Risk Factors - NRUC

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$NRUC Risk Factor changes from 00/08/02/23/2023 to 00/08/01/24/2024

Item 1A. Risk Factors” in this Report. Forward-looking statements speak only as of the date they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect the impact of events, circumstances or changes in expectations that arise after the date any forward-looking statement is made. PART IItem 1. BusinessOVERVIEWOur financial statements include the consolidated accounts of National Rural Utilities Cooperative Finance Corporation (“CFC”) and National Cooperative Services Corporation (“NCSC”). BusinessOVERVIEWOur financial statements include the consolidated accounts of National Rural Utilities Cooperative Finance Corporation (“CFC”), National Cooperative Services Corporation (“NCSC”) and Rural Telephone Finance Cooperative (“RTFC”). Our principal operations are currently organized for management reporting purposes into two business segments, which are based on the accounts of each of the legal entities included in our consolidated financial statements and are discussed below. Our principal operations are currently organized for management reporting purposes into three business segments, which are based on the accounts of each of the legal entities included in our consolidated financial statements and discussed below. On December 1, 2023, Rural Telephone Finance Cooperative (“RTFC”), which was consolidated into our financial statements in prior periods, completed the sale of its business to NCSC (hereon referred to as the “RTFC sale transaction”) and was subsequently dissolved.The business affairs of CFC and NCSC are governed by separate boards of directors for each entity. The business affairs of CFC, NCSC and RTFC are governed by separate boards of directors for each entity. We provide information on CFC’s corporate governance in “Item 10. Directors, Executive Officers and Corporate Governance.” We provide information on the members of each of these entities below in “Item 1. Business—Members” and describe the financing products offered to members by each entity under “Item 1. Business—Loan and Guarantee Programs.” Information on the financial performance of our business segments is disclosed in “Note 16—Business Segments.” Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its consolidated entities. All references to members within this document include members, associates and affiliates of CFC and its consolidated entities, except where indicated otherwise.CFCCFC is a member-owned, nonprofit finance cooperative association incorporated under the laws of the District of Columbia in April 1969. CFCCFC is a member-owned, nonprofit finance cooperative association incorporated under the laws of the District of Columbia in April 1969. CFC’s principal purpose is to provide its members and associates with financing to supplement the loan 1Table of Contentsprograms of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC’s principal purpose is to provide its members and associates with financing to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC extends loans to its rural electric members for construction, acquisitions, system and facility repairs and maintenance, enhancements and ongoing operations to support the goal of electric distribution and generation and transmission (“power supply”) systems providing reliable, affordable power to the customers they serve. CFC extends 1Table of Contentsloans to its rural electric members for construction, acquisitions, system and facility repairs and maintenance, enhancements and ongoing operations to support the goal of electric distribution and generation and transmission (“power supply”) systems of providing reliable, affordable power to the customers they serve. CFC also provides its members and associates with credit enhancements in the form of letters of credit and guarantees of debt obligations. As a cooperative, CFC is owned by and exclusively serves its membership, which consists of not-for-profit entities or subsidiaries or affiliates of not-for-profit entities. CFC is exempt from federal income taxes under Section 501(c)(4) of the Internal Revenue Code. As a member-owned cooperative, CFC’s objective is not to maximize profit, but rather to offer members cost-based financial products and services. As described below under “Allocation and Retirement of Patronage Capital,” CFC annually allocates its net earnings, which consist of net income excluding the effect of certain noncash accounting entries, to (i) a cooperative educational fund; (ii) a general reserve, if necessary; (iii) members based on each member’s patronage of CFC’s loan programs during the year; and (iv) a members’ capital reserve. CFC funds its activities primarily through a combination of public and private issuances of debt securities, member investments and retained equity. As a Section 501(c)(4) tax-exempt, member-owned cooperative, CFC cannot issue equity securities.NCSCNCSC is a taxable cooperative incorporated in 1981 in the District of Columbia as a member-owned cooperative association. The principal purpose of NCSC is to provide financing to its members and associates, which consist of two classes: NCSC electric and NCSC telecommunications. NCSC electric members and associates consist of members of CFC, entities eligible to be members of CFC, government or quasi-government entities that own electric utility systems that meet the Rural Electrification Act definition of “rural,” and the for-profit and not-for-profit entities that are owned, operated or controlled by, or provide significant benefit to, Class A, B and C members of CFC. NCSC telecommunications members and associates consist of rural telecommunications members and their affiliates. See “Members” below for a description of our member classes. CFC, which is the primary source of funding for NCSC, manages NCSC’s business operations under a management agreement that is automatically renewable on an annual basis unless terminated by either party. NCSC pays CFC a fee and, in exchange, CFC reimburses NCSC for loan losses under a guarantee agreement. As a taxable cooperative, NCSC pays income tax based on its reported taxable income and deductions. NCSC is headquartered with CFC in Dulles, Virginia. OUR BUSINESSCFC was established by and for the rural electric cooperative network to provide affordable financing alternatives to electric cooperatives.OUR BUSINESSCFC was established by and for the rural electric cooperative network to provide affordable financing alternatives to electric cooperatives. While our business strategy and policies are set by the CFC Board of Directors and may be amended or revised from time to time, the fundamental goal of our overall business model is to work with our members to ensure that CFC is able to meet their financing needs, as well as provide industry expertise and strategic services to aid them in delivering affordable and reliable essential services to their communities.Focus on Electric LendingAs a member-owned, nonprofit finance cooperative, our primary objective is to provide our members with the credit products they need to fund their operations.2Table of ContentsFocus on Electric LendingAs a member-owned, nonprofit finance cooperative, our primary objective is to provide our members with the credit products they need to fund their operations. As such, we primarily focus on lending to electric systems and securing access to capital through diverse funding sources at rates that allow us to offer cost-based credit products to our members. Rural electric cooperatives, most of which are not-for-profit entities, were established to provide electricity in rural areas historically deemed too costly to be served by investor-owned utilities. As such, our electric cooperative members experience limited competition because they generally operate in exclusive territories, the majority of which are not rate regulated. Loans to electric utility organizations accounted for approximately 98% and 99% of our total loans outstanding as of May 31, 2024 and 2023, respectively. Substantially all of our electric cooperative borrowers continued to demonstrate stable operating performance and strong financial ratios as of May 31, 2024.Maintain Diversified Funding Sources We strive to maintain diversified funding sources beyond capital market offerings of debt securities. We offer various short- and long-term unsecured investment products to our members and their affiliates, including commercial paper, select notes, 2Table of Contentsdaily liquidity fund notes, medium-term notes and subordinated certificates. We offer various short- and long-term unsecured investment products to our members and affiliates, including commercial paper, select notes, daily liquidity fund notes, medium-term notes and subordinated certificates. We continue to issue debt securities, such as secured collateral trust bonds, unsecured medium-term notes and dealer commercial paper, in the capital markets. We also have access to funds through bank revolving line of credit arrangements, government-guaranteed programs such as funding from the Federal Financing Bank that is guaranteed by RUS through the Guaranteed Underwriter Program of the USDA (the “Guaranteed Underwriter Program”), as well as a note purchase agreement with the Federal Agricultural Mortgage Corporation (“Farmer Mac”). We provide additional information on our funding sources in “Item 7. MD&A—Liquidity Risk. MD&A—Credit Risk. ” MEMBERSOur consolidated membership, after taking into consideration entities that are members of both CFC and NCSC and eliminating overlapping members between CFC and NCSC, totaled 1,167 members and 512 associates as of May 31, 2024, compared with 1,426 members and 270 associates as of May 31, 2023.” MEMBERSOur consolidated membership, after taking into consideration entities that are members of both CFC and NCSC and eliminating overlapping members between CFC, NCSC and RTFC, totaled 1,426 members and 270 associates as of May 31, 2023, compared with 1,425 members and 248 associates as of May 31, 2022. The changes in the number of consolidated members and associates were primarily due to the withdrawal of RTFC members following the RTFC sale transaction and the transfer of certain RTFC entities to associate status.CFCCFC lends to its members and associates and also provides credit enhancements in the form of letters of credit and guarantees of debt obligations. CFCCFC lends to its members and associates and also provides credit enhancements in the form of letters of credit and guarantees of debt obligations. Membership in CFC is limited to cooperative or not-for-profit rural electric systems that are eligible to borrow from RUS under its Electric Loan Program and affiliates of those entities. CFC categorizes its members, all of which are not-for-profit entities or subsidiaries or affiliates of not-for-profit entities, into classes based on member type because the demands and needs of each member class differ. Affiliates represent holding companies, subsidiaries and other entities that are owned, controlled or operated by members. Members are not required to have outstanding loans from RUS as a condition of borrowing from CFC. CFC membership consists of members in 50 states and three U.S. territories. In addition to members, CFC has associates that are nonprofit groups or entities organized on a cooperative basis that are owned, controlled or operated by members and are engaged in or plan to engage in furnishing non-electric services primarily for the benefit of the ultimate consumers of CFC members. Associates are not eligible to vote on matters put to a vote of the membership. CFC’s members, by member class, and associates were as follows as of May 31, 2024. ____________________________(1) National Rural Electric Cooperative Association is our sole class D member. 3Table of Contents____________________________(1) National Rural Electric Cooperative Association is our sole class D member. NCSCMembership in NCSC consists of two classes: Class E (Electric) and Class T (Telecommunications). Class E membership includes organizations that are Class A, B and C members of CFC, or eligible for such membership, and are approved for membership by the NCSC Board of Directors.NCSCMembership in NCSC includes organizations that are Class A, B and C members of CFC, or eligible for such membership and are approved for membership by the NCSC Board of Directors. Class E associates may include members of CFC, entities eligible to be members of CFC and for-profit and not-for-profit entities owned, controlled or operated by, or provide significant benefit to, Class A, B and C members of CFC. In addition to members, NCSC has associates that may include members of CFC, entities eligible to be members of CFC and for-profit and not-for-profit entities owned, controlled or operated by, or provide significant benefit to, Class A, B and C members of CFC. Class T membership includes cooperative corporations, not-for-profit corporations, private corporations, public corporations, utility districts and other public bodies that are approved by the NCSC Board of Directors and are actively borrowing or are eligible to borrow from RUS’s traditional infrastructure loan program.RTFCMembership in RTFC is limited to cooperative corporations, not-for-profit corporations, private corporations, public corporations, utility districts and other public bodies that are approved by the RTFC Board of Directors and are actively borrowing or are eligible to borrow from RUS’s traditional infrastructure loan program. These companies must be engaged directly or indirectly in furnishing telephone services as the licensed incumbent carrier. Class T 3Table of Contentsassociates include organizations that provide non-telephone or non-telecommunications companies and holding companies, subsidiaries and other organizations that are owned, controlled or operated by Class T members. NCSC’s members and associates were as follows as of May 31, 2024.LOAN AND GUARANTEE PROGRAMSCFC lends to its members and associates and also provides credit enhancements in the form of letters of credit and guarantees of debt obligations. 4Table of ContentsLOAN AND GUARANTEE PROGRAMSCFC lends to its members and associates and also provides credit enhancements in the form of letters of credit and guarantees of debt obligations. NCSC also lends and provides credit enhancements to its members and associates. NCSC and RTFC also lend and provide credit enhancements to their members and associates. For information on the membership of CFC and NCSC, see “Item 1. For information on the membership of CFC, NCSC and RTFC, see “Item 1. Business—Members.”CFC and NCSC loan commitments generally contain provisions that restrict borrower advances or trigger an event of default if there is any material adverse change in the business or condition, financial or otherwise, of the borrower.”CFC, NCSC and RTFC loan commitments generally contain provisions that restrict borrower advances or trigger an event of default if there is any material adverse change in the business or condition, financial or otherwise, of the borrower. Below is additional information on the loan and guarantee programs offered by CFC and NCSC. CFC Loan ProgramsLong-Term LoansCFC’s long-term loans generally have the following characteristics:•terms of up to 35 years on a senior secured basis and terms of up to five years on an unsecured basis;•amortizing, bullet maturity or serial payment structures;•the property, plant and equipment financed by and securing the long-term loan has a useful life generally equal to or in excess of the loan maturity;•flexibility for the borrower to select a fixed interest rate for periods of one to 35 years or a variable interest rate; and•the ability for the borrower to select various tranches with either a fixed or variable interest rate for each tranche.Borrowers typically have the option of selecting a fixed or variable interest rate at the time of each advance on long-term loan facilities. When selecting a fixed rate, the borrower has the option to choose a fixed rate for a term of one year through the final maturity of the loan. When the selected fixed interest rate term expires, the borrower may select another fixed rate for a term of one year through the remaining loan maturity or the current variable rate. The fixed rate on a loan generally is determined on the day the loan is advanced or repriced based on the term selected.To be in compliance with the covenants in the loan agreement and eligible for loan advances, distribution systems generally must maintain an average modified debt service coverage ratio, as defined in the loan agreement, of 1. To be in compliance with the covenants in the loan agreement and eligible for loan advances, distribution systems generally must maintain an average modified debt service coverage ratio, as defined in the loan agreement, of 1. 35 or greater. CFC may make long-term loans to distribution systems, on a case-by-case basis, that do not meet this general criterion. Power supply systems generally are required (i) to maintain an average debt service coverage ratio, as defined in the loan agreement, of 1.00 or greater; (ii) to establish and collect rates and other revenue in an amount to yield margins for interest, as defined in an indenture, in each fiscal year sufficient to equal at least 1.00; or (iii) both. CFC may make long-term loans to power supply systems, on a case-by-case basis, that may include other requirements, such as maintenance of a minimum equity level.4Table of ContentsLine of Credit LoansLine of credit loans are designed primarily to assist borrowers with liquidity and cash management and are generally advanced at variable interest rates.Line of Credit LoansLine of credit loans are designed primarily to assist borrowers with liquidity and cash management and are generally advanced at variable interest rates. Line of credit loans are typically revolving facilities. Certain line of credit loans require the borrower to pay off the principal balance for at least five consecutive business days at least once during each 12-month period. Line of credit loans are generally unsecured and may be conditional or unconditional facilities. Line of credit loans can be made on an emergency basis when financing is needed quickly to address weather-related or other unexpected events and can also be made available as interim financing when a member either receives RUS approval to obtain a loan and is awaiting its initial advance of funds or submits a loan application that is pending approval from RUS (sometimes referred to as “bridge loans”). In these cases, when the borrower receives the RUS loan advance, the funds must be used to repay the bridge loans.Syndicated Line of Credit and Term LoansSyndicated line of credit and term loans are typically large financings offered by a group of lenders that work together to provide funds for a single borrower. Syndicated loans are generally unsecured, variable-rate loans that can be provided on a revolving or term basis for tenors that range from several months to five years. Syndicated loans are generally unsecured, floating-rate loans that can be provided on a 5Table of Contentsrevolving or term basis for tenors that range from several months to five years. Syndicated financings are arranged for borrowers on a case-by-case basis. CFC may act as lead lender, arranger and/or administrative agent for the syndicated loans. CFC will syndicate these loans on a best effort basis. CFC will syndicate these line of credit facilities on a best effort basis. NCSC Electric Loan ProgramsNCSC makes loans to electric cooperatives and their subsidiaries that provide non-electric services in the energy and telecommunication industries as well as to entities that provide substantial benefit to CFC members, including eligible solar energy providers and investor-owned utilities.NCSC Loan ProgramsNCSC makes loans to electric cooperatives and their subsidiaries that provide non-electric services in the energy and telecommunication industries as well as to entities that provide substantial benefit to CFC members, including eligible solar energy providers and investor-owned utilities. Loans to NCSC associates may require a guarantee of repayment to NCSC from the CFC member cooperative with which it is affiliated. Long-Term LoansNCSC’s electric long-term loans have characteristics similar to CFC’s long-term loans as described herein, with the exception that senior secured long-term loans have terms up to 30 years.Line of Credit LoansNCSC also provides revolving line of credit loans to assist electric borrowers with liquidity and cash management on terms similar to those provided by CFC as described herein.Line of Credit LoansRTFC also provides revolving line of credit loans to assist borrowers with liquidity and cash management on terms similar to those provided by CFC as described herein. LeasesNCSC offers both its electric and telecommunications members and associates equipment financing for leased assets, such as vehicles, with flexible payment terms and the option to purchase the equipment for a Terminal Rental Adjustment Clause (“TRAC”) value at the end of the lease term. CFC unconditionally guarantees full indemnification for any losses of NCSC in financing leased assets to its members pursuant to a guarantee agreement with NCSC.Private PlacementsNCSC’s wholly owned subsidiary, Cooperative Securities LLC (“Cooperative Securities”), is a broker-dealer registered with the U.S. Securities Exchange Commission (“SEC ”). Securities and Exchange Commission (“SEC”). Cooperative Securities is a member of the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation. Cooperative Securities offers institutional debt placement services, which may include advising, arranging and structuring private debt financing transactions, to rural electric cooperatives, including NCSC’s electric members and associates.5Table of ContentsNCSC Telecommunications (“Telecom”) Loan ProgramsNCSC’s telecom portfolio consists primarily of long-term loans to rural local exchange carriers or holding companies of rural local exchange carriers for debt refinancing, construction or upgrades of infrastructure, acquisitions and other corporate purposes. Most of these rural telecommunications companies have diversified their operations and also provide broadband services. Long-Term LoansNCSC’s telecom long-term loans have characteristics similar to CFC’s long-term loans as described herein, with the exception that senior secured long-term loans have terms up to 10 years.Line of Credit LoansNCSC also provides revolving line of credit loans to assist telecom borrowers with liquidity and cash management on terms similar to those provided by CFC as described herein.Line of Credit LoansRTFC also provides revolving line of credit loans to assist borrowers with liquidity and cash management on terms similar to those provided by CFC as described herein. Loan Features and OptionsInterest Rates As a member-owned cooperative finance organization, CFC is a cost-based lender. Loan Features and OptionsInterest Rates As a member-owned cooperative finance organization, CFC is a cost-based lender. As such, our interest rates are set based on a yield that we believe will generate a reasonable level of earnings and cover our cost of funding, general and administrative expenses and provision for credit losses. As such, our interest rates are set based on a yield that we believe will generate a reasonable level of earnings to cover our cost of funding, general and administrative expenses and provision for credit losses. Long-term fixed rates are set daily for new loan advances and loans that reprice. The fixed rate on each loan is generally determined on the day the loan is advanced or repriced based on the term selected. The variable rate is established monthly. Various standardized discounts may reduce the stated interest rates for borrowers meeting certain criteria such as performance, collateral and equity requirements. Various standardized discounts may reduce the stated interest rates for borrowers meeting certain criteria related to performance, volume, collateral and equity requirements. Conversion OptionGenerally, a borrower may convert a long-term loan from a variable interest rate to a fixed interest rate at any time without a fee and convert a long-term loan from a fixed rate to another fixed rate or to a variable rate at any time generally subject to a make-whole premium. Conversion OptionGenerally, a borrower may convert a long-term loan from a variable interest rate to a fixed interest rate at any time without a fee and convert a long-term loan from a fixed rate to another fixed rate or to a variable rate at any time generally subject to a make-whole premium. Prepayment OptionGenerally, borrowers may prepay long-term fixed-rate loans at any time, subject to payment of an administrative fee and a make-whole premium, and prepay long-term variable-rate loans at any time, subject to payment of an administrative fee. Line of credit loans may be prepaid at any time without a fee.Loan SecurityLong-term loans made by CFC typically are senior secured on parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower, subject to standard liens typical in utility mortgages such as those related to taxes, worker’s compensation awards, mechanics’ and similar liens, rights-of-way and governmental rights. We are able to obtain liens on parity with liens for the benefit of RUS because RUS’ form of mortgage expressly provides for other lenders such as CFC to have a parity lien position if the borrower satisfies certain conditions or obtains a written lien accommodation from RUS. When we make loans to borrowers that have existing loans from RUS, we generally require those borrowers to either obtain such a lien accommodation or satisfy the conditions necessary for our loan to be secured on parity under the mortgage with the loan from RUS. As noted above, CFC line of credit loans generally are unsecured.We provide additional information on our loan programs in the sections “Item 7. MD&A—Consolidated Balance Sheet Analysis,” and “Item 7. MD&A—Credit Risk.”6Table of ContentsGuarantee ProgramsWhen we guarantee our members’ debt obligations, we use the same credit policies and monitoring procedures for guarantees as for loans.”Guarantee ProgramsWhen we guarantee our members’ debt obligations, we use the same credit policies and monitoring procedures for guarantees as for loans. If a member system defaults 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. 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.Letters of CreditIn exchange for a fee, we issue irrevocable letters of credit to support members’ obligations to energy marketers, other third parties and to the USDA Rural Business-Cooperative Service. 7Table of ContentsLetters of CreditIn exchange for a fee, we issue irrevocable letters of credit to support members’ obligations to energy marketers, other third parties and to the USDA Rural Business-Cooperative Service. Each letter of credit is supported by a reimbursement agreement with the member on whose behalf the letter of credit was issued. In the event a beneficiary draws on a letter of credit, the agreement generally requires the member to reimburse us within one year from the date of the draw, with interest accruing from the draw date at our line of credit variable interest rate.Guarantees of Long-Term Tax-Exempt BondsWe guarantee debt issued for our members’ construction or acquisition of pollution control, solid waste disposal, industrial development and electric distribution facilities through government-issued, tax-exempt bonds.Guarantees of Long-Term Tax-Exempt BondsWe guarantee debt issued for our members’ construction or acquisition of pollution control, solid waste disposal, industrial development and electric distribution facilities. Governmental authorities issue such debt on a nonrecourse basis and the interest thereon is exempt from federal taxation. The proceeds of the offering are made available to the member system, which in turn is obligated to pay the governmental authority amounts sufficient to service the debt.If a system defaults for failure to make the debt payments and any available debt service reserve funds have been exhausted, we are obligated to pay scheduled debt service under our guarantee. If a system defaults for failure to make the debt payments and any available debt service reserve funds have been exhausted, we are obligated to pay scheduled debt service under our guarantee. Such payment will prevent the occurrence of a payment default that would otherwise permit acceleration of the bond issue. The system is required to repay any amount that we advance pursuant to our guarantee plus interest on that advance. This repayment obligation, together with the interest thereon, is typically senior secured on parity with other lenders (including, in most cases, RUS), by a lien on substantially all of the system’s assets. If the security instrument is a common mortgage with RUS, then in general, we may not exercise remedies for up to two years following default. However, if the debt is accelerated under the common mortgage because of a determination that the related interest is not tax-exempt, the system’s obligation to reimburse us for any guarantee payments will be treated as a long-term loan. The system is required to pay us initial and/or ongoing guarantee fees in connection with these transactions.Certain guaranteed long-term debt bears interest at variable rates that are adjusted at intervals of one to 270 days, including weekly, every five weeks or semiannually to a level favorable to their resale or auction at par. If funding sources are available, the member that issued the debt may choose a fixed interest rate on the debt. When the variable rate is reset, holders of variable-rate debt have the right to tender the debt for purchase at par. In some transactions, we have committed to purchase this debt as liquidity provider if it cannot otherwise be remarketed. If we hold the securities, the member cooperative pays us the interest earned on the bonds or interest calculated based on our short-term variable interest rate, whichever is greater. The system is required to pay us stand-by liquidity fees in connection with these transactions.Other GuaranteesWe may provide other guarantees as requested by our members. Other GuaranteesWe may provide other guarantees as requested by our members. Other guarantees are generally unsecured with guarantee fees payable to us.We provide additional information on our guarantee programs and outstanding guarantee amounts as of May 31, 2024 and 2023 in “Note 13—Guarantees.” 7Table of ContentsINVESTMENT POLICYWe invest funds in accordance with policies adopted by our board of directors.” INVESTMENT POLICYWe invest funds in accordance with policies adopted by our board of directors. Pursuant to our current investment policy, an Investment Management Committee was established to oversee and administer our investments with the objective of seeking returns consistent with the preservation of principal and to provide a supplementary source of liquidity. The Investment Management Committee may direct funds to be invested in direct obligations of, or obligations guaranteed by, the United States (“U.S.”) or agencies thereof and investments in relatively short-term U.S. dollar-denominated fixed-income securities such as government-sponsored enterprises, certain financial institutions in the form of overnight investment products and Eurodollar deposits, bankers’ acceptances, certificates of deposit, working capital acceptances or other deposits. Other permitted investments include highly rated obligations, such as commercial paper, certain obligations of foreign governments, municipal securities, asset-backed securities, mortgage-backed securities and certain corporate bonds. In addition, we may invest in overnight or term repurchase agreements. Investments are denominated in U.S. dollars exclusively. All of these investments are subject to requirements and limitations set forth in our board investment policy.INDUSTRYOverviewOur rural electric cooperative members operate primarily in the energy sector, which is one of 16 critical infrastructure sectors identified by the U.INDUSTRYOverviewOur rural electric cooperative members operate in the energy sector, which is one of 16 critical infrastructure sectors identified by the U. S. government because the services provided by each sector, all of which have an impact on other sectors, are deemed essential in supporting and maintaining the overall functioning of the U. government because the services provided by each sector, all of which have an impact on other sectors, are deemed as essential in supporting and maintaining the overall functioning of the U. S. economy. Rural electric cooperatives are an integral part of the U.S. electric utility industry, a sub-sector of the energy sector. According to a report published in April 2024 by the National Rural Electric Cooperative Association (“NRECA”), electric cooperatives serve as power providers for approximately 42 million people, including over 22 million businesses, homes, schools and farms across 48 states. Electric cooperatives provide power to approximately 56% of the nation’s land mass. Based on the latest annual data reported by the U.S. Energy Information Administration, a statistical and analytical agency within the U.S. Department of Energy, the electric utility industry had revenue of approximately $485 billion in 2022. CFC was established by electric utility cooperatives to serve as a supplemental financing source to RUS loan programs and to mitigate uncertainty related to government funding. CFC aggregates the combined strength of its rural electric member cooperatives to access the public capital markets and other funding sources. CFC works cooperatively with RUS; however, CFC is not a federal agency or a government-sponsored enterprise. CFC meets the financial needs of its rural electric members by:•providing financing to RUS-eligible rural electric utility systems for infrastructure, including for those facilities that are not eligible for financing from RUS;•providing bridge loans required by borrowers in anticipation of receiving RUS funding;•providing financial products not otherwise available from RUS, including lines of credit, letters of credit, guarantees on tax-exempt financing, weather-related emergency lines of credit, unsecured loans and investment products such as commercial paper, select notes, medium-term notes and member capital securities; and•meeting the financing needs of those rural electric systems that repay or prepay their RUS loans and replace the government loans with private capital.Regulatory Oversight of Electric CooperativesThere are 11 states in which some or all electric cooperatives are subject to state regulatory oversight of their rates and tariffs by state utility commissions and do not have a right to opt out of regulation. Those states are Arizona, Arkansas, Hawaii, Kentucky, Louisiana, Maine, Maryland, New Mexico, Vermont, Virginia and West Virginia. Regulatory jurisdiction by state commissions generally includes rate and tariff regulation, the issuance of securities and the enforcement of service territory as provided for by state law.8Table of ContentsThe Federal Energy Regulatory Commission (“FERC”) has regulatory authority over three aspects of electric power, as provided for under Parts II and III of the Federal Power Act (“FPA”):•the transmission of electric energy in interstate commerce; •the sale of electric energy at wholesale in interstate commerce; and•the approval and enforcement of reliability standards affecting all users, owners and operators of the bulk power system.The Federal Energy Regulatory Commission (“FERC”) has regulatory authority over three aspects of electric power, as provided for under Parts II and III of the Federal Power Act (“FPA”):•the transmission of electric energy in interstate commerce; •the sale of electric energy at wholesale in interstate commerce; and•the approval and enforcement of reliability standards affecting all users, owners and operators of the bulk power system. In addition, FERC regulates the issuance of securities by public utilities under the FPA in the event the applicable state commission does not.Our electric distribution and power supply members are subject to regulation by various federal, regional, state and local authorities with respect to the environmental effects of their operations. At the federal level, the U.S. Environmental Protection Agency (“EPA”) from time to time proposes rulemakings that could force the electric utility industry to incur capital costs to comply with potential new regulations and possibly retire coal-fired generating capacity. Since there are only 11 states in which some or all electric cooperatives are subject to state regulatory oversight of their rates and tariffs, in most cases any associated costs of compliance can be passed on to cooperative consumers without additional regulatory approval. On April 25, 2024, the EPA announced the final carbon pollution standards for coal and gas-fired power plants. The final rules set carbon dioxide limits for new gas-fired combustion turbines and carbon dioxide emission guidelines for existing coal, oil and gas-fired steam generating units. The proposals would set limits for new gas-fired combustion turbines, existing coal, oil and gas-fired steam generating units and certain existing gas-fired combustion turbines. On June 28, 2024, the U.S. Supreme Court issued a ruling in Loper Bright Enterprises v. Raimondo that ended the use of the Chevron doctrine when courts analyze federal regulation. The Chevron doctrine required courts to defer to the reasonable interpretation of agencies when deciding if a regulation reflected the intent of Congress. The end of Chevron is likely to make the EPA rule on carbon pollution standards, and other agency rules, more susceptible to legal challenges. Certain states and electric and other industry groups are challenging the standards in federal litigation.Facilitation of Rural Broadband Expansion by Electric CooperativesMany electric cooperatives are making investments in fiber to support core electric plant communications. Facilitation of Rural Broadband Expansion by Electric CooperativesMany electric cooperatives are making investments in fiber to support core electric plant communications. Some of these electric cooperatives are leveraging these fiber assets to offer broadband services, either directly or through partnering with local telecommunication companies and others. Over 30 electric cooperatives were awarded approximately $250 million in federal funding through the Connect America Fund Phase II auction (“CAF II”) process by the Federal Communications Commission (“FCC”) that was held in 2018. Over 30 electric cooperatives were awarded approximately $250 million in federal funding through the Connect America Fund Phase II auction (“CAF II”) process by the FCC that was held in 2018. The awarded funds are being distributed over a 10-year period. More than 190 electric cooperatives, many of which are already offering or building out projects, were awarded approximately $1.6 billion though the FCC’s Rural Development Opportunity Fund (“RDOF”) in 2021. Those funds also will be distributed over a 10-year period. As federal and state governments increase funding opportunities for electric cooperatives in order to offer broadband services, we will continue to increase our credit support, which may include loans and/or letters of credit, to borrowers who participate in CAF II, RDOF and other programs designed to increase broadband services in rural areas. As federal and state governments increase funding opportunities for electric cooperatives in order to offer broadband services, we will continue to increase our credit support, which may include loans and/or letters of credit, to borrowers who participate in CAF II, 9Table of ContentsRDOF and other programs designed to increase broadband services in rural areas. Our aggregate loans outstanding to CFC electric distribution cooperative members relating to broadband projects, which we started tracking in October 2017, increased to approximately $3,103 million as of May 31, 2024, from approximately $2,355 million as of May 31, 2023.LENDING COMPETITIONOverviewRUS is the largest lender to electric cooperatives, providing them with long-term secured loans. CFC provides financial products and services to its members, primarily in the form of long-term secured and short-term unsecured loans, to supplement RUS financing, to provide loans to members that have elected not to borrow from RUS and to bridge long-term financing provided by RUS. We also offer other financing options, such as credit support in the form of letters of credit and guarantees, loan syndications and loan participations. Our credit products are tailored to meet the specific needs of each borrower, and we often offer specific transaction structures that our competitors do not provide. CFC also offers certain risk-mitigation products and interest rate discounts on secured, long-term loans for its members that meet certain criteria, such as performance, collateral and equity requirements. CFC also offers certain risk-mitigation products and interest rate discounts on secured, long-term loans for its members that meet performance, volume, collateral and equity requirements. 9Table of ContentsPrimary Lending CompetitorsCFC’s primary competitor is CoBank, ACB, a federally chartered instrumentality of the U. Primary Lending CompetitorsCFC’s primary competitor is CoBank, ACB, a federally chartered instrumentality of the U. S. that is a member of the Farm Credit System. CFC also competes with banks, other financial institutions and the capital markets to provide loans and other financial products to our members. As a result, we are competing with the customer service, pricing and funding options our members are able to obtain from these sources. As a result, we are competing with the customer service, pricing and funding options our 10Table of Contentsmembers are able to obtain from these sources. We attempt to minimize the effect of competition by offering a variety of loan options and value-added services and by leveraging the working relationships developed with the majority of our members over the past 55 years. In addition to leveraging these working relationships, we differentiate ourselves from other financial institutions by focusing on customer service and product flexibility. We also allocate substantially all net earnings to members (i) in the form of patronage capital, which reduces our members’ effective cost of borrowing, and (ii) through the members’ capital reserve. The value-added services that we provide include, but are not limited to, benchmarking tools, financial models, rate studies, publications and various conferences, meetings, facilitation services and training workshops. The value-added services that we provide include, but are not limited to, benchmarking tools, financial models, publications and various conferences, meetings, facilitation services and training workshops. We are not able to specifically identify the amount of debt our members have outstanding to CoBank, ACB from either the annual financial and statistical reports our members file with us or from CoBank, ACB’s public disclosure; however, we believe CoBank, ACB is the additional lender, along with CFC and RUS, with significant long-term debt outstanding to rural electric cooperatives.Rural Electric Lending MarketMost of our rural electric borrowers are not-for-profit, private companies owned by the members they serve. As such, there is limited publicly available information to accurately determine the overall size of the rural electric lending market. We utilize the annual financial and statistical reports submitted to us by our members to estimate the overall size of the rural electric lending market. The substantial majority of our members have a fiscal year-end that corresponds with the calendar year-end. Therefore, the annual information we use to estimate the size of the rural electric market is typically based on the calendar year-end rather than CFC’s fiscal year-end. Based on financial data submitted to us by our electric utility members, we present the long-term debt outstanding to CFC by member class, RUS and other lenders in the electric cooperative industry as of December 31, 2023 and 2022 in the table below. The data presented as of December 31, 2023, were based on information reported by 807 distribution systems and 52 power supply systems. The data presented as of December 31, 2022, were based on information reported by 809 distribution systems and 53 power supply systems. ____________________________(1) Reported amounts are based on member-provided financial information, which may not have been subject to audit by an independent accounting firm. 10Table of ContentsWhile we believe our estimates of the overall size of the rural electric lending market serve as a useful tool in gauging the size of this lending sector, they should be viewed as estimates rather than precise measures as there are certain limitations in our estimation methodology, including, but not limited to, the following:•Although certain underlying data included in the financial and statistical reports provided to us by members may have been audited by an independent accounting firm, our accumulation of the data from these reports has not been subject to a review for accuracy by an independent accounting firm.While we believe our estimates of the overall size of the rural electric lending market serve as a useful tool in gauging the size of this lending sector, they should be viewed as estimates rather than precise measures as there are certain limitations in our estimation methodology, including, but not limited to, the following:11Table of Contents•Although certain underlying data included in the financial and statistical reports provided to us by members may have been audited by an independent accounting firm, our accumulation of the data from these reports has not been subject to a review for accuracy by an independent accounting firm. •The data presented are not necessarily inclusive of all members because in some cases our receipt of annual member financial and statistical reports may be delayed and not received in a timely manner to incorporate into our market estimates.•The financial and statistical reports submitted by members include information on indebtedness to RUS, but the reports do not include comprehensive data on indebtedness to other lenders and are not on a consolidated basis.REGULATIONGeneralCFC and NCSC are not subject to direct federal regulatory oversight or supervision with regard to lending.REGULATIONGeneralCFC, NCSC and RTFC are not subject to direct federal regulatory oversight or supervision with regard to lending. CFC and NCSC are subject to state and local jurisdiction commercial lending and tax laws that pertain to business conducted in each state, including but not limited to lending laws, usury laws and laws governing mortgages. CFC, NCSC and RTFC are subject to state and local jurisdiction commercial lending and tax laws that pertain to business conducted in each state, including but not limited to lending laws, usury laws and laws governing mortgages. These state and local laws regulate the manner in which we make loans and conduct other types of transactions. The statutes, regulations and policies to which the companies are subject may change at any time. In addition, the interpretation and application by regulators of the laws and regulations to which we are subject may change from time to time. Certain of our contractual arrangements, such as those pertaining to funding obtained through the Guaranteed Underwriter Program, provide for the Federal Financing Bank and RUS to periodically review and assess CFC’s compliance with program terms and conditions. As a member of the Financial Industry Regulatory Authority (“FINRA”), Cooperative Securities is subject to FINRA rules and regulations pertaining to broker-dealers and their customer-related activities.Derivatives RegulationCFC engages in over-the-counter (“OTC”) derivative transactions, primarily interest rate swaps, to hedge interest rate risk. Derivatives RegulationCFC engages in over-the-counter (“OTC”) derivative transactions, primarily interest rate swaps, to hedge interest rate risk. As an end user of derivative financial instruments, CFC is subject to regulations that apply to derivatives generally. The Dodd-Frank Act (“DFA”), enacted July 2010, resulted in, among other things, comprehensive regulation of the OTC derivatives market. The DFA provides for an extensive framework for the regulation of OTC derivatives, including mandatory clearing, exchange trading and transaction reporting of certain OTC derivatives. Subsequent to the enactment of the DFA, the U.S. Commodity Futures Trading Commission (“CFTC”) issued a final rule, “Clearing Exemption for Certain Swaps Entered into by Cooperatives,” which created an exemption from mandatory clearing for cooperatives. The CFTC’s final rule, “Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants,” includes an exemption from margin requirements for uncleared swaps for cooperatives that are financial end users. CFC is an exempt cooperative end user of derivative financial instruments and does not participate in the derivatives markets for speculative, trading or investing purposes and does not make a market in derivatives.HUMAN CAPITAL MANAGEMENTCFC’s success in providing industry expertise and responsive service to meet the needs of our members across the U.S. is dependent on the quality of service provided by our employees and their relationships with our members. We therefore strive to align our human capital management strategy with our member-focused mission and core values of service, integrity and excellence. Our objectives are (i) to attract, develop and retain a highly qualified workforce with diverse backgrounds and experience in multiple areas whose skills and strengths are consistent with CFC’s mission, and (ii) to create an engaged, inclusive and collaborative work culture, which we believe are critical to deliver exceptional service to our members. 11Table of ContentsGovernance of Human Capital CFC’s executive leadership team and board of directors work together to provide oversight on most human capital matters. Governance of Human Capital CFC’s executive leadership team and board of directors work together to provide oversight on most human capital matters. The compensation committee of the board of directors meets quarterly to review updates to our compensation programs, including our salary structure, incentive plans and executive compensation. Our board is provided with periodic updates on succession planning efforts, current human capital management risks and mitigation efforts in addition to any other matters that affect our ability to attract, develop and maintain the talent needed to execute on our corporate objectives. Our board is provided with periodic updates on 12Table of Contentssuccession planning efforts, current human capital management risks and mitigation efforts in addition to any other matters that affect our ability to attract, develop and maintain the talent needed to execute on our corporate objectives. Recruiting and Retaining TalentAs a financial services organization, our recruitment goal is to attract and retain a highly skilled workforce in a highly competitive talent market. Recruiting and Retaining TalentAs a financial services organization, our recruitment goal is to attract and retain a highly skilled workforce in a highly competitive talent market. We strive to provide both external candidates and internal employees who are seeking a different role with challenging and stimulating career opportunities ranging from entry-level to management and executive positions.We use a variety of methods to attract highly talented and engaged professionals, including outreach to local universities, recruitment job boards, including sites focusing on diversity, a referral bonus program and targeted industry-related job posting sites. We use a variety of methods to attract highly talented and engaged professionals, including outreach to local universities, recruitment job boards, including sites focusing on diversity, a referral bonus program and targeted industry-related job posting sites. When appropriate, we engage with recruiting firms to ensure that we have surveyed a broad scope of active and passive candidates for certain critical positions. We strive to ensure that our employment value proposition presented to candidates accurately reflects the features of working for a mission-driven cooperative like CFC so that we can attract individuals who are highly engaged with our vision to be our members’ most trusted financial resource. One of our talent and culture strategic initiatives in fiscal year 2024 focused on assessing and updating our employment branding to ensure it remains relevant and engaging to potential candidates for employment.Because many of our business operations involve significant member-facing interaction with a relatively stable base of long-standing member-borrowers, we place a priority on the retention of high-performing employees who have extensive, in-depth experience serving the needs of our members. Because much of our business operations involves significant member-facing interaction with a relatively stable base of long-standing member borrowers, we place a priority on the retention of high-performing employees who have extensive, in-depth experience serving the needs of our members. Our turnover rate for fiscal year 2024 was 11.1%. Our average employee tenure was 7.6 years with more than a quarter of our workforce having 10 or more years of service with CFC. Given the ongoing challenges of the professional talent market, we feel that CFC’s employee pool represents a balanced mix of long-term and new staff to serve our members. Given the challenges of the current talent market we feel that CFC’s employee pool represents a balanced mix of long-term and new staff to serve our members. We welcomed 44 new hires this fiscal year and employed 289 staff members as of May 31, 2024, all of which are located in the U.S. The majority of our workforce is headquartered in Dulles, Virginia. The majority of our workforce are headquartered in Dulles, Virginia. Employee Engagement and DevelopmentCFC launched several talent and culture initiatives in our fiscal year 2024-2026 strategic plan with a focus on instilling a positive organizational culture characterized by high levels of employee satisfaction and engagement. We conducted an employee engagement survey requesting feedback on drivers of employee satisfaction and contribution; 97% of our staff participated in the survey. Results were analyzed at all levels of the company with corporate, group and team meetings to collaborate on ways to promote employee engagement throughout CFC. Action items have been identified and we are moving forward with making updates and changes in response to input from staff. As part of our efforts to promote an engaged, inclusive and collaborative workplace culture, we encourage employees to expand their capabilities and enhance their career potential through employer-funded onsite training, external training, tuition assistance and professional events.Employee Engagement and DevelopmentAs part of our efforts to promote an engaged, inclusive and collaborative workplace culture, we encourage employees to expand their capabilities and enhance their career potential through employer-funded onsite training, external training, tuition assistance and professional events. In fiscal year 2024, CFC employees completed more than 3,500 training hours through our internal corporate development programs and over 700 hours of external professional training opportunities, such as professional certifications, industry seminars and workshops. In fiscal year 2023, CFC employees completed more than 4,000 training hours through our internal corporate development programs and our support of employees’ enrollment in external professional training opportunities. We seek to create and tailor our training programs to meet our required skill sets and employee interests, while also addressing key risks and compliance matters. We seek to tailor our training programs to meet our required skill sets and employee interests, while also addressing key risks and compliance matters. In fiscal year 2024, CFC launched a new Leadership Development Program designed to serve managers at all levels by providing training opportunities aligned to CFC’s core leadership competencies. The program’s aim was to incorporate leadership competencies, such as business acumen, strategic agility, critical thinking skills and more, across a variety of programs, courses and levels to support and grow our leadership bench strength.Additionally, CFC offered a variety of training opportunities to all staff to enhance their professional and technical skills such as presentation skills, performance management, project management, collaboration skills and more. This is incorporated in custom-made programs like CFC Learning Bites, which allows staff to engage in knowledge-transfer sessions on various technical skills from CFC’s subject matter experts.12Table of ContentsCFC recently completed a corporate-wide training program called CFC E3: Products & Services, which is a continuation of the initial launch of the E3 program in our 2023 fiscal year. E3 is an employee engagement and training program aligned with CFC’s Fiscal Year 2024 Corporate Scorecard goal to “Educate existing and/or new employees on CFC’s/NCSC’s full suite of products and services.” CFC also supports employee development through a company-sponsored Toastmasters chapter, guest speakers from cooperative partners and staff visits to local electric cooperatives to allow employees to learn first-hand how their efforts contribute to our members’ success.Compensation and Benefits PackagesAttracting, developing, rewarding and retaining high-level talent is a key component of our human capital objectives, so we seek to provide a competitive Total Rewards package consisting of base pay, an annual incentive opportunity, and benefits packages.Compensation and Benefits PackagesAttracting, developing, rewarding and retaining high-level talent is a key component of our human capital objectives, so we seek to provide a competitive total rewards package consisting of base pay, an annual incentive opportunity, and benefits packages. CFC’s compensation program includes a base salary range structure to provide flexibility in meeting labor market demands and the ability to differentiate pay based on experience and performance. The salary ranges are structured in zones aligned with median market pay for the positions in each zone. We continue to evaluate and make adjustments to our merit increase budget in order to retain and attract exceptional staff in a highly competitive talent market.Our annual incentive plan is based on (i) attainment of our targeted corporate scorecard goals as established at the beginning of the fiscal year and (ii) individual performance ratings from our annual review process. Our annual incentive plan is based on (i) attainment of our targeted corporate scorecard goals as established at the beginning of the fiscal year and (ii) individual performance ratings from our annual review process. Attainment of the annual scorecard goals requires the collective engagement and effort of employees across the company, which we believe incentivizes teamwork and fosters a collaborative working environment. The individual performance component enables the organization to differentiate a portion of the incentive compensation, which demonstrates the value of a high-performance culture on behalf of our members. The individual performance component enables the organization 13Table of Contentsto differentiate a portion of the incentive compensation, which demonstrates the value of a high-performance culture on behalf of our members. The employee benefits components of our Total Rewards package include the following: vacation and leave programs; health, dental, vision, life and disability insurance coverage; and flexible spending and health savings plans, most of which are funded in whole or in part by CFC. The employee benefits components of our Total Rewards package include vacation and leave programs; health, dental, vision, life and disability insurance coverage; and flexible spending and health savings plans, most of which are funded in whole or in part by CFC. We make investments in the future financial security of our employees by offering retirement plans that consist of a 401(k) plan with a company match component and an employer-funded defined benefit retirement plan in which CFC makes an annual contribution in an amount that approximates 20% of each employee’s base salary, which we believe helps in our efforts to engage employees, retain high-performing employees and reduce turnover. We also offer programs and resources intended to promote work-life balance, assist in navigating life events and improve employee well-being, such as flexible work schedules, remote work options, parental leave, an employee assistance program, legal insurance and identity theft coverage services. We also offer programs and resources intended to promote work-life balance, assist in navigating life events and improve employee well-being, such as flexible work schedules, remote work options, an employee assistance program, legal insurance and identity theft coverage services. Open-Door Communications CFC maintains a strong focus on our core value of integrity in pursuit of our mission. Open-Door Communications CFC maintains a strong focus on our core value of integrity in pursuit of our mission. To promote open communication, we maintain an open-door policy and provide multiple avenues for employees to voice their concerns and offer suggestions. Employees are encouraged to report any issues to their manager, senior vice president, corporate compliance, Human Resources or our corporate ethics helpline. All new employees receive Code of Conduct & Business Ethics training, and all employees complete an annual Code of Conduct & Business Ethics training to foster a culture of integrity and accountability.CORPORATE RESPONSIBILITYFor more than half a century, CFC has helped electric cooperatives provide essential services to rural America. CORPORATE RESPONSIBILITYFor more than half a century, CFC has helped electric cooperatives provide essential services to rural America. Since their creation in the 1930s to bring electricity to rural homes, electric cooperatives have been essential to the economic vitality and quality of life in communities nationwide, including those in persistent poverty counties.As a value-based, financial services cooperative, CFC is engaged in sustaining our environment across multiple fronts—from our Leadership in Energy and Environmental Design (“LEED”) Gold-certified building and 42-acre ecofriendly campus that serves as CFC’s headquarters, to the renewable energy projects we’ve helped finance for the electric cooperative network. CFC’s members are moving forward with renewable energy adoption, and we continue to support them by funding renewable energy initiatives that will help build out greater renewable infrastructure in the United States. 13Table of ContentsCFC had project financing loans outstanding to developers of renewable energy projects of approximately $299 million and $268 million as of May 31, 2024 and 2023, respectively. CFC had outstanding loans to developers of renewable energy projects that benefit members totaling approximately $268 million and $193 million as of May 31, 2023 and 2022, respectively. In 2020, CFC developed a Sustainability Bond Framework that aligned with the Sustainability Bond Guidelines (“SBG”), as administered by the International Capital Markets Association (“ICMA”). Under this framework, we issued sustainability bonds and used the proceeds to finance or refinance projects to enhance access to broadband services and renewable energy projects that provide positive environmental and social impact in rural America. CFC issued its first sustainability bond with an aggregate principal amount of $400 million in October 2020, the first sustainability bond issued for the electric cooperative industry, and its second sustainability bond with an aggregate principal amount of $400 million in August 2022. Today, CFC is proud to support electric cooperatives by providing approximately $3,103 million in outstanding loans to support broadband expansion. These efforts have opened new opportunities in many rural communities by providing first-ever access to affordable high-speed internet services.True to our core values of service, integrity and excellence, CFC continues to help electric cooperatives support the communities that created them, whether it’s through contributions from the CFC Educational Fund or helping them access capital from the USDA’s Rural Economic Development Loan and Grant (“REDL&G”) program, which fosters economic development. Over the past 20 years, CFC has contributed an estimated $243 million to the REDL&G program.CFC and electric cooperatives operate under seven cooperative principles: open and voluntary membership; democratic member control; members’ economic participation; autonomy and independence; education, training and information; cooperation among cooperatives; and concern for community.CFC and electric cooperatives operate under seven cooperative principles: open and voluntary membership; democratic member control; members’ economic participation; autonomy and independence; education, training and information; 14Table of Contentscooperation among cooperatives; and concern for community. Through our “Commitment to Excellence” workshops, CFC has trained electric cooperative directors and executive staff on governance best practices, including how electric cooperative leaders should demonstrate principled leadership, financial stewardship, and effective governance and management risk oversight.With these efforts, CFC empowers electric cooperatives to fulfill their historic mission of service and contribute to sustainability efforts.

AVAILABLE INFORMATIONOur annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports, are available for free at www.nrucfc.coop as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. These reports also are available for free on the SEC’s website at www.sec.gov.

Information posted on our website is not incorporated by reference into this Form 10-K.Item 1A. Risk FactorsOur financial condition, results of operations and liquidity are subject to various risks and uncertainties, some of which are inherent in the financial services industry and others of which are more specific to our own business. The discussion below addresses the most significant risks, of which we are currently aware, that could have a material adverse impact on our business, financial condition, results of operations or liquidity. However, other risks and uncertainties, including those not currently known to us, could also negatively impact our business, financial condition, results of operations and liquidity. Therefore, the following should not be considered a complete discussion of all the risks and uncertainties we may face. For information on how we manage our key risks, see “Item 7. MD&A—Enterprise Risk Management.” You should consider the following risks together with all of the other information in this report. 14Table of ContentsRISK FACTORSCredit RisksWe are subject to credit risk given that borrowers may not be able to meet their contractual obligations in accordance with agreed-upon terms, which could have a material adverse effect on our financial condition, results of operations and liquidity. RISK FACTORSCredit RisksWe are subject to credit risk given that borrowers may not be able to meet their contractual obligations in accordance with agreed-upon terms, which could have a material adverse effect on our financial condition, results of operations and liquidity. Because we lend primarily to U.S. rural electric utility systems, we also are inherently subject to single-industry and single-obligor concentration risks.As a lender, our primary credit risk arises from the extension of credit to borrowers. Our loan portfolio, which represents the largest component of assets on our balance sheet, accounts for the substantial majority of our credit risk exposure. Loans outstanding to electric utility organizations represented approximately 98% of our total loans outstanding as of May 31, 2024. We had 885 borrowers with loans outstanding as of May 31, 2024, and our 20 largest borrowers accounted for 20% of total loans outstanding as of May 31, 2024. We had 884 borrowers with loans outstanding as of May 31, 2023, and our 20 largest borrowers accounted for 20% of total loans outstanding as of May 31, 2023. The largest total exposure to a single borrower or controlled group represented 1% of total loans outstanding as of May 31, 2024. Texas historically has had the largest number of borrowers with loans outstanding and the largest loan concentration in any one state. Loans outstanding to Texas borrowers represented 17% of total loans outstanding as of May 31, 2024.We face the risk that the principal of, or interest on, a loan will not be paid on a timely basis or at all or that the value of any underlying collateral securing a loan will be insufficient to cover our outstanding exposure. A deterioration in the financial condition of a borrower or underlying collateral could impair the ability of a borrower to repay a loan or our ability to recover unpaid amounts from the underlying collateral. We maintain an internal borrower risk rating system in which we assign a rating to each borrower and credit facility that is intended to reflect the ability of a borrower to repay its obligations and assess the probability of default and loss given default. We maintain an internal borrower risk rating system in which we assign a rating to each borrower and credit facility that are intended to reflect the ability of a borrower to repay its obligations and assess the probability of default and loss given default. The borrower risk rating system comprises both quantitative metrics and qualitative considerations. Each component is risk weighted in accordance with its importance. Unforeseen events and developments that affect specific borrowers or that occur in a region where we have a high concentration of credit risk may result in risk rating downgrades. Such an event may result in an increase in any or all of the following: in the allowance for credit losses; delinquent, nonperforming and criticized loans; net charge-offs; and our credit risk. Such an event may result in an increase: in the allowance for credit losses; delinquent, nonperforming and criticized loans; net charge-offs; and our credit risk. We establish an allowance for credit losses based on management’s current estimate of credit losses that are expected to occur over the remaining life of the loans in our portfolio. 15Table of ContentsWe establish an allowance for credit losses based on management’s current estimate of credit losses that are expected to occur over the remaining life of the loans in our portfolio. Because the process for determining our allowance for credit losses requires informed judgments about the ability of borrowers to repay their loans, we identify the estimation of our allowance for credit losses as a critical accounting estimate. Our borrower risk ratings are a key input in establishing our allowance for credit losses. Therefore, the deterioration in the financial condition of a borrower may result in a significant increase in our allowance for credit losses and provision for credit losses and may have a material adverse impact on our results of operations, financial condition and liquidity. In addition, we might underestimate expected credit losses and have credit losses in excess of the established allowance for credit losses if we fail to timely identify a deterioration in a borrower’s financial condition or due to other factors. These other factors include if the methodology and process we use in assigning borrower risk ratings and making judgments in extending credit to our borrowers does not accurately capture the level of our credit risk exposure or our historical loss experience proves to be not indicative of our expected future losses.Adverse changes, developments or uncertainties in the rural electric utility industry could adversely impact the operations or financial performance of our member electric cooperatives, which, in turn, could have an adverse impact on our financial results. Adverse changes, developments or uncertainties in the rural electric utility industry could adversely impact the operations or financial performance of our member electric cooperatives, which, in turn, could have an adverse impact on our financial results. Our focus as a member-owned finance cooperative is on lending to our rural member electric utility cooperatives, which is the primary source of our revenue. As a result of lending primarily to our members, we have a loan portfolio with single-industry concentration. Loans to rural electric utility cooperatives accounted for approximately 98% of our total loans outstanding as of May 31, 2024. While we historically have experienced limited defaults and very low credit losses in our electric utility loan portfolio, factors that may have a negative impact on the operations of our member rural electric cooperatives include but are not limited to, the price and availability of distributed energy resources; whether these resources will be sufficient to serve electric demand at its peak; the operational reliability and resilience of their power grids; cyber-related attacks or other breaches of their operating systems and network infrastructure; regulatory or compliance factors related to managing greenhouse gas emissions (including the potential for stranded assets); and extreme weather conditions leading to events such as hurricanes, tornadoes and wildfires, including weather conditions related to climate change. While we historically have experienced limited defaults and very low credit losses in our electric utility loan portfolio, factors that may have a negative impact on the operations of our member rural electric cooperatives include but are not limited to, the price and availability of distributed energy resources, regulatory or compliance factors related to managing greenhouse gas emissions (including the potential for stranded assets), and extreme weather conditions, including weather conditions related to climate change. The factors listed above, individually or in combination, could result in declining sales or increased power supply and operating 15Table of Contentscosts and could potentially cause a deterioration in the financial performance of our members and the value of the collateral securing their loans. The factors listed above, individually or in combination, could result in declining sales or increased power supply and operating costs and could potentially cause a deterioration in the financial performance of our members and the value of the collateral securing their loans. This could impair their ability to repay us in accordance with the terms of their loans. In such case, it may lead to risk rating downgrades, which may result in an increase in our allowance for credit losses and a decrease in our net income.The threat of weather-related events or shifts in climate patterns resulting from climate change, including, but not limited to, increases in storm intensity, number of intense storms and temperature extremes in areas in which our member rural electric cooperatives operate, could result in increased power supply and operating costs, adversely impacting our members’ results of operations, liquidity and ability to make payments to us. The threat of weather-related events or shifts in climate patterns resulting from climate change, including, but not limited to, increases in storm intensity, number of intense storms and temperature extremes in areas in which our member rural electric cooperatives operate, could result in increased power supply and operating costs, adversely impacting our members’ results of operations, liquidity and ability to make payments to us. While we believe our members would largely be reimbursed by Federal Emergency Management Agency (“FEMA”) relief programs for eligible storm-related damages, such programs may not be implemented in their current forms or payments may not be received on a timely basis. While we believe our members would largely be reimbursed by Federal Emergency Management Agency (“FEMA”) relief programs for storm-related damages, such programs may not be implemented in their current forms or payments may not be received on a timely basis. Further, FEMA does not provide relief for events caused by human error and, as a result, the majority of wildfires may not be covered events. For increased power costs, although we believe our members have the ability to pass through increased costs to their members, in some cases it may be difficult to pass through the entire costs on a timely basis if they are significant. To the extent CFC makes bridge loans to members as they wait for FEMA payments, changes to FEMA programs or delays in payments from FEMA could adversely impact the quality of our loan portfolio and our financial condition. Additionally, our member rural electric cooperatives are subject to evolving local, state and federal laws, regulations and expectations regarding the environment. These requirements and expectations may increase the time and costs of efforts to monitor and comply with such obligations and expose them to liability. The impacts of climate change present notable risks, including damage to the assets of our members, which could adversely impact the quality of our loan portfolio and our financial condition.Advances in technology may change the way electricity is generated and transmitted or the way broadband is deployed, which could adversely affect the business operations of our members and negatively impact the credit quality of our loan portfolio and financial results. Advances in technology may change the way electricity is generated and transmitted or the way broadband is deployed, which could adversely affect the business operations of our members and negatively impact the credit quality of our loan portfolio and financial results. Advances in technology could reduce demand for power supply systems and distribution services. Advances in technology could reduce demand for power supply systems and distribution services. The development of alternative technologies that produce electricity, including solar cells, wind power and microturbines, has expanded and could ultimately provide affordable alternative sources of electricity and permit end users to adopt distributed generation systems that would allow them to generate electricity for their own use. As these and other technologies, including energy conservation measures, are created, developed and improved, the quantity and frequency of electricity usage by rural customers could decline. As with any internet service provider, rural electric cooperatives may face the risk of being outpaced by technological advancements. While fiber broadband is currently a leading technology, the rise of 5G satellite internet, and other emerging technology, could potentially disrupt the broadband market. Advances in technology and conservation that cause our electric system members’ power supply, transmission and/or distribution facilities to become obsolete prior to the maturity of loans secured by these assets could have an adverse impact on the ability of our members to repay such loans, which could result in an increase in nonperforming or restructured loans. Advances in technology and 16Table of Contentsconservation that cause our electric system members’ power supply, transmission and/or distribution facilities to become obsolete prior to the maturity of loans secured by these assets could have an adverse impact on the ability of our members to repay such loans, which could result in an increase in nonperforming or restructured loans. These conditions could negatively impact the credit quality of our loan portfolio and financial results.We may obtain entities or other assets through foreclosure, which would subject us to the same performance and financial risks as any other owner or operator of similar businesses or assets.As a financial institution, from time to time we may obtain entities and assets of borrowers in default through foreclosure proceedings. If we become the owner and operator of entities or assets obtained through foreclosure, we are subject to the same performance and financial risks as any other owner or operator of similar assets or entities. In particular, the value of the foreclosed assets or entities may deteriorate and have a negative impact on our results of operations. We assess foreclosed assets, if any, for impairment periodically as required under generally accepted accounting principles in the U.S. (“U.S. GAAP.”) Impairment charges, if required, represent a reduction to earnings in the period of the charge. There may be substantial judgment used in the determination of whether such assets are impaired and in the calculation of the amount of the impairment. In addition, when foreclosed assets are sold to a third party, the sale price we receive may be below the amount previously recorded in our financial statements, which will result in a loss being recorded in the period of the sale.The nonperformance of our derivative counterparties could impair our financial results.We use interest rate swaps to manage interest rate risk. There is a risk that the counterparties to these agreements will not perform as agreed, which could adversely affect our results of operations. The nonperformance of a counterparty on an agreement would result in the derivative no longer being an effective risk-management tool, which could negatively affect our overall interest rate risk position. In addition, if a counterparty fails to perform on a derivative obligation, we could incur 16Table of Contentsa financial loss to replace the derivative with another counterparty and/or a loss through the failure of the counterparty to pay us amounts owed. In addition, if a counterparty fails to perform on a derivative obligation, we could incur a financial loss to replace the derivative with another counterparty and/or a loss through the failure of the counterparty to pay us amounts owed. After taking into consideration master netting agreements for our interest rate swaps, we were in a net receivable position of $611 million and a net payable position of $1 million as of May 31, 2024. After taking into consideration master netting agreements for our interest rate swaps, we were in a net receivable position of $349 million and a net payable position of $3 million as of May 31, 2023. A decline in our credit rating could trigger payments under our derivative agreements, which could impair our financial results.We have certain interest rate swaps that contain credit risk-related contingent features referred to as rating triggers. Under certain rating triggers, if the credit rating for either counterparty falls to the level specified in the agreement, the other counterparty may, but is not obligated to, terminate the agreement. If either counterparty terminates the agreement, a net payment may be due from one counterparty to the other based on the prevailing fair value, excluding credit risk, of the underlying derivative instrument. In the event that we are required to make a payment as a result of a rating trigger, it could have a material adverse impact on our financial results. These rating triggers are based on our senior unsecured credit ratings by Moody’s Investors Service (“Moody’s”) and S&P Global Inc. (“S&P”). Based on our interest rate swap agreements subject to rating triggers, if our senior unsecured ratings fell to or below Baa2 by Moody’s or below BBB by S&P, and the agreements were consequently terminated as of May 31, 2024, all agreements for which we owe amounts when netted for each counterparty pursuant to a master netting agreement were in a net payable position of approximately $1 million as of that date. Based on our interest rate swap agreements subject to rating triggers, if our senior unsecured ratings fell below Baa2 by Moody’s or below BBB by S&P and the agreements were consequently terminated as of May 31, 2023, all agreements for which we owe amounts when netted for each counterparty pursuant to a master netting agreement were in a net payable position of approximately $3 million as of that date. Liquidity RisksIf we are unable to access the capital markets or other external sources for funding, our liquidity position may be negatively affected and we may not have sufficient funds to meet all of our financial obligations as they become due. Liquidity RisksIf we are unable to access the capital markets or other external sources for funding, our liquidity position may be negatively affected and we may not have sufficient funds to meet all of our financial obligations as they become due. We depend on access to the capital markets and other sources of financing, such as repurchase agreements, bank revolving credit agreements, investments from our members, private debt issuances through Farmer Mac and the Guaranteed Underwriter Program, to fund new loan advances, refinance our long- and short-term debt and, if necessary, to fulfill our obligations under our guarantee and repurchase agreements. We depend on access to the capital markets and other sources of financing, such as repurchase agreements, bank revolving credit agreements, investments from our members, private debt issuances through Farmer Mac and through the Guaranteed Underwriter Program, to fund new loan advances, refinance our long- and short-term debt and, if necessary, to fulfill our obligations under our guarantee and repurchase agreements. Prolonged market disruptions, downgrades to our long-term and/or short-term debt ratings, adverse changes in our business or performance, downturns in the electric industry and other events over which we have no control may deny or limit our access to the capital markets and/or subject us to higher costs for such funding. Our access to other sources of funding also could be limited by the same factors, by adverse changes in the business or performance of our members, by the banks committed to our revolving credit agreements or Farmer Mac, or by changes in federal law or the Guaranteed Underwriter Program. Our funding needs are determined primarily by scheduled short- and long-term debt maturities and the amount of our loan advances to our borrowers relative to the scheduled payment amortization of loans previously made by us. Our funding needs are determined primarily by scheduled 17Table of Contentsshort- and long-term debt maturities and the amount of our loan advances to our borrowers relative to the scheduled payment amortization of loans previously made by us. If we are unable to timely issue debt in the capital markets or obtain funding from other sources, we may not have the funds to meet all of our obligations as they become due.A reduction in the credit ratings for our debt could adversely affect our liquidity and/or cost of debt.Our credit ratings are important to maintaining our liquidity position. We currently contract with three nationally recognized statistical rating organizations to receive ratings for our secured and unsecured debt and our commercial paper. In order to access the commercial paper markets at current levels, we believe that we need to maintain our short-term ratings at the current level from Moody’s, S&P and Fitch Ratings (“Fitch”). Changes in rating agenc