NOTE 4—LOANS

Loans, which are classified as held for investment, are carried at the outstanding unpaid principal balance net of unamortized loan origination costs. The following table presents the outstanding principal balance of loans to members, including deferred loan origination costs, and unadvanced loan commitments by loan type and member class, as of

November 30, 2019 and May 31, 2019.



	November 30, 2019				May 31, 2019
(Dollars in thousands)	Loans Outstanding		Unadvanced Commitments⁽¹⁾		Loans Outstanding		Unadvanced Commitments⁽¹⁾
Loan type:
Long-term loans:
Fixed rate	$	23,861,584	$	—	$	23,094,253	$	—
Variable rate	930,949		5,410,294		1,066,880		5,448,636
Total long-term loans	24,792,533		5,410,294		24,161,133		5,448,636
Lines of credit	1,634,346		7,915,885		1,744,531		7,788,922
Total loans outstanding	26,426,879		13,326,179		25,905,664		13,237,558
Deferred loan origination costs	11,302		—		11,240		—
Loans to members	$	26,438,181	$	13,326,179	$	25,916,904	$	13,237,558

Member class:
CFC:
Distribution	$	20,682,596	$	8,764,486	$	20,155,266	$	8,773,018
Power supply	4,601,783		3,531,558		4,578,841		3,466,680
Statewide and associate	83,897		177,722		83,569		165,687
Total CFC	25,368,276		12,473,766		24,817,676		12,405,385
NCSC	702,279		563,865		742,888		552,840
RTFC	356,324		288,548		345,100		279,333
Total loans outstanding	26,426,879		13,326,179		25,905,664		13,237,558
Deferred loan origination costs	11,302		—		11,240		—
Loans to members	$	26,438,181	$	13,326,179	$	25,916,904	$	13,237,558

^{____________________________}

⁽¹⁾The interest rate on unadvanced loan commitments is not set until an advance is made; therefore, all long-term unadvanced loan commitments are reported as variable-rate. However, the borrower may select either a fixed or a variable rate when an advance on a commitment is made.

Unadvanced Loan Commitments

Unadvanced loan commitments represent approved and executed loan contracts for which funds have not been advanced to borrowers. The following table summarizes the available balance under unadvanced loan commitments as of November 30, 2019 and the related maturities by fiscal year and thereafter by loan type:



	Available Balance		Notional Maturities of Unadvanced Loan Commitments
(Dollars in thousands)	Available Balance		2020		2021		2022		2023		2024		Thereafter
Line of credit loans	$	7,915,885	$	437,701	$	4,059,897	$	492,117	$	1,362,948	$	1,168,481	$	394,741
Long-term loans	5,410,294		230,642		622,895		1,349,256		1,022,784		1,737,285		447,432
Total	$	13,326,179	$	668,343	$	4,682,792	$	1,841,373	$	2,385,732	$	2,905,766	$	842,173

Unadvanced line of credit commitments accounted for 59% of total unadvanced loan commitments as of November 30, 2019, while unadvanced long-term loan commitments accounted for 41% of total unadvanced loan commitments. Unadvanced line of credit commitments are typically revolving facilities for periods not to exceed five years. Unadvanced line of credit 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 $5,410 million will be advanced prior to the expiration of the commitment.

Because we historically have experienced a very low utilization rate on line of credit loan facilities, which account for the majority of our total unadvanced loan commitments, we believe the unadvanced loan commitment total of $13,326 million as of November 30, 2019 is not necessarily representative of our future funding cash requirements.

Unadvanced Loan Commitments—Conditional

The substantial majority of our line of credit commitments and all of our unadvanced long-term loan commitments include material adverse change clauses. Unadvanced loan commitments subject to material adverse change clauses totaled $10,256 million and $10,294 million as of November 30, 2019 and May 31, 2019, respectively. Prior to making an advance on these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. In some cases, the borrower’s access to the full amount of the facility is further constrained by the designated purpose, imposition of borrower-specific restrictions or by additional conditions that must be met prior to advancing funds.

Unadvanced Loan Commitments—Unconditional

Unadvanced loan commitments not subject to material adverse change clauses at the time of each advance consisted of unadvanced committed lines of credit totaling $3,070 million and $2,944 million as of November 30, 2019 and May 31, 2019, respectively. As such, we are required to advance amounts on these committed facilities as long as the borrower is in compliance with the terms and conditions of the facility.

The following table summarizes the available balance under unconditional committed lines of credit, and the related maturities by fiscal year and thereafter, as of November 30, 2019.



	Available Balance	Notional Maturities of Unconditional Committed Lines of Credit
(Dollars in thousands)	Available Balance	2020	2021	2022	2023	2024	Thereafter
Committed lines of credit	$3,070,365	$18,073	$417,498	$173,335	$1,082,986	$897,894	$480,579

Loan Sales

We transfer, from time to time, loans to third parties. We sold CFC loans with outstanding balances totaling $60 million, at par for cash, during the six months ended November 30, 2019. We did not have any loan sales during the six months ended November 30, 2018. We recorded immaterial losses upon the sale of these loans, attributable to the unamortized deferred loan origination costs associated with the transferred loans.

Pledging of Loans

We are required to pledge eligible mortgage notes in an amount at least equal to the outstanding balance of our secured debt. The following table summarizes our loans outstanding as collateral pledged to secure our collateral trust bonds, Clean Renewable Energy Bonds, notes payable to Farmer Mac and notes payable under USDA’s Guaranteed Underwriter Program (“Guaranteed Underwriter Program”) and the amount of the corresponding debt outstanding as of November 30, 2019 and May 31, 2019. See “Note 6—Short-Term Borrowings” and “Note 7—Long-Term Debt” for information on our borrowings.



(Dollars in thousands)	November 30, 2019		May 31, 2019
Collateral trust bonds:
2007 indenture:
Distribution system mortgage notes	$	8,442,063	$	8,775,231
RUS-guaranteed loans qualifying as permitted investments	131,560		134,678
Total pledged collateral	$	8,573,623	$	8,909,909
Collateral trust bonds outstanding	7,322,711		7,622,711

1994 indenture:
Distribution system mortgage notes	$	45,702	$	47,331
Collateral trust bonds outstanding	35,000		40,000

Farmer Mac:
Distribution and power supply system mortgage notes	$	3,729,692	$	3,751,798
Notes payable outstanding	3,094,954		3,054,914

Clean Renewable Energy Bonds Series 2009A:
Distribution and power supply system mortgage notes	$	9,756	$	10,349
Cash	1,188		415
Total pledged collateral	$	10,944	$	10,764
Notes payable outstanding	9,225		9,225

Federal Financing Bank:
Distribution and power supply system mortgage notes	$	6,090,864	$	6,157,218
Notes payable outstanding	5,363,798		5,410,507

Credit Concentration

Concentrations may exist when there are amounts loaned to borrowers engaged in similar activities or in geographic areas that would cause them to be similarly impacted by economic or other conditions or when there are large exposures to single borrowers. As a tax-exempt, member-owned finance cooperative, CFC’s principal focus is to provide funding to its rural electric utility cooperative members to assist them in acquiring, constructing and operating electric distribution systems, power supply systems and related facilities. We serve electric and telecommunications members throughout the United States, with a total of 898 borrowers located in 49 states as of November 30, 2019. Loans to borrowers in Texas accounted for approximately 15% of total loans outstanding as of both November 30, 2019 and May 31, 2019, representing the largest concentration of outstanding loans to borrowers and the largest number of borrowers in any one state.

Because we lend primarily to our rural electric utility cooperative members, we have a loan portfolio subject to single-industry and single-obligor concentration risks. Loans outstanding to electric utility organizations represented approximately 99% of total loans outstanding as of November 30, 2019, unchanged from May 31, 2019. The remaining loans outstanding in our portfolio were to RTFC members, affiliates and associates in the telecommunications industry. The outstanding loan exposure for our 20 largest borrowers was 22% as of both November 30, 2019 and May 31, 2019. The 20 largest borrowers consisted of 11 distribution systems, eight power supply systems and one NCSC associate as of November 30, 2019. The 20 largest borrowers consisted of 10 distribution systems, nine power supply systems and one NCSC associate as of May 31, 2019. The largest total outstanding exposure to a single borrower or controlled group represented approximately 2% of total loans outstanding as of both November 30, 2019 and May 31, 2019.

As part of our strategy in managing our credit exposure, we entered into a long-term standby purchase commitment agreement with Farmer Mac during fiscal year 2016. Under this agreement, we may designate certain long-term loans to be covered under the commitment, subject to approval by Farmer Mac, and in the event any such loan later goes into payment default for at least 90 days, upon request by us, Farmer Mac must purchase such loan at par value. The aggregate unpaid principal balance of designated and Farmer Mac approved loans was $593 million and $619 million as of November 30, 2019 and May 31, 2019, respectively. Under the agreement, we are required to pay Farmer Mac a monthly fee based on the unpaid principal balance of loans covered under the purchase commitment. No loans had been put to Farmer Mac for purchase, pursuant to this agreement, as of November 30, 2019. Also, we had long-term loans totaling $150 million and $154 million as of November 30, 2019 and May 31, 2019, respectively, guaranteed by RUS.

Credit Quality

Assessing the overall credit quality of our loan portfolio and measuring our credit risk is an ongoing process that involves tracking payment status, charge-offs, troubled debt restructurings, nonperforming and impaired loans, the internal risk ratings of our borrowers and other indicators of credit risk. We monitor and subject each borrower and loan facility in our loan portfolio to an individual risk assessment based on quantitative and qualitative factors. Internal risk ratings and payment status trends are indicators, among others, of the probability of borrower default and level of credit risk in our loan portfolio.

Borrower Risk Ratings

As part of our credit risk management process, we monitor and evaluate each borrower and loan in our loan portfolio and assign internal borrower and loan facility risk ratings based on quantitative and qualitative assessments. Our borrower risk ratings are intended to assess probability of default. Each risk rating is reassessed annually following the receipt of the borrower’s audited financial statements; however, interim risk-rating downgrades or upgrades may occur as a result of significant developments or trends. Our borrower risk ratings are intended to align with banking regulatory agency credit risk rating definitions of pass and criticized classifications, with criticized divided between special mention, substandard and doubtful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default. Following is a description of each rating category.


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


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


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


•	Doubtful: Borrowers that have a well-defined credit weakness or weaknesses that make full collection of principal and interest, on the basis of currently known facts, conditions and collateral values, highly questionable and improbable.

Loans to borrowers in the pass, special mention and substandard categories are generally considered not to be individually impaired and are included in the loan pools for determining the collective reserve component of the allowance for loan losses. Loans to borrowers in the doubtful category are considered to be impaired and are therefore individually assessed for impairment in determining the specific reserve component of the allowance for loan losses.

The following tables present total loans outstanding, by member class and borrower risk rating category, based on the risk ratings as of November 30, 2019 and May 31, 2019. If a parent company provides a guarantee of full repayment of loans of a subsidiary borrower, we group the outstanding loans in the borrower risk rating category of the guarantor parent company instead of the risk rating category of the subsidiary borrower for purposes of estimating the allowance for loan losses. The borrower risk ratings for loans outstanding presented in the tables below are based on this risk rating grouping.



	November 30, 2019
(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
CFC:
Distribution	$	20,552,574	$	9,563	$	120,459	$	—	$	20,682,596
Power supply	4,554,111		—		47,672		—		4,601,783
Statewide and associate	67,640		16,257		—		—		83,897
CFC total	25,174,325		25,820		168,131		—		25,368,276
NCSC	702,279		—		—		—		702,279
RTFC	350,982		—		5,342		—		356,324
Total loans outstanding	$	26,227,586	$	25,820	$	173,473	$	—	$	26,426,879



	May 31, 2019
(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
CFC:
Distribution	$	20,022,193	$	10,375	$	122,698	$	—	$	20,155,266
Power supply	4,530,708		—		48,133		—		4,578,841
Statewide and associate	68,569		15,000		—		—		83,569
CFC total	24,621,470		25,375		170,831		—		24,817,676
NCSC	742,888		—		—		—		742,888
RTFC	339,508		—		5,592		—		345,100
Total loans outstanding	$	25,703,866	$	25,375	$	176,423	$	—	$	25,905,664

The substantial majority of the loans in the substandard category are attributable to loans to one electric distribution cooperative borrower and its subsidiary totaling $168 million and $171 million as of November 30, 2019 and May 31, 2019, respectively. The electric distribution cooperative owns and operates a distribution and transmission system. Several years ago, it established a subsidiary to deploy retail broadband service in underserved rural communities. Although the borrower has experienced financial difficulties due to recent net losses and liquidity constraints, the borrower and its subsidiary are current with regard to all principal and interest payments and have never been delinquent. The borrower, which operates in a territory that is not rate-regulated, recently increased its electric and broadband rates and has begun taking other actions to improve its financial performance and liquidity. All of the loans outstanding to this borrower were secured under our typical collateral requirements for long-term loan advances as of November 30, 2019. We currently expect to collect all principal and interest amounts due from the borrower and its subsidiary. Accordingly, the loans outstanding to this borrower and its subsidiary were not deemed to be impaired as of November 30, 2019.

Payment Status of Loans

The following tables present the payment status of loans outstanding by member class as of November 30, 2019 and May 31, 2019. As indicated in the table, we did not have any past due loans as of either November 30, 2019 or May 31, 2019.



	November 30, 2019
(Dollars in thousands)	Current			30-89 Days Past Due			90 Days or More Past Due ⁽¹⁾			Total Past Due			Total Loans Outstanding			Nonaccrual Loans
CFC:
Distribution	$	20,682,596		$	—		$	—		$	—		$	20,682,596		$	—
Power supply	4,601,783			—			—			—			4,601,783			—
Statewide and associate	83,897			—			—			—			83,897			—
CFC total	25,368,276			—			—			—			25,368,276			—
NCSC	702,279			—			—			—			702,279			—
RTFC	356,324			—			—			—			356,324			—
Total loans outstanding	$	26,426,879		$	—		$	—		$	—		$	26,426,879		$	—

Percentage of total loans	100.00		%	—		%	—		%	—		%	100.00		%	—		%



	May 31, 2019
(Dollars in thousands)	Current			30-89 Days Past Due			90 Days or More Past Due ⁽¹⁾			Total Past Due			Total Loans Outstanding			Nonaccrual Loans
CFC:
Distribution	$	20,155,266		$	—		$	—		$	—		$	20,155,266		$	—
Power supply	4,578,841			—			—			—			4,578,841			—
Statewide and associate	83,569			—			—			—			83,569			—
CFC total	24,817,676			—			—			—			24,817,676			—
NCSC	742,888			—			—			—			742,888			—
RTFC	345,100			—			—			—			345,100			—
Total loans outstanding	$	25,905,664		$	—		$	—		$	—		$	25,905,664		$	—

Percentage of total loans	100.00		%	—		%	—		%	—		%	100.00		%	—		%

^{____________________________}

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

Troubled Debt Restructurings

We did not have any loans modified as TDRs during the six months ended November 30, 2019. The following table provides a summary of loans modified as TDRs in prior periods, the performance status of these loans and the unadvanced loan commitments related to the TDR loans, by member class, as of November 30, 2019 and May 31, 2019.



	November 30, 2019						May 31, 2019
(Dollars in thousands)	Loans Outstanding		% of Total Loans		Unadvanced Commitments		Loans Outstanding		% of Total Loans		Unadvanced Commitments
TDR loans:
Performing TDR loans:
CFC/Distribution	$	5,755	0.02	%	$	—	$	6,261	0.03	%	$	—
RTFC	5,342		0.02		—		5,592		0.02		—
Total performing TDR loans	11,097		0.04		—		11,853		0.05		—
Total TDR loans	$	11,097	0.04	%	$	—	$	11,853	0.05	%	$	—

We did not have any TDR loans classified as nonperforming as of November 30, 2019 or May 31, 2019. TDR loans classified as performing as of November 30, 2019 and May 31, 2019 were performing in accordance with the terms of their respective restructured loan agreement and on accrual status as of the respective reported dates. One borrower with a TDR loan also had two line of credit facilities as of both November 30, 2019 and May 31, 2019. One line of credit facility for $6 million as of both November 30, 2019 and May 31, 2019, is restricted for fuel purchases only. Outstanding loans under this facility totaled $2 million and $3 million as of November 30, 2019 and May 31, 2019, respectively, and were classified as performing as of each respective date. The other line of credit facility for $2 million as of both November 30, 2019 and May 31, 2019, provides bridge funding for electric work plan expenditures in anticipation of receiving RUS funding. Outstanding loans under this facility totaled $2 million and $1 million as of November 30, 2019 and May 31, 2019, respectively, and were classified as performing.

Nonperforming Loans

In addition to TDR loans that may be classified as nonperforming, we also may have nonperforming loans that have not been modified as a TDR. We did not have any loans classified as nonperforming as of either November 30, 2019 or May 31, 2019.

We had no foregone interest income for loans on nonaccrual status during the three and six months ended November 30, 2019 and 2018.

Impaired Loans

The following table provides information on loans classified as individually impaired as of November 30, 2019 and May 31, 2019.



	November 30, 2019				May 31, 2019
(Dollars in thousands)	Recorded Investment		Related Allowance		Recorded Investment		Related Allowance
With no specific allowance recorded:
CFC	$	5,755	$	—	$	6,261	$	—

With a specific allowance recorded:
RTFC	5,342		956		5,592		1,021
Total impaired loans	$	11,097	$	956	$	11,853	$	1,021

The following table presents, by company, the average recorded investment for individually impaired loans and the interest income recognized on these loans for the three and six months ended November 30, 2019 and 2018.




	Three Months Ended November 30,
	2019		2018		2019		2018
(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
CFC	$	5,755	$	6,261	$	144	$	137
RTFC	5,424		5,923		68		74
Total impaired loans	$	11,179	$	12,184	$	212	$	211



	Six Months Ended November 30,
	2019		2018		2019		2018
(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
CFC	$	5,999	$	6,383	$	281	$	279
RTFC	5,485		5,986		137		150
Total impaired loans	$	11,484	$	12,369	$	418	$	429

Net Charge-Offs

Charge-offs represent the amount of a loan that has been removed from our consolidated balance sheet when the loan is deemed uncollectible. Generally the amount of a charge-off is the recorded investment in excess of the fair value of the expected cash flows from the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral securing the loan. We report charge-offs net of amounts recovered on previously charged off loans. We had no loan defaults or charge-offs during the three and six months ended November 30, 2019 and 2018.