UNITED STATES
SECURITIES AND EXCHANGE
Washington, D.C. 20549
__________________________
FORM 10-K
__________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-7102
__________________________
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
__________________________
District of Columbia
(State or other jurisdiction of incorporation or organization)
52-0891669
(I.R.S. employer identification no.)
20701 Cooperative Way, Dulles, Virginia, 20166
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (703) 467-1800
__________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
7.35% Collateral Trust Bonds, due 2026
5.50% Subordinated Notes, due 2064
Trading Symbol(s)
NRUC 26
NRUC
Name of Each Exchange on Which Registered
New York Stock Exchange
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes
No
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
No
Yes
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files).
No
Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any
new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
The Registrant is a tax-exempt cooperative and therefore does not issue capital stock.
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
TABLE OF CONTENTS
Page
Business.............................................................................................................................................
Overview ....................................................................................................................................
Our Business ..............................................................................................................................
Loan Programs ...........................................................................................................................
Guarantee Programs ...................................................................................................................
Investment Policy.......................................................................................................................
Industry.......................................................................................................................................
Lending Competition..................................................................................................................
Regulation ..................................................................................................................................
Members.....................................................................................................................................
Tax Status ...................................................................................................................................
Allocation and Retirement of Patronage Capital........................................................................
Employees ..................................................................................................................................
Available Information.................................................................................................................
Risk Factors .......................................................................................................................................
Unresolved Staff Comments..............................................................................................................
Properties...........................................................................................................................................
Legal Proceedings .............................................................................................................................
Mine Safety Disclosures....................................................................................................................
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities................................................................................................................................
Selected Financial Data .....................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”) ........................................................................................................................................
Introduction ................................................................................................................................
Executive Summary ...................................................................................................................
Critical Accounting Policies and Estimates ...............................................................................
Recent Accounting Changes and Other Developments..............................................................
Consolidated Results of Operations ...........................................................................................
Consolidated Balance Sheet Analysis ........................................................................................
Off-Balance Sheet Arrangements...............................................................................................
Risk Management.......................................................................................................................
Credit Risk..................................................................................................................................
Liquidity Risk.............................................................................................................................
Market Risk ................................................................................................................................
Operational Risk.........................................................................................................................
Non-GAAP Financial Measures.................................................................................................
Quantitative and Qualitative Disclosures About Market Risk ..........................................................
Financial Statements and Supplementary Data .................................................................................
Report of Independent Registered Public Accounting Firm..............................................................
Consolidated Statements of Operations .....................................................................................
Consolidated Statements of Comprehensive Income (Loss)......................................................
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Consolidated Balance Sheets .....................................................................................................
Consolidated Statements of Changes in Equity .........................................................................
Consolidated Statements of Cash Flows ....................................................................................
Notes to Consolidated Financial Statements..............................................................................
Note 1 — Summary of Significant Accounting Policies ......................................................
Note 2 — Variable Interest Entities ......................................................................................
Note 3 — Investment Securities ...........................................................................................
Note 4 — Loans....................................................................................................................
Note 5 — Allowance for Loan Losses..................................................................................
Note 6 — Short-Term Borrowings .......................................................................................
Note 7 — Long-Term Debt...................................................................................................
Note 8 — Subordinated Deferrable Debt .............................................................................
Note 9 — Members’ Subordinated Certificates....................................................................
Note 10 — Derivative Instruments and Hedging Activities...................................................
Note 11 — Equity ...................................................................................................................
Note 12 — Employee Benefits ...............................................................................................
Note 13 — Guarantees............................................................................................................
Note 14 — Fair Value Measurement ......................................................................................
Note 15 — Business Segments...............................................................................................
Supplementary Data................................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............
Controls and Procedures....................................................................................................................
Other Information..............................................................................................................................
Directors, Executive Officers and Corporate Governance ................................................................
Executive Compensation ...................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters...............................................................................................................................................
Certain Relationships and Related Transactions, and Director Independence ..................................
Principal Accounting Fees and Services............................................................................................
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Exhibit and Financial Statement Schedules ......................................................................................
Form 10-K Summary.........................................................................................................................
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Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
SIGNATURES .........................................................................................................................................................
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INDEX OF MD&A TABLES
Description
Average Balances, Interest Income/Interest Expense and Average Yield/Cost.......................................
Rate/Volume Analysis of Changes in Interest Income/Interest Expense ................................................
Non-Interest Income ...............................................................................................................................
Derivative Gains (Losses) .......................................................................................................................
Derivative Cash Settlements Expense—Average Notional Amounts and Interest Rates .......................
Non-Interest Expense ..............................................................................................................................
Loans Outstanding by Type and Member Class......................................................................................
Historical Retention Rate and Repricing Selection.................................................................................
Long-Term Loan Scheduled Principal Payments....................................................................................
Debt Product Types .................................................................................................................................
Total Debt Outstanding and Weighted-Average Interest Rates...............................................................
Member Investments...............................................................................................................................
Collateral Pledged ...................................................................................................................................
Unencumbered Loans .............................................................................................................................
Equity ......................................................................................................................................................
Guarantees Outstanding ..........................................................................................................................
Maturities of Guarantee Obligations.......................................................................................................
Unadvanced Loan Commitments............................................................................................................
Notional Maturities of Unadvanced Loan Commitments .......................................................................
Maturities of Notional Amount of Unconditional Committed Lines of Credit.......................................
Loan Portfolio Security Profile ...............................................................................................................
Loan Geographic Concentration .............................................................................................................
Loan Exposure to 20 Largest Borrowers ................................................................................................
Troubled Debt Restructured Loans .........................................................................................................
Net Charge-Offs (Recoveries).................................................................................................................
Allowance for Loan Losses.....................................................................................................................
Rating Triggers for Derivatives...............................................................................................................
Available Liquidity..................................................................................................................................
Committed Bank Revolving Line of Credit Agreements........................................................................
Short-Term Borrowings—Funding Sources ...........................................................................................
Short-Term Borrowings ..........................................................................................................................
Issuances and Repayments of Long-Term and Subordinated Debt ........................................................
Projected Sources and Uses of Liquidity from Debt and Investment Activity .......................................
Contractual Obligations ..........................................................................................................................
Credit Ratings .........................................................................................................................................
Interest Rate Gap Analysis......................................................................................................................
Financial Instruments ..............................................................................................................................
Loan Repricing........................................................................................................................................
Adjusted Financial Measures—Income Statement .................................................................................
TIER and Adjusted TIER ........................................................................................................................
Adjusted Financial Measures—Balance Sheet .......................................................................................
Debt-to-Equity Ratio...............................................................................................................................
Members’ Equity.....................................................................................................................................
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Report”) contains certain statements that are considered “forward-looking
statements” within the Securities Act of 1933, as amended, and the Securities 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
appropriateness of the allowance for loan 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 may differ materially from our forward-looking statements due to several factors. Factors that could
cause future results to vary from our forward-looking statements 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, technological changes within the rural
electric utility industry, regulatory and economic conditions in the rural electric industry, nonperformance of counterparties
to our derivative agreements, the costs and effects of legal or governmental proceedings involving us or our members, the
impact of natural disasters or public health emergencies, such as the emergence in 2019 and continued spread of a novel
coronavirus that causes coronavirus disease 2019 (“COVID-19”), which was declared a global pandemic by the World
Health Organization (“WHO”) in March 2020, and the factors listed and described under “Item 1A. Risk Factors” in this
Report. 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.
PART I
Item 1. Business
OVERVIEW
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
systems, generation and transmission (“power supply”) systems 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 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’s objective is not to maximize profit, but rather to offer members cost-based financial products and
services. As described below under “Allocation and Retirement of Patronage Capital,” CFC annually allocates its net
earnings, which consist of net income excluding the effect of certain noncash accounting entries, to: (i) a cooperative
educational fund; (ii) a general reserve, if necessary; (iii) members based on each member’s patronage of CFC’s loan
programs during the year; and (iv) a members’ capital reserve. CFC funds its activities primarily through a combination of
public and private issuances of debt securities, member investments and retained equity. As a Section 501(c)(4) tax-exempt,
member-owned cooperative, we cannot issue equity securities.
Our financial statements include the consolidated accounts of CFC, National Cooperative Services Corporation (“NCSC”),
Rural Telephone Finance Cooperative (“RTFC”) and subsidiaries created and controlled by CFC to hold foreclosed assets
resulting from defaulted loans or bankruptcy. We did not carry any foreclosed assets on our consolidated balance sheet as of
May 31, 2020 or May 31, 2019. Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its
consolidated entities. All references to members within this document include members, associates and affiliates of CFC and
its consolidated entities, except where indicated otherwise.
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NCSC is a taxable cooperative incorporated in 1981 in the District of Columbia as a member-owned cooperative
association. The principal purpose of NCSC is to provide financing to its members, entities eligible to be members of CFC
and the for-profit and not-for-profit entities that are owned, operated or controlled by, or provide significant benefit to Class
A, B and C members of CFC. See “Members” below for a description of our member classes. NCSC’s membership consists
of distribution systems, power supply systems and statewide and regional associations that were members of CFC as of
May 31, 2020. CFC, which is the primary source of funding for NCSC, manages NCSC’s business operations under a
management agreement that is automatically renewable on an annual basis unless terminated by either party. NCSC pays
CFC a fee and, in exchange, CFC reimburses NCSC for loan losses under a guarantee agreement. As a taxable cooperative,
NCSC pays income tax based on its reported taxable income and deductions. NCSC is headquartered with CFC in Dulles,
Virginia.
RTFC is a taxable Subchapter T 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
financing for its rural telecommunications members and their affiliates. RTFC’s membership consists of a combination of
not-for-profit and for-profit entities. CFC is the sole lender to and manages RTFC’s business operations through a
management agreement that is automatically renewable on an annual basis unless terminated by either party. RTFC pays
CFC a fee and, in exchange, CFC reimburses RTFC for loan losses under a guarantee agreement. As permitted under
Subchapter T of the Internal Revenue Code, RTFC pays income tax based on its taxable income, excluding patronage-
sourced earnings allocated to its patrons. RTFC is headquartered with CFC in Dulles, Virginia.
Our principal operations are currently organized for management reporting purposes into three business segments: CFC,
NCSC and RTFC. We provide information on the financial performance of our business segments in “Note 15—Business
Segments.”
OUR BUSINESS
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 nonprofit 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 focuses on lending to electric
systems and securing access to capital through diverse funding sources at rates that allow us to offer cost-based credit
products to our members.
Focus on Electric Lending
CFC focuses on lending to its member electric utility cooperatives. Substantially all of our electric cooperative borrowers
continue to demonstrate stable operating performance and strong financial ratios as of May 31, 2020. Our electric
cooperative members experience limited competition as they generally operate in exclusive territories and the majority are
not rate regulated. Loans to electric utility organizations represented approximately 99% of total loans outstanding as of
both May 31, 2020 and 2019, respectively.
Maintain Diversified Funding Sources
We strive to maintain diversified funding sources beyond capital market offerings of debt securities. We offer various short-
and long-term unsecured investment products to our members and affiliates, including commercial paper, select notes, daily
liquidity fund notes, medium-term notes and subordinated certificates. We continue to issue debt securities, such as secured
collateral trust bonds, unsecured medium-term notes and dealer commercial paper, in the capital markets. We also have
access to funds through bank revolving line of credit arrangements, government-guaranteed programs such as funding from
the Federal Financing Bank that is guaranteed by RUS through the Guaranteed Underwriter Program of the USDA (the
“Guaranteed Underwriter Program”), as well as private placement note purchase agreements with the Federal Agricultural
Mortgage Corporation (“Farmer Mac”). We provide additional information on our funding sources in “Item 7. MD&A—
Consolidated Balance Sheet Analysis,” “Item 7. MD&A—Liquidity Risk,” “Note 6—Short-Term Borrowings,” “Note 7—
Long-Term Debt,” “Note 8—Subordinated Deferrable Debt” and “Note 9—Members’ Subordinated Certificates.”
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LOAN PROGRAMS
CFC lends to its members and associates. NCSC lends to its members, entities eligible to be members of CFC and its
associates, for-profit and nonprofit entities that are owned, operated or controlled by, or provide significant benefit, to CFC
members. RTFC lends to its members, associates and organizations affiliated with its members and associates. See “Item 1.
Business—Members” for additional information on the entities that comprise our membership. Loans to NCSC associates
may require a guarantee of repayment to NCSC from the CFC member cooperative with which it is affiliated. CFC, NCSC
and RTFC loans generally contain provisions that restrict further borrower advances or trigger an event of default if there is
any material adverse change in the business or condition, financial or otherwise, of the borrower.
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, bullet maturity or 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 interest rate; and
the ability for the borrower to select various tranches with either a fixed or variable interest rate for each tranche.
•
•
Borrowers typically have the option of selecting a fixed or 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 remaining 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 generally determined on the day the loan is
advanced or repriced based on the term selected. The 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. CFC
may make long-term loans to distribution systems, on a case-by-case basis, that do not meet this general criterion. Power
supply systems generally are required: (i) to maintain an average modified debt service coverage ratio, as defined in the loan
agreement, of 1.00 or greater; (ii) to establish and collect rates and other revenue in an amount to yield margins for interest,
as defined in an indenture, in each fiscal year sufficient to equal at least 1.00; or (iii) both. CFC may make long-term loans
to power supply systems, on a case-by-case basis, that may include other requirements, such as maintenance of a minimum
equity level.
Line of Credit Loans
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. Certain line of credit loans 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 generally unsecured and may be conditional or unconditional facilities.
Line of credit loans also are 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”). In these cases, when the borrower receives the RUS loan advance, the funds must be used to
repay the bridge loans.
Syndicated Line of Credit Loans
A syndicated line of credit 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
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revolving or term basis for tenors that range from several months to five years. Syndicated financings are arranged for
borrowers on a case-by-case basis. CFC may act as lead lender, arranger and/or administrative agent for the syndicated
facilities. CFC will syndicate these line of credit facilities on a best effort basis.
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, bullet maturity or 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 interest rate; and
the ability for the borrower to select various tranches with either a fixed or variable interest rate for each tranche.
•
•
NCSC allows borrowers to select a fixed interest rate 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 remaining loan maturity or the current variable rate. The fixed rate on a loan generally is
determined on the day the loan is advanced or repriced based on the term selected. The variable rate is set on the first day of
each month.
Line of Credit Loans
NCSC also provides revolving line of credit loans to assist borrowers with liquidity and cash management on terms similar
to those provided by CFC as described herein.
RTFC Loan Programs
Long-Term Loans
RTFC primarily makes long-term loans to rural local exchange carriers or holding companies of rural local exchange
carriers for debt refinancing, construction or upgrades of infrastructure, acquisitions and other corporate purposes. Most of
these rural telecommunications companies have diversified their operations and also provide broadband services.
RTFC’s long-term loans generally have the following characteristics:
terms not exceeding 10 years on a senior secured basis;
•
• amortizing or bullet maturity 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 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 a selected fixed interest rate term expires, generally the borrower may select another fixed-rate term or the current
variable rate. The fixed rate on a loan is generally determined on the day the loan is advanced or converted to a fixed rate
based on the term selected. The variable rate is set on the first day of each month.
To borrow from RTFC, a rural 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 this general criterion.
4
Line of Credit Loans
RTFC also provides revolving line of credit loans to assist borrowers with liquidity and cash management on terms similar
to those provided by CFC as described herein.
Loan Features and Options
Interest Rates
As a member-owned cooperative finance organization, we are a cost-based lender. As such, our interest rates are set based
on a yield that we believe will generate a reasonable level of earnings to cover our cost of funding, general and
administrative expenses and loan loss provision. Various standardized discounts may reduce the stated interest rates for
borrowers meeting certain criteria related to performance, volume, collateral and equity requirements.
Conversion Option
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 and convert a long-term loan from a fixed rate to another fixed rate or to a variable rate at any time based on current loan
policies.
Prepayment Option
Generally, borrowers may prepay long-term fixed-rate loans at any time, subject to payment of an administrative fee and a
make-whole premium, and prepay long-term variable-rate loans at any time, subject to payment of an administrative fee.
Line of credit loans may be prepaid at any time without a fee.
Loan Security
Long-term loans made by CFC typically are 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 and governmental rights. We are able to obtain
liens on parity with liens for the benefit of RUS because 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. As noted above, CFC line of credit loans generally are unsecured.
We provide additional information on our loan programs in the sections “Item 7. MD&A—Consolidated Balance Sheet
Analysis,” “Item 7. MD&A—Off-Balance Sheet Arrangements” and “Item 7. MD&A—Credit Risk.”
GUARANTEE PROGRAMS
When we guarantee our members’ debt obligations, we use the same credit policies and monitoring procedures for
guarantees as for loans. If a member system defaults in its obligation to pay debt service, then we are obligated to pay any
required amounts under our guarantees. Meeting our guarantee obligations satisfies the underlying obligation of our member
systems and prevents the exercise of remedies by the guarantee beneficiary based upon a payment default by a member
system. The member system is required to repay any amount advanced by us with interest pursuant to the documents
evidencing the member system’s reimbursement obligation. We were not required to perform pursuant to any of our
guarantee obligations during the fiscal year ended May 31, 2020.
Guarantees of Long-Term Tax-Exempt Bonds
We guarantee debt issued for our members’ construction or acquisition of pollution control, solid waste disposal, industrial
development and electric distribution facilities. Governmental authorities issue such debt on a nonrecourse basis and the
5
interest thereon is exempt from federal taxation. The proceeds of the offering are made available to the member system,
which in turn is obligated to pay the governmental authority amounts sufficient to service the debt.
If a system defaults for failure to make the debt payments and any available debt service reserve funds have been exhausted,
we are obligated to pay scheduled debt service under our guarantee. Such payment will prevent the occurrence of an event
of payment default that would otherwise permit acceleration of the bond issue. The system is required to repay any amount
that we advance pursuant to our guarantee plus interest on that advance. This repayment obligation, together with the
interest thereon, is typically senior secured on parity with other lenders (including, in most cases, RUS), by a lien on
substantially all of the system’s assets. If the security instrument is a common mortgage with RUS, then in general, we may
not exercise remedies for up to two years following default. However, if the debt is accelerated under the common mortgage
because of a determination that the related interest is not tax-exempt, the system’s obligation to reimburse us for any
guarantee payments will be treated as a long-term loan. The system is required to pay us initial and/or ongoing guarantee
fees in connection with these transactions.
Certain guaranteed long-term debt bears interest at variable rates that are adjusted at intervals of one to 270 days including
weekly, every five weeks or semi-annually to a level favorable to their resale or auction at par. If funding sources are
available, the member that issued the debt may choose a fixed interest rate on the debt. When the variable rate is reset,
holders of variable-rate debt have the right to tender the debt for purchase at par. In some transactions, we have committed
to purchase this debt as liquidity provider if it cannot otherwise be re-marketed. If we hold the securities, the member
cooperative pays us the interest earned on the bonds or interest calculated based on our short-term variable interest rate,
whichever is greater. The system is required to pay us stand-by liquidity fees in connection with these transactions.
Letters of Credit
In exchange for a fee, we issue irrevocable letters of credit to support members’ obligations to energy marketers, other third
parties and to the USDA Rural Business-Cooperative Service. Each letter of credit is supported by a reimbursement
agreement with the member on whose behalf the letter of credit was issued. In the event a beneficiary draws on a letter of
credit, the agreement generally requires the member to reimburse us within one year from the date of the draw, with interest
accruing from the draw date at our line of credit variable interest rate.
The U.S. Federal Communications Commission (“FCC”) has designated CFC as an acceptable source for letters of credit in
support of USDA and FCC programs that encourage deployment of high-speed broadband services throughout rural
America. The designation allows CFC to provide credit support for rural electric and telecommunication cooperatives that
participate in programs designed to increase deployment of broadband services to underserved rural areas.
Other Guarantees
We may provide other guarantees as requested by our members. Other guarantees are generally unsecured with guarantee
fees payable to us.
We provide additional information on our guarantee programs and outstanding guarantee amounts as of May 31, 2020 and
2019 in “Item 7. MD&A—Off-Balance Sheet Arrangements” and “Note 13—Guarantees.”
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INVESTMENT POLICY
We invest funds in accordance with policies adopted by our board of directors. Pursuant to our current investment policy, an
Investment Management Committee was established to oversee and administer our investments with the objective of
seeking returns consistent with the preservation of principal and maintenance of adequate liquidity. The Investment
Management Committee may direct funds to be invested in: direct obligations of, or obligations guaranteed by, the United
States or agencies thereof and investments in government-sponsored enterprises, certain financial institutions in the form of
overnight investment products and Eurodollar deposits, bankers’ acceptances, certificates of deposit, working capital
acceptances or other deposits. Other permitted investments include highly rated obligations, such as commercial paper,
certain obligations of foreign governments, municipal securities, asset-backed securities, mortgage-backed securities and
certain corporate bonds. In addition, we may invest in overnight or term repurchase agreements. Investments are
denominated in U.S. dollars exclusively. All of these investments are subject to requirements and limitations set forth in our
investment policy.
INDUSTRY
Overview
Since the enactment of the Rural Electrification Act in 1936, RUS has financed the construction of electric generating
plants, transmission facilities and distribution systems to provide electricity to rural areas. Today, with CFC membership
comprised, in part, of rural electric utility systems in 49 states and three U.S. territories, the percentage of farms and
residences in rural areas of the United States receiving central station electric service increased from 11% in 1934 to almost
100% currently.
RUS provides loans, guarantees and other forms of financial assistance to rural electric system borrowers. Under the Rural
Electrification Act, RUS is authorized to make direct loans to systems that qualify for the hardship program (5% interest
rate), the municipal rate program (based on a municipal government obligation index) and a Treasury rate program (at
Treasury plus 0.125%). RUS also is authorized to guarantee loans that bear interest at a rate agreed upon by the borrower
and the lender (which generally has been the Federal Financing Bank). RUS exercises oversight of borrowers’ operations. Its
loans and guarantees are secured by a mortgage or indenture on substantially all of the system’s assets and revenue.
Leading up to CFC’s formation in 1969, there was a growing need for capital for electric cooperatives to build new electric
facilities due to growth in rural America. The electric cooperatives formed CFC to provide a supplemental financing source
to RUS loan programs and to mitigate uncertainty related to government funding.
CFC aggregates the combined strength of its rural electric member cooperatives to access the public capital markets and
other funding sources. CFC works cooperatively with RUS; however, CFC is not a federal agency or a government-
sponsored enterprise. Our members are not required to have outstanding loans from RUS as a condition of borrowing from
CFC. CFC meets the financial needs of its rural electric members by:
• providing financing to RUS-eligible rural electric systems for infrastructure, including for those facilities that are not
eligible for financing from RUS;
• providing bridge loans required by borrowers in anticipation of receiving RUS funding;
• providing financial products not otherwise available from RUS, including lines of credit, letters of credit, guarantees on
tax-exempt financing, weather-related disaster recovery lines of credit, unsecured loans and investment products such as
commercial paper, member capital securities, select notes and medium-term notes; and
• meeting the financing needs of those rural electric systems that repay or prepay their RUS loans and replace the
government loans with private capital.
Many electric cooperatives are making investments in fiber to support core electric plant communications. Some of these
electric cooperatives are leveraging these fiber assets to offer broadband services, either directly or through partnering with
local telecommunication companies and others. Over 30 electric cooperatives were awarded approximately $254 million in
federal funding through the FCC’s Connect America Fund phase II auction (“CAF II”) process that was held in 2018; those
funds will be distributed over a 10-year period. We expect that more than 100 electric cooperatives, many of which are
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already offering or building out projects, will apply for funds though the FCC’s Rural Development Opportunity Fund
(“RDOF”). As federal and state governments increase funding opportunities for electric cooperatives in order to offer
broadband services, we will continue to increase our credit support, which may include loans and/or letters of credit, of
borrowers who participate in CAF II, RDOF and other programs designed to increase broadband services in rural areas.
Electric Member Operating Environment
In general, electric cooperatives have not been significantly impacted by the effects of retail deregulation. There were 19
states that had adopted programs that allow consumers to choose their supplier of electricity as of May 31, 2020. Depending
on the state, the choices can range from being limited to commercial and industrial consumers to “retail choice” for all
consumers. In most states, cooperatives have been exempted from or have been allowed to opt out of the regulations
allowing for competition. In states offering retail competition, it is important to note that while consumers may be able to
choose their energy supplier, the electric utility still receives compensation for the necessary service of delivering electricity
to consumers through its utility transmission and distribution plant.
The electric industry is facing a potential decrease to kilowatt-hour sales due to technology advances that increase energy
efficiency of all appliances and devices used in the home and in businesses as well as from distributed generation in the
form of rooftop solar and home generators (“behind-the-meter generation”). Electric cooperatives are facing the same
issues, but in general to a lesser extent than investor-owned power systems. To date, we have not seen negative impacts in
the electric cooperative financial results due to behind-the-meter generation.
Electric cooperatives have options to mitigate the impact of such issues, such as rate structures to ensure that costs are
appropriately recovered for grid and other necessary ancillary services and the use of electricity for end-uses that would
otherwise be powered by fossil fuels where doing so reduces emissions and saves consumers money (“beneficial
electrification”). The push away from fossil fuel use may continue the trend toward beneficial electrification such as the
adoption of electric vehicles which may increase kilowatt-hour sales to many utilities. Beneficial electrification may also
improve the utilities’ ability to balance load profiles by leveraging and balancing consumer and system assets such as
electric vehicles and battery storage.
Regulatory Oversight
There are 11 states in which some or all electric cooperatives are subject to state regulatory oversight of their rates and
tariffs (“terms and conditions”) by state utility commissions. Those states are Arizona, Arkansas, Hawaii, Kentucky,
Louisiana, Maine, Maryland, New Mexico, Vermont, Virginia and West Virginia. Regulatory jurisdiction by state
commissions generally includes rate and tariff regulation, the issuance of securities and the enforcement of service territory
as provided for by state law.
The Federal Energy Regulatory Commission (“FERC”) has regulatory authority over the below three aspects of electric
power, as provided for under Parts II and III of the Federal Power Act (“FPA”):
•
•
•
the transmission of electric energy in interstate commerce;
the sale of electric energy at wholesale in interstate commerce; and
the approval and enforcement of reliability standards affecting all users, owners and operators of the bulk power system.
In addition, FERC regulates the issuance of securities by public utilities under the FPA in the event the applicable state
commission does not.
Our electric distribution and power supply members are subject to regulation by various federal, regional, state and local
authorities with respect to the environmental effects of their operations. At the federal level, the U.S. Environmental
Protection Agency (“EPA”) from time to time proposes rulemakings that could force the electric utility industry to incur
capital costs to comply with potential new regulations and possibly retire coal-fired generating capacity. Since there are only
11 states in which some or all electric cooperatives are subject to state regulatory oversight of their rates and tariffs, in most
cases any associated costs of compliance can be passed on to cooperative consumers without additional regulatory approval.
On June 19, 2019, the EPA issued the final Affordable Clean Energy (“ACE”) rule. Falling under Section 111(d) of the
Federal Clean Air Act, the ACE rule addresses existing sources of emissions and sets a framework under which states should
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develop plans establishing standards of performance for their existing emissions sources and then submit those plans to the
EPA for approval. States will have three years from the date of the final rule to prepare and submit a plan that establishes a
standard of performance. A coalition of 23 states, several local governments and several environmental organizations filed a
lawsuit against the EPA challenging the ACE rule in the U.S. Court of Appeals for the D.C. Circuit.
LENDING COMPETITION
RUS is the largest lender to electric cooperatives. RUS provides long-term secured loans. CFC provides financial products
and services, primarily in the form of long-term secured and short-term unsecured loans, to its electric cooperative members
to supplement RUS financing, to provide loans to members that have elected not to borrow from RUS, and to bridge long-
term financing provided by RUS.
CFC’s primary competitor is CoBank, ACB, a federally chartered instrumentality of the United States that is a member of
the Farm Credit System. CFC also competes with banks, other financial institutions and the capital markets to provide loans
and other financial products to our members. As a result, we are competing with the customer service, pricing and funding
options our members are able to obtain from these sources. We attempt to minimize the effect of competition by offering a
variety of loan options and value-added services and by leveraging the working relationships developed with the majority of
our members over the past 51 years. Further, on an annual basis, we allocate substantially all net earnings to members (i) in
the form of patronage capital, which reduces our members’ effective cost of borrowing, and (ii) through the members’
capital reserve. The value-added services that we provide include, but are not limited to, benchmarking tools, financial
models, publications and various conferences, meetings and training workshops.
In order to meet other financing needs of our members, we offer options that include credit support in the form of letters of
credit and guarantees, loan syndications and loan participations. Our credit products are tailored to meet the specific needs
of each member cooperative, and we often offer specific transaction structures that our competitors do not provide. CFC
also offers certain risk-mitigation products and interest rate discounts on secured, long-term loans for its members that meet
certain criteria, including performance, volume, collateral and equity requirements.
CFC has established certain funds to benefit its members. Since 1981, CFC has set aside a portion of its annual net earnings
in a cooperative educational fund to promote awareness and appreciation of the cooperative principles. As directed by the
CFC Board of Directors, a portion of the contributions to the fund are distributed through the electric cooperative statewide
associations. Since 1986, CFC has supported its members’ efforts to protect their service territories from erosion or takeover
by other utilities through assistance from the Cooperative System Integrity Fund, which is funded through voluntary
contributions from members. Grants from the integrity fund are distributed to applicants who establish that: (i) all or a
significant portion of their consumers, services or facilities face a hostile threat of acquisition or annexation by a competing
entity; (ii) face a significant threat in their ability to continue to provide non-electric energy services to customers; or (iii)
are facing regulatory, judicial or legislative challenges that threaten their existence under the cooperative business model.
Our rural electric borrowers are mostly private companies; thus, the overall size of the rural electric lending market cannot
be determined from public information. We estimate the size of the overall rural electric lending market from the annual
financial and statistical reports filed with us by our members using calendar year data; however, there are certain limitations
with regard to these estimates, including the following:
• while the underlying data included in the financial and statistical reports may be audited, the preparation of the financial
and statistical reports is not audited;
in some cases, not all members provide the annual financial and statistical reports on a timely basis to be included in
summarized results; and
the financial and statistical reports do not include comprehensive data on indebtedness by lenders other than RUS.
•
•
9
The following table displays long-term debt outstanding to CFC, RUS and other lenders in the electric cooperative industry
as of December 31, 2019 and 2018, based on financial data reported to us by our electric utility cooperative members. The
data as of December 31, 2019, was provided by 800 distribution systems and 53 power supply systems, while the data as of
December 31, 2018, was provided by 812 distribution systems and 54 power supply systems.
(Dollars in thousands)
Total long-term debt reported by members:(1)
December 31,
2019
2018
Debt
Outstanding
% of Total
Debt
Outstanding
% of Total
Distribution .............................................................
Power supply...........................................................
Less: Long-term debt funded by RUS ....................
Members’ non-RUS long-term debt........................
$ 49,976,016
43,958,889
(39,214,146)
$ 54,720,759
$ 49,464,999
44,876,633
(40,039,961)
$ 54,301,671
Funding sources of members’ long-term debt:
Long-term debt funded by CFC ..............................
Long-term debt funded by other lenders.................
Members’ non-RUS long-term debt........................
$ 23,938,749
30,782,010
$ 54,720,759
44% $ 22,897,749
56
31,403,922
100% $ 54,301,671
42%
58
100%
____________________________
(1)
Reported amounts are based on member-provided information, which may not have been subject to audit by an independent accounting firm.
Members’ long-term debt funded by CFC, by type, as of December 31, 2019 and 2018 is summarized further below.
December 31,
2019
2018
(Dollars in thousands)
Distribution................................................................
Power supply .............................................................
Long-term debt funded by CFC ................................
Debt
Outstanding
$ 19,540,233
4,398,516
$ 23,938,749
% of Total
Debt
Outstanding
% of Total
82% $ 18,782,014
18
4,115,735
100% $ 22,897,749
82%
18
100%
We are not able to specifically identify the amount of debt our members have outstanding to CoBank, ACB, from either the
annual financial and statistical reports our members file with us or from CoBank, ACB’s public disclosure; however, we
believe CoBank, ACB, is the additional lender, along with CFC and RUS, with significant long-term debt outstanding to
rural electric cooperatives.
REGULATION
General
CFC, NCSC and RTFC are not subject to direct federal regulatory oversight or supervision with regard to lending. CFC,
NCSC and RTFC are subject to state and local jurisdiction commercial lending and tax laws that pertain to business
conducted in each state, including but not limited to lending laws, usury laws and laws governing mortgages. These state
and local laws regulate the manner in which we make loans and conduct other types of transactions. The statutes, regulations
and policies to which the companies are subject may change at any time. In addition, the interpretation and application by
regulators of the laws and regulations to which we are subject may change from time to time. Certain of our contractual
arrangements, such as those pertaining to funding obtained through the Guaranteed Underwriter Program, provide for the
Federal Financing Bank and RUS to periodically review and assess CFC’s compliance with program terms and conditions.
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Derivatives Regulation
CFC engages in over-the-counter derivative (“OTC”) transactions to manage interest rate risk. As an end user of derivative
financial instruments, CFC is subject to regulations that apply to derivatives generally. The Dodd-Frank Act (“DFA”),
enacted July 2010, resulted in, among other things, comprehensive regulation of the OTC derivatives market. The DFA
provides for an extensive framework for the regulation of OTC derivatives, including mandatory clearing, exchange trading
and transaction reporting of certain OTC derivatives. Subsequent to the enactment of the DFA, the U.S. Commodity Futures
Trading Commission (“CFTC”) issued a final rule, “Clearing Exemption for Certain Swaps Entered into by Cooperatives,”
which created an exemption from mandatory clearing for cooperatives. The CFTC’s final rule, “Margin Requirements for
Uncleared Swaps for Swap Dealers and Major Swap Participants,” includes an exemption from margin requirements for
uncleared swaps for cooperatives that are financial end users. CFC is an exempt cooperative end user of derivative financial
instruments and does not participate in the derivatives markets for speculative, trading or investing purposes and does not
make a market in derivatives.
MEMBERS
Our consolidated membership, after taking into consideration entities that are members of both CFC and NCSC and
eliminating memberships between CFC, NCSC and RTFC, totaled 1,439 members and 232 associates as of May 31, 2020.
CFC
CFC’s bylaws provide that cooperative or nonprofit corporations, public corporations, utility districts and other public
bodies that received or are eligible to receive a loan or commitment for a loan from RUS or any successor agency (as well as
subsidiaries, federations or statewide and regional associations that are wholly owned or controlled by such entities) are
eligible for membership. One of the criteria for eligibility for RUS financing is a “rural area” test. CFC relies on the
definition of “rural” as specified in the Rural Electrification Act, as amended. “Rural” is defined in the Rural Electrification
Act as any area other than a city, town or unincorporated area that has a population of less than 20,000, or any area within
the service area of a borrower who, at the date of enactment of the Food, Conservation and Energy Act of 2008, had an
outstanding RUS electric loan. The definition of “rural” under the act permits an area to be defined as “rural” regardless of
the development of such area subsequent to the approval of the outstanding loan.
Entities that received or qualify for financing from RUS are eligible to apply for membership, upon approval of membership
by the CFC Board of Directors, and subsequently to borrow from CFC regardless of whether there is an outstanding loan
with RUS. There are no requirements to maintain membership, although the board has the authority to suspend a member
under certain circumstances. CFC has not suspended a member to date. CFC has the following types of members, all of
which are not-for-profit entities or subsidiaries or affiliates of not-for-profit entities.
Class A—Distribution Systems
Cooperative or nonprofit corporations, public corporations, utility districts and other public bodies, which received or are
eligible to receive a loan or commitment for a loan from RUS or any successor agency, and that are engaged or planning to
engage in furnishing utility services to their members and patrons for their use as ultimate consumers. The majority of our
distribution system members are consumer-owned electric cooperatives.
Distribution systems are utilities engaged in retail sales of electricity to residential and commercial consumers in their
defined service areas. Such sales are generally on an exclusive basis using the distribution system’s infrastructure, including
substations, wires and related support systems. Distribution systems vary in size from small systems that serve a few
thousand customers to large systems that serve more than 200,000 customers. Thus, the amount of loan funding required by
different distribution systems varies significantly. Distribution systems may serve customers in more than one state.
Most distribution systems have long-term power purchase contracts with their power supply systems, which are owned and
controlled by the member distribution systems. Wholesale power for resale also comes from other sources, including power
supply contracts with government agencies, investor-owned utilities and other entities, and, in some cases, the distribution
systems own generating facilities.
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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 thousands of megawatts of power generation capacity to systems that
have no generating capacity, which generally operate transmission lines to supply certain distribution systems or manage
power supply purchase arrangements for the benefit of their distribution system members. Thus, the amount of loan funding
required by different power supply systems varies significantly. Power supply members may serve distribution systems
located in more than one state.
The wholesale power supply contracts with their distribution system members permit the power supply system, subject to
regulatory approval in certain instances, to establish rates to produce revenue sufficient to cover debt service, to meet the
cost of operation and maintenance of all power supply systems and related facilities and to pay the cost of any power and
energy purchased for resale.
Class C—Statewide and Regional Associations
Statewide and regional associations that are wholly owned or controlled by Class A members or Class B members, or both,
or that are wholly owned subsidiaries of a CFC member, and that do not furnish utility services but supply other forms of
service to their members. Certain states have an organization that represents and serves the distribution systems and power
supply systems located in the state. Such statewide organizations provide training and legislative, regulatory, media and
related services.
Class D—National Associations of Cooperatives
National associations of cooperatives that are Class A, Class B and Class C members, provided said national associations
have, at the time of admission to membership in CFC, members domiciled in at least 80% of the states in the United States.
National Rural Electric Cooperative Association (“NRECA”) is our sole Class D member. NRECA provides training,
sponsors regional and national meetings, and provides legislative, regulatory, media and related services for nearly all rural
electric cooperatives. CFC Class A, B, C and D members are eligible to vote on matters put to a vote of the membership.
CFC’s membership as of May 31, 2020 consisted of the following:
• 842 Class A distribution systems;
• 67 Class B power supply systems;
• 64 Class C statewide and regional associations, including NCSC; and
• 1 Class D national association of cooperatives.
In addition, CFC has associates that are nonprofit groups or entities organized on a cooperative basis that are owned,
controlled or operated by Class A, B, C or D members and are engaged in or plan to engage in furnishing non-electric
services primarily for the benefit of the ultimate consumers of CFC members. CFC had 46 associates, including RTFC, as of
May 31, 2020. Associates are not eligible to vote on matters put to a vote of the membership.
NCSC
Membership in NCSC includes organizations that are Class A, B or C members of CFC, or eligible for such membership
and are approved for membership by the NCSC Board of Directors. NCSC’s membership as of May 31, 2020 consisted of
the following:
• 441 distribution systems;
• 3 power supply systems; and
• 5 statewide associations.
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All of NCSC’s members also were CFC members. CFC, however, is not a member of NCSC. In addition to members,
NCSC had 181 associates as of May 31, 2020. NCSC’s associates may include members of CFC, entities eligible to be
members of CFC and for-profit and not-for-profit entities that are owned, controlled or operated by or provide significant
benefit to Class A, B and C members of CFC.
RTFC
Membership in RTFC is limited to cooperative corporations, nonprofit corporations, private corporations, public
corporations, utility districts and other public bodies that are approved by the RTFC Board of Directors and are actively
borrowing or are eligible to borrow from RUS’s traditional infrastructure loan program. These companies must be engaged
directly or indirectly in furnishing telephone services as the licensed incumbent carrier. Holding companies, subsidiaries and
other organizations that are owned, controlled or operated by members are referred to as affiliates, and are eligible to borrow
from RTFC. Associates are organizations that provide non-telephone or non-telecommunications services to rural
telecommunications companies that are approved by the RTFC Board of Directors. Neither affiliates nor associates are
eligible to vote at meetings of the members.
RTFC’s membership consisted of 466 members as of May 31, 2020. RTFC also had six associates as of May 31, 2020. CFC
is not a member of RTFC.
The business affairs of CFC, NCSC and RTFC are governed by separate boards of directors for each entity. We provide
additional information on CFC’s corporate governance in “Item 10. Directors, Executive Officers and Corporate
Governance.”
TAX STATUS
In 1969, CFC obtained a ruling from the Internal Revenue Service (“IRS”) recognizing CFC’s exemption from the payment
of federal income taxes as an organization described under Section 501(c)(4) of the Internal Revenue Code. In order for
CFC to maintain its exemption under Section 501(c)(4) of the Internal Revenue Code, CFC must be “not organized for
profit” and must be “operated exclusively for the promotion of social welfare” within the meaning of that section of the tax
code. The IRS determined that CFC is an organization that is “operated exclusively for the promotion of social welfare”
because the ultimate beneficiaries of its lending activities, like those of the RUS loan program, are the consumers of
electricity produced by rural electric systems, the communities served by these systems and the nation as a whole.
As an organization described under Section 501(c)(4) of the Internal Revenue Code, no part of CFC’s net earnings can inure
to the benefit of any private shareholder or individual. This requirement is referred to as the private inurement prohibition
and was added to Section 501(c)(4) of the Internal Revenue Code in 1996. A legislative exception allows organizations like
CFC to continue to make allocations of net earnings to members in accordance with its cooperative status.
We believe that CFC’s operations have not changed materially from those described to the IRS in CFC’s exemption filing.
We review the impact on operations of any new activity or potential change in product offerings or business in general to
determine whether such change in activity or operations would be inconsistent with CFC’s status as an organization
described under Section 501(c)(4).
NCSC is a taxable cooperative that pays income tax based on its taxable income and deductions.
RTFC is a taxable cooperative under Subchapter T of the Internal Revenue Code and is not subject to income taxes on
income from patronage sources that is allocated to its borrowers, as long as the allocation is properly noticed and at least
20% of the amount allocated is retired in cash prior to filing the applicable tax return. RTFC pays income tax based on its
taxable income and deductions, excluding amounts allocated to its borrowers.
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ALLOCATION AND RETIREMENT OF PATRONAGE CAPITAL
District of Columbia cooperative law requires cooperatives to allocate net earnings to patrons, to a general reserve in an
amount sufficient to maintain a balance of at least 50% of paid-up capital and to a cooperative educational fund, as well as
permits additional allocations to board-approved reserves. District of Columbia cooperative law also requires that a
cooperative’s net earnings be allocated to all patrons in proportion to their individual patronage and each patron’s allocation
be distributed to the patron unless the patron agrees that the cooperative may retain its share as additional capital.
CFC
Annually, the CFC Board of Directors allocates its net earnings to its patrons in the form of patronage capital, to a
cooperative educational fund, to a general reserve, if necessary, and to other board-approved reserves. Net earnings are
calculated by adjusting net income to exclude the noncash effects of the accounting for derivative financial instruments. Net
losses, if any, are not allocated to board-approved reserves or members and do not affect amounts previously allocated as
patronage capital or to the reserves. Net earnings are first applied against prior-period losses, if any, before an allocation of
patronage capital is made. CFC has never experienced an adjusted net loss.
An allocation to the general reserve is made, if necessary, to maintain the balance of the general reserve at 50% of the
membership fees collected. CFC’s bylaws require the allocation to the cooperative educational fund to be at least 0.25% of
its net earnings. Funds from the cooperative educational fund are disbursed annually to statewide cooperative organizations
to fund the teaching of cooperative principles and for other cooperative education programs.
Currently, CFC has one additional board-approved reserve, the members’ capital reserve. The CFC Board of Directors
determines the amount of net earnings that is allocated to the members’ capital reserve, if any. The members’ capital reserve
represents net earnings that CFC holds to increase equity retention. The net earnings held in the members’ capital reserve
have not been specifically allocated to members, but may be allocated to individual members in the future as patronage
capital if authorized by the CFC Board of Directors.
All remaining net earnings are allocated to CFC’s members in the form of patronage capital. The amount of net earnings
allocated to each member is based on the member’s patronage of CFC’s lending programs during the year. No interest is
earned by members on allocated patronage capital. There is no effect on CFC’s total equity as a result of allocating net
earnings to members in the form of patronage capital or to board-approved reserves. The CFC Board of Directors has voted
annually on whether or not to retire a portion of the patronage capital allocation. Upon retirement, patronage capital is paid
out in cash to the members to which it was allocated. CFC’s total equity is reduced by the amount of patronage capital
retired to its members and by amounts disbursed from board-approved reserves.
Pursuant to CFC’s bylaws, the CFC Board of Directors determines the method, basis, priority and order of retirement of
amounts allocated. The current policy of the CFC Board of Directors is to retire 50% of the prior fiscal year’s allocated net
earnings following the end of each fiscal year and to hold the remaining 50% for 25 years to fund operations. The amount
and timing of future retirements remains subject to annual approval by the CFC Board of Directors, and may be affected by
CFC’s financial condition and other factors. The CFC Board of Directors has the authority to change the current practice for
allocating and retiring net earnings at any time, subject to applicable cooperative law.
NCSC
In accordance with District of Columbia cooperative law and its bylaws and board policies, NCSC allocates its net earnings
to a cooperative educational fund, to a general reserve, if necessary, and to other board-approved reserves. Net earnings are
calculated by adjusting net income to exclude the noncash effects of the accounting for derivative financial instruments. Net
losses, if any, are not allocated to board-approved reserves and do not affect amounts previously allocated to the reserves.
Pursuant to NCSC’s bylaws, the NCSC Board of Directors shall determine the method, basis, priority and order of amounts
allocated. An allocation to the general reserve is made, if necessary, to maintain the balance of the general reserve at 50% of
the membership fees collected. There is no effect on NCSC's total equity due to the allocation of net earnings to board-
approved reserves. NCSC’s bylaws require the allocation to the cooperative educational fund to be at least 0.25% of its net
14
earnings. Funds from the cooperative educational fund are disbursed annually to fund the teaching of cooperative principles
and for other cooperative education programs.
RTFC
In accordance with District of Columbia cooperative law and its bylaws and board policies, RTFC allocates its net earnings
to its patrons, a cooperative educational fund and a general reserve, if necessary. Net losses are not allocated to members and
do not affect amounts previously allocated as patronage capital or to the reserves. Current-period earnings are first applied
against any prior-year losses before allocating patronage capital.
Pursuant to RTFC’s bylaws, the RTFC Board of Directors shall determine the method, basis, priority and order of retirement
of amounts allocated. RTFC’s bylaws require that it allocate at least 1% of net earnings to a cooperative educational fund.
Funds from the cooperative educational fund are disbursed annually to fund the teaching of cooperative principles and for
other cooperative education programs. An allocation to the general reserve is made, if necessary, to maintain the balance of
the general reserve at 50% of the membership fees collected. The remainder is allocated to borrowers in proportion to their
patronage. RTFC provides notice to its members of the amount allocated and retires 20% of the allocation for that year in
cash prior to the filing of the applicable tax return. Any additional amounts are retired as determined by the RTFC Board of
Directors with due regard for RTFC’s financial condition. There is no effect on RTFC's total equity due to the allocation of
net earnings to members or board-approved reserves. The retirement of amounts previously allocated to members or
amounts disbursed from board-approved reserves reduces RTFC's total equity.
EMPLOYEES
We had 253 employees as of May 31, 2020. We believe that our relations with our employees are good.
AVAILABLE INFORMATION
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to
these reports, are available for free at www.nrucfc.coop as soon as reasonably practicable after they are electronically filed
with or furnished to the U.S. Securities and Exchange Commission (“SEC”). These reports also are available for free on the
SEC’s website at www.sec.gov. Information posted on our website is not incorporated by reference into this Form 10-K.
Item 1A. Risk Factors
Our financial condition, results of operations and liquidity are subject to various risks and uncertainties, some of which are
inherent in the financial services industry and others of which are more specific to our own business. The discussion below
addresses the most significant risks, of which we are currently aware, that could have a material adverse impact on our
business, results of operations, financial condition or liquidity. However, other risks and uncertainties, including those not
currently known to us, could also negatively impact our business, results of operations, financial condition and liquidity.
Therefore, the following should not be considered a complete discussion of all the risks and uncertainties we may face. For
information on how we manage our key risks, see “Item 7. MD&A—Risk Management.” You should consider the following
risks together with all of the other information in this report.
RISK FACTORS
Credit Risks
We are subject to credit risk that a borrower or other counterparty may not be able to meet its contractual obligations in
accordance with agreed-upon terms, which could have a material adverse effect on our financial condition, results of
operations and liquidity.
Credit risk is inherent in the financial services business. It results from, among other things, extending credit to borrowers,
purchasing securities, and entering into financial derivative transactions and certain guarantee contracts. In addition to credit
risk associated with our lending activities, we have credit risk arising from other types of business relationships. Routine
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transactions create credit exposure for us to commercial banks as well as to vendors and other non-financial entities. Credit
risk is one of our most significant risks, particularly given the high percentage of our assets represented directly or indirectly
by loans and the importance of lending activity to our overall business. We manage credit risk by assessing and monitoring
the creditworthiness of our borrowers and counterparties and by investing primarily in high-quality securities. Managing
credit risk effectively also relies on forecasts of future overall economic conditions, which are inherently imperfect.
A borrower’s ability to repay a loan can be adversely affected by many factors, including poor business performance,
catastrophe losses, and weakness in general economic conditions or in the financial markets. Borrowers with higher leverage
(that is, higher ratios of indebtedness to total capitalization or income) have an increased risk that they will be unable to
repay loans, particularly when economic conditions worsen. We are exposed to credit risk when we fail to evaluate properly
at origination the likely ability of a borrower to repay a loan. Overestimating the current and potential value of any collateral
pledged to support the loan also adds to our credit risk. A failure to identify declining creditworthiness of a borrower or
declining collateral value at a time when remedial actions could reduce our exposure also increases credit risk. We reserve
for credit losses on our loan portfolio through our allowance for credit losses and we also have reserves for unfunded loan
commitments and letters of credit. We historically have experienced very low credit risk; however, a decrease in our
borrowers’ ability to repay loans could result in an increase in credit risk. Such an increase could result in an increase in
nonperforming loans and net charge-offs, which could lead to an increase in our provision for loan losses and a resulting
reduction in net income and increase in our allowance for loan losses and could have a material adverse effect on our
financial condition, results of operations and liquidity.
Adverse changes, developments or uncertainties in the rural electric utility industry could adversely impact the
operations or financial performance of our member electric cooperatives, which, in turn, could have an adverse impact
on our financial results.
Our focus as a tax-exempt, member-owned finance cooperative is on lending to our rural member electric utility
cooperatives, which is the primary source of our revenue. As a result of lending primarily to our members, we have a loan
portfolio with single-industry concentration. Loans to rural electric utility cooperatives accounted for approximately 99% of
our total loans outstanding as of May 31, 2020. While we historically have experienced limited defaults and very low credit
losses in our electric utility loan portfolio, factors that have a negative impact on the operations of our member rural electric
cooperatives, including but not limited to, the price and availability of alternative energy sources and weather conditions,
such as hurricanes, tornadoes or other weather-related events, could cause a deterioration in their financial performance and
the value of the collateral securing their loans, which could impair their ability to repay us in accordance with the terms of
their loans. In such case, it may be necessary to increase our allowance for loan losses, which would result in an increase in
the provision for loan losses and a decrease in our net income.
Advances in technology may change the way electricity is generated and transmitted, which could adversely affect the
business operations of our members and negatively impact the credit quality of our loan portfolio and financial results.
Advances in technology could reduce demand for power supply systems and distribution services. The development of
alternative technologies that produce electricity, including solar cells, wind power and microturbines, has expanded and
could ultimately provide affordable alternative sources of electricity and permit end users to adopt distributed generation
systems that would allow them to generate electricity for their own use. As these and other technologies, including energy
conservation measures, are created, developed and improved, the quantity and frequency of electricity usage by rural
customers could decline. Advances in technology and conservation that cause our electric system members’ power supply,
transmission and/or distribution facilities to become obsolete prior to the maturity of loans secured by these assets could
have an adverse impact on the ability of our members to repay such loans, which could result in an increase in
nonperforming or restructured loans. These conditions could negatively impact the credit quality of our loan portfolio and
financial results.
We may obtain entities or other assets through foreclosure, which would subject us to the same performance and
financial risks as any other owner or operator of similar businesses or assets.
As a financial institution, from time to time we may obtain entities and assets of borrowers in default through foreclosure
proceedings. If we become the owner and operator of entities or assets obtained through foreclosure, we are subject to the
same performance and financial risks as any other owner or operator of similar assets or entities. In particular, the value of
the foreclosed assets or entities may deteriorate and have a negative impact on our results of operations. We assess
foreclosed assets, if any, for impairment periodically as required under generally accepted accounting principles in the
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United States (“GAAP”). Impairment charges, if required, represent a reduction to earnings in the period of the charge.
There may be substantial judgment used in the determination of whether such assets are impaired and in the calculation of
the amount of the impairment. In addition, when foreclosed assets are sold to a third party, the sale price we receive may be
below the amount previously recorded in our financial statements, which will result in a loss being recorded in the period of
the sale.
The nonperformance of our derivative counterparties could impair our financial results.
We use interest rate swaps to manage our interest rate risk. There is a risk that the counterparties to these agreements will
not perform as agreed, which could adversely affect our results of operations. The nonperformance of a counterparty on an
agreement would result in the derivative no longer being an effective risk-management tool, which could negatively affect
our overall interest rate risk position. In addition, if a counterparty fails to perform on our derivative obligation, we could
incur a financial loss to replace the derivative with another counterparty and/or a loss through the failure of the counterparty
to pay us amounts owed. We were in a net payable position for all of our interest rate swaps, after taking into consideration
master netting agreements, of $1,085 million as of May 31, 2020.
A decline in our credit rating could trigger payments under our derivative agreements, which could impair our financial
results.
We have certain interest rate swaps that contain credit risk-related contingent features referred to as rating triggers. Under
certain rating triggers, if the credit rating for either counterparty falls to the level specified in the agreement, the other
counterparty may, but is not obligated to, terminate the agreement. If either counterparty terminates the agreement, a net
payment may be due from one counterparty to the other based on the prevailing fair value, excluding credit risk, of the
underlying derivative instrument. These rating triggers are based on our senior unsecured credit ratings by Moody’s
Investors Service (“Moody’s”) and S&P Global Inc. (“S&P”). Based on our interest rate swap agreements subject to rating
triggers, if all agreements for which we owe amounts were terminated as of May 31, 2020 and our senior unsecured ratings
fell below Baa3 by Moody’s or below BBB- by S&P, we would have been required to make a payment of up to $753 million
as of that date. In addition, if our senior unsecured ratings fell below Baa3 by Moody’s, below BBB- by S&P or below
BBB- by Fitch Ratings Inc. (“Fitch”), we would have been required to make a payment of up to $62 million as of that date.
In calculating the required payments, we only consider agreements that, when netted for each counterparty pursuant to a
master netting agreement, would require a payment upon termination. In the event that we are required to make a payment
as a result of a rating trigger, it could have a material adverse impact on our financial results.
Liquidity Risks
If we are unable to access the capital markets or other external sources for funding, our liquidity position may be
negatively affected and we may not have sufficient funds to meet all of our financial obligations as they become due.
We depend on access to the capital markets and other sources of financing, such as our bank revolving credit agreements,
investments from our members, private debt issuances through Farmer Mac and through the Guaranteed Underwriter
Program, to fund new loan advances and refinance our long- and short-term debt and, if necessary, to fulfill our obligations
under our guarantee and repurchase agreements. Market disruptions, downgrades to our long-term and/or short-term debt
ratings, adverse changes in our business or performance, downturns in the electric industry and other events over which we
have no control may deny or limit our access to the capital markets and/or subject us to higher costs for such funding. Our
access to other sources of funding also could be limited by the same factors, by adverse changes in the business or
performance of our members, by the banks committed to our revolving credit agreements or Farmer Mac, or by changes in
federal law or the Guaranteed Underwriter Program. Our funding needs are determined primarily by scheduled short- and
long-term debt maturities and the amount of our loan advances to our borrowers relative to the scheduled payment
amortization of loans previously made by us. If we are unable to timely issue debt into the capital markets or obtain funding
from other sources, we may not have the funds to meet all of our obligations as they become due.
A reduction in the credit ratings for our debt could adversely affect our liquidity and/or cost of debt.
Our credit ratings are important to maintaining our liquidity position. We currently contract with three nationally recognized
statistical rating organizations to receive ratings for our secured and unsecured debt and our commercial paper. In order to
access the commercial paper markets at current levels, we believe that we need to maintain our current ratings for
commercial paper of P-1 from Moody’s, A-1 from S&P and F1 from Fitch. Changes in rating agencies’ rating methodology,
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actions by governmental entities or others, losses from impaired loans and other factors could adversely affect the credit
ratings on our debt. A reduction in our credit ratings could adversely affect our liquidity and competitive position, increase
our borrowing costs or limit our access to the capital markets and the sources of financing available to us. A significant
increase in our cost of borrowings and interest expense could cause us to sustain losses or impair our liquidity by requiring
us to seek other sources of financing, which may be difficult to obtain.
Our ability to maintain compliance with the covenants related to our revolving credit agreements, collateral trust bond
and medium-term note indentures and debt agreements could affect our ability to retire patronage capital, result in the
acceleration of the repayment of certain debt obligations, adversely impact our credit ratings and hinder our ability to
obtain financing.
We must maintain compliance with all covenants and conditions related to our revolving credit agreements and debt
indentures. We are required to maintain a minimum average adjusted times interest earned ratio (“adjusted TIER”) for the
six most recent fiscal quarters of 1.025 and an adjusted leverage ratio of no more than 10-to-1. In addition, we must
maintain loans pledged as collateral for various debt issuances at or below 150% of the related secured debt outstanding as a
condition to borrowing under our revolving credit agreements. If we were unable to borrow under the revolving credit
agreements, our short-term debt ratings would likely decline, and our ability to issue commercial paper could become
significantly impaired. Our revolving credit agreements also require that we earn a minimum annual adjusted TIER of 1.05
in order to retire patronage capital to members. See “Item 7. MD&A—Non-GAAP Financial Measures” for additional
information on our adjusted measures and a reconciliation to the most comparable GAAP measures.
Pursuant to our collateral trust bond indentures, we are required to maintain eligible pledged collateral at least equal to
100% of the principal amount of the bonds issued under the indenture. Pursuant to one of our collateral trust bond
indentures and our medium-term note indenture, we are required to limit senior indebtedness to 20 times the sum of our
members’ equity, subordinated deferrable debt and members’ subordinated certificates. If we were in default under our
collateral trust bond or medium-term note indentures, the existing holders of these securities have the right to accelerate the
repayment of the full amount of the outstanding debt of the security before the stated maturity of such debt. That
acceleration of debt repayments poses a significant liquidity risk, as we might not have enough cash or committed credit
available to repay the debt. In addition, if we are not in compliance with the collateral trust bond and medium-term note
covenants, we would be unable to issue new debt securities under such indentures. If we were unable to issue new collateral
trust bonds and medium-term notes, our ability to fund new loan advances and refinance maturing debt would be impaired.
We are required to pledge eligible distribution system or power supply system loans as collateral equal to at least 100% of
the outstanding balance of debt issued under a revolving note purchase agreement with Farmer Mac. We also are required to
pledge distribution or power supply loans as collateral equal to at least 100% of the outstanding balance of debt under the
Guaranteed Underwriter Program. Collateral coverage less than 100% for either of these debt programs constitutes an event
of default, which if not cured within 30 days, could result in creditors accelerating the repayment of the outstanding debt
principal before the stated maturity. An acceleration of the repayment of debt could pose a liquidity risk if we had
insufficient cash or committed credit available to repay the debt. In addition, we would be unable to issue new debt
securities under the applicable debt agreement, which could impair our ability to fund new loan advances and refinance
maturing debt.
Market Risks
Changes in the level and direction of interest rates or our ability to successfully manage interest rate risk could adversely
affect our financial results and condition.
Our earnings are largely dependent on net interest income. Our interest rate risk exposure is primarily related to the funding
of a fixed-rate loan portfolio. We have a matched funding objective that is intended to manage the funding of asset and
liability repricing terms within a range of total assets based on the current environment and extended outlook for interest
rates. We maintain a limited unmatched position, or interest rate gap, on our fixed-rate assets within a targeted range of
adjusted total assets to provide us with funding flexibility.
Our primary strategies for managing interest rate risk include the use of derivatives and limiting the amount of interest rate
gap between fixed-rate assets and fixed-rate liabilities to a specified percentage of total assets based on prevailing market
conditions. We face the risk that changes in interest rates could reduce our net interest income and our earnings, especially if
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actual conditions turn out to be materially different than those we assumed. Fluctuations in interest rates, including changes
in the relationship between short-term rates and long-term rates may affect the pricing of loans to borrowers and our cost of
funds, which could adversely affect the difference between the interest that we earn on assets and the interest we pay on
liabilities used to fund assets. Such changes may also affect our ability to hedge various forms of market and interest rate
risk and may decrease the effectiveness of those hedges in helping to manage such risks, which could cause our interest rate
gap to exceed our targeted range and have an adverse impact on net interest income, earnings and cash flows. See “Item 7.
MD&A—Market Risk” for additional information.
The uncertainty as to the nature of potential changes or other reforms in the London Interbank Offered Rate (“LIBOR”)
benchmark interest rate may adversely affect our financial condition and results of operations.
We have loans, derivative contracts, debt securities and other financial instruments with attributes that are either directly or
indirectly dependent on the LIBOR. In 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates
LIBOR, announced that the FCA intends to stop persuading or compelling banks to submit the rates required to calculate
LIBOR after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be
guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue
to provide submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to
be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR or what the
effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments.
Regulators and various financial industry groups have sponsored or formed committees (e.g., the Federal Reserve-sponsored
Alternative Reference Rates Committee) to, among other things, facilitate the identification of an alternative benchmark
index to replace LIBOR, and publish consultations on recommended practices for transitioning away from LIBOR,
including (i) the utilization of recommended fallback language for LIBOR-linked financial instruments, and (ii)
development of alternative pricing methodologies for recommended alternative benchmarks such as the Secured Overnight
Financing Rate (“SOFR”). SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury
securities, and is based on directly observable U.S. Treasury-based repurchase transactions. At this time, it is still not
possible to predict whether these recommendations and proposals will be broadly accepted in the market, whether they will
continue to evolve, and what the effect of their implementation may be on the markets for floating-rate financial
instruments.
The replacement of LIBOR creates operational and market risks that will become clear as replacement choices are
developed. We will continue to assess all of our contracts and financial instruments that are directly or indirectly dependent
on LIBOR to determine what impact the replacement of LIBOR will have on us. Uncertainty as to the nature of such
potential changes or other reforms may adversely affect our financial condition and results of operations.
Operations and Business Risks
Breaches of our information technology systems, or those managed by third parties, may damage relationships with our
members or subject us to reputational, financial, legal or operational consequences.
Cyber-related attacks pose a risk to the security of our members’ strategic business information and the confidentiality and
integrity of our data, which includes strategic and proprietary information. Security breaches may occur through the actions
of third parties, employee error, malfeasance, technology failures or other irregularities. Any such breach or unauthorized
access could result in a loss of this information, a loss of integrity of this information, a delay or inability to provide service
of affected products, damage to our reputation, including a loss of confidence in the security of our products and services,
and significant legal and financial exposure. Because the techniques used to obtain unauthorized access, disable or degrade
service or sabotage systems change frequently, we may be unable to anticipate these techniques or implement adequate
preventative measures. As a result, cyber-related attacks may remain undetected for an extended period and may be costly to
remediate.
Our business depends on the reliable and secure operation of computer systems, network infrastructure, and other
information technology managed by third parties including, but not limited to: our service providers for external storage and
processing of our information on cloud-based systems; our consulting and advisory firms and contractors that have access to
our confidential and proprietary data; and administrators for our employee payroll and benefits management. We have
limited control and visibility over third-party systems that we rely on for our business. The occurrence of a cyber-related
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attack, breach, unauthorized access, or other cybersecurity event could result in damage to our third parties’ operations. The
failure of third parties to provide services agreed upon through service-level agreements, whether as a result of the
occurrence of a cyber-related attack or other event, could result in the loss of access to our data, the loss of integrity of our
data, disruptions to our corporate functions, loss of business opportunities or reputational damage, or otherwise adversely
impact our financial results and cause significant costs and liabilities.
While CFC maintains insurance coverage that, subject to policy terms and conditions, covers certain aspects of cyber risks,
including business interruptions caused by cyber-related attacks on information technology systems managed by third
parties, such insurance coverage may be insufficient to cover all losses. Our failure to comply with applicable laws and
regulations regarding data security and privacy could result in fines, sanctions and litigation. Additionally, new regulation in
the areas of data security and privacy may increase our costs and our members’ costs.
Our elected directors also serve as officers or directors of certain of our individual member cooperatives, which may
result in a potential conflict of interest with respect to loans, guarantees and extensions of credit that we may make to or
on behalf of such member cooperatives.
In accordance with our charter documents and the purpose for which we were formed, we lend only to our members and
associates. CFC’s directors are elected or appointed from our membership, with 10 director positions filled by directors of
members, 10 director positions filled by general managers or chief executive officers of members, two positions appointed
by NRECA and one at-large position that must, among other things, be a director, financial officer, general manager or chief
executive of one of our members. CFC currently has loans outstanding to members that are affiliated with CFC directors and
may periodically extend new loans to such members. The relationship of CFC’s directors to our members may give rise to
conflicts of interests from time to time. See “Item 13. Certain Relationships and Related Transactions, and Director
Independence—Review and Approval of Transactions with Related Persons” for a description of our policies with regard to
approval of loans to members affiliated with CFC directors.
Natural or man-made disasters, including widespread health emergencies such as the COVID-19 pandemic, or other
similar external events beyond our control, could disrupt our business and adversely affect our results of operations and
financial condition.
Our operations may be subject to disruption due to the occurrence of natural disasters, acts of terrorism or war, public health
emergencies, such as the ongoing COVID-19 pandemic, or other unexpected or disastrous conditions, events, or
emergencies beyond our control, some of which may be intensified by the effects of a government response to the event, or
climate change and changing weather patterns.
COVID-19 has spread globally, including to every state in the United States, and has resulted in the declaration of the
COVID-19 outbreak as a pandemic by the WHO. While still evolving, the COVID-19 pandemic has caused significant
economic and financial turmoil both in the United States (“U.S.”) and around the world, and has fueled concerns that it will
lead to a global recession. On March 13, 2020, the U.S. declared a national emergency with respect to COVID-19 and the
substantial majority of states and certain U.S. territories issued orders requiring the closure of non-essential businesses and/
or requiring residents to stay at home. In response to state stay-at-home orders for nonessential businesses, we implemented
an emergency remote work policy. In mid-June, pursuant to reopening guidelines provided by our state, we implemented a
return-to-work policy that included staggering staff, physical distancing measures, face covering requirements and an
enhanced cleaning program to maintain the well-being of our employees. While certain states have allowed non-essential
businesses to resume operations at partial capacity, there is substantial uncertainty regarding the manner and timing in which
non-essential businesses can return to most or all of their business operations. The recent surge in COVID-19 cases has also
led to speculation of continued and prolonged implementation of restrictions by federal, state or local authorities to slow the
spread of COVID-19.
If federal, state or local authorities impose additional restrictions or significantly scale back existing reopening plans to slow
the spread of COVID-19, such actions could disrupt the business, activities, and operations of our members, as well our
business and operations. As providers of essential services, our members are generally required to maintain operations and
continue to provide services to their customers regardless of the potential inability of customers affected by COVID-19 to
make timely payments for such services during this time. Certain states have imposed mandatory disconnection
moratoriums for electric services due to lack of payment for the duration of emergency legislation enacted in such states and
others have encouraged disconnection moratoriums that are non-binding. At this time, it is unclear whether the moratoriums,
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whether mandatory or non-binding, will continue and whether emergency legislation will be extended past approaching
deadlines. The potential inability to collect, or delays in collecting, payment for services provided, and decreases in
commercial and industrial load demand could result in a decrease in member cash receipts and revenues and constrained
resources. Additional safety precautions required to help mitigate the effects of the COVID-19 pandemic could result in
higher costs, which together with decreases in member cash receipts and revenues could reduce cash flows and earnings and
impair the ability of members to satisfy their obligations to us and other creditors, impair the value of underlying collateral
or otherwise adversely affect their business dealings with us, any of which could have a material adverse effect on the
quality of our credit portfolio, which could ultimately have a material adverse effect on our business, results of operations or
financial condition.
There is significant uncertainty about the duration and severity of the COVID-19 pandemic. As such, we are unable to
quantify and forecast the future impact that the pandemic could have on our business at this time. The effect of the recent
surge in COVID-19 cases in the U.S. and certain measures that may be taken by the governments of other countries, as well
as measures that have been, or may be, taken by state and local governments in the U.S. to contain the spread, could
adversely impact our business, results of operations and financial condition. The extent to which the COVID-19 pandemic
impacts us will depend on future developments that are highly uncertain and cannot be predicted, including, but not limited
to, the duration and spread of the pandemic, its severity, actions taken to contain COVID-19 and mitigate its effects, and
how quickly and to what extent normal economic and operating conditions resume.
Although we have implemented a business continuity management program that we continue to enhance on an ongoing
basis, there can be no assurance that the program will adequately mitigate the risks of business disruptions and interruptions.
Further, events such as natural disasters and public health emergencies may divert our attention away from normal
operations and limit necessary resources. We generally must resume operations promptly following any interruption. If we
were to suffer a disruption or interruption and were not able to resume normal operations within a period consistent with
industry standards, our business, financial condition or results of operations could be adversely affected in a material
manner. In addition, depending on the nature and duration of the disruption or interruption, we might become vulnerable to
fraud, additional expense or other losses, or to a loss of business.
Competition from other lenders could adversely impact our financial results.
We compete with other lenders for the portion of the rural utility loan demand for which RUS will not lend and for loans to
members that have elected not to borrow from RUS. The primary competition for the non-RUS loan volume is from
CoBank, ACB, a federally chartered instrumentality of the United States that is a member of the Farm Credit System. As a
government-sponsored enterprise, CoBank, ACB has the benefit of an implied government guarantee with respect to its
funding. Competition may limit our ability to raise rates to adequately cover increases in costs, which could have an adverse
impact on our results of operations, and increasing interest rates to cover costs could cause a reduction in new lending
business.
Regulatory and Compliance Risks
Loss of our tax-exempt status could adversely affect our earnings.
CFC has been recognized by the IRS as an organization for which income is exempt from federal taxation under Section
501(c)(4) of the Internal Revenue Code (other than any net income from an unrelated trade or business). In order to maintain
CFC’s tax-exempt status, it must continue to operate exclusively for the promotion of social welfare by operating on a
cooperative basis for the benefit of its members by providing them cost-based financial products and services consistent
with sound financial management, and no part of CFC’s net earnings may inure to the benefit of any private shareholder or
individual other than the allocation or return of net earnings or capital to its members in accordance with CFC’s bylaws and
incorporating statute in effect in 1996.
If CFC were to lose its status as a 501(c)(4) organization, it would become a taxable cooperative and would be required to
pay income tax based on its taxable income. If this event occurred, we would evaluate all options available to modify CFC’s
structure and/or operations to minimize any potential tax liability.
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As a tax-exempt cooperative and nonbank financial institution, our lending activities are not subject to the regulations
and oversight of U.S. financial regulators such as the Federal Reserve, the Federal Deposit Insurance Corporation or
the Office of Comptroller of Currency. Because we are not under the purview of such regulation, we could engage in
activities that could expose us to greater credit, market and liquidity risk, reduce our safety and soundness and adversely
affect our financial results.
Financial institutions subject to regulations, oversight and monitoring by U.S. financial regulators are required to maintain
specified levels of capital and may be restricted from engaging in certain lending-related and other activities that could
adversely affect the safety and soundness of the financial institution or are considered conflicts of interest. As a tax-exempt,
nonbank financial institution, we are not subject to the same oversight and supervision. There is no federal financial
regulator that monitors compliance with our risk policies and practices or that identifies and addresses potential deficiencies
that could adversely affect our financial results. Without regulatory oversight and monitoring, there is a greater potential for
us to engage in activities that could pose a risk to our safety and soundness relative to regulated financial institutions.
Changes in accounting standards or assumptions in applying accounting policies could materially impact our financial
statements.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of
operations. Some of these policies require the use of estimates and assumptions that may affect the reported carrying amount
of our assets or liabilities and our results of operations. We consider the accounting policies that require management to
make difficult, subjective and complex judgments about matters that are inherently uncertain as our most critical accounting
policies. The use of reasonably different estimates and assumptions could have a material impact on our financial statements
or if the assumptions, estimates or judgments were incorrectly made, we could be required to correct and restate prior-period
financial statements. In addition, from time to time, the Financial Accounting Standards Board (“FASB”) and the SEC
change the accounting and reporting standards that govern the preparation of our financial statements. These changes can be
hard to predict and can materially impact how CFC records and reports its financial condition and results of operations. We
could be required to apply a new or revised standard retroactively or apply an existing standard differently, on a retroactive
basis, in each case potentially resulting in restating prior-period financial statements. For information on what we consider
to be our most critical accounting policies and estimates and recent accounting changes, see “Item 7. MD&A—Critical
Accounting Policies and Estimates” and “Note 1—Summary of Significant Accounting Policies—Recent Accounting
Changes and Other Developments” to our consolidated financial statements.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
CFC owns an office building, with approximately 141,000 gross square footage, in Loudoun County, Virginia that serves as
its headquarters.
Item 3. Legal Proceedings
From time to time, CFC is subject to certain legal proceedings and claims in the ordinary course of business, including
litigation with borrowers related to enforcement or collection actions. Management presently believes that the ultimate
outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, liquidity, or
results of operations. CFC establishes reserves for specific legal matters when it determines that the likelihood of an
unfavorable outcome is probable and the loss is reasonably estimable. Accordingly, no reserve has been recorded with
respect to any legal proceedings at this time.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Not applicable.
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Item 6. Selected Financial Data
The following table provides a summary of consolidated selected financial data for each fiscal year in the five-year period
ended May 31, 2020. In addition to financial measures determined in accordance with GAAP, management evaluates
performance based on certain non-GAAP measures and metrics, which we refer to as “adjusted” measures. Certain financial
covenant provisions in our credit agreements also are based on non-GAAP financial measures. Our key non-GAAP financial
measures are adjusted net income, adjusted net interest income, adjusted interest expense, adjusted net interest yield,
adjusted TIER and adjusted debt-to-equity ratio. The most comparable GAAP measures are net income, net interest income,
interest expense, net interest yield, TIER and debt-to-equity ratio, respectively. The primary adjustments we make to
calculate these non-GAAP measures consist of (i) adjusting interest expense and net interest income to include the impact of
net periodic derivative cash settlements expense; (ii) adjusting net income, total liabilities and total equity to exclude the
non-cash impact of the accounting for derivative financial instruments; (iii) adjusting total liabilities to exclude the amount
that funds CFC member loans guaranteed by RUS, subordinated deferrable debt and members’ subordinated certificates; and
(iv) adjusting total equity to include subordinated deferrable debt and members’ subordinated certificates and exclude
cumulative derivative forward value gains and losses and accumulated other comprehensive income (“AOCI”). We believe
our non-GAAP adjusted measures, which are not a substitute for GAAP and may not be consistent with similarly titled non-
GAAP measures used by other companies, provide meaningful information and are useful to investors because management
evaluates performance based on these metrics, and certain financial covenants in our committed bank revolving line of
credit agreements and debt indentures are based on non-GAAP adjusted measures. See “Item 7. MD&A—Non-GAAP
Financial Measures” for a detailed reconciliation of these adjusted measures to the most comparable GAAP measures.
Five-Year Summary of Selected Financial Data(1)
(Dollars in thousands)
Statement of operations
Interest income ..............................
Interest expense .............................
Net interest income........................
Fee and other income.....................
Total revenue .................................
Benefit (provision) for loan losses
Derivative gains (losses)(2) ............
Results of operations of
foreclosed assets ........................
Investment securities gains
(losses).......................................
Operating expenses(3) .....................
Other non-interest expense ............
Income (loss) before income taxes
Income tax benefit (expense).........
Net income (loss)...........................
Adjusted operational financial
measures
Adjusted interest expense(4) ...........
Adjusted net interest income(4) ......
Adjusted net income(4) ...................
Selected ratios
Fixed-charge coverage ratio/
TIER(5) .......................................
Adjusted TIER(4)............................
Net interest yield(6) ........................
Adjusted net interest yield(4)(7).......
Net charge-off rate(8)......................
Year Ended May 31,
2020
2019
2018
2017
2016
Change
2020 vs.
2019
2019 vs.
2018
$ 1,151,286
(821,089)
330,197
22,961
353,158
(35,590)
(790,151)
$ 1,135,670
(836,209)
299,461
15,355
314,816
1,266
(363,341)
$ 1,077,357
(792,735)
284,622
17,578
302,200
18,575
231,721
$ 1,036,634
(741,738)
294,896
19,713
314,609
(5,978)
94,903
$ 1,012,636
(681,850)
330,786
21,785
352,571
646
(309,841)
—
—
—
(1,749)
(6,899)
9,431
(101,167)
(26,271)
(590,590)
1,160
$ (589,430)
(1,799)
(93,166)
(8,775)
(150,999)
(211)
$ (151,210)
—
(90,884)
(1,943)
459,669
(2,305)
$ 457,364
—
(86,226)
(1,756)
313,803
(1,704)
$ 312,099
—
(86,343)
(1,593)
(51,459)
(57)
(51,516)
$
1%
(2)
10
50
12
**
117
—
**
9
199
291
**
290
$ (876,962)
274,324
144,848
$ (879,820)
255,850
168,520
$ (867,016)
210,341
151,362
$ (826,216)
210,418
132,718
$ (770,608)
242,028
169,567
—%
7
(14)
5%
5
5
(13)
4
(93)
**
—
**
3
352
**
(91)
**
1%
22
11
0.28
1.17
1.21%
1.00
0.00
0.82
1.19
1.14%
0.97
0.00
24
1.58
1.17
1.12%
0.83
0.00
1.42
1.16
1.20%
0.86
0.01
0.92
1.22
1.43%
1.05
0.00
(54) bps
(2)
7
3
0
(76) bps
2
2
14
0
(Dollars in thousands)
Balance sheet
Cash, cash equivalents and
restricted cash ................................
Investment securities .....................
Loans to members(9) ......................
Allowance for loan losses..............
Loans to members, net...................
Total assets.....................................
Short-term borrowings...................
Long-term debt ..............................
Subordinated deferrable debt.........
Members’ subordinated
certificates......................................
Total debt outstanding ...................
Total liabilities...............................
Total equity....................................
Guarantees(10).................................
Selected ratios period end
Allowance coverage ratio(11)..........
Debt-to-equity ratio(12)...................
Adjusted debt-to-equity ratio(4)......
____________________________
Year Ended May 31,
2020
2019
2018
2017
2016
$ 680,019
370,135
26,702,380
(53,125)
26,649,255
28,157,605
3,961,985
19,712,024
986,119
1,339,618
25,999,746
27,508,783
648,822
820,786
$ 186,204
652,977
25,916,904
(17,535)
25,899,369
27,124,372
3,607,726
19,210,793
986,020
1,357,129
25,161,668
25,820,490
1,303,882
837,435
$ 238,824
609,851
25,178,608
(18,801)
25,159,807
26,690,204
3,795,910
18,714,960
742,410
1,379,982
24,633,262
25,184,351
1,505,853
805,161
$ 188,421
92,554
24,367,044
(37,376)
24,329,668
25,205,692
3,342,900
17,955,594
742,274
1,419,025
23,459,793
24,106,887
1,098,805
889,617
$
209,168
87,940
23,162,696
(33,258)
23,129,438
24,270,200
2,938,848
17,473,603
742,212
1,443,810
22,598,473
23,452,822
817,378
909,208
Change
2020 vs.
2019
2019 vs.
2018
265% (22)%
(43)
3
203
3
4
10
3
0
(1)
3
7
(50)
(2)
7
3
(7)
3
2
(5)
3
33
(2)
2
3
(13)
4
0.20%
42.40
5.85
0.07%
19.80
5.73
0.07%
16.72
6.18
0.15%
21.94
5.95
0.14% 13 bps — bps
2,260
28.69
12
5.82
308
(45)
**Calculation of percentage change is not meaningful.
(1)
Certain reclassifications have been made to prior periods to conform to the current-period presentation.
(2)
Consists of interest rate swap cash settlements income (expense) and forward value gains (losses). Derivative cash settlement amounts represent net
periodic contractual interest accruals related to derivatives not designated for hedge accounting. Derivative forward value gains (losses) represent
changes in fair value during the period, excluding net periodic contractual interest accruals, related to derivatives not designated for hedge accounting
and amounts reclassified into income related to the cumulative transition adjustment recorded in accumulated other comprehensive income as of
June 1, 2001, as a result of the adoption of the derivative accounting guidance that required derivatives to be reported at fair value on the balance sheet.
(3)
Consists of salaries and employee benefits and the other general and administrative expenses components of non-interest expense, each of which are
presented separately on our consolidated statements of operations.
(4)
See “Item 7. MD&A—Non-GAAP Financial Measures” for details on the calculation of these non-GAAP adjusted measures and the reconciliation to
the most comparable GAAP measures.
(5)
Calculated based on net income (loss) plus interest expense for the period divided by interest expense for the period. The fixed-charge coverage ratios
and TIER were the same during each period presented because we did not have any capitalized interest during these periods.
(6)
Calculated based on net interest income for the period divided by average interest-earning assets for the period.
(7)
Calculated based on adjusted net interest income for the period divided by average interest-earning assets for the period.
(8)
Calculated based on net charge-offs (recoveries) for the period divided by average total outstanding loans for the period.
(9)
(10)
(11)
Consists of the outstanding principal balance of member loans plus unamortized deferred loan origination costs, which totaled $11 million as of
May 31, 2020, 2019, 2018 and 2017 and $10 million as of May 31, 2016.
Reflects the total amount of member obligations for which CFC has guaranteed payment to a third party as of the end of each period. This amount
represents our maximum exposure to loss, which significantly exceeds the guarantee liability recorded on our consolidated balance sheets. See “Note 13
—Guarantees” for additional information.
Calculated based on the allowance for loan losses at period end divided by total outstanding loans at period end.
(12)
Calculated based on total liabilities at period end divided by total equity at period end.
25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
INTRODUCTION
Our financial statements include the consolidated accounts of CFC, NCSC, RTFC and any subsidiaries created and
controlled by CFC to hold foreclosed assets resulting from defaulted loans or bankruptcy. CFC and its consolidated entities
did not hold any foreclosed assets during the fiscal year ended May 31, 2020 or the fiscal year ended May 31, 2019. See
“Item 1. Business—Overview” for information on the business activities of each of these entities. Unless stated otherwise,
references to “we,” “our” or “us” relate to CFC and its consolidated entities. All references to members within this
document include members, associates and affiliates of CFC and its consolidated entities.
Our principal operations are organized for management reporting purposes into three business segments: CFC, NCSC and
RTFC. Loans to members totaled $26,702 million as of May 31, 2020, of which 96% was attributable to CFC. We generated
total revenue, which consists of net interest income and fee and other income, of $353 million and $315 million for fiscal
years ended May 31, 2020 and 2019, respectively, of which 99% was attributable to CFC in each fiscal year. We provide
information on the financial performance of each of our business segments in “Note 15—Business Segments.”
Management monitors a variety of key indicators to evaluate our business performance. In addition to financial measures
determined in accordance with GAAP, management also evaluates performance based on certain non-GAAP measures and
metrics, which we refer to as “adjusted” measures. As discussed in “Item 6. Selected Financial Data,” we believe our non-
GAAP adjusted measures provide meaningful information and are useful to investors because management evaluates
performance based on these metrics, and certain financial covenants in our committed bank revolving line of credit
agreements and debt indentures are based on these adjusted measures. We provide a reconciliation of our non-GAAP
measures to the most comparable GAAP measures below under “Non-GAAP Financial Measures.”
The following MD&A is intended to provide the reader with an understanding of our consolidated results of operations,
financial condition and liquidity by discussing the factors influencing changes from period to period and key measures used
by management to evaluate performance, including, among others, net interest income, net interest yield, debt-to-equity
ratio and the related non-GAAP adjusted measures, loan growth and credit quality metrics. Our MD&A is provided as a
supplement to, and should be read in conjunction with, our audited consolidated financial statements and related notes in
this Annual Report on Form 10-K for the fiscal year ended May 31, 2020 (“2020 Form 10-K” or “this Report”), and the
additional information contained elsewhere in this Report, including the risk factors discussed under “Item 1A. Risk
Factors.”
EXECUTIVE SUMMARY
Our primary objective as a member-owned cooperative lender is to provide cost-based financial products to our rural electric
members while maintaining a sound financial position required for investment-grade credit ratings on our debt instruments.
Our objective is not to maximize profit; therefore, the rates we charge our member-borrowers reflect our funding costs plus
a spread to cover our operating expenses, a provision for loan losses and earnings sufficient to achieve interest coverage to
meet our financial objectives. Our goal is to earn an annual minimum adjusted TIER of 1.10 and to maintain an adjusted
debt-to-equity ratio at approximately 6.00-to-1 or below.
We are subject to period-to-period volatility in our reported GAAP results due to changes in market conditions and
differences in the way our financial assets and liabilities are accounted for under GAAP. Our financial assets and liabilities
expose us to interest-rate risk. We use derivatives, primarily interest rate swaps, as part of our strategy in managing this risk.
Our derivatives are intended to economically hedge and manage the interest-rate sensitivity mismatch between our financial
assets and liabilities. We are required under GAAP to carry derivatives at fair value on our consolidated balance sheet;
however, the financial assets and liabilities for which we use derivatives to economically hedge are carried at amortized
cost. Changes in interest rates and the shape of the swap curve result in periodic fluctuations in the fair value of our
derivatives, which may cause volatility in our earnings because we do not apply hedge accounting for our interest rate
swaps. As a result, the mark-to-market changes in our interest rate swaps are recorded in earnings. Because our derivative
portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps, we generally record derivative losses
26
when interest rates decline and derivative gains when interest rates rise. This earnings volatility generally is not indicative of
the underlying economics of our business, as the derivative forward fair value gains or losses recorded each period may or
may not be realized over time, depending on the terms of our derivative instruments and future changes in market conditions
that impact the periodic cash settlement amounts of our interest rate swaps. As such, management uses our adjusted non-
GAAP results to evaluate our operating performance. Our adjusted results include realized net periodic interest rate swap
settlement amounts but exclude the impact of unrealized forward fair value gains and losses. Our financial debt covenants
are also based on our non-GAAP adjusted results, as the forward fair value gains and losses related to our interest rate swaps
do not affect our cash flows, liquidity or ability to service our debt.
COVID-19
The COVID-19 pandemic rapidly evolved from a global public health crisis into a global economic crisis, as containment
measures were implemented to curb the spread of the virus. While the COVID-19 pandemic has negatively impacted
financial markets, overall economic conditions and certain industry sectors, to date, we have been able to navigate the
challenges of the pandemic reasonably well. In response to the COVID-19 pandemic, we have been working diligently to
protect the health and safety of our employees while also fulfilling our commitment to meet the needs of our members. We
have adhered to guidelines established by the Centers for Disease Control and Prevention and the WHO and orders issued
by state and local governments where we operate. As the spread of the virus accelerated in the U.S. in mid-March, we
implemented an emergency remote work policy, which reduced the number of employees working on site at our
headquarters located in Northern Virginia to a minimal level of operationally critical staff. In mid-June, following the
announcement by the governor of phased reopening dates and guidelines for Virginia, we implemented a return-to-work
policy that included staggering staff, physical distancing measures, face covering requirements and an enhanced cleaning
program to maintain the well-being of our employees as well as comply with Virginia’s reopening guidelines. To date, our
business resiliency plans and technology systems have effectively supported both remote and on-site operations.
In response to the COVID-19 crisis, the U.S. federal government has deployed a full range of emergency monetary tools to
ensure the financial system continues to function. In addition, the administration and Congress have passed various fiscal
measures to provide emergency relief to individuals and certain groups impacted by the COVID-19 crisis, such as the
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) relief bill of $2.2 trillion that was signed into law on
March 27, 2020, to provide emergency assistance and health care response for individuals, families, and businesses affected
by the pandemic. Among the numerous provisions contained in the CARES Act was the creation of a $349 billion Paycheck
Protection Program, subsequently increased to $659 billion under the Paycheck Protection Program and Health Care
Enhancement Act (“Enhancement Act”) on April 24, 2020, that provides federal government loan forgiveness for Small
Business Administration Section 7(a) loans for small businesses, which includes our members or our members’ customers,
to pay up to eight weeks of basic expenses, including utilities such as electric and telephone bills. As extended, small
businesses may now apply for such loans until August 8, 2020. The CARES Act also added $45 billion for the disaster relief
fund administered by the Federal Emergency Management Agency (“FEMA”) that our members may rely on to restore
power after storms and emergencies. In addition, the CARES Act includes funds totaling $900 million for the Low-Income
Home Energy Assistance Program, which may assist low-income and moderate-income consumers located in our members’
territories in paying their utility bills. Congress continues to consider stimulus programs designed to provide relief and
bolster the economy, including, but not limited to, further extensions, modifications, and increased funding of the programs
discussed herein.
As owners and operators of critical infrastructure, electric utility cooperatives are an integral part of the U.S. electric utility
industry. It is imperative that they are able to deliver safe, reliable and affordable services to meet the essential energy needs
of their customers. In fulfilling their service obligations, our electric cooperatives generally must maintain robust, flexible
business-continuity and emergency preparedness plans that enable them to respond promptly and effectively to natural
disasters, emergencies and other unexpected crises, such as the current COVID-19 pandemic.
While the government mandated stay-at-home orders and closure of non-essential businesses in mid-March resulted in a
reduction in commercial and industrial electric loads, residential loads generally increased. Most of our electric cooperative
borrowers derive a larger share of their revenues from residential customers than commercial and industrial customers,
which helped mitigate the overall negative impact of declines in revenues from commercial and industrial customers. In
limited cases where borrowers have a larger concentration of commercial and industrial customers, the borrowers have
experienced a net decrease in revenues and a minor increase in customer receivables. However, to date, the COVID-19
27
pandemic has not had a material adverse impact on the operations and financial performance of the substantial majority of
our borrowers. Our electric utility cooperative members, which have a strong track record in preparing for and responding to
emergencies, thus far, have been able to manage the challenges and pressures presented by the COVID-19 pandemic. We
have been working with our members not only as a lender, but also by offering a full range of products, services, tools and
training designed to help cooperatives continue to deliver uninterrupted, essential utility services to their customers and
successfully manage the ongoing challenges of the COVID-19 pandemic.
Financial Performance
Reported Results
We reported a net loss of $589 million for the fiscal year ended May 31, 2020 (“fiscal year 2020”), which resulted in a TIER
of 0.28. In comparison, we reported a net loss of $151 million and a TIER of 0.82 for the fiscal year ended May 31, 2019
(“fiscal year 2019”). The significant variance between our reported results for the current fiscal year and the prior fiscal year
was attributable to mark-to-market changes in the fair value of our derivative instruments resulting from interest rate
changes, the establishment of an asset-specific allowance related to a power supply borrower and a non-cash impairment
charge related to internal-use software. Our debt-to-equity ratio increased to 42.40 as of May 31, 2020, from 19.80 as of
May 31, 2019, primarily due to a reduction in equity resulting from our reported net loss of $589 million for fiscal year 2020
and patronage capital retirement of $63 million in the second quarter of fiscal year 2020.
The increase in our reported net loss of $438 million in fiscal year 2020 was primarily driven by an increase in derivative
losses of $427 million. We recorded derivative losses of $790 million in fiscal year 2020, due to a decrease in the fair value
of our pay-fixed swaps resulting from sharp declines in interest rates across the entire swap curve. In comparison, we
reported derivative losses of $363 million in fiscal year 2019, due to a decrease in the fair value of our pay-fixed swaps
resulting from a decline in medium- and longer-term interest rates during the second half of fiscal year 2019. Net interest
income, which accounted for 93% and 95% of total revenue for fiscal years 2020 and 2019, respectively, increased $31
million, or 10%, attributable to the combined impact of an increase in our average interest-earning assets of $1,018 million,
or 4%, and an increase in the net interest yield of 7 basis points, or 6%, to 1.21%. The increase in the net interest yield was
due to a reduction in our average cost of funds of 17 basis points to 3.19%, which was partially offset by a decrease in the
average yield on interest-earning assets of 11 basis points to 4.20%. The decrease in our average cost of funds reflected the
impact of the maturity of higher cost debt during fiscal year 2019 and the replacement of this debt with lower-cost funding,
combined with a decrease in the average cost of our short-term and variable-rate funding resulting from a steep decline in
short-term interest rates during fiscal year 2020. The Federal Open Market Committee (“FOMC”) reduced the benchmark
federal funds rate over this period by 225 basis points, including a 150 basis point cut in March 2020 to a near zero target
range as part of a series of measures implemented to ease the economic impact of the COVID-19 crisis. The 3-month
LIBOR decreased by 216 basis points over the last 12 months to 0.34% The decrease in the average yield on interest-earning
assets was primarily attributable to a decrease in the average yield on our long-term fixed-rate loan portfolio, as the maturity
and pay-off of loan advances at higher rates were replaced with new loan advances at lower rates due to the decline in
interest rates.
Other factors contributing to the increase in the current fiscal year net loss compared with the prior fiscal year include an
unfavorable shift in the provision for loan losses of $37 million and a non-cash impairment charge of $31 million. We
recorded a provision for loan losses of $36 million for fiscal year 2020, compared with a benefit for loan losses of $1
million for fiscal year 2019. The unfavorable shift in the provision for loan losses was primarily due to the establishment of
an asset-specific allowance of $34 million in the fourth quarter of fiscal year 2020 for a loan to a CFC power supply
borrower with an outstanding balance of $168 million as of May 31, 2020. We provide additional information on this loan
below under “Executive Summary—Credit Quality.” The non-cash impairment charge of $31 million also was recorded in
the fourth quarter of fiscal year 2020, due to management’s decision to abandon a project to develop an internal-use loan
origination and servicing platform.
Adjusted Non-GAAP Results
Our adjusted net income totaled $145 million and our adjusted TIER was 1.17 for fiscal year 2020, compared with adjusted
net income of $169 million and adjusted TIER of 1.19 for fiscal year 2019. While our adjusted debt-to-equity ratio increased
28
to 5.85 as of May 31, 2020, from 5.73 as of May 31, 2019, primarily attributable to an increase in debt to fund loan growth,
it remained below our targeted threshold of 6.00-to-1.
The decrease in adjusted net income of $24 million in fiscal year 2020 from fiscal year 2019 was primarily attributable to
the unfavorable shift in the provision for loan losses of $37 million due to the establishment of the asset-specific allowance
of $34 million for the loan of $168 million to a CFC power supply borrower and the non-cash impairment charge resulting
from the abandonment of the internal-use software project of $31 million recorded in the fourth quarter of fiscal year 2020,
which were partially offset by an increase in adjusted net interest income of $18 million, or 7%, and higher fee income and
unrealized gains on investment securities. The increase in adjusted net interest income of 7% reflected the combined impact
of the increase in average interest-earning assets of 4% and an increase in the adjusted net interest yield of 3 basis points, or
3%, to 1.00%. The increase in our adjusted net interest yield was attributable to a reduction in our adjusted average cost of
funds of 14 basis points to 3.40%, which was partially offset by a decrease in the average yield on interest-earning assets of
11 basis points to 4.20%. The early redemption and payoff of higher cost debt, including the $1.0 billion aggregate principal
amount of 10.375% collateral trust bonds, in fiscal year 2019 and replacement of this debt with lower-cost funding,
combined with the decrease in the average cost of our short-term and variable-rate funding resulting from the decrease in
short-term interest rates during fiscal year 2020 drove the decrease in our adjusted average cost of funds.
See “Non-GAAP Financial Measures” for additional information on our adjusted measures, including a reconciliation of
these measures to the most comparable GAAP measures.
Lending Activity
Loans to members totaled $26,702 million as of May 31, 2020, an increase of $785 million, or 3%, from May 31, 2019. The
increase in loans was driven by an increase in long-term fixed-rate loans of $1,378 million, partially offset by a decrease in
long-term variable-rate and line of credit loans of $593 million. CFC distribution loans, CFC power supply loans, CFC
statewide and associate loans and RTFC loans increased by $615 million, $153 million, $22 million and $40 million,
respectively, which were partially offset by a decrease in NCSC loans of $45 million.
Long-term loan advances totaled $2,422 million during fiscal year 2020, with approximately 80% of those advances for
capital expenditures by members and 15% for the refinancing of loans made by other lenders. In comparison, long-term loan
advances totaled $1,843 million during fiscal year 2019, with approximately 87% of those advances for capital expenditures
by members and 10% for the refinancing of loans made by other lenders. CFC had long-term fixed-rate loans totaling $463
million that were scheduled to reprice during fiscal year 2020, of which $441 million repriced to a new long-term fixed rate,
$11 million repriced to a long-term variable rate and $10 million was repaid in full. In comparison, CFC had long-term
fixed-rate loans totaling $761 million that were scheduled to reprice during fiscal year 2019, of which $568 million repriced
to a new long-term fixed rate, $124 million repriced to a long-term variable rate and $69 million was repaid in full.
Credit Quality
Despite the economic disruption caused by COVID-19, the overall credit quality of our loan portfolio remained high as of
May 31, 2020, as evidenced by our continued strong credit performance metrics. We had no delinquent loans as of May 31,
2020, and we have not experienced any loan defaults or charge-offs since fiscal year 2017. The outstanding loan to the CFC
power supply borrower of $168 million, discussed above, is the only loan that was classified as nonperforming as of
May 31, 2020. In comparison, we did not have any loans classified as nonperforming as of May 31, 2019.
Loans outstanding to electric utility organizations represented approximately 99% of total loans outstanding as of May 31,
2020, unchanged from May 31, 2019. We historically have had limited defaults and losses on loans in our electric utility
loan portfolio due to several factors. First, the majority of our electric cooperative borrowers operate in states where electric
cooperatives are not subject to rate regulation. Thus, they are able to make rate adjustments to pass along increased costs to
the end customer without first obtaining state regulatory approval, allowing them to cover operating costs and generate
sufficient earnings and cash flows to service their debt obligations. Second, electric cooperatives face limited competition,
as they tend to operate in exclusive territories not serviced by public investor-owned utilities. Third, electric cooperatives
typically are consumer-owned, not-for-profit entities that provide an essential service to end-users, the majority of which are
residential customers. Fourth, electric cooperatives tend to adhere to a conservative business strategy model that has
historically resulted in a relatively stable, resilient operating environment and overall strong financial performance and
29
credit strength for the electric cooperative network. Finally, we generally lend to our members on a senior secured basis,
which reduces the risk of loss in the event of a borrower default. Of our total loans outstanding, 94% were secured and 6%
were unsecured as of May 31, 2020, compared with 92% secured and 8% unsecured as of May 31, 2019.
The allowance for loan losses, which consists of a collective allowance for loans in our portfolio that are not considered
individually impaired and an asset-specific allowance for loans identified as individually impaired, totaled $53 million and
$18 million as of May 31, 2020 and 2019, respectively. The collective allowance totaled $18 million and $17 million as of
May 31, 2020 and 2019, respectively, and the asset-specific allowance totaled $35 million and $1 million as of each
respective date. The total allowance coverage ratio was 0.20% and 0.07% as of May 31, 2020 and 2019, respectively, while
the collective allowance coverage ratio was 0.07% and 0.06% as of each respective date.
The increase in the allowance for loan losses was attributable to the establishment of the asset-specific allowance of $34
million in the fourth quarter of fiscal year 2020 for the loan to the CFC power supply borrower discussed above, with an
outstanding balance of $168 million as of May 31, 2020. Under the terms of the loan, which matures in December 2026, the
amount the borrower is required to pay in 2024 and 2025 may vary as the payments are contingent on the borrower’s
financial performance in those years. As of May 31, 2020, the borrower was current with respect to required payments on
the loan and not in default. However, based on our review and assessment of the most recent forecast and underlying
assumptions provided by the borrower in May 2020, we no longer believe that the total future expected cash payments from
the borrower through the maturity of the loan in December 2026 will be sufficient to repay the outstanding loan balance of
$168 million as of May 31, 2020. We therefore determined that it was appropriate to classify the loan as nonperforming,
place it on nonaccrual status, individually evaluate the loan for impairment and establish an asset-specific allowance based
on the estimated impairment as of May 31, 2020. The estimated impairment amount is subject to change based on our
assessment of forecast updates provided by the borrower and the actual future financial performance of the borrower.
We provide additional information on our management of credit risk and the credit quality of our loan portfolio below in the
section “Credit Risk.”
Financing Activity
We issue debt primarily to fund growth in our loan portfolio. As such, our outstanding debt volume generally increases and
decreases in response to member loan demand. We had no outstanding dealer commercial paper as of May 31, 2020, as we
experienced an increase in short-term member investments. Our targeted maximum threshold for dealer commercial paper is
$1,250 million. Total debt outstanding of $26,000 million as of May 31, 2020, increased by $838 million, or 3%, from the
prior fiscal-year end due to an increase in borrowings to fund the increase in loans to members. The increase was primarily
attributable to a net increase in member commercial paper, select notes and daily liquidity fund notes of $991 million, a net
increase in borrowings under USDA’s Guaranteed Underwriter Program (“Guaranteed Underwriter Program”) of $851
million and a net increase in medium-term notes of $160 million. These increases were partially offset by net decreases in
dealer commercial paper of $945 million and collateral trust bonds of $195 million.
Liquidity
In light of the extreme volatility and disruptions in the capital and credit markets in early March 2020 resulting from the
COVID-19 crisis, including a significant decline in corporate debt and equity issuances and a deterioration in the
commercial paper market, we took a number of precautionary actions to enhance our financial flexibility by bolstering our
cash position to ensure we have adequate cash readily available to meet both expected and unexpected cash needs without
adversely affecting our daily operations. These actions included, but were not limited to, drawing additional advances under
our committed credit facilities, revising our objective for the use of our held-to-maturity investment portfolio from
previously serving as a supplemental source of liquidity to serving as a readily available source of liquidity and executing a
plan for the orderly liquidation of a portion of debt securities from our investment portfolio. In March 2020, we borrowed an
additional $625 million under the Guaranteed Underwriter Program and $250 million under the Farmer Mac note purchase
agreement. We also transferred all of the debt securities in our held-to-maturity investment portfolio to trading and sold
securities from the trading portfolio totaling $239 million in March and April 2020.
Subsequent to our cash management actions in early March 2020, the FOMC unveiled a set of aggressive measures to
cushion the economic impact of the global COVID-19 crisis, including, among others, cutting the federal funds rate by 150
30
basis points to a range of 0.00% to 0.25% and establishing a series of emergency credit facilities in an effort to support the
flow of credit in the economy, ease liquidity pressure and calm market turmoil. While volatility in the financial markets
remains elevated, overall market liquidity concerns have eased since the actions taken by the FOMC.
Due largely to the actions undertaken in March and April 2020, we increased our cash position to $671 million as of
May 31, 2020, up from $178 million as of May 31, 2019. The face value of long-term debt scheduled to mature over the
next 12 months totaled $2,036 million as of May 31, 2020, consisting of $1,728 million of fixed-rate debt at a weighted
average cost of 2.59% and $308 million of variable-rate debt. As of May 31, 2020, sources of liquidity readily available for
access totaled $7,042 million, consisting of (i) $671 million in cash and cash equivalents; (ii) up to $900 million available
under committed loan facilities under the Guaranteed Underwriter Program; (iii) up to $2,722 million available for access
under committed bank revolving line of credit agreements; (iv) up to $2,440 million available under a revolving note
purchase agreement with Farmer Mac, subject to market conditions, and (v) $309 million in investment securities. Although
we currently believe that our available liquidity along with the ability to access the capital markets as a well-known
seasoned issuer of debt will be more than sufficient to cover our debt obligations as well as meet the borrowing needs of our
members, we continue to review actions that we may take to further enhance our financial flexibility in the event that market
conditions deteriorate further and for an extended period.
We believe we can continue to roll-over outstanding member short-term debt of $3,712 million as of May 31, 2020, based
on our expectation that our members will continue to reinvest their excess cash in our commercial paper, daily liquidity fund
notes, select notes and medium-term notes. We also have the ability to access the dealer commercial paper market to help
meet our liquidity needs. Although the intra-period amount of outstanding dealer commercial paper may fluctuate based on
our liquidity requirements, we intend to manage our short-term wholesale funding risk by maintaining outstanding dealer
commercial paper at an amount near or below $1,250 million for the foreseeable future. We expect to continue to be in
compliance with the covenants under our committed bank revolving line of credit agreements, which will allow us to
mitigate roll-over risk as we can draw on these facilities to repay dealer or member commercial paper that cannot be
refinanced with similar debt.
We provide additional information on our management of liquidity risk, our primary sources and uses of liquidity and our
liquidity profile below in the section “Liquidity Risk.”
Outlook for the Next 12 Months
Although we have been able to navigate the challenges of the COVID-19 pandemic reasonably well to date, the outlook for
the next 12 months remains highly uncertain. Many states have experienced a resurgence in the spread of COVID-19 due in
part to the lifting of restrictions and reopening, which has led several states to pause or adjust their reopening plans. There is
significant uncertainty about (i) the duration and severity of the COVID-19 pandemic; (ii) the extent of its future economic
impact; (iii) additional, or extended, federal, state or local government orders and regulations that might be imposed to
contain the spread of the virus; and (iv) measures that the U.S. federal government may take to provide further COVID-19
economic relief and stimulus. Due to these uncertainties and the continued evolving, unpredictable and unprecedented
nature of the COVID-19 pandemic, we are not able at this time to quantify and forecast the impact that the pandemic will
have on our business during fiscal year 2021. As noted above, we currently believe that we have sufficient cash flow and
liquidity to cover our debt obligations as well as meet the borrowing needs of our members. Thus far, we have not
experienced any delinquencies in scheduled loan payments from our borrowers and we have not received any requests from
borrowers for payment deferrals or covenant relief. While our borrowers operate in a defensive industry sector that
historically has been resilient to economic downturns, we are actively monitoring conditions and developments, analyzing
key credit metrics of our borrowers to facilitate the timely identification of loans with potential credit weaknesses and
assessing any notable shifts in the credit quality of our loan portfolio.
See “Item 1A. Risk Factors” for a discussion of the potential adverse impact of the COVID-19 pandemic on our business,
results of operations, financial condition and liquidity.
31
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments,
estimates and assumptions that affect the amount of assets, liabilities, income and expenses in the consolidated financial
statements. Understanding our accounting policies and the extent to which we use management’s judgment and estimates in
applying these policies is integral to understanding our financial statements. We provide a discussion of our significant
accounting policies under “Note 1—Summary of Significant Accounting Policies.”
We have identified certain accounting policies as critical because they involve significant judgments and assumptions about
highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a
material impact on our results of operations or financial condition. Our most critical accounting policies and estimates
involve the determination of the allowance for loan losses and fair value. We evaluate our critical accounting estimates and
judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions.
Management has discussed significant judgments and assumptions in applying our critical accounting policies with the
Audit Committee of our board of directors. See “Item 1A. Risk Factors” for a discussion of the risks associated with
management’s judgments and estimates in applying our accounting policies and methods.
Allowance for Loan Losses
We maintain an allowance for loan losses that represents management’s estimate of probable losses inherent in our loan
portfolio as of each balance sheet date. Our allowance for loan losses consists of a collective allowance for loans in our
portfolio that are not considered individually impaired and a specific allowance for loans identified as individually impaired.
Our allowance for loan losses totaled $53 million and $18 million as of May 31, 2020 and 2019, respectively, and the
allowance coverage ratio was 0.20% and 0.07% as of each date. The increase in the allowance was attributable to the
establishment of an asset-specific allowance of $34 million in the fourth quarter of fiscal year 2020 for a loan to a CFC
power supply borrower with an outstanding balance of $168 million as of May 31, 2020, that we designated as individually
impaired. We provide additional information on the increase in our allowance for loan losses in “Credit Risk—Loan
Portfolio Credit Risk,” “Note 4—Loans” and “Note 5—Allowance for Loan Losses.” We discuss the methodology used to
estimate the allowance for loan losses in “Note 1—Summary of Significant Accounting Policies.”
Key Assumptions
Determining the appropriateness of the allowance for loan losses is subject to numerous estimates and assumptions requiring
significant management judgment about matters that involve a high degree of subjectivity and are difficult to predict. The
key assumptions in determining our collective allowance that require significant management judgment and may have a
material impact on the amount of the allowance include: the segmentation of our loan portfolio; our internally assigned
borrower risk ratings; the estimated loss emergence period; the probability of default; the loss severity or recovery rate in the
event of default for each portfolio segment; and management’s consideration of qualitative factors that may cause estimated
credit losses associated with our existing loan portfolio to differ from our historical loss experience.
As discussed below in “Credit Risk—Loan Portfolio Credit Risk,” CFC has experienced only 16 defaults in its 51-year
history, and we have had no defaults in our electric utility loan portfolio since fiscal year 2013. As such, we have a limited
history of defaults to develop reasonable and supportable estimated probability of default rates for our existing loan
portfolio. We therefore utilize third-party default data for the utility sector as a proxy to estimate probability of default rates
for our loan portfolio segments. However, we utilize our internal historical loss experience to estimate loss given default, or
the recovery rate, for each of our loan portfolio segments, as we believe it provides a more reliable estimate than third-party
loss severity data due to the organizational structure and operating environment of rural utility cooperatives, our lending
practice of generally requiring a senior security position on the assets and revenue of borrowers for long-term loans, the
approach we take in working with borrowers that may be experiencing operational or financial issues and other factors
discussed in “Credit Risk—Loan Portfolio Credit Risk.”
The key assumptions in determining our asset-specific allowance that require significant management judgment and may
have a material impact on the amount of the allowance include the determination that a loan is impaired, measuring the
amount and timing of future cash flows for impaired loans that are not collateral-dependent and estimating the value of the
underlying collateral for impaired loans that are collateral-dependent.
32
The degree to which any particular assumption affects the allowance for loan losses depends on the severity of the change
and its relationship to the other assumptions. We regularly evaluate the underlying assumptions used in determining the
allowance for loan losses and periodically update our assumptions to better reflect present conditions, including current
trends in credit performance and borrower risk profile, portfolio concentration risk, changes in risk-management practices,
changes in the regulatory environment, general economic trends and other factors specific to our loan portfolio segments.
We did not change the nature of the underlying assumptions and inputs used in determining our allowance for loan losses
during fiscal year 2020.
Sensitivity Analysis
As noted above, our allowance for credit losses is sensitive to a variety of factors. While management uses its best judgment
to assess loss data and other factors to determine the allowance for loan losses, changes in our loss assumptions, adjustments
to assigned borrower risk ratings, the use of alternate external data sources or other factors could affect our estimate of
probable credit losses inherent in the portfolio as of each balance sheet date, which would also impact the related provision
for loan losses recognized in our consolidated statements of operations. For example, changes in the inputs below, without
taking into consideration the impact of other potential offsetting or correlated inputs, would have the following effect on our
allowance of loan losses as of May 31, 2020.
• A 10% increase or decrease in the default rates for all of our portfolio segments would result in a corresponding increase
or decrease of approximately $2 million.
• A 1% increase or decrease in the recovery rates for all of our portfolio segments would result in a corresponding decrease
or increase of approximately $5 million.
• A one-notch downgrade in the internal borrower risk ratings for our entire loan portfolio would result in an increase of
approximately $17 million, while a one-notch upgrade would result in a decrease of approximately $12 million.
These sensitivity analyses are intended to provide an indication of the isolated impact of hypothetical alternative
assumptions on our allowance for loan losses. Because management evaluates a variety of factors and inputs in determining
the allowance for loan losses, these sensitivity analyses are not considered probable and do not imply an expectation of
future changes in loss rates or borrower risk ratings. Given current processes employed in estimating the allowance for loan
losses, management believes the inherent loss rates and currently assigned risk ratings are appropriate. It is possible that
others performing the analyses, given the same information, may at any point in time reach different reasonable conclusions
that could be significant to our consolidated financial statements.
We provide information on our allowance for loan losses in “Credit Risk—Allowance for Loan Losses” and “Note 5—
Allowance for Loan Losses.” Also refer to “Credit Risk—Loan Portfolio Credit Risk—Credit Quality” and “Note 4—
Loans” for information on the credit performance and quality of our loan portfolios.
On June 1, 2020, we adopted the current expected credit losses (“CECL”) accounting standard, which requires estimating
credit losses over the contractual life of financial assets carried at amortized cost and replaces the incurred loss method used
in determining our allowance for loan losses as of May 31, 2020 and in prior fiscal years. See “Note 1—Summary of
Significant Accounting Policies,” for additional information on the CECL accounting standard, including our financial
assets that are within the scope of CECL, our approach in estimating life-time expected credit losses under CECL and the
expected impact on our financial statements from the adoption of CECL.
Fair Value
Certain of our financial instruments are carried at fair value on our consolidated balance sheet, with changes in fair value
recorded either through earnings or other comprehensive income (loss) in accordance with applicable accounting standards.
These include our equity securities and derivatives. The determination of fair value is important for certain other assets that
are periodically evaluated for impairment using fair value, such as individually impaired loans.
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction
between market participants on the measurement date (also referred to as an exit price). The fair value accounting guidance
provides a three-level fair value hierarchy for classifying fair value measurement techniques. This hierarchy is based on the
33
markets in which the assets or liabilities trade and whether the inputs to the valuation techniques used to measure fair value
are observable or unobservable. Fair value measurement is assigned a level based on the lowest level of any input that is
significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are summarized below:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2: Observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities
Level 3: Unobservable inputs
The degree of management judgment involved in determining fair value is dependent upon the availability of quoted prices
in active markets or observable market parameters. When quoted prices and observable data in active markets are not fully
available, management’s judgment is necessary to estimate fair value. Changes in market conditions, such as reduced
liquidity in the capital markets or changes in secondary market activities, may reduce the availability and reliability of
quoted prices or observable data used to determine fair value.
Significant judgment may be required to determine whether certain assets and liabilities measured at fair value are classified
as Level 2 or Level 3. In making this determination, we consider all available information that market participants use to
measure fair value, including observable market data, indications of market liquidity and orderliness, and our understanding
of the valuation techniques and significant inputs used. Based upon the specific facts and circumstances, judgments are
made regarding the significance of Level 3 inputs used in determining the fair value of the asset or liability in its entirety. If
Level 3 inputs are considered significant, the valuation technique is classified as Level 3. The process for determining fair
value using unobservable inputs is generally more subjective and involves a high degree of management judgment and
assumptions.
Financial instruments recorded at fair value on a recurring basis, which consisted primarily of equity and debt securities,
deferred compensation investments and derivatives, represented approximately 2% and 1% of our total assets as of May 31,
2020 and 2019, respectively, and 5% and 2% of total liabilities as of May 31, 2020 and 2019, respectively. The fair value of
these financial instruments was determined using either Level 1 or 2 inputs. We did not have any financial instruments
recorded at fair value on a recurring basis for which the fair value was determined using Level 3 inputs as of May 31, 2020
and 2019.
We discuss the valuation inputs and assumptions used in determining the fair value, including the extent to which we have
relied on significant unobservable inputs to estimate fair value, in “Note 14—Fair Value Measurement.”
RECENT ACCOUNTING CHANGES AND OTHER DEVELOPMENTS
Recent Accounting Changes
See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted during the
current year, as well as recently issued accounting standards not yet required to be adopted and the expected impact of the
adoption of these accounting standards. To the extent we believe the adoption of new accounting standards has had or will
have a material impact on our consolidated results of operations, financial condition or liquidity, we also discuss the impact
in the applicable section(s) of this MD&A.
34
CONSOLIDATED RESULTS OF OPERATIONS
The section below provides a comparative discussion of our consolidated results of operations between fiscal years 2020
and 2019. Following this section, we provide a comparative analysis of our consolidated balance sheets as of May 31, 2020
and 2019. You should read these sections together with our “Executive Summary—Outlook for the Next 12 Months” where
we discuss trends and other factors that we expect will affect our future results of operations. See “Item 7. MD&A—
Consolidated Results of Operations ” in our Annual Report on Form 10-K for the fiscal year ended May 31, 2019 for a
comparative discussion of our consolidated results of operations between fiscal year 2019 and 2018.
Net Interest Income
Net interest income represents the difference between the interest income earned on our interest-earning assets, which
includes loans and investment securities, and the interest expense on our interest-bearing liabilities. Our net interest yield
represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities plus
the impact from non-interest bearing funding. We expect net interest income and our net interest yield to fluctuate based on
changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing
liabilities. We do not fund each individual loan with specific debt. Rather, we attempt to minimize costs and maximize
efficiency by proportionately funding large aggregated amounts of loans.
Table 1 presents average balances for fiscal years 2020, 2019 and 2018, and for each major category of our interest-earning
assets and interest-bearing liabilities, the interest income earned or interest expense incurred, and the average yield or cost.
Table 1 also presents non-GAAP adjusted interest expense, adjusted net interest income and adjusted net interest yield,
which reflect the inclusion of net accrued periodic derivative cash settlements expense in interest expense. We provide
reconciliations of our non-GAAP adjusted measures to the most comparable GAAP measures under “Non-GAAP Financial
Measures.”
35
Table 1: Average Balances, Interest Income/Interest Expense and Average Yield/Cost
(Dollars in thousands)
Assets:
Long-term fixed-rate loans(1) ...
Long-term variable-rate loans ..
Line of credit loans ...................
TDR loans (2).............................
Nonperforming loans................
Other income, net(3) ..................
Total loans.................................
Cash, time deposits and
investment securities.................
Total interest-earning assets ..
Other assets, less allowance for
loan losses.............................
Total assets................................
Liabilities:
Year Ended May 31,
2020
Interest
Income/
Expense
Average
Balance
Average
Yield/
Cost
Average
Balance
2019
Interest
Income/
Expense
Average
Yield/
Cost
Average
Balance
2018
Interest
Income/
Expense
Average
Yield/
Cost
$ 23,890,577
$1,043,918
4.37% $ 22,811,905
$1,012,277
4.44% $ 22,570,209
$1,000,492
4.43%
891,541
1,718,364
11,238
5,957
31,293
55,140
836
—
—
(1,304)
3.51
3.21
7.44
—
—
1,093,455
1,609,629
12,183
—
—
41,219
57,847
846
—
(1,128)
3.77
3.59
6.94
—
—
925,910
1,402,555
12,885
—
—
27,152
38,195
889
—
(1,185)
2.93
2.72
6.90
—
—
26,517,677
1,129,883
4.26
25,527,172
1,111,061
4.35
24,911,559
1,065,543
4.28
866,013
21,403
2.47
838,599
24,609
2.93
512,517
11,814
2.31
$ 27,383,690
$1,151,286
4.20% $ 26,365,771
$1,135,670
4.31% $ 25,424,076
$1,077,357
4.24%
551,378
$ 27,935,068
879,817
$ 27,245,588
644,563
$ 26,068,639
Short-term borrowings..............
$ 4,113,463
$
77,995
1.90% $ 3,729,239
$
92,854
2.49% $ 3,294,573
$
50,616
1.54%
Medium-term notes...................
3,551,973
125,954
7,185,910
257,396
5,581,854
162,929
2,986,469
87,617
17,586
986,035
1,349,454
671
51,527
57,000
3.55
3.58
2.92
2.93
3.82
5.23
4.22
3,813,666
7,334,957
133,797
273,413
5,045,478
147,895
2,807,705
28,044
759,838
1,369,051
90,942
1,237
38,628
57,443
3.51
3.73
2.93
3.24
4.41
5.08
4.20
3,361,484
7,625,182
111,814
336,079
4,956,417
140,551
2,578,793
33,742
742,336
1,396,449
56,004
1,509
37,661
58,501
3.33
4.41
2.84
2.17
4.47
5.07
4.19
Collateral trust bonds................
Guaranteed Underwriter
Program notes payable..........
Farmer Mac notes payable........
Other notes payable ..................
Subordinated deferrable debt....
Subordinated certificates ..........
Total interest-bearing
liabilities...................................
$ 25,772,744
$ 821,089
3.19% $ 24,887,978
$ 836,209
3.36% $ 23,988,976
$ 792,735
3.30%
Other liabilities .........................
1,141,884
Total liabilities ..........................
26,914,628
Total equity...............................
1,020,440
Total liabilities and equity ........
$ 27,935,068
816,074
25,704,052
1,541,536
$ 27,245,588
822,745
24,811,721
1,256,918
$ 26,068,639
Net interest spread(4) .................
Impact of non-interest bearing
funding(5)...............................
Net interest income/net interest
yield(6) ...................................
Adjusted net interest income/
adjusted net interest yield:
Interest income .........................
Interest expense ........................
Add: Net accrued periodic
derivative cash settlement(7)..
Adjusted interest expense/
adjusted average cost(8) .........
Adjusted net interest spread(4)...
Impact of non-interest bearing
funding..................................
Adjusted net interest income/
adjusted net interest yield(9) ..
1.01%
0.20
0.95%
0.19
0.94%
0.18
$ 330,197
1.21%
$ 299,461
1.14%
$ 284,622
1.12%
$1,151,286
4.20%
$1,135,670
4.31%
$1,077,357
4.24%
821,089
3.19
836,209
3.36
792,735
3.30
55,873
0.55
43,611
0.40
74,281
0.69
$ 876,962
3.40%
0.80%
0.20
$ 879,820
3.54%
0.77%
0.20
$ 867,016
3.61%
0.63%
0.20
$ 274,324
1.00%
$ 255,850
0.97%
$ 210,341
0.83%
36
____________________________
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Interest income on long-term, fixed-rate loans includes loan conversion fees, which are generally deferred and recognized as interest income using the
effective interest method.
Troubled debt restructuring (“TDR”) loans.
Consists of late payment fees and net amortization of deferred loan fees and loan origination costs.
Net interest spread represents the difference between the average yield on total average interest-earning assets and the average cost of total average
interest-bearing liabilities. Adjusted net interest spread represents the difference between the average yield on total average interest-earning assets and
the adjusted average cost of total average interest-bearing liabilities.
Includes other liabilities and equity.
Net interest yield is calculated based on net interest income for the period divided by total average interest-earning assets for the period.
Represents the impact of net accrued periodic interest rate swap settlements during the period. This amount is added to interest expense to derive non-
GAAP adjusted interest expense. The average (benefit)/cost associated with derivatives is calculated based on net accrued periodic interest rate swap
settlements during the period divided by the average outstanding notional amount of derivatives during the period. The average outstanding notional
amount of interest rate swaps was $10,180 million, $10,968 million and $10,816 million for fiscal years 2020, 2019 and 2018, respectively.
Adjusted interest expense consists of interest expense plus net accrued periodic interest rate swap cash settlements expense during the period. Net
accrued periodic derivative cash settlements are reported on our consolidated statements of operations as a component of derivative gains (losses).
Adjusted average cost is calculated based on adjusted interest expense for the period divided by total average interest-bearing liabilities during the
period.
Adjusted net interest yield is calculated based on adjusted net interest income for the period divided by total average interest-earning assets for the
period.
Table 2 displays the change in net interest income between periods and the extent to which the variance is attributable to: (i)
changes in the volume of our interest-earning assets and interest-bearing liabilities or (ii) changes in the interest rates of
these assets and liabilities. The table also presents the change in adjusted net interest income between periods. Changes that
are not solely due to either volume or rate are allocated to these categories on a pro-rata basis based on the absolute value of
the change due to average volume and average rate.
37
Table 2: Rate/Volume Analysis of Changes in Interest Income/Interest Expense
(Dollars in thousands)
Interest income:
Long-term fixed-rate loans..........................
Long-term variable-rate loans .....................
Line of credit loans .....................................
Restructured loans.......................................
Other income, net ........................................
Total loans ...................................................
Cash, time deposits and investment
securities ..................................................
Interest income ............................................
Interest expense:
Short-term borrowings ................................
Medium-term notes .....................................
Collateral trust bonds ..................................
Guaranteed Underwriter Program notes
payable.....................................................
Farmer Mac notes payable ..........................
Other notes payable.....................................
Subordinated deferrable debt ......................
Subordinated certificates.............................
Interest expense...........................................
Net interest income .....................................
Adjusted net interest income:
Interest income ............................................
Interest expense...........................................
Net accrued periodic derivative cash
settlements expense(2) ..............................
Adjusted interest expense(3).........................
Adjusted net interest income(3)....................
____________________________
2020 vs. 2019
2019 vs. 2018
Total
Variance
Variance due to:
(1)
Total
Variance due to:
(1)
Volume
Rate
Variance
Volume
Rate
$
31,641
$
(9,926)
(2,707)
(10)
(176)
18,822
47,866
(7,611)
3,908
(66)
—
44,097
$ (16,225)
(2,315)
(6,615)
56
(176)
(25,275)
$ 11,785
$ 10,714
$
14,067
19,652
(43)
57
45,518
4,913
5,639
(48)
—
1,071
9,154
14,013
5
57
21,218
24,300
(3,206)
804
$
15,616
$
44,901
(4,010)
$ (29,285)
12,795
7,516
5,279
$ 58,313
$ 28,734
$ 29,579
$
(14,859) $
(7,843)
(16,017)
15,034
(3,325)
(566)
12,899
(443)
(15,120)
15,722
5,790
(461)
11,499
(822)
26,558
$
30,736
$
18,343
$
15,616
$
44,901
(15,120)
26,558
12,262
(2,858)
(3,136)
23,422
$
18,474
$
21,479
9,567
(9,181)
(5,556)
$ (24,426)
1,338
(10,461)
$ 42,238
$
6,678
$ 35,560
21,983
(62,666)
15,041
(12,792)
6,942
(49,874)
(688)
(9,115)
(105)
1,400
379
(41,678)
$ 12,393
$ (29,285)
(41,678)
15,398
(26,280)
$ (3,005)
7,344
34,938
(272)
967
(1,058)
43,474
2,526
4,971
(255)
888
(1,148)
15,909
4,818
29,967
(17)
79
90
27,565
$ 14,839
$ 12,825
$
2,014
$ 58,313
$ 28,734
$ 29,579
43,474
15,909
27,565
(30,670)
12,804
1,047
16,956
$ 45,509
$ 11,778
(31,717)
(4,152)
$ 33,731
(1)
(2)
The changes for each category of interest income and interest expense are divided between the portion of change attributable to the variance in volume
and the portion of change attributable to the variance in rate for that category. The amount attributable to the combined impact of volume and rate has
been allocated to each category based on the proportionate absolute dollar amount of change for that category.
For net accrued periodic derivative cash settlements, the variance due to average volume represents the change in derivative cash settlements resulting
from the change in the average notional amount of derivative contracts outstanding. The variance due to average rate represents the change in derivative
cash settlements resulting from the net difference between the average rate paid and the average rate received for interest rate swaps during the period.
(3)
See “Non-GAAP Financial Measures” for additional information on our adjusted non-GAAP measures.
Reported Net Interest Income
Reported net interest income of $330 million for fiscal year 2020 was up $31 million, or 10%, from fiscal year 2019, driven
by an increase in average interest-earning assets of 4%, coupled with an increase in the net interest yield of 6% (7 basis
points) to 1.21%.
38
• Average Interest-Earning Assets: The increase in average interest-earning assets of 4% during fiscal year 2020 was driven
by growth in average total loans of $991 million, or 4%, from the prior fiscal year, as members obtained advances to fund
capital investments and refinanced with us loans made by other lenders.
• Net Interest Yield: The increase of 7 basis points in the net interest yield in fiscal year 2020 was due to a reduction in our
average cost of funds of 17 basis points to 3.19%, partially offset by a decrease in the average yield on interest-earning
assets of 11 basis points to 4.20%. The decrease in our average cost of funds reflects the impact of the interest savings
from the repayment of the $1.0 billion aggregate principal balance of 10.375% collateral trust bonds in the first half of
fiscal year 2019 and the replacement of this debt with lower-cost funding, combined with a decrease in the average cost of
our short-term and variable-rate funding due to a decrease in short-term interest rates during fiscal year 2020. The federal
funds rate decreased by 225 basis points, including a 150 basis point decrease to a near zero target range in March 2020,
as part of a series of measures implemented to ease the economic impact of the COVID-19 pandemic. The 3-month
LIBOR decreased by 216 basis points over the last 12 months to 0.34%. The decrease in the average yield on interest-
earning assets was primarily attributable to a 7 basis point decrease in the average yield on our long-term fixed-rate loan
portfolio, as the maturity and pay-off of loan advances at higher rates were replaced with new loan advances at lower rates
due to the decline in interest rates.
Adjusted Net Interest Income
Adjusted net interest income of $274 million for fiscal year 2020 was up $18 million, or 7%, from fiscal year 2019, driven
by an increase in the adjusted net interest yield of 3% (3 basis points) to 1.00% and the increase in average interest-earning
assets of 4%.
• Average Interest-Earning Assets: The increase in average interest-earning assets of 4% was driven by the growth in
average total loans of $991 million, or 4%, from fiscal year 2019.
• Adjusted Net Interest Yield: The increase in the adjusted net interest yield was primarily due to a reduction in our adjusted
average cost of funds of 14 basis points to 3.40%, partially offset by a decrease in the average yield on interest-earning
assets of 11 basis points to 4.20%. The reduction in our adjusted average cost of funds was attributable to the interest
savings from the repayment of the $1.0 billion aggregate principal balance of 10.375% collateral trust bonds in the first
half of fiscal year 2019 and the replacement of this debt with lower-cost funding, combined with a decrease in the average
cost of our short-term and variable-rate funding due to the decrease in short-term interest rates during fiscal year 2020. As
noted above, the decrease in the average yield on interest-earning assets was primarily attributable to a 7 basis point
decrease in the average yield on our long-term fixed rate loan portfolio, as the maturity and pay-off of loan advances at
higher rates were replaced with new loan advances at lower rates due to the decline in interest rates.
We include net accrued periodic derivative cash settlements during the period in the calculation of our adjusted average cost
of funds, which, as a result, also impacts the calculation of adjusted net interest income and adjusted net interest yield. Net
periodic derivative cash settlements expense totaled $56 million in fiscal year 2020, an increase of $12 million, or 28%,
from $44 million in fiscal year 2019. Pay-fixed swaps represent the substantial majority of our derivatives portfolio. The
floating-rate payments on our interest rate swaps are typically determined based on the 3-month LIBOR. The decrease in the
3-month LIBOR rate resulted in a decrease in the periodic floating-rate interest payments due to us on our pay-fixed,
receive-variable swaps and a significant increase in our net periodic derivative cash settlements expense in fiscal year 2020.
See “Non-GAAP Financial Measures” for additional information on our adjusted measures, including a reconciliation of
these measures to the most comparable GAAP measures.
Provision for Loan Losses
Our provision for loan losses in each period is primarily driven by the level of allowance that we determine is necessary for
probable incurred loan losses inherent in our loan portfolio as of each balance sheet date. The allowance for loan losses,
which consists of a collective allowance for loans in our portfolio that are not considered individually impaired and a
specific allowance for loans identified as individually impaired, totaled $53 million and $18 million as of May 31, 2020 and
2019, respectively.
39
We recorded a provision for loan losses of $36 million in fiscal year 2020. In comparison, we recorded a benefit for loan
losses of $1 million in fiscal year 2019. The unfavorable shift in the provision for loan losses of $37 million in fiscal year
2020 was attributable to the establishment of an asset-specific allowance of $34 million in the fourth quarter of fiscal year
2020 for a loan to a CFC power supply borrower with a carrying amount of $168 million as of May 31, 2020, discussed
above in “Executive Summary—Credit Quality.”
The overall credit quality and performance metrics of our loan portfolio remains high, as evidenced by our continued strong
credit performance metrics. We had no delinquent loans as of May 31, 2020, and we have not experienced any loan defaults
or charge-offs since fiscal year 2017. Although the total allowance coverage ratio increased to 0.20% as of May 31, 2020,
from 0.07% as of May 31, 2019, due to the establishment of the asset-specific allowance of $34 million, the collective
allowance coverage ratio was 0.07% as of May 31, 2020, compared with 0.06% as of May 31, 2019.
We provide additional information on our allowance for loan losses under “Credit Risk—Allowance for Loan Losses” and
“Note 5—Allowance for Loan Losses” of this Report. For a description of our methodology for determining the allowance
for loan losses see “Critical Accounting Policies and Estimates” above and “Note 1—Summary of Significant Accounting
Policies” of this Report.
Non-Interest Income
Non-interest income consists of fee and other income, gains and losses on derivatives not accounted for in hedge accounting
relationships and gains and losses on our investment securities.
Table 3 presents the components of non-interest income (loss) recorded in our consolidated results of operations for fiscal
years 2020, 2019 and 2018.
Table 3: Non-Interest Income
(Dollars in thousands)
Non-interest income:
Year Ended May 31,
2020
2019
2018
Fee and other income.......................................................
Derivative gains (losses)..................................................
Investment securities gains (losses).................................
Total non-interest income ................................................
$
$
22,961
(790,151)
9,431
(757,759)
$
$
15,355
(363,341)
(1,799)
(349,785)
$
$
17,578
231,721
—
249,299
The significant variance in non-interest income between years was primarily attributable to changes in net derivative gains
(losses) recognized in our consolidated statements of operations. In addition, fee and other income increased by $8 million
due to higher prepayment fees and investment gains increased by $11 million primarily due to the recognition of unrealized
gains on our debt securities. The accounting treatment for our debt securities changed as a result of the transfer of all of the
securities in our held-to-maturity investment portfolio to trading in the fourth quarter of fiscal year 2020. Trading securities
are reported at fair value, with unrealized gains and losses recorded in earnings.
Derivative Gains (Losses)
Our derivative instruments are an integral part of our interest rate risk management strategy. Our principal purpose in using
derivatives is to manage our aggregate interest rate risk profile within prescribed risk parameters. The derivative instruments
we use primarily include interest rate swaps, which we typically hold to maturity. In addition, we may on occasion use
treasury locks to manage the interest rate risk associated with debt that is scheduled to reprice in the future. The primary
factors affecting the fair value of our derivatives and derivative gains (losses) recorded in our results of operations include
changes in interest rates, the shape of the swap curve and the composition of our derivative portfolio. We generally do not
designate our interest rate swaps, which currently account for all our derivatives, for hedge accounting. Accordingly,
changes in the fair value of interest rate swaps are reported in our consolidated statements of operations under derivative
gains (losses). However, we typically designate treasury locks as cash flow hedges. We did not have any derivatives
designated as accounting hedges as of May 31, 2020 or May 31, 2019.
40
We currently use two types of interest rate swap agreements: (i) we pay a fixed rate of interest and receive a variable rate of
interest (“pay-fixed swaps”); and (ii) we pay a variable rate of interest and receive a fixed rate of interest (“receive-fixed
swaps”). The interest amounts are based on a specified notional balance, which is used for calculation purposes only. The
benchmark variable rate for the substantial majority of the floating rate payments under our swap agreements is 3-month
LIBOR. As interest rates decline, pay-fixed swaps generally decrease in value and result in the recognition of derivative
losses, as the amount of interest we pay remains fixed, while the amount of interest we receive declines. In contrast, as
interest rates rise, pay-fixed swaps generally increase in value and result in the recognition of derivative gains, as the
amount of interest we pay remains fixed, but the amount we receive increases. With a receive-fixed swap, the opposite
results occur as interest rates decline or rise. Because our pay-fixed and receive-fixed swaps are referenced to different
maturity terms along the swap curve, different changes in the swap curve—parallel, flattening, inversion or steepening—
will also impact the fair value of our derivatives.
Table 4 presents the components of net derivative gains (losses) recorded in our consolidated results of operations.
Derivative cash settlements expense represents the net periodic contractual interest amount for our interest-rate swaps for
the reporting period. Derivative forward value gains (losses) represent the change in fair value of our interest rate swaps
during the reporting period due to changes in expected future interest rates over the remaining life of our derivative
contracts.
Table 4: Derivative Gains (Losses)
(Dollars in thousands)
Derivative gains (losses) attributable to:
Year Ended May 31,
2020
2019
2018
Derivative cash settlements expense ...............................
Derivative forward value gains (losses) ..........................
Derivative gains (losses)..................................................
$
$
(55,873)
(734,278)
(790,151)
$
$
(43,611)
(319,730)
(363,341)
$
$
(74,281)
306,002
231,721
The net derivative losses of $790 million in fiscal year 2020 were primarily attributable to a net decrease in the fair value of
our pay-fixed swaps resulting from sharp declines in interest rates across the entire swap curve during fiscal year 2020, as
depicted by the May 31, 2020 swap curve displayed below in the “Comparative Swap Curves” chart.
The net derivative losses of $363 million in fiscal year 2019 were primarily attributable to a net decrease in the fair value of
our pay-fixed swaps resulting from a decline in medium- and longer-term interest rates during fiscal year 2019, as depicted
by the May 31, 2019 swap curve also displayed below in the “Comparative Swap Curves” chart.
Our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps. Pay-fixed swaps
represented approximately 71% and 68% of the outstanding notional amount of our derivative portfolio as of May 31, 2020
and May 31, 2019, respectively. The profile of our interest rate swap portfolio, however, may change as a result of changes
in market conditions and actions taken to manage exposure to interest rate risk. The average remaining maturity of our pay-
fixed and receive-fixed swaps was 20 years and four years, respectively, as of May 31, 2020. In comparison, the average
remaining maturity of our pay-fixed and receive-fixed swaps was 19 years and four years, respectively, as of May 31, 2019.
Derivative Cash Settlements
As indicated in Table 4 above, net periodic derivative cash settlement expense totaled $56 million, $44 million and $74
million during fiscal years 2020, 2019 and 2018, respectively. Table 5 displays, by swap agreement type, the average
notional amount outstanding and the weighted-average interest rate paid and received for derivative cash settlements during
each respective period.
41
Table 5: Derivative Cash Settlements Expense—Average Notional Amounts and Interest Rates
2020
Year Ended May 31,
2019
2018
(Dollars in
thousands)
Average
Notional
Balance
Weighted-
Average
Rate Paid
Weighted-
Average
Rate
Received
Average
Notional
Balance
Weighted-
Average
Rate Paid
Weighted-
Average
Rate
Received
Average
Notional
Balance
Weighted-
Average
Rate Paid
Weighted-
Average
Rate
Received
Pay-fixed swaps.......
$ 7,092,961
2.82%
1.91% $ 7,352,704
Receive-fixed swaps
3,086,705
2.62
2.64
3,615,781
Total.........................
$10,179,666
2.76%
2.13% $10,968,485
2.83%
3.15
2.93%
2.53% $ 7,007,207
2.53
3,808,794
2.53% $10,816,001
2.84%
2.16
2.60%
1.59%
2.60
1.95%
Comparative Swap Curves
The chart below provides comparative swap curves as of May 31, 2020, 2019, 2018 and 2017.
____________________________
Benchmark rates obtained from Bloomberg.
See “Note 1—Summary of Significant Accounting Policies—Derivative Instruments” and “Note 10—Derivative
Instruments and Hedging Activities” for additional information on our derivative instruments. Also refer to “Note 14—Fair
Value Measurement” for information on how we estimate the fair value of our derivative instruments.
Non-Interest Expense
Non-interest expense consists of salaries and employee benefit expense, general and administrative expenses, gains (losses)
on the early extinguishment of debt and other miscellaneous expenses.
Table 6 presents the components of non-interest expense recorded in our consolidated results of operations in fiscal years
2020, 2019 and 2018.
42
Table 6: Non-Interest Expense
(Dollars in thousands)
Non-interest expense:
Year Ended May 31,
2020
2019
2018
Salaries and employee benefits .......................................
Other general and administrative expenses .....................
Losses on early extinguishment of debt ..........................
Other non-interest expense ..............................................
Total non-interest expense ...............................................
$
$
(54,522) $
(46,645)
(683)
(25,588)
(127,438) $
(49,824) $
(43,342)
(7,100)
(1,675)
(101,941) $
(51,422)
(39,462)
—
(1,943)
(92,827)
Non-interest expense of $127 million for fiscal year 2020 increased by $25 million, or 25%, from fiscal year 2019. The
increase was largely due to a non-cash impairment charge of $31 million recorded in the fourth quarter of fiscal year 2020,
due to management’s decision to abandon a project to develop an internal-use loan origination and servicing platform and an
increase in salaries and employment benefits of $5 million. These amounts were partially offset by a gain of $8 million
recorded in connection with the July 22, 2019 sale of land and the absence of the loss of $7 million on the early redemption
of $300 million of 10.375% collateral trust bonds recorded in fiscal year 2019.
Net Income (Loss) Attributable to Noncontrolling Interests
Net income (loss) attributable to noncontrolling interests represents 100% of the results of operations of NCSC and RTFC,
as the members of NCSC and RTFC own or control 100% of the interest in their respective companies. The fluctuations in
net income (loss) attributable to noncontrolling interests are primarily due to changes in the fair value of NCSC’s derivative
instruments recognized in NCSC’s earnings.
We recorded a net loss attributable to noncontrolling interests of $4 million and $2 million in fiscal years 2020 and 2019,
respectively, and net income of $2 million in fiscal year 2018.
CONSOLIDATED BALANCE SHEET ANALYSIS
Total assets of $28,158 million as of May 31, 2020 increased by $1,033 million, or 4%, from May 31, 2019, primarily due to
growth in our loan portfolio. Total liabilities of $27,509 million as of May 31, 2020 increased by $1,688 million, or 7%,
from May 31, 2019. Total equity decreased by $655 million during fiscal year 2020 to $649 million as of May 31, 2020,
attributable to our reported net loss of $589 million and patronage capital retirement of $63 million in the second quarter of
fiscal year 2020.
Following is a discussion of changes in the major components of our assets and liabilities during fiscal year 2020. Period-
end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management
activities that are intended to manage liquidity requirements for the company and our market risk exposure in accordance
with our risk appetite.
Loan Portfolio
We offer long-term loans that provide borrowers the option to select fixed- and variable-rate loan advances and line of credit
loans. The substantial majority of loans in our portfolio represent fixed-rate advances under secured long-term facilities with
terms up to 35 years. Line of credit loans are typically variable-rate revolving facilities and are generally unsecured.
43
Loans Outstanding
Table 7 summarizes loans to members, by loan type and by member class, for the five-year period ended May 31, 2020. As
indicated in Table 7, long-term fixed-rate loans accounted for 92% and 89% of loans to members as of May 31, 2020 and
2019, respectively.
Table 7: Loans Outstanding by Type and Member Class
(Dollars in millions)
Loans by type:
Long-term loans:
2020
2019
May 31,
2018
2017
2016
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Fixed-rate ................................
Variable-rate ............................
Total long-term loans .................
Lines of credit ............................
$ 24,472
656
25,128
1,563
92% $23,094
2
1,067
94
24,161
6
1,745
89% $22,696
1,040
4
23,736
93
1,432
7
90% $22,137
847
4
22,984
94
1,372
6
91% $21,391
757
3
22,148
94
1,005
6
93%
3
96
4
Total loans outstanding ..............
$ 26,691
100% $25,906
100% $25,168
100% $24,356
100% $23,153
100%
Deferred loan origination costs ..
11 —
11 —
11 —
11 —
10 —
Loans to members ......................
$ 26,702
100% $25,917
100% $25,179
100% $24,367
100% $23,163
100%
Loans by member class:
CFC:
Distribution..............................
Power supply ...........................
Statewide and associate ...........
CFC total ....................................
NCSC .........................................
RTFC..........................................
$ 20,770
4,732
78% $20,155
18
4,579
106 —
96
3
1
24,818
743
345
78% $19,552
4,397
18
84 —
96
3
1
24,019
786
363
78% $18,825
4,505
18
70 —
96
3
1
23,388
614
354
77% $17,674
4,401
19
58 —
96
3
1
22,130
681
342
77%
19
55 —
96
3
1
25,608
698
385
Total loans outstanding ..............
$ 26,691
100% $25,906
100% $25,168
100% $24,356
100% $23,153
100%
Deferred loan origination costs ..
11 —
11 —
11 —
11 —
10 —
Loans to members ......................
$ 26,702
100% $25,917
100% $25,179
100% $24,367
100% $23,163
100%
Loans to members totaled $26,702 million as of May 31, 2020, an increase of $785 million, or 3%, from May 31, 2019. The
increase in loans was driven by a net increase in long-term loans of $967 million. CFC distribution loans, CFC power supply
loans, CFC statewide and associate loans and RTFC loans increased by $615 million, $153 million, $22 million and $40
million, respectively, which were partially offset by a decrease in NCSC loans of $45 million.
Long-term loan advances totaled $2,422 million during fiscal year 2020, with approximately 80% of those advances for
capital expenditures by members and 15% for the refinancing of loans made by other lenders. In comparison, long-term loan
advances totaled $1,843 million during fiscal year 2019, with approximately 87% of those advances for capital expenditures
by members and 10% for the refinancing of loans made by other lenders.
We provide additional information on our loan product types in “Item 1. Business—Loan Programs” and “Note 4—Loans.”
See “Debt—Collateral Pledged” below for information on encumbered and unencumbered loans and “Credit Risk
Management” for information on the credit risk profile of our loan portfolio.
Loan Retention Rate
Table 8 presents a summary of the options selected by borrowers for CFC’s long-term fixed-rate loans that repriced, in
accordance with our standard loan repricing provisions, during the past three fiscal years. At the repricing date, the borrower
44
has the option of (i) selecting CFC’s current long-term fixed rate for a term of between one year and up to the final maturity
of the loan; (ii) selecting CFC’s current long-term variable rate; or (iii) repaying the loan in full.
Table 8: Historical Retention Rate and Repricing Selection(1)
(Dollars in thousands)
Loans retained:
Long-term fixed rate selected ..............
Long-term variable rate selected ..........
Total loans retained by CFC ...................
Loans repaid(2) ......................................
Total ........................................................
____________________________
2020
May 31,
2019
2018
Amount
% of Total
Amount
% of Total
Amount
% of Total
$
441,165
11,446
452,611
10,350
95% $
3
98
2
568,252
123,636
691,888
69,250
75% $
16
91
9
741,792
157,539
899,331
4,637
82%
17
99
1
$
462,961
100% $
761,138
100% $
903,968
100%
(1)
(2)
Does not include NCSC and RTFC loans.
Includes loans totaling $1 million as of May 31, 2018 that were converted to new loans at the repricing date and transferred to a third party as part of our
direct loan sale program. See “Note 4—Loans” for information on our sale of loans.
As shown in Table 8, of the loans that repriced over the last three fiscal years, the substantial majority of borrowers selected
a new long-term fixed or variable rate. The average retention rate, which is calculated based on the election made by the
borrower at the repricing date, was 96% for CFC loans that repriced during the three fiscal year period ended May 31, 2020.
Scheduled Loan Principal Payments
Table 9 displays scheduled long-term loan principal payments as of May 31, 2020, for each of the five fiscal years
subsequent to May 31, 2020 and thereafter.
Table 9: Long-Term Loan Scheduled Principal Payments
Fixed Rate
Scheduled
Principal
Payments
Weighted-
Average
Interest Rate
Variable Rate
Scheduled
Principal
Payments
$
1,304,038
4.29% $
1,269,871
1,269,702
1,197,305
1,199,895
18,231,192
$
24,472,003
4.30
4.30
4.44
4.46
4.50
4.46
Total Scheduled
Principal
Payments(1)
$
1,362,385
1,304,416
1,299,875
1,233,788
1,222,416
58,347
34,545
30,173
36,483
22,521
473,635
18,704,827
$
655,704
$
25,127,707
(Dollars in thousands)
Fiscal year:
2021 .....................................
2022 .....................................
2023 .....................................
2024 .....................................
2025 .....................................
Thereafter ............................
Total .....................................
____________________________
(1)
Excludes line of credit loans.
Debt
We utilize both short-term borrowings and long-term debt as part of our funding strategy and asset/liability interest rate risk
management. We seek to maintain diversified funding sources across products, programs and markets to manage funding
concentrations and reduce our liquidity or debt rollover risk. Our funding sources include a variety of secured and unsecured
debt securities in a wide range of maturities to our members and affiliates and in the capital markets.
45
Debt Product Types
We offer various short- and long-term unsecured debt securities to our members and affiliates, including commercial paper,
select notes, daily liquidity fund notes, medium-term notes and subordinated certificates. We also issue commercial paper,
medium-term notes and collateral trust bonds in the capital markets. Additionally, we have access to funds under borrowing
arrangements with banks, private placements and U.S. government agencies. Table 10 displays our primary funding sources
and their selected key attributes.
Table 10: Debt Product Types
Debt Product Type:
Short-term funding programs:
Maturity Range
Market
Secured/
Unsecured
Commercial paper .................................
Select notes ...........................................
Daily liquidity fund notes .....................
1 to 270 days Capital markets, members and affiliates Unsecured
Unsecured
30 to 270 days Members and affiliates
Unsecured
Demand note Members and affiliates
Other funding programs:
Medium-term notes ...............................
Collateral trust bonds(1) .........................
Guaranteed Underwriter Program notes
payable(2)............................................
Farmer Mac notes payable(3) .................
Other notes payable(4)............................
Subordinated deferrable debt(5) .............
Members’ subordinated certificates(6) ...
Revolving credit agreements.................
____________________________
9 months to 30 years Capital markets, members and affiliates Unsecured
Up to 30 years Capital markets
Up to 30 years U.S. government
Up to 30 years Private placement
Up to 3 years Private placement
Up to 45 years Capital markets
Up to 100 years Members
Up to 5 years Bank institutions
Secured
Secured
Secured
Both
Unsecured
Unsecured
Unsecured
(1)
(2)
(3)
(4)
(5)
(6)
Collateral trust bonds are secured by the pledge of permitted investments and eligible mortgage notes from distribution system borrowers in an amount at
least equal to the outstanding principal amount of collateral trust bonds.
Represents notes payable under the Guaranteed Underwriter Program, which supports the Rural Economic Development Loan and Grant program. The
Federal Financing Bank provides the financing for these notes, and RUS provides a guarantee of repayment. We are required to pledge eligible mortgage
notes from distribution and power supply system borrowers in an amount at least equal to the outstanding principal amount of the notes payable.
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 Farmer Mac.
Other notes payable consist of 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.
Subordinated deferrable debt is subordinate and junior to senior debt and debt obligations we guarantee, but senior to subordinated certificates. We have
the right at any time, and from time to time, during the term of the subordinated deferrable debt to suspend interest payments for a maximum period of
20 consecutive quarters for $1,000 par notes, or a maximum period of 40 consecutive quarters for $25 par notes. To date, we have not exercised our
option to suspend interest payments. We have the right to call the subordinated deferrable debt, at par, any time after 10 years for $1,000 par notes or 5
years for $25 par notes.
Members’ subordinated certificates consist of membership subordinated certificates, loan and guarantee certificates and member capital securities, and
are subordinated and junior to senior debt, subordinated debt and debt obligations we guarantee. Membership subordinated certificates generally mature
100 years subsequent to issuance. Loan and guarantee subordinated certificates have the same maturity as the related long-term loan. Some certificates
also may amortize annually based on the outstanding loan balance. Member capital securities mature 30 years subsequent to issuance. Member capital
securities are callable at par beginning 10 years subsequent to the issuance and anytime thereafter.
Debt Outstanding
Table 11 displays the composition, by product type, of our outstanding debt and the weighted average interest rate as of
May 31, 2020, 2019 and 2018. Table 11 also displays the composition of our debt based on several additional selected
attributes.
46
Table 11: Total Debt Outstanding and Weighted-Average Interest Rates
(Dollars in thousands)
Debt product type:
Commercial paper:
Members, at par ....................................
Dealer, net of discounts ........................
Total commercial paper .............................
Select notes to members ............................
Daily liquidity fund notes to members ......
Medium-term notes:
Members, at par ....................................
Dealer, net of discounts ........................
Total medium-term notes...........................
Collateral trust bonds.................................
Guaranteed Underwriter Program notes
payable ...................................................
Farmer Mac notes payable.........................
Other notes payable ...................................
Subordinated deferrable debt.....................
Members’ subordinated certificates:
Membership subordinated certificates..
Loan and guarantee subordinated
certificates.............................................
Member capital securities .....................
Total members’ subordinated certificates..
Total debt outstanding ...............................
Security type:
Secured debt ............................................
Unsecured debt........................................
Total.........................................................
Funding source:
Members..................................................
Private placement:
Guaranteed Underwriter Program
notes payable ........................................
Farmer Mac notes payable....................
Total private placement...........................
Capital markets .......................................
Total.........................................................
Interest rate type:
Fixed-rate debt ........................................
Variable-rate debt ....................................
Total.........................................................
Interest rate type including the impact of
swaps:
Fixed-rate debt(1) .....................................
Variable-rate debt(2) .................................
Total.........................................................
Maturity classification:(3)
Short-term borrowings ............................
Long-term and subordinated debt(4) ........
Total.........................................................
2020
May 31,
2019
2018
Outstanding
Amount
Weighted-
Average
Interest
Rate
Outstanding
Amount
Weighted-
Average
Interest
Rate
Outstanding
Amount
Weighted-
Average
Interest
Rate
$ 1,318,566
—
1,318,566
1,597,959
508,618
658,959
3,068,793
3,727,752
7,188,553
6,261,312
3,059,637
11,612
986,119
630,483
482,965
226,170
1,339,618
$25,999,746
0.34% $ 1,111,795
944,616
2,056,411
1,023,952
298,817
—
0.34
0.75
0.10
2.52% $ 1,202,105
1,064,266
2.46
2,266,371
2.49
780,472
2.70
400,635
2.25
2.32
3.34
3.16
3.23
2.74
1.99
1.37
5.11
4.95
625,626
2,942,045
3,567,671
7,383,732
5,410,507
3,054,914
22,515
986,020
630,474
2.97
3.55
3.45
3.19
2.97
3.33
3.46
5.11
4.95
643,821
3,002,979
3,646,800
7,639,093
4,856,143
2,891,496
29,860
742,410
630,448
2.92
505,485
5.00
221,170
4.22
1,357,129
2.72% $25,161,668
528,386
2.95
221,148
5.00
4.21
1,379,982
3.24% $24,633,262
1.89%
1.87
1.88
2.04
1.50
2.31
3.51
3.30
3.89
2.85
2.88
3.42
4.98
4.94
2.93
5.00
4.18
3.25%
64
36%
100%
21%
24
12
36
43
100%
75%
25
100%
90%
10
100%
15%
85
100%
47
63
37%
100%
18%
21
12
33
49
100%
77%
23
100%
93%
7
100%
14%
86
100%
63
37%
100%
18%
20
12
32
50
100%
74%
26
100%
87%
13
100%
15%
85
100%
____________________________
(1)
Includes variable-rate debt that has been swapped to a fixed rate, net of any fixed-rate debt that has been swapped to a variable rate.
(2)
Includes fixed-rate debt that has been swapped to a variable rate, net of any variable-rate debt that has been swapped to a fixed rate. Also includes
commercial paper notes, which generally have maturities of less than 90 days. The interest rate on commercial paper notes does not change once the note
has been issued; however, the interest rate for new commercial paper issuances changes daily.
(3)
Borrowings with an original contractual maturity of one year or less are classified as short-term borrowings. Borrowings with an original contractual
maturity of greater than one year are classified as long-term debt.
(4)
Consists of long-term debt, subordinated deferrable debt and total members’ subordinated debt reported on the consolidated balance sheets. Maturity
classification is based on the original contractual maturity as of the date of issuance of the debt.
Our outstanding debt volume generally increases and decreases in response to member loan demand. As outstanding loan
balances increased during the year ended May 31, 2020, our debt volume also increased. We had no outstanding dealer
commercial paper as of May 31, 2020, as we experienced an increase in short-term member investments. Total debt
outstanding of $26,000 million as of May 31, 2020, increased by $838 million, or 3%, from the prior fiscal year-end due to
an increase in borrowings to fund the increase in loans to members. The increase was primarily attributable to a net increase
in member commercial paper, select notes and daily liquidity fund notes of $991 million, a net increase in borrowings under
the Guaranteed Underwriter Program of $851 million and a net increase in medium-term notes of $160 million. These
increases were partially offset by net decreases in dealer commercial paper of $945 million and collateral trust bonds of
$195 million.
Below is a summary of significant financing activities during fiscal year 2020.
• On October 15, 2019, we redeemed the $300 million outstanding principal amount of our 2.30% collateral trust bonds due
November 15, 2019 at par.
• On November 15, 2019, we redeemed the $6 million outstanding principal amount of our 9.07% notes payable due
May 15, 2022, at a premium of approximatively $1 million.
• On November 26, 2019, we amended the three-year and five-year committed bank revolving line of credit agreements to
extend the maturity date of the three-year agreement to November 28, 2022, and to terminate certain bank commitments
totaling $125 million under the three-year agreement and $125 million under the five-year agreement. The total
commitment amount under the amended three-year and five-year bank revolving line of credit agreements is $1,315
million and $1,410 million, respectively, resulting in a combined total commitment amount under the two facilities of
$2,725 million.
• On December 20, 2019, we terminated the $300 million revolving note purchase agreement with the Federal Agricultural
Mortgage Corporation (“Farmer Mac”). As a result of the termination of this revolving note purchase agreement, the
commitment amount under the $5,200 million revolving note purchase agreement with Farmer Mac increased to $5,500
million, effective December 20, 2019.
• On December 27, 2019, we redeemed the $400 million outstanding principal amount of our 2.00% collateral trust bonds
due January 27, 2020 at par.
• On February 5, 2020, we issued $500 million aggregate principal amount of 1.75% dealer medium-term notes due 2022.
• On February 5, 2020, we issued $500 million aggregate principal amount of 2.40% collateral trust bonds due 2030.
• On February 13, 2020, we closed on a $500 million committed loan facility (“Series P”) from the Federal Financing Bank
under the Guaranteed Underwriter Program. Pursuant to this facility, we may borrow any time before July 15, 2024. Each
advance is subject to quarterly amortization and a final maturity not longer than 30 years from the date of the advance.
The available borrowing amount under this program was $900 million as of May 31, 2020.
Member Investments
Debt securities issued to our members represent an important, stable source of funding. Table 12 displays outstanding
member debt, by debt product type, as of May 31, 2020 and 2019.
48
Table 12: Member Investments
(Dollars in thousands)
Commercial paper .................................
Select notes............................................
Daily liquidity fund notes......................
Medium-term notes ...............................
Members’ subordinated certificates.......
Total outstanding member debt .............
Amount
$ 1,318,566
1,597,959
508,618
658,959
1,339,618
$ 5,423,720
May 31,
2020
2019
% of Total (1)
Amount
% of Total (1)
Change
100% $ 1,111,795
100
1,023,952
100
18
100
298,817
625,626
1,357,129
$ 4,417,319
54% $
206,771
100
100
18
100
574,007
209,801
33,333
(17,511)
$ 1,006,401
Percentage of total debt outstanding......
____________________________
21%
18%
(1)
Represents outstanding debt attributable to members for each debt product type as a percentage of the total outstanding debt for each debt product type.
Member investments totaled $5,424 million and accounted for 21% of total debt outstanding as of May 31, 2020, compared
with $4,417 million, or 18%, of total debt outstanding as of May 31, 2019. Over the last three fiscal years, outstanding
member investments as of the end of each quarterly reporting period have averaged $4,704 million.
Short-Term Borrowings
Short-term borrowings consist of borrowings with an original contractual maturity of one year or less and do not include the
current portion of long-term debt. Short-term borrowings totaled $3,962 million and accounted for 15% of total debt
outstanding as of May 31, 2020, compared with $3,608 million, or 14%, of total debt outstanding as of May 31, 2019. See
“Liquidity Risk” below and “Note 6—Short-Term Borrowings” for information on the composition of our short-term
borrowings.
Long-Term and Subordinated Debt
Long-term debt, defined as debt with an original contractual maturity term of greater than one year, primarily consists of
medium-term notes, collateral trust bonds, notes payable under the Guaranteed Underwriter Program and notes payable
under our note purchase agreement with Farmer Mac. Subordinated debt consists of subordinated deferrable debt and
members’ subordinated certificates. Our subordinated deferrable debt and members’ subordinated certificates have original
contractual maturity terms of greater than one year.
Long-term and subordinated debt totaled $22,038 million and accounted for 85% of total debt outstanding as of May 31,
2020, compared with $21,554 million, or 86%, of total debt outstanding as of May 31, 2019. We provide additional
information on our long-term debt below under “Liquidity Risk” and “Note 7—Long-Term Debt” and “Note 8—
Subordinated Deferrable Debt.”
Collateral Pledged
We are required to pledge loans or other collateral in transactions under our collateral trust bond indentures, note purchase
agreements with Farmer Mac and bond agreements under the Guaranteed Underwriter Program. We are required to maintain
pledged collateral equal to at least 100% of the face amount of outstanding borrowings. However, as discussed below, we
typically maintain pledged collateral in excess of the required percentage. Under the provisions of our committed bank
revolving line of credit agreements, the excess collateral that we are allowed to pledge cannot exceed 150% of the
outstanding borrowings under our collateral trust bond indentures, Farmer Mac note purchase agreements or the Guaranteed
Underwriter Program. In certain cases, provided that all conditions of eligibility under the different programs are satisfied,
we may withdraw excess pledged collateral or transfer collateral from one borrowing program to another to facilitate a new
debt issuance.
49
Table 13 displays the collateral coverage ratios as of May 31, 2020 and 2019 for the debt agreements noted above that
require us to pledge collateral.
Table 13: Collateral Pledged
Debt Agreement
Collateral trust bonds 1994 indenture........................
Collateral trust bonds 2007 indenture........................
Guaranteed Underwriter Program notes payable ......
Farmer Mac notes payable.........................................
Clean Renewable Energy Bonds Series 2009A.........
____________________________
Requirement/Limit
Debt Indenture
Minimum
100%
100
100
100
100
Committed Bank
Revolving Line of
Credit Agreements
150%
150
150
150
150
Actual(1)
May 31,
2020
2019
114%
118%
113
120
121
120
117
114
123
112
(1)
Calculated based on the amount of collateral pledged divided by the face amount of outstanding secured debt.
Of our total debt outstanding of $26,000 million as of May 31, 2020, $16,515 million, or 64%, was secured by pledged
loans totaling $19,643 million. In comparison, of our total debt outstanding of $25,162 million as of May 31, 2019, $15,858
million, or 63%, was secured by pledged loans totaling $18,877 million. Total debt outstanding on our consolidated balance
sheet is presented net of unamortized discounts and issuance costs. However, our collateral pledging requirements are based
on the face amount of secured outstanding debt, which does not take into consideration the impact of net unamortized
discounts and issuance costs.
Table 14 displays the unpaid principal balance of loans pledged for secured debt, the excess collateral pledged and
unencumbered loans as of May 31, 2020 and 2019.
Table 14: Unencumbered Loans
(Dollars in thousands)
Total loans outstanding(1).................................................................
Less: Loans required to be pledged for secured debt (2) .................
Loans pledged in excess of requirement(2)(3) .........................
Total pledged loans................................................................
Unencumbered loans .......................................................................
Unencumbered loans as a percentage of total loans........................
____________________________
May 31,
2020
2019
$ 26,690,854
(16,784,728)
(2,858,238)
$ (19,642,966)
$
7,047,888
$ 25,905,664
(16,137,357)
(2,739,248)
$ (18,876,605)
7,029,059
$
26%
27%
(1)
(2)
(3)
Represents the unpaid principal amount of loans as of the end of each period presented and excludes unamortized deferred loan origination costs of $11
million as of both May 31, 2020 and 2019.
Reflects unpaid principal balance of pledged loans.
Excludes cash collateral pledged to secure debt. If there is an event of default under most of our indentures, we can only withdraw the excess collateral
if we substitute cash or permitted investments of equal value.
As displayed above in Table 14, we had excess loans pledged as collateral totaling $2,858 million and $2,739 million as of
May 31, 2020 and 2019, respectively. We typically pledge loans in excess of the required amount for the following reasons:
(i) our distribution and power supply loans are typically amortizing loans that require scheduled principal payments over the
life of the loan, whereas the debt securities issued under secured indentures and agreements typically have bullet maturities;
(ii) distribution and power supply borrowers have the option to prepay their loans; and (iii) individual loans may become
ineligible for various reasons, some of which may be temporary.
We provide additional information on our borrowings, including the maturity profile, below in “Liquidity Risk.” Refer to
“Note 4—Loans—Pledging of Loans” for additional information related to pledged collateral. Also refer to “Note 6—Short-
50
Term Borrowings,” “Note 7—Long-Term Debt,” “Note 8—Subordinated Deferrable Debt” and “Note 9—Members’
Subordinated Certificates” for additional information on each of our debt product types.
Equity
Table 15 presents the components of total CFC equity and total equity as of May 31, 2020 and 2019.
Table 15: Equity
(Dollars in thousands)
Membership fees and educational fund:
Membership fees.........................................................................
Educational fund.........................................................................
Total membership fees and educational fund ..................................
Patronage capital allocated ..............................................................
Members’ capital reserve.................................................................
Total allocated equity.......................................................................
Unallocated net income (loss):
Prior year-end cumulative derivative forward value losses........
Current-year derivative forward value gains (losses)(1)..............
Current year-end cumulative derivative forward value losses....
Other unallocated net income .....................................................
Unallocated net loss.........................................................................
CFC retained equity.........................................................................
Accumulated other comprehensive loss ..........................................
Total CFC equity .............................................................................
Noncontrolling interests ..................................................................
Total equity ......................................................................................
____________________________
May 31,
2020
2019
Change
$
969
$
969
$
2,224
3,193
894,066
807,320
1,704,579
(348,965)
(730,774)
(1,079,739)
3,191
(1,076,548)
628,031
(1,910)
626,121
22,701
2,013
2,982
860,578
759,097
1,622,657
(30,831)
(318,134)
(348,965)
3,190
(345,775)
1,276,882
(147)
1,276,735
27,147
$
648,822
$
1,303,882
$
—
211
211
33,488
48,223
81,922
(318,134)
(412,640)
(730,774)
1
(730,773)
(648,851)
(1,763)
(650,614)
(4,446)
(655,060)
(1)
Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the variable interest
entities NCSC and RTFC, which we are required to consolidate. See “Note 15—Business Segments” for the statements of operations for CFC.
Total equity decreased by $655 million during fiscal year 2020 to $649 million as of May 31, 2020, attributable to our
reported net loss of $589 million and patronage capital retirement of $63 million in the second quarter of fiscal year 2020.
Allocation and Retirement of Patronage Capital
District of Columbia cooperative law requires cooperatives to allocate net earnings to patrons, to a general reserve in an
amount sufficient to maintain a balance of at least 50% of paid-up capital and to a cooperative educational fund, as well as
permits additional allocations to board-approved reserves. District of Columbia cooperative law also requires that a
cooperative’s net earnings be allocated to all patrons in proportion to their individual patronage and each patron’s allocation
be distributed to the patron unless the patron agrees that the cooperative may retain its share as additional capital. Pursuant
to these provisions, the CFC Board of Directors is required to make annual allocations of net earnings, if any. CFC’s net
earnings for determining allocations is based on non-GAAP adjusted net income, which excludes the impact of derivative
forward value gains and losses. We provide a reconciliation of our non-GAAP adjusted net income to our reported net
income and an explanation of the adjustments below in “Non-GAAP Financial Measures.”
In May 2020, the CFC Board of Directors authorized the allocation of $1 million of net earnings for fiscal year 2020 to the
cooperative educational fund. In July 2020, the CFC Board of Directors authorized the allocation of net earnings for fiscal
year 2020 as follows: $96 million to members in the form of patronage capital and $48 million to the members’ capital
51
reserve. In July 2020, the CFC Board of Directors also authorized the retirement of patronage capital totaling $60 million, of
which $48 million represented 50% of the patronage capital allocation for fiscal year 2020 and $12 million represented the
portion of the allocation from fiscal year 1995 net earnings that has been held for 25 years pursuant to the CFC Board of
Directors’ policy. We expect to return the authorized patronage capital retirement amount of $60 million to members in cash
in the second quarter of fiscal year 2021. The remaining portion of the patronage capital allocation for fiscal year 2020 will
be retained by CFC for 25 years pursuant to the guidelines adopted by the CFC Board of Directors in June 2009.
In July 2019, the CFC Board of Directors authorized the allocation of net earnings for fiscal year 2019 as follows: $97
million to members in the form of patronage capital, $71 million to the members’ capital reserve and $1 million to the
cooperative educational fund. In July 2019, the CFC Board of Directors also authorized the retirement of patronage capital
totaling $63 million, of which $48 million represented 50% of the patronage capital allocation for fiscal year 2019 and $15
million represented the portion of the allocation from net earnings for fiscal year 1994 that had been held for 25 years
pursuant to the CFC Board of Directors’ policy. This amount was returned to members in cash in September 2019. The
remaining portion of the patronage capital allocation for fiscal year 2019 will be retained by CFC for 25 years pursuant to
the guidelines adopted by the CFC Board of Directors in June 2009.
CFC has made annual retirements of allocated net earnings in 40 of the last 41 fiscal years; however, future retirements of
allocated amounts are determined based on CFC’s financial condition. The CFC Board of Directors has the authority to
change the current practice governing the allocation of net earnings and retirement of patronage capital at any time, subject
to applicable laws. See “Item 1. Business—Allocation and Retirement of Patronage Capital” and “Note 11—Equity” for
additional information.
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, we engage in financial transactions that are not presented on our consolidated balance
sheets, or may be recorded on our consolidated balance sheets in amounts that are different from the full contract or notional
amount of the transaction. Our off-balance sheet arrangements consist primarily of guarantees of member obligations and
unadvanced loan commitments intended to meet the financial needs of our members.
Guarantees
We provide guarantees for certain contractual obligations of our members to assist them in obtaining 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 defaults on its obligation, we are obligated to pay required amounts pursuant to 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. In general, the member is required to
repay any amount advanced by us with accrued interest, pursuant to the documents evidencing the member’s reimbursement
obligation. Table 16 displays the notional amount of our outstanding guarantee obligations, by guarantee type and by
company, as of May 31, 2020 and 2019.
52
Table 16: Guarantees Outstanding
(Dollars in thousands)
Guarantee type:
Long-term tax-exempt bonds(1) ...................................................
Letters of credit(2) ........................................................................
Other guarantees .........................................................................
Total.................................................................................................
Company:
CFC(3) ..........................................................................................
NCSC ..........................................................................................
RTFC ...........................................................................................
Total .................................................................................................
____________________________
$
$
$
$
May 31,
2020
2019
Change
263,875
$
312,190
$
413,839
143,072
820,786
810,787
9,999
—
$
$
379,001
146,244
837,435
827,344
8,517
1,574
$
$
820,786
$
837,435
$
(48,315)
34,838
(3,172)
(16,649)
(16,557)
1,482
(1,574)
(16,649)
(1)
(2)
(3)
Represents the outstanding principal amount of long-term fixed-rate and variable-rate guaranteed bonds.
Reflects our maximum potential exposure for letters of credit.
Includes CFC guarantees to NCSC and RTFC members totaling $3 million and $1 million as of May 31, 2020 and 2019, respectively.
Of the total notional amount of our outstanding guarantee obligations of $821 million and $837 million as of May 31, 2020
and 2019, respectively, 48% and 55%, respectively, were secured by a mortgage lien on substantially all of the assets and
future revenue of our member cooperatives for which we provide guarantees.
In addition to providing a guarantee on long-term tax-exempt bonds issued by member cooperatives totaling $264 million as
of May 31, 2020, we also were the liquidity provider on $244 million of those tax-exempt bonds. As liquidity provider, we
may be 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. We were not required to perform as liquidity provider pursuant to these obligations during fiscal year 2020 or 2019.
We had outstanding letters of credit for the benefit of our members totaling $414 million as of May 31, 2020. These letters
of credit relate to obligations for which we may be required to advance funds based on various trigger events specified in the
letter of credit agreements. If we are required to advance funds, the member is obligated to repay the advance amount and
accrued interest to us. In addition to these letters of credit, we had master letter of credit facilities in place under which we
may be required to issue letters of credit to third parties for the benefit of our members up to an additional $70 million as of
May 31, 2020. All of our master letter of credit facilities as of May 31, 2020 were subject to material adverse change clauses
at the time of issuance. Prior to issuing a letter of credit under 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 that the borrower is currently in compliance with the letter of credit terms and conditions.
Table 17 presents the maturities for each of the next five fiscal years and thereafter of the notional amount of our
outstanding guarantee obligations of $821 million as of May 31, 2020.
Table 17: Maturities of Guarantee Obligations
(Dollars in thousands)
Outstanding
Amount
Maturities of Guarantee Obligations
2021
2022
2023
2024
2025
Thereafter
Guarantees ...........................
$
820,786
$ 339,979
$ 29,265
$ 157,411
$ 32,824
$ 83,628
$ 177,679
We recorded a guarantee liability of $11 million and $14 million as of May 31, 2020 and 2019, respectively, for our
guarantee and liquidity obligations associated with our members’ debt. We provide additional information about our
guarantee obligations in “Note 13—Guarantees.”
53
Unadvanced Loan Commitments
Unadvanced loan commitments represent approved and executed loan contracts for which funds have not been advanced to
borrowers. Our line of credit commitments include both contracts that are subject to material adverse change clauses and
contracts that are not subject to material adverse change clauses, while our long-term loan commitments are typically
subject to material adverse change clauses.
Table 18 displays the amount of unadvanced loan commitments, which consist of line of credit and long-term loan
commitments, as of May 31, 2020 and 2019.
Table 18: Unadvanced Loan Commitments
(Dollars in thousands)
Line of credit commitments:
May 31,
2020
2019
Amount
% of Total
Amount
% of Total
Change
Conditional(1)........................................................
Unconditional(2)....................................................
Total line of credit unadvanced commitments.........
Total long-term loan unadvanced commitments(1) ..
Total unadvanced loan commitments ......................
____________________________
$ 5,072,921
2,857,029
7,929,950
5,458,676
$ 13,388,626
38% $ 4,845,306
21
2,943,616
59
7,788,922
41
5,448,636
100% $ 13,237,558
37% $ 227,615
22
(86,587)
59
141,028
41
10,040
100% $ 151,068
(1)
(2)
Represents amount related to facilities that are subject to material adverse change clauses.
Represents amount related to facilities that are not subject to material adverse change clauses.
Table 19 presents the amount of unadvanced loan commitments, by loan type, as of May 31, 2020 and the maturities of the
commitment amounts for each of the next five fiscal years and thereafter.
Table 19: Notional Maturities of Unadvanced Loan Commitments
(Dollars in thousands)
Line of credit .................
Available
Balance
$ 7,929,950
Notional Maturities of Unadvanced Loan Commitments
2021
$4,050,588
2022
$ 613,528
2023
$1,223,510
2024
$ 961,034
2025
$1,032,749
Long-term loans.............
5,458,676
Total ...............................
$13,388,626
497,104
$4,547,692
1,364,755
$1,978,283
873,822
$2,097,332
1,674,029
$2,635,063
1,044,671
$2,077,420
Thereafter
48,541
$
4,295
52,836
$
Unadvanced line of credit commitments accounted for 59% of total unadvanced loan commitments as of May 31, 2020,
while unadvanced long-term loan commitments accounted for 41% of total unadvanced loan commitments. Unadvanced
line of credit commitments are typically revolving facilities for periods not to exceed five years and generally serve as
supplemental back-up liquidity to our borrowers. Historically, borrowers have not drawn the full commitment amount for
line of credit facilities, and we have experienced a very low utilization rate on line of credit loan facilities regardless of
whether or not we are obligated to fund the facility where a material adverse change exists.
Our unadvanced long-term loan commitments generally have a five-year draw period under which a borrower may advance
funds prior to the expiration of the commitment. We expect that the majority of the long-term unadvanced loan
commitments of $5,459 million will be advanced prior to the expiration of the commitment.
Because we historically have experienced a very low utilization rate on line of credit loan facilities, which account for the
majority of our total unadvanced loan commitments, we believe the unadvanced loan commitment total of $13,389 million
as of May 31, 2020 is not necessarily representative of our future funding requirements.
54
Unadvanced Loan Commitments—Conditional
The majority of our line of credit commitments and all of our unadvanced long-term loan commitments include material
adverse change clauses. Unadvanced loan commitments subject to material adverse change clauses totaled $10,532 million
and $10,294 million as of May 31, 2020 and 2019, respectively, and accounted for 79% and 78% of the combined total of
unadvanced line of credit and long-term loan commitments as of May 31, 2020 and 2019, respectively. Prior to making
advances on these facilities, we confirm that there has been no material adverse change in the borrower’s business or
condition, financial or otherwise, since the time the loan was approved and confirm that the borrower is currently in
compliance with loan terms and conditions. In some cases, the borrower’s access to the full amount of the facility is further
constrained by use of proceeds restrictions, imposition of borrower-specific restrictions, or by additional conditions that
must be met prior to advancing funds. Since we generally do not charge a fee for the borrower to have an unadvanced
amount on a loan facility that is subject to a material adverse change clause, our borrowers tend to request amounts in excess
of their immediate estimated loan requirements.
Unadvanced Loan Commitments—Unconditional
Unadvanced loan commitments not subject to material adverse change clauses at the time of each advance consisted of
unadvanced committed lines of credit totaling $2,857 million and $2,944 million as of May 31, 2020 and 2019, respectively.
For contracts not subject to a material adverse change clause, we are generally required to advance amounts on the
committed facilities as long as the borrower is in compliance with the terms and conditions of the facility.
Syndicated loan facilities, where the pricing is set at a spread over a market index rate as agreed upon by all of the
participating financial institutions based on market conditions at the time of syndication, accounted for 90% of
unconditional line of credit commitments as of May 31, 2020. The remaining 10% represented unconditional committed line
of credit loans, which under any new advance would be made at rates determined by us.
Table 20 presents the maturities for each of the next five fiscal years of the notional amount of unconditional committed
lines of credit not subject to a material adverse change clause as of May 31, 2020.
Table 20: Maturities of Notional Amount of Unconditional Committed Lines of Credit
(Dollars in thousands)
Committed lines of credit ....
$
Available
Balance
2,857,029
Notional Maturities of Unconditional Committed Lines of Credit
2021
$ 115,815
2022
$ 194,105
2023
$ 970,366
2024
$ 698,396
$
2025
878,347
RISK MANAGEMENT
Overview
We face a variety of risks that can significantly affect our financial performance, liquidity, reputation and ability to meet the
expectations of our members, investors and other stakeholders. As a financial services company, the major categories of risk
exposures inherent in our business activities include credit risk, liquidity risk, market risk and operational risk. These risk
categories are summarized below.
• Credit risk is the risk that a borrower or other counterparty will be unable to meet its obligations in accordance with
agreed-upon terms.
• Liquidity risk is the risk that we will be unable to fund our operations and meet our contractual obligations or that we
will be unable to fund new loans to borrowers at a reasonable cost and tenor in a timely manner.
55
• Market risk is the risk that changes in market variables, such as movements in interest rates, may adversely affect the
match between the timing of the contractual maturities, re-pricing and prepayments of our financial assets and the related
financial liabilities funding those assets.
• Operational risk is the risk of loss resulting from inadequate or failed internal controls, processes, systems, human error
or external events, including natural disasters or public health emergencies, such as the current COVID-19 global
pandemic. Operational risk also includes compliance risk, fiduciary risk, reputational risk and litigation risk.
Effective risk management is critical to our overall operations and to achieving our primary objective of providing cost-
based financial products to our rural electric members while maintaining the sound financial results required for investment-
grade credit ratings on our rated debt instruments. Accordingly, we have a risk-management framework that is intended to
govern the principal risks we face in conducting our business and the aggregate amount of risk we are willing to accept,
referred to as risk appetite, in the context of CFC’s mission and strategic objectives and initiatives.
Risk-Management Framework
Our risk-management framework consists of defined policies, procedures and risk tolerances that are intended to align with
CFC’s mission. The CFC Board of Directors is responsible for risk governance by approving the enterprise risk-
management framework and providing oversight on risk policies, risk appetite and our performance against established
goals. In fulfilling its risk governance responsibility, the CFC Board of Directors receives periodic reports on business
activities from management. The CFC Board of Directors reviews CFC’s risk profile and management’s assessment of those
risks throughout the year at its periodic meetings. The board also 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. For additional information about the role of the CFC Board of Directors in risk governance
and oversight, see “Item 10. Directors, Executive Officers and Corporate Governance.”
Management is responsible for execution of the risk-management framework, risk policy formation and daily management
of the risks associated with our business. Management executes its responsibility by establishing processes for identifying,
measuring, assessing, managing, monitoring and reporting risks. Management and operating groups maintain policies and
procedures, specific to each major risk category, to identify and measure our primary risk exposures at the transaction,
obligor and portfolio levels and ensure that our exposures remain within prescribed limits. Management also is responsible
for establishing and maintaining internal controls to mitigate key risks. We have a number of management-level risk
oversight committees across the organization and groups within the organization that have a defined set of authorities and
responsibilities specific to one or more risk types, including the Corporate Credit Committee, Credit Risk Management
group, Treasury group, Asset Liability Committee, Investment Management Committee, Corporate Compliance, Internal
Audit group and Disclosure Committee. These risk oversight committees and groups collectively help management facilitate
enterprise-wide understanding and monitoring of CFC’s risk profile and the control processes with respect to our inherent
risks. Management and the risk oversight committees periodically report actual results, significant current and emerging
risks, initiatives and risk-management concerns to the CFC Board of Directors.
CREDIT RISK
Our loan portfolio, which represents the largest component of assets on our balance sheet, and guarantees account for the
substantial majority of our credit risk exposure. We also engage in certain non-lending activities that may give rise to credit
and counterparty settlement risk, including the purchase of investment securities and entering into derivative transactions to
manage interest rate risk. Our primary credit exposure is to rural electric cooperatives that provide essential electric services
to end-users, the majority of which are residential customers. We also have a limited portfolio of loans to not-for-profit and
for-profit telecommunication companies.
Credit Risk Management
We manage portfolio and borrower credit risk consistent with credit policies established by the CFC Board of Directors and
through credit underwriting, approval and monitoring processes and practices adopted by management. Our board-
established credit policies include guidelines regarding the types of credit products we offer, limits on credit we extend to
individual borrowers, approval authorities delegated to management, and use of syndications and loan sales. We maintain an
56
internal risk rating system in which we assign a rating to each borrower and credit facility. We review and update the risk
ratings at least annually. Assigned risk ratings inform our credit approval, borrower monitoring and portfolio review
processes. Our Corporate Credit Committee approves individual credit actions within its own authority and together with
our Credit Risk Management group, establishes standards for credit underwriting, oversees credits deemed to be higher risk,
reviews assigned risk ratings for accuracy, and monitors the overall credit quality and performance statistics of our loan
portfolio.
Loan Portfolio Credit Risk
As a tax-exempt, member-owned finance cooperative, CFC’s principal focus is to provide funding to its rural electric utility
cooperative members to assist them in acquiring, constructing and operating electric distribution, power supply systems and
related facilities. Loans outstanding to electric utility organizations represented approximately 99% of total loans
outstanding as of May 31, 2020, unchanged from May 31, 2019. Because we lend primarily to our rural electric utility
cooperative members, we have had a loan portfolio subject to single-industry and single-obligor concentration risks since
our inception in 1969. We historically, however, have experienced limited defaults and losses in our electric utility loan
portfolio due to several factors. First, the majority of our electric cooperative borrowers operate in states where electric
cooperatives are not subject to rate regulation. Thus, they are able to make rate adjustments to pass along increased costs to
the end customer without first obtaining state regulatory approval, allowing them to cover operating costs and generate
sufficient earnings and cash flows to service their debt obligations. Second, electric cooperatives face limited competition,
as they tend to operate in exclusive territories not serviced by public investor-owned utilities. Third, electric cooperatives
typically are consumer-owned, not-for-profit entities that provide an essential service to end-users, the majority of which are
residential customers. Fourth, electric cooperatives tend to adhere to a conservative business strategy model that has
historically resulted in a relatively stable, resilient operating environment and overall strong financial performance and
credit strength for the electric cooperative network. Finally, we generally lend to our members on a senior secured basis,
which reduces the risk of loss in the event of a borrower default. Below we provide information on the credit risk profile of
our loan portfolio, including security provisions, credit concentration, credit quality and our allowance for loan losses.
Security Provisions
Except when providing line of credit loans, we generally lend to our members on a senior secured basis. Long-term loans
are generally secured on parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower
with exceptions typical in utility mortgages. Line of credit loans are generally unsecured. In addition to the collateral
pledged to secure our loans, distribution and power supply borrowers also are required to set rates charged to customers to
achieve certain specified financial ratios.
Table 21 presents, by loan type and by company, the amount and percentage of secured and unsecured loans in our loan
portfolio as of May 31, 2020 and 2019. As indicated in Table 21, secured loans and unsecured loans represented 94% and
6%, respectively, of total loans outstanding as of May 31, 2020. In comparison, secured loans and unsecured loans
represented 92% and 8%, respectively, of total loans outstanding as of May 31, 2019.
57
Table 21: Loan Portfolio Security Profile
(Dollars in thousands)
Loan type:
Long-term loans:
Secured
% of Total
Unsecured
% of Total
Total
May 31, 2020
Long-term fixed-rate loans..................
Long-term variable-rate loans .............
Total long-term loans.............................
Line of credit loans................................
Total loans outstanding(1).......................
$ 24,137,145
650,192
24,787,337
191,268
$ 24,978,605
99% $
334,858
1% $ 24,472,003
99
99
12
94
5,512
340,370
1,371,879
$ 1,712,249
1
1
88
6
655,704
25,127,707
1,563,147
$ 26,690,854
Company:
CFC........................................................
NCSC.....................................................
RTFC .....................................................
Total loans outstanding(1) .......................
$ 23,977,438
638,488
362,679
$ 24,978,605
94% $ 1,630,219
59,374
91
22,656
94
$ 1,712,249
94
May 31, 2019
6% $ 25,607,657
697,862
9
385,335
6
$ 26,690,854
6
(Dollars in thousands)
Loan type:
Long-term loans:
Secured
% of Total
Unsecured
% of Total
Total
Long-term fixed-rate loans..................
Long-term variable-rate loans .............
Total long-term loans.............................
Line of credit loans................................
Total loans outstanding..........................
$ 22,674,330
1,058,434
23,732,764
121,741
$ 23,854,505
98% $
99
98
7
92
419,923
8,446
428,369
1,622,790
$ 2,051,159
2% $ 23,094,253
1,066,880
1
24,161,133
2
1,744,531
93
$ 25,905,664
8
Company:
CFC........................................................
NCSC.....................................................
RTFC .....................................................
Total loans outstanding..........................
____________________________
$ 22,861,414
664,618
328,473
$ 23,854,505
92% $ 1,956,262
78,270
89
16,627
95
$ 2,051,159
92
8% $ 24,817,676
742,888
11
345,100
5
$ 25,905,664
8
(1)
Represents the unpaid principal amount of loans as of the end of each period presented. Excludes deferred loan origination costs of $11 million as of both
May 31, 2020 and 2019.
As part of our strategy in managing our credit risk exposure, we entered into a long-term standby purchase commitment
agreement with Farmer Mac in fiscal year 2016. Under this agreement, we may designate certain loans to be covered under
the commitment, as approved by Farmer Mac, and in the event any such loan later goes into payment default for at least 90
days, upon request by us, Farmer Mac must purchase such loan at par value. The outstanding principal balance of loans
covered under this agreement totaled $569 million as of May 31, 2020, compared with $619 million as of May 31, 2019. No
loans have been put to Farmer Mac for purchase pursuant to this agreement. Our credit exposure is also mitigated by long-
term loans guaranteed by RUS. Guaranteed RUS loans totaled $147 million and $154 million as of May 31, 2020 and 2019,
respectively.
58
Credit Concentration
Concentrations may exist when there are amounts loaned to borrowers engaged in similar activities or in geographic areas
that would cause them to be similarly impacted by economic or other conditions or when there are large exposures to single
borrowers. As discussed above under “Credit Risk—Loan Portfolio Credit Risk,” loans outstanding to electric utility
organizations represented approximately 99% of total loans outstanding as of May 31, 2020, unchanged from May 31, 2019.
Geographic Concentration
Although our organizational structure and mission results in single-industry concentration, we serve a geographically
diverse group of electric and telecommunications members throughout the United States, with a total of 889 borrowers
located in 49 states as of May 31, 2020. Texas had the largest concentration of outstanding loans to borrowers in any one
state, accounting for approximately 16% and 15% of total loans outstanding as of May 31, 2020 and 2019, respectively.
Texas also had the largest concentration of borrowers, with 67 and 70 borrowers as of May 31, 2020 and 2019, respectively.
In addition to having the highest number of borrowers, Texas also had the highest number of electric power supply
borrowers. Of our 59 electric power supply borrowers as of May 31, 2020, eight were located in Texas. Electric power
supply borrowers generally require significantly more capital than electric distribution and telecommunications borrowers.
Table 22 presents the number of CFC, NCSC and RTFC borrowers and the percentage of total loans outstanding by state or
U.S. territory as of May 31, 2020 and 2019.
59
Table 22: Loan Geographic Concentration
U.S. State/Territory
Texas ...................................
Colorado..............................
Missouri ..............................
Georgia................................
Kansas .................................
Florida .................................
Alaska..................................
Illinois .................................
North Carolina.....................
North Dakota.......................
Indiana.................................
Oklahoma ............................
South Carolina.....................
Kentucky .............................
Minnesota............................
Iowa.....................................
Arkansas..............................
Alabama ..............................
Ohio.....................................
Pennsylvania .......................
Wisconsin............................
Maryland .............................
Mississippi ..........................
Oregon.................................
Virginia................................
Washington..........................
Wyoming.............................
Utah .....................................
Michigan .............................
Nevada ................................
Louisiana .............................
Arizona................................
Montana ..............................
Tennessee ............................
South Dakota.......................
Idaho....................................
Hawaii .................................
Delaware .............................
New Hampshire...................
New Mexico ........................
Massachusetts......................
New York ............................
Vermont...............................
California ............................
Nebraska..............................
New Jersey ..........................
West Virginia.......................
Maine ..................................
Rhode Island .......................
Total.....................................
May 31,
2020
2019
Number of
Borrowers
% of Total
Loans
Outstanding
Number of
Borrowers
% of Total
Loans
Outstanding
70
23
45
47
31
17
16
28
28
17
38
27
23
23
50
35
19
23
28
16
23
2
19
20
15
10
11
6
12
8
10
11
25
17
31
12
2
3
1
15
1
6
6
4
13
1
2
2
1
893
15.31%
5.46
5.57
5.53
4.55
4.31
3.70
3.53
3.16
3.26
2.88
2.85
3.11
2.85
2.67
2.24
2.40
2.22
2.29
1.96
1.88
1.72
1.64
1.38
1.19
1.30
1.16
1.17
0.88
0.97
0.96
0.80
0.80
0.57
0.78
0.49
0.46
0.44
0.33
0.24
0.23
0.13
0.20
0.14
0.12
0.07
0.05
0.03
0.02
100.00%
67
26
45
45
31
18
16
32
28
15
39
26
21
23
48
34
20
22
27
16
24
2
20
19
18
10
11
5
12
8
10
11
25
17
29
11
2
3
1
14
1
9
5
4
12
2
2
2
1
889
15.82%
5.89
5.42
5.18
4.40
4.15
3.55
3.51
3.42
3.22
3.11
3.08
2.93
2.81
2.50
2.37
2.32
2.29
2.27
1.92
1.89
1.64
1.50
1.33
1.23
1.22
1.22
1.10
1.00
0.94
0.92
0.82
0.75
0.73
0.72
0.46
0.40
0.40
0.30
0.23
0.23
0.21
0.20
0.13
0.11
0.07
0.04
0.03
0.02
100.00%
60
Single-Obligor Concentration
Table 23 displays the outstanding loan exposure for our 20 largest borrowers, by company, as of May 31, 2020 and 2019.
The 20 largest borrowers consisted of 11 distribution systems and 9 power supply systems as of May 31, 2020. The 20
largest borrowers consisted of 10 distribution systems, nine power supply systems and one NCSC associate as of May 31,
2019. The largest total exposure to a single borrower or controlled group represented approximately 2% of total loans
outstanding as of both May 31, 2020 and 2019.
Table 23: Loan Exposure to 20 Largest Borrowers
(Dollars in thousands)
Amount
% of Total
Amount
% of Total
Change
May 31,
2020
2019
By company:
CFC ..........................................................................
NCSC .......................................................................
Total loan exposure to 20 largest borrowers ............
Less: Loans covered under Farmer Mac standby
purchase commitment....................................
Net loan exposure to 20 largest borrowers...............
Credit Quality
$5,661,540
215,595
5,877,135
21% $5,369,879
1
245,559
22
5,615,438
21% $ 291,661
(29,964)
261,697
22
1
(313,644)
$5,563,491
(360,012)
(1)
21% $5,255,426
46,368
(1)
21% $ 308,065
Assessing the overall credit quality of our loan portfolio and measuring our credit risk is an ongoing process that involves
tracking payment status, the internal risk ratings of our borrowers, troubled debt restructurings, nonperforming and impaired
loans, charge-offs and other indicators of credit risk. We monitor and subject each borrower and loan facility in our loan
portfolio to an individual risk assessment based on quantitative and qualitative factors. Internal risk ratings and payment
status trends are indicators, among others, of the probability of borrower default and level of credit risk in our loan portfolio.
The overall credit quality of our loan portfolio remained high, as evidenced by our strong credit performance metrics,
including low levels of criticized exposure. We had no delinquent loans or charge-offs during and as of the fiscal year ended
May 31, 2020. Moreover, we have not experienced any loan defaults or charge-offs since we recorded a charge-off
attributable to a telecommunications borrower in fiscal year 2017, and we have not experienced any defaults or charge-offs
in our electric utility loan portfolio since fiscal year 2013. We had one loan to a CFC power supply borrower of $168 million
that was classified as nonperforming and designated as impaired as of May 31, 2020. We provide information on this loan
below under “Nonperforming Loans” and “Allowance for Loan Losses.” We did not have any loans classified as
nonperforming as of May 31, 2019.
Borrower Risk Ratings
Our borrower risk ratings are intended to align with the interagency banking regulatory guidance on the framework for
credit risk ratings and the definitions for the classification of credit exposures as pass or criticized. Pass ratings indicate
relatively low probability of default, while criticized ratings, which consist of the categories special mention, substandard
and doubtful, indicate higher probability of default. Loans outstanding with borrowers classified as criticized totaled $371
million, or 1.39%, of total loans outstanding as of May 31, 2020. Of this amount, $170 million was classified as substandard
and $168 million was classified as doubtful. The $168 million classified as doubtful represents the loan to the CFC power
supply borrower discussed below under “Nonperforming Loans.” In comparison, loans outstanding with borrowers
classified as criticized totaled $202 million, or 0.78%, of total loans outstanding as of May 31, 2019. Of this amount, $176
million was classified as substandard. We did not have any loans classified as doubtful as of May 31, 2019. See “Note 4—
Loans” for additional information on the classification of our loans by borrower risk ratings.
61
Troubled Debt Restructurings
We actively monitor problem loans and, from time to time, attempt to work with borrowers to manage such exposures
through loan workouts or modifications that better align with the borrower’s current ability to pay. A loan restructuring or
modification of terms is accounted for as a troubled debt restructuring (“TDR”) if, for economic or legal reasons related to
the borrower’s financial difficulties, a concession is granted to the borrower that we would not otherwise consider. TDR
loans generally are initially placed on nonaccrual status, although in many cases such loans were already on nonaccrual
status prior to modification. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed
against earnings. These loans may be returned to performing status and the accrual of interest resumed if the borrower
performs under the modified terms for an extended period of time, and we expect the borrower to continue to perform in
accordance with the modified terms. In certain limited circumstances in which a TDR loan is current at the modification
date, the loan may remain on accrual status at the time of modification.
Table 24 presents the carrying amount of loans modified as TDRs and the performance status as of the end of each of the
last five fiscal years. Our last modification of a loan that met the definition of a TDR occurred in fiscal year 2017. Although
TDR loans may be returned to performing status if the borrower performs under the modified terms of the loan for an
extended period of time, TDR loans are considered individually impaired.
Table 24: Troubled Debt Restructured Loans
2020
2019
May 31,
2018
2017
2016
Carrying
Amount
% of
Total
Loans
Carrying
Amount
% of
Total
Loans
Carrying
Amount
% of
Total
Loans
Carrying
Amount
% of
Total
Loans
Carrying
Amount
% of
Total
Loans
(Dollars in
thousands)
TDR loans:
CFC ....................
$ 5,755
0.02% $ 6,261
0.03% $ 6,507
0.03% $ 6,581
0.02% $ 6,716
RTFC ..................
Total TDR loans .
5,092
$10,847
0.02
5,592
0.04% $11,853
0.02
6,092
0.05% $12,599
0.02
6,592
0.05% $13,173
0.03
10,598
0.05% $ 17,314
0.03%
0.04
0.07%
Performance
status of TDR
loans:
Performing TDR
loans..................
Nonperforming
TDR loans.........
Total TDR loans .
$10,847
0.04% $11,853
0.05% $12,599
0.05% $13,173
0.05% $ 13,808
0.06%
—
$10,847
—
—
0.04% $11,853
—
—
0.05% $12,599
—
—
0.05% $13,173
—
3,506
0.05% $ 17,314
0.01%
0.07%
Both CFC’s and RTFC’s reported TDR loan amount as of May 31, 2020 and 2019, represents a restructured loan to one
borrower. During fiscal year 2020, we amended the TDR loan agreement for the RTFC borrower to extend the maturity by
two years. The amended RTFC loan currently remains on accrual status and will continue to amortize monthly through the
maturity date of the loan. As indicated in Table 24 above, we did not have any TDR loans classified as nonperforming as of
May 31, 2020 or 2019.
Nonperforming Loans
In addition to TDR loans that may be classified as nonperforming, we also may have nonperforming loans that have not
been modified as a TDR loan. We classify such loans as nonperforming at the earlier of the date when we determine:
(i) interest or principal payments on the loan is past due 90 days or more; (ii) as a result of court proceedings, the collection
of interest or principal payments based on the original contractual terms is not expected; or (iii) the full and timely collection
of interest or principal is otherwise uncertain. Once a loan is classified as nonperforming, we generally place the loan on
nonaccrual status. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against
earnings.
62
We had one loan to a CFC power supply borrower with an outstanding balance of $168 million as of May 31, 2020, which
we classified as nonperforming and designated as impaired as of May 31, 2020. As discussed above under “Borrower Risk
Ratings,” we also classified the loan as doubtful. Under the terms of the loan, which matures in December 2026, the amount
the borrower is required to pay in 2024 and 2025 may vary as the payments are contingent on the borrower’s financial
performance in those years. As of May 31, 2020, the borrower was current with respect to required payments on the loan
and not in default. However, based on our review and assessment of the most recent forecast and underlying assumptions
provided by the borrower in May 2020, we no longer believe that the total future expected cash payments from the borrower
through the maturity of the loan in December 2026 will be sufficient to repay the outstanding loan balance of $168 million
as of May 31, 2020. We therefore determined that it was appropriate to classify the loan as nonperforming and place it on
nonaccrual status as of May 31, 2020. We did not have any loans classified as nonperforming as of May 31, 2019.
Net Charge-Offs
Charge-offs represent the amount of a loan that has been removed from our consolidated balance sheet when the loan is
deemed uncollectible. Generally the amount of a charge-off is the recorded investment in excess of the fair value of the
expected cash flows from the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral securing
the loan. We report charge-offs net of amounts recovered on previously charged off loans. Table 25 presents charge-offs, net
of recoveries, and the net charge-off rate for each of the last five fiscal years.
Table 25: Net Charge-Offs (Recoveries)
(Dollars in thousands)
Charge-offs:
2020
2019
2018
2017
2016
Year Ended May 31,
RTFC.............................................
$
— $
— $
— $
2,119
$
—
Recoveries:
CFC...............................................
RTFC.............................................
Total recoveries ...............................
Net charge-offs (recoveries)............
$
—
—
—
— $
—
—
—
— $
—
—
—
— $
(159)
(100)
(259)
1,860
$
(214)
—
(214)
(214)
Average total loans outstanding ......
$ 26,517,677
$ 25,527,172
$24,911,559
$ 23,834,432
$22,490,847
Net charge-off rate(1) .......................
____________________________
0.00%
0.00%
0.00%
0.01%
0.00 %
(1)
Calculated based on net charge-offs (recoveries) for the period divided by average total outstanding loans for the period.
We had no loan defaults or charge-offs during fiscal years 2020 or 2019. The gross charge-offs of $2 million over the last
five fiscal years were all attributable to our RTFC telecommunications loan portfolio. We now have experienced an extended
period of seven consecutive fiscal years for which we have had no charge-offs in our electric utility loan portfolio.
63
Historical Loan Losses
In its 51-year history, CFC has experienced only 16 defaults, of which 10 resulted in no loss and six resulted in cumulative
historical net charge-offs of $86 million for our electric utility loan portfolio. Of this amount, $67 million was attributable to
electric utility power supply cooperatives and $19 million was attributable to electric distribution cooperatives. We discuss
the reasons loans to electric utility cooperatives, our principal lending market, typically have a relatively low risk of default
above under “Credit Risk—Loan Portfolio Credit Risk.”
In comparison, since RTFC’s inception in 1987, we have experienced 15 defaults and cumulative net charge-offs attributable
to telecommunication borrowers totaling $427 million, the most significant of which was a charge-off of $354 million in
fiscal year 2011. This charge-off related to outstanding loans to Innovative Communications Corporation (“ICC”), a former
RTFC member, and the transfer of ICC’s assets in foreclosure to Caribbean Asset Holdings, LLC.
Loans outstanding to electric utility organizations totaled $26,306 million and accounted for 99% of total loans outstanding
as of May 31, 2020, while outstanding RTFC telecommunications loans totaled $385 million and accounted for 1% of total
loans outstanding as of May 31, 2020. In comparison, loans outstanding to electric utility organizations totaled $25,561
million and accounted for 99% of total loans outstanding as of May 31, 2019, while outstanding RTFC telecommunications
loans totaled $345 million and accounted for 1% of total loans outstanding as of May 31, 2019.
We provide additional information on the credit quality of our loan portfolio in “Note 4—Loans.”
Allowance for Loan Losses
The allowance for loan losses, which consists of a collective allowance for loans in our portfolio that are not considered
individually impaired and an asset-specific allowance for loans identified as individually impaired, represents management’s
estimate of probable losses inherent in our loan portfolio as of each balance sheet date. Table 26 summarizes changes in the
allowance for loan losses during each fiscal year for the five-year period ended May 31, 2020, and a comparison of the
allowance by company as of the end of each fiscal year.
64
Table 26: Allowance for Loan Losses
(Dollars in thousands)
Beginning balance ..................................
Provision (benefit) for loan losses ......
Net (charge-offs) recoveries................
Ending balance........................................
Allowance for loan losses by company:
CFC .....................................................
NCSC ..................................................
RTFC...................................................
Total ........................................................
Allowance components:
Collective allowance ...........................
Asset-specific allowance.....................
Total ........................................................
Loans outstanding:
Collectively evaluated loans ...............
Individually evaluated loans ...............
Total loans outstanding(1) ........................
Allowance coverage ratios:
Collective allowance coverage ratio.......
Asset-specific allowance coverage ratio.
Total allowance coverage ratio ...............
Percentage of total nonperforming loans
outstanding ..........................................
Percentage of total performing TDR
loans outstanding.................................
Percentage of total nonperforming TDR
loans outstanding.................................
Percentage of nonaccrual loans ..............
___________________________
2020
17,535
35,590
—
53,125
47,438
806
4,881
53,125
18,292
34,833
53,125
$
$
$
$
$
$
Year Ended May 31,
2019
18,801
(1,266)
—
17,535
13,120
2,007
2,408
17,535
16,514
1,021
17,535
$
$
$
$
$
$
2018
37,376
(18,575)
—
18,801
12,300
2,082
4,419
18,801
17,603
1,198
18,801
$
$
$
$
$
$
$
$
$
$
$
$
2017
2016
33,258
$
5,978
(1,860)
37,376
29,499
2,910
4,967
37,376
35,736
1,640
37,376
$
$
$
$
$
33,690
(646)
214
33,258
24,559
3,134
5,565
33,258
30,158
3,100
33,258
$26,512,298
$25,893,811
$25,154,895
$24,343,157
$23,135,203
178,556
11,853
12,599
13,173
17,314
$26,690,854
$25,905,664
$25,167,494
$24,356,330
$23,152,517
0.07%
19.51
0.20
31.68
0.06%
8.61
0.07
—
0.07%
9.51
0.07
—
0.15%
0.13%
12.45
0.15
—
17.90
0.14
—
489.77
147.94
149.23
283.73
240.86
—
31.68
—
—
—
—
—
—
948.60
948.60
(1)
Represents the unpaid principal amount of loans as of the end of each period presented and excludes unamortized deferred loan origination costs of $11
million as of May 31, 2020, 2019, 2018 and 2017, and $10 million as of May 31, 2016.
The total allowance increased by $35 million to $53 million as of May 31, 2020, from $18 million as of May 31, 2019. The
collective allowance totaled $18 million and $17 million as of May 31, 2020 and 2019, respectively, while the asset-specific
allowance totaled $35 million and $1 million as of each respective date. The total allowance coverage ratio was 0.20% and
0.07% as of May 31, 2020 and 2019, respectively, and the collective allowance coverage ratio was 0.07% and 0.06% as of
each respective date.
The increase in the allowance for loan losses was attributable to the establishment of an asset-specific allowance of $34
million in the fourth quarter of fiscal year 2020 for the loan of $168 million to the CFC power supply borrower discussed
above. Under the terms of the loan, which matures in December 2026, the amount the borrower is required to pay in 2024
and 2025 may vary as the payments are contingent on the borrower’s financial performance in those years. As of May 31,
2020, the borrower was current with respect to required payments on the loan and not in default. However, based on our
65
review and assessment of the most recent forecast and underlying assumptions provided by the borrower in May 2020, we
no longer believe that the total future expected cash payments from the borrower through the maturity of the loan in
December 2026 will be sufficient to repay the outstanding loan balance of $168 million as of May 31, 2020. We therefore
determined that it was appropriate to classify the loan as nonperforming, place it on nonaccrual status, individually evaluate
the loan for impairment and establish an asset-specific allowance based on the estimated impairment as of May 31, 2020.
The estimated impairment amount is subject to change based on our assessment of forecast updates provided by the
borrower and the actual future financial performance of the borrower.
See “Critical Accounting Policies and Estimates—Allowance for Loan Losses” above and “Note 1—Summary of
Significant Accounting Policies” for information on the methodology for determining our allowance for loan losses and key
inputs and assumptions and “Note 5—Allowance for Loan Losses” for additional information on our allowance for loan
losses.
Counterparty Credit Risk
We are exposed to counterparty credit risk related to the performance of the parties with which we enter into financial
transactions, primarily for derivative instruments, cash and time deposit accounts and our investment security holdings. To
mitigate this risk, we only enter into these transactions with financial institutions with investment-grade ratings. Our cash
and time deposits with financial institutions generally have an original maturity of less than one year.
We manage our derivative counterparty credit risk by monitoring the overall credit worthiness of each counterparty based on
our internal counterparty credit risk scoring model; using counterparty-specific credit risk limits; executing master netting
arrangements; and diversifying our derivative transactions among multiple counterparties. We also require that our
derivative counterparties be a participant in one of our committed bank revolving line of credit agreements. Our active
derivative counterparties had credit ratings ranging from Aa2 to Baa2 by Moody’s and from AA- to BBB+ by S&P as of
May 31, 2020. Our largest counterparty exposure, based on the outstanding notional amount, represented approximately
25% and 23% of the total outstanding notional amount of derivatives as of May 31, 2020 and 2019, respectively.
Credit Risk-Related Contingent Features
Our derivative contracts typically contain mutual early-termination provisions, generally in the form of a credit rating
trigger. Under the mutual credit rating trigger provisions, either counterparty may, but is not obligated to, terminate and
settle the agreement if the credit rating of the other counterparty falls below a level specified in the agreement. If a
derivative contract is terminated, the amount to be received or paid by us would be equal to the prevailing fair value, as
defined in the agreement, as of the termination date.
Our senior unsecured credit ratings from Moody’s and S&P were A2 and A, respectively, as of May 31, 2020. Both Moody’s
and S&P had our ratings on stable outlook as of May 31, 2020. Table 27 displays the notional amounts of our derivative
contracts with rating triggers as of May 31, 2020, and the payments that would be required if the contracts were terminated
as of that date because of a downgrade of our unsecured credit ratings or the counterparty’s unsecured credit ratings below
A3/A-, below Baa1/BBB+, to or below Baa2/BBB, below Baa3/BBB- or to or below Ba2/BB+ by Moody’s or S&P,
respectively. In calculating the payment amounts that would be required upon termination of the derivative contracts, we
assumed that the amounts for each counterparty would be netted in accordance with the provisions of the counterparty’s
master netting agreements. The net payment amounts are based on the fair value of the underlying derivative instrument,
excluding the credit risk valuation adjustment, plus any unpaid accrued interest amounts.
66
Table 27: Rating Triggers for Derivatives
(Dollars in thousands)
Impact of rating downgrade trigger:
Notional Amount
Payable Due
From CFC
Receivable
Due to CFC
Net (Payable)/
Receivable
Falls below A3/A-(1)..................................
Falls below Baa1/BBB+ ...........................
Falls to or below Baa2/BBB (2) .................
Falls below Baa3/BBB- ............................
Total ...........................................................
$
$
45,860
6,091,198
421,303
45,280
6,603,641
$
$
(11,305) $
(692,210)
(33,958)
(15,677)
(753,150) $
— $
—
—
—
— $
(11,305)
(692,210)
(33,958)
(15,677)
(753,150)
___________________________
(1)
(2)
Rating trigger for CFC falls below A3/A-, while rating trigger for counterparty falls below Baa1/BBB+ by Moody’s or S&P, respectively.
Rating trigger for CFC falls to or below Baa2/BBB, while rating trigger for counterparty falls to or below Ba2/BB+ by Moody’s or S&P, respectively.
We have an outstanding notional amount of derivatives with one counterparty subject to a ratings trigger and early
termination provision in the event of a downgrade of CFC’s senior unsecured credit ratings below Baa3, BBB- or BBB- by
Moody’s, S&P or Fitch, respectively, which is not included in the above table, totaling $166 million as of May 31, 2020.
These contracts were in an unrealized loss position of $62 million as of May 31, 2020.
The aggregate fair value amount, including the credit valuation adjustment, of all interest rate swaps with rating triggers that
were in a net liability position was $798 million as of May 31, 2020. There were no counterparties that fell below the rating
trigger levels in our interest swap contracts as of May 31, 2020. If a counterparty has a credit rating that falls below the
rating trigger level specified in the interest swap contract, we have the option to terminate all derivatives with the
counterparty. However, we generally do not terminate such agreements prematurely because our interest rate swaps are
critical to our matched funding strategy to mitigate interest rate risk.
See “Item 1A. Risk Factors” for additional information about credit risk related to our business.
LIQUIDITY RISK
We define liquidity as the ability to convert assets into cash quickly and efficiently, maintain access to readily available
funding and to roll-over or issue new debt under normal operating conditions and periods of CFC-specific and/or market
stress, to ensure that we can meet borrower loan requests, pay current and future obligations and fund our operations on a
cost-effective basis. Our primary sources of liquidity include cash flows from operations, member loan repayments,
committed bank revolving lines of credit, committed loan facilities under the Guaranteed Underwriter Program, revolving
note purchase agreements with Farmer Mac and our ability to issue debt in the capital markets, to our members and in
private placements.
Liquidity Risk Management
Our liquidity risk-management framework is designed to meet our liquidity objectives of providing a reliable source of
funding to members, meet maturing debt and other financial obligations, issue new debt and fund our operations on a cost-
effective basis under normal operating conditions as well as under CFC-specific and/or market stress conditions. We engage
in various activities to manage liquidity risk and achieve our liquidity objectives. Our Asset Liability Committee establishes
guidelines that are intended to ensure that we maintain sufficient, diversified sources of liquidity to cover potential funding
requirements as well as unanticipated contingencies. Our Treasury group develops strategies to manage our targeted
liquidity position, projects our funding needs under various scenarios, including adverse circumstances, and monitors our
liquidity position on an ongoing basis.
Available Liquidity
As part of our strategy in managing liquidity risk and meeting our liquidity objectives, we seek to maintain a substantial
level of on-balance sheet and off-balance sheet sources of liquidity that are readily available for access to meet our near-
term liquidity needs. Table 28 presents the sources of our available liquidity as of May 31, 2020 and 2019.
67
Table 28: Available Liquidity
(Dollars in millions)
Cash and cash equivalents ......................................
Investment securities, excluding equity
securities(1)...........................................................
Committed bank revolving line of credit
agreements—unsecured(2) ...................................
Guaranteed Underwriter Program committed
facilities—secured(3)............................................
Farmer Mac revolving note purchase agreement,
dated March 24, 2011, as amended—secured(4)..
Farmer Mac revolving note purchase agreement,
dated July 31, 2015, as amended—secured(5) .....
Total ........................................................................
____________________________
May 31,
Total
671
$
2020
Accessed
$
— $
Available
671
2019
Total
Accessed
Available
$
178
$
— $
178
309
2,725
—
3
309
—
2,722
2,975
—
3
—
2,972
7,798
6,898
900
7,298
5,948
1,350
5,500
3,060
2,440
5,200
3,055
2,145
—
—
—
300
—
300
$ 17,003
$ 9,961
$
7,042
$ 15,951
$ 9,006
$
6,945
(1)
(2)
(3)
(4)
(5)
Due to our decision in March 2020 to revise our objective for the use of our held-to-maturity investment portfolio from previously serving as a
supplemental source of liquidity to serving as a readily available source of liquidity, we transferred the securities in this portfolio to trading. As such, we
are now including this portfolio of debt securities as part of our available liquidity. Our portfolio of equity securities consists primarily of preferred stock
securities that are not as readily redeemable; therefore, we have excluded this investment portfolio from our sources of liquidity.
The committed bank revolving line of credit agreements consist of a three-year and a five-year line of credit agreement. The accessed amount of $3
million as of both May 31, 2020 and May 31, 2019 relates to letters of credit issued pursuant to the five-year line of credit agreement.
The committed facilities under the Guaranteed Underwriter Program are not revolving.
Availability subject to market conditions.
This Farmer Mac revolving note purchase agreement was terminated effective December 20, 2019.
As discussed above in “Executive Summary—Liquidity,” in light of the extreme volatility and disruptions in the capital and
credit markets in early March 2020 resulting from the COVID-19 crisis, including a significant decline in corporate debt and
equity issuances and a deterioration in the commercial paper market, we took a number of precautionary actions in early
March to enhance our financial flexibility by bolstering our cash position to ensure we have adequate cash readily available
to meet both expected and unexpected cash needs without adversely affecting our daily operations. These actions included,
but were not limited to, drawing additional advances under our committed credit facilities, revising our objective for the use
of our held-to-maturity investment portfolio from previously serving as a supplemental source of liquidity to serving as a
readily available source of liquidity and executing a plan for the orderly liquidation of a portion of debt securities in our
investment portfolio. We borrowed an additional $625 million under the Guaranteed Underwriter Program and $250 million
under the Farmer Mac note purchase agreement. Due largely to the actions undertaken in March, we increased our cash
position to $671 million as of May 31, 2020, up from $178 million as of May 31, 2019.
Subsequent to our cash management actions in early March, the FOMC unveiled a set of aggressive measures to cushion the
economic impact of the global COVID-19 crisis, including, among others, cutting the federal funds rate by 150 basis points
to a range of 0.00% to 0.25% and establishing a series of emergency credit facilities in an effort to support the flow of credit
in the economy, ease liquidity pressure and calm market turmoil. While volatility in the financial markets remains elevated,
overall market liquidity concerns have eased since the actions taken by the FOMC. Our access to funding, however, has not
been interrupted to an extent that the ability to meet our obligations has been compromised. As such, we suspended the plan
for the orderly liquidation of a portion of debt securities in our investment portfolio.
Although we currently believe we have sufficient liquidity from the available on- and off-balance sheet liquidity sources and
our ability to issue debt in the capital markets to meet demand for member loan advances and satisfy our obligations to
repay long-term debt maturing over the next 12 months, we continue to review actions that we may take to further enhance
our financial flexibility in the event that market conditions deteriorate further and for an extended period.
68
Borrowing Capacity Under Current Facilities
Following is a discussion of our borrowing capacity and key terms and conditions under our revolving line of credit
agreements with banks and committed loan facilities under the Guaranteed Underwriter Program and revolving note
purchase agreements with Farmer Mac.
Committed Bank Revolving Line of Credit Agreements—Unsecured
Our committed bank revolving lines of credit may be used for general corporate purposes; however, we generally rely on
them as a backup source of liquidity for our member and dealer commercial paper. We had $2,725 million of commitments
under committed bank revolving line of credit agreements as of May 31, 2020. Under our current committed bank revolving
line of credit agreements, we have the ability to request up to $300 million of letters of credit, which would result in a
reduction in the remaining available amount under the facilities.
On November 28, 2019, we amended the three-year and five-year committed bank revolving line of credit agreements to
extend the maturity date of the three-year agreement to November 28, 2022 and to terminate certain bank commitments
totaling $125 million under the three-year agreement and $125 million under the five-year agreement. The total commitment
amount under the amended three-year and five-year bank revolving line of credit agreements is $1,315 million and $1,410
million, respectively, resulting in a combined total commitment amount under the two facilities of $2,725 million.
Table 29 presents the total commitment, the net amount available for use and the outstanding letters of credit under our
committed bank revolving line of credit agreements as of May 31, 2020. We did not have any outstanding borrowings under
our bank revolving line of credit agreements as of May 31, 2020.
Table 29: Committed Bank Revolving Line of Credit Agreements
(Dollars in millions)
3-year agreement .................
5-year agreement .................
Total .....................................
___________________________
Total
Commitment
1,315
$
1,410
$
2,725
$
May 31, 2020
Letters of
Credit
Outstanding
Net Available
for Advance
Maturity
$
— $
1,315 November 28, 2022
3
3
$
1,407 November 28, 2023
2,722
Annual
Facility Fee (1)
7.5 bps
10 bps
(1)
Facility fee based on CFC’s senior unsecured credit ratings in accordance with the established pricing schedules at the inception of the related agreement.
Our committed bank revolving line of credit agreements do not contain a material adverse change clause or rating triggers
that would limit the banks’ obligations to provide funding under the terms of the agreements; however, we must be in
compliance with the covenants to draw on the facilities. We have been and expect to continue to be in compliance with the
covenants under our committed bank revolving line of credit agreements. As such, we could draw on these facilities to repay
dealer or member commercial paper that cannot be rolled over. See “Financial Ratios” and “Debt Covenants” below for
additional information, including the specific financial ratio requirements under our committed bank revolving line of credit
agreements.
Guaranteed Underwriter Program Committed Facilities—Secured
Under the Guaranteed Underwriter Program, we can borrow from the Federal Financing Bank and use the proceeds to make
new loans and refinance existing indebtedness. As part of the program, we pay fees, based on outstanding borrowings,
supporting the USDA Rural Economic Development Loan and Grant program. The borrowings under this program are
guaranteed by RUS.
On February 13, 2020, we closed on a $500 million committed loan facility (“Series P”) from the Federal Financing Bank
under the Guaranteed Underwriter Program. Pursuant to this facility, we may borrow any time before July 15, 2024. Each
advance is subject to quarterly amortization and a final maturity not longer than 30 years from the date of the advance.
During fiscal year 2020, we borrowed $950 million under our committed loan facilities with the Federal Financing Bank.
69
We had up to $900 million available for access under the Guaranteed Underwriter Program as of May 31, 2020. Of this
amount, $400 million is available for advance through July 15, 2023 and $500 million is available for advance through July
15, 2024.
We are required to pledge eligible distribution system loans or power supply system loans as collateral in an amount at least
equal to the total outstanding borrowings under the Guaranteed Underwriter Program. See “Consolidated Balance Sheet
Analysis—Debt—Collateral Pledged” and “Note 4—Loans” for additional information on pledged collateral.
Farmer Mac Revolving Note Purchase Agreements—Secured
As indicated in Table 28, we had one revolving note purchase agreement with Farmer Mac, which allowed us to borrow up
to $5,500 million from Farmer Mac. Under this revolving note purchase agreement dated March 24, 2011, as amended, we
can borrow up to $5,500 million as of May 31, 2020, at any time, subject to market conditions, through January 11, 2022.
This date automatically extends on each anniversary date of the closing for an additional year, unless prior to any such
anniversary date, Farmer Mac provides us with a notice that the draw period will not be extended beyond the remaining
term. Pursuant to this revolving note purchase agreement, we can borrow, repay and re-borrow funds at any time through
maturity, as market conditions permit, provided that the outstanding principal amount at any time does not exceed the total
available under the agreement. We had outstanding secured notes payable totaling $3,060 million and $3,055 million as of
May 31, 2020 and 2019, respectively, under this Farmer Mac revolving note purchase agreement. We borrowed $250
million under this note purchase agreement with Farmer Mac during the year ended May 31, 2020. The available borrowing
amount totaled $2,440 million as of May 31, 2020.
As of May 31, 2019, we had a second revolving note purchase agreement with Farmer Mac, dated July 31, 2015, as
amended, under which we could borrow up to $300 million at any time through December 20, 2023 at a fixed spread over
LIBOR. This agreement also allowed us to borrow, repay and re-borrow funds at any time through maturity, provided that
the outstanding principal amount at any time does not exceed the total available under the agreement. We had no notes
payable outstanding under this agreement as of May 31, 2019. On December 20, 2019, we terminated the $300 million
revolving note purchase agreement with Farmer Mac. As a result of the termination of this revolving note purchase
agreement, the commitment amount under the $5,200 million revolving note purchase agreement with Farmer Mac
discussed above, increased to $5,500 million, effective December 20, 2019.
Pursuant to the Farmer Mac revolving note purchase agreement, we are required to pledge eligible distribution system or
power supply system loans as collateral in an amount at least equal to the total principal amount of notes outstanding. See
“Consolidated Balance Sheet Analysis—Debt—Collateral Pledged” and “Note 4—Loans” for additional information on
pledged collateral.
Short-Term Borrowings and Long-Term and Subordinated Debt
Additional funding is provided by short-term borrowings and issuances of long-term and subordinated debt. We rely on
short-term borrowings as a source to meet our daily, near-term funding needs. Long-term and subordinated debt represents
the most significant component of our funding. The issuance of long-term debt allows us to reduce our reliance on short-
term borrowings and effectively manage our refinancing and interest rate risk.
Short-Term Borrowings
Our short-term borrowings consist of commercial paper, which we offer to members and dealers, select notes and daily
liquidity fund notes offered to members, and bank-bid notes and medium-term notes offered to members and dealers.
Table 30 displays the composition, by funding source, of our short-term borrowings as of May 31, 2020 and 2019. Member
borrowings accounted for 94% of total short-term borrowings as of May 31, 2020, compared with 74% of total short-term
borrowings as of May 31, 2019.
70
Table 30: Short-Term Borrowings—Funding Sources
(Dollars in thousands)
Funding source:
Members ....................................................................................
Private placement—Farmer Mac notes payable........................
Capital markets..........................................................................
Total ...........................................................................................
May 31,
2020
2019
Outstanding
Amount
% of Total
Short-Term
Borrowings
Outstanding
Amount
% of Total
Short-Term
Borrowings
$ 3,711,985
250,000
—
94% $ 2,663,110
6
—
—
944,616
$ 3,961,985
100% $ 3,607,726
74 %
—
26
100 %
Table 31 displays additional information on our short-term borrowings, including the maximum month-end and average
outstanding amounts, the weighted average interest rate and the weighted average maturity, for each respective category of
our short-term borrowings for fiscal years 2020, 2019 and 2018.
Table 31: Short-Term Borrowings
(Dollars in thousands)
Short-term borrowings:
Commercial paper:
May 31, 2020
Amount
Outstanding
Weighted-
Average
Interest Rate
Weighted-
Average
Maturity
Maximum
Month-End
Outstanding
Amount
Average
Outstanding
Amount
Commercial paper to dealers, net of
discounts....................................................
Commercial paper to members, at par..........
Total commercial paper....................................
Select notes to members ...................................
Daily liquidity fund notes to members.............
Medium-term notes sold to members...............
Farmer Mac revolving facility..........................
Farmer Mac notes payable ...............................
Total short-term borrowings.............................
$
—
1,318,566
1,318,566
1,597,959
508,618
286,842
—
250,000
$ 3,961,985
—%
0.34
0.34
0.75
0.10
1.64
—
1.06
0.62
— $ 2,404,496
1,378,221
3,583,030
1,597,959
511,898
24 days
24 days
46 days
1 day
286,842
150,000
250,000
184 days
—
153 days
50 days
May 31, 2019
$ 1,064,926
1,253,187
2,318,113
1,349,332
446,018
259,531
2,869
50,546
$ 4,426,409
(Dollars in thousands)
Short-term borrowings:
Commercial paper:
Amount
Outstanding
Weighted-
Average
Interest Rate
Weighted-
Average
Maturity
Maximum
Month-End
Outstanding
Amount
Average
Outstanding
Amount
Commercial paper to dealers, net of
discounts....................................................
Commercial paper to members, at par..........
Total commercial paper....................................
Select notes to members ...................................
Daily liquidity fund notes to members.............
Medium-term notes sold to members...............
Farmer Mac revolving facility..........................
Total short-term borrowings.............................
$
944,616
1,111,795
2,056,411
1,023,952
298,817
228,546
—
$ 3,607,726
2.46%
2.52
2.49
2.70
2.25
2.87
—
2.56
7 days
34 days
22 days
48 days
1 day
143 days
—
35 days
$ 2,277,820
1,380,324
3,209,498
1,049,349
572,898
246,676
100,000
$ 1,322,039
1,091,745
2,413,784
907,490
407,964
237,331
3,288
$ 3,969,857
71
(Dollars in thousands)
Short-term borrowings:
Commercial paper:
May 31, 2018
Amount
Outstanding
Weighted-
Average
Interest Rate
Weighted-
Average
Maturity
Maximum
Month-End
Outstanding
Amount
Average
Outstanding
Amount
Commercial paper to dealers, net of
discounts....................................................
Commercial paper to members, at par..........
Total commercial paper....................................
Select notes to members ...................................
Daily liquidity fund notes to members.............
Medium-term notes sold to members...............
Farmer Mac revolving facility..........................
Total short-term borrowings.............................
$ 1,064,266
1,202,105
2,266,371
780,472
400,635
248,432
100,000
$ 3,795,910
1.87%
1.89
1.88
2.04
1.50
1.90
2.23
1.88
14 days
34 days
25 days
44 days
1 day
150 days
61 days
35 days
$ 2,548,147
1,268,515
3,447,274
780,472
866,065
248,432
100,000
$
942,931
1,005,624
1,948,555
727,313
618,705
217,122
548
$ 3,512,243
Our short-term borrowings totaled $3,962 million and accounted for 15% of total debt outstanding as of May 31, 2020,
compared with $3,608 million, or 14%, of total debt outstanding as of May 31, 2019. The weighted-average maturity and
weighted-average cost of our short-term borrowings was 50 days and 0.62%, respectively, as of May 31, 2020, compared
with 35 days and 2.56%, respectively, as of May 31, 2019. We had no outstanding dealer commercial paper as of May 31,
2020, as we experienced an increase in short-term member investments and had additional cash available due to the
borrowings under the Guaranteed Underwriter Program and Farmer Mac note purchase agreement in March 2020. In
comparison, we had outstanding dealer commercial paper totaling $945 million, or 4% of total debt outstanding, that was
issued to dealers as of May 31, 2019. Although the intra-period amount of outstanding dealer commercial paper may
fluctuate based on our liquidity requirements, our intent is to manage our short-term wholesale funding risk by maintaining
outstanding dealer commercial paper at an amount below $1,250 million for the foreseeable future.
Long-Term and Subordinated Debt
Long-term and subordinated debt represents the most significant component of our funding. The issuance of long-term debt
allows us to reduce our reliance on short-term borrowings and effectively manage our refinancing and interest rate risk, due
in part to the multi-year contractual maturity structure of long-term debt. In addition to access to private debt facilities, we
also issue debt in the public capital markets. Pursuant to Rule 405 of the Securities Act, we are classified as a “well-known
seasoned issuer.” Pursuant to our effective shelf registration statements filed with the SEC, we may offer and issue the
following debt securities:
• an unlimited amount of collateral trust bonds until September 2022;
• an unlimited amount of senior and subordinated debt securities, including medium-term notes, member capital securities
and subordinated deferrable debt, until November 2020; and
• daily liquidity fund notes up to $20,000 million in the aggregate—with a $3,000 million limit on the aggregate principal
amount outstanding at any time—until March 2022.
We intend to file a new registration statement registering an unlimited amount of senior and subordinated debt securities,
including medium-term notes, member capital securities and subordinated deferrable debt prior to the expiration of the
existing shelf registration statement in November 2020. Although we register member capital securities and the daily
liquidity fund notes with the SEC, these securities are not available for sale to the general public. Medium-term notes are
available for sale to both the general public and members. Notwithstanding the foregoing, we have contractual limitations
with respect to the amount of senior indebtedness we may incur.
As discussed in “Consolidated Balance Sheet Analysis—Debt,” long-term and subordinated debt totaled $22,038 million
and accounted for 85% of total debt outstanding as of May 31, 2020, compared with $21,554 million, or 86%, of total debt
outstanding as of May 31, 2019. The increase in total debt outstanding, including long-term and subordinated debt, was
primarily due to the issuance of debt to fund loan portfolio growth. Table 32 summarizes long-term and subordinated debt
issuances and repayments during fiscal year 2020.
72
Table 32: Issuances and Repayments of Long-Term and Subordinated Debt(1)
(Dollars in thousands)
Long-term and subordinated debt activity:
Collateral trust bonds .................................................
Guaranteed Underwriter Program notes payable .......
Farmer Mac notes payable .........................................
Medium-term notes sold to members.........................
Medium-term notes sold to dealers ............................
Other notes payable ....................................................
Members’ subordinated certificates............................
Total..............................................................................
___________________________
$
Issuances
Year Ended May 31, 2020
Repayments (2)
Change
$
$
500,000
950,000
—
196,910
517,236
—
$
705,000
99,196
245,277
221,873
392,878
11,064
9,621
2,173,767
$
27,132
1,702,420
$
(205,000)
850,804
(245,277)
(24,963)
124,358
(11,064)
(17,511)
471,347
(1)
(2)
Amounts exclude unamortized debt issuance costs and discounts.
Repayments include principal maturities, scheduled amortization payments, repurchases and redemptions.
We provide additional information on our financing activities above under “Consolidated Balance Sheet Analysis—Debt”
and on the weighted-average interest rates on our long-term debt and subordinated certificates in “Note 7—Long-Term
Debt,” “Note 8—Subordinated Deferrable Debt” and “Note 9—Members’ Subordinated Certificates.”
Investment Portfolio
In addition to our sources of liquidity discussed above, we have an investment portfolio, which totaled $370 million and
$653 million as of May 31, 2020 and 2019, respectively, composed of equity securities and debt securities. Our debt
securities totaled $309 million as of May 31, 2020 and were classified as trading. We recognized unrealized gains on our
consolidated statements of operations of $8 million on our trading investments portfolio. In comparison, debt securities
totaled $565 million as of May 31, 2019 and were classified as held to maturity.
As discussed above during the fourth quarter of fiscal year 2020, management revised its objective for the use of our held-
to-maturity investment portfolio from previously serving as a supplemental source of liquidity to serving as a readily
available source of liquidity and executed a plan for the orderly liquidation of a portion of debt securities in our investment
portfolio due to the extreme volatility and disruptions in the capital and credit markets. We therefore transferred the debt
securities in our held-to-maturity investment portfolio to trading and, in conjunction with the transfer, recognized an
unrealized gain of $1 million in earnings in the fourth quarter of fiscal year 2020.
The decrease in our investment portfolio of $283 million during fiscal year 2020, was primarily attributable to the sale of
debt securities totaling $239 million during the fourth quarter of fiscal year 2020. We recorded a realized gain on the sale of
these debt securities of $4 million during fiscal year 2020. Also contributing to the decrease in our investment portfolio was
the redemption by Farmer Mac of its Series B non-cumulative preferred stock on June 12, 2019, at a redemption price of
$25.00 per share, plus any declared and unpaid dividends through and including the redemption date. The amortized cost of
our investment in the Farmer Mac Series B non-cumulative preferred stock was $25 million as of the redemption date,
which equaled the per share redemption price.
Our investment portfolio is unencumbered and structured so that the securities have active secondary or resale markets
under normal market conditions. The objective of the portfolio is to achieve returns commensurate with the level of risk
assumed subject to CFC’s investment policy and guidelines and liquidity requirements. Pursuant to our investment policy
and guidelines, all fixed-income debt securities, at the time of purchase, must be rated at least investment grade and on
stable outlook based on external credit ratings from at least two of the leading global credit rating agencies, when available,
or the corresponding equivalent, when not available. Securities rated investment grade, that is those rated Baa3 or higher by
Moody’s or BBB- or higher by S&P or BBB- or higher by Fitch, are generally considered by the rating agencies to be of
lower credit risk than non-investment grade securities.
73
We provide additional information on our investment securities in “Note 3—Investment Securities.”
Projected Near-Term Sources and Uses of Liquidity
As discussed above, our primary sources of liquidity include cash flows from operations, member loan repayments,
committed bank revolving lines of credit, committed loan facilities, short-term borrowings and funds from the issuance of
long-term and subordinated debt. Our primary uses of liquidity include loan advances to members, principal and interest
payments on borrowings, periodic settlement payments related to derivative contracts, and operating expenses.
Table 33 below displays our projected sources and uses of cash from debt and investment activity, by quarter, over the next
six quarters through the quarter ended November 30, 2021. Our assumptions also include the following: (i) the estimated
issuance of long-term debt, including collateral trust bonds and private placement of term debt, is based on maintaining a
matched funding position within our loan portfolio with our bank revolving lines of credit serving as a backup liquidity
facility for commercial paper and on maintaining outstanding dealer commercial paper at an amount below $1,250 million;
(ii) long-term loan scheduled amortization payments represent the scheduled long-term loan payments for loans outstanding
as of May 31, 2020, and our current estimate of long-term loan prepayments, which the amount and timing of are subject to
change; (iii) other loan repayments and other loan advances primarily relate to line of credit repayments and advances;
(iv) long-term debt maturities reflect scheduled maturities of outstanding term debt for the periods presented; and (v) long-
term loan advances reflect our current estimate of member demand for loans, the amount and timing of which are subject to
change.
Table 33: Projected Sources and Uses of Liquidity from Debt and Investment Activity(1)
Projected Sources of Liquidity
Projected Uses of Liquidity
(Dollars in
millions)
Long-
Term
Debt
Issuance
Anticipated
Long-Term
Loan
Repayments(2)
Other Loan
Repayments(3)
Total
Projected
Sources of
Liquidity
Long-Term
Debt
Maturities(4)
2Q FY 2021....
1Q FY 2021....
4Q FY 2021....
3Q FY 2021....
$ 120
270
1,170
270
695
350
2Q FY 2022....
$ 2,875
Total ...........
____________________________
1Q FY 2022....
$
$
423
341
313
368
331
314
2,090
$
$
191
24
—
—
—
—
215
$
$
734
635
1,483
638
1,026
664
5,180
$
$
604
593
454
672
488
269
3,080
Long-
Term
Loan
Advances
$
674
461
568
405
473
453
$ 3,034
Other
Loan
Advances(5)
Total
Projected
Uses of
Liquidity
Other
Sources/
(Uses) of
Liquidity(6)
$
$
29
24
—
—
—
—
53
$ 1,307
1,078
1,022
1,077
961
722
$ 6,167
$
$
(2)
538
(362)
369
(15)
(4)
524
(1)
The dates presented represent the end of each quarterly period through the quarter ended November 30, 2021.
Anticipated long-term loan repayments include scheduled long-term loan amortizations, anticipated cash repayments at repricing date and sales.
(2)
(3) Other loan repayments include anticipated short-term loan repayments.
(4) Long-term debt maturities also include medium-term notes with an original maturity of one year or less and expected early redemptions of debt.
(5)
Other loan advances include anticipated short-term loan advances.
(6)
Includes net increase or decrease to dealer commercial paper, member commercial paper and select notes, and purchases and maturity of investments.
As displayed in Table 33, we currently project long-term advances of $2,108 million over the next 12 months, which we
anticipate will exceed anticipated loan repayments over the same period of $1,445 million by approximately $663 million.
The estimates presented above are developed at a particular point in time based on our expected future business growth and
funding. Our actual results and future estimates may vary, perhaps significantly, from the current projections, as a result of
changes in market conditions, management actions or other factors.
Contractual Obligations
Our contractual obligations affect our short- and long-term liquidity needs. Table 34 displays aggregated information about
the listed categories of our contractual obligations as of May 31, 2020. The table provides information on the contractual
maturity profile of our debt securities based on undiscounted future cash payment amounts due pursuant to these
obligations, aggregated by type of contractual obligation. The table excludes certain obligations where the obligation is
74
short-term, such as trade payables, or where the amount is not fixed and determinable, such as derivatives subject to
valuation based on market factors. The timing of actual future payments may differ from those presented due to a number of
factors, such as discretionary debt redemptions or changes in interest rates that may impact our expected future cash interest
payments.
Table 34: Contractual Obligations(1)
(Dollars in millions)
Short-term borrowings..............................
Long-term debt .........................................
Subordinated deferrable debt....................
Members’ subordinated certificates(2) .......
Total long-term and subordinated debt...
Contractual interest on long-term debt(3) ..
Total specified contractual obligations...
____________________________
2021
$ 3,962
2022
$
— $
2023
2024
— $ — $
2025
Thereafter
Total
— $
— $ 3,962
2,016
2,517
1,222
1,118
808
12,031
19,712
—
41
2,057
609
—
13
2,530
558
—
23
1,245
512
—
15
1,133
477
—
24
832
450
986
1,224
14,241
5,079
986
1,340
22,038
7,685
$ 6,628
$ 3,088
$ 1,757
$ 1,610
$ 1,282
$ 19,320
$ 33,685
(1)
(2)
Callable debt is included in this table at its contractual maturity.
Excludes $0.06 million in subscribed and unissued member subordinated certificates for which a payment has been received, but no certificate has been
issued. Amortizing member loan subordinated certificates totaling $239 million are amortizing annually based on the unpaid principal balance of the
related loan. Amortization payments on these certificates totaled $14 million in fiscal year 2020 and represented 6% of amortizing loan subordinated
certificates outstanding.
(3)
Represents the amounts of future interest payments on long-term and subordinated debt outstanding as of May 31, 2020, based on the contractual terms
of the securities. These amounts were determined based on certain assumptions, including that variable-rate debt continues to accrue interest at the
contractual rates in effect as of May 31, 2020 until maturity and redeemable debt continues to accrue interest until its contractual maturity.
Credit Ratings
Our funding and liquidity, borrowing capacity, ability to access capital markets and other sources of funds and the cost of
these funds are partially dependent on our credit ratings. Rating agencies base their ratings on numerous factors, including
liquidity, capital adequacy, industry position, member support, management, asset quality, quality of earnings and the
probability of systemic support. Significant changes in these factors could result in different ratings. Table 35 displays our
credit ratings as of May 31, 2020. Moody's, S&P and Fitch affirmed our ratings and outlook during the third quarter of fiscal
year 2020. Our credit ratings as of May 31, 2020 are unchanged from May 31, 2019, and as of the date of the filing of this
Report.
Table 35: Credit Ratings
Long-term issuer credit rating(1) ........
Senior secured debt(2).........................
Senior unsecured debt(3).....................
Subordinated debt..............................
Commercial paper .............................
Outlook ..............................................
___________________________
(1)
(2)
(3)
Based on our senior unsecured debt rating.
Applies to our collateral trust bonds.
Applies to our medium-term notes.
Moody’s
A2
A1
A2
A3
P-1
Stable
May 31, 2020
S&P
A
A
A
BBB+
A-1
Stable
Fitch
A
A+
A
BBB+
F1
Stable
In order to access the commercial paper markets at attractive rates, we believe we need to maintain our current commercial
paper credit ratings of P-1 by Moody’s, A-1 by S&P and F1 by Fitch. In addition, the notes payable to the Federal Financing
Bank and guaranteed by RUS under the Guaranteed Underwriter Program contain a provision that if during any portion of
75
the fiscal year, our senior secured credit ratings do not have at least two of the following ratings: (i) A3 or higher from
Moody’s, (ii) A- or higher from S&P, (iii) A- or higher from Fitch or (iv) an equivalent rating from a successor rating agency
to any of the above rating agencies, we may not make cash patronage capital distributions in excess of 5% of total patronage
capital. See “Credit Risk—Counterparty Credit Risk—Credit Risk-Related Contingent Features” above for information on
credit rating provisions related to our derivative contracts.
Financial Ratios
Our debt-to-equity ratio increased to 42.40 as of May 31, 2020, from 19.80 as of May 31, 2019, primarily due to a decrease
in equity resulting from our reported net loss of $589 million for fiscal year 2020 and the patronage capital retirement of $63
million in the second quarter of fiscal year 2020.
Our adjusted debt-to-equity ratio increased to 5.85 as of May 31, 2020, from 5.73 as of May 31, 2019, primarily attributable
to an increase in debt outstanding to fund loan growth. We provide a reconciliation of our adjusted debt-to-equity ratio to the
most comparable GAAP measure and an explanation of the adjustments below in “Non-GAAP Financial Measures.”
Debt Covenants
As part of our short-term and long-term borrowing arrangements, we are subject to various financial and operational
covenants. If we fail to maintain specified financial ratios, such failure could constitute a default by CFC of certain debt
covenants under our committed bank revolving line of credit agreements and senior debt indentures. We were in compliance
with all covenants and conditions under our committed bank revolving line of credit agreements and senior debt indentures
as of May 31, 2020.
As discussed above in “Introduction” and “Item 6—Selected Financial Data,” the financial covenants set forth in our
committed bank revolving line of credit agreements and senior debt indentures are based on adjusted financial measures,
including adjusted TIER. We provide a reconciliation of adjusted TIER and other non-GAAP measures disclosed in this
Report to the most comparable GAAP measures and an explanation of the adjustments below in “Non-GAAP Financial
Measures.”
MARKET RISK
Interest rate risk represents our primary source of market risk. Interest rate risk is the risk to current or anticipated earnings
or equity arising primarily from movements in interest rates. This risk results from differences between the timing of cash
flows on our assets and the liabilities funding those assets. The timing of cash flows of our assets is impacted by re-pricing
characteristics, prepayments and contractual maturities. Our interest rate risk exposure is primarily related to the funding of
the fixed-rate loan portfolio. We discuss the risks related to the uncertainty as to the nature of potential changes or other
reforms associated with the transition away from and expected replacement of LIBOR as a benchmark interest rate in “Item
1A. Risk Factors.”
Interest Rate Risk Management
Our interest rate risk exposure is primarily related to the funding of the fixed-rate loan portfolio. Our Asset Liability
Committee provides oversight for maintaining our interest rate position within a prescribed policy range using approved
strategies. 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. Our Asset Liability Committee
monitors interest rate risk and meets quarterly to review and discuss information such as national economic forecasts,
federal funds and interest rate forecasts, interest rate gap analysis, our liquidity position, loan and debt maturities, short-term
and long-term funding needs, anticipated loan demands, credit concentration risk, derivative counterparty exposure and
financial forecasts. The Asset Liability Committee also discusses the composition of fixed-rate versus variable-rate loans,
new funding opportunities, changes to the nature and mix of assets and liabilities for structural mismatches, and interest rate
swap transactions.
76
Future of LIBOR
In 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates the LIBOR index, announced that
the FCA intends to stop requesting banks to submit the rates required to calculate LIBOR after 2021. Management has
formed a cross-functional LIBOR working group to identify CFC’s exposure, assess the potential risks related to the
transition from LIBOR to a new index and develop a strategic transition plan. The LIBOR working group has performed an
initial assessment of all of CFC’s LIBOR-dependent contracts and financial instruments and the systems, models and
processes that may be impacted. The LIBOR working group will closely monitor and assess developments with respect to
the phasing out of LIBOR and provide regular reports to the Chief Financial Officer and the CFC Board of Directors.
Matched Funding Objective
Our funding objective is to manage the matched funding of asset and liability repricing terms within a range of adjusted total
assets (calculated by excluding derivative assets from total assets) deemed appropriate by the Asset Liability Committee
based on the current environment and extended outlook for interest rates. We refer to the difference between fixed-rate loans
scheduled for amortization or repricing and the fixed-rate liabilities and equity funding those loans as our interest rate gap.
Our primary strategies for managing our interest rate risk include the use of derivatives and limiting the amount of fixed-rate
assets that can be funded by variable-rate debt to a specified percentage of adjusted total assets based on market conditions.
We provide our members with many options on loans with regard to interest rates, the term for which the selected interest
rate is in effect and the ability to convert or prepay the loan. Long-term loans generally have maturities of up to 35 years.
Borrowers may select fixed interest rates for periods of one year through the life of the loan. We do not match fund the
majority of our fixed-rate loans with a specific debt issuance at the time the loans are advanced. We fund the amount of
fixed-rate assets that exceed fixed-rate debt and members’ equity with short-term debt, primarily commercial paper.
Interest Rate Gap Analysis
As part of our asset-liability management, we perform a monthly interest rate gap analysis that provides a comparison
between the timing of cash flows, by year, for fixed-rate assets scheduled for amortization and repricing and for fixed-rate
liabilities and members’ equity maturing. This gap analysis is a useful tool in measuring, monitoring and mitigating the
interest rate risk inherent in the funding of fixed-rate assets with variable-rate debt and also helpful in assessing liquidity
risk.
Table 36 displays the scheduled amortization and repricing of fixed-rate assets and outstanding fixed-rate liabilities and
equity as of May 31, 2020. We exclude variable-rate loans from our interest rate gap analysis, as we do not consider the
interest rate risk on these loans to be significant because they are subject to repricing at least monthly. Loans with variable
interest rates accounted for 8% and 11% of our total loan portfolio as of May 31, 2020 and 2019, respectively. Fixed-rate
liabilities include debt issued at a fixed rate, as well as variable-rate debt swapped to a fixed rate using interest rate swaps.
Fixed-rate debt swapped to a variable rate using interest rate swaps is excluded from the analysis because it is used to match
fund our variable-rate loans. With the exception of members’ subordinated certificates, which are generally issued with
extended maturities, and commercial paper, our liabilities have average maturities that closely match the repricing terms (but
not the maturities) of our fixed-rate loans.
77
Table 36: Interest Rate Gap Analysis
(Dollars in millions)
Asset amortization and repricing .................
Liabilities and members’ equity:
Long-term debt (1)(2) ...................................
Subordinated deferrable debt and
subordinated certificates(2)(3) ..................
Members’ equity (4) ....................................
Total liabilities and members’ equity ...........
Gap (5) ..........................................................
Prior to
5/31/21
Two Years
6/1/21 to
5/31/23
Two Years
6/1/23 to
5/31/25
Five Years
6/1/25 to
5/31/30
10 Years
6/1/30 to
5/31/40
6/1/40 and
Thereafter
Total
$ 1,741
$ 3,213
$ 2,877
$ 5,990
$ 7,550
$ 3,329
$ 24,700
$ 2,234
$ 3,692
$ 2,362
$ 6,173
$ 4,902
$ 1,867
$ 21,230
25
53
417
24
$ 2,312
$ 4,133
$ (571)
$ (920)
160
32
$ 2,554
$ 323
484
114
159
325
803
1,005
2,048
1,553
$ 6,771
$ 5,386
$ 3,675
$ 24,831
$ (781)
$ 2,164
$ (346)
$
(131)
Cumulative gap ............................................
(571)
(1,491)
(1,168)
(1,949)
215
(131)
Cumulative gap as a % of total assets ..........
(2.03)% (5.30)% (4.15)% (6.92)%
0.76% (0.47)%
Cumulative gap as a % of adjusted total
assets(6) .........................................................
____________________________
(2.04)
(5.33)
(4.17)
(6.96)
0.77
(0.47)
Includes long-term fixed-rate debt and the net impact of our interest rate swaps.
(1)
(2) The maturity presented for debt is based on the call date.
(3)
Represents the amount of subordinated deferrable debt and subordinated certificates allocated to fund fixed-rate assets.
(4)
(5)
(6)
Represents the portion of members’ equity and loan loss allowance allocated to fund fixed-rate assets. See Table 43: Members’ Equity below under
“Non-GAAP Financial Measures” for a reconciliation of total CFC equity to members’ equity.
Calculated based on the amount of assets scheduled for amortization and repricing less total liabilities and members’ equity funding those assets.
Adjusted total assets represents total assets reported in our consolidated balance sheets less derivative assets.
When the amount of the cash flows related to fixed-rate assets scheduled for amortization and repricing exceeds the amount
of cash flows related to the fixed-rate debt and equity funding those assets, we refer to the difference, or gap, as
“warehousing.” When the amount of the cash flows related to fixed-rate assets scheduled for amortization and repricing is
less than the amount of the cash flows related to the fixed-rate debt and equity funding those assets, we refer to the gap as
“prefunding.” The amount of the gap is an indication of our interest rate and liquidity risk exposure. Our goal is to maintain
an unmatched position related to the cash flows for fixed-rate financial assets within a targeted range of adjusted total assets.
Because the substantial majority of our financial assets are fixed-rate, amortizing loans and these loans are primarily funded
with bullet debt and equity, our interest rate gap analysis typically reflects a warehouse position. When we are in a
warehouse position, we utilize some short-term borrowings to fund the scheduled amortization and repricing of our financial
assets. However, we limit the extent to which we fund our long-term, fixed-rate loans with short-term, variable-rate debt
because it exposes us to higher interest rate and liquidity risk.
As indicated above in Table 36, we were in a prefunded position of $131 million as of May 31, 2020, rather than our typical
warehouse position. The prefunded position was primarily attributable to our issuance in March 2020 of long-term fixed-rate
debt at an attractive coupon rate due to a relative flat yield curve environment. Subsequent to the year-end, due to long-term
fixed-rate loan advances and payments of long-term fixed-rate maturing debt, we were no longer in a prefunded position at
July 31, 2020.
Financial Instruments
Table 37 provides information about our financial instruments, other than derivatives, that are sensitive to changes in interest
rates. We provide additional information on our use of derivatives and exposure in “Note 1—Summary of Significant
Accounting Policies—Derivative Instruments” and “Note 10—Derivative Instruments and Hedging Activities.” All of our
financial instruments as of May 31, 2020 were entered into or contracted for purposes other than trading, except our debt
securities investments, which are trading. For debt obligations, the table presents principal cash flows and related average
interest rates by expected maturity dates as of May 31, 2020.
78
Table 37: Financial Instruments
(Dollars in millions)
Assets:
Equity securities ...................................
Debt securities trading ..........................
Average rate.................................
Long-term fixed-rate loans (1) ..............
Average rate.................................
Long-term variable-rate loans ..............
Average rate.................................
Line of credit loans ...............................
Average rate.................................
Liabilities and equity:
Short-term borrowings (2) ....................
Average rate.................................
Long-term debt .....................................
Average rate.................................
Subordinated deferrable debt................
Average rate.................................
Members’ subordinated certificates (3) .
Average rate.................................
Outstanding
Balance
Fair
Value
$
$
61
309
$
$
61
309
Principal Amortization and Maturities
2021
2022
2023
2024
2025
Remaining
Years
$ — $ — $ — $ — $ — $
$
81
$
53
38
64
69
$
$
$
$
61
4
2.56%
2.12% 2.58% 2.63% 3.12% 2.49%
1.31%
$ 24,472
$27,052
$1,304
$1,270
$1,270
$1,197
$1,200
$18,231
$
$
4.46%
656
3.04%
1,563
2.62%
$
656
$
4.29% 4.30% 4.30% 4.44% 4.46%
30
58
36
35
23
$
$
$
$
4.50%
474
$
—
$1,563
$ 1,563
—
—
$ — $ — $ — $ — $ —
—
—
—
2.62%
—
—
—
—
—
$
3,962
$ 3,963
$3,962
$ — $ — $ — $ — $ —
0.62%
0.62%
$ 19,712
$21,826
$2,016
—
$2,517
—
$1,222
—
$1,118
—
$ 808
—
$12,031
2.92%
986
5.11%
$
$
2.41% 2.12% 2.33% 3.00% 2.77%
$ — $ — $ — $ — $ — $
$ 1,030
1,340
$ 1,340
$
—
41
—
13
$
—
23
$
—
15
$
—
24
$
$ 1,224
4.22%
3.60% 3.07% 3.70% 2.37% 1.66%
4.34%
3.24%
986
5.11%
____________________________
(1) The principal amount of fixed-rate loans is the total of scheduled principal amortizations without consideration for loans that reprice. Includes $11
million in TDR loans that were on accrual status as of May 31, 2020 and $168 million in nonperforming loans that were on nonaccrual status as of
May 31, 2020.
(2)
Short-term borrowings consists of commercial paper, select notes, daily liquidity fund notes, bank bid notes and medium-term notes issued with an
original maturity of one year or less.
(3)
Excludes $0.06 million in subscribed and unissued member subordinated certificates for which a payment has been received, but no certificate has been
issued. Amortizing member loan subordinated certificates totaling $239 million are amortizing annually based on the unpaid principal balance of the
related loan. The amortization payments on these certificates totaled $14 million in fiscal year 2020, which represented 6% of amortizing loan
subordinated certificates outstanding.
Loan Repricing
Table 38 shows long-term fixed-rate loans outstanding as of May 31, 2020, which will be subject to interest rate repricing
during the next five fiscal years and thereafter (due to principal repayments, amounts subject to interest rate repricing may
be lower at the actual time of interest rate repricing).
Table 38: Loan Repricing
(Dollars in thousands)
Repricing
Amount
Weighted-Average
Interest Rate
2021........................................................
2022........................................................
2023........................................................
2024........................................................
2025........................................................
Thereafter...............................................
Total .......................................................
$
$
416,868
394,479
280,222
242,991
312,599
1,174,853
2,822,012
4.20%
4.56
4.72
4.68
4.57
4.90
4.68
79
OPERATIONAL RISK
Operational risk represents the risk of loss resulting from conducting our operations, including, but not limited to, the
execution of unauthorized transactions by employees; errors relating to loan documentation, transaction processing and
technology; the inability to perfect liens on collateral; breaches of internal control and information systems; and the risk of
fraud by employees or persons outside the company. This risk of loss also includes potential legal actions that could arise as
a result of operational deficiencies, noncompliance with covenants in our revolving credit agreements and indentures,
employee misconduct or adverse business decisions. In the event of a breakdown in internal controls, improper access to or
operation of systems or improper employee actions, we could incur financial loss. Operational/business risk may also
include breaches of our technology and information systems resulting from unauthorized access to confidential information
or from internal or external threats, such as cyberattacks.
Operational risk is inherent in all business activities. The management of such risk is important to the achievement of our
objectives. We maintain business policies and procedures, employee training, an internal control framework, and a
comprehensive business continuity and disaster recovery plan that are intended to provide a sound operational environment.
Our business policies and controls have been designed to manage operational risk at appropriate levels given our financial
strength, the business environment and markets in which we operate, the nature of our businesses, and considering factors
such as competition and regulation. Corporate Compliance monitors compliance with established procedures and applicable
law that are designed to ensure adherence to generally accepted conduct, ethics and business practices defined in our
corporate policies. We provide employee compliance training programs, including information protection, suspicious
activity reporting and operational risk. Internal Audit examines the design and operating effectiveness of our operational,
compliance and financial reporting internal controls on an ongoing basis.
Our business continuity and disaster recovery plan establishes the basic principles and framework necessary to ensure
emergency response, resumption, restoration and permanent recovery of CFC’s operations and business activities during a
business interruption event. This plan includes a duplication of our operating systems at an off-site facility coupled with an
extensive business continuity and recovery process to leverage those remote systems. Each of our departments is required to
develop, exercise, test and maintain business resumption plans for the recovery of business functions and processing
resources to minimize disruption for our members and other parties with whom we do business. We conduct disaster
recovery exercises periodically that include both the 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.
In fiscal year 2020, we enhanced our crisis management framework to provide additional corporate guidance on the
management of and response to significant crises that may have an adverse disruptive impact on our business. The crises
identified include, but are not limited to, man-made and natural disasters including infectious disease pandemics, technology
disruption and workforce issues. The objectives of the enhancements are to ensure, in the event of an identified crisis, we
have well-documented plans in place to protect our employees and the work environment, safeguard CFC’s operations,
protect CFC’s brand and reputation and minimize the impact of business disruptions. We conducted a business impact
analysis for each identified crisis to assess the potential impact on our business operations, financial performance,
technology and staff. The results of the business impact analysis have been utilized to develop management action plans that
align business priorities, clarify responsibilities and establish processes and procedures that enable us to respond in a timely,
proactive manner and take appropriate actions to manage and mitigate the potential disruptive impact of specified crises.
Cybersecurity risk is managed as part of our overall management of operational risk. Cyber-related attacks pose a risk to the
security of our members’ strategic business information and the confidentiality and integrity of our data, which includes
strategic and proprietary information. Because such an attack could have a material adverse impact on our operations, the
CFC Board of Directors is actively engaged in the oversight of our continuous efforts in monitoring and managing the risks
associated with the ever-evolving nature of cybersecurity threats. Each quarter, or more frequently as requested by the board
of directors, management provides reports on CFC’s security operations, including any cybersecurity incidents,
management’s efforts to manage any incidents, and any other related information requested from management. On at least
an annual basis, the board of directors reviews management reports concerning the disclosure controls and procedures in
place to enable CFC to make accurate and timely disclosures about any material cybersecurity events. Additionally, upon the
occurrence of a material cybersecurity incident, the board of directors will be notified of the event so it may properly
evaluate such incident, including management’s remediation plan.
80
NON-GAAP FINANCIAL MEASURES
In addition to financial measures determined in accordance with GAAP, management evaluates performance based on
certain non-GAAP measures, which we refer to as “adjusted” measures. Below we provide a discussion of each of these
non-GAAP measures and provide a reconciliation of our adjusted measures to the most comparable GAAP measures in this
section. We believe our non-GAAP adjusted metrics, which are not a substitute for GAAP and may not be consistent with
similarly titled non-GAAP measures used by other companies, provide meaningful information and are useful to investors
because management evaluates performance based on these metrics for purposes of: (i) budgeting and forecasting; (ii)
comparing period-to-period operating results, analyzing changes in results and identifying potential trends; (iii) making
compensation decisions; and (iv) informing the establishment of short- and long-term strategic goals. In addition, certain of
the financial covenants in our committed bank revolving line of credit agreements and debt indentures are based on these
non-GAAP adjusted measures.
Statements of Operations Non-GAAP Adjustments
One of our primary performance measures is TIER, which is a measure indicating our ability to cover the interest expense
requirements on our debt. TIER is calculated by adding the interest expense to net income prior to the cumulative effect of
change in accounting principle and dividing that total by the interest expense. We adjust the TIER calculation to add the
derivative cash settlements expense to the interest expense and to remove the derivative forward value gains (losses) and
foreign currency adjustments from total net income. Adding the cash settlements expense back to interest expense also has a
corresponding effect on our adjusted net interest income.
We use derivatives to manage interest rate risk on our funding of the loan portfolio. The derivative cash settlements expense
represents the amount that we receive from or pay to our counterparties based on the interest rate indexes in our derivatives
that do not qualify for hedge accounting. We adjust the reported interest expense to include the derivative cash settlements
expense. We use the adjusted cost of funding to set interest rates on loans to our members and believe that the interest
expense adjusted to include derivative cash settlements expense represents our total cost of funding for the period. TIER
calculated by adding the derivative cash settlements expense to the interest expense reflects management’s perspective on
our operations and, therefore, we believe that it represents a useful financial measure for investors.
The derivative forward value gains (losses) and foreign currency adjustments do not represent our cash inflows or outflows
during the current period and, therefore, do not affect our current ability to cover our debt service obligations. The derivative
forward value gains (losses) included in the derivative gains (losses) line of the statement of operations represents a present
value estimate of the future cash inflows or outflows that will be recognized as net cash settlements expense for all periods
through the maturity of our derivatives that do not qualify for hedge accounting. We have not issued foreign-denominated
debt since 2007, and as of May 31, 2020 and 2019, there were no foreign currency derivative instruments outstanding.
For operational management and decision-making purposes, we subtract derivative forward value gains (losses) and foreign
currency adjustments from our net income when calculating TIER and for other net income presentation purposes. In
addition, since the derivative forward value gains (losses) and foreign currency adjustments do not represent current-period
cash flows, we do not allocate such funds to our members and, therefore, exclude the derivative forward value gains (losses)
and foreign currency adjustments from net income in calculating the amount of net income to be allocated to our members.
TIER calculated by excluding the derivative forward value gains (losses) and foreign currency adjustments from net income
reflects management’s perspective on our operations and, therefore, we believe that it represents a useful financial measure
for investors.
Total equity includes the noncash impact of derivative forward value gains (losses) and foreign currency adjustments
recorded in net income. It also includes as a component of accumulated other comprehensive income the impact of changes
in the fair value of derivatives designated as cash flow hedges as well as the remaining transition adjustment recorded when
we adopted the accounting guidance that required all derivatives be recorded on the balance sheet at fair value. In evaluating
our debt-to-equity ratio discussed further below, we make adjustments to equity similar to the adjustments made in
calculating TIER. We exclude from total equity the cumulative impact of changes in derivative forward value gains (losses)
and foreign currency adjustments and amounts included in accumulated other comprehensive income related to derivatives
designated for cash flow hedge accounting and the remaining derivative transition adjustment to derive non-GAAP adjusted
equity.
81
Table 39 provides a reconciliation of adjusted interest expense, adjusted net interest income and adjusted net income to the
comparable GAAP measures. The adjusted amounts are used in the calculation of our adjusted net interest yield and
adjusted TIER for each fiscal year in the five-year period ended May 31, 2020.
Table 39: Adjusted Financial Measures—Income Statement
Year Ended May 31,
(Dollars in thousands)
Interest expense........................................................
Include: Derivative cash settlements expense..........
Adjusted interest expense ........................................
2019
2020
2018
$ (821,089) $ (836,209) $ (792,735) $ (741,738) $ (681,850)
(88,758)
$ (876,962) $ (879,820) $ (867,016) $ (826,216) $ (770,608)
(43,611)
(84,478)
(74,281)
(55,873)
2017
2016
Net interest income ..................................................
Include: Derivative cash settlements expense..........
Adjusted net interest income....................................
$ 330,197
(55,873)
$ 274,324
$
$
299,461
(43,611)
255,850
$
$
284,622
(74,281)
210,341
$ 294,896
(84,478)
$ 210,418
Net income (loss) .....................................................
Exclude: Derivative forward value gains (losses) ...
Adjusted net income ................................................
$ (589,430) $ (151,210) $
457,364
$ 312,099
(734,278)
$ 144,848
(319,730)
168,520
$
306,002
179,381
$
151,362
$ 132,718
$
$
$
$
330,786
(88,758)
242,028
(51,516)
(221,083)
169,567
We consider the cost of derivatives to be an inherent cost of funding and hedging our loan portfolio and, therefore,
economically similar to the interest expense that we recognize on debt issued for funding. We therefore include derivative
cash settlements expense in our adjusted interest expense and exclude the unrealized forward value of derivatives from our
adjusted net income.
TIER and Adjusted TIER
Table 40 displays the calculation of our TIER and adjusted TIER for each fiscal year in the five-year period ended May 31,
2020.
Table 40: TIER and Adjusted TIER
TIER (1)...........................................................
Adjusted TIER (2) ...........................................
____________________________
Year Ended May 31,
2020
2019
2018
2017
2016
0.28
1.17
0.82
1.19
1.58
1.17
1.42
1.16
0.92
1.22
(1)
(2)
TIER is calculated based on our net income (loss) plus interest expense for the period divided by interest expense for the period.
Adjusted TIER is calculated based on adjusted net income (loss) plus adjusted interest expense for the period divided by adjusted interest expense for the
period.
Debt-to-Equity and Adjusted Debt-to-Equity Ratios
Management relies on the adjusted debt-to-equity ratio as a key measure in managing our business. We therefore believe
that this adjusted measure, in combination with the comparable GAAP measure, is useful to investors in evaluating
performance. We adjust the comparable GAAP measure to:
• exclude debt used to fund loans that are guaranteed by RUS from total liabilities;
• exclude from total liabilities, and add to total equity, debt with equity characteristics issued to our members and in the capital
markets; and
• exclude the noncash impact of derivative financial instruments and foreign currency adjustments from total liabilities and
total equity.
82
We are an eligible lender under a RUS loan guarantee program. Loans issued under this program carry the U.S.
government’s guarantee of all interest and principal payments. We have little or no risk associated with the collection of
principal and interest payments on these loans. Therefore, we believe there is little or no risk related to the repayment of the
liabilities used to fund RUS-guaranteed loans and we subtract such liabilities from total liabilities to calculate our adjusted
debt-to-equity ratio.
Members may be required to purchase subordinated certificates as a condition of membership and as a condition to
obtaining a loan or guarantee. The subordinated certificates are accounted for as debt under GAAP. The subordinated
certificates have long-dated maturities and pay no interest or pay interest that is below market, and under certain conditions
we are prohibited from making interest payments to members on the subordinated certificates. For computing our adjusted
debt-to-equity ratio we subtract members’ subordinated certificates from total liabilities and add members’ subordinated
certificates to total equity.
We also sell subordinated deferrable debt in the capital markets with maturities of up to 30 years and the option to defer
interest payments. The characteristics of subordination, deferrable interest and long-dated maturity are all equity
characteristics. In calculating our adjusted debt-to-equity ratio, we subtract subordinated deferrable debt from total liabilities
and add it to total equity.
We record derivative instruments at fair value on our consolidated balance sheets. For computing our adjusted debt-to-equity
ratio we exclude the noncash impact of our derivative accounting from liabilities and equity. Also, for computing our
adjusted debt-to-equity ratio we exclude the impact of foreign currency valuation adjustments from liabilities and equity.
The debt-to-equity ratio adjusted to exclude the effect of foreign currency translation reflect management’s perspective on
our operations and, therefore, we believe is a useful financial measure for investors.
Table 41 provides a reconciliation between the liabilities and equity used to calculate the debt-to-equity ratio and the
adjusted debt-to-equity ratio as of the end of each fiscal year in the five-year period ended May 31, 2020. As indicated in the
following table, subordinated debt is treated in the same manner as equity in calculating our adjusted-debt-to-equity ratio.
Table 41: Adjusted Financial Measures—Balance Sheet
(Dollars in thousands)
Total liabilities ......................................................
Exclude:
2020
$ 27,508,783
2019
$ 25,820,490
2018
$25,184,351
2017
$24,106,887
2016
$23,452,822
May 31,
Derivative liabilities .........................................
Debt used to fund loans guaranteed by RUS....
Subordinated deferrable debt ...........................
Subordinated certificates ..................................
Adjusted total liabilities ...................................
1,258,459
146,764
986,119
1,339,618
$ 23,777,823
391,724
153,991
986,020
1,357,129
$ 22,931,626
275,932
160,865
742,410
1,379,982
$ 22,625,162
385,337
167,395
742,274
1,419,025
$ 21,392,856
594,820
173,514
742,212
1,443,810
$ 20,498,466
Total equity ...........................................................
Exclude:
Prior fiscal year-end cumulative derivative
forward value losses .........................................
Current-year derivative forward value gains
(losses) .............................................................
Accumulated other comprehensive income
attributable to derivatives (1) .............................
Include:
$
648,822
$ 1,303,882
$ 1,505,853
$ 1,098,805
$
817,378
(354,704)
(34,974)
(340,976)
(520,357)
(299,274)
(734,278)
(319,730)
306,002
179,381
(221,083)
2,130
2,571
1,980
3,702
4,487
Subordinated deferrable debt ...........................
Subordinated certificates ..................................
Adjusted total equity .............................................
986,119
1,339,618
$ 4,061,411
986,020
1,357,129
$ 3,999,164
742,410
1,379,982
$ 3,661,239
742,274
1,419,025
$ 3,597,378
742,212
1,443,810
$ 3,519,270
83
____________________________
(1)
Represents AOCI related to derivatives. See “Note 11—Equity” for the components of AOCI.
Table 42 displays the calculations of our debt-to-equity and adjusted debt-to-equity ratios as of the end of each fiscal year
during the five-year period ended May 31, 2020.
Table 42: Debt-to-Equity Ratio
Debt-to-equity ratio (1) .......................................
Adjusted debt-to-equity ratio (2).........................
____________________________
2020
2019
42.40
5.85
19.80
5.73
May 31,
2018
16.72
6.18
2017
2016
21.94
5.95
28.69
5.82
(1)
Calculated based on total liabilities as of the end of the period divided by total equity as of the end of the period.
(2)
Calculated based on adjusted total liabilities as of the end of the period divided by adjusted total equity as of the end of the period.
Members’ Equity
Member's equity includes the noncash impact of derivative forward value gains (losses) and foreign currency adjustments
recorded in net income. It also includes amounts recorded in accumulated other comprehensive income. We provide the
components of accumulated other comprehensive income in “Note 11—Equity.” Because these amounts generally have not
been realized, they are not available to members and are excluded by CFC’s Board of Directors in determining the annual
allocation of adjusted net income to patronage capital, members’ capital reserve and other member funds.
Table 43 provides a reconciliation of members’ equity to total CFC equity as of May 31, 2020 and 2019.
Table 43: Members’ Equity
(Dollars in thousands)
Member's equity: ...............................................................................
Total CFC equity ...............................................................................
Excludes:
May 31,
2020
2019
$
626,121
$
1,276,735
Accumulated other comprehensive loss .......................................
Current period-end cumulative derivative forward value losses ..
Subtotal..............................................................................................
Members’ equity ................................................................................
$
(1,910)
(1,079,739)
(1,081,649)
1,707,770
$
(147)
(348,965)
(349,112)
1,625,847
84
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk, see “Item 7. MD&A—Market Risk” and “Note 10—
Derivative Instruments and Hedging Activities.”
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm ............................................................................
Consolidated Statements of Operations for the Years Ended May 31, 2020, 2019 and 2018..........................
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended May 31, 2020, 2019 and
2018..................................................................................................................................................................
Consolidated Balance Sheets as of May 31, 2020 and 2019............................................................................
Consolidated Statements of Changes in Equity for the Years Ended May 31, 2020, 2019 and 2018..............
Consolidated Statements of Cash Flows for the Years Ended May 31, 2020, 2019 and 2018 ........................
Notes to Consolidated Financial Statements ....................................................................................................
Note 1 — Summary of Significant Accounting Policies ........................................................................
Note 2 — Variable Interest Entities ........................................................................................................
Note 3 — Investment Securities .............................................................................................................
Note 4 — Loans ......................................................................................................................................
Note 5 — Allowance for Loan Losses ....................................................................................................
Note 6 — Short-Term Borrowings..........................................................................................................
Note 7 — Long-Term Debt .....................................................................................................................
Note 8 — Subordinated Deferrable Debt................................................................................................
Note 9 — Members’ Subordinated Certificates ......................................................................................
Note 10 — Derivative Instruments and Hedging Activities .....................................................................
Note 11 — Equity .....................................................................................................................................
Note 12 — Employee Benefits .................................................................................................................
Note 13 — Guarantees ..............................................................................................................................
Note 14 — Fair Value Measurement.........................................................................................................
Note 15 — Business Segments .................................................................................................................
Supplementary Data .........................................................................................................................................
Page
86
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88
89
90
91
93
93
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106
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121
123
125
126
128
131
135
136
139
143
147
85
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Members
National Rural Utilities Cooperative Finance Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of National Rural Utilities Cooperative Finance Corporation
and subsidiaries (the Company) as of May 31, 2020 and 2019, the related consolidated statements of operations,
comprehensive income (loss), changes in equity, and cash flows for each of the years in the three year period ended May 31,
2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of May 31, 2020 and 2019, and
the results of its operations and its cash flows for each of the years in the three year period ended May 31, 2020, in
conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal
control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our
audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2013.
McLean, Virginia
August 5, 2020
86
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Interest income ................................................................................
Interest expense ...............................................................................
Net interest income ........................................................................
Benefit (provision) for loan losses .............................................
Net interest income after benefit (provision) for loan losses ..........
Non-interest income:
Fee and other income .................................................................
Derivative gains (losses) ............................................................
Investment securities gains (losses) ...........................................
Total non-interest income..............................................................
Non-interest expense:
Salaries and employee benefits ..................................................
Other general and administrative expenses................................
Losses on early extinguishment of debt .....................................
Other non-interest expense.........................................................
Total non-interest expense ............................................................
Income (loss) before income taxes ..................................................
Income tax benefit (expense)...........................................................
Net income (loss) ............................................................................
Less: Net (income) loss attributable to noncontrolling interests .....
Net income (loss) attributable to CFC .........................................
$
$
Year Ended May 31,
$
2020
1,151,286
(821,089)
330,197
(35,590)
294,607
$
2019
1,135,670
(836,209)
299,461
1,266
300,727
2018
1,077,357
(792,735)
284,622
18,575
303,197
22,961
(790,151)
9,431
(757,759)
(54,522)
(46,645)
(683)
(25,588)
(127,438)
(590,590)
1,160
(589,430)
4,190
(585,240)
$
15,355
(363,341)
(1,799)
(349,785)
(49,824)
(43,342)
(7,100)
(1,675)
(101,941)
(150,999)
(211)
(151,210)
1,979
(149,231)
$
17,578
231,721
—
249,299
(51,422)
(39,462)
—
(1,943)
(92,827)
459,669
(2,305)
457,364
(2,178)
455,186
See accompanying notes to consolidated financial statements.
87
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Net income (loss) ............................................................................
Other comprehensive income (loss):
Unrealized losses on equity securities ........................................
Unrealized gains (losses) on cash flow hedges...........................
Reclassification of derivative gains to net income .....................
Defined benefit plan adjustments ...............................................
Other comprehensive income (loss) ................................................
Total comprehensive income (loss)...............................................
Less: Total comprehensive (income) loss attributable to
noncontrolling interests................................................................
Total comprehensive income (loss) attributable to CFC............
Year Ended May 31,
2020
(589,430)
$
2019
(151,210)
$
2018
$
457,364
—
—
(441)
(1,322)
(1,763)
(591,193)
—
1,059
(468)
(488)
103
(151,107)
4,190
(587,003)
$
1,979
(149,128)
$
$
(3,222)
(1,059)
(663)
313
(4,631)
452,733
(2,178)
450,555
See accompanying notes to consolidated financial statements.
88
NATIONAL RURAL UTILITIES COPERATIVE FINANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
$
$
$
(Dollars in thousands)
Assets:
Cash and cash equivalents ...........................................................................
Restricted cash.............................................................................................
Total cash, cash equivalents and restricted cash..........................................
Investment securities:
Equity securities ........................................................................................
Debt securities trading, at fair value .........................................................
Debt securities held-to-maturity, at amortized cost...................................
Total investment securities ..........................................................................
Loans to members........................................................................................
Less: Allowance for loan losses..............................................................
Loans to members, net.................................................................................
Accrued interest receivable .........................................................................
Other receivables .........................................................................................
Fixed assets, net...........................................................................................
Derivative assets..........................................................................................
Other assets..................................................................................................
Total assets..................................................................................................
Liabilities:
Accrued interest payable .............................................................................
Debt outstanding:
Short-term borrowings............................................................................
Long-term debt .......................................................................................
Subordinated deferrable debt..................................................................
Members’ subordinated certificates:
Membership subordinated certificates ...............................................
Loan and guarantee subordinated certificates....................................
Member capital securities ..................................................................
Total members’ subordinated certificates ...............................................
Total debt outstanding .................................................................................
Deferred income ..........................................................................................
Derivative liabilities ....................................................................................
Other liabilities ............................................................................................
Total liabilities............................................................................................
Equity:
CFC equity:
Retained equity .......................................................................................
Accumulated other comprehensive income............................................
Total CFC equity .........................................................................................
Noncontrolling interests ..............................................................................
Total equity.................................................................................................
Total liabilities and equity.........................................................................
May 31,
2020
2019
$
671,372
8,647
680,019
177,922
8,282
186,204
$
$
60,735
309,400
—
370,135
26,702,380
(53,125)
26,649,255
117,138
41,099
89,137
173,195
37,627
28,157,605
139,619
3,961,985
19,712,024
986,119
630,483
482,965
226,170
1,339,618
25,999,746
59,303
1,258,459
51,656
27,508,783
628,031
(1,910)
626,121
22,701
648,822
87,533
—
565,444
652,977
25,916,904
(17,535)
25,899,369
133,605
36,712
120,627
41,179
53,699
27,124,372
158,997
3,607,726
19,210,793
986,020
630,474
505,485
221,170
1,357,129
25,161,668
57,989
391,724
50,112
25,820,490
1,276,882
(147)
1,276,735
27,147
1,303,882
27,124,372
$
28,157,605
$
See accompanying notes to consolidated financial statements.
89
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Dollars in thousands)
Balance as of May 31, 2017 ..
Net income ............................
Other comprehensive loss......
Patronage capital retirement ..
Other ......................................
Balance as of May 31, 2018 ..
Cumulative effect from
adoption of new accounting
standard ...............................
Balance as of June 1, 2018
Net income (loss)...................
Other comprehensive income
Patronage capital retirement ..
Other ......................................
Balance as of May 31, 2019 ..
Net income (loss)...................
Other comprehensive loss......
Patronage capital retirement ..
Other ......................................
Balance as of May 31, 2020 ..
Membership
Fees and
Educational
Fund
$
$
$
$
2,900
1,000
—
—
(955)
2,945
—
2,945
1,000
—
—
(963)
2,982
1,000
—
—
(789)
3,193
Patronage
Capital
Allocated
$ 761,701
95,012
—
(45,220)
—
$ 811,493
Members’
Capital
Reserve
$ 630,305
57,480
—
—
—
$ 687,785
—
811,493
96,592
—
(47,507)
—
$ 860,578
96,310
—
(62,822)
—
$ 894,066
—
687,785
71,312
—
—
—
$ 759,097
48,223
—
—
—
$ 807,320
Unallocated
Net Income
(Loss)
CFC
Retained
Equity
$ (338,128) $1,056,778
455,186
—
(45,220)
(955)
(36,434) $1,465,789
301,694
—
—
—
$
Accumulated
Other
Comprehensive
Income (Loss)
13,175
$
—
(4,631)
—
—
8,544
$
Total
CFC
Equity
$1,069,953
455,186
(4,631)
(45,220)
(955)
$1,474,333
Non-
controlling
Interests
28,852
$
2,178
—
—
490
31,520
$
8,794
1,474,583
(8,794)
(250)
—
1,474,333
8,794
(27,640)
(318,135)
—
—
—
(149,231)
—
(47,507)
(963)
$ (345,775) $1,276,882
(585,240)
—
(62,822)
(789)
$(1,076,548) $ 628,031
(730,773)
—
—
—
—
—
— (149,231)
103
103
(47,507)
(963)
(147) $1,276,735
— (585,240)
(1,763)
(62,822)
(789)
(1,910) $ 626,121
(1,763)
—
—
$
$
—
31,520
(1,979)
—
(2,908)
514
27,147
(4,190)
—
(1,933)
1,677
22,701
$
$
Total
Equity
$1,098,805
457,364
(4,631)
(45,220)
(465)
$1,505,853
—
1,505,853
(151,210)
103
(50,415)
(449)
$1,303,882
(589,430)
(1,763)
(64,755)
888
$ 648,822
See accompanying notes to consolidated financial statements.
90
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Cash flows from operating activities:
Net income (loss) .......................................................................................................
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred loan fees ..........................................................................
Amortization of debt issuance costs and deferred charges ......................................
Amortization of discount on long-term debt............................................................
Amortization of issuance costs for bank revolving lines of credit...........................
Depreciation and amortization.................................................................................
Provision (benefit) for loan losses ...........................................................................
Loss on early extinguishment of debt ......................................................................
Fixed assets impairment...........................................................................................
Gain on sale of land .................................................................................................
Investment securities unrealized (gains) losses .......................................................
Derivative forward value (gains) losses...................................................................
Changes in operating assets and liabilities:
Accrued interest receivable......................................................................................
Accrued interest payable..........................................................................................
Deferred income.......................................................................................................
Other...........................................................................................................................
Net cash provided by operating activities ..................................................................
Cash flows from investing activities:
Advances on loans, net ............................................................................................
Investment in fixed assets ........................................................................................
Proceeds from sale of land.......................................................................................
Net proceeds from time deposits..............................................................................
Purchase of trading securities ..................................................................................
Proceeds from sales and maturities of trading securities .........................................
Proceeds from redemption of equity securities........................................................
Purchases of held-to-maturity investments..............................................................
Proceeds from maturities of held-to-maturity investments......................................
Net cash used by investing activities..........................................................................
Cash flows from financing activities:
Proceeds from (repayments of) short-term borrowings, net ....................................
Proceeds from short-term borrowings with original maturity > than 90 days.........
Repayments of short term-borrowings with original maturity > 90 days................
Payments for issuance costs for revolving bank lines of credit ...............................
Proceeds from issuance of long-term debt, net of discount and issuance costs.......
Payments for retirement of long-term debt..............................................................
Payments made for early extinguishment of debt....................................................
Payments for issuance costs for subordinated deferrable debt ................................
Proceeds from issuance of subordinated debt..........................................................
Proceeds from issuance of members’ subordinated certificates...............................
Payments for retirement of members’ subordinated certificates..............................
Payments for retirement of patronage capital ..........................................................
Repayments for membership fees, net .....................................................................
Net cash provided by financing activities ..................................................................
Net increase (decrease) in cash, cash equivalents and restricted cash.................
Beginning cash, cash equivalents and restricted cash...........................................
Ending cash, cash equivalents and restricted cash................................................
Year Ended May 31,
2020
2019
2018
$ (589,430) $ (151,210) $ 457,364
(9,309)
9,095
10,896
4,972
9,238
35,590
683
31,284
(7,713)
(5,975)
734,278
16,467
(19,378)
10,973
(12,456)
219,215
(785,190)
(9,565)
21,268
—
(3,883)
277,687
25,000
(76,339)
69,726
(481,296)
(10,009)
10,439
10,605
5,324
9,305
(1,266)
7,100
—
—
1,799
319,730
(6,163)
9,713
2,077
(10,401)
197,043
(738,171)
(14,725)
—
100,000
—
—
—
(80,123)
35,340
(697,679)
(11,296)
10,456
10,164
5,346
7,931
(18,575)
—
—
—
—
(306,002)
(15,949)
11,808
3,246
741
155,234
(811,164)
(15,194)
—
125,000
—
—
—
(510,598)
1,394
(1,210,56)
(208,340)
3,022,910
(2,460,31)
(1,025)
2,156,711
(1,675,28)
(683)
(84)
—
9,621
(24,572)
(63,035)
(8)
755,896
493,815
186,204
$ 680,019
(452,618)
1,652,005
(1,387,57)
(2,382)
3,281,595
(2,806,63)
(7,100)
(6,535)
250,000
1,986
(24,861)
(49,860)
(4)
448,016
(52,620)
238,824
$ 186,204
126,211
1,331,910
(1,005,11)
(2,441)
2,349,885
(1,611,00)
—
—
—
6,136
(45,180)
(44,667)
(10)
1,105,731
50,403
188,421
$ 238,824
See accompanying notes to consolidated financial statements.
91
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Supplemental disclosure of cash flow information:
Year Ended May 31,
2020
2019
2018
Cash paid for interest.............................................................................................
Cash paid for income taxes....................................................................................
$ 805,086
$ 801,966
$ 766,059
20
112
321
Noncash financing and investing activities:
Net decrease in debt service reserve funds/debt service reserve certificates ........
$
2,560
$
— $
—
See accompanying notes to consolidated financial statements.
92
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
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
systems, generation and transmission (“power supply”) systems 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 of not-for-profit entities or subsidiaries or affiliates of not-for-profit
entities. CFC is exempt from federal income taxes.
National Cooperative Services Corporation (“NCSC”) is a taxable cooperative incorporated in 1981 in the District of
Columbia as a member-owned cooperative association. NCSC’s principal purpose is to provide financing to members of
CFC, entities eligible to be members of CFC and the for-profit and nonprofit entities that are owned, operated or controlled
by or provide significant benefit to certain members of CFC. NCSC’s membership consists of distribution systems, power
supply systems and statewide and regional associations that are members of CFC. CFC is the primary source of funding for
NCSC and manages NCSC’s business operations under a management agreement that is automatically renewable on an
annual basis unless terminated by either party. NCSC pays CFC a fee and, in exchange, CFC reimburses NCSC for loan
losses under a guarantee agreement. As a taxable cooperative, NCSC pays income tax based on its reported taxable income
and deductions. NCSC is headquartered with CFC in Dulles, Virginia.
Rural Telephone Finance Cooperative (“RTFC”) is a taxable Subchapter T 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 financing for its rural telecommunications members and their affiliates. RTFC’s
membership consists of a combination of not-for-profit and for-profit entities. CFC is the sole lender to and manages the
business operations of RTFC through a management agreement that is automatically renewable on an annual basis unless
terminated by either party. RTFC pays CFC a fee and, in exchange, CFC reimburses RTFC for loan losses under a guarantee
agreement. As permitted under Subchapter T of the Internal Revenue Code, RTFC pays income tax based on its net income,
excluding patronage-sourced earnings allocated to its patrons. RTFC is headquartered with CFC in Dulles, Virginia.
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts and related disclosures during the period.
Management's most significant estimates and assumptions involve determining the allowance for loan losses and the fair
value of financial assets and liabilities. Actual results could differ from these estimates. Certain reclassifications have been
made to prior periods to conform to the current presentation.
Risks and Uncertainties
We have considered the impact of the emergence in 2019 and continued spread of a novel strain of coronavirus that causes
coronavirus disease 2019 (“COVID-19”), which was declared a global pandemic by the World Health Organization
(“WHO”) in March 2020, on our consolidated financial statements. Although the effects of COVID-19 and the response to
the virus have negatively impacted financial markets and overall economic conditions, we have been able to navigate the
challenges of the pandemic reasonably well. We have been monitoring developments closely, and the future impact of
COVID-19 on our operations is highly uncertain and cannot be predicted. The extent of the impact of COVID-19 on our
93
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
operational and financial performance will depend on certain developments, including, among others, the duration and
severity of the COVID-19 pandemic, the ultimate impact on our members, potential further disruption and deterioration in
the corporate debt markets and additional, or extended, federal, state and local government orders and regulations that might
be imposed in response to the pandemic, all of which are uncertain.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of CFC, variable interest entities (“VIEs”) where
CFC is the primary beneficiary and subsidiary entities created and controlled by CFC to hold foreclosed assets. CFC did not
have any entities that held foreclosed assets as of May 31, 2020 or May 31, 2019. All intercompany balances and
transactions have been eliminated. NCSC and RTFC are VIEs that are required to be consolidated by CFC. Unless stated
otherwise, references to “we, “our” or “us” relate to CFC and its consolidated entities.
Variable Interest Entities
A VIE is an entity that has a total equity investment at risk that is not sufficient to finance its activities without additional
subordinated financial support provided by another party, or where the group of equity holders does not have: (i) the ability
to make decisions about the entity’s activities that most significantly impact its economic performance; (ii) the obligation to
absorb the entity’s expected losses; or (iii) the right to receive the entity’s expected residual returns.
NCSC and RTFC meet the definition of VIEs because they do not have sufficient equity investment at risk to finance their
activities without additional financial support. When evaluating an entity for possible consolidation, we must determine
whether or not we have a variable interest in the entity. If it is determined that we do not have a variable interest in the
entity, no further analysis is required and we do not consolidate the entity. If we have a variable interest in the entity, we
must evaluate whether we are the primary beneficiary based on an assessment of quantitative and qualitative factors. We are
considered the primary beneficiary holder if we have a controlling financial interest in the VIE that provides (i) the power to
direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to
absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. We
consolidate the results of NCSC and RTFC with CFC because CFC is the primary beneficiary holder.
Cash and Cash Equivalents
Cash, certificates of deposit, due from banks and other investments with original maturities of less than 90 days are
classified as cash and cash equivalents.
Restricted Cash
Restricted cash, which consists primarily of member funds held in escrow for certain specifically designed cooperative
programs, totaled $9 million and $8 million as of May 31, 2020 and 2019, respectively.
Investment Securities
We currently hold investments in equity and debt securities. We record purchases and sales of securities on a trade-date
basis. The accounting and measurement framework for investment securities differs depending on the security type and the
classification.
Our equity securities consist of investments in Federal Agricultural Mortgage Corporation (“Farmer Mac”) Series A
common stock and Farmer Mac Series A and Series C non-cumulative preferred stock. We previously had investments in
equity securities that were classified as available for sale as of May 31, 2018. The unrealized gains and losses on these
securities were recorded in other comprehensive income. Effective with our June 1, 2018 adoption of the financial
instrument accounting standard on the recognition and measurement of financial assets and financial liabilities, unrealized
94
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
gains and losses on equity securities are required to be recorded in earnings. Equity securities are carried at fair value on our
consolidated balance sheets with unrealized gains and losses recorded as a component of other non-interest income.
Our debt securities consist of investments in certificates of deposit with maturities greater than 90 days, corporate debt
securities, municipality debt securities, commercial mortgage-backed securities (“MBS”) and other asset-backed securities
(“ABS”). We currently classify and account for our investments in debt securities as trading. We previously had investments
in debt securities that were classified as held to maturity as of May 31, 2019. During the fourth quarter of fiscal year 2020,
in light of the extreme volatility and disruptions in the capital and credit markets in early March 2020 resulting from the
COVID-19 crisis, we transferred the debt securities in our held-to-maturity investment portfolio to trading, as we revised
our objective for the use of our held-to-maturity investment portfolio from previously serving as a supplemental source of
liquidity to serving as a readily available source of liquidity. In conjunction with the transfer, recognized an unrealized gain
of $1 million in earnings. We report debt securities classified as trading on our consolidated balance sheets at fair value with
unrealized gains and losses recorded as a component of other non-interest income. Interest income is generally recognized
over the contractual life of the securities based on the effective yield method.
Loans to Members
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are considered
as held for investment. Loans held for investment are carried at the outstanding unpaid principal balance, net of unamortized
loan origination costs. We classify and account for loans to members as held for investment. Deferred loan origination costs
are amortized using the straight-line method, which approximates the effective interest method, into interest income over the
life of the loan.
Nonperforming Loans
A loan is considered past due if a full payment of interest and principal is not received within 30 days of its due date. Loans
are classified as nonperforming when the collection of interest and principal has become 90 days past due; court
proceedings indicate that collection of interest and principal in accordance with the contractual terms is unlikely; or the full
and timely collection of interest or principal becomes otherwise due.
Once a loan is classified as nonperforming, we typically place the loan on nonaccrual status and reverse any accrued and
unpaid interest recorded during the period in which the loan is classified as nonperforming. We generally apply all cash
received during the nonaccrual period to the reduction of principal, thereby foregoing interest income recognition. The
decision to return a loan to accrual status is determined on a case-by-case basis.
We fully charge off or write down loans to the estimated net realizable value in the period that it becomes evident that
collectability of the full contractual amount is highly unlikely; however, our efforts to recover all charged-off amounts may
continue. The determination to write off all or a portion of a loan balance is made based on various factors on a case-by-case
basis including, but not limited to, cash flow analysis and the fair value of collateral securing the borrower’s loans.
Impaired Loans
A loan is considered impaired when, based on current information and events, we determine that it is probable that we will
be unable to collect all interest and principal amounts due as scheduled in accordance with the contractual terms of the loan
agreement, other than an insignificant delay in payment or insignificant shortfall in payment amount. Factors considered in
determining impairment may include, but are not limited to:
the review of the borrower’s audited financial statements and interim financial statements if available,
•
•
the borrower’s payment history,
• communication with the borrower,
• economic conditions in the borrower’s service territory,
95
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• pending legal action involving the borrower,
•
• estimates of the value of the borrower’s assets that have been pledged as collateral to secure our loans.
restructure agreements between us and the borrower, and
We recognize interest income on impaired loans on a case-by-case basis. An impaired loan to a borrower that is
nonperforming will typically be placed on nonaccrual status and we will reverse all accrued and unpaid interest. We
generally apply all cash received during the nonaccrual period to the reduction of principal, thereby foregoing interest
income recognition. Interest income may be recognized on an accrual basis for restructured impaired loans where the
borrower is performing and is expected to continue to perform based on agreed-upon terms.
We may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial
difficulties. Concessionary modifications are classified as troubled debt restructurings (“TDRs”) unless the modification
results in only an insignificant delay in payments to be received. All of our restructured loans are considered TDRs.
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of probable credit losses inherent in our loan portfolio,
which consists of CFC, NCSC and RTFC loan portfolio segments. Our allowance for loan losses for our portfolio segments
consists of a collective allowance for loans that are not individually impaired and a specific allowance for loans identified as
individually impaired. We increase or decrease the allowance for loan losses by recording a provision or benefit for loan
losses in the statement of operations. We record charge-offs against the allowance for loan losses when management
determines that any portion of a loan is uncollectible. We add subsequent recoveries, if any, to the allowance for loan losses.
Collective Allowance
The collective allowance is established, by loan portfolio segment, using an internal model to estimate probable incurred
losses as of each balance sheet date. We further stratify our loan portfolio segments and group loans into pools based on
member borrower type—distribution, power supply, telecommunications, and statewide and associates—as we consider our
members with the same operations to share similar risk characteristics. We delineate each of our loan pools by borrower risk
rating and apply loss factors to the outstanding principal balance at the end of each reporting period to determine the
collective allowance for loan losses. The loss factors consist of a probability of default, or default rate, and the loss given
default, or loss severity or recovery, for each loan pool. We derive the total collective loss estimate by applying the default
rate, based on a five-year loss emergence period, and recovery rate, based on our historical experience, to each loan pool.
Following is additional information on the key inputs and assumptions used in determining our collective allowance for loan
losses.
•
Internal Risk Ratings: As part of our credit risk-management process, we regularly evaluate each borrower and loan
facility in our loan portfolio and assign an internal risk rating. Our borrower risk rating is intended to reflect probability
of default. We engage an independent third party to perform an annual review of a sample of borrowers and loan
facilities to corroborate our internally assigned risk ratings. The risk ratings are based on quantitative and qualitative
factors, including the general financial condition of the borrower; 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.
• Loss Emergence Period: The loss emergence period represents the average time between when a loss-triggering event,
such as a successful new investment or expansion of services, a severe weather event or deterioration in operations,
occurs and the problem loan is charged-off, restructured or otherwise resolved. Our loss emergence period of five years
is based on CFC’s historical average loss emergence period.
• Default Rates: Because we have a limited history of defaults to develop reasonable and supportable estimated
probability of default rates for our existing loan portfolio, we utilize third-party default data for the utility sector as a
96
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
proxy to estimate probability of default rates for our loan portfolio segments. The third-party default data provides
historical expected default rates, based on credit ratings and remaining maturities of outstanding bonds, for the utility
sector. We align our internal borrower risk ratings to the credit ratings provided in the utility default rate table and apply
the cumulative default rates for our estimated average loss emergence period of five years to each of our loan pools.
• Recovery Rates: We utilize our internal historical loss experience to estimate loss given default, or the recovery rate, for
each of our loan portfolio segments, as we believe it provides a more reliable estimate than third-party loss severity data
due to the organizational structure and operating environment of rural utility cooperatives, our lending practice of
generally requiring a senior security position on the assets and revenues of borrowers for long-term loans, and the
approach we take in working with borrowers that may be experiencing operational or financial issues. The historical
recovery rates for each portfolio segment may be adjusted based on management’s consideration and assessment of
current conditions and relevant factors, such as recent trends in credit performance, historical variability of recovery rates
and additional analysis of long-term loss severity experience, changes in risk-management practices, current and past
underwriting standards, specific industry issues and trends and general economic conditions.
Specific Allowance
The specific allowance for individually impaired loans that are not collateral dependent is calculated based on the difference
between the recorded investment in the loan and the present value of the expected future cash flows, discounted at the loan’s
effective interest rate. If the loan is collateral dependent, we measure the impairment based on the current fair value of the
collateral less estimated selling costs. Loans are considered to be collateral dependent if repayment of the loan is expected to
be provided solely by the underlying collateral and there are no other available and reliable sources of repayment.
Unadvanced Loan Commitments
Unadvanced commitments represent amounts for which we have approved and executed loan contracts, but the funds have
not been advanced. The majority of the unadvanced commitments reported represent amounts that are subject to material
adverse change clauses at the time of the loan advance. Prior to making an advance on these facilities, we would confirm
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 the borrower is currently in compliance with loan terms and conditions. The remaining
unadvanced commitments relate 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 commitment.
Unadvanced loan 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 fund construction work plans and other capital expenditures 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. These factors contribute to our expectation that the majority of the unadvanced loan commitments will expire without
being fully drawn upon and that the total unadvanced amount does not necessarily represent future cash funding
requirements.
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reserve for Unadvanced Loan Commitments
We maintain a reserve for unadvanced loan commitments and committed lines of credit. This reserve is included as a
component of other liabilities on our consolidated balance sheets, and changes in the reserve are included in other non-
interest expense on our consolidated statements of operations. Our estimate of the reserve for potential losses on these
commitments takes into consideration various factors, including the existence of a material adverse change clause, the
historical utilization of the committed lines of credit, the probability of funding, historical loss experience on unadvanced
loan commitments and other inputs along with management judgment consistent with the methodology used to determine
our allowance for loan losses.
Fixed Assets
Fixed assets are recorded at cost less accumulated depreciation. We recognize depreciation expense for each category of our
depreciable fixed assets on a straight-line basis over the estimated useful life, which ranges from three to 40 years. We
recognized depreciation expense of $9 million, $9 million and $8 million in fiscal years 2020, 2019 and 2018, respectively.
The following table displays the components of our fixed assets. Our headquarters facility in Loudoun County, Virginia,
which is owned by CFC, is included as a component of building and building equipment.
(Dollars in thousands)
Building and building equipment ...................
Furniture and fixtures .....................................
Computer software and hardware...................
Other ...............................................................
Depreciable fixed assets .................................
Less: Accumulated depreciation...................
Net depreciable fixed assets............................
Land ................................................................
Software development in progress..................
Fixed assets, net ..............................................
May 31,
2020
2019
$
50,087
$
6,015
49,944
1,051
107,097
(59,007)
48,090
23,796
17,251
50,167
6,012
71,915
1,069
129,163
(53,695)
75,468
23,796
21,363
$
89,137
$
120,627
In the fourth quarter of fiscal year 2020, management made a decision to abandon a project to develop an internal-use loan
origination and servicing platform. The project was intended to update our loan platform to provide increased functionality
and flexibility and enhance the operational efficiency of our lending, loan servicing and loan accounting processes. As a
result of the decision to abandon the project, we wrote off the capitalized amounts related to this project, which were
recorded as a component of computer software and hardware and software development in progress, and recognized a non-
cash impairment charge of $31 million in the fourth quarter of fiscal year 2020. The impairment charge is reported as a
component of other non-interest expense on our consolidated statements of operations.
Assets Held for Sale
An asset is classified as held for sale when (i) management commits to a plan to sell the asset or business; (ii) the asset or
business is available for sale in its present condition; (iii) the asset or business is actively marketed for sale at a reasonable
price; (iv) the sale is expected to be completed within one year; and (v) it is unlikely significant changes to the plan will be
made or that the plan will be withdrawn. Long-lived assets classified as held for sale are initially measured at the lower of
their carrying amount or fair value less cost to sell. If the carrying value exceeds the estimated fair value less cost to sell in
the period the held for sale criteria are met, an impairment charge is recorded equal to the amount by which the carrying
amount exceeds the fair value less cost to sell. Subsequent changes in the long-lived asset’s fair value less cost to sell is
98
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reported as an adjustment to the carrying amount to the extent that the adjusted carrying amount does not exceed the
carrying amount of the long-lived asset at the time it was initially classified as held for sale.
On March 14, 2018, CFC entered into a purchase and sale agreement (“the agreement”), which was subsequently amended,
for the sale of a parcel of land, consisting of approximately 28 acres, located in Loudoun County, Virginia. We designated
the property, which had a carrying value of $14 million, as held for sale and reclassified it from fixed assets, net to other
assets on our consolidated balance sheet. On July 22, 2019, we closed on the sale of the land and received net proceeds of
$22 million, resulting in a gain of $8 million on the sale of this property, which is reported in other non-interest expense on
our consolidated statements of operations.
Foreclosed Assets
Foreclosed assets acquired through our lending activities in satisfaction of indebtedness may be held in operating entities
created and controlled by CFC and presented separately in our consolidated balance sheets under foreclosed assets, net.
These assets are initially recorded at estimated fair value as of the date of acquisition. Subsequent to acquisition, foreclosed
assets not classified as held for sale are evaluated for impairment, and the results of operations and any impairment are
reported on our consolidated statements of operations under results of operations of foreclosed assets. When foreclosed
assets meet the accounting criteria to be classified as held for sale, they are recorded at the lower of cost or fair value less
estimated cost to sell at the date of transfer, with the amount at the date of transfer representing the new cost basis.
Subsequent changes are recognized in our consolidated statements of operations under results of operations of foreclosed
assets. We also review foreclosed assets classified as held for sale each reporting period to determine whether the existing
carrying amounts are fully recoverable in comparison to estimated fair values. We did not carry any foreclosed assets on our
consolidated balance sheet as of May 31, 2020 or May 31, 2019.
Debt
We report debt at cost net of unamortized issuance costs and discounts or premiums. Issuance costs, discounts and premiums
are deferred and amortized into interest expense using the effective interest method or a method approximating the effective
interest method over the legal maturity of each bond issue. Short-term borrowings consist of borrowings with an original
contractual maturity of one year or less and do not include the current portion of long-term debt. Borrowings with an
original contractual maturity of greater than one year are classified as long-term debt.
Derivative Instruments
We are an end user of derivative financial instruments and do not engage in derivative trading. We use derivatives, primarily
interest rate swaps and Treasury rate locks, to manage interest rate risk. Derivatives may be privately negotiated contracts,
which are often referred to as over-the-counter (“OTC”) derivatives, or they may be listed and traded on an exchange. We
generally engage in OTC derivative transactions.
In accordance with the accounting standards for derivatives and hedging activities, we record derivative instruments at fair
value as either a derivative asset or derivative liability on our consolidated balance sheets. We report derivative asset and
liability amounts on a gross basis based on individual contracts, which does not take into consideration the effects of master
netting agreements or collateral netting. Derivatives in a gain position are reported as derivative assets on our consolidated
balance sheets, while derivatives in a loss position are reported as derivative liabilities. Accrued interest related to
derivatives is reported on our consolidated balance sheets as a component of either accrued interest receivable or accrued
interest payable.
If we do not elect hedge accounting treatment, changes in the fair value of derivative instruments, which consist of net
accrued periodic derivative cash settlements expense and derivative forward value amounts, are recognized in our
consolidated statements of operations under derivative gains (losses). If we elect hedge accounting treatment for derivatives,
we formally document, designate and assess the effectiveness of the hedge relationship. Changes in the fair value of
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
derivatives designated as qualifying fair value hedges are recorded in earnings together with offsetting changes in the fair
value of the hedged item and any related ineffectiveness. Changes in the fair value of derivatives designated as qualifying
cash flow hedges are recorded as a component of other comprehensive income (“OCI”), to the extent that the hedge
relationships are effective, and reclassified from accumulated other comprehensive income (“AOCI”) to earnings using the
effective interest method over the term of the forecasted transaction. Any ineffectiveness in the hedging relationship is
recognized as a component of derivative gains (losses) in our consolidated statement of operations.
We generally do not designate interest rate swaps, which represent the substantial majority of our derivatives, for hedge
accounting. Accordingly, changes in the fair value of interest rate swaps are reported in our consolidated statements of
operations under derivative gains (losses). Net periodic cash settlements expense related to interest rate swaps are classified
as an operating activity in our consolidated statements of cash flows.
We typically designate Treasury rate locks as cash flow hedges of forecasted debt issuances or repricings. Changes in the
fair value of treasury locks designated as cash flow hedges are recorded as a component of OCI and reclassified from AOCI
into interest expense when the forecasted transaction occurs using the effective interest method. Any ineffectiveness is
recognized as a component of derivative gains (losses) in our consolidated statements of operations.
Guarantee Liability
We maintain a guarantee liability that represents our contingent and noncontingent exposure related to guarantees and
standby liquidity obligations associated with our members’ debt. The guarantee liability is included in the other liabilities
line item on the consolidated balance sheet, and the provision for guarantee liability is reported in non-interest expense as a
separate line item on the consolidated statement of operations.
The contingent portion of the guarantee liability represents management’s estimate of our exposure to losses within the
guarantee portfolio. The methodology used to estimate the contingent guarantee liability is consistent with the methodology
used to determine the allowance for loan losses.
We have recorded a noncontingent guarantee liability for all new or modified guarantees since January 1, 2003. Our
noncontingent guarantee liability represents our obligation to stand ready to perform over the term of our guarantees and
liquidity obligations that we have entered into or modified since January 1, 2003. Our noncontingent obligation is estimated
based on guarantee and liquidity fees charged for guarantees issued, which represents management’s estimate of the fair
value of our obligation to stand ready to perform. The fees are deferred and amortized using the straight-line method into
interest income over the term of the guarantee.
Fair Value Valuation Processes
We present certain financial instruments at fair value, including equity and debt securities, and derivatives. Fair value is
defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between
market participants on the measurement date (also referred to as an exit price). We have various processes and controls in
place to ensure that fair value is reasonably estimated. We consider observable prices in the principal market in our
valuations where possible. Fair value estimates were developed at the reporting date and may not necessarily be indicative
of amounts that could ultimately be realized in a market transaction at a future date. With the exception of redeeming debt
under early redemption provisions, terminating derivative instruments under early-termination provisions and allowing
borrowers to prepay their loans, we held and intend to hold all financial instruments to maturity excluding common stock
and preferred stock investments that have no stated maturity and our trading debt securities.
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Hierarchy
The fair value accounting guidance provides a three-level fair value hierarchy for classifying financial instruments. This
hierarchy is based on the markets in which the assets or liabilities trade and whether the inputs to the valuation techniques
used to measure fair value are observable or unobservable. Fair value measurement of a financial asset or liability is
assigned a level based on the lowest level of any input that is significant to the fair value measurement in its entirety. The
three levels of the fair value hierarchy are summarized below:
• Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities
• Level 2: Observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities
• Level 3: Unobservable inputs
The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the
availability of quoted prices in active markets or observable market parameters. When quoted prices and observable data in
active markets are not fully available, management’s judgment is necessary to estimate fair value. Changes in market
conditions, such as reduced liquidity in the capital markets or changes in secondary market activities, may reduce the
availability and reliability of quoted prices or observable data used to determine fair value.
Membership Fees
Members are charged a one-time membership fee based on member class. CFC distribution system members, power supply
system members and national associations of cooperatives pay a $1,000 membership fee. CFC service organization
members pay a $200 membership fee and CFC associates pay a $1,000 fee. RTFC voting members pay a $1,000
membership fee and RTFC associates pay a $100 fee. NCSC members pay a $100 membership fee. Membership fees are
accounted for as members’ equity.
Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, we are a party to financial instruments with off-balance sheet risk to meet the financing
needs of our member borrowers. These financial instruments include committed lines of credit, standby letters of credit and
guarantees of members’ obligations.
Interest Income
Interest income on loans and investments is recognized using the effective interest method. The following table presents
interest income, by interest-earning asset category, for fiscal years 2020, 2019 and 2018.
(Dollars in thousands)
2020
2019
2018
Year Ended May 31,
Interest income by interest-earning asset type:
Long-term fixed-rate loans(1).....................................
Long-term variable-rate loans ...............................
Line of credit loans ...............................................
TDR loans(2) ..........................................................
Other income, net(3) ...............................................
Total loans .............................................................
Cash, time deposits and investment securities ......
Total interest income ...............................................
____________________________
$
1,043,918
$
1,012,277
$
1,000,492
31,293
55,140
836
(1,304)
1,129,883
21,403
41,219
57,847
846
(1,128)
1,111,061
24,609
27,152
38,195
889
(1,185)
1,065,543
11,814
$
1,151,286
$
1,135,670
$
1,077,357
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
(2)
Includes loan conversion fees, which are generally deferred and recognized as interest income using the effective interest method.
Troubled debt restructured (“TDR”) loans.
(3) Consists of late payment fees, commitment fees and net amortization of deferred loan fees and loan origination costs.
Deferred income of $59 million and $58 million as of May 31, 2020 and 2019, respectively, consists primarily of deferred
loan conversion fees totaling $53 million and $52 million, respectively. Deferred loan conversion fees are recognized in
interest income using the effective interest method.
Interest Expense
The following table presents interest expense, by debt product type, for fiscal years 2020, 2019 and 2018.
(Dollars in thousands)
Interest expense by debt product type:(1)(2)
Short-term borrowings ..........................................
Medium-term notes ...............................................
Collateral trust bonds ............................................
Guaranteed Underwriter Program notes payable ..
Farmer Mac notes payable ....................................
Other notes payable...............................................
Subordinated deferrable debt ................................
Subordinated certificates.......................................
Total interest expense ..............................................
____________________________
Year Ended May 31,
2020
2019
2018
$
77,995
$
92,854
$
125,954
257,396
162,929
87,617
671
51,527
57,000
133,797
273,413
147,895
90,942
1,237
38,628
57,443
50,616
111,814
336,079
140,551
56,004
1,509
37,661
58,501
$
821,089
$
836,209
$
792,735
(1)
(2)
Includes amortization of debt discounts and debt issuance costs, which are generally deferred and recognized as interest expense using the effective
interest method. Issuance costs related to dealer commercial paper, however, are recognized as interest expense immediately as incurred.
Includes fees related to funding arrangements, such as up-front fees paid to banks participating in our committed bank revolving line of credit
agreements. Depending on the nature of the fee, amounts may be deferred and recognized as interest expense ratably over the term of the arrangement or
recognized immediately as incurred.
Early Extinguishment of Debt
We redeem outstanding debt early from time to time to manage liquidity and interest rate risk. When we redeem outstanding
debt early, we recognize a gain or loss related to the difference between the amount paid to redeem the debt and the net book
value of the extinguished debt as a component of non-interest expense in the gain (loss) on early extinguishment of debt line
item.
Income Taxes
While CFC is exempt under Section 501(c)(4) of the Internal Revenue Code, it is subject to tax on unrelated business
taxable income. NCSC is a taxable cooperative that pays income tax on the full amount of its reportable taxable income and
allowable deductions. RTFC is a taxable cooperative under Subchapter T of the Internal Revenue Code and is not subject to
income taxes on income from patronage sources that is allocated to its borrowers, as long as the allocation is properly
noticed and at least 20% of the amount allocated is retired in cash prior to filing the applicable tax return.
The income tax benefit (expense) recorded in the consolidated statement of operations represents the income tax benefit
(expense) at the applicable combined federal and state income tax rates resulting in a statutory tax rate. The federal statutory
tax rate for both NCSC and RTFC was 21% for fiscal year 2020. The federal statutory tax rate for both NCSC and RTFC
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
was 21% for fiscal year 2019 and the federal statutory tax rate for NCSC and RTFC was 29% and 12%, respectively, for
fiscal year 2018. Substantially all of the income tax expense recorded in our consolidated statements of operations relates to
NCSC. NCSC had a deferred tax asset of $3 million and $2 million as of May 31, 2020 and 2019, respectively, primarily
arising from differences in the accounting and tax treatment for derivatives. We believe that it is more likely than not that the
deferred tax assets will be realized through taxable earnings.
Recent Accounting Changes and Other Developments
Accounting Standards Adopted in Fiscal Year 2020
Derivatives and Hedging—Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging—Targeted Improvements to Accounting for
Hedging Activities (Topic 815), which expands the types of risk management strategies that qualify for hedge accounting
treatment to more closely align the results of hedge accounting with the economics of certain risk-management activities
and simplifies certain hedge documentation and assessment requirements. It also eliminates the concept of separately
recording hedge ineffectiveness and expands disclosure requirements. The guidance is effective for public entities for fiscal
years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted in any
interim period or fiscal year before the effective date. We adopted this guidance on June 1, 2019. Hedge accounting is
elective, and we currently apply hedge accounting on a limited basis, specifically when we enter into Treasury rate lock
agreements. The adoption of this guidance did not have an impact on our consolidated financial statements or cash flows. If
we continue to elect not to apply hedge accounting to our interest rate swaps, the guidance will not have an impact on our
consolidated financial statements or liquidity.
Receivables—Nonrefundable Fees and Other Costs
In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20),
which shortens the amortization period for the premium on certain callable debt securities to the earliest call date rather the
maturity date. The guidance is applicable to any individual debt security, purchased at a premium, with an explicit and
noncontingent call feature with a fixed price on a preset date. The guidance does not impact the accounting for purchased
callable debt securities held at a discount. The guidance is effective for public entities in fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. We adopted this guidance on June 1, 2019. The
adoption of this guidance did not have a material impact on our consolidated financial statements or liquidity.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which provides new guidance that is intended to
improve financial reporting about leasing transactions. The new guidance requires the recognition of a right-of-use asset and
lease liability on the consolidated balance sheet by lessees for those leases classified as operating leases under previous
guidance. It also requires new disclosures to help investors and other financial statement users better understand the amount,
timing, and uncertainty of cash flows arising from leases. The guidance is effective for fiscal years and interim periods
within those fiscal years beginning after December 15, 2018. We adopted this guidance on June 1, 2019. The adoption of
this guidance did not have a material impact on our consolidated financial statements or liquidity.
Accounting Standards Adopted Subsequent to Fiscal Year 2020
Fair Value Measurement—Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement—Changes to the Disclosure Requirements for
Fair Value Measurement (Topic 820), which eliminates, adds and modifies certain disclosure requirements for fair value
measurements as part of its disclosure framework project. The guidance is effective for public entities for fiscal years
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
beginning after December 15, 2019, including interim periods within those years. Early adoption is permitted in any interim
period or fiscal year before the effective date. We adopted this guidance on June 1, 2020. The adoption of this guidance did
not have a material impact on our consolidated financial statements or liquidity.
Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on
Financial Instruments (Topic 326), which replaces the existing incurred credit loss model and establishes a single credit loss
framework based on a current expected credit loss (“CECL”) model for financial assets carried at amortized cost, including
loans and held-to-maturity debt securities. CECL requires an entity to estimate credit losses expected over the life of the
credit exposure upon initial recognition of that exposure when the financial asset is originated or acquired, which will
generally result in earlier recognition of credit losses. The guidance also expands credit quality disclosures and amends the
other-than-temporary model for available-for-sale debt securities by requiring the use of an allowance, rather than directly
reducing the carrying value of the security. The CECL model is applicable to our loans held-for-investment, unadvanced
loan commitments and financial guarantees. Our investment securities are not within the scope of the CECL model because
they are classified as trading. We adopted CECL on June 1, 2020, using a modified retrospective approach.
We leveraged our existing probability of default/loss given default model for estimating incurred credit losses and
recalibrated this model to serve as the framework for our approach in estimating life-time credit losses for our loan portfolio
under CECL. Due to the disruption, rapidly changing conditions and uncertainty caused by the ongoing COVID-19
pandemic, management is continuing to review, assess and refine considerations and judgments related to our qualitative
framework under CECL prior to finalizing our estimate of expected credit losses. However, we currently do not believe that
the impact at adoption of CECL will have a material impact on our consolidated financial statements. We expect the ultimate
impact from our June 1, 2020 adoption of CECL, which we are required to record as a cumulative-effect adjustment to
retained earnings, will result in an immaterial decrease in retained earnings and a corresponding increase in our allowance
for loan losses. Subsequent to June 1, 2020, expected credit losses for newly recognized loans held for investment,
unadvanced loan commitments and financial guarantees, as well as changes in our estimate of expected credit losses on
existing financial instruments subject to CECL, will be recognized in earnings. We will be subject to the expanded credit
quality disclosure requirements under CECL beginning with the filing of our fiscal year 2021 first quarter Form 10-Q report
for the quarterly period ended August 31, 2020.
NOTE 2—VARIABLE INTEREST ENTITIES
NCSC and RTFC meet the definition of a VIE because they do not have sufficient equity investment at risk to finance their
activities without financial support. CFC is the primary source of funding for NCSC and the sole source of funding for
RTFC. Under the terms of management agreements with each company, CFC manages the business operations of NCSC and
RTFC. CFC also unconditionally guarantees full indemnification for any loan losses of NCSC and RTFC pursuant to
guarantee agreements with each company. CFC earns management and guarantee fees from its agreements with NCSC and
RTFC.
All loans that require NCSC board approval also require CFC board approval. CFC is not a member of NCSC and does not
elect directors to the NCSC board. If CFC becomes a member of NCSC, it would control the nomination process for one
NCSC director. NCSC members elect directors to the NCSC board based on one vote for each member. NCSC is a Class C
member of CFC. All loans that require RTFC board approval also require approval by CFC for funding under RTFC’s credit
facilities with CFC. CFC is not a member of RTFC and does not elect directors to the RTFC board. RTFC is a non-voting
associate of CFC. RTFC members elect directors to the RTFC board based on one vote for each member.
NCSC and RTFC creditors have no recourse against CFC in the event of a default by NCSC and RTFC, unless there is a
guarantee agreement under which CFC has guaranteed NCSC or RTFC debt obligations to a third party. The following table
provides information on incremental consolidated assets and liabilities of VIEs included in CFC’s consolidated financial
statements, after intercompany eliminations, as of May 31, 2020 and 2019.
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Total loans outstanding..............................................
Other assets................................................................
Total assets.................................................................
Long-term debt ..........................................................
Other liabilities ..........................................................
Total liabilities ...........................................................
May 31,
2020
1,083,197
11,352
1,094,549
$
$
— $
38,803
38,803
$
2019
1,087,988
10,963
1,098,951
6,000
33,385
39,385
$
$
$
$
The following table provides information on CFC’s credit commitments to NCSC and RTFC, and its potential exposure to
loss as of May 31, 2020 and 2019.
(Dollars in thousands)
CFC credit commitments ..........................................
Outstanding commitments:
$
Borrowings payable to CFC(1) ................................
Credit enhancements:.............................................
CFC third-party guarantees................................
Other credit enhancements.................................
Total credit enhancements(2) ...................................
Total outstanding commitments ................................
CFC available credit commitments...........................
____________________________
(1)
Borrowings payable to CFC are eliminated in consolidation.
(2)
Excludes interest due on these instruments.
May 31,
2020
5,500,000
2019
$
5,500,000
1,062,103
1,059,629
9,999
11,755
21,754
1,083,857
$
4,416,143
$
10,091
14,251
24,342
1,083,971
4,416,029
CFC loans to NCSC and RTFC are secured by all assets and revenue of NCSC and RTFC. CFC’s maximum potential
exposure, including interest due, for the credit enhancements totaled $22 million. The maturities for obligations guaranteed
by CFC extend through 2031.
105
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3—INVESTMENT SECURITIES
We currently hold investments in equity and debt securities. We record purchases and sales of our investment securities on a
trade-date basis. Investments are denominated in US dollars exclusively. The accounting and measurement framework for
investment securities differs depending on the security type and the classification. See “Note 1—Summary of Significant
Accounting Policies” for additional information on our investment securities
Equity Securities
The following table presents the fair value of our equity securities, all of which had readily determinable fair values, as
of May 31, 2020 and 2019.
(Dollars in thousands)
Equity securities at fair value:
May 31,
2020
2019
Farmer Mac—Series A, B and C non-cumulative preferred stock ..........
Farmer Mac—class A common stock ......................................................
Total equity securities at fair value.............................................................
$
$
55,640
5,095
60,735
$
$
82,445
5,088
87,533
We recognized net unrealized losses on our investments in equity securities of $2 million for both years ended May 31, 2020
and 2019. These unrealized amounts are reported as a component of non-interest income on our consolidated statements of
operations. For additional information on our investments in equity securities, see “Note 1—Summary of Significant
Accounting Policies” and “Note 11—Equity—Accumulated Other Comprehensive Income.”
On June 12, 2019, Farmer Mac redeemed its Series B non-cumulative preferred stock at a redemption price of $25.00 per
share, plus any declared and unpaid dividends through and including the redemption date. The amortized cost of our
investment in the Farmer Mac Series B non-cumulative preferred stock was $25 million as of the redemption date, which
equaled the per share redemption price. In connection with this redemption, we recorded a realized loss on equity securities
of $0.2 million for the year ended May 31, 2020.
Debt Securities
Pursuant to our investment policy guidelines, all fixed-income debt securities, at the time of purchase, must be rated at least
investment grade and on stable outlook based on external credit ratings from at least two of the leading global credit rating
agencies, when available, or the corresponding equivalent, when not available. Securities rated investment grade, that is
those rated Baa3 or higher by Moody’s Investors Service (“Moody’s”) or BBB- or higher by S&P or BBB- or higher by
Fitch Ratings Inc. (“Fitch”), are generally considered by the rating agencies to be of lower credit risk than non-investment
grade securities.
In light of the extreme volatility and disruptions in the capital and credit markets in early March 2020 resulting from the
COVID-19 crisis, including a significant decline in corporate debt and equity issuances and a deterioration in the
commercial paper market, we took a number of precautionary actions in March to enhance our financial flexibility by
bolstering our cash position to ensure we have adequate cash readily available to meet both expected and unexpected cash
needs without adversely affecting our daily operations. These actions included, among others, revising our objective for the
use of our held-to-maturity investment portfolio from previously serving as a supplemental source of liquidity to serving as
a readily available source of liquidity and executing a plan for the orderly liquidation of a portion of debt securities in our
investment portfolio. We therefore transferred securities with an amortized cost of $571 million from our held-to-maturity
investment portfolio to trading and, in conjunction with the transfer, recognized an unrealized gain of $1 million in earnings
in the fourth quarter of fiscal year 2020.
106
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Securities Trading, at Fair Value
The following table presents the fair value of our debt securities classified as trading by major security type as of May 31,
2020.
(Dollars in thousands)
Debt securities trading, at fair value:
Certificates of deposit ...................................................................
Corporate debt securities ..............................................................
Commercial MBS:
$
Agency .......................................................................................
Non-agency ................................................................................
Total commercial MBS.................................................................
U.S. state and municipality debt securities...................................
Other ABS(1)..................................................................................
Total debt securities trading, at fair value .......................................
____________________________
May 31, 2020
5,585
253,153
7,655
3,207
10,862
8,296
31,504
$
309,400
(1)
Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.
Realized and Unrealized Gains and Losses
During the year ended May 31, 2020, we sold debt investment securities totaling $239 million. The following table presents
the gross realized and unrealized gains and losses on our debt securities classified as trading as of May 31, 2020. These
realized and unrealized amounts are reported as a component of non-interest income on our consolidated statements of
operations. For additional information on our investments in debt securities, see “Note 1—Summary of Significant
Accounting Policies.”
(Dollars in thousands)
Debt securities gains (losses):
May 31, 2020
Realized gains ................................................................................
Unrealized gains.............................................................................
Total gains on debt securities trading ...............................................
$
$
3,686
7,543
11,229
Debt Securities Held-to-Maturity, at Amortized Cost
Amortized Cost and Fair Value of Debt Securities
The following table presents the amortized cost and fair value of our debt securities classified as held to maturity and the
corresponding gross unrealized gains and losses, by classification category and major security type, as of May 31, 2019.
107
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Debt securities held-to-maturity:
Certificates of deposit .......................................................
Commercial paper .............................................................
U.S. agency debt securities ...............................................
Corporate debt securities...................................................
Commercial MBS:
Agency............................................................................
Non-agency.....................................................................
Total commercial MBS .....................................................
U.S. state and municipality debt securities .......................
Foreign government debt securities ..................................
Other ABS(1) ......................................................................
Total debt securities held-to-maturity..................................
____________________________
May 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Amortized Cost
$
1,000
$
— $
— $
12,395
3,207
478,578
7,255
3,453
10,708
9,608
1,254
48,694
—
108
4,989
291
—
291
352
42
290
$
565,444
$
6,072
$
—
—
(912)
—
(7)
(7)
—
—
(48)
(967) $
1,000
12,395
3,315
482,655
7,546
3,446
10,992
9,960
1,296
48,936
570,549
(1)
Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.
Debt Securities in Gross Unrealized Loss Position
An unrealized loss exists when the fair value of an individual security is less than its amortized cost basis. The following
table presents the fair value and gross unrealized losses for debt securities in a gross loss position, aggregated by security
type, and the length of time the securities have been in a continuous unrealized loss position as of May 31, 2019. The
securities are segregated between investments that have been in a continuous unrealized loss position for less than 12
months and 12 months or more based on the point in time that the fair value declined below the amortized cost basis.
(Dollars in thousands)
Debt securities held-to-maturity:
Commercial paper(1).....................................
Corporate debt securities..............................
Commercial MBS, non-agency....................
Other ABS(2).................................................
Total debt securities held-to-maturity ...............
____________________________
May 31, 2019
Unrealized Loss Position
Less than 12 Months
Unrealized Loss Position
12 Months or Longer
Total
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
$
2,688
$
— $
— $
— $
2,688
$
45,999
1,996
1,982
$ 52,665
$
164,086
1,448
(198)
(4)
(4)
13,840
(206) $ 179,374
210,085
(714)
(3)
(44)
15,822
(761) $ 232,039
3,444
$
$
—
(912)
(7)
(48)
(967)
(1)Unrealized losses on the commercial paper investments are less than $1,000.
(2)
Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.
108
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other-Than-Temporary Impairment
During fiscal year 2019, we conducted periodic reviews of all securities with unrealized losses to evaluate whether the
impairment is other than temporary. The number of individual securities in an unrealized loss position was 187 as of
May 31, 2019. We assessed each security with gross unrealized losses included in the above table for credit impairment. As
part of that assessment, we concluded that the unrealized losses are driven by changes in market interest rates rather than by
adverse changes in the credit quality of these securities. Based on our assessment, we expected to recover the entire
amortized cost basis of these securities, as we did not intend to sell any of the securities and concluded that it is more likely
than not that we will not be required to sell prior to recovery of the amortized cost basis. Accordingly, we considered the
impairment of these securities to be temporary.
Contractual Maturity and Yield
The following table presents, by major security type, the remaining contractual maturity based on amortized cost and fair
value of our held-to-maturity investment securities as of May 31, 2019. Because borrowers may have the right to call or
prepay certain obligations, the expected maturities of our investments may differ from the scheduled contractual maturities
presented below.
109
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Amortized cost:
Certificates of deposit .............................................
Commercial paper ...................................................
U.S. agency debt securities .....................................
Corporate debt securities.........................................
Commercial MBS:
Agency..................................................................
Non-Agency..........................................................
Total Commercial MBS ..........................................
U.S. state and municipality debt securities...........
Foreign government debt securities......................
Other ABS(1)..........................................................
Total...........................................................................
Fair value:
Certificates of deposit .............................................
Commercial paper ...................................................
U.S. agency debt securities .....................................
Corporate debt securities.........................................
Commercial MBS:
Agency..................................................................
Non-Agency..........................................................
Total Commercial MBS ..........................................
U.S. state and municipality debt securities...........
Foreign government debt securities......................
Other ABS(1)..........................................................
Total ...........................................................................
Weighted average coupon(2).......................................
____________________________
May 31, 2019
Due in 1 Year
or Less
Due > 1 Year
through 5
Years
Due > 5 Years
through 10
Years
Due >10
Years
Total
$
— $
1,000
$
— $
— $ 1,000
12,395
—
—
2,678
—
529
—
—
12,395
3,207
51,923
414,788
11,867
— 478,578
—
—
—
—
—
510
310
—
310
9,608
1,254
45,730
$
64,828
$ 475,368
$
— $
1,000
12,395
—
—
2,769
$
$
6,945
—
6,945
—
—
2,454
—
3,453
3,453
—
—
—
7,255
3,453
10,708
9,608
1,254
48,694
21,795
$
3,453
$565,444
— $
— $ 1,000
—
546
—
—
12,395
3,315
51,818
418,606
12,231
— 482,655
—
—
—
—
—
509
317
—
317
9,960
1,296
45,916
7,229
—
7,229
—
—
2,511
—
3,446
3,446
—
—
—
7,546
3,446
10,992
9,960
1,296
48,936
$
64,722
$ 479,864
$
22,517
$
3,446
$570,549
2.08%
3.10%
3.07%
3.26%
2.98%
(1)
(2)
Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.
Calculated based on the weighted-average coupon rate, which excludes the impact of amortization of premium and accretion of discount.
The average contractual maturity and weighted-average coupon of our HTM investment securities was three years and
2.98%, respectively, as of May 31, 2019. The average credit rating of these securities, based on the equivalent lowest credit
rating by Moody’s, S&P and Fitch was A2, A and A, respectively, as of May 31, 2019.
Realized Gains and Losses
We did not sell any of our debt investment securities during the year ended May 31, 2019, and therefore have not recorded
any realized gains or losses during fiscal year 2019.
110
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4—LOANS
We offer loans under secured long-term facilities with terms up to 35 years and line of credit loans. Under secured long-term
facilities, borrowers have the option of selecting a fixed or variable rate for a period of one to 35 years for each long-term
loan advance. When a selected fixed interest rate term expires, the borrower may select another fixed-rate term or a variable
rate. Line of credit loans are typically variable-rate revolving facilities and are generally unsecured. Collateral and security
requirements for advances on loan commitments are identical to those required at the time of the initial loan approval.
The following table presents the outstanding principal balance of loans to members, including deferred loan origination
costs, and unadvanced loan commitments by loan type and member class, as of May 31, 2020 and 2019.
May 31,
2020
2019
Loans
Outstanding
Unadvanced
Commitments (1)
Loans
Outstanding
Unadvanced
Commitments (1)
(Dollars in thousands)
Loan type:
Long-term loans:
Fixed rate.....................................................
$ 24,472,003
$
Variable rate ................................................
Total long-term loans.....................................
Lines of credit................................................
655,704
25,127,707
1,563,147
— $ 23,094,253
1,066,880
5,458,676
$
5,458,676
7,929,950
24,161,133
1,744,531
—
5,448,636
5,448,636
7,788,922
Total loans outstanding..................................
26,690,854
13,388,626
25,905,664
13,237,558
Deferred loan origination costs .....................
11,526
—
11,240
—
Loans to members..........................................
$ 26,702,380
$ 13,388,626
$ 25,916,904
$ 13,237,558
Member class:
CFC:
Distribution .................................................
$ 20,769,653
$
8,992,457
$ 20,155,266
$
8,773,018
Power supply...............................................
Statewide and associate...............................
Total CFC ......................................................
NCSC.............................................................
RTFC .............................................................
4,731,506
106,498
3,409,227
153,626
25,607,657
12,555,310
697,862
385,335
551,674
281,642
4,578,841
83,569
24,817,676
742,888
345,100
3,466,680
165,687
12,405,385
552,840
279,333
Total loans outstanding..................................
26,690,854
13,388,626
25,905,664
13,237,558
Deferred loan origination costs .....................
11,526
—
11,240
—
Loans to members..........................................
$ 26,702,380
$ 13,388,626
$ 25,916,904
$ 13,237,558
____________________________
(1)
The interest rate on unadvanced loan commitments is not set until an advance is made; therefore, all long-term unadvanced loan commitments are
reported as variable rate. However, the borrower may select either a fixed or a variable rate when an advance on a commitment is made.
Unadvanced Loan Commitments
Unadvanced loan commitments represent approved and executed loan contracts for which funds have not been advanced to
borrowers. The following table summarizes, by loan type, the available balance under unadvanced loan commitments as of
May 31, 2020 and related maturities by fiscal year for each of the next five fiscal years and thereafter.
111
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Line of credit loans........
Long-term loans.............
Available
Balance
$ 7,929,950
5,458,676
Total ..........................
$13,388,626
Notional Maturities of Unadvanced Loan Commitments
2021
$4,050,588
2022
$ 613,528
2023
$1,223,510
2024
$ 961,034
2025
$1,032,749
497,104
$4,547,692
1,364,755
$1,978,283
873,822
$2,097,332
1,674,029
$2,635,063
1,044,671
$2,077,420
Thereafter
48,541
$
4,295
52,836
$
Unadvanced line of credit commitments accounted for 59% of total unadvanced loan commitments as of May 31, 2020,
while unadvanced long-term loan commitments accounted for 41% of total unadvanced loan commitments. Unadvanced
line of credit commitments are typically revolving facilities for periods not to exceed five years. Unadvanced line of credit
commitments generally serve as supplemental back-up liquidity to our borrowers. Historically, borrowers have not drawn
the full commitment amount for line of credit facilities, and we have experienced a very low utilization rate on line of credit
loan facilities regardless of whether or not we are obligated to fund the facility where a material adverse change exists.
Our unadvanced long-term loan commitments have a five-year draw period under which a borrower may advance funds
prior to the expiration of the commitment. We expect that the majority of the long-term unadvanced loan commitments of
$5,459 million will be advanced prior to the expiration of the commitment.
Because we historically have experienced a very low utilization rate on line of credit loan facilities, which account for the
majority of our total unadvanced loan commitments, we believe the unadvanced loan commitment total of $13,389 million
as of May 31, 2020 is not necessarily representative of our future funding cash requirements.
Unadvanced Loan Commitments—Conditional
The substantial majority of our line of credit commitments and all of our unadvanced long-term loan commitments include
material adverse change clauses. Unadvanced loan commitments subject to material adverse change clauses totaled $10,532
million and $10,294 million as of May 31, 2020 and 2019, respectively. Prior to making an advance on these facilities, we
confirm 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 the borrower is currently in compliance with loan terms and conditions. In some
cases, the borrower’s access to the full amount of the facility is further constrained by the designated purpose, imposition of
borrower-specific restrictions or by additional conditions that must be met prior to advancing funds.
Unadvanced Loan Commitments—Unconditional
Unadvanced loan commitments not subject to material adverse change clauses at the time of each advance consisted of
unadvanced committed lines of credit totaling $2,857 million and $2,944 million as of May 31, 2020 and 2019, respectively.
As such, we are required to advance amounts on these committed facilities as long as the borrower is in compliance with the
terms and conditions of the facility.
The following table summarizes the available balance under unconditional committed lines of credit and the related
maturities by fiscal year and thereafter, as of May 31, 2020.
(Dollars in thousands)
Committed lines of credit .......
Available
Balance
$2,857,029
Notional Maturities of Unconditional Committed Lines of Credit
2021
$115,815
2022
$194,105
2023
$970,366
2024
$698,396
2025
$878,347
Loan Sales
We transfer, from time to time, whole loans and participating interests to third parties. These transfers, which meet the
accounting criteria required to qualify for sale accounting, are made concurrently with the closing of the loan or
112
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
participation agreement at par value. Accordingly, we remove the transferred loans or participating interests from our
consolidated balance sheets when control has been surrendered and recognize a gain or loss on the sale. We retain a
servicing performance obligation on the transferred loans and recognize related servicing fees on an accrual basis over the
period for which servicing is provided, as we believe the servicing fee represents adequate compensation. Other than the
servicing performance obligation, we do not hold any continuing interest in the loans sold to date. In addition, we have no
obligation to repurchase loans that are sold, except in the case of breaches of representations and warranties.
We sold CFC loans with outstanding balances totaling $151 million, $35 million and $119 million at par for cash in fiscal
years 2020, 2019 and 2018, respectively. We recorded immaterial losses on the sale of these loans, which were attributable
to unamortized deferred loan origination costs associated with the transferred loans.
Pledging of Loans
We are required to pledge eligible mortgage notes in an amount at least equal to the outstanding balance of our secured debt.
The following table summarizes our loans outstanding as collateral pledged to secure our collateral trust bonds, Clean
Renewable Energy Bonds, notes payable to Farmer Mac and notes payable under USDA’s Guaranteed Underwriter Program
(“Guaranteed Underwriter Program”) and the amount of the corresponding debt outstanding as of May 31, 2020 and 2019.
See “Note 6—Short-Term Borrowings” and “Note 7—Long-Term Debt” for information on our borrowings.
(Dollars in thousands)
Collateral trust bonds:
2007 indenture:
May 31,
2020
2019
Distribution system mortgage notes ...........................................................
RUS-guaranteed loans qualifying as permitted investments ......................
Total pledged collateral...............................................................................
Collateral trust bonds outstanding..............................................................
1994 indenture:
Distribution system mortgage notes ...........................................................
Collateral trust bonds outstanding ..............................................................
$
$
$
8,244,202
128,361
8,372,563
7,422,711
39,785
35,000
$
$
$
8,775,231
134,678
8,909,909
7,622,711
47,331
40,000
Farmer Mac:
Distribution and power supply system mortgage notes..............................
$
3,687,418
$
3,751,798
Notes payable outstanding..........................................................................
3,059,637
3,054,914
Clean Renewable Energy Bonds Series 2009A:
Distribution and power supply system mortgage notes..............................
Cash ............................................................................................................
Total pledged collateral...............................................................................
Notes payable outstanding..........................................................................
$
$
$
$
7,269
395
7,664
6,068
10,349
415
10,764
9,225
Federal Financing Bank:
Distribution and power supply system mortgage notes..............................
$
7,535,931
$
6,157,218
Notes payable outstanding..........................................................................
6,261,312
5,410,507
113
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Concentration
Concentrations may exist when there are amounts loaned to borrowers engaged in similar activities or in geographic areas
that would cause them to be similarly impacted by economic or other conditions or when there are large exposures to single
borrowers. As a tax-exempt, member-owned finance cooperative, CFC’s principal focus is to provide funding to its rural
electric utility cooperative members to assist them in acquiring, constructing and operating electric distribution systems,
power supply systems and related facilities. We serve electric and telecommunications members throughout the United
States, with a total of 889 borrowers located in 49 states as of May 31, 2020. Loans to borrowers in Texas accounted for
approximately 16% and 15% of total loans outstanding as of May 31, 2020 and 2019, respectively, representing the largest
concentration of loans outstanding to borrowers and also the highest number of borrowers in any one state.
Because we lend primarily to our rural electric utility cooperative members, we have a loan portfolio subject to single-
industry and single-obligor concentration risks. Loans outstanding to electric utility organizations represented
approximately 99% of total loans outstanding as of May 31, 2020, unchanged from May 31, 2019. The remaining loans
outstanding in our portfolio were to RTFC members, affiliates and associates in the telecommunications industry. The
outstanding loan exposure for our 20 largest borrowers was 22% as of both May 31, 2020 and 2019. The 20 largest
borrowers consisted of 11 distribution systems and nine power supply systems as of May 31, 2020. The 20 largest borrowers
consisted of 10 distribution systems, nine power supply systems and one NCSC associate as of May 31, 2019. The largest
outstanding loan exposure to a single borrower or controlled group represented approximately 2% of total loans outstanding
as of both May 31, 2020 and 2019.
As part of our strategy in managing our credit exposure, we entered into a long-term standby purchase commitment
agreement with Farmer Mac during fiscal year 2016. Under this agreement, we may designate certain long-term loans to be
covered under the commitment, subject to approval by Farmer Mac, and in the event any such loan later goes into payment
default for at least 90 days, upon request by us, Farmer Mac must purchase such loan at par value. The aggregate unpaid
principal balance of designated and Farmer Mac-approved loans was $569 million and $619 million as of May 31, 2020 and
2019, respectively. Under the agreement, we are required to pay Farmer Mac a monthly fee based on the unpaid principal
balance of loans covered under the purchase commitment. No loans had been put to Farmer Mac for purchase, pursuant to
this agreement, as of May 31, 2020. Also, we had long-term loans guaranteed by RUS totaling $147 million and $154
million as of May 31, 2020 and 2019, respectively.
Credit Quality
Assessing the overall credit quality of our loan portfolio and measuring our credit risk is an ongoing process that involves
tracking payment status, charge-offs, troubled debt restructurings, nonperforming and impaired loans, the internal risk
ratings of our borrowers and other indicators of credit risk. We monitor and subject each borrower and loan facility in our
loan portfolio to an individual risk assessment based on quantitative and qualitative factors. Internal risk ratings and
payment status trends are indicators, among others, of the probability of borrower default and level of credit risk in our loan
portfolio.
Borrower Risk Ratings
As part of our credit risk management process, we monitor and evaluate each borrower and loan in our loan portfolio and
assign internal borrower and loan facility risk ratings based on quantitative and qualitative assessments. Our borrower risk
ratings are intended to assess probability of default. Each risk rating is reassessed annually following the receipt of the
borrower’s audited financial statements; however, interim risk-rating downgrades or upgrades may occur as a result of
significant developments or trends. Our borrower risk ratings are intended to align with the interagency banking regulatory
guidance on the framework for credit risk ratings and the definitions for the classification of credit exposures as pass or
criticized. Pass ratings indicate relatively low probability of default, while criticized ratings, which consist of the categories
special mention, substandard and doubtful indicate higher probability of default. Following is a description of each rating
category.
114
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• Pass: Borrowers that are not experiencing difficulty and/or not showing a potential or well-defined credit weakness.
• Special Mention: Borrowers that may be characterized by a potential credit weakness or deteriorating financial condition
that is not sufficiently serious to warrant a classification of substandard or doubtful.
• Substandard: Borrowers that display a well-defined credit weakness that may jeopardize the full collection of principal
and interest.
• Doubtful: Borrowers that have a well-defined credit weakness or weaknesses that make full collection of principal and
interest, on the basis of currently known facts, conditions and collateral values, highly questionable and improbable.
Loans to borrowers in the pass, special mention and substandard categories are generally considered not to be individually
impaired and are included in our loan pools for determining the collective component of the allowance for loan losses.
Loans to borrowers in the doubtful category are considered to be impaired and are therefore individually assessed for
impairment in determining the asset-specific component of the allowance for loan losses.
The following tables present total loans outstanding, by member class and borrower risk-rating category, based on the risk
ratings as of May 31, 2020 and 2019. If a parent company provides a guarantee of full repayment of loans of a subsidiary
borrower, we group the outstanding loans in the borrower risk-rating category of the guarantor parent company instead of
the risk-rating category of the subsidiary borrower for purposes of estimating the allowance for loan losses. The borrower
risk ratings for loans outstanding presented in the tables below are based on this risk-rating grouping.
(Dollars in thousands)
CFC:
Pass
Special Mention
Substandard
Doubtful
Total
May 31, 2020
Distribution .............................
$ 20,643,737
$
7,743
$
118,173
$
— $ 20,769,653
Power supply...........................
Statewide and associate...........
CFC total ...................................
NCSC.........................................
RTFC .........................................
4,516,595
90,274
25,250,606
697,862
371,507
—
16,224
23,967
—
8,736
47,203
—
165,376
—
5,092
167,708
—
4,731,506
106,498
167,708
25,607,657
—
—
697,862
385,335
Total loans outstanding..............
$ 26,319,975
$
32,703
$
170,468
$
167,708
$ 26,690,854
(Dollars in thousands)
CFC:
Pass
Special Mention
Substandard
Doubtful
Total
May 31, 2019
Distribution .............................
$ 20,022,193
$
10,375
$
122,698
$
— $ 20,155,266
Power supply...........................
Statewide and associate...........
CFC total ...................................
NCSC.........................................
RTFC .........................................
4,530,708
68,569
24,621,470
742,888
339,508
—
15,000
25,375
—
—
48,133
—
170,831
—
5,592
—
—
—
—
—
4,578,841
83,569
24,817,676
742,888
345,100
Total loans outstanding..............
$ 25,703,866
$
25,375
$
176,423
$
— $ 25,905,664
The substantial majority of the loan amount in the substandard category is attributable to one electric distribution borrower
and its subsidiary, which had loans outstanding totaling $165 million and $171 million as of May 31, 2020 and 2019,
115
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
respectively. The electric distribution cooperative borrower owns and operates a distribution and transmission system.
Several years ago, it established a subsidiary to deploy retail broadband service in underserved rural communities. Although
the borrower has experienced financial difficulties due to recent net losses and liquidity constraints, the borrower and its
subsidiary are current with regard to all principal and interest payments and have never been delinquent. The borrower,
which operates in a territory that is not rate-regulated, increased its electric and broadband rates in March 2019 and has
taken other actions to improve its financial performance and liquidity. All of the loans outstanding to this borrower were
secured under our typical collateral requirements for long-term loan advances as of May 31, 2020. We currently expect to
collect all principal and interest amounts due from the borrower and its subsidiary. Accordingly, the loans outstanding to this
borrower and its subsidiary were not deemed to be impaired as of May 31, 2020 r.
The loan amount in the doubtful category of $168 million as of May 31, 2020, represents one loan to a CFC power supply
borrower. Under the terms of the loan, which matures in December 2026, the amount the borrower is required to pay in 2024
and 2025 may vary as the payments are contingent on the borrower’s financial performance in those years. As of May 31,
2020, the borrower was current with respect to required payments on the loan and not in default. However, based on our
review and assessment of the most recent forecast and underlying assumptions provided by the borrower in May 2020, we
no longer believe that the total future expected cash payments from the borrower through the maturity of the loan in
December 2026 will be sufficient to repay the outstanding loan balance of $168 million as of May 31, 2020. We therefore
determined that it was appropriate to classify the loan as nonperforming, designate it as impaired and include it in the
doubtful risk-rating category as of May 31, 2020.
Payment Status of Loans
The following tables present the payment status of loans outstanding by member class as of May 31, 2020 and 2019. As
indicated in the table below, we did not have any delinquent loans as of either May 31, 2020 or May 31, 2019. Although, as
discussed above, the CFC power supply borrower with an outstanding loan of $168 million was current with respect to
required payments on the loan and not in default, we classified this loan as nonperforming and placed it on nonaccrual status
as of May 31, 2020.
(Dollars in thousands)
CFC:
Current
30-89 Days
Past Due
90 Days or
More
Past Due (1)
Total
Past Due
Total Loans
Outstanding
Nonaccrual
Loans
May 31, 2020
Distribution .......................
Power supply .....................
Statewide and associate.....
CFC total .............................
NCSC ...................................
RTFC ...................................
Total loans outstanding ........
$ 20,769,653
4,731,506
106,498
25,607,657
697,862
385,335
$ 26,690,854
$
$
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
— $ 20,769,653
4,731,506
—
—
106,498
25,607,657
—
697,862
—
—
385,335
— $ 26,690,854
$
$
—
167,708
—
167,708
—
—
167,708
Percentage of total loans ......
100.00%
—%
—%
—%
100.00%
0.63%
116
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
CFC:
Current
30-89 Days
Past Due
90 Days or
More
Past Due (1)
Total
Past Due
Total Loans
Outstanding
Nonaccrual
Loans
May 31, 2019
Distribution .......................
Power supply .....................
Statewide and associate.....
CFC total .............................
NCSC ...................................
RTFC ...................................
Total loans outstanding ........
$ 20,155,266
4,578,841
83,569
24,817,676
742,888
345,100
$ 25,905,664
$
$
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
— $ 20,155,266
4,578,841
—
—
83,569
24,817,676
—
742,888
—
—
345,100
— $ 25,905,664
$
$
—
—
—
—
—
—
—
Percentage of total loans ......
100.00%
—%
—%
—%
100.00%
—%
____________________________
(1)
All loans 90 days or more past due are on nonaccrual status.
Troubled Debt Restructurings
We did not have any loans modified as TDRs during the year ended May 31, 2020. The following table provides a summary
of loans modified as TDRs in prior periods, the performance status of these loans and the unadvanced loan commitments
related to the TDR loans, by member class, as of May 31, 2020 and 2019.
May 31,
2020
2019
Loans
Outstanding
% of Total
Loans
Unadvanced
Commitments
Loans
Outstanding
% of Total
Loans
Unadvanced
Commitments
(Dollars in thousands)
TDR loans:
Performing TDR loans:
CFC/Distribution .........................
RTFC............................................
Total performing TDR loans ...............
Total TDR loans ..................................
$
5,755
0.02% $
5,092
10,847
0.02
0.04
$
10,847
0.04% $
— $
—
—
— $
6,261
5,592
11,853
11,853
0.03% $
0.02
0.05
0.05% $
—
—
—
—
We did not have any TDR loans classified as nonperforming as of May 31, 2020 or May 31, 2019. TDR loans classified as
performing as of May 31, 2020 and 2019 were performing in accordance with the terms of their respective restructured loan
agreement and on accrual status as of the respective reported dates.
The TDR loan outstanding amount for CFC relates to a loan with one borrower. This borrower also had two line of credit
facilities as of May 31, 2020 and 2019. One line of credit facility for $6 million as of both May 31, 2020 and 2019, is
restricted for fuel purchases only. Outstanding loans under this facility totaled less than $1 million as of May 31, 2020 and
$3 million as of May 31, 2019, and were classified as performing as of each respective date. The other line of credit facility
for $2 million as of May 31, 2020 and 2019, was put in place during fiscal year 2019 to provide bridge funding for electric
work plan expenditures in anticipation of receiving RUS funding. Outstanding loans under this facility totaled $2 million
and $1 million as of May 31, 2020 and 2019, respectively, and were classified as performing as of each respective date.
117
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The TDR loan outstanding amount for RTFC relates to a loan with one borrower. During fiscal year 2020, we amended the
restructured loan agreement with the borrower to extend the maturity by two years. The amended RTFC loan currently
remains on accrual status and will continue to amortize monthly through the maturity date of the loan.
Nonperforming Loans
In addition to TDR loans that may be classified as nonperforming, we also may have nonperforming loans that have not
been modified as a TDR. We had one loan to a CFC power supply borrower with an outstanding balance of $168 million,
which we classified as nonperforming and designated as impaired as of May 31, 2020, and also classified as doubtful. Under
the terms of the loan, which matures in December 2026, the amount the borrower is required to pay in 2024 and 2025 may
vary as the payments are contingent on the borrower’s financial performance in those years. As of May 31, 2020, the
borrower was current with respect to required payments on the loan and not in default. However, based on our review and
assessment of the most recent forecast and underlying assumptions provided by the borrower in May 2020, we no longer
believe that the total future expected cash payments from the borrower through the maturity of the loan in December 2026
will be sufficient to repay the outstanding loan balance of $168 million as of May 31, 2020. We therefore determined that it
was appropriate to classify the loan as nonperforming and place it on nonaccrual status as of May 31, 2020. We did not have
any loans classified as nonperforming as of May 31, 2019.
We had no foregone interest income for loans on nonaccrual status for the years ended May 31, 2020, 2019 and 2018.
Impaired Loans
The following table provides information on loans classified as individually impaired as of May 31, 2020 and 2019.
(Dollars in thousands)
With no specific allowance recorded:
May 31,
2020
2019
Recorded
Investment
Related
Allowance
Recorded
Investment
Related
Allowance
CFC...........................................................
$
5,756
$
— $
6,261
$
—
With a specific allowance recorded:
CFC...........................................................
RTFC.........................................................
Total impaired loans....................................
$
167,708
5,092
178,556
$
33,854
979
34,833
$
5,592
11,853
$
1,021
1,021
The following table presents, by company, the average recorded investment for individually impaired loans and the interest
income recognized on these loans for fiscal years ended May 31, 2020, 2019 and 2018.
Average Recorded Investment
Interest Income Recognized
(Dollars in thousands)
CFC ............................................................
RTFC ..........................................................
Total impaired loans.................................
2020
11,834
5,361
17,195
$
$
2019
2018
2020
2019
2018
$
$
6,322
5,861
12,183
$
$
6,524
6,361
12,885
$
$
568
268
836
$
$
553
293
846
$
$
571
318
889
Net Charge-Offs
Charge-offs represent the amount of a loan that has been removed from our consolidated balance sheet when the loan is
deemed uncollectible. Generally the amount of a charge-off is the recorded investment in excess of the fair value of the
118
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expected cash flows from the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral securing
the loan. We report charge-offs net of amounts recovered on previously charged-off loans. We had no loan defaults or
charge-offs during the years ended May 31, 2020, 2019 and 2018.
NOTE 5—ALLOWANCE FOR LOAN LOSSES
The following tables summarize changes, by company, in the allowance for loan losses as of and for the years ended
May 31, 2020, 2019 and 2018.
(Dollars in thousands)
Balance as of May 31, 2019 ...........................
Provision (benefit) for loan losses..................
Balance as of May 31, 2020 ...........................
(Dollars in thousands)
Balance as of May 31, 2018 ...........................
Provision (benefit) for loan losses..................
Balance as of May 31, 2019 ...........................
(Dollars in thousands)
Balance as of May 31, 2017 ...........................
Benefit for loan losses ....................................
Balance as of May 31, 2018 ...........................
Year Ended May 31, 2020
CFC
NCSC
RTFC
Total
13,120
34,318
47,438
CFC
12,300
820
13,120
CFC
29,499
(17,199)
12,300
$
$
$
$
$
$
2,007
(1,201)
806
$
$
2,408
2,473
4,881
Year Ended May 31, 2019
NCSC
RTFC
2,082
(75)
2,007
$
$
4,419
(2,011)
2,408
Year Ended May 31, 2018
NCSC
RTFC
2,910
(828)
2,082
$
$
4,967
(548)
4,419
$
$
$
$
$
$
17,535
35,590
53,125
Total
18,801
(1,266)
17,535
Total
37,376
(18,575)
18,801
$
$
$
$
$
$
The following tables present, by company, the components of our allowance for loan losses and the recorded investment of
the related loans as of May 31, 2020 and 2019.
119
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Ending balance of the allowance:
Collective allowance....................................
Asset-specific allowance..............................
Total ending balance of the allowance ...........
Recorded investment in loans:
Collectively evaluated loans ........................
Individually evaluated loans ........................
Total recorded investment in loans.................
Total recorded investment in loans, net (1)......
Allowance coverage ratio:
Allowance as a percentage of total recorded
investment in loans .....................................
(Dollars in thousands)
Ending balance of the allowance:
Collective allowance....................................
Asset-specific allowance..............................
Total ending balance of the allowance ...........
Recorded investment in loans:
Collectively evaluated loans ........................
Individually evaluated loans ........................
Total recorded investment in loans.................
Total recorded investment in loans, net(1).......
Allowance coverage ratio:
Allowance as a percentage of total recorded
investment in loans .....................................
___________________________
$
$
$
$
$
$
$
$
$
$
CFC
NCSC
RTFC
Total
May 31, 2020
13,584
33,854
47,438
25,434,193
173,464
25,607,657
25,560,219
$
$
$
$
$
806
—
806
697,862
—
697,862
697,056
$
$
$
$
$
3,902
979
4,881
380,243
5,092
385,335
380,454
$
$
$
$
$
18,292
34,833
53,125
26,512,298
178,556
26,690,854
26,637,729
0.19%
0.12%
1.27%
0.20%
CFC
NCSC
RTFC
Total
May 31, 2019
13,120
—
13,120
24,811,415
6,261
24,817,676
24,804,556
$
$
$
$
$
2,007
—
2,007
742,888
—
742,888
740,881
$
$
$
$
$
1,387
1,021
2,408
339,508
5,592
345,100
342,692
$
$
$
$
$
16,514
1,021
17,535
25,893,811
11,853
25,905,664
25,888,129
0.05%
0.27%
0.70%
0.07%
(1)
Excludes unamortized deferred loan origination costs of $11 million as of both May 31, 2020 and 2019.
As indicated above in “Note 4—Loans,” we had one loan classified as nonperforming totaling $168 million with an asset-
specific allowance of $34 million as of May 31, 2020. We did not have any loans classified as nonperforming as of May 31,
2019.
In addition to the allowance for loan losses, we also maintain a reserve for unadvanced loan commitments at a level
estimated by management to provide for probable losses under these commitments as of each balance sheet date. The
reserve for unadvanced loan commitments was less than $1 million as of both May 31, 2020 and 2019.
120
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6—SHORT-TERM BORROWINGS
Short-term borrowings consist of borrowings with an original contractual maturity of one year or less and do not include the
current portion of long-term debt. Our short-term borrowings totaled $3,962 million and accounted for 15% of total debt
outstanding as of May 31, 2020, compared with $3,608 million, or 14%, of total debt outstanding as of May 31, 2019. The
following table provides comparative information on our short-term borrowings and weighted-average interest rates as of
May 31, 2020 and 2019.
(Dollars in thousands)
Short-term borrowings:
May 31,
2020
2019
Amount
Weighted-
Average
Interest Rate
Amount
Weighted-
Average
Interest Rate
Commercial paper:.................................................................
Commercial paper sold through dealers, net of discounts
Commercial paper sold directly to members, at par .........
Total commercial paper..........................................................
Select notes ............................................................................
Daily liquidity fund notes ......................................................
Medium-term notes sold to members ....................................
Farmer Mac notes payable (1) .................................................
Total short-term borrowings.....................................................
___________________________
$
—
1,318,566
1,318,566
1,597,959
508,618
286,842
250,000
$ 3,961,985
—% $ 944,616
0.34
1,111,795
0.34% 2,056,411
0.75
1,023,952
0.10
1.64
1.06
0.62
298,817
228,546
—
$3,607,726
2.46%
2.52
2.49%
2.70
2.25
2.87
—
2.56
(1)
Advanced under the revolving note purchase agreement with Farmer Mac dated March 24, 2011. See “Note 7—Long-Term Debt” for additional
information on this revolving note purchase agreement with Farmer Mac.
We issue commercial paper for periods of one to 270 days. We also issue select notes for periods ranging from 30 to 270
days. Select notes are unsecured obligations that do not require backup bank lines of credit for liquidity purposes. These
notes 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. We also issue daily liquidity fund notes, which are unsecured obligations that do not
require backup bank lines of credit for liquidity purposes. We also issue medium-term notes, which represent unsecured
obligations that may be issued through dealers in the capital markets or directly to our members.
Committed Bank Revolving Line of Credit Agreements
We had $2,725 million and $2,975 million of commitments under committed bank revolving line of credit agreements as of
May 31, 2020 and 2019, respectively. Under our current committed bank revolving line of credit agreements, we have the
ability to request up to $300 million of letters of credit, which would result in a reduction in the remaining available amount
under the facilities.
On November 26, 2019, we amended the three-year and five-year committed bank revolving line of credit agreements to
extend the maturity date of the three-year agreement to November 28, 2022, and to terminate certain bank commitments
totaling $125 million under the three-year agreement and $125 million under the five-year agreement. As a result, the total
commitment amount from third parties under the three-year facility and the five-year facility is $1,315 million and $1,410
million, respectively, resulting in a combined total commitment amount under the two facilities of $2,725 million.
121
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the total commitment, the net amount available for use and the outstanding letters of credit
under our committed bank revolving line of credit agreements as of May 31, 2020 and 2019.
May 31,
2020
2019
(Dollars in millions)
Total
Commitment
Letters of
Credit
Outstanding
Net
Available
for Use
Total
Commitment
Letters of
Credit
Outstanding
Net
Available
for Use
Maturity
Annual
Facility
Fee (1)
3-year agreement, 2021...
$
— $
— $
— $
1,440
$
— $ 1,440 November 28, 2021
7.5 bps
3-year agreement, 2022...
Total 3-year agreement.
5-year agreement, 2023...
Total............................
___________________________
1,315
1,315
1,410
$
2,725
$
—
—
3
3
1,315
1,315
1,407
—
1,440
1,535
$ 2,722
$
2,975
$
—
—
3
3
— November 28, 2022
7.5 bps
1,440
1,532 November 28, 2023
10 bps
$ 2,972
(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.
We had no borrowings outstanding under our committed bank revolving line of credit agreements as of May 31, 2020 and
2019, and we were in compliance with all covenants and conditions under the agreements as of each date.
122
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7—LONG-TERM DEBT
The following table displays long-term debt outstanding and the weighted-average interest rates, by debt type, as of
May 31, 2020 and 2019.
(Dollars in thousands)
Secured long-term debt:
May 31,
2020
Weighted-
Average
Interest Rate
Amount
Maturity
Date
Amount
Collateral trust bonds....................
$ 7,457,711
3.23% 2020-2049
2019
Weighted-
Average
Interest Rate
Maturity
Date
3.19% 2019-2049
2.97
3.33
2.70
2025-2039
2019-2049
2024
(236,461)
(32,697)
7,188,553
6,261,312
2,809,637
6,068
(117)
5,951
9,076,900
16,265,453
2025-2040
2020-2049
2023
2.74
2.07
2.69
2.53
2.85
$ 7,662,711
(244,643)
(34,336)
7,383,732
5,410,507
3,054,914
9,225
(178)
9,047
8,474,468
15,858,200
3.10
3.14
3,086,733
3.34
2020-2032
2,962,375
3.55
2019-2032
372,117
3,458,850
(997)
(16,943)
3,440,910
5,794
(107)
(26)
5,661
2020-2037
397,080
2.85
3.29
—
2023
2019-2037
3.03
3.49
3.97
2022-2023
3,359,455
(931)
(19,399)
3,339,125
13,701
(187)
(46)
13,468
Unamortized discount...................
Debt issuance costs .......................
Total collateral trust bonds ......
Guaranteed Underwriter Program
notes payable ................................
Farmer Mac notes payable............
Other secured notes payable .........
Debt issuance costs .......................
Total other secured notes
payable ....................................
Total secured notes payable.....
Total secured long-term debt...........
Unsecured long-term debt:
Medium-term notes sold through
dealers ...........................................
Medium-term notes sold to
members........................................
Subtotal medium-term notes ...
Unamortized discount...................
Debt issuance costs .......................
Total unsecured medium-term
notes ........................................
Unsecured notes payable: .............
Unamortized discount...................
Debt issuance costs.......................
Total unsecured notes payable.
Total unsecured long-term debt.......
3,446,571
Total long-term debt........................
$19,712,024
3.29
2.92
3,352,593
$19,210,793
3.49
3.20
123
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amount of long-term debt maturing in each of the five fiscal years subsequent to
May 31, 2020 and thereafter.
(Dollars in thousands)
2021 .....................................
2022 .....................................
2023 .....................................
2024 .....................................
2025 .....................................
Thereafter ............................
Total ................................
$
$
Medium-Term Notes
Amount
Maturing
2,016,164
2,517,356
1,221,908
1,117,749
807,793
12,031,054
19,712,024
Weighted-
Average
Interest Rate
2.41%
2.12
2.33
3.00
2.77
3.24
2.92
Medium-term notes represent unsecured obligations that may be issued through dealers in the capital markets or directly to
our members.
On February 5, 2020, we issued $500 million aggregate principal amount of 1.75% dealer medium-term notes due 2022.
Collateral Trust Bonds
Collateral trust bonds represent secured obligations sold to investors in the capital markets. Collateral trust bonds are
secured by the pledge of mortgage notes or eligible securities in an amount at least equal to the principal balance of the
bonds outstanding.
On October 15, 2019, we redeemed the $300 million outstanding principal amount of our 2.30% collateral trust bonds due
November 15, 2019 at par.
On December 27, 2019, we redeemed the $400 million outstanding principal amount of our 2.00% collateral trust bonds due
January 27, 2020 at par.
On February 5, 2020, we issued $500 million aggregate principal amount of 2.40% collateral trust bonds due 2030.
Secured Notes Payable
We had outstanding secured notes payable totaling $6,261 million and $5,411 million as of May 31, 2020 and 2019,
respectively, under bond purchase agreements with the Federal Financing Bank and a bond guarantee agreement with RUS
issued under the Guaranteed Underwriter Program, which provides guarantees to the Federal Financing Bank. We pay RUS
a fee of 30 basis points per year on the total amount outstanding. On February 13, 2020, we closed on a $500 million
committed loan facility (“Series P”) from the Federal Financing Bank under the Guaranteed Underwriter Program. Pursuant
to this facility, we may borrow any time before July 15, 2024. Each advance is subject to quarterly amortization and a final
maturity not longer than 30 years from the date of the advance. During the year ended May 31, 2020, we borrowed $950
million under our committed loan facilities with the Federal Financing Bank. We had up to $900 million available for access
under the Guaranteed Underwriter Program as of May 31, 2020.
The notes outstanding under the Guaranteed Underwriter Program contain a provision that if during any portion of the fiscal
year, our senior secured credit ratings do not have at least two of the following ratings: (i) A3 or higher from Moody’s, (ii)
A- or higher from S&P, (iii) A- or higher from Fitch or (iv) an equivalent rating from a successor rating agency to any of the
124
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
above rating agencies, we may not make cash patronage capital distributions in excess of 5% of total patronage capital. We
are required to pledge eligible distribution system or power supply system loans as collateral in an amount at least equal to
the total principal amount of notes outstanding under the Guaranteed Underwriter Program. See “Note 4—Loans” for
additional information on the collateral pledged to secure notes payable under this program.
We had one revolving note purchase agreement with Farmer Mac as of May 31, 2020, which allowed us to borrow up to
$5,500 million from Farmer Mac. Under this revolving note purchase agreement, dated March 24, 2011, as amended, we can
borrow up to $5,500 million as of May 31, 2020, at any time, subject to market conditions, through January 11, 2022. This
date automatically extends on each anniversary date of the closing for an additional year, unless prior to any such
anniversary date, Farmer Mac provides us with a notice that the draw period will not be extended beyond the remaining
term. Pursuant to this revolving note purchase agreement, we can borrow, repay and re-borrow funds at any time through
maturity, as market conditions permit, provided that the outstanding principal amount at any time does not exceed the total
available under the agreement. Each borrowing under the revolving note purchase agreement is evidenced by a pricing
agreement setting forth the interest rate, maturity date and other related terms as we may negotiate with Farmer Mac at the
time of each such borrowing. We may select a fixed rate or variable rate at the time of each advance with a maturity as
determined in the applicable pricing agreement. We had outstanding secured long-term notes payable totaling $2,810 million
and $3,055 million, as of May 31, 2020 and 2019, respectively, under this Farmer Mac revolving note purchase agreement.
We borrowed $250 million under this note purchase agreement with Farmer Mac during the year ended May 31, 2020. The
available borrowing amount totaled $2,440 million as of May 31, 2020.
As of May 31, 2019, we had a second revolving note purchase agreement with Farmer Mac, dated July 31, 2015, as
amended, under which we could borrow up to $300 million at any time through December 20, 2023 at a fixed spread over
London Interbank Offered Rate (“LIBOR”). This agreement also allowed us to borrow, repay and re-borrow funds at any
time through maturity, provided that the outstanding principal amount at any time does not exceed the total available under
the agreement. We had no notes payable outstanding under this agreement as of May 31, 2019. On December 20, 2019, we
terminated the $300 million revolving note purchase agreement with Farmer Mac. As a result of the termination of this
revolving note purchase agreement, the commitment amount under the $5,200 million revolving note purchase agreement
with Farmer Mac discussed above, increased to $5,500 million, effective December 20, 2019.
Pursuant to the Farmer Mac revolving note purchase agreement, we are required to pledge eligible distribution system or
power supply system loans as collateral in an amount at least equal to the total principal amount of notes outstanding. See
“Note 4—Loans” for additional information on the pledged collateral.
On March 31, 2020, we prepaid approximately $2 million of our secured Clean Renewable Energy Bond due to a
prepayment of a loan associated with the bond.
Unsecured Notes Payable
On November 15, 2019, we redeemed the $6 million outstanding principal amount of our 9.07% notes payable due
May 15, 2022, at a premium of less than $1 million.
We were in compliance with all covenants and conditions under our senior debt indentures as of May 31, 2020 and 2019.
NOTE 8—SUBORDINATED DEFERRABLE DEBT
Subordinated deferrable debt is long-term debt that is subordinated to our outstanding debt and senior to subordinated
certificates held by our members. Our 4.75% and 5.25% subordinated debt due 2043 and 2046, respectively, was issued for
a term of up to 30 years, pays interest semi-annually, may be called at par after 10 years, converts to a variable rate after 10
years, and allows us to defer the payment of interest for one or more consecutive interest periods not exceeding five
consecutive years. Our 5.50% subordinated debt due 2064 was issued for a term of up to 45 years, pays interest quarterly,
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
may be called at par after five years and allows us to defer the payment of interest for one or more consecutive interest
periods not exceeding 40 consecutive quarterly periods. To date, we have not exercised our right to defer interest payments.
The following table presents subordinated deferrable debt outstanding and the weighted-average interest rates as of
May 31, 2020 and 2019.
May 31,
2020
2019
(Dollars in thousands)
4.75% due 2043 with a call date of April 30, 2023 ............
5.25% due 2046 with a call date of April 20, 2026 ............
5.50% due 2064 with a call date of May 15, 2024 .............
Debt issuance costs .............................................................
Total subordinated deferrable debt .....................................
Amount
$
400,000
350,000
250,000
(13,881)
986,119
$
Weighted-
Average
Interest Rate
4.75% $
5.25
5.50
5.11
$
Amount
400,000
350,000
250,000
(13,980)
986,020
Weighted-
Average
Interest Rate
4.75%
5.25
5.50%
5.11
NOTE 9—MEMBERS’ SUBORDINATED CERTIFICATES
Membership Subordinated Certificates
CFC members were required to purchase membership subordinated certificates as a condition of membership prior to June
2009. Such certificates are interest-bearing, unsecured, subordinated debt. Membership certificates typically have an
original maturity of 100 years and pay interest at 5% semi-annually. No requirement to purchase membership certificates
has existed for NCSC or RTFC members.
Loan and Guarantee Subordinated Certificates
Members obtaining long-term loans, certain line of credit loans or guarantees may be required to purchase additional loan or
guarantee subordinated certificates with each such loan or guarantee based on the borrower’s debt-to-equity ratio with CFC.
These certificates are unsecured, subordinated debt and may be interest bearing or non-interest bearing.
Under our current policy, most borrowers requesting standard loans are not required to buy subordinated certificates as a
condition of a loan or guarantee. Borrowers meeting certain criteria, including but not limited to, high leverage ratios, or
borrowers requesting large facilities, may be required to purchase loan or guarantee subordinated certificates or member
capital securities (described below) as a condition of the loan. Loan subordinated certificates have the same maturity as the
related long-term loan. Some certificates may amortize annually based on the outstanding loan balance.
The interest rates payable on guarantee subordinated certificates purchased in conjunction with our guarantee program vary
in accordance with applicable CFC policy. Guarantee subordinated certificates have the same maturity as the related
guarantee.
Member Capital Securities
CFC offers member capital securities to its voting members. Member capital securities are interest-bearing, unsecured
obligations of CFC, which are subordinate to all existing and future senior and subordinated indebtedness of CFC held by
non-members of CFC, but rank proportionally to our member subordinated certificates. Member capital securities mature 30
years from the date of issuance, typically pay interest at 5% and are callable at par at our option 10 years from the date of
issuance and anytime thereafter. These securities represent voluntary investments in CFC by the members.
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table displays members’ subordinated certificates and the weighted-average interest rates as of May 31, 2020
and 2019.
(Dollars in thousands)
Membership subordinated certificates:
Certificates maturing 2020 through 2119 ...................
Subscribed and unissued (1).........................................
Total membership subordinated certificates ..........
Loan and guarantee subordinated certificates:
Interest-bearing loan subordinated certificates
maturing through 2045 ...............................................
Non-interest-bearing loan subordinated certificates
maturing through 2047 ...............................................
Subscribed and unissued (1).........................................
Total loan subordinated certificates .......................
Interest-bearing guarantee subordinated certificates
maturing through 2044............................................
Non-interest-bearing guarantee subordinated
certificates maturing through 2037 .........................
Total guarantee subordinated certificates...............
Total loan and guarantee subordinated certificates..........
Member capital securities:
May 31,
2020
2019
Amounts
Outstanding
Weighted-
Average
Interest Rate
Amounts
Outstanding
Weighted-
Average
Interest Rate
$
630,467
16
$
630,466
8
630,483
4.95%
630,474
4.95%
280,372
144,258
45
424,675
2.71
43,700
14,590
58,290
482,965
4.43
2.92
5.00
4.22
290,259
150,152
45
440,456
47,878
17,151
65,029
505,485
221,170
$
1,357,129
2.73
4.49
2.95
5.00
4.21
Securities maturing through 2050...............................
Total members’ subordinated certificates ........................
___________________________
226,170
$
1,339,618
(1)
The subscribed and unissued subordinated certificates represent subordinated certificates that members are required to purchase. Upon collection of full
payment of the subordinated certificate amount, the certificate will be reclassified from subscribed and unissued to outstanding.
The weighted-average maturity for all membership subordinated certificates outstanding was 56 years and 57 years as of
May 31, 2020 and 2019, respectively. The following table presents the amount of members’ subordinated certificates
maturing in each of the five fiscal years following May 31, 2020 and thereafter.
(Dollars in thousands)
2021 ........................................
2022 ........................................
$
2023 ........................................
2024 ........................................
2025 ........................................
Thereafter................................
Total ...................................
$
Amount
Maturing(1)
40,511
13,339
22,321
15,240
24,212
1,223,934
1,339,557
Weighted-
Average
Interest Rate
3.60%
3.07
3.70
2.37
1.66
4.34
4.22
127
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________
(1)
Excludes $0.06 million in subscribed and unissued member subordinated certificates for which a payment has been received, but no certificate has been
issued. Amortizing member loan subordinated certificates totaling $239 million are amortizing annually based on the unpaid principal balance of the
related loan. Amortization payments on these certificates totaled $14 million in fiscal year 2020 and represented 6% of amortizing loan subordinated
certificates outstanding.
NOTE 10—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We are an end user of derivative financial instruments and do not engage in derivative trading. We use derivatives, primarily
interest rate swaps and Treasury rate locks, to manage interest rate risk. Derivatives may be privately negotiated contracts,
which are often referred to as OTC derivatives, or they may be listed and traded on an exchange. We generally engage in
OTC derivative transactions.
Outstanding Notional Amount and Maturities of Derivatives Not Designated as Accounting Hedges
The notional amount provides an indication of the volume of our derivatives activity, but this amount is not recorded on our
consolidated balance sheets. The notional amount is used only as the basis on which interest payments are determined and is
not the amount exchanged. The following table shows the outstanding notional amounts and the weighted-average rate paid
and received for our interest rate swaps, by type, as of May 31, 2020 and 2019. The substantial majority of our interest rate
swaps use an index based on LIBOR for either the pay or receive leg of the swap agreement.
(Dollars in thousands)
Pay-fixed swaps...................
Receive-fixed swaps............
Total interest rate swaps ....
Forward pay-fixed swaps ....
Notional
Amount
$ 6,604,808
2,699,000
9,303,808
3,000
Total ...................................
$ 9,306,808
May 31,
2020
2019
Weighted-
Average
Rate Paid
Weighted-
Average
Rate Received
Notional
Amount
Weighted-
Average
Rate Paid
Weighted-
Average
Rate Received
2.78%
1.54
2.42
0.88% $ 7,379,280
2.75
3,399,000
1.42
10,778,280
2.83%
3.25
2.97
2.60%
2.56
2.58
65,000
$10,843,280
The following table presents the maturities for each of the next five fiscal years and thereafter based on the notional amount
of our interest rate swaps as of May 31, 2020.
(Dollars in thousands)
Notional
Amount
Notional Amortization and Maturities
2021
2022
2023
2024
2025
Thereafter
Interest rate swaps......
$9,306,808
$466,602
$749,854
$323,082
$655,899
$100,000
$7,011,371
Cash Flow Hedge
In anticipation of the repricing of $100 million in notes payable outstanding under the Guaranteed Underwriter Program, we
entered into a Treasury rate lock agreement with a notional amount of $100 million on May 25, 2018. The agreement, which
was scheduled to mature on October 12, 2018, was designated as a cash flow hedge of the forecasted transaction. We
recorded an unrealized loss in AOCI of $1 million as of May 31, 2018 related to this cash flow hedge. On September 25,
2018, we terminated this cash flow hedge as the forecasted transaction was no longer expected to occur. Upon termination,
the fair value of the derivative had shifted to a gain of $1 million from a loss of $1 million as of May 31, 2018. We reversed
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the loss recorded in AOCI and recognized the gain in earnings as a component of derivative gains on our consolidated
statements of operations as of May 31, 2019.
Impact of Derivatives on Consolidated Balance Sheets
The following table displays the fair value of the derivative assets and derivative liabilities recorded on our consolidated
balance sheets and the related outstanding notional amount of our interest rate swaps by derivatives type as of May 31, 2020
and 2019.
(Dollars in thousands)
Derivative assets:
May 31,
2020
2019
Fair Value
Notional Balance
Fair Value
Notional Balance
Interest rate swaps .............................................
$
173,195
$
2,699,000
Derivative liabilities:
Interest rate swaps .............................................
$
1,258,459
$
6,607,808
$
$
41,179
$
2,332,104
391,724
$
8,511,176
All of our master swap agreements include netting provisions that allow for offsetting of all contracts with a given
counterparty in the event of default by one of the two parties. However, as indicated above, in “Note 1—Summary of
Significant Accounting Policies,” we report derivative asset and liability amounts on a gross basis by individual contracts.
The following table presents the gross fair value of derivative assets and liabilities reported on our consolidated balance
sheets as of May 31, 2020 and 2019, and provides information on the impact of netting provisions and collateral pledged.
May 31, 2020
Gross Amount
of Recognized
Assets/
Liabilities
Gross
Amount
Offset in the
Balance Sheet
Net Amount
of Assets/
Liabilities
Presented
in the
Balance Sheet
Gross Amount
Not Offset in the
Balance Sheet
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
(Dollars in thousands)
Derivative assets:
Interest rate swaps .........
$
173,195
$
— $
173,195
$
173,195
$
— $
—
Derivative liabilities:
Interest rate swaps .........
1,258,459
—
1,258,459
173,195
— 1,085,264
May 31, 2019
Gross Amount
of Recognized
Assets/
Liabilities
Gross
Amount
Offset in the
Balance Sheet
Net Amount
of Assets/
Liabilities
Presented
in the
Balance Sheet
Gross Amount
Not Offset in the
Balance Sheet
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
(Dollars in thousands)
Derivative assets:
Interest rate swaps .........
$
41,179
$
— $
41,179
$
41,176
$
— $
3
Derivative liabilities:
Interest rate swaps .........
391,724
—
391,724
41,176
—
350,548
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impact of Derivatives on Consolidated Statements of Operations
Derivative gains (losses) reported in our consolidated statements of operations consist of derivative cash settlements
expense and derivative forward value gains (losses). Derivative cash settlements expense represents net contractual interest
expense accruals on interest rate swaps during the period. The derivative forward value gains (losses) represent the change
in fair value of our interest rate swaps during the reporting period due to changes in the estimate of future interest rates over
the remaining life of our derivative contracts.
The following table presents the components of the derivative gains (losses) reported in our consolidated statements of
operations for our interest rate swaps for fiscal years 2020, 2019 and 2018.
(Dollars in thousands)
Derivative gains (losses) attributable to: .........................
Derivative cash settlements expense ...............................
Derivative forward value gains (losses) ..........................
Derivative gains (losses)..................................................
$
$
Year Ended May 31,
2020
2019
2018
(55,873)
(734,278)
(790,151)
$
$
(43,611)
(319,730)
(363,341)
$
$
(74,281)
306,002
231,721
As noted above, during fiscal year 2018, we entered into a treasury rate lock agreement that was designated as a cash flow
hedge of a forecasted transaction. This cash flow hedge was terminated on September 25, 2018 and a gain of $1 million was
recorded upon termination as a component of derivative cash settlements expense in our consolidated statements of
operations during fiscal year 2019.
Credit Risk-Related Contingent Features
Our derivative contracts typically contain mutual early-termination provisions, generally in the form of a credit rating
trigger. Under the mutual credit rating trigger provisions, either counterparty may, but is not obligated to, terminate and
settle the agreement if the credit rating of the other counterparty falls below a level specified in the agreement. If a
derivative contract is terminated, the amount to be received or paid by us would be equal to the prevailing fair value, as
defined in the agreement, as of the termination date.
Our senior unsecured credit ratings from Moody’s and S&P were A2 and A, respectively, as of May 31, 2020. Both Moody’s
and S&P had our ratings on stable outlook as of May 31, 2020. The following table displays the notional amounts of our
derivative contracts with rating triggers as of May 31, 2020, and the payments that would be required if the contracts were
terminated as of that date because of a downgrade of our unsecured credit ratings or the counterparty’s unsecured credit
ratings below A3/A-, below Baa1/BBB+, to or below Baa2/BBB, below Baa3/BBB-, or to or below Ba2/BB+ by Moody’s
or S&P, respectively. In calculating the payment amounts that would be required upon termination of the derivative
contracts, we assumed that the amounts for each counterparty would be netted in accordance with the provisions of the
master netting agreements for each counterparty. The net payment amounts are based on the fair value of the underlying
derivative instrument, excluding the credit risk valuation adjustment, plus any unpaid accrued interest amounts.
130
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Impact of rating downgrade trigger:
Falls below A3/A-(1).....................................
Falls below Baa1/BBB+ ..............................
Falls to or below Baa2/BBB (2)....................
Falls below Baa3/BBB-...............................
Total .............................................................
___________________________
Notional
Amount
Payable Due
from CFC
Receivable Due
to CFC
Net (Payable)/
Receivable
$
45,860
$
6,091,198
421,303
45,280
$
6,603,641
$
(11,305) $
(692,210)
(33,958)
(15,677)
(753,150) $
— $
—
—
—
— $
(11,305)
(692,210)
(33,958)
(15,677)
(753,150)
(1)
(2)
Rating trigger for CFC falls below A3/A-, while rating trigger for counterparty falls below Baa1/BBB+ by Moody’s or S&P, respectively.
Rating trigger for CFC falls to or below Baa2/BBB, while rating trigger for counterparty falls to or below Ba2/BB+ by Moody’s or S&P, respectively.
We have outstanding notional amount of derivatives with one counterparty subject to a ratings trigger and early termination
provision in the event of a downgrade of CFC’s senior unsecured credit ratings below Baa3, BBB- or BBB- by Moody’s,
S&P or Fitch, respectively, which is not included in the above table, totaling $166 million as of May 31, 2020. These
contracts were in an unrealized loss position of $62 million as of May 31, 2020.
Our largest counterparty exposure, based on the outstanding notional amount, accounted for approximately 25% and 23% of
the total outstanding notional amount of derivatives as of May 31, 2020 and 2019, respectively. The aggregate fair value
amount, including the credit valuation adjustment, of all interest rate swaps with rating triggers that were in a net liability
position was $798 million as of May 31, 2020.
NOTE 11—EQUITY
Total equity decreased by $655 million to $649 million as of May 31, 2020. The decrease was primarily attributable to our
reported net loss of $589 million for the year ended May 31, 2020 and the patronage capital retirement of $63 million during
the second quarter of fiscal year 2020. The following table presents the components of equity as of May 31, 2020 and 2019.
131
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Membership fees ......................................................................................
Educational fund ......................................................................................
Total membership fees and educational fund ......................................
Patronage capital allocated ..................................................................
Members’ capital reserve.....................................................................
Unallocated net income (loss):
Prior year-end cumulative derivative forward value losses .....................
Current-year derivative forward value losses(1)........................................
Current year-end cumulative derivative forward value losses .................
Other unallocated net income...................................................................
Unallocated net loss.............................................................................
CFC retained equity.............................................................................
Accumulated other comprehensive loss ..............................................
Total CFC equity ......................................................................................
Noncontrolling interests ...........................................................................
Total equity...............................................................................................
____________________________
May 31,
2020
2019
$
969
$
2,224
3,193
894,066
807,320
(348,965)
(730,774)
(1,079,739)
3,191
(1,076,548)
628,031
(1,910)
626,121
22,701
969
2,013
2,982
860,578
759,097
(30,831)
(318,134)
(348,965)
3,190
(345,775)
1,276,882
(147)
1,276,735
27,147
$
648,822
$
1,303,882
(1)
Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the consolidated
variable interest entities NCSC and RTFC. See “Note 15—Business Segments” for the statements of operations for CFC.
Allocation of Net Earnings and Retirement of Patronage Capital—CFC
District of Columbia cooperative law requires cooperatives to allocate net earnings to patrons, to a general reserve in an
amount sufficient to maintain a balance of at least 50% of paid-in 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.
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 board-approved reserves. An allocation to the general
reserve is made, if necessary, to maintain the balance of the general reserve at 50% of the membership fees collected. CFC’s
bylaws require the allocation to the cooperative educational fund to be at least 0.25% of its net earnings. Funds from the
cooperative educational fund are disbursed annually to statewide cooperative organizations to fund the teaching of
cooperative principles and for other cooperative education programs.
Currently, CFC has one additional board-approved reserve, the members’ capital reserve. The CFC Board of Directors
determines the amount of net earnings that is allocated to the members’ capital reserve, if any. The members’ capital reserve
represents net earnings that CFC holds to increase equity retention. The net earnings held in the members’ capital reserve
have not been specifically allocated to members, but may be allocated to individual members in the future as patronage
capital if authorized by the CFC Board of Directors.
All remaining net earnings are allocated to CFC’s members in the form of patronage capital. The amount of net earnings
allocated to each member is based on the member’s patronage of CFC’s lending programs during the year. No interest is
earned by members on allocated patronage capital. There is no effect on CFC’s total equity as a result of allocating net
earnings to members in the form of patronage capital or to board-approved reserves. The CFC Board of Directors has voted
annually to retire a portion of the patronage capital allocation. Upon retirement, patronage capital is paid out in cash to the
132
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
members to whom 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. CFC’s net earnings for determining allocations is based on CFC’s
non-GAAP adjusted net income, which excludes the impact of derivative forward value gains and losses.
The current policy of the CFC Board of Directors is to retire 50% of the prior year’s allocated patronage capital and hold the
remaining 50% for 25 years. The retirement amount and timing is subject to annual approval by the CFC Board of Directors.
In May 2020, the CFC Board of Directors authorized the allocation of $1 million of net earnings for fiscal year 2020 to the
cooperative educational fund. In July 2020, the CFC Board of Directors authorized the allocation of net earnings for fiscal
year 2020 as follows: $96 million to members in the form of patronage capital and $48 million to the members’ capital
reserve. In July 2020, the CFC Board of Directors also authorized the retirement of patronage capital totaling $60 million, of
which $48 million represented 50% of the patronage capital allocation for fiscal year 2020 and $12 million represented the
portion of the allocation from net earnings for fiscal year 1995 that has been held for 25 years pursuant to the CFC Board of
Directors’ policy.
We expect to return the authorized patronage capital retirement amount of $60 million to members in cash in the second
quarter of fiscal year 2021. The remaining portion of the patronage capital allocation for fiscal year 2020 will be retained by
CFC for 25 years pursuant to the guidelines adopted by the CFC Board of Directors in June 2009.
In July 2019, the CFC Board of Directors authorized the allocation of net earnings for fiscal year 2019 as follows: $97
million to members in the form of patronage capital, $71 million to the members’ capital reserve and $1 million to the
cooperative educational fund. In July 2019, the CFC Board of Directors also authorized the retirement of patronage capital
totaling $63 million, of which $48 million represented 50% of the patronage capital allocation for fiscal year 2019 and $15
million represented the portion of the allocation from net earnings for fiscal year 1994 that has been held for 25 years
pursuant to the CFC Board of Directors’ policy. This amount was returned to members in cash in September 2019. The
remaining portion of the patronage capital allocation for fiscal year 2019 will be retained by CFC for 25 years pursuant to
the guidelines adopted by the CFC Board of Directors in June 2009.
Future allocations and retirements of net earnings may be made annually as determined by the CFC Board of Directors with
due regard for its financial condition. The CFC Board of Directors has the authority to change the current practice for
allocating and retiring net earnings at any time, subject to applicable laws and regulations.
CFC’s total equity includes noncontrolling interests, which consist of 100% of the equity of NCSC and RTFC, as the
members of NCSC and RTFC own or control 100% of the interests in their respective companies. NCSC and RTFC also
allocate annual net earnings, subject to approval by the board of directors for each company. The allocation of net earnings
by NCSC and RTFC to members or board-approved reserves does not affect noncontrolling interests; however, the cash
retirement of amounts allocated to members or to disbursements from board-approved reserves results in a reduction to
noncontrolling interests.
Allocation of Net Earnings and Retirement of Patronage Capital—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. RTFC’s bylaws require that it allocate at
least 1% of net income to a cooperative educational fund. Funds from the cooperative educational fund are disbursed
annually to fund the teaching of cooperative principles and for other cooperative education programs. An allocation to the
general reserve is made, if necessary, to maintain the balance of the general reserve at 50% of the membership fees
collected. The remainder is allocated to borrowers in proportion to their patronage. RTFC retires at least 20% of its annual
allocation, if any, to members in cash prior to filing the applicable tax return. Any additional amounts are retired as
determined by the RTFC Board of Directors taking into consideration RTFC’s financial condition.
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allocation of Net Earnings—NCSC
NCSC’s bylaws require that it allocate at least 0.25% of its net earnings to a cooperative educational fund and an amount to
the general reserve required to maintain the general reserve balance at 50% of membership fees collected. Funds from the
cooperative educational fund are disbursed annually to fund the teaching of cooperative principles and for other cooperative
education programs.
Accumulated Other Comprehensive Income (Loss)
The following tables summarize, by component, the activity in AOCI as of and for the years ended May 31, 2020 and 2019.
Year Ended May 31, 2020
(Dollars in thousands)
Beginning balance .......................................
Gains reclassified into earnings...................
Defined benefit plan adjustments ................
Other comprehensive loss............................
Ending balance ............................................
$
$
Unrealized
Gains (Losses)
Equity
Securities
Unrealized
Gains
Derivatives(1)
2,571
(441)
—
(441)
2,130
— $
—
—
—
— $
$
Unrealized
Gains
(Losses) Cash
Flow Hedges
$
Unrealized
Losses
Defined
Benefit Plan(2)
— $
—
—
—
— $
(2,718) $
—
(1,322)
(1,322)
(4,040) $
Total
(147)
(441)
(1,322)
(1,763)
(1,910)
Year Ended May 31, 2019
(Dollars in thousands)
Beginning balance .......................................
Cumulative effect of changes from
adoption of new accounting standards.....
Unrealized gains ..........................................
Gains reclassified into earnings...................
Defined benefit plan adjustments ................
Other comprehensive income (loss) ............
Ending balance ............................................
____________________________
Unrealized
Gains (Losses)
Equity
Securities
$
8,794
Unrealized
Gains
Derivatives(1)
3,039
$
(8,794)
—
—
—
—
— $
—
—
(468)
—
(468)
2,571
$
Unrealized
Gains
(Losses) Cash
Flow Hedges
$
Unrealized
Losses
Defined
Benefit Plan(2)
Total
(1,059) $
(2,230) $
8,544
—
1,059
—
—
1,059
$
— $
—
—
—
(488)
(488)
(2,718) $
(8,794)
1,059
(468)
(488)
103
(147)
(1)
(2)
Amounts are reclassified into income in the derivative forward value gains (losses) component of the derivative gains (losses) line item of our
consolidated statements of operations.
Amounts are reclassified into income in the other general and administrative expenses line item of our consolidated statements of operations.
We expect to reclassify less than $1 million of amounts in AOCI related to unrealized derivative gains into earnings over the
next 12 months.
134
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12—EMPLOYEE BENEFITS
National Rural Electric Cooperative Association (“NRECA”) Retirement Security Plan
CFC is a participant in the NRECA Retirement Security Plan (“the Retirement Security Plan”), a multiple-employer defined
benefit pension plan. The employer identification number of the Retirement Security Plan is 53-0116145, and the plan
number is 333. Plan information is available publicly through the annual Form 5500, including attachments. The Retirement
Security Plan is a qualified plan in which all employees are eligible to participate upon completion of one year of service.
Under this plan, participating employees 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 participation in the plan, multiplied by the number of
years of participation in the plan.
The risks of participating in the multiple-employer plan are different from the risks of single-employer plans due to the
following characteristics of the plan:
• Assets contributed to the multiple-employer plan by one participating employer may be used to provide benefits to
employees of other participating employers.
•
•
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the
remaining participating employers.
If CFC chooses to stop participating in the plan, CFC may be required to pay a withdrawal liability representing an
amount based on the underfunded status of the Plan.
Because of the current funding status of the Retirement Security Plan, it is not subject to a certified zone status
determination under the Pension Protection Act of 2006 (“PPA”). Based on the PPA target and PPA actuarial value of the
plan assets, it was more than 80% funded as of January 1, 2020, 2019 and 2018. We made contributions to the Retirement
Security Plan of $5 million in each of fiscal years 2020, 2019 and 2018, respectively. In each of these years, our contribution
represented less than 5% of total contributions made to the plan by all participating employers. Our contribution did not
include a surcharge. CFC’s expense is limited to the annual premium to participate in the Retirement Security Plan. Because
it is a multiple-employer plan, there is no funding liability for CFC for the plan. There were no funding improvement plans,
rehabilitation plans implemented or pending, and no required minimum contributions. There are no collective bargaining
agreements in place that cover CFC’s employees.
Pension Restoration Plan
The Pension Restoration Plan (“PRP”) is a nonqualified defined benefit plan established to provide supplemental benefits to
certain eligible employees whose compensation exceeds the IRS limits for the qualified Retirement Security Plan. The PRP
restores the value of the Retirement Security Plan for eligible officers to the level it would be if the IRS limits on annual pay
and annual annuity benefits were not in place. The limit was $285,000 for calendar year 2020. The PRP, which is
administered by NRECA, was frozen as of December 31, 2014.
The benefit and payout formula under the nonqualified PRP component of the Retirement Security Plan is similar to that
under the qualified plan component. Under the PRP, the amount NRECA invoices us for the Retirement Security Plan is
based on the full compensation paid to each covered employee. Upon retirement of an employee covered under the PRP,
NRECA will calculate the retirement benefits to be paid both with and without consideration of the IRS compensation
limits. We will then pay the nonqualified supplemental benefit to the covered employee. NRECA will provide a credit for
supplemental benefit payments made by us to covered employees against future contributions we are required to make to the
Retirement Security Plan.
The two participating executive officers have 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 PRP, we will make distributions of any earned benefit from the
135
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
plan to each of the executive officers included in the plan and the distributions will be credited back to us by NRECA.
Accordingly, the distributions have no impact on our consolidated financial statements.
Executive Benefit Restoration Plan
NRECA restricted additional participation in the PRP in December 2014. We therefore adopted a supplemental top-hat
Executive Benefit Restoration (“EBR”) Plan, effective January 1, 2015. The EBR Plan is a nonqualified, unfunded plan
maintained by CFC to provide retirement benefits to a select group of executive officers whose compensation exceeds IRS
limits for qualified defined benefit plans. There is a risk of forfeiture if participants leave the company prior to becoming
fully vested in the EBR Plan. There were seven plan participants as of May 31, 2020. The unfunded projected benefit
obligation of this plan, which is included on our consolidated balance sheets as a component of other liabilities, was $7
million and $6 million as of May 31, 2020 and 2019, respectively. We recognized pension expense for this plan of
approximatively $2 million, $1 million and $1 million in fiscal years 2020, 2019 and 2018, respectively. Accumulated other
comprehensive income as of May 31, 2020 includes net unrecognized pension costs of $4 million, of which $1 million is
expected to be amortized into benefit cost during fiscal year 2021.
During fiscal year 2020, we recognized settlement losses of $1 million in connection with a $2 million lump-sum benefit
distribution from the EBR Plan that was funded by contributions from CFC. The settlement losses were recorded as a
component of non-interest expense on our consolidated statements of operations for fiscal year 2020. Two plan participants
who became fully vested received their EBR Plan benefit payments in the form of lump-sum settlements. Pro-rata settlement
losses, which can occasionally occur as a result of these lump-sum distributions, are recognized only in years when the total
of such distributions exceeds the sum of the service and interest expense components of net periodic benefit cost.
Defined Contribution Plan
CFC offers a 401(k) defined contribution savings program, the 401(k) Pension Plan, to all employees who have completed a
minimum of 1,000 hours of service in either the first 12 consecutive months or first full calendar year of employment. We
contribute an amount up to 2% of an employee’s salary each year for all employees participating in the program with a
minimum 2% employee contribution. We contributed approximatively $1 million to the plan in each of fiscal years 2020,
2019 and 2018.
NOTE 13—GUARANTEES
We guarantee certain contractual obligations of our members so they may obtain various forms of financing. We use the
same credit policies and monitoring procedures in providing guarantees as we do for loans and commitments. If a member
system defaults on its obligation to pay debt service, then we are obligated to pay any required amounts under our
guarantees. Meeting our guarantee obligations satisfies the underlying obligation of our member systems and prevents the
exercise of remedies by the guarantee beneficiary based upon a payment default by a member system. In general, the
member system is required to repay any amount advanced by us with interest, pursuant to the documents evidencing the
member system’s reimbursement obligation.
The following table summarizes total guarantees, by type of guarantee and by member class, as of May 31, 2020 and 2019.
136
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Guarantee type:
Long-term tax-exempt bonds(1)...........
Letters of credit(2)................................
Other guarantees .................................
Total .........................................................
Member class:
CFC:
Distribution .........................................
Power supply ......................................
Statewide and associate(3) ...................
CFC total ..........................................
NCSC ....................................................
RTFC .....................................................
Total .........................................................
____________________________
$
$
$
$
May 31,
2020
2019
263,875
413,839
143,072
820,786
266,301
538,532
5,954
810,787
9,999
—
820,786
$
$
$
$
312,190
379,001
146,244
837,435
235,919
586,717
4,708
827,344
8,517
1,574
837,435
(1)
(2)
(3)
Represents the outstanding principal amount of long-term fixed-rate and variable-rate guaranteed bonds.
Reflects our maximum potential exposure for letters of credit.
Includes CFC guarantees to NCSC and RTFC members totaling $3 million and $1 million as of May 31, 2020 and 2019, respectively.
We guarantee debt issued in connection with the construction or acquisition of pollution control, solid waste disposal,
industrial development and electric distribution facilities, classified as long-term tax-exempt bonds in the table above. We
unconditionally guarantee to the holders or to trustees for the benefit of holders of these bonds the full principal, interest,
and in most cases, premium, if any, on each bond when due. If a member system defaults in its obligation to pay debt
service, then we are obligated to pay any required amounts under our guarantees. Such payment will prevent the occurrence
of an event of default that would otherwise permit acceleration of the bond issue. 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.
Long-term tax-exempt bonds of $264 million and $312 million as of May 31, 2020 and 2019, respectively, included $244
million and $247 million, respectively, of adjustable or variable-rate bonds that may be converted to a fixed rate as specified
in the applicable indenture for each bond offering. We are unable to determine the maximum amount of interest that we may
be required to pay related to the remaining adjustable and variable-rate bonds. Many of these bonds have a call provision
that allows us to call the bond in the event of a default, which would limit our exposure to future interest payments on these
bonds. Our maximum potential exposure generally is secured by mortgage liens on the members’ assets and future revenue.
If a member’s debt is accelerated because of a determination that the interest thereon is not tax-exempt, the member’s
obligation to reimburse us for any guarantee payments will be treated as a long-term loan. The remaining long-term tax-
exempt bonds of $20 million as of May 31, 2020 are fixed-rate. The maximum potential exposure for these bonds, including
the outstanding principal of $20 million and related interest through maturity, totaled $34 million as of May 31, 2020. The
maturities for long-term tax-exempt bonds and the related guarantees extend through calendar year 2040.
Of the outstanding letters of credit of $414 million and $379 million as of May 31, 2020 and 2019, respectively, $106
million and $126 million, respectively, were secured. We did not have any letters of credit outstanding that provided for
standby liquidity for adjustable and floating-rate tax-exempt bonds issued for the benefit of our members as of May 31,
2020. The maturities for the outstanding letters of credit as of May 31, 2020 extend through calendar year 2039.
137
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to the letters of credit listed in the table above, under master letter of credit facilities in place as of May 31, 2020,
we may be required to issue up to an additional $70 million in letters of credit to third parties for the benefit of our
members. All of our master letter of credit facilities were subject to material adverse change clauses at the time of issuance
as of May 31, 2020. Prior to issuing a letter of credit, we would confirm 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 maximum potential exposure for other guarantees was $143 million and $147 million as of May 31, 2020 and 2019,
respectively, of which $25 million was secured as of both May 31, 2020 and 2019. The maturities for these other guarantees
listed in the table above extend through calendar year 2025. Guarantees under which our right of recovery from our
members was not secured totaled $426 million and $374 million and represented 52% and 45% of total guarantees as of
May 31, 2020 and 2019, respectively.
In addition to the guarantees described above, we were also the liquidity provider for $244 million of variable-rate tax-
exempt bonds as of May 31, 2020, issued for our member cooperatives. While the bonds are in variable-rate mode, in return
for a fee, we have unconditionally agreed to purchase bonds tendered or put for redemption if the remarketing agents are
unable to sell such bonds to other investors. We were not required to perform as liquidity provider pursuant to these
obligations during fiscal years 2020, 2019 or 2018.
Guarantee Liability
As of May 31, 2020 and 2019, we recorded a guarantee liability of $11 million and $14 million, respectively, which
represents the contingent and noncontingent exposures related to guarantees and liquidity obligations. The contingent
guarantee liability was $1 million as of both May 31, 2020 and 2019, based on management’s estimate of exposure to losses
within the guarantee portfolio. The remaining balance of the total guarantee liability of $10 million and $13 million as of
May 31, 2020 and 2019, respectively, relates to our noncontingent obligation to stand ready to perform over the term of our
guarantees and liquidity obligations we have entered into or modified since January 1, 2003.
The following table details the scheduled maturities of our outstanding guarantees in each of the five fiscal years following
May 31, 2020 and thereafter:
(Dollars in thousands)
2021....................................................
2022....................................................
2023....................................................
2024....................................................
2025....................................................
Thereafter ...........................................
Total .................................................
Amount
Maturing
339,979
29,265
157,411
32,824
83,628
177,679
820,786
$
$
138
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14—FAIR VALUE MEASUREMENT
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of
certain assets and liabilities on a recurring or nonrecurring basis. The accounting guidance for fair value measurements and
disclosures establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to
measure fair value. The levels of the fair value hierarchy, in priority order, include Level 1, Level 2 and Level 3. We
describe the valuation technique for each level in “Note 1—Summary of Significant Accounting Policies.” The following
tables present the carrying value and fair value for all of our financial instruments, including those carried at amortized cost,
as of May 31, 2020 and 2019. The tables also display the classification within the fair value hierarchy of the valuation
technique used in estimating fair value.
(Dollars in thousands)
Carrying Value
Fair Value
Level 1
Level 2
Level 3
May 31, 2020
Fair Value Measurement Level
Assets:
Cash and cash equivalents .......................
Restricted cash.........................................
Equity securities ......................................
Debt securities trading.............................
Deferred compensation investments........
Loans to members, net.............................
Accrued interest receivable .....................
Debt service reserve funds.......................
Derivative assets......................................
Liabilities:
Short-term borrowings.............................
Long-term debt ........................................
Accrued interest payable .........................
Guarantee liability ...................................
Derivative liabilities ................................
Subordinated deferrable debt...................
Members’ subordinated certificates.........
$
671,372
$
671,372
$
671,372
$
— $
8,647
60,735
309,400
5,496
8,647
60,735
309,400
5,496
26,649,255
29,252,065
117,138
14,591
173,195
117,138
14,591
173,195
8,647
60,735
—
5,496
—
—
14,591
—
—
—
—
—
—
—
—
309,400
—
— 29,252,065
117,138
—
173,195
—
—
—
$ 3,961,985
$ 3,963,164
$
— $ 3,713,164
$
250,000
19,712,024
21,826,337
— 11,981,580
9,844,757
139,619
10,937
1,258,459
986,119
1,339,618
139,619
11,948
1,258,459
1,030,108
1,339,618
—
—
—
—
—
139,619
—
1,258,459
1,030,108
—
11,948
—
—
—
1,339,618
139
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Carrying Value
Fair Value
Level 1
Level 2
Level 3
May 31, 2019
Fair Value Measurement Level
Assets:
Cash and cash equivalents .......................
Restricted cash.........................................
Equity securities ......................................
Debt securities held-to-maturity ..............
Deferred compensation investments........
Loans to members, net.............................
Accrued interest receivable .....................
Debt service reserve funds.......................
Derivative assets......................................
Liabilities:
Short-term borrowings.............................
Long-term debt ........................................
Accrued interest payable .........................
Guarantee liability ...................................
Derivative liabilities ................................
Subordinated deferrable debt...................
Members’ subordinated certificates.........
Loans to Members, Net
$
177,922
$
177,922
$
177,922
$
— $
8,282
87,533
565,444
4,984
8,282
87,533
570,549
4,984
25,899,369
25,743,503
133,605
17,151
41,179
133,605
17,151
41,179
8,282
87,533
—
4,984
—
—
17,151
—
—
—
570,549
—
133,605
—
41,179
— 25,743,503
$ 3,607,726
$ 3,608,259
$
— $ 3,608,259
$
19,210,793
20,147,183
— 11,482,715
8,664,468
158,997
13,666
391,724
986,020
1,357,129
158,997
13,307
391,724
1,004,707
1,357,129
—
—
—
—
—
158,997
—
391,724
1,004,707
—
13,307
—
—
—
1,357,129
—
—
—
—
—
—
—
—
—
Because of the interest rate repricing options we provide to borrowers on loan advances and other characteristics of our
loans, there is no ready market from which to obtain fair value quotes or observable inputs for similar loans. As a result, we
are unable to use the exit price to estimate the fair value of loans to members. We therefore estimate fair value for fixed-rate
loans by discounting the expected future cash flows based on the current rate at which we would make a similar new loan
for the same remaining maturity to a borrower. The assumed maturity date used in estimating the fair value of loans with a
fixed rate for a selected rate term is the next repricing date because at the repricing date, the loan will reprice at the current
market rate. The carrying value of our variable-rate loans adjusted for credit risk approximates fair value since variable-rate
loans are eligible to be reset at least monthly.
The fair value of loans with different risk characteristics, specifically nonperforming and restructured loans, is estimated
using collateral valuations or by adjusting cash flows for credit risk and discounting those cash flows using the current rates
at which similar loans would be made by us to borrowers for the same remaining maturities. See below for information on
how we estimate the fair value of certain impaired loans.
Recurring Fair Value Measurements
The following table presents the carrying value and fair value of financial instruments reported in our consolidated financial
statements at fair value on a recurring basis as of May 31, 2020 and 2019 and the classification of the valuation technique
within the fair value hierarchy.
140
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31,
2020
2019
(Dollars in thousands)
Equity securities ....................................
Debt securities trading...........................
Deferred compensation investments......
Derivative assets....................................
Derivative liabilities ..............................
Level 1
Level 2
$
60,735
$
— $
—
5,496
309,400
—
Total
60,735
309,400
5,496
—
173,195
173,195
— 1,258,459
1,258,459
Level 1
Level 2
Total
$
87,533
$
— $
87,533
—
4,984
—
—
—
—
41,179
391,724
—
4,984
41,179
391,724
Below is a description of the valuation techniques we use to estimate fair value of our financial assets and liabilities
recorded at fair value on a recurring basis, the significant inputs used in those techniques, if applicable, and the classification
within the fair value hierarchy.
Equity Securities
Our investments in equity securities consist of investments in Farmer Mac Class A common stock and Series A, Series B
and Series C preferred stock. These securities are reported at fair value in our consolidated balance sheets. We determine the
fair value based on quoted prices on the stock exchange where the stock is traded. That stock exchange with respect to
Farmer Mac Class A common stock is an active market based on the volume of shares transacted. Fair values for these
securities are classified within Level 1 of the fair value hierarchy.
Debt Securities Trading
As discussed above in “Note 1—Summary of Significant Accounting Policies” our debt securities consist of investments in
certificates of deposit with maturities greater than 90 days, corporate debt securities, municipality debt securities,
commercial MBS and other ABS and were classified as trading as of May 31, 2020. We previously classified our
investments in debt securities as held to maturity as of May 31, 2019. During the fourth quarter of fiscal year 2020, in light
of the extreme volatility and disruptions in the capital and credit markets in early March 2020 resulting from the COVID-19
pandemic, we transferred the debt securities in our held-to-maturity investment portfolio to trading, as we revised our
objective for the use of our held-to-maturity investment portfolio from previously serving as a supplemental source of
liquidity to serving as a readily available source of liquidity. Management estimates the fair value of our debt securities
utilizing the assistance of third-party pricing services. Methodologies employed, controls relied upon and inputs used by
third-party pricing vendors are subject to management review when such services are provided. This review may consist of,
in part, obtaining and evaluating control reports issued and pricing methodology materials distributed. We review the pricing
methodologies provided by the vendors in order to determine if observable market information is being used to determine
the fair value versus unobservable inputs. Investment securities traded in secondary markets are typically valued using
unadjusted vendor prices. These investment securities, which include those measured using unadjusted vendor prices, are
generally classified as Level 2 because the valuation typically involves using quoted market prices for similar securities,
pricing models, discounted cash flow analyses using significant observable market where available or a combination of
multiple valuation techniques for which all significant assumptions are observable in the market.
Deferred Compensation Investments
CFC offers a nonqualified 457(b) deferred compensation plan to highly compensated employees and board members. Such
amounts deferred by employees are invested by the company. The deferred compensation investments are presented as other
assets in the consolidated balance sheets in the other assets category at fair value. We calculate fair value based on the daily
published and quoted net asset value, and these investments are classified within Level 1 of the fair value hierarchy.
141
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Instruments
Our derivatives primarily consist of over-the-counter interest rate swaps. All of our swap agreements are subject to master
netting agreements. There is not an active secondary market for the types of interest rate swaps we use. We determine the
fair value of our derivatives using models that incorporate observable market inputs, such as spot LIBOR rates, Eurodollar
futures contracts and market swap rates. These inputs can vary depending on the type of derivative and nature of the
underlying rate, price or index upon which the derivative’s value is based. The impact of counterparty nonperformance risk
is considered when measuring the fair value of derivative assets. Internal pricing is compared against additional pricing
sources, such as external valuation agents and other sources. Pricing variances among different pricing sources are analyzed
and validated. The technique for determining the fair value for our interest rate swaps is classified as Level 2.
Transfers Between Levels
We monitor the availability of observable market data to assess the appropriate classification of financial instruments within
the fair value hierarchy and transfer between Level 1, Level 2 and Level 3 accordingly. Observable market data includes, but
is not limited to, quoted prices and market transactions. Changes in economic conditions or market liquidity generally will
drive changes in availability of observable market data. Changes in availability of observable market data, which also may
result in changes in the valuation technique used, are generally the cause of transfers between levels. We did not have any
transfers between levels for financial instruments measured at fair value on a recurring basis for the fiscal years ended May
31, 2020 and 2019.
Nonrecurring Fair Value Measurements
We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis on our consolidated
balance sheets. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in
certain circumstances, such as in the application of lower of cost or fair value accounting or when we evaluate for
impairment. Assets measured at fair value on a nonrecurring basis and still held during fiscal years ended May 31, 2020 and
2019 consisted of certain impaired loans. Fair value measurement adjustments for individually impaired loans are recorded
in the provision for loan losses on our consolidated statements of operations. The fair value of these assets is determined
based on the use of significant unobservable inputs, which are considered Level 3 in the fair value hierarchy. We did not
have any nonrecurring fair value measurement adjustments recorded in earnings attributable to these assets during fiscal
years 2020, 2019 or 2018.
Significant Unobservable Level 3 Inputs
Impaired Loans
The fair value of impaired loans is typically measured based on the present value of expected future cash flows. Our
estimate of expected future cash flows incorporates, among other items, assumptions regarding default rates, loss severities,
the amounts and timing of prepayments, as well as the characteristics of the loan. If we expect repayment to be provided
solely by the continued operation or sale of the underlying collateral, the fair value of the collateral less estimated costs to
sell is used as the basis for measuring fair value. We employ various approaches and techniques to determine the fair value
of collateral-dependent loans, including developing market multiples and obtaining valuations from third-party specialists.
The significant unobservable inputs used in measuring the fair value of collateral-dependent loans include estimated cash
flows before interest, taxes, depreciation and amortization and market multiples for comparable companies. Our Credit Risk
Management group reviews the unobservable inputs to assess the reasonableness of the assumptions used and the accuracy
of the work performed. We did not have any impaired collateral-dependent loans as of May 31, 2020 or May 31, 2019.
142
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15—BUSINESS SEGMENTS
Our consolidated financial statements include the financial results of CFC, NCSC and RTFC and certain entities created and
controlled by CFC to hold foreclosed assets. Separate financial statements are produced for CFC, NCSC and RTFC and are
the primary reports that management reviews in evaluating performance. The separate financial statements for CFC
represent the consolidation of the financial results for CFC and the entities controlled by CFC. For more detail on the
requirement to consolidate the financial results of NCSC and RTFC see “Note 1—Summary of Significant Accounting
Policies.”
The consolidated CFC financial statements include three operating segments: CFC, NCSC and RTFC. The NCSC and RTFC
operating segments are not required to be separately reported as the financial results of NCSC and RTFC do not meet the
quantitative thresholds outlined by the accounting standards for segment reporting as of May 31, 2020. As a result, we have
elected to aggregate the NCSC and RTFC financial results into a combined “Other” segment. CFC is the primary source of
funding to NCSC. CFC is the sole source of funding to RTFC. Pursuant to a guarantee agreement, CFC has agreed to
indemnify NCSC and RTFC for loan losses. The loan loss allowance at NCSC and RTFC is offset by a guarantee receivable
from CFC. The following tables display segment results for the years ended May 31, 2020, 2019 and 2018, and assets
attributable to each segment as of May 31, 2020 and 2019.
143
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended May 31, 2020
(Dollars in thousands)
CFC
Other
Elimination
Consolidated
Statement of operations:
Interest income..................................................................
$
Interest expense ................................................................
Net interest income .........................................................
Provision for loan losses...................................................
Net interest income after provision for loan losses ..........
$
1,143,397
(820,841)
322,556
(35,590)
286,966
$
47,107
(39,466)
7,641
—
7,641
(39,218) $
39,218
—
—
—
1,151,286
(821,089)
330,197
(35,590)
294,607
Non-interest income:
Fee and other income .....................................................
Derivative losses:
Derivative cash settlements expense..........................
Derivative forward value losses.................................
Derivative losses ............................................................
Investment securities gains.............................................
Total non-interest income...............................................
Non-interest expense:
General and administrative expenses..............................
Losses on early extinguishment of debt..........................
Other non-interest expense .............................................
Total non-interest expense..............................................
Loss before income taxes..................................................
Income tax benefit ............................................................
Net loss .............................................................................
28,309
9,524
(14,872)
22,961
(54,707)
(730,774)
(785,481)
9,431
(747,741)
(98,808)
(69)
(25,588)
(124,465)
(585,240)
—
$
(585,240) $
(1,166)
(3,504)
(4,670)
—
4,854
(8,940)
(614)
(8,291)
(17,845)
(5,350)
1,160
(4,190) $
—
—
—
—
(14,872)
6,581
—
8,291
14,872
—
—
— $
(55,873)
(734,278)
(790,151)
9,431
(757,759)
(101,167)
(683)
(25,588)
(127,438)
(590,590)
1,160
(589,430)
May 31, 2020
CFC
Other
Elimination
Consolidated
Assets:
Total loans outstanding.....................................................
Deferred loan origination costs.........................................
Loans to members.............................................................
Less: Allowance for loan losses .....................................
Loans to members, net......................................................
Other assets.......................................................................
Total assets.......................................................................
$ 26,669,759
$
1,083,197
11,526
26,681,285
(53,125)
26,628,160
1,496,998
—
1,083,197
—
1,083,197
106,525
$ 28,125,158
$
1,189,722
144
$ (1,062,102) $ 26,690,854
11,526
—
(1,062,102)
—
(1,062,102)
(95,173)
26,702,380
(53,125)
26,649,255
1,508,350
$ (1,157,275) $ 28,157,605
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended May 31, 2019
(Dollars in thousands)
CFC
Other
Elimination
Consolidated
Statement of operations:
Interest income..................................................................
$
Interest expense ................................................................
Net interest income .........................................................
Benefit for loan losses ......................................................
Net interest income after benefit for loan losses ..............
$
1,126,869
(835,491)
291,378
$
51,741
(43,658)
8,083
1,266
292,644
—
8,083
(42,940) $
42,940
—
—
—
1,135,670
(836,209)
299,461
1,266
300,727
Non-interest income:
Fee and other income .....................................................
Derivative losses:
Derivative cash settlements expense..........................
Derivative forward value losses.................................
Derivative losses ............................................................
Investment securities losses ...........................................
Total non-interest income...............................................
Non-interest expense:
General and administrative expenses .............................
Losses on early extinguishment of debt .........................
Other non-interest expense.............................................
Total non-interest expense..............................................
Loss before income taxes..................................................
Income tax expense...........................................................
Net loss .............................................................................
20,515
2,655
(7,815)
15,355
(42,618)
(318,135)
(360,753)
(1,799)
(342,037)
(91,063)
(7,100)
(1,675)
(99,838)
(149,231)
—
$
(149,231) $
(993)
(1,595)
(2,588)
—
67
(8,477)
—
(1,441)
(9,918)
(1,768)
(211)
(1,979) $
—
—
—
—
(7,815)
6,374
—
1,441
7,815
—
—
— $
(43,611)
(319,730)
(363,341)
(1,799)
(349,785)
(93,166)
(7,100)
(1,675)
(101,941)
(150,999)
(211)
(151,210)
May 31, 2019
CFC
Other
Elimination
Consolidated
Assets:
Total loans outstanding.....................................................
Deferred loan origination costs.........................................
Loans to members.............................................................
Less: Allowance for loan losses .....................................
Loans to members, net......................................................
Other assets.......................................................................
Total assets.......................................................................
$ 25,877,305
$
1,087,988
11,240
25,888,545
(17,535)
25,871,010
1,214,045
—
1,087,988
—
1,087,988
104,890
$ 27,085,055
$
1,192,878
145
$ (1,059,629) $ 25,905,664
11,240
—
(1,059,629)
—
(1,059,629)
(93,932)
25,916,904
(17,535)
25,899,369
1,225,003
$ (1,153,561) $ 27,124,372
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended May 31, 2018
(Dollars in thousands)
CFC
Other
Elimination
Consolidated
Statement of operations:
Interest income..................................................................
$
Interest expense ................................................................
Net interest income .........................................................
Benefit for loan losses ......................................................
Net interest income after benefit for loan losses ..............
$
1,067,016
(791,836)
275,180
$
49,182
(39,740)
9,442
18,575
293,755
—
9,442
(38,841) $
38,841
—
—
—
1,077,357
(792,735)
284,622
18,575
303,197
Non-interest income:
Fee and other income .....................................................
Derivative gains (losses):
Derivative cash settlements expense..........................
Derivative forward value gains..................................
Derivative gains..............................................................
Total non-interest income...............................................
Non-interest expense:
General and administrative expenses .............................
Other non-interest expense.............................................
Total non-interest expense..............................................
Income before income taxes .............................................
Income tax expense...........................................................
Net income .......................................................................
17,369
1,372
(1,163)
17,578
(71,906)
301,694
229,788
247,157
(83,783)
(1,943)
(85,726)
455,186
—
$
455,186
$
(2,375)
4,308
1,933
3,305
(7,101)
(1,163)
(8,264)
4,483
(2,305)
2,178
—
—
—
(1,163)
—
1,163
1,163
—
—
$
— $
(74,281)
306,002
231,721
249,299
(90,884)
(1,943)
(92,827)
459,669
(2,305)
457,364
146
SUPPLEMENTARY DATA
Selected Quarterly Financial Data (Unaudited)
Condensed quarterly financial information for fiscal years May 31, 2020 and 2019 is presented below.
(Dollars in thousands)
Interest income ..........................................
Interest expense .........................................
Net interest income ..................................
Benefit (provision) for loan losses........
Net interest income after benefit
(provision) for loan losses......................
Non-interest income (loss):
Derivative gains (losses).......................
Other non-interest income ....................
Total non-interest income (loss)..............
Non-interest expense .................................
Income (loss) before income taxes ............
Income tax expense (benefit).....................
Net income (loss) ......................................
Less: Net (income) loss attributable to
noncontrolling interests..........................
Net income (loss) attributable to CFC ...
Year Ended May 31, 2020
Aug 31, 2019
290,015
$
(213,271)
76,744
$
Nov 30, 2019
287,037
(207,871)
79,166
$
(30)
1,045
Feb 29, 2020
287,195
(203,040)
84,155
(2,382)
May 31, 2020
287,039
$
(196,907)
90,132
(34,223)
Total
$ 1,151,286
(821,089)
330,197
(35,590)
76,714
80,211
81,773
55,909
294,607
(395,725)
12,561
(383,164)
(18,150)
(324,600)
521
(324,079)
1,657
$
(322,422) $
183,450
3,728
187,178
(25,698)
241,691
(91)
241,600
(337,936)
4,396
(333,540)
(25,628)
(277,395)
426
(276,969)
(239,940)
11,707
(228,233)
(57,962)
(230,286)
304
(229,982)
(790,151)
32,392
(757,759)
(127,438)
(590,590)
1,160
(589,430)
(8)
241,592
$
1,405
(275,564) $
1,136
(228,846) $
4,190
(585,240)
(Dollars in thousands)
Interest income ..........................................
Interest expense .........................................
Net interest income ..................................
Benefit (provision) for loan losses........
Net interest income after benefit
Year Ended May 31, 2019
Aug 31, 2018
Nov 30, 2018
Feb 28, 2019
May 31, 2019
Total
$
278,491
$
(210,231)
68,260
109
$
281,253
(204,166)
77,087
1,788
$
285,566
(207,335)
78,231
(182)
290,360
(214,477)
75,883
(449)
$ 1,135,670
(836,209)
299,461
1,266
(provision) for loan losses......................
68,369
78,875
78,049
75,434
300,727
Non-interest income (loss):
Derivative gains (losses).......................
Other non-interest income ....................
Total non-interest income (loss)..............
Non-interest expense .................................
Income (loss) before income taxes ............
Income tax expense (benefit).....................
Net income (loss) ......................................
Less: Net (income) loss attributable to
noncontrolling interest ...........................
Net income (loss) attributable to CFC ...
7,183
3,185
10,368
(30,699)
48,038
(60)
47,978
(13)
$
47,965
$
147
63,343
4,321
67,664
(26,570)
119,969
(243)
119,726
(132,174)
3,714
(128,460)
(21,209)
(71,620)
149
(71,471)
(301,693)
2,336
(299,357)
(23,463)
(247,386)
(57)
(247,443)
(363,341)
13,556
(349,785)
(101,941)
(150,999)
(211)
(151,210)
(466)
119,260
$
539
(70,932) $
1,919
(245,524) $
1,979
(149,231)
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 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;
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or dispositions
of our assets that could have a material effect on our financial statements; and
(iv) ensure disclosure controls and procedures include, without limitation, controls and procedures designed to provide
reasonable assurance that information required to be disclosed by us in reports filed under the Exchange Act is
accumulated and communicated to our management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
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.
Our management assessed the effectiveness of internal control over financial reporting as of May 31, 2020. 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 (“2013 Framework”).
Based on management’s assessment and those criteria, management believes that we maintained effective internal control
over financial reporting as of May 31, 2020.
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.
148
Changes in Internal Control Over Financial Reporting
As a result of the COVID-19 pandemic, beginning in mid-March 2020, certain of our employees began working remotely.
We have not identified any material changes in our internal control over financial reporting resulting from the changes to the
working environment. We are continually monitoring and assessing the COVID-19 situation to determine any potential
impacts on the design and operating effectiveness of our internal control over financial reporting.
By:
/s/ SHELDON C. PETERSEN
By:
/s/ J. ANDREW DON
Sheldon C. Petersen
Chief Executive Officer
August 5, 2020
J. Andrew Don
Senior Vice President and Chief Financial Officer
August 5, 2020
By:
/s/ ROBERT E. GEIER
Robert E. Geier
Vice President and Controller
August 5, 2020
Item 9B. Other Information
None.
149
Item 10. Directors, Executive Officers and Corporate Governance
PART III
(a) Directors
Name
Dean R. Tesch (President of CFC) ............................................
Alan W. Wattles (Vice President of CFC) .................................
Bruce A. Vitosh (Secretary-Treasurer of CFC) .........................
Thomas A. Bailey ......................................................................
Kevin M. Bender .......................................................................
Robert Brockman.......................................................................
Chris D. Christensen..................................................................
David E. Felkel..........................................................................
Dennis Fulk ...............................................................................
Barbara E. Hampton ..................................................................
Doyle Jay Hanson......................................................................
William Keith Hayward.............................................................
Bradley P. Janorschke................................................................
Jimmy A. LaFoy ........................................................................
Anthony Larson .........................................................................
G. Anthony Norton ....................................................................
Timothy Rodriguez....................................................................
Bradley J. Schardin....................................................................
Mark A. Suggs...........................................................................
Marsha L. Thompson.................................................................
Todd P. Ware..............................................................................
Curtis Wynn...............................................................................
____________________________
Age
Director
Since
Date Present
Term Expires
58
54
54
78
61
70
56
59
69
58
74
55
56
79
46
68
59
60
63
65
54
56
2015
2016
2017
2019
2020
2015
2019
2018
2019
2019
2015
2020
2019
2015
2020
2019
2018
2015
2020
2017
2015
2017
2021
2022
2023
2022
2023
2022
2022(1)
2021
2022
2022
2021
2023
2022
2021
2023
2022
2021
2021
2023
2023
2021
2021(1)
(1)
Pursuant to CFC’s bylaws, NRECA determines the method of director election and length of term for the seat occupied by this director.
Under CFC’s bylaws, the board of directors shall 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 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, other than the two directors designated by NRECA, 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.
150
(b) Executive Officers
Title
Name
President and Director ............................................................... Dean R. Tesch
Vice President and Director....................................................... Alan W. Wattles
Secretary-Treasurer and Director .............................................. Bruce A. Vitosh
Chief Executive Officer (2)......................................................... Sheldon C. Petersen
Senior Vice President and Chief Financial Officer....................
Senior Vice President & Chief Administrative Officer ............. Graceann D. Clendenen
Senior Vice President, Member Services ..................................
Senior Vice President and General Counsel.............................. Roberta B. Aronson
Senior Vice President, Credit Risk Management ......................
John M. Borak
Senior Vice President, Corporate Relations .............................. Brad L. Captain
Senior Vice President, Loan Operations.................................... Robin C. Reed
Senior Vice President, Business and Industry Development..... Gregory Starheim
___________________________
J. Andrew Don
Joel Allen
Age
58
54
54
67
60
62
54
62
75
50
58
57
Held Present
Office Since(1)
2020
2020
2020
1995
2014
2019
2014
2014
2003
2014
2016
2016
(1)
(2)
Refers to fiscal year.
On July 23, 2020, Mr. Petersen notified the Board of Directors of his decision to retire during the first half of 2021, subject to the successful completion
of a search process for a successor by the Board of Directors.
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
Not applicable.
(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. Tesch has served as board chairman of Taylor Electric Cooperative in Stetsonville, Wisconsin, since August 2014. Mr.
Tesch also served as a director for the cooperative’s wholesale power supplier, Dairyland Power Cooperative, headquartered
in La Crosse, Wisconsin, from June 2014 to June 2019. Mr. Tesch has been a certified financial planner since 2000 and is a
former elementary school teacher. From 2010 to January 2019 he served as a member of the Certified Financial Planners
Board Item Writing Group. As the board chairman of Taylor Electric Cooperative, Mr. Tesch has acquired extensive
experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Tesch 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. Wattles has been president and chief executive officer of Monroe County Electric Co-Operative in Waterloo, Illinois
since 2002. He has been a board member of Southern Illinois Power Cooperative since 2002. As president and chief
executive officer of Monroe County Electric Co-Operative, Mr. Wattles has acquired extensive experience with and
knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Wattles 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. Vitosh has been general manager and CEO of Norris Public Power District in Beatrice, Nebraska, since 2012. From
2008 to 2012, Mr. Vitosh was the Manager of Finance and Accounting at Norris Public Power District. Mr. Vitosh is a CPA
151
and is a member of the Nebraska Society of Certified Public Accountants. Mr. Vitosh has also been a self-employed farmer
since 2004. As general manager and CEO of Norris Public Power District, Mr. Vitosh has acquired extensive experience
with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Vitosh 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. Bailey has served as a director of Vermont Electric Cooperative in Johnson, Vermont, since January 2004. From 2006 to
2015 Mr. Bailey served as board president of Vermont Electric Cooperative. He has operated a real estate investment
business since 2009. As a director of Vermont Electric Cooperative, Mr. Bailey has acquired extensive experience with and
knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Bailey 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. Bender has served as a director of Carroll White Rural Electric Membership Corporation in Monticello, Indiana, since
January 2012. Additionally, he has served as President of Carroll White Rural Electric Membership Corporation since July
2017. Mr. Bender has also served as the President and CEO of the Bank of Wolcott in Wolcott, Indiana, since January 2010
and director of Wolcott Bancorp since March 1995. From June 2008 to January 2012, he served as a director of Carroll
County Rural Electric Membership Corporation in Delphi, Indiana. As a director and President of Carroll White Rural
Electric Membership Corporation, Mr. Bender has acquired extensive experience with and knowledge of the rural electric
cooperative industry and, therefore, we believe Mr. Bender 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. Brockman has been a director at Wheatland Rural Electric Association in Wheatland, Wyoming, since 2006. He has
served as president and real estate broker for Keyhole Land Co. in Wheatland, Wyoming, since 1988. As a director of
Wheatland Rural Electric Association, Mr. Brockman has acquired extensive experience with and knowledge of the rural
electric cooperative industry and, therefore, we believe Mr. Brockman 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. Christensen has served as a director of Norval Electric Cooperative, Inc. in Glasgow, Montana, since 2004. Mr.
Christensen has also served as a director of the NRECA Board of Directors since 2014, and has served as NRECA board
vice president since March 2019. He has been a self-employed rancher since 1979. As a director of Norval Electric
Cooperative, Inc. and NRECA, Mr. Christensen has acquired extensive experience with and knowledge of the rural electric
cooperative industry and, therefore, we believe Mr. Christensen 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. Felkel has been president and CEO of Edisto Electric Cooperative, Inc. in Bamberg, South Carolina, since 1997. He has
been a trustee on the Board of Trustees of Central Electric Power Cooperative since 1997. As the president and CEO of
Edisto Electric Cooperative, Mr. Felkel has acquired extensive experience with and knowledge of the rural electric
cooperative industry and, therefore, we believe Mr. Felkel 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. Fulk has served as a director of Platte-Clay Electric Cooperative in Kearney, Missouri, since 1993, including serving as
board President from 2000 to 2015. He served as a director of NW Electric Cooperative from 2004 until April 2019, serving
as board Vice President from 2011 to April 2019. Mr. Fulk also served as a director of the Association of Missouri Electric
Cooperatives from 2000 until 2015, serving as board President from 2010 to 2011. As a director of Platte-Clay Electric
Cooperative, Mr. Fulk has acquired extensive experience with and knowledge of the rural electric cooperative industry and,
therefore, we believe Mr. Fulk 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.
Mrs. Hampton has served as the Senior Vice President, CFO at Georgia Transmission Corporation in Tucker, Georgia, since
2005. Mrs. Hampton has been a Certified Public Accountant since 1990. As Senior Vice President, CFO of Georgia
Transmission Corporation, Mrs. Hampton has acquired extensive experience with and knowledge of the rural electric
cooperative industry and, therefore, we believe Mrs. Hampton 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. We believe Mrs. Hampton’s experience with
accounting principles, financial reporting rules and regulations and evaluating financial results makes her qualified to serve
as CFC’s Audit Committee financial expert as defined by Section 407 of the Sarbanes-Oxley Act of 2002 and as the
Chairman of CFC’s Audit Committee.
152
Mr. Hanson has been a director of Fall River Rural Electric Cooperative in Ashton, Idaho, since 2005. From 1968 until 2001
Mr. Hanson served as a cooperative extension agent for the University of Idaho and University of Wyoming. He also chaired
the Idaho Consumer-Owned Utilities Association Nominating Committee from 2013 until 2014. As a director of Fall River
Rural Electric Cooperative, Mr. Hanson has acquired extensive experience with and knowledge of the rural electric
cooperative industry and, therefore, we believe Mr. Hanson 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. Hayward has served as the General Manager and Chief Executive Officer of North East Mississippi Electric Power
Association in Oxford, Mississippi, since February 2014. From July 2004 to January 2014, he served as its Manager of
Engineering and Operations. Mr. Hayward has also served as a director of South Eastern Data Cooperative, a software
cooperative in Atlanta, Georgia, since 2014. As the General Manager and Chief Executive Officer of North East Mississippi
Electric Power Association, Mr. Hayward has acquired extensive experience with and knowledge of the rural electric
cooperative industry and, therefore, we believe Mr. Hayward 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. Janorschke has been the General Manager at Homer Electric Association, Inc. in Homer, Alaska, since 2004. He has
also been the General Manager of Alaska Electric and Energy Cooperative in Homer, Alaska, since 2004. Mr. Janorschke
has also served on the Board of Trustees of the Northwest Public Power Association in Vancouver, Washington, since 2014.
As the General Manager of Homer Electric Association, Inc., Mr. Janorschke has acquired extensive experience with and
knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Janorschke 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. LaFoy has served as a director and the secretary-treasurer for Baldwin County Electric Member Corporation in Gulf
Shores, Alabama, since July 2009. Mr. LaFoy is a certified public accountant and since 1977 has owned and operated the
public accounting firm LaFoy & Associates. He is a founding organizer and has served as a member of the Southern States
Bank Board since August 2007. Mr. LaFoy also was a member of the Farmers National Bank Board of Opelika from 1989 to
2002 and the First American Bank Advisory Board from 2002 to 2006. Mr. LaFoy was a council member from 1981 until
1986 and president from 1985 until 1986 of the Alabama Society of Certified Public Accountants. He was also a council
member of the American Institute of Certified Public Accountants from 1986 until 1990. As a director and secretary-
treasurer of Baldwin County Electric Member Corporation, Mr. LaFoy has acquired extensive experience with and
knowledge of the rural electric cooperative industry and, therefore, we believe Mr. LaFoy 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. Larson has served as a director of Slope Electric Cooperative, Inc. in New England, North Dakota, since June 2010, and
a director of Upper Missouri Power Cooperative in Sidney, Montana, since April 2000. Mr. Larson has served as an
Advisory Board Member of Dakotas America since September 2017, a director of Innovative Energy Alliance since January
2019 and a director of Maintenance Solutions Cooperative since January 2019, each of which provides services to electric
cooperatives. In addition to being a self-employed rancher since 1986 and a supervisor at Adams County Soil Conservation
District in Hetlinger, North Dakota since February 2020, Mr. Larson was an Ambulatory Care Officer at West River Health
Services from August 2016 to September 2019, and an Agricultural Banker at Dacotah Bank from October 2012 to January
2015. As a director of Slope Electric Cooperative, Inc., Mr. Larson has acquired extensive experience with and knowledge
of the rural electric cooperative industry and, therefore, we believe Mr. Larson 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. Norton has served as a director of Snapping Shoals Electric Membership Corporation in Covington, Georgia, since
1993. Mr. Norton has also served as a director at Georgia Electric Membership Corporation in Tucker, Georgia, since 2009
and Georgia System Operations Corporation in Tucker, Georgia, since 2012. Mr. Norton has owned and operated Conyers
Pharmacy in Conyers, Georgia from 1982 to 2018. As a director of Snapping Shoals Electric Membership Corporation, Mr.
Norton has acquired extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we
believe Mr. Norton 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. Rodriguez has been the CEO of Kay Electric Cooperative in Blackwell, Oklahoma, since 2014. He also served as COO
of Kay Electric Cooperative from 2010 to 2014. Mr. Rodriguez has been a CPA since 1998. As the CEO of Kay Electric
Cooperative, Mr. Rodriguez has acquired extensive experience with and knowledge of the rural electric cooperative industry
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and, therefore, we believe Mr. Rodriguez 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. Schardin has served as general manager of Southeastern Electric Cooperative in Marion, South Dakota, since 1990. He
chaired the Managers Advisory Committee for his cooperative’s wholesale power supplier, East River Electric Power
Cooperative from January 2013 to 2015 and at the same time was a member of the Basin Electric Power Cooperative
Managers Advisory Committee. Mr. Schardin has also been a member of the South Dakota Rural Electric Association
Strategic Issues Committee since 2005, having served terms as President, Vice President, Secretary and Treasurer of the
committee during that time. He has also served as a director on the Rural Electric Economic Development Fund Board of
Directors since 1996. As general manager of Southeastern Electric Cooperative, Mr. Schardin has acquired extensive
experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Schardin 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. Suggs has served as Executive Vice President and General Manager of Pitt & Greene Electric Membership Cooperative
in Farmville, North Carolina, since September 1983. Mr. Suggs has served as a director of North Carolina Electric
Membership Corporation in Raleigh, North Carolina since 1984 and served as its President from 2015 to 2017. He has also
served as a director of North Carolina Association of Electric Cooperatives in Raleigh, North Carolina since 1984 and
served as its President from 2010 to 2011. Additionally, Mr. Suggs has served as a director of Tarheel Electric Membership
Association in Raleigh, North Carolina, since 1984. As Executive Vice President and General Manager of Pitt & Greene
Electric Membership Cooperative, Mr. Suggs has acquired extensive experience with and knowledge of the rural electric
cooperative industry and, therefore, we believe Mr. Suggs 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.
Mrs. Thompson has served as director of Trico Electric Cooperative in Mariana, Arizona, since 2001, and has served as
secretary of the board since 2015. Mrs. Thompson also serves as a member of Trico Electric Cooperative’s Audit and
Finance Committee and served as its chair from 2013 until 2015. Additionally, Mrs. Thompson has been a director of Grand
Canyon State Electric Cooperative Association since 2002 and served as its Board President from 2008 to 2010. As
secretary of the board and a director of Trico Electric Cooperative, Mrs. Thompson has acquired extensive experience with
and knowledge of the rural electric cooperative industry and, therefore, we believe Mrs. 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. Ware has been president and CEO of Licking Rural Electrification-The Energy Cooperative in Newark, Ohio, since
2012. Mr. Ware was the vice president and CFO of Licking Rural Electrification-The Energy Cooperative from 2000 until
2011. In May 2019 Mr. Ware was elected as a director of Farmer Mac, a federally chartered and publicly traded corporation
that provides a secondary market for a variety of loans made to borrowers in rural America, where he serves on the Audit
and Enterprise Risk Committees. He has served as a director of Licking County United Way and Genesis Healthcare
Foundation from 2009 to 2018. He also served as a director of Altheirs Oil Inc. since 2005, the cooperative’s wholesale
power supplier, Buckeye Power Cooperative, since 2012, and The Ohio State University-Newark Advisory Board since
2016 where he currently serves as vice-chairman. He is also a member of the Buckeye Power Cooperative Executive and
Rate Committees and the American Gas Association Leadership Council. As president and CEO of Licking Rural
Electrification-The Energy Cooperative, Mr. Ware has acquired extensive experience with and knowledge of the rural
electric cooperative industry and, therefore, we believe Mr. Ware 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. Wynn has been president and CEO of Roanoke Electric Membership Corporation in Aulander, North Carolina, since
1997. He has been a director on the NRECA Board of Directors since 2007, and has served as NRECA board president since
March 2019. Mr. Wynn also served as NRECA vice president from 2017 to 2019. Mr. Wynn has also served as a director of
the North Carolina Electric Membership Corporation and the North Carolina Association of Electric Cooperatives since
1997. As president and CEO of Roanoke Electric Membership Corporation and director of NRECA, Mr. Wynn has acquired
extensive experience with and knowledge of the rural electric cooperative industry and, therefore, we believe Mr. Wynn 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
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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. 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.
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. In April 2014, she became Senior Vice President, Corporate Services. Effective
December 17, 2018, Ms. Clendenen became Senior Vice President and Chief Administrative Officer.
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 as Vice President, Portfolio Management from 2010 until April 2014,
when he became Senior Vice President, Member Services.
Ms. Aronson joined CFC in 1995. She served as Vice President and Deputy General Counsel until June 2013. Effective July
1, 2013, 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. 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. 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. Reed joined CFC in 1987. She served as Vice President, Portfolio Management from 2002 until 2014. On April 16,
2014, Ms. Reed became Senior Vice President, Member Services. Effective September 14, 2015, Ms. Reed became Senior
Vice President, Loan Operations.
Mr. Starheim joined CFC as Senior Vice President, Business and Industry Development on July 6, 2015. Prior to joining
CFC, Mr. Starheim served as CEO and General Manager of Delaware County Electric Cooperative in upstate New York
from 2001 until 2012. From 2012 until joining CFC, Mr. Starheim held the position of President and CEO of Kenergy Corp
in Henderson, Kentucky.
(f) Involvement in Certain Legal Proceedings
None to our knowledge.
(g) Promoters and Control Persons
Not applicable.
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(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 “Investor Relations/Corporate Governance”).
(i) Nominating Committee
Our board of directors does not have a standing nominating committee. As described above under “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 in reviewing applications from potential candidates. One or more candidates for
the at-large director position 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 12 directors: Mrs. Hampton (Chairperson), Mr. Ware (Co-Vice Chairperson), Mr.
Janorschke (Co-Vice Chairperson), Mr. Tesch (Ex Officio), Mr. Bender, Mr. Christensen, Mr. Felkel, Mr. Fulk, Mr. Hanson,
Mr. Larson, Mr. Suggs and Mr. Vitosh. Mrs. Hampton 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 website, www.nrucfc.coop (under the link “Investor Relations/
Corporate Governance”).
The Audit Committee completed its review and discussions with management regarding our audited financial statements for
the year ended May 31, 2020. The Audit Committee has discussed with the independent auditors the matters required to be
discussed by Auditing Standard No. 1301, 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 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, 2020 for filing with the U.S.
Securities and Exchange Commission.
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(k) Compensation Committee
Role of the Compensation Committee
Our Compensation Committee currently consists of seven directors: Mr. Tesch, Mr. Wattles, Mr. Vitosh, Mrs. Hampton, Mr.
Hanson, Mr. Felkel and Mr. Brockman. 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 “Investor
Relations/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 2020, 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 a one-
year compensation analysis, which assesses CFC’s CEO compensation and the compensation of peer CEOs for the most
recent fiscal year. The elements of compensation reviewed include current base pay, target and actual annual incentives,
actual long-term incentive granted as well as long term incentive payouts, 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 2020.
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In fiscal year 2020, 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
Not applicable.
(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 CFC’s 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 Chief Administrative Officer 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
The board of directors has primary responsibility for the oversight and strategic direction of risk management. The board of
directors has adopted a comprehensive risk management policy that describes the roles and responsibilities of the board and
management within an established framework for identifying and managing risks. The board of directors reviews the risk
management policy annually and updates it accordingly. 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.
The board of directors has also established a risk appetite statement that includes a common understanding between the
board of directors and management regarding acceptable risks and risk tolerances underlying the execution of CFC’s
strategy. The board of directors reviews the risk appetite on at least an annual basis. The risk appetite is also intended as a
benchmark for discussing the implications of pursuing new strategies and business opportunities.
The board of directors has also approved and authorized an Enterprise Risk Management (“ERM”) program for CFC that
provides a holistic view of key risks that may impact CFC’s strategic objectives. ERM provides CFC with a process that
allows CFC to become more anticipatory and effective at evaluating and managing uncertainties. The ERM activities, which
include risk surveys, risk assessments, and risk analyses, are executed within the context of CFC’s strategic objectives,
mission, values, culture, risk management philosophy and risk appetite. The program provides a consistent approach for
identifying CFC’s key risks and determining appropriate responses in light of the board of directors’ strategic objectives,
risk appetite and tolerances. As part of the ERM program and the board of directors’ strategic planning process, the board of
directors periodically participates in a risk assessment process in order to evaluate each risk identified as part of the ERM
program on the basis of likelihood and impact, and prioritize the risks in order to effectively manage CFC’s most critical
risks. Management has primary responsibility for the execution of the ERM program in accordance with the risk philosophy,
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risk appetite and risk tolerances of the board of directors. Additionally, management is responsible for regularly evaluating
the ERM program, making regular reports to the board of directors about its evaluation of the ERM program, and proposing
to the board of directors changes to the ERM program to reflect best practices.
In fulfilling its risk management oversight duties, the board of directors receives periodic reports on business activities and
risk management activities from management and from various operating groups and committees across the organization,
including the Credit Risk Management, the Member Services, the Treasury, the Internal Audit, the Business and Technology
Services and the Legal Services groups, as well as Corporate Compliance, the Asset Liability Committee, the Corporate
Credit Committee, the Investment Management Committee and the Disclosure Committee. Management provides reports to
the board of directors at each regularly scheduled board meeting, and more frequently as requested by the board of directors,
relating to, among other things, the ongoing progress of managing risk at CFC through the ERM program, management’s
responses for the critical business risks identified during each risk assessment process and the status of any gaps or
deficiencies, and CFC’s risk profile and trends, as well as emerging risks and opportunities.
The board of directors places particular emphasis on the oversight of cybersecurity risks. Each quarter, or more frequently as
requested by the board of directors, management provides reports on CFC’s security operations, including any cybersecurity
incidents, management’s efforts to manage any incidents, and any other information requested from management. On at
least an annual basis, the board of directors reviews management reports concerning the disclosure controls and procedures
in place to enable CFC to make accurate and timely disclosures about any material cybersecurity events. Additionally, upon
the occurrence of a material cybersecurity incident, the board of directors will be notified of the event so it may properly
evaluate such incident, including management’s remediation plan.
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,
Starheim and Allen and Ms. Aronson) 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 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 their role in
developing, implementing and overseeing CFC’s strategy and operations. Other components of compensation—short-term
and long-term incentives—reflect the performance of the organization and its 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
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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 2020, Mercer (US), Inc. (“Mercer US”) was engaged by the Compensation Committee to conduct a survey to
provide compensation data for the CEO position using 14 peer organizations identified by Mercer US through discussions
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 and financial services companies.
The peer group companies had assets ranging from approximately 50% to 200% of CFC’s May 31, 2019 total assets of $25
billion, and included eight companies with greater total assets than CFC’s. The peer group consisted of financial services
organizations New York Community Bancorp, Inc.; Signature Bank; Nelnet, Inc.; Webster Financial Corporation; Flagstar
Bancorp, Inc.; People’s United Financial, Inc.; Hancock Whitney Corporation; Onemain Holdings, Inc.; BankUnited, Inc.;
Synovus Financial Corporation; TFS Financial Corporation; and Federal Agricultural Mortgage Corporation, as well as two
Farm Credit System peers. Bok Financial Corporation was removed from the peer group in fiscal year 2020 due to its
merger with CoBiz.
Mercer US led the Compensation Committee through an assessment of CEO compensation data for the peer group
companies. Mercer US’ 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;
• target and actual annual incentive paid in fiscal year 2019;
• actual long-term incentive granted, 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);
• sign-on awards, special awards and mega-grants annualized over the term of the employment contract or the vesting
schedule; and
• annualized value of retirement, perquisites and other noncash compensation.
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 US 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; he 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 workforce, we must remain competitive with the pay of other
employers that compete with us for talent.
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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 met or 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 $1,214,000 effective January 1, 2020.
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 company performance and individual leadership
accomplishments.
Mr. Don, Mr. Starheim, Ms. Aronson and Mr. Allen 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 that would typically warrant a merit-based increase in base pay. Mr. Allen, Mr. Don, Mr. Starheim and Ms. Aronson
received a merit increase. The merit increases 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 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. Over the last 10 years, the actual payout percentage has ranged from
52.5% to 100% of total opportunity, with an average over the 10 years of 84.25%. This equates to a 10-year average payout
of 16.18% 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.
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 2020, which were the basis for the short-term incentive payment, were 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 2020, the board of directors established seven corporate goals within these four
quadrants. The board of directors establishes corporate goals and measures 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 2020 were:
• Customer Engagement: Two goals supporting efforts to maintain or increase market share of borrowers in key segments
of the loan portfolio.
• Internal Process and Operations: Two goals focused on managing 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: One goal focused on the training and development of member engagement aspects of
CFC’s value plan.
161
The determination of the extent to which the seven goals were achieved and, therefore, the amount to be paid out under the
short-term incentive plan for fiscal year 2020 was confirmed by the board of directors with the filing of this Form 10-K. The
board determined that four goals were achieved at 100% and three were achieved at a 75% level. Each goal may carry a
different weight varying between 10% and 20% resulting in an aggregate payout of 88.75% 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 individuals employed by CFC on the first day of each fiscal year in which there is a long-term incentive plan in place,
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 cash payment 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 performance measure for the active long-term incentive plans is the achievement of bond rating targets for our issuer
credit ratings as rated by S&P Global Inc., Fitch Ratings Inc. and Moody’s Investors Service rating agencies, as outlined in
each plan document. The value of the performance units will range from $0 to $150 per performance unit according to the
level of CFC’s issuer credit ratings by the rating agencies. To achieve the highest value of $150, which exceeds the targeted
value, the agencies defined in each plan would have to raise CFC’s issuer credit rating to AA (or the equivalent rating at
Moody’s). To determine the payout value of performance units, the ratings by agencies identified in each plan are given a
numerical value, i.e., 2 for A stable, 3 for A positive, etc. The ratings of these agencies 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% 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, 2020, the target rating level was “A+ 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 fiscal
year 2018, 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
fiscal year 2018 base pay.
The following table presents the potential payout values for performance units awarded for the program cycle that ended
May 31, 2020:
Issuer Credit Rating—Incentive-Performance Linkage
Negative
1
$—
A
Stable
2
$40
Positive
Negative
3
$60
4
$60
A+
Stable
5
$100
Positive
6
$120
AA-
$150
Rating
Outlook ............................
Numerical Score ..............
Plan Payout Unit Value....
____________________________
* The target objective is in bold.
CFC uses our issuer credit rating as the performance measure for the long-term incentive plan because stronger ratings lead
to lower interest cost and more reliable access to the capital markets. We also believe our long-term incentive measure will
better align management’s interests with the interests of our members and investors. Since we have no publicly held equity
securities and our objective is to offer our members cost-based 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.
162
As of May 31, 2020, there were three active long-term incentive plans in which named executive officers were participants.
Performance units issued to all named executive officers in fiscal year 2018 had a payout value based on our issuer credit
ratings in place on May 31, 2020. Performance units issued to all named executive officers in fiscal year 2019 will have a
payout value based on issuer credit ratings in place on May 31, 2021; and performance units issued to named executive
officers in fiscal year 2020 will have a payout value based on issuer credit ratings in place on May 31, 2022.
Payments made to the named executive officers for fiscal year 2020 were for performance units issued in fiscal year 2018
and were based on the May 31, 2020 issuer credit rating level of A stable outlook, which has a value of $40 per performance
unit, or 40% of the targeted opportunity (10% of fiscal year 2018 base pay).
All current plans will pay out if the three rating agencies rate our issuer credit rating at a high enough level to receive a
payout. The payout will be based on the average of the three 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 2020 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.
We also offer a Pension Restoration Plan (“PRP”) and an Executive Benefit Restoration Plan (“EBR”). The PRP is a plan for
a select group of management, to increase their retirement benefits above amounts available under the Retirement Security
Plan, which is restricted by Internal Revenue Service (“IRS”) limitations on annual pay levels and maximum annual annuity
benefits. The PRP 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. The PRP was frozen as of December 31, 2014.
We then established the EBR to provide a similar benefit to a select group of management. A named executive officer may
participate in the PRP or the EBR. Unlike the Retirement Security Plan, the PRP and the EBR are unfunded, unsecured
obligations of CFC and are not qualified for tax purposes. All five named executive officers are participants in either the
PRP or the EBR.
Under the PRP, 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) to NRECA. Under the EBR, we
will also pay any amounts owed to the named executive officers for the restoration benefit once the risk of forfeiture has
expired; amounts will be paid directly by CFC. We record an unfunded pension obligation and an offsetting adjustment to
AOCI for this liability.
For more information on the Retirement Security Plan, the PRP and the EBR, see “Pension Benefits Table” 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 this plan are limited by IRS regulations. The calendar year 2020 cap for contributions is $19,500.
There is no CFC contribution to the deferred compensation plan. For more information see “Nonqualified Deferred
Compensation” below.
The CEO is eligible to earn retirement benefits in addition to those credited under any of the above-mentioned plans in a
Supplemental Executive Retirement Plan (“SERP”). This plan is an ineligible deferred compensation plan within the
meaning of section 457 of the Internal Revenue Code. The account is considered unfunded and may be credited from time to
163
time pursuant to the plan at the discretion of the CFC Board of Directors. During fiscal year 2020, the CFC Board of
Directors used its discretion and credited the account. According to the terms of the SERP, the CEO became fully vested and
those benefits were paid in full. These payments are reflected in the Summary Compensation Table 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, an annual spousal air travel allowance to permit Mr. Petersen’s spouse to accompany him on business travel, and
home security. To provide the automobile and spousal travel 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 2020, the board
of directors authorized an aggregate of $50,000 to cover these two allowances. We provide security for Mr. Petersen,
including security in addition to that provided at business facilities. We believe that all company-incurred security costs are
reasonable and necessary and for the company’s benefit.
Severance/Change-in-Control Agreements
Mr. Petersen, CEO, has an executive agreement with CFC under which he 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. No other named executive officers have termination or change-in-control agreements. For more
information on this severance arrangement, 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 Annual Report on 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:
Robert Brockman
David E. Felkel
Barbara E. Hampton
Doyle Jay Hanson
Dean R. Tesch
Bruce A. Vitosh
Alan W. Wattles
164
Summary Compensation Table
The summary compensation table below sets forth the aggregate compensation for the fiscal years ended May 31, 2020,
2019 and 2018 earned by the named executive officers.
Salary
$ 1,173,750
1,118,750
1,062,171
Bonus(1)
$ — $
—
—
Non-Equity
Incentive Plan
Compensation(2)
364,796
246,293
363,015
493,500
470,000
455,000
—
10,000
10,000
493,500
459,750
435,000
—
10,000
—
451,000
406,250
392,500
396,000
360,000
—
10,000
—
—
—
155,015
105,688
156,270
153,015
101,454
148,520
139,306
90,794
134,125
122,383
80,490
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings (3)
$
544,784
415,728
636,443
648,386
49,564
314,276
553,962
113,379
333,817
591,013
114,130
320,023
788,933
5,218
All Other
Compensation(4)
47,798
$
40,870
46,532
Total
$ 2,131,128
1,821,641
2,108,161
7,296
8,125
8,025
1,304,197
643,377
943,571
10,981
8,292
8,254
1,211,458
692,875
925,591
5,942
5,646
5,546
7,400
9,125
1,187,261
626,820
852,194
1,314,716
454,833
Name and Principal Position
Sheldon C. Petersen.......
Chief Executive
Officer
J. Andrew Don...............
Senior Vice President
and Chief Financial
Officer
Gregory J. Starheim.......
Senior Vice President,
Business and Industry
Development
Roberta B. Aronson .......
Senior Vice President
and General Counsel
Joel Allen .......................
Senior Vice President,
Member Services
____________________________
Year
2020
2019
2018
2020
2019
2018
2020
2019
2018
2020
2019
2018
2020
2019
(1)
Includes amounts given as one-time cash awards in lieu of or in addition to base pay increases. Details for 2020 can be found in “Elements of
Compensation” in “Compensation Discussion and Analysis” above.
(2)
Includes amounts earned during each respective fiscal year and payable as of 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)
(4)
Represents 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 as calculated by NRECA. For Mr. Petersen, in fiscal
years 2018, 2019 and 2020 this also includes a payment from the SERP. For a discussion of the SERP, see “Benefits” in “Compensation Discussion and
Analysis” above.
For Mr. Petersen for fiscal year 2020, includes (i) perquisites comprising Mr. Petersen’s automobile allowance and his spousal air travel allowance and
(ii) $2,765 representing the approximate aggregate incremental cost to the company for maintaining security arrangements for Mr. Petersen in addition
to security arrangements provided at the headquarters facility. We do not believe this provides a personal benefit (other than the intended security) nor do
we view these security arrangements as compensation to the individual. We report these security arrangements as perquisites as required under
applicable SEC rules. 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. 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 accounts.
165
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.
Name
Sheldon C. Petersen ...........
J. Andrew Don ...................
Gregory J. Starheim ...........
Roberta B. Aronson............
Joel Allen ...........................
Grants of Plan-Based Awards
Year
2020
2019
2018
2020
2019
2018
2020
2019
2018
2020
2019
2018
2020
2019
Short-Term
Incentive Plan
Long-Term
Incentive Plan
$
$
261,276
145,773
265,495
103,520
100,520
97,520
109,495
61,688
113,750
109,495
60,454
108,750
100,066
53,274
98,125
87,863
47,250
45,520
44,000
42,520
43,520
41,000
39,770
39,240
37,520
36,000
34,520
33,240
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.
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, 2020.
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
Grant Date
Threshold
Target
Maximum
June 1, 2019
$
— $
—
286,300
303,500
$
429,450
303,500
Name
Sheldon C. Petersen
Long-Term Incentive Plan (1)......
Short-Term Incentive Plan (2) .....
J. Andrew Don
Long-Term Incentive Plan (1)......
Short-Term Incentive Plan (2) .....
Gregory J. Starheim
Long-Term Incentive Plan (1)......
Short-Term Incentive Plan (2) .....
Roberta B. Aronson
Long-Term Incentive Plan (1)......
Short-Term Incentive Plan (2) .....
Joel Allen
June 1, 2019
June 1, 2019
June 1, 2019
Long-Term Incentive Plan (1)......
Short-Term Incentive Plan (2) .....
June 1, 2019
166
—
—
—
—
—
—
—
—
123,400
123,375
123,400
123,375
112,800
112,750
99,000
99,000
185,100
123,375
185,100
123,375
169,200
112,750
148,500
99,000
___________________________
(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 A+ stable as
of May 31, 2022.
(2)
Target and maximum payouts represent 25% of May 31, 2020 base salary. For the payout earned under the fiscal year 2020 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 with grants of performance units effective June 1, 2020.
The performance units will be calculated and issued to the named executive officers in August 2020. The payout under these
grants will be determined on May 31, 2023.
Employment Contracts
Pursuant to an employment agreement effective as of January 1, 2015, CFC employs Mr. Petersen as Chief Executive
Officer on a year-to-year basis, 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 $975,000 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.
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 this 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 Retirement Security Plan. There is no funding liability for CFC for this
plan.
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 participation in the Retirement Security Plan, 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 beginning at age 55. 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. 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 participation in the Retirement Security Plan and a normal retirement age of 62.
CFC also offers a PRP and an EBR. Each of the named executive officers participates in either the PRP or the EBR. The
purpose of these plans is to increase the 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 PRP and the EBR
restore 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 these restoration plans is similar to that under the qualified Retirement Security Plan.
However, one named executive officer has satisfied the provisions established to receive the benefit from the PRP. He was
grandfathered in the plan and no longer has a risk of forfeiture of the benefit under the PRP. One of the named executive
officers has reached their vesting date in accordance with provisions of the EBR plan. As a result, they no longer have a risk
of forfeiture of the benefit under the EBR plan. Distributions are made from these plans to those named executive officers
annually. The details of theses distributions are shown in the Pension Benefits table below.
In addition, the CEO is eligible for benefits under the SERP. This plan is an ineligible deferred compensation plan within the
meaning of section 457 of the Internal Revenue Code. The account is considered unfunded and may be credited from time to
time pursuant to the plan at the discretion of the CFC Board of Directors. During fiscal year 2020, the CFC Board of
167
Directors used its discretion and credited the account. According to the terms of the SERP, the CEO became fully vested and
those benefits totaling $92,704 were paid in full during fiscal year 2020, as presented in the table below.
The following table contains the years of service, the present value of the accumulated benefit for the named executive
officers listed in the “Summary Compensation Table” as of May 31, 2020, as calculated by NRECA and distributions from
the plans for the fiscal year then ended.
Name
Plan Name
Sheldon C. Petersen (4)......... NRECA Retirement Security Plan
SERP
J. Andrew Don..................... NRECA Retirement Security Plan
Gregory J. Starheim............. NRECA Retirement Security Plan
Roberta B. Aronson ............. NRECA Retirement Security Plan
Joel Allen............................. NRECA Retirement Security Plan
___________________________
Number of Years
of Credited
Service (1)
Present Value of
Accumulated
Benefit (2)
Payments
During Last
Fiscal Year(3)
10.33
$
841,349
$
300,120
—
19.66
14.25
23.83
28.66
—
92,704
2,728,844
1,807,191
1,556,139
2,620,136
—
—
954,282
—
(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. All other named executive officers, except for Mr. Starheim,
have credited years of service only with CFC.
(2)
Amount represents the actuarial present value of the named executive officer’s accumulated benefit under this plan as of May 31, 2020, as provided by
the plan administrator, NRECA, using interest rates ranging from 0.25% to 3.68% 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 2020 were as a result of named executive officers no longer being at risk of forfeiture with respect to these amounts
provided under the PRP. Mr. Don, Mr. Starheim and Mr. Allen continue to have a risk of forfeiture of the benefits under the EBR; therefore, no payments
have been made.
(4)
The NRECA Pension Plan allows active employees who have reached normal retirement age to cash in their lump-sum benefit accrued through August
31, 2010, or “quasi-retire.” Due to the quasi-retirement of Mr. Petersen in February 2015 his credited years of service was reduced and he 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 select 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 2020 cap for contributions is $19,500.
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 this plan.
The accounts are credited with “earnings” based on the participants’ selection of available investment options (currently,
nine 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.
168
The following table summarizes information related to the nonqualified deferred compensation plan in which the named
executive officers listed in the “Summary Compensation Table” were eligible to participate during the fiscal year ended May
31, 2020.
$
Name
Sheldon C. Petersen .......
J. Andrew Don ...............
Gregory J. Starheim .......
Roberta B. Aronson........
Joel Allen .......................
___________________________
Executive
Contributions
in Last
Fiscal Year (1)
Registrant
Contributions
in Last
Fiscal Year
Aggregate
Earnings in Last
Fiscal Year
$
19,208
19,000
19,000
18,500
—
— $
—
—
—
—
48,757
7,343
13,954
14,214
—
Aggregate
Withdrawals/
Distributions
$
Aggregate
Balance at Last
Fiscal Year-End
— $
—
—
—
—
918,767
85,105
252,279
159,963
—
(1)
Executive contributions are also included in the fiscal year 2020 Salary column in the “Summary Compensation Table” above.
Termination of Employment and Change-in-Control Arrangements
Mr. Petersen has an executive agreement with CFC under which he 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. Assuming a triggering event on May 31, 2020, the compensation
payable to Mr. Petersen for termination without cause would be $4,079,318. 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 that 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.
This estimate does not include amounts to which the named executive officer 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. On July 23, 2020, Mr. Petersen notified the Board of Directors of his decision to retire during the first half
of 2021, subject to the successful completion of a search process for a successor by the Board of Directors.
169
Chief Executive Officer Pay Ratio
The fiscal year 2020 compensation ratio of the median annual total compensation of all of our employees to the annual total
compensation of our Chief Executive Officer is as follows:
Category and Ratio
Median annual total compensation of all employees (excluding Chief
Executive Officer)...............................................................................................
Annual total compensation of Sheldon C. Petersen, Chief Executive Officer ...
Ratio of the median annual total compensation of all employees to the annual
total compensation of Sheldon C. Petersen, Chief Executive Officer ................
Total
Compensation
$
151,999
2,131,128
14.02:1.0
In determining the median employee, a listing was prepared of all active employees of CFC as of March 31, 2020. We did
not make any assumptions, adjustments or estimates with respect to total compensation. We did not annualize the
compensation for any part-time employees or those who were not employed by us for the full 10-month portion of the fiscal
year. We determined the compensation of our median employee by (i) taking the total gross compensation earned fiscal year-
to-date for all active employees as of March 31, 2020 and (ii) ranking the total gross compensation of all employees, except
the Chief Executive Officer, from lowest to highest.
After identifying the median employee, we calculated annual total compensation for such employee using the same
methodology we use for our named executive officers as set forth in the above Summary Compensation Table.
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 fiscal year ended May 31,
2020.
170
Name
Alan W. Wattles............................................
Anthony Larson............................................
Barbara E. Hampton.....................................
Bradley J. Schardin ......................................
Bradley P. Janorschke ..................................
Bruce A. Vitosh ............................................
Chris D. Christensen ....................................
Curtis Wynn .................................................
David E. Felkel ............................................
Dean R. Tesch ..............................................
Debra L. Robinson .......................................
Dennis R. Fulk .............................................
Doyle Jay Hanson ........................................
Gordon Anthony Norton ..............................
Gregory D. Williams ....................................
Jimmy A. LaFoy...........................................
Kent D. Farmer ............................................
Kevin M. Bender..........................................
Mark A. Suggs..............................................
Marsha L. Thompson ...................................
Robert J. Brockman......................................
Stephen C.Vail..............................................
Thomas A. Bailey.........................................
Thomas L. Hayes .........................................
Timothy J. Rodriguez...................................
Todd P. Ware.................................................
William Keith Hayward ...............................
Total Fees Earned
64,750
$
15,000
58,333
57,917
57,083
60,417
57,083
57,083
59,167
64,750
47,083
57,083
58,333
57,083
42,083
57,083
47,250
15,000
15,000
57,917
58,333
42,083
57,083
42,083
57,083
57,083
15,000
Compensation Committee Interlocks and Insider Participation
During the year ended May 31, 2020, 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
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
between CFC, on the one hand, and its directors, executive officers or key employees and their immediate family members
and entities of which any of our directors, executive officers or key employees (i) is an officer, director, trustee, alternative
director or trustee or employee, (ii) controls or (iii) has a substantial interest. Under this policy, a related-person transaction
is any transaction in excess of $120,000 in which CFC was, is or is proposed to be a direct or indirect participant in which a
related person had, has or will have a direct or indirect material interest in the transaction. Related-person transactions do
not include compensation or expense reimbursement arrangements with directors, officers or key employees
(notwithstanding that officer compensation may be disclosed in “Item 13. Certain Relationships and Related Transactions,
and Director Independence” in our Annual Report on Form 10-K, elsewhere in the CFC’s periodic reports filed with the
171
SEC or otherwise disclosed publicly as a related-person transaction), 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 deemed to be
related credits. Related-person transactions are subject to review 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 officers, directors, trustees,
alternative directors or trustees, or employees 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 credit approval process, 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 officers, directors, trustees,
alternative directors or trustees, or employees, 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
that 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 officers, directors, trustees, alternative directors or trustees or employees, (ii) control or (iii) have a substantial
beneficial interest. CFC has adopted a policy whereby substantially all extensions of credit to such entities are approved
only by the disinterested directors.
172
Related-Person Transactions
The following table contains the total compensation earned by CFC’s executive officers during the year ended May 31, 2020
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” under “Item 11.
Executive Compensation.”
Name and Principal Position
Total
Compensation
Graceann D. Clendenen
Senior Vice President & Chief Administrative Officer .....
$
1,469,099
Steven M. Kettler
Senior Vice President, Strategic Services..........................
John M. Borak
Senior Vice President, Credit Risk Management ..............
Robin C. Reed
Senior Vice President, Loan Operations............................
Brad L. Captain
Senior Vice President, Corporate Relations ......................
Independence Determinations
792,014
584,207
1,071,588
889,436
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% of such other company’s consolidated gross revenue.
173
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 2020. 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 their
independence.
Thomas A. Bailey
Chris D. Christensen
Dennis Fulk
Thomas L. Hayes(1)
Anthony Larson
Dean R. Tesch
Bruce A. Vitosh
____________________________
Independent Directors
Kevin Bender
Kent D. Farmer(1)
Barbara E. Hampton
William K. Hayward
G. Anthony Norton
Marsha L. Thompson
Gregory D. Williams(1)
Robert Brockman
David E. Felkel
Doyle Jay Hanson
Jimmy A. LaFoy
Bradley J. Schardin
Stephen C. Vail(1)
(1) This director served during fiscal year 2020; however, he was no longer a director as of May 31, 2020.
Item 14. Principal Accounting Fees and Services
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.
KPMG, LLP was our independent registered public accounting firm for the fiscal years ended May 31, 2020 and 2019.
KPMG, LLP has advised the Audit Committee that they are independent accountants with respect to the Company, within
the meaning of standards established by the Public Company Accounting Oversight Board and federal securities laws
administered by the U.S. Securities and Exchange Commission. The following table displays the aggregate estimated or
actual fees for professional services provided by KPMG, LLP in fiscal years 2020 and 2019, including fees for the 2020 and
2019 audits. All services for fiscal years 2020 and 2019 were pre-approved by the Audit Committee.
(Dollars in thousands)
Description of fees:
Audit fees(1)..............................................................................
Tax fees(2).................................................................................
All other fees(3) ........................................................................
Total .........................................................................................
____________________________
$
$
Year Ended May 31,
2020
2019
1,822
$
1,589
15
12
13
11
1,849
$
1,613
(1)
Audit fees for fiscal years 2020 and 2019 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. Audit fees for fiscal years
2020 and 2019 also include comfort letter fees and consents related to debt issuances and compliance work required by the independent auditors.
(2)
Tax fees consist of assistance with matters related to tax compliance and consulting.
(3)
All other fees for fiscal years 2020 and 2019 consist of fees for certain agreed-upon procedures.
174
PART IV
Item 15. Exhibit and 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
Report of Independent Registered Public Accounting Firm ..........................................................................
Consolidated Statements of Operations for the Years Ended May 31, 2020, 2019 and 2018........................
Consolidated Statements of Comprehensive Income for the Years Ended May 31, 2020, 2019 and 2018 ...
Consolidated Balance Sheets as of May 31, 2020 and 2019..........................................................................
Consolidated Statements of Changes in Equity for the Years Ended May 31, 2020, 2019 and 2018............
Consolidated Statements of Cash Flows for the Years Ended May 31, 2020, 2019 and 2018 ......................
Notes to Consolidated Financial Statements..................................................................................................
Page
86
87
88
89
90
91
93
Supplementary Data .......................................................................................................................................
147
2. Schedules
None.
(b)
Exhibits
The following exhibits are incorporated by reference or filed herewith.
175
EXHIBIT INDEX
Exhibit No.
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
Description
— Articles of Incorporation. Incorporated by reference to Exhibit 3.1 to our Form 10-K filed on
August 28, 2014.
— 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.
— Description of Securities.
— Form of Capital Term Certificate.
— 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.
— 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).
— 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).
— 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).
— 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).
— 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).
— 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).
4.10
— Indenture dated October 15, 1996, between the Registrant and U.S. Bank National Association, as
successor trustee. Incorporated by reference to Exhibit 4.1 to Form 8-K filed on October 28, 1996.
10.1^
— Plan Document for CFC’s Deferred Compensation Pension Restoration Plan amended and restated
effective January 1, 2015.
10.2^
10.3^
— Plan Document for CFC’s Deferred Compensation Program amended and restated February 1,
2014. Incorporated by reference to Exhibit 10.6 to our Form 10-K filed on August 28, 2014.
— Plan Document for CFC's Executive Benefit Restoration Plan dated December 9, 2014.
Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on April 13, 2015.
10.4^
— Employment Agreement between the Company and Sheldon C. Petersen, effective January 1, 2015.
Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on December 23, 2014.
10.5^
— Supplemental Executive Retirement Plan of the Company, effective January 1, 2015. Incorporated
by reference to Exhibit 10.2 to our Form 8-K filed on December 23, 2014.
10.6
— Amended and Restated Revolving Credit Agreement dated November 19, 2015 maturing on
November 19, 2018. Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on January
13, 2016.
10.7
— Amended and Restated Revolving Credit Agreement dated November 19, 2015 maturing on
November 19, 2020. Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on January
13, 2016.
10.8
10.9
— Amendment No.1 dated as of November 18, 2016 to the Amended and Restated Revolving Credit
Agreement dated as of November 19, 2015 maturing on November 19, 2019. Incorporated by
reference to Exhibit 10.1 to our Form 10-Q filed on January 13, 2017.
— Amendment No.1 dated as of November 18, 2016 to the Amended and Restated Revolving Credit
Agreement dated as of November 19, 2015 maturing on November 19, 2021. Incorporated by
reference to Exhibit 10.2 to our Form 10-Q filed on January 13, 2017.
176
Exhibit No.
10.10
10.11
10.12
10.13
10.14
10.15
Description
— Amendment No. 2 dated as of November 20, 2017 to the Amended and Restated Revolving Credit
Agreement dated as of November 19, 2015 maturing on November 20, 2020. Incorporated by
reference to Exhibit 10.01 to our Form 10-Q filed on January 11, 2018.
— Amendment No. 2 dated as of November 20, 2017 to the Amended and Restated Revolving Credit
Agreement dated as of November 19, 2015 maturing on November 20, 2022. Incorporated by
reference to Exhibit 10.02 to our Form 10-Q filed on January 11, 2018.
— Amendment No. 3 dated as of November 28, 2018 to the Amended and Restated Revolving Credit
Agreement dated as of November 19, 2015 maturing on November 21, 2028. Incorporated by
reference to Exhibit 10.1 to our Form 10-Q filed on January 11, 2019.
— Amendment No. 3 dated as of November 28, 2018 to the Amended and Restated Revolving Credit
Agreement dated as of November 19, 2015 maturing on November 28, 2023. Incorporated by
reference to Exhibit 10.2 to our Form 10-Q filed on January 11, 2019.
— Amendment No. 4 dated as of November 26, 2019 to the Amended and Restated Revolving Credit
Agreement dated as of November 19, 2015 maturing on November 28, 2022. Incorporated by
reference to Exhibit 10.1 to our Form 10-Q filed on January 13, 2020.
— Amendment No. 4 dated as of November 26, 2019 to the Amended and Restated Revolving Credit
Agreement dated as of November 19, 2015 maturing on November 28, 2023. Incorporated by
reference to Exhibit 10.2 to our Form 10-Q filed on January 13, 2020.
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
10.21
— Series C 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.
— 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
— Series D 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.
10.23
— 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.
10.24
— 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.
10.25
— 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.
10.26
— 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.
10.27
— 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.
177
Exhibit No.
10.28
Description
— 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.
10.29
— 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.
10.30
— Series H Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural
Utilities Service dated as of November 18, 2014 for up to $250,000,000. Incorporated by reference
to Exhibit 10.1 to our Form 10-Q filed on January 14, 2015.
10.31
— Series H Future Advance Bond from the Registrant to the Federal Financing Bank dated as of
November 18, 2014 for up to $250,000,000 maturing on October 15, 2034. Incorporated by
reference to Exhibit 10.3 to our Form 10-Q filed on January 14, 2015.
10.32
— Series K Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural
Utilities Service dated as of March 29, 2016 for up to $250,000,000. Incorporated by reference to
Exhibit 10.1 to our Form 10-Q filed on April 4, 2016.
10.33
— Series K Future Advance Bond from the Registrant to the Federal Financing Bank dated as of
March 29, 2016 for up to $250,000,000 maturing on January 15, 2039. Incorporated by reference to
Exhibit 10.2 to our Form 10-Q filed on April 4, 2016.
10.34
— Series L Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural
Utilities Service dated as of December 1, 2016 for up to $375,000,000. Incorporated by reference to
Exhibit 10.3 to our Form 10-Q filed on January 13, 2017.
10.35
— Series L Future Advance Bond from the Registrant to the Federal Financing Bank dated as of
December 1, 2016 for up to $375,000,000 maturing on October 15, 2039. Incorporated by reference
to Exhibit 10.4 to our Form 10-Q filed on January 13, 2017.
10.36
— Series M Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural
Utilities Service dated as of November 9, 2017 for up to $750,000,000. Incorporated by reference to
Exhibit 10.03 to our Form 10-Q filed on January 11, 2018.
10.37
— Series M Future Advance Bond from the Registrant to the Federal Financing Bank dated as of
November 9, 2017 for up to $750,000,000 maturing on July 15, 2042. Incorporated by reference to
Exhibit 10.04 to our Form 10-Q filed on January 11, 2018.
10.38
— Series N Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural
Utilities Service dated as of November 15, 2018 for up to $750,000,000. Incorporated by reference
to Exhibit 10.3 to our Form 10-Q filed on January 11, 2019.
10.39
— Series N Future Advance Bond from the Registrant to the Federal Financing Bank dated as of
November 15, 2018 for up to $750,000,000 maturing on July 15, 2043. Incorporated by reference to
Exhibit 10.3 to our Form 10-Q filed on January 11, 2019.
10.40
— Series P Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural
Utilities Service dated as of February 1 3, 2020 for up to $500,000,000. Incorporated by reference
to Exhibit 10.1 to our Form 10-Q filed on April 10, 2020.
10.41
— Series P Future Advance Bond from the Registrant to the Federal Financing Bank dated as of April
10, 2020 for up to $500,000,000 maturing on July 15, 2054. Incorporated by reference to Exhibit
10.2 to our Form 10-Q filed on April 10, 2020.
10.42
— Sixth Amended, Restated and Consolidated Pledge Agreement, dated as of February 13, 2020,
among 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 on April 10, 2020.
10.43
— Sixth Amended, Restated and Consolidated Bond Guarantee Agreement, dated as of February 13,
2020, between the Registrant and the Rural Utilities Service. Incorporated by reference to Exhibit
10.4 to our Form 10-Q filed April 10, 2020.
10.44
— Amended and Restated Master Sale and Servicing Agreement, dated as of August 12, 2011, by and
between the Registrant and the Federal Agricultural Mortgage Corporation, as amended by
Amendment No. 1 dated as of November 28, 2016. Incorporated by reference to Exhibit 10.7 to our
Form 10-Q filed on January 13, 2017.
10.45
— 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.
178
Exhibit No.
10.46
10.47
10.48
Description
— Second Amended and Restated First Supplemental Note Purchase Agreement dated February 26,
2018 for up to $5,500,000,000 between the Registrant and Federal Agricultural Mortgage
Corporation. Incorporated by reference to Exhibit 10.01 to our Form 10-Q filed on April 11, 2018.
— Second Amended, Restated and Consolidated Pledge Agreement dated July 31, 2015, between the
Registrant, Federal Agricultural Mortgage Corporation and U.S. Bank Trust National Association.
Incorporated by reference to Exhibit 10.48 to our Form 10-K filed on August 26, 2015.
— Long Term Standby Commitment to Purchase dated August 31, 2015, between the Registrant and
Federal Agricultural Mortgage Corporation. Incorporated by reference to Exhibit 10.1 to our Form
10-Q filed on October 14, 2015.
10.49
— Amendment No. 1 to Long Term Standby Commitment to Purchase, dated as of May 31, 2016,
between the Registrant and Federal Agricultural Mortgage Corporation. Incorporated by reference
to Exhibit 10.38 to our Form 10-K filed on August 25, 2016.
10.50
10.51
23.1*
31.1*
— Purchase Agreement dated September 30, 2015, between the Registrant, Caribbean Asset Holdings,
LLC, ATN VI Holdings, LLC and Atlantic Tele-Network, Inc. Incorporated by reference to Exhibit
10.2 to our Form 10-Q filed on October 14, 2015.
— Amendment to Purchase Agreement dated July 1 2016, between the Registrant, Caribbean Asset
Holdings, LLC, ATN VI Holdings, LLC and ATN International (formerly Atlantic Tele-Network,
Inc.). Incorporated by reference to Exhibit 10.40 to our Form 10-K filed on August 25, 2016.
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.
— Consent of KPMG LLP.
— 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.
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.
Item 16. Form 10-K Summary
Not applicable.
179
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 5th-day of August 2020.
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.
180
Signature
Title
Date
/s/ SHELDON C. PETERSEN
Chief Executive Officer
August 5, 2020
Sheldon C. Petersen
/s/ J. ANDREW DON
J. Andrew Don
/s/ ROBERT E. GEIER
Robert E. Geier
/s/ DEAN R. TESCH
Dean R. Tesch
/s/ ALAN W. WATTLES
Alan W. Wattles
/s/ BRUCE A. VITOSH
Bruce A. Vitosh
/s/ THOMAS A. BAILEY
Thomas A. Bailey
/s/ KEVIN M. BENDER
Kevin M. Bender
Senior Vice President and Chief Financial Officer
August 5, 2020
Vice President and Controller
August 5, 2020
President and Director
August 5, 2020
Vice President and Director
August 5, 2020
Secretary-Treasurer and Director
August 5, 2020
Director
Director
August 5, 2020
August 5, 2020
/s/ ROBERT BROCKMAN
Director
August 5, 2020
Robert Brockman
/s/ CHRIS D. CHRISTENSEN
Director
August 5, 2020
Chris D. Christensen
/s/ DAVID E. FELKEL
David E. Felkel
/s/ DENNIS FULK
Dennis Fulk
/s/ BARBARA E. HAMPTON
Barbara E. Hampton
/s/ DOYLE JAY HANSON
Doyle Jay Hanson
Director
Director
Director
Director
181
August 5, 2020
August 5, 2020
August 5, 2020
August 5, 2020
August 5, 2020
August 5, 2020
August 5, 2020
August 5, 2020
August 5, 2020
August 5, 2020
August 5, 2020
August 5, 2020
August 5, 2020
August 5, 2020
August 5, 2020
/s/ WILLIAM KEITH HAYWARD
William Keith Hayward
Director
/s/ BRADLEY P. JANORSCHKE
Director
Bradley P. Janorschke
/s/ JIMMY A. LAFOY
Jimmy A. LaFoy
Director
/s/ ANTHONY LARSON
Director
Anthony Larson
/s/ G. ANTHONY NORTON
Director
G. Anthony Norton
/s/ TIMOTHY RODRIGUEZ
Director
Timothy Rodriguez
/s/ BRADLEY J. SCHARDIN
Director
Bradley J. Schardin
/s/ MARK A. SUGGS
Mark A. Suggs
/s/ MARSHA L. THOMPSON
Marsha L. Thompson
/s/ TODD P. WARE
Todd P. Ware
/s/ CURTIS WYNN
Curtis Wynn
Director
Director
Director
Director
182
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
National Rural Utilities Cooperative Finance Corporation:
We consent to the incorporation by reference in the registration statements (No. 333-230569, No. 333-221261, and No.
333-233687) on Form S-3 of National Rural Utilities Cooperative Finance Corporation of our report dated August 5, 2020,
with respect to the consolidated balance sheets of National Rural Utilities Cooperative Finance Corporation as of May 31,
2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash
flows for each of the years in the three-year period ended May 31, 2020, and the related notes, which report appears in the
May 31, 2020 annual report on Form 10-K of National Rural Utilities Cooperative Finance Corporation.
/s/ KPMG LLP
McLean, Virginia
August 5, 2020
National Rural Utilities Cooperative Finance Corporation
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)
Exhibit 31.1
I, Sheldon C. Petersen, certify that:
1.
I have reviewed this report on Form 10-K of National Rural Utilities Cooperative Finance Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the Audit Committee of the registrant’s board of directors:
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: August 5, 2020
By:
/s/ SHELDON C. PETERSEN
Sheldon C. Petersen
Chief Executive Officer
A signed original of this written statement required by Section 302 has been provided to National Rural Utilities Cooperative Finance
Corporation and will be retained by National Rural Utilities Cooperative Finance Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
National Rural Utilities Cooperative Finance Corporation
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)
Exhibit 31.2
I, J. Andrew Don, certify that:
1.
I have reviewed this report on Form 10-K of National Rural Utilities Cooperative Finance Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the Audit Committee of the registrant’s board of directors:
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: August 5, 2020
By:
/s/ J. ANDREW DON
J. Andrew Don
Chief Financial Officer
A signed original of this written statement required by Section 302 has been provided to National Rural Utilities Cooperative Finance
Corporation and will be retained by National Rural Utilities Cooperative Finance Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
National Rural Utilities Cooperative Finance Corporation
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)
Exhibit 32.1
Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sections 1350(a) and (b)), I, the
Chief Executive Officer of National Rural Utilities Cooperative Finance Corporation (“CFC”), hereby certify to the best of
my knowledge as follows:
1. CFC’s Annual Report on Form 10-K for the fiscal year ended May 31, 2020 filed with the Securities and Exchange
Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of CFC.
Date: August 5, 2020
By:
/s/ SHELDON C. PETERSEN
Sheldon C. Petersen
Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to National Rural Utilities Cooperative Finance
Corporation and will be retained by National Rural Utilities Cooperative Finance Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
National Rural Utilities Cooperative Finance Corporation
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)
Exhibit 32.2
Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sections 1350(a) and (b)), I, the
Chief Financial Officer of National Rural Utilities Cooperative Finance Corporation (“CFC”), hereby certify to the best of
my knowledge as follows:
1. CFC’s Annual Report on Form 10-K for the fiscal year ended May 31, 2020 filed with the Securities and Exchange
Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of CFC.
Date: August 5, 2020
By:
/s/ J. ANDREW DON
J. Andrew Don
Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to National Rural Utilities Cooperative Finance
Corporation and will be retained by National Rural Utilities Cooperative Finance Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.