

NOTE 3—LOANS AND COMMITMENTS

Loans outstanding to members and unadvanced commitments, by loan type and member class, are summarized as follows as of August 31, 2014 and May 31, 2014.



	August 31, 2014				May 31, 2014
(Dollars in thousands)	Loans Outstanding		Unadvanced Commitments ⁽¹⁾		Loans Outstanding		Unadvanced Commitments ⁽¹⁾
Loan type: ⁽²⁾
Long-term fixed-rate loans	$	18,353,930	$	—	$	18,175,656	$	—
Long-term variable-rate loans	684,141		4,560,565		753,918		4,710,273
Loans guaranteed by RUS	200,535		—		201,863		—
Line of credit loans	1,236,265		9,162,418		1,335,488		9,201,805
Total loans outstanding ⁽³⁾	20,474,871		13,722,983		20,466,925		13,912,078
Deferred origination costs	9,707		—		9,717		—
Loans to members	$	20,484,578	$	13,722,983	$	20,476,642	$	13,912,078

Member class:⁽²⁾
CFC:
Distribution	$	15,198,932	$	9,224,128	$	15,035,365	$	9,531,315
Power supply	4,133,998		3,050,566		4,086,163		3,025,423
Statewide and associate	66,587		121,719		67,902		105,961
CFC total	19,399,517		12,396,413		19,189,430		12,662,699
RTFC	436,852		298,415		449,546		304,500
NCSC	638,502		1,028,155		827,949		944,879
Total loans outstanding	$	20,474,871	$	13,722,983	$	20,466,925	$	13,912,078

^{____________________________}

⁽¹⁾The interest rate on unadvanced commitments is not set until drawn; therefore, the long-term unadvanced loan commitments have been classified in this table as variable-rate unadvanced commitments. However, at the time of the advance, the borrower may select a fixed or a variable rate on the new loan.

⁽²⁾Includes nonperforming and restructured loans.

⁽³⁾ Includes the unpaid principal balance excluding deferred loan origination costs.

Unadvanced Loan Commitments

A total of $2,557 million and $2,274 million of unadvanced commitments as of August 31, 2014 and May 31, 2014, respectively, represented unadvanced commitments related to committed lines of credit loans that are not subject to a material adverse change clause at the time of each loan advance. As such, we will be required to advance amounts on these committed facilities as long as the borrower is in compliance with the terms and conditions of the facility.

The following table summarizes the available balance under committed lines of credit as of August 31, 2014 and the related maturities by fiscal year and thereafter as follows:



	Available Balance	Notional Maturities of Unconditional Committed Lines of Credit
(Dollars in thousands)	Available Balance	2015		2016	2017	2018	2019	Thereafter
Committed lines of credit	$2,556,905	$	—	$61,000	$462,312	$790,275	$1,098,318	$145,000

The remaining unadvanced commitments totaling $11,166 million and $11,638 million as of August 31, 2014 and May 31, 2014, respectively, were generally subject to material adverse change clauses. Prior to making an advance on these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. In some cases, the borrower’s access to the full amount of the facility is further constrained by the imposition of borrower-specific restrictions, or by additional conditions that must be met prior to advancing funds.

Unadvanced commitments related to line of credit loans are typically for periods not to exceed five years and are generally revolving facilities used for working capital and backup liquidity purposes. Historically, we have experienced a very low utilization rate on line of credit loan facilities, whether or not there is a material adverse change clause. Since we generally do not charge a fee on the unadvanced portion of the majority of our loan facilities, our borrowers will typically request long-term facilities to cover maintenance and capital expenditure work plans for periods of up to five years and draw down on the facility over that time. In addition, borrowers will typically request an amount in excess of their immediate estimated loan requirements to avoid the expense related to seeking additional loan funding for unexpected items. These factors contribute to our expectation that the majority of the unadvanced commitments will expire without being fully drawn upon and that the total unadvanced amount does not necessarily represent future cash funding requirements.

Loan Sales

We account for the transfer of loans resulting from direct loan sales to third parties and securitization transactions by removing the loans from our condensed consolidated balance sheets when control has been surrendered. We retain the servicing performance obligations on these loans and recognize related servicing fees on an accrual basis over the period for which servicing activity is provided. Deferred transaction costs and unamortized deferred loan origination costs related to the loans sold are included in determining the gain or loss on the sale. We do not hold any continuing interest in the loans sold to date other than servicing performance obligations. We have no obligation to repurchase loans from the purchaser, except in the case of breaches of representations and warranties.

During the three months ended August 31, 2014 and 2013, we sold CFC loans with outstanding balances totaling $2 million and $11 million, respectively, at par for cash.

Payment Status of Loans

The tables below show an analysis of the age of the recorded investment in loans outstanding by member class as of August 31, 2014 and May 31, 2014.



	August 31, 2014
(Dollars in thousands)	Current			30-89 Days Past Due			90 Days or More Past Due ⁽¹⁾			Total Past Due			Total Financing Receivables			Nonaccrual Loans
CFC:
Distribution	$	15,198,905		$	27		$	—		$	27		$	15,198,932		$	7,584
Power supply	4,133,998			—			—			—			4,133,998			—
Statewide and associate	66,587			—			—			—			66,587			—
CFC total	19,399,490			27			—			27			19,399,517			7,584
RTFC	436,730			122			—			122			436,852			1,695
NCSC	638,502			—			—			—			638,502			330
Total loans outstanding	$	20,474,722		$	149		$	—		$	149		$	20,474,871		$	9,609

As a % of total loans	100.00		%	—		%	—		%	—		%	100.00		%	0.05		%



	May 31, 2014
(Dollars in thousands)	Current			30-89 Days Past Due			90 Days or More Past Due ⁽¹⁾			Total Past Due			Total Financing Receivables			Nonaccrual Loans
CFC:
Distribution	$	15,035,365		$	—		$	—		$	—		$	15,035,365		$	7,584
Power supply	4,086,163			—			—			—			4,086,163			—
Statewide and associate	67,902			—			—			—			67,902			—
CFC total	19,189,430			—			—			—			19,189,430			7,584
RTFC	449,546			—			—			—			449,546			1,695
NCSC	827,949			—			—			—			827,949			400
Total loans outstanding	$	20,466,925		$	—		$	—		$	—		$	20,466,925		$	9,679

As a % of total loans	100.00		%	—		%	—		%	—		%	100.00		%	0.05		%

^{____________________________}

⁽¹⁾ All loans 90 days or more past due are on nonaccrual status.

Credit Quality

We monitor the credit quality and performance statistics of our financing receivables in an ongoing manner to provide a balance between the credit needs of our members and the requirements for sound credit quality of the loan portfolio. We evaluate the credit quality of our loans using an internal risk rating system that employs similar criteria for all member classes.

Our internal risk rating system is based on a determination of a borrower’s risk of default utilizing both quantitative and qualitative measurements.

We have grouped our risk ratings into the categories of pass and criticized based on the criteria below.

(i) Pass: Borrowers that are not experiencing difficulty and/or not showing a potential or well-defined credit weakness.

(ii) Criticized: Includes borrowers categorized as special mention, substandard and doubtful as described below:


•	Special mention: Borrowers that may be characterized by a potential credit weakness or deteriorating financial condition that is not sufficiently serious to warrant a classification of substandard or doubtful.


•	Substandard: Borrowers that display a well-defined credit weakness that may jeopardize the full collection of principal and interest.


•	Doubtful: Borrowers that have a well-defined weakness and the full collection of principal and interest is questionable or improbable.

Borrowers included in the pass, special mention, and substandard categories are generally reflected in the general portfolio of loans. Borrowers included in the doubtful category are reflected in the impaired portfolio of loans. Each risk rating is reassessed annually based on the receipt of the borrower’s audited financial statements; however, interim downgrades and upgrades may take place at any time as significant events or trends occur.

The following table presents our loan portfolio by risk rating category and member class based on available data as of August 31, 2014 and May 31, 2014.



	August 31, 2014						May 31, 2014
(Dollars in thousands)	Pass		Criticized		Total		Pass		Criticized		Total
CFC:
Distribution	$	15,187,750	$	11,182	$	15,198,932	$	15,018,642	$	16,723	$	15,035,365
Power supply	4,133,998		—		4,133,998		4,086,163		—		4,086,163
Statewide and associate	66,312		275		66,587		67,625		277		67,902
CFC total	19,388,060		11,457		19,399,517		19,172,430		17,000		19,189,430
RTFC	435,157		1,695		436,852		447,851		1,695		449,546
NCSC	636,406		2,096		638,502		825,736		2,213		827,949
Total loans outstanding	$	20,459,623	$	15,248	$	20,474,871	$	20,446,017	$	20,908	$	20,466,925

Loan Security

Except when providing line of credit loans, we typically lend to our members on a senior secured basis. Long-term loans are typically secured on a parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower with exceptions typical in utility mortgages. Line of credit loans are generally unsecured. In addition to the lien and security interest we receive under the mortgage, our member borrowers are also required to achieve certain financial ratios as required by loan covenants.

The following tables summarize our secured and unsecured loans outstanding by loan type and by company as of August 31, 2014 and May 31, 2014.



	August 31, 2014
(Dollars in thousands)	Secured		%		Unsecured		%		Total
Loan type:
Long-term fixed-rate loans	$	17,335,025	94	%	$	1,018,905	6	%	$	18,353,930
Long-term variable-rate loans	597,893		87		86,248		13		684,141
Loans guaranteed by RUS	200,535		100		—		—		200,535
Line of credit loans	142,027		11		1,094,238		89		1,236,265
Total loans outstanding	$	18,275,480	89		$	2,199,391	11		$	20,474,871

Company:
CFC	$	17,437,542	90	%	$	1,961,975	10	%	$	19,399,517
RTFC	419,694		96		17,158		4		436,852
NCSC	418,244		66		220,258		34		638,502
Total loans outstanding	$	18,275,480	89		$	2,199,391	11		$	20,474,871



	May 31, 2014
(Dollars in thousands)	Secured		%		Unsecured		%		Total
Loan type:
Long-term fixed-rate loans	$	17,185,456	95	%	$	990,200	5	%	$	18,175,656
Long-term variable-rate loans	650,211		86		103,707		14		753,918
Loans guaranteed by RUS	201,863		100		—		—		201,863
Line of credit loans	311,103		23		1,024,385		77		1,335,488
Total loans outstanding	$	18,348,633	90		$	2,118,292	10		$	20,466,925

Company:
CFC	$	17,313,990	90	%	$	1,875,440	10	%	$	19,189,430
RTFC	429,626		96		19,920		4		449,546
NCSC	605,017		73		222,932		27		827,949
Total loans outstanding	$	18,348,633	90		$	2,118,292	10		$	20,466,925

Allowance for Loan Losses

We maintain an allowance for loan losses at a level estimated by management to provide for probable losses inherent in the loan portfolio as of each balance sheet date. The tables below summarize changes, by company, in the allowance for loan losses as of and for the three months ended August 31, 2014 and 2013.



	Three Months Ended August 31, 2014
(Dollars in thousands)	CFC			RTFC ⁽¹⁾		NCSC⁽¹⁾			Total
Balance as of May 31, 2014	$	45,600		$	4,282	$	6,547		$	56,429
Provision for loan losses	(5,192		)	6		(1,585		)	(6,771		)
Recoveries of loans previously charged-off	53			—		—			53
Balance as of August 31, 2014	$	40,461		$	4,288	$	4,962		$	49,711



	Three Months Ended August 31, 2013
(Dollars in thousands)	CFC		RTFC ⁽¹⁾			NCSC⁽¹⁾			Total
Balance as of May 31, 2013	$	41,246	$	9,158		$	3,921		$	54,325
Provision for loan losses	2,037		(661		)	(98		)	1,278
Recoveries of loans previously charged-off	53		—			—			53
Balance as of August 31, 2013	$	43,336	$	8,497		$	3,823		$	55,656

^{____________________________}

⁽¹⁾The allowance for loan losses recorded for RTFC and NCSC are held at CFC.

Our allowance for loan losses consists of a specific allowance for loans individually evaluated for impairment and a general allowance for loans collectively evaluated for impairment. The tables below present, by company, the components of our allowance for loan losses and the recorded investment of the related loans as of August 31, 2014 and May 31, 2014.



	August 31, 2014
(Dollars in thousands)	CFC		RTFC		NCSC		Total
Ending balance of the allowance:
Collectively evaluated	$	40,461	$	3,656	$	4,962	$	49,079
Individually evaluated	—		632		—		632
Total ending balance of the allowance	$	40,461	$	4,288	$	4,962	$	49,711

Recorded investment in loans:
Collectively evaluated	$	19,391,933	$	435,157	$	638,172	$	20,465,262
Individually evaluated	7,584		1,695		330		9,609
Total recorded investment in loans	$	19,399,517	$	436,852	$	638,502	$	20,474,871

Loans to members, net ⁽¹⁾	$	19,359,056	$	432,564	$	633,540	$	20,425,160



	May 31, 2014
(Dollars in thousands)	CFC		RTFC		NCSC		Total
Ending balance of the allowance:
Collectively evaluated	$	45,600	$	3,876	$	6,527	$	56,003
Individually evaluated	—		406		20		426
Total ending balance of the allowance	$	45,600	$	4,282	$	6,547	$	56,429

Recorded investment in loans:
Collectively evaluated	$	19,181,846	$	447,851	$	827,549	$	20,457,246
Individually evaluated	7,584		1,695		400		9,679
Total recorded investment in loans	$	19,189,430	$	449,546	$	827,949	$	20,466,925

Loans to members, net⁽¹⁾	$	19,143,830	$	445,264	$	821,402	$	20,410,496

^{____________________________}

⁽¹⁾ Excludes deferred origination costs of $10 million as of August 31, 2014 and May 31, 2014.

Impaired Loans

Our recorded investment in individually-impaired loans and the related specific valuation allowance is summarized below by member class as of August 31, 2014 and May 31, 2014.



	August 31, 2014				May 31, 2014
(Dollars in thousands)	Recorded Investment		Related Allowance		Recorded Investment		Related Allowance
With no specific allowance recorded:
CFC/Distribution	$	7,584	$	—	$	7,584	$	—
NCSC	330		—		—		—
Total	7,914		—		7,584		—

With a specific allowance recorded:
NCSC	—		—		400		20
RTFC	1,695		632		1,695		406
Total	1,695		632		2,095		426
Total impaired loans	$	9,609	$	632	$	9,679	$	426

The recorded investment for impaired loans was equal to the total unpaid principal balance for impaired loans as of August 31, 2014 and May 31, 2014.

The table below represents the average recorded investment in impaired loans and the interest income recognized by member class for the three months ended August 31, 2014 and 2013.



	Three Months Ended August 31,
	2014		2013		2014		2013
(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
CFC/Distribution	$	7,584	$	20,648	$	—	$	136
CFC/Power Supply	—		5,000		—		—
NCSC	364		—		—		—
RTFC	1,695		10,382		—		—
Total impaired loans	$	9,643	$	36,030	$	—	$	136

Nonperforming and Restructured Loans

Nonperforming and restructured loans outstanding and unadvanced commitments to members are summarized as follows by loan type and by company as of August 31, 2014 and May 31, 2014.



	August 31, 2014				May 31, 2014
(Dollars in thousands)	Loans Outstanding		Unadvanced Commitments⁽¹⁾		Loans Outstanding		Unadvanced Commitments⁽¹⁾
Nonperforming and restructured loans:
Nonperforming loans:
RTFC:
Long-term variable-rate loans	$	1,695	$	—	$	1,695	$	—
NCSC:
Line of credit loans	—		—		400		—
Total nonperforming loans	$	1,695	$	—	$	2,095	$	—

Restructured loans:
CFC:
Long-term fixed-rate loans	$	7,584	$	—	$	7,584	$	—
NCSC:
Line of credit loans	330		—		—		—
Total restructured loans	$	7,914	$	—	$	7,584	$	—

^{____________________________}

The following table shows foregone interest income as a result of holding loans on nonaccrual status for the three months ended August 31, 2014 and 2013.



	Three Months Ended August 31,
(Dollars in thousands)	2014		2013
Nonperforming loans	$	26	$	179
Restructured loans	137		—
Total	$	163	$	179

As of August 31, 2014 and May 31, 2014, nonperforming loans totaled $2 million, or 0.01%, of loans outstanding. One borrower in this group is currently seeking a buyer for its system, as it is not anticipated that it will have sufficient cash flow to repay its loans without the proceeds from the sale of the business. It is currently anticipated that even with the sale of the business, there will not be sufficient funds to repay the full amount owed. We have approval rights with respect to the sale of this company.

As of August 31, 2014 and May 31, 2014, we had restructured loans totaling $8 million, or 0.04%, of loans outstanding, all of which were performing according to their restructured terms. No interest was accrued on restructured loans during the three months ended August 31, 2014, compared with approximately $0.1 million of interest income during the same prior year period.

We believe our allowance for loan losses was appropriate to cover the losses inherent in our loan portfolio as of August 31, 2014.

Pledging of Loans and Loans on Deposit

We are required to pledge eligible mortgage notes in an amount at least equal to the outstanding balance of our secured debt.

The following table summarizes our loans outstanding as collateral pledged to secure our collateral trust bonds, Clean Renewable Energy Bonds and notes payable to Farmer Mac and the amount of the corresponding debt outstanding (see "Note 5—Short-Term Debt and Credit Arrangements" and "Note 6—Long-Term Debt") as of August 31, 2014 and May 31, 2014.



(Dollars in thousands)	August 31, 2014		May 31, 2014
Collateral trust bonds:
2007 indenture:
Distribution system mortgage notes	$	5,931,485	$	5,987,767
RUS guaranteed loans qualifying as permitted investments	160,219		161,372
Total pledged collateral	$	6,091,704	$	6,149,139
Collateral trust bonds outstanding	5,397,711		5,397,711

1994 indenture:
Distribution system mortgage notes	$	986,226	$	1,005,058
Collateral trust bonds outstanding	860,000		860,000

Farmer Mac:
Distribution and power supply system mortgage notes	$	1,876,550	$	1,907,607
Notes payable outstanding	1,455,313		1,667,505

Clean Renewable Energy Bonds Series 2009A:
Distribution and power supply system mortgage notes	$	20,863	$	21,398
Cash	605		520
Total pledged collateral	$	21,468	$	21,918
Notes payable outstanding	18,230		18,230

We are required to maintain collateral on deposit in an amount at least equal to the balance of debt outstanding to the Federal Financing Bank of the United States Treasury issued under the Guaranteed Underwriter Program of the USDA (the “Guaranteed Underwriter Program”). See "Note 5—Short-Term Debt and Credit Arrangements" and "Note 6—Long-Term Debt."

The following table shows the collateral on deposit and the amount of the corresponding debt outstanding as of August 31, 2014 and May 31, 2014.



(Dollars in thousands)	August 31, 2014		May 31, 2014
Federal Financing Bank:
Distribution and power supply system mortgage notes on deposit	$	5,031,779	$	5,076,428
Notes payable outstanding	4,295,250		4,299,000