News Column

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP /DC/ - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 28, 2014

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INTRODUCTION

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The following discussion and analysis is designed to provide a better understanding of our consolidated financial condition and results of operations and as such should be read in conjunction with the consolidated financial statements, including the notes thereto and the information contained elsewhere in this Form 10-K, including "Item 1A. Risk Factors."



Unless stated otherwise, references to "we," "our" or "us" relate to the consolidation of National Rural Utilities Cooperative Finance Corporation ("CFC"), Rural Telephone Finance Cooperative ("RTFC"), National Cooperative Services Corporation ("NCSC") and certain entities created and controlled by CFC to hold foreclosed assets and to accommodate loan securitization transactions.

Throughout this MD&A, we refer to certain of our financial measures that are based on amounts not in accordance with generally accepted accounting principles in the United States ("GAAP") as non-GAAP "adjusted" measures. In addition to discussing our reported GAAP results, our "Executive Summary" below discusses the key non-GAAP metrics that we use to evaluate our business and financial performance, which consist of adjusted times interest earned ratio ("TIER") and adjusted debt-to-equity ratio. The most closely related GAAP measures are TIER and debt-to-equity ratio. The financial covenants in our revolving credit agreements and debt indentures are based on our adjusted measures rather than the comparable GAAP measures. The primary adjustments we make to calculate these non-GAAP measures consist of (i) adjusting interest expense to include the impact of derivative cash settlements; (ii) adjusting net income, senior debt and total equity to exclude the non-cash impact of the accounting for derivative financial instruments; (iii) adjusting senior debt to exclude the amount that funds CFC member loans guaranteed by the Rural Utilities Service ("RUS"), subordinated deferrable debt and members' subordinated certificates; and (iv) adjusting total equity to include subordinated deferrable debt and members' subordinated certificates. See "Non-GAAP Financial Measures" for further explanation of the adjustments we make to our financial results for our own analysis and covenant compliance and for a reconciliation to the most comparable GAAP measures. -------------------------------------------------------------------------------- EXECUTIVE SUMMARY -------------------------------------------------------------------------------- Our primary objective as a member-owned cooperative lender is to provide cost-based financial products to our rural electric and telecommunications members while maintaining sound financial results required for investment-grade credit ratings on our debt instruments. Our objective is not to maximize net income; therefore, the rates we charge our member-borrowers reflect our adjusted interest expense 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 achieve and maintain an adjusted debt-to-equity ratio below 6.00-to-1.



Lending Activity

Total loans outstanding were $20,467 million as of May 31, 2014, an increase of $171 million, or 1%, from May 31, 2013. The increase reflected an increase of $94 million in CFC distribution loans, an increase of $78 million in CFC power supply loans and an increase of $55 million in NCSC loans, which was partially offset by a decrease of $53 million in RTFC loans. During the year ended May 31, 2014, $1,164 million of CFC long-term fixed-rate loans repriced. Of this total, $984 million repriced to a new long-term fixed rate; $69 million repriced to a long-term variable rate; $21 million repriced to a new rate offered as part of our loan sales program and were sold with servicing retained by CFC; and $90 million were repaid in full.



Funding Activity

Total debt outstanding was $20,625 million as of May 31, 2014, an increase of $80 million, or 0.4%, from May 31, 2013. The increase in debt outstanding, coupled with an increase in retained equity of $149 million, was primarily due to funding for the $171 million increase in loans outstanding.



In May 2014, we completed an exchange of $209 million of our outstanding 8% medium-term notes, Series C, due 2032 for $218 million of 4.023% collateral trust bonds due 2032 and $91 million of cash.

26 -------------------------------------------------------------------------------- During the year ended May 31, 2014, we took advantage of availability in the capital markets to extend the maturity and increase the amount of our revolving credit agreements thereby providing us with an additional source of liquidity. Specifically, we amended our three-year, four-year, and five-year revolving credit agreements to extend the maturity dates by one year each to October 28, 2016, 2017, and 2018, respectively. We also exercised our option to increase the commitment level for the three-year, four-year, and five-year revolving credit agreements by $120 million, $115 million and $110 million, respectively, to $1,036 million, $1,122 million, and $1,068 million, respectively.



Financial Results

We generated net income of $193 million and $358 million for the years ended May 31, 2014 and 2013, respectively, and TIER of 1.29 and 1.52, respectively. As previously noted, we use adjusted non-GAAP measures in our analysis to evaluate our performance and for debt covenant compliance. Our adjusted net income was $153 million and $217 million for the years ended May 31, 2014 and 2013, respectively, and adjusted TIER was 1.21 and 1.29, respectively. Our debt-to-equity ratio decreased to 21.91-to-1 as of May 31, 2014, from 26.21-to-1 as of May 31, 2013. Our adjusted debt-to-equity ratio increased to 5.90-to-1 as of May 31, 2014, from 5.76-to-1 as of May 31, 2013, primarily due to an increase in adjusted liabilities. Net Income The decrease of $165 million in our net income in fiscal year 2014 from the prior fiscal year was primarily driven by a shift in the provision for loan losses to an expense of $3 million in the current year from a negative provision of $70 million in the prior year and a shift to derivative losses of $34 million in the current year from derivative gains of $85 million in the prior year. The unfavorable impact of these factors was partially offset by a $39 million increase in net interest income. The $70 million negative provision for loan losses recorded in fiscal year 2013 was attributable to a reduction in our allowance due to refinements we made in certain assumptions used in estimating our allowance for loan losses. The derivative fair value losses recorded in fiscal year 2014 versus gains in 2013 reflect the composition of our derivative portfolio and changes in interest rates. The increase in net interest income of $39 million in fiscal year 2014 was largely attributable to the refinancing of higher-cost debt with lower-cost debt. Adjusted Net Income The decrease of $63 million in our adjusted net income in fiscal year 2014 from the prior fiscal year was primarily driven by the shift in the provision for loan losses discussed above partially offset by a $22 million increase in adjusted net interest income. The increase in adjusted net interest income of $22 million was due to the $39 million increase to net interest income resulting from the refinancing of higher-cost debt discussed above partially offset by an increase of $17 million to derivative cash settlements expense during fiscal year 2014.



Outlook for the Next 12 Months

We expect the amount of new long-term loan advances to exceed scheduled loan repayments over the next 12 months. We anticipate an increase to earnings from core lending operations over the next 12 months due to the expected increase in long-term loans outstanding and the decrease in our funding costs resulting from the call of our 7.5% member capital securities and the debt exchange completed in May 2014. During fiscal year 2014, the CFC Board of Directors authorized management to execute the call of our 7.5% member capital securities and offer members the option to invest in a new series of member capital securities that currently have a 5% interest rate. As of May 31, 2014, $267 million of the 7.5% member capital securities were redeemed and we had call notices outstanding for another $59 million. The call dates for the $59 million will take place through August 2014. Over the next 12 months, we expect to provide notice to members for the early call of an additional $61 million of 7.5% member capital securities with call dates through January 2015. As of May 31, 2014, members have invested $147 million in the new series of member capital securities. We have $1,512 million of long-term debt scheduled to mature over the next 12 months. We believe that we have sufficient liquidity from the combination of member loan repayments and our ability to issue debt in the capital markets, to our members and in private placements, to satisfy member loan advances and meet our need to fund long-term debt maturing over the next 12 months. At May 31, 2014, we had $944 million in cash, investments, and time deposits, up to $624 million available under committed loan facilities from the Federal Financing Bank, $3,224 million available under committed revolving lines of credit with a syndicate of banks and, subject to market conditions, up to $2,232 million available under a revolving note purchase agreement with the Federal Agricultural Mortgage Corporation. We also have the ability to issue collateral trust bonds and 27 -------------------------------------------------------------------------------- medium-term notes in the capital markets and medium-term notes to members. We believe we can continue to roll over the $3,887 million of commercial paper, select notes, daily liquidity fund notes and bank bid notes scheduled to mature over the next 12 months, as we expect to continue to maximize the utilization of these short-term funding options. We expect to be in compliance with the covenants under our revolving credit agreements; therefore, we could draw on these facilities to repay dealer or member commercial paper that cannot be rolled over in the event of market disruptions.



We expect to be able to maintain the adjusted debt-to-equity ratio below 6.00-to-1 over the next 12 months.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES --------------------------------------------------------------------------------



Our significant accounting principles, as described in "Note 1-General Information and Accounting Policies" to the consolidated financial statements, are essential in understanding MD&A. Many of our significant accounting principles require complex judgments to estimate values of assets and liabilities. We have procedures and processes to facilitate making these judgments.

We identified the allowance for loan losses and the determination of fair value of certain items on our balance sheet as critical accounting policies because they require significant estimations and judgments by management. These policies are summarized below and identify and describe the development of the variables most important in the estimation process. In many cases, there are numerous alternative judgments that could be used in the process of determining the inputs required for estimation. Where alternatives exist, we used the factors we believe represent the most reasonable value in developing the inputs. Actual performance that differs from our estimates of the key variables could affect net income. Separate from the possible future effect to net income from our model inputs, market-sensitive assets and liabilities may change subsequent to the balance sheet date, often significantly, due to the nature and magnitude of future credit and market conditions. Such credit and market conditions may change quickly and in unforeseen ways, and the resulting volatility could have a significant negative effect on future operating results. Below is a description of the process used in determining the appropriateness of the allowance for loan losses and the determination of fair value for certain items on our balance sheet. Allowance for Loan Losses We are required to report loans receivable on our consolidated balance sheets at net realizable value. The net realizable value is the total principal amount of loans outstanding less an estimate of the probable losses inherent in the portfolio. We maintain an allowance for loan losses at a level estimated by management to provide for probable losses inherent in the loan portfolio. The allowance for loan losses is reported separately on the consolidated balance sheet, and the provision for loan losses is reported as a separate line item on the consolidated statement of operations. There are significant subjective assumptions and estimates used in calculating the amount of the loss allowance required. We review the estimates and assumptions used in the calculations of the allowance for loan losses on a quarterly basis. Because of the subjective nature of these estimates, other estimates could be reasonable, and changes in the assumptions used and our estimates could have a material effect on our financial statements. The estimate of the allowance for loan losses is based on a review of the composition of the loan portfolio, past loss experience, specific problem loans, current economic conditions, available market data and/or projection of future cash flows and other pertinent factors that in management's judgment may contribute to incurred losses. The methodology used to calculate the allowance for loan losses is summarized below. The allowance for loan losses is calculated by dividing the portfolio into two categories of loans: (1) the general portfolio, which comprises loans that are performing according



to the contractual agreements; and

(2) the impaired portfolio, which comprises loans that (i) are not currently

performing or (ii) for various reasons we do not expect to collect all amounts as and when due and payable under the loan agreement or (iii) are



performing according to a restructured loan agreement, but as a result of

the troubled debt restructuring are required to be classified as impaired.

General Portfolio The general portfolio of loans consists of all loans not specifically identified in the impaired category. We disaggregate the loans in the general portfolio by company: CFC, RTFC and NCSC. We further disaggregate the CFC loan portfolio by member class: distribution, power supply and statewide and associates. 28 -------------------------------------------------------------------------------- We use the following factors to determine the allowance for loan losses for the general portfolio category: Internal risk ratings system. We maintain risk ratings for our borrowers



that are updated at least annually and are based on the following:

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.

Standard & Poor's historical utility sector default table. The table

provides expected default rates for the utility sector based on rating

level and the remaining maturity. We correlate our internal risk ratings

to the ratings used in the utility sector default table. We use the

default table to assist in estimating our allowance for loan losses

because we have limited history from which to develop loss expectations.

Loss Emergence Period. Based on the estimated time between the

loss-causing event(s) and the date that we charge off the unrecoverable

portion of the loan.

Recovery rates. Estimated recovery rates are based on our historical

recovery experience by member class calculated by comparing loan balances

at the time of default to the total loss recorded on the loan. We have

been lending to electric cooperatives since our incorporation in 1969.

At May 31, 2014, the $43 million reserve produced by our general allowance for loan losses model represented 0.21% of the outstanding balance of loans. An increase or decrease of 10% in our default rates would result in a corresponding increase or decrease of $4 million to the general allowance for loan losses model. An increase or decrease of 1% in our recovery rates would result in a corresponding increase or decrease of $3 million to the general allowance for loan losses model. In addition to the allowance for loan losses for the general portfolio, we maintain a qualitative reserve for the general portfolio based on risk factors not captured in the general allowance for loan losses. The overriding factor that creates the necessity for this additional component of loan loss reserves not captured in our loan loss model is lag in the timing of receipt of information regarding our borrowers. We actively monitor the operations and financial performance of our borrowers through the review of audited financial statements, review of borrower-prepared financial statements (if required) and discussions with borrower management. As a result of the lag, there could be credit events or circumstances that exist with our borrowers for which we have not been made aware that could potentially lead to reassessing/downgrading of certain borrower risk ratings to better reflect the risk of default and ultimate loss. Additional qualitative considerations include our expectations with respect to loan workouts, risks associated with large loan exposures and economic and environmental factors. To measure these additional risk factors supporting an additional reserve for the general portfolio, we perform an internal credit risk ratings portfolio stress test quantifying the impact that both upgrades and downgrades in internal credit risk ratings would have on our estimate of losses inherent in the portfolio.



Impaired Loans

A loan is considered to be impaired when we do not expect to collect all principal and interest payments as scheduled by the original loan terms, other than an insignificant delay or an insignificant shortfall in 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,

pending legal action involving the borrower,

restructure agreements between us and the borrower and

estimates of the value of the borrower's assets that have been pledged as

collateral to secure our loans.

We generally measure impairment for individually impaired loans based on the difference between the recorded investment of the loan and the present value of the expected future cash flows discounted at the loan's effective interest rate of the loan. If the loan is collateral dependent, we measure impairment based upon the fair value of the underlying collateral, which we determine based on the current fair value of the collateral less estimated selling costs. Loans are identified as collateral dependent if we believe that collateral is the expected source of repayment. In calculating the impairment on a loan, the estimates of the expected future cash flows or collateral value are the key estimates made by management. Changes in the estimated future cash flows or collateral value affect the amount of the calculated impairment. The change in cash flows required to make the change in the calculated impairment material will be different for 29 -------------------------------------------------------------------------------- each borrower and depend on the period covered, the effective interest rate at the time the loan became impaired and the amount of the loan outstanding. Estimates are not used to determine our investment in the receivables or the discount rate since, in all cases, the investment is equal to the loan balance outstanding at the reporting date, and the discount rate is equal to the effective interest rate on the loan at the time the loan became impaired. We recognize interest income on impaired loans on a case-by-case basis. An impaired loan to a borrower that is nonperforming will generally be placed on non-accrual status and we will reverse all accrued and unpaid interest. We generally apply all cash received during the non-accrual 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. All loans are written off in the period that it becomes evident that collectability is highly unlikely; however, our efforts to recover all charged-off amounts may continue. 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.



We provide additional information on the allowance for loan losses in "Note 3-Loans and Commitments."

Fair Value

Fair Value of Financial Instruments

We identify fair value as a critical accounting policy because of the subjective nature and the requirement for management to make significant estimations in determining the amounts to be recorded. Different assumptions and estimates could also be reasonable, and changes in the assumptions used and estimates made could have a material effect on our financial statements. The primary instruments recorded on our balance sheet at fair value are derivative financial instruments. Derivative instruments must be recorded on the balance sheet as either an asset or liability measured at fair value. Since these instruments generally do not qualify for hedge accounting, the accounting standards require that we record all changes in fair value through earnings. We record the change in the fair value of derivative instruments, along with realized gains and losses from cash settlements, in the derivative gains (losses) line item of the consolidated statement of operations each reporting period. Since there is not an active secondary market for the types of derivative instruments we use, we obtain market quotes from our dealer counterparties. The market quotes are based on the expected future cash flows and estimated yield curves. We perform our own analysis to confirm the values obtained from the counterparties and indicate a valuation adjustment for potential default risk as needed. The counterparties estimate future interest rates as part of the quotes they provide to us. We adjust all derivatives to fair value on a quarterly basis. The fair value we record will change as estimates of future interest rates change. To estimate the impact of changes to interest rates on the forward value of derivatives, we would need to estimate all changes to interest rates through the maturity of our outstanding derivatives. The maturities of our derivatives in the current portfolio run through 2044. Since many of the derivative instruments we use for risk management have such long-dated maturities, the valuation of these derivatives may require extrapolation of market data that is subject to significant judgment. Accounting standards on fair value require that credit risk be considered in determining the market value of any asset or liability carried at fair value. We adjust the market values of our derivatives received from the counterparties based on our counterparties' and our credit spreads observed in the credit default swap market. See "Note 13-Fair Value Measurement" and "Note 14-Fair Value of Financial Instruments" for additional information.



Fair Value of Foreclosed Assets

In addition to the valuation associated with derivative financial instruments, we also present foreclosed assets at fair value when initially recorded on the balance sheet. Foreclosed assets that do not qualify as assets held for sale are periodically reviewed for impairment. In many instances the valuation of these assets is judgmental and dependent upon comparisons to similar assets or estimations of future cash flows that are expected to be generated by the underlying foreclosed properties. In both of these instances, management uses its best estimates, based upon available market data and/or projections of future cash flows. However, because of the subjective nature of these estimates, other estimates could be reasonable, and changes in the assumptions used and our estimates could have a material effect on our financial statements. See "Note 4-Foreclosed Assets" for additional information. 30 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ACCOUNTING CHANGES AND DEVELOPMENTS -------------------------------------------------------------------------------- See "Note 1-General Information and Accounting Policies" for information on accounting standards adopted in fiscal year 2014, as well as recently issued accounting standards not yet required to be adopted and the expected impact 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 results of operations, financial condition or liquidity, we discuss the impacts in the applicable section(s) of MD&A. -------------------------------------------------------------------------------- RESULTS OF OPERATIONS -------------------------------------------------------------------------------- The section below provides a comparative discussion of our consolidated results of operations between fiscal years 2014 and 2013 and between fiscal years 2013 and 2012. Table 1 presents our consolidated results of operations for fiscal years ended May 31, 2014, 2013 and 2012. 31

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Table 1: Results of Operations

For the years ended May 31,



Change from the previous year

2014 vs. 2013 vs. (Dollars in thousands) 2014 2013 2012 2013 2012 Interest income $ 957,540$ 955,753$ 960,961 $ 1,787 $ (5,208 ) Interest expense (654,655 ) (692,025 ) (761,778 ) 37,370 69,753 Net interest income 302,885 263,728 199,183 39,157 64,545 Provision for loan losses (3,498 ) 70,091 18,108 (73,589 ) 51,983 Net interest income after provision for loan losses 299,387 333,819 217,291 (34,432 ) 116,528 Non-interest income: Fee and other income 17,762 38,181 17,749 (20,419 ) 20,432 Derivative (losses) gains (34,421 ) 84,843 (236,620 ) (119,264 ) 321,463 Results of operations from foreclosed assets (13,494 ) (897 ) (67,497 ) (12,597 ) 66,600 Total non-interest income (30,153 ) 122,127 (286,368 ) (152,280 ) 408,495 Non-interest expense: Salaries and employee benefits (41,176 ) (55,536 ) (39,364 ) 14,360 (16,172 ) Other general and (31,390 ) (28,646 ) (25,973 ) (2,744 ) (2,673 ) administrative expenses Provision for guarantee 5,498 liability (217 ) 4,772 (726 ) (4,989 )



Loss on early extinguishment (1,452 ) (10,636 ) (15,525 )

9,184 4,889 of debt Other (69 ) (5,064 ) (739 ) 4,995 (4,325 ) Total non-interest expense (74,304 ) (95,110 ) (82,327 ) 20,806 (12,783 )



Income (loss) prior to income 194,930 360,836 (151,404 )

(165,906 ) 512,240



taxes

Income tax (expense) benefit (2,004 ) (2,749 ) 2,607

745 (5,356 ) Net income (loss) 192,926 358,087 (148,797 ) (165,161 ) 506,884 Less: Net (income) loss attributable to noncontrolling interest (2,859 ) (4,328 ) 4,070 1,469 (8,398 )



Net income (loss) attributable $ 190,067$ 353,759$ (144,727 )

$ (163,692 )$ 498,486 to CFC Adjusted net income $ 153,385$ 216,783$ 74,977$ (63,398 )$ 141,806 Adjusted interest expense $ (728,617 )$ (748,486 )$ (774,624 )$ 19,869$ 26,138 TIER (1) 1.29 1.52 - Adjusted TIER (2) 1.21 1.29 1.10 (1) For the year ended May 31, 2012, we reported a net loss of $149 million and, therefore, the TIER calculation for that period results in a value below 1.00. (2) Adjusted to exclude the effect of the derivative forward value from net income and to include all derivative cash settlements in the interest expense. The derivative forward value and derivative cash settlements are combined in the derivative gains (losses) line item in the chart above. See "Non-GAAP Financial Measures" for further explanation and a reconciliation of these adjustments.



Net Interest Income

Net interest income represents the difference between the interest income and applicable fees earned on our interest-earning assets, which include 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. 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 32 --------------------------------------------------------------------------------



with specific debt. Rather, we attempt to minimize costs and maximize efficiency by funding large aggregated amounts of loans.

Table 2 presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balances, interest income earned or interest expense incurred, and average yield or cost for fiscal years 2014, 2013 and 2012. Table 2 also presents adjusted interest expense, which reflects the inclusion of all derivative cash settlements in interest expense. See "Non-GAAP Financial Measures" for a reconciliation of interest expense to adjusted interest expense and an additional explanation of the adjustments. Table 2: Average Balances, Interest Income/Interest Expense and Average Yield/Cost (Dollars in thousands) 2014 2013 2012 Interest Interest Interest Assets: Average Balance Income/Expense



Average Yield/Cost Average Balance Income/Expense Average Yield/Cost Average Balance Income/Expense Average Yield/Cost Long-term fixed-rate loans $ 18,377,834$ 887,010

4.83 % $ 17,223,370$ 874,287 5.08 % $ 16,440,288$ 878,604 5.34 % Long-term variable-rate loans 737,186 20,388 2.77 721,747 21,684 3.00 658,847 24,374 3.70 Line of credit loans 1,278,549 31,376 2.45 1,245,635 32,378 2.60 1,072,222 30,717 2.86 Restructured loans(1) 10,819 136 1.26 157,059 13,956 8.89 461,670 16,191 3.51 Nonperforming loans 7,952 236 2.97 48,653 - - 39,953 - - Total 20,412,340 939,146 4.60 19,396,464 942,305 4.86 18,672,980 949,886 5.09 Investments and time deposits 860,983 7,080 0.82 491,591 6,325 1.29 334,732 3,934 1.18 Fee income(2) - 11,314 - - 7,123 - - 7,141 - Total $ 21,273,323$ 957,540 4.50 % $ 19,888,055$ 955,753 4.81 % $ 19,007,712$ 960,961 5.06 % Liabilities: Short-term debt $ 4,282,107 $ (5,899 ) (0.14 )% $ 3,739,450 $ (6,888 ) (0.18 )% $ 3,011,409 $ (5,836 ) (0.19 )% Medium-term notes 2,804,289 (82,978 ) (2.96 ) 2,623,428 (95,495 ) (3.64 ) 3,078,905 (173,927 ) (5.65 ) Collateral trust bonds 5,898,955 (300,014 ) (5.09 ) 6,202,374 (327,978 ) (5.29 ) 5,796,367 (314,642 ) (5.43 ) Subordinated deferrable debt 395,661 (19,000 ) (4.80 ) 216,669 (12,922 ) (5.96 ) 180,962 (11,225 ) (6.20 ) Subordinated certificates 1,663,847 (79,328 ) (4.77 ) 1,716,065 (81,920 ) (4.77 ) 1,718,055 (81,124 ) (4.72 ) Long-term notes payable 5,502,370 (150,956 ) (2.74 ) 4,912,791 (150,553 ) (3.06 ) 4,518,181 (154,606 ) (3.42 ) Total 20,547,229 (638,175 ) (3.11 ) 19,410,777 (675,756 ) (3.48 ) 18,303,879 (741,360 ) (4.05 ) Debt issuance costs(3) - (7,447 ) - - (7,582 ) - - (9,044 ) - Fee expense(4) - (9,033 ) - - (8,687 ) - - (11,374 ) - Total $ 20,547,229$ (654,655 ) (3.19 )% $ 19,410,777$ (692,025 ) (3.57 )% $ 18,303,879$ (761,778 ) (4.16 )% Derivative cash settlements(5) $ 8,380,698$ (73,962 ) (0.88 )% $ 9,148,214$ (56,461 ) (0.62 )% $ 10,123,071$ (12,846 ) (0.13 )% Adjusted interest expense(6) 20,547,229 (728,617 ) (3.55 ) 19,410,777 (748,486 ) (3.86 ) 18,303,879 (774,624 ) (4.23 ) Net interest income/Net yield $ 302,885 1.31 % $ 263,728 1.24 % $ 199,183 0.90 % Adjusted net interest income/Adjusted net yield (6)(7) $ 228,923 0.95 % $ 207,267 0.95 % $ 186,337 0.83 % (1) On September 13, 2012, we received a prepayment from one of our borrowers, with $414 million applied to the restructured loan balance, as well as applicable interest due on the restructured loan. (2) Primarily related to conversion fees that are deferred and recognized using the effective interest method over the remaining original loan interest rate pricing term, except for a small portion of the total fee charged to cover administrative costs related to the conversion, which is recognized immediately. (3) Interest expense includes amortization of all deferred charges related to debt issuances, principally underwriter's fees, legal fees, printing costs and comfort letter fees. Amortization is calculated on the effective interest method. Also includes issuance costs related to dealer commercial paper, which are recognized as incurred. (4) Interest expense includes various fees related to funding activities, including fees paid to banks participating in our revolving credit agreements. Fees are recognized as incurred or amortized on a straight-line basis over the life of the respective agreement. (5) For derivative cash settlements, average volume represents the average notional amount of derivative contracts outstanding, and the average cost represents the net difference between the average rate paid and the average rate received for cash settlements during the period. (6) See "Non-GAAP Financial Measures" for further explanation of the adjustment we make in our financial analysis to include the derivative cash settlements in interest expense, which affects adjusted interest expense and adjusted net interest income. (7) Adjusted net yield is calculated as the average yield on total interest income less the average yield on adjusted interest expense. Adjusted interest expense includes interest expense from derivative cash settlements. 33 -------------------------------------------------------------------------------- Table 3 displays the change in our 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 shows the change to derivative cash settlements due to changes in the average notional amount of our derivative portfolio versus changes to the net difference between the average rate paid and the average rate received. Table 3: Rate/Volume Analysis of Changes in Interest Income/Interest Expense 2014 vs. 2013 2013 vs. 2012 Variance due to: Variance due to: Average Average Net Average Average Net (Dollars in thousands) volume (1) rate (2) change (3) volume (1) rate (2) change (3) Increase (decrease) in interest income: Long-term fixed-rate loans $ 58,602$ (45,879 )$ 12,723$ 41,849$ (46,166 )$ (4,317 ) Long-term variable-rate loans 464 (1,760 ) (1,296 ) 2,327 (5,017 ) (2,690 ) Line of credit loans 856 (1,858 ) (1,002 ) 4,968 (3,307 ) 1,661 Restructured loans (12,995 ) (825 ) (13,820 ) (10,683 ) 8,448 (2,235 ) Nonperforming loans - 236 236 - - - Total interest income on 46,927 (50,086 ) (3,159 ) 38,461 (46,042 ) (7,581 ) loans Investments and time deposits 4,753 (3,998 ) 755 1,844 547 2,391 Fee income - 4,191 4,191 - (18 ) (18 ) Total interest income $ 51,680$ (49,893 )$ 1,787$ 40,305$ (45,513 )$ (5,208 ) (Increase) decrease in interest expense: Short-term debt $ (1,000 )$ 1,989$ 989$ (1,411 )$ 359$ (1,052 ) Medium-term notes (6,584 ) 19,101 12,517 25,730 52,702 78,432 Collateral trust bonds 16,045 11,919 27,964 (22,039 ) 8,703 (13,336 ) Subordinated deferrable debt (10,675 ) 4,597 (6,078 ) (2,215 ) 518 (1,697 ) Subordinated certificates 2,493 99 2,592 94 (890 ) (796 ) Long-term notes payable (18,068 ) 17,665 (403 ) (13,503 ) 17,556 4,053 Total interest expense on (17,789 ) 55,370 37,581 (13,344 ) 78,948 65,604 debt Debt issuance costs - 135 135 - 1,462 1,462 Fee expense - (346 ) (346 ) - 2,687 2,687 Total interest expense $ (17,789 )$ 55,159$ 37,370$ (13,344 )$ 83,097$ 69,753 Derivative cash $ 4,737$ (22,238 )$ (17,501 )$ 1,237$ (44,852 )$ (43,615 ) settlements(4) Adjusted interest expense(5) (13,052 ) 32,921 19,869 (12,107 ) 38,245 26,138 Increase (decrease) in net 33,891 5,266 39,157 26,961 37,584 64,545 interest income Increase in adjusted net 38,628 (16,972 ) 21,656 28,198 (7,268 ) 20,930 interest income (1) Calculated based on the current period average balance less the prior period average balance multiplied by the prior period average rate. (2) Calculated based on the current period average rate less the prior period average rate multiplied by the current period average balance. (3) The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of change. (4) For derivative cash settlements, variance due to average volume represents the change in derivative cash settlements that resulted from the change in the average notional amount of derivative contracts outstanding. Variance due to average rate represents the change in derivative cash settlements that resulted from the net difference between the average rate paid and the average rate received for interest rate swaps during the period. (5) See "Non-GAAP Financial Measures" for further explanation of the adjustment we make in our financial analysis to include the derivative cash settlements in interest expense. Net interest income for the year ended May 31, 2014 increased 15% compared with the prior year while net interest income increased 32% for the year ended May 31, 2013 compared with the prior year. The increase to the net interest income for the years ended May 31, 2014 and 2013 as compared with the respective prior year, was due to decreases in interest expense that exceeded the fluctuations in interest income. The primary factor driving the reduction to interest expense for both periods was our refinancing of maturing term debt with lower-cost debt during fiscal years 2013 and 2014. We maintained a higher average 34 --------------------------------------------------------------------------------



balance of commercial paper, medium-term notes and long-term notes payable, which have a lower weighted-average cost, in our overall funding mix and decreased the utilization of collateral trust bonds.

Adjusted net interest income for the year ended May 31, 2014 increased 10% from the prior year, while adjusted net interest income increased 11% for the year ended May 31, 2013 compared with the prior year. The increase to adjusted net interest income for the years ended May 31, 2014 and 2013, compared with the respective prior year, was primarily due to the increase to the net interest income as described above. The reduction to interest expense was partly offset by the increase to derivative cash settlements expense. See "Non-GAAP Financial Measures" for further explanation of the adjustment we make in our financial analysis to include all derivative cash settlements in determining our adjusted interest expense which, in turn, affects adjusted net interest income.



Interest Income

Interest income increased by less than 1% during the year ended May 31, 2014 compared with the prior year. The slight increase in the total interest income earned during the year ended May 31, 2014, was driven primarily by the $13 million increase in interest income earned on our long-term fixed-rate loans and the $4 million increase in fee income. The increase in interest income earned on long-term fixed-rate loans during the year ended May 31, 2014, was primarily due to the $1,154 million increase in average fixed-rate loan balances, partly offset by the 25 basis-point decrease in the weighted-average rate earned on our long-term fixed-rate loans. The increase in average fixed-rate loan balances was primarily due to a large amount of advances to CFC and NCSC borrowers to refinance debt from other lenders, to fund capital improvements and for other purposes. The decrease in average yield on fixed-rate loans was due to lower interest rates in the capital markets and the repricing of loans at lower interest rates. As a cost-based lender, our fixed interest rates reflect our cost of borrowing in the capital markets marked up to cover our cost of operations. As benchmark treasury rates and spreads tightened over the past few years, there was a continued reduction in the rates we had to pay for funding in the capital markets and we lowered the long-term fixed rates on our new loans. Although the average long-term fixed interest rates we offered on electric loans started to increase during the year ended May 31, 2014, the residual impact of lower rates offered over the current and prior year continued to result in a decrease in the average yield earned when comparing the year ended May 31, 2014 to the prior years. The increase in interest income during the year ended May 31, 2014 was partially offset by the $14 million decrease in interest income earned on restructured loans primarily due to the pay-off of a $414 million restructured loan in September 2012. The decrease to the yields earned on long-term variable-rate loans and line of credit loans during the year ended May 31, 2014 when compared to the years ended May 31, 2013 and 2012, was due to the continued impact of the reduction to the standard rates we charged for such loans on October 1, 2012. During the year ended May 31, 2013, interest income decreased by 1% compared with the prior year. The pay-off of a $414 million restructured loan mentioned above resulted in an unusual increase to the average yield on restructured loans of 538 basis points during the year ended May 31, 2013. Excluding the impact of restructured loans, there was a 30 basis-point decrease to the weighted-average rate earned on loans, partly offset by a $1,028 million increase in the average loan balance. Our nonperforming and restructured loans on non-accrual status affect interest income for the current and prior years. The effect of non-accrual loans on interest income is included in the rate variance in table 3 above. Table 4 summarizes foregone interest income as a result of holding loans on non-accrual status. Table 4: Foregone Interest Income (Dollars in thousands) 2014 2013 2012 Electric $ 610$ 491$ 7,918 Telecommunications 192 447 433 Total $ 802$ 938$ 8,351 The decrease in interest foregone for electric loans in fiscal year 2013 compared to fiscal year 2012 was due to placing a $420 million restructured loan on accrual status on October 1, 2011, which was paid off in September 2012. The reduction to interest foregone for telecommunications loans in fiscal year 2014 compared to fiscal year 2013 was due to the significantly lower balance of telecommunications loans on non-accrual status during fiscal year 2014. 35 --------------------------------------------------------------------------------



Interest Expense

During the year ended May 31, 2014, the average balance of debt outstanding increased by $1,136 million, or 6%, in order to fund the overall growth in our balance sheet. Despite the increase in average debt outstanding, total interest expense decreased by 5% compared with the prior year. The lower interest rates and tighter credit spreads available in the capital markets allowed us to refinance maturing debt at a lower cost. Specifically, the decrease in interest expense for the year ended May 31, 2014 is due to the 38 basis-point reduction in the total weighted-average cost of debt. The lower average cost of debt is primarily due to the refinancing of $340 million of 8% medium-term notes in the second quarter of fiscal year 2013, an overall decrease in the average volume of collateral trust bonds, and a lower average rate on collateral trust bonds issued in fiscal year 2014 compared to those that matured, partially offset by an increase in the average volume of subordinated deferrable debt. We funded the refinancing of higher-cost medium-term notes as well as the overall growth in our balance sheet with a mix of lower-cost short-term debt, medium-term notes, collateral trust bonds, and notes payable issued under our Guaranteed Underwriter Program and our agreement with the Federal Agricultural Mortgage Corporation. Short-term debt is our lowest cost of funding. Our utilization of short-term debt increased from 19% to 21% of average total debt during the year ended May 31, 2014 compared with the prior year, while the weighted-average rate paid for these instruments decreased from 18 basis points to 14 basis points, a 22% reduction. The decrease in interest expense during the year ended May 31, 2014 compared to the prior year was also partially driven by the decrease in average volume of our subordinated certificates due to the call of our 7.5% member capital securities with redemption dates that started in the third quarter of fiscal year 2014. During the year ended May 31, 2013, interest expense decreased by 9% compared with the prior year primarily due to the 59 basis-point reduction in the total cost of debt. The lower average cost of debt was primarily due to the refinancing of $1,500 million of 7.25% medium-term notes throughout fiscal year 2012 and the refinancing of $340 million of 8% medium-term notes in the second quarter of fiscal year 2013. Our utilization of short-term debt increased from 16% to 19% of average total debt during the year ended May 31, 2013 compared with the prior year, while the weighted-average rate paid for these instruments decreased slightly from 19 basis points to 18 basis points, a 5% reduction. The adjusted interest expense, which includes all derivative cash settlements, was $729 million for the year ended May 31, 2014, compared with $748 million and $775 million for the years ended May 31, 2013 and 2012, respectively. The decrease in adjusted interest expense during the years ended May 31, 2014 and 2013 was due to the lower interest expense noted above, partially offset by an increase in derivative cash settlements expense during the years ended May 31, 2014 and 2013. Our adjusted interest expense fell from an average of $65 million per month for fiscal year 2012 to $62 million per month for fiscal year 2013 and $61 million per month for fiscal year 2014. See "Non-GAAP Financial Measures" for further explanation of the adjustment we make in our financial analysis to include all derivative cash settlements in interest expense.



Provision for Loan Losses

We recorded a $3 million provision for loan losses during the year ended May 31, 2014 versus a negative provision of $70 million during the prior year. The loan loss provision for the year ended May 31, 2014 was due to an increase in the allowance held for general loans of $2 million and an increase in the qualitative component of the general reserve of $3 million, partially offset by a decrease in the the allowance held for impaired loans of $2 million. The negative provision for loan losses of $70 million recognized during the year ended May 31, 2013 was due to the decrease to the allowance held for general loans of $56 million, the decrease in the qualitative component of the general reserve of $11 million, and the decrease to the allowance held for impaired loans of $3 million. The allowance held for the general portfolio decreased because we updated certain assumptions used to estimate defaults, which included transitioning from the S&P corporate bond default table to the S&P utility sector default table, refining the linkage between the Company's internal risk ratings and the S&P ratings and reassessing and reducing the loss emergence period. In addition, we refined our approach to the qualitative component of the general reserve by focusing on risk factors not captured in the general allowance for loan loss. See "Note 3-Loans and Commitments" for additional information on our allowance for loan losses.



Non-Interest Income

Non-interest income consists of fee and other income, gains and losses on derivatives not accounted for in hedge accounting relationships and results from foreclosed assets.

Non-interest income decreased by $152 million for the year ended May 31, 2014 compared with the prior year primarily due to the increase in derivative losses of $119 million, the decrease in fee income of $20 million and the increase in loss from 36 -------------------------------------------------------------------------------- operations of foreclosed assets of $13 million. The decrease in fee and other income during the year ended May 31, 2014 is primarily due to the $13 million prepayment fee received on a capital expenditures loan in September 2012. The increase in loss from operations of foreclosed assets is primarily due to the reversal of $10 million of previously accrued expenses in the third quarter of fiscal year 2013 at Caribbean Asset Holdings ("CAH"), and a $3 million settlement gain received in the second quarter of fiscal year 2013. Non-interest income increased by $408 million for the year ended May 31, 2013 compared with the prior year mainly due to the increase in derivative gains of $321 million, the decrease in loss from operations of foreclosed assets of $67 million and the increase in fee income of $20 million. The decrease in loss from operations of foreclosed assets is primarily due to the $45 million impairment recorded in the third quarter of fiscal year 2012 at CAH and the $13 million in positive one-time adjustments recorded in fiscal year 2013 mentioned above. The increase in fee income was primarily due to the $13 million prepayment fee received in September 2012 mentioned above. The derivative gains (losses) line item includes income and losses recorded for our interest rate swaps as summarized in table 5 for the years ended May 31, 2014, 2013 and 2012. Table 5: Derivative Gains (Losses) (Dollars in thousands) 2014 2013 2012 Derivative cash settlements $ (73,962 )$ (56,461 )$ (12,846 ) Derivative forward value 39,541 141,304 (223,774 ) Derivative gains (losses) $ (34,421 )$ 84,843$ (236,620 ) We currently use two types of interest rate exchange agreements: (i) we pay a fixed rate and receive a variable rate ("pay-fixed swaps") and (ii) we pay a variable rate and receive a fixed rate ("receive-fixed swaps"). Pay-fixed swaps decrease in value and receive-fixed swaps increase in value as interest rates decrease, with the opposite occurring when interest rates increase. Because the composition of our pay-fixed and receive-fixed derivatives varies across the yield curve, the overall fair value gains and losses of our derivatives are sensitive to flattening and steepening of the yield curve. Table 6 provides a breakout of the average notional amount outstanding by type of interest rate exchange agreement and the weighted-average interest rate paid and received for cash settlements during the years ended May 31, 2014 and 2013.



Table 6: Derivative Average Notional Balances and Average Interest Rates

2014 2013 Average Weighted- Weighted- Average Weighted- Weighted- (Dollars in Notional Average Average Notional Average Average thousands) Balance Rate Paid Rate Received Balance Rate Paid Rate Received Pay fixed-receive $ 5,310,019 3.36 % 0.24 % $ 5,570,239 3.56 % 0.35 % variable Pay 3,070,679 0.94 3.95 3,577,975 1.18 4.65



variable-receive

fixed Total $ 8,380,698 2.47 % 1.60 % $ 9,148,214 2.63 % 2.03 % During the year ended May 31, 2014, the weighted-average rate we paid on our interest rate swap agreements was 87 basis points higher than the weighted-average rate we received, compared with 60 basis points higher than the weighted-average rate we received during the prior year. The primary reason for the increase in the weighted-average outflow was the reduction in the average notional amount for our pay variable-receive fixed interest rate swaps, due to a total of $575 million of pay variable-receive fixed interest rate swaps that matured since May 31, 2013. The derivative forward value represents 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 derivative forward value recorded for the year ended May 31, 2014 decreased by $102 million compared with the prior year. For the year ended May 31, 2014 the derivative value forward gain of $40 million was due to the upward shift and steepening of the estimated yield curve for our swaps of 18 basis points and 13 basis points, respectively. During the year ended May 31, 2014, the increase in fair value for our pay fixed-receive variable interest rate swaps outweighed the decrease in fair value for pay variable-receive fixed swaps as pay fixed-receive variable interest rate swaps represented 63% of our derivative contracts and they are more sensitive to changes in the estimated yield curve as they have a higher weighted-average maturity than our pay variable-receive fixed interest rate swaps. For the year ended May 31, 2014, the fair value of pay variable-receive fixed swaps declined as a result of 37 --------------------------------------------------------------------------------



swap maturities and changes in the estimated yield curve. See "Note 8-Derivative Financial Instruments" for additional information.

Non-Interest Expense

Non-interest expense consists of salaries and employee benefit expense, general and administrative expenses, provision for guarantee liability, losses on early extinguishment of debt and other miscellaneous expenses. Non-interest expense decreased by $21 million during the year ended May 31, 2014 compared with prior year due to the $14 million decrease in salaries and employee benefit expenses, the $9 million decrease in loss on early extinguishment of debt and the $5 million decrease in other expenses. The decrease in salaries and employee benefits during the year ended May 31, 2014 was due to the voluntary $13 million contribution that CFC made to its NRECA-sponsored Retirement Security Plan in January 2013. The $9 million decrease in loss on early extinguishment of debt was due to lower losses recorded in the current year related to the early redemption of $150 million of collateral trust bonds versus the losses recorded in the prior year related to the early redemption of $300 million collateral trust bonds and $186 million of subordinated deferrable debt. The decrease in other expenses during the year ended May 31, 2014 is due to a payment of $4 million related to the ICC bankruptcy made during the prior year. The above items were partially offset by the $5 million negative provision for guarantee losses recognized during the year ended May 31, 2013 versus an immaterial increase in the provision for guarantee losses recognized during the year ended May 31, 2014. Non-interest expense increased by $13 million during the year ended May 31, 2013 compared with prior year primarily due to the $13 million contribution to the Retirement Security Plan discussed above.



Net Income (Loss) Attributable to the Noncontrolling Interest

The net income or loss attributable to the noncontrolling interest represents 100% of the results of operations of RTFC and NCSC as the members of RTFC and NCSC own or control 100% of the interest in their respective companies. Noncontrolling interest for the year ended May 31, 2014 represents $2.9 million of net income, compared with net income of $4.3 million and net loss of $4.1 million for the years ended May 31, 2013 and 2012, respectively. Fluctuations in net income and loss are primarily due to fluctuations in the fair value of NCSC's derivative instruments. -------------------------------------------------------------------------------- FINANCIAL CONDITION --------------------------------------------------------------------------------



Loan Portfolio

We are a cost-based lender that offers long-term fixed- and variable-rate loans and line of credit variable-rate loans. Borrowers choose between a variable interest rate or a fixed interest rate for periods of one to 35 years. When a selected fixed interest rate term expires, the borrower may select another fixed-rate term or the variable rate.



Table 7 summarizes loans outstanding by type and by member class at May 31, 2014, 2013, 2012, 2011 and 2010.

38 -------------------------------------------------------------------------------- Table 7: Loans Outstanding by Type and Member Class (Dollars in millions) 2014 2013 2012 2011 2010 Loans by type: (1) Amount % Amount % Amount % Amount % Amount % Long-term loans: Long-term fixed-rate loans $ 18,176 88 % $ 17,918 88 % $ 16,743 89 % $ 16,405 85 % $ 15,413 80 % Long-term variable-rate loans 754 4 782 4 765 4 1,278 7 2,089 11 Loans guaranteed by RUS 202 1 211 1 219 1 227 1 237 1 Total long-term loans 19,132 93 18,911 93 17,727 94 17,910 93 17,739 92 Line of credit loans 1,335 7 1,385 7 1,185 6 1,415 7 1,599 8 Total loans $ 20,467 100 % $ 20,296 100 % $ 18,912 100 % $ 19,325 100 % $ 19,338 100 % Loans by member class:(1) CFC: Distribution $ 15,035 74 % $ 14,941 74 % $ 14,075 74 % $ 13,760 71 % $ 13,459 70 % Power supply 4,086 20 4,008 20 3,597 19 4,092 21 3,770 19 Statewide and associate 68 - 71 - 74 1 90 1 86 - CFC total 19,189 94 19,020 94 17,746 94 17,942 93 17,315 89 RTFC 450 2 503 2 572 3 859 4 1,672 9 NCSC 828 4 773 4 594 3 524 3 351 2 Total $ 20,467 100 % $ 20,296 100 % $ 18,912 100 % $ 19,325 100 % $ 19,338 100 %



(1) Includes loans classified as restructured and nonperforming.

The balance of loans outstanding increased by $171 million during the year ended May 31, 2014 primarily due to an increase of $94 million in CFC distribution loans, an increase of $78 million in CFC power supply loans and an increase of $55 million in NCSC loans, partly offset by a decrease of $53 million in RTFC loans. During the year ended May 31, 2014, $1,164 million of CFC long-term fixed-rate loans repriced. Of this total, $984 million selected a new long-term fixed rate; $69 million selected the long-term variable rate; $21 million selected a new rate offered as part of our loan sale program and were sold by CFC with CFC continuing to service the loans sold; and $90 million were prepaid in full.



We provide additional information on loans in "Note 3-Loans and Commitments".

39 --------------------------------------------------------------------------------

Debt and Equity Outstanding Debt



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

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

2014 2013 2012 Weighted- Weighted- Weighted- Amounts Average Amounts Average Amounts Average



(Dollars in thousands) Outstanding Interest Rate Outstanding

Interest Rate Outstanding Interest Rate Commercial paper sold through dealers, net of discounts $ 1,973,557 0.14 % $ 2,009,884 0.16 % $ 1,404,901 0.18 % Commercial paper sold directly to members, at par 838,074 0.13 812,141 0.15 997,778 0.18 Commercial paper sold directly to non-members, at par 20,315 0.13 39,298 0.14 70,479 0.18 Select notes 548,610 0.27 358,390 0.34 - - Daily liquidity fund notes 486,501 0.06 680,419 0.10 478,406 0.10 Bank bid notes 20,000 0.60 150,000 0.53 295,000 0.51 Collateral trust bonds 5,980,214 4.65 5,962,681

5.13 6,307,564 5.11 Notes payable 6,019,040 2.60 5,274,415 2.69 4,650,877 3.27 Medium-term notes 2,726,303 2.43 3,091,512 2.74 2,423,686 4.56 Subordinated deferrable debt 400,000 4.75 400,000 4.75 186,440 6.02 Membership certificates 644,944 4.90 644,757 4.90 646,279 4.90 Loan and guarantee certificates 699,724 3.01 733,895 3.29 694,825 3.09 Member capital securities 267,560 6.12 387,750 7.49 398,350 7.50 Total debt outstanding $ 20,624,842 2.91 $ 20,545,142 3.13 $ 18,554,585 3.67 Percentage of fixed-rate debt(1) 79 % 77 % 86 % Percentage of variable-rate debt(2) 21 23 14 Percentage of long-term debt 81 % 80 % 83 % Percentage of short-term debt 19 20 17 (1) Includes variable-rate debt that has been swapped to a fixed rate net of any fixed-rate debt that has been swapped to a variable rate. (2) The rate on commercial paper notes does not change once the note has been issued. However, the rates on new commercial paper notes change daily, and commercial paper notes generally have maturities of less than 90 days. Therefore, commercial paper notes are classified as variable-rate debt. Also includes fixed-rate debt that has been swapped to a variable rate net of any variable-rate debt that has been swapped to a fixed rate. During the year ended May 31, 2014, total debt outstanding increased by $80 million. The increase in debt outstanding, coupled with an increase in retained equity of $149 million, was primarily due to funding for the $171 million increase in loans outstanding. Total commercial paper, select notes, daily liquidity fund notes and bank bid notes outstanding represented 19% and 20% of total debt at May 31, 2014 and 2013, respectively. To take advantage of the current low interest rates on short-term debt, we intend to continue to maximize the use of these short-term debt instruments in our funding portfolio mix. During fiscal year 2014, the CFC Board of Directors authorized management to execute the call of our 7.5% member capital securities and offer members the option to invest in a new series of member capital securities that currently have a 5% interest rate. As of May 31, 2014, $267 million of the 7.5% member capital securities were redeemed and we had call notices outstanding for another $59 million. As of May 31, 2014, members have invested $147 million in the new series of member capital securities. 40 --------------------------------------------------------------------------------



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

Table 9: Debt Instruments and Revolving Credit Agreements

Debt Instrument Maturity Range Market Security Daily liquidity fund notes Demand note Members and affiliates Unsecured Select notes 30 to 270 days Members and affiliates Unsecured Bank bid notes Up to 3 months Bank institutions Unsecured Public capital markets Commercial paper 1 to 270 days and members Unsecured Revolving credit agreements 3 to 5 years Bank institutions Unsecured Collateral trust bonds Up to 30 years Public capital markets Secured (1) Range from 9 months Public capital markets Medium-term notes to 30 years and members Unsecured Notes payable to the Range from 3 months Federal Financing Bank to 20 years Government Unsecured (2) Notes payable to Federal Agricultural Mortgage Corporation Up to 16 years Private placement Secured (3) Other notes payable Up to 30 years Private placement Varies (4) Subordinated deferrable debt Up to 30 years (5) Public capital markets Unsecured (6) Subordinated certificates Up to 100 years (7) Members Unsecured (8) (1) Secured by the pledge of permitted investments and eligible mortgage notes from distribution system borrowers in an amount at least equal to the outstanding principal amount of collateral trust bonds. (2) Represents notes payable issued to the Federal Financing Bank with a guarantee of repayment by RUS under the Guaranteed Underwriter Program of the USDA, which supports the Rural Economic Development Loan and Grant program. We are required to maintain collateral on deposit equal to at least 100% of the outstanding balance of debt. (3) We are required to pledge eligible mortgage notes from distribution and power supply system borrowers in an amount at least equal to the outstanding principal amount under note purchase agreements with the Federal Agricultural Mortgage Corporation. (4) At May 31, 2014, other notes payable includes unsecured and secured Clean Renewable Energy Bonds. We are required to pledge eligible mortgage notes from distribution and power supply system borrowers in an amount at least equal to the outstanding principal amount under the Clean Renewable Energy Bonds Series 2009A note purchase agreement. The remaining other notes payable relate to unsecured notes payable issued by NCSC. (5) We have the right at any time and from time to time during the term of the subordinated deferrable debt to suspend interest payments for a period not exceeding 20 consecutive quarters. We have the right to call the subordinated deferrable debt any time after ten years, at par. To date, we have not exercised our option to suspend interest payments. (6) Subordinate and junior in right of payment to senior debt and the debt obligations we guarantee, but senior to subordinated certificates. (7) Membership subordinated certificates generally mature 100 years from issuance. Loan and guarantee subordinated certificates have the same maturity as the related long-term loan. Some certificates may also amortize annually based on the outstanding loan balance. Member capital securities generally mature 30 years or 35 years from issuance. Member capital securities are callable at par by CFC starting five or ten years from the date of issuance and anytime thereafter. (8) Subordinate and junior in right of payment to senior and subordinated debt and debt obligations we guarantee.



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

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

2014 2013 2012 Weighted- Average Weighted-Average Weighted-Average Debt Interest Debt Interest Debt Interest (Dollars in thousands) Outstanding Rate Outstanding Rate Outstanding Rate Short-term debt: Total commercial paper $ 2,831,946 0.14 % $ 2,861,323 0.16 % $ 2,473,158 0.19 % Select notes 548,610 0.27 358,390 0.34 - - Daily liquidity fund notes 486,501 0.06 680,419 0.10 478,406 0.10 Bank bid notes 20,000 0.60 150,000 0.54 295,000 0.52 Subtotal short-term debt 3,887,057 0.15 4,050,132 0.18 3,246,564 0.20 Long-term debt maturing within one year 1,512,337 1.44 3,669,351 2.65 1,246,870 2.13 Total short-term debt $ 5,399,394 0.51 $ 7,719,483 1.35 $ 4,493,434 0.74 41

-------------------------------------------------------------------------------- Table 11: Short-term Debt - Other Information (Dollars in thousands) 2014 2013



2012

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



3,787,808 2,697,751

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

42 --------------------------------------------------------------------------------



Equity

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

Table 12: Equity Increase/ (Dollars in thousands) 2014 2013 (Decrease) Membership fees $ 973$ 973 $ - Education fund 1,778 1,532 246 Members' capital reserve 485,447 410,259 75,188 Allocated net income 630,340 591,581 38,759 Unallocated net loss(1) (6,238 ) (6,230 ) (8 ) Total members' equity 1,112,300 998,115 114,185 Prior years cumulative derivative forward value and foreign currency adjustments (207,025 ) (340,719 ) 133,694 Year-to-date derivative forward value income(2) 34,613 133,694 (99,081 ) Total CFC retained equity 939,888 791,090 148,798 Accumulated other comprehensive income 3,649 8,381 (4,732 ) Total CFC equity 943,537 799,471 144,066 Noncontrolling interest 26,837 11,790 15,047 Total equity $ 970,374$ 811,261$ 159,113



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

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

In May 2013, the CFC Board of Directors authorized the allocation of $1 million of fiscal year 2013 net earnings to the Cooperative Educational Fund. In July 2013, the CFC Board of Directors authorized the allocation of the fiscal year 2013 net earnings as follows: $138 million to the members' capital reserve and $81 million to members in the form of patronage capital. In July 2013, the CFC Board of Directors authorized the retirement of allocated net earnings totaling $41 million, representing 50% of the fiscal year 2013 allocation. This amount was returned to members in cash in October 2013. Future allocations and retirements of net earnings may be made annually as determined by the CFC Board of Directors with due regard for CFC's financial condition. The CFC Board of Directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable cooperative law. In May 2014, the CFC Board of Directors authorized the allocation of $1 million of fiscal year 2014 net earnings to the Cooperative Educational Fund. In July 2014, the CFC Board of Directors authorized the allocation of the fiscal year 2014 net earnings as follows: $75 million to the members' capital reserve and $79 million to members in the form of patronage capital. In July 2014, the CFC Board of Directors authorized the retirement of allocated net earnings totaling $40 million, representing 50% of the fiscal year 2014 allocation. It is anticipated that this amount will be returned to members in cash in the second quarter of fiscal year 2015. Future allocations and retirements of net earnings may be made annually as determined by the CFC Board of Directors with due regard for CFC's financial condition. The CFC Board of Directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable cooperative law. In December 2013, the RTFC Board of Directors approved the allocation of earnings for the year ended May 31, 2013 with 99% allocated to members and 1% allocated to the Cooperative Educational Fund. A total of $2 million was allocated to members as follows: $0.4 million in cash and $1.6 million in the form of certificates to be redeemed at a later date. In January 2014, RTFC distributed the $0.4 million cash portion of the allocation to members. 43 --------------------------------------------------------------------------------

Ratio Analysis Leverage Ratio The leverage ratio is calculated by dividing the sum of total liabilities and guarantees outstanding by total equity. Based on this formula, the leverage ratio at May 31, 2014 was 23.01-to-1, a decrease from 27.58-to-1 at May 31, 2013. The decrease in the leverage ratio is due to the increase of $159 million in total equity, the decrease of $48 million in total guarantees, partially offset by the increase of $2 million in total liabilities as discussed under "Financial Condition-Liabilities and Equity" and "Contingent Off-Balance Sheet Obligations." For covenant compliance on our revolving credit agreements and for internal management purposes, the leverage ratio calculation is adjusted to exclude derivative liabilities, debt used to fund loans guaranteed by RUS, subordinated deferrable debt and subordinated certificates from liabilities; uses members' equity rather than total equity; and adds subordinated deferrable debt and subordinated certificates to calculate adjusted equity. At May 31, 2014 and 2013, the adjusted leverage ratio was 6.24-to-1 and 6.11-to-1, respectively. See "Non-GAAP Financial Measures" for further explanation and a reconciliation of the adjustments we make to our leverage ratio calculation. The increase to the adjusted leverage ratio was due to the increase of $252 million in adjusted liabilities and the decrease of $34 million in adjusted equity, partially offset by the decrease of $48 million in guarantees as discussed under "Financial Condition-Liabilities and Equity" and "Off-Balance Sheet Obligations."



Debt-to-Equity Ratio

The debt-to-equity ratio is calculated by dividing the sum of total liabilities outstanding by total equity. The debt-to-equity ratio based on this formula at May 31, 2014 was 21.91-to-1, a decrease from 26.21-to-1 at May 31, 2013. The decrease in the debt-to-equity ratio is primarily due to the increase of $159 million in total equity as discussed under the "Financial Condition-Liabilities and Equity" For internal management purposes, the debt-to-equity ratio calculation is adjusted to exclude derivative liabilities, debt used to fund loans guaranteed by RUS, subordinated deferrable debt and subordinated certificates from liabilities; uses members' equity rather than total equity; and adds subordinated deferrable debt and subordinated certificates to determine adjusted equity. At May 31, 2014 and 2013, the adjusted debt-to-equity ratio was 5.90-to-1 and 5.76-to-1, respectively. See "Non-GAAP Financial Measures" for further explanation and a reconciliation of the adjustments made to the debt-to-equity ratio calculation. The increase in the adjusted debt-to-equity ratio is due to the increase of $252 million in adjusted liabilities and the decrease of $34 million in adjusted equity. -------------------------------------------------------------------------------- CONTINGENT OFF-BALANCE SHEET OBLIGATIONS --------------------------------------------------------------------------------



Guarantees

We guarantee certain contractual obligations of our members so they may obtain various forms of financing. We use the same credit policies and monitoring procedures in providing guarantees as we do for loans and commitments. If a member system defaults on its obligation to pay debt service, then we are obligated to pay any required amounts under our guarantees. Meeting our guarantee obligations satisfies the underlying obligation of our member systems and prevents the exercise of remedies by the guarantee beneficiary based upon a payment default by a member system. In general, the member system is required to repay any amount advanced by us with interest, pursuant to the documents evidencing the member system's reimbursement obligation. Table 13 shows our guarantees outstanding by type of guarantee and by company at May 31, 2014 and 2013. 44

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Table 13: Guarantees Outstanding

Increase/ (Dollars in thousands) 2014 2013 (Decrease) Total by guarantee type: Long-term tax-exempt bonds $ 518,360$ 547,970$ (29,610 ) Letters of credit 431,064 447,683 (16,619 ) Other guarantees 115,398 117,118 (1,720 ) Total $ 1,064,822$ 1,112,771$ (47,949 ) Total by company: CFC $ 997,187$ 1,063,113$ (65,926 ) RTFC 2,304 3,711 (1,407 ) NCSC 65,331 45,947 19,384 Total $ 1,064,822$ 1,112,771$ (47,949 ) In addition to the letters of credit listed in the table, under master letter of credit facilities in place at May 31, 2014, we may be required to issue up to an additional $163 million in letters of credit to third parties for the benefit of our members. As of May 31, 2014, all of our master letter of credit facilities were subject to material adverse change clauses at the time of issuance. Also, at May 31, 2014 we had hybrid letter of credit facilities totaling $1,762 million that represent commitments that may be used for the issuance of letters of credit or line of credit loan advances, at the option of a borrower, and are included in unadvanced loan commitments for line of credit loans reported in "Note 3-Loans and Commitments." Hybrid letter of credit facilities subject to material adverse change clauses at the time of issuance totaled $476 million at May 31, 2014. Prior to issuing a letter of credit under these facilities, we would confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with the letter of credit terms and conditions. The remaining commitment under hybrid letter of credit facilities of $1,286 million may be used for the issuance of letters of credit as long as the borrower is in compliance with the terms and conditions of the facility. At May 31, 2014, we were the liquidity provider for a total of $570 million of variable-rate tax-exempt bonds issued for our member cooperatives. As liquidity provider on these $570 million of tax-exempt bonds, we are required to purchase bonds that are tendered or put by investors. Investors provide notice to the remarketing agent that they will tender or put a certain amount of bonds at the next interest rate reset date. If the remarketing agent is unable to sell such bonds to other investors by the next interest rate reset date, we have unconditionally agreed to purchase such bonds. On a total of $445 million of the bonds for which we are liquidity provider at May 31, 2014, we also provide a guarantee of all principal and interest, which is included in table 13 as a long-term tax-exempt bond guarantee. On a total of $125 million of tax-exempt bonds, our obligation as liquidity provider is in the form of a letter of credit, which is reflected in table 13 in our letters of credit. For the year ended May 31, 2014, we were not required to perform as liquidity provider pursuant to these obligations.



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

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



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

Table 14: Maturities of Guaranteed Obligations

Outstanding Maturities of Guaranteed Obligations (Dollars in thousands) Balance 2015 2016 2017 2018 2019 Thereafter Guarantees (1) $ 1,064,822$ 353,298$ 31,885 $



25,624 $ 147,843$ 28,573$ 477,599

(1) At May 31, 2014, we are the guarantor and liquidity provider for $445 million of tax-exempt bonds issued for our member cooperatives. We have also issued letters of credit to provide standby liquidity for an additional $125 million of tax-exempt bonds. 45 --------------------------------------------------------------------------------



See "Note 12-Guarantees" for additional information.

Unadvanced Loan Commitments

Unadvanced commitments represent approved and executed loan contracts for which the funds have not been advanced. At May 31, 2014 and 2013, we had the following amount of unadvanced commitments on loans to our borrowers. Table 15: Unadvanced Loan Commitments (Dollars in thousands) 2014 % of Total 2013 % of Total Long-term $ 4,710,273 34 % $ 4,718,162 35 % Line of credit 9,201,805 66 8,704,586 65 Total $ 13,912,078 100 % $ 13,422,748 100 % A total of $2,274 million and $1,703 million of unadvanced commitments at May 31, 2014 and 2013, respectively, represented unadvanced commitments related to committed lines of credit that are not subject to a material adverse change clause at the time of each advance. As such, we would be required to advance amounts on these committed facilities as long as the borrower is in compliance with the terms and conditions of the facility. The remaining available amounts at May 31, 2014 and 2013 are conditional obligations because they are generally subject to material adverse change clauses. Prior to making an advance on these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. Unadvanced commitments related to line of credit loans are generally revolving facilities for periods not to exceed five years. It is our experience that unadvanced commitments related to line of credit loans are usually not fully drawn. We believe these conditions will continue for the following reasons: electric cooperatives generate a significant amount of cash from the collection of revenue from their customers, so they usually do not need to draw down on loan commitments to supplement operating cash flow;



the majority of the line of credit unadvanced commitments provide backup

liquidity to our borrowers; and

historically, we have experienced a very low utilization rate on line of

credit loan facilities, whether or not there is a material adverse change

clause at the time of advance.

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



multi-year work plans and, as such, it is expected that advances on such

loans will occur over a multi-year period;

electric cooperatives generate a significant amount of cash from the

collection of revenue from their customers, thus operating cash flow is

available to reduce the amount of additional funding needed for capital

expenditures and maintenance;

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

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



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

Table 16: Notional Maturities of Committed Lines of Credit

Available Notional Maturities of Committed Lines of Credit (Dollars in thousands) Balance 2015 2016 2017 2018 2019 Committed lines of credit $2,274,388$19,238$61,000$456,855$678,839$1,058,456 46

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Credit Policies, Process and Monitoring

Loan Underwriting and Credit Monitoring

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



the intended use of proceeds;

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

collateral; the borrower's risk profile as measured by financial ratios and other risk characteristics; and other factors that might be applicable to the type of borrower or the specific loan request being considered. If our lending staff determines that a credit request is acceptable, the staff works with the borrower to structure a loan based on the various options we offer and prepares a credit recommendation for review by management in the lending group as discussed further below under "Loan Approval." When considering credit requests to borrowers with large single-obligor exposures we may use loan syndications, loan participations and whole-loan sale programs to effectively manage portfolio risk related to credit concentrations. Our Credit Risk Management group facilitates the activities of our internal credit review process, establishes credit policies and oversees our internal risk rating system for all of our borrowers. We maintain an internal risk rating system that produces a borrower rating and a facility rating. The borrower risk rating ("BRR") measures risk of default for each borrower based on both quantitative and qualitative measurements specific to the particular business line of the borrower. The facility risk rating measures risk of loss in the event of default for a particular facility based on the collateral or guarantee associated with the loan. Risk ratings are used to assess the credit quality of the overall portfolio, segments of the portfolio and each of our borrowers and to establish credit limitations, and are factors in determining applicable credit approval levels. Risk ratings for borrowers with outstanding and/or unadvanced loan or guarantee commitments are updated at least annually upon the receipt of audited financial information and are reviewed in connection with any new credit request. Annually, an outside financial services consultant conducts a review of the accuracy of specific BRRs and the risk rating process and credit extension practices for compliance with policy and consistency in application. Such consultant provides recommendations to management and the boards of directors for improvement, as well as progress on the resolution of items from prior reviews. Management is responsible for implementing the recommendations accepted by the boards of directors. In addition, we compare our internal ratings to the publicly available ratings for our borrowers that have public ratings.



Loan Approval

The respective boards of directors establish loan policies for CFC, RTFC, and NCSC, each of which includes a credit approval matrix. The credit approval matrix specifies the required level of approval applicable to any proposed loan based on factors such as the amount of the loan, the BRR, whether credit limitations are exceeded and whether the loan is to a member associated with one of our current directors. Through the approval matrix, the respective boards have delegated the authority to approve certain loans to the Chief Executive Officer, who has further delegated approval authority to the Corporate Credit Committee and management in the lending groups while retaining sole authority to approve certain loans. Loans that require approval at a more senior level than management in the lending group are forwarded to the Corporate Credit Committee for consideration. The Corporate Credit Committee is a cross-functional group comprised of senior vice president and vice president level employees with distribution, power supply and telecommunications lending experience, credit risk management experience, legal experience, accounting experience, regulatory experience and financial industry experience. This committee performs a vital role in maintaining a balance between the credit needs of the borrowers and the requirements for sound credit quality of our loan and guarantee portfolio. The Corporate Credit Committee monitors lending policies and practices and reviews extensions of credits requiring special attention. The Corporate Credit Committee also monitors selected rating changes, analyzes rating integrity and works to improve our internal risk rating system. The Corporate Credit Committee approves, rejects or imposes additional conditions on the loans it reviews. Some loans require Chief Executive Officer or board 47 --------------------------------------------------------------------------------



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

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



Nonperforming Loans

The Credit Risk Management group, on an ongoing basis, and the Corporate Credit Committee, on a quarterly basis, monitor all borrowers with past due, non-accrual and restructured facilities as well as other borrowers that warrant a higher degree of monitoring. The Credit Risk Management group presents reports on such matters to the Chief Executive Officer and boards of directors. Once a borrower is classified as nonperforming, we typically place the loan on non-accrual status and reverse all accrued and unpaid interest back to the date of the last payment. A loan is written off in the period that it becomes evident that collectability is highly unlikely; however, our efforts to recover all charged-off amounts may continue. Management makes a recommendation to the respective board of directors as to the timing and amount of loan write-offs based on various factors, including, but not limited to, cash flow analysis and the fair value of the collateral securing the borrower's loans.



Advances on Previously Approved Loan Facilities

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



Covenant Compliance

Borrowers are generally required to maintain certain financial ratios. In addition, members with long-term loans outstanding are generally required to provide us with certain information and documentation on a periodic or annual basis, including, but not limited to, audited financial statements, notices of material adverse change in the business or condition, financial or otherwise, of the borrower, and a certificate of management confirming compliance with all covenants. Credit Concentration CFC, RTFC and NCSC each have policies that limit the amount of credit that can be extended to individual borrowers or a controlled group of borrowers. The credit limitation policies cap the total exposure and unsecured exposure to the borrower based on an assessment of the borrower's risk profile and our internal risk rating system. As a member-owned cooperative lender, we balance the needs of our members and the risk associated with concentrations of credit exposure. Each board of directors must approve new credit requests from borrowers with total exposure or unsecured exposure in excess of the limits in the policies. Management may use syndicated credit arrangements, loan participations and loan sales to manage credit concentrations.



Total exposure, as defined by the policies, generally includes the following: loans outstanding, excluding loans guaranteed by RUS;

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



unadvanced loan commitments;

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

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

The calculation of total exposure includes facilities that are approved but not yet closed and facilities that might not be drawn by the borrower, such as lines of credit and loan commitments for projects that may be delayed or eventually canceled. Credit Risk Profile Below we provide information on the credit risk profile of our loan and guarantee portfolio, including loan concentration, security provisions, pledged loans and loans on deposit, nonperforming and restructured loans, and allowance for loan losses. Loan Concentration Table 17 presents the total number of CFC, RTFC and NCSC borrowers by state or U.S. territory and the percentage of total loans outstanding at May 31, 2014, 2013 and 2012. The percentage of total loans is based on the aggregate principal balance of the loans outstanding. 48

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Table 17: Loan Concentration

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



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

At May 31, 2014 and 2013, the largest concentration of loans to borrowers in any one state was in Texas, which had approximately 15% of total loans outstanding. Two primary factors contributed to Texas having the largest percentage of total loans outstanding compared with other states at May 31, 2014: Texas has the largest number of total borrowers compared with other states (see table above); and 49

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Texas has the largest number of power supply systems (10 of our 71 power

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



Table 18: Credit Exposure to 10 Largest Borrowers

2014 2013 Increase/ (Dollars in thousands) Amount % of Total Amount % of Total (Decrease) Total by exposure type: Loans $ 3,155,857 14 % $ 2,981,627 14 % $ 174,230 Guarantees 363,325 2 374,340 2 (11,015 ) Total credit exposure to 10 largest borrowers $ 3,519,182 16 % $ 3,355,967 16 % $ 163,215 Total by company: CFC $ 3,378,698 15 % $ 3,240,755 15 % $ 137,943 NCSC 140,484 1 115,212 1 25,272 Total credit exposure to 10 largest borrowers $ 3,519,182 16 % $ 3,355,967 16 % $ 163,215 Security Provisions Except when providing line of credit loans, we generally lend to our members on a senior secured basis. Long-term loans are generally secured on parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower with exceptions typical in utility mortgages. Line of credit loans are generally unsecured. Guarantee reimbursement obligations are generally secured on parity with other secured creditors by substantially all assets and revenue of the borrower or by the underlying financed asset. In addition to the collateral pledged to secure our loans, borrowers are also required to set rates charged to customers to achieve certain financial ratios. At May 31, 2014 and 2013, $2,118 million and $2,243 million out of $20,467 million and $20,296 million, respectively, of total loans outstanding were unsecured, representing 10% and 11% of total loans outstanding, respectively.



Pledged Loans and Loans on Deposit

Table 19 summarizes our secured debt or debt requiring collateral on deposit, the excess collateral pledged and our unencumbered loans at May 31, 2014 and 2013. Table 19: Unencumbered Loans (Dollars in thousands) 2014



2013

Total loans to members $ 20,466,925 $



20,296,317

Less: Total secured debt or debt requiring collateral on deposit (12,242,446 ) (11,380,734 ) Excess collateral pledged or on deposit (1) (1,917,184 ) (1,825,020 ) Unencumbered loans $ 6,307,295 $



7,090,563

Unencumbered loans as a percentage of total loans 31 %



35 %

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



Nonperforming and Restructured Loans

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

50 -------------------------------------------------------------------------------- Table 20: Nonperforming and Restructured Loans (Dollars in thousands) 2014 2013 2012 2011 2010 Nonperforming loans (1) $ 2,095$ 15,497$ 41,213$ 31,344$ 560,527 Percent of loans outstanding 0.01 % 0.08 % 0.22 % 0.16 % 2.90 % Percent of loans and guarantees outstanding 0.01 0.07 0.20 0.15 2.73 Restructured loans $ 7,584$ 46,953$ 455,689$ 474,381$ 508,044 Percent of loans outstanding 0.04 % 0.23 % 2.41 % 2.45 % 2.63 % Percent of loans and guarantees outstanding 0.04 0.22 2.26 2.32 2.48 Total nonperforming and restructured loans $ 9,679$ 62,450$ 496,902$ 505,725$ 1,068,571 Percent of loans outstanding 0.05 % 0.31 % 2.63 % 2.61 % 5.53 % Percent of loans and guarantees outstanding 0.05 0.29 2.46 2.47 5.21 Total non-accrual loans $ 9,679$ 23,081$ 41,213$ 465,312$ 1,022,924 Percent of loans outstanding 0.05 % 0.11 % 0.22 % 2.41 % 5.29 % Percent of loans and guarantees outstanding 0.05 0.11 0.20 2.28 4.99



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

A borrower is classified as nonperforming when any one of the following criteria is met: principal or interest payments on any loan to the borrower are past due



90 days or more;

as a result of court proceedings, repayment on the original terms is

not anticipated; or

for some other reason, management does not expect the timely repayment

of principal and interest.

Once a borrower is classified as nonperforming, we generally place the loan on non-accrual status and reverse all accrued and unpaid interest back to the date of the last payment. At May 31, 2014 and 2013, nonperforming loans totaled $2 million, or 0.01%, of loans outstanding and $15 million or 0.1%, of loans outstanding, respectively. One borrower in this group is currently seeking a buyer for its system, as it is not anticipated that it will have sufficient cash flow to repay its loans without the proceeds from the sale of the business. It is currently anticipated that even with the sale of the business, there will not be sufficient funds to repay the full amount owed. We have approval rights with respect to the sale of this company. At May 31, 2014 and 2013, we had restructured loans totaling $8 million, or 0.04%, of loans outstanding and $47 million, or 0.2%, of loans outstanding, respectively, all of which were performing according to their restructured terms. Approximately $0.1 million of interest income was accrued on restructured loans during the year ended May 31, 2014 compared to approximately $14 million of interest income during the prior year. One of the restructured loans totaling $39 million at May 31, 2013, was refinanced without concession during the first quarter of fiscal year 2014, with the new loan classified as performing at May 31, 2014.



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

Allowance for Loan Losses The allowance for loan losses is determined based upon evaluation of the loan portfolio, past loss experience, specific problem loans, economic conditions and other pertinent factors that, in management's judgment, could affect the risk of loss in the loan portfolio. We review and adjust the allowance quarterly to cover estimated probable losses in the portfolio. All loans are written off in the period that it becomes evident that collectability is highly unlikely; however, our efforts to recover all charged-off amounts may continue. Management believes the allowance for loan losses is appropriate to cover estimated probable portfolio losses. 51 --------------------------------------------------------------------------------



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

Table 21: Allowance for Loan Losses

As of and for the years ended May 31, (Dollars in thousands) 2014 2013 2012 2011 2010 Beginning balance $ 54,325$ 143,326$ 161,177$ 592,764$ 622,960 Provision for loan losses 3,498 (70,091 ) (18,108 ) (83,010 ) (30,415 ) Net (charge-offs) recoveries (1,394 ) (18,910 ) 257 (348,577 ) 219 Ending balance $ 56,429$ 54,325$ 143,326$ 161,177$ 592,764 ` Allowance for loan losses by company: CFC $ 45,600$ 41,246$ 126,941$ 143,706$ 177,655 RTFC 4,282 9,158 8,562 8,389 406,214 NCSC 6,547 3,921 7,823 9,082 8,895 Total $ 56,429$ 54,325$ 143,326$ 161,177$ 592,764 As a percentage of total loans outstanding 0.28 % 0.27 % 0.76 % 0.84 % 3.07 % As a percentage of total nonperforming loans outstanding 2,693.51 350.55 347.77 514.22 105.75 As a percentage of total restructured loans outstanding 744.05 115.70 31.45 33.98 116.68 As a percentage of total loans on non-accrual 583.00 235.37 347.77 34.64 57.95 Our allowance for loan losses increased by $2 million during the year ended May 31, 2014, due to an increase in the allowance held for general loans of $2 million and an increase in the qualitative component of the general reserve of $3 million, partially offset by a decrease in the the allowance held for impaired loans of $2 million and net charge-offs of $1 million, due primarily to the sale of one of our impaired loans during the year ended May 31, 2014. Our allowance for loan losses decreased by $89 million during the year ended May 31, 2013 due to a decrease to the allowance held for general loans of $56 million, a decrease in the qualitative component of the general reserve of $11 million, the decrease to the allowance held for impaired loans of $3 million and a $19 million write-off for one of our borrowers that was moved from nonperforming loans to restructured loans during the year ended May 31, 2013. The decrease in the allowance held for general loans is due to refinements in assumptions used to estimate our allowance for loan losses. See "Results of Operations-Provision for Loan Losses" and "Note 3-Loans and Commitments" for additional information. On a quarterly basis, we review all nonperforming and restructured borrowers, as well as certain additional borrowers selected based on known facts and circumstances, to determine if the loans to the borrowers are impaired and/or to determine if there are changes to a previously impaired loan. We calculate a borrower's impairment based on the expected future cash flows or the fair value of the collateral securing our loans to the borrower if cash flow cannot be estimated. As events related to the borrower take place and economic conditions and our assumptions change, the impairment calculations will change. At May 31, 2014 and 2013, there was a total specific allowance for loan losses balance of $0.4 million and $3 million, respectively, related to impaired loans totaling $10 million and $62 million, respectively. -------------------------------------------------------------------------------- LIQUIDITY RISK -------------------------------------------------------------------------------- We face liquidity risk in funding our loan portfolio and refinancing our maturing obligations. Our Asset Liability Committee is responsible for monitoring our management of risks related to liquidity, interest rates, and counterparty credit and to ensure consistent access to funding that is in alignment with our strategic goals. The committee's mandate is to review CFC's liquidity, as well as the relationship of interest rates and tenor of our assets to our liabilities and, as a result, our spread between interest income and interest expense. Functional responsibilities of this committee include reviewing and approving funding options and investment opportunities and reviewing trends in funding alternatives and risk exposure. Performance results and budget deviations also are reviewed. If necessary, the organization's asset-liability strategy is reviewed for modification to react to the current market environment. Our Asset Liability Committee monitors liquidity risk by establishing and monitoring liquidity 52 --------------------------------------------------------------------------------



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

We face liquidity risk in the funding of our loan portfolio based on member demand for new loans, although as presented in Table 23, our projected sources and uses of liquidity chart, we expect over the next six quarters that advances on our long-term loans will exceed long-term loan repayments by an estimated $522 million. We offer long-term loans to our members with maturities of up to 35 years, and the weighted average maturity for our loan portfolio is currently about 16 years. We typically do not match fund individual loans with a debt instrument of similar final maturity. Debt instruments such as membership subordinated certificates and loan and guarantee subordinated certificates have maturities that vary from the term of the associated loan or guarantee to 100 years; member capital securities have maturities of 30 or 35 years; and subordinated deferrable debt has been issued with maturities of up to 30 years. Collateral trust bonds and medium-term notes have typically been issued with maturities of two, three, five, seven and 10 years. At May 31, 2014, we had $3,887 million of commercial paper, select notes, daily liquidity fund notes and bank bid notes scheduled to mature during the next 12 months. We expect to continue to maintain member investments in commercial paper, select notes and the daily liquidity fund notes at recent levels of approximately $1,869 million. Dealer commercial paper and bank bid notes decreased from $2,160 million at May 31, 2013 to $1,994 million at May 31, 2014. We expect that the dealer commercial paper balance will fluctuate to offset changes in demand from our members. We intend to maintain the current level of commercial paper outstanding while favorable market conditions exist. We intend to limit the balance of dealer commercial paper and bank bid notes outstanding to 15% or less of total debt outstanding. At May 31, 2014, 15% of total debt outstanding was $3,094 million. In order to access the commercial paper markets at current levels, we believe we need to maintain our current ratings for commercial paper of P1 from Moody's Investors Service and A1 from Standard & Poor's Corporation. We use our bank lines of credit primarily as backup liquidity for dealer and member commercial paper. At May 31, 2014, we had $3,224 million in available lines of credit with financial institutions. We expect to be in compliance with the covenants under our revolving credit agreements; therefore, we could draw on these facilities to repay dealer or member commercial paper that cannot be rolled over in the event of market disruptions. At May 31, 2014, we had long-term debt maturing in the next 12 months totaling $1,512 million. In addition to our access to the dealer and member commercial paper markets as discussed above, we believe we will be able to refinance these maturing obligations because:



Based on our funding sources available and past history, we believe we

will meet our obligation to refinance the remaining $378 million of

medium-term notes sold through dealers and $383 million of medium-term

notes sold to members that mature over the next 12 months with new medium-term notes including those in the retail notes market.



We expect to maintain the ability to obtain funding through the capital

markets. During the year ended May 31, 2014 we issued $1,264 million of

medium-term notes and $1,618 million of collateral trust bonds.

We had up to $2,232 million available under a note purchase agreement

with the Federal Agricultural Mortgage Corporation at May 31, 2014. We can borrow up to $3,900 million under this revolving note purchase agreement at any time through January 11, 2016, subject to market conditions for debt issued by the Federal Agricultural Mortgage



Corporation. During the year ended May 31, 2014, we issued notes totaling

$151 million under this agreement.

We had up to $624 million available under committed loan facilities from

the Federal Financing Bank at May 31, 2014. A total of $124 million is available for advance through October 15, 2015 and a total of $500 million is available for advance through October 15, 2016. During the



year ended May 31, 2014, we borrowed $625 million under our committed

loan facilities with the Federal Financing Bank.

As discussed in further detail under "Off-Balance Sheet Obligations," at May 31, 2014, we were the liquidity provider for a total of $570 million of variable-rate tax-exempt bonds issued for our member cooperatives. During the year ended May 31, 2014, we were not required to perform as liquidity provider pursuant to these obligations. At May 31, 2014, we had a total of $431 million of letters of credit outstanding for the benefit of our members. That total includes $125 million for the purpose of providing liquidity for pollution control bonds. The remaining $306 million represents obligations for which we may be required to advance funds based on various trigger events included in the letters of credit. If we are required to advance funds, the member is obligated to pay such amounts to CFC. We expect that our current sources of liquidity, along with our $339 million of cash on hand, $55 million of investments and $550 million of time deposits at May 31, 2014, will allow us to meet our obligations and to fund our operations over the next 12 to 18 months. 53 --------------------------------------------------------------------------------



Liquidity and Capital Resources Profile

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



Contractual Obligations

In the normal course of business, we enter into various contractual obligations that may require future cash payments that affect our short- and long-term liquidity and capital resource needs. Table 22 summarizes, by remaining contractual maturity, our significant contractual cash obligations based on the undiscounted future cash payments as of May 31, 2014. The actual timing and amounts of future cash payments may differ from the amounts presented below due to a number of factors, such as discretionary debt repurchases. Table 22 excludes certain obligations where the obligation is subject to valuation based on market factors, such as derivatives. Contractual obligations related to entities included in foreclosed assets are also excluded from the table. Table 22: Contractual Obligations (Dollars in millions) 2015 2016 2017 2018 2019 Thereafter Total Short-term debt $ 3,887 $ - $ - $ - $ - $ - $ 3,887 Long-term debt due in less than one year 1,512 - - - - - $ 1,512 Long-term debt 170 1,494 1,445 766 1,808 7,621 13,304 Subordinated deferrable debt - - - - - 400 400 Members' subordinated certificates(1) 61 21 15 11 19 1,267 1,394 Contractual interest on long-term debt(2) 579 552 527 475 383 4,727 7,243 Total contractual obligations $ 6,209$ 2,067$ 1,987$ 1,252$ 2,210$ 14,015$ 27,740 (1) Excludes loan subordinated certificates totaling $127 million that amortize annually based on the outstanding balance of the related loan and $1 million in payments not received on certificates subscribed and unissued. There are many items that affect the amortization of a loan, such as loan conversions, loan repricing at the end of an interest rate term and prepayments; therefore, an amortization schedule cannot be maintained for these certificates. Over the past fiscal year, annual amortization on these certificates was $13 million. In fiscal year 2014, amortization represented 10% of amortizing loan subordinated certificates outstanding. (2) Represents the interest obligation on our long-term debt based on terms and conditions at May 31, 2014.



Projected Near-Term Sources and Uses of Liquidity

Table 23 shows the projected sources and uses of cash by quarter through November 30, 2015. In analyzing our projected liquidity position, we track key items identified in the table below. The long-term debt maturities represent the scheduled maturities of our outstanding term debt for the period presented. The long-term loan advances represent our current best estimate of the member demand for our loans, the amount and the timing of which are subject to change. The long-term loan amortization and repayments represent the scheduled long-term loan amortization for the outstanding loans at May 31, 2014, as well as our current estimate for the repayment of long-term loans. The estimate of the amount and timing of long-term loan repayments is subject to change. We assumed the issuance of commercial paper, medium-term notes and other long-term debt, including collateral trust bonds and private placement of term debt, to maintain matched funding within our loan portfolio and to allow our revolving lines of credit to provide backup liquidity for our outstanding commercial paper. Commercial paper repayments in the table below do not represent scheduled maturities but rather the assumed use of excess cash to pay down the commercial paper balance. 54

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Table 23: Projected Sources and Uses of Liquidity

Projected Sources of Liquidity Projected Uses of Liquidity Cumulative Long-term Loan Total Total Excess



(Dollars in Amortization and Debt Issuance-Commercial Debt Issuance-Long-term Sources of Long-term Debt Debt Repayment-Commercial Long-term

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



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

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



Sources of Liquidity

Capital Market Debt Issuance

As a well-known seasoned issuer, we have the following effective shelf registration statements on file with the U.S. Securities and Exchange Commission ("SEC") for the issuance of debt: unlimited amount of collateral trust bonds until September 2016; unlimited amount of medium-term notes, member capital securities and subordinated deferrable debt until November 2014; and daily liquidity fund notes for a total of $20,000 million with a $3,000 million limitation on the aggregate principal amount outstanding at any time until April 2016. While we register member capital securities and the daily liquidity fund with the SEC, these securities are not available for sale to the general public. Medium-term notes are available for sale to both the general public and members. During the year ended May 31, 2014, we issued $825 million of 1-year and 3-year floating-rate medium-term notes in registered offerings. Commercial paper issued through dealers and bank bid notes totaled $1,994 million and represented 10% of total debt outstanding at May 31, 2014. We intend to maintain the balance of dealer commercial paper and bank bid notes at 15% or less of total debt outstanding during fiscal year 2015. Our bank lines of credit may be used for general corporate purposes; however, we use them primarily as backup liquidity for dealer and member commercial paper.



In May 2014, we completed an exchange of $209 million of our outstanding 8% medium-term notes, Series C, due 2032 for $218 million of 4.023% collateral trust bonds due 2032 and $91 million of cash. During the year ended May 31, 2014, we issued a total of $1,618 million of collateral trust bonds.

Private Debt Issuance

We have access to liquidity from private debt issuances through a note purchase agreement with the Federal Agricultural Mortgage Corporation. At May 31, 2014 and 2013, we had secured notes payable of $1,668 million and $1,542 million, respectively, outstanding to the Federal Agricultural Mortgage Corporation under a note purchase agreement totaling $3,900 million. Under the terms of our March 2011 note purchase agreement, we can borrow up to $3,900 million at any time from the date of the agreement through January 11, 2016 and thereafter automatically extend the agreement on each anniversary date of the closing for an additional year, unless prior to any such anniversary date, the Federal Agricultural Mortgage Corporation provides CFC with a notice that the draw period will not be extended beyond the remaining term. The agreement with the Federal Agricultural Mortgage Corporation is a revolving credit facility that allows us to borrow, repay and re-borrow funds at 55 -------------------------------------------------------------------------------- any time through maturity or from time to time as market conditions permit. Each borrowing under a note purchase agreement is evidenced by a secured note setting forth the interest rate, maturity date and other related terms as we may negotiate with the Federal Agricultural Mortgage Corporation at the time of each such borrowing. We may select a fixed rate or variable rate at the time of each advance with a maturity as determined in the applicable pricing agreement. On May 2, 2014 and May 23, 2014, we issued notes totaling $60 million and $91 million, respectively, under the agreement with the Federal Agricultural Mortgage Corporation. At May 31, 2014, we had up to $2,232 million available under this agreement, subject to market conditions for debt issued by the Federal Agricultural Mortgage Corporation. At May 31, 2014 and 2013, we had $4,299 million and $3,674 million, respectively, of unsecured notes payable outstanding under bond purchase agreements with the Federal Financing Bank and a bond guarantee agreement with RUS issued under the Guaranteed Underwriter Program, which supports the Rural Economic Development Loan and Grant program and provides guarantees to the Federal Financing Bank. During the year ended May 31, 2014, we borrowed $625 million under our committed loan facilities from the Federal Financing Bank as part of this program at a weighted average interest rate of 2.85% with a repricing period ranging from 5 to 10 years and a final maturity of 20 years. On November 21, 2013, we closed a $500 million commitment from RUS to guarantee a loan from the Federal Financing Bank as part of the Guaranteed Underwriter Program that is available for advance through October 15, 2016. Advances under this facility have a 20-year maturity repayment period. At May 31, 2014, we had up to $624 million available under committed loan facilities from the Federal Financing Bank as part of this program.



Member Loan Repayments

Table 24 summarizes scheduled repayments include the principal amortization of long-term loans in each of the five fiscal years following May 31, 2014 and thereafter.

Table 24: Member Loan Repayments (Dollars in thousands) Amortization (1) 2015 $ 1,157,972 2016 1,094,947 2017 1,126,260 2018 985,748 2019 934,428 Thereafter 13,832,083 Total $ 19,131,438



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

Member Loan Interest Payments

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



Bank Revolving Credit Agreements

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



Table 25 presents the total available and the outstanding letters of credit under our revolving credit agreements.

56 --------------------------------------------------------------------------------



Table 25: Revolving Credit Agreements

Letters of Credit Total Available Outstanding Annual Facility (Dollars in thousands) 2014 2013 2014 2013 Maturity Fee (1) 15 basis Three-year agreement $ - $ 219,000 $ - $ - March 21, 2014 points 10 basis Three-year agreement 1,036,000 916,000 -



- October 28, 2016 points

10 basis Four-year agreement 1,122,500 1,007,500 -



- October 28, 2017 points

10 basis Five-year agreement 1,065,609 954,012 1,891 3,488 October 28, 2018 points Total $ 3,224,109$ 3,096,512$ 1,891$ 3,488



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

During the year ended May 31, 2014, we amended our three-year, four-year, and five-year revolving credit agreements to extend the maturity dates by one year each to October 28, 2016, 2017, and 2018, respectively. In addition, we exercised our option to increase the commitment level for the three-year, four-year, and five-year revolving credit agreements by $120 million, $115 million and $110 million, respectively, to $1,036 million, $1,122 million, and $1,068 million, respectively. The facility fee and applicable margin under each agreement are determined by the pricing matrices in the agreements based on our senior unsecured credit ratings. With respect to the borrowings, we have the right to choose between a (i) Eurodollar rate plus an applicable margin or (ii) base rate calculated based on the greater of prime rate, the federal funds effective rate plus 0.50% or the one-month LIBOR rate plus 1%, plus an applicable margin. Our ability to borrow or obtain a letter of credit under all of the agreements is not conditioned on the absence of material adverse changes with regard to CFC. We also have the right, subject to certain terms and conditions, to increase the aggregate amount of the commitments under (i) the three-year credit facility to a maximum of $1,500 million, (ii) the four-year credit facility to a maximum of $1,300 million and (iii) the five-year credit facility to a maximum of $1,300 million. The revolving credit agreements do not contain a material adverse change clause or ratings triggers that limit the banks' obligations to fund under the terms of the agreements, but we must be in compliance with their other requirements to draw down on the facilities, including financial ratios. For further discussion, see "Liquidity Risk-Liquidity and Capital Resources Profile-Compliance with Debt Covenants." Member Investments



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

57 --------------------------------------------------------------------------------



Table 26: Member Investments

2014 2013 Increase/ (Dollars in thousands) Amount % of Total (1) Amount % of Total (1) (Decrease) Commercial paper $ 838,074 30 % $ 812,141 28 % $ 25,933 Select notes 544,510 99 353,190 99 $ 191,320 Daily liquidity fund notes 486,501 100 680,419 100 $ (193,918 ) Medium-term notes 498,262 18 574,108 19 $ (75,846 ) Members' subordinated 1,612,228 1,766,402 $ (154,174 ) certificates 100 100 Total $ 3,979,575$ 4,186,260$ (206,685 ) Percentage of total debt 20 % outstanding 19 %



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

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

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



Cash, Investments and Time Deposits

At May 31, 2014, cash, investments and time deposits totaled $944 million.The interest rate earned on the investments and time deposits provides an overall benefit to our net interest yield. The total represents an additional source of liquidity that is available to support our operations.



Cash Flows from Operations

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



Compliance with Debt Covenants

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

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



expense adjusted to include the derivative cash settlements plus net

income prior to the cumulative effect of change in accounting principle

and dividing that total by the interest expense adjusted to include the derivative cash settlements.



The senior debt-to-total equity ratio includes adjustments to senior debt

to exclude RUS-guaranteed loans, subordinated deferrable debt and

members' subordinated certificates. Total equity is adjusted to include

subordinated deferrable debt and members' subordinated certificates.

Senior debt includes guarantees; however, it excludes: guarantees for members where the long-term unsecured debt of the member is rated at least BBB+ by Standard & Poor's



Corporation or

Baa1 by Moody's Investors Service; and the payment of principal and interest by the member on the guaranteed indebtedness if covered by insurance or



reinsurance

provided by an insurer having an insurance financial strength rating of AAA by Standard & Poor's Corporation or a financial strength rating of Aaa by Moody's Investors Service. The CAH results of operations and other comprehensive income are eliminated from the CFC financial results used to calculate both the adjusted TIER ratio and the senior debt-to-total equity ratio. 58

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Table 27 represents our required and actual financial ratios under the revolving credit agreements at or for the years ended May 31, 2014 and 2013.

Table 27: Financial Ratios under Revolving Credit Agreements

Actual Requirement 2014 2013 Minimum average adjusted TIER over the six most 1.025 1.28



1.27

recent fiscal quarters (1)

Minimum adjusted TIER for the most recent fiscal 1.05 1.23



1.29

year (1) (2)

Maximum ratio of adjusted senior debt-to-total 10.00 5.79



5.85

equity (1)

(1) In addition to the adjustments made to the leverage ratio set forth under "Non-GAAP Financial Measures", senior debt excludes guarantees to member systems that have certain investment-grade ratings from Moody's Investors Service and Standard & Poor's Corporation. The TIER and debt-to-equity calculations include the adjustments set forth under "Non-GAAP Financial Measures" and exclude the results of operations and other comprehensive income for CAH. (2) We must meet this requirement to retire patronage capital.



The revolving credit agreements prohibit liens on loans to members except liens: under our indentures,

related to taxes that are not delinquent or contested,

stemming from certain legal proceedings that are being contested in

good faith,

created by CFC to secure guarantees by CFC of indebtedness the interest

on which is excludable from the gross income of the recipient for

federal income tax purposes,

granted by any subsidiary to CFC, and

to secure other indebtedness of CFC of up to $7,500 million plus an

amount equal to the incremental increase in CFC's allocated Guaranteed

Underwriter Program obligations, provided that the aggregate amount of

such indebtedness may not exceed $10,000 million. As of May 31, 2014,

the amount of our secured indebtedness for purposes of this provision

of all three revolving credit agreements was $5,985 million.



The revolving credit agreements limit total investments in foreclosed assets held by CAH to $275 million without consent by the required banks. These investments at May 31, 2014 did not exceed this limit.

Table 28 summarizes our required and actual financial ratios as defined under our 1994 collateral trust bonds indenture and our medium-term notes indentures in the United States markets at May 31, 2014 and 2013.



Table 28: Financial Ratios under Indentures

Actual

Requirement



2014 2013 Maximum ratio of adjusted senior debt to total equity (1) 20.00 6.74 6.72

(1) The ratio calculation includes the adjustments made to the leverage ratio under "Non-GAAP Financial Measures," with the exception of the adjustments to exclude the non-cash impact of derivative financial instruments and adjustments from total liabilities and total equity. We are required to pledge collateral equal to at least 100% of the outstanding balance of debt issued under our collateral trust bond indentures and note purchase agreements with the Federal Agricultural Mortgage Corporation. In addition, we are required to maintain collateral on deposit equal to at least 100% of the outstanding balance of debt to the Federal Financing Bank under the Guaranteed Underwriter Program of the USDA, which supports the Rural Economic Development Loan and Grant program, for which distribution and power supply loans may be deposited. See "Note 3-Loans and Commitments-Pledging of Loans and Loans on Deposit" for additional information related to collateral. Although not required, we typically maintain pledged collateral and collateral on deposit in excess of the required 100% of the outstanding balance of debt issued. However, our revolving credit agreements limit pledged collateral to 150% of the outstanding balance of debt issued. The excess collateral ensures that required collateral levels are maintained and, when an opportunity exists, facilitates timely execution of debt issuances by reducing or eliminating the lead time required to pledge collateral. Collateral levels fluctuate because: distribution and power supply loans typically amortize, while the debt issued under secured indentures and agreements typically has bullet maturities; 59

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individual loans may become ineligible for various reasons, some of which may be temporary; and distribution and power supply borrowers have the ability to prepay their loans. We may request the return of collateral pledged or held on deposit in excess of the 100% of the principal balance requirement or may move the collateral from one program to another to facilitate a new debt issuance, provided that all conditions of eligibility under the different programs are satisfied. The $4,299 million and $3,674 million, respectively, of notes payable to the Federal Financing Bank at May 31, 2014 and 2013 contain a rating trigger related to our senior secured credit ratings from Standard & Poor's Corporation and Moody's Investors Service. A rating trigger event occurs if our senior secured debt does not have at least two of the following ratings: (i) A- or higher from Standard & Poor's Corporation, (ii) A3 or higher from Moody's Investors Service and (iii) an equivalent rating from a successor rating agency to any of the above rating agencies. If our senior secured credit ratings fall below the levels listed above, the mortgage notes on deposit at that time, which totaled $5,076 million at May 31, 2014, would be pledged as collateral rather than held on deposit. Also, if during any portion of a fiscal year, our senior secured credit ratings fall below the levels listed above, we may not make cash patronage capital distributions in excess of 5% of total patronage capital. At May 31, 2014, our senior secured debt ratings from Standard & Poor's Corporation and Moody's Investors Service were A+ and A1 respectively. At May 31, 2014, both Standard & Poor's Corporation and Moody's Investors Service had our ratings on stable outlook. A total of $4,299 million and $3,674 million of these notes payable to the Federal Financing Bank at May 31, 2014 and 2013, respectively, have a second trigger requiring that a director on the CFC Board of Directors satisfies the requirements of a financial expert as defined by Section 407 of the Sarbanes-Oxley Act of 2002. A financial expert triggering event will occur if the financial expert position remains vacant for more than 90 consecutive days. If CFC does not satisfy the financial expert requirement, the mortgage notes on deposit at that time, which totaled $5,076 million at May 31, 2014, would be pledged as collateral rather than held on deposit. The financial expert position on the CFC Board of Directors has been filled since March 2007. Table 29 summarizes the amount of notes pledged or on deposit as collateral as a percentage of the related debt outstanding under the debt agreements noted above at May 31, 2014 and 2013.



Table 29: Collateral Pledged or on Deposit

Requirement Actual Debt Indenture Revolving Credit Agreements Debt Agreement Minimum Maximum 2014 2013 Collateral trust bonds 1994 117 % 112 % indenture 100 % 150 % Collateral trust bonds 2007 150 114 125 indenture 100 Federal Agricultural Mortgage 150 114 116 Corporation 100 Clean Renewable Energy Bonds 150 117 118 Series 2009A 100 Federal Financing Bank Series (1) 150 118 106 (2) 100 (1)Represents collateral on deposit as a percentage of the related debt outstanding. (2)All pledge agreements previously entered into with RUS and U.S. Bank National Association were consolidated into one amended, restated and consolidated pledge agreement in December 2012. Uses of Liquidity Loan Advances Loan advances are either from new loans approved to a borrower or from the unadvanced portion of loans previously approved. At May 31, 2014, unadvanced loan commitments totaled $13,912 million. Of that total, $2,274 million represented unadvanced commitments related to line of credit loans that are not subject to a material adverse change clause at the time of each loan advance. As such, we would be required to advance amounts on these committed facilities as long as the borrower is in compliance with the terms and conditions of the loan. New advances under 34% of these committed line of credit loans would be advanced at rates determined by CFC based on our cost and, therefore, any increase in CFC's costs to obtain funding required to make the advance could be passed on to the borrower. The other 66% of committed line of credit loans represent loan syndications where the pricing is set at a spread over a market index as agreed upon by all of the participating banks and 60 -------------------------------------------------------------------------------- market conditions at the time of syndication. The remaining $11,638 million of unadvanced loan commitments at May 31, 2014 were generally subject to material adverse change clauses. Prior to making an advance on these facilities, we would 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 the 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. It has been our history that we do not see significant loan advances from the large amount of long-term unadvanced loan amounts that are subject to material adverse change clauses at the time of the loan advance. We have a very low historical average utilization rate on all our line of credit facilities, including committed line of credit facilities. Unadvanced commitments related to line of credit loans are typically revolving facilities for periods not to exceed five years. Long-term unadvanced commitments generally expire five years from the date of the loan agreement. These reasons, together with the other limitations on advances as described above, all contribute to our expectation that the majority of the unadvanced commitments reported will expire without being fully drawn upon and that the total commitment amount does not necessarily represent future cash funding requirements at May 31, 2014.



We currently expect to make long-term loan advances totaling approximately $2,016 million to our members over the next 12 months.

Interest Expense on Debt

For the year ended May 31, 2014, interest expense on debt was $638 million, representing an average cost of 3.11% compared with 3.48% and 4.05% for the years ended May 31, 2013 and 2012, respectively. For the past three fiscal years, interest expense on debt has averaged $685 million. At May 31, 2014, 79% of outstanding debt had a fixed interest rate and 21% had a variable interest rate.



Principal Repayments on Long-Term Debt

Table 30 summarizes the principal amount of long-term debt, subordinated deferrable debt and members' subordinated certificates maturing by fiscal year and thereafter.

Table 30: Principal Maturity of Long-term Debt

Amount Weighted-Average (Dollars in thousands) Maturing (1) Interest Rate May 31, 2015 $ 1,743,142 1.77 % May 31, 2016 1,514,974 2.28 May 31, 2017 1,460,440 2.70 May 31, 2018 777,260 5.14 May 31, 2019 1,826,377 6.92 Thereafter 9,288,103 3.46 Total $ 16,610,296 3.56 (1)Excludes loan subordinated certificates totaling $127 million that amortize annually based on the outstanding balance of the related loan and $1 million in payments not received on certificates subscribed and unissued. There are many items that affect the amortization of a loan, such as loan conversions, loan repricing at the end of an interest rate term and prepayments; therefore, an amortization schedule cannot be maintained for these certificates. Over the past fiscal year, annual amortization on these certificates was $13 million. In fiscal year 2014, amortization represented 10% of amortizing loan subordinated certificates outstanding.



Patronage Capital Retirements

CFC has made annual retirements of allocated net earnings in 34 of the last 35 fiscal years. In July 2013, the CFC Board of Directors approved the allocation of $81 million from fiscal year 2013 net earnings to CFC's members. CFC made a cash payment of $41 million to its members in October 2013 as retirement of 50% of allocated net earnings from the prior year as approved by the CFC Board of Directors. The remaining portion of allocated net earnings will be retained by CFC for 25 years under guidelines adopted by the CFC Board of Directors in June 2009. In July 2014, the CFC Board of Directors approved the allocation of $79 million from fiscal year 2014 net earnings to CFC's members. CFC will make a cash payment of $40 million 61 -------------------------------------------------------------------------------- to its members in the second quarter of fiscal year 2015 as retirement of 50% of allocated net earnings from the prior year as approved by the CFC Board of Directors. The remaining portion of allocated net earnings will be retained by CFC for 25 years under guidelines adopted by the CFC Board of Directors in June 2009. The 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 regulation. -------------------------------------------------------------------------------- MARKET RISK --------------------------------------------------------------------------------



Our primary market risks are interest rate risk and counterparty risk as a result of entering into derivative financial instruments.

Interest Rate Risk

Our interest rate risk exposure is related to the funding of the fixed-rate loan portfolio. 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 by meeting at least monthly to review the following information: national economic forecasts, forecasts for the federal funds rate and the interest rates that we set, interest rate gap analysis, liquidity position, schedules of loan and debt maturities, short-term and long-term funding needs, anticipated loan demands, credit concentration status, derivatives portfolio and financial forecast. The Asset Liability Committee also discusses the composition of fixed-rate versus variable-rate lending, new funding opportunities, changes to the nature and mix of assets and liabilities for structural mismatches, and interest rate swap transactions.



Matched Funding Practice

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 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. To monitor and mitigate interest rate risk in the funding of fixed-rate loans, we perform a monthly interest rate gap analysis, a comparison of fixed-rate assets repricing or maturing by year to fixed-rate liabilities and members' equity maturing by year (see table 31 below). 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 since it is used to match fund the variable-rate loan pool. With the exception of members' subordinated certificates, which are generally issued at rates below our long-term cost of funding and with extended maturities, and commercial paper, our liabilities have average maturities that closely match the repricing terms (but not the maturities) of our fixed-interest-rate loans. We fund the amount of fixed-rate assets that exceed fixed-rate debt and members' equity with short-term debt, primarily commercial paper. We also have the option to enter pay fixed-receive variable interest rate swaps. Our funding objective is to manage the matched funding of asset and liability repricing terms within a range of total assets (excluding derivative assets) deemed appropriate by the Asset Liability Committee based on the current environment and extended outlook for interest rates. Due to the flexibility we offer our borrowers, there is a possibility of significant changes in the composition of the fixed-rate loan portfolio, and the management of the interest rate gap is very fluid. We may use interest rate swaps to adjust the interest rate gap based on our needs for fixed-rate or variable-rate funding as changes arise. The interest rate risk is deemed minimal on variable-rate loans since the loans are eligible to be repriced at least monthly, therefore minimizing the variance to the cost of variable-rate debt used to fund the loans. At May 31, 2014 and 2013, 10% and 11%, respectively, of loans carried variable interest rates. Our interest rate gap analysis also allows us to analyze the effect on the overall adjusted TIER of issuing a certain amount of debt at a fixed rate for various maturities before the issuance of the debt. See "Non-GAAP Financial Measures" for further explanation and a reconciliation of the adjustments to TIER.



Table 31 shows the scheduled amortization and repricing of fixed-rate assets and liabilities outstanding at May 31, 2014.

62 --------------------------------------------------------------------------------



Table 31: Interest Rate Gap Analysis

June 1, June 1, June 1, June 1, May 31, 2015 2015 to 2017 to 2019 to 2024 to Beyond or May 31, May 31, May 31, May 31, June 1, (Dollars in millions) prior 2017 2019 2024 2034 2034 Total Assets amortization and repricing $ 2,312$ 3,690$ 2,826$ 3,554$ 4,463$ 1,517$ 18,362 Liabilities and members' equity: Long-term debt $ 1,062$ 2,752$ 3,432$ 2,831$ 3,379$ 527$ 13,983 Subordinated certificates 166 77 56



136 795 762 1,992

Members' equity (1) - - - - 919 228 1,147 Total liabilities and members' equity $ 1,228$ 2,829$ 3,488$ 2,967$ 5,093$ 1,517$ 17,122 Gap (2) $ 1,084$ 861$ (662 )$ 587$ (630 ) $ - $ 1,240 Cumulative gap 1,084 1,945 1,283 1,870 1,240 1,240 Cumulative gap as a % of total assets 4.88 % 8.75 % 5.77 % 8.41 % 5.58 % 5.58 % Cumulative gap as a % of adjusted total assets (3) 4.92 8.83 5.83



8.49 5.63 5.63

(1) Includes the portion of the allowance for loan losses and subordinated deferrable debt allocated to fund fixed-rate assets and excludes non-cash adjustments from the accounting for derivative financial instruments. (2) Assets less liabilities and members' equity. (3) Adjusted total assets represent total assets in the consolidated balance sheet less derivative assets. At May 31, 2014, we had $18,362 million of fixed-rate assets amortizing or repricing, funded by $13,983 million of fixed-rate liabilities maturing during the next 30 years and $3,139 million of members' equity and members' subordinated certificates, a portion of members' equity does not have a scheduled maturity. The difference of $1,240 million, or 5.58% of total assets and 5.63% of total assets excluding derivative assets, represents the fixed-rate assets maturing during the next 30 years in excess of the fixed-rate debt and members' equity. Our Asset Liability Committee believes that the difference in the matched funding at May 31, 2014 as a percentage of total assets less derivative assets is appropriate based on the extended outlook for interest rates and allows the flexibility to maximize funding opportunities in the current low interest rate environment. Funding fixed-rate loans with short-term debt presents a liquidity risk of being able to roll over the short-term debt until we issue term debt to fund the fixed-rate loans through their repricing or maturity date. Factors that mitigate this risk include our maintenance of liquidity available at May 31, 2014 through committed revolving credit agreements totaling $3,224 million, $624 million under committed loan facilities from the Federal Financing Bank, and, subject to market conditions, up to $2,232 million under a revolving note purchase agreement with the Federal Agricultural Mortgage Corporation.



Derivative Financial Instruments

We are an end user of derivative financial instruments and not a swap dealer. We use derivatives such as interest rate swaps and treasury rate locks to mitigate interest rate risk. These derivatives are used when they provide a lower cost of funding or minimize interest rate risk as part of our overall interest rate matching strategy. As an end user and not a swap dealer, we have not entered into derivative financial instruments for investing, speculating or trading purposes in the past and do not anticipate doing so in the future. At May 31, 2014 and 2013, there were no foreign currency derivative instruments outstanding. We are required to record all derivative instruments in the consolidated balance sheets as either an asset or liability measured at fair value. Changes in the derivative instrument's fair value are required to be recognized currently in earnings unless specific hedge accounting criteria are met. Generally, our derivatives do not qualify for hedge accounting. A large portion of our interest rate exchange agreements use a LIBOR index or the 30-day composite commercial paper index as the receive leg, which has not been highly correlated enough to our own commercial paper rates to qualify for hedge accounting on a consistent basis. We believe that the LIBOR index or the 30-day composite commercial paper index are the rates that most closely relate to the rates we pay on our own commercial paper, and, therefore, we believe we are economically hedging our net interest income on loans with our interest rate exchange agreements. At May 31, 2014 and 2013, we did not have any interest rate exchange agreements that were accounted for using hedge accounting. Cash settlements that we pay and receive for derivative instruments that do not qualify for hedge accounting are recorded in the derivative gains (losses) line in the consolidated statements of operations. Table 32 provides the notional amount, average interest rates and maturities by fiscal year and thereafter for the interest rate exchange agreements to which we were a party at May 31, 2014. 63 --------------------------------------------------------------------------------



Table 32: Interest Rate Exchange Agreements

Notional Amortization and Maturities (Dollars in millions) Notional Instruments Fair Value Amount 2015 2016 2017 2018 2019 Thereafter Interest rate exchange $(178)$8,447$695 agreements $687$682$1,059$552$4,772 Weighted-average pay rate 2.41 % Weighted-average receive 1.48 rate At May 31, 2014, 63% of our interest rate swaps were pay fixed-receive variable and 37% were pay variable-receive fixed. As a result, each 25 basis-point increase or decrease to the 30-day composite commercial paper index and the one-month and three-month LIBOR rates would result in a $5 million decrease and a $4 million increase, respectively, in our net cash settlements. There were no cross currency or cross-currency interest rate exchange agreements to which we were a party at May 31, 2014 and 2013. We provide additional information on our use of derivatives and exposure "Note 1-General Information and Accounting Policies-Derivative Financial Instruments" and "Note 8-Derivative Financial Instruments."



Other Financial Instruments

Table 33 provides information about our financial instruments other than derivatives that are sensitive to changes in interest rates. All of our financial instruments at May 31, 2014 were entered into or contracted for purposes other than trading. For debt obligations, the table presents principal cash flows and related average interest rates by expected maturity dates at May 31, 2014.

Table 33: Other Financial Instruments

Principal Amortization and Maturities (Dollars in millions) Outstanding Fair Remaining Instruments Balance Value 2015 2016 2017 2018 2019 Years Assets: Investments in time deposits $ 550$ 550$ 550 $ - $ - $ - $ - $ - Investments in equity securities $ 55 $ 55 $ - $ - $ - $ - $ - $ 55 Long-term fixed-rate loans (1) $ 18,352$ 18,961$ 1,070$ 1,040$ 1,070$ 920$ 874$ 13,378 Average rate 5.01 % 4.62 % 4.65 % 4.43 % 4.73 % 4.80 % 5.15 % Long-term variable-rate loans (2) $ 770$ 770$ 88$ 55$ 55$ 65$ 60$ 447 Average rate 2.87 % - - - - - - Line of credit loans $ 1,335$ 1,335$ 1,335 $ - $ - $ - $ - $ - Average rate 2.40 % 2.40 % - - - - - Nonperforming loans (3) $ 2 $ 2 $ - $ - $ - $ - $ - $ - Average rate (3) - % - - - - - - Restructured loans (3) $ 8 $ 8 $ - $ - $ - $ - $ 1$ 7 Average rate (3) - % - - - - - - Liabilities and equity: Short-term debt (4) $ 5,399$ 5,403$ 5,399 $ - $ - $ - $ - $ - Average rate 0.51 % 0.51 % - - - - - Long-term debt $ 13,304$ 14,526$ 170$ 1,494$ 1,445$ 766$ 1,808$ 7,621 Average rate 3.66 % 2.66 % 2.28 % 2.68 % 5.17 % 6.94 % 3.23 % Subordinated deferrable debt $ 400$ 386 $ - $ - $ - $ - $ - $ 400 Average rate 4.75 % - - - - - 4.75 % Membership sub certificates (5) $ 1,394$ 1,394$ 61$ 21$ 15$ 11$ 19$ 1,267 Average rate 4.57 % 7.50 % 2.24 % 4.19 % 3.19 % 5.54 % 4.47 % 64

-------------------------------------------------------------------------------- (1) The principal amount of fixed-rate loans is the total of scheduled principal amortizations without consideration for loans that reprice. Includes $185 million of loans guaranteed by RUS. (2) Long-term variable-rate loans include $17 million of loans guaranteed by RUS. (3) Because repayment schedule is uncertain for nonperforming loans, no amounts are included for future principal cash flows. All nonperforming loans were on non-accrual status at May 31, 2014. Average rate on restructured loans represents current accrual rate. Interest accrual rate cannot be estimated for future periods. (4) Short-term debt includes commercial paper, select notes, daily liquidity fund notes, bank bid notes and long-term debt due in one year or less. (5) Carrying value and fair value exclude loan subordinated certificates totaling $127 million that amortize annually based on the outstanding balance of the related loan; therefore, there is no scheduled amortization and $1 million in payments not received on certificates subscribed and unissued. Over the past fiscal year, annual amortization on these certificates was $13 million. In fiscal year 2014, amortization represented 10% of amortizing loan subordinated certificates outstanding. Counterparty Risk We are exposed to counterparty risk related to the performance of the parties with which we entered into financial transactions, primarily for derivative instruments and cash and time deposits that we have with various financial institutions. 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 have an original maturity of less than one year. For our derivative instruments, at May 31, 2014 and 2013, the highest percentage concentration of total notional exposure to any one counterparty was 21% and 20% of total derivative instruments, respectively. At the time counterparties are selected to participate in our exchange agreements, the counterparty must be a participant in one of our revolving credit agreements. In addition, the derivative instruments executed for each counterparty are based on key characteristics such as the following: notional concentration, credit risk exposure, tenor, bid success rate, total credit commitment and credit ratings. At May 31, 2014, our derivative instrument counterparties had credit ratings ranging from AA- to BBB+ as assigned by Standard & Poor's Corporation and Aa2 to Baa2 as assigned by Moody's Investors Service. Based on the fair market value of our derivative instruments at May 31, 2014, there were three counterparties that would be required to make a payment to us totaling $48 million if all of our derivative instruments were terminated on that day. The largest amount owed to us by a single counterparty was $35 million, or 71% of the total exposure to us, at May 31, 2014.



Rating Triggers

Some of our interest rate swaps have credit risk-related contingent features referred to as rating triggers. Rating triggers are not separate financial instruments and do not meet the definitional elements for embedded derivatives.

At May 31, 2014, the following notional amounts of derivative instruments had rating triggers based on our senior unsecured credit ratings from Moody's Investors Service or Standard & Poor's Corporation falling to a level specified in the applicable agreements and are grouped into the categories below. In calculating the payments and collections required upon termination, we netted the agreements for each counterparty, as allowed by the underlying master agreements. At May 31, 2014, our senior unsecured credit ratings from Moody's Investors Service and Standard & Poor's Corporation were A2 and A, respectively. At May 31, 2014, both Moody's Investors Service and Standard & Poor's Corporation had our ratings on stable outlook.



Table 34: Rating Triggers for Derivatives

Notional Our Required Amount We Net (Dollars in thousands) Amount Payment Would Collect Total Mutual rating trigger if ratings: fall to Baa1/BBB+ (1) $ - $ - $ - $ - fall below Baa1/BBB+ (1) 6,693,197 (173,269 ) 48,387 (124,882 ) Total $ 6,693,197$ (173,269 )$ 48,387$ (124,882 ) (1) Stated senior unsecured credit ratings are for Moody's Investors Service and Standard & Poor's Corporation, respectively. Under these rating triggers, if the credit rating for either counterparty falls to the level specified in the agreement, the other counterparty may, but is not obligated to, terminate the agreement. If either counterparty terminates the agreement, a net payment may be due from one counterparty to the other based on the fair value, excluding credit risk, of the underlying derivative instrument. In addition to the rating triggers listed above, at May 31, 2014, we had a total notional amount of $450 million of derivative instruments with one counterparty that would require the pledging of collateral totaling $10 million (the fair value of such derivative instruments excluding credit risk) if our senior unsecured ratings from Moody's Investors Service were to fall below Baa2 or if our ratings from Standard & Poor's Corporation were to fall below BBB. The aggregate fair value, net of the credit risk valuation adjustment, of all interest rate swaps with rating triggers that were in a net liability position at May 31, 2014 including credit risk was $181 million. 65 -------------------------------------------------------------------------------- At May 31, 2014, the credit rating for two counterparties was below the rating trigger level in the interest swap contracts with these counterparties. As a result, we have the option to terminate all interest rate swaps with these counterparties. At May 31, 2014, the interest rate swap contracts with these counterparties have a total notional amount of $776 million. If we were to decide to terminate the interest rate swaps with these counterparties, the contracts would be settled based on the fair value at the date of termination. At May 31, 2014, we estimate that we would have to make a payment of approximately $19 million to settle the interest rate swaps with these counterparties. Because we use our interest rate swaps as part of our matched funding strategy we generally do not terminate such agreements early. At this time, we have not provided notice to either counterparty that we intend to terminate the interest rate swaps. We will continue to evaluate the overall credit worthiness of these counterparties and to monitor our overall matched funding position.



For additional information about the risks related to our business, see "Item 1A. Risk Factors."

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OPERATIONAL RISK -------------------------------------------------------------------------------- Operational risk is inherent in all business activities and the management of such risk is important to the achievement of our objectives. Operational risk represents the risk of loss resulting from conducting our operations, including 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 the internal control system, 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 cyber-attacks. 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. Our Corporate Compliance group monitors compliance with established procedures 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, such as for our "Code of Conduct" and those regarding information protection, suspicious activity reporting and operational risk. Our Internal Audit group examines the design and operating effectiveness of our internal controls and operational and financial reporting systems 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 production information systems at an off-site facility coupled with an extensive business continuity and recovery process to leverage those remote systems. Each of our departments are required to develop, exercise, test and maintain business resumption plans for the resumption and recovery of business functions and processing resources to minimize disruption for our members and other parties with whom we do business. We conduct disaster recovery exercises twice a year that include both the information technology group and business areas. The business resumption plans are based on a risk assessment that considers potential losses due to unavailability of service versus the cost of resumption. These plans anticipate a variety of probable scenarios ranging from local to regional crises. -------------------------------------------------------------------------------- NON-GAAP FINANCIAL MEASURES -------------------------------------------------------------------------------- We make certain adjustments to financial measures in assessing our financial performance that are not in accordance with GAAP. These non-GAAP adjustments fall primarily into two categories: (i) adjustments related to the calculation of TIER and (ii) adjustments related to the calculation of the leverage and debt-to-equity ratios. These adjustments reflect management's perspective on our operations, and in several cases, adjustments used to measure covenant compliance under our revolving credit agreements. Therefore, we believe these are useful financial measures for investors. We refer to our non-GAAP financial measures as "adjusted" throughout this document. 66 --------------------------------------------------------------------------------



Adjustments to Net Income and the Calculation of TIER

Our primary performance measure is TIER. 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. TIER is a measure of our ability to cover interest expense requirements on our debt. We adjust the TIER calculation to add the derivative cash settlements to the interest expense and to remove the derivative forward value and foreign currency adjustments from total net income. Adding the cash settlements back to the interest expense also has a corresponding effect on our adjusted net interest income. We make these adjustments to our TIER calculation for covenant compliance on our revolving credit agreements. We use derivatives to manage interest rate risk on our funding of the loan portfolio. The derivative cash settlements represent 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. 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 represents our total cost of funding for the period. For computing compliance with our revolving credit agreement covenants, we are required to adjust our interest expense to include the derivative cash settlements. TIER calculated by adding the derivative cash settlements 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 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 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 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 at May 31, 2014 and 2013, there were no foreign currency derivative instruments outstanding. For making operating decisions, we subtract the derivative forward value and foreign currency adjustments from our net income when calculating TIER and for other net income presentation purposes. The covenants in our revolving credit agreements also exclude the effects of derivative forward value and foreign currency adjustments. In addition, since the derivative forward value 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 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 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. Our total equity includes the non-cash impact of changes in derivative forward values and foreign currency adjustments that are recorded in net income. In addition, the accumulated other comprehensive income component of total equity includes 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 requiring that all derivatives be recorded on the balance sheet at fair value. In evaluating our leverage and debt-to-equity ratios 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 values 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. Table 35 provides a reconciliation between interest expense and net interest income, and these financial measures adjusted to include the impact of derivatives. Additionally, it provides a reconciliation of net income and this financial measure adjusted to exclude the impact of derivatives and foreign currency adjustments for the years ended May 31, 2014, 2013, 2012, 2011 and 2010. 67 --------------------------------------------------------------------------------



Table 35: Adjusted Financial Measures - Income Statement (Dollars in thousands)

2014 2013 2012 2011 2010 Interest expense $ (654,655 )$ (692,025 )$ (761,778 )$ (841,080 )$ (912,111 ) Derivative cash settlements (73,962 ) (56,461 ) (12,846 ) (6,848 ) (23,304 ) Adjusted interest expense $ (728,617 )$ (748,486 )$ (774,624 )$ (847,928 )$ (935,415 ) Net interest income $ 302,885$ 263,728$ 199,183$ 167,831$ 131,524 Derivative cash settlements (73,962 ) (56,461 ) (12,846 ) (6,848 ) (23,304 ) Adjusted net interest income $ 228,923$ 207,267$ 186,337$ 160,983$ 108,220 Net income (loss) $ 192,926$ 358,087$ (148,797 )$ 151,215$ 110,547 Derivative forward value (39,541 ) (141,304 ) 223,774 23,388 (2,696 ) Adjusted net income $ 153,385$ 216,783$ 74,977$ 174,603$ 107,851



Table 36 presents our TIER and adjusted TIER for the years ended May 31, 2014, 2013, 2012, 2011 and 2010.

Table 36: TIER and Adjusted TIER

2014 2013 2012 2011 2010 TIER (1) (2) 1.29 1.52 - 1.18 1.12 Adjusted TIER (3) 1.21 1.29 1.10 1.21 1.12 (1) For the year ended May 31, 2012, we reported a net loss of $149 million; therefore, the TIER for this period results in a value below 1.00. (2) TIER using GAAP financial measures is calculated by dividing interest expense plus net income prior to cumulative effect of change in accounting principle by interest expense. (3) Adjusted TIER is calculated by dividing adjusted interest expense plus adjusted net income by adjusted interest expense.



Adjustments to the Calculation of Leverage and Debt-to-Equity Ratios

Our adjusted leverage and debt-to-equity ratios include adjustments to: subtract debt used to fund loans that are guaranteed by RUS from total liabilities; subtract from total liabilities, and add to total equity, debt with



equity characteristics issued to our members and in the capital markets;

and exclude the non-cash impact of derivative financial instruments and



foreign currency adjustments from total liabilities and total equity.

For computing compliance with our revolving credit agreement covenants, we are required to make these adjustments to our leverage ratio calculation. The revolving credit agreements prohibit us from incurring senior debt in an amount in excess of 10 times the sum of equity, members' subordinated certificates and subordinated deferrable debt, as defined by the agreements. In addition to the adjustments we make to calculate the adjusted leverage ratio, guarantees to our member systems that have an investment-grade rating from Moody's Investors Service and Standard & Poor's Corporation are excluded from the calculation of the leverage ratio under the terms of the revolving credit agreements. We are an eligible lender under the 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 leverage and debt-to-equity ratios. For computing compliance with our revolving credit agreement covenants, we are required to adjust our leverage ratio by subtracting liabilities used to fund RUS-guaranteed loans from total liabilities. The leverage and debt-to-equity ratios adjusted to subtract debt used to fund RUS-guaranteed loans from total liabilities reflect management's perspective on our operations and, therefore, we believe that these are useful financial measures for investors. 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 68 -------------------------------------------------------------------------------- from making interest payments to members on the subordinated certificates. For computing compliance with our revolving credit agreement covenants, we are required to adjust our leverage ratio by subtracting members' subordinated certificates from total liabilities and adding members' subordinated certificates to total equity. The leverage and debt-to-equity ratios adjusted to treat members' subordinated certificates as equity rather than debt reflect management's perspective on our operations and, therefore, we believe these are useful financial measures for investors. 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. For computing compliance with our revolving credit agreement covenants, we are required to adjust our leverage ratio by subtracting subordinated deferrable debt from total liabilities and adding it to total equity. The leverage and debt-to-equity ratios adjusted to treat subordinated deferrable debt as equity rather than debt reflect management's perspective on our operations and, therefore, we believe these are useful financial measures for investors. We record derivative instruments at fair value on our consolidated balance sheets. For computing compliance with our revolving credit agreement covenants, we are required to adjust our leverage ratio by excluding the non-cash impact of our derivative accounting from liabilities and equity. The leverage and debt-to-equity ratios adjusted to exclude the impact of our derivative accounting from liabilities and equity reflect management's perspective on our operations and, therefore, we believe these are useful financial measures for investors. For computing compliance with our revolving credit agreement covenants, we are also required to adjust our leverage ratio by excluding the impact of foreign currency valuation adjustments from liabilities and equity. The leverage and debt-to-equity ratios adjusted to exclude the effect of foreign currency translation reflect management's perspective on our operations and, therefore, we believe these are useful financial measures for investors.



Table 37 reconciles the liabilities and equity on the consolidated balance sheets to the amounts used to calculate the adjusted leverage and debt-to-equity ratios as of the years ended May 31, 2014, 2013, 2012, 2011 and 2010.

Table 37: Adjusted Financial Measures - Balance Sheet (Dollars in thousands)

2014 2013 2012 2011 2010 Liabilities $ 21,262,369$ 21,260,390$ 19,460,580$ 19,874,313$ 19,556,448 Less: Derivative liabilities (388,208 ) (475,278 ) (654,125 ) (477,433 ) (482,825 ) Debt used to fund loans guaranteed by RUS (201,863 ) (210,815 ) (219,084 ) (226,695 ) (237,356 ) Subordinated deferrable debt (400,000 ) (400,000 ) (186,440 ) (186,440 ) (311,440 ) Subordinated certificates (1,612,228 ) (1,766,402 ) (1,739,454 ) (1,813,652 ) (1,810,715 ) Adjusted liabilities $ 18,660,070$ 18,407,895$ 16,661,477$ 17,170,093$ 16,714,112 Total equity $ 970,374$ 811,261$ 490,755$ 687,309$ 586,767 Less: Prior year cumulative derivative forward value and foreign currency adjustments 224,722 366,026 142,252 118,864 121,560 Year-to-date derivative forward value (income) loss (39,541 ) (141,304 ) 223,774 23,388 (2,696 ) Accumulated other comprehensive income (1) (6,320 ) (7,287 ) (8,270 ) (9,273 ) (7,489 ) Plus: Subordinated certificates (2) 1,612,228 1,766,402 1,739,454 1,813,652 1,810,715 Subordinated deferrable debt 400,000 400,000 186,440 186,440 311,440 Adjusted equity $ 3,161,463$ 3,195,098$ 2,774,405$ 2,820,380$ 2,820,297 Guarantees (3) $ 1,064,822$ 1,112,771$ 1,249,330$ 1,104,988$ 1,171,109 (1) Represents the accumulated other comprehensive income related to derivatives. Excludes $0.4 million of accumulated other comprehensive loss at May 31, 2014 and $1 million of accumulated other comprehensive income at May 31, 2013 and 2012, related to the unrecognized gains on our investments. At May 31, 2014, it also excludes $2 million of accumulated other comprehensive loss related to foreclosed assets. (2) Includes $91 million, $37 million, $17 million and $12 million of loan and guarantee subordinated certificates, and member capital securities that were reclassified as short-term debt at May 31, 2014, 2013, 2012 and 2011, respectively. (3) Guarantees are used in the calculation of leverage and adjusted leverage ratios below. Table 38 provides the calculated ratio for leverage and debt-to-equity, as well as the adjusted ratio calculations, as of the years ended May 31, 2014, 2013, 2012, 2011 and 2010. 69 -------------------------------------------------------------------------------- Table 38: Leverage and Debt-to-Equity and Adjusted Leverage and Adjusted Debt-to-Equity Ratios 2014 2013 2012 2011 2010 Leverage ratio (1) 23.01 27.58 42.20 30.52 35.33 Adjusted leverage ratio (2) 6.24 6.11 6.46 6.48 6.34 Debt-to-equity ratio (3) 21.91 26.21 39.65 28.92 33.33



Adjusted debt-to-equity ratio (4) 5.90 5.76 6.01 6.09 5.93

(1) The leverage ratio using GAAP financial measures is calculated by dividing liabilities plus guarantees outstanding by total equity. (2) The debt-to-equity ratio using GAAP financial measures is calculated by dividing liabilities by total equity. (3) The adjusted leverage ratio is calculated by dividing adjusted liabilities plus guarantees outstanding by adjusted equity. (4) The adjusted debt-to-equity ratio is calculated by dividing adjusted liabilities by adjusted equity.



Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

70



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