Company Quick10K Filing
National Rural Utilities
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 0 $0
10-Q 2020-01-13 Quarter: 2019-11-30
10-Q 2019-10-10 Quarter: 2019-08-31
10-K 2019-07-31 Annual: 2019-05-31
10-Q 2019-04-11 Quarter: 2019-02-28
10-Q 2019-01-11 Quarter: 2018-11-30
10-Q 2018-10-10 Quarter: 2018-08-31
10-K 2018-07-31 Annual: 2018-05-31
10-Q 2018-04-11 Quarter: 2018-02-28
10-Q 2018-01-11 Quarter: 2017-11-30
10-Q 2017-10-10 Quarter: 2017-08-31
10-K 2017-08-01 Annual: 2017-05-31
10-Q 2017-04-05 Quarter: 2017-02-28
10-Q 2017-01-13 Quarter: 2016-11-30
10-Q 2016-10-11 Quarter: 2016-08-31
10-K 2016-08-25 Annual: 2016-05-31
10-Q 2016-04-04 Quarter: 2016-02-29
10-Q 2016-01-13 Quarter: 2015-11-30
10-Q 2015-10-14 Quarter: 2015-08-31
10-K 2015-08-26 Annual: 2015-05-31
10-Q 2015-04-13 Quarter: 2015-02-28
10-Q 2015-01-14 Quarter: 2014-11-30
10-Q 2014-10-14 Quarter: 2014-08-31
10-K 2014-08-28 Annual: 2014-05-31
10-Q 2014-04-14 Quarter: 2014-02-28
10-Q 2014-01-13 Quarter: 2013-11-30
10-Q 2013-10-15 Quarter: 2013-08-31
10-K 2013-08-28 Annual: 2013-06-13
10-Q 2013-04-12 Quarter: 2013-02-28
10-Q 2013-01-14 Quarter: 2012-11-30
10-Q 2012-10-15 Quarter: 2012-08-31
10-K 2012-08-15 Annual: 2012-05-31
10-Q 2012-04-16 Quarter: 2012-02-29
10-Q 2012-01-17 Quarter: 2011-11-30
10-Q 2011-10-14 Quarter: 2011-08-31
10-K 2011-08-19 Annual: 2011-05-31
10-Q 2011-04-13 Quarter: 2011-02-28
10-Q 2011-01-14 Quarter: 2010-12-02
10-Q 2010-10-13 Quarter: 2010-08-31
10-K 2010-08-30 Annual: 2010-05-31
10-Q 2010-04-14 Quarter: 2010-02-28
10-Q 2010-01-13 Quarter: 2009-11-30
8-K 2020-03-02 Officers
8-K 2020-02-13 Off-BS Arrangement
8-K 2020-01-22 Other Events, Exhibits
8-K 2019-11-27 Other Events
8-K 2019-11-26 Enter Agreement
8-K 2019-09-25 Officers
8-K 2019-09-13 Other Events
8-K 2019-07-17 Officers
8-K 2019-04-29 Other Events, Exhibits
8-K 2019-03-11 Officers
8-K 2019-01-28 Other Events, Exhibits
8-K 2018-12-17 Officers
8-K 2018-11-28 Enter Agreement
8-K 2018-11-15 Off-BS Arrangement
8-K 2018-10-24 Other Events, Exhibits
8-K 2018-06-12 Other Events
8-K 2018-02-26 Enter Agreement
8-K 2018-02-26 Officers
8-K 2018-01-31 Other Events, Exhibits
NRU 2019-11-30
Part I-Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
Item 1. Financial Statements
Note 1-Summary of Significant Accounting Policies
Note 2-Variable Interest Entities
Note 3-Investment Securities
Note 4-Loans
Note 5-Allowance for Loan Losses
Note 6-Short-Term Borrowings
Note 7-Long-Term Debt
Note 8-Subordinated Deferrable Debt
Note 9-Derivative Instruments and Hedging Activities
Note 10-Equity
Note 11-Guarantees
Note 12-Fair Value Measurement
Note 13-Business Segments
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 nrufy2020q2form10-qex101.htm
EX-10.2 nrufy2020q2form10-qex102.htm
EX-31.1 nrufy2020q2form10-qxex311.htm
EX-31.2 nrufy2020q2form10-qxex312.htm
EX-32.1 nrufy2020q2form10-qxex321.htm
EX-32.2 nrufy2020q2form10-qxex322.htm

National Rural Utilities Earnings 2019-11-30

NRU 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
PNAT 0 1 4 0 0 -5 -5 1 37% -0.2 -685%
GRNV 0 0 0 0 -0 -0 -0 294.7 -0%
SPDL 0 0 4 0 0 -3 -2 0 82% -0.1 -4,119%
MYDX 0 0 9 0 0 2 2 1 60% 0.4 474%
BMIX 0 1 2 0 -0 -1 -1 -0 -655% 0.1 -149%
TRIS 0 5,059 1,330 0 48 48 3,050 0% 64.1 1%
GO 2,082 1,365 1,943 599 -9 25 457 31% 18.4 -0%
NRU 0 26,676 25,170 0 0 497 1,322 18,568 14.0 2%
OMSH
XTEG 64 30 30 18 -2 2 -5 60% -3.5 -3%

10-Q 1 nrufy2020q2form10-q.htm NRU FY2020 Q2 FORM 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-Q
__________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2019
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             

Commission File Number: 1-7102
__________________________
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
__________________________
District of Columbia
 
52-0891669
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
20701 Cooperative Way, Dulles, Virginia, 20166
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (703) 467-1800
__________________________
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
7.35% Collateral Trust Bonds, due 2026
 NRUC 26
New York Stock Exchange
5.50% Subordinated Notes, due 2064
NRUC
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes x  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨    Accelerated filer ¨    Non-accelerated filer x Smaller reporting company¨ Emerging growth company¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨  No x
 



TABLE OF CONTENTS
 
  
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 

i


INDEX OF MD&A TABLES
 
Table
  
 Description
 
Page
1
 
Summary of Selected Financial Data
 
3

2
 
Average Balances, Interest Income/Interest Expense and Average Yield/Cost
 
10

3
 
Rate/Volume Analysis of Changes in Interest Income/Interest Expense
 
13

4
 
Non-Interest Income
 
16

5
 
Derivative Gains (Losses)
 
16

6
 
Derivative Cash Settlements Expense—Average Notional Amounts and Interest Rates
 
17

7
 
Non-Interest Expense
 
19

8
 
Loans Outstanding by Type and Member Class
 
20

9
 
Historical Retention Rate and Repricing Selection
 
21

10
 
Total Debt Outstanding
 
22

11
 
Member Investments
 
24

12
 
Collateral Pledged
 
25

13
 
Unencumbered Loans
 
25

14
 
Equity
 
26

15
 
Guarantees Outstanding
 
27

16
 
Maturities of Guarantee Obligations
 
28

17
 
Unadvanced Loan Commitments
 
28

18
 
Notional Maturities of Unadvanced Loan Commitments
 
29

19
 
Maturities of Notional Amount of Unconditional Committed Lines of Credit
 
30

20
 
Loan Portfolio Security Profile
 
31

21
 
Loan Exposure to 20 Largest Borrowers
 
33

22
 
Troubled Debt Restructured Loans
 
34

23
 
Allowance for Loan Losses
 
35

24
 
Rating Triggers for Derivatives
 
36

25
 
Available Liquidity
 
37

26
 
Committed Bank Revolving Line of Credit Agreements
 
38

27
 
Short-Term Borrowings—Funding Sources
 
40

28
 
Short-Term Borrowings
 
40

29
 
Issuances and Repayments of Long-Term and Subordinated Debt
 
41

30
 
Principal Maturity of Long-Term and Subordinated Debt
 
41

31
 
Projected Sources and Uses of Liquidity from Debt and Investment Activity
 
42

32
 
Credit Ratings
 
43

33
 
Interest Rate Gap Analysis
 
45

34
 
Adjusted Financial Measures—Income Statement
 
46

35
 
TIER and Adjusted TIER
 
47

36
 
Adjusted Financial Measures—Balance Sheet
 
47

37
 
Debt-to-Equity Ratio
 
47

38
 
Members’ Equity
 
48


ii


PART I—FINANCIAL INFORMATION

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A)
FORWARD-LOOKING STATEMENTS

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 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”). 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.
INTRODUCTION

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 “we,” “our” or “us” relate to CFC and its consolidated entities. All references to members within this document include members, associates and affiliates of CFC and its consolidated entities.

1



Our principal operations are organized for management reporting purposes into three business segments: CFC, NCSC and RTFC. Loans to members totaled $26,438 million as of November 30, 2019, of which 96% was attributable to CFC. We generated total revenue, which consists of net interest income and fee and other income, of $171 million for the six months ended November 30, 2019, compared with $153 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.
SUMMARY OF SELECTED FINANCIAL DATA

Table 1 provides a summary of consolidated selected financial data for the three and six months ended November 30, 2019 and 2018, and as of November 30, 2019 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) 
 
 
Three Months Ended November 30,
 
 
 
Six Months Ended November 30,
 
 
(Dollars in thousands)
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Statement of operations:
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
287,037

 
$
281,253

 
   2%
 
$
577,052

 
$
559,744

 
   3%
Interest expense
 
(207,871
)
 
(204,166
)
 
2
 
(421,142
)
 
(414,397
)
 
2
Net interest income
 
79,166

 
77,087

 
3
 
155,910

 
145,347

 
7
Fee and other income(1)
 
3,842

 
3,595

 
7
 
14,783

 
7,506

 
97
Total revenue
 
83,008

 
80,682

 
3
 
170,693

 
152,853

 
12
Benefit for loan losses
 
1,045

 
1,788

 
(42)
 
1,015

 
1,897

 
(46)
Derivative gains (losses)(2)
 
183,450

 
63,343

 
190
 
(212,275
)
 
70,526

 
**
Unrealized gains (losses) on equity securities(1)
 
(114
)
 
(1,619
)
 
(93)
 
1,506

 
(2,345
)
 
**
Operating expenses(3) 
 
(24,769
)
 
(23,870
)
 
4
 
(50,098
)
 
(47,075
)
 
6
Other non-interest (expense) income
 
(929
)
 
(355
)
 
162
 
6,250

 
(7,849
)
 
**
Income (loss) before income taxes
 
241,691

 
119,969

 
101
 
(82,909
)
 
168,007

 
**
Income tax benefit (expense)
 
(91
)
 
(243
)
 
(63)
 
430

 
(303
)
 
**
Net income (loss)
 
$
241,600

 
$
119,726

 
102
 
$
(82,479
)
 
$
167,704

 
**
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted operational financial measures
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted interest expense(4)
 
$
(222,021
)
 
$
(215,971
)
 
3
 
$
(446,335
)
 
$
(439,031
)
 
2
Adjusted net interest income(4)
 
65,016

 
65,282

 
 
130,717

 
120,713

 
8
Adjusted net income(4)
 
44,000

 
44,578

 
(1)
 
104,603

 
72,544

 
44
 
 
 
 
 
 
 
 
 
 
 
 
 
Selected ratios
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-charge coverage ratio/TIER(5)
 
2.16

 
1.59

 
57 bps
 
0.80

 
1.40

 
(60) bps
Adjusted TIER(4)
 
1.20

 
1.21

 
(1)
 
1.23

 
1.17

 
6
Net interest yield(6)
 
1.17
%
 
1.19
%
 
(2)
 
1.16
%
 
1.12
%
 
4
Adjusted net interest yield(4)(7)
 
0.96

 
1.01

 
(5)
 
0.97

 
0.93

 
4
Net charge-off rate(8)
 
0.00

 
0.00

 
 
0.00

 
0.00

 





3



 
 
November 30, 2019
 
May 31, 2019
 
Change
Balance sheet
 
 
 
 
 
 
Cash, cash equivalents and restricted cash
 
$
124,671

 
$
186,204

 
   (33)%
Investment securities
 
637,356

 
652,977

 
(2)
Loans to members(9)
 
26,438,181

 
25,916,904

 
  2
Allowance for loan losses
 
(16,520
)
 
(17,535
)
 
  (6)
Loans to members, net
 
26,421,661

 
25,899,369

 
  2
Total assets
 
27,566,601

 
27,124,372

 
  2
Short-term borrowings
 
4,789,024

 
3,607,726

 
  33
Long-term debt
 
18,434,451

 
19,210,793

 
  (4)
Subordinated deferrable debt
 
986,026

 
986,020

 
Members’ subordinated certificates
 
1,355,052

 
1,357,129

 
Total debt outstanding
 
25,564,553

 
25,161,668

 
  2
Total liabilities
 
26,408,707

 
25,820,490

 
  2
Total equity
 
1,157,894

 
1,303,882

 
  (11)
Guarantees(10)
 
794,723

 
837,435

 
  (5)
 
 
 
 
 
 
 
Selected ratios period end
 
 
 
 
 

Allowance coverage ratio(11)
 
0.06
%
 
0.07
%
 
(1) bps
Debt-to-equity ratio(12)
 
22.81

 
19.80

 
301
Adjusted debt-to-equity ratio(4)
 
5.78

 
5.73

 
5
____________________________ 
** 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 November 30, 2019 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 or below 6.00-to-1.

We are subject to period-to-period volatility in our reported GAAP results due to changes in market conditions and differences in the way our financial assets and liabilities are accounted for under GAAP. Our financial assets and liabilities expose us to interest-rate risk. We use derivatives, primarily interest rate swaps, as part of our strategy in managing this risk. Our derivatives are intended to economically hedge and manage the interest-rate sensitivity mismatch between our financial assets and liabilities. We are required under GAAP to carry derivatives at fair value on our consolidated balance sheet; however, the financial assets and liabilities for which we use derivatives to economically hedge are carried at amortized cost. Changes in interest rates and 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 net income of $242 million and a TIER of 2.16 for the quarter ended November 30, 2019 (“current quarter”), compared with net income of $120 million and a TIER of 1.59 for the same prior-year quarter. We reported a net loss of $82 million for the six months ended November 30, 2019, which resulted in a TIER of 0.80. In comparison, we reported net income of $168 million and a TIER of 1.40 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 22.81 as of November 30, 2019, 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 $82 million for the six months ended November 30, 2019 and patronage capital retirement of $63 million in September 2019.

The variance of $122 million between our reported net income of $242 million for the current quarter and our reported net income of $120 million for the same prior-year quarter was driven by an increase in derivative gains of $120 million. We recorded derivative gains of $183 million for the current quarter, compared with derivative gains of $63 million for the same prior-year quarter. The derivative gains in both periods were primarily attributable to an increase in the fair value of our pay-fixed swaps due to increases in medium- and long-term swap rates during each period. The rise in medium- and long-term interest rates, however, was more pronounced during the current quarter relative to the same prior-year quarter, resulting in significantly higher derivative gains. Net interest income, which accounted for 95% and 96% of total revenue for both the current quarter and same prior-year quarter, increased by $2 million, or 3%, to $79 million. The increase was attributable to an increase in our average interest-earning assets of $1,121 million, or 4%, which was partially offset by a decrease in the net interest yield of 2 basis points, or 2%, to 1.17%.



5



The variance of $250 million between our reported net loss of $82 million for the six months ended November 30, 2019, and our reported net income of $168 million for the same prior-year period was driven by an unfavorable shift in derivative fair value changes of $283 million. We recorded derivative losses of $212 million for the six months ended November 30, 2019, largely due to a decrease in the fair value of our pay-fixed swaps resulting from a decline in interest rates across the swap curve. In comparison, we recorded derivative gains of $71 million during the comparable prior-year period due to an increase in the fair value of our pay-fixed swaps resulting from a rise in interest rates across the swap yield curve. Net interest income, which accounted for 91% and 95% of total revenue for the six months ended November 30, 2019 and 2018, respectively, increased $11 million, or 7%, to $156 million. The increase was attributable to the combined impact of an increase in average interest-earning assets of $976 million, or 4%, and an increase in the net interest yield of 4 basis points, or 4%, to 1.16%. The increase in the net interest yield was due to a reduction in our average cost of funds of 5 basis points to 3.32%, which was partially offset by a slight decrease in the average yield on interest-earning assets of 1 basis point to 4.28%. 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, which more than offset an increase in the average cost of our short-term and variable-rate funding due to a rise in short-term interest rates during fiscal year 2019.

Other factors affecting the variance between our results for the six months ended November 30, 2019 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 $44 million and adjusted TIER was 1.20 for the current quarter, compared with adjusted net income of $45 million and adjusted TIER of 1.21 for the same prior-year quarter. Adjusted net income totaled $105 million and adjusted TIER was 1.23 for the six months ended November 30, 2019, compared with adjusted net income of $73 million and adjusted TIER of 1.17 for the same prior-year period. Our adjusted debt-to-equity ratio increased to 5.78 as of November 30, 2019, from 5.73 as of May 31, 2019, primarily attributable to an increase in debt to fund loan growth.

Adjusted net income for the current quarter was relatively unchanged from the same prior-year quarter, as a modest increase in operating expenses and losses on early extinguishment of debt and a reduction in the benefit for loan losses were largely offset by lower unrealized losses on equity securities. Adjusted net interest income of $44 million also remained relatively flat compared with the same prior-year quarter, as a decrease in our adjusted net interest yield of 5 basis points, or 5%, to 0.96% was offset by the increase in average interest-earning assets of $1,121 million, or 4%. The decrease in our adjusted net interest yield of 5 basis points was driven by a decline in the average yield on interest-earning assets of 8 basis points to 4.26%, which was partially offset by a reduction in our adjusted average cost of funds of 3 basis points to 3.50%.

The increase in adjusted net income of $32 million for the six months ended November 30, 2019 from the same prior-year period was attributable to an increase in adjusted net interest income of $10 million, or 8%, to $105 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 8% was driven by the increase in our average interest-earning assets of 4% and an increase in our adjusted net interest yield of 4 basis points, or 4%, to 0.97%. Our adjusted net interest yield reflected the favorable impact of a reduction in our adjusted average cost of funds of 5 basis points to 3.52%, which was partially offset by a slight decrease in the average yield on interest-earning assets of 1 basis point to 4.28%. 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, which more than offset an increase in the average cost of our short-term and variable-rate funding.

See “Non-GAAP Financial Measures” for additional information on our adjusted measures, including a reconciliation of these measures to the most comparable GAAP measures.


6



Lending Activity

Loans to members totaled $26,438 million as of November 30, 2019, an increase of $521 million, or 2%, from May 31, 2019. The increase in loans was driven by a net increase in long-term loans of $631 million, which was partially offset by a net decrease in revolving line-of-credit loans of $110 million. CFC distribution loans, CFC power supply loans and RTFC loans increased by $527 million, $23 million and $11 million, respectively, while NCSC loans decreased by $41 million.

Long-term loan advances totaled $1,387 million during the six months ended November 30, 2019, with approximately 69% of those advances for capital expenditures by members and 25% for the refinancing of loans made by other lenders. In comparison, long-term loan advances totaled $814 million during the same prior-year period, with approximately 83% of those advances for capital expenditures and 14% for the refinancing of loans made by other lenders. CFC had long-term fixed-rate loans totaling $234 million that were scheduled to reprice during the six months ended November 30, 2019. Of this total, $224 million repriced to a new long-term fixed rate, $7 million repriced to a long-term variable rate and $3 million was repaid in full. In comparison, CFC had long-term fixed-rate loans totaling $439 million that were scheduled to reprice during the same prior-year period, of which $296 million repriced to a new long-term fixed rate, $88 million repriced to a long-term variable rate and $55 million was repaid in full.

Credit Quality

The overall credit quality of our loan portfolio remained high as of November 30, 2019, as evidenced by our continued strong credit performance metrics. We had no delinquent or nonperforming loans as of November 30, 2019, 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 November 30, 2019, 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 November 30, 2019, compared to 92% secured and 8% unsecured as of May 31, 2019. The allowance for loan losses was $17 million as of November 30, 2019, compared with $18 million as of May 31, 2019, and the allowance coverage ratio was 0.06% as of November 30, 2019, and 0.07% as of 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 $403 million, or 2%, to $25,565 million as of November 30, 2019, 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 $916 million, a net increase in dealer commercial paper outstanding of $94 million and a net increase in Federal Agricultural Mortgage Corporation (“Farmer Mac”) notes payable of $40 million. These increases were partially offset by a net decrease in medium-term notes of $296 million, a net decrease in collateral trust bonds of $297 million and a net decrease in borrowings under USDA’s Guaranteed Underwriter Program (“Guaranteed Underwriter Program”) of $47 million. Outstanding dealer commercial paper totaled $1,039 million as of November 30, 2019, below our targeted maximum threshold of $1,250 million.

On September 25, 2019, we received a commitment letter for the guarantee by RUS of a $500 million loan facility from the Federal Financing Bank under the Guaranteed Underwriter Program.

On November 14, 2019, we provided notice to Farmer Mac of termination of the $300 million revolving note purchase agreement, effective December 20, 2019. On November 27, 2019, we received an advance of $150 million under this revolving note purchase agreement with Farmer Mac, which was repaid on December 4, 2019.

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

7



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.

Outlook for the Next 12 Months

We currently expect that our net interest income, adjusted net interest income, net interest yield and adjusted net interest yield will increase slightly over the next 12 months, largely due to a projected decrease in our average cost of funds and an increase in average interest-earning assets.

The face value of long-term debt scheduled to mature over the next 12 months totaled $1,772 million as of November 30, 2019, consisting of $1,624 million of fixed-rate debt with a weighted average cost of 2.45% and $148 million of variable-rate debt. We believe we have sufficient liquidity from the combination of existing cash and cash equivalents, member loan repayments, committed bank revolving lines of credit, committed loan facilities 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, to meet the demand for member loan advances and satisfy our obligations to repay long-term debt maturing over the next 12 months. As of November 30, 2019, sources of liquidity readily available for access totaled $6,591 million, consisting of (i) $114 million in cash and cash equivalents; (ii) up to $1,350 million available under committed loan facilities under the Guaranteed Underwriter Program; (iii) up to $2,722 million available for access under committed bank revolving line of credit agreements; (iv) up to $2,255 million available under a revolving note purchase agreement with Farmer Mac, subject to market conditions; and (v) up to $150 million available under a committed revolving note purchase agreement with Farmer Mac.

We believe we can continue to roll over outstanding member short-term debt of $3,600 million as of November 30, 2019, based on our expectation that our members will continue to reinvest their excess cash in our commercial paper, daily liquidity fund notes, select notes and medium-term notes. We expect to continue accessing the dealer commercial paper market as a cost-effective means of satisfying our short-term liquidity needs. Although the intra-period amount of outstanding dealer commercial paper may fluctuate based on our liquidity requirements, we intend to manage our short-term wholesale funding risk by maintaining outstanding dealer commercial paper at an amount near or below $1,250 million for the foreseeable future. We expect to continue to be in compliance with the covenants under our committed bank revolving line of credit agreements, which will allow us to mitigate roll-over risk, as we can draw on these facilities to repay dealer or member commercial paper that cannot be refinanced with similar debt.

While we are not subject to bank regulatory capital rules, we generally aim to maintain an adjusted debt-to-equity ratio at approximately or below 6.00-to-1. Our adjusted debt-to-equity ratio was 5.78 as of November 30, 2019, below our targeted threshold. Based on our projection of loan advances and adjusted equity over the next 12 months, we anticipate that our adjusted debt-to-equity ratio will remain below our target threshold of 6.00-to-1.
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

8



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.
CONSOLIDATED RESULTS OF OPERATIONS

The section below provides a comparative discussion of our condensed consolidated results of operations between the three months ended November 30, 2019 and 2018 and the six months ended November 30, 2019 and 2018. Following this section, we provide a comparative analysis of our condensed consolidated balance sheets as of November 30, 2019 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 2 presents average balances for the three and six months ended November 30, 2019 and 2018, and for each major category of our interest-earning assets and interest-bearing liabilities, the interest income earned or interest expense incurred, and the average yield or cost. Table 2 also presents non-GAAP adjusted interest expense, adjusted net interest income and adjusted net interest yield, which reflect the inclusion of net accrued periodic derivative cash settlements expense in interest expense. We provide reconciliations of our non-GAAP adjusted measures to the most comparable GAAP measures under “Non-GAAP Financial Measures.”

9



Table 2: Average Balances, Interest Income/Interest Expense and Average Yield/Cost
 
 
Three Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
Assets:
 
Average Balance
 
Interest Income/Expense
 
Average Yield/Cost
 
Average Balance
 
Interest Income/Expense
 
Average Yield/Cost
Long-term fixed-rate loans(1)
 
$
23,837,295

 
$
260,714

 
4.40
%
 
$
22,688,250

 
$
253,340

 
4.48
%
Long-term variable-rate loans
 
929,958

 
8,131

 
3.52

 
1,096,965

 
10,066

 
3.68

Line of credit loans
 
1,528,905

 
12,678

 
3.34

 
1,351,917

 
11,752

 
3.49

TDR loans(2)
 
11,179

 
212

 
7.63

 
12,184

 
211

 
6.95

Other income, net(3)
 

 
(287
)
 

 

 
(251
)
 

Total loans
 
26,307,337

 
281,448

 
4.30

 
25,149,316

 
275,118

 
4.39

Cash, time deposits and investment securities
 
795,676

 
5,589

 
2.83

 
833,165

 
6,135

 
2.95

Total interest-earning assets
 
$
27,103,013

 
$
287,037

 
4.26
%
 
$
25,982,481

 
$
281,253

 
4.34
%
Other assets, less allowance for loan losses
 
552,945

 
 
 
 
 
1,090,619

 
 
 
 
Total assets
 
$
27,655,958

 
 
 
 
 
$
27,073,100

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
$
4,108,239

 
$
22,112

 
2.16
%
 
$
3,816,429

 
$
22,619

 
2.38
%
Medium-term notes
 
3,485,891

 
31,440

 
3.63

 
3,910,610

 
33,816

 
3.47

Collateral trust bonds
 
7,232,411

 
64,523

 
3.59

 
7,265,598

 
68,934

 
3.81

Guaranteed Underwriter Program notes payable
 
5,375,091

 
39,786

 
2.98

 
4,835,203

 
35,014

 
2.90

Farmer Mac notes payable
 
2,962,126

 
22,654

 
3.08

 
2,556,991

 
19,697

 
3.09

Other notes payable
 
21,519

 
230

 
4.30

 
29,923

 
322

 
4.32

Subordinated deferrable debt
 
985,996


12,884

 
5.26

 
742,456


9,417

 
5.09

Subordinated certificates
 
1,355,773

 
14,242

 
4.22

 
1,377,089

 
14,347

 
4.18

Total interest-bearing liabilities
 
$
25,527,046

 
$
207,871

 
3.28
%
 
$
24,534,299

 
$
204,166

 
3.34
%
Other liabilities
 
1,116,838

 
 
 
 
 
976,113

 
 
 
 
Total liabilities
 
26,643,884

 
 
 
 
 
25,510,412

 
 
 
 
Total equity
 
1,012,074

 
 
 
 
 
1,562,688

 
 
 
 
Total liabilities and equity
 
$
27,655,958

 
 
 
 
 
$
27,073,100

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest spread(4)
 
 
 
 
 
0.98
%
 
 
 
 
 
1.00
%
Impact of non-interest bearing funding(5)
 
 
 
 
 
0.19

 
 
 
 
 
0.19

Net interest income/net interest yield(6)
 
 
 
$
79,166

 
1.17
%
 
 
 
$
77,087

 
1.19
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net interest income/adjusted net interest yield:
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
 
 
$
287,037

 
4.26
%
 
 
 
$
281,253

 
4.34
%
Interest expense
 
 
 
207,871

 
3.28

 
 
 
204,166

 
3.34

Add: Net accrued periodic derivative cash settlement(7)
 
 
 
14,150

 
0.54

 
 
 
11,805

 
0.43

Adjusted interest expense/adjusted average cost(8)
 
 
 
$
222,021

 
3.50
%
 
 
 
$
215,971

 
3.53
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net interest spread(4)
 
 
 
 
 
0.76
%
 
 
 
 
 
0.81
%
Impact of non-interest bearing funding(5)
 
 
 
 
 
0.20

 
 
 
 
 
0.20

Adjusted net interest income/adjusted net interest yield(9)
 
 
 
$
65,016

 
0.96
%
 
 
 
$
65,282

 
1.01
%
 
 
 
 
 
 
 
 
 
 
 
 
 

10



 
 
Six Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
Assets:
 
Average Balance
 
Interest Income/Expense
 
Average Yield/Cost
 
Average Balance
 
Interest Income/Expense
 
Average Yield/Cost
Long-term fixed-rate loans(1)
 
$
23,596,704

 
$
519,192

 
4.40
%
 
$
22,691,903

 
$
505,141

 
4.44
%
Long-term variable-rate loans
 
961,704

 
17,887

 
3.72

 
1,084,188

 
19,447

 
3.58

Line of credit loans
 
1,620,994

 
28,711

 
3.54

 
1,387,579

 
23,385

 
3.36

TDR loans(2)
 
11,484

 
418

 
7.28

 
12,369

 
429

 
6.92

Other income, net(3)
 

 
(571
)
 

 

 
(576
)
 

Total loans
 
26,190,886

 
565,637

 
4.32

 
25,176,039

 
547,826

 
4.34

Cash, time deposits and investment securities
 
782,146

 
11,415

 
2.92

 
821,222

 
11,918

 
2.89

Total interest-earning assets
 
$
26,973,032

 
$
577,052

 
4.28
%
 
$
25,997,261

 
$
559,744

 
4.29
%
Other assets, less allowance for loan losses
 
579,465

 
 
 
 
 
907,444

 
 
 
 
Total assets
 
$
27,552,497

 


 
 
 
$
26,904,705

 


 


 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 


 


 


 


 


Short-term borrowings
 
$
3,809,089

 
$
44,934

 
2.36
%
 
$
3,667,402

 
$
42,038

 
2.29
%
Medium-term notes
 
3,529,164

 
63,516

 
3.60

 
3,833,484

 
66,226

 
3.45

Collateral trust bonds
 
7,309,165

 
129,904

 
3.55

 
7,370,550

 
146,639

 
3.97

Guaranteed Underwriter Program notes payable
 
5,386,771

 
80,219

 
2.98

 
4,841,855

 
70,348

 
2.90

Farmer Mac notes payable
 
2,997,053

 
47,728

 
3.18

 
2,674,397

 
40,808

 
3.04

Other notes payable
 
22,027

 
484

 
4.39

 
29,900

 
644

 
4.30

Subordinated deferrable debt
 
986,005

 
25,766

 
5.23

 
742,439

 
18,834

 
5.06

Subordinated certificates
 
1,355,960

 
28,591

 
4.22

 
1,377,524

 
28,860

 
4.18

Total interest-bearing liabilities
 
$
25,395,234

 
$
421,142

 
3.32
%
 
$
24,537,551

 
$
414,397

 
3.37
%
Other liabilities
 
1,064,284

 
 
 

 
836,273

 

 
 
Total liabilities
 
26,459,518

 
 
 

 
25,373,824

 

 
 
Total equity
 
1,092,979

 
 
 
 
 
1,530,881

 

 
 
Total liabilities and equity
 
$
27,552,497

 


 
 
 
$
26,904,705

 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest spread(4)
 
 
 


 
0.96
%
 


 


 
0.92
%
Impact of non-interest bearing funding(5)
 
 
 
 
 
0.20

 
 
 
 
 
0.20

Net interest income/net interest yield(6)
 
 
 
$
155,910

 
1.16
%
 
 
 
$
145,347

 
1.12
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net interest income/adjusted net interest yield:
 
 
 
 
 


 
 
 
 
 
 
Interest income
 
 
 
$
577,052

 
4.28
%
 
 
 
$
559,744

 
4.29
%
Interest expense
 
 
 
421,142

 
3.32

 
 
 
414,397

 
3.37

Add: Net accrued periodic derivative cash settlement(7)
 
 
 
25,193

 
0.47

 
 
 
24,634

 
0.45

Adjusted interest expense/adjusted average cost(8)
 
 
 
$
446,335

 
3.52
%
 


 
$
439,031

 
3.57
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net interest spread(4)
 
 
 
 
 
0.76
%
 

 
 
 
0.72
%
Impact of non-interest bearing funding(5)
 
 
 
 
 
0.21

 
 
 
 
 
0.21

Adjusted net interest income/adjusted net interest yield(9)
 
 
 
$
130,717

 
0.97
%
 

 
$
120,713


0.93
%
____________________________ 
(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.

11



(4)Net interest spread represents the difference between the average yield on total average interest-earning assets and the average cost of total average interest-bearing liabilities. Adjusted net interest spread represents the difference between the average yield on total average interest-earning assets and the adjusted average cost of total average interest-bearing liabilities.
(5)Includes other liabilities and equity.
(6)Net interest yield is calculated based on annualized net interest income for the period divided by total average interest-earning assets for the period.
(7)Represents the impact of net accrued periodic interest rate swap settlements during the period. This amount is added to interest expense to derive non-GAAP adjusted interest expense. The average (benefit)/cost associated with derivatives is calculated based on annualized net accrued periodic interest rate swap settlements during the period divided by the average outstanding notional amount of derivatives during the period. The average outstanding notional amount of interest rate swaps was $10,599 million and $11,123 million for the three months ended November 30, 2019 and 2018, respectively. The average outstanding notional amount of interest rate swaps was $10,676 million and $11,039 million for the six months ended November 30, 2019 and 2018, 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 3 displays the change in net interest income between periods and the extent to which the variance is attributable to:
(i) changes in the volume of our interest-earning assets and interest-bearing liabilities or (ii) changes in the interest rates of these assets and liabilities. The table also presents the change in adjusted net interest income between periods. Changes that are not solely due to either volume or rate are allocated to these categories on a pro-rata basis based on the absolute value of the change due to average volume and average rate.
 

12



Table 3: Rate/Volume Analysis of Changes in Interest Income/Interest Expense
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
 
 
2019 versus 2018
 
2019 versus 2018
 
 
Total
 
Variance due to:(1)
 
Total
 
Variance due to:(1)
(Dollars in thousands)
 
Variance
 
Volume
 
Rate
 
Variance
 
Volume
 
Rate
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Long-term fixed-rate loans
 
$
7,374

 
$
12,103

 
$
(4,729
)
 
$
14,051

 
$
18,706

 
$
(4,655
)
Long-term variable-rate loans
 
(1,935
)
 
(1,556
)
 
(379
)
 
(1,560
)
 
(2,244
)
 
684

Line of credit loans
 
926

 
1,502

 
(576
)
 
5,326

 
3,859

 
1,467

Restructured loans
 
1

 
(18
)
 
19

 
(11
)
 
(32
)
 
21

Other income, net
 
(36
)
 

 
(36
)
 
5

 

 
5

Total loans
 
6,330

 
12,031

 
(5,701
)
 
17,811

 
20,289

 
(2,478
)
Cash, time deposits and investment securities
 
(546
)
 
(292
)
 
(254
)
 
(503
)
 
(598
)
 
95

Interest income
 
5,784

 
11,739

 
(5,955
)
 
17,308

 
19,691

 
(2,383
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
(507
)
 
1,663

 
(2,170
)
 
2,896

 
1,505

 
1,391

Medium-term notes
 
(2,376
)
 
(3,755
)
 
1,379

 
(2,710
)
 
(5,424
)
 
2,714

Collateral trust bonds
 
(4,411
)
 
(502
)
 
(3,909
)
 
(16,735
)
 
(1,619
)
 
(15,116
)
Guaranteed Underwriter Program notes payable
 
4,772

 
3,803

 
969

 
9,871

 
7,703

 
2,168

Farmer Mac notes payable
 
2,957

 
3,058

 
(101
)
 
6,920

 
4,798

 
2,122

Other notes payable
 
(92
)
 
(91
)
 
(1
)
 
(160
)
 
(171
)
 
11

Subordinated deferrable debt
 
3,467

 
3,055

 
412

 
6,932

 
6,110

 
822

Subordinated certificates
 
(105
)
 
(261
)
 
156

 
(269
)
 
(529
)
 
260

Interest expense
 
3,705

 
6,970

 
(3,265
)
 
6,745

 
12,373

 
(5,628
)
Net interest income
 
$
2,079

 
$
4,769

 
$
(2,690
)
 
$
10,563

 
$
7,318

 
$
3,245

 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
5,784

 
$
11,739

 
$
(5,955
)
 
$
17,308

 
$
19,691

 
$
(2,383
)
Interest expense
 
3,705

 
6,970

 
(3,265
)
 
6,745

 
12,373

 
(5,628
)
Net accrued periodic derivative cash settlements expense(2)
 
2,345

 
(587
)
 
2,932

 
559

 
(874
)
 
1,433

Adjusted interest expense(3)
 
6,050

 
6,383

 
(333
)
 
7,304

 
11,499

 
(4,195
)
Adjusted net interest income
 
$
(266
)
 
$
5,356

 
$
(5,622
)
 
$
10,004

 
$
8,192

 
$
1,812

____________________________ 
(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 $79 million for the current quarter was up $2 million, or 3%, from the comparable prior-year quarter, as the decrease in the net interest yield of 2% (2 basis points) to 1.17% was partially offset by an increase in average interest-earning assets of 4%.


13



Net Interest Yield: The decrease of 2 basis points in the net interest yield for the current quarter was due to a decrease in the average yield on interest-earning assets of 8 basis points to 4.26%, partially offset by a decrease in the average cost of funds of 6 basis points to 3.28%. The decrease in the average yield on interest-earning assets was 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 November 30, 2018. The decrease in our average cost of funds was largely due to higher interest cost savings during the current quarter from the full repayment of the $1 billion aggregate principal amount of the 10.375% collateral trust bonds during the first half of fiscal year 2019 and the replacement of this debt with lower-cost funding. The replacement of this debt with lower-cost funding more than offset an increase in the average cost of our short-term and variable-rate funding.

Average Interest-Earning Assets: The increase in average interest-earning assets of 4% during the current quarter was driven by growth in average total loans of $1,158 million, or 5%, as members obtained advances to fund capital investments and refinanced with us loans made by other lenders.

Reported net interest income of $156 million for the six months ended November 30, 2019 was up $11 million, or 7%, from the comparable prior-year period, driven by an increase in the net interest yield of 4% (4 basis points) to 1.16%, coupled with an increase in average interest-earning assets of 4%.

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 5 basis points to 3.32%, partially offset by a decrease in the average yield on interest-earning assets of 1 basis point to 4.28%. 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. These amounts more than offset the increase in the average cost of our short-term, variable-rate borrowings resulting from the rise in short-term interest rates during fiscal year 2019 and an increase in the average cost of subordinated deferrable debt resulting from the issuance of $250 million of 5.50% subordinated deferrable debt in May 2019. The decrease in the average yield on interest-earning assets was attributable to a 4 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 November 30, 2018. The decrease in the average yield on our long-term fixed rate loan portfolio was partially offset by higher average rates on line of credit and variable-rate loans due to the overall rise in short-term interest rates during fiscal year 2019.

Average Interest-Earning Assets: The increase in average interest-earning assets of 4% during the six months ended November 30, 2019 was driven by growth in average total loans of $1,015 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 $65 million for the current quarter remained relatively unchanged from the comparable prior-year quarter, as the decrease in the adjusted net interest yield of 5 basis points, or 5%, to 0.96% offset the increase in average interest-earning assets of 4%.

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 8 basis points to 4.26%, partially offset by a reduction in our adjusted average cost of funds of 3 basis points to 3.50%. As noted above, the decrease in the average yield on interest-earning assets was 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 November 30, 2018. The reduction in our adjusted average cost of funds was also largely attributable to higher interest cost savings from the full repayment of the $1 billion aggregate principal amount of the 10.375% collateral trust bonds during the first half of fiscal year 2019 and the replacement of this debt with lower-cost funding. The replacement of this debt with lower-cost funding more than offset an increase in the average cost of our short-term and variable-rate funding.

Average Interest-Earning Assets: The increase in average interest-earning assets of 4% was driven by the growth in average total loans of $1,158 million.


14



Adjusted net interest income of $131 million for the six months ended November 30, 2019 was up $10 million, or 8%, from the comparable prior-year period, driven by an increase in the adjusted net interest yield of 4 basis points, or 4%, to 0.97% and the increase in average interest-earning assets of 4%.

Adjusted Net Interest Yield: The increase in the adjusted net interest yield was due to a reduction in our adjusted average cost of funds of 5 basis points to 3.52%, partially offset by the decrease in the average yield on interest-earning assets of 1 basis point to 4.28%. As noted above, 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. Together these amounts more than offset the increase in the average cost of our short-term, variable-rate borrowings resulting from the rise in short-term interest rates during fiscal year 2019 and the increase in the average cost of subordinated deferrable debt resulting from the issuance of $250 million of 5.50% subordinated deferrable debt in May 2019. The decrease in the average yield on interest-earning assets was attributable to a 4 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 November 30, 2018. The decrease in the average yield on our long-term fixed rate loan portfolio was partially offset by higher average rates on line of credit and variable-rate loans due to the overall rise in short-term interest rates during fiscal year 2019.

Average Interest-Earning Assets: The increase in average interest-earning assets of 4% was driven by the growth in average total loans of $1,015 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 $12 million for the same prior-year quarter. Net periodic derivative cash settlement expense totaled $25 million for the six months ended November 30, 2019, relatively unchanged from 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 $17 million and $18 million as of November 30, 2019 and May 31, 2019, respectively.

We recorded a benefit for loan losses of $1 million for both the three and six months ended November 30, 2019. In comparison, we recorded a benefit for loan losses of $2 million for both the three and six months ended November 30, 2018. The credit quality and performance statistics of our loan portfolio remain strong. We had no payment defaults or charge-offs during the quarter, and no delinquent loans or nonperforming loans in our loan portfolio as of November 30, 2019 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 4 presents the components of non-interest income for the three and six months ended November 30, 2019 and 2018.






15



Table 4: Non-Interest Income
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
 
2019

2018
Non-interest income:
 
 
 
 
 
 
 
 
Fee and other income
 
$
3,842

 
$
3,595

 
$
14,783

 
$
7,506

Derivative gains (losses)
 
183,450

 
63,343

 
(212,275
)
 
70,526

Unrealized gains (losses) on equity securities
 
(114
)
 
(1,619
)
 
1,506

 
(2,345
)
Total non-interest income
 
$
187,178

 
$
65,319

 
$
(195,986
)
 
$
75,687


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 six months ended November 30, 2019.

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 November 30, 2019 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 London Interbank Offered Rate (“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 5 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.

Table 5: Derivative Gains (Losses)
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Derivative gains (losses) attributable to:
 
 
 
 
 
 
 
 
Derivative cash settlements expense
 
$
(14,150
)
 
$
(11,805
)
 
$
(25,193
)
 
$
(24,634
)
Derivative forward value gains (losses)
 
197,600

 
75,148

 
(187,082
)
 
95,160

Derivative gains (losses)
 
$
183,450

 
$
63,343

 
$
(212,275
)
 
$
70,526



16



The net derivative gains of $183 million for the three months ended November 30, 2019 were attributable to a net increase in the fair value of our pay-fixed swaps resulting from an increase in medium- and long-term interest rates during the current quarter. The net derivative losses of $212 million for the six months ended November 30, 2019, 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, with short-term interest rates experiencing a greater decline than medium- and long-term rates. 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 November 30, 2019, August 31, 2019 and May 31, 2019 swap curves presented in the comparative swap curves chart below.

The net derivative gains of $63 million and $71 million in the three and six months ended November 30, 2018, respectively, were attributable to an increase in the fair value of our pay-fixed swaps resulting from an increase in interest rates across the swap yield curve, as depicted by the November 30, 2018 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 70% and 68% of the outstanding notional amount of our derivative portfolio as of November 30, 2019 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 18 years and four years, respectively, as of November 30, 2019. In comparison, the average remaining maturity of our pay-fixed and receive-fixed swaps was 19 years and four years, respectively, as of November 30, 2018.

Derivative Cash Settlements

As indicated in Table 5 above, net periodic derivative cash settlement expense totaled $14 million and $25 million for the three and six months ended November 30, 2019, respectively. In comparison, net periodic derivative cash settlement expense totaled $12 million and $25 million for the three and six months ended November 30, 2018, respectively. Table 6 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 6: Derivative Cash Settlements Expense—Average Notional Amounts and Interest Rates
 
 
Three Months Ended November 30,
 
 
2019
 
2018
(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
 
$
7,299,322

 
2.84
%
 
2.08
%
 
$
7,424,114

 
2.82
%
 
2.43
%
Receive-fixed swaps
 
3,300,099

 
2.77

 
2.59

 
3,699,000

 
3.05

 
2.52

Total
 
$
10,599,421

 
2.82
%
 
2.24
%
 
$
11,123,114

 
2.90
%
 
2.46
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended November 30,
 
 
2019
 
2018
(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
 
$
7,326,509

 
2.84
%
 
2.24
%
 
$
7,308,859

 
2.82
%
 
2.38
%
Receive-fixed swaps
 
3,349,820

 
2.93

 
2.57

 
3,729,738

 
3.01

 
2.52

Total
 
$
10,676,329

 
2.87
%
 
2.34
%
 
$
11,038,597

 
2.88
%
 
2.43
%

Comparative Swap Curves

The chart below provides comparative swap curves as of the end of November 30, 2019, August 31, 2019, May 31, 2019, November 30, 2018 and May 31, 2018.

17





chart-21d27e57f28a5659bb6.jpg
____________________________ 
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.

Table 7 presents the components of non-interest expense recorded in results of operations for the three and six months ended November 30, 2019 and 2018.

18


<