NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP DC

Total assets increased $1,498 million, or 4%, to $35,510 million as of November 30, 2023, primarily due to growth in our loan portfolio. We experienced an increase in total liabilities of $1,191 million, or 4%, to $32,614 million as of November 30, 2023, largely due to the issuances of debt to fund the growth in our loan portfolio. Total equity increased $307 million to $2,896 million as of November 30, 2023, attributable to our reported net income of $376 million for YTD FY2024, which was partially offset by the CFC Board of Directors’ authorized patronage capital retirement in July 2023 of $72 million.

Below is a discussion of changes in the major components of our assets and liabilities during the current quarter. 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 our liquidity requirements and market risk exposure in accordance with our risk appetite framework.

Loan Portfolio

We segregate our loan portfolio into segments, by legal entity, based on the borrower member class, which consists of CFC distribution, CFC power supply, CFC statewide and associate, NCSC and RTFC. We offer both long-term and line of credit loans to our borrowers. Under our long-term loan facilities, a borrower may select a fixed interest rate or a variable interest rate at the time of each loan advance. Line of credit loans are revolving loan facilities and generally have a variable interest rate. We describe and provide additional information on our member classes under “Item 1. Business—Members” and information about our loan programs and loan product types under “Item 1. Business—Loan and Guarantee Programs” in our 2023 Form 10-K.

Loans Outstanding

Loans to members totaled $33,554 million and $32,532 million as of November 30, 2023 and May 31, 2023, respectively. Loans to CFC distribution, power supply, and statewide and associate borrowers accounted for 95% and 96% of total loans to members as of November 30, 2023 and May 31, 2023, respectively. The increase in loans to members of $1,022 million, or 3%, from May 31, 2023, was primarily attributable to net increases in long-term and line of credit loans of $853 million and $169 million, respectively. The $169 million increase in line of credit loans was primarily attributable to funding provided for higher working capital requirements from our members and RUS bridge loan financing. Weexperienced increases in CFC distribution loans, CFC power supply loans, CFC statewide and associate loans and RTFC loans of $605 million, $301 million, $68 million and $58 million, respectively, partially offset by a decrease in NCSC loans of $10 million.

Long-term loan advances totaled $1,608 million during YTD FY2024, of which approximately 94% was provided to members for capital expenditures and approximately 6% was provided for other purposes, primarily business acquisitions. In comparison, long-term loan advances totaled $1,651 million during YTD FY2023, of which approximately 95% was provided to members for capital expenditures and approximately 2% was provided for the refinancing of loans made by other lenders. Of the $1,608 million total long-term loans advanced during the YTD FY2024, $1,532 million were fixed-rate loan advances with a weighted average fixed-rate term of 12 years. In comparison, of the $1,651 million total long-term loans advanced during YTD FY2023, $1,478 million were fixed-rate loan advances with a weighted average fixed-rate term of 18 years.

Our aggregate loans outstanding to CFC electric distribution cooperative members relating to broadband projects, which we started tracking in October 2017, increased to an estimated $2,724 million as of November 30, 2023, from approximately $2,355 million as of May 31, 2023.

We provide information on the credit performance and risk profile of our loan portfolio below under the section “Credit Risk—Loan Portfolio Credit Risk.” Also refer to“Note 4—Loans” for addition information on our loans to members.

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, including our members, affiliates, the capital markets and other 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, affiliates, the capital markets and other funding sources.

Debt Outstanding

Table 10 displays the composition, by product type, of our outstanding debt as of November 30, 2023 and May 31, 2023. Table 10 also displays the composition of our debt based on several additional selected attributes.

Table 10: Debt—Total Debt Outstanding

(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 our consolidated balance sheets. Maturity classification is based on the original contractual maturity as of the date of issuance of the debt.

We issue debt primarily to fund growth in our loan portfolio. As such, our debt outstanding generally increases and decreases in response to member loan demand. Total debt outstanding increased $1,195 million, or 4%, to $32,195 million as of November 30, 2023, due to borrowings to fund the increase in loans to members. Outstanding dealer commercial paper of $1,039 million as of November 30, 2023 was within our quarter-end target range of $1,000 million to $1,500 million. We provide additional information on our financing activities for the YTD FY2024 in the below section “Liquidity Risk” of this Report.

Member Investments

Debt securities issued to our members represent an important, stable source of funding. Table 11 displays member debt outstanding, by product type, as of November 30, 2023 and May 31, 2023.

Table 11: Debt—Member Investments

(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 16% of total debt outstanding as of both November 30, 2023 and May 31, 2023. Member investments totaled $5,161 million as of November 30, 2023, an increase of $320 million from May 31, 2023, primarily attributable to the increase in short-term member investments as our members tend to invest their excess cash with CFC. Over the last twelve fiscal quarters, our member investments have averaged $5,101 million, calculated based on outstanding member investments as of the end of each fiscal quarter during the period.

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 increased to $5,162 million as of November 30, 2023, from $4,546 million as of May 31, 2023, primarily driven by increase in short-term notes payable advanced under the Farmer Mac revolving purchase agreement and short-term member investments, partially offset by a decrease in outstanding dealer commercial paper. Short-term borrowings accounted for 16% and 15% of total debt outstanding as of November 30, 2023 and May 31, 2023, respectively.

See “Liquidity Risk” below and “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 under the Farmer Mac revolving note purchase agreement. 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 increased to $27,033 million as of November 30, 2023, from $26,453 million as of May 31, 2023, primarily due to net increase of $665 million in medium term notes, $252 million in notes payable under the Farmer Mac revolving purchase agreement, and $174 million in notes payable under the Guaranteed Underwriter Program, partially offset by repayments of $405 million of collateral trust bonds and the early redemption of $100 million of our subordinated deferrable debt. Long-term and subordinated debt accounted for 84% and 85% of total debt outstanding as of November 30, 2023 and May 31, 2023, respectively.

We provide additional information on our long-term debt below under the “Liquidity Risk” section and in “Note 7—Long-Term Debt” and “Note 8—Subordinated Deferrable Debt” of this Report.

Equity

Table 12 presents the components of total CFC equity and total equity as of November 30, 2023 and May 31, 2023.

Table 12: Equity

(1)Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the variable interest entities NCSC and RTFC, which we are required to consolidate. We present the consolidated total derivative forward value gains (losses) in Table 30 in the “Non-GAAP Financial Measures” section below. Also, see “Note 14—Business Segments” for the statements of operations for CFC.

The increase in total equity of $307 million to $2,896 million as of November 30, 2023 was attributable to our reported net income of $376 million for YTD FY2024, partially offset by the CFC Board of Directors’ authorized patronage capital retirement in July 2023 of $72 million.

Allocation and Retirement of Patronage Capital

We are subject to District of Columbia law governing cooperatives, under which CFC is required to make annual allocations of net earnings, if any, in accordance with the provisions of the District of Columbia statutes. We describe the allocation requirements under “Item 7. MD&A—Consolidated Balance Sheet Analysis—Equity—Allocation and Retirement of Patronage Capital” in our 2023 Form 10-K. The amount of patronage capital allocated each year by CFC’s Board of Directors is based on non-GAAP adjusted net income, which excludes the impact of derivative forward value gains (losses). We provide a reconciliation of our adjusted net income to our reported net income and an explanation of the adjustments below in “Non-GAAP Financial Measures.”

In May 2023, the CFC Board of Directors authorized the allocation of $1 million of net earnings for fiscal year 2023 to the cooperative educational fund. In July 2023, the CFC Board of Directors authorized the allocation of fiscal year 2023 adjusted net income as follows: $110 million to members in the form of patronage capital and $140 million to the members’ capital reserve.

In July 2023, the CFC Board of Directors also authorized the retirement of patronage capital totaling $72 million, of which $55 million represented 50% of the patronage capital allocation for fiscal year 2023, and $17 million represented the portion of the allocation from fiscal year 1998 net earnings that has been held for 25 years pursuant to the CFC Board of Directors’ policy. This amount was returned to members in cash in September 2023. The remaining portion of the patronage capital allocation for fiscal year 2023 will be retained by CFC for 25 years pursuant to the guidelines adopted by the CFC Board of Directors in June 2009.