Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
INTRODUCTION
As of May 31, 2024, our financial statements included the consolidated accounts of CFC and NCSC. Our principal operations are currently organized for management reporting purposes into two business segments, which ar e based on the accounts of each of the legal entities included in our consolidated financial statements: CFC and NCSC. We provide information on the business structure, mission, principal purpose and core business activities of each of these entities under “Item 1. Business.” Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its consolidated entities.
The following MD&A is intended to enhance the understanding of our consolidated financial statements by providing information that we believe is relevant in evaluating our results of operations, financial condition and liquidity and the potential impact of material known events or uncertainties that, based on management’s assessment, are reasonably likely to cause the financial information included in this Report not to be necessarily indicative of our future financial performance. Management monitors a variety of key indicators and metrics to evaluate our business performance. We discuss these key measures and factors influencing changes from period to period. Our MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and related notes for the fiscal year ended May 31, 2024 included in this Report and additional information contained elsewhere in this Report, including the risk factors discussed under “Item 1A. Risk Factors.”
Our fiscal year begins on June 1 and ends on May 31. References to “FY2024,” “FY2023” and “FY2022” refer to the fiscal years ended May 31, 2024, 2023 and 2022, respectively.
NON-GAAP FINANCIAL MEASURES
Our reported financial results are determined in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) and are subject to period-to-period volatility due to changes in market conditions and differences in the way our financial assets and liabilities are accounted for under U.S. GAAP. Our financial assets and liabilities expose us to interest-rate risk, therefore we use derivatives, primarily interest rate swaps, to economically hedge and manage the interest-rate sensitivity mismatch between our financial assets and liabilities. We are required under U.S. GAAP to carry derivatives at fair value on our consolidated balance sheets; however, the financial assets and liabilities for which we use derivatives to economically hedge are carried at amortized cost. Changes in interest rates and the shape of the swap curve result in periodic fluctuations in the fair value of our derivatives, which may cause volatility in our earnings because we do not apply hedge accounting for our interest rate swaps. As a result, the mark-to-market changes in our interest rate swaps are recorded in earnings. The majority of our derivative portfolio consists of pay-fixed swaps with longer maturities, leading to derivative losses when interest rates decline and derivative gains when interest rates rise. This earnings volatility generally is not indicative of the underlying economics of our business, as the derivative forward fair value gains or losses recorded each period may or may not be realized over time, depending on the terms of our derivative instruments and future changes in market conditions that impact the periodic cash settlement amounts of our interest rate swaps.
Therefore, management uses non-GAAP financial measures, which we refer to as “adjusted” measures, to evaluate financial performance. Our key non-GAAP financial measures are adjusted net income, adjusted net interest income, adjusted interest expense, adjusted net interest yield, adjusted TIER, adjusted debt-to-equity ratio and members’ equity. The most comparable U.S. GAAP financial measures are net income, net interest income, interest expense, net interest yield, TIER, debt-to-equity ratio and CFC equity, respectively. The primary adjustments we make to calculate these non-GAAP financial measures consist of (i) adjusting interest expense and net interest income to include the impact of net periodic derivative cash settlements income (expense) amounts; (ii) adjusting net income, total liabilities and total equity to exclude the non-cash impact of the accounting for derivative financial instruments; (iii) adjusting total liabilities to exclude the amount that funds CFC member loans guaranteed by RUS, subordinated deferrable debt and members’ subordinated certificates; (iv) adjusting total equity to include subordinated deferrable debt and members’ subordinated certificates and exclude cumulative derivative forward value gains and losses and amounts of changes in the fair value included in accumulated other comprehensive income (“AOCI”) related to derivatives; and (v) adjusting CFC equity to exclude derivative forward value gains and losses and AOCI.
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We believe our non-GAAP financial measures, which should not be considered in isolation or as a substitute for measures determined in conformity with U.S. GAAP, provide meaningful information and are useful to investors because management evaluates performance based on these metrics for purposes of (i) establishing short- and long-term performance goals; (ii) budgeting and forecasting; (iii) comparing period-to-period operating results, analyzing changes in results and identifying potential trends; and (iv) making compensation decisions. In addition, certain of the financial covenants in our committed bank revolving line of credit agreements and debt indentures are based on non-GAAP financial measures, as the forward fair value gains and losses related to our interest rate swaps that are excluded from our non-GAAP financial measures do not affect our cash flows, liquidity or ability to service our debt. Our non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies due to differences in the way these measures are calculated. We provide a reconciliation of our non-GAAP adjusted measures to the most directly comparable U.S. GAAP measures in the section “Non-GAAP Financial Measures and Reconciliations.”
EXECUTIVE SUMMARY
Reported Results
Net Income and TIER
The table below shows our net income and TIER for the periods presented and the variance between these periods. We provide a more detailed discussion of our reported results under the section “Consolidated Results of Operations.” See “Item 7. MD&A—Consolidated Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023 (“2023 Form 10-K”) for a comparative discussion of our consolidated results of operations between FY2023 and FY2022.
Table 1: Net Income and TIER
Year Ended May 31, Variance
(Dollars in thousands) 2024 2023 2022 2024 versus 2023
2023 versus 2022
Net income
$ 554,316 $ 501,587 $ 798,537 $ 52,729 $ (296,950)
TIER (1)
1.41 1.48 2.13 (0.07) (0.65)
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(1) Calculated based on net income (loss) plus interest expense for the period divided by interest expense for the period.
FY2024 versus FY2023
The increase in net income was primarily driven by:
• An increase in derivative gains of $106 million, primarily from an increase in the net interest rate received on our pay-fixed swaps, which drove the higher derivative cash settlements income for FY2024;
• A favorable shift from losses to gains recorded on our investment securities of $16 million, primarily due to period-to-period market fluctuations in fair value;
• A favorable shift from provision to benefit for credit losses of $6 million . We recorded a benefit for credit losses of $5 million for FY2024 , resulting primarily from a decrease in the asset-specific allowance, partially offset by an increase in the collective allowance due to loan portfolio growth. In comparison, we recorded a provision for credit losses of $1 million for FY2023 , driven primarily by an increase in the asset-specific allowance; and
• An increase in fee and other income of $5 million;
These were partially offset by:
• A decrease in net interest income of $61 million, attributable to a decrease in the net interest yield of 24 basis points, or 24%, to 0.74%, partially offset by an increase in average interest-earning assets of $2,138 million, or 7%; and
• An increase in operating and other expenses of $19 million.
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The decrease in TIER for FY2024 compared with FY2023 were primarily driven by increased interest expense during FY2024.
Debt-to-Equity Ratio
Our debt-to-equity ratio decreased to 11.01 as of May 31, 2024, fro m 12.14 as of May 31, 2023, primarily due to an increase in equity res ulting from 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, of which $72 million was paid to members in September 2023 and $41 million was paid from CFC to RTFC in December 2023 in connection with the RTFC sale transaction, which is discussed further under “Note 1—Summary of Significant Accounting Policies.”
Non-GAAP Adjusted Results
Adjusted Net Income and Adjusted TIER
The table below shows our adjusted net income and adjusted TIER for the periods presented and the variance between these periods. Our financial goals focus on earning an annual minimum adjusted TIER of 1.10. We provide a more detailed discussion of our non-GAAP adjusted results under the section “Consolidated Results of Operations.” See “Item 7. MD&A—Consolidated Results of Operations” in our 2023 Form 10-K for a comparative discussion of our consolidated results of operations between FY2023 and FY2022.
Table 2 : Adjusted Net Income and Adjusted TIER
Year Ended May 31, Variance
(Dollars in thousands) 2024 2023 2022 2024 versus 2023
2023 versus 2022
Adjusted Net income
$ 289,445 $ 249,320 $ 240,670 $ 40,125 $ 8,650
Adjusted TIER 1.24 1.25 1.30 (0.01) (0.05)
FY2024 versus FY2023
The increase in adjusted net income was primarily driven by:
• An increase in adjusted net interest income of $32 million, driven by the combined impact of an increase in average interest-earning assets of $2,138 million, or 7%, and an increase in the adjusted net interest yield of 3 basis points, or 3%, to 1.11%;
• A favorable shift from losses to gains recorded on our investment securities of $16 million;
• A favorable shift from provision to benefit for credit losses of $6 million; and
• An increase in fee and other income of $5 million;
These were partially offset by:
• An increase in operating and other expenses of $19 million.
Adjusted Debt-to-Equity Ratio
Our financial goals focus on maintaining an adjusted debt-to-equity ratio at approximately 6-to-1 or below. The adjusted debt-to-equity ratio increased to 6.24 a s of May 31, 2024 from 6.04 as of May 31, 2023 , due to an increase in adjusted liabilities resulting from additional borrowings to fund growth in our loan portfolio, partially offset by an increase in adjusted equity. The increase in adjusted equity was primarily due to our adjusted net income of $289 million for FY2024, partially offset by a decrease in equity of $10 million from CFC ’ s deconsolidation of RTFC and $113 million from CFC Board of Directors’ authorized patronage capital retirements , as discussed above.
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Lending and Credit Quality
We segregate our loan portfolio into segments based on the borrower member class, which consists of CFC distribution, CFC power supply, CFC statewide and associate, NCSC electric and NCSC telecom. Prior to the RTFC sale transaction on December 1, 2023, NCSC electric and NCSC telecom were referred to as NCSC and RTFC, respectively.
Loans to members totaled $34,542 million as of May 31, 2024, an increase of $2,010 million, or 6%, from May 31, 2023, reflecting net increases in long-term and line of credit loans o f $1,710 million an d $299 million, respectively. Our loan portfolio composition remained largely unchanged from May 31, 2023 with 78% of loans outstanding to CFC distribution borrowers, 16% to CFC power supply borrowers, 3% to NCSC electric borrowers, 2% to NCSC telecom borrowers, and 1% to CFC statewide and associate borrowers as of May 31, 2024 .
We believe the overall credit quality of our loan portfolio remained strong as of May 31, 2024. We had no loan charge-offs during FY2024. We recorded $1 million in net loan recoveries to previously charged-off loan amounts during FY2024. In comparison, we experienced net charge-offs totaling $15 million during FY2023, which resulted in an annualized net charge-off rate of 0.05% for FY2023.
We had one loan totaling $49 million classified as nonperforming as of May 31, 2024. In comparison, we had two loans totaling $89 million classified as nonperforming as of May 31, 2023. The reduction was due to the receipts of $40 million in payments on nonperforming loans.
Our allowance for credit losses and allowance coverage ratio decreased to $49 million and 0.14%, respectively, as of May 31, 2024, from $53 million and 0.16%, respectively, as of May 31, 2023. The $4 million decrease in the allowance for credit losses reflected a reduction in the asset-specific allowance of $8 million, partially offset by an increase in the collective allowance of $4 million.
Financing and Liquidity
Total debt outstanding increased by $1,719 million, or 6%, to $32,718 million as of May 31, 2024, primarily due to borrowings to fund the increase in loans to our members . We issued an aggregate principal amount of long-term dealer medium-term notes totaling $3,750 million during FY2024, of which $3,150 million was at an average fixed interest rate of 5.05% with an average term of four years and $600 million was at floating interest rates with an average term of two years. We also issued $100 million of 7.125% subordinated deferrable debt due in 2053 during FY2024. Outstanding dealer commercial paper was $505 million as of May 31, 2024.
During FY2024, Fitch Ratings (“Fitch”), S&P Global Inc.(“S&P”) and Moody’s Investors Service (“Moody’s”) affirmed CFC’s credit ratings and stable outlook.
Our available liquidity consists of cash and cash equivalents, investments in debt securities and availability under committed bank revolving line of credit agreements, committed loan facilities under the USDA Guaranteed Underwriter Program and a revolving note purchase agreement with Farmer Mac. As of May 31, 2024, our available liquidity totaled $6,695 million and was $314 million below our total scheduled debt obligations over the next 12 months of $7,009 million. In addition to our existing available liquidity, we expect to re ceive $1,552 million from scheduled long-term loan principal payments over the next 12 months.
We believe we can continue to roll ove r our member short-term investments of $3,328 million based on our expectation that our members will continue to reinvest their excess cash primarily in short-term investment products offered by CFC. Our members historically have maintained a relatively stable level of short-term investments in CFC. Member short-term investments in CFC have averaged $3,530 million over the last 12 fiscal quarter-end reporting periods. Our available liquidity as of May 31, 2024 was $3,014 million in excess of, or 1.8 tim es, our total scheduled debt obligations, excluding member short-term investments, over the next 12 months of $3,681 million.
Electric Cooperative Industry Trends and Developments
Emerging developments and trends in the electric cooperative sector continue to present opportunities as well as challenges for our electric cooperative members. These trends include (i) increased federal government programs and policies for
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electric utilities; (ii) increased electricity demand; (iii) grid reliability risk; (iv) increased focus on enhancing electric system resiliency and reliability; (v) evolving cooperative focus on clean energy supply investments; and (vi) expanded investments by many electric cooperatives to deploy broadband services.
Increased Federal Government Programs and Policies
The federal government has created various funding opportunities that electric cooperatives may take advantage of when deploying renewable energy and other clean energy technologies. The 2022 Inflation Reduction Act (“IRA”) included programs such as the USDA Empowering Rural American (“New ERA”) program, the Powering Affordable Clean Energy (“PACE”) program and a direct-pay tax credits for electric cooperatives. The New ERA program currently provides $9.7 billion specifically for electric cooperatives to build new clean energy systems.
The federal government has also finalized rules on the EPA greenhouse gas emission requirements for new and existing coal and natural gas power plants. CFC and electric cooperative partners are monitoring the potential impact to cooperatives. It is highly likely that the rule will be litigated similar to the Obama Administration’s Clean Power Plan.
Increased Electricity Demand
According to S&P, electricity demand is forecasted to grow substantially in all U.S. regions through 2040. Demand growth is driven primarily by new data centers and new manufacturing facilities in the coming decade followed by strong electric vehicle growth and beneficial electrification trends.
Rural electric cooperatives have become increasingly supportive of beneficial electrification, which refers to the replacement of fossil fuel-powered systems with electrical ones such as electric vehicles and heat pumps in a way that reduces overall emissions, while providing benefits to the environment and to households. The increased support among electric cooperatives reflects an expectation that beneficial electrification will result in increased sales, while also saving money for members and reducing carbon emissions.
Certain areas of the country will experience more growth than others, but we can expect significant investments in new power supply, transmission, and other related infrastructure in order to meet this expected demand.
Grid Reliability Risk
The 2023 Long-Term Reliability Assessment by the North American Electric Reliability Corporation (“NERC”) highlights the key risks to grid reliability. The report emphasizes challenges such as extreme weather events, including hurricanes, winter storms, and heatwaves, which can strain grid infrastructure and cause widespread outages. Additionally, the transition to cleaner energy sources presents reliability concerns due to the intermittent nature of renewable generation and its impact on grid stability. Cybersecurity threats also loom large, with increasing sophistication in attacks targeting critical infrastructure.
Increased Focus on Enhancing Electric System Resiliency and Reliability
We have observed an increase in capital investments by electric cooperatives to proactively strengthen existing electric systems as well as replace systems in the aftermath of damages from weather-related incidents, including hurricanes, winter storms and wildfires. The adverse impact on electric systems from weather-related incidents has resulted in a heightened awareness by electric cooperatives of the need to focus attention on making infrastructure upgrades to improve both the resiliency and reliability of electric systems.
Evolving Cooperative Focus on Clean Energy Supply Investments
Many electric power supply and electric distribution cooperatives are increasingly focused on efforts to identify potential opportunities to increase investments in renewable power supply, transmission and storage. This includes both on-balance sheet construction of renewable generation and off-balance sheet acquisition of renewable power through power purchase agreements. According to a report pub lished in April 2024 by NRECA, el ectric cooperatives have nearly doubled their
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renewable capacity from 8.2 gigawatts to 15.8 gigawatts since 2016, including adding over 1.3 gigawatts of renewable capacity in 2023 alone.
Expanded Investments to Deploy Broadband Services
Many rural electric distribution cooperatives have made or are making infrastructure investments that include building fiber optic lines to improve electric grid system reliability, efficiency and cost savings, as fiber operations offer enhanced communication to monitor electric systems, identify outages and speed restoration. Some of these electric cooperatives are leveraging these fiber assets to offer access to broadband services to the communities they serve, either directly or by partnering with local telecommunication companies and others. We are currently aware of 212 broadband projects by different CFC member cooperatives, and we financed or are financing 125 of these 212 broadband projects. Capital expenditures for the completion of these 212 broadband projects are expected to total approximately $12,834 million. We believe that the capital expenditures for the completion of the broadband projects that we financed or are financing will total approximately $5,197 million. Our aggregate loans outstanding to CFC electric distribution cooperative members relating to broadband projects, which we started tracking in October 2017, increased to approximately $3,103 million as of May 31, 2024, from approximately $2,355 million as of May 31, 2023. The three states with the largest CFC loans outstanding for broadband projects were Arkansas, Missouri and Indiana , and broadband loans outstanding for these states totaled $396 million, $337 million and $334 million, respectively, as of May 31, 2024. Many of these broadband projects are also financially supported by various states and the federal government through grant programs, which reduces the investment risk for our electric cooperative members. We expect our member electric cooperatives to continue in their efforts to expand broadband access to unserved and underserved communities.
We believe the above trends and current investment priorities of our electric cooperative members will require funding and may result in an increased demand for capital from CFC.
Outlook
As further described below in the “Liquidity Risk—Projected Near-Term Sources and Uses of Funds” section, we currently anticipate net long-term loan growth of $1,628 million over th e next 12 months. We also expect that our variable-rate line of credit loans outstanding will remain at approximately the current level over the same period.
Macroeconomic Outlook
In June 2024, the Federal Open Market Committee (“FOMC”) of the Federal Reserve signaled the expectation of no additional increases in the federal funds rate. The FOMC expects the U.S. economy to remain strong in 2024, with the median projected gross domestic product (“GDP”) growth rate at 2.1%, unchanged from its March 2024 projection. In addition, the Federal Reserve revised higher its inflation expectations again, with the Personal Consumption Expenditures (“PCE”) inf lation for December 2024 now expected at +2.6% (up from +2.4% in March). The FOMC projection for U.S. unemployment in 2024 remains unchanged at 4%. Despite a fairly positive economic outlook and inflation remaining above the 2% long-term target, the FOMC projects 25 basis points of federal funds rate cuts in 2024, bringing the target rate to 5.00% - 5.25% by December 31, 2024, down from 75 basis points in federal funds rate cuts in 2024 that the committee projected in March. Further, the FOMC projects additional federal funds rate cuts in 2025, bringing the target rate to 4.00% - 4.25% by December 2025. Consensus market outlook for interest rates indicates declining interest rates across the yield curve in 2024 and 2025. Although the yield curve is expected to remain inverted throughout calendar year 2024, given the expected drop in short-term interest rates, the yield curve inversion is expected to narrow in 2024 and end in 2025.
Projected Reported Results
Based on our current forecast assumptions, including the yield curve forecast noted above, we project i ncreases in our reported net in terest income and net interest yield over the next 12 months compared with the 12-month period ended May 31, 2024. See “Market Risk—Interest Rate Risk Assessment” for an additional discussion.
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Projected Non-GAAP Adjusted Results
Based on our current forecast assumptions, including the yield curve forecast noted above, we project:
• Decreases in our adjusted net interest income and adjusted net interest yield over the next 12 months relative to the 12-month period ended May 31, 2024, primarily due to the current yield curve assumptions and our balance sheet position. See “Market Risk—Interest Rate Risk Assessment” for an additional discussion.
• Decreases in our adjusted net income and adjusted TIER over the next 12 months, primarily attributable to increased operating expenses and a projected decrease in adjusted net interest income.
• Our adjusted debt-to-equity ratio will remain above our target of 6-to-1, primarily due to the projected increase in total debt outstanding to fund anticipated growth in our loan portfolio.
As stated above, we exclude the impact of unrealized derivative forward fair value gains and losses from our non-GAAP financial measures. As the majority of our swaps are long-term with an average remaining life of approximately 14 years as of May 31, 2024 , the unrealized periodic derivative forward value gains and losses are largely based on future expected changes in l onger-term interest rates, which we are unable to accurately predict for each reporting period over the next 12 months. Due to the difficulty in predicting these unrealized amounts, we are unable to provide without unreasonable effort a reconciliation of our forward-looking adjusted financial measures to the most directly comparable GAAP financial measures.
CONSOLIDATED RESULTS OF OPERATIONS
This section provides a comparative discussion of our consolidated results of operations betwe en FY2024 and FY2023. Following this section, we provide a discussion and analysis of material changes in amounts reported on our consolidated balance sheet as of May 31, 2024 and 2023. You should read these sections together with our “Executive Summary—Outlook” where we discuss trends and other factors that we expect will affect our future results of operations. See “Item 7. MD&A—Consolidated Results of Operations” in our 2023 Form 10-K for a comparative discussion of our consolidated results of operations between FY2023 and FY2022.
Net Interest Income
Net interest income, which is our largest source of revenue, represents the difference between the interest income earned on our interest-earning assets and the interest expense on our interest-bearing liabilities. Our net interest yield represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities plus the impact of non-interest-bearing funding. We expect net interest income and our net interest yield to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities. We do not fund each individual loan with specific debt. Rather, we attempt to minimize costs and maximize efficiency by proportionately funding large aggregated amounts of loans.
Table 3 presents average balances for FY2024, FY2023 and FY2022, and for each major category of our interest-earning assets and interest-bearing liabilities, the interest income earned or interest expense incurred, and the average yield or cost. Table 3 also presents non-GAAP adjusted interest expense, adjusted net interest income and adjusted net interest yield, which reflect the inclusion of net accrued periodic derivative cash settlements expense in interest expense. We provide reconciliations of our non-GAAP financial measures to the most comparable U.S. GAAP financial measures under “Non-GAAP Financial Measures and Reconciliations.”
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Table 3 : Average Balances, Interest Income/Interest Expense and Average Yield/Cost
Year Ended May 31,
(Dollars in thousands) 2024 2023 2022
Assets: Average Balance Interest Income/Expense Average Yield/Cost Average Balance Interest Income/Expense Average Yield/Cost Average Balance Interest Income/Expense Average Yield/Cost
Long-term fixed-rate loans (1)
$ 29,430,001 $ 1,269,716 4.31 % $ 27,743,512 $ 1,139,604 4.11 % $ 26,125,791 $ 1,062,958 4.07 %
Long-term variable-rate loans 900,005 64,050 7.12 868,087 46,045 5.30 749,131 16,895 2.26
Line of credit loans 3,346,109 234,387 7.00 2,842,700 146,031 5.14 2,234,453 46,887 2.10
Other, net (2)
— (1,704) — — (1,536) — — (1,448) —
Total loans 33,676,115 1,566,449 4.65 31,454,299 1,330,144 4.23 29,109,375 1,125,292 3.87
Cash, time deposits and investment securities
699,185 26,902 3.85 783,340 21,585 2.76 762,489 15,951 2.09
Total interest-earning assets $ 34,375,300 $ 1,593,351 4.64 % $ 32,237,639 $ 1,351,729 4.19 % $ 29,871,864 $ 1,141,243 3.82 %
Other assets, less allowance for credit losses (3)
1,103,602 942,621 466,329
Total assets (3)
$ 35,478,902 $ 33,180,260 $ 30,338,193
Liabilities:
Commercial paper $ 2,412,511 $ 132,746 5.50 % $ 2,718,934 $ 98,751 3.63 % $ 2,565,629 $ 11,086 0.43 %
Other short-term borrowings 1,763,308 92,147 5.23 2,102,341 67,210 3.20 2,006,020 7,179 0.36
Short-term borrowings (4)
4,175,819 224,893 5.39 4,821,275 165,961 3.44 4,571,649 18,265 0.40
Medium-term notes 7,829,126 327,014 4.18 6,206,717 198,711 3.20 4,854,421 108,769 2.24
Collateral trust bonds 7,223,988 275,956 3.82 7,366,266 271,247 3.68 7,050,468 248,413 3.52
Guaranteed Underwriter Program notes payable
6,766,949 216,379 3.20 6,364,870 185,097 2.91 6,165,206 169,166 2.74
Farmer Mac notes payable 3,694,975 158,627 4.29 3,166,098 108,557 3.43 3,059,946 55,245 1.81
Other notes payable 2,219 106 4.78 3,424 88 2.57 6,774 155 2.29
Subordinated deferrable debt 1,222,951 82,611 6.76 991,488 53,119 5.36 986,407 51,541 5.23
Subordinated certificates 1,209,490 53,502 4.42 1,230,625 53,728 4.37 1,245,120 53,980 4.34
Total interest-bearing liabilities $ 32,125,517 $ 1,339,088 4.17 % $ 30,150,763 $ 1,036,508 3.44 % $ 27,939,991 $ 705,534 2.53 %
Other liabilities (3)
533,544 618,422 897,751
Total liabilities (3)
32,659,061 30,769,185 28,837,742
Total equity (3)
2,819,841 2,411,075 1,500,451
Total liabilities and equity (3)
$ 35,478,902 $ 33,180,260 $ 30,338,193
Net interest spread (5)
0.47 % 0.75 % 1.29 %
Impact of non-interest-bearing funding (6)
0.27 0.23 0.17
Net interest income/net interest yield (7)
$ 254,263 0.74 % $ 315,221 0.98 % $ 435,709 1.46 %
Adjusted net interest income/adjusted net interest yield:
Interest income $ 1,593,351 4.64 % $ 1,351,729 4.19 % $ 1,141,243 3.82 %
Interest expense 1,339,088 4.17 1,036,508 3.44 705,534 2.53
Add: Net periodic derivative cash settlements interest (income) expense (8)
(127,166) (1.67) (33,577) (0.44) 101,385 1.21
Adjusted interest expense/adjusted average cost (9)
$ 1,211,922 3.77 % $ 1,002,931 3.33 % $ 806,919 2.89 %
Adjusted net interest spread (7)
0.87 % 0.86 % 0.93 %
Impact of non-interest-bearing funding (6)
0.24 0.22 0.19
Adjusted net interest income/adjusted net interest yield (10)
$ 381,429 1.11 % $ 348,798 1.08 % $ 334,324 1.12 %
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(1) Interest income on long-term, fixed-rate loans includes loan conversion fees, which are generally deferred and recognized as interest income using the effective interest method.
(2) Consists of late payment fees and net amortization of deferred loan fees and loan origination costs.
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(3) The average balance represents average monthly balances, which is calculated based on the month-end balance as of the beginning of the reporting period and the balances as of the end of each month included in the specified reporting period.
(4) Short-term borrowings reported on our consolidated balance sheets consist of borrowings with an original contractual maturity of one year or less. However, short-term borrowings presented in Table 3 consist of commercial paper, select notes, daily liquidity fund notes and secured borrowings under repurchase agreemen ts. Short-term borrowings presented on our consolidated balance sheets related to medium-term notes, Farmer Mac notes payable and other notes payable are reported in the respective category for presentation purposes in Table 3. The period-end amounts reported as short-term borrowings on our consolidated balances sheets, which are excluded from the calculation of average short-term borrowings presented in Table 3, totaled $1,021 million, $367 million and $417 million as of May 31, 2024, 2023 and 2022, respectively.
(5) Net interest spread represents the difference between the average yield on total average interest-earning assets and the average cost of total average interest-bearing liabilities. Adjusted net interest spread represents the difference between the average yield on total average interest-earning assets and the adjusted average cost of total average interest-bearing liabilities.
(6) Includes other liabilities and equity.
(7) Net interest yield is calculated based on net interest income for the period divided by total average interest-earning assets for the period.
(8) Represents the impact of net periodic contractual interest amounts on our interest rate swaps during the period. This amount is added to interest expense to derive non-GAAP adjusted interest expense. The average (benefit)/cost associated with derivatives is calculated based on net periodic swap settlement interest amount during the period divided by the average outstanding notional amount of derivatives during the period. The average outstanding notional amount of interest rate swaps was $7,597 million, $7,668 million and $8,406 million for FY2024, FY2023 and FY2022, respectively.
(9) Adjusted interest expense consists of interest expense plus net periodic derivative cash settlements interest income (expense) during the period. Net periodic derivative cash settlements interest income (expense) is reported on our consolidated statements of operations as a component of derivative gains (losses). Adjusted average cost is calculated based on the adjusted interest expense for the period divided by total average interest-bearing liabilities during the period.
(10) Adjusted net interest yield is calculated based on adjusted net interest income for the period divided by total average interest-earning assets for the period.
Table 4 displays the change in net interest income between periods and the extent to which the variance for each category of interest-earning assets and interest-bearing liabilities is attributable to (i) changes in volume, which represents the change in the average balances of our interest-earning assets and interest-bearing liabilities or volume, and (ii) changes in the rate, which represents the change in the average interest rates of these assets and liabilities. The table also presents the change in adjusted net interest income between periods.
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Table 4: Rate/Volume Analysis of Changes in Interest Income/Interest Expense
2024 versus 2023
2023 versus 2022
Total Variance Due To: (1)
Total Variance Due To: (1)
(Dollars in thousands) Variance Volume Rate Variance Volume Rate
Interest income:
Long-term fixed-rate loans $ 130,112 $ 69,275 $ 60,837 $ 76,646 $ 65,819 $ 10,827
Long-term variable-rate loans 18,005 1,693 16,312 29,150 2,683 26,467
Line of credit loans 88,356 25,860 62,496 99,144 12,763 86,381
Other, net (168) — (168) (88) — (88)
Total loans 236,305 96,828 139,477 204,852 81,265 123,587
Cash, time deposits and investment securities
5,317 (2,319) 7,636 5,634 436 5,198
Total interest income $ 241,622 $ 94,509 $ 147,113 $ 210,486 $ 81,701 $ 128,785
Interest expense:
Commercial paper $ 33,995 $ (11,129) $ 45,124 $ 87,665 $ 662 $ 87,003
Other short-term borrowings 24,937 (10,839) 35,776 60,031 345 59,686
Short-term borrowings 58,932 (21,968) 80,900 147,696 1,007 146,689
Medium-term notes 128,303 51,942 76,361 89,942 30,300 59,642
Collateral trust bonds 4,709 (5,239) 9,948 22,834 11,127 11,707
Guaranteed Underwriter Program notes payable
31,282 11,693 19,589 15,931 5,479 10,452
Farmer Mac notes payable 50,070 18,134 31,936 53,312 1,916 51,396
Other notes payable 18 (31) 49 (67) (77) 10
Subordinated deferrable debt 29,492 12,401 17,091 1,578 265 1,313
Subordinated certificates (226) (923) 697 (252) (628) 376
Total interest expense 302,580 66,009 236,571 330,974 49,389 281,585
Net interest income $ (60,958) $ 28,500 $ (89,458) $ (120,488) $ 32,312 $ (152,800)
Adjusted net interest income:
Interest income $ 241,622 $ 94,509 $ 147,113 $ 210,486 $ 81,701 $ 128,785
Interest expense 302,580 66,009 236,571 330,974 49,389 281,585
Net periodic derivative cash settlements interest (income) expense (2)
(93,589) 309 (93,898) (134,962) (8,905) (126,057)
Adjusted interest expense (3)
208,991 66,318 142,673 196,012 40,484 155,528
Adjusted net interest income $ 32,631 $ 28,191 $ 4,440 $ 14,474 $ 41,217 $ (26,743)
____________________________
(1) The changes for each category of interest income and interest expense represent changes in either average balances (volume) or average rates for both interest-earning assets and interest-bearing liabilities. We allocate the amount attributable to the combined impact of volume and rate to the rate variance.
(2) For the net periodic derivative cash settlements interest amount, the variance due to average volume represents the change in the net periodic derivative cash settlements interest amount resulting from the change in the average notional amount of derivative contracts outstanding. The variance due to average rate represents the change in the net periodic derivative cash settlements amount resulting from the net difference between the average rate paid and the average rate received for interest rate swaps during the period.
(3) See “Non-GAAP Financial Measures and Reconciliations” for additional information on our adjusted non-GAAP financial measures.
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Reported Net Interest Income
Reported net interest income of $254 million for FY2024 decreased $61 million, or 19%, from FY2023, driven by a decrease in the net interest yield of 24 basis points, or 24%, to 0.74%, partially offset by an increase in average interest-earning assets of $2,138 million, or 7%.
• Average Interest-Earning Assets : The increase in average interest-earning assets of 7% during FY2024 was primarily attributable to growth in average total loans of $2,222 million, or 7%, from FY2023, driven primarily by an increase in average long-term fixed-rate loans of $1,686 million and an increase in average line of credit loans of $503 million, as members continued to advance loans to fund capital expenditures and for working capital purposes.
• Net Interest Yield: The decrease in the net interest yield of 24 basis points, or 24% , was primarily attributable to the combined impact of an increase in our average cost of borrowings of 73 basis points to 4.17%, which was partially offset by an increase in the average yield on interest-earning assets of 45 basis points to 4.64% and an increase in the benefit from non-interest-bearing funding of 4 basis point to 0.27%. Our average yield on interest-earning assets and average cost of borrowings rose mainly due to the sustained increase in the federal funds rate, which increased 25 basis points since May 31, 2023 . The increase in average yields on line of credit and variable-rate loans was the primary driver for the increase in the average yield on interest-earning assets. Meanwhile, our average cost of borrowings increased due to higher interest rates on our short-term and variable-rate borrowings.
Adjusted Net Interest Income
Adjusted net interest income of $381 million for FY2024 increased $32 million , or 9%, from FY2023, driven by the combined impact of an increase in average interest-earning assets of $2,138 million, or 7%, and an increase in the adjusted net interest yield of 3 basis points, or 3%, to 1.11%.
• Average Interest-Earning Assets: The increase in average interest-earning assets of 7% during FY2024 was driven by the growth in average total loans of $2,222 million, or 7%, from FY2023, primarily attributable to an increase in average long-term fixed-rate and line of credit loans as discussed above.
• Adjusted Net Interest Yield: The increase in the adjusted net interest yield of 3 basis points, or 3%, reflected the combined impact of an increase in the average yield on interest-earning assets of 45 basis points to 4.64% and an increase in the benefit from non-interest bearing funding of 2 basis points to 0.24%, partially offset by an increase in our adjusted average cost of borrowings of 44 basis points to 3.77%. The increase in both average yield on interest-earning assets and adjusted average cost of borrowings was attributable to the continued high interest-rate environment during FY2024, as discussed above.
Derivative Cash Settlements
We include the net periodic derivative cash settlements interest income (expense) amounts on our interest rate swaps in the calculation of our adjusted average cost of borrowings, which, as a result, also impacts the calculation of adjusted net interest income and adjusted net interest yield. Because our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps, the net periodic derivative cash settlements interest income (expense) amounts generally change based on changes in the floating interest amount received each period. When floating rates increase during the period, the floating interest amounts received on our pay-fixed swaps increase and, conversely, when floating rates decrease, the floating interest amounts received on our pay-fixed swaps decrease. We recorded net periodic derivative cash settlements interest income of $127 million and $34 million for FY2024 and FY2023, respectively, compared with derivative cash settlements expense of $101 million for FY2022. The increase in derivative cash settlements interest income between FY2024 and FY2023 was due to the higher floating rates in FY2024 , compared with FY2023, respectively.
See “Non-GAAP Financial Measures and Reconciliations” for additional information on our non-GAAP financial measures, including a reconciliation of these measures to the most comparable U.S. GAAP financial measures.
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Provision for Credit Losses
Our p rovision for credit losses each period is driven by changes in our measurement of lifetime expected credit losses for our loan portfolio recorded in the allowance for credit losses. Our allowance for credit losses and allowance coverage ratio was $49 million and 0.14%, respectively, as of May 31, 2024. In comparison, our allowance for credit losses and allowance coverage ratio was $53 million and 0.16%, respectively, as of May 31, 2023.
We recorded a benefit for credit losses of $5 million f or FY2024, resulting from a decrease of $8 million in the asset-specific allowance for a nonperforming CFC power supply loan and a recovery of $1 million attributable to additional loan payments received from Brazos Electric Power Cooperative, Inc. (“Brazos”) and its wholly-owned subsidiary Brazos Sandy Creek Electric Cooperative Inc. (“Brazos Sandy Creek”), partially offset by an increase in the collective allowance of $4 million. The increase in the collective allowance was due to the growth in our loan portfolio, a slight decline in the overall credit quality of our loan portfolio and slightly higher expected default rates derived from a third-party utility sector default data used in estimating the allowance for credit losses. In contrast, we recorded a provision for credit losses of $1 million for FY2023. The provision for credit losses for FY2023 was driven primarily from an increase in the asset-specific allowance for loans to Brazos, Brazos Sandy Creek and for a nonperforming CFC power supply loan, attributable to a reduction and timing change in the expected payments on this loan.
We discuss our methodology for estimating the allowance for credit losses in “Note 1—Summary of Significant Accounting Policies—Allowance for Credit Losses—Loan Portfolio.” We also provide additional information on our allowance for credit losses below under section “Credit Risk—Allowance for Credit Losses” and “Note 5—Allowance for Credit Losses” in this Report.
Non-Interest Income
Non-interest income consists of fee and other income, gains and losses on derivatives not accounted for in hedge accounting relationships, and gains and losses on equity and debt investment securities, which consists of both unrealized and realized gains and losses.
Table 5 presents the components of non-interest income (loss) recorded in our consolidated statements of operations.
Table 5: Non-Interest Income
Year Ended May 31,
(Dollars in thousands) 2024 2023 2022
Non-interest income components:
Fee and other income $ 22,792 $ 18,134 $ 17,193
Derivative gains 392,037 285,844 456,482
Investment securities gains (losses)
10,772 (4,974) (30,179)
Total non-interest income $ 425,601 $ 299,004 $ 443,496
The significant variance in non-interest income between fiscal years was primarily attributable to changes in the derivative gains recognized in our consolidated statements of operations. In addition, we experienced a favorable shift from losses to gains recorded on our debt and equity investment securities of $16 million for FY2024 compared with FY2023. We expect period-to-period market fluctuations in the fair value of our equity and debt investment securities, which we report together with realized gains and losses from the sale of investment securities on our consolidated statements of operations.
Derivative Gains (Losses)
As of May 31, 2024 and 2023 , our derivatives portfolio included interest rate swap agreements not designated for hedge accounting, composed of pay-fixed swaps and receive-fixed swaps, with the benchmark variable rate for the floating rate payments based on daily compounded Secured Overnight Financing Rate (“SOFR”) as of May 31, 2024 . Additionally, Treasury locks may be used to manage the interest rate risk associated with future debt issuance or repricing and are typically designated as cash flow hedges.
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The total notional amount for our interest rate swaps was $7,366 million and $7,816 million as of May 31, 2024 and 2023, respectively. The portfolio was primarily composed of longer-dated pay-fixed swaps, which accounted for approximately 79% and 78% of the outstanding notional amount as of May 31, 2024 and 2023, respectively. Consequently, changes in medium- and longer-term swap rates generally have a more pronounced impact on the net fair value o f our swap portfolio. A s of both May 31, 2024 and May 31, 2023, the a verage remaining maturity of our pay-fixed and recei ve-fixed swaps was 18 years and two years, respectively.
Table 6 presents the components of net derivative gains (losses) recorded in our consolidated statements of operations. Derivative cash settlements interest income (expense) represents the net periodic contractual interest amount for our interest rate swaps during the reporting period. Derivative forward value gains (losses) represent the change in fair value of our interest rate swaps during the applicable reporting period due to changes in expected future interest rates over the remaining life of our derivative contracts.
Table 6: Derivative Gains (Losses)
Year Ended May 31,
(Dollars in thousands) 2024 2023 2022
Derivative gains attributable to:
Derivative cash settlements interest income (expense) $ 127,166 $ 33,577 $ (101,385)
Derivative forward value gains 264,871 252,267 557,867
Derivative gains $ 392,037 $ 285,844 $ 456,482
We recorded derivative gains of $392 million for FY2024, primarily attributable to increases in the medium- and longer-term swap interest rates during FY2024. In comparison, we recorded derivative gains of $286 million for FY2023, attributable to increases in interest rates across the entire swap curve during the period.
During FY2023, we executed two Treasury lock agreements with an aggregate notional amount of $300 million to hedge interest rate risk on anticipated debt issuances. The Treasury locks were designated as a cash flow hedge of a forecasted transaction. We recorded a settlement gain of $8 million in AOCI upon the termination of the Treasury locks during FY2023. As the hedged forecasted transaction did not occur in the time period specified in the hedge documentation, we reclassified the $8 million gain from AOCI to earnings as a component of derivative gains (losses) in our consolidated statements of operations during FY2024. We did not have any derivatives designated as accounting hedges as of May 31, 2024 or May 31, 2023.
We present comparative swap curves, which depict the relationship between swap rates at varying maturities, for our reported periods in Table 7 below.
Comparative Swap Curves
Table 7 provides comparative swap curves as of May 31, 2024, 2023, 2022 and 2021.
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Table 7: Comparative Swap Curves
___________________________
Benchmark rates obtained from Bloomberg.
See “Note 1—Summary of Significant Accounting Policies—Derivative Instruments” and “Note 10—Derivative Instruments and Hedging Activities” for additional information on our derivative instruments. Also refer to “Note 14—Fair Value Measurement” for information on how we measure the fair value of our derivative instruments.
Non-Interest Expense
Non-interest expense consists of salaries and employee benefit expense, general and administrative expenses, gains and losses on the early extinguishment of debt and other miscellaneous expenses.
Table 8 presents the components of non-interest expense recorded in our consolidated statements of operations.
Table 8: Non-Interest Expense
Year Ended May 31,
(Dollars in thousands) 2024 2023 2022
Non-interest expense components:
Salaries and employee benefits $ (67,401) $ (59,011) $ (51,863)
Other general and administrative expenses (58,970) (50,620) (43,323)
Operating expenses (126,371) (109,631) (95,186)
Losses on early extinguishment of debt (1,025) (117) (754)
Other non-interest expense (2,164) (1,487) (1,552)
Total non-interest expense $ (129,560) $ (111,235) $ (97,492)
Non-interest expense of $130 million for FY2024, increased $18 million, or 16%, from FY2023, primarily attributable to an increase in operating expenses, driven by higher expenses recorded for salaries and benefits, information technology, and
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depreciation and amortization expenses. During FY2024, we redeemed $100 million of our $400 million subordinated deferrable debt due 2043, at par plus accrued interest. As a result, we recognized $1 million of losses on early extinguishment of debt related to the unamortized debt issuance costs.
Net Income (Loss) Attributable to Noncontrolling Interests
Net income (loss) attributable to noncontrolling interests represents 100% of the results of operations of NCSC and RTFC, as the members of NCSC and RTFC own or control 100% of the interest in their respective companies. On December 1, 2023, RTFC completed the sale of its business to NCSC and subsequently CFC concluded that it is no longer the primary beneficiary of RTFC and accordingly, deconsolidated RTFC from it s consolidated financial statements. The fluctuations in net income (loss) attributable to noncontrolling interests are primarily due to changes in the fair value of NCSC’s derivative instruments recognized in NCSC’s earnings.
We recorded a net income attributable to noncontrolling interests of $1 million and $3 million for FY2024 and FY2022, respectively. Our net income attributable to noncontrolling interests was less than $1 million for FY2023.
CONSOLIDATED BALANCE SHEET ANALYSIS
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.
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Table 9: Loans—Outstanding Amount by Member Class and Loan Type
May 31,
(Dollars in thousands) 2024 2023
Member class: Amount % of Total Amount % of Total Change
CFC:
Distribution $ 27,104,463 78 % $ 25,437,077 78 % $ 1,667,386
Power supply 5,641,898 16 5,437,242 17 204,656
Statewide and associate 237,346 1 200,368 1 36,978
Total CFC
32,983,707 95 31,074,687 96 1,909,020
NCSC:
Electric
945,880 3 956,874 3 (10,994)
Telecom
598,597 2 487,788 1 110,809
Total NCSC
1,544,477 5 $ 1,444,662 4 99,815
Total loans outstanding (1)
34,528,184 100 32,519,349 100 2,008,835
Deferred loan origination costs—CFC (2)
14,101 — 12,737 — 1,364
Loans to members $ 34,542,285 100 % $ 32,532,086 100 % $ 2,010,199
Loan type:
Long-term loans:
Fixed rate
$ 30,266,043 88 % $ 28,371,358 87 % $ 1,894,685
Variable rate
839,458 2 1,024,653 3 (185,195)
Total long-term loans 31,105,501 90 29,396,011 90 1,709,490
Line of credit loans 3,422,683 10 3,123,338 10 299,345
Total loans outstanding (1)
34,528,184 100 32,519,349 100 2,008,835
Deferred loan origination costs—CFC (2)
14,101 — 12,737 — 1,364
Loans to members $ 34,542,285 100 % $ 32,532,086 100 % $ 2,010,199
____________________________
(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 provided for the refinancing of loans made by other lenders, and 6% was provided for other purposes, primarily business acquisitions. In com parison, long-term loan advances totaled $3,297 million during FY2023, of which approximately 95% was provided to members for capital expenditures and 2% was provided for 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.
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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
Debt Product Type Maturity Range Market Secured/Unsecured
Short-term funding programs:
Commercial paper 1 to 270 days Capital markets, members and affiliates Unsecured
Select notes 30 to 270 days Members and affiliates Unsecured
Daily liquidity fund notes Demand note Members and affiliates Unsecured
Securities sold under repurchase agreements 1 to 90 days Capital markets Secured
Other funding programs:
Medium-term notes 9 months to 30 years Capital markets, members and affiliates Unsecured
Collateral trust bonds (1)
Up to 30 years Capital markets Secured
Guaranteed Underwriter Program notes payable (2)
Up to 30 years U.S. government Secured
Farmer Mac notes payable (3)
Up to 30 years Other noncapital markets Secured
Other notes payable (4)
Up to 3 years Other noncapital markets
Both
Subordinated deferrable debt (5)
Up to 45 years Capital markets Unsecured
Members’ subordinated certificates (6)
Up to 100 years Members Unsecured
Revolving credit agreements Up to 5 years Bank institutions Unsecured
____________________________
(1) Collateral trust bonds are secured by the pledge of permitted investments and eligibl e 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.
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(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.
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Table 11: Debt—Total Debt Outstanding and Weighted-Average Interest Rates
May 31,
2024 2023
(Dollars in thousands) Outstanding Amount Weighted-
Average
Interest Rate Outstanding Amount Weighted-
Average
Interest Rate Change
Debt product type:
Commercial Paper:
Members, at par $ 1,158,020 5.08 % $ 1,017,431 4.76 % $ 140,589
Dealer, net of discounts 504,631 5.41 1,293,167 5.32 (788,536)
Total commercial paper 1,662,651 5.18 2,310,598 5.07 (647,947)
Select notes to members 1,274,066 5.36 1,630,799 4.96 (356,733)
Daily liquidity fund notes to members 375,191 4.60 238,329 4.35 136,862
Medium-term notes:
Members, at par 879,626 5.39 731,809 4.31 147,817
Dealer, net of discounts 8,947,076 4.38 6,131,608 3.52 2,815,468
Total medium-term notes 9,826,702 4.47 6,863,417 3.60 2,963,285
Collateral trust bonds 6,739,921 3.49 7,577,973 3.46 (838,052)
Guaranteed Underwriter Program notes payable 6,491,814 3.27 6,720,643 3.09 (228,829)
Farmer Mac notes payable 3,863,510 4.34 3,149,898 3.92 713,612
Other notes payable — — 1,166 2.91 (1,166)
Subordinated deferrable debt 1,286,861 6.63 1,283,436 6.64 3,425
Members’ subordinated certificates:
Membership subordinated certificates 628,625 4.96 628,614 4.94 11
Loan and guarantee subordinated certificates 322,863 3.02 348,349 2.91 (25,486)
Member capital securities 246,163 5.01 246,163 5.01 —
Total members’ subordinated certificates 1,197,651 4.44 1,223,126 4.38 (25,475)
Total debt outstanding $ 32,718,367 4.17 % $ 30,999,385 3.83 % $ 1,718,982
Security type:
Secured debt 52 % 56 %
Unsecured debt 48 44
Total 100 % 100 %
Funding source:
Members 15 % 16 %
Other non-capital markets:
Guaranteed Underwriter Program notes payable 20 22
Farmer Mac notes payable 12 10
Total other non-capital markets
32 32
Capital markets 53 52
Total 100 % 100 %
Interest rate type:
Fixed-rate debt 82 % 80 %
Variable-rate debt 18 20
Total 100 % 100 %
Interest rate type including swaps impact:
Fixed-rate debt (1)
95 % 94 %
Variable-rate debt (2)
5 6
Total 100 % 100 %
Maturity classification: (3)
Short-term borrowings 13 % 15 %
Long-term and subordinated debt (4)
87 85
Total 100 % 100 %
____________________________
(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.
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(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. W e 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
May 31, Change
2024 2023
(Dollars in thousands) Amount % of Total (1)
Amount % of Total (1)
Member investment product type:
Commercial paper $ 1,158,020 70 % $ 1,017,431 44 % $ 140,589
Select notes 1,274,066 100 1,630,799 100 (356,733)
Daily liquidity fund notes 375,191 100 238,329 100 136,862
Medium-term notes 879,626 9 731,809 11 147,817
Members’ subordinated certificates 1,197,651 100 1,223,126 100 (25,475)
Total member investments $ 4,884,554 $ 4,841,494 $ 43,060
Percentage of total debt outstanding 15 % 16 %
____________________________
(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
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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
May 31, Change
(Dollars in thousands) 2024 2023
Equity components:
Membership fees and educational fund:
Membership fees $ 968 $ 969 $ (1)
Educational fund 2,608 2,565 43
Total membership fees and educational fund 3,576 3,534 42
Patronage capital allocated 928,232 1,006,115 (77,883)
Members’ capital reserve 1,455,564 1,202,152 253,412
Total allocated equity 2,387,372 2,211,801 175,571
Unallocated net income:
Prior fiscal year-end cumulative derivative forward value gains (1)
342,624 92,363 250,261
Current fiscal year derivative forward value gains (1)
263,591 250,261 13,330
Current fiscal year-end cumulative derivative forward value gains (1)
606,215 342,624 263,591
Other unallocated net loss (709) (709) —
Unallocated net income 605,506 341,915 263,591
CFC retained equity 2,992,878 2,553,716 439,162
Accumulated other comprehensive income (loss)
(1,416) 8,343 (9,759)
Total CFC equity 2,991,462 2,562,059 429,403
Noncontrolling interests 20,707 27,190 (6,483)
Total equity $ 3,012,169 $ 2,589,249 $ 422,920
____________________________
(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.”
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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 totalin g $47 million, of which $30 million represented 50% of the patronage capital allocation for FY2024 and $17 million represen ted 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.
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ENTERPRISE RISK MANAGEMENT
Overview
CFC has an Enterprise Risk Management (“ERM”) framework that is designed to identify, assess, monitor and manage the risks we assume in conducting our activities to serve the financial needs of our members. We face a variety of potential internal and external risks that can significantly affect our financial condition, liquidity position, reputation and ability to meet the expectations of our members, investors and other stakeholders. As a financial services company, the major categories of risk exposures inherent in our business activities include credit risk, liquidity risk, market risk and operational risk. These risk categories are summarized below.
• Credit risk is the risk that a borrower or other counterparty will be unable to meet its obligations in accordance with agreed-upon terms.
• Liquidity risk is the risk that we will be unable to fund our operations and meet our contractual financial obligations or that we will be unable to fund new loans to borrowers at a reasonable cost and tenor in a timely manner.
• Market risk is the risk that changes in market variables, such as movements in interest rates, may adversely affect the match between the timing of the contractual maturities, repricing and prepayments of our financial assets and the related financial liabilities funding those assets.
• Operational risk is the risk of loss resulting from inadequate or failed internal controls, processes, systems, human error or external events, including natural disasters or public health emergencies, such as the COVID-19 pandemic. Operational risk also includes cybersecurity risk, compliance risk, fiduciary risk, reputational risk and litigation risk.
Effective risk management is critical to our overall operations and to achieving our primary objective of providing cost-based financial products to our rural electric members while maintaining the sound financial results required to retain our investment-grade credit ratings on our rated debt instruments. In line with this, we have established a risk-management framework designed to oversee the key risks encountered in our operations and the maximum level of risk we are prepared to undertake, known as risk tolerance. This also includes risk limits and guidelines that are in alignment with CFC’s mission and strategic objectives.
Risk-Management Framework
Our ERM framework consists of a defined policy and process for managing key risks in alignment with CFC’s mission and the CFC Board of Director’s strategic objectives. The board of directors has responsibility for the oversight and strategic direction of the ERM framework and has adopted a comprehensive risk-management policy that describes the roles and responsibilities of the board and management within this framework for identifying and managing risks. In fulfilling its risk-management oversight duties, the board of directors receives periodic reports on business activities and risk-management activities from management, and periodically reviews important trends and emerging developments across key risks determined by management at its meetings. The CFC board also establishes CFC’s loan policies and has established a Loan Committee of the board comprising no fewer than six directors that reviews the performance of the loan portfolio in accordance with those policies. For additional information about the role of the CFC Board of Directors in risk governance and oversight, see “Item 10. Directors, Executive Officers and Corporate Governance.”
The Enterprise Risk Group reports to the Chief Risk Officer and collectively provides independent oversight and support in the establishment of CFC’s ERM framework, and is responsible for establishing and maintaining internal controls to mitigate key risks. In addition, we have a number of management-level risk oversight committees across the organization and groups within the organization that have a defined set of authorities and responsibilities specific to one or more risk types, including the Corporate Credit Committee, Asset Liability Committee, Cybersecurity Committee, Investment Management Committee, Information Technology Steering Committee and Disclosure Committee. The Chief Risk Officer provides reports to the CFC Board of Directors at each regularly scheduled board meeting, and more frequently as requested by the board of directors, relating to, among other things, the ongoing progress of managing key risks at CFC given the ERM framework; management’s responses and mitigation plan for any critical business risk trending negatively or
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exceeding prevailing risk limits and guidelines as identified during the risk assessment process; the status of any gaps or deficiencies in the ERM process; CFC’s overall risk universe profile and important trends; and emerging risks and opportunities previously not identified or reported.
CREDIT RISK
Our loan portfolio, which represents the largest component of assets on our balance sheet, accounts for the substantial majority of our credit risk exposure. We also engage in certain nonlending activities that may give rise to counterparty credit risk, such as entering into derivative transactions to manage interest rate risk and investment in debt and equity securities.
Credit Risk Management
We manage credit risk related to our loan portfolio consistent with credit policies established by the CFC Board of Directors and through credit underwriting, approval and monitoring processes and practices adopted by management. Our board-established credit policies include guidelines regarding the types of credit products we offer, limits on credit we extend to individual borrowers, approval authorities delegated to management, and use of syndications and loan sales. We maintain an internal risk rating system in which we assign a rating to each borrower and credit facility. We review and update the risk ratings at least annually. Assigned risk ratings inform our credit approval, borrower monitoring and portfolio review processes. Our Corporate Credit Committee approves individual credit actions within its own authority and, together with our Enterprise Risk Group, establishes standards for credit underwriting, oversees credits deemed to be higher risk, reviews assigned risk ratings for accuracy, and monitors the overall credit quality and performance statistics of our loan portfolio.
Loan Portfolio Credit Risk
Our primary credit exposure is loans to rural electric cooperatives, which provide essential electric services to end-users, the majority of which are residential customers. We also have a limited portfolio of loans to not-for-profit and for-profit telecommunication companies. The substantial majority of loans to our borrowers are long-term fixed-rate loans with terms of up to 35 years. Long-term fixed-rate loans accounted for 88% and 87% of total loans outstanding as of May 31, 2024 and 2023, respectively.
Because we lend primarily to our rural electric utility cooperative members, we have had a loan portfolio inherently subject to single-industry and single-obligor credit concentration risk since our inception in 1969. We historically, however, have experienced limited defaults and losses in our electric utility loan portfolio due to several factors. First, the majority of our electric cooperative borrowers operate in states where electric cooperatives are not subject to rate regulation. Thus, they are able to make rate adjustments to pass along increased costs to the end customer without first obtaining state regulatory approval, allowing them to cover operating costs and generate sufficient earnings and cash flows to service their debt obligations. Second, electric cooperatives face limited competition, as they tend to operate in exclusive territories not serviced by public investor-owned utilities. Third, electric cooperatives typically are consumer-owned, not-for-profit entities that provide an essential service to end-users, the majority of which are residential customers. As not-for-profit entities, rural electric cooperatives, unlike investor-owned utilities, generally are eligible to apply for assistance from the Federal Emergency Management Agency (“FEMA”) and states to help recover from major disasters or emergencies. Fourth, electric cooperatives tend to adhere to a conservative core business strategy model that has historically resulted in a relatively stable, resilient operating environment and overall strong financial performance and credit strength for the electric cooperative network. Finally, we generally lend to our members on a senior secured basis, which reduces the risk of loss in the event of a borrower default.
Below we provide information on the credit risk profile of our loan portfolio, including security provisions, credit concentration, credit quality indicators and our allowance for credit losses.
Security Provisions
Except when providing line of credit loans, we generally lend to our members on a senior secured basis. Long-term loans are generally secured on 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 collateral
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pledged to secure our loans, distribution and power supply borrowers also are required to set rates charged to customers to achieve certain specified financial ratios. Table 14 presents, by legal entity and member class and by loan type, secured and unsecured loans in our loan portfolio as of May 31, 2024 and 2023. Of our total loans outstanding, 92% were secured as of both May 31, 2024 and 2023.
Table 14: Loans—Loan Portfolio Security Profile
May 31, 2024
(Dollars in thousands) Secured % of Total Unsecured % of Total Total
Member class:
CFC:
Distribution $ 25,114,323 93 % $ 1,990,140 7 % $ 27,104,463
Power supply 4,836,612 86 805,286 14 5,641,898
Statewide and associate 215,229 91 22,117 9 237,346
Total CFC 30,166,164 91 2,817,543 9 32,983,707
NCSC:
Electric
921,321 97 24,559 3 945,880
Telecom
554,797 93 43,800 7 598,597
Total NCSC
1,476,118 96 68,359 4 1,544,477
Total loans outstanding (1)
$ 31,642,282 92 $ 2,885,902 8 $ 34,528,184
Loan type:
Long-term loans:
Fixed rate
$ 30,118,544 100 % $ 147,499 — % $ 30,266,043
Variable rate
838,045 100 1,413 — 839,458
Total long-term loans 30,956,589 100 148,912 — 31,105,501
Line of credit loans 685,693 20 2,736,990 80 3,422,683
Total loans outstanding (1)
$ 31,642,282 92 $ 2,885,902 8 $ 34,528,184
May 31, 2023
(Dollars in thousands) Secured % of Total Unsecured % of Total Total
Member class:
CFC:
Distribution $ 23,736,624 93 % $ 1,700,453 7 % $ 25,437,077
Power supply 4,633,558 85 803,684 15 5,437,242
Statewide and associate 157,342 79 43,026 21 200,368
Total CFC 28,527,524 92 2,547,163 8 31,074,687
NCSC:
Electric
925,925 97 30,949 3 956,874
Telecom
462,209 95 25,579 5 487,788
Total NCSC
1,388,134 96 56,528 4 1,444,662
Total loans outstanding (1)
$ 29,915,658 92 $ 2,603,691 8 $ 32,519,349
Loan type:
Long-term loans:
Fixed rate
$ 28,203,752 99 % $ 167,606 1 % $ 28,371,358
Variable rate
1,022,841 100 1,812 — 1,024,653
Total long-term loans 29,226,593 99 169,418 1 29,396,011
Line of credit loans 689,065 22 2,434,273 78 3,123,338
Total loans outstanding (1)
$ 29,915,658 92 $ 2,603,691 8 $ 32,519,349
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____________________________
(1) Represents the unpaid principal balance, net of discounts, charge-offs and recoveries of loans as of the end of each period. Excludes unamortized deferred loan origination costs of $14 million and $13 million as of May 31, 2024 and 2023, respectively.
Credit Concentration
Concentrations of credit may exist when a lender has large credit exposures to single borrowers, large credit exposures to borrowers in the same industry sector or engaged in similar activities or large credit exposures to borrowers in a geographic region that would cause the borrowers to be similarly impacted by economic or other conditions in the region. As discussed above under “Credit Risk—Loan Portfolio Credit Risk,” because we lend primarily to our rural electric utility cooperative members, our loan portfolio is inherently subject to single-industry and single-obligor credit concentration risk. Loans outstanding to electric utility organizations totaled $33,930 million and $32,032 million as of May 31, 2024 and 2023, respectively, and represented approximately 98% and 99% of our total loans outstanding as of each respective date. Our credit exposure is partially mitigated by long-term loans guaranteed by RUS, which totaled $114 million and $123 million as of May 31, 2024 and 2023, respectively.
Single-Obligor Concentration
Table 15 displays the outstanding loan exposure for our 20 largest borrowers, by legal entity and member class, as of May 31, 2024 and 2023. Our 20 largest borrowers consisted of 13 distribution systems and seven power supply systems as of May 31, 2024, compared with 10 distribution systems and 10 power supply systems as of May 31, 2023. The largest total exposure to a single borrower or controlled group represented approximately 1% of total loans outstanding as of both May 31, 2024 and 2023.
Table 15: Loans—Loan Exposure to 20 Largest Borrowers
May 31,
2024 2023
(Dollars in thousands) Amount % of Total Amount % of Total
Member class:
CFC:
Distribution $ 4,583,422 13 % $ 3,600,193 11 %
Power supply 2,090,648 6 2,782,098 9
Total CFC 6,674,070 19 6,382,291 20
NCSC Electric
177,238 1 205,321 —
Total loan exposure to 20 largest borrowers 6,851,308 20 6,587,612 20
Less: Loans covered under Farmer Mac standby purchase commitment
(226,171) (1) (266,754) (1)
Net loan exposure to 20 largest borrowers $ 6,625,137 19 % $ 6,320,858 19 %
We entered into a long-term standby purchase commitment agreement with Farmer Mac during fiscal year 2016. Under this agreement, we may designate certain long-term loans to be covered under the commitment, subject to approval by Farmer Mac, and in the event any such loan later goes into payment default for at least 90 days, upon request by us, Farmer Mac must purchase such loan at par value. The aggregate unpaid principal balance of designated and Farmer Mac approved loans was $370 million and $436 million as of May 31, 2024 and 2023, respectively. Loan exposure to our 20 largest borrowers covered under the Farmer Mac agreement totaled $226 million and $267 million as of May 31, 2024 and 2023, respectively, which reduced our exposure to the 20 largest borrowers to 19% of our total loans outstanding as of each respective date. No loans have been put to Farmer Mac for purchase pursuant to this agreement.
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Geographic Concentration
Although our organizational structure and mission result in single-industry concentration, we serve a geographically diverse group of electric and telecommunications borrowers throughout the U.S. The consolidated number of borrowers with loans outstanding totaled 885 and 884 as of May 31, 2024 and 2023, respectively, located in 49 states and the District of Columbia. Of the 885 and 884 borrowers with loans outstanding as of May 31, 2024 and 2023, respectively, 50 and 52 were electric power supply borrowers as of each respective date . Electric power supply borrowers generally require significantly more capital than electric distribution and telecommunications borrowers.
Texas, which had 67 and 69 borrowers with loans outstanding as of May 31, 2024 and 2023, respectively, accounted for the largest number of borrowers with loans outstanding in any one state as of each respective date, as well as the largest concentration of loan exposure in any one state. Loans outstanding to Texas-based borrowers totaled $5,768 million and $5,529 million as of May 31, 2024 and 2023, respectively, and accounted for approximately 17% of total loans outstanding as of each respective date. Of the loans outstanding to Texas-based borrowers, $126 million and $155 million as of May 31, 2024 and 2023 , respectively, were covered by the Farmer Mac standby repurchase agreement, which reduced our credit risk exposure to Texas-based borrowers to $5,642 million and $5,373 million as of each respective date. See “Note 4—Loans” for information on the Texas-based number of borrowers and loans outstanding by legal entity and member class.
Table 16 provides a breakdown, by state or U.S. territory, of the total number of borrowers with loans outstanding as of May 31, 2024 and 2023 and the outstanding loan exposure to borrowers in each jurisdiction as a percentage of total loans outstanding of $34,528 million and $32,519 million as of May 31, 2024 and 2023, respectively.
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Table 16: Loans—Loan Geographic Concentration
May 31,
2024 2023
U.S. State/Territory Number of Borrowers % of Total Loans
Outstanding Number of
Borrowers % of Total Loans
Outstanding
Alabama 23 2.62 % 21 2.50 %
Alaska 16 3.19 16 3.40
Arizona 10 1.29 10 1.15
Arkansas 23 3.77 22 3.39
California 4 0.11 4 0.13
Colorado 27 5.37 27 5.22
Delaware 3 0.18 3 0.22
District of Columbia 1 0.03 1 0.06
Florida 21 3.97 19 3.96
Georgia 41 5.59 45 5.39
Hawaii 2 0.24 2 0.27
Idaho 10 0.34 10 0.34
Illinois 29 3.12 31 3.02
Indiana 41 3.87 40 3.84
Iowa 37 2.38 36 2.37
Kansas 27 3.28 28 3.43
Kentucky 22 2.56 23 2.84
Louisiana 9 1.68 8 1.96
Maine 3 0.06 3 0.07
Maryland 2 1.50 2 1.39
Massachusetts 1 0.17 1 0.19
Michigan 10 1.90 11 1.73
Minnesota 44 1.87 44 2.06
Mississippi 22 2.04 22 2.13
Missouri 43 5.71 43 5.58
Montana 22 0.86 21 0.76
Nebraska 10 0.12 9 0.08
Nevada 7 0.59 7 0.70
New Hampshire 2 0.52 2 0.38
New Jersey 2 0.07 2 0.07
New Mexico 10 0.16 11 0.16
New York 16 0.38 19 0.44
North Carolina 26 2.72 26 2.76
North Dakota 16 2.49 15 2.66
Ohio 26 2.00 27 2.00
Oklahoma 27 3.32 24 3.31
Oregon 20 1.22 18 1.52
Pennsylvania 15 1.75 15 1.74
Rhode Island 1 0.03 1 0.03
South Carolina 22 2.80 23 2.54
South Dakota 28 0.74 29 0.60
Tennessee 22 0.95 19 0.79
Texas 67 16.71 69 17.00
Utah 4 0.65 4 0.80
Vermont 4 0.15 4 0.15
Virginia 18 1.18 18 1.17
Washington 10 0.87 9 0.92
West Virginia 2 0.03 2 0.03
Wisconsin 27 1.90 26 1.84
Wyoming 10 0.95 12 0.91
Total 885 100.00 % 884 100.00 %
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Credit Quality Indicators
Assessing the overall credit quality of our loan portfolio and measuring our credit risk is an ongoing process that involves tracking payment status, modifications to borrowers experiencing financial difficulty, nonperforming loans, charge-offs, the internal risk ratings of our borrowers and other indicators of credit risk. We monitor and subject each borrower and loan facility in our loan portfolio to an individual risk assessment based on quantitative and qualitative factors. Payment status trends and internal risk ratings are indicators, among others, of the probability of borrower default and overall credit quality of our loan portfolio. We believe the overall credit quality of our loan portfolio remained strong as of May 31, 2024.
L oan Modifications to Borrowers Experiencing Financial Difficulty
We had one loan modification to an NCSC telecom borrower experiencing financial difficulty during FY2024. This loan received a term extension and had an amortized cost of $3 million as of May 31, 2024, representing 1% of the NCSC telecom loan portfolio. Loans modified to borrowers experiencing financial difficulty totaled $3 million as of May 31, 2024, consisting of one NCSC telecom loan as discussed above, which was performing in accordance with the terms of the loan agreement. There were no unadvanced loan commitments related to this loan.
Prior to the Adoption of ASU 2022-02 , Financial Instruments – Credit Losses (Topic 326) – Troubled Debt Restructurings ( “ TDR ” ) and Vintage Disclosures , and as of May 31, 2023, we had loans outstandin g to two borrowers totaling $8 million classified as performing TDR loans and on accrual status, and loans outstanding to Brazos totaling $23 million classified as nonperforming TDR loans which were on non-accrual status. During FY2024, we received the remaining payment of Brazos’ loans outstanding of $23 million in accordance with the provisions of Brazos’ plan of reorganization to repay its loans in full. Prior to the Brazos loan restructuring, we had not had any loan modifications that were required to be accounted for as TDRs since fiscal year 2016.
See “Note 4—Loans” for additional information on loan modifications to borrowers experiencing financial difficulty and TDR loans prior to the adoption of ASU 2022-02. Also refer to “Note 1—Summary of Significant Accounting Policies” for information on the adoption of ASU 2022-02.
Nonperforming Loans
We classify loans as nonperforming at the earlier of the date when we determine: (i) interest or principal payments on the loan are past due 90 days or more; (ii) as a result of court proceedings, the collection of interest or principal payments based on the original contractual terms is not expected; or (iii) the full and timely collection of interest or principal is otherwise uncertain. Once a loan is classified as nonperforming, we generally place the loan on nonaccrual status. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against earnings. Table 17 presents the outstanding balance of nonperforming loans, by member class, as of May 31, 2024 and 2023.
Table 17: Loans—Nonperforming Loans
May 31,
2024 2023
(Dollars in thousands) Number of Borrowers Outstanding Amount (1)
% of Total Loans Outstanding Number of Borrowers Outstanding Amount (1)
% of Total Loans Outstanding
Nonperforming loans:
CFC—Power supply
1 $ 48,669 0.14 % 2 $ 89,334 0.27 %
Total nonperforming loans 1 $ 48,669 0.14 % 2 $ 89,334 0.27 %
____________________________
(1) Represents the unpaid principal balance net of charge-offs and recoveries as of the end of each period.
Nonperforming loan s totaled $49 million as of May 31, 2024, a decrease of $40 million from May 31, 2023, due to the receipts of $4 million in loan payments from Brazos Sandy Creek to pay off its nonperforming loan outstanding and a $36 million payment on the outstanding nonperforming loan during FY2024 .
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Net Charge-Offs
Charge-offs represent the amount of a loan that has been removed from our consolidated balance sheet when the loan is deemed uncollectible. Generally, the amount of a charge-off is the recorded investment in excess of the discounted expected cash flows from the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral securing the loan. We report charge-offs net of amounts recovered on previously charged-off loans.
We had no charge-offs during FY2024. We recorded $1 million in net loan recoveries to previously charged-off loan amounts during FY2024. We received a total of $28 million in loan payments from Brazos and Brazos Sandy Creek to repay their $27 million of total loans outstanding in full during FY2024. The additional payments received totaling $1 million were recorded as net loan recoveries on the Brazos and Brazos Sandy Creek previously charged-off loan amounts during FY2024. In comparison, we experienced net charge-offs totaling $15 million for the CFC electric power supply loan portfolio related to Brazos and Brazos Sandy Creek nonperforming loans during FY2023, which resulted in an annualized net charge-off rate of 0.05% for FY2023. Prior to Brazos’ and Brazos Sandy Creek’s bankruptcy filings, we had not experienced any defaults or charge-offs in our electric utility and telecommunications loan portfolios since fiscal years 2013 and 2017, respectively.
In our 55-year history, we have experienced only 18 defaults in our electric utility loan portfolio. Of the 18 defaults, one remains unreso lved with an expected ultimate resolution date in calendar year 2025; nine resulted in no loss; and eight resulted in cumulative net charge-offs of $100 million. Of this amount, $81 million was attributable to seven electric power supply cooperatives and $19 million was attributable to one electric distribution cooperative. We historically have experienced high recovery rates for our electric loan portfolio. This can be attributed to several factors: (i) the unique organizational structure and operating environment of rural electric utility cooperatives, (ii) our lending policy that typically mandates a senior security position on borrowers’ assets and revenue for long-term loans, (iii) the significant investment our member-borrowers have in CFC and (iv) our collaborative approach when working with members in the event of a default. We cite the factors that have historically contributed to the relatively low risk of default by our electric utility cooperatives, our principal lending market, above under “Credit Risk—Loan Portfolio Credit Risk.”
In comparison, since inception in 1987, we have experienced 17 defaults and cumulative net charge-offs of $427 million in our telecommunications loan portfolio, the most significant of which was a charge-off of $354 million in fiscal year 2011.
Borrower Risk Ratings
As part of our management of credit risk, we maintain a credit risk-rating framework under which we employ a consistent process for assessing the credit quality of our loan portfolio. We evaluate each borrower and loan facility in our loan portfolio and assign internal borrower and loan facility risk ratings based on consideration of a number of quantitative and qualitative factors. We categorize loans in our portfolio based on our internally assigned borrower risk ratings, which are intended to assess the general creditwort hiness of the borrower and probability of default. Our borrower risk ratings align with the U.S. federal banking regulatory agencies’ credit risk definitions of pass and criticized categories, with the criticized category further segmented among special mention, substandard and dou btful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default. Our internally assigned borrower risk ratings serve as the primary credit quality indicator for our loan portfolio. Because our internal borrower risk ratings provide important information on the probability of default, they are a key input in determining our allowance for credit losses.
We use our internal risk ratings to measure the credit risk of each borrower and loan facility, identify or confirm problem or potential problem loans in a timely manner, differentiate risk within each of our portfolio segments, assess the overall credit quality of our loan portfolio and manage overall risk levels. Our internally assigned borrower risk ratings, which we map to equivalent credit ratings by external credit rating agencies, serve as the primary credit quality indicator for our loan portfolio.
Criticized loans totaled $249 million and $323 million as of May 31, 2024 and 2023, respectively, and represented approximately 1% of total loans outstanding as of each respective date. The decrease of $74 million in criticized loans was due primarily to loan payments received from Brazos, Brazos Sandy Creek and one CFC electric power supply borrower in the doubtful category, and a decrease in loans outstanding for one CFC electric distribution borrower in the special mention category during FY2024. Each of the borrowers with loans outst anding in the criticized category was current with regard to
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all principal and interest amounts due to us as of May 31, 2024. In contrast, each of the borrowers with loans outstanding in the criticized category, with the exception of Brazos Sandy Creek, was current with regard to all principal and interest amounts due to us as of May 31, 2023.
We provide additional information on our borrower risk rating classifications, including the amount of loans outstanding in each of the criticized loan categories of special mention, substandard and doubtful, in “Note 1—Summary of Significant Accounting Policies” and “Note 4—Loans” in this Report.
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 contractual 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.
Table 18 presents, by legal entity and member class, loans outstanding and the related allowance for credit losses and allowance coverage ratio as of May 31, 2024 and 2023 and the allowance components as of each date.
Table 18: Allowance for Credit Losses by Borrower Member Class and Evaluation Methodology
May 31,
2024 2023
(Dollars in thousands) Loans Outstanding (1)
Allowance for Credit Losses Allowance Coverage Ratio (2)
Loans Outstanding (1)
Allowance for Credit Losses Allowance Coverage Ratio (2)
Member class:
CFC:
Distribution $ 27,104,463 $ 15,954 0.06 % $ 25,437,077 $ 14,924 0.06 %
Power supply 5,641,898 25,583 0.45 5,437,242 33,306 0.61
Statewide and associate 237,346 1,189 0.50 200,368 1,194 0.60
Total CFC 32,983,707 42,726 0.13 31,074,687 49,424 0.16
NCSC:
Electric 945,880 3,937 0.42 956,874 2,464 0.26
Telecom
598,597 2,063 0.34 487,788 1,206 0.25
Total NCSC
1,544,477 6,000 0.39 1,444,662 3,670 0.25
Total $ 34,528,184 $ 48,726 0.14 $ 32,519,349 $ 53,094 0.16
Allowance components:
Collective allowance $ 34,472,276 $ 31,556 0.09 % $ 32,398,910 $ 27,335 0.08 %
Asset-specific allowance 55,908 17,170 30.71 120,439 25,759 21.39
Total $ 34,528,184 $ 48,726 0.14 $ 32,519,349 $ 53,094 0.16
Allowance coverage ratios:
Nonaccrual loans (3)
$ 48,669 100.12 % $ 112,209 47.32 %
___________________________
(1) Represents the unpaid principal balance, net of discounts, charge-offs and recoveries, of loans as of each period-end. Excludes unamortized deferred loan origination costs of $14 million and $13 million as of May 31, 2024 and 2023, respectively.
(2) Calculated based on the allowance for credit losses attributable to each member class and allowance components at period-end divided by the related loans outstanding at period-end.
(3) Calculated based on the total allowance for credit losses at period-end divided by loans outstanding on nonaccrual status at period-end. Nonaccrual loans represented 0.14% and 0.35% of total loans outstanding as of May 31, 2024 and 2023, respectively. We provide additional information on our nonaccrual loans in “Note 4—Loans” in this Report.
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The allowance for credit losses and allowance coverage ratio decreased to $49 million and 0.14%, respectively, as of May 31, 2024, from $53 million and 0.16%, respectively, as of May 31, 2023. The $4 million decrease in the allowance for credit losses reflected a reduction in the asset-specific allowance of $8 million, partially offset by an increase in collective allowance of $4 million. The decrease in the asset-specific allowance was primarily attributable to an increase in the actual and expected payments on a nonperforming CFC power supply loan. The increase in the collective allowance was primarily due to loan portfolio growth, a slight decline in the overall credit quality of our loan portfolio, and slightly higher expected default rates derived from a third-party utility sector default data used in estimating the allowance for credit losses.
We discuss our methodology for estimating the allowance for credit losses under the current expected credit loss (“CECL”) model in “Note 1—Summary of Significant Accounting Policies—Allowance for Credit Losses —Loan Portfolio ” and provide information on management ’s judgment and the uncertainties involved in our determination of the allowance for credit losses in the below section “Critical Accounting Estimates” of this Report. We provide additional information on our loans and allowance for credit losses under “Note 4—Loans” and “Note 5—Allowance for Credit Losses” of this Report.
Counterparty Credit Risk
In addition to credit exposure from our borrowers, we enter into other types of financial transactions in the ordinary course of business that expose us to counterparty credit risk, primarily related to transactions involving our cash and cash equivalents, securities held in our investment securities portfolio and derivatives. We mitigate our risk by only entering into these transactions with counterparties with investment-grade ratings, establishing operational guidelines and counterparty exposure limits and monitoring our counterparty credit risk position. We evaluate our counterparties based on certain quantitative and qualitative factors, and periodically assign internal risk rating grades to our counterparties.
Cash and Investments Securities Counterparty Credit Exposure
Our cash and cash equivalents and investment securities totaled $280 million and $318 million, respectively, as of May 31, 2024. The primary credit exposure associated with investments held in our investments portfolio is that issuers will not repay principal and interest in accordance with the contractual terms. Our cash and cash equivalents with financial institutions generally have an original maturity of less than one year and pursuant to our investment policy guidelines, all fixed-income debt securities, at the time of purchase, must be rated at least investment grade based on external credit ratings from at least two of the leading global credit rating agencies, when available, or the corresponding equivalent, when not available. We therefore believe that the risk of default by these counterparties is low. As of May 31, 2024, our overall counterparty credit risk was deemed to be satisfactory and not materially changed compared with May 31, 2023.
We provide additional information on the holdings in our investment securities portfolio below under “Liquidity Risk—Investment Securities Portfolio” and in “Note 3—Investment Securities.”
Derivative Counterparty Credit Exposure
Our derivative counterparty credit exposure relates principally to interest-rate swap contracts. We generally engage in OTC derivative transactions, which expose us to individual counterparty credit risk because these transactions are executed and settled directly between us and each counterpart y. We are exposed to the risk that an individual derivative counterparty defaults on payments due to us, which we may not be able to collect or which may require us to seek a replacement derivative from a different counterparty. This replacement may be at a higher cost, or we may be unable to find a suitable replacement.
We manage our derivative counterparty credit exposure through diversification of our derivative positions among various counterparties and by executing derivative transactions with financial institutions that have investment-grade credit ratings and maintaining enforceable master netting arrangements with these counterparties, which allow us to n et derivative assets and liabilities with the same counterparty. We also manage the credit risk associated with our derivative counterparties by using internal credit risk analysis, limits and a monitoring process. We had 12 active derivative counterparties with credit ratings ranging from Aa1 to Baa1 by Moody’s as of both May 31, 2024 and 2023, and fro m AA- to BBB+ and AA- to A- by S&P as of May 31, 2024 and 2023, respectively. The total outstanding notional amount of derivatives with these counterparties was $7,366 million and $7,816 million as of May 31, 2024 and 2023, respectively. The highest single
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derivative counterparty concentration, by outstanding notional amount, accounted for approximately 24% and 23% of the total outstanding notional amount of our derivatives as of May 31, 2024 and 2023, respectively.
While our derivative agreements include netting provisions that allow for offsetting of all contracts with a given counterparty in the event of default by one of the two parties, we report the fair value of our derivatives on a gross basis by individual contract as either a derivative asset or derivative liability on our consolidated balance sheets. The fair value of our derivatives includes credit valuation adjustments reflecting counterparty credit risk. We estimate our exposure to credit loss on our derivatives by calculating the replacement cost to settle at current market prices, as defined in our derivative agreements, of all outstanding derivatives in a net gain position at the counterparty level where a right of legal offset exists. We provide information on the impact of netting provisions under our master swap agreements and collateral pledged, if any, in “Note 10—Derivative Instruments and Hedging Activities—Impact of Derivatives on Consolidated Balance Sheets.” We believe our exposure to derivative counterparty risk, at any point in time, is equal to the amount of our outstanding derivatives in a net gain position, at the individual counterparty level, which totaled $611 million and $349 million as of May 31, 2024 and 2023, respectively.
We provide additional detail on our derivative agreements, including a discussion of derivative contracts with credit rating triggers and settlement amounts that would be required in the event of a ratings trigger, in “Note 10—Derivative Instruments and Hedging Activities.”
See “Item 1A. Risk Factors” in this Report for additional information about credit risks related to our business.
LIQUIDITY RISK
We define liquidity as the ability to convert assets into cash quickly and efficiently, maintain access to available funding and roll over or issue new debt under normal operating conditions and periods of CFC-specific and/or market stress, to ensure that we can meet borrower loan requests, pay current and future obligations and fund our operations in a cost-effective manner.
In addition to cash on hand and investment securities, our primary sources of funds include member loan principal repayments, committed bank revolving lines of credit, committed loan facilities under the Guaranteed Underwriter Program, a revolving note purchase agreement with Farmer Mac and proceeds from debt issuances to members and in the public capital markets. Our primary uses of funds include loan advances to members, principal and interest payments on borrowings, periodic interest settlement payments related to our derivative contracts and operating expenses.
Liquidity Risk Management
Our liquidity risk management framework is designed to meet our liquidity objectives of providing a reliable source of funding to members, meet maturing debt and other financial obligations, issue new debt and fund our operations on a cost-effective basis under normal operating conditions as well as under CFC-specific and/or market stress conditions. Our Asset Liability Committee establishes guidelines that are intended to ensure we maintain sufficient, diversified sources of liquidity to cover potential funding requirements as well as unanticipated contingencies. Our Treasury and Finance Group develops strategies to manage our targeted liquidity position, projects our funding needs under various scenarios, including adverse circumstances, and monitors our liquidity position on an ongoing basis.
Available Liquidity
As part of our strategy in managing liquidity risk and meeting our liquidity objectives, we seek to maintain various committed sources of funding that are available to meet our near-term liquidity needs. Table 19 presents a comparison between our available liquidity, which consists of cash and cash equivalents, our debt securities investment portfolio and amounts under committed credit facilities as of May 31, 2024 and 2023.
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Table 19 : Available Liquidity
May 31,
2024 2023
(Dollars in millions) Total Accessed Available Total Accessed Available
Liquidity sources:
Cash and investment debt securities:
Cash and cash equivalents $ 280 $ — $ 280 $ 199 $ — $ 199
Debt securities investment portfolio (1)
281 — 281 475 — 475
Total cash and investment debt securities 561 — 561 674 — 674
Committed credit facilities:
Committed bank revolving line of credit agreements—unsecured (2)
2,800 2 $ 2,798 2,600 2 2,598
Guaranteed Underwriter Program committed facilities—secured (3)
9,923 8,723 1,200 9,473 8,448 1,025
Farmer Mac revolving note purchase agreement—secured (4)
6,000 3,864 2,136 6,000 3,150 2,850
Total committed credit facilities 18,723 12,589 6,134 18,073 11,600 6,473
Total available liquidity $ 19,284 $ 12,589 $ 6,695 $ 18,747 $ 11,600 $ 7,147
____________________________
(1) Represents the aggregate fair value of our portfolio of debt securities as of period-end. Our portfolio of equity securities consists primarily of preferred stock securities that are not as readily redeemable; therefore, we exclude our portfolio of equity securities from our available liquidity.
(2) The committed bank revolving line of credit agreements consist of a three-year and a four-year revolving line of credit agreement. The accessed amount of $2 million as of both May 31, 2024 and 2023, relates to letters of credit issued pursuant to the four-year revolving line of credit agreement.
(3) The committed facilities under the Guaranteed Underwriter Program are not revolving.
(4) Availability subject to market conditions.
Although as a nonbank financial institution we are not subject to regulatory liquidity requirements, our liquidity management framework includes monitoring our liquidity and funding positions on an ongoing basis and assessing our ability to meet our scheduled debt obligations and other cash flow requirements based on point-in-time metrics as well as forward-looking projections. Our liquidity and funding assessment takes into consideration amounts available under existing liquidity sources, the expected rollover of member short-term investments and scheduled loan principal payment amounts, as well as our continued ability to access the capital markets and other non-capital market-related funding sources.
Liquidity Risk Assessment
We utilize several measures to assess our liquidity risk and ensure we have adequate coverage to meet our liquidity needs. Our primary liquidity measures indicate the extent to which we have sufficient liquidity to cover the payment of scheduled debt obligations over the next 12 months. We calculate our liquidity coverage ratios under several scenarios that take into consideration various assumptions about our near-term sources and uses of liquidity, including the assumption that maturities of member short-term investments will not have a significant impact on our anticipated cash outflows. Our members have historically maintained a relatively stable level of short-term investments in CFC in the form of daily liquidity fund notes, commercial paper, select notes and medium-term notes. As such, we expect that our members will continue to reinvest their excess cash in short-term investment products offered by CFC.
Table 20 presents our primary liquidity coverage ratios as of May 31, 2024 and 2023 and displays the calculation of each ratio as of these respective dates based on the assumptions discussed above.
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Table 20: Liquidity Coverage Ratios
May 31,
(Dollars in millions) 2024 2023
Liquidity coverage ratio: (1)
Total available liquidity (2)
$ 6,695 $ 7,147
Debt scheduled to mature over next 12 months:
Short-term borrowings 4,333 4,546
Long-term and subordinated debt scheduled to mature over next 12 months 2,676 2,383
Total debt scheduled to mature over next 12 months 7,009 6,929
Excess (deficit) in available liquidity over debt scheduled to mature over next 12 months $ (314) $ 218
Liquidity coverage ratio 0.96 1.03
Liquidity coverage ratio, excluding expected maturities of member short-term investments (3)
Total available liquidity (2)
$ 6,695 $ 7,147
Total debt scheduled to mature over next 12 months 7,009 6,929
Exclude: Member short-term investments (4)
(3,328) (3,253)
Total debt, excluding member short-term investments, scheduled to mature over next 12 months
3,681 3,676
Excess in available liquidity over total debt, excluding member short-term investments, scheduled to mature over next 12 months $ 3,014 $ 3,471
Liquidity coverage ratio, excluding expected maturities of member short-term investments 1.82 1.94
___________________________
(1) Calculated based on available liquidity at period-end divided by total debt scheduled to mature over the next 12 months at period-end.
(2) Total available liquidity is presented above in Table 19.
(3) Calculated based on available liquidity at period-end divided by debt, excluding member short-term investments, scheduled to mature over the next 12 months.
(4) Member short-term investments include commercial paper sold directly to members, selected notes, daily liquidity fund note and short-term medium-term notes sold to members. See Table 22: Short-Term Borrowings — Outstanding Amount and Weighted-Average Interest Rates below for additional information.
As presented in Table 20 above, our available liquidity of $6,695 million as of May 31, 2024 was $314 million below our total scheduled debt obligations over the next 12 months of $7,009 million, consisting of short-term borrowings and long-term and subordinated debt. The short-term borrowings scheduled maturity amount consists of member investments of $3,328 million, dealer commercial paper of $505 million and Farmer Mac notes payable of $500 million. The long-term and subordinated scheduled debt obligations over the next 12 months of $2,676 million consist of debt maturities and scheduled debt payment amounts, of whic h, $140 million was from member investments.
We believe we can continue to roll over our member short-term investments of $3,328 million as of May 31, 2024, based on our expectation that our members will continue to reinvest their excess cash in short-term investment products offered by CFC. As mentioned above , our members historically have maintained a relatively stable level of short-term investments in CFC. Member short-te rm investments in CFC have averaged $3,530 million over the last 12 fiscal quarter-end reporting periods. Our available liquidity as of May 31, 2024 was $3,014 million in excess of, or 1.8 times over, our total scheduled debt obligations, excluding member short-term investments, over the next 12 months of $3,681 million. In addition, we expect to re ceive $1,552 million from scheduled long-term loan principal payments over the next 12 months.
We expect to continue accessing the dealer commercial paper market as a cost-effective means of satisfying our incremental short-term liquidity needs. Although the intra-quarter amount of dealer commercial paper outstanding may fluctuate based on our liquidity requirements, our intent is to manage our short-term wholesale funding risk by maintaining the dealer commercial paper outstanding at each quarter-end within a range of $1,000 million to $1,500 million. To mitigate commercial paper rollover risk, we expect to continue to maintain our committed bank revolving line of credit agreements and be in compliance with the covenants of these agreements so we can draw on these facilities, if necessary, to repay dealer
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or member commercial paper that cannot be refinanced with similar debt. Under master repurchase agreements we have with our bank counter parties, we can obtain short-term funding in secured borrowing transactions by selling investment-grade corporate debt securities from our investment securities portfolio subject to an obligation to repurchase the same or similar securities at an agreed-upon price and date.
The issuance of long-term debt, which represents the most significant component of our funding, allows us to reduce our reliance on short-term borrowings, as well as effectively manage our refinancing and interest rate risk. We expect to continue to issue long-term debt in the public capital markets and under our other non-capital market debt arrangements to meet our funding needs and believe that we have sufficient sources of liquidity to meet our debt obligations and support our operations over the next 12 months.
Investment Securities Portfolio
We have an investment portfolio of debt securities classified as trading and equity securities, both of which are reported on our consolidated balance sheets at fair value. Our debt securities investment portfolio is intended to serve as an additional source of liquidity. Under master repurchase agreements that we have with counterparties, we can obtain short-term funding by selling investment-grade corporate debt securities from our investment portfolio subject to an obligation to repurchase the same or similar securities at an agreed-upon price and date. Because we retain effective control over the transferred securities, transactions under these repurchase agreements are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a component of our short-term borrowings on our consolidated balance sheets. The aggregate fair value of debt securities underlying repurchase transactions is parenthetically disclosed on our consolidated balance sheets. We had no borrowings under repurchase agreements outstanding as of both May 31, 2024 and 2023; therefore, we had no debt securities in our investment portfolio pledged as collateral as of each respective date.
Our investment portfolio also included equity securities with a fair value of $37 million and $35 million as of May 31, 2024 and 2023 , respectively, consisting primarily of preferred stock securities that are not as readily redeemable; therefore, we excluded the equity securities from our available liquidity.
We provide additional information on our investment securities portfolio in “Note 3—Investment Securities” of this Report.
Borrowing Capacity Under Various Credit Facilities
The aggregate borrowing capacity under our committed bank revolving line of credit agreements, committed loan facilities under the Guaranteed Underwriter Program and revolving note purchase agreement with Farmer Mac totale d $18,723 million and $18,073 million as of May 31, 2024 and 2023, respectively, and the aggregate amount available for access totaled $6,134 million and $6,473 million as of each respective date. The following is a discussion of our borro wing capacity and key terms and conditions under each of these credit facilities.
Committed Bank Revolving Line of Credit Agreements—Unsecured
Our committed bank revolving lines of credit may be used for general corporate purposes; however, we generally rely on them as a backup source of liquidity for our member and dealer commercial paper. On November 20, 2023, we amended the three-year and four-year committed bank revolving line of credit agreements to extend the maturity dates to November 28, 2026 and November 28, 2027, respectively, and to include a $100 million swingline facility under each agreement. In connection with the amendments to the revolving line of credit agreements, commitments from the existing banks increased by $100 million under each of the three-year and four-year revolving credit agreements. Commitments of $150 million under each agreement will expire at the prior maturity dates of November 28, 2025 and November 28, 2026. The total commitment amount under the three-year facility and the four-year facility was $1,345 million and $1,455 million, respectively, resulting in a combined total commitment amount under the two facilities of $2,800 million. Under our current committed bank revolving line of credit agreements, we have the ability to request up to $300 million of letters of credit, which would result in a reduction in the remaining available amount under the facilities.
Table 21 presents the total commitment amount under our committed bank revolving line of credit agreements, outstanding letters of credit and the amount available for access as of May 31, 2024.
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Table 21: Committed Bank Revolving Line of Credit Agreements
May 31, 2024
(Dollars in millions) Total Commitment Letters of Credit Outstanding Amount Available for Access Maturity Annual Facility Fee (1)
Bank revolving agreements:
3-year agreement $ 150 $ — $ 150 November 28, 2025 7.5 bps
3-year agreement 1,195 — 1,195 November 28, 2026 7.5 bps
Total 3-year agreement 1,345 — 1,345
4-year agreement 150 — 150 November 28, 2026 10.0 bps
4-year agreement 1,305 2 1,303 November 28, 2027 10.0 bps
Total 4-year agreement 1,455 2 1,453
Total $ 2,800 $ 2 $ 2,798
___________________________
(1) Facility fee based on CFC’s senior unsecured credit ratings in accordance with the established pricing schedules at the inception of the related agreement.
We did not have any outstanding borrowings under our committed bank revolving line of credit agreements as of May 31, 2024; however, we had letters of credit outstanding of $2 million under the four-year committed bank revolving agreement as of this date.
Although our committed bank revolving line of credit agreements do not contain a material adverse change clause or rating triggers that would limit the banks’ obligations to provide funding under the terms of the agreements, we must be in compliance with the covenants to draw on the facilities. We have been and expect to continue to be in compliance with the covenants under our committed bank revolving line of credit agreements. As such, we could draw on these facilities to repay dealer or member commercial paper that cannot be rolled over.
Guaranteed Underwriter Program Committed Facilities—Secured
Under the Guaranteed Underwriter Program, we can borrow from the U.S. Treasury Department’s Federal Financing Bank (“FFB”) and use the proceeds to extend new loans to our members and refinance existing member debt. As part of the program, we pay fees based on our outstanding borrowings that are intended to help fund the USDA Rural Economic Development Loan and Grant program, and thereby support additional investment in rural economic development projects. The borrowings under this program are guaranteed by RUS. Each advance is subject to quarterly amortization and a final maturity not longer than 30 years from the date of the advance.
On December 19, 2023, we closed on a $450 million Series U committed loan facility from the FFB under the Guaranteed Underwriter Program. Pursuant to this facility, we may borrow any time before July 15, 2028. Each advance is subject to quarterly amortization and a final maturity not longer than 30 years from the date of the advance. The closing of this facility increased our total committed borrowing amount under the Guaranteed Underwriter Program to $9,923 million as of May 31, 2024, from $9,473 million as of May 31, 2023.
As displayed in Table 19, we had accessed $8,723 million under the Guaranteed Underwriter Program and up to $1,200 million was available for borrowing as of May 31, 2024. Of the $1,200 million available borrowing amount, $750 million is available for advance through July 15, 2027 and $450 million is available for advance through July 15, 2028. We are required to pledge eligible distribution system loans or power supply system loans as collateral in an amount at least equal to our total outstanding borrowings under the Guaranteed Underwriter Program committed loan facilities, which totaled $6,492 million as of May 31, 2024.
The notes payable to FFB and guaranteed by RUS under the Guaranteed Underwriter Program contain a provision that if during any portion of the fiscal year, our senior secured credit ratings do not have at least two of the following ratings: (i) A3 or higher from Moody’s, (ii) A- or higher from S&P, (iii) A- or higher from Fitch or (iv) an equivalent rating from a successor rating agency to any of the above rating agencies, we may not make cash patronage capital distributions in excess of 5% of total patronage capital.
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Farmer Mac Revolving Note Purchase Agreement—Secured
We have a revolving note purchase agreement with Farmer Mac, under which we can borrow up to $6,000 million from Farmer Mac, at any time, subject to market conditions through June 30, 2027. The agreement has successive automatic one-year renewals beginning June 30, 2026, unless Farmer Mac provides 425 days’ written notice of nonrenewal. Pursuant to this revolving note purchase agreement, we can borrow, repay and re-borrow funds at any time through maturity, as market conditions permit, provided that the outstanding principal amount at any time does not exceed the total available under the agreement. Each borrowing under the revolving note purchase agreement is evidenced by a pricing agreement setting forth the interest rate, maturity date and other related terms as we may negotiate with Farmer Mac at the time of each such borrowing. We may select a fixed rate or variable rate at the time of each advance with a maturity as determined in the applicable pricing agreeme nt.
Under this agreement, we had outstanding secured notes payable totaling $3,864 million and $3,150 million as of May 31, 2024 and 2023, respectively. We borrowed $500 million in short-term notes payable and $300 million in long-term notes payable under this note purchase agreement with Farmer Mac during FY2024. As displayed in Table 19, the amount available for borrowing under this agreement was $2,136 million as of May 31, 2024. We are required to pledge eligible electric distribution system or electric power supply system loans as collateral in an amount at least equal to the total principal amount of notes outstanding, under this agr eement. Subsequent to the fiscal year ended May 31, 2024, we borrowed $200 million in long-term notes payable under the Farmer Mac note purchase agreement.
We provide additional information on pledged collateral below under “Pledged Collateral” in this section and “Note 4—Loans.”
Short-Term Borrowings
Our short-term borrowings, which we rely on to meet our daily, near-term funding needs, consist of commercial paper, which we offer to members and dealers, select notes and daily liquidity fund notes offered to members, medium-term notes offered to members and dealers, and funds from repurchase secured borrowing transactions.
Table 22: Short-Term Borrowings—Outstanding Amount and Weighted-Average Interest Rates
May 31,
2024 2023
(Dollars in thousands) Outstanding Amount Weighted- Average
Interest Rate Outstanding Amount Weighted-Average
Interest Rate
Short-term borrowings:
Commercial paper:
Commercial paper sold through dealers, net of discounts $ 504,631 5.41 % $ 1,293,167 5.32 %
Commercial paper sold directly to members, at par 1,158,020 5.08 1,017,431 4.76
Total commercial paper 1,662,651 5.18 2,310,598 5.07
Select notes to members 1,274,066 5.36 1,630,799 4.96
Daily liquidity fund notes to members
375,191 4.60 238,329 4.35
Medium-term notes sold to members 520,782 5.79 366,549 4.64
Farmer Mac notes payable (1)
500,000 5.87 — —
Total short-term borrowings outstanding $ 4,332,690 5.34 $ 4,546,275 4.96
____________________________
(1) Advanced under the revolving purchase agreement with Farmer Mac dated March 24, 2011. See “Note 7—Long-Term Debt” for additional information on this revolving note purchase agreement with Farmer Mac.
Short-term borrowings decreased by $213 million to $4,333 million as of May 31, 2024, from $4,546 million as of May 31, 2023, and accounted for 13% and 15% of total debt outstanding as of each respective date. The weighted-average cost of our outstanding short-term borrowings increased to 5.34% as of May 31, 2024, from 4.96% as of May 31, 2023. The weighted-average maturity of our short-term borrowings increased to 49 days as of May 31, 2024, from 44 days as of May 31, 2023.
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Member investments have historically been our primary source of short-term borrowings. Table 23 displays the composition, by funding source, of our short-term borrowings as of May 31, 2024 and 2023. As indicated in Table 23, members’ investments represented 77% and 72% of our outstanding short-term borrowings as of May 31, 2024 and 2023, respectively.
Table 23: Short-Term Borrowings—Funding Sources
May 31,
2024 2023
(Dollars in thousands) Outstanding Amount % of Total Short-Term Borrowings Outstanding Amount % of Total Short-Term Borrowings
Funding source:
Members
$ 3,328,059 77 % $ 3,253,108 72 %
Farmer Mac notes payable 500,000 11 — —
Capital markets 504,631 12 1,293,167 28
Total
$ 4,332,690 100 % $ 4,546,275 100 %
Our intent is to manage our short-term wholesale funding risk by maintaining the dealer commercial paper outstanding at each quarter-end wit hin a range of $1,000 million to $1,500 million, although the intra-period amount of dealer commercial paper outstanding may fluctuate based on our liquidity requireme nts. Dealer commercial paper outstanding was $505 million and $1,293 million as of May 31, 2024 and 2023, respectively.
See “Note 6—Short-Term Borrowing” for additional information on our short-term borrowings.
Long-Term and Subordinated Debt
Long-term and subordinated debt, which represents the most significant source of our funding, totaled $28,386 million and $26,453 million as of May 31, 2024 and 2023, respectively, and accounted for 87% and 85% of total debt outstanding as of each respective date. See Table 24 below for a summary of our long-term and subordinated debt issuances and repayments during FY2024.
The issuance of long-term debt allows us to reduce our reliance on short-term borrowings and effectively manage our refinancing and interest rate risk, due in part to the multi-year contractual maturity structure of long-term debt. In addition to access to private debt facilities, we also issue debt in the public capital markets. Pursuant to Rule 405 of the Securities Act, we are classified as a “well-known seasoned issuer.” Under our effective shelf registration statements filed with the U.S. Securities and Exchange Commission (“SEC”), we may offer and issue the following debt securities:
• an unlimited amount of collateral trust bonds and senior and subordinated debt securities, including medium-term notes, member capital securities and subordinated deferrable debt, until October 2026; and
• daily liquidity fund notes up to $20,000 million in the aggregate—with a $3,000 million limit on the aggregate principal amount outstanding at any time—until March 2025.
Although we register member capital securities and the daily liquidity fund notes with the SEC, these securities are not available for sale to the general public. Medium-term notes are available for sale to both the general public and members. Notwithstanding the foregoing, we have contractual limitations with respect to the amount of senior indebtedness we may incur.
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Long-Term Debt and Subordinated Debt—Issuances and Repayments
Table 24 summarizes long-term and subordinated debt issuances and repayments during FY2024.
Table 24: Long-Term and Subordinated Debt — Issuances and Repayments
Year Ended May 31, 2024
(Dollars in thousands) Issuances Repayments (1)
Debt product type:
Collateral trust bonds $ — $ 855,000
Guaranteed Underwriter Program notes payable 275,000 503,829
Farmer Mac notes payable 300,000 86,387
Medium-term notes sold to members 179,825 186,241
Medium-term notes sold to dealers 3,786,655 958,868
Other notes payable — 1,169
Subordinated deferrable debt
100,000 100,000
Members’ subordinated certificates 103 25,579
Total $ 4,641,583 $ 2,717,073
___________________________
(1) Repayments include principal maturities, scheduled amortization payments, repurchases and redemptions.
We provide additional information on our financing activities under the above section “Consolidated Balance Sheet Analysis—Debt” and on the weighted-average interest rates on our long-term debt and subordinated certificates in “Note 7—Long-Term Debt,” “Note 8—Subordinated Deferrable Debt” and “Note 9—Members’ Subordinated Certificates” of this Report.
Pledged Collateral
Under our secured borrowing agreements, we are required to pledge loans, investment debt securities or other collateral and maintain certain pledged collateral ratios. Of our total debt outstanding of $32,718 million as of May 31, 2024, $17,095 million, or 52%, was secured by pledged loans totaling $21,403 million. In comparison, of our total debt outstanding of $30,999 million as of May 31, 2023, $17,450 million, or 56%, was secured by pledged loans totaling $21,038 million. Following is additional information on the collateral pledging requirements for our secured borrowing agreements.
Secured Borrowing Agreements—Pledged Loan Requirements
We are required to pledge loans or other collateral in transactions under our collateral trust bond indentures, bond agreements under the Guaranteed Underwriter Program and note purchase agreement with Farmer Mac. Total debt outstanding is presented on our consolidated balance sheets net of unamortized discounts and issuance costs. Our collateral pledging requirements are based, however, on the face amount of secured outstanding debt, which excludes net unamortized discounts and issuance costs. However, as discussed below, we typically maintain pledged collateral in excess of the required percentage. Under the provisions of our committed bank revolving line of credit agreements, the excess collateral that we are allowed to pledge cannot exceed 150% of the outstanding borrowings under our collateral trust bond indentures, the Guaranteed Underwriter Program or the Farmer Mac note purchase agreements.
Table 25 displays the collateral coverage ratios pursuant to these secured borrowing agreements as of May 31, 2024 and 2023.
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Table 25: Collateral Pledged
Requirement Coverage Ratios Actual Coverage Ratios (1)
Minimum Debt Indentures Maximum Committed Bank Revolving Line of Credit Agreements May 31,
2024 2023
Secured borrowing agreement type:
Collateral trust bonds 1994 indenture 100 % 150 % 128 % 115 %
Collateral trust bonds 2007 indenture 100 150 129 114
Guaranteed Underwriter Program notes payable 100 150 124 117
Farmer Mac notes payable 100 150 115 136
Clean Renewable Energy Bonds Series 2009A (2)
100 150 — 129
____________________________
(1) Calculated based on the amount of collateral pledged divided by the face amount of outstanding secured debt.
(2) Collateral includes cash pledged. Clean renewable energy bonds series 2009A matured and was paid off in full as of May 31, 2024.
Table 26 displays the unpaid principal balance of loans pledged for secured debt, the excess collateral pledged and unencumbered loans as of May 31, 2024 and 2023.
Table 26: Loans — Unencumbered Loans
May 31,
(Dollars in thousands) 2024 2023
Total loans outstanding (1)
$ 34,528,184 $ 32,519,349
Less: Loans required to be pledged under secured debt agreements (2)
(17,293,035) (17,664,350)
Loans pledged in excess of required amount (2)(3)
(4,110,051) (3,373,580)
Total pledged loans (21,403,086) (21,037,930)
Unencumbered loans $ 13,125,098 $ 11,481,419
Unencumbered loans as a percentage of total loans outstanding 38 % 35 %
____________________________
(1) Represents the unpaid principal balance of loans as of the end of each period. Excludes unamortized deferred loan origination costs of $14 million and $13 million as of May 31, 2024 and 2023, respectively.
(2) Reflects unpaid principal balance of pledged loans.
(3) Excludes cash collateral pledged to secure debt. If there is an event of default under most of our indentures, we can only withdraw the excess collateral
if we substitute cash or permitted investments of equal value.
As displayed above in Table 26, we had excess loans pledged as collateral totaling $4,110 million and $3,374 million as of May 31, 2024 and 2023, respectively. To ensure that we do not fall below the minimum collateral coverage ratio requirement, we typically pledge loans in excess of the required amount for the following reasons: (i) our distribution and power supply loans are typically amortizing loans that require scheduled principal payments over the life of the loan, whereas the debt securities issued under secured indentures and agreements typically have bullet maturities; (ii) distribution and power supply borrowers have the option to prepay their loans; and (iii) individual loans may become ineligible for various reasons, some of which may be temporary.
We provide additional information on our borrowings, including the maturity profile, below in “Liquidity Risk” and additional information on pledged loans in “Note 4—Loans” in this Report. For additional detail on each of our debt product types, refer to “Note 6—Short-Term Borrowings,” “Note 7—Long-Term Debt,” “Note 8—Subordinated Deferrable Debt” and “Note 9—Members’ Subordinated Certificates” in this Report.
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Member Loan Repayments
Table 27 displays future scheduled loan principal payment amounts, by member class and by loan type, on loans outstanding as of May 31, 2024, disaggregated by amounts due (i) in one year or less; (ii) after one year up to five years; (iii) after five years up to 15 years; and (iv) after 15 years.
Table 27: Loans—Scheduled Principal Payments
May 31, 2024
(Dollars in thousands) Due ≤ 1 Year
Due > 1 Year Up to 5 Years
Due > 5 Years Up to 15 Years
Due After 15 Years Total
Member class:
CFC:
Distribution $ 2,942,824 $ 5,240,190 $ 10,645,585 $ 8,275,864 $ 27,104,463
Power supply 295,174 1,813,131 2,091,203 1,442,390 5,641,898
Statewide and associate 23,330 108,059 40,313 65,644 237,346
Total CFC 3,261,328 7,161,380 12,777,101 9,783,898 32,983,707
NCSC:
Electric 139,302 391,094 342,586 72,898 945,880
Telecom 79,196 302,232 217,169 — 598,597
Total NCSC 218,498 693,326 559,755 72,898 1,544,477
Total loans outstanding $ 3,479,826 $ 7,854,706 $ 13,336,856 $ 9,856,796 $ 34,528,184
Loan type:
Fixed rate $ 1,500,502 $ 6,048,514 $ 13,150,004 $ 9,567,023 $ 30,266,043
Variable rate 1,979,324 1,806,192 186,852 289,773 4,262,141
Total loans outstanding $ 3,479,826 $ 7,854,706 $ 13,336,856 $ 9,856,796 $ 34,528,184
Contractual Obligations
Our contractual obligations affect both our short- and long-term liquidity needs. Our most significant contractual obligations include scheduled payments on our debt obligations. Table 28 displays scheduled amounts due on our debt obligations as of May 31, 2024 and the expected timing of these payments. The amounts presented reflect undiscounted future cash payment amounts due pursuant to these obligations, aggregated by the type of contractual obligation. The table excludes certain obligations that are short-term, such as trade payables, or where the amount is not fixed and determinable, such as derivatives subject to valuation based on market factors. The timing of actual future payments may differ from those presented due to a number of factors, such as discretionary debt redemptions or changes in interest rates that may impact our expected future cash interest payments.
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Table 28: Contractual Obligations (1)
Payments Due by Period
(Dollars in thousands)
In 1 Year or Less
After 1 Year Through 3 Years
After 3 Years Through 5 Years
After 5 Years Total
Short-term borrowings $ 4,332,690 $ — $ — $ — $ 4,332,690
Long-term debt 2,670,143 6,735,020 4,915,276 11,811,953 26,132,392
Subordinated deferrable debt — — — 1,300,000 1,300,000
Members’ subordinated certificates (2)
5,376 67,099 11,510 1,113,658 1,197,643
Total long-term and subordinated debt 2,675,519 6,802,119 4,926,786 14,225,611 28,630,035
Finance leases
524 1,072 1,210 628 3,434
Contractual interest on long-term debt (3)
1,075,675 1,873,126 1,428,104 5,963,387 10,340,292
Total $ 8,084,408 $ 8,676,317 $ 6,356,100 $ 20,189,626 $ 43,306,451
____________________________
(1) Callable debt is included in this table at its contractual maturity.
(2 Member loan subordinated certificates totaling $135 million are amortizing annually based on the unpaid principal balance of the related loan. Amortization payments on these certificates totaled $8 million in FY2024 and represented 6% of amortizing loan subordinated certificates outstanding.
(3) Represents the amounts of future interest payments on long-term and subordinated debt outstanding as of May 31, 2024, based on the contractual terms of the securities. These amounts were determined based on certain assumptions, including that variable-rate debt continues to accrue interest at the contractual rates in effect as of May 31, 2024 until maturity, and redeemable debt continues to accrue interest until its contractual maturity.
Off-Balance Sheet Arrangements
In the ordinary course of business, we engage in financial transactions that are not presented on our consolidated balance sheets, or may be recorded on our consolidated balance sheets in amounts that are different from the full contract or notional amount of the transaction. Our off-balance sheet arrangements consist primarily of unadvanced loan commitments intended to meet the financial needs of our members and guarantees of member obligations, which may affect our liquidity and funding requirements based on the likelihood that borrowers will advance funds under the loan commitments or we will be required to perform under the guarantee obligations. We provide information on our unadvanced loan commitments in “Note 4—Loans” and information on our guarantee obligations in “Note 13—Guarantees.”
Projected Near-Term Sources and Uses of Funds
Table 29 below displays a projection of our primary long-term sources and uses of funds, by quarter, over each of the next six fisc al quarters. Our projection is based on the following, which includes several assumptions: (i) the estimated issuance of long-term debt, including capital market and other non-capital market term debt, is based on our market-risk management goal of minimizing the mismatch between the cash flows from our financial assets and our financial liabilities; (ii) long-term loan scheduled amortization repayment amounts represent scheduled loan principal payments for long-term loans outstanding as of May 31, 2024 and estimated loan principal payments for long-term loan advances, plus estimated prepayment amounts on long-term loans; (iii) long-term and subordinated debt maturities consist of both scheduled principal maturity and amortization amounts and projected principal maturity and amortization amounts on term debt outstanding in each period presented; and (iv) long-term loan advances are based on our current projection of member demand for loans. In addition, amounts available under our committed bank revolving lines of credit, net increases in dealer commercial paper and short-term member investments, are intended to serve as a backup source of liquidity.
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Table 29: Liquidity —Projected Long-Term Sources and Uses of Funds (1)
Projected Long-Term Sources of Funds Projected Long-Term Uses of Funds
(Dollars in millions) Long-Term Debt Issuance Anticipated Long-Term
Loan Repayments (2)
Total Projected
Long-Term Sources of
Funds Long-Term and Subordinated Debt Maturities (3)
Long-Term
Loan Advances Total Projected Long-Term
Uses of
Funds
1Q FY 2025
$ 600 $ 396 $ 996 $ 385 $ 742 $ 1,127
2Q FY 2025
1,063 376 1,439 995 665 1,660
3Q FY 2025
2,022 388 2,410 1,453 982 2,435
4Q FY 2025
465 392 857 512 791 1,303
1Q FY 2026
534 402 936 479 752 1,231
2Q FY 2026
1,321 402 1,723 1,148 752 1,900
Total $ 6,005 $ 2,356 $ 8,361 $ 4,972 $ 4,684 $ 9,656
____________________________
(1) The dates presented represent the end of each quarterly period through the quarter ended November 30, 2025.
(2) Anticipated long-term loan repayments include scheduled long-term loan amortizations and anticipated cash repayments at repricing date.
(3) Long-term debt maturities also include medium-term notes with an original maturity of one year or less and expected early redemptions of debt.
As displayed in Table 29, we currently project long-term advances of $3,180 million over the next 12 months, which we project will exceed anticipated long-term loan repayments over the same period of $1,552 million , resulting in net long-term loan growth of approximately $1,628 million over the next 12 months.
The estimates presented above are developed at a particular point in time based on our expected future business growth and funding. Our actual results and future estimates may vary, perhaps significantly, from the current projections, as a result of changes in market conditions, management actions or other factors.
Credit Ratings
Our funding and liquidity, borrowing capacity, ability to access capital markets and other sources of funds and the cost of these funds are partially dependent on our credit ratings. During FY2024, Moody’s, S&P and Fitch affirmed CFC’s credit ratings and stable outlook. Table 30 displays our credit ratings as of May 31, 2024, which remain unchanged as of the date of this Report.
Table 30: Credit Ratings
May 31, 2024
CFC credit ratings and outlook: Moody’s S&P Fitch
Long-term issuer credit rating (1)
A2 A- A
Senior secured debt (2)
A1 A- A+
Senior unsecured debt (3)
A2 A- A
Subordinated debt A3 BBB BBB+
Commercial paper P-1 A-2 F1
Outlook Stable Stable Stable
Ratings and outlook confirmation date February 21, 2024
December 7, 2023
September 22, 2023
___________________________
(1) Based on our senior unsecured debt rating.
(2) Applies to our collateral trust bonds.
(3) Applies to our medium-term notes.
See “Credit Risk—Counterparty Credit Risk—Derivative Counterparty Credit Exposure” above for information on credit rating provisions related to our derivative contracts.
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Financial Ratios
Our debt-to-equity ratio decreased to 11.01 as of May 31, 2024, from 12.14 as of May 31, 2023, primarily due to an increase in equity from 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.
While our goal is to maintain an adjusted debt-to-equity ratio of approximately 6-to-1, the adjusted debt-to-equity ratio increased to 6.24 as of May 31, 2024, from 6.04 as of May 31, 2023, due to an increase in adjusted liabilities resulting from additional borrowings to fund growth in our loan portfolio, partially offset by an increase in adjusted equity. The increase in adjusted equity was primarily due to our adjusted net income of $289 million for FY2024, 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 . During FY2024 , 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.
Debt Covenants
As part of our short-term and long-term borrowing arrangements, we are subject to various financial and operational covenants. If we fail to maintain specified financial ratios, such failure could constitute a default by CFC of certain covenants under our committed bank revolving line of credit agreements and senior debt indentures. We were in compliance with all covenants and conditions under our committed bank revolving line of credit agreements and senior debt indentures as of May 31, 2024.
As discussed above in “Non-GAAP Financial Measures,” the financial covenants set forth in our committed bank revolving line of credit agreements and senior debt indentures are based on adjusted financial measures, including adjusted TIER. We provide a reconciliation of adjusted TIER and other non-GAAP financial measures disclosed in this Report to the most comparable U.S. GAAP financial measures below in “Non-GAAP Financial Measures and Reconciliations.”
MARKET RISK
Interest rate risk represents our primary source of market risk, as interest rate volatility can have a significant impact on the earnings and overall financial condition of a financial institution. We are exposed to interest rate risk primarily from the differences in the timing between the maturity or repricing of our loans and the liabilities funding our loans. We use derivatives as a tool in matching the duration and repricing characteristics of our interest rate-sensitive assets and liabilities. Below we discuss how we manage and measure interest rate risk.
Interest Rate Risk Management
Our interest rate risk-management objective is to prudently manage the timing of cash flows between interest-earning assets and interest-bearing liabilities in order to mitigate interest rate risk in accordance with CFC’s board policy and risk limits and guidelines established by the Asset Liability Committee (“ALCO”). ALCO provides oversight of our exposure to interest rate risk and ensures that our exposure is compliant with established risk limits and guidelines. We seek to generate stable adjusted net interest income on a sustained and long-term basis by minimizing the mismatch between the cash flows from our interest rate-sensitive financial assets and our financial liabilities. We use derivatives as a tool in matching the duration and repricing characteristics of our assets and liabilities, which we discuss above in “Consolidated Results of Operations—Non-Interest Income—Derivative Gains (Losses) and “Note 10—Derivative Instruments and Hedging Activities.”
Interest Rate Risk Assessment
Our Asset Liability Management (“ALM”) framework includes the use of analytic tools and capabilities, enabling CFC to generate a comprehensive profile of our interest rate risk exposure. We routinely measure and assess our interest rate risk
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exposure using various methodologies through the use of ALM models that enable us to accurately measure and monitor our interest rate risk exposure under multiple interest rate scenarios using several different techniques. Below we present two measures used to assess our interest rate risk exposure: (i) the interest rate sensitivity of projected net interest income and adjusted net interest income; and (ii) duration gap.
Interest Rate Sensitivity Analysis
We regularly evaluate the sensitivity of our interest-earning assets and the interest-bearing liabilities funding those assets and our net interest income and adjusted net interest income projections under multiple interest rate scenarios. Each month we update our ALM models to reflect our existing balance sheet position and incorporate different assumptions about forecasted changes in our balance sheet position over the next 12 months. Based on the forecasted balance sheet changes, we generate various projections of net interest income and adjusted net interest income over the next 12 months. Management reviews and assesses these projections and underlying assumptions to identify a baseline scenario of projected net interest income and adjusted net interest income over the next 12 months, which reflects what management considers, at the time, as the most likely scenario. As discussed under “Non-GAAP Financial Measures,” we derive adjusted net interest income by adjusting our reported interest expense and net interest income to include the impact of net derivative cash settlements amounts.
Our interest rate sensitivity analyses take into consideration existing interest rate-sensitive assets and liabilities as of the reported balance sheet date and forecasted changes to the balance sheet over the next 12 months under management’s baseline p rojection. As discussed in the “Executive Summary—Outlook” section, we currently anticipate net long-term loan growth of $1,628 million over the next 12 months. We also expect that our variable-rate line of credit loans outstanding will remain at approximately the current level over the same period. Although the yield curve is expected to remain inverted throughout calendar year 2024, given the expected drop in short-term interest rates, the yield curve inversion is expected to narrow in 2024 and end in 2025.
Based on our current forecast assumptions, which includes three federal funds rate cuts of 25 basis point each during the fiscal year ended May 31, 2025, we project increases in our reported net interest income and reported net interest yield over the next 12 months compared to the 12-month period ended May 31, 2024. We also project decreases in our adjusted net interest income and adjusted net interest yield over the next 12 months relative to the 12-month period ended May 31, 2024, primarily due to the current yield curve assumptions and our balance sheet position.
Table 31 presents the estimated percentage impact that a hypothetical instantaneous parallel shift of plus or minus 100 basis points in the interest rate yield curve, relative to our base case forecast yield curve, would have on our projected baseline 12-month net interest income and adjusted net interest income as of May 31, 2024 and 2023. In instances where the hypothetical instantaneous interest rate shift of minus 100 basis points results in a negative interest rate, we assume an interest rate floor rate of 0% in a negative interest rate. We also present the estimated percentage impact on our projected baseline 12-month net interest income and adjusted net interest income assuming a hypothetical inverted yield curve under which shorter-term interest rates increase by an instantaneous 75 basis points and longer-term interest rates decrease by an instantaneous 75 basis points.
Table 31: Interest Rate Sensitivity Analysis
May 31, 2024 May 31, 2023
Estimated Impact (1)
+ 100 Basis Points – 100 Basis Points Inverted + 100 Basis Points – 100 Basis Points Inverted
Net interest income
(3.10)% 3.22% (5.12)% (4.41)% 4.70% (5.88)%
Derivative cash settlements 11.25% (11.25)% 9.31% 11.50% (11.58)% 9.38%
Adjusted net interest income (2)
8.15% (8.04)% 4.20% 7.09% (6.88)% 3.50%
____________________________
(1) The actual impact on our reported and adjusted net interest income may differ significantly from the sensitivity analysis presented.
(2) We include net periodic derivative cash settlement interest amounts as a component of interest expense in deriving adjusted net interest income. See the section “Non-GAAP Financial Measures and Reconciliations” for a reconciliation of the non-GAAP financial measures presented in this Report to the most comparable U.S. GAAP financial measures.
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The changes in the sensitivity measures between May 31, 2024 and 2023 are primarily attributable to changes in the size and composition of our forecasted balance sheet, as well as changes in current interest rates and forecasted interest rates. As the interest rate sensitivity simulations displayed in Table 31 indicate, we would expect an unfavorable impact on our projected net interest income over a 12-month horizon as of May 31, 2024, under the hypothetical scenario of an instantaneous parallel shift of plus 100 basis points in the interest rate yield curve and a further inverted yield curve. However, we would expect an unfavorable impact on our adjusted net interest income over a 12-month horizon as of May 31, 2024, under the hypothetical scenario of an instantaneous parallel shift of minus 100 basis points in the interest rate yield curve.
Duration Gap
The duration gap, which represents the difference between the estimated duration of our interest-earning assets and the estimated duration of our interest-bearing liabilities, summarizes the extent to which the cash flows for assets and liabilities are matched over time. We use derivatives in managing the differences in timing between the maturities or repricing of our interest-earning assets and the debt funding those assets. A positive duration gap indicates that the duration of our interest-earning assets is greater than the duration of our debt and derivatives, and therefore denotes an increased exposure to rising interest rates over the long term. Conversely, a negative duration gap indicates that the duration of our interest-earning assets is less than the duration of our debt and derivatives, and therefore denotes an increased exposure to declining interest rates over the long term. While the duration gap provides a relatively concise and simple measure of the interest rate risk inherent in our consolidated balance sheet as of the reported date, it does not incorporate projected changes in our consolidated balance sheet.
The duration gap narrowed slightly to negative 1.13 months as of May 31, 2024, from negative 1.34 months as of May 31, 2023 and was within the risk limits and guidelines established by CFC’s Asset Liability Committee as of each respective date. The narrowing of the duration gap is primarily due to slightly shorter duration liabilities funding interest earning assets.
Limitations of Interest Rate Risk Measures
While we believe that the interest income sensitivities and duration gap measures provided are useful tools in assessing our interest rate risk exposure, there are inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. These measures should be understood as estimates rather than as precise measurements. The interest rate sensitivity analyses only contemplate certain hypothetical movements in interest rates and are performed at a particular point in time based on the existing balance sheet and, in some cases, expected future business growth and funding mix assumptions. The strategic actions that management may take to manage our balance sheet may differ significantly from our projections, which could cause our actual interest income to differ substantially from the above sensitivity analysis. Moreover, as discussed above, we use various other methodologies to measure and monitor our interest rate risk under multiple interest rate scenarios, which, together, provide a comprehensive profile of our interest rate risk.
OPERATIONAL RISK
Operational risk represents the risk of loss resulting from certain risk classifications, including, but not limited to, the execution of unauthorized transactions by employees; reputation risk; talent management (e.g., the inability to retain or attract sufficiently qualified employees); errors relating to loan documentation, transaction processing and technology; the inability to perfect liens on collateral; breaches of internal control and information systems; and the risk of fraud by employees or persons outside the company. Potential legal actions that could arise as a result of operational deficiencies, noncompliance with covenants in our revolving credit agreements and indentures, employee misconduct or adverse business decisions are also considered part of operational risk. In the event of a breakdown in internal controls, improper access to or operation of systems or improper employee actions, we could incur financial loss. Operational risk also includes breaches of technology and information systems resulting from unauthorized access to confidential or sensitive information or from internal or external threats, such as cyberattacks, whether on our technology infrastructure or in relation to third-party vendors that store confidential or sensitive internal data. Furthermore, third-party risk is another important component of our operational risk focus requiring identification, assessment and mitigation of critical risks arising from relationships with third-party vendors, suppliers, partners, service providers and contractors. Not having a set of practices to increase the visibility of third-party risk, including performing due diligence on current and new vendors through standardized
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questionnaires and forms, creating a risk register for recorded risks and implementing risk prioritization, would potentially expose CFC to externally generated operational risks that could disrupt our standard operating environment.
Operational risk is inherent in all business activities. The measurement, assessment and effective management of such risk is important to the achievement of our objectives. Operational risk is a core component of CFC’s Enterprise Risk Management framework and is governed by the CFC Board of Directors while management oversight of the risk is the responsibility of the Chief Risk Officer. We maintain related risk guidelines and limits, business policies and procedures, employee training, an internal control framework, a comprehensive business continuity and disaster recovery plan, as well as a detailed third-party risk management program that are collectively intended to provide a sound operational environment. Our business policies and controls have been designed to manage operational risk at appropriate levels given our financial strength, the business environment and markets in which we operate, and the nature of our businesses, while also considering factors such as competition and regulation. C orporate Compliance monitors compliance with established procedures and applicable laws that are designed to ensure adherence to generally accepted conduct, ethics and business practices defined in our corporate policies. We provide employee compliance training programs, including information protection, Regulation FD (“Fair Disclosure”) compliance and operational risk. Internal Audit examines the design and operating effectiveness of our operational, compliance and financial reporting internal controls on an ongoing basis.
Our business continuity and disaster recovery plan is monitored by our Business Technology Services Group and establishes the basic principles necessary to ensure emergency response, resumption, restoration and permanent recovery of CFC’s operations and business activities during a business interruption event. Each of our de partments is require d to develop, exercise, test and maintain business resumption plans for the recovery of business functions and processing resources to minimize disruption for our members and other parties with whom we do business. We conduct disaster recovery exercises periodically that include both the Business Technology Services Group and business areas. The business resumption plans are based on a risk assessment that considers potential losses due to unavailability of service versus the cost of resumption. These plans anticipate a variety of probable scenarios ranging from local to regional crises.
We continue to enhance our crisis management framework to provide additional corporate guidance on the management of and response to significant crises that may have an adverse disruptive impact on our business. The crises identified include, but are not limited to, man-made and natural disasters including infectious disease pandemics, technology disruption and workforce issues. The objectives of the enhancements are to ensure, in the event of an identified crisis, we have well-documented plans in place to protect our employees and the work environment, safeguard CFC’s operations, protect CFC’s brand and reputation and minimize the impact of business disruptions. We conducted a business impact analysis for each identified crisis to assess the potential impact on our business operations, financial performance, technology and staff. The results of the business impact analysis have been utilized to develop management action plans that align business priorities, clarify responsibilities and establish processes and procedures that enable us to respond in a timely, proactive manner and take appropriate actions to manage and mitigate the potential disruptive impact of specified crises.
Our cybersecurity risk-management efforts are a core component of our overall enterprise risk management framework and CFC’s operational risk oversight. We provide more information on our cybersecurity risk management and strategy as well as cybersecurity governance in “Item 1C. Cybersecurity. ”
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in our consolidated financial statements. Understanding our accounting policies and the extent to which we use management’s judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a discussion of our significant accounting policies in “Note 1—Summary of Significant Accounting Policies.”
Certain accounting estimates are considered critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our results of operations or financial condition. The determination of the allowance for expected credit losses over the remaining expected life of the loans in our loan portfolio involves a significant degree of management judgment and level of estimation uncertainty. As such, we have identified our accounting policy governing the estimation of
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the allowance for credit losses as a critical accounting estim ate. Management established policies and control procedures intended to ensure that the methodology used for determining our allowance for credit losses, including any judgments and assumptions made as part of such method, are well controlled and applied consistently from period to period. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. We describe our allowance methodology and process for estimating the allowance for credit losses under “Note 1—Summary of Significant Accounting Policies—Allowance for Credit Losses—Loan Portfolio.”
We maintain an allowance based on a current estimate of credit losses that are expected to occur over the remaining life of the loans in our portfolio. The methods utilized to estimate the allowance for credit losses, key assumptions and quantitative and qualitative information considered by management in determining the appropriate allowance for credit losses are discussed in “Note 1—Summary of Significant Accounting Policies.”
Key inputs, such as our historical loss data and third-party default data, that we use in determining the appropriate allowance for credit losses are more readily quantifiable, while other inputs, such as our internally assigned borrower risk ratings that are intended to assess a borrower’s capacity to meet its financial obligations and provide information on the probability of default, require more qualitative judgment. Degrees of imprecision exist in each of these inputs due in part to subjective judgments involved and an inherent lag in the data available to quantify current conditions and events that may affect our credit loss estimate.
Our internally assigned borrower risk ratings serve as the primary credit quality indicator for our loan portfolio. We perform an annual comprehensive review of each of our borrowers, following the receipt of the borrower’s annual audited financial statements, to reassess the borrower’s risk rating. In addition, interim risk-rating adjustments may occur as a result of updated information affecting a borrower’s ability to fulfill its obligations or other significant developments and trends. Our Enterprise Risk Group and Corporate Credit Committee review and provide rigorous oversight and governance around our internally assigned risk ratings to ensure the ratings process is consistent. In addition, we engage third-party credit risk management experts to conduct an independent annual review of our risk rating system to validate its overall integrity. This review involves an evaluation of the accuracy and timeliness of individual risk ratings and the overall effectiveness of our risk-rating framework relative to the risk profile of our credit exposures. While we have a robust risk-rating process, changes in our borrower risk ratings may not always directly coincide with changes in the risk profile of an individual borrower due to the timing of the rating process and a potential lag in the receipt of information necessary to evaluate the impact of emerging developments and current conditions on the risk ratings of our borrower. Although our allowance for credit losses is sensitive to each key input, shifts in the credit risk ratings of our borrowers generally have the most notable impact on our allowance for credit losses.
Key Assumptions
Determining the appropriateness of the allowance for credit losses is subject to numerous estimates and assumptions requiring significant management judgment about matters that involve a high degree of subjectivity and are difficult to predict. The key assumptions in determining our collective allowance that require significant management judgment and may have a material impact on the amount of the allowance include the segmentation of our loan portfolio; our internally assigned borrower risk ratings; the probability of default; the loss severity or recovery rate in the event of default for each portfolio segment; and management’s consideration of qualitative factors that may cause estimated credit losses associated with our existing loan portfolio to differ from our historical loss experience.
As discussed in “Credit Risk—Loan Portfolio Credit Risk,” CFC has experienced only 18 defaults in its 55-year history, and prior to Brazos and Brazos Sandy Creek we had no defaults in our electric utility loan portfolio since fiscal year 2013. As such, we have a limited history of defaults to develop reasonable and supportable estimated probability of default rates for our existing loan portfolio. We therefore utilize third-party default data for the utility sector as a proxy to estimate probability of default rates for our loan portfolio segments. However, we utilize our internal historical loss experience to estimate loss given default, or the recovery rate, for each of our loan portfolio segments. We believe our internal historical loss experience serves as a more reliable estimate of loss severity than third-party data due to the organizational structure and operating environment of rural utility cooperatives, our lending practice of generally requiring a senior security position on the assets and revenue of borrowers for long-term loans, the approach we take in working with borrowers that may be experiencing operational or financial issues and other factors discussed in “Credit Risk—Loan Portfolio Credit Risk.”
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We generally consider nonperforming loans as well as loans that have been modified with borrowers experiencing financial difficulty for individual evaluation given the risk characteristics of such loans and establish an asset-specific allowan ce for these loans. The key assumptions in determining our asset-specific allowance that require significant management judgment and may have a material impact on the amount of the allowance include measuring the amount and timing of future cash flows for individually evaluated loans that are not collateral-dependent and estimating the value of the underlying collateral for individually evaluated loans that are collateral-dependent.
The degree to which any particular assumption affects the allowance for credit losses depends on the severity of the change and its relationship to the other assumptions. We regularly evaluate the key inputs and assumptions used in determining the allowance for credit losses and update them, as necessary, to better reflect present conditions, including current trends in credit performance and borrower risk profile, portfolio concentration risk, changes in risk-management practices, changes in the regulatory environment and other factors relevant to our loan portfolio segments. We did not change our allowance methodology or the nature of the underlying key inputs and assumptions used in measuring our allowance for credit losses during FY2024.
Sensitivity Analysis
As noted above, our allowance for credit losses is sensitive to a variety of factors. While management uses its best judgment to assess loss data and other factors to determine the allowance for credit losses, changes in our loss assumptions, adjustments to assigned borrower risk ratings, the use of alternate external data sources or other factors could affect our estimate of probable credit losses inherent in the portfolio as of each balance sheet date, which would also impact the related provision for credit losses recognized in our consolidated statements of operations. For example, changes in the inputs below, without taking into consideration the impact of other potential offsetting or correlated inputs, would have the following effect on our allowance for credit losses as of May 31, 2024.
• A 10% increase or decrea se in the default rates for all of our portfolio segments would result in a corresponding increase or decrease of approximately $3 million.
• A 1% increase or decrease in the recovery rates for all of our portfolio segments would result in a corresponding decrease or increase of approximately $9 million.
• A one-notch downgrade in the internal borr ower risk ratings for our entire loan portfolio would result in an increase of approximately $34 million, while a one-notch upgrade would result in a decrease of approximately $19 million.
These sensitivity analyses are intended to provide an indication of the isolated impact of hypothetical alternative assumptions on our allowance for credit losses. Because management evaluates a variety of factors and inputs in determining the allowance for credit losses, these sensitivity analyses are not considered probable and do not imply an expectation of future changes in loss rates or borrower risk ratings. Given current processes employed in estimating the allowance for credit losses, management believes the inherent loss rates and currently assigned risk ratings are appropriate. It is possible that others performing the analyses, given the same information, may at any point in time reach different reasonable conclusions that could be significant to our consolidated financial statements.
We discuss the risks and uncertainties related to management’s judgments and estimates in applying accounting policies that have been identified as a critical accounting estimates under “Item 1A. Risk Factors—Regulatory and Compliance Risks” in this Report. We provide additional information on the allowance for credit losses under the sections “Credit Risk—Allowance for Credit Losses” and “Note 5—Allowance for Credit Losses” in this Report.
RECENT ACCOUNTING CHANGES AND OTHER DEVELOPMENTS
Recent Accounting Changes
We provide information on recently adopted accounting standards and the adoption impact on CFC’s consolidated financial statements and recently issued accounting standards not yet required to be adopted and the expected adoption impact in “Note 1—Summary of Significant Accounting Policies.” To the extent we believe the adoption of new accounting standards has had or will have a material impact on our consolidated results of operations, financial condition or liquidity, we discuss the impact in the applicable section(s) of this MD&A.
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NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS
Below we discuss each of the non-GAAP financial measures and provide a reconciliation of our non-GAAP financial measures to the most comparable U.S. GAAP financial measures. We believe our non-GAAP financial measures, which are not a substitute for U.S. GAAP and may not be consistent with similarly titled non-GAAP financial measures used by other companies, provide meaningful information and are useful to investors because management evaluates performance based on these metrics for purposes of (i) establishing performance goals; (ii) budgeting and forecasting; (iii) comparing period-to-period operating results, analyzing changes in results and identifying potential trends; and (iv) making compensation decisions. In addition, certain of the financial covenants in our committed bank revolving line of credit agreements and debt indentures are based on non-GAAP financial measures.
Statements of Operations Non-GAAP Financial Measures
One of our primary performance measures is TIER, which is a measure indicating our ability to cover the interest expense requirements on our debt. TIER is calculated by adding the interest expense to net income and dividing that total by the interest expense. We adjust the TIER calculation to add the derivative cash settlements income (expense) to the interest expense and to remove the derivative forward value gains (losses) and foreign currency adjustments from total net income. Adding the cash settlements income (expense) back to interest expense also has a corresponding effect on our adjusted net interest income.
We use derivatives to manage interest rate risk on our funding of the loan portfolio. The derivative cash settlements income (expense) represents the amount that we receive from or pay to our counterparties based on the interest rate indexes in our derivatives that do not qualify for hedge accounting. We adjust the reported interest expense to include the derivative cash settlements income (expense). We use the adjusted cost of funding to set interest rates on loans to our members and believe that the interest expense adjusted to include derivative cash settlements income (expense) represents our total cost of funding for the period. TIER, calculated by adding the derivative cash settlements income (expense) to the interest expense, reflects management’s perspective on our operations and, therefore, we believe that it represents a useful financial measure for investors.
The derivative forward value gains (losses) and foreign currency adjustments do not represent our cash inflows or outflows during the current period and, therefore, do not affect our current ability to cover our debt service obligations. The derivative forward value gains (losses) included in the derivative gains (losses) line of the statement of operations represents a present-value estimate of the future cash inflows or outflows that will be recognized as net cash settlements income (expense) for all periods through the maturity of our derivatives that do not qualify for hedge accounting. We have not issued foreign-denominated debt since 2007, and as of May 31, 2024 and 2023, there were no foreign currency derivative instruments outstanding. For operational management and decision-making purposes, we subtract derivative forward value gains (losses) and foreign currency adjustments from our net income when calculating TIER and for other net income presentation purposes. In addition, since the derivative forward value gains (losses) and foreign currency adjustments do not represent current-period cash flows, we do not allocate such funds to our members and, therefore, exclude the derivative forward value gains (losses) and foreign currency adjustments from net income in calculating the amount of net income to be allocated to our members. TIER, calculated by excluding the derivative forward value gains (losses) and foreign currency adjustments from net income, reflects management’s perspective on our operations and, therefore, we believe that it represents a useful financial measure for investors.
Net Income and Adjusted Net Income
Table 32 provides a reconciliation of adjusted interest expense, adjusted net interest income, adjusted total revenue and adjusted net income to the comparable U.S. GAAP financial measures. These adjusted financial measures are used in the calculation of our adjusted net interest yield and adjusted TIER for the periods presented.
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Table 32: Adjusted Net Income
Year Ended May 31,
(Dollars in thousands) 2024 2023 2022
Adjusted net interest income:
Interest income $ 1,593,351 $ 1,351,729 $ 1,141,243
Interest expense (1,339,088) (1,036,508) (705,534)
Include: Derivative cash settlements interest income (expense) (1)
127,166 33,577 (101,385)
Adjusted interest expense (1,211,922) (1,002,931) (806,919)
Adjusted net interest income $ 381,429 $ 348,798 $ 334,324
Adjusted net income:
Net income
$ 554,316 $ 501,587 $ 798,537
Exclude: Derivative forward value gains (2)
264,871 252,267 557,867
Adjusted net income $ 289,445 $ 249,320 $ 240,670
____________________________
(1) Represents the net periodic contractual interest income (expense) amount on our interest rate swaps during the reporting period.
(2) Represents the change in fair value of our interest rate swaps during the reporting period due to changes in expected future interest rates over the remaining life of our derivative contracts.
We primarily fund our loan portfolio through the issuance of debt. However, we use derivatives as economic hedges as part of our strategy to manage the interest rate risk associated with funding our loan portfolio. We therefore consider the interest income and expense incurred on our derivatives to be part of our funding cost in addition to the interest expense on our debt. As such, we add net periodic derivative cash settlements interest income and expense amounts to our reported interest expense to derive our adjusted interest expense and adjusted net interest income. We exclude unrealized derivative forward value gains and losses from our adjusted total revenue and adjusted net income.
TIER and Adjusted TIER
Table 33 displays the calculation of our TIER and adjusted TIER for the periods presented.
Table 33: TIER and Adjusted TIER
Year Ended May 31,
2024 2023 2022
TIER (1)
1.41 1.48 2.13
Adjusted TIER (2)
1.24 1.25 1.30
____________________________
(1) TIER is calculated based on our net income (loss) plus interest expense for the period divided by interest expense for the period.
(2) Adjusted TIER is calculated based on adjusted net income (loss) plus adjusted interest expense for the period divided by adjusted interest expense for the period.
Liabilities and Equity and Adjusted Liabilities and Equity
Management relies on the adjusted debt-to-equity ratio as a key measure in managing our business. We therefore believe that this adjusted financial measure, in combination with the comparable U.S. GAAP financial measure, is useful to investors in evaluating our financial condition. We adjust the comparable U.S. GAAP financial measure to:
• exclude debt used to fund loans that are guaranteed by RUS from total liabilities;
• exclude from total liabilities, and add to total equity, debt with equity characteristics issued to our members and in the capital markets; and
• exclude the noncash impact of derivative financial instruments and foreign currency adjustments from total liabilities and total equity.
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We are an eligible lender under an RUS loan guarantee program. Loans issued under this program carry the U.S. government’s guarantee of all interest and principal payments. We have little or no risk associated with the collection of principal and interest payments on these loans. Therefore, we believe there is little or no risk related to the repayment of the liabilities used to fund RUS-guaranteed loans, and we subtract such liabilities from total liabilities to calculate our adjusted debt-to-equity ratio.
Members may be required to purchase subordinated certificates as a condition of membership and as a condition to obtaining a loan or guarantee. The subordinated certificates are accounted for as debt under U.S. GAAP. The subordinated certificates have long-dated maturities and pay no interest or pay interest that is below market, and under certain conditions we are prohibited from making interest payments to members on the subordinated certificates. For computing our adjusted debt-to-equity ratio we subtract members’ subordinated certificates from total liabilities and add members’ subordinated certificates to total equity.
We also sell subordinated deferrable debt in the capital markets with maturities of up to 30 years and the option to defer interest payments. The characteristics of subordination, deferrable interest and long-dated maturity are all equity characteristics. In calculating our adjusted debt-to-equity ratio, we subtract subordinated deferrable debt from total liabilities and add it to total equity.
Our total equity includes the noncash impact of derivative forward value gains (losses) and foreign currency adjustments recorded in net income. It also includes a component of AOCI the impact of changes in the fair value of derivatives designated as cash flow hedges as well as the remaining transition adjustment recorded when we adopted the accounting guidance that required all derivatives be recorded on the balance sheet at fair value. In evaluating our debt-to-equity ratio, we make adjustments to equity similar to the adjustments made in calculating TIER. We exclude from total equity the cumulative impact of changes in derivative forward value gains (losses) and foreign currency adjustments and amounts of changes in the fair value included in AOCI related to derivatives designated for cash flow hedge accounting and the remaining derivative transition adjustment to derive non-GAAP adjusted equity.
We record derivative instruments at fair value on our consolidated balance sheets. For computing our adjusted debt-to-equity ratio, we exclude the noncash impact of our derivative accounting from liabilities and equity. Also, for computing our adjusted debt-to-equity ratio, we exclude the impact of foreign currency valuation adjustments from liabilities and equity. The debt-to-equity ratio adjusted to exclude the noncash impact of our derivative accounting and the effect of foreign currency translation reflects management’s perspective on our operations and, therefore, we believe is a useful financial measure for investors.
Table 34 provides a reconciliation between our total liabilities and total equity and the adjusted amounts used in the calculation of our adjusted debt-to-equity ratio a s of May 31, 2024 and 2023. As indicated in Table 34, subordinated debt is treated in the same manner as equity in calculating our adjusted debt-to-equity ratio.
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Table 34: Adjusted Liabilities and Equity
May 31,
(Dollars in thousands) 2024 2023
Adjusted total liabilities:
Total liabilities $ 33,165,645 $ 31,422,811
Exclude:
Derivative liabilities 80,988 115,074
Debt used to fund loans guaranteed by RUS 113,890 122,873
Subordinated deferrable debt 1,286,861 1,283,436
Subordinated certificates 1,197,651 1,223,126
Adjusted total liabilities $ 30,486,255 $ 28,678,302
Adjusted total equity:
Total equity $ 3,012,169 $ 2,589,249
Exclude:
Prior fiscal year-end cumulative derivative forward value gains (1)
343,098 90,831
Current fiscal year derivative forward value gains (1)
264,871 252,267
Current fiscal year-end cumulative derivative forward value gains (1)
607,969 343,098
AOCI attributable to derivatives (2)
703 1,001
Subtotal 608,672 344,099
Include:
Subordinated deferrable debt 1,286,861 1,283,436
Subordinated certificates 1,197,651 1,223,126
Subtotal 2,484,512 2,506,562
Adjusted total equity $ 4,888,009 $ 4,751,712
____________________________
(1) Represents consolidated total derivative forward value gains.
(2) Represents the AOCI amount related to derivatives. See “Note 11—Equity” for the additional components of AOCI.
Debt-to-Equity and Adjusted Debt-to-Equity Ratios
Table 35 displays the calculations of our debt-to-equity a nd adjusted debt-to-equity ratios as of May 31, 2024 and 2023 .
Table 35: Debt-to-Equity Ratio and Adjusted Debt-to-Equity Ratio
May 31,
(Dollars in thousands) 2024 2023
Debt-to-equity ratio:
Total liabilities $ 33,165,645 $ 31,422,811
Total equity 3,012,169 2,589,249
Debt-to-equity ratio (1)
11.01 12.14
Adjusted debt-to-equity ratio:
Adjusted total liabilities (2)
$ 30,486,255 $ 28,678,302
Adjusted total equity (2)
4,888,009 4,751,712
Adjusted debt-to-equity ratio (3)
6.24 6.04
____________________________
(1) Calculated based on total liabilities at period-end divided by total equity at period-end.
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(2) See Table 34 above for details on the calculation of these non-GAAP financial measures and the reconciliation to the most comparable U.S. GAAP financial measures.
(3) Calculated based on adjusted total liabilities at period-end divided by adjusted total equity at period-end.
Total CFC Equity and Members ’ Equity
Members’ equity excludes the noncash impact of derivative forward value gains (losses) and foreign currency adjustments recorded in net income and amounts recorded in AOCI. Because these amounts generally have not been realized, they are not available to members and are excluded by the CFC Board of Directors in determining the annual allocation of adjusted net income to patronage capital, to the members’ capital reserve and to other member funds. Table 36 provides a reconciliation of members’ equity to total CFC equity as of May 31, 2024 and 2023. We present the components of AOCI in “Note 11—Equity.”
Table 36: Members’ Equity
May 31,
(Dollars in thousands) 2024 2023
Members’ equity:
Total CFC equity $ 2,991,462 $ 2,562,059
Exclude:
Accumulated other comprehensive income (1,416) 8,343
Period-end cumulative derivative forward value gains attributable to CFC (1)
606,215 342,624
Subtotal 604,799 350,967
Members’ equity $ 2,386,663 $ 2,211,092
____________________________
(1) Represents period-end cumulative derivative forward value gains 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 report the separate results of operations for CFC in “Note 16—Business Segments.” The period-end cumulative derivative forward value total gain amounts as of May 31, 2024 and 2023 are presented above in Table 34.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk, see “Item 7. MD&A—Market Risk” and “MD&A—Consolidated Results of Operations—Non-Interest Income—Derivatives Gains (Losses)” and also “Note 10—Derivative Instruments and Hedging Activities” in this Report.
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