

		Page
PART I
Item 1.	Business	1
	Overview	1
	Our Business Development	2
	Our Loan Programs	4
	Guarantee Programs	6
	Investment Policy	7
	Our Lending Competition	7
	Our Regulation	9
	Our Members	10
	Corporate Governance	12
	Rural Electric Industry	14
	Rural Telecommunications Industry	15
	Tax Status	16
	Allocation and Retirement of Patronage Capital	17
	Employees	18
Item 1A.	Risk Factors	18
Item 1B.	Unresolved Staff Comments	23
Item 2.	Properties	23
Item 3.	Legal Proceedings	23
Item 4.	Mine Safety Disclosures	23

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24
Item 6.	Selected Financial Data	25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)	26
	Introduction	26
	Executive Summary	26
	Critical Accounting Policies and Estimates	28
	Accounting Changes and Developments	31
	Results of Operations	31
	Financial Condition	38
	Contingent Off-Balance Sheet Obligations	44
	Credit Risk	47
	Liquidity Risk	52
	Market Risk	62
	Operational Risk	66
	Non-GAAP Financial Measures	66
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	70
Item 8.	Financial Statements and Supplementary Data	70
	Reports of Independent Registered Public Accounting Firm	72
	Consolidated Balance Sheets	74
	Consolidated Statements of Operations	75
	Consolidated Statements of Comprehensive Income	76
	Consolidated Statements of Changes in Equity	77



	Consolidated Statements of Cash Flows	78
	Notes to Consolidated Financial Statements	80
	Note 1 — General Information and Accounting Policies	80
	Note 2 — Investments	89
	Note 3 — Loans and Commitments	90
	Note 4 — Foreclosed Assets	100
	Note 5 — Short-term Debt and Credit Arrangements	101
	Note 6 — Long-term Debt	103
	Note 7 — Subordinated Deferrable Debt	105
	Note 8 — Derivative Financial Instruments	105
	Note 9 — Members’ Subordinated Certificates	106
	Note 10 — Equity	108
	Note 11 — Employee Benefits	110
	Note 12 — Guarantees	111
	Note 13 — Fair Value Measurement	113
	Note 14 — Fair Value of Financial Instruments	115
	Note 15 — Segment Information	119
	Note 16 — Disclosures about Offsetting Assets and Liabilities	122
	Supplementary Data	123
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	124
Item 9A.	Controls and Procedures	124
Item 9B.	Other Information	125

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	126
Item 11.	Executive Compensation	135
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	147
Item 13.	Certain Relationships and Related Transactions, and Director Independence	147
Item 14.	Principal Accountant Fees and Services	149

PART IV
Item 15.	Exhibits, Financial Statement Schedules	150

SIGNATURES		151
EXHIBIT INDEX		154

TABLE OF CONTENTS
Part No. Item No. Page
I. 1. Business 1
General 1
Our Business Development 2
Our Loan Programs 4
Guarantee Programs 11
Our Lending Competition 12
Our Regulation 14
Our Members 15
Corporate Governance 17
Rural Electric Industry 18
Rural Telecommunications Industry 21
Disaster Recovery 22
Tax Status 22
Allocation and Retirement of Patronage Capital 23
Investment Policy 24
Employees 24
1A. Risk Factors 24
1B. Unresolved Staff Comments 28
2. Properties 28
3. Legal Proceedings 28
4. Mine Safety Disclosures 28
II. 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities 29
6. Selected Financial Data 29
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Executive Summary 30
Critical Accounting Policies and Estimates 32
Results of Operations 35
Financial Condition 41
Off-Balance Sheet Obligations 48
Liquidity and Capital Resources 50
Market Risk 56
Non-GAAP Financial Measures 61
7A. Quantitative and Qualitative Disclosures About Market Risk 65
8. Financial Statements and Supplementary Information 65
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 65
9A. Controls and Procedures 65
9B. Other Information 66
III. 10. Directors, Executive Officers and Corporate Governance 67
11. Executive Compensation 76
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters 86
13. Certain Relationships and Related Transactions, and Director Independence 86
14. Principal Accounting Fees and Services 88
IV. 15. Exhibits, Financial Statement Schedules 89
Signatures 92
INDEX OF MD&A TABLES



Table	Description	Page
—	MD&A Tables:
1	Results of Operations	32
2	Average Balances, Interest Income/Expense and Average Yield/Cost	33
3	Rate/Volume Analysis of Changes in Interest Income/Expense	34
4	Foregone Interest Income	35
5	Derivative Gains (Losses)	37
6	Derivative Average Notional Balances and Average Interest Rates	37
7	Loans Outstanding by Type and Member Class	39
8	Total Debt Outstanding and Weighted-Average Interest Rates	40
9	Debt Instruments and Revolving Credit Agreements	41
10	Short-term Debt Outstanding and Weighted-Average Interest Rates	41
11	Short-term Debt — Other Information	42
12	Equity	43
13	Guarantees Outstanding	45
14	Maturities of Guaranteed Obligations	45
15	Unadvanced Loan Commitments	46
16	Notional Maturities of Committed Lines of Credit	46
17	Loan Concentration	50
18	Credit Exposure to 10 Largest Borrowers	51
19	Unencumbered Loans	51
20	Nonperforming and Restructured Loans	52
21	Allowance for Loan Losses	53
22	Contractual Obligations	55
23	Projected Sources and Uses of Liquidity	56
24	Member Loan Repayments	57
25	Revolving Credit Agreements	58
26	Member Investments	59
27	Financial Ratios under Revolving Credit Agreements	60
28	Financial Ratios under Indentures	60
29	Collateral Pledged or on Deposit	61
30	Principal Maturity of Long-term Debt	62
31	Interest Rate Gap Analysis	64
32	Interest Rate Exchange Agreements	65
33	Other Financial Instruments	65
34	Rating Triggers for Derivatives	66
35	Adjusted Financial Measures — Income Statement	69
36	TIER and Adjusted TIER	69
37	Adjusted Financial Measures — Balance Sheet	70
38	Leverage and Debt-to-Equity and Adjusted Leverage and Adjusted Debt-to-Equity Ratios	71

iii

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K contains forward-looking statements defined by the Securities Act of 1933, as amended, and the Exchange Act of 1934, as amended. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identified by our use of words such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity” and similar expressions, whether in the negative or affirmative. All statements about future expectations or projections, including statements about loan volume, the ~~adequacy~~appropriateness of the allowance for loan ~~loss allowance,~~losses, operating income and expenses, leverage and debt-to-equity ratios, borrower financial performance, impaired loans, and sources and uses of liquidity, are forward-looking statements. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, actual results and performance could materially differ. Factors that could cause future results to vary from current expectations include, but are not limited to, general economic conditions, legislative changes including those that could affect our tax status, governmental monetary and fiscal policies, demand for our loan products, lending competition, changes in the quality or composition of our loan portfolio, changes in our ability to access external financing, changes in the credit ratings on our debt, valuation of collateral supporting impaired loans, charges associated with our operation or disposition of foreclosed assets, regulatory and economic conditions in the rural electric industry, non-performance of counterparties to our derivative agreements and the costs and effects of legal or governmental proceedings involving CFC or its members. Some of these and other factors are discussed in our annual and quarterly reports previously filed with the U.S. Securities and Exchange Commission (“SEC”). Except as required by law, we undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date on which the statement is made.

The information in this section should be read with our consolidated financial statements and related notes and the information contained elsewhere in this Form 10-K, including that set forth under ~~Item~~"Item 1A. Risk ~~Factors~~Factors" and ~~Item~~"Item 7. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~.Operations."

PART I


Item 1.	~~Business.~~Business

OVERVIEW

~~General~~

National Rural Utilities Cooperative Finance Corporation (“CFC”) is a member-owned cooperative association incorporated under the laws of the District of Columbia in April 1969. CFC’s principal purpose is to provide its members with financing to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC makes loans to its rural electric members so they can acquire, construct and operate electric distribution, generation, transmission and related facilities. CFC also provides its members with credit enhancements in the form of letters of credit and guarantees of debt obligations. As a cooperative, CFC is owned by and exclusively serves its membership, which consists solely of not-for-profit entities or subsidiaries or affiliates of not-for-profit entities. CFC is exempt from federal income taxes under Section 501(c)(4) of the Internal Revenue Code. As a member-owned cooperative, CFC has no publicly held equity securities outstanding. CFC funds its activities primarily through a combination of publicly and privately held debt securities and member investments. ~~CFC’s~~As a member-owned cooperative, CFC's objective is not to maximize profit, but rather offer its members cost-based financial products and services consistent with sound financial ~~management and is not to maximize net income.~~management. As described below under ~~Allocation~~“Allocation and Retirement of Patronage Capital,~~on page 23,~~” CFC annually allocates its net earnings, which consist of net income excluding the effect of certain non-cash accounting entries, ~~annually~~ to a cooperative educational fund, a members’ capital reserve, a general reserve, if necessary, and to members based on each member’s patronage of CFC’s loan programs during the year.

For financial statement purposes, CFC’s results of operations and financial condition are consolidated with and include Rural Telephone Finance Cooperative (“RTFC”) and National Cooperative Services Corporation (“NCSC”). Unless stated otherwise, references to “we,” “our” or “us” relate to the consolidation of CFC, RTFC, NCSC and certain entities created and controlled by CFC to hold foreclosed assets and to accommodate loan securitization transactions. ~~The revenue, net profit or loss and total assets of CFC are presented as a reportable segment in Note 15,~~ ~~Segment Information, to the consolidated financial statements.~~

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available, free of charge, at www.nrucfc.coop as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. These reports are also available free of charge on the SEC ~~website~~Web site at www.sec.gov. Information posted on our ~~website~~Web site is not incorporated by reference into this Form 10-K.

RTFC is a cooperative association originally incorporated in South Dakota in 1987 and reincorporated as a member-owned cooperative association in the District of Columbia in 2005. RTFC’s principal purpose is to provide ~~and arrange~~ financing for its rural telecommunications members and their affiliates. RTFC’s membership consists of a combination of not-for-profit

entities and for-profit entities. CFC is the sole lender to and manages the business operations of RTFC through a ~~long-term~~ management ~~agreement.~~agreement in effect until December 1, 2016, which is automatically renewed for one-year terms thereafter unless terminated by either party. Under a guarantee agreement, RTFC pays CFC a fee and, in exchange, CFC reimburses RTFC for loan losses. RTFC is headquartered with CFC in Dulles, Virginia. RTFC is a taxable cooperative that pays income tax based on its net income, excluding patronage-sourced ~~net~~ earnings allocated to its patrons, as permitted under Subchapter T of the Internal Revenue Code.

NCSC was incorporated in 1981 in the District of Columbia as a member-owned cooperative association. The principal purpose of NCSC is to provide financing to members of CFC, entities eligible to be members of CFC and the for-profit and ~~non-profit~~nonprofit entities that are owned, operated or controlled by, or provide significant benefit to Class A, B and C members of CFC. See the section "Our Members" below for a description of our member classes. At May 31, ~~2013,~~2014, NCSC’s membership consisted primarily of distribution systems, power supply systems and statewide and regional associations that were members of ~~CFC or were eligible for such membership.~~CFC. CFC is the primary source of funding to and manages the business operations of NCSC through a management agreement that is automatically renewable on an annual basis unless terminated by either party. Under a guarantee agreement, NCSC pays CFC a fee and, in exchange, CFC reimburses NCSC for loan losses. NCSC is headquartered with CFC in Dulles, Virginia. NCSC is a taxable cooperative. Thus, NCSC pays income tax based on ~~the full amount of~~ its ~~net income.~~reported taxable income and deductions.

~~Our Business Development~~

OUR BUSINESS DEVELOPMENT

Our business strategy and policies are set by our board of directors and, may be amended or revised from time to time by the board of directors. We are a not-for-profit tax-exempt cooperative finance organization, whose primary focus is to provide our members with the credit products they need to fund their operations. As such, our business development strategies primarily focus on lending to electric systems and our ability to secure access to capital at rates that allow us to offer competitively priced credit products to our members. In recent years, we have continued to undertake the following initiatives related to our primary focus: (i) concentrate on electric lending, (ii) diversify funding sources, ~~and~~(iii) decrease cost of funding ~~(iii) enhance market risk management~~ and (iv) increase member investments and equity retention.

Focus on Electric Lending

In recent years, we renewed our focus on lending to our electric systems while strategically decreasing our telecommunications exposure through RTFC. A majority of NCSC’s lending activities are to electric utility organizations and when NCSC is combined with CFC, electric utility organizations represent approximately ~~98 percent~~98% of the outstanding loan portfolio at May 31, ~~2013. Our~~2014. Most of our electric cooperative borrowers ~~have demonstrated~~continue to demonstrate stable operating performance and strong financial ratios ~~even during the 2007 economic downturn,~~ because the majority of electric cooperatives’ customers are residential, for whom electricity is an essential service. Our electric cooperative members experience limited competition as they generally operate in exclusive territories, the majority of which are not rate regulated. Additionally, they generally have access to low-cost capital from the federal government in addition to our lending resources. In our ~~44-year~~45-year history, we have experienced $19 million in net write-offs for distribution borrowers and ~~$68~~$67 million in net write-offs for power supply borrowers. Loans outstanding to electric utility organizations increased approximately ~~14 percent~~8% over the last five years. On the other hand, the telecommunications service providers, to which RTFC provides loans, have experienced fast-paced technological change, increasing competition and uncertainty with respect to their regulatory environment. For these reasons, RTFC became more selective as to the companies it finances and strategically exited lending relationships with or reduced its exposure to its larger borrowers. The telecommunications loan portfolio decreased by ~~71 percent~~73% over the last five years.

Diversify Funding Sources ~~and Decrease Cost of Funding~~

Diversifying our funding sources to expand beyond capital markets offerings of collateral trust bonds and medium-term notes and the sale of commercial paper has been a primary initiative in recent years. To help meet our capital needs, we expanded our funding programs to include the Guaranteed Underwriter Program of the USDA, as well as note purchase agreements and whole-loan sale programs primarily with the Federal Agricultural Mortgage Corporation. At May 31, ~~2013,~~2014, we have bond purchase agreements with the Federal Financing Bank totaling ~~$4,423~~$4,923 million with a guarantee of repayment by USDA as part of the funding mechanism for the Rural Economic Development Loan and Grant program. At May 31, ~~2013,~~2014, we had debt outstanding totaling ~~$3,674~~$4,299 million under this program, with a remaining available commitment of ~~$749 million available.~~$624 million. The guarantee fees paid to the government by CFC in connection with these borrowings are used to fund economic development programs administered by the USDA in the rural areas served by electric cooperatives and rural telephone organizations. At

May 31, ~~2013,~~2014, we have a note purchase agreement with the Federal Agricultural Mortgage Corporation totaling $3,900 million. Under the agreement we may borrow, repay and re-borrow funds up to $3,900 million at any time or from time to time through January 11, 2016 as market conditions permit. We may select a fixed rate or a variable rate at the time of each advance. Additionally, we developed a program to sell member systems’ distribution and power supply loans to the Federal Agricultural Mortgage Corporation to help manage single-obligor exposures within our loan portfolio, to create an additional form of liquidity and to manage the level of our debt-to-equity ratio. In addition to the program we have with the Federal Agricultural Mortgage Corporation, we established a similar program with KeyBank National Association (“KeyBank”) during fiscal year 2012. In the fourth quarter of fiscal year 2012, we sold a power supply loan with an outstanding principal balance of $25 million to KeyBank, representing our first sale under the agreement with this purchaser. During the first quarter of fiscal year 2013 we sold another $25 million loan to KeyBank. At May 31, ~~2013,~~2014, we were servicing ~~$1,094~~$1,044 million of loans sold to our loan sales program partners.

Decrease Cost of Funding

In recent years, we have also sought to decrease costs related to our funding where possible. ~~Credit spreads and rates continued to decrease during~~During fiscal ~~2013 which provided us with the opportunity to refinance~~year 2014, we refinanced higher-cost, maturing debt with ~~lower cost debt and exercise early redemptions of our collateral trust bonds and subordinated deferrable debt to replace such debt with lower cost~~lower-cost debt. Specifically, in May 2014, we completed ~~a debt~~an exchange ~~transaction in which we exchanged $340~~of $209 million of our ~~8 percent~~outstanding 8% medium-term notes, Series C, due 2032 for ~~$379~~$218 million of ~~4.023 percent~~4.023% collateral trust bonds due 2032 and ~~$134~~$91 million of cash. On ~~March 1,~~December 16, 2013, we redeemed early ~~$300~~$150 million of our ~~$900~~$600 million ~~5.50 percent,~~4.75% collateral trust bonds ~~with an original maturity~~due March 1, 2014.

During fiscal year 2014, the CFC Board of ~~July 1, 2013. On April 25, 2013, we issued $400~~Directors authorized management to execute the call of our 7.5% member capital securities and offer members the option to invest in a new series of member capital securities that currently have a 5% interest rate. As of May 31, 2014, $267 million of ~~4.75 percent subordinated debt due 2043. On~~the 7.5% member capital securities were redeemed and we had call notices outstanding for another $59 million. As of May ~~24, 2013, we redeemed early all~~31, 2014, members have invested $147 million in the new series of ~~our $88 million of Series NRC 6.10 percent subordinated debt due 2044 and all of our $98 million of Series NRU 5.95 percent subordinated debt due 2045 at par. In recent years, we maintained~~member capital securities. The portion that was not reinvested is being funded with lower-cost short-term debt.

We also continued to maintain a high utilization of our commercial paper and other short-term funding to take advantage of the low interest rate environment. At May 31, ~~2013~~2014 and ~~2012,~~2013, commercial paper, select notes, daily liquidity fund notes and bank bid notes outstanding represented ~~20 percent~~19% and ~~17 percent,~~20%, respectively, of total debt outstanding. See ~~Item~~"Item 7. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~—~~Liquidity and Capital Resources~~Operations" for additional information regarding our funding sources.

~~Enhance Market Risk Management~~

In fiscal year 2013, we continued the practice of having monthly Asset Liability Committee meetings to enhance the overall corporate monitoring of our funding activities. Our Asset Liability Committee was established in fiscal year 2009 and monitors our management of risks related to interest rates, counterparty credit and liquidity to ensure consistent access to funding that is in alignment with our strategic goals. The committee’s mandate is to review CFC’s liquidity, as well as the relationship of interest rates and tenor of our assets to our liabilities and, as a result, our spread between interest income and interest expense. Functional responsibilities of this committee include reviewing funding options, investment opportunities and trends in funding alternatives and risk exposure. Performance results and budget deviations also are reviewed. If necessary, the organization’s asset-liability strategy is reviewed for modification to react to the current market environment. At least monthly, the Asset Liability Committee reviews a complete interest rate risk analysis, reviews proposed modifications, if any, to our interest rate risk management strategy and considers adopting strategy changes. See Item 7. ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~—~~Market Risk~~ ~~for additional information regarding our market risk management.~~

Increase Member Investments and Equity Retention

In fiscal year 2009, we developed a corporate objective to increase the investments of our members and our equity retention by implementing two primary initiatives: (i) offering of member capital securities, a 30-year or 35-year unsecured and subordinated voluntary debt investment, to our members beginning in November 2008 and (ii) adjusting CFC’s patronage capital retirement practices in June 2009.

Member capital securities are unsecured obligations and are subordinate to all of our existing and future senior indebtedness and all of our existing and future subordinated indebtedness that may be held by or transferred to non-members, but rank on a parity to all other members’ subordinated certificates. ~~At May 31, 2013 we have $388 million of~~Series 2008 member capital ~~securities outstanding, issued with a 35-year maturity that~~maturities mature 35 years from the date of issuance, typically pay interest at 7.5% and are callable at par ~~by CFC starting~~at our option five years from the date of issuance and anytime thereafter. ~~The majority of~~Series 2013 member capital securities ~~were issued with a 7.5 percent~~mature 30 years from the date of issuance, typically pay interest ~~rate. Effective January 1, 2010,~~at 5% and are callable at par at our option 10 years from the ~~fixed interest rate earned on newly issued member capital securities was reduced to 5 percent. Since that time, an insignificant amount~~date of ~~member capital securities have been issued.~~ issuance and anytime thereafter.

For computing compliance with our revolving credit agreement covenants, we are required to adjust our leverage ratio by subtracting members’ subordinated certificates, including member capital securities, from total liabilities and adding this amount to total equity.

At the end of each fiscal year, the CFC Board of Directors allocates net earnings to members in the form of patronage capital and to board-approved reserves. CFC bases the amount of net earnings allocated to each member on the member’s patronage of CFC’s lending programs during the year. The CFC Board of Directors historically votes to retire a portion of the prior year’s patronage capital allocation. The current policy of the CFC Board of Directors is to retire ~~50 percent~~50% of the prior fiscal year’s allocated net earnings following the end of each fiscal year and to hold the remaining ~~50 percent~~50% for 25 years to fund operations and maintain adequate equity.

~~In fiscal year 2000 the board~~ The CFC Board of ~~directors established the members’ capital reserve~~Directors has continued to increase the retained earnings held by the company as operating capital. The board of directors has annually reviewed net earnings and made a determination as to the amount, if any, that they will allocate to the members’ capital reserve. The current practice is to allocate the earnings in excess of the amount required to earn a targeted adjusted TIER. For the year ended May 31, 2013, the board of directors allocated $138 millionadd to the members’ capital reserve ~~increasing the reserve balance to $410 million. The board~~each year from net earnings. As of ~~directors has the authority to allocate and retire amounts in the members’ capital reserve. The board of directors decided that $74 million of the amount allocated to~~May 31, 2014, the members’ capital reserve ~~at May 31, 2013, resulting from the refinements made by the Company in the assumptions used to estimate its allowance for loan losses,~~ is ~~not intended to be allocated for distribution to members and instead is intended to serve as an enhancement to our capital reserves. The board~~$485 million, representing a significant component of ~~directors will continue to evaluate appropriate levels of capital for CFC.~~retained equity.

LOAN PROGRAMS

~~Our Loan Programs~~

CFC lends to its members and associates; RTFC lends to its members, organizations affiliated with its members and its associates; NCSC lends to its members and associates. The loans to NCSC associates may require a guarantee of repayment to NCSC from the CFC member cooperative with which it is affiliated.

The loans of CFC, RTFC and NCSC generally provide that an event of default has occurred if there is any material adverse change in the business or condition, financial or otherwise, of the borrower. Our loan standards are generally comparable to those of RUS, and most members significantly exceed the financial tests set by both RUS and CFC.

CFC Loan Programs

Long-Term Loans

CFC’s long-term loans generally have the following characteristics:

·	terms of up to 35 years on a senior secured basis;

·	amortizing or bullet maturity loans with serial payment structures;

·	the property, plant and equipment financed by and securing the long-term loan has a useful life equal to or in excess of the loan maturity;

·	flexibility for the borrower to select a fixed interest rate for periods of one to 35 years or a variable rate; and

·	the ability for the borrower to select various tranches with either a fixed or variable interest rate for each tranche.

~~Borrowers~~Most borrowers may select a fixed or a variable interest rate at the time of each advance on long-term loan facilities. When selecting a fixed rate, the borrower has the option to choose a fixed rate for a term of one year through the final maturity of the loan. When the selected fixed interest rate term expires, the borrower may select another fixed rate for a term of one year through the loan maturity or the current variable rate. Long-term fixed rates are set daily for new loan advances and loans that reprice. The fixed rate on each loan is determined on the day the loan is advanced or repriced based on the term selected. The long-term variable rate is set on the first day of each month.

To be in compliance with the covenants in the loan agreement and eligible for loan advances, distribution systems generally must maintain an average modified debt service coverage ratio, as defined in the loan agreement, of 1.35 or greater. ~~Similarly, power~~CFC may make long-term loans to distribution systems, on a case-by-case basis, that do not meet these general criteria. Power supply systems generally ~~must~~are required either (i) to maintain an average modified debt service coverage ratio, as defined in the loan agreement, of 1.00 or ~~greater.~~greater or (ii) to establish and collect rates and other revenue in an amount to yield margins for interest, as defined in the indenture, in each fiscal year sufficient to equal at least 1.00, or (iii) both. CFC may make long-term loans to ~~distribution and~~ power supply systems, on a case-by-case basis, that ~~do not meet these general criteria.~~may include other requirements, such as maintenance of a minimum equity level.

Line of Credit Loans

Line of credit loans are generally unsecured. Line of credit loans are designed primarily to assist borrowers with liquidity and cash management and are generally advanced at variable interest rates. Line of credit loans are typically revolving facilities and generally require the borrower to pay off the principal balance for at least five consecutive business days at least once during each 12-month period. Line of credit loans are also made available as interim financing when a member either receives RUS approval to obtain a loan and is awaiting its initial advance of funds or submits a loan application that is pending approval from RUS (sometimes referred to as “bridge loans”). RUS loan advances, when received, must be used to repay these interim facilities.

Syndicated Line of Credit Loans

A syndicated loan is typically a large financing offered by a group of lenders that work together to provide funds for a single borrower. Syndicated loans are generally unsecured, floating-rate loans that can be provided on a revolving or term basis for tenors that range from several months to ~~several~~five years. Syndicated financing is arranged for borrowers on a case-by-case basis. CFC may act as lead lender, arranger and administrative agent for the syndicated facilities. CFC uses its best efforts to syndicate the loan requirements of certain borrowers. The success of such efforts depends on the financial position and credit quality of the borrower as well as market conditions.

RTFC Loan Programs

At May 31, 2014 and 2013, ~~and 2012, 93 percent~~93% of RTFC loans were outstanding to rural local exchange carriers or holding companies of rural local exchange carriers. Most of these rural ~~local exchange carriers evolved from being solely voice service providers to being providers of voice, data~~telecommunications companies have diversified their operations and ~~in many cases, video and wireless~~also provide broadband services. Rural local exchange carriers are generally characterized by the low population density of their service territories. Services are generally delivered over networks that include digital switching, fiber optics, internet protocol telephony and other advanced technologies. There is generally a significant barrier to competitive entry.

The businesses to which the remaining RTFC loans have been made support the operations of the rural local exchange carriers and are owned, operated or controlled by rural local exchange carriers. Some of these loans are supported by payment guarantees from the sponsoring rural local exchange carriers.

Long-Term Loans

RTFC makes long-term loans to rural telecommunications companies ~~and their affiliates~~ for ~~acquisition,~~debt refinancing, construction or ~~upgrade~~upgrades of ~~wireline telecommunications systems, wireless telecommunications systems, fiber optic networks, cable television systems~~infrastructure, acquisitions and other corporate purposes.

RTFC’s long-term loans generally have the following characteristics:

·	terms not exceeding 10 years on a senior secured basis;

·	the property, plant and equipment financed by and securing the long-term loan has a useful life equal to or in excess of the loan maturity;

·	flexibility for the borrower to select a fixed interest rate for periods from one year to the final loan maturity or a variable interest rate; and

·	the ability for the borrower to select various tranches with either a fixed or variable interest rate for each tranche.

~~When~~For most loans, when a selected fixed interest rate term expires, the borrower may select another fixed-rate term or a variable rate. The fixed rate on a loan is determined on the day the loan is advanced or converted to a fixed rate based on the term selected. The long-term variable rate is set on the first day of each month.

To borrow from RTFC, a wireline telecommunications system generally must be able to demonstrate the ability to achieve and maintain an annual debt service coverage ratio and an annual times interest earned ratio (“TIER”) of 1.25 and 1.50, respectively. To borrow from RTFC, a cable television system, fiber optic network or wireless telecommunicationsrural telecommunication system generally must be able to demonstrate the ability to achieve and maintain an annual debt service coverage ratio of 1.25. RTFC may make long-term loans to rural telecommunication systems, on a case-by-case basis, that do not meet these general criteria.

Line of Credit Loans

Line of credit loans are generally unsecured. Line of credit loans are designed primarily to assist borrowers with liquidity and cash management and are generally advanced at variable interest rates. Line of credit loans are typically revolving facilities and generally require the borrower to pay off the principal balance for at least five consecutive business days at least once during each 12-month period. Line of credit loans are also made available as interim financing, or bridge loans, when a ~~member~~borrower either receives RUS approval to obtain a loan and is awaiting its initial advance of funds or submits a loan application that is pending approval from RUS. RUS loan advances, when received, must be used to repay these interim facilities.

NCSC Loan Programs

Long-Term Loans

NCSC’s long-term loans generally have the following characteristics:

·	terms of up to 35 years on a senior secured or unsecured basis;

·	amortizing or bullet maturity loans with serial payment structures;

·	the property, plant and equipment financed by and securing the long-term loan has a useful life equal to or in excess of the loan maturity;

·	flexibility for the borrower to select a fixed interest rate for periods of one to 35 years or a variable rate; and

·	the ability for the borrower to select various tranches with either a fixed or variable interest rate for each tranche.

NCSC allows most borrowers to select a fixed interest rate or a variable interest at the time of each advance on long-term loan facilities. When selecting a fixed rate, the borrower has the option to choose a fixed rate for a term of one year through the final maturity of the loan. When the selected fixed interest rate term expires, the borrower may select another fixed rate for a term of one year through the loan maturity or the current variable rate. NCSC sets long-term fixed rates daily for new loan advances and loans that reprice. The ~~long-term variable rate is set on the first day of each month. The~~ fixed rate on a loan is determined on the day the loan is advanced or repriced based on the term selected. The long-term variable rate is set on the first day of each month.

Line of Credit Loans

Line of credit loans are generally ~~unsecured.~~secured. Line of credit loans are designed primarily to assist borrowers with liquidity and cash management and are generally advanced at variable interest rates. Line of credit loans are typically revolving facilities.

Loan Features and Options

Interest Rates on Loans

As a member-owned cooperative finance organization, we are a cost-based lender. Our interest rates are set primarily based on our cost of funding, general and administrative expenses, loan loss provision and to provide a reasonable level of earnings. Various standardized discounts may reduce the stated interest rates for Class A and Class B borrowers meeting certain criteria related to business type, performance, volume and whether they borrow solely from us.

~~The table below shows the weighted-average loans outstanding to borrowers and the weighted-average yield earned by loan and borrower type during fiscal years ended May 31:~~

2013 2012
(dollar amounts in thousands)
Weighted-
average
loans outstanding

Weighted-
average
yield

Weighted-
average
loans outstanding

Weighted-
average
yield

Total by loan type:
   Long-term fixed-rate loans $ 17,223,370 5.08 % $ 16,440,288 5.34 %
   Long-term variable-rate loans 721,747 3.00 658,847 3.70
   Line of credit loans 1,245,635 2.60 1,072,222 2.86
   Restructured loans 157,059 8.89 461,670 3.51
   Non-performing loans 48,653 - 39,953 -
Total loans $ 19,396,464 4.86 $ 18,672,980 5.09

Total by borrower type:
   CFC $ 18,169,399 4.88 % $ 17,423,330 5.08 %
   RTFC 539,850 4.77 688,087 5.44
   NCSC 687,215 4.37 561,563 5.00
Total $ 19,396,464 4.86 $ 18,672,980 5.09

~~Credit Policies, Process and Monitoring~~

~~Loan Underwriting and Credit Monitoring~~

We have separate lending staff to underwrite distribution loans, power supply loans and telecommunications loans. Our borrowers contact the applicable lending staff to discuss the borrower’s need for funding. Our lending staff evaluates the borrower’s request to determine whether the requested credit represents an acceptable credit risk. The lending staff evaluation of the proposed credit includes, but is not limited to:

·	~~the size of the loan request;~~

·	~~the intended use of proceeds;~~

·	~~whether collateral is required and, if so, whether there is sufficient collateral;~~

·	~~the borrower’s risk profile as measured by financial ratios and other risk characteristics; and~~

·	~~other factors that might be applicable to the type of borrower or the specific loan request being considered.~~

If our lending staff determines that a credit is acceptable, the staff works with the borrower to structure a loan based on the various options we offer and prepares a credit recommendation for review by management in the lending group as discussed further below under ~~Loan Approval~~. When considering credit requests to borrowers with large single-obligor exposures we may use loan syndications and whole-loan sale programs to effectively manage portfolio risk related to credit concentrations.

Our Credit Risk Management group facilitates the activities of our internal credit review process, establishes credit policies and oversees our internal risk rating system for all of our borrowers. We maintain an internal risk rating system that produces a borrower rating and a facility rating. The borrower risk rating measures risk of default for each borrower based on both quantitative and qualitative measurements specific to the particular business line of the borrower. The facility risk rating measures risk of loss in the event of default for a particular facility based on the collateral or guarantee associated with the loan. Risk ratings are used to assess the credit quality of each of our borrowers and to establish credit limitations, and are factors in determining applicable credit approval levels.

Risk ratings for borrowers with outstanding and/or unadvanced loan or guarantee commitments are updated at least annually upon the receipt of audited financial information and are reviewed in connection with any new credit request. Annually, an outside financial services consultant conducts a review of the accuracy of specific borrower risk ratings and the risk rating process and credit extension practices for compliance with policy and consistency in application. Such consultant provides recommendations to management and the boards of directors for improvement, as well as progress on the resolution of items from prior reviews. Management is responsible for implementing the recommendations accepted by the boards of directors. In addition, we compare our internal ratings to the publicly available ratings for our borrowers that have public ratings.

~~Loan Approval~~

The respective boards of directors establish loan policies for CFC, RTFC, and NCSC, each of which includes a credit approval matrix. The credit approval matrix specifies the required level of approval applicable to any proposed loan based on factors such as the amount of the loan, the borrower risk rating, whether credit limitations are exceeded and whether the loan is to a member associated with one of our current directors. Through the approval matrix, the respective boards have delegated the authority to approve certain loans to the Chief Executive Officer, who has further delegated approval authority to the Corporate Credit Committee and management in the lending groups while retaining sole authority to approve certain loans.

To maintain our ability to consider and approve loans and other extensions of credit on a timely basis, each board has established a committee, made up of board members, that is authorized to approve loans that require board approval in between regularly scheduled board meetings.

Loans that require approval at a more senior level than management in the lending groups are forwarded to the Corporate Credit Committee for consideration. The Corporate Credit Committee is a cross-functional group comprised of senior vice president and vice president level employees with distribution, power supply and telecommunications lending experience, credit risk management experience, legal experience, accounting experience, regulatory experience and financial industry experience. This committee performs a vital role in maintaining a balance between the credit needs of the borrowers and the requirements for sound credit quality of our loan and guarantee portfolio. The Corporate Credit Committee monitors lending policies and practices and reviews extensions of credits requiring special attention. The Corporate Credit Committee also monitors selected rating changes, analyzes rating integrity and works to improve our internal risk rating system. Lending group staff presents the credit recommendation and answers any questions posed by the committee. The Corporate Credit Committee then approves, rejects or imposes additional conditions on the loan. Loans that require Chief Executive Officer or board approval are provided with documentation and a credit recommendation by management from the applicable lending group and the Corporate Credit Committee. The Chief Executive Officer or boards of directors or the committee of the boards established to consider credit requests between regular board meetings reviews the credit recommendation, asks questions of staff if necessary and either approves or rejects the loan request.

Policies for each of the three boards require that any exceptions to applicable credit limitations and any loan or extension of credit to a borrower that has a director of such board as one of its directors or officers must be approved by the board of directors or the established committee of the relevant board, with the director associated with the borrower requesting the loan being recused from receipt of the written materials, discussions and voting. Notwithstanding the foregoing, the Chief Executive Officer has the authority to approve emergency lines of credit and certain other loans and lines of credit, including circumstances where a director is either a director or officer of the borrower receiving such credit. During the year ended May 31, 2013, the board delegated to the Chief Executive Officer the authority to approve loans originated to be sold or participated through the Company’s whole-loan sale programs. Such lines of credit and loans must meet specific qualifying criteria and must be underwritten in accordance with the prevailing standards and terms.

~~Non-performing Loans~~

The Credit Risk Management group, on an ongoing basis, and the Corporate Credit Committee, on a quarterly basis, monitor all borrowers with past due, non-accrual and restructured facilities as well as other borrowers that warrant a higher degree of monitoring. The Credit Risk Management group presents reports on such matters to the boards of directors. Once a borrower is classified as non-performing, we typically place the loan on non-accrual status and reverse all accrued and unpaid interest back to the date of the last payment.

A loan is written off in the period that it becomes evident that collectability is highly unlikely; however, our efforts to recover all charged-off amounts may continue. Management makes a recommendation to the respective board of directors as to the timing and amount of loan write-offs based on various factors, including, but not limited to, cash flow analysis and the fair value of the collateral securing the borrower’s loans.

~~Advances on Previously Approved Loan Facilities~~

Certain of our loan facilities allow our members to draw down the loan amount over a period of time. To advance an amount under an approved loan facility, a member must be in compliance with all terms and conditions of their facility. The majority of our loans allow us to deny an advance if there has been a material adverse change in the business or condition, financial or otherwise, of the borrower since the time the facility was approved.

~~Covenant Compliance~~

Borrowers are required to maintain certain financial ratios. In addition, members with long-term loans outstanding are generally required to provide us with certain information and documentation on an annual basis, including, but not limited to, audited financial statements and a certificate of management confirming compliance with all covenants.

~~Loan Portfolio Performance~~

Our electric cooperative borrowers provide essential services and are insulated to some extent from the problems other companies may experience with regard to collection of amounts due during periods of recession. As a result, the difficult economic conditions experienced in recent years have not resulted in a significant rise in delinquencies or defaults in our borrowers’ receivables. For calendar year 2012, our electric member systems did not report a significant increase in late payments of utility bills from their member rate-payers or write-offs of such customer receivables. Since the start of the financial crisis in September 2008, only two electric cooperative borrowers have gone into payment default.

During the three-year period ended May 31, 2013, only five borrowers were in default on loan payments, three of which were telecommunications borrowers. During fiscal year 2013, we wrote off $19 million of loans outstanding to one of our

distribution borrowers and there were no loan write-offs in fiscal year 2012. During fiscal year 2011, we wrote off $354 million of loans outstanding for Innovative Communication Corporation (“ICC”), a telecommunications borrower. At May 31, 2013 and 2012, all loans classified as restructured are making payments as scheduled by the restructured agreements. At May 31, 2013 and 2012, loans on non-accrual status were $23 million and $41 million, respectively. See Note 3, ~~Loans and Commitments,~~ ~~for additional information on our restructured and non-performing loans.~~

Our total loans outstanding increased by $958 million over the last three fiscal years ended May 31, 2013. The total loans outstanding decreased by $13 million and $413 million during fiscal years 2011 and 2012, respectively, and increased by $1,384 million during fiscal year 2013. Approximately $819 million of the 2013 increase occurred during the fourth quarter of fiscal 2013. The increase in loan activity during fiscal year 2013 was primarily driven by advances to CFC and NCSC borrowers to refinance debt from other lenders, to fund capital improvements and for new loan advances. The increase in loan volume was partly offset by the pay-off of $414 million restructured loan and the prepayment of a $19 million capital expenditures loan by a restructured borrower in September 2012. RTFC loans as a percentage of our total loan portfolio decreased from 4 percent at May 31, 2011 to 3 percent at May 31, 2012 as a result of the maturity of a $200 million telecommunications loan in fiscal year 2012. RTFC loans as a percentage of our total loan portfolio decreased from 3 percent at May 31, 2012 to 2 percent at May 31, 2013 as a result of loan amortization and repayments and low demand for new telecommunications loans.

~~Credit Concentration~~

The table below presents the total number of CFC, RTFC and NCSC borrowers by state or U.S. territory and the percentage of total loans outstanding at May 31, 2013, 2012 and 2011. The percentage of total loans is based on the aggregate principal balance of the loans outstanding.

2013 2012 2011
State/Territory
Number
of
Borrowers

Loan
Balance %

Number
of
Borrowers

Loan
Balance %

Number
of
Borrowers

Loan
Balance %

Alabama              26 1.83 % 26 1.99 % 27 2.29 %
Alaska              20 3.26 18 2.61 19 1.99
Arizona              12 1.10 11 1.40 12 1.06
Arkansas              19 2.73 20 2.98 19 2.82
California                5 0.13 5 0.10 5 0.13
Colorado              28 4.72 27 4.94 28 4.85
Connecticut               - - - - 1 1.03
Delaware                1 0.12 1 0.13 1 0.13
    District of Columbia                1 - 1 - 2 0.04
Florida              16 2.68 16 2.89 16 2.90
Georgia              46 6.90 47 7.50 47 7.98
Hawaii                1 0.12 1 0.13 1 0.04
Idaho              13 0.73 14 0.76 14 0.78
Illinois              31 3.72 30 4.06 30 3.70
Indiana              45 2.89 44 3.05 44 3.28
Iowa              42 2.10 46 2.25 49 2.17
Kansas              39 4.23 40 4.52 43 4.09
Kentucky              25 3.48 25 1.73 25 1.93
Louisiana              12 1.46 13 1.61 11 1.49
Maine                4 0.07 3 0.05 2 0.04
Maryland                3 1.15 3 1.03 3 1.06
Michigan              16 0.71 16 0.82 16 0.93
Minnesota              54 3.57 53 3.89 54 4.02
Mississippi              22 1.85 25 2.00 24 1.96
Missouri              52 5.27 49 4.92 49 3.99
Montana              28 0.70 26 0.65 25 0.60
Nebraska              19 0.21 9 0.11 10 0.10
Nevada                5 1.22 5 0.99 4 0.87
New Hampshire                2 0.48 1 0.42 1 0.54
New Jersey                2 0.10 2 0.09 2 0.08
New Mexico              15 0.39 16 0.49 17 0.46
New York                7 0.11 7 0.12 7 0.11
North Carolina              31 2.78 31 2.87 31 2.63
North Dakota              13 1.68 12 0.89 13 0.72
Ohio              31 2.13 28 2.01 28 1.96
Oklahoma              30 2.98 28 2.94 29 2.74
Oregon              24 1.67 23 1.66 23 1.60
Pennsylvania              16 2.22 16 2.28 16 2.07
South Carolina              26 2.53 25 2.72 25 2.68
South Dakota              32 1.01 32 1.09 33 0.88
Tennessee              19 0.29 19 0.28 22 0.31
Texas              72 14.76 72 16.63 74 18.17
Utah                6 2.60 6 2.88 6 2.89
Vermont                6 0.31 5 0.27 6 0.31
Virginia              19 1.80 19 1.46 19 2.00
Washington              11 1.69 11 0.84 11 0.87
West Virginia                2 0.08 2 0.09 2 0.01
Wisconsin              26 2.08 27 2.19 26 2.14
Wyoming              13 1.36 13 0.67 13 0.56
       Total            988 100 % 969 100 % 985 100 %

The service territories of our electric and telecommunications members and associates are located throughout the United States and its territories, including 49 states, the District of Columbia, American Samoa and Guam. Our members provide essential electric and telecommunications services to customers in rural areas covering approximately 70 percent of the land mass of the contiguous United States. Each system is separate from other systems and there is significant variance in the size of each system, thus each system’s capital requirements vary. At May 31, 2013, 2012 and 2011, loans outstanding to any one borrower did not exceed 2.3 percent, 2.6 percent and 2.6 percent, respectively, of total loans outstanding. At May 31, 2013, the top 10 borrowers

~~held 15 percent of total loans outstanding compared with 15 percent and 17 percent of total loans outstanding at May 31, 2012 and 2011, respectively.~~

At May 31, 2013, 2012 and 2011, the largest concentration of loans to borrowers in any one state was in Texas, which had approximately 15 percent, 17 percent and 18 percent, respectively, of total loans outstanding. Two primary factors contributed to Texas having the largest percentage of total loans outstanding compared with other states at May 31, 2013:

·	~~Texas has the largest number of total borrowers compared with other states (see table on page 9); and~~

·	~~Texas has the largest number of power supply systems (8 of our 52 power supply system borrowers), which require significantly more capital than distribution systems and telecommunications systems.~~

CFC, RTFC and NCSC each have policies limiting the amount of credit that can be extended to individual borrowers or a controlled group of borrowers. The credit limitation policies cap the total exposure and unsecured exposure to a borrower based on the borrower’s risk profile, the type of facility and our internal risk rating system. As a member-owned cooperative lender, we balance the needs of our members and the risk associated with concentrations of credit exposure. The respective boards of directors must approve new credit requests from borrowers with total exposure or unsecured exposure in excess of the limits in the policies. Management may use syndicated credit arrangements, loan participations or loan sales to manage credit concentrations.

~~Total exposure, as defined by the policies, generally includes the following:~~

·	~~loans outstanding, excluding loans guaranteed by RUS;~~

·	~~our guarantees of the borrower’s obligations including letters of credit commitments;~~

·	~~unadvanced loan commitments;~~

·	~~borrower guarantees to us of another borrower’s debt; and~~

·	~~any other indebtedness with us, unless guaranteed by the U.S. government.~~

The calculation of total exposure includes facilities that are approved but not yet closed and facilities that might not be drawn by the borrower, such as lines of credit and loan commitments for projects that may be delayed or eventually cancelled.

~~Unadvanced Loan Commitments~~

Unadvanced commitments represent approved and executed loan contracts for which the funds have not been advanced. At May 31, 2013, 2012 and 2011, we had the following amount of unadvanced commitments on loans to our borrowers.

(dollar amounts in thousands) 2013
% of
Total
2012
% of
Total
2011
% of
Total

Long-term $ 4,718,162 35 % $ 5,437,881 38 % $ 5,461,484 39 %
Line of credit 8,704,586 65 8,691,543 62 8,609,191 61
Total $ 13,422,748 100 % $ 14,129,424 100 % $ 14,070,675 100 %

CFC $ 12,196,431 91 % $ 13,028,657 92 % $ 13,074,685 93 %
RTFC 317,344 2 341,792 2 366,060 3
NCSC 908,973 7 758,975 6 629,930 4
Total $ 13,422,748 100 % $ 14,129,424 100 % $ 14,070,675 100 %

A total of $1,703 million, $1,303 million and $999 million of line of credit unadvanced commitments at May 31, 2013, 2012 and 2011, respectively, represented unadvanced commitments related to line of credit loans that are not subject to a material adverse change clause at the time of each loan advance. As such, we would be required to advance amounts on these committed facilities as long as the borrower is in compliance with the terms and conditions of the loan.

The remaining available amounts at May 31, 2013, 2012 and 2011 were generally subject to material adverse change clauses. Prior to making an advance on these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions.

Unadvanced commitments related to line of credit loans are typically for periods not to exceed five years and are generally revolving facilities used for working capital and backup liquidity purposes. Historically, we have experienced a very low utilization rate on line of credit loan facilities, whether or not there is a material adverse change clause. Since we generally do not charge a fee on the unadvanced portion of the majority of our loan facilities, our borrowers will typically request long-term facilities to cover maintenance and capital expenditure work plans for periods of up to five years and draw down on the facility over that time. In addition, borrowers will typically request an amount in excess of their immediate estimated loan requirements to avoid the expense related to seeking additional loan funding for unexpected items.

~~The above items all contribute to our expectation that a large portion of the unadvanced commitments reported at May 31, 2013 will expire without being utilized.~~

Conversion of Loans

Generally, a borrower may convert a long-term loan from a variable interest rate to a fixed interest rate at any time without a ~~fee. Generally,~~fee and convert a ~~borrower may convert its~~ long-term loan from a fixed rate to another fixed rate or to a variable rate at any time ~~in exchange for an administrative~~upon payment of a conversion fee, ~~plus a make-whole premium,~~ if applicable, based on current loan policies.

Prepayment of Loans

Generally, borrowers may prepay long-term fixed-rate loans at any time, subject to ~~a prepayment~~payment of an administrative fee and a make-whole premium ~~if applicable. Generally,~~and prepay long-term variable-rate loans ~~may be prepaid~~ at any time, subject to ~~a prepayment~~payment of an administrative fee. Line of credit loans may be prepaid at any time without a fee, unless the interest rate on the loan is fixed or based on a LIBOR index.

Loan Security

Long-term loans are typically senior secured on parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower, subject to standard liens typical in utility mortgages such as those related to taxes, worker’s compensation awards, mechanics’ and similar liens, rights-of-way, governmental rights and judgment liens. We are able to obtain liens on parity with liens for the benefit of RUS even where the RUS loan was made earlier in time than ours because ~~RUS’s~~RUS’ form of mortgage expressly provides for other lenders such as CFC to have a parity lien position if the borrower satisfies certain conditions or obtains a written lien accommodation from RUS. When we make loans to borrowers that have existing loans from RUS, we generally require those borrowers to either obtain such a lien accommodation or satisfy the conditions necessary for our loan to be secured on parity under the mortgage with the loan from RUS.

~~Our~~As noted above, our line of credit loans are generally unsecured. ~~Line of credit loans are generally to provide a source of working capital, and thus it is market practice that line of credit loans are not secured.~~

At May 31, 2013 and 2012, $2,243 million and $1,658 million out of $20,296 million and $18,912 million, respectively, of total loans outstanding were unsecured, representing 11 percent and 9 percent of total loans outstanding, respectively.

GUARANTEE PROGRAMS

~~Guarantee Programs~~

When we guarantee debt obligations for our members, we use the same credit policies and monitoring procedures for guarantees as for loans and commitments. 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. In general, the member system is required to repay, ~~on demand,~~ any amount advanced by us with interest, pursuant to the documents evidencing the member system’s reimbursement obligation. We have no significant guarantee concentrations in any one state or territory.

~~The following table provides a breakout of guarantees outstanding by type and member class at May 31:~~

(dollar amounts in thousands) 2013 2012 2011
Total by guarantee type:
Long-term tax-exempt bonds $
547,970
$
573,110
$ 599,935
Indemnifications of tax benefit transfers
784

49,771
59,895
Letters of credit
447,683

509,514
327,201
Other guarantees
116,334

116,935
117,957
Total $ 1,112,771 $ 1,249,330 $ 1,104,988

Total by member class:
CFC: 2013 2012 2011
   Distribution $ 245,265 22 % $   340,385 27 % $ 217,099 20 %
   Power supply 810,900 73 854,444 68 817,618 74
   Statewide and associate 6,948 1   7,202 1 20,807 2
          CFC Total 1,063,113 96 1,202,031 96 1,055,524 96
RTFC 3,711 -   1,026 - 821 -
NCSC 45,947 4   46,273 4 48,643 4
          Total $ 1,112,771 100 % $ 1,249,330 100 % $ 1,104,988 100 %

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 non-recourse 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. The debt we guarantee may include short- and long-term obligations.

If a system defaults for failure to make the debt payments, we are obligated to pay, after available debt service reserve funds have been exhausted, scheduled debt service under our guarantee. Such payment will prevent the occurrence of an event of default that would otherwise permit acceleration of the bond issue. The system is required to repay ~~on demand,~~ 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 a 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 remarketed. If we hold the securities, the cooperative pays interest to us at our short-term variable interest rate. At May 31, 2013, 2012 and 2011, we were the guarantor and liquidity provider for $473 million, $498 million, and $524 million, respectively, of tax-exempt bonds issued for our member cooperatives. During the years ended May 31, 2013, 2012 and 2011 we were notThe system is required to ~~purchase any tax-exempt bonds pursuant to our obligation as~~pay us standby liquidity ~~provider.~~fees in connection with these transactions.

~~Guarantees of Tax Benefit Transfers~~

We also have guaranteed members’ obligations to indemnify against loss of tax benefits in certain tax benefit transfers that occurred in 1981 and 1982. A member’s obligation to reimburse us for any guarantee payments would be treated as a long-term loan, secured on a parity with RUS by a first lien on substantially all of the member’s property to the extent of any cash received by the member at the outset of the transaction. The remainder would be treated as a line of credit loan secured by a subordinated mortgage on substantially all of the member’s property. Due to changes in federal tax law, no guarantees of this nature have been put in place since 1982.

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 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 that date at our line of credit variable interest rate.

Other Guarantees

We may provide other guarantees as requested by our members. These guarantees may be made on a secured or unsecured basis with guarantee fees set to cover our general and administrative expenses, a provision for losses and a reasonable margin.

INVESTMENT POLICY

We invest funds in accordance with policies adopted by our Board of Directors. Under our current investment policy, funds may be invested in direct obligations of, or guaranteed by, the United States or agencies thereof and investments in government sponsored enterprises. Our ~~Lending Competition~~policy also permits us to invest in 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 and certain corporate bonds. In addition, we may invest in repurchase agreements secured by direct obligations of the United States or its agencies and highly rated commercial paper that is set aside in a segregated account. All of these investments are subject to certain limitations set forth in our investment policy.

OUR LENDING COMPETITION

Electric Lending

RUS is the largest lender to electric cooperatives. RUS provides long-term secured loans. CFC ~~offers its members~~provides financial products and services, ~~that~~primarily in the form of long-term and short-term loans, to its electric cooperative members to supplement ~~and complement those of~~ RUS and, therefore, CFC does not consider RUS to be a competitor. CFC competes with banks and other financial institutions to make bridge loans that are needed by electric cooperatives in anticipation of obtaining long-term funding from RUS, to finance a portion of a loan that RUS is unable to provide, andfinancing, to provide loans to members that have elected not to borrow from ~~RUS. For the federal government fiscal year ending September 30, 2013, authorized lending levels under the~~ RUS, ~~electric loan program were $100 million for hardship loans~~ and ~~$6,500 million for loan guarantees.~~to bridge long-term financing provided by RUS.

~~Our~~CFC’s primary competitor is 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. In addition, members may obtain funding from commercial~~CFC also competes with banks, ~~or may be large enough to directly access~~other financial institutions, and the capital markets ~~for funding.~~to provide loans and other financial products to our members. As a result, we are competing with the customer service, pricing and funding options the member is 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 ~~relationship we have~~relationships developed with the majority of our members. Further, on an annual basis, we allocate substantially all net earnings to members (i) through the members’ capital reserve and (ii) in the form of patronage capital, which reduces our members’ effective cost of borrowing. The value-added services that we

provide include, but are not limited to, cash management services, benchmarking tools, financial models, and various conferences, meetings, and training workshops.

In order to meet ~~the unique~~other financing needs of our members, we offer options including credit support in the form of letters of credit and guarantees, ~~large transaction management~~loan syndications and loan ~~sales to other financial institutions. Credit~~participations. Our credit products are tailored to meet the specific needs of each cooperative and we often offer specific transaction structures ~~and~~that our competitors do not or are ~~often designed~~unable to ~~cover gaps left by other lenders, such as bridge loans to long-term financing provided by RUS.~~provide. CFC also offers certain 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 funds 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. This program is funded through voluntary contributions from members, and amounts 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, or(ii) that it faces a significant threat in its ability to continue to provide electric or other energy services to ~~customers.~~

~~CFC also offers~~customers, or (iii) it is facing regulatory, judicial or legislative challenges that may materially affect other cooperatives in its ~~members additional services to enhance member operations including:~~

~~Return of net earnings through the retirement of patronage capital.~~ The laws of the District of Columbia require CFC to allocate but not retire patronage capital. However, CFC maximizes members’ returns by retiring a portion of patronage capital to members in cash to reduce their effective cost of borrowing each year based on approval by its board of directors.

·	~~CFC Paying Agent Service.~~ CFC’s Paying Agent Service allows members to enhance their cash management abilities so that they can earn interest until the moment the money is needed to make loan payments, cover power bill costs or pay other ongoing costs.

~~CFC Key Ratio Trend Analysis.~~ CFC issues a report annually that provides members information about where their operations stand in relation to other electric systems or power suppliers of similar size, location and growth characteristics. The report provides a five-year review of rural electric trends in nine key planning areas and supports decision-making by our members’ managers and boards.

~~CFC RateWatch.~~ This service allows members to monitor certain interest rates and alerts borrowers when fixed rates reach a maximum or minimum level specified by the borrower. Members can lock in a current interest rate for any term specified on expected future borrowings to mitigate risk, subject to certain fees. Borrowers with variable-rate loans are notified when fixed rates reach the selected level and have the option of converting at that time or of resetting CFC RateWatch at a new level. CFC offers this service to members free of charge.

·	~~Regulatory support services.~~ ~~This service is available for members and includes, but is not limited to, assistance with rate design, expert testimony, cost-of-service analysis and strategic regulatory planning.~~

~~Conferences, meetings and workshops~~. CFC produces a range of programs each year providing in-depth information and insight on utility and energy issues, financing and economic trends and outlooks, and management and leadership best practices. These programs also provide opportunities for members’ directors and employees to network with CFC staff and with their peers at other cooperatives, while simultaneously earning professional education credits.

~~CFC Extranet.~~ The CFC extranet provides borrowers with a convenient way to view their loan and investment history with CFC. In addition, the website provides useful financial tools for members to analyze various aspects of their businesses. Members also can make investments in CFC and request loan advances online.

state, region or nation.

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.

According to financial data provided to us by our 810 reporting distribution systems and 58 reporting power supply systems as of December 31, 2013, and our 809 reporting electric cooperative distribution systems and 57 reporting power supply systems as of December 31, 2012, ~~and our 809 reporting electric cooperative distribution systems and 59 reporting power supply systems as of December 31, 2011,~~ long-term debt outstanding to CFC, RUS and other lenders in the electric cooperative industry by those entities was as ~~follows:~~follows at December 31, 2013 and 2012:

(dollar amounts in thousands) 2012 2011
Total long-term debt reported by members:
Distribution $ 40,738,408 $ 39,030,471
Power supply 42,815,991 40,658,796
Less: long-term debt funded by RUS (39,680,399 ) (39,122,823 )
Members’ non-RUS long-term debt $ 43,874,000 $ 40,566,444

(dollar amounts in thousands)		2012	% of Total			2011	% of Total

(Dollars in thousands)									2013					2012
Total long-term debt reported by members:
Distribution									$	43,556,428				$	40,738,408
Power supply									44,323,068					42,815,991
Less: long-term debt funded by RUS									(42,485,241		)			(39,680,399		)
Members’ non-RUS long-term debt									$	45,394,255				$	43,874,000

(Dollars in thousands)									2013			% of Total		2012			% of Total
Long-term debt funded by CFC	$	17,101,777	39	%	$	16,516,682	41	%	$	18,463,481		41	%	$	17,101,777		39	%
Long-term debt funded by other lenders		26,772,223	61			24,049,762	59		26,930,774			59		26,772,223			61
Members’ non-RUS long-term debt	$	43,874,000	100	%	$	40,566,444	100	%	$	45,394,255		100	%	$	43,874,000		100	%

Members’ long-term debt funded by CFC is further summarized by type below at December ~~31:~~31, 2013 and 2012:

(dollar amounts in thousands)		2012	% of Total			2011	% of Total

(Dollars in thousands)									2013		% of Total		2012		% of Total
Distribution	$	13,343,007	78	%	$	13,184,791	80	%	$	14,641,426	79	%	$	13,343,007	78	%
Power supply		3,758,770	22			3,331,891	20		3,822,055		21		3,758,770		22
Long-term debt funded by CFC	$	17,101,777	100	%	$	16,516,682	100	%	$	18,463,481	100	%	$	17,101,777	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, but we believe that

CoBank, ACB, is the lender other than CFC and RUS with significant long-term debt outstanding to the rural electric cooperatives.

Telecommunications Lending

In 1949, the Rural Electrification Act was amended to allow lending for the establishment and improvement of rural telecommunications service. For the federal government’s fiscal year ending September 30, ~~2013,~~2014, RUS has $690 million in annual lending authority for its ~~traditional plant modernization and upgrade lending program of direct loans to rural telephone systems and the~~ Telecommunications Infrastructure Loan program. ~~Additionally, approximately $63 million in loans is available under the Rural Broadband Access Loan and Loan Guarantee Program.~~ In addition, the American Recovery and Reinvestment Act of 2009 provided RUS with $2,500 million of budget authority for loans and grants andthe U.S. Department of Commerce’s National Telecommunications and Information Administration with $4,700 million in budget authority for grants to support the expansion of broadband service into unserved and underserved areas.

RTFC is not in direct competition with RUS, but rather competes with other lenders for supplemental lending and for the full lending requirement of the rural telecommunications companies that decide not to borrow from RUS or for projects not eligible for RUS financing. Given the increased availability of government financing for rural broadband, it is unlikely we will participate in this financing to any significant degree outside of incremental lending to existing rural local exchange carrier borrowers to provide broadband services to their customers or interim financing in connection with the federal funding programs.

RTFC’s competition includes commercial banks and CoBank, ACB. The competitive market for providing credit to the rural telecommunications industry is difficult to quantify. Many rural telecommunications companies are not borrowers of RTFC, RUS or CoBank, ACB, and commercial banks generally do not publish information solely on their telecom portfolios.

As of December 31, ~~2012,~~2013, RUS had approximately ~~$4,660~~$4,567 million in long-term loans outstanding to telecommunications borrowers. At December 31, ~~2012,~~2013, RTFC had ~~$514~~$440 million in long-term loans outstanding to telecommunications borrowers.

~~Our Regulation~~

OUR REGULATION

CFC, RTFC and NCSC are not subject to ~~state or~~ federal regulatory oversight or compliance with regard to lending. CFC, RTFC and NCSC are subject to state laws that pertain to the business conducted in each state, including but not limited to lending laws, usury laws and laws governing mortgages.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law on July 21, 2010, significantly changed the regulation of the financial services industry. Of particular importance for our

operations are the Act’s Title VII provisions imposing new requirements on certain entities that use derivatives, including requirements for swap end-users, such as mandatory clearing, margin mandates and recordkeeping requirements.

Implementation of the Dodd-Frank Act is being accomplished through numerous rulemakings, many of which are still in ~~process.~~progress. Accordingly, it is difficult to fully assess the impact of the Dodd-Frank Act on CFC and the financial services industry at this time. Numerous federal agencies, including the Commodity Futures Trading Commission (“CFTC”)~~, Federal Deposit Insurance Corporation (“FDIC”)~~ and the U.S. Securities and Exchange Commission (“SEC”) have significant discretion in drafting and implementing rules and regulations under the Dodd-Frank Act. These rules may subject us to additional costs and operational requirements associated with any such regulations. However, the full impact of the Dodd-Frank Act will not be known until all final rules become effective. In addition, the Dodd-Frank Act requires various studies and reports to be delivered to Congress, which could result in future legislative changes or regulatory action.

~~Recent developments with respect to the~~ Dodd-Frank Act rulemakings and developments that may ~~have an~~ impact on CFC include, but are not limited to, the following:

• Title VII Derivatives Rulemakings �� - CFC is ~~a qualified cooperative end-user of swaps and~~ not a swap dealer under the final definition rules issued by the ~~U.S. Commodity Futures Trading Commission (“CFTC”). As a qualified cooperative end-user we~~CFTC. We are subject to ~~new~~certain requirements including the CFTC anti-fraud provisions, recordkeeping, ~~transactional reporting~~ and ~~annual end-user exemption~~ reporting.

•Clearing Exemption - The Dodd-Frank Act generally requires that certain swaps, including interest rate swaps which are utilized by CFC, be cleared through a central clearinghouse. On August 13, 2013, the CFTC approved a final rule, “Clearing Exemption for Certain Swaps Entered into by Cooperatives,” exempting ~~certain~~qualifying cooperative swaps ~~executed by qualified cooperatives~~ from ~~the~~ mandatory clearing requirements.

• As a qualified cooperative, CFC ~~Counterparties — We continue~~is exempt from mandatory clearing requirements pursuant to ~~assess~~ the ~~impact of the Dodd-Frank Act regulations affecting the derivatives activities of the banks, swap dealers, major swap participants,~~final rule, provided certain conditions are met.

Proposed Margin Requirements - The SEC, CFTC and other ~~regulated entities that are our counterparties in derivatives transactions, including, the domestic and international~~regulatory agencies have proposed rules on mandatory uncleared swap margin requirements for prudentially regulated banking institutions. These rules, as currently drafted, could result in additional operational and transactional costs for us.

~~• SEC Corporate Governance — The Dodd-Frank Act requires the SEC to promulgate rules related to executive compensation and compensation clawbacks which~~that may require us to ~~make additional disclosures or alter controls and/or risk management.~~

post margins with our derivative counterparties. We have been actively engaged through the regulatory process in advocating that CFC, as a not-for-profit lender owned and controlled by its member electric cooperatives, which are commercial end-users, should be exempt from clearing and margin requirements, just as CFC’s members are exempt. ~~As a qualified cooperative, CFC is exempt from mandatory clearing requirements pursuant to the final rule adopted by the CFTC on August 13, 2013.~~ We will continue to urge the relevant federal agencies to include in their final rules an exemption for qualified cooperatives from mandatory margin requirements for uncleared swaps. Additionally, we will continue to monitor the rulemakings process and assess the impact of final rules and other regulatory activities under the Dodd-Frank Act on our operations.

CFC Counterparties - We continue to assess the impact of the Dodd-Frank Act regulations affecting the derivative activities of the banks, swap dealers, major swap participants, and other regulated entities that are our counterparties in derivatives transactions, including the domestic and international proposed rules on mandatory uncleared swap margin requirements for prudentially regulated banking institutions and other financial institutions. These rules, as currently drafted, could result in additional operational and transactional costs for us.

~~Our Members~~SEC Corporate Governance - The Dodd-Frank Act requires the SEC to promulgate rules related to executive compensation and compensation clawbacks, which may require us to make additional disclosures or alter controls and/or risk management practices.

OUR MEMBERS

At May 31, ~~2013,~~2014, after taking into consideration systems that are members of both CFC and NCSC and eliminating memberships between CFC, RTFC and NCSC, our consolidated membership totaled 1,460 members and ~~252~~229 associates.

CFC

Each of CFC’s distribution and power supply members received or is eligible to receive financing from RUS. One of the criteria for eligibility for RUS financing is a “rural area” test. Thus, as an entity that supplements RUS financing, 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 ~~more~~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, if an RUS borrower met the “rural area” definition at the time of its first loan origination from RUS and continues to have outstanding RUS loans, RUS has the authority to continue lending to the entity regardless of subsequent population growth in its service territory. Similar to RUS, CFC establishes eligibility only at the time a system initially borrows from CFC, and that eligibility, as it relates to the “rural area” test, is based on a determination of whether the system borrowed or is eligible to borrow from RUS.

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. Thus, those entities that received or qualify for financing from RUS are eligible to apply for

membership and subsequently 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. ~~All electric members provide services to both residential and commercial customers.~~

Class 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 all-requirements 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 – 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 hundreds 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. Certain other power supply systems have been formed but do not yet own generation or transmission facilities or have financing commitments from us. 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 generation, transmission and related facilities and to pay the cost of any power and energy purchased for resale.

Class 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. Such statewide organizations provide training, and legislative, regulatory, media and related services. Certain states have an organization that represents and serves the distribution systems and power supply systems located in the state.

Class 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 percent~~80% of the states in the United States. ~~The~~ 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.

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 are eligible to be an associate of CFC.~~members.

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.

At May 31, ~~2013,~~2014, CFC’s membership included:

·	~~837~~838 Class A distribution systems;

·	71 Class B power supply systems;

·	6564 Class C statewide and regional associations, including NCSC; and

·	1 Class D national association of cooperatives.

In addition, CFC had 5149 associates, including RTFC, at May 31, ~~2013.~~2014.

RTFC

Membership in RTFC is limited to cooperative 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. These companies must be engaged directly or indirectly in furnishing telephone or telecommunications services. Holding companies, subsidiaries and other organizations ~~approved by the RTFC Board of Directors~~ that are owned, controlled or operated by ~~members—or entities eligible~~members are referred to ~~become members—~~as affiliates, and are eligible to ~~be an associate of~~borrow from RTFC. Associates are ~~not~~organizations that provide 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. ~~All RTFC members provide services to both residential and commercial customers.~~

~~As of~~At May 31, ~~2013,~~2014, RTFC’s membership included ~~487~~486 members and ~~five~~four associates. CFC is not a member of RTFC. RTFC’s members and associates consist of ~~194 non-for-profit~~193 not-for-profit entities and ~~298~~297 for-profit entities.

NCSC

~~At May 31, 2013, membership~~

Membership in NCSC ~~was limited to organizations that were Class A members of CFC, or eligible for such membership, and CFC. On June 6, 2013, NCSC amended its bylaws to also permit~~includes organizations that are Class A, B or C members of CFC, or eligible for such ~~membership, to be members of NCSC.~~ membership.

At May 31, ~~2013,~~2014, NCSC’s membership included ~~376~~378 distribution ~~systems.~~systems, 1 power supply system, and 1 statewide association. All of the NCSC distribution members were also CFC members. CFC is not a member of NCSC.

In addition, NCSC had ~~197~~177 associates at May 31, ~~2013.~~2014. 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.

~~Corporate Governance~~

CORPORATE GOVERNANCE

CFC

Pursuant to the CFC Bylaws, there are 11 districts, comprising 10 districts for the general membership and one for the Class D membership. Pursuant to its bylaws, CFC holds an annual meeting of the members each calendar year. The board of directors also calls a meeting annually of the members for each of districts 1 to 10 for the purpose of electing a nominating committee, or electing directors or both. Each member is entitled to one vote upon each matter submitted to a vote at all meetings of the members.

The business affairs of CFC are governed by a board of up to 23 directors that exercises all of the powers of CFC except such as are by law, the Articles of Incorporation or the bylaws conferred upon or reserved to the members.

Each district is represented by two board members. In districts 1 to 10, one of the two positions on the board of directors in each district is held by a person who is a trustee or director of a member organization within the district and the other position is held by a person who is a CEO or general manager of a member organization within the district. Additionally, two directors are designated by the Class D (District 11) member, ~~the~~ NRECA.

In addition to the 20 directors elected and two directors designated from the districts described above, if the board of directors in its discretion so determines, there may be one additional at-large director elected to serve on the board of directors of CFC from time to time. The at-large director is elected by the members and serves on the Audit Committee. No person is eligible to become or remain the at-large director unless the person (i) is a trustee, director, manager, chief executive officer or chief financial officer of a member of CFC or holds a comparable position of a member of CFC, (ii) satisfies the applicable requirements of an Audit Committee financial expert and (iii) is otherwise independent in accordance with Rule 10A-3 under the Securities Exchange Act and under the New York Stock Exchange standards, which the board of directors adopted to evaluate the independence of our directors. Since March 2007, CFC has had such an at-large director on its board of directors.

Pursuant to the CFC Bylaws, the officers of CFC include a president, vice president, secretary-treasurer and such other officers as may be determined from time to time by the board of directors. The officers are elected or appointed annually by the board of directors at the first meeting of the board of directors held after each annual meeting. The president, vice president, and secretary-treasurer must be members of the board of directors.

The CFC Board of Directors is responsible for the oversight and direction of risk management, while CFC’s management has primary responsibility for day-to-day management of the risks associated with CFC’s business. In fulfilling its risk management

oversight duties, the CFC Board of Directors receives periodic reports on business activities from executive management and from various operating groups and committees across the organization, including the Credit Risk Management group, Internal Audit group and the Corporate Compliance group, as well as the Asset Liability Committee, the Corporate Credit Committee and the Disclosure Committee. The CFC Board of Directors also reviews CFC’s risk profile and management’s response to those risks throughout the year at its meetings. The board of directors establishes CFC’s loan policies and has established a Loan Committee of the board comprising no fewer than 10 directors that reviews the performance of the loan portfolio in accordance with those policies. See "MD&A—Credit Risk—Credit Policies, Process and ~~Monitoring~~ ~~beginning on page 6~~Monitoring" for ~~more~~additional information about the role of our board of directors in our lending business.

RTFC

The business affairs of RTFC are governed by a board of no less than five and no more than 10 directors. Pursuant to the RTFC Bylaws, there are five districts for the membership, and no less than one director must be a director, trustee, officer or manager of a member in each of the five districts. Directors are elected at the annual meeting of the members. Each member is entitled to one vote upon each matter submitted to a vote at all meetings of the members. ~~There~~CFC is not a member of RTFC and there are no CFC directors, officers or employees that serve as a director of RTFC.

The RTFC Board of Directors established an Executive Committee of the board of directors pursuant to a written board policy that sets forth the delegations of responsibility, authorities and functions of the Executive Committee of the board of directors. The board policy delegates to the Executive Committee the authority to advise and consult with the Chief Executive Officer with respect to the development of policies governing RTFC’s making of loans, guarantees and investments to or for the benefit of members.

The RTFC Board of Directors reserves the authority to approve certain loans and guarantees based on the loan amount, credit quality and other criteria established by the board of directors from time to time. During intervals between board meetings, the Executive Committee may consider and approve financing arrangements that require approval by the full board. The

board of directors delegates to the Chief Executive Officer or to the Chief Executive Officer’s designee(s) the authority to approve certain financing arrangements up to certain dollar thresholds and with certain credit characteristics and also authorizes the Chief Executive Officer to establish an internal Corporate Credit Committee.

One of the loan policies established by the RTFC Board of Directors sets forth the loan guidelines and credit products established to implement the corporate purpose and program objectives of RTFC. Loans and guarantees are made to members, affiliates of members and associates that meet applicable financial and feasibility criteria, security requirements and conditions as established for each type of loan pursuant to RTFC’s practices and procedures in effect at the time. A credit analysis is conducted by staff during the underwriting process for each application to determine if the applicant has the ability to meet its obligations and RTFC’s financial standards and if the proposed structure provides adequate security for each secured credit facility. The RTFC Board of Directors delegates to the Chief Executive Officer or the Chief Executive Officer’s designee(s) the authority to implement this policy.

NCSC

The business affairs of the association are governed by a board of up to 11 directors. Pursuant to the NCSC Bylaws, there are five districts for the general membership and one district for ~~CFC.~~CFC if CFC becomes a member of NCSC. The five general membership districts are represented by two directors, one of which must be a director or trustee of a member and one of which must be a CEO of a member. Directors are elected at the annual meeting of the members. Each member is entitled to one vote upon each matter submitted to a vote at all meetings of the members. CFC is not a member of NCSC and there are no CFC directors, officers or employees that serve as a director of NCSC. If CFC becomes a member of NCSC, it would be the sole member of the sixth district, in which case CFC would nominate one director for election by the members.

The NCSC Board of Directors established an Executive Committee of the board of directors pursuant to a written board policy that sets forth the delegations of responsibility, authorities and functions of the Executive Committee of the board of directors. The board policy delegates to the Executive Committee the authority to advise and consult with the Chief Executive Officer with respect to the development of policies governing NCSC’s making of loans, guarantees and investments to or for the benefit of members.

The NCSC Board of Directors reserves the authority to approve certain loans and guarantees based on the loan amount, credit quality and other criteria established by the board of directors from time to time. During intervals between board meetings, the Executive Committee may consider and approve financing arrangements that require approval by the full board. The board of directors delegates to the Chief Executive Officer or to the Chief Executive Officer’s designee(s) the authority to approve

certain financing arrangements up to certain dollar thresholds and with certain credit characteristics and also authorizes the Chief Executive Officer to establish an internal Corporate Credit Committee.

One of the loan policies established by the NCSC Board of Directors sets forth the loan guidelines and credit products established to implement the corporate purpose and program objectives of NCSC. Loans and guarantees are made to members and associates that meet applicable financial and feasibility criteria, security requirements, and conditions as established for each type of loan pursuant to NCSC’s practices and procedures in effect at the time. A credit analysis is conducted by staff during the underwriting process for each application to determine if the applicant has the ability to meet its obligations and NCSC’s financial standards and if the proposed structure provides adequate security for each secured credit facility. The NCSC Board of Directors has delegated to the Chief Executive Officer or the Chief Executive Officer’s designee(s) the authority to implement this policy.

~~Rural Electric Industry~~

RURAL ELECTRIC INDUSTRY

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. Principally through the creation of local electric cooperatives originally financed under the Rural Electrification Act loan program in 47 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 percent~~11% in 1934 to almost ~~100 percent~~100% currently. According to ~~2011~~2013 data from the U.S. Energy Information Administration, rural electric systems serve approximately ~~13 percent~~13% of all consumers of electricity in the United States and its territories and serve about seven consumers per mile of line, compared with 35 customers per mile of line for investor-owned utilities. Rural electric systems account for approximately ~~11 percent~~11% of total sales of electricity and own about ~~five percent~~5% of the nation’s electricity generating capacity.

RUS makes insured loans and loan guarantees and provides other forms of financial assistance to rural electric system borrowers. RUS is authorized to make direct loans to systems that qualify for the hardship program ~~(5 percent~~(5% interest rate), the municipal rate program (based on a municipal government obligation index), and a treasury rate program (at treasury plus 1/~~8 percent)~~8%). RUS is also 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 financial and technical supervision over 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 so a source of financing would be available to them to supplement the RUS loan programs and to mitigate uncertainty related to government funding. Providing the electric cooperatives with financial products and services to supplement the RUS loan programs remains the purpose of CFC.

CFC aggregates the combined strength of ~~the~~its rural electric member cooperatives to access the public capital markets and ~~fill the need to~~ provide supplemental funding to that of RUS. ~~CFC is owned by its consumer-owned electric cooperative members.~~ CFC works cooperatively with RUS; however, CFC is not a federal agency or a government-sponsored enterprise, and is not owned or controlled by any federal agency or government-sponsored enterprise. Our members are not required to have outstanding loans from RUS as a condition of borrowing from CFC. CFC supplements the RUS financing programs to meet the financial needs of its rural members by:

·	~~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 (usually for pollution-control equipment), weather-related disaster recovery lines of credit, unsecured loans, and investment products such as commercial paper and member capital securities;

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;

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 facilities that are not eligible for financing from RUS. Examples of such facilities include electric utility facilities acquired by a cooperative from an investor-owned or municipal utility for service to an area that falls outside of an eligible rural area, as defined in the Rural Electrification Act. In other cases, an RUS-eligible system obtains CFC financing for non-electric facilities used by the cooperative to serve its rural members when such facilities are not eligible for RUS loans. RUS has instituted restrictions on financing for certain baseload generation facilities. A cooperative in the process of constructing such facilities will need financing to complete this work, and ~~because of the recent change in RUS policy,~~ it may not be able to obtain this additional funding from RUS.

~~Electric Systems and Associations~~

~~Distribution Systems~~

Distribution systems are utilities engaged in retail sales of electricity to residential and commercial consumers in their defined service areas generally on an exclusive basis using their distribution infrastructure including substations, wires and related support systems. Distribution systems are cooperatives owned by the customers they serve. 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.

~~Power Supply Systems~~

Power supply systems are utilities that purchase or generate electric power and provide it on a wholesale basis to distribution systems for delivery to the consumer. The distribution systems are the members of the power supply systems. The power supply systems vary in size from one with hundreds 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. Certain other power supply systems have been formed but do not yet own generation or transmission facilities or have financing commitments from us. 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 meet the cost of operation and maintenance of all generation, transmission and related facilities and to pay the cost of any power and energy purchased for resale.

~~Statewide and Regional Associations~~

Each state may have an organization that represents and serves the distribution systems and power supply systems located in the state. Such statewide organizations provide training, as well as legislative, regulatory, media and related representation for the member distribution and power supply systems.

~~National Associations of Cooperatives~~

The NRECA represents cooperatives nationally. It provides training, sponsors regional and national meetings, and provides legislative, regulatory, media, and related representation for all rural electric cooperatives.

Electric Member Competition

The movement toward electric competition at the retail level has largely ceased. The electric utility industry has settled into a “hybrid” model in which there are significant differences in the retail regulatory approaches followed in different states and regions.

Customer choice regulation, where customers have a choice of alternative energy suppliers, has had little to no impact on distribution and power supply cooperatives, and we do not expect a material impact going forward. As of May 31, ~~2013,~~2014, retail customer choice ~~is active~~exists in 14 states. Those states are Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Texas. In general, even in those states, very few consumers served by CFC members have switched ~~from the traditional supplier.~~to other suppliers.

Many factors ~~influence~~restrict the choices customers have available to them and, therefore, mitigate the effect of customer choice and competition in areas served by cooperatives. These factors include, but are not limited to, the following:

·	utilities in many states may still be regulated regarding rates on non-competitive services, such as distribution;

·	20 states regulate the debt securities issued by utilities, including cooperatives, which could affect funding costs and, therefore, the electric rates charged to customers;

·	Federal Energy Regulatory Commission regulation of rates as well as terms and conditions of transmission service;

·	the fact that few competitors demonstrated much interest in providing electric energy to residential or rural customers; and

distribution systems own the lines to the customer and it would not be feasible for a competitor to build a second line to serve the same customers in almost all situations. Therefore, the distribution systems still charge a fee or access tariff for the service of delivering power, regardless of who supplies the power.

Electric Member Regulation

There are 25 states in which some or all electric cooperatives are subject to state regulation over the rates they charge. In 14 of the 25 states, all electric cooperatives are subject to full or partial state regulation over their electric rates and the cooperatives in these 14 states do not have a right to opt out of regulation. Those states are Arizona, Arkansas, Georgia, Hawaii, Kentucky, Louisiana, Maine, Maryland, New Mexico, New York, Utah, Vermont, Virginia and West Virginia. In these 14 states, we had 154 distribution members and 12 power supply members with a total of $4,367 million, or 22 percent, of powers supply and distribution loans outstanding at May 31, 2013. Nine of the 25 states allow cooperatives the right to opt out of state regulation. Those states are Alaska, Colorado, Delaware, Indiana, Kansas, Michigan, New Hampshire, Oklahoma, and Wyoming. In some of these states a small number of cooperatives have decided to remain regulated, but the majority of the cooperatives have opted out of state regulation. In two states (Iowa and Minnesota) the cooperatives are statutorily exempted from state regulation, but they have the right to opt in to regulation. One cooperative in each of those two states has opted to become regulated. There are 20 states that regulate electric systems’ issuance of debt (although one of these states, New Mexico, does not regulate any loans to RUS borrowers). Federal Energy Regulatory Commission also has jurisdiction to regulate transmission rates, wholesale rates, terms and conditions of service, and the issuance of securities by public utilities within its jurisdiction, which includes only a few cooperatives.

Our 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, including air and water quality control, solid and hazardous waste disposal, and limitations on land use.~~operations. At the federal level, the U.S. Environmental Protection Agency (“EPA”) has ~~been pursuing an active regulatory agenda through~~proposed a ~~substantial~~ number of ~~rulemakings. Estimates indicate that regulations affecting~~rulemakings including cooling water intake structures, coal ash disposal, hazardous air pollutants ~~including mercury,~~ and interstate transport of air pollutants, ~~will~~that could force the electric utility industry to incur capital costs to comply with these regulations and possibly retire ~~from 34,000 to 59,000 megawatts of~~ coal-fired generating capacity by 2018. In calendar year 2012, a federal court overturned the EPA’s Cross-State Air Pollution Rule that would have required electric utilities including cooperatives in some regions to make significant additional reductions in emissions within short timeframes. The decision gives a partial reprieve from emission reduction requirements for coal-dependent power generators but could compound business uncertainty as the rule being remanded to the EPA means that a rewritten rule could eventually take its place.capacity. Additionally, in calendar year 2012, the EPA began the process of regulating greenhouse gas emissions by issuing proposed rules concerning new source performance standards for carbon emissions from new fossil fuel-based power plants. ~~This new regulation, along with other factors including~~On June 2, 2014, the ~~current low price of natural gas, is likely~~EPA issued proposed rules to ~~significantly slow development of new coal-fired generation in the near term. Additional~~regulate carbon emissions from existing power plants. These greenhouse gas emissions regulations ~~if any, on existing power plants could force measures on~~have the ~~industry~~potential to ~~reduce power plant greenhouse gas emissions from these existing coal-fired generation units. These regulations, when they are finalized, could significantly~~ raise the cost of electricity generated from fossil fuel plants and accelerate the retirement of some existing plants. ~~While we cannot currently estimate projected expenditures related to these regulations for our members,~~If such rules are finalized and upheld, we believe the

financial impact of these laws and regulations on our members will ~~generally~~ be ~~less than~~contingent upon on how the ~~impact on~~emission reductions are apportioned under the ~~broader electric utility industry and that~~state implementation plans. In most cases, the associated costs of compliance can be passed through to ~~their customers.~~the customers without additional regulatory approval.

~~Rural Telecommunications Industry~~

RURAL TELECOMMUNICATIONS INDUSTRY

Telecommunications systems include not-for-profit cooperative organizations and for-profit commercial organizations that primarily provide local exchange and access telecommunications services to rural areas.

Independent rural telecommunications companies provide service throughout many of the rural areas of the United States. These approximately 1,300 companies are called independent because they are not affiliated with the former Regional Bell Operating Companies, mainly, Verizon, AT&T and CenturyLink. Included in the 1,300 total are approximately 260 not-for-profit cooperatives. A majority of the remainder of these independent rural telecommunications companies are privately held commercial companies. Less than 15 of these commercial companies are publicly traded or have issued bonds in the capital markets.

Rural telecommunications companies, excluding Verizon, AT&T and CenturyLink, provide service to less than 15 percent of the approximately 120 million end-user switched access lines. These rural companies range in size from fewer than 100 customers to more than 5 million. Annual operating revenue for individual rural telecommunications companies ranges from less than $0.1 million to more than $3,000 million. In addition to basic local exchange and access telecommunications service, most independents offer other communications services including wireless voice and data, cable television and high-speed Internet access. Most rural telecommunications companies’ networks incorporate digital switching, fiber optics, internet protocol telephony and other advanced ~~technologies.~~technologies that support the provision of voice, data and video services.

Telecommunications Competition

The Telecommunications Act of 1996 (the "Telecom Act") created a framework for competition and deregulation in the local wireline telecommunications market. As a result, competition continues to be a significant factor in the telecommunications industry. Wireless carriers are providing service to more than 300 million mobile telephone service subscriptions—more than local exchange carriers and competitive local exchange carriers combined. For the most part, local exchange competition has benefited rural local exchange carriers by enabling them to enter nearby towns and cities as competitive local exchange carriers, leveraging their existing infrastructure and reputation for providing high-quality, modern telecommunications service. Rural local exchange carriers enjoy an exemption from the Telecom Act requirement to provide competitors with access to their networks, absent a determination that it would be in the public interest to do so. Relatively few rural local exchange carriers have competitive local exchange carriers request access to their networks.

The ~~national goal~~expansion of ~~universal~~wireless telephone service has contributed to the decrease in wireline telephone subscribers as numerous residential customers elect to rely solely on a mobile device for voice service. Competition within the wireless market is ~~accomplished through a support mechanism,~~robust as intended by the Universal Service Fund (“USF”), that is required by law to be: (i) sufficient to ensure that consumers throughout the nation, including those in rural and insular areas, receive communications services at rates and of a quality that are reasonably comparable with those obtained by users in urban areas, and (ii) portable; that is, available to all eligible providers. The USF provides support for rural local exchange carriers with costs significantly above the national average. Certain elements of the USF also mitigate fluctuations in implicit cost recovery long contained in the access charges that local telecommunications companies levy on long-distance carriers. As these access charges have been reduced, rural local exchange carriers have obtained compensatory support from the USF. The USF is an important revenue source for most rural local exchange carriers.

The nexus between competition and universal service is the issue of competitor eligibility for universal service funding—the “portability” feature of the USF. Historically many rural wireline markets were first served (and continue to be served) by small, locally owned companies. As wireless carriers extended their coverage areas into some rural markets, they could become eligible for USF. Federal Communications Commission ~~(“FCC”~~( “FCC”) ~~rules, however, did not limit the number of competing carriers that could obtain USF support for serving any particular~~by licensing multiple providers in each market. By obtaining competitive eligible telecommunications carrier status from state and federal regulators (as provided for in the Telecom Act), these wireless carriers were able to receive universal service funds based on the incumbent local exchange carriers’ costs (the “identical support” rule). Although the FCC took steps to address the rampant growth in USF caused by the availability offered to multiple competitive carriers, the process led to growth in claims on the fund and great concern for its sustainability. The USF’s current contribution base of interstate telecommunications revenue is shrinking as traditional long distance minutes-of-use decline due to wireless nationwide calling plans, e-mail and voice-over-internet protocol substitution. Increased demand for funding from the USF has resulted in the rate assessed on all participants in the nationwide network (the “contribution factor”) being increased to 16 percent of interstate and international long distance revenue for the second quarter of calendar year 2013, compared with approximately 11 percent five years ago.

Telecommunications Regulation

Rural ~~telecommunications systems~~local exchange carriers generally are regulated at the state and federal levels. Most state commissions regulate local service rates and intrastate access rates and some regulate ~~telecommunications company~~ borrowing. The FCC regulates

interstate access rates and the issuance of licenses required to operate certain types of telecom operations. ~~Some rural telecommunications systems have affiliated companies that are not regulated.~~

~~Deregulation has not had a significant effect on the wireline local exchange carrier business segment.~~ The FCC ~~continues to regulate~~regulates wireline telephony under Title II of the Telecom Act. Internet, video, wireless and competitive local exchange services are much less regulated. In pursuit of its net neutrality policy, however, the FCC in December 2010 promulgated new “open Internet” rules related to service transparency, blocking and discrimination, which are applicable to certain broadband Internet access services. ~~It also has been considering other potential~~In January 2014, the United States Court of Appeals rejected the FCC’s rules and the FCC released a new ~~regulations~~set of proposed rules that ~~would apply~~were opened to ~~broadband communications after having previously considered broadband Internet services to be information service exempt from Title II regulation.~~a public comment period in May 2014. Most rural local exchange carriers are expanding their service offerings to customers in less regulated business segments. With few competitors in the most rural parts of their service areas, rural local exchange carriers generally have been successful in these growth and diversification efforts.

~~On October 27, 2011~~The goal of universal service is accomplished through a support mechanism, the ~~FCC adopted an order~~Universal Service Fund (“USF”), that is required by law to ~~reform~~be: (i) sufficient to ensure that consumers throughout the nation, including those in rural and insular areas, receive communications services at rates and of a quality that are reasonably comparable with those obtained by users in urban areas, and (ii) portable; that is, available to all eligible providers. The USF ~~and intercarrier compensation systems. This comprehensive plan was intended to restructure~~provides support for rural local exchange carriers with costs significantly above the ~~USF to support broadband deployment to unserved parts of the country going forward and revamp the rates carriers pay each other to connect local calls.~~

national average. The USF is to be transformed, in stages, over a multi-year period, from a mechanism to support voice telephone service to one that supports the deployment of both fixed and mobile broadband. The existing USF was criticized as failing to direct money where it is needed in rural America. As a result, some rural areas have access to broadband but many do not. The High-Cost Fund (the mechanism through which local exchange carriers received support to help provide services in rural areas) is to be phased out and replaced with a new Connect America Fund with a firm budget ~~set at~~of no more than $4,500 million per year over the next ~~six~~five years. The Connect America Fund includes the targeted Mobility Fund to support the deployment of wireless broadband networks to unserved areas and the Remote Areas Fund, to ensure affordable access to broadband networks for the most remote areas in the nation.

In regard to intercarrier compensation systems, the FCC’s order included immediate reforms aimed at curbing arbitrage schemes, phantom traffic and other such schemes as well as a multiyear “glide path” toward comprehensive reform of the intercarrier compensation systems payment framework. The ultimate goal is bill-and-keep, a system where carriers look first to their subscribers to cover the costs of the networks, then to explicit universal service support where necessary.

~~The rural telecommunications industry is actively participating in this regulatory~~On October 27, 2011, the FCC adopted an order to reform ~~process. At this stage,~~ the ~~outcome~~USF and intercarrier compensation systems. This comprehensive plan was intended to restructure the USF to support broadband deployment to unserved parts of the ~~proposed rulemaking is unclear; however,~~country going forward and revamp the ~~impending changes~~rates carriers pay each other to the revenue mechanisms for rural telecommunications companies will affect each company differently, and revenue shortfalls are expected to be addressed through a waiver process established by the FCC or adjustments toconnect local ~~service rates.~~calls.

~~Disaster Recovery~~

TAX STATUS

We have continued to use a comprehensive Business Continuity and Disaster Recovery plan since May of 2001. The plan establishes the basic principles and framework necessary to ensure emergency response, resumption, restoration and permanent recovery of the CFC’s operations and business activities during a business interruption event. This plan includes a duplication of our production information systems at an offsite facility coupled with an extensive business continuity and recovery process to leverage those remote systems.

All of CFC’s departments develop, exercise, test and maintain business resumption plans for the resumption and recovery of business functions and processing resources to minimize disruption for our members and other parties with whom we do business. Specifically, we conduct disaster recovery exercises twice a year that include both the information technology group and business areas. The business resumption plans are based on a risk assessment that considers potential losses due to unavailability of service versus the cost of resumption. These plans anticipate a variety of probable scenarios ranging from local to regional crises.

~~Tax Status~~

In 1969, CFC obtained a ruling from the Internal Revenue Service recognizing CFC’s exemption from the payment of federal income taxes under Section 501(c)(4) of the Internal Revenue Code. Such exempt status could be revoked as a result of changes in legislation or in administrative policy or as a result of changes in CFC’s business.

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 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 operations have not changed materially from those described to the Internal Revenue Service in its exemption filing. CFC reviews 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 status as an organization described under Section 501(c)(4).

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 percent~~20% of the amount allocated is retired in cash prior to filing the applicable tax return. RTFC pays income tax based on its net income, excluding amounts allocated to its borrowers.

NCSC is a taxable cooperative that ~~is subject to~~pays income tax ~~annually~~ based on its ~~net~~reported taxable income ~~for the fiscal year.~~and deductions.

~~Allocation and Retirement of Patronage Capital~~

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 percent~~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 non-cash effects of the accounting for derivative financial instruments and foreign currency translation. Negative net earnings, if any, are not allocated to members or to the reserves and do not affect amounts previously allocated as patronage capital or to the reserves. Net earnings may first be used to offset prior-period losses, if any.

An allocation to the general reserve is made, if necessary, to maintain the balance of the general reserve at ~~50 percent~~50% of the membership fees collected. CFC’s bylaws require the allocation to the cooperative educational fund to be at least ~~0.25 percent~~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 members’ 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 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 shall determine the method, basis, priority and order of retirement of amounts allocated. The current policy of the CFC Board of Directors is to retire ~~50 percent~~50% of the prior fiscal year’s allocated net earnings following the end of each fiscal year and to hold the remaining ~~50 percent~~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.

RTFC

~~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. Negative net earnings, if any, are not allocated to members or to the reserves and do not affect amounts previously allocated as patronage capital or to the reserves. ~~Net earnings may first be used to offset prior-period losses, if any.~~

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 percent~~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 percent~~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 percent~~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 the balance of 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 the balance of RTFC equity.

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 non-cash effects of the accounting for derivative financial instruments. Negative net earnings, if any, are not allocated to members or to the reserves and do not affect amounts previously allocated to the reserves. ~~Net earnings may first be used to offset prior-period losses, if any.~~

Pursuant to NCSC’s bylaws, the NCSC Board of Directors shall determine the method, basis, priority and order of amounts allocated and retired. An allocation to the general reserve is made, if necessary, to maintain the balance of the general reserve at ~~50 percent~~50% of the membership fees collected. NCSC’s bylaws require the allocation to the cooperative educational fund to be at least ~~0.25 percent~~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. The NCSC Board of Directors has the authority to determine if and when patronage-sourced net earnings will be retired. There is no effect on the balance of equity due to the allocation of net earnings. The amounts disbursed from board-approved reserves reduce the balance of NCSC equity.

~~Investment Policy~~

EMPLOYEES

Surplus funds are invested based on policies adopted by our board of directors. Under present policy, surplus funds may be invested in direct obligations of, or guaranteed by, the United States or agencies thereof or other highly liquid investment- grade securities. Current investments may include highly rated securities such as commercial paper, obligations of foreign governments, Eurodollar deposits, bankers’ acceptances, bank letters of credit, certificates of deposit, working capital acceptances or other deposits with financial institutions. The policy also permits investments in certain types of repurchase agreements with highly rated financial institutions, whereby the assets consist of eligible securities of a type listed above set aside in a segregated account. In addition, this policy permits investments in any government-sponsored enterprise, including, but not limited to, the Federal Agricultural Mortgage Corporation, subject to certain limitations.

~~Employees~~

At May 31, ~~2013,~~2014, we had ~~231 employees, including financial and legal personnel, management specialists, credit analysts, accountants and support staff.~~221 employees. We believe that our relations with our employees are good.

~~Item 1A.~~

Item 1A. Risk Factors

Our financial condition, results of operations and liquidity are subject to various risks and uncertainties inherent in our business. The risks described below are the risks we consider to be material to our business. Other risks may prove to be material or important in the future. If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could suffer adversely. You should consider all of the following risks together with all of the other information in this Annual Report on Form 10-K.

Our business depends on access to external financing.

We depend on access to the capital markets and other sources of financing, such as our revolving credit agreements, investment from our members, private debt issuances through the Federal Agricultural Mortgage Corporation, and funding from the Federal Financing Bank through the Guaranteed Underwriter Program, to fund new loan advances and refinance our long-term and short-term debt and, if necessary, to fulfill our obligations under our guarantee and repurchase agreements. We

cannot assure that we will be able to raise capital in the future at all or on terms that are acceptable to us. Market disruptions, downgrades to our long-term debt and/or short-term debt ratings, adverse changes in our business or performance, downturns in the ~~rural~~ electric ~~or rural telephone industries~~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 the Federal Agricultural Mortgage Corporation, or by changes in federal law or the Guaranteed Underwriter Program.

Our funding needs are determined primarily by scheduled long- and short-term debt maturities and the amount of our loan advances to our borrowers relative to the scheduled 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.

Fluctuating interest rates could adversely affect our income, margin and cash flow.

We are a cost-based lender that sets our interest rates on loans based on our cost of funding. We set our line of credit interest rate and long-term variable interest rate monthly based on the cost of our underlying funding. We do not match fund the majority of our long-term fixed-rate loans with a specific debt issuance at the time the loans are advanced. Instead, long-term fixed-rate loans are aggregated until the volume reaches a level that will allow an economically efficient issuance of long-term debt to fund long-term fixed-rate loans. As such, we are exposed to interest rate risk on our long-term fixed-rate loans during the period from which we have set a fixed rate on the loan until the time we obtain the long-term funding for the loan. At May 31, ~~2013,~~2014, fixed-rate loans funded with variable-rate debt totaled ~~$1,325~~$1,240 million, or ~~6 percent~~5.58% of total assets and 5.63% of total assets excluding derivative assets.

A decrease in long-term fixed interest rates provided by other lenders could result in an increase in prepayments on long-term fixed-rate loans scheduled to reprice. Borrowers are able to prepay the long-term fixed-rate loan without a make-whole fee at the time the fixed-rate term expires and the loan reprices. An increase in loan prepayments due to repricings could cause a decrease to earnings for the period of time it takes to use cash from such prepayments to repay maturing debt or make new loan advances. At May 31, ~~2013, $1,318~~2014, $1,283 million of fixed-rate loans have a fixed-rate term scheduled to reprice during the next 12 months.

Competition from other lenders could impair 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 which 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. Competition may limit our ability to raise rates to cover all increases in costs and may negatively impact net income. Raising our interest rates to cover increased costs could cause a reduction in new lending business.

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 ~~the~~ NRECA and one ~~at-large~~at large position that must, among other things, be a director, financial officer, general manager or chief executive of one of our members. ~~To address the conflict of interest inherent in our credit~~CFC currently has loans outstanding to members that are affiliated with CFC directors and ~~lending activities with respect to any member that has one of its officers or directors sitting on the CFC Board of Directors, all~~may periodically extend new loans ~~guarantees and other extensions of credit~~ to such ~~member are required~~members. The relationship of CFC’s directors to ~~be approved by the CFC Board~~our members may give rise to conflicts of ~~Directors or the Loan Committee~~interests from time to time. See "Item 13. Certain Relationships and Related Transactions, and Director Independence—Review and Approval of ~~the CFC Board~~Transactions with Related Persons” for a description of Directors, with the interested director being recused from receipt of the written materials and the discussions and the vote on the approval of the proposed loan, guarantee or extension of credit. Notwithstanding the foregoing, the Chief Executive Officer has the authority to approve emergency lines of credit and certain other loans and lines of credit. All such loan and line of credit requests are required to go through the same underwriting process and review as other loan and line of credit requests before being submitted to the board of directors or Loan Committee for approval. Unlike FDIC-insured banking institutions, we are not subject to federal or state regulation, examination or oversightour policies with regard to ~~our lending activity.~~approval of loans to members affiliated with CFC directors.

We are subject to credit risks related to collecting the amounts owed to us on our outstanding loans. Increased credit risk related to our loans or actual losses that exceed our allowance for loan losses could impair our financial results.

Our allowance for loan losses is established through a provision charged to expense that represents management’s best estimate of probable losses that have been incurred within the existing loan portfolio. The level of the allowance reflects management’s continuing evaluation of credit risk related to industry concentrations; economic conditions; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions; and

unidentified losses and risks inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, if actual losses incurred exceed current estimates of probable losses included in the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. ~~Any material~~Material increases in the allowance for loan losses will result in a decrease in net income, and may have a material adverse effect on our financial results.

We have been and may in the future be in litigation with borrowers related to enforcement or collection actions pursuant to loan documents. In such cases, the borrower or others may assert counterclaims against us or initiate actions against us related to the loan documents. Unfavorable rulings ~~in these cases that result in loan losses that exceed the related allowance~~ could have a material adverse effect on our financial results.

We own and operate assets and entities obtained through foreclosure and are subject to the same performance and financial risks as any other owner or operator of similar assets or businesses.

As the owner and operator of assets and entities 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, there is the risk that the value of the foreclosed assets or entities will deteriorate, negatively affecting our results of operations. We assess our portfolio of foreclosed assets for impairment periodically as required under generally accepted accounting principles in the United States. 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,~~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 non-performance of counterparties to our derivative agreements 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 non-performance 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.

At May 31, ~~2013,~~2014, we were a party to derivative instruments with notional amounts totaling ~~$8,788~~$8,447 million. At May 31, ~~2013,~~2014, the highest concentration of total notional exposure to any one counterparty was ~~20 percent~~21% of total derivative instruments. Based on the fair market value of our derivative instruments at May 31, ~~2013,~~2014, there were three counterparties that would be required to make payments to us totaling ~~$65~~$48 million if all of our derivative instruments were terminated on that date. The largest amount owed to us by a single counterparty was ~~$49~~$35 million, or ~~75 percent~~71% of the total payments owed to us at May 31, ~~2013.~~2014.

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

Nationally recognized statistical rating organizations play an important role in determining, by means of the ratings they assign to issuers and their debt, the availability and cost of debt funding. We currently contract with two nationally recognized statistical rating organizations to receive ratings for our secured and unsecured debt and our commercial paper. Our credit ratings are important to our liquidity. 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 P1 from Moody’s Investors Service and A1 from Standard & Poor’s Corporation. Changes in rating agencies’ rating methodology, actions by governmental entities or others, additional 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, competitive position, or the supply or cost of debt financing available to us. A significant increase in our 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.

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 fair value, excluding credit risk, of the underlying derivative instrument. These rating triggers are based on our senior unsecured credit rating from Moody’s Investors Service and Standard & Poor’s Corporation. Based on the fair market value of our interest rate exchange agreements subject to rating triggers at May 31, ~~2013,~~2014, we may be required to make a payment of up to ~~$209~~$173 million if our senior unsecured ratings from Moody’s Investors Service falls to or below Baa1 or from Standard & Poor’s Corporation falls to or below BBB+ and all agreements for which we owe amounts are terminated. In calculating the required payments, we only considered agreements

that, when netted for each counterparty as allowed by the underlying master 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.

At May 31, ~~2013,~~2014, our senior unsecured debt credit ratings from Moody’s Investors Service and Standard & Poor’s Corporation were A2 and A, respectively. While the rating triggers on our interest rate exchange agreements are not tied to the rating outlooks from Moody’s Investors Service and Standard & Poor’s Corporation, such rating outlooks may provide an indication of possible future movement in the ratings. At May 31, ~~2013,~~2014, both Moody’s Investors Service and Standard & Poor’s Corporation had our ratings on stable outlook.

Our concentration of loans to borrowers within the rural electric industry could impair our revenue if that industry experiences economic difficulties.

At May 31, ~~2013,~~2014, approximately ~~98 percent~~98% of our total exposure was to rural electric cooperatives. Factors that have a negative impact on our member rural electric cooperatives’ financial results could also impair their ability to make payments on our loans. If our members’ financial results materially deteriorate, we could be required to increase our allowance for loan ~~loss allowance~~losses through provisions for loan loss on our income statement that would reduce reported net income.

Advances in technology may change the way electricity is generated and transmitted ~~or may continue to change the way telecommunications services are provided to businesses and consumers~~ prior to the maturity of our loans to rural electric ~~and telecommunications~~ systems.

To the extent that advances in technology make our electric system members’ power supply, transmission and/or distribution facilities ~~or our telecommunications system members’ networks or services~~ obsolete prior to the maturity of our loans, there could be an adverse impact on the ability of our members to repay such loans. This could lead to an increase in ~~non-performing~~nonperforming or restructured loans and an adverse impact on our results of operations.

Loss of our tax-exempt status could increase our tax liability.

CFC has been recognized by the Internal Revenue Service 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 netearnings 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 current bylaws and incorporating statute.

If CFC were to lose its status as a 501(c)(4) organization, we believe that it would be subject to the tax rules generally applicable to cooperatives under Subchapter T of the Internal Revenue Code. As a Subchapter T cooperative, CFC would be allowed to allocate its patronage-sourced income to its members and take a deduction for the amount of such patronage dividends that are paid in cash or qualified written notices of allocation. However, CFC would be taxed as a regular corporation on income in excess of allowed deductions, if any.

Our ability to comply with covenants related to our revolving credit agreements, ~~debt~~collateral trust bond and medium-term note indentures and debt agreements could affect our ability to retire patronage capital, may accelerate certain debt obligations and could affect our ability to obtain financing and maintain preferred rating levels on our debt.

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 adjusted TIER for the six most recent fiscal quarters of 1.025, an adjusted leverage ratio of no more than 10-to-1 and we must maintain loans pledged as collateral for various debt issuances at or below ~~150 percent~~150% of

the related secured debt outstanding as a condition to borrowing under our revolving credit agreements. Our revolving credit agreements also state that we must earn a minimum annual adjusted TIER of 1.05 in order to retire patronage capital to members. See "MD&A—Non-GAAP Financial ~~Measures~~Measures" for further explanation and a reconciliation of our adjusted ratios.

If we are unable to borrow under the revolving credit agreements, our short-term debt ratings would most likely decline, and our ability to issue commercial paper could become significantly impaired. As a member-owned cooperative, all of our retained equity belongs to our members. As such, a restriction on the retirement of patronage capital in any year would result in a delay in the return of such amounts to the members until we earn an annual TIER of at least 1.05 and our board approves the retirement of the amounts allocated from the year in which retirement was restricted. A patronage capital retirement in any one year reduces the effective cost of borrowing for a member’s loan from CFC. Thus, if CFC does not retire patronage capital to its members, it results in a higher effective rate of borrowing from CFC for that year.

Pursuant to ~~one of~~ our collateral trust bond indentures, we are required ~~(i)~~ to maintain eligible collateral pledged at least equal to ~~100 percent~~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, ~~and (ii)~~we are required to limit senior indebtedness to 20 times the sum of our members’ equity, subordinated deferrable debt and members’ subordinated certificates. ~~Our medium-term note indentures also require us to comply with (ii) above.~~

If we are in default under our collateral trust bond or medium-term note indentures, the existing holders of ~~our collateral trust bonds or medium-term notes~~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 percent~~100% of the outstanding balance of debt issued under a revolving note purchase agreement with the Federal Agricultural Mortgage Corporation. We are also required to maintain distribution and power supply loans as collateral on deposit equal to at least ~~100 percent~~100% of the outstanding balance of debt under the Guaranteed Underwriter Program of the USDA, which supports the Rural Economic Development Loan and Grant program. Collateral coverage under ~~100 percent~~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. This poses a liquidity risk of possibly not having enough 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.

Breaches of our information technology systems 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. Although we employ a number of measures to secure such information and prevent access to our data, including encryption and authentication technologies, monitoring and testing, and employee training, 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 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. While CFC maintains insurance coverage that, subject to policy terms and conditions, covers certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses. Data security and privacy continue to receive heightened legislative and regulatory focus in the United States. Many states have enacted legislation requiring notification to those affected by a security breach. Our failure to comply with these laws and regulations could result in fines, sanction, and litigation. Additionally, new regulation in the areas of data security and privacy may increase our costs and our members’ costs.

Our lending activities are not subject to regulation or regulatory oversight.

Unlike FDIC-insured banking institutions, our lending activity is not subject to federal regulation. Some federal regulations require FDIC-insured financial institutions to meet certain requirements or refrain from certain activities, such as requirements to maintain certain levels of capital and restrictions on engaging in activities that may cause conflicts of interest or excess risk. These regulations also appoint one or more regulatory agencies to evaluate and oversee compliance with these regulations. Although our policies and practices require us to meet some of these requirements, we are not required by law or regulation to adhere to these requirements and no external agency ensures compliance with our policies and practices.


Item 1B.	Unresolved Staff ~~Comments.~~Comments

Debt and Equity

Outstanding Debt

Table 8 shows our debt outstanding and the weighted average interest rates by type of debt at May 31, 2014, 2013 and 2012.

Table 8: Total Debt Outstanding and Weighted-Average Interest Rates



	2014					2013					2012
(Dollars in thousands)	Amounts Outstanding			Weighted- Average Interest Rate		Amounts Outstanding			Weighted- Average Interest Rate		Amounts Outstanding			Weighted- Average Interest Rate
Commercial paper sold through dealers, net of discounts	$	1,973,557		0.14	%	$	2,009,884		0.16	%	$	1,404,901		0.18	%
Commercial paper sold directly to members, at par	838,074			0.13		812,141			0.15		997,778			0.18
Commercial paper sold directly to non-members, at par	20,315			0.13		39,298			0.14		70,479			0.18
Select notes	548,610			0.27		358,390			0.34		—			—
Daily liquidity fund notes	486,501			0.06		680,419			0.10		478,406			0.10
Bank bid notes	20,000			0.60		150,000			0.53		295,000			0.51
Collateral trust bonds	5,980,214			4.65		5,962,681			5.13		6,307,564			5.11
Notes payable	6,019,040			2.60		5,274,415			2.69		4,650,877			3.27
Medium-term notes	2,726,303			2.43		3,091,512			2.74		2,423,686			4.56
Subordinated deferrable debt	400,000			4.75		400,000			4.75		186,440			6.02
Membership certificates	644,944			4.90		644,757			4.90		646,279			4.90
Loan and guarantee certificates	699,724			3.01		733,895			3.29		694,825			3.09
Member capital securities	267,560			6.12		387,750			7.49		398,350			7.50
Total debt outstanding	$	20,624,842		2.91		$	20,545,142		3.13		$	18,554,585		3.67
Percentage of fixed-rate debt⁽¹⁾	79		%			77		%			86		%
Percentage of variable-rate debt⁽²⁾	21					23					14

Percentage of long-term debt	81		%			80		%			83		%
Percentage of short-term debt	19					20					17

⁽¹⁾ Includes variable-rate debt that has been swapped to a fixed rate net of any fixed-rate debt that has been swapped to a variable rate.

⁽²⁾The rate on commercial paper notes does not change once the note has been issued. However, the rates on new commercial paper notes change daily, and commercial paper notes generally have maturities of less than 90 days. Therefore, commercial paper notes are classified as variable-rate debt. Also includes fixed-rate debt that has been swapped to a variable rate net of any variable-rate debt that has been swapped to a fixed rate.

During the year ended May 31, 2014, total debt outstanding increased by $80 million. The increase in debt outstanding, coupled with an increase in retained equity of $149 million, was primarily due to funding for the $171 million increase in loans outstanding. Total commercial paper, select notes, daily liquidity fund notes and bank bid notes outstanding represented 19% and 20% of total debt at May 31, 2014 and 2013, respectively. To take advantage of the current low interest rates on short-term debt, we intend to continue to maximize the use of these short-term debt instruments in our funding portfolio mix.

During fiscal year 2014, the CFC Board of Directors authorized management to execute the call of our 7.5% member capital securities and offer members the option to invest in a new series of member capital securities that currently have a 5% interest rate. As of May 31, 2014, $267 million of the 7.5% member capital securities were redeemed and we had call notices outstanding for another $59 million. As of May 31, 2014, members have invested $147 million in the new series of member capital securities.

Table 9 provides additional information on our outstanding debt instruments and revolving credit agreements at May 31, 2014.

Table 9: Debt Instruments and Revolving Credit Agreements



Debt Instrument	Maturity Range	Market	Security
Daily liquidity fund notes	Demand note	Members and affiliates	Unsecured
Select notes	30 to 270 days	Members and affiliates	Unsecured
Bank bid notes	Up to 3 months	Bank institutions	Unsecured
Commercial paper	1 to 270 days	Public capital markets and members	Unsecured
Revolving credit agreements	3 to 5 years	Bank institutions	Unsecured
Collateral trust bonds	Up to 30 years	Public capital markets	Secured ⁽¹⁾
Medium-term notes	Range from 9 months to 30 years	Public capital markets and members	Unsecured
Notes payable to the Federal Financing Bank	Range from 3 months to 20 years	Government	Unsecured ⁽²⁾
Notes payable to Federal Agricultural Mortgage Corporation	Up to 16 years	Private placement	Secured ⁽³⁾
Other notes payable	Up to 30 years	Private placement	Varies ⁽⁴⁾
Subordinated deferrable debt	Up to 30 years⁽⁵⁾	Public capital markets	Unsecured ⁽⁶⁾
Subordinated certificates	Up to 100 years⁽⁷⁾	Members	Unsecured ⁽⁸⁾

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

⁽²⁾ Represents notes payable issued to the Federal Financing Bank with a guarantee of repayment by RUS under the Guaranteed Underwriter Program of the USDA, which supports the Rural Economic Development Loan and Grant program. We are required to maintain collateral on deposit equal to at least 100% of the outstanding balance of debt.

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

⁽⁴⁾At May 31, 2014, other notes payable includes unsecured and secured Clean Renewable Energy Bonds. We are required to pledge eligible mortgage notes from distribution and power supply system borrowers in an amount at least equal to the outstanding principal amount under the Clean Renewable Energy Bonds Series 2009A note purchase agreement. The remaining other notes payable relate to unsecured notes payable issued by NCSC.

⁽⁵⁾ We have the right at any time and from time to time during the term of the subordinated deferrable debt to suspend interest payments for a period not exceeding 20 consecutive quarters. We have the right to call the subordinated deferrable debt any time after ten years, at par. To date, we have not exercised our option to suspend interest payments.

⁽⁶⁾Subordinate and junior in right of payment to senior debt and the debt obligations we guarantee, but senior to subordinated certificates.

⁽⁷⁾Membership subordinated certificates generally mature 100 years from issuance. Loan and guarantee subordinated certificates have the same maturity as the related long-term loan. Some certificates may also amortize annually based on the outstanding loan balance. Member capital securities generally mature 30 years or 35 years from issuance. Member capital securities are callable at par by CFC starting five or ten years from the date of issuance and anytime thereafter.

⁽⁸⁾Subordinate and junior in right of payment to senior and subordinated debt and debt obligations we guarantee.

Table 10 summarizes short-term debt outstanding and the weighted-average interest rates at May 31, 2014, 2013 and 2012.

Table 10: Short-term Debt Outstanding and Weighted-Average Interest Rates



	2014				2013				2012
(Dollars in thousands)	Debt Outstanding		Weighted- Average Interest Rate		Debt Outstanding		Weighted-Average Interest Rate		Debt Outstanding		Weighted-Average Interest Rate
Short-term debt:
Total commercial paper	$	2,831,946	0.14	%	$	2,861,323	0.16	%	$	2,473,158	0.19	%
Select notes	548,610		0.27		358,390		0.34		—		—
Daily liquidity fund notes	486,501		0.06		680,419		0.10		478,406		0.10
Bank bid notes	20,000		0.60		150,000		0.54		295,000		0.52
Subtotal short-term debt	3,887,057		0.15		4,050,132		0.18		3,246,564		0.20
Long-term debt maturing within one year	1,512,337		1.44		3,669,351		2.65		1,246,870		2.13
Total short-term debt	$	5,399,394	0.51		$	7,719,483	1.35		$	4,493,434	0.74

Table 11: Short-term Debt - Other Information



(Dollars in thousands)	2014		2013		2012
Weighted-average maturity outstanding at year-end:
Commercial paper	17 days		18 days		21 days
Select Notes	41 days		50 days		—
Daily liquidity fund notes	1 day		1 day		1 day
Bank bid notes	9 days		20 days		6 days
Subtotal short-term debt	19 days		18 days		17 days
Long-term debt maturing within one year	200 days		180 days		158 days
Total	69 days		95 days		56 days
Average amount outstanding during the year:
Commercial paper	$	3,083,849	$	2,817,305	$	2,492,791
Select Notes	485,839		166,486		—
Daily liquidity fund notes	585,104		586,505		413,525
Bank bid notes	127,315		222,500		295,000
Subtotal short-term debt	4,282,107		3,792,796		3,201,316
Long-term debt maturing within one year	2,205,642		2,639,927		2,168,220
Total	$	6,487,749	$	6,432,723	$	5,369,536
Maximum amount outstanding at any month-end during the year:
Commercial paper	$	3,723,948	$	3,514,679	$	2,746,189
Select Notes	605,536		376,858		—
Daily liquidity fund notes	715,539		680,419		478,406
Bank bid notes	150,000		295,000		295,000
Subtotal short-term debt	4,864,244		4,600,287		3,431,617
Long-term debt maturing within one year	3,873,364		3,787,808		2,697,751

We provide additional information on our borrowings in "Note 5—Short-term Debt and Credit Arrangements," "Note 6—Long-term Debt" and "Note 7—Subordinated Deferrable Debt."

Equity

Table 12 summarizes the components of equity at May 31, 2014 and 2013.

Table 12: Equity



(Dollars in thousands)	2014			2013			Increase/ (Decrease)
Membership fees	$	973		$	973		$	—
Education fund	1,778			1,532			246
Members’ capital reserve	485,447			410,259			75,188
Allocated net income	630,340			591,581			38,759
Unallocated net loss⁽¹⁾	(6,238		)	(6,230		)	(8		)
Total members’ equity	1,112,300			998,115			114,185
Prior years cumulative derivative forward value and foreign currency adjustments	(207,025		)	(340,719		)	133,694
Year-to-date derivative forward value income⁽²⁾	34,613			133,694			(99,081		)
Total CFC retained equity	939,888			791,090			148,798
Accumulated other comprehensive income	3,649			8,381			(4,732		)
Total CFC equity	943,537			799,471			144,066
Noncontrolling interest	26,837			11,790			15,047
Total equity	$	970,374		$	811,261		$	159,113

⁽¹⁾ Excludes derivative forward value.

⁽²⁾ Represents the derivative forward value loss recorded by CFC for the year-to-date period.

At May 31, 2014, total equity increased by $159 million from May 31, 2013, primarily due to net income of $193 million for the year ended May 31, 2014 partially offset by the board authorized patronage capital retirement of $41 million.

In May 2013, the CFC Board of Directors authorized the allocation of $1 million of fiscal year 2013 net earnings to the Cooperative Educational Fund. In July 2013, the CFC Board of Directors authorized the allocation of the fiscal year 2013 net earnings as follows: $138 million to the members' capital reserve and $81 million to members in the form of patronage capital. In July 2013, the CFC Board of Directors authorized the retirement of allocated net earnings totaling $41 million, representing 50% of the fiscal year 2013 allocation. This amount was returned to members in cash in October 2013. Future allocations and retirements of net earnings may be made annually as determined by the CFC Board of Directors with due regard for CFC’s financial condition. The CFC Board of Directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable cooperative law.

In May 2014, the CFC Board of Directors authorized the allocation of $1 million of fiscal year 2014 net earnings to the Cooperative Educational Fund. In July 2014, the CFC Board of Directors authorized the allocation of the fiscal year 2014 net earnings as follows: $75 million to the members’ capital reserve and $79 million to members in the form of patronage capital. In July 2014, the CFC Board of Directors authorized the retirement of allocated net earnings totaling $40 million, representing 50% of the fiscal year 2014 allocation. It is anticipated that this amount will be returned to members in cash in the second quarter of fiscal year 2015. Future allocations and retirements of net earnings may be made annually as determined by the CFC Board of Directors with due regard for CFC’s financial condition. The CFC Board of Directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable cooperative law.

In December 2013, the RTFC Board of Directors approved the allocation of earnings for the year ended May 31, 2013 with 99% allocated to members and 1% allocated to the Cooperative Educational Fund. A total of $2 million was allocated to members as follows: $0.4 million in cash and $1.6 million in the form of certificates to be redeemed at a later date. In January 2014, RTFC distributed the $0.4 million cash portion of the allocation to members.

Ratio Analysis

Leverage Ratio

The ~~following table summarizes loans~~leverage ratio is calculated by dividing the sum of total liabilities and guarantees outstanding by ~~member class~~total equity. Based on this formula, the leverage ratio at May ~~31:~~31, 2014 was 23.01-to-1, a decrease from 27.58-to-1 at May 31, 2013. The decrease in the leverage ratio is due to the increase of $159 million in total equity, the decrease of $48 million in total guarantees, partially offset by the increase of $2 million in total liabilities as discussed under "Financial Condition—Liabilities and Equity" and "Contingent Off-Balance Sheet Obligations."

2013 2012 Increase/
(dollar amounts in thousands) Amount % of Total Amount % of Total (decrease)
CFC:
Distribution $ 15,186,457 71 % $ 14,415,856 72 % $ 770,601
Power supply 4,818,569 23 4,451,264 22 367,305
Statewide and associate 77,904 - 80,808
-
(2,904)
CFC total 20,082,930 94 18,947,928 94 1,135,002
RTFC 507,070 2 572,592 3 (65,522)
NCSC 819,088 4 640,552 3 178,536
Total loans and guarantees $ 21,409,088 100 % $ 20,161,072 100 % $ 1,248,016
For covenant compliance on our revolving credit agreements and for internal management purposes, the leverage ratio calculation is adjusted to exclude derivative liabilities, debt used to fund loans guaranteed by RUS, subordinated deferrable debt and subordinated certificates from liabilities; uses members’ equity rather than total equity; and adds subordinated deferrable debt and subordinated certificates to calculate adjusted equity.

At May 31, 2014 and 2013, the adjusted leverage ratio was 6.24-to-1 and 6.11-to-1, respectively. See "Non-GAAP Financial Measures" for further explanation and a reconciliation of the adjustments we make to our leverage ratio calculation. The increase to the adjusted leverage ratio was due to the increase of $252 million in adjusted liabilities and the decrease of $34 million in adjusted equity, partially offset by the decrease of $48 million in guarantees as discussed under "Financial Condition—Liabilities and Equity" and "Off-Balance Sheet Obligations."

Debt-to-Equity Ratio

The debt-to-equity ratio is calculated by dividing the sum of total liabilities outstanding by total equity. The debt-to-equity ratio based on this formula at May 31, 2014 was 21.91-to-1, a decrease from 26.21-to-1 at May 31, 2013. The decrease in the debt-to-equity ratio is primarily due to the increase of $159 million in total equity as discussed under the "Financial Condition—Liabilities and Equity"

For internal management purposes, the debt-to-equity ratio calculation is adjusted to exclude derivative liabilities, debt used to fund loans guaranteed by RUS, subordinated deferrable debt and subordinated certificates from liabilities; uses members’ equity rather than total equity; and adds subordinated deferrable debt and subordinated certificates to determine adjusted equity. At May 31, 2014 and 2013, the adjusted debt-to-equity ratio was 5.90-to-1 and 5.76-to-1, respectively. See "Non-GAAP Financial Measures" for further explanation and a reconciliation of the adjustments made to the debt-to-equity ratio calculation. The increase in the adjusted debt-to-equity ratio is due to the increase of $252 million in adjusted liabilities and the decrease of $34 million in adjusted equity.

CONTINGENT OFF-BALANCE SHEET OBLIGATIONS

Guarantees

We guarantee certain contractual obligations of our members so they may obtain various forms of financing. We use the same credit policies and monitoring procedures in providing guarantees as we do for loans and commitments. If a member system defaults on its obligation to pay debt service, then we are obligated to pay any required amounts under our guarantees. Meeting our guarantee obligations satisfies the underlying obligation of our member systems and prevents the exercise of remedies by the guarantee beneficiary based upon a payment default by a member system. In general, the member system is required to repay any amount advanced by us with interest, pursuant to the documents evidencing the member system’s reimbursement obligation. Table 13 shows our guarantees outstanding by type of guarantee and by company at May 31, 2014 and 2013.

Table 13: Guarantees Outstanding



(Dollars in thousands)	2014		2013		Increase/ (Decrease)
Total by guarantee type:
Long-term tax-exempt bonds	$	518,360	$	547,970	$	(29,610	)
Letters of credit	431,064		447,683		(16,619		)
Other guarantees	115,398		117,118		(1,720		)
Total	$	1,064,822	$	1,112,771	$	(47,949	)
Total by company:
CFC	$	997,187	$	1,063,113	$	(65,926	)
RTFC	2,304		3,711		(1,407		)
NCSC	65,331		45,947		19,384
Total	$	1,064,822	$	1,112,771	$	(47,949	)

In addition to the letters of credit listed in the table, under master letter of credit facilities in place at May 31, 2014, we may be required to issue up to an additional $163 million in letters of credit to third parties for the benefit of our members. As of May 31, 2014, all of our master letter of credit facilities were subject to material adverse change clauses at the time of issuance. Also, at May 31, 2014 we had hybrid letter of credit facilities totaling $1,762 million that represent commitments that may be used for the issuance of letters of credit or line of credit loan advances, at the option of a borrower, and are included in unadvanced loan commitments for line of credit loans reported in "Note 3—Loans and Commitments." Hybrid letter of credit facilities subject to material adverse change clauses at the time of issuance totaled $476 million at May 31, 2014. Prior to issuing a letter of credit under these facilities, we would confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with the letter of credit terms and conditions. The remaining commitment under hybrid letter of credit facilities of $1,286 million may be used for the issuance of letters of credit as long as the borrower is in compliance with the terms and conditions of the facility.

At May 31, 2014, we were the liquidity provider for a total of $570 million of variable-rate tax-exempt bonds issued for our member cooperatives. As liquidity provider on these $570 million of tax-exempt bonds, we are required to purchase bonds that are tendered or put by investors. Investors provide notice to the remarketing agent that they will tender or put a certain amount of bonds at the next interest rate reset date. If the remarketing agent is unable to sell such bonds to other investors by the next interest rate reset date, we have unconditionally agreed to purchase such bonds. On a total of $445 million of the bonds for which we are liquidity provider at May 31, 2014, we also provide a guarantee of all principal and interest, which is included in table 13 as a long-term tax-exempt bond guarantee. On a total of $125 million of tax-exempt bonds, our obligation as liquidity provider is in the form of a letter of credit, which is reflected in table 13 in our letters of credit. For the year ended May 31, 2014, we were not required to perform as liquidity provider pursuant to these obligations.

At May 31, 2014 and 2013, 61% and 63% of total guarantees, respectively, were secured by a mortgage lien on substantially all of the system’s assets and future revenue.

The decrease in total guarantees during the year ended May 31, 2014 is primarily due to a net decrease to the total amount of long-term tax-exempt bonds and letters of credit outstanding. At May 31, 2014 and 2013, we recorded a guarantee liability of $22 million and $25 million, respectively, which represents the contingent and non-contingent exposures related to guarantees and liquidity obligations associated with our members’ debt.

Table 14 summarizes the off-balance sheet obligations at May 31, 2014, and the related maturities by fiscal year and thereafter.

Table 14: Maturities of Guaranteed Obligations



	Outstanding Balance		Maturities of Guaranteed Obligations
(Dollars in thousands)	Outstanding Balance		2015		2016		2017		2018		2019		Thereafter
Guarantees ⁽¹⁾	$	1,064,822	$	353,298	$	31,885	$	25,624	$	147,843	$	28,573	$	477,599

⁽¹⁾ At May 31, 2014, we are the guarantor and liquidity provider for $445 million of tax-exempt bonds issued for our member cooperatives. We have also issued letters of credit to provide standby liquidity for an additional $125 million of tax-exempt bonds.

See "Note 12—Guarantees" for additional information.

Unadvanced Loan Commitments

Unadvanced commitments represent approved and executed loan contracts for which the funds have not been advanced. At May 31, 2014 and 2013, we had the following amount of unadvanced commitments on loans to our borrowers.

Table 15: Unadvanced Loan Commitments



(Dollars in thousands)	2014		% of Total		2013		% of Total
Long-term	$	4,710,273	34	%	$	4,718,162	35	%
Line of credit	9,201,805		66		8,704,586		65
Total	$	13,912,078	100	%	$	13,422,748	100	%

A total of $2,274 million and $1,703 million of unadvanced commitments at May 31, 2014 and 2013, respectively, represented unadvanced commitments related to committed lines of credit that are not subject to a material adverse change clause at the time of each advance. As such, we would be required to advance amounts on these committed facilities as long as the borrower is in compliance with the terms and conditions of the facility. The remaining available amounts at May 31, 2014 and 2013 are conditional obligations because they are generally subject to material adverse change clauses. Prior to making an advance on these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions.

Unadvanced commitments related to line of credit loans are generally revolving facilities for periods not to exceed five years. It is our experience that unadvanced commitments related to line of credit loans are usually not fully drawn. We believe these conditions will continue for the following reasons:

electric cooperatives generate a significant amount of cash from the collection of revenue from their customers, so they usually do not need to draw down on loan commitments to supplement operating cash flow;

the majority of the line of credit unadvanced commitments provide backup liquidity to our borrowers; and

historically, we have experienced a very low utilization rate on line of credit loan facilities, whether or not there is a material adverse change clause at the time of advance.

In our experience, unadvanced commitments related to term loans may not be fully drawn and borrowings occur in multiple transactions over an extended period of time. We believe these conditions will continue for the following reasons:

electric cooperatives generally execute loan contracts to cover multi-year work plans and, as such, it is expected that advances on such loans will occur over a multi-year period;

electric cooperatives generate a significant amount of cash from the collection of revenue from their customers, thus operating cash flow is available to reduce the amount of additional funding needed for capital expenditures and maintenance;

we generally do not charge our borrowers a fee on long-term unadvanced commitments; and

long-term unadvanced commitments generally expire five years from the date of the loan agreement.

Unadvanced commitments that are subject to a material adverse change clause are classified as contingent liabilities. Based on the conditions to advance funds described above, the majority of our unadvanced loan commitments do not represent off-balance sheet liabilities and have not been included with guarantees in our off-balance sheet disclosures above. We do, however, record a reserve for credit losses associated with our unadvanced commitments for committed facilities that are not subject to a material adverse change clause.

Table 16 summarizes the available balance under committed lines of credit at May 31, 2014, and the related maturities by fiscal year.

Table 16: Notional Maturities of Committed Lines of Credit



	Available Balance	Notional Maturities of Committed Lines of Credit
(Dollars in thousands)	Available Balance	2015	2016	2017	2018	2019
Committed lines of credit	$2,274,388	$19,238	$61,000	$456,855	$678,839	$1,058,456

CREDIT RISK

Credit Policies, Process and Monitoring

Loan Underwriting and Credit Monitoring

We have lending staff that underwrite distribution loans, power supply loans and telecommunications loans. Our borrowers contact the lending staff to discuss the borrower’s need for funding. Our lending staff evaluates the borrower’s request to determine whether the requested credit represents an acceptable credit risk. The lending staff's evaluation of the proposed credit includes, but is not limited to:

the size of the loan request;

the intended use of proceeds;

whether collateral is required and, if so, whether there is sufficient collateral;

the borrower’s risk profile as measured by financial ratios and other risk characteristics; and

other factors that might be applicable to the type of borrower or the specific loan request being considered.

If our lending staff determines that a credit request is acceptable, the staff works with the borrower to structure a loan based on the various options we offer and prepares a credit recommendation for review by management in the lending group as discussed further below under "Loan Approval." When considering credit requests to borrowers with large single-obligor exposures we may use loan syndications, loan participations and whole-loan sale programs to effectively manage portfolio risk related to credit concentrations.

Our Credit Risk Management group facilitates the activities of our internal credit review process, establishes credit policies and oversees our internal risk rating system for all of our borrowers. We maintain an internal risk rating system that produces a borrower rating and a facility rating. The borrower risk rating (“BRR”) measures risk of default for each borrower based on both quantitative and qualitative measurements specific to the particular business line of the borrower. The facility risk rating measures risk of loss in the event of default for a particular facility based on the collateral or guarantee associated with the loan. Risk ratings are used to assess the credit quality of the overall portfolio, segments of the portfolio and each of our borrowers and to establish credit limitations, and are factors in determining applicable credit approval levels.

Risk ratings for borrowers with outstanding and/or unadvanced loan or guarantee commitments are updated at least annually upon the receipt of audited financial information and are reviewed in connection with any new credit request. Annually, an outside financial services consultant conducts a review of the accuracy of specific BRRs and the risk rating process and credit extension practices for compliance with policy and consistency in application. Such consultant provides recommendations to management and the boards of directors for improvement, as well as progress on the resolution of items from prior reviews. Management is responsible for implementing the recommendations accepted by the boards of directors. In addition, we compare our internal ratings to the publicly available ratings for our borrowers that have public ratings.

Loan Approval

The respective boards of directors establish loan policies for CFC, RTFC, and NCSC, each of which includes a credit approval matrix. The credit approval matrix specifies the required level of approval applicable to any proposed loan based on factors such as the amount of the loan, the BRR, whether credit limitations are exceeded and whether the loan is to a member associated with one of our current directors. Through the approval matrix, the respective boards have delegated the authority to approve certain loans to the Chief Executive Officer, who has further delegated approval authority to the Corporate Credit Committee and management in the lending groups while retaining sole authority to approve certain loans.

Loans that require approval at a more senior level than management in the lending group are forwarded to the Corporate Credit Committee for consideration. The Corporate Credit Committee is a cross-functional group comprised of senior vice president and vice president level employees with distribution, power supply and telecommunications lending experience, credit risk management experience, legal experience, accounting experience, regulatory experience and financial industry experience. This committee performs a vital role in maintaining a balance between the credit needs of the borrowers and the requirements for sound credit quality of our loan and guarantee portfolio. The Corporate Credit Committee monitors lending policies and practices and reviews extensions of credits requiring special attention. The Corporate Credit Committee also monitors selected rating changes, analyzes rating integrity and works to improve our internal risk rating system. The Corporate Credit Committee approves, rejects or imposes additional conditions on the loans it reviews. Some loans require Chief Executive Officer or board

approval. The Chief Executive Officer or board receives a credit recommendation by management from the lending group and the Corporate Credit Committee.

Policies for each of the three boards require that any exceptions to applicable credit limitations and any loan or extension of credit to a borrower that has a director, or immediate family member of such director, of such board, (i) as one of its directors or officers, (ii) as a beneficial owner, or (iii) that controls such borrowers, must be approved by the board of directors or the established committee of the relevant board, with the director associated with the borrower requesting the loan being recused from receipt of the written materials, discussions and voting. Notwithstanding the foregoing, the Chief Executive Officer has the authority to approve emergency lines of credit and certain other loans and lines of credit, including circumstances where a director is either a director or officer of the borrower receiving such credit. The Chief Executive Officer has the authority to approve loans originated to be sold or participated through the Company’s whole-loan sale programs. Such lines of credit and loans must meet specific qualifying criteria and must be underwritten in accordance with the prevailing standards and terms.

Nonperforming Loans

The Credit Risk Management group, on an ongoing basis, and the Corporate Credit Committee, on a quarterly basis, monitor all borrowers with past due, non-accrual and restructured facilities as well as other borrowers that warrant a higher degree of monitoring. The Credit Risk Management group presents reports on such matters to the Chief Executive Officer and boards of directors. Once a borrower is classified as nonperforming, we typically place the loan on non-accrual status and reverse all accrued and unpaid interest back to the date of the last payment.

Advances on Previously Approved Loan Facilities

Covenant Compliance

Borrowers are generally required to maintain certain financial ratios. In addition, members with long-term loans outstanding are generally required to provide us with certain information and documentation on a periodic or annual basis, including, but not limited to, audited financial statements, notices of material adverse change in the business or condition, financial or otherwise, of the borrower, and a certificate of management confirming compliance with all covenants.

Credit Concentration

CFC, RTFC and NCSC each have policies that limit the amount of credit that can be extended to individual borrowers or a controlled group of borrowers. The credit limitation policies cap the total exposure and unsecured exposure to the borrower based on an assessment of the borrower’s risk profile and our internal risk rating system. As a member-owned cooperative lender, we balance the needs of our members and the risk associated with concentrations of credit exposure. Each board of directors must approve new credit requests from borrowers with total exposure or unsecured exposure in excess of the limits in the policies. Management may use syndicated credit arrangements, loan participations and loan sales to manage credit concentrations.

Total exposure, as defined by the policies, generally includes the following:

loans outstanding, excluding loans guaranteed by RUS;

our guarantees of the borrower’s obligations including letters of credit commitments;

unadvanced loan commitments;

borrower guarantees to us of another borrower’s debt; and

any other indebtedness with us, unless guaranteed by the U.S. government.

Credit Risk Profile

Below we provide information on the credit risk profile of our loan and guarantee portfolio, including loan concentration, security provisions, pledged loans and loans on deposit, nonperforming and restructured loans, and allowance for loan losses.

Loan Concentration

Table 17 presents the total number of CFC, RTFC and NCSC borrowers by state or U.S. territory and the percentage of total loans outstanding at May 31, 2014, 2013 and 2012. The percentage of total loans is based on the aggregate principal balance of the loans outstanding.

Table 17: Loan Concentration



	2014			2013
State/Territory	Number of Borrowers	Loan Balance %		Number of Borrowers	Loan Balance %
Texas	73	15.43	%	72	14.76	%
Georgia	45	6.40		46	6.90
Missouri	52	5.19		52	5.27
Colorado	27	4.33		28	4.72
Alaska	19	4.28		20	3.26
Kansas	35	4.18		39	4.23
Illinois	30	3.70		31	3.72
Kentucky	25	3.34		25	3.48
Minnesota	56	3.33		54	3.57
Florida	16	2.96		16	2.68
Oklahoma	28	2.98		30	2.98
Indiana	45	2.82		45	2.89
North Carolina	30	2.69		31	2.78
Pennsylvania	20	2.57		16	2.22
Arkansas	20	2.42		19	2.73
South Carolina	25	2.38		26	2.53
Utah	6	2.37		6	2.60
Ohio	34	2.20		31	2.13
Iowa	41	2.15		42	2.10
North Dakota	12	2.09		13	1.68
Wisconsin	27	1.93		26	2.08
Alabama	26	1.88		26	1.83
Mississippi	20	1.78		22	1.85
Washington	11	1.65		11	1.69
Virginia	18	1.66		19	1.80
Oregon	23	1.62		24	1.67
Nevada	5	1.54		5	1.22
Louisiana	10	1.45		12	1.46
Wyoming	13	1.27		13	1.36
Arizona	12	0.97		12	1.10
South Dakota	32	0.96		32	1.01
Maryland	3	0.91		3	1.15
Montana	26	0.76		28	0.70
Idaho	13	0.70		13	0.73
Michigan	16	0.61		16	0.71
New Hampshire	2	0.52		2	0.48
New Mexico	16	0.36		15	0.39
Tennessee	18	0.26		19	0.29
Vermont	6	0.25		6	0.31
Hawaii	2	0.22		1	0.12
Nebraska	20	0.21		19	0.21
California	4	0.17		5	0.13
New York	7	0.16		7	0.11
Delaware	1	0.11		1	0.12
New Jersey	3	0.10		2	0.10
West Virginia	2	0.08		2	0.08
Maine	4	0.06		4	0.07
District of Columbia	1	—		1	—
Total	980	100	%	988	100	%

The service territories of our electric and telecommunications members are located throughout the United States and its territories, including 49 states, the District of Columbia, American Samoa and ~~two U.S. territories. At May 31, 2013 and 2012, loans outstanding to members in any one state or territory did not exceed 15 percent and 17 percent of total loans outstanding, respectively.~~Guam.

At May 31, 2014 and 2013, the largest concentration of loans to borrowers in any one state was in Texas, which had approximately 15% of total loans outstanding. Two primary factors contributed to Texas having the largest percentage of total loans outstanding compared with other states at May 31, 2014:

Texas has the largest number of total borrowers compared with other states (see table above); and

Texas has the largest number of power supply systems (10 of our 71 power supply system borrowers), which require significantly more capital than distribution systems and ~~2012,~~telecommunications systems.

At May 31, 2014 and 2013, the total exposure outstanding to any one borrower or controlled group did not exceed ~~2.2 percent~~2.1% and ~~2.4 percent,~~2.2%, respectively, of total loans and guarantees outstanding. At May 31, 2014 and 2013, the 10 largest borrowers included four distribution systems and six power supply systems. ~~At May 31, 2012, the 10 largest borrowers included five distribution systems and five power supply systems. The following table~~Table 18 represents the exposure to the 10 largest borrowers as a percentage of total exposure presented by type of exposure and by company at May ~~31:~~31, 2014 and 2013.

2013 2012 Increase/
(dollar amounts in thousands) Amount % of Total Amount % of Total (decrease)
Total by exposure type:
Loans $ 2,981,627 14 % $ 2,852,364 14 % $ 129,263
Guarantees 374,340 2 481,706 3 (107,366)
Total credit exposure to 10 largest borrowers $ 3,355,967 16 % $ 3,334,070 17 % $ 21,897

Total by company:
CFC $ 3,240,755 15 % $ 3,314,070 17 % $ (73,315)
NCSC 115,212 1 20,000 - 95,212
Total credit exposure to 10 largest borrowers $ 3,355,967 16 % $ 3,334,070 17 % $ 21,897
Table 18: Credit Exposure to 10 Largest Borrowers



	2014				2013				Increase/ (Decrease)
(Dollars in thousands)	Amount		% of Total		Amount		% of Total		Increase/ (Decrease)
Total by exposure type:
Loans	$	3,155,857	14	%	$	2,981,627	14	%	$	174,230
Guarantees	363,325		2		374,340		2		(11,015		)
Total credit exposure to 10 largest borrowers	$	3,519,182	16	%	$	3,355,967	16	%	$	163,215

Total by company:
CFC	$	3,378,698	15	%	$	3,240,755	15	%	$	137,943
NCSC	140,484		1		115,212		1		25,272
Total credit exposure to 10 largest borrowers	$	3,519,182	16	%	$	3,355,967	16	%	$	163,215

Security Provisions

Except when providing line of credit loans, we ~~typically~~generally lend to our members on a senior secured basis. Long-term loans are ~~typically~~generally secured on parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower with exceptions typical in utility mortgages. Line of credit loans are generally unsecured. Guarantee reimbursement obligations are ~~typically~~generally secured on parity with other secured creditors by substantially all assets and revenue of the borrower or by the underlying financed asset. In addition to the collateral pledged to secure our loans, borrowers are also required to set rates charged to customers to achieve certain financial ratios. At May 31, 2014 and 2013, ~~and 2012, $2,243~~$2,118 million and ~~$1,658~~$2,243 million out of ~~$20,296~~$20,467 million and ~~$18,912~~$20,296 million, respectively, of total loans outstanding were unsecured, representing ~~11 percent~~10% and ~~9 percent~~11% of total loans outstanding, respectively.

~~Pledged Loans~~Outstanding Debt

Table 8 shows our debt outstanding and ~~Loans~~the weighted average interest rates by type of debt at May 31, 2014, 2013 and 2012.

Table 8: Total Debt Outstanding and Weighted-Average Interest Rates



	2014					2013					2012
(Dollars in thousands)	Amounts Outstanding			Weighted- Average Interest Rate		Amounts Outstanding			Weighted- Average Interest Rate		Amounts Outstanding			Weighted- Average Interest Rate
Commercial paper sold through dealers, net of discounts	$	1,973,557		0.14	%	$	2,009,884		0.16	%	$	1,404,901		0.18	%
Commercial paper sold directly to members, at par	838,074			0.13		812,141			0.15		997,778			0.18
Commercial paper sold directly to non-members, at par	20,315			0.13		39,298			0.14		70,479			0.18
Select notes	548,610			0.27		358,390			0.34		—			—
Daily liquidity fund notes	486,501			0.06		680,419			0.10		478,406			0.10
Bank bid notes	20,000			0.60		150,000			0.53		295,000			0.51
Collateral trust bonds	5,980,214			4.65		5,962,681			5.13		6,307,564			5.11
Notes payable	6,019,040			2.60		5,274,415			2.69		4,650,877			3.27
Medium-term notes	2,726,303			2.43		3,091,512			2.74		2,423,686			4.56
Subordinated deferrable debt	400,000			4.75		400,000			4.75		186,440			6.02
Membership certificates	644,944			4.90		644,757			4.90		646,279			4.90
Loan and guarantee certificates	699,724			3.01		733,895			3.29		694,825			3.09
Member capital securities	267,560			6.12		387,750			7.49		398,350			7.50
Total debt outstanding	$	20,624,842		2.91		$	20,545,142		3.13		$	18,554,585		3.67
Percentage of fixed-rate debt⁽¹⁾	79		%			77		%			86		%
Percentage of variable-rate debt⁽²⁾	21					23					14

Percentage of long-term debt	81		%			80		%			83		%
Percentage of short-term debt	19					20					17

⁽¹⁾ Includes variable-rate debt that has been swapped to a fixed rate net of any fixed-rate debt that has been swapped to a variable rate.

⁽²⁾The rate on ~~Deposit~~commercial paper notes does not change once the note has been issued. However, the rates on new commercial paper notes change daily, and commercial paper notes generally have maturities of less than 90 days. Therefore, commercial paper notes are classified as variable-rate debt. Also includes fixed-rate debt that has been swapped to a variable rate net of any variable-rate debt that has been swapped to a fixed rate.

During the year ended May 31, 2014, total debt outstanding increased by $80 million. The ~~following table summarizes~~increase in debt outstanding, coupled with an increase in retained equity of $149 million, was primarily due to funding for the $171 million increase in loans outstanding. Total commercial paper, select notes, daily liquidity fund notes and bank bid notes outstanding represented 19% and 20% of total debt at May 31, 2014 and 2013, respectively. To take advantage of the current low interest rates on short-term debt, we intend to continue to maximize the use of these short-term debt instruments in our ~~secured~~funding portfolio mix.

Table 9 provides additional information on our outstanding debt ~~or debt requiring~~instruments and revolving credit agreements at May 31, 2014.

Table 9: Debt Instruments and Revolving Credit Agreements



Debt Instrument	Maturity Range	Market	Security
Daily liquidity fund notes	Demand note	Members and affiliates	Unsecured
Select notes	30 to 270 days	Members and affiliates	Unsecured
Bank bid notes	Up to 3 months	Bank institutions	Unsecured
Commercial paper	1 to 270 days	Public capital markets and members	Unsecured
Revolving credit agreements	3 to 5 years	Bank institutions	Unsecured
Collateral trust bonds	Up to 30 years	Public capital markets	Secured ⁽¹⁾
Medium-term notes	Range from 9 months to 30 years	Public capital markets and members	Unsecured
Notes payable to the Federal Financing Bank	Range from 3 months to 20 years	Government	Unsecured ⁽²⁾
Notes payable to Federal Agricultural Mortgage Corporation	Up to 16 years	Private placement	Secured ⁽³⁾
Other notes payable	Up to 30 years	Private placement	Varies ⁽⁴⁾
Subordinated deferrable debt	Up to 30 years⁽⁵⁾	Public capital markets	Unsecured ⁽⁶⁾
Subordinated certificates	Up to 100 years⁽⁷⁾	Members	Unsecured ⁽⁸⁾

⁽⁶⁾Subordinate and junior in right of payment to senior debt and the debt obligations we guarantee, but senior to subordinated certificates.

⁽⁸⁾Subordinate and junior in right of payment to senior and subordinated debt and debt obligations we guarantee.

Table 10 summarizes short-term debt outstanding and the weighted-average interest rates at May ~~31:~~31, 2014, 2013 and 2012.

(dollar amounts in thousands) 2013 2012
Total loans to members $ 20,296,317 $ 18,911,742
Less: Total secured debt or debt requiring
collateral on deposit (11,380,734) (10,927,587 )
Excess collateral pledged or on deposit (1)
(1,825,020) (1,870,675 )
Unencumbered loans $ 7,090,563 $ 6,113,480

Unencumbered loans as a percentage of total loans 35 % 32 %
Table 10: Short-term Debt Outstanding and Weighted-Average Interest Rates



	2014				2013				2012
(Dollars in thousands)	Debt Outstanding		Weighted- Average Interest Rate		Debt Outstanding		Weighted-Average Interest Rate		Debt Outstanding		Weighted-Average Interest Rate
Short-term debt:
Total commercial paper	$	2,831,946	0.14	%	$	2,861,323	0.16	%	$	2,473,158	0.19	%
Select notes	548,610		0.27		358,390		0.34		—		—
Daily liquidity fund notes	486,501		0.06		680,419		0.10		478,406		0.10
Bank bid notes	20,000		0.60		150,000		0.54		295,000		0.52
Subtotal short-term debt	3,887,057		0.15		4,050,132		0.18		3,246,564		0.20
Long-term debt maturing within one year	1,512,337		1.44		3,669,351		2.65		1,246,870		2.13
Total short-term debt	$	5,399,394	0.51		$	7,719,483	1.35		$	4,493,434	0.74

Table 11: Short-term Debt - Other Information



(Dollars in thousands)	2014		2013		2012
Weighted-average maturity outstanding at year-end:
Commercial paper	17 days		18 days		21 days
Select Notes	41 days		50 days		—
Daily liquidity fund notes	1 day		1 day		1 day
Bank bid notes	9 days		20 days		6 days
Subtotal short-term debt	19 days		18 days		17 days
Long-term debt maturing within one year	200 days		180 days		158 days
Total	69 days		95 days		56 days
Average amount outstanding during the year:
Commercial paper	$	3,083,849	$	2,817,305	$	2,492,791
Select Notes	485,839		166,486		—
Daily liquidity fund notes	585,104		586,505		413,525
Bank bid notes	127,315		222,500		295,000
Subtotal short-term debt	4,282,107		3,792,796		3,201,316
Long-term debt maturing within one year	2,205,642		2,639,927		2,168,220
Total	$	6,487,749	$	6,432,723	$	5,369,536
Maximum amount outstanding at any month-end during the year:
Commercial paper	$	3,723,948	$	3,514,679	$	2,746,189
Select Notes	605,536		376,858		—
Daily liquidity fund notes	715,539		680,419		478,406
Bank bid notes	150,000		295,000		295,000
Subtotal short-term debt	4,864,244		4,600,287		3,431,617
Long-term debt maturing within one year	3,873,364		3,787,808		2,697,751

We provide additional information on our borrowings in "Note 5—Short-term Debt and Credit Arrangements," "Note 6—Long-term Debt" and "Note 7—Subordinated Deferrable Debt."

Equity

Table 12 summarizes the components of equity at May 31, 2014 and 2013.

Table 12: Equity



(Dollars in thousands)	2014			2013			Increase/ (Decrease)
Membership fees	$	973		$	973		$	—
Education fund	1,778			1,532			246
Members’ capital reserve	485,447			410,259			75,188
Allocated net income	630,340			591,581			38,759
Unallocated net loss⁽¹⁾	(6,238		)	(6,230		)	(8		)
Total members’ equity	1,112,300			998,115			114,185
Prior years cumulative derivative forward value and foreign currency adjustments	(207,025		)	(340,719		)	133,694
Year-to-date derivative forward value income⁽²⁾	34,613			133,694			(99,081		)
Total CFC retained equity	939,888			791,090			148,798
Accumulated other comprehensive income	3,649			8,381			(4,732		)
Total CFC equity	943,537			799,471			144,066
Noncontrolling interest	26,837			11,790			15,047
Total equity	$	970,374		$	811,261		$	159,113

⁽¹⁾ Excludes derivative forward value.

⁽²⁾ Represents the derivative forward value loss recorded by CFC for the year-to-date period.

In May 2013, the CFC Board of Directors authorized the allocation of $1 million of fiscal year 2013 net earnings to the Cooperative Educational Fund. In July 2013, the CFC Board of Directors authorized the allocation of the fiscal year 2013 net earnings as follows: $138 million to the members' capital reserve and $81 million to members in the form of patronage capital. In July 2013, the CFC Board of Directors authorized the retirement of allocated net earnings totaling $41 million, representing 50% of the fiscal year 2013 allocation. This amount was returned to members in cash ~~collateral pledged~~in October 2013. Future allocations and retirements of net earnings may be made annually as determined by the CFC Board of Directors with due regard for CFC’s financial condition. The CFC Board of Directors has the authority to ~~secure~~change the current practice for allocating and retiring net earnings at any time, subject to applicable cooperative law.

Ratio Analysis

Leverage Ratio

The leverage ratio is calculated by dividing the sum of total liabilities and guarantees outstanding by total equity. Based on this formula, the leverage ratio at May 31, 2014 was 23.01-to-1, a decrease from 27.58-to-1 at May 31, 2013. The decrease in the leverage ratio is due to the increase of $159 million in total equity, the decrease of $48 million in total guarantees, partially offset by the increase of $2 million in total liabilities as discussed under "Financial Condition—Liabilities and Equity" and "Contingent Off-Balance Sheet Obligations."

For covenant compliance on our revolving credit agreements and for internal management purposes, the leverage ratio calculation is adjusted to exclude derivative liabilities, debt used to fund loans guaranteed by RUS, subordinated deferrable debt and subordinated certificates from liabilities; uses members’ equity rather than total equity; and adds subordinated deferrable debt and subordinated certificates to calculate adjusted equity.

Debt-to-Equity Ratio

CONTINGENT OFF-BALANCE SHEET OBLIGATIONS

Guarantees

Table 13: Guarantees Outstanding



(Dollars in thousands)	2014		2013		Increase/ (Decrease)
Total by guarantee type:
Long-term tax-exempt bonds	$	518,360	$	547,970	$	(29,610	)
Letters of credit	431,064		447,683		(16,619		)
Other guarantees	115,398		117,118		(1,720		)
Total	$	1,064,822	$	1,112,771	$	(47,949	)
Total by company:
CFC	$	997,187	$	1,063,113	$	(65,926	)
RTFC	2,304		3,711		(1,407		)
NCSC	65,331		45,947		19,384
Total	$	1,064,822	$	1,112,771	$	(47,949	)

At May 31, 2014 and 2013, 61% and 63% of total guarantees, respectively, were secured by a mortgage lien on substantially all of the system’s assets and future revenue.

Table 14 summarizes the off-balance sheet obligations at May 31, 2014, and ~~until~~the related maturities by fiscal year and thereafter.

Table 14: Maturities of Guaranteed Obligations



	Outstanding Balance		Maturities of Guaranteed Obligations
(Dollars in thousands)	Outstanding Balance		2015		2016		2017		2018		2019		Thereafter
Guarantees ⁽¹⁾	$	1,064,822	$	353,298	$	31,885	$	25,624	$	147,843	$	28,573	$	477,599

See "Note 12—Guarantees" for additional information.

Unadvanced Loan Commitments

Table 15: Unadvanced Loan Commitments



(Dollars in thousands)	2014		% of Total		2013		% of Total
Long-term	$	4,710,273	34	%	$	4,718,162	35	%
Line of credit	9,201,805		66		8,704,586		65
Total	$	13,912,078	100	%	$	13,422,748	100	%

the majority of the line of credit unadvanced commitments provide backup liquidity to our borrowers; and

historically, we have experienced a very low utilization rate on line of credit loan facilities, whether or not there is a material adverse change clause at the time of advance.

electric cooperatives generally execute loan contracts to cover multi-year work plans and, as such, it is expected that advances on such loans will occur over a multi-year period;

we generally do not charge our borrowers a fee on long-term unadvanced commitments; and

long-term unadvanced commitments generally expire five years from the date of the loan agreement.

Table 16 summarizes the available balance under committed lines of credit at May 31, 2014, and the related maturities by fiscal year.

Table 16: Notional Maturities of Committed Lines of Credit



	Available Balance	Notional Maturities of Committed Lines of Credit
(Dollars in thousands)	Available Balance	2015	2016	2017	2018	2019
Committed lines of credit	$2,274,388	$19,238	$61,000	$456,855	$678,839	$1,058,456

CREDIT RISK

Credit Policies, Process and Monitoring

Loan Underwriting and Credit Monitoring

the size of the loan request;

the intended use of proceeds;

whether collateral is required and, if so, whether there is sufficient collateral;

the borrower’s risk profile as measured by financial ratios and other risk characteristics; and

other factors that might be applicable to the type of borrower or the specific loan request being considered.

Our Credit Risk Management group facilitates the activities of our internal credit review process, establishes credit policies and oversees our internal risk rating system for all of our borrowers. We maintain an internal risk rating system that produces a borrower rating and a facility rating. The borrower risk rating (“BRR”) measures risk of default for each borrower based on both quantitative and qualitative measurements specific to the particular business line of the borrower. The facility risk rating measures risk of loss in the event of default ~~we can withdraw excess~~for a particular facility based on the collateral ~~as long as there is 100 percent coverage~~or guarantee associated with the loan. Risk ratings are used to assess the credit quality of the ~~secured debt. If there is an event~~overall portfolio, segments of ~~default under most~~the portfolio and each of our ~~indentures, we can only withdraw this excess collateral if we substitute cash of equal value.~~borrowers and to establish credit limitations, and are factors in determining applicable credit approval levels.

~~Non-performing~~Risk ratings for borrowers with outstanding and/or unadvanced loan or guarantee commitments are updated at least annually upon the receipt of audited financial information and ~~Restructured Loans~~

~~The following table presents~~are reviewed in connection with any new credit request. Annually, an outside financial services consultant conducts a ~~summary~~review of ~~non-performing~~the accuracy of specific BRRs and ~~restructured loans~~the risk rating process and credit extension practices for compliance with policy and consistency in application. Such consultant provides recommendations to management and the boards of directors for improvement, as ~~a percentage~~well as progress on the resolution of ~~total loans and total loans and guarantees outstanding at May 31:~~items from prior reviews. Management is responsible for implementing the recommendations accepted by the boards of directors. In addition, we compare our internal ratings to the publicly available ratings for our borrowers that have public ratings.

(dollar amounts in thousands) 2013 2012 2011 2010 2009
Non-performing loans (1)
$ 15,497 $ 41,213 $ 31,344 $ 560,527 $ 523,758
Percent of loans outstanding 0.08 % 0.22 % 0.16 % 2.90 % 2.59 %
Percent of loans and guarantees outstanding 0.07 0.20 0.15 2.73 2.44

Restructured loans $ 46,953 $ 455,689 $ 474,381 $ 508,044 $ 537,587
Percent of loans outstanding 0.23 % 2.41 % 2.45 % 2.63 % 2.66 %
Percent of loans and guarantees outstanding 0.22 2.26 2.32 2.48 2.50

Total non-performing and restructured loans $ 62,450 $ 496,902 $ 505,725 $ 1,068,571 $ 1,061,345
Percent of loans outstanding 0.31 % 2.63 % 2.61 % 5.53 % 5.25 %
Percent of loans and guarantees outstanding 0.29 2.46 2.47 5.21 4.94

Total non-accrual loans $ 23,081 $ 41,213 $ 465,312 $ 1,022,924 $ 1,014,585
Percent of loans outstanding 0.11 % 0.22 % 2.41 % 5.29 % 5.03 %
Percent of loans and guarantees outstanding 0.11 0.20 2.28 4.99 4.73

~~(1) All loans classified as non-performing were on non-accrual status.~~Loan Approval

~~A borrower~~The respective boards of directors establish loan policies for CFC, RTFC, and NCSC, each of which includes a credit approval matrix. The credit approval matrix specifies the required level of approval applicable to any proposed loan based on factors such as the amount of the loan, the BRR, whether credit limitations are exceeded and whether the loan is ~~classified as non-performing when any~~to a member associated with one of our current directors. Through the ~~following criteria is met:~~

·	~~principal or interest payments on any loan to the borrower are past due 90 days or more;~~

·	~~as a result of court proceedings, repayment on the original terms is not anticipated; or~~

·	~~for some other reason, management does not expect the timely repayment of principal and interest.~~

approval matrix, the respective boards have delegated the authority to approve certain loans to the Chief Executive Officer, who has further delegated approval authority to the Corporate Credit Committee and management in the lending groups while retaining sole authority to approve certain loans.

approval. The Chief Executive Officer or board receives a credit recommendation by management from the lending group and the Corporate Credit Committee.

Nonperforming Loans

The Credit Risk Management group, on an ongoing basis, and the Corporate Credit Committee, on a quarterly basis, monitor all borrowers with past due, non-accrual and restructured facilities as well as other borrowers that warrant a higher degree of monitoring. The Credit Risk Management group presents reports on such matters to the Chief Executive Officer and boards of directors. Once a borrower is classified as ~~non-performing,~~nonperforming, we typically place the loan on non-accrual status and reverse all accrued and unpaid interest back to the date of the last payment.

At May 31, 2013 and 2012, non-performing loans totaled $15 million, or 0.1 percent, of loans outstanding and $41 million or 0.2 percent, of loans outstanding, respectively. One borrower in this group is currently in bankruptcy. The trustee for the borrower filed a disclosure statement and draft plan of reorganization on February 15, 2013. The trustee filed an amended disclosure statement and plan of reorganization on August 14, 2013. The amended disclosure statement and plan of reorganization will be subject to certain changes and ultimate approval of the bankruptcy court, which is expected to occur following a hearing on September 24, 2013. Confirmation of the amended plan of reorganization is expected to occur on November 12, 2013. Another borrower in this group is contesting a ruling that it is required to repay state USF payments received. There are two other borrowers that are currently seeking buyers for their systems, as it is not anticipated that they will have sufficient cash flow to repay their loans without the proceeds from the sale of the business. It is currently anticipated that even with the sale of the business, there will not be sufficient funds to repay the full amount owed. We have approval rights with respect to the sale of either of these companies.

At May 31, 2013 and 2012, we had restructured loans totaling $47 million, or 0.2 percent, of loans outstanding and $456 million, or 2.4 percent, of loans outstanding, respectively, all of which were performing according to their restructured terms. Approximately $14 million of interest income was accrued on restructured loans during the year ended May 31, 2013, respectively, compared with $16 million of interest income in the prior year. One of the restructured loans totaling $39 million and $40 million at May 31, 2013 and 2012, respectively, has been on accrual status since the time of restructuring. One restructured loan totaling $416 million at May 31, 2012 was on non-accrual status through September 30, 2011, with all amounts collected being applied against the principal balance. On October 1, 2011, the principal balance of the loan was

reduced below the level of a prepayment option and as such we placed the loan on accrual status at that time at a rate based on the effective rate returned by the future scheduled cash flows. This loan was paid off early by the borrower on September 13, 2012.

Another loan totaling $8 million and $29 million, respectively, at May 31, 2013 and May 31, 2012 was moved from non-performing loans to restructured loans during fiscal year 2013. The related plan of reorganization was approved by the court on April 1, 2013 and it became effective on May 31, 2013. Following the court’s decision, we recorded a $19 million write-off to decrease the original loan balance to the restructured loan balance of $8 million, the net present value of the future estimated payments discounted at our posted 20-year loan rate at the restructure date. The restructuredA loan is ~~on non-accrual status.~~

~~Based on our analysis, we believe we have an adequate loan loss allowance for our exposure related to non-performing and restructured loans at May 31, 2013.~~

~~Allowance for Loan Losses~~

We maintain an allowance for loan losses at a level estimated by management to provide adequately for probable losses inherent in the loan portfolio. The allowance for loan losses is determined based upon evaluation of the loan portfolio, past loss experience, specific problem loans, economic conditions and other pertinent factors that, in management’s judgment, could affect the risk of loss in the loan portfolio. We review and adjust the allowance quarterly to cover estimated probable losses in the portfolio. All loans are written off in the period that it becomes evident that collectability is highly unlikely; however, our efforts to recover all charged-off amounts may continue. Management ~~believes the allowance for loan losses is adequate to cover estimated probable portfolio losses.~~

~~Under~~makes a guarantee agreement, CFC reimburses RTFC and NCSC for loan losses; therefore, RTFC and NCSC do not maintain separate loan loss reserves. Activity in the allowance for loan losses is summarized below including a disaggregation by company of the allowance for loan losses held at CFC:

As of and for the years ended May 31,
(dollar amounts in thousands) 2013 2012 2011 2010 2009
Beginning balance $ 143,326 $ 161,177 $ 592,764 $ 622,960 $ 514,906
(Recovery of) provision for loan losses (70,091) (18,108 ) (83,010 ) (30,415 ) 113,699
Net (charge-off) recovery (18,910) 257 (348,577 ) 219 (5,645 )
Ending balance $ 54,325 $ 143,326 $ 161,177 $ 592,764 $ 622,960
`
Loan loss allowance by company:
  CFC (1)
$ 41,246 $ 126,941 $ 143,706 $ 177,655 $ 224,688
  RTFC (1)
9,158 8,562 8,389 406,214 378,194
  NCSC (1)
3,921 7,823 9,082 8,895 20,078
Total $ 54,325 $ 143,326 $ 161,177 $ 592,764 $ 622,960

As a percentage of total loans outstanding 0.27 % 0.76 % 0.84 % 3.07 % 3.09 %
As a percentage of total non-performing loans outstanding 350.55 347.77 514.22 105.75 118.94
As a percentage of total restructured loans outstanding 115.70 31.45 33.98 116.68 115.88
As a percentage of total loans on non-accrual 235.37 347.77 34.64 57.95 61.40

(1) The allowance for loan losses recorded for RTFC and NCSC is held at CFC with the exception of the NCSC loan loss allowance of less than $1 million for the years ended May 31, 2010 and 2009 required to cover the exposure for consumer loans. The balance of NCSC’s consumer loans was reduced to zero at May 31, 2013, 2012 and 2011.

~~Our loan loss allowance decreased by $89 million from May 31, 2012 to May 31, 2013 due~~recommendation to the ~~decrease~~respective board of directors as to the ~~allowance held for general loans~~timing and amount of $56 million, the decrease in the qualitative component of the general reserve of $11 million and the decrease to the allowance held for impaired loans of $22 million. The decrease in the allowance held for general loans is due to refinements in assumptions used to estimate of our allowance for loan losses. The decrease in the allowance held for impaired loans was primarily due to the $19 million write-off for one of our borrowers that was moved from non-performing loans to restructured loans during the year. Our loan loss allowance decreased by $18 million from May 31, 2011 to May 31, 2012 due to reductions in the allowance held for the impaired loans of $11 million and a decrease to the allowance held for general loans of $7 million. See ~~Recovery of Loan Losses~~ ~~in the~~ ~~Results of Operations~~ ~~section for further discussion. On a quarterly basis, we review all non-performing and restructured borrowers, as well as certain additional borrowers selected~~write-offs based on ~~known facts~~various factors, including, but not limited to, cash flow analysis and circumstances, to determine if the loans to the borrowers are impaired and/or to determine if there are changes to a previously impaired loan. We calculate a borrower’s impairment based on the expected future cash flows or the fair value of the collateral securing the borrower’s loans.

Advances on Previously Approved Loan Facilities

Covenant Compliance

Credit Concentration

CFC, RTFC and NCSC each have policies that limit the amount of credit that can be extended to individual borrowers or a controlled group of borrowers. The credit limitation policies cap the total exposure and unsecured exposure to the borrower ~~if cash flow cannot~~based on an assessment of the borrower’s risk profile and our internal risk rating system. As a member-owned cooperative lender, we balance the needs of our members and the risk associated with concentrations of credit exposure. Each board of directors must approve new credit requests from borrowers with total exposure or unsecured exposure in excess of the limits in the policies. Management may use syndicated credit arrangements, loan participations and loan sales to manage credit concentrations.

Total exposure, as defined by the policies, generally includes the following:

loans outstanding, excluding loans guaranteed by RUS;

our guarantees of the borrower’s obligations including letters of credit commitments;

unadvanced loan commitments;

borrower guarantees to us of another borrower’s debt; and

any other indebtedness with us, unless guaranteed by the U.S. government.

The calculation of total exposure includes facilities that are approved but not yet closed and facilities that might not be ~~estimated. As events related to~~drawn by the borrower, ~~take place~~such as lines of credit and ~~economic conditions~~loan commitments for projects that may be delayed or eventually canceled.

Credit Risk Profile

Loan Concentration

Table 17: Loan Concentration



	2014			2013
State/Territory	Number of Borrowers	Loan Balance %		Number of Borrowers	Loan Balance %
Texas	73	15.43	%	72	14.76	%
Georgia	45	6.40		46	6.90
Missouri	52	5.19		52	5.27
Colorado	27	4.33		28	4.72
Alaska	19	4.28		20	3.26
Kansas	35	4.18		39	4.23
Illinois	30	3.70		31	3.72
Kentucky	25	3.34		25	3.48
Minnesota	56	3.33		54	3.57
Florida	16	2.96		16	2.68
Oklahoma	28	2.98		30	2.98
Indiana	45	2.82		45	2.89
North Carolina	30	2.69		31	2.78
Pennsylvania	20	2.57		16	2.22
Arkansas	20	2.42		19	2.73
South Carolina	25	2.38		26	2.53
Utah	6	2.37		6	2.60
Ohio	34	2.20		31	2.13
Iowa	41	2.15		42	2.10
North Dakota	12	2.09		13	1.68
Wisconsin	27	1.93		26	2.08
Alabama	26	1.88		26	1.83
Mississippi	20	1.78		22	1.85
Washington	11	1.65		11	1.69
Virginia	18	1.66		19	1.80
Oregon	23	1.62		24	1.67
Nevada	5	1.54		5	1.22
Louisiana	10	1.45		12	1.46
Wyoming	13	1.27		13	1.36
Arizona	12	0.97		12	1.10
South Dakota	32	0.96		32	1.01
Maryland	3	0.91		3	1.15
Montana	26	0.76		28	0.70
Idaho	13	0.70		13	0.73
Michigan	16	0.61		16	0.71
New Hampshire	2	0.52		2	0.48
New Mexico	16	0.36		15	0.39
Tennessee	18	0.26		19	0.29
Vermont	6	0.25		6	0.31
Hawaii	2	0.22		1	0.12
Nebraska	20	0.21		19	0.21
California	4	0.17		5	0.13
New York	7	0.16		7	0.11
Delaware	1	0.11		1	0.12
New Jersey	3	0.10		2	0.10
West Virginia	2	0.08		2	0.08
Maine	4	0.06		4	0.07
District of Columbia	1	—		1	—
Total	980	100	%	988	100	%

The service territories of our ~~assumptions change,~~electric and telecommunications members are located throughout the ~~impairment calculations will change.~~United States and its territories, including 49 states, the District of Columbia, American Samoa and Guam.

Texas has the largest number of total borrowers compared with other states (see table above); and

At May 31, 2014 and 2013, the total exposure outstanding to any one borrower or controlled group did not exceed 2.1% and 2.2%, respectively, of total loans and guarantees outstanding. At May 31, 2014 and 2013, the 10 largest borrowers included four distribution systems and six power supply systems. Table 18 represents the exposure to the 10 largest borrowers as a percentage of total ~~specific loan loss allowance balance~~exposure presented by type of $3exposure and by company at May 31, 2014 and 2013.

Table 18: Credit Exposure to 10 Largest Borrowers



	2014				2013				Increase/ (Decrease)
(Dollars in thousands)	Amount		% of Total		Amount		% of Total		Increase/ (Decrease)
Total by exposure type:
Loans	$	3,155,857	14	%	$	2,981,627	14	%	$	174,230
Guarantees	363,325		2		374,340		2		(11,015		)
Total credit exposure to 10 largest borrowers	$	3,519,182	16	%	$	3,355,967	16	%	$	163,215

Total by company:
CFC	$	3,378,698	15	%	$	3,240,755	15	%	$	137,943
NCSC	140,484		1		115,212		1		25,272
Total credit exposure to 10 largest borrowers	$	3,519,182	16	%	$	3,355,967	16	%	$	163,215

Security Provisions

Except when providing line of credit loans, we generally lend to our members on a senior secured basis. Long-term loans are generally secured on parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower with exceptions typical in utility mortgages. Line of credit loans are generally unsecured. Guarantee reimbursement obligations are generally secured on parity with other secured creditors by substantially all assets and revenue of the borrower or by the underlying financed asset. In addition to the collateral pledged to secure our loans, borrowers are also required to set rates charged to customers to achieve certain financial ratios. At May 31, 2014 and 2013, $2,118 million and ~~$25~~$2,243 million out of $20,467 million and $20,296 million, respectively, ~~related to impaired~~of total loans ~~totaling $62 million~~outstanding were unsecured, representing 10% and ~~$497 million,~~11% of total loans outstanding, respectively.

~~Liabilities and Equity~~

Outstanding Debt

~~The following table breaks out~~

Table 8 shows our debt outstanding and the weighted average interest rates by type of debt at May ~~31:~~31, 2014, 2013 and 2012.

2013 2012 2011
(dollar amounts in thousands)
Amounts
Outstanding

Weighted-
Average
Interest Rate
Amounts Outstanding
Weighted-
Average
Interest Rate

Amounts
Outstanding

Weighted-
Average
Interest Rate

Commercial paper
sold through dealers, net of discounts $ 2,009,884 0.16 % $ 1,404,901 0.18 % $ 1,471,715 0.26 %
Commercial paper
sold directly to members, at par 812,141 0.15 997,778 0.18 1,189,770 0.22
Commercial paper
sold directly to non-members, at par 39,298 0.14 70,479 0.18 55,160 0.21
Select notes 358,390 0.34 - - - -
Daily liquidity fund 680,419 0.10 478,406 0.10 308,725 0.15
Bank bid notes 150,000 0.53 295,000 0.51 295,000 0.60
Collateral trust bonds 5,962,681 5.13 6,307,564 5.11 5,513,235 5.56
Notes payable 5,274,415 2.69 4,650,877 3.27 4,633,854 3.45
Medium-term notes 3,091,512 2.74 2,423,686 4.56 3,656,274 5.96
Subordinated deferrable debt 400,000 4.75 186,440 6.02 186,440 6.02
Membership certificates 644,757 4.90 646,279 4.90 646,161 4.90
Loan and guarantee certificates 733,895 3.29 694,825 3.09 769,241 2.91
Member capital securities 387,750 7.49 398,350 7.50 398,250 7.50
Total debt outstanding $ 20,545,142 3.13 $ 18,554,585 3.67 $ 19,123,825 4.12
Percentage of fixed-rate debt (1)

77
% 86 % 79 %
Percentage of variable-rate debt (2)

23
14 21

Percentage of long-term debt
80
% 83 % 83 %
Percentage of short-term debt
20
17 17
Table 8: Total Debt Outstanding and Weighted-Average Interest Rates



	2014					2013					2012
(Dollars in thousands)	Amounts Outstanding			Weighted- Average Interest Rate		Amounts Outstanding			Weighted- Average Interest Rate		Amounts Outstanding			Weighted- Average Interest Rate
Commercial paper sold through dealers, net of discounts	$	1,973,557		0.14	%	$	2,009,884		0.16	%	$	1,404,901		0.18	%
Commercial paper sold directly to members, at par	838,074			0.13		812,141			0.15		997,778			0.18
Commercial paper sold directly to non-members, at par	20,315			0.13		39,298			0.14		70,479			0.18
Select notes	548,610			0.27		358,390			0.34		—			—
Daily liquidity fund notes	486,501			0.06		680,419			0.10		478,406			0.10
Bank bid notes	20,000			0.60		150,000			0.53		295,000			0.51
Collateral trust bonds	5,980,214			4.65		5,962,681			5.13		6,307,564			5.11
Notes payable	6,019,040			2.60		5,274,415			2.69		4,650,877			3.27
Medium-term notes	2,726,303			2.43		3,091,512			2.74		2,423,686			4.56
Subordinated deferrable debt	400,000			4.75		400,000			4.75		186,440			6.02
Membership certificates	644,944			4.90		644,757			4.90		646,279			4.90
Loan and guarantee certificates	699,724			3.01		733,895			3.29		694,825			3.09
Member capital securities	267,560			6.12		387,750			7.49		398,350			7.50
Total debt outstanding	$	20,624,842		2.91		$	20,545,142		3.13		$	18,554,585		3.67
Percentage of fixed-rate debt⁽¹⁾	79		%			77		%			86		%
Percentage of variable-rate debt⁽²⁾	21					23					14

Percentage of long-term debt	81		%			80		%			83		%
Percentage of short-term debt	19					20					17

⁽¹⁾ Includes variable-rate debt that has been swapped to a fixed rate net of any fixed-rate debt that has been swapped to a variable rate.

During the year ended May 31, ~~2013,~~2014, total debt outstanding increased by ~~$1,991~~$80 million. The increase in debt outstanding, coupled with an increase in retained equity of $149 million, was primarily due to funding offor the ~~$1,384~~$171 million increase in loans outstanding and $658 million increase in cash and investments. The increase in cash and investments at May 31, 2013 was driven primarily by three investments made during the year ended May 31, 2013 totaling $700 million.outstanding. Total commercial paper, select notes, daily liquidity fund notes and bank bid notes outstanding represented ~~20 percent~~19% and ~~17 percent~~20% of total debt at May 31, ~~2013~~2014 and ~~2012,~~2013, respectively. To take advantage of the current low interest rates on short-term debt, we intend to continue to maximize the use of ~~commercial paper~~these short-term debt instruments in our funding portfolio mix.

~~The following table~~During fiscal year 2014, the CFC Board of Directors authorized management to execute the call of our 7.5% member capital securities and offer members the option to invest in a new series of member capital securities that currently have a 5% interest rate. As of May 31, 2014, $267 million of the 7.5% member capital securities were redeemed and we had call notices outstanding for another $59 million. As of May 31, 2014, members have invested $147 million in the new series of member capital securities.

Table 9 provides additional information on our outstanding debt instruments and revolving credit agreements at May 31, ~~2013.~~2014.

Table 9: Debt Instruments and Revolving Credit Agreements



Debt Instrument	Maturity Range	Market	Security
Daily liquidity fund notes	Demand note	Members and affiliates	Unsecured
Select notes	30 to 270 days	Members and affiliates	Unsecured
Bank bid notes	Up to 3 months	Bank institutions	Unsecured
Commercial paper	1 to 270 days	Public capital markets and members	Unsecured
Revolving credit agreements	3 to 5 years	Bank institutions	Unsecured
Collateral trust bonds	Up to 30 years	Public capital markets	Secured ⁽¹⁾
Medium-term notes	Range from 9 months to 30 years	Public capital markets and members	Unsecured
Notes payable to the Federal Financing Bank	Range from 3 months to 20 years	Government	Unsecured ⁽²⁾
Notes payable to Federal Agricultural Mortgage Corporation	Up to 716 years	Private placement	Secured ⁽³⁾
Other notes payable	Up to 30 years	Private placement	Varies ⁽⁴⁾
Subordinated deferrable debt	Up to 30 years⁽⁵⁾	Public capital markets	Unsecured ⁽⁶⁾
Subordinated certificates	Up to 100 years⁽⁷⁾	Members	Unsecured ⁽⁸⁾

⁽⁴⁾At May 31, ~~2013,~~2014, other notes payable includes unsecured and secured Clean Renewable Energy Bonds. We are required to pledge eligible mortgage notes from distribution and power supply system borrowers in an amount at least equal to the outstanding principal amount under the Clean Renewable Energy Bonds Series 2009A note purchase agreement. The remaining other notes payable relate to unsecured notes payable issued by NCSC.

⁽⁶⁾Subordinate and junior in right of payment to senior debt and the debt obligations we guarantee, but senior to subordinated certificates.

⁽⁸⁾Subordinate and junior in right of payment to senior and subordinated debt and debt obligations we guarantee.

~~The following is a summary of~~Table 10 summarizes short-term debt outstanding and the weighted-average ~~effective~~ interest rates at May ~~31:~~31, 2014, 2013 and 2012.

2013 2012 2011
(dollar amounts in thousands)
Debt
Outstanding

Weighted-Average Effective
Interest
Rate

Debt
Outstanding

Weighted-Average Effective
Interest
Rate

Debt
Outstanding

Weighted-Average Effective
Interest
Rate
Short-term debt:
   Total commercial paper $ 2,861,323 0.16 % $ 2,473,158 0.19 % $ 2,716,645 0.25 %
   Select notes 358,390 0.34 - - - -
   Daily liquidity fund sold directly to members 680,419 0.10 478,406 0.10 308,725 0.15
   Bank bid notes 150,000 0.54 295,000 0.52 295,000 0.60
Subtotal short-term debt 4,050,132 0.18 3,246,564 0.20 3,320,370 0.27
Long-term debt maturing within one year 3,669,351 2.65 1,246,870 2.13 2,522,554 5.20
Total short-term debt $ 7,719,483 1.35 $ 4,493,434 0.74 $ 5,842,924 2.40
Table 10: Short-term Debt Outstanding and Weighted-Average Interest Rates



	2014				2013				2012
(Dollars in thousands)	Debt Outstanding		Weighted- Average Interest Rate		Debt Outstanding		Weighted-Average Interest Rate		Debt Outstanding		Weighted-Average Interest Rate
Short-term debt:
Total commercial paper	$	2,831,946	0.14	%	$	2,861,323	0.16	%	$	2,473,158	0.19	%
Select notes	548,610		0.27		358,390		0.34		—		—
Daily liquidity fund notes	486,501		0.06		680,419		0.10		478,406		0.10
Bank bid notes	20,000		0.60		150,000		0.54		295,000		0.52
Subtotal short-term debt	3,887,057		0.15		4,050,132		0.18		3,246,564		0.20
Long-term debt maturing within one year	1,512,337		1.44		3,669,351		2.65		1,246,870		2.13
Total short-term debt	$	5,399,394	0.51		$	7,719,483	1.35		$	4,493,434	0.74

Table 11: Short-term Debt - Other Information



(Dollars in thousands)	2014		2013		2012
Weighted-average maturity outstanding at year-end:
Commercial paper	17 days		18 days		21 days
Select Notes	41 days		50 days		—
Daily liquidity fund notes	1 day		1 day		1 day
Bank bid notes	9 days		20 days		6 days
Subtotal short-term debt	19 days		18 days		17 days
Long-term debt maturing within one year	200 days		180 days		158 days
Total	69 days		95 days		56 days
Average amount outstanding during the year:
Commercial paper	$	3,083,849	$	2,817,305	$	2,492,791
Select Notes	485,839		166,486		—
Daily liquidity fund notes	585,104		586,505		413,525
Bank bid notes	127,315		222,500		295,000
Subtotal short-term debt	4,282,107		3,792,796		3,201,316
Long-term debt maturing within one year	2,205,642		2,639,927		2,168,220
Total	$	6,487,749	$	6,432,723	$	5,369,536
Maximum amount outstanding at any month-end during the year:
Commercial paper	$	3,723,948	$	3,514,679	$	2,746,189
Select Notes	605,536		376,858		—
Daily liquidity fund notes	715,539		680,419		478,406
Bank bid notes	150,000		295,000		295,000
Subtotal short-term debt	4,864,244		4,600,287		3,431,617
Long-term debt maturing within one year	3,873,364		3,787,808		2,697,751

~~Other~~We provide additional information ~~about short-term debt~~on our borrowings in "Note 5—Short-term Debt and Credit Arrangements," "Note 6—Long-term Debt" and "Note 7—Subordinated Deferrable Debt."

Equity

Table 12 summarizes the components of equity at May 31, ~~is as follows:~~2014 and 2013.

(dollar amounts in thousands) 2013 2012 2011
Weighted-average maturity outstanding at year-end:
      Commercial paper 18 days 21 days 29 days
      Select Notes 50 days - -
      Daily liquidity fund sold directly to members 1 day 1 day 1 day
      Bank bid notes 20 days 6 days 33 days
Subtotal short-term debt 18 days 17 days 27 days
Long-term debt maturing within one year 180 days 158 days 249 days
Total 95 days 56 days 123 days
Average amount outstanding during the year:
      Commercial paper $ 2,817,305 $ 2,492,791 $ 2,698,653
      Select Notes 166,486 - -
      Daily liquidity fund sold directly to members 586,505 413,525 343,311
      Bank bid notes 222,500 295,000 208,333
Subtotal short-term debt 3,792,796 3,201,316 3,250,297
Long-term debt maturing within one year 2,639,927 2,168,220 1,550,369
Total $ 6,432,723 $ 5,369,536 $ 4,800,666
Maximum amount outstanding at any month-end during the year:
      Commercial paper $ 3,514,679 $ 2,746,189 $ 3,424,449
      Select Notes 376,858 - -
      Daily liquidity fund sold directly to members 680,419 478,406 440,806
      Bank bid notes 295,000 295,000 295,000
Subtotal short-term debt 4,600,287 3,431,617 3,975,621
Long-term debt maturing within one year 3,787,808 2,697,751 2,522,554

Table 12: Equity



(Dollars in thousands)	2014			2013			Increase/ (Decrease)
Membership fees	$	973		$	973		$	—
Education fund	1,778			1,532			246
Members’ capital reserve	485,447			410,259			75,188
Allocated net income	630,340			591,581			38,759
Unallocated net loss⁽¹⁾	(6,238		)	(6,230		)	(8		)
Total members’ equity	1,112,300			998,115			114,185
Prior years cumulative derivative forward value and foreign currency adjustments	(207,025		)	(340,719		)	133,694
Year-to-date derivative forward value income⁽²⁾	34,613			133,694			(99,081		)
Total CFC retained equity	939,888			791,090			148,798
Accumulated other comprehensive income	3,649			8,381			(4,732		)
Total CFC equity	943,537			799,471			144,066
Noncontrolling interest	26,837			11,790			15,047
Total equity	$	970,374		$	811,261		$	159,113

~~Equity~~

~~Equity includes the following components at May 31:~~

(dollar amounts in thousands) 2013 2012
Increase/
(Decrease)

Membership fees $ 973 $ 995 $ (22)
Education fund 1,532 1,418 114
Members’ capital reserve 410,259 272,126 138,133
Allocated net income 591,581 546,366 45,215
Unallocated net loss (1)
(6,230) (6,222 )
(8)

Total members’ equity 998,115 814,683 183,432
Prior years cumulative derivative forward value
and foreign currency adjustments (340,719) (124,476 ) (216,243)
Year-to-date derivative forward value income (loss) (2)
133,694 (216,243 ) 349,937
Total CFC retained equity 791,090 473,964 317,126
Accumulated other comprehensive income 8,381 9,199 (818)
Total CFC equity 799,471 483,163 316,308
Noncontrolling interest 11,790 7,592 4,198
Total equity $ 811,261 $ 490,755 $ 320,506

⁽¹⁾ Excludes derivative forward value.

⁽²⁾ Represents the derivative forward value loss recorded by CFC for the year-to-date period.

At May 31, ~~2013,~~2014, total equity increased by ~~$321~~$159 million from May 31, ~~2012~~2013, primarily due to net income of ~~$358~~$193 million for the year ended May 31, ~~2013,~~2014 partially offset by the board authorized patronage capital retirement of ~~$36~~$41 million. In July 2012, the CFC Board of Directors authorized the allocation of the fiscal year 2012 net earnings as follows: $1 million to the cooperative educational fund and $71 million to members in the form of patronage capital. In July 2012, the CFC Board of Directors authorized the retirement of allocated net earnings totaling $35 million, representing 50 percent of the fiscal year 2012 allocation. This amount was returned to members in cash in September 2012. Future allocations and retirements of net earnings may be made annually as determined by the CFC Board of Directors with due regard for CFC’s financial condition. The CFC Board of Directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable cooperative law.

In May 2013, the CFC Board of Directors authorized the allocation of $1 million of fiscal year 2013 net earnings to the ~~cooperative educational fund.~~

Cooperative Educational Fund. In July 2013, the CFC Board of Directors authorized the allocation of the fiscal year 2013 net earnings as follows: $138 million to the ~~members’~~members' capital reserve and $81 million to members in the form of ~~patronage.~~patronage capital. In July 2013, the CFC Board of Directors authorized the retirement of allocated net earnings totaling $41 million, representing ~~50 percent~~50% of the fiscal year 2013 allocation. ~~It is anticipated that this~~This amount ~~will be~~was returned to members in cash in October 2013. Future allocations and retirements of net earnings may be made annually as determined by the CFC Board of Directors with due regard for CFC’s financial condition. The CFC Board of Directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable cooperative law.

~~As indicated above,~~In May 2014, the CFC Board of Directors authorized the allocation of $1 million of fiscal year 2014 net earnings to the Cooperative Educational Fund. In July 2014, the CFC Board of Directors authorized the allocation of the fiscal year 2014 net earnings as follows: $75 million to the members’ capital reserve and $79 million to members in the form of patronage capital. In July 2014, the CFC Board of Directors authorized the retirement of allocated net earnings totaling $40 million, representing 50% of the fiscal year 2014 allocation. It is anticipated that this amount will be returned to members in cash in the second quarter of fiscal year 2015. Future allocations and retirements of net earnings may be made annually as determined by the CFC Board of Directors with due regard for CFC’s financial condition. The CFC Board of Directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable cooperative law.

Ratio Analysis

Leverage Ratio

Debt-to-Equity Ratio

CONTINGENT OFF-BALANCE SHEET OBLIGATIONS

Guarantees

Table 13: Guarantees Outstanding



(Dollars in thousands)	2014		2013		Increase/ (Decrease)
Total by guarantee type:
Long-term tax-exempt bonds	$	518,360	$	547,970	$	(29,610	)
Letters of credit	431,064		447,683		(16,619		)
Other guarantees	115,398		117,118		(1,720		)
Total	$	1,064,822	$	1,112,771	$	(47,949	)
Total by company:
CFC	$	997,187	$	1,063,113	$	(65,926	)
RTFC	2,304		3,711		(1,407		)
NCSC	65,331		45,947		19,384
Total	$	1,064,822	$	1,112,771	$	(47,949	)

At May 31, 2014 and 2013, 61% and 63% of total guarantees, respectively, were secured by a mortgage lien on substantially all of the system’s assets and future revenue.

Table 14 summarizes the off-balance sheet obligations at May 31, 2014, and the related maturities by fiscal year and thereafter.

Table 14: Maturities of Guaranteed Obligations



	Outstanding Balance		Maturities of Guaranteed Obligations
(Dollars in thousands)	Outstanding Balance		2015		2016		2017		2018		2019		Thereafter
Guarantees ⁽¹⁾	$	1,064,822	$	353,298	$	31,885	$	25,624	$	147,843	$	28,573	$	477,599

See "Note 12—Guarantees" for additional information.

Unadvanced Loan Commitments

Table 15: Unadvanced Loan Commitments



(Dollars in thousands)	2014		% of Total		2013		% of Total
Long-term	$	4,710,273	34	%	$	4,718,162	35	%
Line of credit	9,201,805		66		8,704,586		65
Total	$	13,912,078	100	%	$	13,422,748	100	%

the majority of the line of credit unadvanced commitments provide backup liquidity to our borrowers; and

historically, we have experienced a very low utilization rate on line of credit loan facilities, whether or not there is a material adverse change clause at the time of advance.

electric cooperatives generally execute loan contracts to cover multi-year work plans and, as such, it is expected that advances on such loans will occur over a multi-year period;

we generally do not charge our borrowers a fee on long-term unadvanced commitments; and

long-term unadvanced commitments generally expire five years from the date of the loan agreement.

Table 16 summarizes the available balance under committed lines of credit at May 31, 2014, and the related maturities by fiscal year.

Table 16: Notional Maturities of Committed Lines of Credit



	Available Balance	Notional Maturities of Committed Lines of Credit
(Dollars in thousands)	Available Balance	2015	2016	2017	2018	2019
Committed lines of credit	$2,274,388	$19,238	$61,000	$456,855	$678,839	$1,058,456

CREDIT RISK

Credit Policies, Process and Monitoring

Loan Underwriting and Credit Monitoring

the size of the loan request;

the intended use of proceeds;

whether collateral is required and, if so, whether there is sufficient collateral;

the borrower’s risk profile as measured by financial ratios and other risk characteristics; and

other factors that might be applicable to the type of borrower or the specific loan request being considered.

Our Credit Risk Management group facilitates the activities of our internal credit review process, establishes credit policies and oversees our internal risk rating system for all of our borrowers. We maintain an internal risk rating system that produces a borrower rating and a facility rating. The borrower risk rating (“BRR”) measures risk of default for each borrower based on both quantitative and qualitative measurements specific to the particular business line of the borrower. The facility risk rating measures risk of loss in the event of default for a particular facility based on the collateral or guarantee associated with the loan. Risk ratings are used to assess the credit quality of the overall portfolio, segments of the portfolio and each of our borrowers and to establish credit limitations, and are factors in determining applicable credit approval levels.

Risk ratings for borrowers with outstanding and/or unadvanced loan or guarantee commitments are updated at least annually upon the receipt of audited financial information and are reviewed in connection with any new credit request. Annually, an outside financial services consultant conducts a review of the accuracy of specific BRRs and the risk rating process and credit extension practices for compliance with policy and consistency in application. Such consultant provides recommendations to management and the boards of directors for improvement, as well as progress on the resolution of items from prior reviews. Management is responsible for implementing the recommendations accepted by the boards of directors. In addition, we compare our internal ratings to the publicly available ratings for our borrowers that have public ratings.

Loan Approval

The respective boards of directors establish loan policies for CFC, RTFC, and NCSC, each of which includes a credit approval matrix. The credit approval matrix specifies the required level of approval applicable to any proposed loan based on factors such as the amount of the loan, the BRR, whether credit limitations are exceeded and whether the loan is to a member associated with one of our current directors. Through the approval matrix, the respective boards have delegated the authority to approve certain loans to the Chief Executive Officer, who has further delegated approval authority to the Corporate Credit Committee and management in the lending groups while retaining sole authority to approve certain loans.

approval. The Chief Executive Officer or board receives a credit recommendation by management from the lending group and the Corporate Credit Committee.

Policies for each of the three boards require that any exceptions to applicable credit limitations and any loan or extension of credit to a borrower that has a director, or immediate family member of such director, of such board, (i) as one of its directors or officers, (ii) as a beneficial owner, or (iii) that controls such borrowers, must be approved by the board of directors ~~allocated $138 million~~or the established committee of the relevant board, with the director associated with the borrower requesting the loan being recused from receipt of the written materials, discussions and voting. Notwithstanding the foregoing, the Chief Executive Officer has the authority to approve emergency lines of credit and certain other loans and lines of credit, including circumstances where a director is either a director or officer of the borrower receiving such credit. The Chief Executive Officer has the authority to approve loans originated to be sold or participated through the Company’s whole-loan sale programs. Such lines of credit and loans must meet specific qualifying criteria and must be underwritten in accordance with the prevailing standards and terms.

Nonperforming Loans

The Credit Risk Management group, on an ongoing basis, and the Corporate Credit Committee, on a quarterly basis, monitor all borrowers with past due, non-accrual and restructured facilities as well as other borrowers that warrant a higher degree of monitoring. The Credit Risk Management group presents reports on such matters to the ~~members’ capital reserve. The~~Chief Executive Officer and boards of directors. Once a borrower is classified as nonperforming, we typically place the loan on non-accrual status and reverse all accrued and unpaid interest back to the date of the last payment.

A loan is written off in the period that it becomes evident that collectability is highly unlikely; however, our efforts to recover all charged-off amounts may continue. Management makes a recommendation to the respective board of directors ~~decided~~as to the timing and amount of loan write-offs based on various factors, including, but not limited to, cash flow analysis and the fair value of the collateral securing the borrower’s loans.

Advances on Previously Approved Loan Facilities

Covenant Compliance

Credit Concentration

CFC, RTFC and NCSC each have policies that ~~$74~~limit the amount of credit that can be extended to individual borrowers or a controlled group of borrowers. The credit limitation policies cap the total exposure and unsecured exposure to the borrower based on an assessment of the borrower’s risk profile and our internal risk rating system. As a member-owned cooperative lender, we balance the needs of our members and the risk associated with concentrations of credit exposure. Each board of directors must approve new credit requests from borrowers with total exposure or unsecured exposure in excess of the limits in the policies. Management may use syndicated credit arrangements, loan participations and loan sales to manage credit concentrations.

Total exposure, as defined by the policies, generally includes the following:

loans outstanding, excluding loans guaranteed by RUS;

our guarantees of the borrower’s obligations including letters of credit commitments;

unadvanced loan commitments;

borrower guarantees to us of another borrower’s debt; and

any other indebtedness with us, unless guaranteed by the U.S. government.

Credit Risk Profile

Loan Concentration

Table 17: Loan Concentration



	2014			2013
State/Territory	Number of Borrowers	Loan Balance %		Number of Borrowers	Loan Balance %
Texas	73	15.43	%	72	14.76	%
Georgia	45	6.40		46	6.90
Missouri	52	5.19		52	5.27
Colorado	27	4.33		28	4.72
Alaska	19	4.28		20	3.26
Kansas	35	4.18		39	4.23
Illinois	30	3.70		31	3.72
Kentucky	25	3.34		25	3.48
Minnesota	56	3.33		54	3.57
Florida	16	2.96		16	2.68
Oklahoma	28	2.98		30	2.98
Indiana	45	2.82		45	2.89
North Carolina	30	2.69		31	2.78
Pennsylvania	20	2.57		16	2.22
Arkansas	20	2.42		19	2.73
South Carolina	25	2.38		26	2.53
Utah	6	2.37		6	2.60
Ohio	34	2.20		31	2.13
Iowa	41	2.15		42	2.10
North Dakota	12	2.09		13	1.68
Wisconsin	27	1.93		26	2.08
Alabama	26	1.88		26	1.83
Mississippi	20	1.78		22	1.85
Washington	11	1.65		11	1.69
Virginia	18	1.66		19	1.80
Oregon	23	1.62		24	1.67
Nevada	5	1.54		5	1.22
Louisiana	10	1.45		12	1.46
Wyoming	13	1.27		13	1.36
Arizona	12	0.97		12	1.10
South Dakota	32	0.96		32	1.01
Maryland	3	0.91		3	1.15
Montana	26	0.76		28	0.70
Idaho	13	0.70		13	0.73
Michigan	16	0.61		16	0.71
New Hampshire	2	0.52		2	0.48
New Mexico	16	0.36		15	0.39
Tennessee	18	0.26		19	0.29
Vermont	6	0.25		6	0.31
Hawaii	2	0.22		1	0.12
Nebraska	20	0.21		19	0.21
California	4	0.17		5	0.13
New York	7	0.16		7	0.11
Delaware	1	0.11		1	0.12
New Jersey	3	0.10		2	0.10
West Virginia	2	0.08		2	0.08
Maine	4	0.06		4	0.07
District of Columbia	1	—		1	—
Total	980	100	%	988	100	%

Texas has the largest number of total borrowers compared with other states (see table above); and

Texas has the largest number of power supply systems (10 of our 71 power supply system borrowers), which require significantly more capital than distribution systems and telecommunications systems.

At May 31, 2014 and 2013, the total exposure outstanding to any one borrower or controlled group did not exceed 2.1% and 2.2%, respectively, of total loans and guarantees outstanding. At May 31, 2014 and 2013, the 10 largest borrowers included four distribution systems and six power supply systems. Table 18 represents the exposure to the 10 largest borrowers as a percentage of total exposure presented by type of exposure and by company at May 31, 2014 and 2013.

Table 18: Credit Exposure to 10 Largest Borrowers



	2014				2013				Increase/ (Decrease)
(Dollars in thousands)	Amount		% of Total		Amount		% of Total		Increase/ (Decrease)
Total by exposure type:
Loans	$	3,155,857	14	%	$	2,981,627	14	%	$	174,230
Guarantees	363,325		2		374,340		2		(11,015		)
Total credit exposure to 10 largest borrowers	$	3,519,182	16	%	$	3,355,967	16	%	$	163,215

Total by company:
CFC	$	3,378,698	15	%	$	3,240,755	15	%	$	137,943
NCSC	140,484		1		115,212		1		25,272
Total credit exposure to 10 largest borrowers	$	3,519,182	16	%	$	3,355,967	16	%	$	163,215

Security Provisions

Except when providing line of credit loans, we generally lend to our members on a senior secured basis. Long-term loans are generally secured on parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower with exceptions typical in utility mortgages. Line of credit loans are generally unsecured. Guarantee reimbursement obligations are generally secured on parity with other secured creditors by substantially all assets and revenue of the borrower or by the underlying financed asset. In addition to the collateral pledged to secure our loans, borrowers are also required to set rates charged to customers to achieve certain financial ratios. At May 31, 2014 and 2013, $2,118 million and $2,243 million out of $20,467 million and $20,296 million, respectively, of total loans outstanding were unsecured, representing 10% and 11% of total loans outstanding, respectively.

Pledged Loans and Loans on Deposit

Table 19 summarizes our secured debt or debt requiring collateral on deposit, the excess collateral pledged and our unencumbered loans at May 31, 2014 and 2013.

Table 19: Unencumbered Loans



(Dollars in thousands)	2014			2013
Total loans to members	$	20,466,925		$	20,296,317
Less: Total secured debt or debt requiring collateral on deposit	(12,242,446		)	(11,380,734		)
Excess collateral pledged or on deposit ⁽¹⁾	(1,917,184		)	(1,825,020		)
Unencumbered loans	$	6,307,295		$	7,090,563
Unencumbered loans as a percentage of total loans	31		%	35		%

⁽¹⁾ Excludes cash collateral pledged to secure debt. Unless and until there is an event of default, we can withdraw excess collateral as long as there is 100% coverage of the secured debt. If there is an event of default under most of our indentures, we can only withdraw this excess collateral if we substitute cash of equal value.

Nonperforming and Restructured Loans

Table 20 summarizes nonperforming and restructured loans as a percentage of total loans and total loans and guarantees outstanding at May 31, 2014, 2013, 2012, 2011 and 2010.

Table 20: Nonperforming and Restructured Loans



(Dollars in thousands)	2014			2013			2012			2011			2010
Nonperforming loans ⁽¹⁾	$	2,095		$	15,497		$	41,213		$	31,344		$	560,527
Percent of loans outstanding	0.01		%	0.08		%	0.22		%	0.16		%	2.90		%
Percent of loans and guarantees outstanding	0.01			0.07			0.20			0.15			2.73

Restructured loans	$	7,584		$	46,953		$	455,689		$	474,381		$	508,044
Percent of loans outstanding	0.04		%	0.23		%	2.41		%	2.45		%	2.63		%
Percent of loans and guarantees outstanding	0.04			0.22			2.26			2.32			2.48

Total nonperforming and restructured loans	$	9,679		$	62,450		$	496,902		$	505,725		$	1,068,571
Percent of loans outstanding	0.05		%	0.31		%	2.63		%	2.61		%	5.53		%
Percent of loans and guarantees outstanding	0.05			0.29			2.46			2.47			5.21

Total non-accrual loans	$	9,679		$	23,081		$	41,213		$	465,312		$	1,022,924
Percent of loans outstanding	0.05		%	0.11		%	0.22		%	2.41		%	5.29		%
Percent of loans and guarantees outstanding	0.05			0.11			0.20			2.28			4.99

⁽¹⁾ All loans classified as nonperforming were on non-accrual status.

A borrower is classified as nonperforming when any one of the following criteria is met:

principal or interest payments on any loan to the borrower are past due 90 days or more;

as a result of court proceedings, repayment on the original terms is not anticipated; or

for some other reason, management does not expect the timely repayment of principal and interest.

Once a borrower is classified as nonperforming, we generally place the loan on non-accrual status and reverse all accrued and unpaid interest back to the date of the last payment.

At May 31, 2014 and 2013, nonperforming loans totaled $2 million, or 0.01%, of loans outstanding and $15 million or 0.1%, of loans outstanding, respectively. One borrower in this group is currently seeking a buyer for its system, as it is not anticipated that it will have sufficient cash flow to repay its loans without the proceeds from the sale of the business. It is currently anticipated that even with the sale of the business, there will not be sufficient funds to repay the full amount owed. We have approval rights with respect to the sale of this company.

At May 31, 2014 and 2013, we had restructured loans totaling $8 million, or 0.04%, of loans outstanding and $47 million, or 0.2%, of loans outstanding, respectively, all of which were performing according to their restructured terms. Approximately $0.1 million of interest income was accrued on restructured loans during the ~~amount allocated~~year ended May 31, 2014 compared to approximately $14 million of interest income during the ~~members’ capital reserve~~prior year. One of the restructured loans totaling $39 million at May 31, 2013, ~~resulting from~~was refinanced without concession during the ~~refinements made by~~first quarter of fiscal year 2014, with the ~~Company in the assumptions used~~new loan classified as performing at May 31, 2014.

Based on our analysis, we believe we have an appropriate allowance for loan losses for our exposure related to ~~estimate its~~nonperforming and restructured loans at May 31, 2014.

Allowance for Loan Losses

The allowance for loan losses is ~~not intended~~determined based upon evaluation of the loan portfolio, past loss experience, specific problem loans, economic conditions and other pertinent factors that, in management’s judgment, could affect the risk of loss in the loan portfolio. We review and adjust the allowance quarterly to ~~be allocated~~cover estimated probable losses in the portfolio. All loans are written off in the period that it becomes evident that collectability is highly unlikely; however, our efforts to recover all charged-off amounts may continue. Management believes the allowance for ~~distribution~~loan losses is appropriate to ~~members and instead is intended to serve as an enhancement to our capital reserves. The board of directors will continue to evaluate appropriate levels of capital for CFC.~~cover estimated probable portfolio losses.

~~Noncontrolling interest represents 100 percent of~~

Under a guarantee agreement, CFC reimburses RTFC and NCSC ~~equity as~~for loan losses. Table 21 summarizes activity in the ~~members~~allowance for loan losses including a disaggregation by company.

Table 21: Allowance for Loan Losses



	As of and for the years ended May 31,
(Dollars in thousands)	2014			2013			2012			2011			2010
Beginning balance	$	54,325		$	143,326		$	161,177		$	592,764		$	622,960
Provision for loan losses	3,498			(70,091		)	(18,108		)	(83,010		)	(30,415		)
Net (charge-offs) recoveries	(1,394		)	(18,910		)	257			(348,577		)	219
Ending balance	$	56,429		$	54,325		$	143,326		$	161,177		$	592,764
`
Allowance for loan losses by company:
CFC	$	45,600		$	41,246		$	126,941		$	143,706		$	177,655
RTFC	4,282			9,158			8,562			8,389			406,214
NCSC	6,547			3,921			7,823			9,082			8,895
Total	$	56,429		$	54,325		$	143,326		$	161,177		$	592,764

As a percentage of total loans outstanding	0.28		%	0.27		%	0.76		%	0.84		%	3.07		%
As a percentage of total nonperforming loans outstanding	2,693.51			350.55			347.77			514.22			105.75
As a percentage of total restructured loans outstanding	744.05			115.70			31.45			33.98			116.68
As a percentage of total loans on non-accrual	583.00			235.37			347.77			34.64			57.95

Our allowance for loan losses increased by $2 million during the year ended May 31, 2014, due to an increase in the allowance held for general loans of ~~RTFC~~$2 million and ~~NCSC own or control 100 percent of~~an increase in the ~~interest in their respective companies.~~

In accordance with District of Columbia cooperative law, its bylaws and board policies, RTFC allocates its net earnings to its patrons, a cooperative educational fund and a general reserve, if necessary. RTFC’s bylaws require that it allocate at least 1 percent of net earnings to a cooperative educational fund. An allocation to the general reserve is made, if necessary, to maintain the balancequalitative component of the general reserve ~~at 50 percent~~ of $3 million, partially offset by a decrease in the ~~membership fees collected. The remainder is allocated to borrowers in proportion to their patronage. RTFC retires at least 20 percent~~the allowance held for impaired loans of ~~the allocation for that year to members in cash prior to filing the applicable tax return. Any additional amounts are retired as determined by the RTFC Board~~$2 million and net charge-offs of ~~Directors with due regard for RTFC’s financial condition. In January 2013, RTFC retired~~ $1 million, due primarily to ~~its members representing 20 percent~~the sale of ~~allocated net earnings~~one of our impaired loans during the year ended May 31, 2014.

Our allowance for ~~fiscal~~loan losses decreased by $89 million during the year ~~2012. In accordance with District of Columbia cooperative law and its bylaws and board policies, NCSC allocates its net earnings~~ended May 31, 2013 due to a ~~cooperative educational fund, to a general reserve, if necessary, and to board-approved reserves. NCSC’s bylaws require the allocation~~decrease to the ~~cooperative educational fund to be at least 0.25 percent~~allowance held for general loans of ~~its net earnings. An allocation to~~$56 million, a decrease in the qualitative component of the general reserve of $11 million, the decrease to the allowance held for impaired loans of $3 million and a $19 million write-off for one of our borrowers that was moved from nonperforming loans to restructured loans during the year ended May 31, 2013. The decrease in the allowance held for general loans is ~~made,~~due to refinements in assumptions used to estimate our allowance for loan losses. See "Results of Operations—Provision for Loan Losses" and "Note 3—Loans and Commitments" for additional information.

On a quarterly basis, we review all nonperforming and restructured borrowers, as well as certain additional borrowers selected based on known facts and circumstances, to determine if the loans to the borrowers are impaired and/or to determine if there are changes to a previously impaired loan. We calculate a borrower’s impairment based on the expected future cash flows or the fair value of the collateral securing our loans to the borrower if cash flow cannot be estimated. As events related to the borrower take place and economic conditions and our assumptions change, the impairment calculations will change. At May 31, 2014 and 2013, there was a total specific allowance for loan losses balance of $0.4 million and $3 million, respectively, related to impaired loans totaling $10 million and $62 million, respectively.

LIQUIDITY RISK

We face liquidity risk in funding our loan portfolio and refinancing our maturing obligations. Our Asset Liability Committee is responsible for monitoring our management of risks related to liquidity, interest rates, and counterparty credit and to ensure consistent access to funding that is in alignment with our strategic goals. The committee’s mandate is to review CFC’s liquidity, as well as the relationship of interest rates and tenor of our assets to our liabilities and, as a result, our spread between interest income and interest expense. Functional responsibilities of this committee include reviewing and approving funding options and investment opportunities and reviewing trends in funding alternatives and risk exposure. Performance results and budget deviations also are reviewed. If necessary, the organization’s asset-liability strategy is reviewed for modification to react to the current market environment. Our Asset Liability Committee monitors liquidity risk by establishing and monitoring liquidity

targets, as well as strategies and tactics to meet those targets, and ensuring that sufficient liquidity is available for unanticipated contingencies.

We face liquidity risk in the funding of our loan portfolio based on member demand for new loans, although as presented in Table 23, our projected sources and uses of liquidity chart, we expect over the next six quarters that advances on our long-term loans will exceed long-term loan repayments by an estimated $522 million. We offer long-term loans to our members with maturities of up to 35 years, and the weighted average maturity for our loan portfolio is currently about 16 years. We typically do not match fund individual loans with a debt instrument of similar final maturity. Debt instruments such as membership subordinated certificates and loan and guarantee subordinated certificates have maturities that vary from the term of the associated loan or guarantee to 100 years; member capital securities have maturities of 30 or 35 years; and subordinated deferrable debt has been issued with maturities of up to 30 years. Collateral trust bonds and medium-term notes have typically been issued with maturities of two, three, five, seven and 10 years.

At May 31, 2014, we had $3,887 million of commercial paper, select notes, daily liquidity fund notes and bank bid notes scheduled to mature during the next 12 months. We expect to continue to maintain member investments in commercial paper, select notes and the daily liquidity fund notes at recent levels of approximately $1,869 million. Dealer commercial paper and bank bid notes decreased from $2,160 million at May 31, 2013 to $1,994 million at May 31, 2014. We expect that the dealer commercial paper balance will fluctuate to offset changes in demand from our members. We intend to maintain the current level of commercial paper outstanding while favorable market conditions exist. We intend to limit the balance of dealer commercial paper and bank bid notes outstanding to 15% or less of total debt outstanding. At May 31, 2014, 15% of total debt outstanding was $3,094 million. In order to access the ~~general~~commercial paper markets at current levels, we believe we need to maintain our current ratings for commercial paper of P1 from Moody’s Investors Service and A1 from Standard & Poor’s Corporation.

We use our bank lines of credit primarily as backup liquidity for dealer and member commercial paper. At May 31, 2014, we had $3,224 million in available lines of credit with financial institutions. We expect to be in compliance with the covenants under our revolving credit agreements; therefore, we could draw on these facilities to repay dealer or member commercial paper that cannot be rolled over in the event of market disruptions.

~~reserve at 50 percent of~~At May 31, 2014, we had long-term debt maturing in the ~~membership fees collected. The NCSC Board of Directors has~~next 12 months totaling $1,512 million. In addition to our access to the ~~authority to determine if~~dealer and ~~when net earnings~~member commercial paper markets as discussed above, we believe we will be ~~retired~~able to ~~members.~~refinance these maturing obligations because:

Based on our funding sources available and past history, we believe we will meet our obligation to refinance the remaining $378 million of medium-term notes sold through dealers and $383 million of medium-term notes sold to members that mature over the next 12 months with new medium-term notes including those in the retail notes market.

We expect to maintain the ability to obtain funding through the capital markets. During the year ended May 31, 2014 we issued $1,264 million of medium-term notes and $1,618 million of collateral trust bonds.

We had up to $2,232 million available under a note purchase agreement with the Federal Agricultural Mortgage Corporation at May 31, 2014. We can borrow up to $3,900 million under this revolving note purchase agreement at any time through January 11, 2016, subject to market conditions for debt issued by the Federal Agricultural Mortgage Corporation. During the year ended May 31, 2014, we issued notes totaling $151 million under this agreement.

As discussed in further detail under "Off-Balance Sheet Obligations," at May 31, 2014, we were the liquidity provider for a total of $570 million of variable-rate tax-exempt bonds issued for our member cooperatives. During the year ended May 31, 2014, we were not required to perform as liquidity provider pursuant to these obligations.

At May 31, 2014, we had a total of $431 million of letters of credit outstanding for the benefit of our members. That total includes $125 million for the purpose of providing liquidity for pollution control bonds. The remaining $306 million represents obligations for which we may be required to advance funds based on various trigger events included in the letters of credit. If we are required to advance funds, the member is obligated to pay such amounts to CFC.

We expect that our current sources of liquidity, along with our $339 million of cash on hand, $55 million of investments and $550 million of time deposits at May 31, 2014, will allow us to meet our obligations and to fund our operations over the next 12 to 18 months.

Liquidity and Capital Resources Profile

The following section discusses our expected sources and uses of liquidity. At May 31, 2014, we expect that our current sources of liquidity will allow us to issue the debt required to fund our operations over the next 12 to 18 months.

~~Contractual Obligations~~Debt-to-Equity Ratio

The ~~following table summarizes our long-term contractual obligations~~debt-to-equity ratio is calculated by dividing the sum of total liabilities outstanding by total equity. The debt-to-equity ratio based on this formula at May 31, ~~2013 and the scheduled reductions by fiscal year and thereafter:~~

(dollar amounts in millions) 2014 2015 2016 2017 2018 Thereafter Total
Contractual Obligations (1)

Long-term debt due in less than one year $ 3,669 $ - $ - $ - $ - $ - $ 3,669
Long-term debt - 997 1,421 623 41 7,615 10,697
Subordinated deferrable debt - - - - - 400 400
Members’ subordinated certificates (2)
- 31 20 15 7 1,527 1,600
Contractual interest on long-term debt (3)
598 544 521 499 458 5,497 8,117
Total contractual obligations $ 4,267 $ 1,572 $ 1,962 $ 1,137 $ 506 $ 15,039 $ 24,483

~~(1) The table does not include contractual obligations of the entities that are included in our foreclosed assets.~~

(2) Excludes loan subordinated certificates totaling $128 million that amortize annually based on the outstanding balance of the related loan and $1 million in payments not received on certificates subscribed and unissued. There are many items that affect the amortization of2014 was 21.91-to-1, a loan, such as loan conversions, loan repricing at the end of an interest rate term and prepayments; therefore, an amortization schedule cannot be maintained for these certificates. Over the past three years, annual amortization on these certificates has averaged $24 million. In fiscal year 2013, amortization represented 18 percent of amortizing loan subordinated certificates outstanding.

~~(3) Represents the interest obligation on our debt based on terms and conditions~~decrease from 26.21-to-1 at May 31, 2013. The decrease in the debt-to-equity ratio is primarily due to the increase of $159 million in total equity as discussed under the "Financial Condition—Liabilities and Equity"

~~Off-Balance Sheet Obligations~~For internal management purposes, the debt-to-equity ratio calculation is adjusted to exclude derivative liabilities, debt used to fund loans guaranteed by RUS, subordinated deferrable debt and subordinated certificates from liabilities; uses members’ equity rather than total equity; and adds subordinated deferrable debt and subordinated certificates to determine adjusted equity. At May 31, 2014 and 2013, the adjusted debt-to-equity ratio was 5.90-to-1 and 5.76-to-1, respectively. See "Non-GAAP Financial Measures" for further explanation and a reconciliation of the adjustments made to the debt-to-equity ratio calculation. The increase in the adjusted debt-to-equity ratio is due to the increase of $252 million in adjusted liabilities and the decrease of $34 million in adjusted equity.

CONTINGENT OFF-BALANCE SHEET OBLIGATIONS

Guarantees

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

~~The following table breaks out~~ Table 13 shows our guarantees outstanding by type of guarantee and by company at May ~~31:~~31, 2014 and 2013.

Table 13: Guarantees Outstanding



(Dollars in thousands)	2014		2013		Increase/ (Decrease)
Total by guarantee type:
Long-term tax-exempt bonds	$	518,360	$	547,970	$	(29,610	)
Letters of credit	431,064		447,683		(16,619		)
Other guarantees	115,398		117,118		(1,720		)
Total	$	1,064,822	$	1,112,771	$	(47,949	)
Total by company:
CFC	$	997,187	$	1,063,113	$	(65,926	)
RTFC	2,304		3,711		(1,407		)
NCSC	65,331		45,947		19,384
Total	$	1,064,822	$	1,112,771	$	(47,949	)

(dollar amounts in thousands) 2013 2012
Increase/
(decrease)

Total by guarantee type:
Long-term tax-exempt bonds $ 547,970 $ 573,110 $ (25,140)
Indemnifications of tax benefit transfers 784 49,771 (48,987)
Letters of credit 447,683 504,920 (57,237)
Other guarantees 116,334 121,529 (5,195)
Total $ 1,112,771 $ 1,249,330 $ (136,559)
Total by company:
CFC $ 1,063,113 $ 1,202,031 $ (138,918)
RTFC 3,711 1,026 2,685
NCSC 45,947 46,273 (326)
Total $ 1,112,771 $ 1,249,330 $ (136,559)

In addition to the letters of credit listed in the table, under master letter of credit facilities in place at May 31, ~~2013,~~2014, we may be required to issue up to an additional ~~$280~~$163 million in letters of credit to third parties for the benefit of our members. As of May 31, ~~2013,~~2014, all of our master letter of credit facilities were subject to material adverse change clauses at the time of issuance. Also, at May 31, ~~2013~~2014 we had hybrid letter of credit facilities totaling ~~$2,027~~$1,762 million that represent commitments that may be used for the issuance of letters of credit or line of credit loan advances, at the option of a borrower, and are included in unadvanced loan commitments for line of credit loans reported in ~~Note 3,~~ "Note 3—Loans and ~~Commitments~~.Commitments." Hybrid letter of credit facilities subject to material adverse change clauses at the time of issuance totaled ~~$454~~$476 million at May 31, ~~2013.~~2014. Prior to issuing a letter of credit under these facilities, we would confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with the letter of credit terms and conditions. The remaining commitment under hybrid letter of credit facilities of ~~$1,573~~$1,286 million may be used for the issuance of letters of credit as long as the borrower is in compliance with the terms and conditions of the facility.

~~In addition to the guarantees described above, at~~At May 31, ~~2013,~~2014, we ~~are~~were the liquidity provider for a total of ~~$598~~$570 million of variable-rate tax-exempt bonds issued for our member cooperatives. ~~While~~As liquidity provider on these $570 million of tax-exempt bonds, we are required to purchase bonds that are tendered or put by investors. Investors provide notice to the remarketing agent that they will tender or put a certain amount of bonds ~~are in variable-rate mode, in return for a fee,~~at the next interest rate reset date. If the remarketing agent is unable to sell such bonds to other investors by the next interest rate reset date, we have unconditionally agreed to purchase such bonds. On a total of $445 million of the bonds ~~tendered or put~~ for ~~redemption if~~which we are liquidity provider at May 31, 2014, we also provide a guarantee of all principal and interest, which is included in table 13 as a long-term tax-exempt bond guarantee. On a total of $125 million of tax-exempt bonds, our obligation as liquidity provider is in the ~~remarketing agents are unable to~~

~~sell such bonds to other investors. During~~form of a letter of credit, which is reflected in table 13 in our letters of credit. For the year ended May 31, ~~2013,~~2014, we were not required to perform as liquidity provider pursuant to these obligations.

At May 31, 2014 and 2013, 61% and ~~2012, 63 percent and 69 percent~~63% of total guarantees, respectively, were secured by a mortgage lien on substantially all of the system’s assets and future revenue.

The decrease in total guarantees during the year ended May 31, ~~2013~~2014 is primarily due to a net decrease to the total amount of ~~indemnifications of tax benefit transfers~~long-term tax-exempt bonds and letters of credit outstanding. At May 31, ~~2013~~2014 and ~~2012,~~2013, we recorded a guarantee liability ~~totaling $25~~of $22 million and ~~$29~~$25 million, respectively, which represents the contingent and non-contingent ~~exposure~~exposures related to guarantees and liquidity obligations associated with our members’ debt.

~~The following table~~Table 14 summarizes the off-balance sheet obligations at May 31, ~~2013,~~2014, and the related maturities by fiscal year and ~~thereafter as follows:~~thereafter.

Maturities of guaranteed obligations
Outstanding
(dollar amounts in thousands) balance 2014 2015 2016 2017 2018 Thereafter
Guarantees (1)
$ 1,112,771 $ 211,851 $ 248,210 $ 24,070 $ 16,082 $ 142,328 $ 470,230
Table 14: Maturities of Guaranteed Obligations



	Outstanding Balance		Maturities of Guaranteed Obligations
(Dollars in thousands)	Outstanding Balance		2015		2016		2017		2018		2019		Thereafter
Guarantees ⁽¹⁾	$	1,064,822	$	353,298	$	31,885	$	25,624	$	147,843	$	28,573	$	477,599

⁽¹⁾ At May 31, ~~2013,~~2014, we are the guarantor and liquidity provider for ~~$473~~$445 million of tax-exempt bonds issued for our member cooperatives. We have also issued letters of credit to provide standby liquidity for an additional $125 million of tax-exempt bonds.

See "Note 12—Guarantees" for additional information.

~~Contingent Off-Balance Sheet Obligations~~

Unadvanced Loan Commitments

Unadvanced commitments represent approved and executed loan contracts for which the funds have not been advanced. At May 31, ~~2013~~2014 and ~~2012,~~2013, we had the following amount of unadvanced commitments on loans to our borrowers.

(dollar amounts in thousands) 2013 % of Total 2012 % of Total
Long-term $ 4,718,162 35 % $ 5,437,881 38 %
Line of credit 8,704,586 65 8,691,543 62
Total $ 13,422,748 100 % $ 14,129,424 100 %
Table 15: Unadvanced Loan Commitments



(Dollars in thousands)	2014		% of Total		2013		% of Total
Long-term	$	4,710,273	34	%	$	4,718,162	35	%
Line of credit	9,201,805		66		8,704,586		65
Total	$	13,912,078	100	%	$	13,422,748	100	%

A total of ~~$1,703~~$2,274 million and ~~$1,303~~$1,703 million of unadvanced commitments at May 31, ~~2013~~2014 and ~~2012,~~2013, respectively, represented unadvanced commitments related to committed lines of credit that are not subject to a material adverse change clause at the time of each advance. As such, we would be required to advance amounts on these committed facilities as long as the borrower is in compliance with the terms and conditions of the facility. The remaining available amounts at May 31, ~~2013~~2014 and ~~2012~~2013 are conditional obligations because they are generally subject to material adverse change clauses. Prior to making an advance on these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions.

Unadvanced commitments related to line of credit loans are ~~typically~~generally revolving facilities for periods not to exceed five years. It is our experience that unadvanced commitments related to line of credit loans are usually not fully drawn. We believe these conditions will continue for the following reasons:

·	electric cooperatives generate a significant amount of cash from the collection of revenue from their customers, so they usually do not need to draw down on loan commitments to supplement operating cash flow;

·	the majority of the line of credit unadvanced commitments provide backup liquidity to our borrowers; and

·	historically, we have experienced a very low utilization rate on line of credit loan facilities, whether or not there is a material adverse change clause at the time of advance.

·	~~electric cooperatives typically~~electric cooperatives generally execute loan contracts to cover multi-year work plans and, as such, it is expected that advances on such loans will occur over a multi-year period;

·	electric cooperatives generate a significant amount of cash from the collection of revenue from their customers, thus operating cash flow is available to reduce the amount of additional funding needed for capital expenditures and maintenance;

·	we generally do not charge our borrowers a fee on long-term unadvanced commitments; and

·	long-term unadvanced commitments generally expire five years from the date of the loan agreement.

however, record a reserve for credit losses associated with our unadvanced commitments for committed facilities that are not subject to a material adverse change clause.

~~The following table~~Table 16 summarizes the available balance under committed lines of credit at May 31, ~~2013,~~2014, and the related maturities by fiscal ~~year as follows:~~year.

Available Notional maturities of committed lines of credit
(dollar amounts in thousands) balance 2014 2015 2016 2017 2018
Committed lines of credit $1,702,683 $ 151,703 $ 91,354 $ 198,800 $ 501,224 $ 759,602
Table 16: Notional Maturities of Committed Lines of Credit



	Available Balance	Notional Maturities of Committed Lines of Credit
(Dollars in thousands)	Available Balance	2015	2016	2017	2018	2019
Committed lines of credit	$2,274,388	$19,238	$61,000	$456,855	$678,839	$1,058,456

CREDIT RISK

~~Ratio Analysis~~Credit Policies, Process and Monitoring

~~Leverage Ratio~~

Loan Underwriting and Credit Monitoring

We have lending staff that underwrite distribution loans, power supply loans and telecommunications loans. Our borrowers contact the lending staff to discuss the borrower’s need for funding. Our lending staff evaluates the borrower’s request to determine whether the requested credit represents an acceptable credit risk. The ~~leverage ratio~~lending staff's evaluation of the proposed credit includes, but is ~~calculated~~not limited to:

the size of the loan request;

the intended use of proceeds;

whether collateral is required and, if so, whether there is sufficient collateral;

the borrower’s risk profile as measured by ~~dividing~~financial ratios and other risk characteristics; and

other factors that might be applicable to the ~~sum~~type of borrower or the specific loan request being considered.

Our Credit Risk Management group facilitates the activities of our internal credit review process, establishes credit policies and oversees our internal risk rating system for all of our borrowers. We maintain an internal risk rating system that produces a borrower rating and a facility rating. The borrower risk rating (“BRR”) measures risk of default for each borrower based on both quantitative and qualitative measurements specific to the particular business line of the borrower. The facility risk rating measures risk of loss in the event of default for a particular facility based on the collateral or guarantee associated with the loan. Risk ratings are used to assess the credit quality of the overall portfolio, segments of the portfolio and each of our borrowers and to establish credit limitations, and are factors in determining applicable credit approval levels.

Risk ratings for borrowers with outstanding and/or unadvanced loan or guarantee commitments are updated at least annually upon the receipt of audited financial information and are reviewed in connection with any new credit request. Annually, an outside financial services consultant conducts a review of the accuracy of specific BRRs and the risk rating process and credit extension practices for compliance with policy and consistency in application. Such consultant provides recommendations to management and the boards of directors for improvement, as well as progress on the resolution of items from prior reviews. Management is responsible for implementing the recommendations accepted by the boards of directors. In addition, we compare our internal ratings to the publicly available ratings for our borrowers that have public ratings.

Loan Approval

The respective boards of directors establish loan policies for CFC, RTFC, and NCSC, each of which includes a credit approval matrix. The credit approval matrix specifies the required level of approval applicable to any proposed loan based on factors such as the amount of the loan, the BRR, whether credit limitations are exceeded and whether the loan is to a member associated with one of our current directors. Through the approval matrix, the respective boards have delegated the authority to approve certain loans to the Chief Executive Officer, who has further delegated approval authority to the Corporate Credit Committee and management in the lending groups while retaining sole authority to approve certain loans.

approval. The Chief Executive Officer or board receives a credit recommendation by management from the lending group and the Corporate Credit Committee.

Nonperforming Loans

The Credit Risk Management group, on an ongoing basis, and the Corporate Credit Committee, on a quarterly basis, monitor all borrowers with past due, non-accrual and restructured facilities as well as other borrowers that warrant a higher degree of monitoring. The Credit Risk Management group presents reports on such matters to the Chief Executive Officer and boards of directors. Once a borrower is classified as nonperforming, we typically place the loan on non-accrual status and reverse all accrued and unpaid interest back to the date of the last payment.

Advances on Previously Approved Loan Facilities

Covenant Compliance

Credit Concentration

Total exposure, as defined by the policies, generally includes the following:

loans outstanding, excluding loans guaranteed by RUS;

our guarantees of the borrower’s obligations including letters of credit commitments;

unadvanced loan commitments;

borrower guarantees to us of another borrower’s debt; and

any other indebtedness with us, unless guaranteed by the U.S. government.

The calculation of total ~~liabilities~~exposure includes facilities that are approved but not yet closed and facilities that might not be drawn by the borrower, such as lines of credit and loan commitments for projects that may be delayed or eventually canceled.

Credit Risk Profile

Loan Concentration

Table 17: Loan Concentration



	2014			2013
State/Territory	Number of Borrowers	Loan Balance %		Number of Borrowers	Loan Balance %
Texas	73	15.43	%	72	14.76	%
Georgia	45	6.40		46	6.90
Missouri	52	5.19		52	5.27
Colorado	27	4.33		28	4.72
Alaska	19	4.28		20	3.26
Kansas	35	4.18		39	4.23
Illinois	30	3.70		31	3.72
Kentucky	25	3.34		25	3.48
Minnesota	56	3.33		54	3.57
Florida	16	2.96		16	2.68
Oklahoma	28	2.98		30	2.98
Indiana	45	2.82		45	2.89
North Carolina	30	2.69		31	2.78
Pennsylvania	20	2.57		16	2.22
Arkansas	20	2.42		19	2.73
South Carolina	25	2.38		26	2.53
Utah	6	2.37		6	2.60
Ohio	34	2.20		31	2.13
Iowa	41	2.15		42	2.10
North Dakota	12	2.09		13	1.68
Wisconsin	27	1.93		26	2.08
Alabama	26	1.88		26	1.83
Mississippi	20	1.78		22	1.85
Washington	11	1.65		11	1.69
Virginia	18	1.66		19	1.80
Oregon	23	1.62		24	1.67
Nevada	5	1.54		5	1.22
Louisiana	10	1.45		12	1.46
Wyoming	13	1.27		13	1.36
Arizona	12	0.97		12	1.10
South Dakota	32	0.96		32	1.01
Maryland	3	0.91		3	1.15
Montana	26	0.76		28	0.70
Idaho	13	0.70		13	0.73
Michigan	16	0.61		16	0.71
New Hampshire	2	0.52		2	0.48
New Mexico	16	0.36		15	0.39
Tennessee	18	0.26		19	0.29
Vermont	6	0.25		6	0.31
Hawaii	2	0.22		1	0.12
Nebraska	20	0.21		19	0.21
California	4	0.17		5	0.13
New York	7	0.16		7	0.11
Delaware	1	0.11		1	0.12
New Jersey	3	0.10		2	0.10
West Virginia	2	0.08		2	0.08
Maine	4	0.06		4	0.07
District of Columbia	1	—		1	—
Total	980	100	%	988	100	%

Texas has the largest number of total borrowers compared with other states (see table above); and

Texas has the largest number of power supply systems (10 of our 71 power supply system borrowers), which require significantly more capital than distribution systems and telecommunications systems.

At May 31, 2014 and 2013, the total exposure outstanding to any one borrower or controlled group did not exceed 2.1% and 2.2%, respectively, of total loans and guarantees outstanding. At May 31, 2014 and 2013, the 10 largest borrowers included four distribution systems and six power supply systems. Table 18 represents the exposure to the 10 largest borrowers as a percentage of total exposure presented by type of exposure and by company at May 31, 2014 and 2013.

Table 18: Credit Exposure to 10 Largest Borrowers



	2014				2013				Increase/ (Decrease)
(Dollars in thousands)	Amount		% of Total		Amount		% of Total		Increase/ (Decrease)
Total by exposure type:
Loans	$	3,155,857	14	%	$	2,981,627	14	%	$	174,230
Guarantees	363,325		2		374,340		2		(11,015		)
Total credit exposure to 10 largest borrowers	$	3,519,182	16	%	$	3,355,967	16	%	$	163,215

Total by company:
CFC	$	3,378,698	15	%	$	3,240,755	15	%	$	137,943
NCSC	140,484		1		115,212		1		25,272
Total credit exposure to 10 largest borrowers	$	3,519,182	16	%	$	3,355,967	16	%	$	163,215

Security Provisions

Except when providing line of credit loans, we generally lend to our members on a senior secured basis. Long-term loans are generally secured on parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower with exceptions typical in utility mortgages. Line of credit loans are generally unsecured. Guarantee reimbursement obligations are generally secured on parity with other secured creditors by substantially all assets and revenue of the borrower or by the underlying financed asset. In addition to the collateral pledged to secure our loans, borrowers are also required to set rates charged to customers to achieve certain financial ratios. At May 31, 2014 and 2013, $2,118 million and $2,243 million out of $20,467 million and $20,296 million, respectively, of total loans outstanding were unsecured, representing 10% and 11% of total loans outstanding, respectively.

Pledged Loans and Loans on Deposit

Table 19 summarizes our secured debt or debt requiring collateral on deposit, the excess collateral pledged and our unencumbered loans at May 31, 2014 and 2013.

Table 19: Unencumbered Loans



(Dollars in thousands)	2014			2013
Total loans to members	$	20,466,925		$	20,296,317
Less: Total secured debt or debt requiring collateral on deposit	(12,242,446		)	(11,380,734		)
Excess collateral pledged or on deposit ⁽¹⁾	(1,917,184		)	(1,825,020		)
Unencumbered loans	$	6,307,295		$	7,090,563
Unencumbered loans as a percentage of total loans	31		%	35		%

Nonperforming and Restructured Loans

Table 20 summarizes nonperforming and restructured loans as a percentage of total loans and total loans and guarantees outstanding ~~by total equity. Based~~at May 31, 2014, 2013, 2012, 2011 and 2010.

Table 20: Nonperforming and Restructured Loans



(Dollars in thousands)	2014			2013			2012			2011			2010
Nonperforming loans ⁽¹⁾	$	2,095		$	15,497		$	41,213		$	31,344		$	560,527
Percent of loans outstanding	0.01		%	0.08		%	0.22		%	0.16		%	2.90		%
Percent of loans and guarantees outstanding	0.01			0.07			0.20			0.15			2.73

Restructured loans	$	7,584		$	46,953		$	455,689		$	474,381		$	508,044
Percent of loans outstanding	0.04		%	0.23		%	2.41		%	2.45		%	2.63		%
Percent of loans and guarantees outstanding	0.04			0.22			2.26			2.32			2.48

Total nonperforming and restructured loans	$	9,679		$	62,450		$	496,902		$	505,725		$	1,068,571
Percent of loans outstanding	0.05		%	0.31		%	2.63		%	2.61		%	5.53		%
Percent of loans and guarantees outstanding	0.05			0.29			2.46			2.47			5.21

Total non-accrual loans	$	9,679		$	23,081		$	41,213		$	465,312		$	1,022,924
Percent of loans outstanding	0.05		%	0.11		%	0.22		%	2.41		%	5.29		%
Percent of loans and guarantees outstanding	0.05			0.11			0.20			2.28			4.99

⁽¹⁾ All loans classified as nonperforming were on non-accrual status.

A borrower is classified as nonperforming when any one of the following criteria is met:

principal or interest payments on any loan to the borrower are past due 90 days or more;

as a result of court proceedings, repayment on the original terms is not anticipated; or

for some other reason, management does not expect the timely repayment of principal and interest.

Once a borrower is classified as nonperforming, we generally place the loan on non-accrual status and reverse all accrued and unpaid interest back to the date of the last payment.

At May 31, 2014 and 2013, nonperforming loans totaled $2 million, or 0.01%, of loans outstanding and $15 million or 0.1%, of loans outstanding, respectively. One borrower in this ~~formula,~~group is currently seeking a buyer for its system, as it is not anticipated that it will have sufficient cash flow to repay its loans without the ~~leverage ratio~~proceeds from the sale of the business. It is currently anticipated that even with the sale of the business, there will not be sufficient funds to repay the full amount owed. We have approval rights with respect to the sale of this company.

At May 31, 2014 and 2013, we had restructured loans totaling $8 million, or 0.04%, of loans outstanding and $47 million, or 0.2%, of loans outstanding, respectively, all of which were performing according to their restructured terms. Approximately $0.1 million of interest income was accrued on restructured loans during the year ended May 31, 2014 compared to approximately $14 million of interest income during the prior year. One of the restructured loans totaling $39 million at May 31, 2013, was ~~27.58-to-1, a decrease from 42.20-to-1~~refinanced without concession during the first quarter of fiscal year 2014, with the new loan classified as performing at May 31, ~~2012.~~2014.

Based on our analysis, we believe we have an appropriate allowance for loan losses for our exposure related to nonperforming and restructured loans at May 31, 2014.

Allowance for Loan Losses

The allowance for loan losses is determined based upon evaluation of the loan portfolio, past loss experience, specific problem loans, economic conditions and other pertinent factors that, in management’s judgment, could affect the risk of loss in the loan portfolio. We review and adjust the allowance quarterly to cover estimated probable losses in the portfolio. All loans are written off in the period that it becomes evident that collectability is highly unlikely; however, our efforts to recover all charged-off amounts may continue. Management believes the allowance for loan losses is appropriate to cover estimated probable portfolio losses.

Under a guarantee agreement, CFC reimburses RTFC and NCSC for loan losses. Table 21 summarizes activity in the allowance for loan losses including a disaggregation by company.

Table 21: Allowance for Loan Losses



	As of and for the years ended May 31,
(Dollars in thousands)	2014			2013			2012			2011			2010
Beginning balance	$	54,325		$	143,326		$	161,177		$	592,764		$	622,960
Provision for loan losses	3,498			(70,091		)	(18,108		)	(83,010		)	(30,415		)
Net (charge-offs) recoveries	(1,394		)	(18,910		)	257			(348,577		)	219
Ending balance	$	56,429		$	54,325		$	143,326		$	161,177		$	592,764
`
Allowance for loan losses by company:
CFC	$	45,600		$	41,246		$	126,941		$	143,706		$	177,655
RTFC	4,282			9,158			8,562			8,389			406,214
NCSC	6,547			3,921			7,823			9,082			8,895
Total	$	56,429		$	54,325		$	143,326		$	161,177		$	592,764

As a percentage of total loans outstanding	0.28		%	0.27		%	0.76		%	0.84		%	3.07		%
As a percentage of total nonperforming loans outstanding	2,693.51			350.55			347.77			514.22			105.75
As a percentage of total restructured loans outstanding	744.05			115.70			31.45			33.98			116.68
As a percentage of total loans on non-accrual	583.00			235.37			347.77			34.64			57.95

Our allowance for loan losses increased by $2 million during the year ended May 31, 2014, due to an increase in the allowance held for general loans of $2 million and an increase in the qualitative component of the general reserve of $3 million, partially offset by a decrease in the the allowance held for impaired loans of $2 million and net charge-offs of $1 million, due primarily to the sale of one of our impaired loans during the year ended May 31, 2014.

Our allowance for loan losses decreased by $89 million during the year ended May 31, 2013 due to a decrease to the allowance held for general loans of $56 million, a decrease in the qualitative component of the general reserve of $11 million, the decrease to the allowance held for impaired loans of $3 million and a $19 million write-off for one of our borrowers that was moved from nonperforming loans to restructured loans during the year ended May 31, 2013. The decrease in the ~~leverage ratio~~allowance held for general loans is due to refinements in assumptions used to estimate our allowance for loan losses. See "Results of Operations—Provision for Loan Losses" and "Note 3—Loans and Commitments" for additional information.

On a quarterly basis, we review all nonperforming and restructured borrowers, as well as certain additional borrowers selected based on known facts and circumstances, to determine if the ~~increase~~loans to the borrowers are impaired and/or to determine if there are changes to a previously impaired loan. We calculate a borrower’s impairment based on the expected future cash flows or the fair value of ~~$321~~the collateral securing our loans to the borrower if cash flow cannot be estimated. As events related to the borrower take place and economic conditions and our assumptions change, the impairment calculations will change. At May 31, 2014 and 2013, there was a total specific allowance for loan losses balance of $0.4 million and $3 million, respectively, related to impaired loans totaling $10 million and $62 million, respectively.

LIQUIDITY RISK

targets, as well as strategies and tactics to meet those targets, and ensuring that sufficient liquidity is available for unanticipated contingencies.

At May 31, 2014, we had $3,887 million of commercial paper, select notes, daily liquidity fund notes and bank bid notes scheduled to mature during the next 12 months. We expect to continue to maintain member investments in commercial paper, select notes and the daily liquidity fund notes at recent levels of approximately $1,869 million. Dealer commercial paper and bank bid notes decreased from $2,160 million at May 31, 2013 to $1,994 million at May 31, 2014. We expect that the dealer commercial paper balance will fluctuate to offset changes in demand from our members. We intend to maintain the current level of commercial paper outstanding while favorable market conditions exist. We intend to limit the balance of dealer commercial paper and bank bid notes outstanding to 15% or less of total debt outstanding. At May 31, 2014, 15% of total debt outstanding was $3,094 million. In order to access the commercial paper markets at current levels, we believe we need to maintain our current ratings for commercial paper of P1 from Moody’s Investors Service and A1 from Standard & Poor’s Corporation.

We use our bank lines of credit primarily as backup liquidity for dealer and member commercial paper. At May 31, 2014, we had $3,224 million in ~~total equity and~~available lines of credit with financial institutions. We expect to be in compliance with the ~~decrease of $137 million in total guarantees, partially offset by the increase of $1,800 million in total liabilities as discussed~~covenants under ~~the~~ ~~Liabilities and Equity~~ ~~section of~~ ~~Financial Condition~~ ~~and under~~ ~~Off-Balance Sheet Obligations~~.

~~For covenant compliance on~~ our revolving credit ~~agreements and for internal management purposes,~~agreements; therefore, we could draw on these facilities to repay dealer or member commercial paper that cannot be rolled over in the leverage ratio calculation is adjusted to exclude derivative liabilities, debt used to fund loans guaranteed by RUS, subordinated deferrable debt and subordinated certificates from liabilities; uses members’ equity rather than total equity; and adds subordinated deferrable debt and subordinated certificates to calculate adjusted equity.event of market disruptions.

At May 31, ~~2013~~2014, we had long-term debt maturing in the next 12 months totaling $1,512 million. In addition to our access to the dealer and ~~2012,~~member commercial paper markets as discussed above, we believe we will be able to refinance these maturing obligations because:

Based on our funding sources available and past history, we believe we will meet our obligation to refinance the ~~adjusted leverage ratio was 6.11-to-1~~remaining $378 million of medium-term notes sold through dealers and ~~6.46-to-1, respectively. See~~ ~~Non-GAAP Financial Measures~~$383 million of medium-term notes sold to members that mature over the next 12 months with new medium-term notes including those in the retail notes market.

We had up to $2,232 million available under a note purchase agreement with the Federal Agricultural Mortgage Corporation at May 31, 2014. We can borrow up to $3,900 million under this revolving note purchase agreement at any time through January 11, 2016, subject to market conditions for ~~further explanation~~debt issued by the Federal Agricultural Mortgage Corporation. During the year ended May 31, 2014, we issued notes totaling $151 million under this agreement.

We had up to $624 million available under committed loan facilities from the Federal Financing Bank at May 31, 2014. A total of $124 million is available for advance through October 15, 2015 and a ~~reconciliation~~total of $500 million is available for advance through October 15, 2016. During the ~~adjustments~~year ended May 31, 2014, we ~~make to~~borrowed $625 million under our ~~leverage ratio calculation. The decrease to~~committed loan facilities with the adjusted leverage ratio was due to the decrease of $137 million in guarantees and the increase of $421 million in adjusted equity partially offset by the increase of $1,746 in adjusted liabilities as discussed under the ~~Liabilities and Equity~~ ~~section of~~ ~~Financial Condition~~ ~~and under~~ ~~Off-Balance Sheet Obligations~~.Federal Financing Bank.

Liquidity and Capital Resources Profile

Debt-to-Equity Ratio

The debt-to-equity ratio is calculated by dividing the sum of total liabilities outstanding by total equity. The debt-to-equity ratio based on this formula at May 31, ~~2013~~2014 was ~~26.21-to-1,~~21.91-to-1, a decrease from ~~39.65-to-1~~26.21-to-1 at May 31, ~~2012.~~2013. The decrease in the debt-to-equity ratio is primarily due to the increase of ~~$321~~$159 million in total equity ~~partially offset by the increase of $1,800 million in total liabilities~~ as discussed under the "Financial Condition—Liabilities and ~~Equity~~ ~~section of~~ ~~Financial Condition~~.Equity"

For internal management purposes, the debt-to-equity ratio calculation is adjusted to exclude derivative liabilities, debt used to fund loans guaranteed by RUS, subordinated deferrable debt and subordinated certificates from liabilities; uses members’ equity rather than total equity; and adds subordinated deferrable debt and subordinated certificates to determine adjusted equity. At May 31, ~~2013~~2014 and ~~2012,~~2013, the adjusted debt-to-equity ratio was ~~5.76-to-1~~5.90-to-1 and ~~6.01-to-1,~~5.76-to-1, respectively. See ~~Non-GAAP~~"Non-GAAP Financial ~~Measures~~Measures" for further explanation and a reconciliation of the adjustments made to the debt-to-equity ratio calculation. The ~~decrease~~increase in the adjusted debt-to-equity ratio is due to the increase of ~~$421~~$252 million in adjusted ~~equity~~liabilities and the decrease of $34 million in adjusted equity.

CONTINGENT OFF-BALANCE SHEET OBLIGATIONS

Guarantees

Table 13: Guarantees Outstanding



(Dollars in thousands)	2014		2013		Increase/ (Decrease)
Total by guarantee type:
Long-term tax-exempt bonds	$	518,360	$	547,970	$	(29,610	)
Letters of credit	431,064		447,683		(16,619		)
Other guarantees	115,398		117,118		(1,720		)
Total	$	1,064,822	$	1,112,771	$	(47,949	)
Total by company:
CFC	$	997,187	$	1,063,113	$	(65,926	)
RTFC	2,304		3,711		(1,407		)
NCSC	65,331		45,947		19,384
Total	$	1,064,822	$	1,112,771	$	(47,949	)

At May 31, 2014 and 2013, 61% and 63% of total guarantees, respectively, were secured by a mortgage lien on substantially all of the system’s assets and future revenue.

Table 14 summarizes the off-balance sheet obligations at May 31, 2014, and the related maturities by fiscal year and thereafter.

Table 14: Maturities of Guaranteed Obligations



	Outstanding Balance		Maturities of Guaranteed Obligations
(Dollars in thousands)	Outstanding Balance		2015		2016		2017		2018		2019		Thereafter
Guarantees ⁽¹⁾	$	1,064,822	$	353,298	$	31,885	$	25,624	$	147,843	$	28,573	$	477,599

See "Note 12—Guarantees" for additional information.

Unadvanced Loan Commitments

Table 15: Unadvanced Loan Commitments



(Dollars in thousands)	2014		% of Total		2013		% of Total
Long-term	$	4,710,273	34	%	$	4,718,162	35	%
Line of credit	9,201,805		66		8,704,586		65
Total	$	13,912,078	100	%	$	13,422,748	100	%

the majority of the line of credit unadvanced commitments provide backup liquidity to our borrowers; and

historically, we have experienced a very low utilization rate on line of credit loan facilities, whether or not there is a material adverse change clause at the time of advance.

electric cooperatives generally execute loan contracts to cover multi-year work plans and, as such, it is expected that advances on such loans will occur over a multi-year period;

we generally do not charge our borrowers a fee on long-term unadvanced commitments; and

long-term unadvanced commitments generally expire five years from the date of the loan agreement.

Table 16 summarizes the available balance under committed lines of credit at May 31, 2014, and the related maturities by fiscal year.

Table 16: Notional Maturities of Committed Lines of Credit



	Available Balance	Notional Maturities of Committed Lines of Credit
(Dollars in thousands)	Available Balance	2015	2016	2017	2018	2019
Committed lines of credit	$2,274,388	$19,238	$61,000	$456,855	$678,839	$1,058,456

CREDIT RISK

Credit Policies, Process and Monitoring

Loan Underwriting and Credit Monitoring

the size of the loan request;

the intended use of proceeds;

whether collateral is required and, if so, whether there is sufficient collateral;

the borrower’s risk profile as measured by financial ratios and other risk characteristics; and

other factors that might be applicable to the type of borrower or the specific loan request being considered.

Our Credit Risk Management group facilitates the activities of our internal credit review process, establishes credit policies and oversees our internal risk rating system for all of our borrowers. We maintain an internal risk rating system that produces a borrower rating and a facility rating. The borrower risk rating (“BRR”) measures risk of default for each borrower based on both quantitative and qualitative measurements specific to the particular business line of the borrower. The facility risk rating measures risk of loss in the event of default for a particular facility based on the collateral or guarantee associated with the loan. Risk ratings are used to assess the credit quality of the overall portfolio, segments of the portfolio and each of our borrowers and to establish credit limitations, and are factors in determining applicable credit approval levels.

Risk ratings for borrowers with outstanding and/or unadvanced loan or guarantee commitments are updated at least annually upon the receipt of audited financial information and are reviewed in connection with any new credit request. Annually, an outside financial services consultant conducts a review of the accuracy of specific BRRs and the risk rating process and credit extension practices for compliance with policy and consistency in application. Such consultant provides recommendations to management and the boards of directors for improvement, as well as progress on the resolution of items from prior reviews. Management is responsible for implementing the recommendations accepted by the boards of directors. In addition, we compare our internal ratings to the publicly available ratings for our borrowers that have public ratings.

Loan Approval

The respective boards of directors establish loan policies for CFC, RTFC, and NCSC, each of which includes a credit approval matrix. The credit approval matrix specifies the required level of approval applicable to any proposed loan based on factors such as the amount of the loan, the BRR, whether credit limitations are exceeded and whether the loan is to a member associated with one of our current directors. Through the approval matrix, the respective boards have delegated the authority to approve certain loans to the Chief Executive Officer, who has further delegated approval authority to the Corporate Credit Committee and management in the lending groups while retaining sole authority to approve certain loans.

approval. The Chief Executive Officer or board receives a credit recommendation by management from the lending group and the Corporate Credit Committee.

Nonperforming Loans

The Credit Risk Management group, on an ongoing basis, and the Corporate Credit Committee, on a quarterly basis, monitor all borrowers with past due, non-accrual and restructured facilities as well as other borrowers that warrant a higher degree of monitoring. The Credit Risk Management group presents reports on such matters to the Chief Executive Officer and boards of directors. Once a borrower is classified as nonperforming, we typically place the loan on non-accrual status and reverse all accrued and unpaid interest back to the date of the last payment.

Advances on Previously Approved Loan Facilities

Covenant Compliance

Credit Concentration

Total exposure, as defined by the policies, generally includes the following:

loans outstanding, excluding loans guaranteed by RUS;

our guarantees of the borrower’s obligations including letters of credit commitments;

unadvanced loan commitments;

borrower guarantees to us of another borrower’s debt; and

any other indebtedness with us, unless guaranteed by the U.S. government.

Credit Risk Profile

Loan Concentration

Table 17: Loan Concentration



	2014			2013
State/Territory	Number of Borrowers	Loan Balance %		Number of Borrowers	Loan Balance %
Texas	73	15.43	%	72	14.76	%
Georgia	45	6.40		46	6.90
Missouri	52	5.19		52	5.27
Colorado	27	4.33		28	4.72
Alaska	19	4.28		20	3.26
Kansas	35	4.18		39	4.23
Illinois	30	3.70		31	3.72
Kentucky	25	3.34		25	3.48
Minnesota	56	3.33		54	3.57
Florida	16	2.96		16	2.68
Oklahoma	28	2.98		30	2.98
Indiana	45	2.82		45	2.89
North Carolina	30	2.69		31	2.78
Pennsylvania	20	2.57		16	2.22
Arkansas	20	2.42		19	2.73
South Carolina	25	2.38		26	2.53
Utah	6	2.37		6	2.60
Ohio	34	2.20		31	2.13
Iowa	41	2.15		42	2.10
North Dakota	12	2.09		13	1.68
Wisconsin	27	1.93		26	2.08
Alabama	26	1.88		26	1.83
Mississippi	20	1.78		22	1.85
Washington	11	1.65		11	1.69
Virginia	18	1.66		19	1.80
Oregon	23	1.62		24	1.67
Nevada	5	1.54		5	1.22
Louisiana	10	1.45		12	1.46
Wyoming	13	1.27		13	1.36
Arizona	12	0.97		12	1.10
South Dakota	32	0.96		32	1.01
Maryland	3	0.91		3	1.15
Montana	26	0.76		28	0.70
Idaho	13	0.70		13	0.73
Michigan	16	0.61		16	0.71
New Hampshire	2	0.52		2	0.48
New Mexico	16	0.36		15	0.39
Tennessee	18	0.26		19	0.29
Vermont	6	0.25		6	0.31
Hawaii	2	0.22		1	0.12
Nebraska	20	0.21		19	0.21
California	4	0.17		5	0.13
New York	7	0.16		7	0.11
Delaware	1	0.11		1	0.12
New Jersey	3	0.10		2	0.10
West Virginia	2	0.08		2	0.08
Maine	4	0.06		4	0.07
District of Columbia	1	—		1	—
Total	980	100	%	988	100	%

Texas has the largest number of total borrowers compared with other states (see table above); and

Texas has the largest number of power supply systems (10 of our 71 power supply system borrowers), which require significantly more capital than distribution systems and telecommunications systems.

At May 31, 2014 and 2013, the total exposure outstanding to any one borrower or controlled group did not exceed 2.1% and 2.2%, respectively, of total loans and guarantees outstanding. At May 31, 2014 and 2013, the 10 largest borrowers included four distribution systems and six power supply systems. Table 18 represents the exposure to the 10 largest borrowers as a percentage of total exposure presented by type of exposure and by company at May 31, 2014 and 2013.

Table 18: Credit Exposure to 10 Largest Borrowers



	2014				2013				Increase/ (Decrease)
(Dollars in thousands)	Amount		% of Total		Amount		% of Total		Increase/ (Decrease)
Total by exposure type:
Loans	$	3,155,857	14	%	$	2,981,627	14	%	$	174,230
Guarantees	363,325		2		374,340		2		(11,015		)
Total credit exposure to 10 largest borrowers	$	3,519,182	16	%	$	3,355,967	16	%	$	163,215

Total by company:
CFC	$	3,378,698	15	%	$	3,240,755	15	%	$	137,943
NCSC	140,484		1		115,212		1		25,272
Total credit exposure to 10 largest borrowers	$	3,519,182	16	%	$	3,355,967	16	%	$	163,215

Security Provisions

Except when providing line of credit loans, we generally lend to our members on a senior secured basis. Long-term loans are generally secured on parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower with exceptions typical in utility mortgages. Line of credit loans are generally unsecured. Guarantee reimbursement obligations are generally secured on parity with other secured creditors by substantially all assets and revenue of the borrower or by the underlying financed asset. In addition to the collateral pledged to secure our loans, borrowers are also required to set rates charged to customers to achieve certain financial ratios. At May 31, 2014 and 2013, $2,118 million and $2,243 million out of $20,467 million and $20,296 million, respectively, of total loans outstanding were unsecured, representing 10% and 11% of total loans outstanding, respectively.

Pledged Loans and Loans on Deposit

Table 19 summarizes our secured debt or debt requiring collateral on deposit, the excess collateral pledged and our unencumbered loans at May 31, 2014 and 2013.

Table 19: Unencumbered Loans



(Dollars in thousands)	2014			2013
Total loans to members	$	20,466,925		$	20,296,317
Less: Total secured debt or debt requiring collateral on deposit	(12,242,446		)	(11,380,734		)
Excess collateral pledged or on deposit ⁽¹⁾	(1,917,184		)	(1,825,020		)
Unencumbered loans	$	6,307,295		$	7,090,563
Unencumbered loans as a percentage of total loans	31		%	35		%

Nonperforming and Restructured Loans

Table 20 summarizes nonperforming and restructured loans as a percentage of total loans and total loans and guarantees outstanding at May 31, 2014, 2013, 2012, 2011 and 2010.

Table 20: Nonperforming and Restructured Loans



(Dollars in thousands)	2014			2013			2012			2011			2010
Nonperforming loans ⁽¹⁾	$	2,095		$	15,497		$	41,213		$	31,344		$	560,527
Percent of loans outstanding	0.01		%	0.08		%	0.22		%	0.16		%	2.90		%
Percent of loans and guarantees outstanding	0.01			0.07			0.20			0.15			2.73

Restructured loans	$	7,584		$	46,953		$	455,689		$	474,381		$	508,044
Percent of loans outstanding	0.04		%	0.23		%	2.41		%	2.45		%	2.63		%
Percent of loans and guarantees outstanding	0.04			0.22			2.26			2.32			2.48

Total nonperforming and restructured loans	$	9,679		$	62,450		$	496,902		$	505,725		$	1,068,571
Percent of loans outstanding	0.05		%	0.31		%	2.63		%	2.61		%	5.53		%
Percent of loans and guarantees outstanding	0.05			0.29			2.46			2.47			5.21

Total non-accrual loans	$	9,679		$	23,081		$	41,213		$	465,312		$	1,022,924
Percent of loans outstanding	0.05		%	0.11		%	0.22		%	2.41		%	5.29		%
Percent of loans and guarantees outstanding	0.05			0.11			0.20			2.28			4.99

⁽¹⁾ All loans classified as nonperforming were on non-accrual status.

A borrower is classified as nonperforming when any one of the following criteria is met:

principal or interest payments on any loan to the borrower are past due 90 days or more;

as a result of court proceedings, repayment on the original terms is not anticipated; or

for some other reason, management does not expect the timely repayment of principal and interest.

Once a borrower is classified as nonperforming, we generally place the loan on non-accrual status and reverse all accrued and unpaid interest back to the date of the last payment.

At May 31, 2014 and 2013, we had restructured loans totaling $8 million, or 0.04%, of loans outstanding and $47 million, or 0.2%, of loans outstanding, respectively, all of which were performing according to their restructured terms. Approximately $0.1 million of interest income was accrued on restructured loans during the year ended May 31, 2014 compared to approximately $14 million of interest income during the prior year. One of the restructured loans totaling $39 million at May 31, 2013, was refinanced without concession during the first quarter of fiscal year 2014, with the new loan classified as performing at May 31, 2014.

Based on our analysis, we believe we have an appropriate allowance for loan losses for our exposure related to nonperforming and restructured loans at May 31, 2014.

Allowance for Loan Losses

Under a guarantee agreement, CFC reimburses RTFC and NCSC for loan losses. Table 21 summarizes activity in the allowance for loan losses including a disaggregation by company.

Table 21: Allowance for Loan Losses



	As of and for the years ended May 31,
(Dollars in thousands)	2014			2013			2012			2011			2010
Beginning balance	$	54,325		$	143,326		$	161,177		$	592,764		$	622,960
Provision for loan losses	3,498			(70,091		)	(18,108		)	(83,010		)	(30,415		)
Net (charge-offs) recoveries	(1,394		)	(18,910		)	257			(348,577		)	219
Ending balance	$	56,429		$	54,325		$	143,326		$	161,177		$	592,764
`
Allowance for loan losses by company:
CFC	$	45,600		$	41,246		$	126,941		$	143,706		$	177,655
RTFC	4,282			9,158			8,562			8,389			406,214
NCSC	6,547			3,921			7,823			9,082			8,895
Total	$	56,429		$	54,325		$	143,326		$	161,177		$	592,764

As a percentage of total loans outstanding	0.28		%	0.27		%	0.76		%	0.84		%	3.07		%
As a percentage of total nonperforming loans outstanding	2,693.51			350.55			347.77			514.22			105.75
As a percentage of total restructured loans outstanding	744.05			115.70			31.45			33.98			116.68
As a percentage of total loans on non-accrual	583.00			235.37			347.77			34.64			57.95

Our allowance for loan losses increased by $2 million during the year ended May 31, 2014, due to an increase in the allowance held for general loans of $2 million and an increase in the qualitative component of the general reserve of $3 million, partially offset by a decrease in the ~~increase~~the allowance held for impaired loans of ~~$1,746~~$2 million and net charge-offs of $1 million, due primarily to the sale of one of our impaired loans during the year ended May 31, 2014.

Our allowance for loan losses decreased by $89 million during the year ended May 31, 2013 due to a decrease to the allowance held for general loans of $56 million, a decrease in the qualitative component of the general reserve of $11 million, the decrease to the allowance held for impaired loans of $3 million and a $19 million write-off for one of our borrowers that was moved from nonperforming loans to restructured loans during the year ended May 31, 2013. The decrease in the allowance held for general loans is due to refinements in assumptions used to estimate our allowance for loan losses. See "Results of Operations—Provision for Loan Losses" and "Note 3—Loans and Commitments" for additional information.

LIQUIDITY RISK

targets, as well as strategies and tactics to meet those targets, and ensuring that sufficient liquidity is available for unanticipated contingencies.

At May 31, 2014, we had $3,887 million of commercial paper, select notes, daily liquidity fund notes and bank bid notes scheduled to mature during the next 12 months. We expect to continue to maintain member investments in commercial paper, select notes and the daily liquidity fund notes at recent levels of approximately $1,869 million. Dealer commercial paper and bank bid notes decreased from $2,160 million at May 31, 2013 to $1,994 million at May 31, 2014. We expect that the dealer commercial paper balance will fluctuate to offset changes in demand from our members. We intend to maintain the current level of commercial paper outstanding while favorable market conditions exist. We intend to limit the balance of dealer commercial paper and bank bid notes outstanding to 15% or less of total debt outstanding. At May 31, 2014, 15% of total debt outstanding was $3,094 million. In order to access the commercial paper markets at current levels, we believe we need to maintain our current ratings for commercial paper of P1 from Moody’s Investors Service and A1 from Standard & Poor’s Corporation.

We use our bank lines of credit primarily as backup liquidity for dealer and member commercial paper. At May 31, 2014, we had $3,224 million in ~~adjusted liabilities.~~available lines of credit with financial institutions. We expect to be in compliance with the covenants under our revolving credit agreements; therefore, we could draw on these facilities to repay dealer or member commercial paper that cannot be rolled over in the event of market disruptions.

At May 31, 2014, we had long-term debt maturing in the next 12 months totaling $1,512 million. In addition to our access to the dealer and member commercial paper markets as discussed above, we believe we will be able to refinance these maturing obligations because:

Liquidity and Capital Resources Profile

The following section discusses our expected sources and uses of liquidity. At May 31, ~~2013,~~2014, we expect that our current sources of liquidity will allow us to issue the debt required to fund our operations over the next 12 to 18 months.

Contractual Obligations

In the normal course of business, we enter into various contractual obligations that may require future cash payments that affect our short- and long-term liquidity and capital resource needs. Table 22 summarizes, by remaining contractual maturity, our significant contractual cash obligations based on the undiscounted future cash payments as of May 31, 2014. The ~~table~~actual timing and amounts of future cash payments may differ from the amounts presented below due to a number of factors, such as discretionary debt repurchases. Table 22 excludes certain obligations where the obligation is subject to valuation based on ~~page 51~~market factors, such as derivatives. Contractual obligations related to entities included in foreclosed assets are also excluded from the table.

Table 22: Contractual Obligations



(Dollars in millions)	2015		2016		2017		2018		2019		Thereafter		Total
Short-term debt	$	3,887	$	—	$	—	$	—	$	—	$	—	$	3,887
Long-term debt due in less than one year	1,512		—		—		—		—		—		$	1,512
Long-term debt	170		1,494		1,445		766		1,808		7,621		13,304
Subordinated deferrable debt	—		—		—		—		—		400		400
Members’ subordinated certificates⁽¹⁾	61		21		15		11		19		1,267		1,394
Contractual interest on long-term debt⁽²⁾	579		552		527		475		383		4,727		7,243
Total contractual obligations	$	6,209	$	2,067	$	1,987	$	1,252	$	2,210	$	14,015	$	27,740

⁽¹⁾Excludes loan subordinated certificates totaling $127 million that amortize annually based on the outstanding balance of the related loan and $1 million in payments not received on certificates subscribed and unissued. There are many items that affect the amortization of a loan, such as loan conversions, loan repricing at the end of an interest rate term and prepayments; therefore, an amortization schedule cannot be maintained for these certificates. Over the past fiscal year, annual amortization on these certificates was $13 million. In fiscal year 2014, amortization represented 10% of amortizing loan subordinated certificates outstanding.

⁽²⁾Represents the interest obligation on our long-term debt based on terms and conditions at May 31, 2014.

Projected Near-Term Sources and Uses of Liquidity

Table 23 shows the projected sources and uses of cash by quarter through November 30, ~~2014.~~2015. In analyzing our projected liquidity position, we track key items identified in the ~~chart on page 51.~~table below. The long-term debt maturities represent the scheduled maturities of our outstanding term debt for the period presented. The long-term loan advances represent our current best estimate of the member demand for our loans, the amount and the timing of which are subject to change. The long-term loan amortization and repayments represent the scheduled long-term loan amortization for the outstanding loans at May 31, ~~2013,~~2014, as well as our current estimate for the repayment of long-term loans. The estimate of the amount and timing of long-term loan repayments is subject to change. We assumed the issuance of commercial paper, medium-term notes and other long-term debt, including collateral trust bonds and private placement of term debt, to maintain matched funding within our loan portfolio and to allow our revolving lines of credit to provide backup liquidity for our outstanding commercial paper.

Commercial paper repayments in the table below do not represent scheduled maturities but rather the assumed use of excess cash to pay down the commercial paper balance.

Projected uses of liquidity Projected sources of liquidity
Debt Issuance
(dollar amounts
in millions)

Long-term
debt maturities

Debt
repayment-
commercial
paper

Long-term
loan advances

Total
uses of
liquidity

Long-term
loan
amortization & repayment

Commercial
paper

Other
long-term debt

Medium-
term notes

Total
sources of
liquidity

Cumulative
excess
sources  over uses of liquidity (1)
4Q13 $    909
1Q14 $       1,052 $               -
   $      721
$      1,773 $           480 $           175 $        725 $       175 $      1,555 691
2Q14 746 200 302 1,248 349 150 625 175 1,299 742
3Q14 761 - 320 1,081 320 250 325 175 1,070 731
4Q14 1,110 - 178 1,288 259 - 875 175 1,309 752
1Q15 439 100 197 736 308 - 185 175 668 684
2Q15 58 350 211 619 269 - - 175 444 509
Totals
$       4,166
$          650 $   1,929 $      6,745 $       1,985 $           575 $     2,735 $    1,050 $      6,345

Table 23: Projected Sources and Uses of Liquidity



	Projected Sources of Liquidity								Projected Uses of Liquidity
(Dollars in millions)	Long-term Loan Amortization and Repayment		Debt Issuance-Commercial Paper		Debt Issuance-Long-term Debt		Total Sources of Liquidity		Long-term Debt Maturities		Debt Repayment-Commercial Paper		Long-term Loan Advances		Total Uses of Liquidity		Cumulative Excess Sources over Uses of Liquidity (1)
4Q14																	$	944
1Q15	$	347	$	150	$	400	$	897	$	436	$	—	$	514	$	950	891
2Q15	293		250		400		943		164		100		717		981		853
3Q15	461		300		500		1,261		557		125		574		1,256		858
4Q15	275		250		300		825		415		200		211		826		857
1Q16	290		150		150		590		61		300		233		594		853
2Q16	293		450		300		1,043		692		100		232		1,024		872
Totals	$	1,959	$	1,550	$	2,050	$	5,559	$	2,325	$	825	$	2,481	$	5,631

⁽¹⁾ Cumulative excess sources over uses of liquidity includes cash and investments.

The chart above represents our best estimate of the funding requirements and how we expect to manage such funding requirements through November 30, ~~2014.~~2015. Our estimates assume that the balance of our time deposit investments will remain consistent with current levels over the next six quarters. These estimates will change on a quarterly basis based on the factors described above.

Sources of Liquidity

Capital Market Debt Issuance

As a well-known seasoned issuer, we have the following effective shelf registration statements on file with the U.S. Securities and Exchange Commission ("SEC") for the issuance of debt:

·	~~unlimited amount of collateral trust bonds until September 2013;~~

unlimited amount of collateral trust bonds until September 2016;

·	unlimited amount of medium-term notes, member capital securities and subordinated deferrable debt until November 2014; and

·	daily liquidity fund notes for a total of $20,000 million with a $3,000 million limitation on the aggregate principal amount outstanding at any time until April 2016.

WeWhile we register member capital securities and the daily liquidity fund with the SEC, these securities are not available for sale to the general public. Medium-term notes are available for sale to both the general public and members. During the year ended May 31, 2014, we issued ~~$1,075~~$825 million of ~~12-month~~1-year and 3-year floating-rate medium-term notes in registered ~~offerings during the year ended May 31, 2013. We use our bank lines of credit as backup liquidity, primarily for dealer and member commercial paper.~~ offerings.

Commercial paper issued through dealers and bank bid notes totaled ~~$2,160~~$1,994 million and represented ~~11 percent~~10% of total debt outstanding at May 31, ~~2013.~~2014. We intend to maintain the balance of dealer commercial paper and bank bid notes at ~~15 percent~~15% or less of total debt outstanding during fiscal year ~~2014.~~2015. Our bank lines of credit may be used for general corporate purposes; however, we use them primarily as backup liquidity for dealer and member commercial paper.

In ~~October 2012, CFC~~May 2014, we completed an exchange of ~~$340~~$209 million of ~~its~~our outstanding ~~8 percent~~8% medium-term notes, Series C, due 2032 for ~~$379~~$218 million of ~~4.023 percent~~4.023% collateral trust bonds due 2032 and ~~$134~~$91 million of cash. ~~On April 25, 2013,~~During the year ended May 31, 2014, we issued ~~$400~~a total of $1,618 million of ~~4.75 percent subordinated debt due 2043. On June 6, 2013, we issued $400 million of 2.35 percent~~ collateral trust ~~bonds due 2020.~~bonds.

Private Debt Issuance

We have access to liquidity from private debt issuances through a note purchase agreement with the Federal Agricultural Mortgage Corporation. At May 31, ~~2013~~2014 and ~~2012,~~2013, we had secured notes payable of ~~$1,542~~$1,668 million and ~~$1,165~~$1,542 million, respectively, outstanding to the Federal Agricultural Mortgage Corporation under a note purchase agreement totaling $3,900 million. Under the terms of our March 2011 note purchase agreement, we can borrow up to $3,900 million at any time from the date of the agreement through January 11, 2016 and thereafter automatically extend the agreement on each anniversary date of the closing for an additional year, unless prior to any such anniversary date, the Federal Agricultural Mortgage Corporation provides CFC with a notice that the draw period will not be extended beyond the remaining term. The agreement with the Federal Agricultural Mortgage Corporation is a revolving credit facility that allows us to borrow, repay and re-borrow funds at

any time through maturity or from time to time as market conditions ~~permit, provided that the principal amount at any time outstanding under the note purchase agreement is not more than the total available under the agreement.~~permit. Each borrowing under a note purchase agreement is evidenced by a secured note setting forth the interest rate, maturity date and other related terms as we may negotiate with the Federal Agricultural Mortgage Corporation at the time of each such borrowing. We may select a fixed rate or variable rate at the time of each advance with a maturity as determined in the applicable pricing agreement. ~~In November 2012~~On May 2, 2014 and ~~April 2013,~~May 23, 2014, we issued notes totaling ~~$133~~$60 million and ~~$325~~$91 million, respectively, under the agreement with the Federal Agricultural Mortgage Corporation. At May 31, ~~2013,~~2014, we had up to ~~$2,358~~$2,232 million available under this agreement, subject to market conditions for debt issued by the Federal Agricultural Mortgage Corporation.

At May 31, ~~2013~~2014 and ~~2012,~~2013, we had ~~$3,674~~$4,299 million and ~~$3,419~~$3,674 million, respectively, of unsecured notes payable outstanding under bond purchase agreements with the Federal Financing Bank and a bond guarantee agreement with RUS issued under

the Guaranteed Underwriter Program, which supports the Rural Economic Development Loan and Grant program and provides guarantees to the Federal Financing Bank. During the year ended May 31, ~~2013,~~2014, we borrowed ~~$255~~$625 million under our committed loan facilities from the Federal Financing Bank as part of this program at a weighted average interest rate of ~~2.30 percent~~2.85% with a repricing period ranging from 105 to 1510 years and a final maturity of 20 years. On November 21, 2013, we closed a $500 million commitment from RUS to guarantee a loan from the Federal Financing Bank as part of the Guaranteed Underwriter Program that is available for advance through October 15, 2016. Advances under this facility have a 20-year maturity repayment period. At May 31, ~~2013,~~2014, we had up to ~~$749~~$624 million available under committed loan facilities from the Federal Financing Bank as part of this program. In July 2013, we borrowed $325 million under our committed loan facilities with the Federal Financing Bank. In August 2013, we received a commitment from RUS to guarantee a loan from the Federal Financing Bank for additional funding of $500 million as part of the Guaranteed Underwriter Program. As a result, we will have an additional $500 million available under Federal Financing Bank loan facilities with a 20-year maturity repayment period during the three-year period following the date of closing.

Member Loan Repayments

~~We expect long-term loan repayments from~~

Table 24 summarizes scheduled ~~loan amortization and prepayments to be $1,408 million over the next 12 months. Scheduled~~ repayments include the principal amortization of long-term loans in each of the five fiscal years following May 31, ~~2013~~2014 and ~~thereafter as follows:~~thereafter.

(dollar amounts in thousands)
Amortization (1)
2014 $ 1,145,915
2015 1,089,071
2016 1,049,372
2017 1,007,127
2018 946,525
Thereafter 13,673,079
Total $ 18,911,089
Table 24: Member Loan Repayments



(Dollars in thousands)	Amortization ⁽¹⁾
2015	$	1,157,972
2016	1,094,947
2017	1,126,260
2018	985,748
2019	934,428
Thereafter	13,832,083
Total	$	19,131,438

⁽¹⁾ Represents scheduled amortization based on current rates without consideration for loans that reprice.

Member Loan Interest Payments

During the year ended May 31, ~~2013,~~2014, interest income on the loan portfolio was ~~$942~~$939 million, representing an average rate of ~~4.86 percent~~4.60% compared with ~~5.09 percent~~4.86% and ~~5.15 percent~~5.09% for the years ended May 31, 2013 and 2012, ~~and 2011.~~respectively. For the past three fiscal years, interest income on the loan portfolio has averaged ~~$963~~$944 million. At May 31, ~~2013, 89 percent~~2014, 90% of the total loans outstanding had a fixed rate of interest, and ~~11 percent~~10% of loans outstanding had a variable rate of interest.

Bank Revolving Credit Agreements

At May 31, ~~2013~~2014 and ~~2012,~~2013, we had ~~$3,100~~$3,226 million and ~~$2,845~~$3,100 million, respectively, of commitments under revolving credit agreements. We may request letters of credit for up to $100 million under each agreement in place at May 31, ~~2013,~~2014, which then reduces the amount available under the facility. Our bank lines of credit may be used for general corporate purposes; however, we use them primarily as backup liquidity for dealer and member commercial paper.

~~The following table~~Table 25 presents the total available and the outstanding letters of credit under our revolving credit ~~agreements at May 31:~~agreements.

Total available Letters of credit outstanding
(dollar amounts in thousands) 2013 2012 2013 2012 Original maturity
Facility fee per
year (1)
Three-year agreement $ 219,000 $ 1,125,000 $ - $ - March 21, 2014 15 basis points
Three-year agreement 916,000 - - - October 21, 2015 10 basis points
Four-year agreement 1,007,500 - - - October 21, 2016 10 basis points
Five-year agreement 954,012 - 3,488 - October 21, 2017 10 basis points
Four-year agreement - 883,875 - 1,000 October 21, 2015 10 basis points
Five-year agreement - 834,875 - - October 21, 2016 10 basis points
Total $ 3,096,512 $ 2,843,750 $ 3,488 $ 1,000

Table 25: Revolving Credit Agreements



	Total Available				Letters of Credit Outstanding
(Dollars in thousands)	2014		2013		2014		2013		Maturity	Annual Facility Fee ⁽¹⁾
Three-year agreement	$	—	$	219,000	$	—	$	—	March 21, 2014	15 basis points
Three-year agreement	1,036,000		916,000		—		—		October 28, 2016	10 basis points
Four-year agreement	1,122,500		1,007,500		—		—		October 28, 2017	10 basis points
Five-year agreement	1,065,609		954,012		1,891		3,488		October 28, 2018	10 basis points
Total	$	3,224,109	$	3,096,512	$	1,891	$	3,488

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

~~On March 28, 2013,~~During the year ended May 31, 2014, we amended our ~~$1,125 million three-year, $885 million four-year, and $835 million five-year revolving credit agreements to (i) extend the maturity dates for the~~ three-year, four-year, and five-year revolving credit agreements to extend the maturity dates by one year each to October ~~21, 2015,~~28, 2016, 2017, and 2017, respectively, and (ii) lower the facility fee for the three-year revolving credit agreement to 10 basis points. With respect to the three-year agreement, $219 million of commitments will expire at the original maturity date of March 21, 2014 and the facility fee for lenders holding such commitments will continue to be 15 basis points until maturity.2018, respectively. In addition, ~~we exercised our option to increase the commitment levels for the four-year and five-year revolving credit agreements to $1,008 million, and $958 million, respectively. On May 30, 2013,~~ we exercised our option to increase the commitment level for the three-year, four-year, and five-year revolving credit ~~agreement maturing on October 21, 2015~~agreements by $120 million, $115 million and $110 million, respectively, to ~~$1,135 million.~~ $1,036 million, $1,122 million, and $1,068 million, respectively.

The facility fee and applicable margin under each agreement are determined by the pricing matrices in the agreements based on our senior unsecured credit ratings. With respect to the borrowings, we have the right to choose between a (i) Eurodollar rate plus an applicable margin or (ii) base rate calculated based on the greater of prime rate, the federal funds effective rate plus

~~0.50 percent~~ 0.50% or the one-month LIBOR rate plus ~~1 percent,~~1%, plus an applicable margin. Our ability to borrow or obtain a letter of credit under all of the agreements is not conditioned on the absence of material adverse changes with regard to CFC. We also have the right, subject to certain terms and conditions, to increase the aggregate amount of the commitments under (i) the three-year credit facility to a maximum of $1,500 million, (ii) the four-year credit facility to a maximum of $1,300 million and (iii) the five-year credit facility to a maximum of $1,300 million.

On July 9, 2013, we further exercised our option to increase the commitment levels for the three-year revolving credit agreement maturing on October 21, 2015, four-year revolving credit agreement maturing on October 21, 2016, and five-year revolving credit agreement maturing on October 21, 2017 to $1,225 million, $1,088 million and $1,033 million, respectively.

The revolving credit agreements do not contain a material adverse change clause or ratings triggers that limit the banks’ obligations to fund under the terms of the agreements, but we must be in compliance with their other requirements to draw down on the facilities, including financial ratios. For further discussion, see ~~the~~ "Liquidity Risk—Liquidity and Capital Resources Profile—Compliance with Debt ~~Covenants~~ ~~section.~~Covenants."

Member Investments

~~The table below~~

Table 26 shows the components of our member investments included in total debt outstanding at May ~~31:~~31, 2014 and 2013.

2013 2012 Increase/
(dollar amounts in thousands) Amount % of Total (1) Amount % of Total (1) (decrease)
Commercial paper $ 812,141 28 % $ 997,778 40 % $ (185,637)
Select notes 353,190 99 - - 353,190
Daily liquidity fund 680,419 100 478,406 100 202,013
Medium-term notes 574,108 19 499,222 21 74,886
Members’ subordinated certificates 1,766,402 100 1,739,454 100 26,948
Total $ 4,186,260 $ 3,714,860 $ 471,400

Percentage of total debt outstanding 20 % 20 %

Table 26: Member Investments



	2014					2013					Increase/ (Decrease)
(Dollars in thousands)	Amount			% of Total ⁽¹⁾		Amount			% of Total ⁽¹⁾		Increase/ (Decrease)
Commercial paper	$	838,074		30	%	$	812,141		28	%	$	25,933
Select notes	544,510			99		353,190			99		$	191,320
Daily liquidity fund notes	486,501			100		680,419			100		$	(193,918	)
Medium-term notes	498,262			18		574,108			19		$	(75,846	)
Members’ subordinated certificates	1,612,228			100		1,766,402			100		$	(154,174	)
Total	$	3,979,575				$	4,186,260				$	(206,685	)

Percentage of total debt outstanding	19		%			20		%

⁽¹⁾ Represents the percentage of each line item outstanding to our members.

Member investments averaged ~~$3,962~~$4,107 million outstanding over the last three fiscal years. We view member investments as a more stable source of funding than capital market issuances.

During the year ended May 31, 2013, CFC started offering Select Notes, a flexible short-term investment product. Select Notes may be purchased only by our members and their affiliates. These notes are senior unsecured debt securities with terms ranging from 30 days to 270 days that require a larger minimum investment than our commercial paper sold to members and as a result, offer a higher interest rate than our commercial paper. While the commercial paper investments are backed by CFC’s revolving lines of credit, the Select Notes are not.

Cash, Investments and ~~Investments~~Time Deposits

At May 31, ~~2013,~~2014, cash, investments and ~~investments included $700 million in~~time deposits ~~that we made with three financial institutions in interest bearing accounts. The~~totaled $944 million.The interest rate earned on ~~these~~the investments ~~is sufficient~~and time deposits provides an overall benefit to ~~cover the cost of the underlying borrowed funds.~~our net interest yield. The total ~~investment of $700 million~~ represents an additional source of liquidity that is available to support our operations.

Cash Flows from Operations

For the year ended May 31, ~~2013,~~2014, cash flows provided by operating activities were ~~$163~~$190 million compared with ~~$119~~$163 million for the prior year. Our cash flows from operating activities are driven primarily by a combination of cash flows from operations and the timing and amount of loan interest payments we received compared with interest payments we made on our debt.

Compliance with Debt Covenants

At May 31, ~~2013,~~2014, we were in compliance with all covenants and conditions under our revolving credit agreements and senior debt indentures.

For calculating the required financial covenants in our revolving credit agreements, we adjust net income, senior debt and total equity to exclude the non-cash adjustments from the accounting for derivative financial instruments and foreign currency translation. Additionally, the TIER and senior debt-to-total equity ratio include the following adjustments:

The adjusted TIER, as defined by the agreements, represents the interest expense adjusted to include the derivative cash settlements plus net income prior to the cumulative effect of change in accounting principle and dividing that total by the interest expense adjusted to include the derivative cash settlements.

The senior debt-to-total equity ratio includes adjustments to senior debt to exclude RUS-guaranteed loans, subordinated deferrable debt and members’ subordinated certificates. Total equity is adjusted to include subordinated deferrable debt and members’ subordinated certificates. Senior debt includes guarantees; however, it excludes:


Item 7A.	Quantitative and Qualitative Disclosures About Market ~~Risk.~~Risk

For quantitative and qualitative disclosures about market risk, see "Item 7. MD&A—Market Risk."

~~See~~ ~~Market Risk~~ ~~discussion beginning on page 56.~~


Item 8.	Financial Statements and Supplementary ~~Information.~~Data



				Page
	Reports of Independent Registered Public Accounting Firms			72
	Consolidated Balance Sheets as of May 31, 2014 and 2013			74
	Consolidated Statements of Operations for the Years Ended May 31, 2014, 2013 and 2012			75
	Consolidated Statements of Comprehensive Income for the Years Ended May 31, 2014, 2013 and 2012			76
	Consolidated Statements of Changes in Equity for the Years Ended May 31, 2014, 2013 and 2012			77
	Consolidated Statements of Cash Flows for the Years Ended May 31, 2014, 2013 and 2012			78
	Notes to Consolidated Financial Statements			80
	Supplementary Data			123

~~The consolidated financial statements, auditors’ reports and quarterly financial results are included on pages 94 through 139 (see Supplementary Information,~~ ~~Selected Quarterly Financial Data (Unaudited),~~ ~~to consolidated financial statements for a summary of the quarterly results of our operations).~~

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

~~Item 9.~~

~~Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.~~

To the Board of Directors and Members of

National Rural Utilities Cooperative Finance Corporation

Dulles, Virginia

~~None.~~

~~Item 9A.~~

~~Controls and Procedures.~~

~~Evaluation of Disclosure Controls and Procedures~~

~~Senior management, including~~We have audited the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. At the end of the period covered by this report, based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

~~Management’s Report on Internal Control Over Financial Reporting~~

~~The management~~accompanying consolidated balance sheet of National Rural Utilities Cooperative Finance Corporation ~~(“we”, “our” or “us”) is responsible for establishing~~ and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control system over financial reporting is designed under the supervision of management, including the Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

~~(i.~~subsidiaries (the “Company”)

~~pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets;~~

~~(ii.)~~

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of ours are being made only in accordance with authorizations of management and our directors; and

~~(iii.)~~

~~provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or dispositions of our assets.~~

Any system of internal control, no matter how well designed, has inherent limitations, including but not limited to the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

A material weakness (as defined in PCAOB Auditing Standard No. 5) is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement in financial statements will not be prevented or detected on a timely basis.

~~Our management assessed the effectiveness of internal control over financial reporting~~ as of May 31, ~~2013. In making this assessment, management used~~2014, and the ~~criteria set forth by~~related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for the ~~Committee of Sponsoring Organizations~~year then ended. These consolidated financial statements are the responsibility of the ~~Treadway Commission in Internal Control-Integrated Framework.~~

~~Based~~Company’s management. Our responsibility is to express an opinion on ~~management’s assessment~~these consolidated financial statements based on our audit. The accompanying consolidated financial statements of National Rural Utilities Cooperative Finance Corporation and ~~those criteria, management believes that we maintained effective internal control over financial reporting~~subsidiaries as of May 31, ~~2013.~~

~~This annual~~2013, were audited by other auditors whose report thereon dated August 28, 2013, expressed an unqualified opinion on ~~Form 10-K does not include an attestation report~~those statements, before the adoption of ~~our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant~~Accounting Standards Update No. 2011-11, Disclosures about Offsetting Assets and Liabilities, and Accounting Standards Update No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (collectively “ASU 2011-11”), as described in note 16 to the ~~rules of the U.S. Securities and Exchange Commission that permit us to furnish only management’s report with this annual report on Form 10-K.~~

C~~hanges in Internal Control Over Financial Reporting~~consolidated financial statements.

~~There were no changes~~We conducted our audit in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~By:~~	~~/s/ SHELDON C. PETERSEN~~	~~By:~~	~~/s/ J. ANDREW DON~~
	~~Sheldon C. Petersen~~		~~J. Andrew Don~~
	~~Chief Executive Officer~~		~~Senior Vice President and Chief Financial Officer~~
	~~August 28, 2013~~		~~August 28, 2013~~


~~By:~~	~~/s/ ROBERT E. GEIER~~
	~~Robert E. Geier~~
	~~Vice President and Controller~~
	~~August 28, 2013~~

~~Item 9B.~~

~~Other Information.~~

~~None.~~

~~PART III~~

~~Item 10.~~

~~Directors, Executive Officers and Corporate Governance.~~

(a) Directors
Director Date present
Name Age since term expires
Burns E. Mercer (President of CFC) 62 2008 2014
Joel Cunningham (Vice President of CFC) 59 2009 2015
Ray Beavers (Secretary-Treasurer of CFC) 58 2010 2016
Frederick C. Anderson 61 2008 2014
Patrick L. Bridges       54 2013 2016
Fred Brog 68 2009 2015
Mike Campbell 65 2012 2015
R. Grant Clawson 64 2011 2014
Mel Coleman     59 2013 2014
Walter K. Crook 73 2010 2016
Jim L. Doerstler 65 2008 2014
Roman E. Gillen   51 2013 2016
Christopher L. Hamon 50 2009 2015
Scott W. Handy 55 2009 2015
Robert M. Hill   65 2013 2016
Lyle Korver 57 2010 2016
Glenn W. Miller 49 2009 2015
Curtis Nolan 55 2011 2014
Harry N. Park 78 2013 2016
Curtin R. Rakestraw II       60 2013 2016
Randy D. Renth 49 2009 2015
Dwight Rossow 51 2008 2014
Kirk A. Thompson 50 2011 2014

~~Under CFC’s bylaws, the board of directors must be composed of the following individuals:~~

·	20 directors, which must include one general manager and one director of a member system from each of 10 districts (but no more than one director from each state except in a district where only one state has members);

·	~~two directors designated by the NRECA; and~~

if the board determines at its discretion that an at-large director shall be elected, one at-large director who satisfies the requirements of an Audit Committee financial expert as defined by the Sarbanes-Oxley Act of 2002 and is a trustee, director, manager, Chief Executive Officer or Chief Financial Officer of a member.

The 20 district-level directors are each elected by a vote of the members within the district for which the director serves. The at-large director who satisfies the requirements of an Audit Committee financial expert is elected by the vote of all members. All CFC directors are elected for a three-year term and can serve a maximum of two consecutive terms. Each CFC member (other than associates) is entitled to one vote with respect to elections of directors in their districts.

(b) Executive Officers
Held present
Title Name Age office since
President and Director Burns E. Mercer 62 2013
Vice President and Director Joel Cunningham 59 2013
Secretary-Treasurer and Director Ray Beavers 58 2013
Chief Executive Officer Sheldon C. Petersen 60 1995
Executive Vice President and Chief Operating Officer John T. Evans 63 2011
Senior Vice President of Member Services and General Counsel
John J. List (1)
66 1997
Senior Vice President and Chief Financial Officer
Steven L. Lilly (2)
63 1994
Senior Vice President of Corporate Relations Richard E. Larochelle 60 1998
Senior Vice President of Affiliate Organizations Lawrence Zawalick 55 2011
Senior Vice President and Treasurer
J. Andrew Don (3)
53 2011
Senior Vice President of Credit Risk Management John M. Borak 68 2002
Senior Vice President of Strategy and Business Development Leigh V. Grantham 53 2013

~~(1) Effective July 1, 2013, Mr. List became Senior Vice President of Member Services.~~

~~(2) Effective July 1, 2013, Mr. Lilly became Senior Vice President, Special Asset Management.~~

~~(3) Effective July 1, 2013, Mr. Don became Senior Vice President and Chief Financial Officer.~~

The President, Vice President and Secretary-Treasurer are elected annually by the board of directors at its first organizational meeting immediately following CFC’s annual membership meeting, each to serve a term of one year; the Chief Executive Officer serves at the pleasure of the board of directors; and the other Executive Officers serve at the pleasure of the Chief Executive Officer.

~~(c) Identification of Certain Significant Employees.~~

~~Inapplicable.~~

~~(d) Family Relationships.~~

~~No family relationship exists between any director or executive officer and any other director or executive officer of the registrant.~~

~~(e) (1) and (2) Business Experience and Directorships.~~

Mr. Mercer has served as president and CEO of Meade County R.E.C.C. in Brandenburg, Kentucky since 1994. He serves as a board member for Kentucky Association of Electric Cooperatives, United Utility Supply Cooperative and Farmers Bank. Mr. Mercer is a former NCSC board member and was a member of the Kentucky Society of Certified Public Accountants. As president and CEO of Meade County R.E.C.C., Mr. Mercer has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Mercer has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board. Mr. Mercer’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Cunningham has been a director of Twin County Electric Power Association in Hollandale, Mississippi since 2004. He has been a self-employed certified public accountant in Belzoni, Mississippi since 1981. Mr. Cunningham is a member of the Mississippi Society of CPAs and the American Institute of CPAs. He also holds the Credentialed Cooperative Director Certificate issued by NRECA. As a director of Twin County Electric Power Association, Mr. Cunningham has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Cunningham has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board. Mr. Cunningham’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Beavers has been the general manager and CEO of United Electric Cooperative Services in Cleburne, Texas since 1999. Mr. Beavers served as the board chairman of Texas Electric Cooperatives from 2008 to 2009 and as an alternate director of Brazos Electric Power Cooperative since 1999. Mr. Beavers was the chairman of the Rural Electric Management Development Council and former general manager and CEO of Southwest Rural Electric Association. In addition, he was the assistant to the general manager of Oklahoma Association of Electric Cooperatives and a member services coordinator of Cotton Electric Cooperative. As general manager and CEO of United Electric Cooperative Services, Mr. Beavers has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Beavers has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.

Mr. Anderson has been the president and CEO of New Hampshire Electric Cooperative, Inc. in Plymouth, New Hampshire since 1992. He is a founding board member of the New Hampshire Electric Co-op Foundation. Mr. Anderson is also a former board member of the Cooperative Research Council, a former board member of Northway Bank and former member of Northway Bank’s Audit Committee. Mr. Anderson is the former director of finance and administration/CFO, New Hampshire Electric Cooperative, Inc.; systems accountant, Rural Electrification Administration; president, vice president and treasurer, Northeast Association of Electric Cooperatives; president, Northeast Public Power Association; and president, Consumer-Owned Energy Foundation. He holds the Credentialed Cooperative Director Certificate issued by the NRECA. Mr. Anderson also is a current member of the AICPA. As president and CEO of New Hampshire Electric Cooperative, Mr. Anderson has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Anderson has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board. Mr. Anderson’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Bridges has been the CFO of Tri-State G&T Association in Westminster, Colorado, since 2008. He has served as the vice president and treasurer of Texas-New Mexico Power Company from 2000 to 2003. Mr. Bridges has more than 30 years of experience working in the electric power industry and 20 years of experience working for companies registeredaccordance with the U.S. Securities and Exchange Commission. Mr. Bridges has chaired the Finance Subcommittee of the G&T Managers’ Technical Advisory Council from 2009 to 2012, currently serves as secretary of the G&T Accounting and Finance Committee, and is a

board member of the Colorado Council for Economic Education. Mr. Bridges is a certified public accountant and chartered financial analyst. As the CFO of Tri-State G&T Association, Mr. Bridges has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Bridges has the qualifications, skills and experience necessary to act in the best interest of CFC and to serve as a director on the CFC board. Mr. Bridges’ experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Brog has been director of Lower Valley Energy in Afton, Wyoming since 1988. He has been a rancher and farmer in Freedom, Wyoming since 1970. Mr. Brog served as secretary-treasurer of NCSC and serves as a board member of Snake River Power Association. He was past president of Idaho Consumer-Owned Utilities Association and former director of Wyoming Rural Electric Association. In addition, Mr. Brog serves as president of Star Valley Cooperative Milk Marketing Association and adviser to the State of Wyoming Economic Development Committee. As a director of Lower Valley Energy, Mr. Brog has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Brog has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.

Mr. Campbell has been the executive vice president and general manager of Central Florida Electric Cooperative, Inc. in Chiefland, Florida since 2005. He has served as the vice president of engineering and operations of Coastal Electric Cooperative in Midway, Georgia from 1998 to 2005 and the engineering manager of Colquitt Electric Membership Corporation in Moultrie, Georgia from 1991 to 1998. He is serving as a trustee on the executive committee of Seminole Electric Cooperative, and as a director and secretary-treasurer of the Florida Rural Electric Self Insurer’s Fund and Florida Rural Electric Credit Union. As a general manager of Central Florida Electric Cooperative, Mr. Campbell has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Campbell has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.

Mr. Clawson has been a trustee of Continental Divide Electric Cooperative in Grants, New Mexico since 1989. He represents District 10 on the NRECA Resolutions Committee. Mr. Clawson is a farmer and rancher and has been the owner of a custom saddle business since 1998. As a trustee of Continental Divide Electric Cooperative, Mr. Clawson has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Clawson has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.

Mr. Coleman has been the CEO of North Arkansas Electric Cooperative in Salem, Arkansas, since 2001. He serves as vice president of NRECA and has been a director since 2004. In addition, Mr. Coleman is a director of Arkansas Electric Cooperative Corporation, and of the Arkansas Electric Cooperatives. Before becoming CEO, he was assistant general manager from 1999 to 2001, and manager of member services from 1988 to 1999 for North Arkansas Electric Cooperative. Mr. Coleman is a member of the Development Council of Arkansas State University in Mountain Home, Arkansas. As the CEO of North Arkansas Electric Cooperative, Mr. Coleman has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Coleman has the qualifications, skills and experience necessary to act in the best interest of CFC and to serve as a director on the CFC board. Mr. Coleman’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Crook has been a director of Butler Public Power District in David City, Nebraska since 1991. Mr. Crook has served as the CEO of Polk & Butler Mutual Insurance Company since 1992 and is part owner of a farming operation. He also has served as the state director of Nebraska Rural Electric Association from 1997 to 1998 and from 2008 to present. Mr. Crook is a director of Nebraska Farmers Mutual Reinsurance Company, an executive board member of the State Association of Mutual Insurance Companies of Nebraska and board chairman of Nebraska Rural TV Inc. He also holds the Credentialed Cooperative Director Certificate issued by NRECA. As a director of Butler Public Power District, Mr. Crook has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Crook has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director and member on the CFC board. Mr. Crook’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Doerstler has served as a board director of Whitewater Valley REMC in Liberty, Indiana since 1994. He has served as an officer, an executive committee member and board member of the Indiana Statewide Association of Rural Electric Cooperatives. Mr. Doerstler has served as vice president of Farm Credit Banks of Louisville, vice president of credit for Wabash Valley Production Credit Association and branch manager of Greencastle Production Credit Association. He holds the Credentialed Cooperative Director Certificate and the Board Leadership Certificate issued by NRECA. He is semi-retired and formerly owned and operated Louie’s Boot Barn from 1987 until it was sold in June 2008. As a director of Whitewater Valley REMC, Mr. Doerstler has acquired extensive experience with and knowledge of the rural electric cooperative industry

~~and, therefore, we believe Mr. Doerstler has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.~~

Mr. Gillen has been the president and CEO of Consumers Power, Inc. in Philomath, Oregon, since 2006. He served as director of information systems from 1986 to 2003 and assistant manager from 2004 to 2005. His career began with Douglas Electric Cooperative in Roseburg, Oregon, where he was an accounting and data processing manager, and then worked for Truckee-Donner Public Utility District in Truckee, California. Mr. Gillen has served as chairman of Power Resources Cooperative from 2008 to 2010, secretary of Casco Communications, Inc. from 2006 to present, and president of the Oregon Rural Electric Cooperative Association from 2011 to 2012 and is secretary-treasurer of PNGC Power. As the president and CEO of Consumer Power, Inc., Mr. Gillen has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Gillen has the qualifications, skills and experience necessary to act in the best interest of CFC and to serve as a director on the CFC board.

Mr. Hamon has been the CEO of White River Valley Electric Cooperative, Inc. in Branson, Missouri since 1999. He currently serves as director and served as past president of Sho-Me Power Electric Cooperative and alternate director of KAMO Power. Mr. Hamon serves on the Executive Board, as president of the Alternative Fuel Taskforce and on multiple committees for the Association of Missouri Electric Cooperatives and was past president of the Cooperative Managers Group. In addition, he was the former Operations and Engineering manager for White River Valley Electric Cooperative. Mr. Hamon is a member of the Energy Efficiency/Demand Side Management Team for Associated Electric Cooperative, Inc., the Institute of Electrical & Electronic Engineers and the Missouri Society of Professional Engineers. As CEO of White River Valley Electric Cooperative, Mr. Hamon has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Hamon has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.

Mr. Handy has been the president and CEO of Cass County Electric Cooperative, Inc. in Fargo, North Dakota since February 2002 and has been employed there in various capacities since October 1982. He has previously served as chairman for the Rural Electric Management Development Council, Minnkota Power Cooperative Manager’s Advisory Committee and the North Dakota Association of Rural Electric Cooperatives Manager’s Advisory Committee. In addition, he is a former board chairman for Greater Fargo-Moorhead Economic Development Corporation’s Growth Initiative Fund, a public/private loan pool that lends money for business expansion, vice chairman of the North Dakota State University Alumni Association, and board member of the North Dakota State University Quentin N. Burdick Center for Cooperatives. As president and CEO of Cass County Electric Cooperative, Mr. Handy has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Handy has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.

Mr. Hill has been the board chairman of First Electric Cooperative Corporation in Jacksonville, Arkansas, since 2009 and a director since 1983. He also serves as a director and audit committee member of the Arkansas Electric Cooperative Corporation. Mr. Hill is a former member of the Arkansas State Banking Board and is the former owner of a bank and an accounting firm. He is currently the owner and chair of Hill Investments, LLC, and is a former certified public accountant. As the chair of First Electric Cooperative Corporation, Mr. Hill has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Hill has the qualifications, skills and experience necessary to act in the best interest of CFC and to serve as a director on the CFC board.

Mr. Korver has been the general manager and CEO of North West Rural Electric Cooperative in Orange City, Iowa since 1993. In addition, he was the secretary-treasurer and past chairman of the Resolutions Committee of Mid-West Electric Consumers Association. Mr. Korver was the general manager of Sioux Electric Cooperative Association from 1984 to 1993 and the shared general manager of Sioux Electric Cooperative Association and O’Brien County Rural Electric Cooperative from 1989 to 1993. Mr. Korver was the manager’s representative to the board of the Iowa Association of Electric Cooperatives from 2005 to 2006. He also was a member of NRECA Marketing and Energy Services Committee. He is an ACRE President’s Club member. Mr. Korver has been the president of Orange City Development Corporation since 2007. As general manager and CEO of North West Rural Electric Cooperative, Mr. Korver has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Korver has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC Board.

Mr. Miller has been the president and CEO of Holmes-Wayne Electric Cooperative, Inc. in Millersburg, Ohio since 2004. He currently serves on the board of Buckeye Power, Inc. including the Executive, Audit and Rate committees. Mr. Miller is currently serving on the board of Wayne Savings Community Bank located in Wooster, Ohio, where he also serves on both the Loan, Compensation and Audit Committees. Mr. Miller is a certified public accountant and owner of Glenn W. Miller, CPA. In addition, he is a board member and treasurer of Holmes County Economic Development Council, Inc. and board member of Holmes-Wayne Electric Foundation, Inc. Mr. Miller is a part-owner and vice president of The Pines Golf Club in Orrville, Ohio. As president and CEO of Holmes-Wayne Electric Cooperative, Mr. Miller has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Miller has the qualifications,

skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board. Mr. Miller’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Nolan has been a director of Sulphur Springs Valley Electric Cooperative in Willcox, Arizona since 1993 and a director of NRECA since 2002. Mr. Nolan has also been serving as president of NRECA since March 2013. Mr. Nolan previously served as president and secretary of the Sulphur Springs Valley Electric Cooperative and as a secretary-treasurer and vice president of NRECA. He is a former director and a chairman of Southwest Transmission Cooperative and a former director, treasurer and secretary for Grand Canyon State Electric Cooperative Association. Mr. Nolan has been the owner of Nolan Builders since 2005. Mr. Nolan also holds the Credentialed Cooperative Director Certificate and the Board Leadership Certificate issued by NRECA. As a director of Sulphur Springs Valley Electric Cooperative, Mr. Nolan has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Nolan has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board. Mr. Nolan’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Park has been a director of Southern Rivers Energy in Barnesville, Georgia, since 1997. He also is a director of Georgia System Operations Corporation. Park has served as the president, CEO and director of several banks. As the director of Southern Rivers Energy, Mr. Park has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Park has the qualifications, skills and experience necessary to act in the best interest of CFC and to serve as a director on the CFC board.

Mr. Rakestraw II has been a director of Sullivan County Rural Electric Cooperative in Forksville, Pennsylvania, since 1986. He also is chairman of Allegheny Electric Cooperative and director of Continental Cooperative Services. Mr. Rakestraw II served as the director and president of the Pennsylvania Corn Growers Association from 1985 to 1997 and as a founding director of Lycoming Farmland Preservation. He is the owner of Rakestraw Farms and Promised Land Busing. As the director of Sullivan County Rural Electric Cooperative, Mr. Rakestraw II has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Rakestraw II has the qualifications, skills and experience necessary to act in the best interest of CFC and to serve as a director on the CFC board. Mr. Rakestraw II’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Renth has been director of Clinton County Electric Cooperative in Breese, Illinois since 1997. He is a certified public accountant and has been at Rickhoff & Associates LTD of O’Fallon, Illinois from 2011 to current and from 2007 to 2009. Mr. Renth was at Rehkemper & Son, Inc. of St. Rose, Illinois from 2009 to 2011. Mr. Renth was the controller of Auffenberg Auto Group in St. Louis, Missouri from 2006 to 2007. Also in 2006, he served as the plant controller for Cenveo, Inc. in St. Louis, Missouri. Mr. Renth served as the chief financial officer of Archway International Trucks/Gateway City International in St. Louis, Missouri from 1997 to 2006. In addition, he is a member of the American Institute of CPAs and the Illinois Society of CPAs. He also holds the Credentialed Cooperative Director Certificate and the Board Leadership Certificate issued by NRECA. Mr. Renth is owner and operator of RDR Acres Inc., a family farm corporation. As a director of Clinton County Electric Cooperative, Mr. Renth has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Renth has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board. Mr. Renth’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Rossow has served as a board director of Cam Wal Electric Cooperative in Selby, South Dakota since 1996. Mr. Rossow also is a board member of South Dakota Rural Electric Association. Mr. Rossow has been a self-employed rancher in Herreid, South Dakota since 1980 and is the owner of Rossow Feedlot Cleaning, LLC. He also holds the Credentialed Cooperative Director Certificate issued by NRECA. As a director of Cam Wal Electric Cooperative, Mr. Rossow has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Rossow has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.

Mr. Thompson has been the general manager of CMS Electric Cooperative, Inc., in Meade, Kansas since 1991. Mr. Thompson is board president of Kansas Electric Power Cooperative and board president of High Plains Energy LLC. Mr. Thompson is also the board president of Southwest Kansas Area Cooperative District 613. As general manager of CMS Electric Cooperative, Mr. Thompson has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Thompson has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board. Mr. Thompson’s experience with accounting, financial reporting and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Petersen joined CFC in August 1983 as an area representative. He became the director of Policy Development and Internal Audit in January 1990, director of Credit Analysis in November 1990 and Corporate Secretary on June 1, 1992. He became Assistant to the Governor on May 1, 1993. He became Assistant to the Governor and Acting Administrative Officer on June 1, 1994. He became Governor and CEO on March 1, 1995. Mr. Petersen began his career in the rural electrification program in 1976 as staff assistant for Nishnabotna Rural Electric Cooperative in Harlan, Iowa. He later served as General Manager of Rock County Electric Cooperative Association in Janesville, Wisconsin.

Mr. Evans joined CFC as Senior Vice President of Operations in November 1997. On June 1, 2010, Mr. Evans became Executive Vice President and Chief Operating Officer. He was Senior Vice President and Chief Operating Officer of Suburban Hospital Healthcare System, Bethesda, Maryland from 1994 to 1997. He was Senior Vice President and Chief Operating Officer for Geisinger Medical Center, Danville, Pennsylvania from 1991 to 1994.

Mr. List joined CFC as a staff attorney in February 1972. He served as Corporate Counsel from June 1980 to 1991. He became Senior Vice President and General Counsel on June 1, 1992, and became Senior Vice President, Member Services and General Counsel on February 1, 1997. Effective July 1, 2013, Mr. List became Senior Vice President of Member Services.

Mr. Lilly joined CFC as a Senior Financial Consultant in October 1983. He became director of Special Finance in June 1985 and director of Corporate Finance in June 1986. He became Treasurer and Principal Finance Officer on June 1, 1993, and became Senior Vice President and Chief Financial Officer on January 1, 1994. Effective July 1, 2013, Mr. Lilly became CFC’s Senior Vice President, Special Asset Management.

Mr. Larochelle joined CFC as director of Corporate Relations in May 1996. He became Senior Vice President of Corporate Relations in August 1998. Before joining CFC, he was the Legislative Director at NRECA where he worked for 12 years. He also worked at the USDA in the Rural Electrification Administration and the Farmers Home Administration.

Mr. Zawalick joined CFC in 1980. Throughout his career with CFC, Mr. Zawalick has held various positions. In February 2000, Mr. Zawalick was named CFC’s Senior Vice President of RTFC. On June 1, 2010, Mr. Zawalick was named Senior Vice President, Affiliate Organizations, which includes oversight responsibilities for both RTFC and NCSC operations.

Mr. Don joined CFC in September 1999 as Director of Loan Syndications and became Vice President of Capital Market Relations in June 2005. Effective June 2010, Mr. Don became CFC’s Senior Vice President and Treasurer. Effective July 1, 2013, Mr. Don became CFC’s Senior Vice President and Chief Financial Officer. Prior to joining CFC, he held the position of Vice President and Manager of the Washington, D.C. Office for The Bank of Tokyo–Mitsubishi. Mr. Don started his banking career with the Bank of Montreal in New York in 1984 and subsequently was a Vice President for Corporate Banking for The Bank of New York from 1987 to 1990.

Mr. Borak joined CFC in June 2002 as Senior Vice President, Credit Risk Management. Previously, he was with Fleet National Bank, Boston, Massachusetts from 1992 to 2001 where he was a Senior Credit Officer with risk management and loan approval responsibility for several industry banking portfolios including investor-owned utilities. Prior assignments at Fleet in Hartford, Connecticut included Manager of Credit Review and Manager of Loan Workout in Connecticut.

Ms. Grantham joined CFC as Senior Vice President of Strategy and Business Development in February 2013. Before joining CFC, she worked at Choctawhatchee Electric Cooperative, Inc. in Florida where she was the Chief Executive Officer from 2010 to 2013 and Chief Operating Officer from 2007 to 2010. She worked at Choctawhatchee Electric Cooperative, Inc. for 21 years where she held various management positions.

~~(f) Involvement in Certain Legal Proceedings.~~

~~None to our knowledge.~~

~~(g) Promoters and Control Persons.~~

~~Inapplicable.~~

~~(h) Code of Ethics~~

We have adopted a Code of Ethics within the meaning of Item 406(b) of Regulation S-K. This Code of Ethics applies to our principal executive officer, principal financial officer and principal accounting officer. This Code of Ethics is publicly available on our website at www.nrucfc.coop (under the link “About CFC/Corporate Governance”).

~~(i) Nominating Committee~~

Our board of directors does not have a standing nominating committee. As described above under “Part III – Item 10(a) Directors,” 20 of our directors are each elected by members in the district for which the director serves. To nominate director candidates, at the district meeting before the meeting at which candidates are to be elected from such district, a nominating committee is elected composed of one person from each state within the district. Each member of the nominating committee must be a trustee, director or manager of one of our members. Each district nominating committee then submits names of two or more nominees for each position in the district for which an election is to be held. We provide members of the nominating committee with director guidelines to use as an aide in reviewing applications from potential candidates. One or more candidates for the at-large director who satisfies the requirements of an Audit Committee financial expert are nominated by our board of directors if the board determines that it is appropriate to fill the seat. Our board of directors believes that it is appropriate for the full board of directors to nominate this director because of the position’s specific qualification requirements and the lack of any local district qualification requirement.

While we do not have a formal policy regarding diversity, the director guidelines we provide to each district nominating committee specify that a variety of perspectives, opinions and backgrounds is critical to the board’s ability to perform its duties and various roles. We recognize the value of having a board that encompasses a broad range of skills, expertise, industry knowledge and diversity of professional and personal experience.

~~(j) Audit Committee~~

Our Audit Committee currently consists of 11 directors: Mr. Miller (Chairperson), Mr. Anderson (Vice Chairperson), Mr. Renth (Vice Chairperson), Mr. Mercer (Ex Officio), Mr. Bridges, Mr. Coleman, Mr. Crook, Mr. Cunningham, Mr. Nolan, Mr. Rakestraw II and Mr. Thompson. Mr. Bridges was designated by the board as the “Audit Committee financial expert” as defined by Section 407 of the Sarbanes-Oxley Act of 2002. The members of the Audit Committee are “independent” as that term is defined in Rule 10A-3 under the Securities Exchange Act. Among other things, the Audit Committee reviews our financial statements and the disclosure under ~~Management’s Discussion and Analysis~~ in our Annual Report on Form 10-K. The Audit Committee meets with our independent registered public accounting firm, internal auditors, CEO and financial management executives to review the scope and results of audits and recommendations made by those persons with respect to internal and external accounting controls and specific accounting and financial reporting issues and to assess corporate risk. The board has adopted a written charter for the Audit Committee that may be found on our website, www.nrucfc.coop (under the link “About CFC/Corporate Governance”).

The Audit Committee completed its review and discussions with management regarding our audited financial statements for the year ended May 31, 2013. The Audit Committee has discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 114, and received from the independent accountants written disclosures and the letter from the independent accountant required by applicable requirementsstandards of the Public Company Accounting Oversight Board ~~regarding~~(United States). Those standards require that we plan and perform the ~~independent accountant’s communications with~~audit to obtain reasonable assurance about whether the ~~Audit Committee concerning independence, and discussed with the independent accountants their independence.~~

~~Based on the review and discussions noted above, the Audit Committee recommended to the board that the audited~~ financial statements ~~be included~~are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our ~~Annual Report on Form 10-K~~audit provides a reasonable basis for our opinion.

In our opinion, the 2014 consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Rural Utilities Cooperative Finance Corporation and subsidiaries as of May 31, 2014, and the results of their operations and their cash flows for the year then ended, ~~May 31, 2013 for filing~~in conformity with ~~the Securities and Exchange Commission.~~

~~(k) Compensation Committee~~

~~Role of the Compensation Committee~~U.S. generally accepted accounting principles.

~~Our Compensation Committee currently consists~~We also have audited the adoption of ~~seven directors: Mr. Mercer, Mr. Cunningham, Mr. Beavers, Mr. Miller, Mr. Clawson, Mr. Korver and Mr. Thompson. The Compensation Committee of~~ASU 2011-11as described in note 16. In our opinion, the board of directors reviews and makes appropriate recommendations to the full board of directors regarding CFC’s total compensation philosophy and pay components, including, but not limited to, base and incentive pay programs. The Compensation Committee is also responsible for approving the compensation, employment agreements and perquisites for the CEO. The Compensation Committee annually reviews all approved corporate goals and objectives relevant to compensation, evaluates performance in light of those goals and approves the CEO’s compensation based on this evaluation, all of which is then submitted to the full board of directors for ratification. The Compensation Committee has delegated authority to the CEO for evaluating the performance and approving the annual base compensation for all of the other named executive officersdisclosures as ~~identified in the~~ ~~Summary Compensation Table~~ ~~below. Other than the CEO, no other named executive officer makes decisions regarding executive compensation.~~

~~general employee compensation programs and practices, the full board of directors also reviews and ratifies CFC’s compensation and benefit programs each year.~~

~~The Compensation Committee’s charter can be found on our website at www.nrucfc.coop (under the link “About CFC/Corporate Governance”).~~

~~The Compensation Committee’s Processes~~

The Compensation Committee has established a process to assist it in ensuring that CFC’s executive compensation program is achieving its objectives. Prior to the start of each fiscal year, the board of directors approves performance measures for the “corporate balanced scorecard,” which is the basis for the short-term incentive plan, and the specific goal and metrics for the long-term incentive plan. The Compensation Committee reviews and assesses the accomplishment of goals as of the end of the fiscal year and determines whether to authorize the payment of incentive compensation. This authorization is then submitted to the full board of directors for ratification.

The President, Vice President and Secretary-Treasurer of the board of directors meet annually with the CEO to review his performance based on his individual achievements, contribution to CFC’s performance and other leadership accomplishments. In determining Mr. Petersen’s base pay, the Compensation Committee subjectively considers a variety of corporate performance measures, including financial metrics, portfolio management, customer satisfaction and market share, industry leadership, and peer group compensation data provided by the compensation consultant, as discussed below.

~~Role of Compensation Consultant~~

In fiscal year 2013, the Compensation Committee hired Mercer (US) Inc. (“Mercer US”) to advise it on the CEO’s compensation as compared with the compensation of CEOs of peer group organizations. Through discussions with the Compensation Committee, Mercer US established a peer group of companies to use in assessing the competitiveness of the CEO’s compensation (see “Compensation Analysis” in the ~~Compensation Discussion and Analysis~~ section below). Mercer US advised the Compensation Committee through an assessment of compensation data from this peer group using both a one-year compensation analysis, which assesses CFC’s CEO compensation and the compensation of peer CEOs for the most recent fiscal year, and a three-year compensation analysis, which assesses average peer CEO pay for the last three fiscal years. Compensation analyses include peer group CEO base pay, actual and target, annual incentives, actual and target total cash compensation, one year and three year average long-term incentives and total direct compensation. Mercer US did not determine or provide the Compensation Committee with a specific recommendation on any component of executive compensation, it only reviewed benchmark data and discussed what is generally occurring with executive compensation. Mercer US did not provide any other service to CFC.

~~Role of Executive Officers~~

As described above, the Compensation Committee has delegated the authority for making base pay decisions for the other named executive officers to the CEO. The CEO exercises his judgment to set base pay rates, based on general market data, overall corporate performance and leadership accomplishments. For additional information about the CEO’s role in compensation decisions, see “Base Pay” under the ~~Compensation Discussion and Analysis~~ ~~section below.~~

~~(l) Section 16(a) Beneficial Ownership Reporting Compliance~~

~~Inapplicable.~~

~~(m) Board Leadership Structure and Role of Risk Oversight by the Board of Directors~~

~~Board Leadership Structure~~

The positions of CEO and President of the CFC Board of Directors are held by two separate individuals. The President must be a member of the board of directors and is elected annually by the board of directors. The President of the CFC Board of Directors has authority, among other things, to appoint members of the board to standing committees, to appoint a vice chairperson to each Board standing committee and to appoint members to ad-hoc Board committees. The President of the board presides over Board meetings, sets meeting agendas and determines materials to be distributed to the board. Accordingly, the board president has substantial ability to influence the direction of the board. CFC believes that separation of the positions of Board President and CEO reinforces the independence of the board in its oversight of its business and affairs. CFC also believes that this leadership structure is appropriate in light of the cooperative nature of the organization.

The board of directors appoints the CEO. The CEO is not a member of the board of directors. If the CEO position becomes vacant, the President will exercise the responsibilities of the CEO until a permanent or interim CEO is selected by the board of directors.

~~Board Role in Risk Oversight~~

CFC’s management has primary responsibility for day-to-day management of the risks associated with CFC’s business, including operational, credit, loan, asset and liability management, legal, regulatory and political risks, while the board of directors is primarily responsible for the oversight and direction of risk management. Management’s role includes identifying risks, establishing appropriate internal processes and an effective internal control environment to identify and manage risks, and communicating information about risk to the board. CFC’s management, consisting of the Executive Team and the Operations and Planning Council, which is composed primarily of vice president-level employees, is assisted in its day-to-day duties related to risk by individuals working in the business units, in addition to an Asset Liability Committee, Corporate Credit Committee and Disclosure Committee, which are authorized by the board of directors and have their members appointed by the CEO. Each of these internal, committees consists of certain management-level employees.

In fulfilling its risk management oversight duties, the board of directors receives periodic reports on business activities from management and from various operating groups and committees across the organization, including the Credit Risk Management group, the Member Services group, the Internal Audit group and the Corporate Compliance Officer, as well as the Asset Liability Committee, the Corporate Credit Committee and the Disclosure Committee. The board of directors also reviews CFC’s risk profile and management’s response to those risks throughout the year at its meetings.

~~CFC has an annual strategic planning process that involves the board of directors, the Executive Team and the Operations and Planning Council.~~

The process begins with a review of the strategic risk assessment. This session provides the Executive Team an opportunity to discuss the risk assessment with the board of directors and to discuss other pertinent strategic topics. The objective of the risk assessment is to identify significant business risks facing CFC that could impede our ability to achieve our strategic goals. The result of the risk assessment is a listing of significant business risks that are prioritized based on likelihood and impact. The board of directors has developed a risk management philosophy, which is reviewed and, if appropriate, updated annually, which states CFC’s set of shared beliefs and attitudes on how risk is considered from strategy development and implementation to our operations.

The Operations and Planning Council periodically coordinates operational risk assessment sessions, which involve the Executive Team and other senior managers from across the organization. Before the risk assessment session, the Operations and Planning Council requests participants to prioritize the operational risks within CFC’s risk management framework. The Internal Audit team compiles the risk rankings based on the responses received from participants and determines the overall top 10 risks. During the risk assessment session, the participants assess the likelihood and impact for each of the 10 top risks using a high, medium and low scale without any regard to mitigation strategies.

The board of directors has established a risk appetite that includes a common understanding between executive management and the board of directors regarding acceptable risks and risk tolerances underlying the execution of CFC’s strategy. It is also intended as a benchmark for discussing the implications of pursuing new strategies and business opportunities.

~~The results of the board’s strategic risk assessment and management’s operational risk assessment are used as the basis for the development of the strategic plan.~~

Additionally, the Risk Committee of the Operations and Planning Council periodically conducts a risk culture survey to assess the strengths and weaknesses of our corporate culture in the following areas: risk management activities, management’s philosophy and operating style, organizational structure, integrity and ethical values. The Operations and Planning Council then provides the Executive Team with recommended action items that are focused on improving the internal control environment.

The Audit Committee of the Board of Directors assists the full board of directors in its risk oversight responsibilities. In accordance with its charter, CFC’s Audit Committee is required to periodically inquire of the internal auditors and the external auditors regarding significant risks and exposures to the organization, as well as inquire as to the steps management has taken or proposes to take to minimize these risks. The Audit Committee periodically reviews compliance with such steps. The Corporate Compliance group provides the Audit Committee with semi-annual reports on compliance and ethics matters, including any breaches of laws, regulations or organizational standards. In addition, the Internal Audit group provides the Audit Committee with feedback on the effectiveness and design of internal control processes by reporting the results of its internal audits.

~~Item 11. Executive Compensation.~~

~~Compensation Discussion and Analysis~~

~~Executive Compensation Philosophy and Objectives~~

~~The components of our compensation package for the named executive officers (consisting of Messrs. Petersen, Evans, Lilly, List and Larochelle) are consistent with those offered to all employees.~~

~~Our executive compensation program provides a balanced mix of compensation that incorporates the following key components:~~

·	~~annual base pay,~~

·	~~an annual cash incentive that is based on the achievement of short-term (one-year) corporate goals,~~

·	~~a three-year cash incentive that is based on the achievement of longer-term corporate goals, and~~

·	~~retirement, health and welfare and other benefit programs.~~

~~While all elements of executive compensation work together to provide a competitive compensation package, each element of compensation is determined independently of the other elements.~~

Our compensation philosophy is to provide a total compensation package for employees – base pay, short-term incentive, long-term incentive and benefits – that is competitive in the local employment market. However, due to the cooperative nature of the organization, CFC does not meet the total cash compensation levels of named executive officers of other financial services organizations since we do not offer stock or other equity compensation. It is important to CFC, however, to pay the named executive officers of CFC competitively in base pay to retain key talent.

~~Performance~~ – Named executive officers receive base pay that is both market competitive and reflective of the strategic management they provide to CFC. Other components of compensation – short-term and long-term incentives – reflect the performance of the organization and the success in achieving corporate performance metrics established by the board of directors.

~~Retention~~ – CFC’s success is due in large part to the relationship between our employees and our members. This makes the retention of employees, including the named executive officers, vital to our business and long-term success. The compensation package, particularly the long-term incentive plan and the retirement benefits, assist in the retention of a highly qualified management team.

~~Compensation Analysis~~

In fiscal year 2013, Mercer US was engaged by the Compensation Committee to conduct a compensation survey to provide compensation data for the CEO position using 14 peer organizations identified by Mercer US through discussion with the Compensation Committee. Mercer US included companies in the peer group that were similar to CFC in asset size, industry and business description. The peer group included financial institutions that are private market, commercial and/or mission-driven lenders, offering full-service financing, investment and related services. The companies targeted as peer companies included three members of the Farm Credit system and 12 regional banks or financial services companies. These companies were chosen because their businesses are similar to CFC’s.

The peer group companies had assets ranging from approximately 50 percent to 200 percent of CFC’s December 2011 total assets of $20,430 million, and included six companies with greater total assets than CFC’s. The peer group consisted of financial services organizations New York Community Bancorp, Inc., Astoria Financial Corp., Nelnet, Inc., Webster Financial Corp., Flagstar Bancorp, People’s United Financial Corp., Washington Federal Inc., Hudson City Bancorp Inc., First Niagara Financial Group, TFS Financial Corporation, Everbank Financial Corporation and Federal Agricultural Mortgage Corporation, as well as two Farm Credit System peers. Hudson City Bancorp Inc.’s 2011 assets are outside of the normal targeted asset range, and they have agreed to a merger with M&T Bank Corp. Mercer US recommended that this company remain in the peer group for this year and will re-evaluate the peer group for next year’s analysis. Mercer US also recommended adding Everbank Financial Corporation to the peer group this year due to its close fit with the criteria for peer group inclusion.

Mercer US led the Compensation Committee through an assessment of CEO compensation data at the peer group companies using both a one-year and a three-year compensation analysis. Mercer’s data included both actual compensation and target compensation based on information obtained from each peer group company’s most recent annual report or proxy statement.

~~The elements of compensation reviewed include:~~

·	~~current base salary;~~

·	~~actual bonus paid for fiscal year 2011 and for the targeted compensation the target bonus for 2012;~~

three-year average actual long-term incentive paid, which includes restricted stock awards (valued at face value on the date of grant), stock option awards (valued at grant date utilizing the Black-Scholes option pricing model), other long-term incentive target awards (valued at target value on date of award) and cash long-term incentive payouts (valued at actual payout on date of award if target value is not disclosed); and

·	~~sign-on awards, special awards and mega-grants annualized over the term of employment contract or the vesting schedule.~~

~~The Compensation Committee reviewed total compensation data for the peer group for informational purposes and used this data solely to determine the competitiveness of our CEO base pay.~~

In determining the base compensation paid to our other named executive officers, the CEO reviewed national, credible third-party compensation surveys (including the Mercer Executive and CompAnalyst surveys) for financial services and other organizations of similar asset size as CFC in order to obtain a general understanding of current compensation practices and to ensure that the base pay component of compensation for the named executive officers other than the CEO is competitive with such institutions. CFC has often recruited non-CEO talent from industries outside the financial services sector. As a result, the CEO considers data from surveys covering a larger and broader group of for-profit companies in setting compensation for the other named executive officers than the Compensation Committee considers in setting compensation for the CEO. The CEO considered the data to gain a general understanding of current compensation practices at institutions of similar asset size to CFC, and did not review or consider underlying data pertaining to individual organizations comprising any of the survey groups. Instead, the CEO considered the aggregate compensation data to enhance his understanding of current practices in setting compensation at competitive levels.

~~Elements of Compensation~~

~~Base Pay~~ – Our philosophy is to provide annual base pay that reflects the value of the job in the marketplace, targeted at the 50th percentile. To attract and retain a highly skilled work force, we must remain competitive with the pay of other employers that compete with us for talent.

After reviewing the performance of the organization and the evaluation of the CEO’s performance by each board member, it was the assessment of the Compensation Committee that the CEO and the organization performed extremely well during another challenging business year. In fact, the business results exceeded company targets for nearly all key metrics of performance and the CEO continued to demonstrate outstanding leadership. However, at the request of the CEO, given the continued economic and competitive business challenges facing the organization, the Committee did not increase the CEO’s compensation for calendar year 2013.

~~As discussed under~~ ~~Role of the Compensation Committee~~ ~~above, the CEO exercised his judgment to set the annual base pay for the other named executive officers based on general market data, overall performance and leadership accomplishments.~~

Mr. Evans, Mr. List, Mr. Larochelle and Mr. Lilly all continue to perform well in their various roles as senior leaders of the organization. They each contributed to the achievement of corporate strategies and objectives in a positive and meaningful way which would typically warrant a merit-based increase in base pay. However, it was determined that these individuals are currently being paid an appropriate base salary for an executive of this organization; therefore, no base increases were made. Mr. Evans, Mr. List and Mr. Larochelle each received a one-time cash award. The cash award amounts are included in the total compensation table below.

~~Short-Term Incentive~~ – Our short-term cash incentive program is a one-year cash incentive that is tied to the annual performance of the organization as a whole. We believe that by paying a short-term incentive tied to the achievement of annual operating goals, all employees, including named executive officers, will focus their efforts on the most important strategic objectives that will help us to fulfill our mission to our members and our obligations to the financial markets. Additionally, the short-term incentive pay enhances our ability to provide competitive compensation while at the same time tying total compensation paid to the achievement of corporate goals. Every employee participates in the short-term incentive program, and the corporate strategic goals are the same for all employees, including the named executive officers.

The short-term incentive program provides annual cash incentive opportunities based upon the level of the position within our base pay structure, ranging from 15 percent to 25 percent of base pay. Named executive officers are eligible to receive short-term cash incentive compensation up to 25 percent of their base pay. Since its inception in 1999, the actual payout percentage has ranged from 55 percent to 100 percent of total opportunity, with an average over the 15 years of 82.37 percent. This equates to a 15-year average payout of 15.85 percent of base salaries for all employees.

Our approach to establishing corporate goals for short-term incentive compensation has not changed since the plan’s inception. Corporate performance is measured using a balanced scorecard approved by the board of directors prior to the start of the fiscal year. The balanced scorecard is a performance management tool that articulates the corporate strategy into specific, quantifiable, measurable goals. The goals have always been tied to enhancing service to our member owners while ensuring all aspects of the business are effectively managed.

The scorecard is divided into four quadrants, reflecting crucial areas of business performance. Specific goals are established within those quadrants to focus all employees on the target results and measures that must be achieved if we are to succeed at realizing our strategic plan. The intent is to align organizational, departmental and individual initiatives to achieve a common set of goals.

The four quadrants for fiscal year 2013, which were the basis for the short-term incentive payment, are the same as they have been in previous years: Customer Engagement, Financial Ratios, Internal Process and Operations, and Learning, Growth and Innovation. For fiscal year 2013, the board of directors established five corporate goals within these four quadrants. The board of directors establishes corporate goals and measures that they believe are challenging but achievable if each individual performs well in his or her role and we meet our internal business plan goals.

~~The goals for fiscal year 2013 were:~~

·	~~Customer Engagement: A goal supporting efforts to maintain or increase market share of borrowers in key segments of the loan portfolio.~~

·	~~Internal Process and Operations: Manage CFC’s operating expense levels.~~

·	~~Financial Ratios: Two goals supporting efforts to meet or exceed established financial targets to maintain CFC’s financial strength.~~

·	~~Learning, Growth & Innovation: Targeted interaction with the membership.~~

The determination of the extent to which the five goals were achieved and, therefore, the amount to be paid out under the short-term incentive plan for fiscal year 2013 was confirmed by the board of directors with the filing of this Form 10-K. The board determined that four of the goals were 100 percent achieved; and one goal was achieved at 75 percent, resulting in an aggregate payout of 95 percent of the total opportunity.

~~Long-Term Incentive~~ – The long-term incentive program is a three-year plan that is tied to CFC’s long-term strategic objectives. The long-term incentive program was implemented to create dynamic tension between short-term objectives and long-term goals. It is also an effective retention tool, helping us to keep key employees, and supports CFC’s efforts to compensate its employees at market competitive levels.

All employees employed on the first day of the fiscal year, June 1, are eligible to participate in the program for the performance period beginning on that date. Under the long-term incentive program, performance units covering a three-year performance period are issued to each employee at the start of each fiscal year. The long-term incentive is paid out in one lump sum after the end of the performance period, subject to approval by the board of directors and the continued employment of the participant by CFC on the date of payment. We sometimes refer to each three-year performance period as a plan cycle.

The performance measure for all active long-term incentive plans is the achievement of bond rating targets for our senior secured debt as rated by Standard & Poor’s Corporation and Moody’s Investors Service rating agencies. The value of the performance units will range from $0 to $150 per performance unit according to the level of CFC’s secured debt ratings by the rating agencies. To achieve the highest value of $150, which exceeds the targeted value, both agencies would have to raise CFC’s long-term secured debt rating to AA (or the equivalent rating at Moody’s). To determine the payout value of performance units, the ratings are given a numerical value, i.e., 2 for A+ stable, 3 for A+ positive, etc. The ratings are then averaged to achieve the final value of the performance units.

The number of performance units awarded to each employee for each plan cycle is calculated by dividing a percentage, ranging from 15 percent to 25 percent, of the participant’s base pay on the first day of the plan cycle, by the payout value assigned to the target rating level. For the program cycle ending May 31, 2013, the target rating level was “AA-Stable”, which was assigned a payout value of $100 per performance unit. For the named executive officers, the number of performance units awarded for that program cycle was based on 25 percent of each named executive officer’s base pay on June 1, 2010. If the highest rating level was achieved at the end of that plan cycle, resulting in payout of $150 per performance unit, the long-term incentive pay for named executive officers would have been 37.5 percent of 2010 base pay.

~~The following table shows the potential payout values for performance units awarded for the program cycle that ended May 31, 2013:~~

~~Senior Secured Debt Rating—Incentive-Performance Linkage~~

Rating A+ AA- AA
Outlook negative stable positive negative stable positive
Numerical
Score
1 2 3 4 5 6
Plan Pay-Out
Unit Value
$0 $20 $60 $60 $100 $120 $150

* The target objective is in bold.

CFC uses our senior secured debt rating as the performance measure for the long-term incentive plan because, as a financial services company, CFC is dependent on the capital markets and stronger ratings lead to lower interest cost and more reliable access to the capital markets. Since we have no publicly held equity securities and our objective is to offer our members low-cost financial products and services consistent with sound financial management rather than to maximize net income, more traditional performance measures such as net income or earnings per share would not be appropriate.

As of May 31, 2013, ~~there~~in note 16 related to the adoption of ASU 2011-11 are appropriate. We were ~~three active long-term incentive plans in which named executive officers are participants. Performance units issued~~not engaged to ~~named executive officers in June 2010 had a payout value based on our senior secured debt ratings in place on May 31, 2013; performance units issued~~audit, review, or apply any procedures to ~~named executive officers in June 2011 will have a payout value based on senior secured debt ratings in place on May 31, 2014;~~the 2013 consolidated financial statements of the Company other than with respect to such disclosures related to the adoption of ASU 2011-11 and, performance units issued to named executive officers in June 2012 will have a payout value based on senior secured debt ratings in place on May 31, 2015. Payments made to named executive officers for fiscal year 2013 were for performance units issued in June 2010 and were basedaccordingly, we do not express an opinion or any other form of assurance on the ~~May 31,~~ 2013 ~~senior secured debt rating level of A+ stable outlook, which has a value of $20 per performance unit, or 20 percent of the targeted opportunity (5 percent of June 2010 base pay).~~

All current plans will pay out if both rating agencies, Standard & Poor’s Corporation and Moody’s Investors Services, rate our senior secured debt at a high enough level to receive a payout. The payout will be based on the average of the two ratings (averages are calculated and rounded down to the next whole number).

~~Risk Assessment~~

The Compensation Committee conducts an annual risk assessment of the Company’s compensation policies and practices, particularly the short-term and long-term incentive plan goals, to ensure that the policies and practices do not encourage excessive risk. For fiscal year 2013 the Compensation Committee concluded that our compensation policies and practices are not reasonably likely to provide incentives for behavior that could have a material adverse effect on the Company.

~~Benefits~~

An important retention tool is our defined benefit pension plan, the Retirement Security Plan. CFC participates in a multiple employer pension plan managed by NRECA. We balance the effectiveness of this planconsolidated financial statements taken as a compensation and retention tool with the cost of the annual premium incurred to participate in this pension plan. The value of the pension benefit is determined by base pay only and does not include other cash compensation.

We also offer a Pension Restoration Plan, which is a component of the NRECA Retirement Security Plan, to a select group of management, including the named executive officers, to increase their retirement benefits above amounts available under the Retirement Security Plan, which is restricted by IRS limitations on annual pay levels and maximum annual annuity benefits. The Pension Restoration Plan restores the value of the Retirement Security Plan for named executive officers to the level it would be if the IRS limits on annual pay and annual annuity benefits were not in place. Unlike the Retirement Security Plan, the Pension Restoration Plan is an unfunded, unsecured obligation of CFC and is not qualified for tax purposes. We pay the amount owed to the named executive officers for the pension restoration benefit; amounts paid are then deducted from the premium due for the next Retirement Security Plan invoice(s) from NRECA.

~~For more information on the Retirement Security Plan and the Pension Restoration Plan, see the~~ ~~Pension Benefits Table~~ ~~and accompanying narrative below.~~whole.

As an additional retention tool designed to assist named executive officers in deferring compensation for use in retirement, each named executive officer is also eligible to participate in CFC’s non-qualified 457(b) deferred compensation savings plan. Contributions to the plan are limited by IRS regulations. The calendar year 2013 cap for contributions is $17,500. There/s/ KPMG LLP

McLean, Virginia

~~is no CFC contribution to the deferred compensation plan. For more information see~~ ~~Nonqualified Deferred Compensation~~August 28, 2014 ~~below.~~

~~Other Compensation~~

~~We provide named executive officers with other benefits, as reflected in the All Other Compensation column in the~~ ~~Summary Compensation Table~~ ~~below, that we believe are reasonable and consistent with our compensation philosophy. We do not provide significant perquisites or personal benefits to the named executive officers.~~

The Compensation Committee considers perquisites for the CEO in connection with its annual review of the CEO’s total compensation package described above. The perquisites provided to Mr. Petersen are limited to an annual automobile allowance as well as an annual spousal air travel allowance to permit Mr. Petersen’s spouse to accompany him on business travel. To provide these perquisites in an efficient fashion, the board of directors authorizes an annual allowance rather than providing unlimited reimbursement or use of a company-owned vehicle. The amount of each allowance is authorized annually by the board of directors and is determined based on the estimated cost for operation and maintenance of an automobile and the anticipated cost of air travel by the CEO’s spouse. For 2013, the board of directors authorized an aggregate of $30,000 to cover these allowances.

~~Severance/Change-in-Control Agreements~~

Mr. Petersen, Chief Executive Officer, and Mr. Evans, Executive Vice President and Chief Operating Officer, each have an executive agreement with CFC under which they may continue to receive compensation and benefits in certain circumstances after resignation or termination of employment. The value of Mr. Petersen’s severance package was determined to be appropriate for a CEO and approved by the Compensation Committee as part of his employment contract. The value of Mr. Evans’ severance package was negotiated by the CEO and Mr. Evans as part of Mr. Evans’ employment offer. No other named executive officers have termination or change-in-control agreements. For more information on these severance arrangements, see ~~Termination of Employment and Change-in-Control Arrangements~~ ~~below.~~

~~Compensation Committee Report~~

The Compensation Committee of the board of directors oversees CFC’s compensation program on behalf of the board. In fulfilling its oversight responsibilities, the Compensation Committee reviewed and discussed with management the Compensation Discussion and Analysis set forth in this Form 10-K. Based on this review and discussion, the Compensation Committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this Form 10-K.

~~Submitted by the Compensation Committee:~~

~~Burns E. Mercer~~

~~Joel Cunningham~~

~~Ray Beavers~~

~~Glenn W. Miller~~

~~R. Grant Clawson~~

~~Lyle Korver~~

~~Kirk A. Thompson~~

~~Summary Compensation Table~~

The summary compensation table below sets forth the aggregate compensation for the years ended May 31, 2013, 2012 and 2011 earned by the named executive officers and three additional executive officers of CFC that meet the definition of “related persons” pursuant to SEC disclosure requirements.

Name and Principal Position Year Salary Bonus (1)
Non-Equity
Incentive Plan
Compensation (2)
Change in Pension Value and Nonqualified Deferred Compensation Earnings (3)
All Other
Compensation (4)
Total
Sheldon C. Petersen 2013 $ 813,700 $ - $ 231,494 $ 636,330 $ 42,924 $ 1,724,448
Chief Executive Officer 2012 799,874 100,000 156,721 896,555 41,997 1,995,147
2011 775,329 229,332 540,169 34,025 1,578,855

John T. Evans 2013 458,300 11,500 130,546 190,874 5,833 797,053
Executive Vice President 2012 458,300 - 88,625 260,220 9,104 816,249
& Chief Operating Officer 2011 433,800 128,330 206,602 5,994 774,726

Steven L. Lilly 2013 405,650 - 116,622 121,167 - 643,439
Senior Vice President & 2012 405,650 10,000 80,727 326,923 - 823,300
Chief Financial Officer 2011 405,650 121,292 276,510 - 803,452

John J. List 2013 405,650 8,000 116,622 115,237 5,000 650,509
Senior Vice President of 2012 405,650 15,000 80,727 163,754 4,900 670,031
Member Services and 2011 405,650 121,292 35,705 5,759 568,406
General Counsel

Richard E. Larochelle 2013 421,876 10,500 120,476 496,981 5,000 1,054,833
Senior Vice President of 2012 421,876 - 83,161 628,834 5,035 1,138,906
Corporate Relations 2011 405,650 121,292 347,103 5,759 879,804

Lawrence Zawalick (5) 2013 320,000 - 90,780 280,498 5,483 696,761
Senior Vice President of 2012 312,000 - 61,300 498,172 7,037 878,509
Affiliate Organizations 2011 295,600 88,400 175,814 5,687 565,501

J. Andrew Don (5) 2013 375,000 - 101,423 219,102 6,250 701,775
Senior Vice President & 2012 325,000 - 58,890 206,202 9,317 599,409
Treasurer 2011 261,050 74,863 75,574 5,839 417,326

John M. Borak (5) 2013 260,049 5,200 74,762 82,225 5,000 427,236
Senior Vice President of 2012 260,049 8,000 51,747 68,023 4,900 392,719
Credit Risk Management 2011 260,049 77,752 65,820 5,514 409,135

Leigh V. Grantham (5) (6) 2013 99,038 - 23,522 9,032 38,220 169,812
   Senior Vice President of
   Strategy and Business
   Development

Name Year
Short-term
Incentive Plan

Long-term
Incentive Plan

Sheldon C. Petersen 2013 $$ 193,254 $$ 38,240
2012 119,981 36,740
2011 193,832 35,500

John T. Evans 2013 108,846 21,700
2012 68,745 19,880
2011 108,450 19,880

Steven L. Lilly 2013 96,342 20,280
2012 60,847 19,880
2011 101,412 19,880

John J. List 2013 96,342 20,280
2012 60,847 19,880
2011 101,412 19,880

Richard E. Larochelle 2013 100,196 20,280
2012 63,281 19,880
2011 101,412 19,880

Lawrence Zawalick (5)
2013 76,000 14,780
2012 46,800 14,500
2011 73,900 14,500

J. Andrew Don (5) 2013 89,063 12,360
2012 48,750 10,140
2011 65,263 9,600

John M. Borak (5) 2013 61,762 13,000
2012 39,007 12,740
2011 65,012 12,740

Leigh V. Grantham (5) (6)
2013 23,522 -

~~(1) Includes amounts given as one-time cash awards in lieu of base pay increases, except for Mr. Petersen, which was a bonus in addition to a base pay increase in 2012.~~

(2) Includes amounts earned during each respective fiscal year and payable at May 31 under the long-term and short-term incentive plans. For a discussion of the long-term and short-term incentive plans, see “Elements of Compensation” in ~~Compensation Discussion and Analysis~~ ~~above. The amounts earned by each named executive officer under these incentive plans are listed above.~~

(3) Represents solely the aggregate change in the actuarial present value of the accumulated pension benefit under NRECA Retirement Security Plan, the multiple employer defined benefit pension plan in which CFC participates, during each respective fiscal year.

(4) For Mr. Petersen, includes $30,000 of perquisites comprising Mr. Petersen’s automobile allowance and his spousal air travel allowance, in each case for fiscal year 2012 and 2013. The annual automobile allowance is calculated based on estimated costs associated with maintenance, use and insurance of a personal automobile. The annual spousal travel allowance is calculated based on the anticipated air travel for Mrs. Petersen during the fiscal year. Mr. Petersen’s also includes earnings for accrued and unused annual leave in 2013. The remaining amounts included in this column represent CFC contributions on behalf of each named executive officer pursuant to the CFC 401(k) defined contribution plan, contributions to health savings. For Ms. Grantham, these costs include relocation expenses of $34,062 and $2,408 attributable to tax gross up for relocation.

~~(5) These executives are “related persons” as defined by the SEC’s disclosure requirements and are included in the~~ ~~Summary Compensation Table~~ ~~as we generally treat all of our executive officers equally.~~

~~(6) Leigh V. Grantham became an executive officer of CFC on February 4, 2013 when she was appointed Senior Vice President, Strategy and Business Development.~~

~~Grants of Plan-Based Awards~~

We have a long-term and a short-term incentive plan for all employees, under which the named executive officers may receive a cash incentive up to 37.5 percent and 25 percent of salary, respectively. The incentive payouts are based on the executive officer’s salary at the date the program becomes effective. See the ~~Compensation Discussion and Analysis~~ ~~above for further information on these incentive plans.~~

The following table contains the estimated possible payouts under our short-term incentive plan and possible future payouts for grants issued under our long-term incentive plan during the year ended May 31, 2013.

Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
Threshold Target Maximum
Sheldon C. Petersen
Long-term Incentive Plan (1)
$ - $ 203,400 $   305,100
Short-term Incentive Plan (2)
- 193,254   193,254
John T. Evans
Long-term Incentive Plan (1)
- 114,600   171,900
Short-term Incentive Plan (2)
- 108,846   108,846
Steven L. Lilly
Long-term Incentive Plan (1)
- 101,400   152,100
Short-term Incentive Plan (2)
-   96,342     96,342
John J. List
Long-term Incentive Plan (1)
- 101,400   152,100
Short-term Incentive Plan (2)
-   96,342     96,342
Richard E. Larochelle
Long-term Incentive Plan (1)
- 105,500   158,250
Short-term Incentive Plan (2)
- 100,196   100,196
Lawrence Zawalick
Long-term Incentive Plan (1)
- 80,000   120,000
Short-term Incentive Plan (2)
- 76,000     76,000
J. Andrew Don
Long-term Incentive Plan (1)
- 93,800   140,700
Short-term Incentive Plan (2)
- 89,063     89,063
John M. Borak
Long-term Incentive Plan (1)
- 65,000     97,500
Short-term Incentive Plan (2)
- 61,762     61,762
Leigh V. Grantham
Long-term Incentive Plan (1)
-           -              -
     Short-term Incentive Plan (2) (3)
- 23,522     23,522

~~(1) Target payouts are calculated using unit values of $100 based on our goal of achieving an average long-term senior secured credit rating of AA- stable at May 31, 2015.~~

(2) Target and maximum payouts represent 25 percent of May 31, 2013 base salary. For the payout earned under the fiscal year 2013 short-term incentive plan, see the Non-Equity Incentive Plan Compensation column of the ~~Summary Compensation Table~~ ~~above.~~

~~(3) Ms. Grantham’s target and maximum are prorated based upon time worked during the fiscal year.~~

The board of directors approved a new long-term incentive plan and made grants of performance units to the named executive officers in August 2013. The payout under these grants will be determined on May 31, 2016.

~~Employment Contracts~~

Pursuant to an employment agreement effective as of January 1, 2008 and amended September 1, 2011, CFC has agreed to employ Mr. Petersen as Chief Executive Officer through February 28, 2015, unless otherwise terminated in accordance with the terms of the Agreement. The amended Agreement provides that CFC shall pay Mr. Petersen a base salary at an annual rate of not less than $790,000 per annum, plus such incentive payments (if any) as may be awarded him. In addition, pursuant to the Agreement, Mr. Petersen is entitled to certain payments in the event of his termination other than for cause (e.g., Mr. Petersen leaving for good reason, disability or termination due to death). See ~~Termination of Employment and Change-in-Control Arrangements~~ ~~below for a description of these provisions and for information on these amounts.~~

~~For information about Mr. Evans’ termination agreement, see~~ ~~Termination of Employment and Change-in-Control Arrangements.~~

~~Pension Benefits Table~~

CFC is a participant in a multiple employer defined benefit pension plan, the Retirement Security Plan, which is administered by NRECA. Since the plan is a multiple employer plan in which CFC participates, CFC is not liable for the amounts shown in the table below and such amounts are not reflected in CFC’s audited financial statements. CFC’s expense is limited to the annual premium to participate in the plan. There is no funding liability for CFC for the plan.

compensation. Normal retirement age under the qualified pension plan is age 65; however, the plan does allow for early retirement with reduced benefits. For early retirement, the pension benefit will be reduced by 1/15 for each of the first five years and 1/30 for each of the next five years by which the elected early retirement date precedes the normal retirement date. Each of the named executive officers is eligible for early retirement under the plan. Benefits accrued prior to September 1, 2010, are based on a benefit level of 1.9 percent of the average of their five highest base salaries during their last 10 years of employment and a normal retirement age of 62.

CFC also offers a Pension Restoration Plan, which is a component of the Retirement Security Plan. Each of the named executive officers participates in the Pension Restoration Plan component of the Retirement Security Plan, the purpose of which is to increase their retirement benefits above amounts available under the Retirement Security Plan, which is restricted by IRS limitations on annual pay levels and maximum annual annuity benefits. The Pension Restoration Plan restores the value of the Retirement Security Plan for each officer to the level it would be if the IRS limits on annual pay and annual annuity benefits were not in place.

The benefit and payout formula under this restoration component of the Retirement Security Plan is similar to that under the qualified plan component. However, each of the named executive officers has satisfied the provisions established to receive the benefit from this plan. Since there is no longer a risk of forfeiture of the benefit under the Pension Restoration Plan, distributions will be made from the plan to each named executive officer annually.

The following table contains the years of service, the present value of the accumulated benefit for the executive officers listed in the Summary Compensation Table at May 31, 2013 and distributions from the plan for the fiscal year then ended.

Name Plan Name
Number of Years
Credited Service (1)

Present Value of
Accumulated Benefit (2)

Payments During
Last Fiscal Year (3)
Sheldon C. Petersen NRECA Retirement Security Plan 29.75 $ 2,724,318 $ 489,898
John T. Evans (4) NRECA Retirement Security Plan 2.75 203,244 102,597
Steven L. Lilly (4) NRECA Retirement Security Plan 2.75 193,979 37,514
John J. List (5)
NRECA Retirement Security Plan 4.92 174,382 48,366
Richard E. Larochelle NRECA Retirement Security Plan 29.00 2,384,019 244,715
Lawrence Zawalick NRECA Retirement Security Plan 32.67 1,887,173 339,974
J. Andrew Don NRECA Retirement Security Plan 12.67 806,828 -
John M. Borak (5)
NRECA Retirement Security Plan 6.92 466,224 3,111
Leigh V. Grantham NRECA Retirement Security Plan 20.50 711,545 -

(1) CFC is a participant in a multiple employer pension plan. Credited years of service, therefore, includes not only years of service with CFC, but also years of service with another cooperative participant in the multiple employer pension plan. Mr. Larochelle and Ms. Grantham have credited years of service with another cooperative in addition to CFC. All other executives have credited years of service only with CFC.

~~(2) Amount represents the actuarial present value of the executive officer’s accumulated benefit under the plan as of May 31, 2013, as~~

provided by the plan administrator, NRECA, using interest rates ranging from 0.75 percent to 4.60 percent per annum and mortality according to tables prescribed by the IRS as published in Revenue Rulings 2001-62 and 2007-67.

(3) Distributions during fiscal year 2013 were as a result of executive officers no longer being at risk of forfeiture with respect to these amounts provided under the deferred compensation restoration component of the Retirement Security Plan.

(4) Due to the quasi-retirements of Mr. Evans in March of 2012 and Mr. Lilly in January 2012, for benefit earned through August 2010, their credited years of service were reduced to reflect credited years of service for the remainder of the 2010 calendar year and they received 12 months of credited service in January of each year thereafter.

(5) Due to quasi-retirements of Mr. List in January 2009 and Mr. Borak in January 2007, their credited years of service were reduced to zero at that time. Subsequent to the quasi-retirement, they received credited years of service for the remainder of the year in which the quasi-retirement occurred and received 12 months of credited service in January of each year thereafter.

~~Nonqualified Deferred Compensation~~

The CFC deferred compensation plan is a nonqualified deferred compensation savings program for the senior executive group, including each of the named executive officers, and other selected management or highly compensated employees designated by CFC. Participants may elect to defer up to the lesser of 100 percent of their compensation for the year or the applicable IRS statutory dollar limit in effect for that calendar year. The calendar year 2013 cap for contributions is $17,500. Compensation for the purpose of this plan is defined as the total amount of compensation, including incentive pay, if any, paid by CFC. CFC does not make any contributions to the plan.

The accounts are credited with “earnings” based on the participants’ selection of available investment options (currently, eight options) within the Homestead Funds. When a participant ceases to be an employee for any reason, distribution of the account will generally be made in 15 substantially equal annual payments beginning approximately 60 days after termination (unless an election is made to change the form and timing of the payout). The participant may elect either a single lump sum or substantially equal annual installments paid over no less than two and no more than 14 years. The amount paid is based on the accumulated value of the account.

~~The following table summarizes information related to the nonqualified deferred compensation plan in which the executive officers listed in the~~ ~~Summary Compensation Table~~ ~~were eligible to participate during the year ended May 31, 2013.~~

Name
Executive
Contributions
in Last
Fiscal Year (1)
Registrant
Contributions
in Last
Fiscal Year
Aggregate
Earnings in Last
Fiscal Year
Aggregate
Withdrawals/
Distributions
Aggregate
Balance at Last
Fiscal Year End
Sheldon C. Petersen $ 17,617 $ - $ 103,685 $ - $ 437,915

John T. Evans 17,000 - 24,820 - 240,574

Steven L. Lilly - - 51,924 - 249,576

John J. List 17,208 - 46,821 - 201,178

Richard E. Larochelle 17,583 - 12,415 - 301,909

Lawrence Zawalick 15,500 - 56,738 - 241,717

J. Andrew Don - - - - -

John M. Borak 17,000 - 6,306 - 149,940

Leigh V. Grantham - - - - -

~~(1) Executive contributions are also included in the fiscal year 2013 Salary column in the~~ ~~Summary Compensation Table~~ ~~above.~~

~~Termination of Employment and Change-in-Control Arrangements~~

Mr. Petersen and Mr. Evans each have an executive agreement with CFC under which each such officer may continue to receive base salary and benefits in certain circumstances after resignation or termination of employment. No other named executive officers have termination or change-in-control agreements.

~~Mr. Petersen~~

Under the executive agreement with Mr. Petersen, if CFC terminates his employment without “cause,” or Mr. Petersen terminates his employment for “good reason” (each term as defined below), CFC is obligated to pay him a lump sum payment equal to the product of three times his annual base salary at the rate in effect at the time of termination and his short-term incentive bonus, if any, for the previous year (or an amount equal to the short-term incentive bonus for fiscal year 2007). Assuming a triggering event on May 31, 2013, the compensation payable to Mr. Petersen for termination without cause would be $2,801,043. The actual payments due on a termination without cause on different dates could materially differ from this estimate.

For purposes of Mr. Petersen’s executive agreement, “cause” generally means (i) the willful and continued failure by Mr. Petersen to perform his duties under the agreement or comply with written policies of CFC, (ii) willful conduct materially injurious to CFC or (iii) conviction of a felony involving moral turpitude. “Good reason” generally means (i) a reduction in the rate of Mr. Petersen’s base salary, (ii) a decrease in his titles, duties or responsibilities, or the assignment of new responsibilities which, in either case, is materially less favorable to Mr. Petersen when compared with his titles, duties and responsibilities which were in effect immediately prior to such assignment or (iii) the relocation of CFC’s principal office or the relocation of Mr. Petersen to a location more than 50 miles from the principal office of CFC.

~~Mr. Evans~~

Under the executive agreement with Mr. Evans, if CFC terminates his employment without cause, Mr. Evans would receive continued annual base salary in effect at the time of termination, incentive compensation, and payment for all health and welfare and retirement plans for an additional nine-month period. Assuming a termination date of May 31, 2013, the cost of compensation payable to Mr. Evans for termination without cause would be $497,485. The actual payments due for a termination without cause on different dates could materially differ from this estimate.

The estimates do not include amounts to which the named executive officers would be entitled to upon termination, such as base salary to date, unpaid bonuses earned, unreimbursed expenses, paid vacation time and any other earned benefits under company plans.

~~Director Compensation Table~~

Directors receive a fixed sum for each of the scheduled board meetings attended and for each conference call attended. Additionally, the directors receive reimbursement for reasonable travel expenses. The fixed cash amounts are paid following the conclusion of each board meeting or conference call attended.

~~The following chart summarizes the total compensation earned by CFC’s directors during the year ended May 31, 2013.~~

Name Total Fees Earned
Burns E. Mercer $ 47,500
Joel Cunningham 46,600
Ray Beavers 43,200
Frederick C. Anderson 43,150
Patrick L. Bridges 10,300
Fred Brog 41,650
Raphael A. Brumbeloe 36,950
Mike Campbell 41,950
R. Grant Clawson 42,850
Mel Coleman 10,150
Delbert Cranford 41,400
Walter K. Crook 32,750
Jim L. Doerstler 42,700
Jimmy Ewing, Jr. 37,700
Roman E. Gillen 10,150
Michael J. Guidry 21,900
Christopher L. Hamon 43,000
Scott W. Handy 41,950
Robert M. Hill 10,300
William A. Kopacz 37,700
Lyle Korver 43,000
Glenn W. Miller 43,900
Curtis Nolan 37,000
Harry N. Park 10,300
Curtin R. Rakestraw II 10,300
Randy D. Renth 43,150
Dwight Rossow 42,850
R. Wayne Stratton 38,600
Kirk A. Thompson 42,400

~~Compensation Committee Interlocks and Insider Participation~~

~~During the year ended May 31, 2013, there were no compensation committee interlocks or insider participation related to executive compensation.~~

~~Item 12.~~

~~Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.~~

~~Inapplicable.~~

~~Item 13.~~

~~Certain Relationships and Related Transactions, and Director Independence.~~

~~Review and Approval of Transactions with Related Persons~~

Our board of directors has established a written policy governing related-person transactions. The policy covers transactions with related persons such as our directors and executive officers and their immediate family members and entities, such as certain of our members, of which any of our directors or executive officers is an executive officer, director or employee or otherwise controls. Under this policy, a related-person transaction is any transaction in which we are a participant involving in excess of $120,000 in which a related person had, has or will have a direct or indirect material interest, other than compensatory and expense reimbursement arrangements, transactions where the related person’s interest arises only from the person’s position as a director of another entity that is a party to the transaction, and transactions that are deemed to be related credits. Such related-person transactions are subject to review and approval by the General Counsel, or in some cases, the board of directors (excluding any interested director), based on whether the transaction is fair and reasonable to CFC and consistent with the best interests of CFC.

Related credits are extensions of credit to, or for the benefit of, related persons and entities that are made on substantially the same terms as, and follow underwriting procedures that are no less stringent than, those prevailing at the time for comparable transactions generally offered by CFC. Related credits are not subject to the procedures for transactions with related persons because we were established for the very purpose of extending financing to our members. We, therefore, enter into loan and guarantee transactions with members of which our officers and directors are members, employees, executive officers or directors in the ordinary course of our business. All related credits are reviewed from time to time by our internal Corporate Credit Committee, which monitors our extensions of credit, and our independent third-party reviewer, which reviews our credit extension policies on an annual basis. All loans, including related credits, are approved in accordance with an internal credit approval matrix, with each level of risk or exposure potentially escalating the required approval from our lending staff to management, a credit committee or the board of directors. Related credits of $250,000 or less are generally approved by

our lending staff or internal Corporate Credit Committee. Any related credit in excess of $250,000 requires approval by the full board of directors, except that any interested directors may not participate, directly or indirectly, in the deliberations or vote with respect to such approval and the CEO has the authority to approve emergency lines of credit and certain other loans and lines of credit. Notwithstanding the related-person transaction policy, the CEO will extend such loans and lines of credit in qualifying situations to a member of which a CFC director was a director or officer, provided that all such credits are underwritten in accordance with prevailing standards and terms. Such situations are typically weather related and must meet specific qualifying criteria. To ensure compliance with this policy, no related persons may be present in person or by teleconference while a related credit is being considered. Under no circumstances may we extend credit to a related person or any other person in the form of a personal loan.

~~Related-Person Transactions~~

~~See the~~ ~~Summary Compensation Table~~ in Item 11 for a description of compensation paid to Lawrence Zawalick, J. Andrew Don and John Borak, CFC’s executive officers who are not named executive officers, but meet the definition of a “related person” as described above.

As a cooperative, CFC was established for the very purpose of extending financing to its members (from which our directors must be drawn). Loans and guarantees to member systems of which directors of CFC are members, employees, officers or directors are made in the ordinary course of CFC business on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other members and which do not involve more than normal risk of uncollectibility or present other unfavorable features. It is anticipated that, consistent with its loan and guarantee policies in effect from time to time, additional loans and guarantees will be made by CFC to member systems and trade and service organizations of which directors of CFC are members, employees, officers or directors. CFC has adopted a policy whereby substantially all extensions of credit to entities related to directors or their immediate family members are approved only by the disinterested directors.

~~Independence Determinations~~

The board of directors has determined the independence of each director based on a review by the full board. The Audit Committee is subject to the independence requirements of Rule 10A-3 under the Securities Exchange Act. To evaluate the independence of our directors, the board has voluntarily adopted categorical independence standards consistent with the New York Stock Exchange (“NYSE”) standards. However, because we only list debt securities on the NYSE, we are not subject to most of the corporate governance listing standards of the NYSE, including the independence requirements.

No director is considered independent unless the board has affirmatively determined that he or she has no material relationship with CFC, either directly or as a partner, shareholder or officer of an organization that has a relationship with CFC. Material relationships can include banking, legal, accounting, charitable and familial relationships, among others. In addition, a director is not considered independent if any of the following relationships existed:

~~(i)~~

~~the director is, or has been within the last three years, an employee of CFC or an immediate family member is, or has been within the last three years, an executive officer of CFC;~~

~~(ii)~~

the director has received, or has an immediate family member who has received, during any 12-month period within the last three years, more than $120,000 in direct compensation from CFC, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided that such compensation is not contingent in any way on continued service);

~~(iii)~~

(a) the director or an immediate family member is a current partner of a firm that is CFC’s internal or external auditor; (b) the director is a current employee of such a firm; (c) the director has an immediate family member who is a current employee of such a firm and personally works on CFC’s audit; or (d) the director or an immediate family member was within the last three years (but is no longer) a partner or employee of such a firm and personally worked on CFC’s audit within that time;

~~(iv)~~

the director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of CFC’s present executive officers at the same time serves or served on that company’s compensation committee; or

~~(v)~~

the director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, CFC for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2 percent of such other company’s consolidated gross revenue.

The board of directors also reviewed directors’ responses to a questionnaire asking about their relationships with CFC and its affiliates (and those of their immediate family members) and other potential conflicts of interest.

Based on the criteria above, the board of directors has determined that the directors listed below are independent for the period of time served by such directors during fiscal year 2013. The board determined that none of the directors listed below had any of the relationships listed in (i) - (v) above or any other material relationship that would compromise his or her independence.

~~Independent Directors~~
~~Ray Beavers~~	~~Walter K. Crook~~	~~Curtis Nolan~~
~~Patrick L. Bridges~~	~~Joel Cunningham~~	~~Harry N. Park~~
~~Fred Brog~~	~~Jim L. Doerstler~~	~~Curtin R. Rakestraw II~~
~~Raphael A. Brumbeloe~~ ~~(1)~~	~~Jimmy Ewing, Jr.~~ ~~(1)~~	~~Randy D. Renth~~
~~Mike Campbell~~	~~Michael J. Guidry~~ ~~(1)~~	~~Dwight Rossow~~
~~R. Grant Clawson~~	~~Robert M. Hill~~	~~R. Wayne Stratton~~ ~~(1)~~
~~Mel Coleman~~	~~Burns E. Mercer~~
~~Delbert Cranford~~ ~~(1)~~	~~Glenn W. Miller~~
~~(1) This director served during the year ended May 31, 2013; however he was no longer a director at May 31, 2013.~~

~~Item 14.~~

~~Principal Accounting Fees and Services.~~

~~The following table summarizes the aggregate professional fees for the audit of the financial statements for the years ended~~

~~May 31, 2013 and 2012 and fees for other services provided during that period by Deloitte & Touche, LLP.~~

2013 2012
Audit fees (1)
$ 1,454,200 $ 1,435,750
Audit-related fees (2)
45,000 40,000
Tax fees (3)
115,424 126,147
All other fees (4)
16,500 16,500
Total $ 1,631,124 $ 1,618,397

(1) Audit fees in 2013 and 2012 consist of fees for the audit of our consolidated financial statements, including RTFC and NCSC in accordance with the accounting standards governing variable interest entities, totaling $1,092,250, and fees for the preparation of the stand-alone financial statements for RTFC and NCSC totaling $160,000. Additionally, audit fees in 2013 and 2012 include comfort letter fees and consents related to debt issuances and compliance work required by the independent auditors.

~~(2) Audit-related fees include fees incurred in connection with the CAH audit.~~

~~(3) Tax fees consist of assistance with matters related to tax compliance and consulting.~~

~~(4) These fees relate to the audit of a trust serviced by CFC and legislative research fees.~~

CFC’s Audit Committee is solely responsible for the nomination, approval, compensation, evaluation and discharge of the independent public accountants. The independent registered public accountants report directly to the Audit Committee, and the Audit Committee is responsible for the resolution of disagreements between management and the independent registered public accountants. Consistent with Securities and Exchange Commission requirements, the Audit Committee has adopted a policy to pre-approve all audit and permissible non-audit services provided by the independent registered public accountants provided such services do not impair the independent public accountant’s independence. All fiscal 2013 and fiscal 2012 services were pre-approved by the Audit Committee. CFC’s independent registered public accountants for the current fiscal year have been appointed by the Audit Committee.

~~PART IV~~

~~Item 15.~~

~~Exhibits, Financial Statement Schedules.~~

	~~(a)~~	~~Documents filed as a part of this report.~~

1.	~~Consolidated financial statements~~		~~Page~~
	~~Report of Independent Registered Public Accounting Firm~~		94
	~~Consolidated Balance Sheets~~		95
	~~Consolidated Statements of Operations~~		97
	~~Consolidated Statements of Comprehensive Income~~		98
	~~Consolidated Statements of Changes in Equity~~		99
	~~Consolidated Statements of Cash Flows~~		~~100~~
	~~Notes to Consolidated Financial Statements~~		~~102~~

2.	~~Financial statement schedules~~
	~~All schedules are omitted because they are not required, are inapplicable or the information is included in the financial statements or notes thereto.~~

3.	~~Exhibits~~
	~~3.1~~	-	~~Articles of Incorporation. Incorporated by reference to Exhibit 3.1 to Registration Statement No. 2-46018, filed October 12, 1972.~~
	~~3.2~~	-	~~Amended Bylaws as approved by the CFC Board of Directors and members on March 7, 2011. Incorporated by reference to Exhibit 3.2 to our Form 10-Q filed on April 13, 2011.~~
	~~4.1~~	-	~~Form of Capital Term Certificate. Incorporated by reference to Exhibit 4.3 to Registration Statement No. 2-46018 filed October 12, 1972.~~
	~~4.2~~	-	~~Indenture dated February 15, 1994, between the Registrant and U.S. Bank National Association, successor trustee. Incorporated by reference to Exhibit 4.2 to our Form 10-Q filed on October 15, 2007.~~
	~~4.3~~	-	~~Indenture between CFC and Mellon Bank, N.A., as Trustee. Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-3 filed on November 14, 1995 (Registration No. 33-64231).~~
	~~4.4~~	-	~~Indenture between CFC and Chemical Bank, as Trustee. Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-3ASR filed on November 24, 2008 (Registration No. 333-155631).~~
	~~4.5~~	-	First Supplemental Indenture between CFC and Chemical Bank, as Trustee. Incorporated by reference to Exhibit 4.8 to Registration Statement on Form S-3 filed on October 1, 1990 (Registration No. 33-58445).
	~~4.6~~	-	Indenture dated May 15, 2000, between the Registrant and Bank One Trust Company, National Association, as trustee. Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-3 filed on May 25, 2000 (Registration No. 333-37940).
	~~4.7~~	-	First Supplemental Indenture dated March 12, 2007, between the Registrant and U.S. Bank National Association, as trustee. Incorporated by reference to Exhibit 4.2 to Registration Statement on Form S-3ASR filed on April 19, 2007 (Registration No. 333-142230).
	~~4.8~~	-	Indenture dated October 25, 2007, between the Registrant and U.S. Bank National Association, as trustee. Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-3ASR filed on October 26, 2007 (Registration No. 333-146960).
	~~10.1~~	-	Plan Document for CFC’s Deferred Compensation Program amended and restated July 1, 2003. Incorporated by reference to Exhibit 10.1 to our Form 10-K filed on August 24, 2005.*
	~~10.2~~	-	Employment Contract between CFC and Sheldon C. Petersen, effective January 1, 2008. Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on January 11, 2008.*
	~~10.3~~	-	First Amendment to Employment Contract between CFC and Sheldon C. Petersen, effective September 1, 2011.*
	~~10.4~~	-	Employment Contract between CFC and John T. Evans, dated September 17, 1997 including termination of employment arrangement. Incorporated by reference to Exhibit 10.4 to our Form 10-K filed on August 27, 2007.*
	~~10.5~~	-	Plan Document for CFC’s Deferred Compensation Pension Restoration Plan dated January 1, 2005. Incorporated by reference to Exhibit 10.16 to our Form 10-K filed on August 17, 2009.*
	~~10.6~~	-	~~Revolving Credit Agreement dated March 21, 2011 for $1,125,000,000 originally expiring on March 21, 2014. Incorporated by reference to Exhibit 4.3 to our Form 10-Q filed on April 13, 2011.~~
	~~10.7~~	-	~~Revolving Credit Agreement dated October 21, 2011 for $884,875,000 originally expiring on October 21, 2015. Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on January 17, 2012.~~
	~~10.8~~	-	~~Revolving Credit Agreement dated October 21, 2011 for $834,875,000 originally expiring on October 21, 2016. Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on January 17, 2012.~~
	~~10.9~~	-	Amendment No. 1 dated March 28, 2013 to the Revolving Credit Agreement dated March 21, 2011 originally expiring on March 21, 2014. Incorporated by reference to Exhibit 4.1 to our Form 10-Q filed on April 12, 2013.
	~~10.10~~	-	Amendment No. 1 dated March 28, 2013 to the Revolving Credit Agreement dated October 21, 2011 originally expiring on October 21, 2015. Incorporated by reference to Exhibit 4.2 to our Form 10-Q filed on April 12, 2013.

~~10.11~~	-	Amendment No. 1 dated March 28, 2013 to the Revolving Credit Agreement dated October 21, 2011 originally expiring on October 21, 2016. Incorporated by reference to Exhibit 4.3 to our Form 10-Q filed on April 12, 2013.
~~10.12~~	-	~~Joinder dated May 30, 2013 to the Revolving Credit Agreement dated March 21, 2011 originally expiring on March 21, 2014.~~
~~10.13~~	-	~~Joinder dated July 9, 2013 to the Revolving Credit Agreement dated March 21, 2011 originally expiring on March 21, 2014.~~
~~10.14~~	-	~~Joinder dated July 9, 2013 to the Revolving Credit Agreement dated October 21, 2011 originally expiring on October 21, 2015.~~
~~10.15~~	-	~~Joinder dated July 9, 2013 to the Revolving Credit Agreement dated October 21, 2011 originally expiring on October 21, 2016.~~
~~10.16~~	-	Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural Utilities Service dated June 14, 2005 for up to $1,000,000,000. Incorporated by reference to Exhibit 4.12 to our Form 10-K filed on August 24, 2005.
~~10.17~~	-	Series A Future Advance Bond from the Registrant to the Federal Financing Bank dated June 14, 2005 for up to $1,000,000,000 maturing on July 15, 2028. Incorporated by reference to Exhibit 4.15 to our Form 10-K filed on August 24, 2005.
~~10.18~~	-	Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural Utilities Service dated April 28, 2006 for up to $1,500,000,000. Incorporated by reference to Exhibit 4.11 to our Form 10-K filed on August 25, 2006.
~~10.19~~	-	Series B Future Advance Bond from the Registrant to the Federal Financing Bank dated April 28, 2006 for up to $1,500,000,000 maturing on July 15, 2029. Incorporated by reference to Exhibit 4.14 to our Form 10-K filed on August 25, 2006.
~~10.20~~	-	Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural Utilities Service dated September 19, 2008 for up to $500,000,000. Incorporated by reference to Exhibit 4.29 to our Form 10-Q filed on October 14, 2008.
~~10.21~~	-	Series C Future Advance Bond from the Registrant to the Federal Financing Bank dated September 19, 2008 for up to $500,000,000 maturing on October 15, 2031. Incorporated by reference to Exhibit 4.32 to our Form 10-Q filed on October 14, 2008.
~~10.22~~	-	Indenture for Clean Renewable Energy Bonds, Tax Credit Series 2008A dated January 1, 2008, between the Registrant and U.S. Bank Trust National Association. The Indenture has been omitted and will be furnished supplementally to the Securities and Exchange Commission upon request.
~~10.23~~	-	Indenture for Clean Renewable Energy Bonds, Secured Tax Credit Series 2009A dated September 1, 2009 between the Registrant, U.S. Bank Trust National Association as trustee, and the Federal Agricultural Mortgage Corporation as guarantor. The Indenture has been omitted and will be furnished supplementally to the Securities and Exchange Commission upon request.
~~10.24~~	-	Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural Utilities Service dated as of November 10, 2010 for up to $500,000,000. Incorporated by reference to Exhibit 4.1 to our Form 10-Q filed on January 14, 2011.
~~10.25~~	-	Series D Future Advance Bond from the Registrant to the Federal Financing Bank dated as of November 10, 2010 for up to $500,000,000 maturing on October 15, 2033. Incorporated by reference to Exhibit 4.4 to our Form 10-Q filed on January 14, 2011.
~~10.26~~	-	Series E Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural Utilities Service dated as of December 1, 2011 for up to $499,000,000. Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on January 17, 2012.
~~10.27~~	-	Series E Future Advance Bond from the Registrant to the Federal Financing Bank dated as of December 1, 2011 for up to $499,000,000 maturing on October 15, 2034. Incorporated by reference to Exhibit 10.6 to our Form 10-Q filed on January 17, 2012.
~~10.28~~	-	Series F Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural Utilities Service dated as of December 13, 2012 for up to $424,286,000. Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed in January 14, 2013.
~~10.29~~	-	Series F Future Advance Bond from the Registrant to the Federal Financing Bank dated as of December 13, 2012 for up to $424,286,000 maturing on October 15, 2035. Incorporated by reference to Exhibit 10.4 to our Form 10-Q filed in January 14, 2013.
~~10.30~~	-	Amended, Restated and Consolidated Bond Guarantee Agreement between the Registrant and the Rural Utilities Service dated as of December 13, 2012 for up to $3,999,000,000. Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed in January 14, 2013.
~~10.31~~	-	Amended, Restated and Consolidated Pledge Agreement dated as of December 13, 2012, between the Registrant, the Rural Utilities Service and U.S. Bank National Association. Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed in January 14, 2013.
~~10.32~~	-	Master Sale and Servicing Agreement dated July 24, 2009, between the Registrant and Federal Agricultural Mortgage Corporation. Incorporated by reference to Exhibit 4.47 to our Form 10-K filed on August 17, 2009.

~~10.33~~	-	Amended and Restated Master Note Purchase Agreement dated March 24, 2011 between the Registrant and Federal Agricultural Mortgage Corporation. Incorporated by reference to Exhibit 4.4 to our Form 10-Q filed on April 13, 2011.
~~10.34~~	-	Amended, Restated and Consolidated Pledge Agreement dated March 24, 2011, between the Registrant, Federal Agricultural Mortgage Corporation and U.S. Bank Trust National Association. Incorporated by reference to Exhibit 4.5 to our Form 10-Q filed on April 13, 2011.
~~10.35~~	-	First Supplemental Note Purchase Agreement dated March 24, 2011 for $3,900,000,000 between the Registrant and Federal Agricultural Mortgage Corporation. Incorporated by reference to Exhibit 4.6 to our Form 10-Q filed on April 13, 2011.
~~10.36~~	-	~~Construction agreement between CFC and Whiting-Turner Contracting Company dated August 26, 2009. Incorporated by reference to Exhibit 10.17 to our Form 10-K filed on August 30, 2010.~~
~~10.37~~	-	First Amendment to construction agreement between CFC and Whiting-Turner Contracting Company executed on June 1, 2010. Exhibit F to the First Amendment to the construction agreement has been omitted and will be furnished supplementally to the Securities and Exchange Commission upon request. Incorporated by reference to Exhibit 10.18 to our Form 10-K filed on August 30, 2010.
	-	~~Registrant agrees to furnish to the Securities and Exchange Commission a copy of all other instruments defining the rights of holders of its long-term debt upon request.~~
12	-	~~Computations of ratio of earnings to fixed charges.~~
~~23.1~~	-	~~Consent of Deloitte & Touche LLP.~~
~~31.1~~	-	~~Certification of the Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.~~
~~31.2~~	-	~~Certification of the Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.~~
~~32.1~~	-	~~Certification of the Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.~~
~~32.2~~	-	~~Certification of the Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.~~
~~101.01~~	-	Financial statements from the Annual Report on Form 10-K of National Rural Utilities Cooperative Finance Corporation for the year ended May 31, 2013, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

		* Identifies a management contract or compensatory plan or arrangement.

~~SIGNATURES~~

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of Loudoun, Commonwealth of Virginia, on the 28th day of August 2013.

~~NATIONAL RURAL UTILITIES COOPERATIVE~~
~~FINANCE CORPORATION~~

~~By:~~	~~/s/ SHELDON C. PETERSEN~~
	~~Sheldon C. Petersen~~
	~~Chief Executive Officer~~

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

~~Signature~~	~~Title~~	~~Date~~

~~/s/ SHELDON C. PETERSEN~~	~~Chief Executive Officer~~
~~Sheldon C. Petersen~~

~~/s/ J. ANDREW DON~~	~~Senior Vice President and Chief Financial~~
~~J. Andrew Don~~	~~Officer~~

~~/s/ ROBERT E. GEIER~~	~~Vice President and Controller~~
~~Robert E. Geier~~

~~/s/ BURNS E. MERCER~~	~~President and Director~~
~~Burns E. Mercer~~

~~/s/ JOEL CUNNINGHAM~~	~~Vice President and Director~~
~~Joel Cunningham~~

~~/s/ RAY BEAVERS~~	~~Secretary-Treasurer and Director~~
~~Ray Beavers~~
		~~August 28, 2013~~
~~/s/ FREDERICK C. ANDERSON~~	~~Director~~
~~Frederick C. Anderson~~

~~/s/ PATRICK L. BRIDGES~~	~~Director~~
~~Patrick L. Bridges~~

~~/s/ FRED BROG~~	~~Director~~
~~Fred Brog~~

~~/s/ MIKE CAMPBELL~~	~~Director~~
~~Mike Campbell~~

~~/s/ R. GRANT CLAWSON~~	~~Director~~
~~R. Grant Clawson~~

~~/s/ MEL COLEMAN~~	~~Director~~
~~Mel Coleman~~

~~/s/ WALTER K. CROOK~~	~~Director~~
~~Walter K. Crook~~

~~/s/ JIM L. DOERSTLER~~	~~Director~~
~~Jim L. Doerstler~~

~~/s/ ROMAN E. GILLEN~~	~~Director~~
~~Roman E. Gillen~~

~~/s/ CHRISTOPHER L. HAMON~~	~~Director~~
~~Christopher L. Hamon~~

~~/s/ SCOTT W. HANDY~~	~~Director~~
~~Scott W. Handy~~

~~/s/ ROBERT M. HILL~~	~~Director~~
~~Robert M. Hill~~

~~/s/ LYLE KORVER~~	~~Director~~
~~Lyle Korver~~		~~August 28, 2013~~

~~/s/ GLENN W. MILLER~~	~~Director~~
~~Glenn W. Miller~~

~~/s/ CURTIS NOLAN~~	~~Director~~
~~Curtis Nolan~~

~~/s/ HARRY N. PARK~~	~~Director~~
~~Harry N. Park~~

~~/s/ CURTIN R. RAKESTRAW II~~	~~Director~~
~~Curtin R. Rakestraw II~~

~~/s/ RANDY D. RENTH~~	~~Director~~
~~Randy D. Renth~~

~~/s/ DWIGHT ROSSOW~~	~~Director~~
~~Dwight Rossow~~

~~/s/ KIRK A. THOMPSON~~	~~Director~~
~~Kirk A. Thompson~~

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Members of

National Rural Utilities Cooperative Finance Corporation

Dulles, Virginia

We have audited the accompanying consolidated balance ~~sheets~~sheet of National Rural Utilities Cooperative Finance Corporation and subsidiaries (the ~~"Company"~~“Company”) as of May 31, 2013, ~~and 2012,~~ and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the ~~three~~two years in the period ended May 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of National Rural Utilities Cooperative Finance Corporation and subsidiaries as of May 31, 2013, and ~~2012, and~~ the results of their operations and their cash flows for each of the ~~three~~two years in the period ended May 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

McLean, Virginia

August 28, 2013

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

CONSOLIDATED BALANCE SHEETS

~~139~~



	Fiscal Year 2013 Quarters Ended
(Dollars in thousands)	August 31			November 30			February 29			May 31			Total Year
Interest income	$	240,085		$	241,630		$	234,021		$	240,017		$	955,753
Interest expense	(176,596		)	(174,301		)	(171,899		)	(169,229		)	(692,025		)
Net interest income	63,489			67,329			62,122			70,788			263,728
Provision for loan losses	(9,122		)	3,817			378			75,018			70,091
Net interest income after provision for loan losses	54,367			71,146			62,500			145,806			333,819
Non-interest income:
Derivative (losses) gains	(24,592		)	(3,766		)	46,626			66,575			84,843
Other non-interest income	193			16,898			12,815			7,378			37,284
Total non-interest income	(24,399		)	13,132			59,441			73,953			122,127
Non-interest expense	(17,324		)	(23,743		)	(30,787		)	(23,256		)	(95,110		)
Income prior to income taxes	12,644			60,535			91,154			196,503			360,836
Income tax benefit (expense)	2			(454		)	(1,067		)	(1,230		)	(2,749		)
Net income	12,646			60,081			90,087			195,273			358,087
Less: Net income attributable to noncontrolling interest	(5		)	(699		)	(1,664		)	(1,960		)	(4,328		)
Net income attributable to CFC	$	12,641		$	59,382		$	88,423		$	193,313		$	353,759

123

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. At the end of the period covered by this report, based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

Management’s Report on Internal Control Over Financial Reporting

The management of National Rural Utilities Cooperative Finance Corporation (“we”, “our” or “us”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control system over financial reporting is designed under the supervision of management, including the Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:


(i.)	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets;


(ii.)	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of ours are being made only in accordance with authorizations of management and our directors; and


(iii.)	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or dispositions of our assets.

Our management assessed the effectiveness of internal control over financial reporting as of May 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (1992 Framework).

Based on management’s assessment and those criteria, management believes that we maintained effective internal control over financial reporting as of May 31, 2014.

This annual report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the U.S. Securities and Exchange Commission that permit us to furnish only management’s report with this annual report on Form 10-K.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

124



By:	/s/ SHELDON C. PETERSEN	By:	/s/ J. ANDREW DON
	Sheldon C. Petersen Chief Executive Officer		J. Andrew Don Senior Vice President and Chief Financial Officer
	August 28, 2014		August 28, 2014


By:	/s/ ROBERT E. GEIER
	Robert E. Geier Vice President and Controller
	August 28, 2014

Item 9B. Other Information

None.

125

PART III


Item 10.	Directors, Executive Officers and Corporate Governance



(a) Directors
Name	Age	Director since	Date present term expires
Joel Cunningham (President of CFC)	60	2009	2015
Ray Beavers (Vice President of CFC)	59	2010	2016
R. Grant Clawson (Secretary-Treasurer of CFC)	65	2011	2017
Patrick L. Bridges	55	2013	2016
Fred Brog	69	2009	2015
Mike Campbell	66	2012	2015
Mel Coleman	60	2013	2015
Walter K. Crook	74	2009	2016
Kent D. Farmer	56	2014	2017
Roman E. Gillen	52	2013	2016
Christopher L. Hamon	51	2009	2015
Scott W. Handy	56	2009	2015
Thomas L. Hayes	58	2014	2017
Robert M. Hill	66	2013	2016
Lyle Korver	58	2010	2016
R. W. Matheny	61	2014	2017
Glenn W. Miller	50	2009	2015
Curtis Nolan	56	2011	2015
Harry N. Park	79	2013	2016
Curtin R. Rakestraw II	61	2013	2016
Randy D. Renth	50	2009	2015
Kirk A. Thompson	51	2011	2017
Stephen C. Vail	55	2014	2017

Under CFC’s bylaws, the board of directors must be composed of the following individuals:

20 directors, which must include one general manager and one director of a member system from each of 10 districts (but no more than one director from each state except in a district where only one state has members);

two directors designated by the NRECA; and

126



(b) Executive Officers
Title	Name	Age	Held present office since
President and Director	Joel Cunningham	60	2014
Vice President and Director	Ray Beavers	59	2014
Secretary-Treasurer and Director	R. Grant Clawson	65	2014
Chief Executive Officer	Sheldon C. Petersen	61	1995
Executive Vice President and Chief Operating Officer	John T. Evans	64	2011
Senior Vice President and Chief Lending Officer	John J. List	67	2014
Senior Vice President and Chief Financial Officer	J. Andrew Don	54	2014
Senior Vice President, Special Asset Management	Steven L. Lilly	64	2014
Senior Vice President, Credit Risk Management	John M. Borak	69	2002
Senior Vice President, Member Services	Joel Allen	48	2014
Senior Vice President and General Counsel	Roberta B. Aronson	56	2014
Senior Vice President, Corporate Relations	Brad L. Captain	44	2014
Senior Vice President, Corporate Services	Graceann D. Clendenen	56	2014
Senior Vice President, Strategic Business Development and Support	Steven M. Kettler	55	2014
Senior Vice President, Member Services	Robin C. Reed	51	2014

Inapplicable.

(d) Family Relationships

No family relationship exists between any director or executive officer and any other director or executive officer of the registrant.

(e) (1) and (2) Business Experience and Directorships

Mr. Cunningham has been a director of Twin County Electric Power Association in Hollandale, Mississippi, since 2004. He is a partner of Cunningham CPAs, PLLC and has been a self-employed certified public accountant (“CPA”) since 1981. Mr. Cunningham is a member of the Mississippi Society of CPAs and the American Institute of CPAs. He also holds the Credentialed Cooperative Director Certificate issued by NRECA. As a director of Twin County Electric Power Association, Mr. Cunningham has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Cunningham has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board. Mr. Cunningham’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Beavers has been the general manager and CEO of United Electric Cooperative Services in Cleburne, Texas, since 1999. Mr. Beavers served as the board chairman of Texas Electric Cooperatives from 2008 to 2009 and as an alternate director of Brazos Electric Power Cooperative since 1999. Mr. Beavers was the chairman of the Rural Electric Management Development Council and former general manager and CEO of Southwest Rural Electric Association. In addition, he was the assistant to the general manager of Oklahoma Association of Electric Cooperatives and a member services coordinator of Cotton Electric Cooperative. As general manager and CEO of United Electric Cooperative Services, Mr. Beavers has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Beavers has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.

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Mr. Clawson has been a trustee of Continental Divide Electric Cooperative in Grants, New Mexico, since 1989, and has served on the contract committee of the Tri-State Generation and Transmission Cooperative for the past three years. Mr. Clawson is a farmer, rancher and school administrator and has been the owner of a custom saddle business since 1974. As a trustee of Continental Divide Electric Cooperative, Mr. Clawson has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Clawson has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.

Mr. Bridges has been the CFO of Tri-State G&T Association in Westminster, Colorado, since 2008. He served as the vice president and treasurer of Texas-New Mexico Power Company from 2000 to 2003. Mr. Bridges has more than 30 years of experience working in the electric power industry and 20 years of experience working for companies registered with the U.S. Securities and Exchange Commission. Mr. Bridges chaired the Finance Subcommittee of the G&T Managers’ Technical Advisory Council from 2009 to 2012, currently serves as vice-president of the G&T Accounting and Finance Committee, and is a board member of the Colorado Council for Economic Education. Mr. Bridges is a CPA and chartered financial analyst. As the CFO of Tri-State G&T Association, Mr. Bridges has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Bridges has the qualifications, skills and experience necessary to act in the best interest of CFC and to serve as a director on the CFC board. Mr. Bridges’ experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Brog has been a director of Lower Valley Energy in Afton, Wyoming, since 1988. He has been a rancher and farmer in Freedom, Wyoming, since 1970. Mr. Brog served as secretary-treasurer of NCSC and serves as a board member of Snake River Power Association. He was past president of Idaho Consumer-Owned Utilities Association and a former director of Wyoming Rural Electric Association. In addition, Mr. Brog serves as president of Star Valley Cooperative Milk Marketing Association and adviser to the State of Wyoming Economic Development Committee. As a director of Lower Valley Energy, Mr. Brog has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Brog has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board. Mr. Brog's experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Campbell has been the executive vice president and general manager of Central Florida Electric Cooperative, Inc. in Chiefland, Florida, since 2005. He served as the vice president of engineering and operations of Coastal Electric Cooperative in Midway, Georgia, from 1998 to 2005 and the engineering manager of Colquitt Electric Membership Corporation in Moultrie, Georgia, from 1991 to 1998. He is serving as a trustee on the executive committee of Seminole Electric Cooperative, and as a director and secretary-treasurer of the Florida Rural Electric Self Insurer’s Fund and Florida Rural Electric Credit Union. As a general manager of Central Florida Electric Cooperative, Mr. Campbell has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Campbell has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.

Mr. Coleman has been the CEO of North Arkansas Electric Cooperative in Salem, Arkansas, since 2001. He serves as vice president of NRECA and has been a director since 2004. In addition, Mr. Coleman is a director of Arkansas Electric Cooperative Corporation and of the Arkansas Electric Cooperatives. Before becoming CEO, he was assistant general manager from 1999 to 2001, and manager of member services from 1988 to 1999 for North Arkansas Electric Cooperative. Mr. Coleman is a member of the Development Council of Arkansas State University in Mountain Home, Arkansas. As the CEO of North Arkansas Electric Cooperative, Mr. Coleman has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Coleman has the qualifications, skills and experience necessary to act in the best interest of CFC and to serve as a director on the CFC board. Mr. Coleman’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Crook has been a director of Butler Public Power District in David City, Nebraska, since 1991. Mr. Crook served as the CEO of Polk & Butler Mutual Insurance Company since 1992 and is part owner of a farming operation. He also has served as the state director of the Nebraska Rural Electric Association from 1997 to 1998 and from 2008 to present. Mr. Crook is a director of Nebraska Farmers Mutual Reinsurance Company, an executive board member of the State Association of Mutual Insurance Companies of Nebraska and board chairman of Nebraska Rural TV Inc. He also holds the Credentialed Cooperative Director Certificate issued by NRECA. As a director of Butler Public Power District, Mr. Crook has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Crook has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director and member on the CFC board. Mr. Crook’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

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Mr. Farmer has been the president and CEO of Rappahannock Electric Cooperative in Fredericksburg, Virginia, since 2004 and has been employed there in various roles, including chief operating officer and chief financial officer, since 1979. Mr. Farmer has been the treasurer/secretary of the Old Dominion Electric Cooperative Board of Directors since July 2013 and on the University of Mary Washington Business Advisory Board since 2013. He is a board member of the Virginia, Maryland and Delaware Association of Electric cooperatives. As the president and CEO of Rappahannock Electric Cooperative, Mr. Farmer has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Farmer has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board. Mr. Farmer’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Gillen has been the president and CEO of Consumers Power, Inc. in Philomath, Oregon, since 2006. He served as director of information systems from 1986 to 2003 and assistant manager from 2004 to 2005. His career began with Douglas Electric Cooperative in Roseburg, Oregon, where he was an accounting and data processing manager, and then worked for Truckee-Donner Public Utility District in Truckee, California. Mr. Gillen served as chairman of Power Resources Cooperative from 2008 to 2010, secretary of Casco Communications, Inc. from 2006 to present, and president of the Oregon Rural Electric Cooperative Association from 2011 to 2012. He also is vice-chairman of PNGC Power. As the president and CEO of Consumers Power, Inc., Mr. Gillen has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Gillen has the qualifications, skills and experience necessary to act in the best interest of CFC and to serve as a director on the CFC board.

Mr. Hamon has been the CEO of White River Valley Electric Cooperative, Inc. in Branson, Missouri, since 1999. He currently serves as director and served as past president of Sho-Me Power Electric Cooperative and alternate director of KAMO Power. Mr. Hamon serves on the Executive Board, as president of the Alternative Fuel Taskforce and on multiple committees for the Association of Missouri Electric Cooperatives and was past president of the Cooperative Managers Group. In addition, he was the former Operations and Engineering manager for White River Valley Electric Cooperative. Mr. Hamon is a member of the Energy Efficiency/Demand Side Management Team for Associated Electric Cooperative, Inc., the Institute of Electrical & Electronic Engineers and the Missouri Society of Professional Engineers. As CEO of White River Valley Electric Cooperative, Mr. Hamon has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Hamon has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.

Mr. Handy has been the president and CEO of Cass County Electric Cooperative, Inc. in Fargo, North Dakota, since February 2002 and has been employed there in various capacities since October 1982. He has previously served as chairman for the Rural Electric Management Development Council, Minnkota Power Cooperative Manager’s Advisory Committee and the North Dakota Association of Rural Electric Cooperatives Manager’s Advisory Committee. In addition, he is a former board chairman for Greater Fargo-Moorhead Economic Development Corporation’s Growth Initiative Fund, a public/private loan pool that lends money for business expansion, chairman of the North Dakota State University Alumni Association, and board member of the North Dakota State University Quentin N. Burdick Center for Cooperatives. As president and CEO of Cass County Electric Cooperative, Mr. Handy has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Handy has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.

Mr. Hayes has been the vice president of Brown County Rural Electrical Association in Sleepy Eye, Minnesota, since March 2014. He served as the president of Brown County Rural Electrical Association from 2004 to 2014. He has been a self-employed farmer since 1973. Mr. Hayes is a director and utility committee chair of Cooperative Network. He has held the NRECA Credentialed Cooperative Director Certificate since 2004. As the president of Brown County Rural Electrical Association, Mr. Hayes has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Hayes has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.

Mr. Hill has been the board chairman of First Electric Cooperative Corporation in Jacksonville, Arkansas, since 2009 and a director since 1983. He also serves as a director and audit committee member of the Arkansas Electric Cooperative Corporation. Mr. Hill is a former member of the Arkansas State Banking Board and is the former owner of a bank and an accounting firm. He is currently the owner and chair of Hill Investments, LLC, and is a former CPA. As the chair of First Electric Cooperative Corporation, Mr. Hill has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Hill has the qualifications, skills and experience necessary to act in the best interest of CFC and to serve as a director on the CFC board. Mr. Hill’s experience with accounting principles, financial

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reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Korver has been the general manager and CEO of North West Rural Electric Cooperative in Orange City, Iowa, since 1993. In addition, he was the secretary-treasurer and past chairman of the Resolutions Committee of Mid-West Electric Consumers Association. Mr. Korver was the general manager of Sioux Electric Cooperative Association from 1984 to 1993 and the shared general manager of Sioux Electric Cooperative Association and O’Brien County Rural Electric Cooperative from 1989 to 1993. Mr. Korver was the manager’s representative to the board of the Iowa Association of Electric Cooperatives from 2005 to 2006. He also was a member of the NRECA Marketing and Energy Services Committee. He is an ACRE President’s Club member. Mr. Korver has been the president of Orange City Development Corporation since 2007. As general manager and CEO of North West Rural Electric Cooperative, Mr. Korver has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Korver has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.

Mr. Matheny has been president/CEO of Sequachee Valley Electric Cooperative in South Pittsburg, Tennessee, since 1998. He served as CEO and general manager of Tri-County Electric Cooperative in Michigan from 1983 to 1998 and manager, Conservation and Marketing, for Lee County Electric Cooperative in Florida from 1980 to 1983. Mr. Matheny served as a director on the National Rural Telecommunications Cooperative (“NRTC”) from 1990 to 1999 and from 2010 to 2013 and served as its Chairman from 1996 to 1998. He served on the Cooperative Response Center board from 1999 to 2011 and was Chairman from 2006 to 2011. He has been serving on the board of the Southeastern Data Cooperative since 2004 and presently holds the office of Board Chairman. As the president and CEO of Sequachee Valley Electric Cooperative, Mr. Matheny has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Matheny has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.

Mr. Miller has been the president and CEO of Holmes-Wayne Electric Cooperative, Inc. in Millersburg, Ohio since 2004. He currently serves on the board of Buckeye Power, Inc. including on the Executive, Audit and Rate committees. Mr. Miller is currently serving on the board of Wayne Savings Community Bank located in Wooster, Ohio, where he also serves as chairman of the Compensation Committee and as a member of the Loan and Audit committees. Mr. Miller is a CPA and owner of Glenn W. Miller, CPA. In addition, he is a board member and treasurer of Holmes County Economic Development Council, Inc. and board member of Holmes-Wayne Electric Foundation, Inc. Mr. Miller is vice president of The Pines Golf Club in Orrville, Ohio. As president and CEO of Holmes-Wayne Electric Cooperative, Mr. Miller has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Miller has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board. Mr. Miller’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Nolan has been a director of Sulphur Springs Valley Electric Cooperative in Willcox, Arizona, since 1993 and a director of NRECA, since 2002. Mr. Nolan has also been serving as president of NRECA since March 2013. Mr. Nolan previously served as president and secretary of the Sulphur Springs Valley Electric Cooperative and as the secretary-treasurer and vice president of NRECA. He is a former director and a chairman of Southwest Transmission Cooperative and a former director, treasurer and secretary for Grand Canyon State Electric Cooperative Association. Mr. Nolan has been the owner of Nolan Builders since 2005. Mr. Nolan also holds the Credentialed Cooperative Director Certificate and the Board Leadership Certificate issued by NRECA. As a director of Sulphur Springs Valley Electric Cooperative, Mr. Nolan has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Nolan has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board. Mr. Nolan’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Park has been a director of Southern Rivers Energy in Barnesville, Georgia, since 1997. He also is a director of Georgia System Operations Corporation. Mr. Park has served as the president, CEO and director of several banks. As the director of Southern Rivers Energy, Mr. Park has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Park has the qualifications, skills and experience necessary to act in the best interest of CFC and to serve as a director on the CFC board.

Mr. Rakestraw has been a director of Sullivan County Rural Electric Cooperative in Forksville, Pennsylvania, since 1986. He also is a director of Allegheny Electric Cooperative and director of Continental Cooperative Services. Mr. Rakestraw served as the director and president of the Pennsylvania Corn Growers Association from 1985 to 1997 and as a founding director of Lycoming Farmland Preservation. He is the owner of Rakestraw Farms and Promised Land Busing. As a director of Sullivan

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County Rural Electric Cooperative, Mr. Rakestraw has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Rakestraw has the qualifications, skills and experience necessary to act in the best interest of CFC and to serve as a director on the CFC board. Mr. Rakestraw’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Renth has been a director of Clinton County Electric Cooperative in Breese, Illinois, since 1997. He is a CPA and a Chartered Global Management Accountant and has been at Rickhoff & Associates LTD of O’Fallon, Illinois from 2011 to current and from 2007 to 2009. Mr. Renth was at Rehkemper & Son, Inc. of St. Rose, Illinois from 2009 to 2011. Mr. Renth was the controller of Auffenberg Auto Group in St. Louis, Missouri, from 2006 to 2007. Also in 2006, he served as the plant controller for Cenveo, Inc. in St. Louis, Missouri. Mr. Renth served as the chief financial officer of Archway International Trucks/Gateway City International in St. Louis, Missouri, from 1997 to 2006. In addition, he is a member of the American Institute of CPAs and the Illinois Society of CPAs. He also holds the Credentialed Cooperative Director Certificate and the Board Leadership Certificate issued by NRECA. Mr. Renth is owner and operator of RDR Acres Inc., a family farm corporation. As a director of Clinton County Electric Cooperative, Mr. Renth has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Renth has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board. Mr. Renth’s experience with accounting principles, financial reporting rules and regulations and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Thompson has been the general manager of CMS Electric Cooperative, Inc., in Meade, Kansas since 1991. Mr. Thompson has served as board president of Kansas Electric Power Cooperative and board president of High Plains Energy LLC. Mr. Thompson is also the board president of Southwest Kansas Area Cooperative District 613. As general manager of CMS Electric Cooperative, Mr. Thompson has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Thompson has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board. Mr. Thompson’s experience with accounting, financial reporting and evaluating financial results makes him a valuable resource as a director and member of the Audit Committee of CFC.

Mr. Vail had been the board chairman of NineStar Connect in Greenfield, Indiana since 2012. He also serves as a board member of the Indiana Statewide Association of Rural Electric Cooperatives and has been the owner of ETL Group since 2011. Mr. Vail has held various positions at the Hancock Regional Hospital and he was the senior special accounts loan officer at Farm Credit Services. He is a member of Hancock Redevelopment Commission and a board member of Hancock Community Education Alliance. As the board chairman of NineStar Connect, Mr. Vail has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Vail has the qualifications, skills and experience necessary to act in the best interests of CFC and to serve as a director on the CFC board.

Mr. Petersen joined CFC in August 1983 as an area representative. He became the director of Policy Development and Internal Audit in January 1990, director of Credit Analysis in November 1990 and corporate secretary on June 1, 1992. He became assistant to the governor on May 1, 1993. He became assistant to the governor and acting administrative officer on June 1, 1994. He became governor and CEO on March 1, 1995. Mr. Petersen began his career in the rural electrification program in 1976 as staff assistant for Nishnabotna Rural Electric Cooperative in Harlan, Iowa. He later served as general manager of Rock County Electric Cooperative Association in Janesville, Wisconsin.

Mr. Evans joined CFC as Senior Vice President of Operations in November 1997. On June 1, 2010, Mr. Evans became Executive Vice President and Chief Operating Officer. He was Senior Vice President and Chief Operating Officer of Suburban Hospital Healthcare System, Bethesda, Maryland, from 1994 to 1997. He was Senior Vice President and Chief Operating Officer for Geisinger Medical Center, Danville, Pennsylvania, from 1991 to 1994.

Mr. Don joined CFC in September 1999 as Director of Loan Syndications and became Vice President of Capital Market Relations in June 2005. Effective June 2010, Mr. Don became CFC’s Senior Vice President and Treasurer. Effective July 1, 2013, Mr. Don became CFC’s Senior Vice President and Chief Financial Officer. Prior to joining CFC, he held the position of Vice president and Manager of the Washington, D.C. Office for The Bank of Tokyo–Mitsubishi. Mr. Don started his banking career with the Bank of Montreal in New York in 1984 and subsequently was a vice president for Corporate Banking for The Bank of New York from 1987 to 1990.

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Mr. Lilly joined CFC as a senior financial consultant in October 1983. He became Director of Special Finance in June 1985 and Director of Corporate Finance in June 1986. He became Treasurer and Principal Finance Officer on June 1, 1993, and became Senior Vice President and Chief Financial Officer on January 1, 1994. Effective July 1, 2013, Mr. Lilly became CFC’s Senior Vice President, Special Asset Management.

Mr. Borak joined CFC in June 2002 as Senior Vice President, Credit Risk Management. Previously, he was with Fleet National Bank, Boston, Massachusetts, from 1992 to 2001 where he was a senior credit officer with risk management and loan approval responsibility for several industry banking portfolios including investor-owned utilities. Prior assignments at Fleet in Hartford, Connecticut, included Manager of Credit Review and Manager of Loan Workout.

Mr. Allen joined CFC in 1990. Throughout his career with CFC, Mr. Allen has held various positions. He served as a Director, Portfolio Management through 2010 and a Vice President, Portfolio Management from 2010 until April 2014. Effective April 16, 2014, Mr. Allen became Senior Vice President, Member Services.

Ms. Aronson joined CFC in 1995. She served as Vice President and Deputy General Counsel until June 2014. Effective July 1, 2014, Ms. Aronson became Senior Vice President and General Counsel. Prior to joining CFC, Ms. Aronson was a partner at the law firm of Thompson Hine LLP.

Mr. Captain joined CFC in 1999. He served as Vice President, Government Relations until 2010 when he became Vice President, Corporate Communications. In January 2014, Mr. Captain became Vice President, Corporate Relations. Effective April 16, 2014, Mr. Captain became Senior Vice President, Corporate Relations. Prior to joining CFC, he worked as a Special Assistant to the Undersecretary of Rural Development at the United States Department of Agriculture.

Ms. Clendenen joined CFC in 1982. Throughout her career with CFC, Ms. Clendenen has held various positions. She served as Vice President, Human Resources until February 2012. In February 2012, she became Vice President, Human Resources & Corporate Services until April 2014. Effective April 16, 2014, Ms. Clendenen became Senior Vice President, Corporate Services.

Mr. Kettler joined CFC as a regional vice president in 2001. In 2010, he became Vice President, Portfolio Management Effective April 16, 2014, Mr. Kettler became Senior Vice President, Strategic Business Development and Support.

Ms. Reed joined CFC in 1987. She served as a vice president, Portfolio Management from 2002 until 2014. Effective April 16, 2014, Ms. Reed became Senior Vice President, Member Services.

(f) Involvement in Certain Legal Proceedings

None to our knowledge.

(g) Promoters and Control Persons

Inapplicable.

(h) Code of Ethics

(i) Nominating Committee

Our board of directors does not have a standing nominating committee. As described above under “Part III. Item 10(a) Directors,” 20 of our directors are each elected by members in the district for which the director serves. To nominate director candidates, at the district meeting before the meeting at which candidates are to be elected from such district, a nominating committee is elected composed of one person from each state within the district. Each member of the nominating committee must be a trustee, director or manager of one of our members. Each district nominating committee then submits names of two or more nominees for each position in the district for which an election is to be held. We provide members of the nominating committee with director guidelines to use as an aide in reviewing applications from potential candidates. One or more

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candidates for the at-large director who satisfies the requirements of an Audit Committee financial expert are nominated by our board of directors if the board determines that it is appropriate to fill the seat. Our board of directors believes that it is appropriate for the full board of directors to nominate this director because of the position’s specific qualification requirements and the lack of any local district qualification requirement.

(j) Audit Committee

Our Audit Committee currently consists of 12 directors: Mr. Miller (Chairperson), Mr. Hill (Vice Chairperson), Mr. Bridges (Vice Chairperson), Mr. Cunningham (Ex Officio), Mr. Renth, Mr. Brog, Mr. Thompson, Mr. Rakestraw, Mr. Crook, Mr. Coleman, Mr. Nolan and Mr. Farmer. Mr. Bridges was designated by the board as the “Audit Committee financial expert” as defined by Section 407 of the Sarbanes-Oxley Act of 2002. The members of the Audit Committee are “independent” as that term is defined in Rule 10A-3 under the Securities Exchange Act. Among other things, the Audit Committee reviews our financial statements and the disclosure under "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K. The Audit Committee meets with our independent registered public accounting firm, internal auditors, CEO and financial management executives to review the scope and results of audits and recommendations made by those persons with respect to internal and external accounting controls and specific accounting and financial reporting issues and to assess corporate risk. The board has adopted a written charter for the Audit Committee that may be found on our Web site, www.nrucfc.coop (under the link “About CFC/Corporate Governance”).

The Audit Committee completed its review and discussions with management regarding our audited financial statements for the year ended May 31, 2014. The Audit Committee has discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 114, and received from the independent accountants written disclosures and the letter from the independent accountant required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning independence, and discussed with the independent accountants their independence.

Based on the review and discussions noted above, the Audit Committee recommended to the board that the audited financial statements be included in our Annual Report on Form 10-K for the year ended May 31, 2014 for filing with the U.S. Securities and Exchange Commission.

(k) Compensation Committee

Role of the Compensation Committee

Our Compensation Committee currently consists of seven directors: Mr. Cunningham, Mr. Beavers, Mr. Miller, Mr. Clawson, Mr. Korver, Mr. Thompson and Mr. Campbell. The Compensation Committee of the board of directors reviews and makes appropriate recommendations to the full board of directors regarding CFC’s total compensation philosophy and pay components, including, but not limited to, base and incentive pay programs. The Compensation Committee is also responsible for approving the compensation, employment agreements and perquisites for the CEO. The Compensation Committee annually reviews all approved corporate goals and objectives relevant to compensation, evaluates performance in light of those goals and approves the CEO’s compensation based on this evaluation, all of which is then submitted to the full board of directors for ratification. The Compensation Committee has delegated authority to the CEO for evaluating the performance and approving the annual base compensation for all of the other named executive officers as identified in the "Summary Compensation Table" below. Other than the CEO, no other named executive officer makes decisions regarding executive compensation.

The Compensation Committee reports to the board of directors on its actions and recommendations following committee meetings and meets in executive session without members of management present when making specific compensation decisions. Although the board has delegated authority to the Compensation Committee with respect to CFC’s executive and general employee compensation programs and practices, the full board of directors also reviews and ratifies CFC’s compensation and benefit programs each year.

The Compensation Committee’s charter can be found on our website at www.nrucfc.coop (under the link “About CFC/Corporate Governance”).

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The Compensation Committee’s Processes

Role of Compensation Consultant

In fiscal year 2014, the Compensation Committee hired Mercer (US) Inc. (“Mercer US”) to advise it on the CEO’s compensation as compared with the compensation of CEOs of peer group organizations. Through discussions with the Compensation Committee, Mercer US established a peer group of companies to use in assessing the competitiveness of the CEO’s compensation (see “Compensation Analysis” in the "Compensation Discussion and Analysis" section below). Mercer US advised the Compensation Committee through an assessment of compensation data from this peer group using both a one-year compensation analysis, which assesses CFC’s CEO compensation and the compensation of peer CEOs for the most recent fiscal year, and a three-year compensation analysis, which assesses average peer CEO pay for the last three fiscal years. Compensation analyses include peer group CEO base pay, actual and target, annual incentives, actual and target total cash compensation, one year and three year average long-term incentives and total direct compensation. Mercer US did not determine or provide the Compensation Committee with a specific recommendation on any component of executive compensation, it only reviewed benchmark data and discussed what is generally occurring with executive compensation. Mercer US did not provide any other service to CFC.

In fiscal year 2014, the Compensation Committee conducted an evaluation of Mercer US’ independence considering the relevant regulations of the U.S. Securities and Exchange Commission and the listing standards of the New York Stock Exchange, and concluded that the services performed by Mercer US raised no conflicts of interest.

Role of Executive Officers

As described above, the Compensation Committee has delegated the authority for making base pay decisions for the other named executive officers to the CEO. The CEO exercises his judgment to set base pay rates, based on general market data, overall corporate performance and leadership accomplishments. For additional information about the CEO’s role in compensation decisions, see “Base Pay” under the "Compensation Discussion and Analysis" section below.

(l) Section 16(a) Beneficial Ownership Reporting Compliance

Inapplicable.

(m) Board Leadership Structure and Role of Risk Oversight by the Board of Directors

Board Leadership Structure

The positions of CEO and president of the CFC Board of Directors are held by two separate individuals. The president must be a member of the board of directors and is elected annually by the board of directors. The president of the CFC Board of Directors has authority, among other things, to appoint members of the board to standing committees, to appoint a vice chairperson to each board standing committee and to appoint members to ad-hoc board committees. The president of the board presides over board meetings, sets meeting agendas and determines materials to be distributed to the board. Accordingly, the board president has substantial ability to influence the direction of the board. CFC believes that separation of the positions of board president and CEO reinforces the independence of the board in its oversight of its business and affairs. CFC also believes that this leadership structure is appropriate in light of the cooperative nature of the organization.

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The board of directors appoints the CEO. The CEO is not a member of the board of directors. If the CEO position becomes vacant, the president will exercise the responsibilities of the CEO until a permanent or interim CEO is selected by the board of directors.

Board Role in Risk Oversight

CFC’s management has primary responsibility for day-to-day management of the risks associated with CFC’s business, including operational, credit, loan, asset and liability management, legal, regulatory and political risks, while the board of directors is primarily responsible for the oversight and direction of risk management. Management’s role includes identifying risks, establishing appropriate internal processes and an effective internal control environment to identify and manage risks, and communicating information about risk to the board. Management within the operating groups is responsible for managing and monitoring risks along with the Asset Liability Committee, Corporate Credit Committee and Disclosure Committee, which have their members appointed by the CEO. Each of these internal committees consist of certain management-level employees.

CFC has an annual strategic planning process that involves the board of directors and executive management. The fiscal year 2014 strategic planning process included a facilitated Strengths, Weaknesses, Opportunities and Threats (“SWOT”) analysis with Board members. The objectives of the SWOT analysis were to identify gaps between the organization’s current state and where the Board envisions CFC in the future and to identify critical business risks. The SWOT analysis sessions were also conducted with employees. The combined results from the SWOT analyses were analyzed by executive management to match CFC’s resources and capabilities to the current business environment. The results of the board’s strategic risk assessment and management’s operational risk assessment are used as the basis for the development of the strategic plan.

The board of directors has developed a risk management philosophy, which is reviewed and, if appropriate, updated annually. It states CFC’s set of shared beliefs and attitudes on how risk is considered from strategy development and implementation to our operations.

Additionally, CFC periodically conducts a risk culture survey to assess the strengths and weaknesses of our corporate culture in the following areas: risk management activities, management’s philosophy and operating style, organizational structure, integrity and ethical values. Executive management analyzes the survey results and develops action items that are focused on improving the internal control environment, as necessary.

The Audit Committee of the board of directors assists the full board of directors in its risk oversight responsibilities. In accordance with its charter, CFC’s Audit Committee is required to periodically inquire of the internal auditors and the external auditors regarding significant risks and exposures to the organization, as well as inquire as to the steps management has taken or proposes to take to minimize these risks. The Audit Committee periodically reviews compliance with such steps. The Corporate Compliance group provides the Audit Committee with semi-annual reports on compliance and ethics matters, including any breaches of laws, regulations or organizational standards. In addition, the Internal Audit group provides the Audit Committee with feedback on the effectiveness and design of internal control processes by reporting the results of its internal audits.


Item 11.	Executive Compensation

Compensation Discussion and Analysis

Executive Compensation Philosophy and Objectives

The components of our compensation package for the named executive officers (consisting of Messrs. Petersen, Don, Evans, Lilly, Zawalick, List, Larochelle and Ms. Aronson) are consistent with those offered to all employees.

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Our executive compensation program provides a balanced mix of compensation that incorporates the following key components:

annual base pay,

an annual cash incentive that is based on the achievement of short-term (one-year) corporate goals,

a three-year cash incentive that is based on the achievement of long-term corporate goals and

retirement, health and welfare, and other benefit programs.

While all elements of executive compensation work together to provide a competitive compensation package, each element of compensation is determined independently of the other elements.

Our compensation philosophy is to provide a total compensation package for employees - base pay, short-term incentive, long-term incentive and benefits - that is competitive in the local employment market. However, due to the cooperative nature of the organization, CFC does not meet the total cash compensation levels of named executive officers of other financial services organizations since we do not offer stock or other equity compensation. It is important to CFC, however, to pay the named executive officers of CFC competitively in base pay to retain key talent.

Performance - Named executive officers receive base pay that is both market competitive and reflective of the strategic management they provide to CFC. Other components of compensation - short-term and long-term incentives - reflect the performance of the organization and the success in achieving corporate performance metrics established by the board of directors.

Retention - CFC’s success is due in large part to the relationship between our employees and our members. This makes the retention of employees, including the named executive officers, vital to our business and long-term success. The compensation package, particularly the long-term incentive plan and the retirement benefits, assist in the retention of a highly qualified management team.

Compensation Analysis

In fiscal year 2014, Mercer US was engaged by the Compensation Committee to conduct a compensation survey to provide compensation data for the CEO position using 14 peer organizations identified by Mercer US through discussion with the Compensation Committee. Mercer US included companies in the peer group that were similar to CFC in asset size, industry and business description. The peer group included financial institutions that are private market, commercial and/or mission-driven lenders, offering full-service financing, investment and related services. The companies targeted as peer companies included two members of the Farm Credit system and 12 regional banks or financial services companies. These companies were chosen because their businesses are similar to CFC’s.

The peer group companies had assets ranging from approximately 50% to 200% of CFC’s February 2013 total assets of $21.5 billion, and included five companies with greater total assets than CFC’s. The peer group consisted of financial services organizations New York Community Bancorp, Inc., Astoria Financial Corp., Nelnet, Inc., Webster Financial Corp., Flagstar Bancorp, People’s United Financial Corp., Washington Federal Inc., Hudson City Bancorp Inc., First Niagara Financial Group, TFS Financial Corporation, Everbank Financial Corporation and Federal Agricultural Mortgage Corporation, as well as two Farm Credit System peers. Hudson City Bancorp Inc.’s 2012 assets are outside of the normal targeted asset range, and they have agreed to a merger with M&T Bank Corp. Mercer US recommended that this company remain in the peer group for this year, since they were operating as a stand alone entity, and will re-evaluate the peer group for next year’s analysis.

The elements of compensation reviewed include:

current base salary;

actual bonus paid for fiscal year 2012 and, for the target compensation, the target bonus for 2013;

sign-on awards, special awards and mega-grants annualized over the term of the employment contract or the vesting schedule.

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The Compensation Committee reviewed total compensation data for the peer group for informational purposes and used this data solely to determine the competitiveness of our CEO base pay.

In determining the base compensation paid to our other named executive officers, the CEO reviewed national, credible third-party compensation surveys (including the Mercer Executive and CompAnalyst surveys) for financial services and other organizations of similar asset size as CFC in order to obtain a general understanding of current compensation practices and to ensure that the base pay component of compensation for the named executive officers other than the CEO is competitive with such institutions. CFC has often recruited non-CEO talent from industries outside the financial services sector. As a result, the CEO considers data from surveys covering a larger and broader group of for-profit companies in setting compensation for the other named executive officers than the Compensation Committee considers in setting compensation for the CEO. The CEO considered the data to gain a general understanding of current compensation practices at institutions of similar asset size to CFC; and did not review or consider underlying data pertaining to individual organizations comprising any of the survey groups. Instead, the CEO considered the aggregate compensation data to enhance his understanding of current practices in setting compensation at competitive levels.

Elements of Compensation

Base Pay - Our philosophy is to provide annual base pay that reflects the value of the job in the marketplace, targeted at the 50th percentile. To attract and retain a highly skilled work force, we must remain competitive with the pay of other employers that compete with us for talent.

After reviewing the performance of the organization and the evaluation of the CEO’s performance by each board member, it was the assessment of the Compensation Committee that the CEO and the organization performed extremely well during this business year. In fact, the business results exceeded company targets for many key metrics of performance, and the CEO continued to demonstrate outstanding leadership. Therefore, in recognition of his strong performance and leadership, the Committee increased the CEO’s base pay to $925,000 effective January 1, 2014.

As discussed under "Compensation Analysis"above, the CEO exercised his judgment to set the annual base pay for the other named executive officers based on general market data, overall performance and leadership accomplishments.

Mr. Evans, Mr. List, Mr. Larochelle, Mr. Lilly, Mr. Zawalick, Mr. Don and Ms. Aronson all performed well in their various roles as senior leaders of the organization. They each contributed to the achievement of corporate strategies and objectives in a positive and meaningful way which would typically warrant a merit-based increase in base pay and/or a one-time cash award. Ms. Aronson and Mr. Don received merit increases. Messrs. Larochelle, Zawalick, Borak, List and Lilly received one-time cash awards. Mr. Evans received a merit increase and a one-time cash award. The merit increases and/or cash awards granted are included in the total compensation table below.

Short-Term Incentive - Our short-term cash incentive program is a one-year cash incentive that is tied to the annual performance of the organization as a whole. We believe that by paying a short-term incentive tied to the achievement of annual operating goals, all employees, including named executive officers, will focus their efforts on the most important strategic objectives that will help us to fulfill our mission to our members and our obligations to the financial markets. Additionally, the short-term incentive pay enhances our ability to provide competitive compensation while at the same time tying total compensation paid to the achievement of corporate goals. Every employee participates in the short-term incentive program, and the corporate strategic goals are the same for all employees, including the named executive officers.

The short-term incentive program provides annual cash incentive opportunities based upon the level of the position within our base pay structure, ranging from 15% to 25% of base pay. Named executive officers are eligible to receive short-term cash incentive compensation up to 25% of their base pay. Since its inception in 1999, the actual payout percentage has ranged from 55% to 100% of total opportunity, with an average over the 16 years of 81.68%. This equates to a 16-year average payout of 15.69% of base salaries for all employees.

Our approach to establishing corporate goals for short-term incentive compensation has not changed since the plan’s inception. Corporate performance is measured using a balanced scorecard approved by the board of directors prior to the start of the fiscal year. The balanced scorecard is a performance management tool that articulates the corporate strategy into specific, quantifiable and measurable goals. The goals have always been tied to enhancing service to our member owners while ensuring all aspects of the business are effectively managed.

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realizing our strategic plan. The intent is to align organizational, departmental and individual initiatives to achieve a common set of goals.

The four quadrants for fiscal year 2014, which are the basis for the short-term incentive payment, are the same as they have been in previous years: Customer Engagement, Financial Ratios, Internal Process and Operations, and Learning, Growth and Innovation. For fiscal year 2014, the board of directors established five corporate goals within these four quadrants. The board of directors establishes corporate goals and measures that they believe are challenging but achievable if each individual performs well in his or her role and we meet our internal business plan goals.

The goals for fiscal year 2014 were:

Customer Engagement: A goal supporting efforts to maintain or increase market share of borrowers in key segments of the loan portfolio.

Internal Process and Operations: Manage CFC’s operating expense levels.

Financial Ratios: Two goals supporting efforts to meet or exceed established financial targets to maintain CFC’s financial strength.

Learning, Growth & Innovation: Targeted interaction with the membership.

The determination of the extent to which the five goals were achieved and, therefore, the amount to be paid out under the short-term incentive plan for fiscal year 2014 was confirmed by the board of directors with the filing of this Form 10-K. The board determined that three of the goals were 100% achieved, one goal was achieved at 75%, and one goal was not achieved at all resulting in an aggregate payout of 71.25% of the total opportunity.

Long-Term Incentive - The long-term incentive program is a three-year plan that is tied to CFC’s long-term strategic objectives. The long-term incentive program was implemented to create dynamic tension between short-term objectives and long-term goals. It is also an effective retention tool, helping us to keep key employees, and supports CFC’s efforts to compensate its employees at market competitive levels.

All employees employed on the first day of the fiscal year, June 1, are eligible to participate in the program for the performance period beginning on that date. Under the long-term incentive program, performance units covering a three-year performance period are issued to each employee at the start of each fiscal year. The long-term incentive is paid out in one lump sum after the end of the performance period, subject to approval by the board of directors and the continued employment (or retirement, disability or death) of the participant by CFC on the date of payment. We sometimes refer to each three-year performance period as a plan cycle.

The number of performance units awarded to each employee for each plan cycle is calculated by dividing a percentage, ranging from 15% to 25%, of the participant’s base pay for the first fiscal year of the plan cycle, by the payout value assigned to the target rating level. For the program cycle ending May 31, 2014, the target rating level was “AA-Stable”, which was assigned a payout value of $100 per performance unit. For the named executive officers, the number of performance units awarded for that program cycle was based on 25% of each named executive officer’s base pay for the fiscal year 2012, the first year of the plan cycle. If the highest rating level was achieved at the end of that plan cycle, resulting in payout of $150 per performance unit, the long-term incentive pay for named executive officers would have been 37.5% of FY12 base pay.

The following table shows the potential payout values for performance units awarded for the program cycle that ended May 31, 2014:

Senior Secured Debt Rating—Incentive-Performance Linkage



Rating	A+			AA-			AA
Outlook	negative	stable	positive	negative	stable	positive
Numerical Score	1	2	3	4	5	6
Plan Pay-Out Unit Value	$—	$20	$60	$60	$100	$120	$150

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* The target objective is in bold.

As of May 31, 2014, there were three active long-term incentive plans in which named executive officers are participants. Performance units issued to named executive officers in FY2012 had a payout value based on our senior secured debt ratings in place on May 31, 2014; performance units issued to named executive officers in FY2013 will have a payout value based on senior secured debt ratings in place on May 31, 2015; and performance units issued to named executive officers in FY2014 will have a payout value based on senior secured debt ratings in place on May 31, 2016. Payments made to named executive officers for fiscal year 2014 were for performance units issued in FY2012 and were based on the May 31, 2014 senior secured debt rating level of A+ stable outlook, which has a value of $20 per performance unit, or 20% of the targeted opportunity (5% of FY2012 base pay).

Risk Assessment

The Compensation Committee conducts an annual risk assessment of the Company’s compensation policies and practices, particularly the short-term and long-term incentive plan goals, to ensure that the policies and practices do not encourage excessive risk. For fiscal year 2014 the Compensation Committee concluded that our compensation policies and practices are not reasonably likely to provide incentives for behavior that could have a material adverse effect on the Company.

Benefits

An important retention tool is our defined benefit pension plan, the Retirement Security Plan. CFC participates in a multiple-employer pension plan managed by NRECA. We balance the effectiveness of this plan as a compensation and retention tool with the cost of the annual premium incurred to participate in this pension plan. The value of the pension benefit is determined by base pay only and does not include other cash compensation.

For more information on the Retirement Security Plan and the Pension Restoration Plan, see the "Pension Benefits Table" and accompanying narrative below.

As an additional retention tool designed to assist named executive officers in deferring compensation for use in retirement, each named executive officer is also eligible to participate in CFC’s nonqualified 457(b) deferred compensation savings plan. Contributions to the plan are limited by IRS regulations. The calendar year 2014 cap for contributions is $17,500. There is no CFC contribution to the deferred compensation plan. For more information see Nonqualified Deferred Compensation below.

Other Compensation

We provide named executive officers with other benefits, as reflected in the All Other Compensation column in the "Summary Compensation Table" below, that we believe are reasonable and consistent with our compensation philosophy. We do not provide significant perquisites or personal benefits to the named executive officers.

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The Compensation Committee considers perquisites for the CEO in connection with its annual review of the CEO’s total compensation package described above. The perquisites provided to Mr. Petersen are limited to an annual automobile allowance as well as an annual spousal air travel allowance to permit Mr. Petersen’s spouse to accompany him on business travel. To provide these perquisites in an efficient fashion, the board of directors authorizes an annual allowance rather than providing unlimited reimbursement or use of a company-owned vehicle. The amount of each allowance is authorized annually by the board of directors and is determined based on the estimated cost for operation and maintenance of an automobile and the anticipated cost of air travel by the CEO’s spouse. For 2014, the board of directors authorized an aggregate of $30,000 to cover these allowances.

Severance/Change-in-Control Agreements

Mr. Petersen, CEO, and Mr. Evans, executive vice president and chief operating officer, each have an executive agreement with CFC under which they may continue to receive compensation and benefits in certain circumstances after resignation or termination of employment. The value of Mr. Petersen’s severance package was determined to be appropriate for a CEO and approved by the Compensation Committee as part of his employment contract. The value of Mr. Evans’ severance package was negotiated by the CEO and Mr. Evans as part of Mr. Evans’ employment offer. No other named executive officers have termination or change-in-control agreements. For more information on these severance arrangements, see "Termination of Employment and Change-in-Control Arrangements" below.

Compensation Committee Report

The Compensation Committee of the board of directors oversees CFC’s compensation program on behalf of the board. In fulfilling its oversight responsibilities, the Compensation Committee reviewed and discussed with management the "Compensation Discussion and Analysis" set forth in this Form 10-K. Based on this review and discussion, the Compensation Committee recommended to the board of directors that the "Compensation Discussion and Analysis" be included in this Form

10-K.

Submitted by the Compensation Committee:

Joel Cunningham

Ray Beavers

Glenn W. Miller

R. Grant Clawson

Lyle Korver

Kirk A. Thompson

Mike Campbell

Summary Compensation Table

The summary compensation table below sets forth the aggregate compensation for the years ended May 31, 2014, 2013 and 2012 earned by the named executive officers.

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Name and Principal Position	Year	Salary		Bonus (1)		Non-Equity Incentive Plan Compensation (2)(7)		Change in Pension Value and Nonqualified Deferred Compensation Earnings (3)		All Other Compensation (4)		Total
Sheldon C. Petersen	2014	$	860,075	$	—	$	192,675	$	179,778	$	35,825	$	1,268,353
Chief Executive Officer	2013	813,700		—		231,494		636,330		42,924		1,724,448
	2012	799,874		100,000		156,721		896,555		41,997		1,995,147

J. Andrew Don⁽⁵⁾	2014	395,833		—		87,510		52,179		7,433		542,955
Senior Vice President and	2013	375,000		—		101,423		219,102		6,250		701,775
Chief Financial Officer	2012	325,000		—		58,890		206,202		9,317		599,409

John T. Evans	2014	480,550		15,000		109,311		118,207		6,947		730,015
Executive Vice President	2013	458,300		11,500		130,546		190,874		5,833		797,053
and Chief Operating Officer	2012	458,300		—		88,625		260,220		9,104		816,249

Steven L. Lilly⁽⁵⁾	2014	405,650		7,500		92,536		98,483		—		604,169
Senior Vice President,	2013	405,650		—		116,622		121,167		—		643,439
Special Asset Management	2012	405,650		10,000		80,727		326,923		—		823,300

Lawrence Zawalick⁽⁶⁾	2014	281,231		10,000		64,961		165,392		82,760		604,344
Senior Vice President,	2013	320,000		—		90,780		280,498		5,483		696,761
Affiliate Organizations	2012	312,000		—		61,300		498,172		7,037		878,509

John J. List⁽⁵⁾	2014	405,650		10,000		92,536		87,941		5,100		601,227
Senior Vice President and	2013	405,650		8,000		116,622		115,237		5,000		650,509
Chief Lending Officer	2012	405,650		15,000		80,727		163,754		4,900		670,031

Richard E. Larochelle⁽⁶⁾	2014	246,094		12,656		62,078		149,886		85,754		556,468
Senior Vice President,	2013	421,876		10,500		120,476		496,981		5,000		1,054,833
Corporate Relations	2012	421,876		—		83,161		628,834		5,035		1,138,906

Roberta B. Aronson ⁽⁵⁾	2014	320,804		—		72,311		93,633		6,476		493,224
Senior Vice President and
General Counsel

⁽¹⁾ Includes amounts given as one-time cash awards in lieu of base pay increases, except for Mr. Petersen, which was a bonus in addition to a base pay increase in 2012; and Mr. Evans, which was a bonus in addition to a base pay increase in 2014.

⁽²⁾Includes amounts earned during each respective fiscal year and payable at May 31 under the long-term and short-term incentive plans. For a discussion of the long-term and short-term incentive plans, see “Elements of Compensation” in Compensation Discussion and Analysis above. The amounts earned by each named executive officer under these incentive plans are listed above.

⁽³⁾ Represents solely the aggregate change in the actuarial present value of the accumulated pension benefit under NRECA Retirement Security Plan, the multiple-employer defined benefit pension plan in which CFC participates, during each respective fiscal year. Mr. Larochelle’s change in actuarial pension value is for the period prior to his retirement and distribution on December 31, 2013.

⁽⁴⁾ For Mr. Petersen, includes $30,000 of perquisites comprising Mr. Petersen’s automobile allowance and his spousal air travel allowance, in each case for fiscal year 2012, 2013 and 2014. The annual automobile allowance is calculated based on estimated costs associated with maintenance, use and insurance of a personal automobile. The annual spousal travel allowance is calculated based on the anticipated air travel for Mrs. Petersen during the fiscal year. Mr. Petersen’s also includes earnings for accrued and unused annual leave in 2013. The remaining amounts included in this column represent CFC contributions on behalf of each named executive officer pursuant to the CFC 401(k) defined contribution plan and contributions to health savings. For Mr. Larochelle and Mr. Zawalick, these costs include a vacation payout of $84,169 and $76,810 respectively that was accrued and unused at the time of their retirement.

⁽⁵⁾ Mr. Don and Ms. Aronson became named executive officers of CFC on July 1, 2013. Mr. Lilly and Mr. List had changes to their positions on July 1, 2013. Mr. List also had a change to his position on April 16, 2014.

⁽⁶⁾ Mr. Larochelle retired on December 31, 2013 and Mr. Zawalick retired on April 16, 2014.

⁽⁷⁾The following chart has the amounts paid to each named executive officer under the short-term and long-term incentive plans for the preceding three years.

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Name	Year	Short-term Incentive Plan		Long-term Incentive Plan
Sheldon C. Petersen	2014	$	153,175	$	39,500
	2013	193,254		38,240
	2012	119,981		36,740

J. Andrew Don	2014	71,250		16,260
	2013	89,063		12,360
	2012	48,750		10,140

John T. Evans	2014	86,391		22,920
	2013	108,846		21,700
	2012	68,745		19,880

Steven L. Lilly	2014	72,256		20,280
	2013	96,342		20,280
	2012	60,847		19,880

Lawrence Zawalick⁽⁶⁾	2014	49,985		14,976
	2013	76,000		14,780
	2012	46,800		14,500

John J. List	2014	72,256		20,280
	2013	96,342		20,280
	2012	60,847		19,880

Richard E. Larochelle⁽⁶⁾	2014	43,932		18,146
	2013	100,196		20,280
	2012	63,281		19,880

Roberta B. Aronson	2014	57,891		14,420

Grants of Plan-Based Awards

We have a long-term and a short-term incentive plan for all employees, under which the named executive officers may receive a cash incentive up to 37.5% and 25% of salary, respectively. The incentive payouts are based on the executive officer’s salary for the fiscal year in which the program becomes effective. See the Compensation Discussion and Analysis above for further information on these incentive plans.

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	Estimated Future Payouts Under Non-Equity Incentive Plan Awards
	Threshold		Target		Maximum
Sheldon C. Petersen
Long-term Incentive Plan ⁽¹⁾	$	—	$	203,400	$	305,100
Short-term Incentive Plan ⁽²⁾	—		153,175		153,175
J. Andrew Don
Long-term Incentive Plan ⁽¹⁾	—		100,000		150,000
Short-term Incentive Plan ⁽²⁾	—		71,250		71,250
John T. Evans
Long-term Incentive Plan ⁽¹⁾	—		121,200		181,800
Short-term Incentive Plan ⁽²⁾	—		86,391		86,391
Steven L. Lilly
Long-term Incentive Plan ⁽¹⁾	—		101,400		152,100
Short-term Incentive Plan ⁽²⁾	—		72,256		72,256
Lawrence Zawalick
Long-term Incentive Plan ⁽¹⁾	—		80,000		120,000
Short-term Incentive Plan ⁽²⁾	—		49,765		49,765
John J. List
Long-term Incentive Plan ⁽¹⁾	—		101,400		152,100
Short-term Incentive Plan ⁽²⁾	—		72,256		72,256
Richard E. Larochelle
Long-term Incentive Plan ⁽¹⁾	—		105,500		158,250
Short-term Incentive Plan ⁽²⁾	—		43,932		43,932
Roberta B. Aronson
Long-term Incentive Plan ⁽¹⁾			81,300		121,950
Short-term Incentive Plan ⁽²⁾	—		57,891		57,891

⁽¹⁾ Target payouts are calculated using unit values of $100 based on our goal of achieving an average long-term senior secured credit rating of AA- stable at May 31, 2016.

⁽²⁾Target and maximum payouts represent 25% of May 31, 2014 base salary. For the payout earned under the fiscal year 2014 short-term incentive plan, see the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table above.

The board of directors approved a new long-term incentive plan and made grants of performance units to the named executive officers in August 2014. The payout under these grants will be determined on May 31, 2017.

Employment Contracts

Pursuant to an employment agreement effective as of January 1, 2008 and amended September 1, 2011, CFC has agreed to employ Mr. Petersen as Chief Executive Officer through February 28, 2015, unless otherwise terminated in accordance with the terms of the Agreement. The amended Agreement provides that CFC shall pay Mr. Petersen a base salary at an annual rate of not less than $790,000 per annum, plus such incentive payments (if any) as may be awarded him. In addition, pursuant to the Agreement, Mr. Petersen is entitled to certain payments in the event of his termination other than for cause (e.g., Mr. Petersen leaving for good reason, disability or termination due to death). See "Termination of Employment and Change-in-Control Arrangements" below for a description of these provisions and for information on these amounts.

For information about Mr. Evans’ termination agreement, see "Termination of Employment and Change-in-Control Arrangements."

Pension Benefits Table

CFC is a participant in a multiple-employer defined benefit pension plan, the Retirement Security Plan, which is administered by NRECA. Since the plan is a multiple-employer plan in which CFC participates, CFC is not liable for the amounts shown in the table below and such amounts are not reflected in CFC’s audited financial statements. CFC’s expense is limited to the annual premium to participate in the plan. There is no funding liability for CFC for the plan.

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The Retirement Security Plan is a qualified plan in which all employees are eligible to participate upon completion of one year of service. Each of the named executive officers participates in the qualified pension plan component of the Retirement Security Plan. CFC reduced the value of the pension plan effective September 1, 2010. Under the current pension plan, participants are entitled to receive annually, under a 50% joint and surviving spouse annuity, 1.70% of the average of their five highest base salaries during their last 10 years of employment, multiplied by the number of years of participation in the plan. The value of the pension benefit is determined by base pay only and does not include other cash compensation. Normal retirement age under the qualified pension plan is age 65; however, the plan does allow for early retirement with reduced benefits. For early retirement, the pension benefit will be reduced by 1/15 for each of the first five years and 1/30 for each of the next five years by which the elected early retirement date precedes the normal retirement date. Each of the named executive officers is eligible for early retirement under the plan. Benefits accrued prior to September 1, 2010, are based on a benefit level of 1.9% of the average of their five highest base salaries during their last 10 years of employment and a normal retirement age of 62.

The benefit and payout formula under this restoration component of the Retirement Security Plan is similar to that under the qualified plan component. However, six of the named executive officers have satisfied the provisions established to receive the benefit from this plan. Therefore they no longer have a risk of forfeiture of the benefit under the Pension Restoration Plan; distributions are made from the plan to each of those named executive officers annually.

The following table contains the years of service, the present value of the accumulated benefit for the executive officers listed in the Summary Compensation Table at May 31, 2014 and distributions from the plan for the fiscal year then ended.



Name	Plan Name	Number of Years Credited Service ⁽¹⁾	Present Value of Accumulated Benefit⁽²⁾		Payments During Last Fiscal Year ⁽³⁾
Sheldon C. Petersen	NRECA Retirement Security Plan	30.75	$	2,459,412	$	444,684
J. Andrew Don	NRECA Retirement Security Plan	13.66	859,007		—
John T. Evans⁽⁴⁾	NRECA Retirement Security Plan	3.75	267,815		53,636
Steven L. Lilly⁽⁴⁾	NRECA Retirement Security Plan	3.75	250,152		42,310
Lawrence Zawalick	NRECA Retirement Security Plan	33.66	938,950		1,113,615
John J. List ⁽⁴⁾	NRECA Retirement Security Plan	5.92	203,045		59,278
Richard E. Larochelle	NRECA Retirement Security Plan	29.58	—		2,533,905
Roberta B. Aronson	NRECA Retirement Security Plan	17.83	771,676		—

⁽¹⁾ CFC is a participant in a multiple-employer pension plan. Credited years of service, therefore, includes not only years of service with CFC, but also years of service with another cooperative participant in the multiple-employer pension plan. Mr. Larochelle has credited years of service with another cooperative in addition to CFC. All other named executive officers have credited years of service only with CFC.

⁽²⁾Amount represents the actuarial present value of the executive officer’s accumulated benefit under the plan as of May 31, 2014, as provided by the plan administrator, NRECA, using interest rates ranging from 1.19% to 5.66% per annum and mortality according to tables prescribed by the IRS as published in Revenue Rulings 2001-62 and 2007-67.

⁽³⁾ Distributions during fiscal year 2014 were as a result of executive officers no longer being at risk of forfeiture with respect to these amounts provided under the deferred compensation restoration component of the Retirement Security Plan. Mr. Don and Ms. Aronson continue to have a risk of forfeiture of the benefits under the Pension Restoration Plan, therefore no payments have been made. Distributions for Zawalick and Larochelle also include those related to their retirement.

⁽⁴⁾The NRECA Pension Plan allows active employees who have reached normal retirement age to cash in their lump sum benefit earned to date, or “quasi-retire”. Due to the quasi-retirements of Mr. List in 2009, Mr. Lilly in January 2012 and Mr. Evans in March of 2012, for benefits earned and eligible for quasi-retirement, their credited years of service were reduced and they received 12 months of credited service in January of each year thereafter.

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Nonqualified Deferred Compensation

The CFC deferred compensation plan is a nonqualified deferred compensation savings program for the senior executive group, including each of the named executive officers, and other selected management or highly compensated employees designated by CFC. Participants may elect to defer up to the lesser of 100% of their compensation for the year or the applicable IRS statutory dollar limit in effect for that calendar year. The calendar year 2014 cap for contributions is $17,500. During the three plan years immediately prior to the date a participant attains normal retirement age, participants may be eligible for a statutory catch-up provision that allows them to defer more than the annual contribution limit. Compensation for the purpose of this plan is defined as the total amount of compensation, including incentive pay, if any, paid by CFC. CFC does not make any contributions to the plan.

The following table summarizes information related to the nonqualified deferred compensation plan in which the executive officers listed in the "Summary Compensation Table" were eligible to participate during the year ended May 31, 2014.



Name	Executive Contributions in Last Fiscal Year⁽¹⁾			Registrant Contributions in Last Fiscal Year			Aggregate Earnings in Last Fiscal Year			Aggregate Withdrawals/ Distributions				Aggregate Balance at Last Fiscal Year End
Sheldon C. Petersen		$	17,500		$	—		$	88,276		$	—			$	543,691
J. Andrew Don		—			—			—			—				—
John T. Evans⁽²⁾		24,792			—			18,467			—				283,832
Steven L. Lilly		—			—			49,460			—				299,036
Lawrence Zawalick		13,562			—			49,507			—				304,786
John J. List		17,500			—			41,820			—				260,498
Richard E. Larochelle		9,917			—			3,692			(78,201		)		237,316
Roberta B. Aronson		—			—			—			—				—

⁽¹⁾ Executive contributions are also included in the fiscal year 2014 Salary column in the "Summary Compensation Table" above.

⁽²⁾Mr. Evans was eligible for and deferred an additional amount under the special catch-up provision of the plan.

Termination of Employment and Change-in-Control Arrangements

Mr. Petersen

Under the executive agreement with Mr. Petersen, if CFC terminates his employment without “cause,” or Mr. Petersen terminates his employment for “good reason” (each term as defined below), CFC is obligated to pay him a lump-sum payment equal to the product of three times his annual base salary at the rate in effect at the time of termination and his short-term incentive bonus, if any, for the previous year (or an amount equal to the short-term incentive bonus for fiscal year 2007). Assuming a triggering event on May 31, 2014, the compensation payable to Mr. Petersen for termination without cause would be $3,354,762. The actual payments due on a termination without cause on different dates could materially differ from this estimate.

145

Mr. Evans

Under the executive agreement with Mr. Evans, if CFC terminates his employment without cause, Mr. Evans would receive continued annual base salary in effect at the time of termination, incentive compensation, and payment for all health and welfare and retirement plans for an additional nine-month period. Assuming a termination date of May 31, 2014, the cost of compensation payable to Mr. Evans for termination without cause would be $500,037. The actual payments due for a termination without cause on different dates could materially differ from this estimate.

Director Compensation Table

Directors receive an annual fee for their service on the CFC board. Additionally, the directors receive reimbursement for reasonable travel expenses. The fee is paid on a monthly basis and reimbursement for travel expenses is paid following the conclusion of each board meeting.

The following chart summarizes the total compensation earned by CFC’s directors during the year ended May 31, 2014.



Name	Total Fees Earned
Joel Cunningham	$	58,850
Ray Beavers	58,850
R. Grant Clawson	54,100
Frederick C. Anderson	41,800
Patrick L. Bridges	52,000
Fred Brog	52,000
Mike Campbell	52,450
Mel Coleman	47,300
Walter K. Crook	47,750
Jim L. Doerstler	40,600
Kent D. Farmer	12,000
Roman E. Gillen	52,600
Christopher L. Hamon	52,300
Scott W. Handy	53,050
Thomas L. Hayes	12,000
Robert M. Hill	52,300
Lyle Korver	52,300
R. W. Matheny	12,000
Burns E. Mercer	45,350
Glenn W. Miller	54,100
Curtis Nolan	47,300
Harry N. Park	52,150
Curtin R. Rakestraw II	52,150
Randy D. Renth	53,800
Dwight Rossow	40,450
Kirk A. Thompson	52,000
Stephen C. Vail	12,000

Compensation Committee Interlocks and Insider Participation

During the year ended May 31, 2014, there were no compensation committee interlocks or insider participation related to executive compensation.

146


Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Not applicable.


Item 13.	Certain Relationships and Related Transactions, and Director Independence

Review and Approval of Transactions with Related Persons

Our board of directors has established a written policy governing related-person transactions. The policy covers transactions with related persons such as our directors and executive officers and their immediate family members and entities, such as certain of our members, of which any of our directors or executive officers is an executive officer, director or employee or otherwise controls. Under this policy, a related-person transaction is any transaction in which we are a participant involving in excess of $120,000 in which a related person had, has or will have a direct or indirect material interest, other than compensatory and expense reimbursement arrangements, transactions where the related person’s interest arises only from the person’s position as a director of another entity that is a party to the transaction, and transactions that are deemed to be related credits. Such related-person transactions are subject to review and approval by the general counsel, or in some cases, the board of directors (excluding any interested director), based on whether the transaction is fair and reasonable to CFC and consistent with the best interests of CFC.

lending staff or internal Corporate Credit Committee. Any related credit in excess of $250,000 requires approval by the full

board of directors, except that any interested directors may not participate, directly or indirectly, in the deliberations or vote

with respect to such approval and the CEO has the authority to approve emergency lines of credit and certain other loans and

lines of credit. Notwithstanding the related-person transaction policy, the CEO will extend such loans and lines of credit in

qualifying situations to a member of which a CFC director was a director or officer, provided that all such credits are

underwritten in accordance with prevailing standards and terms. Such situations are typically weather related and must meet

specific qualifying criteria. To ensure compliance with this policy, no related persons may be present in person or by teleconference while a related credit is being considered. Under no circumstances may we extend credit to a related person or any other person in the form of a personal loan.

As a cooperative, CFC was established for the very purpose of extending financing to its members (from which our directors must be drawn). Loans and guarantees to member systems of which directors of CFC are members, employees, officers or directors are made in the ordinary course of CFC business on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other members and which do not involve more than normal risk of uncollectibility or present other unfavorable features. It is anticipated that, consistent with its loan and guarantee policies in effect from time to time, additional loans and guarantees will be made by CFC to member systems and trade and service organizations of which directors of CFC or their immediate family members (i) are members, employees, officers or directors, (ii) are beneficial owners or (iii) control. CFC has adopted a policy whereby substantially all extensions of credit to such entities are approved only by the disinterested directors.

Related-Person Transactions

The following table contains the total compensation earned by CFC’s executive officers during the year ended May 31, 2014 who are not named executive officers but meet the definition of a “related person” as described above. Total compensation disclosed below is made up of the same components included in the "Summary Compensation Table."

147



Name and Principal Position	Total Compensation
John M. Borak Senior Vice President, Credit Risk Management	$	353,276
Steven M. Kettler ⁽¹⁾ Senior Vice President, Strategic Business Development and Support	297,391
Joel Allen⁽¹⁾ Senior Vice President, Member Services	297,391
Robin C. Reed ⁽¹⁾ Senior Vice President, Member Services	292,841
Graceann D. Clendenen ⁽¹⁾ Senior Vice President, Corporate Services	279,811
Leigh Grantham ⁽²⁾ Senior Vice President, Strategic and Business Development	274,214
Brad L. Captain ⁽¹⁾ Senior Vice President, Corporate Relations	258,371

⁽¹⁾These executive officers were promoted to these roles and became related persons effective April 16, 2014.

⁽²⁾Ms. Grantham terminated employment effective April 1, 2014.

Independence Determinations


(i)	the director is, or has been within the last three years, an employee of CFC or an immediate family member is, or has been within the last three years, an executive officer of CFC;


(ii)	the director has received, or has an immediate family member who has received, during any 12-month period within the last three years, more than $120,000 in direct compensation from CFC, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided that such compensation is not contingent in any way on continued service);

(iii)


(iv)	the director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of CFC’s present executive officers at the same time serves or served on that company’s compensation committee; or


(v)	the director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, CFC for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenue.

Based on the criteria above, the board of directors has determined that the directors listed below are independent for the period of time served by such directors during fiscal year 2014. The board determined that none of the directors listed below had any of the relationships listed in (i) - (v) above or any other material relationship that would compromise his or her independence.

148



Independent Directors
Ray Beavers	Jim L. Doerstler (1)	Curtis Nolan
Patrick L. Bridges	Kent D. Farmer	Harry N. Park
Fred Brog	Scott W. Handy	Curtin R. Rakestraw II
Mike Campbell	Thomas L. Hayes	Randy D. Renth
R. Grant Clawson	Robert M. Hill	Dwight Rossow (1)
Mel Coleman	R.W. Matheny	Stephen C. Vail
Walter K. Crook	Burns E. Mercer (1)
Joel Cunningham	Glenn W. Miller
(1) This director served during the year ended May 31, 2014; however he was no longer a director at May 31, 2014.


Item 14.	Principal Accountant Fees and Services

The following table summarizes the aggregate professional fees for the audit of the financial statements for the years ended

May 31, 2014 and 2013 and fees for other services provided during that period by KPMG, LLP and Deloitte & Touche, LLP, respectively.



	2014		2013
Audit fees⁽¹⁾	$	1,837,040	$	1,454,200
Audit-related fees⁽²⁾	—		45,000
Tax fees⁽³⁾	20,013		115,424
All other fees⁽⁴⁾	27,850		16,500
Total	$	1,884,903	$	1,631,124

⁽¹⁾Audit fees in 2014 consist of fees for the quarterly reviews of our interim financial information and the audit of our annual consolidated financial statements and fees for the preparation of the stand-alone financial statements for RTFC, NCSC, and CAH. Audit fees in 2013 consist of fees for the quarterly reviews of our interim financial information and the audit of our annual consolidated financial statements and fees for the preparation of the stand-alone financial statements for RTFC and NCSC. Additionally, audit fees in 2014 and 2013 include comfort letter fees and consents related to debt issuances and compliance work required by the independent auditors.

⁽²⁾ Audit-related fees for 2013 include fees incurred in connection with the CAH audit.

⁽³⁾ Tax fees consist of assistance with matters related to tax compliance and consulting.

⁽⁴⁾In 2014, all other fees consist of fees for the audit of a trust serviced by CFC and fees for certain agreed upon procedures. In 2013, all other fees consist of fees for the audit of a trust serviced by CFC.

CFC’s Audit Committee is solely responsible for the nomination, approval, compensation, evaluation and discharge of the independent public accountants. The independent registered public accountants report directly to the Audit Committee, and the Audit Committee is responsible for the resolution of disagreements between management and the independent registered public accountants. Consistent with U.S. Securities and Exchange Commission requirements, the Audit Committee has adopted a policy to pre-approve all audit and permissible non-audit services provided by the independent registered public accountants provided such services do not impair the independent public accountant’s independence. All fiscal year 2014 and fiscal year 2013 services were pre-approved by the Audit Committee. CFC’s independent registered public accountants for the current fiscal year have been appointed by the Audit Committee.

149

PART IV



Item 15.	Exhibits, Financial Statement Schedules



(a)	Financial Statement Schedules

	The following documents are filed as part of this Report in Part II, Item 8 and are incorporated herein by reference.

1.	Consolidated Financial Statements	Page
	Report of Independent Registered Public Accounting Firm	72
	Consolidated Balance Sheets as of May 31, 2014 and 2013	74
	Consolidated Statements of Operations for the Years Ended May 31, 2014, 2013 and 2012	75
	Consolidated Statements of Comprehensive Income for the Years Ended May 31, 2014, 2013 and 2012	76
	Consolidated Statements of Changes in Equity for the Years Ended May 31, 2014, 2013 and 2012	77
	Consolidated Statements of Cash Flows for the Years Ended May 31, 2014, 2013 and 2012	78
	Notes to Consolidated Financial Statements	80
	Supplementary Data	123

2.	Schedules
	All financial statement schedules have been included in the consolidated financial statements or the related footnotes, or are either inapplicable or not required.

(b)	Exhibits
	An Exhibit Index has been filed as part of this Form 10-K and is incorporated herein by reference.

150

SIGNATURES



NATIONAL RURAL UTILITIES COOPERATIVE
FINANCE CORPORATION

By:	/s/ SHELDON C. PETERSEN
	Sheldon C. Petersen
	Chief Executive Officer

151



Signature	Title	Date

/s/ SHELDON C. PETERSEN	Chief Executive Officer
Sheldon C. Petersen

/s/ J. ANDREW DON	Senior Vice President and Chief Financial Officer
J. Andrew Don

/s/ ROBERT E. GEIER	Vice President and Controller
Robert E. Geier

/s/ JOEL CUNNINGHAM	President and Director
Joel Cunningham

/s/ RAY BEAVERS	Vice President and Director
Ray Beavers

/s/ R. GRANT CLAWSON	Secretary-Treasurer and Director
R. Grant Clawson
		August 28, 2014
/s/ PATRICK L. BRIDGES	Director
Patrick L. Bridges

/s/ FRED BROG	Director
Fred Brog

/s/ MIKE CAMPBELL	Director
Mike Campbell

/s/ MEL COLEMAN	Director
Mel Coleman

/s/ WALTER K. CROOK	Director
Walter K. Crook

/s/ KENT D. FARMER	Director
Kent D. Farmer

/s/ ROMAN E. GILLEN	Director
Roman E. Gillen

/s/ CHRISTOPHER L. HAMON	Director
Christopher L. Hamon

152



/s/ SCOTT W. HANDY	Director
Scott W. Handy

/s/ THOMAS L. HAYES	Director
Thomas L. Hayes

/s/ ROBERT M. HILL	Director
Robert M. Hill

/s/ LYLE KORVER	Director
Lyle Korver

/s/ R. W. MATHENY	Director
R. W. Matheny		August 28, 2014

/s/ GLENN W. MILLER	Director
Glenn W. Miller

/s/ CURTIS NOLAN	Director
Curtis Nolan

/s/ HARRY N. PARK	Director
Harry N. Park

/s/ CURTIN R. RAKESTRAW II	Director
Curtin R. Rakestraw II

/s/ RANDY D. RENTH	Director
Randy D. Renth

/s/ KIRK A. THOMPSON	Director
Kirk A. Thompson

/s/ STEPHEN C. VAIL	Director
Stephen C. Vail

153





EXHIBIT INDEX

	The following exhibits are incorporated by reference or filed herewith.

	Exhibit No.		Description
	3.1*	—	Articles of Incorporation.
	3.2	—	Amended Bylaws as approved by the CFC Board of Directors and members on March 7, 2011. Incorporated by reference to Exhibit 3.2 to our Form 10-Q filed on April 13, 2011.
	4.1	—	Form of Capital Term Certificate. Incorporated by reference to Exhibit 4.3 to Registration Statement No. 2-46018 filed October 12, 1972.
	4.2	—	Indenture dated February 15, 1994, between the Registrant and First Bank National Association as trustee. Incorporated by reference to Exhibit 4.2 to our Form 10-Q filed on October 15, 2007.
	4.3	—	Form of indenture between CFC and Mellon Bank, N.A., as Trustee. Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-3 filed on November 14, 1995 (Registration No. 33-64231).
	4.4	—	Indenture dated as of December 15,1987, between CFC and Chemical Bank, as Trustee. Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-3ASR filed on November 24, 2008 (Registration No. 333-155631).
	4.5	—	First Supplemental Indenture between CFC and Chemical Bank, as Trustee. Incorporated by reference to Exhibit 4.2 to Registration Statement on Form S-3 filed on April 5, 1995 (Registration No. 33-58445).
	4.6	—	Form of indenture dated May 15, 2000, between the Registrant and Bank One Trust Company, National Association, as trustee. Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-3 filed on May 25, 2000 (Registration No. 333-37940).
	4.7	—	First Supplemental Indenture dated March 12, 2007, between the Registrant and U.S. Bank National Association, as successor trustee. Incorporated by reference to Exhibit 4.2 to Registration Statement on Form S-3ASR filed on April 19, 2007 (Registration No. 333-142230).
	4.8	—	Indenture dated October 25, 2007, between the Registrant and U.S. Bank National Association, as trustee. Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-3ASR filed on October 26, 2007 (Registration No. 333-146960).
	10.1^	—	Plan Document for CFC’s Deferred Compensation Program amended and restated July 1, 2003. Incorporated by reference to Exhibit 10.1 to our Form 10-K filed on August 24, 2005.
	10.2^	—	Employment Contract between CFC and Sheldon C. Petersen, effective January 1, 2008. Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on January 11, 2008.
	10.3^	—	First Amendment to Employment Contract between CFC and Sheldon C. Petersen, effective September 1, 2011.
	10.4^	—	Employment Contract between CFC and John T. Evans, dated September 17, 1997 including termination of employment arrangement. Incorporated by reference to Exhibit 10.4 to our Form 10-K filed on August 27, 2007.
	10.5^	—	Plan Document for CFC’s Deferred Compensation Pension Restoration Plan dated January 1, 2005. Incorporated by reference to Exhibit 10.16 to our Form 10-K filed on August 17, 2009.
	10.6^*	—	Plan Document for CFC’s Deferred Compensation Program amended and restated February 1, 2014.
	10.7	—	Revolving Credit Agreement dated March 21, 2011 for $1,125,000,000 originally expiring on March 21, 2014. Incorporated by reference to Exhibit 4.3 to our Form 10-Q filed on April 13, 2011.
	10.8	—	Revolving Credit Agreement dated October 21, 2011 for $884,875,000 originally expiring on October 21, 2015. Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on January 17, 2012.
	10.9	—	Revolving Credit Agreement dated October 21, 2011 for $834,875,000 originally expiring on October 21, 2016. Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on January 17, 2012.
	10.10	—	Amendment No. 1 dated March 28, 2013 to the Revolving Credit Agreement dated March 21, 2011 originally expiring on March 21, 2014. Incorporated by reference to Exhibit 4.1 to our Form 10-Q filed on April 12, 2013.
	10.11	—	Amendment No. 1 dated March 28, 2013 to the Revolving Credit Agreement dated October 21, 2011 originally expiring on October 21, 2015. Incorporated by reference to Exhibit 4.2 to our Form 10-Q filed on April 12, 2013.

154



10.12	—	Amendment No. 1 dated March 28, 2013 to the Revolving Credit Agreement dated October 21, 2011 originally expiring on October 21, 2016. Incorporated by reference to Exhibit 4.3 to our Form 10-Q filed on April 12, 2013.
10.13	—	Amendment No.2 dated October 28, 2013 to the Revolving Credit Agreement dated March 21, 2011 originally expiring on March 21, 2014. Incorporated by reference to Exhibit 10.4 to our Form 10-Q filed in January 13, 2014.
10.14	—	Amendment No.2 dated October 28, 2013 to the Revolving Credit Agreement dated October 21, 2011 originally expiring on October 21, 2015. Incorporated by reference to Exhibit 10.5 to our Form 10-Q filed in January 13, 2014.
10.15	—	Amendment No.2 dated October 28, 2013 to the Revolving Credit Agreement dated October 21, 2011 originally expiring on October 21, 2016. Incorporated by reference to Exhibit 10.6 to our Form 10-Q filed in January 13, 2014.
10.16	—	Joinder dated May 30, 2013 to the Revolving Credit Agreement dated March 21, 2011 originally expiring on March 21, 2014. Incorporated by reference to Exhibit 10.12 to our Form 10-K filed on August 28, 2013.
10.17	—	Joinder dated July 9, 2013 to the Revolving Credit Agreement dated March 21, 2011 originally expiring on March 21, 2014. Incorporated by reference to Exhibit 10.13 to our Form 10-K filed on August 28, 2013.
10.18	—	Joinder dated July 9, 2013 to the Revolving Credit Agreement dated October 21, 2011 originally expiring on October 21, 2015. Incorporated by reference to Exhibit 10.14 to our Form 10-K filed on August 28, 2013.
10.19	—	Joinder dated July 9, 2013 to the Revolving Credit Agreement dated October 21, 2011 originally expiring on October 21, 2016. Incorporated by reference to Exhibit 10.14 to our Form 10-K filed on August 28, 2013.
10.20*	—	Joinder dated February 7, 2014 to the Revolving Credit Agreement dated March 21, 2011 originally expiring on March 21, 2014.
10.21*	—	Joinder dated February 7, 2014 to the Revolving Credit Agreement dated October 21, 2011 originally expiring on October 21, 2015.
10.22*	—	Joinder dated February 7, 2014 to the Revolving Credit Agreement dated October 21, 2011 originally expiring on October 21, 2016.
10.23	—	Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural Utilities Service dated June 14, 2005 for up to $1,000,000,000. Incorporated by reference to Exhibit 4.12 to our Form 10-K filed on August 24, 2005.
10.24	—	Series A Future Advance Bond from the Registrant to the Federal Financing Bank dated June 14, 2005 for up to $1,000,000,000 maturing on July 15, 2028. Incorporated by reference to Exhibit 4.15 to our Form 10-K filed on August 24, 2005.
10.25	—	Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural Utilities Service dated April 28, 2006 for up to $1,500,000,000. Incorporated by reference to Exhibit 4.11 to our Form 10-K filed on August 25, 2006.
10.26	—	Series B Future Advance Bond from the Registrant to the Federal Financing Bank dated April 28, 2006 for up to $1,500,000,000 maturing on July 15, 2029. Incorporated by reference to Exhibit 4.14 to our Form 10-K filed on August 25, 2006.
10.27	—	Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural Utilities Service dated September 19, 2008 for up to $500,000,000. Incorporated by reference to Exhibit 4.29 to our Form 10-Q filed on October 14, 2008.
10.28	—	Series C Future Advance Bond from the Registrant to the Federal Financing Bank dated September 19, 2008 for up to $500,000,000 maturing on October 15, 2031. Incorporated by reference to Exhibit 4.32 to our Form 10-Q filed on October 14, 2008.
10.29	—	Indenture for Clean Renewable Energy Bonds, Tax Credit Series 2008A dated January 1, 2008, between the Registrant and U.S. Bank Trust National Association. The Indenture has been omitted and will be furnished supplementally to the Securities and Exchange Commission upon request.
10.30	—	Indenture for Clean Renewable Energy Bonds, Secured Tax Credit Series 2009A dated September 1, 2009 between the Registrant, U.S. Bank Trust National Association as trustee, and the Federal Agricultural Mortgage Corporation as guarantor. The Indenture has been omitted and will be furnished supplementally to the Securities and Exchange Commission upon request.
10.31	—	Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural Utilities Service dated as of November 10, 2010 for up to $500,000,000. Incorporated by reference to Exhibit 4.1 to our Form 10-Q filed on January 14, 2011.

155



10.32	—	Series D Future Advance Bond from the Registrant to the Federal Financing Bank dated as of November 10, 2010 for up to $500,000,000 maturing on October 15, 2033. Incorporated by reference to Exhibit 4.4 to our Form 10-Q filed on January 14, 2011.
10.33	—	Series E Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural Utilities Service dated as of December 1, 2011 for up to $499,000,000. Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on January 17, 2012.
10.34	—	Series E Future Advance Bond from the Registrant to the Federal Financing Bank dated as of December 1, 2011 for up to $499,000,000 maturing on October 15, 2034. Incorporated by reference to Exhibit 10.6 to our Form 10-Q filed on January 17, 2012.
10.35	—	Series F Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural Utilities Service dated as of December 13, 2012 for up to $424,286,000. Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed in January 14, 2013.
10.36	—	Series F Future Advance Bond from the Registrant to the Federal Financing Bank dated as of December 13, 2012 for up to $424,286,000 maturing on October 15, 2035. Incorporated by reference to Exhibit 10.4 to our Form 10-Q filed in January 14, 2013.
10.37	—	Amended, Restated and Consolidated Bond Guarantee Agreement between the Registrant and the Rural Utilities Service dated as of December 13, 2012 for up to $3,999,000,000. Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed in January 14, 2013.
10.38	—	Amended, Restated and Consolidated Pledge Agreement dated as of December 13, 2012, between the Registrant, the Rural Utilities Service and U.S. Bank National Association. Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed in January 14, 2013.
10.39	—	Series G Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural Utilities Service dated as of November 21, 2013 for up to $500,000,000. Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed in January 13, 2014.
10.40	—	Supplement No. 1 to Amended, Restated and Consolidated Bond Guarantee Agreement dated as of November 21, 2013 between the Registrant and the Rural Utilities Service. Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed in January 13, 2014.
10.41	—	Series G Future Advance Bond from the Registrant to the Federal Financing Bank dated as of November 21, 2013 for up to $500,000,000 maturing on October 15, 2036. Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed in January 13, 2014.
10.42	—	Master Sale and Servicing Agreement dated July 24, 2009, between the Registrant and Federal Agricultural Mortgage Corporation. Incorporated by reference to Exhibit 4.47 to our Form 10-K filed on August 17, 2009.
10.43	—	Amended and Restated Master Note Purchase Agreement dated March 24, 2011 between the Registrant and Federal Agricultural Mortgage Corporation. Incorporated by reference to Exhibit 4.4 to our Form 10-Q filed on April 13, 2011.
10.44	—	Amended, Restated and Consolidated Pledge Agreement dated March 24, 2011, between the Registrant, Federal Agricultural Mortgage Corporation and U.S. Bank Trust National Association. Incorporated by reference to Exhibit 4.5 to our Form 10-Q filed on April 13, 2011.
10.45	—	First Supplemental Note Purchase Agreement dated March 24, 2011 for $3,900,000,000 between the Registrant and Federal Agricultural Mortgage Corporation. Incorporated by reference to Exhibit 4.6 to our Form 10-Q filed on April 13, 2011.
	—	Registrant agrees to furnish to the Securities and Exchange Commission a copy of all other instruments defining the rights of holders of its long-term debt upon request.
12*	—	Computations of ratio of earnings to fixed charges.
23.1*	—	Consent of KPMG LLP.
23.2*	—	Consent of Deloitte & Touche LLP.
31.1*	—	Certification of the Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	—	Certification of the Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1†	—	Certification of the Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2†	—	Certification of the Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	—	XBRL Instance Document
101.SCH*	—	XBRL Taxonomy Extension Schema Document

156



101.CAL*	—	XBRL Taxonomy Calculation Linkbase Document
101.LAB*	—	XBRL Taxonomy Label Linkbase Document
101.PRE*	—	XBRL Taxonomy Presentation Linkbase Document
101.DEF*	—	XBRL Taxonomy Definition Linkbase Document

*Indicates a document being filed with this Report. ^Identifies a management contract or compensatory plan or arrangement. †Indicates a document that is furnished with this Report, which shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section.

157



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

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



Title of Each Class	Name of ~~each~~		~~Name of each~~
	~~exchange~~Each Exchange on		~~exchange on~~
~~Title of each class~~	~~which registered~~	~~Title of each class~~	~~which registered~~	Which Registered
7.20% Collateral Trust Bonds, due 2015	~~NYSE~~	~~7.35% Collateral Trust Bonds, due 2026~~	~~NYSE~~	New York Stock Exchange
6.55% Collateral Trust Bonds, due 2018	~~NYSE~~New York Stock Exchange
7.35% Collateral Trust Bonds, due 2026
				New York Stock Exchange

(dollar amounts in thousands)
For the year ended May 31:		2013		2012			2011			2010			2009
Interest income	$	955,753	$	960,961		$	1,008,911		$	1,043,635		$	1,070,764
Net interest income		263,728		199,183			167,831			131,524			135,743
Derivative gains (losses) (1)		84,843		(236,620	)		(30,236	)		(20,608	)		(47,028	)
Income (loss) prior to income taxes (2)		360,836		(151,404	)		152,542			110,251			(78,871	)
Net income (loss) (3)		358,087		(148,797	)		151,215			110,547			(73,770	)

Fixed-charge coverage ratio/TIER (3)(4)		1.52		-			1.18			1.12			-
Adjusted TIER (5)		1.29		1.10			1.21			1.12			1.10

As of May 31:
Loans to members	$	20,305,874	$	18,919,612		$	19,330,797		$	19,342,704		$	20,192,309
Allowance for loan losses		(54,325)		(143,326	)		(161,177	)		(592,764	)		(622,960	)
Assets		22,071,651		19,951,335			20,561,622			20,143,215			20,982,705
Short-term debt		7,719,483		4,493,434			5,842,924			4,606,361			4,867,864
Long-term debt (6)		10,696,433		12,151,967			11,293,249			12,054,497			12,720,055
Subordinated deferrable debt		400,000		186,440			186,440			311,440			311,440
Members’ subordinated certificates (7)		1,729,226		1,722,744			1,801,212			1,810,715			1,740,054
Total equity		811,261		490,755			687,309			586,767			519,100
Guarantees		1,112,771		1,249,330			1,104,988			1,171,109			1,275,455

Leverage ratio (4)		27.58		42.20			30.52			35.33			41.88
Adjusted leverage ratio (5)		6.11		6.46			6.48			6.34			7.06
Debt-to-equity ratio (4)		26.21		39.65			28.92			33.33			39.42
Adjusted debt-to-equity ratio (5)		5.76		6.01			6.09			5.93			6.59



(Dollars in thousands)	2014			2013			2012			2011			2010
For the year ended May 31:
Interest income	$	957,540		$	955,753		$	960,961		$	1,008,911		$	1,043,635
Net interest income	302,885			263,728			199,183			167,831			131,524
Derivative (losses) gains⁽¹⁾	(34,421		)	84,843			(236,620		)	(30,236		)	(20,608		)
Income (loss) prior to income taxes	194,930			360,836			(151,404		)	152,542			110,251
Net income (loss)⁽²⁾	192,926			358,087			(148,797		)	151,215			110,547

Fixed-charge coverage ratio/TIER ⁽²⁾⁽³⁾	1.29			1.52			—			1.18			1.12
Adjusted TIER⁽⁴⁾	1.21			1.29			1.10			1.21			1.12

As of May 31:
Loans to members	$	20,476,642		$	20,305,874		$	18,919,612		$	19,330,797		$	19,342,704
Allowance for loan losses	(56,429		)	(54,325		)	(143,326		)	(161,177		)	(592,764		)
Assets	22,232,743			22,071,651			19,951,335			20,561,622			20,143,215
Short-term debt	5,399,394			7,719,483			4,493,434			5,842,924			4,606,361
Long-term debt⁽⁵⁾	13,303,931			10,696,433			12,151,967			11,293,249			12,054,497
Subordinated deferrable debt	400,000			400,000			186,440			186,440			311,440
Members’ subordinated certificates⁽⁶⁾	1,521,517			1,729,226			1,722,744			1,801,212			1,810,715
Total equity	970,374			811,261			490,755			687,309			586,767
Guarantees	1,064,822			1,112,771			1,249,330			1,104,988			1,171,109

Leverage ratio⁽³⁾	23.01			27.58			42.20			30.52			35.33
Adjusted leverage ratio⁽⁴⁾	6.24			6.11			6.46			6.48			6.34
Debt-to-equity ratio⁽³⁾	21.91			26.21			39.65			28.92			33.33
Adjusted debt-to-equity ratio⁽⁴⁾	5.90			5.76			6.01			6.09			5.93

		For the years ended May 31,								Change from the previous year
(dollar amounts in thousands)		2013		2012			2011			2013 vs. 2012		2012 vs. 2011
Interest income	$	955,753	$	960,961		$	1,008,911		$	(5,208)	$	(47,950)
Interest expense		(692,025)		(761,778	)		(841,080	)		69,753		79,302
Net interest income		263,728		199,183			167,831			64,545		31,352
Recovery of loan losses		70,091		18,108			83,010			51,983		(64,902)
Net interest income after recovery of
loan losses		333,819		217,291			250,841			116,528		(33,550)

Non-interest income:
Fee and other income		38,181		17,749			23,646			20,432		(5,897)
Derivative gains (losses)		84,843		(236,620	)		(30,236	)		321,463		(206,384)
Results of operations from foreclosed assets		(897)		(67,497	)		(15,989	)		66,600		(51,508)
Total non-interest income		122,127		(286,368	)		(22,579	)		408,495		(263,789)

Non-interest expense:
Salaries and employee benefits		(55,536)		(39,364	)		(42,856	)		(16,172)		3,492
Other general and administrative expenses		(28,646)		(25,973	)		(28,591	)		(2,673)		2,618
Recovery of (provision for) guarantee liability		4,772		(726	)		673			5,498		(1,399)
Loss on early extinguishment of debt		(10,636)		(15,525	)		(3,928	)		4,889		(11,597)
Other		(5,064)		(739	)		(1,018	)		(4,325)		279
Total non-interest expense		(95,110)		(82,327	)		(75,720	)		(12,783)		(6,607)

Income (loss) prior to income taxes		360,836		(151,404	)		152,542			512,240		(303,946)

Income tax (expense) benefit		(2,749)		2,607			(1,327	)		(5,356)		3,934
Net income (loss)		358,087		(148,797	)		151,215			506,884		(300,012)
Less: Net (income) loss attributable to
noncontrolling interest		(4,328)		4,070			(1,789	)		(8,398)		5,859
Net income (loss) attributable to CFC	$	353,759	$	(144,727	)	$	149,426		$	498,486	$	(294,153)
Adjusted net income	$	216,783	$	74,977		$	174,603		$	141,806	$	(99,626)
Adjusted interest expense	$	(748,486)	$	(774,624	)	$	(847,928	)	$	26,138	$	73,304

TIER (1)		1.52		-			1.18
Adjusted TIER (2)		1.29		1.10			1.21



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 OF CONTENTS
Part No.	Item No.			Page
I.	1.	Business		1
			General	1
			Our Business Development	2
			Our Loan Programs	4
			Guarantee Programs	11
			Our Lending Competition	12
			Our Regulation	14
			Our Members	15
			Corporate Governance	17
			Rural Electric Industry	18
			Rural Telecommunications Industry	21
			Disaster Recovery	22
			Tax Status	22
			Allocation and Retirement of Patronage Capital	23
			Investment Policy	24
			Employees	24
	1A.	Risk Factors		24
	1B.	Unresolved Staff Comments		28
	2.	Properties		28
	3.	Legal Proceedings		28
	4.	Mine Safety Disclosures		28
II.	5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
		Equity Securities		29
	6.	Selected Financial Data		29
	7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
			Executive Summary	30
			Critical Accounting Policies and Estimates	32
			Results of Operations	35
			Financial Condition	41
			Off-Balance Sheet Obligations	48
			Liquidity and Capital Resources	50
			Market Risk	56
			Non-GAAP Financial Measures	61
	7A.	Quantitative and Qualitative Disclosures About Market Risk		65
	8.	Financial Statements and Supplementary Information		65
	9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		65
	9A.	Controls and Procedures		65
	9B.	Other Information		66
III.	10.	Directors, Executive Officers and Corporate Governance		67
	11.	Executive Compensation		76
	12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
		Matters		86
	13.	Certain Relationships and Related Transactions, and Director Independence		86
	14.	Principal Accounting Fees and Services		88
IV.	15.	Exhibits, Financial Statement Schedules		89
		Signatures		92

(dollar amounts in thousands)		2013	% of Total			2012	% of Total			2011	% of Total
Long-term	$	4,718,162	35	%	$	5,437,881	38	%	$	5,461,484	39	%
Line of credit		8,704,586	65			8,691,543	62			8,609,191	61
Total	$	13,422,748	100	%	$	14,129,424	100	%	$	14,070,675	100	%

CFC	$	12,196,431	91	%	$	13,028,657	92	%	$	13,074,685	93	%
RTFC		317,344	2			341,792	2			366,060	3
NCSC		908,973	7			758,975	6			629,930	4
Total	$	13,422,748	100	%	$	14,129,424	100	%	$	14,070,675	100	%

Total by member class:
CFC:		2013				2012				2011
Distribution	$	245,265	22	%	$	340,385	27	%	$	217,099	20	%
Power supply		810,900	73			854,444	68			817,618	74
Statewide and associate		6,948	1			7,202	1			20,807	2
CFC Total		1,063,113	96			1,202,031	96			1,055,524	96
RTFC		3,711	-			1,026	-			821	-
NCSC		45,947	4			46,273	4			48,643	4
Total	$	1,112,771	100	%	$	1,249,330	100	%	$	1,104,988	100	%


(1)	the general portfolio, which comprises loans that are performing according to the contractual agreements; and


(2)	the impaired portfolio, which comprises loans that (i) are not currently performing or (ii) for various reasons we do not expect to collect all amounts as and when due and payable under the loan agreement or (iii) are performing according to a restructured loan agreement, but as a result of the troubled debt restructuring are required to be classified as impaired.

-
◦	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.



	2014 vs. 2013									2013 vs. 2012
	Variance due to:									Variance due to:
(Dollars in thousands)	Average volume ⁽¹⁾			Average rate ⁽²⁾			Net change ⁽³⁾			Average volume ⁽¹⁾			Average rate ⁽²⁾			Net change ⁽³⁾
Increase (decrease) in interest income:
Long-term fixed-rate loans	$	58,602		$	(45,879	)	$	12,723		$	41,849		$	(46,166	)	$	(4,317	)
Long-term variable-rate loans	464			(1,760		)	(1,296		)	2,327			(5,017		)	(2,690		)
Line of credit loans	856			(1,858		)	(1,002		)	4,968			(3,307		)	1,661
Restructured loans	(12,995		)	(825		)	(13,820		)	(10,683		)	8,448			(2,235		)
Nonperforming loans	—			236			236			—			—			—
Total interest income on loans	46,927			(50,086		)	(3,159		)	38,461			(46,042		)	(7,581		)
Investments and time deposits	4,753			(3,998		)	755			1,844			547			2,391
Fee income	—			4,191			4,191			—			(18		)	(18		)
Total interest income	$	51,680		$	(49,893	)	$	1,787		$	40,305		$	(45,513	)	$	(5,208	)

(Increase) decrease in interest expense:
Short-term debt	$	(1,000	)	$	1,989		$	989		$	(1,411	)	$	359		$	(1,052	)
Medium-term notes	(6,584		)	19,101			12,517			25,730			52,702			78,432
Collateral trust bonds	16,045			11,919			27,964			(22,039		)	8,703			(13,336		)
Subordinated deferrable debt	(10,675		)	4,597			(6,078		)	(2,215		)	518			(1,697		)
Subordinated certificates	2,493			99			2,592			94			(890		)	(796		)
Long-term notes payable	(18,068		)	17,665			(403		)	(13,503		)	17,556			4,053
Total interest expense on debt	(17,789		)	55,370			37,581			(13,344		)	78,948			65,604
Debt issuance costs	—			135			135			—			1,462			1,462
Fee expense	—			(346		)	(346		)	—			2,687			2,687
Total interest expense	$	(17,789	)	$	55,159		$	37,370		$	(13,344	)	$	83,097		$	69,753
Derivative cash settlements⁽⁴⁾	$	4,737		$	(22,238	)	$	(17,501	)	$	1,237		$	(44,852	)	$	(43,615	)
Adjusted interest expense⁽⁵⁾	(13,052		)	32,921			19,869			(12,107		)	38,245			26,138
Increase (decrease) in net interest income	33,891			5,266			39,157			26,961			37,584			64,545
Increase in adjusted net interest income	38,628			(16,972		)	21,656			28,198			(7,268		)	20,930

			Average balances and interest rates – Assets

			Average volume						Interest income					Average yield
(dollar amounts in thousands)			2013		2012		2011		2013		2012		2011	2013		2012		2011
Long-term fixed-rate loans		$	17,223,370	$	16,440,288	$	16,297,697	$	874,287	$	878,604	$	904,464	5.08	%	5.34	%	5.55	%
Long-term variable-rate loans			721,747		658,847		914,979		21,684		24,374		45,590	3.00		3.70		4.98
Line of credit loans			1,245,635		1,072,222		1,415,919		32,378		30,717		44,346	2.60		2.86		3.13
Restructured loans			157,059		461,670		487,570		13,956		16,191		2,789	8.89		3.51		0.57
Non-performing loans			48,653		39,953		242,890		-		-		149	-		-		0.06
Total			19,396,464		18,672,980		19,359,055		942,305		949,886		997,338	4.86		5.09		5.15
Investments			491,591		334,732		326,774		6,325		3,934		3,830	1.29		1.18		1.17
Fee income (1)			-		-		-		7,123		7,141		7,743	-		-		-
Total	$		19,888,055	$	19,007,712	$	19,685,829	$	955,753	$	960,961	$	1,008,911	4.81		5.06		5.13


		Analysis of changes in interest income

		2013 vs. 2012						2012 vs. 2011
		Change due to (3)						Change due to (3)
(dollar amounts in thousands)		Average volume (1)		Average rate (2)		Net change		Average volume (1)		Average rate (2)		Net change
Increase (decrease) in interest income:
Long-term fixed-rate loans	$	41,849	$	(46,166)	$	(4,317)	$	7,913	$	(33,773)	$	(25,860)
Long-term variable-rate loans		2,327		(5,017)		(2,690)		(12,762)		(8,454)		(21,216)
Line of credit loans		4,968		(3,307)		1,661		(10,764)		(2,865)		(13,629)
Restructured loans		(10,683)		8,448		(2,235)		(148)		13,550		13,402
Non-performing loans		-		-		-		(124)		(25)		(149)
Total interest income on loans		38,461		(46,042)		(7,581)		(15,885)		(31,567)		(47,452)
Investments		1,844		547		2,391		93		11		104
Fee income		-		(18)		(18)		-		(602)		(602)
Total interest income	$	40,305	$	(45,513)	$	(5,208)	$	(15,792)	$	(32,158)	$	(47,950)

		Average balances and interest rates – Liabilities

		Average volume						Interest expense					Average cost
(dollar amounts in thousands)		2013		2012		2011		2013		2012		2011	2013		2012		2011
Short-term debt (1) (2)	$	3,739,450	$	3,011,409	$	2,767,493	$	(6,888)	$	(5,836)	$	(8,886)	(0.18)	%	(0.19)	%	(0.32)	%
Medium-term notes (1)		2,623,428		3,078,905		3,877,036		(95,495)		(173,927)		(241,545)	(3.64)		(5.65)		(6.23)
Collateral trust bonds (1)		6,202,374		5,796,367		5,251,158		(327,978)		(314,642)		(306,332)	(5.29)		(5.43)		(5.83)
Subordinated deferrable debt (1)		216,669		180,962		211,428		(12,922)		(11,225)		(13,358)	(5.96)		(6.20)		(6.32)
Subordinated certificates (1)		1,716,065		1,718,055		1,783,091		(81,920)		(81,124)		(82,057)	(4.77)		(4.72)		(4.60)
Long-term notes payable (1)		4,912,791		4,518,181		4,654,860		(150,553)		(154,606)		(167,700)	(3.06)		(3.42)		(3.60)
Total		19,410,777		18,303,879		18,545,066		(675,756)		(741,360)		(819,878)	(3.48)		(4.05)		(4.42)
Debt issuance costs (3)		-		-		-		(7,582)		(9,044)		(10,358)	-		-		-
Fee expense (4)		-		-		-		(8,687)		(11,374)		(10,844)	-		-		-
Total	$	19,410,777	$	18,303,879	$	18,545,066	$	(692,025)	$	(761,778)	$	(841,080)	(3.57)		(4.16)		(4.54)

Derivative cash settlements (5)	$	9,148,214	$	10,123,071	$	11,152,698	$	(56,461)	$	(12,846)	$	(6,848)	(0.62)	%	(0.13)	%	(0.06)	%
Adjusted interest expense (6)		19,410,777		18,303,879		18,545,066		(748,486)		(774,624)		(847,928)	(3.86)		(4.23)		(4.57)

		Analysis of changes in interest expense

		2013 vs. 2012						2012 vs. 2011
		Change due to (3)						Change due to (3)
(dollar amounts in thousands)		Average volume (1)		Average rate (2)		Net change		Average volume (1)		Average rate (2)		Net change
(Increase) decrease in interest expense:
Short-term debt	$	(1,411)	$	359	$	(1,052)	$	(784)	$	3,834	$	3,050
Medium-term notes		25,730		52,702		78,432		49,725		17,893		67,618
Collateral trust bonds		(22,039)		8,703		(13,336)		(31,805)		23,495		(8,310)
Subordinated deferrable debt		(2,215)		518		(1,697)		1,925		208		2,133
Subordinated certificates		94		(890)		(796)		2,993		(2,060)		933
Long-term notes payable		(13,503)		17,556		4,053		4,924		8,170		13,094
Total interest expense on debt		(13,344)		78,948		65,604		26,978		51,540		78,518
Debt issuance costs		-		1,462		1,462		-		1,314		1,314
Fee expense		-		2,687		2,687		-		(530)		(530)
Total interest expense	$	(13,344)	$	83,097	$	69,753	$	26,978	$	52,324	$	79,302

Derivative cash settlements (4)	$	1,237	$	(44,852)	$	(43,615)	$	632	$	(6,630)	$	(5,998)
Adjusted interest expense (5)		(12,107)		38,245		26,138		27,610		45,694		73,304

		Average interest rates – Assets and Liabilities

		For the years ended May 31,
		2013		2012		2011		2013		2012		2011
(dollar amounts in thousands)		Interest income (expense)						Average yield (cost)
Total interest income	$	955,753	$	960,961	$	1,008,911		4.81	%	5.06	%	5.13	%
Total interest expense		(692,025)		(761,778	)	(841,080	)	(3.57)		(4.16	)	(4.54	)
Net interest income/Net yield	$	263,728	$	199,183	$	167,831		1.24	%	0.90	%	0.59	%
Derivative cash settlements		(56,461)		(12,846	)	(6,848	)	(0.62)		(0.13	)	(0.06	)
Adjusted net interest income/Adjusted net yield (1)(2)	$	207,267	$	186,337	$	160,983		0.95		0.83		0.55

		Analysis of changes in net interest income

		2013 vs. 2012						2012 vs. 2011
		Change due to (3)						Change due to (3)
(dollar amounts in thousands)		Average volume (1)		Average rate (2)		Net change		Average volume (1)		Average rate (2)		Net change
Increase (decrease) in net interest income	$	26,961	$	37,584	$	64,545	$	11,186	$	20,166	$	31,352
Increase in adjusted net interest income		28,198		(7,268	)	20,930		11,818		13,536		25,354

(dollar amounts in millions)		2013				2012				2011				2010				2009
Loans by type (1):		Amount	%			Amount	%			Amount	%			Amount	%			Amount	%
Long-term loans:
Long-term fixed-rate loans	$	17,918	88	%	$	16,743	89	%	$	16,405	85	%	$	15,413	80	%	$	14,602	73	%
Long-term variable-rate loans		782	4			765	4			1,278	7			2,089	11			3,244	16
Loans guaranteed by RUS		211	1			219	1			227	1			237	1			244	1
Total long-term loans		18,911	93			17,727	94			17,910	93			17,739	92			18,090	90
Line of credit loans		1,385	7			1,185	6			1,415	7			1,599	8			2,098	10
Total loans	$	20,296	100	%	$	18,912	100	%	$	19,325	100	%	$	19,338	100	%	$	20,188	100	%

Loans by member class (1):
CFC:
Distribution	$	14,941	74	%	$	14,075	74	%	$	13,760	71	%	$	13,459	70	%	$	13,730	68	%
Power supply		4,008	20			3,597	19			4,092	21			3,770	19			4,268	21
Statewide and associate		71	-			74	1			90	1			86	-			93	1
CFC total		19,020	94			17,746	94			17,942	93			17,315	89			18,091	90
RTFC		503	2			572	3			859	4			1,672	9			1,680	8
NCSC		773	4			594	3			524	3			351	2			417	2
Total	$	20,296	100	%	$	18,912	100	%	$	19,325	100	%	$	19,338	100	%	$	20,188	100	%

		2013				2012				Increase/
(dollar amounts in thousands)		Amount	% of Total			Amount	% of Total			(decrease)
CFC:
Distribution	$	15,186,457	71	%	$	14,415,856	72	%	$	770,601
Power supply		4,818,569	23			4,451,264	22			367,305
Statewide and associate		77,904	-			80,808	-			(2,904)
CFC total		20,082,930	94			18,947,928	94			1,135,002
RTFC		507,070	2			572,592	3			(65,522)
NCSC		819,088	4			640,552	3			178,536
Total loans and guarantees	$	21,409,088	100	%	$	20,161,072	100	%	$	1,248,016

		Maturities of guaranteed obligations
	Outstanding
(dollar amounts in thousands)	balance	2014	2015	2016	2017	2018	Thereafter
Guarantees (1)	$ 1,112,771	$ 211,851	$ 248,210	$ 24,070	$ 16,082	$ 142,328	$ 470,230

	Available	Notional maturities of committed lines of credit
(dollar amounts in thousands)	balance	2014	2015	2016	2017	2018
Committed lines of credit	$1,702,683	$ 151,703	$ 91,354	$ 198,800	$ 501,224	$ 759,602

	Projected uses of liquidity				Projected sources of liquidity
						Debt Issuance
(dollar amounts in millions)	Long-term debt maturities	Debt repayment- commercial paper	Long-term loan advances	Total uses of liquidity	Long-term loan amortization & repayment	Commercial paper	Other long-term debt	Medium- term notes	Total sources of liquidity	Cumulative excess sources over uses of liquidity (1)
4Q13										$ 909
1Q14	$ 1,052	$ -	$ 721	$ 1,773	$ 480	$ 175	$ 725	$ 175	$ 1,555	691
2Q14	746	200	302	1,248	349	150	625	175	1,299	742
3Q14	761	-	320	1,081	320	250	325	175	1,070	731
4Q14	1,110	-	178	1,288	259	-	875	175	1,309	752
1Q15	439	100	197	736	308	-	185	175	668	684
2Q15	58	350	211	619	269	-	-	175	444	509
Totals	$ 4,166	$ 650	$ 1,929	$ 6,745	$ 1,985	$ 575	$ 2,735	$ 1,050	$ 6,345

(dollar amounts in thousands)		Amortization (1)
2014	$	1,145,915
2015		1,089,071
2016		1,049,372
2017		1,007,127
2018		946,525
Thereafter		13,673,079
Total	$	18,911,089

-
◦	the payment of principal and interest by the member on the guaranteed indebtedness if covered by insurance or reinsurance provided by an insurer having an insurance financial strength rating of AAA by Standard & Poor’s Corporation or a financial strength rating of Aaa by Moody’s Investors Service.

		Actual
	Requirement	2013	2012

Minimum average adjusted TIER over the six most recent fiscal quarters (1)	1.025	1.27	1.21

Minimum adjusted TIER for the most recent fiscal year (1) (2)	1.05	1.29	1.18

Maximum ratio of adjusted senior debt to total equity (1)	10.00	5.85	5.97

	Requirement				Actual
Debt agreement	Debt indenture minimum		Revolving credit agreements maximum		2013		2012
Collateral trust bonds 1994 indenture	100	%	150	%	112	%	107%
Collateral trust bonds 2007 indenture	100		150		125		124
Federal Agricultural Mortgage Corporation	100		150		116		118
Clean Renewable Energy Bonds Series 2009A	100		150		118		109
Federal Financing Bank Series A (1)	100		150		-		110
Federal Financing Bank Series B (1)	100		150		-		111
Federal Financing Bank Series C (1)	100		150		-		108
Federal Financing Bank Series D (1)	100		150		-		123
Federal Financing Bank Series E (1)	100		150		-		119
Federal Financing Bank Series (1) (2)	100		150		106		-

		Amount	Weighted-Average
(dollar amounts in thousands)		Maturing (1)	Interest Rate
May 31, 2014	$	3,669,351	2.43	%
May 31, 2015		1,027,741	1.59
May 31, 2016		1,440,781	2.25
May 31, 2017		637,822	5.18
May 31, 2018		48,241	2.31
Thereafter		9,541,568	4.83
Total	$	16,365,504	3.87



(Dollars in thousands)	Amount Maturing ⁽¹⁾		Weighted-Average Interest Rate
May 31, 2015	$	1,743,142	1.77	%
May 31, 2016	1,514,974		2.28
May 31, 2017	1,460,440		2.70
May 31, 2018	777,260		5.14
May 31, 2019	1,826,377		6.92
Thereafter	9,288,103		3.46
Total	$	16,610,296	3.56

(dollar amounts in millions)		May 31, 2014 or prior			June 1, 2014 to May 31, 2016			June 1, 2016 to May 31, 2018			June 1, 2018 to May 31, 2023			June 1, 2023 to May 31, 2033			Beyond June 1, 2033			Total
Assets amortization and repricing	$	2,269		$	3,847		$	2,838		$	4,274		$	3,791		$	1,080		$	18,099

Liabilities and members’ equity:
Long-term debt	$	1,453		$	2,322		$	3,091		$	4,187		$	2,692		$	450		$	14,195
Subordinated certificates		24			44			33			89			1,347			141			1,678
Members’ equity (1)		-			-			-			28			291			582			901
Total liabilities and members’ equity	$	1,477		$	2,366		$	3,124		$	4,304		$	4,330		$	1,173		$	16,774

Gap (2)	$	792		$	1,481		$	(286	)	$	(30	)	$	(539	)	$	(93	)	$	1,325
Cumulative gap		792			2,273			1,987			1,957			1,418			1,325
Cumulative gap as a % of total assets		3.59	%		10.30	%		9.00	%		8.87	%		6.42	%		6.00	%
Cumulative gap as a % of adjusted total assets (3)		3.63			10.42			9.11			8.97			6.50			6.07