
$12 million
and
$13 million
as of
February 29, 2020 and May 31, 2019
, 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.
89
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
NOTE 12—FAIR VALUE MEASUREMENT
|
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 14—Fair Value Measurement” to the Consolidated Financial Statements in our
2019
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
February 29, 2020 and May 31, 2019
. The tables also display the classification within the fair value hierarchy of the valuation technique used in estimating fair value.
|
|
February 29, 2020
|
Fair Value Measurement Level
|
||||||||||||||||||
|
(Dollars in thousands)
|
Carrying Value
|
Fair Value
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||||
|
Assets:
|
|
|
|
|
||||||||||||||||
|
Cash and cash equivalents
|
$
|
55,616
|
|
$
|
55,616
|
|
$
|
55,616
|
|
$
|
—
|
|
$
|
—
|
|
|||||
|
Restricted cash
|
7,812
|
|
7,812
|
|
7,812
|
|
—
|
|
—
|
|
||||||||||
|
Equity securities
|
64,558
|
|
64,558
|
|
64,558
|
|
—
|
|
—
|
|
||||||||||
|
Debt securities held-to-maturity
|
571,975
|
|
587,423
|
|
—
|
|
587,423
|
|
—
|
|
||||||||||
|
Deferred compensation investments
|
5,272
|
|
5,272
|
|
5,272
|
|
—
|
|
—
|
|
||||||||||
|
Loans to members, net
|
26,803,628
|
|
29,782,772
|
|
—
|
|
—
|
|
29,782,772
|
|
||||||||||
|
Accrued interest receivable
|
124,357
|
|
124,357
|
|
—
|
|
124,357
|
|
—
|
|
||||||||||
|
Debt service reserve funds
|
17,151
|
|
17,151
|
|
17,151
|
|
—
|
|
—
|
|
||||||||||
|
Derivative assets
|
118,067
|
|
118,067
|
|
—
|
|
118,067
|
|
—
|
|
||||||||||
|
Liabilities:
|
|
|
||||||||||||||||||
|
Short-term borrowings
|
$
|
4,275,388
|
|
$
|
4,276,186
|
|
$
|
—
|
|
$
|
4,276,186
|
|
$
|
—
|
|
|||||
|
Long-term debt
|
19,190,693
|
|
21,162,514
|
|
—
|
|
12,097,486
|
|
9,065,028
|
|
||||||||||
|
Accrued interest payable
|
190,628
|
|
190,628
|
|
—
|
|
190,628
|
|
—
|
|
||||||||||
|
Guarantee liability
|
13,041
|
|
13,370
|
|
—
|
|
—
|
|
13,370
|
|
||||||||||
|
Derivative liabilities
|
979,610
|
|
979,610
|
|
—
|
|
979,610
|
|
—
|
|
||||||||||
|
Subordinated deferrable debt
|
986,072
|
|
1,062,564
|
|
—
|
|
1,062,564
|
|
—
|
|
||||||||||
|
Members’ subordinated certificates
|
1,340,373
|
|
1,340,373
|
|
—
|
|
—
|
|
1,340,373
|
|
||||||||||
90
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
May 31, 2019
|
Fair Value Measurement Level
|
||||||||||||||||||
|
(Dollars in thousands)
|
Carrying Value
|
Fair Value
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||||
|
Assets:
|
|
|
|
|
||||||||||||||||
|
Cash and cash equivalents
|
$
|
177,922
|
|
$
|
177,922
|
|
$
|
177,922
|
|
$
|
—
|
|
$
|
—
|
|
|||||
|
Restricted cash
|
8,282
|
|
8,282
|
|
8,282
|
|
—
|
|
—
|
|
||||||||||
|
Equity securities
|
87,533
|
|
87,533
|
|
87,533
|
|
—
|
|
—
|
|
||||||||||
|
Debt securities held-to-maturity
|
565,444
|
|
570,549
|
|
—
|
|
570,549
|
|
—
|
|
||||||||||
|
Deferred compensation investments
|
4,984
|
|
4,984
|
|
4,984
|
|
—
|
|
—
|
|
||||||||||
|
Loans to members, net
|
25,899,369
|
|
25,743,503
|
|
—
|
|
—
|
|
25,743,503
|
|
||||||||||
|
Accrued interest receivable
|
133,605
|
|
133,605
|
|
—
|
|
133,605
|
|
—
|
|
||||||||||
|
Debt service reserve funds
|
17,151
|
|
17,151
|
|
17,151
|
|
—
|
|
—
|
|
||||||||||
|
Derivative assets
|
41,179
|
|
41,179
|
|
—
|
|
41,179
|
|
—
|
|
||||||||||
|
Liabilities:
|
|
|
||||||||||||||||||
|
Short-term borrowings
|
$
|
3,607,726
|
|
$
|
3,608,259
|
|
$
|
—
|
|
$
|
3,608,259
|
|
$
|
—
|
|
|||||
|
Long-term debt
|
19,210,793
|
|
20,147,183
|
|
—
|
|
11,482,715
|
|
8,664,468
|
|
||||||||||
|
Accrued interest payable
|
158,997
|
|
158,997
|
|
—
|
|
158,997
|
|
—
|
|
||||||||||
|
Guarantee liability
|
13,666
|
|
13,307
|
|
—
|
|
—
|
|
13,307
|
|
||||||||||
|
Derivative liabilities
|
391,724
|
|
391,724
|
|
—
|
|
391,724
|
|
—
|
|
||||||||||
|
Subordinated deferrable debt
|
986,020
|
|
1,004,707
|
|
—
|
|
1,004,707
|
|
—
|
|
||||||||||
|
Members’ subordinated certificates
|
1,357,129
|
|
1,357,129
|
|
—
|
|
—
|
|
1,357,129
|
|
||||||||||
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
nine months ended February 29, 2020 and February 28, 2019
.
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
February 29, 2020 and May 31, 2019
, and the classification of the valuation technique within the fair value hierarchy.
|
|
February 29, 2020
|
May 31, 2019
|
||||||||||||||||||||||
|
(Dollars in thousands)
|
Level 1
|
Level 2
|
Total
|
Level 1
|
Level 2
|
Total
|
||||||||||||||||||
|
Equity securities
|
$
|
64,558
|
|
$
|
—
|
|
$
|
64,558
|
|
$
|
87,533
|
|
$
|
—
|
|
$
|
87,533
|
|
||||||
|
Deferred compensation investments
|
5,272
|
|
—
|
|
5,272
|
|
4,984
|
|
—
|
|
4,984
|
|
||||||||||||
|
Derivative assets
|
—
|
|
118,067
|
|
118,067
|
|
—
|
|
41,179
|
|
41,179
|
|
||||||||||||
|
Derivative liabilities
|
—
|
|
979,610
|
|
979,610
|
|
—
|
|
391,724
|
|
391,724
|
|
||||||||||||
91
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nonrecurring Fair Value
We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis on our condensed consolidated balance sheets. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as in the application of lower of cost or fair value accounting or when we evaluate for impairment. Assets measured at fair value on a nonrecurring basis and still held during the
nine months ended February 29, 2020 and February 28, 2019
consisted of certain impaired loans. Fair value measurement adjustments for individually impaired loans are recorded in the provision for loan losses on our condensed consolidated statements of operations. The fair value of these assets is determined based on the use of significant unobservable inputs, which are considered Level 3 in the fair value hierarchy. We did not have any nonrecurring fair value measurement adjustments recorded in earnings attributable to these assets during the three and
nine months ended February 29, 2020 and February 28, 2019
.
Significant Unobservable Level 3 Inputs
Impaired Loans
The fair value of impaired loans is typically measured based on the present value of expected future cash flows. Our estimate of expected future cash flows incorporates, among other items, assumptions regarding default rates, loss severities, the amounts and timing of prepayments, as well as the characteristics of the loan. If we expect repayment to be provided solely by the continued operation or sale of the underlying collateral, the fair value of the collateral less estimated costs to sell is used as the basis for measuring fair value. We employ various approaches and techniques to determine the fair value of collateral-dependent loans, including developing market multiples and obtaining valuations from third-party specialists. The significant unobservable inputs used in measuring the fair value of collateral-dependent loans include estimated cash flows before interest, taxes, depreciation and amortization and market multiples for comparable companies. Our Credit Risk Management group reviews the unobservable inputs to assess the reasonableness of the assumptions used and the accuracy of the work performed. We did not have any impaired collateral-dependent loans as of
February 29, 2020
or
May 31, 2019
.
92
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
NOTE 13—BUSINESS SEGMENTS
|
The following tables display segment results for the three and
nine months ended February 29, 2020 and February 28, 2019
, and assets attributable to each segment as of
February 29, 2020
and
February 28, 2019
.
|
|
Three Months Ended February 29, 2020
|
|||||||||||||||
|
(Dollars in thousands)
|
CFC
|
Other
|
Elimination
|
Consolidated Total
|
||||||||||||
|
Statement of operations:
|
|
|
|
|
||||||||||||
|
Interest income
|
$
|
285,316
|
|
$
|
11,608
|
|
$
|
(9,729
|
)
|
$
|
287,195
|
|
||||
|
Interest expense
|
(203,040
|
)
|
(9,729
|
)
|
9,729
|
|
(203,040
|
)
|
||||||||
|
Net interest income
|
82,276
|
|
1,879
|
|
—
|
|
84,155
|
|
||||||||
|
Provision for loan losses
|
(2,382
|
)
|
—
|
|
—
|
|
(2,382
|
)
|
||||||||
|
Net interest income after provision for loan losses
|
79,894
|
|
1,879
|
|
—
|
|
81,773
|
|
||||||||
|
Non-interest income:
|
||||||||||||||||
|
Fee and other income
|
4,978
|
|
557
|
|
(1,888
|
)
|
3,647
|
|
||||||||
|
Derivative losses:
|
||||||||||||||||
|
Derivative cash settlements expense
|
(14,056
|
)
|
(298
|
)
|
—
|
|
(14,354
|
)
|
||||||||
|
Derivative forward value losses
|
(322,029
|
)
|
(1,553
|
)
|
—
|
|
(323,582
|
)
|
||||||||
|
Derivative losses
|
(336,085
|
)
|
(1,851
|
)
|
—
|
|
(337,936
|
)
|
||||||||
|
Unrealized gains on equity securities
|
749
|
|
—
|
|
—
|
|
749
|
|
||||||||
|
Total non-interest income
|
(330,358
|
)
|
(1,294
|
)
|
(1,888
|
)
|
(333,540
|
)
|
||||||||
|
Non-interest expense:
|
||||||||||||||||
|
General and administrative expenses
|
(24,742
|
)
|
(2,173
|
)
|
1,646
|
|
(25,269
|
)
|
||||||||
|
Losses on early extinguishment of debt
|
(69
|
)
|
—
|
|
—
|
|
(69
|
)
|
||||||||
|
Other non-interest expense
|
(289
|
)
|
(243
|
)
|
242
|
|
(290
|
)
|
||||||||
|
Total non-interest expense
|
(25,100
|
)
|
(2,416
|
)
|
1,888
|
|
(25,628
|
)
|
||||||||
|
Loss before income taxes
|
(275,564
|
)
|
(1,831
|
)
|
—
|
|
(277,395
|
)
|
||||||||
|
Income tax benefit
|
—
|
|
426
|
|
—
|
|
426
|
|
||||||||
|
Net loss
|
$
|
(275,564
|
)
|
$
|
(1,405
|
)
|
$
|
—
|
|
$
|
(276,969
|
)
|
||||
93
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Three Months Ended February 28, 2019
|
|||||||||||||||
|
(Dollars in thousands)
|
CFC
|
Other
|
Elimination
|
Consolidated Total
|
||||||||||||
|
Statement of operations:
|
|
|
|
|
||||||||||||
|
Interest income
|
$
|
283,372
|
|
$
|
12,951
|
|
$
|
(10,757
|
)
|
$
|
285,566
|
|
||||
|
Interest expense
|
(207,153
|
)
|
(10,939
|
)
|
10,757
|
|
(207,335
|
)
|
||||||||
|
Net interest income
|
76,219
|
|
2,012
|
|
—
|
|
78,231
|
|
||||||||
|
Provision for loan losses
|
(182
|
)
|
—
|
|
—
|
|
(182
|
)
|
||||||||
|
Net interest income after provision for loan losses
|
76,037
|
|
2,012
|
|
—
|
|
78,049
|
|
||||||||
|
Non-interest income:
|
|
|||||||||||||||
|
Fee and other income
|
4,943
|
|
632
|
|
(1,861
|
)
|
3,714
|
|
||||||||
|
Derivative losses:
|
|
|
||||||||||||||
|
Derivative cash settlements expense
|
(9,559
|
)
|
(240
|
)
|
—
|
|
(9,799
|
)
|
||||||||
|
Derivative forward value losses
|
(121,574
|
)
|
(801
|
)
|
—
|
|
(122,375
|
)
|
||||||||
|
Derivative losses
|
(131,133
|
)
|
(1,041
|
)
|
—
|
|
(132,174
|
)
|
||||||||
|
Unrealized gains on equity securities
|
2,144
|
|
—
|
|
—
|
|
2,144
|
|
||||||||
|
Total non-interest income
|
(124,046
|
)
|
(409
|
)
|
(1,861
|
)
|
(126,316
|
)
|
||||||||
|
Non-interest expense:
|
|
|||||||||||||||
|
General and administrative expenses
|
(22,568
|
)
|
(2,023
|
)
|
1,593
|
|
(22,998
|
)
|
||||||||
|
Other non-interest expense
|
(355
|
)
|
(268
|
)
|
268
|
|
(355
|
)
|
||||||||
|
Total non-interest expense
|
(22,923
|
)
|
(2,291
|
)
|
1,861
|
|
(23,353
|
)
|
||||||||
|
Loss before income taxes
|
(70,932
|
)
|
(688
|
)
|
—
|
|
(71,620
|
)
|
||||||||
|
Income tax benefit
|
—
|
|
149
|
|
—
|
|
149
|
|
||||||||
|
Net loss
|
$
|
(70,932
|
)
|
$
|
(539
|
)
|
$
|
—
|
|
$
|
(71,471
|
)
|
||||
94
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Nine Months Ended February 29, 2020
|
|||||||||||||||
|
(Dollars in thousands)
|
CFC
|
Other
|
Elimination
|
Consolidated Total
|
||||||||||||
|
Statement of operations:
|
|
|
|
|
||||||||||||
|
Interest income
|
$
|
858,316
|
|
$
|
35,674
|
|
$
|
(29,743
|
)
|
$
|
864,247
|
|
||||
|
Interest expense
|
(623,934
|
)
|
(29,991
|
)
|
29,743
|
|
(624,182
|
)
|
||||||||
|
Net interest income
|
234,382
|
|
5,683
|
|
—
|
|
240,065
|
|
||||||||
|
Provision for loan losses
|
(1,367
|
)
|
—
|
|
—
|
|
(1,367
|
)
|
||||||||
|
Net interest income after provision for loan losses
|
233,015
|
|
5,683
|
|
—
|
|
238,698
|
|
||||||||
|
Non-interest income:
|
||||||||||||||||
|
Fee and other income
|
22,441
|
|
8,965
|
|
(12,976
|
)
|
18,430
|
|
||||||||
|
Derivative losses:
|
||||||||||||||||
|
Derivative cash settlements expense
|
(38,731
|
)
|
(816
|
)
|
—
|
|
(39,547
|
)
|
||||||||
|
Derivative forward value losses
|
(508,404
|
)
|
(2,260
|
)
|
—
|
|
(510,664
|
)
|
||||||||
|
Derivative losses
|
(547,135
|
)
|
(3,076
|
)
|
—
|
|
(550,211
|
)
|
||||||||
|
Unrealized gains on equity securities
|
2,255
|
|
—
|
|
—
|
|
2,255
|
|
||||||||
|
Total non-interest income
|
(522,439
|
)
|
5,889
|
|
(12,976
|
)
|
(529,526
|
)
|
||||||||
|
Non-interest expense:
|
||||||||||||||||
|
General and administrative expenses
|
(73,475
|
)
|
(6,828
|
)
|
4,936
|
|
(75,367
|
)
|
||||||||
|
Losses on early extinguishment of debt
|
(69
|
)
|
(614
|
)
|
—
|
|
(683
|
)
|
||||||||
|
Other non-interest (expense) income
|
6,574
|
|
(8,040
|
)
|
8,040
|
|
6,574
|
|
||||||||
|
Total non-interest expense
|
(66,970
|
)
|
(15,482
|
)
|
12,976
|
|
(69,476
|
)
|
||||||||
|
Loss before income taxes
|
(356,394
|
)
|
(3,910
|
)
|
—
|
|
(360,304
|
)
|
||||||||
|
Income tax benefit
|
—
|
|
856
|
|
—
|
|
856
|
|
||||||||
|
Net loss
|
$
|
(356,394
|
)
|
$
|
(3,054
|
)
|
$
|
—
|
|
$
|
(359,448
|
)
|
||||
|
February 29, 2020
|
||||||||||||||||
|
CFC
|
Other
|
Elimination
|
Consolidated Total
|
|||||||||||||
|
Assets:
|
|
|
|
|
||||||||||||
|
Total loans outstanding
|
$
|
26,790,313
|
|
$
|
1,039,622
|
|
$
|
(1,018,834
|
)
|
$
|
26,811,101
|
|
||||
|
Deferred loan origination costs
|
11,429
|
|
—
|
|
—
|
|
11,429
|
|
||||||||
|
Loans to members
|
26,801,742
|
|
1,039,622
|
|
(1,018,834
|
)
|
26,822,530
|
|
||||||||
|
Less: Allowance for loan losses
|
(18,902
|
)
|
—
|
|
—
|
|
(18,902
|
)
|
||||||||
|
Loans to members, net
|
26,782,840
|
|
1,039,622
|
|
(1,018,834
|
)
|
26,803,628
|
|
||||||||
|
Other assets
|
1,131,269
|
|
102,709
|
|
(91,424
|
)
|
1,142,554
|
|
||||||||
|
Total assets
|
$
|
27,914,109
|
|
$
|
1,142,331
|
|
$
|
(1,110,258
|
)
|
$
|
27,946,182
|
|
||||
95
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Nine Months Ended February 28, 2019
|
|||||||||||||||
|
(Dollars in thousands)
|
CFC
|
Other
|
Elimination
|
Consolidated Total
|
||||||||||||
|
Statement of operations:
|
|
|
|
|
||||||||||||
|
Interest income
|
$
|
838,648
|
|
$
|
38,880
|
|
$
|
(32,218
|
)
|
$
|
845,310
|
|
||||
|
Interest expense
|
(621,188
|
)
|
(32,762
|
)
|
32,218
|
|
(621,732
|
)
|
||||||||
|
Net interest income
|
217,460
|
|
6,118
|
|
—
|
|
223,578
|
|
||||||||
|
Benefit for loan losses
|
1,715
|
|
—
|
|
—
|
|
1,715
|
|
||||||||
|
Net interest income after benefit for loan losses
|
219,175
|
|
6,118
|
|
—
|
|
225,293
|
|
||||||||
|
Non-interest income:
|
||||||||||||||||
|
Fee and other income
|
15,039
|
|
1,686
|
|
(5,505
|
)
|
11,220
|
|
||||||||
|
Derivative gains (losses):
|
|
|
|
|
|
|
|
|
||||||||
|
Derivative cash settlements expense
|
(33,667
|
)
|
(766
|
)
|
—
|
|
(34,433
|
)
|
||||||||
|
Derivative forward value gains (losses)
|
(27,312
|
)
|
97
|
|
—
|
|
(27,215
|
)
|
||||||||
|
Derivative losses
|
(60,979
|
)
|
(669
|
)
|
—
|
|
(61,648
|
)
|
||||||||
|
Unrealized losses on equity securities
|
(201
|
)
|
—
|
|
—
|
|
(201
|
)
|
||||||||
|
Total non-interest income
|
(46,141
|
)
|
1,017
|
|
(5,505
|
)
|
(50,629
|
)
|
||||||||
|
Non-interest expense:
|
||||||||||||||||
|
General and administrative expenses
|
(68,537
|
)
|
(6,316
|
)
|
4,780
|
|
(70,073
|
)
|
||||||||
|
Losses on early extinguishment of debt
|
(7,100
|
)
|
—
|
|
—
|
|
(7,100
|
)
|
||||||||
|
Other non-interest expense
|
(1,104
|
)
|
(725
|
)
|
725
|
|
(1,104
|
)
|
||||||||
|
Total non-interest expense
|
(76,741
|
)
|
(7,041
|
)
|
5,505
|
|
(78,277
|
)
|
||||||||
|
Income before income taxes
|
96,293
|
|
94
|
|
—
|
|
96,387
|
|
||||||||
|
Income tax expense
|
—
|
|
(154
|
)
|
—
|
|
(154
|
)
|
||||||||
|
Net income (loss)
|
$
|
96,293
|
|
$
|
(60
|
)
|
$
|
—
|
|
$
|
96,233
|
|
||||
|
February 28, 2019
|
||||||||||||||||
|
CFC
|
Other
|
Elimination
|
Consolidated Total
|
|||||||||||||
|
Assets:
|
|
|
|
|
||||||||||||
|
Total loans outstanding
|
$
|
25,975,580
|
|
$
|
1,125,301
|
|
$
|
(1,094,446
|
)
|
$
|
26,006,435
|
|
||||
|
Deferred loan origination costs
|
11,244
|
|
—
|
|
—
|
|
11,244
|
|
||||||||
|
Loans to members
|
25,986,824
|
|
1,125,301
|
|
(1,094,446
|
)
|
26,017,679
|
|
||||||||
|
Less: Allowance for loan losses
|
(17,086
|
)
|
—
|
|
—
|
|
(17,086
|
)
|
||||||||
|
Loans to members, net
|
25,969,738
|
|
1,125,301
|
|
(1,094,446
|
)
|
26,000,593
|
|
||||||||
|
Other assets
|
1,398,270
|
|
103,783
|
|
(92,585
|
)
|
1,409,468
|
|
||||||||
|
Total assets
|
$
|
27,368,008
|
|
$
|
1,229,084
|
|
$
|
(1,187,031
|
)
|
$
|
27,410,061
|
|
||||
96
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
NOTE 14—SUBSEQUENT EVENTS
|
COVID-19
On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. On March 13, 2020, the United States declared a national emergency with respect to COVID-19. The effects of COVID-19 and the response to the virus have negatively impacted financial markets and overall economic conditions. We have been monitoring developments closely, and although our operations have not been materially affected by the COVID-19 outbreak to date, we are unable at this time to estimate the future impact of COVID-19 on our operations. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including, among others, the duration and severity of the COVID-19 pandemic, the ultimate impact on our members, potential further disruption and deterioration in the corporate debt markets and additional, or extended, federal, state and local government orders and regulations that might be imposed in response to the pandemic, all of which are uncertain.
Asset Impairment
In April 2020, management determined that we would not complete an ongoing project to develop a new internal-use loan origination and servicing platform with the current vendor. The project was intended to update our loan platform to provide increased functionality and flexibility and enhance the operational efficiency of our lending, loan servicing and loan accounting processes. As a result of the decision to abandon the existing project and select a new vendor, we recognized a non-cash impairment charge of
$31 million
, in the fourth quarter of fiscal year 2020. This non-cash impairment charge represents the total capitalized amount, which is included as a component of fixed assets, on our consolidated balance sheet as of March 31, 2020, for the development of this platform.
97
|
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 February 29, 2020
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Subsequent to February 29, 2020, we have not experienced any material impact to our internal controls over financial reporting given that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact to their design and operating effectiveness.
PART II—OTHER INFORMATION
|
Item 1.
|
Legal Proceedings
|
From time to time, CFC is subject to certain legal proceedings and claims in the ordinary course of business, including litigation with borrowers related to enforcement or collection actions. Management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, liquidity or results of operations. CFC establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Accordingly, no reserve has been recorded with respect to any legal proceedings at this time.
|
Item 1A.
|
Risk Factors
|
The following risk factor is in addition to our risk factors included in “Part I—Item 1A. Risk Factors” in our 2019
Form 10-K that could affect our business, financial condition or results of operations. These risk factors should be considered in connection with evaluating the forward-looking statements included in this Quarterly Report on Form 10-Q because these factors could cause the actual results and conditions to differ materially from those projected in forward-looking statements. Additional risks and uncertainties that are not presently known to us or are currently deemed to be immaterial also may materially adversely affect our business, financial condition or results of operations in the future. If any of the risks actually occur, our business, financial condition or results of operations could be negatively affected.
Natural or man-made disasters, including widespread health emergencies such as the COVID-19 pandemic, or other similar external events beyond our control could disrupt our business and adversely affect our results of operations and financial condition.
Our operations may be subject to disruption due to the occurrence of natural disasters, acts of terrorism or war, public health emergencies, such as the recent COVID-19 pandemic, or other unexpected or disastrous conditions, events, or emergencies beyond our control, some of which may be intensified by the effects of a government response to the event or climate change and changing weather patterns.
COVID-19 has spread globally, including to every state in the United States, and has resulted in the declaration of the COVID-19 outbreak as a pandemic by the World Health Organization. While still evolving, the COVID-19 pandemic has caused significant economic and financial turmoil both in the United States and around the world, and has fueled concerns that it will lead to a global recession. On March 13, 2020, the United States declared a national emergency with respect to COVID-19 and more than 40 states and certain U.S. territories, including the District of Columbia, have since issued orders requiring the closure of non-essential businesses and/or requiring residents to stay at home
.
The continued and prolonged implementation of restrictions by federal, state and local authorities to slow the spread of COVID-19 could disrupt the
98
business, activities, and operations of our members, as well our business and operations. As providers of essential services, our members are generally required to maintain operations and continue to provide services to their customers regardless of the potential inability of customers affected by COVID-19 to make timely payments for such services. In addition, certain of our members that service commercial and industrial sectors may experience load reductions due to a decrease in demand resulting from closures of non-essential businesses or closures due to the economic conditions. The potential inability to collect, or delays in collecting, payment for services provided, and decrease in commercial and industrial load demand could result in a decrease in member cash receipts and revenues and constrained resources and additional safety precautions due to the COVID-19 pandemic could result in higher costs, which together could reduce cash flows and earnings and impair the ability of members to satisfy their obligations to us and other creditors, impair the value of underlying collateral or otherwise adversely affect their business dealings with us, any of which could have a material adverse effect on the quality of our credit portfolio, which could ultimately have a material adverse effect on our business, results of operations or financial condition.
While it is not possible at this time to estimate the duration of the COVID-19 pandemic and as such the impact it could have on our business, the continued spread of COVID-19 and the measures taken by the governments of countries, as well as measures taken by state and local governments in the United States, could adversely impact our business, results of operations or financial condition. The extent to which the COVID-19 pandemic impacts our business will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and actions to contain its impact.
Although we have implemented a business continuity management program that we continue to enhance on an ongoing basis, there can be no assurance that the program will adequately mitigate the risks of business disruptions and interruptions. Further, events such as natural disasters and public health emergencies may divert our attention away from normal operations and limit necessary resources. We generally must resume operations promptly following any interruption. If we were to suffer a disruption or interruption and were not able to resume normal operations within a period consistent with industry standards, our business, financial condition or results of operations could be adversely affected in a material manner. In addition, depending on the nature and duration of the disruption or interruption, we might become vulnerable to fraud, additional expense or other losses, or to a loss of business.
|
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.
99
Item 6. Exhibits
The following exhibits are incorporated by reference or filed as part of this Report.
EXHIBIT INDEX
|
Exhibit No.
|
Description
|
|
|
10.1*
|
—
|
|
|
10.2*
|
—
|
|
|
10.3*
|
—
|
|
|
10.4*
|
—
|
|
|
31.1*
|
—
|
|
|
31.2*
|
—
|
|
|
32.1†
|
—
|
|
|
32.2†
|
—
|
|
|
101.INS*
|
—
|
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.
100
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:
April 10, 2020
|
By:
|
/s/ J. ANDREW DON
|
|
J. Andrew Don
|
|
|
Senior Vice President and Chief Financial Officer
|
|
|
By:
|
/s/ ROBERT E. GEIER
|
|
Robert E. Geier
|
|
|
Controller and Principal Accounting Officer
|
|
101
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 SegmentsNote 14 Subsequent EventsItem 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