GUARANTEE PROGRAMS

When we guarantee our members’ debt obligations, we use the same credit policies and monitoring procedures for guarantees as for loans. If a member system defaults in 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. 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. We were not required to perform pursuant to any of our guarantee obligations during the fiscal year ended May 31, ~~2018.~~2020.

Guarantees of Long-Term Tax-Exempt Bonds

We guarantee debt issued for our members’ construction or acquisition of pollution control, solid waste disposal, industrial development and electric distribution facilities. Governmental authorities issue such debt on a nonrecourse basis and the

interest thereon is exempt from federal taxation. The proceeds of the offering are made available to the member system, which in turn is obligated to pay the governmental authority amounts sufficient to service the debt.

If a system defaults for failure to make the debt payments and any available debt service reserve funds have been exhausted, we are obligated to pay scheduled debt service under our guarantee. Such payment will prevent the occurrence of an event of payment default that would otherwise permit acceleration of the bond issue. The system is required to repay any amount that we advance pursuant to our guarantee plus interest on that advance. This repayment obligation, together with the interest thereon, is typically senior secured on parity with other lenders (including, in most cases, RUS), by a lien on substantially all of the system’s assets. If the security instrument is a common mortgage with RUS, then in general, we may not exercise remedies for up to two years following default. However, if the debt is accelerated under the common mortgage because of a determination that the related interest is not tax-exempt, the system’s obligation to reimburse us for any guarantee payments will be treated as a long-term loan. The system is required to pay us initial and/or ongoing guarantee fees in connection with these transactions.

Certain guaranteed long-term debt bears interest at variable rates that are adjusted at intervals of one to 270 days including weekly, every five weeks or semi-annually to a level favorable to their resale or auction at par. If funding sources are available, the member that issued the debt may choose a fixed interest rate on the debt. When the variable rate is reset, holders of variable-rate debt have the right to tender the debt for purchase at par. In some transactions, we have committed to purchase this debt as liquidity provider if it cannot otherwise be re-marketed. If we hold the securities, the member cooperative pays us the interest earned on the bonds or interest calculated based on our short-term variable interest rate, whichever is greater. The system is required to pay us stand-by liquidity fees in connection with these transactions.

Letters of Credit

In exchange for a fee, we issue irrevocable letters of credit to support members’ obligations to energy marketers, other third parties and to the USDA Rural ~~Business and Cooperative Development~~Business-Cooperative Service. Each letter of credit is supported by a reimbursement agreement with the member on whose behalf the letter of credit was issued. In the event a beneficiary draws on a letter of credit, the agreement generally requires the member to reimburse us within one year from the date of the draw, with interest accruing from the draw date at our line of credit variable interest rate.

The U.S. Federal Communications Commission (“FCC”) has designated CFC as an acceptable source for letters of credit in support of USDA and FCC programs that encourage deployment of high-speed broadband services throughout rural America. The designation allows CFC to provide credit support for rural electric and telecommunication cooperatives that participate in programs designed to increase deployment of broadband services to underserved rural areas.

Other Guarantees

We may provide other guarantees as requested by our members. Other guarantees are generally unsecured with guarantee fees payable to us.

We provide additional information on our guarantee programs and outstanding guarantee amounts as of May 31, ~~2018~~2020 and ~~2017~~2019 in “Item 7. MD&A—Off-Balance Sheet ~~Arrangements,” “Item 7. MD&A—Credit Risk—Loan and Guarantee Portfolio Credit Risk”~~Arrangements” and “Note ~~12—~~13—Guarantees.”

INVESTMENT POLICY

We invest funds in accordance with policies adopted by our board of directors. Pursuant to our current investment policy, an Investment Management Committee was established to oversee and administer our investments with the objective of seeking returns consistent with the preservation of principal and maintenance of adequate liquidity. The Investment Management Committee may direct funds to be invested in: direct obligations of, or obligations guaranteed by, the United States or agencies thereof and investments in government-sponsored enterprises, certain financial institutions in the form of overnight investment products and Eurodollar deposits, bankers’ acceptances, certificates of deposit, working capital acceptances or other deposits. Other permitted investments include highly rated obligations, such as commercial paper, certain obligations of foreign governments, municipal securities, ~~asset backed~~asset-backed securities, mortgage-backed securities and certain corporate bonds. In addition, we may invest in overnight or term repurchase agreements. Investments are denominated in U.S. dollars exclusively. All of these investments are subject to requirements and limitations set forth in our investment policy.

INDUSTRY

Overview

Since the enactment of the Rural Electrification Act in 1936, RUS has financed the construction of electric generating plants, transmission facilities and distribution systems to provide electricity to rural areas. Today, with CFC membership comprised, in part, of rural electric utility systems in 49 states and three U.S. territories, the percentage of farms and residences in rural areas of the United States receiving central station electric service increased from 11% in 1934 to almost 100% currently.

RUS ~~makes loan~~provides loans, guarantees and ~~provides~~ other forms of financial assistance to rural electric system borrowers. Under the Rural Electrification Act, RUS is authorized to make direct loans to systems that qualify for the hardship program (5% interest rate), the municipal rate program (based on a municipal government obligation index) and a Treasury rate program (at Treasury plus 0.125%). RUS also is authorized to guarantee loans that bear interest at a rate agreed upon by the borrower and the lender (which generally has been the Federal Financing Bank). RUS exercises oversight of borrowers’ operations. Its loans and guarantees are secured by a mortgage or indenture on substantially all of the system’s assets and revenue.

Leading up to CFC’s formation in 1969, there was a growing need for capital for electric cooperatives to build new electric facilities due to growth in rural America. The electric cooperatives formed CFC soto provide a supplemental financing source ~~of financing would be available~~ to ~~them to supplement the~~ RUS loan programs and to mitigate uncertainty related to government funding.

CFC aggregates the combined strength of its rural electric member cooperatives to access the public capital markets and other funding sources. CFC works cooperatively with RUS; however, CFC is not a federal agency or a government-sponsored enterprise. Our members are not required to have outstanding loans from RUS as a condition of borrowing from CFC. CFC meets the financial needs of its rural electric members by:

providing financing to RUS-eligible rural electric systems for infrastructure, including for those facilities that are not eligible for financing from RUS;

providing bridge loans required by borrowers in anticipation of receiving RUS funding;

providing financial products not otherwise available from RUS, including lines of credit, letters of credit, guarantees on tax-exempt financing, weather-related disaster recovery lines of credit, unsecured loans and investment products such as commercial paper, member capital securities, select notes and medium-term notes; and

meeting the financing needs of those rural electric systems that repay or prepay their RUS loans and replace the government loans with private ~~capital; and~~

~~providing financing to RUS-eligible rural electric systems for infrastructure; including for those facilities that are not eligible for financing from RUS.~~

capital.

Many electric cooperatives are making investments in fiber to support core electric plant communications. Some of these electric cooperatives are leveraging these fiber assets to offer broadband services, either directly or through partnering with local telecommunication companies and others. Over 30 electric cooperatives were awarded approximately $254 million in federal funding through the FCC’s Connect America Fund phase II auction (“CAF II”) process that was held in 2018; those funds will be distributed over a 10-year period. We expect that more than 100 electric cooperatives, many of which are

already offering or building out projects, will apply for funds though the FCC’s Rural Development Opportunity Fund (“RDOF”). As federal and state governments increase funding opportunities for electric cooperatives in order to offer broadband services, we will continue to increase our credit support, which may include loans and/or letters of credit, of borrowers who participate in CAF II, RDOF and other programs designed to increase broadband services in rural areas.

Electric Member Operating Environment

In general, electric cooperatives have not been significantly impacted by the effects of retail deregulation. There were 19 states that had adopted programs that allow consumers to choose their supplier of electricity as of May 31, ~~2018.~~2020. Depending on the state, the choices can range from being limited to commercial and industrial consumers to “retail choice” for all consumers. In most states, cooperatives have been exempted from or have been allowed to opt out of the regulations allowing for competition. In states offering retail competition, it is important to note that while consumers may be able to choose their energy supplier, the electric utility still receives compensation for the necessary service of delivering electricity to consumers through its utility transmission and distribution plant.

The electric industry is facing a potential decrease to kilowatt-hour sales due to technology advances that increase energy efficiency of all appliances and devices used in the home and in businesses as well as from distributed generation in the form of rooftop solar and home generators (“behind-the-meter generation”). Electric cooperatives are facing the same issues, but in general to a lesser extent than investor-owned power systems. To date, we have not seen negative impacts in the electric cooperative financial results due to behind-the-meter generation.

Electric cooperatives have options ~~available~~ to mitigate the impact of such issues, such as rate structures to ensure that costs are appropriately recovered for grid and other necessary ancillary ~~services. To date, we have not seen negative impacts in~~services and the use of electricity for end-uses that would otherwise be powered by fossil fuels where doing so reduces emissions and saves consumers money (“beneficial electrification”). The push away from fossil fuel use may continue the trend toward beneficial electrification such as the adoption of electric ~~cooperative financial results due~~vehicles which may increase kilowatt-hour sales to ~~behind-the-meter generation.~~

many utilities. Beneficial electrification may also improve the utilities’ ability to balance load profiles by leveraging and balancing consumer and system assets such as electric vehicles and battery storage.

Regulatory Oversight

There are 11 states in which some or all electric cooperatives are subject to state regulatory oversight of their rates and tariffs ~~(terms~~(“terms and ~~conditions)~~conditions”) by state utility commissions. Those states are Arizona, Arkansas, Hawaii, Kentucky, Louisiana, Maine, Maryland, New Mexico, Vermont, Virginia and West Virginia.

Regulatory jurisdiction by state commissions generally includes rate and tariff regulation, the issuance of securities and the enforcement of service territory as provided for by state law.

The Federal Energy Regulatory Commission (“FERC”) has regulatory authority over the below three aspects of electric power, as provided for under Parts II and III of the Federal Power Act (“FPA”) ~~provide the Federal Energy Regulatory Commission (“FERC”) with regulatory authority over three aspects of electric power:~~

the transmission of electric energy in interstate commerce;

the sale of electric energy at wholesale in interstate commerce; and

the approval and enforcement of reliability standards affecting all users, owners and operators of the bulk power system.

~~The~~In addition, FERC ~~also~~ regulates the issuance of securities by public utilities under the FPA ~~provided~~in the event the applicable state commission does not.

Our electric distribution and power supply members are subject to regulation by various federal, regional, state and local authorities with respect to the environmental effects of their operations. At the federal level, the U.S. Environmental Protection Agency (“EPA”) from time to time proposes rulemakings that could force the electric utility industry to incur capital costs to comply with potential new regulations and possibly retire coal-fired generating capacity. Since there are only 11 states in which some or all electric cooperatives are subject to state regulatory oversight of their rates and tariffs, in most cases any associated costs of compliance can be passed on to cooperative consumers without additional regulatory approval. ~~One~~

On June 19, 2019, the EPA ~~rulemaking is~~issued the final Affordable Clean ~~Power Plan~~Energy (“~~CPP”~~ACE”). rule. Falling under Section 111(d) of the ~~federal~~Federal Clean Air Act, the ~~CPP is designed~~ACE rule addresses existing sources of emissions and sets a framework under which states should

develop plans establishing standards of performance for their existing emissions sources and then submit those plans to ~~cut carbon emissions (from 2005 levels)~~the EPA for approval. States will have three years from ~~existing fossil fuel-fired power plants by 32% by 2030. The CPP is presently under legal review by United States~~the date of the final rule to prepare and submit a plan that establishes a standard of performance. A coalition of 23 states, several local governments and several environmental organizations filed a lawsuit against the EPA challenging the ACE rule in the U.S. Court of Appeals for the District of Columbia Circuit and the United States Supreme Court has stayed the rule pending disposition of this appeal. On October 16, 2017, the EPA officially proposed to repeal the CPP. In a future regulatory action, the EPA is expected to replace the CPP with a more narrowly focused rule.D.C. Circuit.

LENDING COMPETITION

RUS is the largest lender to electric cooperatives. RUS provides long-term secured loans. CFC provides financial products and services, primarily in the form of long-term secured and short-term unsecured loans, to its electric cooperative members to supplement RUS financing, to provide loans to members that have elected not to borrow from RUS, and to bridge long-term financing provided by RUS.

CFC’s primary competitor is CoBank, ACB, a federally chartered instrumentality of the United States that is a member of the Farm Credit System. CFC also competes with banks, other financial institutions and the capital markets to provide loans and other financial products to our members. As a result, we are competing with the customer service, pricing and funding options our members are able to obtain from these sources. We attempt to minimize the effect of competition by offering a variety of loan options and value-added services and by leveraging the working relationships developed with the majority of our members over the past 4951 years. Further, on an annual basis, we allocate substantially all net earnings to members (i) in the form of patronage capital, which reduces our members’ effective cost of borrowing, and (ii) through the members’ capital reserve. The value-added services that we provide include, but are not limited to, benchmarking tools, financial models, publications and various conferences, meetings and training workshops.

In order to meet other financing needs of our members, we offer options that include credit support in the form of letters of credit and guarantees, loan syndications and loan participations. Our credit products are tailored to meet the specific needs of each member cooperative, and we often offer specific transaction structures that our competitors do not provide. CFC also offers certain ~~risk mitigation~~risk-mitigation products and interest rate discounts on secured, long-term loans for its members that meet certain criteria, including performance, volume, collateral and equity requirements.

CFC has established certain funds to benefit its members. Since 1981, CFC has set aside a portion of its annual net earnings in a cooperative educational fund to promote awareness and appreciation of the cooperative principles. As directed by the CFC Board of Directors, a portion of the contributions to the fund are distributed through the electric cooperative statewide associations. Since 1986, CFC has supported its members’ efforts to protect their service territories from erosion or takeover by other utilities through assistance from the Cooperative System Integrity Fund, which is funded through voluntary contributions from members. ~~Amounts~~Grants from the ~~Integrity Fund~~integrity fund are distributed to applicants who establish that: (i) all or a significant portion of their consumers, services or facilities face a hostile threat of acquisition or annexation by a competing entity; (ii) face a significant threat in their ability to continue to provide non-electric energy services to customers; or (iii) are facing regulatory, judicial or legislative challenges that threaten their existence under the cooperative business model.

Our rural electric borrowers are mostly private companies; thus, the overall size of the rural electric lending market cannot be determined from public information. We estimate the size of the overall rural electric lending market from the annual financial and statistical reports filed with us by our members using calendar year data; however, there are certain limitations with regard to these estimates, including the following:

while the underlying data included in the financial and statistical reports may be audited, the preparation of the financial and statistical reports is not audited;

in some cases, not all members provide the annual financial and statistical reports on a timely basis to be included in summarized results; and

the financial and statistical reports do not include comprehensive data on indebtedness by lenders other than RUS.

The following table displays long-term debt outstanding to CFC, RUS and other lenders in the electric cooperative industry as of December 31, ~~2017~~2019 and ~~2016,~~2018, based on financial data reported to us by our electric utility cooperative members. The data as of December 31, ~~2017~~2019, was provided by ~~812~~800 distribution systems and 5853 power supply systems, while the data as of December 31, ~~2016~~2018, was provided by ~~807 electric cooperative~~812 distribution systems and 5854 power supply systems.


	December 31,										December 31,
	2017					2016					2019					2018
(Dollars in thousands)	Debt Outstanding			% of Total		Debt Outstanding			% of Total		Debt Outstanding			% of Total		Debt Outstanding			% of Total
Total long-term debt reported by members:⁽¹⁾
Distribution	$	48,147,703				$	47,362,415				$	49,976,016				$	49,464,999
Power supply	47,862,984					47,853,905					43,958,889					44,876,633
Less: Long-term debt funded by RUS	(39,180,420		)			(39,273,545		)			(39,214,146		)			(40,039,961		)
Members’ non-RUS long-term debt	$	56,830,267				$	55,942,775				$	54,720,759				$	54,301,671

Funding source of members’ long-term debt:
Funding sources of members’ long-term debt:
Long-term debt funded by CFC	$	22,671,264		40	%	$	22,083,606		39	%	$	23,938,749		44	%	$	22,897,749		42	%
Long-term debt funded by other lenders	34,159,003			60		33,859,169			61		30,782,010			56		31,403,922			58
Members’ non-RUS long-term debt	$	56,830,267		100	%	$	55,942,775		100	%	$	54,720,759		100	%	$	54,301,671		100	%

^{____________________________}

⁽¹⁾ Reported amounts are based on member-provided information, which may not have been subject to audit by an independent accounting firm.

Members’ long-term debt funded by CFC, by type, as of December 31, ~~2017~~2019 and ~~2016~~2018 is summarized further below.


	December 31,								December 31,
	2017				2016				2019				2018
(Dollars in thousands)	Debt Outstanding		% of Total		Debt Outstanding		% of Total		Debt Outstanding		% of Total		Debt Outstanding		% of Total
Distribution	$	18,489,086	82	%	$	17,825,633	81	%	$	19,540,233	82	%	$	18,782,014	82	%
Power supply	4,182,178		18		4,257,973		19		4,398,516		18		4,115,735		18
Long-term debt funded by CFC	$	22,671,264	100	%	$	22,083,606	100	%	$	23,938,749	100	%	$	22,897,749	100	%

We are not able to specifically identify the amount of debt our members have outstanding to CoBank, ACB, from either the annual financial and statistical reports our members file with us or from CoBank, ACB’s public disclosure; however, we believe CoBank, ACB, is the additional lender, along with CFC and RUS, with significant long-term debt outstanding to rural electric cooperatives.

REGULATION

General

CFC, NCSC and RTFC are not subject to direct federal regulatory oversight or supervision with regard to lending. CFC, NCSC and RTFC are subject to state and local jurisdiction commercial lending and tax laws that pertain to business conducted in each state, including but not limited to lending laws, usury laws and laws governing mortgages. These state and local laws regulate the manner in which we make loans and conduct other types of transactions. The statutes, regulations and policies to which the companies are subject may change at any time. In addition, the interpretation and application by regulators of the laws and regulations to which we are subject may change from time to time. Certain of our contractual arrangements, such as those pertaining to funding obtained through the Guaranteed Underwriter Program, provide for the Federal Financing Bank and RUS to periodically review and assess CFC’s compliance with program terms and conditions.

Derivatives Regulation

CFC engages in over-the-counter derivative (“OTC”) transactions to manage interest rate risk. As an end user of derivative financial instruments, CFC is subject to regulations that apply to derivatives generally. The Dodd-Frank Act (“DFA”), enacted July 2010, resulted in, among other things, comprehensive regulation of the ~~over-the-counter (“OTC”)~~OTC derivatives market. The DFA provides for an extensive framework for the regulation of OTC derivatives, including mandatory clearing, exchange

trading and transaction reporting of certain OTC derivatives. ~~In August 2013,~~Subsequent to the enactment of the DFA, the U.S. ~~Commodities~~Commodity Futures Trading Commission (“CFTC”) issued a final rule, “Clearing Exemption for Certain Swaps Entered into by Cooperatives,” which created an exemption from mandatory clearing for cooperatives. ~~In April 2016, the CFTC issued a~~The CFTC’s final rule, “Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants,” ~~which~~ includes an exemption from margin requirements for uncleared swaps for cooperatives that are financial end users. CFC is an exempt cooperative end user of derivative financial instruments and does not participate in the derivatives markets for speculative, trading or investing purposes and does not make a market in derivatives.

MEMBERS

Our consolidated membership, after taking into consideration entities that are members of both CFC and NCSC and eliminating memberships between CFC, NCSC and RTFC, totaled ~~1,449~~1,439 members and ~~216~~232 associates as of May 31, ~~2018.~~2020.

CFC

CFC’s bylaws provide that cooperative or nonprofit corporations, public corporations, utility districts and other public bodies that received or are eligible to receive a loan or commitment for a loan from RUS or any successor agency (as well as subsidiaries, federations or statewide and regional associations that are wholly owned or controlled by such entities) are eligible for membership. One of the criteria for eligibility for RUS financing is a “rural area” test. CFC relies on the definition of “rural” as specified in the Rural Electrification Act, as amended. “Rural” is defined in the Rural Electrification Act as any area other than a city, town or unincorporated area that has a population of less than 20,000, or any area within the service area of a borrower who, at the date of enactment of the Food, Conservation and Energy Act of 2008, had an outstanding RUS electric loan. The definition of “rural” under the act permits an area to be defined as “rural” regardless of the development of such area subsequent to the approval of the outstanding loan. ~~Thus, those entities~~

Entities that received or qualify for financing from RUS are eligible to apply for membership, upon approval of membership by the CFC Board of Directors, and subsequently to borrow from CFC regardless of whether there is an outstanding loan with RUS. There are no requirements to maintain membership, although the board has the authority to suspend a member under certain circumstances. CFC has not suspended a member to date.

CFC has the following types of members, all of which are not-for-profit entities or subsidiaries or affiliates of not-for-profit entities.

Class ~~A –~~ A—Distribution Systems

Cooperative or nonprofit corporations, public corporations, utility districts and other public bodies, which received or are eligible to receive a loan or commitment for a loan from RUS or any successor agency, and that are engaged or planning to engage in furnishing utility services to their members and patrons for their use as ultimate consumers. The majority of our distribution system members are consumer-owned electric cooperatives.

Distribution systems are utilities engaged in retail sales of electricity to residential and commercial consumers in their defined service areas. Such sales are generally on an exclusive basis using the distribution system’s infrastructure, including substations, wires and related support systems. Distribution systems vary in size from small systems that serve a few thousand customers to large systems that serve more than 200,000 customers. Thus, the amount of loan funding required by different distribution systems varies significantly. Distribution systems may serve customers in more than one state.

Most distribution systems have long-term power purchase contracts with their power supply systems, which are owned and controlled by the member distribution systems. Wholesale power for resale also comes from other sources, including power supply contracts with government agencies, investor-owned utilities and other entities, and, in some cases, the distribution systems own generating facilities.

Class ~~B –~~ B—Power Supply Systems

Cooperative or nonprofit corporations that are federations of Class A members or of other Class B members, or both, or that are owned and controlled by Class A members or by other Class B members, or both, and that are engaged or planning to

engage in furnishing utility services primarily to Class A members or other Class B members. Our power supply system members are member-owned electric cooperatives.

The power supply systems vary in size from one with thousands of megawatts of power generation capacity to systems that have no generating capacity, which generally operate transmission lines to supply certain distribution systems or manage power supply purchase arrangements for the benefit of their distribution system members. Thus, the amount of loan funding required by different power supply systems varies significantly. Power supply members may serve distribution systems located in more than one state.

The wholesale power supply contracts with their distribution system members permit the power supply system, subject to regulatory approval in certain instances, to establish rates to produce revenue sufficient to cover debt service, to meet the cost of operation and maintenance of all power supply systems and related facilities and to pay the cost of any power and energy purchased for resale.

Class ~~C –~~ C—Statewide and Regional Associations

Statewide and regional associations that are wholly owned or controlled by Class A members or Class B members, or both, or that are wholly owned subsidiaries of a CFC member, and that do not furnish utility services but supply other forms of service to their members. Certain states have an organization that represents and serves the distribution systems and power supply systems located in the state. Such statewide organizations provide training and legislative, regulatory, media and related services.

Class ~~D –~~ D—National Associations of Cooperatives

National associations of cooperatives that are Class A, Class B and Class C members, provided said national associations have, at the time of admission to membership in CFC, members domiciled in at least 80% of the states in the United States. National Rural Electric Cooperative Association (“NRECA”) is our sole Class D member. NRECA provides training, sponsors regional and national meetings, and provides legislative, regulatory, media and related services for nearly all rural electric cooperatives.

CFC Class A, B, C and D members are eligible to vote on matters put to a vote of the membership. ~~Associates are not eligible to vote on matters put to a vote of the membership.~~

CFC’s membership as of May 31, ~~2018~~2020 consisted ~~of:~~of the following:

~~841~~842 Class A distribution systems;

67 Class B power supply systems;

64 Class C statewide and regional associations, including NCSC; and

1 Class D national association of cooperatives.

In addition, CFC has associates that are nonprofit groups or entities organized on a cooperative basis that are owned, controlled or operated by Class A, B, C or D members and are engaged in or plan to engage in furnishing non-electric services primarily for the benefit of the ultimate consumers of CFC members. CFC had 4746 associates, including RTFC, as of May 31, ~~2018.~~2020. Associates are not eligible to vote on matters put to a vote of the membership.

NCSC

Membership in NCSC includes organizations that are Class A, B or C members of CFC, or eligible for such membership and are approved for membership by the NCSC Board of Directors.

NCSC’s membership ~~consisted of 440 distribution systems, two power supply systems and five statewide associations~~ as of May 31, ~~2018.~~ 2020 consisted of the following:

441 distribution systems;

3 power supply systems; and

5 statewide associations.

All of NCSC’s members also were CFC members. CFC, however, is not a member of NCSC. In addition to members, NCSC had ~~165~~181 associates as of May 31, ~~2018.~~2020. NCSC’s associates may include members of CFC, entities eligible to be members of CFC and for-profit and not-for-profit entities that are owned, controlled or operated by or provide significant benefit to Class A, B and C members of CFC.

RTFC

Membership in RTFC is limited to cooperative corporations, nonprofit corporations, private corporations, public ~~corporations, nonprofit~~ corporations, utility districts and other public bodies that are approved by the RTFC Board of Directors and are actively borrowing or are eligible to borrow from RUS’s traditional infrastructure loan program. These companies must be engaged directly or indirectly in furnishing telephone services as the licensed incumbent carrier. Holding companies, subsidiaries and other organizations that are owned, controlled or operated by members are referred to as affiliates, and are eligible to borrow from RTFC. Associates are organizations that provide non-telephone or non-telecommunications services to rural telecommunications companies that are approved by the RTFC Board of Directors. Neither affiliates nor associates are eligible to vote at meetings of the members.

RTFC’s membership consisted of ~~477~~466 members as of May 31, ~~2018.~~2020. RTFC also had ~~five~~six associates as of May 31, ~~2018.~~2020. CFC is not a member of RTFC.

The business affairs of CFC, NCSC and RTFC are governed by separate boards of directors for each entity. We provide additional information on CFC’s corporate governance in “Item 10. Directors, Executive Officers and Corporate Governance.”

TAX STATUS

In 1969, CFC obtained a ruling from the Internal Revenue Service (“IRS”) recognizing CFC’s exemption from the payment of federal income taxes as an organization described under Section 501(c)(4) of the Internal Revenue Code. In order for CFC to maintain its exemption under Section 501(c)(4) of the Internal Revenue Code, CFC must be “not organized for profit” and must be “operated exclusively for the promotion of social welfare” within the meaning of that section of the tax code. The ~~Internal Revenue Service~~IRS determined that CFC is an organization that is “operated exclusively for the promotion of social welfare” because the ultimate beneficiaries of its lending activities, like those of the RUS loan program, are the consumers of electricity produced by rural electric systems, the communities served by these systems and the nation as a whole.

As an organization described under Section 501(c)(4) of the Internal Revenue Code, no part of CFC’s net earnings can inure to the benefit of any private shareholder or individual. This requirement is referred to as the private inurement prohibition and was added to Section 501(c)(4) of the Internal Revenue Code in 1996. A legislative exception allows organizations like CFC to continue to make allocations of net earnings to members in accordance with its cooperative status.

~~CFC believes its~~We believe that CFC’s operations have not changed materially from those described to the ~~Internal Revenue Service~~IRS in ~~its~~CFC’s exemption filing. ~~CFC reviews~~We review the impact on operations of any new activity or potential change in product offerings or business in general to determine whether such change in activity or operations would be inconsistent with ~~its~~CFC’s status as an organization described under Section 501(c)(4).

NCSC is a taxable cooperative that pays income tax based on its taxable income and deductions.

RTFC is a taxable cooperative under Subchapter T of the Internal Revenue Code and is not subject to income taxes on income from patronage sources that is allocated to its borrowers, as long as the allocation is properly noticed and at least 20% of the amount allocated is retired in cash prior to filing the applicable tax return. RTFC pays income tax based on its taxable income and deductions, excluding amounts allocated to its borrowers.

ALLOCATION AND RETIREMENT OF PATRONAGE CAPITAL

District of Columbia cooperative law requires cooperatives to allocate net earnings to patrons, to a general reserve in an amount sufficient to maintain a balance of at least 50% of paid-up capital and to a cooperative educational fund, as well as permits additional allocations to board-approved reserves. District of Columbia cooperative law also requires that a cooperative’s net earnings be allocated to all patrons in proportion to their individual patronage and each patron’s allocation be distributed to the patron unless the patron agrees that the cooperative may retain its share as additional capital.

CFC

Annually, the CFC Board of Directors allocates its net earnings to its patrons in the form of patronage capital, to a cooperative educational fund, to a general reserve, if necessary, and to other board-approved reserves. Net earnings are calculated by adjusting net income to exclude the noncash effects of the accounting for derivative financial instruments. Net losses, if any, are not allocated to ~~board approved~~board-approved reserves or members and do not affect amounts previously allocated as patronage capital or to the reserves. Net earnings are first applied against prior-period losses, if any, before an allocation of patronage capital is made. CFC has never experienced an adjusted net loss.

An allocation to the general reserve is made, if necessary, to maintain the balance of the general reserve at 50% of the membership fees collected. CFC’s bylaws require the allocation to the cooperative educational fund to be at least 0.25% of its net earnings. Funds from the cooperative educational fund are disbursed annually to statewide cooperative organizations to fund the teaching of cooperative principles and for other cooperative education programs.

Currently, CFC has one additional board-approved reserve, the members’ capital reserve. The CFC Board of Directors determines the amount of net earnings that is allocated to the members’ capital reserve, if any. The members’ capital reserve represents net earnings that CFC holds to increase equity retention. The net earnings held in the members’ capital reserve have not been specifically allocated to members, but may be allocated to individual members in the future as patronage capital if authorized by the CFC Board of Directors.

All remaining net earnings are allocated to CFC’s members in the form of patronage capital. The amount of net earnings allocated to each member is based on the member’s patronage of CFC’s lending programs during the year. No interest is earned by members on allocated patronage capital. There is no effect on CFC’s total equity as a result of allocating net earnings to members in the form of patronage capital or to board-approved reserves. The CFC Board of Directors has voted annually on whether or not to retire a portion of the patronage capital allocation. Upon retirement, patronage capital is paid out in cash to the members to which it was allocated. CFC’s total equity is reduced by the amount of patronage capital retired to its members and by amounts disbursed from board-approved reserves.

Pursuant to CFC’s bylaws, the CFC Board of Directors determines the method, basis, priority and order of retirement of amounts allocated. The current policy of the CFC Board of Directors is to retire 50% of the prior fiscal year’s allocated net earnings following the end of each fiscal year and to hold the remaining 50% for 25 years to fund operations. The amount and timing of future retirements remains subject to annual approval by the CFC Board of Directors, and may be affected by CFC’s financial condition and other factors. The CFC Board of Directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable cooperative law.

NCSC

In accordance with District of Columbia cooperative law and its bylaws and board policies, NCSC allocates its net earnings to a cooperative educational fund, to a general reserve, if necessary, and to other board-approved reserves. Net earnings are calculated by adjusting net income to exclude the noncash effects of the accounting for derivative financial instruments. Net losses, if any, are not allocated to board-approved reserves and do not affect amounts previously allocated to the reserves.

Pursuant to NCSC’s bylaws, the NCSC Board of Directors shall determine the method, basis, priority and order of amounts allocated. An allocation to the general reserve is made, if necessary, to maintain the balance of the general reserve at 50% of the membership fees collected. There is no effect on NCSC's total equity due to the allocation of net earnings to board-approved reserves. NCSC’s bylaws require the allocation to the cooperative educational fund to be at least 0.25% of its net

earnings. Funds from the cooperative educational fund are disbursed annually to fund the teaching of cooperative principles and for other cooperative education programs.

RTFC

In accordance with District of Columbia cooperative law and its bylaws and board policies, RTFC allocates its net earnings to its patrons, a cooperative educational fund and a general reserve, if necessary. Net losses are not allocated to members and do not affect amounts previously allocated as patronage capital or to the reserves. ~~Current period~~Current-period earnings are first applied against any ~~prior year~~prior-year losses before allocating patronage capital.

Pursuant to RTFC’s bylaws, the RTFC Board of Directors shall determine the method, basis, priority and order of retirement of amounts allocated. RTFC’s bylaws require that it allocate at least 1% of net earnings to a cooperative educational fund. Funds from the cooperative educational fund are disbursed annually to fund the teaching of cooperative principles and for other cooperative education programs. An allocation to the general reserve is made, if necessary, to maintain the balance of the general reserve at 50% of the membership fees collected. The remainder is allocated to borrowers in proportion to their patronage. RTFC provides notice to its members of the amount allocated and retires 20% of the allocation for that year in cash prior to the filing of the applicable tax return. Any additional amounts are retired as determined by the RTFC Board of Directors with due regard for RTFC’s financial condition. There is no effect on RTFC's total equity due to the allocation of net earnings to members or board-approved reserves. The retirement of amounts previously allocated to members or amounts disbursed from board-approved reserves reduces RTFC's total equity.

EMPLOYEES

We had ~~254~~253 employees as of May 31, ~~2018.~~2020. We believe that our relations with our employees are good.

AVAILABLE INFORMATION

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports, are available for free at www.nrucfc.coop as soon as reasonably practicable after they are electronically filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”). These reports also are available for free on the SEC’s website at www.sec.gov. Information posted on our website is not incorporated by reference into this Form 10-K.


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. ~~If any~~The discussion below addresses the most significant risks, of ~~the events or circumstances described in the following risks actually occur,~~which we are currently aware, that could have a material adverse impact on our business, ~~liquidity,~~results of operations, financial condition or ~~results of operations could be adversely affected. The risks described below are the risks we consider to be material to our business. Other~~liquidity. However, other risks and uncertainties, including those not currently known to us, could also negatively impact our business, results of operations, financial condition and ~~financial condition.~~liquidity. Therefore, the following 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—Risk Management.” You should consider the following risks together with all of the other information in this ~~Annual Report on Form 10-K.~~report.

RISK FACTORS

Credit Risks

We are subject to credit risk that a borrower or other counterparty may not be able to meet its contractual obligations in accordance with agreed-upon terms, which could have a material adverse effect on our financial condition, results of operations and liquidity.

Credit risk is inherent in the financial services business. It results from, among other things, extending credit to borrowers, purchasing securities, and entering into financial derivative transactions and certain guarantee contracts. In addition to credit risk associated with our lending activities, we have credit risk arising from other types of business relationships. Routine

transactions create credit exposure for us to commercial banks as well as to vendors and other non-financial entities. Credit risk is one of our most significant risks, particularly given the high percentage of our assets represented directly or indirectly by loans and the importance of lending activity to our overall business. We manage credit risk by assessing and monitoring the creditworthiness of our borrowers and counterparties and by investing primarily in high-quality securities. Managing credit risk effectively also relies on forecasts of future overall economic conditions, which are inherently imperfect.

A borrower’s ability to repay a loan can be adversely affected by many factors, including poor business performance, catastrophe losses, and weakness in general economic conditions or in the financial markets. Borrowers with higher leverage (that is, higher ratios of indebtedness to total capitalization or income) have an increased risk that they will be unable to repay loans, particularly when economic conditions worsen. We are exposed to credit risk when we fail to evaluate properly at origination the likely ability of a borrower to repay a loan. Overestimating the current and potential value of any collateral pledged to support the loan also adds to our credit risk. A failure to identify declining creditworthiness of a borrower or declining collateral value at a time when remedial actions could reduce our exposure also increases credit risk. We reserve for credit losses on our loan portfolio through our allowance for credit losses and we also have reserves for unfunded loan commitments and letters of credit. We historically have experienced very low credit risk; however, a decrease in our borrowers’ ability to repay loans could result in an increase in credit risk. Such an increase could result in an increase in nonperforming loans and net charge-offs, which could lead to an increase in our provision for loan losses and a resulting reduction in net income and increase in our allowance for loan losses and could have a material adverse effect on our financial condition, results of operations and liquidity.

Adverse changes, developments or uncertainties in the rural electric utility industry could adversely impact the operations or financial performance of our member electric cooperatives, which, in turn, could have an adverse impact on our financial results.

Our focus as a tax-exempt, member-owned finance cooperative is on lending to our rural member electric utility cooperatives, which is the primary source of our revenue. As a result of lending primarily to our members, we have a loan portfolio with single-industry concentration. Loans to rural electric utility cooperatives accounted for approximately 99% of our total loans outstanding as of May 31, 2020. While we historically have experienced limited defaults and very low credit losses in our electric utility loan portfolio, factors that have a negative impact on the operations of our member rural electric cooperatives, including but not limited to, the price and availability of alternative energy sources and weather conditions, such as hurricanes, tornadoes or other weather-related events, could cause a deterioration in their financial performance and the value of the collateral securing their loans, which could impair their ability to repay us in accordance with the terms of their loans. In such case, it may be necessary to increase our allowance for loan losses, which would result in an increase in the provision for loan losses and a decrease in our net income.

Advances in technology may change the way electricity is generated and transmitted, which could adversely affect the business operations of our members and negatively impact the credit quality of our loan portfolio and financial results.

Advances in technology could reduce demand for power supply systems and distribution services. The development of alternative technologies that produce electricity, including solar cells, wind power and microturbines, has expanded and could ultimately provide affordable alternative sources of electricity and permit end users to adopt distributed generation systems that would allow them to generate electricity for their own use. As these and other technologies, including energy conservation measures, are created, developed and improved, the quantity and frequency of electricity usage by rural customers could decline. Advances in technology and conservation that cause our electric system members’ power supply, transmission and/or distribution facilities to become obsolete prior to the maturity of loans secured by these assets could have an adverse impact on the ability of our members to repay such loans, which could result in an increase in nonperforming or restructured loans. These conditions could negatively impact the credit quality of our loan portfolio and financial results.

We may obtain entities or other assets through foreclosure, which would subject us to the same performance and financial risks as any other owner or operator of similar businesses or assets.

United States (“GAAP”). Impairment charges, if required, represent a reduction to earnings in the period of the charge. There may be substantial judgment used in the determination of whether such assets are impaired and in the calculation of the amount of the impairment. In addition, when foreclosed assets are sold to a third party, the sale price we receive may be below the amount previously recorded in our financial statements, which will result in a loss being recorded in the period of the sale.

The nonperformance of our derivative counterparties could impair our financial results.

We use interest rate swaps to manage our interest rate risk. There is a risk that the counterparties to these agreements will not perform as agreed, which could adversely affect our results of operations. The nonperformance of a counterparty on an agreement would result in the derivative no longer being an effective risk-management tool, which could negatively affect our overall interest rate risk position. In addition, if a counterparty fails to perform on our derivative obligation, we could incur a financial loss to replace the derivative with another counterparty and/or a loss through the failure of the counterparty to pay us amounts owed. We were in a net payable position for all of our interest rate swaps, after taking into consideration master netting agreements, of $1,085 million as of May 31, 2020.

A decline in our credit rating could trigger payments under our derivative agreements, which could impair our financial results.

We have certain interest rate swaps that contain credit risk-related contingent features referred to as rating triggers. Under certain rating triggers, if the credit rating for either counterparty falls to the level specified in the agreement, the other counterparty may, but is not obligated to, terminate the agreement. If either counterparty terminates the agreement, a net payment may be due from one counterparty to the other based on the prevailing fair value, excluding credit risk, of the underlying derivative instrument. These rating triggers are based on our senior unsecured credit ratings by Moody’s Investors Service (“Moody’s”) and S&P Global Inc. (“S&P”). Based on our interest rate swap agreements subject to rating triggers, if all agreements for which we owe amounts were terminated as of May 31, 2020 and our senior unsecured ratings fell below Baa3 by Moody’s or below BBB- by S&P, we would have been required to make a payment of up to $753 million as of that date. In addition, if our senior unsecured ratings fell below Baa3 by Moody’s, below BBB- by S&P or below BBB- by Fitch Ratings Inc. (“Fitch”), we would have been required to make a payment of up to $62 million as of that date. In calculating the required payments, we only consider agreements that, when netted for each counterparty pursuant to a master netting agreement, would require a payment upon termination. In the event that we are required to make a payment as a result of a rating trigger, it could have a material adverse impact on our financial results.

Liquidity Risks

If we are unable to access the capital markets or other external sources for funding, our liquidity position may be negatively affected and we may not have sufficient funds to meet all of our financial obligations as they become due.

We depend on access to the capital markets and other sources of financing, such as our bank revolving credit agreements, investments from our members, private debt issuances through Farmer Mac and through the Guaranteed Underwriter Program, to fund new loan advances and refinance our long- and short-term debt and, if necessary, to fulfill our obligations under our guarantee and repurchase agreements. Market disruptions, downgrades to our long-term and/or short-term debt ratings, adverse changes in our business or performance, downturns in the electric industry and other events over which we have no control may deny or limit our access to the capital markets and/or subject us to higher costs for such funding. Our access to other sources of funding also could be limited by the same factors, by adverse changes in the business or performance of our members, by the banks committed to our revolving credit agreements or Farmer Mac, or by changes in federal law or the Guaranteed Underwriter Program. Our funding needs are determined primarily by scheduled short- and long-term debt maturities and the amount of our loan advances to our borrowers relative to the scheduled payment amortization of loans previously made by us. If we are unable to timely issue debt into the capital markets or obtain funding from other sources, we may not have the funds to meet all of our obligations as they become due.

A reduction in the credit ratings for our debt could adversely affect our liquidity and/or cost of debt.

Our credit ratings are important to maintaining our liquidity position. We currently contract with three nationally recognized statistical rating organizations to receive ratings for our secured and unsecured debt and our commercial paper. In order to access the commercial paper markets at current levels, we believe that we need to maintain our current ratings for commercial paper of P1P-1 from Moody’s, ~~Investors Service (“Moody’s”),~~ A-1 from S&P ~~Global Inc. (“S&P”)~~ and ~~F-1~~F1 from

~~Fitch Ratings Inc. (“Fitch”).~~ Fitch. Changes in rating agencies’ rating methodology,

actions by governmental entities or others, losses from impaired loans and other factors could adversely affect the credit ratings on our debt. A reduction in our credit ratings could adversely affect our liquidity and competitive position, increase our borrowing costs or limit our access to the capital markets and the sources of financing available to us. A significant increase in our cost of borrowings and interest expense could cause us to sustain losses or impair our liquidity by requiring us to seek other sources of financing, which may be difficult to obtain.

Our ability to maintain compliance with the covenants related to our revolving credit agreements, collateral trust bond and medium-term note indentures and debt agreements could affect our ability to retire patronage capital, result in the acceleration of the repayment of certain debt obligations, adversely impact our credit ratings and hinder our ability to obtain financing.

We must maintain compliance with all covenants and conditions related to our revolving credit agreements and debt indentures. We are required to maintain a minimum average adjusted times interest earned ratio (“adjusted TIER”) for the six most recent fiscal quarters of 1.025 and an adjusted leverage ratio of no more than 10-to-1. In addition, we must maintain loans pledged as collateral for various debt issuances at or below 150% of the related secured debt outstanding as a condition to borrowing under our revolving credit agreements. If we were unable to borrow under the revolving credit agreements, our short-term debt ratings would likely decline, and our ability to issue commercial paper could become significantly impaired. Our revolving credit agreements also require that we earn a minimum annual adjusted TIER of 1.05 in order to retire patronage capital to members. See ~~“MD~~“Item 7. MD&A—Non-GAAP Financial Measures” for additional information on our adjusted measures and a reconciliation to the most comparable GAAP measures.

Pursuant to our collateral trust bond indentures, we are required to maintain eligible pledged collateral at least equal to 100% of the principal amount of the bonds issued under the indenture. Pursuant to one of our collateral trust bond indentures and our medium-term note indenture, we are required to limit senior indebtedness to 20 times the sum of our members’ equity, subordinated deferrable debt and members’ subordinated certificates. If we were in default under our collateral trust bond or medium-term note indentures, the existing holders of these securities have the right to accelerate the repayment of the full amount of the outstanding debt ~~principal~~ of the security before the stated maturity of such debt. That acceleration of debt repayments poses a significant liquidity risk, as we might not have enough cash or committed credit available to repay the debt. In addition, if we are not in compliance with the collateral trust bond and medium-term note covenants, we would be unable to issue new debt securities under such indentures. If we were unable to issue new collateral trust bonds and medium-term notes, our ability to fund new loan advances and refinance maturing debt would be impaired.

We are required to pledge eligible distribution system or power supply system loans as collateral equal to at least 100% of the outstanding balance of debt issued under a revolving note purchase agreement with Farmer Mac. We also are required to pledge distribution or power supply loans as collateral equal to at least 100% of the outstanding balance of debt under the Guaranteed Underwriter Program. Collateral coverage less than 100% for either of these debt programs constitutes an event of default, which if not cured within 30 days, could result in creditors accelerating the repayment of the outstanding debt principal before the stated maturity. An acceleration of the repayment of debt could pose a liquidity risk if we had insufficient cash or committed credit available to repay the debt. In addition, we would be unable to issue new debt securities under the applicable debt agreement, which could impair our ability to fund new loan advances and refinance maturing debt.

Market Risks

Changes in the level and direction of interest rates or our ability to successfully manage interest rate risk could adversely affect our financial results and condition.

Our earnings are largely dependent on net interest income. Our interest rate risk exposure is primarily related to the funding of a fixed-rate loan portfolio. We have a matched funding objective that is intended to manage the funding of asset and liability repricing terms within a range of total assets based on the current environment and extended outlook for interest rates. We maintain a limited unmatched position, or interest rate gap, on our fixed-rate assets within a targeted range of adjusted total assets to provide us with funding flexibility.

Our primary strategies for managing interest rate risk include the use of derivatives and limiting the amount of interest rate gap between fixed-rate assets ~~that can be funded by variable-rate debt~~and fixed-rate liabilities to a specified percentage of total assets based on prevailing market conditions. We face the risk that changes in interest rates could reduce our net interest income and our earnings, especially if

actual conditions turn out to be materially different than those we assumed. Fluctuations in interest rates, including changes

in the relationship between short-term rates and long-term rates may affect the pricing of loans to borrowers and our cost of funds, which could adversely affect the difference between the interest that we earn on assets and the interest we pay on liabilities used to fund assets. Such changes may also affect our ability to hedge various forms of market and interest rate risk and may decrease the effectiveness of those hedges in helping to manage such risks, which could cause our interest rate gap to exceed our targeted range and have an adverse impact on net interest income, earnings and cash flows. See “Item 7. MD&A—Market Risk” for additional information.

~~We are subject~~The uncertainty as to ~~credit risk that a borrower~~the nature of potential changes or other ~~counterparty~~reforms in the London Interbank Offered Rate (“LIBOR”) benchmark interest rate may adversely affect our financial condition and results of operations.

We have loans, derivative contracts, debt securities and other financial instruments with attributes that are either directly or indirectly dependent on the LIBOR. In 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that the FCA intends to stop persuading or compelling banks to submit the rates required to calculate LIBOR after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be ~~able~~guaranteed after 2021. Consequently, at this time, it is not possible to ~~meet its contractual obligations in accordance with agreed-upon terms, which could result in significantly higher, unexpected losses.~~

~~Our loan portfolio, which represents the largest component of assets on our balance sheet, accounts~~predict whether and to what extent banks will continue to provide submissions for the ~~substantial majority~~calculation of ~~exposure~~LIBOR. Similarly, it is not possible to ~~credit risk. We had total loans outstanding~~predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR or what the effect of ~~$25,168 million~~any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments.

Regulators and various financial industry groups have sponsored or formed committees (e.g., the Federal Reserve-sponsored Alternative Reference Rates Committee) to, among other things, facilitate the identification of an alternative benchmark index to replace LIBOR, and publish consultations on recommended practices for transitioning away from LIBOR, including (i) the utilization of recommended fallback language for LIBOR-linked financial instruments, and (ii) development of alternative pricing methodologies for recommended alternative benchmarks such as ~~of May 31, 2018. We reserve for~~ ~~credit losses in our loan portfolio by establishing an allowance for loan losses through~~the Secured Overnight Financing Rate (“SOFR”). SOFR is a ~~provision charge to earnings. The amount~~measure of the ~~allowance for loan losses, which was $19 million~~ ascost of ~~May 31, 2018,~~ borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on ~~our assessment of credit losses inherent in our loan portfolio as of each balance sheet date, taking into consideration management's continuing evaluation of credit risk related to: industry concentrations; macro-economic conditions; specific credit risks; loan loss experience; current loan portfolio quality; present political~~directly observable U.S. Treasury-based repurchase transactions. At this time, it is still not possible to predict whether these recommendations and ~~regulatory conditions; and unidentified losses and risks inherent~~proposals will be broadly accepted in the ~~current loan portfolio. We consider~~market, whether they will continue to evolve, and what the ~~process for determining the amount~~effect of ~~the allowance as one of our critical accounting policies because it~~ involves 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. Management believes that the allowance for loan losses appropriately reflects credit losses inherent in our loan portfolio as of May 31, 2018. However, our actual credit losses could exceed our estimate of probable losses due to changes in economic conditions that adversely affect borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control. In those cases, wetheir implementation may be ~~required to increase the allowance for loan losses through an increase in the provision for loan losses, which would reduce net income and may have a material adverse effect on our financial results.~~

Our focus as a tax-exempt, member-owned finance cooperative is on lending to our rural member electric utility cooperatives, which is the primary source of our revenue. As a result of lending primarily to our members, we have a loan portfolio with single-industry concentration. Loans to rural electric utility cooperatives accounted for approximately 99% of our total loans outstanding as of May 31, 2018. While we historically have experienced limited defaults and very low credit losses in our electric utility loan portfolio, factors that have a negative impact on the ~~operations of our member rural electric cooperatives could cause a deterioration in their~~markets for floating-rate financial performance and the value of the collateral securing their loans, which could impair their ability to repay us in accordance with the terms of their loan. In such case, it may be necessary to increase our allowance for loan losses, which would result in an increase in the provision for loan losses and a decrease in our net income.

~~We may obtain entities or other assets through foreclosure, which would subject us to the same performance and financial risks as any other owner or operator of similar businesses or assets.~~

As a financial institution, from time to time we may obtain entities and assets of borrowers in default through foreclosure proceedings. If we become the owner and operator of entities or assets obtained through foreclosure, we are subject to the same performance and financial risks as any other owner or operator of similar assets or entities. In particular, the value of the foreclosed assets or entities may deteriorate and have a negative impact on our results of operations. We assess foreclosed assets, if any, for impairment periodically as required under generally accepted accounting principles in the United States (“GAAP”). Impairment charges, if required, represent a reduction to earnings in the period of the charge. There may be substantial judgment used in the determination of whether such assets are impaired and in the calculation of the amount of the impairment. In addition, when foreclosed assets are sold to a third party, the sale price we receive may be below the amount previously recorded in our financial statements, which will result in a loss being recorded in the period of the sale.

instruments.

The ~~nonperformance~~replacement of LIBOR creates operational and market risks that will become clear as replacement choices are developed. We will continue to assess all of our ~~derivative counterparties could impair our~~contracts and financial ~~results.~~

~~We use interest rate swaps~~instruments that are directly or indirectly dependent on LIBOR to ~~manage our interest rate risk. There is a risk that~~determine what impact the ~~counterparties~~replacement of LIBOR will have on us. Uncertainty as to ~~these agreements will not perform as agreed, which could~~the nature of such potential changes or other reforms may adversely affect our financial condition and results of operations. The nonperformance of a counterparty on an agreement would result in the derivative no longer being an effective risk management tool, which could negatively affect our overall interest rate risk position. In addition, if a counterparty fails to perform on our derivative obligation, we could incur a financial loss to replace the derivative with another counterparty and/or a loss through the failure of the counterparty to pay us amounts owed. We were in a net payable position, after taking into consideration master netting agreements, for all of our interest rate swaps as of May 31, 2018.

~~A decline in our credit rating could trigger payments under our derivative agreements, which could impair our financial results.~~

We have certain interest rate swaps that contain credit risk-related contingent features referred to as rating triggers. Under certain rating triggers, if the credit rating for either counterparty falls to the level specified in the agreement, the other counterparty may, but is not obligated to, terminate the agreement. If either counterparty terminates the agreement, a net payment may be due from one counterparty to the other based on the prevailing fair value, excluding credit risk, of the underlying derivative instrument. These rating triggers are based on our senior unsecured credit ratings by Moody’sOperations and S&P. Based on our interest rate swap agreements subject to rating triggers, if all agreements for which we owe amounts were terminated as of May 31, 2018 and our senior unsecured ratings fell below Baa3 by Moody’s or below BBB- by S&P, we would have been required to make a payment of up to $81 million as of that date. In calculating the required payments, we only considered agreements that, when netted for each counterparty pursuant to a master netting agreement, would require a payment upon termination. In the event that we are required to make a payment as a result of a rating trigger, it could have a material adverse impact on our financial results.

Breaches of our information technology systems, or those managed by third parties, may damage relationships with our members or subject us to reputational, financial, legal or operational consequences.

Cyber-related attacks pose a risk to the security of our members’ strategic business information and the confidentiality and integrity of our data, which includes strategic and proprietary information. Security breaches may occur through the actions of third parties, employee error, malfeasance, technology failures or other irregularities. Any such breach or unauthorized access could result in a loss of this information, a loss of integrity of this information, a delay or inability to provide service of affected products, damage to our reputation, including a loss of confidence in the security of our products and services, and significant legal and financial exposure. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently, we may be unable to anticipate these techniques or implement adequate preventative measures. As a result, cyber-related attacks may remain undetected for an extended period and may be costly to remediate.

Our business depends on the reliable and secure operation of computer systems, network infrastructure, and other information technology managed by third parties including, but not limited to: our service providers for external storage and processing of our information on cloud-based systems; our consulting and advisory firms and contractors that have access to our confidential and proprietary data; and administrators for our employee payroll and benefits management. We have limited control and visibility over third-party systems that we rely on for our business. The occurrence of a cyber-related

attack, breach, unauthorized access, or other cybersecurity event could result in damage to our third parties’ operations. The failure of third parties to provide services agreed upon through ~~service level~~service-level agreements, whether as a result of the occurrence of a cyber-related attack or other event, could result in the loss of access to our data, the loss of integrity of our data, disruptions to our corporate functions, loss of business opportunities or reputational damage, or otherwise adversely impact our financial results and ~~result in~~cause significant costs and liabilities.

While CFC maintains insurance coverage that, subject to policy terms and conditions, covers certain aspects of cyber risks, including business interruptions caused by cyber-related attacks on information technology systems managed by third parties, such insurance coverage may be insufficient to cover all losses. Our failure to comply with applicable laws and regulations regarding data security and privacy could result in fines, sanctions and litigation. Additionally, new regulation in the areas of data security and privacy may increase our costs and our members’ costs.

Our elected directors also serve as officers or directors of certain of our individual member cooperatives, which may result in a potential conflict of interest with respect to loans, guarantees and extensions of credit that we may make to or on behalf of such member cooperatives.

In accordance with our charter documents and the purpose for which we were formed, we lend only to our members and associates. CFC’s directors are elected or appointed from our membership, with 10 director positions filled by directors of members, 10 director positions filled by general managers or chief executive officers of members, two positions appointed by NRECA and one at-large position that must, among other things, be a director, financial officer, general manager or chief executive of one of our members. CFC currently has loans outstanding to members that are affiliated with CFC directors and may periodically extend new loans to such members. The relationship of CFC’s directors to our members may give rise to conflicts of interests from time to time. See “Item 13. Certain Relationships and Related Transactions, and Director Independence—Review and Approval of Transactions with Related Persons” for a description of our policies with regard to approval of loans to members affiliated with CFC directors.

Natural or man-made disasters, including widespread health emergencies such as the COVID-19 pandemic, or other similar external events beyond our control, could disrupt our business and adversely affect our results of operations and financial condition.

Our operations may be subject to disruption due to the occurrence of natural disasters, acts of terrorism or war, public health emergencies, such as the ongoing COVID-19 pandemic, or other unexpected or disastrous conditions, events, or emergencies beyond our control, some of which may be intensified by the effects of a government response to the event, or climate change and changing weather patterns.

COVID-19 has spread globally, including to every state in the United States, and has resulted in the declaration of the COVID-19 outbreak as a pandemic by the WHO. While still evolving, the COVID-19 pandemic has caused significant economic and financial turmoil both in the United States (“U.S.”) and around the world, and has fueled concerns that it will lead to a global recession. On March 13, 2020, the U.S. declared a national emergency with respect to COVID-19 and the substantial majority of states and certain U.S. territories issued orders requiring the closure of non-essential businesses and/or requiring residents to stay at home. In response to state stay-at-home orders for nonessential businesses, we implemented an emergency remote work policy. In mid-June, pursuant to reopening guidelines provided by our state, we implemented a return-to-work policy that included staggering staff, physical distancing measures, face covering requirements and an enhanced cleaning program to maintain the well-being of our employees. While certain states have allowed non-essential businesses to resume operations at partial capacity, there is substantial uncertainty regarding the manner and timing in which non-essential businesses can return to most or all of their business operations. The recent surge in COVID-19 cases has also led to speculation of continued and prolonged implementation of restrictions by federal, state or local authorities to slow the spread of COVID-19.

If federal, state or local authorities impose additional restrictions or significantly scale back existing reopening plans to slow the spread of COVID-19, such actions could disrupt the business, activities, and operations of our members, as well our business and operations. As providers of essential services, our members are generally required to maintain operations and continue to provide services to their customers regardless of the potential inability of customers affected by COVID-19 to make timely payments for such services during this time. Certain states have imposed mandatory disconnection moratoriums for electric services due to lack of payment for the duration of emergency legislation enacted in such states and others have encouraged disconnection moratoriums that are non-binding. At this time, it is unclear whether the moratoriums,

whether mandatory or non-binding, will continue and whether emergency legislation will be extended past approaching deadlines. The potential inability to collect, or delays in collecting, payment for services provided, and decreases in commercial and industrial load demand could result in a decrease in member cash receipts and revenues and constrained resources. Additional safety precautions required to help mitigate the effects of the COVID-19 pandemic could result in higher costs, which together with decreases in member cash receipts and revenues could reduce cash flows and earnings and impair the ability of members to satisfy their obligations to us and other creditors, impair the value of underlying collateral or otherwise adversely affect their business dealings with us, any of which could have a material adverse effect on the quality of our credit portfolio, which could ultimately have a material adverse effect on our business, results of operations or financial condition.

There is significant uncertainty about the duration and severity of the COVID-19 pandemic. As such, we are unable to quantify and forecast the future impact that the pandemic could have on our business at this time. The effect of the recent surge in COVID-19 cases in the U.S. and certain measures that may be taken by the governments of other countries, as well as measures that have been, or may be, taken by state and local governments in the U.S. to contain the spread, could adversely impact our business, results of operations and financial condition. The extent to which the COVID-19 pandemic impacts us will depend on future developments that are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, actions taken to contain COVID-19 and mitigate its effects, and how quickly and to what extent normal economic and operating conditions resume.

Although we have implemented a business continuity management program that we continue to enhance on an ongoing basis, there can be no assurance that the program will adequately mitigate the risks of business disruptions and interruptions. Further, events such as natural disasters and public health emergencies may divert our attention away from normal operations and limit necessary resources. We generally must resume operations promptly following any interruption. If we were to suffer a disruption or interruption and were not able to resume normal operations within a period consistent with industry standards, our business, financial condition or results of operations could be adversely affected in a material manner. In addition, depending on the nature and duration of the disruption or interruption, we might become vulnerable to fraud, additional expense or other losses, or to a loss of business.

Competition from other lenders could adversely impact our financial results.

We compete with other lenders for the portion of the rural utility loan demand for which RUS will not lend and for loans to members that have elected not to borrow from RUS. The primary competition for the non-RUS loan volume is from CoBank, ACB, a federally chartered instrumentality of the United States that is a member of the Farm Credit System. As a government-sponsored enterprise, CoBank, ACB has the benefit of an implied government guarantee with respect to its funding. Competition may limit our ability to raise rates to adequately cover increases in costs, which could have an adverse impact on our results of operations, and increasing interest rates to cover costs could cause a reduction in new lending business.

Regulatory and Compliance Risks

Loss of our tax-exempt status could adversely affect our earnings.

CFC has been recognized by the ~~Internal Revenue Service~~IRS as an organization for which income is exempt from federal taxation under Section 501(c)(4) of the Internal Revenue Code (other than any net income from an unrelated trade or business). In order to maintain CFC’s tax-exempt status, it must continue to operate exclusively for the promotion of social welfare by operating on a cooperative basis for the benefit of its members by providing them cost-based financial products and services consistent with sound financial management, and no part of CFC’s net earnings may inure to the benefit of any private shareholder or individual other than the allocation or return of net earnings or capital to its members in accordance with CFC’s bylaws and incorporating statute in effect in 1996.

If CFC were to lose its status as a 501(c)(4) organization, it would become a taxable cooperative and would be required to pay income tax based on its taxable income. If this event occurred, we would evaluate all options available to modify CFC’s structure and/or operations to minimize any potential tax liability.

As a tax-exempt cooperative and nonbank financial institution, our lending activities are not subject to the regulations and oversight of U.S. financial regulators such as the Federal Reserve, the Federal Deposit Insurance Corporation or the Office of Comptroller of Currency. Because we are not under the purview of such regulation, we could engage in activities that could expose us to greater credit, market and liquidity risk, reduce our safety and soundness and adversely affect our financial results.

Financial institutions subject to regulations, oversight and monitoring by U.S. financial regulators are required to maintain specified levels of capital and may be restricted from engaging in certain lending-related and other activities that could adversely affect the safety and soundness of the financial institution or are considered conflicts of interest. As a tax-exempt, nonbank financial institution, we are not subject to the same oversight and supervision. There is no federal financial regulator that monitors compliance with our risk policies and practices or that identifies and addresses potential deficiencies that could adversely affect our financial results. Without regulatory oversight and monitoring, there is a greater potential for us to engage in activities that could pose a risk to our safety and soundness relative to regulated financial institutions.

~~Competition from other lenders~~Changes in accounting standards or assumptions in applying accounting policies could ~~adversely~~materially impact our financial ~~results.~~statements.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Some of these policies require the use of estimates and assumptions that may affect the reported carrying amount of our assets or liabilities and our results of operations. We ~~compete with other lenders for~~consider the ~~portion~~accounting policies that require management to make difficult, subjective and complex judgments about matters that are inherently uncertain as our most critical accounting policies. The use of ~~the rural utility loan demand for which RUS will not lend~~reasonably different estimates and for loans to members that have elected not to borrow from RUS. The primary competition for the non-RUS loan volume is from CoBank, ACB, a federally chartered instrumentality of the United States that is a member of the Farm Credit System. As a government-sponsored enterprise, CoBank, ACB has the benefit of an implied government guarantee with respect to its funding. Competition may limit our ability to raise rates to adequately cover increases in costs, whichassumptions could have ~~an adverse~~a material impact on our ~~results of operations,~~financial statements or if the assumptions, estimates or judgments were incorrectly made, we could be required to correct and ~~increasing interest rates to cover costs could cause a reduction in new lending business.~~

restate prior-period financial statements. In accordance with our charter documents and the purpose for which we were formed, we lend only to our members and associates. CFC’s directors are elected or appointed from our membership, with 10 director positions filled by directors of members, 10 director positions filled by general managers or chief executive officers of members, two positions appointed

by NRECA and one at-large position that must, among other things, be a director, financial officer, general manager or chief executive of one of our members. CFC currently has loans outstanding to members that are affiliated with CFC directors and may periodically extend new loans to such members. The relationship of CFC’s directors to our members may give rise to conflicts of interestsaddition, from time to ~~time. See “Item 13. Certain Relationships~~time, the Financial Accounting Standards Board (“FASB”) and ~~Related Transactions,~~the SEC change the accounting and ~~Director Independence—Review and Approval of Transactions with Related Persons” for a description~~reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how CFC records and reports its financial condition and results of operations. We could be required to apply a new or revised standard retroactively or apply an existing standard differently, on a retroactive basis, in each case potentially resulting in restating prior-period financial statements. For information on what we consider to be our most critical accounting policies ~~with regard~~and estimates and recent accounting changes, see “Item 7. MD&A—Critical Accounting Policies and Estimates” and “Note 1—Summary of Significant Accounting Policies—Recent Accounting Changes and Other Developments” to ~~approval of loans to members affiliated with CFC directors.~~our consolidated financial statements.


Item 1B.	Unresolved Staff Comments

None.


Item 2.	Properties

CFC owns an office building, with approximately 141,000 gross square ~~feet of office, meeting and storage space~~footage, in Loudoun County, Virginia that serves as its ~~headquarters in Loudoun County, Virginia.~~headquarters.


Item 3.	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 4.	Mine Safety Disclosures

Not applicable.

PART II


Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Not applicable.

Item 6. Selected Financial Data

The following table provides a summary of consolidated selected financial data for each fiscal year in the five-year period ended May 31, ~~2018.~~2020. In addition to financial measures determined in accordance with ~~generally accepted accounting principles in the United States (“GAAP”),~~GAAP, management ~~also~~ evaluates performance based on certain non-GAAP measures and metrics, which we refer to as “adjusted” measures. Certain financial covenant provisions in our credit agreements also are ~~also~~ based on non-GAAP financial 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 (“adjusted TIER”)~~TIER and adjusted debt-to-equity ratio. The most comparable GAAP 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 measures consist of (i) adjusting interest expense and net interest income to include the impact of net periodic derivative cash ~~settlements;~~settlements expense; (ii) adjusting net income, ~~senior debt~~total liabilities and total equity to exclude the non-cash impact of the accounting for derivative financial instruments; (iii) adjusting ~~senior debt~~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.~~income (“AOCI”). We believe our non-GAAP adjusted measures, which are not a substitute for GAAP and may not be consistent with similarly titled non-GAAP measures used by other companies, provide meaningful information and are useful to investors because management evaluates performance based on these metrics, and certain financial covenants in our committed bank revolving line of credit agreements and debt indentures are based on non-GAAP adjusted measures. See “Item 7. MD&A—Non-GAAP Financial Measures” for a detailed reconciliation of these adjusted measures to the most comparable GAAP measures.

Five-Year Summary of Selected Financial Data

Year Ended May 31, Change
(Dollars in thousands) 2018
2017
2016
2015
2014 2018 vs. 2017 2017 vs. 2016
Statement of operations
Interest income $ 1,077,357
$ 1,036,634
$ 1,012,636
$ 952,976
$ 957,540
4% 2%
Interest expense (792,735 ) (741,738 ) (681,850 ) (635,684 ) (654,655 ) 7 9
Net interest income 284,622
294,896

330,786

317,292

302,885
(3) (11)
Fee and other income 17,578
19,713
21,785
36,783
17,762
(11) (10)
Total revenue 302,200
314,609
352,571
354,075
320,647
(4) (11)
Benefit (provision) for loan losses 18,575
(5,978 ) 646
21,954
(3,498 ) ** **
Derivative gains (losses)⁽¹⁾
231,721
94,903
(309,841 ) (196,999 ) (34,421 ) 144 **
Results of operations of foreclosed assets —
(1,749 ) (6,899 ) (120,148 ) (13,494 ) ** (75)
Operating expenses⁽²⁾
(90,884 ) (86,226 ) (86,343 ) (76,530 ) (72,566 ) 5 0
Other non-interest expense (1,943 ) (1,756 ) (1,593 ) (870 ) (1,738 ) 11 10
Income (loss) before income taxes 459,669
313,803
(51,459 ) (18,518 ) 194,930
46 **
Income tax expense (2,305 ) (1,704 ) (57 ) (409 ) (2,004 ) 35 2,889
Net income (loss) $ 457,364
$ 312,099
$ (51,516 ) $ (18,927 ) $ 192,926
47 **

Adjusted operational financial measures

Adjusted interest expense⁽³⁾
$ (867,016 ) $ (826,216 ) $ (770,608 ) $ (718,590 ) $ (728,617 ) 5% 7%
Adjusted net interest income⁽³⁾
210,341
210,418
242,028
234,386
228,923
0 (13)
Adjusted net income⁽³⁾
151,362
132,718
169,567
95,166
153,385
14 (22)

Selected ratios
Fixed-charge coverage ratio/TIER⁽⁴⁾
1.58
1.42
0.92
0.97
1.29
16 bps 50 bps
Adjusted TIER⁽³⁾
1.17
1.16
1.22
1.13
1.21
1 (6)
Net interest yield⁽⁵⁾
1.12 % 1.20 % 1.43 % 1.47 % 1.42 % (8) (23)
Adjusted net interest yield⁽³⁾⁽⁶⁾
0.83
0.86
1.05
1.08
1.07
(3) (19)
Net charge-off rate⁽⁷⁾
0.00
0.01
0.00
0.00
0.01
(1) 1
⁽¹⁾

Year Ended May 31, Change
(Dollars in thousands) 2018 2017 2016 2015 2014 2018 vs. 2017 2017 vs. 2016
Balance sheet ��
Cash and cash equivalents $ 230,999
$ 166,615
$ 204,540
$ 248,836
$ 338,715
39% (19)%
Investment securities 608,851
92,554
87,940
84,472
55,177
558 5
Loans to members⁽⁸⁾
25,178,608
24,367,044
23,162,696
21,469,017
20,476,642
3 5
Allowance for loan losses (18,801 ) (37,376 ) (33,258 ) (33,690 ) (56,429 ) (50) 12
Loans to members, net 25,159,807
24,329,668

23,129,438

21,435,327

20,420,213
3 5
Total assets 26,690,204
25,205,692
24,270,200
22,846,059
22,190,685
6 4
Short-term borrowings 3,795,910
3,342,900
2,938,848
3,127,754
4,099,331
14 14
Long-term debt 18,714,960
17,955,594
17,473,603
16,244,794
14,475,635
4 3
Subordinated deferrable debt 742,410
742,274
742,212
395,699
395,627
0 0
Members’ subordinated certificates 1,379,982
1,419,025
1,443,810
1,505,420
1,612,191
(3) (2)
Total debt outstanding 24,633,262
23,459,793
22,598,473
21,273,667
20,582,784
5 4
Total liabilities 25,184,351
24,106,887
23,452,822
21,934,273
21,220,311
4 3
Total equity 1,505,853
1,098,805
817,378
911,786
970,374
37 34
Guarantees⁽⁹⁾
805,161
889,617
909,208
986,500
1,064,822
(9) (2)

Selected ratios—period end
Allowance coverage ratio⁽¹⁰⁾
0.07 % 0.15 % 0.14 % 0.16 % 0.28 % (8) bps 1 bp
Debt-to-equity ratio⁽¹¹⁾
16.72
21.94
28.69
24.06
21.87
(522) (675)
Adjusted debt-to-equity ratio⁽³⁾
6.18
5.95
5.82
6.26
5.90
23 13



	Year Ended May 31,															Change
(Dollars in thousands)	2020			2019			2018			2017			2016			2020 vs. 2019	2019 vs. 2018
Statement of operations
Interest income	$	1,151,286		$	1,135,670		$	1,077,357		$	1,036,634		$	1,012,636		1%	5%
Interest expense	(821,089		)	(836,209		)	(792,735		)	(741,738		)	(681,850		)	(2)	5
Net interest income	330,197			299,461			284,622			294,896			330,786			10	5
Fee and other income	22,961			15,355			17,578			19,713			21,785			50	(13)
Total revenue	353,158			314,816			302,200			314,609			352,571			12	4
Benefit (provision) for loan losses	(35,590		)	1,266			18,575			(5,978		)	646			**	(93)
Derivative gains (losses)⁽²⁾	(790,151		)	(363,341		)	231,721			94,903			(309,841		)	117	**
Results of operations of foreclosed assets	—			—			—			(1,749		)	(6,899		)	—	—
Investment securities gains (losses)	9,431			(1,799		)	—			—			—			**	**
Operating expenses⁽³⁾	(101,167		)	(93,166		)	(90,884		)	(86,226		)	(86,343		)	9	3
Other non-interest expense	(26,271		)	(8,775		)	(1,943		)	(1,756		)	(1,593		)	199	352
Income (loss) before income taxes	(590,590		)	(150,999		)	459,669			313,803			(51,459		)	291	**
Income tax benefit (expense)	1,160			(211		)	(2,305		)	(1,704		)	(57		)	**	(91)
Net income (loss)	$	(589,430	)	$	(151,210	)	$	457,364		$	312,099		$	(51,516	)	290	**

Adjusted operational financial measures
Adjusted interest expense⁽⁴⁾	$	(876,962	)	$	(879,820	)	$	(867,016	)	$	(826,216	)	$	(770,608	)	—%	1%
Adjusted net interest income⁽⁴⁾	274,324			255,850			210,341			210,418			242,028			7	22
Adjusted net income⁽⁴⁾	144,848			168,520			151,362			132,718			169,567			(14)	11

Selected ratios
Fixed-charge coverage ratio/TIER⁽⁵⁾	0.28			0.82			1.58			1.42			0.92			(54) bps	(76) bps
Adjusted TIER⁽⁴⁾	1.17			1.19			1.17			1.16			1.22			(2)	2
Net interest yield⁽⁶⁾	1.21		%	1.14		%	1.12		%	1.20		%	1.43		%	7	2
Adjusted net interest yield⁽⁴⁾⁽⁷⁾	1.00			0.97			0.83			0.86			1.05			3	14
Net charge-off rate⁽⁸⁾	0.00			0.00			0.00			0.01			0.00			0	0



	Year Ended May 31,															Change
(Dollars in thousands)	2020			2019			2018			2017			2016			2020 vs. 2019	2019 vs. 2018
Balance sheet
Cash, cash equivalents and restricted cash	$	680,019		$	186,204		$	238,824		$	188,421		$	209,168		265%	(22)%
Investment securities	370,135			652,977			609,851			92,554			87,940			(43)	7
Loans to members⁽⁹⁾	26,702,380			25,916,904			25,178,608			24,367,044			23,162,696			3	3
Allowance for loan losses	(53,125		)	(17,535		)	(18,801		)	(37,376		)	(33,258		)	203	(7)
Loans to members, net	26,649,255			25,899,369			25,159,807			24,329,668			23,129,438			3	3
Total assets	28,157,605			27,124,372			26,690,204			25,205,692			24,270,200			4	2
Short-term borrowings	3,961,985			3,607,726			3,795,910			3,342,900			2,938,848			10	(5)
Long-term debt	19,712,024			19,210,793			18,714,960			17,955,594			17,473,603			3	3
Subordinated deferrable debt	986,119			986,020			742,410			742,274			742,212			0	33
Members’ subordinated certificates	1,339,618			1,357,129			1,379,982			1,419,025			1,443,810			(1)	(2)
Total debt outstanding	25,999,746			25,161,668			24,633,262			23,459,793			22,598,473			3	2
Total liabilities	27,508,783			25,820,490			25,184,351			24,106,887			23,452,822			7	3
Total equity	648,822			1,303,882			1,505,853			1,098,805			817,378			(50)	(13)
Guarantees⁽¹⁰⁾	820,786			837,435			805,161			889,617			909,208			(2)	4

Selected ratios period end
Allowance coverage ratio⁽¹¹⁾	0.20		%	0.07		%	0.07		%	0.15		%	0.14		%	13 bps	—
Debt-to-equity ratio⁽¹²⁾	42.40			19.80			16.72			21.94			28.69			2,260	308
Adjusted debt-to-equity ratio⁽⁴⁾	5.85			5.73			6.18			5.95			5.82			12	(45)

^{____________________________}

**Calculation of percentage change is not meaningful.

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

⁽²⁾Consists of interest rate swap cash settlements income (expense) and forward value gains (losses). Derivative cash settlement amounts represent net periodic contractual interest accruals related to derivatives not designated for hedge accounting. Derivative forward value gains (losses) represent changes in fair value during the period, excluding net periodic contractual interest accruals, related to derivatives not designated for hedge accounting and ~~expense~~ amounts reclassified into income related to the cumulative transition ~~loss~~adjustment recorded in accumulated other comprehensive income as of June 1, 2001, as a result of the adoption of the derivative accounting guidance that required derivatives to be reported at fair value on the balance sheet.

⁽²⁾⁽³⁾Consists of salaries and employee benefits and the other general and administrative expenses components of non-interest expense, each of which are presented separately on our consolidated statements of operations.

⁽³⁾⁽⁴⁾See ~~“Non-GAAP~~“Item 7. MD&A—Non-GAAP Financial Measures” for details on the calculation of these non-GAAP adjusted measures and the reconciliation to the most comparable GAAP measures.

⁽⁴⁾⁽⁵⁾Calculated based on net income (loss) plus interest expense for the period divided by interest expense for the period. The fixed-charge coverage ratios and TIER were the same during each period presented because we did not have any capitalized interest during these periods.

⁽⁵⁾⁽⁶⁾Calculated based on net interest income for the period divided by average interest-earning assets for the period.

⁽⁶⁾⁽⁷⁾Calculated based on adjusted net interest income for the period divided by average interest-earning assets for the period.

⁽⁷⁾⁽⁸⁾Calculated based on net charge-offs (recoveries) for the period divided by average total outstanding loans for the period.

⁽⁸⁾⁽⁹⁾Consists of the outstanding principal balance of member loans plus unamortized deferred loan origination costs, which totaled $11 million as of ~~both~~ May 31, 2020, 2019, 2018and2017 and $10 million as of May 31, ~~2016, 2015 and 2014.~~2016.

^(9)(10)Reflects the total amount of member obligations for which CFC has guaranteed payment to a third party as of the end of each period. This amount represents our maximum exposure to loss, which significantly exceeds the guarantee liability recorded on our consolidated balance sheets. See “Note ~~12—~~13—Guarantees” for additional information.

^(10)(11)Calculated based on the allowance for loan losses at period end divided by total outstanding loans at period end.

^(11)(12)Calculated based on total liabilities at period end divided by total equity at period end.


Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

INTRODUCTION

Our financial statements include the consolidated accounts of ~~National Rural Utilities Cooperative Finance Corporation (“CFC”), National Cooperative Services Corporation (“NCSC”)~~CFC, NCSC, RTFC and ~~Rural Telephone Finance Cooperative (“RTFC”), and~~any subsidiaries created and controlled by CFC to hold foreclosed ~~assets.~~assets resulting from defaulted loans or bankruptcy. CFC and its consolidated entities did not hold ~~and did not have~~ any ~~subsidiaries or other entities that held,~~ foreclosed assets ~~as of~~during the fiscal year ended May 31, ~~2018~~2020 or the fiscal year ended May 31, ~~2017.~~2019. See “Item 1. Business—Overview” for information on the 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.

Our principal operations are organized for management reporting purposes into three business segments: CFC, NCSC and RTFC. Loans to members totaled $26,702 million as of May 31, 2020, of which 96% was attributable to CFC. We generated total revenue, which consists of net interest income and fee and other income, of $353 million and $315 million for fiscal years ended May 31, 2020 and 2019, respectively, of which 99% was attributable to CFC in each fiscal year. We provide information on the financial performance of each of our business segments in “Note 15—Business Segments.”

Management monitors a variety of key indicators to evaluate our business performance. In addition to financial measures determined in accordance with GAAP, management also evaluates performance based on certain non-GAAP measures and metrics, which we refer to as “adjusted” measures. ~~We identify our non-GAAP adjusted measures~~As discussed in “Item 6. Selected Financial ~~Data”~~Data,” we believe our non-GAAP adjusted measures provide meaningful information and are useful to investors because management evaluates performance based on these metrics, and certain financial covenants in our committed bank revolving line of credit agreements and debt indentures are based on these adjusted measures. We provide a reconciliation of our non-GAAP measures to the most comparable GAAP measures below under “Non-GAAP Financial Measures.”

The following MD&A is intended to provide the reader with an understanding of our consolidated results of operations, financial condition and liquidity by discussing the factors influencing changes from period to period and ~~the~~ key measures used by management to evaluate performance, ~~such as~~including, among others, net interest income, net interest yield, debt-to-equity ratio and the related non-GAAP adjusted measures, loan growth ~~debt-to-equity ratio~~ and credit quality metrics. Our MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and related notes in this Annual Report on Form 10-K for the fiscal year ended

May 31, ~~2018~~2020 (“2020 Form 10-K” or “this Report”), and the additional information contained elsewhere in this ~~report,~~Report, including the risk factors discussed under ~~“Part I—Item~~“Item 1A. Risk ~~Factors” in this report.~~Factors.”

EXECUTIVE SUMMARY

Our primary objective as a member-owned cooperative lender is to provide cost-based financial products to our rural electric members while maintaining a sound financial position required for investment-grade credit ratings on our debt instruments. Our objective is not to maximize ~~net income;~~profit; therefore, the rates we charge our member-borrowers reflect our ~~adjusted interest expense~~funding costs plus a spread to cover our operating expenses, a provision for loan losses and earnings sufficient to achieve interest coverage to meet our financial objectives. Our goal is to earn an annual minimum adjusted TIER of 1.10 and to maintain an adjusted debt-to-equity ratio at approximately 6.00-to-1 or ~~below 6.00-to-1.~~below.

We are subject to period-to-period volatility in our reported GAAP results due to changes in market conditions and differences in the way our financial assets and liabilities are accounted for under 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 GAAP to carry derivatives at fair value on our consolidated balance sheet; however, the financial assets and liabilities for which we use derivatives to economically hedge are carried at amortized cost. Changes in interest rates and ~~spreads~~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. ~~Based on the composition~~Because our derivative portfolio consists of ~~our interest rate~~a higher proportion of pay-fixed swaps than receive-fixed swaps, we generally record derivative losses ~~in earnings~~

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. As such, management uses our adjusted non-GAAP results to evaluate our operating performance. Our adjusted results include realized net periodic interest rate swap settlement amounts but exclude the impact of unrealized forward fair value gains and losses. Our financial debt covenants are also based on our non-GAAP adjusted results, as the forward fair value gains and losses related to our interest rate swaps do not affect our cash flows, liquidity or ability to service our debt.

COVID-19

The COVID-19 pandemic rapidly evolved from a global public health crisis into a global economic crisis, as containment measures were implemented to curb the spread of the virus. While the COVID-19 pandemic has negatively impacted financial markets, overall economic conditions and certain industry sectors, to date, we have been able to navigate the challenges of the pandemic reasonably well. In response to the COVID-19 pandemic, we have been working diligently to protect the health and safety of our employees while also fulfilling our commitment to meet the needs of our members. We have adhered to guidelines established by the Centers for Disease Control and Prevention and the WHO and orders issued by state and local governments where we operate. As the spread of the virus accelerated in the U.S. in mid-March, we implemented an emergency remote work policy, which reduced the number of employees working on site at our headquarters located in Northern Virginia to a minimal level of operationally critical staff. In mid-June, following the announcement by the governor of phased reopening dates and guidelines for Virginia, we implemented a return-to-work policy that included staggering staff, physical distancing measures, face covering requirements and an enhanced cleaning program to maintain the well-being of our employees as well as comply with Virginia’s reopening guidelines. To date, our business resiliency plans and technology systems have effectively supported both remote and on-site operations.

In response to the COVID-19 crisis, the U.S. federal government has deployed a full range of emergency monetary tools to ensure the financial system continues to function. In addition, the administration and Congress have passed various fiscal measures to provide emergency relief to individuals and certain groups impacted by the COVID-19 crisis, such as the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) relief bill of $2.2 trillion that was signed into law on March 27, 2020, to provide emergency assistance and health care response for individuals, families, and businesses affected by the pandemic. Among the numerous provisions contained in the CARES Act was the creation of a $349 billion Paycheck Protection Program, subsequently increased to $659 billion under the Paycheck Protection Program and Health Care Enhancement Act (“Enhancement Act”) on April 24, 2020, that provides federal government loan forgiveness for Small Business Administration Section 7(a) loans for small businesses, which includes our members or our members’ customers, to pay up to eight weeks of basic expenses, including utilities such as electric and telephone bills. As extended, small businesses may now apply for such loans until August 8, 2020. The CARES Act also added $45 billion for the disaster relief fund administered by the Federal Emergency Management Agency (“FEMA”) that our members may rely on to restore power after storms and emergencies. In addition, the CARES Act includes funds totaling $900 million for the Low-Income Home Energy Assistance Program, which may assist low-income and moderate-income consumers located in our members’ territories in paying their utility bills. Congress continues to consider stimulus programs designed to provide relief and bolster the economy, including, but not limited to, further extensions, modifications, and increased funding of the programs discussed herein.

As owners and operators of critical infrastructure, electric utility cooperatives are an integral part of the U.S. electric utility industry. It is imperative that they are able to deliver safe, reliable and affordable services to meet the essential energy needs of their customers. In fulfilling their service obligations, our electric cooperatives generally must maintain robust, flexible business-continuity and emergency preparedness plans that enable them to respond promptly and effectively to natural disasters, emergencies and other unexpected crises, such as the current COVID-19 pandemic.

While the government mandated stay-at-home orders and closure of non-essential businesses in mid-March resulted in a reduction in commercial and industrial electric loads, residential loads generally increased. Most of our electric cooperative borrowers derive a larger share of their revenues from residential customers than commercial and industrial customers, which helped mitigate the overall negative impact of declines in revenues from commercial and industrial customers. In limited cases where borrowers have a larger concentration of commercial and industrial customers, the borrowers have experienced a net decrease in revenues and a minor increase in customer receivables. However, to date, the COVID-19

pandemic has not had a material adverse impact on the operations and financial performance of the substantial majority of our borrowers. Our electric utility cooperative members, which have a strong track record in preparing for and responding to emergencies, thus far, have been able to manage the challenges and pressures presented by the COVID-19 pandemic. We have been working with our members not only as a lender, but also by offering a full range of products, services, tools and training designed to help cooperatives continue to deliver uninterrupted, essential utility services to their customers and successfully manage the ongoing challenges of the COVID-19 pandemic.

Financial Performance

Reported Results

We reported a net ~~income~~loss of ~~$457~~$589 million for the fiscal year ended May 31, 2020 (“fiscal year 2020”), which resulted in a TIER of 0.28. In comparison, we reported a net loss of $151 million and a TIER of ~~1.58~~0.82 for the fiscal year ended May 31, ~~2018~~2019 (“fiscal year ~~2018”~~2019”)~~, compared with~~. The significant variance between our reported results for the current fiscal year and the prior fiscal year was attributable to mark-to-market changes in the fair value of our derivative instruments resulting from interest rate changes, the establishment of an asset-specific allowance related to a ~~net income of $312 million~~power supply borrower and a ~~TIER of 1.42 for fiscal year 2017, and a net loss of $52 million and a TIER of 0.92 for fiscal year 2016.~~non-cash impairment charge related to internal-use software. Our debt-to-equity ratio ~~decreased~~increased to ~~16.72~~42.40 as of May 31, ~~2018,~~2020, from ~~21.94~~19.80 as of May 31, ~~2017,~~2019, primarily due to ~~an increase~~a reduction in equity resulting from our reported net ~~income~~loss of ~~$457~~$589 million for fiscal year ~~2018, which was partially offset by~~2020 and patronage capital retirement of ~~$45~~$63 million in ~~September 2017.~~the second quarter of fiscal year 2020.

The ~~variance of $145 million between~~increase in our reported net ~~income~~loss of ~~$457~~$438 million ~~for~~in fiscal year ~~2018 and net income of $312 million for fiscal year 2017~~2020 was primarily driven by an increase in derivative ~~gains~~losses of ~~$137~~$427 million. We recorded derivative losses of $790 million in fiscal year 2020, due to a decrease in the fair value of our pay-fixed swaps resulting from sharp declines in interest rates across the entire swap curve. In comparison, we reported derivative losses of $363 million in fiscal year 2019, due to a decrease in the fair value of our pay-fixed swaps resulting from a decline in medium- and longer-term interest rates during the second half of fiscal year 2019. Net interest income, which accounted for 93% and 95% of total revenue for fiscal years 2020 and 2019, respectively, increased $31 million, or 10%, attributable to the combined impact of an increase in our average interest-earning assets of $1,018 million, or 4%, and an increase in the net interest yield of 7 basis points, or 6%, to 1.21%. The increase in the net interest yield was due to a ~~favorable~~reduction in our average cost of funds of 17 basis points to 3.19%, which was partially offset by a decrease in the average yield on interest-earning assets of 11 basis points to 4.20%. The decrease in our average cost of funds reflected the impact of the maturity of higher cost debt during fiscal year 2019 and the replacement of this debt with lower-cost funding, combined with a decrease in the average cost of our short-term and variable-rate funding resulting from a steep decline in short-term interest rates during fiscal year 2020. The Federal Open Market Committee (“FOMC”) reduced the benchmark federal funds rate over this period by 225 basis points, including a 150 basis point cut in March 2020 to a near zero target range as part of a series of measures implemented to ease the economic impact of the COVID-19 crisis. The 3-month LIBOR decreased by 216 basis points over the last 12 months to 0.34% The decrease in the average yield on interest-earning assets was primarily attributable to a decrease in the average yield on our long-term fixed-rate loan portfolio, as the maturity and pay-off of loan advances at higher rates were replaced with new loan advances at lower rates due to the decline in interest rates.

Other factors contributing to the increase in the current fiscal year net loss compared with the prior fiscal year include an unfavorable shift in the provision for loan losses of ~~$24 million, partially offset by a decrease in net interest income of $10~~$37 million and ~~an increase in operating expenses~~a non-cash impairment charge of $5$31 million. We ~~recognized derivative gains~~recorded a provision for loan losses of ~~$232~~$36 million infor fiscal year ~~2018,~~2020, compared with ~~derivative gains of $95 million in the prior fiscal year, both of which were attributable to a net increase in~~ ~~the fair value of our pay-fixed swaps~~ as interest rates increased across the swap curve during each period. The increase in interest rates, however, was more pronounced during fiscal year 2018, which resulted in significantly higher derivative gains relative to fiscal year 2017. We recorded a benefit for loan losses of ~~$18~~$1 million infor fiscal year ~~2018, compared with a~~2019. The unfavorable shift in the provision ~~of $6 million in fiscal year 2017. The benefit~~ for loan losses was attributable to a reduction in our allowance for loan losses due to changes in the loss severity, or recovery rate, assumptions used in determining the collective allowance for our electric distribution and power supply loan portfolios to reflect management’s current assessment of expected losses in the event of default on a loan in these portfolios. The decrease in net interest income resulted from compression in the net interest yield, which was partially offset by an increase of 3% in average interest-earning assets. The net interest yield declined by 8 basis points to 1.12%, reflecting the impact of an overall increase in our average cost of fundsprimarily due to the ~~increase~~establishment of an asset-specific allowance of $34 million in ~~interest rates during~~the fourth quarter of fiscal year ~~2018, which resulted~~2020 for a loan to a CFC power supply borrower with an outstanding balance of $168 million as of May 31, 2020. We provide additional information on this loan below under “Executive Summary—Credit Quality.” The non-cash impairment charge of $31 million also was recorded in ~~a higher average cost for our short-term and variable-rate borrowings.~~

~~The variance~~the fourth quarter of ~~$364 million between our reported net income of $312 million for~~ fiscal year 2017 and net loss of $52 million for fiscal year 2016 was driven by mark-to-market changes in the fair value of our derivatives. We recognized derivative gains of $95 million in fiscal year 2017, largely2020, due to management’s decision to abandon a project to develop an ~~overall increase in interest rates during the year. In contrast, we recognized derivative losses of $310 million in fiscal year 2016, attributable to a decline in longer-term interest rates~~internal-use loan origination and a flattening of the swap curve. The favorable impact of the shift of $405 million to derivative gains in fiscal year 2017 was partially offset by a reduction in net interest income of $36 million, resulting from a decrease in the net interest yield of 23 basis points to 1.20%, which was partially offset by an increase in average interest-earning assets.servicing platform.

Adjusted Non-GAAP Results

Our adjusted net income totaled ~~$151~~$145 million and our adjusted TIER was 1.17 for fiscal year ~~2018,~~2020, compared with adjusted net income of ~~$133~~$169 million and adjusted TIER of ~~1.16~~1.19 for fiscal year ~~2017, and adjusted net income of $170 million and adjusted TIER of 1.22 for fiscal year 2016. Our~~2019. While our adjusted debt-to-equity ratio increased

to ~~6.18~~5.85 as of May 31, ~~2018,~~2020, from ~~5.95~~5.73 as of May 31, ~~2017, predominately due~~2019, primarily attributable to an increase in debt ~~outstanding~~ to fund loan ~~growth.~~growth, it remained below our targeted threshold of 6.00-to-1.

The ~~increase~~decrease in adjusted net income of ~~$18~~$24 million in fiscal year ~~2018~~2020 from fiscal year ~~2017~~2019 was primarily ~~driven by~~attributable to the ~~favorable~~unfavorable shift in the provision for loan losses of ~~$24~~$37 million due to the establishment of the asset-specific allowance of $34 million for the loan of $168 million to a CFC power supply borrower and the non-cash impairment charge resulting from the abandonment of the internal-use software project of $31 million recorded in the fourth quarter of fiscal year 2020, which were partially offset by ~~the increase in operating expenses of $5 million. While our adjusted net interest yield decreased by 3 basis points to 0.83%, largely due to~~ an increase in ~~our adjusted average cost of borrowings,~~ adjusted net interest income of ~~$210~~$18 million, ~~was flat because~~or 7%, and higher fee income and unrealized gains on investment securities. The increase in adjusted net interest income of 7% reflected the combined impact of the increase in average interest-earning assets of ~~3%.~~

~~The decrease~~4% and an increase in ~~adjusted net income of $37 million in fiscal year 2017 from~~ the ~~prior fiscal year was primarily driven by a decrease in~~ adjusted net interest ~~income~~yield of ~~$32 million, resulting from~~3 basis points, or 3%, to 1.00%. The increase in our adjusted net interest yield was attributable to a reduction in ~~the~~our adjusted ~~interest yield~~average cost of 19funds of 14 basis points to ~~0.86%~~3.40%, which was partially offset by a decrease in the ~~increase~~in average yield on interest-earning assets of 6%11 basis points to 4.20%. The early redemption and payoff of higher cost debt, including the $1.0 billion aggregate principal amount of 10.375% collateral trust bonds, in fiscal year 2019 and replacement of this debt with lower-cost funding, combined with the decrease in the average cost of our short-term and variable-rate funding resulting from the decrease in short-term interest rates during fiscal year 2020 drove the decrease in our adjusted average cost of funds.

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

Lending Activity

Loans to members totaled ~~$25,179~~$26,702 million as of May 31, ~~2018,~~2020, an increase of ~~$812~~$785 million, or 3%, from May 31, ~~2017.~~2019. The increase in loans was ~~primarily due to~~driven by an increase in ~~CFC distribution~~long-term fixed-rate loans of ~~$726~~$1,378 million, ~~an increase in NCSC loans of~~

~~$173 million and an increase in RTFC loans of $9 million, which was~~ partially offset by a decrease in long-term variable-rate and line of credit loans of $593 million. CFC distribution loans, CFC power supply loans, CFC statewide and associate loans and RTFC loans increased by $615 million, $153 million, $22 million and $40 million, respectively, which were partially offset by a decrease in NCSC loans of ~~$107~~$45 million.

Long-term loan advances totaled ~~$2,203~~$2,422 million during fiscal year ~~2018,~~2020, with approximately ~~67%~~80% of those advances for capital expenditures by members and ~~24%~~15% for the refinancing of loans made by other lenders. In comparison, long-term loan advances totaled $1,843 million during fiscal year 2019, with approximately 87% of those advances for capital expenditures by members and 10% for the refinancing of loans made by other lenders. CFC had long-term fixed-rate loans totaling ~~$904~~$463 million that were scheduled to reprice during fiscal year ~~2018. Of this total, $742~~2020, of which $441 million repriced to a new long-term fixed ~~rate; $157~~rate, $11 million repriced to a long-term variable ~~rate;~~rate and $5$10 million was repaid in full. In comparison, CFC had long-term fixed-rate loans totaling $761 million that were scheduled to reprice during fiscal year 2019, of which $568 million repriced to a new long-term fixed rate, $124 million repriced to a long-term variable rate and $69 million was repaid in full.

Credit Quality

Despite the economic disruption caused by COVID-19, the overall credit quality of our loan portfolio remained high as of May 31, 2020, as evidenced by our continued strong credit performance metrics. We had no delinquent loans as of May 31, 2020, and we have not experienced any loan defaults or charge-offs since fiscal year 2017. The outstanding loan to the CFC power supply borrower of $168 million, discussed above, is the only loan that was classified as nonperforming as of May 31, 2020. In comparison, we did not have any loans classified as nonperforming as of May 31, 2019.

Loans outstanding to electric utility organizations represented approximately 99% of total loans outstanding as of May 31, 2020, unchanged from May 31, 2019. We historically have had limited defaults and losses on loans 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. Fourth, electric cooperatives tend to adhere to a conservative 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. Of our total loans outstanding, 94% were secured and 6% were unsecured as of May 31, 2020, compared with 92% secured and 8% unsecured as of May 31, 2019.

The allowance for loan losses, which consists of a collective allowance for loans in our portfolio that are not considered individually impaired and an asset-specific allowance for loans identified as individually impaired, totaled $53 million and $18 million as of May 31, 2020 and 2019, respectively. The collective allowance totaled $18 million and $17 million as of May 31, 2020 and 2019, respectively, and the asset-specific allowance totaled $35 million and $1 million as of each respective date. The total allowance coverage ratio was 0.20% and 0.07% as of May 31, 2020 and 2019, respectively, while the collective allowance coverage ratio was 0.07% and 0.06% as of each respective date.

The increase in the allowance for loan losses was attributable to the establishment of the asset-specific allowance of $34 million in the fourth quarter of fiscal year 2020 for the loan to the CFC power supply borrower discussed above, with an outstanding balance of $168 million as of May 31, 2020. Under the terms of the loan, which matures in December 2026, the amount the borrower is required to pay in 2024 and 2025 may vary as the payments are contingent on the borrower’s financial performance in those years. As of May 31, 2020, the borrower was current with respect to required payments on the loan and not in default. However, based on our review and assessment of the most recent forecast and underlying assumptions provided by the borrower in May 2020, we no longer believe that the total future expected cash payments from the borrower through the maturity of the loan in December 2026 will be sufficient to repay the outstanding loan balance of $168 million as of May 31, 2020. We therefore determined that it was appropriate to classify the loan as nonperforming, place it on nonaccrual status, individually evaluate the loan for impairment and establish an asset-specific allowance based on the estimated impairment as of May 31, 2020. The estimated impairment amount is subject to change based on our assessment of forecast updates provided by the borrower and the actual future financial performance of the borrower.

We provide additional information on our management of credit risk and the credit quality of our loan portfolio below in the section “Credit Risk.”

Financing Activity

We issue debt primarily to fund growth in our loan portfolio. As such, our outstanding debt volume generally increases and decreases in response to member loan demand. ~~As total~~We had no outstanding ~~loans increased during fiscal year 2018, our debt also increased.~~dealer commercial paper as of May 31, 2020, as we experienced an increase in short-term member investments. Our targeted maximum threshold for dealer commercial paper is $1,250 million. Total debt outstanding ~~was $24,633~~of $26,000 million as of May 31, ~~2018,~~2020, increased by $838 million, or 3%, from the prior fiscal-year end due to an increase ~~of $1,173 million, or 5%, from May 31, 2017.~~in borrowings to fund the increase in loans to members. The increase was primarily attributable to ~~an increase in dealer medium-term notes of $638 million; an increase in the Federal Agricultural Mortgage Corporation (“Farmer Mac”) notes payable of $378 million; an aggregate~~a net increase in member commercial paper, select notes and daily liquidity fund notes of ~~$230 million; and an~~$991 million, a net increase in ~~dealer commercial paper outstanding~~borrowings under USDA’s Guaranteed Underwriter Program (“Guaranteed Underwriter Program”) of ~~$65~~$851 million and a net increase in medium-term notes of $160 million. These increases were partially offset by net decreases in dealer commercial paper of $945 million and collateral trust bonds of $195 million.

Liquidity

In light of the extreme volatility and disruptions in the capital and credit markets in early March 2020 resulting from the COVID-19 crisis, including a ~~decrease~~significant decline in ~~notes payable~~corporate debt and equity issuances and a deterioration in the commercial paper market, we took a number of precautionary actions to enhance our financial flexibility by bolstering our cash position to ensure we have adequate cash readily available to meet both expected and unexpected cash needs without adversely affecting our daily operations. These actions included, but were not limited to, drawing additional advances under our committed credit facilities, revising our objective for the ~~Federal Financing Bank~~use of our held-to-maturity investment portfolio from previously serving as a supplemental source of liquidity to serving as a readily available source of liquidity and ~~guaranteed by RUS~~executing a plan for the orderly liquidation of a portion of debt securities from our investment portfolio. In March 2020, we borrowed an additional $625 million under the Guaranteed Underwriter Program and $250 million under the Farmer Mac note purchase agreement. We also transferred all of ~~$129 million.~~the debt securities in our held-to-maturity investment portfolio to trading and sold securities from the trading portfolio totaling $239 million in March and April 2020.

~~We provide additional information on~~Subsequent to our ~~financing activities below under “Consolidated Balance Sheet Analysis—Debt” and “Liquidity Risk.”~~cash management actions in early March 2020, the FOMC unveiled a set of aggressive measures to cushion the economic impact of the global COVID-19 crisis, including, among others, cutting the federal funds rate by 150

~~Outlook for~~basis points to a range of 0.00% to 0.25% and establishing a series of emergency credit facilities in an effort to support the ~~Next 12 Months~~flow of credit in the economy, ease liquidity pressure and calm market turmoil. While volatility in the financial markets remains elevated, overall market liquidity concerns have eased since the actions taken by the FOMC.

~~We currently expect that~~Due largely to the actions undertaken in March and April 2020, we increased our ~~net interest income, net interest yield, adjusted net interest income and adjusted net interest yield will increase over the next 12 months~~cash position to $671 million as ~~a result~~ of ~~a projected decrease in our average cost~~May 31, 2020, up from $178 million as of funds and an increase in average outstanding loans. We have scheduled maturities of higher-cost debt over the next 12 months, including $1,830 million in collateral trust bonds with a weighted average coupon rate of 6.98%. On July 12, 2018, we redeemed $300 million of the $1 billion aggregate principal amount of 10.375% collateral trust bonds due November 1, 2018, leaving a remaining outstanding amount of $700 million. We expect that we will be able to replace this higher-cost debt with lower-cost funding, which will reduce our aggregate weighted average cost of funds. We expect the amountMay 31, 2019. The face value of long-term ~~loan advances to exceed anticipated loan repayments over the next 12 months, resulting in an increase in average outstanding loans.~~

~~Long-term~~ debt scheduled to mature over the next 12 months totaled ~~$2,745~~$2,036 million as of May 31, ~~2018. We believe we have sufficient liquidity from the combination~~2020, consisting of ~~existing cash~~$1,728 million of fixed-rate debt at a weighted average cost of 2.59% and ~~cash equivalents, member loan repayments, committed bank revolving lines~~$308 million of credit and our ability to issue debt in the capital markets, to our members and in private placements, to meet the demand for member loan advances and satisfy our obligations to repay long-term debt maturing over the next 12 months.variable-rate debt. As of May 31, ~~2018,~~2020, sources of liquidity readily available for access ~~which we refer to as our liquidity reserves, totaled$7,147~~totaled $7,042 million, consisting of (i) ~~$231~~$671 million in cash and cash ~~equivalents,~~equivalents; (ii) up to ~~$1,225~~$900 million available under committed loan facilities under the Guaranteed Underwriter ~~Program,~~Program; (iii) up to ~~$3,082~~$2,722 million available for access under committed bank revolving line of credit ~~agreements,~~agreements; (iv) up to ~~$200 million available under a committed revolving note purchase agreement with Farmer Mac, and (v) up to $2,409~~$2,440 million available under a revolving note purchase agreement with Farmer Mac, subject to market ~~conditions.~~conditions, and (v) $309 million in investment securities. Although we currently believe that our available liquidity along with the ability to access the capital markets as a well-known seasoned issuer of debt will be more than sufficient to cover our debt obligations as well as meet the borrowing needs of our members, we continue to review actions that we may take to further enhance our financial flexibility in the event that market conditions deteriorate further and for an extended period.

We believe we can continue to ~~roll over the~~roll-over outstanding member short-term debt of ~~$2,632~~$3,712 million as of May 31, ~~2018,~~2020, based on our expectation that our members will continue to reinvest their excess cash in our commercial paper, daily liquidity fund notes, select notes and medium-term notes. ~~Although we expect~~We also have the ability to ~~continue accessing~~access the dealer commercial paper market to help meet our liquidity ~~needs,~~needs. Although the intra-period amount of outstanding dealer commercial paper may fluctuate based on our liquidity requirements, we intend to manage our short-term wholesale funding risk by maintaining outstanding dealer commercial paper at an amount near or below $1,250 million for the foreseeable future. We expect to continue to be in compliance with the covenants under our committed bank revolving line of credit agreements, which will allow us to mitigate roll-over risk as we can draw on these facilities to repay dealer or member commercial paper that cannot be refinanced with similar debt.

We provide additional information on our management of liquidity risk, our primary sources and uses of liquidity and our liquidity profile below in the section “Liquidity Risk.”

~~While~~Outlook for the Next 12 Months

Although we have been able to navigate the challenges of the COVID-19 pandemic reasonably well to date, the outlook for the next 12 months remains highly uncertain. Many states have experienced a resurgence in the spread of COVID-19 due in part to the lifting of restrictions and reopening, which has led several states to pause or adjust their reopening plans. There is significant uncertainty about (i) the duration and severity of the COVID-19 pandemic; (ii) the extent of its future economic impact; (iii) additional, or extended, federal, state or local government orders and regulations that might be imposed to contain the spread of the virus; and (iv) measures that the U.S. federal government may take to provide further COVID-19 economic relief and stimulus. Due to these uncertainties and the continued evolving, unpredictable and unprecedented nature of the COVID-19 pandemic, we are not ~~subject~~able at this time to ~~bank regulatory capital rules,~~quantify and forecast the impact that the pandemic will have on our business during fiscal year 2021. As noted above, we ~~generally aim~~currently believe that we have sufficient cash flow and liquidity to ~~maintain an adjusted debt-to-equity ratio at approximately~~cover our debt obligations as well as meet the borrowing needs of our members. Thus far, we have not experienced any delinquencies in scheduled loan payments from our borrowers and we have not received any requests from borrowers for payment deferrals or ~~below 6.00-to-1. Our adjusted debt-to-equity ratio was 6.18 as~~covenant relief. While our borrowers operate in a defensive industry sector that historically has been resilient to economic downturns, we are actively monitoring conditions and developments, analyzing key credit metrics of ~~May 31, 2018, above~~ our ~~targeted threshold due~~borrowers to facilitate the ~~increase~~timely identification of loans with potential credit weaknesses and assessing any notable shifts in ~~debt outstanding to fund~~the credit quality of our loan ~~growth. Due to anticipated asset growth, we expect~~portfolio.

See “Item 1A. Risk Factors” for a discussion of the potential adverse impact of the COVID-19 pandemic on our ~~adjusted debt-to-equity ratio to be above 6.00-to-1 over the next 12 months.~~business, results of operations, financial condition and liquidity.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the amount of assets, liabilities, income and expenses in the 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 under “Note 1—Summary of Significant Accounting Policies.”

We have identified certain accounting policies as 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. Our most critical accounting policies and estimates involve the determination of the allowance for loan losses and fair value. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. Management has discussed significant judgments and assumptions in applying our critical accounting policies with the Audit Committee of our board of directors. See “Item 1A. Risk Factors” for a discussion of the risks associated with management’s judgments and estimates in applying our accounting policies and methods.

Allowance for Loan Losses

We maintain an allowance for loan losses that represents management’s estimate of probable losses inherent in our loan portfolio as of each balance sheet date. Our allowance for loan losses ~~includes~~consists of a collective allowance for loans in our portfolio that are not considered individually impaired and a specific allowance for loans identified as individually impaired. Our allowance for loan losses ~~decreased by~~totaled $53 million and $18 ~~million to $19~~ million as of May 31, ~~2018, from $37~~2020 and 2019, respectively, and the allowance coverage ratio was 0.20% and 0.07% as of each date. The increase in the allowance was attributable to the establishment of an asset-specific allowance of $34 million in the fourth quarter of fiscal year 2020 for a loan to a CFC power supply borrower with an outstanding balance of $168 million as of May 31, ~~2017.~~2020, that we designated as individually impaired. We provide additional information on the increase in our allowance for loan losses in “Credit Risk—Loan Portfolio Credit Risk,” “Note 4—Loans” and “Note 5—Allowance for Loan Losses.” We discuss the methodology used to estimate the allowance for loan losses in “Note 1—Summary of Significant Accounting Policies.”

~~Collective Allowance~~

The collective loss reserve is calculated using an internal model to estimate probable incurred losses for segments within our loan portfolio that have similar risk characteristics. Our segments are based on member borrower type, which are further stratified into loan pools based on borrower risk ratings. As part of our credit risk-management process, we regularly evaluate each borrower and loan facility in our loan portfolio and assign an internal risk rating. Our borrower risk rating is intended to reflect probability of default. We engage an independent third party to perform an annual review of a sample of borrowers and loan facilities to corroborate our internally assigned risk ratings. We determine the collective allowance by applying loss factors to the outstanding principal balance of each loan pool. The loss factors consist of a probability of default, or default rate, and the loss given default, or loss severity. The probability of default is based on an estimated loss emergence period of five years. We utilize third-party industry default data for estimated default rates. We utilize our historical loss experience for each borrower type to estimate loss severity, which we refer to as our recovery rates. The historical recovery rates for each borrower type may be adjusted based on management’s consideration and assessment of current conditions and relevant factors, such as recent trends in credit performance, historical variability of recovery rates and additional analysis of long-term loss severity experience, changes in risk management practices, current and past underwriting standards, specific industry issues and trends and general economic conditions.

~~Specific Allowance~~

The specific allowance for individually impaired loans that are not collateral dependent is calculated based on the difference between the recorded investment in the loan and the present value of the expected future cash flows, discounted at the loan’s effective interest rate. If the loan is collateral dependent, we measure the impairment based on the current fair value of the collateral less estimated selling costs. Loans are considered to be collateral dependent if repayment of the loan is expected to be provided solely by the underlying collateral and there are no other available and reliable sources of repayment.

Key Assumptions

Determining the appropriateness of the allowance for loan losses is subject to numerous estimates and assumptions requiring significant management judgment about matters that involve a high degree of subjectivity and are difficult to predict. The key assumptions in determining our collective allowance that require significant management judgment and may have a material impact on the amount of the allowance include: the segmentation of our ~~evaluation of the risk profile of various~~ loan ~~portfolio segments and~~portfolio; our internally assigned borrower risk ratings; the estimated loss emergence period; the ~~selection of third-party proxy data to estimate the~~ probability of default; ~~our historical~~the loss ~~experience and assumptions regarding~~severity or recovery ~~rates~~rate in the event of ~~default;~~default for each portfolio segment; and management’s ~~judgment~~consideration of qualitative factors that may cause estimated credit losses associated with our existing loan portfolio to differ from our historical loss experience.

As discussed below in “Credit Risk—Loan Portfolio Credit Risk,” CFC has experienced only 16 defaults in its 51-year history, and we have had no defaults in our electric utility loan portfolio since fiscal year 2013. As such, we have a limited history of defaults to develop reasonable and supportable estimated probability of default rates for our existing loan portfolio. We therefore utilize third-party default data for the ~~selection and evaluation~~utility sector as a proxy to estimate probability of ~~qualitativefactors to assess the overall current level of exposure within~~default rates for our loan ~~portfolio.~~ portfolio segments. However, we utilize our internal historical loss experience to estimate loss given default, or the recovery rate, for each of our loan portfolio segments, as we believe it provides a more reliable estimate than third-party loss severity data due to the organizational structure and operating environment of rural utility cooperatives, our lending practice of generally requiring a senior security position on the assets and revenue of borrowers for long-term loans, the approach we take in working with borrowers that may be experiencing operational or financial issues and other factors discussed in “Credit Risk—Loan Portfolio Credit Risk.”

The key assumptions in determining our ~~specific~~asset-specific allowance that require significant management judgment and may have a material impact on the amount of the allowance include ~~estimating~~the determination that a loan is impaired, measuring the amount and timing of ~~expected~~future cash flows ~~from~~for impaired loans that are not collateral-dependent and estimating the value of the underlying collateral ~~each of which impacts loss severity and certain cash flow assumptions.~~ for impaired loans that are collateral-dependent.

The degree to which any particular assumption affects the allowance for loan losses depends on the severity of the change and its relationship to the other assumptions.

We regularly evaluate the underlying assumptions used in determining the allowance for loan losses and periodically update our assumptions 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, general economic trends and other factors specific to our loan portfolio segments. InWe did not change the ~~fourth quarter~~nature of ~~fiscal year 2018, we increased~~ the ~~recovery rate~~underlying assumptions and inputs used in determining the collective allowance for our electric distribution and power supply loan portfolios to reflect management’s current assessment of expected losses in the event of default on a loan in these portfolios. The increase in recovery rate assumptions for these electric utility loan portfolios was the primary driver of the $18 million reduction in our allowance for loan losses ~~to $19 million as of May 31, 2018, from $37 million as of~~

~~May 31, 2017.~~

~~Our electric utility loan portfolio has continued to exhibit strong credit performance. In~~during fiscal year 2018, for the fifth consecutive fiscal year, we had no payment defaults, charge-offs, delinquent loans or nonperforming loans in our electric utility loan portfolio. In addition, 93% of the loans in our total loan portfolio were secured as of May 31, 2018, up from 92% as of May 31, 2017. Although we downgraded one electric distribution cooperative and its subsidiary, which had combined total loans outstanding of $165 million, to substandard as of May 31, 2018, they are current with regard to all payments of principal and interest on their loans and we currently do not anticipate a default. Therefore, the loans outstanding to this borrower and its subsidiary were not deemed to be impaired as of May 31, 2018. In the event of a default, we currently expect to collect substantially all of the outstanding amount based on our historical average recovery rate for the electric distribution and power supply loan portfolios.2020.

Sensitivity Analysis

As noted above, our allowance for credit losses is sensitive to a variety of factors. While management uses its best judgment to assess loss data and other factors to determine the allowance for loan losses, changes in our loss assumptions, adjustments to assigned borrower risk ratings, the use of alternate external data sources or other factors could affect our estimate of probable credit losses inherent in the portfolio as of each balance sheet date, which would also impact the related provision for loan losses recognized in our consolidated statements of operations. For example, changes in the inputs below, without taking into consideration the impact of other potential offsetting or correlated inputs, would have the following effect on our allowance of loan losses as of May 31, ~~2018.~~2020.

A 10% increase or decrease in the default rates for all of our portfolio segments would result in a corresponding increase or decrease of approximately $2 million.

A 1% increase or decrease in the recovery rates for all of our portfolio segments would result in a corresponding decrease or increase of approximately $4$5 million.

A one-notch downgrade in the internal borrower risk ratings for our entire loan portfolio would result in an increase of approximately ~~$22~~$17 million, while a one-notch upgrade would result in a decrease of approximately ~~$11~~$12 million.

These sensitivity analyses are intended to provide an indication of the isolated impact of hypothetical alternative assumptions on our allowance for loan losses. Because management evaluates a variety of factors and inputs in determining the allowance for loan losses, these sensitivity analyses are not considered probable and do not imply an expectation of

future changes in loss rates or borrower risk ratings. Given current processes employed in estimating the allowance for loan losses, management believes the inherent loss rates and currently assigned risk ratings are appropriate. It is possible that others performing the analyses, given the same information, may at any point in time reach different reasonable conclusions that could be significant to our consolidated financial statements.

We provide ~~additional~~ information on ~~the methodology for determining the allowance for loan losses in “Note 1—Summary of Significant Accounting Policies” and changes in~~ our allowance for loan losses in “Credit Risk—Allowance for Loan Losses” and “Note ~~4—Loans.~~5—Allowance for Loan Losses.” Also refer to “Credit Risk—Loan Portfolio Credit Risk—Credit Quality” and “Note 4—Loans” for information on the credit performance and quality of our loan portfolios.

On June 1, 2020, we adopted the current expected credit losses (“CECL”) accounting standard, which requires estimating credit losses over the contractual life of financial assets carried at amortized cost and replaces the incurred loss method used in determining our allowance for loan losses as of May 31, 2020 and in prior fiscal years. See “Note 1—Summary of Significant Accounting Policies,” for additional information on the CECL accounting standard, including our financial assets that are within the scope of CECL, our approach in estimating life-time expected credit losses under CECL and the expected impact on our financial statements from the adoption of CECL.

Fair Value

Certain of our financial instruments are carried at fair value on our consolidated balance sheet, with changes in fair value recorded either through earnings or other comprehensive income (loss) in accordance with applicable accounting standards. These include our ~~available-for-sale investment~~equity securities and derivatives. The determination of fair value is important for certain other assets that are periodically evaluated for impairment using fair value, such as individually impaired loans.

Fair value 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 (also referred to as an exit price). The fair value accounting guidance provides a three-level fair value hierarchy for classifying fair value measurement techniques. 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. Fair value measurement is assigned a level based on the lowest level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are summarized below:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2: Observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities

Level 3: Unobservable inputs

The degree of management judgment involved in determining fair value is dependent upon the availability of quoted prices in active markets or observable market parameters. When quoted prices and observable data in active markets are not fully available, management’s judgment is necessary to estimate fair value. Changes in market conditions, such as reduced liquidity in the capital markets or changes in secondary market activities, may reduce the availability and reliability of quoted prices or observable data used to determine fair value.

Significant judgment may be required to determine whether certain assets and liabilities measured at fair value are classified as Level 2 or Level 3. In making this determination, we consider all available information that market participants use to measure fair value, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs used. Based upon the specific facts and circumstances, judgments are made regarding the significance of Level 3 inputs used in determining the fair value of the asset or liability in its entirety. If Level 3 inputs are considered significant, the valuation technique is classified as Level 3. The process for determining fair value using unobservable inputs is generally more subjective and involves a high degree of management judgment and assumptions.

Financial instruments recorded at fair value on a recurring basis, which consisted primarily of ~~financial instruments, including available-for-sale investment~~equity and debt securities, deferred compensation investments and derivatives, represented approximately 2% and 1% of our total assets as of ~~both~~ May 31, ~~2018~~2020 and ~~2017,~~2019, respectively, and 1%5% and 2%~~, respectively,~~ of total liabilities as of May 31, ~~2018~~2020 and ~~2017.~~2019, respectively. The fair value of these financial instruments was determined using either Level 1 or 2 inputs. We did not have any financial instruments recorded at fair value on a recurring basis for which the fair value was determined using Level 3 inputs as of May 31, ~~2018~~2020 and ~~2017.~~2019.

We discuss the valuation inputs and assumptions used in determining the fair value, including the extent to which we have relied on significant unobservable inputs to estimate fair value, in “Note ~~13—~~14—Fair Value Measurement.”

RECENT ACCOUNTING CHANGES AND OTHER DEVELOPMENTS

Recent Accounting Changes

See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted during the current year, as well as recently issued accounting standards not yet required to be adopted and the expected impact of the adoption of these accounting standards. 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 also discuss the impact in the applicable section(s) of this MD&A.

CONSOLIDATED RESULTS OF OPERATIONS

The section below provides a comparative discussion of our consolidated results of operations between fiscal ~~year 2018~~years 2020 and ~~2017 and between fiscal year 2017 and 2016.~~2019. Following this section, we provide a comparative analysis of our consolidated balance sheets as of May 31, ~~2018~~2020 and ~~2017.~~2019. You should read these sections together with our “Executive Summary—Outlook for the Next 12 Months” where we discuss trends and other factors that we expect will affect our future results of operations. See “Item 7. MD&A—Consolidated Results of Operations ” in our Annual Report on Form 10-K for the fiscal year ended May 31, 2019 for a comparative discussion of our consolidated results of operations between fiscal year 2019 and 2018.

Net Interest Income

Net interest income represents the difference between the interest income earned on our interest-earning assets, which includes loans and investment securities, 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 from 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 1 presents ~~our~~ average ~~balance sheets~~balances for fiscal years ~~2018, 2017~~2020, 2019 and ~~2016,~~2018, 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 1 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 measures to the most comparable GAAP measures under “Non-GAAP Financial Measures.”

Table 1: Average Balances, Interest Income/Interest Expense and Average Yield/Cost


	Year Ended May 31,																					Year Ended May 31,
(Dollars in thousands)	2018							2017							2016							2020							2019							2018
Assets:	Average Balance		Interest Income/Expense			Average Yield/Cost		Average Balance		Interest Income/Expense			Average Yield/Cost		Average Balance		Interest Income/Expense			Average Yield/Cost		Average Balance		Interest Income/Expense			Average Yield/Cost		Average Balance		Interest Income/Expense			Average Yield/Cost		Average Balance		Interest Income/Expense			Average Yield/Cost
Long-term fixed-rate loans⁽¹⁾	$	22,570,209	$	1,000,492		4.43	%	$	21,896,200	$	980,173		4.48	%	$	20,734,387	$	959,701		4.63	%	$	23,890,577	$	1,043,918		4.37	%	$	22,811,905	$	1,012,277		4.44	%	$	22,570,209	$	1,000,492		4.43	%
Long-term variable-rate loans	925,910		27,152			2.93		799,412		19,902			2.49		708,801		19,858			2.80		891,541		31,293			3.51		1,093,455		41,219			3.77		925,910		27,152			2.93
Line of credit loans	1,402,555		38,195			2.72		1,124,471		25,389			2.26		1,031,548		24,864			2.41		1,718,364		55,140			3.21		1,609,629		57,847			3.59		1,402,555		38,195			2.72
TDR loans ⁽²⁾	12,885		889			6.90		14,349		905			6.31		12,947		512			3.95		11,238		836			7.44		12,183		846			6.94		12,885		889			6.90
Nonperforming loans	—		—			—		—		—			—		3,164		142			4.49		5,957		—			—		—		—			—		—		—			—
Other income, net⁽³⁾	—		(1,185		)	—		—		(1,082		)	—		—		(1,088		)	—		—		(1,304		)	—		—		(1,128		)	—		—		(1,185		)	—
Total loans	24,911,559		1,065,543			4.28		23,834,432		1,025,287			4.30		22,490,847		1,003,989			4.46		26,517,677		1,129,883			4.26		25,527,172		1,111,061			4.35		24,911,559		1,065,543			4.28
Cash, time deposits and investment securities	512,517		11,814			2.31		734,095		11,347			1.55		639,060		8,647			1.35		866,013		21,403			2.47		838,599		24,609			2.93		512,517		11,814			2.31
Total interest-earning assets	$	25,424,076	$	1,077,357		4.24	%	$	24,568,527	$	1,036,634		4.22	%	$	23,129,907	$	1,012,636		4.38	%	$	27,383,690	$	1,151,286		4.20	%	$	26,365,771	$	1,135,670		4.31	%	$	25,424,076	$	1,077,357		4.24	%
Other assets, less allowance for loan losses	644,563							574,682							808,479							551,378							879,817							644,563
Total assets	$	26,068,639						$	25,143,209						$	23,938,386						$	27,935,068						$	27,245,588						$	26,068,639

Liabilities:
Short-term borrowings	$	3,294,573	$	50,616		1.54	%	$	3,185,084	$	26,684		0.84	%	$	2,995,530	$	14,728		0.49	%	$	4,113,463	$	77,995		1.90	%	$	3,729,239	$	92,854		2.49	%	$	3,294,573	$	50,616		1.54	%
Medium-term notes	3,361,484		111,814			3.33		3,345,410		99,022			2.96		3,412,061		86,270			2.53		3,551,973		125,954			3.55		3,813,666		133,797			3.51		3,361,484		111,814			3.33
Collateral trust bonds	7,625,182		336,079			4.41		7,293,251		340,854			4.67		6,917,265		333,338			4.82		7,185,910		257,396			3.58		7,334,957		273,413			3.73		7,625,182		336,079			4.41
Guaranteed Underwriter Program notes payable	4,956,417		140,551			2.84		4,873,520		142,661			2.93		4,649,532		143,240			3.08		5,581,854		162,929			2.92		5,045,478		147,895			2.93		4,956,417		140,551			2.84
Farmer Mac notes payable	2,578,793		56,004			2.17		2,355,324		33,488			1.42		2,124,552		20,529			0.97		2,986,469		87,617			2.93		2,807,705		90,942			3.24		2,578,793		56,004			2.17
Other notes payable	33,742		1,509			4.47		39,314		1,780			4.53		44,621		2,051			4.60		17,586		671			3.82		28,044		1,237			4.41		33,742		1,509			4.47
Subordinated deferrable debt	742,336		37,661			5.07		742,203		37,657			5.07		435,488		21,245			4.88		986,035		51,527			5.23		759,838		38,628			5.08		742,336		37,661			5.07
Subordinated certificates	1,396,449		58,501			4.19		1,433,657		59,592			4.16		1,458,376		60,449			4.14		1,349,454		57,000			4.22		1,369,051		57,443			4.20		1,396,449		58,501			4.19
Total interest-bearing liabilities	$	23,988,976	$	792,735		3.30	%	$	23,267,763	$	741,738		3.19	%	$	22,037,425	$	681,850		3.09	%	$	25,772,744	$	821,089		3.19	%	$	24,887,978	$	836,209		3.36	%	$	23,988,976	$	792,735		3.30	%
Other liabilities	822,745							921,749							1,036,907							1,141,884							816,074							822,745
Total liabilities	24,811,721							24,189,512							23,074,332							26,914,628							25,704,052							24,811,721
Total equity	1,256,918							953,697							864,054							1,020,440							1,541,536							1,256,918
Total liabilities and equity	$	26,068,639						$	25,143,209						$	23,938,386						$	27,935,068						$	27,245,588						$	26,068,639

Net interest spread⁽⁴⁾						0.94	%						1.03	%						1.29	%						1.01	%						0.95	%						0.94	%
Impact of non-interest bearing funding⁽⁵⁾						0.18							0.17							0.14							0.20							0.19							0.18
Net interest income/net interest yield⁽⁶⁾			$	284,622		1.12	%			$	294,896		1.20	%			$	330,786		1.43	%			$	330,197		1.21	%			$	299,461		1.14	%			$	284,622		1.12	%

Adjusted net interest income/adjusted net interest yield:
Interest income			$	1,077,357		4.24	%			$	1,036,634		4.22	%			$	1,012,636		4.38	%			$	1,151,286		4.20	%			$	1,135,670		4.31	%			$	1,077,357		4.24	%
Interest expense			792,735			3.30				741,738			3.19				681,850			3.09				821,089			3.19				836,209			3.36				792,735			3.30
Add: Net accrued periodic derivative cash settlement⁽⁷⁾			74,281			0.69				84,478			0.80				88,758			0.89				55,873			0.55				43,611			0.40				74,281			0.69
Adjusted interest expense/adjusted average cost⁽⁸⁾			$	867,016		3.61	%			$	826,216		3.55	%			$	770,608		3.50	%			$	876,962		3.40	%			$	879,820		3.54	%			$	867,016		3.61	%
Adjusted net interest spread⁽⁴⁾						0.63	%						0.67	%						0.88	%						0.80	%						0.77	%						0.63	%
Impact of non-interest bearing funding						0.20							0.19							0.17							0.20							0.20							0.20
Adjusted net interest income/adjusted net interest yield⁽⁹⁾			$	210,341		0.83	%			$	210,418		0.86	%			$	242,028		1.05	%			$	274,324		1.00	%			$	255,850		0.97	%			$	210,341		0.83	%

^{____________________________}

⁽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⁾Troubled debt restructuring (“TDR”) loans.

⁽³⁾Consists of late payment fees and net amortization of deferred loan fees and loan origination costs.

⁽⁴⁾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.

⁽⁵⁾Includes other liabilities and equity.

⁽⁶⁾Net interest yield is calculated based on net interest income for the period divided by total average interest-earning assets for the period.

⁽⁷⁾Represents the impact of net accrued periodic interest rate swap settlements during the ~~period, which~~period. This amount is added to interest expense to derive non-GAAP adjusted interest expense. The average (benefit)/cost associated with derivatives is calculated based on net accrued periodic interest rate swap settlements 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 ~~$10,816~~$10,180 million, ~~$10,590~~$10,968 million and ~~$9,993~~$10,816 million for fiscal ~~year~~years 2020, 2019 and 2018, ~~2017 and 2016,~~ respectively.

⁽⁸⁾Adjusted interest expense ~~represents~~consists of interest expense plus net accrued periodic interest rate swap cash settlements expense during the period. Net accrued periodic derivative cash settlements are reported on our consolidated statements of operations as a component of derivative gains (losses). Adjusted average cost is calculated based on adjusted interest expense for the period divided by total average interest-bearing liabilities during the period.

⁽⁹⁾Adjusted net interest yield is calculated based on adjusted net interest income for the period divided by total average interest-earning assets for the period.

Table 2 displays the change in net interest income between periods and the extent to which the variance is attributable to: (i) changes in the volume of our interest-earning assets and interest-bearing liabilities or (ii) changes in the interest rates of these assets and liabilities. The table also presents the change in adjusted net interest income between periods. ~~Because of the numerous simultaneous volume and rate changes during any period, it is not possible to precisely allocate such changes between volume and rate.~~ Changes that are not solely due to either volume or rate are allocated to these categories on a pro-rata basis based on the absolute value of the change due to average volume and average rate.

Table 2: Rate/Volume Analysis of Changes in Interest Income/Interest Expense


	2018 vs. 2017									2017 vs. 2016									2020 vs. 2019									2019 vs. 2018
	Total			Variance due to:⁽¹⁾						Total			Variance due to:⁽¹⁾						Total			Variance due to:⁽¹⁾						Total			Variance due to:⁽¹⁾
(Dollars in thousands)	Variance			Volume			Rate			Variance			Volume			Rate			Variance			Volume			Rate			Variance			Volume			Rate
Interest income:
Long-term fixed-rate loans	$	20,319		$	30,172		$	(9,853	)	$	20,472		$	53,775		$	(33,303	)	$	31,641		$	47,866		$	(16,225	)	$	11,785		$	10,714		$	1,071
Long-term variable-rate loans	7,250			3,149			4,101			44			2,539			(2,495		)	(9,926		)	(7,611		)	(2,315		)	14,067			4,913			9,154
Line of credit loans	12,806			6,279			6,527			525			2,240			(1,715		)	(2,707		)	3,908			(6,615		)	19,652			5,639			14,013
Restructured loans	(16		)	(92		)	76			393			55			338			(10		)	(66		)	56			(43		)	(48		)	5
Nonperforming loans	—			—			—			(142		)	(142		)	—
Other income, net	(103		)	—			(103		)	6			—			6			(176		)	—			(176		)	57			—			57
Total loans	40,256			39,508			748			21,298			58,467			(37,169		)	18,822			44,097			(25,275		)	45,518			21,218			24,300
Cash, time deposits and investment securities	467			(3,425		)	3,892			2,700			1,286			1,414			(3,206		)	804			(4,010		)	12,795			7,516			5,279
Interest income	$	40,723		$	36,083		$	4,640		$	23,998		$	59,753		$	(35,755	)	$	15,616		$	44,901		$	(29,285	)	$	58,313		$	28,734		$	29,579

Interest expense:
Short-term borrowings	$	23,932		$	917		$	23,015		$	11,956		$	932		$	11,024		$	(14,859	)	$	9,567		$	(24,426	)	$	42,238		$	6,678		$	35,560
Medium-term notes	12,792			476			12,316			12,752			(1,685		)	14,437			(7,843		)	(9,181		)	1,338			21,983			15,041			6,942
Collateral trust bonds	(4,775		)	15,513			(20,288		)	7,516			18,118			(10,602		)	(16,017		)	(5,556		)	(10,461		)	(62,666		)	(12,792		)	(49,874		)
Guaranteed Underwriter Program notes payable	(2,110		)	2,427			(4,537		)	(579		)	6,900			(7,479		)	15,034			15,722			(688		)	7,344			2,526			4,818
Farmer Mac notes payable	22,516			3,177			19,339			12,959			2,230			10,729			(3,325		)	5,790			(9,115		)	34,938			4,971			29,967
Other notes payable	(271		)	(252		)	(19		)	(271		)	(244		)	(27		)	(566		)	(461		)	(105		)	(272		)	(255		)	(17		)
Subordinated deferrable debt	4			7			(3		)	16,412			14,963			1,449			12,899			11,499			1,400			967			888			79
Subordinated certificates	(1,091		)	(1,547		)	456			(857		)	(1,025		)	168			(443		)	(822		)	379			(1,058		)	(1,148		)	90
Interest expense	50,997			20,718			30,279			59,888			40,189			19,699			(15,120		)	26,558			(41,678		)	43,474			15,909			27,565
Net interest income	$	(10,274	)	$	15,365		$	(25,639	)	$	(35,890	)	$	19,564		$	(55,454	)	$	30,736		$	18,343		$	12,393		$	14,839		$	12,825		$	2,014

Adjusted net interest income:
Interest income	$	40,723		$	36,083		$	4,640		$	23,998		$	59,753		$	(35,755	)	$	15,616		$	44,901		$	(29,285	)	$	58,313		$	28,734		$	29,579
Interest expense	50,997			20,718			30,279			59,888			40,189			19,699			(15,120		)	26,558			(41,678		)	43,474			15,909			27,565
Net accrued periodic derivative cash settlements⁽²⁾	(10,197		)	1,802			(11,999		)	(4,280		)	5,304			(9,584		)
Net accrued periodic derivative cash settlements expense⁽²⁾																			12,262			(3,136		)	15,398			(30,670		)	1,047			(31,717		)
Adjusted interest expense⁽³⁾	40,800			22,520			18,280			55,608			45,493			10,115			(2,858		)	23,422			(26,280		)	12,804			16,956			(4,152		)
Adjusted net interest income	$	(77	)	$	13,563		$	(13,640	)	$	(31,610	)	$	14,260		$	(45,870	)
Adjusted net interest income⁽³⁾																			$	18,474		$	21,479		$	(3,005	)	$	45,509		$	11,778		$	33,731

^{____________________________}

⁽¹⁾The changes for each category of interest income and interest expense are divided between the portion of change attributable to the variance in volume and the portion of change attributable to the variance in rate for that category. The amount attributable to the combined impact of volume and rate has been allocated to each category based on the proportionate absolute dollar amount of change for that category.

⁽²⁾For net accrued periodic derivative cash settlements, the variance due to average volume represents the change in derivative cash settlements resulting from the change in the average notional amount of derivative contracts outstanding. The variance due to average rate represents the change in derivative cash settlements 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 measures.

Reported Net Interest Income

Reported net interest income of ~~$285~~$330 million for fiscal year ~~2018 decreased by $10~~2020 was up $31 million, or 3%10%, from fiscal year ~~2017,~~2019, driven ~~by a decrease in the net interest yield of 7% (8 basis points) to 1.12%, which was partially offset~~ by an increase in average interest-earning assets of ~~3%.~~

~~Net Interest Yield:~~ ~~The decrease~~4%, coupled with an increase in the net interest yield ~~in fiscal year 2018 was primarily due~~of 6% (7 basis points) to an increase in our average cost of funds, which was partially offset by a slight increase in the average yield on our interest-earning assets. Our average cost of funds increased by 11 basis points to 3.30% for fiscal year 2018, largely due to increases in the cost of our short-term and variable-rate debt resulting from an increase in short-term interest rates. The 3-month London Interbank Offered Rate (“LIBOR”) was 2.32% as of May 31, 2018, an increase of 111 basis points from May 31, 2017, while the federal funds target rate was 1.75%, up 75 basis points from May 31, 2017.The average yield on interest-earning assets increased by 2 basis points to 4.24%, largely due to increases in rates on variable rate loans and a higher yield on time deposits and investment securities. 1.21%.

Average Interest-Earning Assets: The increase in average interest-earning assets of 4% during fiscal year ~~2018~~2020 was ~~primarily attributable to~~driven by growth in average total loans of ~~$1,077~~$991 million, or 5%4%, ~~over~~from the prior fiscal year, as members obtained advances to fund capital investments and refinanced with us loans made by other lenders.

Net interest income of $295 million in fiscal year 2017 decreased by $36 million, or 11%, from fiscal year 2016, driven by a decrease in the net interest yield of 16% (23 basis points) to 1.20%, which was partially offset by an increase in average interest-earning assets of 6%.

Net Interest Yield: The ~~decrease~~increase of 7 basis points in the net interest yield in fiscal year ~~2017 reflected the combined impact~~2020 was due to a reduction in our average cost of funds of 17 basis points to 3.19%, partially offset by a ~~decline~~decrease in the average yield on interest-earning assets ~~and an increase~~of 11 basis points to 4.20%. The decrease in our average cost of ~~funds.~~funds reflects the impact of the interest savings from the repayment of the $1.0 billion aggregate principal balance of 10.375% collateral trust bonds in the first half of fiscal year 2019 and the replacement of this debt with lower-cost funding, combined with a decrease in the average cost of our short-term and variable-rate funding due to a decrease in short-term interest rates during fiscal year 2020. The federal funds rate decreased by 225 basis points, including a 150 basis point decrease to a near zero target range in March 2020, as part of a series of measures implemented to ease the economic impact of the COVID-19 pandemic. The 3-month LIBOR decreased by 216 basis points over the last 12 months to 0.34%. The decrease in the average yield on interest-earning assets ~~decreased by 16~~was primarily attributable to a 7 basis ~~points~~point decrease in the average yield on our long-term fixed-rate loan portfolio, as the maturity and pay-off of loan advances at higher rates were replaced with new loan advances at lower rates due to ~~4.22%~~the decline in interest rates.

Adjusted Net Interest Income

Adjusted net interest income of $274 million for fiscal year ~~2017. The decrease resulted~~2020 was up $18 million, or 7%, from repayments on existing long-term loans with higher weighted-average fixed rates than the weighted average fixed rates on new long-term loan advances, coupled with the repricing of higher-rate loans to lower fixed rates. Our average cost of funds increased by 10 basis points in fiscal year ~~2017 to 3.19%, largely due to~~2019, driven by an increase in ~~short-term~~the adjusted net interest ~~rates during~~yield of 3% (3 basis points) to 1.00% and the ~~fiscal year.~~

increase in average interest-earning assets of 4%.

Average Interest-Earning Assets: The increase in average interest-earning assets ~~during fiscal year 2017~~of 4% was ~~primarily attributable to~~driven by the growth in average total loans of ~~$1,344~~$991 million, or 6%4%, ~~over the prior~~from fiscal year ~~as members obtained advances to fund capital investments and refinanced with us loans made by other lenders.~~2019.

Adjusted ~~net interest income of $210 million in fiscal year 2018 was flat compared to fiscal year 2017, as the decrease in the adjusted net interest yield of 3% (3 basis points) to 0.83% was offset by the~~Net Interest Yield: The increase ~~in average interest-earning assets of 3%. The decrease~~ in the adjusted net interest yield was ~~driven by an increase~~primarily due to a reduction in ~~the~~our adjusted average cost of funds of 614 basis points to ~~3.61%~~3.40%, ~~attributable to the increase in short-term interest rates that resulted in a higher average cost for our short-term and variable-rate borrowings.~~

~~Adjusted net interest income of $210 million in fiscal year 2017 decreased by $32 million, or 13%, from fiscal year 2016, driven~~partially offset by a decrease in the adjusted net interest yield of 18% (19 basis points) to 0.86%, which was partially offset by the increase in average interest-earning assets of 6%. The decrease in the adjusted net interest yield was attributable to the combined impact of the decline in the average yield on interest-earning assets ~~and an increase~~of 11 basis points to 4.20%. The reduction in our adjusted average cost of ~~funds.~~funds was attributable to the interest savings from the repayment of the $1.0 billion aggregate principal balance of 10.375% collateral trust bonds in the first half of fiscal year 2019 and the replacement of this debt with lower-cost funding, combined with a decrease in the average cost of our short-term and variable-rate funding due to the decrease in short-term interest rates during fiscal year 2020. As noted above, the decrease in the average yield on interest-earning assets was primarily attributable to a 7 basis point decrease in the average yield on our long-term fixed rate loan portfolio, as the maturity and pay-off of loan advances at higher rates were replaced with new loan advances at lower rates due to the decline in interest rates.

~~Our~~We include net accrued periodic derivative cash settlements during the period in the calculation of our adjusted average cost

of funds, which, as a result, also impacts the calculation of adjusted net interest income and adjusted net interest ~~yield include the impact of net accrued~~yield. Net periodic derivative cash settlements ~~during~~expense totaled $56 million in fiscal year 2020, an increase of $12 million, or 28%, from $44 million in fiscal year 2019. Pay-fixed swaps represent the ~~year. We recorded~~substantial majority of our derivatives portfolio. The floating-rate payments on our interest rate swaps are typically determined based on the 3-month LIBOR. The decrease in the 3-month LIBOR rate resulted in a decrease in the periodic floating-rate interest payments due to us on our pay-fixed, receive-variable swaps and a significant increase in our net periodic derivative cash ~~settlement~~settlements expense ~~of $74 million~~ in fiscal year ~~2018 compared with $84 million and $89 million in fiscal years 2017 and 2016, respectively.~~ 2020.

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

Provision for Loan Losses

Our provision for loan losses in each period is primarily driven by the level of allowance that we determine is necessary for probable incurred loan losses inherent in our loan portfolio as of each balance sheet date. The allowance for loan losses, which consists of a collective allowance for loans in our portfolio that are not considered individually impaired and a specific allowance for loans identified as individually impaired, totaled $53 million and $18 million as of May 31, 2020 and 2019, respectively.

We recorded ~~a benefit for loan losses of $18 million in fiscal year 2018, compared with~~ a provision for loan losses of $6$36 million in fiscal year ~~2017 and~~2020. In comparison, we recorded a benefit for loan losses of $1 million in fiscal year ~~2016.~~2019. The ~~benefit~~unfavorable shift in the provision for loan losses of ~~$18~~$37 million in fiscal year ~~2018~~2020 was ~~due~~attributable to the ~~$18~~establishment of an asset-specific allowance of $34 million ~~reduction~~ in ~~our allowance for loan losses to $19 million as of May 31, 2018, from $37 million as of May 31, 2017. In~~ the fourth quarter of fiscal year ~~2018, we increased the recovery rate~~2020 for a loan to a CFC power supply borrower with a carrying amount of $168 million as of May 31, 2020, discussed above in “Executive Summary—Credit Quality.”

~~assumptions used in determining~~The overall credit quality and performance metrics of our loan portfolio remains high, as evidenced by our continued strong credit performance metrics. We had no delinquent loans as of May 31, 2020, and we have not experienced any loan defaults or charge-offs since fiscal year 2017. Although the total allowance coverage ratio increased to 0.20% as of May 31, 2020, from 0.07% as of May 31, 2019, due to the establishment of the asset-specific allowance of $34 million, the collective allowance ~~for our electric distribution and power supply loan portfolios to reflect management’s current assessment~~coverage ratio was 0.07% as of ~~expected losses in the event~~May 31, 2020, compared with 0.06% as of default on a loan in these portfolios. In fiscal year 2018, for the fifth consecutive fiscal year, we had no payment defaults, charge-offs, delinquent loans or nonperforming loans in our electric utility loan portfolio. The increase in recovery rate assumptions was the primary driver of the $18 million reduction in our allowance for loan losses.May 31, 2019.

The unfavorable shift of $7 million in the provision for loan losses in fiscal year 2017 from the prior fiscal year was primarily attributable to an increase in total loans outstanding coupled with an increase in default rates for loans with higher risk, which was partially offset by a decrease in default rates for loans with lower risk and a reduction in the specific allowance for individually impaired loans.

~~For~~We provide additional information on our allowance for loan losses under “Credit Risk—Allowance for Loan Losses” and “Note 5—Allowance for Loan Losses” of this Report. For a description of our methodology ~~and our~~for determining the allowance for loan losses see “Critical Accounting Policies and Estimates” above and ~~“Credit Risk—Allowance for Loan Losses” of MD&A. Also refer to~~ “Note 1—Summary of Significant Accounting Policies” ~~and “Note 4—Loans”~~ of this ~~report.~~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 ~~results of operations of foreclosed assets.~~gains and losses on our investment securities.

Table 3 presents the components of non-interest income (loss) recorded in our consolidated results of operations for fiscal years ~~2018, 2017~~2020, 2019 and ~~2016.~~2018.

Table 3: Non-Interest Income


	Year Ended May 31,								Year Ended May 31,
(Dollars in thousands)	2018		2017			2016			2020			2019			2018
Non-interest income:
Fee and other income	$	17,578	$	19,713		$	21,785		$	22,961		$	15,355		$	17,578
Derivative gains (losses)	231,721		94,903			(309,841		)	(790,151		)	(363,341		)	231,721
Results of operations of foreclosed assets	—		(1,749		)	(6,899		)
Investment securities gains (losses)									9,431			(1,799		)	—
Total non-interest income	$	249,299	$	112,867		$	(294,955	)	$	(757,759	)	$	(349,785	)	$	249,299

The significant ~~variances~~variance in non-interest income between years ~~were~~was primarily attributable to changes in net derivative gains (losses) recognized in our consolidated statements of operations. In addition, fee and other income increased by $8 million due to higher prepayment fees and investment gains increased by $11 million primarily due to the recognition of unrealized gains on our debt securities. The accounting treatment for our debt securities changed as a result of the transfer of all of the securities in our held-to-maturity investment portfolio to trading in the fourth quarter of fiscal year 2020. Trading securities are reported at fair value, with unrealized gains and losses recorded in earnings.

Derivative Gains (Losses)

Our derivative instruments are an integral part of our interest rate ~~risk-management~~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 on occasion use treasury locks to manage the interest rate risk associated with 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 ~~the substantial majority of~~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, we typically designate treasury locks as cash flow hedges. We ~~entered into one treasury lock agreement, which was designated as a cash flow hedge of a forecasted transaction, during fiscal year 2018. We~~ did not have any derivatives designated as accounting hedges ~~during fiscal year 2017~~as of May 31, 2020 or ~~2016.~~May 31, 2019.

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~~floating rate payments under our swap agreements is 3-month LIBOR. ~~Table 4 displays the average notional amount outstanding, by swap agreement type, and the weighted-average~~As interest ~~rate paid and received for interest~~

~~rate swap settlements during fiscal years 2018, 2017 and 2016. As indicated in Table 4, our interest rate swap portfolio currently consists of a higher proportion of~~rates decline, pay-fixed swaps than receive-fixed swaps. The profile of our interest rate swap portfolio, however, may change as a result of changes in market conditions and actions taken to manage exposure to interest rate risk.

~~Table 4: Derivative Average Notional Amounts and Average Interest Rates~~

Year Ended May 31,
2018 2017 2016
(Dollars in thousands)
Average
Notional
Balance

Weighted-
Average
Rate Paid

Weighted-
Average
Rate Received

Average
Notional
Balance

Weighted-
Average
Rate Paid

Weighted-
Average
Rate Received

Average
Notional
Balance

Weighted-
Average
Rate Paid

Weighted-
Average
Rate Received
Pay-fixed swaps $ 7,007,207
2.82 % 1.58 % $ 6,675,617
2.89 % 0.90 % $ 6,322,338
3.03 % 0.45 %
Receive-fixed swaps 3,808,794
2.16
2.60
3,914,479
1.34
2.71
3,670,585
0.88
2.97
Total $ 10,816,001
2.58 % 1.94 % $ 10,590,096
2.32 % 1.57 % $ 9,992,923
2.24 % 1.38 %

The average remaining maturity of our pay-fixed and receive-fixed swaps was 19 years and five years, respectively, as of May 31, 2018. In comparison, the average remaining maturity of our pay-fixed and receive-fixed swaps was 19 years and four years, respectively, as of May 31, 2017 and 18 years and three years, respectively, as of May 31, 2016.

~~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 ~~decline and increase in value as interest rates rise. In contrast, receive-fixed~~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 ~~and decrease in value as interest rates~~or 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 ~~result in differences in~~also impact the fair value of our derivatives. ~~The chart below provides comparative swap curves as of May 31, 2018, 2017, 2016 and 2015.~~

^{____________________________}

~~Benchmark rates obtained from Bloomberg.~~

Table 54 presents the components of net derivative gains (losses) recorded in our consolidated results of operations. Derivative cash settlements ~~represent~~expense represents the net periodic contractual interest amount for our interest-rate swaps for 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.

Table 5:4: Derivative Gains (Losses)

Year Ended May 31,
(Dollars in thousands) 2018 2017 2016
Derivative gains (losses) attributable to:
Derivative cash settlements $ (74,281 ) $ (84,478 ) $ (88,758 )
Derivative forward value gains (losses) 306,002
179,381
(221,083 )
Derivative gains (losses) $ 231,721
$ 94,903
$ (309,841 )

~~The net derivative gains of $232 million in fiscal year 2018 were largely attributable to a~~ ~~net increase in the fair value of our pay-fixed swaps~~ as interest rates increased across the swap curve, as depicted by the May 31, 2018 swap curve presented in the above chart. As depicted in the comparative swap curves, the general level of market interest rates as of the end of fiscal year 2018 was higher relative to the general level of market rates as of the end of fiscal year 2017, resulting in the recognition of significantly higher net derivative gain amounts.



	Year Ended May 31,
(Dollars in thousands)	2020			2019			2018
Derivative gains (losses) attributable to:
Derivative cash settlements expense	$	(55,873	)	$	(43,611	)	$	(74,281	)
Derivative forward value gains (losses)	(734,278		)	(319,730		)	306,002
Derivative gains (losses)	$	(790,151	)	$	(363,341	)	$	231,721

The net derivative ~~gains~~losses of ~~$95~~$790 million in fiscal year 2017 were primarily attributable to a net increase in the fair value of our swaps due to an overall increase in interest rates across the swap curve, as depicted by the May 31, 2017 swap curve presented in the above chart.

~~The derivative losses of $310 million in fiscal year 2016~~2020 were primarily attributable to a net decrease in the fair value of our pay-fixed swaps ~~due~~resulting from sharp declines in interest rates across the entire swap curve during fiscal year 2020, as depicted by the May 31, 2020 swap curve displayed below in the “Comparative Swap Curves” chart.

The net derivative losses of $363 million in fiscal year 2019 were primarily attributable to a ~~flattening~~net decrease in the fair value of ~~the swap curve~~our pay-fixed swaps resulting from ~~an increase in short-term interest rates and~~ a decline in ~~long-term~~medium- and longer-term interest rates during fiscal year 2019, as depicted by the May 31, 2019 swap curve also displayed below in the “Comparative Swap Curves” chart.

Our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps. Pay-fixed swaps represented approximately 71% and 68% of the outstanding notional amount of our derivative portfolio as of May 31, 2020 and May 31, 2019, respectively. The profile of our interest rate swap portfolio, however, may change as a result of changes in market conditions and actions taken to manage exposure to interest rate risk. The average remaining maturity of our pay-fixed and receive-fixed swaps was 20 years and four years, respectively, as of May 31, 2020. In comparison, the average remaining maturity of our pay-fixed and receive-fixed swaps was 19 years and four years, respectively, as of May 31, 2019.

Derivative Cash Settlements

As indicated in Table 4 above, net periodic derivative cash settlement expense totaled $56 million, $44 million and $74 million during fiscal years 2020, 2019 and 2018, respectively. Table 5 displays, by swap agreement type, the average notional amount outstanding and the weighted-average interest rate paid and received for derivative cash settlements during each respective period.

Table 5: Derivative Cash Settlements Expense—Average Notional Amounts and Interest Rates



	Year Ended May 31,
	2020						2019						2018
(Dollars in thousands)	Average Notional Balance		Weighted- Average Rate Paid		Weighted- Average Rate Received		Average Notional Balance		Weighted- Average Rate Paid		Weighted- Average Rate Received		Average Notional Balance		Weighted- Average Rate Paid		Weighted- Average Rate Received
Pay-fixed swaps	$	7,092,961	2.82	%	1.91	%	$	7,352,704	2.83	%	2.53	%	$	7,007,207	2.84	%	1.59	%
Receive-fixed swaps	3,086,705		2.62		2.64		3,615,781		3.15		2.53		3,808,794		2.16		2.60
Total	$	10,179,666	2.76	%	2.13	%	$	10,968,485	2.93	%	2.53	%	$	10,816,001	2.60	%	1.95	%

Comparative Swap Curves

The chart below provides comparative swap curves as of May 31, ~~2016~~2020, 2019, 2018 and ~~2015 in the above chart.~~2017.

^{____________________________}

Benchmark rates obtained from Bloomberg.

See “Note 1—Summary of Significant Accounting Policies—Derivative Instruments” and “Note 9—10—Derivative Instruments and Hedging Activities” for additional information on our derivative instruments. Also refer to “Note ~~13—~~14—Fair Value Measurement” for information on how we estimate the fair value of our derivative instruments.

~~Results of Operations of Foreclosed Assets~~

Results of operations of foreclosed assets consists of the operating results of entities controlled by CFC that hold foreclosed assets, impairment charges related to those entities, gains or losses related to the disposition of the assets and potential subsequent charges related to those assets. On July 1, 2016, we completed the sale of Caribbean Asset Holdings, LLC (“CAH”). As a result, we did not carry any foreclosed assets on our consolidated balance sheet as of May 31, 2018 and 2017.

We recorded charges of $2 million in fiscal year 2017 and $7 million in fiscal year 2016 related to foreclosed assets. The charge of $2 million in fiscal year 2017 represented the combined impact of adjustments recorded at the closing date of the sale of CAH, post-closing purchase price adjustments and certain legal costs incurred pertaining to CAH. The charge of $7 million in fiscal year 2016 was attributable to impairment of our investment in CAH due to a reduction in the fair value less estimated cost to sell.

In connection with the sale of CAH, $16 million of the sale proceeds was deposited into escrow to fund potential indemnification claims following the closing. Of this amount, $14.5 million was designated to cover general indemnification claims and has been released back to us. The remaining $1.5 million was designated to cover indemnification of certain tax liens and remains in escrow. We continue to be liable for certain indemnification obligations, if raised and substantiated, regardless of whether amounts are held in escrow.

Non-Interest Expense

Non-interest expense consists of salaries and employee benefit expense, general and administrative expenses, ~~losses~~gains (losses) on the early extinguishment of debt and other miscellaneous expenses.

Table 6 presents the components of non-interest expense recorded in our consolidated results of operations in fiscal years ~~2018, 2017~~2020, 2019 and ~~2016.~~2018.

Table 6: Non-Interest Expense


	Year Ended May 31,									Year Ended May 31,
(Dollars in thousands)	2018			2017			2016			2020			2019			2018
Non-interest expense:
Salaries and employee benefits	$	(51,422	)	$	(47,769	)	$	(44,590	)	$	(54,522	)	$	(49,824	)	$	(51,422	)
Other general and administrative expenses	(39,462		)	(38,457		)	(41,753		)	(46,645		)	(43,342		)	(39,462		)
Gains (losses) on early extinguishment of debt	—			192			(333		)
Losses on early extinguishment of debt										(683		)	(7,100		)	—
Other non-interest expense	(1,943		)	(1,948		)	(1,260		)	(25,588		)	(1,675		)	(1,943		)
Total non-interest expense	$	(92,827	)	$	(87,982	)	$	(87,936	)	$	(127,438	)	$	(101,941	)	$	(92,827	)



District of Columbia		52-0891669
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)



Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
~~6.55% Collateral Trust Bonds, due 2018~~		~~New York Stock Exchange~~
7.35% Collateral Trust Bonds, due 2026	NRUC 26	New York Stock Exchange
5.50% Subordinated Notes, due 2064	NRUC	New York Stock Exchange



		Page
PART I
Item 1.	Business	1
	Overview	1
	Our Business	2
	Loan Programs	3
	Guarantee Programs	65
	Investment Policy	7
	Industry	7
	Lending Competition	9
	Regulation	10
	Members	11
	Tax Status	13
	Allocation and Retirement of Patronage Capital	1314
	Employees	15
	Available Information	15
Item 1A.	Risk Factors	15
Item 1B.	Unresolved Staff Comments	2023
Item 2.	Properties	2023
Item 3.	Legal Proceedings	2023
Item 4.	Mine Safety Disclosures	2023

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2023
Item 6.	Selected Financial Data	2124
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)	2326
	Introduction	2326
	Executive Summary	2326
	Critical Accounting Policies and Estimates	2632
	Recent Accounting Changes and Other Developments	2934
	Consolidated Results of Operations	2935
	Consolidated Balance Sheet Analysis	3743
	Off-Balance Sheet Arrangements	4652
	Risk Management	4955
	Credit Risk	5056
	Liquidity Risk	6067
	Market Risk	6876
	Operational Risk	7180
	Non-GAAP Financial Measures	7281
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	7685
Item 8.	Financial Statements and Supplementary Data	7685
	~~Reports~~Report of Independent Registered Public Accounting Firm	7786
	Consolidated Statements of Operations	7887
	Consolidated Statements of Comprehensive Income (Loss)	7988



	Consolidated Balance Sheets	8089
	Consolidated Statements of Changes in Equity	8190
	Consolidated Statements of Cash Flows	8291
	Notes to Consolidated Financial Statements	8493
	Note 1 — Summary of Significant Accounting Policies	8493
	Note 2 — Variable Interest Entities	96104
	Note 3 — Investment Securities	97106
	Note 4 — Loans	~~101~~111
	Note 5 — ~~Short-Term Borrowings~~Allowance for Loan Losses	~~111~~119
	Note 6 — ~~Long-Term Debt~~	~~113~~
	~~Note 7 — Subordinated Deferrable Debt~~	~~115~~
	~~Note 8 — Members’ Subordinated Certificates~~	~~116~~
	~~Note 9 — Derivative Instruments and Hedging Activities~~	~~118~~
	~~Note 10 — Equity~~Short-Term Borrowings	121
	Note 117 — ~~Employee Benefits~~Long-Term Debt	~~124~~123
	Note 128 — ~~Guarantees~~Subordinated Deferrable Debt	125
	Note 139 — ~~Fair Value Measurement~~Members’ Subordinated Certificates	~~127~~126
	Note 10 — Derivative Instruments and Hedging Activities	128
	Note 11 — Equity	131
	Note 12 — Employee Benefits	135
	Note 13 — Guarantees	136
	Note 14 — Fair Value Measurement	139
	Note 15 — Business Segments	~~134~~143
	Supplementary Data	~~138~~147
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	~~139~~148
Item 9A.	Controls and Procedures	~~139~~148
Item 9B.	Other Information	~~140~~149

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	~~141~~150
Item 11.	Executive Compensation	~~151~~159
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~163~~171
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~163~~171
Item 14.	Principal Accounting Fees and Services	~~166~~174

PART IV
Item 15.	~~Exhibits,~~Exhibit and Financial Statement Schedules	~~167~~175
Item 16.	Form 10-K Summary	179

SIGNATURES		~~168~~
~~EXHIBIT INDEX~~		~~171~~180


	Fixed Rate				Variable Rate				Fixed Rate				Variable Rate
(Dollars in thousands)	Scheduled Principal Payments		Weighted-Average Interest Rate		Scheduled Principal Payments		Total Scheduled Principal Payments		Scheduled Principal Payments		Weighted-Average Interest Rate		Scheduled Principal Payments		Total Scheduled Principal Payments⁽¹⁾
Fiscal year:
2019	$	1,131,941	4.33	%	$	94,966	$	1,226,907
2020	1,168,011		4.40		77,192		1,245,203
2021	1,168,748		4.43		53,445		1,222,193		$	1,304,038	4.29	%	$	58,347	$	1,362,385
2022	1,148,220		4.48		49,092		1,197,312		1,269,871		4.30		34,545		1,304,416
2023	1,157,297		4.54		43,467		1,200,764		1,269,702		4.30		30,173		1,299,875
2024									1,197,305		4.44		36,483		1,233,788
2025									1,199,895		4.46		22,521		1,222,416
Thereafter	16,921,968		4.66		721,329		17,643,297		18,231,192		4.50		473,635		18,704,827
Total	$	22,696,185	4.60		$	1,039,491	$	23,735,676	$	24,472,003	4.46		$	655,704	$	25,127,707



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



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


Table	Description	Page	Description	Page
1	Average Balances, Interest Income/Interest Expense and Average Yield/Cost	30	Average Balances, Interest Income/Interest Expense and Average Yield/Cost	36
2	Rate/Volume Analysis of Changes in Interest Income/Interest Expense	32	Rate/Volume Analysis of Changes in Interest Income/Interest Expense	38
3	Non-Interest Income	34	Non-Interest Income	40
4	Derivative Average Notional Amounts and Average Interest Rates	35	Derivative Gains (Losses)	41
5	Derivative Gains (Losses)	36	Derivative Cash Settlements Expense—Average Notional Amounts and Interest Rates	42
6	Non-Interest Expense	37	Non-Interest Expense	43
7	Loans Outstanding by Type and Member Class	38	Loans Outstanding by Type and Member Class	44
8	Historical Retention Rate and Repricing Selection	39	Historical Retention Rate and Repricing Selection	45
9	Long-Term Loan Scheduled Principal Payments	39	Long-Term Loan Scheduled Principal Payments	45
10	Debt Product Types	40	Debt Product Types	46
11	Total Debt Outstanding and Weighted-Average Interest Rates	41	Total Debt Outstanding and Weighted-Average Interest Rates	47
12	Member Investments	42	Member Investments	49
13	Collateral Pledged	43	Collateral Pledged	50
14	Unencumbered Loans	44	Unencumbered Loans	50
15	Equity	45	Equity	51
16	Guarantees Outstanding	46	Guarantees Outstanding	53
17	Maturities of Guarantee Obligations	47	Maturities of Guarantee Obligations	53
18	Unadvanced Loan Commitments	47	Unadvanced Loan Commitments	54
19	Notional Maturities of Unadvanced Loan Commitments	48	Notional Maturities of Unadvanced Loan Commitments	54
20	Maturities of Notional Amount of Unconditional Committed Lines of Credit	49	Maturities of Notional Amount of Unconditional Committed Lines of Credit	55
21	Loan Portfolio Security Profile	51	Loan Portfolio Security Profile	58
22	Loan Geographic Concentration	53	Loan Geographic Concentration	60
23	Credit Exposure to 20 Largest Borrowers	54	Loan Exposure to 20 Largest Borrowers	61
24	Troubled Debt Restructured Loans	55	Troubled Debt Restructured Loans	62
25	Nonperforming Loans	56	Net Charge-Offs (Recoveries)	63
26	Net Charge-Offs (Recoveries)	56	Allowance for Loan Losses	65
27	Allowance for Loan Losses	58	Rating Triggers for Derivatives	67
28	Rating Triggers for Derivatives	59	Available Liquidity	68
29	Liquidity Reserve	60	Committed Bank Revolving Line of Credit Agreements	69
30	Committed Bank Revolving Line of Credit Agreements	61	Short-Term Borrowings—Funding Sources	71
31	Short-Term Borrowings—Funding Sources	63	Short-Term Borrowings	71
32	Short-Term Borrowings	63	Issuances and Repayments of Long-Term and Subordinated Debt	73
33	Issuances and Repayments of Long-Term and Subordinated Debt	65	Projected Sources and Uses of Liquidity from Debt and Investment Activity	74
34	Projected Sources and Uses of Liquidity	66	Contractual Obligations	75
35	Contractual Obligations	67	Credit Ratings	75
36	Credit Ratings	67	Interest Rate Gap Analysis	78
37	Interest Rate Gap Analysis	69	Financial Instruments	79
38	Financial Instruments	70	Loan Repricing	79
39	Loan Repricing	71	Adjusted Financial Measures—Income Statement	82
40	Adjusted Financial Measures—Income Statement	73	TIER and Adjusted TIER	82
41	TIER and Adjusted TIER	73	Adjusted Financial Measures—Balance Sheet	83
42	Adjusted Financial Measures—Balance Sheet	74	Debt-to-Equity Ratio	84
43	Debt-to-Equity Ratio	75	Members’ Equity	84
44	Members’ Equity	75


	May 31,																				May 31,
(Dollars in millions)	2018				2017				2016				2015				2014				2020				2019				2018				2017				2016
Loans by type:	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Long-term loans:
Fixed-rate	$	22,696	90	%	$	22,137	91	%	$	21,391	93	%	$	19,722	92	%	$	18,360	89	%	$	24,472	92	%	$	23,094	89	%	$	22,696	90	%	$	22,137	91	%	$	21,391	93	%
Variable-rate	1,040		4		847		3		757		3		699		3		772		4		656		2		1,067		4		1,040		4		847		3		757		3
Total long-term loans	23,736		94		22,984		94		22,148		96		20,421		95		19,132		93		25,128		94		24,161		93		23,736		94		22,984		94		22,148		96
Lines of credit	1,432		6		1,372		6		1,005		4		1,038		5		1,335		7		1,563		6		1,745		7		1,432		6		1,372		6		1,005		4
Total loans outstanding	$	25,168	100	%	$	24,356	100	%	$	23,153	100	%	$	21,459	100	%	$	20,467	100	%	$	26,691	100	%	$	25,906	100	%	$	25,168	100	%	$	24,356	100	%	$	23,153	100	%
Deferred loan origination costs	11		—		11		—		10		—		10		—		10		—		11		—		11		—		11		—		11		—		10		—
Loans to members	$	25,179	100	%	$	24,367	100	%	$	23,163	100	%	$	21,469	100	%	$	20,477	100	%	$	26,702	100	%	$	25,917	100	%	$	25,179	100	%	$	24,367	100	%	$	23,163	100	%

Loans by member class:
CFC:
Distribution	$	19,552	78	%	$	18,825	77	%	$	17,674	77	%	$	16,095	75	%	$	15,035	74	%	$	20,770	78	%	$	20,155	78	%	$	19,552	78	%	$	18,825	77	%	$	17,674	77	%
Power supply	4,397		18		4,505		19		4,401		19		4,181		20		4,086		20		4,732		18		4,579		18		4,397		18		4,505		19		4,401		19
Statewide and associate	70		—		58		—		55		—		65		—		68		—		106		—		84		—		70		—		58		—		55		—
CFC total	24,019		96		23,388		96		22,130		96		20,341		95		19,189		94		25,608		96		24,818		96		24,019		96		23,388		96		22,130		96
NCSC	786		3		614		3		681		3		732		3		828		4		698		3		743		3		786		3		614		3		681		3
RTFC	363		1		354		1		342		1		386		2		450		2		385		1		345		1		363		1		354		1		342		1
Total loans outstanding	$	25,168	100	%	$	24,356	100	%	$	23,153	100	%	$	21,459	100	%	$	20,467	100	%	$	26,691	100	%	$	25,906	100	%	$	25,168	100	%	$	24,356	100	%	$	23,153	100	%
Deferred loan origination costs	11				11				10		—		10		—		10		—		11		—		11		—		11		—		11		—		10		—
Loans to members	$	25,179	100	%	$	24,367	100	%	$	23,163	100	%	$	21,469	100	%	$	20,477	100	%	$	26,702	100	%	$	25,917	100	%	$	25,179	100	%	$	24,367	100	%	$	23,163	100	%



Debt Product Type:	Maturity Range	Market	Secured/Unsecured
Short-term funding programs:
Commercial paper	1 to 270 days	Capital markets, members and affiliates	Unsecured
Select notes	30 to 270 days	Members and affiliates	Unsecured
Daily liquidity fund notes	Demand note	Members and affiliates	Unsecured
Other funding programs:
Medium-term notes	9 months to 30 years	Capital markets, members and affiliates	Unsecured
Collateral trust bonds⁽¹⁾	Up to 30 years	Capital markets	Secured
Guaranteed Underwriter Program notes payable⁽²⁾	Up to 2030 years	U.S. government	Secured
Farmer Mac notes payable⁽³⁾	Up to 30 years	Private placement	Secured
Other notes payable⁽⁴⁾	Up to 303 years	Private placement	Both
Subordinated deferrable debt⁽⁵⁾	Up to 3045 years	Capital markets	Unsecured
Members’ subordinated certificates⁽⁶⁾	Up to 100 years	Members	Unsecured
Revolving credit agreements	3Up to 5 years	Bank institutions	Unsecured


	May 31,										Increase/(Decrease)			May 31,										Change
	2018					2017								2020					2019
(Dollars in thousands)	Amount			% of Total ⁽¹⁾		Amount			% of Total ⁽¹⁾					Amount			% of Total ⁽¹⁾		Amount			% of Total ⁽¹⁾
Commercial paper	$	1,202,105		53	%	$	928,158		48	%	$	273,947		$	1,318,566		100	%	$	1,111,795		54	%	$	206,771
Select notes	780,472			100		696,889			100		83,583			1,597,959			100		1,023,952			100		574,007
Daily liquidity fund notes	400,635			100		527,990			100		(127,355		)	508,618			100		298,817			100		209,801
Medium-term notes	643,821			18		612,951			20		30,870			658,959			18		625,626			18		33,333
Members’ subordinated certificates	1,379,982			100		1,419,025			100		(39,043		)	1,339,618			100		1,357,129			100		(17,511		)
Total outstanding member debt	$	4,407,015				$	4,185,013				$	222,002		$	5,423,720				$	4,417,319				$	1,006,401

Percentage of total debt outstanding	18		%			18		%						21		%			18		%


	Requirement/Limit				Actual⁽¹⁾					Requirement/Limit						Actual⁽¹⁾
	Debt Indenture Minimum		Committed Bank Revolving Line of Credit Agreements Maximum		May 31,					Debt Indenture Minimum			Committed Bank Revolving Line of Credit Agreements Maximum			May 31,
Debt Agreement		2018			2017				2020				Committed Bank Revolving Line of Credit Agreements Maximum		2019
Collateral trust bonds 1994 indenture	Debt Indenture Minimum	100	Committed Bank Revolving Line of Credit Agreements Maximum	%	150	%	111	%		Debt Indenture Minimum	117	%		100	%		150	%		114	%	118	%
Collateral trust bonds 2007 indenture	100		150		114		115			100			150			113			117
Guaranteed Underwriter Program notes payable	100		150		119		117			100			150			120			114
Farmer Mac notes payable	100		150		115		117			100			150			121			123
Clean Renewable Energy Bonds Series 2009A	100		150		109		113			100			150			120			112


	May 31,				Increase/ (Decrease)			May 31,				Change
(Dollars in thousands)	2018		2017		Increase/ (Decrease)			2020		2019		Change
Guarantee type:
Long-term tax-exempt bonds(1)	$	316,985	$	468,145	$	(151,160	)	$	263,875	$	312,190	$	(48,315	)
Letters of credit(2)	343,970		307,321		36,649			413,839		379,001		34,838
Other guarantees	144,206		114,151		30,055			143,072		146,244		(3,172		)
Total	$	805,161	$	889,617	$	(84,456	)	$	820,786	$	837,435	$	(16,649	)

Company:
CFC(3)	$	793,156	$	874,920	$	(81,764	)	$	810,787	$	827,344	$	(16,557	)
NCSC	10,431		13,123		(2,692		)	9,999		8,517		1,482
RTFC	1,574		1,574		—			—		1,574		(1,574		)
Total	$	805,161	$	889,617	$	(84,456	)	$	820,786	$	837,435	$	(16,649	)


	Outstanding Amount				Maturities of Guarantee Obligations																		Outstanding Amount				Maturities of Guarantee Obligations
(Dollars in thousands)				2019				2020			2021			2022			2023			Thereafter			Outstanding Amount			2021				2022			2023			2024			2025			Thereafter
Guarantees	Outstanding Amount	$	805,161			$	265,684		$	66,142		$	121,700		$	27,515		$	160,541		$	163,579		$	820,786			$	339,979		$	29,265		$	157,411		$	32,824		$	83,628		$	177,679


	Available Balance				Notional Maturities of Unadvanced Loan Commitments																							Available Balance				Notional Maturities of Unadvanced Loan Commitments
(Dollars in thousands)				2019				2020				2021				2022				2023				Thereafter				Available Balance			2021				2022				2023				2024				2025				Thereafter
Line of credit	Available Balance	$	7,692,784			$	4,168,751			$	710,763			$	805,508			$	770,971			$	1,211,791			$	25,000		$	7,929,950			$	4,050,588			$	613,528			$	1,223,510			$	961,034			$	1,032,749			$	48,541
Long-term loans	4,952,834				883,840				586,005				652,499				1,714,338				1,104,185				11,967			5,458,676				497,104				1,364,755				873,822				1,674,029				1,044,671				4,295
Total	$	12,645,618			$	5,052,591			$	1,296,768			$	1,458,007			$	2,485,309			$	2,315,976			$	36,967		$	13,388,626			$	4,547,692			$	1,978,283			$	2,097,332			$	2,635,063			$	2,077,420			$	52,836


	Available Balance		Notional Maturities of Unconditional Committed Lines of Credit						Available Balance				Notional Maturities of Unconditional Committed Lines of Credit
(Dollars in thousands)		2019		2020	2021	2022	2023		Available Balance			2021				2022			2023			2024			2025
Committed lines of credit	Available Balance	$2,857,350		$279,285	$435,151	$444,326	$644,178	$1,054,410		$	2,857,029			$	115,815		$	194,105		$	970,366		$	698,396		$	878,347


	May 31, 2018										May 31, 2020
(Dollars in thousands)	Secured		% of Total		Unsecured		% of Total		Total		Secured		% of Total		Unsecured		% of Total		Total
Loan type:
Long-term loans:
Long-term fixed-rate loans	$	22,220,087	98	%	$	476,098	2	%	$	22,696,185	$	24,137,145	99	%	$	334,858	1	%	$	24,472,003
Long-term variable-rate loans	996,970		96		42,521		4		1,039,491		650,192		99		5,512		1		655,704
Total long-term loans	23,217,057		98		518,619		2		23,735,676		24,787,337		99		340,370		1		25,127,707
Line of credit loans	69,097		5		1,362,721		95		1,431,818		191,268		12		1,371,879		88		1,563,147
Total loans outstanding	$	23,286,154	93		$	1,881,340	7		$	25,167,494
Total loans outstanding⁽¹⁾											$	24,978,605	94		$	1,712,249	6		$	26,690,854

Company:
CFC	$	22,233,592	93	%	$	1,784,327	7	%	$	24,017,919	$	23,977,438	94	%	$	1,630,219	6	%	$	25,607,657
NCSC	703,396		89		83,061		11		786,457		638,488		91		59,374		9		697,862
RTFC	349,166		96		13,952		4		363,118		362,679		94		22,656		6		385,335
Total loans outstanding	$	23,286,154	93		$	1,881,340	7		$	25,167,494
Total loans outstanding⁽¹⁾											$	24,978,605	94		$	1,712,249	6		$	26,690,854


	May 31, 2017										May 31, 2019
(Dollars in thousands)	Secured		% of Total		Unsecured		% of Total		Total		Secured		% of Total		Unsecured		% of Total		Total
Loan type:
Long-term loans:
Long-term fixed-rate loans	$	21,503,871	97	%	$	632,819	3	%	$	22,136,690	$	22,674,330	98	%	$	419,923	2	%	$	23,094,253
Long-term variable-rate loans	795,326		94		52,093		6		847,419		1,058,434		99		8,446		1		1,066,880
Total long-term loans	22,299,197		97		684,912		3		22,984,109		23,732,764		98		428,369		2		24,161,133
Line of credit loans	54,258		4		1,317,963		96		1,372,221		121,741		7		1,622,790		93		1,744,531
Total loans outstanding	$	22,353,455	92		$	2,002,875	8		$	24,356,330	$	23,854,505	92		$	2,051,159	8		$	25,905,664

Company:
CFC	$	21,591,723	92	%	$	1,796,264	8	%	$	23,387,987	$	22,861,414	92	%	$	1,956,262	8	%	$	24,817,676
NCSC	424,636		69		189,288		31		613,924		664,618		89		78,270		11		742,888
RTFC	337,096		95		17,323		5		354,419		328,473		95		16,627		5		345,100
Total loans outstanding	$	22,353,455	92		$	2,002,875	8		$	24,356,330	$	23,854,505	92		$	2,051,159	8		$	25,905,664



(Dollars in thousands)	Notional Amount		Payable Due From CFC			Receivable Due to CFC		Net (Payable)/Receivable
Impact of rating downgrade trigger:
Falls below A3/A-⁽¹⁾	$	54,890	$	(9,355	)	$	—	$	(9,355	)
Falls below Baa1/BBB+	7,164,065		(60,054		)	38,057		(21,997		)
Falls to or below Baa2/BBB ⁽²⁾	530,980		—			4,533		4,533
Falls below Baa3/BBB-	257,271		(11,625		)	—		(11,625		)
Total	$	8,007,206	$	(81,034	)	$	42,590	$	(38,444	)



	May 31, 2018
(Dollars in millions)	Total Commitment		Letters of Credit Outstanding		Net Available for Advance		Maturity	Annual Facility Fee ⁽¹⁾
3-year agreement	$	1,492	$	—	$	1,492	November 20, 2020	7.5 bps

5-year agreement	1,593		3		1,590		November 20, 2022	10 bps
Total	$	3,085	$	3	$	3,082



	May 31, 2018
(Dollars in thousands)	Amount Outstanding		Weighted- Average Interest Rate		Weighted-Average Maturity	Maximum Month-End Outstanding Amount		Average Outstanding Amount
Short-term borrowings:
Commercial paper:
Commercial paper to dealers, net of discounts	$	1,064,266	1.87	%	14 days	$	2,548,147	$	942,931
Commercial paper to members, at par	1,202,105		1.89		34 days	1,268,515		1,005,624
Total commercial paper	2,266,371		1.88		25 days	3,447,274		1,948,555
Select notes to members	780,472		2.04		44 days	780,472		727,313
Daily liquidity fund notes to members	400,635		1.50		1 day	866,065		618,705
Medium-term notes sold to members	248,432		1.90		150 days	248,432		217,122
Farmer Mac revolving facility	100,000		2.23		61 days	100,000		548
Total short-term borrowings	$	3,795,910	1.88		35 days			$	3,512,243



	May 31, 2016
(Dollars in thousands)	Amount Outstanding		Weighted- Average Interest Rate		Weighted-Average Maturity	Maximum Month-End Outstanding Amount		Average Outstanding Amount
Short-term borrowings:
Commercial paper:
Commercial paper to dealers, net of discounts	$	659,935	0.43	%	24 days	$	1,639,835	$	944,928
Commercial paper to members, at par	848,007		0.45		9 days	1,001,361		789,723
Total commercial paper	1,507,942		0.44		17 days	2,445,894		1,734,651
Select notes	701,849		0.62		43 days	845,805		709,285
Daily liquidity fund notes	525,959		0.34		1 day	740,142		551,594
Medium-term notes sold to members	203,098		1.05		161 days	213,260		199,078
Total short-term borrowings	$	2,938,848	0.51		31 days			$	3,194,608


	Year Ended May 31, 2018							Year Ended May 31, 2020
(Dollars in thousands)	Issuances		Repayments ⁽¹⁾		Increase/(Decrease)			Issuances		Repayments ⁽²⁾		Change
Long-term and subordinated debt activity:⁽²⁾
Collateral trust bonds	$	700,000	$	705,000	$	(5,000	)	$	500,000	$	705,000	$	(205,000	)
Guaranteed Underwriter Program notes payable	250,000		379,374		(129,374		)	950,000		99,196		850,804
Farmer Mac notes payable	325,000		46,893		278,107			—		245,277		(245,277		)
Medium-term notes sold to members	230,130		257,520		(27,390		)	196,910		221,873		(24,963		)
Medium-term notes sold to dealers	856,166		216,650		639,516			517,236		392,878		124,358
Other notes payable	—		5,565		(5,565		)	—		11,064		(11,064		)
Members’ subordinated certificates	6,136		45,180		(39,044		)	9,621		27,132		(17,511		)
Total	$	2,367,432	$	1,656,182	$	711,250		$	2,173,767	$	1,702,420	$	471,347



	Projected Sources of Liquidity								Projected Uses of Liquidity
(Dollars in millions)	Long-Term Debt Issuance		Anticipated Long-Term Loan Repayments⁽²⁾		Other Loan Repayments⁽³⁾		Total Projected Sources of Liquidity		Long-Term Debt Maturities⁽⁴⁾		Long-Term Loan Advances		Other Loan Advances⁽⁵⁾		Total Projected Uses of Liquidity		Other Sources/ (Uses) of Liquidity⁽⁶⁾

1Q FY 2019	$	635	$	395	$	—	$	1,030	$	466	$	522	$	95	$	1,083	$	(53	)
2Q FY 2019	1,350		317		55		1,722		1,301		446		—		1,747		38
3Q FY 2019	1,250		291		—		1,541		780		586		—		1,366		(77		)
4Q FY 2019	400		320		—		720		477		304		—		781		(52		)
1Q FY 2020	195		312		—		507		167		408		—		575		65
2Q FY 2020	700		281		55		1,036		678		396		—		1,074		24
Total	$	4,530	$	1,916	$	110	$	6,556	$	3,869	$	2,662	$	95	$	6,626	$	(55	)



	May 31, ~~2018~~2020
	Moody’s	S&P	Fitch
Long-term issuer credit rating⁽¹⁾	A2	A	A
Senior secured debt⁽²⁾	A1	A	A+
Senior unsecured debt⁽³⁾	A2	A	A
Subordinated debt	A3	BBB+	BBB+
Commercial paper	P-1	A-1	F1
Outlook	Stable	Stable	Stable


(Dollars in millions)	Prior to 5/31/19			Two Years 6/1/19 to 5/31/21			Two Years 6/1/21 to 5/31/23			Five Years 6/1/23 to 5/31/28			10 Years 6/1/28 to 5/31/38			6/1/38 and Thereafter			Total		Prior to 5/31/21			Two Years 6/1/21 to 5/31/23			Two Years 6/1/23 to 5/31/25			Five Years 6/1/25 to 5/31/30			10 Years 6/1/30 to 5/31/40			6/1/40 and Thereafter			Total
Asset amortization and repricing	$	1,870		$	3,239		$	2,958		$	5,531		$	6,549		$	2,937		$	23,084	$	1,741		$	3,213		$	2,877		$	5,990		$	7,550		$	3,329		$	24,700
Liabilities and members’ equity:
Long-term debt ⁽¹⁾⁽²⁾	$	2,500		$	3,107		$	2,421		$	5,610		$	4,523		$	1,147		$	19,308	$	2,234		$	3,692		$	2,362		$	6,173		$	4,902		$	1,867		$	21,230
Subordinated certificates	16			52			48			977			154			578			1,825
Subordinated deferrable debt and subordinated certificates⁽²⁾⁽³⁾																					25			417			160			484			159			803			2,048
Members’ equity⁽²⁾⁽⁴⁾	48			23			24			105			293			875			1,368		53			24			32			114			325			1,005			1,553
Total liabilities and members’ equity⁽³⁾	$	2,564		$	3,182		$	2,493		$	6,692		$	4,970		$	2,600		$	22,501	$	2,312		$	4,133		$	2,554		$	6,771		$	5,386		$	3,675		$	24,831
Gap ⁽⁴⁾⁽⁵⁾	$	(694	)	$	57		$	465		$	(1,161	)	$	1,579		$	337		$	583	$	(571	)	$	(920	)	$	323		$	(781	)	$	2,164		$	(346	)	$	(131	)

Cumulative gap	(694		)	(637		)	(172		)	(1,333		)	246			583					(571		)	(1,491		)	(1,168		)	(1,949		)	215			(131		)
Cumulative gap as a % of total assets	(2.60		)%	(2.39		)%	(0.64		)%	(4.99		)%	0.92		%	2.18		%			(2.03		)%	(5.30		)%	(4.15		)%	(6.92		)%	0.76		%	(0.47		)%
Cumulative gap as a % of adjusted total assets ⁽⁵⁾	(2.62		)	(2.41		)	(0.65		)	(5.04		)	0.93			2.20
Cumulative gap as a % of adjusted total assets⁽⁶⁾																					(2.04		)	(5.33		)	(4.17		)	(6.96		)	0.77			(0.47		)


								Principal Amortization and Maturities																												Principal Amortization and Maturities
	Outstanding Balance				Fair Value																			Remaining Years				Outstanding Balance				Fair Value																								Remaining Years
(Dollars in millions)				2019				2020			2021			2022			2023						2021					Outstanding Balance			2022					2023				2024				2025												Remaining Years
Assets:	Outstanding Balance
Time deposits	$	101			Fair Value	$	101		$	101		$	—		$	—		$	—		$	—		Remaining Years			$	—
Investment securities, available for sale	$	89			$	89		$	—		$	—		$	—		$	—		$	—			$	89
Investment securities, held to maturity	$	520			$	516		$	23		$	59		$	101		$	113		$	141			$	83
Equity securities																												$	61			Fair Value		$	61			$	—			$	—			$	—			$	—			$	—			$	61
Debt securities trading																												$	309			$	309			$	64			$	69			$	81			$	53			$	38			$	4
Average rate	2.91		%					1.81		%	2.43		%	2.79		%	2.96		%	2.96		%		3.56		%		2.56		%						2.12		%		2.58		%		2.63		%		3.12		%		2.49		%		1.31		%
Long-term fixed-rate loans ⁽¹⁾	$	22,696			$	21,714		$	1,132		$	1,168		$	1,169		$	1,148		$	1,157			$	16,922			$	24,472			$	27,052			$	1,304			$	1,270			$	1,270			$	1,197			$	1,200			$	18,231
Average rate	4.60		%					4.33		%	4.40		%	4.43		%	4.48		%	4.54		%		4.66		%		4.46		%						4.29		%		4.30		%		4.30		%		4.44		%		4.46		%		4.50		%
Long-term variable-rate loans	$	1,039			$	1,039		$	95		$	77		$	53		$	49		$	43			$	722			$	656			$	656			$	58			$	35			$	30			$	36			$	23			$	474
Average rate	3.39		%					—			—			—			—			—				—				3.04		%						—				—				—				—				—				—
Line of credit loans	$	1,432			$	1,432		$	1,432		$	—		$	—		$	—		$	—			$	—			$	1,563			$	1,563			$	1,563			$	—			$	—			$	—			$	—			$	—
Average rate	3.09		%					3.09		%	—			—			—			—				��				2.62		%						2.62		%		—				—				—				—				—
Liabilities and equity:
Short-term borrowings ⁽²⁾	$	3,796			$	3,796		$	3,796		$	—		$	—		$	—		$	—			$	—			$	3,962			$	3,963			$	3,962			$	—			$	—			$	—			$	—			$	—
Average rate	1.88		%					1.88		%	—			—			—			—				—				0.62		%						0.62		%		—				—				—				—				—
Long-term debt	$	18,715			$	18,909		$	2,745		$	1,463		$	1,737		$	1,577		$	1,128			$	10,065			$	19,712			$	21,826			$	2,016			$	2,517			$	1,222			$	1,118			$	808			$	12,031
Average rate	3.39		%					5.47		%	2.24		%	2.64		%	2.79		%	2.67		%		3.30		%		2.92		%						2.41		%		2.12		%		2.33		%		3.00		%		2.77		%		3.24		%
Subordinated deferrable debt	$	742			$	766		$	—		$	—		$	—		$	—		$	—			$	742			$	986			$	1,030			$	—			$	—			$	—			$	—			$	—			$	986
Average rate	4.98		%					—			—			—			—			—				4.98		%		5.11		%						—				—				—				—				—				5.11		%
Members’ subordinated certificates ⁽³⁾	$	1,380			$	1,380		$	10		$	13		$	43		$	15		$	31			$	1,268			$	1,340			$	1,340			$	41			$	13			$	23			$	15			$	24			$	1,224
Average rate	4.18		%					2.82		%	2.85		%	3.64		%	2.92		%	2.70		%		4.27		%		4.22		%						3.60		%		3.07		%		3.70		%		2.37		%		1.66		%		4.34		%


(Dollars in thousands)	Repricing Amount		Weighted-Average Interest Rate		Repricing Amount		Weighted-Average Interest Rate
2019	$	756,283	4.48	%
2020	521,833		4.66
2021	430,680		4.43		$	416,868	4.20	%
2022	393,109		4.66		394,479		4.56
2023	328,004		4.93		280,222		4.72
2024					242,991		4.68
2025					312,599		4.57
Thereafter	1,346,704		5.07		1,174,853		4.90
Total	$	3,776,613			$	2,822,012	4.68


(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			Total CFC Equity			Non-controlling Interests			Total Equity			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 May 31, 2015	$	2,743		$	668,980		$	501,731		$	(293,212	)	$	880,242		$	4,080		$	884,322		$	27,464		$	911,786
Net income (loss)	1,000			84,257			85,917			(220,827		)	(49,653		)	—			(49,653		)	(1,863		)	(51,516		)
Other comprehensive loss	—			—			—			—			—			(3,022		)	(3,022		)	(4		)	(3,026		)
Patronage capital retirement	—			(39,384		)	—			—			(39,384		)	—			(39,384		)	—			(39,384		)
Other	(971		)	—			(429		)	429			(971		)	—			(971		)	489			(482		)
Balance as of May 31, 2016	$	2,772		$	713,853		$	587,219		$	(513,610	)	$	790,234		$	1,058		$	791,292		$	26,086		$	817,378
Net income	1,000			90,441			43,086			175,379			309,906			—			309,906			2,193			312,099
Other comprehensive income	—			—			—			—			—			12,117			12,117			—			12,117
Patronage capital retirement	—			(42,593		)	—			103			(42,490		)	—			(42,490		)	—			(42,490		)
Other	(872		)	—			—			—			(872		)	—			(872		)	573			(299		)
Balance as of May 31, 2017	$	2,900		$	761,701		$	630,305		$	(338,128	)	$	1,056,778		$	13,175		$	1,069,953		$	28,852		$	1,098,805		$	2,900		$	761,701		$	630,305	$	(338,128	)	$	1,056,778		$	13,175		$	1,069,953		$	28,852		$	1,098,805
Net income	1,000			95,012			57,480			301,694			455,186			—			455,186			2,178			457,364			1,000			95,012			57,480		301,694			455,186			—			455,186			2,178			457,364
Other comprehensive loss	—			—			—			—			—			(4,631		)	(4,631		)	—			(4,631		)	—			—			—		—			—			(4,631		)	(4,631		)	—			(4,631		)
Patronage capital retirement	—			(45,220		)	—			—			(45,220		)	—			(45,220		)	—			(45,220		)	—			(45,220		)	—		—			(45,220		)	—			(45,220		)	—			(45,220		)
Other	(955		)	—			—			—			(955		)	—			(955		)	490			(465		)	(955		)	—			—		—			(955		)	—			(955		)	490			(465		)
Balance as of May 31, 2018	$	2,945		$	811,493		$	687,785		$	(36,434	)	$	1,465,789		$	8,544		$	1,474,333		$	31,520		$	1,505,853		$	2,945		$	811,493		$	687,785	$	(36,434	)	$	1,465,789		$	8,544		$	1,474,333		$	31,520		$	1,505,853
Cumulative effect from adoption of new accounting standard																												—			—			—		8,794			8,794			(8,794		)	—			—			—
Balance as of June 1, 2018																												2,945			811,493			687,785		(27,640		)	1,474,583			(250		)	1,474,333			31,520			1,505,853
Net income (loss)																												1,000			96,592			71,312		(318,135		)	(149,231		)	—			(149,231		)	(1,979		)	(151,210		)
Other comprehensive income																												—			—			—		—			—			103			103			—			103
Patronage capital retirement																												—			(47,507		)	—		—			(47,507		)	—			(47,507		)	(2,908		)	(50,415		)
Other																												(963		)	—			—		—			(963		)	—			(963		)	514			(449		)
Balance as of May 31, 2019																												$	2,982		$	860,578		$	759,097	$	(345,775	)	$	1,276,882		$	(147	)	$	1,276,735		$	27,147		$	1,303,882
Net income (loss)																												1,000			96,310			48,223		(730,773		)	(585,240		)	—			(585,240		)	(4,190		)	(589,430		)
Other comprehensive loss																												—			—			—		—			—			(1,763		)	(1,763		)	—			(1,763		)
Patronage capital retirement																												—			(62,822		)	—		—			(62,822		)	—			(62,822		)	(1,933		)	(64,755		)
Other																												(789		)	—			—		—			(789		)	—			(789		)	1,677			888
Balance as of May 31, 2020																												$	3,193		$	894,066		$	807,320	$	(1,076,548	)	$	628,031		$	(1,910	)	$	626,121		$	22,701		$	648,822

















See accompanying notes to consolidated financial statements.


◦	~~our judgment of the quality of the borrower’s management;~~


◦	~~our judgment of the borrower’s competitive position within its service territory and industry;~~


◦	~~our estimate of the potential impact of proposed regulation and litigation; and~~


◦	~~other factors specific to individual borrowers or classes of borrowers.~~



(Dollars in thousands)	May 31, 2020
Debt securities trading, at fair value:
Certificates of deposit	$	5,585
Corporate debt securities	253,153
Commercial MBS:
Agency	7,655
Non-agency	3,207
Total commercial MBS	10,862
U.S. state and municipality debt securities	8,296
Other ABS⁽¹⁾	31,504
Total debt securities trading, at fair value	$	309,400



(Dollars in thousands)	May 31, 2020
Debt securities gains (losses):
Realized gains	$	3,686
Unrealized gains	7,543
Total gains on debt securities trading	$	11,229