Allowance for Credit Losses

3 Months Ended

Aug. 31, 2022


NOTE 5—ALLOWANCE FOR CREDIT LOSSES

We are required to maintain an allowance based on a current estimate of credit losses that are expected to occur over the remaining term of the loans in our portfolio. Our allowance for credit losses consists of a collective allowance and an asset-specific allowance. The collective allowance is established for loans in our portfolio that share similar risk characteristics and are therefore evaluated on a collective, or pool, basis in measuring expected credit losses. The asset-specific allowance is established for loans in our portfolio that do not share similar risk characteristics with other loans in our portfolio and are therefore evaluated on an individual basis in measuring expected credit losses.

Allowance for Credit Losses—Loan Portfolio

The following tables summarize, by legal entity and member class, changes in the allowance for credit losses for our loan portfolio for the three months ended August 31, 2022 and 2021.

Table 5.1: Changes in Allowance for Credit Losses


	Three Months Ended August 31, 2022
(Dollars in thousands)	CFC Distribution		CFC Power Supply		CFC Statewide & Associate		CFC Total		NCSC		RTFC		Total
Balance as of May 31, 2022	$	15,781	$	47,793	$	1,251	$	64,825	$	1,449	$	1,286	$	67,560


Provision for credit losses	631		2,550		68		3,249		116		131		3,496

Balance as of August 31, 2022	$	16,412	$	50,343	$	1,319	$	68,074	$	1,565	$	1,417	$	71,056


	Three Months Ended August 31, 2021
(Dollars in thousands)	CFC Distribution		CFC Power Supply		CFC Statewide & Associate		CFC Total		NCSC		RTFC		Total
Balance as of May 31, 2021	$	13,426	$	64,646	$	1,391	$	79,463	$	1,374	$	4,695	$	85,532


Provision for credit losses	1,943		1,823		31		3,797		81		125		4,003


Balance as of August 31, 2021	$	15,369	$	66,469	$	1,422	$	83,260	$	1,455	$	4,820	$	89,535

The following tables present, by legal entity and member class, the components of our allowance for credit losses as of August 31, 2022 and May 31, 2022.

Table 5.2: Allowance for Credit Losses Components


	August 31, 2022
(Dollars in thousands)	CFC Distribution		CFC Power Supply		CFC Statewide & Associate		CFC Total		NCSC		RTFC		Total
Allowance components:
Collective allowance	$	16,412	$	9,741	$	1,319	$	27,472	$	1,565	$	1,042	$	30,079
Asset-specific allowance	—		40,602		—		40,602		—		375		40,977
Total allowance for credit losses	$	16,412	$	50,343	$	1,319	$	68,074	$	1,565	$	1,417	$	71,056

Loans outstanding:(1)
Collectively evaluated loans	$	24,239,555	$	4,883,872	$	131,617	$	29,255,044	$	727,869	$	465,669	$	30,448,582
Individually evaluated loans	4,638		217,810		—		222,448		—		3,966		226,414
Total loans outstanding	$	24,244,193	$	5,101,682	$	131,617	$	29,477,492	$	727,869	$	469,635	$	30,674,996


Allowance coverage ratios:
Collective allowance coverage ratio(2)	0.07%	0.20%	1.00%	0.09%	0.22%	0.22%	0.10%
Asset-specific allowance coverage ratio(3)	—	18.64	—	18.25	—	9.46	18.10
Total allowance coverage ratio(4)	0.07	0.99	1.00	0.23	0.22	0.30	0.23


	May 31, 2022
(Dollars in thousands)	CFC Distribution		CFC Power Supply		CFC Statewide & Associate		CFC Total		NCSC		RTFC		Total
Allowance components:
Collective allowance	$	15,781	$	9,355	$	1,251	$	26,387	$	1,449	$	1,040	$	28,876
Asset-specific allowance	—		38,438		—		38,438		—		246		38,684
Total allowance for credit losses	$	15,781	$	47,793	$	1,251	$	64,825	$	1,449	$	1,286	$	67,560

Loans outstanding:(1)
Collectively evaluated loans	$	23,839,150	$	4,673,980	$	126,863	$	28,639,993	$	710,878	$	463,509	$	29,814,380
Individually evaluated loans	5,092		227,790		—		232,882		—		4,092		236,974
Total loans outstanding	$	23,844,242	$	4,901,770	$	126,863	$	28,872,875	$	710,878	$	467,601	$	30,051,354


Allowance coverage ratios:
Collective allowance coverage ratio(2)	0.07%	0.20%	0.99%	0.09%	0.20%	0.22%	0.10%
Asset-specific allowance coverage ratio(3)	—	16.87	—	16.51	—	6.01	16.32
Total allowance coverage ratio(4)	0.07	0.98	0.99	0.22	0.20	0.28	0.22

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(1)Represents the unpaid principal amount of loans as of the end of each period. Excludes unamortized deferred loan origination costs of $12 million as of both August 31, 2022 and May 31, 2022.

(2)Calculated based on the collective allowance component at period end divided by collectively evaluated loans outstanding at period end.

(3)Calculated based on the asset-specific allowance component at period end divided by individually evaluated loans outstanding at period end.

(4)Calculated based on the total allowance for credit losses at period end divided by total loans outstanding at period end.

Our allowance for credit losses and allowance coverage ratio increased slightly to $71 million and 0.23%, respectively, as of August 31, 2022, from $68 million and 0.22%, respectively, as of May 31, 2022. The $3 million increase in the allowance for credit losses reflected an increase in the collective and the asset-specific allowance of $1 million and $2 million, respectively. The collective allowance increase of $1 million was primarily due to an increase in total loans outstanding. The asset-specific allowance increase of $2 million stemmed from the combined impact of an increase in the asset-specific allowance for Brazos Sandy Creek as a result of the terms of a settlement of Brazos Sandy Creek’s rejection damages claim against Brazos approved by the bankruptcy court, partially offset by a reduction in the asset-specific allowance for Brazos attributable to its reorganization plan filed with the bankruptcy court and a decrease in the asset-specific allowance for a nonperforming CFC power supply borrower, attributable to loan payments received on this loan.

Reserve for Credit Losses—Unadvanced Loan Commitments

In addition to the allowance for credit losses for our loan portfolio, we maintain an allowance for credit losses for unadvanced loan commitments, which we refer to as our reserve for credit losses because this amount is reported as a component of other liabilities on our consolidated balance sheets. We measure the reserve for credit losses for unadvanced loan commitments based on expected credit losses over the contractual period of our exposure to credit risk arising from our obligation to extend credit, unless that obligation is unconditionally cancellable by us. The reserve for credit losses related to our off-balance sheet exposure for unadvanced loan commitments was less than $1 million as of both August 31, 2022 and May 31, 2022.