UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~February 28,~~August 31, 2023


¨			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-7102

NATIONAL RURAL UTILITIES

COOPERATIVE FINANCE CORPORATION

(Exact name of registrant as specified in its charter)


District of Columbia						52-0891669
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


20701 Cooperative Way,	Dulles,	Virginia,	20166
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (703) 467-1800

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
7.35% Collateral Trust Bonds, due 2026	NRUC 26	New York Stock Exchange
5.50% Subordinated Notes, due 2064	NRUC	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨ Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

The Registrant is a tax-exempt cooperative and therefore does not issue capital stock.

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION		1
Item 1.	Financial Statements	5547
	Consolidated Statements of Operations (Unaudited)	5648
	Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	5749
	Consolidated Balance Sheets (Unaudited)	5850
	Consolidated Statements of Changes in Equity (Unaudited)	5951
	Consolidated Statements of Cash Flows (Unaudited)	6052
	Notes to Consolidated Financial Statements (Unaudited)	6153
	Note 1 — Summary of Significant Accounting Policies	6153
	Note 2 — Interest Income and Interest Expense	6354
	Note 3 — Investment Securities	6355
	Note 4 — Loans	6556
	Note 5 — Allowance for Credit Losses	7668
	Note 6 — Short-Term Borrowings	7970
	Note 7 — Long-Term Debt	8071
	Note 8 — Subordinated Deferrable Debt	8274
	Note 9 — Derivative Instruments and Hedging Activities	8274
	Note 10 — Equity	8677
	Note 11 — Guarantees	8778
	Note 12 — Fair Value Measurement	8980
	Note 13 — Variable Interest Entities	9182
	Note 14 — Business Segments	9384

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)	1
	Forward-Looking Statements	1
	Introduction	1
	Summary of Selected Financial Data	2
	Executive Summary	5
	Critical Accounting Estimates	1110
	Recent Accounting Changes and Other Developments	1211
	Consolidated Results of Operations	1311
	Consolidated Balance Sheet Analysis	2419
	Enterprise Risk Management	3024
	Credit Risk	3025
	Liquidity Risk	3932
	Market Risk	4841
	Non-GAAP Financial Measures	5143
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	9887
Item 4.	Controls and Procedures	9887

PART II—OTHER INFORMATION		9887
Item 1.	Legal Proceedings	9887
Item 1A.	Risk Factors	9887
Item 2.	Unregistered Sales of Equity Securities, ~~and~~ Use of Proceeds, and Issuer Purchases of Equity Securities	9887
Item 3.	Defaults Upon Senior Securities	9887
Item 4.	Mine Safety Disclosures	9887
Item 5.	Other Information	9887
Item 6.	Exhibits	9988

SIGNATURES		~~100~~89

Table of Contents

CROSS REFERENCE INDEX OF MD&A TABLES


Table	Table	Description	Page	Table	Description	Page
1	1	Summary of Selected Financial Data	3	1	Summary of Selected Financial Data	3
2	2	Average Balances, Interest Income/Interest Expense and Average Yield/Cost	14	2	Average Balances, Interest Income/Interest Expense and Average Yield/Cost	12
3	3	Rate/Volume Analysis of Changes in Interest Income/Interest Expense	17	3	Rate/Volume Analysis of Changes in Interest Income/Interest Expense	14
4	4	Non-Interest Income	20	4	Non-Interest Income	16
5	5	Derivative Gains (Losses)	21	5	Derivative Gains (Losses)	17
6	6	Derivatives—Average Notional Amounts and Interest Rates	22	6	Comparative Swap Curves	18
7	7	Comparative Swap Curves	23	7	Non-Interest Expense	19
8	8	Non-Interest Expense	24	8	Debt—Total Debt Outstanding	21
9	9	Debt—Total Debt Outstanding	26	9	Debt—Member Investments	22
10	10	Debt—Member Investments	28	10	Equity	23
11	11	Equity	29	11	Loans—Loan Portfolio Security Profile	26
12	12	Loans—Loan Portfolio Security Profile	31	12	Loans—Loan Exposure to 20 Largest Borrowers	27
13	13	Loans—Loan Exposure to 20 Largest Borrowers	33	13	Allowance for Credit Losses by Borrower Member Class and Evaluation Methodology	30
14	14	Loans—Loan Exposure to Texas-Based Borrowers	34	14	Available Liquidity	32
15	15	Allowance for Credit Losses by Borrower Member Class and Evaluation Methodology	37	15	Liquidity Coverage Ratios	33
16	16	Available Liquidity	39	16	Committed Bank Revolving Line of Credit Agreements	34
17	17	Liquidity Coverage Ratios	40	17	Short-Term Borrowings—Funding Sources	36
18	18	Committed Bank Revolving Line of Credit Agreements	41	18	Long-Term and Subordinated Debt—Issuances and Repayments	37
19	19	Short-Term Borrowings—Funding Sources	43	19	Long-Term and Subordinated Debt—Scheduled Principal Maturities and Amortization	37
20	20	Long-Term and Subordinated Debt—Issuances and Repayments	44	20	Collateral Pledged	38
21	21	Long-Term and Subordinated Debt—Scheduled Principal Maturities and Amortization	44	21	Loans—Unencumbered Loans	38
22	22	Collateral Pledged	45	22	Liquidity—Projected Long-Term Sources and Uses of Funds	39
23	23	Loans—Unencumbered Loans	45	23	Credit Ratings	40
24	24	Liquidity—Projected Long-Term Sources and Uses of Funds	46	24	Interest Rate Sensitivity Analysis	42
25	25	Credit Ratings	47	25	Adjusted Net Income	43
26	26	Interest Rate Sensitivity Analysis	49	26	TIER and Adjusted TIER	44
27	27	LIBOR-Indexed Financial Instruments	50	27	Adjusted Liabilities and Equity	45
28	28	Adjusted Net Income	51	28	Debt-to-Equity Ratio and Adjusted Debt-to-Equity Ratio	45
29	29	TIER and Adjusted TIER	52	29	Members’ Equity	46
30		Adjusted Liabilities and Equity	53
31		Debt-to-Equity Ratio and Adjusted Debt-to-Equity Ratio	53
32		Members’ Equity	54

Table of Contents

PART I—FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the quarterly period ended ~~February 28,~~August 31, 2023 (“this Report”) contains certain statements that are considered “forward-looking statements” as defined in and within the meaning of the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements do not represent historical facts or statements of current conditions. Instead, forward-looking statements represent management’s current beliefs and expectations, based on certain assumptions and estimates made by, and information available to, management at the time the statements are made, regarding our future plans, strategies, operations, financial results or other events and developments, many of which, by their nature, are inherently uncertain and outside our control. Forward-looking statements are generally identified by the use of words such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity” and similar expressions, whether in the negative or affirmative. All statements about future expectations or projections, including statements about loan volume, the adequacy of the allowance for credit losses, operating income and expenses, leverage and debt-to-equity ratios, borrower financial performance, impaired loans, and sources and uses of liquidity, are forward-looking statements. Although we believe the expectations reflected in our forward-looking statements are based on reasonable assumptions, actual results and performance may differ materially from our forward-looking statements. Therefore, you should not place undue reliance on any forward-looking statement and should consider the risks and uncertainties that could cause our current expectations to vary from our forward-looking statements, including, but not limited to, legislative changes that could affect our tax status and other matters, demand for our loan products, lending competition, changes in the quality or composition of our loan portfolio, changes in our ability to access external financing, changes in the credit ratings on our debt, valuation of collateral supporting impaired loans, charges associated with our operation or disposition of foreclosed assets, nonperformance of counterparties to our derivative agreements, economic conditions and regulatory or technological changes within the rural electric industry, the costs and impact of legal or governmental proceedings involving us or our members, general economic conditions, governmental monetary and fiscal policies, the occurrence and effect of natural disasters, including severe weather events or public health emergencies, ~~such as the emergence and spread since 2019 of a novel coronavirus (“COVID-19”)~~ and the factors listed and described under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended May 31, ~~2022~~2023 (“~~2022~~2023 Form 10-K”), as well as any risk factors identified under “Part II—Item 1A. Risk Factors” in this Report. Forward-looking statements speak only as of the date they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect the impact of events, circumstances or changes in expectations that arise after the date any forward-looking statement is made.


INTRODUCTION

Our financial statements include the consolidated accounts of National Rural Utilities Cooperative Finance Corporation (“CFC”), National Cooperative Services Corporation (“NCSC”) and Rural Telephone Finance Cooperative (“RTFC.”) Our principal operations are currently organized for management reporting purposes into three business segments, which are based on the accounts of each of the legal entities included in our consolidated financial statements: CFC, NCSC and RTFC.

CFC is a member-owned, nonprofit finance cooperative association with a principal purpose of providing financing to its members to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC extends loans to its rural electric members for construction, acquisitions, system and facility repairs and maintenance, enhancements and ongoing operations to support the goal of electric distribution and generation and transmission (“power supply”) systems of providing reliable, affordable power to the customers they service. CFC also provides its members and associates with credit enhancements in the form of letters of credit and guarantees of debt obligations. As a Section 501(c)(4) tax-exempt, member-owned cooperative, CFC’s objective is not to maximize profit, but rather to offer members cost-based financial products and services. Because CFC is a tax-exempt cooperative, we cannot issue equity securities as a source of funding. CFC’s primary funding sources consist of a combination of public and private issuances of debt securities, member investments and retained equity. NCSC is a member-owned taxable cooperative that is permitted to provide financing to members of CFC, government or quasi-government entities which own electric utility systems that

meet the Rural Electrification Act definition of “rural,” and for-profit and nonprofit entities that are owned,

Table of C onten t s

operated or controlled by, or provide significant benefits to certain members of CFC. RTFC is a taxable Subchapter T member-owned cooperative association. RTFC’s principal purpose is to provide financing to its rural telecommunications members and their affiliates. See “Item 1. Business” in our ~~2022~~2023 Form 10-K for additional information on the business structure, principal purpose, members and core business activities of each of these entities. Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its consolidated entities. All references to members within this document include members, associates and affiliates of CFC and its consolidated entities, except where indicated otherwise.

The following MD&A is intended to enhance the understanding of our consolidated financial statements by providing material 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, the unaudited consolidated financial statements included in this Report, our audited consolidated financial statements and related notes for the fiscal year ended May 31, ~~2022~~2023 (“fiscal year ~~2022”~~2023”) included in our ~~2022~~2023 Form 10-K and additional information, including the risk factors discussed under “Item 1A. Risk Factors,” contained in our ~~2022~~2023 Form 10-K, as well as additional information contained elsewhere in this Report.


SUMMARY OF SELECTED FINANCIAL DATA

In addition to financial measures determined in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”), management also evaluates performance based on certain non-GAAP financial measures and metrics, which we refer to as “adjusted” measures. Our key non-GAAP financial measures are adjusted net income, adjusted net interest income, adjusted interest expense, adjusted net interest yield, adjusted times interest earned ratio (“TIER”) and adjusted debt-to-equity ratio. The most comparable U.S. GAAP financial measures are net income, net interest income, interest expense, net interest yield, TIER and debt-to-equity ratio, 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; and (iv) adjusting total equity to include subordinated deferrable debt and members’ subordinated certificates and exclude cumulative derivative forward value gains and losses and accumulated other comprehensive income (“AOCI”).

We believe our non-GAAP ~~adjusted~~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 ~~adjusted~~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 ~~adjusted~~financial measures may not be comparable to similarly titled measures reported by other companies due to differences in the way that 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.”

Table 1 provides a summary of selected financial data and key metrics used by management in evaluating performance for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023 and 2022, and as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

Table of C onten t s

Table 1: Summary of Selected Financial Data(1)


		Three Months Ended						Nine Months Ended							Three Months Ended
		February 28,						February 28,							August 31,
(Dollars in thousands)	(Dollars in thousands)	2023		2022		Change		2023		2022		Change		(Dollars in thousands)		2023		2022		Change
Statements of operations	Statements of operations													Statements of operations
Net interest income:	Net interest income:													Net interest income:
Interest income	Interest income	$	353,292	$	285,206	24	%	$	984,464	$	851,626	16	%	Interest income		$	380,956	$	306,978	24	%
Interest expense	Interest expense	(281,709)		(173,654)		62		(736,621)		(522,027)		41		Interest expense		(316,281)		(209,468)		51
Net interest income	Net interest income	71,583		111,552		(36)			247,843		329,599	(25)		Net interest income			64,675		97,510	(34)
Fee and other income	Fee and other income	5,326		4,270		25		13,548		13,042		4		Fee and other income		4,537		4,056		12
Total revenue	Total revenue	76,909		115,822		(34)			261,391		342,641	(24)		Total revenue			69,212		101,566	(32)
Benefit (provision) for credit losses		11,318		12,749		(11)		(3,806)		12,146		**
Provision for credit losses														Provision for credit losses		(800)		(3,496)		(77)
Derivative gains:	Derivative gains:													Derivative gains:
Derivative cash settlements interest income (expense)(2)	Derivative cash settlements interest income (expense)(2)	18,634		(26,212)		**		12,650		(79,727)		**		Derivative cash settlements interest income (expense)(2)		27,869		(10,785)		**
Derivative forward value gains(3)	Derivative forward value gains(3)	83,674		195,492		(57)		330,035		122,930		168		Derivative forward value gains(3)		162,018		104,372		55
Derivative gains	Derivative gains	102,308		169,280		(40)			342,685	43,203		693		Derivative gains			189,887	93,587		103
Investment securities losses		(1,402)		(11,621)		(88)		(5,574)		(18,190)		(69)
Investment security gains (losses)														Investment security gains (losses)		2,933		(3,679)		**
Operating expenses(4)	Operating expenses(4)	(25,315)		(23,079)		10		(78,081)		(70,384)		11		Operating expenses(4)		(31,503)		(25,519)		23
Other non-interest expense	Other non-interest expense	(298)		(843)		(65)		(975)		(1,530)		(36)		Other non-interest expense		(1,117)		(322)		247
Income before income taxes	Income before income taxes	163,520		262,308		(38)		515,640		307,886		67		Income before income taxes		228,612		162,137		41
Income tax provision	Income tax provision	(303)		(343)		(12)		(785)		(524)		50		Income tax provision		(328)		(263)		25
Net income	Net income	$	163,217	$	261,965	(38)		$	514,855	$	307,362	68		Net income		$	228,284	$	161,874	41

Adjusted statements of operations measures	Adjusted statements of operations measures													Adjusted statements of operations measures
Interest income	Interest income	$	353,292	$	285,206	24	%	$	984,464	$	851,626	16	%	Interest income		$	380,956	$	306,978	24	%
Interest expense	Interest expense	(281,709)		(173,654)		62		(736,621)		(522,027)		41		Interest expense		(316,281)		(209,468)		51
Include: Derivative cash settlements interest income (expense)(2)	Include: Derivative cash settlements interest income (expense)(2)	18,634		(26,212)		**		12,650		(79,727)		**		Include: Derivative cash settlements interest income (expense)(2)		27,869		(10,785)		**
Adjusted interest expense(5)	Adjusted interest expense(5)	(263,075)		(199,866)		32		(723,971)		(601,754)		20		Adjusted interest expense(5)		(288,412)		(220,253)		31
Adjusted net interest income(5)	Adjusted net interest income(5)	$	90,217	$	85,340	6		$	260,493	$	249,872	4		Adjusted net interest income(5)		$	92,544	$	86,725	7

Net income	Net income	$	163,217	$	261,965	(38)		$	514,855	$	307,362	68		Net income		$	228,284	$	161,874	41
Exclude: Derivative forward value gains(3)	Exclude: Derivative forward value gains(3)	83,674		195,492		(57)		330,035		122,930		168		Exclude: Derivative forward value gains(3)		162,018		104,372		55
Adjusted net income(5)	Adjusted net income(5)	$	79,543	$	66,473	20		$	184,820	$	184,432	—		Adjusted net income(5)		$	66,266	$	57,502	15


Profitability ratios	Profitability ratios													Profitability ratios
Times interest earned ratio (“TIER”)(6)	Times interest earned ratio (“TIER”)(6)	1.58		2.51		(37)	%	1.70		1.59		7	%	Times interest earned ratio (“TIER”)(6)	1.72		1.77		(3)	%
Adjusted TIER(5)	Adjusted TIER(5)	1.30		1.33		(2)		1.26		1.31		(4)		Adjusted TIER(5)	1.23		1.26		(2)
Net interest yield(7)	Net interest yield(7)	0.88	%	1.50	%	(62)	bps	1.04	%	1.48	%	(44)	bps	Net interest yield(7)	0.77	%	1.24	%	(47)	bps
Adjusted net interest yield(5)(8)	Adjusted net interest yield(5)(8)	1.11		1.15		(4)		1.09		1.13		(4)		Adjusted net interest yield(5)(8)	1.10		1.10		—

Credit quality ratios	Credit quality ratios													Credit quality ratios
Net charge-off rate(9)		—		—		—		0.06	%	—		6	bps
Net (recovery) charge-off rate(9)														Net (recovery) charge-off rate(9)	(0.01)	%	—		(1)	bps

Table of C onten t s

(Dollars in thousands) February 28, 2023 May 31, 2022 Change
Balance sheet
Assets:
Cash, cash equivalents and restricted cash $ 180,260 $ 161,114 12 %
Investment securities 587,126 599,904 (2)
Loans to members(10)
32,381,829 30,063,386 8
Allowance for credit losses (56,297) (67,560) (17)
Loans to members, net 32,325,532 29,995,826 8
Total assets 34,001,512 31,251,382 9
Liabilities and equity:
Short-term borrowings 4,899,631 4,981,167 (2)
Long-term debt 23,831,978 21,545,440 11
Subordinated deferrable debt 986,678 986,518 —
Members’ subordinated certificates 1,223,415 1,234,161 (1)
Total debt outstanding 30,941,702 28,747,286 8
Total liabilities 31,398,086 29,109,413 8
Total equity 2,603,426 2,141,969 22
Adjusted balance sheet measures
Adjusted total liabilities(5)
$ 28,932,057 $ 26,629,324 9 %
Adjusted total equity(5)
4,391,572 4,270,476 3
Members’ equity(5)
2,147,204 2,019,952 6
Debt ratios
Debt-to-equity ratio(11)
12.06 13.59 (11) %
Adjusted debt-to-equity ratio(5)
6.59 6.24 6
Liquidity coverage ratio(12)
0.95 0.99 (4)
Credit quality ratios
Nonperforming loans ratio(13)
0.33 % 0.76 % (43) bps
Criticized loans ratio(14)
1.04 1.65 (61)
Allowance coverage ratio(15)
0.17 0.22 (5)


(Dollars in thousands)	August 31, 2023		May 31, 2023		Change
Balance sheets
Assets:
Cash, cash equivalents and restricted cash	$	208,842	$	207,237	1	%
Investment securities	462,111		510,369		(9)
Loans to members(10)	33,096,646		32,532,086		2
Allowance for credit losses	(54,926)		(53,094)		3
Loans to members, net	33,041,720		32,478,992		2
Total assets	34,694,163		34,012,060		2
Liabilities and equity:
Short-term borrowings	5,124,335		4,546,275		13
Long-term debt	23,874,274		23,946,548		—
Subordinated deferrable debt	1,184,197		1,283,436		(8)
Members’ subordinated certificates	1,222,026		1,223,126		—
Total debt outstanding	31,404,832		30,999,385		1
Total liabilities	31,946,236		31,422,811		2
Total equity	2,747,927		2,589,249		6

Adjusted balance sheets measures
Adjusted total liabilities(5)	$	29,311,221	$	28,678,302	2	%
Adjusted total equity(5)	4,648,111		4,751,712		(2)
Members’ equity(5)	2,205,266		2,211,092		—

Debt ratios
Debt-to-equity ratio(11)	11.63		12.14		(4)	%
Adjusted debt-to-equity ratio(5)	6.31		6.04		4
Liquidity coverage ratio(12)	0.94		1.03		(9)


Credit quality ratios
Nonperforming loans ratio(13)	0.26	%	0.27	%	(1)	bps
Criticized loans ratio(14)	0.87		0.99		(12)
Allowance coverage ratio(15)	0.17		0.16		1

____________________________

**Calculation of percentage change is not meaningful.

(1)Certain reclassifications may have been made for prior periods to conform to the current-period presentation.

(2)Consists of net periodic contractual interest amounts on our interest rate swaps, which we refer to as derivatives cash settlements interest income (expense).

(3)Consists of derivative forward value gains (losses), which represent changes in fair value during the period, excluding net periodic contractual interest settlement amounts, attributable to derivatives not designated for hedge accounting.

(4)Consists of the total non-interest expense components (i) salaries and employee benefits and (ii) other general and administrative expenses, each of which is presented separately on the consolidated statements of operations.

(5)See “Item 7. MD&A—Non-GAAP Financial Measures” in our ~~2022~~2023 Form 10-K for a description of each of our non-GAAP financial measures. See the section “Non-GAAP Financial Measures” for a reconciliation of the non-GAAP financial measures presented in this Report to the most comparable U.S. GAAP ~~measure.~~financial measures.

(6)Calculated based on net income (loss) plus interest expense for the period divided by interest expense for the period.

(7)Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.

(8)Calculated based on annualized adjusted net interest income for the period divided by average interest-earning assets for the period.

(9)Calculated based on annualized net charge-offs ~~(recoveries)~~or recoveries for the period divided by average total loans outstanding for the period.

(10)Consists of the unpaid principal balance of member loans plus unamortized deferred loan origination costs of $13 million ~~and $12 million~~ as of ~~February 28,~~both August 31, 2023 and May 31, ~~2022, respectively.~~2023.

(11)Calculated based on total liabilities at period end divided by total equity at period end.

(12)Calculated based on available liquidity at period end, divided by the amount of maturing debt obligations over the next 12 months at period end, as of each respective date.

(13)Calculated based on total nonperforming loans at period end divided by total loans outstanding at period end.

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(14)Calculated based on loans outstanding at period end to borrowers with a risk rating that falls within the criticized risk rating category, which consists of special mention, substandard and doubtful, divided by total loans outstanding at period end.

(15)Calculated based on the allowance for credit losses at period end divided by total loans outstanding at period end.


EXECUTIVE SUMMARY

As a member-owned, nonprofit finance cooperative, our primary objective is to provide our rural electric utility members with access to affordable, flexible financing products while also maintaining a sound, stable financial position and adequate liquidity to meet our financial obligations and maintain ongoing investment-grade credit ratings. Because maximizing profit is not our primary objective, the interest rates on lending products offered to our member borrowers reflect our funding costs plus a spread to cover operating expenses and estimated credit losses, ~~and generate~~while also generating sufficient earnings to cover interest owed on our debt obligations and achieve certain financial target goals. Our financial goals focus on earning an annual minimum adjusted TIER of 1.10 and maintaining an adjusted debt-to-equity ratio at approximately ~~6.00-to-1~~6-to-1 or below.

We are subject to period-to-period volatility in our reported U.S. GAAP results 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. We use derivatives, primarily interest rate swaps, as part of our strategy in managing this risk. Our derivatives are intended 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. Because our derivative portfolio consists of a higher proportion of pay-fixed swaps, the majority of which are longer dated, than receive-fixed swaps, the majority of which are shorter dated, we generally record 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, as discussed above under “Summary of Selected Financial Data,” management uses our non-GAAP ~~adjusted~~financial measures to evaluate financial performance. Our adjusted financial results include the realized net periodic contractual interest expense amounts on our interest rate swaps but exclude the unrealized forward fair value gains and losses.

Financial Performance

Reported Results

We reported net income of ~~$163~~$228 million and TIER of ~~1.58~~1.72 for the three months ended ~~February 28,~~August 31, 2023 (“current quarter”), compared with net income of ~~$262~~$162 million and TIER of ~~2.51~~1.77 for the three months ended ~~February 28,~~August 31, 2022 (“same prior-year quarter”). We reported net income of $515 million and TIER of 1.70 for the nine months ended February 28, 2023 (“current year-to-date period”), compared with net income of $307 million and TIER of 1.59 for the ~~nine months ended February 28, 2022~~ ~~(“same prior year-to-date period”).~~ The ~~significant~~ variances between our reported results for the current quarter and ~~year-to-date period and~~ the same prior-year quarter ~~and year-to-date period~~ are primarily attributable to mark-to-market changes in the fair value of our derivative instruments. Our debt-to-equity ratio decreased to ~~12.06~~11.63 as of ~~February 28,~~August 31, 2023, from ~~13.59~~12.14 as of May 31, ~~2022,~~2023, primarily due to an increase in equity resulting from our reported net income of ~~$515~~$228 million for the current ~~year-to-date period,~~quarter, which was partially offset by a decrease in equity attributable to the CFC Board of Directors’ authorized patronage capital retirement in July ~~2022~~2023 of ~~$59~~$72 million.

~~Current Quarter Reported Results~~

The ~~decrease~~increase in our reported net income of ~~$99~~$66 million to ~~$163~~$228 million for the current quarter from ~~$262~~$162 million for the same prior-year quarter was driven primarily by ~~a reduction~~an increase in derivative gains of ~~$67~~$96 million, ~~and~~partially offset by a decrease in net interest income of ~~$40~~$33 million. We recorded derivative gains of ~~$102~~$190 million for the current quarter attributable to increases in the medium- and longer-term swap interest rates. In comparison, we recorded derivative gains of $94 million for the same prior-year quarter, attributable to increases in interest rates across the entire swap curve. In comparison, we recorded derivative gains of $169 million for the same prior-year quarter, attributable to more pronounced increases in interest rates across the entire swap curve relative to the current-quarter increases. As noted above, the substantial majority of our swap portfolio consists of longer-dated, pay-fixed swaps. Therefore, increases and decreases in medium- and longer-term swap rates generally have a more pronounced corresponding impact on the change in the net fair value of our swap portfolio.

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The decrease in net interest income of ~~$40~~$33 million,, or ~~36%~~34%, to ~~$72~~$65 million for the current quarter was attributable to a decrease in the net interest yield of 6247 basis points, or ~~41%~~38%, to ~~0.88%~~0.77%, partially offset by an increase in average interest-earning assets of $2,768 million, or 9%. The decrease in the net interest yield reflected the combined impact of an increase in our average cost of borrowings of 121 basis points to 3.71%, partially offset by an increase in the average yield on our interest-earning assets of 51 basis points to 4.35% and an increase in the benefit from non-interest bearing funding of 8 basis points to 0.24%. The increase in our average cost of borrowings and average yield on interest-earning assets were driven by the continued increase in the federal funds rate. The increase in average interest-earning assets was primarily driven by growth in average total loans.

Other factors affecting the variance between our reported results for the current quarter and the same prior-year quarter include the impact of a decrease in losses recorded on our investment securities of $10 million, primarily due to period-to-period market fluctuations ~~in fair value, partially offset by an~~ increase in operating expenses of $2 million, attributable to higher expenses recorded for salaries, information technology, business travel and in-person corporate meetings and events, and a reduction in the benefit for credit losses of $2 million.

~~We recorded a benefit for credit losses of~~ ~~$11 million~~ ~~for the~~ ~~current quarter, compared with a~~ ~~benefit for credit losses of~~ ~~$13 million~~ ~~for the~~ ~~same prior-year quarter. The~~ ~~current quarter~~ benefit for credit losses stemmed primarily from a reduction in the asset-specific allowance for a nonperforming CFC power supply loan, attributable to an increase in the expected payments on this loan. The benefit for credit losses recorded in the same prior-year quarter was primarily attributable to a decrease in the collective allowance, stemming largely from positive developments during the same prior-year quarter related to Rayburn Country Electric Cooperative, Inc. (“Rayburn”) that resulted in an improvement in Rayburn’s credit risk profile and also a significant reduction in our loans outstanding to Rayburn.

~~Year-to-Date Reported Results~~

~~The increase in our reported net income of $208 million to $515 million for the~~ ~~current year-to-date period~~ ~~from $307 million for the~~ ~~same prior year-to-date period~~ ~~was driven primarily by an increase in derivative gains of $300 million, partially offset by a decrease in net interest income of $82 million. We recorded derivative gains of $343 million for the~~ ~~current year-to-date period, attributable to pronounced increases in interest rates across the entire swap curve. In~~ ~~comparison, we recorded derivative gains of $43 million for the same prior year-to-date period, driven by the combined impact of increases in short- and medium-term swap rates.~~

The decrease in net interest income of $82 million, or 25%, to $248 million for the current year-to-date period was attributable to a decrease in the net interest yield of 44 basis points, or 30%, to 1.04%, partially offset by an increase in average interest-earning assets of $2,269$2,345 million, or 8%. The decrease in the net interest yield reflected the combined impact of an increase in our average cost of borrowings of 79117 basis points to ~~3.30%~~4.02%, partially offset by an increase in the average yield on our interest-earning assets of 2862 basis points to ~~4.12%~~4.52% and an increase in the benefit from non-interest bearing funding of 78 basis points to ~~0.22%~~0.27%. The increase in average interest-earning assets was primarily driven by growth in average total loans.

~~As mentioned above under “Current Quarter Reported Results,” the~~The increases in the average cost of borrowings and average yield on interest-earning assets were driven by the continued increase in the federal funds rate, which resulted in increases in the average cost of our short-term and variable-rate borrowings and the average yield earned on our line of credit and variable-rate loans. ~~On March 16, 2022,~~During the current quarter, the Federal Open Market Committee (“FOMC”) of the Federal Reserve ~~raised the target range for the federal funds rate by 0.25%~~continued to ~~a range of 0.25% to 0.50%, the first rate increase since December 2018. The FOMC further raised~~raise the target range for the federal funds rate at ~~each of~~ its ~~subsequent meetings held through February 2023, with the~~July meeting, resulting in a federal funds rate ~~reaching a target range~~ of ~~4.50%~~5.25% to ~~4.75%~~5.50% as of ~~February 28,~~August 31, 2023.

Other factors affecting the variance between our reported results for the current ~~year-to-date period~~quarter and the same ~~prior year-to-date period~~prior-year quarter include the impact of a favorable shift from losses to gains recorded on our investment securities of $7 million, primarily due to period-to-period market fluctuations in fair value, and a reduction in the provision for credit losses of $2 million, partially offset by an ~~increase~~increase in operating expenses of $8$6 million, attributable to higher expenses recorded for salaries, information technology, ~~business travel~~depreciation and ~~in-person corporate meetings~~amortization expenses, and ~~events, and an unfavorable shift of $16 million in the~~member relations expenses. We provide additional information on our provision for credit losses ~~partially offset by a decrease in losses recorded on our investment securities~~under the section “Consolidated Results of ~~$13 million, primarily due to period-t~~Operations—~~o-period market fluctuations in fair value.~~Provision for Credit Losses” of this Report.

We recorded a provision for credit losses of $4 million for the current year-to-date period. In contrast, we recorded a benefit for credit losses of $12 million for the same prior year-to-date period. The current year-to-date period provision for credit losses stemmed from an ~~increase in the collective allowance, primarily due to loan portfolio growth, and~~ ~~in the asset-specific allowance for loans~~ to Brazos Electric Power Cooperative, Inc. (“Brazos”), its wholly-owned subsidiary Brazos Sandy Creek Electric Cooperative Inc. (“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. The benefit for credit losses for the same prior year-to-date period was primarily driven by a decrease in the collective allowance due to an improvement in Rayburn’s credit risk profile and a significant reduction in loans outstanding to Rayburn.

Non-GAAP Adjusted Results

Adjusted net income totaled ~~$80~~$66 million and adjusted TIER was ~~1.30 for the~~ ~~current quarter, compared with adjusted net income of $66 million and adjusted TIER of 1.33 for the same prior-year quarter.~~ ~~Adjusted net income totaled $185 million and adjusted~~ ~~TIER was 1.26~~1.23 for the current ~~year-to-date period,~~quarter, compared with adjusted net income of $~~184~~58 million and adjusted TIER of ~~1.31~~1.26 for the same ~~prior year-to-date period.~~prior-year quarter. The adjusted TIER for the current ~~periods~~quarter and the same prior-year ~~periods~~quarter was well above our target of 1.10. While our goal is to maintain an adjusted debt-to-equity ratio of approximately ~~6.00-to-1,~~6-to-1, the adjusted debt-to-equity ratio increased to ~~6.59~~6.31 as of ~~February 28,~~August 31, 2023 from ~~6.24~~6.04 as of May 31, ~~2022,~~2023, and was above our targeted goal, ~~largely~~ due to the combined impact of an increase in adjusted liabilities resulting from additional borrowings to fund growth in our loan portfolio and a decrease in adjusted equity. The decrease in adjusted equity was primarily due to the early redemption during the current quarter of $100 million in principal amount of our $400 million subordinated deferrable debt due 2043 and the CFC Board of Directors’ authorized patronage capital retirement in July ~~2022 of $59 million,~~2023, partially offset by our ~~current year-to-date period~~current-quarter adjusted net income.

~~Current Quarter Adjusted Results~~

The increase in adjusted net income of ~~$14~~$8 million to ~~$80~~$66 million for the current quarter, from ~~$66~~$58 million for the same prior-year quarter was due primarily to an increase in adjusted net interest income of $5$6 million, ~~and~~ a ~~reduction in~~ favorable shift from losses to gains recorded on our investment securities of ~~$10~~$7 million, and a reduction in the provision for credit losses of $2 million, partially offset by an increase in operating expenses of ~~$2 million and a reduction in the benefit for credit losses of $2~~$6 million, as discussed above under ~~“Current Quarter Reported~~“Reported Results.”

The increase in adjusted net interest income of $56 million, or 6%7%, to ~~$90~~$93 million, was attributable primarily to an increase in average interest-earning assets of ~~$2,768~~$2,345 million, or 9%8%, primarily due to growth in average total ~~loans,~~ loans. T~~partially offset by the decrease in the~~he adjusted net interest yield ~~of 4 basis points, or 3%~~remained unchanged at 1.10%, ~~to 1.11%. The decrease in the adjusted net interest yield reflected~~reflecting the combined impact of ~~an increase in our adjusted average cost of borrowings of 58 basis points to 3.46%, partially offset by~~ an increase in the average yield on interest-earning assets of 5162 basis points to ~~4.35%~~4.52% and an increase in the benefit from non-interest bearing funding of 34 basis points to ~~0.22%.~~

~~Year-to-Date Adjusted Results~~

The slight increase in adjusted net income of less than $1 million to $185 million for the current year-to-date period, from $184 million for the same prior year-to-date period was due primarily to an increase in adjusted net interest income of $11 million and a reduction in losses recorded on our investment securities of $13 million, partially0.24%, offset by an unfavorable shift in the provision for credit losses of $16 million and an increase in operating expenses of $8 million. See above under “Year-to-Date Reported Results” for a discussion on the drivers of the current year-to-date period unfavorable shift in the provision for credit losses, increase in operating expenses and reduction in the losses recorded on our investment securities.

~~The increase in adjusted net interest income~~ ~~of $11 million, or 4%, to $260 million, was attributable primarily to an increase in average interest-earning assets of $2,269 million, or 8%, due~~ ~~to growth in average total loans,~~ ~~partially offset by the decrease in the adjusted net interest yield of 4 basis points, or 4%, to 1.09%. The decrease in the adjusted net interest yield reflected the combined impact of~~ an increase in our adjusted average cost of borrowings of 3466 basis points to 3.24%, partially offset by an increase in the average yield on interest-earning assets of 28 basis points to 4.12% and an increase in the benefit from non-interest bearing funding of 2 basis points to 0.21%3.66%.

See “Non-GAAP Financial Measures” for additional information on our ~~adjusted~~non-GAAP financial measures, including a reconciliation of these measures to the most directly comparable U.S. GAAP financial measures.

Lending Activity

Loans to members totaled ~~$32,382~~$33,097 million as of ~~February 28,~~August 31, 2023, an increase of ~~$2,319~~$565 million, or 8%2%, from May 31, ~~2022,~~2023, reflecting net increases in long-term and line of credit ~~loans~~loans of ~~$1,182~~$326 million and ~~$1,136~~$239 million, respectively. The ~~$1,136~~$239 million increase in line of credit loans was largely attributable to funding provided for higher member operating costs, ~~that our members experienced, bridge loans due to delays in~~working capital and RUS ~~financing and broadband~~ bridge loan financing. We experienced increases in CFC distribution loans, CFC power supply loans, CFC statewide and associate loans, NCSC loans and RTFC loans of $1,580 million, $417 million, $29 million, $278 million and $14 million, respectively.

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Long-term loan advances totaled ~~$2,460~~$711 million during the current ~~year-to-date period~~,quarter, of which approximately ~~94%~~87% was provided to members for capital expenditures and approximately 2%13% was provided for ~~the refinancing of loans made by~~ other ~~lenders. In comparison, long-term loan advances totaled $2,384 million during the~~ ~~same prior year-to-date period,~~ of which approximately 79% was provided to members for capital expenditures and approximately 20% was provided to members for operating expenses and also to refinance advances that were drawn under line of credit facilities to meet elevated power cost obligations incurred during the February 2021 polar vortex.purposes, primarily asset acquisitions. Of the ~~$2,460~~$711 million total long-term loans advanced during the current ~~year-to-date period, $2,135~~quarter, $659 million were fixed-rate loan advances with a weighted average fixed-rate term of 1814 years.

~~Of the total long-term loans advanced for capital expenditures during the current year-to-date period,~~ ~~approximately $605 million was~~ ~~to provide funding for CFC electric distribution cooperative members’ infrastructure investments in broadband projects.~~ Our aggregate loans outstanding to CFC electric distribution cooperative members relating to broadband projects, which we started tracking in October 2017, increased to an estimated ~~$2,127~~$2,558 million as of ~~February 28,~~August 31, 2023, from approximately ~~$1,647~~$2,355 million as of May 31, ~~2022.~~2023.

We provide additional information on our lending activity and loan portfolio under the section “Consolidated Balance Sheet Analysis—Loan Portfolio” and “Note 4—Loans” in this Report.

Credit Quality

We believe the overall credit quality of our loan portfolio remained strong as of ~~February 28,~~August 31, 2023. Historically, we have had limited defaults and losses on loans in our electric utility loan portfolio largely because of the essential nature of the service provided by electric utility cooperatives as well as other factors, such as limited rate regulation and competition, which we discuss further in the section “Credit Risk—Loan Portfolio Credit Risk.” In addition, we generally lend to members on a senior secured basis, which reduces the risk of loss in the event of a borrower default. Loans outstanding to electric utility organizations of ~~$31,887~~$32,545 million and ~~$29,584~~$32,032 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, represented approximately 98% and 99% of total loans outstanding as of each respective date. Of our total loans outstanding, ~~91% and 93%~~92% were secured as of ~~February 28,~~both August 31, 2023 and May 31, ~~2022, respectively.~~2023.

We had no loan charge-offs during the current quarter and the same prior-year quarter. During the current quarter, we received a total amount of $28 million in loan payments from Brazos Electric Power Cooperative, Inc. (“Brazos”) and its wholly-owned subsidiary Brazos Sandy Creek Electric Cooperative Inc. (“Brazos Sandy Creek”) to repay their $27 million of total loans outstanding in full. The additional payment of $1 million was recorded as a loan recovery on the Brazos and Brazos Sandy Creek previously charged-off loan amounts, which resulted in an annualized net recovery rate of 0.01%.

We had a loan to one CFC electric power supply borrower totaling $85 million classified as nonperforming as of August 31, 2023. In comparison, we had loans to two CFC electric power supply borrowers totaling ~~$108 million classified as nonperforming as of February 28, 2023. In comparison we had loans to three CFC electric power supply borrowers totaling $228~~$89 million classified as nonperforming as of May 31, ~~2022.~~2023. The reduction in nonperforming loans ~~of $120 million during the current year-to-date period~~ was due to the receipt of $4 million in loan ~~principal~~ payments from ~~the partial charge-offs related to~~ ~~Brazos and~~ Brazos Sandy Creek to pay off its nonperforming ~~loans~~, ~~and the classification of Brazos nonperforming loans to TDR loans during the current quarter.~~ ~~Loans~~loan outstanding, ~~to Brazos and Brazos Sandy Creek totaled $27 million and $114 million~~ as ~~of February 28, 2023~~discussed above. ~~and May 31, 2022, respectively.~~

We had no charge-offs during the three months ended February 28, 2023. We experienced charge-offs totaling $15 million for the CFC electric power supply loan portfolio related to Brazos and Brazos Sandy Creek nonperforming loans during the current year-to-date period, which resulted in an annualized net charge-off rate of 0.06% for the current year-to-date period. In comparison we had no loan charge-offs during the same prior-year periods. 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 year 2013 and 2017, respectively.

~~See section “Credit Risk—Credit Quality Indicators” below for additional information on Brazos and Brazos Sandy Creek.~~

allowance for credit losses reflecteda ~~reduction in the asset-specific allowance of~~ ~~$13 million, partially offset by~~ an increase in the collective allowance of $1$3 million p~~rimarily due to loan portfolio growth.~~, partially offset by a reduction in the asset-specific allowance of $1 million.

We provide additional information on the credit quality of our loan portfolio and the allowance for credit losses in the sections “Critical Accounting Estimates,” “Credit Risk—Credit Quality Indicators” and “Credit Risk—Allowance for Credit Losses,” and in “Note 4—Loans” and “Note 5—Allowance for Credit Losses” of this Report.

Financing Activity

We issue debt primarily to fund growth in our loan portfolio. As such, our debt outstanding generally increases and decreases in response to member loan demand. Total debt outstanding increased ~~$2,194~~$405 million, or 8%1%, to ~~$30,942~~$31,405 million as of ~~February 28,~~August 31, 2023, due to borrowings to fund the increase in loans to members. Outstanding dealer commercial paper of ~~$1,214~~$1,088 million as of ~~February 28,~~August 31, 2023 was within our quarter-end target range. We provide additional information on our financing activities ~~under~~in the ~~“Consolidated Balance Sheet Analysis—Debt”~~below section “Liquidity Risk” of this Report.

~~During the current quarter, Moody’s Investors Service (“Moody’s”), S&P Global Inc. (“S&P”) and~~ In September 2023, Fitch Ratings (“Fitch”) affirmed CFC’s credit ratings and stable outlook. ~~Table 25 presents~~We present our credit ratings for each CFC debt product type as of ~~February 28,~~August 31, 2023, which remain unchanged as of the date of this Report, in Table 23 in the below section “Liquidity Risk—Credit Ratings” ~~section~~ of this Report.

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Liquidity

In addition to cash on hand, our primary sources of funds include member loan principal repayments, securities held in our investment portfolio, committed bank revolving lines of credit, committed loan facilities under the USDA Guaranteed Underwriter Program (“Guaranteed Underwriter Program”), revolving note purchase ~~agreements~~agreement with the Federal Agricultural Mortgage Corporation (“Farmer Mac”) and proceeds from debt issuances to our members and in the public capital markets. Although as a ~~non-bank~~nonbank financial institution we are not subject to regulatory liquidity requirements, we monitor our liquidity and funding positions on an ongoing basis and assess 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 repayment amounts, as well as our continued ability to access the public capital markets and other non-capital market related funding sources.

As of ~~February 28,~~August 31, 2023, our available liquidity totaled ~~$6,816~~$6,622 million, consisting of: (i) cash and cash equivalents of ~~$173~~$200 million; (ii) investments in debt securities with an aggregate fair value of ~~$549~~$425 million, which is subject to ~~change~~changes based on market fluctuations; (iii) up to ~~$2,593~~$2,598 million available under committed bank revolving line of credit agreements; (iv) up to $1,025 million available under committed loan facilities under the Guaranteed Underwriter Program; and (v) up to ~~$2,476~~$2,374 million available under a Farmer Mac revolving note purchase agreement, subject to market conditions. In addition to our existing available liquidity of ~~$6,816~~$6,622 million as of ~~February 28,~~August 31, 2023, we expect to receive ~~$1,494~~$1,487 million from scheduled long-term loan principal payments over the next 12 months.

Debt scheduled to mature over the next 12 months totaled ~~$7,155~~$7,011 million as of ~~February 28,~~August 31, 2023, consisting of short-term borrowings of ~~$4,900~~$5,124 million and long-term and subordinated debt of ~~$2,255~~$1,887 million. The short-term borrowings scheduled maturity amount of ~~$4,900~~$5,124 million consists of member investments of ~~$3,186~~$3,536 million, dealer commercial paper of ~~$1,214~~$1,088 million and Farmer Mac notes payable of $500 million. The long-term and subordinated scheduled debt obligations over the next 12 months of ~~$2,255~~$1,887 million consist of debt maturities and scheduled debt payment ~~amounts.~~amounts, of which, $202 million was from member investments.

Our available liquidity of ~~$6,816~~$6,622 million as of ~~February 28,~~August 31, 2023 was ~~$339~~$389 million ~~under~~below our total scheduled debt obligations over the next 12 months of ~~$7,155~~$7,011 million. We believe we can continue to roll over our member short-term investments of ~~$3,186~~$3,536 million as of ~~February 28,~~August 31, 2023, based on our expectation that our members will continue to reinvest their excess cash in short-term investment products offered by CFC. Our members historically have maintained a relatively stable level of short-term investments in CFC in the form of commercial paper, select notes, daily liquidity fund notes and medium-term notes. Member short-term investments in CFC have averaged ~~$3,685~~$3,607 million over the last 12 fiscal quarter-end reporting periods. ~~In addition, we expect to receive $1,494 million from scheduled long-term loan principal payments over the next 12 months.~~ Our available liquidity of ~~$6,816~~$6,622 million as of ~~February 28,~~August 31, 2023 was ~~$2,847~~$3,147 million in excess of,

or ~~1.7~~1.9 times over, our total scheduled debt obligations, excluding member short-term investments, over the next 12 months of ~~$3,969~~$3,475 million.

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-period~~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 ~~and~~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 asso we can draw on these facilities, if necessary, to repay dealer or member commercial paper that cannot be refinanced with similar debt. In addition, under master repurchase agreements we have with our bank counterparties, 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.

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We provide additional information on our liquidity profile and our primary sources and uses of funds, including projected amounts, by quarter, over each of the next six fiscal quarters through the quarter ending ~~August 31, 2024,~~February 28, 2025, in the “Liquidity Risk” section of this Report.

~~COVID-19~~RTFC and NCSC Consolidation

In April 2023 and June 2023, RTFC’s and NCSC’s members, respectively, approved the sale of RTFC’s business to NCSC. We ~~believe that~~intend to complete the ~~COVID-19 pandemic has not adversely affected our primary objective~~consolidation of ~~providing our members~~RTFC and NCSC within the fiscal year ended May 31, 2024, subject to meeting certain closing conditions. In October 2023, in connection with the ~~credit products they need~~consolidation transaction, the Board of Directors approved the early retirement of allocated but unretired patronage capital at a discounted amount of $52 million, which may be subject to ~~fund their operations and that we have been able to successfully navigate~~adjustment at the ~~challenges~~closing of the ~~COVID-19 pandemic~~consolidation transaction. In addition, CFC’s and RTFC’s Board of Directors approved the early redemption of $12 million of members’ subordinated certificates, which is expected to date. To date, we believe that the pandemic has not had a significant negative impact on the overall financial performance and credit quality of our members. CFC has been able to maintain business continuity throughout the pandemic and has experienced no pandemic-related employee furloughs or layoffs. We provide additional information on actions taken in responseoccur prior to the ~~pandemic to protect~~closing of the safety and health of our employees under “Item 1. Business—Human Capital Management” and “Item 7. MD&A—Executive Summary” in our 2022 Form 10-K. We discuss the potential adverse impact of natural disasters, including weather-related events such as the February 2021 polar vortex, and widespread health emergencies, such as COVID-19, on our business, results of operations, financial condition and liquidity under “Item 1A. Risk Factors—Operations and Business Risks” in our 2022 Form 10-K.consolidation transaction.

Electric Cooperative Industry Trends and Developments

~~We believe there are emerging~~Emerging developments and trends in the electric cooperative sector ~~that~~ continue to present opportunities as well as challenges for our electric cooperative members. These trends include: (i) expanded investments by many electric cooperatives to deploy broadband services to their members; (ii) inflation, ~~and~~ supply chain ~~challenges;~~challenges and labor shortages; (iii) increased federal government programs and policies for electric utilities; (iv) an increased focus on enhancing electric system resiliency and reliability; ~~(iv) increased~~(v) continued interest in renewable energy investments; and ~~(v)~~(vi) growing support of beneficial electrification strategies to reduce overall carbon emissions, while also providing benefits to cooperative members. We provide additional information on these emerging developments and trends in the electric cooperative sector in “Item 7. MD&A—Executive Summary” in our ~~2022~~2023 Form 10-K.

On August 16, 2022, the U.S. Inflation Reduction Act (the “IRA”) was signed into law and it includes opportunities for electric cooperatives to fund clean energy projects such as solar, wind, stand-alone energy storage, carbon capture, and nuclear energy by allowing these entities to treat certain credits as direct payment rather than as a credit against their federal income tax liabilities. The IRA also provides nearly $10 billion in grants and loans specifically for electric cooperatives to invest in clean energy projects and related infrastructure.

Outlook

As further described below in thtehe “Liquidity Risk—Projected Near-Term Sources and Uses of Funds” section, we currently anticipate net long-term loan growth of ~~$1,378~~$1,955 million over the next 12 months. ~~The~~In September 2023, the FOMC of the Federal Reserve signaled the expectation of one additional increase in the federal funds rate and pointed to a consensus target rate of 5.60% by December 31, 2023, stating its continued objective of returning the inflation rate to 2% over the longer run. In addition, the FOMC projections include a decrease in the federal funds rate to a target rate of 5.10% by December 31, 2024. As a result, the September 2023 consensus market outlook for interest rates asindicated rising interest rates across the yield curve during the remainder of ~~March~~ 2023, ~~pointed to~~followed by a decrease in ~~the~~ short-term interest rates ~~resulting~~during 2024. The yield curve is expected to remain inverted for the remainder of 2023 and, given the expected drop in ~~a less inverted yield curve. The~~short-term interest rates in the following year, the yield curve inversion is expected to narrow in 2024, and remain ~~until mid-calendar year 2024, however the interest rate market has experienced extreme volatility in March 2023, which is expected to continue.~~ inverted beyond that period.

Based on this yield curve forecast, we anticipate a decrease in our reported net interest income and reported net interest yield over the next 12 months ~~relative~~compared to the 12-month period ended ~~February 28,~~August 31, 2023. However, we ~~expect a modest~~project an increase in our adjusted net interest income and adjusted net interest yield over the next 12 months relative to the 12-month period ended ~~February 28, 2023, due~~August 31, 2023. This is primarily attributable to ~~an anticipated~~the expected significant ~~reduction~~increase in our derivative net periodic cash settlements ~~expense,~~income, which ~~reduce~~will contribute to reducing our adjusted cost of ~~borrowings, and loan portfolio growth.~~borrowings. Additionally, we anticipate a ~~slight decrease~~sustained expansion of our loan portfolio, with variable-rate line of credit loans outstanding remaining at an elevated level. The anticipated improvement in our adjusted net interest yield over the next 12 months relative to the 12-month period ended ~~February 28,~~August 31, 2023 is due to the current yield curve assumptions and our balance sheet position.

We expect that our adjusted net income will increase ~~slightly~~ over the next 12 months, primarily attributable to our projected ~~modest~~ increase in adjusted net interest income. However, we believe that our adjusted TIER will decrease slightly over the next 12 months, primarily attributable to our projected increase in adjusted interest expense. We believe that our adjusted debt-to-equity ratio will remain elevated above our target of ~~6.00-to-1~~6-to-1, primarily due to athe projected increase in total debt outstanding to fund anticipated growth in our loan ~~portfolio.~~ portfolio and the expected retirement of discounted patronage capital as part of RTFC’s consolidation with NCSC, which we intend to complete during the fiscal year ended May 31, 2024, as discussed above.

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As ~~discussed~~stated above, we are subject to earnings volatility, often significant, because we do not apply hedge accounting to our interest rate swaps. Therefore, the periodic unrealized fluctuations in the fair value of our interest rate swaps are recorded in our earnings. The variances in our earnings between periods are generally attributable to significant shifts in recorded unrealized derivative forward value gain and loss amounts. We exclude the impact of unrealized derivative forward fair value gains and losses from our non-GAAP ~~adjusted~~financial measures.

We are unable to provide a reconciliation of our projected adjusted net income, adjusted TIER and adjusted debt-to-equity ratio to the most directly comparable GAAP financial measures or directional guidance for the most directly comparable GAAP financial measures on a forward-looking basis without unreasonable effort due to the significant shifts in the unrealized derivative forward value gains and losses recorded each period. The majority of our swaps are long-term, with an average remaining life of approximately 15 years as of ~~February 28,~~August 31, 2023. We can reasonably estimate the realized net periodic derivative cash settlement amounts over the next 12 months for our interest rate swaps, which are typically based on ~~the 3-month London Interbank Offered Rate (“LIBOR”) that will transition to~~daily compounded Secured Overnight Financing Rate (“SOFR”) ~~after June 30, 2023,~~, and the fixed rate of the swap. In contrast, the unrealized periodic derivative forward value gains and losses are largely based on future expected changes in longer-term interest rates, which we are unable to accurately predict for each reporting period over the next 12 months. Because unrealized periodic derivative forward value gain and loss amounts are a key driver of changes in our earnings between periods, this unavailable information is likely to have a significant impact on our reported net income, TIER and debt-to-equity ratio, which represent the most directly comparable GAAP financial measures. We provide reconciliations of our non-GAAP adjusted net income, adjusted TIER and adjusted debt-to-equity ratio to the most directly comparable GAAP financial measures for each reporting period included in this Report in the section “Non-GAAP Financial Measures.” These reconciliations illustrate the potential significant impact that unrealized derivative forward value gains and losses could have on our future reported net income, reported TIER and reported ~~adjusted~~ debt-to-equity ratio.


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” in our ~~2022~~2023 Form 10-K.

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 the allowance for credit losses as a critical accounting estimate. 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—Current Methodology” in our ~~2022~~2023 Form 10-K.

We identify the key inputs used in determining the allowance for credit losses, discuss the assumptions that require the most significant management judgment and contribute to the estimation uncertainty and disclose the sensitivity of our allowance to hypothetical changes in the assumptions underlying the calculation of our reported allowance for credit losses under “Item 7. MD&A—Critical Accounting Estimates” in our ~~2022~~2023 Form 10-K. 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 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 the current quarter.

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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 our ~~2022~~2023 Form 10-K. We provide additional information on the allowance for credit losses under the section “Credit Risk—Allowance for Credit Losses” and in “Note 5—Allowance for Credit Losses” ofin 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.


CONSOLIDATED RESULTS OF OPERATIONS

This section provides a comparative discussion of our consolidated results of operations between the three months ended ~~February 28,~~August 31, 2023 and ~~2022 and between the nine months ended February 28, 2023 and 2022 .~~2022. Following this section, we provide a discussion and analysis of material changes between amounts reported on our consolidated balance ~~sheet~~sheets as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~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.

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 2 presents average balances for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023 and 2022, 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 2 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 ~~adjusted~~financial measures to the most comparable U.S. GAAP financial measures under “Non-GAAP Financial Measures.”

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Table 2: Average Balances, Interest Income/Interest Expense and Average Yield/Cost
Three Months Ended February 28,
2023 2022
(Dollars in thousands) Average Balance Interest Income/Expense Average Yield/Cost Average Balance Interest Income/Expense Average Yield/Cost
Assets:
Long-term fixed-rate loans(1)
$ 27,839,825 $ 288,016 4.20% $ 26,141,256 $ 265,493 4.12%
Long-term variable-rate loans 916,868 13,648 6.04 695,401 3,790 2.21
Line of credit loans 3,153,392 45,653 5.87 2,282,758 12,262 2.18
Troubled debt restructuring (“TDR”) loans 32,074 184 2.33 9,387 181 7.82
Nonperforming loans 125,757 — — 217,837 — —
Other, net(2)
— (389) — — (365) —
Total loans 32,067,916 347,112 4.39 29,346,639 281,361 3.89
Cash and investment securities 833,024 6,180 3.01 786,608 3,845 1.98
Total interest-earning assets $ 32,900,940 $ 353,292 4.35% $ 30,133,247 $ 285,206 3.84%
Other assets, less allowance for credit losses(3)
1,041,947 439,629
Total assets(3)
$ 33,942,887 $ 30,572,876
Liabilities:
Commercial paper $ 2,901,375 $ 31,943 4.47% $ 2,990,565 $ 2,574 0.35%
Other short-term borrowings 2,047,112 18,696 3.70 1,835,473 1,228 0.27
Short-term borrowings(4)
4,948,487 50,639 4.15 4,826,038 3,802 0.32
Medium-term notes 6,423,373 57,056 3.60 5,006,411 26,928 2.18
Collateral trust bonds 7,614,181 70,859 3.77 6,917,753 61,003 3.58
Guaranteed Underwriter Program notes payable 6,378,600 46,477 2.96 6,121,837 41,496 2.75
Farmer Mac notes payable 3,225,962 30,469 3.83 3,068,924 14,181 1.87
Other notes payable 2,557 15 2.38 5,890 31 2.13
Subordinated deferrable debt 986,642 12,881 5.29 986,433 12,885 5.30
Subordinated certificates 1,228,253 13,313 4.40 1,239,044 13,328 4.36
Total interest-bearing liabilities $ 30,808,055 $ 281,709 3.71% $ 28,172,330 $ 173,654 2.50%
Other liabilities(3)
614,711 899,953
Total liabilities(3)
31,422,766 29,072,283
Total equity(3)
2,520,121 1,500,593
Total liabilities and equity(3)
$ 33,942,887 $ 30,572,876
Net interest spread(5)
0.64% 1.34%
Impact of non-interest bearing funding(6)
0.24 0.16
Net interest income/net interest yield(7)
$ 71,583 0.88% $ 111,552 1.50%
Adjusted net interest income/adjusted net interest yield:
Interest income $ 353,292 4.35% $ 285,206 3.84%
Interest expense 281,709 3.71 173,654 2.50
Add: Net periodic derivative cash settlements interest (income) expense(8)
(18,634) (1.00) 26,212 1.28
Adjusted interest expense/adjusted average cost(9)
$ 263,075 3.46% $ 199,866 2.88%
Adjusted net interest spread(7)
0.89 0.96
Impact of non-interest bearing funding(6)
0.22 0.19
Adjusted net interest income/adjusted net interest yield(10)
$ 90,217 1.11% $ 85,340 1.15%

Nine Months Ended February 28,
2023 2022
(Dollars in thousands) Average Balance Interest Income/Expense Average Yield/Cost Average Balance Interest Income/Expense Average Yield/Cost
Assets:
Long-term fixed-rate loans(1)
$ 27,447,941 $ 844,731 4.11% $ 25,752,324 $ 792,147 4.11%
Long-term variable-rate loans 833,137 29,965 4.81 747,450 12,402 2.22
Line of credit loans 2,656,726 94,533 4.76 2,182,527 35,523 2.18
TDR loans.. 16,505 539 4.37 9,617 555 7.72
Nonperforming loans 189,756 — — 226,503 — —
Other, net(2)
— (1,139) — — (1,079) —
Total loans 31,144,065 968,629 4.16 28,918,421 839,548 3.88
Cash and investment securities 803,120 15,835 2.64 759,648 12,078 2.13
Total interest-earning assets $ 31,947,185 $ 984,464 4.12% $ 29,678,069 $ 851,626 3.84%
Other assets, less allowance for credit losses(3)
938,222 459,785
Total assets(3)
$ 32,885,407 $ 30,137,854
Liabilities:
Commercial paper $ 2,886,202 $ 70,735 3.28% $ 2,594,386 $ 6,531 0.34%
Other short-term borrowings 2,160,816 45,299 2.80 1,994,307 3,740 0.25
Short-term borrowings(4)
5,047,018 116,034 3.07 4,588,693 $ 10,271 0.30
Medium-term notes 5,991,902 134,477 3.00 4,606,393 78,815 2.29
Collateral trust bonds 7,295,834 199,421 3.65 7,079,926 186,833 3.53
Guaranteed Underwriter Program notes payable 6,236,285 133,107 2.85 6,178,128 127,536 2.76
Farmer Mac notes payable 3,086,668 74,601 3.23 3,070,396 39,297 1.71
Other notes payable 4,015 72 2.40 7,470 127 2.27
Subordinated deferrable debt 986,589 38,656 5.24 986,382 38,657 5.24
Subordinated certificates 1,233,109 40,253 4.36 1,248,834 40,491 4.33
Total interest-bearing liabilities $ 29,881,420 $ 736,621 3.30% $ 27,766,222 $ 522,027 2.51%
Other liabilities(3)
663,999 981,342
Total liabilities(3)
30,545,419 28,747,564
Total equity(3)
2,339,988 1,390,290
Total liabilities and equity(3)
$ 32,885,407 $ 30,137,854
Net interest spread(5)
0.82% 1.33%
Impact of non-interest bearing funding(6)
0.22 0.15
Net interest income/net interest yield(7)
$ 247,843 1.04% $ 329,599 1.48%
Adjusted net interest income/adjusted net interest yield:
Interest income $ 984,464 4.12% $ 851,626 3.84%
Interest expense 736,621 3.30 522,027 2.51
Add: Net periodic derivative cash settlements interest (income) expense(8)
(12,650) (0.22) 79,727 1.25
Adjusted interest expense/adjusted average cost(9)
$ 723,971 3.24% $ 601,754 2.90%
Adjusted net interest spread(7)
0.88 0.94
Impact of non-interest bearing funding(6)
0.21 0.19
Adjusted net interest income/adjusted net interest yield(10)
$ 260,493 1.09% $ 249,872 1.13%


	Three Months Ended August 31,
	2023						2022
(Dollars in thousands)	Average Balance		Interest Income/Expense		Average Yield/Cost		Average Balance		Interest Income/Expense		Average Yield/Cost
Assets:
Long-term fixed-rate loans(1)	$	28,610,870	$	301,703	4.20	%	$	27,255,164	$	276,303	4.02	%
Long-term variable-rate loans	1,012,846		17,752		6.97		760,386		6,871		3.59
Line of credit loans	3,270,350		56,514		6.87		2,395,365		19,879		3.29


Other, net(2)	—		(401)		—		—		(373)		—
Total loans	32,894,066		375,568		4.54		30,410,915		302,680		3.95
Cash and investment securities	644,358		5,388		3.33		782,101		4,298		2.18
Total interest-earning assets	$	33,538,424	$	380,956	4.52	%	$	31,193,016	$	306,978	3.90	%
Other assets, less allowance for credit losses(3)	971,320						696,468
Total assets(3)	$	34,509,744					$	31,889,484

Liabilities:
Commercial paper	$	2,328,557	$	31,530	5.39	%	$	2,855,770	$	14,613	2.03	%
Other short-term borrowings	1,885,279		23,919		5.05		2,171,205		9,596		1.75
Short-term borrowings(4)	4,213,836		55,449		5.23		5,026,975		$	24,209	1.91
Medium-term notes	7,043,395		68,142		3.85		5,868,605		35,915		2.43
Collateral trust bonds	7,579,428		71,949		3.78		6,914,496		61,567		3.53
Guaranteed Underwriter Program notes payable	6,695,394		52,530		3.12		6,085,954		41,996		2.74
Farmer Mac notes payable	3,345,219		34,283		4.08		3,007,523		19,375		2.56
Other notes payable	1,821		18		3.93		4,716		28		2.36
Subordinated deferrable debt	1,211,112		20,448		6.72		986,536		12,888		5.18
Subordinated certificates	1,222,235		13,462		4.38		1,233,856		13,490		4.34
Total interest-bearing liabilities	$	31,312,440	$	316,281	4.02	%	$	29,128,661	$	209,468	2.85	%
Other liabilities(3)	557,475						582,764
Total liabilities(3)	31,869,915						29,711,425
Total equity(3)	2,639,829						2,178,059
Total liabilities and equity(3)	$	34,509,744					$	31,889,484
Net interest spread(5)					0.50	%					1.05	%
Impact of non-interest bearing funding(6)					0.27						0.19
Net interest income/net interest yield(7)			$	64,675	0.77	%			$	97,510	1.24	%

Adjusted net interest income/adjusted net interest yield:
Interest income			$	380,956	4.52	%			$	306,978	3.90	%
Interest expense			316,281		4.02				209,468		2.85
Add: Net periodic derivative cash settlements interest (income) expense(8)			(27,869)		(1.44)				10,785		0.54
Adjusted interest expense/adjusted average cost(9)			$	288,412	3.66	%			$	220,253	3.00	%
Adjusted net interest spread(7)					0.86						0.90
Impact of non-interest bearing funding(6)					0.24						0.20
Adjusted net interest income/adjusted net interest yield(10)			$	92,544	1.10	%			$	86,725	1.10	%

___________________________

(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.

(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.

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(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 2 consist of commercial paper, select notes, daily liquidity fund notes and secured borrowings under repurchase agreements. 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 2. 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 2, totaled ~~$853~~$910 million and ~~$416~~$410 million as of ~~February 28,~~August 31, 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 annualized 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 the annualized 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 ~~$7,555~~$7,714 million and ~~$8,308~~$7,973 million for the three months ended ~~February 28, 2023 and 2022, respectively. The average outstanding notional amount of interest rate swaps was $7,762 million and $8,540 million for the nine months ended February 28,~~August 31, 2023 and 2022, respectively.

(9)Adjusted interest expense consists of interest expense plus net periodic derivative cash settlements interest ~~expense~~income (expense) during the period. Net periodic derivative cash ~~settlement~~settlements interest ~~amounts are~~income (expense) is reported on our consolidated statements of operations as a component of derivative gains (losses). Adjusted average cost is calculated based on annualized 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 annualized adjusted net interest income for the period divided by total average interest-earning assets for the period.

Table 3 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 3: Rate/Volume Analysis of Changes in Interest Income/Interest Expense


		Three Months Ended February 28,						Nine Months Ended February 28,							Three Months Ended August 31,
		2023 versus 2022						2023 versus 2022							2023 versus 2022
		Total		Variance Due To:(1)				Total		Variance Due To:(1)						Total	Variance Due To:(1)
(Dollars in thousands)	(Dollars in thousands)	Variance		Volume		Rate		Variance		Volume		Rate		(Dollars in thousands)			Variance		Volume		Rate
Interest income:	Interest income:													Interest income:
Long-term fixed-rate loans	Long-term fixed-rate loans	$	22,523	$	17,251	$	5,272	$	52,584	$	52,158	$	426	Long-term fixed-rate loans			$	25,400	$	12,951	$	12,449
Long-term variable-rate loans	Long-term variable-rate loans	9,858		1,207		8,651		17,563		1,422		16,141		Long-term variable-rate loans			10,881		2,256		8,625
Line of credit loans	Line of credit loans	33,391		4,677		28,714		59,010		7,718		51,292		Line of credit loans			36,635		7,187		29,448
TDR loans		3		437		(434)		(16)		398		(414)

Other, net	Other, net	(24)		—		(24)		(60)		—		(60)		Other, net			(28)		—		(28)
Total loans	Total loans	65,751		23,572		42,179		129,081		61,696		67,385		Total loans			72,888		22,394		50,494
Cash and investment securities	Cash and investment securities	2,335		227		2,108		3,757		691		3,066		Cash and investment securities			1,090		(767)		1,857
Total interest income	Total interest income	68,086		23,799		44,287		132,838		62,387		70,451		Total interest income			73,978		21,627		52,351

Interest expense:	Interest expense:													Interest expense:
Commercial paper	Commercial paper	29,369		(77)		29,446		64,204		735		63,469		Commercial paper			16,917		(2,730)		19,647
Other short-term borrowings	Other short-term borrowings	17,468		142		17,326		41,559		312		41,247		Other short-term borrowings			14,323		(1,286)		15,609
Short-term borrowings	Short-term borrowings	46,837		65		46,772		105,763		1,047		104,716		Short-term borrowings			31,240		(4,016)		35,256
Medium-term notes	Medium-term notes	30,128		7,621		22,507		55,662		23,706		31,956		Medium-term notes			32,227		7,072		25,155
Collateral trust bonds	Collateral trust bonds	9,856		6,141		3,715		12,588		5,698		6,890		Collateral trust bonds			10,382		5,736		4,646
Guaranteed Underwriter Program notes payable	Guaranteed Underwriter Program notes payable	4,981		1,740		3,241		5,571		1,201		4,370		Guaranteed Underwriter Program notes payable			10,534		4,079		6,455
Farmer Mac notes payable	Farmer Mac notes payable	16,288		726		15,562		35,304		208		35,096		Farmer Mac notes payable			14,908		2,117		12,791
Other notes payable	Other notes payable	(16)		(18)		2		(55)		(59)		4		Other notes payable			(10)		(17)		7
Subordinated deferrable debt	Subordinated deferrable debt	(4)		3		(7)		(1)		8		(9)		Subordinated deferrable debt			7,560		2,891		4,669
Subordinated certificates	Subordinated certificates	(15)		(116)		101		(238)		(510)		272		Subordinated certificates			(28)		(164)		136
Total interest expense	Total interest expense	108,055		16,162		91,893		214,594		31,299		183,295		Total interest expense			106,813		17,698		89,115
Net interest income	Net interest income	$	(39,969)	$	7,637	$	(47,606)	$	(81,756)	$	31,088	$	(112,844)	Net interest income			$	(32,835)	$	3,929	$	(36,764)

Adjusted net interest income:	Adjusted net interest income:													Adjusted net interest income:
Interest income	Interest income	$	68,086	$	23,799	$	44,287	$	132,838	$	62,387	$	70,451	Interest income			$	73,978	$	21,627	$	52,351
Interest expense	Interest expense	108,055		16,162		91,893		214,594		31,299		183,295		Interest expense			106,813		17,698		89,115
Net periodic derivative cash settlements interest expense(2)	Net periodic derivative cash settlements interest expense(2)	(44,846)		(2,374)		(42,472)		(92,377)		(7,265)		(85,112)		Net periodic derivative cash settlements interest expense(2)			(38,654)		(378)		(38,276)
Adjusted interest expense(3)	Adjusted interest expense(3)	63,209		13,788		49,421		122,217		24,034		98,183		Adjusted interest expense(3)			68,159		17,320		50,839
Adjusted net interest income	Adjusted net interest income	$	4,877	$	10,011	$	(5,134)	$	10,621	$	38,353	$	(27,732)	Adjusted net interest income			$	5,819	$	4,307	$	1,512

____________________________

(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 expense 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” for additional information on our adjusted non-GAAP financial measures.

Reported Net Interest Income

Reported net interest income of ~~$72~~$65 million for the current quarter decreased ~~$40~~$33 million, or ~~36%~~34%, from the same ~~prior-year-quarter,~~prior-year quarter, driven by a decrease in the net interest yield of 6247 basis points, or ~~41%~~38%, to ~~0.88%~~0.77%, partially offset by an increase in average interest-earning assets of ~~$2,768 million, or 9%.~~

•~~Average Interest-Earning Assets~~: The increase in average interest-earning assets of 9% was attributable to growth in average total loans of $2,721 million, or 9%, driven primarily by an increase in average long-term fixed-rate loans of $1,699 million and an increase in averag~~e line of credit loans of $871 million, as members continued to advance loans to fund capital expenditures and for working capital.~~

•~~Net Interest Yield:~~ The decrease in the net interest yield of 62 basis points, or 41%, was primarily attributable to the combined impact of an increase in our average cost of borrowings of 121 basis points to 3.71%, which was partially offset by an increase in the average yield on interest-earning assets of 51 basis points to 4.35% and an increase in the benefit from non-interest bearing funding of 8 basis points to 0.24%. The increase in our average cost of borrowings and average yield on interest-earning assets were driven by the continued increase in the federal funds rate.

Reported net interest income of $248 million for the current year-to-date period decreased $82 million, or 25%, from the same prior year-to-date period, driven by a decrease in the net interest yield of 44 basis points, or 30%, to 1.04%, partially offset by an increase in average interest-earning assets of $2,269$2,345 million, or 8%.

•Average Interest-Earning Assets: The increase in average interest-earning assets of 8% was attributable to growth in average total loans of ~~$2,226~~$2,483 million, or 8%, driven primarily by an increase in average long-term fixed-rate loans of ~~$1,696~~

Table of C onten t s

$1,356 million and an increase in average line of credit loans of ~~$474~~$875 million, as members continued to advance loans to fund capital expenditures and for working ~~capital.~~capital purposes.

•Net Interest Yield: The decrease in the net interest yield of 4447 basis points, or ~~30%~~38%, was primarily attributable to the combined impact of an increase in our average cost of borrowings of 79117 basis points to ~~3.30%~~4.02%, which was partially offset by an increase in the average yield on interest-earning assets of 2862 basis points to ~~4.12%~~4.52% and an increase in the benefit from non-interest bearing funding of 78 basis points to 0.22%. As mentioned above, the increases in the average cost of borrowings and average yield on interest-earning assets were driven by the continued increase in the federal funds rate. Specifically, we experienced an increase in our average cost of short-term and variable-rate borrowings and average yield on line of credit and variable-rate loans attributable to an overall increase in the federal funds rate of 450 basis points since February 28, 2022.

~~Adjusted Net Interest Income~~

Adjusted net interest income of $90 million for the current quarter, increased $5 million, or 6%, from the same prior-year quarter, driven by an increase in average interest-earning assets of $2,768 million, or 9%, partially offset by a decrease in the adjusted net interest yield of 4 basis point, or 3%, to 1.11%.

•~~Average Interest-Earning Assets:~~ The increase in average interest-earning assets of 9% during the current quarter was driven by the growth in average total loans of $2,721 million, or 9%, attributable primarily to the increase in average long-term fixed-rate and line of credit loans as discussed above.

•~~AdjustedNet Interest Yield~~: The decrease in the adjusted net interest yield of 4 basis point, or 3%, reflected the combined impact of an increase in our adjusted average cost of borrowings of 58 basis points to 3.46%, partially offset by an increase in the average yield on interest-earning assets of 51 basis points to 4.35% and an increase in the benefit from non-interest bearing funding of 3 basis points to 0.22%0.27%. Our average yield on interest-earning assets and ~~adjusted~~ average cost of borrowings rose mainly due to the sustained increase in the federal funds ~~rate.~~rate, which increased 300 basis points since August 31, 2022. 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 ~~adjusted~~ average cost of borrowings increased due to higher interest rates on our short-term and variable-rate borrowings.

18Adjusted Net Interest Income

Adjusted net interest income of ~~$260~~$93 million for the current ~~year-to-date period~~quarter increased ~~$11~~$6 million, or 4%7%, from the same ~~prior year-to-date period~~prior-year quarter driven by ~~the combined impact of~~ an increase in average interest-earning assets of ~~$2,269~~$2,345 million, or 8%~~, partially offset by a decrease in the adjusted net interest yield of 4 basis point, or 4%, to 1.09%~~.

•Average Interest-Earning Assets: The increase in average interest-earning assets of 8% during the current ~~year-to-date period~~quarter was driven by the growth in average total loans of ~~$2,226~~$2,483 million, or 8%, attributable primarily to the ~~increase~~increases in average long-term fixed-rate and line of credit loans as discussed above.

•Adjusted Net Interest Yield: The ~~decrease in the~~ adjusted net interest yield ~~of 4 basis point, or 4%~~remained unchanged at 1.10%, ~~reflected~~reflecting the combined impact of ~~an increase in our adjusted average cost of borrowings of 34 basis points to 3.24%, partially offset by~~ an increase in the average yield on interest-earning assets of 2862 basis points to ~~4.12%~~4.52% and an increase in the benefit from non-interest bearing funding of 24 basis points to ~~0.21%. We discuss above the primary drivers for the~~0.24%, offset by an increase in ~~the~~our adjusted average cost of borrowings of 66 basis points to 3.66%, The increase in both average yield on interest-earning assets and adjusted average cost of ~~borrowings.~~borrowings was attributable to the continued high interest-rate environment since August 31, 2022, 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. We recorded net periodic derivative cash settlements interest income of ~~$19~~$28 million for the current quarter, compared with derivative cash settlements interest expense of ~~$26~~$11 million for the same prior-year quarter. ~~We recorded net periodic derivative cash settlements interest income of $13 million for the~~ ~~current year-to-date period, compared with derivative cash settlements interest expense of $80 million for the~~ ~~same prior year-to-date period~~.

~~The~~Following the cessation of LIBOR on June 30, 2023, daily compounded SOFR replaced LIBOR as the floating-rate ~~payments on~~index for our interest rate ~~swaps are typically based on 3-month LIBOR.~~swaps. 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 ~~the 3-month LIBOR rate increases~~floating rates increase during the period, the ~~received~~ floating interest amounts received on our pay-fixed swaps increase and, conversely, when floating rates decrease, the ~~3-month LIBOR swap rate decreases, the received~~ floating interest amounts received on our pay-fixed swaps decrease. The ~~3-month LIBOR rate increased~~higher floating rates during the current quarter ~~and~~ ~~year-to-date period,~~ ~~resulting in an increase in received floating interest amounts and contributing~~contributed to ~~a net periodic~~the derivative cash settlements interest income infor the ~~current quarter and~~ ~~year-to-date period~~. period. In ~~contrast,~~comparison, the ~~3-month LIBOR rate increase was more modest~~lower floating rates during the same prior-year ~~periods, resulting in a lower increase in received floating interest amounts and contributing~~quarter contributed to ~~a modest reduction in net periodic~~the derivative cash settlements interest expense ~~amounts in~~for the ~~same prior-year periods, when compared to the current-year periods.~~period.

See “Non-GAAP Financial Measures” for additional information on our ~~adjusted~~non-GAAP financial measures, including a reconciliation of these measures to the most comparable U.S. GAAP financial measures.

Provision for Credit Losses

Our provision 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 ~~$56~~$55 million and 0.17%, respectively, as of ~~February 28,~~August 31, 2023. In comparison, our allowance for credit losses and allowance coverage ratio was ~~with $68~~$53 million and ~~0.22%~~0.16%, respectively, as of May 31, ~~2022.~~2023.

Table of C onten t s

We recorded a ~~benefit~~provision for credit losses of ~~$11~~$1 million ~~for~~for the current ~~quarter~~quarter. In contrast, we recorded ~~, compared with~~ a ~~benefit~~provision for credit losses of ~~$13~~$3 million for the same prior-year quarter. The current quarter provision for credit losses resulted from an increase of $3 million ~~benefit stemmed primarily from~~in the collective allowance, partially offset by a ~~reduction~~decrease of $1 million in the asset-specific allowance for a nonperforming CFC power supply loan and a recovery of $1 million attributable to anadditional loan payments received from Brazos and Brazos Sandy Creek during the current quarter. The increase ~~in the expected payments on this loan.~~of $3 million ~~The benefit for credit losses recorded in the~~ ~~same prior-year quarter~~ ~~was primarily attributable to a decrease~~ in the collective allowance stemming largely from positive developments during the same prior-year quarter related to Rayburn that resulted in an improvement in Rayburn’s credit risk profile and also a significant reduction in our loans outstanding to Rayburn.

~~We recorded a provision for credit losses of $4 million for the~~ ~~current year-to-date period. In contrast, we recorded~~ ~~a benefit for credit losses of $12 million for the same prior year-to-date period. The~~ ~~current year-to-date period provision for credit losses stemmed from an~~ ~~increase in the collective allowance,~~was primarily due to loan portfolio growth and a slight decline in the overall credit quality and risk profile of our loan portfolio.

The provision for credit losses of $3 million for the same prior-year quarter was primarily attributable to an increase in the collective allowance due to loan portfolio growth and an increase in the asset-specific allowance for ~~loans~~ to ~~Brazos,~~the Brazos Sandy Creek ~~and for~~nonperforming loan as a ~~nonperforming CFC power supply loan,~~

~~attributable to~~result of the terms of a ~~reduction and timing change in~~settlement of Brazos Sandy Creek’s rejection damages claim against Brazos approved by the ~~expected payments on this loan. The benefit fo~~r credit losses for the same prior year-to-date period was primarily driven by a decrease in the collective allowance due to an improvement in Rayburn’s credit risk profile and a significant reduction in loans outstanding to Rayburn.bankruptcy court.

We discuss our methodology for estimating the allowance for credit losses in “Note 1—Summary of Significant Accounting Policies—Allowance for Credit Losses—Current Methodology” in our ~~2022~~2023 Form ~~10-K and~~10-K. We also provide additional information on our allowance for credit losses below under ~~the~~section “Credit Risk—Allowance for Credit Losses” ~~section~~ and in “Note 5—Allowance for Credit Losses” ofin 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 4 presents the components of non-interest income (loss) recorded in our consolidated statements of operations for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023 and 2022.

Table 4: Non-Interest Income


		Three Months Ended February 28,				Nine Months Ended February 28,					Three Months Ended August 31,
(Dollars in thousands)	(Dollars in thousands)	2023		2022		2023		2022		(Dollars in thousands)		2023		2022
Non-interest income components:	Non-interest income components:									Non-interest income components:
Fee and other income	Fee and other income	$	5,326	$	4,270	$	13,548	$	13,042	Fee and other income		$	4,537	$	4,056
Derivative gains	Derivative gains	102,308		169,280		342,685		43,203		Derivative gains		189,887		93,587
Investment securities losses		(1,402)		(11,621)		(5,574)		(18,190)
Investment securities gains (losses)										Investment securities gains (losses)		2,933		(3,679)
Total non-interest income	Total non-interest income	$	106,232	$	161,929	$	350,659	$	38,055	Total non-interest income		$	197,357	$	93,964

The ~~significant~~ variance in non-interest income between the ~~current-year periods~~current quarter and the same prior-year ~~periods~~quarter was primarily attributable to changes in the derivative gains recognized in our consolidated statements of operations. In addition, we experienced a ~~decrease in the~~favorable shift from losses to gains recorded on our debt and equity investment securities of $~~10 million~~ ~~and~~ ~~$13~~7 million for the current quarter ~~and year-to-date period, respectively,~~ compared with the same prior-year ~~periods.~~quarter. 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)

Our derivative instruments are an integral part of our interest rate risk management strategy. Our principal purpose in using derivatives is to manage our aggregate interest rate risk profile within prescribed risk parameters. The derivative instruments we use primarily include interest rate swaps, which we typically hold to maturity. In addition, we may use ~~treasury~~Treasury locks to manage the interest rate risk associated with future debt issuance or debt that is scheduled to reprice in the future. The primary factors affecting the fair value of our derivatives and derivative gains (losses) recorded in our results of operations include changes in interest rates, the shape of the swap curve and the composition of our derivative portfolio. We generally do not designate our interest rate swaps, which currently account for all our derivatives, for hedge accounting. Accordingly, changes in the fair value of interest rate swaps are reported in our consolidated statements of operations under derivative gains (losses). However, if we execute a ~~treasury~~Treasury lock, we typically designate the ~~treasury~~Treasury lock as a cash flow hedge.

Table of C onten t s

We currently use two types of interest rate swap agreements: (i) we pay a fixed rate of interest and receive a variable rate of interest (“pay-fixed swaps”), and (ii) we pay a variable rate of interest and receive a fixed rate of interest (“receive-fixed swaps”). The interest amounts are based on a specified notional balance, which is used for calculation purposes only. The benchmark variable rate for the substantial majority of the floating-rate payments under our swap agreements is ~~3-month LIBOR.~~daily compounded SOFR as of August 31, 2023. As interest rates decline, pay-fixed swaps generally decrease in value and result in the recognition of derivative losses, as the amount of interest we pay remains fixed, while the amount of interest we receive declines. In contrast, as interest rates rise, pay-fixed swaps generally increase in value and result in the recognition of derivative gains, as the amount of interest we pay remains fixed, but the amount we receive increases. With a receive-fixed swap, the opposite results occur

as interest rates decline or rise. Our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps; therefore, we generally record derivative losses when interest rates decline and derivative gains when interest rates rise. Because our pay-fixed and receive-fixed swaps are referenced to different maturity terms along the swap curve, different changes in the swap curve—parallel, flattening, inversion or steepening—will also impact the fair value of our derivatives.

During the nine months ended February 28, 2023, we executed three treasury lock agreements with a total aggregate notional amount of $400 million to hedge interest rate risk by locking in the underlying U.S. Treasury interest rate component of interest rate payments on anticipated debt issuances. The treasury locks were designated and qualified as cash flow hedges. We terminated these treasury locks in February 2023 and we recorded a net settlement gain of $7 million in AOCI, which will be reclassified into interest expense over the term that the hedged debt transaction affects earnings. We did not have any derivatives designated as accounting hedges as of ~~February 28, 2023 and May 31, 2022~~.

Table 5 presents the components of net derivative gains (losses) recorded in our consolidated statements of operations for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023 and 2022. 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 5: Derivative Gains (Losses)


		Three Months Ended February 28,				Nine Months Ended February 28,					Three Months Ended August 31,
(Dollars in thousands)	(Dollars in thousands)	2023		2022		2023		2022		(Dollars in thousands)		2023		2022
Derivative gains attributable to:	Derivative gains attributable to:									Derivative gains attributable to:
Derivative cash settlements interest income (expense)	Derivative cash settlements interest income (expense)	$	18,634	$	(26,212)	$	12,650	$	(79,727)	Derivative cash settlements interest income (expense)		$	27,869	$	(10,785)
Derivative forward value gains	Derivative forward value gains	83,674		195,492		330,035		122,930		Derivative forward value gains		162,018		104,372
Derivative gains	Derivative gains	$	102,308	$	169,280	$	342,685	$	43,203	Derivative gains		$	189,887	$	93,587

We recorded derivative gains of ~~$102~~$190 million for the current quarter, attributable to increases in the medium- and longer-term swap interest rates. In comparison, we recorded derivative gains of $94 million for the same prior-year quarter, attributable to increases in interest rates across the entire swap curve during the period. In comparison, we recorded derivatives gains of $169 million for the same prior-year quarter, attributable to more pronounced increases in interest rates across the entire swap curve relative to the current-quarter increases.

~~We recorded~~Our derivatives portfolio consisted of interest rate swaps with a total notional amount of $7,622 million and $7,816 million as of August 31, 2023 and May 31, 2023, respectively. As discussed above, our derivative ~~gains of $343 million for the~~ current year-to-date period, attributable to pronounced increases in interest rates across the entire swap curve during the period. In comparison, we recorded derivative gains of $43 million for the same prior year-to-date period, ~~driven by the combined impact of increases in short- and medium-term swap rates, namely the 3-month LIBOR to 10-year swap rates.~~

~~As noted above, the substantial majority of our swap~~ portfolio consists of a higher proportion of longer-dated pay-fixed ~~swaps.~~swaps than receive-fixed swaps, with pay-fixed swaps accounting for approximately 79% and 78% of the outstanding notional amount of our derivative portfolio as of August 31, 2023 and May 31, 2023, respectively. Therefore, increases and decreases in medium- and longer-term swap rates generally have a more pronounced corresponding impact on the change in the net fair value of our swap portfolio. The average remaining maturity of our pay-fixed and receive-fixed swaps was 18 years and two years, respectively, as of August 31, 2023 and 19 years and three years, respectively, as of August 31, 2022.

We present comparative swap curves, which depict the relationship between swap rates at varying maturities, for our reported periods in Table 76 below.

Table 6 displays, by interest rate swap agreement type, the average notional amount and the weighted-average interest rate paid and received for the net periodic derivative cash settlements interest income (expense) during each respective period. As discussed above, our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps, with pay-fixed swaps accounting for approximately 77% and 75% of the outstanding notional amount of our derivative portfolio as of February 28, 2023 and May 31, 2022, respectively.

2117

Table ~~6: Derivatives—Average Notional Amounts and Interest Rates~~

Three Months Ended February 28,
2023 2022
Average Weighted- Average Weighted-
Notional Average Rate Notional Average Rate
(Dollars in thousands) Amount Paid Received Amount Paid Received
Interest rate swap type:
Pay-fixed swaps $ 5,855,424 2.59% 4.70% $ 6,076,233 2.61% 0.25%
Receive-fixed swaps 1,700,000 5.36 2.97 2,231,779 0.94 2.82
Total $ 7,555,424 3.22% 4.31% $ 8,308,012 2.15% 0.95%

Nine Months Ended February 28,
2023 2022
Average Weighted- Average Weighted-
Notional Average Rate Notional Average Rate
(Dollars in thousands) Amount Paid Received Amount Paid Received
Interest rate swap type:
Pay-fixed swaps $ 5,939,056 2.60% 3.50% $ 6,196,383 2.62% 0.18%
Receive-fixed swaps 1,823,004 4.04 2.91 2,343,872 0.90 2.81
Total $ 7,762,060 2.94% 3.36% $ 8,540,255 2.14% 0.91%

~~The average remaining maturity~~ of ~~our pay-fixed and receive-fixed swaps was 19 years and three years, respectively, as of both February 28, 2023 and February 28, 2022.~~

C onten t s

Comparative Swap Curves

Table 76 below provides comparative swap curves as of ~~February 28,~~August 31, 2023, ~~November 30, 2022,~~ May 31, 2023, August 31, 2022 ~~February 28, 2022, November 30, 2021~~ and May 31, ~~2021.~~2022.

Table 7:6: Comparative Swap Curves

____________________________

Benchmark rates obtained from Bloomberg.

See “Note 9—Derivative Instruments and Hedging Activities” for additional information on our derivative instruments. Also refer to “Note 14—Fair Value Measurement” to the Consolidated Financial Statements in our ~~2022~~2023 Form 10-K 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 87 presents the components of non-interest expense recorded in our consolidated statements of operations for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023 and 2022.

2318

Table of C onten t s

Table 8:7: Non-Interest Expense


		Three Months Ended February 28,				Nine Months Ended February 28,					Three Months Ended August 31,
(Dollars in thousands)	(Dollars in thousands)	2023		2022		2023		2022		(Dollars in thousands)		2023		2022
Non-interest expense components:	Non-interest expense components:									Non-interest expense components:
Salaries and employee benefits	Salaries and employee benefits	$	(14,808)	$	(13,181)	$	(42,792)	$	(38,871)	Salaries and employee benefits		$	(15,874)	$	(13,778)
Other general and administrative expenses	Other general and administrative expenses	(10,507)		(9,898)		(35,289)		(31,513)		Other general and administrative expenses		(15,629)		(11,741)
Operating expenses	Operating expenses	(25,315)		(23,079)		(78,081)		(70,384)		Operating expenses		(31,503)		(25,519)

Losses on early extinguishment of debt										Losses on early extinguishment of debt		(939)		—
Other non-interest expense	Other non-interest expense	(298)		(843)		(975)		(1,530)		Other non-interest expense		(178)		(322)
Total non-interest expense	Total non-interest expense	$	(25,613)	$	(23,922)	$	(79,056)	$	(71,914)	Total non-interest expense		$	(32,620)	$	(25,841)

Non-interest expense of ~~$26 million and $79~~$33 million for current quarter, ~~and year-to-date period, respectively,~~ increased ~~$2 million, or 7%, and~~ $7 million, or ~~10%~~26%, ~~respectively,~~ from the same prior-year ~~periods,~~quarter, primarily attributable to an increase in operating expenses, driven by higher expenses ~~recorded~~recorded for salaries, information technology, ~~business travel~~depreciation and ~~in-person corporate meetings~~amortization expenses, and ~~events.~~member relations expenses. During the current quarter, we redeemed $100 million in principal amount 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. 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 net income attributable to noncontrolling interests of less than $1 million ~~and $1 million~~ for both the current quarter and ~~current year-to-date period, respectively. In comparison, we recorded a net income attributable to noncontrolling interests of $1 million for both~~ the same prior-year ~~quarter and prior year-to-date period.~~quarter.


CONSOLIDATED BALANCE SHEET ANALYSIS

Total assets increased ~~$2,750~~$682 million, or 9%2%, to ~~$34,002~~$34,694 million as of ~~February 28,~~August 31, 2023, primarily due to growth in our loan portfolio. We experienced an increase in total liabilities of ~~$2,289~~$523 million, or 8%2%, to ~~$31,398~~$31,946 million as of ~~February 28,~~August 31, 2023, largely due to the issuances of debt to fund the growth in our loan portfolio. Total equity increased ~~$461~~$159 million to ~~$2,603~~$2,748 million as of ~~February 28,~~August 31, 2023, attributable to our reported net income of ~~$515~~$228 million for the current ~~year-to-date period,~~quarter, which was partially offset by the CFC Board of Directors’ authorized patronage capital retirement in July ~~2022~~2023 of ~~$59~~$72 million.

Below is a discussion of changes in the major components of our assets and liabilities during the current ~~year-to-date period.~~quarter. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to manage our liquidity requirements and market risk exposure in accordance with our risk appetite framework.

Loan Portfolio

We segregate our loan portfolio into segments, by legal entity, based on the borrower member class, which consists of CFC distribution, CFC power supply, CFC statewide and associate, NCSC and RTFC. We offer both long-term and line of credit loans to our borrowers. Under our long-term loan facilities, a borrower may select a fixed interest rate or a variable interest rate at the time of each loan advance. Line of credit loans are revolving loan facilities and generally have a variable interest rate. We describe and provide additional information on our member classes under “Item 1. Business—Members” and information about our loan programs and loan product types under “Item 1. Business—Loan and Guarantee Programs” in our ~~2022~~2023 Form 10-K.

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Loans Outstanding

Loans to members totaled ~~$32,382~~$33,097 million and ~~$30,063~~$32,532 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively. Loans to CFC distribution and power supply borrowers accounted for ~~95% and~~ 96% of total loans to members as of ~~February 28,~~both August 31, 2023 and May 31, ~~2022, respectively.~~2023. The increase in loans to members of ~~$2,319~~$565 million, or 8%2%, from May 31, ~~2022~~2023, was primarily attributable to net increases in long-term and line of credit loans of ~~$1,182~~$326 million and ~~$1,136~~$239 million, respectively. The ~~$1,136~~$239 million increase in line of credit loans was primarily attributable to funding provided for higher member operating costs, ~~that our members experienced, bridge loans due to delays in~~working capital and RUS ~~financing and broadband~~ bridge loan financing. We experienced increases in CFC distribution loans, CFC power supply loans, CFC statewide and associate loans ~~NCSC loans~~ and RTFC loans of ~~$1,580~~$381 million, ~~$417~~$134 million, ~~$29 million, $278~~$32 million and ~~$14~~$51 million, ~~respectively.~~respectively, partially offset by a decrease in NCSC loans of $33 million.

Long-term loan advances totaled ~~$2,460~~$711 million during the current ~~year-to-date period~~,quarter, of which approximately ~~94%~~87% was provided to members for capital expenditures and approximately 13% was provided for other purposes, primarily asset acquisitions. In comparison, long-term loan advances totaled $815 million during the same prior-year quarter, of which approximately 95% was provided to members for capital expenditures and approximately 2% was provided for the refinancing of loans made by other lenders. ~~In comparison, long-term loan advances totaled $2,384 million during the~~ ~~same prior year-to-date period,~~ of which approximately 79% was provided to members for capital expenditures and approximately 20% was provided to members for operating expenses and also to refinance advances that were drawn under line of credit facilities to meet elevated power cost obligations incurred during the February 2021 polar vortex. Of the ~~$2,460~~$711 million total long-term loans advanced during the current ~~year-to-date period, $2,135~~quarter, $659 million were fixed-rate loan advances with a weighted average fixed-rate term of 1814 years.

~~Of t~~he In comparison, of the $815 million total long-term loans advanced ~~for capital expenditures~~ during the ~~current year-to-date period, approximately $605~~same prior-year quarter, $747 million ~~was to pro~~were fixed-rate loan advances with a weighted average fixed-rate term of 21 years.

~~vide funding for members’ infrastructure investments in broadband projects.~~

Our aggregate loans outstanding to CFC electric distribution cooperative members relating to broadband projects, which we started tracking in October 2017, increased to an estimated ~~$2,127~~$2,558 million as of ~~February 28,~~August 31, 2023, from approximately ~~$1,647~~$2,355 million as of May 31, ~~2022.~~2023.

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

Debt

We utilize both short-term borrowings and long-term debt as part of our funding strategy and asset/liability interest rate risk management. We seek to maintain diversified funding sources, including our members, affiliates, the capital markets and other funding sources, across products, programs and markets to manage funding concentrations and reduce our liquidity or debt rollover risk. Our funding sources include a variety of secured and unsecured debt securities, in a wide range of maturities, to our members, affiliates, the capital markets and other funding sources.

Debt Outstanding

Table 98 displays the composition, by product type, of our outstanding debt as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023. Table 98 also displays the composition of our debt based on several additional selected attributes.

2520

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Table 9:8: Debt—Total Debt Outstanding

(Dollars in thousands) February 28, 2023 May 31, 2022 Change
Debt product type:
Commercial paper:
Members, at par $ 932,880 $ 1,358,069 $ (425,189)
Dealer, net of discounts 1,213,653 1,024,813 188,840
Total commercial paper 2,146,533 2,382,882 (236,349)
Select notes, members 1,601,165 1,753,441 (152,276)
Daily liquidity fund notes, members 298,502 427,790 (129,288)
Medium-term notes:
Members, at par 664,908 667,451 (2,543)
Dealer, net of discounts 6,150,600 5,241,687 908,913
Total medium-term notes 6,815,508 5,909,138 906,370
Collateral trust bonds 7,573,869 6,848,490 725,379
Guaranteed Underwriter Program notes payable 6,771,125 6,105,473 665,652
Farmer Mac notes payable 3,523,742 3,094,679 429,063
Other notes payable 1,165 4,714 (3,549)
Subordinated deferrable debt 986,678 986,518 160
Members’ subordinated certificates:
Membership subordinated certificates 628,609 628,603 6
Loan and guarantee subordinated certificates 348,643 365,388 (16,745)
Member capital securities 246,163 240,170 5,993
Total members’ subordinated certificates 1,223,415 1,234,161 (10,746)
Total debt outstanding $ 30,941,702 $ 28,747,286 $ 2,194,416

Security type:
Secured debt 58% 56%
Unsecured debt 42 44
Total 100% 100%
Funding source:
Members 15% 19%
Other non-capital market:
Guaranteed Underwriter Program notes payable 22 21
Farmer Mac notes payable 11 11
Total other non-capital market 33 32
Capital markets 52 49
Total 100% 100%
Interest rate type:
Fixed-rate debt 80% 77%
Variable-rate debt 20 23
Total 100% 100%
Interest rate type, including the impact of swaps:
Fixed-rate debt(1)
93% 91%
Variable-rate debt(2)
7 9
Total 100% 100%
Maturity classification:(3)
Short-term borrowings 16% 17%
Long-term and subordinated debt(4)
84 83
Total 100% 100%


(Dollars in thousands)	August 31, 2023		May 31, 2023		Change
Debt product type:
Commercial paper:
Members, at par	$	1,309,508	$	1,017,431	$	292,077
Dealer, net of discounts	1,088,343		1,293,167		(204,824)
Total commercial paper	2,397,851		2,310,598		87,253
Select notes to members	1,550,697		1,630,799		(80,102)
Daily liquidity fund notes to members	265,832		238,329		27,503

Medium-term notes:
Members, at par	782,310		731,809		50,501
Dealer, net of discounts	6,122,478		6,131,608		(9,130)
Total medium-term notes	6,904,788		6,863,417		41,371
Collateral trust bonds	7,582,174		7,577,973		4,201
Guaranteed Underwriter Program notes payable	6,670,146		6,720,643		(50,497)
Farmer Mac notes payable	3,625,953		3,149,898		476,055
Other notes payable	1,168		1,166		2
Subordinated deferrable debt	1,184,197		1,283,436		(99,239)
Members’ subordinated certificates:
Membership subordinated certificates	628,614		628,614		—
Loan and guarantee subordinated certificates	347,249		348,349		(1,100)
Member capital securities	246,163		246,163		—
Total members’ subordinated certificates	1,222,026		1,223,126		(1,100)
Total debt outstanding	$	31,404,832	$	30,999,385	$	405,447


Security type:
Secured debt	57	%	56	%
Unsecured debt	43		44
Total	100	%	100	%

Funding source:
Members	16	%	16	%
Other non-capital market:
Guaranteed Underwriter Program notes payable	21		22
Farmer Mac notes payable	12		10

Total other non-capital market	33		32
Capital markets	51		52
Total	100	%	100	%

Interest rate type:
Fixed-rate debt	80	%	80	%
Variable-rate debt	20		20
Total	100	%	100	%

Interest rate type, including the impact of swaps:
Fixed-rate debt(1)	94	%	94	%
Variable-rate debt(2)	6		6
Total	100	%	100	%

Maturity classification:(3)
Short-term borrowings	16	%	15	%
Long-term and subordinated debt(4)	84		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.

Table of C onten t s

(2) Includes fixed-rate debt that has been swapped to a variable rate, net of any variable-rate debt that has been swapped to a fixed rate. Also includes

commercial paper notes, which generally have maturities of less than 90 days. The interest rate on commercial paper notes does not change once the note has been issued; however, the interest rate for new commercial paper issuances changes daily.

(3) Borrowings with an original contractual maturity of one year or less are classified as short-term borrowings. Borrowings with an original contractual maturity of greater than one year are classified as long-term debt.

(4) Consists of long-term debt, subordinated deferrable debt and total members’ subordinated debt reported on our consolidated balance sheets. Maturity classification is based on the original contractual maturity as of the date of issuance of the debt.

We issue debt primarily to fund growth in our loan portfolio. As such, our debt outstanding generally increases and decreases in response to member loan demand. Total debt outstanding increased ~~$2,194~~$405 million, or 8%1%, to ~~$30,942~~$31,405 million as of ~~February 28,~~August 31, 2023, due to borrowings to fund the increase in loans to members. Outstanding dealer commercial paper of ~~$1,214~~$1,088 million as of ~~February 28,~~August 31, 2023 was within our quarter-end target range of $1,000 million ~~and~~to $1,500 million. We provide additional information on our financing activities for the three months ended August 31, 2023 in the below section “Liquidity Risk” of this Report.

~~Below is a summary of significant financing activities during the current year-to-date period:~~

•~~On June 15, 2022, we amended the revolving note purchase agreement with Farmer Mac to increase the maximum borrowing availability to~~ ~~$6,000 million~~ ~~from $5,500 million, and extend the draw period from June 30, 2026 to~~ ~~June 30, 2027~~.

•On August 17, 2022, we issued $400 million aggregate principal amount of 4.15% sustainability collateral trust bonds due December 15, 2032. On October 31, 2022, we issued $350 million aggregate principal amount of 5.80% collateral trust bonds due January 15, 2033. On February 9, 2023, we issued a total of $300 million aggregate principal amount of collateral trust bonds at 5.80% due January 15, 2033.

•~~On August 22, 2022, October 4, 2022, and~~ ~~January 26, 2023, we borrowed $200 million, $200 million and $500 million, respectively, under the Farmer Mac revolving note purchase agreemen~~t.

•~~On August 29, 2022, October 13, 2022, and February 14, 2023, we borrowed $100 million, $200 million and $500~~ ~~million, respectively, under the Guaranteed Underwriter Program.~~

•On October 20, 2022, we amended the three-year and four-year revolving credit agreements to extend the maturity dates to November 28, 2025 and November 28, 2026, respectively, and to replace LIBOR with ~~SOFR index.~~

•On October 31, 2022, we issued $500 million aggregate principal amount of dealer medium-term notes at a fixed rate of 5.45% due on October 30, 2025. On December 16, 2022, we issued $400 million aggregate principal amount of dealer medium-term notes at a fixed rate of 4.80% due on March 15, 2028. On February 9, 2023, we issued $600 million aggregate principal amount of dealer medium-term notes at a fixed rate of 4.45% due on March 13, 2026 and $200 million ~~aggregate principal amount of dealer medium-term notes at a fixed rate of 4.80% due on March 15, 2028.~~

•~~On November 29, 2022, we borrowed $390 million under repurchase agreements that we have with counterparties and we repurchased the securities underlying these transactions on December 2, 2022.~~

•~~On December 15, 2022, we closed on a $750 million committed loan facility (“Series T”) from the Federal Financing Bank under the Guar~~anteed Underwriter Program. Pursuant to this facility, we may borrow any time before July 15, 2027. Each advance is subject to quarterly amortization and a final maturity not longer than 30 years from the date of the a~~dvance.~~

Member Investments

Debt securities issued to our members represent an important, stable source of funding. Table 109 displays member debt outstanding, by product type, as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

Table ~~10:~~9: Debt—Member Investments


		February 28, 2023			May 31, 2022			Change			August 31, 2023					May 31, 2023					Change
(Dollars in thousands)	(Dollars in thousands)	Amount		% of Total (1)	Amount		% of Total (1)			(Dollars in thousands)	Amount			% of Total (1)		Amount			% of Total (1)
Member investment product type:	Member investment product type:									Member investment product type:
Commercial paper	Commercial paper	$	932,880	43%	$	1,358,069	57%	$	(425,189)	Commercial paper	$	1,309,508		55	%	$	1,017,431		44	%	$	292,077
Select notes	Select notes	1,601,165		100	1,753,441		100	(152,276)		Select notes	1,550,697			100		1,630,799			100		(80,102)
Daily liquidity fund notes	Daily liquidity fund notes	298,502		100	427,790		100	(129,288)		Daily liquidity fund notes	265,832			100		238,329			100		27,503
Medium-term notes	Medium-term notes	664,908		10	667,451		11	(2,543)		Medium-term notes	782,310			11		731,809			11		50,501
Members’ subordinated certificates	Members’ subordinated certificates	1,223,415		100	1,234,161		100	(10,746)		Members’ subordinated certificates	1,222,026			100		1,223,126			100		(1,100)
Total member investments	Total member investments	$	4,720,870		$	5,440,912		$	(720,042)	Total member investments	$	5,130,373				$	4,841,494				$	288,879

Percentage of total debt outstanding	Percentage of total debt outstanding	15%			19%					Percentage of total debt outstanding	16		%			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 19%~~16% of total debt outstanding as of ~~February 28,~~both August 31, 2023 and May 31, ~~2022, respectively.~~2023. Member investments totaled $5,130 million as of August 31, 2023, an increase of $289 million from May 31, 2023, primarily attributable to the increase in short-term member investments as our members had more excess cash on hand. Over the last twelve fiscal quarters, our member investments have averaged ~~$5,211~~$5,122 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~~increased to ~~$4,900~~$5,124 million as of ~~February 28,~~August 31, 2023, from ~~$4,981~~$4,546 million as of May 31, ~~2022,~~2023, primarily driven by ~~a decrease in short-term member investments, partially offset by~~ increase in ~~outstanding dealer commercial paper and~~ short-term notes payable advanced under the Farmer Mac revolving ~~note~~ purchase ~~agreement.~~agreement and short-term member investments, partially offset by a decrease in outstanding dealer commercial paper. Short-term borrowings accounted for 16% and ~~17%~~15% of total debt outstanding as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively.

See “Liquidity Risk” below and “Note 6—Short-Term Borrowings” for information on the composition of our short-term borrowings.

Table of C onten t s

Long-Term and Subordinated Debt

Long-term debt, defined as debt with an original contractual maturity term of greater than one year, primarily consists of medium-term notes, collateral trust bonds, notes payable under the Guaranteed Underwriter Program and notes payable under the Farmer Mac revolving note purchase agreement. Subordinated debt consists of subordinated deferrable debt and members’ subordinated certificates. Our subordinated deferrable debt and members’ subordinated certificates have original contractual maturity terms of greater than one year.

Long-term and subordinated debt ~~increased~~decreased to ~~$26,042~~$26,280 million as of ~~February 28,~~August 31, 2023, from ~~$23,766~~$26,453 million as of May 31, ~~2022,~~2023, primarily due to ~~a net increase~~the early redemption of ~~$910~~$100 million ~~in dealer medium term notes, $725 million in collateral trust bonds~~of our subordinated deferrable debt, and ~~$666~~the repayments of $50 million in notes payable under the Guaranteed Underwriter Program and $24 million in notes payable under the Farmer Mac revolving purchase agreement~~to fund loan portfolio growth~~ .~~during the current year-to-date period.~~ Long-term and subordinated debt accounted for 84% and ~~83%~~85% of total debt outstanding as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively.

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

Equity

Table 1110 presents the components of total CFC equity and total equity as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

Table ~~11:~~10: Equity

(Dollars in thousands) February 28, 2023 May 31, 2022
Equity components:
Membership fees and educational fund:
Membership fees $ 969 $ 970
Educational fund 1,780 2,417
Total membership fees and educational fund 2,749 3,387
Patronage capital allocated 896,096 954,988
Members’ capital reserve 1,062,286 1,062,286
Total allocated equity 1,961,131 2,020,661
Unallocated net income (loss):
Prior fiscal year-end cumulative derivative forward value gains (losses)(1)
92,363 (461,162)
Year-to-date derivative forward value gains (1)
327,532 553,525
Period-end cumulative derivative forward value gains(1)
419,895 92,363
Other unallocated net income (loss) 186,073 (709)
Unallocated net income 605,968 91,654
CFC retained equity 2,567,099 2,112,315
Accumulated other comprehensive income 8,694 2,258
Total CFC equity 2,575,793 2,114,573
Noncontrolling interests 27,633 27,396
Total equity $ 2,603,426 $ 2,141,969


(Dollars in thousands)	August 31, 2023		May 31, 2023
Equity components:
Membership fees and educational fund:
Membership fees	$	969	$	969
Educational fund	2,116		2,565
Total membership fees and educational fund	3,085		3,534
Patronage capital allocated	934,135		1,006,115
Members’ capital reserve	1,202,152		1,202,152
Total allocated equity	2,139,372		2,211,801
Unallocated net income (loss):
Prior fiscal year-end cumulative derivative forward value gains(1)	342,624		92,363
Year-to-date derivative forward value gains (1)	161,254		250,261
Period-end cumulative derivative forward value gains(1)	503,878		342,624
Other unallocated net income (loss)	65,894		(709)
Unallocated net income	569,772		341,915
CFC retained equity	2,709,144		2,553,716
Accumulated other comprehensive income	8,241		8,343
Total CFC equity	2,717,385		2,562,059
Noncontrolling interests	30,542		27,190
Total equity	$	2,747,927	$	2,589,249

____________________________

(1)Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the variable interest entities NCSC and RTFC, which we are required to consolidate. We present the consolidated total derivative forward value gains (losses) in Table 3028 in the “Non-GAAP Financial Measures” section below. Also, see “Note 14—Business Segments” for the statements of operations for CFC.

The increase in total equity of ~~$461~~$159 million to ~~$2,603~~$2,748 million as of ~~February 28,~~August 31, 2023 was attributable to our reported net income of ~~$515~~$228 million for the current ~~year-to-date period,~~quarter, partially offset by the CFC Board of Directors’ authorized patronage capital retirement in July ~~2022~~2023 of ~~$59~~$72 million.

Table of C onten t s

Allocation and Retirement of Patronage Capital

In May 2022, the CFC Board of Directors authorized the allocation of $1 million of net earnings for fiscal year 2022 to the cooperative educational fund. In July 2022, the CFC Board of Directors authorized the allocation of fiscal year 2022 adjusted net income as follows: $89 million to members in the form of patronage capital and $153 million to the members’ capital reserve. The amount of patronage capital allocated each year by CFC’s Board of Directors is based on non-GAAP adjusted net income, which excludes the impact of derivative forward value gains (losses). We provide a reconciliation of our adjusted net income to our reported net income and an explanation of the adjustments below in “Non-GAAP Financial Measures.”

In May 2023, the CFC Board of Directors authorized the allocation of $1 million of net earnings for fiscal year 2023 to the cooperative educational fund. In July ~~2022,~~2023, the CFC Board of Directors authorized the allocation of fiscal year 2023 adjusted net income as follows: $110 million to members in the form of patronage capital and $140 million to the members’ capital reserve.

In July 2023, the CFC Board of Directors also authorized the retirement of patronage capital totaling ~~$59~~$72 million, of which ~~$44~~$55 million represented 50% of the patronage capital allocation for fiscal year ~~2022,~~2023, and ~~$15~~$17 million represented the portion of the allocation from fiscal year ~~1997~~1998 net earnings that has been held for 25 years pursuant to the CFC Board of Directors’

policy. This amount was returned to members in cash in September ~~2022.~~2023. The remaining portion of the patronage capital allocation for fiscal year ~~2022~~2023 will be retained by CFC for 25 years pursuant to the guidelines adopted by the CFC Board of Directors in June 2009.


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 risks that can significantly affect our financial performance, liquidity, 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 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, ~~re-pricing~~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 ~~current~~ 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 for investment-grade credit ratings on our rated debt instruments. Accordingly, we have a risk-management framework that is intended to govern the principal risks we face in conducting our business and the aggregate amount of risk we are willing to accept, referred to as risk ~~appetite~~tolerance as well as risk limits and ~~risk~~related guidelines, in the context of CFC’s mission and strategic objectives and initiatives. We provide a discussion of our risk management framework in our ~~2022~~2023 Form 10-K under “Item 7. MD&A—Enterprise Risk Management” and describe how we manage these risks under each respective MD&A section in our ~~2022~~2023 Form 10-K.

Table of C onten t s


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 ~~non-lending~~nonlending activities that may give rise to counterparty credit risk, such as entering into derivative transactions to manage interest rate risk and purchasing investment securities. We provide additional information on our credit risk-management framework under “Item 7. MD&A—Credit Risk—Credit Risk Management” in our ~~2022~~2023 Form 10-K.

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. Loans outstanding to electric utility organizations totaled ~~$31,887~~$32,545 million and ~~$29,584~~$32,032 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, representing 98% and 99% of our total loans outstanding as of each respective date. The remaining loans outstanding in our loan portfolio were to RTFC members, affiliates and associates in the telecommunications industry sector. 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 ~~86% and 90%~~87% of total loans outstanding as of ~~February 28,~~both August 31, 2023 and May 31, ~~2022, respectively.~~2023.

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. Table 1211 presents, by legal entity and member class and by loan type, secured and unsecured loans in our loan portfolio as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023. Of our total loans outstanding, ~~91% and 93%~~92% were secured as of ~~February 28,~~both August 31, 2023 and May 31, ~~2022, respectively.~~2023.

~~Table 12: Loans—Loan Portfolio Security Profile~~
February 28, 2023
(Dollars in thousands) Secured % of Total Unsecured % of Total Total
Member class:
CFC:
Distribution $ 23,331,069 92% $ 2,093,559 8% $ 25,424,628
Power supply 4,578,367 86 740,198 14 5,318,565
Statewide and associate 107,910 69 47,968 31 155,878
Total CFC 28,017,346 91 2,881,725 9 $ 30,899,071
NCSC 956,116 97 32,255 3 988,371
RTFC 461,347 96 20,442 4 481,789
Total loans outstanding(1)
$ 29,434,809 91 $ 2,934,422 9 $ 32,369,231
Loan type:
Long-term loans:
Fixed rate $ 27,853,993 99% $ 185,815 1% $ 28,039,808
Variable rate 913,152 100 1,943 — 915,095
Total long-term loans 28,767,145 99 187,758 1 28,954,903
Line of credit loans 667,664 20 2,746,664 80 3,414,328
Total loans outstanding(1)
$ 29,434,809 91 $ 2,934,422 9 $ 32,369,231

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May 31, 2022
(Dollars in thousands) Secured % of Total Unsecured % of Total Total
Member class:
CFC:
Distribution $ 22,405,486 94% $ 1,438,756 6% $ 23,844,242
Power supply 4,455,098 91 446,672 9 4,901,770
Statewide and associate 83,759 66 43,104 34 126,863
Total CFC $ 26,944,343 93 1,928,532 7 28,872,875
NCSC 689,887 97 20,991 3 710,878
RTFC 454,985 97 12,616 3 467,601
Total loans outstanding(1)
$ 28,089,215 93 $ 1,962,139 7 $ 30,051,354
Loan type:
Long-term loans:
Fixed rate $ 26,731,763 99% $ 220,609 1% $ 26,952,372
Variable rate 817,866 100 2,335 — 820,201
Total long-term loans 27,549,629 99 222,944 1 27,772,573
Line of credit loans 539,586 24 1,739,195 76 2,278,781
Total loans outstanding(1)
$ 28,089,215 93 $ 1,962,139 7 $ 30,051,354
Table 11: Loans—Loan Portfolio Security Profile


	August 31, 2023
(Dollars in thousands)	Secured		% of Total		Unsecured		% of Total		Total
Member class:
CFC:
Distribution	$	24,012,128	93	%	$	1,806,096	7	%	$	25,818,224
Power supply	4,709,602		85		860,952		15		5,570,554
Statewide and associate	182,305		78		49,987		22		232,292
Total CFC	28,904,035		91		2,717,035		9		$	31,621,070
NCSC	910,605		99		12,842		1		923,447
RTFC	509,464		95		29,512		5		538,976
Total loans outstanding(1)	$	30,324,104	92		$	2,759,389	8		$	33,083,493

Loan type:
Long-term loans:
Fixed rate	$	28,547,292	99	%	$	161,556	1	%	$	28,708,848
Variable rate	1,010,501		100		1,680		—		1,012,181
Total long-term loans	29,557,793		99		163,236		1		29,721,029
Line of credit loans	766,311		23		2,596,153		77		3,362,464
Total loans outstanding(1)	$	30,324,104	92		$	2,759,389	8		$	33,083,493



	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	925,925		97		30,949		3		956,874
RTFC	462,209		95		25,579		5		487,788
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

____________________________

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

Credit Concentration

Table of C onten t s

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 ~~$31,887~~$32,545 million and ~~$29,584~~$32,032 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~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 ~~$125~~$121 million and ~~$131~~$123 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively.

Single-Obligor Concentration

Table 1312 displays the outstanding loan exposure for our 20 largest borrowers, by legal entity and member class, as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023. Our 20 largest borrowers consisted of 10 distribution systems and 10 power supply systems as of ~~February 28,~~both August 31, 2023 and ~~12 distribution systems and eight power~~ ~~supply systems as of~~ May 31, ~~2022.~~2023. The largest total exposure to a single borrower or controlled group represented 1% of total loans outstanding as of both ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

Table ~~13:~~12: Loans—Loan Exposure to 20 Largest Borrowers


		February 28, 2023			May 31, 2022				August 31, 2023				May 31, 2023
(Dollars in thousands)	(Dollars in thousands)	Amount		% of Total	Amount		% of Total	(Dollars in thousands)	Amount		% of Total		Amount		% of Total
Member class:	Member class:							Member class:
CFC:	CFC:							CFC:
Distribution	Distribution	$	3,594,611	11%	$	3,929,160	13%	Distribution	$	3,644,193	11	%	$	3,600,193	11	%
Power supply	Power supply	2,755,117		8	2,095,640		7	Power supply	2,929,766		9		2,782,098		9
Total CFC	Total CFC	6,349,728		19	6,024,800		20	Total CFC	6,573,959		20		6,382,291		20
NCSC	NCSC	207,778		1	195,001		1	NCSC	202,849		—		205,321		—
Total loan exposure to 20 largest borrowers	Total loan exposure to 20 largest borrowers	6,557,506		20	6,219,801		21	Total loan exposure to 20 largest borrowers	6,776,808		20		6,587,612		20
Less: Loans covered under Farmer Mac standby purchase commitment	Less: Loans covered under Farmer Mac standby purchase commitment	(269,909)		(1)	(316,367)		(1)	Less: Loans covered under Farmer Mac standby purchase commitment	(224,023)		—		(266,754)		(1)
Net loan exposure to 20 largest borrowers	Net loan exposure to 20 largest borrowers	$	6,287,597	19%	$	5,903,434	20%	Net loan exposure to 20 largest borrowers	$	6,552,785	20	%	$	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 ~~$443~~$428 million and ~~$493~~$436 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively. Loan exposure to our 20 largest borrowers covered under the Farmer Mac agreement totaled ~~$270~~$224 million and ~~$316~~$267 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, which reduced our exposure to the 20 largest borrowers to ~~19%~~$6,553 million and ~~20%~~$6,321 million as of each respective date. No loans have been put to Farmer Mac for purchase pursuant to this agreement.

Geographic Concentration

Although our organizational structure and mission ~~results~~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 ~~880~~883 and ~~883~~884 as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, located in 49 states and the District of Columbia. Of the ~~880~~883 and ~~883~~884 borrowers with loans outstanding as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, 5150 and 4952 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 66 and 69 borrowers with loans outstanding as of August 31, 2023 and May 31, 2023, respectively, accounted for the largest number of borrowers with loans outstanding in any one state as of ~~both February 28, 2023 and May 31, 2022,~~each respective date, as well as the largest concentration of loan exposure in any one state. Loans outstanding to Texas-based borrowers totaled $5,637 million and $5,529 million as of August 31, 2023 and May 31, 2023, respectively, and accounted for approximately 17% of total loans outstanding as of each respective date. Of the loans outstanding to Texas-based borrowers, $153 million and $155 million as of August 31, 2023 and May 31, 2023, respectively, were covered by the Farmer Mac standby repurchase agreement, which reduced our credit risk exposure to Texas-based borrowers to $5,484 million and $5,373 million as of

Table ~~14 presents~~of C onten t s

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, as of February 28, 2023 and May 31, 2022.~~

class.

~~Table 14: Loans~~—~~Loan Exposure to Texas-Based Borrowers~~

February 28, 2023 May 31, 2022
(Dollars in thousands) Number of Borrowers Amount % of Total Number of Borrowers Amount % of Total
Member class:
CFC:
Distribution 57 $ 4,284,930 13 % 57 $ 3,984,887 13 %
Power supply 8 1,128,456 4 8 1,089,896 4
Statewide and associate 1 38,428 — 1 29,335 —
Total CFC 66 5,451,814 17 66 5,104,118 17
NCSC 1 16,400 — 1 378 —
RTFC 2 12,313 — 1 5,853 —
Total loan exposure to Texas-based borrowers 69 5,480,527 17 68 5,110,349 17
Less: Loans covered under Farmer Mac standby purchase commitment (157,098) (1) (163,369) (1)
Net loan exposure to Texas-based borrowers $ 5,323,429 16 % $ 4,946,980 16 %

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, ~~troubled debt restructurings,~~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 ~~February 28,~~August 31, 2023.

~~Troubled Debt Restructurings~~Loan Modifications to Borrowers Experiencing Financial Difficulty

We actively monitor problem loans and, from time to time, attempt to work with borrowers to manage such exposures through loan workouts or modifications that better align with the borrower’s current ability to pay. A Therefore, as part of our loss mitigation efforts, we may provide modifications to a borrower experiencing financial difficulty to improve long-term collectability of the loan and to avoid the need for exercising remedies. We consider the impact of all loan modifications when estimating the credit quality of our loan portfolio and establishing the allowance for credit losses.

On June 1, 2023, we adopted ASU 2022-02, Financial Instruments – Credit Losses (Topic 326) – Troubled Debt Restructurings and Vintage Disclosures, using the prospective adoption method. The ASU eliminated the accounting guidance for TDRs and enhanced the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty, which are to be applied prospectively. For additional information on the adoption of ASU 2022-02 see “Note 1—Summary of Significant Accounting Policies.”

We had no loan modifications to borrowers experiencing financial difficulty during the three months ended August 31, 2023.

Troubled Debt Restructurings—Prior to Adoption of ASU 2022-02

As discussed above, ASU 2022-02 eliminated the accounting guidance for TDRs. Prior to the adoption of ASU 2022-02, a loan restructuring or modification of terms is accounted for as ~~a troubled debt restructuring (“TDR”)~~TDR if, for economic or legal reasons related to the borrower’s financial difficulties, a concession is granted to the borrower that we would not otherwise consider.

We had TDR loans outstanding to three borrowers, a CFC electric distribution borrower, Brazos and a RTFC telecommunications borrower, which together totaled $31 million as of February 28, 2023. In comparison, we had TDR loans outstanding to two borrowers a CFC electric distribution borrower and a RTFC telecommunications borrower, which together totaled $9 million as of May 31, 2022. TDR loans outstanding represented 0.10% and 0.03% of total loans outstanding as of February 28, 2023 and May 31, 2022, respectively. Two borrowers had TDR loans totaling $8 million ~~and $9 million as of February 28, 2023 and May 31, 2022, respectively, that were classified as performing and on accrual status as of each respective date, as these loans~~which have been performing in accordance with the terms of their respective restructured loan agreement for an extended period of time ~~since their modification dates.~~

and were classified as performing TDR loans and on accrual status as of May 31, 2023. We had ~~TDR~~ loans outstanding to Brazos totaling $23 million ~~as of February 28, 2023, which were~~ classified as nonperforming TDR loans during the ~~current quarter, and~~three months ended February 28, 2023, which were on non-accrual status as of ~~February 28,~~May 31, 2023. ~~Brazos, a CFC Texas-based electric power supply borrower, filed for bankruptcy~~During the current quarter, we received the remaining payment of Brazos’ loans outstanding of $23 million in ~~March 2021 due to its exposure to elevated wholesale electric power costs during~~accordance with the February 2021 polar vortex. On November 14, 2022, Brazos’ plan of reorganization was confirmed by the bankruptcy court and it became effective on December 15, 2022. Due to Brazos experiencing financial difficulty and the principal loan concession provided to Brazos by the bankruptcy court as part of its approvalprovisions of Brazos’ plan of reorganization ~~which was effective on December 15, 2022, the remaining Brazos~~to repay its loans ~~outstanding were moved from nonperforming loans and classified as nonperforming TDR loans during the current quarter. We did not have any TDR loan classified as nonperforming as of May 31, 2022.~~in full. Prior to the Brazos loan restructuring, we have not had any loan modifications that were required to be accounted for as TDRs since fiscal year 2016.

~~We provide additional information on TDR loans under “Note 4—Loans—Credit Quality Indicators—Troubled Debt Restructurings.”~~

Nonperforming Loans

~~In addition to TDR loans that may be classified as nonperforming, we also may have nonperforming loans that have not been modified as a TDR.~~ We classify ~~such~~ loans as nonperforming at the earlier of the date when we determine: (i) interest or principal payments on the loan is 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.

We had a loan to one CFC electric power supply borrower totaling $85 million classified as nonperforming as of August 31, 2023. In comparison, we had loans to two CFC electric power supply borrowers totaling ~~$108 million classified as nonperforming as of February 28, 2023. In comparison, we had loans to three CFC electric power supply borrowers totaling $228~~$89 million classified as nonperforming as of May 31, ~~2022.~~2023. Nonperforming loans represented ~~0.33%~~0.26% and ~~0.76%~~0.27% of total loans outstanding as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively. The reduction in nonperforming loans of ~~$120~~$4 million ~~during the nine months ended February 28, 2023~~ was due to the receipt

Table of C onten t s

of $4 million in loan ~~principal~~ payments ~~the partial~~ ~~charge-offs related to the Brazos and~~from Brazos Sandy Creek to pay off its nonperforming ~~loans, and the classification of Brazos nonperforming loans to TDR loans~~loan outstanding during the current ~~quarter, as discussed above.~~ ~~Brazos’ loans outstanding accounted for $86 million of our total nonperforming loans as of~~ ~~May 31, 2022 andwas delinquent and on nonaccrual as of this date.~~quarter.

Brazos Sandy Creek, a wholly-owned subsidiary of Brazos and a CFC Texas-based electric power supply borrower, filed for bankruptcy in March 2022 following the filing of a motion by Brazos to reject its power purchase agreement with Brazos Sandy Creek as part of Brazos’ bankruptcy proceedings. Brazos Sandy Creek’s loan outstanding accounted for $4 million

~~and $28 million of our total nonperforming loans as of~~ Net Charge-Of~~February 28, 2023~~ and May 31, 2022, respectively, and was delinquent and on nonaccrual as of each date. The loan is secured by Brazos Sandy Creek’s 25% tenant-in-common (“TIC”) ownership interest in the Brazos Sandy Creek Energy Station (“the Plant”), and its rights under a power purchase agreement (“PPA”) with Brazos for the output of the Brazos Sandy Creek Energy Station attributable to the TIC interest. On December 20, 2022, the Brazos Sandy Creek’s 25% TIC ownership interest in the Plant was sold for a credit bid of $105 million to Riesel HoldCo, LLC (“HoldCo,”) an entity formed by the Brazos Sandy Creek noteholders. CFC was allocated ownership shares in HoldCo based on its 7.41% share in the $105 million credit bid, which totaled $8 million that was recorded as an investment in HoldCo during the current quarter in the other assets line of our consolidated balance sheets and reduced the Brazos Sandy Creek loan balance by the same amount. HoldCo intends to manage its ownership interest in the Plant directly and potentially sell it at a future date; however, HoldCo has no current timeline for its disposition.fs

We provide additional information on nonperforming loans in “Note 4—Loans—Credit Quality Indicators—Nonperforming Loans.”

Net Charge-Offs

We had no charge-offs during the ~~three months ended February 28, 2023.~~current quarter and the same prior-year quarter. We ~~experienced charge-offs totaling $15~~received a total of $28 million ~~for the~~ ~~CFC electric power supply~~in loan ~~portfolio related to~~ payments from Brazos and Brazos Sandy Creek ~~nonperforming~~to repay their $27 million of total loans outstanding in full during the ~~nine months ended February 28, 2023,~~current quarter. The additional payment received of $1 million was recorded as a loan recovery on the Brazos and Brazos Sandy Creek previously charged-off loan amounts, which resulted in an annualized net ~~charge-off~~ recovery rate of ~~0.06%~~0.01% for the current quarter. ~~the nine months ended February 28, 2023. In comparison we had no loan charge-offs during the same prior-year periods.~~ 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 year 2013 and 2017, respectively.

Borrower Risk Ratings

category further segmented among special mention, substandard and doubtful. 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.

Criticized loans totaled ~~$337~~$288 million and ~~$494~~$323 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, and represented approximately 1% ~~and 2%~~ of total loans outstanding as of each respective date. The decrease of ~~$157~~$35 million in criticized loans was primarily due to loan payments received from a CFC electric distribution borrower in the special mention ~~loans~~ category and ~~from~~ Brazos and Brazos Sandy Creek ~~and~~in the ~~partial charge-offs related to Brazos and Brazos Sandy Creek loans~~doubtful category during the ~~nine months ended February 28,~~current quarter, as discussed above. Each of the borrowers with loans outstanding in the criticized category was current with regard to all principal and interest amounts due to us as of August 31, 2023. ~~Each~~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 February 28, 2023. In contrast, each of the borrowers with loans outstanding in the criticized category, with the exception of Brazos and Brazos Sandy Creek, which filed for bankruptcy in March 2021 and March 2022, respectively, was current with regard to all principal and interest amounts due to us as of May 31, ~~2022.~~2023. ~~See “Trouble Debt Restructurings” and “Nonperforming Loans” above for additional information on Brazos and Brazos Sandy Creek, respectively.~~

We provide additional information on our borrower risk rating framework in our ~~2022~~2023 Form 10-K under “Item 7. MD&A Credit Risk—Loan Portfolio Credit Risk—Credit Quality Indicators.” See “Note 4—Loans” of this Report for detail, by member class, on loans outstanding in each borrower risk rating category.

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 1513 presents, by legal entity and member class, loans outstanding and the related allowance for credit losses and allowance coverage ratio as of ~~February 28,~~August 31, 2023 and May 31, ~~2022~~2023 and the allowance components as of each date.

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Table of C onten t s

Table ~~15:~~13: Allowance for Credit Losses by Borrower Member Class and Evaluation Methodology

February 28, 2023 May 31, 2022
(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 $ 25,424,628 $ 16,654 0.07% $ 23,844,242 $ 15,781 0.07%
Power supply 5,318,565 34,355 0.65 4,901,770 47,793 0.98
Statewide and associate 155,878 1,257 0.81 126,863 1,251 0.99
Total CFC 30,899,071 52,266 0.17 28,872,875 64,825 0.22
NCSC 988,371 2,627 0.27 710,878 1,449 0.20
RTFC 481,789 1,404 0.29 467,601 1,286 0.28
Total $ 32,369,231 $ 56,297 0.17 $ 30,051,354 $ 67,560 0.22
Allowance components:
Collective allowance $ 32,229,833 $ 29,858 0.09% $ 29,814,380 $ 28,876 0.10%
Asset-specific allowance 139,398 26,439 18.97 236,974 38,684 16.32
Total allowance for credit losses $ 32,369,231 $ 56,297 0.17 $ 30,051,354 $ 67,560 0.22
Allowance coverage ratios:
Nonperforming and nonaccrual loans (3)
$ 131,043 42.96% 227,790 29.66%


	August 31, 2023						May 31, 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	$	25,818,224	$	15,722	0.06	%	$	25,437,077	$	14,924	0.06	%
Power supply	5,570,554		33,434		0.60		5,437,242		33,306		0.61
Statewide and associate	232,292		1,198		0.52		200,368		1,194		0.60
Total CFC	31,621,070		50,354		0.16		31,074,687		49,424		0.16
NCSC	923,447		2,612		0.28		956,874		2,464		0.26
RTFC	538,976		1,960		0.36		487,788		1,206		0.25
Total	$	33,083,493	$	54,926	0.17		$	32,519,349	$	53,094	0.16

Allowance components:
Collective allowance	$	32,990,830	$	29,792	0.09	%	$	32,398,910	$	27,335	0.08	%
Asset-specific allowance	92,663		25,134		27.12		120,439		25,759		21.39
Total allowance for credit losses	$	33,083,493	$	54,926	0.17		$	32,519,349	$	53,094	0.16

Allowance coverage ratios:
Nonaccrual loans (3)	$	84,987			64.63	%	$	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 $13 million ~~and $12 million~~ as of ~~February 28,~~both August 31, 2023 and May 31, ~~2022, respectively.~~2023.

(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 ~~classified as nonperforming and~~ on nonaccrual status at period end. Nonaccrual loans represented 0.26% and 0.35% of total loans outstanding as of August 31, 2023 and May 31, 2023, respectively. We provide additional information on our nonaccrual loans in “Note 4—Loans” in this Report.

~~Our~~The allowance for credit losses and allowance coverage ratio ~~decreased~~increased to ~~$56~~$55 million and 0.17%, respectively, as of ~~February 28,~~August 31, 2023, from ~~$68~~$53 million and ~~0.22%~~0.16%, respectively, as of May 31, ~~2022.~~2023. The ~~$12~~$2 million ~~decrease~~increase in the allowance for credit losses reflected ~~a reduction in the asset-specific allowance of~~ ~~$13 million, partially offset by~~ an increase in the collective allowance of $1$3 million,~~. The~~ ~~asset-specific allowance decrease was attributable primarily to charge-offs totaling $15 million related to the Brazos and Brazos Sandy Creek nonperforming loans,~~ partially offset by ~~an increase~~a reduction in the asset-specific allowance ~~for~~of $1 million. The increase in the collective allowance was primarily due to loan portfolio growth and a slight decline in the overall credit quality and risk profile of our loan portfolio. The decrease in the asset-specific allowance was attributable to a timing change in the expected payments on a nonperforming CFC power supply ~~loan, due to a reduction~~ ~~and timing change~~ ~~in the expected payments on this~~ loan. T~~he collective allowance increase was primarily due to the loan portfolio growth.~~

We discuss our methodology for estimating the allowance for credit losses under the CECL model in “Note 1—Summary of Significant Accounting Policies—Allowance for Credit Losses” and provide information on ~~the management~~management’s judgment and the uncertainties involved in our ~~determining~~determination of the allowance for credit losses in “MD&A—Critical Accounting Estimates—Allowance for Credit Losses” in our ~~2022~~2023 Form 10-K. 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.

Table of C onten t s

Cash and Investments Securities Counterparty Credit Exposure

Our cash and cash equivalents and investment securities totaled ~~$173~~$200 million and ~~$587~~$462 million, respectively, as of ~~February 28,~~August 31, 2023. The primary credit exposure associated with investments held in our other 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 August 31, 2023, 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 over-the-counter (“OTC”) derivative transactions, which expose us to individual counterparty credit risk because these transactions are executed and settled directly between us and each counterparty. 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 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 net derivative assets and liabilities with the same counterparty. We had 12 active derivative counterparties with credit ratings ranging from Aa1 to Baa1 by Moody’s as of both ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, and from AA- to BBB+ and AA- to A- by S&P as of ~~both February 28,~~August 31, 2023 and May 31, ~~2022.~~2023, respectively. The total outstanding notional amount of derivatives with these counterparties was ~~$7,451~~$7,622 million and ~~$8,062~~$7,816 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively. The highest single derivative counterparty concentration, by outstanding notional amount, accounted for approximately ~~25%~~24% and ~~24%~~23% of the total outstanding notional amount of our derivatives as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~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. However, 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, 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 9—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 ~~$426~~$509 million and ~~$119~~$349 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~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 9—Derivative Instruments and Hedging Activities.”

See “Item 1A. Risk Factors” in our ~~2022~~2023 Form 10-K and “Item 1A. Risk Factors” of this Report for additional information about credit risks related to our business.

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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. We provide additional information on our liquidity risk-management framework under “Item 7. MD&A—Liquidity Risk—Liquidity Risk Management” in our ~~2022~~2023 Form 10-K.

Available Liquidity

Table ~~16:~~14: Available Liquidity


		February 28, 2023						May 31, 2022							August 31, 2023						May 31, 2023
(Dollars in millions)	(Dollars in millions)	Total		Accessed		Available		Total		Accessed		Available		(Dollars in millions)	Total		Accessed		Available		Total		Accessed		Available
Liquidity sources:	Liquidity sources:													Liquidity sources:
Cash and investment debt securities:	Cash and investment debt securities:													Cash and investment debt securities:
Cash and cash equivalents	Cash and cash equivalents	$	173	$	—	$	173	$	154	$	—	$	154	Cash and cash equivalents	$	200	$	—	$	200	$	199	$	—	$	199
Debt securities investment portfolio(1)	Debt securities investment portfolio(1)	549		—		549		566		—		566		Debt securities investment portfolio(1)	425		—		425		475		—		475
Total cash and investment debt securities	Total cash and investment debt securities	722		—		722		720		—		720		Total cash and investment debt securities	625		—		625		674		—		674
Committed credit facilities:	Committed credit facilities:													Committed credit facilities:
Committed bank revolving line of credit agreements—unsecured(2)	Committed bank revolving line of credit agreements—unsecured(2)	2,600		7		2,593		2,600		3		2,597		Committed bank revolving line of credit agreements—unsecured(2)	2,600		2		2,598		2,600		2		2,598
Guaranteed Underwriter Program committed facilities—secured(3)	Guaranteed Underwriter Program committed facilities—secured(3)	9,473		8,448		1,025		8,723		7,648		1,075		Guaranteed Underwriter Program committed facilities—secured(3)	9,473		8,448		1,025		9,473		8,448		1,025
Farmer Mac revolving note purchase agreement—secured(4)	Farmer Mac revolving note purchase agreement—secured(4)	6,000		3,524		2,476		5,500		3,095		2,405		Farmer Mac revolving note purchase agreement—secured(4)	6,000		3,626		2,374		6,000		3,150		2,850
Total committed credit facilities	Total committed credit facilities	18,073		11,979		6,094		16,823		10,746		6,077		Total committed credit facilities	18,073		12,076		5,997		18,073		11,600		6,473
Total available liquidity	Total available liquidity	$	18,795	$	11,979	$	6,816	$	17,543	$	10,746	$	6,797	Total available liquidity	$	18,698	$	12,076	$	6,622	$	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 ~~$7 million and $3~~$2 million as of ~~February 28,~~both August 31, 2023 and May 31, ~~2022, respectively,~~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 ~~non-bank~~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.

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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 1715 presents our primary liquidity coverage ratios as of ~~February 28,~~August 31, 2023 and May 31, ~~2022~~2023 and displays the calculation of each ratio as of these respective dates based on the assumptions discussed above.

Table ~~17:~~15: Liquidity Coverage Ratios

(Dollars in millions) February 28, 2023 May 31, 2022
Liquidity coverage ratio:(1)
Total available liquidity(2)
$ 6,816 $ 6,797
Debt scheduled to mature over next 12 months:
Short-term borrowings 4,900 4,981
Long-term and subordinated debt scheduled to mature over next 12 months 2,255 1,913
Total debt scheduled to mature over next 12 months 7,155 6,894
Excess (deficit) in available liquidity over debt scheduled to mature over next 12 months $ (339) $ (97)
Liquidity coverage ratio 0.95 0.99
Liquidity coverage ratio, excluding expected maturities of member short-term investments(3)
Total available liquidity(2)
$ 6,816 $ 6,797
Total debt scheduled to mature over next 12 months 7,155 6,894
Exclude: Member short-term investments (3,186) (3,956)
Total debt, excluding member short-term investments, scheduled to mature over next 12 months 3,969 2,938
Excess in available liquidity over total debt, excluding member short-term investments, scheduled to mature over next 12 months $ 2,847 $ 3,859
Liquidity coverage ratio, excluding expected maturities of member short-term investments 1.72 2.31


(Dollars in millions)	August 31, 2023		May 31, 2023
Liquidity coverage ratio:(1)
Total available liquidity(2)	$	6,622	$	7,147
Debt scheduled to mature over next 12 months:
Short-term borrowings	5,124		4,546
Long-term and subordinated debt scheduled to mature over next 12 months	1,887		2,383
Total debt scheduled to mature over next 12 months	7,011		6,929
Excess (deficit) in available liquidity over debt scheduled to mature over next 12 months	$	(389)	$	218

Liquidity coverage ratio	0.94		1.03

Liquidity coverage ratio, excluding expected maturities of member short-term investments(3)
Total available liquidity(2)	$	6,622	$	7,147
Total debt scheduled to mature over next 12 months	7,011		6,929
Exclude: Member short-term investments	(3,536)		(3,253)
Total debt, excluding member short-term investments, scheduled to mature over next 12 months	3,475		3,676
Excess in available liquidity over total debt, excluding member short-term investments, scheduled to mature over next 12 months	$	3,147	$	3,471

Liquidity coverage ratio, excluding expected maturities of member short-term investments	1.91		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 ~~16.~~14.

(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.

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. The aggregate fair value of the securities in our investment portfolio was ~~$587~~$462 million as of ~~February 28,~~August 31, 2023, consisting of debt securities with a fair value of ~~$549~~$425 million and equity securities with a fair value of ~~$38~~$37 million. In comparison, the aggregate fair value of the securities in our investment portfolio was ~~$600~~$510 million as of May 31, ~~2022,~~2023, consisting of debt securities with a fair value of ~~$566~~$475 million and equity securities with a fair value of ~~$34 million. Subsequent to the quarter ended February 28, 2023, we sold debt securities at fair value totaling $36 million and realized gains on the sale of these securities of $1~~$35 million.

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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.~~(i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The ob~~ligation~~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 ~~February 28,~~August 31, 2023 and May 31, ~~2022;~~2023; therefore, we had no debt securities in our investment portfolio pledged as collateral as of each respective date.

We provide additional information on our investment securities portfolio in “Note 3—Investment Securities” of this Report.

~~Borrowing Capacity Under Various Credit Facilities~~Short-Term Borrowings

Short-term borrowings consist of borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. Short-term borrowings increased to $5,124 million as of August 31, 2023, from $4,546 million as of May 31, 2023, primarily driven by increase in short-term notes payable advanced under the Farmer Mac revolving purchase agreement and short-term member investments, partially offset by a decrease in outstanding dealer commercial paper. Short-term borrowings accounted for 16% and 15% of total debt outstanding as of August 31, 2023 and May 31, 2023, respectively.

See “Liquidity Risk” below and “Note 6—Short-Term Borrowings” for information on the composition of our short-term borrowings.

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Long-Term and Subordinated Debt

Long-term and subordinated debt decreased to $26,280 million as of August 31, 2023, from $26,453 million as of May 31, 2023, primarily due to the early redemption of $100 million of our subordinated deferrable debt, and the repayments of $50 million in notes payable under the Guaranteed Underwriter Program and $24 million in notes payable under the Farmer Mac revolving purchase agreement. Long-term and subordinated debt accounted for 84% and 85% of total debt outstanding as of August 31, 2023 and May 31, 2023, respectively.

Equity

Table 10 presents the components of total CFC equity and total equity as of August 31, 2023 and May 31, 2023.

Table 10: Equity


(Dollars in thousands)	August 31, 2023		May 31, 2023
Equity components:
Membership fees and educational fund:
Membership fees	$	969	$	969
Educational fund	2,116		2,565
Total membership fees and educational fund	3,085		3,534
Patronage capital allocated	934,135		1,006,115
Members’ capital reserve	1,202,152		1,202,152
Total allocated equity	2,139,372		2,211,801
Unallocated net income (loss):
Prior fiscal year-end cumulative derivative forward value gains(1)	342,624		92,363
Year-to-date derivative forward value gains (1)	161,254		250,261
Period-end cumulative derivative forward value gains(1)	503,878		342,624
Other unallocated net income (loss)	65,894		(709)
Unallocated net income	569,772		341,915
CFC retained equity	2,709,144		2,553,716
Accumulated other comprehensive income	8,241		8,343
Total CFC equity	2,717,385		2,562,059
Noncontrolling interests	30,542		27,190
Total equity	$	2,747,927	$	2,589,249

____________________________

(1)Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the variable interest entities NCSC and RTFC, which we are required to consolidate. We present the consolidated total derivative forward value gains (losses) in Table 28 in the “Non-GAAP Financial Measures” section below. Also, see “Note 14—Business Segments” for the statements of operations for CFC.

The increase in total equity of $159 million to $2,748 million as of August 31, 2023 was attributable to our reported net income of $228 million for the current quarter, partially offset by the CFC Board of Directors’ authorized patronage capital retirement in July 2023 of $72 million.

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

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

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


ENTERPRISE RISK MANAGEMENT

Overview

•Credit risk is the risk that a borrower or other counterparty will be unable to meet its obligations in accordance with agreed-upon terms.

•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 for investment-grade credit ratings on our rated debt instruments. Accordingly, we have a risk-management framework that is intended to govern the principal risks we face in conducting our business and the aggregate ~~borrowing capacity~~amount of risk we are willing to accept, referred to as risk tolerance as well as risk limits and related guidelines, in the context of CFC’s mission and strategic objectives and initiatives. We provide a discussion of our risk management framework in our 2023 Form 10-K under “Item 7. MD&A—Enterprise Risk Management” and describe how we manage these risks under each respective MD&A section in our 2023 Form 10-K.

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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 purchasing investment securities. We provide additional information on our credit risk-management framework under “Item 7. MD&A—Credit Risk—Credit Risk Management” in our 2023 Form 10-K.

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. Loans outstanding to electric utility organizations totaled $32,545 million and $32,032 million as of August 31, 2023 and May 31, 2023, respectively, representing 98% and 99% of our total loans outstanding as of each respective date. The remaining loans outstanding in our loan portfolio were to RTFC members, affiliates and associates in the telecommunications industry sector. 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 87% of total loans outstanding as of both August 31, 2023 and May 31, 2023.

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. Table 11 presents, by legal entity and member class and by loan type, secured and unsecured loans in our loan portfolio as of August 31, 2023 and May 31, 2023. Of our total loans outstanding, 92% were secured as of both August 31, 2023 and May 31, 2023.

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Table 11: Loans—Loan Portfolio Security Profile


	August 31, 2023
(Dollars in thousands)	Secured		% of Total		Unsecured		% of Total		Total
Member class:
CFC:
Distribution	$	24,012,128	93	%	$	1,806,096	7	%	$	25,818,224
Power supply	4,709,602		85		860,952		15		5,570,554
Statewide and associate	182,305		78		49,987		22		232,292
Total CFC	28,904,035		91		2,717,035		9		$	31,621,070
NCSC	910,605		99		12,842		1		923,447
RTFC	509,464		95		29,512		5		538,976
Total loans outstanding(1)	$	30,324,104	92		$	2,759,389	8		$	33,083,493

Loan type:
Long-term loans:
Fixed rate	$	28,547,292	99	%	$	161,556	1	%	$	28,708,848
Variable rate	1,010,501		100		1,680		—		1,012,181
Total long-term loans	29,557,793		99		163,236		1		29,721,029
Line of credit loans	766,311		23		2,596,153		77		3,362,464
Total loans outstanding(1)	$	30,324,104	92		$	2,759,389	8		$	33,083,493



	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	925,925		97		30,949		3		956,874
RTFC	462,209		95		25,579		5		487,788
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

____________________________

Credit Concentration

Table of C onten t s

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 $32,545 million and $32,032 million as of August 31, 2023 and May 31, 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 $121 million and $123 million as of August 31, 2023 and May 31, 2023, respectively.

Single-Obligor Concentration

Table 12 displays the outstanding loan exposure for our 20 largest borrowers, by legal entity and member class, as of August 31, 2023 and May 31, 2023. Our 20 largest borrowers consisted of 10 distribution systems and 10 power supply systems as of both August 31, 2023 and May 31, 2023. The largest total exposure to a single borrower or controlled group represented 1% of total loans outstanding as of both August 31, 2023 and May 31, 2023.

Table 12: Loans—Loan Exposure to 20 Largest Borrowers


	August 31, 2023				May 31, 2023
(Dollars in thousands)	Amount		% of Total		Amount		% of Total
Member class:
CFC:
Distribution	$	3,644,193	11	%	$	3,600,193	11	%
Power supply	2,929,766		9		2,782,098		9
Total CFC	6,573,959		20		6,382,291		20
NCSC	202,849		—		205,321		—
Total loan exposure to 20 largest borrowers	6,776,808		20		6,587,612		20
Less: Loans covered under Farmer Mac standby purchase commitment	(224,023)		—		(266,754)		(1)
Net loan exposure to 20 largest borrowers	$	6,552,785	20	%	$	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 $428 million and $436 million as of August 31, 2023 and May 31, 2023, respectively. Loan exposure to our 20 largest borrowers covered under the Farmer Mac agreement totaled $224 million and $267 million as of August 31, 2023 and May 31, 2023, respectively, which reduced our exposure to the 20 largest borrowers to $6,553 million and $6,321 million as of each respective date. No loans have been put to Farmer Mac for purchase pursuant to this agreement.

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 883 and 884 as of August 31, 2023 and May 31, 2023, respectively, located in 49 states and the District of Columbia. Of the 883 and 884 borrowers with loans outstanding as of August 31, 2023 and May 31, 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 66 and 69 borrowers with loans outstanding as of August 31, 2023 and May 31, 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 $5,637 million and $5,529 million as of August 31, 2023 and May 31, 2023, respectively, and accounted for approximately 17% of total loans outstanding as of each respective date. Of the loans outstanding to Texas-based borrowers, $153 million and $155 million as of August 31, 2023 and May 31, 2023, respectively, were covered by the Farmer Mac standby repurchase agreement, which reduced our credit risk exposure to Texas-based borrowers to $5,484 million and $5,373 million as of

Table of C onten t s

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.

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 August 31, 2023.

Loan Modifications to Borrowers Experiencing Financial Difficulty

We actively monitor problem loans and, from time to time, attempt to work with borrowers to manage such exposures through loan workouts or modifications that better align with the borrower’s current ability to pay. Therefore, as part of our loss mitigation efforts, we may provide modifications to a borrower experiencing financial difficulty to improve long-term collectability of the loan and to avoid the need for exercising remedies. We consider the impact of all loan modifications when estimating the credit quality of our loan portfolio and establishing the allowance for credit losses.

We had no loan modifications to borrowers experiencing financial difficulty during the three months ended August 31, 2023.

Troubled Debt Restructurings—Prior to Adoption of ASU 2022-02

As discussed above, ASU 2022-02 eliminated the accounting guidance for TDRs. Prior to the adoption of ASU 2022-02, a loan restructuring or modification of terms is accounted for as TDR if, for economic or legal reasons related to the borrower’s financial difficulties, a concession is granted to the borrower that we would not otherwise consider.

We had loans outstanding to two borrowers totaling $8 million which have been performing in accordance with the terms of their respective restructured loan agreement for an extended period of time and were classified as performing TDR loans and on accrual status as of May 31, 2023. We had loans outstanding to Brazos totaling $23 million classified as nonperforming TDR loans during the three months ended February 28, 2023, which were on non-accrual status as of May 31, 2023. During the current quarter, 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 have not had any loan modifications that were required to be accounted for as TDRs since fiscal year 2016.

Nonperforming Loans

We classify loans as nonperforming at the earlier of the date when we determine: (i) interest or principal payments on the loan is 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.

We had a loan to one CFC electric power supply borrower totaling $85 million classified as nonperforming as of August 31, 2023. In comparison, we had loans to two CFC electric power supply borrowers totaling $89 million classified as nonperforming as of May 31, 2023. Nonperforming loans represented 0.26% and 0.27% of total loans outstanding as of August 31, 2023 and May 31, 2023, respectively. The reduction in nonperforming loans of $4 million was due to the receipt

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of $4 million in loan payments from Brazos Sandy Creek to pay off its nonperforming loan outstanding during the current quarter.

Net Charge-Offs

We provide additional information on nonperforming loans in “Note 4—Loans—Credit Quality Indicators—Nonperforming Loans.”

Net Charge-Offs

We had no charge-offs during the current quarter and the same prior-year quarter. 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 the current quarter. The additional payment received of $1 million was recorded as a loan recovery on the Brazos and Brazos Sandy Creek previously charged-off loan amounts, which resulted in an annualized net recovery rate of 0.01% for the current quarter. 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 year 2013 and 2017, respectively.

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 creditworthiness 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 doubtful. 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.

Criticized loans totaled $288 million and $323 million as of August 31, 2023 and May 31, 2023, respectively, and represented approximately 1% of total loans outstanding as of each respective date. The decrease of $35 million in criticized loans was primarily due to loan payments received from a CFC electric distribution borrower in the special mention category and Brazos and Brazos Sandy Creek in the doubtful category during the current quarter, as discussed above. Each of the borrowers with loans outstanding in the criticized category was current with regard to all principal and interest amounts due to us as of August 31, 2023. 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 framework in our 2023 Form 10-K under “Item 7. MD&A Credit Risk—Loan Portfolio Credit Risk—Credit Quality Indicators.” See “Note 4—Loans” of this Report for detail, by member class, on loans outstanding in each borrower risk rating category.

Allowance for Credit Losses

Table 13 presents, by legal entity and member class, loans outstanding and the related allowance for credit losses and allowance coverage ratio as of August 31, 2023 and May 31, 2023 and the allowance components as of each date.

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Table 13: Allowance for Credit Losses by Borrower Member Class and Evaluation Methodology


	August 31, 2023						May 31, 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	$	25,818,224	$	15,722	0.06	%	$	25,437,077	$	14,924	0.06	%
Power supply	5,570,554		33,434		0.60		5,437,242		33,306		0.61
Statewide and associate	232,292		1,198		0.52		200,368		1,194		0.60
Total CFC	31,621,070		50,354		0.16		31,074,687		49,424		0.16
NCSC	923,447		2,612		0.28		956,874		2,464		0.26
RTFC	538,976		1,960		0.36		487,788		1,206		0.25
Total	$	33,083,493	$	54,926	0.17		$	32,519,349	$	53,094	0.16

Allowance components:
Collective allowance	$	32,990,830	$	29,792	0.09	%	$	32,398,910	$	27,335	0.08	%
Asset-specific allowance	92,663		25,134		27.12		120,439		25,759		21.39
Total allowance for credit losses	$	33,083,493	$	54,926	0.17		$	32,519,349	$	53,094	0.16

Allowance coverage ratios:
Nonaccrual loans (3)	$	84,987			64.63	%	$	112,209			47.32	%

___________________________

(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 0.26% and 0.35% of total loans outstanding as of August 31, 2023 and May 31, 2023, respectively. We provide additional information on our nonaccrual loans in “Note 4—Loans” in this Report.

The allowance for credit losses and allowance coverage ratio increased to $55 million and 0.17%, respectively, as of August 31, 2023, from $53 million and 0.16%, respectively, as of May 31, 2023. The $2 million increase in the allowance for credit losses reflected an increase in the collective allowance of $3 million, partially offset by a reduction in the asset-specific allowance of $1 million. The increase in the collective allowance was primarily due to loan portfolio growth and a slight decline in the overall credit quality and risk profile of our loan portfolio. The decrease in the asset-specific allowance was attributable to a timing change in the expected payments on a nonperforming CFC power supply loan.

We discuss our methodology for estimating the allowance for credit losses under the CECL model in “Note 1—Summary of Significant Accounting Policies—Allowance for Credit Losses” and provide information on management’s judgment and the uncertainties involved in our determination of the allowance for credit losses in “MD&A—Critical Accounting Estimates—Allowance for Credit Losses” in our 2023 Form 10-K. 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

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Cash and Investments Securities Counterparty Credit Exposure

Our cash and cash equivalents and investment securities totaled $200 million and $462 million, respectively, as of August 31, 2023. The primary credit exposure associated with investments held in our other 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 August 31, 2023, our overall counterparty credit risk was deemed to be satisfactory and not materially changed compared with May 31, 2023.

Derivative Counterparty Credit Exposure

We manage our derivative counterparty credit exposure 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 net derivative assets and liabilities with the same counterparty. We had 12 active derivative counterparties with credit ratings ranging from Aa1 to Baa1 by Moody’s as of both August 31, 2023 and May 31, 2023, respectively, and from AA- to BBB+ and AA- to A- by S&P as of August 31, 2023 and May 31, 2023, respectively. The total outstanding notional amount of derivatives with these counterparties was $7,622 million and $7,816 million as of August 31, 2023 and May 31, 2023, respectively. The highest single derivative counterparty concentration, by outstanding notional amount, accounted for approximately 24% and 23% of the total outstanding notional amount of our derivatives as of August 31, 2023 and May 31, 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. However, 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, 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 9—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 $509 million and $349 million as of August 31, 2023 and May 31, 2023, respectively.

See “Item 1A. Risk Factors” in our 2023 Form 10-K and “Item 1A. Risk Factors” of this Report for additional information about credit risks related to our business.

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LIQUIDITY RISK

In addition to cash on hand, our primary sources of funds include member loan principal repayments, securities held in our investment portfolio, committed bank revolving ~~line~~lines of credit, ~~agreements,~~ committed loan facilities under the Guaranteed Underwriter Program, ~~and~~ revolving note purchase agreement with Farmer Mac ~~totaled $18,073 million~~ and ~~$16,823 million~~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.

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 14 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 ~~February 28,~~August 31, 2023 and May 31, 2022, respectively, and the aggregate amount available for access totaled $6,094 million and $6,077 million as of each respective date. The following is a discussion of our borrowing capacity and key terms and conditions under each of these credit facilities.2023.

~~Committed Bank Revolving Line~~Table 14: Available Liquidity


	August 31, 2023						May 31, 2023
(Dollars in millions)	Total		Accessed		Available		Total		Accessed		Available
Liquidity sources:
Cash and investment debt securities:
Cash and cash equivalents	$	200	$	—	$	200	$	199	$	—	$	199
Debt securities investment portfolio(1)	425		—		425		475		—		475
Total cash and investment debt securities	625		—		625		674		—		674
Committed credit facilities:
Committed bank revolving line of credit agreements—unsecured(2)	2,600		2		2,598		2,600		2		2,598
Guaranteed Underwriter Program committed facilities—secured(3)	9,473		8,448		1,025		9,473		8,448		1,025
Farmer Mac revolving note purchase agreement—secured(4)	6,000		3,626		2,374		6,000		3,150		2,850
Total committed credit facilities	18,073		12,076		5,997		18,073		11,600		6,473
Total available liquidity	$	18,698	$	12,076	$	6,622	$	18,747	$	11,600	$	7,147

____________________________

(1)Represents the aggregate fair value of ~~Credit Agreements—Unsecured~~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)

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 October 20, 2022, we amended the three-year and four-yearThe committed bank revolving line of credit agreements ~~to extend the maturity dates to November 28, 2025~~consist of a three-year and ~~November 28, 2026, respectively, and to replace LIBOR with Term SOFR. The total commitment amount under the three-year facility and the~~a four-year ~~facility is $1,245 million and $1,355 million, respectively, resulting in a combined total commitment amount under the two facilities of $2,600 million. Under our current committed bank~~ revolving line of credit ~~agreements, we have the ability~~agreement. The accessed amount of $2 million as of both August 31, 2023 and May 31, 2023, relates to ~~request up to $300 million of~~ letters of credit ~~which would result in a reduction in~~issued pursuant to the ~~remaining available amount under the facilities.~~

~~Table 18 presents the total commitment amount under our committed bank~~four-year revolving line of credit ~~agreements, outstanding letters of credit and the amount available for access as of February 28, 2023.~~

~~Table 18: Committed Bank Revolving Line of Credit Agreements~~

February 28, 2023
(Dollars in millions) Total Commitment Letters of Credit Outstanding Amount Available for Access Maturity
Annual
Facility Fee (1)
Bank revolving line of credit term:
3-year agreement $ 1,245 $ — $ 1,245 November 28, 2025 7.5 bps
4-year agreement 1,355 7 1,348 November 28, 2026 10.0 bps
Total $ 2,600 $ 7 $ 2,593

~~____________________________~~

~~(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.

(3)

~~We did not have any outstanding borrowings under our~~The committed ~~bank revolving line of credit agreements as of February 28, 2023; however, we had letters of credit outstanding of $7 million~~facilities under the ~~four-year committed bank revolving agreement as of this date.~~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 ~~committed bank revolving line~~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 ~~credit agreements do not contain a material adverse change clause or rating triggers that would limit~~member short-term investments and scheduled loan principal payment amounts, as well as our continued ability to access the ~~banks’ obligations to provide~~capital markets and other non-capital market related 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~~sources.

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~~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 Federal Financing Bank 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 15, 2022, we closed on a $750 million committed loan facility (“Series T”) from the Federal Financing Bank under the Guar~~anteed Underwriter Program. Pursuant to this facility, we may borrow any time before July 15, 2027. Each advance is subject to quarterly amortization and a final maturity not longer than 30 years from the date of the a~~dvance.~~

As displayed in Table 16, we had accessed $8,448 million under the Guaranteed Underwriter Program and up to $1,025 million was available for borrowing as of February 28, 2023. Of the $1,025 million available borrowing amount, $275 million is available for advance through July 15, 2026 and $750 million is available for advance through July 15, 2027. 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 $6,771 million as of February 28, 2023.

~~Farmer Mac Revolving Note Purchase Agreement—Secured~~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 ~~revolving note purchase agreement with Farmer Mac~~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 ~~under which~~liquidity fund notes, commercial paper, select notes and medium-term notes. As such, we ~~can borrow up~~expect that our members will continue 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 non-renewal.reinvest their excess cash in short-term investment products offered by CFC.

~~Under this agreement, we had outstanding secured notes payable totaling $3,524 million and $3,095 million~~Table 15 presents our primary liquidity coverage ratios as of ~~February 28,~~August 31, 2023 and May 31, ~~2022, respectively. We borrowed $500 million in short-term notes payable~~2023 and ~~$400 million in long-term notes payable under this note purchase agreement with Farmer Mac during~~displays the ~~current year-to-date period. As displayed~~calculation of each ratio as of these respective dates based on the assumptions discussed above.

Table 15: Liquidity Coverage Ratios


(Dollars in millions)	August 31, 2023		May 31, 2023
Liquidity coverage ratio:(1)
Total available liquidity(2)	$	6,622	$	7,147
Debt scheduled to mature over next 12 months:
Short-term borrowings	5,124		4,546
Long-term and subordinated debt scheduled to mature over next 12 months	1,887		2,383
Total debt scheduled to mature over next 12 months	7,011		6,929
Excess (deficit) in available liquidity over debt scheduled to mature over next 12 months	$	(389)	$	218

Liquidity coverage ratio	0.94		1.03

Liquidity coverage ratio, excluding expected maturities of member short-term investments(3)
Total available liquidity(2)	$	6,622	$	7,147
Total debt scheduled to mature over next 12 months	7,011		6,929
Exclude: Member short-term investments	(3,536)		(3,253)
Total debt, excluding member short-term investments, scheduled to mature over next 12 months	3,475		3,676
Excess in available liquidity over total debt, excluding member short-term investments, scheduled to mature over next 12 months	$	3,147	$	3,471

Liquidity coverage ratio, excluding expected maturities of member short-term investments	1.91		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 ~~16,~~14.

(3)Calculated based on available liquidity at period end divided by debt, excluding member short-term investments, scheduled to mature over the ~~amount available for borrowing under this agreement~~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. The aggregate fair value of the securities in our investment portfolio was ~~$2,476~~$462 million as of ~~February 28, 2023.~~August 31, 2023, consisting of debt securities with a fair value of $425 million and equity securities with a fair value of $37 million. In comparison, the aggregate fair value of the securities in our investment portfolio was $510 million as of May 31, 2023, consisting of debt securities with a fair value of $475 million and equity securities with a fair value of $35 million.

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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 ~~are required to pledge eligible electric distribution system or electric power supply system loans~~had no borrowings under repurchase agreements outstanding as of both August 31, 2023 and May 31, 2023; therefore, we had no debt securities in our investment portfolio pledged as collateral ~~in an amount at least equal to the total principal amount~~as of ~~notes outstanding under this agreement.~~each respective date.

We provide additional information on ~~pledged collateral below under “Pledged Collateral” in this section and~~our investment securities portfolio in “Note 3—Investment Securities” ~~and “Note 4—Loans.”~~of this Report.

Short-Term Borrowings

Short-term borrowings consist of borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. Short-term borrowings increased to $5,124 million as of August 31, 2023, from $4,546 million as of May 31, 2023, primarily driven by increase in short-term notes payable advanced under the Farmer Mac revolving purchase agreement and short-term member investments, partially offset by a decrease in outstanding dealer commercial paper. Short-term borrowings accounted for 16% and 15% of total debt outstanding as of August 31, 2023 and May 31, 2023, respectively.

See “Liquidity Risk” below and “Note 6—Short-Term Borrowings” for information on the composition of our short-term borrowings.

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Long-Term and Subordinated Debt

Equity

Table 10 presents the components of total CFC equity and total equity as of August 31, 2023 and May 31, 2023.

Table 10: Equity


(Dollars in thousands)	August 31, 2023		May 31, 2023
Equity components:
Membership fees and educational fund:
Membership fees	$	969	$	969
Educational fund	2,116		2,565
Total membership fees and educational fund	3,085		3,534
Patronage capital allocated	934,135		1,006,115
Members’ capital reserve	1,202,152		1,202,152
Total allocated equity	2,139,372		2,211,801
Unallocated net income (loss):
Prior fiscal year-end cumulative derivative forward value gains(1)	342,624		92,363
Year-to-date derivative forward value gains (1)	161,254		250,261
Period-end cumulative derivative forward value gains(1)	503,878		342,624
Other unallocated net income (loss)	65,894		(709)
Unallocated net income	569,772		341,915
CFC retained equity	2,709,144		2,553,716
Accumulated other comprehensive income	8,241		8,343
Total CFC equity	2,717,385		2,562,059
Noncontrolling interests	30,542		27,190
Total equity	$	2,747,927	$	2,589,249

____________________________

(1)Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the variable interest entities NCSC and RTFC, which we are required to consolidate. We present the consolidated total derivative forward value gains (losses) in Table 28 in the “Non-GAAP Financial Measures” section below. Also, see “Note 14—Business Segments” for the statements of operations for CFC.

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Allocation and Retirement of Patronage Capital


ENTERPRISE RISK MANAGEMENT

Overview

•Credit risk is the risk that a borrower or other counterparty will be unable to meet its obligations in accordance with agreed-upon terms.

•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 for investment-grade credit ratings on our rated debt instruments. Accordingly, we have a risk-management framework that is intended to govern the principal risks we face in conducting our business and the aggregate amount of risk we are willing to accept, referred to as risk tolerance as well as risk limits and related guidelines, in the context of CFC’s mission and strategic objectives and initiatives. We provide a discussion of our risk management framework in our 2023 Form 10-K under “Item 7. MD&A—Enterprise Risk Management” and describe how we manage these risks under each respective MD&A section in our 2023 Form 10-K.

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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 purchasing investment securities. We provide additional information on our credit risk-management framework under “Item 7. MD&A—Credit Risk—Credit Risk Management” in our 2023 Form 10-K.

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. Loans outstanding to electric utility organizations totaled $32,545 million and $32,032 million as of August 31, 2023 and May 31, 2023, respectively, representing 98% and 99% of our total loans outstanding as of each respective date. The remaining loans outstanding in our loan portfolio were to RTFC members, affiliates and associates in the telecommunications industry sector. 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 87% of total loans outstanding as of both August 31, 2023 and May 31, 2023.

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

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Table 11: Loans—Loan Portfolio Security Profile


	August 31, 2023
(Dollars in thousands)	Secured		% of Total		Unsecured		% of Total		Total
Member class:
CFC:
Distribution	$	24,012,128	93	%	$	1,806,096	7	%	$	25,818,224
Power supply	4,709,602		85		860,952		15		5,570,554
Statewide and associate	182,305		78		49,987		22		232,292
Total CFC	28,904,035		91		2,717,035		9		$	31,621,070
NCSC	910,605		99		12,842		1		923,447
RTFC	509,464		95		29,512		5		538,976
Total loans outstanding(1)	$	30,324,104	92		$	2,759,389	8		$	33,083,493

Loan type:
Long-term loans:
Fixed rate	$	28,547,292	99	%	$	161,556	1	%	$	28,708,848
Variable rate	1,010,501		100		1,680		—		1,012,181
Total long-term loans	29,557,793		99		163,236		1		29,721,029
Line of credit loans	766,311		23		2,596,153		77		3,362,464
Total loans outstanding(1)	$	30,324,104	92		$	2,759,389	8		$	33,083,493



	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	925,925		97		30,949		3		956,874
RTFC	462,209		95		25,579		5		487,788
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

____________________________

Credit Concentration

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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 $32,545 million and $32,032 million as of August 31, 2023 and May 31, 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 $121 million and $123 million as of August 31, 2023 and May 31, 2023, respectively.

Single-Obligor Concentration

Table 12: Loans—Loan Exposure to 20 Largest Borrowers


	August 31, 2023				May 31, 2023
(Dollars in thousands)	Amount		% of Total		Amount		% of Total
Member class:
CFC:
Distribution	$	3,644,193	11	%	$	3,600,193	11	%
Power supply	2,929,766		9		2,782,098		9
Total CFC	6,573,959		20		6,382,291		20
NCSC	202,849		—		205,321		—
Total loan exposure to 20 largest borrowers	6,776,808		20		6,587,612		20
Less: Loans covered under Farmer Mac standby purchase commitment	(224,023)		—		(266,754)		(1)
Net loan exposure to 20 largest borrowers	$	6,552,785	20	%	$	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 $428 million and $436 million as of August 31, 2023 and May 31, 2023, respectively. Loan exposure to our 20 largest borrowers covered under the Farmer Mac agreement totaled $224 million and $267 million as of August 31, 2023 and May 31, 2023, respectively, which reduced our exposure to the 20 largest borrowers to $6,553 million and $6,321 million as of each respective date. No loans have been put to Farmer Mac for purchase pursuant to this agreement.

Geographic Concentration

Texas, which had 66 and 69 borrowers with loans outstanding as of August 31, 2023 and May 31, 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 $5,637 million and $5,529 million as of August 31, 2023 and May 31, 2023, respectively, and accounted for approximately 17% of total loans outstanding as of each respective date. Of the loans outstanding to Texas-based borrowers, $153 million and $155 million as of August 31, 2023 and May 31, 2023, respectively, were covered by the Farmer Mac standby repurchase agreement, which reduced our credit risk exposure to Texas-based borrowers to $5,484 million and $5,373 million as of

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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.

Credit Quality Indicators

Loan Modifications to Borrowers Experiencing Financial Difficulty

We actively monitor problem loans and, from time to time, attempt to work with borrowers to manage such exposures through loan workouts or modifications that better align with the borrower’s current ability to pay. Therefore, as part of our loss mitigation efforts, we may provide modifications to a borrower experiencing financial difficulty to improve long-term collectability of the loan and to avoid the need for exercising remedies. We consider the impact of all loan modifications when estimating the credit quality of our loan portfolio and establishing the allowance for credit losses.

We had no loan modifications to borrowers experiencing financial difficulty during the three months ended August 31, 2023.

Troubled Debt Restructurings—Prior to Adoption of ASU 2022-02

As discussed above, ASU 2022-02 eliminated the accounting guidance for TDRs. Prior to the adoption of ASU 2022-02, a loan restructuring or modification of terms is accounted for as TDR if, for economic or legal reasons related to the borrower’s financial difficulties, a concession is granted to the borrower that we would not otherwise consider.

Nonperforming Loans

We had a loan to one CFC electric power supply borrower totaling $85 million classified as nonperforming as of August 31, 2023. In comparison, we had loans to two CFC electric power supply borrowers totaling $89 million classified as nonperforming as of May 31, 2023. Nonperforming loans represented 0.26% and 0.27% of total loans outstanding as of August 31, 2023 and May 31, 2023, respectively. The reduction in nonperforming loans of $4 million was due to the receipt

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of $4 million in loan payments from Brazos Sandy Creek to pay off its nonperforming loan outstanding during the current quarter.

Net Charge-Offs

We provide additional information on nonperforming loans in “Note 4—Loans—Credit Quality Indicators—Nonperforming Loans.”

Net Charge-Offs

Borrower Risk Ratings

Allowance for Credit Losses

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Table 13: Allowance for Credit Losses by Borrower Member Class and Evaluation Methodology


	August 31, 2023						May 31, 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	$	25,818,224	$	15,722	0.06	%	$	25,437,077	$	14,924	0.06	%
Power supply	5,570,554		33,434		0.60		5,437,242		33,306		0.61
Statewide and associate	232,292		1,198		0.52		200,368		1,194		0.60
Total CFC	31,621,070		50,354		0.16		31,074,687		49,424		0.16
NCSC	923,447		2,612		0.28		956,874		2,464		0.26
RTFC	538,976		1,960		0.36		487,788		1,206		0.25
Total	$	33,083,493	$	54,926	0.17		$	32,519,349	$	53,094	0.16

Allowance components:
Collective allowance	$	32,990,830	$	29,792	0.09	%	$	32,398,910	$	27,335	0.08	%
Asset-specific allowance	92,663		25,134		27.12		120,439		25,759		21.39
Total allowance for credit losses	$	33,083,493	$	54,926	0.17		$	32,519,349	$	53,094	0.16

Allowance coverage ratios:
Nonaccrual loans (3)	$	84,987			64.63	%	$	112,209			47.32	%

___________________________

(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.

We discuss our methodology for estimating the allowance for credit losses under the CECL model in “Note 1—Summary of Significant Accounting Policies—Allowance for Credit Losses” and provide information on management’s judgment and the uncertainties involved in our determination of the allowance for credit losses in “MD&A—Critical Accounting Estimates—Allowance for Credit Losses” in our 2023 Form 10-K. 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

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Cash and Investments Securities Counterparty Credit Exposure

Derivative Counterparty Credit Exposure

We manage our derivative counterparty credit exposure 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 net derivative assets and liabilities with the same counterparty. We had 12 active derivative counterparties with credit ratings ranging from Aa1 to Baa1 by Moody’s as of both August 31, 2023 and May 31, 2023, respectively, and from AA- to BBB+ and AA- to A- by S&P as of August 31, 2023 and May 31, 2023, respectively. The total outstanding notional amount of derivatives with these counterparties was $7,622 million and $7,816 million as of August 31, 2023 and May 31, 2023, respectively. The highest single derivative counterparty concentration, by outstanding notional amount, accounted for approximately 24% and 23% of the total outstanding notional amount of our derivatives as of August 31, 2023 and May 31, 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. However, 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, 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 9—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 $509 million and $349 million as of August 31, 2023 and May 31, 2023, respectively.

See “Item 1A. Risk Factors” in our 2023 Form 10-K and “Item 1A. Risk Factors” of this Report for additional information about credit risks related to our business.

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LIQUIDITY RISK

Available Liquidity

Table 14: Available Liquidity


	August 31, 2023						May 31, 2023
(Dollars in millions)	Total		Accessed		Available		Total		Accessed		Available
Liquidity sources:
Cash and investment debt securities:
Cash and cash equivalents	$	200	$	—	$	200	$	199	$	—	$	199
Debt securities investment portfolio(1)	425		—		425		475		—		475
Total cash and investment debt securities	625		—		625		674		—		674
Committed credit facilities:
Committed bank revolving line of credit agreements—unsecured(2)	2,600		2		2,598		2,600		2		2,598
Guaranteed Underwriter Program committed facilities—secured(3)	9,473		8,448		1,025		9,473		8,448		1,025
Farmer Mac revolving note purchase agreement—secured(4)	6,000		3,626		2,374		6,000		3,150		2,850
Total committed credit facilities	18,073		12,076		5,997		18,073		11,600		6,473
Total available liquidity	$	18,698	$	12,076	$	6,622	$	18,747	$	11,600	$	7,147

____________________________

(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 August 31, 2023 and May 31, 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.

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Liquidity Risk Assessment

Table 15 presents our primary liquidity coverage ratios as of August 31, 2023 and May 31, 2023 and displays the calculation of each ratio as of these respective dates based on the assumptions discussed above.

Table 15: Liquidity Coverage Ratios


(Dollars in millions)	August 31, 2023		May 31, 2023
Liquidity coverage ratio:(1)
Total available liquidity(2)	$	6,622	$	7,147
Debt scheduled to mature over next 12 months:
Short-term borrowings	5,124		4,546
Long-term and subordinated debt scheduled to mature over next 12 months	1,887		2,383
Total debt scheduled to mature over next 12 months	7,011		6,929
Excess (deficit) in available liquidity over debt scheduled to mature over next 12 months	$	(389)	$	218

Liquidity coverage ratio	0.94		1.03

Liquidity coverage ratio, excluding expected maturities of member short-term investments(3)
Total available liquidity(2)	$	6,622	$	7,147
Total debt scheduled to mature over next 12 months	7,011		6,929
Exclude: Member short-term investments	(3,536)		(3,253)
Total debt, excluding member short-term investments, scheduled to mature over next 12 months	3,475		3,676
Excess in available liquidity over total debt, excluding member short-term investments, scheduled to mature over next 12 months	$	3,147	$	3,471

Liquidity coverage ratio, excluding expected maturities of member short-term investments	1.91		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 14.

(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.

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. The aggregate fair value of the securities in our investment portfolio was $462 million as of August 31, 2023, consisting of debt securities with a fair value of $425 million and equity securities with a fair value of $37 million. In comparison, the aggregate fair value of the securities in our investment portfolio was $510 million as of May 31, 2023, consisting of debt securities with a fair value of $475 million and equity securities with a fair value of $35 million.

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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 August 31, 2023 and May 31, 2023; therefore, we had no debt securities in our investment portfolio pledged as collateral as of each respective date.

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 totaled $18,073 million as of both August 31, 2023 and May 31, 2023, and the aggregate amount available for access totaled $5,997 million and $6,473 million as of each respective date. The following is a discussion of our borrowing 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. The total commitment amount under the three-year facility and the four-year facility was $1,245 million and $1,355 million, respectively, resulting in a combined total commitment amount under the two facilities of $2,600 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 16 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 August 31, 2023.

Table 16: Committed Bank Revolving Line of Credit Agreements


	August 31, 2023
(Dollars in millions)	Total Commitment		Letters of Credit Outstanding		Amount Available for Access		Maturity	Annual Facility Fee (1)
Bank revolving line of credit term:
3-year agreement	$	1,245	$	—	$	1,245	November 28, 2025	7.5 bps
4-year agreement	1,355		2		1,353		November 28, 2026	10.0 bps
Total	$	2,600	$	2	$	2,598

____________________________

(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 August 31, 2023; 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.

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Guaranteed Underwriter Program Committed Facilities—Secured

As displayed in Table 14, we had accessed $8,448 million under the Guaranteed Underwriter Program and up to $1,025 million was available for borrowing as of August 31, 2023. Of the $1,025 million available borrowing amount, $275 million is available for advance through July 15, 2026 and $750 million is available for advance through July 15, 2027. 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 $6,670 million as of August 31, 2023. On September 11, 2023, we executed a commitment letter for the guarantee by RUS of a $450 million loan facility from the Federal Financing Bank under the Guaranteed Underwriter Program. On September 27, 2023, we borrowed $275 million under the Guaranteed Underwriter Program.

Farmer Mac Revolving Note Purchase Agreement—Secured

Under this agreement, we had outstanding secured notes payable totaling $3,626 million and $3,150 million as of August 31, 2023 and May 31, 2023, respectively. We borrowed $500 million in short-term notes payable under this note purchase agreement with Farmer Mac during the current quarter. As displayed in Table 14, the amount available for borrowing under this agreement was $2,374 million as of August 31, 2023. 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 agreement.

We provide additional information on pledged collateral below under “Pledged Collateral” in this section and in “Note 3—Investment Securities” 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.

Short-term borrowings ~~decreased $81~~increased $578 million to ~~$4,900~~$5,124 million as of ~~February 28,~~August 31, 2023, from ~~$4,981~~$4,546 million as of May 31, ~~2022,~~2023, and accounted for 16% and ~~17%~~15% of total debt outstanding as of each respective period. The ~~decrease~~increase in short-term borrowings was primarily driven by ~~a decrease~~the increase in ~~short-term member investments, partially offset by increases in outstanding dealer commercial paper and~~ short-term notes payable advanced under the Farmer Mac revolving note purchase ~~agreement.~~agreement and short-term member investments, partially offset by the decrease in outstanding dealer commercial paper.

Member investments have historically been our primary source of short-term borrowings. Table 1917 displays the composition, by funding source, of our short-term borrowings as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023. As indicated in Table ~~19,~~17, members’ investments represented ~~65%~~69% and ~~79%~~72% of our outstanding short-term borrowings as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively.

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Table ~~19:~~17: Short-Term Borrowings—Funding Sources


		February 28, 2023				May 31, 2022					August 31, 2023				May 31, 2023
(Dollars in thousands)	(Dollars in thousands)	Amount Outstanding		% of Total Short-Term Borrowings		Amount Outstanding		% of Total Short-Term Borrowings		(Dollars in thousands)	Amount Outstanding		% of Total Short-Term Borrowings		Amount Outstanding		% of Total Short-Term Borrowings
Funding source:	Funding source:									Funding source:
Members	Members	$	3,185,978	65	%	$	3,956,354	79	%	Members	$	3,535,992	69	%	$	3,253,108	72	%
Farmer Mac notes payable	Farmer Mac notes payable	500,000		10		—		—		Farmer Mac notes payable	500,000		10		—		—
Capital markets	Capital markets	1,213,653		25		1,024,813		21		Capital markets	1,088,343		21		1,293,167		28
Total	Total	$	4,899,631	100	%	$	4,981,167	100	%	Total	$	5,124,335	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 within a range of $1,000 million ~~and~~to $1,500 million, although the ~~intra-period~~intra-quarter amount of dealer commercial paper outstanding may fluctuate based on our liquidity requirements. Dealer commercial paper outstanding of ~~$1,214~~$1,088 million and ~~$1,025~~$1,293 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, was within our quarter-end target range of $1,000 million ~~and~~to $1,500 million.

See “Note 6—Short-Term Borrowing” for additional information on our short-term borrowings.

Long-Term and Subordinated Debt

Long-term and ~~subordinated~~subordinated debt, which represents the most significant source of our funding, totaled ~~$26,042~~$26,280 million and ~~$23,766~~$26,453 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, and accounted for 84% and ~~83%~~85% of total debt outstanding as of each respective date. The ~~increase~~decrease in long-term and subordinated debt was primarily due to ~~a net increase of $910~~debt repayments totaling $612 million ~~in dealer medium term notes, $725 million in collateral trust bonds and $666 million in notes payable under the Guaranteed Underwriter Program~~ ~~to fund loan portfolio growth~~ during the current ~~year-to-date period. Subsequent to~~quarter, partially offset by debt issuances totaling $435 million during the ~~quarter ended February 28, 2023, we borrowed $150 million~~current fiscal year, as presented below in ~~long-term notes payable under the Farmer Mac note purchase agreement.~~Table 18.

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 2023; 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.

We intend to file a new registration statement registering an unlimited amount of collateral trust bonds and senior and subordinated debt securities, including medium-term notes, member capital securities and subordinated deferrable debt prior to the expiration of the existing shelf registration statement in October 2023.

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.

Long-Term Debt and Subordinated Debt—Issuances and Repayments

Table 2018 summarizes long-term and subordinated debt issuances and repayments during the ~~nine~~three months ended ~~February 28,~~August 31, 2023.

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Table ~~20:~~18: Long-Term and Subordinated Debt— Issuances and Repayments


		Nine Months Ended February 28, 2023					Three Months Ended August 31, 2023
(Dollars in thousands)	(Dollars in thousands)	Issuances		Repayments(1)		(Dollars in thousands)	Issuances		Repayments(1)
Debt product type:	Debt product type:					Debt product type:
Collateral trust bonds		$	1,050,000	$	355,000

Guaranteed Underwriter Program notes payable	Guaranteed Underwriter Program notes payable	800,000		134,349		Guaranteed Underwriter Program notes payable	$	—	$	50,496
Farmer Mac notes payable	Farmer Mac notes payable	400,000		470,938		Farmer Mac notes payable	—		23,945
Medium-term notes sold to members	Medium-term notes sold to members	100,907		39,827		Medium-term notes sold to members	23,645		16,550
Medium-term notes sold to dealers	Medium-term notes sold to dealers	1,708,085		798,225		Medium-term notes sold to dealers	411,651		419,752
Other notes payable		—		3,565

Subordinated deferrable debt						Subordinated deferrable debt	—		100,000
Members’ subordinated certificates	Members’ subordinated certificates	6,127		4,315		Members’ subordinated certificates	—		1,100
Total	Total	$	4,065,119	$	1,806,219	Total	$	435,296	$	611,843

____________________________

(1) Repayments include principal maturities, scheduled amortization payments, repurchases and redemptions.

Long-Term and Subordinated Debt—Principal Maturity and Amortization

Table 2119 summarizes scheduled principal maturity and amortization of our long-term debt, subordinated deferrable debt and members’ subordinated certificates outstanding of as of ~~February 28,~~August 31, 2023, in each fiscal year during the five-year period ending May 31, ~~2027,~~2028, and thereafter.

Table ~~21:~~19: Long-Term and Subordinated Debt—Scheduled Principal Maturities and Amortization(1)

(Dollars in thousands)
Scheduled Amortization(2)
% of Total
Fiscal year ending May 31:
2023 $ 112,554 — %
2024 2,235,236 8
2025 2,276,183 9
2026 3,585,232 14
2027 1,639,656 6
Thereafter 16,448,078 63
Total $ 26,296,939 100 %


(Dollars in thousands)	Scheduled Amortization(2)		% of Total
Fiscal year ending May 31:
2024	$	1,770,551	7	%
2025	2,300,339		9
2026	3,546,046		13
2027	1,704,161		6
2028	2,164,450		8
Thereafter	15,043,379		57
Total	$	26,528,926	100	%

____________________________

(1) Amounts presented are based on the face amount of debt outstanding as of ~~February 28,~~August 31, 2023, and therefore does not include related debt issuance costs and discounts.

(2) Member loan subordinated certificates totaling ~~$159~~$158 million amortize annually based on the unpaid principal balance of the related loan.

We provide additional information on our financing activities under the above ~~under~~ “Consolidated Balance Sheet Analysis—Debt” and in “Note 7—Long-Term Debt” and “Note 8—Subordinated Deferrable Debt.”

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 ~~$30,942~~$31,405 million as of ~~February 28,~~August 31, 2023, ~~$17,870~~$17,879 million, or ~~58%~~57%, was secured by pledged loans totaling ~~$20,799~~$20,798 million. In comparison, of our total debt outstanding of ~~$28,747~~$30,999 million as of May 31, ~~2022, $16,051~~2023, $17,450 million, or 56%, was secured by pledged loans totaling ~~$19,062~~$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 ~~agreements~~agreement with Farmer Mac. Total debt

Table of C onten t s

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 2220 displays the collateral coverage ratios pursuant to these secured borrowing agreements as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

Table ~~22:~~20: Collateral Pledged


		Requirement Coverage Ratios									Requirement Coverage Ratios
			Maximum Committed Bank Revolving Line of Credit Agreements		Actual Coverage Ratios(1)								Maximum Committed Bank Revolving Line of Credit Agreements			Actual Coverage Ratios(1)
		Minimum Debt Indentures		February 28, 2023		May 31, 2022			Minimum Debt Indentures						August 31, 2023			May 31, 2023
Secured borrowing agreement type:	Secured borrowing agreement type:									Secured borrowing agreement type:
Collateral trust bonds 1994 indenture	Collateral trust bonds 1994 indenture	100%	150%		118%		118%	Collateral trust bonds 1994 indenture			100	%	150	%		111	%		115	%
Collateral trust bonds 2007 indenture	Collateral trust bonds 2007 indenture	100	150		115		123	Collateral trust bonds 2007 indenture			100		150			112			114
Guaranteed Underwriter Program notes payable	Guaranteed Underwriter Program notes payable	100	150		110		113	Guaranteed Underwriter Program notes payable			100		150			117			117
Farmer Mac notes payable	Farmer Mac notes payable	100	150		124		111	Farmer Mac notes payable			100		150			117			136
Clean Renewable Energy Bonds Series 2009A(2)	Clean Renewable Energy Bonds Series 2009A(2)	100	150		110		128	Clean Renewable Energy Bonds Series 2009A(2)			100		150			126			129

___________________________

(1) Calculated based on the amount of collateral pledged divided by the face amount of outstanding secured debt.

(2) Collateral includes cash pledged.

Table 2321 displays the unpaid principal balance of loans pledged for secured debt, the excess collateral pledged and unencumbered loans as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

Table ~~23:~~21: Loans—Unencumbered Loans

(Dollars in thousands) February 28, 2023 May 31, 2022
Total loans outstanding(1)
$ 32,369,231 $ 30,051,354
Less: Loans required pledged under secured debt agreements(2)
(18,088,676) (16,300,618)
Loans pledged in excess of required amount(2)(3)
(2,710,483) (2,761,335)
Total pledged loans (20,799,159) (19,061,953)
Unencumbered loans $ 11,570,072 $ 10,989,401

~~Unencumbered loans as a percentage of total loans outstanding 36% 37%~~


(Dollars in thousands)	August 31, 2023		May 31, 2023
Total loans outstanding(1)	$	33,083,493	$	32,519,349
Less: Loans required pledged under secured debt agreements(2)	(18,089,908)		(17,664,350)
Loans pledged in excess of required amount(2)(3)	(2,708,499)		(3,373,580)
Total pledged loans	(20,798,407)		(21,037,930)
Unencumbered loans	$	12,285,086	$	11,481,419

Unencumbered loans as a percentage of total loans outstanding

37%

35%

____________________________

(1) Represents the unpaid principal balance of loans as of the end of each period. Excludes unamortized deferred loan origination costs of $13 million ~~and $12 million~~ as of ~~February 28,~~both August 31, 2023 and May 31, ~~2022, respectively.~~2023.

(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 ~~23,~~21, we had excess loans pledged as collateral totaling ~~$2,710~~$2,708 million and ~~$2,761~~$3,374 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively. 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.

Table of C onten t s

We provide additional information on our borrowings, including the maturity profile, below in the “Liquidity Risk” section and additional information on pledged loans in “Note 4—Loans” of this Report. For additional detail on each of our debt product types, refer to “Note 5—Short-Term Borrowings,” “Note 7—Long-Term Debt,” “Note 8—Subordinated Deferrable Debt” and “Note 9—Members’ Subordinated Certificates” in our ~~2022~~2023 Form 10-K.

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 11—Guarantees.”

Projected Near-Term Sources and Uses of Funds

Table 2422 below displays a projection of our primary long-term sources and uses of funds, by quarter, over each of the next six fiscal quarters through the quarter ending ~~August 31, 2024.~~February 28, 2025. Our projection is based on the following, which includes several assumptions: (i) the estimated issuance of long-term debt, including capital ~~markets~~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 ~~February 28,~~August 31, 2023 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.

Table ~~24:~~22: Liquidity—~~Project~~edProjected Long-Term ~~Sourc~~esSources 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
4Q FY2023 $ 684 $ 374 $ 1,058 $ 151 $ 865 $ 1,016
1Q FY2024 617 374 991 633 728 1,361
2Q FY2024 709 361 1,070 697 616 1,313
3Q FY2024 1,456 385 1,841 1,141 663 1,804
4Q FY2024 395 374 769 396 632 1,028
1Q FY2025 — 383 383 103 633 736
Total $ 3,861 $ 2,251 $ 6,112 $ 3,121 $ 4,137 $ 7,258


	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

2Q FY2024	$	705	$	361	$	1,066	$	698	$	1,062	$	1,760
3Q FY2024	1,691		365		2,056		1,169		940		2,109
4Q FY2024	225		374		599		251		703		954
1Q FY2025	594		387		981		208		737		945
2Q FY2025	1,111		377		1,488		865		727		1,592
3Q FY2025	1,658		381		2,039		1,227		731		1,958
Total	$	5,984	$	2,245	$	8,229	$	4,418	$	4,900	$	9,318

____________________________

(1) The dates presented represent the end of each quarterly period through the quarter ended ~~August 31, 2024.~~February 28, 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 ~~24,~~22, we currently project long-term advances of ~~$2,872~~$3,442 million over the next 12 months, which we project will exceed anticipated long-term loan repayments over the same period of ~~$1,494~~$1,487 million, resulting in net loan growth of approximately ~~$1,378~~$1,955 million over the next 12 months.

Table of C onten t s

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 the current quarter, Moody’s, S&P and Fitch affirmed CFC’s credit ratings and stable outlook.~~ Table 2523 displays our credit ratings as of ~~February 28,~~August 31, 2023, which remain unchanged as of the date of this Report. In September 2023, Fitch affirmed CFC’s credit ratings and stable outlook.

Table ~~25:~~23: Credit Ratings

~~February 28,~~August 31, 2023

Moody’s

S&P

Fitch

CFC credit ratings and outlook:

Long-term issuer credit rating(1)

A-

Senior secured debt(2)

A-

A+

Senior unsecured debt(3)

A-

Subordinated debt

BBB

BBB+

Commercial paper

P-1

A-2

Outlook

Stable

Ratings and outlook confirmation date

February 16, 2023

December 7, 2022

February 6, 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 ~~Risk-Related Contingent Features”~~Exposure” above for information on credit rating provisions related to our derivative contracts.

Financial Ratios

Our debt-to-equity ratio decreased to ~~12.06~~11.63 as of ~~February 28,~~August 31, 2023, from ~~13.59~~12.14 as of May 31, ~~2022,~~2023, primarily due to an increase in equity from our reported net income of ~~$515~~$228 million for the current ~~year-to-date period,~~quarter, which was partially offset by a decrease in equity attributable to the CFC Board of Directors’ authorized patronage capital retirement in July ~~2022~~2023 of ~~$59~~$72 million.

While our goal is to maintain an adjusted debt-to-equity ratio of approximately ~~6.00-to-1,~~6-to-1, the adjusted debt-to-equity ratio increased to ~~6.59~~6.31 as of ~~February 28,~~August 31, 2023 from ~~6.24~~6.04 as of May 31, ~~2022,~~2023, and was above our targeted goal, largely due to the combined impact of an increase in adjusted liabilities resulting from additional borrowings to fund growth in our loan portfolio and a decrease in adjusted equity. The decrease in adjusted equity was primarily due to the early redemption during the current quarter of $100 million in principal amount of our $400 million subordinated deferrable debt due 2043 and the CFC Board of Directors’ authorized patronage capital retirement in July ~~2022 of $59 million,~~2023, partially offset by our ~~current year-to-date period~~current-quarter adjusted net income.

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 ~~debt~~ 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 ~~February 28,~~August 31, 2023.

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As discussed above in “Summary of Selected Financial Data,” 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.” See “Item 7. MD&A—Non-GAAP Financial Measures” in our ~~2022~~2023 Form 10-K for a discussion of each of our non-GAAP measures and an explanation of the adjustments to derive these measures.


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 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 financial assets and our financial liabilities. We use derivatives as a tool in matching the duration and repricing characteristics of our interest-rate sensitive assets and liabilities. We provide additional information on our management of interest rate risk in our ~~2022~~2023 Form 10-K under “Item 7. MD&A—Market Risk—Interest Rate Risk Management.”

Below we discuss how we manage and measure interest rate risk. We also provide a status update on actions taken to identify, assess, monitor and mitigate risks associated with the expected discontinuance or unavailability of LIBOR and facilitate an orderly transition from LIBOR as a benchmark interest reference rate to an alternative benchmark rate.

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 exposure using various methodologies through the use of ALM models that enable us to ~~more~~ 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 “Summary of Selected Financial Data,” 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 projection. As discussed in the “Executive Summary—Outlook” section, we currently anticipate net long-term loan growth of ~~$1,378~~$1,955 million over the next 12 months. The September 2023 consensus market outlook for interest rates asindicated rising interest rates across the yield curve during the remainder of ~~March~~ 2023, ~~pointed to~~followed by a decrease in ~~the~~ short-term interest rates ~~resulting~~during 2024. The yield curve is expected to remain inverted for the remainder of 2023 and, given the expected drop in ~~a less inverted yield curve. The~~short-term interest rates in the following year, the yield curve inversion is expected to narrow in 2024, and remain ~~until mid-calendar year 2024, however the interest rate market has experienced extreme volatility in March 2023, which is expected to continue.~~inverted beyond that period. Based on this yield curve forecast, we anticipate a decrease in our reported net interest income and reported net interest yield over the next 12 months relative to the 12-month period ended ~~February 28,~~August 31, 2023. However, we ~~expect a modest~~project an increase in our adjusted net interest income and adjusted net interest yield over the next 12 months ~~relative to~~compared with the 12-month period ended ~~February 28, 2023, due~~August 31, 2023. This is primarily attributable to ~~an anticipated~~the expected significant ~~reduction~~increase in our derivative net periodic cash settlements

~~expense,~~ income, which ~~reduce~~will contribute to reducing our adjusted cost of ~~borrowings, and loan portfolio growth.~~borrowings. Additionally, we anticipate a ~~slight decrease~~sustained expansion of our loan portfolio, with the variable-rate line of credit loans outstanding remaining at an elevated level. The anticipated improvement in our adjusted net interest yield over the next 12 months

Table of C onten t s

relative to the 12-month period ended ~~February 28,~~August 31, 2023, is due to the current yield curve assumptions and our balance sheet position.

Table 2624 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 ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~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 ~~26:~~24: Interest Rate Sensitivity Analysis


		February 28, 2023						May 31, 2022							August 31, 2023						May 31, 2023
Estimated Impact(1)	Estimated Impact(1)	+ 100 Basis Points		– 100 Basis Points		Inverted		+ 100 Basis Points		– 100 Basis Points		Inverted		Estimated Impact(1)	+ 100 Basis Points		– 100 Basis Points		Inverted		+ 100 Basis Points		– 100 Basis Points		Inverted
Net interest income	Net interest income	(4.28)	%	4.04	%	(4.94)	%	(9.76)	%	9.68	%	(14.25)	%	Net interest income	(5.29)	%	5.38	%	(6.84)	%	(4.41)	%	4.70	%	(5.88)	%
Derivative cash settlements	Derivative cash settlements	11.02	%	(10.98)	%	8.58	%	10.49	%	(10.49)	%	7.95	%	Derivative cash settlements	13.04	%	(14.11)	%	8.39	%	11.50	%	(11.58)	%	9.38	%
Adjusted net interest income(2)	Adjusted net interest income(2)	6.75	%	(6.93)	%	3.65	%	0.74	%	(0.81)	%	(6.31)	%	Adjusted net interest income(2)	7.75	%	(8.73)	%	1.55	%	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 expense amounts as a component of interest expense in deriving adjusted net interest income. See the section “Non-GAAP Financial Measures” for a reconciliation of the non-GAAP financial measures presented in this Report to the most comparable U.S. GAAP ~~measure.~~financial measures.

The changes in the sensitivity measures between ~~February 28,~~August 31, 2023 and May 31, ~~2022~~2023 are primarily attributable to ana slight increase in the amount of variable rate assets being funded with fixed rate debt, 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 2624 indicate, we would expect an unfavorable impact on our projected net interest income over a 12-month horizon as of ~~February 28,~~August 31, 2023, under the hypothetical ~~scenarios~~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 ~~February 28,~~August 31, 2023, under the hypothetical ~~scenarios~~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~~widened to negative ~~0.91~~1.98 months as of ~~February 28,~~August 31, 2023, from ~~plus 5.29~~negative 1.34 months as of May 31, ~~2022~~2023 and was within the risk limits and guidelines established by CFC’s Asset Liability Committee as of each respective date. The ~~narrowing~~widening of the duration gap is primarily due ~~primarily~~ to ~~the funding of loan advances and the refinancing of maturing debt during the current year-to-date period with longer duration borrowings, combined with~~ an increase in line of credit loans outstanding of ~~$1,136~~$239 million, which reduced the duration of interest-earning assets.

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Table of C onten t s

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.

~~LIBOR Transition~~

In July 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates the LIBOR index, announced that it intended to stop compelling banks to submit the rates required to calculate LIBOR after December 31, 2021. Following this announcement, the Federal Reserve Board and the Federal Reserve Bank of New York established the Alternative Reference Rates Committee (“ARRC”) which is comprised of private-market participants and ex-officio members representing banking and financial sector regulators. The ARRC has recommended SOFR as the alternative reference rate.

In March 2021, the FCA and the Intercontinental Exchange (“ICE”) Benchmark Administration, the administrator for LIBOR, concurrently confirmed the intention to stop requiring banks to submit the rates required to calculate LIBOR after December 31, 2021 for one-week and two-month LIBOR and June 30, 2023 for all remaining LIBOR tenors. Pursuant to the announcement, one-week and two-month LIBOR ceased to be published immediately after December 31, 2021, and all remaining USD LIBOR tenors will cease to be published or lose representativeness immediately after June 30, 2023.

We established a cross-functional LIBOR working group that identified CFC’s exposure, assessed the potential risks related to the transition from LIBOR to a new index and developed a strategic transition plan. Our transition effort is focused on two objectives: (i) remediation of our existing LIBOR exposures and (ii) transitioning ongoing activities away from LIBOR. The LIBOR working group has been closely monitoring and assessing developments with respect to the LIBOR transition and providing regular reports to our senior management team and the CFC Board of Directors. We have identified all of CFC’s LIBOR-based contracts and financial instruments, evaluated the impact of the LIBOR transition on our existing systems, models and processes and updated all internal systems to accommodate SOFR as a new index. CFC has made substantial efforts to remediate its LIBOR exposures that have a contractual maturity date after June 30, 2023, including incorporating hardwired fallback language in agreements to transition instruments to SOFR following the cessation of LIBOR or amending agreements to replace LIBOR with a new benchmark index. On October 20, 2022, we amended the three-year and four-year revolving credit agreements to replace LIBOR with Term SOFR. Certain legacy LIBOR instruments are subject to the Adjustable Interest Rate Act of 2021 that was signed into federal law in March 2022.

Table 27 summarizes our outstanding LIBOR-indexed financial instruments as of February 28, 2023 that have a contractual maturity date after June 30, 2023. These financial instruments are included in amounts reported on our consolidated balance sheets.

~~Table 27: LIBOR-Indexed Financial Instruments~~


~~(Dollars in millions)~~	~~February 28, 2023~~
~~Loans to members, performing~~	$	~~382~~
~~Investment securities(1)~~	46
~~Debt~~	~~1,610~~

~~____________________________~~

~~(1)~~ ~~Amount presented is based on cost of the investment securities. The aggregate fair value of these investment securities was $48 million as of February 28, 2023.~~

In addition to the financial instruments presented in Table 27, we have outstanding LIBOR-indexed interest rate swaps and unadvanced loan commitments that have a contractual maturity date after June 30, 2023. The aggregate notional amount of

these interest rate swaps was $6,968 million as of February 28, 2023, which represented 94% of the total notional amount of our outstanding interest rate swaps of $7,451 million as of February 28, 2023. The aggregate amount of the unadvanced loan commitments was $1,644 million as of February 28, 2023, which represented 11% of the total unadvanced loan commitments of $14,320 million as of February 28, 2023.

~~We ceased originating new LIBOR-based loans effective December 31, 2021. We have confirmed CFC’s adherence to the International Swaps and Derivatives Association, Inc. 2020 LIBOR Fallbacks Protocol for our derivative instruments.~~

We discuss the risks related to the uncertainty as to the nature of potential changes and other reforms associated with the transition away from and expected replacement of LIBOR as a benchmark interest rate under “Item 1A. Risk Factors” in our 2022 Form 10-K.


NON-GAAP FINANCIAL MEASURES

As discussed above in the section “Summary of Selected Financial Data,” in addition to financial measures determined in accordance with U.S. GAAP, management evaluates performance based on certain non-GAAP financial measures, which we refer to as “adjusted” financial measures. Below we provide a reconciliation of our adjusted financial measures presented in this Report to the most comparable U.S. GAAP financial measures. See “Item 7. MD&A—Non-GAAP Financial Measures” in our ~~2022~~2023 Form 10-K for a discussion of each of our non-GAAP financial measures and an explanation of the adjustments to derive these measures.

Net Income and Adjusted Net Income

Table 2825 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 for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023 and 2022. These adjusted financial measures are used in the calculation of our adjusted net interest yield and adjusted TIER.

Table ~~28:~~25: Adjusted Net Income

Three Months Ended February 28, Nine Months Ended February 28,
(Dollars in thousands) 2023 2022 2023 2022
Adjusted net interest income:
Interest income $ 353,292 $ 285,206 $ 984,464 $ 851,626
Interest expense (281,709) (173,654) (736,621) (522,027)
Include: Derivative cash settlements interest income (expense)(1)
18,634 (26,212) 12,650 (79,727)
Adjusted interest expense (263,075) (199,866) (723,971) (601,754)
Adjusted net interest income $ 90,217 $ 85,340 $ 260,493 $ 249,872
Adjusted total revenue:
Net interest income $ 71,583 $ 111,552 $ 247,843 $ 329,599
Fee and other income 5,326 4,270 13,548 13,042
Total revenue 76,909 115,822 261,391 342,641
Include: Derivative cash settlements interest income (expense)(1)
18,634 (26,212) 12,650 (79,727)
Adjusted total revenue $ 95,543 $ 89,610 $ 274,041 $ 262,914
Adjusted net income:
Net income $ 163,217 $ 261,965 $ 514,855 $ 307,362
Exclude: Derivative forward value gains(2)
83,674 195,492 330,035 122,930
Adjusted net income $ 79,543 $ 66,473 $ 184,820 $ 184,432


	Three Months Ended August 31,
(Dollars in thousands)		2023		2022
Adjusted net interest income:
Interest income		$	380,956	$	306,978
Interest expense		(316,281)		(209,468)
Include: Derivative cash settlements interest income (expense)(1)		27,869		(10,785)
Adjusted interest expense		(288,412)		(220,253)
Adjusted net interest income		$	92,544	$	86,725

Adjusted total revenue:
Net interest income		$	64,675	$	97,510
Fee and other income		4,537		4,056
Total revenue		69,212		101,566
Include: Derivative cash settlements interest income (expense)(1)		27,869		(10,785)
Adjusted total revenue		$	97,081	$	90,781

Adjusted net income:
Net income		$	228,284	$	161,874
Exclude: Derivative forward value gains(2)		162,018		104,372
Adjusted net income		$	66,266	$	57,502

____________________________

(1)Represents the net periodic contractual interest expense amount on our interest-rate swaps during the reporting period.

5143

Table of C onten t s

(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 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 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 2926 displays the calculation of our TIER and adjusted TIER for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023 and 2022.

Table ~~29:~~26: TIER and Adjusted TIER

Three Months Ended February 28, Nine Months Ended February 28,
2023 2022 2023 2022
TIER (1)
1.58 2.51 1.70 1.59
Adjusted TIER (2)
1.30 1.33 1.26 1.31


	Three Months Ended August 31,
	2023	2022
TIER (1)	1.72	1.77

Adjusted TIER (2)	1.23	1.26

____________________________

(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

Table 3027 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 as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023. As indicated in Table ~~30,~~27, subordinated debt is treated in the same manner as equity in calculating our adjusted-debt-to-equity ratio.

5244

Table of C onten t s

Table ~~30:~~27: Adjusted Liabilities and Equity

(Dollars in thousands) February 28, 2023 May 31, 2022
Adjusted total liabilities:
Total liabilities $ 31,398,086 $ 29,109,413
Exclude:
Derivative liabilities 131,075 128,282
Debt used to fund loans guaranteed by RUS 124,861 131,128
Subordinated deferrable debt 986,678 986,518
Subordinated certificates 1,223,415 1,234,161
Adjusted total liabilities $ 28,932,057 $ 26,629,324
Adjusted total equity:
Total equity $ 2,603,426 $ 2,141,969
Exclude:
Prior fiscal year-end cumulative derivative forward value gains (losses)(1)
90,831 (467,036)
Year-to-date derivative forward value gains(1)
330,035 557,867
Period-end cumulative derivative forward value gains(1)
420,866 90,831
AOCI attributable to derivatives(2)
1,081 1,341
Subtotal 421,947 92,172
Include:
Subordinated deferrable debt 986,678 986,518
Subordinated certificates 1,223,415 1,234,161
Subtotal 2,210,093 2,220,679
Adjusted total equity $ 4,391,572 $ 4,270,476


(Dollars in thousands)	August 31, 2023		May 31, 2023
Adjusted total liabilities:
Total liabilities	$	31,946,236	$	31,422,811
Exclude:
Derivative liabilities	108,239		115,074
Debt used to fund loans guaranteed by RUS	120,553		122,873
Subordinated deferrable debt	1,184,197		1,283,436
Subordinated certificates	1,222,026		1,223,126
Adjusted total liabilities	$	29,311,221	$	28,678,302

Adjusted total equity:
Total equity	$	2,747,927	$	2,589,249
Exclude:
Prior fiscal year-end cumulative derivative forward value gains(1)	343,098		90,831
Year-to-date derivative forward value gains(1)	162,018		252,267
Period-end cumulative derivative forward value gains(1)	505,116		343,098
AOCI attributable to derivatives(2)	923		1,001
Subtotal	506,039		344,099
Include:
Subordinated deferrable debt	1,184,197		1,283,436
Subordinated certificates	1,222,026		1,223,126
Subtotal	2,406,223		2,506,562
Adjusted total equity	$	4,648,111	$	4,751,712

____________________________

(1) Represents consolidated total derivative forward value ~~gains (losses).~~gains.

(2) Represents the AOCI amount related to derivatives. See “Note 10—Equity” for the additional components of AOCI.

Debt-to-Equity and Adjusted Debt-to-Equity Ratios

Table 3128 displays the calculations of our debt-to-equity and adjusted debt-to-equity ratios as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

Table ~~31:~~28: Debt-to-Equity Ratio and Adjusted Debt-to-Equity Ratio

(Dollars in thousands) February 28, 2023 May 31, 2022
Debt-to equity ratio:
Total liabilities $ 31,398,086 $ 29,109,413
Total equity 2,603,426 2,141,969
Debt-to-equity ratio (1)
12.06 13.59
Adjusted debt-to-equity ratio:
Adjusted total liabilities(2)
$ 28,932,057 $ 26,629,324
Adjusted total equity(2)
4,391,572 4,270,476
Adjusted debt-to-equity ratio(3)
6.59 6.24


(Dollars in thousands)	August 31, 2023		May 31, 2023
Debt-to equity ratio:
Total liabilities	$	31,946,236	$	31,422,811
Total equity	2,747,927		2,589,249
Debt-to-equity ratio (1)	11.63		12.14

Adjusted debt-to-equity ratio:
Adjusted total liabilities(2)	$	29,311,221	$	28,678,302
Adjusted total equity(2)	4,648,111		4,751,712
Adjusted debt-to-equity ratio(3)	6.31		6.04

____________________________

(1) Calculated based on total liabilities at period end divided by total equity at period end.

Table of C onten t s

(2) See Table 3027 above for details on the calculation of these non-GAAP ~~adjusted~~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 accumulated other comprehensive income. 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 3229 provides a reconciliation of members’ equity to total CFC equity as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023. We present the components of accumulated other comprehensive income in “Note 10—Equity.”

Table ~~32:~~29: Members’ Equity

(Dollars in thousands) February 28, 2023 May 31, 2022
Members’ equity:
Total CFC equity $ 2,575,793 $ 2,114,573
Exclude:
Accumulated other comprehensive income 8,694 2,258
Period-end cumulative derivative forward value gains attributable to CFC(1)
419,895 92,363
Subtotal 428,589 94,621
Members’ equity $ 2,147,204 $ 2,019,952


(Dollars in thousands)	August 31, 2023		May 31, 2023
Members’ equity:
Total CFC equity	$	2,717,385	$	2,562,059
Exclude:
Accumulated other comprehensive income	8,241		8,343
Period-end cumulative derivative forward value gains attributable to CFC(1)	503,878		342,624
Subtotal	512,119		350,967
Members’ equity	$	2,205,266	$	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 NCSC and RTFC, which we are required to consolidate. We report the separate results of operations for CFC in “Note 14—Business Segments.” The period-end cumulative derivative forward value total ~~gains~~gain amounts as of ~~February 28,~~August 31, 2023 and May 31, ~~2022~~2023 are presented above in Table ~~30.~~27.

5446

Table of C onten t s

Item 1. Financial Statements


									Page
			Consolidated Statements of Operations (Unaudited)						5648
			Consolidated Statements of Comprehensive Income (Loss) (Unaudited)						5749
			Consolidated Balance Sheets (Unaudited)						5850
			Consolidated Statements of Changes in Equity (Unaudited)						5951
			Consolidated Statements of Cash Flows (Unaudited)						6052
			Notes to Consolidated Financial Statements (Unaudited)						6153
			Note 1 — Summary of Significant Accounting Policies						6153
			Note 2 — Interest Income and Interest Expense						6354
			Note 3 — Investment Securities						6355
			Note 4 — Loans						6556
			Note 5 — Allowance for Credit Losses						7668
			Note 6 — Short-Term Borrowings						7970
			Note 7 — Long-Term Debt						8071
			Note 8 — Subordinated Deferrable Debt						8274
			Note 9 — Derivative Instruments and Hedging Activities						8274
			Note 10 — Equity						8677
			Note 11 — Guarantees						8778
			Note 12 — Fair Value Measurement						8980
			Note 13 — Variable Interest Entities						9182
			Note 14 — Business Segments						9384

5547

Table of C onten t s

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


		Three Months Ended February 28,				Nine Months Ended February 28,					Three Months Ended August 31,
(Dollars in thousands)	(Dollars in thousands)	2023		2022		2023		2022		(Dollars in thousands)		2023		2022
Interest income	Interest income	$	353,292	$	285,206	$	984,464	$	851,626	Interest income		$	380,956	$	306,978
Interest expense	Interest expense	(281,709)		(173,654)		(736,621)		(522,027)		Interest expense		(316,281)		(209,468)
Net interest income	Net interest income	71,583		111,552		247,843		329,599		Net interest income		64,675		97,510
Benefit (provision) for credit losses		11,318		12,749		(3,806)		12,146
Net interest income after benefit (provision) for credit losses		82,901		124,301		244,037		341,745
Provision for credit losses										Provision for credit losses		(800)		(3,496)
Net interest income after provision for credit losses										Net interest income after provision for credit losses		63,875		94,014
Non-interest income:	Non-interest income:									Non-interest income:
Fee and other income	Fee and other income	5,326		4,270		13,548		13,042		Fee and other income		4,537		4,056
Derivative gains	Derivative gains	102,308		169,280		342,685		43,203		Derivative gains		189,887		93,587
Investment securities losses		(1,402)		(11,621)		(5,574)		(18,190)
Investment securities gains (losses)										Investment securities gains (losses)		2,933		(3,679)
Total non-interest income	Total non-interest income	106,232		161,929		350,659		38,055		Total non-interest income		197,357		93,964
Non-interest expense:	Non-interest expense:									Non-interest expense:
Salaries and employee benefits	Salaries and employee benefits	(14,808)		(13,181)		(42,792)		(38,871)		Salaries and employee benefits		(15,874)		(13,778)
Other general and administrative expenses	Other general and administrative expenses	(10,507)		(9,898)		(35,289)		(31,513)		Other general and administrative expenses		(15,629)		(11,741)

Losses on early extinguishment of debt										Losses on early extinguishment of debt		(939)		—
Other non-interest expense	Other non-interest expense	(298)		(843)		(975)		(1,530)		Other non-interest expense		(178)		(322)
Total non-interest expense	Total non-interest expense	(25,613)		(23,922)		(79,056)		(71,914)		Total non-interest expense		(32,620)		(25,841)
Income before income taxes	Income before income taxes	163,520		262,308		515,640		307,886		Income before income taxes		228,612		162,137
Income tax provision	Income tax provision	(303)		(343)		(785)		(524)		Income tax provision		(328)		(263)
Net income	Net income	163,217		261,965		514,855		307,362		Net income		228,284		161,874
Less: Net income attributable to noncontrolling interests	Less: Net income attributable to noncontrolling interests	(321)		(888)		(541)		(1,081)		Less: Net income attributable to noncontrolling interests		(427)		(193)
Net income attributable to CFC	Net income attributable to CFC	$	162,896	$	261,077	$	514,314	$	306,281	Net income attributable to CFC		$	227,857	$	161,681

The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements.

5648

Table of C onten t s

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)


		Three Months Ended February 28,				Nine Months Ended February 28,					Three Months Ended August 31,
(Dollars in thousands)	(Dollars in thousands)	2023		2022		2023		2022		(Dollars in thousands)		2023		2022
Net income	Net income	$	163,217	$	261,965	$	514,855	$	307,362	Net income		$	228,284	$	161,874
Other comprehensive income (loss):	Other comprehensive income (loss):									Other comprehensive income (loss):

Changes in unrealized gains on derivative cash flow hedges		6,691		—		6,691		4,028

Reclassification to earnings of realized gains on derivatives	Reclassification to earnings of realized gains on derivatives	(177)		(192)		(555)		(432)		Reclassification to earnings of realized gains on derivatives		(155)		(189)
Defined benefit plan adjustments	Defined benefit plan adjustments	100		72		300		215		Defined benefit plan adjustments		53		100
Other comprehensive income (loss)		6,614		(120)		6,436		3,811
Other comprehensive loss										Other comprehensive loss		(102)		(89)
Total comprehensive income	Total comprehensive income	169,831		261,845		521,291		311,173		Total comprehensive income		228,182		161,785
Less: Total comprehensive income attributable to noncontrolling interests	Less: Total comprehensive income attributable to noncontrolling interests	(321)		(888)		(541)		(1,081)		Less: Total comprehensive income attributable to noncontrolling interests		(427)		(193)
Total comprehensive income attributable to CFC	Total comprehensive income attributable to CFC	$	169,510	$	260,957	$	520,750	$	310,092	Total comprehensive income attributable to CFC		$	227,755	$	161,592

The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements.

5749

Table of C onten t s

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


(Dollars in thousands)	(Dollars in thousands)	February 28, 2023		May 31, 2022		(Dollars in thousands)	August 31, 2023		May 31, 2023
Assets:	Assets:					Assets:
Cash and cash equivalents	Cash and cash equivalents	$	172,962	$	153,551	Cash and cash equivalents	$	199,552	$	198,936
Restricted cash	Restricted cash	7,298		7,563		Restricted cash	9,290		8,301
Total cash, cash equivalents and restricted cash	Total cash, cash equivalents and restricted cash	180,260		161,114		Total cash, cash equivalents and restricted cash	208,842		207,237
Investment securities:	Investment securities:					Investment securities:
Debt securities trading, at fair value	Debt securities trading, at fair value	549,124		566,146		Debt securities trading, at fair value	425,331		474,875
Equity securities, at fair value	Equity securities, at fair value	38,002		33,758		Equity securities, at fair value	36,780		35,494
Total investment securities, at fair value	Total investment securities, at fair value	587,126		599,904		Total investment securities, at fair value	462,111		510,369
Loans to members	Loans to members	32,381,829		30,063,386		Loans to members	33,096,646		32,532,086
Less: Allowance for credit losses	Less: Allowance for credit losses	(56,297)		(67,560)		Less: Allowance for credit losses	(54,926)		(53,094)
Loans to members, net	Loans to members, net	32,325,532		29,995,826		Loans to members, net	33,041,720		32,478,992
Accrued interest receivable	Accrued interest receivable	161,856		111,418		Accrued interest receivable	177,351		172,723
Other receivables	Other receivables	39,448		35,431		Other receivables	30,613		31,243
Fixed assets, net		113,281		101,762
Fixed assets, net of accumulated depreciation of $78,626 and $77,508 as of August 31, 2023 and May 31, 2023, respectively						Fixed assets, net of accumulated depreciation of $78,626 and $77,508 as of August 31, 2023 and May 31, 2023, respectively	85,521		86,011

Derivative assets	Derivative assets	554,610		222,042		Derivative assets	615,866		460,762
Other assets	Other assets	39,399		23,885		Other assets	72,139		64,723
Total assets	Total assets	$	34,001,512	$	31,251,382	Total assets	$	34,694,163	$	34,012,060

Liabilities:	Liabilities:					Liabilities:
Accrued interest payable	Accrued interest payable	$	233,690	$	131,950	Accrued interest payable	$	274,554	$	212,340
Debt outstanding:	Debt outstanding:					Debt outstanding:
Short-term borrowings	Short-term borrowings	4,899,631		4,981,167		Short-term borrowings	5,124,335		4,546,275
Long-term debt	Long-term debt	23,831,978		21,545,440		Long-term debt	23,874,274		23,946,548
Subordinated deferrable debt	Subordinated deferrable debt	986,678		986,518		Subordinated deferrable debt	1,184,197		1,283,436
Members’ subordinated certificates:	Members’ subordinated certificates:					Members’ subordinated certificates:
Membership subordinated certificates	Membership subordinated certificates	628,609		628,603		Membership subordinated certificates	628,614		628,614
Loan and guarantee subordinated certificates	Loan and guarantee subordinated certificates	348,643		365,388		Loan and guarantee subordinated certificates	347,249		348,349
Member capital securities	Member capital securities	246,163		240,170		Member capital securities	246,163		246,163
Total members’ subordinated certificates	Total members’ subordinated certificates	1,223,415		1,234,161		Total members’ subordinated certificates	1,222,026		1,223,126
Total debt outstanding	Total debt outstanding	30,941,702		28,747,286		Total debt outstanding	31,404,832		30,999,385

Patronage capital retirement payable						Patronage capital retirement payable	69,053		—
Deferred income	Deferred income	40,541		44,332		Deferred income	37,099		38,601
Derivative liabilities	Derivative liabilities	131,075		128,282		Derivative liabilities	108,239		115,074
Other liabilities	Other liabilities	51,078		57,563		Other liabilities	52,459		57,411
Total liabilities	Total liabilities	31,398,086		29,109,413		Total liabilities	31,946,236		31,422,811

Equity:	Equity:					Equity:
CFC equity:	CFC equity:					CFC equity:
Retained equity	Retained equity	2,567,099		2,112,315		Retained equity	2,709,144		2,553,716
Accumulated other comprehensive income	Accumulated other comprehensive income	8,694		2,258		Accumulated other comprehensive income	8,241		8,343
Total CFC equity	Total CFC equity	2,575,793		2,114,573		Total CFC equity	2,717,385		2,562,059
Noncontrolling interests	Noncontrolling interests	27,633		27,396		Noncontrolling interests	30,542		27,190
Total equity	Total equity	2,603,426		2,141,969		Total equity	2,747,927		2,589,249
Total liabilities and equity	Total liabilities and equity	$	34,001,512	$	31,251,382	Total liabilities and equity	$	34,694,163	$	34,012,060

The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements.

5850

Table of C onten t s

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(UNAUDITED)


		Three Months Ended February 28, 2023																			Three Months Ended August 31, 2023
(Dollars in thousands)	(Dollars in thousands)	Membership Fees and Educational Fund		Patronage Capital Allocated		Members’ Capital Reserve		Unallocated Net Income		CFC Retained Equity		Accumulated Other Comprehensive Income		Total CFC Equity		Non-controlling Interests		Total Equity		(Dollars in thousands)	Membership Fees and Educational Fund		Patronage Capital Allocated		Members’ Capital Reserve		Unallocated Net Income		CFC Retained Equity		Accumulated Other Comprehensive Income (Loss)		Total CFC Equity		Non-controlling Interests		Total Equity
Balance as of November 30, 2022		$	2,859	$	896,096	$	1,062,286	$	443,072	$	2,404,313	$	2,080	$	2,406,393	$	27,319	$	2,433,712

Balance as of May 31, 2023																				Balance as of May 31, 2023	$	3,534	$	1,006,115	$	1,202,152	$	341,915	$	2,553,716	$	8,343	$	2,562,059	$	27,190	$	2,589,249

Net income	Net income	—		—		—		162,896		162,896		—		162,896		321		163,217		Net income	—		—		—		227,857		227,857		—		227,857		427		228,284
Other comprehensive income		—		—		—		—		—		6,614		6,614		—		6,614
Other comprehensive loss																				Other comprehensive loss	—		—		—		—		—		(102)		(102)		—		(102)
Patronage capital retirement	Patronage capital retirement	—		—		—		—		—		—		—		—		—		Patronage capital retirement	—		(71,980)		—		—		(71,980)		—		(71,980)		—		(71,980)
Other	Other	(110)		—		—		—		(110)		—		(110)		(7)		(117)		Other	(449)		—		—		—		(449)		—		(449)		2,925		2,476
Balance as of February 28, 2023		$	2,749	$	896,096	$	1,062,286	$	605,968	$	2,567,099	$	8,694	$	2,575,793	$	27,633	$	2,603,426
Balance as of August 31, 2023																				Balance as of August 31, 2023	$	3,085	$	934,135	$	1,202,152	$	569,772	$	2,709,144	$	8,241	$	2,717,385	$	30,542	$	2,747,927

																					Three Months Ended August 31, 2022
(Dollars in thousands)																				(Dollars in thousands)	Membership Fees and Educational Fund		Patronage Capital Allocated		Members’ Capital Reserve		Unallocated Net Income (Loss)		CFC Retained Equity		Accumulated Other Comprehensive Income (Loss)		Total CFC Equity		Non-controlling Interests		Total Equity

		Nine Months Ended February 28, 2023

Balance as of May 31, 2022	Balance as of May 31, 2022	$	3,387	$	954,988	$	1,062,286	$	91,654	$	2,112,315	$	2,258	$	2,114,573	$	27,396	$	2,141,969	Balance as of May 31, 2022	$	3,387	$	954,988	$	1,062,286	$	91,654	$	2,112,315	$	2,258	$	2,114,573	$	27,396	$	2,141,969

Net income	Net income	—		—		—		514,314		514,314		—		514,314		541		514,855		Net income	—		—		—		161,681		161,681		—		161,681		193		161,874
Other comprehensive income		—		—		—		—		—		6,436		6,436		—		6,436
Patronage capital retirement		—		(58,892)		—		—		(58,892)		—		(58,892)		(2,704)		(61,596)
Other		(638)		—		—		—		(638)		—		(638)		2,400		1,762
Balance as of February 28, 2023		$	2,749	$	896,096	$	1,062,286	$	605,968	$	2,567,099	$	8,694	$	2,575,793	$	27,633	$	2,603,426

		Three Months Ended February 28, 2022
(Dollars in thousands)		Membership Fees and Educational Fund		Patronage Capital Allocated		Members’ Capital Reserve		Unallocated Net Income (Loss)		CFC Retained Equity		Accumulated Other Comprehensive Income (Loss)		Total CFC Equity		Non-controlling Interests		Total Equity
Balance as of November 30, 2021		$	2,665	$	866,405	$	909,749	$	(416,667)	$	1,362,152	$	3,906	$	1,366,058	$	24,927	$	1,390,985
Net income		—		—		—		261,077		261,077		—		261,077		888		261,965
Other comprehensive loss	Other comprehensive loss	—		—		—		—		—		(120)		(120)		—		(120)		Other comprehensive loss	—		—		—		—		—		(89)		(89)		—		(89)
Patronage capital retirement	Patronage capital retirement	—		—		—		—		—		—		—		—		—		Patronage capital retirement	—		(58,892)		—		—		(58,892)		—		(58,892)		—		(58,892)
Other	Other	(234)		—		—		—		(234)		—		(234)		(1)		(235)		Other	(335)		—		—		—		(335)		—		(335)		2,408		2,073
Balance as of February 28, 2022		$	2,431	$	866,405	$	909,749	$	(155,590)	$	1,622,995	$	3,786	$	1,626,781	$	25,814	$	1,652,595

		Nine Months Ended February 28, 2022

Balance as of May 31, 2021		$	3,125	$	923,970	$	909,749	$	(461,871)	$	1,374,973	$	(25)	$	1,374,948	$	24,931	$	1,399,879

Net income		—		—		—		306,281		306,281		—		306,281		1,081		307,362
Other comprehensive income		—		—		—		—		—		3,811		3,811		—		3,811
Patronage capital retirement		—		(57,565)		—		—		(57,565)		—		(57,565)		(2,414)		(59,979)
Other		(694)		—		—		—		(694)		—		(694)		2,216		1,522
Balance as of February 28, 2022		$	2,431	$	866,405	$	909,749	$	(155,590)	$	1,622,995	$	3,786	$	1,626,781	$	25,814	$	1,652,595
Balance as of August 31, 2022																				Balance as of August 31, 2022	$	3,052	$	896,096	$	1,062,286	$	253,335	$	2,214,769	$	2,169	$	2,216,938	$	29,997	$	2,246,935

The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements.

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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


		Nine Months Ended February 28,					Three Months Ended August 31,
(Dollars in thousands)	(Dollars in thousands)	2023		2022		(Dollars in thousands)	2023		2022
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	514,855	$	307,362	Net income	$	228,284	$	161,874
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred loan fees	Amortization of deferred loan fees	(5,720)		(6,233)		Amortization of deferred loan fees	(1,698)		(1,974)
Amortization of debt issuance costs and discounts	Amortization of debt issuance costs and discounts	21,692		20,358		Amortization of debt issuance costs and discounts	7,177		7,123
Amortization of guarantee fee	Amortization of guarantee fee	14,144		14,078		Amortization of guarantee fee	5,121		4,653
Depreciation and amortization	Depreciation and amortization	3,815		5,811		Depreciation and amortization	2,720		1,311
Provision (benefit) for credit losses		3,806		(12,146)
Provision for credit losses						Provision for credit losses	800		3,496
Loss on early extinguishment of debt						Loss on early extinguishment of debt	939		—

Unrealized losses on equity and debt securities		2,638		17,619
Unrealized (gains) losses on equity and debt securities						Unrealized (gains) losses on equity and debt securities	(4,038)		2,446
Derivative forward value gains	Derivative forward value gains	(330,035)		(122,930)		Derivative forward value gains	(162,018)		(104,372)
Advances on loans held for sale	Advances on loans held for sale	(148,142)		(70,186)		Advances on loans held for sale	(39,000)		(69,000)
Proceeds from sales of loans held for sale	Proceeds from sales of loans held for sale	191,942		64,186		Proceeds from sales of loans held for sale	39,000		112,800
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accrued interest receivable	Accrued interest receivable	(50,438)		(2,628)		Accrued interest receivable	(4,628)		(20,338)

Accrued interest payable	Accrued interest payable	101,740		47,734		Accrued interest payable	62,214		66,972
Deferred income	Deferred income	1,929		787		Deferred income	196		740
Other	Other	(25,648)		(13,890)		Other	(18,855)		(20,216)
Net cash provided by operating activities	Net cash provided by operating activities	296,578		249,922		Net cash provided by operating activities	116,214		145,515

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Advances on loans held for investments, net		(2,384,524)		(1,087,256)
Advances on loans held for investment, net						Advances on loans held for investment, net	(563,112)		(667,442)
Investments in fixed assets, net	Investments in fixed assets, net	(14,586)		(12,363)		Investments in fixed assets, net	(1,085)		(4,532)

Purchase of trading securities	Purchase of trading securities	(118,065)		(122,116)		Purchase of trading securities	—		(48,276)
Proceeds from sales and maturities of trading securities	Proceeds from sales and maturities of trading securities	125,268		114,419		Proceeds from sales and maturities of trading securities	51,191		46,170

Net cash used in investing activities	Net cash used in investing activities	(2,391,907)		(1,107,316)		Net cash used in investing activities	(513,006)		(674,080)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Proceeds from short-term borrowings ≤ 90 days, net	Proceeds from short-term borrowings ≤ 90 days, net	49,287		31,983		Proceeds from short-term borrowings ≤ 90 days, net	182,251		310,868
Proceeds from short-term borrowings with original maturity > 90 days	Proceeds from short-term borrowings with original maturity > 90 days	2,141,018		1,975,416		Proceeds from short-term borrowings with original maturity > 90 days	1,150,142		654,762
Repayments of short-term borrowings with original maturity > 90 days	Repayments of short-term borrowings with original maturity > 90 days	(2,271,841)		(2,161,438)		Repayments of short-term borrowings with original maturity > 90 days	(754,333)		(675,971)
Payments for issuance costs for revolving bank lines of credit		(2,108)		(3,563)

Proceeds from issuance of long-term debt, net of discount and issuance costs	Proceeds from issuance of long-term debt, net of discount and issuance costs	4,069,959		3,395,920		Proceeds from issuance of long-term debt, net of discount and issuance costs	432,366		724,300
Payments for retirement of long-term debt	Payments for retirement of long-term debt	(1,801,904)		(2,494,922)		Payments for retirement of long-term debt	(510,743)		(408,323)

Payments for issuance costs for subordinated deferrable debt						Payments for issuance costs for subordinated deferrable debt	(185)		—
Payments for retirement of subordinated deferrable debt						Payments for retirement of subordinated deferrable debt	(100,000)		—
Proceeds from issuance of members’ subordinated certificates	Proceeds from issuance of members’ subordinated certificates	6,127		359		Proceeds from issuance of members’ subordinated certificates	—		3,330
Payments for retirement of members’ subordinated certificates	Payments for retirement of members’ subordinated certificates	(16,873)		(21,183)		Payments for retirement of members’ subordinated certificates	(1,100)		(963)
Payments for retirement of patronage capital		(59,189)		(57,761)

Repayments for membership fees, net	Repayments for membership fees, net	(1)		—		Repayments for membership fees, net	(1)		—
Net cash provided by financing activities	Net cash provided by financing activities	2,114,475		664,811		Net cash provided by financing activities	398,397		608,003
Net increase (decrease) in cash, cash equivalents and restricted cash		19,146		(192,583)
Net increase in cash, cash equivalents and restricted cash						Net increase in cash, cash equivalents and restricted cash	1,605		79,438
Beginning cash, cash equivalents and restricted cash	Beginning cash, cash equivalents and restricted cash	161,114		303,361		Beginning cash, cash equivalents and restricted cash	207,237		161,114
Ending cash, cash equivalents and restricted cash	Ending cash, cash equivalents and restricted cash	$	180,260	$	110,778	Ending cash, cash equivalents and restricted cash	$	208,842	$	240,552

Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Cash paid for interest	Cash paid for interest	$	619,052	$	451,179	Cash paid for interest	$	248,345	$	139,482
Cash paid for income taxes	Cash paid for income taxes	201		3		Cash paid for income taxes	260		2
Non-cash financing and investing activities:
Equity investment, at cost, obtained in exchange for loan held for investment		$	7,778	$	—

The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements.

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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

National Rural Utilities Cooperative Finance Corporation (“CFC”) is a tax-exempt, member-owned cooperative association incorporated under the laws of the District of Columbia in April 1969. CFC’s principal purpose is to provide its members with financing to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC makes loans to its rural electric members so they can acquire, construct and operate electric distribution systems, electric generation and transmission (“power supply”) systems and related facilities. CFC also provides its members and associates with credit enhancements in the form of letters of credit and guarantees of debt obligations. As a cooperative, CFC is owned by and exclusively serves its membership, which consists of not-for-profit entities or subsidiaries or affiliates of not-for-profit entities.

Basis of Presentation and Use of Estimates

The accompanying unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). These consolidated financial statements include the accounts of CFC and variable interest entities (“VIEs”) where CFC is the primary beneficiary. National Cooperative Services Corporation (“NCSC”) and Rural Telephone Finance Cooperative (“RTFC”) are VIEs that are required to be consolidated by CFC. NCSC is a taxable member-owned cooperative that may provide financing to members of CFC, government or quasi-government entities which own electric utility systems that meet the Rural Electrification Act definition of “rural,” and for-profit and nonprofit entities that are owned, operated or controlled by, or provide significant benefits to certain members of CFC. RTFC is a taxable Subchapter T cooperative association that provides financing for its rural telecommunications members and their affiliates. All intercompany balances and transactions have been eliminated. Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its consolidated entities.

In April 2023 and June 2023, RTFC’s and NCSC’s members, respectively, approved the sale of RTFC’s business to NCSC. We intend to complete the consolidation of RTFC and NCSC within the fiscal year ended May 31, 2024, subject to meeting certain closing conditions. In October 2023, in connection with the consolidation transaction, the Board of Directors approved the early retirement of allocated but unretired patronage capital at a discounted amount of $52 million, which may be subject to adjustment at the closing of the consolidation transaction. In addition, CFC’s and RTFC’s Board of Directors approved the early redemption of $12 million of members’ subordinated certificates, which is expected to occur prior to the closing of the consolidation transaction.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures during the period. Management’s most significant estimates and assumptions involve determining the allowance for credit losses. These estimates are based on information available as of the date of the consolidated financial statements. While management makes its best judgments, actual amounts or results could differ from these estimates. In the opinion of management, these unaudited interim financial statements reflect all adjustments of a normal, recurring nature that are necessary for the fair statement of results for the periods presented. The results in the interim financial statements included in our Quarterly Report on Form 10-Q for the quarterly period ended ~~February 28,~~August 31, 2023 (“this Report”) are not necessarily indicative of results that may be expected for the full fiscal year, and the unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in CFC’s Annual Report on Form 10-K for the fiscal year ended May 31, ~~2022~~2023 (“~~2022~~2023 Form 10-K”). Certain reclassifications and updates may have been made to the presentation of information in prior periods to conform to the current period presentation. These reclassifications had no effect on prior periods’ net income (loss) or equity.

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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

New Accounting Standards Adopted in Fiscal Year 2024

Financial Instruments-Credit Losses, Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which addresses and amends areas identified by the FASB as part of its post-implementation review of the accounting standard that introduced the current expected credit losses (“CECL”) model. The amendments eliminate the accounting guidance for

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

troubled debt restructurings (“TDR”) by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for entities, such as CFC, that have adopted the CECL accounting standard. ~~Early adoption, however, is permitted if an entity has~~We adopted the ~~CECL accounting standard. We expect to adopt the~~ guidance ~~for our fiscal year beginning~~on June 1, ~~2023.~~2023 using the prospective adoption method. Accordingly, we will continue to account for existing TDR loans pursuant to the prior TDR accounting guidance until the loans are subsequently modified or settled, and to provide the disclosure required for TDR loans for the comparative periods prior to the adoption. While the guidance ~~will result~~resulted in expanded disclosures, ~~we do~~it did not ~~expect~~have an impact on our consolidated results of operation, financial condition or liquidity from adoption of this accounting standard.

~~Reference Rate Reform~~

~~In March 2020, the FASB issued ASU 2020-04,~~ ~~Reference Rate Reform(Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting~~, which provides temporary optional expedients and exceptions for applying U.S. GAAP on contracts, hedging relationships and other transactions subject to modification due to the expected discontinuance of the London Interbank Offered Rate (“LIBOR”) and other reference rate reform changes to ease the potential accounting and financial burdens related to the expected transition in market reference rates. This guidance permits entities to elect not to apply certain modification accounting requirements to contracts affected by reference rate transition, if certain criteria are met. An entity that makes this election would not be required to remeasure modified contracts at the modification date or reassess a previous accounting determination. The guidance was effective upon issuance on March 12, 2020, and can generally be applied through December 31, 2022~~. On December 21, 2022, the FASB issued ASU 2022-06,~~ ~~Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848,~~ ~~which~~extends the period of time entities can utilize the reference rate reform relief guidance under ASU 2020-04 from December 31, 2022 to December 31, 2024. Upon issuance of ASU 2020-04, we elected to apply certain of the optional expedients for contract modifications to our financial instruments impacted by the LIBOR discontinuance. We expect to continue to elect various optional expedients for contract modifications to our financial instruments affected by the reference rate reform through the effective date of December 31, 2024, as extended by ASU 2022-06. The application of this guidance did not have a material impact on our consolidated financial statements.

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~


NOTE 2—INTEREST INCOME AND INTEREST EXPENSE

The following table displays the components of interest income, by interest-earning asset type, and interest expense, by debt product type, presented on our consolidated statements of operations for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023 and 2022.

Table 2.1: Interest Income and Interest Expense


		Three Months Ended February 28,				Nine Months Ended February 28,					Three Months Ended August 31,
(Dollars in thousands)	(Dollars in thousands)	2023		2022		2023		2022		(Dollars in thousands)		2023		2022
Interest income:	Interest income:									Interest income:

Loans(1)	Loans(1)	$	347,112	$	281,361	$	968,629	$	839,548	Loans(1)		$	375,568	$	302,680
Investment securities	Investment securities	6,180		3,845		15,835		12,078		Investment securities		5,388		4,298
Total interest income	Total interest income	353,292		285,206		984,464		851,626		Total interest income		380,956		306,978

Interest expense:(2)(3)	Interest expense:(2)(3)									Interest expense:(2)(3)
Short-term borrowings	Short-term borrowings	50,639		3,802		116,034		10,271		Short-term borrowings		58,394		24,209

Long-term debt	Long-term debt	204,876		143,639		541,678		432,608		Long-term debt		223,976		158,881

Subordinated debt	Subordinated debt	26,194		26,213		78,909		79,148		Subordinated debt		33,911		26,378
Total interest expense	Total interest expense	281,709		173,654		736,621		522,027		Total interest expense		316,281		209,468

Net interest income	Net interest income	$	71,583	$	111,552	$	247,843	$	329,599	Net interest income		$	64,675	$	97,510

____________________________

(1) Includes loan conversion fees, which are generally deferred and recognized in interest income over the period to maturity using the effective interest method, late payment fees, commitment fees and net amortization of deferred loan fees and loan origination costs.

(2) Includes amortization of debt discounts and debt issuance costs, which are generally deferred and recognized as interest expense over the period to maturity using the effective interest method. Issuance costs related to dealer commercial paper, however, are recognized in interest expense immediately as incurred.

(3) Includes fees related to funding arrangements, such as up-front fees paid to banks participating in our committed bank revolving line of credit agreements. Based on the nature of the fees, the amount is either recognized immediately as incurred or deferred and recognized in interest expense ratably over the term of the arrangement.

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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Deferred income reported on our consolidated balance sheets of ~~$41~~$37 million and ~~$44~~$39 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, consists primarily of deferred loan conversion fees that totaled ~~$32~~$29 million and ~~$37~~$30 million as of each respective date.


NOTE 3—INVESTMENT SECURITIES

Our investment securities portfolio consists of debt securities classified as trading and equity securities with readily determinable fair values. We therefore record changes in the fair value of our debt and equity securities in earnings and report these unrealized changes together with realized gains and losses from the sale of securities as a component of non-interest income in our consolidated statements of operations.

Debt Securities

The following table presents the composition of our investment debt securities portfolio and the fair value as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Table 3.1: Investments in Debt Securities, at Fair Value

(Dollars in thousands) February 28, 2023 May 31, 2022
Debt securities, at fair value:
Commercial paper $ — $ 9,985
Corporate debt securities 467,581 487,172
Commercial agency mortgage-backed securities (“MBS”)(1)
7,288 7,815
U.S. state and municipality debt securities 28,762 27,778
Foreign government debt securities 962 967
Other asset-backed securities(2)
44,531 32,429
Total debt securities trading, at fair value $ 549,124 $ 566,146


(Dollars in thousands)	August 31, 2023		May 31, 2023
Debt securities, at fair value:



Corporate debt securities	$	366,885	$	401,367

Commercial agency mortgage-backed securities (“MBS”)(1)	7,181		7,237


U.S. state and municipality debt securities	18,408		27,300
Foreign government debt securities	986		974
Other asset-backed securities(2)	31,871		37,997
Total debt securities trading, at fair value	$	425,331	$	474,875

____________________________

(1)Consists of securities backed by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”).

(2)Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.

We recognized net unrealized gains on our debt securities of $2$3 million and net unrealized losses of $7$5 million for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023 ~~respectively. We recognized net unrealized losses on our debt securities of $9 million~~ and ~~$18 million for the three and nine months ended February 28,~~ 2022, respectively.

We did not sell any debt securities during the three ~~and nine~~ months ended ~~February 28, 2023;~~August 31, 2023 and 2022; therefore, no realized gains or losses were recorded during ~~each period~~these periods for sale of securities.We sold $3 million of debt securities at fair value during the three months ended February 28, 2022 and realized gains on the sale of these securities of less than $1 million. We sold $5 million of debt securities at fair value during the nine months ended February 28, 2022 and realized gains on the sale of these securities of less than $1 million. Subsequent to the quarter ended February 28, 2023, we sold debt securities at fair value totaling $36 million and realized gains on the sale of these securities of $1 million.

Equity Securities

The following table presents the composition of our equity security holdings and the fair value as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~

~~Table 3.2: Investments in Equity Securities, at Fair Value~~

(Dollars in thousands) February 28, 2023 May 31, 2022
Equity securities, at fair value:
Farmer Mac—Series C non-cumulative preferred stock $ 28,140 $ 25,520
Farmer Mac—Class A common stock 9,862 8,238
Total equity securities, at fair value $ 38,002 $ 33,758

We recognized net unrealized losses on our equity securities of $2 million and net unrealized gains of $4 million for the three and nine months ended February 28, 2023, respectively. We recognized net unrealized losses on our equity securities of $2 million and net unrealized gains of less than $1 million for the three and nine months ended February 28, 2022, respectively.2023.

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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Table 3.2: Investments in Equity Securities, at Fair Value


(Dollars in thousands)	August 31, 2023		May 31, 2023
Equity securities, at fair value:
Farmer Mac—Series C non-cumulative preferred stock	$	25,200	$	25,750
Farmer Mac—Class A common stock	11,580		9,744
Total equity securities, at fair value	$	36,780	$	35,494

We recognized net unrealized gains on our equity securities of $1 million and $3 million for the three months ended August 31, 2023 and 2022, respectively.


NOTE 4—LOANS

Loans to Members

Loans to members consist of loans held for investment and loans held for sale. The outstanding amount of loans held for investment is recorded based on the unpaid principal balance, net of discounts, charge-offs and recoveries, of loans and deferred loan origination costs. The outstanding amount of loans held for sale is recorded based on the lower of cost or fair value. The following table presents loans to members by legal entity, member class and loan type, as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Table 4.1: Loans to Members by Member Class and Loan Type

February 28, 2023 May 31, 2022
(Dollars in thousands) Amount % of Total Amount % of Total
Member class:
CFC:
Distribution $ 25,424,628 79% $ 23,844,242 79%
Power supply 5,318,565 16 4,901,770 17
Statewide and associate 155,878 — 126,863 —
Total CFC 30,899,071 95 28,872,875 96
NCSC 988,371 3 710,878 2
RTFC 481,789 2 467,601 2
Total loans outstanding(1)
32,369,231 100 30,051,354 100
Deferred loan origination costs—CFC(2)
12,598 — 12,032 —
Loans to members $ 32,381,829 100% $ 30,063,386 100%
Loan type:
Long-term loans:
Fixed rate $ 28,039,808 86% $ 26,952,372 90%
Variable rate 915,095 3 820,201 2
Total long-term loans 28,954,903 89 27,772,573 92
Lines of credit 3,414,328 11 2,278,781 8
Total loans outstanding(1)
32,369,231 100 30,051,354 100
Deferred loan origination costs—CFC(2)
12,598 — 12,032 —
Loans to members $ 32,381,829 100% $ 30,063,386 100%


	August 31, 2023				May 31, 2023
(Dollars in thousands)	Amount		% of Total		Amount		% of Total
Member class:
CFC:
Distribution	$	25,818,224	78	%	$	25,437,077	78	%
Power supply	5,570,554		17		5,437,242		17
Statewide and associate	232,292		1		200,368		1
Total CFC	31,621,070		96		31,074,687		96
NCSC	923,447		2		956,874		3
RTFC	538,976		2		487,788		1
Total loans outstanding(1)	33,083,493		100		32,519,349		100
Deferred loan origination costs—CFC(2)	13,153		—		12,737		—
Loans to members	$	33,096,646	100	%	$	32,532,086	100	%

Loan type:
Long-term loans:
Fixed rate	$	28,708,848	87	%	$	28,371,358	87	%
Variable rate	1,012,181		3		1,024,653		3

Total long-term loans	29,721,029		90		29,396,011		90
Lines of credit	3,362,464		10		3,123,338		10
Total loans outstanding(1)	33,083,493		100		32,519,349		100
Deferred loan origination costs—CFC(2)	13,153		—		12,737		—
Loans to members	$	33,096,646	100	%	$	32,532,086	100	%

____________________________

(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.

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Loan Sales

We may transfer whole loans and participating interests to third parties. These transfers are typically made concurrently or within a short period of time with the closing of the loan sale or participation agreement at par value and meet the accounting criteria required for sale accounting.

We sold CFC and NCSC loans, at par for cash, totaling ~~$192~~$39 million and ~~$64~~$113 million during the ~~nine~~three months ended ~~February 28,~~August 31, 2023 and 2022, respectively. We recorded immaterial losses on the sale of these loans attributable to the unamortized deferred loan origination costs associated with the transferred loans. We had no loans held for sale as of ~~February 28, 2023.~~August 31, 2023 or ~~We had loans held for sale totaling $44 million as of~~ May 31, ~~2022, which were sold at par for cash during the nine months ended February 28,~~ 2023.

Accrued Interest Receivable

We report accrued interest on loans separately on our consolidated balance sheets as a component of the line item accrued interest receivable rather than as a component of loans to members. Accrued interest on loans totaled ~~$126~~$134 million and ~~$94~~$133 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively. Accrued interest receivable amounts generally represent three months or less of accrued interest on loans outstanding. Because our policy is to write off past-due accrued interest receivable in a timely manner, we elected not to measure an allowance for credit losses for accrued interest receivable on

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(UNAUDITED)

loans outstanding. We also elected to exclude accrued interest receivable from the credit quality disclosures required under CECL.

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 a tax-exempt, member-owned finance cooperative, CFC’s principal focus is to provide funding to its rural electric utility cooperative members to assist them in acquiring, constructing and operating electric distribution systems, power supply systems and related facilities.

Because we lend primarily to our rural electric utility cooperative members, we have had a loan portfolio subject to single-industry and single-obligor concentration risks since our inception in 1969. Loans outstanding to electric utility organizations of ~~$31,887~~$32,545 million and ~~$29,584~~$32,032 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, accounted for 98% and 99% of total loans outstanding as of each rerespective ~~spective~~ date. The remaining loans outstanding in our portfolio were to RTFC members, affiliates and associates in the telecommunications industry. Our credit exposure is partially mitigated by long-term loans guaranteed by RUS, which totaled ~~$125~~$121 million and ~~$131~~$123 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively.

Single-Obligor Concentration

The outstanding loan exposure for our 20 largest borrowers totaled ~~$6,558~~$6,777 million and ~~$6,220~~$6,588 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, representing 20% ~~and 21%~~ of total loans outstanding as of each respective date. Our 20 largest borrowers consisted of 10 distribution systems and 10 power supply systems as of ~~February 28,~~both August 31, 2023 and ~~12 distribution systems and eight power~~ ~~supply systems as of~~ May 31, ~~2022.~~2023. The largest total outstanding exposure to a single borrower or controlled group represented 1% of total loans outstanding as of both ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

balance of loans covered under the purchase commitment. The aggregate unpaid principal balance of designated and Farmer Mac approved loans was ~~$443~~$428 million and ~~$493~~$436 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively. Loan exposure to our 20 largest borrowers covered under the Farmer Mac agreement totaled ~~$270~~$224 million and ~~$316~~$267 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, which reduced our exposure to the 20 largest borrowers to ~~19%~~$6,553 million and ~~20%~~$6,321 million as of each respective date. We have had no loan defaults for loans covered under this agreement; therefore, no loans have been put to Farmer Mac for purchase pursuant to the standby purchase agreement as of ~~February 28,~~August 31, 2023. Our credit exposure is also mitigated by long-term loans guaranteed by RUS.

Geographic Concentration

Although our organizational structure and mission ~~results~~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 ~~880~~883 and ~~883~~884 as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, located in 49 states and the District of Columbia. Of the ~~880~~883 and ~~883~~884 borrowers with loans outstanding, 5150 and 4952 were electric power supply borrowers as of ~~February 28,~~

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(UNAUDITED)

August 31, 2023 and May 31, ~~2022,~~2023, respectively. Electric power supply borrowers generally require significantly more capital than electric distribution and telecommunications borrowers.

Texas accounted for the largest number of borrowers with loans outstanding in any one state as of both ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, as well as the largest concentration of loan exposure. The following table presents the Texas-based number of borrowers and loans outstanding by legal entity and member class, as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

Table 4.2: Loan Exposure to Texas-Based Borrowers


		February 28, 2023					May 31, 2022						August 31, 2023					May 31, 2023
(Dollars in thousands)	(Dollars in thousands)	Number of Borrowers	Amount		% of Total		Number of Borrowers	Amount		% of Total		(Dollars in thousands)	Number of Borrowers	Amount		% of Total		Number of Borrowers	Amount		% of Total
Member class:	Member class:											Member class:
CFC:	CFC:											CFC:
Distribution	Distribution	57	$	4,284,930	13	%	57	$	3,984,887	13	%	Distribution	57	$	4,368,220	13	%	57	$	4,319,937	13	%
Power supply	Power supply	8	1,128,456		4		8	1,089,896		4		Power supply	6	1,181,919		4		8	1,128,941		4
Statewide and associate	Statewide and associate	1	38,428		—		1	29,335		—		Statewide and associate	1	75,754		—		1	51,504		—
Total CFC	Total CFC	66	5,451,814		17		66	5,104,118		17		Total CFC	64	5,625,893		17		66	5,500,382		17
NCSC	NCSC	1	16,400		—		1	378		—		NCSC	—	—		—		1	16,667		—

RTFC	RTFC	2	12,313		—		1	5,853		—		RTFC	2	11,429		—		2	11,755		—
Total loan exposure to Texas-based borrowers	Total loan exposure to Texas-based borrowers	69	5,480,527		17		68	5,110,349		17		Total loan exposure to Texas-based borrowers	66	5,637,322		17		69	5,528,804		17
Less: Loans covered under Farmer Mac standby purchase commitment	Less: Loans covered under Farmer Mac standby purchase commitment		(157,098)		(1)			(163,369)		(1)		Less: Loans covered under Farmer Mac standby purchase commitment		(153,132)		—			(155,409)		—
Net loan exposure to Texas-based borrowers	Net loan exposure to Texas-based borrowers		$	5,323,429	16	%		$	4,946,980	16	%	Net loan exposure to Texas-based borrowers		$	5,484,190	17	%		$	5,373,395	17	%

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, ~~TDRs,~~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.

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Payment Status of Loans

Loans are considered delinquent when contractual principal or interest amounts become past due 30 days or more following the scheduled payment due date. Loans are placed on nonaccrual status when payment of principal or interest is 90 days or more past due or management determines that the full collection of principal and interest is doubtful. The following table presents the payment status, by legal entity and member class, of loans outstanding as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

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(UNAUDITED)

Table 4.3: Payment Status of Loans Outstanding
February 28, 2023
(Dollars in thousands) Current 30-89 Days Past Due > 90 Days
Past Due Total
Past Due Total Loans Outstanding Nonaccrual Loans
Member class:
CFC:
Distribution $ 25,424,628 $ — $ — $ — $ 25,424,628 $ —
Power supply 5,314,218 — 4,347 4,347 5,318,565 131,043
Statewide and associate 155,878 — — — 155,878 —
CFC total 30,894,724 — 4,347 4,347 30,899,071 131,043
NCSC 988,371 — — — 988,371 —
RTFC 481,789 — — — 481,789 —
Total loans outstanding $ 32,364,884 $ — $ 4,347 $ 4,347 $ 32,369,231 $ 131,043
Percentage of total loans 99.99% — % 0.01% 0.01% 100.00% 0.40%


		May 31, 2022													August 31, 2023
(Dollars in thousands)	(Dollars in thousands)	Current		30-89 Days Past Due		> 90 Days Past Due		Total Past Due		Total Loans Outstanding		Nonaccrual Loans		(Dollars in thousands)	Current			30-89 Days Past Due			> 90 Days Past Due			Total Past Due			Total Loans Outstanding			Nonaccrual Loans
Member class:	Member class:													Member class:
CFC:	CFC:													CFC:
Distribution	Distribution	$	23,844,242	$	—	$	—	$	—	$	23,844,242	$	—	Distribution	$	25,818,224		$	—		$	—		$	—		$	25,818,224		$	—
Power supply	Power supply	4,787,832		28,389		85,549		113,938		4,901,770		227,790		Power supply	5,570,554			—			—			—			5,570,554			84,987
Statewide and associate	Statewide and associate	126,863		—		—		—		126,863		—		Statewide and associate	232,292			—			—			—			232,292			—
CFC total	CFC total	28,758,937		28,389		85,549		113,938		28,872,875		227,790		CFC total	31,621,070			—			—			—			31,621,070			84,987
NCSC	NCSC	710,878		—		—		—		710,878		—		NCSC	923,447			—			—			—			923,447			—
RTFC	RTFC	467,601		—		—		—		467,601		—		RTFC	538,976			—			—			—			538,976			—
Total loans outstanding	Total loans outstanding	$	29,937,416	$	28,389	$	85,549	$	113,938	$	30,051,354	$	227,790	Total loans outstanding	$	33,083,493		$	—		$	—		$	—		$	33,083,493		$	84,987

Percentage of total loans	Percentage of total loans	99.62%		0.09%		0.29%		0.38%		100.00%		0.76%		Percentage of total loans	100.00		%	—		%	—		%	—		%	100.00		%	0.26		%


	May 31, 2023
(Dollars in thousands)	Current			30-89 Days Past Due		> 90 Days Past Due		Total Past Due		Total Loans Outstanding			Nonaccrual Loans
Member class:
CFC:
Distribution	$	25,437,077		$	—	$	—	$	—	$	25,437,077		$	—
Power supply	5,432,895			—		4,347		4,347		5,437,242			112,209
Statewide and associate	200,368			—		—		—		200,368			—
CFC total	31,070,340			—		4,347		4,347		31,074,687			112,209
NCSC	920,159			36,715		—		36,715		956,874			—
RTFC	487,788			—		—		—		487,788			—
Total loans outstanding	$	32,478,287		$	36,715	$	4,347	$	41,062	$	32,519,349		$	112,209

Percentage of total loans	99.87		%	0.11%		0.02%		0.13%		100.00		%	0.35		%

We had no delinquent loans as of August 31, 2023. In comparison, we had one CFC electric power supply borrower, Brazos Sandy Creek Electric Cooperative Inc. (“Brazos Sandy Creek”), with a delinquent loan oftotaling $4 million asand one NCSC borrower with a delinquent loan of ~~February 28, 2023. In comparison, we had two CFC electric power supply borrowers, Brazos Electric Power Cooperative, Inc. (“Brazos”) and Brazos Sandy Creek with delinquent loans totaling $114~~$37 million as of May 31, ~~2022.~~2023. The decrease in loans on nonaccrual status of ~~$97~~$27 million to ~~$131~~$85 million as of ~~February 28,~~August 31, 2023, from ~~$228~~$112 million as of May 31, ~~2022~~2023 was due to the ~~partial~~ receipt of loan principal payments for Brazos Electric Power Cooperative, Inc. (~~charge-offs related~~“Brazos”) and Brazos Sandy Creek during the three months ended August 31, 2023. 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 the three months ended August 31, 2023. The additional payment received of $1 million was recorded as a loan recovery on the Brazos and Brazos Sandy Creek ~~loans,~~ ~~and the receipt of~~previously charged-off loan ~~principal payments on the outstanding nonaccrual loans. See “Troubled Debt Restructurings,” “Nonperforming Loans” and “Net Charge-Offs” below for additional information.~~amounts.

Loan Modifications to Borrowers Experiencing Financial Difficulty

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(UNAUDITED)

~~Troubled Debt Restructurings~~collectability of the loan and to avoid the need for exercising remedies. We consider the impact of all loan modifications when estimating the credit quality of our loan portfolio and establishing the allowance for credit losses.

On June 1, 2023, we adopted ASU 2022-02, Financial Instruments – Credit Losses (Topic 326) – Troubled Debt Restructurings and Vintage Disclosures, using the prospective adoption method.The ASU eliminated the accounting guidance for TDRs and enhanced the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty, which are to be applied prospectively. For additional information on the adoption of ASU 2022-02 see “Note 1—Summary of Significant Accounting Policies.”

We had no loan modifications to borrowers experiencing financial difficulty during the three months ended August 31, 2023.

Troubled Debt Restructurings—Prior to the Adoption of ASU 2022-02

As discussed above, ASU 2022-02 eliminated the accounting guidance for TDRs. Prior to the adoption of ASU 2022-02, a loan restructuring or modification of terms was accounted for as a TDR if, for economic or legal reasons related to the borrower’s financial difficulties, a concession was granted to the borrower that we would not otherwise consider. The following table presents the outstanding balance of modified loans accounted for as TDRs and the performance status, by legal entity and member class, of these loans as of ~~February 28, 2023 and~~ May 31, ~~2022.~~2023.

Table 4.4: ~~Trouble~~Troubled Debt Restructurings—Prior to the Adoption of ASU 2022-02

February 28, 2023 May 31, 2022
(Dollars in thousands) Number of Borrowers
Outstanding Amount (1)
% of Total Loans Outstanding Number of Borrowers
Outstanding Amount (1)
% of Total Loans Outstanding
TDR loans:
Member class:
CFC—Distribution 1 $ 4,638 0.02% 1 $ 5,092 0.02%
CFC—Power Supply 1 22,875 0.07 — — —
RTFC 1 3,717 0.01 1 4,092 0.01
Total TDR loans 3 $ 31,230 0.10% 2 $ 9,184 0.03%
Performance status of TDR loans:
Performing TDR loans 2 $ 8,355 0.03% 2 $ 9,184 0.03%
Nonperforming TDR loans 1 22,875 0.07 — — —
Total TDR loans 3 $ 31,230 0.10% 2 $ 9,184 0.03%


	May 31, 2023
(Dollars in thousands)		Number of Borrowers	Outstanding Amount (1)		% of Total Loans Outstanding
TDR loans:


Member class:
CFC—Distribution		1	$	4,638	0.02	%
CFC—Power Supply		1	22,875		0.07
RTFC		1	3,592		0.01
Total TDR loans		3	$	31,105	0.10	%

Performance status of TDR loans:
Performing TDR loans		2	$	8,230	0.03	%
Nonperforming TDR loans		1	22,875		0.07
Total TDR loans		3	$	31,105	0.10	%

____________________________

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

There were no unadvanced commitments related to these loans as of ~~February 28, 2023 and~~ May 31, ~~2022.~~ 2023. We had loans outstanding to two borrowers totaling $8 ~~million and $9~~ million which have been performing in accordance with the terms of their respective restructured loan agreement for an extended period of time and were classified as performing TDR loans and on accrual status as of ~~February 28, 2023 and~~ May 31, ~~2022, respectively.~~2023. We had loans outstanding to Brazos totaling $23 million ~~as of February 28, 2023, which we~~ classified as nonperforming TDR loans during the three months ended February 28, 2023, ~~(“current quarter,”) and~~which were on non-accrual status as of ~~February 28,~~May 31, 2023. ~~Brazos, a CFC Texas-based electric power supply borrower, filed for bankruptcy~~During the three months ended August 31, 2023, we received the remaining payment of Brazos’ loans outstanding of $23 million in ~~March 2021 due to its exposure to elevated wholesale electric power costs during~~accordance with the February 2021 polar vortex. On November 14, 2022, Brazos’ plan of reorganization was confirmed by the bankruptcy court and it became effective on December 15, 2022. Due to Brazos experiencing financial difficulty and the principal loan concession provided to Brazos by the bankruptcy court as part of its approvalprovisions of Brazos’ plan of reorganization ~~which was effective on December 15, 2022, the remaining Brazos~~to repay its loans ~~outstanding were moved from nonperforming loans and classified as nonperforming TDR loans during the current quarter. We did not have any TDR loans classified as nonperforming as of May 31, 2022.~~in full. Prior to the Brazos loan restructuring, we have not had any loan modifications that were required to be accounted for as TDRs since fiscal year 2016.

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(UNAUDITED)

Nonperforming Loans

~~In addition to TDR loans that may be classified as nonperforming, we also may have nonperforming loans that have not been modified as a TDR.~~ The following table presents the outstanding balance of nonperforming loans, by legal entity and member class, as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023. Loans classified as nonperforming are placed on nonaccrual status.

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Table 4.5: Nonperforming Loans

February 28, 2023 May 31, 2022
(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:
Member class:
CFC—Power supply
2 $ 108,167 0.33% 3 $ 227,790 0.76%
Total nonperforming loans 2 $ 108,167 0.33% 3 $ 227,790 0.76%


	August 31, 2023					May 31, 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:
Member class:


CFC—Power supply	1	$	84,987	0.26	%	2	$	89,334	0.27	%


Total nonperforming loans	1	$	84,987	0.26	%	2	$	89,334	0.27	%

____________________________

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

~~We had~~Nonperforming loans ~~to two CFC electric power supply borrowers totaling $108~~totaled $85 million ~~classified as nonperforming~~ as of ~~February 28, 2023. In comparison we had loans to three CFC electric power supply borrowers $228~~August 31, 2023, a decrease of $4 million ~~classified as nonperforming as of~~ from May 31, ~~2022. Nonperforming loans represented 0.33% and 0.76% of total loans outstanding as of February 28,~~ 2023, ~~and May 31, 2022, respectively. The reduction in nonperforming loans of $120 million during the nine months ended February 28, 2023 was~~ due to the receipt of $4 million in loan ~~principal~~ payments from ~~the partial charge-offs related to the Brazos and~~ Brazos Sandy Creek to pay off its nonperforming ~~loans, and the classification of Brazos nonperforming loans to TDR loans~~loan outstanding during the ~~current quarter,~~three months ended August 31, 2023, as discussed above. ~~Brazos’ loans outstanding accounted for $86 million of our total nonperforming loans as of May 31, 2022.~~

~~and $28 million of our total nonperforming loans as of~~ ~~February 28, 2023~~ and May 31, 2022, respectively, and was delinquent and on nonaccrual as of each date. The loan is secured by Brazos Sandy Creek’s 25% tenant-in-common (“TIC”) ownership interest in the Brazos Sandy Creek Energy Station (“the Plant”), and its rights under a power purchase agreement (“PPA”) with Brazos for the output of the Brazos Sandy Creek Energy Station attributable to the TIC interest. On December 20, 2022, the Brazos Sandy Creek’s 25% TIC ownership interest in the Plant was sold for a credit bid of $105 million to Riesel HoldCo, LLC (“HoldCo,”) an entity formed by the Brazos Sandy Creek noteholders. CFC was allocated ownership shares in HoldCo based on its 7.41% share in the $105 million credit bid, which totaled $8 million that was recorded as an investment in HoldCo during the current quarter in the other assets line of our consolidated balance sheets and reduced the Brazos Sandy Creek loan balance by the same amount. HoldCo intends to manage its ownership interest in the Plant directly and potentially sell it at a future date; however, HoldCo has no current timeline for its disposition.

Net Charge-Offs

We had no charge-offs during the three months ended ~~February 28, 2023. We experienced charge-offs totaling $15~~August 31, 2023 and 2022. As mentioned above, during the three months ended August 31, 2023 we recorded a $1 million ~~for~~loan recovery on the ~~CFC electric power supply loan portfolio related to~~ Brazos and Brazos Sandy Creek ~~loans during the nine months ended February 28, 2023,~~previously charged-off loan amounts, which resulted in an annualized net ~~charge-off~~ recovery rate of ~~0.06% for~~0.01%. ~~the nine months ended February 28, 2023. In comparison we had no loan charge-offs during the same prior-year periods.~~ 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 year 2013 and 2017, respectively.

Borrower Risk Ratings

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

statements; however, 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. We categorize loans in our portfolio based on our internally assigned borrower risk ratings, which are intended to assess the general creditworthiness 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 doubtful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default.

The following is a description of the borrower risk rating categories.

•Pass: Borrowers that are not included in the categories of special mention, substandard or doubtful.

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

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(UNAUDITED)

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

•Doubtful: Borrowers that have a well-defined credit weakness or weaknesses that make full collection of principal and interest, on the basis of currently known facts, conditions and collateral values, highly questionable and improbable.

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.

Table 4.6 displays total loans outstanding, by borrower risk rating category and by legal entity and member class, as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023. The borrower risk rating categories presented below correspond to the borrower risk rating categories used in calculating our collective allowance for credit losses. If a parent company provides a guarantee of full repayment of loans of a subsidiary borrower, we include the loans outstanding in the borrower risk-rating category of the guarantor parent company rather than the risk rating category of the subsidiary borrower for purposes of calculating the collective allowance.

We present term loans outstanding as of ~~February 28,~~August 31, 2023, by fiscal year of origination for each year during the five-year annual reporting period beginning in fiscal year ~~2019~~2020, and in the aggregate for periods prior to fiscal year ~~2019~~2020. The origination period represents the date CFC advances funds to a borrower, rather than the execution date of a loan facility for a borrower. Revolving loans are presented separately due to the nature of revolving loans. The substantial majority of loans in our portfolio represent fixed-rate advances under secured long-term facilities with terms up to 35 years, and as indicated in Table 4.6 below, term loan advances made to borrowers prior to fiscal year ~~2019~~2020 totaled ~~$17,381~~$18,381 million, representing ~~54%~~56% of our total loans outstanding of ~~$32,369~~$33,083 million as of ~~February 28,~~August 31, 2023. The average remaining maturity of our long-term loans, which accounted for ~~89%~~90% of total loans outstanding as of ~~February 28,~~August 31, 2023, was 19 years.

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Table 4.6: Loans Outstanding by Borrower Risk Ratings and Origination Year


		February 28, 2023																			August 31, 2023
		Term Loans by Fiscal Year of Origination																			Term Loans by Fiscal Year of Origination
(Dollars in thousands)	(Dollars in thousands)	YTD Q3 2023		2022		2021		2020		2019		Prior		Revolving Loans		Total		May 31, 2022		(Dollars in thousands)	YTD Q1 2024		2023		2022		2021		2020		Prior		Revolving Loans		Total		May 31, 2023
Pass	Pass																			Pass
CFC:	CFC:																			CFC:
Distribution	Distribution	$	1,800,130	$	2,431,756	$	1,660,098	$	1,836,617	$	1,162,421	$	14,049,245	$	2,295,219	$	25,235,486	$	23,596,004	Distribution	$	552,343	$	2,442,462	$	2,383,521	$	1,631,443	$	1,808,667	$	14,771,702	$	2,041,214	$	25,631,352	$	25,242,708
Power supply	Power supply	343,465		354,189		551,263		181,672		386,352		2,729,956		640,626		5,187,523		4,673,980		Power supply	99,394		462,843		342,465		545,372		176,313		3,003,208		855,972		5,485,567		5,325,033
Statewide and associate	Statewide and associate	23,846		33,753		2,064		15,619		2,969		17,085		47,200		142,536		112,610		Statewide and associate	1,000		61,104		23,489		1,875		13,840		18,812		99,400		219,520		187,310
CFC total	CFC total	2,167,441		2,819,698		2,213,425		2,033,908		1,551,742		16,796,286		2,983,045		30,565,545		28,382,594		CFC total	652,737		2,966,409		2,749,475		2,178,690		1,998,820		17,793,722		2,996,586		31,336,439		30,755,051
NCSC	NCSC	238,254		48,131		5,866		210,308		3,824		256,838		225,150		988,371		710,878		NCSC	3,000		264,868		23,838		5,489		190,849		271,951		163,452		923,447		956,874
RTFC	RTFC	48,171		86,896		77,782		40,685		8,386		195,569		20,583		478,072		463,509		RTFC	55,204		50,703		81,879		72,164		37,300		196,746		41,513		535,509		484,196
Total pass	Total pass	$	2,453,866	$	2,954,725	$	2,297,073	$	2,284,901	$	1,563,952	$	17,248,693	$	3,228,778	$	32,031,988	$	29,556,981	Total pass	$	710,941	$	3,281,980	$	2,855,192	$	2,256,343	$	2,226,969	$	18,262,419	$	3,201,551	$	32,795,395	$	32,196,121

Special mention	Special mention																			Special mention
CFC:	CFC:																			CFC:
Distribution	Distribution	$	4,240	$	—	$	4,804	$	—	$	5,028	$	12,395	$	162,675	$	189,142	$	248,238	Distribution	$	—	$	4,213	$	—	$	4,746	$	—	$	17,000	$	160,913	$	186,872	$	194,369

Statewide and associate	Statewide and associate	—		—		—		—		4,844		8,498		—		13,342		14,253		Statewide and associate	—		—		—		—		—		12,772		—		12,772		13,058
CFC total	CFC total	4,240		—		4,804		—		9,872		20,893		162,675		202,484		262,491		CFC total	—		4,213		—		4,746		—		29,772		160,913		199,644		207,427
RTFC	RTFC	—		—		—		—		—		3,717		—		3,717		4,092		RTFC	—		—		—		—		—		3,467		—		3,467		3,592
Total special mention	Total special mention	$	4,240	$	—	$	4,804	$	—	$	9,872	$	24,610	$	162,675	$	206,201	$	266,583	Total special mention	$	—	$	4,213	$	—	$	4,746	$	—	$	33,239	$	160,913	$	203,111	$	211,019

Substandard	Substandard																			Substandard

Total substandard	Total substandard	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	Total substandard	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Doubtful	Doubtful																			Doubtful
CFC:	CFC:																			CFC:
Power supply	Power supply	$	—	$	—	$	—	$	—	$	—	$	108,167	$	22,875	$	131,042	$	227,790	Power supply	$	—	$	—	$	—	$	—	$	—	$	84,987	$	—	$	84,987	$	112,209

Total doubtful	Total doubtful	$	—	$	—	$	—	$	—	$	—	$	108,167	$	22,875	$	131,042	$	227,790	Total doubtful	$	—	$	—	$	—	$	—	$	—	$	84,987	$	—	$	84,987	$	112,209

Total criticized loans	Total criticized loans	$	4,240	$	—	$	4,804	$	—	$	9,872	$	132,777	$	185,550	$	337,243	$	494,373	Total criticized loans	$	—	$	4,213	$	—	$	4,746	$	—	$	118,226	$	160,913	$	288,098	$	323,228
Total loans outstanding	Total loans outstanding	$	2,458,106	$	2,954,725	$	2,301,877	$	2,284,901	$	1,573,824	$	17,381,470	$	3,414,328	$	32,369,231	$	30,051,354	Total loans outstanding	$	710,941	$	3,286,193	$	2,855,192	$	2,261,089	$	2,226,969	$	18,380,645	$	3,362,464	$	33,083,493	$	32,519,349

Criticized loans totaled ~~$337~~$288 million and ~~$494~~$323 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, and represented approximately 1% ~~and~~ 2% of total loans outstanding as of each respective date. The decrease of ~~$157~~$35 million in criticized loans was primarily due to loan payments received from a CFC electric distribution borrower in the special mention ~~loans~~ category and from Brazos and Brazos Sandy Creek ~~and~~in the ~~partial charge-offs related to Brazos and Brazos Sandy Creek loans~~doubtful category during the ~~nine~~three months ended ~~February 28,~~August 31, 2023. Each of the borrowers with loans outstanding in the criticized category was current with regard to all principal and interest amounts due to us as of August 31, 2023. 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 February 28, 2023. In contrast, each of the borrowers with loans outstanding in the criticized category, with the exception of Brazos and Brazos Sandy Creek, which filed for bankruptcy in March 2021 and March 2022, respectively, was current with regard to all principal and interest amounts due to us as of May 31, ~~2022.~~ ~~See~~“~~Troubled Debt Restructurings~~” ~~and~~ “N~~onperforming Loans~~” ~~above for additional information on Brazos and Brazos Sandy Creek, respectively.~~2023.

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Special Mention

One CFC electric distribution borrower with loans outstanding of ~~$189~~$187 million and ~~$248~~$194 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, accounted for the substantial majority of loans in the special mention loan category amount of ~~$206~~

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(UNAUDITED)

$203 million and ~~$267~~$211 million as of each respective date. This borrower experienced an adverse financial impact from restoration costs incurred to repair damage caused by two successive hurricanes. We expect that the borrower will continue to receive grant funds from the Federal Emergency Management Agency and the state where it is located for the full reimbursement of the hurricane damage-related restoration costs.

Substandard

We did not have any loans classified as substandard as of ~~February 28,~~August 31, 2023 or May 31, ~~2022.~~2023.

Doubtful

~~Loans~~We had loans outstanding classified as doubtful ~~totaled $131 million and $228~~totaling $85 million as of ~~February 28,~~August 31, 2023 ~~and May 31, 2022, respectively, consisting of~~to a CFC electric power supply borrower. We had loans outstanding ~~to Brazos and Brazos Sandy Creek~~classified as doubtful totaling ~~$27 million and $114~~$112 million as of ~~each respective date and~~May 31, 2023, consisting of $85 million loans outstanding to a CFC electric power supply borrower and $27 million of ~~$104 million~~loans outstanding to Brazos and ~~$114 million as of each respective date.~~Brazos Sandy Creek. See “Troubled Debt Restructurings”—Prior to the Adoption of ASU 2022-02” and “Nonperforming Loans” above for additional information on these loans.

Unadvanced Loan Commitments

Unadvanced loan commitments represent approved and executed loan contracts for which funds have not been advanced to borrowers. The following table presents unadvanced loan commitments, by member class and by loan type, as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

Table 4.7: Unadvanced Commitments by Member Class and Loan Type

(Dollars in thousands) February 28, 2023 May 31, 2022
Member class:
CFC:
Distribution $ 9,332,479 $ 9,230,197
Power supply 3,884,174 3,835,535
Statewide and associate 152,400 183,845
Total CFC 13,369,053 13,249,577
NCSC 606,121 551,901
RTFC 345,104 309,724
Total unadvanced commitments $ 14,320,278 $ 14,111,202
Loan type:(1)

Long-term loans:
Fixed rate $ — $ —
Variable rate 5,643,107 5,357,205
Total long-term loans 5,643,107 5,357,205
Lines of credit 8,677,171 8,753,997
Total unadvanced commitments $ 14,320,278 $ 14,111,202

(1)

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~


(Dollars in thousands)	August 31, 2023		May 31, 2023
Member class:
CFC:
Distribution	$	9,803,363	$	9,673,712
Power supply	3,995,643		3,995,128
Statewide and associate	157,100		175,150
Total CFC	13,956,106		13,843,990
NCSC	633,895		604,436
RTFC	374,920		340,135
Total unadvanced commitments	$	14,964,921	$	14,788,561



Loan type:(2)
Long-term loans:
Fixed rate	$	—	$	—
Variable rate	5,796,421		5,669,634

Total long-term loans	5,796,421		5,669,634
Lines of credit	9,168,500		9,118,927
Total unadvanced commitments	$	14,964,921	$	14,788,561

____________________________

(1)Excludes the portion of any commitment to advance funds under swingline loan facilities in excess of CFC’s total commitment amount in a syndicated credit facility. Other syndicate lenders have an absolute obligation to acquire participations in such swingline loans upon CFC’s election, including during a default by the borrower.

(2)The interest rate on unadvanced loan commitments is not set until an advance is made; therefore, all unadvanced long-term loan commitments are reported as variable rate. However, the borrower may select either a fixed or a variable rate when an advance is drawn under a loan commitment.

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(UNAUDITED)

The following table displays, by loan type, the available balance under unadvanced loan commitments as of ~~February 28,~~August 31, 2023, and the related maturities in each fiscal year during the five-year period ended May 31, ~~2027,~~2028, and thereafter.

Table 4.8: Unadvanced Loan Commitments

Available
Balance Notional Maturities of Unadvanced Loan Commitments
(Dollars in thousands) 2023 2024 2025 2026 2027 Thereafter
Line of credit loans $ 8,677,171 $ 250,394 $ 4,017,370 $ 1,404,741 $ 865,242 $ 1,274,004 $ 865,420
Long-term loans 5,643,107 171,539 1,159,276 702,264 848,354 1,429,226 1,332,448
Total $ 14,320,278 $ 421,933 $ 5,176,646 $ 2,107,005 $ 1,713,596 $ 2,703,230 $ 2,197,868


	Available Balance		Notional Maturities of Unadvanced Loan Commitments
(Dollars in thousands)			2024		2025		2026		2027		2028		Thereafter
Line of credit loans	$	9,168,500	$	758,854	$	5,172,684	$	837,114	$	1,199,718	$	636,387	$	563,743
Long-term loans	5,796,421		877,539		694,623		706,646		1,301,246		1,684,716		531,651
Total	$	14,964,921	$	1,636,393	$	5,867,307	$	1,543,760	$	2,500,964	$	2,321,103	$	1,095,394

Unadvanced line of credit commitments accounted for 61% of total unadvanced loan commitments as of ~~February 28,~~August 31, 2023, while unadvanced long-term loan commitments accounted for 39% of total unadvanced loan commitments. Unadvanced line of credit commitments are typically revolving facilities for periods not to exceed five years and generally serve as supplemental back-up liquidity to our borrowers. Historically, borrowers have not drawn the full commitment amount for line of credit facilities, and we have experienced a very low utilization rate on line of credit loan facilities regardless of whether or not we are obligated to fund the facility ~~where~~when a material adverse change ~~exists.~~has occurred.

Our unadvanced long-term loan commitments typically have a five-year draw period under which a borrower may draw funds prior to the expiration of the commitment. We expect that the majority of the long-term unadvanced loan commitments of ~~$5,643~~$5,796 million will be advanced prior to the expiration of the commitment.

Because we historically have experienced a very low utilization rate on line of credit loan facilities, which account for the majority of our total unadvanced loan commitments, we believe the unadvanced loan commitment total of ~~$14,320~~$14,965 million as of ~~February 28,~~August 31, 2023 is not necessarily representative of our future funding requirements.

Unadvanced Loan Commitments—Conditional

The substantial majority of our line of credit commitments and all of our unadvanced long-term loan commitments include material adverse change clauses. Unadvanced loan commitments subject to material adverse change clauses totaled ~~$11,188~~$11,817 million and ~~$10,908~~$11,617 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively. Prior to making an advance on these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. In some cases, the borrower’s access to the full amount of the facility is further constrained by the designated purpose, imposition of borrower-specific restrictions or by additional conditions that must be met prior to advancing funds.

Unadvanced Loan Commitments—Unconditional

Unadvanced loan commitments not subject to material adverse change clauses at the time of each advance consisted of unadvanced committed lines of credit totaling ~~$3,132~~$3,148 million and ~~$3,203~~$3,172 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively. ~~As such, we~~We are required to advance amounts on these committed facilities as long as the borrower is in compliance with the terms and conditions of the facility. The following table summarizes the available balance under unconditional committed lines of credit as of ~~February 28,~~August 31, 2023, and the related maturity amounts in each fiscal year during the five-year period ending May 31, ~~2027,~~2028, and thereafter.

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Table 4.9: Unconditional Committed Lines of Credit—Available Balance

Available
Balance Notional Maturities of Unconditional Committed Lines of Credit
(Dollars in thousands) 2023 2024 2025 2026 2027 Thereafter
Committed lines of credit $ 3,131,762 $ 103,285 $ 170,500 $ 792,586 $ 434,500 $ 907,665 $ 723,226


	Available Balance		Notional Maturities of Unconditional Committed Lines of Credit
(Dollars in thousands)	Available Balance		2024		2025		2026		2027		2028		Thereafter
Committed lines of credit	$	3,148,266	$	160,500	$	486,002	$	539,800	$	864,900	$	688,665	$	408,399

Pledged Collateral—Loans

We are required to pledge eligible mortgage notes or other collateral in an amount at least equal to the outstanding balance of our secured debt. Table 4.10 displays the borrowing amount under each of our secured borrowing agreements and the corresponding loans outstanding pledged as collateral as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023. See “Note 6—Short-Term Borrowings” and “Note 7—Long-Term Debt” for information on our secured borrowings and other borrowings.

Table 4.10: Pledged Loans

(Dollars in thousands) February 28, 2023 May 31, 2022
Collateral trust bonds:
2007 indenture:
Collateral trust bonds outstanding $ 7,772,711 $ 7,072,711
Pledged collateral:
Distribution system mortgage notes pledged 8,832,021 8,564,596
RUS-guaranteed loans qualifying as permitted investments pledged 109,149 114,654
Total pledged collateral 8,941,170 8,679,250
1994 indenture:
Collateral trust bonds outstanding $ 20,000 $ 25,000
Pledged collateral:
Distribution system mortgage notes pledged 23,515 29,616
Guaranteed Underwriter Program:
Notes payable outstanding $ 6,771,125 $ 6,105,473
Pledged collateral:
Distribution and power supply system mortgage notes pledged 7,467,744 6,904,591
Farmer Mac:
Notes payable outstanding $ 3,523,742 $ 3,094,679
Pledged collateral:
Distribution and power supply system mortgage notes pledged 4,365,523 3,445,358
Clean Renewable Energy Bonds Series 2009A:
Notes payable outstanding $ 1,098 $ 2,755
Pledged collateral:
Distribution and power supply system mortgage notes pledged 1,207 3,138
Cash — 392
Total pledged collateral 1,207 3,530


(Dollars in thousands)	August 31, 2023		May 31, 2023
Collateral trust bonds:
2007 indenture:
Collateral trust bonds outstanding	$	7,772,711	$	7,772,711
Pledged collateral:
Distribution system mortgage notes pledged	8,623,311		8,719,287
RUS-guaranteed loans qualifying as permitted investments pledged	120,554		122,874
Total pledged collateral	8,743,865		8,842,161

1994 indenture:
Collateral trust bonds outstanding	$	20,000	$	20,000
Pledged collateral:
Distribution system mortgage notes pledged	22,278		22,900

Guaranteed Underwriter Program:
Notes payable outstanding	$	6,670,146	$	6,720,643
Pledged collateral:
Distribution and power supply system mortgage notes pledged	7,804,512		7,877,558

Farmer Mac:
Notes payable outstanding	$	3,625,953	$	3,149,898
Pledged collateral:
Distribution and power supply system mortgage notes pledged	4,227,149		4,294,282

Clean Renewable Energy Bonds Series 2009A:
Notes payable outstanding	$	1,098	$	1,098
Pledged collateral:
Distribution and power supply system mortgage notes pledged	603		1,029
Cash	780		391
Total pledged collateral	1,383		1,420

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


NOTE 5—ALLOWANCE FOR CREDIT LOSSES

We are required to maintain an allowance based on a current estimate of credit losses that are expected to occur over the remaining term of the loans in our portfolio. Our allowance for credit losses consists of a collective allowance and an asset-specific allowance. The collective allowance is established for loans in our portfolio that share similar risk characteristics and are therefore evaluated on a collective, or pool, basis in measuring expected credit losses. The asset-specific allowance is established for loans in our portfolio that do not share similar risk characteristics with other loans in our portfolio and are therefore evaluated on an individual basis in measuring expected credit losses.

Allowance for Credit Losses—Loan Portfolio

The following tables summarize, by legal entity and member class, changes in the allowance for credit losses for our loan portfolio for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023 and 2022.

Table 5.1: Changes in Allowance for Credit Losses

Three Months Ended February 28, 2023
(Dollars in thousands) CFC Distribution CFC Power Supply CFC Statewide & Associate CFC Total NCSC RTFC Total
Balance as of November 30, 2022 $ 17,021 $ 45,289 $ 1,289 $ 63,599 $ 2,511 $ 1,505 $ 67,615
Provision (benefit) for credit losses (367) (10,934) (32) (11,333) 116 (101) (11,318)
Balance as of February 28, 2023 $ 16,654 $ 34,355 $ 1,257 $ 52,266 $ 2,627 $ 1,404 $ 56,297


	Three Months Ended August 31, 2023
(Dollars in thousands)	CFC Distribution		CFC Power Supply		CFC Statewide & Associate		CFC Total		NCSC		RTFC		Total
Balance as of May 31, 2023	$	14,924	$	33,306	$	1,194	$	49,424	$	2,464	$	1,206	$	53,094


Provision for credit losses	798		(904)		4		(102)		148		754		800

Recoveries	—		1,032		—		1,032		—		—		1,032
Balance as of August 31, 2023	$	15,722	$	33,434	$	1,198	$	50,354	$	2,612	$	1,960	$	54,926

Three Months Ended February 28, 2022
(Dollars in thousands) CFC Distribution CFC Power Supply CFC Statewide & Associate CFC Total NCSC RTFC Total
Balance as of November 30, 2021 $ 16,032 $ 65,467 $ 1,424 $ 82,923 $ 1,594 $ 1,618 $ 86,135
Provision (benefit) for credit losses 353 (12,989) (111) (12,747) 135 (137) (12,749)
Balance as of February 28, 2022 $ 16,385 $ 52,478 $ 1,313 $ 70,176 $ 1,729 $ 1,481 $ 73,386

Nine Months Ended February 28, 2023
(Dollars in thousands) CFC Distribution CFC Power Supply CFC Statewide & Associate CFC Total NCSC RTFC Total
Balance as of May 31, 2022 $ 15,781 $ 47,793 $ 1,251 $ 64,825 $ 1,449 $ 1,286 $ 67,560
Provision for credit losses 873 1,631 6 2,510 1,178 118 3,806
Charge-offs — (15,069) — (15,069) — — (15,069)
Balance as of February 28, 2023 $ 16,654 $ 34,355 $ 1,257 $ 52,266 $ 2,627 $ 1,404 $ 56,297

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Nine Months Ended February 28, 2022
(Dollars in thousands) CFC Distribution CFC Power Supply CFC Statewide & Associate CFC Total NCSC RTFC Total
Balance as of May 31, 2021 $ 13,426 $ 64,646 $ 1,391 $ 79,463 $ 1,374 $ 4,695 $ 85,532
Provision (benefit) for credit losses 2,959 (12,168) (78) (9,287) 355 (3,214) (12,146)
Balance as of February 28, 2022 $ 16,385 $ 52,478 $ 1,313 $ 70,176 $ 1,729 $ 1,481 $ 73,386


	Three Months Ended August 31, 2022
(Dollars in thousands)	CFC Distribution		CFC Power Supply		CFC Statewide & Associate		CFC Total		NCSC		RTFC		Total
Balance as of May 31, 2022	$	15,781	$	47,793	$	1,251	$	64,825	$	1,449	$	1,286	$	67,560


Provision for credit losses	631		2,550		68		3,249		116		131		3,496


Balance as of August 31, 2022	$	16,412	$	50,343	$	1,319	$	68,074	$	1,565	$	1,417	$	71,056

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

~~Table 5.2: Allowance for Credit Losses Components~~

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

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

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

2023.

7768

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

May 31, 2022
(Dollars in thousands) CFC Distribution CFC Power Supply CFC Statewide & Associate CFC Total NCSC RTFC Total
Allowance components:
Collective allowance $ 15,781 $ 9,355 $ 1,251 $ 26,387 $ 1,449 $ 1,040 $ 28,876
Asset-specific allowance — 38,438 — 38,438 — 246 38,684
Total allowance for credit losses $ 15,781 $ 47,793 $ 1,251 $ 64,825 $ 1,449 $ 1,286 $ 67,560
Loans outstanding:(1)

Collectively evaluated loans $ 23,839,150 $ 4,673,980 $ 126,863 $ 28,639,993 $ 710,878 $ 463,509 $ 29,814,380
Individually evaluated loans 5,092 227,790 — 232,882 — 4,092 236,974
Total loans outstanding $ 23,844,242 $ 4,901,770 $ 126,863 $ 28,872,875 $ 710,878 $ 467,601 $ 30,051,354
Table 5.2: Allowance for Credit Losses Components

Allowance coverage ratios:
Collective allowance coverage ratio(2)
0.07% 0.20% 0.99% 0.09% 0.20% 0.22% 0.10%
Asset-specific allowance coverage ratio(3)
— 16.87 — 16.51 — 6.01 16.32
Total allowance coverage ratio(4)
0.07 0.98 0.99 0.22 0.20 0.28 0.22


	August 31, 2023
(Dollars in thousands)	CFC Distribution		CFC Power Supply		CFC Statewide & Associate		CFC Total		NCSC		RTFC		Total
Allowance components:
Collective allowance	$	15,722	$	8,585	$	1,198	$	25,505	$	2,612	$	1,675	$	29,792
Asset-specific allowance	—		24,849		—		24,849		—		285		25,134
Total allowance for credit losses	$	15,722	$	33,434	$	1,198	$	50,354	$	2,612	$	1,960	$	54,926

Loans outstanding:(1)
Collectively evaluated loans	$	25,814,015	$	5,485,567	$	232,292	$	31,531,874	$	923,447	$	535,509	$	32,990,830
Individually evaluated loans	4,209		84,987		—		89,196		—		3,467		92,663
Total loans outstanding	$	25,818,224	$	5,570,554	$	232,292	$	31,621,070	$	923,447	$	538,976	$	33,083,493


Allowance coverage ratios:
Collective allowance coverage ratio(2)	0.06	%	0.16	%	0.52	%	0.08	%	0.28	%	0.31	%	0.09	%
Asset-specific allowance coverage ratio(3)	—		29.24		—		27.86		—		8.22		27.12
Total allowance coverage ratio(4)	0.06		0.60		0.52		0.16		0.28		0.36		0.17


	May 31, 2023
(Dollars in thousands)	CFC Distribution		CFC Power Supply		CFC Statewide & Associate		CFC Total		NCSC		RTFC		Total
Allowance components:
Collective allowance	$	14,924	$	7,837	$	1,194	$	23,955	$	2,464	$	916	$	27,335
Asset-specific allowance	—		25,469		—		25,469		—		290		25,759
Total allowance for credit losses	$	14,924	$	33,306	$	1,194	$	49,424	$	2,464	$	1,206	$	53,094

Loans outstanding:(1)
Collectively evaluated loans	$	25,432,439	$	5,325,033	$	200,368	$	30,957,840	$	956,874	$	484,196	$	32,398,910
Individually evaluated loans	4,638		112,209		—		116,847		—		3,592		120,439
Total loans outstanding	$	25,437,077	$	5,437,242	$	200,368	$	31,074,687	$	956,874	$	487,788	$	32,519,349


Allowance coverage ratios:
Collective allowance coverage ratio(2)	0.06	%	0.15	%	0.60	%	0.08	%	0.26	%	0.19	%	0.08	%
Asset-specific allowance coverage ratio(3)	—		22.70		—		21.80		—		8.07		21.39
Total allowance coverage ratio(4)	0.06		0.61		0.60		0.16		0.26		0.25		0.16

____________________________

(1)Represents the unpaid principal amount of loans as of the end of each period. Excludes unamortized deferred loan origination costs of $13 million ~~and $12 million~~ as of ~~February 28,~~both August 31, 2023 and May 31, ~~2022, respectively.~~2023.

(2)Calculated based on the collective allowance component at period end divided by collectively evaluated loans outstanding at period end.

(3)Calculated based on the asset-specific allowance component at period end divided by individually evaluated loans outstanding at period end.

(4)Calculated based on the total allowance for credit losses at period end divided by total loans outstanding at period end.

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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Our allowance for credit losses and allowance coverage ratio ~~decreased~~increased to ~~$56~~$55 million and 0.17%, respectively, as of ~~February 28,~~August 31, 2023, from ~~$68~~$53 million and ~~0.22%~~0.16%, respectively, as of May 31, ~~2022.~~2023. The ~~$12~~$2 million ~~decrease~~increase in the allowance for credit losses reflected ~~a reduction in the asset-specific allowance of~~ ~~$13 million, partially offset by~~ an increase in the collective allowance of $1$3 million,~~. The decrease in~~ ~~asset-specific allowance was attributable primarily to charge-offs totaling $15 million related to the Brazos and Brazos Sandy Creek loans,~~ partially ~~offse~~toffset by ~~an increase~~a reduction in the asset-specific allowance ~~for a nonperforming CFC power supply loan, due to a reduction and timing change in the expected payments on this loan.~~of $1 million. The increase in the collective allowance was primarily due to ~~the~~ loan portfolio ~~growth.~~growth and a slight decline in the overall credit quality and risk profile of our loan portfolio. The decrease in the asset-specific allowance was attributable to a timing change in the expected payments on a nonperforming CFC power supply loan.

Reserve for Credit Losses—Unadvanced Loan Commitments

In addition to the allowance for credit losses for our loan portfolio, we maintain an allowance for credit losses for unadvanced loan commitments, which we refer to as our reserve for credit losses because this amount is reported as a component of other liabilities on our consolidated balance sheets. We measure the reserve for credit losses for unadvanced loan commitments based on expected credit losses over the contractual period of our exposure to credit risk arising from our obligation to extend credit, unless that obligation is unconditionally cancellable by us. The reserve for credit losses related to our off-balance sheet exposure for unadvanced loan commitments was less than $1 million as of both ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~


NOTE 6—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. Our short-term borrowings totaled ~~$4,900~~$5,124 million and accounted for 16% of total debt outstanding as of ~~February 28,~~August 31, 2023, compared with ~~$4,981~~$4,546 million and ~~17%~~15% of total debt outstanding as of May 31, ~~2022.~~2023. The following table provides ~~comparative~~ information on our short-term borrowings as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

Table 6.1: Short-Term Borrowings Sources


		February 28, 2023			May 31, 2022				August 31, 2023				May 31, 2023
(Dollars in thousands)	(Dollars in thousands)	Amount		% of Total Debt Outstanding	Amount		% of Total Debt Outstanding	(Dollars in thousands)	Amount		% of Total Debt Outstanding		Amount		% of Total Debt Outstanding
Short-term borrowings:	Short-term borrowings:							Short-term borrowings:
Commercial paper:	Commercial paper:							Commercial paper:
Commercial paper dealers, net of discounts	Commercial paper dealers, net of discounts	$	1,213,653	4%	$	1,024,813	4%	Commercial paper dealers, net of discounts	$	1,088,343	3	%	$	1,293,167	4	%
Commercial paper members, at par	Commercial paper members, at par	932,880		3	1,358,069		5	Commercial paper members, at par	1,309,508		4		1,017,431		4
Total commercial paper	Total commercial paper	2,146,533		7	2,382,882		9	Total commercial paper	2,397,851		7		2,310,598		8
Select notes to members	Select notes to members	1,601,165		5	1,753,441		6	Select notes to members	1,550,697		5		1,630,799		5
Daily liquidity fund notes to members	Daily liquidity fund notes to members	298,502		1	427,790		1	Daily liquidity fund notes to members	265,832		1		238,329		1
Medium-term notes to members	Medium-term notes to members	353,431		1	417,054		1	Medium-term notes to members	409,955		1		366,549		1
Farmer Mac notes payable (1)	Farmer Mac notes payable (1)	500,000		2	—		—	Farmer Mac notes payable (1)	500,000		2		—		—

Total short-term borrowings	Total short-term borrowings	$	4,899,631	16%	$	4,981,167	17%	Total short-term borrowings	$	5,124,335	16	%	$	4,546,275	15	%

____________________________

(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.

Committed Bank Revolving Line of Credit Agreements

The following table presents the amount available for access under our bank revolving line of credit agreements as of ~~February 28,~~August 31, 2023.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Table 6.2: Committed Bank Revolving Line of Credit Agreements Available Amounts

February 28, 2023
(Dollars in millions) Total Commitment Letters of Credit Outstanding Available Amount Maturity
Annual Facility Fee (1)
Bank revolving agreements:
3-year agreement $ 1,245 $ — $ 1,245 November 28, 2025 7.5 bps
4-year agreement 1,355 7 1,348 November 28, 2026 10.0 bps
Total $ 2,600 $ 7 $ 2,593


	August 31, 2023
(Dollars in millions)	Total Commitment		Letters of Credit Outstanding		Available Amount		Maturity	Annual Facility Fee (1)
Bank revolving agreements:
3-year agreement	$	1,245	$	—	$	1,245	November 28, 2025	7.5 bps

4-year agreement	1,355		2		1,353		November 28, 2026	10.0 bps

Total	$	2,600	$	2	$	2,598

____________________________

(1) Facility fee determined by CFC’s senior unsecured credit ratings based on the pricing schedules put in place at the inception of the related agreement.

On October 20, 2022, we amended the three-year and four-year committed bank revolving line of credit agreements to extend the maturity dates to November 28, 2025 and November 28, 2026, respectively, and to replace LIBOR with Term Secured Overnight Financing Rate. The total commitment amount under the three-year facility and the four-year facility ~~remained unchanged at~~was $1,245 million and $1,355 million, respectively, resulting in a combined total commitment amount

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

under the two facilities of $2,600 million. These agreements allow us to request up to $300 million of letters of credit, which, if requested, results in a reduction in the total amount available for our use. We were in compliance with all covenants and conditions under the agreements as of ~~February 28,~~August 31, 2023.


NOTE 7—LONG-TERM DEBT

The following table displays, by debt product type, long-term debt outstanding as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023. Long-term debt outstanding totaled ~~$23,832~~$23,874 million and accounted for ~~77%~~76% of total debt outstanding as of ~~February 28,~~August 31, 2023, compared with ~~$21,545~~$23,947 million and ~~75%~~77% of total debt outstanding as of May 31, ~~2022.~~

~~Table 7.1: Long-Term Debt by Debt Product Type~~
(Dollars in thousands) February 28, 2023 May 31, 2022
Secured long-term debt:
Collateral trust bonds $ 7,792,711 $ 7,097,711
Unamortized discount net, of premium (181,756) (216,608)
Debt issuance costs (37,086) (32,613)
Total collateral trust bonds 7,573,869 6,848,490
Guaranteed Underwriter Program notes payable 6,771,125 6,105,473
Farmer Mac notes payable 3,023,742 3,094,679
Other secured notes payable 1,098 2,755
Debt issuance costs (3) (9)
Total other secured notes payable 1,095 2,746
Total secured notes payable 9,795,962 9,202,898
Total secured long-term debt 17,369,831 16,051,388
Unsecured long-term debt:
Medium-term notes sold through dealers 6,173,356 5,263,496
Medium-term notes sold to members 311,477 250,397
Medium term notes sold through dealers and to members 6,484,833 5,513,893
Unamortized discount net, of premium (113) (2,086)
Debt issuance costs (22,643) (19,723)
Total unsecured medium-term notes 6,462,077 5,492,084
Unsecured notes payable 71 1,979
Unamortized discount (1) (10)
Debt issuance costs — (1)
Total unsecured notes payable 70 1,968
Total unsecured long-term debt 6,462,147 5,494,052
Total long-term debt $ 23,831,978 $ 21,545,440

2023.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Table 7.1: Long-Term Debt by Debt Product Type


(Dollars in thousands)	August 31, 2023		May 31, 2023
Secured long-term debt:
Collateral trust bonds	$	7,792,711	$	7,792,711
Unamortized discount, net	(175,836)		(178,832)
Debt issuance costs	(34,701)		(35,906)
Total collateral trust bonds	7,582,174		7,577,973
Guaranteed Underwriter Program notes payable	6,670,146		6,720,643
Farmer Mac notes payable	3,125,953		3,149,898
Other secured notes payable	1,098		1,098
Debt issuance costs	(1)		(2)
Total other secured notes payable	1,097		1,096
Total secured notes payable	9,797,196		9,871,637
Total secured long-term debt	17,379,370		17,449,610
Unsecured long-term debt:
Medium-term notes sold through dealers	6,144,625		6,152,726
Medium-term notes sold to members	372,355		365,260
Medium term notes sold through dealers and to members	6,516,980		6,517,986
Unamortized premium, net	79		4
Debt issuance costs	(22,226)		(21,122)
Total unsecured medium-term notes	6,494,833		6,496,868
Unsecured notes payable	71		71
Unamortized discount	—		(1)

Total unsecured notes payable	71		70
Total unsecured long-term debt	6,494,904		6,496,938
Total long-term debt	$	23,874,274	$	23,946,548

Secured Debt

Long-term secured debt of ~~$17,370~~$17,379 million and ~~$16,051~~$17,450 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, represented 73% ~~and 75%~~ of total long-term debt outstanding as of each respective date. We were in compliance with all covenants and conditions under our debt indentures as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023. We are required to pledge eligible mortgage notes in an amount at least equal to the outstanding balance of our secured debt. See “Note 4—Loans” for information on pledged collateral under our secured debt agreements.

Collateral Trust Bonds

Collateral trust bonds represent secured obligations sold to investors in the capital markets. Collateral trust bonds are secured by the pledge of mortgage notes or eligible securities in an amount at least equal to the principal balance of the bonds outstanding. We issued aggregate principal amount of collateral trust bonds totaling $1,050 million with an average fixed interest rate of 5.17% and an average term of 10 years during the nine months ended February 28, 2023.

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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Guaranteed Underwriter Program Notes Payable

We ~~borrowed $800 million an~~d repaid ~~$134~~$50 million of notes payable outstanding under the Guaranteed Underwriter Program during the ~~nine~~three months ended ~~February 28,~~August 31, 2023. We had up to $1,025 million available for access under the Guaranteed Underwriter Program as of ~~February 28,~~August 31, 2023. On ~~December 15, 2022,~~ September 11, 2023, we ~~closed on~~executed a ~~$750~~commitment letter for the guarantee by RUS of a $450 million ~~committed~~ loan facility ~~(“Series T”)~~ from the Federal Financing Bank under the ~~Guaranteed~~Guaranteed Underwriter Program. ~~Pursuant to this facility,~~On September 27, 2023, we ~~may borrow any time before July 15, 2027. Each advance is subject to quarterly amortization and a final maturity not longer than 30 years from~~borrowed $275 million under the ~~date of the advance.~~Guaranteed Underwriter Program.

The notes outstanding 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 Investors Service (“Moody’s”), (ii) A- or higher from S&P Global Inc. (“S&P”), (iii) A- or higher from Fitch Ratings (“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. We are required to pledge eligible distribution system or power supply system loans as collateral in an amount at least equal to the total principal amount of notes outstanding under the Guaranteed Underwriter Program.

Farmer Mac Notes Payable

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 non-renewal. 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 agreement. The amount outstanding under this agreement included ~~$3,024~~$500 million of short-term borrowings and $3,126 million of long-term debt as of ~~February 28, 2023. We borrowed~~ ~~$400 million in~~ ~~long-term notes payable under the Farmer Mac note purchase agreement during the nine months ended February 28,~~August 31, 2023. The amount available for borrowing totaled ~~$2,476~~$2,374 million as of ~~February 28,~~August 31, 2023. ~~Subsequent~~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 ~~quarter ended February 28, 2023, we borrowed $150 million in long-term~~total principal amount of notes ~~payable~~outstanding under ~~the Farmer Mac note purchase~~this agreement.

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Unsecured Debt

Long-term unsecured debt of ~~$6,462~~$6,495 million and ~~$5,494~~$6,497 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, represented 27% ~~and 25%~~ of long-term debt outstanding as of each respective date. The increase in long-term unsecured debt of $968 million for the nine months ended February 28, 2023 was primarily attributable to dealer medium-term notes issuances, as described below, partially offset by dealer medium-term notes repayments.

Medium-Term Notes

Medium-term notes present unsecured obligations that may be issued through dealers in the capital markets or directly to our members. WeOn June 29, 2023, we issued $400 million aggregate principal amount of dealer medium-term notes ~~totaling $1,700 million with an average~~at a fixed ~~interest~~ rate of ~~4.87% and an average term~~5.05% due on September 15, 2028. On August 7, 2023, we repaid $400 million in principal amount of ~~four years during the nine months ended February 28, 2023.~~dealer medium-term notes that matured.

See “Note 7—Long-Term Debt” in our ~~2022~~2023 Form 10-K for additional information on our various long-term debt product types.

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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


NOTE 8—SUBORDINATED DEFERRABLE DEBT

Subordinated deferrable debt represents long-term debt that is subordinated to all debt other than subordinated certificates held by our members. We had subordinated deferrable debt outstanding of $~~987~~1,184 million and $1,283 million as of ~~February 28,~~August 31, 2023 ~~unchanged from~~and May 31, ~~2022.~~2023, respectively. On June 26, 2023, we redeemed $100 million in principal amount 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 unamortized debt issuance costs in our consolidated statements of operations for the three months ended August 31, 2023. See “Note 8—Subordinated Deferrable Debt” in our ~~2022~~2023 Form 10-K for additional information on the terms and conditions, including maturity and call dates, of our subordinated deferrable debt outstanding.


NOTE 9—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We are an end user of derivative financial instruments and do not engage in derivative trading. Derivatives may be privately negotiated contracts, which are often referred to as over-the-counter (“OTC”) derivatives, or they may be listed and traded on an exchange. We generally engage in OTC derivative transactions. Our derivative instruments are an integral part of our interest rate risk-management strategy. Our principal purpose in using derivatives is to manage our aggregate interest rate risk profile within prescribed risk parameters. The derivative instruments we use primarily consist of interest rate swaps, which we typically hold to maturity. In addition, we may use ~~treasury~~Treasury locks to manage the interest rate risk associated with future debt issuance or debt that is scheduled to reprice in the future. We provide a discussion of our accounting for derivatives policy in “Note 1—Summary of Significant Accounting Policies” in our ~~2022~~2023 Form 10-K.

Notional Amount of Derivatives Not Designated as Accounting Hedges

The notional amount is used only as the basis on which interest payments are determined and is not the amount exchanged, nor recorded on our consolidated balance sheets. The following table shows, by derivative instrument type, the notional amount, the weighted-average rate paid and the weighted-average interest rate received for our interest rate swaps as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023. For the substantial majority of interest rate swap agreements, ~~a LIBOR index~~the daily compounded Secured Overnight Financing Rate (“SOFR”) is currently used as the basis for determining variable interest payment amounts each period.

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Table 9.1: Derivative Notional Amount and Weighted Average Rates


		February 28, 2023						May 31, 2022							August 31, 2023						May 31, 2023
(Dollars in thousands)	(Dollars in thousands)	Notional Amount		Weighted- Average Rate Paid		Weighted- Average Rate Received		Notional Amount		Weighted- Average Rate Paid		Weighted- Average Rate Received		(Dollars in thousands)	Notional Amount		Weighted- Average Rate Paid		Weighted- Average Rate Received		Notional Amount		Weighted- Average Rate Paid		Weighted- Average Rate Received
Pay-fixed swaps	Pay-fixed swaps	$	5,589,869	2.70	%	4.81	%	$	5,957,631	2.60	%	1.24	%	Pay-fixed swaps	$	6,021,557	2.77	%	5.53	%	$	5,920,269	2.75	%	5.26	%
Receive-fixed swaps	Receive-fixed swaps	1,700,000		5.57		2.97		1,980,000		1.53		2.86		Receive-fixed swaps	1,600,000		6.32		2.96		1,700,000		6.05		2.97
Total interest rate swaps	Total interest rate swaps	7,289,869		3.37		4.38		7,937,631		2.33		1.64		Total interest rate swaps	7,621,557		3.52		4.99		7,620,269		3.49		4.75
Forward pay-fixed swaps	Forward pay-fixed swaps	160,845						124,000						Forward pay-fixed swaps	—						195,845
Total interest rate swaps	Total interest rate swaps	$	7,450,714					$	8,061,631					Total interest rate swaps	$	7,621,557					$	7,816,114

~~Cash Flow Hedges~~

During the nine months ended February 28, 2023, we executed three treasury lock agreements with a total aggregate notional amount of $400 million to hedge interest rate risk by locking in the underlying U.S. Treasury interest rate component of interest rate payments on anticipated debt issuances. The treasury locks were designated and qualified as cash flow hedges. We terminated these treasury locks in February 2023 and we recorded a net settlement gain of $7 million in accumulated other comprehensive income (“AOCI”), which will be reclassified into interest expense over the term that the hedged debt transaction affects earnings. We did not have any derivatives designated as accounting hedges as of ~~February 28, 2023 and May 31, 2022~~.

Impact of Derivatives on Consolidated Balance Sheets

The following table displays the fair value of the derivative assets and derivative liabilities, by derivatives type, recorded on our consolidated balance sheets and the related outstanding notional amount as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Table 9.2: Derivative Assets and Liabilities at Fair Value


		February 28, 2023				May 31, 2022					August 31, 2023				May 31, 2023
(Dollars in thousands)	(Dollars in thousands)	Fair Value		Notional Amount (1)		Fair Value		Notional Amount (1)		(Dollars in thousands)	Fair Value		Notional Amount		Fair Value		Notional Amount (1)
Derivative assets:	Derivative assets:									Derivative assets:

Interest rate swaps	Interest rate swaps	$	554,610	$	5,236,910	$	222,042	$	4,791,699	Interest rate swaps	$	615,866	$	5,525,253	$	460,762	$	5,405,274
Total derivative assets	Total derivative assets	$	554,610	$	5,236,910	$	222,042	$	4,791,699	Total derivative assets	$	615,866	$	5,525,253	$	460,762	$	5,405,274

Derivative liabilities:	Derivative liabilities:									Derivative liabilities:

Interest rate swaps	Interest rate swaps	$	131,075	$	2,213,804	$	128,282	$	3,269,932	Interest rate swaps	$	108,239	$	2,096,304	$	115,074	$	2,410,840
Total derivative liabilities	Total derivative liabilities	$	131,075	$	2,213,804	$	128,282	$	3,269,932	Total derivative liabilities	$	108,239	$	2,096,304	$	115,074	$	2,410,840

____________________________

(1) The notional amount as of May 31, 2023 includes ~~$161 million and $124~~$196 million notional amount of forward starting swaps, as shown above in Table 9.1: Derivative Notional Amount and Weighted-Average Rates, with an effective start date ~~subsequent to February 28, 2023 and May~~during the three months ended August 31, ~~2022, respectively, outstanding as of February 28, 2023 and May 31, 2022, respectively.~~2023. The fair value of these swaps as of ~~February 28, 2023 and~~ May 31, ~~2022~~2023 is included in the above table and in our consolidated financial statements.

All of our master swap 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. However, we report derivative asset and liability amounts on a gross basis by individual contract. The following table presents the gross fair value of derivative assets and liabilities reported on our consolidated balance sheets as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, and provides information on the impact of netting provisions under our master swap agreements and collateral pledged, if any.

Table 9.3: Derivative Gross and Net Amounts


	August 31, 2023
	Gross Amount of Recognized Assets/ Liabilities		Gross Amount Offset in the Balance Sheet		Net Amount of Assets/ Liabilities Presented in the Balance Sheet		Gross Amount Not Offset in the Balance Sheet
(Dollars in thousands)							Financial Instruments		Cash Collateral Pledged		Net Amount
Derivative assets:

Interest rate swaps	$	615,866	$	—	$	615,866	$	106,557	$	—	$	509,309

Derivative liabilities:

Interest rate swaps	108,239		—		108,239		106,557		—		1,682


	May 31, 2023
	Gross Amount of Recognized Assets/ Liabilities		Gross Amount Offset in the Balance Sheet		Net Amount of Assets/ Liabilities Presented in the Balance Sheet		Gross Amount Not Offset in the Balance Sheet
(Dollars in thousands)							Financial Instruments		Cash Collateral Pledged		Net Amount
Derivative assets:
Interest rate swaps	$	460,762	$	—	$	460,762	$	112,047	$	—	$	348,715

Derivative liabilities:

Interest rate swaps	115,074		—		115,074		112,047		—		3,027

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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~(UNAUDITED)~~

~~Table 9.3: Derivative Gross and Net Amounts~~
February 28, 2023
Gross Amount
of Recognized
Assets/ Liabilities Gross Amount
Offset in the
Balance Sheet Net Amount of Assets/ Liabilities
Presented
in the
Balance Sheet Gross Amount
Not Offset in the
Balance Sheet
(Dollars in thousands) Financial
Instruments Cash
Collateral
Pledged Net
Amount
Derivative assets:
Interest rate swaps $ 554,610 $ — $ 554,610 $ 129,010 $ — $ 425,600
Derivative liabilities:
Interest rate swaps 131,075 — 131,075 129,010 — 2,065

May 31, 2022
Gross Amount
of Recognized
Assets/ Liabilities Gross Amount
Offset in the
Balance Sheet Net Amount of Assets/ Liabilities
Presented
in the
Balance Sheet Gross Amount
Not Offset in the
Balance Sheet
(Dollars in thousands) Financial
Instruments Cash
Collateral
Pledged Net
Amount
Derivative assets:
Interest rate swaps $ 222,042 $ — $ 222,042 $ 103,228 $ — $ 118,814
Derivative liabilities:
Interest rate swaps 128,282 — 128,282 103,228 — 25,054

(UNAUDITED)

Impact of Derivatives on Consolidated Statements of Operations

The primary factors affecting the fair value of our derivatives and the derivative gains (losses) recorded in our consolidated statements of operations include changes in interest rates, the shape of the swap curve and the composition of our derivative portfolio. We generally record derivative losses when interest rates decline and derivative gains when interest rates rise, as our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps.

The following table presents the components of the derivative gains (losses) reported in our consolidated statements of operations for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023 and 2022. Derivative cash settlements interest 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 reporting period due to changes in expected future interest rates over the remaining life of our derivative contracts. We classify the derivative cash settlement amounts for the net periodic contractual interest expense on our interest rate swaps as an operating activity in our consolidated statements of cash flows.

Table 9.4: Derivative Gains (Losses)


		Three Months Ended February 28,				Nine Months Ended February 28,					Three Months Ended August 31,
(Dollars in thousands)	(Dollars in thousands)	2023		2022		2023		2022		(Dollars in thousands)		2023		2022
Derivative gains (losses) attributable to:	Derivative gains (losses) attributable to:									Derivative gains (losses) attributable to:
Derivative cash settlements interest income (expense)	Derivative cash settlements interest income (expense)	$	18,634	$	(26,212)	$	12,650	$	(79,727)	Derivative cash settlements interest income (expense)		$	27,869	$	(10,785)
Derivative forward value gains	Derivative forward value gains	83,674		195,492		330,035		122,930		Derivative forward value gains		162,018		104,372
Derivative gains	Derivative gains	$	102,308	$	169,280	$	342,685	$	43,203	Derivative gains		$	189,887	$	93,587

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Credit Risk-Related Contingent Features

Our derivative contracts typically contain mutual early-termination provisions, generally in the form of a credit rating trigger. Under the mutual credit rating trigger provisions, either counterparty may, but is not obligated to, terminate and settle the agreement if the credit rating of the other counterparty falls below a level specified in the agreement. If a derivative contract is terminated, the amount to be received or paid by us would be equal to the prevailing fair value, as defined in the agreement, as of the termination date.

~~During the current quarter, Moody’s, S&P and Fitch affirmed CFC’s credit ratings and stable outlook.~~ Our senior unsecured credit ratings from Moody’s, S&P and Fitch were A2, A- and A, respectively, as of ~~February 28,~~August 31, 2023. Moody’s, S&P and Fitch had our ratings on stable outlook as of ~~February 28,~~August 31, 2023. In September 2023, Fitch affirmed CFC’s credit ratings and stable outlook. Our credit ratings and outlook remain unchanged as of the date of this Report.

The following table displays the notional amounts of our derivative contracts with rating triggers as of ~~February 28,~~August 31, 2023, and the payments that would be required if the contracts were terminated as of that date because of a downgrade of our unsecured credit ratings or the counterparty’s unsecured credit ratings below A3/A-, below Baa1/BBB+, to or below Baa2/BBB, or to or below Ba2/BB+ by Moody’s or S&P, respectively. In calculating the payment amounts that would be required upon termination of the derivative contracts, we assume that amounts for each counterparty would be netted in accordance with the provisions of the master netting agreements with the counterparty. The net payment amounts are based on the fair value of the underlying derivative instrument, excluding the credit risk valuation adjustment, plus any unpaid accrued interest amounts.

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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Table 9.5: Derivative Credit Rating Trigger Exposure


(Dollars in thousands)	(Dollars in thousands)	Notional Amount		Payable Due from CFC		Receivable Due to CFC		Net Receivable (Payable)		(Dollars in thousands)	Notional Amount		Payable Due from CFC		Receivable Due to CFC		Net Receivable (Payable)
Impact of rating downgrade trigger:	Impact of rating downgrade trigger:									Impact of rating downgrade trigger:
Falls below A3/A-(1)	Falls below A3/A-(1)	$	30,930	$	(1,292)	$	—	$	(1,292)	Falls below A3/A-(1)	$	30,930	$	(951)	$	—	$	(951)
Falls below Baa1/BBB+	Falls below Baa1/BBB+	4,992,690		(999)		273,349		272,350		Falls below Baa1/BBB+	5,177,232		(765)		340,918		340,153
Falls to or below Baa2/BBB (2)	Falls to or below Baa2/BBB (2)	319,439		—		22,018		22,018		Falls to or below Baa2/BBB (2)	315,461		—		24,183		24,183

Total	Total	$	5,343,059	$	(2,291)	$	295,367	$	293,076	Total	$	5,523,623	$	(1,716)	$	365,101	$	363,385

____________________________

(1) Rating trigger for CFC falls below A3/A-, while rating trigger for counterparty falls below Baa1/BBB+ by Moody’s or S&P, respectively.

(2) Rating trigger for CFC falls to or below Baa2/BBB, while rating trigger for counterparty falls to or below Ba2/BB+ by Moody’s or S&P, respectively.

We have interest rate swaps with one counterparty that are subject to a ratings trigger and early termination provision in the event of a downgrade of CFC’s senior unsecured credit ratings below Baa3, BBB- or BBB- by Moody’s, S&P or Fitch, respectively. The outstanding notional amount of these swaps, which is not included in the above table, totaled ~~$229~~$223 million as of ~~February 28,~~August 31, 2023. These swaps were in an unrealized gain position of ~~$30~~$34 million as of ~~February 28,~~August 31, 2023.

Our largest counterparty exposure, based on the outstanding notional amount, accounted for approximately ~~25%~~24% and ~~24%~~23% of the total outstanding notional amount of derivatives as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively. The aggregate fair value amount, including the credit valuation adjustment, of all interest rate swaps with rating triggers that were in a net liability position was $2 million as of ~~February 28,~~August 31, 2023.

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~


NOTE 10—EQUITY

Total equity increased ~~$461~~$159 million to ~~$2,603~~$2,748 million as of ~~February 28,~~August 31, 2023, attributable primarily to our reported net income of ~~$515~~$228 million for the ~~nine~~three months ended ~~February 28,~~August 31, 2023, partially offset by the patronage capital retirement of ~~$59~~$72 million authorized by the CFC Board of Directors in July ~~2022.~~2023.

Allocation of Net Earnings and Retirement of Patronage Capital

In May 2022, the CFC Board of Directors authorized the allocation of $1 million of net earnings for fiscal year 2022 to the cooperative educational fund. In July 2022, the CFC Board of Directors authorized the allocation of net earnings for fiscal year 2022 as follows: $89 million to members in the form of patronage capital and $153 million to the members’ capital reserve. The amount of patronage capital allocated each year by CFC’s Board of Directors is based on adjusted net income, which excludes the impact of derivative forward value gains (losses). See “MD&A—Non-GAAP Financial Measures” for information on adjusted net income. In May 2023, the CFC Board of Directors authorized the allocation of $1 million of net earnings for fiscal year 2023 to the cooperative educational fund. In July 2023, the CFC Board of Directors authorized the allocation of net earnings for fiscal year 2023 as follows: $110 million to members in the form of patronage capital and $140 million to the members’ capital reserve.

In July ~~2022,~~2023, the CFC Board of Directors also authorized the retirement of allocated net earnings totaling ~~$59~~$72 million, of which ~~$44~~$55 million represented 50% of the patronage capital allocation for fiscal year ~~2022~~2023 and ~~$15~~$17 million represented the portion of the allocation from net earnings for fiscal year ~~1997~~1998 that ~~has~~had been held for 25 years pursuant to the CFC Board of Directors’ policy. The authorized patronage capital retirement amount of ~~$59~~$72 million was returned to members in cash in September ~~2022.~~2023. The remaining portion of the patronage capital allocation for fiscal year ~~2022~~2023 will be retained by CFC for 25 years pursuant to the ~~current~~ guidelines adopted by the CFC Board of Directors in June 2009.

See “Note 11—Equity” in our ~~2022~~2023 Form 10-K for additional information on our policy for allocation and retirement of patronage capital.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Accumulated Other Comprehensive Income (Loss)

The following table presents, by component, changes in AOCI for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023 and 2022 and the balance of each component as of the end of each respective period.

Table 10.1: Changes in Accumulated Other Comprehensive Income (Loss)

Three Months Ended February 28,
2023 2022
(Dollars in thousands)
Unrealized Gains on Derivative Hedges(1)
Unrealized Losses on Defined Benefit Plans(2)
Total
Unrealized Gains on Derivative Hedges(1)
Unrealized Losses on Defined Benefit Plans(2)
Total
Beginning balance $ 4,745 $ (2,665) $ 2,080 $ 5,506 $ (1,600) $ 3,906
Changes in unrealized gains 6,691 — 6,691 — — —
Realized (gains) losses reclassified to earnings (177) 100 (77) (192) 72 (120)
Ending balance $ 11,259 $ (2,565) $ 8,694 $ 5,314 $ (1,528) $ 3,786

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~


		Nine Months Ended February 28,													Three Months Ended August 31,
		2023						2022							2023						2022
(Dollars in thousands)	(Dollars in thousands)	Unrealized Gains on Derivative Hedges(1)		Unrealized Losses on Defined Benefit Plans(2)		Total		Unrealized Gains on Derivative Hedges(1)		Unrealized Losses on Defined Benefit Plans(2)		Total		(Dollars in thousands)	Unrealized Gains on Derivative Hedges(1)		Unrealized Losses on Defined Benefit Plans(2)		Total		Unrealized Gains on Derivative Hedges(1)		Unrealized Losses on Defined Benefit Plans(2)		Total
Beginning balance	Beginning balance	$	5,123	$	(2,865)	$	2,258	$	1,718	$	(1,743)	$	(25)	Beginning balance	$	11,102	$	(2,759)	$	8,343	$	5,123	$	(2,865)	$	2,258
Changes in unrealized gains		6,691		—		6,691		4,028		—		4,028

Realized (gains) losses reclassified to earnings	Realized (gains) losses reclassified to earnings	(555)		300		(255)		(432)		215		(217)		Realized (gains) losses reclassified to earnings	(155)		53		(102)		(189)		100		(89)
Ending balance	Ending balance	$	11,259	$	(2,565)	$	8,694	$	5,314	$	(1,528)	$	3,786	Ending balance	$	10,947	$	(2,706)	$	8,241	$	4,934	$	(2,765)	$	2,169

____________________________

(1) Of the derivative gains reclassified to earnings, a portion is reclassified as a component of the derivative gains (losses) line item and the remainder is reclassified as a component of the interest expense line item on our consolidated statements of operations.

(2) Reclassified to earnings as a component of the other non-interest expense line item presented on our consolidated statements of operations.

See “Note 9—Derivative Instruments and Hedging Activities” for discussion on our derivatives designated as accounting hedges. We expect to reclassify realized net gains of $1 million attributable to derivative cash flow hedges from AOCI into earnings over the next 12 months.


NOTE 11—GUARANTEES

We guarantee certain contractual obligations of our members so they may obtain various forms of financing. We use the same credit policies and monitoring procedures in providing guarantees as we do for loans and commitments. If a member system defaults on its obligation to pay debt service, then we are obligated to pay any required amounts under our guarantees. Meeting our guarantee obligations satisfies the underlying obligation of our member systems and prevents the exercise of remedies by the guarantee beneficiary based upon a payment default by a member system. In general, the member system is required to repay any amount advanced by us with interest, pursuant to the documents evidencing the member system’s reimbursement obligation.

The following table displays the notional amount of our outstanding guarantee obligations, by guarantee type and by member class, as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Table 11.1: Guarantees Outstanding by Type and Member Class

(Dollars in thousands) February 28, 2023 May 31, 2022
Guarantee type:
Long-term tax-exempt bonds(1)
$ 99,600 $ 122,150
Letters of credit(2)(3)
516,042 450,354
Other guarantees 160,165 158,279
Total $ 775,807 $ 730,783
Member class:
CFC:
Distribution $ 350,864 $ 314,925
Power supply 379,834 378,516
Statewide and associate(4)
17,145 13,372
CFC total 747,843 706,813
NCSC 27,964 23,970
Total $ 775,807 $ 730,783


(Dollars in thousands)	August 31, 2023		May 31, 2023
Guarantee type:
Long-term tax-exempt bonds(1)	$	97,705	$	98,405
Letters of credit(2)(3)	618,172		538,393
Other guarantees	184,564		160,023
Total	$	900,441	$	796,821

Member class:
CFC:
Distribution	$	405,271	$	383,644
Power supply	460,652		380,382
Statewide and associate(4)	17,839		17,532
CFC total	883,762		781,558
NCSC	16,679		15,263

Total	$	900,441	$	796,821

____________________________

(1)Represents the outstanding principal amount of long-term variable-rate guaranteed bonds.

(2)Reflects our maximum potential exposure for letters of credit.

(3)Under a hybrid letter of credit facility, we had ~~$31~~$30 million of commitments that may be used for the issuance of letters of credit as of ~~February 28,~~August 31, 2023.

(4)Includes CFC guarantees to ~~NCSC and~~ RTFC members totaling $16 million an~~d $11 million~~ as of ~~February 28,~~both August 31, 2023 and May 31, ~~2022, respectively.~~2023.

We had guarantees outstanding totaling ~~$776~~$900 million and ~~$731~~$797 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively. Guarantees under which our right of recovery from our members was not secured totaled ~~$501~~$629 million and ~~$466~~$535 million and represented ~~65%~~70% and ~~64%~~67% of total guarantees as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively.

Long-term tax-exempt bonds of ~~$100 million and $122~~$98 million as of ~~February 28,~~both August 31, 2023 and May 31, ~~2022, respectively,~~2023, consist of adjustable or variable-rate bonds that may be converted to a fixed rate as specified in the applicable indenture for each bond offering. We are unable to determine the maximum amount of interest that we may be required to pay related to the remaining adjustable and variable-rate bonds. Many of these bonds have a call provision that allows us to call the bond in the event of a default, which would limit our exposure to future interest payments on these bonds. Our maximum potential exposure generally is secured by mortgage liens on the members’ assets and future revenue. If a member’s debt is accelerated because of a determination that the interest thereon is not tax-exempt, the member’s obligation to reimburse us for any guarantee payments will be treated as a long-term loan. The maturities for long-term tax-exempt bonds and the related guarantees extend through calendar year 2037.

Of the outstanding letters of credit of ~~$516~~$618 million and ~~$450~~$538 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, ~~$151~~$149 million and ~~$118~~$138 million were secured at each respective date. The maturities for the outstanding letters of credit as of ~~February 28,~~August 31, 2023 extend through calendar year ~~2041.~~2043.

In addition to the letters of credit listed in the table above, under master letter of credit facilities in place as of ~~February 28,~~August 31, 2023, we may be required to issue up to an additional ~~$100~~$129 million in letters of credit to third parties for the benefit of our members. All of our master letter of credit facilities were subject to material adverse change clauses at the time of issuance as of ~~February 28,~~August 31, 2023. Prior to issuing a letter of credit, we would confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the master letter of credit facility was approved and confirm that the borrower is currently in compliance with the terms and conditions of the agreement governing the facility.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The maximum potential exposure for other guarantees was ~~$160~~$185 million and ~~$158~~$160 million as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, respectively, of which $25 million was secured as of both ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023. The maturities for these other guarantees listed in the table above extend through calendar year 2025.

In addition to the guarantees described above, we were also the liquidity provider for ~~$100~~$98 million of variable-rate tax-exempt bonds as of ~~February 28,~~August 31, 2023, issued for our member cooperatives. While the bonds are in variable-rate mode, in return for a fee, we have unconditionally agreed to purchase bonds tendered or put for redemption if the remarketing agents are unable to sell such bonds to other investors. We were not required to perform as liquidity provider pursuant to these obligations during the ~~nine~~three months ended ~~February 28,~~August 31, 2023 or the prior fiscal year.

Guarantee Liability

We recorded a total guarantee liability for noncontingent and contingent exposures related to guarantees and liquidity obligations of $14 million and $13 million as of ~~both February 28,~~August 31, 2023 and May 31, ~~2022.~~2023, respectively. The noncontingent guarantee liability, which pertains to our obligation to stand ready to perform over the term of our guarantees and liquidity obligations we have entered into or modified since January 1, 2003 and accounts for the substantial majority of our guarantee liability, totaled $13 million and $12 million as of ~~both February 28,~~August 31, 2023 and May 31, ~~2022.~~2023, respectively. The remaining amount pertains to our contingent guarantee exposures.


NOTE 12—FAIR VALUE MEASUREMENT

Fair value, also referred to as an exit price, is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value accounting guidance provides a three-level fair value hierarchy for classifying financial instruments. This hierarchy is based on the markets in which the assets or liabilities trade and whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. The fair value measurement of a financial asset or liability is assigned a level based on the lowest level of any input that is significant to the fair value measurement in its entirety. The levels, in priority order based on the extent to which observable inputs are available to measure fair value, are Level 1, Level 2 and Level 3. The accounting guidance for fair value measurements requires that we maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value.

The following table presents the carrying value and estimated fair value of all of our financial instruments, including those carried at amortized cost, as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023. The table also displays the classification level within the fair value hierarchy based on the degree of observability of the inputs used in the valuation technique for estimating fair value.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Table 12.1: Fair Value of Financial Instruments


		February 28, 2023				Fair Value Measurement Level							August 31, 2023				Fair Value Measurement Level
(Dollars in thousands)	(Dollars in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3		(Dollars in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:	Assets:											Assets:
Cash and cash equivalents	Cash and cash equivalents	$	172,962	$	172,962	$	172,962	$	—	$	—	Cash and cash equivalents	$	199,552	$	199,552	$	199,552	$	—	$	—
Restricted cash	Restricted cash	7,298		7,298		7,298		—		—		Restricted cash	9,290		9,290		9,290		—		—

Equity securities, at fair value	Equity securities, at fair value	38,002		38,002		38,002		—		—		Equity securities, at fair value	36,780		36,780		36,780		—		—
Debt securities trading, at fair value	Debt securities trading, at fair value	549,124		549,124		—		549,124		—		Debt securities trading, at fair value	425,331		425,331		—		425,331		—

Deferred compensation investments	Deferred compensation investments	6,377		6,377		6,377		—		—		Deferred compensation investments	7,162		7,162		7,162		—		—
Loans to members, net	Loans to members, net	32,325,532		28,703,674		—		—		28,703,674		Loans to members, net	33,041,720		29,309,889		—		—		29,309,889
Accrued interest receivable	Accrued interest receivable	161,856		161,856		—		161,856		—		Accrued interest receivable	177,351		177,351		—		177,351		—
Derivative assets	Derivative assets	554,610		554,610		—		554,610		—		Derivative assets	615,866		615,866		—		615,866		—
Total financial assets	Total financial assets	$	33,815,761	$	30,193,903	$	224,639	$	1,265,590	$	28,703,674	Total financial assets	$	34,513,052	$	30,781,221	$	252,784	$	1,218,548	$	29,309,889

Liabilities:	Liabilities:											Liabilities:
Short-term borrowings	Short-term borrowings	$	4,899,631	$	4,900,240	$	—	$	4,400,240	$	500,000	Short-term borrowings	$	5,124,335	$	5,125,706	$	—	$	4,625,706	$	500,000
Long-term debt	Long-term debt	23,831,978		22,202,369		—		13,323,038		8,879,331		Long-term debt	23,874,274		22,148,726		—		13,395,526		8,753,200
Accrued interest payable	Accrued interest payable	233,690		233,690		—		233,690		—		Accrued interest payable	274,554		274,554		—		274,554		—
Guarantee liability	Guarantee liability	12,628		11,940		—		—		11,940		Guarantee liability	13,552		13,088		—		—		13,088
Derivative liabilities	Derivative liabilities	131,075		131,075		—		131,075		—		Derivative liabilities	108,239		108,239		—		108,239		—
Subordinated deferrable debt	Subordinated deferrable debt	986,678		952,901		235,157		717,744		—		Subordinated deferrable debt	1,184,197		1,172,990		241,771		931,219		—
Members’ subordinated certificates	Members’ subordinated certificates	1,223,415		1,223,415		—		—		1,223,415		Members’ subordinated certificates	1,222,026		1,222,026		—		—		1,222,026
Total financial liabilities	Total financial liabilities	$	31,319,095	$	29,655,630	$	235,157	$	18,805,787	$	10,614,686	Total financial liabilities	$	31,801,177	$	30,065,329	$	241,771	$	19,335,244	$	10,488,314


		May 31, 2022				Fair Value Measurement Level							May 31, 2023				Fair Value Measurement Level
(Dollars in thousands)	(Dollars in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3		(Dollars in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:	Assets:											Assets:
Cash and cash equivalents	Cash and cash equivalents	$	153,551	$	153,551	$	153,551	$	—	$	—	Cash and cash equivalents	$	198,936	$	198,936	$	198,936	$	—	$	—
Restricted cash	Restricted cash	7,563		7,563		7,563		—		—		Restricted cash	8,301		8,301		8,301		—		—

Equity securities, at fair value	Equity securities, at fair value	33,758		33,758		33,758		—		—		Equity securities, at fair value	35,494		35,494		35,494		—		—
Debt securities trading, at fair value	Debt securities trading, at fair value	566,146		566,146		—		566,146		—		Debt securities trading, at fair value	474,875		474,875		—		474,875		—

Deferred compensation investments	Deferred compensation investments	6,710		6,710		6,710		—		—		Deferred compensation investments	6,660		6,660		6,660		—		—
Loans to members, net	Loans to members, net	29,995,826		28,595,111		—		—		28,595,111		Loans to members, net	32,478,992		29,308,647		—		—		29,308,647
Accrued interest receivable	Accrued interest receivable	111,418		111,418		—		111,418		—		Accrued interest receivable	172,723		172,723		—		172,723		—
Derivative assets	Derivative assets	222,042		222,042		—		222,042		—		Derivative assets	460,762		460,762		—		460,762		—
Total financial assets	Total financial assets	$	31,097,014	$	29,696,299	$	201,582	$	899,606	$	28,595,111	Total financial assets	$	33,836,743	$	30,666,398	$	249,391	$	1,108,360	$	29,308,647

Liabilities:	Liabilities:											Liabilities:
Short-term borrowings	Short-term borrowings	$	4,981,167	$	4,978,580	$	—	$	4,978,580	$	—	Short-term borrowings	$	4,546,275	$	4,547,333	$	—	$	4,547,333	$	—
Long-term debt	Long-term debt	21,545,440		21,106,750		—		12,248,695		8,858,055		Long-term debt	23,946,548		22,665,551		—		13,527,393		9,138,158
Accrued interest payable	Accrued interest payable	131,950		131,950		—		131,950		—		Accrued interest payable	212,340		212,340		—		212,340		—
Guarantee liability	Guarantee liability	12,764		13,083		—		—		13,083		Guarantee liability	12,973		12,475		—		—		12,475
Derivative liabilities	Derivative liabilities	128,282		128,282		—		128,282		—		Derivative liabilities	115,074		115,074		—		115,074		—
Subordinated deferrable debt	Subordinated deferrable debt	986,518		960,869		250,800		710,069		—		Subordinated deferrable debt	1,283,436		1,261,141		240,831		1,020,310		—
Members’ subordinated certificates	Members’ subordinated certificates	1,234,161		1,234,161		—		—		1,234,161		Members’ subordinated certificates	1,223,126		1,223,126		—		—		1,223,126
Total financial liabilities	Total financial liabilities	$	29,020,282	$	28,553,675	$	250,800	$	18,197,576	$	10,105,299	Total financial liabilities	$	31,339,772	$	30,037,040	$	240,831	$	19,422,450	$	10,373,759

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

For additional information regarding fair value measurements, the fair value hierarchy and a description of the methodologies we use to estimate fair value, see “Note 14—Fair Value Measurement” to the Consolidated Financial Statements in our ~~2022~~2023 Form 10-K.

Transfers Between Levels

We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy and transfer between Level 1, Level 2, and Level 3 accordingly. Observable market data includes but is not limited to quoted prices and market transactions. Changes in economic conditions or market liquidity generally will drive changes in availability of observable market data. Changes in availability of observable market data, which also may result in changes in the valuation technique used, are generally the cause of transfers between levels. We did not have any transfers into or out of Level 3 of the fair value hierarchy during the ~~nine~~three months ended ~~February 28,~~August 31, 2023 and 2022.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the carrying value and fair value of financial instruments reported in our consolidated financial statements at fair value on a recurring basis as of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, and the classification of the valuation technique within the fair value hierarchy. We did not have any assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs during the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023 and 2022.

Table 12.2: Assets and Liabilities Measured at Fair Value on a Recurring Basis

February 28, 2023 May 31, 2022
(Dollars in thousands) Level 1 Level 2 Total Level 1 Level 2 Total
Assets:
Equity securities, at fair value $ 38,002 $ — $ 38,002 $ 33,758 $ — $ 33,758
Debt securities trading, at fair value — 549,124 549,124 — 566,146 566,146
Deferred compensation investments 6,377 — 6,377 6,710 — 6,710
Derivative assets — 554,610 554,610 — 222,042 222,042
Liabilities:
Derivative liabilities $ — $ 131,075 $ 131,075 $ — $ 128,282 $ 128,282


	August 31, 2023						May 31, 2023
(Dollars in thousands)	Level 1		Level 2		Total		Level 1		Level 2		Total
Assets:
Equity securities, at fair value	$	36,780	$	—	$	36,780	$	35,494	$	—	$	35,494
Debt securities trading, at fair value	—		425,331		425,331		—		474,875		474,875
Deferred compensation investments	7,162		—		7,162		6,660		—		6,660
Derivative assets	—		615,866		615,866		—		460,762		460,762

Liabilities:
Derivative liabilities	$	—	$	108,239	$	108,239	$	—	$	115,074	$	115,074

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis on our consolidated balance sheets. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as in the application of the lower of cost or fair value accounting or when we evaluate assets for impairment. We did not have any assets or liabilities measured at fair value on a nonrecurring basis ~~during the nine months ended February 28,~~as of August 31, 2023 and May 31, 2023. ~~We had certain loans measured at fair value on a nonrecurring basis during the~~ ~~nine months ended February 28, 2022, which were repaid in full in November 2021.~~


NOTE 13—VARIABLE INTEREST ENTITIES

NCSC and RTFC meet the definition of a VIE because they do not have sufficient equity investment at risk to finance their activities without financial support. CFC is the primary source of funding for NCSC and the sole source of funding for RTFC. Under the terms of management agreements with each company, CFC manages the business operations of NCSC and RTFC. CFC also unconditionally guarantees full indemnification for any loan losses of NCSC and RTFC pursuant to

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

guarantee agreements with each company. CFC earns management and guarantee fees from its agreements with NCSC and RTFC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

All loans that require NCSC board approval also require CFC board approval. CFC is not a member of NCSC and does not elect directors to the NCSC board. If CFC becomes a member of NCSC, it would control the nomination process for one NCSC director. NCSC members elect directors to the NCSC board based on one vote for each member. NCSC is a Class C member of CFC. All loans that require RTFC board approval also require approval by CFC for funding under RTFC’s credit facilities with CFC. CFC is not a member of RTFC and does not elect directors to the RTFC board. RTFC is a ~~non-voting~~nonvoting associate of CFC. RTFC members elect directors to the RTFC board based on one vote for each member.

NCSC and RTFC creditors have no recourse against CFC in the event of a default by NCSC and RTFC, unless there is a guarantee agreement under which CFC has guaranteed NCSC or RTFC debt obligations to a third party. The following table provides information on incremental consolidated assets and liabilities of VIEs included in CFC’s consolidated financial statements, after intercompany eliminations, as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

Table 13.1: Consolidated Assets and Liabilities of Variable Interest Entities

(Dollars in thousands) February 28, 2023 May 31, 2022
Assets:
Loans outstanding $ 1,470,160 $ 1,178,479
Other assets 14,588 9,672
Total assets $ 1,484,748 $ 1,188,151
Liabilities:
Total liabilities $ 19,577 $ 22,958


(Dollars in thousands)	August 31, 2023		May 31, 2023
Assets:
Loans outstanding	$	1,462,423	$	1,444,662
Other assets	8,017		12,612
Total assets	$	1,470,440	$	1,457,274

Liabilities:


Total liabilities	$	19,118	$	19,704

The following table provides information on CFC’s credit commitments to NCSC and RTFC and potential exposure to loss under these commitments as of ~~February 28,~~August 31, 2023 and May 31, ~~2022.~~2023.

Table 13.2: CFC Exposure Under Credit Commitments to NCSC and RTFC

(Dollars in thousands) February 28, 2023 May 31, 2022
CFC credit commitments to NCSC and RTFC:
Total CFC credit commitments $ 5,500,000 $ 5,500,000
Outstanding commitments:
Borrowings payable to CFC(1)
1,456,045 1,158,583
Credit enhancements:
CFC third-party guarantees 27,964 23,970
Other credit enhancements 1,541 4,044
Total credit enhancements(2)
29,505 28,014
Total outstanding commitments 1,485,550 1,186,597
CFC credit commitments available(3)
$ 4,014,450 $ 4,313,403


(Dollars in thousands)	August 31, 2023		May 31, 2023
CFC credit commitments to NCSC and RTFC:
Total CFC credit commitments	$	5,500,000	$	5,500,000

Outstanding commitments:
Borrowings payable to CFC(1)	1,442,215		1,428,886
Credit enhancements:
CFC third-party guarantees	16,679		15,263
Other credit enhancements	1,274		2,038
Total credit enhancements(2)	17,953		17,301
Total outstanding commitments	1,460,168		1,446,187
CFC credit commitments available(3)	$	4,039,832	$	4,053,813

____________________________

(1) Intercompany borrowings payable by NCSC and RTFC to CFC are eliminated in consolidation.

(2) Excludes interest due on these instruments.

(3) Represents total CFC credit commitments less outstanding commitments as of each period end.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Under a loan and security agreement with CFC, NCSC has access to a $1,500 million revolving line of credit and a $1,500 million revolving term loan from CFC, which mature in 2067. Under a loan and security agreement with CFC, RTFC has access to a $1,000 million revolving line of credit and a $1,500 million revolving term loan from CFC, which mature in 2067. CFC loans to NCSC and RTFC are secured by all assets and revenue of NCSC and RTFC. CFC’s maximum potential exposure, including interest due, for the credit enhancements totaled ~~$30~~$18 million as of ~~February 28,~~August 31, 2023. The maturities for obligations guaranteed by CFC extend through 2031.


NOTE 14—BUSINESS SEGMENTS

Our activities are conducted through three operating segments, which are based on each of the legal entities included in our consolidated financial statements: CFC, NCSC and RTFC. We report segment information for CFC separately; however, we aggregate segment information for NCSC and RTFC into one reportable segment because neither entity meets the quantitative materiality threshold for separate reporting under the accounting guidance governing segment reporting. We present the results of our business segments on the basis in which management internally evaluates operating performance to establish short- and long-term performance goals, develop budgets and forecasts, identify potential trends, allocate resources and make compensation decisions. We describe the business segment reporting methodology in “Note 16—Business Segments” to the Consolidated Financial Statements in our ~~2022~~2023 Form 10-K.

Segment Results and Reconciliation

The following tables display segment results of operations for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023 and 2022, assets attributable to each segment as of ~~February 28,~~August 31, 2023 and ~~February 28,~~August 31, 2022 and a reconciliation of total segment amounts to our consolidated total amounts.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Table 14.1: Business Segment Information


	Three Months Ended August 31, 2023
(Dollars in thousands)	CFC		NCSC and RTFC		Segments Total		Reclasses and Adjustments(1)		Intersegment Eliminations(2)		Consolidated Total
Results of operations:
Interest income	$	378,630	$	19,032	$	397,662	$	—	$	(16,706)	$	380,956
Interest expense	(316,273)		(16,714)		(332,987)		—		16,706		(316,281)
Derivative cash settlements interest income	27,837		32		27,869		(27,869)		—		—
Interest expense	(288,436)		(16,682)		(305,118)		(27,869)		16,706		(316,281)
Net interest income	90,194		2,350		92,544		(27,869)		—		64,675
Provision for credit losses	(800)		(902)		(1,702)		—		902		(800)
Net interest income after provision for credit losses	89,394		1,448		90,842		(27,869)		902		63,875
Non-interest income:
Fee and other income	6,327		1,666		7,993		—		(3,456)		4,537
Derivative gains:
Derivative cash settlements interest income	—		—		—		27,869		—		27,869
Derivative forward value gains	—		—		—		162,018		—		162,018
Derivative gains	—		—		—		189,887		—		189,887
Investment securities gains	2,933		—		2,933		—		—		2,933
Total non-interest income	9,260		1,666		10,926		189,887		(3,456)		197,357
Non-interest expense:
General and administrative expenses	(30,936)		(2,763)		(33,699)		—		2,196		(31,503)
Losses on early extinguishment of debt	(939)		—		(939)		—		—		(939)
Other non-interest expense	(177)		(359)		(536)		—		358		(178)
Total non-interest expense	(32,052)		(3,122)		(35,174)		—		2,554		(32,620)
Income (loss) before income taxes	66,602		(8)		66,594		162,018		—		228,612
Income tax provision	—		(328)		(328)		—		—		(328)
Net income (loss)	$	66,602	$	(336)	$	66,266	$	162,018	$	—	$	228,284

	August 31, 2023
	CFC		NCSC and RTFC		Segments Total		Reclasses and Adjustments(1)		Intersegment Eliminations(2)		Consolidated Total
Assets:
Total loans outstanding	$	33,063,285	$	1,462,423	$	34,525,708	$	—	$	(1,442,215)	$	33,083,493
Deferred loan origination costs	13,153		—		13,153		—		—		13,153
Loans to members	33,076,438		1,462,423		34,538,861		—		(1,442,215)		33,096,646
Less: Allowance for credit losses	(54,926)		(4,572)		(59,498)		—		4,572		(54,926)
Loans to members, net	33,021,512		1,457,851		34,479,363		—		(1,437,643)		33,041,720
Other assets	1,644,426		76,321		1,720,747		—		(68,304)		1,652,443
Total assets	$	34,665,938	$	1,534,172	$	36,200,110	$	—	$	(1,505,947)	$	34,694,163

Three Months Ended February 28, 2023
(Dollars in thousands) CFC NCSC and RTFC Segments Total
Reclasses and Adjustments(1)
Intersegment Eliminations(2)
Consolidated Total
Results of operations:
Interest income $ 350,914 $ 17,915 $ 368,829 $ — $ (15,537) $ 353,292
Interest expense (281,706) (15,540) (297,246) — 15,537 (281,709)
Derivative cash settlements interest income (expense) 18,680 (46) 18,634 (18,634) — —
Interest expense (263,026) (15,586) (278,612) (18,634) 15,537 (281,709)
Net interest income 87,888 2,329 90,217 (18,634) — 71,583
Provision (benefit) for credit losses 11,318 (15) 11,303 — 15 11,318
Net interest income after provision (benefit) for credit losses 99,206 2,314 101,520 (18,634) 15 82,901
Non-interest income:
Fee and other income 7,004 828 7,832 — (2,506) 5,326
Derivative gains:
Derivative cash settlements interest income — — — 18,634 — 18,634
Derivative forward value gains — — — 83,674 — 83,674
Derivative gains — — — 102,308 — 102,308
Investment securities losses (1,402) — (1,402) — — (1,402)
Total non-interest income 5,602 828 6,430 102,308 (2,506) 106,232
Non-interest expense:
General and administrative expenses (24,570) (2,766) (27,336) — 2,021 (25,315)
Other non-interest expense (297) (471) (768) — 470 (298)
Total non-interest expense (24,867) (3,237) (28,104) — 2,491 (25,613)
Income (loss) before income taxes 79,941 (95) 79,846 83,674 — 163,520
Income tax provision — (303) (303) — — (303)
Net income (loss) $ 79,941 $ (398) $ 79,543 $ 83,674 $ — $ 163,217

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~(UNAUDITED)~~

Three Months Ended February 28, 2022
(Dollars in thousands) CFC NCSC and RTFC Segments Total
Reclasses and Adjustments(1)
Intersegment Eliminations(2)
Consolidated Total
Results of operations:
Interest income $ 283,162 $ 10,817 $ 293,979 $ — $ (8,773) $ 285,206
Interest expense (173,654) (8,773) (182,427) — 8,773 (173,654)
Derivative cash settlements interest expense (25,802) (410) (26,212) 26,212 — —
Interest expense (199,456) (9,183) (208,639) 26,212 8,773 (173,654)
Net interest income 83,706 1,634 85,340 26,212 — 111,552
Benefit for credit losses 12,749 2 12,751 — (2) 12,749
Net interest income after benefit for credit losses 96,455 1,636 98,091 26,212 (2) 124,301
Non-interest income:
Fee and other income 5,590 685 6,275 — (2,005) 4,270
Derivative gains:
Derivative cash settlements interest expense — — — (26,212) — (26,212)
Derivative forward value gains — — — 195,492 — 195,492
Derivative gains — — — 169,280 — 169,280
Investment securities losses (11,621) — (11,621) — — (11,621)
Total non-interest income (6,031) 685 (5,346) 169,280 (2,005) 161,929
Non-interest expense:
General and administrative expenses (22,690) (1,984) (24,674) — 1,595 (23,079)
Other non-interest expense (843) (412) (1,255) — 412 (843)
Total non-interest expense (23,533) (2,396) (25,929) — 2,007 (23,922)
Income (loss) before income taxes 66,891 (75) 66,816 195,492 — 262,308
Income tax provision — (343) (343) — — (343)
Net income (loss) $ 66,891 $ (418) $ 66,473 $ 195,492 $ — $ 261,965

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

(UNAUDITED)

Nine Months Ended February 28, 2023
(Dollars in thousands) CFC NCSC and RTFC Segments Total
Reclasses and Adjustments(1)
Intersegment Eliminations(2)
Consolidated Total
Results of operations:
Interest income $ 978,150 $ 42,914 $ 1,021,064 $ — $ (36,600) $ 984,464
Interest expense (736,618) (36,603) (773,221) — 36,600 (736,621)
Derivative cash settlements interest income (expense) 13,090 (440) 12,650 (12,650) — —
Interest expense (723,528) (37,043) (760,571) (12,650) 36,600 (736,621)
Net interest income 254,622 5,871 260,493 (12,650) — 247,843
Provision for credit losses (3,806) (1,296) (5,102) — 1,296 (3,806)
Net interest income after provision for credit losses 250,816 4,575 255,391 (12,650) 1,296 244,037
Non-interest income:
Fee and other income 18,696 3,442 22,138 — (8,590) 13,548
Derivative gains:
Derivative cash settlements interest income — — — 12,650 — 12,650
Derivative forward value gains — — — 330,035 — 330,035
Derivative gains — — — 342,685 — 342,685
Investment securities losses (5,574) — (5,574) — — (5,574)
Total non-interest income 13,122 3,442 16,564 342,685 (8,590) 350,659
Non-interest expense:
General and administrative expenses (76,183) (7,976) (84,159) — 6,078 (78,081)
Other non-interest expense (973) (1,218) (2,191) — 1,216 (975)
Total non-interest expense (77,156) (9,194) (86,350) — 7,294 (79,056)
Income (loss) before income taxes 186,782 (1,177) 185,605 330,035 — 515,640
Income tax provision — (785) (785) — — (785)
Net income (loss) $ 186,782 $ (1,962) $ 184,820 $ 330,035 $ — $ 514,855
February 28, 2023
CFC NCSC and RTFC Segments Total
Reclasses and Adjustments(1)
Intersegment Eliminations(2)
Consolidated Total
Assets:
Total loans outstanding $ 32,355,116 $ 1,470,160 $ 33,825,276 $ — $ (1,456,045) $ 32,369,231
Deferred loan origination costs 12,598 — 12,598 — — 12,598
Loans to members 32,367,714 1,470,160 33,837,874 — (1,456,045) 32,381,829
Less: Allowance for credit losses (56,297) (4,031) (60,328) — 4,031 (56,297)
Loans to members, net 32,311,417 1,466,129 33,777,546 — (1,452,014) 32,325,532
Other assets 1,661,392 98,919 1,760,311 — (84,331) 1,675,980
Total assets $ 33,972,809 $ 1,565,048 $ 35,537,857 $ — $ (1,536,345) $ 34,001,512

~~NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~


		Nine Months Ended February 28, 2022													Three Months Ended August 31, 2022
(Dollars in thousands)	(Dollars in thousands)	CFC		NCSC and RTFC		Segments Total		Reclasses and Adjustments(1)		Intersegment Eliminations(2)		Consolidated Total		(Dollars in thousands)	CFC		NCSC and RTFC		Segments Total		Reclasses and Adjustments(1)		Intersegment Eliminations(2)		Consolidated Total
Results of operations:	Results of operations:													Results of operations:
Interest income	Interest income	$	845,600	$	32,243	$	877,843	$	—	$	(26,217)	$	851,626	Interest income	$	304,984	$	11,936	$	316,920	$	—	$	(9,942)	$	306,978
Interest expense	Interest expense	(522,027)		(26,217)		(548,244)		—		26,217		(522,027)		Interest expense	(209,468)		(9,942)		(219,410)		—		9,942		(209,468)
Derivative cash settlements interest expense	Derivative cash settlements interest expense	(78,480)		(1,247)		(79,727)		79,727		—		—		Derivative cash settlements interest expense	(10,528)		(257)		(10,785)		10,785		—		—
Interest expense	Interest expense	(600,507)		(27,464)		(627,971)		79,727		26,217		(522,027)		Interest expense	(219,996)		(10,199)		(230,195)		10,785		9,942		(209,468)
Net interest income	Net interest income	245,093		4,779		249,872		79,727		—		329,599		Net interest income	84,988		1,737		86,725		10,785		—		97,510
Benefit for credit losses		12,146		2,859		15,005		—		(2,859)		12,146
Net interest income after benefit for credit losses		257,239		7,638		264,877		79,727		(2,859)		341,745
Provision for credit losses														Provision for credit losses	(3,496)		(247)		(3,743)		—		247		(3,496)
Net interest income after provision for credit losses														Net interest income after provision for credit losses	81,492		1,490		82,982		10,785		247		94,014
Non-interest income:	Non-interest income:													Non-interest income:
Fee and other income (expense)		17,006		(243)		16,763		—		(3,721)		13,042
Fee and other income														Fee and other income	5,793		919		6,712		—		(2,656)		4,056
Derivative gains:	Derivative gains:													Derivative gains:
Derivative cash settlements interest expense	Derivative cash settlements interest expense	—		—		—		(79,727)		—		(79,727)		Derivative cash settlements interest expense	—		—		—		(10,785)		—		(10,785)
Derivative forward value gains	Derivative forward value gains	—		—		—		122,930		—		122,930		Derivative forward value gains	—		—		—		104,372		—		104,372
Derivative gains	Derivative gains	—		—		—		43,203		—		43,203		Derivative gains	—		—		—		93,587		—		93,587
Investment securities losses	Investment securities losses	(18,190)		—		(18,190)		—		—		(18,190)		Investment securities losses	(3,679)		—		(3,679)		—		—		(3,679)
Total non-interest income	Total non-interest income	(1,184)		(243)		(1,427)		43,203		(3,721)		38,055		Total non-interest income	2,114		919		3,033		93,587		(2,656)		93,964
Non-interest expense:	Non-interest expense:													Non-interest expense:
General and administrative expenses	General and administrative expenses	(69,060)		(6,110)		(75,170)		—		4,786		(70,384)		General and administrative expenses	(25,012)		(2,535)		(27,547)		—		2,028		(25,519)

Other non-interest expense	Other non-interest expense	(1,530)		(1,794)		(3,324)		—		1,794		(1,530)		Other non-interest expense	(322)		(381)		(703)		—		381		(322)
Total non-interest expense	Total non-interest expense	(70,590)		(7,904)		(78,494)		—		6,580		(71,914)		Total non-interest expense	(25,334)		(2,916)		(28,250)		—		2,409		(25,841)
Income (loss) before income taxes	Income (loss) before income taxes	185,465		(509)		184,956		122,930		—		307,886		Income (loss) before income taxes	58,272		(507)		57,765		104,372		—		162,137
Income tax provision	Income tax provision	—		(524)		(524)		—		—		(524)		Income tax provision	—		(263)		(263)		—		—		(263)
Net income (loss)	Net income (loss)	$	185,465	$	(1,033)	$	184,432	$	122,930	$	—	$	307,362	Net income (loss)	$	58,272	$	(770)	$	57,502	$	104,372	$	—	$	161,874

		February 28, 2022													August 31, 2022
		CFC		NCSC and RTFC		Segment Total		Reclasses and Adjustments(1)		Intersegment Eliminations(2)		Consolidated Total			CFC		NCSC and RTFC		Segment Total		Reclasses and Adjustments(1)		Intersegment Eliminations(2)		Consolidated Total
Assets:	Assets:													Assets:
Total loans outstanding	Total loans outstanding	$	29,487,207	$	1,187,887	$	30,675,094	$	—	$	(1,166,731)	$	29,508,363	Total loans outstanding	$	30,656,301	$	1,197,504	$	31,853,805	$	—	$	(1,178,809)	$	30,674,996
Deferred loan origination costs	Deferred loan origination costs	12,018				12,018		—		—		12,018		Deferred loan origination costs	12,335		—		12,335		—		—		12,335
Loans to members	Loans to members	29,499,225		1,187,887		30,687,112		—		(1,166,731)		29,520,381		Loans to members	30,668,636		1,197,504		31,866,140		—		(1,178,809)		30,687,331
Less: Allowance for credit losses	Less: Allowance for credit losses	(73,386)		(3,210)		(76,596)		—		3,210		(73,386)		Less: Allowance for credit losses	(71,056)		(2,982)		(74,038)		—		2,982		(71,056)
Loans to members, net	Loans to members, net	29,425,839		1,184,677		30,610,516		—		(1,163,521)		29,446,995		Loans to members, net	30,597,580		1,194,522		31,792,102		—		(1,175,827)		30,616,275
Other assets	Other assets	1,027,433		96,117		1,123,550		—		(87,023)		1,036,527		Other assets	1,456,295		97,694		1,553,989		—		(87,970)		1,466,019
Total assets	Total assets	$	30,453,272	$	1,280,794	$	31,734,066	$	—	$	(1,250,544)	$	30,483,522	Total assets	$	32,053,875	$	1,292,216	$	33,346,091	$	—	$	(1,263,797)	$	32,082,294

____________________________

(1)Consists of (i) the reclassification of net periodic derivative settlement interest expense amounts, which we report as a component of interest expense for business segment reporting purposes but is included in derivatives gains (losses) in our consolidated total results and (ii) derivative forward value gains and losses, which we exclude from our business segment results but is included in derivatives gains (losses) in our consolidated total results.

(2)Consists of intercompany borrowings payable by NCSC and RTFC to CFC and the interest related to those borrowings, management fees paid by NCSC and RTFC to CFC and other intercompany amounts, all of which are eliminated in consolidation.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk, see “Part I—Item 2. MD&A—Market Risk” and “Note 9—Derivative Instruments and Hedging Activities.”

Item 4. Controls and Procedures

As of the end of the period covered by this report, senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting that occurred during the three months ended ~~February 28,~~August 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, CFC is subject to certain legal proceedings and claims in the ordinary course of business, including litigation with borrowers related to enforcement or collection actions. Management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, liquidity or results of operations. CFC establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Accordingly, no reserve has been recorded with respect to any legal proceedings at this time.

Item 1A. Risk Factors

Our financial condition, results of operations and liquidity are subject to various risks and uncertainties, some of which are inherent in the financial services industry and others of which are more specific to our own business. We identify and discuss the most significant risk factors of which we are currently aware that could have a material adverse impact on our business, results of operations, financial condition or liquidity in the section “Part I—Item 1A. Risk Factors” in our ~~2022~~2023 Form 10-K, as filed with the SEC on August ~~8, 2022.~~2, 2023. We are not aware of any material changes in the risk factors identified in our ~~2022~~2023 Form 10-K. However, other risks and uncertainties, including those not currently known to us, could also negatively impact our business, results of operations, financial condition and liquidity. Therefore, the risk factors identified and discussed in our ~~2022~~2023 Form 10-K should not be considered a complete discussion of all the risks and uncertainties we may face. For information on how we manage our key risks, see “Item 7. MD&A—Enterprise Risk Management” in our ~~2022~~2023 Form 10-K.

Item 2. Unregistered Sales of Equity Securities, ~~and~~ Use of Proceeds, and Issuer Purchases of Equity Securities

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

The following exhibits are incorporated by reference or filed as part of this Report.

EXHIBIT INDEX


Exhibit No.		Description
31.1*	—	Certification of the Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	—	Certification of the Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1†	—	Certification of the Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2†	—	Certification of the Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	—	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*	—	Inline XBRL Taxonomy Extension Schema Document
101.CAL*	—	Inline XBRL Taxonomy Calculation Linkbase Document
101.LAB*	—	Inline XBRL Taxonomy Label Linkbase Document
101.PRE*	—	Inline XBRL Taxonomy Presentation Linkbase Document
101.DEF*	—	Inline XBRL Taxonomy Definition Linkbase Document
104	—	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

____________________________

* Filed herewith this Report.

† Furnished with this Report, which shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION

Date: ~~April~~October 12, 2023


By:			/s/ YU LING WANG
			Yu Ling Wang
			Senior Vice President and Chief Financial Officer

By:

/s/ PANKAJ SHAH

Pankaj Shah

Vice President and Controller
(Principal Accounting Officer)

~~100~~89


Credit quality ratios
Nonperforming loans ratio(13)	0.33	%	0.76	%	(43)	bps
Criticized loans ratio(14)	1.04		1.65		(61)
Allowance coverage ratio(15)	0.17		0.22		(5)


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