10-Q 1 nrufy2019q1form10-q.htm NRU FY2019 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, 2018
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
__________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒  No ☐

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

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

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

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





TABLE OF CONTENTS
 
  
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 

i




INDEX OF MD&A TABLES
 
Table
  
 Description
 
Page
1
 
Summary of Selected Financial Data
 
2

2
 
Average Balances, Interest Income/Interest Expense and Average Yield/Cost
 
8

3
 
Rate/Volume Analysis of Changes in Interest Income/Interest Expense
 
10

4
 
Non-Interest Income
 
12

5
 
Derivative Average Notional Amounts and Average Interest Rates
 
12

6
 
Derivative Gains (Losses)
 
13

7
 
Non-Interest Expense
 
14

8
 
Loans Outstanding by Type and Member Class
 
15

9
 
Historical Retention Rate and Repricing Selection
 
16

10
 
Total Debt Outstanding
 
17

11
 
Member Investments
 
18

12
 
Collateral Pledged
 
19

13
 
Unencumbered Loans
 
20

14
 
Guarantees Outstanding
 
21

15
 
Maturities of Guarantee Obligations
 
22

16
 
Unadvanced Loan Commitments
 
22

17
 
Notional Maturities of Unadvanced Loan Commitments
 
22

18
 
Maturities of Notional Amount of Unconditional Committed Lines of Credit
 
23

19
 
Loan Portfolio Security Profile
 
25

20
 
Credit Exposure to 20 Largest Borrowers
 
26

21
 
Troubled Debt Restructured Loans
 
28

22
 
Allowance for Loan Losses
 
29

23
 
Rating Triggers for Derivatives
 
30

24
 
Available Liquidity
 
31

25
 
Committed Bank Revolving Line of Credit Agreements
 
32

26
 
Short-Term Borrowings—Funding Sources
 
33

27
 
Short-Term Borrowings
 
34

28
 
Issuances and Maturities of Long-Term and Subordinated Debt
 
34

29
 
Principal Maturity of Long-Term and Subordinated Debt
 
35

30
 
Projected Sources and Uses of Liquidity
 
36

31
 
Credit Ratings
 
36

32
 
Interest Rate Gap Analysis
 
38

33
 
Adjusted Financial Measures—Income Statement
 
39

34
 
TIER and Adjusted TIER
 
40

35
 
Adjusted Financial Measures—Balance Sheet
 
40

36
 
Debt-to-Equity Ratio
 
40

37
 
Members’ Equity
 
41


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 contains certain statements that are considered “forward-looking statements” within the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identified by our use of words such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity” and similar expressions, whether in the negative or affirmative. All statements about future expectations or projections, including statements about loan volume, the appropriateness of the allowance for loan losses, operating income and expenses, leverage and debt-to-equity ratios, borrower financial performance, impaired loans, and sources and uses of liquidity, are forward-looking statements. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, actual results and performance may differ materially from our forward-looking statements due to several factors. Factors that could cause future results to vary from our forward-looking statements include, but are not limited to, general economic conditions, legislative changes including those that could affect our tax status, governmental monetary and fiscal policies, demand for our loan products, lending competition, changes in the quality or composition of our loan portfolio, changes in our ability to access external financing, changes in the credit ratings on our debt, valuation of collateral supporting impaired loans, charges associated with our operation or disposition of foreclosed assets, technological changes within the rural electric utility industry, regulatory and economic conditions in the rural electric industry, nonperformance of counterparties to our derivative agreements, the costs and effects of legal or governmental proceedings involving us or our members and the factors listed and described under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended May 31, 2018 (“2018 Form 10-K”). Except as required by law, we undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date on which the statement is made.
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, generation and transmission (“power supply”) systems and related facilities. CFC also provides its members with credit enhancements in the form of letters of credit and guarantees of debt obligations. As a cooperative, CFC is owned by and exclusively serves its membership, which consists of not-for-profit entities or subsidiaries or affiliates of not-for-profit entities. CFC is exempt from federal income taxes under Section 501(c)(4) of the Internal Revenue Code. As a member-owned cooperative, CFC’s objective is not to maximize profit, but rather to offer members cost-based financial products and services. CFC funds its activities primarily through a combination of public and private issuances of debt securities, member investments and retained equity. As a Section 501(c)(4) tax-exempt, member-owned cooperative, we cannot issue equity securities.

Our financial statements include the consolidated accounts of CFC, National Cooperative Services Corporation (“NCSC”), Rural Telephone Finance Cooperative (“RTFC”) and subsidiaries created and controlled by CFC to hold foreclosed assets resulting from defaulted loans or bankruptcy. NCSC is a taxable member-owned cooperative that may provide financing to members of CFC, government or quasi-government entities which own electric utility systems that meet the Rural Electrification Act definition of “rural” and for-profit and nonprofit entities that are owned, operated or controlled by, or provide significant benefits to certain members of CFC. RTFC is a taxable Subchapter T cooperative association that provides financing for its rural telecommunications members and their affiliates. CFC did not hold, and did not have any subsidiaries or other entities that held, foreclosed assets as of August 31, 2018 or May 31, 2018. See “Item 1. Business—Overview” in our 2018 Form 10-K for additional information on the business activities of each of these entities. Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its consolidated entities. All references to members within this document include members, associates and affiliates of CFC and its consolidated entities.

1




Our principal operations are currently organized for management reporting purposes into three business segments: CFC, NCSC and RTFC. Management monitors a variety of key indicators to evaluate our business performance. The following MD&A is intended to provide the reader with an understanding of our results of operations, financial condition and liquidity by discussing the factors influencing changes from period to period and the key measures used by management to evaluate performance, such as net interest income, net interest yield, loan growth, debt-to-equity ratio, and credit quality metrics. We provide additional information on the financial performance of each of our business segments in “Note 13—Business Segments.” The MD&A section is provided as a supplement to, and should be read in conjunction with our unaudited condensed consolidated financial statements and related notes in this Report, our audited consolidated financial statements and related notes in our 2018 Form 10-K and additional information contained in our 2018 Form 10-K, including the risk factors discussed under “Part I—Item 1A. Risk Factors,” as well as any risk factors identified under “Part II—Item 1A. Risk Factors” in this Report.
SUMMARY OF SELECTED FINANCIAL DATA

Table 1 provides a summary of consolidated selected financial data for the three months ended August 31, 2018 and 2017, and as of August 31, 2018 and May 31, 2018. In addition to financial measures determined in accordance with generally accepted accounting principles in the United States (“GAAP”), management also evaluates performance based on certain non-GAAP measures and metrics, which we refer to as “adjusted” measures. Certain financial covenant provisions in our credit agreements are also based on non-GAAP financial measures. Our key non-GAAP financial measures are adjusted net income, adjusted net interest income, adjusted interest expense, adjusted net interest yield, adjusted times interest earned ratio (“adjusted TIER”) and adjusted debt-to-equity ratio. The most comparable GAAP measures are net income, net interest income, interest expense, net interest yield, TIER and debt-to-equity ratio, respectively. The primary adjustments we make to calculate these non-GAAP measures consist of (i) adjusting interest expense and net interest income to include the impact of net periodic derivative cash settlements; (ii) adjusting net income, senior debt and total equity to exclude the non-cash impact of the accounting for derivative financial instruments; (iii) adjusting senior debt to exclude the amount that funds CFC member loans guaranteed by RUS, subordinated deferrable debt and members’ subordinated certificates; and (iv) adjusting total equity to include subordinated deferrable debt and members’ subordinated certificates and exclude cumulative derivative forward value gains and losses and accumulated other comprehensive income. We believe our non-GAAP adjusted measures, which are not a substitute for GAAP and may not be consistent with similarly titled non-GAAP measures used by other companies, provide meaningful information and are useful to investors because management evaluates performance based on these metrics, and certain financial covenants in our committed bank revolving line of credit agreements and debt indentures are based on adjusted measures. See “Non-GAAP Financial Measures” for a detailed reconciliation of these adjusted measures to the most comparable GAAP measures.

Table 1: Summary of Selected Financial Data
 
 
Three Months Ended August 31,
 
 
(Dollars in thousands)
 
2018
 
2017
 
Change
Statement of income
 
 
 
 
 
 
Interest income
 
$
278,491

 
$
265,915

 
   5%
Interest expense
 
(210,231
)
 
(192,731
)
 
9
Net interest income
 
68,260

 
73,184

 
(7)
Fee and other income
 
3,185

 
3,945

 
(19)
Total revenue
 
71,445

 
77,129

 
(7)
Benefit for loan losses
 
109

 
298

 
(63)
Derivative gains (losses)(1)
 
7,183

 
(46,198
)
 
**
Results of operations of foreclosed assets
 

 
(24
)
 
**
Operating expenses(2) 
 
(23,205
)
 
(21,636
)
 
7
Other non-interest expense
 
(7,494
)
 
(522
)
 
1,336
Income before income taxes
 
48,038

 
9,047

 
431
Income tax expense
 
(60
)
 
(32
)
 
88
Net income
 
$
47,978

 
$
9,015

 
432

2



 
 
Three Months Ended August 31,
 
 
 
 
2018

2017
 
Change
Adjusted operational financial measures
 
 
 
 
 
 
Adjusted interest expense(3)
 
$
(223,060
)
 
$
(212,953
)
 
   5%
Adjusted net interest income(3)
 
55,431

 
52,962

 
5
Adjusted net income(3)
 
27,966

 
34,991

 
(20)
 
 
 
 
 
 
 
Selected ratios
 
 
 
 
 
 
Fixed-charge coverage ratio/TIER (4)
 
1.23

 
1.05

 
18 bps
Adjusted TIER(3)
 
1.13

 
1.16

 
(3)
Net interest yield(5)
 
1.04
%
 
1.16
%
 
(12)
Adjusted net interest yield(3)(6)
 
0.85

 
0.84

 
1
 
 
 
 
 
 
 
 
 
August 31, 2018
 
May 31, 2018
 
Change
Balance sheet
 
 
 
 
 
 
Cash, cash equivalents and restricted cash
 
$
274,502

 
$
238,824

 
     15%
Investment securities
 
642,360

 
609,851

 
5
Loans to members(7)
 
25,182,654

 
25,178,608

 
Allowance for loan losses
 
(18,692
)
 
(18,801
)
 
  (1)
Loans to members, net
 
25,163,962

 
25,159,807

 
Total assets
 
26,676,207

 
26,690,204

 
Short-term borrowings
 
3,793,136

 
3,795,910

 
Long-term debt
 
18,674,932

 
18,714,960

 
Subordinated deferrable debt
 
742,445

 
742,410

 
Members’ subordinated certificates
 
1,378,097

 
1,379,982

 
Total debt outstanding
 
24,588,610

 
24,633,262

 
Total liabilities
 
25,169,631

 
25,184,351

 
Total equity
 
1,506,576

 
1,505,853

 
Guarantees(8)
 
776,687

 
805,161

 
  (4)
 
 
 
 
 
 
 
Selected ratios period end
 
 
 
 
 

Allowance coverage ratio(9)
 
0.07
%
 
0.07
%
 
Debt-to-equity ratio(10)
 
16.71

 
16.72

 
(1)
Adjusted debt-to-equity ratio(3)
 
6.21

 
6.18

 
  3
____________________________ 
** Calculation of percentage change is not meaningful.
(1)Consists of interest rate swap cash settlements and forward value gains (losses). Derivative cash settlement amounts represent net periodic contractual interest accruals related to derivatives not designated for hedge accounting. Derivative forward value gains (losses) represent changes in fair value during the period, excluding net periodic contractual interest accruals, related to derivatives not designated for hedge accounting and expense amounts reclassified into income related to the cumulative transition loss recorded in accumulated other comprehensive income as of June 1, 2001, as a result of the adoption of the derivative accounting guidance that required derivatives to be reported at fair value on the balance sheet.
(2)Consists of salaries and employee benefits and the other general and administrative expenses components of non-interest expense, each of which are presented separately on our consolidated statements of income.
(3)See “Non-GAAP Financial Measures” for details on the calculation of these non-GAAP adjusted measures and the reconciliation to the most comparable GAAP measures.
(4)Calculated based on net income (loss) plus interest expense for the period divided by interest expense for the period. The fixed-charge coverage ratios and TIER were the same during each period presented because we did not have any capitalized interest during these periods.
(5)Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.
(6)Calculated based on annualized adjusted net interest income for the period divided by average interest-earning assets for the period.
(7)Consists of the outstanding principal balance of member loans plus unamortized deferred loan origination costs, which totaled $11 million as of both August 31, 2018 and May 31, 2018.
(8)Reflects the total amount of member obligations for which CFC has guaranteed payment to a third party as of the end of each period. This amount represents our maximum exposure to loss, which significantly exceeds the guarantee liability recorded on our consolidated balance sheets. See “Note 11—Guarantees” for additional information.  

3



(9)Calculated based on the allowance for loan losses at period end divided by total outstanding loans at period end.
(10)Calculated based on total liabilities at period end divided by total equity at period end.
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 net income; therefore, the rates we charge our member-borrowers reflect our adjusted interest expense plus a spread to cover our operating expenses, a provision for loan losses and earnings sufficient to achieve interest coverage to meet our financial objectives. Our goal is to earn an annual minimum adjusted TIER of 1.10 and to maintain an adjusted debt-to-equity ratio at approximately or below 6.00-to-1.

We are subject to period-to-period volatility in our reported GAAP results due to changes in market conditions and differences in the way our financial assets and liabilities are accounted for under GAAP. Our financial assets and liabilities expose us to interest-rate risk. We use derivatives, primarily interest rate swaps, as part of our strategy in managing this risk. Our derivatives are intended to economically hedge and manage the interest-rate sensitivity mismatch between our financial assets and liabilities. We are required under GAAP to carry derivatives at fair value on our consolidated balance sheet; however, the financial assets and liabilities for which we use derivatives to economically hedge are carried at amortized cost. Changes in interest rates and spreads result in periodic fluctuations in the fair value of our derivatives, which may cause volatility in our earnings because we do not apply hedge accounting for our interest rate swaps. As a result, the mark-to-market changes in our interest rate swaps are recorded in earnings. Based on the composition of our interest rate swaps, we generally record derivative losses in earnings when interest rates decline and derivative gains when interest rates rise. This earnings volatility generally is not indicative of the underlying economics of our business, as the derivative forward fair value gains or losses recorded each period may or may not be realized over time, depending on the terms of our derivative instruments and future changes in market conditions that impact the periodic cash settlement amounts of our interest rate swaps. As such, management uses our adjusted non-GAAP results to evaluate our operating performance. Our adjusted results include realized net periodic interest rate swap settlement amounts but exclude the impact of unrealized forward fair value gains and losses. Our financial debt covenants are also based on our non-GAAP adjusted results, as the forward fair value gains and losses related to our interest rate swaps do not affect our cash flows, liquidity or ability to service our debt.

Financial Performance

Reported Results

We reported net income of $48 million and a TIER of 1.23 for the quarter ended August 31, 2018 (“current quarter”), compared with net income of $9 million and a TIER of 1.05 for the same prior-year quarter. Our debt-to-equity ratio decreased slightly to 16.71 as of August 31, 2018, from 16.72 as of May 31, 2018, primarily due to a decline in liabilities as equity remained relatively unchanged. In July 2018, the CFC Board of Directors authorized the allocation of patronage capital of $95 million for fiscal year 2018 and the retirement of 50% of this amount, or $48 million, which was returned to members in August 2018. The increase in equity from our reported net income of $48 million for the current quarter was offset by the retirement of patronage capital.

The variance of $39 million between our reported net income of $48 million for the current quarter and our net income of $9 million for the same prior-year quarter was primarily driven by a favorable shift in the mark-to-market changes in the fair value of our derivatives. We recognized derivative gains of $7 million in the current quarter due to a net increase in the fair value of our pay-fixed swaps resulting from a slight rise in medium- and long-term interest rates. In contrast, we recognized derivative losses of $46 million during the comparable prior-year quarter, mainly due to a modest flattening of the swap curve as interest rates on the shorter end of the curve rose while medium- and long-term interest rates declined slightly. The favorable shift of $53 million in the fair value of our derivatives was offset in part by the recognition of losses of $7 million on the early extinguishment of debt, a decrease in net interest income of $5 million and an increase in operating expenses of $2 million. The decrease in net interest income resulted from compression in the net interest yield, which was partially offset by an increase in average interest-earning assets of $1,068 million, or 4%. Net interest yield declined by 12 basis points to 1.04%, primarily driven by an increase in our overall average cost of funds due to a higher average cost for our short-term and variable-rate borrowings resulting from the rise in short-term interest rates.

4



Adjusted Non-GAAP Results

Our adjusted net income totaled $28 million and our adjusted TIER was 1.13 for the current quarter, compared with adjusted net income of $35 million and adjusted TIER of 1.16 for the same prior-year quarter. Our adjusted debt-to-equity ratio increased to 6.21 as of August 31, 2018, from 6.18 as of May 31, 2018, primarily attributable to a decrease in adjusted equity due to the patronage capital retirement of $48 million, which more than offset our adjusted net income of $28 million.

The decrease in adjusted net income of $7 million in the current quarter from the comparable prior-year quarter was primarily driven by losses on the early extinguishment of debt of $7 million and an increase in operating expenses of $2 million, offset in part by an increase in adjusted net interest income of $2 million. The increase in adjusted net interest income was attributable to the increase in average interest-earning assets $1,068 million and a slight increase in the adjusted interest yield of 1 basis point to 0.85%.

Lending Activity and Credit Performance

Loans to members totaled $25,183 million as of August 31, 2018, relatively unchanged from May 31, 2018. CFC distribution loans increased by $87 million, which was offset by decreases in CFC power supply loans, NCSC loans and RTFC loans of $76 million, $6 million and $5 million, respectively.

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

The overall credit quality of our loan portfolio remained high as of August 31, 2018, as evidenced by our strong credit performance metrics. We had no delinquent or nonperforming loans as of August 31, 2018, and no loan defaults or charge-offs during the current quarter. Outstanding loans to electric utility organizations represented approximately 99% of total outstanding loan portfolio as of August 31, 2018, unchanged from May 31, 2018. We historically have had limited defaults and losses on loans in our electric utility loan portfolio. We generally lend to members on a senior secured basis, which reduces the risk of loss in the event of a borrower default. Of our total loans outstanding, 93% were secured and 7% were unsecured as of both August 31, 2018 and May 31, 2018.

Financing Activity

We issue debt primarily to fund growth in our loan portfolio. As such, our outstanding debt volume generally increases and decreases in response to member loan demand. Total debt outstanding was $24,589 million as of August 31, 2018, relatively unchanged from May 31, 2018, as loans to members also remained flat. Decreases in collateral trust bonds, dealer commercial paper and Federal Agricultural Mortgage Corporation (“Farmer Mac”) notes payable of $296 million, $135 million, and $114 million, respectively, were largely offset by increases in dealer medium-term notes of $291 million and in member commercial paper, select notes and daily liquidity fund notes of $238 million. Outstanding dealer commercial paper of $929 million and $1,064 million as of August 31, 2018 and May 31, 2018, respectively, was below our maximum threshold of $1,250 million.

We provide additional information on our financing activities below under “Consolidated Balance Sheet Analysis—Debt” and “Liquidity Risk.”

Outlook for the Next 12 Months

We currently expect that our net interest income, adjusted net interest income, net income, adjusted net income, tier, adjusted tier, net interest yield and adjusted net interest yield will increase over the next 12 months as a result of a projected decrease in our average cost of funds. Long-term debt scheduled to mature over the next 12 months totaled $2,820 million as of August 31, 2018. Included in this amount is $880 million aggregate principal amount of higher-cost collateral trust bonds with a weighted average coupon rate of 9.60%, scheduled to mature on November 1, 2018. On July 12, 2018, we redeemed $300 million of our 10.375% collateral trust bonds due November 1, 2018, leaving a remaining outstanding principal

5



amount of $700 million. We expect that we will be able to replace this higher-cost debt with lower-cost funding, which will reduce our aggregate weighted average cost of funds.

We believe we have sufficient liquidity from the combination of existing cash and cash equivalents, member loan repayments, committed bank revolving lines of credit, committed loan facilities from the Federal Financing Bank guaranteed by RUS under the Guaranteed Underwriter Program (“Guaranteed Underwriter Program”), revolving note purchase agreements with Farmer Mac and our ability to issue debt in the capital markets, to our members and in private placements, to meet the demand for member loan advances and satisfy our obligations to repay long-term debt maturing over the next 12 months. As of August 31, 2018, sources of liquidity readily available for access totaled $7,295 million, consisting of (i) $266 million in cash and cash equivalents; (ii) up to $1,225 million available under committed loan facilities under the Guaranteed Underwriter Program; (iii) up to $3,082 million available under committed bank revolving line of credit agreements; (iv) up to $300 million available under a committed revolving note purchase agreement with Farmer Mac; and (v) up to $2,422 million available under a revolving note purchase agreement with Farmer Mac, subject to market conditions. On August 17, 2018, we executed a commitment letter for a $750 million loan facility under the Guaranteed Underwriter Program. The amount available for access under the Guaranteed Underwriter Program, based on amounts advanced to us as of August 31, 2018, will increase to $1,975 million upon closing of the facility.

We believe we can continue to roll over the outstanding member short-term debt of $2,864 million as of August 31, 2018, based on our expectation that our members will continue to reinvest their excess cash in our commercial paper, daily liquidity fund notes, select notes and medium-term notes. Although we expect to continue accessing the dealer commercial paper market to help meet our liquidity needs, we intend to manage our short-term wholesale funding risk by maintaining outstanding dealer commercial paper at an amount below $1,250 million for the foreseeable future. We expect to continue to be in compliance with the covenants under our committed bank revolving line of credit agreements, which will allow us to mitigate roll-over risk, as we can draw on these facilities to repay dealer or member commercial paper that cannot be refinanced with similar debt.

While we are not subject to bank regulatory capital rules, we generally aim to maintain an adjusted debt-to-equity ratio at approximately or below 6.00-to-1. Our adjusted debt-to-equity ratio was 6.21 as of August 31, 2018, above our targeted threshold due to the decrease in adjusted equity resulting from the patronage capital retirement of $48 million during the quarter. We expect that our adjusted debt-to-equity ratio will decrease during the remainder of the fiscal year due to an increase in equity from earnings. As a result, we believe our adjusted debt-to equity ratio will decrease closer to our target ratio of 6.00-to-1 over the next 12 months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the amount of assets, liabilities, income and expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which we use management’s judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a discussion of our significant accounting policies under “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K.

We have identified certain accounting policies as critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our results of operations or financial condition. Our most critical accounting policies and estimates involve the determination of the allowance for loan losses and fair value. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. There were no material changes in the key inputs and assumptions used in our critical accounting policies during the current quarter. Management has discussed significant judgments and assumptions in applying our critical accounting policies with the Audit Committee of our board of directors. We provide additional information on our critical accounting policies and estimates under “MD&A—Critical Accounting Policies and Estimates” in our 2018 Form 10-K. See “Item 1A. Risk Factors” in our 2018 Form 10-K for a discussion of the risks associated with management’s judgments and estimates in applying our accounting policies and methods.

6



RECENT ACCOUNTING CHANGES AND OTHER DEVELOPMENTS

See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted during the current quarter, as well as recently issued accounting standards not yet required to be adopted and the expected impact of the adoption of these accounting standards. To the extent we believe the adoption of new accounting standards has had or will have a material impact on our consolidated results of operations, financial condition or liquidity, we also discuss the impact in the applicable section(s) of this MD&A.
CONSOLIDATED RESULTS OF OPERATIONS

The section below provides a comparative discussion of our condensed consolidated results of operations between the three months ended August 31, 2018 and 2017. Following this section, we provide a comparative analysis of our condensed consolidated balance sheets as of August 31, 2018 and May 31, 2018. You should read these sections together with our “Executive Summary—Outlook for the Next 12 Months” where we discuss trends and other factors that we expect will affect our future results of operations.

Net Interest Income

Net interest income represents the difference between the interest income earned on our interest-earning assets, which includes loans and investment securities, and the interest expense on our interest-bearing liabilities. Our net interest yield represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities plus the impact from non-interest bearing funding. We expect net interest income and our net interest yield to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities. We do not fund each individual loan with specific debt. Rather, we attempt to minimize costs and maximize efficiency by proportionately funding large aggregated amounts of loans.

Table 2 presents average balances for the three months ended August 31, 2018 and 2017, and for each major category of our interest-earning assets and interest-bearing liabilities, the interest income earned or interest expense incurred, and the average yield or cost. Table 2 also presents non-GAAP adjusted interest expense, adjusted net interest income and adjusted net interest yield, which reflect the inclusion of net accrued periodic derivative cash settlements in interest expense. We provide reconciliations of our non-GAAP adjusted measures to the most comparable GAAP measures under “Non-GAAP Financial Measures.”


7



Table 2: Average Balances, Interest Income/Interest Expense and Average Yield/Cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended August 31,
(Dollars in thousands)
 
2018
 
2017
Assets:
 
Average Balance
 
Interest Income/Expense
 
Average Yield/Cost
 
Average Balance
 
Interest Income/Expense
 
Average Yield/Cost
Long-term fixed-rate loans(1)
 
$
22,695,516

 
$
251,801

 
4.40
%
 
$
22,371,291

 
$
249,364

 
4.42
%
Long-term variable-rate loans
 
1,071,550

 
9,381

 
3.47

 
842,968

 
5,863

 
2.76

Line of credit loans
 
1,422,853

 
11,633

 
3.24

 
1,353,349

 
8,707

 
2.55

TDR loans(2)
 
12,552

 
218

 
6.89

 
13,122

 
226

 
6.83

Other income, net(3)
 

 
(325
)
 

 

 
(232
)
 

Total loans
 
25,202,471

 
272,708

 
4.29

 
24,580,730

 
263,928

 
4.26

Cash, time deposits and investment securities
 
809,409

 
5,783

 
2.83

 
363,645

 
1,987

 
2.17

Total interest-earning assets
 
$
26,011,880

 
$
278,491

 
4.25
%
 
$
24,944,375

 
$
265,915

 
4.23
%
Other assets, less allowance for loan losses
 
726,260

 
 
 
 
 
560,169

 
 
 
 
Total assets
 
$
26,738,140

 


 
 
 
$
25,504,544

 


 


 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 


 


 


 


 


Short-term borrowings
 
$
3,519,995

 
$
19,419

 
2.19
%
 
$
3,223,476

 
$
10,539

 
1.30
%
Medium-term notes
 
3,757,196

 
32,410

 
3.42

 
3,010,730

 
25,116

 
3.31

Collateral trust bonds
 
7,474,361

 
77,705

 
4.12

 
7,635,433

 
85,277

 
4.43

Guaranteed Underwriter Program notes payable
 
4,848,435

 
35,334

 
2.89

 
4,995,723

 
35,602

 
2.83

Farmer Mac notes payable
 
2,790,527

 
21,111

 
3.00

 
2,507,545

 
11,490

 
1.82

Other notes payable
 
29,877

 
322

 
4.28

 
35,243

 
390

 
4.39

Subordinated deferrable debt
 
742,422

 
9,417

 
5.03

 
742,285

 
9,416

 
5.03

Subordinated certificates
 
1,377,954

 
14,513

 
4.18

 
1,417,872

 
14,901

 
4.17

Total interest-bearing liabilities
 
$
24,540,767

 
$
210,231

 
3.40
%
 
$
23,568,307

 
$
192,731

 
3.24
%
Other liabilities
 
697,954

 
 
 

 
853,196

 

 
 
Total liabilities
 
25,238,721

 
 
 

 
24,421,503

 

 
 
Total equity
 
1,499,419

 
 
 
 
 
1,083,041

 

 
 
Total liabilities and equity
 
$
26,738,140

 


 
 
 
$
25,504,544

 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest spread(4)
 
 
 


 
0.85
%
 


 


 
0.99
%
Benefit from non-interest bearing funding(5)
 
 
 
 
 
0.19

 
 
 
 
 
0.17

Net interest income/net interest yield(6)
 
 
 
$
68,260

 
1.04
%
 
 
 
$
73,184

 
1.16
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net interest income/adjusted net interest yield:
 
 
 
 
 


 
 
 
 
 
 
Interest income
 
 
 
$
278,491

 
4.25
%
 
 
 
$
265,915

 
4.23
%
Interest expense
 
 
 
210,231

 
3.40

 
 
 
192,731

 
3.24

Add: Net accrued periodic derivative cash settlements(7)
 
 
 
12,829

 
0.46

 
 
 
20,222

 
0.75

Adjusted interest expense/adjusted average cost(8)
 
 
 
$
223,060

 
3.61
%
 


 
$
212,953

 
3.58
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net interest spread(4)
 
 
 
 
 
0.64
%
 

 
 
 
0.65
%
Benefit from non-interest bearing funding(5)
 
 
 
 
 
0.21

 
 
 
 
 
0.19

Adjusted net interest income/adjusted net interest yield(9)
 
 
 
$
55,431

 
0.85
%
 

 
$
52,962


0.84
%
____________________________ 
(1)Interest income on long-term, fixed-rate loans includes loan conversion fees, which are generally deferred and recognized as interest income using the effective interest method.
(2)Troubled debt restructuring (“TDR”) loans.

8



(3)Consists of late payment fees and net amortization of deferred loan fees and loan origination costs.
(4)Net interest spread represents the difference between the average yield on total average interest-earning assets and the average cost of total average interest-bearing liabilities. Adjusted net interest spread represents the difference between the average yield on total average interest-earning assets and the adjusted average cost of total average interest-bearing liabilities.
(5)Includes other liabilities and equity.
(6)Net interest yield is calculated based on annualized net interest income for the period divided by total average interest-earning assets for the period.
(7)Represents the impact of net accrued periodic interest rate swap settlements during the period. This amount is added to interest expense to derive non-GAAP adjusted interest expense. The average (benefit)/cost associated with derivatives is calculated based on annualized net accrued periodic interest rate swap settlements during the period divided by the average outstanding notional amount of derivatives during the period. The average outstanding notional amount of interest rate swaps was $10,955 million and $10,682 million for the three months ended August 31, 2018 and 2017, respectively.
(8)Adjusted interest expense represents interest expense plus net accrued periodic interest rate swap cash settlements during the period. Net accrued periodic derivative cash settlements are reported on our consolidated statements of income as a component of derivative gains (losses). Adjusted average cost is calculated based on annualized adjusted interest expense for the period divided by total average interest-bearing liabilities during the period.
(9)Adjusted net interest yield is calculated based on annualized adjusted net interest income for the period divided by total average interest-earning assets for the period.
Table 3 displays the change in net interest income between periods and the extent to which the variance is attributable to: (i) changes in the volume of our interest-earning assets and interest-bearing liabilities or (ii) changes in the interest rates of these assets and liabilities. The table also presents the change in adjusted net interest income between periods. Changes that are not solely due to either volume or rate are allocated to these categories on a pro-rata basis based on the absolute value of the change due to average volume and average rate.
 

9



Table 3: Rate/Volume Analysis of Changes in Interest Income/Interest Expense
 
 
Three Months Ended August 31,
 
 
2018 versus 2017
 
 
Total
 
Variance due to:(1)
(Dollars in thousands)
 
Variance
 
Volume
 
Rate
Interest income:
 
 
 
 
 
 
Long-term fixed-rate loans
 
$
2,437

 
$
3,614

 
$
(1,177
)
Long-term variable-rate loans
 
3,518

 
1,590

 
1,928

Line of credit loans
 
2,926

 
447

 
2,479

Restructured loans
 
(8
)
 
(10
)
 
2

Other income, net
 
(93
)
 

 
(93
)
Total loans
 
8,780

 
5,641

 
3,139

Cash, time deposits and investment securities
 
3,796

 
2,436

 
1,360

Interest income
 
12,576

 
8,077

 
4,499

 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
Short-term borrowings
 
8,880

 
969

 
7,911

Medium-term notes
 
7,294

 
6,227

 
1,067

Collateral trust bonds
 
(7,572
)
 
(1,799
)
 
(5,773
)
Guaranteed Underwriter Program notes payable
 
(268
)
 
(1,050
)
 
782

Farmer Mac notes payable
 
9,621

 
1,297

 
8,324

Other notes payable
 
(68
)
 
(59
)
 
(9
)
Subordinated deferrable debt
 
1

 
2

 
(1
)
Subordinated certificates
 
(388
)
 
(420
)
 
32

Interest expense
 
17,500

 
5,167

 
12,333

Net interest income
 
$
(4,924
)
 
$
2,910

 
$
(7,834
)
 
 
 
 
 
 
 
Adjusted net interest income:
 
 
 
 
 
 
Interest income
 
$
12,576

 
$
8,077

 
$
4,499

Interest expense
 
17,500

 
5,167

 
12,333

Net accrued periodic derivative cash settlements(2)
 
(7,393
)
 
516

 
(7,909
)
Adjusted interest expense(3)
 
10,107

 
5,683

 
4,424

Adjusted net interest income
 
$
2,469

 
$
2,394

 
$
75

____________________________ 
(1)The changes for each category of interest income and interest expense are divided between the portion of change attributable to the variance in volume and the portion of change attributable to the variance in rate for that category. The amount attributable to the combined impact of volume and rate has been allocated to each category based on the proportionate absolute dollar amount of change for that category.
(2)For net accrued periodic derivative cash settlements, the variance due to average volume represents the change in derivative cash settlements resulting from the change in the average notional amount of derivative contracts outstanding. The variance due to average rate represents the change in derivative cash settlements resulting from the net difference between the average rate paid and the average rate received for interest rate swaps during the period.
(3) See “Non-GAAP Financial Measures” for additional information on our adjusted non-GAAP measures.

Net interest income of $68 million for the current quarter decreased by $5 million, or 7%, from the comparable prior-year quarter, driven by a decrease in net interest yield of 10% (12 basis points) to 1.04%, which was partially offset by an increase in average interest-earning assets of 4%.
 
Net Interest Yield: The decrease in the net interest yield for the current quarter was primarily due to an increase in our average cost of funds. Our average cost of funds increased by 16 basis points during the current quarter to 3.40%, largely due to increases in the cost of our short-term and variable-rate debt resulting from the rise in short-term interest rates.

10



The 3-month London Interbank Offered Rate (“LIBOR”) was 2.32% as of August 31, 2018, an increase of 100 basis points from August 31, 2017, while the federal funds target rate was 2.00% as of August 31, 2018, up 75 basis points from August 31, 2017.

Average Interest-Earning Assets: The increase of $1,068 million, or 4%, in average interest-earning assets during the current quarter was attributable to growth in average total loans of $622 million, as members obtained advances to fund capital investments and refinanced with us loans made by other lenders, and an increase in average investment securities of $543 million.

Adjusted net interest income of $55 million for the current quarter increased by $2 million, or 5%, from the comparable prior-year quarter, due to the combined impact of an increase in average interest-earning assets of 4% and a slight increase in the adjusted net interest yield of 1% (1 basis point) to 0.85%. The increase in the adjusted net interest yield reflected the combined impact of increases in the average yield on interest-earning assets and the benefit from non-interest bearing funding, which were partially offset by an increase in the adjusted average cost of debt.

Our adjusted net interest income and adjusted net interest yield include the impact of net accrued periodic derivative cash settlements during the period. We recorded net periodic derivative cash settlement expense of $13 million and $20 million for the three months ended August 31, 2018 and 2017, respectively. See “Non-GAAP Financial Measures” for additional information on our adjusted measures.

Provision for Loan Losses

Our provision for loan losses in each period is primarily driven by the level of allowance that we determine is necessary for probable incurred loan losses inherent in our loan portfolio as of each balance sheet date.

We recorded a benefit for loan losses of less than $1 million for both the current quarter and comparable prior-year quarter. The credit quality and performance statistics of our loan portfolio continued to remain strong. We had no payment defaults, charge-offs, delinquent loans or nonperforming loans in our loan portfolio during the current quarter or the comparable prior-year quarter.

We provide additional information on our allowance for loan losses under “Credit Risk—Allowance for Loan Losses” and “Note 5—Allowance for Loan Losses” of this report. For additional information on our allowance methodology, see “MD&A—Critical Accounting Policies and Estimates” and “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K.

Non-Interest Income

Non-interest income consists of fee and other income, gains and losses on derivatives not accounted for in hedge accounting relationships and results of operations of foreclosed assets.
 
Table 4 presents the components of non-interest income recorded in results of operations for the three months ended August 31, 2018 and 2017.

11



Table 4: Non-Interest Income
 
 
Three Months Ended August 31,
(Dollars in thousands)
 
2018

2017
Non-interest income:
 
 
 
 
Fee and other income
 
$
3,185

 
$
3,945

Derivative gains (losses)
 
7,183

 
(46,198
)
Results of operations of foreclosed assets
 

 
(24
)
Total non-interest income
 
$
10,368

 
$
(42,277
)

The significant variances in non-interest income between periods were primarily attributable to changes in net derivative gains (losses) recognized in our consolidated statements of income.

Derivative Gains (Losses)

Our derivative instruments are an integral part of our interest rate risk management strategy. Our principal purpose in using derivatives is to manage our aggregate interest rate risk profile within prescribed risk parameters. The derivative instruments we use primarily include interest rate swaps, which we typically hold to maturity. In addition, we may on occasion use treasury locks to manage the interest rate risk associated with debt that is scheduled to reprice in the future. The primary factors affecting the fair value of our derivatives and derivative gains (losses) recorded in our results of operations include changes in interest rates, the shape of the swap curve and the composition of our derivative portfolio. We generally do not designate our interest rate swaps, which currently account for the substantial majority of our derivatives, for hedge accounting. Accordingly, changes in the fair value of interest rate swaps are reported in our consolidated statements of income under derivative gains (losses). However, we typically designate treasury locks as cash flow hedges. We entered into one treasury lock agreement, which was designated as a cash flow hedge of a forecasted transaction as of
August 31, 2018 and May 31, 2018.

We currently use two types of interest rate swap agreements: (i) we pay a fixed rate and receive a variable rate (“pay-fixed swaps”); and (ii) we pay a variable rate and receive a fixed rate (“receive-fixed swaps”). The benchmark variable rate for the substantial majority of the floating rate payments under our swap agreements is LIBOR. Table 5 displays the average notional amount outstanding, by swap agreement type, and the weighted-average interest rate paid and received for interest rate swap settlements during the three months ended August 31, 2018 and 2017. As indicated in Table 5, our interest rate swap portfolio currently consists of a higher proportion of pay-fixed swaps than receive-fixed swaps. The profile of our interest rate swap portfolio, however, may change as a result of changes in market conditions and actions taken to manage exposure to interest rate risk.

Table 5: Derivative Average Notional Amounts and Average Interest Rates
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended August 31,
 
 
2018
 
2017
(Dollars in thousands)
 
Average
Notional
Balance
 
Weighted-
Average
Rate Paid
 
Weighted-
Average
Rate Received
 
Average
Notional
Balance
 
Weighted-
Average
Rate Paid
 
Weighted-
Average
Rate Received
Pay-fixed swaps
 
$
7,194,857

 
2.69
%
 
2.24
%
 
$
6,955,697

 
2.84
%
 
1.27
%
Receive-fixed swaps
 
3,760,141

 
2.96

 
2.52

 
3,726,717

 
1.83

 
2.64

Total
 
$
10,954,998

 
2.78
%
 
2.34
%
 
$
10,682,414

 
2.49
%
 
1.75
%

The average remaining maturity of our pay-fixed and receive-fixed swaps was 19 years and four years, respectively, as of both August 31, 2018 and 2017.

Pay-fixed swaps generally decrease in value as interest rates decline and increase in value as interest rates rise. In contrast, receive-fixed swaps generally increase in value as interest rates decline and decrease in value as interest rates rise. Because

12



our pay-fixed and receive-fixed swaps are referenced to different maturity terms along the swap curve, different changes in the swap curve— parallel, flattening or steepening—will result in differences in the fair value of our derivatives. The chart below provides comparative swap curves as of the end of August 31, 2018, May 31, 2018, August 31, 2017 and May 31, 2017.

chart-8f902229884a501e892.jpg
____________________________ 
Benchmark rates obtained from Bloomberg.

Table 6 presents the components of net derivative gains (losses) recorded in results of operations for the three months ended August 31, 2018 and 2017. Derivative cash settlements represent the net periodic contractual interest amount for our interest-rate swaps for the reporting period. Derivative forward value gains (losses) represent the change in fair value of our interest rate swaps during the reporting period due to changes in expected future interest rates over the remaining life of our derivative contracts.

Table 6: Derivative Gains (Losses)
 
 
Three Months Ended August 31,
(Dollars in thousands)
 
2018
 
2017
Derivative gains (losses) attributable to:
 
 
 
 
Derivative cash settlements
 
$
(12,829
)
 
$
(20,222
)
Derivative forward value gains (losses)
 
20,012

 
(25,976
)
Derivative gains (losses)
 
$
7,183

 
$
(46,198
)

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


13



The net derivative losses of $46 million in the same prior-year quarter were due to a net decrease in the fair value of our interest rate swaps resulting from a modest flattening of the swap curve, as interest rates on the shorter end of the curve rose while medium and longer-term interest rates declined slightly, as depicted by the May 31, 2017 and August 31, 2017 swap curves presented in the above chart.

See “Note 9—Derivative Instruments and Hedging Activities” for additional information on our derivative instruments.

Non-Interest Expense

Non-interest expense consists of salaries and employee benefit expense, general and administrative expenses, losses on early extinguishment of debt and other miscellaneous expenses.

Table 7 presents the components of non-interest expense recorded in results of operations for the three months ended August 31, 2018 and 2017.

Table 7: Non-Interest Expense
 
 
Three Months Ended August 31,
(Dollars in thousands)
 
2018
 
2017
Non-interest expense:
 
 
 
 
Salaries and employee benefits
 
$
(12,682
)
 
$
(11,823
)
Other general and administrative expenses
 
(10,523
)
 
(9,813
)
Losses on early extinguishment of debt
 
(7,100
)
 

Other non-interest expense
 
(394
)
 
(522
)
Total non-interest expense
 
$
(30,699
)
 
$
(22,158
)

Non-interest expense of $31 million for the current quarter increased by $9 million, or 39%, from the comparable prior-year quarter. The increase was largely due to the loss on early extinguishment of debt of $7 million, attributable to the premium paid for the early redemption of $300 million of the $1 billion collateral trust bonds, with a coupon rate of 10.375%, that mature on November 1, 2018.

Net Income (Loss) Attributable to Noncontrolling Interests

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

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

Total assets of $26,676 million as of August 31, 2018 decreased slightly by $14 million from May 31, 2018. Total liabilities of $25,170 million as of August 31, 2018 decreased slightly by $15 million from May 31, 2018. Total equity of $1,507 million as of August 31, 2018 remained relatively unchanged from May 31, 2018, as our reported net income of $48 million during the current quarter was offset by patronage capital retirement of $48 million in August 2018.

Following is a discussion of changes in the major components of our assets and liabilities during the three months ended August 31, 2018. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to manage liquidity requirements for the company and our customers and our market risk exposure in accordance with our risk appetite.


14



Loan Portfolio

We offer long-term fixed- and variable-rate loans and line of credit variable-rate loans. The substantial majority of loans in our portfolio represent advances under secured long-term facilities with terms up to 35 years. Borrowers have the option of selecting a fixed or variable interest rate for each advance for periods ranging from one year to the final maturity of the facility. Line of credit loans are typically revolving facilities and are generally unsecured.
 
Loans Outstanding

Table 8 summarizes loans to members, by loan type and by member class, as of August 31, 2018 and May 31, 2018. As indicated in Table 8, long-term fixed-rate loans accounted for 90% of loans to members as of both August 31, 2018 and May 31, 2018.

Table 8: Loans Outstanding by Type and Member Class
 
 
August 31, 2018
 
May 31, 2018
 

(Dollars in thousands)
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Change
Loans by type:
 
 
 
 
 
 
 
 
 
 
Long-term loans:
 
 
 
 
 
 
 
 
 
 
Fixed-rate
 
$
22,682,597

 
90
%
 
$
22,696,185

 
90
%
 
$
(13,588
)
Variable-rate
 
1,111,679

 
5

 
1,039,491

 
4

 
72,188

Total long-term loans
 
23,794,276

 
95

 
23,735,676

 
94

 
58,600

Lines of credit
 
1,377,160

 
5

 
1,431,818

 
6

 
(54,658
)
Total loans outstanding
 
25,171,436

 
100

 
25,167,494

 
100

 
3,942

Deferred loan origination costs

11,218




11,114




104

Loans to members

$
25,182,654


100
%

$
25,178,608


100
%

$
4,046

 
 
 
 
 
 
 
 
 
 
 
Loans by member class:
 
 
 
 
 
 
 
 
 
 
CFC:
 
 
 
 
 
 
 
 
 
 
Distribution
 
$
19,638,104

 
78
%
 
$
19,551,511

 
78
%
 
$
86,593

Power supply
 
4,320,866

 
18

 
4,397,353

 
18

 
(76,487
)
Statewide and associate
 
72,959

 

 
69,055

 

 
3,904

CFC total
 
24,031,929

 
96

 
24,017,919

 
96

 
14,010

NCSC
 
780,892

 
3

 
786,457

 
3

 
(5,565
)
RTFC
 
358,615

 
1

 
363,118

 
1

 
(4,503
)
Total loans outstanding
 
25,171,436

 
100

 
25,167,494

 
100

 
3,942

Deferred loan origination costs
 
11,218

 

 
11,114

 

 
104

Loans to members
 
$
25,182,654

 
100
%
 
$
25,178,608

 
100
%
 
$
4,046


Loans to members totaled $25,183 million as of August 31, 2018, relatively unchanged from May 31, 2018. CFC distribution loans increased by $87 million, which was offset by decreases in CFC power supply loans, NCSC loans and RTFC loans of $76 million, $6 million and $5 million, respectively. Long-term loan advances totaled $468 million during the current quarter, with approximately 71% of those advances for capital expenditures by members and 25% for the refinancing of loans made by other lenders.

We provide additional information on our loan product types in “Item 1. Business—Loan Programs” and “Note 4—Loans” in our 2018 Form 10-K. See “Debt—Collateral Pledged” below for information on encumbered and unencumbered loans and “Credit Risk Management” for information on the credit risk profile of our loan portfolio.


15



Loan Retention Rate

Table 9 presents a comparison between the historical retention rate of CFC’s long-term fixed-rate loans that repriced, in accordance with our standard loan provisions, during the three months ended August 31, 2018 and loans that repriced during fiscal year 2018, and provides information on the percentage of loans that repriced to either another fixed-rate term or a variable rate. The retention rate is calculated based on the election made by the borrower at the repricing date. The average annual retention rate of CFC’s repriced loans has been 98% over the last three fiscal years.

Table 9: Historical Retention Rate and Repricing Selection(1) 
 
 
Three Months Ended
 
Fiscal Year Ended
 
 
August 31, 2018
 
May 31, 2018
(Dollars in thousands)
 
Amount
 
% of Total
 
Amount
 
% of Total
Loans retained:
 
 
 
 
 
 
 
 
Long-term fixed rate selected
 
$
95,963

 
50
%
 
$
741,792

 
82
%
Long-term variable rate selected
 
48,082

 
25

 
157,539

 
17

Total loans retained by CFC
 
144,045

 
75

 
899,331

 
99

Loans repaid(2)
 
48,858

 
25

 
4,637

 
1

Total
 
$
192,903

 
100
%
 
$
903,968

 
100
%
____________________________ 
(1)Does not include NCSC and RTFC loans.
(2)Includes loans totaling $1 million as of May 31, 2018 that were converted to new loans at the repricing date and transferred to a third party as part of our direct loan sale program. See “Note 4—Loans” for information on our sale of loans.

Debt

We utilize both short-term borrowings and long-term debt as part of our funding strategy and asset/liability interest rate risk management. We seek to maintain diversified funding sources across products, programs and markets to manage funding concentrations and reduce our liquidity or debt rollover risk. Our funding sources include a variety of secured and unsecured debt securities in a wide range of maturities to our members and affiliates and in the capital markets.

Debt Outstanding

Table 10 displays the composition, by product type, of our outstanding debt as of August 31, 2018 and May 31, 2018. Table 10 also displays the composition of our debt based on several additional selected attributes.

16



Table 10: Total Debt Outstanding
(Dollars in thousands)
 
August 31, 2018
 
May 31, 2018
 
Change
Debt product type:
 
 
 
 
 
 
Commercial paper:
 
 
 
 
 
 
Members, at par
 
$
1,286,441

 
$
1,202,105

 
$
84,336

Dealer, net of discounts
 
929,380

 
1,064,266

 
(134,886
)
Total commercial paper
 
2,215,821

 
2,266,371

 
(50,550
)
Select notes to members
 
799,240

 
780,472

 
18,768

Daily liquidity fund notes to members
 
535,090

 
400,635

 
134,455

Medium-term notes:
 
 
 
 
 


Members, at par
 
631,733

 
643,821

 
(12,088
)
Dealer, net of discounts
 
3,294,200

 
3,002,979

 
291,221

Total medium-term notes
 
3,925,933

 
3,646,800

 
279,133

Collateral trust bonds
 
7,343,569

 
7,639,093

 
(295,524
)
Guaranteed Underwriter Program notes payable
 
4,840,976

 
4,856,143

 
(15,167
)
Farmer Mac notes payable
 
2,777,532

 
2,891,496

 
(113,964
)
Other notes payable
 
29,907

 
29,860

 
47

Subordinated deferrable debt
 
742,445

 
742,410

 
35

Members’ subordinated certificates:
 
 
 
 
 
 
Membership subordinated certificates
 
630,448

 
630,448

 

Loan and guarantee subordinated certificates
 
526,479

 
528,386

 
(1,907
)
Member capital securities
 
221,170

 
221,148

 
22

Total members’ subordinated certificates
 
1,378,097

 
1,379,982

 
(1,885
)
Total debt outstanding
 
$
24,588,610

 
$
24,633,262


$
(44,652
)
 
 
 
 
 
 
 
Security type:
 
 
 
 
 
 
Unsecured debt
 
39
%
 
37
%
 
 
Secured debt
 
61

 
63

 
 
Total
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
Funding source:
 
 
 
 
 
 
Members
 
19
%
 
18
%
 
 
Private placement:
 
 
 
 
 
 
Guaranteed Underwriter Program notes payable
 
20

 
20

 
 
Farmer Mac notes payable
 
11

 
12

 
 
Total private placement
 
31

 
32

 
 
Capital markets
 
50

 
50

 
 
Total
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
Interest rate type:
 
 
 
 
 
 
Fixed-rate debt
 
73
%
 
74
%
 
 
Variable-rate debt
 
27

 
26

 
 
Total
 
100
%
 
100
%
 
 
Interest rate type, including the impact of swaps:
 
 
 
 
 
 
Fixed-rate debt(1)
 
88
%
 
87
%
 
 
Variable-rate debt(2)
 
12

 
13

 
 
Total
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
Maturity classification:(3)
 
 
 
 
 
 
Short-term borrowings
 
15
%
 
15
%
 
 
Long-term and subordinated debt(4)
 
85

 
85

 
 
Total
 
100
%
 
100
%
 
 
____________________________ 

17



(1) Includes variable-rate debt that has been swapped to a fixed rate, net of any fixed-rate debt that has been swapped to a variable rate.
(2) Includes fixed-rate debt that has been swapped to a variable rate, net of any variable-rate debt that has been swapped to a fixed rate. Also includes commercial paper notes, which generally have maturities of less than 90 days. The interest rate on commercial paper notes does not change once the note has been issued; however, the interest rate for new commercial paper issuances changes daily.
(3) Borrowings with an original contractual maturity of one year or less are classified as short-term borrowings. Borrowings with an original contractual maturity of greater than one year are classified as long-term debt.
(4) Consists of long-term debt, subordinated deferrable debt and total members’ subordinated debt reported on the condensed consolidated balance sheets. Maturity classification is based on the original contractual maturity as of the date of issuance of the debt.

Our outstanding debt volume generally increases and decreases in response to member loan demand. Total debt outstanding was $24,589 million as of August 31, 2018, relatively unchanged from May 31, 2018, as loans to members also remained relatively flat. Decreases in collateral trust bonds, dealer commercial paper and Farmer Mac notes payable of $296 million, $135 million and $114 million, respectively, were largely offset by an increase in dealer medium-term notes of $291 million and a combined increase in member commercial paper, select notes and daily liquidity fund notes of $238 million.

We had outstanding collateral trust bonds of $1 billion aggregate principal amount with a coupon rate of 10.375% due November 1, 2018. On July 12, 2018, we redeemed $300 million of these bonds, leaving a remaining outstanding principal amount of $700 million as of August 31, 2018.

Member Investments

Debt securities issued to our members represent an important, stable source of funding. Table 11 displays outstanding member debt, by debt product type, as of August 31, 2018 and May 31, 2018.

Table 11: Member Investments
 
 
August 31, 2018
 
May 31, 2018
 
Change
(Dollars in thousands)
 
Amount
 
% of Total (1)
 
Amount
 
% of Total (1)
 
Commercial paper
 
$
1,286,441

 
58
%
 
$
1,202,105

 
53
%
 
$
84,336

Select notes
 
799,240

 
100

 
780,472

 
100

 
18,768

Daily liquidity fund notes
 
535,090

 
100

 
400,635

 
100

 
134,455

Medium-term notes
 
631,733

 
16

 
643,821

 
18

 
(12,088
)
Members’ subordinated certificates
 
1,378,097

 
100

 
1,379,982

 
100

 
(1,885
)
Total outstanding member debt
 
$
4,630,601

 
 
 
$
4,407,015

 
 
 
$
223,586

 
 
 
 
 
 
 
 
 
 
 
Percentage of total debt outstanding
 
19
%
 
 
 
18
%
 
 
 
 

____________________________ 
(1) Represents outstanding debt attributable to members for each debt product type as a percentage of the total outstanding debt for each debt product type.

Member investments accounted for 19% and 18% of total debt outstanding as of August 31, 2018 and May 31, 2018, respectively. Over the last three fiscal years, outstanding member investments have averaged $4,366 million on a quarterly basis.

Short-Term Borrowings

Short-term borrowings consist of borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. Short-term borrowings totaled $3,793 million and accounted for 15% of total debt outstanding as of August 31, 2018, compared with $3,796 million, or 15%, of total debt outstanding as of May 31, 2018. See “Liquidity Risk” below and for “Note 6—Short-Term Borrowings” for information on the composition of our short-term borrowings.

Long-Term 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

18



under our note purchase agreement with Farmer Mac. Subordinated debt consists of subordinated deferrable debt and members’ subordinated certificates. Our subordinated deferrable debt and members’ subordinated certificates have original contractual maturity terms of greater than one year.

Long-term and subordinated debt totaled $20,795 million and accounted for 85% of total debt outstanding as of August 31, 2018, compared with $20,837 million, or 85%, of total debt outstanding as of May 31, 2018. We provide additional information on our long-term debt below under “Liquidity Risk” and in “Note 7—Long-Term Debt” and “Note 8—Subordinated Deferrable Debt.”

Collateral Pledged

We are required to pledge loans or other collateral in borrowing transactions under our collateral trust bond indentures, note purchase agreements with Farmer Mac and bond agreements under the Guaranteed Underwriter Program. We are required to maintain pledged collateral equal to at least 100% of the face amount of outstanding borrowings. However, we typically maintain pledged collateral in excess of the required percentage to ensure that required collateral levels are maintained and to facilitate the timely execution of debt issuances by reducing or eliminating the lead time to pledge additional collateral. Under the provisions of our committed bank revolving line of credit agreements, the excess collateral that we are allowed to pledge cannot exceed 150% of the outstanding borrowings under our collateral trust bond indentures, Farmer Mac note purchase agreements or the Guaranteed Underwriter Program. In certain cases, provided that all conditions of eligibility under the different programs are satisfied, we may withdraw excess pledged collateral or transfer collateral from one borrowing program to another to facilitate a new debt issuance.

Table 12 displays the collateral coverage ratios as of August 31, 2018 and May 31, 2018 for the debt agreements noted above that require us to pledge collateral.

Table 12: Collateral Pledged
 
 
Requirement/Limit
 
 
 
 
Debt Indenture
Minimum
 
Committed Bank Revolving Line of Credit Agreements
Maximum
 
Actual(1)
Debt Agreement
 
 
 
August 31, 2018
 
May 31, 2018
Collateral trust bonds 1994 indenture
 
100
%
 
150
%
 
109
%
 
111
%
Collateral trust bonds 2007 indenture
 
100

 
150

 
115

 
114

Guaranteed Underwriter Program notes payable
 
100

 
150

 
115

 
119

Farmer Mac notes payable
 
100

 
150

 
115

 
115

Clean Renewable Energy Bonds Series 2009A
 
100

 
150

 
105

 
109

____________________________ 
(1) Calculated based on the amount of collateral pledged divided by the face amount of outstanding secured debt.

Of our total debt outstanding of $24,589 million as of August 31, 2018, $14,973 million, or 61%, was secured by pledged loans totaling $17,550 million. In comparison, of our total debt outstanding of $24,633 million as of May 31, 2018, $15,398 million, or 63%, was secured by pledged loans totaling $18,145 million. Total debt outstanding on our condensed consolidated balance sheet is presented net of unamortized discounts and issuance costs. However, our collateral pledging requirements are based on the face amount of secured outstanding debt, which does not take into consideration the impact of net unamortized discounts and issuance costs.

Table 13 displays the unpaid principal balance of loans pledged for secured debt, the excess collateral pledged and unencumbered loans as of August 31, 2018 and May 31, 2018.

19



Table 13: Unencumbered Loans
(Dollars in thousands)
 
August 31, 2018
 
May 31, 2018
Total loans outstanding(1) 
 
$
25,171,436

 
$
25,167,494

Less: Loans required to be pledged for secured debt (2)
 
(15,247,775
)
 
(15,677,138
)
 Loans pledged in excess of requirement (2)(3)
 
(2,302,414
)
 
(2,467,444
)
 Total pledged loans
 
(17,550,189
)
 
(18,144,582
)
Unencumbered loans
 
$
7,621,247

 
$
7,022,912

Unencumbered loans as a percentage of total loans
 
30
%
 
28
%
____________________________ 
(1) Represents the unpaid principal amount of loans as of the end of each period presented and excludes unamortized deferred loan origination costs of $11 million as of both August 31, 2018 and May 31, 2018.
(2) Reflects unpaid principal balance of pledged loans.
(3) Excludes cash collateral pledged to secure debt. If there is an event of default under most of our indentures, we can only withdraw the excess collateral if we substitute cash or permitted investments of equal value.

As displayed above in Table 13, we had excess loans pledged as collateral totaling $2,302 million and $2,467 million as of August 31, 2018 and May 31, 2018, respectively. We typically pledge loans in excess of the required amount for the following reasons: (i) our distribution and power supply loans are typically amortizing loans that require scheduled principal payments over the life of the loan, whereas the debt securities issued under secured indentures and agreements typically have bullet maturities; (ii) distribution and power supply borrowers have the option to prepay their loans; and (iii) individual loans may become ineligible for various reasons, some of which may be temporary.

We provide additional information on our borrowings, including the maturity profile, below in “Liquidity Risk.” Refer to “Note 4—Loans—Pledging of Loans” for additional information related to pledged collateral. Also refer to “Note 5—Short-Term Borrowings,” “Note 6—Long-Term Debt,” “Note 7—Subordinated Deferrable Debt” and “Note 8—Members’ Subordinated Certificates” in our 2018 Form 10-K for a more detailed description of each of our debt product types.

Equity

Total equity of $1,507 million as of August 31, 2018 remained relatively unchanged from May 31, 2018, as our reported net income of $48 million for the current quarter was offset by the patronage capital retirement of $48 million in August 2018.

In July 2018, the CFC Board of Directors authorized the allocation of fiscal year 2018 adjusted net income as follows: $95 million to members in the form of patronage capital; $57 million to the members’ capital reserve; and $1 million to the cooperative educational fund. The amount of patronage capital allocated each year by CFC’s Board of Directors is based on adjusted non-GAAP net income, which excludes the impact of derivative forward value gains (losses). See “Non-GAAP Financial Measures” for information on adjusted net income.

In July 2018, the CFC Board of Directors also authorized the retirement of patronage capital totaling $48 million, which represented 50% of the patronage capital allocation for fiscal year 2018. This amount was returned to members in cash in August 2018. The remaining portion of the allocated amount will be retained by CFC for 25 years under guidelines adopted by the CFC Board of Directors in June 2009.

The CFC Board of Directors is required to make annual allocations of adjusted net income, if any. CFC has made annual retirements of allocated net earnings in 39 of the last 40 fiscal years; however, future retirements of allocated amounts are determined based on CFC’s financial condition. The CFC Board of Directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable laws. See “Item 1. Business—Allocation and Retirement of Patronage Capital” of our 2018 Form 10-K for additional information.

20



OFF-BALANCE SHEET ARRANGEMENTS

In the ordinary course of business, we engage in financial transactions that are not presented on our condensed consolidated balance sheets, or may be recorded on our condensed consolidated balance sheets in amounts that are different from the full contract or notional amount of the transaction. Our off-balance sheet arrangements consist primarily of guarantees of member obligations and unadvanced loan commitments intended to meet the financial needs of our members.

Guarantees

We provide guarantees for certain contractual obligations of our members to assist them in obtaining various forms of financing. We use the same credit policies and monitoring procedures in providing guarantees as we do for loans and commitments. If a member defaults on its obligation, we are obligated to pay required amounts pursuant to our guarantees. Meeting our guarantee obligations satisfies the underlying obligation of our member systems and prevents the exercise of remedies by the guarantee beneficiary based upon a payment default by a member. In general, the member is required to repay any amount advanced by us with accrued interest, pursuant to the documents evidencing the member’s reimbursement obligation. Table 14 displays the notional amount of our outstanding guarantee obligations, by guarantee type and by company, as of August 31, 2018 and May 31, 2018.

Table 14: Guarantees Outstanding
(Dollars in thousands)
 
August 31, 2018
 
May 31, 2018
 
Change
Guarantee type:
 
 
 
 
 
 
Long-term tax-exempt bonds
 
$
316,385

 
$
316,985

 
$
(600
)
Letters of credit
 
316,731

 
343,970

 
(27,239
)
Other guarantees
 
143,571

 
144,206

 
(635
)
Total
 
$
776,687

 
$
805,161

 
$
(28,474
)
 
 
 
 
 
 
 
Company:
 
 

 
 
 
 
CFC
 
$
762,908

 
$
793,156

 
$
(30,248
)
NCSC
 
12,205

 
10,431

 
1,774

RTFC
 
1,574

 
1,574

 

Total
 
$
776,687

 
$
805,161

 
$
(28,474
)

Of the total notional amount of our outstanding guarantee obligations of $777 million and $805 million as of August 31, 2018 and May 31, 2018, respectively, 59% and 57%, respectively, were secured by a mortgage lien on substantially all of the assets and future revenue of our member cooperatives for which we provide guarantees.

In addition to providing a guarantee on long-term tax-exempt bonds issued by member cooperatives totaling $316 million as of August 31, 2018, we also were the liquidity provider on $249 million of those tax-exempt bonds. As liquidity provider, we may be required to purchase bonds that are tendered or put by investors. Investors provide notice to the remarketing agent that they will tender or put a certain amount of bonds at the next interest rate reset date. If the remarketing agent is unable to sell such bonds to other investors by the next interest rate reset date, we have unconditionally agreed to purchase such bonds. We were not required to perform as liquidity provider pursuant to these obligations during the three months ended August 31, 2018 or the prior fiscal year.

We had outstanding letters of credit for the benefit of our members totaling $317 million as of August 31, 2018. These letters of credit relate to obligations for which we may be required to advance funds based on various trigger events specified in the letter of credit agreements. If we are required to advance funds, the member is obligated to repay the advance amount and accrued interest to us. In addition to these letters of credit, we had master letter of credit facilities in place as of August 31, 2018, under which we may be required to issue letters of credit to third parties for the benefit of our members up to an additional $67 million as of August 31, 2018. All of our master letter of credit facilities as of August 31, 2018 were subject to material adverse change clauses at the time of issuance. Prior to issuing a letter of credit under these

21



facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and that the borrower is currently in compliance with the letter of credit terms and conditions.

Table 15 presents the maturities for each of the next five fiscal years and thereafter of the notional amount of our outstanding guarantee obligations as of August 31, 2018.

Table 15: Maturities of Guarantee Obligations
 
 
 Outstanding
Amount
 
Maturities of Guarantee Obligations
(Dollars in thousands)
 
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
Guarantees
 
$
776,687

 
$
187,100

 
$
113,103

 
$
121,756

 
$
27,650

 
$
162,499

 
$
164,579


We recorded a guarantee liability of $10 million and $11 million as of August 31, 2018 and May 31, 2018, respectively, for our guarantee and liquidity obligations associated with our members’ debt. We provide additional information about our guarantee obligations in “Note 11—Guarantees.”

Unadvanced Loan Commitments

Unadvanced loan commitments represent approved and executed loan contracts for which funds have not been advanced to borrowers. Our line of credit commitments include both contracts that are subject to material adverse change clauses and contracts that are not subject to material adverse change clauses, while our long-term loan commitments are typically subject to material adverse change clauses.

Table 16 displays the amount of unadvanced loan commitments, which consist of line of credit and long-term loan commitments, as of August 31, 2018 and May 31, 2018.

Table 16: Unadvanced Loan Commitments
 
 
August 31, 2018
 
May 31, 2018
 
 
(Dollars in thousands)
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Change
Line of credit commitments:
 
 
 
 
 
 
 
 
 
 
Conditional(1)
 
$
4,858,370

 
37
%
 
$
4,835,434

 
38
%
 
$
22,936

Unconditional(2)
 
2,946,596

 
23

 
2,857,350

 
23

 
89,246

Total line of credit unadvanced commitments
 
7,804,966


60

 
7,692,784

 
61

 
112,182

Total long-term loan unadvanced commitments(1)
 
5,103,629


40

 
4,952,834

 
39

 
150,795

Total unadvanced loan commitments
 
$
12,908,595


100
%
 
$
12,645,618

 
100
%
 
$
262,977

____________________________ 
(1)Represents amount related to facilities that are subject to material adverse change clauses.
(2)Represents amount related to facilities that are not subject to material adverse change clauses.

Table 17 presents the amount of unadvanced loan commitments, by loan type, as of August 31, 2018 and the maturities of the commitment amounts for each of the next five fiscal years and thereafter.

Table 17: Notional Maturities of Unadvanced Loan Commitments
 
 
Available
Balance
 
Notional Maturities of Unadvanced Loan Commitments
(Dollars in thousands)
 
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
Line of credit loans
 
$
7,804,966

 
$
504,426

 
$
4,144,522

 
$
889,426

 
$
860,833

 
$
1,304,869

 
$
100,890

Long-term loans
 
5,103,629

 
732,028

 
556,221

 
620,100

 
1,652,454

 
1,224,865

 
317,961

Total
 
$
12,908,595

 
$
1,236,454

 
$
4,700,743

 
$
1,509,526

 
$
2,513,287

 
$
2,529,734

 
$
418,851



22



Unadvanced line of credit commitments accounted for 60% of total unadvanced loan commitments as of August 31, 2018, while unadvanced long-term loan commitments accounted for 40% of total unadvanced loan commitments. Unadvanced line of credit commitments are typically revolving facilities for periods not to exceed five years. Unadvanced line of credit commitments generally serve as supplemental back-up liquidity to our borrowers. Historically, borrowers have not drawn the full commitment amount for line of credit facilities, and we have experienced a very low utilization rate on line of credit loan facilities regardless of whether or not we are obligated to fund the facility where a material adverse change exists. Our unadvanced long-term loan commitments have a five-year draw period under which a borrower may advance funds prior to the expiration of the commitment. We expect that the majority of the long-term unadvanced loan commitments of $5,104 million will be advanced prior to the expiration of the commitment.

Because we historically have experienced a very low utilization rate on line of credit loan facilities, which account for the majority of our total unadvanced loan commitments, we believe the unadvanced loan commitment total of $12,909 million as of August 31, 2018 is not necessarily representative of our future funding requirements.

Unadvanced Loan Commitments—Conditional

The substantial majority of our line of credit commitments and all our unadvanced long-term loan commitments include material adverse change clauses. Unadvanced loan commitments subject to material adverse change clauses totaled $9,962 million and $9,789 million as of August 31, 2018 and May 31, 2018, respectively, and accounted for 77% of the combined total of unadvanced line of credit and long-term loan commitments as of both August 31, 2018 and May 31, 2018. Prior to making advances on these facilities, we confirm that there has been no material adverse change in the borrower’s business or condition, financial or otherwise, since the time the loan was a