NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP DC

Total assets increased $2,166 million, or 6%, in FY2024 to $36,178 million as of May 31, 2024, primarily due to growth in our loan portfolio. We experienced an increase in total liabilities of $1,743 million, or 6%, to $33,166 million as of May 31, 2024, largely due to issuances of debt to fund the growth in our loan portfolio. Total equity increased $423 million to $3,012 million as of May 31, 2024, primarily attributable to our reported net income of $554 million for FY2024, which was partially offset by a decrease in equity of$10 million from CFC’s deconsolidation of RTFC and$113 million from the CFC Board of Directors’ authorized patronage capital retirements during FY2024.

Below is a discussion of changes in the major components of our assets and liabilities during FY2024. 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 electric and NCSC telecom. 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 this Report.

Loans Outstanding

Table 9 presents loans outstanding by legal entity, member class and loan product type as of May 31, 2024 and 2023.

Table 9: Loans—Outstanding Amount by Member Class and Loan Type

(1) Represents the unpaid principal balance, net of discounts, charge-offs and recoveries, of loans as of the end of each period.

(2) Deferred loan origination costs are recorded on the books of CFC.

Loans to members totaled $34,542 million and $32,532 million as of May 31, 2024 and 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 May 31, 2024 and 2023, respectively. The increase in loans to members of $2,010 million, or 6%, from May 31, 2023, was primarily attributable to net increases in long-term and line of credit loans of $1,710 million and $299 million, respectively. The increase in line of credit loans was primarily attributable to funding provided for higher working capital requirements from our members and bridge loan financing. We experienced increases in CFC distribution loans, CFC power supply loans, CFC statewide and associate loans and NCSC telecom loans of $1,667 million, $205 million, $37 million and $111 million, respectively, partially offset by a decrease in NCSC electric loans of $11 million.

Long-term loan advances totaled $3,371 million during FY2024, of which approximately 93% was provided to members for capital expenditures, 1%was providedfor the refinancing of loans made by other lenders, and 6% was provided for other purposes, primarily business acquisitions. In comparison, long-term loan advances totaled $3,297 million during FY2023, of which approximately 95% was provided to members for capital expenditures and 2% was providedfor the refinancing of loans made by other lenders. Of the$3,371 million total long-term loans advanced during FY2024, $3,155 million were fixed-rate loan advances with a weighted average fixed-rate term of 11 years. In comparison, of the$3,297 million total long-term loans advanced during FY2023, $2,849 million were fixed-rate loan advances with a weighted average fixed-rate term of 18 years. The weighted average term selected by our members on the long-term fixed-rate loans has continued to decline due to the elevated interest rate environment.

We provide information on the credit performance and risk profile of our loan portfolio below under the section “Credit Risk—Loan Portfolio Credit Risk” in this Report. Also refer to “Item 1. Business—Loan and Guarantee Programs” and “Note 4—Loans” in this Report 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 Product Types

We offer various short- and long-term unsecured debt securities to our members and their affiliates, including commercial paper, select notes, daily liquidity fund notes, medium-term notes and subordinated certificates. We also issue commercial paper, medium-term notes and collateral trust bonds in the capital markets. Additionally, we have access to funds under borrowing arrangements with banks, other noncapital markets and U.S. government agencies. Table 10 displays our primary funding sources and their selected key attributes.

Table 10: Debt—Debt Product Types

(1)Collateral trust bonds are secured by the pledge of permitted investments and eligible mortgage notes from distribution system borrowers in an amount at least equal to the outstanding principal amount of collateral trust bonds.

(2)Represents notes payable under the Guaranteed Underwriter Program, which supports the Rural Economic Development Loan and Grant program. The Federal Financing Bank provides the financing for these notes, and RUS provides a guarantee of repayment. We are required to pledge eligible mortgage notes from distribution and power supply system borrowers in an amount at least equal to the outstanding principal amount of the notes payable.

(3)We are required to pledge eligible mortgage notes from distribution and power supply system borrowers in an amount at least equal to the outstanding principal amount under the note purchase agreement with Farmer Mac.

(4)Other notes payable consisted of unsecured and secured Clean Renewable Energy Bonds as of May 31, 2023. We are required to pledge eligible mortgage notes from distribution and power supply system borrowers in an amount at least equal to the outstanding principal amount under the Clean Renewable Energy Bonds Series 2009A note purchase agreement, which matured and was paid off in full during FY2024.

(5)Subordinated deferrable debt is subordinate and junior to senior debt and debt obligations we guarantee, but senior to subordinated certificates. We have the right at any time, and from time to time, during the term of the subordinated deferrable debt to suspend interest payments for a certain number of consecutive interest payment periods, as defined in the respective prospectus supplements. To date, we have not exercised our option to suspend interest payments. We also have the right to call the subordinated deferrable debt, in whole or in part, at par, either at certain intervals or any time five or 10 years after the issuance. The specific terms are detailed in each respective subordinated deferrable debt’s prospectus supplement.

(6)Members’ subordinated certificates consist of membership subordinated certificates, loan and guarantee certificates and member capital securities, and are subordinated and junior to senior debt, subordinated debt and debt obligations we guarantee. Membership subordinated certificates generally mature 100 years subsequent to issuance. Loan and guarantee subordinated certificates have the same maturity as the related long-term loan. Some certificates also may amortize annually based on the outstanding loan balance. Member capital securities mature 30 years subsequent to issuance. Member capital securities are callable at par beginning either five or 10 years subsequent to the issuance and anytime thereafter.

Debt Outstanding

Table 11 displays the composition, by product type, of our outstanding debt and the weighted average interest rate as of May 31, 2024 and 2023. Table 11 also displays the composition of our debt based on several additional selected attributes.

Table 11: Debt—Total Debt Outstanding and Weighted-Average Interest Rates

(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. Debt outstanding totaled $32,718 million as of May 31, 2024, increased by $1,719 million, or 6%, from May 31, 2023, due to borrowings to fund the increase in loans to members. Outstanding dealer commercial paper was $505 million as of May 31, 2024. We provide additional information on our financing activities for 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 12 displays member debt outstanding, by product type, as of May 31, 2024 and 2023.

Table 12: 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 15% and 16% of total debt outstanding as of May 31, 2024 and 2023, respectively. Over the last three fiscal years, our member investments have averaged $5,046 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 decreased to $4,333 million as of May 31, 2024, from $4,546 million as of May 31, 2023, primarily driven by a decrease in outstanding dealer commercial paper, partially offset by an increase in short-term notes payable advanced under the Farmer Mac revolving purchase agreement and a slight increase in short-term member investments. Short-term borrowings accounted for 13% and 15% of total debt outstanding as of May 31, 2024 and 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 $28,386 million as of May 31, 2024, from $26,453 million as of May 31, 2023, primarily due to net increases of $2,828 million in dealer medium-term notes and $214 million in notes payable under the Farmer Mac revolving purchase agreement, partially offset by decreases of $229 million in notes payable under the Guaranteed Underwriter Program and repayments of $855 million of collateral trust bonds during FY2024. Long-term and subordinated debt accounted for 87% and 85% of total debt outstanding as of May 31, 2024 and 2023, respectively. We provide additional information on our long-term debt below under the section “Liquidity Risk” and “Note 7—Long-Term Debt” and “Note—Subordinated Deferrable Debt” in this Report.

Equity

Table 13 presents the components of total CFC equity and total equity as of May 31, 2024 and 2023.

Table 13: 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, which we are required to consolidate. We present the consolidated total derivative forward value gains (losses) in Table 34 in the “Non-GAAP Financial Measures and Reconciliations” section below. Also, see “Note 16—Business Segments” for the statements of operations for CFC.

The increase in total equity of $423 million to $3,012 million as of May 31, 2024 was attributable to our reported net income of $554 million for FY2024, which was partially offset by a decrease in equity of$10 million from CFC’s deconsolidation of RTFC and $113 million from the CFC Board of Directors’ authorized patronage capital retirements, as discussed above under “Executive Summary.”

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. District of Columbia cooperative law requires cooperatives to allocate net earnings to patrons, to a general reserve in an amount sufficient to maintain a balance of at least 50% of paid-up capital and to a cooperative educational fund. In addition, the District of Columbia cooperative law permits additional allocations to board-approved reserves. District of Columbia cooperative law also requires that a cooperative’s net earnings be allocated to all patrons in proportion to their individual patronage and each patron’s allocation be distributed to the patron unless the patron agrees that the cooperative may retain its share as additional capital. Pursuant to these provisions, the CFC Board of Directors is required to make annual allocations of net earnings, if any. CFC’s net earnings for determining allocations are 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 and Reconciliations.”

In May 2024, the CFC Board of Directors authorized the allocation of $1 million of net earnings for FY2024 to the cooperative educational fund. In July 2024, the CFC Board of Directors authorized the allocation of FY2024 adjusted net income as follows: $61 million to members in the form of patronage capital and $228 million to the members’ capital reserve. In July 2024, the CFC Board of Directors also authorized the retirement of patronage capital totaling $47 million, of which $30 million represented 50% of the patronage capital allocation for FY2024 and $17 million represented the portion of the allocation from fiscal year 1999 net earnings that had been held for 25 years pursuant to the CFC Board of Directors’ policy. We expect to return the authorized patronage capital retirement amount of $47 million to members in cash in the second quarter of fiscal year 2025. The remaining portion of the patronage capital allocation for FY2024 will be retained by CFC for 25 years pursuant to the guidelines adopted by the CFC Board of Directors in June 2009.

In connection with the RTFC sale transaction, the CFC Board of Directors approved the early retirement of $66 million of allocated but unretired CFC patronage capital to RTFC at a discounted amount of$41 million, which was paid from CFC to RTFC in December 2023, and the remaining$25 million was allocated to the CFC members’ capital reserve during FY2024. We provide additional information on the RTFC sale transaction under “Note 1—Summary of Significant Accounting Policies.”

In May 2023, the CFC Board of Directors authorized the allocation of $1 million of net earnings for FY2023 to the cooperative educational fund. In July 2023 the CFC Board of Directors authorized the allocation of FY2023 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 FY2023 and $17 million represented the portion of the allocation from fiscal year 1998 net earnings that had 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 FY2023 will be retained by CFC for 25 years pursuant to the guidelines adopted by the CFC Board of Directors in June 2009.

The CFC Board of Directors is required to make annual allocations of adjusted net income, if any. CFC has made annual retirements of allocated net earnings in 44 of the last 45 fiscal years; however, future retirements of allocated amounts are determined based on CFC’s financial condition. The CFC Board of Directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable laws. During FY2024, the CFC Board of Directors approved a change in the allocation of net earnings that would allow us to retain additional earnings and help in effectively managing our adjusted debt-to-equity ratio. As a result of this change, we retained 79% of adjusted net income for FY2024 in members’ capital reserve, compared with 56% for FY2023.