Company Quick10K Filing
Quick10K
National Rural Utilities Cooperative Finance
10-Q 2019-08-31 Quarter: 2019-08-31
10-K 2019-05-31 Annual: 2019-05-31
10-Q 2019-02-28 Quarter: 2019-02-28
10-Q 2018-11-30 Quarter: 2018-11-30
10-Q 2018-08-31 Quarter: 2018-08-31
10-K 2018-05-31 Annual: 2018-05-31
10-Q 2018-02-28 Quarter: 2018-02-28
10-Q 2017-11-30 Quarter: 2017-11-30
10-Q 2017-08-31 Quarter: 2017-08-31
10-K 2017-05-31 Annual: 2017-05-31
10-Q 2017-02-28 Quarter: 2017-02-28
10-Q 2016-11-30 Quarter: 2016-11-30
10-Q 2016-08-31 Quarter: 2016-08-31
10-K 2016-05-31 Annual: 2016-05-31
10-Q 2016-02-29 Quarter: 2016-02-29
10-Q 2015-11-30 Quarter: 2015-11-30
10-Q 2015-08-31 Quarter: 2015-08-31
10-K 2015-05-31 Annual: 2015-05-31
10-Q 2015-02-28 Quarter: 2015-02-28
10-Q 2014-11-30 Quarter: 2014-11-30
10-Q 2014-08-31 Quarter: 2014-08-31
10-K 2014-05-31 Annual: 2014-05-31
10-Q 2014-02-28 Quarter: 2014-02-28
10-Q 2013-11-30 Quarter: 2013-11-30
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 2018-01-31 Other Events, Exhibits
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QTMM Quantum Materials 17
AEXC American Express Credit 0
ATIM AmericaTowne Holdings 0
CIRT Cirtran 0
ECMT Eco-Mat 0
ANDES Andes 7 0
RBCA Republic Bancorp 0
VSPC Viaspace 0
PING Ping Identity 0
NRU 2019-08-31
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-31.1 nrufy2020q1form10-qxex311.htm
EX-31.2 nrufy2020q1form10-qxex312.htm
EX-32.1 nrufy2020q1form10-qxex321.htm
EX-32.2 nrufy2020q1form10-qxex322.htm

National Rural Utilities Cooperative Finance Earnings 2019-08-31

NRU 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 nrufy2020q1form10-q.htm NRU FY2020 Q1 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 August 31, 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
 
9

3
 
Rate/Volume Analysis of Changes in Interest Income/Interest Expense
 
11

4
 
Non-Interest Income
 
13

5
 
Derivative Gains (Losses)
 
14

6
 
Derivative Cash Settlements Expense—Average Notional Amounts and Interest Rates
 
14

7
 
Non-Interest Expense
 
16

8
 
Loans Outstanding by Type and Member Class
 
17

9
 
Historical Retention Rate and Repricing Selection
 
18

10
 
Total Debt Outstanding
 
19

11
 
Member Investments
 
20

12
 
Collateral Pledged
 
21

13
 
Unencumbered Loans
 
22

14
 
Equity
 
23

15
 
Guarantees Outstanding
 
24

16
 
Maturities of Guarantee Obligations
 
25

17
 
Unadvanced Loan Commitments
 
25

18
 
Notional Maturities of Unadvanced Loan Commitments
 
25

19
 
Maturities of Notional Amount of Unconditional Committed Lines of Credit
 
26

20
 
Loan Portfolio Security Profile
 
28

21
 
Loan Exposure to 20 Largest Borrowers
 
29

22
 
Troubled Debt Restructured Loans
 
31

23
 
Allowance for Loan Losses
 
32

24
 
Rating Triggers for Derivatives
 
33

25
 
Available Liquidity
 
34

26
 
Committed Bank Revolving Line of Credit Agreements
 
35

27
 
Short-Term Borrowings—Funding Sources
 
36

28
 
Short-Term Borrowings
 
37

29
 
Issuances and Repayments of Long-Term and Subordinated Debt
 
37

30
 
Principal Maturity of Long-Term and Subordinated Debt
 
38

31
 
Projected Sources and Uses of Liquidity from Debt and Investment Activity
 
39

32
 
Credit Ratings
 
40

33
 
Interest Rate Gap Analysis
 
42

34
 
Adjusted Financial Measures—Income Statement
 
43

35
 
TIER and Adjusted TIER
 
43

36
 
Adjusted Financial Measures—Balance Sheet
 
44

37
 
Debt-to-Equity Ratio
 
44

38
 
Members’ Equity
 
45


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 did not hold, and did not have any subsidiaries or other entities that held, foreclosed assets as of August 31, 2019 or May 31, 2019. 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 $26,300 million as of August 31, 2019, of which 96% was attributable to CFC. We generated total revenue, which consists of net interest income and fee and other income, of $88 million for the three months ended August 31, 2019 (“current quarter”), compared with $72 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 months ended August 31, 2019 and 2018, and as of August 31, 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 August 31,
 
 
(Dollars in thousands)
 
2019
 
2018
 
Change
Statement of operations:
 
 
 
 
 
 
Interest income
 
$
290,015

 
$
278,491

 
   4%
Interest expense
 
(213,271
)
 
(210,231
)
 
1
Net interest income
 
76,744

 
68,260

 
12
Fee and other income(1)
 
10,941

 
3,911

 
180
Total revenue
 
87,685

 
72,171

 
21
Benefit (provision) for loan losses
 
(30
)
 
109

 
**
Derivative gains (losses)(2)
 
(395,725
)
 
7,183

 
**
Unrealized gains (losses) on equity securities(1)
 
1,620

 
(726
)
 
**
Operating expenses(3) 
 
(25,329
)
 
(23,205
)
 
9
Other non-interest (expense) income
 
7,179

 
(7,494
)
 
**
Income (loss) before income taxes
 
(324,600
)
 
48,038

 
**
Income tax benefit (expense)
 
521

 
(60
)
 
**
Net income (loss)
 
$
(324,079
)
 
$
47,978

 
**
 
 
 
 
 
 
 
Adjusted operational financial measures
 
 
 
 
 
 
Adjusted interest expense(4)
 
$
(224,314
)
 
$
(223,060
)
 
1
Adjusted net interest income(4)
 
65,701

 
55,431

 
19
Adjusted net income(4)
 
60,603

 
27,966

 
117
 
 
 
 
 
 
 
Selected ratios
 
 
 
 
 
 
Fixed-charge coverage ratio/TIER(5)
 
(0.52
)
 
1.23

 
(175) bps
Adjusted TIER(4)
 
1.27

 
1.13

 
14
Net interest yield(6)
 
1.14
%
 
1.04
%
 
10
Adjusted net interest yield(4)(7)
 
0.97

 
0.85

 
12
Net charge-off rate(8)
 
0.00

 
0.00

 



3



 
 
August 31, 2019
 
May 31, 2019
 
Change
Balance sheet
 
 
 
 
 
 
Cash, cash equivalents and restricted cash
 
$
240,188

 
$
186,204

 
     29%
Investment securities
 
633,497

 
652,977

 
(3)
Loans to members(9)
 
26,299,838

 
25,916,904

 
  1
Allowance for loan losses
 
(17,565
)
 
(17,535
)
 
Loans to members, net
 
26,282,273

 
25,899,369

 
  1
Total assets
 
27,578,756

 
27,124,372

 
  2
Short-term borrowings
 
4,027,645

 
3,607,726

 
  12
Long-term debt
 
19,094,236

 
19,210,793

 
  (1)
Subordinated deferrable debt
 
985,981

 
986,020

 
Members’ subordinated certificates
 
1,356,485

 
1,357,129

 
Total debt outstanding
 
25,464,347

 
25,161,668

 
  1
Total liabilities
 
26,660,328

 
25,820,490

 
  3
Total equity
 
918,428

 
1,303,882

 
  (30)
Guarantees(10)
 
801,327

 
837,435

 
  (4)
 
 
 
 
 
 
 
Selected ratios period end
 
 
 
 
 

Allowance coverage ratio(11)
 
0.07
%
 
0.07
%
 
Debt-to-equity ratio(12)
 
29.03

 
19.80

 
923
Adjusted debt-to-equity ratio(4)
 
5.84

 
5.73

 
11
____________________________ 
** 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 August 31, 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 a net loss of $324 million for the current quarter, which resulted in a negative TIER of 0.52. In comparison, we reported net income of $48 million and a TIER of 1.23 for the same prior-year quarter. The significant variance between our reported results for the current quarter and the same prior-year period was primarily attributable to mark-to-market changes in the fair value of our derivative instruments. Our debt-to-equity ratio increased to 29.03 as of August 31, 2019, 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 $324 million and the authorization by the CFC Board of Directors in the current quarter to retire patronage capital of $63 million, which we returned to members in September 2019.

The variance of $372 million between our reported net loss of $324 million for the current quarter and our reported net income of $48 million for the same prior-year quarter was driven by a shift in derivative fair value changes of $403 million. We recorded derivative losses of $396 million during the current quarter, due to decreases in the fair value of our pay-fixed swaps resulting from a decline in interest rates across the swap curve, with medium- and longer-term interest rates experiencing a steeper decline than short-term rates. The swap curve remained inverted, as short-term interest rates continued to exceed medium- and longer-term interest rates as of the end of the current quarter. In comparison, we recorded derivative gains of $7 million during the comparable prior-year quarter due to a net increase in the fair value of our pay-fixed swaps resulting from a slight rise in medium and longer-term interest rates. Net interest income, which represented 88% and 95% of total revenue for both the current quarter and same prior-year quarter, increased $8 million, or 12%, attributable to the combined impact of an increase in the net interest yield of 10 basis points, or 10%, to 1.14%, and an increase in our average interest-earning assets of $833 million, or 3%. The increase in the net interest yield reflected the combined impact of an increase in the average yield on interest-earning assets of 5 basis points to 4.30% and a reduction in our average cost of funds of 4 basis points to 3.36%. The decrease in our average cost of funds was largely due to the interest savings from the repayment of the 10.375% collateral trust bonds in fiscal year 2019 and the replacement of this

5



debt with lower-cost funding, which more than offset an increase in the average cost of our short-term and variable-rate funding.

Other factors affecting the variance between our current quarter results and the prior-year quarter include an increase in fee income of $7 million due to higher prepayment fees during the current quarter, 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 prior-year quarter.

Adjusted Non-GAAP Results

Our adjusted net income totaled $61 million and our adjusted TIER was 1.27 for the current quarter, compared with adjusted net income of $28 million and adjusted TIER of 1.13 for the same prior-year quarter. Our adjusted debt-to-equity ratio increased to 5.84 as of August 31, 2019, from 5.73 as of May 31, 2019, primarily attributable to an increase in debt to fund loan growth.

The increase in adjusted net income of $33 million for the current quarter from the comparable prior-year quarter was attributable to an increase in adjusted net interest income of $10 million, or 19%, the increase in fee income of $7 million due to higher prepayment fees during the current quarter, the gain of $8 million recorded in connection with the sale of land and the absence of the loss of $7 million on the early redemption of the collateral trust bonds recorded in the prior-year quarter. The increase in adjusted net interest income of 19% was driven by an increase in the adjusted net interest yield of 12 basis points, or 14%, to 0.97%, coupled with the increase in average interest-earning assets of 3%. The increase in the adjusted net interest yield reflected the combined impact of an increase in the average yield on interest-earning assets of 5 basis points to 4.30% and a reduction in our adjusted average cost of funds of 8 basis points to 3.53%. This reduction also was largely due to the interest savings from the repayment of the 10.375% collateral trust bonds in 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.

Lending Activity

Loans to members totaled $26,300 million as of August 31, 2019, an increase of $383 million, or 1%, from May 31, 2019. CFC distribution loans, CFC power supply loans and RTFC loans increased by $329 million, $92 million and $6 million, respectively, which was partially offset by a decrease in NCSC loans of $45 million. The increase in loans was driven by a net increase in long-term loans of $479 million, which was offset by a net decrease in revolving line-of-credit loans of $96 million.

Long-term loan advances totaled $888 million during the current quarter, with approximately 73% of those advances for capital expenditures by members and 19% for the refinancing of loans made by other lenders. In comparison, long-term loan advances totaled $468 million during the prior-year quarter, with approximately 71% of those advances for capital expenditures and 25% for refinancing of loans made by other lenders. CFC had long-term fixed-rate loans totaling $110 million that were scheduled to reprice during the current quarter. Of this total, $109 million repriced to a new long-term fixed rate and $1 million was repaid in full. In comparison, CFC had long-term fixed-rate loans totaling $193 million that were scheduled to reprice during the same prior-year quarter, of which $96 million repriced to a new long-term fixed rate, $48 million repriced to a long-term variable rate and $49 million was repaid in full.

Credit Quality

The overall credit quality of our loan portfolio remained high as of August 31, 2019, as evidenced by our continued strong credit performance metrics. We had no delinquent or nonperforming loans as of August 31, 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 August 31, 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

6



outstanding, 93% were secured and 7% were unsecured as of August 31, 2019, compared to 92% secured and 8% unsecured as of May 31, 2019. The allowance for loan losses was $18 million as of both August 31, 2019 and May 31, 2019, and the allowance coverage ratio was 0.07% as of each date.

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 $303 million, or 1%, to $25,464 million as of August 31, 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 $519 million, which was partially offset by a net decrease in dealer commercial paper of $115 million, a net decrease in Federal Agricultural Mortgage Corporation (“Farmer Mac”) notes payable of $92 million and a net decrease in borrowings under USDA’s Guaranteed Underwriter Program (“Guaranteed Underwriter Program”) of $23 million. Outstanding dealer commercial paper totaled $830 million as of August 31, 2019, below our targeted maximum threshold of $1,250 million.

Outlook for the Next 12 Months

We currently expect that our net interest income, adjusted net interest income, tier, adjusted tier, net interest yield and adjusted net interest yield will increase 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.

Long-term debt scheduled to mature over the next 12 months totaled $2,218 million as of August 31, 2019, consisting of $2,071 million of fixed-rate debt at a weighted average cost of 2.35% and $147 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 August 31, 2019, sources of liquidity readily available for access totaled $7,091 million, consisting of (i) $231 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 $2,972 million available for access under committed bank revolving line of credit agreements; (iv) up to $2,238 million available under a revolving note purchase agreement with Farmer Mac, subject to market conditions; and (v) up to $300 million available under a committed revolving note purchase agreement with Farmer Mac. 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.

We believe we can continue to roll over outstanding member short-term debt of $3,198 million as of August 31, 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 5.84 as of August 31, 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.

7



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.
CONSOLIDATED RESULTS OF OPERATIONS

The section below provides a comparative discussion of our condensed consolidated results of operations between the three months ended August 31, 2019 and 2018. Following this section, we provide a comparative analysis of our condensed consolidated balance sheets as of August 31, 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 months ended August 31, 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.”

8



Table 2: Average Balances, Interest Income/Interest Expense and Average Yield/Cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended August 31,
(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)
 
$
23,358,728

 
$
258,478

 
4.40
%
 
$
22,695,516

 
$
251,801

 
4.40
%
Long-term variable-rate loans
 
993,105

 
9,756

 
3.91

 
1,071,550

 
9,381

 
3.47

Line of credit loans
 
1,712,082

 
16,033

 
3.73

 
1,422,853

 
11,633

 
3.24

TDR loans(2)
 
11,786

 
206

 
6.95

 
12,552

 
218

 
6.89

Other income, net(3)
 

 
(284
)
 

 

 
(325
)
 

Total loans
 
26,075,701

 
284,189

 
4.34

 
25,202,471

 
272,708

 
4.29

Cash, time deposits and investment securities
 
768,763

 
5,826

 
3.01

 
809,409

 
5,783

 
2.83

Total interest-earning assets
 
$
26,844,464

 
$
290,015

 
4.30
%
 
$
26,011,880

 
$
278,491

 
4.25
%
Other assets, less allowance for loan losses
 
605,697

 
 
 
 
 
726,260

 
 
 
 
Total assets
 
$
27,450,161

 


 
 
 
$
26,738,140

 


 


 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 


 


 


 


 


Short-term borrowings
 
$
3,513,191

 
$
22,822

 
2.58
%
 
$
3,519,995

 
$
19,419

 
2.19
%
Medium-term notes
 
3,571,967

 
32,076

 
3.57

 
3,757,196

 
32,410

 
3.42

Collateral trust bonds
 
7,385,085

 
65,381

 
3.52

 
7,474,361

 
77,705

 
4.12

Guaranteed Underwriter Program notes payable
 
5,398,324

 
40,433

 
2.98

 
4,848,435

 
35,334

 
2.89

Farmer Mac notes payable
 
3,031,600

 
25,074

 
3.29

 
2,790,527

 
21,111

 
3.00

Other notes payable
 
22,529

 
254

 
4.49

 
29,877

 
322

 
4.28

Subordinated deferrable debt
 
986,014

 
12,882

 
5.20

 
742,422

 
9,417

 
5.03

Subordinated certificates
 
1,356,145

 
14,349

 
4.21

 
1,377,954

 
14,513

 
4.18

Total interest-bearing liabilities
 
$
25,264,855

 
$
213,271

 
3.36
%
 
$
24,540,767

 
$
210,231

 
3.40
%
Other liabilities
 
1,012,301

 
 
 

 
697,954

 

 
 
Total liabilities
 
26,277,156

 
 
 

 
25,238,721

 

 
 
Total equity
 
1,173,005

 
 
 
 
 
1,499,419

 

 
 
Total liabilities and equity
 
$
27,450,161

 


 
 
 
$
26,738,140

 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest spread(4)
 
 
 


 
0.94
%
 


 


 
0.85
%
Impact of non-interest bearing funding(5)
 
 
 
 
 
0.20

 
 
 
 
 
0.19

Net interest income/net interest yield(6)
 
 
 
$
76,744

 
1.14
%
 
 
 
$
68,260

 
1.04
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net interest income/adjusted net interest yield:
 
 
 
 
 


 
 
 
 
 
 
Interest income
 
 
 
$
290,015

 
4.30
%
 
 
 
$
278,491

 
4.25
%
Interest expense
 
 
 
213,271

 
3.36

 
 
 
210,231

 
3.40

Add: Net accrued periodic derivative cash settlement(7)
 
 
 
11,043

 
0.41

 
 
 
12,829

 
0.46

Adjusted interest expense/adjusted average cost(8)
 
 
 
$
224,314

 
3.53
%
 


 
$
223,060

 
3.61
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net interest spread(4)
 
 
 
 
 
0.77
%
 

 
 
 
0.64
%
Impact of non-interest bearing funding(5)
 
 
 
 
 
0.20

 
 
 
 
 
0.21

Adjusted net interest income/adjusted net interest yield(9)
 
 
 
$
65,701

 
0.97
%
 

 
$
55,431


0.85
%
____________________________ 
(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.

9



(3)Consists of late payment fees and net amortization of deferred loan fees and loan origination costs.
(4)Net interest spread represents the difference between the average yield on total average interest-earning assets and the average cost of total average interest-bearing liabilities. Adjusted net interest spread represents the difference between the average yield on total average interest-earning assets and the adjusted average cost of total average interest-bearing liabilities.
(5)Includes other liabilities and equity.
(6)Net interest yield is calculated based on annualized net interest income for the period divided by total average interest-earning assets for the period.
(7)Represents the impact of net accrued periodic interest rate swap settlements during the period. This amount is added to interest expense to derive non-GAAP adjusted interest expense. The average (benefit)/cost associated with derivatives is calculated based on annualized net accrued periodic interest rate swap settlements during the period divided by the average outstanding notional amount of derivatives during the period. The average outstanding notional amount of interest rate swaps was $10,752 million and $10,955 million for the three months ended August 31, 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.
 

10



Table 3: Rate/Volume Analysis of Changes in Interest Income/Interest Expense
 
 
Three Months Ended August 31,
 
 
2019 versus 2018
 
 
Total
 
Variance due to:(1)
(Dollars in thousands)
 
Variance
 
Volume
 
Rate
Interest income:
 
 
 
 
 
 
Long-term fixed-rate loans
 
$
6,677

 
$
6,650

 
$
27

Long-term variable-rate loans
 
375

 
(711
)
 
1,086

Line of credit loans
 
4,400

 
2,326

 
2,074

Restructured loans
 
(12
)
 
(14
)
 
2

Other income, net
 
41

 

 
41

Total loans
 
11,481

 
8,251

 
3,230

Cash, time deposits and investment securities
 
43

 
(305
)
 
348

Interest income
 
11,524

 
7,946

 
3,578

 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
Short-term borrowings
 
3,403

 
(90
)
 
3,493

Medium-term notes
 
(334
)
 
(1,682
)
 
1,348

Collateral trust bonds
 
(12,324
)
 
(1,138
)
 
(11,186
)
Guaranteed Underwriter Program notes payable
 
5,099

 
3,900

 
1,199

Farmer Mac notes payable
 
3,963

 
1,761

 
2,202

Other notes payable
 
(68
)
 
(80
)
 
12

Subordinated deferrable debt
 
3,465

 
3,056

 
409

Subordinated certificates
 
(164
)
 
(269
)
 
105

Interest expense
 
3,040

 
5,458

 
(2,418
)
Net interest income
 
$
8,484

 
$
2,488

 
$
5,996

 
 
 
 
 
 
 
Adjusted net interest income:
 
 
 
 
 
 
Interest income
 
$
11,524

 
$
7,946

 
$
3,578

Interest expense
 
3,040

 
5,458

 
(2,418
)
Net accrued periodic derivative cash settlements expense(2)
 
(1,786
)
 
(272
)
 
(1,514
)
Adjusted interest expense(3)
 
1,254

 
5,186

 
(3,932
)
Adjusted net interest income
 
$
10,270

 
$
2,760

 
$
7,510

____________________________ 
(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 $77 million for the current quarter was up $8 million, or 12%, from the comparable prior-year quarter, driven by an increase in the net interest yield of 10% (10 basis points) to 1.14%, coupled with an increase in average interest-earning assets of 3%.


11



Net Interest Yield: The increase of 10 basis points in the net interest yield for the current quarter reflected the combined impact of an increase in the average yield on interest-earning assets of 5 basis points to 4.30% and a decrease in the average cost of funds of 4 basis points to 3.36%. The increase in the average yield on interest-earning assets was attributable to higher rates on our line of credit and variable-rate loans due to the overall rise in short-term interest rates during fiscal year 2019. Although medium- and longer-term interest rates experienced a steep decline during the current quarter relative to the same prior-year quarter, the average yield on our long-term fixed rate loan portfolio remained stable. 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.

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 $873 million, or 3%, 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 $66 million for the current quarter was up $10 million, or 19%, from the comparable prior-year quarter, driven by an increase in the adjusted net interest yield of 12 basis points, or 14%, to 0.97% and the increase in average interest-earning assets of 3%.

Adjusted Net Interest Yield: The increase in the adjusted net interest yield was primarily due to the combined impact of an increase in the average yield on interest-earning assets of 5 basis points to 4.30% and a reduction in our adjusted average cost of funds of 8 basis points to 3.53%. As noted above, the increase in the average yield on interest-earning assets was attributable to higher rates on our line of credit and variable-rate loans due to the overall rise in short-term interest rates during fiscal year 2019. The reduction in our adjusted average cost of funds was also 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, as well as a reduction in net derivative cash settlements expense amounts. 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.

Average Interest-Earning Assets: The increase in average interest-earning assets of 3% was driven by the growth in average total loans of $873 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 $11 million for the current quarter, down from $13 million for the same prior-year quarter. See “Non-GAAP Financial Measures” for additional information on our adjusted measures, including a reconciliation of these measures to the most comparable 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 $18 million as of both August 31, 2019 and May 31, 2019.

We recorded a provision for loan losses of less than $1 million for the current quarter. In comparison, we recorded a benefit for loan losses of less than $1 million for the same prior-year quarter. 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 August 31, 2019 or May 31, 2019.


12



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 months ended August 31, 2019 and 2018.

Table 4: Non-Interest Income
 
 
Three Months Ended August 31,
(Dollars in thousands)
 
2019

2018
Non-interest income:
 
 
 
 
Fee and other income
 
$
10,941

 
$
3,911

Derivative gains (losses)
 
(395,725
)
 
7,183

Unrealized gains (losses) on equity securities
 
1,620

 
(726
)
Total non-interest income
 
$
(383,164
)
 
$
10,368


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 current quarter.

Derivative Gains (Losses)

Our derivative instruments are an integral part of our interest rate risk management strategy. Our principal purpose in using derivatives is to manage our aggregate interest rate risk profile within prescribed risk parameters. The derivative instruments we use primarily include interest rate swaps, which we typically hold to maturity. In addition, we may on occasion use treasury locks to manage the interest rate risk associated with debt that is scheduled to reprice in the future. The primary factors affecting the fair value of our derivatives and derivative gains (losses) recorded in our results of operations include changes in interest rates, the shape of the swap curve and the composition of our derivative portfolio. We generally do not designate our interest rate swaps, which currently account for the substantial majority of our derivatives, for hedge accounting. Accordingly, changes in the fair value of interest rate swaps are reported in our 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 August 31, 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

13



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 August 31,
(Dollars in thousands)
 
2019
 
2018
Derivative gains (losses) attributable to:
 
 
 
 
Derivative cash settlements expense
 
$
(11,043
)
 
$
(12,829
)
Derivative forward value gains (losses)
 
(384,682
)
 
20,012

Derivative gains (losses)
 
$
(395,725
)
 
$
7,183


The net derivative losses of $396 million in the current quarter 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 medium- and longer-term interest rates experiencing a steeper decline than short-term rates. The swap curve remained inverted, as short-term interest rates continued to exceed medium- and longer-term interest rates as of the end of the current quarter, as depicted by the August 31, 2019 and May 31, 2019 swap curves presented in the chart below.

The net derivative gains of $7 million in the same prior-year quarter were attributable to a net increase in the fair value of our pay-fixed swaps resulting from a slight increase in medium-and long-term interest rates, as depicted by the
August 31, 2018 and May 31, 2018 swap curves presented in the below chart.

Our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps, with pay-fixed swaps representing approximately 68% of the outstanding notional amount of our derivative portfolio as of both August 31, 2019 and May 31, 2019. 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 August 31, 2019. In comparison, the average remaining maturity of our pay-fixed and receive-fixed swaps was 19 years and four years, respectively, as of August 31, 2018.

Derivative Cash Settlements

As indicated in Table 5 above, net periodic derivative cash settlement expense totaled $11 million and $13 million for the three months ended August 31, 2019 and 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 August 31,
 
 
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
 
$
7,353,402

 
2.84
%
 
2.39
%
 
$
7,194,857

 
2.81
%
 
2.32
%
Receive-fixed swaps
 
3,399,000

 
3.09

 
2.56

 
3,760,141

 
2.96

 
2.52

Total
 
$
10,752,402

 
2.92
%
 
2.44
%
 
$
10,954,998

 
2.86
%
 
2.39
%


14



Comparative Swap Curves

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


chart-cd8a580d6d6851d695a.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 months ended August 31, 2019 and 2018.

15



Table 7: Non-Interest Expense
 
 
Three Months Ended August 31,
(Dollars in thousands)
 
2019
 
2018
Non-interest expense:
 
 
 
 
Salaries and employee benefits
 
$
(12,942
)
 
$
(12,682
)
Other general and administrative expenses
 
(12,387
)
 
(10,523
)
Losses on early extinguishment of debt
 

 
(7,100
)
Other non-interest (expense) income
 
7,179

 
(394
)
Total non-interest expense
 
$
(18,150
)
 
$
(30,699
)

Non-interest expense of $18 million for the current quarter decreased by $13 million, or 41%, from the same prior-year quarter. The decrease was largely due to the 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 in the prior-year quarter.

Net Income (Loss) Attributable to Noncontrolling Interests

Net income (loss) attributable to noncontrolling interests represents 100% of the results of operations of NCSC and RTFC, as the members of NCSC and RTFC own or control 100% of the interest in their respective companies. The fluctuations in net income (loss) attributable to noncontrolling interests are primarily due to changes in the fair value of NCSC’s derivative instruments recognized in NCSC’s earnings.

We recorded a net loss attributable to noncontrolling interests of $2 million for the current quarter. In comparison, we recorded net income attributable to noncontrolling interests of less than $1 million for the same prior-year quarter.
CONSOLIDATED BALANCE SHEET ANALYSIS

Total assets of $27,579 million as of August 31, 2019 increased by $454 million, or 2%, from May 31, 2019, primarily due to growth in our loan portfolio. Total liabilities of $26,660 million as of August 31, 2019 increased by $840 million, or 3%, 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 $385 million to $918 million as of August 31, 2019, attributable to our reported net loss of $324 million during the three months ended August 31, 2019 and the CFC Board of Directors authorization in the current quarter to retire patronage capital of $63 million.

Following is a discussion of changes in the major components of our assets and liabilities during the three months ended August 31, 2019. 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.
 
Loans Outstanding

Table 8 summarizes loans to members, by loan type and by member class, as of August 31, 2019 and May 31, 2019. As indicated in Table 8, long-term fixed-rate loans accounted for 90% and 89% of loans to members as of August 31, 2019 and May 31, 2019, respectively.


16



Table 8: Loans Outstanding by Type and Member Class
 
 
August 31, 2019
 
May 31, 2019
 

(Dollars in thousands)
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Change
Loans by type:
 
 
 
 
 
 
 
 
 
 
Long-term loans:
 
 
 
 
 
 
 
 
 
 
Fixed-rate
 
$
23,677,234

 
90
%
 
$
23,094,253

 
89
%
 
$
582,981

Variable-rate
 
962,541

 
4

 
1,066,880

 
4

 
(104,339
)
Total long-term loans
 
24,639,775

 
94

 
24,161,133

 
93

 
478,642

Lines of credit
 
1,648,824

 
6

 
1,744,531

 
7

 
(95,707
)
Total loans outstanding
 
26,288,599

 
100

 
25,905,664

 
100

 
382,935

Deferred loan origination costs

11,239




11,240




(1
)
Loans to members

$
26,299,838


100
%

$
25,916,904


100
%

$
382,934

 
 
 
 
 
 
 
 
 
 
 
Loans by member class:
 
 
 
 
 
 
 
 
 
 
CFC:
 
 
 
 
 
 
 
 
 
 
Distribution
 
$
20,484,460

 
78
%
 
$
20,155,266

 
78
%
 
$
329,194

Power supply
 
4,671,035

 
18

 
4,578,841

 
18

 
92,194

Statewide and associate
 
84,212

 

 
83,569

 

 
643

CFC total
 
25,239,707

 
96

 
24,817,676

 
96

 
422,031

NCSC
 
697,791

 
3

 
742,888

 
3

 
(45,097
)
RTFC
 
351,101

 
1

 
345,100

 
1

 
6,001

Total loans outstanding
 
26,288,599

 
100

 
25,905,664

 
100

 
382,935

Deferred loan origination costs
 
11,239

 

 
11,240

 

 
(1
)
Loans to members
 
$
26,299,838

 
100
%
 
$
25,916,904

 
100
%
 
$
382,934


Loans to members totaled $26,300 million as of August 31, 2019, an increase of $383 million, or 1%, from May 31, 2019. The increase was primarily due to an increase in CFC distribution loans, CFC power supply loans and RTFC loans of $329 million, $92 million and $6 million, respectively, which was partially offset by a decrease in NCSC loans of $45 million.

Long-term loan advances totaled $888 million during the three months ended August 31, 2019, with approximately 73% of those advances for capital expenditures by members and 19% for the refinancing of loans made by other lenders. In comparison, long-term loan advances totaled $468 million during the prior year three months ended August 31, 2018, with approximately 71% of those advances for capital expenditures by members and 25% for refinancing of loans made by other lenders.

We provide additional 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 9 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 three months ended August 31, 2019 and 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 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.


17



Table 9: Historical Retention Rate and Repricing Selection(1) 
 
 
Three Months Ended
 
Fiscal Year Ended
 
 
August 31, 2019
 
May 31, 2019
(Dollars in thousands)
 
Amount
 
% of Total
 
Amount
 
% of Total
Loans retained:
 
 
 
 
 
 
 
 
Long-term fixed rate selected
 
$
108,925

 
99
%
 
$
568,252

 
75
%
Long-term variable rate selected
 
267

 

 
123,636

 
16

Total loans retained by CFC
 
109,192

 
99

 
691,888

 
91

Loans repaid
 
864

 
1

 
69,250

 
9

Total
 
$
110,056

 
100
%
 
$
761,138

 
100
%
____________________________ 
(1)Does not include NCSC and RTFC loans.

As shown in Table 9, of the loans that repriced during the three months ended August 31, 2019 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 10 displays the composition, by product type, of our outstanding debt as of August 31, 2019 and May 31, 2019. Table 10 also displays the composition of our debt based on several additional selected attributes.

18



Table 10: Total Debt Outstanding
(Dollars in thousands)
 
August 31, 2019
 
May 31, 2019
 
Change
Debt product type:
 
 
 
 
 
 
Commercial paper:
 
 
 
 
 
 
Members, at par
 
$
1,240,830

 
$
1,111,795

 
$
129,035

Dealer, net of discounts
 
829,763

 
944,616

 
(114,853
)
Total commercial paper
 
2,070,593

 
2,056,411

 
14,182

Select notes to members
 
1,277,927

 
1,023,952

 
253,975

Daily liquidity fund notes to members
 
435,070

 
298,817

 
136,253

Medium-term notes:
 
 
 
 
 


Members, at par
 
662,263

 
625,626

 
36,637

Dealer, net of discounts
 
2,916,200

 
2,942,045

 
(25,845
)
Total medium-term notes
 
3,578,463

 
3,567,671

 
10,792

Collateral trust bonds
 
7,387,636

 
7,383,732

 
3,904

Guaranteed Underwriter Program notes payable
 
5,387,155

 
5,410,507

 
(23,352
)
Farmer Mac notes payable
 
2,962,478

 
3,054,914

 
(92,436
)
Other notes payable
 
22,559

 
22,515

 
44

Subordinated deferrable debt
 
985,981

 
986,020

 
(39
)
Members’ subordinated certificates:
 
 
 
 
 
 
Membership subordinated certificates
 
630,474

 
630,474

 

Loan and guarantee subordinated certificates
 
504,841

 
505,485

 
(644
)
Member capital securities
 
221,170

 
221,170

 

Total members’ subordinated certificates
 
1,356,485

 
1,357,129

 
(644
)
Total debt outstanding
 
$
25,464,347

 
$
25,161,668


$
302,679

 
 
 
 
 
 
 
Security type:
 
 
 
 
 
 
Secured debt
 
62
%
 
63
%
 
 
Unsecured debt
 
38

 
37

 
 
Total
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
Funding source:
 
 
 
 
 
 
Members
 
20
%
 
18
%
 
 
Private placement:
 
 
 
 
 
 
Guaranteed Underwriter Program notes payable
 
21

 
21

 
 
Farmer Mac notes payable
 
12

 
12

 
 
Total private placement
 
33

 
33

 
 
Capital markets
 
47

 
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
 
16
%
 
14
%
 
 
Long-term and subordinated debt(4)
 
84

 
86

 
 
Total
 
100
%
 
100
%
 
 


19



____________________________ 
(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 three months ended August 31, 2019, our debt volume also increased. Total debt outstanding of $25,464 million as of August 31, 2019, increased by $303 million or 1%, 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 $519 million, partially offset by a net decrease in commercial paper sold through dealers of $115 million, a net decrease in Farmer Mac notes payable of $92 million and a net decrease in borrowings under the Guaranteed Underwriter Program of $23 million.

On September 13, 2019, we provided notice to investors that we will redeem all $300 million outstanding principal amount of our 2.30% collateral trust bonds due November 15, 2019 on October 15, 2019.

Member Investments

Debt securities issued to our members represent an important, stable source of funding. Table 11 displays outstanding member debt, by debt product type, as of August 31, 2019 and May 31, 2019.

Table 11: Member Investments
 
 
August 31, 2019
 
May 31, 2019
 
Change
(Dollars in thousands)
 
Amount
 
% of Total (1)
 
Amount
 
% of Total (1)
 
Commercial paper
 
$
1,240,830

 
60
%
 
$
1,111,795

 
54
%
 
$
129,035

Select notes
 
1,277,927

 
100

 
1,023,952

 
100

 
253,975

Daily liquidity fund notes
 
435,070

 
100

 
298,817

 
100

 
136,253

Medium-term notes
 
662,263

 
19

 
625,626

 
18

 
36,637

Members’ subordinated certificates
 
1,356,485

 
100

 
1,357,129

 
100

 
(644
)
Total outstanding member debt
 
$
4,972,575

 
 
 
$
4,417,319

 
 
 
$
555,256

 
 
 
 
 
 
 
 
 
 
 
Percentage of total debt outstanding
 
20
%
 
 
 
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 $4,973 million and accounted for 20% of total debt outstanding as of August 31, 2019, compared with $4,417 million, or 18%, of total debt outstanding as of May 31, 2019. Over the last three fiscal years, outstanding member investments as of the end of each quarterly reporting period have averaged $4,480 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 $4,028 million and accounted for 16% of total debt outstanding as of August 31, 2019, 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.




20



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 $21,437 million and accounted for 84% of total debt outstanding as of August 31, 2019, 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 12 displays the collateral coverage ratios as of August 31, 2019 and May 31, 2019 for the debt agreements noted above that require us to pledge collateral.

Table 12: Collateral Pledged
 
 
Requirement/Limit
 
 
 
 
Debt Indenture
Minimum
 
Committed Bank Revolving Line of Credit Agreements
Maximum
 
Actual(1)
Debt Agreement
 
 
 
August 31, 2019
 
May 31, 2019
Collateral trust bonds 1994 indenture
 
100
%
 
150
%
 
116
%
 
118
%
Collateral trust bonds 2007 indenture
 
100

 
150

 
114

 
117

Guaranteed Underwriter Program notes payable
 
100

 
150

 
114

 
114

Farmer Mac notes payable
 
100

 
150

 
127

 
123

Clean Renewable Energy Bonds Series 2009A
 
100

 
150

 
106

 
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 $25,464 million as of August 31, 2019, $15,746 million, or 62%, was secured by pledged loans totaling $18,635 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 13 displays the unpaid principal balance of loans pledged for secured debt, the excess collateral pledged and unencumbered loans as of August 31, 2019 and May 31, 2019.

21



Table 13: Unencumbered Loans
(Dollars in thousands)
 
August 31, 2019
 
May 31, 2019
Total loans outstanding(1) 
 
$
26,288,599

 
$
25,905,664

Less: Loans required to be pledged for secured debt (2)
 
(16,021,569
)
 
(16,137,357
)
 Loans pledged in excess of requirement (2)(3)
 
(2,613,083
)
 
(2,739,248
)
 Total pledged loans
 
(18,634,652
)
 
(18,876,605
)
Unencumbered loans
 
$
7,653,947

 
$
7,029,059

Unencumbered loans as a percentage of total loans
 
29
%
 
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 August 31, 2019 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 13, we had excess loans pledged as collateral totaling $2,613 million and $2,739 million as of August 31, 2019 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.

Equity

Table 14 presents the components of total CFC equity and total equity as of August 31, 2019 and May 31, 2019.
























22



Table 14: Equity
(Dollars in thousands)
 
August 31, 2019
 
May 31, 2019
 
Change
Membership fees and educational fund:
 
 
 
 
 
 
Membership fees
 
$
970

 
$
969

 
$
1

Educational fund
 
1,706

 
2,013

 
(307
)
Total membership fees and educational fund
 
2,676

 
2,982

 
(306
)
Patronage capital allocated
 
797,756

 
860,578

 
(62,822
)
Members’ capital reserve
 
759,097

 
759,097

 

Total allocated equity
 
1,559,529

 
1,622,657

 
(63,128
)
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)