Allowance for Credit Losses

9 Months Ended

Feb. 28, 2023


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 and nine months ended February 28, 2023 and 2022.

Table 5.1: Changes in Allowance for Credit Losses


	Three Months Ended February 28, 2023
(Dollars in thousands)	CFC Distribution		CFC Power Supply		CFC Statewide & Associate		CFC Total		NCSC		RTFC		Total
Balance as of November 30, 2022	$	17,021	$	45,289	$	1,289	$	63,599	$	2,511	$	1,505	$	67,615


Provision (benefit) for credit losses	(367)		(10,934)		(32)		(11,333)		116		(101)		(11,318)

Balance as of February 28, 2023	$	16,654	$	34,355	$	1,257	$	52,266	$	2,627	$	1,404	$	56,297


	Three Months Ended February 28, 2022
(Dollars in thousands)	CFC Distribution		CFC Power Supply		CFC Statewide & Associate		CFC Total		NCSC		RTFC		Total
Balance as of November 30, 2021	$	16,032	$	65,467	$	1,424	$	82,923	$	1,594	$	1,618	$	86,135


Provision (benefit) for credit losses	353		(12,989)		(111)		(12,747)		135		(137)		(12,749)


Balance as of February 28, 2022	$	16,385	$	52,478	$	1,313	$	70,176	$	1,729	$	1,481	$	73,386


	Nine Months Ended February 28, 2023
(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	873		1,631		6		2,510		1,178		118		3,806
Charge-offs	—		(15,069)		—		(15,069)		—		—		(15,069)
Balance as of February 28, 2023	$	16,654	$	34,355	$	1,257	$	52,266	$	2,627	$	1,404	$	56,297


	Nine Months Ended February 28, 2022
(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 (benefit) for credit losses	2,959		(12,168)		(78)		(9,287)		355		(3,214)		(12,146)


Balance as of February 28, 2022	$	16,385	$	52,478	$	1,313	$	70,176	$	1,729	$	1,481	$	73,386

The following tables present, by legal entity and member class, the components of our allowance for credit losses as of February 28, 2023 and May 31, 2022.

Table 5.2: Allowance for Credit Losses Components


	February 28, 2023
(Dollars in thousands)	CFC Distribution		CFC Power Supply		CFC Statewide & Associate		CFC Total		NCSC		RTFC		Total
Allowance components:
Collective allowance	$	16,654	$	8,208	$	1,257	$	26,119	$	2,627	$	1,112	$	29,858
Asset-specific allowance	—		26,147		—		26,147		—		292		26,439
Total allowance for credit losses	$	16,654	$	34,355	$	1,257	$	52,266	$	2,627	$	1,404	$	56,297

Loans outstanding:(1)
Collectively evaluated loans	$	25,419,990	$	5,187,522	$	155,878	$	30,763,390	$	988,371	$	478,072	$	32,229,833
Individually evaluated loans	4,638		131,043		—		135,681		—		3,717		139,398
Total loans outstanding	$	25,424,628	$	5,318,565	$	155,878	$	30,899,071	$	988,371	$	481,789	$	32,369,231


Allowance coverage ratios:
Collective allowance coverage ratio(2)	0.07%	0.16%	0.81%	0.08%	0.27%	0.23%	0.09%
Asset-specific allowance coverage ratio(3)	—	19.95	—	19.27	—	7.86	18.97
Total allowance coverage ratio(4)	0.07	0.65	0.81	0.17	0.27	0.29	0.17


	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 $13 million and $12 million as of February 28, 2023 and May 31, 2022, respectively.

(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 decreased to $56 million and 0.17%, respectively, as of February 28, 2023, from $68 million and 0.22%, respectively, as of May 31, 2022. The $12 million decrease in the allowance for credit losses reflected a reduction in the asset-specific allowance of $13 million, partially offset by an increase in the collective allowance of $1 million. The decrease in asset-specific allowance was attributable primarily to charge-offs totaling $15 million related to the Brazos and Brazos Sandy Creek loans, partially offset by an increase in the asset-specific allowance for a nonperforming CFC power supply loan, due to a reduction and timing change in the expected payments on this loan. The increase in the collective allowance was primarily due to the loan portfolio growth.

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 February 28, 2023 and May 31, 2022.