Loans and Commitments

9 Months Ended

Feb. 28, 2014

(3)

Loans and Commitments

Loans outstanding to members and unadvanced commitments by loan type and by member class are summarized as follows:

	February 28, 2014				May 31, 2013
(Dollars in thousands)	Loans Outstanding		Unadvanced Commitments (1)		Loans Outstanding		Unadvanced Commitments (1)
Total by loan type (2):
Long-term fixed-rate loans	$	18,185,111	$	-	$	17,918,268	$	-
Long-term variable-rate loans		770,883		4,547,813		782,006		4,718,162
Loans guaranteed by RUS		203,173		-		210,815		-
Line of credit loans		1,476,166		8,996,845		1,385,228		8,704,586
Total loans outstanding		20,635,333		13,544,658		20,296,317		13,422,748
Deferred origination costs		9,731		-		9,557		-
Less: Allowance for loan losses		(56,040)		-		(54,325)		-
Net loans outstanding	$	20,589,024	$	13,544,658	$	20,251,549	$	13,422,748

Total by member class (2):
CFC:
Distribution	$	15,186,620	$	9,115,128	$	14,941,192	$	8,948,826
Power supply		4,149,104		3,024,666		4,007,669		3,145,518
Statewide and associate		64,822		128,440		70,956		102,087
CFC total		19,400,546		12,268,234		19,019,817		12,196,431
RTFC		455,492		312,466		503,359		317,344
NCSC		779,295		963,958		773,141		908,973
Total loans outstanding	$	20,635,333	$	13,544,658	$	20,296,317	$	13,422,748

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

(2) Includes nonperforming and restructured loans.

Nonperforming and restructured loans outstanding and unadvanced commitments to members included in the table above are summarized by loan type and by company below:

	February 28, 2014				May 31, 2013
	Loans		Unadvanced		Loans		Unadvanced
(Dollars in thousands)	Outstanding		Commitments (1)		Outstanding		Commitments (1)
Nonperforming and restructured loans:
Nonperforming loans:
CFC:
Line of credit loans	$	5,000	$	-	$	5,000	$	-
NCSC:
Line of credit loans		450		-		-		-
RTFC:
Long-term fixed-rate loans		2,786		-		3,690		-
Long-term variable-rate loans		2,609		-		6,807		-
Total nonperforming loans	$	10,845	$	-	$	15,497	$	-

Restructured loans:
CFC:
Long-term fixed-rate loans	$	7,584	$	-	$	46,953	$	-
Line of credit loans (2)		-		-		-		5,000
Total restructured loans	$	7,584	$	-	$	46,953	$	5,000

(2) The unadvanced commitment is part of the terms outlined in the related restructure agreement. Loans advanced under these commitments would be classified as performing. Principal and interest due under these performing loans would be in addition to scheduled payments due under the restructured loan agreement.

Unadvanced Loan Commitments

A total of $2,249 million and $1,703 million of unadvanced commitments at February 28, 2014 and May 31, 2013, respectively, represented unadvanced commitments related to committed lines of credit loans that are not subject to a material adverse change clause at the time of each loan advance. As such, we will be required to advance amounts on these committed facilities as long as the borrower is in compliance with the terms and conditions of the facility.

The following table summarizes the available balance at February 28, 2014 under committed lines of credit that are not subject to a material adverse change clause and the related maturities by fiscal year and thereafter as follows:

	Available		Notional Maturities of Committed Lines of Credit
(Dollars in thousands)	Balance		2014		2015		2016		2017		2018		Thereafter
Committed lines of credit	$	2,248,762	$	19,048	$	55,026	$	61,000	$	466,061	$	861,098	$	786,529

The remaining unadvanced commitments totaling $11,296 million and $11,720 million at February 28, 2014 and May 31, 2013, respectively, were generally subject to material adverse change clauses. Prior to making an advance on these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. In some cases, the borrower’s access to the full amount of the facility is further constrained by the imposition of borrower-specific restrictions, or by additional conditions that must be met prior to advancing funds.

Unadvanced commitments related to line of credit loans are typically for periods not to exceed five years and are generally revolving facilities used for working capital and backup liquidity purposes. Historically, we have experienced a very low utilization rate on line of credit loan facilities, whether or not there is a material adverse change clause. Since we generally do not charge a fee on the unadvanced portion of the majority of our loan facilities, our borrowers will typically request long-term facilities to cover maintenance and capital expenditure work plans for periods of up to five years and draw down on the facility over that time. In addition, borrowers will typically request an amount in excess of their immediate estimated loan requirements to avoid the expense related to seeking additional loan funding for unexpected items.

The above items all contribute to our expectation that the majority of the unadvanced commitments will expire without being fully drawn upon and that the total unadvanced amount does not necessarily represent future cash funding requirements.

Payment Status of Loans

The tables below present the payment status, including an aging of delinquent loans, of the recorded investment in loans outstanding by member class at February 28, 2014 and May 31, 2013:

	February 28, 2014
(Dollars in thousands)	Current			30-89 Days Past Due			90 Days or More Past Due (1)			Total Past Due			Total Financing Receivables			Non-accrual Loans
CFC:
Distribution	$	15,186,620		$	-		$	-		$	-		$	15,186,620		$	7,584
Power supply		4,144,104			-			5,000			5,000			4,149,104			5,000
Statewide and associate		64,822			-			-			-			64,822			-
CFC total		19,395,546			-			5,000			5,000			19,400,546			12,584
RTFC		451,913			-			3,579			3,579			455,492			5,395
NCSC		779,295			-			-			-			779,295			450
Total loans outstanding	$	20,626,754		$	-		$	8,579		$	8,579		$	20,635,333		$	18,429

As a % of total loans		99.96	%		0.00	%		0.04	%		0.04	%		100.00	%		0.09	%

(1) All loans 90 days or more past due are on non-accrual status.

	May 31, 2013
(Dollars in thousands)	Current			30-89 Days Past Due			90 Days or More Past Due (1)			Total Past Due			Total Financing Receivables			Non-accrual Loans
CFC:
Distribution	$	14,938,351		$	2,841		$	-		$	2,841		$	14,941,192		$	7,584
Power supply		4,002,669			-			5,000			5,000			4,007,669			5,000
Statewide and associate		70,956			-			-			-			70,956			-
CFC total		19,011,976			2,841			5,000			7,841			19,019,817			12,584
RTFC		495,040			4,163			4,156			8,319			503,359			10,497
NCSC		773,141			-			-			-			773,141			-
Total loans outstanding	$	20,280,157		$	7,004		$	9,156		$	16,160		$	20,296,317		$	23,081

As a % of total loans		99.92	%		0.03	%		0.05	%		0.08	%		100.00	%		0.11	%

(1) All loans 90 days or more past due are on non-accrual status.

Credit Quality

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

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

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

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

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

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

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

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

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

The following table presents our loan portfolio by risk rating category and member class at February 28, 2014 and May 31, 2013:

	February 28, 2014						May 31, 2013
(Dollars in thousands)	Pass		Criticized		Total		Pass		Criticized		Total
CFC:
Distribution	$	15,168,785	$	17,835	$	15,186,620	$	14,922,558	$	18,634	$	14,941,192
Power supply		4,144,104		5,000		4,149,104		4,002,669		5,000		4,007,669
Statewide and associate		64,542		280		64,822		70,668		288		70,956
CFC total		19,377,431		23,115		19,400,546		18,995,895		23,922		19,019,817
RTFC		441,757		13,735		455,492		483,058		20,301		503,359
NCSC		776,981		2,314		779,295		770,419		2,722		773,141
Total loans outstanding	$	20,596,169	$	39,164	$	20,635,333	$	20,249,372	$	46,945	$	20,296,317

Loan Security

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

The following table summarizes our secured and unsecured loans outstanding by loan type and by company:

	February 28, 2014								May 31, 2013
(Dollars in thousands)	Secured		%		Unsecured		%		Secured		%		Unsecured		%
Total by loan type:
Long-term fixed-rate loans	$	17,128,504	94	%	$	1,056,607	6	%	$	16,871,594	94	%	$	1,046,674	6	%
Long-term variable-rate loans		679,446	88			91,437	12			676,075	86			105,931	14
Loans guaranteed by RUS		203,173	100			-	-			210,815	100			-	-
Line of credit loans		307,820	21			1,168,346	79			294,575	21			1,090,653	79
Total loans outstanding	$	18,318,943	89		$	2,316,390	11		$	18,053,059	89		$	2,243,258	11

Total by company:
CFC	$	17,323,741	89	%	$	2,076,805	11	%	$	17,049,029	90	%	$	1,970,788	10	%
RTFC		436,001	96			19,491	4			482,647	96			20,712	4
NCSC		559,201	72			220,094	28			521,383	67			251,758	33
Total loans outstanding	$	18,318,943	89		$	2,316,390	11		$	18,053,059	89		$	2,243,258	11

Loan Loss Allowance

We maintain an allowance for loan losses at a level estimated by management to provide for probable losses inherent in the loan portfolio. The tables below summarize the changes in the allowance for loan losses by company for the three and nine months ended February 28, 2014.

	Three Months Ended February 28, 2014
(Dollars in thousands)	CFC		RTFC		NCSC		Total
Balance as of November 30, 2013	$	42,762	$	7,859	$	4,578	$	55,199
Provision for (recovery of) loan losses		1,543		(2,450)		1,694		787
Charge-offs		-		-		-		-
Recoveries of loans previously charged-off		54		-		-		54
Balance as of February 28, 2014	$	44,359	$	5,409	$	6,272	$	56,040

	Three Months Ended February 28, 2013
(Dollars in thousands)	CFC		RTFC		NCSC		Total
Balance as of November 30, 2012	$	133,578	$	8,314	$	6,845	$	148,737
Provision for (recovery of) loan losses		432		(214)		(596)		(378)
Recoveries of loans previously charged-off		52		-		-		52
Balance as of February 28, 2013	$	134,062	$	8,100	$	6,249	$	148,411

	Nine Months Ended February 28, 2014
(Dollars in thousands)	CFC		RTFC		NCSC		Total
Balance as of May 31, 2013	$	41,246	$	9,158	$	3,921	$	54,325
Provision for (recovery of) loan losses		2,953		(2,143)		2,351		3,161
Charge-offs		-		(1,606)		-		(1,606)
Recoveries of loans previously charged-off		160		-		-		160
Balance as of February 28, 2014	$	44,359	$	5,409	$	6,272	$	56,040

	Nine Months Ended February 28, 2013
(Dollars in thousands)	CFC		RTFC		NCSC		Total
Balance as of May 31, 2012	$	126,941	$	8,562	$	7,823	$	143,326
Provision for (recovery of) loan losses		6,963		(462)		(1,574)		4,927
Recoveries of loans previously charged-off		158		-		-		158
Balance as of February 28, 2013	$	134,062	$	8,100	$	6,249	$	148,411

Our allowance for loan losses includes a specific valuation allowance related to individually-evaluated impaired loans, as well as a general reserve for other probable incurred losses for loans that are collectively evaluated. The tables below present the loan loss allowance and the recorded investment in outstanding loans by impairment methodology and by company:

	February 28, 2014
(Dollars in thousands)	CFC		RTFC		NCSC		Total
Ending balance of the allowance:
Collectively evaluated	$	44,359	$	4,950	$	6,217	$	55,526
Individually evaluated		-		459		55		514
Total ending balance of the allowance	$	44,359	$	5,409	$	6,272	$	56,040

Recorded investment in loans:
Collectively evaluated	$	19,387,962	$	450,097	$	778,845	$	20,616,904
Individually evaluated		12,584		5,395		450		18,429
Total recorded investment in loans (1)	$	19,400,546	$	455,492	$	779,295	$	20,635,333

Loans to members, net (1)	$	19,356,187	$	450,083	$	773,023	$	20,579,293

	May 31, 2013
(Dollars in thousands)	CFC		RTFC		NCSC		Total
Ending balance of the allowance:
Collectively evaluated	$	41,246	$	5,731	$	3,921	$	50,898
Individually evaluated		-		3,427		-		3,427
Total ending balance of the allowance	$	41,246	$	9,158	$	3,921	$	54,325

Recorded investment in loans:
Collectively evaluated	$	18,967,864	$	492,862	$	773,141	$	20,233,867
Individually evaluated		51,953		10,497		-		62,450
Total recorded investment in loans (1)	$	19,019,817	$	503,359	$	773,141	$	20,296,317

Loans to members, net (1)	$	18,978,571	$	494,201	$	769,220	$	20,241,992

(1) Excludes deferred origination costs of $10 million at February 28, 2014 and May 31, 2013.

Impaired Loans

Our recorded investment in individually-impaired loans and the related specific valuation allowance is summarized below by member class:

	February 28, 2014				May 31, 2013
(Dollars in thousands)	Recorded Investment		Related Allowance		Recorded Investment		Related Allowance
With no specific allowance recorded:
CFC/Distribution	$	7,584	$	-	$	46,953	$	-
CFC/Power Supply		5,000		-		5,000		-
RTFC		3,580		-		-		-
Total		16,164		-		51,953		-

With a specific allowance recorded:
NCSC		450		55
RTFC		1,815		459		10,497		3,427
Total		2,265		514		10,497		3,427
Total impaired loans	$	18,429	$	514	$	62,450	$	3,427

The table below represents the average recorded investment in impaired loans and the interest income recognized by member class:

	Three Months Ended February 28,
	2014		2013		2014		2013

(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
CFC/Distribution	$	7,584	$	70,111	$	-	$	435
CFC/Power Supply		5,000		5,000		-		-
NCSC		454		-		-		-
RTFC		5,527		6,497		-		-
Total impaired loans	$	18,565	$	81,608	$	-	$	435

	Nine Months Ended February 28,
	Average Recorded Investment				Interest Income Recognized
(Dollars in thousands)	2014		2013		2014		2013
CFC/Distribution	$	11,939	$	208,632	$	136	$	13,522
CFC/Power Supply		5,000		5,000		-		-
NCSC		151		-		-		-
RTFC		7,735		6,668		-		-
Total impaired loans	$	24,825	$	220,300	$	136	$	13,522

Nonperforming and Restructured Loans

Foregone interest income as a result of holding loans on non-accrual status:

	Three Months Ended February 28,				Nine Months Ended February 28,
(Dollars in thousands)	2014		2013		2014		2013
Nonperforming loans	$	120	$	355	$	440	$	1,135
Restructured loans		122		-		367		-
Total	$	242	$	355	$	807	$	1,135

At February 28, 2014 and May 31, 2013, nonperforming loans totaled $11 million or 0.05 percent, of loans outstanding and $15 million or 0.08 percent, of loans outstanding, respectively. One borrower in this group is currently in bankruptcy. The debtor and certain secured creditors have negotiated a settlement for an agreed upon plan of reorganization. Another borrower in this group received a reversal of an unfavorable ruling related to state Universal Service Fund (“USF”) payments. In March 2014, this borrower made a payment moving its loans to current payment status. There is one other borrower in this group that is currently seeking a buyer for its system, as it is not anticipated that it will have sufficient cash flow to repay its loans without the proceeds from the sale of the business. It is currently anticipated that even with the sale of the business, there will not be sufficient funds to repay the full amount owed. We have approval rights with respect to the sale of this company.

At February 28, 2014 and May 31, 2013, we had restructured loans totaling $8 million, or 0.04 percent, of loans outstanding and $47 million, or 0.23 percent, of loans outstanding, respectively, all of which were performing according to their restructured terms. No interest income was accrued on restructured loans during the three months ended February 28, 2014 compared to $0.4 million of interest income during the prior-year period. Approximately $0.1 million of interest income was accrued on restructured loans during the nine months ended February 28, 2014, compared with $14 million of interest income in the prior-year period. One of the restructured loans totaling $39 million at May 31, 2013, was refinanced without concession during the first quarter of fiscal year 2014, with the new loan classified as performing at February 28, 2014. This loan was on accrual status since the time of restructuring. At February 28, 2014, all restructured loans were on non-accrual status.

We believe our allowance for loan loss is appropriate to cover the losses inherent in our loan portfolio at February 28, 2014.

Pledging of Loans and Loans on Deposit

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

The following table summarizes our loans outstanding as collateral pledged to secure our collateral trust bonds, Clean Renewable Energy Bonds and notes payable to the Federal Agricultural Mortgage Corporation and the amount of the corresponding debt outstanding (see Note 5, Short-Term Debt and Credit Arrangements and Note 6, Long-Term Debt).

(Dollars in thousands)	February 28, 2014		May 31, 2013
Collateral trust bonds:
2007 indenture
Distribution system mortgage notes	$	5,454,096	$	5,674,804
RUS guaranteed loans qualifying as permitted investments		162,509		165,823
Total pledged collateral	$	5,616,605	$	5,840,627
Collateral trust bonds outstanding		5,179,372		4,679,372

1994 indenture
Distribution system mortgage notes	$	1,567,122	$	1,641,858
Collateral trust bonds outstanding		1,310,000		1,465,000

Federal Agricultural Mortgage Corporation:
Distribution and power supply system mortgage notes	$	1,784,959	$	1,795,947
Notes payable outstanding		1,523,032		1,542,474

Clean Renewable Energy Bonds Series 2009A:
Distribution and power supply system mortgage notes	$	21,932	$	23,536
Cash		7,221		7,634
Total pledged collateral	$	29,153	$	31,170
Notes payable outstanding		18,230		19,888

We are required to maintain collateral on deposit in an amount at least equal to the balance of debt outstanding to the Federal Financing Bank of the United States Treasury issued under the Guaranteed Underwriter program of the U.S. Department of Agriculture (the “Guaranteed Underwriter Program”). See Note 6, Long-Term Debt.

The following table shows the collateral on deposit and the amount of the corresponding debt outstanding:

(Dollars in thousands)	February 28, 2014		May 31, 2013
Federal Financing Bank
Distribution and power supply system mortgage notes on deposit	$	4,387,115	$	3,903,786
Notes payable outstanding		3,999,000		3,674,000